S-4 1 g27037sv4.htm FORM S-4 sv4
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As filed with the Securities and Exchange Commission on May 6, 2011
Registration No. ________
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PARK STERLING CORPORATION
(Exact name of registrant as specified in its charter)
         
North Carolina   6022   27-4107242
(State or other jurisdiction of   (Primary Standard Industrial   (I.R.S. Employer
incorporation or organization)   Classification Code Number)   Identification Number)
1043 Morehead Street, Suite 201
Charlotte, North Carolina 28204
(704) 716-2134
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
James C. Cherry
Chief Executive Officer
1043 Morehead Street, Suite 201
Charlotte, North Carolina 28204
(704) 716-2134

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)
Copies to:
     
P. Christian Scheurer, Esq.   Neil E. Grayson, Esq.
Anne Team Kelly, Esq.   Nikki Lee, Esq.
McGuireWoods LLP   Nelson Mullins Riley & Scarborough LLP
201 North Tryon Street   Poinsett Plaza, Suite 900
Charlotte, North Carolina 28202   104 South Main Street
Phone: (704) 343-2000   Greenville, South Carolina 29601
    Phone: (864) 250-2367
     Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.
     If the securities being registered on this Form are to be offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. o
     If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
     If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer o   Smaller reporting company þ
    (Do not check if a smaller reporting company)
     If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:
Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer) o
Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer) o
CALCULATION OF REGISTRATION FEE
                                             
 
                  Proposed              
        Amount     maximum              
        to be     offering price     Proposed maximum aggregate     Amount of  
  Title of each class of securities to be registered     registered (1)     per unit     offering price (2)     registration fee (3)  
 
Common Stock, par value $1.00 per share
      4,024,550         N/A       $ 18,713,046         $2,173    
 
 
(1)   Represents the maximum number of shares of the Registrant’s common stock estimated to be issuable upon completion of the merger of Community Capital Corporation (Community Capital) with and into the Registrant, based on the number of shares of Community Capital common stock outstanding and the exchange of Community Capital shares for shares of the Registrant’s common stock pursuant to the formula set forth in the Agreement and Plan of Merger dated as of March 30, 2011 by and between the Registrant and Community Capital.
 
(2)   Estimated solely for the purpose of computing the registration fee, and calculated pursuant to Rule 457(f) under the Securities Act of 1933 (Securities Act). Pursuant to Rule 457(c), (f)(1) and (f)(3) under the Securities Act, based on the aggregate market value on May 3, 2011 of the 10,060,777 shares of Community Capital common stock expected to be exchanged in connection with the merger, the proposed maximum aggregate offering price is $18,713,046, which was determined by taking (i) the product of the average of the high and low prices of Community Capital common stock on May 3, 2011 ($3.18) multiplied by the aggregate number of shares of Community Capital common stock expected to be exchanged in connection with the merger, less (ii) the amount of cash expected to be paid by the Registrant in exchange for the shares of Community Capital common stock.
 
(3)   Determined in accordance with Section 6(b) of the Securities Act at a rate equal to $116.10 per $1,000,000 of the proposed maximum aggregate offering price.
     The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.
 
 

 


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Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This document shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.

PRELIMINARY — SUBJECT TO COMPLETION — DATED MAY 6, 2011
     
(PARK STERLING BANK LOGO)
  (COMMUNITY CAPITAL CORPORATION LOGO)
     
Prospectus of Park Sterling Corporation   Proxy Statement of Community Capital Corporation
MERGER PROPOSED — YOUR VOTE IS VERY IMPORTANT
Dear Community Capital Shareholders:
          The boards of directors of Park Sterling Corporation (Park Sterling) and Community Capital Corporation (Community Capital) each have approved a merger of Community Capital with and into Park Sterling. If the merger is completed, each outstanding share of Community Capital common stock will be exchanged for either $3.30 in cash or 0.6667 of a share of Park Sterling common stock. You will have the opportunity to elect to receive cash for all of your shares, Park Sterling common stock for all of your shares, or a combination of cash for some of your shares and Park Sterling common stock for the remainder of your shares, or you may choose no preference, in which case the merger consideration to be received by you will be determined by the exchange agent depending on the amount of cash and shares elected by those Community Capital shareholders who make an express election.
          Notwithstanding the elections that may be made by the Community Capital shareholders, the total consideration to be paid by Park Sterling will be approximately 60% in shares of Park Sterling common stock and approximately 40% in cash, but in no event more than 40% in cash. If the elections made by Community Capital shareholders would result in an oversubscription for either stock or cash, then the exchange agent will prorate the amount of stock and cash to be issued to Community Capital shareholders in the merger as necessary to obtain the 60% stock - 40% cash allocation of the merger consideration. In that case, you may receive a combination of cash and shares of Park Sterling common stock for your Community Capital shares that is different than what you elected, depending on the elections made by other Community Capital shareholders.
          The value of the total merger consideration will fluctuate with the market price of Park Sterling common stock. The following table shows the closing sale prices of Park Sterling common stock and Community Capital common stock as reported on the NASDAQ Global Market (NASDAQ) on March 30, 2011, the last trading day before we announced the merger, and on , 2011, the last practicable trading day before the distribution of this Proxy Statement/Prospectus. This table also shows the implied value of the merger consideration proposed for each share of Community Capital common stock, which we calculated by assuming (1) 60% of each share of Community Capital common stock is converted into Park Sterling common stock (with the value of a full Community Capital share for this purpose calculated by multiplying the closing price of Park Sterling common stock on those dates by the exchange ratio of 0.6667) and (2) the remaining 40% of each such share is converted into cash (based on a price per Community Capital share equal to $3.30). Based on these assumptions, Park Sterling expects to issue approximately 4,024,550 shares of its common stock in connection with the merger.
                         
                    Implied Value per
Share of
    Park Sterling   Community Capital   Community Capital
    Common Stock   Common Stock   Common Stock
At March 30, 2011
  $ 4.74     $ 2.75     $ 3.22  
At , 2011
  $     $     $  
          The market prices of both Park Sterling common stock and Community Capital common stock will fluctuate before the merger and you are urged to obtain current market quotations. Park Sterling common stock is listed on NASDAQ under the symbol “PSTB” and Community Capital common stock is listed on NASDAQ under the symbol “CPBK.” We expect that the merger generally will be tax free to you as to shares of Park Sterling common stock you receive in the merger and taxable to you as to the cash you receive.
          We cannot complete the merger unless the holders of two-thirds of the issued and outstanding shares of common stock of Community Capital approve it. Community Capital will hold a special meeting of its shareholders to vote on this merger proposal at the offices of CapitalBank at 109 Montague Avenue, Greenwood, South Carolina, on , 2011, at a.m., local time. Your vote is important. Regardless of whether you plan to attend the special meeting, please take the time to vote your shares in accordance with the instructions contained in this Proxy Statement/Prospectus. Failing to vote will have the same effect as voting against the merger.
          The Community Capital board of directors unanimously recommends that Community Capital shareholders vote ”FOR” approval of the merger agreement and the merger.
          This Proxy Statement/Prospectus describes the special meeting, the merger, the documents related to the merger and other related matters. Please carefully read this entire Proxy Statement/Prospectus, including “Risk Factors” beginning on page 19 for a discussion of the risks relating to the proposed merger. You also can obtain information about our companies from documents that each of Park Sterling and Community Capital has filed with the Securities and Exchange Commission.
          Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the Park Sterling common stock to be issued under this Proxy Statement/Prospectus or determined if this Proxy Statement/Prospectus is accurate or adequate. Any representation to the contrary is a criminal offense.
          The securities to be issued in connection with the merger are not savings or deposit accounts of any bank or nonbank subsidiary of any of the parties, and they are not insured by the Federal Deposit Insurance Corporation, the Deposit Insurance Fund or any other governmental agency.
          The date of this Proxy Statement/Prospectus is , 2011, and it is first being mailed or otherwise delivered to Community Capital shareholders on or about , 2011.

 


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Community Capital Corporation
1402-C Highway 72 West
Greenwood, South Carolina 29649
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on , 2011
          NOTICE IS HEREBY GIVEN that a special meeting of shareholders of Community Capital Corporation will be held at the offices of CapitalBank at 109 Montague Avenue, Greenwood, South Carolina on , 2011, at a.m., local time, for the following purposes:
  1.   Merger Proposal. To consider and vote upon the Agreement and Plan of Merger, dated as of March 30, 2011, by and between Park Sterling Corporation and Community Capital Corporation, as the agreement may be amended from time to time, and the transactions contemplated by that agreement, including the merger of Community Capital Corporation with and into Park Sterling Corporation;
 
  2.   Advisory Vote on Golden Parachute Compensation. To cast an advisory (nonbinding) vote to approve “golden parachute” compensation payable under existing agreements that certain Community Capital officers will receive from Community Capital and its subsidiary, CapitalBank, in connection with the merger; and
 
  3.   Adjournment Proposal. To consider and vote upon a proposal to approve the adjournment or postponement of the special meeting, if necessary or appropriate, including to solicit additional proxies to approve the merger agreement and the merger.
          The merger with Park Sterling and the “golden parachute” compensation arrangements are more fully described in the accompanying Proxy Statement/Prospectus, which you should read carefully in its entirety before voting. A copy of the merger agreement is included as Appendix A to the accompanying Proxy Statement/Prospectus. Holders of Community Capital common stock are not entitled to appraisal or dissenters’ rights under South Carolina law in connection with the merger, as described in greater detail in the accompanying Proxy Statement/Prospectus. In particular, you should carefully read “Risk Factors” beginning on page 19 for a discussion of certain risk factors relating to the proposed merger.
          Our board of directors unanimously recommends that you vote “FOR” approval of the merger and the merger agreement, “FOR” approval, on an advisory (nonbinding) basis, of the “golden parachute” compensation and “FOR” approval of the adjournment or postponement of the special meeting, if necessary or appropriate. Approval of the merger agreement and the merger and approval of the “golden parachute” compensation are subject to separate votes by the Community Capital shareholders, and approval of the “golden parachute” compensation is not a condition to completion of the merger.
          Only shareholders of record of Community Capital common stock at the close of business on , 2011 will be entitled to notice of and to vote at the special meeting and at any adjournment or postponement of the special meeting.
          YOUR VOTE IS VERY IMPORTANT. The merger agreement must be adopted by the affirmative vote of holders of two-thirds of the issued and outstanding shares of Community Capital common stock in order for the proposed merger to be consummated. If you do not vote by proxy or do not vote in person at the special meeting, the effect will be a vote against the proposed merger. Whether or not you expect to attend the special meeting in person, Community Capital urges you to submit your proxy as promptly as possible (1) by accessing the internet website specified on the enclosed proxy card, (2) by calling the telephone number specified on the enclosed proxy card or (3) by completing, signing and dating the enclosed proxy card and returning it in the postage-paid envelope provided. Voting by proxy will not prevent you from voting in person at the special meeting, but it will ensure that your vote is counted if you are unable to attend. You may revoke your proxy at any time before it is exercised at the special meeting.
          Each shareholder who attends the special meeting in person may be asked to present valid picture identification, such as a driver’s license or passport. Shareholders attending the special meeting and holding stock in brokerage accounts (“street name” holders) will need to bring a copy of a brokerage statement reflecting stock ownership as of the record date for the special meeting.
          By Order of the Board of Directors,
William G. Stevens
President and Chief Executive Officer
Patricia C. Hartung
Chairman of the Board
Greenwood, South Carolina
, 2011

 


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IMPORTANT NOTICE
          This Proxy Statement/Prospectus constitutes a proxy statement of Community Capital with respect to the solicitations of proxies for the Community Capital special meeting and a prospectus of Park Sterling for the shares of common stock that Park Sterling will issue to Community Capital shareholders in the merger.
          Park Sterling has filed a registration statement on Form S-4 under the Securities Act of 1933, as amended (Securities Act) to register with the Securities and Exchange Commission (SEC) the distribution to Community Capital shareholders of the shares of Park Sterling common stock to be issued in connection with the merger. This Proxy Statement/Prospectus constitutes part of that registration statement. The registration statement, including the attached exhibits, contains additional relevant information about Park Sterling and Park Sterling common stock. For further information about Park Sterling, you should review the registration statement.
          Park Sterling and Community Capital file annual, quarterly and current reports, proxy statements and other information with the SEC under the Securities Exchange Act of 1934, as amended (Exchange Act). You may read and copy any materials that Park Sterling and Community Capital file with the SEC at the SEC’s Public Reference Room, 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet website (www.sec.gov) that contains the reports, proxy statements and other information that Park Sterling and Community Capital file electronically with the SEC.
          You may obtain copies of the documents that Park Sterling files with the SEC, free of charge, by going to the Investor Relations section of Park Sterling’s website (www.parksterlingbank.com) or by written or oral request to Pamela G. Brady, Assistant Corporate Secretary, at 1043 E. Morehead Street, Suite 201, Charlotte, North Carolina 28204, telephone: (704) 716-2134. You may obtain copies of the documents that Community Capital files with the SEC, free of charge, by going to the Investor Relations section of Community Capital’s website (www.capitalbanksc.com) or by written or oral request to Lee Lee M. Lee at P.O. Box 218, Greenwood, South Carolina 29648, telephone: (864) 941-8242. In order to receive timely delivery of documents in advance of the Community Capital special meeting, your request should be received no later than five days before the special meeting, or , 2011. You will not be charged for any documents that you request.
          Park Sterling has supplied all information contained in this Proxy Statement/Prospectus relating to Park Sterling, and Community Capital has supplied all information contained in this Proxy Statement/Prospectus relating to Community Capital.
          The web addresses of the SEC, Park Sterling and Community Capital are included as inactive textual references only. Information contained on those websites is not incorporated by reference into this Proxy Statement/Prospectus and you should not consider information contained on those websites to be part of this Proxy Statement/Prospectus or any supplement thereto.
          This Proxy Statement/Prospectus does not constitute an offer to sell, or a solicitation of an offer to purchase, the securities offered by this Proxy Statement/Prospectus, or the solicitation of a proxy, in any jurisdiction in which or to or from any person to whom or from whom it is unlawful to make such offer, solicitation of an offer or proxy solicitation.
          Neither Park Sterling nor Community Capital has authorized anyone to give any information or make any representation about the merger or our companies that is different from, or in addition to, that contained in this Proxy Statement/Prospectus. Therefore, if anyone does give you information of this sort, you should not rely on it. If you are in a jurisdiction where offers to exchange or sell, or solicitations of offers to exchange or purchase, the securities offered by this Proxy Statement/Prospectus or the solicitation of proxies is unlawful, or if you are a person to whom it is unlawful to direct these types of activities, then the offer presented in this Proxy Statement/Prospectus does not extend to you. The information contained in this Proxy Statement/Prospectus speaks only as of the date of this Proxy Statement/Prospectus unless the information specifically indicates that another date applies.

 


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APPENDICES
       
Appendix A — Merger Agreement
       
Appendix B — Opinion of Howe Barnes Hoefer & Arnett, Inc.
       
Appendix C — Form of Director Support Agreement
       
Appendix D — Form of KSOP Support Agreement
       
 EX-23.3
 EX-23.4
 EX-23.5
 EX-24.1
 EX-99.1
 EX-99.2

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QUESTIONS AND ANSWERS
          The following are some questions that you may have regarding the merger and the Community Capital special meeting, and brief answers to those questions. We urge you to read carefully the remainder of this Proxy Statement/Prospectus because the information in this section does not provide all the information that might be important to you with respect to the merger and the Community Capital special meeting.
     
Q:
  What is the purpose of the special meeting?
 
   
A:
  At the special meeting, Community Capital shareholders will act upon the matters outlined in the notice of special meeting at the beginning of this Proxy Statement/Prospectus, including a proposal to approve the merger and the merger agreement, an advisory (nonbinding) vote to approve “golden parachute” compensation payable under existing agreements that certain Community Capital officers will receive from Community Capital and CapitalBank in connection with the merger and a proposal to approve the adjournment or postponement of the special meeting, if necessary or appropriate, including to solicit additional proxies to approve the merger agreement and the merger, and in the discretion of the proxy holders on any other proposals to be voted on at the special meeting.
 
   
Q:
  Why is Community Capital merging with and into Park Sterling?
 
   
A:
  Community Capital is merging with and into Park Sterling because the board of directors of Community Capital believes that partnering with a financial institution with a strong management team and excess capital will better maximize the long-term value of shareholders’ investment than if Community Capital remains independent. For a detailed discussion of the background of and reasons for the proposed merger, see “Proposal No. 1—The Merger—Background of the Merger,” “—Community Capital’s Reasons for the Merger and Recommendation of the Community Capital Board of Directors” and “—Park Sterling’s Reasons for the Merger.”
 
   
Q:
  What will I receive in the merger?
 
   
A:
  Each share of Community Capital common stock can be exchanged for either: (i) 0.6667 of a share of Park Sterling common stock; or (ii) $3.30 in cash. In total, 60% of Community Capital’s shares of common stock outstanding will be exchanged for shares of Park Sterling common stock and 40% of Community Capital’s shares of common stock outstanding will be exchanged for cash. Park Sterling will not issue fractional shares in the merger. Instead, you will receive a cash payment, without interest, for the value of any fraction of a share of Park Sterling common stock that you would otherwise be entitled to receive. Each outstanding share of Park Sterling common stock will remain outstanding after the merger.
 
   
Q:
  If I am a Community Capital shareholder, am I assured of receiving the exact form of consideration I elect to receive?
 
   
A:
  No. Both the total number of shares of Park Sterling common stock to be issued and the amount of cash to be paid in the merger are fixed. Accordingly, there is no assurance that you will receive the form of consideration you elect with respect to all of your shares of Community Capital common stock. If the elections of all Community Capital shareholders result in an oversubscription of Park Sterling common stock or cash, the exchange agent will allocate the consideration you will receive between cash and Park Sterling common stock. For a discussion of the proration procedures, see “The Merger Agreement—Cash or Stock Election.” Because the exchange ratio is fixed, unless you only receive cash for your shares of Community Capital common stock, the value of the merger consideration you receive will fluctuate depending on the current market price of Park Sterling common stock.
 
   
Q:
  If I am a Community Capital shareholder, what happens if I don’t make an election for cash or shares of Park Sterling common stock?
 
   
A:
  If you fail to make an election prior to the election deadline, the exchange agent will have the discretion to determine the type of consideration you will receive in exchange for your shares of Community Capital common stock. The type of consideration you will receive will be determined by the type of consideration other Community Capital shareholders elect to receive so that, in total, 60% of the total outstanding shares of Community Capital common stock will be exchanged for shares of Park Sterling common stock and 40% of the total outstanding shares of Community Capital common stock will be exchanged for cash. For more information concerning the merger consideration, election procedures and allocation procedures, see “The Merger Agreement—Terms of the Merger” and “—Cash or Stock Election.” If you make an election prior to the election deadline and subsequently sell or otherwise transfer your shares before the completion of the merger, the exchange agent will treat those shares as if no election had been made with respect to them, unless the purchaser or other transferee of your shares makes a new election prior to the election deadline.

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Q:
  How does Community Capital’s board of directors recommend that I vote at the special meeting?
 
   
A:
  Community Capital’s board of directors unanimously recommends that you vote “FOR” the proposal to approve the merger agreement and the merger, “FOR” approval, on an advisory (nonbinding) basis, of the “golden parachute” compensation and “FOR” the proposal to approve the adjournment or postponement of the special meeting, if necessary or appropriate.
 
   
Q:
  When and where is the Community Capital special meeting?
 
   
A:
  The Community Capital special meeting will be held at the offices of CapitalBank at 109 Montague Avenue, Greenwood, South Carolina, on , 2011, at a.m., local time.
 
   
Q:
  Who is entitled to vote at the special meeting?
 
   
A:
  Holders of Community Capital common stock at the close of business on , 2011, the record date for the special meeting established by the Community Capital board of directors, are entitled to receive notice of the special meeting and to vote their shares at the special meeting and any related adjournments or postponements. The notice of special meeting, the Proxy Statement/Prospectus and the form of proxy are first being made available to shareholders on or about , 2011.
 
   
 
  As of the close of business on the record date, there were shares of Community Capital common stock outstanding and entitled to vote. Holders of Community Capital common stock are entitled to one vote per share on each matter to be presented at the special meeting.
 
   
Q:
  What do I need to do now?
 
   
A:
  After you have carefully read this Proxy Statement/Prospectus, you are requested to vote by mail, by telephone, through the internet or by attending the special meeting and voting in person. If you choose to vote by mail, you should complete, sign, date and promptly return the enclosed proxy card as soon as possible so that your shares may be represented and voted at the Community Capital special meeting. The proxy card will instruct the persons named on the proxy card to vote your shares of Community Capital common stock at the special meeting as you direct. If you sign and send in your proxy card and do not indicate how you want to vote, we will vote your shares:
  §   in favor of approval of the merger agreement and the merger;
 
  §   in favor of approval, on an advisory (nonbinding) basis, of “golden parachute” compensation payable under existing agreements that certain Community Capital officers will receive from Community Capital and CapitalBank in connection with the merger;
 
  §   in favor of approval of the adjournment or postponement of the special meeting, if necessary or appropriate, including to solicit additional proxies to approve the merger agreement and the merger; and
 
  §   in the discretion of the proxy holders on any other proposals to be presented at the special meeting.
     
Q:
  Why is my vote important?
 
   
A:
  The merger agreement and the merger must be approved by the holders of at least two-thirds of the issued and outstanding shares of Community Capital common stock entitled to vote at the special meeting. Therefore, the failure of a Community Capital shareholder to vote, by proxy or in person, will have the same effect as a vote against the merger agreement and the merger. In addition, if you do not return your proxy card at or before the special meeting, it will be more difficult for Community Capital to obtain the necessary quorum to hold the special meeting.
 
   
 
  Many Community Capital shareholders hold their shares in “street name” through a stockbroker or bank rather than directly in their own names. If you hold Community Capital shares in a brokerage account or through a bank or other nominee, you are considered the beneficial owner of shares held in street name, and these materials are being forwarded to you by your broker or nominee, which is considered the shareholder of record with respect to those shares. As the beneficial owner, you have the right to direct your broker or nominee how to vote and you are also invited to attend the special meeting. However, since you are not the shareholder of record, you may not vote these shares in person at the special meeting unless you obtain a signed proxy from the shareholder of record giving you the right to vote the shares. Your broker or nominee has enclosed or provided a voting instruction card for you to use to direct your broker or nominee how to vote these shares.

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Q:
  What are the quorum requirements for the special meeting?
 
   
A:
  The presence in person or by proxy of holders having a majority of the total votes entitled to be cast by holders of Community Capital’s common stock at the special meeting constitutes a quorum. Your shares of Community Capital common stock are counted as present at the special meeting for purposes of determining whether there is a quorum if you are present and vote in person at the special meeting or if a proxy card has been properly submitted by you or on your behalf at the special meeting, without regard to whether the proxy is marked as casting a vote or abstaining from voting.
 
   
Q:
  How do I vote?
 
   
A:
  You can vote by (1) accessing the internet website specified on the enclosed proxy card, (2) calling the telephone number specified on the enclosed proxy card or (3) completing, signing and dating the enclosed proxy card and returning it in the postage-paid envelope provided. You can also vote in person at the special meeting. Even if you plan to attend the special meeting in person, please take the time to vote by one of these methods prior to the meeting to ensure that your vote is counted.
 
   
Q:
  If my shares are held in “street name” by my broker, will my broker vote my shares for me?
 
   
A:
  No. Your broker cannot vote on your behalf without specific instructions from you on how to vote. Accordingly, if you hold your shares in street name, it is critical that you cast your vote. You should follow the directions provided by your broker.
 
   
Q:
  Can I attend the special meeting and vote my shares in person?
 
   
A:
  Yes. All shareholders are invited to attend the special meeting. Shareholders of record on the record date for the special meeting can vote in person at the special meeting. If a broker holds your shares in street name, then you are not the shareholder of record and you must ask your broker how you can vote at the special meeting in person. Each shareholder who attends the special meeting in person may be asked to present valid picture identification, such as a driver’s license or passport. Shareholders attending the special meeting and holding stock in brokerage accounts will need to bring a copy of a brokerage statement reflecting stock ownership as of the record date for the special meeting.
 
   
Q:
  Can I change my vote?
 
   
A:
  Yes. If you are the record holder of the shares, you may change your vote by: (1) submitting timely written notice of revocation to the Corporate Secretary of Community Capital at any time prior to the vote at the special meeting; (2) if you previously completed and returned a proxy card, by submitting a new proxy card with a later date and returning it prior to the vote at the special meeting; (3) if you voted over the internet or by telephone, voting again over the internet or by telephone by the applicable deadline described below or by submitting a proxy card and returning it prior to the vote at the special meeting; or (4) attending the special meeting in person and voting your shares by ballot at the meeting. Your last properly submitted vote will be the vote that is counted.
 
   
 
  If your shares are held in street name, you may change your vote by submitting new voting instructions to your broker or, if you have obtained a legal proxy from your broker giving you the right to vote your shares, you may change your vote by attending the special meeting and voting in person.
 
   
Q:
  What is the deadline for voting?
 
   
A:
  If you are the record holder of shares of Community Capital common stock, you may vote by mail at any time prior to the special meeting as long as Community Capital receives your proxy through the mail before the time of the meeting or . In addition, as a record holder, you may vote by internet or phone until p.m., Eastern time, on , 2011. If your shares are held in street name, you must vote your shares in accordance with the voting instruction form by the deadline set by your broker.
 
   
Q:
  What vote is required to approve each proposal?
 
   
A:
  Approval of the merger agreement and the merger requires the affirmative vote of the holders of at least two-thirds of the issued and outstanding shares of Community Capital common stock entitled to vote at the special meeting. For each other proposal, assuming a quorum is present, the proposal will be approved if the number of votes cast at the special meeting, in person or by proxy and entitled to vote thereon, in favor of the proposal exceeds the number of votes cast against the proposal.

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Q:
  I am a Community Capital shareholder. Should I send in my stock certificates now?
 
   
A:
  No. You should not send in your stock certificates at this time. If the merger agreement and the merger are approved, the exchange agent will separately send you a letter of transmittal with instructions for exchanging your Community Capital stock certificates.
 
   
Q:
  Do I have the right to dissent and obtain the fair market value of my shares?
 
   
A:
  No. South Carolina law does not provide dissenters’ rights because Community Capital common stock is listed on NASDAQ. South Carolina corporate law does not provide dissenters’ rights to shareholders of corporations that have shares listed on a national exchange.
 
   
Q:
  Will Community Capital be required to submit the proposal to approve the merger agreement and the merger to its shareholders even if the Community Capital board of directors has withdrawn, modified or qualified its recommendation?
 
   
A:
  Yes. Unless the merger agreement is terminated before the Community Capital special meeting, Community Capital is required to submit the proposal to approve the merger agreement to its shareholders even if the Community Capital board of directors has withdrawn, modified or qualified its recommendation. In this event, you will receive an amendment or supplement to this Proxy Statement/Prospectus with updated information and explaining why the Community Capital board of directors has withdrawn, modified or qualified its recommendation.
 
   
Q:
  When do you expect Park Sterling and Community Capital to merge?
 
   
A:
  We are working toward completing the merger as quickly as possible. We expect to complete the merger in the third quarter of 2011. However, we cannot assure you when or if the merger will occur. We must first obtain the approval of Community Capital shareholders and all necessary regulatory approvals.
 
   
Q:
  Why am I being asked to cast an advisory (nonbinding) vote to approve “golden parachute” compensation that certain Community Capital officers will receive in connection with the merger?
 
   
A:
  The SEC recently has adopted new rules that require us to seek an advisory (nonbinding) vote with respect to certain payments that will be made to our named executive officers by Community Capital and CapitalBank in connection with the merger.
 
   
Q:
  What will happen if shareholders do not approve the “golden parachute” compensation at the special meeting?
 
   
A:
  Approval of the “golden parachute” compensation payable under existing agreements that certain Community Capital officers will receive from Community Capital and CapitalBank in connection with the merger is not a condition to completion of the merger. The vote with respect to the “golden parachute” compensation is an advisory vote and will not be binding on Community Capital. Therefore, if the merger is approved by the shareholders and completed, the “golden parachute” compensation will still be paid to the Community Capital named executive officers.
 
   
Q:
  Whom should I call with questions about the merger agreement or the merger or to obtain additional copies of this Proxy Statement/Prospectus?
 
   
A:
  Community Capital shareholders should call Lee Lee M. Lee at (864) 941-8242 with any questions about the merger agreement or the merger or to obtain additional copies of this Proxy Statement/Prospectus. If your broker holds your shares, you may also call your broker for additional information.

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SUMMARY
          This is a summary of material information regarding the proposed merger and the shareholder meeting contained later in this Proxy Statement/Prospectus. This summary does not contain all of the information that may be important to you, and we urge you to carefully read the entire Proxy Statement/Prospectus, including the Appendices, before deciding how to vote. Each item in this summary refers to the page of this Proxy Statement/Prospectus on which that subject is discussed in more detail. We have included page references parenthetically to direct you to a more complete description of the topics presented in this summary.
About This Proxy Statement/Prospectus
          The boards of directors of Community Capital and Park Sterling have approved and adopted the merger agreement between Community Capital and Park Sterling and pursuant to which Community Capital will merge with and into Park Sterling. The merger cannot be completed unless the shareholders of Community Capital approve the merger on substantially the terms set forth in the merger agreement. Community Capital’s shareholders will vote on the merger agreement at Community Capital’s special meeting. This document is the Proxy Statement used by the Community Capital board of directors to solicit proxies for the special meeting. It is also the Prospectus of Park Sterling regarding the shares of Park Sterling common stock to be issued to Community Capital shareholders if the merger is completed.
          Except where the context indicates otherwise, references in this Proxy Statement/Prospectus to “Park Sterling” refer to Park Sterling Corporation and its consolidated subsidiary and references to “Community Capital” refer to Community Capital Corporation and its consolidated subsidiary. Likewise, references to “Park Sterling Bank” refer to Park Sterling Bank, a wholly owned subsidiary of Park Sterling, and references to “CapitalBank” refer to CapitalBank, a wholly owned subsidiary of Community Capital. References to “we,” “us” or “our” refer to either Park Sterling or Community Capital, as the context indicates.
The Companies
     Park Sterling Corporation (See page 80)
          Overview. Park Sterling Corporation, a North Carolina corporation, is the holding company for Park Sterling Bank, a North Carolina-chartered commercial bank. Park Sterling opened for business on October 25, 2006 at 1043 E. Morehead Street, Suite 201 in Charlotte, North Carolina. Park Sterling Bank opened a branch in Wilmington, North Carolina in October 2007 and in the SouthPark neighborhood of Charlotte, North Carolina in July 2008. It has also received approval from the State of North Carolina Office of the Commissioner of Banks (N.C. Commissioner) in March 2011 to open a branch in Charleston, South Carolina and expects to open this branch in the second quarter of 2011. Park Sterling provides banking services to small and mid-sized businesses, owner-occupied and income producing real estate owners, real estate developers and builders, professionals and consumers doing business or residing within its target markets. At December 31, 2010, Park Sterling had total assets of approximately $616.1 million, total loans of approximately $399.8 million, total deposits of approximately $407.8 million and total shareholders’ equity of approximately $177.1 million. Park Sterling’s principal executive offices are located at 1043 E. Morehead Street, Suite 201, Charlotte, North Carolina, 28204 and its telephone number is (704) 716-2134.
          Park Sterling acquired all of the outstanding stock of Park Sterling Bank in a statutory share exchange transaction on January 1, 2011. Before that date, Park Sterling conducted no operations other than applying for regulatory approval of the share exchange transaction. Accordingly, the consolidated financial statements, discussions of those financials statements, market data and all other information presented in this Proxy Statement/Prospectus with respect to periods before January 1, 2011 are those of Park Sterling Bank. See “Information About Park Sterling Corporation.”
          Recent Developments. On April 28, 2011, Park Sterling announced a net loss for the first quarter of 2011 of $2.9 million, or $0.10 per diluted share, compared to net income of $157,000, or $0.03 per diluted share, for the first quarter of 2010. Park Sterling’s first quarter results were impacted by, among other things, a provision expense of $4.5 million and noninterest expense of $4.2 million. Net interest income for the first quarter of 2011 was $4.0 million, compared to net interest income of $3.7 million for the first quarter of 2010. At March 31, 2011, total assets were $628.4 million, total gross loans were $388.2 million and total deposits were $421.5 million. Based on preliminary data, at March 31, 2011 Park Sterling’s Tier 1 risk-based capital ratio was 42.25% and its Tier 1 leverage ratio was 28.36%.

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     Community Capital Corporation (See page 103)
          Overview. Community Capital Corporation, a South Carolina corporation, is the holding company for CapitalBank, a South Carolina state-chartered Federal Reserve member bank that provides banking services to consumers and small- to medium-sized businesses at 18 branches throughout South Carolina. At December 31, 2010, CapitalBank operated 17 full-service branches and one drive-through facility in South Carolina, three of which are located in Greenwood, South Carolina, two of which are located in each of Abbeville, Anderson and Greer, South Carolina and one of which is located in each of Newberry, Belton, Greenville, Clemson, Saluda, Prosperity, Honea Path, Clinton and Calhoun Falls, South Carolina. At December 31, 2010, Community Capital had total assets of approximately $654.9 million, total loans of approximately $480.3 million, total deposits of approximately $496.3 million and total shareholders’ equity of approximately $47.4 million. Community Capital’s principal executive offices are located at 1402-C Highway 72 West, Greenwood, South Carolina, and its telephone number is (864) 941-8200.
          Written Agreement. Community Capital and CapitalBank entered into a written agreement (the Written Agreement) with the Federal Reserve Bank of Richmond and the State of South Carolina Board of Financial Institutions (the S.C. Board) on July 28, 2010. The Written Agreement requires CapitalBank to take certain actions to continue to address concerns raised in the Federal Reserve Bank of Richmond’s October 2009 report of examination including, but not limited to, designing a plan to improve CapitalBank’s position on certain problem loans, reviewing and revising its allowance for loan and lease losses (ALLL) methodology, strengthening its credit risk management and lending program, enhancing its written liquidity and contingency funding plan, and submitting a capital plan to maintain CapitalBank’s capital ratios in excess of the minimum thresholds required to be well capitalized. The Written Agreement also prohibits Community Capital and CapitalBank from declaring or paying any dividends without the prior written approval of the Federal Reserve Bank of Richmond and the S.C. Board, respectively.
          Recent Developments. On April 28, 2011, Community Capital announced first quarter earnings of $1.0 million, or $0.10 per diluted share, compared to net income of $1.6 million, or $0.16 per diluted share, for the first quarter of 2010. Community Capital’s first quarter results were impacted by the reduction in interest and noninterest income due in part by Community Capital’s reduction in earning assets. Net interest income for the first quarter was $4.9 million, compared to net interest income of $5.3 million for the first quarter of 2010. At March 31, 2011, total assets were $649.1 million, total loans were $465.0 million and total deposits were $487.0 million. Based on preliminary data, at March 31, 2011, Community Capital’s Tier 1 risk-based capital ratio was 11.46% and its Tier 1 leverage ratio was 8.31%.
The Merger
     General Description (See page 39)
          Community Capital will merge with and into Park Sterling, with Park Sterling being the surviving company. The merger will be completed within five business days after all conditions to closing have been met, unless Park Sterling and Community Capital agree on a different closing date. CapitalBank initially will become a wholly owned subsidiary of Park Sterling and will continue to operate as a South Carolina state-chartered Federal Reserve member bank separate from Park Sterling. Park Sterling anticipates that CapitalBank and Park Sterling will, as soon as practicable, merge into a single North Carolina state-chartered nonmember bank in order to more efficiently manage capital and liquidity. A copy of the merger agreement is attached as Appendix A to this Proxy Statement/Prospectus and is incorporated herein by reference. We encourage you to read the merger agreement carefully as it is the legal document that governs the merger.
     Consideration Payable to Community Capital Shareholders (See page 59)
          Community Capital shareholders may elect to receive merger consideration in the form of 0.6667 of a share of Park Sterling common stock or $3.30 in cash, in exchange for each share of Community Capital common stock they held immediately before the merger. However, because the merger agreement generally provides that 60% of the total number of shares of Community Capital common stock outstanding at the time of closing will be exchanged for Park Sterling common stock and the remaining 40% of the outstanding shares will be exchanged for cash, a Community Capital shareholder may actually receive a combination of cash and shares of Park Sterling common stock that is different than what that shareholder elects, depending on the elections made by other Community Capital shareholders. Cash will be paid in lieu of any fractional share of Park Sterling common stock. All elections will be subject to the allocation and proration procedures described in the merger agreement. Community Capital shareholders may make a different election with respect to each share of Community Capital stock they hold.

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     Election of Cash or Stock Consideration (See page 57)
          Before the expected date of completion of the merger, Park Sterling will send an election form to Community Capital shareholders that you may use to indicate whether your preference is to receive cash, Park Sterling common stock or a combination of cash and Park Sterling common stock, or whether you have no preference for your shares of Community Capital common stock. You should not send in your stock certificate(s) until after the merger is effective. When the merger becomes effective you will receive a letter of transmittal with instructions from the exchange agent regarding sending in your stock certificate(s) in exchange for the merger consideration.
          The merger agreement contains allocation and proration provisions that are designed to ensure that 60% of the outstanding shares of common stock of Community Capital will be exchanged for shares of Park Sterling common stock (based on the exchange ratio of 0.6667) and the remaining 40% of the outstanding shares of common stock of Community Capital will be exchanged for cash. Therefore, if Community Capital shareholders elect to receive Park Sterling common stock for more than 60% of the outstanding shares of Community Capital common stock, the amount of Park Sterling common stock that each such shareholder will be entitled to receive from Park Sterling will be reduced on a pro rata basis. As a result, these Community Capital shareholders will receive cash consideration for any Community Capital shares for which they do not receive Park Sterling common stock.
          Similarly, if Community Capital shareholders elect to receive cash for more than 40% of the outstanding shares of Community Capital common stock, the amount of cash that each such shareholder will be entitled to receive from Park Sterling will be reduced on a pro rata basis. As a result, such shareholders will receive Park Sterling common stock for any Community Capital shares for which they do not receive cash.
          If you do not make an election, you will be allocated either cash or shares of Park Sterling common stock, or a combination of cash and shares of Park Sterling common stock, depending on the elections made by other Community Capital shareholders. If you make an election before the election deadline but transfer your shares before the completion of the merger, those shares will be treated as if no election had been made with respect to them, unless the transferee makes a new election prior to the election deadline.
Community Capital’s Board of Directors Unanimously Recommends that Community Capital Shareholders Vote “FOR” Approval of the Merger Agreement and the Merger (See page 38)
          Community Capital’s board of directors has determined that the merger agreement, the merger and the transactions contemplated by the merger agreement are advisable and in the best interests of Community Capital and its shareholders and has unanimously approved the merger and the merger agreement. Community Capital’s board of directors unanimously recommends that Community Capital shareholders vote “FOR” approval of the merger agreement and the merger. For the factors considered by Community Capital’s board of directors in reaching its decision to approve the merger agreement and the merger, see “Proposal No. 1 — The Merger—Community Capital’s Reasons for the Merger and Recommendation of the Community Capital Board of Directors.”
     Material Federal Income-Tax Consequences of the Merger (See page 54)
          The merger is intended to qualify as a reorganization for U.S. federal income-tax purposes, and it is a condition to Community Capital’s obligations to complete the merger that Community Capital receive a legal opinion to that effect. Accordingly, the merger generally will be tax free to you with respect to the shares of Park Sterling common stock you receive in the merger and taxable to you with respect to the cash you receive in the merger. The amount of gain that you recognize in the merger generally will be limited to the lesser of the amount of gain that you realize and the amount of cash that you receive in the merger. The amount of gain that you realize generally is equal to the excess, if any, of the sum of the cash and the fair market value of the Park Sterling common stock that you receive over your tax basis in the Community Capital common stock you surrender in the merger.
          The federal income-tax consequences described above may not apply to all holders of Community Capital common stock. Your tax consequences will depend on your individual situation. Accordingly, we strongly urge you to consult your tax advisor for a full understanding of the particular tax consequences of the merger to you.

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     Public Trading Markets and Share Information (See page 17)
          Park Sterling common stock is listed on NASDAQ under the symbol “PSTB.” Community Capital common stock is listed on NASDAQ under the symbol “CPBK.” The following table shows the closing sale prices of Park Sterling common stock and Community Capital common stock as reported on NASDAQ on March 30, 2011, the last trading day before we announced the merger, and on , 2011, the last practicable trading day before the distribution of this Proxy Statement/Prospectus. This table also shows the implied value of the merger consideration proposed for each share of Community Capital common stock, which we calculated by assuming (1) 60% of each share of Community Capital common stock is converted into Park Sterling common stock (with the value of a full Community Capital share for this purpose calculated by multiplying the closing price of Park Sterling common stock on those dates by the exchange ratio of 0.6667) and (2) the remaining 40% of each such share is converted into cash (based on a price per Community Capital share equal to $3.30). Based on these assumptions, Park Sterling expects to issue approximately 4,024,550 shares of its common stock in connection with the merger.
                         
                    Implied Value per
Share of
    Park Sterling   Community Capital   Community Capital
    Common Stock   Common Stock   Common Stock
At March 30, 2011
  $ 4.74     $ 2.75     $ 3.22  
At , 2011
  $     $     $  
          The market price of Park Sterling’s common stock will fluctuate between the date of this Proxy Statement/Prospectus and the date on which the merger takes place, as well as after completion of the merger. Community Capital shareholders are urged to obtain current market quotations for Park Sterling’s common stock. No assurance can be given as to the market price of Park Sterling’s common stock at the time of the merger or thereafter.
     Reselling the Shares You Receive in the Merger (See page 53)
          The shares of Park Sterling common stock to be issued in the merger will be freely transferable under the Securities Act, except for shares issued to any shareholder who is an “affiliate” of Park Sterling as defined by Rule 144 under the Securities Act.
     Differences in Shareholders’ Rights (See page 71)
          In the merger, each Community Capital shareholder who receives Park Sterling common stock will become a Park Sterling shareholder. The rights of Community Capital shareholders currently are governed by South Carolina law and Community Capital’s articles of incorporation and bylaws. The rights of Park Sterling shareholders currently are, and following the completion of the merger will continue to be, governed by North Carolina law and Park Sterling’s articles of incorporation and bylaws. There are differences in the rights of shareholders of Community Capital and shareholders of Park Sterling with respect to voting requirements and various other matters.
     Reasons for the Merger (See pages 41 and 48)
          Community Capital entered into the merger agreement at the conclusion of a process in which Community Capital determined that a merger with Park Sterling was in the best interests of the Community Capital shareholders. The reasons of the Community Capital board of directors are discussed in more detail in the body of this Proxy Statement/Prospectus. The Community Capital board of directors believes that the merger is in the best interests of Community Capital shareholders and urges shareholders to vote “FOR” approval of the merger agreement and the merger.
          Park Sterling determined that a merger with Community Capital would represent an effective use of its capital and would add to its franchise by expanding its banking operations and providing access to the upstate and central areas of South Carolina, which Park Sterling believes are attractive market areas.
     Community Capital’s Financial Advisors and Fairness Opinion (See page 43)
          Among other factors considered in deciding to approve the merger agreement, the board of directors of Community Capital considered the opinion of Howe Barnes Hoefer & Arnett, Inc. (Howe Barnes), its financial advisor, provided to the Community Capital board of directors on March 30, 2011 that, as of that date, and based on and subject to the assumptions made, matters considered and qualifications and limitations set forth therein, in its opinion, the per share merger consideration provided for in the merger agreement was fair from a financial point of view to holders of Community Capital common stock. A copy of the full text of Howe Barnes’s fairness opinion is included as Appendix B to this Proxy Statement/Prospectus and holders of Community Capital common stock should read this opinion in its entirety. Howe Barnes’s opinion is not intended to be and does not constitute a recommendation to any holder of Community Capital common stock as to how such holder should vote in connection with the merger.
          Pursuant to an engagement letter between Community Capital and Howe Barnes, Community Capital agreed to pay Howe Barnes a transaction fee with respect to its services as Community Capital’s independent financial advisor. Howe Barnes has received a portion of its fee, which was payable by Community Capital upon execution of the merger agreement, and the remainder of Howe Barnes’s fee is payable upon completion of the merger.

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Financial Interests of Community Capital’s Directors and Executive Officers in the Merger (See page 49)
          Community Capital’s directors and executive officers have economic interests in the merger that are different from, or in addition to, their interests as Community Capital shareholders. The Community Capital board of directors considered these interests in its decision to adopt and approve the merger agreement. Some of the interests of the directors and executive officers of Community Capital include:
  §   Concurrent with completion of the merger, Park Sterling will take certain actions to appoint to the Park Sterling and Park Sterling Bank boards of directors an individual currently serving on the Community Capital board of directors. Park Sterling currently expects to appoint Patricia C. Hartung, the current chairman of the Community Capital board of directors.
 
  §   As a condition to entering into the merger agreement, Park Sterling required that William G. Stevens and R. Wesley Brewer, currently President and Chief Executive Officer and Chief Financial Officer and Executive Vice-President of Community Capital, respectively, enter into employment agreements with Park Sterling to serve as executives of Park Sterling following the completion of the merger.
 
  §   Community Capital has made restricted stock awards to certain officers under its 2004 Equity Incentive Plan. As a result of the merger, each share of such restricted stock will become fully vested and transferable and will be converted into a right to receive merger consideration.
 
  §   William G. Stevens and R. Wesley Brewer are parties to salary continuation agreements, under which those executives are provided with cash retirement benefits that are increased if the executives terminate employment following a change of control. Because the CapitalBank board of directors has determined that the merger will constitute a change of control under those agreements, Mr. Brewer will be entitled to increased benefits after the effectiveness of the merger payable in accordance with his salary continuation agreement. Mr. Stevens has already earned the maximum level of benefit payable under his salary continuation agreement and therefore will not be entitled to any increased benefits after the merger occurs.
 
  §   William G. Stevens and R. Wesley Brewer are parties to split dollar life insurance agreements with CapitalBank. Because the CapitalBank board of directors has determined that the merger will constitute a change of control under those agreements, Mr. Brewer will, upon effectiveness of the merger, have a vested right to designate a beneficiary of certain death proceeds under the life insurance policies owned by CapitalBank on his life. Mr. Stevens already has a vested right to designate a beneficiary of the death proceeds payable under the insurance policy on his life.
 
  §   Community Capital has entered into deferred fee agreements with four of its directors under which those directors are able to defer their directors’ fees. The fees are credited with interest, and the fees and interest are generally payable in 120 equal monthly installments following termination of such director’s services as a director. When there is a change in control of Community Capital, such as will occur in connection with the merger with Park Sterling, the deferred fees, plus accrued interest, must be paid to the director in a single lump sum on or before the 60th day following the effective time of the change in control.
 
  §   Each director of Community Capital will be appointed to an advisory board of Park Sterling and will receive a $25,000 annual retainer for a period of two years to be paid in quarterly installments, except for Patricia C. Hartung, the current chairman of the Community Capital board of directors who is expected to be appointed to the Park Sterling and Park Sterling Bank boards of directors effective upon completion of the merger, and William G. Stevens.
 
  §   Park Sterling will generally indemnify and will provide liability insurance to each officer and director of Community Capital for a period of six years following the merger in coverage amounts that can be purchased for up to 280% of the current annual premium of Community Capital’s liability insurance.
     Conditions to the Merger (See page 66)
          Currently, we expect to complete the merger in the third quarter of 2011. As more fully described in this Proxy Statement/Prospectus and in the merger agreement, the completion of the merger depends on the approval of the merger agreement and the merger by Community Capital shareholders at the special meeting and receipt of the required regulatory approvals, in addition to satisfaction of, or where legally permissible, waiver of, other customary conditions. We cannot be certain when, or if, the conditions to the merger will be satisfied or, where permissible, waived, or that the merger will be completed. Approval of the “golden parachute” compensation in the advisory (nonbinding) vote described in this Proxy Statement/Prospectus is not a condition to completion of the merger.

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     Regulatory Approvals (See page 52)
          Park Sterling and Community Capital have agreed to use our reasonable best efforts to obtain all regulatory approvals required to complete the transactions contemplated by the merger agreement. These approvals include approval from the Board of Governors of the Federal Reserve System (Federal Reserve Board) and other federal and state regulatory authorities, including the S.C. Board. Park Sterling and Community Capital have filed, or are in the process of filing, applications and notifications to obtain the required regulatory approvals. In obtaining the required regulatory approvals, Park Sterling is not required to agree to any restriction or condition that would have a material adverse effect on Community Capital or Park Sterling, measured on a scale relative to Community Capital. Although we do not know of any reason why we cannot obtain these regulatory approvals in a timely manner, we cannot be certain when or if we will obtain them. Approval or nonobjection by the regulators does not constitute an endorsement of the merger or a determination that the terms of the merger are fair to Community Capital shareholders.
     Termination of the Merger Agreement (See page 67)
          The merger agreement may be terminated by mutual consent, or by either Park Sterling or Community Capital if the merger has not occurred by December 30, 2011 and under other limited circumstances described in the merger agreement and which are described in further detail later in this Proxy Statement/Prospectus.
          Community Capital will be required to pay Park Sterling a termination fee in the amount of $2.0 million, plus up to $500,000 of Park Sterling’s out-of-pocket legal and due diligence expenses in connection with the proposed transaction, if Community Capital enters into or closes on an acquisition agreement with respect to an Alternative Transaction (as defined in the merger agreement and described in greater detail under “The Merger Agreement—Agreement Not to Solicit Other Offers”) if either:
  §   the merger agreement is duly terminated by Park Sterling and before such termination, an Alternative Transaction was received, commenced, publicly proposed or publicly disclosed, and within 12 months after such termination, Community Capital has entered into a definitive written agreement relating to an Alternative Transaction or consummated an Alternative Transaction, or
 
  §   after receiving an Alternative Proposal (as defined in the merger agreement and described in greater detail under “The Merger Agreement—Agreement Not to Solicit Other Offers”), Community Capital’s board of directors fails to convene the special meeting to approve the merger agreement and the merger with Park Sterling or recommend that the Community Capital shareholders approve the merger agreement and the merger, and within 12 months of receiving the Alternative Proposal, Community Capital has entered into a definitive written agreement relating to an Alternative Transaction or consummated an Alternative Transaction.
Community Capital Has Agreed Not to Solicit Alternative Transactions (See page 64)
          In the merger agreement, Community Capital has agreed not to solicit, initiate, encourage, facilitate (including by way of furnishing information) or take any other action designed to facilitate any inquiries or proposals for an acquisition transaction involving Community Capital by any party other than Park Sterling. This restriction may deter other potential acquirors of control of Community Capital. However, Community Capital may take certain of these actions if its board of directors determines that it must do so in order to properly discharge its fiduciary duties following consultation with its legal counsel and financial advisors.
Community Capital Shareholders Do Not Have Dissenters’ Rights in the Merger (See page 54)
          Shareholders of a corporation that is proposing to merge or consolidate with another entity are sometimes entitled under relevant state laws to appraisal or dissenters’ rights in connection with the proposed transaction depending on the circumstances. These rights generally confer on shareholders who oppose a merger or the consideration to be received in a merger the right to receive, in lieu of the consideration being offered in the merger, the fair value for their shares as determined in a judicial appraisal proceeding.
          Community Capital shareholders are not entitled to appraisal or dissenters’ rights under South Carolina law in connection with the merger because Community Capital common stock was listed on NASDAQ on the record date for the special meeting.

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The Community Capital Special Meeting Will be Held on , 2011
     Date, Time and Place (See page 36)
          Community Capital will hold its special meeting of shareholders at the offices of CapitalBank at 109 Montague Avenue, Greenwood, South Carolina, on , 2011, at a.m., local time. At the special meeting, Community Capital shareholders will be asked to:
  §   approve the merger agreement and the transactions contemplated by the merger agreement, including the merger;
 
  §   cast an advisory (nonbinding) vote to approve “golden parachute” compensation payable under existing agreements that certain Community Capital officers will receive from Community Capital and CapitalBank in connection with the merger; and
 
  §   approve the adjournment or postponement of the special meeting, if necessary or appropriate, including to solicit additional proxies to approve the merger agreement and the merger.
     Record Date (See page 37)
          The record date for Community Capital shareholders entitled to vote at the special meeting of shareholders is , 2011.
     Shares Entitled to Vote (See page 37)
           shares of Community Capital common stock were outstanding on the record date and entitled to vote at the Community Capital special meeting.
     Support Agreements (See page 38)
          In consideration of Park Sterling agreeing to enter into the merger agreement, the directors of Community Capital have agreed to vote their shares of Community Capital common stock in favor of the merger and not to support any other merger proposal by a third party. A copy of the form of this support agreement is attached to this Proxy Statement/Prospectus as Appendix C. In addition, Community Capital, as trustee of the Community Capital Corporation Employee Stock Ownership Plan (with Code Section 401(k) Provisions) (KSOP), has signed a support agreement committing to vote any shares held by the KSOP, with respect to which the KSOP beneficiaries have not voted, in favor of the merger and not to support any other merger proposal by a third party. A copy of the form of this support agreement is attached to this Proxy Statement/Prospectus as Appendix D. Because the Community Capital directors and the KSOP beneficiaries collectively beneficially own approximately 22.6% of the outstanding Community Capital common stock, these support agreements may have the effect of discouraging a competing offer to acquire Community Capital.
     Vote Required (See page 37)
          Approval of the merger agreement and the merger requires the affirmative vote of the holders of at least two-thirds of the issued and outstanding shares of Community Capital common stock entitled to vote at the special meeting. Your failure to vote your shares (including your failure to instruct your broker to vote your shares) or your abstaining from voting will have the same effect as a vote against the merger agreement and the merger.
          Community Capital’s board of directors has unanimously adopted and approved the merger agreement and unanimously recommends that Community Capital shareholders vote “FOR” the approval of the merger agreement and the merger.
          As of April 28, 2011, the directors and executive officers of Community Capital, and their affiliates, beneficially owned 1,516,292 shares, or approximately 15% of the outstanding shares of Community Capital common stock. As referenced above, pursuant to support agreements entered into at the time of the merger agreement with Park Sterling, each director of Community Capital, as well as Community Capital, as trustee of the KSOP (with respect to shares held under the KSOP with respect to which it has voting power), has agreed, among other things, to vote or cause to be voted all shares which they beneficially own in favor of the merger agreement and the merger.
          The approval of the proposal regarding “golden parachute” compensation payable under existing agreements that certain Community Capital officers will receive from Community Capital and CapitalBank in connection with the merger requires the number of votes cast at the special meeting, in person or by proxy and entitled to vote thereon, in favor of the proposal to exceed the number of votes cast against the proposal.

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          Community Capital’s board of directors unanimously recommends that Community Capital shareholders vote “FOR” the approval of the “golden parachute” compensation payable under existing agreements that certain of its officers will receive from Community Capital and CapitalBank in connection with the merger.
          Approval of the merger agreement and the merger and approval of the “golden parachute” compensation are subject to separate votes of the Community Capital shareholders, and approval of the “golden parachute” compensation is not a condition to completion of the merger.
          The approval of the proposal to adjourn or postpone the special meeting, if necessary or appropriate, including to solicit additional proxies to approve the merger agreement and the merger requires the number of votes cast at the special meeting, in person or by proxy and entitled to vote thereon, in favor of the proposal to exceed the number of votes cast against the proposal, whether or not a quorum is present at the special meeting. The board of directors of Community Capital unanimously recommends that shareholders vote “FOR” this proposal.

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SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF PARK STERLING
          Set forth below are highlights derived from Park Sterling’s audited consolidated financial statements as of and for the years ended December 31, 2006 through 2010. You should read this information in conjunction with Park Sterling’s audited consolidated financial statements and related notes included in this Proxy Statement/Prospectus and from which this information is derived. See “Financial Statements.”
                                         
    At or for the Years Ended December 31,  
    2010     2009     2008     2007     2006 (1)  
    (Dollars in thousands, except per share data)  
Operating Data
                                       
Total interest income
  $ 22,642     $ 21,668     $ 20,102     $ 10,988     $ 690  
Total interest expense
    7,607       9,290       10,471       4,837       134  
 
                             
Net interest income
    15,035       12,378       9,631       6,151       556  
Provision for loan losses
    17,005       3,272       2,544       2,758       640  
 
                             
Net interest income (loss) after provision
    (1,970 )     9,106       7,087       3,393       (84 )
Noninterest income (loss)
    130       (293 )     26       13       1  
Noninterest expense
    11,057       7,997       7,099       5,278       1,811  
 
                             
Income (loss) before taxes
    (12,897 )     816       14       (1,872 )     (1,894 )
Income tax expense (benefit)
    (5,038 )     239       (1,532 )            
 
                             
Net income (loss)
  $ (7,859 )   $ 577     $ 1,546     $ (1,872 )   $ (1,894 )
 
                             
Per Share Data (2)
                                       
Basic earnings (loss) per common share
  $ (0.58 )   $ 0.12     $ 0.31     $ (0.38 )   $ (0.38 )
Diluted earnings (loss) per common share
  $ (0.58 )   $ 0.12     $ 0.31     $ (0.38 )   $ (0.38 )
Weighted-average common shares outstanding:
                                       
Basic
    13,558,221       4,951,098       4,951,098       4,950,355       4,950,000  
Diluted
    13,558,221       4,951,098       5,000,933       4,950,355       4,950,000  
 
                                       
Balance Sheet Data
                                       
Cash and cash equivalents
  $ 65,378     $ 23,238     $ 16,511     $ 1,423     $ 20,371  
Investment securities
    140,590       42,567       31,588       14,883       4,572  
Loans
    399,829       397,564       371,272       226,541       42,647  
Allowance for loan losses
    (12,424 )     (7,402 )     (5,568 )     (3,398 )     (640 )
Total assets
    616,108       473,855       428,073       246,667       68,424  
Deposits
    407,820       392,633       351,327       185,602       25,409  
Borrowings
    20,874       26,989       27,962       16,804        
Subordinated debt
    6,895       6,895                    
Shareholders’ equity
  $ 177,101     $ 46,095     $ 45,697     $ 42,421     $ 42,964  
 
(1)   Operating and per share data from September 8, 2006 (date of incorporation) to December 31, 2006.
 
(2)   Per share data has been adjusted for the effects of an eleven-for-ten stock split in the third quarter of 2008.

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SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF COMMUNITY CAPITAL
          Set forth below are highlights derived from Community Capital’s audited consolidated financial statements as of and for the years ended December 31, 2006 through 2010. You should read this information in conjunction with Community Capital’s audited consolidated financial statements and related notes included in this Proxy Statement/Prospectus and from which this information is derived. See “Financial Statements.”
                                         
    Year Ended December 31,
    2010   2009   2008   2007   2006
    (Dollars in thousands, except per share)
Income Statement Data:
                                       
Interest income
  $ 31,010     $ 36,233     $ 43,594     $ 49,132     $ 40,679  
Interest expense
    10,903       13,867       18,656       25,229       19,625  
Net interest income
    20,107       22,366       24,938       23,903       21,054  
Provision for loan losses
    18,350       32,800       9,300       1,025       1,140  
Net interest income (loss) after provision for loan losses
    1,757       (10,434 )     15,638       22,878       19,914  
Net securities gains (losses)
    1,999       224       98       (469 )     (61 )
Noninterest income
    8,702       7,306       7,149       6,875       6,028  
Noninterest expense
    21,397       31,774       20,192       19,257       18,104  
Income (loss) before income taxes
    (8,939 )     (34,678 )     2,693       10,027       7,777  
Income tax expense (benefit)
    (3,454 )     (9,433 )     284       3,139       2,018  
Net income (loss)
  $ (5,485 )   $ (25,245 )   $ 2,409     $ 6,888     $ 5,759  
Balance Sheet Data:
                                       
Assets
  $ 655,934     $ 749,442     $ 790,600     $ 800,598     $ 713,244  
Earning assets
    590,904       686,443       733,539       727,367       648,450  
Securities (1)
    83,651       79,172       89,858       81,315       73,949  
Loans (2)
    484,909       568,281       642,040       645,785       574,193  
Allowance for loan losses
    17,165       14,160       13,617       6,759       6,200  
Deposits
    495,182       583,483       513,601       520,072       486,956  
Federal Home Loan Bank advances
    95,400       95,400       161,185       135,525       105,625  
Shareholders’ equity
    47,404       53,757       64,957       64,847       58,926  
Per Share Data: (3)
                                       
Basic earnings (loss) per share
  $ (0.55 )   $ (4.34 )   $ 0.54     $ 1.58     $ 1.34  
Diluted earnings (loss) per share
    (0.55 )     (4.34 )     0.54       1.56       1.31  
Book value (period end) (4)
    4.73       5.44       14.54       14.72       13.52  
Cash dividends per share
          0.15       0.60       0.54       0.52  
Performance Ratios:
                                       
Return on average assets
    (0.75 )%     (3.28 )%     0.30 %     0.91 %     0.87 %
Return on average equity
    (9.92 )     (40.26 )     3.69       11.09       10.05  
Net interest margin (5)
    3.05       3.18       3.48       3.52       3.59  
Efficiency (6)
    73.87       105.37       61.91       61.54       65.61  
Allowance for loan losses to loans
    3.58       2.50       2.12       1.05       1.08  
Net charge-offs to average loans
    2.90       5.23       0.38       0.08       0.24  
Nonperforming assets to period end assets (7)
    6.10       6.67       4.04       0.32       0.26  
Capital and Liquidity Ratios:
                                       
Average equity to average assets
    7.59       8.10       8.25       8.20       8.66  
Leverage (4.00% required minimum)
    7.77       8.31       8.44       8.33       8.46  
Tier 1 risk-based capital ratio
    10.89       10.88       10.43       10.05       10.03  
Total risk-based capital ratio
    12.17       12.15       11.69       11.10       11.09  
Average loans to average deposits
    94.31       112.23       124.85       120.46       110.96  
 
(1)   Securities held-to-maturity are stated at amortized cost, securities available-for-sale are stated at fair value, and nonmarketable equity securities are stated at cost.
 
(2)   Loans are stated before the allowance for loan losses and include loans held for sale.
 
(3)   All share and per-share data have been adjusted to reflect the 15% common stock dividend in November 2007.
 
(4)   Excludes the effect of any outstanding stock options.
 
(5)   Tax equivalent net interest income divided by average earning assets.
 
(6)   Noninterest expense divided by the sum of tax equivalent net interest income and noninterest income, excluding gains and losses on sales of assets and the write-down of intangible assets related to the sale of those assets.
 
(7)   Nonperforming loans and nonperforming assets do not include loans past due 90 days or more that are still accruing interest.

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SELECTED UNAUDITED PRO FORMA FINANCIAL DATA
          The following table shows selected unaudited pro forma condensed combined financial information about the financial condition and results of operations of Park Sterling giving effect to the merger with Community Capital. The selected unaudited pro forma condensed combined financial information assumes that the merger is accounted for under the acquisition method of accounting with Park Sterling treated as the acquirer. Under the acquisition method of accounting, the assets and liabilities of Community Capital, as of the effective date of the merger, will be recorded by Park Sterling at their respective fair values and the excess of the merger consideration over the fair value of Community Capital’s net assets will be allocated to goodwill.
          The table sets forth the information as if the merger had become effective on December 31, 2010, with respect to financial condition data, and on January 1, 2010, with respect to the results of operations data. The selected unaudited pro forma condensed combined financial data has been derived from and should be read in conjunction with the consolidated financial statements and the related notes of each of Park Sterling and Community Capital, which are included in this Proxy Statement/Prospectus under “Financial Statements” beginning on page F-1, and the more detailed unaudited pro forma condensed combined financial information, including the notes thereto, which is included in this Proxy Statement/Prospectus under “Unaudited Pro Forma Condensed Combined Financial Information” beginning on page 152.
           The selected unaudited pro forma condensed combined financial information is presented for illustrative purposes only and does not necessarily indicate the financial results of the combined companies had the companies actually been combined at the beginning of the period presented. The selected unaudited pro forma condensed combined financial information also does not consider any potential impacts of current market conditions on revenues, potential revenue enhancements, anticipated cost savings and expense efficiencies, or asset dispositions, among other factors. Further, as explained in more detail in the notes accompanying the more detailed unaudited pro forma condensed combined financial information included under “Unaudited Pro Forma Condensed Combined Financial Information,” the pro forma allocation of purchase price reflected in the selected unaudited pro forma condensed combined financial information is subject to adjustment and may vary significantly from the actual purchase price allocation that will be recorded at the time the merger is completed. Additionally, the adjustments made in the unaudited pro forma condensed financial information, which are described in those notes, are preliminary and may be revised.
         
    As of
    or for the Year Ended
    December 31, 2010
(Dollars in thousands)
       
Pro Forma Condensed Consolidated Income Statement Information:
       
Net interest income
  $ 36,594  
Provision for loan losses
    35,355  
Income (loss) before income taxes
    (20,309 )
Net income (loss)
    (12,411 )
Pro Forma Condensed Consolidated Balance Sheet Information:
       
Loans
    827,108  
Total assets
    1,240,690  
Deposits
    903,644  
Long-term borrowings
    118,989  
Common Shareholders’ equity
    134,463  

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COMPARATIVE PER SHARE DATA
          The following table sets forth for Park Sterling common stock and Community Capital common stock certain historical, unaudited pro forma and pro forma-equivalent per share financial information. In accordance with the requirements of the SEC, the unaudited pro forma and pro forma equivalent per share information gives effect to the merger as if the merger had been effective on the dates presented, in the case of the book value data, and as if the merger had become effective on January 1, 2010, in the case of the net income and dividends declared data. The unaudited pro forma data in the tables assume that the merger is accounted for using the acquisition method of accounting and represents a current preliminary estimate based on available information of the combined company’s results of operations. The pro forma financial adjustments record the assets and liabilities of Community Capital at their preliminary estimated fair values and are subject to adjustment as additional information becomes available and as additional analyses are performed. See “Unaudited Pro Forma Condensed Combined Financial Information.” The information in the following table is based on, and should be read together with, the audited consolidated financial statements and related notes of each of Park Sterling and Community Capital included in this Proxy Statement/Prospectus. See “Financial Statements.”
          We anticipate that the merger will provide the combined company with financial benefits that include reduced operating expenses and revenue enhancement opportunities. The unaudited pro forma information, while helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect the impact of possible revenue enhancements, expense efficiencies, asset dispositions and share repurchases, among other factors, that may result as a consequence of the merger and, accordingly, does not attempt to predict or suggest future results. It also does not necessarily reflect what the historical results of the combined company would have been if our companies had combined during this period nor is it indicative of the results of operations in future periods or the future financial position of the combined company. The Comparative Per Share Data Table for the year ended December 31, 2010 combines the historical income per share data of Park Sterling and its subsidiary and Community Capital and its subsidiary giving effect to the merger as if the merger had become effective on January 1, 2010, using the acquisition method of accounting. The pro forma adjustments are based upon available information and certain assumptions that Park Sterling management believes are reasonable. Upon completion of the merger, the operating results of Community Capital will be reflected in the consolidated financial statements of Park Sterling on a prospective basis.
                                 
                            Per
    Park   Community   Pro   Equivalent
    Sterling   Capital   Forma   Community
    Historical   Historical   Combined   Capital Share(1)
(Dollars in thousands, except per share information)
                               
Net income (loss) from continuing operations for the twelve months ended December 31, 2010:
  $ (7,859 )   $ (5,485 )   $ (15,936 )   $ (10,625 )
Basic
    (0.58 )     (0.55 )     (0.91 )(2)     (0.60 )
Diluted
    (0.58 )     (0.55 )     (0.91 )(2)     (0.60 )
Dividends Paid:
                               
For the twelve months ended December 31, 2010
                       
Book Value:
                               
As of December 31, 2010
    6.31       4.73       5.96 (3)     4.05  
 
(1)   Calculated based on pro forma combined multiplied by the exchange ratio of 0.6667.
(2)   Pro forma earnings per share are based upon pro forma combined net income and pro forma combined weighted average shares outstanding.
(3)   Calculated based on pro forma combined equity and pro forma combined shares outstanding at the end of the period.

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COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
          Since the August 2010 public offering of Park Sterling Bank, shares of Park Sterling common stock (and before the reorganization whereby Park Sterling became the holding company for Park Sterling Bank, Park Sterling Bank’s common stock) have been listed for trading on NASDAQ under the symbol “PSTB.” Prior to the public offering, shares of Park Sterling Bank common stock were traded on the Over the Counter Bulletin Board (OTCBB) under the symbol “PSTB.OB.” The table below sets forth, with respect to Park Sterling: (i) since August 13, 2010, the date that it began trading on NASDAQ, the high and low sales prices for the common stock, as reported on NASDAQ, and (ii) before August 13, 2010, the high and low bid information for the common stock, as reported on the OTCBB, in each case for the periods shown. The OTCBB bid information reflects inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. There may have been other transactions in Park Sterling Bank common stock during the periods referenced of which Park Sterling is not aware.
          Shares of Community Capital common stock are listed on NASDAQ under the symbol “CPBK.” The table below sets forth, with respect to Community Capital, the high and low sales prices for Community Capital common stock, as reported on NASDAQ for the periods shown.
          You are urged to obtain current market quotations before making any decision with respect to the merger.
                                 
    Park Sterling   Community Capital
    High   Low   High   Low
2011
                               
First Quarter
  $ 6.30     $ 4.52     $ 3.15     $ 2.45  
Second Quarter (through May 5, 2011)
    5.00       4.71       3.22       3.00  
 
                               
2010
                               
First Quarter
  $ 6.50     $ 5.80     $ 3.99     $ 2.50  
Second Quarter
    8.95       6.24       4.05       2.75  
Third Quarter (1)
    6.45       5.56       4.96       2.75  
Fourth Quarter
    6.40       5.03       3.18       2.74  
 
                               
2009
                               
First Quarter
  $ 9.00     $ 5.50     $ 3.94     $ 2.49  
Second Quarter
    7.20       6.00       4.90       2.50  
Third Quarter
    7.00       5.50       6.00       4.59  
Fourth Quarter
    6.75       6.00       8.49       4.45  
 
(1)   Represents the high and low sales prices, as reported on NASDAQ, for the period from August 13, 2010 through September 30, 2010. For the period from July 1, 2010 through August 12, 2010, the high and low bid information, as reported on the OTCBB was $8.91 and $6.35, respectively.
          On March 30, 2011, the last full trading day before the announcement of the merger agreement, the high and low sales prices of shares of Park Sterling common stock as reported on NASDAQ were $4.93 and $4.70, respectively. On , 2011, the last full trading day before the date of this Proxy Statement/Prospectus, the high and low sales prices of shares of Park Sterling common stock as reported on NASDAQ were $ and $, respectively.
          On March 30, 2011, the last full trading day before the announcement of the merger agreement, the high and low sales prices of shares of Community Capital common stock as reported on NASDAQ were $2.75 and $2.65, respectively. On , 2011, the last full trading day before the date of this Proxy Statement/Prospectus, the high and low sales prices of shares of Community Capital common stock as reported on NASDAQ were $ and $, respectively.
           As of April 28, 2011, there were approximately 177 registered holders of Park Sterling common stock and approximately 1,504 registered holders of Community Capital common stock.
          Community Capital shareholders are advised to obtain current market quotations for Park Sterling common stock and Community Capital common stock. The market price of Park Sterling common stock and Community Capital common stock will fluctuate between the date of this Proxy Statement/Prospectus and the effective date of the merger. No assurance can be given concerning the market price of Community Capital common stock before or, in the case of Park Sterling common stock, after the effective date of the merger.

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          To date, no cash dividends have been paid with respect to Park Sterling common stock. The current policy of Park Sterling’s board of directors is to retain any earnings to provide for the growth of Park Sterling. Therefore, it is not anticipated that Park Sterling will pay cash dividends in the foreseeable future. At such time as the board of directors contemplates a change in the dividend policy, Park Sterling’s ability to pay dividends will be subject to the restrictions of North Carolina law, various statutory limitations and its organizational documents, and may be dependent on the receipt of dividends from Park Sterling Bank, payment of which is subject to regulatory restrictions. For more information regarding Park Sterling’s ability to pay dividends and restrictions thereon, see “Supervision and Regulation.”
          During 2010, Park Sterling Bank did not have any unregistered sales of equity securities except as previously reported on Park Sterling Bank’s Current Report on Form 8-K dated August 18, 2010 and filed with the Federal Deposit Insurance Corporation (FDIC), and did not have any repurchases of its common stock.
          Until September 17, 2001, Community Capital had not declared or distributed any cash dividends to its shareholders since its organization in 1988. From then until April 2009, Community Capital paid cash dividends to its shareholders on a quarterly basis. On March 6, 2009, Community Capital paid a cash dividend in the amount of $0.15 per share. In April 2009, Community Capital announced it was suspending its quarterly cash dividends to preserve its retained capital and because of regulatory concerns.
          For the foreseeable future, Community Capital does not intend to declare cash dividends. Community Capital intends to retain earnings to grow its business and strengthen its capital base. Future dividends are subject to the discretion of Community Capital’s board of directors and will depend upon a number of factors, including future earnings, financial condition, cash requirements and general business conditions. Community Capital’s ability to distribute cash dividends will depend entirely upon CapitalBank’s ability to distribute dividends to Community Capital. As a South Carolina state-chartered bank, CapitalBank is subject to legal limitations on the amount of dividends each is permitted to pay. In addition, the Written Agreement prohibits Community Capital and CapitalBank from declaring or paying dividends without the prior written approval of the Federal Reserve Bank of Richmond and the S.C. Board, respectively. For more information regarding Community Capital’s ability to pay dividends and restrictions thereon, see “Supervision and Regulation.”
          Community Capital did not sell any of its equity securities that were not registered under the Securities Act and Community Capital did not have any repurchases of its common stock during fiscal year 2010.

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RISK FACTORS
          You should carefully consider each of the following risk factors in evaluating whether to vote for the approval of the merger agreement and the merger and payments to certain officers and directors of Community Capital as a result of the merger. If the merger is consummated, Park Sterling and Community Capital will operate as a combined company in a market environment that cannot be predicted and that involves significant risks, many of which will be beyond the combined company’s control. An investment in the combined company’s common stock contains a high degree of risk. In addition to the other information contained in this Proxy Statement/Prospectus, including the matters addressed under the heading “Cautionary Statement Regarding Forward-Looking Statements,” you should carefully consider the following risk factors before deciding how to vote your Community Capital shares.
          We have described below the risks and uncertainties that we believe to be material to a decision on how to vote your Community Capital shares. If any of the following risks and uncertainties develops into actual events, the combined company or its results of operations or financial condition could be adversely impacted. In such an event, the trading price of the Park Sterling common stock could decline and you could lose all or part of your investment. See “Cautionary Statement Regarding Forward-Looking Statements.”
Risks Associated with the Merger
Community Capital shareholders will experience a reduction in percentage ownership and voting power of their shares as a result of the merger.
          Community Capital shareholders will experience a substantial reduction in their percentage ownership interests and effective voting power in Park Sterling compared to their ownership interests and voting power in Community Capital prior to the merger. If the merger is consummated, current Community Capital shareholders will own approximately 13% of Park Sterling’s outstanding common stock, on a fully diluted basis. Accordingly, former Community Capital shareholders will own less than a majority of the outstanding voting stock of the combined company and could, as a result, be outvoted by current Park Sterling shareholders if such current Park Sterling shareholders voted together as a group.
The form of merger consideration Community Capital shareholders ultimately receive could be different from the form elected based on the form of merger consideration elected by other Community Capital shareholders.
          All Community Capital shareholders will be permitted to make an election as to the form of consideration to receive. Because the total amount of Park Sterling common stock and cash to be issued in the merger is fixed, the exchange agent will be allowed, subject to limitations set forth in the merger agreement, to adjust the form of consideration that a Community Capital shareholder will receive in order to ensure no greater than 60% of the outstanding shares of Community Capital common stock are converted into shares of Park Sterling common stock and no greater than 40% of the shares of Community Capital common stock are converted into cash. Consequently, if either the stock consideration or the cash consideration is oversubscribed, Community Capital shareholders could receive a different form of consideration from the form they elect, which could result in different tax consequences than they had anticipated (including the recognition of gain for federal income-tax purposes with respect to the cash received). If Community Capital shareholders do not make an election, they will receive the merger consideration in a combination of cash and/or shares of common stock as provided for in the merger agreement. If a Community Capital shareholder makes an election but sells or transfers his or her shares before the completion of the merger, those shares will be treated as if no election had been made with respect to them, unless the purchaser or transferee makes a new election prior to the election deadline.
Because the market price of Park Sterling common stock will fluctuate, Community Capital shareholders who receive stock consideration will not know until the effective time of the merger the value of the consideration they will receive in the merger.
          The number of shares of Park Sterling common stock to be exchanged for each share of Community Capital common stock is fixed such that, if a Community Capital shareholder elects to receive Park Sterling common stock as merger consideration, each of his or her shares of Community Capital common stock will be converted into the right to receive 0.6667 of a share of Park Sterling common stock in connection with the merger. No adjustments to this exchange ratio will be made based on changes in the price of either the Park Sterling common stock or Community Capital common stock prior to the completion of the merger. Changes in stock price may result from a variety of factors, including, among others, general market and economic conditions, changes in Park Sterling’s or Community Capital’s respective businesses, operations and prospects, market assessment of the likelihood that the merger will be completed as anticipated or at all and regulatory considerations. Many of these factors are beyond Park Sterling’s control.

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          As a result of any such changes in stock price, the market value of the shares of Park Sterling common stock that Community Capital shareholders receive at the time that the merger is completed could vary significantly from the value of such shares immediately before the public announcement of the merger, on the date of this Proxy Statement/Prospectus, on the date of the Community Capital special meeting or on the date on which Community Capital shareholders actually receive their shares of Park Sterling common stock. Accordingly, at the time of the Community Capital special meeting, Community Capital shareholders will not know or be able to calculate the exact market value of the Park Sterling common stock that they will receive upon completion of the merger.
We may fail to realize all of the anticipated benefits of the merger.
          The success of the merger will depend, in part, on Park Sterling’s ability to realize the anticipated benefits and cost savings from combining the businesses of Park Sterling and Community Capital. However, to realize these anticipated benefits and cost savings, we must successfully combine the businesses of Park Sterling and Community Capital. If we are not able to achieve these objectives, the anticipated benefits and cost savings of the merger may not be realized fully or at all or may take longer to realize than expected.
          Park Sterling and Community Capital have operated and, until the completion of the merger, will continue to operate, independently. It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect Park Sterling’s ability to maintain relationships with clients, depositors and employees or to achieve the anticipated benefits of the merger. Integration efforts between the two companies will also divert management attention and resources. These integration matters could have an adverse effect on each of Community Capital and Park Sterling during that transition period.
Park Sterling and Community Capital will incur significant transaction and merger-related integration costs in connection with the merger.
          Park Sterling and Community Capital expect to incur significant costs associated with completing the merger and integrating the operations of the two companies. Park Sterling and Community Capital are continuing to assess the impact of these costs. Although Park Sterling and Community Capital believe that the elimination of duplicate costs, as well as the realization of other efficiencies related to the integration of the businesses, will offset incremental transaction and merger-related costs over time, this net benefit may not be achieved in the near term, or at all.
Park Sterling has not previously operated in South Carolina.
          Community Capital’s primary service areas are upstate and central South Carolina. The banking business in these areas is extremely competitive, and the level of competition may increase further. Park Sterling has not previously participated in this market and there may be unexpected challenges and difficulties that could adversely affect Park Sterling following the completion of the merger.
The market price of Park Sterling common stock after the merger may be affected by factors different from those affecting the shares of Community Capital or Park Sterling currently.
          The businesses of Park Sterling and Community Capital differ in important respects and, accordingly, the results of operations of the combined company and the market price of the combined company’s shares of common stock may be affected by factors different from those currently affecting the independent results of operations of either Park Sterling or Community Capital. For a discussion of the business of Park Sterling and of certain factors to consider in connection with its business, see “Information About Park Sterling Corporation.” For a discussion of the business of Community Capital and of certain factors to consider in connection with its business, see “Information About Community Capital Corporation.”
The opinion obtained by Community Capital from its financial advisor will not reflect changes in circumstances between signing the merger agreement and the merger.
          Community Capital has not obtained an updated opinion as of the date of this Proxy Statement/Prospectus from its financial advisor. Changes in the operations and prospects of Park Sterling or Community Capital, general market and economic conditions and other factors that may be beyond the control of Park Sterling and Community Capital, and on which the financial advisor’s opinion was based, may significantly alter the value of Park Sterling or Community Capital or the prices of shares of Park Sterling common stock or Community Capital common stock by the time the merger is completed. The opinion does not speak as of the time the merger will be completed or as of any date other than the date of such opinion. Because Community Capital currently does not anticipate asking its financial advisor to update its opinion, the opinion will not address the fairness of the merger consideration, from a financial point of view, at the time the merger is completed. For a description of the opinion that Community Capital received from its financial advisor, see “Proposal No.1 — The Merger — Opinion of Financial Advisor to Community Capital.” For a description of the other factors considered by Community Capital’s board of directors in determining to approve the merger, see “Proposal No.1 — The Merger—Community Capital’s Reasons for the Merger and Recommendation of the Community Capital Board of Directors.”

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The merger agreement limits Community Capital’s ability to pursue alternatives to the merger.
          The merger agreement contains provisions that limit Community Capital’s ability to discuss competing third-party proposals to acquire all or a significant part of Community Capital. In addition, Community Capital has agreed to pay Park Sterling a termination fee of $2,000,000 plus expense reimbursement of up to $500,000 if the transaction is terminated because Community Capital decides to enter into or close another acquisition transaction. These provisions might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of Community Capital from considering or proposing that acquisition, even if it were prepared to pay consideration with a higher per share price than that proposed in the merger with Park Sterling, or might result in a potential competing acquirer proposing to pay a lower per share price to acquire Community Capital than it might otherwise have proposed to pay.
The merger is subject to the receipt of consents and approvals from government entities that may impose conditions that could have an adverse effect on Park Sterling.
          Before the merger may be completed, various approvals or consents must be obtained from the Federal Reserve Board and various state bank regulatory and other authorities. These governmental entities, including the Federal Reserve Board, may impose conditions on the completion of the merger or require changes to the terms of the merger. Although Park Sterling and Community Capital do not currently expect that any such conditions or changes would be imposed, there can be no assurance that they will not be, and such conditions or changes could have the effect of delaying completion of the merger or imposing additional costs on or limiting the revenues of Park Sterling following the merger, any of which might have a material adverse effect on Park Sterling following the merger. Park Sterling is not obligated to complete the merger if the regulatory approvals received in connection with the completion of the merger include any conditions or restrictions that, in the aggregate, would reasonably be expected to have a material adverse effect on Community Capital or Park Sterling, measured relative to Community Capital, but Park Sterling could choose to waive this condition.
Park Sterling’s involvement in another merger transaction contemporaneously with this merger transaction may make consummation of this transaction and successful integration of Park Sterling and Community Capital more difficult.
          Park Sterling’s strategic plan is, in part, to grow through acquisitions of other financial institutions and/or the assets of other financial institutions, such as branches or lines of business. If Park Sterling announces another acquisition before the completion of the merger, the merger may be more difficult to complete due to potential delays in obtaining regulatory or shareholder approval and Park Sterling’s focus on that other transaction may limit its ability to fully realize the expected benefits from this transaction if the merger agreement is approved and the merger takes place.
Community Capital is subject to a Written Agreement that may require the combined company to take certain actions.
          As part of its application for bank regulatory approval, Park Sterling plans to request that, after the effective time of the merger, CapitalBank no longer be subject to the restrictions set forth in the Written Agreement. If Park Sterling is unsuccessful with this request, having CapitalBank subject to the Written Agreement may have an adverse effect on the combined company and may subject the combined company to further and more restrictive regulatory action.
Community Capital directors and executive officers have financial interests in the merger that are different from, or in addition to, the interests of Community Capital shareholders.
          Executive officers of Community Capital negotiated the terms of the merger agreement with their counterparts at Park Sterling, and Community Capital’s board of directors adopted and approved the merger agreement and unanimously recommended that Community Capital shareholders vote to approve the merger agreement and the merger on substantially the terms set forth in the merger agreement. In considering these facts and the other information contained in this Proxy Statement/Prospectus, you should be aware that Community Capital’s directors and executive officers have financial interests in the merger that are different from, or in addition to, the interests of Community Capital shareholders. For example, certain executive officers have entered into agreements with Community Capital that provide, among other things, retention, salary continuation, severance and/or other benefits following the merger. Also, at the effective time of the merger, certain executive officers will become entitled to change-of-control benefits under existing salary continuation agreements with Community Capital. These and some other additional interests of Community Capital directors and executive officers may create potential conflicts of interest and cause some of these persons to view the proposed transaction differently than you may view it, as a shareholder. See “Proposal No.1 — The Merger—Community Capital’s Directors and Officers Have Financial Interests in the Merger” for information about these financial interests.

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The tax consequences of the merger to a Community Capital shareholder will be dependent upon the merger consideration received.
          The tax consequences of the merger to a Community Capital shareholder will depend upon the merger consideration that the shareholder receives. A Community Capital shareholder generally will not recognize any gain or loss on the conversion of shares of Community Capital common stock solely into shares of Park Sterling common stock. However, a Community Capital shareholder generally will be taxed if the shareholder receives cash in exchange for shares of Community Capital common stock or for any fractional share of Park Sterling common stock. For a detailed discussion of the tax consequences of the merger to Community Capital shareholders generally, see “Proposal No.1 — The Merger—Material U.S. Federal Income-Tax Consequences of the Merger.” Each Community Capital shareholder should consult his, her or its own tax advisors as to the effect of the merger as applicable to the Community Capital shareholder’s particular circumstances.
If the merger does not constitute a reorganization under Section 368(a) of the Internal Revenue Code, then Community Capital shareholders may be responsible for payment of U.S. federal income taxes.
          The United States Internal Revenue Service (IRS) may determine that the merger does not qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended (Code). In that case, each Community Capital shareholder would recognize a gain or loss equal to the difference between the fair market value of the Park Sterling common stock plus cash received by the shareholder in the merger, and the shareholder’s adjusted tax basis in the shares of Community Capital common stock exchanged therefor.
If the merger is not completed, the trading price of Community Capital common stock could decline.
          If the merger is not completed, Community Capital may be subject to a number of material risks, including that the price of its common stock may decline to the extent that the current market price of Community Capital’s common stock reflects an assumption that the merger will be completed.
The unaudited pro forma financial information included in this Proxy Statement/Prospectus is preliminary, and the combined company’s actual financial position and results of operations after the merger may differ materially from the unaudited pro forma financial information included in this Proxy Statement/Prospectus.
          The unaudited pro forma financial information in this Proxy Statement/Prospectus is presented for illustrative purposes only and is not necessarily indicative of what the combined company’s actual financial position or results of operations would have been had the merger been completed on the dates indicated.
The merger will not be completed unless important conditions are satisfied.
          Specified conditions set forth in the merger agreement must be satisfied or waived to complete the merger. If the conditions are not satisfied or waived, to the extent permitted by law or stock exchange rules, the merger will not occur or will be delayed and each of Park Sterling and Community Capital may lose some or all of the intended benefits of the merger. The following conditions, in addition to other customary closing conditions (which are described in greater detail beginning on page 66), must be satisfied or, with respect to conditions other than shareholder and regulatory approval, waived, if permissible, before Park Sterling and Community Capital are obligated to complete the merger:
  §   the merger agreement and merger must be approved by the holders of at least two-thirds of the outstanding shares of Community Capital common stock as of the record date of the Community Capital special meeting;
 
  §   all required regulatory consents must be obtained;
 
  §   the absence of any law or order by a court or regulatory authority that prohibits, restricts or makes illegal the merger; and
 
  §   Community Capital’s classified assets (which means loans or other assets characterized as “substandard,” “doubtful,” “loss” or words of similar import and other real estate owned) must not exceed $84 million at the effective time of the merger.
The merger may distract management of Community Capital and Park Sterling from their other responsibilities.
          The merger could cause the respective management groups of Community Capital and Park Sterling to focus their time and energies on matters related to the transaction that otherwise would be directed to their business and operations. Any such distraction on the part of either company’s management, if significant, could affect its ability to fully realize the expected financial benefits from this transaction if the merger agreement is approved and the merger takes place.

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Sales of substantial amounts of Park Sterling common stock in the open market by former Community Capital shareholders could depress Park Sterling’s stock price.
          Shares of Park Sterling common stock that are issued to shareholders of Community Capital will be freely tradable without restrictions or further registration under the Securities Act, except for shares issued to any shareholder who may be deemed to be an affiliate of Park Sterling. As of April 28, 2011, Park Sterling had approximately 28,619,358 shares of common stock outstanding and approximately 2,239,889 shares of common stock subject to outstanding options and other rights to purchase or acquire its shares. Park Sterling currently expects that it will issue approximately 4,024,550 shares of Park Sterling common stock in connection with the merger.
          If the merger is completed and if Community Capital’s shareholders sell substantial amounts of Park Sterling common stock in the public market following completion of the merger, the market price of Park Sterling common stock may decrease. These sales might also make it more difficult for Park Sterling to sell equity or equity-related securities at a time and price that it otherwise would deem appropriate.
Risks Associated With Park Sterling’s Growth Strategy
Park Sterling may not be able to implement aspects of its growth strategy.
          Park Sterling’s growth strategy contemplates the future expansion of its business and operations both organically and by acquisitions such as through the establishment or acquisition of banks and banking offices in its market area and other markets in the Carolinas and Virginia. Implementing these aspects of Park Sterling’s growth strategy depends, in part, on its ability to successfully identify acquisition opportunities and strategic partners that will complement its operating philosophy and to successfully integrate their operations with Park Sterling’s, as well as generate loans and deposits of acceptable risk and expense. To successfully acquire or establish banks or banking offices, Park Sterling must be able to correctly identify profitable or growing markets, as well as attract the necessary relationships and high caliber banking personnel to make these new banking offices profitable. In addition, Park Sterling may not be able to identify suitable opportunities for further growth and expansion or, if it does, Park Sterling may not be able to successfully integrate these new operations into its business.
          As consolidation of the financial services industry continues, the competition for suitable acquisition candidates may increase. Park Sterling will compete with other financial services companies for acquisition opportunities, and many of these competitors have greater financial resources than Park Sterling does and may be able to pay more for an acquisition than Park Sterling is able or willing to pay.
          Park Sterling can offer no assurance that it will have opportunities to acquire other financial institutions or acquire or establish any new branches or loan production offices, or that it will be able to negotiate, finance and complete any opportunities available to it.
          If Park Sterling is unable to effectively implement its growth strategies, its business, results of operations and stock price may be materially and adversely affected.
Future expansion involves risks.
          The acquisition by Park Sterling of other financial institutions or parts of those institutions, or the establishment of de novo branch offices and loan production offices involves a number of risks, including the risk that:
  §   Park Sterling may incur substantial costs in identifying and evaluating potential acquisitions and merger partners, or in evaluating new markets, hiring experienced local managers, and opening new offices;
 
  §   Park Sterling’s estimates and judgments used to evaluate credit, operations, management and market risks relating to target institutions may not be accurate;
 
  §   the institutions Park Sterling acquires may have distressed assets and there can be no assurance that Park Sterling will be able to realize the value it predicts from those assets or that it will make sufficient provisions or have sufficient capital for future losses;

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  §   Park Sterling may be required to take write-downs or write-offs, restructuring and impairment, or other charges related to the institutions it acquires that could have a significant negative effect on Park Sterling’s financial condition and results of operations;
 
  §   there may be substantial lag-time between completing an acquisition or opening a new office and generating sufficient assets and deposits to support costs of the expansion;
 
  §   Park Sterling may not be able to finance an acquisition, or the financing it obtains may have an adverse effect on its results of operations or result in dilution to its existing shareholders;
 
  §   Park Sterling’s management’s attention in negotiating a transaction and integrating the operations and personnel of the combining businesses may be diverted from its existing business and Park Sterling may not be able to successfully integrate such operations and personnel;
 
  §   Park Sterling’s announcement of another transaction prior to completion of the merger could result in a delay in obtaining regulatory or shareholder approval for the merger, which could have the effect of limiting Park Sterling’s ability to fully realize the expected financial benefits from the transaction;
 
  §   Park Sterling may not be able to obtain regulatory approval for an acquisition;
 
  §   Park Sterling may enter new markets where it lacks local experience or that introduce new risks to its operations, or that otherwise result in adverse effects on its results of operations;
 
  §   Park Sterling may introduce new products and services it is not equipped to manage or that introduce new risks to its operations, or that otherwise result in adverse effects on its results of operations;
 
  §   Park Sterling may incur intangible assets in connection with an acquisition, or the intangible assets it incurs may become impaired, which results in adverse short-term effects on Park Sterling’s results of operations;
 
  §   Park Sterling may assume liabilities in connection with an acquisition, including unrecorded liabilities that are not discovered at the time of the transaction, and the repayment of those liabilities may have an adverse effect on Park Sterling’s results of operations, financial condition and stock price; or
 
  §   Park Sterling may lose key employees and clients.
          Park Sterling cannot assure you that it will be able to successfully integrate any banking offices that Park Sterling acquires into its operations or retain the clients of those offices. If any of these risks occur in connection with Park Sterling’s expansion efforts, it may have a material and adverse effect on Park Sterling’s results of operations and financial condition.
Park Sterling may not be able to maintain and manage its organic growth, which may adversely affect its results of operations and financial condition.
          Park Sterling has grown rapidly since it commenced operations in October 2006, and its modified business strategy contemplates significant acceleration in such growth, both organically and through acquisitions. Park Sterling can provide no assurance that it will continue to be successful in increasing the volume of loans and deposits or in introducing new products and services at acceptable risk levels and upon acceptable terms while managing the costs and implementation risks associated with its historical or modified organic growth strategy. Park Sterling may be unable to continue to increase its volume of loans and deposits or to introduce new products and services at acceptable risk levels for a variety of reasons, including an inability to maintain capital and liquidity sufficient to support continued growth. If Park Sterling is successful in continuing its growth, it cannot assure you that further growth would offer the same levels of potential profitability or that Park Sterling would be successful in controlling costs and maintaining asset quality. Accordingly, an inability to maintain growth, or an inability to effectively manage growth, could adversely affect Park Sterling’s results of operations, financial condition and stock price.
New bank office facilities and other facilities may not be profitable.
          Park Sterling may not be able to organically expand into new markets that are profitable for its franchise. The costs to start up new bank branches and loan production offices in new markets, other than through acquisitions, and the additional costs to operate these facilities would increase Park Sterling’s noninterest expense and may decrease its earnings. It may be difficult to adequately and profitably manage Park Sterling’s growth through the establishment of bank branches or loan production offices in new markets. In addition, Park Sterling can provide no assurance that its expansion into any such new markets will successfully attract enough new business to offset the expenses of their operation. If Park Sterling is not able to do so, its earnings and stock price may be negatively impacted.

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Acquisition of assets and assumption of liabilities may expose Park Sterling to intangible asset risk, which could impact its results of operations and financial condition.
          In connection with any acquisitions, as required by U.S. generally accepted accounting principles (GAAP), Park Sterling will record assets acquired and liabilities assumed at their fair value, and, as such, acquisitions may result in Park Sterling recording intangible assets, including deposit intangibles and goodwill. Park Sterling will perform a goodwill valuation at least annually to test for goodwill impairment. Impairment testing is a two-step process that first compares the fair value of goodwill with its carrying amount, and second measures impairment loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. Adverse conditions in its business climate, including a significant decline in future operating cash flows, a significant change in Park Sterling’s stock price or market capitalization, or a deviation from Park Sterling’s expected growth rate and performance may significantly affect the fair value of any goodwill and may trigger impairment losses, which could be materially adverse to Park Sterling’s results of operations, financial condition and stock price.
The success of Park Sterling’s growth strategy depends on Park Sterling’s ability to identify and retain individuals with experience and relationships in the markets in which it intends to expand.
          Park Sterling’s growth strategy contemplates that it will expand its business and operations to other markets in the Carolinas and Virginia. Park Sterling intends to primarily target market areas that it believes possess attractive demographic, economic or competitive characteristics. To expand into new markets successfully, Park Sterling must identify and retain experienced key management members with local expertise and relationships in these markets. Competition for qualified personnel in the markets in which Park Sterling may expand may be intense, and there may be a limited number of qualified persons with knowledge of and experience in the commercial banking industry in these markets. Even if Park Sterling identifies individuals that it believes could assist it in establishing a presence in a new market, Park Sterling may be unable to recruit these individuals away from other banks or be unable to do so at a reasonable cost. In addition, the process of identifying and recruiting individuals with the combination of skills and attributes required to carry out Park Sterling’s strategy is often lengthy. Park Sterling’s inability to identify, recruit and retain talented personnel to manage new offices effectively would limit its growth and could materially adversely affect its business, financial condition, results of operations and stock price.
Park Sterling may need additional access to capital, which it may be unable to obtain on attractive terms or at all.
          Park Sterling may need to incur additional debt or equity financing in the future to make strategic acquisitions or investments, for future growth or to fund losses or additional provision for loan losses in the future. Park Sterling’s ability to raise additional capital, if needed, will depend in part on conditions in the capital markets at that time, which are outside Park Sterling’s control, and on Park Sterling’s financial performance. Accordingly, Park Sterling may be unable to raise additional capital, if and when needed, on terms acceptable to it, or at all. If Park Sterling cannot raise additional capital when needed, its ability to further expand its operations through internal growth and acquisitions could be materially impaired and its stock price negatively affected.
Risks Associated With Park Sterling’s Business
The current economic environment poses significant challenges for Park Sterling and could adversely affect its financial condition and results of operations.
          Although Park Sterling remains well capitalized and has not suffered from liquidity issues, it is operating in an economic environment that remains challenging and uncertain. Financial institutions continue to be affected by declines in the real estate market and constrained financial markets. Park Sterling retains direct exposure to the residential and commercial real estate markets, and it could be affected by these events. Continued declines in real estate values, home sales volumes and financial stress on borrowers as a result of the uncertain economic environment, including continued job losses, could have an adverse affect on Park Sterling’s borrowers, or their clients, which could adversely affect Park Sterling’s financial condition, results of operations and stock price. In addition, an extended deterioration in local economic conditions in Park Sterling’s markets and target markets could drive losses beyond those that are or will be provided for in its allowance for loan losses and result in the following consequences:
  §   increases in loan delinquencies;
 
  §   increases in nonperforming loans and foreclosures;

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  §   decreases in demand for Park Sterling’s products and services, which could adversely affect its liquidity position;
 
  §   decreases in the value of the collateral securing Park Sterling’s loans, especially real estate, which could reduce clients’ borrowing power; and
 
  §   decreases in Park Sterling’s ability to raise additional capital on terms acceptable to it or at all.
          Until conditions improve, Park Sterling expects its business, financial condition and results of operations to continue to be adversely affected, which could negatively impact its stock price.
Park Sterling’s estimated allowance for loan losses may not be sufficient to cover actual loan losses, which could adversely affect its earnings.
          Park Sterling maintains an allowance for loan losses in an attempt to cover loan losses inherent in its loan portfolio. The determination of the allowance for loan losses, which represents management’s estimate of probable losses inherent in Park Sterling’s credit portfolio, involves a high degree of judgment and complexity. Park Sterling’s policy is to establish reserves for estimated losses on delinquent and other problem loans when it is determined that losses are expected to be incurred on such loans. Management’s determination of the adequacy of the allowance is based on various factors, including an evaluation of the portfolio, current economic conditions, the volume and type of lending conducted by Park Sterling, composition of the portfolio, the amount of Park Sterling’s classified assets, seasoning of the loan portfolio, the status of past due principal and interest payments and other relevant factors. Changes in such estimates may have a significant impact on Park Sterling’s financial statements. If Park Sterling’s assumptions and judgments prove to be incorrect, Park Sterling’s current allowance may not be sufficient and adjustments may be necessary to allow for different economic conditions or adverse developments in its loan portfolio. In addition, Park Sterling may be required to increase the allowance due to the conditions of loans acquired with Community Capital. Federal and state regulators also periodically review Park Sterling’s allowance for loan losses and may require Park Sterling to increase its provision for loan losses or recognize further loan charge-offs, based on judgments different than those of management. The risks inherent in Park Sterling’s loan portfolio have been exacerbated by the negative developments in the financial markets and the economy in general, and additional loan losses will likely occur in the future and may occur at a rate greater than Park Sterling has experienced to date. Park Sterling significantly increased its allowance for loan losses in 2010. However, no assurance can be given that the allowance will be adequate to cover loan losses inherent in Park Sterling’s loan portfolio, and Park Sterling may experience losses in its loan portfolio or perceive adverse conditions and trends that may require it to significantly increase its allowance for loan losses in the future. Any increase in Park Sterling’s allowance for loan losses would have an adverse effect on its results of operations and financial condition, which could impact its stock price.
If Park Sterling’s nonperforming assets increase, its earnings will suffer.
          At December 31, 2010, Park Sterling’s nonperforming assets totaled approximately $42.2 million, or 6.84% of total assets. Park Sterling may be required to increase the nonperforming assets of the combined company when it analyzes Community Capital’s assets after the closing of the merger. Park Sterling’s nonperforming assets adversely affect its earnings in various ways. Park Sterling does not record interest income on nonaccrual loans or other real estate owned. Park Sterling must reserve for probable losses, which is established through a current period charge to the provision for loan losses as well write-downs from time to time, as appropriate, of the value of properties in its other real estate owned portfolio to reflect changing market values. Additionally, there are legal fees associated with the resolution of problem assets as well as carrying costs such as taxes, insurance and maintenance related to its other real estate owned. Further, the resolution of nonperforming assets requires the active involvement of management, which can distract them from more profitable activity. Finally, if Park Sterling’s estimate for the recorded allowance for loan losses proves to be incorrect and Park Sterling’s allowance is inadequate, it will have to increase the allowance accordingly and as a result its earnings may be adversely affected, which could impact its stock price.
Park Sterling’s concentration in loans secured by real estate, particularly commercial real estate and construction and development, may increase its loan losses.
          Park Sterling offers a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity, consumer and other loans. Many of Park Sterling’s loans are secured by real estate (both residential and commercial) in its market areas, as are those of Community Capital. Consequently, a decline in economic conditions in these market areas may have a greater effect on its earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are more geographically diverse.
          At December 31, 2010, approximately 86% of Park Sterling’s loans had real estate as a primary or secondary component of collateral and includes a significant portion of loans secured by commercial real estate and construction and development collateral.

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The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If Park Sterling is required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, its earnings and capital could be adversely affected. Over the past year, real estate values in Park Sterling’s market areas have declined and may continue to decline. Continued declines in real estate values expose Park Sterling to further deterioration in the value of the collateral for all loans secured by real estate and may adversely affect Park Sterling’s results of operations and financial condition.
          Commercial real estate loans are generally viewed as having more risk of default than residential real estate loans, particularly when there is a downturn in the business cycle. They are also typically larger than residential real estate loans and consumer loans and depend on cash flows from the owner’s business or the property to service the debt. Cash flows may be affected significantly by general economic conditions and a downturn in the local economy or in occupancy rates in the local economy where the property is located, each of which could increase the likelihood of default on the loan. Because the loan portfolio of the combined company will contain a number of commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in the percentage of nonperforming loans. An increase in nonperforming loans could result in a loss of earnings from these loans, an increase in the provision for loan losses and an increase in charge-offs, all of which could have a material adverse effect on Park Sterling’s results of operations and financial condition, which could negatively affect its stock price.
          Banking regulators are examining commercial real estate lending activity with heightened scrutiny and may require banks with higher levels of commercial real estate loans to implement improved underwriting, internal controls, risk management policies and portfolio stress testing, as well as possibly higher levels of allowances for losses and capital levels as a result of commercial real estate lending growth and exposures, which could have a material adverse effect on Park Sterling’s results of operations, which in turn could negatively affect its stock price.
Since Park Sterling engages in lending secured by real estate and may be forced to foreclose on the collateral property and own the underlying real estate, Park Sterling may be subject to the increased costs associated with the ownership of real property, which could adversely impact its results of operations and stock price.
          Since Park Sterling originates loans secured by real estate, it may have to foreclose on the collateral property to protect its investment and may thereafter own and operate such property, in which case Park Sterling is exposed to the risks inherent in the ownership of real estate.
          The amount that Park Sterling, as a mortgagee, may realize after a default is dependent upon factors outside of its control, including, but not limited to: general or local economic conditions; environmental cleanup liability; neighborhood values; interest rates; real estate tax rates; operating expenses of the mortgaged properties; supply of and demand for rental units or properties; ability to obtain and maintain adequate occupancy of the properties; zoning laws; governmental rules, regulations and fiscal policies; and acts of God.
          Certain expenditures associated with the ownership of real estate, principally real estate taxes and maintenance costs, may adversely affect the income from the real estate. Therefore, the cost of operating income producing real property may exceed the rental income earned from such property, and Park Sterling may have to advance funds in order to protect its investment or Park Sterling may be required to dispose of the real property at a loss.
Park Sterling maintains a number of large lending relationships, any of which could have a material adverse effect on Park Sterling’s results of operations if its borrowers were not to perform according to the terms of these loans.
          Park Sterling maintains a number of large lending relationships, which will increase after the merger. Park Sterling’s ten largest lending relationships (including aggregate exposure to guarantors) at December 31, 2010, range from $6.2 million to $9.6 million and averaged $7.7 million. One of these lending relationships, representing $6.2 million in loans, was included in nonperforming loans at December 31, 2010. The deterioration of one or more additional large relationship loans could result in a significant increase in Park Sterling’s nonperforming loans and its provision for loan losses, which would negatively impact its results of operations, which in turn could negatively affect its stock price.
As a result of Park Sterling’s limited operating history, its loan portfolio is unseasoned.
          Park Sterling’s loan portfolio consists of loans made by Park Sterling since it began operations in October 2006. It is difficult to assess the future performance of Park Sterling’s loan portfolio due to the recent origination of the loans. Industry experience shows that in most cases it takes several years for loan difficulties to become apparent. At December 31, 2010, 48 loans, with a combined outstanding balance of $40.9 million, were classified as nonaccrual (generally, loans contractually past due 90 days or more as to principal or interest, for which terms are renegotiated below market levels in response to a financially distressed borrower or guarantor, or where substantial doubt about full repayment of principal or interest is evident). At December 31, 2010, Park Sterling had loans totaling $73.3 million on its watch list, including the $40.9 million in nonaccrual loans. Park Sterling can give no assurance that other loans, including the remaining loans on its watch list or those acquired in the merger, will not become nonperforming or delinquent, which could adversely affect Park Sterling’s results of operations, financial condition and stock price.

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Park Sterling’s reliance on time deposits, including out-of-market and brokered certificates of deposit, as a source of funds for loans and Park Sterling’s other liquidity needs could have an adverse effect on its results of operations.
          Park Sterling relies on deposits for funds to make loans and provide for its other liquidity needs. Park Sterling’s loan demand has exceeded the rate at which it has been able to build core deposits. As a result, Park Sterling has relied heavily on time deposits, especially brokered certificates of deposit, as a source of funds. Although Park Sterling has focused recently on decreasing its reliance on brokered deposits, as of December 31, 2010, brokered deposits and other wholesale sources comprised approximately 29.01% of Park Sterling’s total liabilities. Such deposits may not be as stable as other types of deposits and, in the future, depositors may not renew those time deposits when they mature, or Park Sterling may have to pay a higher rate of interest to attract or keep them or to replace them with other deposits or with funds from other sources. Not being able to replace these deposits as they mature would adversely affect Park Sterling’s liquidity. Additionally, Park Sterling is regulated by the FDIC, which requires it to maintain certain capital levels to be considered well capitalized. If Park Sterling fails to maintain these capital levels, it would lose its ability to obtain funding through brokered deposits, absent receipt of a waiver from the FDIC. Paying higher deposit rates to attract, keep or replace those deposits could have a negative effect on Park Sterling’s interest margin and results of operations.
Recent negative developments in the financial industry and the increased level of recent bank failures may lead to regulatory changes that may adversely affect Park Sterling’s operations and results.
          Recent negative developments in the credit markets and in the general economy have resulted in uncertainty in the financial markets in general with the expectation of the current economic downturn continuing throughout 2011. As a result, commercial as well as consumer loan portfolio performances have deteriorated at many institutions and the competition for deposits and quality loans has increased significantly. In addition, the values of real estate collateral supporting many commercial loans and home mortgages have declined and may continue to decline. Bank and bank holding company stock prices have been negatively affected, as has the ability of banks and bank holding companies to raise capital or borrow in the debt markets compared to recent years, and the high rate at which banks have been placed in federal receivership during 2009 and 2010 is unprecedented. As a result, there is a potential for additional federal or state laws and regulations regarding lending and funding practices and liquidity standards, and bank regulatory agencies are expected to be very aggressive in responding to concerns and trends identified in examinations, including the expected issuance of many formal enforcement orders. Negative developments in the financial industry and the domestic and international credit markets, and the impact of new legislation in response to those developments, may negatively impact Park Sterling’s operations by restricting its business operations, including Park Sterling’s ability to originate or sell loans, and adversely impact its results of operations and financial condition.
The FDIC deposit insurance assessments that Park Sterling is required to pay may increase in the future, which would have an adverse effect on its earnings.
          As an insured depository institution, Park Sterling is required to pay quarterly deposit insurance premium assessments to the FDIC. These assessments are required to maintain the level of the FDIC deposit insurance reserve ratio. The recent failures of several financial institutions have significantly increased the loss provisions of the federal Deposit Insurance Fund (the DIF), resulting in a decline in the reserve ratio. The FDIC expects a higher rate of insured institution failures in the next few years, which may result in a continued decline in the reserve ratio.
          Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the minimum reserve ratio (previously 1.15% of insured deposits) must increase to a minimum of 1.35% of insured deposits (or the comparable percentage of the applicable assessment base) by 2020, with certain exception for small banks (those institutions with less than $10 billion in assets). In December 2010, the FDIC adopted a final rule setting the reserve ratio at 2%.
          The FDIC also can, subject to certain limitations, change the assessment rates of insured institutions in order to maintain a strong funding position and restore the reserve ratio. In the second quarter of 2009, the FDIC levied a special assessment on insured depository institutions equal to 5 basis points of the institution’s total assets less Tier 1 capital. In addition, on November 12, 2009, the FDIC adopted a rule requiring banks to prepay three years’ worth of premiums to replenish the DIF on December 31, 2009.
          The Dodd-Frank Act and FDIC rules adopted thereunder changed the formula for calculating deposit insurance assessments. Effective April 1, 2011, assessments are calculated as a percentage of average total assets less average tangible equity during the assessment period, rather than as a percentage of total deposits, as previously provided. Furthermore, also effective April 1, 2011, the FDIC has changed the initial and total base assessment rates applicable to all insured depository institutions. In addition, on January 12, 2010, the FDIC requested comments on a proposed rule tying assessment rates of insured institutions to the institution’s employee compensation programs. The exact requirements of such a rule are not yet known, but such a rule could increase the amount of premiums Park Sterling must pay for FDIC insurance.

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          During the years ended December 31, 2010 and 2009, Park Sterling incurred approximately $648,000 and $900,000, respectively, in deposit insurance expense. Due to the recent changes in the deposit base and in the assessment rates, as well as Park Sterling’s growth strategy, Park Sterling may be required to pay additional amounts to the DIF. If the deposit insurance premium assessment rate applicable to Park Sterling increases, whether because of Park Sterling’s risk classification, because of emergency assessments, or because of another uniform increase or prepayment requirements, Park Sterling’s earnings could be further adversely impacted.
Recent legislation and administrative actions authorizing the U.S. government to take direct actions within the financial services industry may not stabilize the U.S. financial system.
          Numerous actions have been taken by the U.S. Congress, the Federal Reserve Board, the U.S. Department of the Treasury (U.S. Treasury), the FDIC, the SEC and others to address the current liquidity and credit crisis that has followed the subprime mortgage crisis that commenced in 2007. The Emergency Economic Stabilization Act of 2008 (EESA) was enacted on October 3, 2008. Under EESA, the U.S. Treasury has the authority to, among other things, invest in financial institutions and purchase up to $700 billion of troubled assets and mortgages from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. The Dodd-Frank Act reduced the size of that program, known as the Troubled Asset Relief Program (TARP), from $700 billion to $475 billion and prohibits the establishment of additional programs under TARP. Under the U.S. Treasury’s Capital Purchase Program (CPP) the U.S. Treasury committed to purchase up to $250 billion of preferred stock and warrants in eligible institutions. The EESA also temporarily increased FDIC deposit insurance coverage to $250,000, and the Dodd-Frank Act made the increase permanent.
          On February 10, 2009, the U.S. Treasury announced the Financial Stability Plan which, among other things, provides a forward-looking supervisory capital assessment program that is mandatory for banking institutions with over $100 billion of assets and makes capital available to financial institutions qualifying under a process and criteria similar to the CPP. In addition, the American Recovery and Reinvestment Act of 2009 (the Recovery Act) was signed into law on February 17, 2009, and includes, among other things, extensive new restrictions on the compensation and governance arrangements of financial institutions.
          In addition, the Secretary of the Treasury proposed fundamental changes to the regulation of financial institutions, markets and products on June 17, 2009. Finally, the Dodd-Frank Act, which was enacted in July 2010, will result in significant regulatory initiatives that could have a significant and possibly adverse impact on the financial services industry, including Park Sterling.
          Park Sterling cannot predict the actual effects of the Dodd-Frank Act, EESA, the Recovery Act, future legislative and regulatory reform measures and various governmental, regulatory, monetary and fiscal initiatives that have been and may be enacted on the economy, the financial markets or Park Sterling. The terms and costs of these activities, or the failure of these actions to help stabilize the financial markets, asset prices, market liquidity and a continuation or worsening of current financial market and economic conditions, could materially and adversely affect Park Sterling’s business, financial condition and results of operations, and the trading prices of Park Sterling’s securities.
Park Sterling’s net interest income could be negatively affected by further interest rate adjustments by the Federal Reserve Board.
          As a financial institution, Park Sterling’s earnings are dependent upon its net interest income, which is the difference between the interest income that it earns on interest-earning assets, such as investment securities and loans, and the interest expense that it pays on interest-bearing liabilities, such as deposits and borrowings. Therefore, any change in general market interest rates, including changes resulting from changes in the Federal Reserve Board’s policies, affects Park Sterling more than non-financial institutions and can have a significant effect on Park Sterling’s net interest income and total income. Park Sterling’s assets and liabilities may react differently to changes in overall market rates or conditions because there may be mismatches between the repricing or maturity characteristics of Park Sterling’s assets and liabilities. As a result, an increase or decrease in market interest rates could have a material adverse effect on Park Sterling’s net interest margin and results of operations. Actions by monetary and fiscal authorities, including the Federal Reserve Board, could have an adverse effect on Park Sterling’s deposit levels, loan demand, business and results of operations.
          In response to the dramatic deterioration of the subprime, mortgage, credit and liquidity markets, the Federal Reserve Board has taken action on nine occasions to reduce interest rates by a total of 450 basis points since September 2007, which contributed to a decline in Park Sterling’s net interest income in 2010. Any reduction in net interest income will negatively affect Park Sterling’s business, financial condition, liquidity, results of operations, cash flows and/or the price of its securities.

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Park Sterling is subject to extensive regulation that could limit or restrict its activities.
          Park Sterling operates in a highly regulated industry and currently is subject to examination, supervision and comprehensive regulation by the N.C. Commissioner, the FDIC and the Federal Reserve Board. Park Sterling’s compliance with these regulations is costly and restricts certain of its activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, locations of offices, and the ability to accept brokered deposits on which Park Sterling currently relies heavily to fund its operations. Park Sterling must also meet regulatory capital requirements. If it fails to meet these capital and other regulatory requirements, Park Sterling’s financial condition, liquidity, deposit funding strategy and results of operations would be materially and adversely affected. Park Sterling’s failure to remain well capitalized and well managed for regulatory purposes could affect client confidence, the ability to execute its business strategies, the ability to grow its assets or establish new branches, the ability to obtain or renew brokered deposits, its cost of funds and FDIC insurance, the ability to pay dividends on its common stock and the ability to make acquisitions.
          The laws and regulations applicable to the banking industry could change at any time, and Park Sterling cannot predict the effects of these changes on its business and profitability. For example, new legislation or regulation could limit the manner in which Park Sterling may conduct its business, including its ability to obtain financing, attract deposits and make loans. Many of these regulations are intended to protect depositors, the public and the FDIC, not shareholders. In addition, the burden imposed by these regulations may place Park Sterling at a competitive disadvantage compared to competitors who are less regulated. The laws, regulations, interpretations and enforcement policies that apply to Park Sterling have been subject to significant change in recent years, sometimes retroactively applied, and may change significantly in the future. Park Sterling’s cost of compliance could adversely affect its ability to operate profitably.
Park Sterling’s success depends significantly on economic conditions in its market areas.
          Unlike larger organizations that are more geographically diversified, Park Sterling’s banking offices are currently concentrated in North Carolina and, after the merger, will be in North Carolina and upstate and central South Carolina. Even if Park Sterling’s growth strategy is successful, Park Sterling expects that its banking offices will remain primarily concentrated in North Carolina, South Carolina and Virginia. As a result of this geographic concentration, Park Sterling’s financial results will depend largely upon economic conditions in these market areas. If the communities in which Park Sterling operates do not grow or if prevailing economic conditions, locally or nationally, deteriorate further, this may have a significant impact on the amount of loans that Park Sterling originates, the ability of its borrowers to repay these loans and the value of the collateral securing these loans. Prolonged continuation of the current economic downturn caused by inflation, recession, unemployment, government action or other factors beyond Park Sterling’s control would likely contribute to the deterioration of the quality of its loan portfolio and reduce its level of deposits, which in turn would have an adverse effect on Park Sterling’s business.
          In addition, some portions of Park Sterling’s target market are in coastal areas, which are susceptible to hurricanes and tropical storms. Such weather events can disrupt Park Sterling’s operations, result in damage to its properties, decrease the value of real estate collateral for its loans and negatively affect the local economies in which Park Sterling operates. Park Sterling cannot predict whether or to what extent damage that may be caused by future hurricanes or other weather events will affect its operations or the economies in its market areas, but such weather events could result in a decline in loan originations, a decline in the value or destruction of properties securing Park Sterling’s loans and an increase in the delinquencies, foreclosures and loan losses. Park Sterling’s business or results of operations may be adversely affected by these and other negative effects of hurricanes or other significant weather events.
Current levels of market volatility are unprecedented.
          The capital and credit markets have in recent years been experiencing volatility and disruption. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. If current levels of market disruption and volatility continue or worsen, there can be no assurance that Park Sterling will not experience an adverse effect, which may be material, on its ability to access capital and on its business, financial condition and results of operations.

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Park Sterling relies heavily on the services of key executives and directors, a number of which are new additions to its management team.
          Following Park Sterling Bank’s public offering in August 2010, Park Sterling changed its management team and reduced the size of and reconstituted its board of directors. Park Sterling’s growth strategy contemplates continued services and expertise of these persons in the different markets in which it seeks to expand. The loss of the services of any of these persons could have an adverse impact on Park Sterling’s ability to execute its growth strategy or on its business, operations and financial condition.
To be profitable, Park Sterling must compete successfully with other financial institutions that have greater resources and capabilities than Park Sterling does.
          The banking business in Park Sterling’s target markets is highly competitive. Many of Park Sterling’s existing and potential competitors are larger and have greater resources than Park Sterling does and have been in existence a longer period of time. Park Sterling competes with these institutions both in attracting deposits and originating loans. Park Sterling may not be able to attract clients away from its competition. Park Sterling competes for loans and deposits with the following types of institutions:
  §   other commercial banks;
 
  §   savings banks;
 
  §   thrifts;
 
  §   trust companies;
 
  §   credit unions;
 
  §   securities brokerage firms;
 
  §   mortgage brokers;
 
  §   insurance companies;
 
  §   mutual funds; and
 
  §   industrial loan companies.
          Competitors that are not depository institutions are generally not regulated as extensively as Park Sterling is and, therefore, may have greater flexibility in competing for business. Other competitors are subject to similar regulation but have the advantages of larger established client bases, higher lending limits, extensive branch networks, greater advertising and marketing budgets or other factors.
          Park Sterling’s legal lending limit is determined by law and is calculated as a percentage of Park Sterling’s capital and unimpaired surplus. The size of the loans that Park Sterling is able to offer to its clients is less than the size of the loans that larger competitors are able to offer. This limit may affect Park Sterling’s success in establishing relationships with the larger businesses in its market. Park Sterling may not be able to successfully compete with the larger banks in its target markets.
Liquidity needs of Park Sterling could adversely affect its results of operations and financial condition.
          The primary sources of funds for Park Sterling are deposits and loan repayments. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected by a number of factors, including, but not limited to, changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, availability of, and/or access to, sources of refinancing, business closings or lay-offs, inclement weather, natural disasters and international instability. Additionally, deposit levels may be affected by a number of factors, including, but not limited to, rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to clients on alternative investments and general economic conditions. Accordingly, Park Sterling may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Such sources include Federal Home Loan Bank (FHLB) advances, sales of securities and loans, federal funds lines of credit from correspondent banks and borrowings from the Federal Reserve Discount Window, as well as additional out-of-market time deposits and brokered deposits. While Park Sterling believes that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands, particularly if we continue to grow and experience increasing loan demand. Park Sterling may be required to slow or discontinue loan growth, capital expenditures or other investments or liquidate assets should such sources not be adequate.

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Park Sterling depends on the accuracy and completeness of information about clients and counterparties, which, if incorrect or incomplete, could harm its earnings.
          In deciding whether to extend credit or enter into other transactions with clients and counterparties, Park Sterling relies on information furnished to it by or on behalf of clients and counterparties, including financial statements and other financial information. Park Sterling also may rely on representations of clients, counterparties or other third parties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to clients, Park Sterling may assume that a client’s audited financial statements conform to GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the client. Park Sterling’s earnings are significantly affected by its ability to properly originate, underwrite and service loans. Park Sterling’s financial condition and results of operations could be negatively impacted to the extent it incorrectly assesses the creditworthiness of its borrowers, fails to detect or respond to deterioration in asset quality in a timely manner, or relies on information provided to it, such as financial statements that do not comply with GAAP and may be materially misleading.
Negative public opinion could damage Park Sterling’s reputation and adversely impact its earnings.
          Reputation risk, or the risk to Park Sterling’s business, earnings and capital from negative public opinion, is inherent in its operations. Negative public opinion can result from Park Sterling’s actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions, and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect Park Sterling’s ability to keep and attract clients and employees and can expose Park Sterling to litigation and regulatory action and adversely impact its results of operations. Although Park Sterling takes steps to minimize reputation risk in dealing with its clients and communities, this risk will always be present given the nature of Park Sterling’s business.
Park Sterling is subject to security and operational risks relating to its use of technology that, if not managed properly, could damage Park Sterling’s reputation, business or operating results.
          To conduct its business, Park Sterling relies heavily on technology-driven products and services and on communications and information systems. Park Sterling’s future success will depend, in part, on its ability to address its clients’ needs by using technology to provide products and services that will satisfy client demands for convenience as well as to create additional efficiencies in operations. Furthermore, any failure, interruption or breach of the security of Park Sterling’s information systems could result in failures or disruptions in its client relationship management, general ledger, deposit, loan and other systems. While Park Sterling has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, it cannot assure investors that it can prevent any such failures, interruptions or security breaches or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of Park Sterling’s information systems could damage Park Sterling’s reputation, result in a loss of client business, subject Park Sterling to additional regulatory scrutiny or expose Park Sterling to civil litigation and possible financial liability, any of which could have a material adverse effect on its financial condition and results of operations, which could negatively affect its stock price.
Risks Related to Park Sterling’s Common Stock
Park Sterling may issue additional shares of stock or equity derivative securities, including awards to current and future executive officers, directors and employees, that could result in the dilution of Community Capital shareholders who receive their merger consideration as stock.
          Park Sterling’s authorized capital includes 200,000,000 shares of common stock and 5,000,000 shares of preferred stock. As of April 28, 2011, Park Sterling had 28,619,358 shares of common stock outstanding and had reserved or otherwise set aside for issuance 2,239,889 shares underlying outstanding options and 1,057,801 shares that are available for future grants of stock options, restricted stock or other equity-based awards pursuant to Park Sterling’s equity incentive plans. Park Sterling expects to issue approximately 4,024,550 shares of common stock in connection with the merger. Subject to NASDAQ rules, the Park Sterling board of directors generally has the authority to issue all or part of any authorized but unissued shares of common stock or preferred stock for any corporate purpose. Park Sterling may seek additional equity capital in the future as it develops its business and expands its operations, or Park Sterling may issue additional equity in connection with the acquisition of other strategic partners. These issuances would dilute the ownership interests of existing shareholders and Community Capital shareholders who receive their merger consideration as stock and may dilute the per share book value of the common stock. New investors also may have rights, preferences and privileges that are senior to, and that adversely affect, Park Sterling’s then existing shareholders and Community Capital shareholders who receive their merger consideration as stock.

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          In addition, the issuance of shares under the equity compensation plans will result in dilution of Park Sterling shareholders’ ownership of Park Sterling common stock. The exercise price of stock options could also adversely affect the terms on which Park Sterling can obtain additional capital. Option holders are most likely to exercise their options when the exercise price is less than the market price for Park Sterling’s common stock. They may profit from any increase in the stock price without assuming the risks of ownership of the underlying shares of common stock by exercising their options and selling the stock immediately.
Park Sterling’s stock price may be volatile, which could result in losses to its investors and litigation against Park Sterling.
          Park Sterling’s stock price has been volatile in the past and several factors could cause the price to fluctuate in the future. These factors include, but are not limited to: actual or anticipated variations in earnings, changes in analysts’ recommendations or projections, Park Sterling’s announcement of developments related to its businesses, operations and stock performance of other companies deemed to be peers, new technology used or services offered by traditional and nontraditional competitors, news reports of trends and concerns and other issues related to the financial services industry. Fluctuations in Park Sterling’s stock price may be unrelated to Park Sterling’s performance. General market declines or market volatility in the future, especially in the financial institutions sector, could adversely affect the price of Park Sterling’s common stock, and the current market price may not be indicative of future market prices.
          Stock price volatility may make it more difficult for you to resell your Park Sterling common stock when you want and at prices you find attractive. Moreover, in the past, securities class action lawsuits have been instituted against some companies following periods of fluctuation in the market price of their securities. Park Sterling could in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources from Park Sterling’s normal business, which could result in losses to investors.
Future sales of Park Sterling’s common stock by Park Sterling shareholders or the perception that those sales could occur may cause Park Sterling’s common stock price to decline.
          Although Park Sterling’s common stock is listed for trading on NASDAQ, the trading volume in the common stock may be lower than that of other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of the common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which Park Sterling has no control. Given the potential for lower relative trading volume in the common stock, significant sales of the common stock in the public market, or the perception that those sales may occur, could cause the trading price of Park Sterling’s common stock to decline or to be lower than it otherwise might be in the absence of those sales or perceptions.
State laws and provisions in Park Sterling’s articles of incorporation or bylaws could make it more difficult for another company to purchase Park Sterling, even though such a purchase may increase shareholder value.
          In many cases, shareholders may receive a premium for their shares if Park Sterling were purchased by another company. State law and Park Sterling’s articles of incorporation and bylaws could make it difficult for anyone to purchase Park Sterling without approval of its board of directors. For example, Park Sterling’s articles of incorporation divide its board of directors into three classes of directors serving staggered three-year terms with approximately one-third of the board of directors elected at each annual meeting of shareholders. This classification of directors makes it difficult for shareholders to change the composition of the Park Sterling board of directors. As a result, at least two annual meetings of shareholders would be required for the shareholders to change a majority of directors, whether or not a change in the board of directors would be beneficial and whether or not a majority of shareholders believe that such a change would be desirable.
Park Sterling does not currently intend to pay dividends and may be unable to pay dividends in the future.
          Park Sterling does not intend to pay dividends in the foreseeable future. If Park Sterling determines to pay dividends in the future, holders of its common stock are only entitled to receive such dividends as Park Sterling’s board of directors may declare out of funds legally available for such payments. Park Sterling’s ability to pay dividends also is limited by regulatory restrictions and the need to maintain sufficient capital. If these regulatory requirements are not satisfied, Park Sterling would be unable to pay dividends on its common stock.
          Moreover, Park Sterling is a bank holding company that is a separate and distinct legal entity from Park Sterling Bank and, following the merger, CapitalBank. As a result, Park Sterling’s ability to make dividend payments, if any, on its common stock would depend primarily upon the receipt of dividends and other distributions received from Park Sterling Bank and, following the merger, CapitalBank. Various federal and state regulations limit the amount of dividends that Park Sterling Bank and, following the merger, CapitalBank may pay to Park Sterling.

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          In addition, Park Sterling’s right to participate in any distribution of assets of Park Sterling Bank, CapitalBank or any other subsidiary of Park Sterling from time to time upon the subsidiary’s liquidation or otherwise, and thus the ability of Park Sterling shareholders to benefit indirectly from such distribution, will be subject to the prior claims of creditors of the subsidiary, except to the extent any of Park Sterling’s claims as a creditor of the subsidiary may be recognized. As a result, Park Sterling’s common stock effectively will be subordinated to all existing and future liabilities and obligations of Park Sterling Bank, CapitalBank and any other subsidiaries Park Sterling may have.
Your right to receive liquidation and dividend payments on the Park Sterling common stock is junior to its existing and future indebtedness and to any other senior securities Park Sterling may issue in the future.
          Shares of Park Sterling’s common stock are equity interests in Park Sterling and do not constitute indebtedness. This means that shares of the common stock will rank junior to all of indebtedness of Park Sterling and to other nonequity claims against Park Sterling and its assets available to satisfy claims against it, including in Park Sterling’s liquidation. As of December 31, 2010, Park Sterling had approximately $6.9 million of subordinated debt, in addition to its other liabilities, and upon completion of the merger will assume approximately $10.3 million of junior subordinated debt of Community Capital, all of which would be senior in right of payment to Park Sterling’s common stock. Park Sterling may incur additional indebtedness from time to time without the approval of the holders of its common stock.
          Additionally, Park Sterling’s board of directors is authorized to issue classes or series of preferred stock in the future without any action on the part of its common shareholders. Park Sterling common shareholders would be subject to the prior dividend and liquidation rights of holders of any preferred stock outstanding.
Park Sterling common stock is not insured by the FDIC.
          Park Sterling common stock is not a savings or deposit account, and is not insured by the FDIC or any other governmental agency and is subject to risk, including the possible loss of all or some principal.

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
          This Proxy Statement/Prospectus contains a number of forward-looking statements, including statements about the financial conditions, results of operations, earnings outlook and prospects of Park Sterling, Community Capital and the potential combined company and may include statements for the period following the completion of the merger. You can find many of these statements by looking for words such as “may,” “plan,” “contemplate,” “anticipate,” “believe,” “intend,” “anticipate,” “continue,” “expect,” “project,” “potential,” “possible,” “predict,” “estimate,” “could,” “should,” “would,” “will,” “goal,” “target” or other similar expressions.
          The forward-looking statements involve certain risks and uncertainties. The ability of either Park Sterling or Community Capital to predict results or the actual effects of its plans and strategies, or those of the combined company, is subject to inherent uncertainty. Factors that may cause actual results or earnings to differ materially from such forward-looking statements include, among others, the following:
  §   the risk that the businesses of Park Sterling and/or Community Capital in connection with the merger will not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected;
 
  §   expected revenue synergies and cost savings from the merger may not be fully realized or realized within the expected timeframe;
 
  §   the merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events;
 
  §   revenues following the merger may be lower than expected;
 
  §   changes in the interest rate environment reduce interest margins and impact funding sources;
 
  §   changes in market rates and prices may adversely impact the value of financial products;
 
  §   client and employee relationships and business operations may be disrupted by the merger;
 
  §   the ability to obtain required governmental and Community Capital shareholder approvals, and the ability to complete the merger on the expected timeframe;
 
  §   the ability of the combined company to comply with the terms of the Written Agreement, should the combined company be subject to the Written Agreement following the merger, and potential more restrictive regulatory actions if the combined company fails to comply;
 
  §   possible changes in economic and business conditions;
 
  §   the existence or exacerbation of general geopolitical instability and uncertainty;
 
  §   the ability of Park Sterling to integrate other acquisitions and attract new clients;
 
  §   possible changes in monetary and fiscal policies, and laws and regulations;
 
  §   the effects of easing of restrictions on participants in the financial services industry;
 
  §   the cost and other effects of legal and administrative cases;
 
  §   possible changes in the creditworthiness of clients and the possible impairment of collectibility of loans;
 
  §   the effects of changes in interest rates; and
 
  §   other risks and factors identified in this Proxy Statement/Prospectus under the heading “Risk Factors.”
          Because these forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. You are cautioned not to place undue reliance on these statements, which speak only as of the date of this Proxy Statement/Prospectus.
          All subsequent written and oral forward-looking statements concerning the merger or other matters addressed in this Proxy Statement/Prospectus and attributable to Park Sterling or Community Capital or any person acting on their behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Proxy Statement/Prospectus. Except to the extent required by applicable law or regulation, Park Sterling and Community Capital undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this Proxy Statement/Prospectus or to reflect the occurrence of unanticipated events.

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THE COMMUNITY CAPITAL SPECIAL MEETING
          This section contains information about the special meeting of Community Capital shareholders that has been called to consider and approve the merger agreement and the merger, as well as the advisory (nonbinding) vote on the “golden parachute” compensation payable under existing agreements that will be received from Community Capital and CapitalBank by certain Community Capital officers in connection with the merger and, if necessary or appropriate, the adjournment of the special meeting to solicit additional proxies. Together with this Proxy Statement/Prospectus, we are also sending you a notice of special meeting and a form of proxy that is solicited by the Community Capital board of directors. The special meeting will be held at the offices of CapitalBank at 109 Montague Avenue, Greenwood, South Carolina, on , 2011, at a.m., local time.
Matters To Be Considered
          The purposes of the special meeting are:
  §   to consider and vote upon a proposal to approve the merger agreement and the transactions contemplated by that agreement, including the merger;
 
  §   to cast an advisory (nonbinding) vote to approve certain “golden parachute” compensation payable under existing agreements that certain Community Capital officers will receive from Community Capital and CapitalBank in connection with the merger; and
 
  §   to consider and vote upon a proposal to approve the adjournment or postponement of the special meeting, if necessary or appropriate, including to solicit additional proxies to approve the merger agreement and the merger.
Proxies
     Each copy of this Proxy Statement/Prospectus mailed to holders of Community Capital common stock is accompanied by a form of proxy with instructions for voting. If you hold Community Capital common stock in your name as a shareholder of record, you should complete and return the proxy card in the enclosed envelope to ensure that your vote is counted at the special meeting, or at any adjournment or postponement of the special meeting, regardless of whether you plan to attend the special meeting. If you hold your Community Capital common stock in “street name” through a bank or broker, you must direct your bank or broker to vote in accordance with the instructions you have received from that bank or broker. If you hold Community Capital common stock in your name as a shareholder of record, you may revoke any proxy at any time before it is voted by signing and returning a proxy card with a later date, by delivering a written revocation letter to Community Capital’s Corporate Secretary, or by attending the special meeting in person, notifying the Corporate Secretary and voting by ballot at the special meeting. Any shareholder entitled to vote in person at the special meeting may vote in person regardless of whether a proxy has been previously given, but the mere presence of a shareholder at the special meeting will not constitute revocation of a previously given proxy. Written notices of revocation and other communications about revoking your proxy should be addressed to:
Community Capital Corporation
P.O. Box 218
Greenwood, South Carolina 29649
Attention: R. Wesley Brewer,
Corporate Secretary
Phone Number: (864) 941-8242
          If your shares are held in “street name” by a bank or broker, you should follow the instructions of your bank or broker regarding the revocation of proxies.
          All shares represented by valid proxies that we receive through this solicitation, and that are not revoked, will be voted in accordance with your instructions on the proxy card. If you make no specification on your proxy card as to how you want your shares voted before signing and returning it, your proxy will be voted “FOR” approval of the merger agreement and the merger, “FOR” approval of “golden parachute” compensation payable under existing agreements that certain Community Capital officers will receive from Community Capital and CapitalBank in connection with the merger and “FOR” approval of the adjournment or postponement of the special meeting, if necessary or appropriate, including to solicit additional proxies to approve the merger agreement and the merger.
          Community Capital shareholders should NOT send stock certificates with their proxy cards. If the merger is completed, Community Capital shareholders will be mailed a transmittal form promptly following the completion of the merger with instructions on how to exchange their Community Capital stock certificates for the merger consideration.

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Solicitation of Proxies
          Community Capital and Park Sterling will bear equally the cost of printing and mailing this Proxy Statement/Prospectus and all filing and other fees paid to the SEC in connection with the merger; however, Community Capital solely will bear any additional costs of soliciting proxies from you. In addition to solicitation of proxies by mail, Community Capital will request that banks, brokers and other record holders send proxies and proxy material to the beneficial owners of Community Capital common stock and secure their voting instructions. Community Capital will reimburse the record holders for their reasonable expenses in taking those actions. Community Capital also has made arrangements with Regan & Associates, Inc. to assist it in soliciting proxies and has agreed to pay them $15,000, which includes all out-of-pocket expenses, for these services. If necessary, several of Community Capital’s regular employees, who will not be specially compensated, may solicit proxies from Community Capital shareholders, either personally or by telephone, facsimile, letter or other electronic means.
Record Date
          The board of directors of Community Capital has fixed close of business on , 2011 as the record date for determining the Community Capital shareholders entitled to receive notice of and to vote at the special meeting. At that time, shares of Community Capital common stock were outstanding, held by approximately holders of record.
Voting Rights and Vote Required
          The presence, in person or by properly executed proxy, of the holders of a majority of the outstanding shares of Community Capital common stock entitled to vote is necessary to constitute a quorum at the special meeting. Abstentions from voting will be counted for the purpose of determining whether a quorum is present.
          Approval of the merger agreement and the merger requires the affirmative vote of the holders of at least two-thirds of the issued and outstanding shares of Community Capital common stock entitled to vote at the special meeting. You are entitled to one vote for each share of Community Capital common stock you held as of the record date with respect to each matter to be considered at the special meeting. Because the affirmative vote of the holders of two-thirds of the issued and outstanding shares of Community Capital common stock entitled to vote at the special meeting is needed for us to proceed with the merger, the failure to vote by proxy or in person will have the same effect as a vote against the merger. Abstentions from voting also will have the same effect as a vote against the merger. Accordingly, the Community Capital board of directors urges Community Capital shareholders to promptly vote by completing, dating and signing the accompanying proxy card and to return it promptly in the enclosed postage-paid envelope, or, if you hold your stock in “street name” through a bank or broker, by following the voting instructions of your bank or broker.
          Approval of the advisory (nonbinding) proposal regarding “golden parachute” compensation payable under existing agreements that certain Community Capital officers will receive from Community Capital and CapitalBank in connection with the merger requires the number of votes cast at the special meeting, in person or by proxy and entitled to vote thereon, in favor of the proposal to exceed the number of votes cast against the proposal. Abstentions from voting are not treated as votes cast and, therefore, will have no effect on the vote required for the proposal. Since the required vote is advisory, the result of the vote is not binding upon Community Capital.
          Approval of any proposal to approve the adjournment or postponement of the special meeting, if necessary or appropriate, including to solicit additional proxies requires the number of votes cast at the special meeting, in person or by proxy and entitled to vote thereon, in favor of the proposal to exceed the number of votes cast against the proposal, whether or not a quorum is present. Abstentions from voting are not treated as votes cast and, therefore, will have no effect on the vote required for the proposal.
          Under the rules of the New York Stock Exchange applicable to brokers, each of the proposals to be presented at the special meeting is considered a non routine matter. Therefore, if your shares are held in street name by a broker, your broker cannot vote your shares unless it receives specific voting instructions from you. If you do not provide voting instructions to your broker and the broker nevertheless submits an unvoted proxy with respect to your shares, the resulting “broker non-vote” will not be counted for purposes of determining whether a quorum is present and will have the same effect as a vote against the proposal to approve the merger agreement and the merger. However, the broker non-vote will have no effect on the vote required for the proposal regarding certain “golden parachute” compensation or the proposal to approve the adjournment or postponement of the special meeting.
          Shareholders will vote at the meeting by ballot. Votes cast at the meeting, in person or by proxy, will be tallied by Community Capital’s transfer agent.

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Support Agreements
          As an inducement to and a condition of Park Sterling’s willingness to enter into the merger agreement, each of the directors of Community Capital entered into a support agreement with Park Sterling. Pursuant to the support agreements, each of the directors of Community Capital agreed, among other things, to vote (or cause to be voted), all the shares owned beneficially by each of them, (i) in favor of the approval and adoption of the merger agreement (or any amended version thereof), the merger and the other transactions contemplated thereby and (ii) against any Alternative Transaction (as defined in the merger agreement and as further described under “The Merger Agreement—Agreement Not to Solicit Other Offers”). As of April 28, 2011, the directors of Community Capital beneficially owned 1,402,256 shares, or approximately 14% of the outstanding shares of Community Capital common stock. A copy of the form of this support agreement is attached as Appendix C to this Proxy Statement/Prospectus and is incorporated herein by reference.
          As a further inducement to and a condition to Park Sterling’s willingness to enter into the merger agreement, Community Capital, as trustee of the KSOP, entered into a support agreement with Park Sterling. Pursuant to that support agreement, Community Capital agreed to vote all shares of Community Capital stock over which the KSOP permits the trustee voting authority (i) in favor of the approval and adoption of the merger agreement (or any amended version thereof), the merger and the other transactions contemplated thereby and (ii) against any Alternative Transaction (as defined in the merger agreement and as further described under “The Merger Agreement — Agreement Not to Solicit Other Offers”). As of the record date, beneficiaries of the KSOP own 864,217 shares of Community Capital common stock under such plan, or approximately 8.6% of the outstanding shares of Community Capital common stock. Until such beneficiaries vote those shares, or fail to vote them, pursuant to the terms of the KSOP, it is unknown how many shares Community Capital, as trustee of the KSOP, will have power to vote in accordance with this support agreement. A copy of the form of this support agreement is attached as Appendix D of this Proxy Statement/Prospectus and is incorporated herein by reference.
          Community Capital shareholders are urged to read the support agreements in their entirety.
Recommendation of Community Capital Board of Directors
          The Community Capital board of directors unanimously recommends that Community Capital shareholders vote:
  §   “FOR” approval of the merger agreement and the merger;
 
  §   “FOR” approval of the “golden parachute” compensation payable under existing agreements that certain of Community Capital officers will receive from Community Capital and CapitalBank in connection with the merger; and
 
  §   “FOR” approval of the adjournment or postponement of the special meeting, if necessary or appropriate.
          Approval of the merger agreement and the merger and approval of the “golden parachute” compensation are subject to separate votes by the Community Capital shareholders, and approval of the “golden parachute” compensation is not a condition to completion of the merger.

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PROPOSAL NO. 1 — THE MERGER
Background of the Merger
          Community Capital initiated a strategy in 1994 of creating a statewide network of locally managed community banks that serve their respective markets, share a common vision and benefit from the strength, resources and economies of a larger institution. The objectives of this strategy have been to expand across upstate and central South Carolina (I-85 and I-26 corridors), maintain superior asset quality, grow net interest income, increase fee income and control expenses.
          Over the past three years, Community Capital has been adversely affected by the general economic deterioration and downturn in real estate values that has occurred throughout the country, including Community Capital’s home markets, which has undermined execution of this strategy. Declining asset quality has resulted in increased losses, loan loss provisions and charge-offs. Over the past two years, Community Capital has undertaken numerous efforts to preserve its capital, reduce problem asset levels and stabilize earnings, including, without limitation, raising $14.2 million in new capital in the third and fourth quarters of 2009, suspending dividend payments on its common stock in April 2009 and reducing total loans. While these efforts have improved Community Capital’s financial position, on July 28, 2010, Community Capital entered into the Written Agreement with the Federal Reserve Bank of Richmond and the S.C. Board which, among other things, requires Community Capital to implement a capital plan to maintain CapitalBank’s capital ratios in excess of the minimum thresholds required to be well capitalized.
          Until early 2010, Community Capital’s board of directors believed that its shareholders, customers and employees were best served by Community Capital remaining an independent financial institution. However, as a result of the foregoing circumstances and the current state of equity capital markets, the board of directors and senior management of Community Capital began to more closely consider potential strategic alternatives involving the acquisition of Community Capital by another financial institution.
          In February 2010, Community Capital had an introductory meeting with James C. Cherry, David L. Gaines and Leonard R. Robinett, Jr., prior to these individuals’ affiliation with Park Sterling. The meeting was facilitated by Park Sterling’s financial advisor, which was helping the three individuals identify a platform bank interested in pursuing their vision of building a traditional regional banking franchise across the Carolinas and Virginia. Messrs. Cherry, Gaines and Robinett shortly thereafter partnered with Park Sterling in this effort.
          In July 2010, Community Capital had initial discussions with Howe Barnes, during which Howe Barnes presented analysis on the condition of the banking industry and merger market, a range of strategic alternatives, as well as a list of potential acquirers for Community Capital. On August 31, 2010, Community Capital formally retained Howe Barnes as its financial advisor to provide advice regarding a possible business combination with another entity. Community Capital chose Howe Barnes because of its regular engagement in the evaluation of business and securities in connection with mergers and acquisitions and its familiarity with the market for common stock of publicly and privately traded banks, thrifts and bank and thrift holding companies.
          In August 2010, Messrs. Cherry, Gaines and Robinett were hired by Park Sterling as Chief Executive Officer, Chief Financial Officer and Head of Corporate Development, respectively, concurrent with Park Sterling closing a $150.2 million offering of common stock, which the three individuals helped to facilitate. Park Sterling was soon thereafter contacted by Howe Barnes, representing Community Capital, to inquire into Park Sterling’s interest in a potential partnership between the two companies. Park Sterling subsequently executed a nondisclosure agreement, received certain confidential information and initiated a dialogue with Community Capital. Park Sterling entered into additional nondisclosure agreements and initiated dialogues with other potential partners during this same general timeframe.
          Over a period of approximately six months, Howe Barnes and Community Capital conducted an extensive marketing effort, which included contacting 42 potential acquirers, including Park Sterling, distributing 13 confidential information memoranda on the business and financial condition of Community Capital and CapitalBank, including to Park Sterling, and providing updated financial information on Community Capital. Howe Barnes also conducted discussions with several of the potential acquirers, including Park Sterling, and provided customized financial analyses. Four of the potential acquirers conducted initial credit due diligence and, in January and February 2010 two of the potential acquirers, one of which was Park Sterling, submitted written, nonbinding indications of interest to acquire Community Capital, subject to completion of full due diligence. A third potential acquirer verbally submitted a proposal, which was ultimately deemed by Howe Barnes and Community Capital not to be a bona fide offer.
          On January 25, 2011, Park Sterling submitted its nonbinding indication of interest to acquire Community Capital for between $3.25 and $3.75 per share, which was subject to further due diligence and contingent upon Community Capital entering into an exclusivity arrangement. Park Sterling subsequently updated its indication of interest on January 31, 2011, and on February 15, 2011 to provide additional details, as requested by Community Capital, as well as to extend its deadline for Community Capital to consider the indication of interest. Another potential acquirer submitted its nonbinding indication of interest during this time to invest in Community Capital and to use part of such an investment to repurchase 50.0% of Community Capital’s outstanding shares in a tender offer at a slightly higher price. However, this proposal was contingent upon the acquirer, which was not an existing bank holding company or operating company, raising the necessary capital and receiving regulatory approvals to make an investment.

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          On February 18, 2011, at a special meeting of Community Capital’s board of directors, Howe Barnes reviewed the terms of the two proposals, including the benefits and drawbacks of each, and provided the board with an update on the status of the banking industry, merger and capital markets. After lengthy discussions, Community Capital’s board of directors and management concluded that Park Sterling’s proposal was superior to the proposal of the other potential acquirer. The board of directors invited executive management of Park Sterling to make a presentation with the expectation that it would learn more about Park Sterling, its plans to execute the merger and for the pro forma combined company. On February 23, 2011, Leslie M. (Bud) Baker, Chairman of the Park Sterling board of directors, and Mr. Cherry made such a presentation to the Community Capital board of directors, after which the board of directors confirmed its decision to proceed with Park Sterling. Accordingly, Community Capital agreed to invite Park Sterling to conduct full due diligence. In connection with the Community Capital board’s decision to move forward with Park Sterling, Community Capital executed the nonbinding indication of interest with Park Sterling, which, among other things, restricted Community Capital from soliciting, negotiating or encouraging any alternative proposals through March 30, 2011.
          During the first three weeks of March 2011, Park Sterling engaged in documentary due diligence and performed extensive due diligence on Community Capital’s operations and financial condition, including CapitalBank’s loan portfolio. As a result of its due diligence, on March 16, 2011, Park Sterling’s board of directors authorized management to verbally submit its refined proposal to acquire Community Capital for $3.30 per outstanding share of Community Capital assuming a consideration mix of 70% Park Sterling common stock and 30% cash, which Park Sterling management subsequently communicated to Community Capital.
          Following the receipt of Park Sterling’s refined proposal, on March 17, 2011, Community Capital held a special meeting of its board of directors at which representatives of Howe Barnes were present. At this meeting, William G. Stevens, Community Capital’s President and Chief Executive Officer, and R. Wesley Brewer, Community Capital’s Chief Financial Officer, provided the board of directors with details regarding the revised proposal from Park Sterling. Representatives of Nelson Mullins Riley & Scarborough LLP (Nelson Mullins), counsel to Community Capital, also advised the Community Capital board of directors regarding the legal standards and fiduciary duties applicable to dealing with acquisition offers, factors to consider when evaluating offers, actions that can be taken when responding to offers and legal considerations related to maintaining the confidentiality of any potential transaction being considered by the board of directors. At this meeting, Howe Barnes also presented the board with a financial analysis of Park Sterling’s revised proposal and contrasted it with recent comparable merger transactions. After further discussions, the Community Capital board of directors determined that Park Sterling’s revised proposal was acceptable and authorized Messrs. Stevens and Brewer and Community Capital’s legal and financial advisors to pursue further negotiations with Park Sterling and its legal counsel, on an exclusive basis, in an effort to reach a definitive merger agreement embodying the terms of Park Sterling’s revised offer. The board also expressed a strong interest in receiving consideration of 60% Park Sterling common stock and 40% cash, which was subsequently agreed to by Park Sterling.
          At about the same time, Park Sterling’s legal counsel, McGuireWoods LLP (McGuireWoods), began drafting a definitive merger agreement and, on March 21, 2011, delivered a first draft of the definitive merger agreement to Nelson Mullins. Consistent with Park Sterling’s revised proposal, the merger agreement provided that each outstanding share of Community Capital’s common stock, except for shares owned by Community Capital, Park Sterling or any of their respective wholly owned subsidiaries (other than shares held in trust or managed accounts) would be converted into the right to receive a fraction of a share of Park Sterling’s common stock equal to an unspecified exchange ratio, or $3.30 in cash, as elected by Community Capital’s shareholders, subject to the limitation that the consideration to be paid by Park Sterling was to consist of 60% Park Sterling common stock and 40% cash. Between March 21 and 22, 2011, Community Capital, Nelson Mullins and Howe Barnes conducted a thorough review of the first draft of the merger agreement. At this time, Community Capital, Park Sterling, and their respective legal counsels also began preparing the disclosure schedules and other documents related to the merger agreement. On March 23, 2011, Community Capital’s senior management, a member of Community Capital’s board of directors, Howe Barnes and Nelson Mullins commenced a two-day on-site due diligence of Park Sterling. Between March 21, 2011 and March 30, 2011, the parties negotiated the terms of the merger agreement, including fixing the exchange ratio at 0.6667.
          On March 30, 2011, the Park Sterling board of directors held a special meeting to consider the merger. It discussed with Park Sterling management and its financial advisor the merger agreement, including a summary of the merger agreement that had been prepared by legal counsel and the consideration to be paid by Park Sterling to Community Capital’s shareholders. Following a lengthy discussion, the Park Sterling board of directors voted to approve the merger agreement in substantially the form presented as well as management’s finalization and execution of the merger agreement and all related documents.

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          On March 30, 2011, Community Capital’s board of directors held a special meeting, at which Nelson Mullins and Howe Barnes participated. Representatives of Nelson Mullins led a discussion regarding the provisions of the merger agreement draft and responded to numerous questions from directors. In addition, representatives of Howe Barnes provided a detailed analysis of the financial aspects of the proposed merger and orally delivered its opinion (subsequently confirmed in writing) that the merger consideration was fair, from a financial point of view, to Community Capital’s shareholders. After final discussion of the proposed transaction and the merger agreement terms, Community Capital’s board of directors approved the merger agreement and authorized the execution of the merger agreement and all related documents.
          Community Capital and Park Sterling executed the definitive merger agreement after the close of business on Wednesday, March 30, 2011. Community Capital and Park Sterling issued a joint press release publicly announcing the transaction prior to the opening of the financial markets on March 31, 2011.
Community Capital’s Reasons for the Merger and Recommendation of the Community Capital Board of Directors
          In reaching its decision to adopt and approve the merger agreement and recommend its approval to Community Capital shareholders, the Community Capital board of directors consulted with senior management and its outside financial and legal advisors and evaluated the increasing difficulty Community Capital faces in maintaining and improving performance and value for its shareholders over the long term in the current and prospective economic environment affecting the banking industry as a whole. The board of directors believes that economic recovery and improvements in banks’ profits and market values will be a slow process, which would be particularly challenging for Community Capital given its asset deterioration over the past two years and the Written Agreement with the Federal Reserve Bank of Richmond and the S.C. Board. After considering Community Capital’s future prospects and strategic options, the board of directors concluded that partnering with a financial institution with a strong management team and excess capital would better maximize the long-term value of shareholders’ investment than if Community Capital remained independent or pursued a transaction that was contingent on a newly formed company raising a substantial amount of capital and obtaining regulatory approval, and it believes that the proposed merger with Park Sterling is in the best interests of Community Capital’s shareholders.
          In its deliberations described above and in making its determination, Community Capital’s board of directors considered many factors including, without limitation, the following:
  §   the current and prospective business and economic environments in which Community Capital operates, including challenging regional and local economic conditions, the competitive environment for South Carolina financial institutions characterized by intensifying competition from out-of-state financial institutions, the continuing consolidation of the financial services industry, the increased regulatory burdens on financial institutions, the effects of the expected continued operation of CapitalBank under the extensive regulatory restrictions imposed by its Written Agreement with the Federal Reserve Bank of Richmond and the S.C. Board, and the uncertainties in the regulatory climate going forward;
 
  §   Park Sterling’s access to capital resources relative to that of Community Capital;
 
  §   the business, earnings, operations, financial condition, management, prospects, capital levels and asset quality of both Park Sterling and Community Capital;
 
  §   the fact that Community Capital would likely need to raise a material amount of additional capital in the near future if it remained independent, and that any equity raised would likely be very dilutive to Community Capital’s shareholders;
 
  §   the limited capital-raising alternatives available to Community Capital, especially given that its common stock is trading below book value, and the risk that Community Capital would not be able to raise a sufficient amount of capital when needed;
 
  §   the board of directors’ desire to provide Community Capital shareholders with the prospects for greater future appreciation on their investments in Community Capital common stock than the amount the board of directors believes Community Capital could achieve independently;
 
  §   the fact that Community Capital shareholders will be able to elect whether to receive cash at $3.30 per share, which, subject to the allocation limitations in the merger agreement, represented a premium of 25% over Community Capital’s market price of $2.65 per share on March 29, 2011, the date immediately prior to the execution of the merger agreement;
 
  §   the overall greater scale that will be achieved by the merger that will better position the combined company for future growth;

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  §   the financial analysis prepared by Howe Barnes, Community Capital’s financial advisor, and the opinion dated March 30, 2011, delivered to the Community Capital board of directors by Howe Barnes, to the effect that the merger consideration is fair, from a financial point of view, to Community Capital’s shareholders;
 
  §   the interest of Community Capital’s directors and executive officers in the merger, in addition to their interests generally as shareholders, as described under “—Community Capital’s Directors and Officers Have Financial Interests in the Merger” below;
 
  §   the likelihood that the regulatory approvals necessary to complete the transaction would be obtained;
 
  §   the effect of the merger on Community Capital’s and CapitalBank’s employees, including the prospects for continued employment and the severance and other benefits agreed to be provided by Park Sterling to CapitalBank’s employees;
 
  §   the complementary geographic locations of Community Capital and Park Sterling branch networks in the Carolinas; and
 
  §   the effect of the merger on CapitalBank’s customers and the communities in which they conduct business.
          Community Capital’s board of directors also considered the following potential risks and negative factors relating to the merger:
  §   the exchange ratio is fixed so if the market price of Park Sterling common stock decreases prior to the completion of the merger, the value of the consideration to be received by Community Capital’s shareholders electing, or otherwise receiving, stock consideration will decrease as well;
 
  §   the merger agreement limits Community Capital’s ability to pursue other merger opportunities;
 
  §   the merger agreement obligates Community Capital to pay a substantial termination fee if it later chooses to pursue a more attractive uninvited merger proposal or if the agreement is terminated under certain circumstances;
 
  §   Community Capital will lose the autonomy associated with being an independent financial institution;
 
  §   the merger could result in employee attrition and have a negative effect on business and customer relationships;
 
  §   while the merger is pending, Community Capital’s officers and employees will have to focus extensively on actions required to complete the merger, which will divert their attention from Community Capital’s business, and Community Capital will incur substantial transaction costs even if the merger is not consummated; and
 
  §   while the merger is pending, Community Capital will be subject to certain restrictions on the conduct of its business which may delay or prevent it from pursuing business opportunities that may arise or preclude it from taking actions that would be advisable if it was to remain independent.
          The Community Capital board of directors concluded that the anticipated benefits of combining with Park Sterling were likely to substantially outweigh these potential risks and negative factors.
          Before approving the proposed transaction with Park Sterling, the board of directors discussed at length, with input from Howe Barnes, Community Capital’s strategic options, including remaining independent or pursuing other alternatives, in relation to the long-term best interests of shareholders. The board of directors discussed Community Capital’s prospects for resolving its current high level of nonperforming loans, successfully dealing with issues addressed in its and CapitalBank’s Written Agreement with the Federal Reserve Bank of Richmond and the S.C. Board, raising capital as an independent entity and restoring a satisfactory level of profitability if it were to remain independent. The board of directors concluded that combining with Park Sterling on the terms offered by Park Sterling was its best option for maximizing the long-term value of Community Capital’s shareholders and was in the shareholders’ best interest.
          The foregoing discussion of the factors considered by Community Capital’s board of directors is not intended to be exhaustive, but is believed to include all the material factors considered by Community Capital’s board of directors. In view of the wide variety of factors considered in connection with its evaluation of the merger and the complexity of these matters, the Community Capital board of directors did not find it useful and did not attempt to quantify or assign any relative or specific weights to the various factors that it considered in reaching its determination to approve the merger agreement and the merger and recommend that the shareholders vote “FOR” approval of the merger agreement and the merger. In addition, individual members of the Community Capital board of directors may have given differing weights to different factors. The board of directors conducted an overall analysis of the factors described above, including thorough discussions with, and questioning of, Community Capital’s management and outside financial and legal advisors. The Community Capital board of directors considered all of the foregoing factors as a whole and unanimously supported a favorable determination to approve the merger and recommend that Community Capital shareholders approve the merger agreement and the merger.

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          The Community Capital board of directors determined that the merger, the merger agreement and the transactions contemplated by the merger agreement are in the best interests of Community Capital and its shareholders. Accordingly, the Community Capital board of directors unanimously approved the merger and the merger agreement and unanimously recommends that Community Capital shareholders vote “FOR” approval of the merger agreement and the merger.
Opinion of Financial Advisor to Community Capital
          Community Capital retained Howe Barnes to serve as its financial advisor and provide a fairness opinion in connection with the merger. As part of its investment banking business, Howe Barnes is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, initial and secondary offerings of securities, and valuations for other purposes.
          On March 30, 2011, the board of directors of Community Capital met to evaluate the proposed merger and the terms of the merger agreement. At this meeting, Howe Barnes presented its analysis and rendered to the board of directors its oral opinion, which was subsequently confirmed in writing, that, as of the date of the opinion and based upon and subject to various assumptions, matters considered and limitations on Howe Barnes’s review described in the opinion, the merger consideration to be received by the holders of the outstanding common stock of Community Capital was fair, from a financial point of view, to the existing shareholders of Community Capital. Howe Barnes’s opinion was based on their experience as investment bankers, their activities as described below and all other factors Howe Barnes deemed relevant. No limitations were imposed on, or instructions provided to, Howe Barnes by Community Capital with respect to the investigations made or the procedures followed in rendering its opinion. The opinion was approved by Howe Barnes’s Fairness Opinion Committee.
          The full text of Howe Barnes’s written opinion to Community Capital’s board of directors, dated March 30, 2011, which sets forth the assumptions made, matters considered and extent of review by Howe Barnes, is attached as Appendix B to this Proxy Statement/Prospectus and is incorporated herein by reference. You should read the fairness opinion carefully and in its entirety. The following summary of Howe Barnes’s opinion is qualified in its entirety by reference to the full text of the opinion. Howe Barnes’s opinion is directed to Community Capital’s board of directors and does not constitute a recommendation to any shareholder of Community Capital as to how a shareholder should vote with regard to the merger at the special meeting described in this Proxy Statement/Prospectus. The opinion addresses only the fairness to existing Community Capital shareholders, from a financial point of view, of the merger consideration to be received by the holders of the outstanding common stock of Community Capital in connection with the merger. The opinion does not address the relative merits of the merger or any alternatives to the merger, the underlying decision of Community Capital’s board of directors to approve or proceed with or effect the merger, or any other aspect of the merger. No opinion was expressed by Howe Barnes as to whether any alternative transaction might be more favorable to the holders of the outstanding common stock of Community Capital than the merger.
          Howe Barnes has consented to the inclusion of its opinion and to the inclusion of the summary of its opinion in this Proxy Statement/Prospectus. In giving such consent, Howe Barnes does not concede that it comes within the category of persons whose consent is required under the Securities Act or the rules and regulations of the SEC thereunder, nor does it concede that it is an expert within the meaning of the term “expert” as used in the Securities Act or the rules and regulations of the SEC thereunder with respect to any part of the registration statement on Form S-4 of which this Proxy Statement/Prospectus forms a part.
          In connection with rendering its opinion, in addition to other things it considered and deemed relevant, Howe Barnes:
  §   Reviewed the terms of the draft merger agreement dated March 29, 2011;
 
  §   Participated in discussions with representatives of each of Park Sterling and Community Capital concerning Park Sterling’s and Community Capital’s respective financial condition, businesses, assets, earnings, prospects, and such senior management’s views as to future financial performance;
 
  §   Reviewed a draft of Park Sterling’s proxy statement for the 2011 annual meeting of shareholders of Park Sterling to be held on May 25, 2011 and its draft annual report on Form 10-K for the year ended December 31, 2010;
 
  §   Reviewed Park Sterling Bank’s annual reports for the two years ended December 31, 2009 and 2008;

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  §   Reviewed Community Capital’s recent filings with the SEC, including its proxy statement filed April 21, 2010, annual reports on Form 10-K for the three years ended December 31, 2010, 2009 and 2008 and quarterly reports on Form 10-Q for the quarters ended September 30, 2010, June 30, 2010 and March 31, 2010;
 
  §   Reviewed current reports to shareholders of Park Sterling Bank as filed on Form 8-K with the FDIC from August 12, 2010 (the first such filing by Park Sterling Bank) to December 31, 2010 (the day prior to the share exchange with Park Sterling);
 
  §   Reviewed current reports to shareholders of Park Sterling as filed on Form 8-K with the SEC from January 1, 2011 to the date of the opinion;
 
  §   Reviewed current reports to shareholders of Community Capital as filed on Form 8-K with the SEC from January 1, 2009 to the date of the opinion;
 
  §   Reviewed Park Sterling Bank’s and CapitalBank’s Consolidated Reports of Condition and Income for Bank with Domestic Offices Only filed on Form FFIEC 041 for the year ended December 31, 2010;
 
  §   Reviewed certain financial forecasts and projections of Park Sterling and Community Capital prepared by their respective management teams, as well as information regarding the amount and timing of the cost savings and related expenses expected to result from the merger furnished to Howe Barnes by Park Sterling;
 
  §   Reviewed reported market prices and historical trading activity of Park Sterling’s and Community Capital’s common stock;
 
  §   Reviewed certain aspects of the financial performance of Park Sterling and Community Capital and compared such financial performance of Park Sterling and Community Capital, together with stock market data relating to Park Sterling common stock and Community Capital common stock, with similar data available for certain other financial institutions and certain of their publicly traded securities;
 
  §   Compared the proposed financial terms of the merger with the financial terms of certain other transactions that Howe Barnes deemed to be relevant;
 
  §   Reviewed the Written Agreement by and among Community Capital, CapitalBank, the Federal Reserve Bank of Richmond and the S.C. Board dated July 28, 2010;
 
  §   Reviewed written correspondence among Park Sterling, Park Sterling Bank and their respective regulators and written correspondence among Community Capital, CapitalBank and their respective regulators;
 
  §   Reviewed third party loan review reports on Park Sterling Bank prepared since January 1, 2010 (Third Party Reviews);
 
  §   Reviewed the pro forma impact of the merger on the assets, equity, net income, earnings per share and book value per share of Park Sterling; and
 
  §   Reviewed such other information and performed such other studies and analyses as Howe Barnes considered relevant.
          In connection with its review and arriving at its opinion, with the consent of Community Capital’s board of directors, Howe Barnes assumed and relied upon the accuracy and completeness of the financial information and other pertinent information provided by Community Capital to Howe Barnes, and Howe Barnes relied on publicly available information of Park Sterling, as well as financial information provided by Park Sterling and its representatives, for purposes of rendering its opinion. Howe Barnes did not assume any obligation to independently verify any of the information discussed above, including, without limitation, information from published sources, as being complete and accurate. With regard to the financial information, including financial projections it received from Community Capital, Howe Barnes assumed that this information reflected the best available estimates and good faith judgments of management as to Community Capital’s future performance and that the projections provided a reasonable basis upon which Howe Barnes could formulate its opinion. Community Capital does not publicly disclose internal management forecasts or projections of the type utilized by Howe Barnes in connection with Howe Barnes’s role in serving as financial advisor to Community Capital, and those forecasts and projections were not prepared with a view towards public disclosure. The forecasts and projections were based upon numerous variables and assumptions that are inherently uncertain, including, among others, factors relative to the general economic and competitive conditions faced by Community Capital. Accordingly, actual results could vary significantly from those set forth in the forecasts and projections.

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          Howe Barnes does not purport to be an expert in the evaluation of loan portfolios or the allowance for loan losses with respect to loan portfolios and, accordingly, assumes that Community Capital’s and Park Sterling’s allowances were adequate to cover any losses at December 31, 2010 and complied fully with applicable law, regulatory policy and sound banking practice; however, Howe Barnes noted that, based on discussions with management of Community Capital, Community Capital likely will maintain elevated provision expenses during 2011 and into 2012. Howe Barnes was not retained to and did not conduct a physical inspection of any of the properties or facilities of Park Sterling or Community Capital, did not make an independent evaluation, appraisal or physical inspection of the assets, liabilities or prospects of Community Capital or Park Sterling and was not furnished with any such evaluation or appraisals other than the Third Party Reviews and did not review any individual credit files.
          In formulating its opinion, Howe Barnes assumed that the merger would be consummated on terms described in the draft of the merger agreement dated March 29, 2011. Furthermore, Howe Barnes assumed, in all respects material to its analysis, that the representations and warranties of each party contained in the draft merger agreement were true and correct, that each party will perform all of the covenants and agreements required to be performed by it under the draft merger agreement and that all conditions to the merger will be satisfied without being waived. Howe Barnes also assumed that all material governmental, regulatory or other consents will be obtained and that, in the course of obtaining any necessary governmental regulatory or other consents and approvals, or any amendments, modifications or waivers to any documents to which Community Capital is a party, as contemplated by the draft merger agreement, no restrictions will be imposed or amendments, modifications or waivers made that would have any material adverse effect on Community Capital.
          In connection with rendering its opinion to Community Capital’s board of directors, Howe Barnes performed a variety of financial and comparative analyses, which are summarized below. Such summaries do not purport to be a complete description of the analyses performed by Howe Barnes. The ranges of values resulting from any particular analysis described below should not be taken to be Howe Barnes’s view of Community Capital’s actual value. Moreover, Howe Barnes believes that the analyses must be considered as a whole and that selecting any portions of the analyses and the factors considered, including information presented in tabular form, without considering all of the analyses and factors, could create an incomplete understanding of the process underlying the analyses and, more importantly, a misleading or incomplete view of its opinion as to the fairness, from a financial point of view, of the merger consideration that is based on those analyses.
          Transaction Overview
          In providing an overview of the merger, Howe Barnes noted that each of the issued and outstanding shares of Community Capital common stock not owned by Community Capital, Park Sterling or any of their respective wholly owned bank subsidiaries at the effective time of the merger will be converted, at the election of the holder thereof, into 0.6667 of one share of Park Sterling common stock or $3.30 in cash, subject to certain limitations. The implied value of the merger consideration was $3.21 based on the closing price of Park Sterling common stock on March 29, 2011. The terms of the merger are more fully set forth in the merger agreement.
          Market Validation
          Howe Barnes led an extensive process to contact financial institutions (potential acquirors) that Howe Barnes and Community Capital determined may be interested in acquiring Community Capital and that had a high certainty of closing such a transaction with Community Capital. Over a period of approximately six months, Howe Barnes contacted 42 potential acquirers, distributed 13 confidential informational memoranda on the business and financial condition of Community Capital and its subsidiary, CapitalBank, provided updated financial information, and held discussions with multiple potential acquirors. Four of the potential acquirers, including Park Sterling, conducted thorough onsite due diligence on Community Capital, third party loan reviews, off-site due diligence, management meetings and/or customized financial analyses and discussions with Howe Barnes.
          During the due diligence process, Community Capital received a nonbinding written indication of interest from Park Sterling and from another potential acquiror. Park Sterling initially provided a preliminary nonbinding indication of interest to acquire Community Capital for stock and cash at a range of $3.25 to $3.75 per share subject to the results of its due diligence, which would focus on Community Capital’s loan portfolio and potential losses. Upon completion of due diligence, Park Sterling submitted a final offer to acquire no less than 60% of Community Capital’s shares of common stock in exchange for shares of Park Sterling common stock at an exchange ratio of 0.6667 and no more than 40% of Community Capital’s shares of common stock for $3.30 in cash per share.
          Following numerous discussions, Howe Barnes concurred with Community Capital’s board of directors that the Park Sterling offer overall was the best transaction alternative.

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          Comparable Precedent Transaction Analysis
          Howe Barnes analyzed publicly available information relating to selected recent transactions involving strategic buyers (mainly bank-to-bank acquisitions) and financial buyers (mainly recapitalization transactions) to determine relevant valuation multiples (pricing ratios) for transactions deemed to have similar financial and other characteristics as the merger. The following were the key criteria considered in selecting comparable precedent transactions:
  §   bank and thrift merger and recapitalization transactions announced since January 1, 2010;
 
  §   acquisition targets with assets between $500 million and $2.5 billion;
 
  §   acquisition targets with nonperforming assets as a percentage of total assets greater than 4.00%; and
 
  §   transactions with relevant pricing ratios available or sufficient information available to calculate such pricing ratios.
          The following table represents the selected comparable precedent transactions:
     
Target   Buyer
Omni Bancshares, Inc.
  IBERIABANK Corp.
MidCarolina Financial Corp.
  American National Bankshares, Inc.
Monroe Bancorp
  Old National Bancorp
Smithtown Bancorp, Inc.
  People’s United Financial, Inc.
Cascade Financial Corp.
  Opus Bank
Crescent Financial Corp.
  Piedmont Community Bank Holdings, Inc.
First Federal Bancshares of Arkansas, Inc.
  Bear State Financial Holdings, LLC
Capital Bank Corp.
  North American Financial Holdings, Inc.
Cadence Financial Corp.
  Community Bancorp, LLC
TIB Financial Corp.
  North American Financial Holdings, Inc.
Palmetto Bancshares, Inc.
  Investor group
          The following table summarizes the median pricing ratios for the selected comparable precedent transactions:
                                 
    Median Pricing Ratios
    Price /   Market   Price /   Price /
    TBV   Premium   Assets   Deposits
    (%)   (%)   (%)   (%)
     
Strategic Buyers
    113       100       6.2       7.1  
Financial Buyers
    27       (2 )   NM   NM
All Buyers
    40       20     NM   NM
 
The Merger
    70       21       4.9       6.5  
 
 
Source: SNL Financial LC
          Howe Barnes examined a range of various pricing ratios and median pricing ratios for the selected comparable precedent transactions for comparison to the pricing ratios for the merger, which were derived from the merger consideration. Howe Barnes placed more emphasis on the comparison of the price-to-tangible-book-value ratio for the merger to the median price-to-tangible-book-value ratio for the selected comparable precedent transactions.
          Net Asset Value Analysis
          In determining a range of possible net asset values for Community Capital, Howe Barnes first calculated a range of adjusted tangible book values for Community Capital at December 31, 2010 by subtracting a range of potential embedded losses in Community Capital’s loan portfolio and Other Real Estate Owned (OREO), as well as estimated after-tax fair value adjustments and transaction costs. Howe Barnes used a range of potential embedded losses from $40.0 million to $60.0 million on a pre-tax basis, which was deemed by Howe Barnes to be reasonable based on several analyses and market intelligence. The potential embedded losses were reduced by Community Capital’s allowance for loan losses at December 31, 2010. Howe Barnes then calculated premiums ranging from 1.0% to 5.0% on Community Capital’s core deposits (all deposits except Jumbo CDs and brokered deposits) and from 1.0x to 2.0x on the revenue generated by Community Capital’s wealth management division and added such premiums to the range of adjusted tangible book values. The purpose for adding the premiums was to ascribe value to characteristics of Community Capital based on market indications of value. Howe Barnes used three different scenarios for premiums — low, medium and high.

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          Howe Barnes determined the range of net asset values to be $2.05 per share to $5.30 per share and compared such values to the merger consideration, which was valued at $3.21 per share. The results of the net asset value analysis are summarized in the following chart:
             
    Scenarios for Premiums on
Embedded   Core Deposits (1) / Wealth Management (2)
Losses   Low   Medium   High
($ Mil.)   1.0% / 1.0x   3.0% / 1.5x   5.0% / 2.0x
40.0
  $3.35   $4.33   $5.30
50.0   $2.70   $3.68   $4.66
60.0   $2.05   $3.03   $4.01
 
(1)   The range of core deposit premiums was multiplied by Community Capital’s $429.1 million in non-Jumbo CD / brokered deposits at December 31, 2010.
 
(2)   The range of revenue multiples was multiplied by $2.5 million in wealth management revenues, which Howe Barnes calculated by annualizing Community Capital’s fourth quarter 2010 results.
          Conclusion
          Based on the above analyses, Howe Barnes concluded that, as of the date of the opinion, the merger consideration was fair, from a financial point of view, to the holders of Community Capital common stock. In performing its various analyses, Howe Barnes made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond Community Capital’s and Park Sterling’s control. The analyses performed by Howe Barnes are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than those suggested by those analyses. Accordingly, those analyses and estimates are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of the parties or their respective advisors, and Howe Barnes does not assume any responsibility if future results are materially different from those projected.
          The preparation of a fairness opinion is a complex process involving subjective judgment and is not necessarily susceptible to partial analyses or a summary description of such analyses. In its full analysis, Howe Barnes also included assumptions with respect to general economic, market and other financial conditions. Furthermore, Howe Barnes drew from its past experience in similar transactions, as well as its experience in the valuation of securities and its general knowledge of the banking industry as a whole. Any estimates in Howe Barnes’s analyses are not necessarily indicative of actual future results or values, which may significantly diverge more or less favorably from those estimates. An estimate of Community Capital’s valuation does not purport to be appraisals or to necessarily reflect the prices at which Community Capital or their respective securities actually may be sold.
          Howe Barnes’s opinion is limited to the fairness, from a financial point of view, of the merger consideration to be received by the holders of the outstanding common stock of Community Capital in connection with the merger. Howe Barnes does not express any opinion with respect to any other class of Community Capital stock, warrant or option issued and outstanding. In rendering the opinion, Howe Barnes expressed no opinions with respect to the amount or nature of any compensation to any officers, directors or employees of Community Capital, or any class of such persons, relative to the consideration to be received by the holders of the common stock of Community Capital in the merger or with respect to the fairness of any such compensation.
          Howe Barnes’s opinion was based on market, economic, financial and other circumstances existing and disclosed to it on March 30, 2011, and any material change in such circumstances and conditions could affect Howe Barnes’s opinion, but Howe Barnes does not have any obligation to update, revise or reaffirm that opinion.
          Community Capital has agreed to pay Howe Barnes a fee for Howe Barnes’s financial advisory services rendered in connection with the merger. Howe Barnes has received a portion of its fee, which was payable by Community Capital upon execution of the merger agreement, and the remainder of Howe Barnes’s fee is payable upon successful completion of the merger. Community Capital’s board of directors was aware of this fee structure and took it into account in considering Howe Barnes’s fairness opinion and in approving the merger. In addition, Community Capital has agreed to reimburse Howe Barnes for its reasonable expenses incurred in connection with its engagement and to indemnify Howe Barnes against certain liabilities arising out of the merger. During the two years preceding the date of the opinion, Howe Barnes has not had a material relationship with Community Capital or Park Sterling where compensation was received or that it contemplates will be received after closing of the merger.

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          Howe Barnes is actively involved in the investment banking business and regularly undertakes the valuation of investment securities in connection with public offerings, private placements, business combinations and similar transactions. In the ordinary course of business, Howe Barnes may trade in the securities of Community Capital and Park Sterling for its own account and for the accounts of its customers and, accordingly, may at any time hold a long or short position in such securities.
          As described above, Howe Barnes’s opinion and presentation to Community Capital’s board of directors were among the many factors taken into consideration by Community Capital’s board of directors in making its determination to approve the merger agreement, and to recommend that Community Capital’s shareholders approve the merger agreement.
Park Sterling’s Reasons for the Merger
          Park Sterling’s board of directors believes that the merger of Community Capital into Park Sterling will further the strategic plan of Park Sterling to build an $8 to $10 billion financial services company delivering community-banking services in the Carolinas. The Park Sterling board of directors believes that the completion of the merger presents a unique opportunity for Park Sterling to broaden its geographic market area by expanding its franchise and banking operations into the upstate and central areas of South Carolina, which Park Sterling believes are attractive market areas. The acquisition of Community Capital also is expected to benefit Park Sterling by providing a strong source of core deposits to support its organic growth initiatives as well as an expansion of product capabilities.
          The terms of the merger, including the merger consideration, are the result of arm’s-length negotiations between representatives of Park Sterling and Community Capital. In reaching its decision to approve the merger, the Park Sterling board of directors consulted with its legal advisors regarding the terms of the transaction, with its financial advisor regarding the financial aspects of the proposed transaction and the merger consideration, and with management of Park Sterling. In approving the entry into the merger agreement, the Park Sterling board of directors considered the following material factors:
  §   Community Capital’s strategic presence around the attractive Greenville-Spartanburg Metropolitan Statistical Area (MSA) and close proximity to the Columbia MSA positions Park Sterling to pursue organic growth opportunities not only along the I-85 corridor throughout Greenville-Spartanburg, but also along the I-26 corridor through Columbia into Charleston, where Park Sterling has recently been approved to open a branch.
 
  §   The completion of the merger would expand Park Sterling’s product capabilities and diversify its revenue mix by virtue of acquiring Community Capital’s strong wealth-management business, consumer banking franchise and residential mortgage origination and retail brokerage lines of business, which Park Sterling expects to provide a strong source of future noninterest income.
 
  §   The reports of Park Sterling management and the financial presentation of Park Sterling’s financial advisor concerning the operations and financial condition of Community Capital and the pro forma financial impact of the merger.
 
  §   Community Capital is a very well managed, quality organization with a strong earnings capability and a customer-focused business model.
 
  §   The completion of the merger would add Community Capital’s experienced management team to the Park Sterling management team.
 
  §   Community Capital’s and Park Sterling’s management teams share a common business vision and commitment to their respective clients, shareholders, employees and other constituencies.
 
  §   The two companies have complementary service-focused business models.
 
  §   Park Sterling’s management believes that the merger will be accretive to Park Sterling’s earnings under generally accepted accounting practices.
 
  §   The merger is likely to provide an increase in shareholder value, including the benefits of a stronger strategic position.

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           The Park Sterling board of directors also considered potential risks associated with the merger in connection with its deliberations of the proposed transaction, including the challenges of integrating Community Capital’s business, operations and workforce with those of Park Sterling, the potential negative impact on Park Sterling’s stock price and the need to obtain Community Capital shareholder and regulatory approvals in order to complete the transaction.
          Park Sterling’s board of directors considered all of these factors as a whole and, on balance, Park Sterling’s board of directors believes that the opportunities created by the merger to increase the value of the Park Sterling franchise more than offset any integration or other risks inherent in the merger.
          The foregoing discussion of the information and factors considered by the Park Sterling board of directors is not exhaustive, but includes the material factors considered by the Park Sterling board of directors. In view of the wide variety of factors considered by the Park Sterling board of directors in connection with its evaluation of the merger and the complexity of these matters, the Park Sterling board of directors did not consider it practical to, nor did it attempt to, quantify, rank or otherwise assign relative weights to the specific factors that it considered in reaching its decision. In considering the factors described above, individual members of the Park Sterling board of directors may have given different weights to different factors.
          On the basis of these considerations, Park Sterling’s entry into the merger agreement was unanimously approved by Park Sterling’s board of directors on March 30, 2011.
Board of Directors and Management of Park Sterling Following Completion of the Merger
          Effective upon completion of the merger, Park Sterling currently expects to take certain actions to appoint to the Park Sterling and Park Sterling Bank boards of directors Patricia C. Hartung, an individual currently serving as chairman of Community Capital’s board of directors. For information about the current Park Sterling directors and executive officers as well as Ms. Hartung, see “Management Following the Merger” and for more information on the employment arrangements between Park Sterling and certain Community Capital officers that will become effective upon the completion of the merger, see “—Community Capital’s Directors and Officers Have Financial Interests in the Merger—Stevens Employment Agreement” and “—Brewer Employment Agreement” immediately below.
Community Capital’s Directors and Officers Have Financial Interests in the Merger
Interests of Directors and Executive Officers of Community Capital
          In considering the recommendation of the Community Capital board of directors that you vote to approve the merger on substantially the terms set forth in the merger agreement, you should be aware that some of Community Capital’s directors and executive officers have interests in the merger and have arrangements that are different from, or are in addition to, those of Community Capital’s shareholders generally. The Community Capital board of directors was aware of these interests and considered them, among other matters, in reaching its decisions to approve the merger agreement and to recommend that you vote in favor of approving the merger agreement and the merger.
          Stevens Employment Agreement. Park Sterling required, as a condition to entering into the merger agreement, Mr. Stevens to enter into an employment agreement with Park Sterling that replaces his employment agreement with Community Capital. Under the Park Sterling employment agreement, which will be effective upon completion of the merger, Mr. Stevens will serve as South Carolina State Chief Executive Officer, be paid an initial annual base salary of $295,915, be entitled to receive annual bonuses and equity incentive awards as determined by the Compensation and Development Committee of the Park Sterling board of directors, be entitled to receive other benefits provided to similarly situated employees and receive reimbursement of business expenses. The employment agreement has an initial term of two years from completion of the merger, and is automatically renewed for additional one-year terms thereafter unless either party gives the other 180 days of written notice of nonrenewal.
          The employment agreement provides that Mr. Stevens will be paid a lump-sum retention bonus within 60 days following completion of the merger. The retention bonus is equal to the retention bonus that would have been paid under the terms of Mr. Stevens’s Community Capital employment agreement if that employment agreement had remained in effect following the merger. If Mr. Stevens’s employment is terminated following the merger for any reason other than by Park Sterling without “cause”, his resignation for “good reason,” his death or disability or by mutual agreement of the parties within 6 months following the merger, he must repay 100% of the retention bonus. If he has such a termination within one year of the merger, he must repay 66 2/3% of the retention bonus and he must repay 33 1/3% of the retention bonus if he has such a termination within 18 months of the merger. Under the terms of the Community Capital employment agreement, Mr. Stevens would have been entitled to a retention bonus 30 days after the merger, contingent upon Mr. Stevens’s continuous employment through that date. In addition to the retention bonus, under the terms of the employment agreement, Mr. Stevens will be entitled to receive agreement termination payments if his employment is terminated by Park Sterling without “cause” or if he terminates employment for “good reason,” which is defined in the employment agreement as either a material reduction of his annual base salary (other than a proportionate reduction applicable to all executive

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officers) or a material diminution of his authority, responsibilities or duties without his consent. The agreement termination payments are equal to the total salary that he would have received if he remained employed to the end of the term of the employment agreement, based on the salary in effect at the time of the qualifying termination of employment and will be made in a series of substantially equal monthly payments over the 24-month period following his qualifying termination of employment.
          Under the terms of the employment agreement, Mr. Stevens must sign a release and nondisparagement agreement to receive the retention bonus and the agreement termination payments. He is also subject to noncompetition restrictions and restrictions on soliciting clients or employees of Park Sterling for one year following his termination of employment with Park Sterling, as well as restrictions on disclosure of confidential information for two years following termination of employment and a restriction on disclosure of trade secrets for as long as permitted under applicable law. If Mr. Stevens breaches these restrictions he will forfeit any remaining agreement termination payments and must repay any such payments that he has previously received. Park Sterling may waive a breach of the agreement.
          If the payments Mr. Stevens receives in connection with the merger trigger excise tax under federal tax rules relating to “parachute payments,” Mr. Stevens’s employment agreement provides for either a reduction in payments to avoid triggering that excise tax or payment of a tax “gross-up” amount equal to the amount of the excise tax, and any additional taxes related to that payment. Park Sterling will pay Mr. Stevens a tax gross-up only if the amount of the parachute payments Mr. Stevens receives in excess of the compensation level at which the excise tax is triggered equals or exceeds 20% of the total amount of the parachute payments payable to Mr. Stevens.
          Brewer Employment Agreement. Park Sterling also required, as a condition to entering into the merger agreement, Mr. Brewer to enter into an employment agreement with Park Sterling that replaces his employment agreement with Community Capital. Under the Park Sterling employment agreement, which will be effective upon completion of the merger, Mr. Brewer will serve as an executive in the Park Sterling finance department, be paid an initial annual base salary of $171,000, be entitled to receive annual bonuses and equity incentive awards as determined by the Compensation and Development Committee of the Park Sterling board of directors, be entitled to receive other benefits provided to similarly situated employees and reimbursement of business expenses. The employment agreement has an initial term of two years from completion of the merger, and is automatically renewed for additional one-year terms thereafter unless either party gives the other 180 days of written notice of nonrenewal.
          The employment agreement, provides that Mr. Brewer will be paid a lump-sum retention bonus within 60 days following completion of the merger. The retention bonus is equal to the retention bonus that would have been paid under the terms of Mr. Brewer’s Community Capital employment agreement if that employment agreement would have remained in effect following the merger. If Mr. Brewer’s employment is terminated following the merger for any reason other than by Park Sterling without “cause,” his resignation for “good reason,” his death or disability or by mutual agreement of the parties within 6 months following the merger, he must repay 100% of the retention bonus. If he has such a termination within one year of the merger, he must repay 66 2/3% of the retention bonus and he must repay 33 1/3% of the retention bonus if he has such a termination within 18 months of the merger. Under the terms of the Community Capital employment agreement, Mr. Brewer would have been entitled to a retention bonus 30 days after the merger, contingent upon Mr. Brewer’s continuous employment through that date. In addition to the retention bonus, under the terms of the employment agreement, Mr. Brewer will be entitled to receive agreement termination payments if his employment is terminated by Park Sterling without “cause” or if he terminates employment for “good reason,” which is defined in the employment agreement as either a material reduction of his annual base salary (other than a proportionate reduction applicable to all executive officers) or a material diminution of his authority, responsibilities or duties without his consent. The agreement termination payments are equal to the total salary that he would have received if he remained employed to the end of the term of the employment agreement, based on the salary in effect at the time of the qualifying termination of employment and will be made in a series of substantially equal monthly payments over the 24-month period following his qualifying termination of employment.
          Mr. Brewer is also entitled to receive reimbursement for certain expenses associated with relocating to Park Sterling’s Charlotte, North Carolina headquarters. These include relocation expenses he incurs during the 90-day period following the merger, up to $10,000 of temporary living expenses that he incurs during the 90-day period following the merger and major expenses incurred in connection with continuing to maintain his primary residence in South Carolina for a period of up to 6 months following the merger, such as the interest portion of any mortgage payment on his primary residence, utility costs, taxes and insurance. If Mr. Brewer’s employment is terminated within one year following the merger for any reason other than by Park Sterling without “cause,” resignation for “good reason,” or his death or disability, he must repay 100% of the relocation expenses previously reimbursed by Park Sterling (but not the temporary living or house maintenance expenses). If he has such a termination within 2 years of the merger, he must repay 66 2/3% of the relocation expenses and he must repay 33 1/3% of the relocation expenses if he has such a termination within 3 years of the merger.

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          Mr. Brewer must sign a release and nondisparagement agreement to receive the retention bonus and the agreement termination payments. He is subject to noncompetition restrictions and restrictions on soliciting clients or employees of Park Sterling for one year following his termination of employment with Park Sterling, as well as restrictions on disclosure of confidential information for two years following termination of employment and a restriction on disclosure of trade secrets for as long as permitted under applicable law. If Mr. Brewer breaches these restrictions he will forfeit any remaining agreement termination payments and must repay any such payments that he has previously received. Park Sterling may waive a breach of the agreement.
          Mr. Brewer’s employment agreement also provides that Park Sterling will make a tax “gross-up” payment to him if the payments he receives in connection with the merger trigger excise tax under federal tax rules relating to “parachute payments.” The gross-up payment will equal the amount of the excise tax, and any additional taxes related to that payment.
          Restricted Stock Awards. Pursuant to the merger agreement, all outstanding unvested Community Capital restricted stock awards held by executive officers will become fully vested and freely transferable upon completion of the merger, and will be entitled to be exchanged for the merger consideration at the same time and in the same form as other Community Capital shareholders. No other types of Community Capital equity compensation awards are outstanding.
          Salary Continuation Agreements. Mr. Stevens and Mr. Brewer are parties to salary continuation agreements with CapitalBank. Mr. Stevens’s salary continuation agreement provides a retirement benefit of 49.45% of his average annual cash compensation over his most recently completed three calendar years of employment, which is payable in equal monthly installments for 18 years starting after he reaches age 65. For Mr. Brewer, the benefit is 40% of his average annual cash compensation over the most recently completed three calendar years of employment, and is payable in equal monthly installments for 21 years starting after he reaches age 62. Upon a change of control of CapitalBank, Mr. Stevens and Mr. Brewer are entitled to an enhancement in the benefit that would normally be paid under their salary continuation agreements if they terminate employment following the change in control, even if such termination occurs before they reach their normal retirement age (which is defined under the agreement as the August 1 immediately following their 65th birthday). Benefit payments do not begin until after they reach age 65 unless they die before benefit payments begin, in which case their entire benefit is paid in a single lump sum to their designated beneficiary.
          The Community Capital board of directors has determined that the merger will constitute an acquisition of more than 50% of the outstanding voting stock of CapitalBank. As a result, Mr. Brewer will be entitled to receive enhanced benefits under his salary continuation agreement if he terminates employment following the merger, as described in note 2 to the Golden Parachute Compensation table on page 69. Mr. Stevens has already earned the maximum level of benefit payable under his salary continuation agreement and therefore will not receive an enhancement in the benefit payable as a result of a change of control of CapitalBank. Restrictions on competition and on soliciting employees or clients that generally apply under the salary continuation agreements will automatically terminate when the merger occurs. However, as discussed above, Mr. Stevens and Mr. Brewer will be subject to noncompetition and nonsolicitation restrictions under their employment agreements with Park Sterling.
          Split Dollar Life Insurance Agreements. Mr. Stevens and Mr. Brewer are parties to split dollar life insurance agreements with CapitalBank. If Mr. Stevens continues in employment until the earliest of August 31st following his 65th birthday, the date of termination of his employment on account of disability, or the date of a change of control of CapitalBank, then when he dies his designated beneficiary will receive a specified portion of the death proceeds payable under an insurance policy owned by CapitalBank on his life. The rights of Mr. Stevens’s beneficiaries to payment of death proceeds under the policy became vested in 2010.
          As long as Mr. Brewer continues to be employed until the earliest of August 31st following his 62nd birthday, the date of his termination of employment on account of disability, or the date of a change of control of CapitalBank, then when he dies his designated beneficiary will receive a specified portion of the death proceeds payable under an insurance policy owned by CapitalBank on his life. The Community Capital board of directors has determined that the merger will constitute a change of control of CapitalBank. As a result, upon the merger Mr. Brewer’s designated beneficiary will have a vested right to receive death benefits under the life insurance policy.
          Payments Under Director Deferred Fee Agreements. Four directors of Community Capital — Wayne Q. Justesen, B. Marshall Keys, Miles Loadholt and Lex. D Walters — have deferred fee agreements with CapitalBank under which they are permitted to defer all or a portion of the fees they earn for services as directors. The fees are credited with interest while deferred. The deferred fees and interest are generally payable in 120 equal monthly installments following the director’s termination of services as a director. However, in the event of a change of control of CapitalBank, a director’s deferred fees and interest are required to be paid in a single lump sum within 60 days following the change of control. The Community Capital board of directors has determined that the merger will constitute a change of control for purposes of the deferred fee agreements. As a result, the Community Capital directors will receive a lump-sum payment of their deferred fees and interest upon completion of the merger.

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           Park Sterling Board Seat. Effective upon completion of the merger, Park Sterling currently expects to appoint to the Park Sterling and Park Sterling Bank boards of directors Patricia C. Hartung, an individual currently as chairman of Community Capital’s board of directors.
          Park Sterling Advisory Board. Each member of the board of directors of Community Capital, other than Ms. Hartung and Mr. Stevens, will be asked to serve on a local advisory board of Park Sterling for at least a two-year period. It is anticipated that the advisory board will meet quarterly, and members of the board will receive an annual retainer of $25,000 to be paid in quarterly installments.
          Community Capital Director and Officer Indemnification. Park Sterling has agreed to indemnify the directors and officers of Community Capital following the merger against certain liabilities arising from their acts or omissions before the merger. Park Sterling has also agreed to provide directors’ and officers’ liability insurance for the directors and officers of Community Capital for a period of six years following the merger with respect to acts or omissions occurring before the merger, but is not required to pay more than 280% of the amount paid for premiums immediately before the merger.
Golden Parachute Compensation for Community Capital Named Executive Officers
          Mr. Stevens and Mr. Brewer, the named executive officers of Community Capital, are entitled under existing agreements to receive certain compensation from Community Capital and CapitalBank that is based on or that otherwise relates to the merger. This compensation is referred to as “golden parachute” compensation. The “golden parachute” compensation payable by Community Capital and CapitalBank to Mr. Stevens and Mr. Brewer is subject to an advisory (nonbinding) vote of the Community Capital shareholders, and is described under “Proposal No. 2 — Advisory Vote on Golden Parachute Compensation” on page 69.
          Mr. Stevens and Mr. Brewer are also entitled to receive certain “golden parachute” compensation from Park Sterling in connection with the merger. The “golden parachute” compensation payable by Park Sterling to Mr. Stevens and Mr. Brewer is not subject to a shareholder vote, and is described below.
Golden Parachute Compensation Payable by Park Sterling
                                                         
                    Pension/   Perquisites/   Tax        
    Cash   Equity   NQDC   Benefits   Reimbursement   Other   Total
Name   ($)(1)   ($)   ($)   ($)   ($)(2)   ($)   ($)
William G. Stevens
    1,004,984                                     1,004,984  
R. Wesley Brewer
    581,255                       588,067         1,169,322
 
(1)   This is the “single-trigger” retention bonus payment that will be paid in a lump sum within 60 days following completion of the merger if the named executive officer signs and does not revoke a release and nondisparagement agreement with Park Sterling. The retention bonus is subject to a prorated repayment schedule if the named executive officer terminates employment with Park Sterling for certain reasons within 18 months following completion of the merger. For more information concerning the retention bonus, see “—Stevens Employment Agreement” and “—Brewer Employment Agreement” above.
 
(2)   This is the amount of the tax “gross-up” payment that Mr. Brewer will receive under his employment agreement following the merger. For more information concerning this payment, see “—Brewer Employment Agreement” above.
No Golden Parachute Compensation Payable to Park Sterling Named Executive Officers
          None of Park Sterling’s executive officers will receive any type of “golden parachute” compensation that is based on or that otherwise relates to the merger.
Public Trading Markets
          Park Sterling common stock is listed on NASDAQ under the symbol “PSTB.” Community Capital common stock is listed on NASDAQ under the symbol “CPBK.” Upon completion of the merger, Community Capital common stock will be removed from NASDAQ and deregistered under the Exchange Act. The shares of Park Sterling common stock issued pursuant to the merger agreement will be listed for trading on NASDAQ.
Regulatory Approvals Required for the Merger
          Bank holding companies, such as Park Sterling and Community Capital, and their respective depository institution subsidiaries are highly regulated institutions, with numerous federal and state laws and regulations governing their activities. These institutions are subject to ongoing supervision, regulation and periodic examination by various federal and state financial institution regulatory agencies. For detailed discussions of this ongoing regulatory oversight and the laws and regulations under which it is carried, see “Supervision and Regulation.” Those discussions are qualified in their entirety by the actual language of the laws and regulations, which are subject to change based on possible future legislation and action by regulatory agencies. To the extent that the following information describes statutes and regulations, it is qualified in its entirety by reference to those particular statutes and regulations.

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          The merger is subject to approval by the Federal Reserve Board under the Bank Holding Company Act of 1956 (Bank Holding Company Act). In considering the approval of a transaction such as the merger, this Act requires the Federal Reserve Board to review, with respect to the bank holding companies and the banks concerned, the financial condition and future prospects, including capital positions and managerial resources, the effect of the merger on competition in the relevant markets and the convenience and needs of the communities to be served and the record of the insured depository institution subsidiaries of the bank holding companies under the Community Reinvestment Act. The Federal Reserve Board also is required to evaluate whether the merger would result in a monopoly or would be in furtherance of any combination or conspiracy or attempt to monopolize the business of banking in any part of the United States or otherwise would substantially lessen competition or tend to create a monopoly or which in any manner would be in restraint of trade. If the Federal Reserve Board determines that there are anticompetitive consequences to the merger, it will not approve the transaction unless it finds that the anticompetitive effects of the proposed transaction are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the communities to be served.
          Where a transaction, such as the merger, is the acquisition by a bank holding company of a bank located in a state other than the home state of the bank holding company (in this case North Carolina), the Bank Holding Company Act authorizes the Federal Reserve Board to approve the transaction without regard to whether such transaction is prohibited under the laws of the other state, as long as the bank holding company is adequately capitalized and adequately managed and certain other limitations are not exceeded. Park Sterling is considered well capitalized and well managed under the Federal Reserve Board’s Regulation Y, and the transaction does not exceed the other limitations.
          Park Sterling also must obtain the prior approval of the merger from the S.C. Board under Title 34 of the South Carolina Code of Laws. Park Sterling expects to file its application for regulatory approval with the Federal Reserve Board and the S.C. Board during the second quarter of 2011.
Community Capital Shareholders Do Not Have Dissenters’ Rights of Appraisal in the Merger
          Shareholders of a corporation that is proposing to merge or consolidate with another entity are sometimes entitled under relevant state laws to appraisal or dissenters’ rights in connection with the proposed transaction depending on the circumstances. These rights generally confer on shareholders who oppose a merger or the consideration to be received in a merger the right to receive, in lieu of the consideration being offered in the merger, the fair value for their shares as determined in a judicial appraisal proceeding.
          Community Capital shareholders are not entitled to appraisal or dissenters’ rights under South Carolina law in connection with the merger because Community Capital common stock was listed on NASDAQ on the record date for the special meeting.
Accounting Treatment
          The merger will be accounted for under the acquisition method of accounting within generally accepted accounting principles. Under the acquisition method of accounting, the assets (including identifiable intangible assets) and liabilities (including executory contracts and other commitments) of Community Capital as of the effective date of the merger will be recorded at their respective fair values and added to those of Park Sterling. Any excess of purchase price over the fair values of assets acquired and liabilities assumed will be recorded as goodwill. Financial statements of Park Sterling issued after the merger will reflect these fair values and will not be restated retroactively to reflect the historical financial position or results of operations of Community Capital before the merger date.
Restrictions on Sales of Shares by Certain Affiliates
          All shares of Park Sterling common stock to be issued in the merger will be freely transferable under the Securities Act, except shares issued to any shareholder who is an “affiliate” of Park Sterling as defined by Rule 144 under the Securities Act. These affiliates may only sell their shares in transactions permitted by Rule 144 under the Securities Act or as otherwise permitted under the Securities Act. “Affiliates” typically include directors, executive officers and those who control, are controlled by or are under common control with Park Sterling and may include significant shareholders of Park Sterling.

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Material U.S. Federal Income-Tax Consequences of the Merger
          The following summary describes the anticipated material U.S. federal income-tax consequences of the merger to U.S. holders (as defined below) of Community Capital common stock. The following summary is based upon the Code, its legislative history, existing and proposed regulations thereunder and published rulings and decisions, all as currently in effect as of the date hereof, and all of which are subject to change, possibly with retroactive effect. Tax considerations under state, local and foreign laws, or federal laws other than those pertaining to income tax, or federal laws applicable to alternative minimum taxes, are not addressed in this Proxy Statement/Prospectus.
          For purposes of this discussion, the term “U.S. holder” means a beneficial owner that is: an individual citizen or resident of the United States; a corporation (or other entity taxable as a corporation for U.S. federal income-tax purposes) created or organized under the laws of the United States or any of its political subdivisions; a trust that (1) is subject to the supervision of a court within the United States and the control of one or more U.S. persons or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person; or an estate that is subject to U.S. federal income taxation on its income regardless of its source.
          This discussion addresses only those holders of Community Capital common stock that hold their Community Capital common stock as a capital asset within the meaning of Section 1221 of the Code and does not address all the U.S. federal income-tax consequences that may be relevant to particular holders of Community Capital common stock in light of their individual circumstances or to holders of Community Capital common stock that are subject to special rules, such as
    financial institutions;
 
    investors in pass-through entities;
 
    insurance companies;
 
    tax-exempt organizations;
 
    dealers in securities or currencies;
 
    traders in securities that elect to use a mark-to-market method of accounting;
 
    persons that hold Community Capital common stock as part of a straddle, hedge, constructive sale or conversion transaction;
 
    regulated investment companies;
 
    real estate investment trusts;
 
    persons whose “functional currency” is not the U.S. dollar;
 
    persons who are not citizens or residents of the United States; and
 
    holders who acquired their shares of Community Capital common stock through the exercise of an employee stock option or otherwise as compensation.
          If a partnership (or other entity that is taxed as a partnership for federal income-tax purposes) holds Community Capital common stock, the tax treatment of a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership. Partnerships and partners in partnerships should consult their tax advisors about the tax consequences of the merger to them.
          The actual tax consequences of the merger to you may be complex and will depend on your specific situation and on factors that are not within the control of Park Sterling or Community Capital. You should consult with your own tax advisor as to the tax consequences of the merger in your particular circumstances, including the applicability and effect of the alternative minimum tax and any state, local or foreign and other tax laws and of changes in those laws.

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Tax Consequences of the Merger Generally
          The merger is intended to qualify as a “reorganization” within the meaning of Section 368(a) of the Code. Accordingly, the material U.S. federal income-tax consequences will be as follows:
    no gain or loss will be recognized by Park Sterling or Community Capital as a result of the merger;
 
    except as discussed below with respect to cash received instead of a fractional share of Park Sterling common stock, under “—Receipt of Cash Consideration Only and Cash Received Instead of a Fractional Share of Park Sterling Common Stock,” no gain or loss will be recognized by U.S. holders who exchange all of their Community Capital common stock solely for Park Sterling common stock pursuant to the merger;
 
    gain (but not loss) will be recognized by U.S. holders of Community Capital common stock who receive shares of Park Sterling common stock and cash in exchange for shares of Community Capital common stock pursuant to the merger in an amount equal to the lesser of (1) the amount by which the sum of the fair market value of the Park Sterling common stock and cash received by a U.S. holder of Community Capital common stock exceeds such U.S. holder’s basis in its Community Capital common stock and (2) the amount of cash received by such U.S. holder of Community Capital common stock (except with respect to U.S. holders who receive the entirety of their consideration in cash, which is discussed below under “—Receipt of Cash Consideration Only and Cash Received Instead of a Fractional Share of Park Sterling Common Stock”);
 
    the aggregate basis of the Park Sterling common stock received by a U.S. holder of Community Capital common stock in the merger (including fractional shares of Park Sterling common stock deemed received and redeemed as described below) will be the same as the aggregate basis of the Community Capital common stock for which it is exchanged, decreased by the amount of cash received in the merger (other than cash received in lieu of a fractional share in Park Sterling common stock), and increased by the amount of gain recognized on the exchange, other than with respect to cash received in lieu of a fractional share in Park Sterling common stock (regardless of whether such gain is classified as capital gain or as dividend income, as discussed below under “—Potential Recharacterization of Gain as a Dividend”); and
 
    the holding period of Park Sterling common stock received in exchange for shares of Community Capital common stock (including fractional shares of Park Sterling common stock deemed received and redeemed as described below) will include the holding period of the Community Capital common stock for which it is exchanged.
          If a U.S. holder of Community Capital common stock acquired different blocks of Community Capital common stock at different times or at different prices, any gain or loss will be determined separately with respect to each block of Community Capital common stock, and the cash and shares of Park Sterling common stock received will be allocated pro rata to each such block of stock. U.S. holders should consult their tax advisors with regard to identifying the bases or holding periods of the particular shares of Park Sterling common stock received in the merger.
          At the time a U.S. holder makes a cash or stock election pursuant to the terms of the merger agreement, such U.S. holder will not know whether, and to what extent, the proration provisions of the merger agreement might alter the mix of consideration such U.S. holder will receive. As a result, the U.S. federal income-tax consequences to such U.S. holder will not be ascertainable with certainty until such U.S. holder knows the precise amount of cash and Park Sterling common shares that such U.S. holder will receive in the merger.
          Completion of the merger is conditioned on, among other things, the receipt by Park Sterling and Community Capital of legal opinions from McGuireWoods and Nelson Mullins, respectively, each dated as of the closing date of the merger, that for U.S. federal income-tax purposes the merger will be treated as a “reorganization” within the meaning of Section 368(a) of the Code. These opinions will be based on certain assumptions and on representation letters provided by Community Capital and Park Sterling to be delivered at the time of closing. Neither of the tax opinions will be binding on the IRS. Neither Park Sterling nor Community Capital intends to request any ruling from the IRS as to the U.S. federal income-tax consequences of the merger and there is no guarantee that the IRS will treat the merger as a “reorganization” within the meaning of Section 368(a) of the Code.
Taxation of Capital Gain
          Except as described under “—Potential Recharacterization of Gain as a Dividend” below, gain that U.S. holders of Community Capital common stock recognize in connection with the merger generally will constitute capital gain and will constitute long-term capital gain if such U.S. holders have held (or are treated as having held) their Community Capital common stock for more than one year as of the date of the merger. For U.S. holders of Community Capital common stock that are noncorporate holders, long-term capital gain generally will be taxed at a maximum U.S. federal income-tax rate of 15%.

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Potential Recharacterization of Gain as a Dividend
          All or part of the gain that a particular U.S. holder of Community Capital common stock recognizes could be treated as dividend income rather than capital gain if (1) such U.S. holder is a significant shareholder of Park Sterling or (2) such U.S. holder’s percentage ownership, taking into account constructive ownership rules, in Park Sterling after the merger is not meaningfully reduced from what its percentage ownership would have been if it had received solely shares of Park Sterling common stock rather than a combination of cash and shares of Park Sterling common stock in the merger. This could happen, for example, because of ownership of additional shares of Park Sterling common stock by such holder, ownership of shares of Park Sterling common stock by a person related to such holder or a share repurchase by Park Sterling from other holders of Park Sterling common stock. The IRS has indicated in rulings that any reduction in the interest of a minority shareholder that owns a small number of shares in a publicly and widely held corporation and that exercises no control over corporate affairs would result in capital gain as opposed to dividend treatment. Because the possibility of dividend treatment depends primarily upon the particular circumstances of a holder of Community Capital common stock, including the application of certain constructive ownership rules, holders of Community Capital common stock should consult their own tax advisors regarding the potential tax consequences of the merger to them.
Receipt of Cash Consideration Only and Cash Received Instead of a Fractional Share of Park Sterling Common Stock
          A U.S. holder of Community Capital common stock who receives the entirety of his or her consideration in the form of cash will generally recognize gain or loss equal to the difference between the amount of cash received and the basis in his or her Community Capital common stock. In addition, a U.S. holder of Community Capital common stock who receives cash in lieu of a fractional share of Park Sterling common stock will be treated as having received the fractional share pursuant to the merger and then as having exchanged the fractional share for cash in a redemption by Park Sterling. As a result, such U.S. holder of Community Capital common stock will generally recognize gain or loss equal to the difference between the amount of cash received and the basis in his or her fractional share interest as set forth above. The gain or loss recognized by the U.S. holders described in this paragraph will generally be capital gain or loss, and will be long-term capital gain or loss if, as of the effective date of the merger, the U.S. holder’s holding period for the relevant shares is greater than one year. The deductibility of capital losses is subject to limitations.
Backup Withholding and Information Reporting
          Payments of cash to a U.S. holder of Community Capital common stock pursuant to the merger may, under certain circumstances, be subject to information reporting and backup withholding unless the holder provides proof of an applicable exemption or, in the case of backup withholding, furnishes its taxpayer identification number and otherwise complies with all applicable requirements of the backup withholding rules. Any amounts withheld from payments to a U.S. holder under the backup withholding rules are not additional tax and generally will be allowed as a refund or credit against the U.S. holder’s U.S. federal income-tax liability, provided the required information is timely furnished to the IRS.
          A U.S. holder of Community Capital common stock who receives Park Sterling common stock as a result of the merger will be required to retain records pertaining to the merger. Each U.S. holder of Community Capital common stock who is required to file a U.S. federal income-tax return and who is a “significant holder” that receives Park Sterling common stock in the merger will be required to file a statement with such U.S. federal income-tax return in accordance with Treasury Regulations Section 1.368-3 setting forth such holder’s basis in the Community Capital common stock surrendered and the fair market value of the Park Sterling common stock and cash received in the merger. A “significant holder” is a holder of Community Capital common stock who, immediately before the merger, owned at least 5% of the outstanding stock of Community Capital or securities of Community Capital with a basis for federal income taxes of at least $1 million.
          This discussion does not address tax consequences that may vary with, or are contingent on, individual circumstances. Moreover, it does not address any non-income tax or any foreign, state or local tax consequences of the merger. Tax matters are very complicated, and the tax consequences of the merger to you will depend upon the facts of your particular situation. Accordingly, we strongly urge you to consult with a tax advisor to determine the particular federal, state, local or foreign income or other tax consequences to you of the merger.
          The foregoing summary of material federal U.S. income-tax consequences of the merger is not intended or written to be used, and cannot be used, by any shareholder of Community Capital, any shareholder of Park Sterling or any other person for the purpose of avoiding penalties that may be imposed by the IRS.

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THE MERGER AGREEMENT
          The following describes certain aspects of the merger, including material provisions of the merger agreement. The following description of the merger agreement is subject to, and qualified in its entirety by reference to, the merger agreement, which is attached to this Proxy Statement/Prospectus as Appendix A and is incorporated by reference in this Proxy Statement/Prospectus. We urge you to read the merger agreement carefully and in its entirety, as it is the legal document governing the merger.
Terms of the Merger
          The merger agreement provides for the merger of Community Capital with and into Park Sterling, with Park Sterling as the surviving corporation. Under the terms of the merger agreement, at the effective time of the merger, each outstanding share of Community Capital common stock will be converted into the right to receive, at the election of the holder of such share, either:
  §   $3.30 in cash (without interest); or
 
  §   0.6667 of a share of Park Sterling common stock.
          Community Capital shareholders may make a different election with respect to each share of Community Capital stock they hold. Any merger consideration is subject to ratable proration, as described below under “—Cash or Stock Election.” No fractional shares of Park Sterling common stock will be issued in connection with the merger. Instead, Community Capital shareholders will receive, without interest, a cash payment from Park Sterling equal to the fractional share interest they otherwise would have received, multiplied by $3.30.
          Based on the closing price of $ per share of Park Sterling common stock, as reported on NASDAQ on , 2011, the latest practicable trading day before the distribution of this Proxy Statement/Prospectus, the implied value of the merger consideration proposed for each share of Community Capital common stock is $, which we calculated by assuming (1) 60% of each share of Community Capital common stock is converted into Park Sterling common stock (with the value of a full Community Capital share for this purpose calculated by multiplying the closing price of Park Sterling common stock on those dates by the exchange ratio of 0.6667) and (2) the remaining 40% of each such share is converted into cash (based on a price per Community Capital share equal to $3.30). We cannot give you any assurance as to whether or when the merger will be completed, and you are advised to obtain current market quotations for Park Sterling common stock.
          The Park Sterling articles of incorporation will be the articles of incorporation, and the Park Sterling bylaws will be the bylaws, of the combined company after completion of the merger. The merger agreement provides that Park Sterling may change the structure of the merger, but no such change may alter the amount or kind of merger consideration to be provided under the merger agreement, adversely affect the tax consequences to Community Capital shareholders in the merger or materially impede or delay completion of the merger.
          CapitalBank initially will become a wholly owned subsidiary of Park Sterling and will continue to operate as a South Carolina state-chartered Federal Reserve member bank separate from Park Sterling. Park Sterling anticipates that CapitalBank and Park Sterling will, as soon as practicable, merge into a single North Carolina state-chartered nonmember bank in order to more efficiently manage capital and liquidity.
Cash or Stock Election
          If you are a record holder of Community Capital common stock, an election form will be provided to you under separate cover. The election form will entitle you to elect to receive cash, Park Sterling common stock or a combination of cash and Park Sterling common stock, or to make no election with respect to the merger consideration that you wish to receive. A more detailed description of the election form is set forth below under “—Election Procedures.”
          All elections by Community Capital shareholders are subject to the allocation and proration procedures described in the merger agreement. These procedures are intended to ensure that 60% of the outstanding shares of Community Capital common stock will be converted into the right to receive Park Sterling common stock and the remaining 40% of the outstanding shares of Community Capital common stock will be converted into the right to receive cash.
          It is unlikely that elections will be made in the exact proportions provided for in the merger agreement. As a result, the merger agreement describes procedures to be followed if Community Capital shareholders in the aggregate elect to receive more or fewer shares of Park Sterling common stock than Park Sterling has agreed to issue. These procedures are summarized below.

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  §   If Park Sterling common stock is oversubscribed: If Community Capital shareholders elect to receive more Park Sterling common stock than Park Sterling has agreed to issue in the merger, then all Community Capital shareholders who have elected to receive cash or who have made no election will receive cash for their Community Capital shares and all shareholders who elected to receive Park Sterling common stock will receive a pro rata portion of the available Park Sterling shares plus cash for those shares not converted into Park Sterling common stock.
 
  §   If Park Sterling common stock is undersubscribed: If Community Capital shareholders elect to receive fewer shares of Park Sterling common stock than Park Sterling has agreed to issue in the merger, then all Community Capital shareholders who have elected to receive Park Sterling common stock will receive Park Sterling common stock, and
  o   if the number of shares as to which Community Capital shareholders have made no election is less than this shortfall, then all Community Capital shareholders who have made no election will receive Park Sterling common stock, and all Community Capital shareholders who have elected to receive cash will receive a pro rata portion of the available cash consideration plus Park Sterling common stock for those Community Capital shares not converted into cash; or
 
  o   if the number of shares as to which Community Capital shareholders have made no election is greater than or equal to the shortfall, all Community Capital shareholders who have elected to receive cash will receive cash, and all Community Capital shareholders who made no election will receive a pro rata portion of the remaining available cash consideration plus Park Sterling common stock for those Community Capital shares not converted into cash.
          Neither Community Capital nor Park Sterling is making any recommendation as to whether Community Capital shareholders should elect to receive cash or Park Sterling common stock in the merger. Each Community Capital shareholder must make his or her own decision with respect to such election.
          No guarantee can be made that you will receive the amounts of cash or stock you elect. As a result of the allocation procedures and other limitations outlined in this Proxy Statement/Prospectus and in the merger agreement, you may receive Park Sterling common stock or cash in amounts that vary from the amounts you elected to receive.
Closing and Effective Time of the Merger
          The merger will be completed only if all of the following occur:
  §   the merger agreement and the merger are approved by Community Capital shareholders;
 
  §   we obtain all required governmental and regulatory consents and approvals without a condition or restriction that would have a material adverse effect on either Community Capital or Park Sterling, measured on a scale relative to Community Capital; and
 
  §   all other conditions to the merger discussed in this Proxy Statement/Prospectus and in the merger agreement are either satisfied or waived.
          The merger will become effective when articles of merger are filed with each of the South Carolina Secretary of State and the North Carolina Secretary of State. However, we may agree to a later time for completion of the merger and specify that time in the articles of merger in accordance with South Carolina and North Carolina law. In the merger agreement, we have agreed to cause the completion of the merger to occur no later than the fifth business day following the satisfaction or waiver of the last of the conditions specified in the merger agreement, or on another mutually agreed date. If these conditions are satisfied or waived during the two weeks immediately before the end of a fiscal quarter of Park Sterling, then Park Sterling may postpone the closing until the first full week after the end of that quarter. It currently is anticipated that the effective time of the merger will occur in the third quarter of 2011, but we cannot guarantee when or if the merger will be completed.
Board of Directors of the Surviving Corporation
          Before completion of the merger, Park Sterling and Park Sterling Bank currently expects to take certain actions to appoint to the Park Sterling and Park Sterling Bank boards of directors Patricia C. Hartung, the current chairman and an independent member of the Community Capital board of directors and, if necessary, will increase the size of the Park Sterling and Park Sterling Bank boards of directors to permit this appointment. Upon completion of the merger, the current members of the CapitalBank board of directors will resign, except for Ms. Hartung, and the members of the Park Sterling board of directors will be appointed to the CapitalBank board of directors.

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Election Procedures
          As described above, holders of record of Community Capital common stock will receive an election form under separate cover. The election form will entitle you to elect to receive cash, Park Sterling common stock or a combination of cash and Park Sterling common stock, or to make no election with respect to the merger consideration that you wish to receive.
          To make a valid election, you must submit a properly completed election form to First-Citizens Bank and Trust Company, which will be acting as the exchange agent, on or before 5:00 p.m., Eastern Time, on the 25th day following the mailing of the election form (or such other date set forth in the election form). As exchange agent, First-Citizens Bank and Trust Company will process the exchange of Community Capital common stock certificates for cash and/or Park Sterling common stock. Shortly after the merger, the exchange agent will allocate cash and shares of Park Sterling common stock among Community Capital shareholders, consistent with their elections, and the allocation and proration procedures. Please do not forward your Community Capital stock certificates and election form with your proxy cards. Election forms should be returned to the exchange agent in accordance with the instructions contained in the election form.
          You may change your election at any time before the election deadline by written notice accompanied by a properly completed and signed, revised election form received by the exchange agent before the election deadline. You also may revoke your election by written notice received by the exchange agent before the election deadline. All elections will be revoked automatically if the merger agreement is terminated. If you have a preference for receiving either Park Sterling common stock and/or cash for your Community Capital common stock, you should complete and return the election form. If you do not make an election, you will be allocated Park Sterling common stock and/or cash depending on the elections made by other Community Capital shareholders.
          Community Capital shareholders who hold their shares of common stock in “street name” through a bank, broker or other financial institution, and who wish to make an election, should seek instructions from the institution holding their shares concerning how to make the election.
          If a Community Capital shareholder makes an election but sells or otherwise transfers his or her shares before the completion of the merger, the exchange agent will treat those shares as if no election had been made with respect to them, unless the purchaser or other transferee makes a new election with respect to those shares prior to the election deadline.
Conversion of Shares; Exchange of Certificates
          The conversion of Community Capital common stock into the right to receive the merger consideration will occur automatically upon completion of the merger. As soon as reasonably practicable after completion of the merger, the exchange agent will exchange certificates representing shares of Community Capital common stock for the merger consideration to be received pursuant to Community Capital shareholders’ elections and the merger agreement. Park Sterling will deposit with the exchange agent the shares of Park Sterling common stock (or evidence of such shares in book-entry form) and cash to be issued to Community Capital shareholders in exchange for their shares of Community Capital common stock.
Letter of Transmittal
          As soon as is reasonably practicable after the completion of the merger, the exchange agent will mail to each Community Capital shareholder at the time of the merger a letter of transmittal containing instructions for the exchange of his or her Community Capital stock certificates for the merger consideration. Upon surrendering your certificate(s) representing shares of Community Capital common stock, together with the properly executed letter of transmittal and any other required documents, your Community Capital stock certificate(s) will be cancelled and you will receive the shares of Park Sterling common stock, or a cash payment, or both, as applicable, to which you are entitled in accordance with your election and the merger agreement. You also will receive a cash payment for any fractional shares of Park Sterling common stock that would have been otherwise issuable to you as a result of the merger. No interest will be paid to Community Capital shareholders or accrued with respect to the cash consideration, cash in lieu of fractional shares or unpaid dividends and distributions, if any. Upon completion of the merger, Community Capital stock certificates will no longer represent shares of Community Capital common stock and will only represent the right to receive the merger consideration. After the completion of the merger, there will be no further transfers of Community Capital common stock, except as required to settle trades executed before completion of the merger.
          Holders of Community Capital common stock should not submit their Community Capital stock certificate(s) for exchange until they receive the transmittal instructions and a form of letter of transmittal from the exchange agent.
          If your stock certificates have been lost, stolen or destroyed, you will have to prove your ownership of these certificates and that they were lost, stolen or destroyed and an indemnity bond must be purchased at your expense before you receive any consideration for your shares. Upon request, the exchange agent will send you instructions on how to provide evidence of ownership and the purchase of an indemnity bond for lost certificates.

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          If any certificate representing shares of Park Sterling’s common stock is to be issued in a name other than that in which the certificate for shares surrendered in exchange is registered, or cash is to be paid to a person other than the registered holder, it will be a condition of issuance or payment that the certificate so surrendered be properly endorsed or otherwise be in proper form for transfer and that the person requesting the exchange either:
  §   pay to the exchange agent in advance any transfer or other taxes required by reason of the issuance of a certificate or payment to a person other than the registered holder of the certificate surrendered, or
 
  §   establish to the satisfaction of the exchange agent that the tax has been paid or is not payable.
          Any portion of the cash or shares of Park Sterling common stock made available to the exchange agent that remains unclaimed by Community Capital shareholders as of the first anniversary of the effective time of the merger will be returned to Park Sterling. After that time, any Community Capital shareholder who has not exchanged shares of Community Capital common stock for the merger consideration in accordance with the merger agreement may look only to Park Sterling for payment of the merger consideration for these shares and any unpaid dividends or distributions. Nonetheless, none of Park Sterling, Community Capital, the exchange agent or any other person will be liable to any Community Capital shareholder for any amount properly delivered to a public official under applicable abandoned property, escheat or similar laws.
Withholding
          The exchange agent will be entitled to deduct and withhold from the cash consideration or cash in lieu of fractional shares payable to any Community Capital shareholder the amounts it is required to deduct and withhold under any federal, state, local or foreign tax law. If the exchange agent withholds any amounts, these amounts will be treated for all purposes of the merger as having been paid to the shareholders from whom they were withheld.
Dividends and Distributions
          Until Community Capital common stock certificates are surrendered for exchange, any dividends or other distributions declared after the effective time with respect to Park Sterling common stock into which shares of Community Capital common stock may have been converted into the right to receive will accrue, without interest, but will not be paid. Park Sterling will pay to former Community Capital shareholders any unpaid dividends or other distributions, without interest, only after they have duly surrendered their Community Capital stock certificates. To date, Park Sterling has not paid any cash dividends with respect to its common stock, and it is not currently anticipated that Park Sterling will pay cash dividends in the foreseeable future.
          Before the effective time of the merger, Community Capital and its subsidiaries may not declare or pay any dividend or distribution on its capital stock or repurchase any shares of its capital stock, other than:
  §   dividends paid by any subsidiary of Community Capital to Community Capital or to any of its wholly owned subsidiaries; and
 
  §   the acceptance of shares of Community Capital common stock in payment of the exercise price or withholding taxes incurred in connection with the vesting of restricted shares of Community Capital stock granted under a Community Capital stock plan, in accordance with past practice.
Representations and Warranties
          The merger agreement contains customary representations and warranties of Community Capital and Park Sterling relating to their respective businesses. With the exception of certain representations that must be true and correct in all material respects (or, in the case of specific representations and warranties regarding the capitalization of Community Capital, true and correct except to a de minimis extent or, in the case of specific representations and warranties regarding the reports of the respective companies to governmental entities, true and correct in all respects), no representation or warranty will be deemed untrue or incorrect as a consequence of the existence or absence of any fact, circumstance or event unless that fact, circumstance or event, individually or when taken together with all other facts, circumstances or events, has had or is reasonably likely to have a material adverse effect on the company making the representation. In determining whether a material adverse effect has occurred or is reasonably likely, the parties will disregard any effects resulting from (1) changes in GAAP or regulatory accounting requirements applicable to banks or savings associations and their holding companies generally, (2) changes in laws, rules or regulations of general applicability to banks or savings associations, and their holding companies generally, or their interpretations by courts or governmental entities, except to the extent such changes have a disproportionate adverse effect on such party as compared to other community banks in the southeastern United States, (3) changes in global or national political conditions or in general economic or market conditions affecting banks, savings associations or their holding companies generally, except to the extent that such changes in general economic or market conditions have a disproportionate adverse effect on such party as compared to other community banks in the southeastern United States, or (4) the direct effects of negotiating the merger agreement or completing the merger on each party’s operating performance. The representations and warranties in the merger agreement do not survive the effective time of the merger.

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          Each of Park Sterling and Community Capital has made representations and warranties to the other regarding, among other things:
  §   corporate matters, including due organization and qualification;
 
  §   capitalization;
 
  §   authority relative to execution and delivery of the merger agreement and the absence of conflicts with, or violations of, organizational documents or other obligations as a result of the merger;
 
  §   required governmental filings and consents;
 
  §   the timely filing of reports with governmental entities, and the absence of investigations by regulatory agencies;
 
  §   financial statements and accounting;
 
  §   broker’s fees payable in connection with the merger;
 
  §   the absence of material adverse changes;
 
  §   legal proceedings;
 
  §   tax matters;
 
  §   compliance with applicable laws;
 
  §   tax treatment of the merger; and
 
  §   the accuracy of information supplied for inclusion in this Proxy Statement/Prospectus and other similar documents.
          In addition, Community Capital has made other representations and warranties about itself to Park Sterling as to:
  §   employee matters, including employee benefit plans;
 
  §   material contracts;
 
  §   risk management instruments and derivatives;
 
  §   investment and loan portfolios;
 
  §   real property and intellectual property;
 
  §   environmental liabilities;
 
  §   personal and real property leases;
 
  §   securitizations;
 
  §   the inapplicability of state takeover laws; and

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  §   the receipt of a financial advisor’s opinion.
          Park Sterling also has made a representation and warranty to Community Capital regarding the availability of cash to pay the cash portion of the merger consideration.
          The representations and warranties described above and included in the merger agreement were made by each of Park Sterling and Community Capital to the other. These representations and warranties were made as of specific dates, may be subject to important qualifications and limitations agreed to by Park Sterling and Community Capital in connection with negotiating the terms of the merger agreement, and may have been included in the merger agreement for the purpose of allocating risk between Park Sterling and Community Capital rather than to establish matters as facts. The merger agreement is described in, and included as Appendix A to, this Proxy Statement/Prospectus only to provide you with information regarding its terms and conditions, and not to provide any other factual information regarding Community Capital, Park Sterling or their respective businesses. Accordingly, the representations and warranties and other provisions of the merger agreement should not be read alone, but instead should be read only in conjunction with the information provided elsewhere in this Proxy Statement/Prospectus.
Covenants and Agreements
          Each of Community Capital and Park Sterling has undertaken customary covenants that place restrictions on it and its subsidiary until the effective time of the merger. In general, Community Capital agreed to (1) conduct its business in the ordinary course in all material respects, (2) use reasonable best efforts to maintain and preserve intact its business organization and advantageous business relationships, including retaining the services of key officers and employees, and (3) take no action that is intended to or would reasonably be expected to adversely affect or materially delay the ability of either party to obtain any necessary regulatory approvals, perform its covenants or complete the merger. Community Capital has further agreed that, with certain exceptions and except with Park Sterling’s prior written consent, Community Capital will not, and will not permit CapitalBank to, among other things, undertake the following extraordinary actions:
  §   incur indebtedness or in any way assume the indebtedness of another person, except in the ordinary course of business;
 
  §   adjust, split, combine or reclassify any of its capital stock;
 
  §   make, declare or pay any dividends (other than accrued dividends on its restricted stock, which are to be paid at the effective time) or other distributions on any shares of its capital stock, except as set forth under “—Conversion of Shares; Exchange of Certificates—Dividends and Distributions”;
 
  §   issue shares, stock options or other equity-based awards;
 
  §   hire or terminate any employees or independent contractors or enter into any collective-bargaining agreements, except in the ordinary course of business;
 
  §   make any loans in amounts in excess of $5,000,000 (excluding any loan of a smaller amount on an outstanding loan or line of credit exceeding $5,000,000) or make, renew or amend any loan outside the ordinary course of business;
 
  §   except as contemplated by the merger agreement and except in the ordinary course of business, (1) increase wages, salaries or incentive compensation, (2) pay or provide, or increase or accelerate the accrual rate, vesting or timing or payment or funding of, any compensation or benefit to employees, retired employees, directors or consultants of Community Capital and CapitalBank, (3) establish, adopt or become a party to any new employee benefit or compensation plan or agreement or amend, modify or terminate any existing plan, (4) take any action to fund or secure the payment of compensation or benefits under any of its benefits plans or (5) amend, modify or terminate any third-party agreement related to any benefit plan;
 
  §   other than in the ordinary course of business, sell, transfer, mortgage, encumber or otherwise dispose of any material assets or properties, or cancel, release or assign any material indebtedness, except for certain nonmaterial properties, which may be sold for greater than or equal to 90% of their carrying value;
 
  §   enter into any new line of business or change in any material respect its lending, investment, underwriting, risk and asset liability management and other banking, operating and servicing policies other than as required by applicable law;
 
  §   make any material investment either by purchase of securities, capital contributions, property transfers or purchase of property or assets;

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  §   take any action or knowingly fail to take any action reasonably likely to prevent the merger from qualifying as a reorganization for federal income-tax purposes;
  §   amend any charter documents, take any action to exempt another person from any applicable takeover law or defensive charter provision or terminate, amend or waive any provision of any confidentiality or standstill agreements in place with third parties;
 
  §   restructure or materially change its investment securities portfolio or its gap position;
 
  §   commence or settle any material claim other than foreclosure claims in the ordinary course of business;
 
  §   take or fail to take any action that is intended, or may be reasonably expected, to cause any of the conditions to the merger to fail to be satisfied;
 
  §   change its tax accounting or financial accounting methods, except as required by applicable law or generally accepted or regulatory accounting principles;
 
  §   file or amend any tax return other than in the ordinary course of business, make or change any material tax election or settle or compromise any material tax liability;
 
  §   terminate or waive any material provision of any material contract or agreement governing its securities, except in the ordinary course of business; or
 
  §   agree to take or adopt any resolutions by the board of directors in support of any of the actions prohibited by the preceding bullets.
          If Community Capital requests Park Sterling’s consent to make a loan in excess of $5,000,000 and Park Sterling fails to disapprove that request in writing within five business days, then Community Capital may make the requested loan. If Community Capital requests Park Sterling’s consent to sell any “Other Real Estate Owned,” and that request is not disapproved in writing within five business days, then Community Capital may sell that Other Real Estate Owned.
          Park Sterling has agreed that, except with Community Capital’s prior written consent, Park Sterling will not, among other things, undertake the following extraordinary actions:
  §   amend any charter documents in a manner that would adversely affect Community Capital or its shareholders or the transactions contemplated by the merger agreement;
 
  §   take any action or knowingly fail to take any action reasonably likely to prevent the merger from qualifying as a reorganization for federal income-tax purposes;
 
  §   take any action that is intended, or may be reasonably expected, to result in any of the conditions to the merger failing to be satisfied;
 
  §   take any action that would reasonably be expected to prevent, materially impede or materially delay completion of the merger or the attainment of any bank regulatory approval or cause any other application for bank regulatory approval to be accepted by a bank regulatory agency, with limited exceptions; or
 
  §   agree to take or adopt any resolutions by the board of directors in support of any of the actions prohibited by the preceding bullets.
          Park Sterling may, however, pursue and consummate other acquisitions.
          The merger agreement also contains mutual covenants relating to the preparation of this Proxy Statement/Prospectus, access to information of the other company and public announcements with respect to the transactions contemplated by the merger agreement. Park Sterling also has agreed to cause the shares of Park Sterling common stock issued in the merger to be approved for listing on NASDAQ.

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Reasonable Best Efforts of Community Capital to Obtain the Required Shareholder Vote
          Community Capital has agreed to hold a meeting of its shareholders as soon as is reasonably practicable for the purpose of obtaining shareholder approval of the merger agreement and the merger. Community Capital will use its reasonable best efforts to obtain such approval. Community Capital is also required to submit the merger agreement to a shareholder vote even if its board of directors no longer recommends approval of the merger agreement and the merger.
          Community Capital and Park Sterling have also agreed in good faith to use their reasonable best efforts to negotiate a restructuring of the merger if Community Capital’s shareholders do not approve the merger agreement and the merger at the special meeting and to resubmit the transaction to Community Capital’s shareholders for approval. However, in any restructuring neither party has any obligation to change the amount or kind of the merger consideration in a manner adverse to that party or its shareholders.
Agreement Not to Solicit Other Offers
          Community Capital has agreed that it and CapitalBank, and their officers, directors, employees, agents and representatives will not, directly or indirectly:
  §   solicit, initiate, encourage or facilitate any inquiries or proposals for any “Alternative Transaction” (as defined below); or
 
  §   participate in any discussions or negotiations, or enter into any agreement, regarding any Alternative Transaction.
          Community Capital also has agreed to cease any existing discussions or negotiations with any persons with respect to any Alternative Proposal (as defined below), and to use reasonable best efforts to cause all persons other than Park Sterling who have been furnished with confidential information in connection with an Alternative Proposal within the 12 months before the date of the merger agreement to return or destroy such information.
          However, before the special meeting, and subject to entering into a customary confidentiality agreement that is no less favorable to Community Capital than its confidentiality agreement with Park Sterling, the Community Capital board of directors is permitted to furnish nonpublic information that had been provided, or is concurrently provided, to Park Sterling to a person making an Alternative Proposal and to participate in discussions and negotiations with respect to an unsolicited, written, bona fide Alternative Proposal with the person making the proposal, if (1) Community Capital receives an unsolicited written Alternative Proposal that its board of directors believes in good faith to be bona fide, (2) the proposal was not the result of a breach of Community Capital’s nonsolicitation provisions, (3) Community Capital’s board of directors determines in good faith, after consulting with outside financial and legal counsel, that such Alternative Proposal constitutes or is reasonably likely to lead to a Superior Proposal (as defined below) and (4) after consulting with outside legal counsel, Community Capital’s board of directors determines that failure to so act would be reasonably likely to violate its fiduciary duties under applicable law.
          Community Capital has agreed to call its shareholder meeting as soon as reasonably practicable to obtain shareholder approval of the merger agreement and the merger and that its board of directors will recommend that its shareholders approve the merger agreement. Community Capital has further agreed that its board of directors will not withdraw (or modify or qualify in a manner adverse to Park Sterling) or refuse to recommend its approval of the merger agreement and the merger, or approve, adopt, recommend, endorse or otherwise declare advisable the adoption of any Alternative Proposal (we refer to any such action as an “Adverse Recommendation Change”) or enter into any agreement that is intended to or reasonably likely to lead to an Alternative Proposal. However, before obtaining the Community Capital shareholder approval Community Capital’s board of directors may, if such board determines in good faith (after consultation with outside counsel) that failure to do so would be reasonably likely to violate its fiduciary duties under applicable law, taking into account all adjustments to the terms of the merger agreement that may be offered by Park Sterling, make an Adverse Recommendation Change in response to an Alternative Proposal so long as Community Capital has not breached its nonsolicitation agreement covenant in any material respect and:
          (i) the Community Capital board of directors determines in good faith (after consultation with outside legal and financial advisors) that such Alternative Proposal is a Superior Proposal and such proposal has been made and has not been withdrawn and continues to be a Superior Proposal after taking into account all adjustments to the terms of the merger agreement that may be offered by Park Sterling pursuant to the merger agreement;
          (ii) Community Capital has given Park Sterling at least four business days’ prior written notice of its intention to take such action and specifying the material terms and conditions of any such Superior Proposal and has contemporaneously provided an unredacted copy of the relevant proposed transaction agreements with the party making such Superior Proposal; and

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          (iii) before effecting such an Adverse Recommendation Change, Community Capital has negotiated, and has caused its representatives to negotiate, in good faith with Park Sterling during such notice period to the extent Park Sterling wishes to negotiate, to enable Park Sterling to revise the terms of the merger agreement such that it would cause such Superior Proposal to no longer constitute a Superior Proposal.
          Community Capital has agreed that, in the event of any material change to a Superior Proposal, it will comply with the above notice and negotiation obligations with respect to such changed proposal.
          Community Capital has further agreed to notify Park Sterling promptly (but in no event later than 24 hours) in writing after it receives any Alternative Proposal, or any material change to any Alternative Proposal, or any request for nonpublic information relating to Community Capital or any of its subsidiaries, or if it enters into discussions or negotiations concerning any Alternative Proposal, and to provide Park Sterling with an unredacted copy of the relevant proposed transaction agreements; and to keep Park Sterling fully informed, on a current basis, of any material changes in the status and any material changes in the terms of any such Alternative Proposal.
          As used in the merger agreement, “Alternative Proposal” means any inquiry or proposal regarding any merger, share exchange, consolidation, sale of assets, sale of shares of capital stock (including by way of a tender offer) or similar transactions involving Community Capital or any of its subsidiaries that, if completed, would constitute an Alternative Transaction.
          As used in the merger agreement, “Alternative Transaction” means:
  §   a transaction pursuant to which any person (or group of persons) other than Park Sterling or its affiliates, directly or indirectly, acquires or would acquire more than 15% of the outstanding shares of Community Capital common stock or outstanding voting power or of any new series or new class of Community Capital preferred stock that would be entitled to a class or series vote with respect to the merger, whether from Community Capital or pursuant to a tender offer or exchange offer or otherwise;
 
  §   a merger, share exchange, consolidation or other business combination involving Community Capital (other than the merger being described in this Proxy Statement/Prospectus);
 
  §   any transaction pursuant to which any person (or group of persons) other than Park Sterling or its affiliates acquires or would acquire control of assets (including, for this purpose, the outstanding equity securities of subsidiaries of Community Capital and securities of the entity surviving any merger or business combination including any of Community Capital’s subsidiaries) of Community Capital, or any of its subsidiaries representing more than 15% of the assets of Community Capital and its subsidiaries, taken as a whole, immediately before such transaction; or
 
  §   any other consolidation, business combination, recapitalization or similar transaction involving Community Capital or any of its subsidiaries, other than the transactions contemplated by the merger agreement, as a result of which the holders of shares of Community Capital common stock immediately before the transaction do not, in the aggregate, own at least 85% of each of the outstanding shares of common stock and the outstanding voting power of the surviving or resulting entity in the transaction immediately after the completion of the transaction in substantially the same proportion as the holders held their shares of Community Capital common stock immediately before the completion of the transaction.
          As used in the merger agreement, “Superior Proposal” means:
  §   any unsolicited bona fide written Alternative Proposal (with the relevant percentages in the definition of such term changed from 15% to 50%) that Community Capital’s board determines in good faith (after consultation with outside counsel and its financial advisor) and taking into account all legal, financial, regulatory and other aspects of the proposal and the person making the proposal, that, if consummated, would be more favorable to its shareholders from a financial point of view than the transactions contemplated by the merger agreement and, if accepted, would be reasonably likely to be completed on the terms proposed on a timely basis.
Expenses and Fees
          In general, each of Park Sterling and Community Capital will be responsible for all expenses incurred by it in connection with the negotiation and completion of the transactions contemplated by the merger agreement. However, (1) the costs and expenses of printing and mailing this Proxy Statement/Prospectus, and all filing and other fees paid to the SEC in connection with the merger, shall be borne equally by Community Capital and Park Sterling and (2) Community Capital has agreed to reimburse $150,000 of Park Sterling’s due diligence expenses if the merger is not completed. Further, Community Capital has agreed to reimburse certain expenses of Park Sterling if the merger agreement is terminated under certain circumstances. See “—Termination of the Merger Agreement.”

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Employee Matters
          Park Sterling has agreed that for a period of six months following completion of the merger, with respect to the employees of Community Capital and CapitalBank at the effective time, it will provide such employees in the aggregate with employee benefits, rates of base salary or hourly wage and annual bonus opportunities that are substantially similar in the aggregate to the aggregate employee benefits, rates of base salary or hourly wage and annual bonus opportunities provided to such employees pursuant to CapitalBank’s benefit plans as in effect immediately before the merger or, if more favorable to such employees, under Park Sterling’s corresponding benefit plans as of such time.
          In addition, Park Sterling has agreed, for any Community Capital employee who does not have an employment, change-of-control or severance agreement and who within six months after the effective time is terminated by Park Sterling for a reduction in force or as a result of a business restructuring or relocation of a business function or voluntarily resigns after being having his or her base salary materially decreased to pay such employee (after providing a customary release) two weeks of severance pay for each year of service to Community Capital (with a minimum of four weeks and a maximum of 16 weeks of severance pay). However, Park Sterling has no obligation to continue the employment of any Community Capital employee for any period following the merger.
          For a discussion of employment agreements that Park Sterling has entered into with certain Community Capital officers, including Community Capital’s President and Chief Executive Officer, and the effect of the merger on salary continuation agreements between Community Capital and certain of its executives and director fee deferral agreements between Community Capital and certain of its directors, see “Proposal No.1 — The Merger—Community Capital’s Directors and Officers Have Financial Interests in the Merger.”
Indemnification and Insurance
          The merger agreement requires Park Sterling to maintain in effect for and in accordance with their terms the current rights of Community Capital directors, officers and employees to indemnification under the Community Capital articles of incorporation or the Community Capital bylaws or disclosed agreements of Community Capital. The merger agreement also provides that, upon completion of the merger, Park Sterling will indemnify and hold harmless, and provide advancement of expenses to, all past and present officers, directors and employees of Community Capital and its subsidiaries in their capacities as such against all losses, claims, damages, costs, expenses, liabilities, judgments or amounts paid in settlement to the fullest extent permitted by applicable laws.
          The merger agreement provides that Park Sterling will maintain for a period of six years after completion of the merger Community Capital’s current directors’ and officers’ liability insurance policy, or policies of at least the same coverage and amount and containing terms and conditions that are not less advantageous than the current policy, with respect to acts or omissions occurring before the effective time of the merger, except that Park Sterling is not required to incur annual premium expense greater than 280% of Community Capital’s current annual directors’ and officers’ liability insurance premium.
Conditions to Complete the Merger
          The respective obligations of Park Sterling and Community Capital to complete the merger are subject to the fulfillment or waiver of certain conditions, including:
  §   the approval of the merger by Community Capital shareholders;
 
  §   the approval of the listing of Park Sterling common stock to be issued in the merger on NASDAQ, subject to official notice of issuance;
 
  §   the effectiveness of the registration statement of which this Proxy Statement/Prospectus is a part with respect to the Park Sterling common stock to be issued in the merger under the Securities Act and the absence of any stop order or proceedings initiated or threatened by the SEC for that purpose;
 
  §   the absence of any law, statute, regulation, judgment, decree, injunction or other order in effect by any court or other governmental entity that prohibits completion of the transactions contemplated by the merger agreement;

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  §   the receipt and effectiveness of all governmental and other approvals, registrations and consents, and the expiration of all related waiting periods required to complete the merger (in the case of the conditions to Park Sterling’s obligation to complete the merger, without any conditions or restrictions that would have a material adverse effect on either Community Capital or Park Sterling, measured on a scale relative to Community Capital); and
 
  §   the truth and correctness of the representations and warranties of the other party in the merger agreement, subject to the materiality standard provided in the merger agreement, and the performance by the other party in all material respects of its obligations under the merger agreement and the receipt by each party of certificates from the other party to that effect.
          The obligation of Park Sterling to complete the merger is also subject to the satisfaction or waiver of a number of other conditions, including:
  §   Community Capital shall have performed in all material respects all obligations required to be performed by it under the merger agreement;
 
  §   the receipt by Park Sterling of a legal opinion with respect to certain federal income-tax consequences of the merger;
 
  §   Park Sterling must have received from each director of Community Capital (1) an executed support agreement and (2) a confidentiality, nonsolicitation and noncompetition agreement, each in the form attached as an exhibit to the merger agreement (see “Proposal No.1 — The Merger—Community Capital’s Directors and Officers Have Financial Interests in the Merger”) and each of which shall be in full force and effect;
 
  §   Park Sterling must have received from Community Capital, as trustee of the KSOP, an executed support agreement from the KSOP with respect to shares of Community Capital common stock that it is empowered to vote pursuant to the terms of the KSOP, which shall be in full force and effect;
 
  §   The employment agreements with William G. Stevens and R. Wesley Brewer, which are discussed under the heading “Proposal No.1 — The Merger—Community Capital’s Directors and Officers Have Financial Interests in the Merger,” as well as an employment agreement with Taylor T. Stokes (with respect to employment in connection with CapitalBank’s wealth management business), shall be in full force and effect;
 
  §   Park Sterling shall have received resignations, effective as of the effective time of the merger, from all of Community Capital’s directors; and
 
  §   Community Capital’s classified assets (which means loans or other assets characterized as “substandard,” “doubtful,” “loss” or words of similar import and other real estate owned) shall not exceed $84 million as of the effective time of the merger.
          The obligation of Community Capital to complete the merger is also subject to the satisfaction or waiver of a number of other conditions, including:
  §   Park Sterling shall have performed in all material respects all obligations required to be performed by it under the merger agreement; and
 
  §   the receipt by Community Capital of a legal opinion with respect to certain federal income-tax consequences of the merger.
          We cannot provide assurance as to when or if all of the conditions to the merger can or will be satisfied or, if applicable, waived by the appropriate party. As of the date of this Proxy Statement/Prospectus, we have no reason to believe that any of these conditions will not be satisfied.
Termination of the Merger Agreement
          The merger agreement can be terminated at any time before completion of the merger by mutual consent, if authorized by each of our boards of directors, or by either party in the following circumstances:
  §   if any of the required regulatory approvals are denied (and the denial is final and nonappealable);

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  §   if the merger has not been completed by December 30, 2011, unless the failure to complete the merger by that date is due to the terminating party’s failure to abide by the merger agreement; or
 
  §   if there is a breach by the other party that would cause the failure of the closing conditions described above, unless the breach is capable of being, and is, cured within 45 days’ notice of the breach.
          Park Sterling also may terminate the merger agreement if the Community Capital board of directors fails to recommend that Community Capital shareholders approve the merger, withdraws or modifies in a manner adverse to Park Sterling, or makes public statements inconsistent with, its recommendation of the merger to shareholders, or recommends a competing merger proposal.
          Community Capital will be required to pay Park Sterling a termination fee in the amount of $2.0 million, plus up to $500,000 of Park Sterling’s out-of-pocket legal and due diligence expenses in connection with the proposed merger, if Community Capital enters into or closes on an acquisition agreement with respect to an Alternative Transaction (or an Alternative Proposal is received (as described above under “—Agreement Not to Solicit Other Offers”)) if either:
  §   the merger agreement is duly terminated by Park Sterling and before such termination, an Alternative Transaction was received, commenced, publicly proposed or publicly disclosed (as described above under “—Agreement Not to Solicit Other Offers”), and within 12 months after such termination, Community Capital has entered into a definitive written agreement relating to an Alternative Transaction or consummated an Alternative Transaction, or
 
  §   after receiving an Alternative Proposal, Community Capital’s board of directors fails to convene the special meeting to approve the merger with Park Sterling or fails to recommend that the Community Capital shareholders approve the merger agreement and the merger, and within 12 months of receiving the Alternative Proposal, Community Capital has entered into a definitive written agreement relating to an Alternative Transaction or consummated an Alternative Transaction.
          However, Park Sterling will in any event not be entitled to a termination fee if the merger agreement is terminated by mutual consent or due to a failure to obtain the necessary regulatory approvals. Similarly, Park Sterling will not be entitled to a termination fee if Community Capital terminates the merger agreement due to a material breach of a representation, warranty or covenant by Park Sterling.
Effect of Termination
          If the merger agreement is terminated, it will become void, and there will be no liability on the part of Park Sterling or Community Capital, except that (1) both Park Sterling and Community Capital will remain liable for any willful breach of the merger agreement and (2) designated provisions of the merger agreement, including the payment of fees and expenses, the confidential treatment of information and publicity restrictions, will survive the termination.
Amendment, Waiver and Extension of the Merger Agreement
          Subject to applicable law, the parties may amend the merger agreement by action taken or authorized by their boards of directors or by written agreement. However, after any approval of the transactions contemplated by the merger agreement by the Community Capital shareholders, there may not be, without further approval of the shareholders, any amendment of the merger agreement that (1) changes the amount or the form of the consideration to be delivered to the holders of Community Capital common stock, (2) changes any term of the articles of incorporation of Park Sterling or (3) changes any of the terms and conditions of the merger agreement if such change would adversely affect the holders of any Community Capital securities, in each case other than as contemplated by the merger agreement.
          At any time before the completion of the merger, each of Park Sterling and Community Capital, by action taken or authorized by its respective board of directors, to the extent legally allowed, may:
  §   extend the time for the performance of any of the obligations or other acts of the other party;
 
  §   waive any inaccuracies in the representations and warranties of the other party; or
 
  §   waive compliance by the other party with any of the other agreements or conditions contained in the merger agreement.

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PROPOSAL NO. 2 — ADVISORY VOTE ON GOLDEN PARACHUTE COMPENSATION
          Section 951 of the Dodd-Frank Act and Rule 14a-21(c) under the Exchange Act require that Community Capital seek an advisory (nonbinding) vote from its shareholders to approve certain “golden parachute” compensation that its “named executive officers” will receive from Community Capital and CapitalBank in connection with the merger.
          Community Capital is presenting this proposal, which gives Community Capital shareholders the opportunity to express their views on such “golden parachute” compensation by voting for or against the following resolution:
RESOLVED, that the shareholders approve, on an advisory (nonbinding) basis, the agreements for and compensation to be paid by Community Capital Corporation and CapitalBank to Community Capital Corporation’s named executive officers in connection with the merger with Park Sterling Corporation, as disclosed in the section of the Proxy Statement/Prospectus for the merger captioned “Proposal No. 2 — Advisory Vote on Golden Parachute Compensation.”
          The Community Capital board of directors unanimously recommends that shareholders approve the “golden parachute” compensation arrangements described in this Proxy Statement/Prospectus by voting “FOR” the above proposal.
          Approval of this proposal is not a condition to completion of the merger, and the vote with respect to this proposal is advisory only and will not be binding on Community Capital or Park Sterling. Therefore, if the merger is approved by the Community Capital shareholders and completed, the “golden parachute” compensation will still be paid to the Community Capital named executive officers.
          Golden Parachute Compensation Payable by Community Capital and CapitalBank. William G. Stevens and R. Wesley Brewer, the named executive officers of Community Capital, are entitled to receive, under existing agreements, certain compensation from Community Capital and CapitalBank that is based on or that otherwise relates to the merger. Community Capital believes that this compensation is reasonable and appropriate, and is the result of a carefully considered approach. This compensation, collectively referred to as “golden parachute” compensation, is described below.
Golden Parachute Compensation
                                                         
    Cash   Equity   Pension/ NQDC   Perquisites/ Benefits   Tax Reimbursement   Other   Total
Name   ($)   ($)(1)   ($)(2)   ($)(3)   ($)   ($)   ($)
William G. Stevens
          21,001                           21,001  
R. Wesley Brewer
          16,799     236,797                       253,596  
 
(1)   This is the amount that each named executive officer will receive when his unvested shares of Community Capital restricted stock become fully vested and transferable at the time of the merger. This is a “single-trigger” arrangement. Mr. Stevens and Mr. Brewer hold 10,000 and 8,000 unvested shares of Community Capital restricted stock, respectively. The amount shown was computed assuming that Mr. Stevens and Mr. Brewer would receive at the time of the merger 6,667 and 5,333 shares of Park Sterling common stock, respectively, and by using a per share price for Park Sterling common stock based on the average closing market price for those shares, as reported on NASDAQ during the five business days following March 31, 2011, the date on which the merger was publicly announced ($3.15).
 
(2)   This is the aggregate present value of the increase in the named executive officer’s vested benefit under a salary continuation agreement with CapitalBank that will occur as a result of the merger. This is a “double-trigger” arrangement because the increased benefit is not payable until the named executive officer terminates employment following the merger and begins to be paid after age 65 for Mr. Stevens and 62 for Mr. Brewer. Mr. Stevens has already earned the maximum level of benefit payable under his salary continuation agreement. The amount shown for Mr. Brewer was determined by subtracting (a) the present value of his vested benefit without the increase from (b) the present value of his vested benefit as increased as a result of the merger. Present value was determined as of July 31, 2011 using an 8% interest rate and his current level of includible compensation projected to that date. Upon completion of the merger, Mr. Brewer will be entitled to an annual benefit for 21 years to be paid in monthly installments beginning in September 2030.
 
    For more information concerning the salary continuation agreements, see “Proposal No. 1 — The Merger—Community Capital’s Directors and Officers Have Financial Interests in the Merger—Salary Continuation Agreements” at page 51.
 
(3)   When the merger occurs, Mr. Brewer’s designated beneficiary will have a vested right to receive a portion of the death benefits payable under a life insurance policy owned by CapitalBank on Mr. Brewer’s life. Prior to the merger, this right would have been forfeited if Mr. Brewer terminated employment for any reason other than disability or death before the August 31st following his 62nd birthday. There is no incremental cost to CapitalBank of maintaining the insurance policy after the merger because all premiums have been fully paid. For purposes of applying federal tax rules relating to parachute payments, CapitalBank has determined that the value of the vested right to receive death proceeds under the insurance policy is $238,722.
 
    For more information concerning this benefit, see “Proposal No. 1 — The Merger—Community Capital’s Directors and Officers Have Financial Interests in the Merger—Split Dollar Life Insurance Agreements” at page 51.

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DESCRIPTION OF THE COMMON STOCK OF PARK STERLING CORPORATION
          Park Sterling’s articles of incorporation authorize the issuance of up to 200,000,000 shares of common stock, par value $1.00 per share, of which, as of April 28, 2011, 28,619,358 shares are issued and outstanding and 3,297,690 shares are reserved or otherwise set aside for issuance in connection with outstanding employee stock options or future grants of stock options, restricted stock or other equity-based awards pursuant to Park Sterling’s equity incentive plans, and 5,000,000 shares of preferred stock, no par value, of which none are issued and outstanding. Each holder of outstanding Park Sterling common stock is entitled to one vote per share on any issue requiring a vote at any meeting of shareholders. The Park Sterling board of directors is divided into three classes, which are as nearly equal in number as possible. Shareholders do not have cumulative voting rights in the election of directors. The shares of Park Sterling common stock are not subject to any redemption provisions, nor are they convertible into any other security or property of Park Sterling. Holders of shares of Park Sterling common stock will not have the benefit of a sinking fund. No holder of any class of Park Sterling capital stock has preemptive rights with respect to the issuance of shares of that or any other class of capital stock. Holders of Park Sterling common stock are entitled to dividends when, as and if declared by Park Sterling’s board of directors from funds legally available, whether in cash or in stock, as more particularly described below under “Comparison of Shareholders’ Rights for Existing Community Capital Shareholders.” As more particularly described below under “Comparison of Shareholders’ Rights for Existing Community Capital Shareholders,” Park Sterling’s articles of incorporation and bylaws contain protective provisions that would have the effect of impeding an attempt to change or remove Park Sterling’s management or to gain control of Park Sterling in a transaction not supported by its board of directors.

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COMPARISON OF SHAREHOLDERS’ RIGHTS FOR EXISTING COMMUNITY CAPITAL SHAREHOLDERS
          When the merger becomes effective, holders of Community Capital common stock who elect to receive Park Sterling common stock as merger consideration, or who otherwise receive Park Sterling common stock due to the proration of their cash merger consideration election as described elsewhere in this Proxy Statement/Prospectus, will become holders of Park Sterling common stock. The following is a summary of material differences between the rights of holders of Park Sterling common stock and the rights of holders of Community Capital common stock. Since Park Sterling is organized under the laws of the State of North Carolina and Community Capital is organized under the laws of the State of South Carolina, differences in the rights of holders of Park Sterling common stock and those of holders of Community Capital common stock arise from differing provisions of the North Carolina Business Corporation Act (NCBCA) and the South Carolina Business Corporation Act (SCBCA), in addition to differing provisions of their respective articles of incorporation and bylaws.
          The following summary does not purport to be a complete statement of the provisions affecting and differences between the rights of holders of Park Sterling common stock and the rights of holders of Community Capital common stock. The identification of specific provisions or differences is not meant to indicate that other equally or more significant differences do not exist. This summary is qualified in its entirety by reference to the NCBCA and the SCBCA and the governing corporate documents of Park Sterling and Community Capital, to which the shareholders of Community Capital are referred.
     
PARK STERLING   COMMUNITY CAPITAL
Authorized Capital Stock
 
   
Common Stock. Park Sterling’s authorized common stock consists of 200,000,000 shares of common stock, $1.00 par value per share. As of April 28, 2011, there were 28,619,358 shares of Park Sterling common stock issued and outstanding, of which 568,260 shares are restricted stock issued pursuant to Park Sterling’s 2010 Park Sterling Corporation Long-Term Incentive Plan (LTIP). As of April 28, 2011, there were (i) 2,239,889 shares of Park Sterling common stock underlying options currently outstanding and (ii) 1,057,801 shares of Park Sterling common stock available in connection with future grants of stock options, restricted stock and other equity-based awards, in each case reserved or otherwise set aside for issuance pursuant to employee and director stock plans of Park Sterling in effect as of April 28, 2011. Except for the preferred stock discussed below, there are no other classes of capital stock authorized for issuance by Park Sterling.
  Common Stock. Community Capital’s authorized common stock consists of 20,000,000 shares of common stock, $1.00 par value per share. As of April 28, 2011, there were 10,060,777 shares of Community Capital common stock issued and outstanding, of which 49,200 shares are restricted stock issued pursuant to Community Capital’s 2004 Equity Incentive Plan. Except for the preferred stock discussed below, there are no other classes of capital stock authorized for issuance by Community Capital.
 
   
Preferred Stock. Park Sterling’s authorized preferred stock consists of 5,000,000 shares, no par value. Park Sterling’s articles of incorporation authorize the Park Sterling board of directors to fix the number, designation, powers, preferences and relative rights of the shares of each series of preferred stock issued by Park Sterling. As of the date of this Proxy Statement/Prospectus, Park Sterling had not issued any preferred stock.
  Preferred Stock. Community Capital’s authorized preferred stock consists of 2,000,000 shares, $1.00 par value per share. Community Capital’s articles of incorporation authorize the Community Capital board of directors to fix the relative rights, preferences and limitations of the shares of each series of preferred stock issued by Community Capital. As of the date of this Proxy Statement/Prospectus, Community Capital had not issued any preferred stock.
 
   
Mergers, Share Exchanges and Sales of Assets
 
   
The NCBCA provides that, generally, any merger or share exchange may be submitted to the shareholders of Park Sterling only if approved by the Park Sterling board of directors. If submitted to Park Sterling’s shareholders, such action generally must be approved by each voting group entitled to vote separately on the action by a majority of all the votes entitled to be cast by the voting group.

If Park Sterling is the surviving corporation, its shareholders’ approval is not required if: (i) its articles of incorporation will
  Community Capital’s articles of incorporation provide that any merger, consolidation or exchange of Community Capital’s shares with any other corporation, partnership, trust, estate or association, or the sale or exchange by Community Capital of all or a substantial part of its assets to or with such entity requires either: (i) the affirmative vote of the holders of not less than 80% of the outstanding common stock of Community Capital entitled to vote with respect to each such transaction; or (ii) (A) the affirmative vote of not less than 80% of members of the Community Capital board of directors and (B) the

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not be changed; (ii) each shareholder whose shares were outstanding immediately before the effective date of the merger will hold the same shares, with identical preferences, limitations and relative rights, immediately after the effective date of the merger; (iii) the number of voting shares outstanding immediately after the merger, plus the number of voting shares issuable as a result of the merger (either by the conversion of securities issued pursuant to the merger or the exercise of rights and warrants issued pursuant to the merger) will not exceed by more than 20% the total number of voting shares of the surviving corporation outstanding immediately before the merger; and (iv) the number of participating shares outstanding immediately after the merger, plus the number of participating shares issuable as a result of the merger (either by the conversion of securities issued pursuant to the merger or the exercise of rights and warrants issued pursuant to the merger) will not exceed by more than 20% the total number of participating shares outstanding immediately before the merger. As these four criteria are satisfied Park Sterling’s shareholders are not required to approve the merger with Community Capital.
  affirmative vote of at least two-thirds of the issued and outstanding shares of the corporation entitled to vote, as required by the SCBCA. As the Community Capital board of directors unanimously approved the merger with Park Sterling the affirmative vote of at least two-thirds of the issued and outstanding shares of Community Capital common stock is required to approve the merger with Park Sterling.
 
   
In addition, Park Sterling’s articles of incorporation provide that certain fundamental corporate transactions to which Park Sterling or any subsidiary is a party, such as a merger, share exchange, sale of more than $1 million of assets or issuance of more than $1 million in securities, with any Interested Shareholder (as defined below) or any other corporation (whether or not itself an Interested Shareholder) that is, or after such merger or consolidation would be, an affiliate of an Interested Shareholder require the affirmative vote of (i) the holders of not less than 66-2/3% of the voting power of all shares of stock entitled to vote in the election of such entity's directors that are not beneficially owned by any Interested Shareholder, voting together as a single class, and (ii) 80% of the voting power of all shares of stock entitled to vote in the election of such entity's directors, voting together as a single class, unless, in either case, such transaction is approved by a majority of the disinterested directors of Park Sterling or such subsidiary, as the case may be. Interested Shareholder means any person or entity who or which is the beneficial owner, directly or indirectly, of 5% or more of the outstanding shares of stock entitled to vote in the election of directors.
   
 
   
Amendments to the Articles of Incorporation
 
   
The NCBCA provides that a North Carolina corporation’s articles of incorporation may be amended only upon approval by a majority of the votes cast within each voting group entitled to vote. Park Sterling’s articles of incorporation further require the affirmative vote of 80% of the outstanding shares of capital stock entitled to vote in the election of Park Sterling’s directors, voting together as a single class, in order to amend, repeal or adopt any provision or take any action inconsistent with Article 6 of the articles of incorporation, which, among other things, sets the range for the number of directors, prescribes three classes of directors and governs the removal of directors and the filling of vacancies on the Park Sterling board of directors.
  The SCBCA provides that a South Carolina corporation’s articles of incorporation generally may be amended only upon approval by (i) two-thirds of the votes entitled to be cast on the amendment, regardless of the class or voting group to which the shares belong and (ii) two-thirds of the votes entitled to be cast on the amendment within each voting group entitled to vote as a separate voting group on the amendment.

Community Capital’s articles of incorporation require the approval of either the holders of not less than 80% of Community Capital’s outstanding common stock or 80% of Community Capital’s directors to amend the following provisions of the articles (or to enact provisions inconsistent with them): (1) Article Eight (requiring a special

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  supermajority vote of either shareholders or directors for fundamental transactions such as a merger or sale of the company or its dissolution), (2) Article Nine (requiring the Community Capital board of directors to consider certain noneconomic factors when approving a merger or sale of the company), (3) Article Ten (governing shareholder nominations of director candidates), (4) Article Eleven (requiring a supermajority shareholder vote to remove one or more directors without cause), (5) Article Twelve (providing for a staggered board) and (6) Article Thirteen (setting forth the supermajority board or shareholder voting requirement for certain amendments to the articles of incorporation).
 
   
Amendments to the Bylaws
 
   
Park Sterling’s bylaws provide that, generally, the Park Sterling board of directors may amend or repeal and replace the Park Sterling bylaws by the affirmative vote of a majority of the number of directors then in office at any regular or special board meeting. The Park Sterling board of directors cannot amend, repeal or adopt a bylaw: (i) requiring more than a majority of the voting shares for a quorum at a meeting of shareholders or more than a majority of the votes cast to constitute action by the shareholders, except where required by law; (ii) providing for the management of Park Sterling other than by the Park Sterling board of directors or its executive committee; (iii) increasing or decreasing the authorized number of directors beyond the maximum or minimum number set forth in Park Sterling’s articles of incorporation; or (iv) that is inconsistent with Article 6 of Park Sterling’s articles of incorporation (which, among other things, sets the range for the number of directors, prescribes three classes of directors and governs the removal of directors and the filling of vacancies on the Park Sterling board of directors). The Park Sterling board of directors also cannot alter or repeal any bylaw adopted or amended by Park Sterling’s shareholders, except when Park Sterling’s articles of incorporation or a bylaw adopted by the shareholders authorizes the Park Sterling board of directors to adopt or repeal any such bylaw.
  Community Capital’s bylaws provide that, generally, the Community Capital board of directors may alter, amend or repeal and replace the Community Capital bylaws, subject to: (a) the rights of the shareholders to alter, adopt, amend or repeal bylaws as provided in the SCBCA; or (b) action of the Community Capital shareholders in adopting, amending or repealing a particular bylaw where the board of directors is expressly prohibited by such shareholder action from amending or repealing the particular bylaw acted upon by the shareholders.

Community Capital’s bylaws also provide that its shareholders may amend or repeal the Community Capital bylaws. Any notice of a meeting of shareholders at which bylaws are to be adopted, amended or repealed shall state that the purpose, or one of the purposes, of the meeting is to consider the adoption, amendment or repeal of bylaws and contain or be accompanied by a copy or summary of the proposal.
 
   
Park Sterling’s bylaws also provide that its shareholders may amend or repeal and replace the bylaws at any annual meeting or at a special meeting called for such purpose. However, no bylaw may be amended, repealed or adopted that is inconsistent with Article 6 of the Park Sterling articles of incorporation without the affirmative vote of the holders of not less than 80% of the outstanding shares of capital stock entitled to vote in the election of directors, voting together as a single class.
   
 
   
Shareholders’ Rights of Dissent and Appraisal
 
   
The NCBCA provides that shareholders of a corporation who are voting on a merger or consolidation generally are entitled to dissent from the transaction and obtain payment of the fair value of their shares. However, the NCBCA provides that for any merger, share exchange or sale or exchange of property, dissenters’ rights are not available to the shareholders of a corporation, such as Park Sterling, that is either listed on a national securities exchange or held by more
  The SCBCA provides that shareholders of a corporation who are voting on a merger or consolidation generally are entitled to dissent from the transaction and obtain payment of the fair value of their shares. However, the SCBCA does not provide dissenters’ rights for corporations that are either listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc.

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than 2,000 shareholders of record, unless (i) the articles of incorporation of the corporation provide otherwise or (ii) in the case of a merger or share exchange, the holders of the shares are required to accept anything other than (a) cash, (b) shares in another corporation that are either listed on a national securities exchange or held by more than 2,000 shareholders of record, or (c) a combination of cash and such shares. Park Sterling’s articles of incorporation do not authorize any special dissenters’ rights.
   
 
   
Special Meetings of Shareholders
 
   
Park Sterling’s bylaws provide that special meetings of the shareholders of Park Sterling may be called at any time by the Park Sterling board of directors, the chairman of the Park Sterling board of directors or Park Sterling’s Chief Executive Officer.
  Community Capital’s bylaws provide that special meetings of the shareholders of Community Capital may be called by the Community Capital board of directors, the chair of the Community Capital board of directors, Community Capital’s Chief Executive Officer or upon written request to Community Capital’s Corporate Secretary by the holders of record of not less than 10% of Community Capital’s outstanding shares of stock entitled to vote at such meeting.
 
   
Shareholder Nominations and Shareholder Proposals
 
   
Park Sterling’s bylaws provide that persons may be nominated to the Park Sterling board of directors at Park Sterling’s annual meeting of shareholders: (i) by or at the direction of the Park Sterling board of directors or (ii) by any Park Sterling shareholder, if made pursuant to timely notice, generally between 60 and 90 days before the first anniversary of the preceding year’s annual meeting, and containing certain information delivered in writing to Park Sterling’s Corporate Secretary.

Similarly, any Park Sterling shareholder intending to make a proposal for consideration at a regularly scheduled annual meeting of shareholders must provide notice to Park Sterling’s Corporate Secretary, generally between 60 and 90 days before the anniversary of the preceding year’s annual meeting, and containing certain information delivered in writing to Park Sterling’s Corporate Secretary.
  Community Capital’s bylaws provide that persons may be nominated to the Community Capital board of directors: (i) by the Community Capital board of directors or (ii) by any Community Capital shareholder, if made pursuant to timely notice, generally between 30 and 60 days before the first anniversary of the preceding year’s annual meeting or before the 10th day following the date on which notice of a special meeting of Community Capital’s shareholders for the election of directors is first given to Community Capital’s shareholders, and containing certain information delivered in writing to Community Capital’s Corporate Secretary.

Any Community Capital shareholder may make a proposal for consideration at a shareholder meeting by providing notice to Community Capital’s Corporate Secretary (1) with respect to any annual meeting, between 60 and 90 days before the anniversary of the preceding year’s annual meeting or (2) with respect to a special shareholders’ meeting, before the 10th day following the date on which notice of the special meeting is first given to Community Capital’s shareholders. In each case, the shareholder’s notice must contain a brief description of the business desired to be brought before the meeting, the shareholder’s name and address and number of shares held and any interest of that shareholder in the business that it seeks to bring before the meeting.

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Directors
 
   
Number of Directors
 
   
Park Sterling’s articles of incorporation provide the Park Sterling board of directors shall have not less than six nor more than 19 directors, as determined from time to time by the affirmative vote of a majority of the directors then in office. Currently, the number of directors serving on the Park Sterling board of directors has been fixed at seven directors and there are seven directors serving on the board with no vacancies.
  Community Capital’s bylaws provide the Community Capital board of directors shall have not less than five nor more than 25 directors, as determined from time to time by the affirmative vote of a majority of the directors then in office. Community Capital’s board of directors is currently fixed at 12 directors and there are currently 12 directors serving on the board with no vacancies.
 
   
Classification
 
   
Park Sterling’s articles of incorporation provide that the Park Sterling board of directors shall be divided into three classes, with directors serving staggered three-year terms.
  In the event that the Community Capital board of directors consists of nine or more members, Community Capital’s articles of incorporation provide that the Community Capital board of directors shall be divided into three classes, with directors serving staggered three-year terms.
 
   
Election of Directors
 
   
Park Sterling’s bylaws provide that directors are to be elected by a plurality of the votes cast by the shares entitled to vote in the election of directors at a meeting at which a quorum is present.
  Community Capital’s bylaws provide that directors are to be elected at each annual meeting of the shareholders by the affirmative vote of a plurality of the shares represented at such meeting.
 
   
Removal
 
   
Under Park Sterling’s bylaws, Park Sterling directors may be removed only for cause and only by the affirmative vote of the holders of a majority of the outstanding shares of Park Sterling capital stock entitled to vote in the election of directors, voting together as a single class. A director may not be removed by the shareholders at a meeting unless the notice of the meeting states that one of the purposes of the meeting is the removal of the director. If any directors are removed, new directors may be elected to fill the resulting vacancies at the same meeting. Notwithstanding the foregoing, the affirmative vote of the holders of not less than 80% of the outstanding shares of Park Sterling capital stock entitled to vote in the election of directors, voting together as a single class, is required to take any action inconsistent with the foregoing requirement.
  Community Capital’s articles of incorporation provide that the entire Community Capital board of directors or any individual director may be removed without cause only by the affirmative vote of the holders of not less than 80% of Community Capital’s outstanding shares of common stock.

Community Capital’s bylaws provide that any director may be removed with cause only by (i) a majority vote of the Community Capital board of directors or (ii) a majority vote of the shares of Community Capital’s voting stock at a meeting at which only the removal and replacement of the director or directors in question shall be considered.
 
   
Vacancy
 
   
Park Sterling’s articles of incorporation provide that if a vacancy occurs on the Park Sterling board of directors between annual meetings of shareholders at which directors are elected, including vacancies resulting from an increase in the number of directors, the vacancy shall be filled by the affirmative vote of a majority of the remaining directors, even though less than a quorum or by a sole remaining director.
  Community Capital’s bylaws provide that upon any vacancy among directors, including a vacancy created by an increase in the number of directors: (i) Community Capital’s shareholders may fill the vacancy; (ii) the Community Capital board of directors may fill the vacancy; or (iii) if the Community Capital directors remaining in office constitute fewer than a quorum of the Community Capital board of directors, they may fill the vacancy by the affirmative vote of a majority of all of the Community Capital directors remaining in office.

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Discharge of Duties
 
   
The NCBCA requires that a director discharge his or her duties (i) in good faith, (ii) with the care an ordinarily prudent person in a like position would exercise under similar circumstances and (iii) in a manner the director reasonably believes to be in the best interests of the corporation. The NCBCA expressly provides that a director facing a change of control situation is not subject to any different duties or to a higher standard of care.
  The SCBCA requires that a director discharge his or her duties (i) in good faith, (ii) with the care an ordinarily prudent person in a like position would exercise under similar circumstances and (iii) in a manner the director reasonably believes to be in the best interests of the corporation.
 
   
Exculpation
 
   
Park Sterling’s articles of incorporation provide that the personal liability of each director of Park Sterling is eliminated to the fullest extent permitted by the NCBCA.
  Community Capital’s articles of incorporation and bylaws are silent as to exculpation.
 
   
Consideration of Business Combinations
 
   
Neither Park Sterling’s articles of incorporation nor its bylaws specify any factors to which the Park Sterling board of directors must give consideration in evaluating a transaction involving a potential change in control of Park Sterling. For a discussion of the factors considered by the Park Sterling board of directors in connection with the merger, see “Proposal No.1 — The Merger—Park Sterling’s Reasons for the Merger.”
  Community Capital’s articles of incorporation provide that the Community Capital board of directors, when evaluating any offer of another party to (i) make a tender offer or exchange offer for any equity security of Community Capital, (ii) merge or consolidate any other corporation with Community Capital or (iii) purchase or otherwise acquire all or substantially all of the assets of Community Capital, the Community Capital board of directors must, in connection with the exercise of its judgment in determining what is in the best interests of Community Capital and its shareholders, give due consideration to: (a) all relevant factors, including, without limitation, the social, legal, environmental and economic effects on the employees, customers, suppliers and other constituencies of Community Capital and its subsidiaries, on the communities and geographical areas in which Community Capital and its subsidiaries operate or are located, and on any of the businesses and properties of Community Capital and its subsidiaries, as well as such other factors the Community Capital directors deem relevant; and (b) not only the consideration being offered in relation to the then current market price for Community Capital’s outstanding shares of capital stock, but also in relation to the then-current value of Community Capital in a freely negotiated transaction and in relation to the Community Capital board of directors’ estimate of the future value of Community Capital (including the unrealized value of its properties and assets) as an independent going concern. For a discussion of the factors considered by the Community Capital board of directors in connection with the merger, see “Proposal No. 1 — The Merger—Community Capital’s Reasons for the Merger and Recommendation of the Community Capital Board of Directors.”
 
   
Anti-Takeover Statutes
 
   
The North Carolina Control Share Acquisition Act is designed to protect shareholders of publicly owned corporations based and incorporated in North Carolina against certain changes in control and to provide shareholders with the opportunity to vote on whether to afford voting rights to certain types of shareholders. The act is triggered by the acquisition by a person of shares of voting stock of a covered corporation that, when added to all other shares
  South Carolina law provides that, unless a corporation’s articles of incorporation or bylaws provide otherwise, shares that would have voting power that, when added to all other Community Capital shares owned by a person or in respect to which that person may exercise or direct the exercise of voting power, would entitle that person, immediately after acquisition of the shares (directly or indirectly, alone or as a part of a group), to exercise or direct the exercise of

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beneficially owned by the person, would result in that person holding one-fifth, one-third or a majority of voting power for the election of directors. Under the act, the shares acquired that result in the crossing of any of these thresholds have no voting rights until such rights are conferred by the affirmative vote of the holders of a majority of all outstanding voting shares, excluding those shares held by any person involved or proposing to be involved in the acquisition of shares in excess of the thresholds, any officer of the corporation and any employee of the corporation who is also a director of the corporation. If voting rights are conferred on the acquired shares, all shareholders of the corporation may require that their shares be redeemed at the highest price paid per share by the acquirer for any of the acquired shares. Park Sterling has opted out of the North Carolina Control Share Acquisition Act as permitted by that Act.
  one-fifth, one-third or a majority of the voting power of Community Capital in the election of directors, have no voting rights until such rights are conferred by the affirmative vote of the holders of a majority of all outstanding voting shares in each voting group, excluding those shares held by any person involved or proposing to be involved in the acquisition of shares in excess of the thresholds, any officer of the corporation or any employee of the corporation who is also a director of the corporation. If voting rights are conferred on the acquired shares, all shareholders of the corporation may require that their shares be redeemed for their fair value immediately before the relevant corporate action. While corporations are permitted to opt out of this South Carolina law, Community Capital has not done so.
 
   
Indemnification of Directors and Officers
 
   
Under the NCBCA, a corporation may indemnify any director against liability if such person (i) acted in his or her official capacity as a director; (ii) conducted himself or herself in good faith; (iii) reasonably believed, in the case of conduct in his or her official capacity with the corporation, that his or her conduct was in the best interests of the corporation, and in all other cases, that his or her conduct was at least not opposed to the corporation’s best interests; and (iii) in the case of any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. Also under the NCBCA, a corporation may not indemnify a director in connection with a proceeding by or in the right of the corporation in which such person was held liable to the corporation or in connection with a proceeding in which such person was held liable on the basis that personal benefit was improperly received by him or her.

Unless limited by its articles of incorporation, a North Carolina corporation must indemnify, against reasonable expenses incurred, a director who is wholly successful, on the merits or otherwise, in defending any proceeding to which the director was a party because of his or her status as a director of the corporation. Expenses incurred by a director in defending a proceeding may be paid by the corporation in advance of the final disposition of the proceeding if that director furnishes the corporation a written undertaking to repay such amount if it is ultimately determined that he or she is not entitled to be indemnified by the corporation against such expenses. A director may apply for court-ordered indemnification under certain circumstances.

Under the NCBCA, unless a corporation’s articles of incorporation provide otherwise, (i) an officer of a corporation is entitled to mandatory indemnification and is entitled to apply for court-ordered indemnification to the same extent as a director and (ii) the corporation may indemnify and advance expenses to an officer, employee or agent of the corporation to the same extent as to a director.
  The SCBCA contains indemnification provisions comparable to the NCBCA. Community Capital’s articles of incorporation provide for indemnification, to the fullest extent legally permissible by the SCBCA, of any director or officer of Community Capital or any person serving in that capacity or as Community Capital’s representative in a partnership, joint venture, trust or other enterprise at Community Capital’s request against any and all expenses, liabilities and losses reasonably incurred by such person in connection therewith.

Community Capital’s bylaws require Community Capital to indemnify and hold harmless every person who was or is a party to, or is threatened to be made a party to, or is otherwise involved in, any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact such person is or was a Community Capital director or officer to the fullest extent legally permissible under and pursuant to the SCBCA against all expenses, liabilities and losses (including without limitation attorneys’ fees, judgments, fines and amounts paid or to be paid in settlement) suffered or reasonably incurred by such person. The right of indemnification is a contract right that may be enforced in any manner desired by the director or officer.

The determination that indemnification is permissible and the evaluation as to the reasonableness of expenses in a specific case is made, in the case of a director as provided by the SCBCA and, in the case of an officer, if authorized by the general or specific action of the Community Capital board of directors; provided, however, that, if a majority of the Community Capital board of directors has changed after the date of the alleged conduct giving rise to a claim for indemnification such determination and evaluation may, at the option of the person claiming indemnification, be made by special legal counsel agreed upon by the Community Capital board of directors and such director.
 
   

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In addition and separate from the statutory indemnification rights discussed above, the NCBCA provides that a corporation may in its articles of incorporation or bylaws or by contract or resolution indemnify or agree to indemnify any one or more of its directors, officers, employees or agents against liability and expenses in any proceeding (including without limitation a proceeding brought by or on behalf of the corporation itself) arising out of their status as such or their activities in any of the foregoing capacities. A corporation may not indemnify or agree to indemnify a person against liability or expenses he or she may incur on account of activities that were at the time taken known or believed by him or her to be clearly in conflict with the best interests of the corporation. A corporation may likewise and to the same extent indemnify or agree to indemnify any person who, at the request of the corporation, is or was serving as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise or as a trustee or administrator under an employee benefit plan. Any such provision for indemnification also may include provisions for recovery from the corporation of reasonable costs, expenses and attorneys’ fees in connection with the enforcement of rights to indemnification and may further include provisions establishing reasonable procedures for determining and enforcing the rights granted therein.
   
 
   
Park Sterling’s articles of incorporation provide for indemnification, to the fullest extent permitted by the NCBCA, of any person whom Park Sterling is empowered to indemnify under the NCBCA against any and all expenses, liabilities or other matters referred to or covered in the NCBCA.
   
 
   
Park Sterling’s bylaws require Park Sterling to indemnify its directors and officers made party to a proceeding because he or she was a director or officer if the individual acted in a manner he or she believed in good faith to be in or not opposed to the best interests of Park Sterling and, in the case of any criminal proceeding, he or she had no reasonable cause to believe he or her conduct was unlawful. Park Sterling must also indemnify each director and officer for reasonable expenses, judgments, fines, penalties and amounts paid in settlement (including attorneys’ fees) incurred in connection with the enforcement of rights to indemnification, if the individual is successful, on the merits or otherwise, in the defense of any proceeding or any claim, issue or matter therein, or if it is determined that the director or officer is entitled to indemnification.
   
 
   
The determination concerning whether an officer or director is entitled to indemnification must be made (i) by the Park Sterling board of directors by a majority vote of the directors that are not parties to the proceeding; (ii) if a quorum of directors cannot be obtained, by a majority vote of a committee duly designated by the Park Sterling board of directors (in which designation directors who are parties may participate), consisting solely of two or more directors not at the time parties to the proceeding; (iii) by special legal counsel selected by the Park Sterling board of directors or its committee; or (iv) by the shareholders, but shares owned by or voted under the control of directors who are at the time parties to the proceeding may not be voted on the determination.
   

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PARK STERLING   COMMUNITY CAPITAL
Dividends and Other Distributions
 
   
The NCBCA prohibits a North Carolina corporation from making any distributions to shareholders, including the payment of cash dividends, that would (i) render the corporation insolvent, (ii) make the corporation unable to meet its obligations as they become due in the ordinary course of business or (iii) result in the corporation’s total assets being less than the sum of its total liabilities plus the amount that would be needed, if it were to be dissolved at the time of the dividend payment, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. Park Sterling is not subject to any other express restrictions on payments of dividends or other distributions.

Because Park Sterling is a holding company, however, the ability of Park Sterling to pay distributions to the holders of its common stock will largely depend upon the amount of dividends that Park Sterling Bank, which is subject to restrictions imposed by regulatory authorities, pays to Park Sterling. In addition, the Federal Reserve Board could oppose a distribution by Park Sterling if it determined that such a distribution would harm Park Sterling’s ability to support its bank subsidiary. The declaration, payment and amount of any such future dividends would depend on business conditions, operating results, capital, reserve requirements and the consideration of other relevant factors by the Park Sterling Board. Park Sterling has not paid any dividends in the past and the Park Sterling board of directors currently does not intend to declare any dividends in the foreseeable future.
  The SCBCA prohibits a South Carolina corporation from making any distributions to shareholders if, after giving effect to such distribution: (i) the corporation would not be able to pay its debts as they become due in the usual course of business; or (ii) the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution.

Like Park Sterling, since Community Capital is a bank holding company, the ability of Community Capital to pay distributions to Community Capital shareholders largely depends upon the amount of dividends CapitalBank may pay to it under regulatory guidelines and as the Federal Reserve Board will permit.

The Written Agreement prohibits Community Capital and CapitalBank from declaring or paying dividends, without the prior written approval of the Federal Reserve Bank of Richmond and the S.C. Board, respectively.
 
   
Liquidation Rights
 
   
In the event of any involuntary or voluntary liquidation, dissolution or winding-up of Park Sterling, holders of Park Sterling common stock are entitled to receive, after payment to the holders of all shares of Park Sterling preferred stock of the full preferential amounts to which such holders are entitled, the net assets of the corporation.
  Holders of Community Capital common stock are entitled to all dividends declared and all assets of the corporation upon liquidation, subject to the rights of the holders of Community Capital’s preferred stock as established by the Community Capital board of directors.
 
   
Because Park Sterling is a bank holding company, its rights and the rights of its creditors and shareholders to receive the assets of any subsidiary upon the subsidiary’s liquidation or recapitalization are subject to the prior claims of the subsidiary’s creditors, except to the extent that Park Sterling may itself be a creditor with recognized claims against the subsidiary.
  Because Community Capital is a bank holding company, its rights and the rights of its creditors and shareholders to receive the assets of any subsidiary upon liquidation or recapitalization are subject to prior claims of the subsidiary’s creditors, except to the extent that Community Capital may itself be a creditor with recognized claims against the subsidiary.

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INFORMATION ABOUT PARK STERLING CORPORATION
General
          Park Sterling was formed on October 6, 2010 to serve as the holding company for Park Sterling Bank and is a bank holding company registered with the Federal Reserve Board under the Bank Holding Company Act. Park Sterling’s primary operations and business are its ownership of Park Sterling Bank, its sole subsidiary. Park Sterling’s offices are located at 1043 E. Morehead Street, Suite 201, Charlotte, North Carolina, 28204 and its phone number is (704) 716-2134.
          Park Sterling Bank was incorporated on September 8, 2006 as a North Carolina-chartered commercial bank and is the wholly owned subsidiary of Park Sterling. Park Sterling Bank opened for business on October 25, 2006 at 1043 E. Morehead Street, Suite 201, in Charlotte, North Carolina. Park Sterling Bank opened a branch in Wilmington, North Carolina, in October 2007 and in the SouthPark neighborhood of Charlotte in July 2008, and received approval from the N.C. Commissioner in March 2011 to open a branch in Charleston, South Carolina.
          Park Sterling provides banking services to small and mid-sized businesses, owner-occupied and income producing real estate owners, real estate developers and builders, professionals and consumers doing business or residing within its target markets. Through its branches, Park Sterling Bank provides a wide range of banking products, including personal and business checking accounts, individual retirement accounts, business and personal money market accounts, certificates of deposit, overdraft protection, safe deposit boxes and online banking. Park Sterling’s lending activities include a range of short to medium-term commercial, real estate, residential mortgage and home equity and personal loans. Its 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. Park Sterling strives to develop a personal relationship with its clients while at the same time offering traditional deposit and loan banking services. At December 31, 2010, Park Sterling had approximately $616.1 million in assets, approximately $399.8 million in loans, approximately $407.8 million in deposits and approximately $177.1 million in shareholders’ equity.
          Due to the diverse economic base of the markets in which it operates, Park Sterling believes it is not dependent on any one or a few clients or types of commerce whose loss would have a material adverse effect on Park Sterling.
          As part of its operations, Park Sterling regularly evaluates the potential acquisition of, and holds discussions with, various financial institutions eligible for bank holding company ownership or control. As a general rule, Park Sterling expects to publicly announce material transactions when a definitive agreement has been reached.
Recent Developments
          In August 2010, Park Sterling Bank conducted a public offering of common stock (Public Offering), which raised gross proceeds of $150.2 million to facilitate a change in its business plan from primarily organic growth at a moderate pace over the next few years to seeking to acquire regional and community banks in the Carolinas and Virginia. Park Sterling intends to become a regional-sized multistate banking franchise through acquisitions and organic growth, seeking to reach a consolidated asset size of between $8 billion and $10 billion over the next several years. Park Sterling is committed to building a banking franchise that is noted for sound risk management, superior client service and exceptional client relationships.
          On January 1, 2011, Park Sterling acquired all of the outstanding stock of Park Sterling Bank in a statutory share exchange transaction (Reorganization) effected under North Carolina law and in accordance with the terms of an Agreement and Plan of Reorganization and Share Exchange dated October 22, 2010. This agreement and the Reorganization were approved by Park Sterling Bank’s shareholders at a special meeting of Park Sterling Bank’s shareholders held on November 23, 2010. Pursuant to the Reorganization, shares of Park Sterling Bank’s common stock were exchanged for shares of Park Sterling’s common stock on a one-for-one basis. As a result, Park Sterling Bank became the sole subsidiary of Park Sterling, Park Sterling became the holding company for Park Sterling Bank and the shareholders of Park Sterling Bank became shareholders of Park Sterling.
          As part of Park Sterling Bank’s change in strategy, immediately following the Public Offering, Park Sterling Bank reduced the size of its board of directors from thirteen members to six members, maintaining two of the sitting directors, Larry W. Carroll and Thomas B. Henson, and adding four new directors, Walter C. Ayers, Leslie M. (Bud) Baker, James C. Cherry and Jeffrey S. Kane. Mr. Baker was named Chairman of the board of directors upon becoming a member. In March 2011, the board of directors of Park Sterling, which mirrors that of Park Sterling Bank, approved expanding its membership to seven and appointed Jean E. Davis as a director.
          Park Sterling Bank also reorganized its management team following the Public Offering. The new executive management team includes James C. Cherry, who became the Chief Executive Officer; David L. Gaines, who became the Chief Financial Officer; Nancy J. Foster, who became the Chief Risk Officer; and Bryan F. Kennedy, III, who was the President and Chief Executive Officer and remains the President.

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Market Area
          Park Sterling’s current primary market area consists of the Charlotte and Wilmington, North Carolina MSAs. During 2011, Park Sterling intends to open a branch office in Charleston, South Carolina and has employed a veteran banker to serve as the South Carolina Market President. Park Sterling plans to open additional branch offices and/or loan production offices in its target markets this year. Additional information regarding each of the existing locations is provided below.
          Charlotte. Charlotte, the largest city in North or South Carolina, anchors an MSA with a total population of approximately 1.8 million in 2010, according to the Charlotte Chamber of Commerce. According to the U.S. Census Bureau, the population for the Charlotte-Gastonia-Rock Hill MSA increased 34.8% from 2000 to 2010. This population is expected to grow 14.8% between 2010 and 2015. Charlotte is a significant financial center and is currently home to nine Fortune 500 companies. Charlotte also has concentrations in the transportation, utilities, education, professional services and construction sectors. The 2010 median household income for the Charlotte MSA was $62,215 and is projected to grow 13.2% over the next five years.
          Wilmington. Wilmington, a historic seaport and the largest city on the coast of North Carolina, anchors a metropolitan area covering New Hanover, Brunswick and Pender counties with a 2010 population of 367,101. The U.S. Census Bureau estimates that Wilmington’s MSA is expected to grow 13.2% from 2010 to 2015. Wilmington’s economy is diversified and includes tourism, shipping, pharmaceutical development, chemical and aircraft component manufacturing, and fiber optic industries. Wilmington is also a regional retail and medical center, with the New Hanover Regional Medical Center/Cape Fear Hospital ranking in the top ten largest medical facilities in the state. The median household income in 2010 for the Wilmington MSA was $49,403 and is projected to increase 13.2% over the next five years.
          Charleston. Charleston, the second largest city in South Carolina, is located on the state’s coastline. According to the U.S. Census Bureau, the population for the Charleston-North Charleston-Summerville MSA was 671,833, a 22.3% increase since 2000. The area’s population is projected to grow 10.3% from 2010 to 2015. Charleston is the largest business and financial center for the southeastern section of South Carolina. The city is a popular tourist destination, with a large number of restaurants, hotels and retail stores. The manufacturing, shipping and medical industries are also key economic sectors in Charleston. The 2010 median household income for the Charleston MSA was $51,065 and is expected to grow 12.6% from 2010 to 2015.
Competition
          Park Sterling Bank competes for deposits in its banking markets with other commercial banks, savings banks and other thrift institutions, credit unions, agencies issuing United States government securities, and all other organizations and institutions engaged in money market transactions. In its lending activities, Park Sterling competes with all other financial institutions as well as consumer finance companies, mortgage companies and other lenders. Commercial banking in the Charlotte and Wilmington markets, and in its targeted markets of the Carolinas and Virginia generally, is extremely competitive.
          There were a total of 48 FDIC-insured institutions operating in the Charlotte MSA as of June 30, 2010. Those institutions operated 447 offices within the Charlotte MSA, holding approximately $90 billion in deposits. Of those institutions, Park Sterling ranked twelfth in deposit market share, holding 0.43% of the total dollar amount of deposits held in the market.
          The Wilmington MSA, although smaller than the Charlotte market, is also very competitive. As of June 30, 2010, a total of 23 institutions operated 138 offices within the MSA, holding approximately $6 billion in deposits. Park Sterling Bank ranked eighteenth in deposit market share in the Wilmington MSA with 0.58% of the total dollar amount of deposits in the market.
          Interest rates, both on loans and deposits, and prices of fee-based services are significant competitive factors among financial institutions generally. Other important competitive factors include office location, office hours, the quality of client service, community reputation, continuity of personnel and services, and, in the case of larger commercial clients, relative lending limits and the ability to offer sophisticated cash management and other commercial banking services. Many of Park Sterling Bank’s competitors have greater resources, broader geographic markets and higher lending limits than Park Sterling Bank does, and they can offer more products and services and can better afford and make more effective use of media advertising, support services and electronic technology than can Park Sterling Bank. To counter these competitive disadvantages, Park Sterling Bank depends on its reputation as a community bank in its local market, its direct client contact, its ability to make credit and other business decisions locally, and its personalized service.

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          In recent years, federal and state legislation has heightened the competitive environment in which all financial institutions conduct their business, and the potential for competition among financial institutions of all types has increased significantly. Additionally, with the elimination of restrictions on interstate banking, a North Carolina commercial bank may be required to compete not only with other North Carolina-based financial institutions, but also with out-of-state financial institutions which may acquire North Carolina institutions, establish or acquire branch offices in North Carolina, or otherwise offer financial services across state lines, thereby adding to the competitive atmosphere of the industry in general. In terms of assets, Park Sterling Bank is currently one of the smaller commercial banks in North Carolina.
Employees
          As of April 28, 2011, Park Sterling employed a total of 69 people and had 66 full time equivalent employees. Park Sterling is not a party to a collective bargaining agreement, and it considers its relations with employees to be good.
Regulatory Considerations
          Bank holding companies and commercial banks, such as Park Sterling and Park Sterling Bank, are subject to extensive supervision and regulation by federal and state agencies. Certain material elements of this regulatory environment, including minimum capital requirements and significant features of recent financial reform legislation, are described under “Supervision and Regulation.”
Properties
          Park Sterling leases 16,265 square feet in a building located at 1043 E. Morehead Street, Charlotte, North Carolina that serves as its corporate headquarters and a branch office location. In February 2011, Park Sterling leased 7,965 square feet in a building adjacent to the Morehead Street location to accommodate Park Sterling’s expanding operations. Both of the buildings are owned by an entity with respect to which a former director of Park Sterling Bank is president.
          Park Sterling owns its branch office location in the SouthPark neighborhood of Charlotte, North Carolina and leases a branch office location in Wilmington, North Carolina. In February 2011, Park Sterling leased an office location in Charleston, South Carolina, where Park Sterling Bank intends to open a branch. Management believes the terms of the various leases are consistent with market standards and were arrived at through arm’s-length bargaining.
Legal Proceedings
          There are no pending material legal proceedings to which Park Sterling is a party or of which any of its property is subject. In addition, Park Sterling is not aware of any threatened litigation, unasserted claims or assessments that could have a material adverse effect on Park Sterling’s business, operating results or financial condition.
Park Sterling’s Management’s Discussion and Analysis of Financial Condition and Results of Operations
     Summary of Recent Events
          Park Sterling was formed on October 6, 2010 to serve as the holding company for Park Sterling Bank and is a bank holding company registered with the Federal Reserve Board under the Bank Holding Company Act. At present, Park Sterling’s primary operations and business are that of owning Park Sterling Bank.
          Park Sterling Bank was incorporated on September 8, 2006 as a North Carolina-chartered commercial bank and is a subsidiary of Park Sterling. Park Sterling Bank opened for business on October 25, 2006 at 1043 E. Morehead Street, Suite 201, Charlotte, North Carolina. Park Sterling Bank opened a branch in Wilmington, North Carolina, in October 2007 and in the SouthPark neighborhood of Charlotte in July 2008, and received approval from the N.C. Commissioner in March 2011 to open a branch in Charleston, South Carolina.
          On January 1, 2011, Park Sterling acquired all of the outstanding common stock of Park Sterling Bank, on a one-for-one basis, in a statutory share exchange transaction effected under North Carolina law and in accordance with the terms of an Agreement and Plan of Reorganization and Share Exchange dated October 22, 2010. Prior to the January 1, 2011, Park Sterling conducted no operations other than obtaining regulatory approval for the Reorganization. The Consolidated Financial Statements of Park Sterling Corporation as of December 31, 2010 and 2009 and for the years ended December 31, 2010, 2009 and 2008 and the Notes thereto (Park Sterling Consolidated Financial Statements) under “Financial Statements,” and the discussion of those financial statements included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as market data and all other operating information presented herein, are those of Park Sterling Bank on a stand-alone basis.

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          In August 2010, Park Sterling Bank conducted the Public Offering which raised gross proceeds of $150.2 million to facilitate a change in its business plan from primarily organic growth at a moderate pace over the next few years to seeking to acquire regional and community banks in the Carolinas and Virginia. Park Sterling intends to become a regional-sized multistate banking franchise through acquisitions and organic growth, seeking to reach a consolidated asset size of between $8 billion and $10 billion over the next several years. Park Sterling is committed to building a banking franchise that is noted for sound risk management, superior client service and exceptional client relationships.
          As part of Park Sterling Bank’s change in strategy, immediately following the Public Offering, Park Sterling Bank reduced the size of its board of directors from thirteen members to six members, maintaining two of the sitting directors, Larry W. Carroll and Thomas B. Henson, and adding four new directors, Walter C. Ayers, Leslie M. (Bud) Baker, James C. Cherry and Jeffrey S. Kane. Mr. Baker was named Chairman of the board of directors upon becoming a member. In March 2011, the board of directors of Park Sterling, which mirrors that of Park Sterling Bank, approved expanding its membership to seven and appointed Jean E. Davis as a director.
          Park Sterling Bank also reorganized its management team following the Public Offering. The new executive management team includes James C. Cherry, who became the Chief Executive Officer; David L. Gaines, who became the Chief Financial Officer; Nancy J. Foster, who became the Chief Risk Officer; and Bryan F. Kennedy, III, who was the President and Chief Executive Officer and remains the President.
          On March 30, 2011, Park Sterling and Community Capital entered into the merger agreement.
     Critical Accounting Policies
          In the preparation of its financial statements, Park Sterling has adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and in accordance with general practices within the banking industry. Park Sterling’s significant accounting policies are described in Note B — Summary of Significant Accounting Policies to the Park Sterling Consolidated Financial Statements. While all of these policies are important to understanding the Park Sterling Consolidated Financial Statements, certain accounting policies described below involve significant judgment and assumptions by management of Park Sterling that have a material impact on the carrying value of certain assets and liabilities. Park Sterling considers these accounting policies to be critical accounting policies. The judgment and assumptions Park Sterling uses are based on historical experience and other factors, which it believes to be reasonable under the circumstances. Because of the nature of the judgment and assumptions Park Sterling makes, actual results could differ from these judgments and assumptions and could have a material impact on the carrying values of its assets and liabilities and its results of operations.
          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 gives consideration to current economic conditions, statutory examinations of the loan portfolio by regulatory agencies, independent loan reviews performed periodically by third parties, delinquency information, management’s internal review of the loan portfolio, 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 Park Sterling 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 is available to absorb further loan losses in any segment. Further information regarding Park Sterling’s policies and methodology used to estimate the allowance for possible loan losses is presented in Note D — Loans to the Park Sterling Consolidated Financial Statements.
          Income Taxes. Income taxes are provided based on the liability method of accounting, which includes the recognition of deferred tax assets and liabilities for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. In general, Park Sterling records deferred tax assets when the event giving rise to the tax benefit has been recognized in the consolidated financial statements.
          A valuation allowance is recognized to reduce any deferred tax assets for which, based upon available information, it is more-likely-than-not that all or any portion will not be realized. Assessing the need for, and amount of, a valuation allowance for deferred tax assets requires significant judgment and evaluation. In most cases, the realization of deferred tax assets is dependent upon Park Sterling generating a sufficient level of taxable income in future periods, which can be difficult to predict. Management has prepared a forecast which includes judgmental and quantitative elements that may be subject to significant change. If Park Sterling’s forecast of taxable income within the carryforward periods available under applicable law is not sufficient to cover the amount of net deferred assets, such assets may be impaired. Based on its forecast and other judgmental elements, management determined no valuation allowances were needed at either December 31, 2010 or 2009.

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          Fair Value Measurements. As a financial services company, the carrying value of certain financial assets and liabilities is impacted by the application of fair value measurements, either directly or indirectly. In certain cases, an asset or liability is measured and reported at fair value on a recurring basis, such as available-for-sale investment securities. In other cases, management must rely on estimates or judgments to determine if an asset or liability not measured at fair value warrants an impairment write-down or whether a valuation reserve should be established. Given the inherent volatility, the use of fair value measurements may have a significant impact on the carrying value of assets or liabilities, or result in material changes to the financial statements, from period to period.
          Detailed information regarding fair value measurements can be found in Note M — Fair Value of Financial Instruments to the Park Sterling Consolidated Financial Statements. The following is a summary of those assets that may be affected by fair value measurements, as well as a brief description of the current accounting practices and valuation methodologies employed by Park Sterling:
          Available-for-Sale Investment Securities. Investment securities classified as available-for-sale are measured and reported at fair value on a recurring basis. For most securities, the fair value is based upon quoted market prices or determined by pricing models that consider observable market data. However, the fair value of certain investment securities must be based upon unobservable market data, such as nonbinding broker quotes and discounted cash flow analysis or similar models, due to the absence of an active market for these securities. As a result, management’s determination of fair value for these securities is highly dependent on subjective or complex judgments, estimates and assumptions, which could change materially between periods.
          Impaired Loans. For loans considered impaired, the amount of impairment loss recognized is determined based on a discounted cash flow analysis or the fair value of the underlying collateral if repayment is expected solely from the sale of the collateral. The vast majority of the collateral securing impaired loans is real estate, although it may also include accounts receivable and equipment, inventory or similar personal property.
     Results of Operations
          Summary. Park Sterling recorded a net loss of $7.9 million, or $(0.58) per diluted share, for the year ended December 31, 2010, compared to net income of $577 thousand, or $0.12 per diluted share, for the year ended December 31, 2009 and net income of $1.5 million, or $0.31 per diluted share, for the year ended December 31, 2008.
          The net loss for the fourth quarter of 2010 was $4.5 million, or $(0.16) per share, compared to the fourth quarter of 2009 net income of $118 thousand, or $0.02 per diluted share, and a net loss of $3.7 million, or $(0.23) per diluted share, for the third quarter of 2010.
          As a result of the Public Offering, diluted weighted average shares increased from 4,951,098 in 2009 to 13,558,221 in 2010. Diluted weighted average shares for the fourth quarter of 2009 and the third and fourth quarters of 2010 were 4,951,098, 15,998,924 and 28,051,098, respectively.
          The return on average assets in 2010 was (1.46)% compared to 0.13% in 2009 and 0.46% in 2008. The return on average shareholders’ equity was (8.0)% in 2010 compared to 1.26% in 2009 and 3.59% in 2008.
          In addition to traditional capital measurements, management uses tangible equity and related ratios, which are non-GAAP financial measures, to evaluate the adequacy of shareholders’ equity and to facilitate comparisons with peers. The following table presents these non-GAAP financial measures and reconciles the calculation of tangible assets and tangible equity to the related amounts as reported in the Park Sterling Consolidated Financial Statements at December 31:

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Non-GAAP Financial Measures
                         
    2010     2009     2008  
    (Dollars in thousands, except share and per share amounts)  
Tangible assets:
                       
Total assets
  $ 616,108     $ 473,855     $ 428,073  
Less: intangible assets
                 
 
                 
Tangible assets
  $ 616,108     $ 473,855     $ 428,073  
 
                 
Tangible common equity:
                       
Total common equity
  $ 177,101     $ 46,095     $ 45,697  
Less: intangible assets
                 
 
                 
Tangible common equity
  $ 177,101     $ 46,095     $ 45,697  
 
                 
Tangible common equity to tangible assets:
                       
Tangible common equity
  $ 177,101     $ 46,095     $ 45,697  
Divided by: tangible assets
    616,108       473,855       428,073  
 
                 
Tangible common equity to tangible assets
    28.75 %     9.73 %     10.68  
 
                 
Tangible book value per share:
                       
Tangible common equity
  $ 177,101     $ 46,095     $ 45,697  
Divided by: period end outstanding shares
    28,051,098       4,951,098       4,951,098  
 
                 
Tangible common book value per share
  $ 6.31     $ 9.31     $ 9.23  
 
                 
          Net Income (Loss). The following table summarizes components of net income (loss) and the changes in those components for the years ended December 31:
Components of Net Income (Loss)
                                                         
    2010     2009     2008     Change 2010 vs. 2009     Change 2009 vs. 2008  
                            (Dollars in thousands)                  
Interest income
  $ 22,642     $ 21,668     $ 20,102     $ 974       4.5 %   $ 1,566       7.8 %
Interest expense
    7,607       9,290       10,471       (1,683 )     -18.1 %     (1,181 )     -11.3 %
 
                                         
Net interest income
    15,035       12,378       9,631       2,657       21.5 %     2,747       28.5 %
Provision for loan losses
    17,005       3,272       2,544       13,733       419.7 %     728       28.6 %
Noninterest income
    130       (293 )     26       423       -144.4 %     (319 )     -1,226.9 %
Noninterest expense
    11,057       7,997       7,099       3,060       38.3 %     898       12.6 %
 
                                         
Net income (loss) before taxes
    (12,897 )     816       14       (13,713 )     -1,680.5 %     802       5,728.6 %
Income tax expense (benefit)
    (5,038 )     239       (1,532 )     (5,277 )     -2,207.9 %     1,771       -115.6 %
 
                                         
Net income (loss)
  $ (7,859 )   $ 577     $ 1,546     $ (8,436 )     -1,462.0 %   $ (969 )     -62.7 %
 
                                         

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          Park Sterling incurred a net loss of $7.9 million for the year ended December 31, 2010, compared to net income of $577 thousand for the year ended December 31, 2009. The change in Park Sterling’s results of operations in 2010 includes an increase of $2.7 million in net interest income, offset primarily by increases of $13.7 million in the provision for loan losses, $1.7 million in salary and benefit costs and other noninterest expenses such as legal and due diligence expenses incurred in connection with Park Sterling Bank becoming a public company and engaging in the process of acquiring regional and community banks, less a $5.0 million tax benefit recorded as a result of the loss for the year.
          Net income for the year ended December 31, 2009 was $577 thousand, compared to $1.5 million for the year ended December 31, 2008. Net income for 2008 increased by $1.5 million as a result of a deferred tax allowance that was released during 2008. During 2009, Park Sterling’s results of operations includes a $2.7 million increase in net interest income compared to 2008 and is offset primarily by increases of $728 thousand in the provision for loan losses, impairment charges related to an investment in a large correspondent bank in the amount of $698 thousand and an increase in FDIC assessments of $765 thousand.
          Details of the changes in the various components of net income (loss) are further discussed below.
          Net Interest Income and Expense. Park Sterling’s 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 for 2010 totaled $15.0 million compared to $12.4 million in 2009, an increase of $2.6 million, or 21.5%. This increase is primarily attributable to a reduction in interest expense due to a decrease in the cost of funds for time deposits along with an increase in average investments and federal funds sold of $61.4 million as a result of investing the proceeds received from the Public Offering. Net interest income increased $2.7 million in 2009 to $12.4 million from $9.6 in 2008. The increase in 2009 is primarily a result of an increase in average loan balances and a reduction in interest expense due to a decrease in the cost of funds for time deposits.
          The following table summarizes the average volume of interest-earning assets and interest-bearing liabilities and average yields and rates for the years ended December 31:
Net Interest Margin
                                                                         
    2010     2009     2008  
    Average     Income/     Yield/     Average     Income/     Yield/     Average     Income/     Yield/  
    Balance     Expense     Rate     Balance     Expense     Rate     Balance     Expense     Rate  
                            (Dollars in thousands)                                  
Assets
                                                                       
Interest-earning assets:
                                                                       
Loans with fees (1)
  $ 399,965     $ 20,260       5.07 %   $ 389,036     $ 19,710       5.07 %   $ 307,665     $ 18,767       6.10 %
Federal funds sold
    45,794       107       0.23 %     19,274       41       0.21 %     3,677       60       1.63 %
Investment securities — taxable
    57,877       1,567       2.71 %     26,153       1,365       5.22 %     19,345       1,112       5.75 %
Investment securities — tax-exempt (2)
    14,378       1,045       7.27 %     11,264       867       7.70 %     2,336       174       7.45 %
Other interest-earning assets
    6,341       66       1.04 %     3,314       19       0.57 %     1,847       56       3.03 %
 
                                                     
 
                                                                       
Total interest-earning assets
    524,355       23,045       4.39 %     449,041       22,002       4.90 %     334,870       20,169       6.02 %
Allowance for loan losses
    (9,556 )                     (6,307 )                     (4,517 )                
Cash and due from banks
    7,340                       4,695                       1,866                  
Premises and equipment
    4,602                       4,788                       4,647                  
Other assets
    10,496                       7,462                       2,030                  
 
                                                                 
 
Total assets
  $ 537,237                     $ 459,679                     $ 338,896                  
 
                                                                 

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    2010     2009     2008  
    Average     Income/     Yield/     Average     Income/     Yield/     Average     Income/     Yield/  
    Balance     Expense     Rate     Balance     Expense     Rate     Balance     Expense     Rate  
                            (Dollars in thousands)                                  
Liabilities and shareholders’ equity
                                                                       
Interest-bearing liabilities:
                                                                       
Interest-bearing demand
  $ 9,831     $ 10       0.10 %   $ 8,205     $ 6       0.07 %   $ 4,374     $ 8       0.18 %
Savings and money market
    50,954       398       0.78 %     42,249       347       0.82 %     44,202       989       2.24 %
Time deposits — core
    189,841       3,615       1.90 %     146,109       4,086       2.80 %     82,384       3,338       4.05 %
Time deposits — brokered
    125,123       2,254       1.80 %     161,331       3,882       2.41 %     124,123       5,481       4.42 %
 
                                                     
 
                                                                       
Total interest-bearing deposits
    375,749       6,277       1.67 %     357,894       8,321       2.32 %     255,083       9,816       3.85 %
Federal Home Loan Bank advances
    22,110       572       2.59 %     25,000       590       2.36 %     20,164       535       2.65 %
Other borrowings
    8,755       758       8.66 %     6,124       379       6.19 %     5,598       120       2.14 %
 
                                                     
 
                                                                       
Total borrowed funds
    30,865       1,330       4.31 %     31,124       969       3.11 %     25,762       655       2.54 %
 
                                                     
 
                                                                       
Total interest-bearing liabilities
    406,614       7,607       1.87 %     389,018       9,290       2.39 %     280,845       10,471       3.73 %
 
                                                     
Net interest rate spread
            15,438       2.52 %             12,712       2.51 %             9,698       2.29 %
 
                                                           
 
                                                                       
Noninterest-bearing demand deposits
    30,462                       22,039                       12,438                  
Other liabilities
    1,735                       2,685                       2,552                  
Shareholders’ equity
    98,426                       45,937                       43,061                  
 
                                                                 
 
                                                                       
Total liabilities and shareholders’ equity
  $ 537,237                     $ 459,679                     $ 338,896                  
 
                                                                 
 
                                                                       
Net interest margin
                    2.94 %                     2.83 %                     2.90 %
 
                                                                 
 
(1)   Nonaccrual loans are included in the average loan balances.
 
(2)   Interest income and yields are presented on a fully tax-equivalent basis.

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          The following table details the calculation of fully tax-equivalent net interest income for the years ended December 31:
Tax Equivalent Adjustments
                         
    2010     2009     2008  
    (Dollars in thousands)  
Net interest income, as reported
  $ 15,035     $ 12,378     $ 9,631  
Tax equivalent adjustments
    403       334       67  
 
                 
 
                       
Fully tax equivalent net interest income
  $ 15,438     $ 12,712     $ 9,698  
 
                 
          Changes in interest income and interest expense can result from variances in both volume and rates. The following table presents the relative impact on tax-equivalent net interest income to changes in the average outstanding balances of interest-earning assets and interest-bearing liabilities and the rates earned and paid by Park Sterling on such assets and liabilities:
Volume and Rate Variance Analysis
                                                 
    Year Ended December 31,  
    2010 vs. 2009     2009 vs. 2008  
    Increase/(Decrease) Due to  
    Volume     Rate     Total     Volume     Rate     Total  
                    (Dollars in thousands)                  
Interest-earning assets:
                                               
Loans
  $ 554     $ (4 )   $ 550     $ 4,543     $ (3,600 )   $ 943  
Federal funds sold
    59       7       66       144       (163 )     (19 )
 
                                               
Investment securities — taxable
    1,257       (1,055 )     202       373       (120 )     253  
Investment securities — tax-exempt
    233       (56 )     177       676       17       693  
Other interest-earning assets
    24       23       47       26       (63 )     (37 )
 
                                   
 
                                               
Total earning assets
    2,128       (1,085 )     1,043       5,763       (3,930 )     1,833  
 
                                   
 
                                               
Interest-bearing liabilities:
                                               
Interest bearing demand
    1       3       4       5       (7 )     (2 )
Savings and money market
    70       (19 )     51       (30 )     (612 )     (642 )
Time deposits — core
    1,028       (1,499 )     (471 )     2,182       (1,434 )     748  
Time deposits — brokered
    (762 )     (866 )     (1,628 )     1,269       (2,868 )     (1,599 )
 
                                   
 
                                               
Total interest bearing deposits
    337       (2,381 )     (2,044 )     3,426       (4,921 )     (1,495 )
 
                                   
 
Federal Home Loan Bank advances
    (71 )     53       (18 )     121       (66 )     56  
Other borrowings
    195       184       379       22       237       259  
 
                                   
 
                                               
Total borrowed funds
    124       237       361       143       171       314  
 
                                   
 
                                               
Total interest-bearing liabilities
    461       (2,144 )     (1,683 )     3,569       (4,750 )     (1,181 )
 
                                   
 
                                               
Increase in net interest income
  $ 1,668     $ 1,059     $ 2,726     $ 2,194     $ 820     $ 3,014  
 
                                   
          Net interest income on a tax equivalent basis totaled $15.4 million in 2010 as compared to $12.7 million in 2009. The interest rate spread, which represents the rate earned on interest-earning assets less the rate paid on interest-bearing liabilities, was 2.52% in 2010, a slight increase from the 2009 net interest spread of 2.51%. The net yield on interest-earning assets in 2010 increased to 2.94% from the 2009 net interest margin of 2.83%.
          Tax equivalent interest income increased $1.0 million, or 4.7%, in 2010 primarily due to an increase in the average balance of loans, investments and federal funds sold. The yield on interest-earning assets decreased to 4.39% in 2010 from 4.90% in 2009 as a result of a decrease in the average yield received on investments. Average interest-earning assets increased $75.3 million primarily as the result of a $10.9 million increase in average loans and a $61.4 million increase in average investment securities over 2009.
          Interest expense decreased $1.7 million, or 18%, in 2010 due to a decrease in the average rate paid on interest-bearing liabilities. The cost of funds decreased to 1.87% in 2010 from 2.39% in 2009. This decrease in the cost of funds was primarily attributable to decreases in the

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average rate paid on time deposits. The $17.6 million growth in average interest-bearing liabilities was primarily attributable to an increase in interest-bearing savings and money market accounts and core time deposits offset by a $36.0 million decrease in brokered certificates of deposit.
          In 2009, net interest income on a tax equivalent basis increased $3.0 million, or 31%, to $12.7 million from $9.7 million in 2008. The net interest margin was 2.83% in 2009, a slight decrease from the 2008 net interest margin of 2.90%. The net yield on interest-earning assets in 2009 decreased to 4.90% from the 2008 net interest margin of 6.02%.
          Park Sterling’s hedging policies permit the use of various derivative financial instruments to manage exposure to changes in interest rates. Details of derivatives and hedging activities are set forth in Note L — Derivative Financial Instruments and Hedging Activities to the Park Sterling Consolidated Financial Statements. Information regarding the impact of fluctuations in interest rates on Park Sterling’s derivative financial instruments is set forth below in the section titled "— Interest Rate Sensitivity.”
          Provision for Loan Losses. The provision for loan losses was $17.0 million, $3.3 million and $2.5 million for the years ended December 31, 2010, 2009 and 2008, respectively. The increase in the 2010 and the 2009 provisions resulted from the negative impact on Park Sterling Bank’s loan portfolio of the continued economic downturn that persists across its markets and a 2010 refinement to its allowance for loan loss methodology which introduced a more comprehensive qualitative component. Park Sterling had $12.0 million in net charge-offs during 2010, compared to $1.4 million and $374 thousand during 2009 and 2008, respectively. See “—Financial Condition —Allowance for Loan Losses” below for a more complete discussion of Park Sterling’s policy for addressing potential loan losses.
          Noninterest Income. Noninterest income is not a major component of Park Sterling’s earnings. Park Sterling has a minimal amount of noninterest income from service charges. In 2010 and 2008, noninterest income of $130 thousand and $26 thousand, respectively, consisted primarily of the sales and calls of available-for-sale securities. In 2009, noninterest income of $(293) thousand included impairment charges on an investment in a large correspondent bank totaling $698 thousand which offset income of $405 thousand consisting primarily of the sales and calls of available-for-sale securities.
          Noninterest Expense. Total noninterest expense was $11.0 million for 2010, an increase of 38% from 2009. Noninterest expense for 2009 increased 13% to $8.0 million from $7.1 million in 2008.
          Salaries and employee benefits expenses were $6.4 million in 2010, compared to $4.7 million during 2009, an increase of $1.7 million, or 36%, following a $34 thousand, or (0.7)%, decrease in salaries and employee benefits expenses in 2009 compared to 2008. The increase in salaries and employee benefits in 2010 is primarily due to an increase in compensation and related benefits for additional employees as Park Sterling expanded its management team and added other personnel to pursue the change in business plan following Park Sterling’s Public Offering of common stock. This included compensation expense for share-based compensation plans of $810 thousand, $642 thousand and $665 thousand for the years ended December 31, 2010, 2009 and 2008, respectively.
          Occupancy expenses were $916 thousand in 2010, compared to $820 thousand during 2009, an increase of $96 thousand, or 12%, following an increase of $100 thousand, or 14%, in occupancy expenses in 2009 over 2008. The increase in 2010 is primarily due to an increase in expenses associated with additional corporate office space and in 2009, the increase is primarily related to a full year’s expenses associated with a new branch opened in 2008.
          Legal and professional fees were $445 thousand in 2010, compared to $212 thousand during 2009, an increase of $233 thousand, or 110%, and did not change in 2009 compared to 2008. This 2010 increase is a result of legal and consulting fees associated with being a publicly held company.
          Deposit charges and FDIC insurance decreased $237 thousand in 2010 compared to 2009, primarily as a result of a special assessment levied by the FDIC in the second quarter of 2009 in an effort to rebuild the DIF. Deposit charges and FDIC insurance increased $774 thousand in 2009 compared to 2008, primarily as a result of a special assessment levied by the FDIC in the second quarter of 2009 in an effort to rebuild the DIF. Park Sterling Bank was required to prepay $2.3 million for the fourth quarter of 2009 and for the years of 2010, 2011 and 2012. This prepayment is being expensed based upon Park Sterling’s regular quarterly assessments.
          Directors’ fees totaling $392 thousand were paid to directors for the first time in 2010 and included ongoing payments of directors’ fees to current directors of $67 thousand subsequent to the Public Offering and payments of directors’ fees of $325 thousand to directors prior to the Public Offering.
          Other real estate owned expense increased $250 thousand in 2010 and $156 thousand in 2009 compared to the respective prior years. These increases for both 2010 and 2009 are primarily a result of losses incurred on the sale of other real estate owned.

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          The total of all other noninterest expense increased $540 thousand, or 111%, to $1.0 million during 2010 and 2009 remained comparable to 2008. The 2010 increase was primarily a result of $169 thousand in due diligence expenses incurred in connection with potential acquisitions, increased costs for directors’ and officers’ insurance, a State of North Carolina assessment fee and expenses associated with being a public company.
          The following table summarizes components of noninterest expense for the years ended December 31:
Noninterest Expense
                                                         
    2010     2009     2008     Change 2010 vs. 2009     Change 2009 vs. 2008  
    (Dollars in thousands)  
Salaries and employee benefits
  $ 6,442     $ 4,723     $ 4,757     $ 1,719       36 %   $ (34 )     -1 %
Occupancy and equipment
    916       820       720       96       12 %     100       14 %
Advertising and promotion
    287       236       335       51       22 %     (99 )     -30 %
Legal and professional fees
    445       212       229       233       110 %     (17 )     -7 %
Deposit charges and FDIC insurance
    728       965       191       (237 )     -25 %     774       405 %
Data processing and outside service fees
    411       395       350       16       4 %     45       13 %
Director fees
    392                   392       0 %           0 %
Other real estate owned expense
    411       161       5       250       155 %     156       3120 %
Other noninterest expense
    1,025       485       512       540       111 %     (27 )     -5 %
 
                                         
 
                                                       
Total noninterest expense
  $ 11,057     $ 7,997     $ 7,099     $ 3,060       38 %   $ 898       13 %
 
                                         
          Income Taxes. Park Sterling recognized an income-tax benefit for 2010 and 2008 of $5.0 million and $1.5 million, respectively. Income tax expense for 2009 was $239 thousand. The increase in the provision for loan losses in 2010 resulted in the pretax loss and the related income tax benefit. The 2008 income-tax benefit of $1.5 million is due to the release of a deferred tax valuation allowance in that amount. The effective tax rate for the year ended December 31, 2010 was (39.1)% compared to 29.3% for the same period of 2009. The change in the effective tax rate in 2010 was primarily due to the inability to fully recognize the tax benefit of tax-exempt income from certain securities available for sale.
          Park Sterling’s net deferred tax asset was $7.4 million and $2.9 million at December 31, 2010 and 2009, respectively. The increase is primarily a result of the 2010 provision for loan losses and net operating loss carryforwards. In evaluating whether Park Sterling will realize the full benefit of its net deferred tax asset, it considered projected earnings, asset quality, liquidity, capital position, which will enable it to deploy capital to generate taxable income, growth plans, etc. In addition, Park Sterling also considered the previous twelve quarters of income (loss) before income taxes in determining the need for a valuation allowance, which is called the cumulative loss test. In 2010, Park Sterling incurred a loss, primarily as a result of the increased provision for loan losses, which resulted in the failure of the cumulative loss test. Significant negative trends in credit quality, losses from operations, etc. could impact the realizability of the deferred tax asset in the future. After considering the above factors, both positive and negative, management believes that its deferred assets are more likely than not to be realized.
     Financial Condition
          Summary. Total assets at December 31, 2010 were $616.1 million, an increase of $142.2 million, or 30%, over total assets of $473.9 million at December 31, 2009. This change was primarily due to increases in investment securities available-for-sale of $98.0 million, federal funds sold of $43.9 million, other assets of $5.5 million and interest-earning assets at banks of $2.3 million. These increases were partially offset by decreases in cash and due from banks of $4.1 million and loans, net of allowance for loan losses, of $2.8 million.

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          Total shareholders’ equity increased $131.0 million, or 284%, during 2010 to $177.1 million at December 31, 2010. The increase in shareholders’ equity is attributable to $140.2 million in net proceeds from the Public Offering, partially offset by a net loss of $7.9 million and accumulated other comprehensive loss of $2.1 million in 2010.
          Investment Securities. All of Park Sterling’s investment securities are categorized as available-for-sale. Securities available-for-sale are carried at market value, with unrealized holding gains and losses reported in other comprehensive income, net of tax. At December 31, 2010 the market value of securities totaled $140.6 million, compared to $42.6 million at December 31, 2009. The increase in investment securities at December 31, 2010 is primarily due to the investment of the net proceeds from the Public Offering.
          The following table presents a summary of the fair value of investment securities available-for-sale at December 31:
Fair Value of Investment Portfolio
                                 
            %             %  
    2010     of Total     2009     of Total  
            (Dollars in thousands)          
U.S. Government agencies
  $ 13,160       9 %   $ 5,759       14 %
Mortgage-backed securities
    111,118       79 %     19,994       47 %
Municipal securities
    13,808       10 %     13,884       33 %
Corporate and other securities
    2,504       2 %     2,930       7 %
 
                       
 
                               
Total investment securities
  $ 140,590       100 %   $ 42,567       100 %
 
                       
          The following table summarizes the maturity distribution schedule of the amortized cost of securities available-for-sale with corresponding weighted-average yields at December 31, 2010. Weighted-average yields have been computed on a fully taxable-equivalent basis using a tax rate of 38.55%. Mortgage-backed securities are included in maturity categories based on their stated maturity date. Expected maturities may differ from contractual maturities for a variety of reasons, including the ability of issuers to call or prepay obligations and the ability of borrowers to prepay underlying mortgage collateral.
Contractual Maturities of Investment Portfolio — Amortized Cost
                                                                 
    1-5 years     5-10 years     Over 10 years     Total  
            Weighted             Weighted             Weighted             Weighted  
            Average             Average             Average             Average  
December 31, 2010   Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield  
    (Dollars in thousands)  
U.S. Government agencies
  $ 12,548       1.85 %   $ 527       4.05 %   $           $ 13,075       1.94 %
Mortgage-backed securities
                16,298       2.10 %     96,755       2.83 %     113,053       2.73 %
Municipal securities
                            13,772       6.86 %     13,772       6.86 %
Corporate and other securities
                500       9.14 %     2,174       7.33 %     2,674       7.67 %
 
                                               
 
                                                               
Total investment securities
  $ 12,548       1.85 %   $ 17,325       2.36 %   $ 112,701       3.41 %   $ 142,574       3.15 %
 
                                               
          At December 31, 2010, there were no holdings of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of Park Sterling’s total shareholders’ equity.
          Loans. At December 31, 2010, total loans, net of deferred fees, were $399.8 million compared to $397.6 million at December 31, 2009. Although there was minimal growth in total loans during 2010, significant changes in the loan portfolio include increases in commercial and industrial loans of $6.4 million, or 15.3%, owner-occupied commercial real estate loans of $4.4 million, or 8.7%, and home equity lines of credit (HELOC) of $4.9 million, or 9.5%. These increases were offset by decreases in acquisition, construction and development loans of $12.8 million, or 12.7%, which is consistent with Park Sterling’s strategy to continue reducing these components of its portfolio.

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          The following table presents a summary of the loan portfolio at December 31:
Summary of Loans By Segment and Class
                                 
    2010     %     2009     %  
    (Dollars in thousands)  
Commercial:
                               
Commercial and industrial
  $ 48,401       12 %   $ 41,980       11 %
Commercial real estate — owner occupied
    55,089       14 %     50,693       13 %
Commercial real estate — investor income producing
    110,407       28 %     112,508       28 %
Acquisition, construction and development
    87,846       22 %     100,668       25 %
Other commercial
    3,225       1 %     1,115       0 %
 
                       
 
                               
Total commercial loans
    304,968       76 %     306,964       77 %
 
                       
 
                               
Consumer:
                               
Residential mortgage
    21,716       5 %     20,577       5 %
Home equity lines of credit
    56,968       14 %     52,026       13 %
Residential construction
    9,051       2 %     11,639       3 %
Other loans to individuals
    7,245       2 %     6,471       2 %
 
                       
 
                               
Total consumer loans
    94,980       24 %     90,713       23 %
 
                       
 
                               
Total loans
    399,948       100 %     397,677       100 %
 
                       
 
                               
Deferred fees
    (119 )     0 %     (113 )     0 %
 
                       
 
                               
Total loans, net of deferred fees
  $ 399,829       100 %   $ 397,564       100 %
 
                       
          Substantially all of Park Sterling’s loans are to clients in its immediate markets. In the Charlotte market, Park Sterling has a diversified mix of commercial real estate, owner-occupied commercial real estate, commercial and small business loans, and a significant portfolio of HELOCs. Park Sterling’s Wilmington operation has a heavier concentration of real estate related loans with a smaller proportion of construction and development loans than Charlotte. Wilmington, like most coastal markets, is heavily dependent on real estate and tourism to drive its economy. Park Sterling believes it is not dependent on any single client or group of clients whose insolvency would have a material adverse effect on its financial condition or results of operations.

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          The following table details loan maturities by loan class and interest rate type at December 31, 2010:
Loan Portfolio Maturities by Loan Class and Rate Type
                                 
    Within     One              
    One     Year to     After Five        
December 31, 2010   Year     Five Years     Years     Total  
    (Dollars in thousands)  
Commercial and industrial
  $ 22,892     $ 25,509     $     $ 48,401  
Commercial real estate — owner-occupied
    3,943       46,517       4,629       55,089  
Commercial real estate — investor income producing
    16,439       93,740       228       110,407  
Acquisition, construction and development
    76,093       11,753             87,846  
Other commercial
    2,180       1,035       10       3,225  
Residential mortgages
    4,728       14,934       2,054       21,716  
Home equity lines of credit
          13,842       43,126       56,968  
Residential construction
    7,002       2,049             9,051  
Other loans to individuals
    5,881       1,364             7,245  
 
                       
 
                               
Total loans
  $ 139,158     $ 210,743     $ 50,047     $ 399,948  
 
                       
 
                               
Fixed interest rate
  $ 24,349     $ 133,522     $ 4,517     $ 162,388  
Variable interest rate
    114,809       77,221       45,530       237,560  
 
                       
 
                               
Total loans
  $ 139,158     $ 210,743     $ 50,047     $ 399,948  
 
                       
          Allowance for Loan Losses. The allowance for loan losses is based on 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 reporting 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 gives consideration to current economic conditions, statutory examinations of the loan portfolio by regulatory agencies, independent loan reviews performed periodically by third parties, delinquency information, management’s internal review of the loan portfolio and other relevant factors.
          In connection with Park Sterling Bank’s charter and deposit insurance approval, it committed to the FDIC and the N.C. Commissioner to maintain an allowance for loan losses of at least 1.50% of total loans through December 31, 2008, the first three years of its operation. Following that time, Park Sterling Bank has maintained an allowance for loan loss policy and methodology consistent with regulatory guidance and GAAP. As of December 31, 2010 and December 31, 2009, the allowance for loan losses as a percentage of total loans was 3.11% and 1.86%, respectively.
          The evaluation of the allowance for loan losses, which generally occurs at the end of each quarter, consists of three components, as follow:
1) Specific Reserve Component. Specific reserves represent the current impairment estimate on specific loans, which is an estimate of the amount for which it is probable that Park Sterling Bank will be unable to collect all amounts due on such loans, if any, 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 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, for both collateral dependent loans and for loans when foreclosure is probable.

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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 Park Sterling Bank 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. This component of the allowance for loan losses is based on estimates of historical loss rates for groups of loans with similar risk characteristics utilizing Park Sterling Bank’s internal risk grades. The data series for collecting historical loss rates should generally extend through one full economic cycle, but may be adjusted through weightings or other means during periods of significant economic volatility. Given the limited operating history of Park Sterling Bank, historical loss rates associated with each loan risk grade are currently based on the loss experience of comparable institutions.
3) Qualitative Reserve Component. Qualitative reserves represent an estimate of the amount for which it is probable that environmental factors will cause the aforementioned loss contingency estimate to differ from historical results or other assumptions. Park Sterling Bank has identified six environmental factors for inclusion in its allowance methodology at this time including (i) portfolio trends, (ii) portfolio concentrations, (iii) economic and market trends, (iv) changes in lending practices, (v) regulatory environment, and (vi) other factors. The first three factors are believed by management to present the most significant risk to the portfolio, and are therefore associated with both higher absolute and range of potential reserve percentage. The reserve percentages for each of the six factors are derived from available industry information combined with management judgment. Park Sterling Bank may consider both trends and absolute levels of such factors, if applicable.
          The allowance is increased by provisions charged to operations and reduced by loans charged off, net of recoveries. The continued economic downturn that has persisted across North Carolina resulted in net charge-offs increasing to $12.0 million in 2010 compared to $1.4 million in 2009 and $374 thousand in 2008. Net charge-offs to total loans increased to 3.00% in 2010 compared to 0.36% in 2009 and 0.10% and 2008. The allowance for loan losses increased to $12.4 million, or 3.11%, of total loans outstanding at December 31, 2010 compared to $7.4 million, or 1.86%, and $5.6 million, or 1.50%, at December 31, 2009 and 2008, respectively. The allowance for loan losses to total loans may further increase in 2011 if Park Sterling Bank’s loan portfolio deteriorates due to economic conditions or other factors.
          While management believes that it uses the best information available to determine the allowance for loan losses, and that its allowance for loan losses is maintained at a level appropriate in light of the risk inherent in Park Sterling Bank’s 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 following table presents a summary of changes in the allowance for loan losses and includes information regarding charge-offs, and selected coverage ratios for the years ended December 31:
Allowance for Loans Losses
                         
    2010     2009     2008  
Balance, beginning of year
  $ 7,402     $ 5,568     $ 3,398  
Provision for loan losses
    17,005       3,272       2,544  
Charge-offs
    (12,042 )     (1,438 )     (374 )
Recoveries
    59              
 
                 
 
                       
Net charge-offs
    (11,983 )     (1,438 )     (374 )
 
                 
 
                       
Balance, end of year
  $ 12,424     $ 7,402     $ 5,568  
 
                 
 
                       
Net charge-offs to total loans
    3.00 %     0.36 %     0.10 %
Allowance for loan losses to total loans
    3.11 %     1.86 %     1.50 %
          Park Sterling Bank 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. These estimated credit losses were not material at December 31, 2010 and 2009.

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          Nonperforming Assets. Nonperforming assets, which consist of nonaccrual loans, term debt restructurings (TDRs), accruing loans for which payments are 90 days or more past due and other real estate owned, totaled $42.2 million at December 31, 2010 compared to $4.2 million and $1.4 million at December 31, 2009 and 2008, respectively. Nonaccrual loans were $40.9 million at December 31, 2010, an increase of $38.2 million over nonaccrual loans of $2.7 million at December 31, 2009. Nonaccrual loans increased significantly in 2010 compared to prior years as a result of the negative impact on Park Sterling Bank’s loan portfolio from increased unemployment, the slow-down in housing, depressed real estate values in its markets and other relevant factors. Nonaccrual loans consist primarily of commercial loans involving acquisition, construction and development activity which totaled $33.9 million, or 82.8%, of nonaccrual loans, at December 31, 2010.
          Park Sterling grades loans with a risk grade scale of 1 through 9, with grades 1 through 5 representing “pass” loans, grade 6 representing “special mention” loans and 7 through 9 representing “classified” loans. 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 to include collateral perfection and outdated or inadequate financial information are also considered in grading loans.
          All loans graded 6 or worse are included on Park Sterling Bank’s list of “watch loans,” which is updated and reported to both management and the board of directors on a monthly basis. Additionally, other loans with more favorable ratings may be placed on the watch list if there are concerns that the loan may become a problem in the future. Impairment analysis has been performed on all loans graded “substandard” (risk grade of 7 or worse) and selected other loans as deemed appropriate. At December 31, 2010, Park Sterling Bank maintained “watch loans” totaling $73.3 million, compared to $36.0 million and $10.3 at December 31, 2009 and 2008, respectively. 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. It is the general policy of Park Sterling to stop accruing interest income when a loan is placed on nonaccrual status and any interest previously accrued but not collected is reversed against current income. Generally, a loan is placed on nonaccrual status when it is over 90 days past due and there is reasonable doubt that all principal will be collected.
          Interest that would have been recorded on nonaccrual loans for the years ended December 31, 2010, 2009 and 2008, had they performed in accordance with their original terms, totaled $275,000, $70,000 and $56,000, respectively. Interest income on nonaccrual loans included in the results of operations for 2010, 2009 and 2008 which were still accruing at that time totaled $1.5 million, $95 thousand and $0, respectively.
          The following table summarizes nonperforming assets at December 31:
Nonperforming Assets
                         
    2010     2009     2008  
    (Dollars in thousands)  
Nonaccrual loans
  $ 40,911     $ 2,688     $  
Past due 90 days or more and accruing
                 
 
                 
 
                       
Total nonperforming loans
    40,911       2,688        
Other real estate owned
    1,246       1,550       1,431  
 
                 
 
                       
Total nonperforming assets
  $ 42,157     $ 4,238     $ 1,431  
 
                 
 
                       
Nonperforming loans to total loans
    10.23 %     0.68 %      
Nonperforming assets to total assets
    6.84 %     0.89 %     0.33 %
Allowance for loan losses to nonperforming assets
    29.47 %     175 %     389 %
     Included in nonperforming assets are nonaccruing loans whose terms have been modified in a TDR. At December 31, 2010, nonaccruing TDR loans were $24.9 million and had a recorded allowance of $2.4 million. During 2010, Park Sterling recorded charge-offs of $3.9 million related TDRs of acquisition, construction and development loans. There were no TDRs still accruing interest at December 31, 2009.

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          Deposits. Park Sterling offers 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. Park Sterling regularly evaluates the internal cost of funds, surveys rates offered by competing institutions, reviews Park Sterling’s cash flow requirements for lending and liquidity and executes rate changes when deemed appropriate.
          Total deposits at December 31, 2010 were $407.8 million, an increase of $15.2 million, or 3.9%, from December 31, 2009. Average deposits for 2010 were $406.2 million, an increase of $26.3 million, or 6.9%, from 2009. With the exception of brokered time deposits, the increase in each category of deposits was primarily related to the competitive pricing of Park Sterling’s deposit products coupled with the continued development of relationships with local small businesses and the high level of individualized service to clients provided by Park Sterling. With respect to brokered time deposits, Park Sterling is focused on reducing its reliance on these deposits due to the limited opportunities to develop a relationship with those depositors. Brokered deposits remain attractive, however, given their relatively lower interest costs and will continue to be selectively utilized by Park Sterling.
          The following table sets forth Park Sterling’s average balance of deposit accounts for the years ended December 31 and the average cost for each category of deposit:
Average Deposits and Costs
                                                 
    2010     2009  
    Average     % of     Average     Average     % of     Average  
    Balance     Total     Cost     Balance     Total     Cost  
    (Dollars in thousands)  
Demand deposits
  $ 40,293       10 %     0.02 %   $ 30,244       8 %     0.02 %
Savings and money market
    50,954       13 %     0.78 %     42,249       11 %     0.82 %
Time deposits — core
    189,841       47 %     1.90 %     146,109       38 %     2.80 %
 
                                               
Time deposits — brokered
    125,123       31 %     1.80 %     161,331       42 %     2.41 %
 
                                   
 
                                               
Total deposits
  $ 406,211       100 %     1.55 %   $ 379,933       100 %     2.19 %
 
                                   
          The following table indicates the amount of Park Sterling’s certificates of deposit by time remaining until maturity as of December 31, 2010:
Maturities of Time Deposits
                                         
    Within     3-6     6-12     1-5        
December 31, 2010   3 Months     Months     Months     Years     Total  
    (Dollars in thousands)  
Time deposits of $100,000 or more
  $ 47,698     $ 45,561     $ 55,876     $ 71,695     $ 220,830  
Other time deposits
    26,807       23,345       20,767       8,072       78,991  
 
                             
 
                                       
Total time deposits
  $ 74,505     $ 68,906     $ 76,643     $ 79,767     $ 299,821  
 
                             
          Borrowings. Borrowings totaled $27.8 million at December 31, 2010 compared to $33.9 million and $28.0 million at December 31, 2009 and 2008, respectively. During 2009, $6.9 million was raised through a subordinated debt offering.

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          The following table details short and long-term borrowings at December 31:
Schedule of Borrowed Funds
                                         
            % Change             % Change        
            From Prior             From Prior        
    2010     Year     2009     Year     2008  
    (Dollars in thousands)  
Short-term:
                                       
Repurchase agreements
  $ 874       -56.1 %   $ 1,989       -32.8 %   $ 2,962  
Federal Home Loan Bank advances
          -100.0 %     5,000             5,000  
 
                             
 
                                       
Total short-term
    874       -87.5 %     6,989       -12.2 %     7,962  
 
                             
 
                                       
Long-term:
                                       
Federal Home Loan Bank advances
    20,000             20,000             20,000  
Subordinated debt
    6,895             6,895       100.0 %      
 
                             
 
                                       
Total long-term
    26,895       0.0 %   $ 26,895       34.5 %     20,000  
 
                             
 
                                       
Total borrowed funds
  $ 27,769       -18.0 %   $ 33,884       21.2 %   $ 27,962  
 
                             
          The following table details balances outstanding related to short-term borrowings at December 31 and annual information for the years presented:
Short-Term Borrowings
                                         
            Weighted     Maximum     Average     Average  
            Average     Amount     Daily Balance     Annual  
    Balance at     Interest Rate     Outstanding     Outstanding     Interest  
    Year end     at Year End     During Year     During Year     Rate Paid  
    (Dollars in thousands)  
2010
                                       
Repurchase agreements
  $ 874       0.15 %   $ 4,722     $ 2,351       0.12 %
Federal funds purchased
                26    </