Edgar Filing: CenterState Banks, Inc.

Date: November 3, 2016

/s/ Jennifer Idell

Jennifer Idell

Senior Vice President

and Chief Financial Officer

csfl-10q_20160930.htm

U.S. SECURTIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-Q

(Mark One)

☒	Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2016

☐	Transition report under Section 13 or 15(d) of the Exchange Act

For the transition period from to

Commission file number 000-32017

CENTERSTATE BANKS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Florida		59-3606741
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

1101 First Street South, Suite 202

Winter Haven, Florida 33880

(Address of Principal Executive Offices)

(863) 293-4710

(Issuer’s Telephone Number, Including Area Code)

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

YES ☒ NO ☐

Check whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or a smaller reporting company.

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES ☒ NO ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

YES ☐ NO ☒

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

	Common stock, par value $.01 per share				48,018,388 shares
(class)				Outstanding at October 31, 2016

CENTERSTATE BANKS, INC. AND SUBSIDIARIES

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets (unaudited) at September 30, 2016 and December 31, 2015		3
Condensed consolidated statements of earnings and comprehensive income for the three and nine months ended September 30, 2016 and 2015 (unaudited)		4
Condensed consolidated statements of changes in stockholders’ equity for the nine months ended September 30, 2016 and 2015 (unaudited)		6
Condensed consolidated statements of cash flows for the nine months ended September 30, 2016 and 2015 (unaudited)		7
Notes to condensed consolidated financial statements (unaudited)		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		40
Item 3. Quantitative and Qualitative Disclosures About Market Risk		59
Item 4. Controls and Procedures		59
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		60
Item 1A. Risk Factors		60
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		60
Item 3. Defaults Upon Senior Securities		60
Item 4. [Removed and Reserved]		60
Item 5. Other Information		60
Item 6. Exhibits		60
SIGNATURES		61
CERTIFICATIONS

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands of dollars, except per share data)

	September 30, 2016			December 31, 2015
ASSETS
Cash and due from banks	$	37,460		$	50,902
Federal funds sold and Federal Reserve Bank deposits		161,406			101,580
Cash and cash equivalents		198,866			152,482
Trading securities, at fair value		2,166			2,107
Investment securities available for sale, at fair value		761,648			604,739
Investment securities held to maturity (fair value of $269,721 and $273,983
at September 30, 2016 and December 31, 2015, respectively)		263,692			272,840
Loans held for sale		2,333			1,529

Loans, excluding purchased credit impaired		3,097,194			2,383,248
Purchased credit impaired loans		197,288			210,528
Allowance for loan losses		(25,499	)		(22,264	)
Net Loans		3,268,983			2,571,512

Bank premises and equipment, net		114,567			101,821
Accrued interest receivable		11,782			10,286
Federal Home Loan Bank and Federal Reserve Bank stock, at cost		17,003			14,041
Goodwill		105,492			76,739
Core deposit intangible, net		16,267			12,164
Trust intangible, net		733			837
Bank owned life insurance		97,767			85,890
Other repossessed real estate owned		9,005			11,196
FDIC indemnification asset		-			25,795
Deferred income tax asset, net		58,614			46,220
Bank property held for sale		9,355			1,665
Interest rate swap derivatives, at fair value		63,207			18,619
Prepaid expense and other assets		13,032			12,235
TOTAL ASSETS	$	5,014,512		$	4,022,717

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand - non-interest bearing	$	1,406,030		$	1,133,138
Demand - interest bearing		814,123			679,714
Savings and money market accounts		1,256,244			979,906
Time deposits		579,537			422,420
Total deposits		4,055,934			3,215,178

Securities sold under agreement to repurchase		26,889			27,472
Federal funds purchased		258,329			200,250
Other borrowed funds		-			25,000
Corporate debentures		25,899			24,093
Accrued interest payable		928			218
Interest rate swap derivatives, at fair value		65,165			19,822
Payables and accrued expenses		28,597			20,170
Total liabilities		4,461,741			3,532,203

Stockholders' equity:
Common stock, $.01 par value: 100,000,000 shares
authorized; 48,016,624 and 45,459,195 shares issued and outstanding
at September 30, 2016 and December 31, 2015, respectively		480			455
Additional paid-in capital		428,798			393,191
Retained earnings		115,985			95,430
Accumulated other comprehensive income		7,508			1,438
Total stockholders' equity		552,771			490,514

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	5,014,512		$	4,022,717

See notes to the accompanying condensed consolidated financial statements

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (unaudited)

(in thousands of dollars, except per share data)

	Three months ended September 30,					Nine months ended September 30,
	2016		2015			2016			2015
Interest income:
Loans	$	41,445	$	35,134		$	119,540		$	106,188
Investment securities available for sale:
Taxable		4,693		3,895			14,523			11,981
Tax-exempt		1,053		728			2,775			1,933
Federal funds sold and other		512		355			1,672			1,120
		47,703		40,112			138,510			121,222
Interest expense:
Deposits		1,821		1,339			5,042			4,155
Securities sold under agreement to repurchase		25		51			80			154
Federal funds purchased		240		150			761			436
Corporate debentures		298		244			836			722
		2,384		1,784			6,719			5,467


Net interest income		45,319		38,328			131,791			115,755
Provision for loan losses		1,275		-			2,696			3,950
Net interest income after loan loss provision		44,044		38,328			129,095			111,805


Non interest income:
Correspondent banking capital markets revenue		6,381		4,943			21,801			17,971
Other correspondent banking related revenue		1,147		992			3,793			3,351
Service charges on deposit accounts		3,770		2,488			9,835			7,169
Debit, prepaid, ATM and merchant card related fees		2,017		1,659			6,245			5,183
Wealth management related revenue		892		940			2,422			2,900
FDIC indemnification income		-		27			96			1,053
FDIC indemnification asset amortization		-		(4,144	)		(1,166	)		(13,143	)
Bank owned life insurance income		658		580			1,877			1,772
Other service charges and fees		736		641			2,230			1,524
Net gain on sale of securities available for sale		13		4			13			4
Total other income		15,614		8,130			47,146			27,784

See notes to the accompanying condensed consolidated financial statements.

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (unaudited)

(in thousands of dollars, except per share data)

	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015
Non interest expense:
Salaries, wages and employee benefits		22,418			18,916			66,832			58,421
Occupancy expense		2,414			2,586			7,038			7,597
Depreciation of premises and equipment		1,629			1,438			4,714			4,274
Supplies, stationary and printing		341			382			1,020			1,098
Marketing expenses		700			630			2,216			1,649
Data processing expense		1,761			1,153			5,053			3,610
Legal, audit and other professional fees		904			779			2,756			2,204
Core deposit intangible ("CDI") amortization		756			579			2,179			1,810
Postage and delivery		423			348			1,264			1,052
ATM and debit card related expenses		725			515			2,137			1,398
Bank regulatory expenses		863			774			2,641			2,567
(Gain) loss on sale of repossessed real estate (“OREO”)		(558	)		(282	)		(1,270	)		(1,783	)
Valuation write down of repossessed real estate (“OREO”)		237			237			651			1,016
(Gain) loss on repossessed assets other than real estate		(4	)		15			33			14
Foreclosure related expenses		512			423			1,743			1,742
Merger and acquisition related expenses		-			169			11,172			169
Branch closure and efficiency initiatives		549			12			967			637
Loss from termination of FDIC loss share agreements		-			-			17,560			-
Other expenses		2,658			2,181			7,524			6,521
Total other expenses		36,328			30,855			136,230			93,996

Income before provision for income taxes		23,330			15,603			40,011			45,593
Provision for income taxes		7,946			5,687			13,697			16,651
Net income	$	15,384		$	9,916		$	26,314		$	28,942

Other comprehensive income, net of tax:
Unrealized securities holding gain (loss), net of income taxes	$	232		$	1,869		$	6,078		$	(653	)
Less: reclassified adjustments for gain included in net income, net of income taxes, of $5, $2, $5 and $2 ,respectively		(8	)		(2	)		(8	)		(2	)
Net unrealized gain (loss) on available for sale securities, net of income taxes	$	224		$	1,867		$	6,070		$	(655	)

Total comprehensive income	$	15,608		$	11,783		$	32,384		$	28,287

Earnings per share:
Basic	$	0.32		$	0.22		$	0.55		$	0.64
Diluted	$	0.32		$	0.22		$	0.55		$	0.63
Common shares used in the calculation of (loss) earnings per share:
Basic (1)		47,820,543			45,200,366			47,254,255			45,163,766
Diluted (1)		48,602,566			45,826,153			47,954,759			45,732,665

(1)

Excludes participating shares.

See notes to the accompanying condensed consolidated financial statements

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the nine months ended September 30, 2016 and 2015 (unaudited)

(in thousands of dollars, except per share data)

													Accumulated
	Number of						Additional						other			Total
	common			Common			paid in			Retained			comprehensive			stockholders'
	shares			stock			capital			earnings			income			equity
Balances at January 1, 2015		45,323,553		$	453		$	388,698		$	59,273		$	4,053		$	452,477

Net income											28,942						28,942
Unrealized holding loss on
available for sale securities, net of
deferred income tax of $411														(655	)		(655	)

Dividends paid - common ($0.05 per share)											(2,272	)					(2,272	)
Stock grants issued		69,416			1			1,172									1,173
Stock based compensation expense								163									163
Stock options exercised, including tax benefit		141,190			2			780									782
Stock repurchase		(65,265	)		(1	)		(797	)								(798	)
Balances at September 30, 2015		45,468,894		$	455		$	390,016		$	85,943		$	3,398		$	479,812


Balances at January 1, 2016		45,459,195		$	455		$	393,191		$	95,430		$	1,438		$	490,514

Net income											26,314						26,314
Unrealized holding gain on
available for sale securities, net of
deferred income tax of $3,811														6,070			6,070

Dividends paid - common ($0.12 per share)											(5,759	)					(5,759	)
Stock grants issued		205,628			2			198									200
Stock based compensation expense								3,251									3,251
Stock options exercised, including tax benefit		103,381			1			717									718
Stock repurchase		(27,622	)		(1	)		(401	)								(402	)
Stock issued pursuant to Community Bank acquisition		2,276,042			23			31,842									31,865
Balances at September 30, 2016		48,016,624		$	480		$	428,798		$	115,985		$	7,508		$	552,771

See notes to the accompanying condensed consolidated financial statements

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands of dollars, except per share data)

	Nine months ended September 30,
	2016			2015
Cash flows from operating activities:
Net income	$	26,314		$	28,942
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		2,696			3,950
Depreciation of premises and equipment		4,714			4,274
Accretion of purchase accounting adjustments		(27,786	)		(33,091	)
Net amortization of investment securities		8,297			6,824
Net deferred loan origination fees		(354	)		343
Gain on sale of securities available for sale		(13	)		(4	)
Trading securities revenue		(418	)		(337	)
Purchases of trading securities		(122,383	)		(114,101	)
Proceeds from sale of trading securities		122,742			116,592
Repossessed real estate owned valuation write down		651			1,016
Gain on sale of repossessed real estate owned		(1,270	)		(1,783	)
Loss on repossessed assets other than real estate		33			14
Gain on sale of loans held for sale		(623	)		(454	)
Loans originated and held for sale		(30,883	)		(23,592	)
Proceeds from sale of loans held for sale		31,434			24,491
Loss (gain) on disposal of and or sale of fixed assets		1			(19	)
Gain on disposal of bank property held for sale		(107	)		(57	)
Impairment on bank property held for sale		1,074			694
Gain on extinguishment of debt		(308	)		-
Deferred income taxes		(1,321	)		2,486
Stock based compensation expense		3,251			2,417
Bank owned life insurance income		(1,877	)		(1,772	)
FDIC indemnification asset amortization		1,166			13,143
Loss from termination of FDIC loss share agreements		17,560			-
Net cash from changes in:
Net changes in accrued interest receivable, prepaid expenses, and other assets		2,042			3,102
Net change in accrued interest payable, accrued expense, and other liabilities		7,507			9,713
Net cash provided by operating activities	$	42,139			42,791

See notes to the accompanying condensed consolidated financial statements.

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands of dollars, except per share data)

(continued)

	Nine months ended September 30,
	2016			2015
Cash flows from investing activities:
Available for sale securities:
Purchases of investment securities	$	(10,025	)	$	(3,867	)
Purchases of mortgage backed securities		(245,190	)		(65,459	)
Proceeds from pay-downs of mortgage backed securities		90,984			71,336
Proceeds from sales of investment securities		79,657			-
Proceeds from sales of mortgage backed securities		62,418			16,305
Proceeds from called investment securities		10,113			2,190
Held to maturity securities:
Purchases of investment securities		(58,458	)		(53,789	)
Purchases of mortgage backed securities		(3,730	)		(30,776	)
Proceeds from called investment securities		42,936			44,425
Proceeds from pay-downs of mortgage backed securities		26,875			27,799
Purchases of FHLB and FRB stock		-			(23	)
Proceeds from sales of FHLB and FRB stock		29			208
Net increase in loans		(161,807	)		(110,363	)
Cash received from FDIC loss sharing agreements		5,482			6,291
Purchases of premises and equipment, net		(4,776	)		(6,181	)
Proceeds from sale of repossessed real estate		15,227			27,696
Proceeds from sale of fixed assets		-			49
Proceeds from sale of bank property held for sale		1,482			1,518
Purchase of bank owned life insurance		(10,000	)		-
Net cash from bank acquisitions		41,885			12,537
Net cash used in investing activities	$	(116,898	)	$	(60,104	)
Cash flows from financing activities:
Net increase in deposits		135,650			79,087
Net (decrease) increase in securities sold under agreement to repurchase		(1,127	)		1,490
Net increase in federal funds purchased		58,079			9,311
Net decrease in other borrowings		(57,418	)		-
Extinguishment of debt		(8,680	)		-
Net increase (decrease) in payable to shareholders for acquisitions		82			(269	)
Stock options exercised, including tax benefit		718			782
Stock repurchased		(402	)		(798	)
Dividends paid		(5,759	)		(2,272	)
Net cash provided by financing activities	$	121,143		$	87,331

Net increase in cash and cash equivalents		46,384			70,018
Cash and cash equivalents, beginning of period		152,482			158,413
Cash and cash equivalents, end of period	$	198,866		$	228,431

Transfer of loans to other real estate owned	$	5,643		$	9,309
Transfers of bank property to held for sale	$	4,415		$	970

Cash paid during the period for:
Interest	$	6,968		$	6,252
Income taxes	$	14,909		$	11,553

See notes to the accompanying condensed consolidated financial statements.

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

NOTE 1: Nature of operations and basis of presentation

The consolidated financial statements include the accounts of CenterState Banks, Inc. (the “Parent Company,” “Company” or “CSFL”), and its wholly owned subsidiary bank, CenterState Bank of Florida, N.A. (“CenterState”), and non bank subsidiaries, R4ALL, Inc. and CSFL Insurance Corp. The subsidiary bank operates through 66 full service banking locations in 22 counties throughout Florida, providing traditional deposit and lending products and services to its commercial and retail customers. R4ALL, Inc. is a separate non bank subsidiary of CSFL. Its purpose is to purchase troubled loans from the subsidiary bank and manage their eventual disposition. CSFL Insurance Corp. is a non bank subsidiary of CSFL and its primary purpose is to function as a captive insurance subsidiary pursuant to Section 831(b) of the U.S. Tax Code.

In addition, the Company also operates a correspondent banking and capital markets division. The division is integrated with and part of the subsidiary bank located in Winter Haven, Florida, although the majority of its bond salesmen, traders and operational personnel are physically housed in leased facilities located in Birmingham, Alabama, Atlanta, Georgia, Winston Salem, North Carolina and San Francisco, California. The business lines of this division are primarily divided into three inter-related revenue generating activities. The first, and largest, revenue generator is commissions earned on fixed income security sales, fees from hedging services, loan brokerage fees and consulting fees for services related to these activities. The second category includes correspondent bank deposits (i.e. federal funds purchased) and correspondent bank checking account deposits. The third revenue generating category includes fees from safe-keeping activities, bond accounting services for correspondents, asset/liability consulting related activities, international wires, and other clearing and corporate checking account services. The customer base includes small to medium size financial institutions primarily located in the Southeastern United States.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These statements should be read in conjunction with the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2015. In the Company’s opinion, all adjustments, consisting primarily of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods have been made. The results of operations of the three and nine month periods ended September 30, 2016 are not necessarily indicative of the results expected for the full year.

Some items in the prior period financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior period net income or shareholders’ equity.

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

NOTE 2: Common stock outstanding and earnings per share data

The two-class method is used in the calculation of basic and diluted earnings per share. Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings. There were an average of 24,500, 462,004, 67,609 and 473,501 stock options that were not considered in computing diluted earnings per common share because they were anti-dilutive during the three and nine month periods ending September 30, 2016 and 2015, respectively. The following table presents the factors used in the earnings per share computations for the periods indicated.

	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015
Basic
Net income available to common shareholders	$	15,384		$	9,916		$	26,314		$	28,942
Less: Earnings allocated to participating securities		(60	)		(54	)		(104	)		(160	)
Net income allocated to common shareholders	$	15,324		$	9,862		$	26,210		$	28,782

Weighted average common shares outstanding
including participating securities		48,006,824			45,447,962			47,441,952			45,414,202
Less: Participating securities (1)		(186,281	)		(247,596	)		(187,697	)		(250,436	)
Average shares		47,820,543			45,200,366			47,254,255			45,163,766
Basic earnings per common share	$	0.32		$	0.22		$	0.55		$	0.64

Diluted
Net income available to common shareholders	$	15,324		$	9,862		$	26,210		$	28,782
Weighted average common shares outstanding for
basic earnings per common share		47,820,543			45,200,366			47,254,255			45,163,766
Add: Dilutive effects of stock based compensation awards		782,023			625,787			700,504			568,899
Average shares and dilutive potential common shares		48,602,566			45,826,153			47,954,759			45,732,665
Diluted earnings per common share	$	0.32		$	0.22		$	0.55		$	0.63

Participating securities are restricted stock awards whereby the stock certificates have been issued, are included in outstanding shares, receive dividends and can be voted, but have not vested.

NOTE 3: Fair value

Generally accepted accounting principles establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing and asset or liability.

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

The fair values of trading securities are determined as follows: (1) for those securities that have traded prior to the date of the consolidated balance sheet but have not settled (date of sale) until after such date, the sales price is used as the fair value (Level 1); and, (2) for those securities which have not traded as of the date of the consolidated balance sheet, the fair value was determined by broker price indications of similar or same securities (Level 2).

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

The fair value of derivatives is based on valuation models using observable market data as of the measurement date (Level 2).

Assets and liabilities measured at fair value on a recurring basis are summarized below.

			Fair value measurements using
			Quoted prices	Significant
			in active	other		Significant
			markets for	observable		unobservable
	Carrying		identical assets	inputs		inputs
	value		(Level 1)	(Level 2)		(Level 3)
at September 30, 2016
Assets:
Trading securities	$	2,166	—	$	2,166	—
Available for sale securities
U.S. Treasury securities		1,002	—		1,002	—
Obligations of U.S. government sponsored entities and agencies		10,023	—		10,023	—
Mortgage backed securities		726,092	—		726,092	—
Municipal securities		24,531	—		24,531	—
Interest rate swap derivatives		63,207	—		63,207	—

Liabilities:
Interest rate swap derivatives		65,165	—		65,165	—

at December 31, 2015
Assets:
Trading securities	$	2,107	—	$	2,107	—
Available for sale securities
U.S. Treasury securities		1,000	—		1,000	—
Mortgage backed securities		568,452	—		568,452	—
Municipal securities		35,287	—		35,287	—
Interest rate swap derivatives		18,619	—		18,619	—

Liabilities:
Interest rate swap derivatives		19,822	—		19,822	—

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

The fair value of impaired loans with specific valuation allowance for loan losses and other real estate owned is based on recent real estate appraisals. For residential real estate impaired loans and other real estate owned, appraised values are based on the comparative sales approach. For commercial and commercial real estate impaired loans, and other real estate owned, appraisers may use either a single valuation approach or a combination of approaches such as comparative sales, cost or the income approach. A significant unobservable input in the income approach is the estimated income capitalization rate for a given piece of collateral. At September 30, 2016, the range of capitalization rates utilized to determine the fair value of the underlying collateral ranged from 7% to 10%. Adjustments to appraisals may be made by the appraiser to reflect local market conditions or other economic factors and may result in changes in the fair value of a given asset over time. As such, the fair value of impaired loans and other real estate owned are considered a Level 3 in the fair value hierarchy.

Assets and liabilities measured at fair value on a non-recurring basis are summarized below.

			Fair value measurements using
				Significant
			Quoted prices in	other	Significant
			active markets for	observable	unobservable
	Carrying		identical assets	inputs	inputs
	value		(Level 1)	(Level 2)	(Level 3)
at September 30, 2016
Assets:
Impaired loans
Residential real estate	$	2,870	—	—	$	2,870
Commercial real estate		7,469	—	—		7,469
Land, land development and construction		1,011	—	—		1,011
Commercial		1,220	—	—		1,220
Consumer		65	—	—		65
Other real estate owned
Residential real estate		715	—	—		715
Commercial real estate		938	—	—		938
Land, land development and construction		1,515	—	—		1,515
Bank property held for sale		1,136	—	—		1,136

at December 31, 2015
Assets:
Impaired loans
Residential real estate	$	3,288	—	—	$	3,288
Commercial real estate		7,061	—	—		7,061
Land, land development and construction		1,767	—	—		1,767
Commercial		280	—	—		280
Consumer		90	—	—		90
Other real estate owned
Residential real estate		85	—	—		85
Commercial real estate		1,506	—	—		1,506
Land, land development and construction		2,002	—	—		2,002
Bank property held for sale		1,665	—	—		1,665

Impaired loans measured at fair value had a recorded investment of $13,034 with a valuation allowance of $399, at September 30, 2016, and a recorded investment of $13,293, with a valuation allowance of $807, at December 31, 2015. The Company recorded a provision for loan loss expense of $86 and $458 on these loans during the three and nine month periods ending September 30, 2016. The Company recorded a provision for loan loss expense of $241 and $516 on impaired loans carried at fair value during the three and nine month periods ending September 30, 2015.

Other real estate owned had a decline in fair value of $237, $237, $651 and $1,016 during the three and nine month periods ending September 30, 2016 and 2015, respectively. Changes in fair value were recorded directly to current earnings through non interest expense.

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

Bank property held for sale represents certain branch office buildings which the Company has closed and consolidated with other existing branches. The real estate was transferred out of the Bank Premises and Equipment category into bank property held for sale at the lower of amortized cost or fair value less estimated costs to sell. The fair values were based upon appraisals. The Company recognized an impairment charge of $549, $12, $967 and $637 during the three and nine month periods ending September 30, 2016 and 2015, respectively, related to bank properties held for sale.

Fair Value of Financial Instruments

The methods and assumptions, not previously presented, used to estimate fair value are described as follows:

Cash and Cash Equivalents: The carrying amounts of cash and cash equivalents approximate fair values and are classified as Level 1.

FHLB and FRB Stock: It is not practical to determine the fair value of FHLB and FRB stock due to restrictions placed on their transferability.

Investment securities held to maturity: The fair values of securities held to maturity are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

Loans held for sale: The fair value of loans held for sale is estimated based upon binding contracts from third party investors resulting in a Level 2 classification.

Loans, net: Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

FDIC Indemnification Asset: It is not practical to determine the fair value of the FDIC indemnification asset due to restrictions placed on its transferability.

Accrued Interest Receivable: The carrying amount of accrued interest receivable approximates fair value and is classified as Level 2 for accrued interest receivable related to investment securities and Level 3 for accrued interest receivable related to loans.

Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

Short-term Borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.

Corporate Debentures: The fair values of the Company’s corporate debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

Accrued Interest Payable: The carrying amount of accrued interest payable approximates fair value resulting in a Level 2 classification.

Off-balance Sheet Instruments: The fair value of off-balance-sheet items is not considered material.

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

The following table presents the carry amounts and estimated fair values of the Company’s financial instruments:

			Fair value measurements
at September 30, 2016	Carrying amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and cash equivalents	$	198,866	$	198,866	$	-	$	-	$	198,866
Trading securities		2,166		-		2,166		-		2,166
Investment securities available for sale		761,648		-		761,648		-		761,648
Investment securities held to maturity		263,692		-		269,721		-		269,721
FHLB and FRB stock		17,003		-		-		-	n/a
Loans held for sale		2,333		-		2,333		-		2,333
Loans, less allowance for loan losses of $25,499		3,268,983		-		-		3,267,908		3,267,908
Interest rate swap derivatives		63,207		-		63,207		-		63,207
Accrued interest receivable		11,782		-		4,077		7,705		11,782

Financial liabilities:
Deposits- without stated maturities	$	3,476,397	$	3,476,397	$	-	$	-	$	3,476,397
Deposits- with stated maturities		579,537		-		581,527		-		581,527
Securities sold under agreement to repurchase		26,889		-		26,889		-		26,889
Federal funds purchased		258,329		-		258,329		-		258,329
Corporate debentures		25,899		-		-		22,226		22,226
Interest rate swap derivatives		65,165		-		65,165		-		65,165
Accrued interest payable		928		-		928		-		928

			Fair value measurements
at December 31, 2015	Carrying amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and cash equivalents	$	152,482	$	152,482	$	-	$	-	$	152,482
Trading securities		2,107		-		2,107		-		2,107
Investment securities available for sale		604,739		-		604,739		-		604,739
Investment securities held to maturity		272,840		-		273,983		-		273,983
FHLB and FRB stock		14,041		-		-		-	n/a
Loans held for sale		1,529		-		1,529		-		1,529
Loans, less allowance for loan losses of $22,264		2,571,512		-		-		2,574,516		2,574,516
FDIC indemnification asset		25,795		-		-		-	n/a
Interest rate swap derivatives		18,619		-		18,619		-		18,619
Accrued interest receivable		10,286		-		-		10,286		10,286

Financial liabilities:
Deposits- without stated maturities	$	2,792,758	$	2,792,758	$	-	$	-	$	2,792,758
Deposits- with stated maturities		422,420		-		423,391		-		423,391
Securities sold under agreement to repurchase		27,472		-		27,472		-		27,472
Federal funds purchased		200,250		-		200,250		-		200,250
Other borrowed funds		25,000		-		25,000		-		25,000
Corporate debentures		24,093		-		-		19,734		19,734
Interest rate swap derivatives		19,822		-		19,822		-		19,822
Accrued interest payable		218		-		218		-		218

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

NOTE 4: Reportable segments

The Company’s reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning purposes by management. The table below is a reconciliation of the reportable segment revenues, expenses, and profit to the Company’s consolidated total for the three and nine month periods ending September 30, 2016 and 2015.

	Three month period ending September 30, 2016
				Correspondent			Corporate
	Commercial			banking and			overhead
	and retail			capital markets			and			Elimination
	banking			division			administration			entries			Total
Interest income	$	45,840		$	1,863		$	-		$	-		$	47,703
Interest expense		(1,848	)		(238	)		(298	)		-			(2,384	)
Net interest income (expense)		43,992			1,625			(298	)		-			45,319
Provision for loan losses		(1,303	)		28			-			-			(1,275	)
Non interest income		8,086			7,528			-			-			15,614
Non interest expense		(29,958	)		(5,456	)		(914	)		-			(36,328	)
Net income (loss) before taxes		20,817			3,725			(1,212	)		-			23,330
Income tax (provision) benefit		(6,973	)		(1,437	)		464			-			(7,946	)
Net income (loss)	$	13,844		$	2,288		$	(748	)	$	-		$	15,384
Total assets	$	4,612,833		$	394,475		$	585,561		$	(578,357	)	$	5,014,512

	Nine month period ending September 30, 2016
				Correspondent			Corporate
	Commercial			banking and			overhead
	and retail			capital markets			and			Elimination
	banking			division			administration			entries			Total
Interest income	$	132,783		$	5,727		$	-		$	-		$	138,510
Interest expense		(5,129	)		(745	)		(845	)		-			(6,719	)
Net interest income (expense)	$	127,654		$	4,982		$	(845	)		-		$	131,791
Provision for loan losses		(2,648	)		(48	)		-			-			(2,696	)
Non interest income		21,244			25,594			308			-			47,146
Non interest expense		(115,867	)		(17,397	)		(2,966	)		-			(136,230	)
Net income (loss) before taxes	$	30,383		$	13,131		$	(3,503	)		-		$	40,011
Income tax (provision) benefit		(9,964	)		(5,064	)		1,331			-			(13,697	)
Net income (loss)	$	20,419		$	8,067		$	(2,172	)	$	-		$	26,314
Total assets	$	4,612,833		$	394,475		$	585,561		$	(578,357	)	$	5,014,512

	Three month period ending September 30, 2015
				Correspondent			Corporate
	Commercial			banking and			overhead
	and retail			capital markets			and			Elimination
	banking			division			administration			entries			Total
Interest income		38,417			1,695			-		-				40,112
Interest expense		(1,390	)		(150	)		(244	)	-				(1,784	)
Net interest income (expense)		37,027			1,545			(244	)	-				38,328
Provision for loan losses		(1	)		1			-		-				-
Non interest income		2,195			5,935			-		-				8,130
Non interest expense		(24,663	)		(5,063	)		(1,129	)	-				(30,855	)
Net income (loss) before taxes		14,558			2,418			(1,373	)		-			15,603
Income tax (provision) benefit		(5,279	)		(934	)		526		-				(5,687	)
Net income (loss)		9,279			1,484			(847	)	-				9,916
Total assets		3,616,330			308,046			511,223			(502,527	)		3,933,072

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

	Nine month period ending September 30, 2015
				Correspondent			Corporate
	Commercial			banking and			overhead
	and retail			capital markets			and			Elimination
	banking			division			administration			entries			Total
Interest income	$	116,173		$	5,049		$	-		$	-		$	121,222
Interest expense		(4,310	)		(435	)		(722	)		-			(5,467	)
Net interest income		111,863			4,614			(722	)		-			115,755
Provision for loan losses		(3,796	)		(154	)		-			-			(3,950	)
Non interest income		6,462			21,322			-			-			27,784
Non interest expense		(73,962	)		(16,666	)		(3,368	)		-			(93,996	)
Net income (loss) before taxes		40,567			9,116			(4,090	)		-			45,593
Income tax (provision) benefit		(14,700	)		(3,517	)		1,566			-			(16,651	)
Net income (loss)	$	25,867		$	5,599		$	(2,524	)	$	-		$	28,942
Total assets	$	3,616,330		$	308,046		$	511,223		$	(502,527	)	$	3,933,072

Commercial and retail banking: The Company’s primary business is commercial and retail banking. Currently, the Company operates through its subsidiary bank and two non bank subsidiaries, R4ALL and CSFL Insurance Corp., with 66 full service banking locations in 22 counties throughout Florida providing traditional deposit and lending products and services to its commercial and retail customers.

Correspondent banking and capital markets division: Operating as a division of our subsidiary bank, its primary revenue generating activities are related to the capital markets division which includes commissions earned on fixed income security sales, fees from hedging services, loan brokerage fees and consulting fees for services related to these activities. Income generated related to the correspondent banking services includes spread income earned on correspondent bank deposits (i.e. federal funds purchased) and fees generated from safe-keeping activities, bond accounting services, asset/liability consulting services, international wires, clearing and corporate checking account services and other correspondent banking related services. The fees derived from the correspondent banking services are less volatile than those generated through the capital markets group. The customer base includes small to medium size financial institutions primarily located in Southeastern United States.

Corporate overhead and administration: Corporate overhead and administration is comprised primarily of compensation and benefits for certain members of management, interest on parent company debt, office occupancy and depreciation of parent company facilities, certain merger related costs and other expenses.

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

NOTE 5: Investment securities

Available-for-Sale

All of the mortgage backed securities listed below were issued by U.S. government sponsored entities and agencies, primarily Fannie Mae, Freddie Mac and Ginnie Mae, institutions which the government has affirmed its commitment to support. The fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

	September 30, 2016
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
U.S. Treasury securities	$	1,001	$	1	$	-	$	1,002
Obligations of U.S. government sponsored entities and agencies		10,041		-		18		10,023
Mortgage backed securities		714,938		11,399		245		726,092
Municipal securities		23,445		1,086		-		24,531
Total available-for-sale	$	749,425	$	12,486	$	263	$	761,648


	December 31, 2015
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
U.S. Treasury securities	$	1,002	$	-	$	2	$	1,000
Mortgage backed securities		567,264		4,102		2,914		568,452
Municipal securities		34,131		1,156		-		35,287
Total available-for-sale	$	602,397	$	5,258	$	2,916	$	604,739

The cost of securities sold is determined using the specific identification method. The securities sold during the first quarter of 2016 were securities acquired through the acquisitions of Community Bank of South Florida, Inc. (“Community”) and Hometown of Homestead Banking Company (“Hometown”) on March 1, 2016. These acquired securities were marked to fair value and subsequently sold after the acquisition date, and no gain or loss was recognized from the sale of these securities. Sales of available for sale securities for the nine months ended September 30, 2016 and 2015 were as follows:

For the nine months ended:	September 30, 2016		September 30, 2015
Proceeds	$	142,075	$	16,305
Gross gains		13		303
Gross losses		-		299

The tax provision related to these net realized gains was $5 and $2, respectively.

The fair value of available for sale securities at September 30, 2016 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

	Fair		Amortized
Investment securities available for sale:	Value		Cost
Due in one year or less	$	1,621	$	1,616
Due after one year through five years		3,747		3,583
Due after five years through ten years		8,611		8,227
Due after ten years through thirty years		21,577		21,061
Mortgage backed securities		726,092		714,938
Total available-for-sale	$	761,648	$	749,425

Available for sale securities pledged at September 30, 2016 and December 31, 2015 had a carrying amount (estimated fair value) of $235,957 and $195,753 respectively. These securities were pledged primarily to secure public deposits and repurchase agreements.

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

At September 30, 2016 and December 31, 2015, there were no holdings of securities of any one issuer, other than mortgage backed securities issued by U.S. Government sponsored entities and agencies, in an amount greater than 10% of stockholders’ equity.

The following tables show the Company’s available for sale investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2016 and December 31, 2015.

	September 30, 2016
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Obligations of U.S. government sponsored entities and agencies	$	10,023	$	18	$	-	$	-	$	10,023	$	18
Mortgage backed securities		54,879		141		18,857		104		73,736		245
Total temporarily impaired available-for-sale securities	$	64,902	$	159	$	18,857	$	104	$	83,759	$	263

	December 31, 2015
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
U.S. Treasury securities	$	1,000	$	2	$	-	$	-	$	1,000	$	2
Mortgage backed securities		282,299		1,599		32,892		1,315		315,191		2,914
Total temporarily impaired available-for-sale securities	$	283,299	$	1,601	$	32,892	$	1,315	$	316,191	$	2,916

At September 30, 2016, 100% of the mortgage-backed securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae, Freddie Mac, and Ginnie Mae, institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2016.

Held-to-Maturity

The following reflects the fair value of held-to-maturity securities and the related gross unrecognized gains and losses as of September 30, 2016 and December 31, 2015.

	September 30, 2016
			Gross			Gross
	Amortized		Unrecognized			Unrecognized		Fair
	Cost		Gains			Losses		Value
Obligations of U.S. government sponsored entities and agencies	$	14,797	$	37	$		-	$	14,834
Mortgage backed securities		131,452		1,764			-		133,216
Municipal securities		117,443		4,420			192		121,671
Total held-to-maturity	$	263,692	$	6,221	$		192	$	269,721


	December 31, 2015
			Gross		Gross
	Amortized		Unrecognized			Unrecognized		Fair
	Cost		Gains			Losses		Value
Obligations of U.S. government sponsored entities and agencies	$	57,610	$	141	$		23	$	57,728
Mortgage backed securities		155,942		71			601		155,412
Municipal securities		59,288		1,566			11		60,843
Total held-to-maturity	$	272,840	$	1,778	$		635	$	273,983

Held-to-maturity securities pledged at September 30, 2016 and December 31, 2015 had a carrying amount of $44,436 and $48,246 respectively. These securities were pledged primarily to secure public deposits and repurchase agreements.

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

At September 30, 2016, there were no holdings of held-to-maturity securities of any one issuer in an amount greater than 10% of stockholders’ equity.

The fair value and amortized cost of held to maturity securities at September 30, 2016 by contractual maturity were as follows. Mortgage-backed securities are not due at a single maturity date and are shown separately.

	Fair		Amortized
Investment securities held-to-maturity	Value		Cost
Due after five years through ten years	$	10,474	$	10,446
Due after ten years through thirty years		126,031		121,794
Mortgage backed securities		133,216		131,452
Total held-to-maturity	$	269,721	$	263,692

The following table shows the Company’s held to maturity investments’ gross unrecognized losses and fair value, aggregated by investment category and length of time the individual securities have been in a continuous unrecognized loss position, at September 30, 2016 and December 31, 2015.

	September 30, 2016
	Less than 12 months				12 months or more				Total
	Fair		Unrecognized		Fair		Unrecognized		Fair		Unrecognized
	Value		Losses		Value		Losses		Value		Losses
Municipal securities	$	13,917	$	192	$	-	$	-		13,917		192
Total temporarily impaired held-to-maturity securities	$	13,917	$	192	$	-	$	-	$	13,917	$	192

	December 31, 2015
	Less than 12 months				12 months or more				Total
	Fair		Unrecognized		Fair		Unrecognized		Fair		Unrecognized
	Value		Losses		Value		Losses		Value		Losses
Obligations of U.S. government sponsored entities and agencies	$	9,958	$	23	$	-	$	-		9,958		23
Mortgage backed securities		119,546		601		-		-		119,546		601
Municipal securities		1,735		11		-		-		1,735		11
Total temporarily impaired held-to-maturity securities	$	131,239	$	635	$	-	$	-	$	131,239	$	635

Unrealized losses on municipal securities have not been recognized into income because the issuers bonds are of high quality, and because management does not intend to sell these investments or more likely than not will not be required to sell these investments before their anticipated recovery. The fair value is expected to recover as the securities approach maturity.

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

NOTE 6: Loans

The following table sets forth information concerning the loan portfolio by collateral types as of the dates indicated.

	September 30, 2016			December 31, 2015
Loans excluding PCI loans
Real estate loans
Residential	$	806,489		$	647,496
Commercial		1,682,375			1,254,782
Land, development and construction		120,331			105,276
Total real estate		2,609,195			2,007,554
Commercial		402,713			307,321
Consumer and other loans		84,767			67,500
Loans before unearned fees and deferred cost		3,096,675			2,382,375
Net unearned fees and costs		519			873
Total loans excluding PCI loans		3,097,194			2,383,248
PCI loans (note 1)
Real estate loans
Residential		74,825			86,104
Commercial		106,482			105,629
Land, development and construction		10,928			15,548
Total real estate		192,235			207,281
Commercial		4,649			2,771
Consumer and other loans		404			476
Total PCI loans		197,288			210,528
Total loans		3,294,482			2,593,776
Allowance for loan losses for loans that are not PCI loans		(25,274	)		(22,143	)
Allowance for loan losses for PCI loans		(225	)		(121	)
Total loans, net of allowance for loan losses	$	3,268,983		$	2,571,512

note 1:

Purchased credit impaired (“PCI”) loans are being accounted for pursuant to ASC Topic 310-30.

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

The table below set forth the activity in the allowance for loan losses for the periods presented.

	Allowance for loan losses for loans that are not PCI loans			Allowance for loan losses on PCI loans			Total
Three months ended September 30, 2016
Balance at beginning of period	$	24,066		$	106		$	24,172
Loans charged-off		(821	)		(66	)		(887	)
Recoveries of loans previously charged-off		939			-			939
Net recoveries		118			(66	)		52
Provision for loan losses		1,090			185			1,275
Balance at end of period	$	25,274		$	225		$	25,499

Three months ended September 30, 2015
Balance at beginning of period	$	22,818		$	116		$	22,934
Loans charged-off		(893	)		(50	)		(943	)
Recoveries of loans previously charged-off		657			-			657
Net charge-offs		(236	)		(50	)		(286	)
Provision for loan losses		4			(4	)		-
Balance at end of period	$	22,586		$	62		$	22,648


	Allowance for loan losses for loans that are not PCI loans			Allowance for loan losses on PCI loans			Total
Nine months ended September 30, 2016
Balance at beginning of period	$	22,143		$	121		$	22,264
Loans charged-off		(1,642	)		(66	)		(1,708	)
Recoveries of loans previously charged-off		2,247			-			2,247
Net recoveries		605			(66	)		539
Provision for loan losses		2,526			170			2,696
Balance at end of period	$	25,274		$	225		$	25,499

Nine months ended September 30, 2015
Balance at beginning of period	$	19,384		$	514		$	19,898
Loans charged-off		(2,625	)		(127	)		(2,752	)
Recoveries of loans previously charged-off		1,552			-			1,552
Net charge-offs		(1,073	)		(127	)		(1,200	)
Provision for loan losses		4,275			(325	)		3,950
Balance at end of period	$	22,586		$	62		$	22,648

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

The following tables present the activity in the allowance for loan losses by portfolio segment for the periods presented.

	Real Estate Loans
	Residential			Commercial			Land, develop., constr.			Comm. & industrial			Consumer & other			Total

Allowance for loan losses for loans that are not PCI loans:

Three months ended September 30, 2016
Beginning of the period	$	5,909		$	12,454		$	799		$	3,497		$	1,407		$	24,066
Charge-offs		(93	)		(155	)		(198	)		(138	)		(237	)		(821	)
Recoveries		496			293			15			91			44			939
Provision for loan losses		(453	)		924			133			194			292			1,090
Balance at end of period	$	5,859		$	13,516		$	749		$	3,644		$	1,506		$	25,274

Three months ended September 30, 2015
Beginning of the period	$	6,764		$	10,649		$	867		$	3,035		$	1,503		$	22,818
Charge-offs		(634	)		-			(58	)		(37	)		(164	)		(893	)
Recoveries		213			328			-			83			33			657
Provision for loan losses		(68	)		143			(221	)		24			126			4
Balance at end of period	$	6,275		$	11,120		$	588		$	3,105		$	1,498		$	22,586


	Real Estate Loans
	Residential			Commercial			Land, develop., constr.			Comm. & industrial			Consumer & other			Total

Allowance for loan losses for loans that are PCI loans:

Three months ended September 30, 2016
Beginning of the period	$	-		$	92		$	-		$	-		$	14		$	106
Charge-offs		-			-			(66	)		-			-			(66	)
Recoveries		-			-			-			-			-			-
Provision for loan losses		61			-			124			-			-			185
Balance at end of period	$	61		$	92		$	58		$	-		$	14		$	225

Three months ended September 30, 2015
Beginning of the period	$	-		$	111		$	2		$	3		$	-		$	116
Charge-offs		-			-			-			-			(50	)		(50	)
Recoveries		-			-			-			-			-			-
Provision for loan losses		-			(70	)		-			-			66			(4	)
Balance at end of period	$	-		$	41		$	2		$	3		$	16		$	62

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

	Real Estate Loans
	Residential			Commercial			Land, develop., constr.			Comm. & industrial			Consumer & other			Total

Allowance for loan losses for loans that are not PCI loans:

Nine months ended September 30, 2016
Beginning of the period	$	6,015		$	10,559		$	936		$	3,212		$	1,421		$	22,143
Charge-offs		(226	)		(421	)		(232	)		(161	)		(602	)		(1,642	)
Recoveries		1,056			590			250			210			141			2,247
Provision for loan losses		(986	)		2,788			(205	)		383			546			2,526
Balance at end of period	$	5,859		$	13,516		$	749		$	3,644		$	1,506		$	25,274

Nine months ended September 30, 2015
Beginning of the period	$	6,743		$	8,269		$	752		$	2,330		$	1,290		$	19,384
Charge-offs		(1,037	)		(60	)		(129	)		(849	)		(550	)		(2,625	)
Recoveries		800			448			4			172			128			1,552
Provision for loan losses		(231	)		2,463			(39	)		1,452			630			4,275
Balance at end of period	$	6,275		$	11,120		$	588		$	3,105		$	1,498		$	22,586


	Real Estate Loans
	Residential			Commercial			Land, develop., constr.			Comm. & industrial			Consumer & other			Total

Allowance for loan losses for loans that are PCI loans:

Nine months ended September 30, 2016
Beginning of the period	$	-		$	103		$	1		$	3		$	14		$	121
Charge-offs		-			-			(66	)		-			-			(66	)
Recoveries		-			-			-			-			-			-
Provision for loan losses		61			(11	)		123			(3	)		-			170
Balance at end of period	$	61		$	92		$	58		$	-		$	14		$	225

Nine months ended September 30, 2015
Beginning of the period	$	-		$	372		$	6		$	136		$	-		$	514
Charge-offs		-			(77	)		-			-			(50	)		(127	)
Recoveries		-			-			-			-			-			-
Provision for loan losses		-			(254	)		(4	)		(133	)		66			(325	)
Balance at end of period	$	-		$	41		$	2		$	3		$	16		$	62

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2016 and December 31, 2015. Accrued interest receivable and unearned loan fees and costs are not included in the recorded investment because they are not material.

	Real Estate Loans
As of September 30, 2016	Residential		Commercial		Land, develop., constr.		Comm. & industrial		Consumer & other		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	683	$	2	$	11	$	15	$	25	$	736
Collectively evaluated for impairment		5,176		13,514		738		3,629		1,481		24,538
Purchased credit impaired		61		92		58		-		14		225
Total ending allowance balance	$	5,920	$	13,608	$	807	$	3,644	$	1,520	$	25,499

Loans:
Individually evaluated for impairment	$	8,152	$	8,139	$	1,068	$	1,921	$	236	$	19,516
Collectively evaluated for impairment		798,337		1,674,236		119,263		400,792		84,531		3,077,159
Purchased credit impaired		74,825		106,482		10,928		4,649		404		197,288
Total ending loan balances	$	881,314	$	1,788,857	$	131,259	$	407,362	$	85,171	$	3,293,963

	Real Estate Loans
As of December 31, 2015		Residential		Commercial		Land, develop., constr.		Comm. & industrial		Consumer & other		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	402	$	478	$	164	$	7	$	29	$	1,080
Collectively evaluated for impairment			5,613		10,081		772		3,205		1,392		21,063
Purchased credit impaired			-		103		1		3		14		121
Total ending allowance balance		$	6,015	$	10,662	$	937	$	3,215	$	1,435	$	22,264

Loans:
Individually evaluated for impairment		$	8,096	$	11,482	$	2,267	$	1,057	$	273	$	23,175
Collectively evaluated for impairment			639,400		1,243,300		103,009		306,264		67,227		2,359,200
Purchased credit impaired			86,104		105,629		15,548		2,771		476		210,528
Total ending loan balance		$	733,600	$	1,360,411	$	120,824	$	310,092	$	67,976	$	2,592,903

Loans collectively evaluated for impairment reported at September 30, 2016 include loans acquired from First Southern Bank (“FSB”) on June 1, 2014 and from Gulfstream Business Bank (“GSB”) on January 17, 2014 that are not PCI loans. These loans were performing loans recorded at estimated fair value at the acquisition date. The aggregate fair value adjustment for these loans at their respective acquisition dates was approximately $17,761, or approximately 2.10% of the aggregate acquisition date balances. The amount is accreted into interest income over the remaining lives of the related loans on a level yield basis. The aggregate unamortized acquisition date fair value adjustment was approximately $7,207 and $9,354, which represents approximately 1.40% and 1.59% of the remaining outstanding balance of these acquired loans at September 30, 2016 and December 31, 2015, respectively. Management has also estimated probable incurred losses based on performance since the respective acquisition dates, and based on these estimates, has included $2,323 in the Company’s general loan allowance with respect to these acquired loans.

Loans collectively evaluated for impairment reported at September 30, 2016 also include loans acquired from Community and Hometown on March 1, 2016. The acquired loans were recorded at estimated fair value at acquisition; therefore, no allowance for loan losses was recorded for these loans at September 30, 2016.

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

The table below summarizes impaired loan data for the periods presented.

	Sept. 30, 2016		Dec. 31, 2015
Performing TDRs (these are not included in nonperforming loans ("NPLs"))	$	10,528	$	10,254
Nonperforming TDRs (these are included in NPLs)		3,064		4,873
Total TDRs (these are included in impaired loans)		13,592		15,127
Impaired loans that are not TDRs		5,924		8,048
Total impaired loans	$	19,516	$	23,175

In certain situations it has become more common to restructure or modify the terms of certain loans under certain conditions (i.e. troubled debt restructure or “TDRs”). In those circumstances it may be beneficial to restructure the terms of a loan and work with the borrower for the benefit of both parties, versus forcing the property into foreclosure and having to dispose of it in a distressed sale. When the terms of a loan have been modified, usually the monthly payment and/or interest rate is reduced for generally twelve to twenty-four months. Material principal amounts on any loan modifications have not been forgiven to date.

TDRs as of September 30, 2016 and December 31, 2015 quantified by loan type classified separately as accrual (performing loans) and non-accrual (non performing loans) are presented in the tables below.

As of September 30, 2016	Accruing		Non Accrual		Total
Real estate loans:
Residential	$	7,081	$	1,073	$	8,154
Commercial		2,003		1,873		3,876
Land, development, construction		287		87		374
Total real estate loans		9,371		3,033		12,404
Commercial		952		-		952
Consumer and other		205		31		236
Total TDRs	$	10,528	$	3,064	$	13,592


As of December 31, 2015	Accruing		Non-Accrual		Total
Real estate loans:
Residential	$	5,987	$	2,108	$	8,095
Commercial		2,458		2,558		5,016
Land, development, construction		593		93		686
Total real estate loans		9,038		4,759		13,797
Commercial		991		66		1,057
Consumer and other		225		48		273
Total TDRs	$	10,254	$	4,873	$	15,127

Our policy is to return non accrual TDR loans to accrual status when all the principal and interest amounts contractually due, pursuant to its modified terms, are brought current and future payments are reasonably assured. Our policy also considers the payment history of the borrower, but is not dependent upon a specific number of payments. The Company recorded a provision for loan loss expense of $87 and $447 and partial charge offs of $51 and $169 on the TDR loans described above during the three and nine month periods ending September 30, 2016. The Company recorded a provision for loan loss expense of $70 and $321 and partial charge-offs of $50 and $224 on TDR loans during the three and nine month periods ending September 30, 2015.

Loans are modified to minimize loan losses when we believe the modification will improve the borrower’s financial condition and ability to repay the loan. We typically do not forgive principal. We generally either reduce interest rates or decrease monthly payments for a temporary period of time and those reductions of cash flows are capitalized into the loan balance. We may also extend maturities, convert balloon loans to longer term amortizing loans, or vice versa, or change interest rates between variable and fixed rate. Each borrower and situation is unique and we try to accommodate the borrower and minimize the Company’s potential losses. Approximately 77% of our TDRs are current pursuant to their modified terms, and $3,064, or approximately 23% of our total TDRs are not performing pursuant to their modified terms. There does not appear to be any significant difference in success rates with one type of concession versus another.

Loans modified as TDRs during the three and nine month periods ending September 30, 2016 were $400 and $2,395. The Company recorded a loan loss provision of $48 and $201 for loans modified during the three and nine month periods ending September 30, 2016. Loans modified as TDRs during the three and nine month periods ending September 30, 2015 were $225 and $3,225. The Company recorded a loan loss provision of $3 and $194 for loans modified during the three and nine month periods ending September 30, 2015.

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

The following table presents loans by class modified and for which there was a payment default within twelve months following the modification during the periods ending September 30, 2016 and 2015.

	Period ending				Period ending
	September 30, 2016				September 30, 2015
	Number		Recorded		Number		Recorded
	of loans		investment		of loans		investment
Residential		2	$	170		3	$	596
Commercial real estate		2		948		3		1,364
Land, development, construction		-		-		1		95
Commercial and Industrial		-		-		-		-
Consumer and other		-		-		-		-
Total		4	$	1,118		7	$	2,055

The Company recorded a provision for loan loss expense of $12, $25, $86 and $123 and partial charge offs of $20, $28, $73 and $125 on TDR loans that subsequently defaulted as described above during the three and nine month periods ending September 30, 2016 and 2015, respectively.

The following tables present loans individually evaluated for impairment by class of loans as of September 30, 2016 and December 31, 2015, excluding purchased credit impaired loans accounted for pursuant to ASC Topic 310-30. The recorded investment is less than the unpaid principal balance due to partial charge-offs.

As of September 30, 2016	Unpaid principal balance		Recorded investment		Allowance for loan losses allocated
With no related allowance recorded:
Residential real estate	$	3,981	$	3,881	$	-
Commercial real estate		8,356		7,838		-
Land, development, construction		1,070		881		-
Commercial and industrial		1,506		1,468		-
Consumer, other		89		86		-

With an allowance recorded:
Residential real estate		4,449		4,271		683
Commercial real estate		401		301		2
Land, development, construction		213		187		11
Commercial and industrial		452		453		15
Consumer, other		169		150		25
Total	$	20,686	$	19,516	$	736

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

As of December 31, 2015	Unpaid principal balance		Recorded investment		Allowance for loan losses allocated
With no related allowance recorded:
Residential real estate	$	5,784	$	5,465	$	-
Commercial real estate		9,595		9,202		-
Land, development, construction		1,869		1,229		-
Commercial and industrial		585		577		-
Consumer, other		109		103		-

With an allowance recorded:
Residential real estate		2,682		2,631		402
Commercial real estate		2,538		2,280		478
Land, development, construction		1,065		1,038		164
Commercial and industrial		484		480		7
Consumer, other		179		170		29
Total	$	24,890	$	23,175	$	1,080

Three months ended September 30, 2016	Average of impaired loans		Interest income recognized during impairment		Cash basis interest income recognized
Real estate loans:
Residential	$	8,356	$	67	$	-
Commercial		10,530		24		-
Land, development, construction		1,148		4		-
Total real estate loans		20,034		95		-

Commercial and industrial		1,923		12		-
Consumer and other loans		243		3		-
Total	$	22,200	$	110	$	-


Nine months ended September 30, 2016	Average of impaired loans		Interest income recognized during impairment		Cash basis interest income recognized
Real estate loans:
Residential	$	8,447	$	185	$	-
Commercial		12,744		101		-
Land, development, construction		1,650		20		-
Total real estate loans		22,841		306		-

Commercial and industrial		1,806		35		-
Consumer and other loans		260		8		-
Total	$	24,907	$	349	$	-

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

Three months ended September 30, 2015	Average of impaired loans		Interest income recognized during impairment		Cash basis interest income recognized
Real estate loans:
Residential	$	8,446	$	61	$	-
Commercial		10,938		66		-
Land, development, construction		1,802		7		-
Total real estate loans		21,186		134		-

Commercial and industrial		871		10		-
Consumer and other loans		295		3		-
Total	$	22,352	$	147	$	-


Nine months ended September 30, 2015	Average of impaired loans		Interest income recognized during impairment		Cash basis interest income recognized
Real estate loans:
Residential	$	8,789	$	184	$	-
Commercial		10,808		193		-
Land, development, construction		1,990		21		-
Total real estate loans		21,587		398		-

Commercial and industrial		924		27		-
Consumer and other loans		345		11		-
Total	$	22,856	$	436	$	-

Nonperforming loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans, excluding purchased credit impaired loans accounted for pursuant to ASC Topic 310-30.

Nonperforming loans were as follows:	Sept. 30, 2016		Dec. 31, 2015
Non accrual loans	$	19,704	$	20,833
Loans past due over 90 days and still accruing interest		-		-
Total non performing loans	$	19,704	$	20,833

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual by class of loans as of September 30, 2016 and December 31, 2015, excluding purchased credit impaired loans:

As of September 30, 2016	Nonaccrual		Loans past due over 90 days still accruing
Residential real estate	$	7,005	$	-
Commercial real estate		9,335		-
Land, development, construction		1,289		-
Commercial		1,668		-
Consumer, other		407		-
Total	$	19,704	$	-

As of December 31, 2015	Nonaccrual		Loans past due over 90 days still accruing
Residential real estate	$	9,540	$	-
Commercial real estate		9,145		-
Land, development, construction		1,608		-
Commercial		187		-
Consumer, other		353		-
Total	$	20,833	$	-

The following table presents the aging of the recorded investment in past due loans as of September 30, 2016 and December 31, 2015, excluding purchased credit impaired loans:

					Accruing Loans
	Total		30 - 59 days past due		60 - 89 days past due		Greater than 90 days past due		Total Past Due		Loans Not Past Due		Nonaccrual Loans
As of September 30, 2016
Residential real estate	$	806,489	$	4,307	$	2,329	$	-	$	6,636	$	792,848	$	7,005
Commercial real estate		1,682,375		1,506		829		-		2,335		1,670,705		9,335
Land/dev/construction		120,331		1,068		39		-		1,107		117,935		1,289
Commercial		402,713		642		180		-		822		400,223		1,668
Consumer		84,767		329		26		-		355		84,005		407
	$	3,096,675	$	7,852	$	3,403	$	-	$	11,255	$	3,065,716	$	19,704


					Accruing Loans
	Total		30 - 59 days past due		60 - 89 days past due		Greater than 90 days past due		Total Past Due		Loans Not Past Due		Nonaccrual Loans
As of December 31, 2015
Residential real estate	$	647,496	$	2,118	$	3,089	$	-	$	5,207	$	632,749	$	9,540
Commercial real estate		1,254,782		4,647		2,170		-		6,817		1,238,820		9,145
Land/dev/construction		105,276		280		595		-		875		102,793		1,608
Commercial		307,321		1,101		348		-		1,449		305,685		187
Consumer		67,500		285		90		-		375		66,772		353
	$	2,382,375	$	8,431	$	6,292	$	-	$	14,723	$	2,346,819	$	20,833

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on at least an annual basis. The Company uses the following definitions for risk ratings:

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. The following table presents the risk category of loans by class of loans based on the most recent analysis performed, excluding purchased credit impaired loans accounted for pursuant to ASC Topic 310-30, as of September 30, 2016 and December 31, 2015. The increase in loans categorized as special mention between the periods presented is due to the acquisitions of Community and Hometown on March 1, 2016.

			As of September 30, 2016
Loan Category	Pass		Special Mention		Substandard		Doubtful
Residential real estate	$	776,343	$	12,357	$	17,789	$	-
Commercial real estate		1,568,768		88,257		25,350		-
Land/dev/construction		107,742		10,510		2,079		-
Commercial		393,811		5,503		3,399		-
Consumer		83,846		274		647		-
Total	$	2,930,510	$	116,901	$	49,264	$	-


			As of December 31, 2015
Loan Category	Pass		Special Mention		Substandard		Doubtful
Residential real estate	$	620,313	$	9,585	$	17,598	$ -
Commercial real estate		1,174,990		47,885		31,907	-
Land/dev/construction		95,885		5,896		3,495	-
Commercial		299,742		4,077		3,502	-
Consumer		66,683		297		520	-
Total	$	2,257,613	$	67,740	$	57,022	$	-

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in residential and consumer loans, excluding purchased credit impaired loans, based on payment activity as of September 30, 2016 and December 31, 2015:

As of September 30, 2016	Residential		Consumer
Performing	$	799,484	$	84,360
Nonperforming		7,005		407
Total	$	806,489	$	84,767

As of December 31, 2015	Residential		Consumer
Performing	$	637,956	$	67,147
Nonperforming		9,540		353
Total	$	647,496	$	67,500

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

Purchased Credit Impaired (“PCI”) loans:

Income is recognized on PCI loans pursuant to ASC Topic 310-30. A portion of the fair value discount has been ascribed as an accretable yield that is accreted into interest income over the estimated remaining life of the loans. The remaining non-accretable difference represents cash flows not expected to be collected.

The table below summarizes the total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and carrying value of the loans as of September 30, 2016 and December 31, 2015. Contractually required principal and interest payments have been adjusted for estimated prepayments.

	Sept. 30, 2016			Dec. 31, 2015
Contractually required principal and interest	$	316,667		$	332,570
Non-accretable difference		(19,290	)		(19,452	)
Cash flows expected to be collected		297,377			313,118
Accretable yield		(100,089	)		(102,590	)
Carrying value of acquired loans		197,288			210,528
Allowance for loan losses		(225	)		(121	)
Carrying value less allowance for loan losses	$	197,063		$	210,407

We adjusted our estimates of future expected losses, cash flows and renewal assumptions during the current quarter. These adjustments resulted in an increase in expected cash flows and accretable yield, and a decrease in the non-accretable difference. We reclassified approximately $1,130, $6,722, $4,731 and $19,147 from non-accretable difference to accretable yield during the three and nine month periods ending September 30, 2016 and 2015 to reflect our adjusted estimates of future expected cash flows. The table below summarizes the changes in total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and carrying value of the loans during the three and nine month periods ending September 30, 2016 and 2015.

Activity during the				Effect of			income		all other
three month period ending September 30, 2016	Jun. 30, 2016			acquisitions			accretion		adjustments			Sept. 30, 2016
Contractually required principal and interest	$	344,464		$	-		$	-	$	(27,797	)	$	316,667
Non-accretable difference		(20,462	)		-			-		1,172			(19,290	)
Cash flows expected to be collected		324,002			-			-		(26,625	)		297,377
Accretable yield		(107,143	)		-			7,795		(741	)		(100,089	)
Carry value of acquired loans	$	216,859		$	-		$	7,795	$	(27,366	)	$	197,288

Activity during the				Effect of			income		all other
nine month period ending September 30, 2016	Dec. 31, 2015			acquisitions			accretion		adjustments			Sept. 30, 2016
Contractually required principal and interest	$	332,570		$	73,005		$	-	$	(88,908	)	$	316,667
Non-accretable difference		(19,452	)		(9,295	)		-		9,457			(19,290	)
Cash flows expected to be collected		313,118			63,710			-		(79,451	)		297,377
Accretable yield		(102,590	)		(18,585	)		24,750		(3,664	)		(100,089	)
Carry value of acquired loans	$	210,528		$	45,125		$	24,750	$	(83,115	)	$	197,288

Activity during the				Effect of			income		all other
three month period ending September 30, 2015	Jun. 30, 2015			acquisitions			accretion		adjustments			Sept. 30, 2015
Contractually required principal and interest	$	379,776		$	-		$	-	$	(24,456	)	$	355,320
Non-accretable difference		(25,188	)		-			-		5,190			(19,998	)
Cash flows expected to be collected		354,588			-			-		(19,266	)		335,322
Accretable yield		(107,059	)		-			9,898		(6,383	)		(103,544	)
Carry value of acquired loans	$	247,529		$	-		$	9,898	$	(25,649	)	$	231,778

Activity during the				Effect of			income		all other
nine month period ending September 30, 2015	Dec. 31, 2014			acquisitions			accretion		adjustments			Sept. 30, 2015
Contractually required principal and interest	$	460,836		$	-		$	-	$	(105,516	)	$	355,320
Non-accretable difference		(68,757	)		-			-		48,759			(19,998	)
Cash flows expected to be collected		392,079			-			-		(56,757	)		335,322
Accretable yield		(115,313	)		-			31,226		(19,457	)		(103,544	)
Carry value of acquired loans	$	276,766		$	-		$	31,226	$	(76,214	)	$	231,778

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

NOTE 7: FDIC indemnification asset

The FDIC indemnification asset represented the estimated amounts due from the FDIC pursuant to the Loss Share Agreements related to the acquisition of the three failed banks in 2010, the acquisition of two failed banks in 2012 and the Loss Share Agreements of two failed banks assumed by the Company pursuant to its acquisition of FSB in June 2014. On February 3, 2016, the FDIC bought out the remaining FDIC loss share agreements. As such, the FDIC indemnification asset was written-off effectively accelerating all future FDIC indemnification asset amortization expense as well as ending any future FDIC indemnification income. The activity in the FDIC loss share indemnification asset was as follows:

	Nine months period ended Sept. 30, 2016			Twelve months period ended Dec. 31, 2015
Beginning of the year	$	25,795		$	49,054
Amortization, net		(1,133	)		(16,282	)
Indemnification revenue		96			1,900
Indemnification of foreclosure expense		(197	)		(4,001	)
Proceeds from FDIC		(5,482	)		(4,662	)
Impairment (recovery) of loan pool		-			(214	)
Loss from termination of loss share agreements		(19,079	)		-
Period end balance	$	-		$	25,795

The FDIC agreements allowed for the recovery of some payments made for loss share reimbursements under certain conditions based on the actual performance of the portfolios acquired. This true-up payment was estimated and accrued for as part of the overall FDIC indemnification asset analysis and was reflected as a separate liability. The accrual for this liability was reflected as additional amortization income or expense in noninterest income. On February 3, 2016, the FDIC clawback liability was written-off as a result of the termination of FDIC loss share agreements as discussed above. The activity in the true-up payment liability was as follows:

	Nine months period ended Sept. 30, 2016			Twelve months period ended Dec. 31, 2015
Beginning of the year	$	1,486		$	1,205
True-up liability accrual		33			281
Gain from termination of loss share agreements		(1,519	)		-
Period end balance	$	-		$	1,486

NOTE 8: Securities sold under agreement to repurchase

Our subsidiary bank enters into borrowing arrangements with our retail business customers by agreements to repurchase (“securities sold under agreements to repurchase”) under which the bank pledges investment securities owned and under its control as collateral against these one-day borrowing arrangement. These short-term borrowings totaled $26,889 at September 30, 2016 compared to $27,472 at December 31, 2015. The following table provides additional details for the periods presented.

	MBS			Municipal
As of September 30, 2016	Securities			Securities			Total
Market value of securities pledged	$	39,119		$	1,496		$	40,615
Borrowings related to pledged amounts		26,032		857				26,889
Market value pledged as a % of borrowings		150	%		175	%		151	%

As of December 31, 2015
Market value of securities pledged	$	45,745		$	1,653		$	47,398
Borrowings related to pledged amounts		27,179		293				27,472
Market value pledged as a % of borrowings		168	%		564	%		173	%

Any risk related to these arrangements, primarily market value changes, are minimized due to the overnight (one day) maturity and the additional collateral pledged over the borrowed amounts.

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

NOTE 9: Business Combinations

Acquisition of Community Bank of South Florida, Inc.

On March 1, 2016, the Company completed its acquisition of Community Bank of South Florida, Inc. (“Community”) whereby Community merged with and into the Company. Pursuant to and simultaneously with the merger of Community with and into the Company, Community’s wholly owned subsidiary bank, Community Bank of Florida, Inc. merged with and into the Company’s subsidiary bank, CenterState Bank of Florida, N.A.

The Company’s primary reasons for the transaction were to further solidify its market share in the Central and South Florida markets and expand its customer base to enhance deposit fee income and leverage operating cost through economies of scale. The acquisition increased the Company’s total assets and total deposits by approximately 12% and 14%, respectively, as compared with the balances at December 31, 2015, and is expected to positively affect the Company’s operating results to the extent the Company earns more from interest earning assets than it pays in interest on its interest bearing liabilities.

The acquisition was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. The Company recognized goodwill on this acquisition of $25,464 which is nondeductible for tax purposes as this acquisition is a nontaxable transaction. The goodwill is calculated based on the fair values of the assets acquired and liabilities assumed as of the acquisition date. Fair value estimates are based on the information available, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available. Fair values are preliminary estimates due to pending appraisals on loans and other real estate owned.

The Company acquired 100% of the outstanding common stock of Community. The purchase price consisted of both cash and stock. Each share of Community common stock was either exchanged for $13.31 cash or 0.9148 shares of the Company’s common stock. Based on the closing price of the Company’s common stock on February 29, 2016, the resulting purchase price was $64,986. The table below summarizes the purchase price calculation.

Number of shares of Community common stock exchanged for CenterState common stock		2,488,260
Per share exchange ratio		0.9148
Number of shares of CenterState common stock less 218 of fractional shares		2,276,042
Multiplied by CenterState common stock price per share on February 29, 2016	$	14.00
Fair value of CenterState common stock issued	$	31,865
Total Community common shares exchanged for cash		2,488,261
Multiplied by the cash consideration each Community share was entitled to receive	$	13.31
Total cash consideration, plus $3 for 218 of fractional shares	$	33,121
Total purchase price	$	64,986

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

The list below summarizes the estimates of the fair value of the assets purchased, including goodwill, and liabilities assumed as of the March 1, 2016 purchase date.

	March 1, 2016
Assets:
Cash and cash equivalents	$	79,800
Loans, held for investment		273,146
Purchased credit impaired loans		43,298
Loans held for sale		732
Investments		63,716
Accrued interest receivable		995
Branch real estate		10,646
Furniture and fixtures		459
Bank property held for sale		850
FHLB stock		420
Other repossessed real estate owned		4,819
Core deposit intangible		3,684
Goodwill		25,464
Deferred tax asset		11,754
Other assets		758
Total assets acquired	$	520,541
Liabilities:
Deposits	$	452,935
Notes payable		650
Accrued interest payable		604
Other liabilities		1,366
Total liabilities assumed	$	455,555

In the acquisition, the Company acquired $316,444 of loans at fair value, net of $20,439, or 6.1%, estimated discount to the outstanding principal balance, representing 12.2% of the Company’s total loans at December 31, 2015. Of the total loans acquired, management identified $43,298 with credit deficiencies. All loans that were on non-accrual status, impaired loans including TDRs and other substandard loans were considered by management to be credit impaired and are accounted for pursuant to ASC Topic 310-30. The table below summarizes the total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and fair value of the loans as of March 1, 2016 for purchased credit impaired loans. Contractually required principal and interest payments have been adjusted for estimated prepayments.

Contractually required principal and interest	$	69,400
Non-accretable difference		(8,383	)
Cash flows expected to be collected		61,017
Accretable yield		(17,719	)
Total purchased credit-impaired loans acquired	$	43,298

The table below presents information with respect to the fair value of acquired loans, as well as their unpaid principal balance (“Book Balance”) at acquisition date.

	Book Balance		Fair Value
Loans:
Single family residential real estate	$	76,035	$	73,737
Commercial real estate		160,875		155,678
Construction/development/land		18,391		17,587
Commercial loans		19,467		19,294
Consumer and other loans		6,914		6,850
Purchased credit-impaired		55,201		43,298
Total earning assets	$	336,883	$	316,444

In its assumption of the deposit liabilities, the Company believed the deposits assumed from the acquisition have an intangible value. The Company applied ASC Topic 805, which prescribes the accounting for goodwill and other intangible assets such as core deposit intangibles, in a business combination. The Company determined the estimated fair value of the core deposit intangible asset totaled $3,684, which will be amortized utilizing an accelerated amortization method over an estimated economic life not to exceed ten years. In determining the valuation amount, deposits were analyzed based on factors such as type of deposit, deposit retention, interest rates and age of deposit relationships.

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

Acquisition of Hometown of Homestead Banking Company

On March 1, 2016, the Company completed its acquisition of Hometown of Homestead Banking Company (“Hometown”) whereby a newly formed wholly-owned subsidiary of the Company merged with and into Hometown and, immediately thereafter, Hometown merged with and into the Company. Pursuant to and simultaneously with the merger of Hometown with and into the Company, Hometown’s subsidiary bank, 1^st National Bank of South Florida, merged with and into the Company’s subsidiary bank, CenterState Bank of Florida, N.A.

The Company’s primary reasons for the transaction were to expand its market share in the South Florida market, together with its acquisition of Community as described above, and expand its customer base to enhance deposit fee income and leverage operating cost through economies of scale. The acquisition increased the Company’s total assets and total deposits by approximately 8% and 8%, respectively, as compared with the balances at December 31, 2015, and is expected to positively affect the Company’s operating results to the extent the Company earns more from interest earning assets than it pays in interest on its interest bearing liabilities.

The acquisition was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. The Company recognized goodwill on this acquisition of $3,289 which is nondeductible for tax purposes as this acquisition is a nontaxable transaction. The goodwill is calculated based on the fair values of the assets acquired and liabilities assumed as of the acquisition date. Fair value estimates are based on the information available, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available. Fair values are preliminary estimates due to pending appraisals on loans and other real estate owned.

The Company acquired 100% of the outstanding common stock of Hometown. Each share of Hometown common stock was exchanged for $1.25, resulting in a purchase price of $19,150. The table below summarizes the purchase price calculation.

Number of shares of Hometown common stock outstanding at February 29, 2016		15,319,622
Multiplied by the cash consideration each Hometown share was entitled to receive	$	1.25
Total purchase price	$	19,150

The list below summarizes the preliminary estimates of the fair value of the assets purchased, including goodwill, and liabilities assumed as of the March 1, 2016 purchase date.

	March 1, 2016
Assets:
Cash and cash equivalents	$	14,356
Loans, held for investment		195,960
Purchased credit impaired loans		1,827
Investments		77,999
Accrued interest receivable		1,163
Branch real estate		6,830
Furniture and fixtures		132
Bank property held for sale		3,897
Federal Reserve Bank and Federal Home Loan Bank stock		2,571
Other repossessed real estate owned		1,955
Core deposit intangible		2,598
Goodwill		3,289
Deferred tax asset		3,130
Other assets		842
Total assets acquired	$	316,549
Liabilities:
Deposits	$	252,977
Repurchase agreements		544
FHLB advances		31,768
Corporate debentures		10,640
Accrued interest payable		314
Other liabilities		1,156
Total liabilities assumed	$	297,399

In the acquisition, the Company acquired $197,787 of loans at fair value, net of $3,051, or 1.5%, estimated discount to the outstanding principal balance, representing 7.6% of the Company’s total loans at December 31, 2015. Of the total loans acquired,

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

management identified $1,827 with credit deficiencies. All loans that were on non-accrual status, impaired loans including TDRs and other substandard loans were considered by management to be credit impaired and are accounted for pursuant to ASC Topic 310-30. The table below summarizes the total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and fair value of the loans as of March 1, 2016 for purchased credit impaired loans. Contractually required principal and interest payments have been adjusted for estimated prepayments.

Contractually required principal and interest	$	3,605
Non-accretable difference		(912	)
Cash flows expected to be collected		2,693
Accretable yield		(866	)
Total purchased credit-impaired loans acquired	$	1,827

The table below presents information with respect to the fair value of acquired loans, as well as their unpaid principal balance (“Book Balance”) at acquisition date.

	Book		Fair
	Balance		Value
Loans:
Single family residential real estate	$	73,178	$	72,994
Commercial real estate		111,175		109,837
Construction/development/land		6,491		6,173
Commercial loans		3,531		3,482
Consumer and other loans		3,529		3,474
Purchased credit-impaired		2,934		1,827
Total earning assets	$	200,838	$	197,787

In its assumption of the deposit liabilities, the Company believed the deposits assumed from the acquisition have an intangible value. The Company applied ASC Topic 805, which prescribes the accounting for goodwill and other intangible assets such as core deposit intangibles, in a business combination. The Company determined the estimated fair value of the core deposit intangible asset totaled $2,598, which will be amortized utilizing an accelerated amortization method over an estimated economic life not to exceed ten years. In determining the valuation amount, deposits were analyzed based on factors such as type of deposit, deposit retention, interest rates and age of deposit relationships.

Pro-forma information

Pro-forma data for the three and nine month periods ending September 30, 2015 and nine month period ending September 30, 2016 listed in the table below presents pro-forma information as if the Community and Hometown acquisitions occurred at the beginning of 2015. Because the Community and Hometown transactions closed on March 1, 2016, there is no pro-forma information for the three month period ending September 30, 2016 as both Community and Hometown actual results are included in the current reported figures.


	Three months ended Sept. 30,	Nine months ended Sept. 30,
	2015	2016	2015
Net interest income	$46,779	$133,900	$140,692
Net income available to common shareholders	$10,895	$31,071	$33,320
EPS - basic	$0.23	$0.65	$0.71
EPS - diluted	$0.23	$0.64	$0.70

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

NOTE 10: Derivatives

The Company enters into interest rate swaps in order to provide commercial loan clients the ability to swap from fixed to variable interest rates. Under these agreements, the Company enters into a fixed-rate loan with a client in addition to a swap agreement. This swap agreement effectively converts the client’s fixed rate loan into a variable rate. The Company then enters into a matching swap agreement with a third party dealer in order to offset its exposure on the customer swap. At September 30, 2016 and December 31, 2015, the notional amount of such arrangements was $2,006,466 and $939,831, respectively, and investment securities with a fair value of $85,785 and $31,801 were pledged as collateral to the third party dealers. As the interest rate swaps with the clients and third parties are not designated as hedges under ASC 815, changes in market values are reported in earnings.

Summary information about the derivative instruments is as follows:

	Sept. 30, 2016			Dec. 31, 2015
Notional amount	$	2,006,466		$	939,831
Weighted average pay rate on interest-rate swaps		2.46	%		2.61	%
Weighted average receive rate on interest rate swaps		2.45	%		2.57	%
Weighted average maturity (years)		11		12
Fair value of interest rate swap derivatives (asset)	$	63,207		$	18,619
Fair value of interest rate swap derivatives (liability)	$	65,165		$	19,822

NOTE 11: Subsequent Events

On October 17, 2016, the Company entered into an Agreement and Plan of Merger (“Agreement”) with Platinum Bank Holding Company (“Platinum”), whereby Platinum will be merged with and into the Company (the “Merger”), with the Company continuing as the surviving corporation in the Merger. Pursuant to and simultaneously with entering into the Agreement, the Company’s wholly owned subsidiary bank, CenterState Bank of Florida, N.A. (“CenterState Bank”) and Platinum’s wholly owned subsidiary bank, Platinum Bank., will merge with CenterState Bank as the surviving bank. Under the terms and subject to the conditions of the Agreement each outstanding share of Platinum common stock is entitled to receive a $7.60 cash payment and 3.7832 shares of the Company’s common stock. The Agreement has been unanimously approved by the boards of directors of the Company and Platinum. The transaction is expected to close early in the second quarter of 2017 subject to customary conditions, including receipt of all applicable regulatory approvals and Platinum shareholder approval. Platinum, which is headquartered in Brandon, Florida, currently operates seven banking locations in the Tampa-St. Petersburg-Clearwater and Lakeland-Winter Haven MSAs. At September 30, 2016, Platinum reported total assets of $584,050, gross loans of $452,264 and deposits of $495,002.

NOTE 12: Recently Issued Accounting Standards

In May 2014, the FASB and the International Accounting Standards Board (the "IASB") jointly issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under GAAP and International Financial Reporting Standards ("IFRS"). Previous revenue recognition guidance in GAAP consisted of broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions. In contrast, IFRS provided limited revenue recognition guidance and, consequently, could be difficult to apply to complex transactions. Accordingly, the FASB and the IASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that would: (1) remove inconsistencies and weaknesses in revenue requirements; (2) provide a more robust framework for addressing revenue issues; (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) provide more useful information to users of financial statements through improved disclosure requirements; and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. To meet those objectives, the FASB issued ASU No. 2014-09,"Revenue from Contracts with Customers." The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies generally will be required to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard was initially effective for public entities for interim and annual reporting periods beginning after December 15, 2016; early adoption was not permitted. However, in August 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers - Deferral of the Effective Date" which deferred the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

the standard recognized at the date of initial application. In addition, the FASB has begun to issue targeted updates to clarify specific implementation issues of ASU 2014-09. These updates include ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” and ASU No. 2016-12 “Narrow-Scope Improvements and Practical Expedients.” The Company is currently evaluating the provisions of ASU No. 2014-09 and its related updates and will be closely monitoring developments and additional guidance to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements.

In January 2016, the FASB issued ASU No. 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities." This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. Early application is permitted as of the beginning of the fiscal year of adoption only for provisions (3) and (6) above. Early adoption of the other provisions mentioned above is not permitted. The Company has performed a preliminary evaluation of the provisions of ASU No. 2016-01. Based on this evaluation, the Company has determined that ASU No. 2016-01 is not expected to have a material impact on the Company's Consolidated Financial Statements; however, the Company will continue to closely monitor developments and additional guidance.

In February 2016, the FASB issued ASU No. 2016-02, "Leases." Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases): 1) a lease liability, which is the present value of a lessee's obligation to make lease payments, and 2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. ASU No. 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. They have the option to use certain relief; full retrospective application is prohibited. The Company is currently evaluating the provisions of ASU No. 2016-02 and will be closely monitoring developments and additional guidance to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements.

In March 2016, the FASB issued ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting.” This ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. Some of the key provisions of this new ASU include: (1) companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC pools will be eliminated. The guidance also eliminates the requirement that excess tax benefits be realized before companies can recognize them. In addition, the guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity; (2) increase the

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. The new guidance will also require an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on its statement of cash flows (current guidance did not specify how these cash flows should be classified); and (3) permit companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated, as required today, or recognized when they occur. ASU No. 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted, but all of the guidance must be adopted in the same period. The Company is currently evaluating the provisions of ASU No. 2016-09 to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements.

In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements.

ITEM 2:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(All dollar amounts presented herein are in thousands, except per share data, or unless otherwise noted.)

COMPARISON OF BALANCE SHEETS AT SEPTEMBER 30, 2016 AND DECEMBER 31, 2015

Overview

Our total assets increased approximately 25% from December 31, 2015 to September 30, 2016, which was primarily the result of the two bank acquisitions on March 1, 2016. In addition to the growth through acquisitions, organic deposit growth increased $134,844 or 6% annualized primarily in commercial checking. The growth in liquidity from the liability increases was used primarily to support the 14% annualized loan growth (excluding PCI loans and acquisition day balances from the two Homestead, Florida acquisitions as described below) during the period. Our loan to deposit ratio was 81.2% and 80.7% at September 30, 2016 and December 31, 2015, respectively.

On March 1, 2016, we closed our previously announced acquisitions of Community Bank of South Florida, Inc. (“Community”) and Hometown of Homestead Banking Company (“Hometown”) , whereby we acquired approximately $837,090 of assets including $514,231 of loans and an additional $705,912 of deposits. Furthermore, we acquired 17 branch locations of which 15 are located in Miami-Dade and Monroe Counties and two are located in Polk County. The two branches in Polk County were closed in March 2016 and nine additional branches were closed in May 2016.

In February 2016, we terminated all existing loss share agreements with the FDIC. As a result, the Company wrote off the remaining indemnification asset and the claw back liability, received cash from the FDIC and recognized a pretax loss on the transaction of approximately $17,560 during the first quarter.

These changes are discussed and analyzed below and on the following pages.

Federal funds sold and Federal Reserve Bank deposits

Federal funds sold and Federal Reserve Bank deposits were $161,406 at September 30, 2016 (approximately 3% of total assets) as compared to $101,580 at December 31, 2015 (approximately 3% of total assets). We use our available-for-sale securities portfolio, as well as federal funds sold and Federal Reserve Bank deposits for liquidity management and for investment yields. These accounts, as a group, will fluctuate as a function of loans outstanding, and to some degree the amount of correspondent bank deposits (i.e. federal funds purchased) outstanding.

Investment securities available for sale

Securities available-for-sale, consisting primarily of U.S. government sponsored enterprises and municipal tax exempt securities, were $761,648 at September 30, 2016 (approximately 15% of total assets) compared to $604,739 at December 31, 2015 (approximately 15% of total assets), an increase of $156,909 or 26%. We use our available-for-sale securities portfolio, as well as federal funds sold and Federal Reserve Bank deposits for liquidity management and for investment yields. These accounts, as a group, will fluctuate as a function of loans outstanding as discussed above, under the caption “Federal funds sold and Federal Reserve Bank deposits.” We classify the majority of our securities as “available for sale” to provide for greater flexibility to respond to changes in interest rates as well as future liquidity needs. Our available for sale securities are carried at fair value.

Trading securities

We also have a trading securities portfolio. Realized and unrealized gains and losses are included in trading securities revenue, a component of our non interest income, in our Condensed Consolidated Statement of Earnings and Comprehensive Income. Securities purchased for this portfolio have primarily been various municipal securities. A list of the activity in this portfolio is summarized below.

	Three month periods ended						Nine month periods ended
	Sept. 30, 2016			Sept. 30, 2015			Sept. 30, 2016			Sept. 30, 2015
Beginning balance	$	-		$	1,508			2,107		$	3,420
Purchases		33,746			37,611			122,383			114,101
Proceeds from sales		(31,634	)		(37,931	)		(122,742	)		(116,592	)
Net realized gain on sales		37		56			401			315
Net unrealized gains		17		22				17		22
Ending balance	$	2,166		$	1,266		$	2,166		$	1,266

Investment securities held to maturity

At September 30, 2016, we had $263,692 (unamortized cost basis) of securities with an estimated fair value of $269,721, resulting in a net unrecognized gain of $6,029, compared to $272,840 (unamortized cost basis) of securities with an estimated fair value of $273,983 and a net unrecognized gain of $1,143 at December 31, 2015. This portfolio generally holds longer term securities for the primary purpose of yield. This classification was chosen to minimize temporary effects on our tangible equity and tangible equity ratio due to increases and decreases in general market interest rates.

Loans held for sale

We also have a loans held for sale portfolio, whereby we originate single family home loans and sell those mortgages into the secondary market, servicing released. These loans are recorded at the lower of cost or market. Gains and losses on the sale of loans held for sale are included as a component of non-interest income in our Condensed Consolidated Statement of Earnings and Comprehensive Income. A list of the activity in this portfolio is summarized below.

	Three month periods ended						Nine month periods ended
	Sept. 30, 2016			Sept. 30, 2015			Sept. 30, 2016			Sept. 30, 2015
Beginning balance	$	4,329		$	1,656		$	1,529		$	1,251
Effect from acquisitions		-			-			732			-
Loans originated		11,695			7,886			30,883			23,592
Proceeds from sales		(13,993	)		(8,898	)		(31,434	)		(24,491	)
Net realized gain on sales		302		162			623			454
Ending balance	$	2,333		$	806		$	2,333		$	806

Loans

Lending-related income is the most important component of our net interest income and is a major contributor to profitability. The loan portfolio is the largest component of earning assets, and it therefore generates the largest portion of revenues. The absolute volume of loans and the volume of loans as a percentage of earning assets is an important determinant of net interest margin as loans are expected to produce higher yields than securities and other earning assets. Average loans during the nine month period ended September 30, 2016, were $3,068,715 or 71.8% of average earning assets, as compared to $2,495,935, or 72.6% of average earning assets, for the nine month period ending September 30, 2015. Total loans at September 30, 2016 and December 31, 2015 were $3,294,482 and $2,593,776, respectively. This represents a loan to total asset ratio of 65.7% and 64.5% and a loan to deposit ratio of 81.2% and 80.7%, at September 30, 2016 and December 31, 2015, respectively.

Non-PCI loans

At September 30, 2016, we have total Non-PCI loans of $3,097,194. Total new loans originated during the nine month period ended September 30, 2016 approximated $735.8 million, of which $625.0 million were funded at the time of origination. The weighted average interest rate on funded loans was approximately 3.72% during the nine month period. The graph below summarizes new loan originations and funded loan production over the past nine quarters. The loan origination pipeline is approximately $378 million at September 30, 2016 compared to $365 million at June 30, 2016.

PCI loans

Total Purchased Credit Impaired (“PCI”) loans at September 30, 2016 were $197,288 compared to $210,528 at December 31, 2015. We acquired $45,125 of PCI loans at fair value, net of $13,010 estimated discount, with the acquisitions of Community and Hometown.

Loan concentrations are considered to exist where there are amounts loaned to multiple borrowers engaged in similar activities, which collectively could be similarly impacted by economic or other conditions and when the total of such amounts would exceed 25% of total capital. Due to the lack of diversified industry and the relative proximity of markets served, the Company has concentrations in geographic as well as in types of loans funded.

Total loans at September 30, 2016 were $3,294,482. Of this amount, approximately 85.0% are collateralized by real estate, 12.4% are commercial non real estate loans and the remaining 2.6% are consumer and other non real estate loans. We have approximately $881,314 of single family residential loans which represents about 27% of our total loan portfolio. Our largest category of loans is commercial real estate which represents approximately 54.3% of our total loan portfolio.

The following table sets forth information concerning the loan portfolio by collateral types as of the dates indicated.

	September 30, 2016			December 31, 2015
Loans excluding PCI loans
Real estate loans
Residential	$	806,489		$	647,496
Commercial		1,682,375			1,254,782
Land, development and construction		120,331			105,276
Total real estate		2,609,195			2,007,554
Commercial		402,713			307,321
Consumer and other loans		84,767			67,500
Loans before unearned fees and deferred cost		3,096,675			2,382,375
Net unearned fees and costs		519			873
Total loans excluding PCI loans		3,097,194			2,383,248
PCI loans (note 1)
Real estate loans
Residential		74,825			86,104
Commercial		106,482			105,629
Land, development and construction		10,928			15,548
Total real estate		192,235			207,281
Commercial		4,649			2,771
Consumer and other loans		404			476
Total PCI loans		197,288			210,528
Total loans		3,294,482			2,593,776
Allowance for loan losses for loans that are not PCI loans		(25,274	)		(22,143	)
Allowance for loan losses for PCI loans		(225	)		(121	)
Total loans, net of allowance for loan losses	$	3,268,983		$	2,571,512

note 1:

PCI loans are accounted for pursuant to ASC Topic 310-30.

The table below summarizes the Company’s loan mix for the periods presented.

	September 30, 2016		December 31, 2015
Originated Loans
Real estate loans
Residential	$	534,070	$	491,149
Commercial		1,019,458		781,419
Land, development and construction loans		94,896		91,817
Total real estate loans		1,648,424		1,364,385
Commercial loans		339,938		251,855
Consumer and other loans		80,391		67,026
Total loans before unearned fees and costs		2,068,753		1,683,266
Unearned fees and costs		519		873
Total originated loans		2,069,272		1,684,139

Acquired Loans (1)
Real estate loans
Residential		272,419		156,347
Commercial		662,917		473,363
Land, development and construction loans		25,435		13,459
Total real estate loans		960,771		643,169
Commercial loans		62,775		55,466
Consumer and other loans		4,376	474
Total acquired loans		1,027,922		699,109

PCI loans
Real estate loans
Residential		74,825		86,104
Commercial		106,482		105,629
Land, development and construction loans		10,928		15,548
Total real estate loans		192,235		207,281
Commercial loans		4,649		2,771
Consumer and other loans	404		476
Total PCI loans		197,288		210,528

Total Loans	$	3,294,482	$	2,593,776

(1)

Acquired loans include the non-PCI loans purchased pursuant to the following acquisitions:

•

Branch and loan transaction from TD Bank (year 2011);

•

Federal Trust Bank acquisition (year 2011);

•

Gulfstream Business Bank acquisition (year 2014);

•

First Southern Bank acquisition (year 2014);

•

Community Bank of South Florida acquisition (year 2016); and

•

Hometown of Homestead Banking Company acquisition (year 2016).

Credit quality and allowance for loan losses

We maintain an allowance for loan losses that we believe is adequate to absorb probable losses incurred in our loan portfolio. The allowance is increased by the provision for loan losses, which is a charge to current period earnings and decreased by loan charge-offs net of recoveries of prior period loan charge-offs. Loans are charged against the allowance when management believes collection of the principal is unlikely.

The allowance consists of three components. The first component is an allocation for impaired loans, as defined by ASC 310. Impaired loans are those loans whereby management has arrived at a determination that the Company will not be repaid according to the original terms of the loan agreement. Each of these loans is required to have a written analysis supporting the amount of specific allowance allocated to the particular loan, if any. That is to say, a loan may be impaired (i.e., not expected to be repaid as agreed), but

may be sufficiently collateralized such that we expect to recover all principal and interest eventually, and therefore no specific allowance is warranted.

Commercial, commercial real estate, land, land development and construction loans in excess of $500 are monitored and evaluated for impairment on an individual loan basis. Commercial, commercial real estate, land, land development and construction loans less than $500 are evaluated for impairment on a pool basis. All consumer and single family residential loans are evaluated for impairment on a pool basis.

On at least a quarterly basis, management reviews each impaired loan to determine whether it should have a specific reserve or partial charge-off. Management relies on appraisals to help make this determination. Updated appraisals are obtained for collateral dependent loans when a loan is scheduled for renewal or refinance. In addition, if the classification of the loan is downgraded to substandard, identified as impaired, or placed on nonaccrual status (collectively “Problem Loans”), an updated appraisal is obtained if the loan amount is greater than $500 and individually evaluated for impairment.

After an updated appraisal is obtained for a Problem Loan, as described above, an additional updated appraisal will be obtained on at least an annual basis. Thus, current appraisals for Problem Loans in excess of $500 will not be older than one year.

After the initial updated appraisal is obtained for a Problem Loan and before its next annual appraisal update is due, management considers the need for a downward adjustment to the current appraisal amount to reflect current market conditions, based on management’s analysis, judgment and experience. In an extremely volatile market, we may update the appraisal prior to the one year anniversary date.

The second component is a general allowance on all of the Company’s loans other than PCI loans and those identified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent two years. The portfolio segments identified by the Company are residential loans, commercial real estate loans, construction and land development loans, commercial and industrial and consumer and other. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic, or qualitative, factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; levels and trends in special mention and substandard loans; and effects of changes in credit concentrations.

The third component consists of amounts reserved for purchased credit impaired loans. On a quarterly basis, the Company updates the amount of loan principal and interest cash flows expected to be collected, incorporating assumptions regarding default rates, loss severities, the amounts and timing of prepayments and other factors that are reflective of current market conditions. Probable decreases in expected loan principal cash flows trigger the recognition of impairment, which is then measured as the present value of the expected principal loss plus any related foregone interest cash flows discounted at the pool’s effective interest rate. Impairments that occur after the acquisition date are recognized through the provision for loan losses. Probable and significant increases in expected principal cash flows would first reverse any previously recorded allowance for loan losses; any remaining increases are recognized prospectively as interest income. The impacts of (i) prepayments, (ii) changes in variable interest rates, and (iii) any other changes in the timing of expected cash flows are recognized prospectively as adjustments to interest income. Disposals of loans, which may include sales of loans, receipt of payments in full by the borrower, or foreclosure, result in removal of the loan from the PCI portfolio. The aggregate of these three components results in our total allowance for loan losses.

In the table below we have shown the components, as discussed above, of our allowance for loan losses at September 30, 2016 and December 31, 2015.

	Sept. 30, 2016							Dec. 31, 2015							increase (decrease)
	Loan		ALLL					Loan		ALLL					Loan			ALLL
	balance		balance		%			balance		balance		%			balance			balance
Originated loans	$	2,051,764	$	21,426		1.04	%	$	1,664,056	$	17,326		1.04	%	$	387,708		$	4,100		-		bps
Impaired originated loans		17,508		693		3.96	%		20,083		757		3.77	%		(2,575	)		(64	)	19		bps
Total originated loans		2,069,272		22,119		1.07	%		1,684,139		18,083		1.07	%		385,133			4,036		-		bps

Acquired loans (2)		1,025,914		3,112		0.30	%		696,017		3,737		0.54	%		329,897			(625	)	(24	)	bps
Impaired acquired loans (1)		2,008	43			2.14	%		3,092	323			10.45	%		(1,084	)		(280	)	(831	)	bps
Total acquired loans		1,027,922		3,155		0.31	%		699,109		4,060		0.58	%		328,813			(905	)	(27	)	bps

Total non-PCI loans		3,097,194		25,274					2,383,248		22,143					713,946			3,131
PCI loans		197,288		225					210,528		121					(13,240	)		104
Total loans	$	3,294,482	$	25,499				$	2,593,776	$	22,264				$	700,706		$	3,235

(1)	These are loans that were acquired as performing loans that subsequently became impaired.

(2)

These are performing acquired loans that were recorded at estimated fair value on the related acquisition dates. The total net unamortized fair value adjustment at September 30, 2016 was approximately $16,787 or 1.6% of the aggregate outstanding related loan balances. Prior to March 31, 2016, the Company did not previously include loans acquired pursuant to the TD Bank and Federal Trust acquisitions that occurred in 2011. Acquired loans currently include performing loans acquired from the TD Bank acquisition (year 2011), the Federal Trust acquisition (year 2011), the Gulfstream Bank acquisition (year 2014), the First Southern Bank acquisition (year 2014), the Community Bank acquisition (year 2016) and the Hometown of Homestead Banking Company acquisition (year 2016). All prior periods have been reclassified to conform to this new presentation format.

The general loan loss allowance (non-impaired loans) relating to originated loans increased by $4,100 resulting primarily from an increase in loans outstanding. Net changes resulting from a mixture of decreases and increases in the Company’s various two year historical loss factors and qualitative factors also slightly affected the net change.

The general loan loss allowance (non-impaired loans) relating to acquired loans decreased by $625 resulting primarily from a decrease in loans outstanding, excluding the two bank acquisitions (Community Bank and Hometown of Homestead Banking Company) which occurred during the first quarter of 2016. At September 30, 2016 the non-impaired loans acquired from these two acquisitions were equal to approximately $421,590. These loans were recorded at estimated fair value at the March 1, 2016 acquisition date. As such, there is no allowance for loan losses associated with these loans as of September 30, 2016. The unamortized acquisition date fair value adjustment related to these loans at September 30, 2016 was approximately $8,218, or 1.9% of the related aggregate outstanding loan balances.

The specific loan loss allowance (impaired loans) for both originated loans and acquired loans is the aggregate of the results of individual analyses prepared for each one of the impaired loans, excluding PCI loans. Total impaired loans at September 30, 2016 are equal to $19,516 ($17,508 originated impaired loans plus $2,008 acquired impaired loans).

The Company recorded partial charge offs in lieu of specific allowance for a number of the impaired loans. The Company’s impaired loans have been written down by $1,170 to $19,516 ($18,780 when the $736 specific allowance is considered) from their legal unpaid principal balance outstanding of $20,686. In the aggregate, total impaired loans have been written down to approximately 91% of their legal unpaid principal balance, and non-performing impaired loans have been written down to approximately 89% of their legal unpaid principal balance. Approximately $10,528 of the Company’s impaired loans, or 54% of total impaired loans, are accruing performing loans. This group of impaired loans is not included in the Company’s non-performing loans or non-performing assets categories.

PCI loans are accounted for pursuant to ASC Topic 310-30. PCI loan pools are evaluated for impairment each quarter. If a pool is impaired, an allowance for loan loss is recorded.

The allowance is increased by the provision for loan losses, which is a charge to current period earnings and decreased by loan charge-offs net of recoveries of prior period loan charge-offs. Loans are charged against the allowance when management believes collection of the principal is unlikely. We believe our allowance for loan losses was adequate at September 30, 2016. However, we

recognize that many factors can adversely impact various segments of the Company’s markets and customers, and therefore there is no assurance as to the amount of losses or probable losses which may develop in the future.

The tables below summarize the changes in allowance for loan losses during the periods presented.

	Allowance for loan losses for loans that are not PCI loans			Allowance for loan losses on PCI loans			Total
Three months ended September 30, 2016
Balance at beginning of period	$	24,066		$	106		$	24,172
Loans charged-off		(821	)		(66	)		(887	)
Recoveries of loans previously charged-off		939			-			939
Net recoveries		118			(66	)		52
Provision for loan losses		1,090			185			1,275
Balance at end of period	$	25,274		$	225		$	25,499

Three months ended September 30, 2015
Balance at beginning of period	$	22,818		$	116		$	22,934
Loans charged-off		(893	)		(50	)		(943	)
Recoveries of loans previously charged-off		657			-			657
Net charge-offs		(236	)		(50	)		(286	)
Provision for loan losses		4			(4	)		-
Balance at end of period	$	22,586		$	62		$	22,648


	Allowance for loan losses for loans that are not PCI loans			Allowance for loan losses on PCI loans			Total
Nine months ended September 30, 2016
Balance at beginning of period	$	22,143		$	121		$	22,264
Loans charged-off		(1,642	)		(66	)		(1,708	)
Recoveries of loans previously charged-off		2,247			-			2,247
Net recoveries		605			(66	)		539
Provision for loan losses		2,526			170			2,696
Balance at end of period	$	25,274		$	225		$	25,499

Nine months ended September 30, 2015
Balance at beginning of period	$	19,384		$	514		$	19,898
Loans charged-off		(2,625	)		(127	)		(2,752	)
Recoveries of loans previously charged-off		1,552			-			1,552
Net charge-offs		(1,073	)		(127	)		(1,200	)
Provision for loan losses		4,275			(325	)		3,950
Balance at end of period	$	22,586		$	62		$	22,648

Nonperforming loans and nonperforming assets

Non-performing loans exclude PCI loans and are defined as non-accrual loans plus loans past due 90 days or more and still accruing interest. Generally, we place loans on non-accrual status when they are past due 90 days and management believes the borrower’s financial condition, after giving consideration to economic conditions and collection efforts, is such that collection of interest is doubtful. When we place a loan on non-accrual status, interest accruals cease and uncollected interest is reversed and charged against current income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Non-performing loans, as defined above, as a percentage of total non-PCI loans, were 0.64% at September 30, 2016, compared to 0.87% at December 31, 2015.

Non-performing assets (which we define as non-performing loans, as defined above, plus (a) OREO (i.e., real estate acquired through foreclosure, in substance foreclosure, or deed in lieu of foreclosure); and (b) other repossessed assets that are not real estate), were $28,879 at September 30, 2016, compared to $32,174 at December 31, 2015. Non-performing assets as a percentage of total

assets were 0.58% at September 30, 2016, compared to 0.80% at December 31, 2015. The table below summarizes selected credit quality data at the dates indicated.

The table below summarizes selected credit quality data at the dates indicated.

	Sept. 30, 2016			Dec. 31, 2015
Non-accrual loans (note 1)	$	19,704		$	20,833
Accruing loans 90 days or more past due (note 1)		-			-
Total non-performing loans ("NPLs") (note 1)		19,704			20,833
Other real estate owned ("OREO")		9,005			11,196
Repossessed assets other than real estate ("ORAs") (note 1)		170		145
Total NPAs	$	28,879		$	32,174

NPLs as percentage of total loans (note 1)		0.64	%		0.87	%
NPAs as percentage of total assets		0.58	%		0.80	%
NPAs as percentage of loans and OREO and ORAs (note 1)		0.93	%		1.34	%
30-89 days past due accruing loans as percentage of total loans (note 1)		0.36	%		0.62	%
Allowance for loan losses as percentage of NPLs (note 1)		128	%		106	%

note 1:

Excludes PCI loans.

As shown in the table above, the largest component of non-performing loans is non-accrual loans. As of September 30, 2016 the Company had non-accrual loans with an aggregate carrying value of $19,704 compared to December 31, 2015 when an aggregate book value of $20,833 was reported.

The second largest component of non-performing assets after non-accrual loans is OREO. At September 30, 2016, total OREO was $9,005 compared to $11,196 at December 31, 2015 (of which $9,629 was previously covered by FDIC loss sharing agreements). On March 1, 2016, we acquired $6,774 in OREO from Community and Hometown after fair value adjustments. OREO is carried at the lower of cost or market less the estimated cost to sell. Further declines in real estate values can affect the market value of these assets. Any further decline in market value beyond its cost basis is recorded as a current expense in the Company’s Condensed Consolidated Statement of Earnings and Comprehensive Income.

Impaired loans are defined as loans that management has determined will not repay as agreed pursuant to the terms of the related loan agreement. Small balance homogeneous loans are not considered for impairment purposes. Once management has determined a loan is impaired, we perform a specific reserve analysis to determine if it is probable that we will eventually collect all contractual cash flows. If management determines that a shortfall is probable, then a specific valuation allowance is placed against the loan. This loan is then placed on non-accrual basis, even if the borrower is current with his/her contractual payments, and will remain on non-accrual until payments collected reduce the loan balance such that it eliminates the specific valuation allowance or equivalent partial charge-down or other economic conditions change. At September 30, 2016 we have identified a total of $19,516 impaired loans, excluding PCI loans. A specific valuation allowance of $736 has been attached to $5,362 of impaired loans included in the total $19,516 of identified impaired loans. It should also be noted that the total carrying balance of the impaired loans, or $19,516, has been partially charged down by $1,170 from their aggregate legal unpaid balance of $20,686.

The table below summarizes impaired loan data for the periods presented.

	Sept. 30, 2016		Dec. 31, 2015
Impaired loans with a specific valuation allowance	$	5,362	$	6,599
Impaired loans without a specific valuation allowance		14,154		16,576
Total impaired loans	$	19,516	$	23,175

Performing TDRs (these are not included in NPLs)	$	10,528	$	10,254
Non performing TDRs (these are included in NPLs)		3,064		4,873
Total TDRs		13,592		15,127
Impaired loans that are not TDRs		5,924		8,048
Total impaired loans	$	19,516	$	23,175

Bank premises and equipment

Bank premises and equipment was $114,567 at September 30, 2016 compared to $101,821 at December 31, 2015, an increase of $12,746 or 12.5%. The primary component of the increase is $22,814 of branch real estate acquired on March 1, 2016 with the purchase of Community and Hometown. In addition, we transferred $10,139 of branch real estate that is no longer in use to held for sale at estimated fair value less estimated cost to sell. A summary of our bank premises and equipment for the period end indicated is presented in the table below.

	Sept. 30, 2016		Dec. 31, 2015
Land	$	40,952	$	35,941
Land improvements		1,077	995
Buildings		71,022		62,109
Leasehold improvements		5,292		5,917
Furniture, fixtures and equipment		34,350		31,666
Construction in progress		1,666		1,263
Subtotal		154,359		137,891
Less: accumulated depreciation		39,792		36,070
Total	$	114,567	$	101,821

We transferred branch real estate that is no longer in use to held for sale at estimated fair value less estimated cost to sell and sold four properties during the nine months ending September 30, 2016. Our branch real estate held for sale at September 30, 2016 and December 31, 2015 was $9,355 and $1,665, respectively, a net increase of $7,690. The reduction due to the four sold properties is offset by the transfers into held for sale of $9,172, after impairment expense of $967.

Interest Rate Swap Derivatives

The Company enters into interest rate swaps in order to provide commercial loan clients the ability to swap from fixed to variable interest rates. Under these agreements, the Company enters into a fixed-rate loan with a client in addition to a swap agreement. This swap agreement effectively converts the client’s fixed rate loan into a variable rate. The Company then enters into a matching swap agreement with a third party dealer in order to offset its exposure on the customer swap. The fair value of interest rate swap derivatives (asset component) was $63,207 at September 30, 2016 compared to $18,619 at December 31, 2015. The fair value of interest rate swap derivatives (liability component) was $65,165 at September 30, 2016 compared to $19,822 at December 31, 2015.

Deposits

The cost of interest bearing deposits in the current quarter is 0.27%, the same as the previous quarter. The overall cost of total deposits (i.e. includes non-interest bearing checking accounts) in the current quarter was 0.18% compared to 0.17% in the prior quarter. On March 1, 2016, we acquired approximately $705.9 million in deposits from Community and Hometown. See “Overview” for additional information on regarding this transaction. The table below summarizes the Company’s deposit mix for the periods presented.

			% of					% of
	Sept. 30, 2016		total			Dec. 31, 2015		total
Demand - non-interest bearing	$	1,406,030		35	%	$	1,133,138		35	%
Demand - interest bearing		814,123		20	%		679,714		21	%
Savings deposits		352,547		9	%		241,605		8	%
Money market accounts		903,697		22	%		738,301		23	%
Time deposits		579,537		14	%		422,420		13	%
Total deposits	$	4,055,934		100	%	$	3,215,178		100	%

Securities sold under agreement to repurchase

Our subsidiary bank enters into borrowing arrangements with our retail business customers by agreements to repurchase (“securities sold under agreements to repurchase”) under which the bank pledges investment securities owned and under their control as collateral against these one-day borrowing arrangement. These short-term borrowings totaled $26,889 at September 30, 2016 compared to $27,472 at December 31, 2015.

Federal funds purchased

Federal funds purchased are overnight deposits from correspondent banks. Federal funds purchased acquired from other than our correspondent bank deposits are included with Federal Home Loan Bank advances and other borrowed funds as described below, if any. At September 30, 2016 we had $258,329 of correspondent bank deposits or federal funds purchased, compared to $200,250 at December 31, 2015.

Federal Home Loan Bank advances and other borrowed funds

From time to time, we borrow either through Federal Home Loan Bank advances or Federal Funds Purchased, other than correspondent bank deposits (i.e. federal funds purchased) listed above. At September 30, 2016 there were no outstanding advances compared to $25,000 at December 31, 2015.

Corporate debentures

On January 22, 2016, we purchased, redeemed and terminated the Gulfstream Bancshares Capital Trust I $7,000 corporate debenture and recognized a gain on early extinguishment of debt of approximately $308. On March 1, 2016, we assumed $16,000 in corporate debentures from Hometown of which we partially redeemed and terminated $6,000. These corporate debentures were assumed through acquisitions, and as a result, were carried at less than par value at the time of termination.

Below is a schedule of statutory trust entities and the related corporate debentures formed and assumed through various acquisitions:


	Amount	Interest Rate	Maturity
CenterState Banks of Florida Statutory Trust I	$10,000	LIBOR + 3.05%	Sep. 2033
Valrico Capital Statutory Trust	$2,500	LIBOR + 2.70%	Sep. 2034
Federal Trust Statutory Trust I	$5,000	LIBOR + 2.95%	Sep. 2033
Gulfstream Bancshares Capital Trust II	$3,000	LIBOR + 1.70%	Mar. 2037
Homestead Statutory Trust I	$10,000	LIBOR + 1.65%	Jul. 2036

Stockholders’ equity

Stockholders’ equity at September 30, 2016, was $552,771, or 11.0% of total assets, compared to $490,514, or 12.2% of total assets at December 31, 2015. The increase in stockholders’ equity was due to the following items:

Total stockholders' equity at December 31, 2015	$	490,514
Net income during the period		26,314
Dividends paid on common shares ($0.12 per share)		(5,759	)
Net increase in market value of securities available for sale, net of deferred taxes		6,070
Stock options exercised, including tax benefit		718
Employee equity based compensation		3,451
Stock repurchase (27,622 shares, average price of $14.55 per share)		(402	)
Stock issued pursuant to acquisition of Community		31,865
Total stockholders' equity at September 30, 2016	$	552,771

The federal bank regulatory agencies have established risk-based capital requirements for banks. These guidelines are intended to provide an additional measure of a bank’s capital adequacy by assigning weighted levels of risk to asset categories. Banks are also required to systematically maintain capital against such “off- balance sheet” activities as loans sold with recourse, loan commitments, guarantees and standby letters of credit. These guidelines are intended to strengthen the quality of capital by increasing the emphasis on common equity and restricting the amount of loan loss reserves and other forms of equity such as preferred stock that may be included in capital. As of September 30, 2016, our subsidiary bank exceeded the minimum capital levels to be considered “well capitalized” under the terms of the guidelines.

The U.S. Basel III Capital Rules require financial institutions (including the Company and the Bank) to maintain minimum amounts and ratios. The Company and the Bank are now subject to a capital conservation buffer in addition to the minimum risk-based capital ratios. The Company and Bank capital conservation buffer is determined by calculating the margin between the Company’s and Bank’s three risk-based asset ratios and the minimum required adequately capitalized ratio, with the lowest of the three margins resulting in the capital conservation buffer. The required buffer is phased in over three years beginning January 1, 2016, and the phase-in amount for 2016 is 0.625 percent of risk-weighted assets. Failure to maintain the buffer will result in restrictions on the ability to make capital distributions and to pay discretionary bonuses to executive officers. As of September 30, 2016, management believes that the Company and the Bank met all capital adequacy requirements to which they were subject.

Selected consolidated capital ratios at September 30, 2016 and December 31, 2015 for the Company and for the Company’s subsidiary bank, CenterState Bank of Florida, N.A., are presented in the tables below.

CenterState Banks, Inc. (the Company)	Actual					Capital Adequacy			Excess
	Amount		Ratio			Amount		Ratio	Amount
September 30, 2016
Total capital (to risk weighted assets)	$	461,277		12.4	%	$	297,968	>8.0%	$	163,309
Tier 1 capital (to risk weighted assets)		435,778		11.7	%		223,476	>6.0%		212,302
Common equity Tier 1 capital (to risk weighted assets)		414,995		11.1	%		167,607	>4.5%		247,388
Tier 1 capital (to average assets)		435,778		9.0	%		194,535	>4.0%		241,243

December 31, 2015
Total capital (to risk weighted assets)	$	438,748		15.8	%	$	222,322	>8.0%	$	216,426
Tier 1 capital (to risk weighted assets)		416,484		15.0	%		166,742	>6.0%		249,742
Common equity Tier 1 capital (to risk weighted assets)		399,876		14.4	%		125,056	>4.5%		274,820
Tier 1 capital (to average assets)		416,484		10.5	%		158,206	>4.0%		258,278

CenterState Bank of Florida, N.A.	Actual					Well Capitalized			Excess
	Amount		Ratio			Amount		Ratio	Amount
September 30, 2016
Total capital (to risk weighted assets)	$	431,491		11.6	%	$	372,265	>10.0%	$	59,226
Tier 1 capital (to risk weighted assets)		405,999		10.9	%		297,812	>8.0%		108,187
Common equity Tier 1 capital (to risk weighted assets)		405,999		10.9	%		241,972	>6.5%		164,027
Tier 1 capital (to average assets)		405,999		8.4	%		242,817	>5.0%		163,182

December 31, 2015
Total capital (to risk weighted assets)	$	411,627		14.7	%	$	279,517	>10.0%	$	132,110
Tier 1 capital (to risk weighted assets)		389,371		13.9	%		223,613	>8.0%		165,758
Common equity Tier 1 capital (to risk weighted assets)		389,371		13.9	%		181,686	>6.5%		207,685
Tier 1 capital (to average assets)		389,371		9.9	%		197,514	>5.0%		191,857

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2016 AND 2015

Overview

We recognized net income of $15,384 or $0.32 per share basic and $0.32 per share diluted for the three month period ended September 30, 2016, compared to net income of $9,916 or $0.22 per share basic and $0.22 per share diluted for the same period in 2015. A summary of the differences are listed in the table below.

	Sept. 30,		Sept. 30,			increase
Three month period ending	2016		2015			(decrease)
Net interest income	$	45,319		38,328		$	6,991
Provision for loan losses		1,275		-			1,275
Net interest income after loan loss provision		44,044		38,328			5,716

Correspondent banking and capital markets division		7,528		5,935			1,593
IA amortization		-		(4,144	)		4,144
FDIC revenue		-		27			(27	)
Gain on sale of available for sale securities		13		4			9
All other non interest income		8,073		6,308			1,765
Total non interest income		15,614		8,130			7,484

Correspondent banking and capital markets division		5,456		5,063			393
Credit related expenses	187			393			(206	)
Merger related expenses		-		169			(169	)
Impairment (recovery) of branch real estate held for sale		549		12			537
All other non interest expense		30,136		25,218			4,918
Total non interest expense		36,328		30,855			5,473

Net income before provision for income taxes		23,330		15,603			7,727
Provision for income taxes		7,946		5,687			2,259
Net income	$	15,384	$	9,916			5,468

The primary differences between the two quarters presented above relate to the acquisitions of Community and Hometown on March 1, 2016. Other differences between both quarters include lower IA amortization expense due to the termination of FDIC loss share agreements in February 2016 and higher net interest income.

The increase in our net interest income relates primarily to the increase in our average interest earning assets as a result of loan growth. The increase in our “all other non interest expense,” which represents the operating expenses of our commercial/retail banking segment, is primarily due to the acquisition of Community and Hometown as of March 1, 2016. These items along with others are discussed and analyzed below.

Net interest income/margin

Net interest income increased $6,991 or 18.2% to $45,319 during the three month period ended September 30, 2016 compared to $38,328 for the same period in 2015. The $6,991 increase was the result of a $7,591 increase in interest income and a $600 increase in interest expense.

Interest earning assets averaged $4,467,735 during the three month period ended September 30, 2016 as compared to $3,481,339 for the same period in 2015, an increase of $986,396, or 28.3%. The yield on average interest earning assets decreased 32 bps to 4.25% (31 bps to 4.33% tax equivalent basis) during the three month period ended September 30, 2016, compared to 4.57% (4.64% tax equivalent basis) for the same period in 2015. The combined effects of the $986,396 increase in average interest earning assets and the 32 bps (31 bps tax equivalent basis) decrease in yield on average interest earning assets resulted in the $7,591 ($7,932 tax equivalent basis) increase in interest income between the two periods.

Interest bearing liabilities averaged $2,914,374 during the three month period ended September 30, 2016 as compared to $2,262,002 for the same period in 2015, an increase of $652,372 or 28.8%. The cost of average interest bearing liabilities was 0.33% during the three month period ended September 30, 2016, compared to 0.31% for the same period in 2015. The effect of the $652,372 increase in average interest bearing liabilities resulted in the $600 increase in interest expense between the two periods.

The table below summarizes the analysis of changes in interest income and interest expense for the three month periods ended September 30, 2016 and 2015 on a tax equivalent basis.

	Three months ended September 30,
	2016								2015
	Average			Interest		Average			Average			Interest		Average
	Balance			inc / exp		rate			balance			inc / exp		rate
Loans (notes 1, 2, 8)	$	3,037,333		$	34,071		4.46	%	$	2,306,751		$	25,465		4.38	%
PCI loans (note 9)		207,406			7,795		14.95	%		241,393			9,898		16.27	%
Securities- taxable		900,514			4,693		2.07	%		676,892			3,895		2.28	%
Securities- tax exempt (note 8)		134,576			1,581		4.67	%		90,376			1,107		4.86	%
Fed funds sold and other (note 3)		187,906		512			1.08	%		165,927		355			0.85	%
Total interest earning assets		4,467,735			48,652		4.33	%		3,481,339			40,720		4.64	%

Allowance for loan losses		(24,209	)							(22,890	)
All other assets		559,841								455,067
Total assets	$	5,003,367							$	3,913,516

Interest bearing deposits (note 4)		2,678,638			1,821		0.27	%		2,033,045			1,339		0.26	%
Fed funds purchased		181,037		238			0.52	%		173,575		150			0.34	%
Other borrowings (note 5)		28,847		27			0.37	%		31,356		51			0.65	%
Corporate debenture (note 10)		25,852		298			4.59	%		24,026		244			4.03	%
Total interest bearing liabilities		2,914,374			2,384		0.33	%		2,262,002			1,784		0.31	%
Demand deposits		1,445,140								1,136,788
Other liabilities		97,830								39,740
Stockholders’ equity		546,023								474,986
Total liabilities and stockholders’ equity	$	5,003,367							$	3,913,516
Net interest spread (tax equivalent basis) (note 6)							4.00	%							4.33	%
Net interest income (tax equivalent basis)				$	46,268							$	38,936
Net interest margin (tax equivalent basis) (note 7)							4.12	%							4.44	%

note 1:

Loan balances are net of deferred origination fees and costs.

note 2:

Interest income on average loans includes amortization of loan fee recognition of $363 and $50 for the three month periods ended September 30, 2016 and 2015.

note 3:

Includes federal funds sold, interest earned on deposits at the Federal Reserve Bank and earnings on Federal Reserve Bank stock and Federal Home Loan Bank stock.

note 4:

Includes interest bearing deposits only. Non-interest bearing checking accounts are included in the demand deposits listed above. Also, includes net amortization of fair market value adjustments related to various acquisitions of time deposits of ($268) and ($147) for the three month periods ended September 30, 2016 and 2015.

note 5:

Includes securities sold under agreements to repurchase and Federal Home Loan Bank advances.

note 6:

Represents the average rate earned on interest earning assets minus the average rate paid on interest bearing liabilities.

note 7:

Represents net interest income divided by total interest earning assets.

note 8:

Interest income and rates include the effects of a tax equivalent adjustment using applicable statutory tax rates to adjust tax exempt interest income on tax exempt investment securities and loans to a fully taxable basis.

note 9:

PCI loans are accounted for pursuant to ASC 310-30.

note 10:

Includes amortization of fair value adjustments related to various acquisitions of corporate debentures of $59 and $44 for the three month periods ended September 30, 2016 and 2015.

The primary reason for the decrease in our net interest margin (“NIM”) during the current period was due to the mix of interest earning assets between the two periods presented above. Higher average balances in lower yielding assets, such as taxable securities and federal funds sold, and lower average balances in higher yielding assets, such as PCI loans, during the three month period ending September 30, 2016 compared to the three month period ending September 30, 2015 contributed to the decrease in NIM.

The Company acquired two banks, Community and Hometown (the “Homestead banks”), on March 1, 2016. As such, the acquired assets and assumed liabilities were fully integrated into the current quarter averages and income, resulting in a yield reduction on PCI loans due to the lower yield on the Homestead banks acquired PCI loans. The Homestead banks PCI loans have an average yield of 8.32% which is lower than the Company’s existing average yield.

Provision for loan losses

The provision for loan losses increased $1,275 to $1,275 during the three month period ending September 30, 2016 compared to no provision expense for the comparable period in 2015. Our policy is to maintain the allowance for loan losses at a level sufficient to

absorb probable incurred losses in the loan portfolio. The allowance is increased by the provision for loan losses, which is a charge to current period earnings, and is decreased by charge-offs, net of recoveries on prior loan charge-offs. Therefore, the provision for loan losses (Income Statement effect) is a residual of management’s determination of allowance for loan losses (Balance Sheet approach). In determining the adequacy of the allowance for loan losses, we consider the conditions of individual borrowers, the historical loan loss experience, the general economic environment, the overall portfolio composition, and other information. As these factors change, the level of loan loss provision changes. The decrease in our loan loss provision between the comparable periods is a result of net recoveries versus net charge-offs, as well as improved credit metrics used to determine the appropriate allowance for loan losses. See “Credit quality and allowance for loan losses” for additional information regarding the allowance for loan losses.

Non-interest income

Non-interest income for the three months ended September 30, 2016 was $15,614 compared to $8,130 for the comparable period in 2015. This increase was the result of the following components listed in the table below.

	Sept. 30,		Sept. 30,			$ increase			% increase
Three month period ending:	2016		2015			(decrease)			(decrease)
Income from correspondent banking capital markets division (note 1)	$	6,381	$	4,943		$	1,438			29.1		%
Other correspondent banking related revenue (note 2)		1,147		992			155			15.6		%
Wealth management related revenue		892		940			(48	)		(5.1	)	%
Service charges on deposit accounts		3,770		2,488			1,282			51.5		%
Debit, prepaid, ATM and merchant card related fees		2,017		1,659			358			21.6		%
BOLI income		658		580			78			13.4		%
Other service charges and fees		736		641			95			14.8		%
Gain on sale of securities	13		4			9				225.0		%
Subtotal	$	15,614	$	12,247		$	3,367			27.5		%
FDIC indemnification asset-amortization (see explanation below)		-		(4,144	)		4,144			(100.0	)	%
FDIC indemnification income		-		27			(27	)		(100.0	)	%
Total non-interest income	$	15,614	$	8,130		$	7,484			92.1		%

note 1:

Includes gross commissions earned on bond sales, fees from hedging services, loan brokering fees and related consulting fees. The fee income in this category is based on sales volume in any particular period and is therefore volatile between comparable periods.

note 2:

Includes fees from safe-keeping activities, bond accounting services, asset/liability consulting services, international wires, clearing and corporate checking account services and other correspondent banking related revenue and fees. The fees included in this category are less volatile than those described above in note 1.

“Income from correspondent banking capital markets division” increased between the two periods presented above due to increased fees from hedging services and loan brokering fees. Service charges on deposit accounts increased $1,282 in part due to the acquisitions of Community and Hometown on March 1, 2016 and new product changes on personal and business accounts during the current quarter. In addition, the termination of the FDIC loss share agreements in February 2016 resulted in no further FDIC indemnification asset amortization during the three month period ending September 30, 2016 which increased non-interest income by $4,144 compared to the same period in 2015.

Non-interest expense

Non-interest expense for the three months ended September 30, 2016 increased $5,473, or 17.7%, to $36,328, compared to $30,855 for the same period in 2015. Components of our non-interest expenses are listed in the table below.

	Sept. 30,			Sept. 30,			$ increase			% increase
Three month period ending:	2016			2015			(decrease)			(decrease)
Salaries and wages	$	17,074		$	14,200		$	2,874			20.2		%
Incentive/bonus compensation		1,610			1,719			(109	)		(6.3	)	%
Stock based compensation		1,109			775			334			43.1		%
Employer 401K matching contributions		470			416			54			13.0		%
Deferred compensation expense		148			158			(10	)		(6.3	)	%
Health insurance and other employee benefits		1,537			1,240			297			24.0		%
Payroll taxes		999			825			174			21.1		%
Other employee related expenses		322			327			(5	)		(1.5	)	%
Incremental direct cost of loan origination		(851	)		(744	)		(107	)		14.4		%
Total salaries, wages and employee benefits		22,418			18,916			3,502			18.5		%

(Gain) loss on sale of OREO		(558	)		31			(589	)		(1,900.0	)	%
Gain on sale of FDIC covered OREO		-			(313	)		313			(100.0	)	%
Valuation write down of OREO		237			65			172			264.6		%
Valuation write down of FDIC covered OREO		-			172			(172	)		(100.0	)	%
(Gain) loss on repossessed assets other than real estate		(4	)		15			(19	)		(126.7	)	%
Foreclosure and repossession related expenses		512			328			184			56.1		%
Foreclosure and repo expense, FDIC (note 1)		-			95			(95	)		(100.0	)	%
Total credit related expenses		187			393			(206	)		(52.4	)	%

Occupancy expense		2,414			2,203			211			9.6		%
Depreciation of premises and equipment		1,629			1,438			191			13.3		%
Supplies, stationary and printing		341			382			(41	)		(10.7	)	%
Marketing expenses		700			630			70			11.1		%
Data processing expense		1,761			1,536			225			14.6		%
Legal, auditing and other professional fees		904			779			125			16.0		%
Bank regulatory related expenses		863			774			89			11.5		%
Postage and delivery		423			348			75			21.6		%
Debit, prepaid, ATM and merchant card related expenses		725			515			210			40.8		%
CDI amortization		756			579			177			30.6		%
Trust intangible amortization		35			36			(1	)		(2.8	)	%
Internet and telephone banking		559			545			14			2.6		%
Operational write-offs and losses		310			67			243			362.7		%
Correspondent accounts and Federal Reserve charges		191			163			28			17.2		%
Conferences/Seminars/Education/Training		155			110			45			40.9		%
Director fees		134			164			(30	)		(18.3	)	%
Travel expenses		153			148			5			3.4		%
Other expenses		1,121			948			173			18.2		%
Subtotal		35,779			30,674			5,105			16.6		%
Impairment of bank property held for sale, net		549			12			537			4,475.0		%
Merger and acquisition related expenses		-			169			(169	)	NM			%
Total non-interest expense	$	36,328		$	30,855		$	5,473			17.7		%

note 1:

These are foreclosure and repossession related expenses related to FDIC covered assets, and are shown net of FDIC reimbursable amounts pursuant to FDIC loss share agreements.

The primary reason for the increase in non-interest expense relates to the acquisitions of Community and Hometown. Both acquisitions closed on March 1, 2016 and were fully integrated into the Company during the second quarter of 2016. The increase in salaries and wages between the periods presented above is due primarily to the increase in personnel as a result of the acquisitions of Community and Hometown as mentioned above.

Provision for income taxes

We recognized an income tax expense for the three months ended September 30, 2016 of $7,946 on pre-tax income of $23,330 (an effective tax rate of 34.1%) compared to an income tax expense of $5,687 on pre-tax income of $15,603 (an effective tax rate of 36.4%) for the comparable quarter in 2015. The primary reason for the decrease in the effective tax rates is due to a larger percentage

of tax exempt interest income relative to total revenue and the impact of CSFL Insurance Corp, the Company’s captive insurance subsidiary, incorporated in December 2015 pursuant to section 831(b) of the U.S. Tax Code.

COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2016 AND 2015

Overview

We recognized net income of $26,314 or $0.55 per share basic and diluted for the nine month period ended September 30, 2016, compared to net income of $28,942 or $0.64 per share basic and $0.63 per share diluted for the same period in 2015. A summary of the differences are listed in the table below.

	Sept. 30,			Sept. 30,			increase
Nine month period ending:	2016			2015			(decrease)
Net interest income	$	131,791		$	115,755		$	16,036
Provision for loan losses		2,696			3,950			(1,254	)
Net interest income after loan loss provision		129,095			111,805			17,290

Correspondent banking and capital markets division		25,594			21,322			4,272
IA amortization		(1,166	)		(13,143	)		11,977
FDIC revenue		96			1,053			(957	)
Gain from early extinguishment of debt		308			-			308
Gain on sale of available for sale securities		13			4			9
All other non-interest income		22,301			18,548			3,753
Total non-interest income		47,146			27,784			19,362

Correspondent banking and capital markets division		17,397			16,666			731
Credit related expenses	1,157				989			168
Merger related expenses		11,172			169			11,003
Impairment of branch real estate held for sale	967				637			330
Termination of FDIC loss share agreements		17,560			-			17,560
All other non-interest expense		87,977			75,535			12,442
Total non-interest expense		136,230			93,996			42,234

Net income before provision for income taxes		40,011			45,593			(5,582	)
Provision for income taxes		13,697			16,651			(2,954	)
Net income	$	26,314		$	28,942			(2,628	)

The primary differences between the two periods presented above relate to the termination of the FDIC loss share agreements in February 2016 resulting in a charge of $17,560 and merger related expenses of $11,172 for the acquisitions of Community and Hometown on March 1, 2016. Other differences between both periods include lower IA amortization expense due to the termination of FDIC loss share agreements as stated above, increased correspondent revenue from our capital markets division and higher net interest income.

Net interest income/margin

Net interest income increased $16,036 or 13.9% to $131,791 during the nine month period ended September 30, 2016 compared to $115,755 for the same period in 2015. The $16,036 increase was the result of a $17,288 increase in interest income and a $1,252 increase in interest expense.

Interest earning assets averaged $4,272,762 during the nine month period ended September 30, 2016 as compared to $3,439,412 for the same period in 2015, an increase of $833,350, or 24.2%. The yield on average interest earning assets decreased 38 bps to 4.33% (36 bps to 4.41% tax equivalent basis) during the nine month period ended September 30, 2016, compared to 4.71% (4.77% tax equivalent basis) for the same period in 2015. The combined effects of the $833,350 increase in average interest earning assets and the 38 bps (36 bps tax equivalent basis) decrease in yield on average interest earning assets resulted in the $17,288 ($18,138 tax equivalent basis) increase in interest income between the two periods.

Interest bearing liabilities averaged $2,769,931 during the nine month period ended September 30, 2016 as compared to $2,261,929 for the same period in 2015, an increase of $508,002 or 22.5%. The cost of average interest bearing liabilities was 0.32% during the nine month period ended September 30, 2016, compared to 0.32% for the same period in 2015. The effect of the $508,002 increase in average interest bearing liabilities resulted in the $1,252 increase in interest expense between the two periods.

The table below summarizes the analysis of changes in interest income and interest expense for the nine month periods ended September 30, 2016 and 2015 on a tax equivalent basis.

	Nine months ended September 30,
	2016								2015
	Average			Interest		Average			Average			Interest		Average
	Balance			inc / exp		rate			balance			inc / exp		rate
Loans (notes 1, 2, 8)	$	2,852,751		$	95,803		4.49	%	$	2,239,341		$	75,530		4.51	%
PCI loans (note 9)		215,964			24,750		15.31	%		256,594			31,227		16.27	%
Securities- taxable		856,476			14,523		2.27	%		682,679			11,980		2.35	%
Securities- tax exempt (note 8)		119,105			4,189		4.70	%		78,526			2,942		5.01	%
Fed funds sold and other (note 3)		228,466		1672			0.98	%		182,272		1120			0.82	%
Total interest earning assets		4,272,762			140,937		4.41	%		3,439,412			122,799		4.77	%

Allowance for loan losses		(23,336	)							(21,333	)
All other assets		531,881								467,736
Total assets	$	4,781,307							$	3,885,815

Interest bearing deposits (note 4)		2,524,567			5,041		0.27	%		2,027,538			4,155		0.27	%
Fed funds purchased		188,983			745		0.53	%		178,060			435		0.33	%
Other borrowings (note 5)		32,137			97		0.40	%		32,348			155		0.64	%
Corporate debenture (note 10)		24,244			836		4.61	%		23,983			722		4.02	%
Total interest bearing liabilities		2,769,931			6,719		0.32	%		2,261,929			5,467		0.32	%
Demand deposits		1,411,564								1,121,029
Other liabilities		75,553								36,111
Stockholders’ equity		524,259								466,746
Total liabilities and stockholders’ equity	$	4,781,307							$	3,885,815
Net interest spread (tax equivalent basis) (note 6)							4.09	%							4.45	%
Net interest income (tax equivalent basis)				$	134,218							$	117,332
Net interest margin (tax equivalent basis) (note 7)							4.20	%							4.56	%

note 1:

Loan balances are net of deferred origination fees and costs.

note 2:

Interest income on average loans includes amortization of loan fee recognition of $270 and ($343) for the nine month periods ended September 30, 2016 and 2015.

note 3:

Includes federal funds sold, interest earned on deposits at the Federal Reserve Bank and earnings on Federal Reserve Bank stock and Federal Home Loan Bank stock.

note 4:

Includes interest bearing deposits only. Non-interest bearing checking accounts are included in the demand deposits listed above. Also, includes net amortization of fair market value adjustments related to various acquisitions of time deposits of ($805) and ($549) for the nine month periods ended September 30, 2016 and 2015.

note 5:

Includes securities sold under agreements to repurchase and Federal Home Loan Bank advances.

note 6:

Represents the average rate earned on interest earning assets minus the average rate paid on interest bearing liabilities.

note 7:

Represents net interest income divided by total interest earning assets.

note 8:

note 9:

PCI loans are accounted for pursuant to ASC 310-30.

note 10:

Includes amortization of fair value adjustments related to various acquisitions of corporate debentures of $154 and $132 for the nine month periods ended September 30, 2016 and 2015.

The primary reason for the decrease in our net interest margin (“NIM”) during the current period was due to the mix of interest earning assets between the two periods presented above. Higher average balances in lower yielding assets, such as taxable securities and federal funds sold, and lower average balances in higher yielding assets, such as PCI loans, during the nine month period ending September 30, 2016 compared to the nine month period ending September 30, 2015 contributed to the decrease in NIM.

The Company acquired the two Homestead banks on March 1, 2016. As such, the acquired assets and assumed liabilities were included in the averages for the nine months period ending September 30, 2016, but only for seven months, resulting in a yield reduction on PCI loans due to the lower yield on the Homestead acquired PCI loans.

Provision for loan losses

The provision for loan losses decreased $1,254 to $2,696 during the nine month period ending September 30, 2016 compared to provision expense of $3,950 for the comparable period in 2015. Our policy is to maintain the allowance for loan losses at a level sufficient to absorb probable incurred losses in the loan portfolio. The allowance is increased by the provision for loan losses, which is a charge to current period earnings, and is decreased by charge-offs, net of recoveries on prior loan charge-offs. Therefore, the provision for loan losses (Income Statement effect) is a residual of management’s determination of allowance for loan losses (Balance Sheet approach). In determining the adequacy of the allowance for loan losses, we consider the conditions of individual borrowers, the historical loan loss experience, the general economic environment, the overall portfolio composition, and other information. As these factors change, the level of loan loss provision changes. The decrease in our loan loss provision between the comparable periods is a result of net recoveries versus net charge-offs, as well as improved credit metrics used to determine the appropriate allowance for loan losses. See “Credit quality and allowance for loan losses” for additional information regarding the allowance for loan losses.

Non-interest income

Non-interest income for the nine months ended September 30, 2016 was $47,146 compared to $27,784 for the comparable period in 2015. This increase was the result of the following components listed in the table below.

	Sept. 30,			Sept. 30,			$ increase			% increase
Nine month period ending:	2016			2015			(decrease)			(decrease)
Income from correspondent banking capital markets division (note 1)	$	21,801		$	17,971		$	3,830			21.3		%
Other correspondent banking related revenue (note 2)		3,793			3,351			442			13.2		%
Wealth management related revenue		2,422			2,900			(478	)		(16.5	)	%
Service charges on deposit accounts		9,835			7,169			2,666			37.2		%
Debit, prepaid, ATM and merchant card related fees		6,245			5,183			1,062			20.5		%
BOLI income		1,877			1,772			105			5.9		%
Other service charges and fees		1,922			1,524			398			26.1		%
Gain on sale of securities	13			4			9				225.0		%
Subtotal	$	47,908		$	39,874		$	8,034			20.1		%
Gain on early extinguishment of debt		308			-			308		NM			%
FDIC indemnification asset-amortization(see explanation below)		(1,166	)		(13,143	)		11,977			(91.1	)	%
FDIC indemnification income		96			1,053			(957	)		(90.9	)	%
Total non-interest income	$	47,146		$	27,784		$	19,362			69.7		%

note 1:

note 2:

“Income from correspondent banking capital markets division” increased between the two periods presented above due to increased fees from hedging services and loan brokering fees. In addition, the termination of the FDIC loss share agreements in February resulted in no further FDIC indemnification asset amortization which increased non-interest income by $11,977 compared to the same period in 2015. Service charges on deposit accounts increased $2,666 in part due to the acquisitions of Community and Hometown on March 1, 2016 and new product changes on personal and business accounts during the current year. Lastly, the early extinguishment of trust preferred debt during the nine month period ending September 30, 2016 resulted in a gain of $308.

Non-interest expense

Non-interest expense for the nine months ended September 30, 2016 increased $42,234, or 44.9%, to $136,230, compared to $93,996 for the same period in 2015. Components of our non-interest expenses are listed in the table below.

	Sept. 30,			Sept. 30,			$ increase			% increase
Nine month period ending:	2016			2015			(decrease)			(decrease)
Salaries and wages	$	50,710		$	43,865		$	6,845			15.6		%
Incentive/bonus compensation		4,417			4,668			(251	)		(5.4	)	%
Stock based compensation		3,251			2,417			834			34.5		%
Employer 401K matching contributions		1,426			1,259			167			13.3		%
Deferred compensation expense		468			470			(2	)		(0.4	)	%
Health insurance and other employee benefits		4,343			3,882			461			11.9		%
Payroll taxes		3,533			3,121			412			13.2		%
Other employee related expenses		904			804			100			12.4		%
Incremental direct cost of loan origination		(2,220	)		(2,065	)		(155	)		7.5		%
Total salaries, wages and employee benefits		66,832			58,421			8,411			14.4		%

Gain on sale of OREO		(1,270	)		(442	)		(828	)		187.3		%
Gain on sale of FDIC covered OREO		-			(1,341	)		1,341			(100.0	)	%
Valuation write down of OREO		651			235			416			177.0		%
Valuation write down of FDIC covered OREO		-			781			(781	)		(100.0	)	%
Loss (gain) on repossessed assets other than real estate		33			14			19			135.7		%
Foreclosure and repossession related expenses		1,743			1,170			573			49.0		%
Foreclosure and repo expense, FDIC (note 1)		-			572			(572	)		(100.0	)	%
Total credit related expenses		1,157			989			168			17.0		%

Occupancy expense		7,038			6,414			624			9.7		%
Depreciation of premises and equipment		4,714			4,274			440			10.3		%
Supplies, stationary and printing		1,020			1,098			(78	)		(7.1	)	%
Marketing expenses		2,216			1,649			567			34.4		%
Data processing expense		5,053			4,793			260			5.4		%
Legal, auditing and other professional fees		2,756			2,204			552			25.0		%
Bank regulatory related expenses		2,641			2,567			74			2.9		%
Postage and delivery		1,264			1,052			212			20.2		%
Debit, prepaid, ATM and merchant card related expenses		2,137			1,398			739			52.9		%
CDI amortization		2,179			1,810			369			20.4		%
Trust intangible amortization		104			111			(7	)		(6.3	)	%
Internet and telephone banking		1,751			1,629			122			7.5		%
Operational write-offs and losses		417			426			(9	)		(2.1	)	%
Correspondent accounts and Federal Reserve charges		570			500			70			14.0		%
Conferences/Seminars/Education/Training		390			378			12			3.2		%
Director fees		493			516			(23	)		(4.5	)	%
Travel expenses		351			329			22			6.7		%
Other expenses		3,448			3,229			219			6.8		%
Subtotal		106,531			93,787			12,744			13.6		%
Impairment of bank property held for sale, net		967			637			330			51.8		%
Lease termination recovery		-			(597	)		597			(100.0	)	%
Merger and acquisition related expenses		11,172			169			11,003			6,510.7		%
Loss from termination of FDIC loss share agreements		17,560			-			17,560		NM			%
Total non-interest expense	$	136,230		$	93,996		$	42,234			44.9		%

note 1:

These are foreclosure and repossession related expenses related to FDIC covered assets, and are shown net of FDIC reimbursable amounts pursuant to FDIC loss share agreements.

Excluding net impairments on bank property held for sale, lease termination recovery, merger related expenses and charges related to termination of FDIC loss sharing agreements, our non-interest expenses increased $12,744, or 13.6% to $106,531 during the nine months ended September 30, 2016 compared to $93,787 during the same period last year. The overall primary reason for the increase relates to the acquisitions of Community and Hometown on March 1, 2016.

Provision for income taxes

We recognized an income tax expense for the nine months ended September 30, 2016 of $13,697 on pre-tax income of $40,011 (an effective tax rate of 34.2%) compared to an income tax expense of $16,651 on pre-tax income of $45,593 (an effective tax rate of 36.5%) for the comparable period in 2015. The primary reason for the decrease in the effective tax rates is due to a larger percentage of tax exempt interest income relative to total revenue and the impact of CSFL Insurance Corp, the Company’s captive insurance subsidiary, incorporated in December 2015 pursuant to section 831(b) of the U.S. Tax Code.

Liquidity

Liquidity is defined as the ability to meet anticipated customer demands for funds under credit commitments and deposit withdrawals at a reasonable cost and on a timely basis. We measure liquidity position by giving consideration to both on- and off-balance sheet sources of and demands for funds on a daily and weekly basis.

Our subsidiary bank regularly assesses the amount and likelihood of projected funding requirements through a review of factors such as historical deposit volatility and funding patterns, present and forecasted market and economic conditions, individual client funding needs, and existing and planned business activities. The subsidiary bank’s asset/liability committee (ALCO) provides oversight to the liquidity management process and recommends guidelines, subject to the approval of its board of directors, and courses of action to address actual and projected liquidity needs.

Short term sources of funding and liquidity include cash and cash equivalents, net of federal requirements to maintain reserves against deposit liabilities; investment securities eligible for pledging to secure borrowings from customers pursuant to securities sold under repurchase agreements; loan repayments; deposits and certain interest rate-sensitive deposits; and borrowings under overnight federal fund lines available from correspondent banks. In addition to interest rate-sensitive deposits, the primary demand for liquidity is anticipated fundings under credit commitments to customers.

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements except for approved and unfunded loans and letters of credit to our customers in the ordinary course of business.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES: MARKET RISK

Market risk

We believe interest rate risk is the most significant market risk impacting us. We monitor and manage interest rate risk using interest rate sensitivity “gap” analysis to measure the impact of market interest rate changes on net interest income. See our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 for disclosure of the quantitative and qualitative information regarding the interest rate risk inherent in interest rate risk sensitive instruments as of December 31, 2015. There have been no changes in the assumptions used in monitoring interest rate risk as of September 30, 2016. The impact of other types of market risk, such as foreign currency exchange risk and equity price risk, is deemed immaterial.

ITEM 4.

CONTROLS AND PROCEDURES

As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e)). Based on that evaluation, the CEO and CFO have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 are recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f)) during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

None.

Item 1a.

Risk Factors

There have been no material changes in our risk factors from our disclosure in Item 1A of our December 31, 2015 annual report on Form 10-K.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds


				Total Number	Maximum Number
				of Shares	of Shares that
		Total		Purchased as	may yet be
		Number of	Average	part of Publicly	Purchased Under
Period		Shares	Price paid	Announced Plans	the Plans or
Beginning	Ending	Purchased	per Share	or Programs	Programs
July 1, 2016	July 31, 2016	1,559 (1)	$16.49	---	1,934,735
August 1, 2016	August 31, 2016	66 (1)	$17.66	---	1,934,735
September 1, 2016	September 30, 2016	660 (1)	$17.46	---	1,934,735
Total for quarter ending September 30, 2016		2,285	$16.80	---	1,934,735

(1)

We did not repurchase any shares of our common stock during the third quarter of 2016 pursuant to our stock repurchase plan currently in place. We repurchased 2,285 shares of our common stock from our employees during the third quarter of 2016 for settlement of certain tax withholding obligations related to certain equity based compensation awards.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

[Removed and Reserved]

Item 5.

Other Information

None

Item 6.

Exhibits

Exhibit 31.1

The Chairman, President and Chief Executive Officer’s certification required under section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2

The Chief Financial Officer’s certification required under section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1

The Chairman, President and Chief Executive Officer’s certification required under section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 32.2

The Chief Financial Officer’s certification required under section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 101.1

Interactive Data File

101.INS

XBRL Instance Document

101.SCH

XBRL Schema Document

101.CAL

XBRL Calculation Linkbase Document

101.DEF

XBRL Definition Linkbase Document

101.LAB

XBRL Label Linkbase Document

101.PRE

XBRL Presentation Linkbase Document

CENTERSTATE BANKS, INC.

SIGNATURES

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

CENTERSTATE BANKS, INC.

(Registrant)

Date: November 3, 2016	By:	/s/ John C. Corbett
		John C. Corbett
		President and Chief Executive Officer