UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

For the Fiscal Year Ended December 31, 20162019

OR

Commission File Number 000-32017

CENTERSTATE BANKS, INC.BANK CORPORATION

(Name of registrant as specified in its charter)

Issuer’s telephone number, including area code:

(863) 293-4710

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $0.01 per share

Securities registered pursuant to Section 12(g) of the Act:

None

The registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ☐☒    NO  ☒☐

The registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES  ☐    NO  ☒

Check whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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  ☐

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  ☐

CheckIndicate by check mark if there is no disclosure of delinquent filers in responsepursuant to Item 405 of Regulation SKS-K (§229.405 of this chapter) is not contained in this form,herein, and no disclosure will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

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

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

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

Securities registered pursuant to Section 12 (b) of the Act:

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

The aggregate market value of the Common Stock of the registrant held by non-affiliates of the registrant (40,244,803(99,727,055 shares) on June 30, 2016,2019, was approximately $633,856,000.$2,296,714,000.  The aggregate market value was computed by reference to the last sale of the Common Stock of the registrant at $15.75$23.03 per share on June 30, 2016.2019.  For the purposes of this response, directors, executive officers and holders of 5% or more of the registrant’s Common Stock are considered the affiliates of the issuer at that date.

As of February 28, 2017 there were outstanding 51,064,897 shares of the registrant’s Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on April 27, 201723, 2020 to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the registrant’s fiscal year end are incorporated by reference into Part III, of this Annual Report on Form 10-K.

TABLE OF CONTENTS

PART

PART I

Some of the statements in this report constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities Exchange Act of 1934. These statements related to future events, other future financial performance or business strategies, and include statements containing terminology such as “may,” “will,” “should,” “expects,” “scheduled,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “potential,” or “continue” or the negative of such terms or other comparable terminology. Actual events or results may differ materially from the results anticipated in these forward looking statements, due to a variety of factors, including, without limitation:  the impact on failing to implement our business strategy, including our growth and acquisition strategy; the ability to successfully integrate our acquisitions; additional capital requirements due to our growth plans; the impact of an increase in our asset size to over $10 billion; the ability to implement our mortgage and SBA lines of business; the risks of changes in interest rates and the level and composition of deposits, loan demand, the credit and other risks in our loan portfolio and the values of loan collateral; the impact of us not being able to manage our risk; the impact of a loss of management or other experienced employees; the impact if we failed to maintain our culture and attract and retain skilled people; risks related to pending or future litigation; the risk of changes in technology and customer preferences; the impact of any material failure or breach in our infrastructure or the infrastructure of third parties on which we rely as a result of cyber-attacks; or material regulatory liability in areas such as BSA or consumer protection; the effects of future economic and political conditions; reputational risks from such failures or liabilities or other events; adverse weather or manmade events that may or may not be caused by climate change; governmental monetary and fiscal policies, as well as legislative and regulatory changes; the effects of competition from technological change and other commercial banks, thrifts, consumer finance companies, and other financial institutions operating in our market area and elsewhere; other factors disclosed in this Annual Report on Form 10-K, including, among others, those disclosed in Part I, Item 1A. “Risk Factors.”  All forward looking statements attributable to our Company are expressly qualified in their entirety by these cautionary statements.  We disclaim any intent or obligation to update these forward looking statements, whether as a result of new information, future events or otherwise.  There is no assurance that future results, levels of activity, performance or goals will be achieved.  

General

CenterState Banks, Inc.Bank Corporation (“We,” “Our,” “CenterState,” “CSFL,” or the “Company”) wasis a financial holding company incorporated in September 20, 1999 under the laws of the State of Florida on September 20, 1999.  We are a financial holding company which ownsFlorida. Through our national bank subsidiary, CenterState Bank, of Florida, N.A. (“CenterState Bank” or the “Bank”).  Headquartered in Winter Haven, Florida,, we provide a full range of consumer and commercial banking services to individuals, businesses and industries through 67our headquarters branch in Winter Haven, Florida and, as of December 31, 2019, a 149 bank officebranch network located within 23 counties throughout Florida, Georgia and Alabama, as well as threeone loan production officesoffice in Florida and one loan production office in Macon, Georgia.  As of December 31, 2016, CenterState Bank wasis among the second largest Florida-based community banking organizationorganizations in terms of publicly available deposit data (on a pro forma basis taking into account the closingas of its pending acquisition transactions with Platinum Bank Holding Company (“Platinum”) and Gateway Financial Holdings of Florida, Inc. (“Gateway”).December 31, 2019.  

We also operate, through our subsidiary bank,Bank, a correspondent banking and capital markets service division for approximately 600over 650 small and medium sized community banks throughout the United States. Based primarily in Atlanta, Georgia and Birmingham, Alabama, this division earns commissions on fixed income security sales, fees from hedging services, loan brokerage fees and consulting fees for services related to these activities. The Bank also owns CBI Holding Company, LLC (“CBI”), which in turn owns Corporate Billing, LLC (“Corporate Billing”), a transaction-based finance company headquartered in Decatur, Alabama that provides factoring, invoicing, collection and accounts receivable management services to transportation companies and automotive parts and services providers throughout the United States and Canada.

We have grown from our formation in 2000 primarily through a series of acquisitions, starting in June 2000 through 2016.2019. Our most recent acquisitions include:

On October 17, 2016, weJanuary 25, 2020, CenterState entered into an Agreement and Plan of Merger with South State Corporation (“South State”), a definitive agreement to acquire Platinum, thebank holding company of Platinum Bank. The transaction was approved by the boards of directors of both companies, has received all required regulatory approvals, and is expected to closeheadquartered in Columbia, South Carolina, which engages in the second quarterbusiness of 2017. Completionbanking through South State Bank. South State Bank operates branches throughout South Carolina, North Carolina, Georgia and Virginia.  The combined company will operate under the South State Bank name and will trade under the South State ticker symbol SSB on the Nasdaq stock market.  The company will be headquartered in Winter Haven, Florida and will maintain a significant presence in Columbia and Charleston, South Carolina; Charlotte, North Carolina; and Atlanta, Georgia.  Upon completion of the transactionmerger, which is subject to receipt of regulatory and shareholder approvals and other customary closing conditions, including approvalthe combined company will have, on a pro forma basis, excluding purchase accounting adjustments, assets of Platinum’s shareholders. Under$34 billion, deposits of $26 billion and loans of $24 billion.

In addition to the terms of the agreement, holders of Platinum common stock will receive 3.7832 shares of our common stock and $7.60 in cash for each share of Platinum common stock, which equates to an aggregate transaction value of approximately $83.8 million, based on our closing stock price on September 30, 2016 (comprised of approximately 74.5 million of our common stock and $9.3 million of cash).

On November 30, 2016,Bank, we entered into a definitive agreement to acquire Gateway, the holding company of Gateway Bank of Florida, Gateway Bank of Central Florida, and Gateway Bank of Southwest Florida. The transaction was approved by the boards of directors of both companies, has received all required regulatory approvals, and is expected to close in the second quarter of 2017. Completion of the transaction is subject to customary closing conditions, including approval of Gateway’s shareholders. Under the terms of the agreement, holders of Gateway common stock will receive $18.00 in cash or 0.95 shares of our common stock for each share of Gateway common stock; provided, however, that the aggregate cash payment shall constitute 30% of the merger consideration, which equates to an aggregate transaction value of approximately $116.9 million, based on our closing stock price on September 30, 2016.  

We also own R4ALL, Inc. (“R4ALL”), which acquires and disposes troubled assets, and CSFL IC,Insurance Corp. (“CSFL IC”), which operates a captive insurance subsidiary pursuant to section 831(b) of the U.S. Tax Code.  National Commerce Risk Management, Inc. (“Risk Mgmt”), acquired from the NCOM transaction, was also a captive insurance subsidiary pursuant to Section 831(b) of the U.S. Tax Code, and it has since been dissolved.

At December 31, 2016,2019, we had total consolidated assets of $5.1$17.1 billion, total consolidated loans of $3.4$12.0 billion, total consolidated deposits of $4.2$13.1 billion, and total consolidated shareholders’ equity of $552.5 million.$2.9 billion.

Our revenue is primarily derived from interest on, and fees received in connection with, real estate and other loans, interest and dividends from investment securities and short-term investments, and commissions on bond sales.  The principal sources of funds for our lending activities are customer deposits, repayment of loans, and the sale and maturity of investment securities.  Our principal expenses are interest paid on deposits, and operating and general administrative expenses.

As is the case with banking institutions generally, our operations are materially and significantly influenced by the real estate market, general economic conditions, and by relatedthe tax, monetary and fiscal policies of financial institutionthe U.S. and state government and regulatory agencies, including the Board of Governors of the Federal Reserve System (the “Federal Reserve”).  Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest.  Lending activities are affected by the demand for

financing of real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered and other factors affecting local demand and availability of funds.funds, including tax rates and regulatory structure.  We face strong competition in the attraction of deposits (our primary source of lendable funds) and in the origination of loans.  See “Competition.”

Lending Activities

We offer a range of lending services, including real estate, consumer and commercial loans, to individuals and small businesses and other organizations that are located in or conduct a substantial portion of their business in our market area.  Our consolidated loans at December 31, 20162019 and 20152018 were $3,429,747,000,$12.0 billion, or 68%70% and $2,593,776,000,$8.3 billion, or 64%68%, respectively, of total consolidated assets.  The interest rates charged on loans vary with the degree of risk, maturity, and amount of the loan, and are further subject to competitive pressures, money market rates, availability of funds, and government regulations.  We have no foreign loans or loans for highly leveraged transactions.  We do have immaterial amounts of loans with foreigners on property located within our Florida market area, primarily vacation and second homes.

Our loans are concentrated in three major areas: real estate loans, commercial loans and consumer loans.  A majority of our loans are made on a secured basis.  As of December 31, 2016,2019, approximately 84%83% of our consolidated loan portfolio consisted of loans secured by mortgages on real estate, 13%15% of the loan portfolio consisted of commercial loans (not secured by real estate) and 3%2% of our loan portfolio consisted of consumer and other loans.

On February 3, 2016, we entered into an agreement with the FDIC to terminate all existing FDIC loss share agreements.  We will now recognize the full amounts of all future charge-offs and recoveries related to the former covered assets as the FDIC will no longer be sharing in such amounts.

Our real estate loans are secured by mortgages and consist primarily of loans to individuals and businesses for the purchase, improvement of or investment in real estate, for the construction of single-family residential and commercial units, and for the development of single-family residential building lots. These real estate loans may be made at fixed or variable interest rates.  Generally, we do not make fixed-rate commercial real estate loans for terms exceeding five years.  Loans in excess of five years are generally adjustable.made at adjustable interest rates.  Our residential real estate loans generally are repayable in monthly installments based on up to a 15-year or a 30-year amortization schedule with variable or fixed interest rates.

Our commercial loan portfolio consists primarily of loans to small-to-medium sized businesses located primarily in our market area for working capital, equipment purchases, and various other business purposes.  A majority of commercial loans are secured by equipment or similar assets, but these loans may also be made on an unsecured basis.  Commercial loans may be made at variable or fixed rates of interest.  Commercial lines of credit are typically granted on a one-year basis, with loan covenants and monetary thresholds.  Other commercial loans with terms or amortization schedules of longer than one year will normally carry interest rates which vary with the prime lending rate and will become payable in full and are generally refinanced in three to five

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years.  Commercial and agricultural loans not secured by real estate amounted to approximately 13%15% and 12%14% of our Company’s total loan portfolio as of December 31, 20162019 and 2015,2018, respectively.

Our consumer loan portfolio consists primarily of loans to individuals for various consumer purposes, but includes some business purpose loans which are payable on an installment basis.  The majority of these loans are for terms of less than five years and are secured by liens on various personal assets of the borrowers, but consumer loans may also be made on an unsecured basis.  Consumer loans are made at fixed and variable interest rates, and are often based on up to a five-year amortization schedule.

At December 31, 2016,2019, approximately 43%52% of our total non-PCI (“Purchased Credit Impaired”Credit-Impaired”) loan portfolio is fixed rate, 24%23% is floating rate and 33%25% is variable rate other than floating.

For additional information regarding our loan portfolio, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Loan originations are derived primarily from employee loan officers within our local market areas, but can also be attributed to referrals from existing customers and borrowers, advertising, or walk-in customers.

Certain credit risks are inherent in making loans.  These include prepayment risks, risks resulting from uncertainties in the future value of collateral, risks resulting from changes in economic and industry conditions, and risks inherent in dealing with individual borrowers.  In particular, longer maturities increase the risk that economic conditions will change and adversely affect collectability.  We attempt to minimize credit losses through various means.  In particular, on larger credits, we generally rely on the cash flow of a debtor as the source of repayment and secondarily on the value of the underlying collateral.  In addition, we attempt to utilizeemploy shorter loan terms in order to reduce the risk of a decline in the value of such collateral.

2In addition, we have a mortgage line of business which originates single-family home loans and sells a majority of those mortgages into the secondary market of which the majority are sold with servicing rights released. We also have a SBA 7(a) line of business whereby we routinely sell the government guaranteed portion of the SBA loans to investors with the unguaranteed portion of the loan and the servicing rights retained.

DepositFor additional information regarding our loan portfolio, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Deposit Activities

Deposits are the major source of our funds for lending and other investment activities.  We consider the majority of our regular savings, demand, negotiable order of withdrawal or NOW, and money market deposit accounts to be core deposits.  These accounts comprised approximately 87%83% and 81% of our consolidated total deposits at December 31, 20162019 and 2015.2018, respectively.  Approximately 13%17% and 19% of our consolidated deposits at December 31, 20162019 and December 31, 2015,2018, respectively, were certificates of deposit.  Generally, we attempt to maintain the rates paid on our deposits at a competitive level.  Time deposits of $100,000 and over made up approximately 8%10% of consolidated total deposits at December 31, 20162019 and 6% at December 31, 2015.2018.  The majority of the deposits are generated from customers in the market areas where we conduct business.  Generally, we do not accept brokered deposits and we do not solicit deposits on a national level.  We obtain substantially all of our deposits from customers in our local markets.  For additional information regarding the Company’s deposit accounts, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Deposits.”

Investments

Our investment securities portfolio available for sale investment debt securities portfolio was $740,702,000$1.9 billion and $604,739,000$1.7 billion at December 31, 20162019 and 2015,2018, respectively, representing 15%11% and 14% of our total consolidated assets.  At December 31, 2016,2019, approximately 96%94% of this portfolio was invested in U.S. government mortgage backed securities (“MBS”), specifically residential FNMA, FHLMC,Fannie Mae, Freddie Mac and GNMA MBSs.Ginnie Mae MBS.  We have selected these types of investments because such securities generally represent what we believe to be a minimal investment risk.  We do not own any private label MBSs.  Approximately 3%,5% or $22,443,000,$93.9 million, of this portfolio is invested in municipal securities.  Our investments are managed in relation to loan demand and deposit growth, and are generally used to provide for the investment of excess funds at acceptable risks levels while providing liquidity to fund increases in loan demand or to offset fluctuations in deposits.  Investment debt securities available for sale are recorded on our balance sheet at market value at each balance sheet date.  Any change in market value is recorded directly in our stockholders’shareholders’ equity account and is not recognized in our income statement unless the security is sold or unless it is impaired and the impairment is other than temporary.  During 2016,2019, we sold approximately $347,000$227.2 million of these securities and recognized a net gain on the sales of approximately $13,000.$25.  In addition, we sold approximately $141,715,000$42.0 million of securities acquired from the purchase of Community and HometownNCOM on MarchApril 1, 2016.  These2019.  All of the acquired securities sold were collateralized loan obligation securities (“CLOs”).  The CLOs were marked to fair value at acquisition and subsequently sold after the acquisition date and thus no gains or losses were recognized.resulting in a loss of $5.  

We have selected these types of investments because such securities generally represent what we believe to be a minimal investment risk.  Occasionally, we may purchase certificates of deposits of national and state banks.  These investments may exceed $250,000 in any one institution (the limit of FDIC insurance for deposit accounts).  Federal funds sold, money market accounts and interest bearing deposits held at the Federal Reserve Bank represent the excess cash we have available over and above daily cash needs.  Federal funds sold and money market funds are invested on an overnight basis with approved correspondent banks.

We monitor changes in financial markets.  In addition to investments for our portfolio, we monitor daily cash positions to ensure that all available funds earn interest at the earliest possible date.  A portion of the investment account is invested in liquid

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securities that can be readily converted to cash with minimum risk of market loss.  These investments usually consist of obligations of U.S. government agencies, mortgage backed securities and federal funds.  The remainder of the investment account may be placed in investment securities of different type and/or longer maturity.  Daily surplus funds are sold in the federal funds market for one business day.  We attempt to stagger the maturities of our securities so as to produce a steady cash-flow in the event cash is needed, or economic conditions change.

We also have a trading securities portfolio managed at our subsidiary bank.Bank.  For this portfolio, realized and unrealized gains and losses are included in trading securities revenue, a component of non interest incomeNon-interest Income in our Consolidated Statement“Consolidated Statements of Income and Comprehensive Income.”  Securities purchased for this portfolio have primarily been municipal securities and are held for short periods of time.  During 2016,2019, we purchased approximately $186,150,000$194.8 million of securities for this portfolio and sold $176,393,000$191.6 million, recognizing a net realized gain on sale of approximately $323,000.$133 thousand.  At December 31, 20162019, we had $12,383,000$5.0 million of securities in our trading portfolio.

Our held to maturity debt securities portfolio was $250,543,000$202.9 million and $272,840,000$216.8 million at December 31, 20162019 and December 31, 2015,2018, respectively, representing 5%1% and 7% of2% our total consolidated assets.  These securities had unrecognized net (losses) gains of approximately ($7,850,000)$5.9 million and $1,143,000,unrecognized net losses of approximately $4.7 million, resulting in estimated fair values of $242,693,000$208.9 million and $273,983,000$212.2 million at December 31, 20162019 and 2015,2018, respectively.  At December 31, 2016,2019, approximately 48%35% of this portfolio is invested in mortgage backed securitiesMBS and 52%65% in municipal securities.  It is anticipated that this portfolio will generally hold 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.

Correspondent Banking

Our correspondent banking and capital markets segment operates as a division within our subsidiary bank.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

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banking services are less volatile than those generated through the capital markets group. The customer base includes small to medium size financial institutions located throughout the United States.

Acquisition Strategy

Our business growth, profitability and market share have been enhanced by us engaging in strategic mergers and acquisitions either within or contiguous to our existing footprint.  Our acquisition strategy focuses on banking institutions that:

We expect to continue to assess future opportunities of financial companies using these criteria, based on market and other conditions.  

Data Processing

We use a single in-house core data processing solution.  The core data processing system provides deposit processing, loan processing and overall accounting services.  

A division of our subsidiary bankThe Bank provides item processing services and certain other information technology (“IT”) services for the Bankitself and the Company overall.  These services include;include: sorting, encoding, processing, and imaging checks and rendering checking and other deposit statements to commercial and retail customers, as well as providing IT services, including intranet and internet services for our Bank and the Company overall.

Effect of Governmental Policies

Our earnings and business are and will be affected by the policies of various regulatory authorities of the United States, especially the Federal Reserve.  The Federal Reserve, among other things, regulatesseeks to influence interest rates and the supply of creditmoney and deals with general economic conditionscredit within the United States.  Among the traditional methods that have been used to achieve this objective are open market operations in U.S. government securities, changes in the discount rate for bank borrowings, expanded access to funds for non-banks and changes in reserve requirements against bank deposits. The instrumentsFederal Reserve has, as a response to the financial crisis, steeply

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increased the size of monetary policy employedits balance sheet by buying securities and has paid interest on excess reserves held by banks at the Federal Reserve for these purposesReserve.  Both the traditional and more recent methods are used in varying combinations to influence in various ways the overall levelgrowth and distribution of investments,bank loans, other extensions of creditinvestments and deposits, and the interest rates on loans and securities, and rates paid on liabilities and received on assets.for deposits.  The monetary policies of the Federal Reserve have had a significant effect on the operating results of commercial banks and are expected to continue to do so in the future.  The monetary policies of the Federal Reserve are influenced by various factors, including inflation, unemployment, and short-term and long-term changes in the international trade balance and in the fiscal policies of the U.S. Government.  Following a prolonged period in which the federal funds rate was stable or decreasing, the Federal Reserve began to increase this benchmark rate, but has more recently started to decrease the federal funds rate. In addition, since the period during which the Federal Reserve increased the size of its balance sheet substantially above historical levels through the purchase of debt securities, the Federal Reserve has started to vary the size of its balance sheet, which might also affect interest rates.  Future monetary policies, including whether the Federal Reserve will increase or decrease the federal funds rate and whether or at what pace it will reduce or increase the size of its balance sheet, and the effect of such policies on the future business and earnings of the Company and our subsidiary bank cannot be predicted.

Supervision and Regulation

We are extensively regulated under federal and state law.  The followingfollowing is a brief summarysummary of certain aspects of that regulation which are material to us, and does not purport to be a complete description of all regulations that affect us or all aspects of those regulations. To the extent particular statutory and regulatory provisionsparticular statutory and regulatory provisions are described, the description is qualified in its entirety by reference to the particular statute or regulation.  Proposals to change the laws and regulations governing the banking industry are frequently raised at both the state and federal levels.  The likelihood and timing of any changes in these laws and regulations, and the impact such changes may have on the Company and the Bank, are difficult to ascertain.  In addition to laws and regulations, bank regulatory agencies may issue policy statements, interpretive letters and similar written guidance applicable to the Company or the Bank.  A change in applicable laws, and regulations or regulatory guidance, or in the manner such laws, and regulations or regulatory guidance are interpreted by regulatory agencies or courts, may have a material adverse effect on the Company’s and the Bank’s business, operations, and earnings.  Supervision, regulation, and examination of banksSupervision, regulation, and examination of banks by regulatory agenciesregulatory agencies are intended primarilyintended primarily for the protection of depositors, rather than shareholders.the protection of depositors and customers, the deposit insurance fund and the U.S. banking and financial system rather than shareholders.

Both the scope of the laws and regulations and the intensity of the supervision to which we are subject have increased in recent years in response to the financial crisis, as well as other factors such as technological and market changes. As described in further detail below, the Company and the Bank have become subject to additional regulatory requirements as a result of the growth of their assets. Regulatory enforcement and fines have also increased across the banking and financial services sector. Many of these changes have occurred as a result of the Dodd-Frank Act Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and its implementing regulations.  While there have been some changes in the post financial crisis framework applicable to the Company, the Company expects that its business will remain subject to extensive regulation and supervision.

We are also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, both as administered by the SEC, as well as the rules of Nasdaq that apply to companies with securities listed on the Nasdaq Global Select Market.

Regulation of the Company

We are regulated by the Federal Reserveregistered as a bank holding company with the Federal Reserve under the Bank Holding Company Act of 1956 (the “BHC Act”) and have elected to be a financial holding company. As a financial holding company, under the BHC Act, subjectwe are subject to the supervision, examinationcomprehensive regulation, examination and reporting requirements ofsupervision by the Federal Reserve.  FederalReserve and are subject to its regulatory reporting requirements.  Federal law subjects financial holding companies, such as the Company, to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations.

Under current lawAs and Federal Reserve policy, financial holding company, we are permitted to engage in, and be affiliated with companies engaging in, a finbroader range of activities than those permitted for ancial holding comp bank holding company. Bank holding companies are generally restricted to engaging in the business of banking, managing or controlling banks and certain other activities determined by the Federal Reserve to be closely related to banking. Financial holding companies may also engage in activities that are considered to be financial in nature, as well as those incidental or complementary to financial activities, including certain insurance underwriting activities.  We and the Bank must each remain “well-capitalized” and “well-managed” and the Bank must receive a Community Reinvestment Act (“CRA”) rating of at least “Satisfactory” at its most recent examination in order for us to maintain our status as a financial holding company. In addition, the Federal Reserve has the power to order a financial holding company or its subsidiaries to terminate any activity or terminate its ownership or control of any subsidiary, when it has reasonable cause to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness, or stability of any bank subsidiary of that financial holding company.  

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A financial holding company is expected torequired to act as a sourcesource of financial and managerial strengthfinancial and managerial strength to its subsidiary bank andsubsidiary bank and to maintain resources adequatemaintain resources adequate to support its bank. The termsupport its bank.  The term “source of financial strength” of financial strength” has been defineddefined as the abilitythe ability of a companycompany to provide financial assistanceprovide financial assistance to its insured depository institution subsidiariesinsured depository institution subsidiaries in the eventthe event of financial distress.financial distress.  The appropriate federal banking agency forappropriate federal banking agency for the depository institutiondepository institution (in this case the Office of the Comptroller of the Currency or OCC) may require reports from“OCC”) may require reports from the CompanyCompany to assess its abilityability to serveserve as a source of strengthsource of strength and to enforce complianceenforce compliance with the source-of-strength requirementsthe source-of-strength requirements by requiring the holding companyholding company to provide financial assistanceprovide financial assistance to the Bank if its capital were to become impaired.  If the Company fails to provide such assistance within three months,within three months, it couldcould be ordered to sellordered to sell its stock of the Bank to coverto cover the deficiency.  As disclosed below,deficiency.  Any capital loans by the Company has minimum capital requirements which must be maintained to remainto the Bank would be subordinate in regulatory compliance.right of payment to deposits and certain other debts of the Bank. In the event of the Company’s bankruptcy, any commitment by the Company to a federal bank regulatory agency to maintain the capital of the Bank would be assumed by the bankruptcy trustee and entitled to a priority of payment.

The BHCBHC Act requires thatrequires that a financial holding company obtain the prior approvalfinancial holding company obtain the prior approval of the Federalthe Federal Reserve beforebefore (i) acquiringacquiring direct or indirect ownership or controlindirect ownership or control of more thanmore than 5% of the voting shares of any of the voting shares of any additional bank,bank or bank holding company, (ii) taking any actiontaking any action that causescauses an additional bankbank or bank holding company to becomebecome a subsidiary of the financial holding company,subsidiary of the financial holding company, or (iii) mergingmerging or consolidating with any other financial holding company.consolidating with any other bank holding company.  The Federal Reserve may not approve anyFederal Reserve may not approve any such transaction that would resulttransaction that would result in a monopolymonopoly or wouldwould be in furtherancefurtherance of any combinationany combination or conspiracy to monopolizeconspiracy to monopolize or attemptattempt to monopolize the business of bankingmonopolize the business of banking in any section of the Unitedany section of the United States, or theor the effect of which may be substantiallywhich may be substantially to lessen competitioncompetition or toto tend to create a monopoly in anymonopoly in any section of the country, or thatthe country, or that in any other manner would beother manner would be in restraintrestraint of trade, unless the anticompetitivetrade, unless the anticompetitive effects of the proposed transaction are

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the proposed transaction are clearly outweighedoutweighed by the public interest in meetingtheconvenience andneedsthe public interest in meeting the convenience and needs ofthecommunity the community tobeserved.The Federal Reserve served. The Federal Reserve is alsorequired required to considerconsider (1)thefinancial andmanagerial resources the financial and managerial resources of the companies involved, including pro forma capital ratios; (2) the risk to the stability of the United States banking or financial system; (3) the convenience and needs of the communities to be served, including the companies’ performance under the Community Reinvestment Act or CRA; and (4) the effectiveness of the companies in combatting money laundering.  We are permitted under applicable federal and state law to make out of state acquisitions and mergers of other banks and bank holding companies, subject to the requirements summarized above.

Federal law restricts the amount of voting stockFederal law restricts the amount of voting stock of a bank holding companybank holding company and a bank that bank that a person may acquire without theperson may acquire without the prior approvalapproval of banking regulators. The overallbanking regulators. The overall effect of suchof such laws is to make make it more difficultmore difficult to acquireacquire a bank holding companybank holding company and and a bank bank by tender offer or similar means thantender offer or similar means than it mightmight be to acquire controlacquire control of another typeanother type of corporation. Consequently, shareholderscorporation. Consequently, shareholders of the Company maythe Company may be less likelylikely to benefit from the rapid increasesbenefit from the rapid increases in stockstock prices thatthat may resultresult from tender offers or similar effortstender offers or similar efforts to acquire control of other companies.acquire control of other companies. Federal law also imposes restrictionsimposes restrictions on acquisitionsacquisitions of stock instock in a bank holding company andbank holding company or a state bank.  Under the federal Changenational bank.  Under the federal Change in Bank ControlControl Act and the regulations thereunder,and the regulations thereunder, a person person or group must give advance noticegroup must give advance notice to the Federalthe Federal Reserve before acquiring controlbefore acquiring control of any bank holding company, bank holding company, such as the Company, and thethe OCC before acquiring controlbefore acquiring control of anyany national bank.bank, such as the Bank. Upon receiptreceipt of suchsuch notice, the bankbank regulatory agencies may agencies may approve or disapprovedisapprove the acquisition.  The Change in Bank Controlacquisition.  The Change in Bank Control Act creates a rebuttable presumption of controlrebuttable presumption of control if a member ormember or group acquiresacquires a certain percentage or morecertain percentage or more of a bank holding company’s or bank’s voting stock,bank holding company’s or bank’s voting stock, or if one or more or more other control factorscontrol factors set forthforth in thethe Act are present.

A finpresent. As ancial holding comp result, any is prohibited from engaging in activities other than banking, or managing or controlling banks person or other permissible subsidiaries, and from acquiring or retaining directentity generally must provide prior notice to the Federal Reserve before acquiring the power to vote 10% or indirect controlmore of any company engaged in any activities other than those activities determined by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.  In determining whether a particular activity is permissible, the Federal Reserve must consider whether the performance of such an activity can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflictsour outstanding common stock.  Investors should be aware of interest, or unsound banking practices. For example, factoring accounts receivable, acquiring or servicing loans, leasing personal property, conducting securities brokerage activities, performing certain data processing services, acting as agent or broker in selling credit life insurance and certain other types these requirements when acquiring shares of insurance in connection with credit transactions, and certain insurance underwriting activities have all been determined by regulations of the Federal Reserve to be permissible activities of financial holding companies.  Despite prior approval, the Federal Reserve has the power to order a holding company or its subsidiaries to terminate any activity or terminate its ownership or control of any subsidiary, when it has reasonable cause to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness, or stability of any bank subsidiary of that financial holding company.our stock.

Regulation of the Bank

CenterState Bank is a national bank subjectsubject to comprehensive regulation, examination and supervcomprehensive regulation, examination and supervision by the OCC and ision by the OCC. The deposits subject to its regulatory reporting requirements. The deposits of thethe Bank are insured by theinsured by the FDIC and, accordingly, the and, accordingly, the Bank is also subject to certainto certain FDIC regulations and theregulations and the FDIC has backup examination authority andhas backup examination authority and some enforcementenforcement powers over the Bank.  Theover the Bank.  The Bank also is subject tosubject to certain regulation by the Federal Reserve.Reserve regulations.  These regulations include limitationsregulations include limitations on loansloans to a single borrower andsingle borrower and to its directors, officers and employees;directors, officers and employees; restrictions on the openingopening and closing of branch offices; the maintenance of required capital and liquidity ratios; the grantingclosing of credit under equal andbranch offices; the maintenance of required capital and liquidity ratios; the granting of credit under equal and fair conditions; the disclosureconditions; the disclosure of the costs and termsthe costs and terms of such credit,such credit, requirements to maintain reserves against deposits and loans, limitation on the types of investment that may be made and requirements governing risk management practices.  The Bank also is required to submit periodic reports regarding its financial condition and other matters.

The BankBank also is subject to restrictionsto restrictions on its ability to lend to and engage in other transactions with the Company and the Bank’s other affiliates.  Under these provisions, individual transactionsloans or other extensions of credit between the Bank and the Company or any nonbank affiliate generally are limited to 10% of the Bank’s capital and surplus, and all such transactions between the Bank and either the Company or any nonbank affiliate are limited to 20% of the Bank’s capital and surplus. Loans and other extensions of credit from the Bank to any affiliate generally are required to be secured by eligible collateral in specified amounts. In addition, any transaction between the Bank and any affiliate are required to be on arm’s length terms and conditions. The Dodd-Frank Act Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"), expanded these affiliate transaction rules to broaden the definition of affiliate and to apply to securities lending, repurchase agreements and derivatives activities that we may have with an affiliate, as well as to strengthen collateral requirements and limit Federal Reserve exemptive authority. Also, the definition of “extension of credit” for transactions with executive officers, directors and principal shareholders was expanded to includethese purposes includes credit exposureexposures arising from a derivative transaction, a repurchase or reverse repurchase agreement and a securities lending or borrowing transaction.  Federal banking laws also place similar restrictions on loans and other extensions of credit by FDIC-insured banks, such as the Bank, to their directors, executive officers and principal shareholders.  These provisionsrestrictions have not had a material impact on the Company or the Bank.

Federal Reserve rules require depository institutions, such as the Bank, to maintain reserves against their transaction accounts, primarily NOW and regular checking accounts.  For 2019, the first $16 million of covered balances are exempt from the reserve

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requirement, aggregate balances between $16 million and $122.3 million are subject to a 3% reserve requirement and aggregate balances above $122.3 million are subject to a 10% reserve requirement. These reserve requirements are subject to annual adjustment by the Federal Reserve.

The Bank is permitted under federal law to branch on a de novo basis across state lines where the laws of that state would permit a bank chartered by that state to open a de novo branch.

Supervision, Examination and Enforcement

The Federal Reserve, OCC and FDIC have broad supervisory, examination and enforcement authority with regard to bank holding companies and banks, including the power to impose nonpublic supervisory agreements, issue cease and desist or removal orders, impose fines and other civil and criminal penalties, initiate injunctive actions, terminate deposit insurance and appoint a conservator or receiver.  In general, these actions may be initiated for violations of laws and regulations, as well as engagement in unsafe and unsound practices, and certain of these actions also may be taken against an “institution affiliated party” as defined in the law. Specifically, the regulators may direct a bank holding company or bank to, among other things, increase its capital, sell subsidiaries or other assets, limit its dividends and distributions, restrict its growth or remove officers and directors. Supervision and examinations are confidential, and the outcomes of these actions may not be made public.

Changes to our Regulation and Supervision in Crossing $10 Billion in Assets Threshold

Effective July 1, 2019, which was the date following the fourth consecutive quarter (plus any applicable phase-in period) in which the Company or the Bank’s total consolidated assets exceeded that $10 billion threshold, certain changes occurred in our supervision:  

In addition, beginning on July 1, 2019, the Bank became subject to the cap on debit card interchange fees imposed by the so-called Durbin Amendment. Under the Durbin Amendment and the Federal Reserve’s implementing regulations, bank issuers who are not exempt may only receive an interchange fee from merchants that is reasonable and proportional to the cost of clearing the transaction.  The maximum permissible interchange fee is equal to no more than $0.21 plus 5 basis points of the transaction value for many types of debit interchange transactions.  A debit card issuer may also recover $0.01 per transaction for fraud prevention purposes if the issuer complies with certain fraud-related requirements required by the Federal Reserve.  In addition, the Federal Reserve has rules governing routing and exclusivity that require issuers to offer two unaffiliated networks for routing transactions on each debit or prepaid product.  The impact of this change reduced the Bank’s fee income by approximately $6.2 million in year 2019 and is expected to reduce by $12.4 million annually, afterwards.

FDIC Insurance Assessments and Depositor Preference  

The deposits of the Bank are insured by the FDIC up to the limits under applicable law, which currently are set at $250,000 for accounts under the same name and title. The Bank is subject to deposit insurance premium assessments. The FDIC imposes a risk-based deposit premium assessment system. Under this system, the assessment rates for an insured depository institution vary

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according to the level of risk incurred in its activities. To arrive at an assessment rate for a banking institution, the FDIC places it in one of four risk categories determined by reference to its capital levels and supervisory ratings. In the case of those institutions in the lowest risk category, the FDIC further determines its assessment rate based on certain specified financial ratios or, if applicable, long-term debt ratings. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits. Under the current system, premiums are assessed quarterly. The FDIC has published guidelines on the adjustment of assessment rates for certain institutions. In addition, insured depository institutions have been required to pay a pro rata portion of the interest due on the obligations issued by the Financing Corporation to fund the closing and disposal of failed thrift institutions by the Resolution Trust Corporation.

The assessment base on which the Bank’s deposit insurance premiums is paid to the FDIC is nowwas previously calculated based on its average consolidated total assets less its average equity. However, effective as of July 1, 2019, the FDIC uses a performance score and loss-severity score to calculate the Bank’s initial FDIC assessment rate.  In addition, under current law,calculating these scores, the minimum designated reserve ratio ofFDIC uses the deposit insurance fund is requiredBank’s capital level and regulatory supervisory ratings and certain financial measures to increase from a minimum of 1.15%assess the Bank’s ability to 1.35% of the estimated amount of total insured deposits by September 30, 2020. The FDIC is required to offset the effect of the increased minimum reserve ratio for banks with assets of less than $10 billion.

withstand asset-related and funding related stress, and make certain adjustments based on risk factors that are not adequately captured in these calculations.  

Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by a bank’s federal regulatory agency.  Deposits and certain claims for administrative expenses and employee

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compensation against insured depository institutions are afforded a priority over other general unsecured claims against the institution, including federal funds and letters of credit, in the liquidation or other resolution of that institution by any receiver appointed by federal authorities. These priority creditors include the FDIC.

Dividend Restrictions

The Company is a legal entity separate and distinct from its banking and other subsidiaries and has in the past relied on dividends from the Bank as its primary source of liquidity. There are limitations on the payment of dividends by the Bank to the Company, as well as by the Company to its shareholders.  For example,

The OCC has the general authority to limit the dividends paid by the Bank wouldif such payment may be requireddeemed to obtainconstitute an unsafe and unsound practice.  The Bank may not pay dividends from its paid-in surplus.  All dividends must be paid out of undivided profits then on hand, after deducting expenses, including reserves for losses and bad debts.  In addition, a national bank, such as the priorBank, is prohibited from declaring a dividend on its shares of common stock until its surplus equals its stated capital, unless there has been transferred to surplus no less than one/tenth of the bank’s net profits of the preceding two consecutive half-year periods (in the case of an annual dividend).  The approval of the OCC to pay dividendsis required if the total of all dividends declared by the Banka national bank in any calendar year would exceedexceeds the sumtotal of its net incomeprofits for that year andcombined with its retained net incomeprofits for the preceding two calendar years, less any required transfers required by the OCC or to be made to retire any preferred stock. Federal law also prohibitssurplus.

We and the Bank from paying dividends that inmust maintain the aggregate would be greater than its undivided profits after deducting statutory bad debts in excessapplicable common equity Tier 1 ("CET1") capital conservation buffer of its ALL.  2.5% to avoid becoming subject to restrictions on capital distributions, including dividends.  For more information on the CET1 capital conservation buffer, see Part I Item 1. Supervision and Regulation – Capital Requirements.

In addition, the Federal Reserve has indicatedpolicy provides that banking organizationsbank holding companies, such as the Company, should generally pay dividends to shareholders only if (i) the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends anddividends; (ii) the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition.  For information on the restrictions on the right of our Bankcondition; and (iii) the organization will continue to pay dividends to us, see Part II - Item 5 “Marketmeet minimum capital adequacy ratios.  The policy also provides that a bank holding company should inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”

period for which the dividend is being paid or that could result in a material adverse change to the bank holding company’s capital structure.  Bank holding companies also are required to consult with the Federal Reserve before increasing dividends or redeeming or repurchasing capital instruments.  Additionally, the Federal Reserve could prohibit or limit the payment of dividends by a bank holding company if it determines that payment of the dividend would constitute an unsafe or unsound practice.

Capital

Requirements

We are required under federal law to maintain certain minimum capital levels at each of the Company and the Bank. The federal banking agencies have issued substantially similar risk-based and leverage capital requirements to banking organizations they supervise. Under these requirements, the Company and the Bank are required to maintain certain capital standards based on ratios of capital to total assets and capital to risk-weighted assets. The requirements also define the weights assigned to assets and off-balance sheet items to determine the risk weightedrisk-weighted asset components of the risk-based capital rules. The required capital ratios are minimums, and the Federal Reserve and OCC may determine that a banking organization, based on its size, complexity or risk profile, must maintain a higher level of capital in order to operate in a safe and sound manner. Risks such as concentration of credit risks and the risk arising from non-traditional activities, as well as the institution’s exposure to a decline in the economic value of its capital due to changes in interest rates, and an institutionsinstitution’s ability to manage those risks are important factors that are to be taken into account by the federal banking agencies in assessing an institution’s overall capital adequacy.

Effective January 1, 2015, revisedUnder the applicable capital rules, became effective for community banks with assets less than $10 billionthe Company and their holding companies pursuantthe Bank are subject to the requirements of the Dodd-Frank Act and standards adopted by the Basel Committee on Banking Supervision (referred to as “Basel III”). Under these revised rules, capital adequacy is measured by certainfollowing risk-based capital ratios, supplemented byratios: a leverage capital ratio. These capital rules assess an institution'sCET1 risk-based capital through three ratios:ratio, a common equity Tier 1 capital ("CET1") ratio, an additional Tier 1 risk-based capital ratio, which includes CET1 and additional Tier 1 capital, and a total capital ratio, which includes Tier 1 and Tier 2 capital.  CET1 is primarily comprised of the sum of common stock instruments and related surplus net of treasury stock, retained earnings, accumulated other comprehensive income (AOCI) and certain qualifying minority interests, less certain adjustments and deductions, that includeincluding with respect to goodwill, intangible assets, mortgage serv8icingservicing assets and deferred tax assets subject to temporary timing differences and AOCI (based on an irrevocable option to neutralize the AOCI).differences. Additional Tier 1 capital is primarily comprised of noncumulative perpetual preferred stock, tier 1minority1 minority interests and grandfathered trust preferred securities. Because the Company exceeded $15 billion in assets upon completion of its merger with NCC, the Company’s trust preferred securities less certain intangibles. no longer qualify as Tier 1 capital.

Tier 2 capital continues to consistconsists of instruments disqualified from Tier 1 capital, including as noted above, qualifying subordinated debt, other preferred stock and certain hybrid capital instruments, and a limited amount of loan loss reserves up to a maximum of 1.25% of risk-weighted assets; but thereassets, subject to certain eligibility criteria.  For institutions, such as us, that have exercised an opt-out election regarding the treatment of accumulated other comprehensive income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values are additional eligibility criteria placed on them.also included in Tier 2 capital.  The requirementscapital rules also define the weightsrisk-weights assigned to assets and off-balance sheet items

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to determine the risk weightedrisk-weighted asset components of the risk-based capital rules, and changes the risk weighting of certain assets, including, for example, “high volatility” commercial real estate, past due assets, structured securities and equity holdings.

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In addition, in December 2018, the U.S. federal banking agencies finalized rules that would permit bank holding companies and banks to phase-in, for regulatory capital purposes, the day-one impact of the new current expected credit loss accounting rule on retained earnings over a period of three years. For further discussion of the new current expected credit loss accounting rule, see Note 1 of the “Notes to Consolidated Financial Statements.”

The revisedcapital rules require a minimum CET1 risk-based capital ratio of 4.5%, a minimum overall Tier 1 risk-based capital ratio of 6%6.0%, and a total risk-based capital ratio of 8%8.0%. In addition, the revisedcapital rules require a capital conservation buffer of up to 2.5% above each of the minimum capital ratio requirements (CET1, tierTier 1, and total risk-based capital), which must be met for a bank or bank holding company to be able to pay dividends, engage in share buybacks or make discretionary bonus payments to executive management without restriction. This capital conservation buffer is beingwas phased in over a four yearfour-year period startingthat began on January 1, 2016, and was 0.625% in 2016 and 1.25% as of January 1, 2017. The revised rules also change the risk-weighting2017, 1.875% as of certain assets, including “high volatility” commercial real estate, past due assets, structured securitiesJanuary 1, 2018, and equity holdings. When fully implemented,is 2.50% as of January 1, 2019, so that a banking organization would neednow needs to maintain a CET1 capital ratio of at least 7%, a total Tier 1 capital ratio of at least 8.5% and a total risk-based capital ratio of at least 10.5% or it would be subject to restrictions on capital distributions and discretionary bonus payments to its executive management.

The leverage capital ratio, which serves as a minimum capital standard, considersis the ratio of Tier 1 capital only and is expressed as a percentage ofto quarterly average total assets, for the most recent quarter, after reduction of those assets forless goodwill and other disallowed intangible assets at the measurement date. Risks such as concentration of credit risks and the risk arising from non-traditional activities, as well as the institution's exposure to a decline in the economic value of its capital due to changes in interest rates, and an institution's ability to manage those risks are important factors that are to be taken into account by the federal banking agencies in assessing an institution's overall capital adequacy.  As of December 31, 2016, theassets. The required minimum leverage ratio for all banks wasand bank holding companies is 4%.

To be well-capitalized, the Bank must maintain the following capital ratios:

Safety and Soundness Considerations

There areThe Federal Reserve has not yet revised the well-capitalized standard for bank holding companies to reflect the higher capital requirements imposed under the current capital rules. For purposes of the Federal Reserve’s Regulation Y, including determining whether a number of additional obligations and restrictions imposed by law and policy onbank holding company meets the requirements to be a financial holding company, bank holding companies, such as the Company, and CenterState Bank, that are designed to reduce potential loss exposure to depositors and to the FDIC insurance fund in the event that the depository institutions become in danger of default or in default. Under current federal law, for example, the federal banking agencies, including the OCC and the FDIC, possess broad powers to take prompt corrective action to resolve problems of insured depository institutions such as the Bank. The extent of these powers depends upon whether the institution is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized," as defined by the law. Under regulations issued by the federal banking agencies to implement Basel III and the minimum leverage and risk-based capital requirements of the Dodd-Frank Act, to be considered “well capitalized,” an institution must have a total risk based capital of at least 10.0%, a Tier 1 capital ratio of at least 8.0%, a common equity Tier 1 capital ratio of at least 6.5% and a leverage ratio of at least 5%. An “adequately capitalized” institution must have a total risk-based capital of at least 8.0%, a Tier 1 capital ratio of at least 6.0%, a common equity Tier 1 capital ratio of at least 4.5% and a leverage ratio of at least 4.0%. An “undercapitalized” institution has a total risk-based capital ratio of less than 8.0%,maintain a Tier 1 risk-based capital ratio of less than 6.0%, a common equity Tier 1 capital ratio of less than 4.5%, or a leverage ratio of less than 4.0%; a “significantly undercapitalized” institution hasgreater and a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a common equity Tier 1 capital ratio of less than 3.0%10.0% or greater to be well-capitalized. If the Federal Reserve were to apply the same or a leverage ratiovery similar well-capitalized standard to bank holding companies as that applicable to the Bank, the Company’s capital ratios as of less than 3.0%;December 31, 2019 would exceed such revised well-capitalized standard. The Federal Reserve may require bank holding companies, including the Company, to maintain capital ratios substantially in excess of mandated minimum levels, depending upon general economic conditions and a “critically undercapitalized” institution has a ratio of tangible equity to total assets that is equal to or less than 2.0%. The Bank currently is designated as “well capitalized." This classification is primarily for the purpose of applying the prompt corrective action provisions of federal lawbank holding company’s particular condition, risk profile and is not intendedgrowth plans.

Failure to be well-capitalized or to meet minimum capital requirements could result in certain mandatory and should not be interpreted as a representation of overallpossible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our operations or financial condition or prospects of the institution.

The federal banking agencies’ prompt corrective action powers are broad.condition. For example, an institution that is categorized as “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized” is required to submit an acceptable capital restoration plan to its appropriate federal banking agency and the parent bank holding company must guarantee that the institution meet its capital restoration plan, subject to certain limitations. An "undercapitalized" institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval. In addition, the appropriate federal banking agency may treat an "undercapitalized" institution in the same manner as it treats a "significantly undercapitalized" institution if it determines that those actions are necessary.   These prompt corrective actionprovisions also provide that in general no institution may make a capital distribution if it would cause the institution to become “undercapitalized.” Capital distributions include cash (but not stock) dividends, stock purchases, redemptions, and other distributions of capital to the owners of an institution.  These provisions also require, among other things, that only a “well capitalized”well-capitalized depository institution may accept brokered deposits without prior regulatory approval. Failure to be well-capitalized or to meet minimum capital requirements could also result in restrictions on the Company’s or the Bank’s ability to pay dividends or otherwise distribute capital or to receive regulatory approval of applications or other restrictions on its growth.

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As of December 31, 2019 the Company’s and the Bank’s regulatory capital ratios were above the well-capitalized standards and met the fully phased-in capital conservation buffer.  Please refer to the table below for a summary of the Company’s and the Bank’s regulatory capital ratios as of December 31, 2019 and 2018, calculated using the regulatory capital methodology applicable to us during 2019.

Safety and Soundness Guidelines

The federal banking agencies also have adopted guidelines prescribing safety and soundness standards relating to internal controls, risk management, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. These guidelines in general require appropriate systems and practices to identify and manage specified risks and exposures. The guidelines prohibit excessive compensation as an unsafe and unsound practice and characterize compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer or employee, director or principal shareholder. In addition, the agencies have adopted regulations that authorize but do not require an agency to order an institution that has been given notice by the agency that it is not in compliance with any of the

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safety and soundness standards to submit a compliance plan. If after being so notified, an institution fails to submit an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types, to which an "undercapitalized" institution is subject under the prompt corrective action provisions described above.including those that may limit growth or capital distributions.

Lending Standards and Guidance

The enforcement powers available to the federal banking agencies have adopted uniform regulations prescribing standards for extensions of credit that are substantialsecured by liens or interests in real estate or made for the purpose of financing permanent improvements to real estate. Under these regulations, all insured depository institutions, such as the Bank, must adopt and maintain written policies establishing appropriate limits and standards for extensions of credit that are secured by liens or interests in real estate or are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio diversification standards, prudent underwriting standards (including loan-to-value limits) that are clear and measurable, loan administration procedures, and documentation, approval and reporting requirements. The real estate lending policies must reflect consideration of the federal bank regulators’ Interagency Guidelines for Real Estate Lending Policies.

The federal banking agencies have also jointly issued guidance on “Concentrations in Commercial Real Estate Lending” (the “Guidance”), which defines commercial real estate loans as exposures secured by raw land, land development and construction (including 1-4 family residential construction), multi-family property, and non-farm nonresidential property where the primary or a significant source of repayment is derived from rental income associated with the property (that is, loans for which 50% or more of the source of repayment comes from third party, non-affiliated, rental income) or the proceeds of the sale, refinancing, or permanent

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financing of the property. The Guidance requires that appropriate processes be in place to identify, monitor and control risks associated with real estate lending concentrations. If a concentration is present, management must employ heightened risk management practices that address key elements, including board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending. The required heightened risk management practices could include among other things, the ability to assess civil money penalties, to issue ceaseenhanced strategic planning, underwriting policies, risk management, internal controls, portfolio stress testing and desist or removal orders, and to initiate injunctive actions against banks and bank holding companies and any “institution affiliated party” as defined in the law. In general, these enforcement actions may be initiated for violations of laws and regulations,risk exposure limits as well as engagement in unsafeappropriately designed compensation and unsound practices. Other actionsincentive programs. Higher allowances for loan losses and capital levels may also be required. The Guidance states that the following metrics may indicate a concentration of commercial real estate loans, but that these metrics are neither limits nor a safe harbor: (1) total reported loans for construction, land development, and other land represent 100% or inactions may providemore of total risk-based capital; or (2) total reported loans secured by multi-family properties, non-farm non-residential properties (excluding those that are owner-occupied), and loans for construction, land development, and other land represent 300% or more of total risk-based capital and the basisbank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. As of December 31, 2019, our total reported loans for enforcement actions, including filing misleading or untimely reports with regulatory authorities.construction, land development, and other land were 63% of the Bank’s total risk based capital and our total reported loans secured by multifamily and non-farm nonresidential properties and loans for construction, land development, and other land were 289% of the Bank’s total risk based capital.

Community Reinvestment and Consumer Protection Laws

In connection with its lending activities, theThe Bank is subject to a number of federal laws designed to protect borrowersits customers. These consumer protection laws apply to a broad range of our activities and promote lending to various sectorsaspects of our business and include laws relating to interest rates, fair lending, disclosures of credit terms and estimated transaction costs to consumer borrowers, debt collection practices, the economy and population. These include, among other laws, the Equal Credit Opportunity Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act (“RESPA”), the Fair Credit Reporting Act, the Truth in Savings Actuse of and the Community Reinvestment Act ("CRA").provision of information to consumer reporting agencies, and the prohibition of unfair, deceptive or abusive acts or practices in connection with the offer, sale or provision of consumer financial products and services. Administration of many of these consumer protection rules are now the responsibility of the Consumer Financial Protection Bureau ("CFPB").CFPB, which has exclusive supervisory authority over insured depository institutions with more than $10 billion in total assets and any affiliates thereof. The CFPB also has authority to define and prevent unfair, deceptive and abusive practices in the consumer financial area, and expanded data collecting powers for purposes of determining bank compliance with the fair lending laws. In each of these cases, because we haveBecause our insured depository institution, the Bank, has had less than $10 billion in total assets, we arehave been supervised in these areas by the OCC.

The CFPB became our exclusive supervisor in these areas following the fourth consecutive quarter where the Bank’s total assets exceed $10 billion or as of the second quarter of 2019.

The regulations relating to mortgage lending and servicing pursuantCFPB has promulgated many mortgage-related final rules, including rules related to the Truth in Lendingability to repay and qualified mortgage standards, mortgage servicing standards, loan originator compensation standards, high-cost mortgage requirements, Home Mortgage Disclosure Act the Equal Credit Opportunity Actrequirements and RESPA were substantially revisedappraisal and escrow standards for higher priced mortgages. In addition, several proposed revisions to mortgage-related rules are pending finalization. The mortgage-related final rules issued by the CFPB effective January 10, 2014, to require, among other things, enhanced disclosures to consumers relating to appraisals, home ownership counseling, payments, forced placed insurance,have materially restructured the origination, servicing and error resolution, certain minimum standards for the originationsecuritization of residential mortgages in the United States. These rules have impacted, and will continue to impact, the business practices of mortgage lenders, including the Company. For example, under the CFPB’s Ability to Repay and Qualified Mortgage rule, before making a determination ofmortgage loan, a lender must establish that a borrower has the borrower’s ability to repay enhanced trainingthe mortgage. “Qualified mortgages”, as defined in the rule, are presumed to comply with this requirement and, as a result, present less litigation risk to lenders. For a loan to qualify as a qualified mortgage, the loan officers, enhanced mitigation proceduresmust satisfy certain limits on terms and conditions, pricing and a maximum debt-to-income ratio. Loans eligible for delinquent borrowers,purchase, guarantee or insurance by a government agency or government-sponsored enterprise are exempt from some of these requirements. Satisfying the qualified mortgage standards, ensuring correct calculations are made for individual loans, recordkeeping and provisions that will allow borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualifiedmonitoring, as well as understanding the effect of the qualified mortgage” as that term has been defined by standards on CRA obligations, impose significant new compliance obligations on, and involve compliance costs for, mortgage lenders, including the CFPB. The Bank is in compliance with these new regulations.Company.

Rules developed by the federal banking agencies pursuant to federal law also require institutions to disclose their privacy policies to consumers and in some circumstances to allow consumers to prevent the disclosure of certain personal information to affiliated entities and unaffiliated third parties.

Community Reinvestment Act

The CRA requires the appropriate federal banking agency, in connection with its examination of a bank, to assess the bank’s record in meeting the credit needs of the communities served by the institution, including low and moderate income neighborhoods. Furthermore, such assessmentthe relevant federal bank regulatory agency is required to be undertaken of any bank that has applied,consider a bank’s CRA assessment when considering the bank’s application to, among other things, to merge or consolidate with or acquire the assets or assume the liabilities of an insured depository institution or to open or relocate a branch office. In the case of a bank holding company, the Federal Reserve Board is required to assess the CRA record of each subsidiary bank of any bank holding company that applies to acquire a bank or bank holding company in connection with the application. Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to improve,” or “unsatisfactory.” The Bank received a "satisfactory”an "outstanding” rating at its most recent CRA evaluation.

Leaders of the federal banking agencies recently have indicated their support for revising the CRA regulatory framework, and in December 2019, the OCC and FDIC issued a joint proposed rule that would amend the CRA regulatory framework. It is too early to tell whether and to what extent any changes will be made to applicable CRA requirements.

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Anti-Money Laundering Rules

We are subject to the requirements of theThe Bank Secrecy Act, ("BSA"), its implementing regulationsthe USA PATRIOT Act of 2001, and other anti-money laundering ("AML") laws and regulations including the USA Patriot Act of 2001.require financial institutions, among other duties, to institute and maintain an effective anti-money laundering (“AML”) program and file suspicious activity and currency transaction reports when appropriate.  Among other things, these laws and regulations require the Bank to take steps to prevent the use of the Bank to facilitate the flow of illegal or illicit money, to report large currency transactions and to file suspicious activity reports.  The Bank also is required to develop and implement a comprehensive AML compliance program.  Banks must also have in place appropriate “know your customer” policies and procedures.

Violations of these requirements can result in substantial civil and criminal sanctions. In addition, a provision of the USA Patriot Act of 2001 requiressanctions, and the federal banking agencies are required to consider the effectiveness of a financial institution’s AML activities when reviewing bank mergers and bank holding company acquisitions.  In addition to other bank regulatory agencies, the federal Financial Crimes Enforcement Network of the Department of the Treasury is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the state and federal banking regulators, as well as the U.S. Department of Justice, CFPB, Drug Enforcement Administration, and Internal Revenue Service.

OFAC Regulation

TheThe Office of Foreign Assets Control or OFAC is respresponsible for administering economic sanctions that affect transactions with designated foreign countries, nationals and others, as defined by various Executive Orders and in various legislation. OFAC-administered sanctions take many different forms. For example, sanctions may include: (1) restrictions onsible for helping to insure that trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on U.S. entities do not engagepersons engaging in transactions with certain prohibited pfinancial transactions relating to, making investments in, or providing investment-related advice or assistance to, arties, as defined sanctioned country; and (2) a blocking of assets in which the government or “specially designated nationals” of the sanctioned country have an interest, by various Executive Orders and Acts of Congress. OFAC publishesprohibiting transfers of property subject to U.S. jurisdiction, including property in the possession or control of U.S. persons. OFAC also publishes lists of persons, organizations and countries suspected persons, organizations and countries suspected of aiding, harbaiding, harboring oring or engaging engaging in terrorist acts, known as Specially Designated Nationalsterrorist acts, known as Specially Designated Nationals and Blocked Persons. IfBlocked Persons. Blocked assets, for example property and bank deposits, cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. If we or our Bank or our Bank find a namename on anyany transaction, accountaccount or wire transfertransfer that is on an OFAC list,list, we or our Bank must freezeBank must freeze or block suchblock such account or transaction, or transaction, file a suspicious activity report and notify the appropriate authorities.suspicious activity report and notify the appropriate authorities. Failure to comply with these sanctions could have serious legal and reputational consequences.

Data Privacy

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Federal and state law contains extensive consumer privacy protection provisions. The Dodd-FrankGramm-Leach-Bliley Act

The Dodd-Frank Act significantly changed the bank regulatory structure and has affected the lending, deposit, investment, trading and operating activities of 1999 requires financial institutions to periodically disclose their privacy policies and their holding companies including COB. Somepractices relating to sharing such information and enables retail customers to opt out of our ability to share information with unaffiliated third parties under certain circumstances. Other federal and state laws and regulations impact our ability to share certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes, or to contact customers with marketing offers. The Gramm-Leach-Bliley Act also requires financial institutions to implement a comprehensive information security program that includes administrative, technical and physical safeguards to ensure the security and confidentiality of customer records and information. These security and privacy policies and procedures for the protection of personal and confidential information are in effect across all businesses and geographic locations. Federal law also makes it a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means.

Data privacy and data protection are areas of increasing state legislative focus. For example, in June of 2018, the Governor of California signed into law the California Consumer Privacy Act of 2018 (“CCPA”). The CCPA, which became effective on January 1, 2020, applies to for-profit businesses that conduct business in California and meet certain revenue or data collection thresholds. The CCPA will give consumers the right to request disclosure of information collected about them, and whether that information has been sold or shared with others, the right to request deletion of personal information (subject to certain exceptions), the right to opt out of the changes made bysale of the Dodd-Frank Act have been described above. In addition to those summaries, among other things,consumer’s personal information, and the Dodd-Frank Act created a Financial Stability Oversight Council to identify systemic risks in the financial system and gives federal regulators new authority to take control of and liquidate larger financial firms.

Significant rules and regulations have been and continueright not to be issued bydiscriminated against for exercising these rights. The CCPA contains several exemptions, including that many, but not all, requirements of the various federal agenciesCCPA are inapplicable to information that is collected, processed, sold, or disclosed pursuant to the requirements ofGramm-Leach-Bliley Act.  The California State Legislature has amended the Dodd-Frank Act. Those rulesAct since its passage, which the Governor has signed into law, and the California Attorney General has proposed regulations implementing the CCPA that have not yet been adopted. Because our correspondent division has an office in California, we are in the process of changing our data collection and retrieval processes to comply with the CCPA.  In addition, similar laws may be adopted by other states where we do business. The federal government may also pass data privacy or will affectdata protection legislation.

Like other lenders, the Bank uses credit bureau data in their underwriting activities. Use of such data is regulated under the Fair Credit Reporting Act, which also regulates reporting information to credit bureaus, prescreening individuals for credit offers, sharing of information between affiliates, and using affiliate data for marketing purposes. Similar state laws may impose additional requirements on us and our operations include:subsidiaries.

Future Legislation and Regulation

Not all of the regulations under the Dodd-Frank Act have been finalized and thus we cannot predict the ultimate impact of these regulations on the Company or its business, financial condition or results of operations. However, the regulations have increased and are expected to continue to increase our operating and compliance costs.12

Future Legislation

FederalBanking statutes, regulations and policies are continually under review by Congress, state legislatures and federal and state regulatory agencies propose and adopt changesagencies. In addition to their laws and regulations, or change the manner in which existing laws or regulations are applied. state and federal bank regulatory agencies may issue policy statements, interpretive letters and similar written guidance applicable to us and our subsidiaries. We cannot predict the substance or impact of pending or future legislation or regulation or the application of those laws or regulations, although enactment of any significant proposal could affect how we operate and could significantly increase our costs, impede the efficiency of internal business processes or limit our ability to pursue business opportunities in an efficient manner, any of which could materially and adversely affect our business, financial condition and results of operations.

Competition

We encounter strong competition bothencounter strong competition both in making loansmaking loans and in attracting deposits.  The deregulation of the banking industry and the widespread enactment of state laws which permit multi-bank holding companies as well as an increasing level of interstate banking have created a highly competitive environment for commercial banking.attracting deposits.  In oneone or more aspectsmore aspects of its business,business, our Company competesCompany competes with otherother local, regional and national financial service providers, including commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokeragecommercial banks, savings and investment banking companies, loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and other financial intermediariesinvestment banking companies, and other financial intermediaries located both within and outside our market area.  Most of these competitors, some of whichMost of these competitors, some of which are affiliated with bank holding companies, have substantially greater resources and lendingbank holding companies, have substantially greater resources and lending limits, and may offer certain services thatmay offer certain services that we do notnot currently provide.provide.