CenterState Bank (CSFL) 10-Q 2006 Q3 Quarterly report

U. S. SECURTIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2006

Commission file number 333-95087

CENTERSTATE BANKS OF FLORIDA, INC.

(Exact Name of Registrant as Specified in Its Charter)

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

1101 First Street South, Suite 202

Winter Haven, Florida 33880

(Address of Principal Executive Offices)

(863) 293-2600

(Issuer’s Telephone Number, Including Area Code)

Check whether the issuer: (1) filed all reports required to be filed by Section 12, 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    YES  x    NO  ¨

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

Large accelerated filer  ¨        Accelerated filer  x        Non-accelerated filer  ¨

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

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

Common stock, par value $.01 per share	11,122,540
(class)	Outstanding at September 30, 2006

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

INDEX

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets - September 30, 2006 and December 31, 2005 (unaudited)	2
Condensed consolidated statements of earnings for the three and nine months ended September 30, 2006 and 2005 (unaudited)	3
Condensed consolidated statements of cash flows – nine months ended September 30, 2006 and 2005 (unaudited)	4
Notes to condensed consolidated financial statements (unaudited)	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3. Quantitative and qualitative disclosures about market risk	26
Item 4. Controls and procedures	26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	27
Item 1a. Risk Factors	27
Item 2. Unregistered sales of Equity Securities and Use of Proceeds	27
Item 3. Defaults Upon Senior Securities	27
Item 4. Submission of Matters to a Vote of Shareholders	27
Item 5. Other Information	27
Item 6. Exhibits	27
SIGNATURES	28
CERTIFICATIONS	29

Centerstate Banks of Florida, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands of dollars)

	As of September 30, 2006			As of December 31, 2005
ASSETS
Cash and due from banks	$	35,345		$	41,949
Federal funds sold and money market account		48,250			52,977
Cash and cash equivalents		83,595			94,926
Securities available for sale, at fair value		242,921			218,841
Loans		637,684			516,658
Less allowance for loan losses		(7,367	)		(6,491	)
Net Loans		630,317			510,167
Premises and equipment, net		38,748			28,909
Accrued interest receivable		4,949			3,610
Deferred income taxes, net		2,193			2,712
Goodwill		9,863			4,675
Core deposit intangible		3,249			479
Bank owned life insurance		7,246			6,043
Other assets		1,609			1,159
TOTAL ASSETS	$	1,024,690		$	871,521
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand - non-interest bearing	$	198,386		$	219,444
Demand - interest bearing		97,060			89,309
Savings and money market accounts		149,676			143,432
Time deposits		400,727			265,152
Total deposits		845,849			717,337
Securities sold under agreement to repurchase		49,605			41,811
Corporate debenture		10,000			10,000
Other borrowings		—			1,000
Payable to shareholders		261			—
Accrued interest payable		884			582
Accrued expenses and other liabilities		3,279			3,430
Total liabilities		909,878			774,160
Minority interest		—			120
Stockholders’ equity:
Preferred Stock, $.01 par value; 5,000,000 shares authorized No shares issued or outstanding		—			—
Common stock, $.01 par value: 40,000,000 shares authorized; 11,122,540 and 10,500,772 shares issued and outstanding at September 30, 2006 and December 31, 2005 respectively		111			52
Additional paid-in capital		86,827			75,001
Retained earnings		29,076			23,954
Accumulated other comprehensive loss		(1,202	)		(1,766	)
Total stockholders’ equity		114,812			97,241
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,024,690		$	871,521

See notes to the accompanying condensed consolidated financial statements

2

Centerstate Banks of Florida, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)

(in thousands of dollars, except per share data)

	Three months ended				Nine months ended
	Sept 30, 2006		Sept 30, 2005		Sept 30, 2006		Sept 30, 2005
Interest income:
Loans	$	12,475	$	8,481	$	33,708	$	23,443
Securities available for sale		2,628		1,633		6,936		4,223
Federal funds sold and money market account		831		510		2,205		1,205
		15,934		10,624		42,849		28,871
Interest expense:
Deposits		5,478		2,651		13,177		7,124
Securities sold under agreement to repurchase		592		296		1,552		654
Corporate debenture		228		176		639		492
Other borrowings		—		2		—		12
		6,298		3,125		15,368		8,282
Net interest income		9,636		7,499		27,481		20,589
Provision for loan losses		129		255		575		795
Net interest income after loan loss provision		9,507		7,244		26,906		19,794
Other income:
Service charges on deposit accounts		902		833		2,525		2,413
Commissions from mortgage broker activities		79		126		270		393
Loan related fees		70		79		224		220
Commissions on sale of mutual funds and annuities		142		126		493		282
Rental income		53		50		153		154
Other service charges and fees		304		195		887		597
Gain on sale of other real estate owned		—		7		—		8
		1,550		1,416		4,552		4,067
Other expenses:
Salaries, wages and employee benefits		4,335		3,189		12,379		9,183
Occupancy expense		907		727		2,531		2,050
Depreciation of premises and equipment		484		402		1,438		1,214
Supplies, stationary and printing		141		139		461		392
Marketing expenses		98		117		336		328
Data processing expense		300		246		825		721
Legal, auditing and other professional fees		190		138		486		402
Bank regulatory related expenses		96		98		233		241
Postage and delivery		66		72		211		216
ATM related expenses		110		107		340		289
Other expenses		736		549		2,110		1,652
Total other expenses		7,463		5,784		21,350		16,688
Income before provision for income taxes		3,594		2,876		10,108		7,173
Provision for income taxes		1,343		1,075		3,840		2,678
Net income	$	2,251	$	1,801	$	6,268	$	4,495
Earnings per share:
Basic	$	0.20	$	0.17	$	0.57	$	0.50
Diluted	$	0.20	$	0.17	$	0.56	$	0.49
Common shares used in the calculation of earnings per share:
Basic		11,113,648		10,447,332		10,911,050		8,971,804
Diluted		11,380,467		10,717,514		11,164,634		9,245,420

See notes to the accompanying condensed consolidated financial statements.

3

Centerstate Banks of Florida, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands of dollars)

	Nine months ended September 30,
	2006			2005
Cash flows from operating activities:
Net Income	$	6,268		$	4,495
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		575			795
Depreciation of premises and equipment		1,438			1,214
Amortization of purchase accounting adjustments		313			(3	)
Net amortization/accretion of investments securities		149			299
Net deferred origination fees		79			209
BOLI income		(203	)		—
(Gain) loss on sale of fixed asset		(40	)		2
Gain on sale of other real estate owned		—			(8	)
Employee stock option expense		458			—
Deferred income taxes		252			(250	)
Cash provided by (used in) changes in:
Net changes in accrued interest receivable		(1,069	)		(829	)
Net change in other assets		(664	)		370
Net change in accrued interest payable		234			143
Net change in accrued expenses and other liabilities		(194	)		859
Net cash provided by operating activities		7,596			7,296
Cash flows from investing activities:
Proceeds from maturities of investment securities available for sale		62,350			65,000
Purchases of investment securities available for sale		(48,890	)		(50,939	)
Purchases of mortgage back securities available for sale		(47,493	)		(67,274	)
Proceeds from pay-downs of mortgage back securities available for sale		21,799			19,702
Increase in loans, net of repayments		(68,116	)		(64,041	)
Purchases of premises and equipment		(8,265	)		(4,030	)
Proceeds from sale of other real estate owned		373			392
Purchase of bank owned life insurance		(1,000	)		—
Net cash from acquisition of Mid FL bank		13,760			—
Net cash used in investing activities		(75,482	)		(101,190	)
Cash flows from financing activities:
Net increase in deposits		50,445			36,548
Net increase in securities sold under agreement to repurchase		7,794			15,114
Stock options exercised		462			607
Net (decrease) increase in other borrowings		(1,000	)		3,000
Net proceeds of public stock offering		—			34,854
Dividends paid		(1,146	)		(857	)
Net cash provided by financing activities		56,555			89,266
Net decrease in cash and cash equivalents		(11,331	)		(4,628	)
Cash and cash equivalents, beginning of period		94,926			90,115
Cash and cash equivalents, end of period	$	83,595		$	85,487

4

Centerstate Banks of Florida, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands of dollars)

(continued)

	Nine months ended September 30,
	2006		2005
Cash paid during the period for:
Interest	$	15,038	$	8,112
Income taxes	$	5,233	$	2,560

See notes to the accompanying condensed consolidated financial statements.

CenterState Banks of Florida, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1: Nature of operations and basis of presentation

Our consolidated financial statements include the accounts of CenterState Banks of Florida, Inc. (the “Parent Company” or “CSFL”), and our wholly owned subsidiary banks and wholly owned subsidiary, C. S. Processing. Our four subsidiary banks operate through 30 locations in eight Counties throughout Central Florida, providing traditional deposit and lending products and services to their commercial and retail customers.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2005. In our opinion, all adjustments, consisting primarily of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods have been made. The results of operations of the nine month period ended September 30, 2006 are not necessarily indicative of the results expected for the full year.

NOTE 2: Common stock outstanding and earnings per share data

Basic earnings per share is based on the weighted average number of common shares outstanding during the periods. Diluted earnings per share includes the weighted average number of common shares outstanding during the periods and the further dilution from stock options using the treasury method. There were 70,500 stock options that were anti dilutive at September 30, 2006. The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the periods presented (dollars are in thousands, except per share data). All per share data has been adjusted to reflect our May 2006 two for one stock split.

5

	For the three months ended September 30,
	2006						2005
	Earnings		Weighted Average Shares	Per Share Amount			Earnings		Weighted Average Shares	Per Share Amount
Basic EPS
Net earnings available to common Shareholders	$	2,251	11,113,648	$	0.20		$	1,801	10,447,332	$	0.17
Effect of dilutive securities:
Incremental shares from assumed exercise of stock Options		—	266,819		—			—	270,182		—
Diluted EPS
Net earnings available to common shareholders and assumed Conversions	$	2,251	11,380,467	$	0.20		$	1,801	10,717,514	$	0.17
	For the nine months ended September 30,
	2006						2005
	Earnings		Weighted Average Shares	Per Share Amount			Earnings		Weighted Average Shares	Per Share Amount
Basic EPS
Net earnings available to common Shareholders	$	6,268	10,911,050	$	0.57		$	4,495	8,971,804	$	0.500
Effect of dilutive securities:
Incremental shares from assumed exercise of stock Options		—	253,584		(0.01	)		—	273,616		(0.015	)
Diluted EPS
Net earnings available to common shareholders and assumed Conversions	$	6,268	11,164,634	$	0.56		$	4,495	9,245,420	$	0.485

NOTE 3: Comprehensive income

Under Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” certain transactions and other economic events that bypass our income statement must be displayed as other comprehensive income. Our comprehensive income consists of net earnings and unrealized gains and losses on securities available-for-sale, net of deferred income taxes.

6

The table below sets forth our comprehensive income for the periods indicated below (in thousands of dollars).

	Three months ended					Nine months ended
	Sept 30, 2006		Sept 30, 2005			Sept 30, 2006		Sept 30, 2005
Net income	$	2,251	$	1,801		$	6,268	$	4,495
Other comprehensive income (loss), net of tax:
Unrealized holding gain (loss) arising during the period		1,627		(70	)		564		(324	)
Other comprehensive income (loss), net of tax		1,627		(70	)		564		(324	)
Comprehensive income (loss)	$	3,878	$	1,731		$	6,832	$	4,171

NOTE 4: Stock-based compensation

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), that requires companies to expense the value of employee stock purchase plans, stock option grants and similar awards at the beginning of their next fiscal year that begins after June 15, 2005 and requires the use of either the modified prospective or the modified retrospective application method. We adopted SFAS 123R on January 1, 2006 under the modified prospective method; as such, prior periods do not include share-based compensation expense related to SFAS 123R. The modified prospective method requires the application of SFAS 123R to new awards and to awards modified, repurchased, or cancelled after the effective date. Additionally, compensation cost for the portion of outstanding awards for which service has not been rendered (such as unvested options) that are outstanding as of the date of adoption are recognized as the remaining services are rendered. We recognize the fair value of stock-based compensation awards in salaries and benefits in the condensed consolidated statement of earnings on a straight line basis over the vesting period.

Our shareholders have authorized 730,000 common shares for employees of the Company under an incentive stock option and non-statutory stock option plan (the “1999 Plan”). Options are granted at fair market value of the underlying stock at date of grant. Each option expires ten years from the date of grant. Options become 25% vested immediately as of the grant date and will continue to vest at a rate of 25% on each anniversary date thereafter. At September 30, 2006, there were 104,760 shares available for future grants. In addition to the 1999 Plan, we have assumed and converted the stock option plans of our subsidiary banks consistent with the terms and conditions of their respective merger agreements. These options are all vested and exercisable.

In 2004, our shareholders authorized an Employee Stock Purchase Plan (“ESPP”). The number of shares of common stock for which options may be granted under the ESPP is 400,000, which amount shall be increased on December 31 of each calendar year. At December 31, 2005 and September 30, 2006, there were no options outstanding pursuant to this plan, and no activity occurred during the nine month period ending September 30, 2006 relating to our ESPP.

Our stock-based compensation consists solely of expense related to stock options. During the nine month period ended September 30, 2006, the Company recognized approximately $458,000 of stock-based compensation expense. As all of these options were incentive stock options (“ISO”) there was no related tax benefit. As of September 30, 2006, the total remaining unrecognized compensation cost related to non-vested stock options, net of estimated forfeitures, was approximately $726,000 and is expected to be recognized over a weighted-average period of 0.8 years (approximately 10 months).

7

Prior to January 1, 2006, we accounted for stock options in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). As such, we did not recognize compensation expense in our consolidated financial statements for stock options as the exercise price was not less than 100% of the fair value of the underlying common stock on the date of grant.

The following table illustrates the effect on net income and net income per share had we recognized compensation expense consistent with the fair value provisions of SFAS No. 123 “Accounting for Stock-Based Compensation” prior to the adoption of SFAS 123R (amounts are in thousands of dollars, except per share date).

	three months Ended Sept 30, 2005			nine months Ended Sept 30, 2005
Net income as reported	$	1,801		$	4,495
Deduct: Stock-based compensation expense
Determined under fair value based method		(144	)		(446	)
Pro forma net income	$	1,657		$	4,049
Basic earnings per share as reported	$	0.17		$	0.50
Pro forma basic earnings per share	$	0.16		$	0.45
Diluted earnings per share as reported	$	0.17		$	0.49
Pro forma diluted earnings per share	$	0.15		$	0.44

We granted stock options for 3,500 shares of common stock and 6,000 shares of common stock during the three month periods ended September 30, 2006 and 2005, respectively. We granted stock options for 31,500 shares of common stock during the nine month period ended September 30, 2006 and we acquired stock options for 77,456 shares of common stock pursuant to the merger with CenterState Bank Mid Florida (“Mid FL”) as of the close of business March 31, 2006. These options vested immediately upon change of control, and their fair value was included as a portion of the purchase price paid for Mid FL. We granted stock options for 33,000 shares of common stock during the nine month period ending September 30, 2005.

We estimated the fair value of options granted during these periods as of the grant date (as of the merger date for those options acquired pursuant to the merger of Mid FL) using the Black-Scholes option-pricing model. The weighted-average assumptions as of the grant date, and as of the merger date in the case of the Mid FL transaction, are as follows:

	three months ended Sept 30,				nine months ended Sept 30,
	2006		2005		2006		2005
Expected option life	5.8 years		10 years		7.3 years		10 years
Risk-free interest rate	5.07	%	4.14	%	4.89	%	4.37	%
Expected volatility	29.9	%	31.7	%	29.8	%	31.5	%
Dividend yield	0.74	%	0.70	%	0.76	%	0.68	%

We determine the expected life of the stock options using historical data adjusted for known factors that would alter historical exercise behavior including announced retirement dates. The risk-free interest rate is based on the U.S. treasury yield curve in effect as of the grant date. Expected volatility was determined using historical volatility.

8

SFAS 123R requires the recognition of stock-based compensation for the number of awards that are ultimately expected to vest. As a result, for most awards, recognized stock compensation would be reduced for estimated forfeitures prior to vesting. Based on historical data, we expect our annual forfeiture rates to be immaterial. Estimated forfeitures will be reassessed in subsequent periods and may change based on new facts and circumstances. Prior to January 1, 2006, actual forfeitures were accounted for as they occurred for purposes of required pro forma stock compensation disclosures.

The weighted-average estimated fair value of stock options granted during the three months ended September 30, 2006 and 2005 were $6.81 per share and $7.52 per share respectively.

The weighted-average estimated fair value of stock options granted during the nine months ended September 30, 2006 (including those stock options acquired pursuant to the merger with Mid FL) and 2005 were $8.87 and $8.15 per share respectively.

The table below presents information related to stock option activity for the three month and nine month periods ended September 30, 2006 and 2005 (in thousands of dollars):

	Three months ended Sept 30,				nine months ended Sept 30,
	2006		2005		2006		2005
Total intrinsic value of stock options exercised	$	171	$	45	$	802	$	161
Cash received from stock options exercised		82		53		440		149
Gross income tax benefit from the exercise of stock options		21		—		21		—

A summary of stock option activity for the three month and nine month periods ended September 30, 2006 is as follows (dollars are in thousands, except for per share data):

	three months ended Sept 30, 2006				nine months ended Sept 30, 2006				weighted- average contractual Term	aggregate intrinsic value
	number of options		weighted- Average Exercise Price		number of options		weighted- average exercise price
Options outstanding, beginning of period	758,256		$	11.22	706,918		$	10.43
Options granted	3,500			19.04	31,500			18.56
Options forfeited	—			—	—			—
Options exercised	(13,040	)		6.32	(67,158	)		6.57
Options issued pursuant to Mid FL merger	—			—	77,456			12.62
Options outstanding, end of period	748,716		$	11.34	748,716		$	11.34	6.4 years	$	6,559
Options fully vested and expected to vest, Sept 30, 2006					748,716		$	11.34	6.4 years	$	6,559
Options exercisable, Sept 30, 2006					581,091		$	10.08	5.9 years	$	5,823

The total fair value of options vested during the three month and nine month periods ended September 30, 2006 was approximately $18,000 and $170,000, respectively.

Common stock issued upon exercise of stock options are newly-issued shares.

9

NOTE 5: Effect of new pronouncements

In March 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 156, “Accounting for Servicing of Financial Assets,” which amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 156 requires an entity to separately recognize servicing assets and servicing liabilities and to report these balances at fair value upon inception. Future methods of assessing values can be performed using either the amortization or fair value measurement techniques. Adoption of SFAS No. 156 is required for transactions occurring in fiscal years beginning after September 15, 2006. The adoption of this standard is not expected to have a material effect on the financial statements of the Company.

In July 2006, the FASB released Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.” This Interpretation revises the recognition tests for tax positions taken in tax returns such that a tax benefit is recorded only when it is more likely than not that the tax position will be allowed upon examination by taxing authorities. The amount of such a tax benefit to record is the largest amount that is more likely than not to be allowed. Any reduction in deferred tax asset or increase in tax liabilities upon adoption will correspondingly reduce retained earnings. The Company has not yet determined the effect of adopting this Interpretation, which is effective for it on January 1, 2007.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108 (“SAB 108”). Due to diversity in practice among registrants, SAB 108 expresses SEC staff views regarding the process by which misstatements in financial statements are evaluated for purposes of determining whether financial statement restatement is necessary. SAB 108 is effective for fiscal years ending after November 15, 2006, and early application is encouraged. The effect of this recently-issued and not yet implemented pronouncement is not yet known.

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Branch activity

During September, we opened a new branch office in Lake County (Eustis, Florida area) in a temporary location. Land has been purchased for the construction of a new permanent facility, which is expected to be completed sometime in 2007. Of our 30 banking locations (as of September 30, 2006), four are what we refer to as “freedom offices,” which are small offices located inside gated retirement communities in central Florida. The office is usually located in a small room or area of the community’s “club house,” and caters to the needs of that particular community. Two of the four are very successful. The other two have not performed as well. Consequently, we closed those two locations during October 2006. These two offices combined had total deposits of less than $1,500,000, which were transferred to another branch office.

Also during October, we opened our newly constructed branch office in Polk County (south of Lakeland, Florida) and opened a second new branch office in Polk County in a temporary facility on U.S. Highway 27 near Interstate 4. We have begun construction on a permanent facility, which we expect to complete late in 2007.

We also have another branch office under construction in Osceola County (St. Cloud, Florida area) which we expect to be completed late this year or early 2007. We also have several other site locations that we have purchased or are in the process of purchasing for future branches in 2007 and 2008.

10

COMPARISON OF BALANCE SHEETS AT SEPTEMBER 30, 2006 AND DECEMBER 31, 2005

Overview

Total assets were $1,024,690,000 as of September 30, 2006, compared to $871,521,000 at December 31, 2005, an increase of $153,169,000 or 18%. Approximately $94,016,000, or 10.8%, of this increase was the result of our March 31, 2006 acquisition of CenterState Bank Mid Florida. The remaining $59,153,000, or 6.8%, of this increase, was primarily the result of our internally generated loan growth and investment growth funded by an increase in deposits and retail repurchase agreements.

Federal funds sold and money market accounts

Federal funds sold and money market accounts were $48,250,000 at September 30, 2006 (approximately 4.7% of total assets) as compared to $52,977,000 at December 31, 2005 (approximately 6.1% of total assets). We use our available-for-sale securities portfolio, as well as federal funds sold and money market accounts for liquidity management and for investment yields. These accounts, as a group, will fluctuate as a function of loans and deposits outstanding.

Investment securities

Securities available-for-sale, consisting primarily of U.S. Treasury and government agency securities, were $242,921,000 at September 30, 2005 (approximately 24% of total assets) compared to $218,841,000 at December 31, 2005 (approximately 25% of total assets), an increase of $24,080,000 or 11%. These securities have been recorded at fair value. We classify our securities as “available-for-sale” to provide for greater flexibility to respond to changes in interest rates. We use our available-for-sale securities portfolio, as well as federal funds sold and money market accounts for liquidity management and for investment yields. These accounts, as a group, will fluctuate as a function of loans and deposits outstanding as discussed above, under the caption “Federal funds sold and money market accounts.”

Loans

Total gross loans were $638,710,000 at September 30, 2006, compared to $517,424,000 at December 31, 2005, an increase of $121,286,000 or 23%. During the same period, real estate loans increased by $112,043,000 or 28%, commercial loans increased by $4,167,000 or 7%, and all other loans including consumer loans increased by $5,076,000 or 10%. Total loans net of unearned fees and allowance for loan losses were $637,684,000 at September 30, 2006, compared to $516,658,000 at December 31, 2005, an increase of $121,026,000 or 23%. Excluding the loans acquired through the Mid FL merger ($53,336,000), the increase during this nine month period was $67,690,000, or 13%.

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The following table sets forth information concerning the loan portfolio by collateral types as of the dates indicated (dollars are in thousands).

	Sept 30, 2006			Dec 31, 2005
Real estate loans
Residential	$	181,579		$	148,090
Commercial		277,888			219,094
Construction, land development, land		56,112			36,352
Total real estate		515,579			403,536
Commercial		67,642			63,475
Consumer and other loans		55,489			50,413
Gross loans		638,710			517,424
Unearned fees/costs		(1,026	)		(766	)
Total loans net of unearned fees		637,684			516,658
Allowance for loan losses		(7,367	)		(6,491	)
Total loans net of unearned fees and allowance for loan losses	$	630,317		$	510,167

Credit quality and allowance for loan losses

The allowance for loan losses represents our estimate of an amount adequate to provide for probably incurred losses within the existing loan portfolio. Loans are charged against the allowance when we believe collection of the principal is unlikely. The allowance consists of amounts established for specific loans and is also based on historical loan loss experience, the volume and type of lending conducted, the amount of nonperforming loans, general economic conditions, particularly as they relate to the specific market areas, and other environmental factors related to the collectibility of the loan portfolio. The specific reserve element is the result of a regular analysis of certain loans based on credit rating classifications and other factors. At September 30, 2006, the allowance for loan losses was $7,367,000 or 1.16% of total loans outstanding, compared to $7,310,000 (1.18%), $7,095,000 (1.18%), and $6,491,000 (1.26%), at June 30, 2006, March 31, 2006, and December 31, 2005, respectively.

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The following table sets forth information concerning the activity in the allowance for loan losses during the periods indicated (in thousands of dollars).

	three month period Ended Sept 30,						nine month period ended Sept 30,
	2006			2005			2006			2005
Allowance at beginning of period	$	7,310		$	6,169		$	6,491		$	5,685
Charge-offs
Commercial loans		(33	)		(2	)		(353	)		(39	)
Real estate loans		—			—			—			—
Consumer and other loans		(63	)		(22	)		(79	)		(89	)
Total charge-offs		(96	)		(24	)		(432	)		(128	)
Recoveries
Commercial loans		33			14			45			52
Real estate loans		(13	)(a)		5			6			7
Consumer and other loans		4			7			35			15
Total recoveries		24			26			86			74
Net (charge-offs) recoveries		(72	)		2			(346	)		(54	)
Provision for loan losses		129			255			575			795
Adjustment relating to Mid FL merger		—			—			647			—
Allowance at end of period	$	7,367		$	6,426		$	7,367		$	6,426

(a) Represents a correction of an error which occurred in the quarter ending June 30, 2006 and corrected in the quarter ending September 30, 2006 (approximately $13,000).

Nonperforming assets

Nonperforming assets include (1) non-accrual loans; (2) accruing loans that are 90 days or more delinquent that are deemed by management to be adequately secured and in the process of collection; (3) OREO (i.e. real estate acquired through foreclosure or deed in lieu of foreclosure); and (4) other repossessed assets (not real estate). All delinquent loans are reviewed on a regular basis and are placed on non-accrual status when, in the opinion of management, the possibility of collecting additional interest is deemed insufficient to warrant further accrual. As a matter of policy, interest is not accrued on loans past due 90 days or more unless the loan is both well secured and in the process of collection. When a loan is placed on non-accrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Additional interest income on such loans is recognized only when received. The following table sets forth information regarding the components of nonperforming assets at the dates indicated (in thousands of dollars).

	Sept 30 2006			Dec 31 2005
Non-accrual loans	$	696		$	852
Accruing loans past due over 90 days		458			658
Other real estate owned		—			—
Repossessed assets other than real estate		35			39
Total non-performing assets	$	1,189		$	1,549
As a percent of total assets		0.12	%		0.18	%
Allowance for loan losses	$	7,367		$	6,491
Allowance for loan losses to non-performing assets		620	%		419	%

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We are continually analyzing our loan portfolio in an effort to recognize and resolve problem assets as quickly and efficiently as possible. As of September 30, 2006, we believe the allowance for loan losses was adequate. However, we recognize that many factors can adversely impact various segments of the market. Accordingly, there is no assurance that losses in excess of such reserves will not be incurred.

Bank premises and equipment

Bank premises and equipment was $38,748,000 at September 30, 2006 compared to $28,909,000 at December 31, 2005, an increase of $9,839,000 or 34%. This amount is the result of purchases totaling $11,610,000 less $1,438,000 of depreciation expense, less $326,000 sale of land and less $7,000 disposal of equipment. A portion of the purchase amount ($3,345,000) is a result of the March 31, 2006 acquisition of the Mid FL bank. The remaining purchases ($8,265,000) are listed in the table below (amounts are in thousands of dollars):

$	710	construction in progress, Osceola County (St. Cloud) branch; land purchased in prior year
	1,100	construction in progress, Polk County (South Lakeland) branch; land is leased
	300	construction cost; build out second floor Lake Wales branch (Polk County); completed
	100	leasehold improvement downtown Lakeland branch (Polk County)
	45	leasehold improvement, remodel Poinciana branch (Osceola County)
	600	purchased land -future branch site for Crystal River, Florida (Citrus County)
	515	purchased land -future branch site Bushnell, Florida (Sumter County)
	1,700	purchased land -future branch and corporate office site (Polk County)
	1,450	purchased land -future branch site for Eustis, Florida (Lake County)
	775	purchased land -future branch site for Wesly Chapel, Florida (Pasco County)
	970	purchases of equipment and furniture
$	8,265

Bank owned life insurance (“BOLI”)

On October 31, 2005, we purchased $6,000,000 of bank owned life insurance (“BOLI”) covering 18 of our officers. In January 2006, we entered into agreements with the 18 officers, whereby upon their death, while still employed, their beneficiary(s) will receive one half of the net life insurance proceeds as defined in the agreements. Further, if the officer meets the vesting requirements as defined in the agreement, upon termination or retirement, they may be entitled to a post retirement life insurance benefit equal to 10% of the net proceeds as defined in the agreement. During the current quarter, we purchased an additional $1,000,000 of BOLI covering three senior officers acquired pursuant to the acquisition of CenterState Bank Mid Florida. The agreements with the three new officers have similar terms as the initial 18 officers discussed above.

Deposits

Total deposits were $845,849,000 at September 30, 2006, compared to $717,337,000 at December 31, 2005, an increase of $128,512,000 or 18%. Most of this increase (approximately $78,302,000) was a result of the March 31, 2006 acquisition of the Mid FL bank. Exclusive of the Mid FL acquisition, our deposits grew $50,210,000, or 7% (9.3% annualized), during the nine month period. This was a result of normal organic growth. The percentage of our time deposits to our total deposits increased from 37% at December 31, 2005, to 47% at September 30, 2006. Conversely, our non time deposits (demand accounts and money market accounts) decreased during this same period from 63% to

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53%. Part of that shift relates to the Mid FL bank, where approximately 52% of total deposits at the date of acquisition were time deposits, however, management believes that there seems to be a shift in trend at our other banks as well, probably due to the interest rate environment. We do not purchase broker deposits, nor do we solicit deposits nationally. All of our deposits are generated from our local markets in central Florida.

The table below sets forth our deposits by type and as a percentage to total deposits at September 30, 2006 and December 31, 2005 (amounts shown in the table are in thousands of dollars).

	Sept 30, 2006		% of total		Dec 31, 2005		% of total
Demand – non-interest bearing	$	198,386	23	%	$	219,444	31	%
Demand - interest bearing		97,060	12	%		89,309	12	%
Savings and money market accounts		149,676	18	%		143,432	20	%
Time deposits		400,727	47	%		265,152	37	%
Total deposits	$	845,849	100	%	$	717,337	100	%

Securities sold under agreement to repurchase

Our subsidiary banks enter into borrowing arrangements with our retail business customers by agreements to repurchase (“securities sold under agreements to repurchase”) under which the banks pledge investment securities owned and under their control as collateral against the one-day borrowing arrangement. These short-term borrowings totaled $49,605,000 at September 30, 2006 compared to $41,811,000 at December 31, 2005, resulting in an increase of $7,794,000, or 19%.

Corporate debenture

In September 2003, we formed CenterState Banks of Florida Statutory Trust I (the “Trust”) for the purpose of issuing trust preferred securities. On September 22, 2003, we issued a floating rate corporate debenture in the amount of $10,000,000. The Trust used the proceeds from the issuance of a trust preferred security to acquire the corporate debenture. The trust preferred security essentially mirrors the corporate debenture, carrying a cumulative preferred dividend at a variable rate equal to the interest rate on the corporate debenture (three month LIBOR plus 305 basis points). The corporate debenture and the trust preferred security each have 30-year lives. The trust preferred security and the corporate debenture are callable by us or the Trust, at their respective option after five years, and sooner in specific events, subject to prior approval by the Federal Reserve, if then required. Related debt issuance costs of $188,000 were capitalized and are being amortized to interest expense over a five year period ending September 2008. We have treated the trust preferred security as Tier 1 capital as allowed under the Federal Reserve guidelines.

Payable to shareholders

This liability represents the amount of cash we are required to pay Mid FL shareholders pursuant to the acquisition of the Mid FL bank at March 31, 2006. As the Mid FL shareholders send their old Mid FL certificates along with an executed transmittal letter to our transfer agent, we will pay them cash of $4.35 per share (1,000,050 shares x $4.35per share = $4,350,218) and issue 0.2774 shares of our common stock for each share of Mid FL common stock exchanged. As of September 30, 2006, approximately 94% of the Mid FL certificates have been exchanged.

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Stockholders’ equity

Shareholders’ equity at September 30, 2006, was $114,812,000, or 11.2% of total assets, compared to $97,241,000, or 11.2% of total assets at December 31, 2005. The increase in stockholders’ equity was due to the following items (amounts are in thousands of dollars):

$	97,241		Total stockholders’ equity at December 31, 2005
	6,268		Net income during the nine month period ended September 30, 2006
	(1,146	)	Dividends declared and paid
	564		Net increase in market value of securities available for sale, net of deferred taxes
	462		Employee stock options exercised
	458		Employee stock option expense pursuant to SFAS #123(R)
	10,965		Common stock deemed issued pursuant to the acquisition of the Mid FL bank
$	114,812		Total stockholders’ equity at September 30, 2006

The federal bank regulatory agencies have established risk-based capital requirements for banks. These guidelines are intended to provide an additional measure of a bank’s capital adequacy by assigning weighted levels of risk to asset categories. Banks are also required to systematically maintain capital against such “off- balance sheet” activities as loans sold with recourse, loan commitments, guarantees and standby letters of credit. These guidelines are intended to strengthen the quality of capital by increasing the emphasis on common equity and restricting the amount of loan loss reserves and other forms of equity such as preferred stock that may be included in capital. As of September 30, 2006, each of our four subsidiary banks exceeded the minimum capital levels to be considered “well capitalized” under the terms of the guidelines.

Selected consolidated capital ratios at September 30, 2006 and December 31, 2005 are presented in the table below (amounts are in thousands of dollars).

	Actual				Well capitalized				Excess
	Amount		Ratio		Amount		Ratio		Amount
September 30, 2006
Total capital (to risk weighted assets)	$	120,269	16.8	%	$	71,674	> 10	%	$	48,595
Tier 1 capital (to risk weighted assets)		112,902	15.8	%		43,004	> 6	%		69,898
Tier 1 capital (to average assets)		112,902	11.2	%		50,539	> 5	%		62,363
December 31, 2005
Total capital (to risk weighted assets)	$	110,344	19.2	%	$	57,379	> 10	%	$	52,965
Tier 1 capital (to risk weighted assets)		103,853	18.1	%		34,427	> 6	%		69,426
Tier 1 capital (to average assets)		103,853	12.4	%		42,029	> 5	%		61,824

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2006 AND 2005

Overview

Net income for the three months ended September 30, 2006 was $2,251,000 or $0.20 per share basic and diluted, compared to $1,801,000 or $0.17 per share basic and diluted for the same period in 2005.

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The return on average equity (“ROE”) and the return on average assets (“ROA”), calculated on an annualized basis, for the three month period ended September 30, 2006 was 7.93% and 0.88%, respectively, as compared to 7.57% and 0.86%, respectively, for the same period in 2005.

Net interest income/margin

Net interest income increased $2,137,000 or 28% to $9,636,000 during the three month period ended September 30, 2006 compared to $7,499,000 for the same period in 2005. The $2,137,000 increase was the result of a $5,310,000 increase in interest income less a $3,173,000 increase in interest expense.

Interest earning assets averaged $933,414,000 during the three month period ended September 30, 2006 as compared to $773,847,000 for the same period in 2005, an increase of $159,567,000, or 21%. The yield on average interest earning assets increased 1.34% to 6.83% during the three month period ended September 30, 2006, compared to 5.49% for the same period in 2005. The combined effects of the $159,567,000 increase in average interest earning assets and the 1.34% increase in yield on average interest earning assets resulted in the $5,310,000 increase in interest income between the two periods.

Interest bearing liabilities averaged $714,495,000 during the three month period ended September 30, 2006 as compared to $550,383,000 for the same period in 2005, an increase of $164,112,000, or 30%. The cost of average interest bearing liabilities increased 1.26% to 3.53% during the three month period ended September 30, 2006, compared to 2.27% for the same period in 2005. The combined effects of the $164,112,000 increase in average interest bearing liabilities and the 1.26% increase in cost on average interest bearing liabilities resulted in the $3,173,000 increase in interest expense between the two periods.

The net interest margin (“NIM”) for the current quarter was 4.13% compared to 3.88% for the comparable quarter in 2005, and 4.27% for the previous quarter. After six consecutive quarters of margin expansion, the our current quarter NIM (4.13%) compressed 14 basis points compared to the previous quarter. This is consistent with what appears to be occurring in the industry as a result of the changing yield curve and shift in deposit mix. We believe that part of the reason for the shrinkage in checking accounts was related to title companies and other real estate business related accounts. As the real estate market in Florida slowed down, the average balances of title companies and other real estate business related accounts decreased. We also believe that as local market competition placed upward pressure on time deposit rates, customers tended to shift deposits from low cost deposits to higher cost time deposit products. We have initiated incentive and other marketing plans focusing on checking account and other non time deposit account growth.

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The table below summarizes, the analysis of changes in interest income and interest expense for the three month periods ended September 30, 2006 and 2005 (in thousands of dollars).

	Three months ended September 30,
	2006							2005
	Average Balance			Interest Inc / Exp		Average Rate		Average Balance			Interest Inc / Exp		Average Rate
Loans (1) (2) (3)	$	632,568		$	12,475	7.89	%	$	494,493		$	8,481	6.86	%
Securities (4)		300,846			3,459	4.60	%		279,354			2,143	3.07	%
Total earning assets		933,414			15,934	6.83	%		773,847			10,624	5.49	%
Allowance for loan losses		(7,371	)						(6,294	)
All other assets		97,844							66,467
Total assets	$	1,023,887						$	834,020
Deposits (5)		654,009			5,478	3.35	%		498,576			2,651	2.13	%
Borrowings (6)		50,486			592	4.69	%		41,807			298	2.85	%
Corporate debenture (7)		10,000			228	9.12	%		10,000			176	7.04	%
Total interest bearing Liabilities		714,495			6,298	3.53	%		550,383			3,125	2.27	%
Demand deposits		191,057							183,159
Other liabilities		4,825							5,170
Minority shareholder interest		—							120
Shareholders’ equity		113,510							95,188
Total liabilities and shareholders’ equity	$	1,023,887						$	834,020
Net interest spread (8)						3.30	%						3.22	%
Net interest income				$	9,636						$	7,499
Net interest margin (9)						4.13	%						3.88	%

Note 1: Loan balances are net of deferred origination fees and costs.

Note 2: Interest income on average loans includes loan fee recognition of $143,000 and $71,000 for the three month periods ended September 30, 2006 and 2005.

Note 3: The average rates have not been presented on a tax equivalent basis, as this amount is not deemed material.

Note 4: Includes securities available-for-sale, federal funds sold and money market.

Note 5: Includes interest bearing deposits only. Non-interest bearing checking accounts are included in the demand deposits listed above.

Note 6: Includes securities sold under agreements to repurchase, federal funds purchased and federal home loan bank advances.

Note 7: Includes amortization of origination costs of $9,000 for the three month periods ended September 30, 2006 and 2005.

Note 8: Represents the average rate earned on interest earning assets minus the average rate paid on interest bearing liabilities.

Note 9: Represents net interest income divided by total interest earning assets.

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Provision for loan losses

The provision for loan losses is charged to earnings to bring the total loan loss allowance to a level deemed appropriate by management and is based upon historical experience, the volume and type of lending conducted by us, the amount of nonperforming loans, general economic conditions, particularly as they relate to our market areas, and other environmental factors related to the collectibility of our loan portfolio. As these factors change, the level of loan loss allowance changes. As such, the provision for loan loss (income statement) is the difference between the loan loss allowance (balance sheet) at the beginning and end of the period, net of current period loan charge-offs and recoveries of previously charged off loans. The provision was $129,000 for the three month period ended September 30, 2006 compared to $255,000 for the same period in 2005, a decrease of $126,000. There were several factors effecting the provision period to period (e.g.net differences in net charge-offs and recoveries), however, the primary reason for the decrease in the provision between the periods was due to a decrease in specific reserves on impaired loans.

Non-interest income

Non-interest income for the three months ended September 30, 2006 was $1,550,000 compared to $1,416,000 for the comparable period in 2005. This increase was the result of the following components listed in the table below (Amounts listed are in thousands of dollars).

Three month period ending: (in thousands of dollars)	Sept 30, 2006		Sept 30, 2005		$ Increase (decrease)			% increase (decrease)
Service charges on deposit accounts	$	902	$	833	$	69		8.3	%
Commissions from mortgage broker activities		79		126		(47	)	(37.3	)%
Loan related fees		70		79		(9	)	(11.4	)%
Commissions from sale of mutual funds and annuities		142		126		16		12.7	%
Rental income		53		50		3		6.0	%
Debit card and ATM fees		138		128		10		7.8	%
BOLI income		74		—		74		n/a
Other service charges and fees		92		67		25		37.3	%
Gain on sale of other real estate owned		—		7		(7	)	n/a
Total non-interest income	$	1,550	$	1,416	$	134		9.5	%

Our general business growth helped increase fee income in general. Mid FL’s non-interest income is included in the current quarter’s income, but not the comparable quarter in the prior year. Mid Florida’s total non interest income contribution for the current quarter was approximately $74,000, of which about $41,000 relates to service charges on deposit accounts. Partially off-setting these increasing effects on our deposit account service charges were rising interest rates and the related effect on the earnings credit on our commercial (business) checking accounts. That is, as interest rates rise, the earnings credit on checking accounts has increased thereby reducing checking account service fees, producing a decreasing effect in service charges on deposit accounts. Another off-setting decreasing effect on deposit account service charges was the merger of two of our subsidiary banks in January 2006. One of the banks had been charging customers for checking accounts (i.e. non-business checking accounts). Subsequent to the merger, that product has been changed to free checking, which produced a decreasing effect on service charges on deposit accounts. The reason we changed to free checking was to conform to our other banks and to better align ourselves to the local competition.

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We purchased our BOLI on October 31, 2005. As such, we had no comparative earnings credit during the third quarter of 2005.

Non-interest expense

Non-interest expense for the three months ended September 30, 2006 increased $1,679,000, or 29%, to $7,463,000, compared to $5,784,000 for the same period in 2005. The table below breaks down the individual components. Amounts are in thousands of dollars.

Three month period ending: (in thousands of dollars)	Sept 30, 2006			Sept 30, 2005			$ Increase (decrease)			% increase (decrease)
Employee salaries and wages	$	3,116		$	2,564		$	552		21.5	%
Employee incentive/bonus compensation		515			307			208		67.8	%
Employee stock option expense		147			—			147		n/a
Health insurance and other employee benefits		432			286			146		51.0	%.
Payroll taxes		214			182			32		17.6	%.
Other employee related expenses		159			113			46		40.7	%.
Incremental direct cost of loan origination		(248	)		(263	)		15		(5.7	)%
Total salaries, wages and employee benefits	$	4,335		$	3,189		$	1,146		35.9	%
Occupancy expense		907			727			180		24.8	%
Depreciation of premises and equipment		484			402			82		20.4	%
Supplies, stationary and printing		141			139			2		1.4	%
Marketing expenses		98			117			(19	)	(16.2	)%
Data processing expense		300			246			54		22.0	%
Legal, auditing and other professional fees		190			138			52		37.7	%
Bank regulatory related expenses		96			98			(2	)	(2.0	)%
Postage and delivery		66			72			(6	)	(8.3	)%
ATM related expenses		110			107			3		2.8	%
Other expenses		736			549			187		34.1	%
Total non-interest expense	$	7,463		$	5,784		$	1,679		29.0	%

The most significant component when comparing these two quarters is the March 31, 2006 acquisition of CenterState Bank Mid FL. Their non interest expenses is included in the current quarter but not in the comparable quarter in 2005. Their total non interest expense during the current quarter was $762,000. Excluding Mid FL, our net increase would adjust from $1,679,000 to $917,000 ($1,679,000 minus $762,000).

Our largest non-interest expense is employee and employee related expenses. Total salaries, wages and employee benefits for the three months ended September 30, 2006 ($4,335,000) accounted for 58% of our total non-interest expense, compared to 55% for the same period last year. Looking at the table below, employee salaries and wages increased by 21.5% to $3,116,000 for the three month period ending September 30, 2006 (“current quarter”), compared to $2,564,000 for the same period last year. To analyze this $552,000 increase, removing the Mid FL component of salary expense (approximately $318,000), results in an adjusted increase of $234,000, or 9.1%. This increase is a result of an increase in FTEs (“full time equivalent employees”), exclusive of Mid FL (289 in the current quarter compared to 270 for the same quarter last year), as well as salary increases commensurate with our market environment.

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We use a combination of performance incentive / bonus guidelines to motivate our employees to perform. These are primarily all tied to earnings performance metrics. As our net income increases, our employee incentive/bonus compensation also increases.

Effective January 1, 2006, we are required to expense employee stock options pursuant to Statement of Financial Accounting Standard No. 123(R). This expense during the current quarter was $147,000.

Incremental direct cost of loan origination, represents direct incremental cost of originating loans for our portfolio (successful efforts) that are required to be capitalized and amortized to interest income over the life of the related loan pursuant to Statement of Financial Accounting Standard No. 91. The amount that we capitalize is dependent on not just the cost, but the volume of loans successfully originated.

We added one new branch in October 2005, which is currently operating out of a temporary location until we construct a new permanent facility. As such this branch was operating during the current quarter, but not in the comparable quarter last year. This accounts for a few of the additional FTE’s quarter to quarter, the rest is due to the continual growth of our business. The increase in the remainder of our non-interest expenses, excluding employee related expenses, was primarily due to the continual growth of our business.

Provision for income taxes

The income tax provision for the three months ended September 30, 2006 was $1,343,000 (an effective rate of 37.4%) compared to $1,075,000 (an effective rate of 37.4%) for the same period in 2005. Although the effective tax rates are comparable, there are offsetting factors occurring during the current quarter. Non deductible stock option expense of $147,000 was off-set by tax exempt income from BOLI, and tax exempt securities and loans.

COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2006 AND 2005

Overview

Net income for the nine months ended September 30, 2006 was $6,268,000 or $0.57 per share basic and $0.56 per share diluted, compared to $4,495,000 or $0.50 per share basic and $0.49 per share diluted for the same period in 2005.

ROE and ROA, calculated on an annualized basis, for the nine month period ended September 30, 2006 was 7.77% and 0.87%, respectively, as compared to 8.35% and 0.75%, respectively, for the same period in 2005.

Net interest income/margin

Net interest income increased $6,892,000 or 33% to $27,481,000 during the nine month period ended September 30, 2006 compared to $20,589,000 for the same period in 2005. The increase was the result of a $13,978,000 increase in interest income less a $7,086,000 increase in interest expense.

Interest earning assets averaged $962,963,000 during the nine month period ended September 30, 2006 as compared to $795,656,000 for the same period in 2005, an increase of $167,307,000, or 21%. The yield on average interest earning assets increased 1.26% to 6.51% during the nine month period

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ended September 30, 2006, compared to 5.25% for the same period in 2005. The combined net effects of the $167,307,000 increase in average interest earning assets and the 1.26% increase in yield on average interest earning assets resulted in the $13,978,000 increase in interest income between the two periods.

Interest bearing liabilities averaged $654,065,000 during the nine month period ended September 30, 2006 as compared to $542,436,000 for the same period in 2005, an increase of $111,629,000, or 21%. The cost of average interest bearing liabilities increased 1.09% to 3.13% during the nine month period ended September 30, 2006, compared to 2.04% for the same period in 2005. The combined net effects of the $111,629,000 increase in average interest bearing liabilities and the 1.09% increase in cost of average interest bearing liabilities resulted in the $7,086,000 increase in interest expense between the two periods.

The table below summarizes, the analysis of changes in interest income and interest expense for the nine month periods ended September 30, 2006 and 2005 (in thousands of dollars).

	Nine months ended September 30,
	2006							2005
	Average Balance			Interest Inc / Exp		Average Rate		Average Balance			Interest Inc / Exp		Average Rate
Loans (1) (2) (3)	$	591,947		$	33,708	7.59	%	$	473,312		$	23,443	6.60	%
Securities (4)		285,578			9,141	4.27	%		260,562			5,428	2.78	%
Total earning assets		877,525			42,849	6.51	%		733,874			28,871	5.25	%
Allowance for loan losses		(7,040	)						(6,043	)
All other assets		92,478							67,825
Total assets	$	962,963						$	795,656
Deposits (5)		595,098			13,177	2.95	%		495,240			7,124	1.92	%
Borrowings (6)		48,967			1,552	4.23	%		37,196			666	2.39	%
Corporate debenture (7)		10,000			639	8.52	%		10,000			492	6.56	%
Total interest bearing Liabilities		654,065			15,368	3.13	%		542,436			8,282	2.04	%
Demand deposits		196,955							178,398
Other liabilities		4,397							3,084
Shareholders’ equity		107,546							71,738
Total liabilities and shareholders’ equity	$	962,963						$	795,656
Net interest spread (8)						3.38	%						3.21	%
Net interest income				$	27,481						$	20,589
Net interest margin (9)						4.18	%						3.74	%

Note 1: Loan balances are net of deferred origination fees and costs.

Note 2: Interest income on average loans includes loan fee recognition of $380,000 and $171,000 for the nine month periods ended September 30, 2006 and 2005.

Note 3: The average rates have not been presented on a tax equivalent basis, as this amount is not deemed material.

Note 4: Includes securities available-for-sale, federal funds sold and money market.

Note 5: Includes interest bearing deposits only. Non-interest bearing checking accounts are included in the demand deposits listed above.

Note 6: Includes securities sold under agreements to repurchase, federal funds purchased and federal home loan bank advances.

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Note 7: Includes amortization of origination costs of $28,000 for the nine month periods ended September 30, 2006 and 2005.

Note 8: Represents the average rate earned on interest earning assets minus the average rate paid on interest bearing liabilities.

Note 9: Represents net interest income divided by total interest earning assets.

Provision for loan losses

The provision for loan losses is charged to earnings to bring the total loan loss allowance to a level deemed appropriate by management and is based upon historical experience, the volume and type of lending conducted by the Company, the amount of nonperforming loans, general economic conditions, particularly as they relate to the Company’s market areas, and other environmental factors related to the collectibility of the Company’s loan portfolio. As these factors change, the level of loan loss allowance changes. As such, the provision for loan loss (income statement) is the difference between the loan loss allowance (balance sheet) at the beginning and end of the period, net of current period loan charge-offs and recoveries of previously charged off loans. The provision was $575,000 for the nine month period ended September 30, 2006 compared to $795,000 for the same period in 2005, a decrease of $220,000. There were several factors effecting the provision period to period (e.g.net differences in net charge-offs and recoveries), however, the primary reason for the decrease in the provision between the periods was due to a decrease in specific reserves on impaired loans.

Non-interest income

Non-interest income for the nine months ended September 30, 2006 was $4,552,000 compared to $4,067,000 for the comparable period in 2005, resulting in an increase of $485,000, or 11.9%. This increase was the result of the following components listed in the table below. Amounts listed are in thousands of dollars.

Nine month period ending: (in thousands of dollars)	Sept 30, 2006		Sept 30, 2005		$ Increase (decrease)			% increase (decrease)
Service charges on deposit accounts	$	2,525	$	2,413	$	112		4.6	%
Commissions from mortgage broker activities		270		393		(123	)	(31.3	)%
Loan related fees		224		220		4		1.8	%
Commissions from sale of mutual funds and annuities		493		282		211		74.8	%
Rental income		153		154		(1	)	(0.6	)%
Debit card and ATM fees		416		289		127		43.9	%
BOLI income		202		—		202		n/a
Other service charges and fees		269		308		(39	)	(12.7	)%
Gain on sale of other real estate owned		—		8		(8	)	n/a
Total non-interest income	$	4,552	$	4,067	$	485		11.9	%

Our general business growth helped increase fee income in general. The March 31, 2006 merger with Mid FL also helped increase fees. Mid FL’s non-interest income is included in the current period’s income, but not the comparable period in the prior year. Mid Florida’s total non interest income contribution for the current period was approximately $142000, of which about $80,000 relates to service charges on deposit accounts. Partially off-setting these increasing effects on our deposit account service charges was rising interest rates and the related effect on the earnings credit on our commercial (business) checking accounts. That is, as interest rates rise, the earnings credit on checking accounts has increased thereby reducing checking account service fees, producing a decreasing effect in service charges on deposit accounts. Another off-setting decreasing effect on deposit account service charges was the merger of two of our subsidiary banks in January 2006. One of the banks had been charging customers for checking accounts (i.e. non-business checking accounts). Subsequent to the merger, that product has

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been changed to free checking, which produced a decreasing effect on service charges on deposit accounts. The reason we changed to free checking was to conform to our other banks and to better align ourselves to the local competition.

We purchased our BOLI on October 31, 2005. As such, we had no comparative earnings credit during the nine month period ending September 30, 2005.

Non-interest expense

Non-interest expense for the nine months ended September 30, 2006 increased $4,662,000, or 27.9%, to $21,350,000, compared to $16,688,000 for the same period in 2005. The table below breaks down the individual components. Amounts are in thousands of dollars.

Nine month period ending: (in thousands of dollars)	Sept 30, 2006			Sept 30, 2005			$ Increase (decrease)			% increase (decrease)
Employee salaries and wages	$	8,864		$	7,422		$	1,442		19.4	%
Employee incentive/bonus compensation		1,476			768			708		92.2	%
Employee stock option expense		458			—			458		n/a
Health insurance and other employee benefits		1,223			829			394		47.5	%.
Payroll taxes		723			579			144		24.9	%.
Other employee related expenses		455			329			126		38.3	%.
Incremental direct cost of loan origination		(820	)		(744	)		(76	)	10.2	%.
Total salaries, wages and employee benefits	$	12,379		$	9,183		$	3,196		34.8	%
Occupancy expense		2,531			2,050			481		23.5	%
Depreciation of premises and equipment		1,438			1,214			224		18.5	%
Supplies, stationary and printing		461			392			69		17.6	%
Marketing expenses		336			328			8		2.4	%
Data processing expense		825			721			104		14.4	%
Legal, auditing and other professional fees		486			402			84		20.9	%
Bank regulatory related expenses		233			241			(8	)	(3.3	)%
Postage and delivery		211			216			(5	)	(2.3	)%
ATM related expenses		340			289			51		17.6	%
Other expenses		2,110			1,652			458		27.7	%
Total non-interest expense	$	21,350		$	16,688		$	4,662		27.9	%

The most significant component when comparing these two periods is the March 31, 2006 acquisition of CenterState Bank Mid FL. Their non interest expenses, after the March 31, 2006 acquisition date, is included in the current period but not in the comparable period in 2005. Their total non interest expense during this period was $1,514,000. Excluding Mid FL, our net increase would adjust from $4,662,000 to $3,148,000 ($4,662,000 minus $1,514,000).

Our largest non-interest expense is employee and employee related expenses. Total salaries, wages and employee benefits for the nine months ended September 30, 2006 ($12,379,000) accounted for 58% of our total non-interest expense, compared to 55% for the same period last year. Looking at the table below, employee salaries and wages increased by 19.4% to $8,864,000 for the nine month period ending September 30, 2006 (“current period”), compared to $7,422,000 for the same period last year. To analyze this $1,442,000 increase, first remove the Mid FL component of salary expense (approximately $529,000). This will adjust the increase to $913,000, or 12.3%. We believe this increase is a result of an increase in FTEs, exclusive of Mid FL (281 average FTEs during the current period compared to 264 during the comparable period in 2005), as well as salary increases commensurate with our market environment.

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We use a combination of performance incentive / bonus guidelines to motivate our employees to perform. These are primarily all tied to earnings performance metrics. As our net income increases, our employee incentive/bonus compensation also increases. Also contributing to this increase is the increasing number of employees (FTEs) and the addition of Mid FL, as discussed above.

Effective January 1, 2006, we are required to expense employee stock options pursuant to Statement of Financial Accounting Standard No. 123(R). This expense during the current period was $458,000.

Incremental direct cost of loan origination, represents direct incremental cost of originating loans for our portfolio (successful efforts) that are required to be capitalized and amortized to interest income over the life of the related loan pursuant to Statement of Financial Accounting Standard No. 91. The amount that we capitalize is dependent on not just the cost, but the volume of loans successfully originated.

We added one new branch in October 2005, which is currently operating out of a temporary location until we construct a new permanent facility. As such, this branch was operating during the current period, but not in the comparable period last year. This accounts for a few of the additional FTE’s period to period, the rest is due to the continual growth of our business. The increase in the remainder of our non-interest expenses, excluding employee related expenses, was primarily due to the continual growth of our business.

Provision for income taxes

The income tax provision for the nine months ended September 30, 2006 was $3,840,000 (an effective rate of 38.0%) compared to $2,678,000 (an effective rate of 37.3%) for the same period in 2005. The increase in the effective tax rate is due to expensing stock options effective this year (pursuant to SFAS No. 123R), which is not tax deductible, partially offset by BOLI income, which is not taxable. Our stock option expense is not tax deductible because all of these particular stock options are qualifying incentive stock options. Excluding these two items, our effective tax rates are comparable period to period as presented in the table below. Amounts are in thousands of dollars.

	nine months Ended Sept 30, 2006			effective tax rate		nine months Ended Sept 30, 2005		effective tax rate
Income before provision for income taxes	$	10,108				$	7,173
Provision for income taxes		3,840		38.0	%		2,678	37.3	%
Income before provision for income taxes	$	10,108				$	7,173
Non deductible stock option expense		458					—
Non taxable BOLI income		(202	)				—
Adjusted income before provision for income taxes	$	10,364				$	7,173
Provision for income taxes		3,840		37.1	%		2,678	37.3	%

Liquidity

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

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES: MARKET RISK

Market risk

We believe interest rate risk is the most significant market risk impacting us. Each of our subsidiary banks monitors and manages its interest rate risk using interest rate sensitivity “gap” analysis to measure the impact of market interest rate changes on net interest income. See our 2005 annual report on Form 10-K for disclosure of the quantitative and qualitative information regarding the interest rate risk inherent in interest rate risk sensitive instruments as of December 31, 2005. There has been no material changes in the assumptions used in monitoring interest rate risk as of September 30, 2006. The impact of other types of market risk, such as foreign currency exchange risk and equity price risk, is deemed immaterial. We do not maintain a portfolio of trading securities and do not intend to engage in such activities in the immediate future.

ITEM 4. CONTROLS AND PROCEDURES

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

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1a. Risk Factors

There has been no material changes in our risk factors from our disclosure in Item 7a of our December 31, 2005 annual report on Form 10-K.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Shareholders

None.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit 31.1	The President and Chief Executive Officer’s certification required under section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2	The Chief Financial Officer’s certification required under section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1	The President and Chief Executive Officer’s certification required under section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2	The Chief Financial Officer’s certification required under section 906 of the Sarbanes-Oxley Act of 2002

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CENTERSTATE BANKS OF FLORIDA, INC.

SIGNATURES

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

	CENTERSTATE BANKS OF FLORIDA, INC.
	(Registrant)
Date: November 3, 2006	By:	/s/Ernest S. Pinner
		Ernest S. Pinner
		President and Chief Executive Officer
Date: November 3, 2006	By:	/s/James J. Antal
		James J. Antal
		Senior Vice President and Chief Financial Officer

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