CenterState Bank (CSFL) 10-Q 2011 Q3 Quarterly report

U.S. SECURITIES 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, 2011

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

For the transition period from              to             

Commission file number 000-32017

CENTERSTATE BANKS, INC.

(Exact Name of Registrant as Specified in Its Charter)

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

42745 U.S. Highway 27

Davenport, Florida 33837

(Address of Principal Executive Offices)

(863) 419-7750

(Issuer’s Telephone Number, Including Area Code)

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

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

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨	Smaller reporting company	¨

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

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

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

Common stock, par value $.01 per share	30,039,332 shares
(class)	Outstanding at October 31, 2011

CENTERSTATE BANKS, INC. AND SUBSIDIARIES

INDEX

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
Condensed consolidated balance sheets at September 30, 2011 (unaudited) and December 31, 2010 (audited)			2
Condensed consolidated statements of earnings for the three and nine months ended September 30, 2011 and 2010 (unaudited)			3
Condensed consolidated statements of changes in stockholders’ equity for the nine months ended September 30, 2011 and 2010 (unaudited)			5
Condensed consolidated statements of cash flows for the nine months ended September 30, 2011 and 2010 (unaudited)			6
Notes to condensed consolidated financial statements (unaudited)			8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		57
Item 4.	Controls and Procedures		57
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		58
Item 1A.	Risk Factors		58
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		58
Item 3.	Defaults Upon Senior Securities		58
Item 4.	[Removed and Reserved]		58
Item 5.	Other Information		58
Item 6.	Exhibits		58
SIGNATURES			59
CERTIFICATIONS			60

1

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands of dollars, except per share data)

	As of September 30, 2011			As of December 31, 2010
ASSETS
Cash and due from banks	$	19,119		$	23,251
Federal funds sold and Federal Reserve Bank deposits		163,745			154,264
Cash and cash equivalents		182,864			177,515
Trading securities, at fair value		—			2,225
Investment securities available for sale, at fair value		557,129			500,927
Loans held for sale, at lower of cost or fair value		664			673
Loans covered by FDIC loss share agreements		171,193			198,285
Loans, excluding those covered by FDIC loss share agreements		991,725			930,670
Less allowance for loan losses		(26,192	)		(26,267	)
Net Loans		1,136,726			1,102,688
Bank premises and equipment, net		88,995			84,982
Accrued interest receivable		6,105			6,570
Federal Home Loan Bank and Federal Reserve Bank stock		8,521			10,122
Goodwill		38,035			38,035
Core deposit intangible		4,187			3,921
Bank owned life insurance (“BOLI”)		28,141			27,440
Other repossessed real estate owned covered by FDIC loss share agreements		9,634			11,104
Other repossessed real estate owned (“OREO”)		12,061			12,239
FDIC indemnification asset		53,820			59,456
Deferred income taxes, net		10,302			8,439
Prepaid expense and other assets		16,621			16,588
TOTAL ASSETS	$	2,153,805		$	2,062,924
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand - non-interest bearing	$	402,683		$	323,224
Demand -interest bearing		310,723			282,405
Savings and money market accounts		494,945			422,152
Time deposits		583,587			657,813
Total deposits		1,791,938			1,685,594
Securities sold under agreement to repurchase		14,482			13,789
Federal funds purchased		61,343			68,495
Federal Home Loan Bank advances		3,000			15,000
Corporate debentures		12,500			12,500
Accrued interest payable		832			1,148
Settlement payments due FDIC		2,391			6,258
Accounts payable and accrued expenses		17,283			7,891
Total liabilities		1,903,769			1,810,675
Stockholders’ equity:
Preferred Stock, $.01 par value; 5,000,000 shares authorized, no shares issued and outstanding at September 30, 2011 and December 31, 2010		—			—
Common stock, $.01 par value: 100,000,000 shares authorized; 30,039,332 and 30,004,761 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively		300			300
Additional paid-in capital		228,085			227,464
Retained earnings		14,495			21,569
Accumulated other comprehensive income		7,156			2,916
Total stockholders’ equity		250,036			252,249
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,153,805		$	2,062,924

See notes to the accompanying condensed consolidated financial statements

2

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)

(in thousands of dollars, except per share data)

		00000000			00000000			00000000		00000000
	Three months ended						Nine months ended
	Sept 30, 2011			Sept 30, 2010			Sept 30, 2011		Sept 30, 2010
Interest income:
Loans	$	16,164		$	14,409		$	48,745	$	40,678
Investment securities available for sale:
Taxable		3,132			4,203			10,646		12,940
Tax-exempt		353			367			1,041		1,089
Federal funds sold and other		188			127			487		400
		19,837			19,106			60,919		55,107
Interest expense:
Deposits		2,731			4,085			8,922		12,089
Securities sold under agreement to repurchase		20			19			67		69
Federal funds purchased		9			23			41		88
Federal Home Loan Bank advances		17			104			110		314
Corporate debentures		104			112			310		316
		2,881			4,343			9,450		12,876
Net interest income		16,956			14,763			51,469		42,231
Provision for loan losses		5,005			16,448			27,926		24,568
Net interest income after loan loss provision		11,951			(1,685	)		23,543		17,663
Non interest income:
Service charges on deposit accounts		1,629			1,713			4,602		4,964
Income from correspondent banking and bond sales division		7,999			11,828			18,228		25,556
Commissions from sale of mutual funds and annuities		557			318			1,318		783
Debit card and ATM fees		713			458			2,083		1,325
Loan related fees		199			128			670		375
BOLI income		227			220			701		524
Gain on sale of securities		205			151			3,334		3,226
Trading securities revenue		130			249			397		448
Bargain purchase gain		—			1,377			11,129		1,377
Adjustment to FDIC indemnification asset		256			—			1,977		—
FDIC indemnification asset accretion/(amortization)		(225	)		225			196		225
Other non interest revenue and fees		555			455			1,734		951
Total other income		12,245			17,122			46,369		39,754

See notes to the accompanying condensed consolidated financial statements.

3

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)

(in thousands of dollars, except per share data)

(continued)

		00000000			00000000			00000000			00000000
	Three months ended						Nine months ended
	Sept 30, 2011			Sept 30, 2010			Sept 30, 2011			Sept 30, 2010
Non interest expenses:
Salaries, wages and employee benefits		14,944			16,009			42,270			40,401
Occupancy expense		2,036			1,633			6,244			4,568
Depreciation of premises and equipment		1,016			971			3,011			2,432
Supplies, stationary and printing		314			248			984			746
Marketing expenses		611			615			2,099			1,766
Data processing expense		848			726			3,765			1,924
Legal, auditing and other professional fees		559			1,554			1,876			2,936
Core deposit intangible (CDI) amortization		194			142			585			348
Postage and delivery		293			198			724			433
ATM and debit card related expenses		335			365			1,075			964
Bank regulatory expenses		617			819			2,062			2,121
Loss on sale of repossessed real estate (“OREO”)		307			153			362			177
Valuation write down of repossessed real estate (“OREO”)		1,389			1,273			4,659			2,583
Loss on repossessed assets other than real estate		218			171			321			404
Foreclosure related expenses		1,052			803			4,048			1,497
Other expenses		2,054			1,850			5,880			4,553
Total other expenses		26,787			27,530			79,965			67,853
Loss before income taxes		(2,591	)		(12,093	)		(10,053	)		(10,436	)
Benefit for income taxes		(599	)		(4,422	)		(3,880	)		(4,062	)
Net loss	$	(1,992	)	$	(7,671	)	$	(6,173	)	$	(6,374	)
Comprehensive loss	$	(42	)	$	(8,124	)	$	(1,933	)	$	(5,332	)
Loss per share:
Basic	$	(0.07	)	$	(0.27	)	$	(0.21	)	$	(0.24	)
Diluted	$	(0.07	)	$	(0.27	)	$	(0.21	)	$	(0.24	)
Common shares used in the calculation of loss per share:
Basic		30,039,329			28,789,008			30,032,377			26,800,582
Diluted		30,039,329			28,789,008			30,032,377			26,800,582

See notes to the accompanying condensed consolidated financial statements.

4

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the nine months ended September 30, 2011 and 2010 (unaudited)

(in thousands of dollars, except per share data)

	Number of common shares			Common stock		Additional paid in capital		Retained earnings			Accumulated other comprehensive income(loss)		Total stockholders’ equity
Balances at January 1, 2010		25,773,229		$	258	$	193,464	$	28,623		$	7,065	$	229,410
Comprehensive income:
Net loss									(6,374	)				(6,374	)
Unrealized holding gain on available for sale securities, net of deferred income taxes of $455												1,042		1,042
Total comprehensive income														(5,332	)
Dividends paid - common ($0.03 per share)									(816	)				(816	)
Stock options exercised, including tax benefit		90,592			1		734							735
Stock grants issued		940					10							10
Stock based compensation expense							319							319
Proceeds from issuance of common stock		4,140,000			41		32,725							32,766
Balances at September 30, 2010		30,004,761		$	300	$	227,252	$	21,433		$	8,107	$	257,092
Balances at January 1, 2011		30,004,761		$	300	$	227,464	$	21,569		$	2,916	$	252,249
Comprehensive income:
Net loss									(6,173	)				(6,173	)
Unrealized holding gain on available for sale securities, net of deferred income taxes of $2,558												4,240		4,240
Total comprehensive loss														(1,933	)
Dividends paid - common ($0.03 per share)									(901	)				(901	)
Stock options exercised, including tax benefit		14,903					96							96
Stock grants issued		19,668					218							218
Stock based compensation expense							307							307
Balances at September 30, 2011		30,039,332		$	300	$	228,085	$	14,495		$	7,156	$	250,036
			��

	Three months ended						Nine months ended
	Sept 30, 2011			Sept 30, 2010			Sept 30, 2011			Sept 30, 2010
Disclosure of reclassification amounts:
Unrealized holding gain arising during the period, net of income taxes	$	2,077		$	(330	)	$	6,319		$	3,054
Less: reclassified adjustments for gain included in net income, net of income taxes of $78, $28, $1,255 and $1,214, respectively		(127	)		(123	)		(2,079	)		(2,012	)
Net unrealized gain (loss) on securities, net of income taxes	$	1,950		$	(453	)	$	4,240		$	1,042

See notes to the accompanying condensed consolidated financial statements

5

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands of dollars)

		000000			000000
	Nine months ended Sept 30,
	2011			2010
Cash flows from operating activities:
Net loss	$	(6,173	)	$	(6,374	)
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		27,926			24,568
Depreciation of premises and equipment		3,011			2,432
Amortization of purchase accounting adjustments		(9,639	)		(1,851	)
Net amortization/accretion of investment securities		5,146			4,556
Net deferred loan origination fees		(55	)		(24	)
Gain on sale of securities available for sale		(3,334	)		(3,226	)
Trading securities revenue		(397	)		(448	)
Purchases of trading securities		(189,880	)		(215,284	)
Proceeds from sale of trading securities		192,502			214,151
Repossessed real estate owned valuation write down		4,659			2,583
Loss on sale of repossessed real estate owned		362			177
Repossessed assets other than real estate valuation write down		222			163
Loss on sale of repossessed assets other than real estate		99			241
Gain on sale of loans held for sale		(88	)		(36	)
Loans originated and held for sale		(5,271	)		(6,003	)
Proceeds from sale of loans held for sale		5,368			4,229
(Gain) loss on disposal of and or sale of fixed assets		(28	)		25
Deferred income taxes		(4,422	)		(949	)
Stock based compensation expense		535			518
Bank owned life insurance income		(701	)		(524	)
Bargain purchase gain from acquisition		(11,129	)		(1,377	)
Net cash from changes in:
Net changes in accrued interest receivable, prepaid expenses, and other assets		6,691			(68	)
Net change in accrued interest payable, accrued expense, and other liabilities		5,057			2,313
Net cash provided by operating activities		20,461			19,792
Cash flows from investing activities:
Purchases of investment securities available for sale		(82,749	)		(326,692	)
Purchases of mortgage backed securities available for sale		(294,653	)		(199,870	)
Purchases of FHLB and FRB stock		—			(479	)
Proceeds from maturities of investment securities available for sale		977			14,154
Proceeds from called investment securities available for sale		84,125			121,365
Proceeds from pay-downs of mortgage backed securities available for sale		77,829			93,744
Proceeds from sale of investment securities available for sale		20,684			31,009
Proceeds from sales of mortgage backed securities available for sale		142,572			121,849
Proceeds from sale of FHLB and FRB stock		1,601			241
Net decrease in loans		44,600			14,731
Proceeds from wholesale disposal of problem loans		4,156			8,579
Purchases of premises and equipment, net		(6,367	)		(12,705	)
Proceeds from sale of repossessed real estate		14,447			3,322
Proceeds from insurance claims related to repossessed real estate		263			—
Proceeds from sale of fixed assets		102			—
Purchase of bank owned life insurance		—			(11,000	)
Net cash from bank acquisitions		4,349			55,368
Net cash (used) provided by investing activities		11,936			(86,384	)

See notes to the accompanying condensed consolidated financial statements.

6

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands of dollars)

(continued)

		000000			000000
	Nine months ended Sept 30,
	2011			2010
Cash flows from financing activities:
Net (decrease) increase in deposits		(7,784	)		71,426
Net decrease in securities sold under agreement to repurchase		693			(10,346	)
Net decrease increase in federal funds purchased		(7,152	)		(72,080	)
Net decrease in FHLB advances		(12,000	)		(20,741	)
Stock options exercised, including tax benefit		96			735
Net proceeds from public stock offering		—			32,766
Dividends paid		(901	)		(816	)
Net cash (used) provided by financing activities		(27,048	)		944
Net increase (decrease) in cash and cash equivalents		5,349			(65,648	)
Cash and cash equivalents, beginning of period		177,515			192,407
Cash and cash equivalents, end of period	$	182,864		$	126,759
Transfer of loans to other real estate owned	$	18,083		$	8,356
Cash paid during the period for:
Interest	$	10,921		$	13,371
Income taxes	$	178		$	384

See notes to the accompanying condensed consolidated financial statements.

7

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

NOTE 1: Nature of Operations and basis of presentation

Our consolidated financial statements include the accounts of CenterState Banks, Inc. (the “Parent Company,” “Company” or “CSFL”), and our wholly owned subsidiary banks, CenterState Bank of Florida, N.A. and Valrico State Bank, and our non bank subsidiary, R4ALL, Inc. Our subsidiary banks operate through 52 full service banking locations in 14 counties throughout Central Florida, providing traditional deposit and lending products and services to their commercial and retail customers. R4ALL, Inc. is a separate non bank subsidiary of CSFL. Its purpose is to purchase troubled loans from our two subsidiary banks and manage their eventual disposition.

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

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, 2010. 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, 2011 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 approximately 1,135,304 and 1,175,000 stock options that were anti dilutive at September 30, 2011 and 2010, respectively. The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the periods presented.

8

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

(continued)

	Three months ended Sept 30,						Nine months ended Sept 30,
	2011			2010			2011			2010
Numerator for basic and diluted loss per share:
Net loss	$	(1,992	)	$	(7,671	)	$	(6,173	)	$	(6,374	)
Net (loss) income available for common shareholders	$	(1,992	)	$	(7,671	)	$	(6,173	)	$	(6,374	)
Denominator:
Denominator for basic loss per share
- weighted-average shares		30,039,329			28,789,008			30,032,377			26,800,582
Effect of dilutive securities:
Employee stock options and stock grants		—			—			—			—
Denominator for diluted loss per share
- adjusted weighted-average shares		30,039,329			28,789,008			30,032,377			26,800,582
Basic loss per share	$	(0.07	)	$	(0.27	)	$	(0.21	)	$	(0.24	)
Diluted loss per share	$	(0.07	)	$	(0.27	)	$	(0.21	)	$	(0.24	)

NOTE 3: Fair value

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

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

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

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

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

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

9

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

(continued)

The mortgage back securities held by the Company were issued by U. S. government sponsored entities and agencies. Assets and liabilities measured at fair value on a recurring basis are summarized below.

		000000		000000		000000		000000
			Fair value measurements using
			Quoted prices in active markets for identical assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant unobservable inputs (Level 3)
at September 30, 2011
Assets:
Available for sale securities
U.S. government sponsored entities and agencies		82,818		—		82,818		—
Mortgage backed securities		429,857		—		429,857		—
Municipal securities		44,454		—		44,454		—
at December 31, 2010
Assets:
Trading securities	$	2,225		—	$	2,225		—
Available for sale securities
U.S. government sponsored entities and agencies		113,416		—		113,416		—
Mortgage backed securities		354,258		—		354,258		—
Municipal securities		33,253		—		33,253		—

10

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

(continued)

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

		000000		000000		000000		000000
			Fair value measurements using
			Quoted prices in active markets for identical assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant unobservable inputs (Level 3)
at September 30, 2011
Assets:
Impaired loans
Residential real estate	$	—		—		—	$	—
Commercial real estate		1,318		—		—		1,318
Construction, land development and land		620		—		—		620
Commercial		—		—		—		—
Consumer		—		—		—		—
Other real estate owned
Residential real estate	$	2,153		—		—	$	2,153
Commercial real estate		4,391		—		—		4,391
Construction, land development and land		2,091		—		—		2,091
at December 31, 2010
Assets:
Impaired loans
Residential real estate	$	2,000		—		—	$	2,000
Commercial real estate		4,931		—		—		4,931
Construction, land development and land		3,949		—		—		3,949
Other real estate owned
Residential real estate	$	2,372		—		—	$	2,372
Commercial real estate		6,851		—		—		6,851
Construction, land development and land		3,016		—		—		3,016

Impaired loans measured for impairment using the fair value of the collateral for collateral dependent loans had a recorded investment of $2,677, with a valuation allowance of $739, at September 30, 2011, and a carrying amount of $14,074, with a valuation allowance of $3,194, at December 31, 2010. The Company recorded a provision for loan loss expense of $413, $889 and $2,455 on these loans during the three and nine month period ending September 30, 2011, and the year ending December 31, 2010, respectively.

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data. Such adjustments are typically significant and result in level 3 classification of inputs for determining fair value.

11

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

(continued)

The fair value of our repossessed real estate (“other real estate owned” or “OREO”) is determined using Level 3 inputs which include current and prior appraisals and estimated costs to sell. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. The decline in fair value of other real estate owned was $1,389 and $4,659 during the three and nine month period ending September 30, 2011. Changes in fair value were recorded directly as an adjustment to current earnings through non interest expense.

Fair Value of Financial Instruments

The methods and assumptions used to estimate fair value are described as follows: Carrying amount is the estimated fair value for cash and cash equivalents, interest bearing deposits, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using underlying collateral values. For the FDIC indemnification asset, fair value is based on discounted cash flows using current market rates applied to the estimated life. Fair value of debt is based on current rates for similar financing. It was not practicable to determine the fair value of Federal Home Loan Bank stock or Federal Reserve Bank stock due to restrictions placed on its transferability. The fair value of off-balance-sheet items is not considered material. The following table presents the carry amounts and estimated fair values of the Company’s financial instruments:

	Sept 30, 2011				Dec 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	182,864	$	182,864	$	177,515	$	177,515
Trading securities		—		—		2,225		2,225
Investment securities available for sale		557,129		557,129		500,927		500,927
FHLB and FRB stock		8,521		n/a		10,122		n/a
Loans held for sale		664		664		673		673
Loans, less allowance for loan losses of $26,192 and $26,267, at September 30, 2011 and December 31, 2010, respectively		1,136,726		1,143,319		1,102,688		1,109,853
FDIC indemnification asset		53,820		53,820		59,456		59,456
Accrued interest receivable		6,105		6,105		6,570		6,570
Financial liabilities:
Deposits- without stated maturities	$	1,208,351	$	1,208,351	$	1,027,781	$	1,027,781
Deposits- with stated maturities		583,587		593,654		657,813		667,632
Securities sold under agreement to repurchase		14,482		14,482		13,789		13,789
Federal funds purchased		61,343		61,343		68,495		68,495
Federal Home Loan Bank advances and other borrowed funds		3,000		3,016		15,000		15,113
Corporate debentures		12,500		6,159		12,500		6,075
Accrued interest payable		832		832		1,148		1,148

12

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

(continued)

NOTE 4: Reportable segments

The Company’s reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning purposes by management. The table below is a reconciliation of the reportable segment revenues, expenses, and profit to the Company’s consolidated total for the nine and three month periods ending September 30, 2011 and 2010.

Nine month period ending September 30, 2011

	Commercial and retail banking			Correspondent banking and bond sales division			Corporate overhead and administration			Elimination entries			Total
Interest income	$	58,022		$	2,897			—					$	60,919
Interest expense		(9,101	)		(40	)		(309	)					(9,450	)
Net interest income		48,921			2,857			(309	)					51,469
Provision for loan losses		(27,920	)		(6	)		—						(27,926	)
Non interest income		26,506			19,863			—						46,369
Non interest expense		(60,412	)		(17,510	)		(2,043	)					(79,965	)
Net income (loss) before taxes		(12,905	)		5,204			(2,352	)					(10,053	)
Income tax benefit (provision)		4,977			(1,958	)		861						3,880
Net (loss) income	$	(7,928	)	$	3,246		$	(1,491	)				$	(6,173	)
Total assets	$	1,971,417		$	178,042		$	265,284		$	(260,938	)	$	2,153,805

Three month period ending September 30, 2011

	Commercial and retail banking			Correspondent banking and bond sales division			Corporate overhead and administration			Elimination entries			Total
Interest income	$	18,746		$	1,091			—					$	19,837
Interest expense		(2,769	)		(9	)		(103	)					(2,881	)
Net interest income		15,977			1,082			(103	)					16,956
Provision for loan losses		(5,005	)		—			—						(5,005	)
Non interest income		3,671			8,574			—						12,245
Non interest expense		(19,347	)		(6,806	)		(634	)					(26,787	)
Net income (loss) before taxes		(4,704	)		2,850			(737	)					(2,591	)
Income tax benefit (provision)		1,403			(1,073	)		269						599
Net (loss) income	$	(3,301	)	$	1,777		$	(468	)				$	(1,992	)
Total assets	$	1,971,417		$	178,042		$	265,284		$	(260,938	)	$	2,153,805

13

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

(continued)

Nine month period ending September 30, 2010

	Commercial and retail banking			Correspondent banking and bond sales division			Corporate overhead and administration			Elimination entries			Total
Interest income	$	51,010		$	4,097		$	0		$	0		$	55,107
Interest expense		(12,456	)		(104	)		(316	)		0			(12,876	)
Net interest income		38,554			3,993			(316	)					42,231
Provision for loan losses		(24,562	)		(6	)								(24,568	)
Non interest income		13,016			26,738									39,754
Non interest expense		(43,529	)		(22,147	)		(2,177	)					(67,853	)
Net income before taxes		(16,521	)		8,578			(2,493	)					(10,436	)
Income tax benefit (provision)		6,376			(3,228	)		914						4,062
Net income	($	10,145	)	$	5,350		($	1,579	)				($	6,374	)
Total assets	$	1,965,563		$	169,450		$	273,794		($	285,364	)	$	2,123,443

Three month period ending September 30, 2010

	Commercial and retail banking			Correspondent banking and bond sales division			Corporate overhead and administration			Elimination entries			Total
Interest income	$	17,926		$	1,180								$	19,106
Interest expense		(4,199	)		(32	)		(112	)					(4,343	)
Net interest income		13,727			1,148			(112	)					14,763
Provision for loan losses		(16,445	)		(3	)								(16,448	)
Non interest income		4,764			12,358									17,122
Non interest expense		(17,578	)		(9,246	)		(706	)					(27,530	)
Net income before taxes		(15,532	)		4,257			(818	)					(12,093	)
Income tax benefit (provision)		5,710			(1,564	)		276						4,422
Net (loss) income	($	9,822	)	$	2,693		($	542	)				($	7,671	)
Total assets	$	1,965,563		$	169,450		$	273,794		($	285,364	)	$	2,123,443

Commercial and retail banking: The Company’s primary business is commercial and retail banking. Currently, the Company operates through two subsidiary banks and a non bank subsidiary, R4ALL, with 52 locations in fourteen counties throughout Central Florida providing traditional deposit and lending products and services to its commercial and retail customers.

Corresponding banking and bond sales division: Operating as a division of our largest subsidiary bank, its primary revenue generating activities are as follows: 1) the first, and largest, revenue generator is commissions earned on fixed income security sales; 2) the second category includes spread income earned on correspondent bank deposits (i.e. federal funds purchased) and service fees on correspondent bank checking accounts; and, 3) the third revenue generating category, includes fees from safe-keeping activities, bond accounting services for correspondents, asset/liability consulting related activities, international wires, and other clearing and corporate checking account services. The customer base includes small to medium size financial institutions primarily located in Florida, Alabama, Georgia, North Carolina, South Carolina, Tennessee, Virginia and West Virginia.

14

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

(continued)

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

NOTE 5: Investment Securities Available for Sale

The fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

	September 30, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Obligations of U.S. government sponsored entities and agencies	$	82,128	$	690	$	—	$	82,818
Mortgage backed securities		420,758		9,176		77		429,857
Municipal securities		42,769		1,716		31		44,454
Total	$	545,655	$	11,582	$	108	$	557,129

	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Obligations of U.S. government sponsored entities and agencies	$	113,183	$	732	$	499	$	113,416
Mortgage backed securities		348,990		6,563		1,295		354,258
Municipal securities		34,079		259		1,085		33,253
Total	$	496,252	$	7,554	$	2,879	$	500,927

The cost of securities sold is determined using the specific identification method. Sales of available for sale securities were as follows:

For the nine months ended:	Sept 30, 2011		Sept 30, 2010
Proceeds	$	163,256	$	152,858
Gross gains		3,465		3,248
Gross losses		131		22

The tax provision related to these net realized gains was $1,255 and $1,214, respectively.

15

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

(continued)

The fair value of available for sale securities at September 30, 2011 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

Investment securities available for sale	Fair Value		Amortized Cost
Due in one year or less	$	2,266	$	2,265
Due after one year through five years		11,306		11,193
Due after five years through ten years		31,027		30,192
Due after ten years through thirty years		82,673		81,247
Mortgage backed securities		429,857		420,758
	$	557,129	$	545,655

Securities pledged at September 30, 2011 and December 31, 2010 had a carrying amount (estimated fair value) of $160,547 and $157,087 respectively. These securities were pledged primarily to secure public deposits and repurchase agreements.

At September 30, 2011 and December 31, 2010, there were no holdings of securities of any one issuer, other than the U.S. Government sponsored entities and agencies, in an amount greater than 10% of stockholders’ equity.

The following tables show the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2011 and December 31, 2010.

		$000,000		$000,000		$000,000		$000,000		$000,000		$000,000
	September 30, 2011
	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage backed securities		16,224		77		—		—		16,224		77
Municipal securities		4,395		31		—		—		4,395		31
Total temporarily impaired securities	$	20,619	$	108	$	—	$	—	$	20,619	$	108

		$00,0000		$00,0000		$00,0000		$00,0000		$00,0000		$00,0000
	December 31, 2010
	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. government sponsored entities and agencies	$	14,501	$	499	$	—	$	—	$	14,501	$	499
Mortgage backed securities		130,937		1,295		—		—		130,937		1,295
Municipal securities		19,135		880		1,246		205		20,381		1,085
Total temporarily impaired securities	$	164,573	$	2,674	$	1,246	$	205	$	165,819	$	2,879

16

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

(continued)

Mortgage-backed securities: At September 30, 2011, 100% of the mortgage-backed securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae, Freddie Mac, and Ginnie Mae, institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because management does not intend to sell these investments or more likely than not will not be required to sell these investments before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2011

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

NOTE 6: Loans

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

	Sept 30, 2011			Dec 31, 2010
Loans not covered by FDIC loss share agreements (note 2)
Real estate loans
Residential	$	259,829		$	255,571
Commercial		466,860			410,162
Construction, development, land		95,894			109,380
Total real estate		822,583			775,113
Commercial		117,900			100,906
Consumer and other loans (note 1)		1,633			3,264
Consumer and other		50,283			52,115
Loans before unearned fees and cost		992,399			931,398
Unearned fees/costs		(674	)		(728	)
Total loans not covered by FDIC loss share agreements		991,725			930,670
Loans covered by FDIC loss share agreements
Real estate loans
Residential		102,852			110,586
Commercial		56,839			68,286
Construction, development, land		8,686			13,653
Total real estate		168,377			192,525
Commercial		2,816			5,760
Total loans covered by FDIC loss share agreements		171,193			198,285
Total loans		1,162,918			1,128,955
Allowance for loan losses		(26,192	)		(26,267	)
Total loans, net of allowance for loan losses	$	1,136,726		$	1,102,688

Note 1: Consumer loans acquired pursuant to three FDIC assisted transactions of failed financial institutions during the third quarter of 2010. These loans are not covered by an FDIC loss share agreement. The loans have been written down to estimated fair value at the acquisition date and are being accounted for pursuant to ASC Topic 310-30.

Note 2: Includes $97,048 of loans that are subject to a two year put back option with TD Bank, N.A., so that if any of these loans become 30 days past due or are adversely classified pursuant to bank regulatory guidelines, the Company has the option to put back the loan to TD Bank.

17

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

(continued)

The tables below sets forth the activity in the allowance for loan losses for the periods presented.

	Loans not covered by FDIC loss share agreements			Loans covered by FDIC loss share agreements		Total
Three months ended September 30, 2011
Balance at beginning of period	$	27,418		$	—	$	27,418
Loans charged-off		(7,186	)		— ��		(7,186	)
Recoveries of loans previously charged-off		662			293		955
Net charge-offs		(6,524	)		293		(6,231	)
Provision for loan loss		4,985			20		5,005
Balance at end of period	$	25,879		$	313	$	26,192
Three months ended September 30, 2010
Balance at beginning of period	$	24,191		$	—	$	24,191
Loans charged-off		(12,704	)		—		(12,704	)
Recoveries of loans previously charged-off		77			—		77
Net charge-offs		(12,627	)		—		(12,627	)
Provision for loan losses		16,448			—		16,448
Balance at end of period	$	28,012		$	—	$	28,012

	Loans not covered by FDIC loss share agreements			Loans covered by FDIC loss share agreements			Total
Nine months ended September 30, 2011
Balance at beginning of period	$	26,267		$	—		$	26,267
Loans charged-off		(28,947	)		(293	)		(29,240	)
Recoveries of loans previously charged-off		946			293			1,239
Net charge-offs		(28,001	)		—			(28,001	)
Provision for loan loss		27,613			313			27,926
Balance at end of period	$	25,879		$	313		$	26,192
Nine months ended September 30, 2010
Balance at beginning of period	$	23,289		$	—		$	23,289
Loans charged-off		(20,177	)		—			(20,177	)
Recoveries of loans previously charged-off		332			—			332
Net charge-offs		(19,845	)		—			(19,845	)
Provision for loan losses		24,568			—			24,568
Balance at end of period	$	28,012		$	—		$	28,012

18

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

(continued)

		000000			000000			000000			000000			000000			000000
	Real Estate Loans
	Residential			Commercial			Construction, development, and land			Commercial & Industrial			Consumer and other			Total
Three months ended September 30, 2011
Beginning of the period	$	7,932		$	9,539		$	7,588		$	1,493		$	866		$	27,418
Charge-offs		(1,232	)		(3,317	)		(1,968	)		(289	)		(380	)		(7,186	)
Recoveries		235			264			325			66			65			955
Provisions		1,192			2,446			784			201			382			5,005
Balance at September 30, 2011	$	8,127		$	8,932		$	6,729		$	1,471		$	933		$	26,192
Nine months ended September 30, 2011
Beginning of the period	$	7,704		$	8,587		$	6,893		$	2,182		$	901		$	26,267
Charge-offs		(6,755	)		(12,955	)		(7,738	)		(914	)		(878	)		(29,240	)
Recoveries		313			338			337			81			170			1,239
Provisions		6,865			12,962			7,237			122			740			27,926
Balance at September 30, 2011	$	8,127		$	8,932		$	6,729		$	1,471		$	933		$	26,192

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2011 and December 31, 2010. Accrued interest receivable and unearned fees/costs are not included in the recorded investment because they are not material.

		000000		000000		000000		000000		000000		000000
	Real Estate Loans
As of September 30, 2011	Residential		Commercial		Constr., develop., land		Comm. & industrial		Consumer & other		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	588	$	151	$	—	$	—	$	739
Collectively evaluated for impairment		8,045		8,121		6,528		1,463		933		25,090
Acquired with deteriorated credit quality		82		223		—		8		—		313
Total ending allowance balance		8,127		8,932		6,729		1,471		933		26,192
Loans:
Loans individually evaluated for impairment		12,575		41,832		13,292		6,531		450		74,680
Loans collectively evaluated for impairment (1)		247,254		425,028		82,602		111,369		49,833		916,086
Loans acquired with deteriorated credit quality		102,852		56,839		8,686		2,816		1,633		172,826
Total ending loans balance	$	362,681	$	523,699	$	104,580	$	120,716	$	51,916	$	1,163,592

(1) Includes $97,048 of loans purchased from TD Bank during the first quarter of 2011. The loans purchased are all performing loans with a two year put back option. This segment of the loan portfolio has no allocation of the allowance for loan loss.

19

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

(continued)

	Real Estate Loans
As of December 31, 2010	Residential		Commercial		Constr., develop., land		Comm. & industrial		Consumer & other		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	679	$	1,981	$	534		—		—	$	3,194
Collectively evaluated for impairment		7,025		6,606		6,359		2,182		901		23,073
Acquired with deteriorated credit quality		—		—		—		—		—		—
Total ending allowance balance	$	7,704	$	8,587	$	6,893	$	2,182	$	901	$	26,267
Loans:
Loans individually evaluated for impairment		14,856		49,427		16,298		5,712		684		86,977
Loans collectively evaluated for impairment		240,715		360,735		93,082		95,194		51,431		841,157
Loans acquired with deteriorated credit quality		110,586		68,286		13,653		5,760		3,264		201,549
Total ending loans balance	$	366,157	$	478,448	$	123,033	$	106,666	$	55,379	$	1,129,683

The Company recorded partial charge offs in lieu of specific allowance for a number of the impaired loans, which is the primary reason for the decrease in specific allowance and for the appearance of low specific allowance on impaired loans overall. The Company’s impaired loans have been written down by $17,425 to $74,680 ($73,941 when the $739 specific allowance is considered) from their legal unpaid principal balance outstanding of $92,105. The table below summarizes impaired loan data for the periods presented.

	Sept 30, 2011		Dec 31, 2010
Impaired loans with a specific valuation allowance	$	2,677	$	14,074
Impaired loans without a specific valuation allowance		72,003		72,903
Total impaired loans	$	74,680	$	86,977
Amount of allowance for loan losses allocated to impaired loans		739	$	3,194
Performing TDRs	$	7,131	$	10,591
Non performing TDRs, included in NPLs		9,112		11,731
Total TDRs (TDRs are required to be included in impaired loans)	$	16,243	$	22,322
Impaired loans that are not TDRs		58,437		64,655
Total impaired loans	$	74,680	$	86,977

20

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

(continued)

In this current real estate environment it has become more common to restructure or modify the terms of certain loans under certain conditions (i.e. troubled debt restructure or “TDRs”). In those circumstances it may be beneficial to restructure the terms of a loan and work with the borrower for the benefit of both parties, versus forcing the property into foreclosure and having to dispose of it in an unfavorable real estate market. When we have modified the terms of a loan, we usually either reduce the monthly payment and/or interest rate for generally about twelve months. We have not forgiven any material principal amounts on any loan modifications to date. We have approximately $16,243 of TDRs. Of this amount $7,131 are performing pursuant to their modified terms, and $9,112 are not performing and have been placed on non accrual status and included in our non performing loans (“NPLs”).

Troubled debt restructured loans (“TDRs”):	Sept 30, 2011		Dec 31, 2010
Performing TDRs	$	7,131	$	10,591
Non performing TDRs		9,112		11,731
Total TDRs	$	16,243	$	22,322

TDRs as of September 30, 2011 quantified by loan type classified separately as accrual (performing loans) and non-accrual (non performing loans) are presented in the table below.

TDRs	Accruing		Non Accrual		Total
Real estate loans:
Residential	$	5,193	$	4,880	$	10,073
Commercial		699		3,797		4,496
Construction, development, land		498		378		876
Total real estate loans		6,390		9,055		15,445
Commercial		348		—		348
Consumer and other		393		57		450
Total TDRs	$	7,131	$	9,112	$	16,243

Our policy is to return non accrual TDR loans to accrual status when all the principal and interest amounts contractually due, pursuant to its modified terms, are brought current and future payments are reasonably assured. Our policy also considers the payment history of the borrower, but is not dependent upon a specific number of payments. The Company recorded a provision for loan loss expense of $517 and $1,943 and partial charge offs of $517 and $2,613 on the TDR loans described above during the three and nine month period ending September 30, 2011.

21

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

(continued)

Loans are modified to minimize loan losses when we believe the modification will improve the borrower’s financial condition and ability to repay the loan. We typically do not forgive principal. We generally either reduce interest rates or decrease monthly payments for a temporary period of time and those reductions of cash flows are capitalized into the loan balance. A summary of the types of concessions made are presented in the table below.

	Sept 30, 2011
3 months interest only	$	212
6 months interest only		2,115
9 months interest only		199
12 months interest only		5,786
18 months interest only		189
payment reduction for 12 months		2,878
all other		4,864
Total TDRs	$	16,243

It is still early in our experience with these types of activities, but approximately 44% of our TDRs are current pursuant to their modified terms, and about $9,112, or approximately 56% of our total TDRs are not performing pursuant to their modified terms. Long-term success with our performing TDRs is an unknown, and will depend to a great extent on the future of our economy and our local real estate markets. Thus far, there does not appear to be any significant difference in success rates with one type of concession versus another. It appears that the longer the period from modification date, the higher the probability of not performing pursuant to the modified terms. Non performing TDRs average approximately twenty-two months in age from their modification date through September 30, 2011. Performing TDRs average approximately thirteen months in age from their modification date through September 30, 2011.

The following table presents loans by class modified as TDRs within the past twelve months for which there was a payment default within the nine month period ending September 30, 2011.

	Number of Loans		Recorded Investment
Residential		—	$	—
Commercial real estate		1		75
Construction, development, land		1		108
Commercial		—		—
Consumer and other		—		—
Total		2	$	183

The Company recorded a provision for loan loss expense and partial charge offs of $0 and $198 on TDR loans that subsequently defaulted as described above during the three and nine month period ending September 30, 2011.

22

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

(continued)

The following tables present loans individually evaluated for impairment by class of loans as of September 30, 2011 and December 31, 2010, excluding loans acquired from the FDIC with evidence of credit deterioration and covered by FDIC loss share agreements, which are evaluated on a pool basis. The recorded investment is less than the unpaid principal balance due to partial charge-offs of $17,425 and $9,172 as of September 30, 2011 and December 31, 2010, respectively.

As of September 30, 2011	Unpaid principal balance		Recorded investment		Allowance for loan losses allocated
With no related allowance recorded:
Residential real estate	$	14,821	$	12,575	$	—
Commercial real estate		46,582		39,926		—
Construction, development, land		19,801		12,521		—
Commercial		6,614		6,531		—
Consumer, other		452		450		—
With an allowance recorded:
Residential real estate		—		—		—
Commercial real estate		2,707		1,906		588
Construction, development, land		1,128		771		151
Commercial		—		—		—
Consumer, other		—		—		—
Total	$	92,105	$	74,680	$	739

As of December 31, 2010	Unpaid principal balance		Recorded investment		Allowance for loan losses allocated
With no related allowance recorded:
Residential real estate	$	13,313	$	12,177	$	—
Commercial real estate		46,616		42,515		—
Construction, development, land		15,539		11,815		—
Commercial		5,712		5,712		—
Consumer, other		684		684		—
With an allowance recorded:
Residential real estate		2,679		2,679		679
Commercial real estate		7,123		6,912		1,981
Construction, development, land		4,483		4,483		534
Commercial		—		—		—
Consumer, other		—		—		—
Total	$	96,149	$	86,977	$	3,194

23

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

(continued)

Three month period ending September 30, 2011	Average of impaired loans during the period		Interest income recognized during impairment		Cash basis interest income recognized
Real estate loans:
Residential	$	12,904	$	83	$	—
Commercial		40,370		244		—
Construction, development, land		13,817		57		—
Total real estate loans		67,091		384		—
Commercial loans		6,366		67		—
Consumer and other loans		537		5		—
Total	$	73,994	$	456	$	—
Nine month period ending September 30, 2011
Real estate loans:
Residential	$	13,515	$	193	$	—
Commercial		42,890		600		—
Construction, development, land		14,929		98		—
Total real estate loans		71,334		891		—
Commercial loans		6,047		194		—
Consumer and other loans		602		16		—
Total	$	77,983	$	1,101	$	—

	Three month period ended Sept 30, 2010		Nine month period ended Sept 30, 2010
Average impaired loans during the period	$	82,532	$	82,248
Interest income recognized during impairment		587		1,743
Cash-basis interest income recognized		563		1,671

Nonperforming loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. The following table presents non-performing loans, excluding loans acquired from the FDIC with evidence of credit deterioration and covered by FDIC loss share agreements.

Nonperforming loans were as follows:
	Sept 30, 2011		Dec 31, 2010
Non accrual loans	$	61,990	$	62,553
Loans past due over 90 days and still accruing interest		207		3,200
Total non performing loans	$	62,197	$	65,753

24

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

(continued)

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual by class of loans as of September 30, 2011 and December 31, 2010, excluding loans acquired from the FDIC with evidence of credit deterioration and covered by FDIC loss share agreements:

As of September 30, 2011	Nonaccrual		Loans past due over 90 days still accruing
Residential real estate	$	19,213	$	106
Commercial real estate		29,261		—
Construction, development, land		11,376		—
Commercial		1,810		6
Consumer, other		330		95
Total	$	61,990	$	207

As of December 31, 2010	Nonaccrual		Loans past due over 90 days still accruing
Residential real estate	$	17,282	$	1,820
Commercial real estate		28,364		869
Construction, development, land		15,546		366
Commercial		615		83
Consumer, other		746		62
Total	$	62,553	$	3,200

The following table presents the aging of the recorded investment in past due loans as of September 30, 2011 and December 31, 2010, excluding loans acquired from the FDIC with evidence of credit deterioration and covered by FDIC loss share agreements:

		0000000		0000000		0000000		0000000		0000000		0000000		0000000
	Accruing Loans
As of September 30, 2011	Total		30 - 59 days past due		60 - 89 days past due		Greater than 90 days past due		Total Past Due		Loans Not Past Due		Nonaccrual Loans
Residential Real Estate	$	259,829	$	2,385	$	1,464	$	106	$	3,955	$	236,661	$	19,213
Commercial Real Estate		466,860		2,047		139		—		2,186		435,413		29,261
Construction/Dev/Land		95,894		864		267		—		1,131		83,387		11,376
Commercial		117,900		172		479		6		657		115,433		1,810
Consumer		51,916		348		31		95		474		51,112		330
	$	992,399	$	5,816	$	2,380	$	207	$	8,403	$	922,006	$	61,990

25

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

(continued)

		0000000		0000000		0000000		0000000		0000000		0000000		0000000
	Accruing Loans
As of December 31, 2010	Total		30 - 59 days past due		60 - 89 days past due		Greater than 90 days past due		Total Past Due		Loans Not Past Due		Nonaccrual Loans
Residential Real Estate	$	255,571	$	4,901	$	800	$	1,820	$	7,521	$	230,768	$	17,282
Commercial Real Estate		410,162		4,093		1,945		869		6,907		374,891		28,364
Construction/Dev/Land		109,380		2,575		619		366		3,560		90,274		15,546
Commercial		100,906		1,293		627		83		2,003		98,288		615
Consumer		55,379		710		236		62		1,008		53,625		746
	$	931,398	$	13,572	$	4,227	$	3,200	$	20,999	$	847,846	$	62,553

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $500 and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on at least an annual basis. The Company uses the following definitions for risk ratings:

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

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $500 or are included in groups of homogeneous loans. As of September 30, 2011 and December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans, excluding loans with evidence of deterioration of credit quality purchased from the FDIC and covered by FDIC loss share agreements, is as follows:

	As of September 30, 2011
Loan Category	Pass		Special Mention		Substandard		Doubtful
Residential Real Estate	$	220,516	$	5,887	$	33,426	$	—
Commercial Real Estate		381,156		37,186		48,518		—
Construction/Dev/Land		69,317		9,911		16,666		—
Commercial		102,863		3,764		11,273		—
Consumer		50,433		722		761		—
	$	824,285	$	57,470	$	110,644	$	—

26

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

(continued)

	As of December 31, 2010
Loan Category	Pass		Special Mention		Substandard		Doubtful
Residential Real Estate	$	216,164	$	8,555	$	30,852	$	—
Commercial Real Estate		336,869		19,300		53,993		—
Construction/Dev/Land		77,811		8,001		23,568		—
Commercial		88,290		2,806		9,810		—
Consumer		52,850		838		1,691		—
	$	771,984	$	39,500	$	119,914	$	—

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in residential and consumer loans, excluding loans with evidence of deterioration of credit quality purchased from the FDIC and covered by FDIC loss share agreements, based on payment activity as of September 30, 2011:

	Residential		Consumer
Performing	$	240,510	$	51,491
Nonperforming		19,319		425
Total	$	259,829	$	51,916

Loans purchased from the FDIC:

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

The table below summarizes the total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and carrying value of the loans as of September 30, 2011 and December 31, 2010.

	Balance at Sept 30, 2011			Balance at Dec 31, 2010
Contractually required principal and interest	$	305,241		$	320,220
Non-accretable difference		(58,155	)		(79,658	)
Cash flows expected to be collected		247,086			240,562
Accretable yield		(74,260	)		(39,013	)
Carrying value of acquired loans	$	172,826		$	201,549

27

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

(continued)

We adjusted our estimates of future expected losses, cash flows and renewal assumptions during the current quarter. These adjustments resulted in an increase of approximately $42 million in expected cash flows and, as a result, accretable yield, which will be recognized on a prospective basis over the life of the loans. The tables below summarizes the changes in total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and carrying value of the loans during the three month and nine month periods ending September 30, 2011.

Activity during the Three month period ending Sept 30, 2011	Balance at June 30, 2011			income accretion		all other adjustments			Balance at Sept 30, 2011
Contractually required principal and interest	$	295,112				$	10,129		$	305,241
Non-accretable difference		(77,725	)				19,570			(58,155	)
Cash flows expected to be collected		217,387					29,699			247,086
Accretable yield		(35,118	)		2,850		(41,992	)		(74,260	)
Carry value of acquired loans	$	182,269		$	2,850	$	(12,293	)	$	172,826

Activity during the Nine month period ending Sept 30, 2011	Balance at Dec 31, 2010			income accretion		all other adjustments			Balance at Sept 30, 2011
Contractually required principal and interest	$	320,220				$	(14,979	)	$	305,241
Non-accretable difference		(79,658	)				21,503			(58,155	)
Cash flows expected to be collected		240,562					6,524			247,086
Accretable yield		(39,013	)		8,678		(43,925	)		(74,260	)
Carry value of acquired loans	$	201,549		$	8,678	$	(37,401	)	$	172,826

NOTE 7: FDIC indemnification asset

The activity in the FDIC loss share indemnification asset which resulted from the July 16, 2010 acquisition of Olde Cypress Community Bank and the August 20, 2010 acquisitions of the Community National Bank of Bartow and Independent National Bank in Ocala loss share agreements is as follows:

	Nine months period ended Sept 30, 2011			Twelve months period ended Dec 31, 2010
Beginning of the year	$	59,456		$	—
Effect of acquisitions		—			58,309
Discount accretion		196			598
Indemnification revenue		2,870			549
Proceeds from FDIC		(8,952	)		—
Impairment of loan pool		250			—
End of the period	$	53,820		$	59,456

Impairment of loan pools

Loan pools covered by FDIC loss share agreements were impaired by $313 which was an expense included in our loan loss provision expense. The 80% FDIC reimbursable amount of this expense ($250) was included in the Company’s non interest income and as an increase in the Company’s FDIC indemnification asset.

Indemnification Revenue

Indemnification Revenue represents approximately 80% of the cost incurred pursuant to the repossession process and losses incurred on the sale of OREO, or writedown of OREO values to current fair value. These costs are reimbursable from the FDIC.

Discount Accretion

If expected cash flows from loan pools are greater than previously expected, the accretable yield increases and is accreted into interest income over the remaining lives of the related loan pools. The increase in future accretable income may result in less reimbursements from the FDIC (i.e. if the expected losses decrease, then the expected reimbursements from the FDIC decrease). The expected decrease in FDIC reimbursements is amortized over the period of the related increase in accretable yield from the related loan pools.

28

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

(continued)

NOTE 8: Announced acquisitions

On May 23, 2011, the Company announced that it had entered into a definitive agreement with The Hartford Financial Services Group, Inc. to purchase Federal Trust Corporation and subsequently merge Federal Trust Bank into its lead subsidiary bank, CenterState Bank of Florida. This transaction closed on November 1, 2011. With the closing of this transaction, the Company will assume all of the deposits, approximately $200 million, and purchase selected performing loans totaling approximately $165 million and other assets of Federal Trust Bank. The Company will not pay a premium to assume the deposits and will receive a 27% discount on the selected performing loans. The Company also has the option to put back any purchased loan for up to one year after closing that becomes 30 days past due or becomes adversely classified by applicable regulatory standards. Due to the timing of this acquisition, the Company has not been able to complete the fair value estimates of loans, deposits, and other tangible and intangible assets and liabilities, therefore, disclosures have been omitted. The Company expects to recognize a substantial bargain purchase gain as a result of the discount received on loans and the put back option, but the amount will not be known until the Company completes the estimates of the fair value of assets acquired and liabilities assumed. As a result of this acquisition, the Company expects to solidify its market share in Central Florida, expand its customer base to enhance its core deposit franchise and its deposit fee income, and reduce operating costs through economies of scale.

NOTE 9: Measurement period adjustments

On July 16, 2010 the Company acquired substantially all the assets and assumed substantially all the deposits of Olde Cypress Community Bank through a purchase and assumption agreement, including loss sharing with the Federal Deposit Insurance Corporation (“FDIC”). As previously disclosed, the fair values initially assigned to the assets acquired and liabilities assumed were preliminary and subject to refinement for up to one year after the closing date of the acquisition as new information relative to closing date fair values became available. Preliminary valuation and purchase price allocation adjustments are reflected in the table below.

	July 16, 2010 (as initially reported)		Preliminary measurement period adjustments			July 16, 2010 (as adjusted)
Cash due from banks and Federal Reserve Bank, net	$	18,643	$	—		$	18,643
Investment securities available for sale		8,509					8,509
Loans		93,360		(991	)		92,369
Other repossessed real estate owned (“OREO”)		6,388					6,388
FDIC indemnification asset		26,637		358			26,995
FHLB stock		305					305
Core deposit intangible		714					714
Other assets		1,159					1,159
Total assets acquired	$	155,715	$	(633	)	$	155,082
Deposits	$	152,264				$	152,264
Escrow accounts		1,308					1,308
Interest payable on deposits		132					132
other liabilities		1					1
Total liabilities assumed	$	153,705	$	—		$	153,705
Net assets acquired	$	2,010	$	(633	)	$	1,377
Deferred tax impact	$	775	$	(238	)	$	537
Net assets acquired, including deferred tax impact	$	1,235	$	(395	)	$	840

29

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

(continued)

NOTE 10: Acquisition of certain assets and liabilities

On January 20, 2011 the Company completed its previously announced transaction as described in the Purchase and Assumption Agreement dated as of August 8, 2010 by and among CenterState, Carolina First Bank and, to the extent provided therein, The South Financial Group, Inc. and TD Bank, National Association (the “P&A Agreement). The reason for this transaction is as follows. The seller had recently entered into several acquisition transactions and pursuant to certain concentration of deposit regulations, was required to divest a certain amount of deposit liabilities in Putnam County, Florida. CenterState (purchaser) was in a position to assist them with this divesture, if the seller was willing to sell performing loans, selected by CenterState, and to sell them at a discount with a put back option.

Pursuant to the P&A Agreement, CenterState acquired deposits with an estimated fair value of approximately $115,283, two branch offices and assumed the leases on an additional two branch offices within Putnam County, Florida. CenterState did not pay a premium for the deposits and purchased the two owned branches for approximately $700. In addition, CenterState purchased performing loans with an estimated fair value of approximately $119,387 previously selected by CenterState and located within CenterState’s fourteen County market areas within Central Florida. CenterState purchased the performing loans for 90% of their face value amount, plus accrued and unpaid interest. During the two year period following the closing of this transaction and subject to the terms of the P&A Agreement, CenterState may put back to TD Bank N.A. (“TD”) any acquired loan that (1) becomes more than 30 days delinquent or (2) becomes classified as “nonaccrual,” “substandard,” “doubtful,” or “loss” in accordance with applicable regulatory standards for loss classification.

The loans acquired pursuant to this transaction are not being accounted for pursuant to ASC Topic 310-30. We arrived at this conclusion because none of these loans have specifically identifiable or implied credit deficiencies associated with them. We base this on the results of our due diligence team who reviewed and selected only qualified performing loans rejecting approximately 80% of the potential loan pool offered in terms of dollars. That is, our team looked at a total loan population of approximately $800 million in order to identify enough qualified loans to fill the $120 million target amount. In addition, the Company has the option during a two year period to put back any loan that becomes 30 days past due or becomes adversely classified, as discussed previously. This transaction has a different fact pattern than the three FDIC fail banks we purchased during the third quarter of 2010. The loans we purchased pursuant to the FDIC failed bank transactions are being accounted for pursuant to ASC Topic 310-30 because we acquired all the loans in those troubled loan portfolios. These loans had either specifically identifiable credit deficiencies factors or implied factors such that we believed there to be an element of elevated risk as to whether all contractual cash flows will eventually be received. In this case, the loans were not hand selected from fourteen counties within Central Florida, but acquired as an entire portfolio in a single county. This is a combined loan portfolio of three failed financial institutions, which implies potentially deficient, or at least questionable, credit underwriting.

30

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

(continued)

The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:

Assets:
Cash	$	724
Cash due from seller		3,624
Loans, net		119,388
Interest receivable		357
Premises and equipment		731
Put back option		876
CDI		851
Other assets		3
Total assets acquired	$	126,554
Liabilities:
Deposits	$	115,283
Interest payable		131
Other liabilities		11
Total assets assumed	$	115,425
Net assets acquired	$	11,129
Deferred tax impact		4,188
Net assets acquired, including deferred tax impact	$	6,941

NOTE 11: Effect of new pronouncements

In April 2011, the Financial Accounting Standards Board (“FASB”) amended existing guidance for assisting a creditor in determining whether a restructuring is a troubled debt restructuring. The amendments clarify the guidance for a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. This guidance is effective for interim and annual reporting periods beginning after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. For purposes of measuring impairment on newly identified troubled debt restructurings, the amendments should be applied prospectively for the first interim or annual period beginning on or after June 15, 2011. The effect of adopting this new guidance is disclosed in Note 6.

In September 2011, the FASB amended guidance on the annual goodwill impairment test performed by the Company. Under the amended guidance, the Company will have the option to first assess qualitative factors to determine whether it is necessary to perform a two-step impairment test. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than the carrying value, the quantitative impairment test is required. If the Company believes the fair value of a reporting unit is greater than the carrying value, no further testing is required. A company can choose to perform the qualitative assessment on some or none of its reporting entities. The amended guidance includes examples of events and circumstances that might indicate that a reporting unit’s fair value is less than its carrying amount. These include macro-economic conditions such as deterioration in the entity’s operating environment, entity-specific events such as declining financial performance, and other events such as an expectation that a reporting unit will be sold. The amended

31

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

(continued)

guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. However, an entity can choose to early adopt even if its annual test date is before the issuance of the final standard, provided that the entity has not yet performed its 2011 annual impairment test or issued its financial statements. The Company is currently evaluating the impact of this amendment on the consolidated financial statements.

In May, 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and International accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this guidance are effective during interim and annual periods beginning after December 15, 2011. The Company is currently evaluating the impact of this amendment on the consolidated financial statements.

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

All dollar amounts presented herein are in thousands, except per share data.

COMPARISON OF BALANCE SHEETS AT SEPTEMBER 30, 2011 AND DECEMBER 31, 2010

Overview

Our total assets increased approximately 4.4% during the nine month period ending September 30, 2011 due to the TD Bank acquisition, whereby we acquired four branches and approximately $115,283 of deposits and $119,388 of loans on January 20, 2011. Excluding the loans acquired from TD Bank, our loans decreased by about 5.6%, or $63,085 during the nine month period. These changes are discussed and analyzed below and on the following pages.

Federal funds sold and Federal Reserve Bank deposits

Federal funds sold and Federal Reserve Bank deposits were $163,745 at September 30, 2011 (approximately 7.6% of total assets) as compared to $154,264 at December 31, 2010 (approximately 7.5% of total assets). We use our available-for-sale securities portfolio, as well as federal funds sold and Federal Reserve Bank deposits for liquidity management and for investment yields. These accounts, as a group, will fluctuate as a function of loans outstanding, and to some degree the amount of correspondent bank deposits (i.e. federal funds purchased) outstanding.

Investment securities available for sale

Securities available-for-sale, consisting primarily of U.S. government sponsored entities and agency securities and municipal tax exempt securities, were $557,129 at September 30, 2011 (approximately 26% of total assets) compared to $500,927 at December 31, 2010 (approximately 24% of total assets), an increase of $56,202 or 11%. We use our available-for-sale securities portfolio, as well as federal funds sold and Federal Reserve Bank deposits for liquidity management and for investment yields. These accounts, as a group, will fluctuate as a function of loans outstanding as discussed above, under the caption “Federal funds sold and Federal Reserve Bank deposits.” Our securities are carried at fair value. We classify our securities as “available-for-sale” to provide for greater flexibility to respond to changes in interest rates as well as future liquidity needs.

Trading securities

We also have a trading securities portfolio. Realized and unrealized gains and losses are included in trading securities revenue, a component of our non interest income, in our Condensed Consolidated Statement of Earnings. Securities purchased for this portfolio have primarily been various municipal securities. We were not holding any securities in our trading portfolio at September 30, 2011. A list of the activity in this portfolio is summarized below.

	Nine month period ended Sept 30, 2011			Nine month period ended Sept 30, 2010
Beginning balance	$	2,225		$	—
Purchases		189,880			215,284
Proceeds from sales		(192,502	)		(214,151	)
Net realized gain on sales		397			423
Mark to market adjustment		—			25
Ending balance	$	—		$	1,581

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Loans held for sale

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

	Nine month period ended Sept 30, 2011			Nine month period ended Sept 30, 2010
Beginning balance	$	673		$	—
Loans originated		5,271			6,003
Proceeds from sales		(5,368	)		(4,229	)
Net realized gain on sales		88			36
Ending balance	$	664		$	1,810

Loans

Lending-related income is the most important component of our net interest income and is a major contributor to profitability. The loan portfolio is the largest component of earning assets, and it therefore generates the largest portion of revenues. The absolute volume of loans and the volume of loans as a percentage of earning assets is an important determinant of net interest margin as loans are expected to produce higher yields than securities and other earning assets. Average loans during the nine month period ended September 30, 2011, were $1,198,838, or 63% of average earning assets, as compared to $981,006, or 58% of average earning assets, for the similar period in 2010. Total loans at September 30, 2011 and December 31, 2010 were $1,162,918 and $1,128,955, respectively, an increase of $33,963, or 3.0%. This represents a loan to total asset ratio of 54% and 55% and a loan to deposit ratio of 65% and 67%, at September 30, 2011 and December 31, 2010, respectively.

The continuing weak economy in general and the struggling Florida real estate market in particular, have made it difficult to grow our loan portfolio. Although our loans increased by $33,963, or 3.0% as indicated above, this was primarily due to the TD Bank transaction whereby we purchased approximately $119,388 of performing loans on January 20, 2011. Excluding these purchased loans (outstanding balance of $97,048 at September 30, 2011), our loan portfolio decreased by $63,085, or 5.6% during the nine month period ending September 30, 2011. Part of this decrease was due to net charge-offs (approximately $28,001), and transfers out of loans into OREO and repossessed assets other than real estate (approximately $18,083 and $2,207, respectively), and net proceeds from loan sales of approximately $4,156. Excluding these components, loans decreased $10,638 which is a net amount comprised of new loan originations less maturities, pay-offs and normal amortization. This continued decrease is reflective of a sluggish economy and weak loan demand.

Approximately 14.7% of our loans, or $171,193, are covered by FDIC loss sharing agreements. Pursuant to and subject to the terms of the loss sharing agreements, the FDIC is obligated to reimburse CenterState for 80% of losses with respect to the covered loans beginning with the first dollar of loss

34

incurred. CenterState will reimburse the FDIC for its share of recoveries with respect to the covered loans. The loss sharing agreements applicable to single family residential mortgage loans provide for FDIC loss sharing and CenterState reimbursement to the FDIC for recoveries for ten years. The loss sharing agreements applicable to commercial loans provide for FDIC loss sharing for five years and CenterState reimbursement to the FDIC for a total of eight years for recoveries. All of the covered loans acquired are accounted for pursuant to ASC Topic 310-30. Within the FDIC covered loan portfolio, ninety-eight percent (98%) is collateralized by real estate, of which single family loans represent the largest component at $102,852 or 61% of total covered real estate loans.

In addition to the loans covered by FDIC loss share agreements discussed above, approximately 8.3% of our total loans, or $97,048, are subject to a two year put back option, commencing on January 20, 2011, with TD Bank, whereas if any of these loans become 30 days past due or are adversely classified pursuant to bank regulatory guidelines, we have the option to put back these loans to TD Bank subject to the terms of our agreement with TD Bank. We have no allowance for loan losses set aside for loans subject to the put back options discussed above. There is a total of approximately $894,677, or 77% of our total loans, that are not subject to either of these agreements of which we have set aside a total allowance for loan losses of $25,879 or 2.89%, after partial charge-offs on certain impaired loans of approximately $17,425.

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

Our total loans, including those with and without loss protection agreements, total $1,162,918 at September 30, 2011. Of this amount approximately 85% are collateralized by real estate, 10% are commercial non real estate loans and the remaining 5% are consumer and other non real estate loans. We have approximately $362,681 of single family residential loans which represents about 31% of our total loan portfolio. As with all of our loans, these are originated in our geographical market area in central Florida. Our largest category of loans is commercial real estate which represents approximately 45% of our total loan portfolio.

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

	Sept 30, 2011			Dec 31, 2010
Loans not covered by FDIC loss share agreements (note 2)
Real estate loans
Residential	$	259,829		$	255,571
Commercial		466,860			410,162
Construction, development, land		95,894			109,380
Total real estate		822,583			775,113
Commercial		117,900			100,906
Consumer and other loans, at fair value (note 1)		1,633			3,264
Consumer and other		50,283			52,115
Loans before unearned fees and cost		992,399			931,398
Unearned fees/costs		(674	)		(728	)
Total loans not covered by FDIC loss share agreements		991,725			930,670
Loans covered by FDIC loss share agreements
Real estate loans
Residential		102,852			110,586
Commercial		56,839			68,286
Construction, development, land		8,686			13,653
Total real estate		168,377			192,525
Commercial		2,816			5,760
Total loans covered by FDIC loss share agreements		171,193			198,285
Total loans	$	1,162,918		$	1,128,955

Note 1: Consumer loans acquired pursuant to three FDIC assisted transactions of failed financial institutions during the third quarter of 2010. These loans are not covered by an FDIC loss share agreement. The loans have been written down to estimated fair value at the acquisition date and are being accounted for pursuant to ASC Topic 310-30.

Note 2: Includes $97,048 of loans that are subject to a two year put back option with TD Bank, N.A., so that if any of these loans become 30 days past due or are adversely classified pursuant to bank regulatory guidelines, the Company has the option to put back the loan to TD Bank.

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Credit quality and allowance for loan losses

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

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

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

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

We maintain an allowance for loan losses that we believe is adequate to absorb probable losses incurred in our non covered loan portfolio. The FDIC is obligated to reimburse us for 80% of losses incurred in our covered loan portfolio subject to the terms of our loss share agreements with the FDIC. Our covered loan portfolio, loans purchased from the FDIC with specific identified credit deficiencies and those with implied credit deficiencies, has been marked to fair value at the acquisition date, which considers an estimate of probable losses, and is evaluated for impairment on a pool basis on a quarterly basis, pursuant to ASC Topic 310-30. Performing loans purchased pursuant to the January 20, 2011 TD Bank transaction, are performing loans without any specific or implied credit deficiencies. These loans are included in our allowance for loan loss analysis, but do not have any loss factor assigned to them since they are at fair value at the acquisition date and due to the two year put back option in place with TD Bank, as described in Note 8 in our Form 10-Q for the period ending March 31, 2011, filed on May 10, 2011, and incorporated herein by reference. We believe that our total loans are adequately recorded to absorb probable losses.

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The allowance is increased by the provision for loan losses, which is a charge to current period earnings and decreased by loan charge-offs net of recoveries of prior period loan charge-offs. Loans are charged against the allowance when management believes collection of the principal is unlikely.

The allowance consists of two components. The first component is an allocation for impaired loans, as defined by generally accepted accounting principles. Impaired loans are those loans whereby management has arrived at a determination that the Company will not be repaid according to the original terms of the loan agreement. Each of these loans is required to have a written analysis supporting the amount of specific allowance allocated to the particular loan, if any. That is to say, a loan may be impaired (i.e., not expected to be repaid as agreed), but may be sufficiently collateralized such that we expect to recover all principal and interest eventually, and therefore no specific allowance is warranted.

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

Any losses in loans covered by FDIC loss share agreements, as described above, are reimbursable from the FDIC to the extent of 80% of any losses. These loans are being accounted for pursuant to ASC Topic 310-30. Loan pools in this portfolio are evaluated for impairment each quarter. If a pool is impaired, an allowance for potential loan loss is recorded.

In the table below we have shown the two components, as discussed above, of our allowance for loan losses at September 30, 2011 and December 31, 2010. The data in the table below excludes loans covered by FDIC loss share agreement.

	Sept 30, 2011			Dec 31, 2010			Increase (decrease)
Impaired loans	$	74,680		$	86,977		($	12,297	)
Component 1 (specific allowance)		739			3,194			(2,455	)
Specific allowance as percentage of impaired loans		0.99	%		3.67	%		(268 bps	)
Performing loans purchased from TD Bank and subject to put back option		97,048			—			97,048
Component 2 (general allowance)		—			—			—
General allowance as percentage of purchased loans		—			—			—
Non impaired loans excluding loans subject to put back option		819,997			843,693			(23,696	)
Component 2 (general allowance)		25,140			23,073			2,067
General allowance as percentage of non impaired loans		3.07	%		2.73	%		34 bps
Total loans, excluding loans covered by FDIC loss share agreements		991,725			930,670			61,055
Total allowance for loan losses, excluding FDIC covered loans		25,879			26,267			(388	)
Allowance for loan losses as percentage of non covered loans		2.61	%		2.82	%		(21 bps	)
Allowance for loan losses as percentage of non covered loans excluding loans purchased from TD Bank and subject to put back option		2.89	%		2.82	%		7 bps

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As shown in the table above, our allowance for loan losses (“ALLL”) as a percentage of total loans not covered by FDIC loss share agreements outstanding was 2.61% (2.89% excluding loans purchased from TD Bank and subject to put back option) at September 30, 2011 compared to 2.82% at December 31, 2010. Our ALLL, excluding covered loans, decreased by a net amount of $388 during this nine month period. Component 2 (general allowance) increased by $2,067 during the period. This increase is primarily due to changes in our historical charge-off rates, current environmental factors and portfolio mix.

Component 1 (specific allowance) decreased by $2,455. This Component is the result of a specific allowance analysis prepared for each of our impaired loans excluding loans covered by FDIC loss share agreements. Our specific allowance is the aggregate of the results of individual analysis prepared for each one of these impaired loans on a loan by loan basis. The decrease in our specific allowance during this period is primarily the result of recording partial charge-offs versus specific allowance. The change in mix and evaluation of impaired loans also impacts these changes. The carrying value of our impaired loans ($74,680) represents approximately 81% of the related legal unpaid principal balances (80% when we consider the $739 specific allowance), which is a result of using charge-offs versus specific allowance.

The tables below sets forth the activity in the allowance for loan losses for the periods presented.

	Loans not covered by FDIC loss share agreements			Loans covered by FDIC loss share agreements		Total
Three months ended September 30, 2011
Balance at beginning of period	$	27,418		$	—	$	27,418
Loans charged-off		(7,186	)		—		(7,186	)
Recoveries of loans previously charged-off		662			293		955
Net charge-offs		(6,524	)		293		(6,231	)
Provision for loan loss		4,985			20		5,005
Balance at end of period	$	25,879		$	313	$	26,192
Three months ended September 30, 2010
Balance at beginning of period	$	24,191		$	—	$	24,191
Loans charged-off		(12,704	)		—		(12,704	)
Recoveries of loans previously charged-off		77			—		77
Net charge-offs		(12,627	)		—		(12,627	)
Provision for loan losses		16,448			—		16,448
Balance at end of period	$	28,012		$	—	$	28,012

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	Loans not covered by FDIC loss share agreements			Loans covered by FDIC loss share agreements			Total
Nine months ended September 30, 2011
Balance at beginning of period	$	26,267		$	—		$	26,267
Loans charged-off		(28,947	)		(293	)		(29,240	)
Recoveries of loans previously charged-off		946			293			1,239
Net charge-offs		(28,001	)		—			(28,001	)
Provision for loan loss		27,613			313			27,926
Balance at end of period	$	25,879		$	313		$	26,192
Nine months ended September 30, 2010
Balance at beginning of period	$	23,289		$	—		$	23,289
Loans charged-off		(20,177	)		—			(20,177	)
Recoveries of loans previously charged-off		332			—			332
Net charge-offs		(19,845	)		—			(19,845	)
Provision for loan losses		24,568			—			24,568
Balance at end of period	$	28,012		$	—		$	28,012

We acquired three FDIC failed financial institutions during the third quarter of 2010, including loans covered by FDIC loss share agreements. All of the loans acquired are being accounted for pursuant to ASC Topic 310-30. We arrived at this conclusion as follows.

First, we segregated all acquired loans with specifically identified credit deficiency factor(s). The factors we used were all acquired loans that were non-accrual, 60 days or more past due, designated as Trouble Debt Restructured (“TDR”), graded “special mention” or “substandard,” had more than five 30 day past due notices or had any 60 day or 90 day past due notices during the loan term. For this disclosure purpose, we refer to these loans as Type A loans. As required by generally accepted accounting principles, we are accounting for these loans pursuant to ASC Topic 310-30.

Second, all remaining acquired loans, those without specifically identified credit deficiency factors, we refer to as Type B loans for disclosure purposes, were then grouped into pools with common risk characteristics. These loans were then evaluated to determine estimated fair values as of the acquisition date. Although no specific credit deficiencies were identifiable, we believe there is an element of risk as to whether all contractual cash flows will be eventually received. Factors that were considered included the challenging economic environment both nationally and locally as well as the unfavorable real estate market particularly in Florida. In addition, these loans were acquired from three failed financial institutions, which implies potentially deficient, or at least questionable, credit underwriting. Based on management’s estimate of fair value, each of these pools was assigned a discount credit mark. We have applied ASC Topic 310-30 accounting treatment by analogy to Type B loans. The result is that all loans acquired from these three failed financial institutions will be accounted for under ASC Topic 310-30.

The carrying amount of the loans we acquired from the FDIC, both Type A and Type B, as we defined in the two preceding paragraphs, are summarized as follows:

	Sept 30, 2011		Dec 31, 2010
Real estate loans
Residential	$	102,852	$	110,586
Commercial		56,839		68,286
Construction, development, land		8,686		13,653
Total real estate loans		168,377		192,525
Commercial		2,816		5,760
Total loans covered by FDIC loss share agreements		171,193		198,285
Consumer (not covered by FDIC loss share)		1,633		3,264
Total loans purchased from the FDIC	$	172,826	$	201,549

Income recognized on loans we purchased from the FDIC is recognized pursuant to ASC Topic 310-30. A portion of the fair value discount has been ascribed as an accretable yield that is accreted into interest income over the estimated remaining life of the loans. The remaining non-accretable difference represents cash flows not expected to be collected. We have accreted interest income from these loans acquired during the third quarter of 2010, in the amounts and in the periods as summarized below.

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	2011		2010
Three month periods ending September 30	$	2,850	$	1,695
Nine month periods ending September 30	$	8,678	$	1,695

Each quarter, management reevaluates expected future losses and expected future cash flows compared to previously estimated expected losses and cash flows. To the extent revised expected cash flows are higher than previously expected cash flows, the estimated difference is reclassified from non-accretable difference to accretable yield, and future yield accretion will increase over the remaining life of the loans in the related pool. This has occurred during the current quarter in a number of pools resulting in higher yield accretion in 3Q11 compared to 2Q11.

To the extent future expected cash flows are determined to be less than previously estimated future expected cash flows, then that particular pool is impaired. When a pool is deemed to be impaired the estimated loss is recognized in the current period. This has also occurred with four of our thirty accounting pools. We recognized impairment losses of $329 of which $16 relates to a non covered consumer loan pool and the remaining $313 relate to pools with FDIC loss share coverage. Within our total loan loss allowance, as indicated on the previous page, we have recognized an allowance against three covered pools in the amount of $313. Because the loans within these pools are subject to FDIC loss share coverage to the extent of 80% of the loss, we also recognized $250 (80% of $313) of non interest income included in our Condensed Consolidated Statement of Earnings, and increased our indemnification asset by $250. Refer to Notes 6 and 7 for additional discussion and information regarding this subject.

Nonperforming loans and nonperforming assets

Non performing loans, excluding loans covered by FDIC loss share agreements, are defined as non accrual loans plus loans past due 90 days or more and still accruing interest. Generally we place loans on non accrual status when they are past due 90 days and management believes the borrower’s financial condition, after giving consideration to economic conditions and collection efforts, is such that collection of interest is doubtful. When we place a loan on non accrual status, interest accruals cease and uncollected interest is reversed and charged against current income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Non performing loans, excluding loans covered by FDIC loss share agreements, as a percentage of total loans, excluding loans covered by FDIC loss share agreements, were 6.27% at September 30, 2011, compared to 7.07% at December 31, 2010.

Non performing assets, excluding assets covered by FDIC loss share agreements, (which we define as non performing loans, as defined above, plus (a) OREO (i.e., real estate acquired through foreclosure, in substance foreclosure, or deed in lieu of foreclosure); and (b) other repossessed assets that are not real estate), were $75,985 at September 30, 2011, compared to $78,524 at December 31, 2010. Non performing assets as a percentage of total assets were 3.53% at September 30, 2011, compared to 3.81% at December 31, 2010.

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The following table sets forth information regarding the components of nonperforming assets at the dates indicated.

	Sept 30, 2011			Dec 31, 2010
Non-accrual loans (note 1)	$	61,990		$	62,553
Past due loans 90 days or more and still accruing interest (note 1)		207			3,200
Total non-performing loans (NPLs)(note 1)		62,197			65,753
Other real estate owned (OREO) (note 1)		12,061			12,239
Repossessed assets other than real estate (note 1)		1,727			532
Total non-performing assets (NPAs)(note 1)	$	75,985		$	78,524
Total NPLs as a percentage of total loans (note 1)		6.27	%		7.07	%
Total NPAs as a percentage of total assets (note 1)		3.53	%		3.81	%
Loans past due between 30 and 89 days and accruing interest as a percentage of total loans (note 1)		0.83	%		1.96	%
Allowance for loan losses, excluding FDIC covered loans	$	25,879		$	26,267
Allowance for loan losses as a percentage of NPLs (note 1)		42	%		40	%

Note 1: Excludes loans, OREO and other repossessed assets covered by FDIC loss share agreements.

As shown in the table above, the largest component of non performing loans excluding loans covered by FDIC loss share agreements is non accrual loans. As of September 30, 2011 the Company had reported a total of 302 non accrual loans with an aggregate book value of $61,990, compared to December 31, 2010 when 268 non accrual loans with an aggregate book value of $62,553 were reported. The $563 decrease was due primarily to a decrease in construction/development/land category of approximately $4,170 which was partially offset by increases in residential real estate, commercial and commercial real estate. This amount is further delineated by collateral category and number of loans in the table below.

Collateral category	Total amount in thousands of dollars		Percentage of total non accrual loans			Number of non accrual loans in category
Residential real estate loans	$	19,213		31	%		120
Commercial real estate loans		29,261		47	%		70
Construction, development and land loans		11,376		18	%		60
Non real estate commercial loans		1,810		3	%		29
Non real estate consumer and other loans		330		1	%		23
Total non accrual loans at September 30, 2011	$	61,990		100	%		302

The Company believes that the construction, development and land loan category is the loan category where the most risk is present. This category includes primarily land and building lots, both residential and commercial, with very little vertical construction included. On the positive side, the category only represents about 10% of the total loan portfolio excluding loans covered by FDIC loss share agreements. Evidencing the riskier nature of the category, it represents a disproportionate 18% of the Company’s total non accrual loans and approximately 35% of the Company’s total OREO, excluding OREO covered by FDIC loss share agreements.

The second largest component of non performing assets after non accrual loans is OREO, excluding OREO covered by FDIC loss share agreements. At September 30, 2011, total OREO was $21,695. Of this amount, $9,634 is covered by FDIC loss sharing agreements. Pursuant and subject to the terms of the loss sharing agreements, the FDIC is obligated to reimburse the Company for 80% of losses with respect to the covered OREO beginning with the first dollar of loss incurred. The Company will reimburse the FDIC for its share of recoveries with respect to the covered OREO. The loss sharing agreements applicable to single family residential mortgage loans provide for FDIC loss sharing and the Company reimbursement to the FDIC for recoveries for ten years. The loss sharing agreements applicable to commercial loans provides for FDIC loss sharing for five years and Company reimbursement to the FDIC for a total of eight years for recoveries.

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OREO not covered by FDIC loss share agreements is $12,061 at September 30, 2011. OREO is carried at the lower of cost or market less the estimated cost to sell. Further declines in real estate values can affect the market value of these assets. Any further decline in market value beyond its cost basis is recorded as a current expense in the Company’s Statement of Operations. OREO is further delineated in the table below.

(unaudited) Description of repossessed real estate	carrying amount at Sept 30, 2011
27 single family homes	$	2,778
2 mobile homes with land		153
42 residential building lots		1,880
18 commercial buildings		4,890
Land / various acreages		2,360
Total, excluding OREO covered by FDIC loss share agreements	$	12,061

Impaired loans are defined as loans that management has concluded will not repay as agreed. (Small balance homogeneous loans are not considered for impairment purposes.) Once management has determined a loan is impaired, we perform a specific reserve analysis to determine if it is probable that we will eventually collect all contractual cash flows. If management determines that a shortfall is probable, then a specific valuation allowance is placed against the loan. This loan is then placed on non accrual basis, even if the borrower is current with his/her contractual payments, and will remain on non accrual until payments collected reduce the loan balance such that it eliminates the specific valuation allowance or other economic conditions change. At September 30, 2011 we have identified a total of $74,680 impaired loans, excluding loans covered by FDIC loss share agreements. A specific valuation allowance of $739 has been attached to $2,677 of the total identified impaired loans. It should also be noted that the total carrying balance of the impaired loans, or $74,680, has been partially charged down by $17,425 from their aggregate legal unpaid balance of $92,105. The table below summarizes impaired loan data for the periods presented.

	Sept 30, 2011		Dec 31, 2010
Impaired loans with a specific valuation allowance	$	2,677	$	14,074
Impaired loans without a specific valuation allowance		72,003		72,903
Total impaired loans	$	74,680	$	86,977
Amount of allowance for loan losses allocated to impaired loans		739	$	3,194
Performing TDRs	$	7,131	$	10,591
Non performing TDRs, included in NPLs		9,112		11,731
Total TDRs (TDRs are required to be included in impaired loans)	$	16,243	$	22,322
Impaired loans that are not TDRs		58,437		64,655
Total impaired loans	$	74,680	$	86,977

We continually analyze our loan portfolio in an effort to recognize and resolve problem assets as quickly and efficiently as possible. As of September 30, 2011, 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 allowance will not be incurred.

Bank premises and equipment

Bank premises and equipment was $88,995 at September 30, 2011 compared to $84,982 at December 31, 2010, an increase of $4,013 or 4.7%. This amount is the result of purchases and construction in process of $7,024 less $3,011 of depreciation expense. The $7,024 of purchases and construction cost can be further delineated as follows: approximately $2,270 for purchases of buildings, land and construction costs; approximately $681 in capitalization of certain software development costs related to our correspondent banking division; $677 for purchase of software, also related to our correspondent banking division; and, the remaining $3,396 is a combination of purchases of equipment, furniture and software, net of disposals.

42

Deposits

During the nine month period ending September 30, 2011, time deposits decreased by $74,226 and non time deposits increased by $180,570. Cost of deposits decreased in each deposit category, but the category affecting the overall decrease the most was time deposits. In addition to repricing maturing time deposits to current market rates, time deposits as a percentage of total deposits decreased from 39% to 33%. During the same time, core deposits (non time deposits) as a percentage of total deposits increased, both in terms of actual dollars and as a percentage of total deposits. A summary of our deposit mix over the previous five quarters is presented in the table below.

	Sept 30, 2011		% of total			Dec 31, 2010		% of total
Demand - non-interest bearing	$	402,683		22	%	$	323,224		19	%
Demand - interest bearing		310,723		17	%		282,405		17	%
Savings deposits		206,053		12	%		198,428		12	%
Money market accounts		288,892		16	%		223,724		13	%
Time deposits		583,587		33	%		657,813		39	%
Total deposits	$	1,791,938		100	%	$	1,685,594		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 $14,482 at September 30, 2011 compared to $13,789 at December 31, 2010.

Federal funds purchased

Federal funds purchased are overnight deposits from correspondent banks. Federal funds purchased acquired from other than our correspondent bank deposits are included with Federal Home Loan Bank advances and other borrowed funds as described below, if any. At September 30, 2011 we had $61,343 of correspondent bank deposits or federal funds purchased, compared to $68,495 at December 31, 2010.

Federal Home Loan Bank advances and other borrowed funds

From time to time, we borrow either through Federal Home Loan Bank advances or Federal Funds Purchased, other than correspondent bank deposits (i.e. federal funds purchased) listed above. At September 30, 2011 and December 31, 2010, advances from the Federal Home Loan Bank were as follows.

	Sept 30, 2011		Dec 31, 2010
Matured January 7, 2011, interest rate is fixed at 3.63%	$	—	$	3,000
Matured January 10, 2011, interest rate is fixed at 1.84%		—		3,000
Matured January 11, 2011, interest rate is fixed at 0.61%		—		3,000
Matured June 27, 2011, interest rate is fixed at 3.93%		—		3,000
Matures December 30, 2011, interest rate is fixed at 2.30%		3,000		3,000
Total	$	3,000	$	15,000

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Corporate debentures

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. The Trust used the proceeds from the issuance of a trust preferred security to acquire the corporate debenture of the Company. 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 the Company or the Trust, at their respective option, subject to prior approval by the Federal Reserve Board, if then required. The Company has treated the trust preferred security as Tier 1 capital up to the maximum amount allowed under the Federal Reserve guidelines for federal regulatory purposes.

In September 2004, Valrico Bancorp Inc. (“VBI”) formed Valrico Capital Statutory Trust (“Valrico Trust”) for the purpose of issuing trust preferred securities. On September 9, 2004, VBI issued a floating rate corporate debenture in the amount of $2,500. The Trust used the proceeds from the issuance of a trust preferred security to acquire the corporate debenture. On April 2, 2007, the Company acquired all the assets and assumed all the liabilities of VBI pursuant to the merger agreement, including VBI’s corporate debenture and related trust preferred security discussed above. 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 270 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 the Company or the Valrico Trust, at their respective option, subject to prior approval by the Federal Reserve, if then required. The Company has treated the trust preferred security as Tier 1 capital up to the maximum amount allowed under the Federal Reserve guidelines for federal regulatory purposes.

Stockholders’ equity

Stockholders’ equity at September 30, 2011, was $250,036, or 11.6% of total assets, compared to $252,249, or 12.2% of total assets at December 31, 2010. The increase in stockholders’ equity was due to the following items:

$252,249	Total stockholders’ equity at December 31, 2010
(6,173)	Net loss during the period
(901)	Dividends paid on common shares, $0.02 per common share
4,240	Net increase in market value of securities available for sale, net of deferred taxes
96	Employee stock options exercised
525	Employee equity based compensation
$250,036	Total stockholders’ equity at September 30, 2011

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, 2011, each of our subsidiary banks exceeded the minimum capital levels to be considered “well capitalized” under the terms of the guidelines.

44

Selected consolidated capital ratios at September 30, 2011 and December 31, 2010 are presented in the table below.

	Actual					Well capitalized					Excess
	Amount		Ratio			Amount		Ratio			Amount
September 30, 2011
Total capital (to risk weighted assets)	$	228,615		18.7	%	$	122,582		> 10	%	$	106,033
Tier 1 capital (to risk weighted assets)		213,158		17.4	%		73,549		> 6	%		139,609
Tier 1 capital (to average assets)		213,158		10.3	%		103,667		> 5	%		109,491
December 31, 2010
Total capital (to risk weighted assets)	$	227,907		19.3	%	$	118,230		> 10	%	$	109,677
Tier 1 capital (to risk weighted assets)		212,986		18.0	%		70,938		> 6	%		142,048
Tier 1 capital (to average assets)		212,986		10.3	%		103,053		> 5	%		109,933

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED SEPTEMBER, 2011 AND 2010

Overview

We recognized a net loss of $1,992 or $0.07 per share basic and diluted for the three month period ended September 30, 2011, compared to net loss of $7,671 or $0.27 per share basic and diluted for the same period in 2010.

The primary reason for the smaller loss during the current quarter is lower credit cost. Although Florida continues to struggle with a sluggish economy and a weak real estate market, our credit metrics have indicated modest improvement during the current quarter.

Credit cost, income and expense categories, along with other items are discussed and analyzed below.

Net interest income/margin

Net interest income increased $2,193 or 15% to $16,956 during the three month period ended September 30, 2011 compared to $14,763 for the same period in 2010. The $2,193 increase was the result of a $731 increase in interest income and a $1,462 decrease in interest expense.

Interest earning assets averaged $1,857,078 during the three month period ended September 30, 2011 as compared to $1,795,889 for the same period in 2010, an increase of $61,189, or 3%. The yield on average interest earning assets increased 2 bps to 4.24% (4 bps to 4.30% tax equivalent basis) during the three month period ended September 30, 2011, compared to 4.22% (4.26% tax equivalent basis) for the same period in 2010. The combined effects of the $61,189 increase in average interest earning assets and the 2 bps (4 bps tax equivalent basis) increase in yield on average interest earning assets resulted in the $731 ($857 tax equivalent basis) increase in interest income between the two periods.

Interest bearing liabilities averaged $1,451,731 during the three month period ended September 30, 2011 as compared to $1,430,595 for the same period in 2010, an increase of $21,136, or 1.5%. The cost of average interest bearing liabilities decreased 41 bps to 0.79% during the three month period ended September 30, 2011, compared to 1.20% for the same period in 2010. The combined effects of the $21,136 increase in average interest bearing liabilities and the 41 bps decrease in cost of average interest bearing liabilities resulted in the $1,462 decrease in interest expense between the two periods.

45

The table below summarizes the analysis of changes in interest income and interest expense for the three month periods ended September 30, 2011 and 2010 on a tax equivalent basis.

	Three months ended September 30,
	2011								2010
	Average Balance			Interest Inc / Exp		Average Rate			Average Balance			Interest Inc / Exp		Average Rate
Loans (1) (2) (8)	$	991,217		$	13,549		5.42	%	$	918,553		$	12,786		5.52	%
Covered loans		176,275			2,759		6.21	%		127,641			1,645		5.11	%
Securities- taxable		422,641			3,132		2.94	%		588,154			4,203		2.84	%
Securities- tax exempt (8)		36,229			521		5.71	%		35,969			531		5.86	%
Fed funds sold and other (3)		230,716			188		0.32	%		125,572			127		0.40	%
Total interest earning assets		1,857,078			20,149		4.30	%		1,795,889			19,292		4.26	%
Allowance for loan losses		(29,009	)							(25,916	)
All other assets		287,483								278,149
Total assets	$	2,115,552							$	2,048,122
Interest bearing deposits (4)		1,353,164			2,731		0.80	%	$	1,292,668			4,085		1.25	%
Fed funds purchased		67,540			9		0.05	%		90,368			23		0.10	%
Other borrowings (5)		18,527			37		0.79	%		35,059			123		1.39	%
Corporate debenture		12,500			104		3.30	%		12,500			112		3.55	%
Total interest bearing liabilities		1,451,731			2,881		0.79	%		1,430,595			4,343		1.20	%
Demand deposits		406,455								331,507
Other liabilities		8,374								30,958
Stockholders’ equity		248,992								255,062
Total liabilities and stockholders’ equity	$	2,115,552							$	2,048,122
Net interest spread (tax equivalent basis) (6)							3.52	%							3.06	%
Net interest income (tax equivalent basis)				$	17,268							$	14,949
Net interest margin (tax equivalent basis) (7)							3.69	%							3.30	%

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

Note 2: Interest income on average loans includes amortization of loan fee recognition of $79 and $58 for the three month periods ended September 30, 2011 and 2010.

Note 3: Includes federal funds sold, interest earned on deposits at the Federal Reserve Bank and earnings on Federal Reserve Bank stock and Federal Home Loan Bank stock.

Note 4: Includes interest bearing deposits only. Non-interest bearing checking accounts are included in the demand deposits listed above. Also, includes net amortization of fair market value adjustments related to various acquisitions of time deposits of ($274) and ($317) for the three month periods ended September 30, 2011 and 2010.

Note 5: Includes securities sold under agreements to repurchase and Federal Home Loan Bank advances.

Note 6: Represents the average rate earned on interest earning assets minus the average rate paid on interest bearing liabilities.

Note 7: Represents net interest income divided by total interest earning assets.

Note 8: Interest income and rates include the effects of a tax equivalent adjustment using applicable statutory tax rates to adjust tax exempt interest income on tax exempt investment securities and loans to a fully taxable basis.

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Provision for loan losses

The provision for loan losses decreased $11,443, or 70%, to $5,005 during the three month period ending September 30, 2011 compared to $16,448 for the comparable period in 2010. During the third quarter of 2010, the Company disposed of commercial real estate problem loans with a carrying balance of $16,940 for $8,579 in the wholesale debt market, resulting in loan loss expense of $8,361 directly related to the sale. No loans were sold in the wholesale debt market during the third quarter of 2011. Our policy is to maintain the allowance for loan losses at a level sufficient to absorb probable incurred losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses, which is a charge to current period earnings, and is decreased by charge-offs, net of recoveries on prior loan charge-offs. Therefore, the provision for loan losses (Income Statement effect) is a residual of management’s determination of allowance for loan losses (Balance Sheet approach). In determining the adequacy of the allowance for loan losses, we consider the conditions of individual borrowers, the historical loan loss experience, the general economic environment, the overall portfolio composition, and other information. As these factors change, the level of loan loss provision changes. The lower loan loss provision during the current quarter versus same quarter last year is the primary reason for lower net loss during the current quarter. Although Florida continues to endure a sluggish economy and a depressed real estate market, our credit metrics have improved during the current quarter. See “Credit quality and allowance for loan losses” for additional information regarding the allowance for loan losses.

Non-interest income

Non-interest income for the three months ended September 30, 2011 was $12,245 compared to $17,122 for the comparable period in 2010. This increase was the result of the following components listed in the table below.

Three month period ending:	Sept 30, 2011			Sept 30, 2010		$ increase (decrease)			% increase (decrease)
Service charges on deposit accounts	$	1,629		$	1,713	$	(84	)		(4.9	%)
Income from correspondent banking and bond sales division		7,999			11,828		(3,829	)		(32.4	%)
Correspondent banking division – other fees		434			362		72			19.9	%
Commissions from sale of mutual funds and annuities		557			318		239			75.2	%
Debit card and ATM fees		713			458		255			55.7	%
Loan related fees		199			128		71			55.5	%
BOLI income		227			220		7			3.2	%
Trading securities revenue		130			249		(119	)		(47.8	%)
FDIC indemnification asset- accretion of discount rate		(225	)		225		(450	)		(200.0	%)
Adjustments to FDIC indemnification asset		256			—		256			n/a
Other service charges and fees		121			93		28			30.1	%
Gain on sale of securities		205			151		54			35.8	%
Subtotal		12,245			15,745		(3,500	)		(22.2	%)
Bargain purchase gain		—			1,377		(1,377	)		n/a
Total non-interest income	$	12,245		$	17,122	$	(4,877	)		28.5	%

We recognized revenue of approximately $256 relating to adjustments to our FDIC indemnification asset. Approximately $241 of this amount relates to FDIC OREO indemnification and approximately $15 relates to the indemnification of a FDIC loss share loan pool impairment. Both of these relate to the acquisition of three failed financial institutions we acquired during the third quarter of 2010. To the extent we recognize further degradation of value related to these OREO properties, the loss

47

or charge-down is recognized as non interest expense, and approximately 80% of the recognized loss is recognized as income in our non interest income, pursuant to the loss sharing agreements we have with the FDIC. Similar, to the extent we recognize a loan pool impairment (expense is included in provision for loan loss expense included in our condensed consolidated statement of earnings), approximately 80% of the recognized loss is recognized as non interest income, pursuant to the loss sharing agreements we have with the FDIC.

We also recognized accretion income, or in this particular quarter negative income, relating to our FDIC indemnification asset of approximately $225. This also relates to the acquisition of three failed financial institutions we acquired during the third quarter of 2010. We make estimates of expected losses on the loans we purchased from the FDIC and we estimate the time period we expect those losses to occur. Pursuant to our loss share agreements (indemnification agreements) with the FDIC, we expect to be reimbursed for those expected future losses during those expected future periods. The present value of these expected future reimbursements is the estimated value of our indemnification asset carried on our balance sheet. Over time, we accrete non interest income based on the discount factor(s) we used to present value our expected future reimbursements. Each quarter we adjust our estimates of losses and the estimated time period to recover those losses. As these factors change, the income accretion will change and can go negative relative to changes in expected loss reimbursements and timing thereof. Based on our recent evaluations of expected cash flows from acquired loans, we have estimated new expected future cash flows in excess of previously estimated future cash flows (this valuation process occurs quarterly). As such, the higher expected future cash flows are recognized through higher interest income accretion over the lives of the related loans. Since we now have estimated higher future expected cash flows, we are estimating lower future losses. Since future losses are now expected to be less than previously estimated, the resulting future reimbursements for losses from the FDIC is expected to be less. These lower expected reimbursements from the FDIC reduce the FDIC indemnification asset over time, and can exceed the original present value accretion discussed above resulting in a net negative accretion. During the current quarter, this accretion was a negative $225. The alternative to this method of adjusting expected reimbursements over the life of the related loan pools is to recognize an impairment expense immediately on the indemnification asset. We believe that it is more appropriate to match the lower expected reimbursement loss against the pick-up in loan yield over the future periods as they occur.

48

Non-interest expense

Non-interest expense for the three months ended September 30, 2011 decreased $743, or 2.7%, to $26,787, compared to $27,530 for the same period in 2010. Components of our non-interest expenses are listed in the table below.

Three month period ending:	Sept 30, 2011			Sept 30, 2010			$ Increase (decrease)			% increase (decrease)
Employee salaries and wages	$	12,621		$	13,544		$	(923	)		(6.8	%)
Employee incentive/bonus compensation		600			1,020			(420	)		(41.2	%)
Employee stock based compensation		158			180			(22	)		(12.2	%)
Deferred compensation expense		114			97			17			17.5	%
Health insurance and other employee benefits		483			311			172			55.3	%
Payroll taxes		618			642			(24	)		(3.7	%)
Employer 401K matching contributions		231			211			20			9.5	%
Other employee related expenses		231			179			52			29.1	%
Incremental direct cost of loan origination		(112	)		(175	)		63			(36.0	%)
Total salaries, wages and employee benefits	$	14,944		$	16,009		$	(1,065	)		(6.7	%)
Occupancy expense		2,036			1,633			403			24.7	%
Depreciation of premises and equipment		1,016			971			45			4.6	%
Supplies, stationary and printing		314			248			66			26.6	%
Marketing expenses		611			615			(4	)		(0.7	%)
Data processing expense		848			726			122			16.8	%
Legal, auditing and other professional fees		559			785			(226	)		(28.8	%)
Bank regulatory related expenses		617			819			(202	)		(24.7	%)
Postage and delivery		293			198			95			48.0	%
ATM and debit card related expenses		335			365			(30	)		(8.2	%)
CDI amortization		194			142			52			36.6	%
Loss on sale of repossessed real estate (“OREO”)		307			153			154			100.7	%
Valuation write down of repossessed real estate (“OREO”)		1,389			1,273			116			9.1	%
Loss on repossessed assets other than real estate		218			171			47			27.5	%
Foreclosure and other credit related expenses		1,052			803			249			31.0	%
Internet and telephone banking		324			132			192			145.5	%
Visa/Mastercard processing and prepaid card expenses		35			82			(47	)		(57.3	%)
Put-back option amortization		109			—			109			n/a
Operational write-offs and losses		166			296			(130	)		(43.9	%)
Correspondent accounts and Federal Reserve charges		118			83			35			42.2	%
Conferences/Seminars/Education/Training		134			236			(102	)		(43.2	%)
Director fees		71			92			(21	)		(22.8	%)
Travel expenses		30			224			(194	)		(86.6	%)
Other expenses		488			705			(217	)		(30.8	%)
Subtotal	$	26,208		$	26,761		$	(553	)		(2.1	%)
Merger and acquisition related expenses		579			769			(190	)		(24.7	%)
Total non-interest expense	$	26,787		$	27,530		$	(743	)		(2.7	%)

49

We acquired three failed institutions from the FDIC in the third quarter of last year, which had a combined nine branches, one of which we subsequently closed. In addition, we closed on our TD Bank transaction in January 2011, adding four additional branches and their related additional operating expenses. The four TD Bank branches and their related operating expenses were not included in our third quarter 2010 expenses. The FDIC branches and their related operating expenses occurred in the middle of the third quarter of 2010, approximately.

In September 2011, we have completed the integration process of the three failed institutions acquired from the FDIC during the third quarter of 2010. These institutions continued to operate on their legacy core processing systems. We converted the first one during June 2011, the second during July 2011 and the third during September 2011. We are beginning to realize the expected operating efficiencies from these acquisitions during the third quarter of 2011 and expect to see additional efficiencies in 4Q11 as well.

In addition, several seasoned bank management teams were hired last year and two additional new offices were opened. The teams are growing and developing business in the new markets rapidly and are expected to eventually add significant contributions to the Company’s profitability, but at the present time they have added additional overhead expenses.

The Company has conversion teams in place for the three FDIC bank conversions, the Federal Trust Bank acquisition scheduled for the fourth quarter 2011 and the merger of the remaining subsidiary bank not yet merged into the lead bank. This team has contributed to the elevated operating expenses, as well as the due diligence team used for evaluating potential FDIC and other acquisition transactions, and a large special asset disposition department that is charged with the task of resolving the Company’s NPAs and OREO. All of these activities have elevated the Company’s operating expenses, but much of this added expense is temporary in nature, and as indicated above, we are beginning to realize expected efficiencies.

Lastly, as indicated in “non interest income,” our gross commission from bond sales was $7,999 this quarter, compared to $11,828 during the same quarter last year, which was a record quarter. Much of the related expense in our correspondent banking division (bond sales) is variable in nature. To the extent gross commissions were lower this quarter versus last year, the related compensation expense is also lower.

Benefit for income taxes

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income, which includes a substantial bargain purchase gain, management believes it is more likely than not that the Company will realize the benefits of those deductible differences.

50

We recognized an income tax benefit for the three months ended September 30, 2011 of $599 on pre-tax loss of $2,591 (an effective tax rate of 23.1%) compared to an income tax benefit of $4,422 on pre-tax loss of $12,093 (an effective tax rate of 36.6%) for the comparable quarter in 2010. We reported pre-tax losses of $45, $7,417 and $2,591 during quarters one, two and three of this year, respectively. Due to the volatility of pre-tax losses, and our tax exempt income net of non deductible expenses, quarterly effective tax rates can fluctuate. Our pre-tax loss for the current nine month period is similar to the pre-tax loss for the same period last year resulting in comparable effect tax rates of 38.6% versus 38.9%, respectively.

COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2011 AND 2010

Overview

We recognized a net loss of $6,173 or $0.21 per share basic and diluted for the nine month period ended September 30, 2011, compared to net loss of $6,374 or $0.24 per share basic and diluted for the same period in 2010.

The primary reason for our losses during both of these periods is credit related costs which is reflective of a continuing sluggish economy and weak real estate market in Florida. Income and expense categories, along with other items are discussed and analyzed below.

Net interest income/margin

Net interest income increased $9,238 or 22% to $51,469 during the nine month period ended September 30, 2011 compared to $42,231 for the same period in 2010. The $9,238 increase was the result of a $5,812 increase in interest income and a $3,426 decrease in interest expense.

Interest earning assets averaged $1,890,776 during the nine month period ended September 30, 2011 as compared to $1,690,508 for the same period in 2010, an increase of $200,268, or 12%. The yield on average interest earning assets decreased 5 bps to 4.31% (3 bps to 4.37% tax equivalent basis) during the nine month period ended September 30, 2011, compared to 4.36% (4.40% tax equivalent basis) for the same period in 2010. The combined effects of the $200,268 increase in average interest earning assets and the 5 bps (3 bps tax equivalent basis) decrease in yield on average interest earning assets resulted in the $5,812 ($6,126 tax equivalent basis) increase in interest income between the two periods.

Interest bearing liabilities averaged $1,502,030 during the nine month period ended September 30, 2011 as compared to $1,332,038 for the same period in 2010, an increase of $169,992, or 13%. The cost of average interest bearing liabilities decreased 45 bps to 0.84% during the nine month period ended September 30, 2011, compared to 1.29% for the same period in 2010. The combined effects of the $169,992 increase in average interest bearing liabilities and the 45 bps decrease in cost of average interest bearing liabilities resulted in the $3,426 decrease in interest expense between the two periods.

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The table below summarizes the analysis of changes in interest income and interest expense for the nine month periods ended September 30, 2011 and 2010 on a tax equivalent basis.

	Nine months ended September 30,
	2011								2010
	Average Balance			Interest Inc / Exp		Average Rate			Average Balance			Interest Inc / Exp		Average Rate
Loans (1) (2) (8)	$	1,013,841		$	40,600		5.35	%	$	937,991		$	39,104		5.57	%
Covered loans		184,997			8,523		6.16	%		43,015			1,645		5.11	%
Securities- taxable		480,524			10,646		2.96	%		524,413			12,940		3.30	%
Securities- tax exempt (8)		35,088			1,536		5.85	%		35,823			1,577		5.89	%
Fed funds sold and other (3)		176,326			487		0.37	%		149,266			400		0.36	%
Total interest earning assets		1,890,776			61,792		4.37	%		1,690,508			55,666		4.40	%
Allowance for loan losses		(27,399	)							(24,526	)
All other assets		289,767								210,606
Total assets	$	2,153,144							$	1,876,588
Interest bearing deposits (4)		1,391,661			8,922		0.86	%		1,163,572			12,089		1.39	%
Fed funds purchased		75,621			41		0.07	%		115,577			88		0.10	%
Other borrowings (5)		22,248			177		1.06	%		40,389			383		1.27	%
Corporate debenture		12,500			310		3.32	%		12,500			316		3.38	%
Total interest bearing liabilities		1,502,030			9,450		0.84	%		1,332,038			12,876		1.29	%
Demand deposits		384,524								287,979
Other liabilities		15,071								17,735
Stockholders’ equity		251,519								238,836
Total liabilities and stockholders’ equity	$	2,153,144							$	1,876,588
Net interest spread (tax equivalent basis) (6)							3.53	%							3.11	%
Net interest income (tax equivalent basis)				$	52,342							$	42,790
Net interest margin (tax equivalent basis) (7)							3.70	%							3.38	%

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

Note 2: Interest income on average loans includes amortization of loan fee recognition of $223 and $181 for the nine month periods ended September 30, 2011 and 2010.

Note 3: Includes federal funds sold, interest earned on deposits at the Federal Reserve Bank and earnings on Federal Reserve Bank stock and Federal Home Loan Bank stock.

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Note 4: Includes interest bearing deposits only. Non-interest bearing checking accounts are included in the demand deposits listed above. Also, includes net amortization of fair market value adjustments related to various acquisitions of time deposits of ($1,155) and ($497) for the nine month periods ended September 30, 2011 and 2010.

Note 5: Includes securities sold under agreements to repurchase and Federal Home Loan Bank advances.

Note 6: Represents the average rate earned on interest earning assets minus the average rate paid on interest bearing liabilities.

Note 7: Represents net interest income divided by total interest earning assets.

Note 8: Interest income and rates include the effects of a tax equivalent adjustment using applicable statutory tax rates to adjust tax exempt interest income on tax exempt investment securities and loans to a fully taxable basis.

Provision for loan losses

The provision for loan losses increased $3,358, or 14%, to $27,926 during the nine month period ending September 30, 2011 compared to $24,568 for the comparable period in 2010. During the third quarter of 2010, the Company disposed of commercial real estate problem loans with a carrying balance of $16,940 for $8,579 in the wholesale debt market, resulting in loan loss expense of $8,361 directly related to the sale. In March of 2011, the Company also disposed of a smaller pool of commercial real estate problem loans with a carrying balance of $6,648 for $4,156 in the wholesale debt market, resulting in loan loss expense of $2,492 directly related to the sale. Our policy is to maintain the allowance for loan losses at a level sufficient to absorb probable incurred losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses, which is a charge to current period earnings, and is decreased by charge-offs, net of recoveries on prior loan charge-offs. Therefore, the provision for loan losses (Income Statement effect) is a residual of management’s determination of allowance for loan losses (Balance Sheet approach). In determining the adequacy of the allowance for loan losses, we consider the conditions of individual borrowers, the historical loan loss experience, the general economic environment, the overall portfolio composition, and other information. As these factors change, the level of loan loss provision changes. See “Credit quality and allowance for loan losses” for additional information regarding the allowance for loan losses.

Non-interest income

Non-interest income for the nine months ended September 30, 2011 was $46,369 compared to $39,754 for the comparable period in 2010. This increase was the result of the following components listed in the table below.

Nine month period ending:	Sept 30, 2011		Sept 30, 2010		$ increase (decrease)			% increase (decrease)
Service charges on deposit accounts	$	4,602	$	4,964	$	(362	)		(7.3	%)
Income from correspondent banking and bond sales division		18,228		25,556		(7,328	)		(28.7	%)
Correspondent banking division – other fees		1,203		697		506			72.6	%
Commissions from sale of mutual funds and annuities		1,318		783		535			68.3	%
Debit card and ATM fees		2,083		1,325		758			57.2	%
Loan related fees		670		375		295			78.7	%
BOLI income		701		524		177			33.8	%
Trading securities revenue		397		448		(51	)		(11.4	%)
FDIC indemnification asset- accretion of discount rate		196		225		(29	)		(12.9	%)
Adjustments to FDIC indemnification asset		1,977		—		1,977			n/a
Other service charges and fees		531		254		277			109.1	%
Gain on sale of securities		3,334		3,226		108			3.3	%
Subtotal		35,240		38,377		(3,137	)		(8.2	%)
Bargain purchase gain		11,129		1,377		9,752			708.2	%
Total non-interest income	$	46,369	$	39,754	$	6,615			16.6	%

The increase in non-interest income between the two periods presented above was primarily due to the bargain purchase gain recognized pursuant to the TD Bank, N.A. transaction discussed in Note 8 in our Form 10-Q for the period ending March 31, 2010 filed on May 10, 2011 and incorporated herein by reference.

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We recognized revenue of approximately $1,977 relating to adjustments to our FDIC indemnification asset. Approximately $1,727 of this amount relates to FDIC OREO indemnification and approximately $250 relates to the indemnification of FDIC loss share loan pool impairment. Both of these relate to the acquisition of three failed financial institutions we acquired during the third quarter of 2010. To the extent we recognize further degradation of value related to these OREO properties, the loss or charge-down is recognized as non interest expense, and approximately 80% of the recognized loss is recognized as income in our non interest income, pursuant to the loss sharing agreements we have with the FDIC. Similar, to the extent we recognize a loan pool impairment (expense is included in provision for loan loss expense included in our condensed consolidated statement of earnings), approximately 80% of the recognized loss is recognized as non interest income, pursuant to the loss sharing agreements we have with the FDIC.

We also recognized accretion income relating to our FDIC indemnification asset of approximately $196. This also relates to the acquisition of three failed financial institutions we acquired during the third quarter of 2010. We make estimates of expected losses on the loans we purchased from the FDIC and we estimate the time period we expect those losses to occur. Pursuant to our loss share agreements (indemnification agreements) with the FDIC, we expect to be reimbursed for those expected future losses during those expected future periods. The present value of these expected future reimbursements is the estimated value of our indemnification asset carried on our balance sheet. Over time, we accrete non interest income based on the discount factor(s) we used to present value our expected future reimbursements. During the nine month period ending September 30, 201, this accretion was $196. Refer to “COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2011 AND 2010, Non-Interest Income” for additional discussion regarding potential negative accretion.

Commissions earned on bond sales (“Income from correspondent banking and bond sales division”) was lower this period due to lower volume of bond sales which management believes is related to the current interest rate environment, as well as the needs of our institutional customers. Our customers are small to medium size financial institutions primarily located in the southeast. Typically, when interest rates are falling, these institutions generate significant unrealized gains in their security portfolios, some of which they will lock in by selling bonds, and reinvesting. That type of interest rate environment will generally increase volume, which will increase our commission revenue. When interest rates are low, with the propensity to increase, volume tends to slow, which will tend to generally decrease our revenue from bond sales commissions. The third quarter of 2010 was a record quarter for bond sales.

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Non-interest expense

Non-interest expense for the nine months ended September 30, 2011 increased $12,112, or 17.9%, to $79,965, compared to $67,853 for the same period in 2010. Components of our non-interest expenses are listed in the table below.

Nine month period ending:	Sept 30, 2011			Sept 30, 2010			$ Increase (decrease)			% increase (decrease)
Employee salaries and wages	$	34,439		$	33,038		$	1,401			4.2	%
Employee incentive/bonus compensation		1,806			2,682			(876	)		(32.7	%)
Employee stock based compensation		535			518			17			3.3	%
Deferred compensation expense		345			222			123			55.4	%
Health insurance and other employee benefits		2,147			1,549			598			38.6	%
Payroll taxes		2,200			1,795			405			22.6	%
Employer 401K matching contributions		740			623			117			18.8	%
Other employee related expenses		427			432			(5	)		(1.2	%)
Incremental direct cost of loan origination		(369	)		(458	)		89			(19.4	%)
Total salaries, wages and employee benefits		42,270			40,401			1,869			4.6	%
Occupancy expense		6,244			4,568			1,676			36.7	%
Depreciation of premises and equipment		3,011			2,432			579			23.8	%
Supplies, stationary and printing		984			746			238			31.9	%
Marketing expenses		2,099			1,766			333			18.9	%
Data processing expense		3,765			1,924			1,841			95.7	%
Legal, auditing and other professional fees		1,876			2,167			(291	)		(13.4	%)
Bank regulatory related expenses		2,062			2,121			(59	)		(2.8	%)
Postage and delivery		724			433			291			67.2	%
ATM and debit card related expenses		1,075			964			111			11.5	%
CDI amortization		585			348			237			68.1	%
Loss on sale of repossessed real estate (“OREO”)		362			177			185			104.5	%
Valuation write down of repossessed real estate (“OREO”)		4,659			2,583			2,076			80.4	%
Loss on repossessed assets other than real estate		321			404			(83	)		(20.5	%)
Foreclosure and other credit related expenses		4,048			1,497			2,551			170.4	%
Internet and telephone banking		762			442			320			72.4	%
Visa/Mastercard processing and prepaid card expenses		105			162			(57	)		(35.2	%)
Put-back option amortization		292			—			292			n/a
Operational write-offs and losses		407			655			(248	)		(37.9	%)
Correspondent accounts and Federal Reserve charges		356			234			122			52.1	%
Conferences/Seminars/Education/Training		330			555			(225	)		(40.5	%)
Director fees		205			285			(80	)		(28.1	%)
Travel expenses		107			470			(363	)		(77.2	%)
Other expenses		1,867			1,750			117			6.7	%
Subtotal	$	78,516		$	67,084		$	11,432			17.0	%
Merger and acquisition related expenses		1,449			769			680			88.4	%
Total non-interest expense	$	79,965		$	67,853		$	12,112			17.9	%

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We acquired three failed institutions from the FDIC in the third quarter of last year, which had a combined nine branches of which one was subsequently closed. In addition, we closed on our TD Bank transaction in January 2011, adding four additional branches and their related additional operating expenses. The four TD Bank branches and their related operating expenses were not included in our non interest expense for the nine month period ending September 30, 2010. The FDIC branches and their related operating expenses occurred in the middle of the third quarter of 2010, approximately. As a result, related expenses were not included in our non interest expense for the nine month period ending September 30, 2010.

In addition, several seasoned bank management teams were hired during the spring and summer of last year and two additional new offices were opened. The teams are growing and developing business in the new markets rapidly and are expected to eventually add significant contributions to the Company’s profitability, but at the present time they have added additional overhead expenses.

The Company has conversion teams in place for the three FDIC bank conversions and the merger of the remaining subsidiary bank not yet merged into the lead bank. This team has contributed to the elevated operating expenses, as well as the due diligence team used for evaluating potential FDIC and other acquisition transactions, and a large special asset disposition department that is charged with the task of resolving the Company’s NPAs and OREO. All of these activities have elevated the Company’s operating expenses, but much of this added expense is temporary in nature.

Benefit for income taxes

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income, which includes a substantial bargain purchase gain, management believes it is more likely than not that the Company will realize the benefits of those deductible differences.

We recognized an income tax benefit for the nine months ended September 30, 2011 of $3,880 on pre-tax loss of $10,053 (an effective tax rate of 38.6%) compared to a tax benefit of $4,062 on pre-tax loss of $10,436 (an effective tax rate of 38.9%) for the comparable period in 2010.

Liquidity

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

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

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business activities. Each subsidiary bank’s asset/liability committee (ALCO) provides oversight to the liquidity management process and recommends guidelines, subject to the approval of its board of directors, and courses of action to address actual and projected liquidity needs.

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

Off-Balance Sheet Arrangements

We do not currently have any off-balance sheet arrangements, other than approved and unfunded loans and letters of credit to our customers in the ordinary course of business.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES: MARKET RISK

Market risk

We believe interest rate risk is the most significant market risk impacting us. 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2010 for disclosure of the quantitative and qualitative information regarding the interest rate risk inherent in interest rate risk sensitive instruments as of December 31, 2010. There have been no changes in the assumptions used in monitoring interest rate risk as of September 30, 2011. The impact of other types of market risk, such as foreign currency exchange risk and equity price risk, is deemed immaterial.

ITEM 4. CONTROLS AND PROCEDURES

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

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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 1A of our December 31, 2010 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. [Removed and Reserved]

Item 5. Other Information

None

Item 6. Exhibits

Exhibit 31.1 The Chairman, President and Chief Executive Officer’s certification required under section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2 The Chief Financial Officer’s certification required under section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1 The Chairman, President and Chief Executive Officer’s certification required under section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 32.2 The Chief Financial Officer’s certification required under section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 101.1 Interactive Data File

101.INS XBRL Instance Document

101.SCH XBRL Schema Document

101.CAL XBRL Calculation Linkbase Document

101.DEF XBRL Definition Linkbase Document

101.LAB XBRL Label Linkbase Document

101.PRE XBRL Presentation Linkbase Document

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CENTERSTATE BANKS, INC.

SIGNATURES

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

CENTERSTATE BANKS, INC.

(Registrant)

Date: November 2, 2011	By:	/s/Ernest S. Pinner
		Ernest S. Pinner Chairman, President and Chief Executive Officer

Date: November 2, 2011	By:	/s/James J. Antal
		James J. Antal Senior Vice President and Chief Financial Officer

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