CenterState Bank (CSFL) 10-Q 2013 Q2 Quarterly report

U.S. SECURTIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2013

¨ 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  x    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	30,109,045 shares
(class)	Outstanding at July 31, 2013

CENTERSTATE BANKS, INC. AND SUBSIDIARIES

INDEX

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
Condensed consolidated balance sheets at June 30, 2013 (unaudited) and December 31, 2012			3
Condensed consolidated statements of earnings and comprehensive income for the three and six months ended June 30, 2013 and 2012 (unaudited)			4
Condensed consolidated statements of changes in stockholders’ equity for the six months ended June 30, 2013 and 2012 (unaudited)			6
Condensed consolidated statements of cash flows for the six months ended June 30, 2013 and 2012 (unaudited)			7
Notes to condensed consolidated financial statements (unaudited)			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			36
Item 3. Quantitative and Qualitative Disclosures About Market Risk			59
Item 4. Controls and Procedures			59
PART II.	OTHER INFORMATION
Item 1. Legal Proceedings			60
Item 1A. Risk Factors			60
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			60
Item 3. Defaults Upon Senior Securities			60
Item 4. [Removed and Reserved]			60
Item 5. Other Information			60
Item 6. Exhibits			60
SIGNATURES			61
CERTIFICATIONS			62

2

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands of dollars, except per share data)

	As of June 30, 2013			As of December 31, 2012
ASSETS
Cash and due from banks	$	21,160		$	19,160
Federal funds sold and Federal Reserve Bank deposits		82,395			117,588
Cash and cash equivalents		103,555			136,748
Trading securities, at fair value		—			5,048
Investment securities available for sale, at fair value		492,087			425,758
Loans held for sale, at lower of cost or fair value		1,760			2,709
Loans covered by FDIC loss share agreements		256,828			296,295
Loans, excluding those covered by FDIC loss share agreements		1,178,759			1,139,568
Allowance for loan losses		(23,820	)		(26,682	)
Net Loans		1,411,767			1,409,181
Bank premises and equipment, net		96,506			97,954
Accrued interest receivable		6,272			6,100
Federal Home Loan Bank and Federal Reserve Bank stock, at cost		8,179			9,749
Goodwill		44,924			44,924
Core deposit intangible		5,441			5,944
Trust intangible		1,259			1,363
Bank owned life insurance		48,634			47,957
Other repossessed real estate owned covered by FDIC loss share agreements		28,532			26,783
Other repossessed real estate owned		5,469			6,875
FDIC indemnification asset		88,716			119,289
Deferred income tax asset, net		1,552			—
Prepaid expense and other assets		10,700			16,858
TOTAL ASSETS	$	2,355,353		$	2,363,240
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand - non-interest bearing	$	555,721		$	519,510
Demand - interest bearing		456,660			452,961
Savings and money market accounts		554,500			549,457
Time deposits		409,811			475,304
Total deposits		1,976,692			1,997,232
Securities sold under agreement to repurchase		21,890			18,792
Federal funds purchased		53,274			38,932
Corporate debentures		16,983			16,970
Accrued interest payable		446			579
Deferred income tax liability, net		—			1,892
Payables and accrued expenses		14,652			15,312
Total liabilities		2,083,937			2,089,709
Stockholders’ equity:
Common stock, $.01 par value: 100,000,000 shares authorized; 30,104,270 and 30,079,767 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively		301			301
Additional paid-in capital		229,354			228,952
Retained earnings		43,711			36,979
Accumulated other comprehensive income (loss)		(1,950	)		7,299
Total stockholders’ equity		271,416			273,531
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,355,353		$	2,363,240

See notes to the accompanying condensed consolidated financial statements

3

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (unaudited)

(in thousands of dollars, except per share data)

	Three months ended						Six months ended
	June 30, 2013			June 30, 2012			June 30, 2013			June 30, 2012
Interest income:
Loans	$	21,790		$	21,029		$	43,225		$	40,649
Investment securities available for sale:
Taxable		2,097			3,064			4,485			6,433
Tax-exempt		372			350			729			700
Federal funds sold and other		228			144			426			295
		24,487			24,587			48,865			48,077
Interest expense:
Deposits		1,330			2,004			2,713			4,235
Securities sold under agreement to repurchase		21			25			39			45
Federal funds purchased		6			7			11			15
Federal Home Loan Bank advances and other borrowings		—			111			—			198
Corporate debentures		150			157			300			321
		1,507			2,304			3,063			4,814
Net interest income		22,980			22,283			45,802			43,263
Provision for loan losses		1,374			1,894			1,014			4,626
Net interest income after loan loss provision		21,606			20,389			44,788			38,637
Non interest income:
Income from correspondent banking and bond sales division		4,904			9,966			11,044			17,750
Other correspondent banking related revenue		705			741			1,570			1,311
Service charges on deposit accounts		2,081			1,595			3,900			3,078
Debit, prepaid, ATM and merchant card related fees		1,342			1,172			2,627			2,221
Wealth management related revenue		1,130			950			2,200			1,818
FDIC indemnification income		1,396			1,229			2,024			1,793
FDIC indemnification asset amortization		(3,272	)		(348	)		(5,471	)		(885	)
Bank owned life insurance income		338			363			677			721
Other service charges and fees		231			147			533			598
Net gain on sale of securities available for sale		1,008			726			1,038			1,328
Bargain purchase gain		—			—			—			453
Total other income		9,863			16,541			20,142			30,186

See notes to the accompanying condensed consolidated financial statements.

4

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (unaudited)

(in thousands of dollars, except per share data)

	Three months ended						Six months ended
	June 30, 2013			June 30, 2012			June 30, 2013			June 30, 2012
Non interest expense:
Salaries, wages and employee benefits		15,234			19,050			31,474			36,511
Occupancy expense		1,942			2,481			3,834			4,542
Depreciation of premises and equipment		1,455			1,416			2,952			2,683
Supplies, stationary and printing		285			303			573			618
Marketing expenses		586			609			1,114			1,193
Data processing expense		912			962			1,796			1,967
Legal, audit and other professional fees		844			601			1,627			1,221
Core deposit intangible (CDI) amortization		250			299			503			577
Postage and delivery		267			264			552			587
ATM and debit card related expenses		428			256			939			518
Bank regulatory expenses		635			658			1,216			1,358
Loss on sale of repossessed real estate (“OREO”)		563			229			562			501
Valuation write down of repossessed real estate (“OREO”)		1,680			835			2,667			1,090
Loss on repossessed assets other than real estate		104			40			346			138
Foreclosure related expenses		787			1,094			1,580			2,060
Merger and acquisition related expenses		—			614			—			2,482
Other expenses		1,401			1,947			2,728			3,698
Total other expenses		27,373			31,658			54,463			61,744
Income before provision for income taxes		4,096			5,272			10,467			7,079
Provision for income taxes		1,338			1,558			3,133			2,052
Net income	$	2,758		$	3,714		$	7,334		$	5,027
Other comprehensive income, net of tax:
Unrealized holding (loss) gain, net of income taxes	$	(6,799	)	$	2,635		$	(8,611	)	$	2,729
Less: reclassified adjustments for gain included in net income, net of income taxes, of $388, $273, $400, and $500, respectively		(620	)[1]		(453	)[1]		(638	)[1]		(828	)[1]
Net unrealized (loss) gain on available for sale securities, net of income taxes		(7,419	)		2,182			(9,249	)		1,901
Total comprehensive (loss) income	$	(4,661	)	$	5,896		$	(1,915	)	$	6,928
Earnings per share:
Basic	$	0.09		$	0.12		$	0.24		$	0.16
Diluted	$	0.09		$	0.12		$	0.24		$	0.16
Common shares used in the calculation of earnings per share:
Basic		30,098,853			30,072,395			30,094,315			30,069,013
Diluted		30,161,241			30,140,009			30,155,780			30,138,992

^[1] Amounts are included in net gain on sale of securities available for sale in total non interest income. Provision for income taxes associated with the reclassification adjustment for the three and six months periods ended June 30, 2013 and 2012 was 388, $273, $400, and $500, respectively.

See notes to the accompanying condensed consolidated financial statements

5

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the six months ended June 30, 2013 and 2012 (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, 2012		30,055,499	$	301	$	228,342	$	28,277		$	5,713		$	262,633
Net income								5,027						5,027
Change in unrealized holding gain on available for sale securities, net of deferred income tax of $1,147											1,901			1,901
Dividends paid - common ($0.02 per share)								(601	)					(601	)
Stock grants issued		19,428				216								216
Stock based compensation expense						197								197
Balances at June 30, 2012		30,074,927	$	301	$	228,755	$	32,703		$	7,614		$	269,373
Balances at January 1, 2013		30,079,767	$	301	$	228,952	$	36,979		$	7,299		$	273,531
Net income								7,334						7,334
Change in unrealized holding gain on available for sale securities, net of deferred income tax of $5,808											(9,249	)		(9,249	)
Dividends paid - common ($0.02 per share)								(602	)					(602	)
Stock grants issued		24,503				250								250
Stock based compensation expense						152								152
Balances at June 30, 2013		30,104,270	$	301	$	229,354	$	43,711		$	(1,950	)	$	271,416

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, except per share data)

	Six months ended June 30,
	2013			2012
Cash flows from operating activities:
Net income	$	7,334		$	5,027
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,014			4,626
Depreciation of premises and equipment		2,952			2,683
Accretion of purchase accounting adjustments		(15,866	)		(12,520	)
Net amortization of investment securities		3,725			4,634
Net deferred loan origination fees		(456	)		5
Gain on sale of securities available for sale		(1,038	)		(1,328	)
Trading securities revenue		(131	)		(277	)
Purchases of trading securities		(129,249	)		(191,078	)
Proceeds from sale of trading securities		134,428			190,294
Repossessed real estate owned valuation write down		2,667			1,090
Loss on sale of repossessed real estate owned		562			501
Repossessed assets other than real estate valuation write down		52			89
Loss on sale of repossessed assets other than real estate		294			49
Gain on sale of loans held for sale		(170	)		(119	)
Loans originated and held for sale		(10,887	)		(7,342	)
Proceeds from sale of loans held for sale		12,006			9,510
Gain on disposal of and or sale of fixed assets		—			(7	)
Impairment of bank property held for sale		—			165
Gain on disposal of bank property held for sale		(31	)		—
Deferred income taxes		2,184			1,979
Stock based compensation expense		289			318
Bank owned life insurance income		(677	)		(721	)
Bargain purchase gain from acquisition		—			(453	)
Net cash from changes in:
Net changes in accrued interest receivable, prepaid expenses, and other assets		6,905			811
Net change in accrued interest payable, accrued expense, and other liabilities		(680	)		2,405
Net cash provided by operating activities		15,227			10,341
Cash flows from investing activities:
Purchases of investment securities available for sale		(31,133	)		(14,147	)
Purchases of mortgage backed securities available for sale		(183,002	)		(99,503	)
Purchases of FHLB and FRB stock		—			(855	)
Proceeds from maturities of investment securities available for sale		165			204
Proceeds from called investment securities available for sale		3,670			56,550
Proceeds from pay-downs of mortgage backed securities available for sale		57,515			64,068
Proceeds from sales of investment securities available for sale		31,201			12,812
Proceeds from sales of mortgage backed securities available for sale		37,691			102,265
Proceeds from sales of FHLB and FRB stock		1,570			3,683
Net (increase) decrease in loans		(2,589	)		24,590
Cash received from FDIC loss sharing agreements		28,371			4,193
Purchases of premises and equipment, net		(1,517	)		(8,038	)
Proceeds from sale of repossessed real estate		12,095			10,172
Proceeds from sale of fixed assets		13			37
Proceeds from sale of bank property held for sale		931			—
Purchase of bank owned life insurance		—			(10,000	)
Net cash from bank acquisitions		—			81,061
Net cash provided by/(used in) investing activities		(45,019	)		227,092

See notes to the accompanying condensed consolidated financial statements.

7

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands of dollars, except per share data)

(continued)

	Six months ended June 30,
	2013			2012
Cash flows from financing activities:
Net decrease in deposits		(20,239	)		(280,950	)
Net increase in securities sold under agreement to repurchase		3,098			9,115
Net increase (decrease) in federal funds purchased		14,342			(9,287	)
Net increase in other borrowed funds		—			10,000
Dividends paid		(602	)		(601	)
Net cash used in financing activities		(3,401	)		(271,723	)
Net decrease in cash and cash equivalents		(33,193	)		(34,290	)
Cash and cash equivalents, beginning of period		136,748			151,095
Cash and cash equivalents, end of period	$	103,555		$	116,805
Transfer of loans to other real estate owned	$	15,667		$	13,015
Cash paid during the period for:
Interest	$	3,485		$	5,710
Income taxes	$	783		$	—

See notes to the accompanying condensed consolidated financial statements.

8

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 bank, CenterState Bank of Florida, N.A. (“CenterState”), and our non bank subsidiary, R4ALL, Inc. Our subsidiary bank operates through 55 full service banking locations in 18 counties throughout Central Florida, providing traditional deposit and lending products and services to its commercial and retail customers. R4ALL, Inc. is a separate non bank subsidiary of CSFL. Its purpose is to purchase troubled loans from our subsidiary bank 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 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 the Southeastern United States.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012. 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 three month and six month periods ended June 30, 2013 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. Average stock options outstanding that were anti dilutive during the three month and six month periods ending June 30, 2013 and 2012 were 1,121,942, 1,126,478, 1,133,315 and 1,130,809, respectively. The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the periods presented.

9

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

	Three months ended June 30,				Six months ended June 30,
	2013		2012		2013		2012
Numerator for basic and diluted earnings per share:
Net income	$	2,758	$	3,714	$	7,334	$	5,027
Denominator:
Denominator for basic earnings per share
- weighted-average shares		30,098,853		30,072,395		30,094,315		30,069,013
Effect of dilutive securities:
Stock options and stock grants		62,388		67,614		61,465		69,979
Denominator for diluted earnings per share
- adjusted weighted-average shares		30,161,241		30,140,009		30,155,780		30,138,992
Basic earnings per share	$	0.09	$	0.12	$	0.24	$	0.16
Diluted earnings per share	$	0.09	$	0.12	$	0.24	$	0.16

NOTE 3: Fair value

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

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

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

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

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

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

10

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

The fair value of derivatives is based on valuation models using observable market data as of the measurement date (Level 2). Assets and liabilities measured at fair value on a recurring basis are summarized below.

	Carrying value		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 June 30, 2013
Assets:
Available for sale securities
U.S. government sponsored entities and agencies	$	5,044		—	$	5,044		—
Mortgage backed securities		445,127		—		445,127		—
Municipal securities		41,916		—		41,916		—
Interest rate swap derivatives		734		—		734		—
Liabilities:
Interest rate swap derivatives		956		—		956		—
at December 31, 2012
Assets:
Trading securities	$	5,048		—	$	5,048		—
Available for sale securities
U.S. government sponsored entities and agencies		7,546		—		7,546		—
Mortgage backed securities		373,190		—		373,190		—
Municipal securities		45,022		—		45,022		—
Interest rate swap derivatives		1,131		—		1,131		—
Liabilities:
Interest rate swap derivatives		2,014		—		2,014		—

The fair value of impaired loans with specific valuation allowance for loan losses and other real estate owned is based on recent real estate appraisals. For residential real estate impaired loans and other real estate owned, appraised values are based on the comparative sales approach. For commercial and commercial real estate impaired loans and other real estate owned, appraisers may use either a single valuation approach or a combination of approaches such as comparative sales, cost or the income approach. A significant unobservable input in the income approach is the estimated income capitalization rate for a given piece of collateral. At June 30, 2013, the range of capitalization rates utilized to determine the fair value of the underlying collateral ranged from 8% to 11%. Adjustments to appraisals may be made by the appraiser to reflect local market conditions or other economic factors and may result in changes in the fair value of a given asset over time. As such, the fair value of impaired loans and other real estate owned are considered a Level 3 in the fair value hierarchy.

11

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

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

			Fair value measurements using
	Carrying value		Quoted prices in active markets for identical assets (Level 1)		Significant Other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
at June 30, 2013
Assets:
Impaired loans
Residential real estate	$	1,638		—		—	$	1,638
Commercial real estate		4,520		—		—		4,520
Land, land development and construction		1,281		—		—		1,281
Commercial		1,279		—		—		1,279
Consumer		100		—		—		100
Other real estate owned
Residential real estate	$	276		—		—	$	276
Commercial real estate		7,388		—		—		7,388
Land, land development and construction		7,625		—		—		7,625
Bank owned real estate held for sale		1,582		—		—		1,582
at December 31, 2012
Assets:
Impaired loans
Residential real estate	$	837		—		—	$	837
Commercial real estate		8,379		—		—		8,379
Land, land development and construction		1,103		—		—		1,103
Commercial		905		—		—		905
Consumer		84		—		—		84
Other real estate owned
Residential real estate	$	582		—		—	$	582
Commercial real estate		5,933		—		—		5,933
Land, land development and construction		4,445		—		—		4,445
Bank owned real estate held for sale		2,482		—		—		2,482

Impaired loans with specific valuation allowances and/or partial charge-offs had a recorded investment of $9,151, with a valuation allowance of $333, at June 30, 2013, and a recorded investment of $11,678, with a valuation allowance of $370, at December 31, 2012. The Company recorded a provision for loan loss expense of $409 and $476 on these loans during the three and six month periods ending June 30, 2013, respectively.

Other real estate owned had a decline in fair value of $1,680 and $2,667 during the three and six month period ending June 30, 2013, respectively. Changes in fair value were recorded directly to current earnings through non interest expense.

12

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

Bank owned real estate held for sale represents certain branch office buildings which the Company has closed and consolidated to other existing branches. The real estate was transferred out of the Bank Premises and Equipment category into bank owned property held for sale and included in Prepaid and Other Assets category in the Company’s Condensed Consolidated Balance Sheet during 2012. The real estate was transferred at the lower of amortized cost or fair value less estimated costs to sell. During the current year, one of the properties was sold. The net proceeds from the sale was $931 resulting in a gain on the sale of $31, which was included in other non interest income in the Company’s Condensed Consolidated Statements of Earnings and Comprehensive Income. Impairment charges recognized during the three and six month periods ending June 30, 2013 and 2012 were $0, $0, $165 and $165, respectively.

Fair Value of Financial Instruments

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

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

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

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

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

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

Accrued Interest Receivable: The carrying amount of accrued interest receivable approximates fair value and is classified as Level 3.

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

13

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

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

Corporate Debentures: The fair values of the Company’s corporate debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

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

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

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

			Fair value measurements
at June 30, 2013	Carrying amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and cash equivalents	$	103,555	$	103,555	$	—	$	—	$	103,555
Investment securities available for sale		492,087		—		492,087		—		492,087
FHLB and FRB stock		8,179		—		—		—		n/a
Loans held for sale		1,760		—		1,760		—		1,760
Loans, less allowance for loan losses of $23,820		1,411,767		—		—		1,327,061		1,327,061
FDIC indemnification asset		88,716		—		—		—		n/a
Interest rate swap derivatives		734		—		734		—		734
Accrued interest receivable		6,272		—		—		6,272		6,272
Financial liabilities:
Deposits- without stated maturities	$	1,566,881	$	1,566,881	$	—	$	—	$	1,566,881
Deposits- with stated maturities		409,811		—		415,468		—		415,468
Securities sold under agreement to repurchase		21,890		—		21,890		—		21,890
Federal funds purchased		53,274		—		53,274		—		53,274
Corporate debentures		16,983		—		11,021		—		11,021
Interest rate swap derivatives		956		—		956		—		956
Accrued interest payable		446		—		446		—		446

14

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

			Fair value measurements
at December 31, 2012	Carrying amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and cash equivalents	$	136,748	$	136,748	$	—	$	—	$	136,748
Trading securities		5,048		—		5,048		—		5,048
Investment securities available for sale		425,758		—		425,758		—		425,758
FHLB and FRB stock		9,749		—		—		—		n/a
Loans held for sale		2,709		—		2,709		—		2,709
Loans, less allowance for loan losses of $26,682		1,409,181		—		—		1,324,630		1,324,630
FDIC indemnification asset		119,289		—		—		—		n/a
Interest rate swap derivatives		1,131		—		1,131		—		—
Accrued interest receivable		6,100		—		—		6,100		6,100
Financial liabilities:
Deposits- without stated maturities	$	1,521,928	$	1,521,928	$	—	$	—	$	1,521,928
Deposits- with stated maturities		475,304		—		483,220		—		483,220
Securities sold under agreement to repurchase		18,792		—		18,792		—		18,792
Federal funds purchased		38,932		—		38,932		—		38,932
Corporate debentures		16,970		—		—		8,477		8,477
Interest rate swap derivatives		2,014		—		2,014		—		2,014
Accrued interest payable		579		—		579		—		579

NOTE 4: Reportable segments

The Company’s reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning purposes by management. The table below is a reconciliation of the reportable segment revenues, expenses, and profit to the Company’s consolidated total for the three and six month periods ending June 30, 2013 and 2012.

Three month period ending June 30, 2013

	Commercial and retail banking			Correspondent banking and bond sales division			Corporate overhead and administration			Elimination entries			Total
Interest income	$	23,875		$	612		$	—			—		$	24,487
Interest expense		(1,352	)		(5	)		(150	)		—			(1,507	)
Net interest income		22,523			607			(150	)		—			22,980
Provision for loan losses		(1,374	)		—			—			—			(1,374	)
Non interest income		4,254			5,609			—			—			9,863
Non interest expense		(21,212	)		(5,363	)		(798	)		—			(27,373	)
Net income before taxes		4,191			853			(948	)		—			4,096
Income tax (provision) benefit		(1,368	)		(329	)		359			—			(1,338	)
Net income (loss)	$	2,823		$	524		$	(589	)		—		$	2,758
Total assets	$	2,201,379		$	150,679		$	293,127		$	(289,832	)	$	2,355,353

15

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

Six month period ending June 30, 2013

	Commercial and retail banking			Correspondent banking and bond sales division			Corporate overhead and administration			Elimination entries			Total
Interest income	$	47,473		$	1,392		$	—			—		$	48,865
Interest expense		(2,752	)		(11	)		(300	)		—			(3,063	)
Net interest income		44,721			1,381			(300	)		—			45,802
Provision for loan losses		(1,014	)		—			—			—			(1,014	)
Non interest income		7,528			12,614			—			—			20,142
Non interest expense		(41,297	)		(11,438	)		(1,728	)		—			(54,463	)
Net income before taxes		9,938			2,557			(2,028	)		—			10,467
Income tax (provision) benefit		(3,066	)		(986	)		919			—			(3,133	)
Net income (loss)	$	6,872		$	1,571		$	(1,109	)		—		$	7,334
Total assets	$	2,201,379		$	150,679		$	293,127		$	(289,832	)	$	2,355,353

Three month period ending June 30, 2012

	Commercial and retail banking			Correspondent banking and bond sales division			Corporate overhead and administration			Elimination entries			Total
Interest income	$	23,538		$	1,049		$	—			—		$	24,587
Interest expense		(2,028	)		(7	)		(269	)		—			(2,304	)
Net interest income		21,510			1,042			(269	)		—			22,283
Provision for loan losses		(1,894	)		—			—			—			(1,894	)
Non interest income		5,831			10,707			3			—			16,541
Non interest expense		(22,985	)		(7,896	)		(777	)		—			(31,658	)
Net income before taxes		2,462			3,853			(1,043	)		—			5,272
Income tax (provision) benefit		(492	)		(1,450	)		384			—			(1,558	)
Net income (loss)	$	1,970		$	2,403		$	(659	)		—		$	3,714
Total assets	$	2,288,953		$	146,703		$	299,868		$	(294,961	)	$	2,440,563

Six month period ending June 30, 2012

	Commercial and retail banking			Correspondent banking and bond sales division			Corporate overhead and administration			Elimination entries			Total
Interest income	$	45,842		$	2,235		$	—			—		$	48,077
Interest expense		(4,283	)		(15	)		(516	)		—			(4,814	)
Net interest income		41,559			2,220			(516	)		—			43,263
Provision for loan losses		(4,626	)		—			—			—			(4,626	)
Non interest income		11,122			19,061			3			—			30,186
Non interest expense		(45,307	)		(14,864	)		(1,573	)		—			(61,744	)
Net income before taxes		2,748			6,417			(2,086	)		—			7,079
Income tax (provision) benefit		(406	)		(2,415	)		769			—			(2,052	)
Net income (loss)	$	2,342		$	4,002		$	(1,317	)		—		$	5,027
Total assets	$	2,288,953		$	146,703		$	299,868		$	(294,961	)	$	2,440,563

16

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

Commercial and retail banking: The Company’s primary business is commercial and retail banking. Currently, the Company operates through its subsidiary bank and a non bank subsidiary, R4ALL, with 55 full service banking locations in 18 counties throughout Florida providing traditional deposit and lending products and services to its commercial and retail customers.

Correspondent banking and bond sales division: Operating as a division of our 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 Southeastern United States.

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

17

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

NOTE 5: Investment Securities Available for Sale

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

	June 30, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Obligations of U.S. government sponsored entities and agencies	$	5,032	$	12	$	—	$	5,044
Mortgage backed securities		449,086		4,473		8,432		445,127
Municipal securities		41,143		1,254		481		41,916
Total	$	495,261	$	5,739	$	8,913	$	492,087

	December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Obligations of U.S. government sponsored entities and agencies	$	7,465	$	81	$	—	$	7,546
Mortgage backed securities		364,014		9,247		71		373,190
Municipal securities		42,570		2,504		52		45,022
Total	$	414,049	$	11,832	$	123	$	425,758

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

For the six months ended:	June 30, 2013		June 30, 2012
Proceeds	$	68,892	$	115,077
Gross gains		1,038		1,610
Gross losses		—		282

The tax provision related to these net realized gains was $400 and $500, respectively.

18

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

The fair value of available for sale securities at June 30, 2013 by contractual maturity were as follows. Securities not due at a single maturity date, primarilymortgage-backed securities, are shown separately.

	Fair Value		Amortized Cost
Investment securities available for sale
Due in one year or less	$	—	$	—
Due after one year through five years		1,646		1,523
Due after five years through ten years		15,685		15,358
Due after ten years through thirty years		29,629		29,294
Mortgage backed securities		445,127		449,086
	$	492,087	$	495,261

Securities pledged at June 30, 2013 and December 31, 2012 had a carrying amount (estimated fair value) of $98,250 and $108,737 respectively. These securities were pledged primarily to secure public deposits and repurchase agreements.

At June 30, 2013 and December 31, 2012, 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 June 30, 2013 and December 31, 2012.

	June 30, 2013
	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	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage backed securities		250,689		8,432		—		—		250,689		8,432
Municipal securities		10,903		481		—		—		10,903		481
Total temporarily impaired securities	$	261,592	$	8,913	$	—	$	—	$	261,592	$	8,913

	December 31, 2012
	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	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage backed securities		30,840		71		—		—		30,840		71
Municipal securities		2,180		52		—		—		2,180		52
Total temporarily impaired securities	$	33,020	$	123	$	—	$	—	$	33,020	$	123

19

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

At June 30, 2013, 100% of the mortgage-backed securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae, Freddie Mac, and Ginnie Mae, institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2013.

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.

	June 30, 2013			Dec 31, 2012
Loans not covered by FDIC loss share agreements
Real estate loans
Residential	$	437,946		$	428,554
Commercial		504,487			480,494
Land, development and construction		60,928			55,474
Total real estate		1,003,361			964,522
Commercial		124,465			124,225
Consumer and other loans (note 1)		2,851			2,732
Consumer and other loans		48,084			48,547
Loans before unearned fees and cost		1,178,761			1,140,026
Net unearned fees and costs		(2	)		(458	)
Allowance for loan losses for noncovered loans		(21,800	)		(24,033	)
Net loans not covered by FDIC loss share agreements		1,156,959			1,115,535
Loans covered by FDIC loss share agreements
Real estate loans
Residential		128,930			142,480
Commercial		118,999			134,413
Land, development and construction		4,897			13,259
Total real estate		252,826			290,152
Commercial		4,002			6,143
		256,828			296,295
Allowance for loan losses for covered loans		(2,020	)		(2,649	)
Net loans covered by FDIC loss share agreements		254,808			293,646
Total loans, net of allowance for loan losses	$	1,411,767		$	1,409,181

note 1: Consumer loans acquired pursuant to three FDIC assisted transactions of failed financial institutions during the third quarter of 2010 and two in the first quarter of 2012. These loans are not covered by an FDIC loss share agreement. The loans are being accounted for pursuant to ASC Topic 310-30.

20

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

The tables below set 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 June 30, 2013
Balance at beginning of period	$	22,631		$	2,623		$	25,254
Loans charged-off		(2,603	)		(515	)		(3,118	)
Recoveries of loans previously charged-off		310			—			310
Net charge-offs		(2,293	)		(515	)		(2,808	)
Provision for loan losses		1,462			(88	)		1,374
Balance at end of period	$	21,800		$	2,020		$	23,820
Six months ended June 30, 2013
Balance at beginning of period	$	24,033		$	2,649		$	26,682
Loans charged-off		(3,834	)		(515	)		(4,349	)
Recoveries of loans previously charged-off		473			—			473
Net charge-offs		(3,361	)		(515	)		(3,876	)
Provision for loan losses		1,128			(114	)		1,014
Balance at end of period	$	21,800		$	2,020		$	23,820
Three months ended June 30, 2012
Balance at beginning of period	$	25,569		$	441		$	26,010
Loans charged-off		(3,322	)		—			(3,322	)
Recoveries of loans previously charged-off		601			—			601
Net charge-offs		(2,721	)		—			(2,721	)
Provision for loan losses		786			1,108			1,894
Balance at end of period	$	23,634		$	1,549		$	25,183
Six months ended June 30, 2012
Balance at beginning of period	$	27,585		$	359		$	27,944
Loans charged-off		(8,148	)		—			(8,148	)
Recoveries of loans previously charged-off		761			—			761
Net charge-offs		(7,387	)		—			(7,387	)
Provision for loan losses		3,436			1,190			4,626
Balance at end of period	$	23,634		$	1,549		$	25,183

21

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

The following tables present the activity in the allowance for loan losses for loans not covered by FDIC loss share agreements by portfolio segment for the periods presented.

	Real Estate Loans
	Residential				Commercial			Land, develop., constr.			Comm. & industrial			Consumer & other			Total
Loans not covered by FDIC loss share agreements:
Three months ended June 30, 2013
Beginning of the period	$	8,100			$	7,093		$	5,326		$	1,224		$	888		$	22,631
Charge-offs		(1,569	)			(650	)		(144	)		(7	)		(233	)		(2,603	)
Recoveries		153				13			106			11			27			310
Provision for loan losses		3,107				(430	)		(1,217	)		(164	)		166			1,462
Balance at end of period	$	9,791		��	$	6,026		$	4,071		$	1,064		$	848		$	21,800
Six months ended June 30, 2013
Beginning of the period	$	6,831			$	8,272		$	6,211		$	1,745		$	974		$	24,033
Charge-offs		(2,181	)			(1,074	)		(183	)		(59	)		(337	)		(3,834	)
Recoveries		233				40			120			21			59			473
Provision for loan losses		4,908				(1,212	)		(2,077	)		(643	)		152			1,128
Balance at end of period	$	9,791			$	6,026		$	4,071		$	1,064		$	848		$	21,800
Three months ended June 30, 2012
Beginning of the period	$	5,633			$	7,594		$	9,737		$	1,575		$	1,030		$	25,569
Charge-offs		(482	)			(491	)		(2,100	)		(17	)		(232	)		(3,322	)
Recoveries		131				420			21			7			22			601
Provision for loan losses		(422	)			568			210			73			357			786
Balance at end of period	$	4,860			$	8,091		$	7,868		$	1,638		$	1,177		$	23,634
Six months ended June 30, 2012
Beginning of the period	$	6,700			$	8,825		$	9,098		$	1,984		$	978		$	27,585
Charge-offs		(1,777	)			(1,579	)		(4,208	)		(61	)		(523	)		(8,148	)
Recoveries		152				423			85			11			90			761
Provision for loan losses		(215	)			422			2,893			(296	)		632			3,436
Balance at end of period	$	4,860			$	8,091		$	7,868		$	1,638		$	1,177		$	23,634

22

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

The following tables present the activity in the allowance for loan losses for loans covered by FDIC loss share agreements by portfolio segment for the periods presented.

	Real Estate Loans
	Residential		Commercial			Land, develop., constr.			Comm. & industrial			Total
Loans covered by FDIC loss share agreements:
Three months ended June 30, 2013
Beginning of the period	$	—	$	2,310		$	—		$	313		$	2,623
Charge-offs		—		(515	)		—			—			(515	)
Recoveries		—		—			—			—			—
Provision for loan losses		—		(218	)		130			—			(88	)
Balance at end of period	$	—	$	1,577		$	130		$	313		$	2.020
Six months ended June 30, 2013
Beginning of the period	$	0	$	2,335		$	—		$	314		$	2,649
Charge-offs		—		(515	)		—			—			(515	)
Recoveries		—		—			—			—			—
Provision for loan losses		—		(243	)		130			(1	)		(114	)
Balance at end of period	$	—	$	1,577		$	130		$	313		$	2.020
Three months ended June 30, 2012
Beginning of the period	$	82	$	292		$	40		$	27		$	441
Charge-offs		—		—			—			—			—
Recoveries		—		—			—			—			—
Provision for loan losses		—		1,163			(40	)		(15	)		1,108
Balance at end of period	$	82	$	1,455		$	—		$	12		$	1,549
Six months ended June 30, 2012
Beginning of the period	$	82	$	223		$	40		$	14		$	359
Charge-offs		—		—			—			—			—
Recoveries		—		—			—			—			—
Provision for loan losses		—		1,232			(40	)		(2	)		1,190
Balance at end of period	$	82	$	1,455		$	—		$	12		$	1,549

23

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2013 and December 31, 2012. Accrued interest receivable and unearned loan fees and costs are not included in the recorded investment because they are not material.

	Real Estate Loans
As of June 30, 2013	Residential		Commercial		Land, develop., constr.		Comm. & industrial		Consumer & other		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	270	$	251	$	56	$	—	$	23	$	600
Collectively evaluated for impairment		9,521		5,775		4,015		1,064		825		21,200
Acquired with deteriorated credit quality		—		1,577		130		313		—		2,020
Total ending allowance balance	$	9,791	$	7,603	$	4,201	$	1,377	$	848	$	23,820
Loans:
Loans individually evaluated for impairment	$	8,605	$	26,674	$	1,480	$	1,589	$	345	$	38,693
Loans collectively evaluated for impairment		429,341		477,813		59,448		122,876		47,739		1,137,217
Loans acquired with deteriorated credit quality		128,930		118,999		4,897		4,002		2,851		259,679
Total ending loan balances	$	566,876	$	623,486	$	65,825	$	128,467	$	50,935	$	1,435,589

	Real Estate Loans
As of December 31, 2012	Residential		Commercial		Land, develop., constr.		Comm. & industrial		Consumer & other		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	610	$	277	$	107	$	1	$	27	$	1,022
Collectively evaluated for impairment		6,221		7,995		6,104		1,744		947		23,011
Acquired with deteriorated credit quality		—		2,335		—		314		—		2,649
Total ending allowance balance	$	6,831	$	10,607	$	6,211	$	2,059	$	974	$	26,682
Loans:
Loans individually evaluated for impairment	$	9,936	$	32,860	$	1,520	$	3,470	$	393	$	48,179
Loans collectively evaluated for impairment		418,618		447,634		53,954		120,755		48,154		1,089,115
Loans acquired with deteriorated credit quality		142,480		134,413		13,259		6,143		2,732		299,027
Total ending loan balance	$	571,034	$	614,907	$	68,733	$	130,368	$	51,279	$	1,436,321

24

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

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

	June 30, 2013		Dec 31, 2012
Impaired loans with a specific valuation allowance	$	6,075	$	10,744
Impaired loans without a specific valuation allowance		32,618		37,435
Total impaired loans	$	38,693	$	48,179
Amount of allowance for loan losses allocated to impaired loans	$	600	$	1,022
Performing TDRs	$	9,345	$	8,841
Non performing TDRs, included in NPLs		3,758		5,819
Total TDRs (TDRs are required to be included in impaired loans)	$	13,103	$	14,660
Impaired loans that are not TDRs		25,590		33,519
Total impaired loans	$	38,693	$	48,179

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 twelve to twenty-four months. We have not forgiven any material principal amounts on any loan modifications to date. We have approximately $13,103 of TDRs. Of this amount $9,345 are performing pursuant to their modified terms, and $3,758 are not performing and have been placed on non accrual status and included in our non performing loans (“NPLs”).

25

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

TDRs as of June 30, 2013 and December 31, 2012 quantified by loan type classified separately as accrual (performing loans) and non-accrual (non performing loans) are presented in the tables below.

As of June 30, 2013	Accruing		Non Accrual		Total
Real estate loans:
Residential	$	6,031	$	1,938	$	7,969
Commercial		2,623		1,575		4,198
Land, development, construction		144		136		280
Total real estate loans		8,798		3,649		12,447
Commercial		311		—		311
Consumer and other		236		109		345
Total TDRs	$	9,345	$	3,758	$	13,103

As of December 31, 2012	Accruing		Non-Accrual		Total
Real estate loans:
Residential	$	6,446	$	1,778	$	8,224
Commercial		1,589		3,701		5,290
Land, development, construction		202		231		433
Total real estate loans		8,237		5,710		13,947
Commercial		315		5		320
Consumer and other		289		104		393
Total TDRs	$	8,841	$	5,819	$	14,660

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 $310 and $320 and partial charge offs of $160 and $191 on the TDR loans described above during the three and six month period ending June 30, 2013.

Loans are modified to minimize loan losses when we believe the modification will improve the borrower’s financial condition and ability to repay the loan. We typically do not forgive principal. We generally either reduce interest rates or decrease monthly payments for a temporary period of time and those reductions of cash flows are capitalized into the loan balance. We may also extend maturities, convert balloon loans to longer term amortizing loans, or vice versa, or change interest rates between variable and fixed rate. Each borrower and situation is unique and we try to accommodate the borrower and minimize the Company’s potential losses. Approximately 71% of our TDRs are current pursuant to their modified terms, and about $3,758, or approximately 29% of our total TDRs are not performing pursuant to their modified terms. There does not appear to be any significant difference in success rates with one type of concession versus another.

26

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

The following table presents loans by class modified as for which there was a payment default within twelve months following the modification during the period ending June 30, 2013 and December 31, 2012.

	Period ending June 30, 2013				Year ending December 31, 2012
	Number of loans		Recorded investment		Number of loans		Recorded investment
Residential		4	$	834		10	$	758
Commercial real estate		2		566		4		2,567
Land, development, construction		1		53		4		156
Consumer and other		—		—		1		45
Total		7	$	1,453		19	$	3,526

The Company recorded a provision for loan loss expense of $112 and $113 and partial charge offs of $70 and $90 on TDR loans that subsequently defaulted as described above during the three and six month period ending June 30, 2013, respectively.

The following tables present loans individually evaluated for impairment by class of loans as of June 30, 2013 and December 31, 2012. The recorded investment is less than the unpaid principal balance due to partial charge-offs.

As of June 30, 2013	Unpaid principal balance		Recorded investment		Allowance for loan losses allocated
With no related allowance recorded:
Residential real estate	$	5,549	$	5,486	$	—
Commercial real estate		26,527		24,597		—
Land, development, construction		1,931		940		—
Commercial		1,687		1,589		—
Consumer, other		6		6
With an allowance recorded:
Residential real estate		3,387		3,119		270
Commercial real estate		2,218		2,077		251
Land, development, construction		583		540		56
Consumer, other		348		339		23
Total	$	42,236	$	38,693	$	600

27

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

As of December 31, 2012	Unpaid principal balance			Recorded investment		Allowance for loan losses allocated
With no related allowance recorded:
Residential real estate	$	1,712	��	$	1,712	$	—
Commercial real estate		33,789			31,171		—
Land, development, construction		2,042			1,087		—
Commercial		3,556			3,465		—
With an allowance recorded:
Residential real estate		8,624			8,224		610
Commercial real estate		1,742			1,689		277
Land, development, construction		664			433		107
Commercial		5			5		1
Consumer, other		395			393		27
Total	$	52,529		$	48,179	$	1,022

Three month period ending June, 30, 2013	Average of impaired loans		Interest income recognized during impairment		Cash basis interest income recognized
Real estate loans:
Residential	$	8,777	$	70	$	—
Commercial		27,192		288		—
Land, development, construction		1,407		6		—
Total real estate loans		37,376		364		—
Commercial loans		1,656		8		—
Consumer and other loans		366		3		—
Total	$	39,398	$	375	$	—

Six month period ending June 30, 2013	Average  of impaired loans		Interest income recognized during impairment		Cash basis interest income recognized
Real estate loans:
Residential	$	9,108	$	143	$	—
Commercial		28,730		545		—
Land, development, construction		1,417		8		—
Total real estate loans		39,255		696		—
Commercial loans		2,124		16		—
Consumer and other loans		378		6		—
Total	$	41,757	$	718	$	—

28

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

Three month period ending June, 30, 2012	Average of impaired loans		Interest income recognized during impairment		Cash basis interest income recognized
Real estate loans:
Residential	$	9,807	$	76	$	—
Commercial		31,444		336		—
Land, development, construction		4,413		6		—
Total real estate loans		45,664		418		—
Commercial loans		4,768		30		—
Consumer and other loans		468		5		—
Total	$	50,900	$	453	$	—

Six month period ending June 30, 2012	Average of impaired loans		Interest income recognized during impairment		Cash  basis interest income recognized
Real estate loans:
Residential	$	9,972	$	138	$	—
Commercial		29,613		661		—
Land, development, construction		6,666		15		—
Total real estate loans		42,251		814		—
Commercial loans		5,559		46		—
Consumer and other loans		483		10		—
Total	$	52,293	$	870	$	—

Nonperforming loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

Nonperforming loans were as follows:
	June 30, 2013		Dec 31, 2012
Non accrual loans	$	24,219	$	25,448
Loans past due over 90 days and still accruing interest		615		293
Total non performing loans	$	24,834	$	25,741

29

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual by class of loans as of June 30, 2013 and December 31, 2012, excluding loans acquired from the FDIC with evidence of credit deterioration and covered by FDIC loss share agreements:

As of June 30, 2013	Nonaccrual		Loans past due over 90 days still accruing
Residential real estate	$	13,115	$	—
Commercial real estate		7,364		—
Land, development, construction		1,811		—
Commercial		1,661		—
Consumer, other		268		615
Total	$	24,219	$	615

As of December 31, 2012	Nonaccrual		Loans past due over 90 days still accruing
Residential real estate	$	9,993	$	—
Commercial real estate		11,459		—
Land, development, construction		2,032		—
Commercial		1,650		—
Consumer, other		314		293
Total	$	25,448	$	293

The following table presents the aging of the recorded investment in past due loans as of June 30, 2013 and December 31, 2012, excluding loans acquired from the FDIC with evidence of credit deterioration and covered by FDIC loss share agreements:

	Accruing Loans
As of June 30, 2013	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	$	437,946	$	3,070	$	798	$	—	$	3,868	$	420,963	$	13,115
Commercial real estate		504,487		5,516		987		—		6,503		490,620		7,364
Land/dev/construction		60,928		531		107		—		638		58,479		1,811
Commercial		124,465		109		268		—		377		122,427		1,661
Consumer		50,935		289		50		615		954		49,713		268
	$	1,178,761	$	9,515	$	2,210	$	615	$	12,340	$	1,142,202	$	24,219

	Accruing Loans
As of December 31, 2012	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	$	428,554	$	1,632	$	677	$	—	$	2,309	$	416,252	$	9,993
Commercial real estate		480,494		1,663		1,147		—		2,810		466,225		11,459
Land/dev/construction		55,474		115		624		—		739		52,703		2,032
Commercial		124,225		203		416		—		619		121,956		1,650
Consumer		51,279		456		489		293		1,238		49,727		314
	$	1,140,026	$	4,069	$	3,353	$	293	$	7,715		1,106,863	$	25,448

30

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $500 that are non-homogeneous loans, such as commercial, commercial real estate, land, land development and construction 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.

31

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

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 June 30, 2013 and December 31, 2012, 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 June 30, 2013
Loan Category	Pass		Special Mention		Substandard		Doubtful
Residential real estate	$	408,287	$	5,443	$	24,216	$	—
Commercial real estate		415,471		55,414		33,602		—
Land/dev/construction		45,920		11,596		3,412		—
Commercial		116,659		3,435		4,371		—
Consumer		48,501		706		1,728		—
	$	1,034,838	$	76,594	$	67,329	$	—

	As of December 31, 2012
Loan Category	Pass		Special Mention		Substandard		Doubtful
Residential real estate	$	400,244	$	4,797	$	23,513	$	—
Commercial real estate		394,238		44,933		41,323		—
Land/dev/construction		39,650		11,994		3,830		—
Commercial		114,067		3,978		6,180		—
Consumer		49,894		613		772		—
	$	998,093	$	66,315	$	75,618	$	—

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 covered by FDIC loss share agreements, based on payment activity as of June 30, 2013:

	Residential		Consumer
Performing	$	424,831	$	50,052
Nonperforming		13,115		883
Total	$	437,946	$	50,935

Purchased Credit Impaired Loans:

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 June 30, 2013 and December 31, 2012. Contractually required principal and interest payments have been adjusted for estimated prepayments.

32

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

	Jun 30, 2013			Dec 31, 2012
Contractually required principal and interest	$	449,146		$	534,989
Non-accretable difference		(90,060	)		(142,855	)
Cash flows expected to be collected		359,086			392,134
Accretable yield		(99,407	)		(93,107	)
Carrying value of acquired loans	$	259,679		$	299,027
Allowance for loan losses		(2,020	)		(2,649	)
Carrying value less allowance for loan losses	$	257,659		$	296,378

We adjusted our estimates of future expected losses, cash flows and renewal assumptions during the current quarter. These adjustments resulted in an increase in expected cash flows and accretable yield, and a decrease in the non-accretable difference. We reclassified approximately $14,512 and $19,917 from non-accretable difference to accretable yield during the three and six month period ending June 30, 2013, respectively, to reflect our adjusted estimates of future expected cash flows. The table below summarizes the changes in total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and carrying value of the loans during the three and six month period ending June 30, 2013.

Activity during the three month period ending June 30, 2013	Mar 31, 2013			income accretion		all other adjustments			June 30, 2013
Contractually required principal and interest	$	486,531				$	(37,385	)	$	449,146
Non-accretable difference		(110,243	)		—		20,183			(90,060	)
Cash flows expected to be collected		376,288					(17,202	)		359,086
Accretable yield		(95,499	)		8,020		(11,928	)		(99,407	)
Carry value of acquired loans	$	280,789		$	8,020	$	(29,130	)	$	259,679
Activity during the six month period ending June 30, 2013	Dec 31, 2012			income accretion		all other adjustments			June 30, 2013
Contractually required principal and interest	$	534,989				$	(85,843	)	$	449,146
Non-accretable difference		(142,855	)		—		52,795			(90,060	)
Cash flows expected to be collected		392,134					(33,048	)		359,086
Accretable yield		(93,107	)		15,847		(22,147	)		(99,407	)
Carry value of acquired loans	$	299,027		$	15,847	$	(55,195	)	$	259,679

33

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

NOTE 7: FDIC indemnification asset

The FDIC Indemnification Asset represents the estimated amounts due from the FDIC pursuant to the Loss Share Agreements related to the acquisition of the three failed banks acquired in 2010 and the acquisition of two failed banks in 2012. The activity in the FDIC loss share indemnification asset is as follows:

	Six months period ended June 30, 2013			Twelve months period ended Dec 31, 2012
Beginning of the year	$	119,289		$	50,642
Effect of acquisitions		—			85,088
Amortization, net		(5,471	)		(3,096	)
Indemnification income - ORE		2,115			4,185
Indemnification of foreclosure expense		1,245			2,425
Proceeds from FDIC		(28,371	)		(21,787	)
Impairment of loan pool		(91	)		1,832
Period end balance	$	88,716		$	119,289

Impairment of loan pools

When a loan pool (with loss share) is impaired, the impairment expense is included in provision for loan losses, and 80% of that loss is recognized as income from FDIC reimbursement, and included in this line item. During the six month period ended June 30, 2013, the estimated amount of impairment declined, which resulted in a reversal of $91 of income previously recognized.

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.

Amortization , net

On the date of an FDIC acquisition, the Company estimates the amount and the timing of expected future losses that will be covered by the FDIC loss sharing agreements. The FDIC indemnification asset is initially recorded as the discounted value of the reimbursement of losses from the FDIC. Discount accretion is recognized over the estimated period of losses, and the Company updates its estimate of future losses and the timing of the losses each quarter. To the extent management estimates that future losses are less than initial estimate of future losses, management adjusts its estimates of future expected reimbursements and any decrease in the expected future reimbursements is amortized over the shorter of the loss share period or the life of the related loan by amortization in this line item. Based upon the most recent estimate of future losses, the Company expects less reimbursements from the FDIC and is amortizing the estimated reduction as described in the previous sentence.

Indemnification of foreclosure expense

Indemnification of foreclosure expense represents approximately 80% of the foreclosure related expenses incurred and reimbursable from the FDIC. Foreclosure expense is included in non interest expense. The amount of the reimbursable portion of the expense reduces foreclosure expense included in non interest expense.

34

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

NOTE 8: Subsequent event

On July 29, 2013, CenterState Banks, Inc. (“CSFL”) entered into an Agreement and Plan of Merger (“Agreement”) by and between CenterState Banks, Inc. and Gulfstream Bancshares, Inc. (“GS” or “Gulfstream”), whereby GS will be merged with and into CSFL. Pursuant to and simultaneously with entering into the Agreement, CSFL’s wholly owned subsidiary bank, CenterState Bank of Florida, N.A. (“CSB”) and GS’s wholly owned subsidiary bank, Gulfstream Business Bank (“GSB”) have entered into a Plan of Merger and Merger Agreement (“Bank Merger Agreement”) whereby GSB will be merged with and into CSB simultaneously with the merger of GS with and into CSFL.

At June 30, 2013, Gulfstream reported total consolidated assets of $572,324, total loans of $367,702 and total deposits of $486,010. Gulfstream is headquartered in Stuart, Florida with branch offices in St. Lucie, Jupiter, and Delray Beach, Florida.

Under the terms of the Agreement each outstanding share of GS common stock is entitled to receive 3.012 shares of CSFL common stock and $14.65 cash payment. The Agreement has been unanimously approved by the board of directors of CSFL and GS. The transaction is expected to close early in the first quarter of 2014 subject to customary conditions, including all applicable regulatory approvals and GS shareholder approval.

NOTE 9: Effect of new pronouncements

In October 2012, the Financial Accounting Standards Board (“FASB”) issued guidance on the subsequent accounting for an indemnification asset recognized at the acquisition date as a result of a government assisted acquisition of a financial institution. When an entity recognizes such an indemnification asset and subsequently a change in the cash flows expected to be collected on the indemnification asset occurs as a result of a change in the cash flows expected to be collected on the indemnified asset, the guidance requires the entity to recognize the change in the measurement of the indemnification asset on the same basis as the indemnified assets. Any amortization of changes in value of the indemnification asset should be limited to the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets. The amendments are effective for fiscal years beginning on or after December 15, 2012 and early adoption is permitted. The amendments are to be applied prospectively to any new indemnification assets acquired after the date of adoption and to indemnification assets existing as of the date of adoption arising from a government-assisted acquisition of a financial institution. The impact of this amendment on the consolidated financial statements had no effect since the Company’s prior accounting for the indemnification asset was consistent with this standard.

In February 2013, the Financial Accounting Standards Board (FASB) issued updated guidance related to disclosure of reclassification amounts out of other comprehensive income. The standard requires that companies present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. The new requirements will take effect for public companies in fiscal years, and interim periods within those years, beginning after December 15, 2012. The Company adopted this standard on January 1, 2013. The effect of adopting this standard increased our disclosure surrounding reclassification items out of accumulated other comprehensive income.

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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 JUNE 30, 2013 AND DECEMBER 31, 2012

Overview

Our total assets decreased slightly between June 30, 2013 and year end 2012 primarily due to decrease in total deposits partially offset by increases in federal funds purchased (i.e. deposits from our correspondent banks) and repurchase agreements. Our total stockholders’ equity also decreased during this six month period due to changes in unrealized gains and losses in our available for sale securities portfolio, as a result of rising interest rates.

Our total loans, excluding loans covered by FDIC loss share agreements, increased during the six month period by an annualized rate of approximately 6.9%, all resulting from in-market loan origination. The indemnification asset decreased $30,573 during the period due to cash payments received from the FDIC for loss reimbursements and through amortization of losses previously estimated, that are currently no longer expected to occur. 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 $82,395 at June 30, 2013 (approximately 3.5% of total assets) as compared to $117,588 at December 31, 2012 (approximately 5.0% 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 agency securities and municipal tax exempt securities, were $492,087 at June 30, 2013 (approximately 20.9% of total assets) compared to $425,758 at December 31, 2012 (approximately 18.0% of total assets), an increase of $66,329 or 15.6%. 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.

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Trading securities

We also have a trading securities portfolio. Realized and unrealized gains and losses are included in trading securities revenue, a component of our non interest income, in our Condensed Consolidated Statement of Earnings and Comprehensive Income. Securities purchased for this portfolio have primarily been various municipal securities. We held no trading securities as of June 30, 2013. A list of the activity in this portfolio is summarized below.

	Six month period ended June 30, 2013			Six month period ended June 30, 2012
Beginning balance	$	5,048		$	—
Purchases		129,249			191,078
Proceeds from sales		(134,428	)		(190,294	)
Net realized gain on sales		131			277
Ending balance	$	—		$	1,061

Loans held for sale

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

	Six month period ended June 30, 2013			Six month period ended June 30, 2012
Beginning balance	$	2,709		$	3,741
Loans originated		10,887			7,342
Proceeds from sales		(12,006	)		(9,510	)
Net realized gain on sales		170			119
Ending balance	$	1,760		$	1,692

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 six months ended June 30, 2013, were $1,420,367, or 70.0% of average earning assets, as compared to $1,442,883, or 68.5% of average earning assets, for the six month period ending June 30, 2012. Total loans at June 30, 2013 and December 31, 2012 were $1,435,587 and $1,435,863, respectively. This represents a loan to total asset ratio of 60.9% and 60.8% and a loan to deposit ratio of 72.6% and 71.9%, at June 30, 2013 and December 31, 2012, respectively.

Approximately 17.9% of our loans, or $256,828, 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 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

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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, approximately fifty percent (50%) are collateralized by single family residential real estate and forty-six percent (46%) are collateralized by commercial real estate. The remainder of our covered loans included land, land development, and non-real estate commercial loans.

Our loans that are not covered by FDIC loss sharing agreements at June 30, 2013 and December 31, 2012 were $1,178,759 and $1,139,568, respectively, an increase of $39,191, or approximately 6.9% annualized. New loan origination (funded during the quarter of origination) for the current quarter compared to the prior four quarters is presented in the table below:

	2Q13			1Q13			4Q12			3Q12			2Q12
New loan production (funded)	$	84,303		$	43,607		$	54,819		$	51,519		$	48,357
Average yield		4.13	%		4.27	%		4.31	%		4.40	%		4.43	%

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 sharing agreements, total $1,435,587 at June 30, 2013. Of this amount, approximately 88% are collateralized by real estate, 9% are commercial non real estate loans and the remaining 3% are consumer and other non real estate loans. We have approximately $566,876 of single family residential loans which represents about 39% of our total loan portfolio. Our largest category of loans is commercial real estate which represents approximately 43% of our total loan portfolio.

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

	June 30, 2013			Dec 31, 2012
Loans not covered by FDIC loss share agreements
Real estate loans
Residential	$	437,946		$	428,554
Commercial		504,487			480,494
Land, development, construction		60,928			55,474
Total real estate		1,003,361			964,522
Commercial		124,465			124,225
Consumer and other loans (note 1)		2,851			2,732
Consumer and other		48,084			48,547
Loans before unearned fees and cost		1,178,761			1,140,026
Unearned fees/costs		(2	)		(458	)
Allowance for loan losses for non-covered loans		(21,800	)		(24,033	)
Net loans not covered by FDIC loss share agreements		1,156,959			1,115,535
Loans covered by FDIC loss share agreements
Real estate loans
Residential		128,930			142,480
Commercial		118,999			134,413
Land, development, construction		4,897			13,259
Total real estate		252,826			290,152
Commercial		4,002			6,143
		256,828			296,295
Allowance for loan losses for covered loans		(2,020	)		(2.649	)
Net loans covered by FDIC loss share agreements		254,808			293,646
Total loans, net of allowance for loan losses	$	1,411,767		$	1,409,181

note 1: Consumer loans acquired pursuant to three FDIC assisted transactions of failed financial institutions during the third quarter of 2010 and two in the first quarter of 2012. These loans are not covered by an FDIC loss share agreement. The loans are being accounted for pursuant to ASC Topic 310-30.

Credit quality and allowance for loan losses

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

On at least a quarterly basis, management reviews each impaired loan to determine whether it should have a specific reserve or partial charge-off. Management relies on appraisals to help make this determination. Updated appraisals are obtained for collateral dependent loans when a loan is scheduled for renewal or refinance. In addition, if the classification of the loan is downgraded to substandard, identified as impaired, or placed on 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.

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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.

The allowance consists of three 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.

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

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In the table below we have shown the components, as discussed above, of our allowance for loan losses at June 30, 2013 and December 31, 2012.

	June 30, 2013							Dec 31, 2012							increase (decrease)
	loan		ALLL					loan		ALLL					loan			ALLL
	balance		balance		%			Balance		balance		%			balance			balance
Impaired loans	$	38,693	$	600		1.55	%	$	48,179	$	1,022		2.12	%	$	(9,486	)	$	(422	)	-57bps
Non impaired loans		1,140,066		21,200		1.86	%		1,091,389		23,011		2.11	%		48,677			(1,811	)	-25bps
Loans (note 1)		1,178,759		21,800		1.85	%		1,139,568		24,033		2.11	%		39,191			(2,233	)	-26bps
Covered loans (note 2)		256,828		2,020					296,295		2,649					(39,467	)		(629	)
Total loans	$	1,435,587	$	23,820		1.66	%	$	1,435,863	$	26,682		1.86	%	$	(276	)	$	(2,862	)	-20bps

note 1: Total loans not covered by FDIC loss share agreements.

note 2: Loans covered by FDIC loss share agreements. Eighty percent of any losses in this portfolio will be reimbursed by the FDIC and recognized as FDIC Indemnification income and included in non-interest income within the Company’s condensed consolidated statement of operations. Five loan pools with an aggregate carrying value of $30,109 are impaired at June 30, 2013, and have a specific allowance of $2,020. The aggregate carrying value of $30,109 represents approximately 78% of the underlying loan balances outstanding.

The general loan loss allowance (non-impaired loans) decreased by a net amount of $1,811. This decrease was primarily due to the continued improvement in our credit metrics, partially offset by the growth in our non-impaired loan portfolio.

The specific loan loss allowance (impaired loans) is the aggregate of the results of individual analyses prepared for each one of the impaired loans not covered by an FDIC loss sharing agreement on a loan level basis. We recorded partial charge offs in lieu of specific allowance for a number of the impaired loans. The Company’s impaired loans have been written down by $3,543 to $38,693 ($38,093 when the $600 specific allowance is considered) from their legal unpaid principal balance outstanding of $42,236. In the aggregate, total impaired loans have been written down to approximately 90% of their legal unpaid principal balance, and non-performing impaired loans have been written down to approximately 69% of their legal unpaid principal balance. The Company’s total non-performing loans (non-accrual loans plus loans past due greater than 90 days and still accruing, $24,834 at June 30, 2013) have been written down to approximately 77% of their legal unpaid principal balance.

Any losses in loans covered by FDIC loss share agreements, as described in note 2 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. On a quarterly basis, management updates the amount of loan principal and interest cash flows expected to be collected, incorporating assumptions regarding default rates, loss severities, the amounts and timing of prepayments and other factors that are reflective of current market conditions. Probable decreases in expected loan principal cash flows trigger the recognition of impairment, which is then measured as the present value of the expected principal loss plus any related foregone interest cash flows discounted at the pool’s effective interest rate. Impairments that occur after the acquisition date are recognized through the provision for loan losses.

The allowance is increased by the provision for loan losses, which is a charge to current period earnings and decreased by loan charge-offs net of recoveries of prior period loan charge-offs. Loans are charged against the allowance when management believes collection of the principal is unlikely. We believe our allowance for loan losses was adequate at June 30, 2013. However, we recognize that many factors can adversely impact various segments of the Company’s market and customers, and therefore there is no assurance as to the amount of losses or probable losses which may develop in the future. The tables below summarize the changes in allowance for loan losses during the periods presented.

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	Loans not covered by FDIC loss share agreements			Loans covered by FDIC loss share agreements			Total
Three months ended June 30, 2013
Balance at beginning of period	$	22,631		$	2,623		$	25,254
Loans charged-off		(2,603	)		(515	)		(3,118	)
Recoveries of loans previously charged-off		310			—			310
Net charge-offs		(2,293	)		(515	)		(2,808	)
Provision for loan loss		1,462			(88	)		1,374
Balance at end of period	$	21,800		$	2,020		$	23,820
Three months ended June 30, 2012
Balance at beginning of period	$	25,569		$	441		$	26,010
Loans charged-off		(3,322	)		—			(3,322	)
Recoveries of loans previously charged-off		601			—			601
Net charge-offs		(2,721	)		—			(2,721	)
Provision for loan losses		786			1,108			1,894
Balance at end of period	$	23,634		$	1,549		$	25,183
Six months ended June 30, 2013
Balance at beginning of period	$	24,033		$	2,649		$	26,682
Loans charged-off		(3,834	)		(515	)		(4,349	)
Recoveries of loans previously charged-off		473			—			473
Net charge-offs		(3,361	)		(515	)		(3,876	)
Provision for loan loss		1,128			(114	)		1,014
Balance at end of period	$	21,800		$	2,020		$	23,820
Six months ended June 30, 2012
Balance at beginning of period	$	27,585		$	359		$	27,944
Loans charged-off		(8,148	)		—			(8,148	)
Recoveries of loans previously charged-off		761			—			761
Net charge-offs		(7,387	)		—			(7,387	)
Provision for loan losses		3,436			1,190			4,626
Balance at end of period	$	23,634		$	1,549		$	25,183

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 2.11% at June 30, 2013, compared to 2.26% at December 31, 2012.

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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 $30,526 at June 30, 2013, compared to $33,386 at December 31, 2012. Non performing assets as a percentage of total assets were 1.30% at June 30, 2013, compared to 1.41% at December 31, 2012.

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

	June 30,			Dec 31,
	2013			2012
Non-accrual loans (note 1)	$	24,219		$	25,448
Past due loans 90 days or more and still accruing interest (note 1)		615			293
Total non-performing loans (NPLs) (note 1)		24,834			25,741
Other real estate owned (OREO) (note 1)		5,469			6,875
Repossessed assets other than real estate (note 1)		223			770
Total non-performing assets (NPAs) (note 1)	$	30,526		$	33,386
Total NPLs as a percentage of total loans (note 1)		2.11	%		2.26	%
Total NPAs as a percentage of total assets (note 1)		1.30	%		1.41	%
Loans past due between 30 and 89 days and accruing interest as a percentage of total loans (note 1)		0.99	%		0.65	%
Allowance for loan losses, excluding FDIC covered loans	$	21,800		$	24,033
Allowance for loan losses as a percentage of NPLs (note 1)		88	%		93	%

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 June 30, 2013 the Company had reported a total of 189 non accrual loans with an aggregate carrying value of $24,219, compared to December 31, 2012 when 184 non accrual loans with an aggregate book value of $25,448 were reported. 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	$	13,115		54	%		99
Commercial real estate		7,364		30	%		31
Land, development, construction		1,811		8	%		13
Commercial		1,661		7	%		22
Consumer, other		268		1	%		24
Total non accrual loans at June 30, 2013	$	24,219		100	%		189

The second largest component of non performing assets after non accrual loans is OREO, excluding OREO covered by FDIC loss share agreements. At June 30, 2013, total OREO was $34,001. Of this amount, $28,532 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 $5,469 at June 30, 2013. OREO is carried at the lower of cost or market less the estimated cost to sell. Further declines in real estate values can affect the market value of these assets. Any further decline in market value beyond its cost basis is recorded as a current expense in the Company’s Condensed Consolidated Statement of Earnings and Comprehensive Income. OREO is further delineated in the table below.

(unaudited) Description of repossessed real estate	carrying amount at June 30, 2013
8 single family homes	$	754
10 residential building lots		900
14 commercial buildings		2,194
Land / various acreages		1,621
Total, excluding OREO covered by FDIC loss share agreements	$	5,469

Impaired loans are defined as loans that management has determined will not repay as agreed pursuant to the terms of the related loan agreement. Small balance homogeneous loans are not considered for impairment purposes. Once management has determined a loan is impaired, we perform a specific reserve analysis to determine if it is probable that we will eventually collect all contractual cash flows. If management determines that a shortfall is probable, then a specific valuation allowance is placed against the loan. This loan is then placed on non accrual basis, even if the borrower is current with his/her contractual payments, and will remain on non accrual until payments collected reduce the loan balance such that it eliminates the specific valuation allowance or equivalent partial charge-down or other economic conditions change. At June 30, 2013 we have identified a total of $38,693 impaired loans, excluding loans covered by FDIC loss share agreements. A specific valuation allowance of $600 has been attached to $6,075 of the total identified impaired loans. It should also be noted that the total carrying balance of the impaired loans, or $38,693, has been partially charged down by $3,543 from their aggregate legal unpaid balance of $42,236. The table below summarizes impaired loan data for the periods presented.

	June 30, 2013		Dec 31, 2012
Impaired loans with a specific valuation allowance	$	6,075	$	10,744
Impaired loans without a specific valuation allowance		32,618		37,435
Total impaired loans	$	38,693	$	48,179
Amount of allowance for loan losses allocated to impaired loans	$	600	$	1,022
Performing TDRs	$	9,345	$	8,841
Non performing TDRs, included in NPLs		3,758		5,819
Total TDRs (TDRs are required to be included in impaired loans)	$	13,103	$	14,660
Impaired loans that are not TDRs		25,590		33,519
Total impaired loans	$	38,693	$	48,179

We continually analyze our loan portfolio in an effort to recognize and resolve problem assets as quickly and efficiently as possible. As of June 30, 2013, 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 $96,506 at June 30, 2013 compared to $97,954 at December 31, 2012, a decrease of $1,448 or 1.5%. This amount is the result of purchases net of disposals of $1,504 less $2,952 of depreciation expense.

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Deposits

During the six month period ending June 30, 3013, total deposits decreased by $20,540 (time deposits decreased by $65,493 and non-time deposits increased by $44,953). The loan to deposit ratio was approximately 72.6% at June 30, 2013. The table below summarizes the Company’s deposit mix at the dates indicated.

	June 30, 2013		% of total			Dec 31, 2012		% of total
Demand - non-interest bearing	$	555,721		28	%	$	519,510		26	%
Demand - interest bearing		456,660		23	%		452,961		23	%
Savings deposits		241,609		12	%		238,216		12	%
Money market accounts		312,891		16	%		311,241		16	%
Time deposits		409,811		21	%		475,304		23	%
Total deposits	$	1,976,692		100	%	$	1,997,232		100	%

Securities sold under agreement to repurchase

Our subsidiary bank enters into borrowing arrangements with our retail business customers by agreements to repurchase (“securities sold under agreements to repurchase”) under which the bank pledges investment securities owned and under their control as collateral against the one-day borrowing arrangement. These short-term borrowings totaled $21,890 at June 30, 2013 compared to $18,792 at December 31, 2012.

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 June 30, 2013 we had $53,274 of correspondent bank deposits or federal funds purchased, compared to $38,932 at December 31, 2012.

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 June 30, 2013 and December 31, 2012, there were no outstanding advances from the Federal Home Loan Bank.

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.

45

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.

In November 2011, we acquired certain assets and assumed certain liabilities of Federal Trust Corporation (“FTC”) from The Hartford Financial Services Group, Inc. (“Hartford”) pursuant to an acquisition agreement, including FTC’s corporate debenture and related trust preferred security issued through FTC’s finance subsidiary Federal Trust Statutory Trust (“FTC Trust) in the amount of $5,000. 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 295 basis points). The corporate debenture and the trust preferred security each have 30-year lives maturing in 2033. The trust preferred security and the corporate debenture are callable by the Company or the FTC Trust, at their respective option after five years, and sooner in specific events, subject to prior approval by the Federal Reserve, if then required. The Company has treated the corporate debenture as Tier 1 capital up to the maximum amount allowed under the Federal Reserve guidelines for federal regulatory purposes. The Company is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability.

Stockholders’ equity

Stockholders’ equity at June 30, 2013, was $271,416, or 11.5% of total assets, compared to $273,531, or 11.6% of total assets at December 31, 2012. The increase in stockholders’ equity was due to the following items:

$273,531	Total stockholders’ equity at December 31, 2012
7,334	Net income during the period
(602)	Dividends paid on common shares, $0.02 per common share
(9,249)	Net decrease in market value of securities available for sale, net of deferred taxes
402	Employee equity based compensation
$271,416	Total stockholders’ equity at June 30, 2013

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 June 30, 2013, our subsidiary bank exceeded the minimum capital levels to be considered “well capitalized” under the terms of the guidelines.

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Selected consolidated capital ratios at June 30, 2013 and December 31, 2012 for the Company and for the Company’s subsidiary bank, CenterState Bank of Florida, N.A. are presented in the tables below. There is no threshold for “well-capitalized” status for bank holding companies.

CenterState Banks, Inc. (the Company)	Actual					Capital Adequacy					Excess
	Amount		Ratio			Amount		Ratio			Amount
June 30, 2013
Total capital (to risk weighted assets)	$	256,945		18.2	%	$	112,810		>8	%	$	144,135
Tier 1 capital (to risk weighted assets)		239,242		17.0	%		56,405		>4	%		182,837
Tier 1 capital (to average assets)		239,242		10.3	%		93,228		>4	%		146,014
December 31, 2012
Total capital (to risk weighted assets)	$	249,016		17.9	%	$	111,360		>8	%	$	137,656
Tier 1 capital (to risk weighted assets)		231,501		16.6	%		55,680		>4	%		175,821
Tier 1 capital (to average assets)		231,501		9.9	%		93,432		>4	%		138,069

CenterState Bank of Florida, N.A.	Actual					Well capitalized					Excess
	Amount		Ratio			Amount		Ratio			Amount
June 30, 2013
Total capital (to risk weighted assets)	$	240,039		17.1	%	$	140,394		>10	%	$	99,645
Tier 1 capital (to risk weighted assets)		222,415		15.8	%		84,236		>6	%		138,179
Tier 1 capital (to average assets)		222,415		9.6	%		116,138		>5	%		106,277
December 31, 2012
Total capital (to risk weighted assets)	$	230,590		16.6	%	$	138,530		>10	%	$	92,060
Tier 1 capital (to risk weighted assets)		213,161		15.4	%		83,118		>6	%		130,043
Tier 1 capital (to average assets)		213,161		9.2	%		115,789		>5	%		97,372

In July 2013, the two federal banking regulatory agencies that have authority to regulate the Company’s capital resources and capital structure (the Board of Governors of the Federal Reserve System (FRB) and Federal Deposit Insurance Corporation (FDIC)) took action to finalize the application to the United States banking industry of new regulatory capital requirements that are established by the international banking framework commonly referred to as “Basel III” and to implement certain other changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. As anticipated by management of the Company (see the related discussion included in Item 1 of the Company’s annual report on Form 10-K for the year 2012 filed in March 2013), these rules make significant changes to the U.S. bank regulatory capital framework, and generally increase capital requirements for banking organizations. However, in response to concerns expressed by community banks such as the Company, the final rules addressed previous concerns of community banks about the proposed rules’ regulatory capital treatment of trust preferred securities, unrealized gains and losses on available-for-sale securities in accumulated other comprehensive income (“AOCI”) and mortgage risk weights. Therefore, although the Company has not yet had the opportunity to analyze the final rules in detail in order to determine their likely impact upon the Company, and although management does continue to believe that such requirements will in general increase the amount of capital that the Company and the Bank may be required to maintain under these new standards, the Company now believes that its prior concerns regarding volatility and trust preferred securities have been favorably addressed by the final rules. The Company does not presently expect that any materially burdensome compliance efforts with these final capital rules will be required of us prior to January 1, 2015.

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COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED JUNE 30, 2013 AND 2012

Overview

We recognized net income of $2,758 or $0.09 per share basic and diluted for the three month period ended June 30, 2013, compared to net income of $3,714 or $0.12 per share basic and diluted for the same period in 2012. The primary items resulting in decreased earnings between the two periods is a decrease in the level of fixed income sales in our correspondent banking division, and higher FDIC indemnification asset amortization due to better than previously estimated performance of our credit impaired loans acquired pursuant to our FDIC assisted acquisitions of five failed financial institutions. These items along with others are discussed and analyzed in greater detail below.

Net interest income/margin

Net interest income increased $697 or 3% to $22,980 during the three month period ended June 30, 2013 compared to $22,283 for the same period in 2012. The $697 increase was the result of a $100 decrease in interest income and a $797 decrease in interest expense.

Interest earning assets averaged $2,038,303 during the three month period ended June 30, 2013 as compared to $2,099,466 for the same period in 2012, a decrease of $61,163, or 3%. The yield on average interest earning assets increased 11bps to 4.82% (11bps to 4.89% tax equivalent basis) during the three month period ended June 30, 2013, compared to 4.71% (4.78% tax equivalent basis) for the same period in 2012. The combined effects of the $61,163 decrease in average interest earning assets and the 11bps (11bps tax equivalent basis) increase in yield on average interest earning assets resulted in the $100 ($98 tax equivalent basis) decrease in interest income between the two periods.

Interest bearing liabilities averaged $1,510,237 during the three month period ended June 30, 2013 as compared to $1,696,412 for the same period in 2012, a decrease of $186,175, or 11%. The cost of average interest bearing liabilities decreased 15bps to 0.40% during the three month period ended June 30, 2013, compared to 0.55% for the same period in 2012. The combined effects of the $186,175 decrease in average interest bearing liabilities and the 15bps decrease in cost of average interest bearing liabilities resulted in the $797 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 three month periods ended June 30, 2013 and 2012 on a tax equivalent basis.

	Three months ended June 30,
	2013								2012
	Average balance			Interest inc / exp		Average rate			Average balance			Interest inc / exp		Average rate
Loans (notes 1, 2, 8)	$	1,155,737		$	13,995		4.86	%	$	1,122,268		$	14,718		5.27	%
Covered loans		264,769			7,943		12.03	%		347,191			6,480		7.51	%
Securities - taxable		392,974			2,097		2.14	%		475,099			3,063		2.59	%
Securities - tax exempt (note 8)		44,841			566		5.06	%		38,755			521		5.41	%
Fed funds sold and other (note 3)		179,982			228		0.51	%		116,153			145		0.50	%
Total interest earning assets		2,038,303			24,829		4.89	%		2,099,466			24,927		4.78	%
Allowance for loan losses		(23,962	)							(26,254	)
All other assets		367,969								413,498
Total assets	$	2,382,310							$	2,486,710
Interest bearing deposits (note 4)		1,433,806			1,330		0.37	%		1,590,953			2,004		0.51	%
Fed funds purchased		35,619			6		0.07	%		54,131			7		0.05	%
Other borrowings (note 5)		23,831			21		0.35	%		24,373			25		0.41	%
Note payable (9)		—			—		—			10,000			111		4.42	%
Corporate debenture		16,981			150		3.54	%		16,955			157		3.75	%
Total interest bearing liabilities		1,510,237			1,507		0.40	%		1,696,412			2,304		0.55	%
Demand deposits		574,345								507,138
Other liabilities		22,135								15,720
Stockholders’ equity		275,593								267,440
Total liabilities and stockholders’ equity	$	2,382,310							$	2,486,710
Net interest spread (tax equivalent basis) (note 6)							4.49	%							4.23	%
Net interest income (tax equivalent basis)				$	23,322							$	22,623
Net interest margin (tax equivalent basis) (note 7)							4.59	%							4.33	%

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 $190 and $211 for the three month periods ended June 30, 2013 and 2012.

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 ($122) and ($493) for the three month periods ended June 30, 2013 and 2012.

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

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

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

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

note 9: Represents a $10,000 short-term note used to facilitate the two FDIC assisted transactions during January 2012 which was subsequently repaid during July 2012.

During the current quarter the covered loan yield increased because the cash received (or the estimate of the value of the asset repossessed and transferred to OREO) exceeded the amount that was previously estimated. This occurred in several loan pools during the quarter and resulted in additional income of approximately $1,047. Excluding this amount from interest income during the current quarter, the yield on the FDIC covered loan portfolio is equal to approximately 10.45% compared to the reported 12.03%, and the NIM is equal to approximately 4.38% compared to the reported 4.59%.

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Provision for loan losses

The provision for loan losses decreased $520, or 27%, to $1,374 during the three month period ending June 30, 2013 compared to $1,894 for the comparable period in 2012. 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. Our loss factors associated with our general allowance for loan losses is the primary reason causing the decrease in our provision expense due to our continued improvement in substantially all of our credit metrics, in particular our historical loss factors which is a derivative of our historical charge-off rates. 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 June 30, 2013 was $9,863 compared to $16,541 for the comparable period in 2012. This decrease was the result of the following components listed in the table below.

Three month period ending:	June 30, 2013			June 30, 2012			$ increase (decrease)			% increase (decrease)
Income from correspondent banking and bond sales division	$	4,904		$	9,966		$	(5,062	)		(50.8	%)
Other correspondent banking related revenue		705			741			(36	)		(4.9	%)
Wealth management related revenue		1,130			950			180			18.9	%
Service charges on deposit accounts		2,081			1,595			486			30.5	%
Debit, prepaid, ATM and merchant card related fees		1,342			1,172			170			14.5	%
BOLI income		338			363			(25	)		(6.9	%)
Other service charges and fees		231			147			84			57.1	%
Gain on sale of securities		1,008			726			282			38.8	%
Subtotal	$	11,739		$	15,660		$	(3,921	)		(25.0	%)
FDIC indemnification asset-amortization(see explanation below)		(3,272	)		(348	)		(2,924	)		(840.2	%)
FDIC indemnification income		1,396			1,229			167			13.6	%
Total non-interest income	$	9,863		$	16,541		$	(6,678	)		(40.4	%)

When the estimate of future losses in covered loans decrease (i.e. future cash flows increase), this increase in cash flows is accreted into interest income, increasing yields, over the remaining life of the related loan pool. The indemnification asset (“IA”) represents the amount that is expected to be collected from the FDIC for reimbursement of 80% of the estimated losses in the covered pools. When the Company decreases its estimate of future losses, the expected reimbursement from the FDIC, or IA, is decreased by 80% of this amount. The decrease in estimated reimbursements is expensed (negative accretion) over the lesser of the remaining expected life of the related loan pool(s) or the remaining term of the related loss share agreement(s), and is included in the Company’s non-interest income as a negative amount.

At June 30, 2013, the total IA on the Company’s balance sheet was $88,716. Of this amount, the Company expects to receive reimbursements from the FDIC of approximately $58,556 related to future estimated losses, and expects to write-off approximately $30,160 for previously estimated losses that are no longer expected. The $30,160 is now expected to be paid by the borrower (or realized upon the sale of

50

OREO) instead of a reimbursement from the FDIC. At June 30, 2013, the $30,160 previously estimated reimbursements from the FDIC will be written off as expense (negative accretion) in the Company’s non-interest income as summarized below.

Year			Year
2013 (6 months)	22.8	%	2017	5.8	%
2014	31.9	%	2018	4.8	%
2015	16.1	%	2019 thru 2021	7.4	%
2016	11.2	%	Total	100.0	%

When a FDIC covered OREO property is sold at a loss, the loss is included in non-interest expense as loss on sale of OREO, and 80% of the loss is recorded as FDIC OREO indemnification income and included in non-interest income. When a FDIC covered loan pool is impaired, the impairment expense is included in loan loss provision expense, and 80% of the impairment expense is recorded as FDIC pool impairment indemnification income and included in non-interest income.

Income from correspondent banking and bond sales division means the spread earned from buying and selling fixed income securities among our correspondent bank customers. We do not take a position in the transaction, but merely earn a spread for facilitating it. Gross revenue depends on the amount of sales volume which is volatile from period to period. Sales volume was substantially less in the current quarter compared to the second quarter of 2012.

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Non-interest expense

Non-interest expense for the three months ended June 30, 2013 decreased $4,285, or 13.5%, to $27,373, compared to $31,658 for the same period in 2012. Components of our non-interest expenses are listed in the table below.

	June 30,			June 30,			$ increase			% increase
Three month period ending:	2013			2012			(decrease)			(decrease)
Employee salaries and wages	$	12,142		$	15,650		$	(3,508	)		(22.4	%)
Employee incentive/bonus compensation		1,171			897			274			30.6	%
Employee stock based compensation		143			164			(21	)		(12.8	%)
Employer 401K matching contributions		308			303			5			1.7	%
Deferred compensation expense		134			123			11			8.9	%
Health insurance and other employee benefits		796			1,052			(256	)		(24.3	%)
Payroll taxes		733			814			(81	)		(10.0	%)
Other employee related expenses		344			231			113			48.9	%
Incremental direct cost of loan origination		(537	)		(184	)		(353	)		(191.9	%)
Total salaries, wages and employee benefits		15,234			19,050			(3,816	)		(20.0	%)
Loss (gain) on sale of OREO		177			(120	)		297			247.5	%
Loss (gain) on sale of FDIC covered OREO		386			349			37			10.6	%
Valuation write down (recovery) of OREO		295			418			(123	)		(29.4	%)
Valuation write down of FDIC covered OREO		1,385			417			968			232.1	%
Loss on repossessed assets other than real estate		104			40			64			160.0	%
Loan put back expense		—			22			(22	)		(100.0	%)
Foreclosure and repossession related expenses		438			649			(211	)		(32.5	%)
Foreclosure and repo expense, FDIC (note 1)		349			423			(74	)		(17.5	%)
Total credit related expenses		3,134			2,198			936			42.6	%
Occupancy expense		1,942			2,481			(539	)		(21.7	%)
Depreciation of premises and equipment		1,455			1,416			39			2.8	%
Supplies, stationary and printing		285			303			(18	)		(5.9	%)
Marketing expenses		586			609			(23	)		(3.8	%)
Data processing expense		912			962			(50	)		(5.2	%)
Legal, auditing and other professional fees		844			601			243			40.4	%
Bank regulatory related expenses		635			658			(23	)		(3.5	%)
Postage and delivery		267			264			3			1.1	%
Debit, prepaid, ATM and merchant card related expenses		428			285			143			50.2	%
CDI and Trust intangible amortization		301			359			(58	)		(16.2	%)
Impairment – bank property held for sale		—			165			(165	)		(100.0	%)
Internet and telephone banking		239			224			15			6.7	%
Put-back option amortization		—			182			(182	)		(100.0	%)
Operational write-offs and losses		14			91			(77	)		(84.6	%)
Correspondent accounts and Federal Reserve charges		120			146			(26	)		(17.8	%)
Conferences/Seminars/Education/Training		138			161			(23	)		(14.3	%)
Director fees		102			80			22			27.5	%
Travel expenses		104			63			41			65.1	%
Other expenses		633			746			(113	)		(15.2	%)
Subtotal		27,373			31,044			(3,671	)		(11.8	%)
Merger, acquisition and conversion related expenses		—			614			(614	)		(100.0	%)
Total non-interest expense	$	27,373		$	31,658		$	(4,285	)		(13.5	%)

note 1: These are foreclosure and repossession related expenses related to FDIC covered assets, and are shown net of FDIC reimbursable amounts pursuant to FDIC loss share agreements.

As noted in the table above, employee salaries and wages decreased approximately 22.4% between the two periods presented. This was due primarily to: (1) a decrease in bond sales from our

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correspondent banking division. Our bond salesmen are compensated on a commission basis. When sales volume decreases, as was the case in the current quarter compared to the second quarter of 2012, their compensation decreases; and, (2) we purchased two failed banks with FDIC assistance in January 2012, adding to our overall operating expenses beginning as of the end of January 2012. However, overall operating expenses have declined due to our efficiency efforts primarily taking effect in the last two quarters of 2012, which included the consolidation and closing of 15 branches (added one new branch) and the reduction of branch and back office personnel.

Provision for income taxes

We recognized an income tax provision for the three months ended June 30, 2013 of $1,338 on pre-tax income of $4,096 (an effective tax rate of 32.7%) compared to an income tax provision of $1,558 on pre-tax income of $5,272 (an effective tax rate of 29.5%) for the comparable quarter in 2012.

COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2013 AND 2012

Overview

We recognized net income of $7,334 or $0.24 per share basic and diluted for the six month period ended June 30, 2013, compared to net income of $5,027 or $0.16 per share basic and diluted for the same period in 2012. The primary differences between the two periods include an increase in our net interest margin (“NIM”) for reasons discussed below, reduction in loan loss provision expense due primarily to improved credit metrics and merger related expenses recognized in the first quarter of last year related to our acquisitions from the FDIC of First Guaranty Bank and Central Florida State Bank. These positive contributions to our net increase in net income are partially offset by lower bond sales from our correspondent banking and bond sales division. Each of these items, along with other items are discussed and analyzed in greater detail below.

Net interest income/margin

Net interest income increased $2,539 or 6% to $45,802 during the six month period ended June 30, 2013 compared to $43,263 for the same period in 2012. The $2,539 increase was the result of a $788 increase in interest income and a $1,751 decrease in interest expense.

Interest earning assets averaged $2,028,322 during the six month period ended June 30, 2013 as compared to $2,114,304 for the same period in 2012, a decrease of $85,982, or 4%. The yield on average interest earning assets increased 29bps to 4.86% (28bps to 4.92% tax equivalent basis) during the six month period ended June 30, 2013, compared to 4.57% (4.64% tax equivalent basis) for the same period in 2012. The combined effects of the $85,982 decrease in average interest earning assets and the 29bps (28bps tax equivalent basis) increase in yield on average interest earning assets resulted in the $788 ($746 tax equivalent basis) increase in interest income between the two periods.

Interest bearing liabilities averaged $1,527,288 during the six month period ended June 30, 2013 as compared to $1,709,335 for the same period in 2012, a decrease of $182,047, or 11%. The cost of average interest bearing liabilities decreased 17bps to 0.40% during the six month period ended June 30, 2013, compared to 0.57% for the same period in 2012. The combined effects of the $182,047 decrease in average interest bearing liabilities and the 17bps decrease in cost of average interest bearing liabilities resulted in the $1,751 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 six month periods ended June 30, 2013 and 2012 on a tax equivalent basis.

		Six months ended June 30,
		2013								2012
		Average			Interest		Average			Average			Interest		Average
		balance			inc / exp		rate			balance			inc / exp		rate
Loans (notes 1, 2, 8)		$	1,145,960		$	27,790		4.89	%	$	1,119,536		$	29,239		5.25	%
Covered loans			274,407			15,692		11.53	%		331,807			11,744		7.12	%
Securities- taxable			405,017			4,485		2.23	%		502,525			6,433		2.57	%
Securities- tax exempt (note 8)			43,942			1,108		5.08	%		38,121			1,042		5.50	%
Fed funds sold and other (note 3)			158,996			426		0.54	%		122,315			295		0.49	%
Total interest earning assets			2,028,322			49,501		4.92	%		2,114,304			48,753		4.64	%
Allowance for loan losses			(25,364	)							(27,337	)
All other assets			383,068								404,403
Total assets		$	2,386,026							$	2,491,370
Interest bearing deposits (note 4)			1,448,079			2,713		0.38	%		1,600,564			4,235		0.53	%
Fed funds purchased			40,115			11		0.06	%		61,487			15		0.05	%
Other borrowings (note 5)			22,116			39		0.36	%		21,499			49		0.46	%
Note payable (9)	��		—			—		—			8,833			194		4.42	%
Corporate debenture			16,978			300		3.56	%		16,952			321		3.81	%
Total interest bearing liabilities			1,527,288			3,063		0.40	%		1,709,335			4,814		0.57	%
Demand deposits			560,041								501,018
Other liabilities			23,660								15,693
Stockholders’ equity			275,037								265,324
Total liabilities and stockholders’ equity		$	2,386,026							$	2,491,370
Net interest spread (tax equivalent basis) (note 6)								4.52	%							4.07	%
Net interest income (tax equivalent basis)					$	46,438							$	43,939
Net interest margin (tax equivalent basis) (note 7)								4.62	%							4.18	%

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 $236 and $379 for the six month periods ended June 30, 2013 and 2012.

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 ($301) and ($1,049) for the six month periods ended June 30, 2013 and 2012.

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

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

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

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

note 9: Represents a $10,000 short-term note used to facilitate the two FDIC assisted transactions during January 2012 which was subsequently repaid during July 2012.

During the current six month period the covered loan yield increased because the cash received (or the estimate of the value of the asset repossessed and transferred to OREO) exceeded the amount that was previously estimated. This occurred in several loan pools during the six month period and resulted in additional income of approximately $2,896. Excluding this amount from interest income during the current six month period, the yield on the FDIC covered loan portfolio is equal to approximately 9.40% compared to the reported 11.53%, and the NIM is equal to approximately 4.33% compared to the reported 4.62%.

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Provision for loan losses

The provision for loan losses decreased $3,612, or 78%, to $1,014 during the six month period ending June 30, 2013 compared to $4,626 for the comparable period in 2012, which was one of the primary reasons for the increase in our current period’s net income. 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. Our loss factors associated with our general allowance for loan losses is the primary reason causing the decrease in our provision expense due to our continued improvement in substantially all of our credit metrics, in particular our historical loss factors which is a derivative of our historical charge-off rates. 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 six months ended June 30, 2013 was $20,142 compared to $30,186 for the comparable period in 2012. This decrease was the result of the following components listed in the table below.

Six month period ending:	June 30, 2013			June 30, 2012			$ increase (decrease)			% increase (decrease)
Income from correspondent banking and bond sales division	$	11,044		$	17,750		$	(6,706	)		(37.8	%)
Other correspondent banking related revenue		1,570			1,311			259			19.8	%
Wealth management related revenue		2,200			1,818			382			21.0	%
Service charges on deposit accounts		3,900			3,078			822			26.7	%
Debit, prepaid, ATM and merchant card related fees		2,627			2,221			406			18.3	%
BOLI income		677			721			(44	)		(6.1	%)
Other service charges and fees		533			598			(65	)		(10.9	%)
Gain on sale of securities		1,038			1,328			(290	)		(21.8	%)
Bargain purchase gain		—			453			(453	)		n/a
Subtotal		23,589		$	29,278			(5,689	)		(19.4	%)
FDIC indemnification asset-amortization(see explanation below)		(5,471	)		(885	)		(4,586	)		518.2	%
FDIC indemnification income		2,024			1,793			231			12.9	%
Total non-interest income	$	20,142		$	30,186		$	(10,044	)		(33.3	%)

When the estimate of future losses in covered loans decrease (i.e. future cash flows increase), this increase in cash flows is accreted into interest income, increasing yields, over the remaining life of the related loan pool. The indemnification asset (“IA”) represents the amount that is expected to be collected from the FDIC for reimbursement of 80% of the estimated losses in the covered pools. When the Company decreases its estimate of future losses, the expected reimbursement from the FDIC, or IA, is decreased by 80% of this amount. The decrease in estimated reimbursements is expensed (negative accretion) over the lesser of the remaining expected life of the related loan pool(s) or the remaining term of the related loss share agreement(s), and is included in the Company’s non-interest income as a negative amount.

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At June 30, 2013, the total IA on the Company’s balance sheet was $88,716. Of this amount, the Company expects to receive reimbursements from the FDIC of approximately $58,556 related to future estimated losses, and expects to write-off approximately $30,160 for previously estimated losses that are no longer expected. The $30,160 is now expected to be paid by the borrower (or realized upon the sale of OREO) instead of a reimbursement from the FDIC. At June 30, 2013, the $30,160 previously estimated reimbursements from the FDIC will be written off as expense (negative accretion) in the Company’s non-interest income as summarized below.

Year			Year
2013 (6 months)	22.8	%	2017	5.8	%
2014	31.9	%	2018	4.8	%
2015	16.1	%	2019 thru 2021	7.4	%
2016	11.2	%	Total	100.0	%

When a FDIC covered OREO property is sold at a loss, the loss is included in non-interest expense as loss on sale of OREO, and 80% of the loss is recorded as FDIC OREO indemnification income and included in non-interest income. When a FDIC covered loan pool is impaired, the impairment expense is included in loan loss provision expense, and 80% of the impairment expense is recorded as FDIC pool impairment indemnification income and included in non-interest income.

Income from correspondent banking and bond sales division means the spread earned from buying and selling fixed income securities among our correspondent bank customers. We do not take a position in the transaction, but merely earn a spread for facilitating it. Gross revenue depends on the amount of sales volume which is volatile from period to period. Sales volume was substantially less in the current period versus the comparable period in 2012.

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Non-interest expense

Non-interest expense for the six months ended June 30, 2013 decreased $7,281, or 11.8%, to $54,463, compared to $61,744 for the same period in 2012. Components of our non-interest expenses are listed in the table below.

Six month period ending:	June 30, 2013			June 30, 2012			$ increase (decrease)			% increase (decrease)
Employee salaries and wages	$	24,807		$	29,569		$	(4,762	)		(16.1	%)
Employee incentive/bonus compensation		2,265			1,659			606			36.5	%
Employee stock based compensation		289			324			(35	)		(10.7	%)
Employer 401K matching contributions		675			640			35			5.5	%
Deferred compensation expense		275			246			29			11.6	%
Health insurance and other employee benefits		1,747			2,073			(326	)		(15.7	%)
Payroll taxes		1,750			1,907			(157	)		(8.3	%)
Other employee related expenses		640			417			223			53.6	%
Incremental direct cost of loan origination		(974	)		(324	)		(650	)		200.7	%
Total salaries, wages and employee benefits		31,474			36,511			(5,037	)		(13.8	%)
Loss (gain) on sale of OREO		253			(156	)		409			262.6	%
(Gain) loss on sale of FDIC covered OREO		309			657			(348	)		(53.0	%)
Valuation write down (recovery) of OREO		637			356			281			78.9	%
Valuation write down of FDIC covered OREO		2,030			734			1,296			176.6	%
Loss on repossessed assets other than real estate		346			138			208			150.6	%
Loan put back expense		4			46			(42	)		(91.2	%)
Foreclosure and repossession related expenses		879			1,274			(395	)		(31.0	%)
Foreclosure and repo expense, FDIC (note 1)		697			740			(43	)		(5.8	%)
Total credit related expenses		5,155			3,789			1,366			36.0	%
Occupancy expense		3,834			4,542			(708	)		(15.6	%)
Depreciation of premises and equipment		2,952			2,683			269			10.0	%
Supplies, stationary and printing		573			618			(45	)		(7.2	%)
Marketing expenses		1,114			1,193			(79	)		(6.6	%)
Data processing expense		1,796			1,967			(171	)		(8.7	%)
Legal, auditing and other professional fees		1,627			1,221			406			33.2	%
Bank regulatory related expenses		1,216			1,358			(142	)		(10.5	%)
Postage and delivery		552			587			(35	)		(6.0	%)
Debit, prepaid, ATM and merchant card related expenses		953			587			366			62.4	%
CDI and Trust intangible amortization		607			677			(70	)		(10.3	%)
Impairment – bank property held for sale		—			165			(165	)		(100.0	%)
Internet and telephone banking		463			501			(38	)		(7.6	%)
Put-back option amortization		37			364			(327	)		(89.8	%)
Operational write-offs and losses		30			233			(203	)		(87.1	%)
Correspondent accounts and Federal Reserve charges		229			279			(50	)		(18.1	%)
Conferences/Seminars/Education/Training		291			291			—			0.0	%
Director fees		204			171			33			19.0	%
Travel expenses		178			91			87			95.0	%
Other expenses		1,178			1,434			(256	)		(17.8	%)
Subtotal		54,463			59,262			(4,799	)		(8.1	%)
Merger, acquisition and conversion related expenses		—			2,482			(2,482	)		(100.0	%)
Total non-interest expense	$	54,463		$	61,744		$	(7,281	)		(11.8	%)

note 1: These are foreclosure and repossession related expenses related to FDIC covered assets, and are shown net of FDIC reimbursable amounts pursuant to FDIC loss share agreements.

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As noted in the table above, employee salaries and wages decreased approximately 16.1% between the two periods presented. This was due primarily to: (1) a decrease in bond sales from our correspondent banking division. Our bond salesmen are compensated on a commission basis. When sales volume decreases, as was the case in the current period compared to the comparable period in 2012, their compensation decreases; and, (2) we purchased two failed banks with FDIC assistance in January 2012, adding to our overall operating expenses beginning as of the end of January 2012. However, overall operating expenses have declined due to our efficiency efforts primarily taking effect in the last two quarters of 2012, which included the consolidation and closing of 15 branches (added one new branch) and the reduction of branch and back office personnel.

Provision for income taxes

We recognized an income tax provision for the six months ended June 30, 2013 of $3,133 on pre-tax income of $10,467 (an effective tax rate of 29.9%) compared to an income tax provision of $2,052 on pre-tax income of $7,079 (an effective tax rate of 29.0%) for the comparable period in 2012.

Liquidity

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

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

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

Off-Balance Sheet Arrangements

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES: MARKET RISK

Market risk

We believe interest rate risk is the most significant market risk impacting us. We monitor and manage interest rate risk using interest rate sensitivity “gap” analysis to measure the impact of market interest rate changes on net interest income. See our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 for disclosure of the quantitative and qualitative information regarding the interest rate risk inherent in interest rate risk sensitive instruments as of December 31, 2012. There have been no changes in the assumptions used in monitoring interest rate risk as of June 30, 2013. 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, 2012 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

60

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:August 6, 2013	By:	/s/ Ernest S. Pinner
		Ernest S. Pinner
		Chairman, President and Chief
		Executive Officer
Date:August 6, 2013	By:	/s/ James J. Antal
		James J. Antal
		Senior Vice President
		and Chief Financial Officer

61