Edgar Filing: CenterState Banks, Inc.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Form 10-Q

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2010

¨	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		(I.R.S. Employer
of Incorporation or Organization)		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.

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		30,004,761 shares
(class)		Outstanding at November 1, 2010

CENTERSTATE BANKS, INC. AND SUBSIDIARIES

INDEX


	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed consolidated balance sheets at September 30, 2010 (unaudited) and December 31, 2009 (audited)		2

Condensed consolidated statements of earnings for the three and nine months ended September 30, 2010 and 2009 (unaudited)		3

Condensed consolidated statements of cash flows for the nine months ended September 30, 2010 and 2009 (unaudited)		5

Notes to condensed consolidated financial statements (unaudited)		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		21

Item 3. Quantitative and Qualitative Disclosures About Market Risk		45

Item 4. Controls and Procedures		45

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		46

Item 1a. Risk Factors		46

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		46

Item 3. Defaults Upon Senior Securities		46

Item 4. Other Information		46

Item 5. Exhibits		46

SIGNATURES		47

CERTIFICATIONS		48

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands of dollars)


	As of September 30, 2010			As of December 31, 2009
ASSETS
Cash and due from banks	$	41,447		$	19,139
Federal funds sold and Federal Reserve Bank deposits		85,312			173,268

Cash and cash equivalents		126,759			192,407
Trading securities, at fair value		1,581			—
Investment securities available for sale, at fair value		619,282			463,186
Loans held for sale, at lower of cost or market		1,810			—

Loans		1,129,809			959,021
Less allowance for loan losses		(28,012	)		(23,289	)

Net Loans		1,101,797			935,732

Bank premises and equipment, net		74,484			62,368
Accrued interest receivable		7,342			6,378
Federal Home Loan Bank and Federal Reserve Bank stock		9,766			7,908
Goodwill		38,035			32,840
Core deposit intangible		4,092			2,422
Bank owned life insurance		27,190			15,665
Other repossessed real estate owned (“OREO”)		21,266			10,196
FDIC indemnification asset		58,175			—
Deferred income taxes, net		3,752			3,495
Excess bank property held for sale		—			2,368
Prepaid expense and other assets		28,112			16,334

TOTAL ASSETS	$	2,123,443		$	1,751,299


LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand—non-interest bearing	$	330,255		$	233,688
Demand—interest bearing		253,950			193,527
Savings and money market accounts		417,952			307,513
Time deposits		718,148			570,308

Total deposits		1,720,305			1,305,036

Securities sold under agreement to repurchase		19,216			29,562
Federal funds purchased		72,859			144,939
Federal Home Loan Bank advances		15,000			21,000
Corporate debentures		12,500			12,500
Accrued interest payable		1,270			1,268
Accounts payables and accrued expenses		24,806			7,584

Total liabilities		1,865,956			1,521,889

Stockholders’ equity:
Preferred Stock, $.01 par value; 5,000,000 shares authorized, no shares issued and outstanding at September 30, 2010 and December 31, 2009		—			—
Common stock, $.01 par value: 100,000,000 shares authorized; 30,004,761 and 25,773,229 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively		300			258
Additional paid-in capital		227,252			193,464
Retained earnings		21,828			28,623
Accumulated other comprehensive income		8,107			7,065

Total stockholders’ equity		257,487			229,410

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,123,443		$	1,751,299

See notes to the accompanying condensed consolidated financial statements

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)

(in thousands of dollars, except per share data)


	Three months ended						Nine months ended
	Sept 30, 2010			Sept 30, 2009			Sept 30, 2010			Sept 30, 2009
Interest income:
Loans	$	14,409		$	13,751		$	40,678		$	39,858
Investment securities available for sale:
Taxable		4,203			4,559			12,940			14,432
Tax-exempt		367			375			1,089			1,122
Federal funds sold and other		127			162			400			388

		19,106			18,847			55,107			55,800

Interest expense:
Deposits		4,085			4,624			12,089			16,226
Securities sold under agreement to repurchase		19			27			69			78
Federal funds purchased		23			108			88			461
Federal Home Loan Bank advances		104			153			314			497
Corporate debentures		112			110			316			369

		4,343			5,022			12,876			17,631

Net interest income		14,763			13,825			42,231			38,169
Provision for loan losses		16,448			8,682			24,568			14,510

Net interest (expense) income after loan loss provision		(1,685	)		5,143			17,663			23,659

Other income:
Service charges on deposit accounts		1,713			1,405			4,964			3,838
Income from correspondent banking and bond sales division		11,828			5,630			25,556			10,797
Commissions from sale of mutual funds and annuities		318			130			783			426
Debit card and ATM fees		458			344			1,325			976
Loan related fees		128			103			375			316
BOLI income		220			156			524			398
Gain on sale of securities		151			257			3,226			978
Trading securities revenue		249			312			448			312
Bargain purchase gain, acquisition of failed institution		2,010			—			2,010			—
Other service charges and fees		680			199			1,176			562

		17,755			8,536			40,387			18,603

Other expenses:
Salaries, wages and employee benefits		16,009			10,093			40,401			24,860
Occupancy expense		1,633			1,408			4,568			3,985
Depreciation of premises and equipment		971			728			2,432			2,160
Supplies, stationary and printing		248			210			746			630
Marketing expenses		615			464			1,766			1,350
Data processing expense		726			621			1,924			1,775
Legal, auditing and other professional fees		1,554			602			2,936			1,539
Core deposit intangible (CDI) amortization		142			197			348			596
Postage and delivery		198			113			433			323
ATM and debit card related expenses		365			264			964			770
Bank regulatory expenses		819			612			2,121			2,454
Loss on sale of repossessed real estate (“OREO”)		153			175			177			464
Valuation write down of repossessed real estate (“OREO”)		1,273			482			2,583			1,387
Loss on repossessed assets other than real estate		171			176			404			444
Foreclosure related expenses		803			218			1,497			675
Other expenses		1,850			1,300			4,553			3,097

Total other expenses		27,530			17,663			67,853			46,509
Loss before benefit for income taxes		(11,460	)		(3,984	)		(9,803	)		(4,247	)
Benefit for income taxes		(4,184	)		(1,754	)		(3,824	)		(2,057	)

Net loss	$	(7,276	)	$	(2,230	)	$	(5,979	)	$	(2,190	)

See notes to the accompanying condensed consolidated financial statements.

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)

(in thousands of dollars, except per share data)

(continued)


	Three months ended						Nine months ended
	Sept 30, 2010			Sept 30, 2009			Sept 30, 2010			Sept 30, 2009
Net income (loss)	$	(7,276	)	$	(2,230	)	$	(5,979	)	$	(2,190	)

Net income (loss) available for common shareholders	$	(7,276	)	$	(3,569	)	$	(5,979	)	$	(4,323	)

Earnings (loss) per share:
Basic	$	(0.25	)	$	(0.17	)	$	(0.22	)	$	(0.28	)
Diluted	$	(0.25	)	$	(0.17	)	$	(0.22	)	$	(0.28	)
Common shares used in the calculation of earnings per share:
Basic		28,789,008			20,713,017			26,800,582			15,253,492
Diluted		28,789,008			20,713,017			26,800,582			15,253,492

See notes to the accompanying condensed consolidated financial statements.

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands of dollars)


	Nine months ended Sept 30,
	2010			2009
Cash flows from operating activities:
Net loss	$	(5,979	)	$	(2,190	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for loan losses		24,568			14,510
Depreciation of premises and equipment		2,432			2,160
Amortization of purchase accounting adjustments		(1,851	)		(806	)
Net amortization/accretion of investment securities		4,556			3,870
Net deferred loan origination fees		(24	)		60
Gain on sale of securities available for sale		(3,226	)		(978	)
Trading securities revenue		(448	)		(312	)
Purchases of trading securities		(215,284	)		(26,964	)
Proceeds from sale of trading securities		214,151			23,845
Repossessed real estate owned valuation write down		2,583			1,387
Loss on sale of repossessed real estate owned		177			464
Repossessed assets other than real estate valuation write down		163			—
Loss on sale of repossessed assets other than real estate		241			444
Gain on sale of loans held for sale		(36	)		—
Loans originated and held for sale		(6,003	)		—
Proceeds from sale of loans held for sale		4,229			—
Loss (gain) on disposal of and or sale of fixed assets		25			(82	)
Deferred income taxes		(711	)		(3,152	)
Stock based compensation expense		518			312
Bank owned life insurance income		(524	)		(398	)
Bargain purchase gain from a FDIC assisted failed bank acquisition		(2,010	)		—
Net cash from changes in:
Net changes in accrued interest receivable, prepaid expenses, and other assets		(68	)		131
Net change in accrued interest payable, accrued expense, and other liabilities		2,313			4,181

Net cash provided by operating activities		19,792			16,482

Cash flows from investing activities:
Purchases of investment securities available for sale		(326,692	)		(18,461	)
Purchases of mortgage backed securities available for sale		(199,870	)		(474,704	)
Purchases of FHLB and FRB stock		(479	)		(2,226	)
Proceeds from maturities of investment securities available for sale		14,154			5,493
Proceeds from called investment securities available for sale		121,365			7,124
Proceeds from pay-downs of mortgage backed securities available for sale		93,744			114,954
Proceeds from the sale of investment securities available for sale		31,009			41,795
Proceeds from sales of mortgage backed securities available for sale		121,849			87,625
Proceeds from sales of FHLB and FRB stock		241			143
Decrease (increase) in loans, net of repayments		14,731			(74,712	)
Proceeds from wholesale disposal of problem loans		8,579			—
Purchases of premises and equipment, net		(12,705	)		(5,543	)
Proceeds from sale of fixed assets		—			92
Proceeds from sale of repossessed real estate		3,322			2,794
Purchase of bank owned life insurance		(11,000	)		(5,000	)
Net cash from FDIC assisted acquisitions of failed banks		55,368			—
Net cash from acquisition of Ocala branches		—			155,640

Net cash used in investing activities		(86,384	)		(164,986	)

See notes to the accompanying condensed consolidated financial statements.

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands of dollars)

(continued)


	Nine months ended Sept 30,
	2010			2009
Cash flows from financing activities:
Net increase in deposits		71,426			83,573
Net decrease in securities sold under agreement to repurchase		(10,346	)		(3,129	)
Net (decrease) increase in federal funds purchased		(72,080	)		129,297
Net (decrease) increase in FHLB advances and other borrowings		(20,741	)		1,250
Stock options exercised, including tax benefit		735			187
Net proceeds from public stock offering		32,766			81,003
Redemption of perpetual preferred stock		—			(27,875	)
Dividends paid		(816	)		(2,078	)
Adjustment to net proceeds from preferred stock and warrant issue		—			(5	)

Net cash provided by (used in) financing activities		944			262,223

Net (decrease) increase in cash and cash equivalents		(65,648	)		113,719
Cash and cash equivalents, beginning of period		192,407			77,552

Cash and cash equivalents, end of period	$	126,759		$	191,271

Transfer of loans to other real estate owned	$	8,356		$	9,134

Cash paid during the period for:
Interest	$	13,371		$	18,786

Income taxes	$	384		$	896

See notes to the accompanying condensed consolidated financial statements.

NOTE 1: Nature of Operations and basis of presentation

Our consolidated financial statements include the accounts of CenterState Banks, Inc. (the “Parent Company,” “Company” or “CSFL”), and our wholly owned subsidiary banks and their wholly owned subsidiary, CenterState Shared Services (“CSS”). Currently, our four subsidiary banks operate through 49 full service banking locations in 13 counties throughout Central Florida, providing traditional deposit and lending products and services to their commercial and retail customers. After the branch acquisition transaction with TD Bank N.A., announced on August 9, 2010, closes, the Company will then have a total of 53 full service banking locations in 14 counties throughout Central Florida. This transaction is expected to close during the first quarter of 2011.

In addition, we also operate a correspondent banking and bond sales division. The division is integrated with and part of our lead subsidiary bank located in Winter Haven, Florida, although the majority of our bond salesmen, traders and operational personnel are physically housed in leased facilities located in Birmingham, Alabama, Atlanta, Georgia and Winston Salem, North Carolina. The business lines of this division are primarily divided into three inter-related revenue generating activities. The first, and largest, revenue generator is commissions earned on fixed income security sales. The second category includes: (a) correspondent bank deposits (i.e. federal funds purchased); (b) correspondent bank

checking account deposits; and (c) loans to correspondent banks. The third revenue generating category includes fees from safe-keeping activities, bond accounting services for correspondents, asset/liability consulting related activities, international wires, and other clearing and corporate checking account services. The customer base includes small to medium size financial institutions primarily located in Florida, Alabama, Georgia, North Carolina, South Carolina, Tennessee, Virginia and West Virginia.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009. In our opinion, all adjustments, consisting primarily of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods have been made. The results of operations of the nine month period ended September 30, 2010 are not necessarily indicative of the results expected for the full year.

NOTE 2: Common stock outstanding and earnings per share data

Basic earnings per share is based on the weighted average number of common shares outstanding during the periods. Diluted earnings per share includes the weighted average number of common shares outstanding during the periods and the further dilution from stock options using the treasury method. There were 1,175,000 and 1,000,000 stock options that were anti dilutive at September 30, 2010 and 2009, respectively. The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the periods presented (dollars are in thousands, except per share data).


	Three months ended Sept 30,						Nine months ended Sept 30,
	2010			2009			2010			2009
Numerator for basic and diluted earnings per share:
Net loss	$	(7,276	)	$	(2,230	)	$	(5,979	)	$	(2,190	)
Preferred stock dividend accrued		—			(349	)		—			(1,045	)
Preferred stock discount accretion		—			(990	)		—			(1,088	)

Net loss available for common shareholders	$	(7,276	)	$	(3,569	)	$	(5,979	)	$	(4,323	)

Denominator for basic and diluted earnings per share:
Denominator for basic earnings per share—weighted average shares		28,789,008			20,713,017			26,800,582			15,253,492
Effect of dilutive securities: Employee stock
Options and stock grants		—			—			—			—

Denominator for diluted earnings per share—adjusted weighted average shares		28,789,008			20,713,017			26,800,582			15,253,492

Basic loss per share	$	(0.25	)	$	(0.17	)	$	(0.22	)	$	(0.28	)
Diluted loss per share	$	(0.25	)	$	(0.17	)	$	(0.22	)	$	(0.28	)

NOTE 3: Comprehensive income

As required by generally accepted accounting principles, certain transactions and other economic events that bypass our income statement must be displayed as other comprehensive income. Our comprehensive income consists of net earnings and unrealized gains and losses on securities available-for-sale, net of deferred income taxes. The table below sets forth our comprehensive income for the periods indicated below (in thousands of dollars).


	Three months ended						Nine months ended
	Sept 30, 2010			Sept 30, 2009			Sept 30, 2010			Sept 30, 2009
Net loss	$	(7,276	)	$	(2,230	)	$	(5,979	)	$	(2,190	)

Other comprehensive gain (loss), net of tax:
Unrealized holding gain (loss) arising during the period, net of tax		(330	)		5,440			3,054			7,600
Reclassified adjustments for gain included in net income, net of income taxes of $28, $97, $1,214 and $368, respectively, for the periods presented		(123	)		160			(2,012	)		610

Other comprehensive gain (loss), net of tax		(453	)		5,280			1,042			6,990

Comprehensive income (loss)	$	(7,729	)	$	3,050		$	(4,937	)	$	4,800

NOTE 4: 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 trading securities and 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 September 30, 2010 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 September 30, 2010, the fair value was determined by broker price indications of similar or same securities.

All of the mortgaged back securities (“MBSs”) listed below are residential FNMA, FHLMC, and GNMA MBSs. Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands of dollars).


			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 December 31, 2009
Assets:
Available for sale securities
U.S. government agencies and government sponsored enterprises	$	17,910	$	—	$	17,910	$	—
Mortgage backed securities		409,780		—		409,780		—
Municipal securities		35,496		—		35,496		—

at September 30, 2010
Assets:
Trading securities	$	1,581	$	—	$	1,581	$	—
Available for sale securities
U.S. government agencies and government sponsored enterprises		182,206		—		182,206		—
Mortgage backed securities		401,957		—		401,957		—
Municipal securities		35,119		—		35,119		—

Assets and liabilities measured at fair value on a non-recurring basis are summarized below (in thousands of dollars).


			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 December 31, 2009
Assets:
Impaired loans	$	10,779	$	—	$	—	$	10,779
Other real estate owned	$	10,196	$	—	$	—	$	10,196
Excess bank real estate held for sale	$	2,368	$	—	$	—	$	2,368

at September 30, 2010
Assets
Impaired loans	$	16,844	$	—	$	—	$	16,844
Other real estate owned	$	21,266	$	—	$	—	$	21,266

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $22,069,000 with a valuation allowance of $5,225,000 at September 30, 2010, and a carrying amount of $15,391,000 with a valuation allowance of $4,612,000 at December 31, 2009. The Company recorded a provision for loan loss expense of $3,579,000 and $3,709,000 on these loans during the three month and nine month periods ending September 30, 2010, respectively.

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.

The fair value of our repossessed real estate (“other real estate owned” or “OREO”) is determined using Level 3 inputs which include current and prior appraisals and estimated costs to sell. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. The decline in fair value of other real estate owned was $1,273,000 and $2,583,000 during the three month and nine month periods ending September 30, 2010, respectively. Changes in fair value were recorded directly as an adjustment to current earnings through non interest expense.

Excess bank real estate held for sale represents a single family house we purchased from one of our executives when the executive was relocated to another county, and land which was originally purchased for future branch sites. The fair value of excess bank real estate held for sale is determined using Level 3 inputs which include current and prior appraisals and estimated costs to sell. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Changes in fair value are recorded directly as an adjustment to current earnings through non interest expense. The reason for the decrease between December 31, 2009 and September 30, 2010, was the transfer of land to bank premises and equipment for future branch sites, and the sale of the house we purchased from the relocated executive. We incurred a loss of approximately $74,000 on the sale of the executive’s house, which was recorded directly as an adjustment to current earnings through non interest expense.

Fair Value of Financial Instruments

The methods and assumptions used to estimate fair value are described as follows:

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

The following table presents the carry amounts and estimated fair values of the Company’s financial instruments (in thousands of dollars):


	Sept 30, 2010				Dec 31, 2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	126,759	$	126,759	$	192,407	$	192,407
Trading securities		1,581		1,581		—		—
Investment securities available for sale		619,282		619,282		463,186		463,186
FHLB and FRB stock		9,766		n/a		7,908		n/a
Loans held for sale		1,810		1,810		—		—
Loans, less allowance for loan losses of $28,012 and $23,289, at September 30, 2010 and December 31, 2009, respectively		1,101,797		1,110,881		935,732		945,993
Accrued interest receivable		7,342		7,342		6,378		6,378

Financial liabilities:
Deposits- without stated maturities	$	1,002,157	$	1,002,157	$	734,728	$	734,728
Deposits- with stated maturities		718,148		726,448		570,308		576,237
Securities sold under agreement to repurchase		19,216		19,216		29,562		29,562
Federal funds purchased (correspondent bank deposits)		72,859		72,859		144,939		144,939
Federal Home Loan Bank advances		15,000		15,192		21,000		21,274
Corporate debentures		12,500		6,884		12,500		6,865
Accrued interest payable		1,270		1,270		1,268		1,268

NOTE 5: Reportable segments

The Company’s reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning purposes by management. The table below is a reconciliation of the reportable segment revenues, expenses, and profit to the Company’s consolidated total for the nine and three month periods ending September 30, 2010 and 2009 (in thousands of dollars).

Nine month period ending September 30, 2010


	Commercial and retail banking			Correspondent banking and bond sales division			Corporate overhead and administration			Elimination entries			Total
Interest income	$	51,010		$	4,097		$	0		$	0		$	55,107
Interest expense		(12,456	)		(104	)		(316	)		0			(12,876	)

Net interest income		38,554			3,993			(316	)					42,231
Provision for loan losses		(24,562	)		(6	)								(24,568	)
Non interest income		13,649			26,738									40,387
Non interest expense		(43,529	)		(22,147	)		(2,177	)					(67,853	)

Net income before taxes		(15,888	)		8,578			(2,493	)					(9,803	)
Income tax provision		6,138			(3,228	)		914						3,824

Net income	$	(9,750	)	$	5,350		$	(1,579	)				$	(5,979	)

Total assets	$	1,965,563		$	169,450		$	273,794		$	(285,364	)	$	2,123,443

Three month period ending September 30, 2010


	Commercial and retail banking			Correspondent banking and bond sales division			Corporate overhead and administration			Elimination entries			Total
Interest income	$	17,926		$	1,180								$	19,106
Interest expense		(4,199	)		(32	)		(112	)					(4,343	)

Net interest income		13,727			1,148			(112	)					14,763
Provision for loan losses		(16,445	)		(3	)								(16,448	)
Non interest income		5,397			12,358									17,755
Non interest expense		(17,578	)		(9,246	)		(706	)					(27,530	)

Net income before taxes		(14,899	)		4,257			(818	)					(11,460	)
Income tax provision (benefit)		5,472			(1,564	)		276						4,184

Net (loss) income	$	(9,427	)	$	2,693		$	(542	)				$	(7,276	)

Total assets	$	1,965,563		$	169,450		$	273,794		$	(285,364	)	$	2,123,443

Nine month period ending September 30, 2009


	Commercial and retail banking			Correspondent banking and bond sales Division			Corporate Overhead And Administration			Elimination Entries			Total
Interest income	$	50,357		$	5,443		$	—		$	—		$	55,800
Interest expense		(16,785	)		(477	)		(369	)					(17,631	)

Net interest income		33,572			4,966			(369	)					38,169
Provision for loan losses		(14,510	)		—			—						(14,510	)
Non interest income		7,325			11,278			—						18,603
Non interest expense		(35,107	)		(9,454	)		(1,948	)					(46,509	)

Net income before taxes		(8,720	)		6,790			(2,317	)					(4,247	)
Income tax (benefit) provision		3,476			(2,277	)		858						2,057

Net (loss) income	$	(5,244	)	$	4,513		$	(1,459	)				$	(2,190	)

Total assets	$	1,515,713		$	279,150		$	250,219		$	(261,259	)	$	1,783,823

Three month period ending September 30, 2009


	Commercial and retail banking			Correspondent banking and bond sales Division			Corporate Overhead And Administration			Elimination entries			Total
Interest income	$	16,922		$	1,925		$	—		$	—		$	18,847
Interest expense		(4,801	)		(112	)		(109	)					(5,022	)

Net interest income		12,121			1,813			(109	)					13,825
Provision for loan losses		(8,682	)		—			—						(8,682	)
Non interest income		2,525			6,011			—						8,536
Non interest expense		(11,738	)		(5,312	)		(613	)					(17,663	)

Net income before taxes		(5,774	)		2,512			(722	)					(3,984	)
Income tax (benefit) provision		2,453			(967	)		268						1,754

Net (loss) income	$	(3,321	)	$	1,545		$	(454	)				$	(2,230	)

Total assets	$	1,515,713		$	279,150		$	250,219		$	(261,259	)	$	1,783,823

Commercial and retail banking: The Company’s primary business is commercial and retail banking. Currently, we operate through our four separately chartered subsidiary banks with 49 locations in 13 counties throughout Central Florida providing traditional deposit and lending products and services to our commercial and retail customers.

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

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

NOTE 6: Investment Securities Available for Sale

All of the mortgaged back securities listed below are residential FNMA, FHLMC, and GNMA MBSs. Cost of securities is determined using the specific identification method. 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 (in thousands of dollars):


	September 30, 2010
	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Obligations of U.S. government agencies and government sponsored enterprises	$	180,672	$	1,534	$	—	$	182,206
Mortgage backed securities		391,526		10,733		302		401,957
Municipal securities		34,086		1,125		92		35,119

	$	606,284	$	13,392	$	394	$	619,282


	December 31, 2009
	Amortized Cost		Gross Unrealized Gains		Gross unrealized losses		Estimated fair value
Obligations of U.S. government agencies and government sponsored enterprises	$	17,826	$	128	$	44	$	17,910
Mortgage backed securities		398,482		11,467		169		409,780
Municipal securities		35,376		396		276		35,496

	$	451,684	$	11,991	$	489	$	463,186

Sales of available for sale securities were as follows (in thousands of dollars):


For the nine months ended:	Sept 30, 2010		Sept 30, 2009
Proceeds	$	152,858	$	129,420
Gross gains	$	3,248	$	1,029
Gross losses	$	22	$	51

The tax provision related to these net realized gains was $1,214 and $368, respectively.

The fair value of available for sale securities at September 30, 2010 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately. Amounts are shown in thousands of dollars.


	Fair Value		Amortized Cost
Investment securities available for sale
Due in one year or less	$	14,778	$	14,646
Due after one year through five years		32,860		32,645
Due after five years through ten years		125,667		124,452
Due after ten years through thirty years		44,020		43,014
Mortgage backed securities		401,957		391,527

	$	619,282	$	606,284

Securities pledged at September 30, 2010 and December 31, 2009 had a carrying amount (estimated fair value) of $202,369,000 and $214,785,000 respectively. These securities were pledged primarily to secure public deposits and repurchase agreements.

At September 30, 2010 and December 31, 2009, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

The following tables show the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2010 and December 31, 2009 (in thousands of dollars).


	September 30, 2010
	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage backed securities	$	62,861	$	302	$	—	$	—	$	62,861	$	302
Municipal securities		1,280		15		1,730		77		3,010		92

Total temporarily impaired securities	$	64,141	$	317	$	1,730	$	77	$	65,871	$	394


	December 31, 2009
	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 agencies and government sponsored enterprises	$	7,287	$	44	$	—	$	—	$	7,287	$	44
Mortgage backed securities		46,537		169		—		—		46,537		169
Municipal securities		7,713		236		892		40		8,605		276

Total temporarily impaired securities	$	61,537	$	449	$	892	$	40	$	62,429	$	489

Mortgage-backed securities: The unrealized losses on investments in mortgage-backed securities were caused by changes in interest rate. Fannie Mae and Freddie Mac guarantee the contractual cash flows of these securities. It is expected that the securities would not be settled at a price less than the par value of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

Municipal securities: Unrealized losses on municipal securities have not been recognized into income because the issuers bonds are of high quality, management has the intent and ability to hold for the foreseeable future, and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the securities approach maturity.

NOTE 7: Loans

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


	Sept 30, 2010			Dec 31, 2009
Loans not covered by FDIC loss share agreements
Real estate loans
Residential	$	252,867		$	251,634
Commercial		414,383			438,540
Construction, development, land		107,028			115,937

Total real estate		774,278			806,111
Commercial		83,715			98,273
Consumer and other loans, at fair value (note 1)		5,493			—
Consumer and other		57,445			55,376

Loans before unearned fees and cost		920,931			959,760
Unearned fees/costs		(716	)		(739	)

Total loans not covered by FDIC loss share agreements		920,215			959,021

Loans covered by FDIC loss share agreements
Real estate loans
Residential		119,576			—
Commercial		72,793			—
Construction, development, land		10,880			—

Total real estate		203,249			—
Commercial		6,345			—

Total loans covered by FDIC loss share agreements		209,594			—


Total loans		1,129,809			959,021
Allowance for loan losses		(28,012	)		(23,289	)

Total loans, net of allowance for loan losses	$	1,101,797		$	935,732

Note 1:

Consumer loans acquired pursuant to three FDIC assisted transactions of failed financial institutions during the third quarter of 2010. These loans are not covered by an FDIC loss share agreement. The loans have been written down to estimated fair value, which includes a discount of $899, or 14% of the unpaid legal balance as of the acquisition date, and are being accounted for pursuant to ASC Topic 310-30.

The table below summarizes impaired loan data for the periods presented (in thousands of dollars).


	Sept 30, 2010		Dec 31, 2009
Impaired loans with a specific valuation allowance	$	22,069	$	15,391
Impaired loans without a specific valuation allowance		59,025		63,557

Total impaired loans	$	81,094	$	78,948
Amount of allowance for loan losses allocated to impaired loans		5,225		4,612

Performing TDRs	$	11,624	$	14,517
Non performing TDRs, included in NPLs		11,804		11,982

Total TDRs (TDRs are required to be included in impaired loans)	$	23,428	$	26,499
Impaired loans that are not TDRs		57,666		52,449

Total impaired loans	$	81,094	$	78,948

The table below sets forth the activity in the allowance for loan losses for the periods presented, in thousands of dollars.


	Nine month period ended Sept 30, 2010			Twelve month period ended Dec 31, 2009
Allowance at beginning of period	$	23,289		$	13,335
Charge-offs
Residential real estate loans		(3,029	)		(3,442	)
Commercial real estate loans		(12,525	)		(3,001	)
Construction, development and land loans		(3,718	)		(6,457	)
Non real estate commercial loans		(460	)		(830	)
Non real estate consumer and other loans		(445	)		(353	)

Total charge-offs		(20,177	)		(14,083	)

Recoveries
Residential real estate loans		108			16
Commercial real estate loans		16			6
Construction, development and land loans		163			43
Non real estate commercial loans		11			29
Non real estate consumer and other loans		34			47

Total recoveries		332			141

Net charge-offs		(19,845	)		(13,942	)
Provision for loan losses		24,568			23,896

Allowance at end of period	$	28,012		$	23,289

NOTE 8: Capital raise

On July 27, 2010, we raised $35,190,000 through a previously announced public offering by issuing 4,140,000 shares of common stock including the underwriter’s 15% over-allotment option. The net proceeds of the offering were approximately $32,766,000.

NOTE 9: Failed Bank Purchases

Effective July 16, 2010, we acquired substantially all the assets and assumed substantially all the deposits of Olde Cypress Community Bank in Clewiston, Florida (“Olde Cypress) through a purchase and assumption agreement, including loss-sharing (the “P&A Agreements”) with the Federal Deposit Insurance Corporation (“FDIC”) dated as July 16, 2010. As a result of this acquisition, the Company expects to further solidify its market share in the Hendry County, Florida market, expand its customer base to enhance deposit fee income, and reduce operating costs through economies of scale.

Effective August 20, 2010, we acquired substantially all the assets and assumed substantially all the deposits of Independent National Bank in Ocala, Florida (“Independent National”) and Community National Bank in Bartow, Florida (“Community National”) through separate purchase and assumption agreements, including loss-sharing (the “P&A Agreements”) with the Federal Deposit Insurance Corporation (“FDIC”) dated as of August 20, 2010. As a result of these acquisitions, the Company expects to further solidify its market share in the Marion County and Polk County, Florida markets, expand its customer base to enhance deposit fee income, and reduce operating costs through economies of scale.

Pursuant to the P&A Agreements, CenterState received a discount (bargain purchase gain) of $2,010,000 from the Olde Cypress transaction, and recognized goodwill of $3,490,000 and $1,704,000 from the Independent National transaction and the Community National transaction, respectively. As a result of the three failed bank acquisitions, the Company incurred approximately $769,000 in acquisition related costs which are reported in legal, auditing, and other professional expenses on the income statement. All of the loans acquired, except for $7,862,000 of consumer loans at fair value, are covered by loss share agreements with the FDIC. In addition, all of the repossessed real estate (“OREO”) acquired, $8,796,000

at fair value, is also covered by loss share agreements with the FDIC. The covered loans and OREO are collectively referred to as the “Covered Assets.” We did not pay the FDIC a premium to assume the customer deposits.

Under and subject to the terms of these loss share agreements, the FDIC is obligated to reimburse CenterState for 80% of the losses with respect to the unpaid legal balance of the Covered Assets beginning with the first dollar of loss incurred. CenterState will reimburse the FDIC for its share of recoveries with respect to losses for which the FDIC paid CenterState a reimbursement under the loss sharing agreements. The loss sharing agreements applicable to single family residential mortgage loans provide for FDIC loss sharing and CenterState reimbursement to the FDIC for recoveries for ten years. The loss sharing agreement applicable to commercial loans and other Covered Assets provides for FDIC loss sharing for five years and CenterState reimbursement to the FDIC for a total of eight years for recoveries.

As of the date of acquisition, we calculated the amount of such reimbursements that we expect to receive from the FDIC using the present value of anticipated cash flows from the Covered Assets based on the credit adjustments estimated for each pool of loans and the estimated losses on foreclosed assets. In accordance with ASC Topic 805, the FDIC Indemnification Asset was initially recorded at its fair value, and is measured separately from the loan assets and foreclosed assets because the loss sharing agreements are not contractually embedded in them or transferrable with them in the event of disposal. The balance of the FDIC Indemnification Asset increases and decreases as the expected and actual cash flows from the Covered Assets fluctuates, as loans are paid off or impaired and as loans and foreclosed assets are sold. There are no contractual interest rates on this contractual receivable from the FDIC; however, a discount was recorded against the initial balance of the FDIC Indemnification Asset in conjunction with the fair value measurement as this receivable will be collected over the term of the loss sharing agreements. This discount will be accreted to non interest income over future periods.

We did not immediately acquire the real estate, banking facilities, furniture or equipment as part of the P&A Agreements. On November 2, 2010, CenterState notified the FDIC it would purchase the real estate and related furniture and equipment of two full service branches and the furniture and equipment of one leased facility related to the Olde Cypress transaction. We have not yet received the appraisals back for Independent National and Community National. When these appraisals are completed, we will have thirty days to decide whether to purchase at appraised values or not.

The acquisitions were accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. Both the purchased assets and liabilities assumed are recorded at their respective acquisition date fair values. Determining the fair values of assets and liabilities, especially the loan portfolio and foreclosed real estate, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values become available.

All of the loans acquired are being accounted for pursuant to ASC Topic 310-30. We arrived at this conclusion as follows.

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

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

The table below summarizes the total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and fair value of the loans as of the respective acquisition dates and carrying amounts as of September 30, 2010.


	at acquisition dates									3Q activity			total Sept 30, 2010
in thousands of dollars:	Type A loans			Type B loans			total			3Q activity			total Sept 30, 2010
Contractually required principal and interest	$	182,967		$	174,979		$	357,946			(7,181	)	$	350,765
Non-accretable difference		(65,655	)		(28,384	)		(94,039	)		—			(94,039	)

Cash flows expected to be collected		117,312			146,595			263,907			(7,181	)		256,726
Accretable yield		(27,056	)		(16,278	)		(43,334	)		1,695			(41,639	)

Total acquired loans	$	90,256		$	130,317		$	220,573		$	(5,486	)	$	215,087

Type A loans: acquired loans with specifically identified credit deficiency factor(s).

Type B loans: all other acquired loans.

Income on acquired loans, whether Type As or Type Bs, is recognized in the same manner 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 operating results of the Company for the three and nine month periods ended September 30, 2010, includes the operating results of the acquired assets and assumed liabilities since the acquisition date of July 16, 2010 for Olde Cypress and August 20, 2010 for Community National and Independent National. Due primarily to the significant amount of fair value adjustments and the Loss Share Agreements now in place, historical results of Olde Cypress, Community National, and Independent National are not believed to be relevant to the Company’s results, and thus no pro forma information is presented.

The following tables present the assets acquired and liabilities assumed at the acquisition date and as adjusted for purchase accounting adjustments for Olde Cypress, Independent National and Community National.


Olde Cypress *(in thousands of dollars)* Acquisition date: July 16, 2010	balances acquired from FDIC		fair value adjustments			as recorded by CenterState
Assets:
Cash and cash equivalents, net	$	18,643				$	18,643
Investment securities available for sale		8,509					8,509

Covered loans		120,248		(30,647	)(a)		89,601
Consumer loans not covered by loss share agreements		4,093		(334	)(a)		3,759

Total loans		124,341					93,360

Covered other repossessed real estate owned (“OREO”)		8,274		(1,886	)(b)		6,388
FDIC indemnification asset		—		26,637	(c)		26,637
FHLB stock		305					305
Core deposit intangible		—		714	(d)		714
Other assets		1,159					1,159

Total assets acquired	$	161,231				$	155,715

Liabilities:
Deposits:
Non interest bearing demand accounts	$	6,693				$	6,693
Interest bearing checking accounts		26,711					26,711
Interest bearing savings accounts		17,485					17,485
Time deposits		100,758		617	(e)		101,375

Total deposits		151,647					152,264
Other liabilities		1,441					1,441

Total liabilities assumed	$	153,088				$	153,705

Net assets acquired						$	2,010

Deferred tax impact						$	775

Net assets acquired, including deferred tax impact						$	1,235

(a)	Adjustment reflects the fair value adjustments based on CenterState’s evaluation of the acquired loan portfolio.

(b)	Adjustment reflects the estimated OREO losses based on CenterState’s evaluation of the acquired OREO portfolio.

(c)	Adjustment reflects the estimated fair value of payments CenterState expects to receive from the FDIC under the loss share agreements.

(d)	Adjustment reflects the recording of the core deposit intangible on the acquired non time deposit accounts.

(e)	Adjustment reflects the difference between the rates paid on time deposits acquired versus rates available on similar duration time deposits as of the acquisition date.


Independent National *(in thousands of dollars)* Acquisition date: August 20, 2010	balances acquired from FDIC		fair value adjustments			as recorded by CenterState
Assets:
Cash and cash equivalents, net	$	26,005				$	26,005
Investment securities available for sale		1,416					1,416

Covered loans		113,148		(25,790	)(a)		87,358
Consumer loans not covered by loss share agreements		1,587		(351	)(a)		1,236

Total loans		114,735					88,594

Covered other repossessed real estate owned (“OREO”)		1,244		(104	)(b)		1,140
FDIC indemnification asset		—		21,477	(c)		21,477
FHLB and FRB stock		954					954
Core deposit intangible		—		968	(d)		968
Goodwill		—		3,490	(e)		3,490
Receivable from FDIC		—		10,872	(f)		10,872
Other assets		443					443

Total assets acquired	$	144,797				$	155,359

Liabilities:
Deposits:
Non interest bearing demand accounts	$	13,872				$	13,872
Interest bearing checking accounts		21,009					21,009
Interest bearing savings accounts		45,345					45,345
Time deposits		63,036		1,131	(g)		64,167

Total deposits		143,262					144,393
FHLB advances		10,000		591	(h)		10,591
Other liabilities		375					375

Total liabilities assumed	$	153,637				$	155,359

(a)	Adjustment reflects the fair value adjustments based on CenterState’s evaluation of the acquired loan portfolio.

(b)	Adjustment reflects the estimated OREO losses based on CenterState’s evaluation of the acquired OREO portfolio.

(c)	Adjustment reflects the estimated fair value of payments CenterState expects to receive from the FDIC under the loss share agreements.

(d)	Adjustment reflects the recording of the core deposit intangible on the acquired non time deposit accounts.

(e)	Adjustment reflects the recording of goodwill, which represents the payment received from the FDIC less the fair value of the net liabilities assumed.

(f)	Reflects the amount due from the FDIC pursuant to the P&A Agreement.

(g)	Adjustment reflects the difference between the rates paid on time deposits acquired versus rates available on similar duration time deposits as of the acquisition date.

(h)	Adjustment reflects the prepayment penalty paid when FHLB advances were completely paid off immediately subsequent to the date of the acquisition.


Community National *(in thousands of dollars)* Acquisition date: August 20, 2010	balances acquired from FDIC		fair value adjustments			as recorded by CenterState
Assets:
Cash and cash equivalents, net	$	10,720				$	10,720
Investment securities available for sale		1,564					1,564

Covered loans		47,565		(11,813	)(a)		35,752
Consumer loans not covered by loss share agreements		3,105		(238	)(a)		2,867

Total loans		50,670					38,619

Covered other repossessed real estate owned (“OREO”)		1,774		(506	)(b)		1,268
FDIC indemnification asset		—		9,837	(c)		9,837
FHLB stock		361					361
Core deposit intangible		—		336	(d)		336
Goodwill		—		1,704	(e)		1,704
Other assets		330					330

Total assets acquired	$	65,419				$	64,739

Liabilities:
Deposits:
Non interest bearing demand accounts	$	10,937				$	10,937
Interest bearing checking accounts		3,783					3,783
Interest bearing savings accounts		9,909					9,909
Time deposits		22,966		88	(f)		23,054

Total deposits		47,595					47,683
FHLB advances		4,000		150	(g)		4,150
Payable to FDIC		—		12,860	(h)		12,860
Other liabilities		46					46

Total liabilities assumed	$	51,641				$	64,739

(a)	Adjustment reflects the fair value adjustments based on CenterState’s evaluation of the acquired loan portfolio.

(b)	Adjustment reflects the estimated OREO losses based on CenterState’s evaluation of the acquired OREO portfolio.

(c)	Adjustment reflects the estimated fair value of payments CenterState expects to receive from the FDIC under the loss share agreements.

(d)	Adjustment reflects the recording of the core deposit intangible on the acquired non time deposit accounts.

(e)	Adjustment reflects the recording of goodwill, which represents the payment received from the FDIC less the fair value of the net liabilities assumed.

(f)	Adjustment reflects the difference between the rates paid on time deposits acquired versus rates available on similar duration time deposits as of the acquisition date.

(g)	Adjustment reflects the prepayment penalty paid when FHLB advances were completely paid off immediately subsequent to the date of the acquisition.

(h)	Reflects the amount payable to the FDIC pursuant to the P&A Agreement.

NOTE 10: Effect of new pronouncements

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140 (ASC 810). The new accounting requirement amends previous guidance relating to the transfers of financial assets and eliminates the concept of a qualifying special purpose entity. This Statement must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. This Statement must be applied to transfers occurring on or after the effective date. Additionally, on and after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. Therefore, formerly qualifying special-purpose entities should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance. Additionally, the disclosure provisions of this Statement were also

amended and apply to transfers that occurred both before and after the effective date of this Statement. The effect of adopting this new guidance was not material.

In January 2010, the FASB issued an amendment to Fair Value Measurements and Disclosures, Topic 820, Improving Disclosures about Fair Value Measurements. This amendment requires new disclosures regarding significant transfers in and out of Level 1 and 2 fair value measurements and the reasons for the transfers. This amendment also requires that a reporting entity present separately information about purchases, sales, issuances and settlements, on a gross basis rather than a net basis for activity in Level 3 fair value measurements using significant unobservable inputs. This amendment also clarifies existing disclosures on the level of disaggregation, in that the reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities, and that a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and 3. The new disclosures and clarifications of existing disclosures for ASC 820 are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of ASC 820 did not have a material effect on the Company’s consolidated financial statements.

ITEM 2:

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

COMPARISON OF BALANCE SHEETS AT SEPTEMBER 30, 2010 AND DECEMBER 31, 2009

Overview

Our total assets increased approximately 21% during the nine month period ending September 30, 2010 due to the three FDIC assisted failed bank acquisitions discussed in Note 8. Our loans increase 18% and our deposits increased by 32% primarily due to the failed bank acquisitions. As discussed in Note 7, we raised capital through a public offering during the third quarter of 2010 adding net proceeds of approximately $32,766,000 to our stockholders’ equity. 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 $85,312,000 at September 30, 2010 (approximately 4.0% of total assets) as compared to $173,268,000 at December 31, 2009 (approximately 9.9% 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.

Trading securities

During the third quarter of 2009, we initiated a trading securities portfolio at our lead subsidiary bank. Realized and unrealized gains and losses are included in trading securities revenue, a component of our non interest income, in our Condensed Consolidated Statement of Earnings. Securities purchased for this portfolio have primarily been various municipal securities. At September 30, 2010 our trading securities had a fair market value of $1,581,000, which were two municipal securities. A list of the activity in this portfolio is summarized below (amounts are in thousands of dollars).


Balance at December 31, 2009	$	—
Purchases		215,284
Proceeds from sales		(214,151	)
Net realized gain on sales		423
Unrealized gains		25

Balance at September 30, 2010	$	1,581

Investment securities available for sale

Securities available-for-sale, consisting primarily of U.S. government agency securities and municipal tax exempt securities, were $619,282,000 at September 30, 2010 (approximately 29% of total assets) compared to $463,186,000 at December 31, 2009 (approximately 26% of total assets), an increase of $156,096,000 or 34%. 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.

Loans held for sale

During the first quarter of 2010, we initiated a loans held for sale portfolio, whereby we originate single family home loans and sell those mortgages into the secondary market, servicing released. These loans are recorded at the lower of cost or market. Gains and losses on the sale of loans held for sale are included as a component of non interest income in our Condensed Consolidated Statement of Earnings. A list of the activity in this portfolio is summarized below (amounts are in thousands of dollars).


Balance at December 31, 2009	$	—
Loans originated		6,003
Proceeds from sales		(4,229	)
Net realized gain on sales		36

Balance at September 30, 2010	$	1,810

Loans

Lending-related income is the most important component of our net interest income and is a major contributor to profitability. The loan portfolio is the largest component of earning assets, and it therefore generates the largest portion of revenues. The absolute volume of loans and the volume of loans as a percentage of earning assets is an important determinant of net interest margin as loans are expected to produce higher yields than securities and other earning assets. Average loans during the quarter ended September 30, 2010, were $1,046,194,000, or 58% of average earning assets, as compared to $931,681,000, or 56% of average earning assets, for the quarter ending December 31, 2009. Total loans, net of unearned fees and cost, at September 30, 2010 and December 31, 2009 were $1,129,809,000 and $959,021,000, respectively, an increase of $170,788,000, or 18%. This represents a loan to total asset ratio of 53% and 55% and a loan to deposit ratio of 66% and 73%, at September 30, 2010 and December 31, 2009, respectively.

The current weak economy in general and the struggling Florida real estate market in particular, has made it difficult to grow our loan portfolio. Although our loans increased by $170,788,000, or 18% as indicated above, we purchased loans with fair values of approximately $220,573,000 pursuant to the

three FDIC assisted failed financial institution acquisitions described in Note 8. Excluding these acquisitions our loan portfolio decreased by $49,785,000, or 5% during the nine month period ending September 30, 2010. Part of this decrease was due to charge-offs (approximately $19,845,000), disposal of troubled loans in the wholesale debt market (approximately $8,579,000) and transfers out of loans into OREO and repossessed assets other than real estate (approximately $8,356,000 and $544,000, respectively). Excluding these components, loans deceased $12,461,000 which is a net amount comprised of new loan originations less maturities, pay-offs and normal amortization.

Eighteen and a half percent (18.5%) of our loans, or $209,594,000, 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 sharing agreements applicable to commercial loans provides 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. The covered loans are carried at their estimated fair value which represents an aggregate discount to their unpaid legal balances outstanding of approximately 24%, or $67,095,000, at September 30, 2010. Within the covered loan portfolio, ninety-seven percent (97%) is collateralized by real estate, of which single family loans represent the largest component at $119,576,000 or 59% of total covered real estate loans.

Eighty-one and a half percent (81.5%) of the Company’s loans, or $920,215,000, are not covered by FDIC loss sharing agreements. Of this amount approximately eighty-four percent (84%) are collateralized by real estate, 9% are commercial non real estate loans and the remaining 7% are consumer and other non real estate loans. Our non covered single family residential real estate loans totaled $252,867,000 or 27% of our total non covered loans as of September 30, 2010. As with all of our loans, these are originated in our geographical market area in central Florida. We do not and have never engaged in sub-prime lending. Our largest category of non covered loans is commercial real estate which represents approximately 45% of our total non covered loans. The largest category within non covered commercial real estate loans is office buildings which represents about a quarter of this amount, followed by retail which represents about 15% of the category. There is no other single category within the non covered commercial real estate portfolio that would represent 10% or more of the total.

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.

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


	Sept 30, 2010			Dec 31, 2009
Loans not covered by FDIC loss share agreements
Real estate loans
Residential	$	252,867		$	251,634
Commercial		414,383			438,540
Construction, development, land		107,028			115,937

Total real estate		774,278			806,111
Commercial		83,715			98,273
Consumer and other loans, at fair value (note 1)		5,493			—
Consumer and other		57,445			55,376

Loans before unearned fees and cost		920,931			959,760
Unearned fees/costs		(716	)		(739	)

Total loans not covered by FDIC loss share agreements		920,215			959,021

Loans covered by FDIC loss share agreements
Real estate loans
Residential		119,576			—
Commercial		72,793			—
Construction, development, land		10,880			—

Total real estate		203,249			—
Commercial		6,345			—

Total loans covered by FDIC loss share agreements		209,594			—


Total loans		1,129,809			959,021
Allowance for loan losses		(28,012	)		(23,289	)

Total loans, net of allowance for loan losses	$	1,101,797		$	935,732

Note 1:

Credit quality and allowance for loan losses

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 $250,000 and individually evaluated for impairment. If the loan amount is less than $250,000 and individually evaluated for impairment then either a Brokers Price Opinion (“BPO”) is obtained or an internal evaluation is performed, in lieu of an updated appraisal.

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 $250,000 will not be older than one year.

After the initial updated appraisal is obtained for a Problem Loan and before its next annual appraisal update is due, management considers the need for a downward adjustment to the current appraisal amount to reflect current market conditions, based on management’s analysis, judgment and

experience. In an extremely volatile market, management may update the appraisal prior to the one year anniversary date.

We maintain an allowance for loan losses that we believe is adequate to absorb probable losses incurred in our non covered loan portfolio. The FDIC is obligated to reimburse us for 80% of losses incurred in our covered loan portfolio. Our covered loan portfolio has been marked to fair value, which considers an estimate of probable losses. We believe that our total loans are adequately recorded to absorb probable 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.

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

The second component is a general allowance on all of the Company’s loans other than those identified as impaired. We group these loans into five general categories with similar characteristics, and then apply an adjusted loss factor to each group of loans to determine the total amount of this second component of our allowance for loan losses. The adjusted loss factor for each category of loans is a derivative of our historical loss factor for that category, adjusted for current internal and external environmental factors, as well as for certain loan grading factors.

In the table below we have shown the two components, as discussed above, of our allowance for loan losses at September 30, 2010 and December 31, 2009. The data in the table below excludes loans covered by FDIC loss share agreement.


*(amounts are in thousands of dollars)*	Sept 30, 2010			Dec 31, 2009			Increase (decrease)
Impaired loans	$	81,094		$	78,948		$	2,146
Component 1 (specific allowance)		5,225			4,612			613
Specific allowance as percentage of impaired loans		6.44	%		5.84	%		60 bps

Total loans other than impaired loans		839,121			880,073			(40,952	)
Component 2 (general allowance)		22,787			18,677			4,110
General allowance as percentage of non impaired loans		2.72	%		2.12	%		60 bps

Total loans, excluding loans covered by FDIC loss share agreements		920,215			959,021			(38,806	)
Total allowance for loan losses		28,012			23,289			4,723
Allowance for loan losses as percentage of non covered loans		3.04	%		2.43	%		61 bps

As shown in the table above, our allowance for loan losses (“ALLL”) as a percentage of total loans not covered by FDIC loss share agreements outstanding was 3.04% at September 30, 2010 compared to 2.43% at December 31, 2009. Our ALLL increased by a net amount of $4,723,000 during this nine month period. Component 2 (general allowance) increased by $4,110,000 during the period. This increase is primarily due to changes in our historical charge-off rates and changes in our current environmental factors.

Component 1 (specific allowance) increased by $613,000. This Component is the result of a specific allowance analysis prepared for each of our impaired loans excluding loans covered by FDIC loss share agreements. Our specific allowance is the aggregate of the results of individual analysis prepared for each one of these impaired loans on a loan by loan basis. The increase in our specific allowance is the result of charge-offs taken during the period, as well as the change in mix and evaluation of impaired loans.

The table below sets forth the activity in the allowance for loan losses for the periods presented, in thousands of dollars.


	Three month period ended Sept 30,						Nine month period ended Sept 30,
	2010			2009			2010			2009
Allowance at beginning of period	$	24,191		$	16,409		$	23,289		$	13,335
Charge-offs
Residential real estate loans		(732	)		(1,287	)		(3,029	)		(2,084	)
Commercial real estate loans		(11,088	)		(1,531	)		(12,525	)		(2,011	)
Construction, development and land loans		(634	)		(4,566	)		(3,718	)		(5,439	)
Non real estate commercial loans		(34	)		(113	)		(460	)		(655	)
Non real estate consumer and other loans		(216	)		(57	)		(445	)		(170	)

Total charge-offs		(12,704	)		(7,554	)		(20,177	)		(10,359	)

Recoveries
Residential real estate loans		63			5			108			11
Commercial real estate loans		—			1			16			6
Construction, development and land loans		4			—			163			—
Non real estate commercial loans		1			2			11			15
Non real estate consumer and other loans		9			8			34			35

Total recoveries		77			16			332			67

Net charge-offs		(12,627	)		(7,538	)		(19,845	)		(10,292	)
Provision for loan losses		16,448			8,682			24,568			14,510

Allowance at end of period	$	28,012		$	17,553		$	28,012		$	17,553

During the current quarter, the Company disposed of commercial real estate problem loans with an unpaid legal balance of approximately $18,807,000 for $8,579,000 or approximately 46% of the aggregate unpaid legal balance in the wholesale debt market. Approximately $13,184,000 of this total amount represented non accrual and therefore non performing loans. The remaining $5,623,000 represented impaired loans or classified loans which were still accruing and therefore considered performing loans.

Approximately $9,746,000 of commercial loan charge-offs during the current quarter related to the troubled loans which were disposed of in the wholesale debt market. As discussed above, the Company sold troubled commercial loans with an aggregate unpaid legal balance of approximately $18,807,000 for an amount equal to about 46% of the unpaid legal balance. The Company had been receiving about 55% to 65% on average of the unpaid legal balance when a troubled loan is eventually foreclosed and the asset is repossessed and eventually sold. The foreclosure, repossession and asset disposition process has been taking a long time. It could have been several years before these troubled loans would eventually be repossessed and eventually sold. In addition to the time value of money, the Company also considered the effective use and cost of management time when it made a decision to sell off a portion of the troubled loans that were not yet OREO for a deeper discount than may have been attainable several years in the future.

As described in Note 9 in this Form 10-Q we acquired three FDIC failed financial institutions during the current quarter, including loans covered by FDIC loss share agreements. All of the loans acquired are being accounted for pursuant to ASC Topic 310-30. We arrived at this conclusion as follows.


	at acquisition dates
in thousands of dollars:	Type A loans			Type B loans			total			3Q activity			total Sept 30, 2010
Contractually required principal and interest	$	182,967		$	174,979		$	357,946			(7,181	)	$	350,765
Non-accretable difference		(65,655	)		(28,384	)		(94,039	)		—			(94,039	)

Cash flows expected to be collected		117,312			146,595			263,907			(7,181	)		256,726
Accretable yield		(27,056	)		(16,278	)		(43,334	)		1,695			(41,639	)

Total acquired loans	$	90,256		$	130,317		$	220,573		$	(5,486	)	$	215,087

Type A loans: acquired loans with specifically identified credit deficiency factor(s).

Type B loans: all other acquired loans.

The table below shows the changes in the carrying value of acquired loans at the July 16, 2010 and August 20, 2010 acquisition dates through period ending September 30, 2010.


*in thousands of dollars:*	fair value of acquired loans
Balance at June 30, 2010	$	—
Fair value of acquired loans		220,573
Cash flows collected		(7,181	)
Accretable yield		1,695

Balance at September 30, 2010	$	215,087

Nonperforming loans and nonperforming assets

Non performing loans, excluding loans covered by FDIC loss share agreements, are defined as non accrual loans plus loans past due 90 days or more and still accruing interest. Generally we place loans on non accrual status when they are past due 90 days and management believes the borrower’s financial condition, after giving consideration to economic conditions and collection efforts, is such that collection of interest is doubtful. When we place a loan on non accrual status, interest accruals cease and uncollected interest is reversed and charged against current income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Non performing loans, excluding loans covered by FDIC loss share agreements, as a percentage of total loans, excluding loans covered by FDIC loss share agreements, were 6.13% at September 30, 2010, compared to 4.42% at December 31, 2009.

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 $68,827,000 at September 30, 2010, compared to $53,452,000 at December 31, 2009. Non performing assets as a percentage of total assets were 3.24% at September 30, 2010, compared to 3.05% at December 31, 2009.

The following table sets forth information regarding the components of nonperforming assets at the dates indicated (in thousands of dollars).


	Sept 30, 2010			Dec 31, 2009
Non-accrual loans (note 1)	$	55,921		$	42,059
Past due loans 90 days or more and still accruing interest (note 1)		478			282

Total non-performing loans (NPLs) (note 1)		56,399			42,341

Other real estate owned (OREO) (note 1)		11,861			10,196
Repossessed assets other than real estate (note 1)		567			915

Total non-performing assets (NPAs) (note 1)	$	68,827		$	53,452


Total NPLs as a percentage of total loans (note 1)		6.13	%		4.42	%
Total NPAs as a percentage of total assets (note 1)		3.24	%		3.05	%
Loans past due between 30 and 89 days and accruing interest as a percentage of total loans (note 1)		1.50	%		1.28	%
Allowance for loan losses	$	28,012		$	23,289
Allowance for loan losses as a percentage of NPLs (note 1)		50	%		55	%
Allowance for loan losses as a percentage of NPAs (note 1)		41	%		44	%

Note 1:

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

As shown in the table above, the largest component of non performing loans excluding loans covered by FDIC loss share agreements is non accrual loans. As of September 30, 2010 the Company had reported a total of 243 non accrual loans with an aggregate book value of $55,921,000, compared to December 31, 2009 when 171 non accrual loans with an aggregate book value of $42,059,000 were reported. Each of the five categories increased over the nine month period, with the largest increases occurring in residential real estate followed by commercial real estate.

This amount is further delineated by collateral category and number of loans in the table below (in thousands of dollars).


Collateral category	Total amount in thousands of dollars		Percentage of total non accrual loans			Number of non accrual loans in category
Residential real estate loans	$	16,626		30	%		101
Commercial real estate loans		25,892		46	%		50
Construction, development and land loans		12,421		22	%		52
Non real estate commercial loans		440		1	%		17
Non real estate consumer and other loans		542		1	%		23

Total non accrual loans at March 31, 2010	$	55,921		100	%		243

There are no construction or development loans with national builders. The Company has historically done business with local builders and developers that have typically been long time customers. However, the Company believes that this category (i.e. construction, development and land) is the loan category where the most risk is present. On the positive side, the category only represents about 12% of the total loan portfolio excluding loans covered by FDIC loss share agreements. Evidencing the riskier nature of the category, it represents a disproportionate 22% of the Company’s total non accrual loans and approximately 25% of the Company’s total OREO, excluding OREO covered by FDIC loss share agreements.

As indicated above, non accrual construction, development, and land loans totaled $12,421,000 at September 30, 2010. All but about $914,000 of this amount relates to land, either developed or not developed, commercial and residential. The $914,000 represents one single family home and one multi family project where construction is either completed or not yet completed, but in either case the homes are not sold.

During the first nine months of the current year, the Company charged off, net of recoveries, approximately $3,555,000 of its construction, development and land loans, about 18% of the total net charge offs. During the year ending December 31, 2009, the Company had total charge offs, net of recoveries, of $13,942,000. Almost half ($6,414,000) came from this same category.

The second largest component of non performing assets after non accrual loans is OREO, excluding OREO covered by FDIC loss share agreements. At September 30, 2010, total OREO was $21,266,000. Of this amount, $9,405,000 was acquired pursuant to the acquisition of three failed financial institutions during the third quarter of 2010. The acquired OREO is covered by FDIC subject to the terms if the 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.

OREO not covered by FDIC loss share agreements is $11,861,000 at September 30, 2010. OREO is carried at the lower of cost or market less the estimated cost to sell. Further declines in real estate values can affect the market value of these assets. Any further decline in market value beyond its cost basis is recorded as a current expense in the Company’s Statement of Operations. OREO is further delineated in the table below (in thousands of dollars).


(unaudited) Description of repossessed real estate	carrying amount at Sept 30, 2010
29 single family homes	$	3,037
6 mobile homes with land		151
48 residential building lots		1,140
18 commercial buildings		5,737
Land / various acreages		1,796

Total, excluding OREO covered by FDIC loss share agreements	$	11,861

In this current real estate crisis that the Nation in general and Florida in particular has been experiencing, 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 and depressed real estate market. When we have modified the terms of a loan, we usually either reduce the monthly payment and/or interest rate for generally about twelve months. We have not forgiven any material principal amounts on any loan modifications to date. We have approximately $23,428,000 of TDRs. Of this amount $11,624,000 are performing pursuant to their modified terms, and $11,804,000 are not performing and have been placed on non accrual status and included in our non performing loans (“NPLs”). Current accounting standards generally require TDRs to be included in our impaired loans, whether they are performing or not performing. Only non performing TDRs are included in our NPLs.


Troubled debt restructured loans (“TDRs”): (in thousands of dollars)	Sept 30, 2010		Dec 31, 2009
Performing TDRs	$	11,624	$	14,517
Non performing TDRs, included in NPLs above		11,804		11,982

Total TDRs	$	23,428	$	26,499

TDRs as of September 30, 2010 quantified by loan type classified separately as accrual (performing loans) and non-accrual (non performing loans) are presented in the table below. Amounts are in thousands of dollars.


TDRs	Accruing		Non Accrual		Total
Real estate loans:
Residential	$	6,130	$	4,920	$	11,050
Commercial		3,178		6,552		9,730
Construction, development, land		1,084		315		1,399

Total real estate loans		10,392		11,787		22,179
Commercial		582		—		582
Consumer and other		650		17		667

Total TDRs	$	11,624	$	11,804	$	23,428

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.

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. Generally we do not forgive principal,

however, we forgave $25,000 of principal on one of our TDR loans. We generally either reduce interest rates or decrease monthly payments for a temporary period of time and those reductions of cash flows are capitalized into the loan balance. A summary of the types of concessions made are presented in the table below. Amounts are in thousands of dollars.


	Sept 30, 2010
3 months interest only	$	282
6 months interest only		2,882
7 months interest only		236
9 months interest only		381
12 months interest only		12,322
18 months interest only		191
payment reduction for 12 months		4,448
all other		2,686

Total TDRs	$	23,428

It is still early in our experience with these types of activities, but approximately 50% of our TDRs are current pursuant to their modified terms. On the other hand, $11,804,000, or approximately 50% of our total TDRs are not performing pursuant to their modified terms. Long-term success with our performing TDRs is an unknown, and will depend to a great extent on the future of our economy and our local real estate markets. Thus far, there does not appear to be any significant difference in success rates with one type of concession versus another. Non performing TDRs average approximately fourteen months in age from their modification date through September 30, 2010. Performing TDRs average approximately nine months in age from their modification date through September 30, 2010.

Impaired loans are defined as loans that management has concluded will not repay as agreed. (Small balance homogeneous loans are not considered for impairment purposes.) Once management has determined a loan is impaired, we perform a specific reserve analysis to determine if it is probable that we will eventually collect all contractual cash flows. If management determines that a shortfall is probable, then a specific valuation allowance is placed against the loan. This loan is then placed on non accrual basis, even if the borrower is current with his/her contractual payments, and will remain on non accrual until payments collected reduce the loan balance such that it eliminates the specific valuation allowance or other economic conditions change. At September 30, 2010 we have identified a total of $81,094,000 impaired loans, excluding loans covered by FDIC loss share agreements. A specific valuation allowance of $5,225,000 has been attached to $22,069,000 of the total identified impaired loans.

The table below summarizes impaired loan data for the periods presented (in thousands of dollars).


	Sept 30, 2010		Dec 31, 2009
Impaired loans with a specific valuation allowance	$	22,069	$	15,391
Impaired loans without a specific valuation allowance		59,025		63,557

Total impaired loans	$	81,094	$	78,948
Amount of allowance for loan losses allocated to impaired loans		5,225		4,612

Performing TDRs	$	11,624	$	14,517
Non performing TDRs, included in NPLs		11,804		11,982

Total TDRs (TDRs are required to be included in impaired loans)	$	23,428	$	26,499
Impaired loans that are not TDRs		57,666		52,449

Total impaired loans	$	81,094	$	78,948

We continually analyze our loan portfolio in an effort to recognize and resolve problem assets as quickly and efficiently as possible. As of September 30, 2010, 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 $74,484,000 at September 30, 2010 compared to $62,368,000 at December 31, 2009, an increase of $12,116,000 or 19%. This amount is the result of purchases and construction in process of $12,680,000 plus transfer in from bank property held for sale of $1,868,000 less $2,432,000 of depreciation expense. The $12,680,000 of purchases and construction cost can be further delineated as follows: approximately $2,230,000 for purchase of buildings from the FDIC (related to the 2009 Ocala National Bank transaction), $3,548,000 in construction costs related to a number of the Company’s branch office locations, $2,856,000 for the purchase of land, $1,544,000 in capitalization of certain software development costs related to our correspondent banking division, and the remaining $2,502,000 relates to furniture, fixtures and equipment purchases net of disposals.

Deposits

During the nine month period ending September 30, 2010, total deposits increased by $415,269,000, or 31.8%. We acquired $344,340,000 of deposits from the three failed bank acquisitions during the third quarter as of their respective acquisition dates. Approximately 55% of the acquired deposits were time deposits. As of September 30, 2010, these deposits decreased by $48,354,000, or 14% to $295,986,000. At this date, approximately 49% of the acquired deposits were in time deposits. Another way to look at this is of the $48,354,000 decrease in these acquired deposits, $42,685,000 related to time deposits, which most of this decrease was by design and/or expected.

Excluding the deposits acquired in the failed bank transactions, our legacy bank deposits increased by $119,283,000, or 9.1% during the nine month period. The table below sets forth our deposits by type and as a percentage to total deposits at September 30, 2010 and December 31, 2009 (amounts shown in the table are in thousands of dollars).


	Sept 30, 2010		% of total			Dec 31, 2009		% of total
Demand—non-interest bearing	$	330,255		19	%	$	233,688		18	%
Demand—interest bearing		253,950		15	%		193,527		15	%
Savings deposits		196,950		11	%		148,915		11	%
Money market accounts		221,002		13	%		158,598		12	%
Time deposits		718,148		42	%		570,308		44	%

Total deposits	$	1,720,305		100	%	$	1,305,036		100	%

Securities sold under agreement to repurchase

Our subsidiary banks enter into borrowing arrangements with our retail business customers by agreements to repurchase (“securities sold under agreements to repurchase”) under which the banks pledge investment securities owned and under their control as collateral against the one-day borrowing arrangement. These short-term borrowings totaled $19,216,000 at September 30, 2010 compared to $29,562,000 at December 31, 2009.

Federal funds purchased

Federal funds purchased are overnight deposits from correspondent banks. We commenced accepting correspondent bank deposits during September 2008. 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. At September 30, 2010 we had $72,859,000 of correspondent bank deposits or federal funds purchased, compared to $144,939,000 at December 31, 2009.

Federal Home Loan Bank advances and other borrowed funds

From time to time, we borrow either through Federal Home Loan Bank advances or Federal Funds Purchased, other than correspondent bank deposits (i.e. federal funds purchased) listed above. At September 30, 2010 and December 31, 2009, advances from the Federal Home Loan Bank were as follows (amounts are in thousands of dollars).


	Sept 30, 2010		Dec 31, 2009
Matures January 7, 2011, interest rate is fixed at 3.63%		3,000		3,000
Matures June 27, 2011, interest rate is fixed at 3.93%		3,000		3,000
Matures January 11, 2010, interest rate is fixed at 1.04%		—		3,000
Matures January 12, 2010, interest rate is fixed at 1.04%		—		3,000
Matures July 12, 2010, interest rate is fixed at 1.50%		—		3,000
Matures January 10, 2011, interest rate is fixed at 1.84%		3,000		3,000
Matures December 30, 2011, interest rate is fixed at 2.30%		3,000		3,000
Matures January 11, 2011, interest rate is fixed at 0.61%		3,000		—

Total	$	15,000	$	21,000

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 $10,000,000. The Trust used the proceeds from the issuance of a trust preferred security to acquire the corporate debenture of the Company. The trust preferred security essentially mirrors the corporate debenture, carrying a cumulative preferred dividend at a variable rate equal to the interest rate on the corporate debenture (three month LIBOR plus 305 basis points). The corporate debenture and the trust preferred security each have 30-year lives. The trust preferred security and the corporate debenture are callable by the Company or the Trust, at their respective option, subject to prior approval by the Federal Reserve Board, if then required. The Company has treated the trust preferred security as Tier 1 capital up to the maximum amount allowed under the Federal Reserve guidelines for federal regulatory purposes.

In September 2004, Valrico Bancorp Inc. (“VBI”) formed Valrico Capital Statutory Trust (“Valrico Trust”) for the purpose of issuing trust preferred securities. On September 9, 2004, VBI issued a floating rate corporate debenture in the amount of $2,500,000. The Trust used the proceeds from the issuance of a trust preferred security to acquire the corporate debenture. On April 2, 2007, the Company acquired all the assets and assumed all the liabilities of VBI pursuant to the merger agreement, including VBI’s corporate debenture and related trust preferred security discussed above. The trust preferred security essentially mirrors the corporate debenture, carrying a cumulative preferred dividend at a variable rate equal to the interest rate on the corporate debenture (three month LIBOR plus 270 basis points). The corporate debenture and the trust preferred security each have 30-year lives. The trust preferred security and the corporate debenture are callable by the Company or the Valrico Trust, at their respective option, subject to prior approval by the Federal Reserve, if then required. The Company has treated the trust preferred security as Tier 1 capital up to the maximum amount allowed under the Federal Reserve guidelines for federal regulatory purposes.

Stockholders’ equity

Stockholders’ equity at September 30, 2010, was $257,487,000, or 12.1% of total assets, compared to $229,410,000, or 13.1% of total assets at December 31, 2009. The increase in stockholders’ equity was due to the following items:


$229,410,000		Total stockholders’ equity at December 31, 2009
(5,979,000	)	Net loss during the period
(816,000	)	Dividends paid on common shares, $0.03 per common share
32,766,000		Net proceeds from public stock offering
1,042,000		Net increase in market value of securities available for sale, net of deferred taxes
735,000		Employee stock options exercised
329,000		Employee equity based compensation

$257,487,000		Total stockholders’ equity at September 30, 2010

The federal bank regulatory agencies have established risk-based capital requirements for banks. These guidelines are intended to provide an additional measure of a bank’s capital adequacy by assigning weighted levels of risk to asset categories. Banks are also required to systematically maintain capital against such “off- balance sheet” activities as loans sold with recourse, loan commitments, guarantees and standby letters of credit. These guidelines are intended to strengthen the quality of capital by increasing the emphasis on common equity and restricting the amount of loan loss reserves and other forms of equity such as preferred stock that may be included in capital. As of September 30, 2010, each of our four subsidiary banks exceeded the minimum capital levels to be considered “well capitalized” under the terms of the guidelines.

Selected consolidated capital ratios at September 30, 2010 and December 31, 2009 are presented in the table below.


	Actual					Well capitalized					Excess
	Amount		Ratio			Amount		Ratio			Amount
September 30, 2010
Total capital (to risk weighted assets)	$	234,838		19.7	%	$	119,388		> 10	%	$	115,450
Tier 1 capital (to risk weighted assets)		219,753		18.4	%		71,633		> 6	%		148,120
Tier 1 capital (to average assets)		219,753		11.0	%		100,300		> 5	%		119,453

December 31, 2009
Total capital (to risk weighted assets)	$	213,569		19.2	%	$	110,960		> 10	%	$	102,609
Tier 1 capital (to risk weighted assets)		199,583		18.0	%		66,576		> 6	%		133,007
Tier 1 capital (to average assets)		199,583		11.4	%		87,831		> 5	%		111,752

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2010 AND 2009

Overview

We recognized a net loss of $7,276,000 or $0.25 per share basic and diluted for the three month period ended September 30, 2010, compared to a net loss of $2,230,000 or $0.17 per share basic and diluted for the same period in 2009.

The major factor causing our loss was credit related expenses. Our loan loss provision expense during the current quarter was significantly larger than the same period last year. Similarly, our other credit related expenses currently was twice as much as the same quarter last year.

Our non interest income increased significantly primarily due to commissions on bond sales and a bargain purchase gain recognized on the acquisition of a FDIC failed financial institution.

Non interest expense also increased significantly primarily due to expenses relating to the activity in our bond sales division, as well as operating expenses related to our acquisition of three failed financial institutions during the current quarter.

Each of the above referenced income and expense categories, along with other items are discussed and analyzed in greater detail below.

Net interest income/margin

Net interest income increased $938,000 or 6.8% to $14,763,000 during the three month period ended September 30, 2010 compared to $13,825,000 for the same period in 2009. The $938,000 increase was the result of a $259,000 increase in interest income and a $679,000 decrease in interest expense.

Interest earning assets averaged $1,795,889,000 during the three month period ended September 30, 2010 as compared to $1,625,204,000 for the same period in 2009, an increase of $170,685,000, or 10.5%. The yield on average interest earning assets decreased 38bps to 4.22% (39bps to 4.26% tax equivalent basis) during the three month period ended September 30, 2010, compared to 4.60% (4.65% tax equivalent basis) for the same period in 2009. The combined effects of the $170,685,000 increase in average interest earning assets and the 38bps (39bps tax equivalent basis) decrease in yield on average interest earning assets resulted in the $259,000 ($264,000 tax equivalent basis) increase in interest income between the two periods.

Interest bearing liabilities averaged $1,430,595,000 during the three month period ended September 30, 2010 as compared to $1,348,868,000 for the same period in 2009, a increase of $81,727,000, or 6%. The cost of average interest bearing liabilities decreased 28bps to 1.20% during the three month period ended September 30, 2010, compared to 1.48% for the same period in 2009. The combined effects of the $81,727,000 increase in average interest bearing liabilities and the 28bps decrease in cost of average interest bearing liabilities resulted in the $679,000 decrease in interest expense between the two periods.

The table below summarizes the analysis of changes in interest income and interest expense for the three month periods ended September 30, 2010 and 2009 on a tax equivalent basis (in thousands of dollars).


	Three months ended Sept 30,
	2010								2009
	Average Balance			Interest Inc / Exp		Average Rate			Average Balance			Interest Inc / Exp		Average Rate
Loans (1) (2) (9)	$	1,046,194		$	14,431		5.47	%	$	921,405		$	13,776		5.93	%
Securities—taxable		588,154			4,203		2.84	%		488,141			4,559		3.71	%
Securities—tax exempt (9)		35,969			531		5.86	%		37,330			531		5.64	%
Fed funds sold and other (3)		125,572			127		0.40	%		178,328			162		0.32	%

Total interest earning assets		1,795,889			19,292		4.26	%		1,625,204			19,028		4.65	%

Allowance for loan losses		(25,916	)							(15,785	)
All other assets		278,149								163,697

Total assets	$	2,048,122							$	1,773,116

Interest bearing deposits (4)	$	1,292,668			4,085		1.25	%	$	1,036,896			4,624		1.77	%
Fed funds purchased		90,368			23		0.10	%		241,128			108		0.18	%
Other borrowings (5)		35,059			123		1.39	%		58,344			180		1.23	%
Corporate debenture (6)		12,500			112		3.55	%		12,500			110		3.47	%

Total interest bearing liabilities		1,430,595			4,343		1.20	%		1,348,868			5,022		1.48	%

Demand deposits		331,507								203,982
Other liabilities		30,958								5,031
Stockholders’ equity		255,062								215,235

Total liabilities and stockholders’ equity	$	2,048,122							$	1,773,116

Net interest spread (tax equivalent basis) (7)							3.06	%							3.17	%

Net interest income (tax equivalent basis)				$	14,949							$	14,006

Net interest margin (tax equivalent basis) (8)							3.30	%							3.42	%

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 $58,000 and $88,000 for the three month periods ended September 30, 2010 and 2009.

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 ($317,000) and ($291,000) for the three month periods ended September 30, 2010 and 2009.

Note 5:

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

Note 6:

Includes amortization of origination costs and amortization of fair market value adjustment related to our April 2, 2007 acquisition of VSB of $0 and ($5,000) for the three month periods ended September 30, 2010 and 2009.

Note 7:

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

Note 8:

Represents net interest income divided by total interest earning assets.

Note 9:

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

Provision for loan losses

The provision for loan losses increased $7,766,000, or 89%, to $16,448,000 during the three month period ending September 30, 2010 compared to $8,682,000 for the comparable period in 2009. Our policy is to maintain the allowance for loan losses at a level sufficient to absorb probable incurred losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses, which is a charge to current period earnings, and is decreased by charge-offs, net of recoveries on prior loan charge-offs. Therefore, the provision for loan losses (Income Statement effect) is a residual of management’s determination of allowance for loan losses (Balance Sheet approach). In determining the

adequacy of the allowance for loan losses, we consider the conditions of individual borrowers, the historical loan loss experience, the general economic environment, the overall portfolio composition, and other information. As these factors change, the level of loan loss provision changes. See “Credit quality and allowance for loan losses” for additional information regarding the allowance for loan losses.

Non-interest income

Non-interest income for the three months ended September 30, 2010 was $17,755,000 compared to $8,536,000 for the comparable period in 2009. This increase was the result of the following components listed in the table below (amounts listed are in thousands of dollars).


Three month period ending: (in thousands of dollars)	Sept 30, 2010		Sept 30, 2009		$ increase (decrease)			% increase (decrease)
Service charges on deposit accounts		1,713		1,405	$	308			21.9	%
Income from correspondent banking and bond sales division		11,828		5,630		6,198			110.1	%
Commissions from sale of mutual funds and annuities		318		130		188			144.6	%
Debit card and ATM fees		458		344		114			33.1	%
Loan related fees		128		103		25			24.3	%
BOLI income		220		156		64			41.0	%
Gain on sale of securities		151		257		(106	)		(41.2	)%
Trading securities revenue		249		312		(63	)		(20.2	)%
Bargain purchase gain, acquisition of failed FDIC bank		2,010		—		2,010			n/a
FDIC indemnification asset amortization		225		—		225			n/a
Other service charges and fees		455		199		256			128.6	%

Total non-interest income	$	17,755	$	8,536	$	9,219			108.0	%

The increase in non-interest income between the two quarters presented above was primarily due to commissions on bond sales and bargain purchase gain resulting from the FDIC assisted acquisition of a failed financial institution during the current quarter. We acquired a total of three FDIC failed financial institutions during the quarter, of which one resulted in the above bargain purchase gain and the other two resulted in the recognition of goodwill.

Through our lead bank in Winter Haven, Florida, we have initiated a correspondent banking and bond sales division during the end of the third quarter of 2008 by hiring substantially all the employees of the Royal Bank of Canada’s (“RBC”) bond sales division who were previously employees of Alabama National Bank (“ALAB”) prior to RBC’s acquisition of ALAB. In July of 2009, we added to this business segment by hiring a substantial percentage of the correspondent banking and bond sales division of the failed Silverton Bank, N.A. in Atlanta Georgia. The division operates primarily out of leased facilities in Birmingham, Alabama, Atlanta, Georgia and Winston Salem, North Carolina. The division’s largest revenue generating activity is commissions earned on fixed income security sales. This was a record earnings quarter for the division.

Non-interest expense

Non-interest expense for the three months ended September 30, 2010 increased $9,867,000, or 55.9%, to $27,530,000, compared to $17,663,000 for the same period in 2009. Components of our non-interest expenses are listed in the table below. Amounts are in thousands of dollars.


Three month period ending: (in thousands of dollars)	Sept 30, 2010			Sept 30, 2009			$ increase (decrease)			% increase (decrease)
Employee salaries and wage compensation	$	13,544		$	8,496		$	5,048			59.4	%
Employee incentive/bonus compensation		1,020			548			472			86.1	%
Employee stock based compensation expense		180			99			81			81.8	%
Employee deferred compensation expense		97			55			42			76.4	%
Health insurance and other employee benefits		311			367			(56	)		(15.3	)%
Payroll taxes		642			451			191			42.4	%
Other employee related expenses		390			267			123			46.1	%
Incremental direct cost of loan origination		(175	)		(190	)		15			7.9	%

Total salaries, wages and employee benefits	$	16,009		$	10,093		$	5,916			58.6	%

Occupancy expense		1,633			1,408			225			16.0	%
Depreciation of premises & equipment		971			728			243			33.4	%
Supplies, stationary & printing		248			210			38			18.1	%
Marketing expense		615			464			151			32.5	%
Data processing expense		726			621			105			16.9	%
Legal, auditing & other professional exp		785			602			183			30.4	%
FDIC acquisition expenses		769			—			769			n/a	%
Core deposit intangible (CDI) amortization		142			197			(55	)		(27.9	)%
Postage & delivery		198			113			85			75.2	%
ATM related expenses		365			264			101			38.3	%
Bank regulatory related expenses		819			612			207			33.8	%
Loss on sale of repossessed real estate		153			175			(22	)		(12.6	)%
Valuation writedown on repossessed real estate		1,273			482			791			164.1	%
Loss on other repossessed assets		171			176			(5	)		(2.8	)%
Foreclosure related expenses		803			218			585			268.3	%
Internet and telephone banking		132			111			21			18.9	%
Operational write-offs and losses		296			85			211			248.2	%
Correspondent acct and Federal Reserve charges		83			83			—			—	%
Conferences/Seminars/Education/Training		236			122			114			93.4	%
Directors fees		92			87			5			5.7	%
Travel expenses		224			143			81			56.6	%
Other expenses		787			669			118			17.6	%

Total non-interest expense	$	27,530		$	17,663		$	9,867			55.9	%

The primary reason for the overall increase in non interest expense for the periods presented above is primarily due to the following.

The compensation expense related to our bond salesmen is based on commissions and is variable in nature. The salesforce had a record quarter in terms of earnings. Gross commission revenue was up 110% or approximately $6,198,000 between the two periods presented above. Approximately half of this amount is reflected in increased compensation and compensation related expenses. In addition, we hired a team of experienced bankers in Vero Beach, Florida, including a previous community bank CEO during the first quarter of 2010. We hired another team of experienced bankers in Okeechobee, Florida, including another previous community bank CEO in the second quarter of 2010. During the second quarter of 2010 we also hired the former CIO (“Chief Investment Officer”) of Alabama National Bank and a regular contributor to CNBC and Bloomberg, along with two private bankers in Orlando, Florida. We also hired several other executive level individuals during the first, second and third quarter of this

year to fill key roles in special assets, finance and commercial credit. In addition, we acquired a failed FDIC institution on July 16, 2010 and two other failed institutions on August 20, 2010. These three institutions not only added significant compensation and related compensation expense, but also overall operating expenses. Each of these institutions is operating on their separate legacy systems. We expect to fully convert and integrate them into our system during the spring and summer of next year.

FDIC acquisition expenses listed above relate to the acquisition of the three FDIC assisted failed bank acquisitions that occurred during the current quarter. These expenses include investment banker fees, third party evaluation and consulting fees, legal fees, audit fees, and other various fees related to the acquisition process.

Credit related costs included in the non interest expense category include, loss on sale of repossessed real estate, valuation write down on repossessed real estate, loss on other repossessed assets and foreclosure related expenses. As a group, these cost increased from $1,051,000 in the third quarter of 2009 to $2,400,000 during the current quarter. These costs are a reflection of the local real estate markets and economy in general, as well as the Company’s effort to accelerate the resolutions of its problem assets this year.

Benefit for income taxes

We recognized an income tax benefit for the three months ended September 30, 2010 of $4,184,000 (an effective tax rate of 36.5%) compared to an income tax benefit of $1,754,000 (an effective tax rate of 44.0%) for the comparable quarter in 2009. Net tax exempt income generally decreases a company’s effective tax rate (compared to statutory rates) when the company reports earnings. When there is a loss, the same net tax exempt income will generally produce higher effective tax rates. We had similar net tax exempt income in both quarters, but the pre tax book loss in the current quarter was substantially larger than the pre tax book loss in last year’s quarter. Therefore the effective tax rate was significantly higher in last year’s comparable quarter than in the current quarter.

COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2010 AND 2009

Overview

Net loss and net loss available to common shareholders for the nine months ended September 30, 2010 was $5,979,000 or $0.22 per share basic and diluted. Net loss for the nine months ended September 30, 2009 was $2,190,000 which resulted in a loss available to common shareholders of $4,323,000 after consideration of our preferred dividends. Our loss per common share for the nine month period in 2009 was $0.28 per share basic and diluted. The reason our net loss available to common shareholders was larger but the per share amount was less during the current period compared to last year, was because we issued additional common shares through a public stock offering on August 4, 2009 and another on July 27, 2010.

The major factor causing our loss was credit related expenses. Our loan loss provision expense during the current nine month period was significantly larger than the same period last year. Similarly, our other credit related expenses currently was larger compared to same period last year.

Our non interest income increased significantly primarily due to commissions on bond sales, gain on sale of securities held for sale and a bargain purchase gain recognized on the acquisition of a FDIC failed financial institution.

Each of the above referenced income and expense categories, along with other items are discussed and analyzed in greater detail below.

Net interest income/margin

Net interest income increased $4,062,000 or 10.6% to $42,231,000 during the nine month period ended September 30, 2010 compared to $38,169,000 for the same period in 2009. The increase was the result of a $4,755,000 decrease in interest expense less a decrease of $693,000 in interest income.

Interest earning assets averaged $1,690,508,000 during the nine month period ended September 30, 2010 as compared to $1,602,396,000 for the same period in 2009, an increase of $88,112,000, or 5.5%. The yield on average interest earning assets decreased 30bps to 4.36% (30bps to 4.40% tax equivalent basis) during the nine month period ended September 30, 2010, compared to 4.66% (4.70% tax equivalent basis) for the same period in 2009. The combined net effects of the $88,112,000 increase in average interest earning assets and the 30bps (30bps tax equivalent basis) decrease in yield on average interest earning assets resulted in the $693,000 ($677,000 tax equivalent basis) decrease in interest income between the two periods.

Interest bearing liabilities averaged $1,332,038,000 during the nine month period ended September 30, 2010 as compared to $1,350,009,000 for the same period in 2009, a decrease of $17,971,000, or 1.3%. The cost of average interest bearing liabilities decreased 46bps to 1.29% during the nine month period ended September 30, 2010, compared to 1.75% for the same period in 2009. The combined net effects of the $17,971,000 decrease in average interest bearing liabilities and the 46bps decrease in cost of average interest bearing liabilities resulted in the $4,755,000 decrease in interest expense between the two periods.

The table below summarizes the analysis of changes in interest income and interest expense for the nine month periods ended September 30, 2010 and 2009 on a tax equivalent basis (in thousands of dollars).


	Nine months ended Sept 30,
	2010								2009
	Average Balance			Interest Inc / Exp		Average Rate			Average Balance			Interest Inc / Exp		Average Rate
Loans (1) (2) (9)	$	981,006		$	40,749		5.56	%	$	914,480		$	39,932		5.84	%
Securities—taxable		524,413			12,940		3.30	%		493,903			14,432		3.91	%
Securities—tax exempt (9)		35,823			1,577		5.89	%		37,217			1,591		5.72	%
Fed funds sold and other (3)		149,266			400		0.36	%		156,796			388		0.33	%

Total interest earning assets		1,690,508			55,666		4.40	%		1,602,396			56,343		4.70	%

Allowance for loan losses		(24,526	)							(14,667	)
All other assets		210,606								162,455

Total assets	$	1,876,588							$	1,750,184

Interest bearing deposits (4)	$	1,163,572			12,089		1.39	%	$	1,046,509			16,226		2.07	%
Fed funds purchased		115,577			88		0.10	%		230,906			461		0.27	%
Other borrowings (5)		40,389			383		1.27	%		60,094			575		1.28	%
Corporate debenture (6)		12,500			316		3.38	%		12,500			369		3.95	%

Total interest bearing liabilities		1,332,038			12,876		1.29	%		1,350,009			17,631		1.75	%

Demand deposits		287,979								191,409
Other liabilities		17,735								10,763
Stockholders’ equity		238,836								198,003

Total liabilities and stockholders’ equity	$	1,876,588							$	1,750,184

Net interest spread (tax equivalent basis) (7)							3.11	%							2.95	%

Net interest income (tax equivalent basis)				$	42,790							$	38,712

Net interest margin (tax equivalent basis) (8)							3.38	%							3.23	%

Note 1:

Loan balances are net of deferred origination fees and costs.

Note 2:

Interest income on average loans includes loan fee recognition of $181,000 and $254,000 for the nine month periods ended June 30, 2010 and 2009.

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 ($497,000) and ($1,307,000) for the nine month periods ended September 30, 2010 and 2009.

Note 5:

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

Note 6:

Includes amortization of origination costs and amortization of fair market value adjustment related to our April 2, 2007 acquisition of VSB of $0 and ($19,000) for the nine month periods ended September 30, 2010 and 2009.

Note 7:

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

Note 8:

Represents net interest income divided by total interest earning assets.

Note 9:

Provision for loan losses

The provision for loan losses increased $10,058,000, or 69%, to $24,568,000 during the nine month period ending September 30, 2010 compared to $14,510,000 for the comparable period in 2009. 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

Non-interest income

Non-interest income for the nine months ended September 30, 2010 was $40,387,000 compared to $18,603,000 for the comparable period in 2009, resulting in an increase of $21,784,000, or 117.1%. This increase was the result of the following components listed in the table below. Amounts listed are in thousands of dollars.


Nine month period ending: (in thousands of dollars)	Sept 30, 2010		Sept 30, 2009		$ Increase (decrease)		% increase (decrease)
Service charges on deposit accounts		4,964		3,838	$	1,126		29.3	%
Income from correspondent banking and bond sales division		25,556		10,797		14,759		136.7	%
Commissions from sale of mutual funds and annuities		783		426		357		83.8	%
Debit card and ATM fees		1,325		976		349		35.8	%
Loan related fees		375		316		59		18.7	%
BOLI income		524		398		126		31.7	%
Gain on sale of securities		3,226		978		2,248		229.9	%
Trading securities revenue		448		312		136		43.6	%
Bargain purchase gain, acquisition of failed institution		2,010		—		2,010		n/a	%
FDIC indemnification asset- amortization of discount rate		225		—		225		n/a	%
Other service charges and fees		951		562		389		69.2	%

Total non-interest income		40,387		18,603	$	21,784		117.1	%

The increase in non-interest income between the two periods presented above was primarily due to commissions on bond sales and gain on sale of securities.

The increase in non-interest income between the two periods presented above was primarily due to commissions on bond sales, gain on sales of securities available for sale and bargain purchase gain resulting from the FDIC assisted acquisition of a failed financial institution during the current period. We acquired a total of three FDIC failed financial institutions during the current period, of which one resulted in the above bargain purchase gain and the other two resulted in the recognition of goodwill.

We sold approximately $152,858,000 and $129,420,000 of our securities available for sale, realizing a net gain on sale of $3,226,000 and $978,000, during the nine month periods ending September 30, 2010 and 2009, respectively. These securities were sold as part of our on-going asset/liability portfolio management strategies.

Non-interest expense

Non-interest expense for the nine months ended September 30, 2010 increased $21,344,000, or 45.9%, to $67,853,000, compared to $46,509,000 for the same period in 2009. Components of our non-interest expenses are listed in the table below. Amounts are in thousands of dollars.


Nine month period ending: (in thousands of dollars)	Sept 30, 2010			Sept 30, 2009			$ increase (decrease)			% increase (decrease)
Employee salaries and wages	$	33,038		$	20,460		$	12,578			61.5	%
Employee incentive/bonus compensation		2,682			1,321			1,361			103.0	%
Employee stock based compensation expense		518			315			203			64.4	%
Employee deferred compensation expense		222			165			57			34.5	%
Health insurance and other employee benefits		1,549			1,106			443			40.1	%
Payroll taxes		1,795			1,280			515			40.2	%
Other employee related expenses		1,055			763			292			38.3	%
Incremental direct cost of loan origination		(458	)		(550	)		92			16.7	%

Total salaries, wages and employee benefits	$	40,401		$	24,860		$	15,541			62.5	%

Occupancy expense		4,568			3,985			583			14.6	%
Depreciation of premises & equipment		2,432			2,160			272			12.6	%
Supplies, stationary & printing		746			630			116			18.4	%
Marketing expense		1,766			1,350			416			30.8	%
Data processing expense		1,924			1,775			149			8.4	%
FDIC acquisition expenses		769			—			769			n/a	%
Legal, auditing & other professional exp		2,167			1,539			628			40.8	%
Core deposit intangible (CDI) amortization		348			596			(248	)		(41.6	)%
Postage & delivery		433			323			110			34.1	%
ATM related expenses		964			770			194			25.2	%
Bank regulatory related expenses		2,121			2,454			(333	)		(13.6	)%
Loss on sale of repossessed real estate		177			464			(287	)		(61.9	)%
Valuation write down on repossessed real estate		2,583			1,387			1,196			86.2	%
Loss on other repossessed assets		404			444			(40	)		(9.0	)%
Foreclosure related expenses		1,497			675			822			121.8	%
Internet and telephone banking		442			359			83			23.1	%
Operational write-offs and losses		655			162			493			304.3	%
Correspondent accounts and Federal Reserve charges		234			252			(18	)		(7.1	)%
Conferences, seminars, education, training		555			294			261			88.8	%
Directors fees		285			259			26			10.0	%
Travel expenses		470			300			170			56.7	%
Other expenses		1,912			1,471			441			30.0	%

Total non-interest expense	$	67,853		$	46,509		$	21,344			45.9	%

The primary reason for the overall increase in non interest expense for the periods presented above is primarily due to the following.

The compensation expense related to our bond salesmen is based on commissions and is variable in nature. The salesforce had record earnings during the current period. Gross commission revenue was up 137% or approximately $14,759,000 between the two periods presented above. Approximately half of this amount is reflected in increased compensation and compensation related expenses. In addition, we hired a team of experienced bankers in Vero Beach, Florida, including a previous community bank CEO during the first quarter of 2010. We hired another team of experienced bankers in Okeechobee, Florida, including another previous community bank CEO in the second quarter of 2010. During the second quarter of 2010 we also hired the former CIO (“Chief Investment Officer”) of Alabama National Bank and a regular contributor to CNBC and Bloomberg, along with two private bankers in Orlando, Florida. We also hired several other executive level individuals during the first, second and third quarter of this

Credit related costs included in the non interest expense category include, loss on sale of repossessed real estate, valuation write down on repossessed real estate, loss on other repossessed assets and foreclosure related expenses. As a group, these cost increased from $2,970,000 reported in the nine month period ending September 30, 2009 to $4,661,000 reported during the current nine month period ending September 30, 2010. These costs are a reflection of the local real estate markets and economy in general, as well as the Company’s effort to accelerate the resolutions of its problem assets this year.

Benefit for income taxes

We recognized an income tax benefit for the nine months ended September 30, 2010 of $3,824,000 (an effective tax rate of 39.0%) compared to an income tax benefit of $2,057,000 (an effective tax rate of 48.4%) for the comparable period in 2009. Net tax exempt income generally decreases a company’s effective tax rate (compared to statutory rates) when the company reports earnings. When there is a loss, the same net tax exempt income will generally produce higher effective tax rates. We had similar net tax exempt income in both periods, but the pre tax book loss in the current period was substantially larger than the pre tax book loss in comparable period last year. Therefore the effective tax rate was significantly higher in last year’s comparable period than in the current quarter.

Liquidity

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

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

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

Off-Balance Sheet Arrangements

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

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES: MARKET RISK

Market risk

We believe interest rate risk is the most significant market risk impacting us. Each of our subsidiary banks monitors and manages its interest rate risk using interest rate sensitivity “gap” analysis to measure the impact of market interest rate changes on net interest income. See our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 for disclosure of the quantitative and qualitative information regarding the interest rate risk inherent in interest rate risk sensitive instruments as of December 31, 2009. There have been no changes in the assumptions used in monitoring interest rate risk as of September 30, 2010. The impact of other types of market risk, such as foreign currency exchange risk and equity price risk, is deemed immaterial. We do not maintain a portfolio of trading securities and do not intend to engage in such activities in the immediate future.

ITEM 4.

CONTROLS AND PROCEDURES

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

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

None.

Item 1a.

Risk Factors

There has been no material changes in our risk factors from our disclosure in Item 1A of our December 31, 2009 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.

Other Information

None.

Item 5.

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

CENTERSTATE BANKS, INC.

SIGNATURES

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

CENTERSTATE BANKS, INC.

(Registrant)



Date: November 9, 2010	By:	/S/ ERNEST S. PINNER
		Ernest S. Pinner
		Chairman, President and Chief Executive Officer

Date: November 9, 2010	By:	/S/ JAMES J. ANTAL
		James J. Antal
		Senior Vice President and Chief Financial Officer