Edgar Filing: CENTERSTATE BANKS OF FLORIDA INC

Form 10-Q

U. S. SECURTIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2008

¨	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 OF FLORIDA, INC.

(Exact Name of Registrant as Specified in Its Charter)

Florida

59-3606741

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

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

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


Large accelerated filer ¨		Accelerated filer x

Non-accelerated filer ¨		Smaller reporting company ¨

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

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


Common stock, par value $.01 per share		12,454,407 shares
(class)		Outstanding at July 31, 2008

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

INDEX


		Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed consolidated balance sheets – June 30, 2008 and December 31, 2007 (unaudited)		2

Condensed consolidated statements of earnings for the three and six months ended June 30, 2008 and 2007 (unaudited)		3

Condensed consolidated statements of cash flows – six months ended June 30, 2008 and 2007 (unaudited)		4

Notes to condensed consolidated financial statements (unaudited)		5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		9

Item 3. Quantitative and Qualitative Disclosures About Market Risk		26

Item 4. Controls and Procedures		26

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		27

Item 1a. Risk Factors		27

Item 2. Unregistered sales of Equity Securities and Use of Proceeds		27

Item 3. Defaults Upon Senior Securities		27

Item 4. Submission of Matters to a Vote of Security Holders		27

Item 5. Other Information		27

Item 6. Exhibits		27

SIGNATURES		28

CERTIFICATIONS		29

Centerstate Banks of Florida, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands of dollars)


ASSETS	As of June 30, 2008			As of December 31, 2007
Cash and due from banks	$	33,784		$	30,293
Federal funds sold and money market accounts		36,671			42,155

Cash and cash equivalents		70,455			72,448

Investment securities available for sale, at fair value		193,449			199,434

Loans		849,058			841,405
Less allowance for loan losses		(11,599	)		(10,828	)

Net Loans		837,459			830,577

Accrued interest receivable		5,017			5,843
Federal Home Loan Bank and Federal Reserve Bank stock		6,575			5,408
Bank premises and equipment, net		58,093			55,458
Deferred income taxes, net		2,280			1,120
Goodwill		28,118			28,118
Core deposit intangible		4,330			4,725
Bank owned life insurance		9,920			9,728
Other real estate owned		2,270			583
Prepaid expense and other assets		4,174			3,988

TOTAL ASSETS	$	1,222,140		$	1,217,430


LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand – non-interest bearing	$	159,176		$	159,089
Demand – interest bearing		147,421			135,442
Savings and money market accounts		180,701			142,203
Time deposits		477,029			535,886

Total deposits		964,327			972,620

Securities sold under agreement to repurchase		33,613			33,128
Corporate debenture		12,500			12,500
Other borrowed funds		55,235			42,518
Accrued interest payable		1,563			1,940
Accounts payables and accrued expenses		6,208			6,442

Total liabilities		1,073,446			1,069,148

Stockholders’ equity:
Preferred Stock, $.01 par value; 5,000,000 shares authorized No shares issued or outstanding		—			—
Common stock, $.01 par value: 40,000,000 shares authorized; 12,454,407 and 12,436,407 shares issued and outstanding at June 30, 2008 and December 31, 2007 respectively		124			124
Additional paid-in capital		110,942			110,604
Retained earnings		38,440			36,857
Accumulated other comprehensive income		(812	)		697

Total stockholders’ equity		148,694			148,282

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,222,140		$	1,217,430

See notes to the accompanying condensed consolidated financial statements

Centerstate Banks of Florida, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)

(in thousands of dollars, except per share data)


	Three months ended					Six months ended
	June 30, 2008			June 30, 2007		June 30, 2008		June 30, 2007
Interest income:
Loans	$	14,156		$	16,109	$	29,144	$	29,118
Investment securities available for sale:
Taxable		1,981			2,490		3,925		4,969
Tax-exempt		385			348		764		643
Federal funds sold and other		344			676		999		1,413

		16,866			19,623		34,832		36,143

Interest expense:
Deposits		6,202			7,098		13,490		13,090
Securities sold under agreement to repurchase		126			827		326		1,536
Corporate debenture		184			266		431		486
Other borrowed funds		324			188		741		189

		6,836			8,379		14,988		15,301

Net interest income		10,030			11,244		19,844		20,842
Provision for loan losses		1,515			376		2,119		658

Net interest income after loan loss provision		8,515			10,868		17,725		20,184

Other income:
Service charges on deposit accounts		1,018			1,146		2,104		2,099
Commissions from mortgage broker activities		29			62		50		114
Commissions from sale of mutual funds and annuities		173			165		282		245
Debit card and ATM fees		274			237		535		425
Loan related fees		91			87		198		162
BOLI income		97			95		192		169
(Loss) gain on sale of securities		(6	)		—		38		—
Gain on sale of bank branch office real estate		1,483			—		1,483		—
Other service charges and fees		111			111		259		229

		3,270			1,903		5,141		3,443

Other expenses:
Salaries, wages and employee benefits		5,244			5,265		10,574		9,920
Occupancy expense		1,105			1,083		2,235		1,997
Depreciation of premises and equipment		606			588		1,195		1,092
Supplies, stationary and printing		183			173		373		319
Marketing expenses		261			257		534		544
Data processing expense		317			389		615		669
Legal, auditing and other professional fees		305			276		568		472
Core deposit intangible (CDI) amortization		196			238		395		377
Postage and delivery		88			75		178		143
ATM and debit card related expenses		183			179		352		320
Bank regulatory expenses		217			110		401		208
Other expenses		898			729		1,660		1,374

Total other expenses		9,603			9,362		19,080		17,435

Income before provision for income taxes		2,182			3,409		3,786		6,192
Provision for income taxes		714			1,129		1,207		2,104

Net income	$	1,468		$	2,280	$	2,579	$	4,088

Earnings per share:
Basic	$	0.12		$	0.18	$	0.21	$	0.35
Diluted	$	0.12		$	0.18	$	0.21	$	0.34
Common shares used in the calculation of earnings per share:
Basic		12,447,484			12,400,627		12,445,000		11,777,266
Diluted		12,572,067			12,602,556		12,569,988		11,998,658

See notes to the accompanying condensed consolidated financial statements.

Centerstate Banks of Florida, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands of dollars)


	Six months ended June 30,
	2008			2007
Cash flows from operating activities:
Net Income	$	2,579		$	4,088
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		2,119			658
Depreciation of premises and equipment		1,195			1,092
Amortization of purchase accounting adjustments		281			223
Net amortization/accretion of investment securities		(10	)		59
Net deferred loan origination fees		(201	)		(92	)
OREO valuation write down		165			—
Gain on sale of securities available for sale		(38	)		—
Loss on sale of repossessed real estate owned		—			5
(Gain) loss on disposal of and or sale of fixed assets		(1,483	)		12
Deferred income taxes		(212	)		(665	)
Stock based compensation expense		197			268
Bank owned life insurance income		(192	)		(169	)
Net cash from changes in:
Net changes in accrued interest receivable, prepaid expenses, and other assets		640			(1,095	)
Net change in accrued interest payable, accrued expense, and other liabilities		(597	)		(990	)

Net cash provided by operating activities		4,443			3,394

Cash flows from investing activities:
Purchases of investment securities available for sale		(7,092	)		(14,623	)
Purchases of mortgage backed securities available for sale		(37,229	)		(15,865	)
Purchases of FHLB and FRB stock		(1,668	)		(94	)
Proceeds from maturities of investment securities available for sale		4,430			26,000
Proceeds from called investment securities available for sale		10,893			—
Proceeds from pay-downs of mortgage backed securities available for sale		18,201			16,189
Proceeds from the sale of investment securities available for sale		2,877			4,986
Proceeds from sales of mortgage backed securities available for sale		11,496			—
Proceeds from sales of FHLB and FRB stock		501			—
Increase in loans, net of repayments		(10,581	)		(46,531	)
Purchases of premises and equipment, net		(4,551	)		(4,763	)
Proceeds from sale of bank branch office real estate		2,204			—
Proceeds from sale of other real estate owned (repossessed real estate)		46			210
Net cash from acquisition of Valrico State bank		—			7,650

Net cash used in investing activities		(10,473	)		(26,841	)

Cash flows from financing activities:
Net decrease in deposits		(8,310	)		(25,003	)
Net increase in securities sold under agreement to repurchase		485			11,944
Net increase in other borrowings		12,717			3,250
Stock options exercised, including tax benefit		141			515
Dividends paid		(996	)		(826	)

Net cash provided by (used in) financing activities		4,037			(10,120	)

Net decrease in cash and cash equivalents		(1,993	)		(33,567	)
Cash and cash equivalents, beginning of period		72,448			120,021

Cash and cash equivalents, end of period	$	70,455		$	86,454

Centerstate Banks of Florida, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands of dollars)

(continued)


	Six months ended June 30,
	2008		2007
Transfer of loans to other real estate owned	$	1,898	$	215

Cash paid during the period for:
Interest	$	15,362	$	15,099

Income taxes	$	1,480	$	2,235

See notes to the accompanying condensed consolidated financial statements.

CenterState Banks of Florida, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1: Nature of Operations and basis of presentation

Our consolidated financial statements include the accounts of CenterState Banks of Florida, Inc. (the “Parent Company” or “CSFL”), and our wholly owned subsidiary banks and their wholly owned subsidiary, C. S. Processing. Our four subsidiary banks operate through 37 locations in nine Counties throughout Central Florida, providing traditional deposit and lending products and services to their commercial and retail customers.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2007. 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 six month period ended June 30, 2008 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 include the weighted average number of common shares outstanding during the periods and the further dilution from stock options using the treasury method. There were 878,000 stock options that were anti dilutive at June 30, 2008.

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).


	For the three months ended June 30,
	2008					2007
	Earnings		Weighted Average Shares	Per Share Amount		Earnings		Weighted Average Shares	Per Share Amount
Basic EPS
Net earnings available to common stockholders	$	1,468	12,447,484	$	0.12	$	2,280	12,400,627	$	0.18

Effect of dilutive securities:
Incremental shares from assumed exercise of stock options		—	124,583		—		—	201,929		—

Diluted EPS
Net earnings available to common stockholders and assumed conversions	$	1,468	12,572,067	$	0.12	$	2,280	12,602,556	$	0.18


	For the six months ended June 30,
	2008					2007
	Earnings		Weighted Average Shares	Per Share Amount		Earnings		Weighted Average Shares	Per Share Amount
Basic EPS
Net earnings available to common stockholders	$	2,579	12,445,000	$	0.21	$	4,088	11,777,266	$	0.35

Effect of dilutive securities:
Incremental shares from assumed exercise of stock options		—	124,988		—		—	221,392		(0.01	)

Diluted EPS
Net earnings available to common stockholders and assumed conversions	$	2,579	12,569,988	$	0.21	$	4,088	11,998,658	$	0.34

NOTE 3: Comprehensive income

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

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


	Three months ended						Six months ended
	Jun 30, 2008			Jun 30, 2007			Jun 30, 2008			Jun 30, 2007
Net income	$	1,468		$	2,280		$	2,579		$	4,088
Other comprehensive loss, net of tax:
Unrealized holding loss arising during the period		(2,423	)		(1,974	)		(1,532	)		(1,573	)
Reclassified adjustments for (loss) gain included in net income, net of income taxes of ($2) and $15		(4	)		—			23			—

Other comprehensive loss, net of tax		(2,427	)		(1,974	)		(1,509	)		(1,573	)

Comprehensive income	$	(959	)	$	306		$	1,070		$	2,515

NOTE 4: Sale of bank branch office real estate

The Company sold one of its branch office buildings on April 1, 2008 for $2,500,000 and simultaneously entered into an agreement to lease back the real estate for a period of one year with an option to renew the lease for an additional year. Part of the gain, approximately $120,000, was deferred pursuant to sale lease-back accounting rules, and the remaining amount of the gain, approximately $1,483,000, was recognized currently during the current quarter.

NOTE 5: Fair value

FASB Statement No. 157 establishes 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) or identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

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

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

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

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


			Fair value measurements at June 30, 2008 using
	Jun 30, 2008		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets:
Available for sale securities	$	193,449	$	0	$	193,449	$	0

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


			Fair value measurements at June 30, 2008 using
	Jun 30, 2008		Quoted prices in active markets for identical assets (Level 1)		Significant other observable Inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets:
Impaired loans	$	18,358	$	0	$	18,358	$	0

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $19,523,000, with a valuation allowance of $1,165,000, resulting in an additional provision for loan losses of $353,000 for the six month period ending June 30, 2008.

NOTE 6: Effect of new pronouncements

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157. This FSP delays the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The impact of adoption was not material.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. The standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The Company did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008, the effective date of the standard.

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This issue requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants’ employment or retirement. The required

accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. This issue is effective for fiscal years beginning after December 15, 2007. The impact of adoption was not material.

On November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value through Earnings (“SAB 109”). Previously, SAB 105, Application of Accounting Principles to Loan Commitments, stated that in measuring the fair value of a derivative loan commitment, a company should not incorporate the expected net future cash flows related to the associated servicing of the loan. SAB 109 supersedes SAB 105 and indicates that the expected net future cash flows related to the associated servicing of the loan should be included in measuring fair value for all written loan commitments that are accounted for at fair value through earnings. SAB 105 also indicated that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment, and SAB 109 retains that view. SAB 109 is effective for derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The impact of adoption was not material.

ITEM 2:

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

COMPARISON OF BALANCE SHEETS AT JUNE 30, 2008 AND DECEMBER 31, 2007

Overview

Total assets were $1,222,140,000 as of June 30, 2008, compared to $1,217,430,000 at December 31, 2007, an increase of $4,710,000 or 0.4%. Our assets remained stable period to period, a reflection of the current economic environment.

Federal funds sold and money market accounts

Federal funds sold and money market accounts were $36,671,000 at June 30, 2008 (approximately 3.0% of total assets) as compared to $42,155,000 at December 31, 2007 (approximately 3.5% of total assets). We use our available-for-sale securities portfolio, as well as federal funds sold and money market accounts for liquidity management and for investment yields. These accounts, as a group, will fluctuate as a function of loans outstanding.

Investment securities

Securities available-for-sale, consisting primarily of U.S. government agency securities, municipal tax exempt securities, and U.S. Treasury securities were $193,449,000 at June 30, 2008 (approximately 16% of total assets) compared to $199,434,000 at December 31, 2007 (approximately 16% of total assets), a decrease of $5,985,000 or 3%. These 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. We use our available-for-sale securities portfolio, as well as federal funds sold and money market accounts for liquidity management and for investment yields. These accounts, as a group, will fluctuate as a function of loans outstanding as discussed above, under the caption “Federal funds sold and money market accounts.”

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 June 30, 2008, were $838,915,000, or 77% of average earning assets, as compared to $813,927,000, or 74% of average earning assets, for the quarter ending June 30, 2007. Total loans, net of unearned fees and cost, at June 30, 2008 and December 31, 2007 were $849,058,000 and $841,405,000, respectively, an increase of $7,653,000, or 0.9%. This represents a loan to total asset ratio of 69% and 69% and a loan to deposit ratio of 88% and 87%, at June 30, 2008 and December 31, 2007, respectively. The reduction in loan growth during this period was due to the current economic environment in general and the lending environment in particular in central Florida.

Total residential real estate loans totaled $211,602,000 or 25% of our total loans as of June 30, 2008. As with all of our loans, these are originated in our geographical market area in central Florida. We do not engage in sub-prime lending. As of this same date, our commercial real estate loans totaled $409,131,000, or 48% of our total loans. Construction, development, and land loans totaled $91,514,000, or 11% of our loans. As a group, all of our real estate collateralized loans represent approximately 84% of our total loans at June 30, 2008. The remaining 16% is comprised of commercial loans (9%) and consumer loans (7%).

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).


	June 30, 2008			Dec 31, 2007
Real estate loans
Residential	$	211,602		$	209,186
Commercial		409,131			385,669
Construction, development, land		91,514			108,615

Total real estate		712,247			703,470
Commercial		78,279			78,231
Consumer and other		59,316			60,687

Gross loans		849,842			842,388
Unearned fees/costs		(784	)		(983	)

Total loans net of unearned fees		849,058			841,405
Allowance for loan losses		(11,599	)		(10,828	)

Total loans net of unearned fees and allowance for loan losses	$	837,459		$	830,577

Credit quality and allowance for loan losses

We maintain an allowance for loan losses that we believe is adequate to absorb probable losses inherent in our loan portfolio. 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 Statement of Financial Accounting Standard No. 114. Impaired loans are those loans that management has estimated will not repay as agreed upon. 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 repay 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, 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 June 30, 2008 and December 31, 2007.


*(amounts are in thousands of dollars)*	Jun 30, 2008			Dec 31, 2007			Increase (decrease)
Impaired loans	$	19,523		$	11,803		$	7,720
Component 1 (specific allowance)		1,165			812			353
Specific allowance as percentage of impaired loans		5.97	%		6.88	%		(91 bps	)

Total loans other than impaired loans		829,535			829,602			(67	)
Component 2 (general allowance)		10,434			10,016			418
General allowance as percentage of non impaired loans		1.26	%		1.21	%		5 bps

Total loans		849,058			841,405			7,653
Total allowance for loan losses		11,599			10,828			771
Allowance for loan losses as percentage of total loans		1.37	%		1.29	%		8 bps

As shown in the table above, our allowance for loan losses (“ALLL”) as a percentage of total loans outstanding was 1.37% at June 30, 2008 compared to 1.29% at December 31, 2007. Our ALLL increased by $771,000 during this six month period. Of this amount, $418,000 relates to an increase in our Component 2, or general allowance, as described and discussed above. This increase is primarily due to changes in the loan portfolio mix, changes in our historical charge-off rates and the increase in our loan portfolio. The remaining $353,000 increase is due to an increase in our Component 1, or specific allowance. This Component is the result of specific allowance analyses prepared for each of our impaired loans. The increase in our specific allowance is the result of charge-offs taken during the period, the change in the mix of impaired loans, and the growth in impaired loans.

We continually analyze our loan portfolio in an effort to recognize and resolve problem assets as quickly and efficiently as possible. We are committed to the early recognition of problems and to maintaining a sufficient allowance. As of June 30, 2008, 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.

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


	Three month period ended June 30,						Six month period ended June 30,
	2008			2007			2008			2007
Allowance at beginning of period	$	11,258		$	7,632		$	10,828		$	7,355
Charge-offs
Commercial loans		(172	)		—			(172	)		—
Real estate loans		(844	)		(15	)		(1,070	)		(15	)
Consumer and other loans		(169	)		(102	)		(241	)		(129	)

Total charge-offs		(1,185	)		(117	)		(1,483	)		(144	)
Recoveries
Commercial loans		1			—			7			1
Real estate loans		3			4			81			10
Consumer and other loans		7			7			47			22

Total recoveries		11			11			135			33
Net charge-offs		(1,174	)		(106	)		(1,348	)		(111	)
Provision for loan losses		1,515			376			2,119			658
Adjustment relating to Valrico merger		—			1,617			—			1,617

Allowance at end of period	$	11,599		$	9,519		$	11,599		$	9,519

Non performing loans and non performing assets

Non performing loans are defined as non accrual loans plus loans past due 90 days or more and still accruing interest. 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. Subsequent collections reduce the principal balance of the loan until the loan is returned to accrual status. Non performing loans as a percentage of total loans were 1.23% at June 30, 2008, compared to 0.48% at December 31, 2007.

Non performing assets (which we define as non performing loans, as defined above, plus (a) OREO (i.e. real estate acquired through foreclosure or deed in lieu of foreclosure); and (b) other repossessed assets that are not real estate), were $13,089,000 at June 30, 2008, compared to $12,474,000 at March 31, 2008. Non performing assets as a percentage of total assets was 1.07% at June 30, 2008, compared to 0.40% at December 31, 2007.

As shown in the table below, the largest component of non performing loans is non accrual loans, which as of June 30, 2008 management had identified a total of $10,385,000 (60 loans). Of this amount approximately $2,816,000 or 27% are residential real estate loans (19 loans); approximately $4,054,000 or 39% are commercial real estate loans (9 loans); approximately $2,339,000 or 23% are construction, acquisition and development, and land loans (13 loans); approximately $939,000 or 9% are commercial loans (6 loans); and $237,000 or 2% are consumer and all other loans (13 loans).

We have no construction or development loans with national builders. We do business with local builders and developers that have typically been long time customers. As indicated above, non accrual construction, acquisition and development, and land loans totaled $2,339,000 at June 30, 2008. This category includes the following loans: 6 loans for $1,065,000 collateralized by 17 residential lots; 3 loans for $637,000 collateralized by three single family homes under construction (spec homes); and, 4 loans for $637,000 for land, other than developed lots. Six of these thirteen loans have a specific allowance which in the aggregate totals $340,000.

The largest non accrual loan we had on our books as of June 30, 2008 is a commercial real estate loan for $1,136,000. The average size non accrual loan is approximately $173,000.

OREO at June 30, 2008 was $2,270,000, which represents eight single family homes ($1,951,000), one mobile home with land ($86,000), and one commercial real estate property ($233,000).

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


	June 30, 2008			Mar 31, 2008			Dec 31, 2007
Non-accrual loans	$	10,385		$	9,101		$	3,797
Past due loans 90 days or more and still accruing interest		68			2,345			277

Total non-performing loans (“NPLs”)		10,453			11,446			4,074

Other real estate owned (“OREO”)		2,270			792			583
Repossessed assets other than real estate		366			236			170

Total non-performing assets (“NPAs”)	$	13,089		$	12,474		$	4,827

Total NPLs as a percentage of total loans		1.23	%		1.37	%		0.48	%
Total NPAs as a percentage of total assets		1.07	%		1.00	%		0.40	%
Allowance for loan losses	$	11,599		$	11,258		$	10,828
Allowance for loan losses as a percentage of NPLs		111	%		98	%		266	%

Bank premises and equipment

Bank premises and equipment was $58,093,000 at June 30, 2008 compared to $55,458,000 at December 31, 2007, an increase of $2,635,000 or 4.8%. This amount is the result of purchases and construction costs totaling $4,551,000 less $1,195,000 of depreciation expense and $721,000 relating to the sale of bank branch real estate. Most of these costs relate to construction activity at several of our office locations.

Deposits

Deposit growth, in particular core deposit (i.e. non time deposit) growth, has been a challenge. Core deposit growth has been and remains a primary focus for us. Our subsidiary Presidents have initiated various incentive programs throughout their Banks as well as other marketing efforts targeted at core deposit growth.

During the six month period ended June 30, 2008, total deposits decreased by $8,293,000, or 0.9%. Although total deposits decreased slightly, this is a net result. The underlying metrics indicate the following. That is, time deposits (our higher cost deposits) decreased by $58,857,000, or 11.0%, and core deposits (deposits other than time deposits) increased by $50,564,000, or 11.6%. Furthermore, time deposits were 49% of total deposits at June 30, 2008 compared to 55% at December 31, 2007. This favorable shift in deposit mix along with the repricing of time deposits as they mature subsequent to the

decrease in market interest rates during the first quarter of this year contributed to the 14bps improvement in the Company’s net interest margin (“NIM”) during the current quarter compared to the first quarter of the year.

The table below sets forth our deposits by type and as a percentage to total deposits at June 30, 2008 and December 31, 2007 (amounts shown in the table are in thousands of dollars).


	Jun 30, 2008		% of Total		Dec 31, 2007		% of total
Demand – non-interest bearing	$	159,176	17	%	$	159,089	16	%
Demand – interest bearing		147,421	15	%		135,442	14	%
Savings and money market accounts		180,701	19	%		142,203	15	%
Time deposits		477,029	49	%		535,886	55	%

Total deposits	$	964,327	100	%	$	972,620	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 $33,613,000 at June 30, 2008 compared to $33,128,000 at December 31, 2007, resulting in an increase of $485,000, or 1.5%.

Other borrowed funds

From time to time we borrow short-term either through Federal Home Loan Bank advances or Federal Funds Purchased. At June 30, 2008 and December 31, 2007, advances from the Federal Home Loan Bank were as follows (amounts are in thousands of dollars).


	June 30, 2008		Dec 31, 2007
Daily overnight advances, interest rate was 2.57% and 4.4% at June 30, 2008 and December 31, 2007, respectively	$	12,500	$	36,000
Daily overnight Federal Funds Purchased , at June 30, 2008 the interest rate was 3.22%		1,735		—
Matures January 2, 2008, interest rate is fixed at 4.6%		—		1,518
Matures March 28, 2008, interest rate is fixed at 5.51%		—		2,000
Matures August 1, 2008, interest rate is fixed at 2.92%		10,000		—
Matures October 22, 2008, interest rate is fixed at 3.02%		5,000		—
Matures December 31, 2008, interest rate is fixed at 4.11%		3,000		3,000
Matures January 12, 2009, interest rate is fixed at 3.48%		10,000		—
Matures February 2, 2009, interest rate is fixed at 2.72%		10,000		—
Matures June 27, 2011, interest rate is fixed at 3.93%		3,000		—

Total	$	55,235	$	42,518

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 after five years, and sooner in specific

events, 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 after five years, and sooner in specific events, 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 June 30, 2008, was $148,694,000, or 12.2% of total assets, compared to $148,282,000, or 12.2% of total assets at December 31, 2007. The increase in stockholders’ equity was due to the following items:


$148,282,000		Total stockholders’ equity at December 31, 2007
2,579,000		Net income during the period
(996,000)		Dividends declared and paid ($0.08 per share)
(1,509,000)		Net decrease in market value of securities available for sale, net of deferred taxes
141,000		Employee stock options exercised
197,000		Employee stock option expense consistent with SFAS #123(R)

$148,694,000		Total stockholders’ equity at June 30, 2008

The federal bank regulatory agencies have established risk-based capital requirements for banks. These guidelines are intended to provide an additional measure of a bank’s capital adequacy by assigning weighted levels of risk to asset categories. Banks are also required to systematically maintain capital against such “off- balance sheet” activities as loans sold with recourse, loan commitments, guarantees and standby letters of credit. These guidelines are intended to strengthen the quality of capital by increasing the emphasis on common equity and restricting the amount of loan loss reserves and other forms of equity such as preferred stock that may be included in capital. As of June 30, 2008, 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 June 30, 2008 and December 31, 2007 are presented in the table below.


	Actual				Well capitalized				Excess
	Amount		Ratio		Amount		Ratio		Amount
June 30, 2008
Total capital (to risk weighted assets)	$	141,157	15.2	%	$	92,930	> 10	%	$	48,227
Tier 1 capital (to risk weighted assets)		129,558	13.9	%		55,758	> 6	%		73,800
Tier 1 capital (to average assets)		129,558	10.9	%		59,321	> 5	%		70,237

December 31, 2007
Total capital (to risk weighted assets)	$	138,070	15.0	%	$	92,231	> 10	%	$	45,839
Tier 1 capital (to risk weighted assets)		127,242	13.8	%		55,339	> 6	%		71,903
Tier 1 capital (to average assets)		127,242	10.8	%		58,995	> 5	%		68,247

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED JUNE 30, 2008 AND 2007

Overview

Net income for the three months ended June 30, 2008 was $1,468,000 or $0.12 per share basic and diluted, compared to $2,280,000 or $0.18 per share basic and diluted for the same period in 2007. The primary reasons for this difference were: (1) the 38bps decrease in our net interest margin which decreased from 4.13% in the second quarter of 2007 to 3.75% in the second quarter of 2008; (2) our loan loss provision was $1,139,000 higher in the current quarter compared to the same quarter last year, and; (3) we recognized a one time non recurring gain of $1,483,000 from the sale of a bank branch office real estate transaction during the current quarter, which partially offset some of the negative impact to earnings listed in (1) and (2).

The return on average equity (“ROE”) and the return on average assets (“ROA”), calculated on an annualized basis, for the three month period ended June 30, 2008 was 3.93% and 0.48%, respectively, as compared to 6.41% and 0.74%, respectively, for the same period in 2007.

Net interest income/margin

Net interest income decreased $1,214,000 or 11% to $10,030,000 during the three month period ended June 30, 2008 compared to $11,244,000 for the same period in 2007. The $1,214,000 decrease was the result of a $2,757,000 decrease in interest income less a $1,543,000 decrease in interest expense.

Interest earning assets averaged $1,092,428,000 during the three month period ended June 30, 2008 as compared to $1,106,713,000 for the same period in 2007, a decrease of $14,285,000, or 1.3%. The yield on average interest earning assets decreased 90bps to 6.21% (90bps to 6.27% tax equivalent basis) during the three month period ended June 30, 2008, compared to 7.11% (7.17% tax equivalent basis) for the same period in 2007. The combined effects of the $14,285,000 decrease in average interest earning assets and the 90bps (90bps tax equivalent basis) decrease in yield on average interest earning assets resulted in the $2,757,000 ($2,742,000 tax equivalent basis) decrease in interest income between the two periods.

Interest bearing liabilities averaged $905,504,000 during the three month period ended June 30, 2008 as compared to $888,501,000 for the same period in 2007, an increase of $17,003,000, or 1.9%.

The cost of average interest bearing liabilities decreased 74bps to 3.04% during the three month period ended June 30, 2008, compared to 3.78% for the same period in 2007. The combined effects of the $17,003,000 increase in average interest bearing liabilities and the 74bps decrease in cost of average interest bearing liabilities resulted in the $1,543,000 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 June 30, 2008 and 2007 on a tax equivalent basis (in thousands of dollars).


	Three months ended June 30,
	2008							2007
	Average Balance			Interest Inc / Exp		Average Rate		Average Balance			Interest Inc / Exp		Average Rate
Loans (1) (2) (9)	$	838,915		$	14,185	6.80	%	$	813,927		$	16,135	7.95	%
Securities- taxable (3)		215,628			2,325	4.34	%		258,320			3,166	4.92	%
Securities- tax exempt (9)		37,885			523	5.55	%		34,466			474	5.52	%

Total earning assets		1,092,428			17,033	6.27	%		1,106,713			19,775	7.17	%

Allowance for loan losses		(11,429	)						(9,369	)
All other assets		137,878							145,680

Total assets	$	1,218,877						$	1,243,024

Deposits (4)		815,623			6,202	3.06	%		789,457			7,098	3.61	%
Borrowings (5)		77,381			450	2.34	%		86,544			1,015	4.70	%
Corporate debenture (6)		12,500			184	5.92	%		12,500			266	8.54	%

Total interest bearing Liabilities		905,504			6,836	3.04	%		888,501			8,379	3.78	%

Demand deposits		154,769							200,164
Other liabilities		8,289							11,608
Stockholders’ equity		150,315							142,751

Total liabilities and Stockholders’ equity	$	1,218,877						$	1,243,024

Net interest spread (tax equivalent basis) (7)						3.23	%						3.39	%

Net interest income (tax equivalent basis)				$	10,197						$	11,396

Net interest margin (tax equivalent basis) (8)						3.75	%						4.13	%


Note 1:		Loan balances are net of deferred origination fees and costs.
Note 2:		Interest income on average loans includes loan fee recognition of $95,000 and $163,000 for the three month periods ended June 30, 2008 and 2007.
Note 3:		Includes securities available-for-sale, federal funds sold and money market 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.
Note 5:		Includes securities sold under agreements to repurchase, Federal Home Loan Bank advances and federal funds purchased.
Note 6:		Includes net amortization of origination costs and amortization of purchase accounting adjustment of $2,000 and $2,000 for the three month periods ended June 30, 2008 and 2007.
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 $1,139,000, or 303%, to $1,515,000 during the three month period ending June 30, 2008 compared to $376,000 for the comparable period in 2007. 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 those levels maintained by 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” regarding the allowance for loan losses for additional information.

Non-interest income

Non-interest income for the three months ended June 30, 2008 was $3,270,000 compared to $1,903,000 for the comparable period in 2007. 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)	Jun 30, 2008		Jun 30, 2007		$ increase (decrease)			% Increase (decrease)
Service charges on deposit accounts	$	1,018	$	1,146	$	(128	)	(11.2	)%
Commissions from mortgage broker activities		29		62		(33	)	(53.2	)%
Commissions from sale of mutual funds and annuities		173		165		8		4.8	%
Debit card and ATM fees		274		237		37		15.6	%
Loan related fees		91		87		4		4.6	%
BOLI income		97		95		2		2.1	%
Other service charges and fees		105		111		(6	)	(5.4	)%

Subtotal	$	1,787	$	1,903	$	(116	)	(6.1	)%
Gain on sale of bank branch real estate		1,483		—		1,483		—	%

Total non-interest income	$	3,270	$	1,903	$	1,367		71.8	%

During the current quarter, we sold one of our branch bank sites and simultaneously entered into an agreement to lease back the real estate for a period of one year with an option to renew the lease for an additional year. A pre-tax gain on the sale of approximately $1,483,000 was recognized during April. The branch office has been operating from its current location since October 1996. It has approximately $14 million in deposits and $12 million in loans. The sale was for the real estate only. It is our intention to eventually transfer the related customer accounts to either a new branch office that has not yet been identified or to one of our existing branch locations. Excluding this transaction, our non-interest income for the first quarter was $1,787,000, which was $116,000 or 6.1% less than our non-interest income for the similar quarter last year. The largest component contributing to the decline was “service charges on deposit accounts,” which was $128,000 or 11.2% less in the current quarter compared to the similar quarter last year. Of this decrease, $112,000 of it relates to a decrease in NSF fees. We recognized $704,000 of NSF fees during the current quarter, which was $112,000 or 13.7% less than the $816,000 of NSF fees recognized in the comparable quarter last year. As reported previously, one of our banks initiated an on-going checking account marketing campaign during the fourth quarter of 2006

which is designed to increase fees, as well as increase the number of checking accounts. Primarily as a result of this program, this bank’s NSF fees have continually increased. During the current quarter, this bank reported NSF fees of $294,000 which was a $15,000 or 5% increase over the $279,000 of NSF fees reported for the comparable quarter last year. Our remaining banks had a net decrease in their NSF fees for comparable quarters of approximately $127,000 which is primarily due to changing the daily customer account cut-off time to a later hour in the day.

Commissions from mortgage broker activities are dependent on market place forces including supply and demand of single family residential property in our local markets. The single family real estate market has slowed downed considerably in our market areas in central Florida. Commissions from the sale of mutual funds and annuities are also dependent on market place forces including the successful efforts of our investment sales representatives. Commissions earned are expected to fluctuate period to period.

Non-interest expense

Non-interest expense for the three months ended June 30, 2008 increased $241,000, or 2.6%, to $9,603,000, compared to $9,362,000 for the same period in 2007. 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)	Jun 30, 2008			Jun 30, 2007			$ increase (decrease)			% Increase (decrease)
Employee salaries and wages	$	4,113		$	3,840		$	273		7.1	%
Employee incentive/bonus compensation		287			508			(221	)	(43.5	)%
Employee stock option expense		107			133			(26	)	(19.5	)%
Health insurance and other employee benefits		475			575			(100	)	(17.4	)%
Payroll taxes		279			260			19		7.3	%
Other employee related expenses		228			228			—		—	%
Incremental direct cost of loan origination		(245	)		(279	)		34		12.2	%

Total salaries, wages and employee benefits	$	5,244		$	5,265		$	(21	)	(0.4	)%

Occupancy expense		1,105			1,083			22		2.0	%
Depreciation of premises and equipment		606			588			18		3.1	%
Supplies, stationary and printing		183			173			10		5.8	%
Marketing expenses		261			257			4		1.6	%
Data processing expense		317			389			(72	)	(18.5	)%
Legal, auditing and other professional fees		305			276			29		10.5	%
Core deposit intangible (CDI) amortization		196			238			(42	)	(17.6	)%
Postage and delivery		88			75			13		17.3	%
ATM and debit card related expenses		183			179			4		2.2	%
Bank regulatory related expenses		217			110			107		97.3	%
Foreclosure and repossession related expenses		104			22			82		327.7	%
Internet and telephone banking		88			74			14		18.9	%
Operational write-offs and losses		105			37			68		183.8	%
Correspondent accounts and Federal Reserve charges		70			69			1		1.4	%
Conferences, seminars, education and training		63			54			9		16.7	%
Other expenses		468			473			(5	)	(1.1	)%

Total non-interest expense	$	9,603		$	9,362		$	241		2.6	%

Non-interest expense increased quarter to quarter by 2.6% as listed in the above schedule. As noted in the schedule above and the discussion below, the primary components contributing to this

increase were increases in employee salaries and wages, bank regulatory related expenses, foreclosure and repossession related expenses and operational write-offs and losses. Increases in these components were offset by decreases in employee incentive/bonus compensation, employee health insurance expenses and data processing related expenses.

Employee salaries and wages increased $273,000 or 7.1% period to period, as shown in the above table. Part of the increase is due to a larger number of full time equivalent employees (“FTEs”) and part is due to an increase in employee salary and wage expense per FTE. Average FTEs in the current quarter were 384 compared to 376 during the same quarter last year, an increase of 8 or 2.1%. Employee salary and wage expense per FTE during the current quarter was $10,711 per FTE, compared to $10,213 per FTE during the same quarter last year, an increase of $498 per FTE, or 4.9%. The growth in number of FTEs is primarily due to our continued effort to grow our business and normal timing issues relating to normal employee turnover and replacement efforts. The cost per FTE relates to a combination of normal salary increases and the mix of employee level.

We do not view the decrease in our employee incentive/bonus compensation as a positive event. The bulk of our bonus and incentive plans are tied to the earnings and growth of our Company. If our incentive/bonus compensation expenses are decreasing it is because our earnings and growth are likewise not doing as well.

Employee health insurance, as listed in the table above, decreased $100,000 between the two periods presented. We have been proactive in this area since 2007. Effective October 1, 2007, we changed insurance company and third party administrators, and effective January 1, 2008, we initiated a Health Savings Account plan (“HSA”), as well as other consumer driven initiatives. We do not necessarily expect a decrease in employee health insurance expense for the year 2008, but we do expect very little, if any, increase in this expense from our 2007 levels. For the first six months of 2008, we recognized expenses of $984,000 compared to $1,117,000 during the comparable period in 2007, a $133,000 or 11.9% decrease period to period.

Data processing expenses, as listed in the table above, decreased by $72,000 between the two periods presented. Beginning in December 2007 and ending in February 2008, we converted each of our banks’ core processing to in-house data processing solutions. By making this change, we expect net savings to approximate $300,000 per year on a comparable basis.

Bank regulatory expenses increased by $107,000 or 97.3% between the two quarters listed in the table above. The banking regulatory authorities began increasing their charges to our banks during the fourth quarter of 2007. Given the current banking environment, we expect these higher charges to continue into the foreseeable future.

Increase in foreclosure and repossession related expenses is reflective of the current environment and consistent with the increase in our repossessed real estate (OREO) and activity in our repossessed assets other than real estate. Increase in operational write-offs and losses are a result of bad check write-offs, teller errors, processing errors and robberies.

Provision for income taxes

The income tax provision for the three months ended June 30, 2008 was $714,000 (an effective rate of 32.7%) compared to $1,129,000 (an effective rate of 33.1%) for the same period in 2007. The primary reason for the decrease in our effective tax rate was due to the increase in our tax exempt securities and loans.

COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2008 AND 2007

Overview

Net income for the six months ended June 30, 2008 was $2,579,000 or $0.21 per share basic and diluted, compared to $4,088,000 or $0.35 per share basic and $0.34 per share diluted for the same period in 2007. Factors contributing to this decrease include: (1) the 42bps decrease in our net interest margin which decreased from 4.11% for the first half of 2007 to 3.69% for the first half of 2008; (2) our loan loss provision was $1,461,000 higher in the current period compared to the same period last year; (3) new branches opened in February 2007, May 2007 and August 2007 have not yet produced incremental revenue in excess of their incremental cost, which has had a greater negative effect on our earnings during the first half of 2008 compared to the first half of 2007 because they were not opened for the full six months in 2007; and (4) we recognized a one time non recurring gain of $1,483,000 from the sale of a bank branch office real estate transaction during the current period, which partially offset some of the negative impact to earnings listed in (1), (2) and (3).

ROE and ROA, calculated on an annualized basis, for the six month period ended June 30, 2008 was 3.45% and 0.42%, respectively, as compared to 6.30% and 0.72%, respectively, for the same period in 2007.

Net interest income/margin

Net interest income decreased $998,000 or 4.8% to $19,844,000 during the six month period ended June 30, 2008 compared to $20,842,000 for the same period in 2007. The decrease was the result of a $1,311,000 decrease in interest income less a $313,000 decrease in interest expense.

Interest earning assets averaged $1,100,782,000 during the six month period ended June 30, 2008 as compared to $1,035,542,000 for the same period in 2007, an increase of $65,240,000, or 6.3%. The yield on average interest earning assets decreased 68bps to 6.36% (66bps to 6.43% tax equivalent basis) during the six month period ended June 30, 2008, compared to 7.04% (7.09% tax equivalent basis) for the same period in 2007. The combined net effects of the $65,240,000 increase in average interest earning assets and the 68bps (66bps tax equivalent basis) decrease in yield on average interest earning assets resulted in the $1,311,000 ($1,257,000 tax equivalent basis) decrease in interest income between the two periods.

Interest bearing liabilities averaged $910,075,000 during the six month period ended June 30, 2008 as compared to $817,322,000 for the same period in 2007, an increase of $92,753,000, or 11.3%. The cost of average interest bearing liabilities decreased 47bps to 3.31% during the six month period ended June 30, 2008, compared to 3.78% for the same period in 2007. The combined net effects of the $92,753,000 increase in average interest bearing liabilities and the 47bps decrease in cost of average interest bearing liabilities resulted in the $313,000 decrease in interest expense between the two periods.

The table below summarizes the analysis of changes in interest income and interest expense for the six month periods ended June 30, 2008 and 2007 (in thousands of dollars).


	Six months ended June 30,
	2008							2007
	Average Balance			Interest Inc / Exp		Average Rate		Average Balance			Interest Inc / Exp		Average Rate
Loans (1) (2) (9)	$	836,943		$	29,209	7.02	%	$	741,466		$	29,171	7.93	%
Securities- taxable (3)		226,003			4,924	4.38	%		261,863			6,382	4.91	%
Securities- tax exempt (9)		37,836			1,039	5.52	%		32,213			876	5.48	%

Total earning assets		1,100,782			35,172	6.43	%		1,035,542			36,429	7.09	%

Allowance for loan losses		(11,163	)						(8,396	)
All other assets		138,316							125,137

Total assets	$	1,227,935						$	1,152,283

Deposits (4)		820,979			13,490	3.31	%		731,509			13,090	3.61	%
Borrowings (5)		76,596			1,067	2.80	%		74,563			1,725	4.67	%
Corporate debenture (6)		12,500			431	6.93	%		11,250			486	8.71	%

Total interest bearing Liabilities		910,075			14,988	3.31	%		817,322			15,301	3.78	%

Demand deposits		159,142							196,554
Other liabilities		8,420							7,652
Stockholders’ equity		150,298							130,755

Total liabilities and Stockholders’ equity	$	1,227,935						$	1,152,283

Net interest spread (tax equivalent basis) (7)						3.12	%						3.31	%

Net interest income (tax equivalent basis)				$	20,184						$	21,128

Net interest margin (tax equivalent basis) (8)						3.69	%						4.11	%


Note 1:		Loan balances are net of deferred origination fees and costs.
Note 2:		Interest income on average loans includes loan fee recognition of $190,000 and $301,000 for the six month periods ended June 30, 2008 and 2007.
Note 3:		Includes securities available-for-sale, federal funds sold and money market 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.
Note 5:		Includes securities sold under agreements to repurchase, Federal Home Loan Bank advances and federal funds purchased.
Note 6:		Includes net amortization of origination costs and amortization of purchase accounting adjustment of $4,000 and $12,000 for the six month periods ended June 30, 2008 and 2007.
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 $1,461,000, or 222%, to $2,119,000 during the six month period ending June 30, 2008 compared to $658,000 for the comparable period in 2007. 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 those levels maintained by 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” regarding the allowance for loan losses for additional information.

Non-interest income

Non-interest income for the six months ended June 30, 2008 was $5,141,000 compared to $3,443,000 for the comparable period in 2007, resulting in an increase of $1,698,000, or 49.3%. This increase was the result of the following components listed in the table below. Amounts listed are in thousands of dollars.


Six month period ending: (in thousands of dollars)	June 30, 2008		June 30, 2007		$ Increase (decrease)			% increase (decrease)
Service charges on deposit accounts	$	2,104	$	2,099	$	5		0.2	%
Commissions from mortgage broker activities		50		114		(64	)	(56.1	)%
Commissions from sale of mutual funds and annuities		282		245		37		15.1	%
Debit card and ATM fees		535		425		110		25.9	%
Loan related fees		198		162		36		22.2	%
BOLI income		192		169		23		13.6	%
Gain on sale of securities		38		—		38		—	%
Other service charges and fees		259		229		30		13.1	%

Subtotal	$	3,658	$	3,443	$	215		6.2	%
Gain on sale of bank branch real estate		1,483		—		1,483		—	%

Total non-interest income	$	5,141	$	3,443	$	1,698		49.3	%

We acquired Valrico State Bank (“VSB”) on April 2, 2007. As such, six months of non-interest income from VSB ($429,000) was included in the six month period ending June 30, 2008, compared to three months ($215,000) in the comparable period in 2007.

Commissions from mortgage broker activities are dependent on market place forces including supply and demand of single family residential property in our local markets. Commissions from the sale of mutual funds and annuities are also dependent on market place forces including the successful efforts of our investment sales representatives. These two categories will vary from period to period.

Non-interest expense

Non-interest expense for the six months ended June 30, 2008 increased $1,645,000, or 9.4%, to $19,080,000, compared to $17,435,000 for the same period in 2007. Components of our non-interest expenses are listed in the table below. Amounts are in thousands of dollars.


Six month period ending: (in thousands of dollars)	Jun 30, 2008			Jun 30, 2007			$ increase (decrease)			% increase (decrease)
Employee salaries and wages	$	8,103		$	7,083		$	1,020		14.4	%
Employee incentive/bonus compensation		676			1,020			(344	)	(33.7	)%
Employee stock option expense		197			268			(71	)	(26.5	)%
Health insurance and other employee benefits		984			1,117			(133	)	(11.9	)%
Payroll taxes		608			590			18		3.1	%
Other employee related expenses		461			398			63		15.8	%
Incremental direct cost of loan origination		(455	)		(556	)		101		18.2	%

Total salaries, wages and employee benefits	$	10,574		$	9,920		$	654		6.6	%

Occupancy expense		2,235			1,997			238		11.9	%
Depreciation of premises and equipment		1,195			1,092			103		9.4	%
Supplies, stationary and printing		373			319			54		16.9	%
Marketing expenses		534			544			(10	)	(1.8	)%
Data processing expense		615			669			(54	)	(8.1	)%
Legal, auditing and other professional fees		568			472			96		20.3	%
Core deposit intangible (CDI) amortization		395			377			18		4.8	%
Postage and delivery		178			143			35		24.5	%
ATM and debit card related expenses		352			320			32		10.0	%
Bank regulatory related expenses		401			208			193		92.8	%
Foreclosure and repossession related expenses		174			32			142		443.8	%
Internet and telephone banking		173			125			48		38.4	%
Operational write-offs and losses		148			110			38		34.5	%
Correspondent accounts and Federal Reserve charges		136			133			3		2.3	%
Conferences, seminars, education and training		134			101			33		32.7	%
Other expenses -need more detail here		895			873			22		2.5	%

Total non-interest expense	$	19,080		$	17,435		$	1,645		9.4	%

The most significant component to consider when comparing these two periods are the April 2, 2007 acquisition of VSB. VSB contributed $2,721,000 of non-interest expense in 2008 versus $1,441,000 in 2007. Excluding VSB, our net increase in non-interest expense would adjust from $1,645,000 to $365,000 or from 9.4% to 2.3%.

Employee salaries and wages increased $1,020,000 or 14.4% period to period, as shown in the above table. Most of the increase is due to a larger number of full time equivalent employees (“FTEs”) and part is due to an increase in employee salary and wage expense per FTE. Average FTEs during the first half of 2008 were 383 compared to 347 during the same period last year, an increase of 36 or 10.4%. This increase in FTEs was primarily due to the acquisition of VSB, as discussed above. Employee salary and wage expense per FTE during the current period was $21,157 per FTE, compared to $20,412 per FTE during the same period last year, an increase of $745 per FTE, or 3.6%. The cost per FTE relates to a combination of normal salary increases and the mix of employee level.

The decrease in our employee incentive/bonus compensation is a reflection of how well the Company’s performing during the current period relative to the comparable period last year. The bulk of our bonus and incentive plans are tied to the earnings and growth of our Company. If our incentive/bonus compensation expenses are decreasing it is because our earnings and growth are likewise not doing as well.

Employee health insurance, as listed in the table above, decreased $133,000 between the two periods presented. We have been proactive in this area since 2007. Effective October 1, 2007, we changed insurance company and third party administrators, and effective January 1, 2008, we initiated a Health Savings Account plan (“HSA”), as well as other consumer driven initiatives. We do not necessarily expect a decrease in employee health insurance expense for the year 2008, but we do expect very little, if any, increase in this expense from our 2007 levels. For the first six months of 2008, we recognized expenses of $984,000 compared to $1,117,000 during the comparable period in 2007, a $133,000 or 11.9% decrease period to period.

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

Occupancy and depreciation expense combined increased by $341,000 during the current period compared to the same period last year. The majority of the increase (approximately $201,000) is due to the acquisition of VSB discussed above. The remaining amount primarily relates to the branches we opened in February 2007, May 2007 and August 2007.

Bank regulatory expenses increased by $193,000 or 92.8% between the two periods listed in the table above. The banking regulatory authorities began increasing their charges to our banks during the fourth quarter of 2007. Given the current banking environment, we expect these higher charges to continue into the foreseeable future

Provision for income taxes

The income tax provision for the six months ended June 30, 2008 was $1,207,000 (an effective rate of 31.9%) compared to $2,104,000 (an effective rate of 34.0%) for the same period in 2007. The primary reason for the decrease in our effective tax rate was due to the increase in our tax exempt securities and loans.

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

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

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES: MARKET RISK

Market risk

We believe interest rate risk is the most significant market risk impacting us. Each of our subsidiary banks monitors and manages its interest rate risk using interest rate sensitivity “gap” analysis to measure the impact of market interest rate changes on net interest income. See our 2007 annual report on Form 10-K for disclosure of the quantitative and qualitative information regarding the interest rate risk inherent in interest rate risk sensitive instruments as of December 31, 2007. There have been no changes in the assumptions used in monitoring interest rate risk as of June 30, 2008. 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 were no changes 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 have materially effected, or are 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 7a of our December 31, 2007 annual report on Form 10-K

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Submission of Matters to a Vote of Security Holders

At the April 29, 2008 annual shareholders’ meeting, the Company’s shareholders reelected all of the Company’s Directors. The results of the vote were as follows.


	For	Withheld
James H. Bingham	9,704,371	154,134
G. Robert Blanchard, Jr.	8,742,963	1,115,542
Terry W. Donley	9,753,259	105,246
Frank M. Foster, Jr.	9,394,229	464,276
Bryan W. Judge	9,751,859	106,646
Samuel L. Lupfer	9,755,259	103,246
Lawrence W. Maxwell	9,754,209	104,296
Rulon D. Munns	9,755,265	103,240
G. Tierso Nunez II	9,756,185	102,320
Thomas E. Oakley	8,745,225	1,113,280
Ernest S. Pinner	9,753,722	104,783
J. Thomas Rocker	9,758,385	100,120
Gail Gregg-Strimenos	8,747,059	1,111,446

Item 5.

Other Information

None.

Item 6.

Exhibits


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

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

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

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

CENTERSTATE BANKS OF FLORIDA, INC.

SIGNATURES

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

CENTERSTATE BANKS OF FLORIDA, INC.

(Registrant)


Date:	August 7, 2008	By:	/s/ Ernest S. Pinner
			Ernest S. Pinner
			Chairman, President and Chief Executive Officer

Date:	August 7, 2008	By:	/s/ James J. Antal
			James J. Antal
			Senior Vice President and Chief Financial Officer

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