Edgar Filing: CenterState Banks, Inc.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Form 10Q

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 March 31, 2014

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

For the transition period from to

Commission file number 000-32017

CENTERSTATE BANKS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Florida

59-3606741

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

42745 U.S. Highway 27

Davenport, Florida 33837

(Address of Principal Executive Offices)

(863) 419-7750

(Issuer’s Telephone Number, Including Area Code)

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

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

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

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

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


Common stock, par value $.01 per share		35,539,299 shares
(class)		Outstanding at April 30, 2014

CENTERSTATE BANKS, INC. AND SUBSIDIARIES

INDEX



PART I. FINANCIAL INFORMATION			Page

Item 1. Financial Statements

Condensed consolidated balance sheets at March 31, 2014 (unaudited) and December 31, 2013			3

Condensed consolidated statements of earnings and comprehensive income for the three ended March 31, 2014 and 2013 (unaudited)			4

Condensed consolidated statements of changes in stockholders’ equity for the three months ended March 31, 2014 and 2013 (unaudited)			6

Condensed consolidated statements of cash flows for the three months ended March 31, 2014 and 2013 (unaudited)			7

Notes to condensed consolidated financial statements (unaudited)			9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			37

Item 3. Quantitative and Qualitative Disclosures About Market Risk			56

Item 4. Controls and Procedures			56

PART II. OTHER INFORMATION

Item 1. Legal Proceedings			57

Item 1A. Risk Factors			57

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			57

Item 3. Defaults Upon Senior Securities			57

Item 4. [Removed and Reserved]			57

Item 5. Other Information			57

Item 6. Exhibits			57

SIGNATURES			58

CERTIFICATIONS

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands of dollars, except per share data)


ASSETS	March 31, 2014			December 31, 2013
Cash and due from banks	$	29,862		$	21,581
Federal funds sold and Federal Reserve Bank deposits		190,399			153,308

Cash and cash equivalents		220,261			174,889
Investment securities available for sale, at fair value		617,143			457,086
Loans held for sale, at lower of cost or fair value		1,017			1,010
Loans, excluding purchased credit impaired		1,564,834			1,242,758
Purchased credit impaired loans		250,800			231,421
Allowance for loan losses		(20,096	)		(20,454	)

Net Loans		1,795,538			1,453,725
Bank premises and equipment, net		95,103			96,619
Accrued interest receivable		7,669			6,337
Federal Home Loan Bank and Federal Reserve Bank stock, at cost		8,019			8,189
Goodwill		76,440			44,924
Core deposit intangible		8,800			4,958
Trust intangible		1,113			1,158
Bank owned life insurance		54,574			49,285
Other repossessed real estate owned covered by FDIC loss share agreements		13,892			19,111
Other repossessed real estate owned		9,895			6,409
FDIC indemnification asset		64,719			73,433
Deferred income tax asset, net		7,910			5,296
Bank property held for sale		6,049			1,582
Prepaid expense and other assets		17,555			11,556

TOTAL ASSETS	$	3,005,697		$	2,415,567

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand - non-interest bearing	$	838,764		$	644,915
Demand - interest bearing		558,845			483,842
Savings and money market accounts		717,041			542,599
Time deposits		444,054			384,875

Total deposits		2,558,704			2,056,231
Securities sold under agreement to repurchase		26,116			20,457
Federal funds purchased		45,183			29,909
Corporate debentures		23,785			16,996
Accrued interest payable		394			333
Payables and accrued expenses		18,351			18,262

Total liabilities		2,672,533			2,142,188
Stockholders’ equity:
Common stock, $.01 par value: 100,000,000 shares authorized; 35,535,530 and 30,112,475 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively		355			301
Additional paid-in capital		287,449			229,544
Retained earnings		48,716			48,018
Accumulated other comprehensive loss		(3,356	)		(4,484	)

Total stockholders’ equity		333,164			273,379

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	3,005,697		$	2,415,567

See notes to the accompanying condensed consolidated financial statements

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (unaudited)

(in thousands of dollars, except per share data)


	Three months ended
	March 31, 2014			March 31, 2013
Interest income:
Loans	$	25,729		$	21,435
Investment securities available for sale:
Taxable		3,478			2,388
Tax-exempt		336			357
Federal funds sold and other		239			198

		29,782			24,378

Interest expense:
Deposits		1,337			1,383
Securities sold under agreement to repurchase		23			18
Federal funds purchased		6			5
Corporate debentures		223			150

		1,589			1,556

Net interest income		28,193			22,822
Provision for loan losses		(41	)		(360	)

Net interest income after loan loss provision		28,234			23,182

Non interest income:
Income from correspondent banking and bond sales division		3,136			6,140
Other correspondent banking related revenue		795			865
Service charges on deposit accounts		2,262			1,819
Debit, prepaid, ATM and merchant card related fees		1,506			1,285
Wealth management related revenue		1,217			1,070
FDIC indemnification income		1,268			628
FDIC indemnification asset amortization		(5,185	)		(2,199	)
Bank owned life insurance income		352			339
Other service charges and fees		409			302
Net gain on sale of securities available for sale		—			30

Total other income		5,760			10,279

See notes to the accompanying condensed consolidated financial statements.

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (unaudited)

(in thousands of dollars, except per share data)


	Three months ended
	March 31, 2014			March 31, 2013
Non interest expense:
Salaries, wages and employee benefits	$	15,681		$	16,240
Occupancy expense		1,960			1,892
Depreciation of premises and equipment		1,478			1,497
Supplies, stationary and printing		227			288
Marketing expenses		620			528
Data processing expense		1,039			884
Legal, audit and other professional fees		775			783
Core deposit intangible (CDI) amortization		331			253
Postage and delivery		268			285
ATM and debit card related expenses		474			511
Bank regulatory expenses		631			581
Loss (gain) on sale of repossessed real estate (“OREO”)		77			(1	)
Valuation write down of repossessed real estate (“OREO”)		1,020			987
(Gain) loss on repossessed assets other than real estate		(2	)		242
Foreclosure related expenses		729			793
Merger and acquisition related expenses		2,347			—
Branch closure and efficiency initiatives		3,158			—
Other expenses		1,590			1,327

Total other expenses		32,403			27,090

Income before provision for income taxes		1,591			6,371
Provision for income taxes		538			1,795

Net income	$	1,053		$	4,576

Other comprehensive income, net of tax:
Unrealized securities holding gain (loss), net of income taxes	$	1,128		$	(1,812	)
Less: reclassified adjustments for gain included in net income, net of income taxes, of $12		—			(18	)^[1]

Net unrealized gain (loss) on available for sale securities, net of income taxes		1,128			(1,830	)
Total comprehensive income	$	2,181		$	2,746

Earnings per share:
Basic	$	0.03		$	0.15
Diluted	$	0.03		$	0.15
Common shares used in the calculation of earnings per share:
Basic		34,465,022			30,089,726
Diluted		34,862,703			30,159,188

(1)	Amounts are included in net gain on sale of securities available for sale in total non interest income. Provision for income taxes associated with the reclassification adjustment for the three month period ended March 31, 2013 was $12.

See notes to the accompanying condensed consolidated financial statements

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the three months ended March 31, 2014 and 2013 (unaudited)

(in thousands of dollars, except per share data)


										Accumulated
	Number of				Additional					Other			Total
	common		Common		paid in		Retained			comprehensive			stockholders’
	shares		stock		capital		earnings			income (loss)			equity
Balances at January 1, 2013		30,079,767	$	301	$	228,952	$	36,979		$	7,299		$	273,531
Net income								4,576						4,576
Change in unrealized holding gain on available for sale securities, net of deferred income tax of $1,132											(1,830	)		(1,830	)
Dividends paid - common ($0.01 per share)								(301	)					(301	)
Stock grants issued		15,753				171								171
Stock based compensation expense						78								78

Balances at March 31, 2013		30,095,520	$	301	$	229,201	$	41,254		$	5,469		$	276,225

Balances at January 1, 2014		30,112,475	$	301	$	229,544	$	48,018		$	(4,484	)	$	273,379
Net income								1,053						1,053
Change in unrealized holding gain on available for sale securities, net of deferred income tax of $708											1,128			1,128
Dividends paid - common ($0.01 per share)								(355	)					(355	)
Stock grants issued		19,856				216								216
Stock based compensation expense						67								67
Stock options exercised, including tax benefit		207,658		2		907								909
Stock issued pursuant to Gulfstream acquisition		5,195,541		52		53,098								53,150
Stock options acquired and converted pursuant to Gulfstream acquisition						3,617								3,617

Balances at March 31, 2014		35,535,530	$	355	$	287,449	$	48,716		$	(3,356	)	$	333,164

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, except per share data)


	Three months ended March 31,
	2014			2013
Cash flows from operating activities:
Net income	$	1,053		$	4,576
Adjustments to reconcile net income to net cash provided by operating activities:
Recovery for loan losses		(41	)		(360	)
Depreciation of premises and equipment		1,478			1,497
Accretion of purchase accounting adjustments		(8,092	)		(7,858	)
Net amortization of investment securities		1,175			1,899
Net deferred loan origination fees		(162	)		(241	)
Gain on sale of securities available for sale		—			(30	)
Trading securities revenue		(27	)		(146	)
Purchases of trading securities		(28,809	)		(61,878	)
Proceeds from sale of trading securities		28,836			67,072
Repossessed real estate owned valuation write down		1,020			987
Loss (gain) on sale of repossessed real estate owned		77			(1	)
Repossessed assets other than real estate valuation write down		—			47
(Gain) loss on sale of repossessed assets other than real estate		(2	)		195
Gain on sale of loans held for sale		(76	)		(87	)
Loans originated and held for sale		(4,610	)		(4,842	)
Proceeds from sale of loans held for sale		4,926			5,507
Gain on disposal of and or sale of fixed assets		(7	)		(5	)
Gain on disposal of bank property held for sale		—			(31	)
Impairment on bank property held for sale		2,506			—
Deferred income taxes		3,724			1,188
Stock based compensation expense		187			146
Bank owned life insurance income		(352	)		(339	)
Net cash from changes in:
Net changes in accrued interest receivable, prepaid expenses, and other assets		(3,234	)		1,484
Net change in accrued interest payable, accrued expense, and other liabilities		(3,946	)		(1,008	)

Net cash (used in)/provided by operating activities		(4,376	)		7,772

Cash flows from investing activities:
Purchases of investment securities available for sale		—			(31,133	)
Purchases of mortgage backed securities available for sale		(176,583	)		(50,737	)
Proceeds from maturities of investment securities available for sale		—			165
Proceeds from called investment securities available for sale		—			3,200
Proceeds from pay-downs of mortgage backed securities available for sale		17,187			29,271
Proceeds from sales of investment securities available for sale		19,583			—
Proceeds from sales of mortgage backed securities available for sale		41,233			9,789
Proceeds from sales of FHLB and FRB stock		1,055			1,279
Net decrease in loans		22,898			19,139
Cash received from FDIC loss sharing agreements		5,299			20,694
Purchases of premises and equipment, net		3,470			(489	)
Proceeds from sale of repossessed real estate		6,762			5,992
Proceeds from sale of fixed assets		7			5
Proceeds from sale of bank property held for sale		—			931
Net cash from bank acquisitions		77,005			—

Net cash provided by investing activities		17,916			8,106

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, except per share data)

(continued)


	Three months ended March 31,
	2014			2013
Cash flows from financing activities:
Net increase in deposits	$	23,629		$	16,543
Net (decrease) increase in securities sold under agreement to repurchase		(1,917	)		1,629
Net increase in federal funds purchased		15,274			6,198
Net decrease in other borrowings		(5,708	)		—
Stock options exercised, including tax benefit		909			—
Dividends paid		(355	)		(301	)

Net cash provided by financing activities		31,832			24,069

Net increase in cash and cash equivalents		45,372			39,947
Cash and cash equivalents, beginning of period		174,889			136,748

Cash and cash equivalents, end of period	$	220,261		$	176,695

Transfer of loans to other real estate owned	$	3,432		$	8,940

Transfers of bank property to held for sale	$	4,647		$	—

Cash paid during the period for:
Interest	$	1,727		$	1,799

Income taxes	$	1,520		$	185

See notes to the accompanying condensed consolidated financial statements.

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

NOTE 1: Nature of Operations and basis of presentation

Our consolidated financial statements include the accounts of CenterState Banks, Inc. (the “Parent Company,” “Company” or “CSFL”), and our wholly owned subsidiary bank, CenterState Bank of Florida, N.A. (“CenterState”), and our non bank subsidiary, R4ALL, Inc. Our subsidiary bank operates through 51 full service banking locations in 19 counties throughout Florida, providing traditional deposit and lending products and services to its commercial and retail customers. R4ALL, Inc. is a separate non bank subsidiary of CSFL. Its purpose is to purchase troubled loans from our subsidiary bank and manage their eventual disposition.

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

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013. In our opinion, all adjustments, consisting primarily of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods have been made. The results of operations of the three month period ended March 31, 2014 are not necessarily indicative of the results expected for the full year.

NOTE 2: Common stock outstanding and earnings per share data

Basic earnings per share is based on the weighted average number of common shares outstanding during the periods. Diluted earnings per share includes the weighted average number of common shares outstanding during the periods and the further dilution from stock options using the treasury method. Average stock options outstanding that were anti dilutive during the three month periods ending March 31, 2014 and 2013 were 1,016,949 and 1,121,942, respectively. The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the periods presented.

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)


	Three months ended March 31,
	2014		2013
Numerator for basic and diluted earnings per share:
Net income	$	1,053	$	4,576
Denominator:
Denominator for basic earnings per share - weighted-average shares		34,465,022		30,089,726
Effect of dilutive securities:
Stock options and stock grants		397,681		69,462

Denominator for diluted earnings per share - adjusted weighted-average shares		34,862,703		30,159,188

Basic earnings per share	$	0.03	$	0.15
Diluted earnings per share	$	0.03	$	0.15

NOTE 3: Fair value

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

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

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

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

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

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

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

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


			Fair value measurements using
	Carrying value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
at March 31, 2014
Assets:
Trading securities	$	—		—	$	—		—
Available for sale securities
U.S. government sponsored entities and agencies		4		—		4		—
Mortgage backed securities		576,663		—		576,663		—
Municipal securities		40,476		—		40,476		—
Interest rate swap derivatives		2,874		—		2,874		—
Liabilities: Interest rate swap derivatives		3,015		—		3,015		—

at December 31, 2013
Assets:
Trading securities	$	—		—	$	—		—
Available for sale securities
U.S. government sponsored entities and agencies		4		—		4		—
Mortgage backed securities		416,881		—		416,881		—
Municipal securities		40,201		—		40,201		—
Interest rate swap derivatives		2,603		—		2,603		—
Liabilities:
Interest rate swap derivatives		2,496		—		2,496		—

The fair value of impaired loans with specific valuation allowance for loan losses and other real estate owned is based on recent real estate appraisals. For residential real estate impaired loans and other real estate owned, appraised values are based on the comparative sales approach. For commercial and commercial real estate impaired loans, and other real estate owned, appraisers may use either a single valuation approach or a combination of approaches such as comparative sales, cost or the income approach. A significant unobservable input in the income approach is the estimated income capitalization rate for a given piece of collateral. At March 31, 2014, the range of capitalization rates utilized to determine the fair value of the underlying collateral ranged from 8% to 11%. Adjustments to appraisals may be made by the appraiser to reflect local market conditions or other economic factors and may result in changes in the fair value of a given asset over time. As such, the fair value of impaired loans and other real estate owned are considered a Level 3 in the fair value hierarchy.

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

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


			Fair value measurements using
	Carrying value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
at March 31, 2014
Assets:
Impaired loans
Residential real estate	$	3,076		—		—	$	3,076
Commercial real estate		6,950		—		—		6,950
Land, land development and construction		596		—		—		596
Commercial		1,234		—		—		1,234
Consumer		152		—		—		152
Other real estate owned
Residential real estate	$	1,456		—		—	$	1,456
Commercial real estate		4,793		—		—		4,793
Land, land development and construction		3,403		—		—		3,403
Bank owned real estate held for sale		4,811		—		—		4,811

at December 31, 2013
Assets:
Impaired loans
Residential real estate	$	3,191		—		—	$	3,191
Commercial real estate		7,515		—		—		7,515
Land, land development and construction		290		—		—		290
Commercial		731		—		—		731
Consumer		157		—		—		157
Other real estate owned
Residential real estate	$	27		—		—	$	27
Commercial real estate		3,837		—		—		3,837
Land, land development and construction		3,949		—		—		3,949
Bank owned real estate held for sale		1,582		—		—		1,582

Impaired loans with specific valuation allowances and/or partial charge-offs had a recorded investment of $13,807 with a valuation allowance of $1,799, at March 31, 2014, and a recorded investment of $13,528, with a valuation allowance of $1,644, at December 31, 2013. The Company recorded a provision for loan loss expense of $380 on these loans during the three month period ending March 31, 2014.

Other real estate owned had a decline in fair value of $1,020 and $987 during the three month periods ending March 31, 2014 and 2013, respectively. Changes in fair value were recorded directly to current earnings through non interest expense.

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

Bank owned real estate held for sale represents certain branch office buildings which the Company has closed and consolidated to other existing branches. The real estate was transferred out of the Bank Premises and Equipment category into bank owned property held for sale and included in Prepaid and Other Assets category in the Company’s Condensed Consolidated Balance Sheet. The real estate was transferred at the lower of amortized cost or fair value less estimated costs to sell. The fair values were based upon comparative sales data provided by real estate brokers. The Company closed eight bank branch offices in April 2014, seven owned by the Company and one leased. Five of the properties owned by the Company were transferred to held-for-sale, the remaining two are being used as loan production offices, back office support staff offices and a portion of the second floor of one of the buildings is leased to an existing tenant. The Company recognized an impairment charge of $2,326 during the three month period ending March 31, 2014 related to the transfer to held-for-sale. Also during the first quarter of 2014, the Company recognized an additional impairment of $180 on a property previously transferred to held-for-sale in 2012.

Fair Value of Financial Instruments

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

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

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

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

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

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

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

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

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

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

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

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

Off-balance Sheet Instruments: The fair value 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:


			Fair value measurements
at March 31, 2014	Carrying amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and cash equivalents	$	220,261	$	220,261	$	—	$	—	$	220,261
Trading securities		—		—		—		—		—
Investment securities available for sale		617,143		—		617,143		—		617,143
FHLB and FRB stock		8,019		—		—		—		n/a
Loans held for sale		1,017		—		1,017		—		1,017
Loans, less allowance for loan losses of $20,096		1,795,538		—		—		1,797,640		1,797,640
FDIC indemnification asset		64,719		—		—		—		n/a
Interest rate swap derivatives		2,874		—		2,874		—		2,874
Accrued interest receivable		7,669		—		—		7,669		7,669
Financial liabilities:
Deposits- without stated maturities	$	2,114,650	$	2,114,650	$	—	$	—	$	2,114,650
Deposits- with stated maturities		444,054		—		451,143		—		451,143
Securities sold under agreement to repurchase		26,116		—		26,116		—		26,116
Federal funds purchased		45,183		—		45,183		—		45,183
Corporate debentures		23,785		—		—		19,509		19,509
Interest rate swap derivatives		3,015		—		3,015		—		3,015
Accrued interest payable		394		—		394		—		394

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)


			Fair value measurements
at December 31, 2013	Carrying amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and cash equivalents	$	174,889	$	174,889	$	—	$	—	$	174,889
Trading securities		—		—		—		—		—
Investment securities available for sale		457,086		—		457,086		—		457,086
FHLB and FRB stock		8,189		—		—		—		n/a
Loans held for sale		1,010		—		1,010		—		1,010
Loans, less allowance for loan losses of $20,454		1,453,725		—		—		1,456,295		1,456,295
FDIC indemnification asset		73,433		—		—		—		n/a
Interest rate swap derivatives		2,603		—		2,603		—		2,603
Accrued interest receivable		6,337		—		—		6,337		6,337
Financial liabilities:
Deposits- without stated maturities	$	1,671,356	$	1,671,356	$	—	$	—	$	1,671,356
Deposits- with stated maturities		384,875		—		389,115		—		389,115
Securities sold under agreement to repurchase		20,457		—		20,457		—		20,457
Federal funds purchased		29,909		—		29,909		—		29,909
Corporate debentures		16,996		—		—		11,091		11,091
Interest rate swap derivatives		2,496		—		2,496		—		2,496
Accrued interest payable		333		—		333		—		333

NOTE 4: Reportable segments

The Company’s reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning purposes by management. The table below is a reconciliation of the reportable segment revenues, expenses, and profit to the Company’s consolidated total for the three month periods ending March 31, 2014 and 2013.


Three month period ending March 31, 2014
	Commercial and retail banking			Correspondent banking and bond sales division			Corporate overhead and administration			Elimination entries			Total
Interest income	$	29,070		$	712		$	—					$	29,782
Interest expense		(1,361	)		(5	)		(223	)					(1,589	)

Net interest income (expense)		27,709			707			(223	)					28,193
Recovery of prior loan loss provision		41			—			—						41
Non interest income		1,829			3,931			—						5,760
Non interest expense		(27,167	)		(4,378	)		(858	)					(32,403	)

Net income (loss) before taxes		2,412			260			(1,081	)					1,591
Income tax (provision) benefit		(849	)		(100	)		411						(538	)

Net income (loss)	$	1,563		$	160		($	670	)				$	1,053

Total assets	$	2,835,871		$	164,599		$	363,107		($	357,880	)	$	3,005,697

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)


Three month period ending March 31, 2013
				Correspondent			Corporate
	Commercial			banking and			overhead
	and retail			bond sales			and			Elimination
	banking			division			administration			entries			Total
Interest income	$	23,598		$	780			—			—		$	24,378
Interest expense		(1,400	)		(6	)		(150	)		—			(1,556	)

Net interest income (expense)		22,198			774			(150	)		—			22,822
Provision for loan losses		360			—			—			—			360
Non interest income		3,274			7,005			—			—			10,279
Non interest expense		(20,085	)		(6,075	)		(930	)		—			(27,090	)

Net income before taxes		5,747			1,704			(1,080	)		—			6,371
Income tax (provision) benefit		(1,698	)		(657	)		560			—			(1,795	)

Net income (loss)	$	4,049		$	1,047		($	520	)		—		$	4,576

Total assets	$	2,224,471		$	159,342		$	297,826		($	292,400	)	$	2,389,239

Commercial and retail banking: The Company’s primary business is commercial and retail banking. Currently, the Company operates through its subsidiary bank and a non bank subsidiary, R4ALL, with 51 full service banking locations in 19 counties throughout Florida providing traditional deposit and lending products and services to its commercial and retail customers.

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

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

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

NOTE 5: Investment Securities Available for Sale

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


	March 31, 2014
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Obligations of U.S. government sponsored entities and agencies	$	4	$	—	$	—	$	4
Mortgage backed securities		582,930		4,842		11,109		576,663
Municipal securities		39,672		1,088		284		40,476

Total	$	622,606	$	5,930	$	11,393	$	617,143


	December 31, 2013
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Obligations of U.S. government sponsored entities and agencies	$	4	$	—	$	—	$	4
Mortgage backed securities		424,654		4,623		12,396		416,881
Municipal securities		39,728		921		448		40,201

Total	$	464,386	$	5,544	$	12,844	$	457,086

The cost of securities sold is determined using the specific identification method. The securities sold during the first quarter of 2014 were securities acquired through the Gulfstream acquisition. These securities were marked to fair value and subsequently sold after the acquisition date, therefore no gain or loss was recognized from the sale of these securities. Sales of available for sale securities for the three months ended March 31, 2014 and 2013 were as follows:


For the three months ended:	Mar 31, 2014		Mar 31, 2013
Proceeds	$	60,816	$	9,789
Gross gains		—		30
Gross losses		—		—

The tax provision related to these net realized gains was $0 and $12, respectively.

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

The fair value of available for sale securities at March 31, 2014 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.


Investment securities available for sale	Fair Value		Amortized Cost
Due in one year or less	$	1,357	$	1,350
Due after one year through five years		2,200		2,088
Due after five years through ten years		13,230		12,907
Due after ten years through thirty years		23,693		23,331
Mortgage backed securities		576,663		582,930

	$	617,143	$	622,606

Securities pledged at March 31, 2014 and December 31, 2013 had a carrying amount (estimated fair value) of $127,926 and $108,528 respectively. These securities were pledged primarily to secure public deposits and repurchase agreements.

At March 31, 2014 and December 31, 2013, there were no holdings of securities of any one issuer, other than mortgage backed securities issued by U.S. Government sponsored entities and agencies, in an amount greater than 10% of stockholders’ equity.

The following tables show the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2014 and December 31, 2013.


	March 31, 2014
	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Mortgage backed securities	$	335,084	$	8,399	$	27,562	$	2,710	$	362,646	$	11,109
Municipal securities		8,905		206		1,043		78		9,948		284

Total temporarily impaired securities	$	343,989	$	8,605	$	28,605	$	2,788	$	372,594		11,393


	December 31, 2013
	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Obligations of U.S. government sponsored entities and agencies	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage backed securities		239,641		10,221		18,793		2,175		258,434		12,396
Municipal securities		7,603		333		1,010		115		8,613		448

Total temporarily impaired securities	$	247,244	$	10,554	$	19,803	$	2,290	$	267,047	$	12,844

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

At March 31, 2014, 100% of the mortgage-backed securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae, Freddie Mac, and Ginnie Mae, institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2014.

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

NOTE 6: Loans

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


	Mar 31, 2014			Dec 31, 2013
Loans, excluding PCI loans
Real estate loans
Residential	$	495,450		$	458,331
Commercial		736,406			528,710
Land, development and construction		60,726			62,503

Total real estate		1,292,582			1,049,544
Commercial		217,482			143,263
Consumer and other loans		54,205			49,547

Loans before unearned fees and deferred cost		1,564,269			1,242,354
Net unearned fees and costs		565			404

Total loans, excluding PCI loans		1,564,834			1,242,758
Allowance for loan losses		(18,913	)		(19,694	)

Net loans, excluding PCI loans		1,545,921			1,223,064

PCI loans (note 1)
Real estate loans
Residential		117,879			120,030
Commercial		112,558			100,012
Land, development and construction		11,144			6,381

Total real estate		241,581			226,423
Commercial		8,118			3,850
Consumer and other loans		1,101			1,148

Total PCI loans		250,800			231,421
Allowance for loan losses		(1,183	)		(760	)

Net PCI loans		249,617			230,661

Total loans, net of allowance for loan losses	$	1,795,538		$	1,453,725

note 1: Purchased credit impaired (“PCI”) loans are being accounted for pursuant to ASC Topic 310-30.

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

All loans covered by FDIC loss sharing agreements are included in PCI loans in the table above. The following table sets forth information concerning the covered FDIC loans by collateral types.


Loans covered by FDIC loss sharing agreements	Mar 31, 2014			Dec 31, 2013
Real estate loans:
Residential	$	113,418		$	120,030
Commercial		95,942			100,012
Land, development and construction		6,824			6,381

Total real estate		216,184			226,423
Commercial		3,549			3,850

Total loans covered by FDIC loss sharing agreements		219,733			230,273
Allowance for loan losses		(1,183	)		(760	)

Net FDIC covered loans	$	218,550		$	229,513

The table below set forth the activity in the allowance for loan losses for the periods presented.


Three months ended March 31, 2014	Loans excluding PCI loans			PCI loans			Total
Balance at beginning of period	$	19,694		$	760		$	20,454
Loans charged-off		(1,160	)		—			(1,160	)
Recoveries of loans previously charged-off		843			—			843

Net charge-offs		(317	)		—			(317	)
(Recovery) provision for loan losses		(464	)		423			(41	)

Balance at end of period	$	18,913		$	1,183		$	20,096

Three months ended March 31, 2013
Balance at beginning of period	$	24,033		$	2,649		$	26,682
Loans charged-off		(1,231	)		—			(1,231	)
Recoveries of loans previously charged-off		163			—			163

Net charge-offs		(1,068	)		—			(1,068	)
Provision for loan losses		(334	)		(26	)		(360	)

Balance at end of period	$	22,631		$	2,623		$	25,254

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

The following tables present the activity in the allowance for loan losses by portfolio segment for the periods presented.


	Real Estate Loans
	Residential			Commercial			Land, develop., constr.			Comm. & industrial			Consumer & other			Total
Loans, excluding purchased credit impaired:
Three months ended March 31, 2014
Beginning of the period	$	8,785		$	6,441		$	3,069		$	510		$	889		$	19,694
Charge-offs		(687	)		(16	)		(77	)		(200	)		(180	)		(1,160	)
Recoveries		455			314			23			1			50			843
Provision for loan losses		(741	)		599			(1,227	)		645			260			(464	)

Balance at end of period	$	7,812		$	7,338		$	1,788		$	956		$	1,019		$	18,913

Three months ended March 31, 2013
Beginning of the period	$	6,831		$	8,272		$	6,211		$	1,745		$	974		$	24,033
Charge-offs		(612	)		(424	)		(39	)		(52	)		(104	)		(1,231	)
Recoveries		80			27			14			10			32			163
Provision for loan losses		1,801			(782	)		(860	)		(479	)		(14	)		(334	)

Balance at end of period	$	8,100		$	7,093		$	5,326		$	1,224		$	888		$	22,631

Purchased credit impaired loans:
Three months ended March 31, 2014
Beginning of the period	$	—		$	138		$	89		$	533		$	—		$	760
Charge-offs		—			—			—			—			—			—
Recoveries		—			—			—			—			—			—
Provision for loan losses		—			485			—			(62	)		—			423

Balance at end of period	$	—		$	623		$	89		$	471		$	—		$	1,183

Three months ended March 31, 2013
Beginning of the period	$	—		$	2,335		$	—		$	314		$	—		$	2,649
Charge-offs		—			—			—			—			—			—
Recoveries		—			—			—			—			—			—
Provision for loan losses		—			(25	)		—			(1	)		—			(26	)

Balance at end of period	$	—		$	2,310		$	—		$	313		$	—		$	2,623

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2014 and December 31, 2013. Accrued interest receivable and unearned loan fees and costs are not included in the recorded investment because they are not material.


	Real Estate Loans
As of March 31, 2014	Residential		Commercial		Land, develop., constr.		Comm. & industrial		Consumer & other		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	331	$	1,543	$	16	$	7	$	22	$	1,919
Collectively evaluated for impairment		7,481		5,795		1,772		949		997		16,994
Acquired with deteriorated credit quality		—		623		89		471		—		1,183

Total ending allowance balance	$	7,812	$	7,961	$	1,877	$	1,427	$	1,019	$	20,096

Loans:
Loans individually evaluated for impairment	$	9,545	$	12,687	$	1,460	$	2,538	$	325	$	26,555
Loans collectively evaluated for impairment		485,905		723,719		59,266		214,944		53,880		1,537,714
Loans acquired with deteriorated credit quality		117,879		112,558		11,144		8,118		1,101		250,800

Total ending loan balances	$	613,329	$	848,964	$	71,870	$	225,600	$	55,306	$	1,815,069


	Real Estate Loans
As of December 31, 2013	Residential		Commercial		Land, develop., constr.		Comm. & industrial		Consumer & other		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	395	$	1,377	$	16	$	2	$	21	$	1,811
Collectively evaluated for impairment		8,390		5,064		3,053		508		868		17,883
Acquired with deteriorated credit quality		—		138		89		533		—		760

Total ending allowance balance	$	8,785	$	6,579	$	3,158	$	1,043	$	889	$	20,454

Loans:
Loans individually evaluated for impairment	$	8,610	$	12,564	$	1,307	$	1,297	$	332	$	24,110
Loans collectively evaluated for impairment		449,721		516,146		61,196		141,966		49,215		1,218,244
Loans acquired with deteriorated credit quality		120,030		100,012		6,381		3,850		1,148		231,421

Total ending loan balance	$	578,361	$	628,722	$	68,884	$	147,113	$	50,695	$	1,473,775

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

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


	Mar 31, 2014		Dec 31, 2013
Impaired loans with a specific valuation allowance	$	10,931	$	9,454
Impaired loans without a specific valuation allowance		15,624		14,656

Total impaired loans	$	26,555	$	24,110
Amount of allowance for loan losses allocated to impaired loans	$	1,919	$	1,811
Performing TDRs	$	12,649	$	10,763
Non performing TDRs, included in NPLs		2,337		4,684

Total TDRs (TDRs are required to be included in impaired loans)	$	14,986	$	15,447
Impaired loans that are not TDRs		11,569		8,663

Total impaired loans	$	26,555	$	24,110

In certain situations it has become more common to restructure or modify the terms of certain loans under certain conditions (i.e. troubled debt restructure or “TDRs”). In those circumstances it may be beneficial to restructure the terms of a loan and work with the borrower for the benefit of both parties, versus forcing the property into foreclosure and having to dispose of it in an unfavorable real estate market. When the terms of a loan have been modified, usually the monthly payment and/or interest rate is reduced for generally twelve to twenty-four months. Material principal amounts on any loan modifications have not been forgiven to date. There is $14,986 of TDRs. Of this amount $12,649 are performing pursuant to their modified terms, and $2,337 are not performing and have been placed on non accrual status and included in non performing loans (“NPLs”).

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

TDRs as of March 31, 2014 and December 31, 2013 quantified by loan type classified separately as accrual (performing loans) and non-accrual (non performing loans) are presented in the tables below.


As of March 31, 2014	Accruing		Non Accrual		Total
Real estate loans:
Residential	$	7,730	$	822	$	8,552
Commercial		3,042		1,319		4,361
Land, development, construction		600		45		645

Total real estate loans		11,372		2,186		13,558
Commercial		1,055		48		1,103
Consumer and other		222		103		325

Total TDRs	$	12,649	$	2,337	$	14,986


As of December 31, 2013	Accruing		Non-Accrual		Total
Real estate loans:
Residential	$	7,221	$	1,389	$	8,610
Commercial		2,169		3,077		5,246
Land, development, construction		608		47		655

Total real estate loans		9,998		4,513		14,511
Commercial		555		49		604
Consumer and other		210		122		332

Total TDRs	$	10,763	$	4,684	$	15,447

Our policy is to return non accrual TDR loans to accrual status when all the principal and interest amounts contractually due, pursuant to its modified terms, are brought current and future payments are reasonably assured. Our policy also considers the payment history of the borrower, but is not dependent upon a specific number of payments. The Company recorded a provision for loan loss expense of $75 and partial charge offs of $56 on the TDR loans described above during the three month period ending March 31, 2014.

Loans are modified to minimize loan losses when we believe the modification will improve the borrower’s financial condition and ability to repay the loan. We typically do not forgive principal. We generally either reduce interest rates or decrease monthly payments for a temporary period of time and those reductions of cash flows are capitalized into the loan balance. We may also extend maturities, convert balloon loans to longer term amortizing loans, or vice versa, or change interest rates between variable and fixed rate. Each borrower and situation is unique and we try to accommodate the borrower and minimize the Company’s potential losses. Approximately 84% of our TDRs are current pursuant to their modified terms, and $2,337, or approximately 16% of our total TDRs are not performing pursuant to their modified terms. There does not appear to be any significant difference in success rates with one type of concession versus another.

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

The following table presents loans by class modified and for which there was a payment default within twelve months following the modification during the period ending March 31, 2014 and December 31, 2013.


	Period ending				Year ending
	March 30, 2014				December 31, 2013
	Number		Recorded		Number		Recorded
	of loans		investment		of loans		investment
Residential		—	$	—		3	$	553
Commercial real estate		4		1,319		6		2,244
Land, development, construction		—		—		—		—
Commercial and Industrial		2		33		2		34
Consumer and other		—		—		1		17

Total		6	$	1,352		12	$	2,848

The Company recorded a provision for loan loss expense of $15 and partial charge offs of $21 on TDR loans that subsequently defaulted as described above during the three month period ending March 31, 2014.

The following tables present loans individually evaluated for impairment by class of loans as of March 31, 2014 and December 31, 2013, excluding purchased credit impaired loans accounted for pursuant to ASC Topic 310-30. The recorded investment is less than the unpaid principal balance due to partial charge-offs.


As of March 31, 2014	Unpaid principal balance		Recorded investment		Allowance for loan losses allocated
With no related allowance recorded:
Residential real estate	$	6,570	$	6,315	$	—
Commercial real estate		6,622		6,002		—
Land, development, construction		1,402		1,327		—
Commercial and industrial		2,069		1,980		—
Consumer, other		—		—		—
With an allowance recorded:
Residential real estate		3,367		3,230		331
Commercial real estate		6,894		6,685		1,543
Land, development, construction		141		133		16
Commercial and industrial		605		558		7
Consumer, other		339		325		22

Total	$	28,009	$	26,555	$	1,919

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)


As of December 31, 2013	Unpaid principal balance		Recorded investment		Allowance for loan losses allocated
With no related allowance recorded:
Residential real estate	$	5,052	$	4,803	$	—
Commercial real estate		9,330		7,439		—
Land, development, construction		1,377		1,168		—
Commercial and industrial		1,330		1,241		—
Consumer, other		5		5		—
With an allowance recorded:
Residential real estate		3,942		3,807		395
Commercial real estate		5,257		5,125		1,377
Land, development, construction		147		139		16
Commercial and industrial		102		56		2
Consumer, other		340		327		21

Total	$	26,882	$	24,110	$	1,811


Three month period ending March, 31, 2014	Average of impaired loans		Interest income recognized during impairment		Cash basis interest income recognized
Real estate loans:
Residential	$	9,078	$	77	$	—
Commercial		12,625		28		—
Land, development, construction		1,383		9		—

Total real estate loans		23,086		114		—
Commercial and industrial		1,918		21		—
Consumer and other loans		328		3		—

Total	$	25,332	$	138	$	—


Three month period ending March, 31, 2013	Average of impaired loans		Interest income recognized during impairment		Cash basis interest income recognized
Real estate loans:
Residential	$	9,442	$	74	$	—
Commercial		30,285		257		—
Land, development, construction		1,427		2		—

Total real estate loans		41,154		333		—
Commercial and industrial		2,597		8		—
Consumer and other loans		390		3		—

Total	$	44,141	$	344	$	—

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

Nonperforming loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans, excluding purchased credit impaired loans accounted for pursuant to ASC Topic 310-30.


Nonperforming loans were as follows:	Mar 31, 2014		Dec 31, 2013
Non accrual loans	$	30,689	$	27,077
Loans past due over 90 days and still accruing interest		—		—

Total non performing loans	$	30,689	$	27,077

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual by class of loans as of March 31, 2014 and December 31, 2013, excluding purchased credit impaired loans:


As of March 31, 2014	Nonaccrual		Loans past due over 90 days still accruing
Residential real estate	$	12,859	$	—
Commercial real estate		14,629		—
Land, development, construction		1,136		—
Commercial		1,582		—
Consumer, other		483		—

Total	$	30,689	$	—


As of December 31, 2013	Nonaccrual		Loans past due over 90 days still accruing
Residential real estate	$	10,162	$	—
Commercial real estate		13,925		—
Land, development, construction		1,099		—
Commercial		1,582		—
Consumer, other		309		—

Total	$	27,077	$	—

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

The following table presents the aging of the recorded investment in past due loans as of March 31, 2014 and December 31, 2013, excluding purchased credit impaired loans:


	Accruing Loans
As of March 31, 2014	Total		30 - 59 days past due		60 - 89 days past due		Greater than 90 days past due		Total Past Due		Loans Not Past Due		Nonaccrual Loans
Residential real estate	$	495,450	$	3,053	$	2,654	$	—	$	5,707	$	476,884	$	12,859
Commercial real estate		736,406		4,905		433		—		5,338		716,439		14,629
Land/dev/construction		60,726		329		161		—		490		59,100		1,136
Commercial		217,482		181		3		—		184		215,716		1,582
Consumer		54,205		347		42		—		389		53,333		483

		$1,564,269	$	8,815	$	3,293	$	—	$	12,108	$	1,521,472	$	30,689


	Accruing Loans
As of December 31, 2013	Total		30 - 59 days past due		60 - 89 days past due		Greater than 90 days past due		Total Past Due		Loans Not Past Due		Nonaccrual Loans
Residential real estate	$	458,331	$	2,801	$	1,942	$	—	$	4,743	$	443,426	$	10,162
Commercial real estate		528,710		2,420		1,941		—		4,361		510,424		13,925
Land/dev/construction		62,503		136		241		—		377		61,027		1,099
Commercial		143,263		491		1		—		492		141,189		1,582
Consumer		49,547		295		240		—		535		48,703		309

		$1,242,354	$	6,143	$	4,365	$	—	$	10,508	$	1,204,769	$	27,077

Credit Quality Indicators:

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

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

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

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of March 31, 2014 and December 31, 2013, and based on the most recent analysis performed, the risk category of loans by class of loans, excluding purchased credit impaired loans accounted for pursuant to ASC Topic 310-30:


	As of March 31, 2014
Loan Category	Pass		Special Mention		Substandard		Doubtful
Residential real estate	$	465,482	$	5,006	$	24,962	$	—
Commercial real estate		658,902		41,583		35,921		—
Land/dev/construction		48,772		8,917		3,037		—
Commercial		209,536		3,446		4,500		—
Consumer		53,144		353		708		—

Total	$	1,435,836	$	59,305	$	69,128	$	—


	As of December 31, 2013
Loan Category	Pass		Special Mention		Substandard		Doubtful
Residential real estate	$	428,671	$	6,438	$	23,222	$	—
Commercial real estate		448,762		46,427		33,521		—
Land/dev/construction		50,164		9,566		2,773		—
Commercial		134,901		4,490		3,872		—
Consumer		49,448		526		573		—

Total	$	1,110,946	$	67,447	$	63,961	$	—

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in residential and consumer loans, excluding purchased credit impaired loans, based on payment activity as of March 31, 2014:


	Residential		Consumer
Performing	$	482,591	$	53,722
Nonperforming		12,859		483

Total	$	495,450	$	54,205

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

Purchased Credit Impaired (“PCI”) loans:

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

The table below summarizes the total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and carrying value of the loans as of March 31, 2014 and December 31, 2013. Contractually required principal and interest payments have been adjusted for estimated prepayments.


	Mar 31, 2014			Dec 31, 2013
Contractually required principal and interest	$	414,385		$	389,537
Non-accretable difference		(56,062	)		(55,304	)

Cash flows expected to be collected		358,323			334,233
Accretable yield		(107,523	)		(102,812	)

Carrying value of acquired loans	$	250,800		$	231,421
Allowance for loan losses		(1,183	)		(760	)

Carrying value less allowance for loan losses	$	249,617		$	230,661

We adjusted our estimates of future expected losses, cash flows and renewal assumptions during the current quarter. These adjustments resulted in an increase in expected cash flows and accretable yield, and a decrease in the non-accretable difference. We reclassified approximately $7,294 from non-accretable difference to accretable yield during the three month period ending March 31, 2014, respectively, to reflect our adjusted estimates of future expected cash flows. The table below summarizes the changes in total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and carrying value of the loans during the three month periods ending March 31, 2014 and 2013.


Activity during the				Effect of			income		all other
three month period ending March 31, 2014	Dec 31, 2013			acquisitions			accretion		adjustments			Mar 31, 2014
Contractually required principal and interest	$	389,537		$	48,289		$	—	$	(23,441	)	$	414,385
Non-accretable difference		(55,304	)		(11,766	)		—		11,008			(56,062	)

Cash flows expected to be collected		334,233			36,523			—		(12,433	)		358,323
Accretable yield		(102,812	)		(6,455	)		8,231		(6,487	)		(107,523	)

Carry value of acquired loans	$	231,421		$	30,068		$	8,231	$	(18,920	)	$	250,800

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)


Activity during the three month period ending March 31, 2013	Dec 31, 2012			Effect of acquisitions		income accretion		all other adjustments			Mar 31, 2013
Contractually required principal and interest	$	534,989		$	—	$	—	$	(48,458	)	$	486,531
Non-accretable difference		(142,855	)				—		32,612			(110,243	)

Cash flows expected to be collected		392,134					—		(15,846	)		376,288
Accretable yield		(93,107	)				7,827		(10,219	)		(95,499	)

Carry value of acquired loans	$	299,027		$	—	$	7,827	$	(26,065	)	$	280,789

NOTE 7: FDIC indemnification asset

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


	Three month period ended Mar 31, 2014			Twelve month period ended Dec 31, 2013
Beginning of the year	$	73,433		$	119,289
Amortization, net		(5,185	)		(13,807	)
Indemnification revenue		930			6,055
Indemnification of foreclosure expense		502			4,413
Proceeds from FDIC		(5,299	)		(42,004	)
Impairment (recovery) of loan pool		338			(513	)

Period end balance	$	64,719		$	73,433

Impairment of loan pools

When a loan pool (with loss share) is impaired, the impairment expense is included in provision for loan losses, and 80% of that loss is recognized as income from FDIC reimbursement, and included in this line item. During the three month period ended March 31, 2014, the estimated amount of impairment increased, which resulted in an additional $338 of indemnification income recognition.

Indemnification revenue

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

Amortization, net

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

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

Indemnification of foreclosure expense

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

NOTE 8: Business Combination

On January 17, 2014, the Company completed its previously announced acquisition of Gulfstream Bancshares, Inc. (“Gulfstream”) as set forth in the Agreement and Plan of Merger (“Agreement”) whereby Gulfstream merged with and into the Company. Pursuant to and simultaneously with the merger of Gulfstream with and into the Company, Gulfstream’s wholly owned subsidiary bank, Gulfstream Business Bank (“GSB”), merged with and into the Company’s subsidiary bank, CenterState Bank of Florida, N.A.

The Company’s primary reasons for the transaction were to further solidify its market share in the southeast Florida market and expand its customer base to enhance deposit fee income and leverage operating cost through economies of scale. The acquisition increased the Company’s total assets and total deposits by approximately 23% and 23%, respectively, as compared with the balances at December 31, 2013, and is expected to positively affect the Company’s operating results to the extent the Company earns more from interest earning assets than it pays in interest on its interest bearing liabilities.

The acquisition was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. The Company recognized goodwill on this acquisition of $31,516, after consideration of a measurement period adjustment discussed below, which is nondeductible for tax purposes as this acquisition is a nontaxable transaction. The goodwill is calculated based on the fair values of the assets acquired and liabilities assumed as of the acquisition date. Fair value estimates are based on the information available, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available. Fair values are preliminary estimates due to pending appraisals on loans and other real estate owned.

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

The Company acquired 100% of the outstanding common stock of Gulfstream. The purchase price consisted of both cash and stock. Each share of Gulfstream common stock was exchanged for $14.65 cash and 3.012 shares of the Company’s common stock. Based on the closing price of the Company’s common stock on January 16, 2014, the resulting purchase price was $82,040. The table below summarizes the purchase price calculation.


Number of shares of Gulfstream common stock outstanding at January 16, 2014		1,569,364
Gulfstream preferred shares that convert to Gulfstream common shares upon a change in control		155,629

Total Gulfstream common shares including conversion of preferred shares		1,724,993
Per share exchange ratio		3.012

Number of shares of CenterState common stock less 138 of fractional shares		5,195,541
Multiplied by CenterState common stock price per share on January 16, 2014	$	10.23

Fair value of CenterState common stock issued	$	53,150

Total Gulfstream common shares including conversion of preferred shares		1,724,993
Multiplied by the cash consideration each Gulfstream share is entitled to receive	$	14.65

Total Cash Consideration, not including cash for fractional shares	$	25,271

Total Stock Consideration	$	53,150
Total Cash Consideration plus $2 for 138 of fractional shares		25,273

Total consideration to be paid to Gulfstream common shareholders	$	78,423
Fair value of current Gulfstream stock options to be converted to CenterState stock options		3,617

Total purchase price	$	82,040

The list below summarizes the preliminary estimates of the fair value of the assets purchased, including goodwill, and liabilities assumed as of the January 17, 2014 purchase date.


	Jan 17, 2014
Assets:
Cash and cash equivalents	$	102,278
Loans, held for investment		329,515
Purchased credit impaired loans		30,068
Loans held for sale		247
Investments		60,816
Interest receivable		1,087
Branch real estate		5,519
Furniture and fixtures		262
FHLB stock		885
Bank owned life insurance		4,939
Other real estate owned		2,694
Core deposit intangible		4,173
Goodwill		31,516
Other assets		11,261

Total assets acquired	$	585,260

Liabilities:
Deposits	$	478,999
Federal Home loan advances		5,708
Repurchase agreements		7,576
Interest payable		125
Official checks outstanding		826
Corporate debentures		6,745
Other liabilities		3,241

Total liabilities assumed	$	503,220

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

In the acquisition, the Company purchased $359,583 of loans at fair value, net of $18,267, or 4.8%, estimated discount to the outstanding principal balance, representing 24.4% of the Company’s total loans at December 31, 2013. Of the total loans acquired, management identified $30,068 with credit deficiencies. All loans that were on non-accrual status and all loan relationships that were greater than $500 and identified as impaired as of the acquisition date were considered by management to be credit impaired and are accounted for pursuant to 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 January 17, 2014 for purchased credit impaired loans. Contractually required principal and interest payments have been adjusted for estimated prepayments.


Contractually required principal and interest	$	48,289
Non-accretable difference		(11,766	)

Cash flows expected to be collected		36,523
Accretable yield		(6,455	)

Total purchased credit-impaired loans acquired	$	30,068

The table below presents information with respect to the fair value of acquired loans, as well as their unpaid principal balance (“Book Balance”) at acquisition date.


	Book balance		Fair value
Loans:
Single family residential real estate		33,506		32,319
Commercial real estate		185,250		183,189
Construction/development/land		30,387		27,704
Commercial loans		85,940		84,203
Consumer and other loans		2,112		2,100
Purchased credit-impaired		40,655		30,068

Total earning assets	$	377,850	$	359,583

In its assumption of the deposit liabilities, the Company believed the deposits assumed from the acquisition have an intangible value. The Company applied ASC Topic 805, which prescribes the accounting for goodwill and other intangible assets such as core deposit intangibles, in a business combination. The Company determined the estimated fair value of the core deposit intangible asset totaled $4,173, which will be amortized utilizing an accelerated amortization method over an estimated economic life not to exceed ten years. In determining the valuation amount, deposits were analyzed based on factors such as type of deposit, deposit retention, interest rates and age of deposit relationships.

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

The following table presents pro-forma information as if the acquisition had occurred at the beginning of 2013. The pro-forma information includes adjustments for interest income on loans acquired, amortization of intangibles arising from the transaction, interest expense on deposits acquired, interest expense on trust preferred securities assumed, effect of redeeming preferred stock, and the related income tax effects. The pro-forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been effected on the assumed dates. The operating results of the Company for the three month period ended March 31, 2014 includes the operating results of Gulfstream since the acquisition date of January 17, 2014 and are omitted from the table below.


Three months ended	Mar 31, 2013
Net interest income	$	27,779

Net income available to common shareholders	$	5,388

EPS- basic	$	0.15
EPS- diluted	$	0.15

Measurement period adjustments

On January 17, 2014 the Company purchased Gulfstream. As previously disclosed, the fair values initially assigned to the assets acquired and liabilities assumed were preliminary and subject to refinement for up to one year after the closing date of the acquisition as new information relative to closing date fair values became available. Based on appraisals received subsequent to the acquisition date, the Company adjusted its initial fair value estimates of certain other real estate owned acquired.


	Jan 17, 2014 (as initially reported)		measurement period adjustments			Jan 17, 2014 (as adjusted)
Assets:
Cash and cash equivalents	$	102,278	$	—		$	102,278
Loans, held for investment		329,515					329,515
Purchased credit impaired loans		30,068					30,068
Loans held for sale		247					247
Investments		60,816					60,816
Interest receivable		1,087					1,087
Branch real estate		5,519					5,519
Furniture and fixtures		262					262
FHLB stock		885					885
Bank owned life insurance		4,939					4,939
Other real estate owned		3,365		(671	)		2,694
Core deposit intangible		4,173					4,173
Goodwill		31,104		412			31,516
Other assets		11,002		259			11,261

Total assets acquired	$	585,260	$	—		$	585,260

Liabilities:
Deposits	$	478,999	$	—		$	478,999
Federal Home loan advances		5,708					5,708
Repurchase agreements		7,576					7,576
Interest payable		125					125
Official checks outstanding		826					826
Trust Preferred Security		6,745					6,745
Other liabilities		3,241					3,241

Total liabilities assumed	$	503,220	$	—		$	503,220

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

NOTE 9: Announced acquisitions

On January 29, 2014, the Company announced it entered into an Agreement and Plan of Merger (the “Agreement”) with First Southern Bancorp, Inc. (“First Southern”), whereby First Southern will be merged with and into the Company (the “Merger”), with the Company continuing as the surviving corporation in the Merger. As soon as possible after the Merger, the Company’s wholly owned subsidiary bank, CenterState Bank of Florida, N.A. (“CenterState Bank”) and First Southern’s subsidiary bank, First Southern Bank, will merge with CenterState Bank as the surviving bank. Under the terms of the Agreement each outstanding share of First Southern common stock will be converted into the right to receive 0.3 shares of the Company’s common stock and $3.00 in cash. The Agreement has been unanimously approved by the boards of directors of the Company and First Southern. The transaction is expected to close during the summer of 2014 subject to the satisfaction of customary conditions, including receipt of all required regulatory approvals and the Company and First Southern’s shareholder approval.

First Southern Bank, which is headquartered in Boca Raton, Florida, currently operates 17 banking locations in the Orlando, Jacksonville, and West Palm Beach-Fort Lauderdale MSAs. As of December 31, 2013, First Southern reported assets of $1,093,256, loans of $635,492 and deposits of $882,732.

ITEM 2:

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

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

or unless otherwise noted.)

COMPARISON OF BALANCE SHEETS AT MARCH 31, 2014 AND DECEMBER 31, 2013

Overview

Our total assets and liabilities increased between March 31, 2014 and year end 2013 primarily due to the acquisition of Gulfstream Bancshares, Inc. and its banking subsidiary, Gulfstream Business Bank (collectively “Gulfstream”). We issued approximately 5.2 million common shares and acquired the outstanding stock options pursuant to the Gulfstream acquisition which added approximately $56,769 to our shareholders’ equity during the quarter. 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 $220,261 at March 31, 2014 (approximately 7.3% of total assets) as compared to $174,889 at December 31, 2013 (approximately 7.2% of total assets). We use our available-for-sale securities portfolio, as well as federal funds sold and Federal Reserve Bank deposits for liquidity management and for investment yields. These accounts, as a group, will fluctuate as a function of loans outstanding, and to some degree the amount of correspondent bank deposits (i.e. federal funds purchased) outstanding.

Investment securities available for sale

Securities available-for-sale, consisting primarily of U.S. government sponsored enterprises and municipal tax exempt securities, were $617,143 at March 31, 2014 (approximately 20.5% of total assets) compared to $457,086 at December 31, 2013 (approximately 18.9% of total assets), an increase of $160,057 or 35.0%. We use our available-for-sale securities portfolio, as well as federal funds sold and Federal Reserve Bank deposits for liquidity management and for investment yields. These accounts, as a group, will fluctuate as a function of loans outstanding as discussed above, under the caption “Federal funds sold and Federal Reserve Bank deposits.” Our securities are carried at fair value. We classify our securities as “available-for-sale” to provide for greater flexibility to respond to changes in interest rates as well as future liquidity needs.

Trading securities

We also have a trading securities portfolio. Realized and unrealized gains and losses are included in trading securities revenue, a component of our non interest income, in our Condensed Consolidated Statement of Earnings and Comprehensive Income. Securities purchased for this portfolio have primarily been various municipal securities. We held no securities in our trading securities portfolio as of March 31, 2014. A list of the activity in this portfolio is summarized below.


	Three month period ended Mar 31, 2014			Three month period ended Mar 31, 2013
Beginning balance	$	—		$	5,048
Purchases		28,809			61,878
Proceeds from sales		(28,836	)		(67,072	)
Net realized gain on sales		27			146

Ending balance	$	—		$	—

Loans held for sale

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


	Three month period ended Mar 31, 2014			Three month period ended Mar 31, 2013
Beginning balance	$	1,010		$	2,709
Acquired from Gulfstream		247			—
Loans originated		4,610			4,842
Proceeds from sales		(4,926	)		(5,507	)
Net realized gain on sales		76			87

Ending balance	$	1,017		$	2,131

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 three months ended March 31, 2014, were $1,764,647, or 70.7% of average earning assets, as compared to $1,420,227, or 70.4% of average earning assets, for the three month period ending March 31, 2013. Total loans at March 31, 2014 and December 31, 2013 were $1,815,634 and $1,474,179, respectively. This represents a loan to total asset ratio of 60.4% and 61.0% and a loan to deposit ratio of 71.0% and 71.7%, at March 31, 2014 and December 31, 2013, respectively.

At March 31, 2014, we have total Purchased Credit Impaired (“PCI”) loans of $250,800 and non-PCI loans of $1,564,834. Approximately 88% of our PCI loans, or $219,733, are covered by FDIC loss sharing agreements related to the acquisitions of three failed financial institutions during the third quarter of 2010 and two during the first quarter of 2012. 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 provide for FDIC loss sharing for five years and CenterState reimbursement to the FDIC for a total of eight years for recoveries. All of our PCI loans are accounted for pursuant to ASC Topic 310-30.

Total PCI loans increased by $19,379 during the quarter, which included $30,068 of PCI loans acquired on January 17^th in the Gulfstream acquisition. Excluding the Gulfstream acquisition, our PCI loans decreased $10,689, or approximately 18.5% on an annualized basis. Of the $250,800 PCI loans outstanding at March 31, 2014 and accounted for pursuant to ASC Topic 310-30, $219,733 are covered by FDIC loss sharing agreements and $31,067 are not. A summary of the current quarters change in PCI loans outstanding is presented in the table below.


Balance at 12/31/13	$	231,421
Acquisition of PCI loans from Gulfstream 1/17/14		30,068
Net change in PCI loans during the quarter		(10,689	)

Balance at 3/31/14	$	250,800

Non-PCI loans increased $322,076 during the quarter, which included $329,515 acquired on January 17^th through the Gulfstream acquisition. Excluding the Gulfstream acquisition the Company’s non-PCI loans decreased $7,439 or approximately 2.4% on an annualized basis. A summary of the current quarter’s change in non-PCI loans outstanding is presented in the table below.


Balance at 12/31/13	$	1,242,758
Acquisition of non-PCI loans from Gulfstream 1/17/14		329,515
Net change in non-PCI loans during the quarter		(7,439	)

Balance at 3/31/14	$	1,564,834

Total new loans originated during the quarter approximated $76.5 million, of which $58.6 million were funded. The weighted average interest rate on funded loans was approximately 4.54%. The graph below summarizes total loan production and funded loan production over the past nine quarters.

LOGO

Although the production was lower in the first quarter of 2014 compared to the fourth quarter of 2013, the pipeline is $140 million at March 31, 2014 compared to $114 million at December 31, 2013.

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.

Prior to allowance for loan losses, our total loans at March 31, 2014 is equal to $1,815,634. Of this amount, approximately 85% are collateralized by real estate, 12% are commercial non real estate loans and the remaining 3% are consumer and other non real estate loans. We have approximately $613,329 of single family residential loans which represents about 34% of our total loan portfolio. Our largest category of loans is commercial real estate which represents approximately 47% of our total loan portfolio. The following table sets forth information concerning the loan portfolio by collateral types as of the dates indicated.


	Mar 31, 2014			Dec 31, 2013
Loans, excluding PCI loans
Real estate loans
Residential	$	495,450		$	458,331
Commercial		736,406			528,710
Land, development and construction		60,726			62,503

Total real estate		1,292,582			1,049,544
Commercial		217,482			143,263
Consumer and other loans		54,205			49,547

Loans before unearned fees and deferred cost		1,564,269			1,242,354
Net unearned fees and costs		565			404

Total non-PCI loans		1,564,834			1,242,758
Allowance for loan losses		(18,913	)		(19,694	)

Non-PCI loans, net of allowance for loan losses		1,545,921			1,223,064

PCI loans (note 1)
Real estate loans
Residential		117,879			120,030
Commercial		112,558			100,012
Land, development and construction		11,144			6,381

Total real estate		241,581			226,423
Commercial		8,118			3,850
Consumer and other loans		1,101			1,148

Total PCI loans		250,800			231,421
Allowance for loan losses		(1,183	)		(760	)

PCI loans, net of allowance for loan losses		249,617			230,661

Total loans, net of allowance for loan losses	$	1,795,538		$	1,453,725

note 1:

Purchased credit impaired loans accounted for pursuant to ASC Topic 310-30.

Included in our total PCI loans listed above, are loans covered by FDIC loss share agreements. The following table sets forth information concerning the loan portfolio by collateral types which are covered by FDIC loss sharing agreements and are included in total PCI loans above.


FDIC covered loans (note 1)	Mar 31, 2014			Dec 31, 2013
Real estate loans
Residential	$	113,418		$	120,030
Commercial		95,942			100,012
Land, development and construction		6,824			6,381

Total real estate		216,184			226,423
Commercial		3,549			3,850

Total FDIC covered loans		219,733			230,273
Allowance for loan losses		(1,183	)		(760	)

FDIC covered loans, net of allowance for loan losses	$	218,550		$	229,513

note 1:

FDIC covered loans included in our total PCI loans in the previous table above.

Credit quality and allowance for loan losses

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

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

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

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 loan portfolio. The FDIC is obligated to reimburse us for 80% of losses incurred in our covered loan portfolio subject to the terms of our loss share agreements with the FDIC. Our PCI loans have been marked to fair value at their respective acquisition date, which considers an estimate of probable losses, and is evaluated for impairment on a pool basis on a quarterly basis, pursuant to ASC Topic 310-30.

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

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

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

In the table below we have shown the components, as discussed above, of our allowance for loan losses at March 31, 2014 and December 31, 2013.


	Mar 31, 2014							Dec 31, 2013							increase (decrease)
	loan		ALLL					loan		ALLL					loan			ALLL
	balance		balance		%			balance		balance		%			balance			balance
Non impaired loans	$	1,218,614	$	16,994		1.39	%	$	1,218,648	$	17,883		1.47	%	$	(34	)	$	(889	)	-8 bps
Gulfstream loans (note 1)		319,665		—		—	%		—				—	%		319,665			—
Impaired loans		26,555		1,919		7.23	%		24,110		1,811		7.51	%		2,445			108		-28 bps

Non-PCI loans		1,564,834		18,913		1.21	%		1,242,758		19,694		1.58	%		322,076			(781	)	-37 bps
PCI loans (note 2)		250,800		1,183					231,421		760					19,379			423

Total loans	$	1,815,634	$	20,096		1.11	%*	$	1,474,179	$	20,454		1.39	%	$	341,455		$	(358	)	-28 bps

*	The significant decrease in this ratio compared to the prior quarter end is primarily due to the addition of the Gulfstream loans.


note 1:		Loans acquired pursuant to the Company’s January 17, 2014 acquisition of Gulfstream Business Bank that are not PCI loans. These are performing loans recorded at estimated fair value at the acquisition date. The fair value adjustment at the acquisition date was approximately $7,680, or approximately 2.3% of the outstanding aggregate loan balances. This amount is accreted into interest income over the remaining lives of the related loans on a level yield basis. Because these loans were recorded at estimated fair value on January 17, 2014, no provision for loan loss was recorded related to these loans at March 31, 2014.


note 2:		Included in the $250,800 PCI loans at March 31, 2014 are $219,733 of loans that are covered by FDIC loss sharing arrangements. Of the remaining PCI loan amount, $29,966 were acquired pursuant to the Company’s January 17, 2014 acquisition of Gulfstream Business Bank and $1,101 are consumer loans acquired pursuant to FDIC assisted transactions of failed financial institutions that are not covered by FDIC loss sharing agreements.

The general loan loss allowance (non-impaired loans) decreased by a net amount of $889. This decrease was primarily due to the continued improvement in the local economy and real estate market, and the continued decline in the Company’s two year charge-off history. The Company’s other credit metrics, such as the levels of and trends in the Company’s non-performing loans, past-due loans and impaired loans were also considered when adjusting its qualitative factors, which ultimately increased the current two year historical loss factor ratios.

The specific loan loss allowance (impaired loans) is the aggregate of the results of individual analyses prepared for each one of the impaired loans, excluding PCI loans. The Company recorded partial charge offs in lieu of specific allowance for a number of the impaired loans. The Company’s impaired loans have been written down by $1,454 to $26,555 ($24,636 when the $1,919 specific allowance is considered) from their legal unpaid principal balance outstanding of $28,009. In the aggregate, total impaired loans have been written down to approximately 88% of their legal unpaid principal balance, and non-performing impaired loans have been written down to approximately 78% of their legal unpaid principal balance. The Company’s total non-performing loans (non-accrual loans plus loans past due greater than 90 days and still accruing, $30,689 at March 31, 2014) have been written down to approximately 82% of their legal unpaid principal balance.

Approximately $14,740 of the Company’s impaired loans (56%) are accruing performing loans. This group of impaired loans is not included in the Company’s non-performing loans or non-performing assets categories.

PCI loans, including those covered by FDIC loss sharing agreements, are accounted for pursuant to ASC Topic 310-30. PCI loan pools are evaluated for impairment each quarter. If a pool is impaired, an allowance for loan loss is recorded.

The allowance is increased by the provision for loan losses, which is a charge to current period earnings and decreased by loan charge-offs net of recoveries of prior period loan charge-offs. Loans are charged against the allowance when management believes collection of the principal is unlikely. We believe our allowance for loan losses was adequate at March 31, 2014. However, we recognize that many factors can adversely impact various segments of the Company’s market and customers, and therefore there is no assurance as to the amount of losses or probable losses which may develop in the future. The tables below summarize the changes in allowance for loan losses during the periods presented.


	Loans, excluding purchased credit impaired			Purchased credit impaired loans			Total
Three months ended March 31, 2014
Balance at beginning of period	$	19,694		$	760		$	20,454
Loans charged-off		(1,160	)		—			(1,160	)
Recoveries of loans previously charged-off		843			—			843

Net charge-offs		(317	)		—			(317	)
(Recovery) provision for loan loss		(464	)		423			(41	)

Balance at end of period	$	18,913		$	1,183		$	20,096

Three months ended March 31, 2013
Balance at beginning of period	$	24,033		$	2,649		$	26,682
Loans charged-off		(1,231	)		—			(1,231	)
Recoveries of loans previously charged-off		163			—			163

Net charge-offs		(1,068	)		—			(1,068	)
Provision for loan losses		(334	)		(26	)		(360	)

Balance at end of period	$	22,631		$	2,623		$	25,254

Nonperforming loans and nonperforming assets

Non performing loans exclude PCI loans and 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, as defined above, as a percentage of total non-PCI loans, were 1.96% at March 31, 2014, compared to 2.18% at December 31, 2013.

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 $40,719 at March 31, 2014, compared to $33,636 at December 31, 2013. Non performing assets as a percentage of total assets were 1.35% at March 31, 2014, compared to 1.39% at December 31, 2013.

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


	Mar 31,			Dec 31,
	2014			2013
Non-accrual loans (note 1)	$	30,689		$	27,077
Past due loans 90 days or more and still accruing interest (note 1)		—			—

Total non-performing loans (NPLs) (note 1)		30,689			27,077
Other real estate owned (OREO) (note 1)		9,895			6,409
Repossessed assets other than real estate (note 1)		135			150

Total non-performing assets (NPAs) (note 1)	$	40,719		$	33,636

Total NPLs as a percentage of total loans (note 1)		1.96	%		2.18	%
Total NPAs as a percentage of total assets (note 1)		1.35	%		1.39	%
Loans past due between 30 and 89 days and accruing interest as a percentage of total loans (note 1)		0.77	%		0.85	%
Allowance for loan losses, excluding PCI loans	$	18,913		$	19,694
Allowance for loan losses as a percentage of NPLs (note 1)		62	%		73	%


note 1:		Excludes PCI loans and OREO 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 March 31, 2014 the Company had reported a total of 192 non accrual loans with an aggregate carrying value of $30,689 compared to December 31, 2013 when 191 non accrual loans with an aggregate book value of $27,077 were reported. This amount is further delineated by collateral category and number of loans in the table below.


Collateral category	Total amount in thousands of dollars		Percentage of total non accrual loans			Number of non accrual loans in category
Residential real estate	$	12,859		42	%		87
Commercial real estate		14,629		48	%		40
Land, development, construction		1,136		4	%		11
Commercial		1,582		5	%		24
Consumer, other		483		1	%		30

Total non accrual loans at March 31, 2014	$	30,689		100	%		192

The second largest component of non performing assets after non accrual loans is OREO, excluding OREO covered by FDIC loss share agreements. At March 31, 2014, total OREO was $23,787. Of this amount, $13,892 is covered by FDIC loss sharing agreements. Pursuant 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 $9,895 at March 31, 2014. OREO is carried at the lower of cost or market less the estimated cost to sell. Further declines in real estate values can affect the market value of these assets. Any further decline in market value beyond its cost basis is recorded as a current expense in the Company’s Condensed Consolidated Statement of Earnings and Comprehensive Income. OREO is further delineated in the table below.


(unaudited) Description of repossessed real estate	carrying amount at Mar 31, 2014
12 single family homes	$	3,193
6 residential building lots		866
11 commercial buildings		2,031
Land / various acreages		3,805

Total, excluding OREO covered by FDIC loss share agreements	$	9,895

Impaired loans are defined as loans that management has determined will not repay as agreed pursuant to the terms of the related loan agreement. Small balance homogeneous loans are not considered for impairment purposes. Once management has determined a loan is impaired, we perform a specific reserve analysis to determine if it is probable that we will eventually collect all contractual cash flows. If

management determines that a shortfall is probable, then a specific valuation allowance is placed against the loan. This loan is then placed on non accrual basis, even if the borrower is current with his/her contractual payments, and will remain on non accrual until payments collected reduce the loan balance such that it eliminates the specific valuation allowance or equivalent partial charge-down or other economic conditions change. At March 31, 2014 we have identified a total of $26,555 impaired loans, excluding PCI loans. A specific valuation allowance of $1,919 has been attached to $10,931 of the total identified impaired loans. It should also be noted that the total carrying balance of the impaired loans, or $26,555, has been partially charged down by $1,454 from their aggregate legal unpaid balance of $28,009. The table below summarizes impaired loan data for the periods presented.


	Mar 31, 2014		Dec 31, 2013
Impaired loans with a specific valuation allowance	$	10,931	$	9,454
Impaired loans without a specific valuation allowance		15,624		14,656

Total impaired loans	$	26,555	$	24,110
Amount of allowance for loan losses allocated to impaired loans	$	1,919	$	1,811
Performing TDRs	$	12,649	$	10,763
Non performing TDRs, included in NPLs		2,337		4,684

Total TDRs (TDRs are required to be included in impaired loans)	$	14,986	$	15,447
Impaired loans that are not TDRs		11,569		8,663

Total impaired loans	$	26,555	$	24,110

We continually analyze our loan portfolio in an effort to recognize and resolve problem assets as quickly and efficiently as possible. As of March 31, 2014, 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 $95,103 at March 31, 2014 compared to $96,619 at December 31, 2013, a decrease of $1,516 or 1.6%. This amount is the result of branch real estate transferred to held for sale of $6,973 prior to impairment charges of $2,326, $5,781 of bank premises and equipment acquired from the Gulfstream acquisition, other purchases net of disposals of $1,154 less $1,478 of depreciation expense.

Deposits

On January 17, 2014, we assumed $478,999 of deposits pursuant to the acquisition of Gulfstream, which included approximately $84,995 of time deposits. During the quarter, our total deposits increased by $502,473 (time deposits increased by $59,179 and non-time deposits increased by $443,294). The cost of interest bearing deposits in the current quarter decreased by 2bp to 33bps compared to the prior quarter. The overall cost of total deposits (i.e. includes non-interest bearing checking accounts) decreased by 2bps to 0.22% in the current quarter compared to 0.24% in the prior quarter. The table below summarizes the Company’s deposit mix over the dates indicated.


			% of					% of
	Mar 31, 2014		total			Dec 31, 2013		total
Demand - non-interest bearing	$	838,764		33	%	$	644,915		31	%
Demand - interest bearing		558,845		22	%		483,842		24	%
Savings deposits		234,908		9	%		232,942		11	%
Money market accounts		482,133		19	%		309,657		15	%
Time deposits		444,054		17	%		384,875		19	%

Total deposits	$	2,558,704		100	%	$	2,056,231		100	%

Securities sold under agreement to repurchase

Our subsidiary bank enters into borrowing arrangements with our retail business customers by agreements to repurchase (“securities sold under agreements to repurchase”) under which the bank pledges investment securities owned and under their control as collateral against the one-day borrowing arrangement. These short-term borrowings totaled $26,116 at March 31, 2014 compared to $20,457 at December 31, 2013.

Federal funds purchased

Federal funds purchased are overnight deposits from correspondent banks. Federal funds purchased acquired from other than our correspondent bank deposits are included with Federal Home Loan Bank advances and other borrowed funds as described below, if any. At March 31, 2014 we had $45,183 of correspondent bank deposits or federal funds purchased, compared to $29,909 at December 31, 2013.

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 March 31, 2014 and December 31, 2013, there were no outstanding advances from the Federal Home Loan Bank.

Corporate debentures

We formed CenterState Banks of Florida Statutory Trust I (the “Trust”) for the purpose of issuing trust preferred securities. On September 22, 2003, we issued a floating rate corporate debenture in the amount of $10,000. The Trust used the proceeds from the issuance of a trust preferred security to acquire the corporate debenture of the Company. The trust preferred security essentially mirrors the corporate debenture, carrying a cumulative preferred dividend at a variable rate equal to the interest rate on the corporate debenture (three month LIBOR plus 305 basis points). The corporate debenture and the trust preferred security each have 30-year lives. The trust preferred security and the corporate debenture are callable by the Company or the Trust, at their respective option, subject to prior approval by the Federal Reserve Board, if then required. The Company has treated the trust preferred security as Tier 1 capital up to the maximum amount allowed under the Federal Reserve guidelines for federal regulatory purposes.

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

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

In January 2005, Gulfstream Bancshares, Inc. (“GBI”) formed Gulfstream Bancshares Capital Trust I (“GBI Trust I”) for the purpose of issuing trust preferred securities. On January 18, 2005, GBI issued a floating rate corporate debenture in the amount of $7,000. The Trust used the proceeds from the issuance of a trust preferred security to acquire the corporate debenture. The trust preferred security essentially mirrors the corporate debenture, carrying a cumulative preferred dividend at a variable rate equal to the interest rate on the corporate debenture (three month LIBOR plus 190 basis points). The rate is subject to change quarterly. 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 GBI Trust I, at their respective option, subject to prior approval by the Federal Reserve, if then required. On January 17, 2014, the Company acquired all the assets and assumed all the liabilities of GBI by merger, including GBI’s corporate debenture and related trust preferred security discussed above. The Company will treat the corporate debenture as Tier 1 capital up to the maximum amount allowed under the Federal Reserve guidelines for federal regulatory purposes.

In March 2007, Gulfstream Bancshares, Inc. (“GBI”) formed Gulfstream Bancshares Capital Trust II (“GBI Trust I”) for the purpose of issuing trust preferred securities. On March 6, 2007, GBI issued a floating rate corporate debenture in the amount of $3,000. The Trust used the proceeds from the issuance of a trust preferred security to acquire the corporate debenture. The trust preferred security essentially mirrors the corporate debenture, carrying a cumulative preferred dividend at a variable rate equal to the interest rate on the corporate debenture (three month LIBOR plus 170 basis points). The rate is subject to change quarterly. 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 GBI Trust II, at their respective option, subject to prior approval by the Federal Reserve, if then required. On January 17, 2014, the Company acquired all the assets and assumed all the liabilities of GBI by merger, including GBI’s corporate debenture and related trust preferred security discussed above. The Company will treat the corporate debenture as Tier 1 capital up to the maximum amount allowed under the Federal Reserve guidelines for federal regulatory purposes.

Stockholders’ equity

Stockholders’ equity at March 31, 2014, was $333,164, or 11.1% of total assets, compared to $273,379, or 11.3% of total assets at December 31, 2013. The increase in stockholders’ equity was due to the following items:


	$273,379			Total stockholders’ equity at December 31, 2013
	53,150			Common stock issued in relation to Gulfstream acquisition
	3,617			Gulfstream stock options converted to CenterState stock options
	1,053			Net income during the period
	(355)			Dividends paid on common shares, $0.01 per common share
	1,128			Net increase in market value of securities available for sale, net of deferred taxes
	909			Stock options exercised, including tax benefit
	283			Employee equity based compensation

	$333,164			Total stockholders’ equity at March 31, 2014

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 March 31, 2014, our subsidiary bank exceeded the minimum capital levels to be considered “well capitalized” under the terms of the guidelines.

Selected consolidated capital ratios at March 31, 2014 and December 31, 2013 for the Company and for the Company’s subsidiary bank, CenterState Bank of Florida, N.A., are presented in the tables below. There is no threshold for “well-capitalized” status for bank holding companies.


CenterState Banks, Inc. (the Company)	Actual					Capital Adequacy					Excess
	Amount		Ratio			Amount		Ratio			Amount
March 31, 2014
Total capital (to risk weighted assets)	$	297,763		15.8	%	$	150,509		> 8	%	$	147,254
Tier 1 capital (to risk weighted assets)		277,667		14.8	%		75,254		> 4	%		202,413
Tier 1 capital (to average assets)		277,667		10.0	%		111,336		> 4	%		166,331
December 31, 2013
Total capital (to risk weighted assets)	$	262,701		17.9	%	$	117,450		> 8	%	$	145,251
Tier 1 capital (to risk weighted assets)		244,323		16.6	%		58,725		> 4	%		185,598
Tier 1 capital (to average assets)		244,323		10.4	%		94,182		> 4	%		150,141


CenterState Bank of Florida, N.A.	Actual					Well capitalized					Excess
	Amount		Ratio			Amount		Ratio			Amount
March 31, 2014
Total capital (to risk weighted assets)	$	260,206		13.9	%	$	187,521		> 10	%	$	72,685
Tier 1 capital (to risk weighted assets)		240,291		12.8	%		112,512		> 6	%		127,779
Tier 1 capital (to average assets)		240,291		8.7	%		138,877		> 5	%		101,414
December 31, 2013
Total capital (to risk weighted assets)	$	213,744		14.6	%	$	146,277		> 10	%	$	67,467
Tier 1 capital (to risk weighted assets)		195,434		13.4	%		87,766		> 6	%		107,668
Tier 1 capital (to average assets)		195,434		8.3	%		117,444		> 5	%		77,990

In July 2013, the two federal banking regulatory agencies that have authority to regulate the Company’s capital resources and capital structure (the Board of Governors of the Federal Reserve System (FRB) and Federal Deposit Insurance Corporation (FDIC)) took action to finalize the application to the United States banking industry of new regulatory capital requirements that are established by the international banking framework commonly referred to as “Basel III” and to implement certain other changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. As anticipated by management of the Company (see the related discussion included in Item 1 of the Company’s annual report on Form 10-K for the year 2013 filed in March 2014), these rules make significant changes to the U.S. bank regulatory capital framework, and generally increase capital requirements for banking organizations. However, in response to concerns expressed by community banks such as the Company, the final rules addressed previous concerns of community banks about the proposed rules’ regulatory capital treatment of trust preferred securities, unrealized gains and losses on available-for-sale securities in accumulated other comprehensive income (“AOCI”) and mortgage risk weights. Therefore, although the Company has not yet had the opportunity to analyze the final rules in detail in order to determine their likely impact upon the Company, and although management does continue to believe that such requirements will in general increase the amount of capital that the Company and the Bank may be required to maintain under these new standards, the Company believes that its prior concerns regarding volatility and trust preferred securities have been favorably addressed by the final rules. The Company does not presently expect that any materially burdensome compliance efforts with these final capital rules will be required of us prior to January 1, 2015.

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED March 31, 2014 AND 2013

Overview

We recognized net income of $1,053 or $0.03 per share basic and diluted for the three month period ended March 31, 2014, compared to net income of $4,576 or $0.15 per share basic and diluted for the same period in 2013. The largest differences between the two periods included:

•

merger and acquisition related expenses of $2,347 during the first quarter of 2014 related primarily to the Gulfstream acquisition and also included approximately $275 initial merger expenses related to the recently announced First Southern acquisition;

•

charges related to our January 2014 announcement of efficiency and enhanced profitability initiatives of $3,158 during the first quarter of 2014;

•

increase of $2,986 FDIC indemnification amortization between the two periods;

•

lower fixed income security sales revenue from our correspondent banking division of $3,004 between the two quarters; and,

•

the above negative impacts to our first quarter 2014 earnings compared to the first quarter of 2013 were partially offset by higher net interest income primarily due to the January 17, 2014 acquisition of Gulfstream.

These items along with others are discussed and analyzed below.

Net interest income/margin

Net interest income increased $5,371 or 24% to $28,193 during the three month period ended March 31, 2014 compared to $22,822 for the same period in 2013. The $5,371 increase was the result of a $5,404 increase in interest income and a $33 increase in interest expense.

Interest earning assets averaged $2,494,608 during the three month period ended March 31, 2014 as compared to $2,018,231 for the same period in 2013, an increase of $476,377, or 23.6%. The yield on average interest earning assets decreased 6bps to 4.84% (5bps to 4.91% tax equivalent basis) during the three month period ended March 31, 2014, compared to 4.90% (4.96% tax equivalent basis) for the same period in 2013. The combined effects of the $476,377 increase in average interest earning assets and the 6bps (5bps tax equivalent basis) decrease in yield on average interest earning assets resulted in the $5,404 ($5,521 tax equivalent basis) increase in interest income between the two periods.

Interest bearing liabilities averaged $1,748,146 during the three month period ended March 31, 2014 as compared to $1,544,529 for the same period in 2013, an increase of $203,617, or 13.2%. The cost of average interest bearing liabilities decreased 4bps to 0.37% during the three month period ended March 31, 2014, compared to 0.41% for the same period in 2013. The combined effects of the $203,617 increase in average interest bearing liabilities and the 4bps decrease in cost of average interest bearing liabilities resulted in the $33 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 March 31, 2014 and 2013 on a tax equivalent basis.


	Three months ended March 31,
	2014								2013
	Average			Interest		Average			Average			Interest		Average
	balance			inc / exp		rate			balance			inc / exp		rate
Loans (notes 1, 2, 8)	$	1,513,060		$	17,727		4.75	%	$	1,133,046		$	13,718		4.91	%
PCI loans (note 9)		251,587			8,231		13.27	%		287,181			7,827		11.05	%
Securities- taxable		492,766			3,478		2.86	%		417,185			2,389		2.32	%
Securities- tax exempt (note 8)		39,280			511		5.28	%		43,043			533		5.02	%
Fed funds sold and other (note 3)		197,915			239		0.49	%		137,776			198		0.58	%

Total interest earning assets		2,494,608			30,186		4.91	%		2,018,231			24,665		4.96	%
Allowance for loan losses		(20,970	)							(26,782	)
All other assets		396,123								398,334

Total assets	$	2,869,761							$	2,389,783

Interest bearing deposits (note 4)		1,653,806			1,337		0.33	%		1,462,511			1,383		0.38	%
Fed funds purchased		41,999			6		0.06	%		44,662			5		0.05	%
Other borrowings (note 5)		29,768			23		0.31	%		20,381			18		0.36	%
Corporate debenture (note 10)		22,573			223		4.01	%		16,975			150		3.58	%

Total interest bearing liabilities		1,748,146			1,589		0.37	%		1,544,529			1,556		0.41	%
Demand deposits		767,926								545,579
Other liabilities		30,389								25,200
Stockholders’ equity		323,300								274,475

Total liabilities and stockholders’ equity	$	2,869,761							$	2,389,783

Net interest spread (tax equivalent basis) (note 6)							4.54	%							4.55	%

Net interest income (tax equivalent basis)				$	28,597							$	23,109

Net interest margin (tax equivalent basis) (note 7)							4.65	%							4.64	%


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 $43 and $46 for the three month periods ended March 31, 2014 and 2013.
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 ($155) and ($179) for the three month periods ended March 31, 2014 and 2013.
note 5:		Includes securities sold under agreements to repurchase and Federal Home Loan Bank advances.
note 6:		Represents the average rate earned on interest earning assets minus the average rate paid on interest bearing liabilities.
note 7:		Represents net interest income divided by total interest earning assets.
note 8:		Interest income and rates include the effects of a tax equivalent adjustment using applicable statutory tax rates to adjust tax exempt interest income on tax exempt investment securities and loans to a fully taxable basis.
note 9:		PCI loans are accounted for pursuant to ASC 310-30.
note 10:		Includes amortization of fair value adjustments related to various acquisitions of corporate debentures of $44 and $6 for the three month periods ended March 31, 2014 and 2013.

Provision for loan losses

The provision for loan losses increased $319 to a negative provision of $(41) during the three month period ending March 31, 2014 compared to a negative provision of $(360) for the comparable period in 2013. Our policy is to maintain the allowance for loan losses at a level sufficient to absorb probable incurred losses in the loan portfolio. The allowance is increased by the provision for loan losses, which is a charge to current period earnings, and is decreased by charge-offs, net of recoveries on prior loan charge-offs. Therefore, the provision for loan losses (Income Statement effect) is a residual of management’s determination of allowance for loan losses (Balance Sheet approach). In determining the adequacy of the allowance for loan losses, we consider the conditions of individual borrowers, the historical loan loss experience, the general economic environment, the overall portfolio composition, and other information. As these factors change, the level of loan loss provision changes. Our loss factors associated with our general allowance for loan losses is the primary reason causing the decrease in our provision expense due to our continued improvement in substantially all of our credit metrics, in particular our historical loss factors which is a derivative of our historical charge-off rates. See “Credit quality and allowance for loan losses” for additional information regarding the allowance for loan losses.

Non-interest income

Non-interest income for the three months ended March 31, 2014 was $5,760 compared to $10,279 for the comparable period in 2013. This decrease was the result of the following components listed in the table below.


							$			%
	Mar 31,			Mar 31,			increase			increase
Three month period ending:	2014			2013			(decrease)			(decrease)
Income from correspondent banking and bond sales division	$	3,136		$	6,140		$	(3,004	)		(48.9	%)
Other correspondent banking related revenue		795			865			(70	)		(8.1	%)
Wealth management related revenue		1,217			1,070			147			13.7	%
Service charges on deposit accounts		2,262			1,819			443			24.4	%
Debit, prepaid, ATM and merchant card related fees		1,506			1,285			221			17.2	%
BOLI income		352			339			13			3.8	%
Other service charges and fees		409			302			107			35.4	%
Gain on sale of securities		—			30			(30	)		(100.0	%)

Subtotal	$	9,677		$	11,850		$	(2,173	)		(18.3	%)
FDIC indemnification asset-amortization(see explanation below)		(5,185	)		(2,199	)		(2,986	)		135.8	%
FDIC indemnification income		1,268			628			640			101.9	%

Total non-interest income	$	5,760		$	10,279		$	(4,519	)		(44.0	%)

When the estimate of future losses in covered loans decrease (i.e. future cash flows increase), this increase in cash flows is accreted into interest income, increasing yields, over the remaining life of the related loan pool. The indemnification asset (“IA”) represents the amount that is expected to be collected

from the FDIC for reimbursement of 80% of the estimated losses in the covered pools. When management decreases its estimate of future losses, the expected reimbursement from the FDIC, or IA, is decreased by 80% of this amount. The decrease in estimated reimbursements is expensed (negative accretion) over the lesser of the remaining expected life of the related loan pool(s) or the remaining term of the related loss share agreement(s), and is included in non-interest income as a negative amount.

At March 31, 2014, the total IA on our Condensed Consolidated Balance Sheet was $64,719. Of this amount, we expect to receive reimbursements from the FDIC of approximately $30,805 related to future estimated losses, and expect to write-off approximately $33,914 for previously estimated losses that are no longer expected. The $33,914 is now expected to be paid by the borrower (or realized upon the sale of OREO) instead of a reimbursement from the FDIC. At March 31, 2014, the $33,914 previously estimated reimbursements from the FDIC will be written off as expense (negative accretion) included in our non-interest income category of our Condensed Consolidated Statement of Earnings and Comprehensive Income as summarized below.


Year			Year
2014 (9 months)	37.4	%	2018	5.3	%
2015	25.2	%	2019	4.6	%
2016	16.6	%	2020 thru 2021	4.0	%

2017	6.9	%	Total	100.0	%

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

Income from correspondent banking and bond sales division means the spread earned from buying and selling fixed income securities among our correspondent bank customers. We do not take a position in the transaction, but merely earn a spread for facilitating it. Gross revenue depends on the amount of sales volume, which is volatile from period to period. Sales volume was substantially less in the current quarter compared to the first quarter of 2013. The decrease in volume is likely due to recent increases in market interest rates thereby causing unrealized losses in our correspondent bank customers’ securities portfolios. Many of our correspondent bank customers may be reluctant to execute sales and realize the loss if there are other possible strategies they can use which is likely a primary contributing factor to reduced sales volume.

Non-interest expense

Non-interest expense for the three months ended March 31, 2014 increased $5,313, or 19.6%, to $32,403, compared to $27,090 for the same period in 2013. Components of our non-interest expenses are listed in the table below.


							$			%
	Mar 31,			Mar 31,			increase			increase
Three month period ending:	2014			2013			(decrease)			(decrease)
Employee salaries and wages	$	11,873		$	12,665		$	(792	)		(6.3	%)
Employee incentive/bonus compensation		1,238			1,094			144			13.2	%
Employee stock based compensation		187			146			41			28.1	%
Employer 401K matching contributions		360			367			(7	)		(1.9	%)
Deferred compensation expense		107			141			(34	)		(24.1	%)
Health insurance and other employee benefits		987			951			36			3.8	%
Payroll taxes		1,120			1,017			103			10.1	%
Other employee related expenses		258			296			(38	)		(12.8	%)
Incremental direct cost of loan origination		(449	)		(437	)		(12	)		(2.8	%)

Total salaries, wages and employee benefits		15,681			16,240			(559	)		(3.4	%)

Loss (gain) on sale of OREO		(30	)		76			(106	)		(139.5	%)
Loss (gain) on sale of FDIC covered OREO		107			(77	)		184			239.0	%
Valuation write down (recovery) of OREO		70			342			(272	)		(79.5	%)
Valuation write down of FDIC covered OREO		950			645			305			47.3	%
Loss on repossessed assets other than real estate		(2	)		242			(244	)		(100.8	%)
Loan put back expense		—			4			(4	)		(100.0	%)
Foreclosure and repossession related expenses		485			441			44			10.0	%
Foreclosure and repo expense, FDIC (note 1)		244			348			(104	)		(29.9	%)

Total credit related expenses		1,824			2,021			(197	)		(9.8	%)

Occupancy expense		1,960			1,892			68			3.6	%
Depreciation of premises and equipment		1,478			1,497			(19	)		(1.3	%)
Supplies, stationary and printing		227			288			(61	)		(21.2	%)
Marketing expenses		620			528			92			17.4	%
Data processing expense		1,039			884			155			17.5	%
Legal, auditing and other professional fees		775			783			(8	)		(1.0	%)
Bank regulatory related expenses		631			581			50			8.6	%
Postage and delivery		268			285			(17	)		(6.0	%)
Debit, prepaid, ATM and merchant card related expenses		474			525			(51	)		(9.5	%)
CDI and Trust intangible amortization		376			306			70			22.5	%
Internet and telephone banking		378			224			154			68.9	%
Put-back option amortization		—			37			(37	)		(100.0	%)
Operational write-offs and losses		36			16			20			125.0	%
Correspondent accounts and Federal Reserve charges		135			109			26			23.9	%
Conferences/Seminars/Education/Training		100			153			(53	)		(34.6	%)
Director fees		115			102			13			12.8	%
Travel expenses		65			74			(9	)		(12.2	%)
Other expenses		716			545			171			31.4	%

Subtotal		26,898			27,090			(192	)		(0.7	%)
Merger, acquisition and conversion related expenses		2,347			—			2,347			100.0	%
Branch closure and efficiency initiatives		3,158			—			3,158			100.0	%

Total non-interest expense	$	32,403		$	27,090		$	5,313			19.6	%

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

Merger, acquisition and conversion expenses listed above relate primarily to our January 17, 2014 acquisition of Gulfstream, and also includes approximately $275 initial merger expenses related to our recently announced acquisition of First Southern, which we expect to close this summer. The Gulfstream acquisition added four branches and additional back office expenses during the first quarter of 2014. We converted Gulfstream’s core systems to ours on February 14, 2014, and as such we expect additional efficiencies in the second quarter.

Branch closure and efficiency initiatives expenses listed above relate to our announcement in January 2014. During April 2014 we consolidated and closed 7 branches and one standalone drive-thru facility (which the banking regulators count as a branch). Five of the seven branch office locations (real estate) were transferred to held-for-sale. We also restructured residential lending, credit administration, portfolio management divisions, wealth management department, correspondent unit and certain other retail platform staffing. The $3,158 charges listed in the table above was primarily a result of impairment charges on the real estate transferred to held-for-sale and severance payments related to reduction in force. The expense saves from these efficiency initiatives will be phased in through the first quarter of 2015 as discussed and illustrated in the table included in our Form 8-K, and related fourth quarter earnings release, filed on January 29, 2014.

Provision for income taxes

We recognized an income tax provision for the three months ended March 31, 2014 of $538 on pre-tax income of $1,591 (an effective tax rate of 33.8%) compared to an income tax provision of $1,795 on pre-tax income of $6,371 (an effective tax rate of 28.2%) for the comparable quarter in 2013.

Liquidity

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

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

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

Off-Balance Sheet Arrangements

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

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES: MARKET RISK

Market risk

We believe interest rate risk is the most significant market risk impacting us. We monitor and manage interest rate risk using interest rate sensitivity “gap” analysis to measure the impact of market interest rate changes on net interest income. See our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 for disclosure of the quantitative and qualitative information regarding the interest rate risk inherent in interest rate risk sensitive instruments as of December 31, 2013. There have been no changes in the assumptions used in monitoring interest rate risk as of March 31, 2014. The impact of other types of market risk, such as foreign currency exchange risk and equity price risk, is deemed immaterial.

ITEM 4.

CONTROLS AND PROCEDURES

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

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, 2013 annual report on Form 10-K.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. [Removed and Reserved]

Item 5. Other Information

Merger Related Litigation

On April 24, 2014, a class action complaint was filed in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County, Florida against First Southern Bancorp, Inc. (“First Southern”), its directors and CenterState challenging the merger of First Southern with CenterState. Among other things, the complaint alleges that the First Southern directors breached their fiduciary duties to First Southern and its shareholders by agreeing to the proposed merger. Plaintiffs seek, among other things, declaratory and injunctive relief concerning the alleged breaches of fiduciary duties, injunctive relief prohibiting consummation of the merger, recession, damages and attorneys’ fees and costs and other further relief. While CenterState believes that the suit is without merit and intends to vigorously defend its interest, it is not possible to predict the outcome of the proceeding or its impact on CenterState.

Item 6. Exhibits

Exhibit 31.1

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

Exhibit 31.2

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

Exhibit 32.1

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

Exhibit 32.2

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

Exhibit 101.1

Interactive Data File

101.INS

XBRL Instance Document

101.SCH

XBRL Schema Document

101.CAL

XBRL Calculation Linkbase Document

101.DEF

XBRL Definition Linkbase Document

101.LAB

XBRL Label Linkbase Document

101.PRE

XBRL Presentation Linkbase Document

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)