10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2005

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 333-95087

CENTERSTATE BANKS OF FLORIDA, INC.

(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.)
1101 First Street South, Suite 202, Winter Haven, Florida	33880
(Address of principal executive offices)	(Zip Code)

Issuer’s telephone number, including area code: (863) 293-2600

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.01 per share

(Title of Class)

Check whether the issuer has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation SK contained in this form, and no disclosure will be contained, to the best of issuer’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark if:

The issuer is an accelerated filer, as defined in Rule 12b-2 of the Act.    YES  x    NO  ¨

The registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ¨    NO  x

The registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES  ¨    NO  x

The registrant is a shell company, as defined in Rule 12b-2 of the Exchange Act.    YES  ¨    NO  x

The aggregate market value of the Common Stock of the issuer held by non-affiliates of the issuer (3,723,750 shares) on June 30, 2005, was approximately $122,325,188. The aggregate market value was computed by reference the last sale of the Common Stock of the issuer at $32.85 per share on June 30, 2005. For the purposes of this response, directors, officers and holders of 5% or more of the issuer’s Common Stock are considered the affiliates of the issuer at that date.

As of March 6, 2006 there were outstanding 5,254,178 shares of the issuer’s Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on April 25, 2006 to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the issuer’s fiscal year end are incorporated by reference into Part II and Part III, of this Annual Report on Form 10-K.

TABLE OF CONTENTS

		Page
PART I		4
Item 1.	Business	4
	General	4
	Note about Forward-Looking Statements	5
	Lending Activities	6
	Deposit Activities	7
	Investments	7
	Correspondent Banking	8
	Data Processing	8
	Effect of Governmental Policies	8
	Interest and Usury	8
	Supervision and Regulation	8
	Competition	15
	Employees	16
	Statistical Profile and Other Financial Data	16
	Risk Factors	16
Item 2.	Properties	20
Item 3.	Legal Proceedings	21
Item 4.	Submission of Matters to a Vote of Security Holders	21
PART II		22
Item 5.	Market for Common Equity, Related Stockholder Matters and Purchases of Equity Securities	22
Item 6.	Selected Consolidated Financial Data	24
Item 7.	Manangement’s Discussion and Analysis of Financial Conditions and Results of Operations	26
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	54
Item 8.	Financial Statements and Supplementary Data	54
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	54
Item 9A.	Controls and Procedures	54
Item 9B.	Other Information	55

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		Page
PART III		56
Item 10.	Directors and Executive Officers	56
Item 11.	Executive Compensation	56
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	56
Item 13.	Certain Relationships and Related Transactions	56
Item 14.	Principal Accountant Fees and Services	56
Item 15.	Exhibits and Financial Statement Schedules	56
SIGNATURES		90
EXHIBIT INDEX		91

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PART I

Item 1. Business

General

CenterState Banks of Florida, Inc. (“CenterState” or the “Company”) was incorporated under the laws of the State of Florida on September 20, 1999. CenterState is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). On June 30, 2000, we closed separate merger transactions resulting in First National Bank of Osceola County (“First National/Osceola”), First National Bank of Polk County (“First National/Polk”), and Community National Bank of Pasco County (“Community National Bank”) becoming separate wholly owned subsidiaries of our Company. Community National Bank later changed its name to CenterState Bank West Florida (“CSWFL”). On December 31, 2002, we closed the merger transaction resulting in CenterState Bank of Florida (“CenterState Bank”) becoming a wholly owned subsidiary of CenterState. In these four merger transactions (the “Merger Transactions”), each outstanding share of common stock of the four banks were converted into shares of our Company. Accordingly, as a result of the Merger Transactions, our Company owns all of the outstanding shares of First National/Osceola, First National/Polk, CSWFL, and CenterState Bank (collectively, the “Banks”).

In January 2006, two of our Company’s subsidiary banks (First National/Polk and CenterState Bank) merged with the resulting bank named CenterState Bank of Florida, National Association. On September 30, 2005, we entered into a definitive agreement to acquire CenterState Bank Mid Florida (“Mid FL”) for $14.50 per share (approximately $14,500,000). The consideration will be comprised of $4.35 per share in cash and $10.15 per share in our Company common stock. The transaction is expected to close before the end of March 2006. Mid FL is a de novo bank that began operations in January 2004. It purchased two branches from us during February 2004. Our Chairman, President and CEO, Ernest S. Pinner, is also Chairman of the Board of Mid FL. James S. Stalnaker, Jr. is the President and CEO of CSWFL (one of our subsidiary banks) and he is also a director of Mid FL. Timothy A. Pierson is the President and CEO of Mid FL. Previously, Mr. Pierson was an executive vice president of CSWFL. Mid FL operates from three locations within Lake County, Florida. At December 31, 2005, Mid FL had approximately $68,600,000 in total assets and stockholders’ equity of approximately $9,000,000. On March 8, 2006 and March 9, 2006 the shareholders of CenterState and Mid FL, respectively, approved the transaction.

First National/Osceola and CSWFL commenced operations in 1989. First National/Polk commenced operations in 1992 and CenterState Bank commenced operations in 2000. First National/Osceola’s operations are conducted from its main office located in Kissimmee, Florida, and branch offices located in St. Cloud, Poinciana, Ocoee and Orlando, Florida. CSWFL operations are conducted from its main office located in Zephyrhills, Florida, and branch offices located in Zephyrhills, Bushnell, Wildwood, Dade City, Inverness, Spring Hill and Crystal River, Florida. CenterState Bank (previously First National/Polk and CenterState Bank), operates through twelve banking locations all within Polk County, Florida. The cities within Polk County include Winter Haven, Haines City, Davenport, Lake Alfred, Auburdale, Lakeland and Lake Wales. Each of these banks is subject to examination and regulation by the Office of the Comptroller of the Currency (“Comptroller of the Currency”) and to a certain extent by the Federal Deposit Insurance Corporation (the “FDIC”).

Our Company provides a range of consumer and commercial banking services to individuals, businesses and industries. The basic services we offer include: demand interest-bearing and noninterest-bearing accounts, money market deposit accounts, time deposits, safe deposit services, cash management, direct deposits, notary services, money orders, night depository, travelers’ checks, cashier’s checks,

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domestic collections, savings bonds, bank drafts, automated teller services, drive-in tellers, and banking by mail and by internet. In addition, we make secured and unsecured commercial and real estate loans and issue stand-by letters of credit. Our Company provides automated teller machine (ATM) cards, thereby permitting customers to utilize the convenience of larger ATM networks. We also offer internet banking services to our customers. In addition to the foregoing services, our offices provide customers with extended banking hours. We do not have a trust department, however, trust services are available to customers through a business relationship with another bank. We also offer other financial products to our customers, including mutual funds, annuities and other products, through a relationship with Infinex Investment, Inc.

The revenue of our Company is primarily derived from interest on, and fees received in connection with, real estate and other loans, and from interest and dividends from investment securities and short-term investments. The principal sources of funds for our lending activities are customer deposits, repayment of loans, and the sale and maturity of investment securities. Our principal expenses are interest paid on deposits, and operating and general administrative expenses.

As is the case with banking institutions generally, our Company’s operations are materially and significantly influenced by general economic conditions and by related monetary and fiscal policies of financial institution regulatory agencies, including the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered and other factors affecting local demand and availability of funds. We face strong competition in the attraction of deposits (our primary source of lendable funds) and in the origination of loans. See “Competition.”

During 2001, C.S. Processing, Inc. (“CSP”) was formed as a subsidiary of our Company’s subsidiary banks. During 2004, we sold 20% of CSP to Mid FL for $120,000. The remaining 80% is owned by our subsidiary banks. Our investment in CSP, through our subsidiary banks, is $480,000 at December 31, 2005. CSP processes checks and renders statements (i.e. “item processing center”) for our subsidiary banks and Mid FL.

At December 31, 2005, our Company’s primary assets were our ownership of stock of each of our four Banks. At December 31, 2005, we had total consolidated assets of $871,521,000, total consolidated deposits of $717,337,000, and total consolidated stockholders’ equity of $97,241,000.

Note about Forward-Looking Statements

This Form 10-K contains forward-looking statements, such as statements relating to our financial condition, results of operations, plans, objectives, future performance and business operations. These statements relate to expectations concerning matters that are not historical facts. These forward-looking statements reflect our current views and expectations based largely upon the information currently available to us and are subject to inherent risks and uncertainties. Although we believe our expectations are based on reasonable assumptions, they are not guarantees of future performance and there are a number of important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. By making these forward-looking statements, we do not undertake to update them in any manner except as may be required by our disclosure obligations in filings we make with the Securities and Exchange Commission under the Federal securities laws. Our actual results may differ materially from our forward-looking statements.

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Lending Activities

We offer a range of lending services, including real estate, consumer and commercial loans, to individuals and small businesses and other organizations that are located in or conduct a substantial portion of their business in our market area. The Company’s consolidated loans at December 31, 2005 and 2004 were $516,658,000, or 59% and $441,005,000 or 51%, respectively, of total consolidated assets. The interest rates charged on loans vary with the degree of risk, maturity, and amount of the loan, and are further subject to competitive pressures, money market rates, availability of funds, and government regulations. We have no foreign loans or loans for highly leveraged transactions.

Our loans are concentrated in three major areas: commercial loans, real estate loans, and consumer loans. A majority of our loans are made on a secured basis. As of December 31, 2005, approximately 78% of our consolidated loan portfolio consisted of loans secured by mortgages on real estate and 12% of the loan portfolio consisted of commercial loans. At the same date, 10% of our loan portfolio consisted of consumer and other loans.

Our commercial loan portfolio includes loans to individuals and small-to-medium sized businesses located primarily in Polk, Osceola, Pasco, Hernando, Citrus, Sumter and Orange counties for working capital, equipment purchases, and various other business purposes. A majority of commercial loans are secured by equipment or similar assets, but these loans may also be made on an unsecured basis. Commercial loans may be made at variable or fixed rates of interest. Commercial lines of credit are typically granted on a one-year basis, with loan covenants and monetary thresholds. Other commercial loans with terms or amortization schedules of longer than one year will normally carry interest rates which vary with the prime lending rate and will become payable in full and are generally refinanced in three to five years. Commercial and agricultural loans not secured by real estate amounted to approximately 12% of the our Company’s total loan portfolio as of December 31, 2005, compared to 15% at December 31, 2004.

Our real estate loans are secured by mortgages and consist primarily of loans to individuals and businesses for the purchase, improvement of or investment in real estate and for the construction of single-family residential units or the development of single-family residential building lots. These real estate loans may be made at fixed or variable interest rates. Generally, we do not make fixed-rate commercial real estate loans for terms exceeding five years. Loans in excess of five years are generally adjustable. Our residential real estate loans generally are repayable in monthly installments based on up to a 15-year or a 30-year amortization schedule with variable interest rates.

Our consumer loan portfolio consists primarily of loans to individuals for various consumer purposes, but includes some business purpose loans which are payable on an installment basis. The majority of these loans are for terms of less than five years and are secured by liens on various personal assets of the borrowers, but consumer loans may also be made on an unsecured basis. Consumer loans are made at fixed and variable interest rates, and are often based on up to a five-year amortization schedule.

For additional information regarding the Company’s loan portfolio, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Loan originations are derived from a number of sources. Loan originations can be attributed to direct solicitation by our loan officers, existing customers and borrowers, advertising, walk-in customers and, in some instances, referrals from brokers.

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Certain credit risks are inherent in making loans. These include prepayment risks, risks resulting from uncertainties in the future value of collateral, risks resulting from changes in economic and industry conditions, and risks inherent in dealing with individual borrowers. In particular, longer maturities increase the risk that economic conditions will change and adversely affect collectibility. We attempt to minimize credit losses through various means. In particular, on larger credits, we generally rely on the cash flow of a debtor as the source of repayment and secondarily on the value of the underlying collateral. In addition, we attempt to utilize shorter loan terms in order to reduce the risk of a decline in the value of such collateral.

Deposit Activities

Deposits are the major source of our funds for lending and other investment activities. We consider the majority of our regular savings, demand, NOW and money market deposit accounts to be core deposits. These accounts comprised approximately 63% and 68% of our consolidated total deposits at December 31, 2005 and 2004, respectively. Approximately 37% of our consolidated deposits at December 31, 2005, were certificates of deposit compared to 32% at December 31, 2004. Generally, we attempt to maintain the rates paid on our deposits at a competitive level. Time deposits of $100,000 and over made up approximately 18% of consolidated total deposits at December 31, 2005 and 13% at December 31, 2004. The majority of the deposits are generated from Polk, Osceola, Orange, Pasco, Hernando, Sumter and Citrus counties. We do not currently accept brokered deposits. For additional information regarding the Company’s deposit accounts, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Deposits.”

Investments

A portion of our assets are invested in U.S. Treasury securities, obligations of U.S. government agencies, mortgage backed securities and federal funds sold. Our investments are managed in relation to loan demand and deposit growth, and are generally used to provide for the investment of excess funds at minimal risks while providing liquidity to fund increases in loan demand or to offset fluctuations in deposits.

With respect to our investment portfolio, we invest in U.S. Treasury securities, obligations of U.S. government agencies, mortgage backed securities and municipal securities, because such securities generally represent a minimal investment risk. Occasionally, we may purchase certificates of deposits of national and state banks. These investments may exceed $100,000 in any one institution (the limit of FDIC insurance for deposit accounts). Federal funds sold and money market accounts represent the excess cash we have available over and above daily cash needs. This money is invested on an overnight basis with approved correspondent banks.

We monitor changes in financial markets. In addition to investments for our portfolio, we monitor daily cash positions to ensure that all available funds earn interest at the earliest possible date. A portion of the investment account is invested in liquid securities that can be readily converted to cash with minimum risk of market loss. These investments usually consist of U.S. Treasury securities, obligations of U.S. government agencies, mortgage backed securities and federal funds. The remainder of the investment account may be placed in investment securities of different type and/or longer maturity. Daily surplus funds are sold in the federal funds market for one business day. We attempt to stagger the maturities of our securities so as to produce a steady cash-flow in the event cash is needed, or economic conditions change.

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Correspondent Banking

Correspondent banking involves one bank providing services to another bank which cannot provide that service for itself from an economic or practical standpoint. We purchase correspondent services offered by larger banks, including check collections, purchase of federal funds, security safekeeping, investment services, coin and currency supplies, overline and liquidity loan participations and sales of loans to or participation with correspondent banks.

We have established correspondent relationships with Federal Home Loan Bank, Independent Bankers’ Bank of Florida, First American Bank and SunTrust Banks. The Company pays for such services.

Data Processing

Each of our subsidiary banks use the same third party core data processing service bureau which provides an automated general ledger system, deposit accounting, and commercial, mortgage and installment lending data processing. The output of each of these comprehensive systems is then consolidated at the holding company level.

Our 80% owned subsidiary, CSP, provides item processing services for our subsidiary banks and Mid FL. These services include; sorting, encoding, processing, and imaging checks and rendering checking and other deposit statements to commercial and retail customers. The total cost of providing these services are charged to each subsidiary bank and Mid FL based on usage.

Effect of Governmental Policies

The earnings and business of our Company are and will be affected by the policies of various regulatory authorities of the United States, especially the Federal Reserve. The Federal Reserve, among other things, regulates the supply of credit and deals with general economic conditions within the United States. The instruments of monetary policy employed by the Federal Reserve for these purposes influence in various ways the overall level of investments, loans, other extensions of credit and deposits, and the interest rates paid on liabilities and received on assets.

Interest and Usury

Our Company is subject to numerous state and federal statutes that affect the interest rates that may be charged on loans. These laws do not, under present market conditions, deter us from continuing the process of originating loans.

Supervision and Regulation

Banks and their holding companies, and many of their affiliates, are extensively regulated under both federal and state law. The following is a brief summary of certain statutes, rules, and regulations affecting our Company, and our subsidiary Banks. This summary is qualified in its entirety by reference to the particular statutory and regulatory provisions referred to below and is not intended to be an exhaustive description of the statutes or regulations applicable to the business of our Company and subsidiary Banks. Supervision, regulation, and examination of banks by regulatory agencies are intended primarily for the protection of depositors, rather than shareholders.

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Bank Holding Company Regulation. Our Company is a bank holding company, registered with the Federal Reserve under the BHC Act. As such, we are subject to the supervision, examination and reporting requirements of the BHC Act and the regulations of the Federal Reserve. The BHC Act requires that a bank holding company obtain the prior approval of the Federal Reserve before (i) acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, (ii) taking any action that causes a bank to become a subsidiary of the bank holding company, or (iii) merging or consolidating with any other bank holding company.

The BHC Act further provides that the Federal Reserve may not approve any transaction that would result in a monopoly or would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any section of the United States, or the effect of which may be substantially to lessen competition or to tend to create a monopoly in any section of the country, or that in any other manner would be in restraint of trade, unless the anticompetitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience, and needs of the community to be served. Consideration of financial resources generally focuses on capital adequacy and consideration of convenience and needs issues includes the parties’ performance under the Community Reinvestment Act of 1977 (the “CRA”), both of which are discussed below.

Banks are subject to the provisions of the CRA. Under the terms of the CRA, the appropriate federal bank regulatory agency is required, in connection with its examination of a bank, to assess such bank’s record in meeting the credit needs of the community served by that bank, including low- and moderate-income neighborhoods. The regulatory agency’s assessment of the bank’s record is made available to the public. Further, such assessment is required of any bank which has applied to:

• charter a bank,

• obtain deposit insurance coverage for a newly chartered institution,

• establish a new branch office that will accept deposits,

• relocate an office, or

• merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution

In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal Reserve will assess the record of each subsidiary bank of the applicant bank holding company, and such records may be the basis for denying the application.

The BHC Act generally prohibits a bank holding company from engaging in activities other than banking, or managing or controlling banks or other permissible subsidiaries, and from acquiring or retaining direct or indirect control of any company engaged in any activities other than those activities determined by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In determining whether a particular activity is permissible, the Federal Reserve must consider whether the performance of such an activity can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. For example, factoring accounts receivable, acquiring or servicing loans, leasing personal property, conducting securities brokerage activities, performing certain data processing services, acting as agent or broker in selling credit life

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insurance and certain other types of insurance in connection with credit transactions, and certain insurance underwriting activities have all been determined by regulations of the Federal Reserve to be permissible activities of bank holding companies. Despite prior approval, the Federal Reserve has the power to order a holding company or its subsidiaries to terminate any activity or terminate its ownership or control of any subsidiary, when it has reasonable cause to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness, or stability of any bank subsidiary of that bank holding company.

Gramm-Leach-Bliley Act. Enacted in 1999, the Gramm-Leach-Bliley Act reforms and modernizes certain areas of financial services regulation. The law permits the creation of new financial services holding companies that can offer a full range of financial products under a regulatory structure based on the principle of functional regulation. The legislation eliminates the legal barriers to affiliations among banks and securities firms, insurance companies, and other financial services companies. The law also provides financial organizations with the opportunity to structure these new financial affiliations through a holding company structure or a financial subsidiary. The new law reserves the role of the Federal Reserve Board as the supervisor for bank holding companies. At the same time, the law also provides a system of functional regulation which is designed to utilize the various existing federal and state regulatory bodies. The law also sets up a process for coordination between the Federal Reserve Board and the Secretary of the Treasury regarding the approval of new financial activities for both bank holding companies and national bank financial subsidiaries.

The law also includes a minimum federal standard of financial privacy. Financial institutions are required to have written privacy policies that must be disclosed to customers. The disclosure of a financial institution’s privacy policy must take place at the time a customer relationship is established and not less than annually during the continuation of the relationship. The act also provides for the functional regulation of bank securities activities. The law repeals the exemption that banks were afforded from the definition of “broker,” and replaces it with a set of limited exemptions that allow the continuation of some historical activities performed by banks. In addition, the act amends the securities laws to include banks within the general definition of dealer. Regarding new bank products, the law provides a procedure for handling products sold by banks that have securities elements. In the area of Community Reinvestment Act activities, the law generally requires that financial institutions address the credit needs of low-to-moderate income individuals and neighborhoods in the communities in which they operate. Bank regulators are required to take the Community Reinvestment Act ratings of a bank or of the bank subsidiaries of a holding company into account when acting upon certain branch and bank merger and acquisition applications filed by the institution. Under the law, financial holding companies and banks that desire to engage in new financial activities are required to have satisfactory or better Community Reinvestment Act ratings when they commence the new activity.

Bank Regulation. First National/Osceola, CenterState Bank and CSWFL are chartered under the national banking laws. Each of the deposits of the Banks is insured by the FDIC to the extent provided by law. The Banks are subject to comprehensive regulation, examination and supervision by the OCC. The Banks also are subject to other laws and regulations applicable to banks. Such regulations include limitations on loans to a single borrower and to its directors, officers and employees; restrictions on the opening and closing of branch offices; the maintenance of required capital and liquidity ratios; the granting of credit under equal and fair conditions; and the disclosure of the costs and terms of such credit. The Banks are examined periodically by the OCC. The Banks submit to their examining agencies periodic reports regarding their financial condition and other matters. The bank regulatory agencies have a broad range of powers to enforce regulations under their jurisdiction, and to take discretionary actions determined to be for the protection and safety and soundness of banks, including the institution of cease and desist orders and the removal of directors and officers. The bank regulatory agencies also have the authority to approve or disapprove mergers, consolidations, and similar corporate actions.

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There are various statutory limitations on the ability of our Company to pay dividends. The bank regulatory agencies also have the general authority to limit the dividend payment by banks if such payment may be deemed to constitute an unsafe and unsound practice. For information on the restrictions on the right of our Banks to pay dividends to our Company, see Part II - Item 5 “Market for the Registrant’s Common Equity, Related Stockholder Matters and Purchases of Equity Securities.”

Under federal law, federally insured banks are subject, with certain exceptions, to certain restrictions on any extension of credit to their parent holding companies or other affiliates, on investment in the stock or other securities of affiliates, and on the taking of such stock or securities as collateral from any borrower. In addition, banks are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or the providing of any property or service.

The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) imposed major regulatory reforms, stronger capital standards for savings and loan associations and stronger civil and criminal enforcement provisions. FIRREA also provides that a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with:

• the default of a commonly controlled FDIC insured depository institution; or

• any assistance provided by the FDIC to a commonly controlled FDIC insured institution in danger of default.

The FDIC Improvement Act of 1993 (“FDICIA”) made a number of reforms addressing the safety and soundness of deposit insurance funds, supervision, accounting, and prompt regulatory action, and also implemented other regulatory improvements. Annual full-scope, on-site examinations are required of all insured depository institutions. The cost for conducting an examination of an institution may be assessed to that institution, with special consideration given to affiliates and any penalties imposed for failure to provide information requested. Insured state banks also are precluded from engaging as principal in any type of activity that is impermissible for a national bank, including activities relating to insurance and equity investments. The Act also recodified current law restricting extensions of credit to insiders under the Federal Reserve Act.

Also important in terms of its effect on banks has been the deregulation of interest rates paid by banks on deposits and the types of deposit accounts that may be offered by banks. Most regulatory limits on permissible deposit interest rates and minimum deposit amounts expired several years ago. The effect of the deregulation of deposit interest rates generally has been to increase the costs of funds to banks and to make their costs of funds more sensitive to fluctuations in money market rates. A result of the pressure on banks interest margins due to deregulation has been a trend toward expansion of services offered by banks and an increase in the emphasis placed on fee or noninterest income.

Capital Requirements. The Federal Reserve Board and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. Under the risk-based standard, capital is classified into two tiers. Tier 1 capital consists of common shareholders’ equity (excluding the unrealized gain (loss) on available-for-sale securities), trust preferred securities subject to certain limitations, and minus certain intangible assets. Tier 2 capital consists of the general

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allowance for credit losses except for certain limitations. An institution’s qualifying capital base for purposes of its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital. At December 31, 2005, our Tier 1 and total risk-based capital ratios were 18.1% and 19.2%, respectively.

Bank holding companies and banks are also required to maintain capital at a minimum level based on total assets, which is known as the leverage ratio. The minimum requirement for the leverage ratio is 3%, but all but the highest rated institutions are required to maintain ratios 100 to 200 basis points above the minimum. At December 31, 2005, our leverage ratio was 12.4%.

FDICIA contains “prompt corrective action” provisions pursuant to which banks are to be classified into one of five categories based upon capital adequacy, ranging from “well capitalized” to “critically undercapitalized” and which require (subject to certain exceptions) the appropriate federal banking agency to take prompt corrective action with respect to an institution which becomes “significantly undercapitalized” or “critically undercapitalized.”

The OCC and the FDIC have issued regulations to implement the “prompt corrective action” provisions of FDICIA. In general, the regulations define the five capital categories as follows:

• an institution is “well capitalized” if it has a total risk-based capital ratio of 10% or greater, has a Tier 1 risk-based capital ratio of 6% or greater, has a leverage ratio of 5% or greater and is not subject to any written capital order or directive to meet and maintain a specific capital level for any capital measures;

• an institution is “adequately capitalized” if it has a total risk-based capital ratio of 8% or greater, has a Tier 1 risk-based capital ratio of 4% or greater, and has a leverage ratio of 4% or greater;

• an institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8%, has a Tier 1 risk-based capital ratio that is less than 4% or has a leverage ratio that is less than 4%;

• an institution is “significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a leverage ratio that is less than 3%; and

• an institution is “critically undercapitalized” if its “tangible equity” is equal to or less than 2% of its total assets.

The OCC and the FDIC, after an opportunity for a hearing, have authority to downgrade an institution from “well capitalized” to “adequately capitalized” or to subject an “adequately capitalized” or “undercapitalized” institution to the supervisory actions applicable to the next lower category, for supervisory concerns.

Generally, FDICIA requires that an “undercapitalized” institution must submit an acceptable capital restoration plan to the appropriate federal banking agency within 45 days after the institution becomes “undercapitalized” and the agency must take action on the plan within 60 days. The appropriate federal banking agency may not accept a capital restoration plan unless, among other requirements, each company having control of the institution has guaranteed that the institution will comply with the plan until the institution has been adequately capitalized on average during each of the three consecutive calendar quarters and has provided adequate assurances of performance. The aggregate liability under this provision of all companies having control of an institution is limited to the lesser of:

• 5% of the institution’s total assets at the time the institution becomes “undercapitalized” or

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• the amount which is necessary, or would have been necessary, to bring the institution into compliance with all capital standards applicable to the institution as of the time the institution fails to comply with the plan filed pursuant to FDICIA

An “undercapitalized” institution may not acquire an interest in any company or any other insured depository institution, establish or acquire additional branch offices or engage in any new business unless the appropriate federal banking agency has accepted its capital restoration plan, the institution is implementing the plan, and the agency determines that the proposed action is consistent with and will further the achievement of the plan, or the appropriate Federal banking agency determines the proposed action will further the purpose of the “prompt corrective action” sections of FDICIA.

If an institution is “critically undercapitalized,” it must comply with the restrictions described above. In addition, the appropriate Federal banking agency is authorized to restrict the activities of any “critically undercapitalized” institution and to prohibit such an institution, without the appropriate Federal banking agency’s prior written approval, from:

• entering into any material transaction other than in the usual course of business;

• engaging in any covered transaction with affiliates (as defined in Section 23A(b) of the Federal Reserve Act);

• paying excessive compensation or bonuses; and

• paying interest on new or renewed liabilities at a rate that would increase the institution’s weighted average costs of funds to a level significantly exceeding the prevailing rates of interest on insured deposits in the institution’s normal market areas.

The “prompt corrective action” provisions of FDICIA also provide that in general no institution may make a capital distribution if it would cause the institution to become “undercapitalized.” Capital distributions include cash (but not stock) dividends, stock purchases, redemptions, and other distributions of capital to the owners of an institution.

Additionally, FDICIA requires, among other things, that:

• only a “well capitalized” depository institution may accept brokered deposits without prior regulatory approval and

• the appropriate federal banking agency annually examine all insured depository institutions, with some exceptions for small, “well capitalized” institutions and state-chartered institutions examined by state regulators.

FDICIA also contains a number of consumer banking provisions, including disclosure requirements and substantive contractual limitations with respect to deposit accounts.

As of December 31, 2005, our Company and each of our subsidiary Banks met the capital requirements of a “well capitalized” institution.

Enforcement Powers. Congress has provided the federal bank regulatory agencies with an array of powers to enforce laws, rules, regulations and orders. Among other things, the agencies may require that institutions cease and desist from certain activities, may preclude persons from participating in the affairs of insured depository institutions, may suspend or remove deposit insurance, and may impose civil money penalties against institution-affiliated parties for certain violations.

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Maximum Legal Interest Rates. Like the laws of many states, Florida law contains provisions on interest rates that may be charged by banks and other lenders on certain types of loans. Numerous exceptions exist to the general interest limitations imposed by Florida law. The relative importance of these interest limitation laws to the financial operations of the Banks will vary from time to time, depending on a number of factors, including conditions in the money markets, the costs and availability of funds, and prevailing interest rates.

Branch Banking. Banks in Florida are permitted to branch state wide. Such branch banking, however, is subject to prior approval by the bank regulatory agencies. Any such approval would take into consideration several factors, including the bank’s level of capital, the prospects and economics of the proposed branch office, and other conditions deemed relevant by the bank regulatory agencies for purposes of determining whether approval should be granted to open a branch office.

Change of Control. Federal law restricts the amount of voting stock of a bank holding company and a bank that a person may acquire without the prior approval of banking regulators. The overall effect of such laws is to make it more difficult to acquire a bank holding company and a bank by tender offer or similar means than it might be to acquire control of another type of corporation. Consequently, shareholders of the Company may be less likely to benefit from the rapid increases in stock prices that may result from tender offers or similar efforts to acquire control of other companies. Federal law also imposes restrictions on acquisitions of stock in a bank holding company and a state bank. Under the federal Change in Bank Control Act and the regulations thereunder, a person or group must give advance notice to the Federal Reserve before acquiring control of any bank holding company, the OCC before acquiring control of any national bank and the FDIC and the Florida Department before acquiring control of a state bank. Upon receipt of such notice, the bank regulatory agencies may approve or disapprove the acquisition. The Change in Bank Control Act creates a rebuttable presumption of control if a member or group acquires a certain percentage or more of a bank holding company’s or state bank’s voting stock, or if one or more other control factors set forth in the Act are present.

Interstate Banking. Federal law provides for nationwide interstate banking and branching. Under the law, interstate acquisitions of banks or bank holding companies in any state by bank holding companies in any other state are permissible subject to certain limitations. Florida has a law that allows out-of-state bank holding companies (located in states that allow Florida bank holding companies to acquire banks and bank holding companies in that state) to acquire Florida banks and Florida bank holding companies. The law essentially provides for out-of-state entry by acquisition only (and not by interstate branching) and requires the acquired Florida bank to have been in existence for at least three years.

Effect of Governmental Policies. Our earnings and businesses are affected by the policies of various regulatory authorities of the United States, especially the Federal Reserve. The Federal Reserve, among other things, regulates the supply of credit and deals with general economic conditions within the United States. The instruments of monetary policy employed by the Federal Reserve for those purposes influence in various ways the overall level of investments, loans, other extensions of credit, and deposits, and the interest rates paid on liabilities and received on assets.

Sarbanes-Oxley Act. In 2002, the Sarbanes-Oxley Act was enacted which imposes a myriad of corporate governance and accounting measures designed that shareholders are treated and have full and accurate information about the public companies in which they invest. All public companies are affected by the Act. Some of the principal provisions of the Act include:

• the creation of an independent accounting oversight board to oversee the audit of public companies and auditors who perform such audits;

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• auditor independence provisions which restrict non-audit services that independent accountants may provide to their audit clients;

• additional corporate governance and responsibility measures which (a) require the chief executive officer and chief financial officer to certify financial statements and internal controls and to forfeit salary and bonuses in certain situations, and (b) protect whistleblowers and informants;

• expansion of the authority and responsibilities of the company’s audit, nominating and compensation committees;

• mandatory disclosure by analysts of potential conflicts of interest; and

• enhanced penalties for fraud and other violations.

USA Patriot Act. In 2001, the USA Patriot Act was enacted. The Act requires financial institutions to help prevent, detect and prosecute international money laundering and financing of terrorism. The effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any application submitted by the financial institution with the bank regulatory agencies. Our Banks have adopted systems and procedures designed to comply with the USA Patriot Act and regulations adopted thereunder by the Secretary of the Treasury.

Competition

We encounter strong competition both in making loans and in attracting deposits. The deregulation of the banking industry and the widespread enactment of state laws which permit multi-bank holding companies as well as an increasing level of interstate banking have created a highly competitive environment for commercial banking. In one or more aspects of its business, our Company competes with other commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries. Most of these competitors, some of which are affiliated with bank holding companies, have substantially greater resources and lending limits, and may offer certain services that we do not currently provide. In addition, many of our non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks. Recent federal and state legislation has heightened the competitive environment in which financial institutions must conduct their business, and the potential for competition among financial institutions of all types has increased significantly.

To compete, we rely upon specialized services, responsive handling of customer needs, and personal contacts by its officers, directors, and staff. Large multi-branch banking competitors tend to compete primarily by rate and the number and location of branches while smaller, independent financial institutions tend to compete primarily by rate and personal service.

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Employees

As of December 31, 2005, we had a total of approximately 275 full-time equivalent employees. The employees are not represented by a collective bargaining unit. We consider relations with employees to be good.

Statistical Profile and Other Financial Data

Reference is hereby made to the statistical and financial data contained in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for statistical and financial data providing a review of our Company’s business activities.

Risk Factors

We have identified risk factors described below, which should be viewed in conjunction with the other information contained in this document and information incorporated by reference, including our consolidated financial statements and related notes. If any of the following risks or other risks which have not been identified or which we may believe are immaterial or unlikely, actually occur, our business, financial condition and results of operations could be harmed. As noted previously, this report contains forward-looking statements that involve risks and uncertainties, including statements about our future plans, objectives, intentions and expectations. Many factors, including those described below, could cause actual results to differ materially from those discussed in forward-looking statements.

Our business strategy includes the continuation of significant growth plans, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively

We intend to continue pursuing a significant growth strategy for our business. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in significant growth stages of development. There is no assurance we will be able to expand our market presence in our existing markets or successfully enter new markets or that any such expansion will not adversely affect our results of operations. Failure to manage our growth effectively could have a material adverse effect on our business, future prospects, financial condition or results of operations, and could adversely affect our ability to successfully implement our business strategy. Also, if our growth occurs more slowly than anticipated or declines, our operating results could be materially adversely affected.

Our ability to successfully grow will depend on a variety of factors including the continued availability of desirable business opportunities, the competitive responses from other financial institutions in our market areas and our ability to manage our growth. While we believe we have the management resources and internal systems in place to successfully manage our future growth, there can be no assurance growth opportunities will be available or growth will be successfully managed.

Our business is subject to the success of the local economies where we operate

Our success significantly depends upon the growth in population, income levels, deposits and housing starts in our primary and secondary markets. If the communities in which we operate do not grow or if prevailing economic conditions locally or nationally are unfavorable, our business may not succeed. Adverse economic conditions in our specific market area could reduce our growth rate, affect the ability of our customers to repay their loans to us and generally affect our financial condition and results of

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operations. We are less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Moreover, we cannot give any assurance we will benefit from any market growth or favorable economic conditions in our primary market areas if they do occur.

Any adverse market or economic conditions in the State of Florida may disproportionately increase the risk our borrowers will be unable to make their loan payments. In addition, the market value of the real estate securing loans as collateral could be adversely affected by unfavorable changes in market and economic conditions. As of December 31, 2005, approximately 78% of our loans held for investment were secured by real estate. Of this amount, approximately 42% were commercial real estate loans, 29% were residential real estate loans and 7% were construction and development loans. Any sustained period of increased payment delinquencies, foreclosures or losses caused by adverse market or economic conditions in the State of Florida could adversely affect the value of our assets, our revenues, results of operations and financial condition.

We may face risks with respect to future expansion

We may acquire other financial institutions or parts of those institutions in the future and we may engage in additional de novo branch expansion. We may also consider and enter into new lines of business or offer new products or services. We also may receive future inquiries and have discussions with potential acquirors of us. Acquisitions and mergers involve a number of risks, including:

• the time and costs associated with identifying and evaluating potential acquisitions and merger partners;

• the estimates and judgments used to evaluate credit, operations, management and market risks with respect to the target institution may not be accurate;

• the time and costs of evaluating new markets, hiring experienced local management and opening new offices, and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion;

• our ability to finance an acquisition and possible dilution to our existing shareholders;

• the diversion of our management’s attention to the negotiation of a transaction, and the integration of the operations and personnel of the combining businesses;

• entry into new markets where we lack experience;

• the introduction of new products and services into our business;

• the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of operations; and

• the risk of loss of key employees and customers.

We may incur substantial costs to expand, and we can give no assurance such expansion will result in the levels of profits we seek. There can be no assurance integration efforts for any future mergers or acquisitions will be successful. Also, we may issue equity securities, including common stock and

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securities convertible into shares of our common stock in connection with future acquisitions, which could cause ownership and economic dilution to our current shareholders. There is no assurance that, following any future mergers or acquisition, our integration efforts will be successful or our company, after giving effect to the acquisition, will achieve profits comparable to or better than our historical experience.

If the value of real estate in our core Florida market were to decline materially, a significant portion of our loan portfolio could become under-collateralized, which could have a material adverse effect on us

With most of our loans concentrated in Central Florida, a decline in local economic conditions could adversely affect the values of our real estate collateral. Consequently, a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are geographically diverse.

In addition to the financial strength and cash flow characteristics of the borrower in each case, the Banks often secure loans with real estate collateral. At December 31, 2005, approximately 78% of our loans have real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings and capital could be adversely affected.

An inadequate allowance for loan losses would reduce our earnings

The risk of credit losses on loans varies with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the value and marketability of the collateral for the loan. We maintain an allowance for loan losses based upon, among other things, historical experience, an evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality. Based upon such factors, management makes various assumptions and judgments about the ultimate collectibility of the loan portfolio and provides an allowance for loan losses based upon a percentage of the outstanding balances and for specific loans when their ultimate collectibility is considered questionable. If management’s assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb losses, or if the bank regulatory authorities require the Banks to increase the allowance for loan losses as a part of their examination process, our earnings and capital could be significantly and adversely affected.

The building of market share throughout our de novo branching strategy could cause our expenses to increase faster than revenues

We intend to continue to build market share in Central Florida through our de novo branching strategy. We currently plan to open several new branches in 2006 and 2007. There are considerable costs involved in opening branches and new branches generally do not generate sufficient revenues to offset their costs until they have been in operation for at least a year or more. Accordingly, our new branches can be expected to negatively impact our earnings for some period of time until the branches reach certain economies of scale. Our expenses could be further increased if we encounter delays in the opening of any of our new branches. Finally, we have no assurance our new branches will be successful even after they have been established.

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Our recent results may not be indicative of our future results

We may not be able to sustain our historical rate of growth or may not even be able to grow our business at all. In addition, our recent and rapid growth may distort some of our historical financial ratios and statistics. In the future, we may not have the benefit of several recently favorable factors, such as a generally stable interest rate environment, a strong residential mortgage market, or the ability to find suitable expansion opportunities. Various factors, such as economic conditions, regulatory and legislative considerations and competition, may also impede or prohibit our ability to expand our market presence. If we experience a significant decrease in our historical rate of growth, our results of operations and financial condition may be adversely affected due to a high percentage of our operating costs being fixed expenses.

Our continued pace of growth may require us to raise additional capital in the future, but that capital may not be available when it is needed

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. We anticipate our capital resources following this offering will satisfy our capital requirements for the foreseeable future. We may at some point, however, need to raise additional capital to support our continued growth.

Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital if needed on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired.

Increases in interest rates may negatively affect our earnings and the value of our assets

Changes in interest rates may affect our level of interest income, the primary component of our gross revenue, as well as the level of our interest expense, our largest recurring expenditure. In a period of rising interest rates, our interest expense could increase in different amounts and at different rates while the interest that we earn on our assets may not change in the same amounts or at the same rates. Accordingly, increases in interest rates could decrease our net interest income.

Changes in the level of interest rates also may negatively affect our ability to originate real estate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings. A decline in the market value of our assets may limit our ability to borrow additional funds or result in our lenders requiring additional collateral from us under our loan agreements. As a result, we could be required to sell some of our loans and investments under adverse market conditions, upon terms that are not favorable to us, in order to maintain our liquidity. If those sales are made at prices lower than the amortized costs of the investments, we will incur losses.

Competition from financial institutions and other financial service providers may adversely affect our profitability

The banking business is highly competitive and we experience competition in each of our markets from many other financial institutions. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other super-regional, national and international financial institutions that operate offices in our primary market areas and elsewhere.

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We compete with these institutions both in attracting deposits and in making loans. In addition, we have to attract our customer base from other existing financial institutions and from new residents. Many of our competitors are well-established, larger financial institutions. While we believe we can and do successfully compete with these other financial institutions in our primary markets, we may face a competitive disadvantage as a result of our smaller size, lack of geographic diversification and inability to spread our marketing costs across a broader market. Although we compete by concentrating our marketing efforts in our primary markets with local advertisements, personal contacts, and greater flexibility and responsiveness in working with local customers, we can give no assurance this strategy will be successful.

We are subject to extensive regulation that could limit or restrict our activities

We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various federal and state agencies. Our compliance with these regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our growth.

The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably.

The Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the Securities and Exchange Commission and Nasdaq that are now applicable to us, have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices. As a result, we may experience greater compliance costs.

We are dependent upon the services of our management team

Our future success and profitability is substantially dependent upon the management and banking abilities of our senior executives. We believe that our future results will also depend in part upon our attracting and retaining highly skilled and qualified management and sales and marketing personnel. Competition for such personnel is intense, and we cannot assure you that we will be successful in retaining such personnel. We also cannot guarantee that members of our executive management team will remain with us. Changes in key personnel and their responsibilities may be disruptive to our business and could have a material adverse effect on our business, financial condition and results of operations.

Item 2. Properties

Our holding Company owns no real property. We occupy office space in the main office building of CenterState Bank, one of our subsidiary Banks, which is located at 1101 First Street South, Suite 202, Winter Haven, Florida 33880. Our Company, through our Banks, currently operates a total of 26 banking offices. Of these offices there are four “mini” offices in active adult communities. These offices are leased for nominal amounts, and generally consist of a room that is set aside for us in the community club house or community center. These offices are opened for abbreviated periods and cater to the residents of the gated community. Of the 24 full service offices, we own 21 without encumbrances. Of the remaining

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three, two are long-term lease arrangements (the main office of First National Bank/Osceola in Osceola County and the other is a branch office of CenterState Bank located in downtown Lakeland in Polk County), and the last one is our newest branch located in Crystal River, Florida. This branch opened in October 2006, and is operated out of a temporary location, which is on a short-term lease, until the permanent facility is constructed. See Note 4 to the Consolidated Financial Statements of our Company included in this Annual Report on Form 10-K beginning at page 60 for additional information regarding our premises and equipment.

Item 3. Legal Proceedings

Our Banks are periodically parties to or otherwise involved in legal proceedings arising in the normal course of business, such as claims to enforce liens, claims involving the making and servicing of real property loans, and other issues incident to their respective businesses. We do not believe that there is any pending or threatened proceeding against the Banks which would have a material adverse effect on our consolidated financial position.

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

No matters were submitted to a vote of our Company security holders during the fourth quarter of the year ended December 31, 2005.

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PART II

Item 5. Market for Common Equity, Related Stockholder Matters and Purchases of Equity Securities

The shares of our Common Stock are traded on the Nasdaq National Market System. The following sets forth the high and low trading prices for trades of our Common Stock that occurred during 2005 and 2004:

	2005		2004
	High	Low	High	Low
1st Quarter	$34.50	$29.82	$19.80	$18.80
2nd Quarter	40.85	32.36	24.99	19.25
3rd Quarter	34.94	32.50	27.00	23.02
4th Quarter	34.95	33.50	34.60	25.20

As of December 31, 2005, there are 5,250,386 shares of common stock outstanding. There were approximately 845 registered shareholders as of this date, as reported by our transfer agent, Continental Stock Transfer and Trust Company.

Dividends

We pay cash dividends quarterly, payable on the last business day of the calendar quarter. The following sets forth the per share cash dividends paid during 2005 and 2004.

	2005	2004
1st Quarter	$0.06	$0.06
2nd Quarter	$0.06	$0.06
3rd Quarter	$0.07	$0.06
4th Quarter	$0.07	$0.06

The payment of dividends is a decision of our Board of Directors based upon existing circumstances, including our rate of growth, profitability, financial condition, existing and anticipated capital requirements, the amount of funds legally available for the payment of cash dividends, regulatory constraints and such other factors as the Board determines relevant. The source of funds for payment of dividends by is dividends received from our Banks, or excess cash available at the Holding Company level. Payments by our subsidiary Banks to our Holding Company are limited by law and regulations of the bank regulatory authorities. There are various statutory and contractual limitations on the ability of our Banks to pay dividends to our Holding Company. The bank regulatory agencies also have the general authority to limit the dividends paid by banks if such payment may be deemed to constitute an unsafe and unsound practice. Our subsidiaries may not pay dividends from their paid-in surplus. All dividends must be paid out of undivided profits then on hand, after deducting expenses, including reserves for losses and bad debts. In addition, a national bank is prohibited from declaring a dividend on its shares of common stock until its surplus equals its stated capital, unless there has been transferred to surplus no less than one/tenth of the bank’s net profits of the preceding two consecutive half-year periods (in the case of an annual

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dividend). The approval of the OCC is required if the total of all dividends declared by a national bank in any calendar year exceeds the total of its net profits for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus. No dividends may be paid at a time when the Bank’s net income from the preceding two years is a loss or which would cause the capital accounts of the Bank to fall below the minimum amount required by law, regulation, order or any written agreement with the Florida Department or a Federal regulatory agency.

Share Repurchases

We did not repurchase any shares of our common stock during 2005.

Stock Plans

With respect to information regarding our securities authorized for issuance under equity incentive plans, the information contained in the section entitled “Equity Compensation Plan Information” in our Definitive Proxy Statement for the 2006 Annual Meeting of Shareholders is incorporated herein by reference.

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Item 6. Selected Consolidated Financial Data

The selected consolidated financial data presented below should be read in conjunction with management’s discussion and analysis of financial condition and results of operations, and the consolidated financial statements and footnotes thereto, of the Company at December 31, 2005 and 2004, and the three year period ended December 31, 2005, presented elsewhere herein.

Selected Consolidated Financial Data

December 31

(Dollars in thousands except for share and per share data)	2005			2004			2003			2002			2001
SUMMARY OF OPERATIONS:
Total interest income	$	40,266		$	29,088		$	25,802		$	21,048		$	23,513
Total interest expense		(11,722	)		(7,874	)		(7,532	)		(6,892	)		(9,826	)
Net interest income		28,544			21,214			18,270			14,156			13,687
Provision for loan losses		(1,065	)		(1,270	)		(1,243	)		(644	)		(577	)
Net interest income after provision for loan losses		27,479			19,944			17,027			13,512			13,110
Non-interest income		5,380			4,932			4,687			3,660			3,062
Gain on sale of branches		—			1,844			—			—			—
Non-interest expense		(22,805	)		(19,780	)		(17,547	)		(13,397	)		(12,143	)
Income before income taxes		10,054			6,940			4,167			3,775			4,029
Income taxes		(3,724	)		(2,567	)		(1,541	)		(1,406	)		(1,513	)
Net income	$	6,330		$	4,373		$	2,626		$	2,369		$	2,516
PER COMMON SHARE DATA:
Basic earnings per share	$	1.35		$	1.17		$	0.78		$	0.84		$	0.89
Diluted earnings per share	$	1.31		$	1.14		$	0.77		$	0.82		$	0.89
Book value per share	$	18.52		$	14.17		$	12.45		$	11.87		$	9.83
Tangible book value per share	$	17.54		$	12.89		$	10.35		$	10.37		$	9.54
Dividends per share	$	0.26		$	0.24		$	0.22		$	0.20		$	0.18
Actual shares outstanding		5,250,386			4,068,713			3,369,380			3,362,068			2,818,602
Weighted average shares outstanding		4,678,523			3,750,158			3,364,824			2,823,213			2,817,240
Diluted weighted average shares outstanding		4,814,597			3,828,154			3,428,819			2,878,770			2,839,914
BALANCE SHEET DATA:
Assets	$	871,521		$	753,779		$	608,896		$	494,800		$	341,374
Total loans, net		510,167			435,320			409,048			329,666			241,349
Total deposits		717,337			659,630			538,235			441,462			307,998
Short-term borrowings		42,811			24,627			17,465			10,005			4,598
Corporate debenture		10,000			10,000			10,000			—			—
Shareholders’ equity		97,241			57,664			41,963			39,915			27,717
Tangible capital		92,087			52,438			36,651			34,868			26,883
Goodwill		4,675			4,675			4,675			4,308			—
Core deposit intangible (CDI)		479			551			637			739			—
Average total assets		808,177			673,669			550,866			374,008			331,768
Average loans, net		476,676			415,864			370,029			258,232			224,865
Average interest earning assets		744,298			618,589			503,292			343,541			303,726
Average deposits		678,149			584,442			488,952			340,123			298,828
Average interest bearing deposits		496,046			445,358			393,528			277,466			248,534
Average interest bearing liabilities		544,663			481,468			412,457			281,651			253,561
Average shareholders’ equity		78,037			51,340			40,955			28,581			26,785

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Selected Consolidated Financial Data - continued

December 31

(Dollars in thousands except for share and per share data)	2005		2004		2003		2002		2001
SELECTED FINANCIAL RATIOS:
Return on average assets	0.78	%	0.65	%	0.48	%	0.63	%	0.76	%
Return on average equity	8.11	%	8.52	%	6.41	%	8.29	%	9.39	%
Dividend payout	19	%	21	%	28	%	24	%	20	%
Efficiency (1)	67	%	76	%	76	%	75	%	72	%
Net interest margin (2)	3.84	%	3.43	%	3.63	%	4.12	%	4.51	%
Net interest spread (3)	3.26	%	3.06	%	3.30	%	3.68	%	3.86	%
CAPITAL RATIOS:
Tier 1 leverage ratio	12.35	%	8.60	%	7.84	%	8.54	%	7.89	%
Risk-based capital
Tier 1	18.10	%	13.40	%	11.30	%	9.95	%	11.51	%
Total	19.23	%	14.61	%	12.48	%	11.16	%	12.76	%
Average equity to average assets	9.66	%	7.62	%	7.43	%	7.64	%	8.07	%
ASSET QUALITY RATIOS:
Net charge-offs to average loans	0.05	%	0.07	%	0.12	%	0.13	%	0.10	%
Allowance to period end loans	1.26	%	1.29	%	1.17	%	1.22	%	1.26	%
Allowance for loan losses to non-performing assets	419	%	436	%	296	%	274	%	467	%
Non-performing assets to total assets	0.18	%	0.17	%	0.27	%	0.30	%	0.19	%
OTHER DATA:
Banking locations	26		25		25		21		16
Full-time equivalent employees	275		257		254		233		169

(1) Efficiency ratio is non-interest expense divided by the sum of net interest income before the provision for loan losses plus non-interest income, exclusive of non-recurring income.

(2) Net interest margin is net interest income divided by total average earning assets.

(3) Net interest spread is the difference between the average yield on earning assets and the average yield on average interest bearing liabilities.

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Quarterly Financial Information

The following table sets forth, for the periods indicated, certain consolidated quarterly financial information. This information is derived from our unaudited financial statements which include, in the opinion of management, all normal recurring adjustments which management considers necessary for a fair presentation of the results for such periods. The sum of the four quarters of earnings per share might not equal the total earnings per share for the full year due to rounding. This information should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this document. The results for any quarter are not necessarily indicative of results for future periods.

Selected Quarterly Data

(Dollars are in thousands)

(Dollars in thousands except for per share data)	2005												2004
	4Q			3Q			2Q			1Q			4Q			3Q			2Q			1Q
Interest income	$	11,395		$	10,624		$	9,561		$	8,686		$	8,016		$	7,508		$	6,871		$	6,693
Interest expense		(3,440	)		(3,125	)		(2,744	)		(2,413	)		(2,253	)		(2,059	)		(1,774	)		(1,788	)
Net interest income		7,955			7,499			6,817			6,273			5,763			5,449			5,097			4,905
Provision for loan losses		(270	)		(255	)		(255	)		(285	)		(370	)		(225	)		(240	)		(435	)
Net interest income after Provision for loan losses		7,685			7,244			6,562			5,988			5,393			5,224			4,857			4,470
Non-interest income		1,316			1,416			1,310			1,341			1,247			1,204			1,247			1,234
Gain on sale of branches		—			—			—			—			—			—			—			1,844
Securities loss		(3	)		—			—			—			—			—			—			—
Non-interest expenses		(6,117	)		(5,784	)		(5,583	)		(5,321	)		(5,090	)		(5,110	)		(4,824	)		(4,756	)
Income before income tax expense		2,881			2,876			2,289			2,008			1,550			1,318			1,280			2,792
Income tax expense		(1,046	)		(1,075	)		(857	)		(746	)		(567	)		(489	)		(472	)		(1,039	)
Net income	$	1,835		$	1,801		$	1,432		$	1,262		$	983		$	829		$	808		$	1,753
Basic earnings per common share	$	0.35		$	0.34		$	0.35		$	0.31		$	0.24		$	0.20		$	0.23		$	0.52
Diluted earnings per common share	$	0.34		$	0.34		$	0.33		$	0.30		$	0.24		$	0.20		$	0.23		$	0.51

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Some of the statements in this report constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities Exchange Act of 1934. These statements related to future events, other future financial performance or business strategies, and include statements containing terminology such as “may,” “will,” “should,” “expects,” “scheduled,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “potential,” or “continue” or the negative of such terms or other comparable terminology. Actual events or results may differ materially from the results anticipated in these forward looking statements, due to a variety of factors, including, without limitation: the effects of future economic conditions; governmental monetary and fiscal policies, as well as legislative and regulatory changes; the risks of changes in interest rates and the level and composition of deposits, loan demand, and the values of loan collateral; and the effects of competition from other commercial banks, thrifts, consumer finance companies, and other financial institutions operating in our market area and elsewhere. All forward looking statements attributable to our Company are expressly qualified in their entirety by these cautionary statements. We disclaim any intent or obligation to update these forward looking statements, whether as a result of new information, future events or otherwise. There is no assurance that future results, levels of activity, performance or goals will be achieved.

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Our discussion and analysis of earnings and related financial data are presented herein to assist investors in understanding the financial condition of our Company at December 31, 2005 and 2004, and the results of operations for the years ended December 31, 2005, 2004 and 2003. This discussion should be read in conjunction with the consolidated financial statements and related footnotes of our Company presented elsewhere herein.

Executive Summary

Our consolidated financial statements include the accounts of CenterState Banks of Florida, Inc. (the “Parent Company”), and our wholly owned subsidiary banks and an 80% owned subsidiary, C. S. Processing.

Our subsidiary banks operate through 26 locations in seven Counties throughout Central Florida, providing traditional deposit and lending products and services to its commercial and retail customers. C.S. Processing is an 80% owned subsidiary, which provides item processing services for our subsidiary banks and the minority shareholder bank (CenterState Bank Mid Florida, which will be acquired in March 2006) which owns the remaining 20%.

During January 2006, we combined two of our four subsidiary banks, First National Bank of Polk County and CenterState Bank of Florida. The combined bank operates under the name CenterState Bank of Florida, National Association. Both banks operated in Polk County, Florida. The two banks were geographically close and their market overlaps continued to grow. The proximity of the two banks led to some confusion with customers and operating inefficiencies. We expect any redundancy and over staffing to cure itself through attrition and Company-wide growth. The combined bank, CenterState Bank of Florida, has twelve banking locations, all in Polk County, Florida. We have no plans to combine any of our remaining banks. With regard to our two other banks as of December 31, 2005, CenterState Bank West Florida (“CSWFL”) operates through eight locations in Pasco, Citrus, Hernando and Sumter Counties, and, First National Bank of Osceola County operates through six locations in Osceola and Orange Counties.

On September 30, 2005 we entered into a definitive agreement to purchase CenterState Bank Mid Florida (“Mid FL”) for $14.50 per share (approximately $14,500,000). The consideration is comprised of $4.35 per share in cash and $10.15 per share in our common stock pursuant to the agreement. The Bank has 1,000,050 common shares outstanding and options on approximately 98,000 additional shares at an average exercise price of approximately $10 per share. Mid FL began operations in January 2004. In February 2004, it purchased two branches from us. Currently, it operates from three locations in Lake County, Florida. At December 31, 2005, it had total assets of approximately $68,600,000 and total stockholders’ equity of approximately $9,000,000. Ernest S. Pinner is our Chairman, President and CEO, and, he is also the Chairman of the Board of Directors of Mid FL. James S. Stalnaker, Jr. is the President and CEO of CSWFL (one of our subsidiary banks), and, he is also a director of Mid FL. Timothy A. Pierson is the President and CEO of Mid FL. Prior to Mr. Pierson’s employment with Mid FL, he worked for us as an executive vice president of one of our subsidiary banks. Mr. Pierson severed his ties with us when he accepted his employment position with Mid FL.

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This transaction is expected to close by the end of March 2006. Subsequent to this transaction, we expect to be operating through four banks with 29 locations in eight Counties in Central Florida as summarized in the table below:

Subsidiary Banks	No. of locations	Counties
First National Bank of Osceola (“FNB/Osceola”)	6	Osceola, Orange
CenterState Bank West Florida (“CSWFL”)	8	Pasco, Hernando, Citrus, Sumter
CenterState Bank of Florida (“CSB”)	12	Polk
CenterState Bank Mid Florida (“MidFL”)	3	Lake

During 2005 we completed construction on our Lake Wales branch office (Polk County), which was operating from a temporary facility since its opening in April 2004. We opened one new branch office during 2005. We opened this during October in a temporary facility in Citrus County, and expect to construct a permanent facility during 2006. We also have several more branches planned for the next two years.

During 2005, we also raised additional capital through a secondary public stock offering. On June 24, 2005, we closed the sale of 1,000,000 shares of our common stock to several underwriters in a secondary public offering at a purchase price of $32.50 per share. On July 15, 2005, we closed the sale of an additional 150,000 shares of common stock which were subject to the over-allotment option granted to the underwriters at $32.50 per share. We received net proceeds of $34,854,000 after underwriters discount ($2,243,000 or $1.95 per share) and offering expenses of approximately $278,000.

Our Company’s principal asset is its ownership of the Banks. Accordingly, our consolidated results of operations are primarily dependent upon the results of operations of the Banks. Through our subsidiary Banks, we conduct commercial banking business consisting of attracting deposits from the general public and applying those funds to the origination of commercial, consumer and real estate loans (including commercial loans collateralized by real estate). Our profitability depends primarily on net interest income, which is the difference between interest income generated from interest-earning assets (i.e. loans and investments) less the interest expense incurred on interest-bearing liabilities (i.e. customer deposits and borrowed funds). Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities, and the interest rate earned and paid on these balances. Net interest income is dependent upon the interest rate spread which is the difference between the average yield earned on our interest-earning assets and the average rate paid on our interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income. The interest rate spread is impacted by interest rates, deposit flows, and loan demand. Additionally, and to a lesser extent, our profitability is affected by such factors as the level of non-interest income and expenses, the provision for credit losses, and the effective tax rate. Non-interest income consists primarily of service fees on deposit accounts and related services, and to a lesser extent commission earned on brokering single family home loans, and commissions earned on the sale of mutual funds, annuities and other non traditional and non insured investments. Non-interest expense consists of compensation and employee benefits, occupancy and equipment expenses, and other operating expenses.

Critical Accounting Policies

Our accounting policies are integral to understanding the results reported. Accounting policies are described in detail in Note 1 of the notes to the consolidated financial statements. The critical accounting policies require management’s judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. We have established policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. In addition, the policies and

28

procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief description of our current accounting policies involving significant management valuation judgments.

Allowance for Loan Losses

The allowance for loan losses represents our estimate of losses inherent in the existing loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries. The allowance for loan losses is determined based on our assessment of several factors: reviews and evaluation of individual loans, changes in the nature and volume of the loan portfolio, current economic conditions and the related impact on specific borrowers and industry concentrations, historical loan loss experiences and the level of classified and nonperforming loans.

Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the condition of the various markets in which collateral may be sold may all affect the required level of the allowance for loan losses and the associated provision for loan losses.

A standardized loan grading system is utilized at each of our subsidiary Banks. The grading system is integral to our risk assessment function related to lending. Loan officers of each Bank assign a loan grade to their newly originated loans in accordance with the standard loan grades. Throughout the lending relationship, the loan officer is responsible for periodic reviews, and if warranted he/she will downgrade or upgrade a particular loan based on specific events and/or analyses. Loans graded 5 or higher are placed on a watch list each month end and reported to that particular Bank’s board of directors. The Company’s loan review officer, who is independent of the lending function and is not an employee of any subsidiary bank, periodically reviews each Bank’s loan portfolio and lending relationships. He may disagree with a particular Bank’s grade on a particular loan and subsequently downgrade or upgrade such loan(s) based on his risk analysis. As such, our lending process is decentralized, but our credit review process is centralized.

Loans are considered impaired if, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate stipulated in the loan agreement, except that collateral-dependent loans are generally measured for impairment based on the fair value of the collateral. In measuring the fair value of the collateral, management uses assumptions and methodologies consistent with those that would be utilized by unrelated third parties. We consider loans graded 7 or higher to be impaired.

Deferred Tax Assets

We use an estimate of future earnings to support the position that the benefit of our deferred tax assets will be realized. If future income should prove non-existent or less than the amount of the deferred tax assets within the tax years to which they may be applied, the asset may not be realized and net income will be reduced. Deferred tax assets are described further in Note 9 of the notes to the consolidated financial statements.

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Goodwill

Effective July 1, 2001, we adopted SFAS No. 141, Business Combinations, which requires the use of the purchase method of accounting. We acquired CenterState Bank of Florida, in Winter Haven, Florida, on December 31, 2002. Consequently, we were required to record the assets acquired, including identified intangible assets, and liabilities assumed at their fair value, which involves estimates based on third party valuations, such as appraisals, internal valuations based on discounted cash flow analyses or other valuation techniques. The determination of the useful lives of intangible assets is subjective as is the appropriate amortization period for such intangible assets. In addition, purchase acquisitions typically result in recording goodwill, which is subject to ongoing periodic impairment tests based on the fair value of net assets acquired compared to the carrying value of goodwill. In November 2005, the required impairment testing of goodwill was performed and no impairment existed as of the valuation date, as the fair value of our net assets exceeded their carrying value. If for any future period we determine that there has been impairment in the carrying value of our goodwill balances, we will record a charge to our earnings, which could have a material adverse effect on our net income.

Stock Based Compensation

We use Accounting Principle Board Opinion No. 25 and related interpretations to account for stock based compensation costs. As such, we estimate the value of options that we grant using the fair value method and the Black-Scholes option pricing model, and disclose this information in the notes to our consolidated financial statements. We do not recognize the estimated values as expense in our consolidated financial statements. Effective with our fiscal year beginning January 1, 2006, we will be required to recognize the estimated values of our stock option grants in our consolidated financial statements using the fair value method.

Under the fair value method, stock option expense is measured on the date of grant using the Black-Scholes option pricing model with market assumptions. Option pricing models require the use of highly subjective assumptions, including expected stock price volatility, which when changed can materially affect fair value estimates. Accordingly, the model does not necessarily provide a reliable single measure of the fair value of our stock options. SFAS No. 123R, Accounting for Stock-Based Compensation, requires all public companies to record compensation cost for stock options provided to employees in return for employee service. The cost is measured at the fair value of the options when granted, and this cost is expensed over the employee service period, which is the vesting period of the options. This will apply to awards granted or modified after the first fiscal year beginning after June 15, 2005. Compensation cost will also be recorded for prior option grants that vest after the date of adoption. The effect on results of operations will depend on the level of future option grants and the calculation of the fair value of the options granted at such future date, as well as the vesting periods provided.

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005 AND DECEMBER 31, 2004.

Net Income

Our net income for the year ended December 31, 2005 was $6,330,000 or $1.35 per share (basic) and $1.31 per share (diluted), compared to $4,373,000 or $1.17 per share (basic) and $1.14 per share (diluted) for the year ended December 31, 2004. Exclusive of the non-recurring income relating to the gain from sale of branches, the net income for the year ended December 31, 2004 would have been $3,223,000 or $0.86 per share (basic) and $0.84 per share (diluted).

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Our return on average assets (“ROA”) and return on average equity (“ROE”) for the year ended December 31, 2005 were 0.78% and 8.11%, as compared to the ROA and ROE of 0.65% and 8.52% (0.48% and 6.28% exclusive of non recurring income from the gain on sale of branches), for the year ended December 31, 2004. The efficiency ratios for the years ended December 31, 2005 and 2004 were 67% and 76%, respectively.

Net income increased approximately $1,957,000 or 45% to $6,330,000 ($3,107,000 or 96% increase, exclusive of non recurring income from the gain on sale of branches) for the year ended December 31, 2005, compared to $4,373,000 for the same period during 2004.

The table below provides a reconciliation between net income and net income exclusive of non recurring income resulting from the gain on sale of branches.

Amounts are in thousands of dollars, except per share data	2005			2004
Net income	$	6,330		$	4,373
Gain on sale of branches, net of tax $694		—			(1,150	)
Net income exclusive of gain on sale of branches	$	6,330		$	3,223
Earnings per share, basic	$	1.35		$	1.17
Gain on sale of branches, net of tax $0.19		—			(0.31	)
Earnings per share, basic, exclusive of gain on sale of branches	$	1.35		$	0.86
Earnings per share, diluted	$	1.31		$	1.14
Gain on sale of branches, net of tax $0.18		—			(0.30	)
Earnings per share, diluted, exclusive of gain on sale of branches	$	1.31		$	0.84
ROA		0.78	%		0.65	%
Gain on sale of branches, net of taxes 0.10%		—			(0.17	%)
ROA, exclusive of gain on sale of branches		0.78	%		0.48	%
ROE		8.11	%		8.52	%
Gain on sale of branches, net of taxes 1.35%		—			(2.24	%)
ROE, exclusive of gain on sale of branches		8.11	%		6.28	%

The primary component contributing to the increase in net income in 2005 compared to 2004 comes from net interest income which increased $7,330,000, or 35%, as shown in the table below. The increase in net interest income was due to both an increase in our net interest margin (“NIM”) and growth in assets. Our NIM was 3.84% in 2005 compared to 3.43% in 2004. Average interest earning assets during 2005 was $744,298,000, compared to $618,589,000 during 2004. Average interest bearing liabilities during 2005 was $544,663,000 compared to $481,468,000 during 2004.

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The table below shows a comparison of our condensed consolidated income statements for 2005 and 2004.

Condensed Consolidated Income Statements

Amounts in thousands of dollars (except per share data)	2005			2004			Increase (decrease)			%
Net interest income	$	28,544		$	21,214		$	7,330		35	%
Provision for loan losses		(1,065	)		(1,270	)		205		(16	)%
Net interest income after loan loss provision		27,479			19,944			7,535		38	%
Non interest income		5,380			4,932			448		9	%
Gain on sale of branches		—			1,844			n/a		n/a
Non interest expense		(22,805	)		(19,780	)		(3,025	)	15	%
Income before income tax		10,054			6,940			3,114		45	%
Income tax expense		(3,724	)		(2,567	)		(1,157	)	45	%
NET INCOME	$	6,330		$	4,373			1,957		45	%
Gain on sale of branches, net of tax $694 (as reconciled in the table above)					1,150
Net income exclusive of gain on sale of branches	$	6,330		$	3,223			3,107		96	%

Net Interest Income/Margin

Net interest income consists of interest income generated by earning assets, less interest expense.

Net interest income increased $7,330,000 or 35% to $28,544,000 during the year ended December 31, 2005 compared to $21,214,000 for the year ended December 31, 2004. The $7,330,000 increase was a combination of a $11,178,000 increase in interest income offset by a $3,848,000 increase in interest expense.

Average interest earning assets increased $125,709,000 to $744,298,000 during the year ended December 31, 2005, compared to $618,589,000 for the year ended December 31, 2004. Comparing these same two periods, the yield on average interest earning assets increased from 4.70% in 2004 to 5.41% in 2005. The increase in volume had a positive effect on the change in interest income ($5,046,000 volume variance), and the increase in yields also had a positive effect on the change in interest income ($6,132,000 rate variance). The result was an $11,178,000 increase in interest income.

Average interest bearing liabilities increased $63,195,000 to $544,663,000 during the year ended December 31, 2005, compared to $481,468,000 for the year ended December 31, 2004. Comparing these same two periods, the cost of average interest bearing liabilities increased from 1.64% in 2004 to 2.15% in 2005. The increase in volume resulted in an increase in interest expense ($1,082,000 volume variance), and the increase in yields also resulted in an increase in interest expense ($2,766,000 rate variance). The result was a net increase of $3,848,000 in interest expense. See the tables “Average Balances – Yields & Rates,” and “Analysis Of Changes In Interest Income And Expenses” below.

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Average Balances – Yields & Rates

(Dollars are in thousands)

	Years Ended December 31,
	2005							2004
	Average Balance			Interest Inc / Exp		Average Rate		Average Balance			Interest Inc / Exp		Average Rate
ASSETS:
Federal funds sold & money market	$	53,701		$	1,641	3.06	%	$	54,579		$	714	1.31	%
Securities available for sale		207,778			6,101	2.94	%		142,781			2,940	2.06	%
Loans (1) (2) (7)		482,819			32,524	6.74	%		421,229			25,434	6.04	%
TOTAL EARNING ASSETS	$	744,298		$	40,266	5.41	%	$	618,589		$	29,088	4.70	%
Allowance for loan losses		(6,143	)						(5,365	)
All other assets		70,022							60,445
TOTAL ASSETS	$	808,177						$	673,669
LIABILITIES & SHAREHOLDERS’ EQUITY:
Deposits:
Now	$	99,909		$	317	0.32	%		87,710		$	265	0.30	%
Money market		105,625			1,505	1.42	%		105,184			1,057	1.01	%
Savings		48,739			201	0.41	%		44,767			133	0.30	%
Time deposits		241,773			7,988	3.30	%		207,697			5,730	2.76	%
Repurchase agreements		38,210			1,013	2.65	%		26,110			193	0.74	%
Other borrowed funds (3)		407			16	3.93	%		—			—	—	%
Corporate debenture (4)		10,000			682	6.82	%		10,000			496	4.96	%
TOTAL INTEREST BEARING LIABILITIES	$	544,663		$	11,722	2.15	%		481,468		$	7,874	1.64	%
Demand deposits		182,103							139,084
Other liabilities		3,374							1,777
Shareholders’ equity		78,037							51,340
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	808,177						$	673,669
NET INTEREST SPREAD (5)						3.26	%						3.06	%
NET INTEREST INCOME				$	28,544						$	21,214
NET INTEREST MARGIN (6)						3.84	%						3.43	%

(1) Loan balances are net of deferred fees/cost of origination.

(2) Interest income on average loans includes fee recognition of $269,000 and $164,000 for the years ended December 31, 2005 and 2004, respectively.

(3) Includes short-term (usually overnight) Federal Home Loan Bank advances and Federal Funds Purchased.

(4) Includes amortization of origination costs of $38,000 and $38,000 during year ended December 31, 2005 and 2004, respectively.

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

(6) Represents net interest income divided by total earning assets.

(7) The average rates have not been presented on a tax equivalent basis, as this amount is not deemed material.

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Analysis of Changes in Interest Income and Expenses

(Dollars are in thousands)

	Net Change Dec 31, 2005 versus 2004
	Volume (1)			Rate (2)		Net Change
INTEREST INCOME
Federal funds sold and money market	$	(11	)	$	938	$	927
Securities available for sale		1,338			1,823		3,161
Loans		3,719			3,371		7,090
TOTAL INTEREST INCOME	$	5,046		$	6,132	$	11,178
INTEREST EXPENSE
Deposits
NOW accounts	$	37		$	15	$	52
Money market accounts		4			444		448
Savings		12			56		68
Time deposits		940			1,318		2,258
Repurchase agreements		89			731		820
Other borrowed funds		—			16		16
Corporate debenture		—			186		186
TOTAL INTEREST EXPENSE	$	1,082		$	2,766	$	3,848
NET INTEREST INCOME	$	3,964		$	3,366	$	7,330

(1) The volume variance reflects the change in the average balance outstanding multiplied by the actual average rate during the prior period.

(2) The rate variance reflects the change in the actual average rate multiplied by the average balance outstanding during the current period.

Provision for Loan Losses

The provision for loan loss losses decreased $205,000 or 16% to $1,065,000 during the year ended December 31, 2005, as compared to $1,270,000 for the year ended December 31, 2004. Our policy is to maintain the allowance for loan losses at a level sufficient to absorb probable losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses, which is a charge to current period earnings, and is decreased by charge-offs, net of recoveries on prior loan charge-offs. Therefore, the provision for loan losses (Income Statement effect) is a residual of management’s determination of allowance for loan losses (Balance Sheet approach). In determining the adequacy of the allowance for loan losses, we consider those levels maintained by conditions of individual borrowers, the historical loan loss experience, the general economic environment, the overall portfolio composition, and other information. As these factors change, the level of loan loss provision changes. See “Asset Quality” regarding the allowance for loan losses for additional information.

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Non-Interest Income

Non-interest income for 2005 decreased by $1,396,000, or 20%, to $5,380,000 as compared to $6,776,000 for the year ending December 31, 2004. The largest component contributing to this difference was the gain on sale of branches that occurred in 2004. Non-interest income, exclusive of this $1,844,000 gain on the sale of branches, increased $448,000, or 9%, in 2005 compared to 2004. Commissions from mortgage broker activities is a function of, and will vary with, market and interest rate environments. Several of our newer branch offices where constructed with second floors, which are currently being leased, until such time we need the additional space, contributing to the increase in rental income. We hired two experienced financial sales professionals during 2004, resulting in increased commissions from the sale of mutual funds and annuities. Overall, the growth of all other fees and service charges relate to our general business growth. Non-interest income items are listed in the table below.

(in thousands of dollars)	2005			2004		$ increase (decrease)			% increase (decrease)
Service charges on deposit accounts	$	3,222		$	3,113	$	109		4	%
Commissions from mortgage broker activities		499			571		(72	)	(13	)%
Loan related fees		283			289		(6	)	(2.1	)%
Commissions from sale of mutual funds and annuities		321			207		114		55	%
Rental income		203			134		69		52	%
Other service charges and fees		847			607		240		40	%
Loss on sale of securities		(3	)		0		(3	)	n/a
Gain (loss) on sale of other real estate owned		8			11		(3	)	(27	)%
Sub-total	$	5,380		$	4,932	$	448		9	%
Gain on sale of branches		—			1,844		(1,844	)	n/a
Total non-interest income	$	5,380		$	6,776	$	(1,396	)	(20	)%

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Non-Interest Expense

Non-interest expense increased $3,025,000, or 15%, to $22,805,000 for the year ended December 31, 2005, compared to $19,780,000 for the year ended December 31, 2004. We opened two new branches in 2004, one in April 2004 and one in June 2004, and we opened one new branch, in a temporary facility during October 2005. This growth in new facilities, equipment and personnel, along with our overall business growth we experienced during 2005, are the primary reasons for the increase in non-interest expense.

Non-interest expenses are listed in the table below.

(in thousands of dollars)	2005		2004		$ increase (decrease)			% increase (decrease)
Salaries, wages and employee benefits	$	12,623	$	10,440	$	2,183		21	%
Occupancy expense		2,780		2,419		361		15	%
Depreciation of premises and equipment		1,642		1,526		116		8	%
Supplies, stationary and printing		522		456		66		14	%
Marketing expenses		447		378		69		18	%
Data processing expense		961		864		97		11	%
Legal, auditing and other professional fees (1)		577		626		(49	)	(8	)%
Bank regulatory related expenses		316		276		40		14	%
Postage and delivery		270		288		(18	)	(6	)%
ATM related expenses		399		319		80		25	%
Correspondent account expenses		156		196		(40	)	(20	)%
Item processing direct production expenses		215		208		7		3	%
Other expenses		1,897		1,784		113		6	%
Total non-interest expense	$	22,805	$	19,780	$	3,025		15	%

Note 1: Out of pocket expenses in 2004 relating to the Company’s first year compliance with Section 404 of the Sarbanes-Oxley Act of 2002 were $240,000. In 2005, second year compliance expenses (out of pocket) were estimated to be about $111,000.

Income Tax Provision

The income tax provision for the year ended December 31, 2005, was $3,724,000, an effective tax rate of 37.0%, as compared to $2,567,000 for the year ended December 31, 2004, an effective tax rate of 37.0%.

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 AND DECEMBER 31, 2003.

Net Income

Our net income for the year ended December 31, 2004 was $4,373,000 or $1.17 per share (basic) and $1.14 per share (diluted), compared to $2,626,000 or $0.78 per share (basic) and $0.77 per share (diluted) for the year ended December 31, 2003. Exclusive of the non recurring income relating to the gain from sale of branches, the net income for the year ended December 31, 2004 would have been $3,223,000 or $0.86 per share (basic) and $0.84 per share (diluted).

Our return on average assets (“ROA”) and return on average equity (“ROE”) for the year ended December 31, 2004 were 0.65% and 8.52% (0.48% and 6.28% exclusive of non recurring income from the

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gain on sale of branches), as compared to the ROA and ROE of 0.48% and 6.41% for the year ended December 31, 2003. The efficiency ratios for the years ended December 31, 2004 and 2003 were 76% for each year.

Net income increased approximately $1,747,000 or 67% to $4,373,000 ($597,000 or 23% to $3,223,000 exclusive of non recurring income from the gain on sale of branches) for the year ended December 31, 2004, compared to $2,626,000 for the same period during 2003.

The table below provides the required reconciliation between net income and net income exclusive of non recurring income resulting from the gain on sale of branches.

Amounts are in thousands of dollars, except per share data	2004			2003
Net income	$	4,373		$	2,626
Gain on sale of branches, net of tax $694		(1,150	)		—
Net income exclusive of gain on sale of branches	$	3,223		$	2,626
Earnings per share, basic	$	1.17		$	0.78
Gain on sale of branches, net of tax $0.19		(0.31	)		—
Earnings per share, basic, exclusive of gain on sale of branches	$	0.86		$	0.78
Earnings per share, diluted	$	1.14		$	0.77
Gain on sale of branches, net of tax $0.18		(0.30	)		—
Earnings per share, diluted, exclusive of gain on sale of branches	$	0.84		$	0.77
ROA		0.65	%		0.48	%
Gain on sale of branches, net of taxes 0.10%		(0.17	)%		—
ROA, exclusive of gain on sale of branches		0.48	%		0.48	%
ROE		8.52	%		6.41	%
Gain on sale of branches, net of taxes 1.35%		(2.24	)%		—
ROE, exclusive of gain on sale of branches		6.28	%		6.41	%

Net Interest Income/Margin

Net interest income consists of interest income generated by earning assets, less interest expense.

Net interest income increased $2,944,000 or 16% to $21,214,000 during the year ended December 31, 2004 compared to $18,270,000 for the year ended December 31, 2003. The $2,944,000 increase was a combination of a $3,286,000 increase in interest income offset by a $342,000 increase in interest expense.

Average interest earning assets increased $115,297,000 to $618,589,000 during the year ended December 31, 2004, compared to $503,292,000 for the year ended December 31, 2003. Comparing these same two periods, the yield on average interest earning assets decreased from 5.13% in 2003 to 4.70% in 2004. The increase in volume had a positive effect on the change in interest income ($4,504,000 volume variance). The decrease in yields had a negative effect on the change in interest income ($1,218,000 rate variance). The net result was a $3,286,000 increase in interest income.

Average interest bearing liabilities increased $69,011,000 to $481,468,000 during the year ended December 31, 2004, compared to $412,457,000 for the year ended December 31, 2003. Comparing these same two periods, the cost of average interest bearing liabilities decreased from 1.83% in 2003 to 1.64% in 2004. The increase in volume resulted in an increase in interest expense ($754,000 volume variance), and

37

the decrease in yields resulted in a decrease in interest expense ($412,000 rate variance). The result was a net increase of $342,000 in interest expense. See the tables “Average Balances – Yields & Rates,” and “Analysis Of Changes In Interest Income And Expenses” below.

Average Balances – Yields & Rates

(Dollars are in thousands)

	Years Ended December 31,
	2004							2003
	Average Balance			Interest Inc / Exp		Average Rate		Average Balance			Interest Inc / Exp		Average Rate
ASSETS:
Federal funds sold & money market	$	54,579		$	714	1.31	%	$	57,796		$	651	1.13	%
Securities available for sale		142,781			2,940	2.06	%		70,929			1,584	2.23	%
Loans (1) (2) (6)		421,229			25,434	6.04	%		374,567			23,567	6.29	%
TOTAL EARNING ASSETS	$	618,589		$	29,088	4.70	%	$	503,292		$	25,802	5.13	%
Allowance for loan losses		(5,365	)						(4,538	)
All other assets		60,445							52,112
TOTAL ASSETS	$	673,669						$	550,866
LIABILITIES & SHAREHOLDERS’ EQUITY:
Deposits:
Now	$	87,710		$	265	0.30	%		68,155		$	261	0.38	%
Money market		105,184			1,057	1.01	%		83,828			886	1.06	%
Savings		44,767			133	0.30	%		35,806			142	0.40	%
Time deposits		207,697			5,730	2.76	%		205,739			6,026	2.93	%
Short term borrowings (repos)		26,110			193	0.74	%		15,562			73	0.47	%
Short term note payable (7)		—			—	—	%		600			18	3.00	%
Corporate debenture (3)		10,000			496	4.96	%		2,767			126	4.55	%
TOTAL INTEREST BEARING LIABILITIES	$	481,468		$	7,874	1.64	%		412,457		$	7,532	1.83	%
Demand deposits		139,084							95,424
Other liabilities		1,777							2,030
Shareholders’ equity		51,340							40,955
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	673,669						$	550,866
NET INTEREST SPREAD (4)						3.06	%						3.30	%
NET INTEREST INCOME				$	21,214						$	18,270
NET INTEREST MARGIN (5)						3.43	%						3.63	%

(1) Loan balances are net of deferred fees/cost of origination.

(2) Interest income on average loans includes fee recognition of $164,000 and $184,000 for the years ended December 31, 2004 and 2003, respectively.

(3) Includes amortization of origination costs of $38,000 and $9,000 during year ended December 31, 2004 and 2003, respectively.

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

(5) Represents net interest income divided by total earning assets.

(6) The average rates have not been presented on a tax equivalent basis, as this amount is not deemed material.

(7) Includes short-term (usually overnight) Federal Home Loan Bank advances and Federal Funds Purchased.

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Analysis of Changes in Interest Income and Expenses

(Dollars are in thousands)

	Net Change Dec 31, 2004 versus 2003
	Volume (1)			Rate (2)			Net Change
INTEREST INCOME
Federal funds sold and money market	$	(36	)	$	99		$	63
Securities available for sale		1,604			(248	)		1,356
Loans		2,936			(1,069	)		1,867
TOTAL INTEREST INCOME	$	4,504		$	(1,218	)	$	3,286
INTEREST EXPENSE
Deposits
NOW accounts	$	75		$	(71	)	$	4
Money market accounts		226			(55	)		171
Savings		36			(45	)		(9	)
Time deposits		57			(353	)		(296	)
Short-term borrowings (repos)		49			71			120
Short-term note payable		(18	)		—			(18	)
Corporate debenture		329			41			370
TOTAL INTEREST EXPENSE	$	754		$	(412	)	$	342
NET INTEREST INCOME	$	3,750		$	(806	)	$	2,944

(1) The volume variance reflects the change in the average balance outstanding multiplied by the actual average rate during the prior period.

(2) The rate variance reflects the change in the actual average rate multiplied by the average balance outstanding during the current period.

Provision for Loan Losses

The provision for loan loss losses increased $27,000 or 2% to $1,270,000 during the year ended December 31, 2004, as compared to $1,243,000 for the year ended December 31, 2003. Our policy is to maintain the allowance for loan losses at a level sufficient to absorb probable losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses, which is a charge to current period earnings, and is decreased by charge-offs, net of recoveries on prior loan charge-offs. Therefore, the provision for loan losses (Income Statement effect) is a residual of management’s determination of allowance for loan losses (Balance Sheet approach). In determining the adequacy of the allowance for loan losses, we consider those levels maintained by conditions of individual borrowers, the historical loan loss experience, the general economic environment, the overall portfolio composition, and other information. As these factors change, the level of loan loss provision changes. See “Asset Quality” regarding the allowance for loan losses for additional information.

Non-Interest Income

Non-interest income for 2004 increased by $2,089,000, or 45%, to $6,776,000 as compared to $4,687,000 for the year ending December 31, 2003. Exclusive of the $1,844,000 non recurring income from the gain on sale of branches, the remaining non-interest income for 2004 increased by $245,000, or 5.2% compared to 2003. The two largest components contributing to this increase, excluding gain on the sale of branches, were service charges on deposit accounts, which increased approximately $188,000 (6%), and all other service charges, fees and other income, which increased approximately $57,000 (3%).

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Non-Interest Expense

Non-interest expense increased $2,233,000, or 13%, to $19,780,000 for the year ended December 31, 2004, compared to $17,547,000 for the year ended December 31, 2003. Salaries and employee benefits increased by $1,385,000 (15%), occupancy and depreciation expenses increased by $124,000 (3%), data processing expenses (includes item processing and conversion expenses) increased by $68,000 (9%), and all remaining expenses together increased by $656,000 (17%).

The primary reason for the increase in non-interest expense is the internal growth we experienced during 2004 net of the non-interest expenses related to the two branches that were sold during February 2004.

Non-interest expenses are summarized in the table below.

Non-Interest Expense

(Dollars are in thousands)

	Years ended Dec 31
	2004		2003		Incr(Decr)
Salary, wages and employee benefits	$	10,440	$	9,055	$	1,385
Occupancy expense		2,419		2,316		103
Depreciation of premises and equipment		1,526		1,505		21
Stationary and printing supplies		456		473		(17	)
Marketing expenses		378		277		101
Data processing expense		864		796		68
Legal, audit and other professional fees		386		512		(126	)
SOX 404 (note 1)		240		—		240
Bank regulatory related expenses		276		265		11
ATM expenses		319		283		36
Other operating expenses		2,476		2,065		411
Total other operating expenses	$	19,780	$	17,547	$	2,233

Note 1: Out of pocket expenses relating to the Company’s compliance with Section 404 of the Sarbanes-Oxley Act of 2002.

Income Tax Provision

The income tax provision for the year ended December 31, 2004, was $2,567,000, an effective tax rate of 37.0%, as compared to $1,541,000 for the year ended December 31, 2003, an effective tax rate of 37.0%.

COMPARISON OF BALANCE SHEETS AT DECEMBER 31, 2005 AND DECEMBER 31, 2004

Overview

Our total assets grew by $117,742,000, or 15.6%, from $753,779,000 at December 31, 2004 to $871,521,000 at December 31, 2005. Part of this growth is attributable to the capital we raised through a public offering during the summer of 2005. If we reduce our asset growth amount by the $34,854,000 net proceeds we raised in our public offering, our total asset growth rate for 2005 would be 11.0%, instead of 15.6%. Our loans increased by $75,653,000, or 17.2%, from $441,005,000 at December 31, 2004 to $516,658,000 at December 31, 2005. Our deposits increased by $57,707,000, or 8.7%, from $659,630,000 at December 31, 2004 to $717,337,000 at December 31, 2005.

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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 year ended December 31, 2005, were $482,819,000, or 65% of average earning assets, as compared to $421,229,000, or 68% of average earning assets, for the year ending December 31, 2004. Total loans, net of unearned fees and cost, at December 31, 2005 and 2004 were $516,658,000 and $441,005,000, respectively, an increase of $75,653,000, or 17.2%. This represents a loan to total asset ratio of 59% and 59% and a loan to deposit ratio of 72% and 67%, at December 31, 2005 and 2004, respectively. The growth in loans during this period was normal business growth. Market forces were such that loan growth outpaced deposit growth during 2005, which was opposite to the situation during 2004, when deposit growth outpaced loan growth.

Total residential real estate loans totaled $148,090,000 and total commercial real estate loans totaled $219,094,000, making up 29% and 42% (combined total of 71%) of the loan portfolio as of December 31, 2005, respectively. Construction loans totaled $36,352,000, or 7% of the loan portfolio. Commercial loans totaled $63,475,000, or 12% of the loan portfolio. Consumer and all other loans totaled $50,413,000, or 10% of the loan portfolio.

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

The tables below provide a summary of the loan portfolio composition and maturities for the periods provided below.

Loan Portfolio Composition

(Dollars are in thousands)

Types of Loans at December 31:	2005			2004			2003			2002			2001
Real estate loans:
Residential	$	148,090		$	129,796		$	140,826		$	114,183		$	84,033
Commercial		219,094			179,846			157,586			117,964			88,711
Construction		36,352			20,032			16,930			22,544			17,917
Total real estate loans		403,536			329,674			315,342			254,691			190,661
Commercial		63,475			64,984			59,175			43,607			30,900
Consumer and other loans		50,413			46,883			39,908			35,906			23,295
Total loans – gross		517,424			441,541			414,425			334,204			244,856
Less: unearned fees/costs		(766	)		(536	)		(527	)		(483	)		(431	)
Total loans		516,658			441,005			413,898			333,721			244,425
Less: allowance for loan losses		(6,491	)		(5,685	)		(4,850	)		(4,055	)		(3,076	)
Total loans, net	$	510,167		$	435,320		$	409,048		$	329,666		$	241,349

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Percentage of loans in each category to total loans

	December 31,
	2005		2004		2003		2002		2001
Real estate loans:
Residential	29	%	29	%	34	%	34	%	34	%
Commercial	42	%	41	%	38	%	35	%	36	%
Construction	7	%	4	%	4	%	7	%	7	%
Total real estate loans	78	%	74	%	76	%	76	%	77	%
Commercial	12	%	15	%	14	%	13	%	13	%
Consumer and other loans	10	%	11	%	10	%	11	%	10	%
Total	100	%	100	%	100	%	100	%	100	%

The repayment of loans is a source of additional liquidity for the Company. The following table sets forth the loans maturing within specific intervals at December 31, 2005.

Loan Maturity Schedule

(Dollars are in thousands)

	December 31, 2005
	0 – 12 Months		1 – 5 Years		Over 5 Years		Total
All loans other than construction	$	102,951	$	241,006	$	137,424	$	481,381
Real estate – construction		17,948		12,703		5,392		36,043
Total	$	120,899	$	253,709	$	142,817	$	517,424
Fixed interest rate	$	22,367	$	172,442	$	54,617	$	249,426
Variable interest rate		132,487		75,753		59,758		267,998
Total	$	154,854	$	248,195	$	114,376	$	517,424

The information presented in the above table is based upon the contractual maturities of the individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon their maturity. Consequently, management believes this treatment presents fairly the maturity structure of the loan portfolio. See “Liquidity and Market Risk Management” for a discussion regarding the repricing structure of the loan portfolio.

Credit Quality and Allowance for Loan Losses

We maintain an allowance for loan losses that we believe is adequate to absorb probable losses inherent in our loan portfolio. The allowance is increased by the provision for loan losses, which is a charge to current period earnings and decreased by loan charge-offs net of recoveries of prior period loan charge-offs. Loans are charged against the allowance when management believes collection of the principal is unlikely. The allowance consists of amounts reserved for specific loans that management believes may prove uncollectible and amounts generally reserved based on our historical loan loss experience. The specific reserve element is the result of a regular analysis of all our loans and commitments based on credit rating classifications. The general reserve element represents an assessment of potential credit problems and is determined based on loan loss experience of each loan type, general economic conditions, the risk characteristics of various classifications of our loans, credit records of our borrowers, the fair market value of underlying collateral and other factors. We are committed to the early recognition of problems and to maintaining a sufficient allowance.

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

Activity in Allowance for Loan Losses

(Dollars are in thousands)

	2005			2004			2003			2002			2001
Balance, beginning of year	$	5,685		$	4,850		$	4,055		$	3,076		$	2,730
Loans charged-off:
Commercial		(225	)		(133	)		(298	)		(47	)		(4	)
Real estate mortgage		—			(112	)		(85	)		(159	)		(92	)
Consumer		(134	)		(105	)		(151	)		(160	)		(208	)
Total loans charged-off		(359	)		(350	)		(534	)		(366	)		(304	)
Recoveries on loans previously charged-off:
Commercial		52			7			29			1			4
Real estate mortgage		31			3			24			3			43
Consumer		17			35			33			22			26
Total loan recoveries		100			45			86			26			73
Net loans charged-off		(259	)		(305	)		(448	)		(340	)		(231	)
Provision for loan losses charged to expense		1,065			1,270			1,243			644			577
Acquisition of CSB		—			—			—			675			—
Adjustment relating to sale of branches		—			(130	)		—			—			—
Balance, end of year	$	6,491		$	5,685		$	4,850		$	4,055		$	3,076
Total loans at year end	$	516,658		$	441,005		$	413,898		$	333,721		$	244,425
Average loans outstanding	$	482,819		$	421,229		$	374,567		$	261,511		$	227,792
Allowance for loan losses to total loans at year end		1.26	%		1.29	%		1.17	%		1.22	%		1.26	%
Net charge-offs to average loans outstanding		0.05	%		0.07	%		0.12	%		0.13	%		0.10	%

Non-performing assets consist of non-accrual loans, loans past due 90 days or more and still accruing interest, other real estate owned (“OREO”) and repossessed assets other than real estate. We place loans on non-accrual status when they are past due 90 days and management believes the borrower’s financial condition, after giving consideration to economic conditions and collection efforts, is such that collection of interest is doubtful. When we place a loan on non-accrual status, interest accruals cease and uncollected interest is reversed and charged against current income. Subsequent collections reduce the principal balance of the loan until the loan is returned to accrual status.

At December 31, 2005 non-accrual loans totaled $852,000. This consisted of an aggregate $502,000 in real estate related loans (6 loans), $41,000 in a mobile home loan (1 loan), $240,000 in a loan collateralized by inventory and accounts receivable (1 loan), and several vehicle, equipment and other miscellaneous loans aggregating $69,000 (5 loans). At December 31, 2005, loans that were past due 90 or more days and still accruing interest totaled $658,000.

There was no other real estate owned (OREO) at December 31, 2005. At December 31, 2005 repossessed assets other than real estate totaled $39,000. This represents two repossessed vehicles.

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Total non-performing assets as of December 31, 2005, increased $244,000 or 19% to $1,549,000, compared to $1,305,000 as of December 31, 2004. Non-performing assets, as a percentage of total assets at December 31, 2005 and December 31, 2004, were 0.18% and 0.17%, respectively. We believe the allowance for loan losses at December 31, 2005 was adequate.

Interest income not recognized on non accrual loans was approximately $35,000, $40,000 and $10,000 for the years ended December 31, 2005, 2004 and 2003, respectively. Interest income recognized on impaired loans was approximately $18,000, $48,000 and $22,000 for the years ended December 31, 2005, 2004 and 2003, respectively. The average recorded investment in impaired loans during 2005, 2004 and 2003 were $987,000, $1,103,000 and $333,000, respectively. The table below summarizes non-performing assets for the periods provided.

Non-Performing Assets

(Dollars are in thousands)

	December 31,
	2005			2004			2003			2002			2001
Non-accrual loans	$	852		$	890		$	1,078		$	402		$	580
Past due loans 90 days or more and still accruing interest		658			7			246			996			64
Other real estate owned (“OREO”)		—			384			282			65			—
Repossessed assets other than real estate		39			24			35			19			15
Total non-performing assets	$	1,549		$	1,305		$	1,641		$	1,482		$	659
Total non-performing assets as a percentage of total assets		0.18	%		0.17	%		0.27	%		0.30	%		0.19	%
Allowance for loan losses as a percentage of non-performing assets		419	%		436	%		296	%		274	%		467	%
Restructured loans	$	—		$	—		$	—		$	—		$	—
Recorded investment in impaired loans	$	784		$	1,053		$	368		$	433		$	163
Allowance for loan losses related to impaired loans	$	443		$	406		$	132		$	124		$	71

We are continually analyzing our loan portfolio in an effort to recognize and resolve our problem assets as quickly and efficiently as possible. While we believe we use the best information available at the time to make a determination with respect to the allowance for loan losses, we recognize that many factors can adversely impact various segments of our markets, and subsequent adjustments in the allowance may be necessary if future economic indications or other factors differ from the assumptions used in making the initial determination or if regulatory policies change. We continuously focuses our attention on promptly identifying and providing for potential problem loans, as they arise. Although the total allowance for loan losses is available to absorb losses from all loans, management allocates the reserve among the general loan portfolio categories for informational and regulatory reporting purposes. Regulatory examiners may require us to recognize additions to the allowance based upon the regulators’ judgments about the information available to them at the time of their examination, which may differ from our judgments about the allowance for loan losses.

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While no portion of the allowance is in any way restricted to any individual loan or group of loans, and the entire allowance is available to absorb losses from any and all loans, the following table summarizes the Company’s allocation of allowance for loan losses for the periods presented.

Allocation of allowance for loan losses
(Dollars are in thousands)
	December 31,
	2005			2004			2003			2002			2001
Real estate loans:
Residential	$	1,093		$	876		$	815		$	854		$	603
Commercial		2,949			2,562			1,927			1,789			1,442
Construction		498			324			237			290			245
Total real estate loans		4,540			3,762			2,979			2,933			2,290
Commercial		1,056			1,184			1,301			724			479
Consumer and other loans		792			665			570			398			307
Unallocated		103			74			—			—			—
Total	$	6,491		$	5,685		$	4,850		$	4,055		$	3,076
Percentage of allowance for loan losses to total loans in each category
	December 31,
	2005			2004			2003			2002			2001
Real estate loans:
Residential		0.74	%		0.67	%		0.58	%		0.75	%		0.72	%
Commercial		1.35	%		1.42	%		1.22	%		1.52	%		1.63	%
Construction		1.37	%		1.62	%		1.40	%		1.29	%		1.37	%
Total real estate loans		1.13	%		1.14	%		0.94	%		1.15	%		1.20	%
Commercial		1.66	%		1.82	%		2.20	%		1.66	%		1.55	%
Consumer and other loans		1.57	%		1.42	%		1.43	%		1.11	%		1.32	%
Total		1.26	%		1.29	%		1.17	%		1.21	%		1.26	%

Bank Premises and Equipment

Bank premises and equipment was $28,909,000 at December 31, 2005, compared to $25,669,000 at December 31, 2004, an increase of $3,240,000, or 12.6%. The increase resulted in purchases of $4,884,000 less depreciation of $1,642,000 and the sale of a small piece of equipment with a book value of $2,000. We purchased land for two future branch sites. In Osceola County, we purchased a site for approximately $1,000,000, and in Sumter County, we purchased a site for approximately $325,000. We also have deposits on several other parcels of land that we may or may not purchase. These deposits are approximately $45,000. We also constructed an addition to the main office of our CSWFL bank (approximately $450,000), constructed a two story brick branch office in Lake Wales, Florida (approximately $1,500,000), and undertook several other minor remodeling and land improvement projects aggregating approximately $461,000. We purchased approximately $705,000 of furniture, fixtures and equipment during the year, and we increased our current construction in progress (several remodeling projects and the build out of a second floor in one of our newer two story branch office buildings (approximately $106,000)).

45

Deposits

Total deposits increased $57,707,000 to $717,337,000 as of December 31, 2005, compared to $659,630,000 at December 31, 2004. We do not rely on purchased or brokered deposits as a source of funds. Instead, the generation of deposits within our market area serves as our primary source of funds for investment principally in loans. The tables below summarize selected deposit information for the periods indicated.

Average deposit balance by type and average interest rates

(Dollars are in thousands)

	2005				2004				2003
	Average Balance		Average Rate		Average Balance		Average Rate		Average Balance		Average Rate
Non interest bearing demand deposits	$	182,103	0.00	%	$	139,084	0.00	%	$	95,424	0.00	%
NOW accounts		99,909	0.32	%		87,710	0.30	%		68,155	0.38	%
Money market accounts		105,625	1.42	%		105,184	1.01	%		83,828	1.06	%
Savings accounts		48,739	0.41	%		44,767	0.30	%		35,806	0.40	%
Time deposits		241,773	3.30	%		207,697	2.76	%		205,739	2.93	%
Total	$	678,149	1.48	%	$	584,442	1.23	%	$	488,952	1.50	%

Maturity of time deposits of $100,000 or more

(Dollars are in thousands)

	December 31,
	2005		2004		2003
Three months or less	$	28,106	$	15,261	$	18,082
Three through six months		24,057		16,678		20,819
Six through twelve months		31,364		13,886		12,109
Over twelve months		46,672		41,339		30,823
Total	$	130,199	$	87,164	$	81,833

Repurchase Agreements

We, through our subsidiary Banks, enter into borrowing arrangements with retail business customers by agreements to repurchase (“repurchase agreements”) under which we pledge investment securities owned and under our control as collateral against the one-day borrowing arrangement. The daily average balance of these short-term borrowing agreements for the years ended December 31, 2005, 2004 and 2003, was approximately $38,210,000, $26,110,000 and $15,562,000, respectively. Interest expense for the same periods was approximately $1,013,000, $193,000 and $73,000, respectively, resulting in an average rate paid of 2.65%, 0.74% and 0.47% for the years ended December 31, 2005, 2004, and 2003, respectively. The table below summarizes our repurchase agreements for the periods presented.

Schedule of short-term borrowings (1)

(Dollars are in thousands)

	Maximum Outstanding at any month end		Average balance		Average interest rate during the year		Ending balance		Weighted average interest rate at year end
Year ended December 31,
2005	$	49,046	$	38,210	2.65	%	$	41,811	3.38	%
2004	$	35,167	$	26,110	0.74	%	$	24,627	1.56	%
2003	$	24,366	$	15,562	0.47	%	$	17,465	0.28	%

(1) Consists of securities sold under agreements to repurchase

46

Other borrowed funds

From time to time we borrow on a short-term basis, usually over-night, either through Federal Home Loan Bank advances or Federal Funds Purchased. At December 31, 2005 we had an over-night borrowing of this type of $1,000,000 outstanding. The interest rate was 4.75%. During 2005, our average balance outstanding was $407,000, with an average interest rate of 3.93%. We did not have any of these types of transactions during 2004.

Corporate debenture

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 million. 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 rate is subject to change quarterly. The rate in effect during the quarter ended December 31, 2005 was 7.07%. The corporate debenture and the trust preferred security each have 30-year lives. The trust preferred security and the corporate debenture are callable by the Company or the Trust, at their respective option after five years, and sooner in specific events, subject to prior approval by the Federal Reserve Board, if then required. Related loan origination costs of $188,000 were capitalized and are being amortized to interest expense over a five year period. The Company has treated the trust preferred security as Tier 1 capital up to the maximum amount allowed, and the remainder as Tier 2 capital for federal regulatory purposes.

Securities

We account for our investments at fair value and classifies them as available for sale. Unrealized holding gains and losses are included as a separate component of shareholders’ equity, net of the effect of deferred income taxes.

A decline in the market value of any available-for-sale security below cost that is deemed to be other-than-temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is other-than-temporary, we consider whether we have the ability and intent to hold the investment until a market price recovery and consider whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year-end, and forecasted performance of the security.

If a security has a decline in fair value below its amortized cost that is other than temporary, then the security will be written down to its new cost basis by recording a loss in the statement of operations. We do not engage in trading activities as defined in Statement of Financial Accounting Standard Number 115.

Our available for sale portfolio totaled $218,841,000 at December 31, 2005 and $191,400,000 at December 31, 2004, or 25% and 25%, respectively, of total assets. See the tables below for a summary of security type, maturity and average yield distributions.

47

We use our security portfolio primarily as a source of liquidity and a base from which to pledge assets for repurchase agreements and public deposits. When our liquidity position exceeds expected loan demand, other investments are considered as a secondary earnings alternative. Typically, we remain short-term (under 5 years) in our decision to invest in certain securities. As these investments mature, they will be used to meet cash needs or will be reinvested to maintain a desired liquidity position. We have designated all of our securities as available for sale to provide flexibility, in case an immediate need for liquidity arises. We believe the composition of the portfolio offers flexibility in managing our liquidity position and interest rate sensitivity, without adversely impacting our regulatory capital levels. The available for sale portfolio is carried at fair market value and had a net unrealized loss of approximately $2,831,000 at December 31, 2005, compared to $1,236,000 at December 31, 2004.

We invest primarily in direct obligations of the United States, obligations guaranteed as to the principal and interest by the United States, mortgage backed securities and obligations of agencies of the United States. In addition, we enter into federal funds transactions with our principal correspondent banks, and act as a net seller of such funds. The Federal Reserve Bank and the Federal Home Loan Bank also require equity investments to be maintained by us.

The tables below summarize the maturity distribution of securities, weighted average yield by range of maturities, and distribution of securities for the periods provided.

Maturity Distribution of Investment Securities

(Dollars are in thousands)

	December 31, 2005
	Amortized Cost		Estimated Fair Value
AVAILABLE-FOR-SALE
U.S. Treasury and government agencies, mortgage back securities, and obligations of State and political Subdivisions:
One year or less	$	75,118	$	74,596
Over one through five years		110,488		108,558
Over five through ten years		33,859		33,480
Over ten years		635		635
Federal Reserve Bank stock		773		773
Federal Home Loan Bank stock		699		699
Other equity investment		100		100
Total	$	221,672	$	218,841

Weighted Average Yield by Range of Maturities

(average yields on securities available for sale are calculated based on amortized cost)

(tax equivalent basis is deemed immaterial)

	Dec 31, 2005
One year or less	2.70	%
Over one through five years	3.84	%
Over five through ten years	4.65	%
Over ten years (variable rate security)	4.37	%

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Distribution of Investment Securities

(Dollars are in thousands)

	December 31, 2005				December 31, 2004				December 31, 2003
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
AVAILABLE-FOR-SALE
US Treasury securities	$	94,396	$	93,734	$	121,438	$	120,809	$	58,752	$	58,891
US Government agencies		26,817		26,491		21,826		21,717		7,999		7,988
State, county, & municipal		1,135		1,129		635		635		635		635
Mortgage-backed securities		97,452		95,615		47,250		46,752		26,662		26,565
Federal Reserve Bank stock		773		773		674		674		566		566
Federal Home Loan Bank stock		699		699		413		413		612		612
Other investment		400		400		400		400		100		100
Total	$	221,672	$	218,841	$	192,636	$	191,400	$	95,326	$	95,357

Liquidity and Market Risk Management

Market and public confidence in our financial strength and financial institutions in general will largely determine our access to appropriate levels of liquidity. This confidence is significantly dependent on our ability to maintain sound asset quality and appropriate levels of capital reserves.

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 our liquidity position by giving consideration to both on- and off-balance sheet sources of and demands for funds on a daily and weekly basis.

Liquidity risk involves the risk of being unable to fund assets with the appropriate duration and rate-based liabilities, as well as the risk of not being able to meet unexpected cash needs. Liquidity planning and management are necessary to ensure the ability to fund operations cost-effectively and to meet current and future potential obligations such as loan commitments, lease obligations, and unexpected deposit outflows. In this process, we focus on both assets and liabilities and on the manner in which they combine to provide adequate liquidity to meet our needs. While our liquidity monitoring and management considers both present and future demands for and sources of liquidity, the following table of contractual commitments focuses only on our future obligations. In the table, all deposits with indeterminate maturities, such as demand deposits, checking accounts, savings accounts and money market accounts, are presented as having a maturity of one year or less.

	December 31, 2005
(in thousands of dollars)	Total		Due in one year or less		Due over one year and less than three years		Due over three years and less than five years		Due over five years
Contractual commitments:
Deposit maturities	$	497,893	$	387,351	$	71,339	$	39,179	$	24
Securities sold under agreements to repurchase		41,811		41,811		—		—		—
Other borrowed funds		1,000		1,000		—		—		—
Corporate debenture		10,000		—		—		—		10,000
Operating lease obligations		1,180		379		568		233		—
Total	$	551,884	$	430,541	$	71,907	$	39,412	$	10,024

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Interest rate sensitivity refers to the responsiveness of interest-earning assets and interest-bearing liabilities to changes in market interest rates. The rate sensitive position, or gap, is the difference in the volume of rate-sensitive assets and liabilities, at a given time interval, including both floating rate instruments and instruments which are approaching maturity. The measurement of our interest rate sensitivity, or gap, is one of the principal techniques we use in our asset/liability management effort. Each of our Banks, generally attempts to maintain a range, set by policy, between rate-sensitive assets and liabilities by repricing periods. Each of our Banks set their own range, approved by their board of directors. Generally, the range is between 1.25 and 0.75. If any of our Banks fall outside their pre-approved range, it requires board action and board approval, by that particular Bank’s board of directors.

The asset mix of our balance sheet is evaluated continually in terms of several variables: yield, credit quality, and appropriate funding sources and liquidity. Management of the liability mix of the balance sheet focuses on expanding the various funding sources.

Our gap and liquidity positions are reviewed periodically to determine whether or not changes in policies and procedures are necessary to achieve financial goals. At December 31, 2005, approximately 52% of total gross loans were adjustable rate and 47% of total investments (includes investment securities, federal funds sold and money market) either reprice or mature in less than one year. Deposit liabilities consisted of approximately $89,309,000 (12%) in NOW accounts, $143,432,000 (20%) in money market accounts and savings, $265,152,000 (37%) in time deposits and $219,444,000 (31%) in non-interest bearing demand accounts.

The table below presents the market risk associated with our financial instruments. In the “Rate Sensitivity Analysis” table, rate sensitive assets and liabilities are shown by maturity or repricing periods, separating fixed and variable interest rates. The estimated fair value of each instrument category is also shown in the table. While these estimates of fair value are based on our judgment of the most appropriate factors, there is no assurance that, if we had to dispose of such instruments at December 31, 2005, the estimated fair values would necessarily have been achieved at that date, since market values may differ depending on various circumstances. The estimated fair values at December 31, 2005, should not necessarily be considered to apply at subsequent dates.

50

RATE SENSITIVITY ANALYSIS

December 31, 2005

(Dollars are in thousands)

(Dollars in thousands)	0-1 Yr			1-2 Yrs			2-3 Yrs			3-4 Yrs			4-5 Yrs			5 Yrs +			TOTAL			Est. Fair Value
INTEREST EARNING ASSETS:
Loans
Fixed rate loans (3)	$	22,367		$	23,199		$	52,887		$	47,700		$	48,656		$	54,617		$	249,426		$	245,140
Average interest rate		6.89	%		6.96	%		6.39	%		6.63	%		7.19	%		7.06	%		6.84	%
Variable rate loans (3)		203,383			12,868			16,942			9,554			15,876			9,375			267,998			267,998
Average interest rate		7.57	%		6.56	%		6.29	%		6.34	%		6.55	%		6.19	%		7.29	%
Investment securities (1)
Fixed rate investments		75,118			45,430			30,454			23,130			11,474			33,859			219,465			216,634
Average interest rate		2.70	%		3.74	%		3.80	%		3.92	%		4.16	%		4.65	%		3.57	%
Variable rate investments		635			—			—			—			—			—			635			635
Average interest rate		4.37	%																	4.37	%
Federal funds sold (4)		52,977			—			—			—			—			—			52,977			52,977
Average interest rate		4.21	%																	4.21	%
Other earning assets (2)		1,472			—			—			—			—			—			1,472			1,472
Average interest rate		3.37	%																	3.37	%
Bank owned life insurance		6,043			—			—			—			—			—			6,043			6,043
Average interest rate		4.34	%																	4.34	%
Total interest-earning assets	$	361,995		$	81,497		$	100,283		$	80,384		$	76,006		$	97,851		$	798,016		$	790,899
Average interest rate		5.95	%		5.10	%		5.59	%		5.82	%		6.60	%		6.14	%		5.89	%
INTEREST BEARING LIABILITIES
NOW	$	89,309		$	—		$	—		$	—		$	—		$	—		$	89,309		$	89,309
Average interest rate		0.34	%																	0.34	%
Money market		96,082			—			—			—			—			—			96,082			96,082
Average interest rate		1.92	%																	1.92	%
Savings		47,350			—			—			—			—			—			47,350			47,350
Average interest rate		0.49	%																	0.49	%
CDs $100,000 & over		83,527			19,644			7,154			14,052			5,822						130,199			130,823
Average interest rate		3.37	%		4.21	%		4.30	%		4.69	%		4.65	%		3.75	%
CDs under $100,000		71,083			31,478			13,063			13,954			5,351			24			134,953			135,201
Average interest rate		3.13	%		4.03	%		4.13	%		4.58	%		4.41	%		4.50	%		3.64	%
Securities sold under agreements to repurchase		41,811			—			—			—			—			—			41,811			41,811
Average interest rate		3.38	%																	3.38	%
Corporate debenture		10,000			—			—			—			—			—			10,000			10,000
Average interest rate		7.07	%																	7.07	%
Other borrowed funds		1,000			—			—			—			—			—			1,000			1,000
Average interest rate		4.50	%																	4.50	%
Total interest-bearing liabilities	$	440,162		$	51,122		$	20,217		$	28,006		$	11,173		$	24		$	550,704		$	551,576
Average interest rate		2.18	%		4.10	%		4.19	%		4.64	%		4.54	%		4.50	%		2.60	%
Interest sensitivity gap		(78,167	)		30,375			80,066			52,378			64,833			97,827
Cumulative gap		(78,167	)		(47,792	)		32,274			84,652			149,485			247,312
Cumulative gap to total assets		(9.0	)%		(5.5	)%		3.7	%		9.7	%		17.2	%		28.4	%
Cumulative gap (RSA/RSL) (5)		0.82			0.90			1.06			1.16			1.27			1.45

(1) Securities are shown at amortized cost.

(2) Represents interest earning Federal Reserve stock and Federal Home Loan Bank stock.

(3) Loans are shown at gross value.

(4) Includes fed funds sold and money market accounts held at a large regional bank.

(5) Rate sensitive assets (RSA) divided by rate sensitive liabilities (RSL), cumulative basis.

50

Primary Sources and Uses of Funds

Our primary sources of funds during the year ended December 31, 2005 were a $57,775,000 increase in deposits, net proceeds of $34,854,000 received from our public stock offering, $613,000 of proceeds received upon the exercise of stock options by our employees, $10,662,000 in funds provided by operations, a $18,184,000 increase in borrowings, and $392,000 proceeds from the sale of OREO.

Our primary uses of funds during 2005 included a $76,143,000 increase in net loans outstanding, a $4,884,000 increase (purchases) in premises and equipment, a $29,417,000 increase in investment securities net of maturities/sales, $6,000,000 purchase of bank owned life insurance, $1,225,000 in dividends paid to our shareholders and a $4,811,000 increase in federal funds sold and other cash items.

Capital Resources

Total shareholders’ equity at December 31, 2005 was $97,241,000, or 11.2% of total assets compared to $57,664,000, or 7.6% of total assets at December 31, 2004. The $39,577,000 increase was primarily the result of the following items: net proceeds received from our public stock offering ($34,854,000), plus net income ($6,330,000), plus exercise of stock options ($613,000), less dividends paid ($1,225,000), less net change of unrealized losses in securities available for sale ($995,000).

The 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. Each of our Company’s subsidiary banks’ objective is to maintain its current status as a “well-capitalized institution” as that term is defined by its regulators.

Under the terms of the guidelines, banks must meet minimum capital adequacy based upon both total assets and risk-adjusted assets. All banks are required to maintain a minimum ratio of total capital to risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to risk-weighted assets of 4%. Adherence to these guidelines has not had an adverse impact on our Company.

Selected consolidated capital ratios at December 31, 2005, and 2004 were as follows:

Capital Ratios

(Dollars are in thousands)

	Actual				Well Capitalized				Excess Amount
	Amount		Ratio		Amount		Ratio
As of December 31, 2005:
Total capital: (to risk weighted assets):	$	110,344	19.2	%	$	57,379	10.0	%	$	52,965
Tier 1 capital: (to risk weighted assets):	$	103,853	18.1	%	$	34,427	6.0	%	$	69,426
Tier 1 capital: (to average assets):	$	103,853	12.4	%	$	42,029	5.0	%	$	61,824
As of December 31, 2004:
Total capital: (to risk weighted assets):	$	68,894	12.5	%	$	47,163	10.0	%	$	21,731
Tier 1 capital: (to risk weighted assets):	$	63,209	11.3	%	$	28,298	6.0	%	$	34,911
Tier 1 capital: (to average assets):	$	63,209	7.8	%	$	36,755	5.0	%	$	26,454

52

Effects of Inflation and Changing Prices

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on the performance of a financial institution than the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services, increases in inflation generally have resulted in increased interest rates. In addition, inflation affects financial institutions’ increased cost of goods and services purchased, the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and shareholders’ equity. Commercial and other loan originations and refinancings tend to slow as interest rates increase, and can reduce our earnings from such activities.

Off-Balance Sheet Arrangements

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

Accounting Pronouncements

In March 2004, the SEC issued SAB No. 105, Application of Accounting Principles to Loan Commitments. This staff accounting bulletin summarizes the views of the staff regarding the application of generally accepted accounting principles to loan commitments accounted for as derivative instruments. In particular, this bulletin clarifies whether the entity can consider the expected future cash flows related to the associated servicing of the loan and adds additional disclosures to the annual consolidated financial statements. The adoption of this bulletin did not have a material effect on our consolidated financial statements.

FASB Statement No. 123R, Accounting for Stock-Based Compensation, requires all public companies to record compensation expense for stock options provided to employees in return for employee service. The expense is measured at the fair value of the options when granted, and is expensed over the employee service period, which is the vesting period of the options. This will apply to awards granted or modified beginning with the next fiscal year beginning after June 15, 2005. Compensation expense will also be recorded for prior option grants that vest after the date of adoption. The effect on results of operations will depend on the level of future option grants and the calculation of the fair value of the options granted at such future date, as well as the vesting periods provided, and thus cannot currently be predicted. Options existing at December 31, 2005, that will vest after adoption date are expected to result in additional compensation expense of approximately $500,000 in 2006 and $440,000 in 2007.

On September 14, 2005, the FASB decided to include in the draft final FASB Staff Position (FSP) FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” guidance similar to that provided in EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” regarding the accounting for debt securities subsequent to an other-than-temporary impairment. The Board also decided to add a footnote to clarify that the final FSP will not address when a debt security should be designated as non accrual or how

53

to subsequently report income on a non accrual debt security. In addition, the Board decided that (1) the FSP would be applied prospectively and (2) the effective date would be reporting periods beginning after December 15, 2005. The adoption of this Statement is not expected to have a material effect on our consolidated financial statements.

Item 7 A. Quantitative and qualitative disclosures about market risk.

Market risk is the risk of economic loss from adverse changes in the fair value of financial instruments due to changes in (a) interest rates, (b) foreign exchange rates, or (c) other factors that relate to market volatility of the rate, index, or price underlying the financial instrument. Our market risk is composed primarily of interest rate risk. Each of our subsidiary Banks has an Asset/Liability Committee (“ALCO”) which is responsible for reviewing the interest rate sensitivity position, and establishing policies to monitor and limit the exposure to interest rate risk for their specific Bank. Substantially all of our interest rate risk exposure relates to the financial instrument activity of each of our subsidiary Banks. As such, the board of directors of each subsidiary Bank is responsible to review and approve the policies and guidelines established by their Bank’s ALCO.

The primary objective of asset/liability management is to provide an optimum and stable net interest margin, after-tax return on assets and return on equity capital, as well as adequate liquidity and capital. Interest rate risk is measured and monitored through gap analysis, which measures the amount of repricing risk associated with the balance sheet at specific points in time. See “Liquidity and Market Risk Management” presented in Item 7 above for quantitative disclosures in tabular format, as well as additional qualitative disclosures.

Item 8. Financial Statements and Supplementary Data

The financial statements of our Company as of December 31, 2005 and 2004 and for the years ended December 31, 2005, 2004 and 2003 are set forth in this Form 10-K at page 60.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures. The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed within 90 days of the filing date of this report, the Chief Executive and Chief Financial officers of the Company concluded that the Company’s disclosure controls and procedures were adequate.

(b) Changes in internal controls. The Company made no significant changes in its internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of those controls by the Chief Executive and Chief Financial officers.

54

(c) Management’s report on internal control over financial reporting. Management is responsible for establishing and maintaining effective internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations, also referred to as the Treadway Commission. Based upon our evaluation under the framework in Internal Control – Integrated Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2005. Management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Item 9B. Other Information.

Not applicable.

55

PART III

Item 10. Directors and Executive Officers

Our Company has a Code of Ethics that applies to its principal executive officer and principal financial officer (who is also its principal accounting officer), a copy of which is included with this Form 10-K as Exhibit 14.1. The information contained under the sections captioned “Directors” and “Executive Officers” under “Proposal One – Election of Directors,” and in the sections captioned “Audit Committee Report” and “Section 16(a) Reporting Requirements,” in the registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 25, 2006, to be filed with the SEC pursuant to Regulation 14A within 120 days of their registrant’s fiscal year end (the “Proxy Statement”), is incorporated herein by reference.

Item 11. Compensation of Executive Officers and Directors

The information contained in the sections captioned “Information About the Board of Directors and Its Committees” under “Proposal One – Election of Directors,” and the sections captioned “Executive Compensation and Benefits,” “Compensation Committee Report,” and “Performance Graph,” in the Proxy Statement, is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Information contained in the section captioned “Directors” and “Management and Principal Stock Ownership” under “Election of Directors,” and under the table captioned “Equity Compensation Plan Information,” in the Proxy Statement, is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

The information contained in the section entitled “Certain Transactions” under “Executive Compensation and Benefits” in the Proxy Statement is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

The information contained in the section captioned “Independent Auditors” in the Proxy Statement is incorporated herein by reference.

Item 15. Exhibits and Financial Statement Schedules

(a) The following documents are filed as part of this report:

1. Financial Statements

Reports of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2005 and 2004

Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2005, 2004 and 2003

Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003

56

Consolidated Statement of changes in stockholders’ Equity and Comprehensive Income for the years ended December 31, 2005, 2004 and 2003

Notes to Consolidated Financial Statements

2. Financial Statement Schedules

All schedules have been omitted as the required information is either inapplicable or included in the Notes to Consolidated Financial Statements.

3. Exhibits

3.1	-	Articles of Incorporation of CenterState Banks of Florida, Inc. (Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement No. 333-95087 (the “Registration Statement”))
3.2	-	Bylaws of CenterState Banks of Florida, Inc. (Incorporated by reference to Exhibit 3.2 to the Registration Statement)
4.1	-	Specimen Stock Certificate of CenterState Banks of Florida, Inc. (Incorporated by reference to Exhibit 4.2 to the Registration Statement)
10.1	-	CenterState Banks of Florida, Inc. Stock Option Plan (Incorporated by reference to Exhibit 10.1 to the Registration Statement)*
10.2	-	CenterState Banks of Florida, Inc. Employee Stock Purchase Plan (Incorporated by reference to Appendix A to the Company’s Proxy Statement dated March 25, 2004 )*
10.3	-	Form of CenterState Banks of Florida, Inc. Split Dollar Agreement (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K dated January 11, 2006)
14.1	-	Code of Ethics (Incorporated by reference to Exhibit 14.1 to the Company’s December 31, 2003 Form 10-K dated March 26, 2004)
21.1	-	List of Subsidiaries of CenterState Banks of Florida, Inc.
23.1	-	Consent of KPMG LLP
31.1	-	Certification of President and Chief Executive Officer under Section 302 of the Sarbanes–Oxley Act of 2002
31.2	-	Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
32.1	-	Certification of President and Chief Executive Officer under Section 906 of the Sarbanes–Oxley Act of 2002
32.2	-	Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002

* Represents a management contract or compensatory plan or arrangement required to be filed as an exhibit.

57

CENTERSTATE BANKS OF FLORIDA, INC. and SUBSIDIARIES

Index to consolidated financial statements

Reports of Independent Registered Public Accounting Firm	60
Consolidated Balance Sheets as of December 31, 2005 and 2004	62
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003	63
Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income for the years ended December 31, 2005, 2004 and 2003	64
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003	65
Notes to Consolidated Financial Statements	67

58

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Centerstate Banks of Florida, Inc.:

We have audited the accompanying consolidated balance sheets of CenterState Banks of Florida, Inc. and subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above represent fairly, in all material respects, the financial position of CenterState Banks of Florida, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of CenterState Banks of Florida, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 10, 2006 expressed an unqualified opinion on management’s assessment of, and the effectiveness of, internal control over financial reporting.

/s/ KPMG LLP

March 10, 2006

Tampa, Florida

Certified Public Accountants

59

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

CenterState Banks of Florida, Inc.:

We have audited management’s assessment, included in the accompanying Report of Management on Internal Control over Financial Reporting, that CenterState Banks of Florida, Inc. and subsidiaries (the Company) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

60

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of CenterState Banks of Florida, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2005, and our report dated March 10, 2006 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

March 10, 2006

Tampa, Florida

Certified Public Accountants

61

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2005 and 2004

(in thousands of dollars, except per share data)

	2005			2004
Assets
Cash and due from banks	$	41,949		$	27,306
Federal funds sold and money market account		52,977			62,809
Investment securities available for sale, at fair value		218,841			191,400
Loans, less allowance for loan losses of $6,491 and $5,685 at December 31, 2005 and 2004, respectively		510,167			435,320
Accrued interest receivable		3,610			2,417
Bank premises and equipment, net		28,909			25,669
Other real estate owned		—			384
Deferred income taxes, net		2,712			1,884
Goodwill		4,675			4,675
Core deposit intangible		479			551
Bank owned life insurance		6,043			—
Prepaid expenses and other assets		1,159			1,364
Total assets	$	871,521		$	753,779
Liabilities and Stockholders’ Equity
Deposits:
Interest bearing	$	497,893		$	484,558
Noninterest bearing		219,444			175,072
Total deposits		717,337			659,630
Securities sold under agreement to repurchase		41,811			24,627
Corporate debenture		10,000			10,000
Other borrowed funds		1,000			—
Accrued interest payable		582			373
Accounts payable and accrued expenses		3,430			1,365
Total liabilities		774,160			695,995
Minority interest		120			120
Stockholders’ equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized, no shares issued or outstanding		—			—
Common stock, $.01 par value: 20,000,000 shares authorized; 5,250,386 and 4,068,713 shares issued and outstanding at December 31, 2005 and 2004, respectively		52			41
Additional paid-in capital		75,001			39,545
Retained earnings		23,954			18,849
Accumulated other comprehensive income		(1,766	)		(771	)
Total stockholders’ equity		97,241			57,664
Commitments and contingent liabilities
Total liabilities and stockholders’ equity	$	871,521		$	753,779

See accompanying notes to the consolidated financial statements

62

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

Years ended December 31, 2005, 2004 and 2003

(in thousands of dollars, except per share data)

	2005			2004		2003
Interest income:
Loans	$	32,524		$	25,434	$	23,567
Investment securities		6,101			2,940		1,584
Federal funds sold and money market		1,641			714		651
		40,266			29,088		25,802
Interest expense:
Deposits		10,011			7,185		7,315
Securities sold under agreement to repurchase		1,013			193		73
Corporate debentures		682			496		126
Other borrowed funds		16			—		18
		11,722			7,874		7,532
Net interest income		28,544			21,214		18,270
Provision for loan losses		1,065			1,270		1,243
Net interest income after provision for loan losses		27,479			19,944		17,027
Other income:
Service charges on deposit accounts		3,222			3,113		2,925
Other service charges and fees		2,153			1,808		1,763
Gain on sale of branches		—			1,844		—
Loss on sale of securities		(3	)		—		(1	)
Gain on sale of other real estate owned		8			11		—
		5,380			6,776		4,687
Other expenses:
Salaries, wages and employee benefits		12,623			10,440		9,055
Occupancy expense		2,780			2,419		2,316
Depreciation of premises and equipment		1,642			1,526		1,505
Supplies, stationary and printing		522			456		473
Marketing expenses		447			378		277
Data processing expense		961			864		796
Legal, audit and other professional fees		577			626		512
Other expenses		3,253			3,071		2,613
Total other expenses		22,805			19,780		17,547
Income before provision for income taxes		10,054			6,940		4,167
Provision for income taxes		3,724			2,567		1,541
Net income	$	6,330		$	4,373	$	2,626
Earnings per share:
Basic	$	1.35		$	1.17	$	0.78
Diluted	$	1.31		$	1.14	$	0.77
Common shares used in the calculation of earnings per share:
Basic		4,678,523			3,750,158		3,364,824
Diluted		4,814,597			3,828,154		3,428,819

See accompanying notes to the consolidated financial statements.

63

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

Statements of Changes in Stockholders’ Equity and Comprehensive Income

Years ended December 31, 2005, 2004, and 2003

(in thousands of dollars)

	Common stock		Additional paid-in capital		Retained earnings			Accumulated other comprehensive income (loss)			Total stockholders’ equity			Comprehensive income
Balances at January 1, 2003		34		26,036		13,523			322			39,915
Dividends paid		—		—		(740	)		—			(740	)
Stock options exercised		—		102		—			—			102
Comprehensive income:
Net income		—		—		2,626			—			2,626		$	2,626
Unrealized holding loss on available for sale securities, net of deferred income taxes of $174		—		—		—			(302	)		(302	)		(302	)
Total comprehensive income														$	2,324
Acquisition of CenterState Bank purchase price adjustment		—		362		—			—			362
Balances at December 31, 2003	$	34	$	26,500	$	15,409		$	20		$	41,963
Dividends paid		—		—		(933	)		—			(933	)
Stock options exercised		—		321		—			—			321
Tax effect of tax deduction in excess of book deduction on options exercised during the year		—		33		—			—			33
Comprehensive income:
Net income		—		—		4,373			—			4,373		$	4,373
Unrealized holding loss on available for sale securities, net of deferred income taxes of $476		—		—		—			(791	)		(791	)		(791	)
Total comprehensive income														$	3,582
Shareholder rights offering (net of cost)		7		12,691		—			—			12,698
Balances at December 31, 2004	$	41	$	39,545	$	18,849		$	(771	)	$	57,664
Dividends paid		—		—		(1,225	)		—			(1,225	)
Stock options exercised		—		613		—			—			613
Comprehensive income:
Net income		—		—		6,330			—			6,330		$	6,330
Unrealized holding loss on available for sale securities, net of deferred income taxes of $600		—		—		—			(995	)		(995	)		(995	)
Total comprehensive income														$	5,335
Public stock offering (net of cost)		11		34,843		—			—			34,854
Balances at December 31, 2005	$	52	$	75,001	$	23,954		$	(1,766	)	$	97,241

	2005			2004			2003
Disclosure of reclassification amounts:
Unrealized holding loss arising during the year	$	(995	)	$	(791	)	$	(302	)
Add: reclassified adjustments for loss included in net income, net of income taxes, at December 31, 2005, 2004 and 2003 of $1, $0 and $0, respectively		(2	)		—			—
Net unrealized loss on securities	$	(997	)	$	(791	)	$	(302	)

See accompanying notes to the consolidated financial statements.

64

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31, 2005, 2004 and 2003

(in thousands of dollars)

	2005			2004			2003
Cash flows from operating activities:
Net income	$	6,330		$	4,373		$	2,626
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,065			1,270			1,243
Depreciation of premises and equipment		1,642			1,526			1,505
Amortization of intangibles		4			(58	)		(172	)
Net amortization/accretion of investment securities		378			470			631
Net deferred loan origination fees		231			9			44
Write down of other real estate owned		—			29			—
Gain on sale of other real estate owned		(8	)		(11	)		—
Loss on sale of fixed assets		2			—			—
Deferred income taxes		(228	)		584			(290	)
Realized gain on sale of available for sale securities		3			—			1
Gain on sale of branches		—			(1,844	)		—
Tax deduction in excess of book deduction on options exercised		—			33			—
Bank owned life insurance interest accrual		(43	)		—			—
Cash provided by (used in) changes in:
Net change in accrued interest receivable		(1,193	)		(377	)		(117	)
Net change in prepaid expenses and other assets		205			(554	)		(467	)
Net change in accrued interest payable		209			15			(8	)
Net change in accounts payable and accrued expenses		2,065			580			158
Net cash provided by operating activities		10,662			6,045			5,154
Cash flows from investing activities:
Purchases of investment securities available for sale		(62,899	)		(126,110	)		(57,944	)
Purchases of mortgage backed securities available for sale		(78,570	)		(32,783	)		(30,162	)
Proceeds from callable investment securities available for sale		—			5,000			15,000
Proceeds from maturities of investment securities available for sale		81,500			44,105			20,000
Proceeds from pay-downs of mortgage backed securities available for sale		27,559			11,779			7,441
Proceeds from sales of investment securities available for sale		2,993			229			999
Purchase of bank owed life insurance		(6,000	)		—			—
Increase in loans, net of repayments		(76,143	)		(49,498	)		(80,933	)
Purchases of premises and equipment		(4,884	)		(5,883	)		(4,114	)
Proceeds from sale of other real estate owned		392			497			47
Net cash paid in connection with CSB merger		—			(65	)		(2,335	)
Net cash from branch sales		—			829			—
Increase in goodwill due to cash payments for fractional shares related to CSB merger		—			—			(5	)
Net cash used in investing activities		(116,052	)		(151,900	)		(132,006	)
Cash flows from financing activities:
Net increase in demand and savings deposits		57,775			145,543			97,047
Net increase in securities sold under agreement to repurchase		17,184			7,162			7,460
Issuance of corporate debenture		—			—			10,000
Net increase in other borrowed funds		1,000			—			—
Net proceeds of public stock offering		34,854			—			—
Stock options exercised		613			321			102
Net proceeds of shareholder rights offering					12,698			—
Proceeds from sale of minority interest of subsidiary		—			120			—
Dividends paid		(1,225	)		(933	)		(740	)
Net cash provided by financing activities		110,201			164,911			113,869
Net increase (decrease) in cash and cash equivalents		4,811			19,056			(12,983	)
Cash and cash equivalents, at beginning of year		90,115			71,059			84,042
Cash and cash equivalents, at end of year	$	94,926		$	90,115		$	71,059

65 (Continued)

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31,2005, 2004, and 2003

(in thousands of dollars)

	2005			2004			2003
Supplemental schedule of noncash activities:
Market value adjustment-investment securities available for sale Market value adjustment-investment securities	$	(1,595	)	$	(1,267	)	$	(476	)
Deferred income tax asset		600			476			174
Unrealized loss on investments available for sale	$	(995	)		(791	)	$	(302	)
Transfer of loans to other real estate owned	$	—			617		$	264
Purchase price adjustment related to CSB acquisition	$	—			—		$	362
Cash paid during the year for:
Interest	$	11,476			7,845		$	7,531
Income taxes	$	2,560			2,038		$	1,715

See accompanying notes to the consolidated financial statements.

66

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(amounts are in thousands of dollars, except per share data)

December 31, 2005 and 2004

(1) Nature of Operations and Summary of Significant Accounting Policies

The consolidated financial statements of CenterState Banks of Florida, Inc. (the “Company”) include the accounts of CenterState Banks of Florida, Inc. (the “Parent Company”), its four wholly owned subsidiary banks and an 80% owned subsidiary, C. S. Processing.

The Company, through its subsidiary banks, operates through 26 locations in seven Counties throughout Central Florida, providing traditional deposit and lending products and services to its commercial and retail customers. C.S. Processing is an 80% owned subsidiary at December 31, 2005, which provides item processing services for the Company’s four subsidiary banks and the minority shareholder bank which owns the remaining 20%.

The following is a description of the basis of presentation and the significant accounting and reporting policies, which the Company follows in preparing and presenting its consolidated financial statements.

(a) Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Parent Company, its four wholly owned banking subsidiaries (the “Banks”) and its’ majority owned subsidiary, C.S. Processing. The operations of the Company currently consist primarily of the operations of each of the four banks. All significant intercompany accounts and transactions have been eliminated in consolidation.

(b) Cash Equivalents

For purposes of the statement of cash flows, the Company considers cash and due from banks, federal funds sold, money market and non interest bearing deposits in other banks with a purchased maturity of three months or less to be cash equivalents.

(c) Investment Securities Available for Sale

The Company accounts for its investments at fair value and classifies them as available for sale. Unrealized holding gains and losses are included as a separate component of shareholders’ equity, net of the effect of deferred income taxes.

A decline in the fair value of any available-for-sale security below cost that is deemed to be other-than-temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is other-than-temporary, the Company considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year-end, and forecasted performance of the security.

(d) Loans

Loans receivable that management has the intent and the Company has the ability to hold for the foreseeable future or payoff are reported at their outstanding unpaid principal balance, less the allowance for loan losses and deferred fees on originated loans.

67 (Continued)

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(amounts are in thousands of dollars, except per share data)

December 31, 2005 and 2004

Loan origination fees and the incremental direct cost of loan origination, are capitalized and recognized in income over the contractual life of the loans. If the loan is prepaid, the remaining unamortized fees and costs are charged or credited to interest income. Amortization ceases for non-accrual loans.

Commitment fees and costs relating to the commitments are deferred until the commitment period has expired or the commitment is exercised. If the commitment is exercised during the commitment period, the commitment fee is recognized over the life of the loan as an adjustment of yield.

Loans are placed on nonaccrual status when the loan becomes 90 days past due as to interest or principal, or when the full timely collection of interest or principal becomes uncertain, unless the loan is both well secured and in the process of collection. When a loan is placed on nonaccrual status, the accrued and unpaid interest receivable is written off, accretion of the net deferred loan origination fees cease. The loan is accounted for on the cash or cost recovery method thereafter until qualifying for return to accrual status.

The Company, considering current information and events regarding the borrower’s ability to repay their obligations, considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the secondary market value of the loan, or the fair value of the collateral for collateral dependent loans. Impaired loans are written down to the extent that principal is judged to be uncollectible and, in the case of impaired collateral dependent loans where repayment is expected to be provided solely by the underlying collateral and there is no other available and reliable sources of repayment, are written down to the lower of cost or collateral value. Impairment losses are included in the allowance for loan losses.

(e) Allowance for Loan Losses

The Company follows a consistent procedural discipline and maintains the allowance at a level adequate to absorb probable losses in the loan portfolio at the date of the financial statements. The following is a description of how each portion of the allowance for loan losses is determined.

The Company segregates the loan portfolio for loan loss purposes into the following broad segments: commercial real estate; residential real estate; non real estate commercial loans; and consumer loans. The Company provides for a general allowance for losses inherent in the portfolio by the above categories, which consists of two components. General loss percentages are calculated based upon historical analyses. A supplemental portion of the allowance is calculated for probable inherent losses which exist as of the evaluation date even though they might not have been identified by the more objective processes used for the portion of the allowance described above. This is due to the risk of error and/or inherent imprecision in the process. This portion of the allowance is particularly subjective and requires judgments based on qualitative factors which do not lend themselves to exact mathematical calculations such as; trends in delinquencies and nonaccruals; trends in the historical losses of the portfolio; trends in volume, terms, and portfolio mix; new credit products and/or changes in the geographic distribution of those products; changes in lending policies and procedures; loan review reports on the risk identification process; changes in the outlook for local, regional and national economic conditions; and concentrations of credit risk.

In July 2001, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 102 (“SAB 102”) which expresses certain of the staff’s views on the development, documentation and application of a systematic methodology for determining allowances for loan and lease losses in accordance with U.S.

68 (Continued)

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(amounts are in thousands of dollars, except per share data)

December 31, 2005 and 2004

generally accepted accounting principles. In particular, the guidance focuses on the documentation the staff normally would expect registrants to prepare and maintain in support of their allowances for loan losses. Management believes that the Company complies with the views included in SAB 102.

Regulatory examiners may require the Company to recognize adjustments to the allowance based upon their judgment about the information available to them at the time of their examination.

(f) Bank Premises and Equipment

Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is provided on a straight-line basis over the estimated useful lives of the related assets (3 to 40 years). Leasehold improvements are depreciated over the shorter of their useful lives or the term of the lease. Major renewals and betterments of property are capitalized; maintenance, repairs, and minor renewals and betterments are expensed in the period incurred. Upon retirement or other disposition of the asset, the asset cost and related accumulated depreciation are removed from the accounts, and gains or losses are included in income.

(g) Impairment of Long-Lived Assets

In accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets, assets such as property, plant and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

Goodwill is tested annually for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with FASB Statement No. 141, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. For all periods presented, the annual impairment analysis was performed with no impairment noted.

(h) Goodwill and Intangible Assets

Goodwill represents the excess of costs over fair value of net assets of businesses acquired. The Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets as of January 1, 2002. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable

69 (Continued)

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(amounts are in thousands of dollars, except per share data)

December 31, 2005 and 2004

useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.

The core deposit intangible is amortized over a ten-year period on an accelerated basis using the projected decay rates of the underlying core deposits.

(i) Other Real Estate Owned

Real estate acquired in the settlement of loans is recorded at the lower of cost (principal balance of the former loan plus costs of obtaining title and possession) or estimated fair value, less estimated selling costs. Costs relating to development and improvement of the property are capitalized, whereas those relating to holding the property are charged to operations.

(j) Compensation Programs

Substantially all of the Company’s employees are covered under the Company’s employee benefit plan. The expense of providing this plan is charged to income in the year the expense is incurred.

Certain directors and key employees are covered under the Company’s stock option plans. The Company applies Accounting Principle Board Opinion No. 25 and related interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost for the Company’s stock-based compensation plan been determined consistent with FASB Statement No. 123R, the Company’s net income would have been reduced to the pro forma amounts indicated below (amounts are in thousands of dollars except for per share data):

	December 31,
	2005			2004			2003
Net income, as reported	$	6,330		$	4,373		$	2,626
Deduct total stock-based employee compensation expense determined under fair-value-based method for all awards, net of tax		(369	)		(420	)		(117	)
Pro forma net income	$	5,961		$	3,953		$	2,509
Basic earnings per share, as reported	$	1.35		$	1.17		$	0.78
Deduct per share stock-based employee compensation expense determined under fair-value-based method for all awards, net of tax		(0.08	)		(0.11	)		(0.03	)
Pro forma basic earnings per share	$	1.27		$	1.06		$	0.75
Diluted earnings per share, as reported	$	1.31		$	1.14		$	0.77
Deduct per share stock-based employee compensation expense determined under fair-value-based method for all awards, net of tax		(0.07	)		(0.11	)		(0.04	)
Pro forma diluted earnings per share	$	1.24		$	1.03		$	0.73

(k) Accumulated Other Comprehensive Income

The Company’s accumulated other comprehensive income is the unrealized gain or loss on investment securities available for sale, net of applicable deferred taxes.

70 (Continued)

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(amounts are in thousands of dollars, except per share data)

December 31, 2005 and 2004

(l) Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date. Deferred tax assets are recognized subject to management’s judgment that realization is more likely than not.

(m) Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Significant items subject to estimates and assumptions relate to useful life of intangibles and valuation of goodwill and allowance for loans receivable. Actual results could differ from these estimates.

(n) Segment Reporting

The Company follows SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for reporting information about segments in financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available and that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company derives its revenues from providing similar banking products and services to customers located throughout the Central Florida Region through similar distribution channels and processes. Operating segments consist of the Company’s banking subsidiaries. Management believes that the Company meets the aggregation criteria, as defined by SFAS No. 131, for aggregating its operating segments into the bank segment.

(o) Effect of New Pronouncements

In March 2004, the SEC issued SAB No. 105, Application of Accounting Principles to Loan Commitments. This staff accounting bulletin summarizes the views of the staff regarding the application of generally accepted accounting principles to loan commitments accounted for as derivative instruments. In particular, this bulletin clarifies whether the entity can consider the expected future cash flows related to the associated servicing of the loan and adds additional disclosures to the annual consolidated financial statements. The adoption of this bulletin did not have a material effect on our consolidated financial statements.

FASB Statement No. 123R, Accounting for Stock-Based Compensation, requires all public companies to record compensation expense for stock options provided to employees in return for employee service. The expense is measured at the fair value of the options when granted, and is expensed over the employee service period, which is the vesting period of the options. This will apply to awards granted or modified beginning with the next fiscal year beginning after June 15, 2005. Compensation expense will also be recorded for prior option grants that vest after the date of adoption. The effect on results of operations will depend on the level of future option grants and the calculation of the fair value of the options granted at such future date, as well as the vesting periods provided, and thus cannot currently be predicted. Existing options that will vest after adoption date are expected to result in additional compensation expense of approximately $500 in 2006 and $440 in 2007.

71 (Continued)

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(amounts are in thousands of dollars, except per share data)

December 31, 2005 and 2004

On September 14, 2005, the FASB decided to include in the draft final FASB Staff Position (FSP) FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” guidance similar to that provided in EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” regarding the accounting for debt securities subsequent to an other-than-temporary impairment. The Board also decided to add a footnote to clarify that the final FSP will not address when a debt security should be designated as non accrual or how to subsequently report income on a non accrual debt security. In addition, the Board decided that (1) the FSP would be applied prospectively and (2) the effective date would be reporting periods beginning after December 15, 2005. The adoption of this Statement is not expected to have a material effect on our consolidated financial statements.

(2) Investment Securities Available for Sale

The amortized cost and estimated fair values of investment securities available for sale at December 31, 2005 and 2004, are as follows:

	December 31, 2005
	Amortized cost		Gross Unrealized Gains		Gross unrealized losses			Estimated fair value
U.S. Treasury securities	$	94,396	$	––	$	(662	)	$	93,734
Obligations of U.S. government agencies		26,817		––		(326	)		26,491
Mortgage backed securities		97,452		1		(1,838	)		95,615
Municipal securities		1,135		––		(6	)		1,129
Federal Home Loan Bank stock		699		––		––			699
Federal Reserve Bank stock		773		––		––			773
Other investments		400		––		––			400
	$	221,672	$	1	$	(2,832	)	$	218,841
	December 31, 2004
	Amortized cost		Gross unrealized gains		Gross Unrealized losses			Estimated Fair value
U.S. Treasury securities	$	121,438	$	––	$	(629	)	$	120,809
Obligations of U.S. government agencies		21,826		1		(110	)		21,717
Mortgage backed securities		47,250		8		(506	)		46,752
Municipal securities		635		––		––			635
Federal Home Loan Bank stock		413		––		––			413
Federal Reserve Bank stock		674		––		––			674
Other investments		400		––		––			400
	$	192,636	$	9	$	(1,245	)	$	191,400

72 (Continued)

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(amounts are in thousands of dollars, except per share data)

December 31, 2005 and 2004

The amortized cost and estimated fair value of investment securities available for sale at December 31, 2005, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized cost		Estimated Fair Value
Investment securities available for sale
Due in one year or less	$	75,118	$	74,596
Due after one year through five years		110,488		108,558
Due after five years through fifteen years		33,859		33,480
Due after fifteen years through thirty years		635		635
Federal Home Loan Bank stock		699		699
Federal Reserve Bank stock		773		773
Other equity investment		100		100
	$	221,672	$	218,841

At December 31, 2005, the Company had $2,568 (estimated fair value) in investment securities pledged to the Treasurer of the State of Florida as collateral on public fund deposits and for other purposes required or permitted by law. Repurchase agreements are secured by U.S. Treasury securities and Government Agency securities with fair values of $80,047 and $41,188 at December 31, 2005 and 2004, respectively.

Proceeds from sales of investment securities available for sale were $2,993, $229 and $999 for the years ending December 31, 2005, 2004 and 2003, respectively. Gross realized losses on sales of investment securities available for sale during 2005, 2004 and 2003 were $3, $0 and $1, respectively.

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 December 31, 2005 and 2004.

	December 31, 2005
	less than 12 months				12 months or more				Total
	fair value		Unrealized Losses		fair value		unrealized losses		fair value		Unrealized Losses
U.S. Treasury securities	$	46,035	$	274	$	44,714	$	388	$	90,749	$	662
Obligations of U.S. government agencies		13,817		157		12,674		169		26,491		326
Mortgage backed securities		65,273		978		25,954		860		91,227		1,838
Municipal securities		494		6		—		—		494		6
Total temporarily impaired securities	$	125,619	$	1,415	$	83,342	$	1,417	$	208,961	$	2,832
	December 31, 2004
	less than 12 months				12 months or more				Total
	fair value		unrealized losses		fair value		unrealized losses		fair value		Unrealized Losses
U.S. Treasury securities	$	107,351	$	577	$	8,437	$	52	$	115,788	$	629
Obligations of U.S. government agencies		14,762		79		1,970		31		16,732		110
Mortgage backed securities		28,713		307		10,652		199		39,365		506
Total temporarily impaired securities	$	150,826	$	963	$	21,059	$	282	$	171,885	$	1,245

73 (Continued)

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(amounts are in thousands of dollars, except per share data)

December 31, 2005 and 2004

U.S. Treasury securities and Obligations of U.S. Government agencies: The unrealized losses on investments in U.S. Treasury securities and Obligations of U.S Government agencies were caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

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

(3) Loans

Major categories of loans included in the loan portfolio as of December 31, 2005 and 2004 are:

	December 31,
	2005		2004
Real estate:
Residential	$	148,090	$	129,796
Commercial		219,094		179,846
Construction		36,352		20,032
Total real estate		403,536		329,674
Commercial		63,475		64,984
Consumer and other loans		50,413		46,883
		517,424		441,541
Less: Deferred loan origination fees, net		766		536
Total loans		516,658		441,005
Less: Allowance for loan losses		6,491		5,685
Total net loans	$	510,167	$	435,320

The following is a summary of information regarding nonaccrual loans, impaired loans and other real estate owned at December 31, 2005 and 2004:

	December 31,
	2005		2004
Nonaccrual loans	$	852	$	890
Recorded investment in impaired loans	$	784	$	1,053
Allowance for loan losses related to impaired loans	$	443	$	406
Other real estate owned	$	—	$	384

74 (Continued)

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(amounts are in thousands of dollars, except per share data)

December 31, 2005 and 2004

	Interest income not recognized on nonaccrual loans		Interest Income recognized on impaired Loans		Average recorded investment in impaired loans
For years ended December 31:
2005	$	35	$	18	$	987
2004	$	40	$	48	$	1,103
2003	$	10	$	22	$	333

Certain principal stockholders, directors and officers and their related interests were indebted to the Company as summarized below, for the periods ending December 31, 2005, 2004 and 2003:

	December 31,
	2005		2004		2003
Balance, beginning of year	$	11,037	$	13,230	$	11,768
Additional new loans		9,914		5,297		4,488
Repayments on outstanding loans		7,413		7,490		3,026
Balance, end of year	$	13,538	$	11,037	$	13,230

All such loans were made in the ordinary course of business. At December 31, 2005, 2004 and 2003, certain principal stockholders, directors and officers of the Company and their related interests had $5,541, $5,272 and $3,864, respectively, available in lines of credit.

Changes in the allowance for loan losses for the years ended December 31, 2005, 2004 and 2003, are as follows:

	December 31,
	2005			2004			2003
Balance, beginning of year	$	5,685		$	4,850		$	4,055
Provision charged to operations		1,065			1,270			1,243
Loans charged-off		(359	)		(350	)		(534	)
Recoveries of previous charge-offs		100			45			86
Adjustment relating to sale of branches		—			(130	)		—
Balance, end of year	$	6,491		$	5,685		$	4,850

75 (Continued)

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(amounts are in thousands of dollars, except per share data)

December 31, 2005 and 2004

(4) Bank Premises and Equipment

A summary of bank premises and equipment as of December 31, 2005 and 2004, is as follows:

	December 31,
	2005		2004
Land	$	10,509	$	9,139
Land improvements		571		309
Buildings		16,501		14,456
Leasehold improvements		1,243		1,139
Furniture, fixtures and equipment		9,641		8,936
Construction in progress		249		143
		38,714		34,122
Less: Accumulated depreciation		9,805		8,453
	$	28,909	$	25,669

(5) Deposits

A detail of deposits at December 31, 2005 and 2004 is as follows:

	December 31,
	2005		Weighted average interest rate		2004		Weighted Average Interest rate
Non-interest bearing deposits	$	219,444	0.0	%	$	175,072	0.0	%
Interest bearing deposits:
Interest bearing demand deposits		89,309	0.3	%		100,496	0.3	%
Savings deposits		47,350	0.5	%		51,011	0.3	%
Money market accounts		96,082	1.9	%		119,881	1.2	%
Time deposits less than $100,000		134,953	3.5	%		126,006	3.0	%
Time deposits of $100,000 or greater		130,199	3.7	%		87,164	3.0	%
	$	717,337	1.7	%	$	659,630	1.3	%

The following table presents the amount of certificate accounts at December 31, 2005, maturing during the periods reflected below:

Year	Amount
2006	$	154,610
2007		51,122
2008		20,217
2009		28,006
2010		11,173
beyond 2010		24
Total	$	265,152

76 (Continued)

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(amounts are in thousands of dollars, except per share data)

December 31, 2005 and 2004

A summary of interest expense on deposits for the years ended December 31, 2005, 2004 and 2003, is as follows:

	December 31,
	2005		2004		2003
Interest-bearing demand deposits	$	317	$	265	$	261
Savings deposits		201		133		142
Money market accounts		1,505		1,057		886
Time deposits less than $100,000		4,392		3,480		3,803
Time deposits of $100,000 or greater		3,596		2,250		2,223
	$	10,011	$	7,185	$	7,315

The Company had deposits from certain principle shareholders, directors and officers and their related interests of approximately $18,630, and $10,274 at December 31, 2005 and 2004, respectively.

(6) Securities sold under agreements to repurchase

The Company’s subsidiary banks enter into borrowing arrangements with their retail business customers by agreements to repurchase (“repurchase agreements”) under which the banks pledge investment securities owned and under its control as collateral against the one-day borrowing arrangement.

At December 31, 2005 and 2004, the Company had $41,811 and $24,627 in repurchase agreements with weighted average interest rates of 3.38% and 1.56%, respectively. Repurchase agreements are secured by U.S. Treasury securities and Government Agency securities with fair values of $80,047 and $41,188 at December 31, 2005 and 2004, respectively.

Repurchase agreements averaged $38,210, $26,110 and $15,562 for the years ended December 31, 2005, 2004 and 2003, respectively. The maximum amount outstanding at any month-end for the corresponding periods was $49,046, $35,167 and $24,366, respectively. Total interest expense paid on repurchase agreements for the years ending December 31, 2005, 2004 and 2003, was $1,013, $193 and $73, respectively.

(7) Other borrowed funds

From time to time the Company will borrow short-term either through Federal Home Loan Bank advances or Federal Funds Purchased. As of December 31, 2005, $1,000 of Federal Funds Purchased was outstanding with an overnight maturity and an interest rate of 4.5%.

(8) Corporate debenture

The Company formed CenterState Banks of Florida Statutory Trust I (the “Trust”) for the purpose of issuing trust preferred securities. On September 22, 2003, the Company 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 debentue (three month LIBOR plus 305 basis points). The rate is subject to change on a quarterly basis. The rate in effect during the quarter ended December 31, 2005 was 7.07%. The corporate debenture and the trust preferred security each have 30-year lives. The trust preferred security and the corporate debenture are callable by the Company or the Trust, at their respective option after five years, and sooner in specific events, subject to prior approval by the Federal Reserve Board, if then required. Related loan origination costs of $188 were capitalized and are being amortized to interest expense over a five year period. The Company has treated the trust preferred security as Tier 1 capital up to the maximum amount allowed, and the remainder as Tier 2 capital for federal regulatory purposes.

77 (Continued)

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(amounts are in thousands of dollars, except per share data)

December 31, 2005 and 2004

(9) Income Taxes

The provision for income taxes at December 31, 2005, 2004 and 2003, consists of the following:

	Current		Deferred			Total
December 31, 2005:
Federal	$	3,375	$	(195	)	$	3,180
State		577		(33	)		544
	$	3,952	$	(228	)	$	3,724
December 31, 2004:
Federal	$	1,681	$	499		$	2,180
State		301		86			387
	$	1,982	$	585		$	2,567
December 31, 2003:
Federal	$	1,557	$	(249	)	$	1,308
State		274		(41	)		233
	$	1,831	$	(290	)	$	1,541

The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2005 and 2004, are presented below:

	December 31,
	2005			2004
Deferred tax assets:
Allowance for loan losses	$	2,414		$	2,085
Deferred loan fees		289			202
Merger cost		50			50
Intangible assets		16			36
Unrealized loss on investment securities available for sale		1,065			464
Net operating loss carryforward		32			277
Other		97			—
Total deferred tax asset		3,963			3,116
Deferred tax liabilities:
Premises and equipment, due to differences in depreciation methods and useful lives		(650	)		(630	)
Core deposit intangible		(180	)		(207	)
Like kind exchange		(293	)		(293	)
Accretion of discounts on investments		(128	)		(67	)
Other		—			(33	)
Total deferred tax liability		(1,251	)		(1,232	)
Net deferred tax asset	$	2,712		$	1,884

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

78 (Continued)

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(amounts are in thousands of dollars, except per share data)

December 31, 2005 and 2004

income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences.

A reconciliation between the actual tax expense and the “expected” tax expense (computed by applying the U.S. federal corporate rate of 34 percent to earnings before income taxes) for the years ending December 31, 2005, 2004 and 2003 is as follows:

	December 31,
	2005			2004			2003
“Expected” tax expense	$	3,418		$	2,360		$	1,417
Tax exempt interest, net		(79	)		(84	)		(51	)
State income taxes, net of federal income tax benefits		366			256			154
Other, net		19			35			21
	$	3,724		$	2,567		$	1,541

(10) Rent

The following is a schedule of future minimum annual rentals under the noncancellable operating leases of the Company’s facilities:

Year ending December 31,
2006	$	379
2007		349
2008		219
2009		233
	$	1,180

Rent expense for the years ended December 31, 2005, 2004 and 2003, was $403, $335 and $304, respectively, and is included in occupancy expense in the accompanying consolidated statements of operations.

(11) Fair Value of Financial Instruments

The following methods and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein:

Cash and cash equivalents – The carrying amount of cash and cash equivalents approximates fair value due to short-term maturity and market interest rates earned.

Investments – The Company’s investment securities available for sale represents investments in U.S. Treasury securities, U.S. Government agency securities, mortgage backed securities, and municipal securities. The Company’s equity investments at year end represents stock investments in the Federal Reserve Bank, Federal Home Loan Bank and other equity. The stocks are not publicly traded and the carrying amount was used to estimate the fair value. The fair value of the U.S. Treasury securities, U.S. Government agency securities, mortgage backed securities and municipal securities was estimated based on quoted market prices.

79 (Continued)

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(amounts are in thousands of dollars, except per share data)

December 31, 2005 and 2004

Loans – For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for commercial real estate, commercial and consumer loans other than variable rate loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values of impaired loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable.

Deposits – The fair values disclosed for non-interest bearing demand deposits are, by definition, equal to the amount payable on demand (that is their carrying amounts). The carrying amounts of variable rate, money market accounts and fixed term certificates of deposit (CDs) approximate their fair value at the reporting date due to the fact they reprice frequently. Fair values for fixed rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Repurchase agreements and other borrowed funds – The carrying amount of the repurchase agreements and other borrowed funds approximate their fair value due to the short-term nature of the agreement and the market interest rates charged.

Corporate debenture – Because it reprices quarterly and has no significant change in credit risk, fair value is based on carrying value.

The following tables present the carrying amounts and estimated fair values of the Company’s financial instruments.

	December 31, 2005
	Carrying Amount		Fair value
Financial assets:
Cash and cash equivalents	$	94,926	$	94,926
Investment securities available for sale		218,841		218,841
Loans, less allowance for loan losses of $6,491		510,167		505,880
Financial liabilities:
Deposits:
Without stated maturities	$	452,185	$	452,185
With stated maturities		265,152		266,024
Securities sold under agreement to repurchase		41,811		41,811
Corporate debenture		10,000		10,000
Other borrowed funds		1,000		1,000

80 (Continued)

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(amounts are in thousands of dollars, except per share data)

December 31, 2005 and 2004

	December 31, 2004
	Carrying Amount		Fair value
Financial assets:
Cash and cash equivalents	$	90,115	$	90,115
Investment securities available for sale		191,400		191,400
Loans, less allowance for loan losses of $5,685		435,320		434,565
Financial liabilities:
Deposits:
Without stated maturities	$	446,460	$	446,460
With stated maturities		213,170		219,647
Securities sold under agreement to repurchase		24,627		24,627
Corporate debenture		10,000		10,000

(12) Regulatory Capital

The Company and the Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Banks must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets. Management believes, as of December 31, 2005, that the Company meets all capital adequacy requirements to which it is subject.

As of December 31, 2005, the most recent notification from the Office of Comptroller of the Currency and the FDIC categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Banks must maintain total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution’s category.

81 (Continued)

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(amounts are in thousands of dollars, except per share data)

December 31, 2005 and 2004

A summary of actual, required, and capital levels necessary to be considered well-capitalized for the Company as of December 31, 2005 and 2004, are presented in the table below.

	Actual				For capital adequacy purposes				To be well capitalized under prompt corrective action provision
	Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2005:
Total capital (to risk weighted assets)	$	110,344	19.2	%	$	45,903	>8	%	$	57,379	>10	%
Tier 1 capital (to risk weighted assets)		103,853	18.1	%		22,951	>4	%		34,427	>6	%
Tier 1 capital (to average assets)		103,853	12.4	%		33,623	>4	%		42,029	>5	%
December 31, 2004:
Total capital (to risk weighted assets)	$	68,894	14.6	%	$	37,730	>8	%	$	47,163	>10	%
Tier 1 capital (to risk weighted assets)		63,209	13.4	%		18,865	>4	%		28,298	>6	%
Tier 1 capital (to average assets)		63,209	8.6	%		29,404	>4	%		36,755	>5	%

A summary of actual, required, and capital levels necessary to be considered well-capitalized for each of the Company’s subsidiary Banks as of December 31, 2005 and 2004, are presented in the table below.

	Actual				For capital adequacy purposes				To be well capitalized under prompt corrective action provision
	Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2005:
First National Bank of Osceola County
Total capital (to risk weighted assets)	$	19,667	12.6	%	$	12,465	>8	%	$	15,581	>10	%
Tier 1 capital (to risk weighted assets)		17,911	11.5	%		6,233	>4	%		9,349	>6	%
Tier 1 capital (to average assets)		17,911	7.2	%		9,930	>4	%		12,412	>5	%
CenterState Bank West Florida, N.A.
Total capital (to risk weighted assets)		21,051	10.4	%		16,226	>8	%		20,282	>10	%
Tier 1 capital (to risk weighted assets)		18,531	9.1	%		8,113	>4	%		12,169	>6	%
Tier 1 capital (to average assets)		18,531	7.5	%		9,850	>4	%		12,312	>5	%
First National Bank of Polk County
Total capital (to risk weighted assets)		14,597	18.5	%		6,316	>8	%		7,895	>10	%
Tier 1 capital (to risk weighted assets)		13,688	17.3	%		3,158	>4	%		4,737	>6	%
Tier 1 capital (to average assets)		13,688	7.8	%		6,989	>4	%		8,736	>5	%
CenterState Bank of Florida
Total capital (to risk weighted assets)		13,759	10.1	%		10,859	>8	%		13,573	>10	%
Tier 1 capital (to risk weighted assets)		12,453	9.2	%		5,429	>4	%		8,144	>6	%
Tier 1 capital (to average assets)		12,453	7.3	%		6,845	>4	%		8,556	>5	%
December 31, 2004:
First National Bank of Osceola County
Total capital (to risk weighted assets)	$	15,754	12.0	%	$	10,505	>8	%	$	13,131	>10	%
Tier 1 capital (to risk weighted assets)		14,144	10.8	%		5,252	>4	%		7,879	>6	%
Tier 1 capital (to average assets)		14,144	6.6	%		8,611	>4	%		10,764	>5	%
CenterState Bank West Florida, N.A.
Total capital (to risk weighted assets)		17,941	10.6	%		13,528	>8	%		16,910	>10	%
Tier 1 capital (to risk weighted assets)		15,948	9.4	%		6,764	>4	%		10,146	>6	%
Tier 1 capital (to average assets)		15,948	7.6	%		8,349	>4	%		10,436	>5	%
First National Bank of Polk County
Total capital (to risk weighted assets)		12,903	19.3	%		5,344	>8	%		6,680	>10	%
Tier 1 capital (to risk weighted assets)		12,066	18.1	%		2,672	>4	%		4,008	>6	%
Tier 1 capital (to average assets)		12,066	6.9	%		7,022	>4	%		8,778	>5	%
CenterState Bank of Florida
Total capital (to risk weighted assets)		10,719	10.3	%		8,310	>8	%		10,388	>10	%
Tier 1 capital (to risk weighted assets)		9,792	9.4	%		4,155	>4	%		6,233	>6	%
Tier 1 capital (to average assets)		9,792	7.6	%		5,164	>4	%		6,455	>5	%

(13) Dividends

The Company declared and paid cash dividends of $1,225, $933 and $740 during the years ended December 31, 2005, 2004 and 2003, respectively. Banking regulations limit the amount of dividends that may be paid by the subsidiary banks to the Company without prior approval of the Bank’s regulatory agency. At December 31, 2005 dividends from the subsidiary banks available to be paid to the Company, without prior approval of the Bank’s regulatory agency, was $12,958, subject to the Banks meeting or exceeding regulatory capital requirements.

(14) Stock Option Plans

The Company has authorized 365,000 common shares for employees of the Company under an incentive stock option and non-statutory stock option plan (the “1999 Plan”). Options are granted at fair market value of the underlying stock at date of grant. Each option expires ten years from the date of grant. Options become 25% vested immediately as of the grant date and will continue to vest at a rate of 25% on each anniversary date thereafter. At December 31, 2005, there were 69,230 shares available for future grants. In addition to the 1999 Plan, the Company has assumed and converted the stock option plans of the four subsidiary Banks consistent with the terms and conditions of their respective merger agreements. These options are all vested and exercisable. At December 31, 2005, they represented exercisable options on 73,739 shares of the Company’s common stock.

In 2004, the Company’s shareholders authorized an Employee Stock Purchase Plan (“ESPP”). The number of shares of common stock for which options may be granted under the ESPP is 200,000, which amount shall be increased on December 31 of each calendar year for an amount equal to 6% of the increase in the outstanding shares of common stock from January 1 of each calendar year (from February 27, 2004 for the 2004 calendar year). During July 2004, the Company granted options for 30,607 shares of common stock pursuant to the ESPP. The options vest at the date of grant. The exercise price was $20.31 per share and the options expired on June 30, 2005. As of December 31, 2005, there are no grants outstanding pursuant to this plan.

82 (Continued)

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(amounts are in thousands of dollars, except per share data)

December 31, 2005 and 2004

A summary of the status of the Company’s stock option plans at December 31, 2005, 2004 and 2003, and changes during the years ended on those dates is presented below:

	2005					2004					2003
	Number			Weighted Average Exercise price		Number			Weighted average exercise price		Number			Weighted average exercise price
Stock Options
Options outstanding, beginning of year		344,333		$	19.96		245,086		$	14.25		224,657		$	13.20
Granted		20,500		$	34.00		122,000		$	29.98		41,500		$	19.25
Exercised		(9,124	)	$	17.09		(19,503	)	$	12.11		(7,421	)	$	13.85
Forfeited		(2,250	)	$	18.34		(3,250	)	$	13.16		(13,650	)	$	12.38
Options outstanding, end of year		353,459		$	20.86		344,333		$	19.96		245,086		$	14.25
Options exerciseable at end of year		266,709		$	18.07		232,208		$	16.07		185,519		$	13.56
Weighted-average fair value of options granted during the year per share	$	16.13				$	13.45				$	5.59
Employee Stock Purchase Plan
Options outstanding, beginning of year		26,404		$	20.31		—			—		—			—
Granted		—			—		30,607		$	20.31		—			—
Exercised		(22,549	)	$	20.31		(4,203	)	$	20.31		—			—
Forfeited		(3,855	)	$	20.31		—			—		—			—
Options outstanding, end of year		—			—		26,404		$	20.31		—			—
Options exerciseable at end of year		—			—		26,404		$	20.31		—			—
Weighted-average fair value of options granted during the year per share		—				$	4.97					—

Under the fair value method, stock option expense is measured on the date of grant using the Black-Scholes option pricing model with market assumptions. Option pricing models require the use of highly subjective assumptions, including expected stock price volatility, which when changed can materially affect fair value estimates. Accordingly, the model does not necessarily provide a reliable single measure of the fair value of the Company’s stock options. The Company used the following variables: ten year U.S. government treasury rates for the risk free rate at the date of grant (ranged between 4.14% and 4.47%); dividend yield was calculated by dividing the dividend paid during the year of grant by the fair value of the underlying stock as of the grant date (ranged between 0.61% and 0.83%); expected volatility was calculated as of the grant date, ranging from approximately 31.1 through 31.7; and an expected life of 10 years.

83 (Continued)

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(amounts are in thousands of dollars, except per share data)

December 31, 2005 and 2004

The following table summarizes information about stock options outstanding at December 31, 2005:

Range of exercise prices	Number outstanding at December 31, 2005	Weighted Remaining Contractual Life	Weighted average exercise price		Number exercisable at December 31, 2005	Weighted average exercise price at December 31, 2005
$7.25 - $10.88	11,615	13 months	$	8.34	11,615	$	8.34
$10.89 - $16.34	160,719	59 months	$	13.54	160,719	$	13.54
$16.35 - $24.53	51,625	90 months	$	19.53	34,500	$	19.45
$24.54 - $36.81	126,500	108 months	$	31.40	59,125	$	31.21
$36.82 -$39.55	3,000	114 months	$	39.55	750	$	39.55

(15) Employee Benefit Plan

Substantially all of the subsidiary banks employees are covered under the Company’s 401(k) compensation and incentive plan. Employees are eligible to participate in the plan after completing six months of continuous employment. The Company contributes an amount equal to a certain percentage of the employees’ contributions based on the discretion of the Board of Directors. In addition, the Company may also make additional contributions to the plan each year, subject to profitability and other factors, and based solely on the discretion of the Board of Directors. For the years ended December 31, 2005, 2004 and 2003, the Company’s contributions to the plan were $650, $470 and $378, respectively, which are included in salary and benefits on the consolidated statement of operations.

84 (Continued)

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(amounts are in thousands of dollars, except per share data)

December 31, 2005 and 2004

(16) Parent Company Only Financial Statements

Condensed financial statements of CenterState Banks of Florida, Inc. (parent company only) follow:

Condensed Balance Sheet

December 31, 2005 and 2004

	2005			2004
Assets:
Cash and due from banks	$	3,850		$	10,602
Inter-company receivable from bank subsidiaries		37,000			—
Investment in wholly-owned bank subsidiaries		65,971			56,405
Investments		400			400
Prepaid expenses and other assets		509			626
Total assets	$	107,730		$	68,033
Liabilities:
Accounts payable and accrued expenses		489			369
Corporate debenture		10,000			10,000
Total liabilities		10,489			10,369
Shareholders’ Equity:
Common stock		52			41
Additional paid-in capital		75,001			39,545
Retained earnings		23,954			18,849
Accumulated other comprehensive loss		(1,766	)		(771	)
Total shareholders’ equity		97,241			57,664
Total liabilities and shareholders’ equity	$	107,730		$	68,033

Condensed Statements of Operations

Years ended December 31, 2005, 2004 and 2003

	2005			2004			2003
Other income	$	21		$	8		$	—
Interest expense		682			496			144
Operating expenses		1,303			1,174			725
Loss before equity in net earnings of subsidiaries		(1,964	)		(1,662	)		(869	)
Equity in net earnings of subsidiaries (net of income tax expense of $4,457, $3,187 and $1,865 at December 31, 2005, 2004 and 2003, respectively)		7,561			5,415			3,171
Net income before income tax benefit		5,597			3,753			2,302
Income tax benefit		(733	)		(620	)		(324	)
Net income	$	6,330		$	4,373		$	2,626

85 (Continued)

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(amounts are in thousands of dollars, except per share data)

December 31, 2005 and 2004

Condensed Statements of Cash Flows

Years ended December 31, 2005, 2004 and 2003

	2005			2004			2003
Cash flows from operating activities:
Net income	$	6,330		$	4,373		$	2,626
Tax deduction in excess of book deduction on options exercised		—			33			—
Adjustments to reconcile net income to net cash used in operating activities:
Equity in net earnings of subsidiaries		(7,561	)		(5,415	)		(3,171	)
Increase (decrease) in payables and accrued expenses		120			244			(194	)
Decrease (increase) in other assets		117			(299	)		(240	)
Net cash flows used in operating activities		(994	)		(1,064	)		(979	)
Cash flows from investing activities:
Inter-company receivables from subsidiary banks		(37,000	)		—			—
Cash payments for fractional shares		—			—			(5	)
Cash payments to CSB shareholders		—			(65	)		(2,335	)
Purchase of equity investment, available for sale portfolio		—			—			(100	)
Purchase of CD investment, available for sale portfolio		—			(300	)		—
Investment in subsidiaries		(3,000	)		(4,600	)		(5,200	)
Dividend received from subsidiaries		—			—			3,188
Net cash flows used in investing activities		(40,000	)		(4,965	)		(4,452	)
Cash flows from financing activities:
Stock options exercised		613			321			102
Dividends paid to shareholders		(1,225	)		(933	)		(740	)
Public stock offering (net of cost)		34,854			—			—
Corporate debenture		—			—			10,000
Shareholder rights offering (net of cost)		—			12,698			—
Net cash flows provided by financing activities		34,242			12,086			9,362
Net (decrease )increase in cash and cash equivalents		(6,752	)		6,057			3,931
Cash and cash equivalents at beginning of year		10,602			4,545			614
Cash and cash equivalents at end of year	$	3,850		$	10,602		$	4,545

86 (Continued)

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(amounts are in thousands of dollars, except per share data)

December 31, 2005 and 2004

Condensed Statements of Cash Flows - continued

	2005			2004			2003
Supplemental disclosure of noncash activities:
Market value adjustment – investment securities available for sale:
Market value adjustment – investment securities	$	(1,595	)	$	(1,267	)	$	(476	)
Deferred income tax asset		600			476			174
Unrealized loss on investment securities available for sale, net	$	(995	)	$	(791	)	$	(302	)
Acquisition of CSB purchase price adjustment	$	—		$	—		$	362

(17) Credit Commitments

The Company has outstanding at any time a significant number of commitments to extend credit. These arrangements are subject to strict credit control assessments and each customer’s credit worthiness is evaluated on a case-by-case basis. A summary of commitments to extend credit and standby letters of credit written at December 31, 2005 and 2004, are as follows:

	December 31,
	2005		2004
Standby letters of credit	$	4,817	$	2,573
Available lines of credit		103,611		78,548
Unfunded loan commitments – fixed		13,790		15,351
Unfunded loan commitments – variable		23,595		12,821

Because many commitments expire without being funded in whole or part, the contract amounts are not estimates of future cash flows.

Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. The credit risk amounts are equal to the contractual amounts, assuming that the amounts are fully advanced and that the collateral or other security is of no value.

The Company’s policy is to require customers to provide collateral prior to the disbursement of approved loans. The amount of collateral obtained, if it is deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, real estate and income providing commercial properties.

Standby letters of credit are contractual commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

87 (Continued)

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(amounts are in thousands of dollars, except per share data)

December 31, 2005 and 2004

Outstanding commitments are deemed to approximate fair value due to the variable nature of the interest rates involved and the short-term nature of the commitments.

(18) Concentrations of Credit Risk

Most of the Company’s business activity is with customers located within Osceola, Orange, Pasco, Hernando, Citrus and Polk Counties of the State of Florida and portions of adjacent counties. The majority of commercial and mortgage loans are granted to customers residing in these areas. Generally, commercial loans are secured by real estate, and mortgage loans are secured by either first or second mortgages on residential or commercial property. As of December 31, 2005, substantially all of the Company’s loan portfolio was secured. Although the Company has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent upon the economy of Osceola, Orange, Pasco, Hernando, Citrus, Sumter and Polk Counties and portions of adjacent counties. The Company does not have significant exposure to any individual customer or counterparty.

(19) Basic and Diluted Earnings Per Share

Basic and diluted earnings per share are calculated as follows:

	2005		2004		2003
Numerator for basic and diluted earnings per share:
Net income	$	6,330	$	4,373	$	2,626
Denominator:
Denominator for basic earnings per share - weighted-average shares		4,678,523		3,750,158		3,364,824
Effect of dilutive securities:
Employee stock options		136,074		77,996		63,995
Denominator for diluted earnings per share - adjusted weighted-average shares		4,814,597		3,828,154		3,428,819
Basic earnings per share	$	1.35	$	1.17	$	0.78
Diluted earnings per share	$	1.31	$	1.14	$	0.77

88 (Continued)

CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(amounts are in thousands of dollars, except per share data)

December 31, 2005 and 2004

(20) Investment in CenterState Home Loans, LLC

The Company acquired a 49% interest in a newly formed joint venture, CenterState Home Loans, LLC, during 2004 for $34. The entity, located in Orlando, Florida, brokers single family home mortgages for a fee. The Company does not assume any interest rate risk, market risk or credit risk. The entity commenced business on December 1, 2004. The investment is carried on the equity method and included in other assets on the Company’s consolidated balance sheet. Income earned from the joint venture is included in other service charges and fees in the Company’s consolidated statement of operations. Summary combined unaudited financial information for the investee company as of and for the periods ending December 31, 2005 and 2004 follows:

	2005			2004
Cash	$	65		$	92
Accounts receivable		88			—
Fixed assets		12			—
Accumulated depreciation		(2	)		—
Prepaid expenses		4			—
Total assets	$	167		$	92
Accounts payable	$	58		$	—
Total liabilities		58			—
Total stockholders’ equity		109			92
Total liabilities and stockholders’ equity	$	167		$	92
Total revenues	$	1,224		$	65
Total expenses		893			43
Net income	$	331		$	22

89 (Continued)

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be duly signed on its behalf by the undersigned, thereunto duly authorized, in the City of Winter Haven, State of Florida, on the 10th day of March, 2006.

CenterState BANKS OF FLORIDA, INC.

/s/ Ernest S. Pinner

Ernest S. Pinner

Chairman of the Board,

President and Chief Executive Officer

/s/ James J. Antal

James J. Antal

Senior Vice President and Chief Financial Officer (Principal financial officer and principal accounting officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on March 10, 2006.

Signature	Title
/s/ E. S “Ernie” Pinner E. S. “Ernie” Pinner	Chairman of the Board President and Chief Executive Officer
/s/ James H. Bingham James H. Bingham	Director
/s/ G. Robert Blanchard, Jr. G. Robert Blanchard, Jr.	Director
/s/ Terry W. Donley Terry W. Donley	Director
/s/ Bryan W. Judge Bryan W. Judge	Director
/s/ Samuel L. Lupfer Samuel L. Lupfer	Director
/s/ Lawrence W. Maxwell Lawrence W. Maxwell	Director
/s/ G. Tierso Nunez II G. Tierso Nunez II	Director
/s/ Thomas E. Oakley Thomas E. Oakley	Director
/s/ J. Thomas Rocker J. Thomas Rocker	Director

90

CenterState Banks of Florida, Inc.

Form 10-K

For Fiscal Year Ending December 31, 2005

EXHIBIT INDEX

Exhibit No.	Exhibit
21.1	Subsidiaries of the Registrant
23.1	Consent of KPMG LLP
31.1	Certification of President and Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of President and Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002

91

EX-21.1

Exhibit 21.1

CenterState Banks of Florida, Inc.

Form 10-K

For Fiscal Year Ended December 31, 2005

Subsidiaries of Registrant

First National Bank of Osceola County, organized under the laws of the United States

First National Bank of Polk County, organized under the laws of the United States

CenterState Bank West Florida, organized under the laws of the United States

CenterState Bank of Florida, organized under the laws of the State of Florida

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors

CenterState Banks of Florida, Inc.:

We consent to the incorporation by reference in the registration statements (No. 333-62704, 333-62706 and 333-117591) on Form S-8, (No. 333-125070) on Form S-3, and (No. 333-131033) on Form S-4 of CenterState Banks of Florida, Inc., of our reports dated March 10, 2006, with respect to the consolidated balance sheets of CenterState Banks of Florida, Inc. as of December 31, 2005 and 2004, and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2005, and management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 and the effectiveness of internal control over financial reporting as of December 31, 2005, which report appears in the December 31, 2005 annual report on Form 10-K of CenterState Banks of Florida, Inc.

/s/ KPMG

March 10, 2006

Tampa, Florida

Certified Public Accountants

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Ernest S. Pinner, certify, that:

1. I have reviewed this report on Form 10-K of CenterState Banks of Florida, Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 10, 2006	By:	/s/ Ernest S. Pinner
		Ernest S. Pinner, President and Chief Executive Officer

EX-31.2

Exhibit 31.2

I, James J. Antal, certify, that:

1. I have reviewed this report on Form 10-K of CenterState Banks of Florida, Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 10, 2006	By:	/s/ James J. Antal
		James J. Antal, Senior Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification of President and Chief Executive Officer

The undersigned President and Chief Executive Officer of CenterState Banks of Florida, Inc. does hereby certify, to such officer’s knowledge, that this report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this report fairly presents, in all material respects, the financial condition and results of operation of CenterState Banks of Florida, Inc.

/s/ Ernest S. Pinner

Ernest S. Pinner

President and Chief Executive Officer

Date: March 10, 2006

EX-32.2

Exhibit 32.2

Certification of Senior Vice President and Chief Financial Officer

The undersigned Senior Vice President and Chief Financial Officer of CenterState Banks of Florida, Inc. does hereby certify, to such officer’s knowledge, that this report fully complies with the requirements of Section 13(a) or (15(d) of the Securities Exchange Act of 1934 and that the information contained in this report fairly presents, in all material respects, the financial condition and results of operation of CenterState Banks of Florida, Inc.

/s/ James J. Antal

James J. Antal

Senior Vice President and Chief Financial Officer

Date: March 10, 2006