MidWestOne Financial Group, Inc. - FORM 8-K/A - EX-99.3 - EXHIBIT 99.3

Attached files

file	filename
8-K/A - FORM 8-K/A - MidWestOne Financial Group, Inc.	postmergerfinancials.htm
EX-99.4 - EXHIBIT 99.4 - MidWestOne Financial Group, Inc.	exhibit994.htm
EX-23.1 - EXHIBIT 23.1 - MidWestOne Financial Group, Inc.	exhibit231.htm
EX-99.2 - EXHIBIT 99.2 - MidWestOne Financial Group, Inc.	exhibit992.htm

Exhibit 99.3

Independent Auditor’s Report

To the Board of Directors and Audit Committee

Central Bancshares, Inc. and Subsidiary

Golden Valley, Minnesota

Report on the Financial Statements

We have audited the accompanying consolidated financial statements of Central Bancshares, Inc. and Subsidiary (the Company), which comprise the consolidated balance sheets as of December 31, 2013 and 2012; the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the years then ended; and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating

the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Central Bancshares, Inc. and Subsidiary as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Other Matter

We also have examined, in accordance with attestation standards established by the American Institute of Certified Public Accountants, Central Bancshares, Inc. and Subsidiary’s internal control over financial reporting as of December 31, 201 3, based on criteria established in Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 1992, and our report dated March 27, 201 4, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Minneapolis, Minnesota

March 27, 2014

Central Bancshares, Inc. and Subsidiary

Consolidated Balance Sheets

December 31, 2013 and 2012

(In Thousands, Except Share Data)



Assets	2013		2012

Cash	$	26,814	$	30,755
Interest-bearing deposits in Federal Reserve Bank	67,210		113,440
Total cash and cash equivalents	94,024		144,195

Certificate of deposit	839		886

Federal funds sold	1,006		3,235

Available-for-sale securities	141,973		119,374

Securities held to maturity, at amortized cost	32,317		15,263

Loans held for sale	2,681		11,189

Loans:
Noncovered loans, net of allowance for loan losses	574,750		494,846
Covered loans, net of allowance for loan losses	207,806		272,823
Net loans	782,556		767,669

Investment in restricted stock	1,499		2,463
Premises and equipment, net	29,329		29,105
Other real estate owned (OREO), net, including covered OREO of $17,389 and $27,889 at December 31, 2013 and 2012, respectively	21,177		34,287
FDIC indemnification asset, net	33,930		68,530
Bank-owned life insurance	5,631		460
Accrued interest receivable	2,903		2,985
Other assets	2,011		3,762
Goodwill	437		2,344
Other intangible assets, net	818		1,177
	97,735		145,113
	$	1,153,131	$	1,206,924

See Notes to Consolidated Financial Statements.

Central Bancshares, Inc. and Subsidiary

Consolidated Balance Sheets

December 31, 2013 and 2012

(In Thousands, Except Share Data)



Liabilities and Stockholders’ Equity	2013			2012
Liabilities
Deposits:
Noninterest-bearing	$	259,877		$	247,896
Interest-bearing	782,770			855,332
Total deposits	1,042,647			1,103,228

Short-term borrowings	5,506			4,574
Subordinated notes payable	22,610			10,310
Notes payable	1,291			6,208
Accrued interest payable	1,291			1,771
Other liabilities	6,658			5,688
Total liabilities	1,080,003			1,131,779

Commitments, Contingencies and Credit Risk

Stockholders’ Equity
Common stock, par value $1.00 per share; 10,000 shares authorized; 6,500 shares issued and outstanding	6			6
Additional paid-in capital	3,407			3,407
Retained earnings	73,875			69,661
Accumulated other comprehensive income (loss)	(4,160		)	2,071
Total stockholders’ equity	73,128			75,145
	$	1,153,131		$	1,206,924

See Notes to Consolidated Financial Statements.

Central Bancshares, Inc. and Subsidiary

Consolidated Statements of Income

Years Ended December 31, 2013 and 2012

(In Thousands)



	2013		2012
Interest income:
Loans	$	50,902	$	50,441
Securities	3,076		2,371
Federal funds sold and other	252		186
	54,230		52,998

Interest expense:
Deposits	4,850		6,797
Short-term borrowings	77		94
Subordinated notes payable	947		423
Notes payable	101		921
	5,975		8,235

Net interest income	48,255		44,763

Provision for loan losses	3,330		3,801
Net interest income after provision for loan losses	44,925		40,962

Noninterest income:
Service charges and other fees	3,644		3,658
FDIC indemnification income	2,848		2,480
Gain on sales of loans	2,424		3,095
Net gain on available-for-sale securities	461		356
Acquisition-related gains	—		5,779
Other income	1,872		2,312
	11,249		17,680

Noninterest expenses:
Salaries and employee benefits	23,635		23,219
Occupancy and equipment	5,922		5,253
Data processing	1,844		2,038
FDIC insurance and assessments	808		715
OREO, net	1,726		920
Other	8,453		7,956
	42,388		40,101
Net income	$	13,786	$	18,541

See Notes to Consolidated Financial Statements.

Central Bancshares, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2013 and 2012

(In Thousands)



	2013			2012

Net income	$	13,786		$	18,541
Other comprehensive income:
Change in unrealized gain (loss) on available-for-sale securities	(6,231		)	440
Comprehensive income	$	7,555		$	18,981

See Notes to Consolidated Financial Statements.

Central Bancshares, Inc. and Subsidiary

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2013 and 2012

(In Thousands, Except Share Data)



									Accumulated
	Common Stock			Additional					Other
		Par		Paid-In		Retained			Comprehensive
	Shares	Value		Capital		Earnings			Income (Loss)			Total

Balance, December 31, 2011	6,500	$	6	$	3,407	$	60,168		$	1,631		$	65,212
Net income	—	—		—		18,541			—			18,541
Other comprehensive income	—	—		—		—			440			440
Dividends	—	—		—		(9,048		)	—			(9,048		)
Balance, December 31, 2012	6,500	6		3,407		69,661			2,071			75,145
Net income	—	—		—		13,786			—			13,786
Other comprehensive loss	—	—		—		—			(6,231		)	(6,231		)
Dividends	—	—		—		(9,572		)	—			(9,572		)
Balance, December 31, 2013	6,500	$	6	$	3,407	$	73,875		$	(4,160	)	$	73,128

See Notes to Consolidated Financial Statements.

Central Bancshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows

Years Ended December 31, 2013 and 2012

(In Thousands)



	2013			2012
Cash Flows From Operating Activities
Net income	$	13,786		$	18,541
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses	3,330			3,801
FDIC indemnification income	(2,848		)	(2,480		)
Depreciation	1,760			1,450
Net amortization and accretion of bond premiums and discounts	939			1,172
Net accretion of covered loans accretable interest discount	(31,589		)	(11,245		)
Net accretion of FDIC indemnification asset fair value discount	(239		)	(309		)
Gain on available-for-sale securities	(461		)	(356		)
Originations of loans held for sale	(101,174		)	(138,415		)
Proceeds from sale of loans held for sale	112,106			135,825
Gain on sale of loans held for sale	(2,424		)	(3,095		)
Amortization of intangible assets	359			456
Net gain on acquisitions	—			(5,779		)
(Gain) loss on sale and write-down of other real estate owned, net	3,839			(1,701		)
Other, net	(3,130		)	(54		)
Net cash used in operating activities	(5,746		)	(2,189		)

Cash Flows From Investing Activities
Net decrease in investments in certificates of deposit	47			522
Net decrease in federal funds sold	2,229			3,496
Purchases of securities available for sale	(65,751		)	(60,482		)
Proceeds from sales and maturities of available-for-sale securities	36,443			47,006
Purchases of securities held to maturity	(26,831		)	(14,088		)
Proceeds from maturities of securities held to maturity	9,777			18,115
Net (increase) decrease in loans	(1,415		)	28,969
Purchases of premises and equipment	(1,984		)	(4,311		)
Proceeds from sale of other real estate owned	26,248			21,363
Net change in FDIC indemnification loss share agreements	37,686			46,102
Net cash proceeds received in acquisitions (Note 2)	—			31,664
Net decrease in restricted stock	964			3,560
Net cash provided by investing activities	17,413			121,916

Cash Flows From Financing Activities
Increase (decrease) in short-term borrowings	932			(290		)
Net increase (decrease) in deposits	(60,581		)	63,645
Proceeds from subordinated debentures	12,300			2,000
Payments on notes payable	(4,917		)	(94,338		)
Cash dividends paid on common stock	(9,572		)	(9,048		)
Net cash used in financing activities	(61,838		)	(38,031		)

Net change in cash and cash equivalents	(50,171		)	81,696

Cash and Cash Equivalents
Beginning	144,195			62,499
Ending	$	94,024		$	144,195

(Continued)

Central Bancshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Continued)

Years Ended December 31, 2013 and 2012

(In Thousands)



	2013		2012
Supplemental Disclosures of Cash Flow Information
Cash payments for interest	$	6,455	$	8,320

Supplemental Schedule of Noncash Investing Activities
Loans transferred to other real estate owned	$	16,977	$	18,357

Supplemental Schedule of Noncash Investing Activities—Acquisitions
Noncash assets acquired:
Investment securities available for sale	$	—	$	6,284
Loans, net of discount	—		66,457
Restricted securities	—		918
Other real estate owned	—		1,357
Other assets	—		485
Goodwill	—		437
Total noncash assets acquired	—		75,938

Liabilities assumed:
Deposits	—		91,160
Notes payable	—		16,060
Accrued expenses and other liabilities	—		382
Total liabilities assumed	—		107,602

Net noncash assets acquired	—		(31,664		)

Net cash proceeds received in acquisitions	—		31,664
Net gain recorded on acquisitions	$	—	$	—

See Notes to Consolidated Financial Statements.

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 1. Summary of Significant Accounting Policies

Nature of business: Central Bancshares, Inc. is a one-bank holding company. Its wholly owned subsidiary, Central Bank (Bank), is a state-chartered commercial bank with offices located in Center City, Centerville, Chisago, Coon Rapids, Eden Prairie, Forest Lake, Golden Valley, Minneapolis, Newport, Otsego, St. Michael, St. Paul, South St. Paul, Spring Grove, Stillwater, White Bear Lake and Woodbury, Minnesota; Hudson, Osceola and St. Croix Falls, Wisconsin; and Naples and Fort Meyers, Florida. The Bank provides commercial and retail loan and deposit services principally to customers within the Minneapolis-St. Paul metropolitan area of Minnesota and the southwest area of Florida (Florida makes up approximately 4 percent of consolidated assets and operations).

Basis of financial statement presentation and accounting estimates: The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.

In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, estimated credit losses on purchased impaired loans, fair value estimates on the acquired banks (Note 2), valuation of the FDIC indemnification asset, valuation of securities, and valuation of other real estate owned.

Principles of consolidation: The accompanying consolidated financial statements include the accounts of Central Bancshares, Inc. and its wholly owned subsidiary, Central Bank. These entities are collectively referred to herein as the Company. All significant intercompany balances and transactions have been eliminated in consolidation.

Cash, cash equivalents and cash flows: For purposes of reporting cash flows, cash and cash equivalents includes cash on hand and amounts due from banks. Cash flows from certificates of deposit, loans, federal funds sold, restricted stock, FDIC indemnification asset, deposits and short-term borrowings are reported net.

Investment securities: Debt securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity and recorded at amortized cost. Securities not classified as held-to-maturity or trading, including equity securities with readily determinable fair values, are classified as available-for-sale and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. If the trade date and settlement date occur in different reporting periods, the transaction will be recorded on the trade date.

Declines in the fair value of individual securities, classified as either held-to-maturity or available-for-sale, below their amortized cost that are determined to be other than temporary result in write-downs of the individual securities. If the Company (a) has the intent to sell a debt security or (b) more likely than not will be required to sell the debt security before its anticipated recovery, then the Company recognizes the entire unrealized loss in earnings as an other-than-temporary loss. If neither of these conditions is met, the Company evaluates whether a credit loss exists. The impairment is separated into (a) the amount of the total impairment related to the credit loss and (b) the amount of the total impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings, and the amount related to all other factors is recognized in other comprehensive income.

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 1. Summary of Significant Accounting Policies (Continued)

Securities with unrealized losses that the Company deems to be other than temporary are recognized as realized losses. The assessment of whether such impairment has occurred is based on management’s case-by-case evaluation of the underlying reasons for the decline in fair value. Management considers a wide range of factors in making this assessment. Those factors include, but are not limited to, the length and severity of the decline in value and changes in the credit quality of the issuer or underlying assets.

Investment in restricted stock: The Company is a member of the Federal Home Loan Bank of Des Moines and, as such, is required to maintain a minimum investment in stock of the Federal Home Loan Bank that varies with the level of advances outstanding with the Federal Home Loan Bank. The stock is bought from and sold to the Federal Home Loan Bank based upon its $100 par value. The stock does not have a readily determinable fair value and, as such, is classified as restricted stock, carried at cost and evaluated for impairment in accordance with Accounting Standards Codification (ASC) 942-325-35. In accordance with this guidance, the stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) The significance of the decline in net assets of the Federal Home Loan Bank as compared to the capital stock amount and the length of time this situation has persisted, (b) commitments by the Federal Home Loan Bank to make payments required by law or regulation and the level of such payments in relation to the operating performance,

(c) the impact of legislative and regulatory changes on the customer base of the Federal Home Loan Bank and (d) the liquidity position of the Federal Home Loan Bank.

Loans held for sale: Loans held for sale (those loans that the Company has the intent to sell in the foreseeable future) are carried at the lower of aggregate cost or market value. The market value calculation includes consideration of all open positions. Gains and losses on sales of loans are recognized at settlement dates and are determined by the difference between the sales proceeds and the carrying value of the loans. The Company does not retain servicing rights, and all sales are made without recourse.

Purchased loans: All purchased loans (nonimpaired and impaired) are initially measured at fair value as of the acquisition date in accordance with applicable authoritative accounting guidance. Credit discounts are included in the determination of fair value. An allowance for credit losses is not recorded at the acquisition date for loans purchased.

Individual loans acquired through the completion of a transfer, including loans that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments receivable, are referred to herein as “purchased impaired loans.” In determining the acquisition date fair value and estimated credit losses of purchased impaired loans, and in subsequent accounting, the Company accounts for loans individually. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “nonaccretable difference,” are not recognized as a yield adjustment or as a loss accrual or valuation allowance. Expected cash flows at the purchase date in excess of the fair value of loans, if any, are recorded as interest income over the expected life of the loans if the timing and amount of the future cash flows are reasonably estimable. Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income prospectively.

The present value of any decreases in expected cash flows after the purchase date is recognized by recording an allowance for credit losses and a provision for loan losses. If the Company does not have the information necessary to reasonably estimate cash flows to be expected, it may use the cost-recovery method or cash-basis method of income recognition.

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 1. Summary of Significant Accounting Policies (Continued)

For purchased loans acquired that are not deemed impaired at acquisition, credit loss discounts representing the principal losses expected over the life of the loan are a component of the initial fair value and are treated as a nonaccretable difference. Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income prospectively. Subsequent to the purchase date, the methods utilized to estimate the required allowance for credit losses for these loans are similar to originated loans. The remaining differences between the purchase price and the unpaid principal balance at the date of acquisition are recorded in interest income over the life of the loans.

Covered assets and indemnification asset: Loans and other real estate owned covered under loss-sharing or similar credit protection agreements with the FDIC are reported respectively in loans or other real estate owned. The related FDIC indemnification asset is reported separately. In accordance with applicable authoritative accounting guidance, all purchased loans, other real estate owned, and the related indemnification assets are recorded at fair value at the date of purchase.

Subsequent to the initial recording, the indemnified asset is subject to impairment testing. Additionally, if expected cash flows on covered assets increase, the Company accounts for the associated decrease in the indemnification asset by amortizing the change over the lessor of the contractual term of the indemnification agreement or the remaining life of the indemnification asset.

Loans and allowance for loan losses: Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses.

The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb estimated losses on existing loans that may become uncollectible, based on evaluation of the collectibility of loans and prior loan loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower’s ability to pay. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary as more information becomes available.

A loan is impaired when it is probable the Company will be unable to collect all principal and interest payments due in accordance with the terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows or, alternatively, the observable market price or the fair value of the collateral if the loan is collateral-dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses. Purchased credit-impaired loans are not reported as impaired loans as long as they continue to perform at least as well as expected at acquisition.

Interest on loans is accrued daily on the outstanding balances. For impaired loans, accrual of interest is discontinued on a loan when management believes, after considering collection efforts and other factors, that the borrower’s financial condition is such that collection of interest is doubtful. Interest on these loans is recognized only when actually paid by the borrower if collection of the principal is likely to occur.

The Company determines a loan to be delinquent when payments have not been made according to contractual terms, typically evidenced by nonpayment of a monthly installment by the due date. The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent, unless the credit is well secured and in the process of collection.

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 1. Summary of Significant Accounting Policies (Continued)

All interest accrued but not collected for loans that are placed on nonaccrual status or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost- recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Off-balance-sheet credit-related financial instruments: In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded when they are funded.

Premises and equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is provided principally by the straight-line method over the estimated useful lives of the assets.

Other real estate owned: Other real estate owned (OREO) represents properties acquired through foreclosure or other proceedings. OREO is initially recorded at the fair value of the properties less estimated costs of disposal. Any write-down to fair value less estimated costs of disposal at the time of transfer to OREO is charged to the allowance for loan losses. Property is evaluated regularly to ensure that the recorded amount is supported by its current fair value less estimated costs of disposal. Subsequent write-downs are charged to expense.

Transfers of financial assets: Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity, or the ability to unilaterally cause the holder to return specific assets. In addition, for transfers of a portion of financial assets (for example, participations of loan receivables), the transfer must meet the definition of a “participating interest” in order to be accounted for as a sale. Following are the characteristics of a “participating interest”:


•	Participating interest holders have pro rata ownership in an entire financial asset.


•	From the date of the transfer, all cash flows received from the entire financial asset are divided proportionately among the participating interest holders in an amount equal to their share of ownership.


•	The rights of each participating interest holder have the same priority, and no participating interest holder’s interest is subordinated to the interest of another participating interest holder. That is, no participating interest holder is entitled to receive cash before any other participating interest holder under its contractual rights as a participating interest holder.


•	No party has the right to pledge or exchange the entire financial asset unless all participating interest holders agree to pledge or exchange the entire financial asset.

Advertising costs: Advertising costs are expensed as incurred.

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 1. Summary of Significant Accounting Policies (Continued)

Income taxes: The Company, with the consent of its stockholders, has elected to be taxed under sections of federal and state income tax law which provide that, in lieu of corporation income taxes, the stockholders separately account for their pro rata shares of the Company’s items of income, deductions, losses and credits. As a result of this election, no income taxes have been recognized in the accompanying consolidated financial statements.

Under guidance on accounting for uncertainty in income taxes, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of that position. Management evaluated the Company’s tax positions and concluded that the Company had taken no uncertain positions that require adjustment to the consolidated financial statements to comply with the provisions of the guidance. With few exceptions, the Company is subject to income tax examinations by the U.S. federal and state tax authorities for a 10-year period following the S corporation election. Tax returns prior to 2010 for federal filings and 2009 for state filings are no longer open and subject to examination.

Goodwill: Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for as purchases. Certain other intangible assets that have finite lives are amortized over the remaining useful lives. Under ASC Topic 350, goodwill of a reporting unit is tested for impairment on an annual basis, or between annual tests if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying amount. Any future impairment will be recorded as noninterest expense in the period of assessment.

Salary reduction-401(k) plan: The Company provides a 401(k) plan covering substantially all employees eligible as to age and length of service. A participant may elect to make contributions of up to the maximum allowed by law. The Company matches 100 percent of employee contributions up to 5 percent of each employee’s salary.

Comprehensive income: Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. Gains and losses on available-for-sale securities are reclassified to net income as the gains or losses are realized upon sale of the securities. Other-than-temporary impairment charges are reclassified to net income at the time of the charge.

Fair values of financial instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 17. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.

Reclassifications: Certain 2012 amounts have been reclassified to be consistent with the 2013 presentation. These reclassifications had no effect on net income or stockholders’ equity.

Subsequent events: In preparing these consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through March 27, 2014, the date the consolidated financial statements were available to be issued.

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 2. Acquisitions

On August 28, 2009, Central Bank assumed all nonbrokered deposits and approximately $186,392 in loans and other real estate owned, net of a $23,980 discount, of Mainstreet Bank, Forest Lake, Minnesota (Mainstreet), in a loss-share transaction facilitated by the Federal Deposit Insurance Corporation (FDIC). Central Bank will share in the losses on assets (loans and other real estate owned) covered under the agreement (referred to as “covered loans” and “covered other real estate owned”). On initial losses up to $8,434, the FDIC has agreed to cover losses 100 percent. On the next $90,000 of losses, the FDIC has agreed to reimburse Central Bank for 80 percent of losses. On all remaining losses, the FDIC has agreed to reimburse Central Bank for 95 percent of losses. The transaction generated a 2009 pretax gain of $2,818 and core deposit intangibles of $203.

On October 2, 2009, Central Bank assumed all nonbrokered deposits and approximately $26,100 in loans and other real estate owned, net of a $10,000 discount, of Jennings State Bank, Spring Grove, Minnesota (Jennings), in a loss-share transaction facilitated by the FDIC. Central Bank will share in the losses on assets (loans and other real estate owned) covered under the agreement. On losses up to $7,000, the FDIC has agreed to reimburse Central Bank for 80 percent of losses. On losses exceeding $7,000, the FDIC has agreed to reimburse Central Bank for 95 percent of losses. The transaction generated a 2009 pretax gain of $7,483 and core deposit intangibles of $50.

On October 23, 2009, Central Bank assumed all nonbrokered deposits and approximately $52,074 in loans and other real estate owned, net of a $12,900 discount, of Riverview Community Bank, Otsego, Minnesota (Riverview), in a loss-share transaction facilitated by the FDIC. Central Bank will share in the losses on assets (loans and other real estate owned) covered under the agreement. On losses up to $16,000, the FDIC has agreed to reimburse Central Bank for 80 percent of losses. On losses exceeding $16,000, the FDIC has agreed to reimburse Central Bank for 95 percent of losses. The agreement also requires Central Bank to reimburse the FDIC at the end of a 10-year period for 50 percent of gains over and above certain stated amounts as specified in the agreement, if actual losses are less than certain benchmarks as established by the FDIC. As of December 31, 2013 and 2012, the Company estimated no amounts will be due under this clause, and therefore, no liability has been recorded. The transaction generated a 2009 pretax gain of $7,323 and core deposit intangibles of $100.

On November 20, 2009, Central Bank assumed all nonbrokered deposits and approximately $30,600 in loans and other real estate owned, net of a $14,800 discount, of Commerce Bank of Southwest Florida, Fort Meyers, Florida (Commerce), in a loss-share transaction facilitated by the FDIC. Central Bank will share in the losses on assets (loans and other real estate owned) covered under the agreement. On losses up to $18,000, the FDIC has agreed to reimburse Central Bank for 80 percent of losses. On losses exceeding $18,000, the FDIC has agreed to reimburse Central Bank for 95 percent of losses. The agreement also requires Central Bank to reimburse the FDIC at the end of a 10-year period for 50 percent of gains over and above certain stated amounts as specified in the agreement, if actual losses are less than certain benchmarks as established by the FDIC. As of December 31, 2013 and 2012, the Company estimated no amounts will be due under this clause, and therefore, no liability has been recorded. The transaction generated a 2009 pretax gain of $8,722 and core deposit intangibles of $100.

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 2. Acquisitions (Continued)

On April 15, 2011, Central Bank assumed all nonbrokered deposits and approximately $13,219 in loans and other real estate owned, net of a discount of $3,328, of Rosemount National Bank, Rosemount, Minnesota (Rosemount), in a nonshared-loss transaction facilitated by the FDIC. The transaction generated a 2011 pretax gain of $560.

On October 7, 2011, Central Bank assumed all nonbrokered deposits and approximately $343,439 in loans and other real estate owned, net of a discount of $89,179, of The Riverbank, Osceola, Wisconsin (The Riverbank), in a loss-share transaction facilitated by the FDIC. Central Bank will share in the losses on assets (certain loans and other real estate owned) covered under the agreement. The agreement also requires Central Bank to reimburse the FDIC at the end of a 10-year period for 50 percent of gains over and above certain stated amounts as specified in the agreement, if actual losses are less than certain benchmarks as established by the FDIC. As of December 31, the Company estimated no amounts will be due under this clause, and therefore, no liability has been recorded. The transaction generated a pretax gain of $11,690 and core deposit intangibles of $1,332. The Company recorded $5,911 and $452 of the pretax gain and core deposit intangibles, respectively, in 2011 based on provisional estimates. The remaining pretax gain and core deposit intangibles of $5,779 and $880, respectively, were recorded in 2012 as the provisional fair value estimates were finalized.

On July 13, 2012, Central Bank acquired 100 percent of the stock of Bank of Naples, Naples, Florida (Naples), including all liabilities and approximately $67,814 in loans and other real estate owned, net of a discount of $10,921, in a private transaction. The Company recorded $2,344 of provisional goodwill in 2012 based on provisional estimates. The adjustment to decrease estimated losses on loans and increase estimated losses on other real estate owned of $2,188 and $(281), respectively, were recorded in 2013 as the provisional fair value estimates were finalized, resulting in final goodwill of $437.

On December 19, 2013, Central Bank signed an agreement to acquire 100 percent of the stock of First Financial Holdings, Inc. and its wholly owned subsidiary, First National Bank and Trust in Barron, Wisconsin, from a related party. The acquisition will include total assets of approximately $45,000, including loans of approximately $30,000, and total liabilities of approximately $40,000, including deposits of approximately $39,400, from the Barron and Rice Lake locations. The transaction has received regulatory approval and is expected to be completed in April 2014.

The Company accounts for the loss-sharing agreements with the FDIC as an indemnification asset. The loss-sharing agreements require that Central Bank follow certain servicing procedures as specified in the agreements or risk losing FDIC reimbursement of covered losses.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in the Mainstreet, Jennings, Riverview, Commerce, Rosemount, The Riverbank and Naples (collectively, the Purchased Banks) transactions, as of the closing dates of those transactions.

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 2. Acquisitions (Continued)

Assets acquired and liabilities assumed:



	2009								2011				2012
	Mainstreet		Jennings		Riverview		Commerce		Rosemount		The Riverbank		Naples
Assets:
Cash and cash equivalents	$	44,433	$	16,849	$	12,386	$	11,716	$	7,928	$	74,306	$	31,664
Certificates of deposit in other banks	27,458		—		2,897		—		—		—		738
Federal funds sold	—		310		4,700		—		2,557		—		—
Investment securities available for sale	88,575		9,285		11,166		250		599		25,523		5,546
Loans, net of discount	168,690		24,442		47,142		28,944		9,014		235,219		66,457
Restricted securities	1,650		—		1,224		399		—		2,494		918
Other real estate owned	17,702		1,658		4,932		1,656		877		19,041		1,357
Core deposit intangibles	203		50		100		100		—		1,332		—
FDIC indemnification asset	55,502		5,827		17,662		22,740		—		59,509		—
Other assets	1,912		348		368		316		1,253		7,797		485
Goodwill	—		—		—		—		—		—		437
Total assets	$	406,125	$	58,769	$	102,577	$	66,121	$	22,228	$	425,221	$	107,602

Liabilities:
Deposits	$	366,367	$	50,842	$	73,009	$	57,351	$	21,592	$	379,728	$	91,160
Short-term borrowings	2,929		—		—		—		—		—		—
Notes payable	24,221		—		21,444		—		—		29,336		16,060
Accrued expenses and other liabilities	9,790		444		801		48		76		4,467		382
Total liabilities	$	403,307	$	51,286	$	95,254	$	57,399	$	21,668	$	413,531	$	107,602

Net gain recorded on acquisition	$	2,818	$	7,483	$	7,323	$	8,722	$	560	$	11,690	$	—

Loss Sharing: Residential real estate loans and covered consumer loans are subject to loss-sharing with the FDIC for a period of 10 years from the acquisition date. Commercial and all other loans are subject to loss-sharing for a period of five years from the acquisition date.

FDIC indemnification asset: As part of certain of the Purchased Banks transactions, the Company and the FDIC entered into loss-sharing agreements. These agreements cover realized losses on loans and foreclosed real estate. Under these agreements, the FDIC will reimburse the Company for realized losses as follows:



	Mainstreet		Jennings		Riverview		Commerce		The Riverbank

Losses covered at 100% up to	$	8,434	$	—	$	—	$	—	$	—

Losses covered at 80%:
From	$	8,434	$	—	$	—	$	—	$	—
To	98,434		7,000		16,000		18,000		No upper limit

Losses covered 95% over	$	98,434	$	7,000	$	16,000	$	18,000	$	—

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 2. Acquisitions (Continued

These agreements extend for 10 years for one- through four-family real estate loans and for five years for other loans. This loss-sharing asset is measured separately from the loan portfolio because it is not contractually embedded in the loans and is not transferable with the loans should the Company choose to dispose of them. The related FDIC indemnification asset as of December 31, 2013 and 2012, was $33,930 and $68,530, respectively.

Covered assets represent assets acquired from the FDIC subject to loss-sharing agreements. The carrying amount of covered assets consisted of loans (Note 5) and other real estate owned (Note 6).

Note 3. Restrictions on Cash and Due From Banks

The Bank is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank, based on a percentage of deposits. The total of those reserve balances was approximately $1,581 and $1,199 at December 31, 2013 and 2012, respectively.

Note 4. Investments

Summary of securities available for sale:



	December 31, 2013
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value

U.S. government and federal agencies	$	16,890	$	6	$	(874	)	$	16,022
GSE residential mortgage-backed securities	112,340		968		(3,403		)	109,905
Corporate bonds	9,319		8		(677		)	8,650
Obligations of states and political subdivisions	7,584		52		(240		)	7,396
	$	146,133	$	1,034	$	(5,194	)	$	141,973



	December 31, 2012
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value

U.S. government and federal agencies	$	17,206	$	184	$	(13	)	$	17,377
GSE residential mortgage-backed securities	85,077		1,933		(183		)	86,827
Corporate bonds	7,765		53		(29		)	7,789
Obligations of states and political subdivisions	7,279		141		(39		)	7,381
	$	117,327	$	2,311	$	(264	)	$	119,374

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 4. Investments (Continued)

Summary of securities held to maturity:



	December 31, 2013
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value

U.S. government and federal agencies	$	15,926	$	—	$	(1,253	)	$	14,673
GSE residential mortgage-backed securities	16,391		154		(183		)	16,362
	$	32,317	$	154	$	(1,436	)	$	31,035



	December 31, 2012
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		(Losses)		Value

U.S. government and federal agencies	$	8,996	$	27	$	—	$	9,023
GSE residential mortgage-backed securities	6,267		233		—		6,500
	$	15,263	$	260	$	—	$	15,523

Pledged securities: Securities with a carrying amount of $93,492 and $82,383 at December 31, 2013 and 2012, respectively, were pledged to secure government obligations, securities sold under agreements to repurchase, and for other purposes as required or permitted by law.

Realized gains and losses: There was $465 and $373 of realized gains and $4 and $17 of realized losses in 2013 and 2012, respectively.

Contractual maturities of available-for-sale securities:



	December 31, 2013
	Amortized		Estimated Fair
	Cost		Value

Due in less than one year	$	270	$	271
Due in one year through five years	8,455		8,271
Due in five years through 10 years	23,759		22,209
Due in more than 10 years	1,309		1,317
	33,793		32,068

GSE residential mortgage-backed securities	112,340		109,905
	$	146,133	$	141,973

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 4. Investments (Continued)

Contractual maturities of held-to-maturity securities:



	December 31, 2013
	Amortized		Estimated Fair
	Cost		Value

Due in less than one year	$	—	$	—
Due in one year through five years	—		—
Due in five years through 10 years	15,926		14,673
Due in more than 10 years	—		—
	15,926		14,673

GSE residential mortgage-backed securities	16,391		16,362
	$	32,317	$	31,035

Anticipated maturities of mortgage-backed securities are not readily determinable, since they may be prepaid without penalty.

Available-for-sale securities in an unrealized loss position which are not other-than-temporarily impaired:



	December 31, 2013
	Less Than 12 Months					12 Months or More					Total
	Estimated fair		Unrealized			Estimated fair		Unrealized			Estimated fair		Unrealized
	Value		(Losses)			Value		(Losses)			Value		(Losses)
U.S. government and federal agencies	$	14,483	$	(874	)	$	—	$	—		$	14,483	$	(874	)
GSE residential mortgage- backed securities	65,549		(3,110		)	4,278		(293		)	69,827		(3,403		)
Corporate bonds	8,550		(677		)	—		—			8,550		(677		)
Obligations of states and political subdivisions	2,935		(240		)	—		—			2,935		(240		)
Total temporarily impaired securities	$	91,517	$	(4,901	)	$	4,278	$	(293	)	$	95,795	$	(5,194	)



	December 31, 2012
	Less Than 12 Months					12 Months or More				Total
	Estimated fair		Unrealized			Estimated fair		Unrealized		Estimated fair		Unrealized
	Value		(Losses)			Value		(Losses)		Value		(Losses)
U.S. government and federal agencies	$	5,115	$	(13	)	$	—	$	—	$	5,115	$	(13	)
GSE residential mortgage- backed securities	21,445		(183		)	—		—		21,445		(183		)
Corporate bonds	7,225		(29		)	—		—		7,225		(29		)
Obligations of states and political subdivisions	3,181		(39		)	—		—		3,181		(39		)
Total temporarily impaired securities	$	36,966	$	(264	)	$	—	$	—	$	36,966	$	(264	)

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 4. Investments (Continued)

Held-to-maturity securities in an unrealized loss position which are not other-than-temporarily impaired:



	December 31, 2013
	Less Than 12 Months					12 Months or More				Total
	Estimated fair		Unrealized			Estimated fair		Unrealized		Estimated fair		Unrealized
	Value		(Losses)			Value		(Losses)		Value		(Losses)
U.S. government and federal agencies	$	14,673	$	(1,253	)	$	—	$	—	$	14,673	$	(1,253	)
GSE residential mortgage- backed securities	9,227		(183		)	—		—		9,227		(183		)
Total temporarily impaired securities	$	23,900	$	(1,436	)	$	—	$	—	$	23,900	$	(1,436	)

There were no held-to-maturity securities in an unrealized loss position at December 31, 2012.

There were 32 and 1 4 available-for-sale securities and 7 and none held-to-maturity securities in an unrealized loss position at December 31, 2013 and 2012, respectively.

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.

U.S. government and federal agencies: The unrealized losses associated with the U.S. government and federal agencies securities relate to changes in interest rates and market spreads subsequent to purchase. At December 31, 2013, the Company had no plans to sell securities with unrealized losses and believes it is more likely than not it would not be required to sell such securities before recovery of their amortized cost.

GSE residential mortgage-backed securities: The unrealized losses in the Company’s GSE residential mortgage-backed securities were caused by interest rate increases. The Company purchased those investments at a discount relative to their face amount, and the contractual cash flows of those investments are guaranteed by an agency of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2013.

Corporates: The unrealized losses associated with corporate securities relate to changes in interest rates and market spreads subsequent to purchase. In general, the issuers of the investment securities are contractually prohibited from prepayment at less than par, and the Company did not pay purchase premiums for these securities. At December 31, 2013, the Company had no plans to sell securities with unrealized losses and believes it is more likely than not it would not be required to sell such securities before recovery of their amortized cost.

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 4. Investments (Continued)

Obligations of states and political subdivisions: The unrealized losses associated with the obligations of states and political subdivisions relate to changes in interest rates and market spreads subsequent to purchase. At December 31, 2013, the Company had no plans to sell securities with unrealized losses and believes it is more likely than not it would not be required to sell such securities before recovery of their amortized cost.

The unrealized loss has been recorded as a mark-to-market loss on securities available for sale and reflected as a reduction to equity through other comprehensive income (loss).

Note 5. Loans

Composition of loans:



	Noncovered, December 31
	2013		2012

Commercial real estate	$	290,158	$	231,698
Commercial	85,988		76,262
Residential real estate	84,594		77,916
Home equity and junior lien	52,351		55,757
Construction loans	48,181		41,440
Consumer installment	9,385		15,659
Other	13,337		8,048
	583,994		506,780

Less allowance for loan losses	9,244		11,934
Loans, net	$	574,750	$	494,846



	Covered, December 31
	2013		2013

Commercial real estate	$	111,509	$	141,967
Commercial	17,469		26,561
Residential real estate	42,365		49,650
Home equity and junior lien	29,895		37,424
Construction loans	13,958		23,053
Consumer installment	421		1,232
Other	2281		3,010
	217,898		282,897

Less allowance for loan losses	10,092		10,074
Loans, net	$	207,806	$	272,823

At December 31, 2013 and 2012, the outstanding contractual principal balance of covered loans was $244,664 and $346,468, respectively.

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 5. Loans (Continued)

Loans are made to individuals as well as commercial and tax-exempt entities. Specific loan terms vary as to interest rate, repayment and collateral requirements based on the type of loan requested and the creditworthiness of the prospective borrower. Credit risk tends to be geographically concentrated in that a majority of the loan customers are located in the markets serviced by the Company.

The Company’s extension of credit is governed by the individual loan policies that were established to control the quality of the Company’s loans. These policies and procedures are reviewed and approved by the Board of Directors on a regular basis.

Commercial real estate loans: The Company’s goal is to create and maintain a high-quality portfolio of commercial real estate loans with customers who meet the quality and relationship profitability objectives of the Company. Commercial real estate loans are subject to underwriting standards and processes similar to commercial operating and term loans. These loans are analyzed using projected cash flows, and the repayment of these loans is largely dependent on the successful operation of the property. Loan performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market, such as geographic location and property type.

Commercial loans: Commercial operating and term loans are originated in the Company’s primary service area. These loans are made to individuals, partnerships, corporations, limited liability partnerships and limited liability companies for the purpose of assisting in the development of a business enterprise. Loans to closely held businesses will generally be guaranteed in full or for a meaningful amount by the businesses’ major owners. Commercial loans are made based primarily on the historical and projected cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not perform as forecasted, and collateral securing loans may fluctuate in value due to economic or individual performance factors. Minimum standards and underwriting guidelines have been established for all commercial loan types.

Residential real estate loans: The Company originates loans secured by one- to four-family residential property that is generally located in the Twin Cities and southwest Florida markets. Residential real estate loans are secured by senior mortgages on residential properties. Residential real estate loans take the form of amortizing term loans. Residential real estate loans are underwritten per the approved credit policy.

Home equity and junior lien loans: The Company originates home equity and junior lien loans secured by one- to four-family residential property that is generally located in the Twin Cities and southwest Florida markets. Home equity loans are secured by senior or junior mortgages on residential properties. These loans take the form of amortizing term loans as well as revolving lines of credit and are underwritten per the approved credit policy.

Construction loans: Construction loans are extended for the purpose of acquiring land and the construction of improvements. Improvements largely take the form of buildings, however, in the case of development loans, may include infrastructure necessary for occupancy. The construction loans are largely to borrowers who will occupy the finished project. At the completion of construction, construction loans are structured as amortizing term loans under terms consistent with the approved credit policy. Upon completion of development projects, the loans for development are extended for a time period consistent with the approved credit policy and are reduced as parcels of underlying collateral are sold.

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 5. Loans (Continued)

Consumer installment loans: The Company originates direct consumer loans, including vehicle loans and overdraft protection plans, using criteria established by the approved credit policy. Each loan type has separate specified factors upon which credit decisions are based. These factors include credit history, debt to income, and collateral type and value.

Other loans: Other loans consist mainly of a bank holding company loan, obligations of states and political subdivisions, including industrial revenue obligations, leases, and loans to farmers.

Loans receivable:



	Noncovered, December 31, 2013
							Loans Past
			30–59 Days		60–89 Days		Due More		Total
	Current		Past Due		Past Due		Than 90 Days		Past Due		Total

Commercial real estate	$	289,580	$	—	$	137	$	441	$	578	$	290,158
Commercial	85,728		170		90		—		260		85,988
Residential real estate	83,643		212		382		357		951		84,594
Home equity and junior lien	51,306		611		301		133		1,045		52,351
Construction loans	47,611		—		102		468		570		48,181
Consumer installment	9,324		45		3		13		61		9,385
Other	12,306		—		1,031		—		1,031		13,337
Total loans	$	579,498	$	1,038	$	2,046	$	1,412	$	4,496	$	583,994

Nonperforming loans	$	924	$	367	$	1,474	$	1,412	$	3,252	$	4,177



	Noncovered, December 31, 2012
							Loans Past
			30–59 Days		60–89 Days		Due More		Total
	Current		Past Due		Past Due		Than 90 Days		Past Due		Total

Commercial real estate	$	230,243	$	483	$	469	$	503	$	1,455	$	231,698
Commercial	74,790		1,096		273		103		1,472		76,262
Residential real estate	76,538		347		169		862		1,378		77,916
Home equity and junior lien	54,353		613		250		541		1,404		55,757
Construction loans	39,464		153		229		1,594		1,976		41,440
Consumer installment	15,532		49		39		39		127		15,659
Other	8,048		—		—		—		—		8,048
Total loans	$	498,968	$	2,741	$	1,429	$	3,642	$	7,812	$	506,780

Nonperforming loans	$	2,705	$	—	$	418	$	3,642	$	4,060	$	6,765

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 5. Loans (Continued)



	Covered, December 31, 2013
							Loans Past
			30–59 Days		60–89 Days		Due More		Total
	Current		Past Due		Past Due		Than 90 Days		Past Due		Total

Commercial real estate	$	102,398	$	1,776	$	2,071	$	5,264	$	9,111	$	111,509
Commercial	15,836		405		235		993		1,633		17,469
Residential real estate	37,836		327		431		3,771		4,529		42,365
Home equity and junior lien	28,821		137		441		496		1,074		29,895
Construction loans	12,913		294		200		551		1,045		13,958
Consumer installment	421		—		—		—		—		421
Other	2,281		—		—		—		—		2,281
Total loans	$	200,506	$	2,939	$	3,378	$	11,075	$	17,392	$	217,898

Nonperforming loans	$	5,181	$	1,897	$	377	$	11,075	$	13,349	$	18,530



	Covered, December 31, 2012
							Loans Past
			30–59 Days		60–89 Days		Due More		Total
	Current		Past Due		Past Due		Than 90 Days		Past Due		Total

Commercial real estate	$	135,272	$	1,877	$	214	$	4,604	$	6,695	$	141,967
Commercial	25,193		129		122		1,117		1,368		26,561
Residential real estate	45,943		787		968		1,952		3,707		49,650
Home equity and junior lien	35,875		409		47		1,093		1,549		37,424
Construction loans	20,445		13		73		2,522		2,608		23,053
Consumer installment	1,226		2		—		4		6		1,232
Other	2,718		—		—		292		292		3,010
Total loans	$	266,672	$	3,217	$	1,424	$	11,584	$	16,225	$	282,897

Nonperforming loans	$	2,916	$	891	$	345	$	11,584	$	12,820	$	15,736

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 5. Loans (Continued)

Recorded investment in nonaccrual loans and loans past due 90 days or more and still accruing interest by class of loans are as follows:



	Noncovered, December 31, 2013				Covered, December 31, 2013
			Loans Past Due				Loans Past Due
			90 Days or More				90 Days or More
	Nonaccrual		and Still Accruing		Nonaccrual		and Still Accruing

Commercial real estate	$	982	$	—	$	9,224	$	—
Commercial	308		—		2,378		—
Residential real estate	693		—		4,947		—
Home equity and junior lien	628		—		1,159		—
Construction loans	465		—		821		—
Consumer installment	70		—		1		—
Other	1,031		—		—		—
Total	$	4,177	$	—	$	18,530	$	—



	Noncovered, December 31, 2012				Covered, December 31, 2012
			Loans Past Due				Loans Past Due
			90 Days or More				90 Days or More
	Nonaccrual		and Still Accruing		Nonaccrual		and Still Accruing

Commercial real estate	$	1,388	$	—	$	5,764	$	—
Commercial	132		—		1,353		—
Residential real estate	1,674		—		3,105		—
Home equity and junior lien	1,008		—		1,190		—
Construction loans	2,463		—		4027		—
Consumer installment	100		—		5		—
Other	—		—		292		—
Total	$	6,765	$	—	$	15,736	$	—

Included in noncovered nonaccruals are purchased credit-impaired loans with carrying values at December 31, 2013, of approximately $913 and contractual balances of approximately $1,679. There were no purchased credit-impaired loans included in noncovered nonaccruals at December 31,2012.

Included in covered nonaccruals are purchased credit-impaired loans with carrying values at December 31, 2013 and 2012, of approximately $11,384 and $12,111, respectively, and contractual balances of approximately $17,374 and $19,195, respectively

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 5. Loans (Continued)

The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans. Under the Company’s risk-rating system, the Company classifies problem and potential problem loans as “Special Mention,” “Substandard” and “Doubtful,” which correspond to risk ratings six, seven and eight, respectively. Substandard loans, risk-rated seven, include those characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful, or risk-rated eight, have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses that deserve management’s close attention, are deemed to be Special Mention, or risk-rated six. Risk ratings are updated any time the situation warrants.

Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass-rated loans. The following tables present the risk category of loans by class of loans based on the most recent analysis performed and the contractual aging:



	Noncovered, December 31, 2013
			Special
	Pass		Mention		Substandard		Doubtful		Total

Commercial real estate	$	274,402	$	7,896	$	7,860	$	—	$	290,158
Commercial	77,501		6,350		2,119		18		85,988
Residential real estate	80,148		968		3,478		—		84,594
Home equity and junior lien	49,055		1,621		1,545		130		52,351
Construction loans	41,424		2,771		3,986		—		48,181
Consumer installment	8,870		145		314		56		9,385
Other	12,306		—		1,031		—		13,337
Total	$	543,706	$	19,751	$	20,333	$	204	$	583,994



	Noncovered, December 31, 2013
			Special
	Pass		Mention		Substandard		Doubtful		Total

Current	$	542,955	$	19,701	$	16,768	$	74	$	579,498
Past due 30–59 days	479		50		509		—		1,038
Past due 60–89 days	271		—		1,645		130		2,046
Past due 90 days or more	1		—		1,411		—		1,412
Total	$	543,706	$	19,751	$	20,333	$	204	$	583,994

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 5. Loans (Continued)



	Noncovered, December 31, 2012
			Special
	Pass		Mention		Substandard		Doubtful		Total

Commercial real estate	$	206,694	$	12,888	$	11,513	$	603	$	231,698
Commercial	66,125		6,902		3,034		201		76,262
Residential real estate	70,712		1,969		5,235		—		77,916
Home equity and junior lien	51,081		1,814		2,622		240		55,757
Construction loans	27,411		5,708		8,243		78		41,440
Consumer installment	15,134		84		360		81		15,659
Other	7,855		—		—		193		8,048
Total	$	445,012	$	29,365	$	31,007	$	1,396	$	506,780



	Noncovered, December 31, 2012
			Special
	Pass		Mention		Substandard		Doubtful		Total

Current	$	442,260	$	29,323	$	26,094	$	1,291	$	498,968
Past due 30–59 days	1,964		42		735		—		2,741
Past due 60–89 days	651		—		778		—		1,429
Past due 90 days or more	137		—		3,400		105		3,642
Total	$	445,012	$	29,365	$	31,007	$	1,396	$	506,780



	Covered, December 31, 2013
			Special
	Pass		Mention		Substandard		Doubtful		Total

Commercial real estate	$	67,730	$	8,421	$	34,844	$	514	$	111,509
Commercial	11,622		1,981		3,557		309		17,469
Residential real estate	28,457		1,949		11,002		957		42,365
Home equity and junior lien	26,012		996		2,622		265		29,895
Construction loans	9,585		2,017		2,067		289		13,958
Consumer installment	398		3		20		—		421
Other	1,380		901		—		—		2,281
Total	$	145,184	$	16,268	$	54,112	$	2,334	$	217,898



	Covered, December 31, 2013
			Special
	Pass		Mention		Substandard		Doubtful		Total

Current	$	144,157	$	15,991	$	38,925	$	1,433	$	200,506
Past due 30–59 days	355		277		2,307		—		2,939
Past due 60–89 days	388		—		2,915		75		3,378
Past due 90 days or more	284		—		9,965		826		11,075
Total	$	145,184	$	16,268	$	54,112	$	2,334	$	217,898

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 5. Loans (Continued)



	Covered, December 31, 2012
			Special
	Pass		Mention		Substandard		Doubtful		Total

Commercial real estate	$	84,795	$	16,797	$	38,509	$	1,866	$	141,967
Commercial	15,684		1,602		7,969		1,306		26,561
Residential real estate	32,066		3,670		12,903		1,011		49,650
Home equity and junior lien	33,125		79		3,374		130		37,424
Construction loans	11,838		1,815		8,828		572		23,053
Consumer installment	987		167		78		—		1,232
Other	2,723		—		284		3		3,010
Total	$	181,218	$	24,846	$	71,945	$	4,888	$	282,897



	Covered, December 31, 2012
			Special
	Pass		Mention		Substandard		Doubtful		Total

Current	$	179,834	$	24,320	$	60,827	$	1,691	$	266,672
Past due 30–59 days	1,098		174		1,945		—		3,217
Past due 60–89 days	123		352		727		222		1,424
Past due 90 days or more	163		—		8,446		2,975		11,584
Total	$	181,218	$	24,846	$	71,945	$	4,888	$	282,897

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 5. Loans (Continued)

The following tables present loans individually evaluated for impairment by class of loans as of December 31, 2013 and 2012:



	Noncovered Impaired Loans, December 31, 2013
	Unpaid				Allowance for		Average		Interest
	Principal		Recorded		Loan Losses		Recorded		Income
	Balance		Investment		Allocated		Investment		Recognized
With no related allowance recorded:
Commercial real estate	$	3,024	$	3,006	$	—	$	2,940	$	101
Commercial	1,406		1,406		—		1,648		80
Residential real estate	1,148		1,148		—		1,218		43
Home equity and junior lien	873		873		—		786		33
Construction loans	830		830		—		1,385		35
Consumer installment	50		50		—		33		4
Other	1,031		1,031		—		515		28
	8,362		8,344		—		8,525		324

With an allowance recorded:
Commercial real estate	3,503		3,287		663		3,496		185
Commercial	734		734		584		788		41
Residential real estate	1,435		1,435		354		2,016		77
Home equity and junior lien	713		590		501		703		22
Construction loans	1,876		1,876		801		3,183		111
Consumer installment	310		304		265		276		17
Other	—		—		—		97		—
	8,571		8,226		3,168		10,559		453
Total	$	16,933	$	16,570	$	3,168	$	19,084	$	777



	Noncovered Impaired Loans, December 31, 2012
	Unpaid				Allowance for		Average		Interest
	Principal		Recorded		Loan Losses		Recorded		Income
	Balance		Investment		Allocated		Investment		Recognized
With no related allowance recorded:
Commercial real estate	$	2,874	$	2,874	$	—	$	4,019	$	152
Commercial	2,056		1,889		—		3,943		122
Residential real estate	1,609		1,286		—		1,291		43
Home equity and junior lien	697		697		—		1,732		37
Construction loans	2,492		1,940		—		2,317		110
Consumer installment	69		17		—		8		11
Other	—		—		—		—		—
	9,797		8,703		—		13,310		475

With an allowance recorded:
Commercial real estate	4,008		3,705		932		5,471		214
Commercial	901		842		645		1,635		36
Residential real estate	2,689		2,597		685		2,553		150
Home equity and junior lien	860		817		552		1,202		34
Construction loans	5,814		4,489		1,574		4,856		159
Consumer installment	271		247		201		203		18
Other	193		193		193		1,616		10
	14,736		12,890		4,782		17,536		621
Total	$	24,533	$	21,593	$	4,782	$	30,846	$	1,096

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 5. Loans (Continued)



	Covered Impaired Loans, December 31, 2013
	Unpaid				Allowance for		Average		Interest
	Principal		Recorded		Loan Losses		Recorded		Income
	Balance		Investment		Allocated		Investment		Recognized
With no related allowance recorded:
Commercial real estate	$	14,823	$	13,091	$	—	$	9,431	$	1,017
Commercial	990		984		—		2,030		55
Residential real estate	2,706		2,633		—		2,499		121
Home equity and junior lien	944		932		—		728		45
Construction loans	302		302		—		296		12
Consumer installment	14		14		—		15		1
Other	—		—		—		—		—
	19,779		17,956		—		14,999		1,251

With an allowance recorded:
Commercial real estate	20,025		16,706		3,702		14,143		837
Commercial	6,066		3,266		1,913		3,667		290
Residential real estate	9,237		7,380		1,226		7,287		347
Home equity and junior lien	1,447		1,291		787		1,521		57
Construction loans	1,938		1,269		443		3,118		98
Consumer installment	10		6		2		31		1
Other	—		—		—		32		—
	38,723		29,918		8,073		29,799		1,630
Total	$	58,502	$	47,874	$	8,073	$	44,798	$	2,881



	Covered Impaired Loans, December 31, 2012
	Unpaid				Allowance for		Average		Interest
	Principal		Recorded		Loan Losses		Recorded		Income
	Balance		Investment		Allocated		Investment		Recognized
With no related allowance recorded:
Commercial real estate	$	5,936	$	5,771	$	—	$	6,495	$	364
Commercial	3,313		3,076		—		1,919		159
Residential real estate	2,688		2,365		—		2,011		155
Home equity and junior lien	536		523		—		403		33
Construction loans	364		290		—		467		18
Consumer installment	17		15		—		12		1
Other	—		—		—		—		—
	12,854		12,040		—		11,307		730

With an allowance recorded:
Commercial real estate	15,032		11,580		3,009		11,922		717
Commercial	5,255		4,068		2,564		3,998		240
Residential real estate	9,775		7,194		1,007		5,798		386
Home equity and junior lien	2,109		1,750		864		1,687		93
Construction loans	8,293		4,967		1,047		5,397		182
Consumer installment	61		56		40		70		4
Other	65		64		34		64		—
	40,590		29,679		8,565		28,936		1,622
Total	$	53,444	$	41,719	$	8,565	$	40,243	$	2,352

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 5. Loans (Continued)

There are no material commitments to lend additional funds to customers whose loans were classified as nonaccrual or renegotiated at December 31, 2013 and 2012.

Impaired loans also include loans modified in a troubled debt restructuring where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collections.

The following is a summary of the Company’s loans modified as troubled debt restructuring during the years ended December 31, 2013 and 2012:



	Noncovered, December 31, 2013
		Premodification		Post-modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded
	Contracts	Investment		Investment

Commercial real estate	3	$	2,405	$	2,405
Commercial	2	446		446
Residential real estate	4	803		803
Home equity and junior lien	2	223		223
Construction loans	6	1,313		1,313
Consumer installment	—	—		—
Other	—	—		—
Total	17	$	5,190	$	5,190



	Noncovered, December 31, 2012
		Premodification		Post-modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded
	Contracts	Investment		Investment

Commercial real estate	1	$	324	$	324
Commercial	4	222		222
Residential real estate	5	1,471		1,154
Home equity and junior lien	3	169		169
Construction loans	7	2,940		2,940
Consumer installment	—	—		—
Other	—	—		—
Total	20	$	5,126	$	4,809

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 5. Loans (Continued)



	Covered, December 31, 2013
		Premodification		Post-modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded
	Contracts	Investment		Investment

Commercial real estate	10	$	3,932	$	3,932
Commercial	5	289		289
Residential real estate	8	1,676		1,676
Home equity and junior lien	6	608		608
Construction loans	4	154		154
Consumer installment	—	—		—
Other	—	—		—
Total	33	$	6,659	$	6,659



	Covered, December 31, 2012
		Premodification		Post-modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded
	Contracts	Investment		Investment

Commercial real estate	6	$	2,753	$	2,753
Commercial	7	1,071		1,071
Residential real estate	6	549		540
Home equity and junior lien	3	87		87
Construction loans	3	1,565		1,565
Consumer installment	—	—		—
Other	—	—		—
Total	25	$	6,025	$	6,016

The Company had a recorded investment of $7,076 and $8,201 in noncovered impaired loans that were modified in a troubled debt restructuring as of December 31, 2013 and 2012, respectively. The Company modified 10 and 11 noncovered loans through rate reductions in 2013 and 2012, respectively. The remaining 7 and 9 noncovered loan modifications in 2013 and 2012, respectively, were either extensions of maturities or forgiveness of principal balances.

The Company had a recorded investment of $13,989 and $6,097 in covered impaired loans that were modified in a troubled debt restructuring as of December 31, 2013 and 2012, respectively. The Company modified 11 and 8 covered loans through rate reductions in 2013 and 2012, respectively. The remaining 22 and 17 covered loan modifications in 2013 and 2012, respectively, were either extensions of maturities or forgiveness of principal balances.

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 5. Loans (Continued)

The following are troubled debt restructurings that subsequently defaulted during the year ended December 31, 2013 and 2012:



	Noncovered, December 31, 2013
	Number of	Recorded
	Contracts	Investment
Total debt restructurings that subsequently defaulted:
Commercial real estate	—	$	—
Commercial	1		111
Residential real estate	—		—
Home equity and junior liens	1		133
Construction loans	—		—
Consumer installment	—		—
Other	—		—
Total	2	$	244



	Covered, December 31, 2013
	Number of	Recorded
	Contracts	Investment
Total debt restructurings that subsequently defaulted:
Commercial real estate	10	$	4,675
Commercial	4		262
Residential real estate	3		262
Home equity and junior liens	1		1
Construction loans	2		256
Consumer installment	—		—
Other	—		—
Total	20	$	5,456

The Company did not have any noncovered or covered troubled debt restructurings in default at December 31,2012.

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 5. Loans (Continued)

Allowance for loan losses: Transactions in the allowance for loan losses during the years ended December 31, 2013 and 2012, are summarized as follows:



	2013 —Rollforward Noncovered
										Home
	Commercial						Residential			Equity and			Construction			Consumer
	Real Estate			Commercial			Real Estate			Junior Lien			Loans			Installment			Other			Total

Balance, beginning	$	4,105		$	2,019		$	1,905		$	1,002		$	2,260		$	330		$	313		$	11,934
Charge-offs	(166		)	(63		)	(272		)	(173		)	(543		)	(113		)	—			(1,330		)
Recoveries	35			3			9			42			80			2			1			172
Provision for loan losses	(668		)	(530		)	(149		)	(55		)	(73		)	150			(207		)	(1,532		)
Balance, ending	$	3,306		$	1,429		$	1,493		$	816		$	1,724		$	369		$	107		$	9,244



	2013 —Rollforward Covered
										Home
	Commercial						Residential			Equity and			Construction			Consumer
	Real Estate			Commercial			Real Estate			Junior Lien			Loans			Installment			Other			Total

Balance, beginning	$	3,708		$	2,714		$	1,228		$	1,008		$	1,311		$	47		$	58		$	10,074
Charge-offs	(2,205		)	(340		)	(909		)	(375		)	(1,018		)	(33		)	(3		)	(4,883		)
Recoveries	32			2			1			2			2			—			—			39
Provision for loan losses	3,013			(345		)	1,317			483			417			(6		)	(17		)	4,862
Balance, ending	$	4,548		$	2,031		$	1,637		$	1,118		$	712		$	8		$	38		$	10,092



	2012 —Rollforward Noncovered
										Home
	Commercial						Residential			Equity and			Construction			Consumer
	Real Estate			Commercial			Real Estate			Junior Lien			Loans			Installment		Other			Total

Balance, beginning	$	3,721		$	3,008		$	1,826		$	1,824		$	2,217		$	258	$	326		$	13,180
Charge-offs	(99		)	(285		)	(326		)	(38		)	(307		)	—		(50		)	(1,105		)
Recoveries	1			92			8			9			56			—		14			180
Provision for loan losses	482			(796		)	397			(793		)	294			72		23			(321		)
Balance, ending	$	4,105		$	2,019		$	1,905		$	1,002		$	2,260		$	330	$	313		$	11,934



	2012 —Rollforward Covered
										Home
	Commercial						Residential			Equity and			Construction			Consumer
	Real Estate			Commercial			Real Estate			Junior Lien			Loans			Installment			Other			Total

Balance, beginning	$	4,258		$	2,482		$	1,364		$	1,022		$	2,125		$	79		$	34		$	11,364
Charge-offs	(2,073		)	(769		)	(636		)	(900		)	(1,028		)	—			(27		)	(5,433)		)
Recoveries	—			3			2			1			15			—			—			21
Provision for loan losses	1,523			998			498			885			199			(32		)	51		)	4,122
Balance, ending	$	3,708		$	2,714		$	1,228		$	1,008		$	1,311		$	47		$	58		$	10,074

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 5. Loans (Continued)

The allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2013 and 2012, are as follows:



	Noncovered, December 31, 2013
	Individually		Collectively
	Evaluated for		Evaluated for
	Impairment		Impairment		Total
Allowance for loan losses:
Commercial real estate	$	663	$	2,643	$	3,306
Commercial	584		845		1,429
Residential real estate	354		1,139		1,493
Home equity and junior lien	501		315		816
Construction loans	801		923		1,724
Consumer installment	265		104		369
Other	—		107		107
Total	$	3,168	$	6,076	$	9,244

Loans:
Commercial real estate	$	6,293	$	283,865	$	290,158
Commercial	2,140		83,848		85,988
Residential real estate	2,584		82,010		84,594
Home equity and junior lien	1,464		50,887		52,351
Construction loans	2,706		45,475		48,181
Consumer installment	352		9,033		9,385
Other	1,031		12,306		13,337
Total	$	16,570	$	567,424	$	583,994



	Noncovered, December 31, 2012
	Individually		Collectively
	Evaluated for		Evaluated for
	Impairment		Impairment		Total
Allowance for loan losses:
Commercial real estate	$	932	$	3,173	$	4,105
Commercial	645		1,374		2,019
Residential real estate	685		1,220		1,905
Home equity and junior lien	552		450		1,002
Construction loans	1,574		686		2,260
Consumer installment	201		129		330
Other	193		120		313
Total	$	4,782	$	7,152	$	11,934

Loans:
Commercial real estate	$	6,579	$	225,119	$	231,698
Commercial	2,731		73,531		76,262
Residential real estate	3,883		74,033		77,916
Home equity and junior lien	1,514		54,243		55,757
Construction loans	6,429		35,011		41,440
Consumer installment	264		15,395		15,659
Other	193		7,855		8,048
Total	$	21,593	$	485,187	$	506,780

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 5. Loans (Continued)



	Covered, December 31, 2013
	Individually		Collectively
	Evaluated for		Evaluated for
	Impairment		Impairment		Total
Allowance for loan losses:
Commercial real estate	$	3,702	$	846	$	4,548
Commercial	1,913		118		2,031
Residential real estate	1,226		411		1,637
Home equity and junior lien	787		331		1,118
Construction loans	443		269		712
Consumer installment	2		6		8
Other	—		38		38
Total	$	8,073	$	2,019	$	10,092

Loans:
Commercial real estate	$	29,797	$	81,712	$	111,509
Commercial	4,250		13,219		17,469
Residential real estate	10,013		32,352		42,365
Home equity and junior lien	2,223		27,672		29,895
Construction loans	1,571		12,387		13,958
Consumer installment	20		401		421
Other	—		2,281		2,281
Total	$	47,874	$	170,024	$	217,898



	Covered, December 31, 2012
	Individually		Collectively
	Evaluated for		Evaluated for
	Impairment		Impairment		Total
Allowance for loan losses:
Commercial real estate	$	3,009	$	699	$	3,708
Commercial	2,564		150		2,714
Residential real estate	1,007		221		1,228
Home equity and junior lien	864		144		1,008
Construction loans	1,047		264		1,311
Consumer installment	40		7		47
Other	34		24		58
Total	$	8,565	$	1,509	$	10,074

Loans:
Commercial real estate	$	17,351	$	124,616	$	141,967
Commercial	7,144		19,417		26,561
Residential real estate	9,559		40,091		49,650
Home equity and junior lien	2,273		35,151		37,424
Construction loans	5,257		17,796		23,053
Consumer installment	71		1,161		1,232
Other	64		2,946		3,010
Total	$	41,719	$	241,178	$	282,897

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 5. Loans (Continued)

Acquired loan matters: The carrying amount of covered loans and other purchased noncovered loans consists of purchased credit-impaired loans and non—credit-impaired loans as shown in the following tables:



	Noncovered, December 31, 2013
	Purchased		Purchased
	Impaired		Nonimpaired
	Loans		Loans		Total

Commercial real estate	$	3,375	$	17,307	$	20,682
Commercial	3		1,599		1,602
Residential real estate	1,074		10,562		11,636
Home equity and junior lien	216		7,120		7,336
Construction loans	2,737		1,910		4,647
Consumer installment and other	19		2,251		2,270
	$	7,424	$	40,749	$	48,173



	Noncovered, December 31, 2012
	Purchased		Purchased
	Impaired		Nonimpaired
	Loans		Loans		Total

Commercial real estate	$	8,319	$	19,739	$	28,055
Commercial	182		2,728		2,910
Residential real estate	2,638		13,447		16,085
Home equity and junior lien	983		8,078		9,061
Construction loans	3,242		2,177		5,419
Consumer installment and other	101		6,720		6,821
	$	15,462	$	52,889	$	68,351



	Covered, December 31, 2013
	Purchased		Purchased
	Impaired		Nonimpaired
	Loans		Loans		Total

Commercial real estate	$	18,324	$	93,185	$	111,509
Commercial	1,239		16,230		17,469
Residential real estate	7,639		34,726		42,365
Home equity and junior lien	1,054		28,841		29,895
Construction loans	2,030		11,928		13,958
Consumer installment and other	5		2,697		2,702
	$	30,291	$	187,607	$	217,898

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 5. Loans (Continued)



	Covered, December 31, 2012
	Purchased		Purchased
	Impaired		Nonimpaired
	Loans		Loans		Total

Commercial real estate	$	37,440	$	104,527	$	141,967
Commercial	5,340		21,221		26,561
Residential real estate	11,425		38,225		49,650
Home equity and junior lien	1,353		36,071		37,424
Construction loans	10,287		12,766		23,053
Consumer installment and other	332		3,910		4,242
	$	66,177	$	216,720	$	282,897

Covered loans include loans acquired in the Mainstreet, Jennings, Riverview, Commerce and certain loans of The Riverbank acquisitions.

Noncovered loans include loans acquired in the Rosemount, certain loans of The Riverbank, and the Naples acquisitions.

The nonaccretable discount represents the estimated amount of contractually required payments that are expected to be uncollectible on loans acquired in a business combination, including loans purchased in FDIC-assisted transactions.

Changes in the nonaccretable balance for purchased impaired and purchased nonimpaired loans for the transactions were as follows:



	Years Ended December 31
	2013			2012

Balance, beginning of year	$	42,354		$	97,093
Purchases	—			11,200
Utilization of nonaccretable differences	(7,597		)	(16,488		)
Purchase accounting adjustments	(2,532		)	(25,358		)
Reclassifications to accretable difference	(19,977		)	(24,093		)
Balance, end of year	$	12,248		$	42,354

The accretable discount is the discount applied to the expected cash flows of the portfolio to account for the differences between the interest rates at acquisition and rates currently expected on similar portfolios in the marketplace. The discount includes an adjustment on loans that are not accruing or paying contractual interest. As the accretable discount is accreted to interest income over the expected average life of the portfolio, the result will be interest income on the accruing and nonaccruing loans at the estimated current market rate.

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 5. Loans (Continued)

Changes in the accretable balance for purchased impaired and purchased nonimpaired loans for the transactions were as follows:



	Years Ended December 31
	2013			2012

Balance, beginning of year	$	32,029		$	14,782
Purchases	—			2,000
Accretion	(31,589		)	(11,245		)
Purchase accounting adjustments	551			2,399
Reclassification from nonaccretable discount	19,977			24,093
Balance, end of year	$	20,968		$	32,029

Pledged loans: Loans with carrying values of approximately $122,672 and $125,426 at December 31, 2013 and 2012, respectively, were pledged to secure available advances from the Federal Home Loan Bank of Des Moines and the Federal Reserve Bank.

Note 6. Other Real Estate Owned

Covered other real estate owned is presented net of valuation discounts of $4,739 and $25,969 as of December 31, 2013 and 2012, respectively. Noncovered other real estate owned is presented net of valuation discounts of $79 and $172 as of December 31, 2013 and 2012, respectively. An analysis of activity related to other real estate owned is as follows:



	Year Ended December 31, 2013
	Covered			Noncovered
	OREO			OREO			Total

Balance, beginning of year	$	27,889		$	6,398		$	34,287
Loans transferred to other real estate owned	12,064			4,913			16,977
Gain (loss) on sale and write-down of other real estate owned, net	(3,773		)	(66		)	(3,839		)
Proceeds from sales of other real estate owned	(18,791		)	(7,457		)	(26,248		)
Balance, end of year	$	17,389		$	3,788		$	21,177

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 6. Other Real Estate Owned (Continued)



	Year Ended December 31, 2013
	Covered			Noncovered
	OREO			OREO			Total

Balance, beginning of year	$	31,222		$	2,732		$	33,954
Other real estate owned from business combinations	—			1,638			1,638
Loans transferred to other real estate owned	13,142			5,215			18,357
Gain (loss) on sale and write-down of other real estate owned, net	1,956			(255		)	1,701
Proceeds from sales of other real estate owned	(18,431		)	(2,932		)	(21,363		)
Balance, end of year	$	27,889		$	6,398		$	34,287

Income and expenses applicable to other real estate owned assets include the following amounts:



	Year Ended December 31, 2013
	Related To
	Covered			Noncovered
	OREO			OREO			Total

Rental income	$	10		$	1		$	11
Expenses	(3,145		)	(687		)	(3,832		)
Gains on sale	2,482			777			3,259
Loss on sale	(1,595		)	(548		)	(2,143		)
Write-downs	(4,660		)	(295		)	(4,955		)
Change to FDIC receivable	5,934			—			5,934
Other real estate owned expense, net	$	(974	)	$	(752	)	$	(1,726	)



	Year Ended December 31, 2012
	Related To
	Covered			Noncovered
	OREO			OREO			Total

Rental income	$	475		$	29		$	504
Expenses	(4,010		)	(668		)	(4,678		)
Gains on sale	4,875			220			5,095
Loss on sale	(1,070		)	(94		)	(1,164		)
Write-downs	(1,849		)	(381		)	(2,230		)
Change to FDIC receivable	1,553			—			1,553
Other real estate owned expense, net	$	(26	)	$	(894	)	$	(920	)

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 7. Premises and Equipment



	December 31
	2013		2012

Land and buildings	$	28,224	$	27,516
Leasehold improvements	1,585		1,152
Furniture and equipment	9,719		8,867
	39,528		37,535

Less accumulated depreciation	10,199		8,430
	$	29,329	$	29,105

Note 8. Goodwill and Other intangible Assets

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in the Bank of Naples acquisition occurring on July 13, 2012. Goodwill will be subject to an impairment test at least on an annual basis. At December 31, 2013, the Company’s goodwill recorded as a result of the acquisition totaled $437. At December 31,2012, the Company’s provisional goodwill recorded as a result of the acquisition totaled $2,344.

As a result of the acquisition of the Purchased Banks, the Company has other intangible assets consisting of core deposit intangibles that had, as of December 31, 2013 and 2012, a remaining weighted-average amortization period of approximately 2.09 and 2.45 years, respectively. The following tables present the changes during the years ended December 31, 2013 and 2012, in the carrying amount of core deposit and client relationship intangibles, and the gross carrying amount, accumulated amortization, and net book value as of December 31, 2013 and 2012:



	Years Ended December 31
	2013		2012

Balance, beginning of year	$	1,177	$	753
Other intangibles from business combinations (1)	—		880
Amortization expense	359		456
Balance, end of year	$	818	$	1,177

(1) See Note 2 for additional information.



	December 31
	2013		2012

Gross carrying amount	$	1,785	$	1,785
Accumulated amortization	967		608
Net book value	$	818	$	1,177

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 8. Goodwill and Other intangible Assets (Continued)

The following presents the estimated future amortization expense of other intangible assets:



Years Ending December 31,

2014	$	306
2015	251
2016	167
2017	74
2018	20
Thereafter	—
	$	818

Note 9. Deposits

Composition of deposits:



	December 31
	2013		2012

Noninterest-bearing demand deposits	$	259,877	$	247,896
Money market NOW accounts and savings accounts	480,023		490,844
Time certificates, $100 or more	122,538		148,407
Other time deposits	180,209		216,081
	$	1,042,647	$	1,103,228

Scheduled maturities of time deposits are as follows:



Years Ending December 31,

2014	$	182,207
2015	61,596
2016	36,211
2017	16,466
2018	6,242
Thereafter	25
	$	302,747

Note 10. Short-Term Borrowings



	December 31
	2013		2012

Securities sold under agreements to repurchase	$	5,506	$	4,574

Securities sold under agreements to repurchase are held by the Company. The Company has pledged certain investment securities with a fair value of $12,284 and $10,092 at December 31, 2013 and 2012, respectively. The agreements mature daily and carry a weighted-average interest rate of 2.55 percent and 1.87 percent at December 31, 2013 and 2012, respectively.

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 11. Subordinated Notes Payable



	December 31
	2013		2012
Subordinated note payable due to a related entity, CBI Capital Trust II, interest paid quarterly, variable rate at one-month LIBOR plus 3.50% (3.74% at December 31, 2013). The subordinated debt matures on March 15, 2038. (1)	$	7,217	$	7,217
Subordinated note payable due to a related entity, CBI Capital Trust III, interest paid quarterly, variable rate at three-month LIBOR plus 3.75% (4.02% December 31, 2013). The subordinated debt matures on September 30, 2039. (1)	3,093		3,093
Subordinated note payable due to 1907 EJF Fund, LTD, interest paid semiannually, fixed rate of 8.75%. The subordinated debt matures on June 28, 2023. (2)	12,300		—
	$	22,610	$	10,310

(1)

The Company has formed two statutory business trusts, CBI Capital Trust II and III, under the laws of the state of Delaware, which exist for the exclusive purposes of (i) issuing trust securities representing undivided beneficial interests in the assets of the trust; (ii) investing the gross proceeds of the trust securities in junior subordinated deferrable interest debentures (subordinated debentures); and (iii) engaging in only those activities necessary or incidental thereto.

CBI Capital Trust III, which has outstanding subordinated debentures of $3,093 at December 31, 2012, has issued 3,000 preferred securities shares of the Trust to CBS LLC, a related party of the Company. These shares were issued at a par value of $1,000 and were offered at terms comparable to those offered to other parties not affiliated with the Company.

For regulatory capital purposes, these trust securities qualify as a component of Tier 1 capital.


(2)	The subordinated note purchase agreement with 1907 EJF Fund, LTD contains certain covenants regarding, among other matters, a requirement to maintain an “adequately capitalized” status and maintain a debt-to-equity ratio of 35 percent or less.

The agreement also contains a clause to obtain prior approval before payments of dividends and distributions in excess of the rolling 12-month aggregated earnings, beginning March 31,2014.

The debt may be prepaid, subject to varying prepayment penalties, in full if the lender opts not to consent to the borrower’s request to exceed the dividend and distribution payment covenants or the debt-to-equity covenants. After 2021, the debt may be prepaid, without penalty, in full if the lender opts not to consent to the borrower’s request to exceed the limits in the covenants of the agreement.

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 12. Notes Payable



	December 31
	2013		2012
Variable-rate term loan from US Bank, interest rate of one-month LIBOR plus 2.00% (2.1875% at December 31, 2013), principal payments of $41,667 plus outstanding interest due quarterly, remaining outstanding principal and interest due at maturity on April 30, 2014 (1)	$	1,291	$	1,458
Variable-rate revolving loan from US Bank, maximum commitment of $6,000, interest rate of one-month LIBOR plus 2.00% (2.25% at December 31, 2012), interest payments due quarterly with principal and remaining interest due at maturity on December 31, 2012 (1)	—		4,750
Total	$	1,291	$	6,208

(1) The revolving and term note debt payable to US Bank is secured by 100 percent of the stock of the Bank. The agreement contains restrictions regarding, among other matters, a requirement to maintain “well-capitalized” status; a requirement to not exceed certain ratios of noncurrent loans, classified assets, and other real estate owned to capital; a minimum allowance for loan losses as a percent of total loans; and a minimum fixed charge coverage ratio.

Note 13. Commitments, Contingencies and Credit Risk

Contingencies: In the normal course of business, the Company may be involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the consolidated financial statements.

Financial instruments with off-balance-sheet risk: The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. They involve, to varying degrees, elements of credit risk in excess of amounts recognized on the consolidated balance sheet.

The Company’s exposure to credit loss in the event of nonperformance by the other parties to the financial instruments for these commitments is represented by the contractual amounts of the instruments. The Company uses the same credit policies in making commitments as it does for on- balance-sheet instruments. These commitments at December 31, 2013 and 2012, were as follows:



	December 31
	2013		2012

Commitments to extend credit	$	118,665	$	108,313
Standby letters of credit	4,283		2,377
	$	122,948	$	110,690

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 13. Commitments, Contingencies and Credit Risk (Continued)

Commitments to extend credit: Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. If deemed necessary upon extension of credit, the amount of collateral obtained is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, securities, and mortgages held on various properties.

Standby letters of credit: Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances that the Company deems necessary.

Lease commitments: The Company leases certain of its office spaces under operating leases. The leases require the Company to also pay a portion of the operating expenses and real estate taxes. The following is a schedule of approximate future minimum lease payments under the various lease commitments:



Years Ending December 31,

2014	$	398
2015	247
2016	231
2017	128
Thereafter	8
	$	1,012

Total rent expense, net of rental income, for the years ended December 31, 2013 and 2012, was approximately $332 and $498, respectively.

Financial instruments with concentration of credit risk:

Concentration over insured limits: The nature of the Company’s business requires that it maintain amounts due from banks that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts.

Concentration by geographic location: The Company makes commercial, residential and consumer loans to its customers, primarily in the Company’s Minneapolis metropolitan trade area and also in the Company’s secondary trade area, which encompasses the entire Minneapolis-St. Paul metropolitan area of Minnesota and the Naples and Fort Meyers area of Florida. Although the Company’s loan portfolio is diversified, a substantial portion of the Company’s customers’ ability to honor their contracts is dependent upon the local business economy, which is taken into consideration by management in determining the allowance for loan losses.

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 14. Employee Benefit Plans

Deferred compensation plans: The Company has entered into supplemental pension agreements and salary continuation agreements with certain executive officers. The agreements provide compensation to the officers after retirement or upon termination. Compensation expense under these agreements is being accrued over the anticipated employment of the individual officers. Compensation expense under these agreements totaled $124 and $373 during 2013 and 2012, respectively. Supplemental pension and deferred compensation liabilities totaled $1,194 and $1,070 as of December 31, 2013 and 2012, respectively.

401(k) retirement plan: Company contributions to the plan for the years ended December 31, 2013 and 2012, were approximately $727 and $704, respectively.

Note 15. Transactions With Related Parties

The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, significant stockholders, executive officers and affiliated companies in which they are principal stockholders (commonly referred to as related parties). In management’s opinion, these loans were on the same terms as those for comparable loans with nonrelated parties. Total extensions of credit with related parties were approximately $360 at December 31, 2013 and 2012.

The Company also leases its Naples location from an entity that is partially owned by the Company’s shareholder. Rent expense under this lease was approximately $219,000, and this lease commitment is included in lease commitments in Note 13.

Note 16. Regulatory Capital Requirements

The Company (on a consolidated basis) and the Bank 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 and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of assets 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. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum ratios (set forth in the table below) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets (all as defined in the regulations). Management believes, as of December 31, 2013, that the Company and Bank meet all capital adequacy requirements to which they are subject.

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 16. Regulatory Capital Requirements (Continued)

As of December 31, 2013, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s category. The Company’s and the Bank’s actual capital amounts and ratios as of December 31, 2013 and 2012, are also presented in the table.



							Minimum to Be Well-
				Minimum Capital			Capitalized Under Prompt
	Actual			Requirement			Corrective Action Provisions
	Amount	Ratio		Amount	Ratio		Amount	Ratio
As of December 31, 2013:
Total risk-based capital (to risk-weighted assets):
Consolidated	73,129	14.13	%	41,404	8.0	%	N/A	N/A
Central Bank	91,037	15.33	%	47,521	8.0	%	59,402	10.0	%
Tier I capital (to risk- weighted assets):
Consolidated	86,031	12.86	%	26,759	4.0	%	N/A	N/A
Central Bank	93,942	14.06	%	26,735	4.0	%	40,102	6.0	%
Tier I capital (to average assets):
Consolidated	86,031	7.50	%	45,883	4.0	%	N/A	N/A
Central Bank	93,942	8.20	%	45,850	4.0	%	57,312	5.0	%
As of December 31, 2012:
Total risk-based capital (to risk-weighted assets):
Consolidated	87,363	14.26	%	49,012	8.0	%	N/A	N/A
Central Bank	92,740	15.14	%	49,004	8.0	%	61,255	10.0	%
Tier I capital (to risk- weighted assets):
Consolidated	79,529	12.98	%	24,508	4.0	%	N/A	N/A
Central Bank	84,906	13.86	%	24,504	4.0	%	36,756	6.0	%
Tier I capital (to average assets):
Consolidated	79,529	6.60	%	48,199	4.0	%	N/A	N/A
Central Bank	84,906	7.05	%	48,174	4.0	%	60,217	5.0	%

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 17. Fair Value Measurements

ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (1) independent, (2) knowledgeable, (3) able to transact and (4) willing to transact.

ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert expected future amounts, such as cash flows or earnings, to a single present value amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

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

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

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

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 17. Fair Value Measurements (Continued)

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Investment securities available for sale: The fair values of investment securities available for sale were generally determined based on matrix pricing. Matrix pricing is a mathematical technique that utilizes observable market inputs including, for example, yield curves, credit ratings and prepayment speeds. Fair values determined using matrix pricing are categorized as Level 2 in the fair value hierarchy.

The following tables summarize assets measured at fair value on a recurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:



	Estimated Fair Value Measurements at December 31,
	2013		Level 1		Level 2		Level 3

U.S. government and federal agencies	$	16,022	$	—	$	16,022	$	—
GSE residential mortgage-backed securities	109,905		—		109,905		—
Corporates	8,650		—		8,650		—
Obligations of states and political subdivisions	7,396		—		7,396		—
	$	141,973	$	—	$	141,973	$	—



	Estimated Fair Value Measurements at December 31,
	2012		Level 1		Level 2		Level 3

U.S. government and federal agencies	$	17,377	$	—	$	17,377	$	—
GSE residential mortgage-backed securities	86,827		—		86,827		—
Corporate and private residential mortgage-backed securities	7,789		—		7,789		—
Obligations of states and political subdivisions	7,381		—		7,381		—
	$	119,374	$	—	$	119,374	$	—

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 17. Fair Value Measurements (Continued)

Financial instruments recorded at fair value on a nonrecurring basis: The Company is required, on a nonrecurring basis, to adjust the carrying value of certain assets or provide valuation allowances related to certain assets using fair value measurements in accordance with generally accepted accounting principles.

Impaired loans: The specific reserves for collateral-dependent impaired loans are determined based on the fair value of collateral method in accordance with ASC Topic 310. Under the fair value of collateral method, the specific reserve is equal to the difference between the carrying value of the loan and the fair value of the collateral less estimated selling costs. When a specific reserve is required for an impaired loan, the impaired loan is essentially measured at fair value. The fair value of collateral was determined based on appraisals, with further adjustments made to the appraised values due to various factors, including the age of the appraisal, age of comparables included in the appraisal, and known changes in the market and in the collateral. The resulting fair value measurement is disclosed in the nonrecurring hierarchy table. Where estimates of fair values used for other collateral supporting commercial loans are based on assumptions not observable in the marketplace, such valuations have been classified as Level 3.

Other real estate owned: Other real estate owned, upon initial recognition, is measured and reported at fair value through a charge-off to the allowance for possible loan losses based upon the fair value of the other real estate owned. Where the fair value of other real owned, upon initial recognition, is estimated based on assumptions not observable in the marketplace, such valuation has been classified as Level 3.

The Company may be required, from time to time, to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period.

Assets subject to the nonrecurring fair value measurements described herein included in the Company’s consolidated balance sheets at December 31, 2013 and 2012, are summarized in the following tables:



	Carrying Value at December 31, 2013
	Total		Level 1		Level 2		Level 3

Impaired loans	$	26,903	$	—	$	—	$	26,903
Other real estate owned	21,177		—		—		21,177
	$	48,080	$	—	$	—	$	48,080



	Carrying Value at December 31, 2012
	Total		Level 1		Level 2		Level 3

Impaired loans	$	29,222	$	—	$	—	$	29,222
Other real estate owned	34,287		—		—		34,287
	$	63,509	$	—	$	—	$	63,509

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 17. Fair Value Measurements (Continued)

ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring or nonrecurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or nonrecurring basis are discussed above. The methodologies for other financial assets and financial liabilities are discussed below.



	December 31, 2013				December 31, 2012
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Financial assets:
Cash and cash equivalents	$	94,024	$	94,024	$	144,195	$	144,195
Certificates of deposit	839		839		886		886
Federal funds sold	1,006		1,006		3,235		3,235
Available-for-sale securities	141,973		141,973		119,374		119,374
Held-to-maturity securities	32,317		31,035		15,263		15,523
Loans originated, including covered loans
and loans held for sale, net	785,237		787,927		778,858		780,616
Investment in restricted stock	1,499		1,499		2,463		2,463
FDIC indemnification asset	33,930		33,930		68,530		68,530
Bank-owned life insurance	5,631		5,631		460		460
Accrued interest receivable	2,903		2,903		2,985		2,985
Financial liabilities:
Deposits	1,042,647		1,045,230		1,103,228		1,107,572
Short-term borrowings	5,506		5,506		4,574		4,574
Subordinated notes payable	22,610		22,516		10,310		10,310
Notes payable	1,291		1,291		6,208		6,208
Accrued interest payable	1,291		1,291		1,771		1,771

Fair value of financial instruments: The following methods and assumptions were used by the Company in estimating the fair values of its financial instruments:

The carrying amounts reported in the consolidated balance sheet for cash and cash equivalents, certificates of deposit, federal funds sold, bank-owned life insurance, investments in restricted securities, demand deposits, NOW and money market deposits, savings deposits, short-term borrowings, variable- rate long-term borrowings, accrued interest receivable and accrued interest payable approximate their fair values.

Originated loans and loans held for sale: For variable-rate originated loans that reprice frequently and that have experienced no significant change in credit risk, fair values are based on carrying values. Fair values for all other originated loans are estimated based on discounted cash flows, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality.

Covered loans: The fair value carrying amounts of covered loans are calculated with a discounted cash flow model using market-based credit spreads of comparable debt instruments or credit derivatives of the specific borrower or comparable borrowers. Results of discounted cash flow calculations may be adjusted, as appropriate, to reflect other market conditions or the perceived credit risk of the borrower.

Central Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(In Thousands)

Note 17. Fair Value Measurements (Continued)

FDIC indemnification asset: Fair value at the acquisition dates was estimated based on projected cash flows available for loss-sharing based on the credit adjustments estimated for each loan pool and the loss-sharing percentages. This loss-sharing asset is also separately measured from the related covered loans and foreclosed real estate. Although this asset is a contractual receivable from the FDIC, there is no contractual interest rate; therefore, an imputed rate of interest has also been taken into account to estimate fair values.

Deposits: Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregate expected monthly maturities on time deposits.

Notes payable and subordinated notes payable: Fair values for fixed-rate borrowings are estimated using a discounted cash flow analysis based on interest rates for the same or similar debt offered to the Company having the same or similar remaining maturities and collateral requirements.

Off-balance-sheet instruments: Since the majority of the Company’s off-balance-sheet instruments consist of nonfee-producing, variable-rate commitments, the Company has determined they do not have a distinguishable fair value.

Interest rate risk: The Company assumes interest rate risk, the risk that general interest rate levels will change, as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change, and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to appropriately manage interest rate risk. However, borrowers with fixed-rate obligations are less likely to prepay in a rising-rate environment and more likely to prepay in a falling-rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising-rate environment and less likely to do so in a falling-rate environment. Management monitors rates and maturities of assets and liabilities and attempts to manage its interest rate risk within policy guidelines by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

MidWestOne Financial Group, Inc. - FORM 8-K/A - EX-99.3 - EXHIBIT 99.3 - June 5, 2015

Attached files

MidWestOne Financial Group, Inc. Reports