10-Q 1 v471934_10q.htm FORM 10-Q

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended June 30, 2017

 

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

 

For the transition period from____________to____________

 

Commission file number 001-37700

NICOLET BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

 

WISCONSIN

(State or other jurisdiction of incorporation or organization)

47-0871001

(I.R.S. Employer Identification No.)

 

111 North Washington Street

Green Bay, Wisconsin 54301

(920) 430-1400

(Address, including zip code, and telephone number, including area code, of
Registrant’s principal executive offices)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨
    (Do not check if a smaller reporting company)

 

Emerging Growth Company x

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

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

 

As of August 1, 2017 there were 9,864,525 shares of $0.01 par value common stock outstanding.

 

 

 

 

 

 

Nicolet Bankshares, Inc.

 

TABLE OF CONTENTS

 

    PAGE
PART I FINANCIAL INFORMATION  
     
  Item 1. Financial Statements:  
       
    Consolidated Balance Sheets June 30, 2017 (unaudited) and December 31, 2016 3
       
    Consolidated Statements of Income Three Months and Six Months Ended June 30, 2017 and 2016 (unaudited) 4
       
    Consolidated Statements of Comprehensive Income Three Months and Six Months Ended June 30, 2017 and 2016 (unaudited) 5
       
    Consolidated Statement of Changes in Stockholders’ Equity Six Months Ended June 30, 2017 (unaudited) 6
       
    Consolidated Statements of Cash Flows Six Months Ended June 30, 2017 and 2016 (unaudited) 7
       
    Notes to Unaudited Consolidated Financial Statements 8-29
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30-52
       
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 52
       
  Item 4. Controls and Procedures 52
       
PART II OTHER INFORMATION  
     
  Item 1. Legal Proceedings 53
       
  Item 1A. Risk Factors 53
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 53
       
  Item 3. Defaults Upon Senior Securities 53
       
  Item 4. Mine Safety Disclosures 53
       
  Item 5. Other Information 53
       
  Item 6. Exhibits 54
       
    Signatures 54

 

 2 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS:

 

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets
(In thousands, except share and per share data)

 

   June 30, 2017
(Unaudited)
   December 31, 2016
(Audited)
 
Assets          
Cash and due from banks  $59,215   $68,056 
Interest-earning deposits   51,697    60,320 
Federal funds sold   730    727 
Cash and cash equivalents   111,642    129,103 
Certificates of deposit in other banks   2,985    3,984 
Securities available for sale (“AFS”)   418,286    365,287 
Other investments   12,939    17,499 
Loans held for sale   6,568    6,913 
Loans   2,009,964    1,568,907 
Allowance for loan losses   (12,591)   (11,820)
Loans, net   1,997,373    1,557,087 
Premises and equipment, net   47,401    45,862 
Bank owned life insurance (“BOLI”)   63,460    54,134 
Goodwill and other intangibles   128,871    87,938 
Accrued interest receivable and other assets   36,392    33,072 
Total assets  $2,825,917   $2,300,879 
           
Liabilities and Stockholders’ Equity          
Liabilities:          
Demand  $573,372   $482,300 
Money market and NOW accounts   1,170,986    964,509 
Savings   265,165    221,282 
Time   380,448    301,895 
Total deposits   2,389,971    1,969,986 
Notes payable   21,787    1,000 
Junior subordinated debentures   29,377    24,732 
Subordinated notes   11,903    11,885 
Accrued interest payable and other liabilities   19,923    16,911 
Total liabilities   2,472,961    2,024,514 
           
Stockholders’ Equity:          
Common stock   99    86 
Additional paid-in capital   268,601    209,700 
Retained earnings   83,424    68,888 
Accumulated other comprehensive income (loss) (“AOCI”)   260    (2,727)
Total Nicolet Bankshares, Inc. stockholders’ equity   352,384    275,947 
Noncontrolling interest   572    418 
Total stockholders’ equity and noncontrolling interest   352,956    276,365 
Total liabilities, noncontrolling interest and stockholders’ equity  $2,825,917   $2,300,879 
           
Preferred shares authorized (no par value)   10,000,000    10,000,000 
Preferred shares issued and outstanding   -    - 
Common shares authorized (par value $0.01 per share)   30,000,000    30,000,000 
Common shares outstanding   9,862,615    8,553,292 
Common shares issued   9,890,088    8,596,241 

 

See accompanying notes to unaudited consolidated financial statements.

 

 3 

 

 

ITEM 1. Financial Statements Continued:

 

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands, except share and per share data) (Unaudited)

 

   Three Months Ended
June 30,
   Six months Ended
June 30,
 
   2017   2016   2017   2016 
Interest income:                    
Loans, including loan fees  $24,673   $16,836   $45,768   $28,406 
Investment securities:                    
Taxable   1,239    762    2,308    1,166 
Non-taxable   592    391    1,157    653 
Other interest income   376    362    730    555 
Total interest income   26,880    18,351    49,963    30,780 
Interest expense:                    
Money market and NOW accounts   779    605    1,375    1,095 
Savings and time deposits   886    718    1,477    1,383 
Short-term borrowings   51    5    72    5 
Notes payable   49    74    52    224 
Junior subordinated debentures   429    324    825    550 
Subordinated notes   159    159    318    318 
Total interest expense   2,353    1,885    4,119    3,575 
Net interest income   24,527    16,466    45,844    27,205 
Provision for loan losses   450    450    900    900 
Net interest income after provision for loan losses   24,077    16,016    44,944    26,305 
Noninterest income:                    
Service charges on deposit accounts   1,121    870    2,129    1,463 
Mortgage income, net   1,406    1,132    2,248    1,703 
Trust services fee income   1,485    1,465    2,952    2,627 
Brokerage fee income   1,433    788    2,692    1,098 
Bank owned life insurance   454    312    855    562 
Rent income   295    273    567    535 
Investment advisory fees   109    95    265    195 
Gain on sale or writedown of assets, net   772    100    766    95 
Other income   2,010    1,335    3,380    1,970 
Total noninterest income   9,085    6,370    15,854    10,248 
Noninterest expense:                    
Personnel   10,983    8,884    20,916    14,232 
Occupancy, equipment and office   3,223    2,508    6,054    4,306 
Business development and marketing   1,317    790    2,246    1,368 
Data processing   2,207    1,421    4,190    2,577 
FDIC assessments   145    239    377    382 
Intangibles amortization   1,178    874    2,341    1,123 
Other expense   1,260    2,803    2,512    3,549 
Total noninterest expense   20,313    17,519    38,636    27,537 
                     
Income before income tax expense   12,849    4,867    22,162    9,016 
Income tax expense   4,440    1,545    7,472    2,994 
Net income   8,409    3,322    14,690    6,022 
Less: net income attributable to noncontrolling interest   81    65    154    111 
Net income attributable to Nicolet Bankshares, Inc.   8,328    3,257    14,536    5,911 
Less: preferred stock dividends   -    274    -    386 
Net income available to common shareholders  $8,328   $2,983   $14,536   $5,525 
                     
Basic earnings per common share  $0.88   $0.41   $1.61   $0.97 
Diluted earnings per common share  $0.83   $0.39   $1.53   $0.91 
Weighted average common shares outstanding:                    
Basic   9,515,745    7,257,218    9,052,590    5,719,651 
Diluted   9,991,625    7,629,175    9,521,206    6,041,543 

 

See accompanying notes to unaudited consolidated financial statements.

 

 4 

 

 

ITEM 1. Financial Statements Continued:

 

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands) (Unaudited)

 

   Three Months Ended
June 30,
   Six months Ended
June 30,
 
   2017   2016   2017   2016 
Net income  $8,409   $3,322   $14,690   $6,022 
Other comprehensive income, net of tax:                    
Unrealized gains on securities AFS:                    
Net unrealized holding gains arising during the period   1,981    1,770    4,851    3,242 
Reclassification adjustment for net gains (losses) included in net income   2    (40)   2    (40)
Income tax expense   (746)   (675)   (1,866)   (1,249)
Total other comprehensive income   1,237    1,055    2,987    1,953 
Comprehensive income  $9,646   $4,377   $17,677   $7,975 

 

See accompanying notes to unaudited consolidated financial statements.

 

 5 

 

 

ITEM 1. Financial Statements Continued:

 

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

(In thousands) (Unaudited)

 

   Nicolet Bankshares, Inc. Stockholders’ Equity     
   Common
Stock
   Additional
Paid-In
Capital
   Retained
Earnings
   Accumulated
Other
Comprehensive
Income (loss)
   Noncontrolling
Interest
   Total 
Balance December 31, 2016  $86   $209,700   $68,888   $(2,727)  $418   $276,365 
Comprehensive income:                              
Net income   -    -    14,536    -    154    14,690 
Other comprehensive income   -    -    -    2,987    -    2,987 
Stock compensation expense   -    919    -    -    -    919 
Exercise of stock options, net   1    1,235    -    -    -    1,236 
Issuance of common stock   -    114    -    -    -    114 
Issuance of common stock in acquisitions, net of capitalized issuance costs of $186   13    60,703    -    -    -    60,716 
Purchase and retirement of common stock   (1)   (4,070)   -    -    -    (4,071)
Balance, June 30, 2017  $99   $268,601   $83,424   $260   $572   $352,956 

 

See accompanying notes to unaudited consolidated financial statements.

 

 6 

 

 

ITEM 1. Financial Statements Continued:

 

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands) (Unaudited)

 

   Six months Ended June 30, 
   2017   2016 
Cash Flows From Operating Activities, net of effects of business combinations:          
Net income  $14,690   $6,022 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation, amortization, and accretion   3,677    3,166 
Provision for loan losses   900    900 
Increase in cash surrender value of life insurance   (855)   (562)
Stock compensation expense   919    768 
Gain on sale or writedown of assets, net   (766)   (95)
Gain on sale of loans held for sale, net   (2,005)   (1,642)
Proceeds from sale of loans held for sale   94,371    89,012 
Origination of loans held for sale   (95,399)   (88,830)
Net change in:          
Accrued interest receivable and other assets   1,729    (392)
Accrued interest payable and other liabilities   (1,840)   (2,797)
Net cash provided by operating activities   15,421    5,550 
Cash Flows From Investing Activities, net of effects of business combinations:          
Net decrease in certificates of deposit in other banks   999    490 
Net decrease (increase) in loans   (84,385)   6,811 
Purchases of securities AFS   (48,436)   (35,738)
Proceeds from sales of securities AFS   10,798    15,849 
Proceeds from calls and maturities of securities AFS   25,002    14,327 
Purchase of other investments   (891)   (85)
Proceeds from sale of other investments   6,146    - 
Net increase in premises and equipment   (1,895)   (2,999)
Proceeds from sales of other real estate and other assets   2,791    314 
Proceeds from redemption of BOLI   -    21,549 
Net cash received in business combination   9,119    66,517 
Net cash provided (used) by investing activities   (80,752)   87,035 
Cash Flows From Financing Activities, net of effects of business combinations:          
Net increase in deposits   45,074    15,485 
Net decrease in short-term borrowings   -    (37,917)
Proceeds from notes payable   10,000    - 
Repayments of notes payable   (4,297)   (51,519)
Purchase and retirement of common stock   (3,895)   (281)
Capitalized issuance costs, net   (186)   (260)
Proceeds from issuance of common stock   114    66 
Proceeds from exercise of common stock options, net   1,060    227 
Cash dividends paid on preferred stock   -    (142)
Net cash provided (used) by financing activities   47,870    (74,341)
Net increase (decrease) in cash and cash equivalents   (17,461)   18,244 
Cash and cash equivalents:          
Beginning  $129,103   $83,619 
Ending  $111,642   $101,863 
Supplemental Disclosures of Cash Flow Information:          
Cash paid for interest  $4,083   $3,375 
Cash paid for taxes   4,521    3,150 
Transfer of loans and bank premises to other real estate owned   828    33 
Capitalized mortgage servicing rights   413    191 
Transfer of loans from held for sale to held for investment   3,236    - 
Acquisitions          
Fair value of assets acquired   439,000    1,035,000 
Fair value of liabilities assumed   397,000    937,000 
Net assets acquired   42,000    98,000 

 

See accompanying notes to unaudited consolidated financial statements.

 

 7 

 

 

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

 

Notes to Unaudited Consolidated Financial Statements

 

Note 1 – Basis of Presentation

 

General

 

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly Nicolet Bankshares, Inc. (the “Company”) and its subsidiaries, consolidated balance sheets, statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the periods presented, and all such adjustments are of a normal recurring nature. All material intercompany transactions and balances are eliminated. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the entire year.

 

These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been omitted or abbreviated. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

Critical Accounting Policies and Estimates

 

Preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, the allowance for loan losses, useful lives for depreciation and amortization, fair value of financial instruments, deferred tax assets, uncertain income tax positions and contingencies. Estimates that are particularly susceptible to significant change for the Company include the determination of the allowance for loan losses, the assessment of deferred tax assets and liabilities, and the valuation of loans acquired in acquisitions; therefore, these are critical accounting policies. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: external market factors such as market interest rates and employment rates, changes to operating policies and procedures, changes in applicable banking regulations, and changes to deferred tax estimates. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period presented.

 

There have been no material changes or developments with respect to the assumptions or methodologies that the Company uses when applying what management believes are critical accounting policies and developing critical accounting estimates as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

Recent Accounting Developments Adopted

 

In December 2016, the Financial Accounting Standards Board (“FASB”) issued updated guidance to Accounting Standards Update (“ASU”) 2016-19 Technical Corrections and Improvements intended to make changes to clarify the Accounting Standards Codification or correct unintended application of guidance that is not expected to have a significant effect on current accounting practice. The ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016. The impact of the new guidance did not have a material impact on the Company’s consolidated financial statements.

 

In March 2016, the FASB issued updated guidance to ASU 2016-09: Stock Compensation Improvements to Employee Share-Based Payment Activity intended to simplify and improve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of such awards as either equity or liabilities and classification on the statement of cash flows. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2016. The consolidated financial statements include the impact of the new guidance. The Company adopted the pronouncement as required on January 1, 2017, prospectively, which included a reduction to income tax expense of $0.1 million and $0.2 million for the three months and six months ended June 30, 2017, respectively, for deductions attributable to exercised stock options and vesting of restricted stock.

 

 8 

 

 

Note 1 – Basis of Presentation, continued

 

Operating Segment

 

While the chief decision makers monitor the revenue streams of the various products and services, and evaluate costs, balance sheet positions and quality, all such products, services and activities are directly or indirectly related to the business of community banking, with no regular, formal or material segment delineations. Operations are managed and financial performance is evaluated on a company-wide basis, and accordingly, all the financial service operations are considered by management to be aggregated in one reportable operating segment.

 

Reclassifications

 

Certain amounts in the 2016 consolidated financial statements have been reclassified to conform to the 2017 presentation.

 

Note 2 – Acquisitions

 

First Menasha Bancshares, Inc. (“First Menasha”):

On April 28, 2017, the Company consummated its merger with First Menasha pursuant to the Agreement and Plan of Merger by and between the Company and First Menasha dated November 3, 2016, (the “Merger Agreement”), whereby First Menasha was merged with and into the Company, and The First National Bank-Fox Valley, the wholly owned commercial bank subsidiary of First Menasha serving the Fox Valley area of Wisconsin, was merged with and into Nicolet National Bank (the “Bank”). The system integration was completed, and five branches of First Menasha opened, on May 1, 2017, as Nicolet National Bank branches, expanding its presence into Calumet and Winnebago Counties, Wisconsin. Concurrently, Nicolet closed one of its Calumet County locations, bringing the Bank’s footprint to 38 branches as of June 30, 2017.

 

The purpose of the merger was to continue Nicolet’s interest in strategic growth, consistent with its plan to improve profitability through efficiency, leverage the strengths of each bank across the combined customer base, and add shareholder value. With the merger, Nicolet became the leading community bank to serve the Fox Valley area of Wisconsin.

 

Pursuant to the Merger Agreement, the final purchase price consisted of issuing 1,309,885 shares of the Company’s common stock (given the final stock-for-stock exchange ratio of 3.126 except for First Menasha shares owned by the Company immediately prior to the time of the merger), for common stock consideration of $62.2 million (based on $47.52 per share, the volume weighted average closing price of the Company’s common stock over the preceding 20 trading day period) plus cash consideration of $19.3 million. Approximately $0.2 million in direct stock issuance costs for the merger were incurred and charged against additional paid in capital.

 

Upon consummation, the Company added $479 million in assets, $351 million in loans, $375 million in deposits, $4 million in core deposit intangible, and $40 million of goodwill. The Company accounted for the transaction under the acquisition method of accounting, and thus, the financial position and results of operations of First Menasha prior to the consummation date were not included in the accompanying consolidated financial statements. The accounting required assets purchased and liabilities assumed to be recorded at their respective estimated fair values at the date of acquisition. The estimated fair values may be subject to refinement as additional information relative to the closing date fair values becomes available through the measurement period of approximately one year from consummation.

 

Financial advisor business acquired:

During the first quarter of 2016, Nicolet agreed in a private transaction to hire a select group of financial advisors and purchase their respective books of business, as well as their operating platform, to enhance the leadership and future growth of the Company’s wealth management business. The transaction was effected in phases and completed April 1, 2016. The Company paid $4.9 million total initial consideration, including $0.8 million cash, $2.6 million of Nicolet common stock, and recorded a $1.5 million earn-out liability payable to one principal in the future (which may require adjustment based on change in initial business purchased over a period, but not contingent upon the principal’s employment). The Company initially recorded $0.4 million of goodwill, $0.2 million of fixed assets, and $4.3 million of customer relationship intangibles (a portion amortizing straight-line over 10 years and a portion over 15 years). The transaction impacts the income statement primarily within brokerage income, personnel expense, and intangibles amortization.

 

Baylake Corp. (“Baylake”):

On April 29, 2016, the Company consummated its merger with Baylake. The system integration was completed, and 21 branches of Baylake opened, on May 2, 2016, as branches of the Bank, expanding its presence into Door, Kewaunee, and Manitowoc Counties, Wisconsin. The Company closed one of its Brown County locations concurrently with the Baylake merger, and closed an additional six branches in the fourth quarter of 2016.

 

 9 

 

 

Note 2 – Acquisitions, continued

 

The purpose of the Baylake merger was for strategic reasons beneficial to the Company. The acquisition was consistent with its plan to drive growth and efficiency through increased scale, leverage the strengths of each bank across the combined customer base, enhance profitability, and add liquidity and shareholder value.

 

Baylake shareholders received 0.4517 shares of the Company’s common stock for each outstanding share of Baylake common stock (except for Baylake shares pre-owned by the Company at the time of the merger), and cash in lieu of any fractional share. Pre-existing Baylake equity awards (restricted stock units and stock options) immediately vested upon consummation of the merger. The Company issued 0.4517 shares of its common stock for each vesting Baylake restricted stock unit, and Nicolet assumed, after appropriate adjustment by the 0.4517 exchange ratio, all pre-existing Baylake stock options. As a result, the Company issued 4,344,243 shares of the Company’s common stock, for common stock consideration of $163.3 million (based on $37.58 per share, the volume weighted average closing price of the Company’s common stock over the preceding 20 trading day period) and recorded an additional $1.2 million consideration for the assumed stock options. Approximately $0.3 million in direct stock issuance costs for the merger were incurred and charged against additional paid in capital.

 

The Company accounted for the transaction under the acquisition method of accounting, and thus, the financial position and results of operations of Baylake prior to the consummation date were not included in the accompanying consolidated financial statements.

 

The fair value of the assets acquired and liabilities assumed on April 29, 2016 was as follows:

 

(in millions)  As recorded by
Baylake Corp
   Fair Value
Adjustments
   As Recorded
by Nicolet
 
Cash, cash equivalents and securities available for sale  $262   $1   $263 
Loans   710    (19)   691 
Other real estate owned   3    (2)   1 
Core deposit intangible   1    16    17 
Fixed assets and other assets   71    (8)   63 
Total assets acquired  $1,047   $(12)  $1,035 
                
Deposits   $822   $-   $822 
Junior subordinated debentures, borrowings and other liabilities   116    (1)   115 
Total liabilities acquired  $938   $(1)  $937 
                
Excess of assets acquired over liabilities acquired  $109   $(11)  $98 
Less: purchase price             164 
Goodwill            $66 

 

The following unaudited pro forma information presents the results of operations for the three and six months ended June 30, 2016, as if the Baylake acquisition had occurred January 1 of that year. These unaudited pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined company that would have been achieved had the acquisition occurred at the beginning of each period presented, nor are they intended to represent or be indicative of future results of operations.

 

(in thousands, except per share data)  Three months ended
June 30, 2016
   Six months ended
June 30, 2016
 
Total revenues, net of interest expense  $26,831   $53,434 
Net income   4,343    10,214 
Diluted earnings per share  $0.46   $1.10 

 

Note 3 – Earnings per Common Share

 

Basic earnings per common share are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of shares adjusted for the dilutive effect of common stock awards (outstanding stock options and unvested restricted stock), if any. Presented below are the calculations for basic and diluted earnings per common share.

 

 10 

 

 

Note 3 – Earnings per Common Share, continued

 

   Three Months Ended
June 30,
   Six months Ended
June 30,
 
   2017   2016   2017   2016 
(In thousands except per share data)                
Net income, net of noncontrolling interest  $8,328   $3,257   $14,536   $5,911 
Less: preferred stock dividends   -    274    -    386 
Net income available to common shareholders  $8,328   $2,983   $14,536   $5,525 
Weighted average common shares outstanding   9,516    7,257    9,053    5,720 
Effect of dilutive stock instruments   476    372    468    322 
Diluted weighted average common shares outstanding   9,992    7,629    9,521    6,042 
Basic earnings per common share*  $0.88   $0.41   $1.61   $0.97 
Diluted earnings per common share*  $0.83   $0.39   $1.53   $0.91 

 

*Cumulative quarterly per share performance may not equal annual per share totals due to the effects of the amount and timing of capital increases. When computing earnings per share for an interim period, the denominator is based on the weighted-average shares outstanding during the interim period, and not on an annualized weighted-average basis. Accordingly, the sum of the quarters' earnings per share data will not necessarily equal the year to date earnings per share data.

 

There were no options outstanding at June 30, 2017 or June 30, 2016 that were excluded from the calculation of diluted earnings per common share as anti-dilutive.

 

Note 4 – Stock-based Compensation

 

A Black-Scholes model is utilized to estimate the fair value of stock options and the market price of the Company’s stock at the date of grant is used to estimate the value of restricted stock awards. The weighted average assumptions used in the model for valuing option grants were as follows:

 

   Six months ended
June 30, 2017
   Year ended
December 31, 2016
 
Dividend yield   0%   0%
Expected volatility   25%   25%
Risk-free interest rate   2.13%   1.52%
Expected average life   7 years    7 years 
Weighted average per share fair value of options  $15.44   $11.04 

 

Activity in the Company’s Stock Incentive Plans is summarized in the following tables:

 

Stock Options  Weighted-
Average Fair
Value of Options
Granted
   Option Shares
Outstanding
   Weighted-
Average
Exercise Price
   Exercisable
Shares
 
Balance – December 31, 2015        746,004   $21.56    325,979 
Granted  $11.04    170,500    36.86      
Options assumed in acquisition        91,701    21.03      
Exercise of stock options*        (84,723)   20.98      
Forfeited        (1,456)   21.71      
Balance – December 31, 2016        922,026    24.39    439,639 
Granted  $15.44    814,500    48.86      
Exercise of stock options*        (63,498)   19.46      
Forfeited        (400)   16.50      
Balance – June 30, 2017        1,672,628   $36.49    446,278 

 

*The terms of the stock option agreements permit having a number of shares of stock withheld, the fair market value of which as of the date of exercise is sufficient to satisfy the exercise price and/or tax withholding requirements, and accordingly 3,635 shares were surrendered during the six months ended June 30, 2017 and 10,244 shares were surrendered during the year ended December 31, 2016. These stock options were considered exercised and then surrendered and are included in the Exercise of stock option line.

 

 11 

 

 

Note 4 – Stock-based Compensation, continued

 

Options outstanding at June 30, 2017 are exercisable at option prices ranging from $9.19 to $49.30. There are 258,875 options outstanding in the range from $9.19 - $20.00, 241,665 options outstanding in the range from $20.01 - $25.00, 154,724 options outstanding in the range from $25.01 - $30.00, 202,864 options outstanding in the range from $30.01 - $40.00 and 814,500 options outstanding in the range from $40.01 - $49.30. At June 30, 2017, the exercisable options have a weighted average remaining contractual life of approximately 5 years and a weighted average exercise price of $20.53.

 

Intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the exercise price of the stock options. The total intrinsic value of options exercised in the first six months of 2017, and full year of 2016 was approximately $1.8 million and $1.3 million, respectively.

 

Restricted Stock  Weighted-
Average Grant
Date Fair Value
   Restricted
Shares
Outstanding
 
Balance – December 31, 2015  $18.70    36,690 
Granted   33.68    31,466 
Vested*   23.58    (25,207)
Forfeited   -    - 
Balance – December 31, 2016   26.80    42,949 
Granted   -    - 
Vested *   22.47    (15,346)
Forfeited   16.50    (130)
Balance – June 30, 2017  $29.27    27,473 

 

*The terms of the restricted stock agreements permit the surrender of shares to the Company upon vesting in order to satisfy applicable tax withholding requirements at the minimum statutory withholding rate, and accordingly 4,553 shares were surrendered during the six months ended June 30, 2017 and 7,851 shares were surrendered during the twelve months ended December 31, 2016.

 

The Company recognized approximately $0.9 million and $0.7 million of stock-based employee compensation expense during the six months ended June 30, 2017 and 2016, respectively, associated with its stock equity awards. As of June 30, 2017, there was approximately $16.2 million of unrecognized compensation cost related to equity award grants. The cost is expected to be recognized over the weighted average remaining vesting period of approximately four and one half years.

 

Note 5 – Securities Available for Sale

 

Amortized costs and fair values of securities available for sale are summarized as follows:

 

   June 30, 2017 
(in thousands)  Amortized Cost   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair Value 
U.S. government sponsored enterprises  $26,374   $-   $222   $26,152 
State, county and municipals   191,482    563    917    191,128 
Mortgage-backed securities   166,537    313    1,179    165,671 
Corporate debt securities   32,224    572    -    32,796 
Equity securities   1,287    1,252    -    2,539 
   $417,904   $2,700   $2,318   $418,286 

 

   December 31, 2016 
(in thousands)  Amortized Cost   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair Value 
U.S. government sponsored enterprises  $1,981   $-   $18   $1,963 
State, county and municipals   191,721    160    4,638    187,243 
Mortgage-backed securities   161,309    242    2,422    159,129 
Corporate debt securities   12,117    52    -    12,169 
Equity securities   2,631    2,152    -    4,783 
   $369,759   $2,606   $7,078   $365,287 

 

 12 

 

 

Note 5 – Securities Available for Sale, continued

 

The following table represents gross unrealized losses and the related fair value of investment securities available for sale, aggregated by investment category and length of time individual securities have been in a continuous unrealized loss position, at June 30, 2017 and December 31, 2016.

 

   June 30, 2017 
   Less than 12 months   12 months or more   Total 
(in thousands)  Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
 
U.S Government agency securities  $26,374   $222   $-   $-   $26,374   $222 
State, county and municipals   113,373    796    7,838    121    121,211    917 
Mortgage-backed securities   108,512    938    11,955    241    120,466    1,179 
   $248,259   $1,956   $19,793   $362   $268,051   $2,318 

 

   December 31, 2016 
   Less than 12 months   12 months or more   Total 
(in thousands)  Fair
 Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair Value   Unrealized
Losses
 
U.S Government agency securities  $1,963   $18   $-   $-   $1,963   $18 
State, county and municipals   167,457    4,629    1,300    9    168,757    4,638 
Mortgage-backed securities   134,770    2,311    3,653    111    138,423    2,422 
   $304,190   $6,958   $4,953   $120   $309,143   $7,078 

 

At June 30, 2017 the Company had $2.3 million of gross unrealized losses related to 529 securities. As of June 30, 2017, the Company does not consider securities with unrealized losses to be other-than-temporarily impaired as the unrealized losses in each category have occurred as a result of changes in interest rates and current market conditions subsequent to purchase, not credit deterioration. The Company has the ability and intent to hold its securities to maturity. There were no other-than-temporary impairments charged to earnings during the six-month periods ending June 30, 2017 or June 30, 2016.

 

The amortized cost and fair values of securities available for sale at June 30, 2017 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Fair values of securities are estimated based on financial models or prices paid for the same or similar securities. It is possible interest rates could change considerably, resulting in a material change in estimated fair value.

 

   June 30, 2017 
(in thousands)  Amortized Cost   Fair Value 
Due in less than one year  $13,978   $13,976 
Due in one year through five years   96,542    96,791 
Due after five years through ten years   131,571    130,961 
Due after ten years   7,989    8,348 
    250,080    250,076 
Mortgage-backed securities   166,537    165,671 
Equity securities   1,287    2,539 
Securities available for sale  $417,904   $418,286 

 

Proceeds from sales of securities available for sale during the first six months of 2017 and 2016 were approximately $10.8 million and $15.8 million, respectively. During the first six months of 2017, gross gains and losses realized were $5,000 and $7,000, respectively, while gross gains and gross losses were $50,000 and $10,000, respectively, for the comparable six months of 2016.

 

 13 

 

 

Note 6 – Loans, Allowance for Loan Losses, and Credit Quality

 

The loan composition as of June 30, 2017 and December 31, 2016 is summarized as follows.

 

   Total 
   June 30, 2017   December 31, 2016 
(in thousands)  Amount   % of
Total
   Amount   % of
Total
 
Commercial & industrial  $589,460    29.3%  $428,270    27.3%
Owner-occupied commercial real estate (“CRE”)   419,066    20.8    360,227    23.0 
Agricultural (“AG”) production   35,428    1.8    34,767    2.2 
AG real estate   49,977    2.5    45,234    2.9 
CRE investment   307,572    15.3    195,879    12.5 
Construction & land development   85,367    4.3    74,988    4.8 
Residential construction   29,325    1.4    23,392    1.5 
Residential first mortgage   369,007    18.4    300,304    19.1 
Residential junior mortgage   103,935    5.2    91,331    5.8 
Retail & other   20,827    1.0    14,515    0.9 
Loans   2,009,964    100.0%   1,568,907    100.0%
Less allowance for loan losses   12,591         11,820      
Loans, net  $1,997,373        $1,557,087      
Allowance for loan losses to loans   0.63%        0.75%     

 

   Originated 
   June 30, 2017   December 31, 2016 
(in thousands)  Amount   % of
Total
   Amount   % of
Total
 
Commercial & industrial  $420,456    39.2%  $330,073    36.6%
Owner-occupied CRE   204,781    19.1    182,776    20.3 
AG production   10,205    0.9    9,192    1.0 
AG real estate   23,229    2.2    18,858    2.1 
CRE investment   93,992    8.8    72,930    8.1 
Construction & land development   48,880    4.5    44,147    4.9 
Residential construction   21,275    2.0    20,768    2.3 
Residential first mortgage   177,761    16.6    164,949    18.3 
Residential junior mortgage   57,718    5.4    48,199    5.3 
Retail & other   14,605    1.3    10,095    1.1 
Loans   1,072,902    100.0%   901,987    100.0%
Less allowance for loan losses   10,200         9,449      
Loans, net  $1,062,702        $892,538      
Allowance for loan losses to loans   0.95%        1.05%     

 

   Acquired 
   June 30, 2017   December 31, 2016 
(in thousands)  Amount   % of
Total
   Amount   % of
Total
 
Commercial & industrial  $169,004    18.0%  $98,197    14.7%
Owner-occupied CRE   214,285    22.9    177,451    26.6 
AG production   25,223    2.7    25,575    3.8 
AG real estate   26,748    2.9    26,376    4.0 
CRE investment   213,580    22.8    122,949    18.4 
Construction & land development   36,487    3.9    30,841    4.6 
Residential construction   8,050    0.9    2,624    0.4 
Residential first mortgage   191,246    20.3    135,355    20.3 
Residential junior mortgage   46,217    4.9    43,132    6.5 
Retail & other   6,222    0.7    4,420    0.7 
Loans   937,062    100.0%   666,920    100.0%
Less allowance for loan losses   2,391         2,371      
Loans, net  $934,671        $664,549      
Allowance for loan losses to loans   0.26%        0.36%     

 

 14 

 

 

Note 6 – Loans, Allowance for Loan Losses, and Credit Quality, continued

 

Practically all of the Company’s loans, commitments, financial letters of credit and standby letters of credit have been granted to customers in the Company’s market area. Although the Company has a diversified loan portfolio, the credit risk in the loan portfolio is largely influenced by general economic conditions and trends of the counties and markets in which the debtors operate, and the resulting impact on the operations of borrowers or on the value of underlying collateral, if any.

 

The allowance for loan and lease losses (“ALLL”) represents management’s estimate of probable and inherent credit losses in the Company’s loan portfolio at the balance sheet date. In general, estimating the amount of the ALLL is a function of a number of factors, including but not limited to changes in the loan portfolio, net charge-offs, trends in past due and impaired loans, and the level of potential problem loans, all of which may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses could be required that could adversely affect our earnings or financial position in future periods. Allocations to the ALLL may be made for specific loans but the entire ALLL is available for any loan that, in management’s judgment, should be charged-off or for which an actual loss is realized.

 

The allocation methodology used by the Company includes specific allocations for impaired loans evaluated individually for impairment based on collateral values and for the remaining loan portfolio collectively evaluated for impairment primarily based on historical loss rates and other qualitative factors. Loan charge-offs and recoveries are based on actual amounts charged-off or recovered by loan category. Management allocates the ALLL by pools of risk within each loan portfolio.

 

The following tables present the balance and activity in the ALLL by portfolio segment and the recorded investment in loans by portfolio at or for the six months ended June 30, 2017:

 

   TOTAL – Six months Ended June 30, 2017 
(in
thousands)
  Commercial
& industrial
   Owner-
occupied
CRE
   AG
production
   AG real
estate
   CRE
investment
   Construction
& land
development
   Residential
construction
   Residential
first
mortgage
   Residential
junior
mortgage
   Retail
& other
   Total 
ALLL:                                                       
Beginning balance  $3,919   $2,867   $150   $285   $1,124   $774   $304   $1,784   $461   $152   $11,820 
Provision   955    (211)   11    13    220    (43)   (154)   6    36    67    900 
Charge-offs   (129)   -    -    -    -    (13)   -    (8)   -    (26)   (176)
Recoveries   19    14    -    -    1    -    -    4    1    8    47 
Net charge-offs   (110)   14    -    -    1    (13)   -    (4)   1    (18)   (129)
Ending balance  $4,764   $2,670   $161   $298   $1,345   $718   $150   $1,786   $498   $201   $12,591 
As percent of ALLL   37.8%   21.2%   1.3%   2.4%   10.7%   5.7%   1.2%   14.2%   4.0%   1.5%   100.0%
                                                        
ALLL:                                                       
Individually evaluated  $-   $-   $-   $-   $-   $-   $-   $-   $-   $-   $- 
Collectively evaluated   4,764    2,670    161    298    1,345    718    150    1,786    498    201    12,591 
Ending balance  $4,764   $2,670   $161   $298   $1,345   $718   $150   $1,786   $498   $201   $12,591 
                                                        
Loans:                                                       
Individually evaluated  $4,005   $3,098   $37   $229   $6,053   $740   $80   $2,029   $295   $-   $16,566 
Collectively evaluated   585,455    415,968    35,391    49,748    301,519    84,627    29,245    366,978    103,640    20,827    1,993,398 
Total loans  $589,460   $419,066   $35,428   $49,977   $307,572   $85,367   $29,325   $369,007   $103,935   $20,827   $2,009,964 
                                                        
Less ALLL  $4,764   $2,670   $161   $298   $1,345   $718   $150   $1,786   $498   $201   $12,591 
Net loans  $584,696   $416,396   $35,267   $49,679   $306,227   $84,649   $29,175   $367,221   $103,437   $20,626   $1,997,373 

 

 15 

 

 

Note 6 – Loans, Allowance for Loan Losses, and Credit Quality, continued

 

   Originated – Six months Ended June 30, 2017 
(in thousands)  Commercial
& industrial
   Owner-
occupied
CRE
   AG
production
   AG real
estate
   CRE
investment
   Construction
& land
development
   Residential
construction
   Residential
first
mortgage
   Residential
junior
mortgage
   Retail
& other
   Total 
ALLL:                                                       
Beginning balance  $3,150   $2,263   $122   $222   $893   $656   $266   $1,372   $373   $132   $9,449 
Provision   846    (161)   13    10    197    (50)   (149)   40    33    58    837 
Charge-offs   (75)   -    -    -    -    -    -    (8)   -    (26)   (109)
Recoveries   1    12    -    -    -    -    -    1    1    8    23 
Net charge-offs   (74)   12    -    -    -    -    -    (7)   1    (18)   (86)
Ending balance  $3,922   $2,114   $135   $232   $1,090   $606   $117   $1,405   $407   $172   $10,200 
As percent of ALLL   38.5%   20.7%   1.3%   2.3%   10.7%   5.9%   1.1%   13.8%   4.0%   1.7%   100.0%
                                                        
ALLL:                                                       
Individually evaluated  $-   $-   $-   $-   $-   $-   $-   $-   $-   $-   $- 
Collectively evaluated   3,922    2,114    135    232    1,090    606    117    1,405    407    172    10,200 
Ending balance  $3,922   $2,114   $135   $232   $1,090   $606   $117   $1,405   $407   $172   $10,200 
                                                        
Loans:                                                       
Individually evaluated  $-   $-   $-   $-   $-   $-   $-   $-   $-   $-   $- 
Collectively evaluated   420,456    204,781    10,205    23,229    93,992    48,880    21,275    177,761    57,718    14,605    1,072,902 
Total loans  $420,456   $204,781   $10,205   $23,229   $93,992   $48,880   $21,275   $177,761   $57,718   $14,605   $1,072,902 
                                                        
Less ALLL  $3,922   $2,114   $135   $232   $1,090   $606   $117   $1,405   $407   $172   $10,200 
Net loans  $416,534   $202,667   $10,070   $22,997   $92,902   $48,274   $21,158   $176,356   $57,311   $14,433   $1,062,702 

 

   Acquired – Six months Ended June 30, 2017 
(in thousands)  Commercial 
& industrial
   Owner-
occupied
CRE
   AG
production
   AG real
estate
   CRE
investment
   Construction
& land
development
   Residential
construction
   Residential
first
mortgage
   Residential
junior
mortgage
   Retail
& other
   Total 
ALLL:                                                       
Beginning balance  $769   $604   $28   $63   $231   $118   $38   $412   $88   $20   $2,371 
Provision   109    (50)   (2)   3    23    7    (5)   (34)   3    9    63 
Charge-offs   (54)   -    -    -    -    (13)   -    -    -    -    (67)
Recoveries   18    2    -    -    1    -    -    3    -    -    24 
Net charge-offs   (36)   2    -    -    1    (13)   -    3    -    -    (43)
Ending balance  $842   $556   $26   $66   $255   $112   $33   $381   $91   $29   $2,391 
As percent of ALLL   35.2%   23.3%   1.1%   2.8%   10.7%   4.7%   1.4%   15.8%   3.8%   1.2%   100.0%
                                                        
Loans:                                                       
Individually evaluated  $4,005   $3,098   $37   $229   $6,053   $740   $80   $2,029   $295   $-   $16,566 
Collectively evaluated   164,999    211,187    25,186    26,519    207,527    35,747    7,970    189,217    45,922    6,222    920,496 
Total loans  $169,004   $214,285   $25,223   $26,748   $213,580   $36,487   $8,050   $191,246   $46,217   $6,222   $937,062 
                                                        
Less ALLL  $842   $556   $26   $66   $255   $112   $33   $381   $91   $29   $2,391 
Net loans  $168,162   $213,729   $25,197   $26,682   $213,325   $36,375   $8,017   $190,865   $46,126   $6,193   $934,671 

 

 16 

 

 

Note 6 – Loans, Allowance for Loan Losses, and Credit Quality, continued

 

The following table presents the balance and activity in the ALLL by portfolio segment and the recorded investment in loans by portfolio at or for the six months ended June 30, 2016.

 

   TOTAL – Six months Ended June 30, 2016 
(in
thousands)
  Commercial
& industrial
   Owner-
occupied
CRE
   AG
production
   AG real
estate
   CRE
investment
   Construction
& land
development
   Residential
construction
   Residential
first
mortgage
   Residential
junior
mortgage
   Retail
& other
   Total 
ALLL:                                                       
Beginning balance  $3,721   $1,933   $85   $380   $785   $1,446   $147   $1,240   $496   $74   $10,307 
Provision   345    491    12    40    170    (385)   72    85    11    59    900 
Charge-offs   (262)   -    -    -    -    -    -    -    (12)   (24)   (298)
Recoveries   17    2    -    -    8    -    -    3    6    2    38 
Net charge-offs   (245)   2    -    -    8    -    -    3    (6)   (22)   (260)
Ending balance  $3,821   $2,426   $97   $420   $963   $1,061   $219   $1,328   $501   $111   $10,947 
As percent of ALLL   34.9%   22.2%   0.9%   3.8%   8.8%   9.7%   2.0%   12.1%   4.6%   1.0%   100.0%
                                                        
ALLL:                                                       
Individually evaluated  $-   $119   $-   $-   $-   $-   $-   $-   $-   $-   $119 
Collectively evaluated   3,821    2,307   $97   $420   $963   $1,061   $219   $1,328   $501   $111   $10,828 
Ending balance  $3,821   $2,426   $97   $420   $963   $1,061   $219    1,328   $501   $111   $10,947 
                                                        
Loans:                                                       
Individually evaluated  $1,407   $3,836   $64   $252   $14,595   $1,074   $313   $2,482   $185   $-   $24,208 
Collectively evaluated   425,686    355,565    32,582    52,753    184,990    67,883    20,121    285,240    97,324    14,205    1,536,349 
Total loans  $427,093   $359,401   $32,646   $53,005   $199,585   $68,957   $20,434   $287,722   $97,509   $14,205   $1,560,557 
                                                        
Less ALLL  $3,821   $2,426   $97   $420   $963   $1,061   $219   $1,328   $501   $111   $10,947 
Net loans  $423,272   $356,975   $32,549   $52,585   $198,622   $67,896   $20,215   $286,394   $97,008   $14,094   $1,549,610 

 

   Originated – Six months Ended June 30, 2016 
(in thousands)  Commercial
& industrial
   Owner-
occupied
CRE
   AG
production
   AG real
estate
   CRE
investment
   Construction
& land
development
   Residential
construction
   Residential
first
mortgage
   Residential
junior
mortgage
   Retail
& other
   Total 
ALLL:                                                       
Beginning balance  $3,135   $1,567   $71   $299   $646   $1,381   $147   $987   $418   $63   $8,714 
Provision   361    481    12    46    166    (393)   50    104    20    58    905 
Charge-offs   (262)   -    -    -    -    -    -    -    (12)   (24)   (298)
Recoveries   -    2    -    -    8    -    -    -    5    1    16 
Net charge-offs   (262)   2    -    -    8    -    -    -    (7)   (23)   (282)
Ending balance  $3,234   $2,050   $83   $345   $820   $988   $197   $1,091   $431   $98   $9,337 
As percent of ALLL   34.6%   22.0%   0.9%   3.7%   8.8%   10.6%   2.1%   11.7%   4.6%   1.0%   100.0%
                                                        
ALLL:                                                       
Individually evaluated  $-   $119   $-   $-   $-   $-   $-   $-   $-   $-   $119 
Collectively evaluated   3,234    1,931    83    345    820    988    197    1,091    431    98    9,218 
Ending balance  $3,234   $2,050   $83   $345   $820   $988   $197   $1,091   $431   $98   $9,337 
                                                        
Loans:                                                       
Individually evaluated  $440   $623   $-   $-   $-   $-   $-   $-   $-   $-   $1,063 
Collectively evaluated   305,077    162,423    7,102    26,063    65,153    33,000    14,391    132,422    46,230    8,496    800,357 
Total loans  $305,517   $163,046   $7,102   $26,063   $65,153   $33,000   $14,391   $132,422   $46,230   $8,496   $801,420 
                                                        
Less ALLL  $3,234   $2,050   $83   $345   $820   $988   $197   $1,091   $431   $98   $9,337 
Net loans  $302,283   $160,996   $7,019   $25,718   $64,333   $32,012   $14,194   $131,331   $45,799   $8,398   $792,083 

 

 17 

 

 

Note 6 – Loans, Allowance for Loan Losses, and Credit Quality, continued

 

   Acquired – Six months Ended June 30, 2016 
(in thousands)  Commercial
& industrial
   Owner-
occupied
CRE
   AG
production
   AG real
estate
   CRE
investment
   Construction
& land
development
   Residential
construction
   Residential
first
mortgage
   Residential
junior
mortgage
   Retail
& other
   Total 
ALLL:                                                       
Beginning balance  $586   $366   $14   $81   $139   $65   $-   $253   $78   $11   $1,593 
Provision   (16)   10    -    (6)   4    8    22    (19)   (9)   1    (5)
Charge-offs   -    -    -    -    -    -    -    -    -    -    - 
Recoveries   17    -    -    -    -    -    -    3    1    1    22 
Net charge-offs   17    -    -    -    -    -    -    3    1    1    22 
Ending balance  $587   $376   $14   $75   $143   $73   $22   $237   $70   $13   $1,610 
As percent of ALLL   36.5%   23.4%   0.9%   4.7%   8.9%   4.5%   1.4%   14.7%   4.3%   0.7%   100.0%
                                                        
Loans:                                                       
Individually evaluated  $967   $3,213   $64   $252   $14,595   $1,074   $313   $2,482   $185   $-   $23,145 
Collectively evaluated   120,609    193,142    25,480    26,690    119,837    34,883    5,730    152,818    51,094    5,709    735,992 
Total loans  $121,576   $196,355   $25,544   $26,942   $134,432   $35,957   $6,043   $155,300   $51,279   $5,709   $759,137 
                                                        
Less ALLL  $587   $376   $14   $75   $143   $73   $22   $237   $70   $13   $1,610 
Net loans  $120,989   $195,979   $25,530   $26,867   $134,289   $35,884   $6,021   $155,063   $51,209   $5,696   $757,527 

 

 18 

 

 

Note 6 – Loans, Allowance for Loan Losses, and Credit Quality, continued

 

The following table presents nonaccrual loans by portfolio segment in total and then as a further breakdown by originated or acquired as of June 30, 2017 and December 31, 2016.

 

   Total Nonaccrual Loans 
(in thousands)  June 30, 2017   % to Total   December 31, 2016   % to Total 
Commercial & industrial  $4,017    23.8%  $358    1.8%
Owner-occupied CRE   3,266    19.3    2,894    14.3 
AG production   3    0.0    9    0.1 
AG real estate   197    1.2    208    1.0 
CRE investment   5,744    34.0    12,317    60.6 
Construction & land development   740    4.4    1,193    5.9 
Residential construction   80    0.5    260    1.3 
Residential first mortgage   2,602    15.4    2,990    14.7 
Residential junior mortgage   252    1.4    56    0.3 
Retail & other   -    -    -    - 
Nonaccrual loans - Total  $16,901    100.0%  $20,285    100.0%

 

   Originated 
(in thousands)  June 30, 2017   % to Total   December 31, 2016   % to Total 
Commercial & industrial  $1    0.4%  $4    1.6%
Owner-occupied CRE   39    14.7    42    16.3 
AG production   3    1.1    7    2.7 
AG real estate   -    -    -    - 
CRE investment   -    -    -    - 
Construction & land development   -    -    -    - 
Residential construction   -    -    -    - 
Residential first mortgage   188    70.7    204    79.4 
Residential junior mortgage   34    13.1    -    - 
Retail & other   -    -    -    - 
Nonaccrual loans - Originated  $265    100.0%  $257    100.0%

 

   Acquired 
(in thousands)  June 30, 2017   % to Total   December 31, 2016   % to Total 
Commercial & industrial  $4,016    24.2%  $354    1.8%
Owner-occupied CRE   3,227    19.4    2,852    14.2 
AG production   -    -    2    0.1 
AG real estate   197    1.2    208    1.0 
CRE investment   5,744    34.5    12,317    61.4 
Construction & land development   740    4.4    1,193    6.0 
Residential construction   80    0.5    260    1.3 
Residential first mortgage   2,414    14.5    2,786    13.9 
Residential junior mortgage   217    1.3    56    0.3 
Retail & other   -    -    -    - 
Nonaccrual loans – Acquired  $16,635    100.0%  $20,028    100.0%

 

 19 

 

 

Note 6 – Loans, Allowance for Loan Losses, and Credit Quality, continued

 

The following tables present total past due loans by portfolio segment as of June 30, 2017 and December 31, 2016:

 

   June 30, 2017 
(in thousands)  30-89 Days
Past Due
(accruing)
   90 Days &
Over or non-
accrual
   Current   Total 
Commercial & industrial  $167   $4,017   $585,276   $589,460 
Owner-occupied CRE   363    3,266    415,437    419,066 
AG production   -    3    35,425    35,428 
AG real estate   -    197    49,780    49,977 
CRE investment   154    5,744    301,674    307,572 
Construction & land development   -    740    84,627    85,367 
Residential construction   -    80    29,245    29,325 
Residential first mortgage   578    2,602    365,827    369,007 
Residential junior mortgage   20    252    103,663    103,935 
Retail & other   6    -    20,821    20,827 
Total loans  $1,288   $16,901   $1,991,775   $2,009,964 
As a percent of total loans   0.1%   0.8%   99.1%   100.0%

 

   December 31, 2016 
(in thousands)  30-89 Days
Past Due
(accruing)
   90 Days &
Over or non-
accrual
   Current   Total 
Commercial & industrial  $22   $358   $427,890   $428,270 
Owner-occupied CRE   268    2,894    357,065    360,227 
AG production   -    9    34,758    34,767 
AG real estate   -    208    45,026    45,234 
CRE investment   -    12,317    183,562    195,879 
Construction & land development   -    1,193    73,795    74,988 
Residential construction   -    260    23,132    23,392 
Residential first mortgage   486    2,990    296,828    300,304 
Residential junior mortgage   200    56    91,075    91,331 
Retail & other   15    -    14,500    14,515 
Total loans  $991   $20,285   $1,547,631   $1,568,907 
As a percent of total loans   0.1%   1.3%   98.6%   100.0%

 

A description of the loan risk categories used by the Company follows:

 

1-4 Pass: Credits exhibit adequate cash flows, appropriate management and financial ratios within industry norms and/or are supported by sufficient collateral. Some credits in these rating categories may require a need for monitoring but elements of concern are not severe enough to warrant an elevated rating.

 

5 Watch: Credits with this rating are adequately secured and performing but are being monitored due to the presence of various short-term weaknesses which may include unexpected, short-term adverse financial performance, managerial problems, potential impact of a decline in the entire industry or local economy and delinquency issues. Loans to individuals or loans supported by guarantors with marginal net worth or collateral may be included in this rating category.

 

6 Special Mention: Credits with this rating have potential weaknesses that, without the Company’s attention and correction may result in deterioration of repayment prospects. These assets are considered Criticized Assets. Potential weaknesses may include adverse financial trends for the borrower or industry, repeated lack of compliance with Company requests, increasing debt to net worth, serious management conditions and decreasing cash flow.

 

7 Substandard: Assets with this rating are characterized by the distinct possibility the Company will sustain some loss if deficiencies are not corrected. All foreclosures, liquidations, and non-accrual loans are considered to be categorized in this rating, regardless of collateral sufficiency.

 

8 Doubtful: Assets with this rating exhibit all the weaknesses as one rated Substandard with the added characteristic that such weaknesses make collection or liquidation in full highly questionable.

 

 20 

 

 

Note 6 – Loans, Allowance for Loan Losses, and Credit Quality, continued

 

9 Loss: Assets in this category are considered uncollectible. Pursuing any recovery or salvage value is impractical but does not preclude partial recovery in the future.

 

The following tables present total loans by loan grade as of June 30, 2017 and December 31, 2016:

 

   June 30, 2017 
(in thousands)  Grades 1- 4   Grade 5   Grade 6   Grade 7   Grade 8   Grade 9   Total 
Commercial & industrial  $559,790   $13,074   $3,621   $12,975   $-   $-   $589,460 
Owner-occupied CRE   397,649    15,192    725    5,500    -    -    419,066 
AG production   30,334    5,017    63    14    -    -    35,428 
AG real estate   42,555    6,831    -    591    -    -    49,977 
CRE investment   297,090    3,156    -    7,326    -    -    307,572 
Construction & land development   77,887    6,528    17    935    -    -    85,367 
Residential construction   29,047    198    -    80    -    -    29,325 
Residential first mortgage   362,287    2,191    873    3,656    -    -    369,007 
Residential junior mortgage   103,500    17    92    326    -    -    103,935 
Retail & other   20,827    -    -    -    -    -    20,827 
Total loans  $1,920,966   $52,204   $5,391   $31,403   $-   $-   $2,009,964 
Percent of total   95.5%   2.6%   0.3%   1.6%   -    -    100.0%

 

   December 31, 2016 
(in thousands)  Grades 1- 4   Grade 5   Grade 6   Grade 7   Grade 8   Grade 9   Total 
Commercial & industrial  $401,954   $16,633   $2,133   $7,550   $-   $-   $428,270 
Owner-occupied CRE   340,846    14,758    193    4,430    -    -    360,227 
AG production   31,026    3,191    70    480    -    -    34,767 
AG real estate   41,747    2,727    -    760    -    -    45,234 
CRE investment   173,652    8,137    -    14,090    -    -    195,879 
Construction & land development   69,097    4,318    -    1,573    -    -    74,988 
Residential construction   22,030    1,102    -    260    -    -    23,392 
Residential first mortgage   295,109    1,348    192    3,655    -    -    300,304 
Residential junior mortgage   91,123    -    114    94    -    -    91,331 
Retail & other   14,515    -    -    -    -    -    14,515 
Total loans  $1,481,099   $52,214   $2,702   $32,892   $-   $-   $1,568,907 
Percent of total   94.4%   3.3%   0.2%   2.1%   -    -    100.0%

 

Management considers a loan to be impaired when it is probable the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. For determining the adequacy of the ALLL, management defines impaired loans as nonaccrual credit relationships over $250,000, all loans determined to be troubled debt restructurings, plus additional loans with impairment risk characteristics. At the time an individual loan goes into nonaccrual status, however, management evaluates the loan for impairment and possible charge-off regardless of loan size.

 

In determining the appropriateness of the ALLL, management includes allocations for specifically identified impaired loans and loss factor allocations for all remaining loans, with a component primarily based on historical loss rates and another component primarily based on other qualitative factors. Impaired loans are individually assessed and are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.

 

Loans that are determined not to be impaired are collectively evaluated for impairment, stratified by type and allocated loss ranges based on the Company’s actual historical loss ratios for each strata, and adjustments are also provided for certain current environmental and qualitative factors. An internal loan review function rates loans using a grading system based on nine different categories. Loans with grades of seven or higher (“classified loans”) represent loans with a greater risk of loss and may be assigned allocations for loss based on specific review of the weaknesses observed in the individual credits if classified as impaired. Classified loans are constantly monitored by the loan review function to ensure early identification of any deterioration.

 

 21 

 

  

Note 6 – Loans, Allowance for Loan Losses, and Credit Quality, continued

 

The following tables present impaired loans as of June 30, 2017 and December 31, 2016.

 

   Total Impaired Loans – June 30, 2017 
(in thousands)  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest Income
Recognized
 
                     
Commercial & industrial  $4,005   $9,020   $-   $4,013   $235 
Owner-occupied CRE   3,098    5,488    -    3,216    183 
AG production   37    51    -    38    3 
AG real estate   229    363    -    233    13 
CRE investment   6,053    10,518    -    6,286    363 
Construction & land development   740    1,577    -    752    78 
Residential construction   80    983    -    98    33 
Residential first mortgage   2,029    3,515    -    2,080    127 
Residential junior mortgage   295    761    -    303    27 
Retail & Other   -    25    -    -    1 
Total  $16,566   $32,301   $-   $17,019   $1,063 

 

There were no originated impaired loans as of June 30, 2017. All loans in the table above were acquired loans.

 

   Total Impaired Loans – December 31, 2016 
(in thousands)  Recorded
Investment
   Unpaid  
Principal 
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest Income
Recognized
 
Commercial & industrial  $338   $720   $-   $348   $34 
Owner-occupied CRE   2,588    4,661    -    2,700    271 
AG production   41    163    -    48    6 
AG real estate   240    332    -    245    26 
CRE investment   12,552    19,695    -    12,982    1,051 
Construction & land development   694    2,122    -    752    112 
Residential construction   261    1,348    -    287    82 
Residential first mortgage   2,204    3,706    -    2,312    190 
Residential junior mortgage   299    639    -    209    17 
Retail & Other   -    36    -    -    - 
Total  $19,217   $33,422   $-   $19,883   $1,789 

 

There were no originated impaired loans as of December 31, 2016. All loans in the table above were acquired loans.

 

In April 2017, the First Menasha merger added purchased credit impaired loans at a fair value of $5.4 million, net of an initial $5.9 million non-accretable mark. Including these credit impaired loans acquired in the First Menasha merger, total purchased credit impaired loans acquired in aggregate were initially recorded at a fair value of $42.9 million on their respective acquisition dates, net of an initial $32.0 million non-accretable mark and a zero accretable mark. At June 30, 2017, $15.8 million of the $42.9 million remain in impaired loans and $0.8 million of acquired loans have subsequently become impaired, bringing acquired impaired loans to $16.6 million.

 

 22 

 

  

Note 6 – Loans, Allowance for Loan Losses, and Credit Quality, continued

 

Non-accretable discount on purchase credit impaired (“PCI”) loans:

 

   Six months
ended
   Year ended 
(in thousands)  June 30,
2017
   December 31,
2016
 
Balance at beginning of period  $14,327   $4,229 
Acquired balance, net   5,932    13,923 
Reclassifications from (to) non-accretable   -    - 
Accretion to loan interest income   (3,830)   (3,458)
Disposals of loans   (1,104)   (367)
Balance at end of period  $15,325   $14,327 

 

Troubled Debt Restructurings

 

At June 30, 2017, there were five loans classified as troubled debt restructurings totaling $0.8 million. These five loans had a combined premodification balance of $1.0 million. There were no other loans which were modified and classified as troubled debt restructurings at June 30, 2017. There were no loans classified as troubled debt restructurings during the previous twelve months that subsequently defaulted as of June 30, 2017. Loans which were considered troubled debt restructurings by First Menasha and Baylake prior to acquisition are not required to be classified as troubled debt restructurings in the Company’s consolidated financial statements unless and until such loans subsequently meet criteria to be classified as such, since acquired loans were recorded at their estimated fair values at the time of the acquisition.

 

Note 7 – Goodwill and Intangible Assets and Mortgage Servicing Rights

 

The excess of the purchase price in an acquisition over the fair value of net assets acquired consists primarily of goodwill, core deposit intangibles and other identifiable intangibles (primarily related to customer relationships acquired). Goodwill is not amortized but is instead subject to impairment tests on at least an annual basis. Core deposit intangibles, which arise from value ascribed to the deposit base of a bank acquired, have estimated finite lives and are amortized on an accelerated basis to expense over a 10-year period. The other intangibles, which represent value ascribed to financial advisor books of business purchased in 2016 in a private transaction, have estimated finite lives and are amortized on a straight-line basis to expense over their life.

 

Management periodically reviews the carrying value of its long-lived and intangible assets to determine if any impairment has occurred, in which case an impairment charge would be recorded as an expense in the period of impairment, or whether changes in circumstances have occurred that would require a revision to the remaining useful life which would impact expense prospectively. In making such determination, management evaluates whether there are any adverse qualitative factors indicating that an impairment may exist, as well as the performance, on an undiscounted basis, of the underlying operations or assets which give rise to the intangible. The Company’s annual assessments indicated no impairment charge on goodwill or core deposit intangible was required for 2016 or the first six months of 2017.

 

Goodwill: Goodwill was $107 million at June 30, 2017 and $67 million at December 31, 2016. There was an addition to the carrying amount of goodwill in 2017 of $40 million related to the related to the First Menasha merger. See Note 2 for additional information on the acquisitions.

 

Other intangible assets: Other intangible assets, consisting of core deposit intangibles and other intangibles (related to the customer relationships acquired in connection with the 2016 acquisition of financial advisor business), are amortized over their estimated finite lives. There was an addition of $3.7 million to the core deposit intangibles related to the First Menasha merger. See Note 2 for additional information on the acquisitions.

 

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Note 7 – Goodwill and Intangible Assets and Mortgage Servicing Rights, continued

 

(in thousands)  June 30, 2017   December 31, 2016 
Core deposit intangibles:          
Gross carrying amount  $29,015   $25,345 
Accumulated amortization   (10,392)   (8,244)
Net book value  $18,623   $17,101 
Additions during the period  $3,670   $17,259 
Amortization during the period  $2,148   $3,189 
Other intangibles:          
Gross carrying amount  $4,363   $4,363 
Accumulated amortization   (461)   (269)
Net book value  $3,902   $4,094 
Additions during the period  $-   $4,363 
Amortization during the period  $192   $269 

 

Mortgage servicing rights: Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income, and assessed for impairment at each reporting date, with the amortization recorded in mortgage income, net, in the consolidated income statements. Mortgage servicing rights are carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value, and are included in other assets in the consolidated balance sheets. Activity in the mortgage servicing rights asset for the six months ended June 30, 2017 and year ended December 31, 2016 was as follows:

 

(in thousands)  June 30, 2017   December 31, 2016 
Mortgage servicing rights (MSR) asset:          
MSR asset at beginning of year  $1,922   $193 
Capitalized MSR   412    1,023 
MSR asset acquired   874    885 
Amortization during the period   (200)   (179)
Valuation allowance at end of period   -    - 
Net book value at end of period  $3,008   $1,922 
           
Fair value of MSR asset at end of period  $3,880   $2,013 
Residential mortgage loans serviced for others  $480,081   $295,353 
Net book value of MSR asset to loans serviced for others   0.63%   0.65%

 

The Company periodically evaluates its mortgage servicing rights asset for impairment. At each reporting date, impairment is assessed based on an estimated fair value using estimated prepayment speeds of the underlying mortgage loans serviced and stratifications based on the risk characteristics of the underlying loans serviced (predominantly loan type and note interest rate). No valuation or impairment charge was recorded for 2016 or year to date 2017.

 

The following table shows the estimated future amortization expense for amortizing intangible assets. The projections are based on existing asset balances, the current interest rate environment and prepayment speeds as of the June 30, 2017. The actual amortization expense the Company recognizes in any given period may be significantly different depending upon acquisition or sale activities, changes in interest rates, prepayment speeds, market conditions, regulatory requirements and events or circumstances that indicate the carrying amount of an asset may not be recoverable.

 

(in thousands)  Core deposit
intangibles
   Other intangibles   MSR asset 
Year ending December 31,               
2017 (remaining six months)  $2,146   $193   $264 
2018   3,915    385    529 
2019   3,337    385    529 
2020   2,657    385    635 
2021   2,167    385    294 
Thereafter   4,401    2,169    757 
Total  $18,623   $3,902   $3,008 

 

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Note 8-Notes Payable

 

The Company had the following long-term notes payable (notes with original maturities of greater than one year):

 

(in thousands)  June 30, 2017   December 31, 2016 
         
Federal Home Loan Bank (“FHLB”) advances  $21,787   $1,000 
Notes payable  $21,787   $1,000 

 

The Company’s FHLB advances bear fixed rates, require interest-only monthly payments, and have maturities ranging from July 2017 to November 2022. The weighted average rates of FHLB advances were 1.75% at June 30, 2017 and 1.17% at December 31, 2016, respectively. FHLB advances are collateralized by a blanket lien on qualifying first mortgages, home equity loans, multi-family loans and certain farmland loans which totaled approximately $281.2 million and $283.8 million at June 30, 2017 and December 31, 2016, respectively.

 

The following table shows the maturity schedule of the notes payable as of June 30, 2017:

 

Maturing in  (in thousands) 
2017  $5,172 
2018   1,000 
2019   - 
2020   10,000 
2021   - 
2022   5,615 
   $21,787 

 

The Company has a $10 million line of credit with a third party bank, bearing a variable rate of interest based on one-month LIBOR plus a margin, but subject to a floor rate, with quarterly payments of interest only. At June 30, 2017, the available line was $10 million, the rate was one-month LIBOR plus 2.25% with a 3.25% floor. The outstanding balance was zero at June 30, 2017 and December 31, 2016, and the line was not used during 2017 or 2016.

 

Note 9 – Junior Subordinated Debentures

 

At June 30, 2017 and December 31, 2016, the Company’s carrying value of junior subordinated debentures was $29.3 million and $24.7 million, respectively. At June 30, 2017 and December 31, 2016, $28.2 million and $23.7 million, respectively, of guaranteed preferred beneficial interests (“trust preferred securities”) qualify as Tier 1 capital.

 

In July 2004 Nicolet Bankshares Statutory Trust I (the “Statutory Trust”), issued $6.0 million of trust preferred securities that qualify as Tier 1 capital under Federal Reserve Board guidelines. All of the common securities of the Statutory Trust are owned by the Company. The proceeds from the issuance of the common securities and the trust preferred securities were used by the Statutory Trust to purchase $6.2 million of junior subordinated debentures of the Company, which pay an 8% fixed rate. Interest on these debentures is current. The debentures may be redeemed in part or in full, on or after July 15, 2009 at par plus any accrued but unpaid interest. The maturity date of the debenture, if not redeemed, is July 15, 2034.

 

In April 2013, as part of the Mid-Wisconsin Financial Services, Inc. (“Mid-Wisconsin”) acquisition, the Company assumed $10.3 million of junior subordinated debentures issued in December 2005 by Mid-Wisconsin, related to $10.0 million of trust preferred securities issued by a statutory trust, whose common securities were wholly owned by Mid-Wisconsin. These trust preferred securities and debentures mature on December 15, 2035 and have a floating rate of the three-month LIBOR plus 1.43%, adjusted quarterly. Interest on these debentures is current. The interest rates were 2.68% and 2.39% as of June 30, 2017 and December 31, 2016, respectively. The debentures may be called at par plus any accrued but unpaid interest, in part or in full, on or after December 15, 2010. At acquisition the debentures were recorded at an initial fair market value of $5.8 million, with the initial $4.5 million discount being accreted to interest expense over the remaining life of the debentures. At June 30, 2017, the carrying value of these junior debentures was $6.7 million.

 

As part of the 2016 acquisition of Baylake, the Company assumed $16.6 million of junior subordinated debentures related to $16.1 million of issued trust preferred securities. The trust preferred securities and the debentures mature on September 30, 2036 and have a floating rate of three-month LIBOR plus 1.35% adjusted quarterly. Interest on these debentures is current. The interest rates were 2.65% and 2.35% as of June 30, 2017 and December 31, 2016 respectively. The debentures may be redeemed on any interest payment date at par in part or in full, on or after June 30, 2011. At acquisition in April 2016 the debentures were recorded at fair value of $11.8 million, with the discount being accreted to interest expense over the remaining life of the debentures. At June 30, 2017, the carrying value of these junior debentures was $12.1 million.

 

 25 

 

  

Note 9 – Junior Subordinated Debentures, continued

 

As part of the 2017 acquisition of First Menasha, the Company assumed $5.2 million of junior subordinated debentures related to $5.0 million of issued trust preferred securities. The trust preferred securities and the debentures mature on March 17, 2034 and have a floating rate of three-month LIBOR plus 2.79% adjusted quarterly. Interest on these debentures is current. The interest rate was 4.06% as of June 30, 2017. The debentures may be redeemed on any interest payment date at par in part or in full, on any interest payment date. At acquisition in April 2017 the debentures were recorded at fair value of $4.4 million, with the discount being accreted to interest expense over the remaining life of the debentures. At June 30, 2017, the carrying value of these junior debentures was $4.4 million.

 

The debentures represent the sole asset of the respective statutory trusts. The statutory trusts are not included in the consolidated financial statements. The net effect of all the documents entered into with respect to the trust preferred securities is that the Company, through payment on its debentures, is liable for the distributions and other payments required on the trust preferred securities.

 

Note 10 – Subordinated Notes

 

In 2015 the Company placed an aggregate of $12 million in subordinated Notes in private placements with certain accredited investors. All Notes were issued with 10-year maturities, have a fixed annual interest rate of 5% payable quarterly, are callable on or after the fifth anniversary of their respective issuances dates, and qualify for Tier 2 capital for regulatory purposes. At June 30, 2017, the carrying value of these subordinated notes was $11.9 million.

 

The $180,000 debt issuance costs associated with the $12 million Notes are being amortized on a straight line basis over the first five years, representing the no-call periods, as additional interest expense. As of June 30, 2017 and December 31, 2016, respectively, $97,000 and $115,000, of unamortized debt issuance costs remain and are reflected as a deduction to the carrying value of the outstanding debt.

 

Note 11 – Fair Value Measurements

 

Fair value represents the estimated price at which an orderly transaction to sell an asset or transfer a liability would take place between market participants at the measurement date under current market conditions (i.e. an exit price concept), and is a market-based measurement versus an entity-specific measurement.

 

As provided for by accounting standards, the Company records and/or discloses financial instruments on a fair value basis. These financial assets and financial liabilities are measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the assumptions used to determine fair value. These levels are: Level 1 - quoted market prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date; Level 2 - inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; Level 3 – significant unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the fair value measurement is based on inputs from different levels, the level within which the entire fair value measurement will be categorized is based on the lowest level input that is significant to the fair value measurement in its entirety; this assessment of the significance of an input requires management judgment.

 

Disclosure of the fair value of financial instruments, whether recognized or not recognized in the balance sheet, is required for those instruments for which it is practicable to estimate that value, with the exception of certain financial instruments and all nonfinancial instruments as provided for by the accounting standards. For financial instruments recognized at fair value in the consolidated balance sheets, the fair value disclosure requirements also apply.

 

 26 

 

  

Note 11 – Fair Value Measurements, continued

 

Recurring basis fair value measurements:

The following table presents the balances of assets and liabilities measured at fair value on a recurring basis for the periods presented. During 2017, three securities classified as Level 3 were acquired with the First Menasha acquisition in the second quarter of 2017 with a fair value of $0.2 million, and two securities classified as Level 3 had a change in fair values during the second quarter of 2017 due to pay downs.

 

       Fair Value Measurements Using 
Measured at Fair Value on a Recurring Basis:  Total   Level 1   Level 2   Level 3 
(in thousands)                
U.S. government sponsored enterprises  $26,152   $-   $26,152   $-