10-Q 1 tv478030_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 September 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 October 27, 2017 there were 9,801,613 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
September 30, 2017 (unaudited) and December 31, 2016
3
       
    Consolidated Statements of Income
Three Months and Nine Months ended September 30, 2017 and 2016 (unaudited)
4
       
    Consolidated Statements of Comprehensive Income
Three Months and Nine Months ended September 30, 2017 and 2016 (unaudited)
5
       
    Consolidated Statement of Changes in Stockholders’ Equity
Nine Months Ended September 30, 2017 (unaudited)
6
       
    Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2017 and 2016 (unaudited)
7
       
    Notes to Unaudited Consolidated Financial Statements 8-31
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 32-55
       
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 55
       
  Item 4. Controls and Procedures 55-56
       
PART II OTHER INFORMATION  
     
  Item 1. Legal Proceedings 56
       
  Item 1A. Risk Factors 56
       
  Item 2. Unregistered Sales of Equity Securities and Use of  Proceeds 56
       
  Item 3. Defaults Upon Senior Securities 56
       
  Item 4. Mine Safety Disclosures 56
       
  Item 5. Other Information 56
       
  Item 6. Exhibits 57
       
    Signatures 57

 

 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)

 

   September 30, 2017
(Unaudited)
   December 31, 2016
(Audited)
 
Assets          
Cash and due from banks  $64,075   $68,056 
Interest-earning deposits   31,297    60,320 
Federal funds sold   731    727 
Cash and cash equivalents   96,103    129,103 
Certificates of deposit in other banks   2,494    3,984 
Securities available for sale (“AFS”)   408,217    365,287 
Other investments   14,931    17,499 
Loans held for sale   6,963    6,913 
Loans   2,051,122    1,568,907 
Allowance for loan losses   (12,610)   (11,820)
Loans, net   2,038,512    1,557,087 
Premises and equipment, net   47,432    45,862 
Bank owned life insurance (“BOLI”)   63,989    54,134 
Goodwill and other intangibles   129,588    87,938 
Accrued interest receivable and other assets   37,501    33,072 
Total assets  $2,845,730   $2,300,879 
           
Liabilities and Stockholders’ Equity          
Liabilities:          
Demand  $638,447   $482,300 
Money market and NOW accounts   1,107,360    964,509 
Savings   274,828    221,282 
Time   346,316    301,895 
Total deposits   2,366,951    1,969,986 
Short-term borrowings   12,900    - 
Notes payable   41,571    1,000 
Junior subordinated debentures   29,497    24,732 
Subordinated notes   11,912    11,885 
Accrued interest payable and other liabilities   21,827    16,911 
Total liabilities   2,484,658    2,024,514 
           
Stockholders’ Equity:          
Common stock   98    86 
Additional paid-in capital   267,396    209,700 
Retained earnings   92,935    68,888 
Accumulated other comprehensive loss (“AOCI”)   (3)   (2,727)
Total Nicolet Bankshares, Inc. stockholders’ equity   360,426    275,947 
Noncontrolling interest   646    418 
Total stockholders’ equity and noncontrolling interest   361,072    276,365 
Total liabilities, noncontrolling interest and stockholders’ equity  $2,845,730   $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   9,798,724    8,553,292 
Common shares issued   9,826,197    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
September 30,
   Nine Months Ended
September 30,
 
   2017   2016   2017   2016 
Interest income:                    
Loans, including loan fees  $27,329   $21,049   $73,098   $49,455 
Investment securities:                    
Taxable   1,114    902    3,422    2,068 
Non-taxable   604    493    1,761    1,146 
Other interest income   407    351    1,136    906 
Total interest income   29,454    22,795    79,417    53,575 
Interest expense:                    
Money market and NOW accounts   1,380    631    2,755    1,726 
Savings and time deposits   984    719    2,461    2,102 
Short-term borrowings   -    -    72    5 
Notes payable   81    6    133    230 
Junior subordinated debentures   459    376    1,284    926 
Subordinated notes   159    159    477    477 
Total interest expense   3,063    1,891    7,182    5,466 
Net interest income   26,391    20,904    72,235    48,109 
Provision for loan losses   975    450    1,875    1,350 
Net interest income after provision for loan losses   25,416    20,454    70,360    46,759 
Noninterest income:                    
Service charges on deposit accounts   1,238    1,051    3,367    2,514 
Mortgage income, net   1,774    2,010    4,022    3,713 
Trust services fee income   1,479    1,373    4,431    4,000 
Brokerage fee income   1,500    992    4,192    2,090 
Bank owned life insurance   459    318    1,314    880 
Rent income   285    285    852    820 
Investment advisory fees   92    146    357    341 
Gain on sale or writedown of assets, net   1,305    453    2,071    548 
Other income   2,032    1,904    5,412    3,874 
Total noninterest income   10,164    8,532    26,018    18,780 
Noninterest expense:                    
Personnel   11,488    10,516    32,404    24,748 
Occupancy, equipment and office   3,559    3,018    9,613    7,324 
Business development and marketing   1,113    985    3,359    2,353 
Data processing   2,238    1,831    6,428    4,408 
FDIC assessments   205    247    582    629 
Intangibles amortization   1,173    1,172    3,514    2,295 
Other expense   1,086    1,250    3,598    4,799 
Total noninterest expense   20,862    19,019    59,498    46,556 
                     
Income before income tax expense   14,718    9,967    36,880    18,983 
Income tax expense   5,132    3,438    12,605    6,432 
Net income   9,586    6,529    24,275    12,551 
Less: net income attributable to noncontrolling interest   74    65    228    176 
Net income attributable to Nicolet Bankshares, Inc.   9,512    6,464    24,047    12,375 
Less:  preferred stock dividends   -    247    -    633 
Net income available to common shareholders  $9,512   $6,217   $24,047   $11,742 
                     
Basic earnings per common share  $0.97   $0.72   $2.58   $1.76 
Diluted earnings per common share  $0.91   $0.69   $2.45   $1.67 
Weighted average common shares outstanding:                    
Basic   9,836,646    8,607,719    9,316,814    6,689,367 
Diluted   10,408,683    8,969,735    9,820,724    7,024,169 

 

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
September 30,
   Nine Months Ended
September 30,
 
   2017   2016   2017   2016 
Net income  $9,586   $6,529   $24,275   $12,551 
Other comprehensive income, net of tax:                    
Unrealized gains on securities AFS:                    
Net unrealized holding gains (losses) arising during the period   834    (984)   5,685    2,257 
Reclassification adjustment for net gains included in net income   (1,221)   (37)   (1,220)   (77)
Income tax benefit (expense)   125    397    (1,741)   (851)
Total other comprehensive income (loss)   (262)   (624)   2,724    1,329 
Comprehensive income  $9,324   $5,905   $26,999   $13,880 

 

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   -    -    24,047    -    228    24,275 
Other comprehensive income   -    -    -    2,724    -    2,724 
Stock compensation expense   -    1,871    -    -    -    1,871 
Exercise of stock options, net   1    1,285    -    -    -    1,286 
Issuance of common stock   -    175    -    -    -    175 
Issuance of  common stock in acquisitions, net of capitalized issuance costs of $186   13    62,047    -    -    -    62,060 
Purchase and retirement of common stock   (2)   (7,682)   -    -    -    (7,684)
Balance, September 30, 2017  $98   $267,396   $92,935   $(3)  $646   $361,072 

 

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)

 

   Nine Months Ended September 30, 
   2017   2016 
Cash Flows From Operating Activities, net of effects of business combinations:          
Net income  $24,275   $12,551 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation, amortization, and accretion   7,038    4,227 
Provision for loan losses   1,875    1,350 
Increase in cash surrender value of life insurance   (1,314)   (880)
Stock compensation expense   1,871    1,123 
Gain on sale or writedown of assets, net   (2,071)   (548)
Gain on sale of loans held for sale, net   (3,614)   (3,713)
Proceeds from sale of loans held for sale   164,726    179,967 
Origination of loans held for sale   (164,806)   (179,581)
Net change in:          
Accrued interest receivable and other assets   239    1,182 
Accrued interest payable and other liabilities   1,733    (3,888)
Net cash provided by operating activities   29,952    11,790 
Cash Flows From Investing Activities, net of effects of business combinations:          
Net decrease in certificates of deposit in other banks   1,490    239 
Net decrease (increase) in loans   (126,499)   15,582 
Purchases of securities AFS   (49,119)   (57,510)
Proceeds from sales of securities AFS   10,798    30,319 
Proceeds from calls and maturities of securities AFS   34,426    22,962 
Purchase of other investments   (3,256)   (3,745)
Proceeds from sales of other investments   6,519    - 
Net increase in premises and equipment   (2,958)   (3,802)
Proceeds from sales of other real estate and other assets   3,410    1,661 
Purchase of BOLI   (70)   (20,000)
Proceeds from redemption of BOLI   -    21,549 
Intangible from acquired customer relationships   (870)   - 
Net cash received in business combination   9,119    66,517 
Net cash provided (used) by investing activities   (117,010)   73,772 
Cash Flows From Financing Activities, net of effects of business combinations:          
Net increase in deposits   22,054    55,332 
Net increase (decrease) in short-term borrowings   12,900    (49,087)
Proceeds from notes payable   30,000    - 
Repayments of notes payable   (4,487)   (56,519)
Redemption of preferred stock   -    (12,200)
Purchase and retirement of common stock   (7,462)   (3,046)
Capitalized issuance costs, net   (186)   (260)
Proceeds from issuance of common stock   175    101 
Proceeds from exercise of common stock options, net   1,064    1,502 
Cash dividends paid on preferred stock   -    (633)
Net cash provided (used) by financing activities   54,058    (64,810)
Net increase (decrease) in cash and cash equivalents   (33,000)   20,752 
Cash and cash equivalents:          
Beginning  $129,103   $83,619 
Ending  $96,103   $104,371 
Supplemental Disclosures of Cash Flow Information:          
Cash paid for interest  $7,117   $5,787 
Cash paid for taxes   8,805    7,150 
Transfer of loans and bank premises to other real estate owned   828    33 
Capitalized mortgage servicing rights   679    492 
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   398,000    937,000 
Net assets acquired   41,000    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 $14,000 and $176,000 for the three months and nine months ended September 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 September 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 $480 million in assets, $351 million in loans, $375 million in deposits, $4 million in core deposit intangible, and $41 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. During the third quarter of 2017, adjustments were made based on additional information. Goodwill was increased by $1.0 million to account for the gain in the Company’s pre-acquisition equity interest holding in First Menasha, resulting in a $1.2 million gain in pre-tax earnings.

 

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. 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). During the third quarter of 2017, the previously variable earn-out liability was agreed to be modified to a fixed amount. Therefore, the earn-out liability was adjusted to $2.4 million, with a corresponding $0.9 million increase in the customer relationship intangible, being amortized over the original term. The transaction impacts the income statement primarily within brokerage income, personnel expense, and intangibles amortization.

 

 9 

 

 

Note 2 – Acquisitions, continued

 

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.

 

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 nine months ended September 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
September 30, 2016
   Nine Months Ended
September 30, 2016
 
Total revenues, net of interest expense  $29,436   $82,870 
Net income   6,827    17,042 
Diluted earnings per share   0.74    1.85 

 

 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.

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2017   2016   2017   2016 
(In thousands except per share data)                    
Net income, net of noncontrolling interest  $9,512   $6,464   $24,047   $12,375 
Less: preferred stock dividends   -    247    -    633 
Net income available to common shareholders  $9,512   $6,217   $24,047   $11,742 
Weighted average common shares outstanding   9,837    8,608    9,317    6,689 
Effect of dilutive stock instruments   572    362    504    335 
Diluted weighted average common shares outstanding   10,409    8,970    9,821    7,024 
Basic earnings per common share*  $0.97   $0.72   $2.58   $1.76 
Diluted earnings per common share*  $0.91   $0.69   $2.45   $1.67 

 

*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 September 30, 2017 or September 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:

 

   Nine Months Ended
September 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 

 

 11 

 

 

Note 4 – Stock-based Compensation, continued

 

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

 

   Option Shares
Stock Options
Outstanding
   Weighted-
Average
Exercise Price
   Exercisable
Shares
   Weighted-
Average
Exercise
Price
 
Balance – December 31, 2015   746,004   $21.56    325,979   $19.09 
Granted (1)   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   $19.97 
Granted (2)   814,500    48.86           
Exercise of stock options*   (65,833)   19.52           
Forfeited   (400)   16.50           
Balance – September 30, 2017   1,670,293   $36.51    471,043   $21.49 

 

*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 4,443 shares were surrendered during the nine months ended September 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.

(1) The weighted average per share fair value of options granted was $11.04 for the period.

(2) The weighted average per share fair value of options granted was $15.44 for the period.

 

The following options were outstanding at September 30, 2017:

 

   Number of Shares   Weighted-Average Exercise
Price
   Weighted-Average
Remaining Life (Years)
 
   Outstanding   Exercisable   Outstanding   Exercisable   Outstanding   Exercisable 
$9.19 – $20.00   257,750    238,000   $16.30   $16.28    3.78    3.71 
$20.01 – $25.00   241,455    110,055    23.68    23.54    6.54    5.89 
$25.01 – $30.00   153,724    71,524    26.00    26.11    6.91    6.44 
$30.01 – $40.00   202,864    51,464    35.88    34.76    8.64    8.27 
$40.01 – $49.30   814,500    -    48.86    -    9.63    - 
    1,670,293    471,043   $36.51   $21.49    7.91    5.14 

 

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 nine 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 – September 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 nine months ended September 30, 2017 and 7,851 shares were surrendered during the twelve months ended December 31, 2016.

 

 12 

 

 

Note 4 – Stock-based Compensation, continued

 

The Company recognized approximately $1.9 million and $1.1 million of stock-based employee compensation expense during the nine months ended September 30, 2017 and 2016, respectively, associated with its stock equity awards. As of September 30, 2017, there was approximately $15.2 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 years.

 

Note 5 – Securities Available for Sale

 

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

 

   September 30, 2017 
(in thousands)  Amortized Cost   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair Value 
U.S. government sponsored enterprises  $26,394   $-   $122   $26,272 
State, county and municipals   189,226    521    1,031    188,716 
Mortgage-backed securities   159,113    261    1,438    157,936 
Corporate debt securities   32,203    541    -    32,744 
Equity securities   1,288    1,261    -    2,549 
   $408,224   $2,584   $2,591   $408,217 
                     
   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 

 

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 September 30, 2017 and December 31, 2016.

 

   September 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 sponsored enterprises  $26,272   $122   $-   $-   $26,272   $122 
State, county and municipals   63,924    352    46,677    679    110,601    1,031 
Mortgage-backed securities   94,850    747    35,475    691    130,325    1,438 
   $185,046   $1,221   $82,152   $1,370   $267,198   $2,591 
                               
   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 sponsored enterprises  $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 

 

 13 

 

 

Note 5 – Securities Available for Sale, continued

 

At September 30, 2017 the Company had $2.6 million of gross unrealized losses related to 507 securities. As of September 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 nine-month periods ending September 30, 2017 or September 30, 2016.

 

The amortized cost and fair values of securities available for sale at September 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.

 

   September 30, 2017 
(in thousands)  Amortized Cost   Fair Value 
Due in less than one year  $13,262   $13,261 
Due in one year through five years   96,098    96,410 
Due after five years through ten years   130,477    129,769 
Due after ten years   7,986    8,292 
    247,823    247,732 
Mortgage-backed securities   159,113    157,936 
Equity securities   1,288    2,549 
Securities available for sale  $408,224   $408,217 

 

Proceeds from sales of securities available for sale during the first nine months of 2017 and 2016 were approximately $10.8 million and $30.3 million, respectively. During the first nine months of 2017, gross gains and losses realized were $1.2 million and $7,000, respectively, while gross gains and gross losses were $90,000 and $13,000, respectively, for the comparable nine months of 2016.

 

 14 

 

 

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

 

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

 

   Total 
   September 30, 2017   December 31, 2016 
(in thousands)  Amount  

% of

Total

   Amount   % of
Total
 
Commercial & industrial  $625,729    30.5%  $428,270    27.3%
Owner-occupied commercial real estate (“CRE”)   428,054    20.9    360,227    23.0 
Agricultural (“AG”) production   36,352    1.8    34,767    2.2 
AG real estate   48,443    2.4    45,234    2.9 
CRE investment   303,448    14.8    195,879    12.5 
Construction & land development   87,649    4.3    74,988    4.8 
Residential construction   33,163    1.6    23,392    1.5 
Residential first mortgage   363,116    17.7    300,304    19.1 
Residential junior mortgage   102,654    5.0    91,331    5.8 
Retail & other   22,514    1.0    14,515    0.9 
Loans   2,051,122    100.0%   1,568,907    100.0%
Less allowance for loan losses   12,610         11,820      
Loans, net  $2,038,512        $1,557,087      
Allowance for loan losses to loans   0.61%        0.75%     
                     
   Originated 
   September 30, 2017   December 31, 2016 
(in thousands)  Amount  

% of

Total

   Amount   % of
Total
 
Commercial & industrial  $470,700    40.4%  $330,073    36.6%
Owner-occupied CRE   221,556    19.0    182,776    20.3 
AG production   11,605    1.0    9,192    1.0 
AG real estate   23,876    2.0    18,858    2.1 
CRE investment   98,328    8.4    72,930    8.1 
Construction & land development   55,387    4.7    44,147    4.9 
Residential construction   27,129    2.3    20,768    2.3 
Residential first mortgage   180,509    15.5    164,949    18.3 
Residential junior mortgage   60,207    5.2    48,199    5.3 
Retail & other   17,092    1.5    10,095    1.1 
Loans   1,166,389    100.0%   901,987    100.0%
Less allowance for loan losses   10,406         9,449      
Loans, net  $1,155,983        $892,538      
Allowance for loan losses to loans   0.89%        1.05%     
                     
   Acquired 
   September 30, 2017   December 31, 2016 
(in thousands)  Amount  

% of

Total

   Amount   % of
Total
 
Commercial & industrial  $155,029    17.5%  $98,197    14.7%
Owner-occupied CRE   206,498    23.3    177,451    26.6 
AG production   24,747    2.8    25,575    3.8 
AG real estate   24,567    2.8    26,376    4.0 
CRE investment   205,120    23.2    122,949    18.4 
Construction & land development   32,262    3.7    30,841    4.6 
Residential construction   6,034    0.7    2,624    0.4 
Residential first mortgage   182,607    20.6    135,355    20.3 
Residential junior mortgage   42,447    4.8    43,132    6.5 
Retail & other   5,422    0.6    4,420    0.7 
Loans   884,733    100.0%   666,920    100.0%
Less allowance for loan losses   2,204         2,371      
Loans, net  $882,529        $664,549      
Allowance for loan losses to loans   0.25%        0.36%     

 

 15 

 

 

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 nine months ended September 30, 2017:

 

   TOTAL – Nine Months Ended September 30, 2017 
(in thousands)
ALLL:
  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 
Beginning balance  $3,919   $2,867   $150   $285   $1,124   $774   $304   $1,784   $461   $152   $11,820 
Provision   2,183    (253)   16    (17)   132    (19)   (137)   (124)   4    90    1,875 
Charge-offs   (1,097)   -    -    -    -    (13)   -    (8)   -    (38)   (1,156)
Recoveries   20    29    -    -    1    -    -    6    2    13    71 
Net charge-offs   (1,077)   29    -    -    1    (13)   -    (2)   2    (25)   (1,085)
Ending balance  $5,025   $2,643   $166   $268   $1,257   $742   $167   $1,658   $467   $217   $12,610 
As percent of ALLL   39.9%   21.0%   1.3%   2.1%   10.0%   5.9%   1.3%   13.1%   3.7%   1.7%   100.0%
                                                        
ALLL:                                                       
Individually evaluated  $226   $-   $-   $-   $-   $-   $-   $-   $-   $-   $226 
Collectively evaluated   4,799    2,643    166    268    1,257    742    167    1,658    467    217    12,384 
Ending balance  $5,025   $2,643   $166   $268   $1,257   $742   $167   $1,658   $467   $217   $12,610 
                                                        
Loans:                                                       
Individually evaluated  $5,071   $1,116   $-   $218   $4,845   $723   $80   $1,619   $60   $-   $13,732 
Collectively evaluated   620,658    426,938    36,352    48,225    298,603    86,926    33,083    361,497    102,594    22,514    2,037,390 
Total loans  $625,729   $428,054   $36,352   $48,443   $303,448   $87,649   $33,163   $363,116   $102,654   $22,514   $2,051,122 
                                                        
Less ALLL  $5,025   $2,643   $166   $268   $1,257   $742   $167   $1,658   $467   $217   $12,610 
Net loans  $620,704   $425,411   $36,186   $48,175   $302,191   $86,907   $32,996   $361,458   $102,187   $22,297   $2,038,512 

 

 16 

 

 

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

 

   Originated – Nine Months Ended September 30, 2017 
(in thousands)
ALLL:
  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 
Beginning balance  $3,150   $2,263   $122   $222   $893   $656   $266   $1,372   $373   $132   $9,449 
Provision   2,128    (167)   19    (11)   140    (20)   (135)   (44)   13    82    2,005 
Charge-offs   (1,043)   -    -    -    -    -    -    (8)   -    (38)   (1,089)
Recoveries   1    24    -    -    -    -    -    1    2    13    41 
Net charge-offs   (1,042)   24    -    -    -    -    -    (7)   2    (25)   (1,048)
Ending balance  $4,236   $2,120   $141   $211   $1,033   $636   $131   $1,321   $388   $189   $10,406 
As percent of ALLL   40.7%   20.4.%   1.4%   2.0%   9.9%   6.1%   1.3%   12.7%   3.7%   1.8%   100.0%
                                                        
ALLL:                                                       
Individually evaluated  $226   $-   $-   $-   $-   $-   $-   $-   $-   $-   $226 
Collectively evaluated   4,010    2,120    141    211    1,033    636    131    1,321    388    189    10,180 
Ending balance  $4,236   $2,120   $141   $211   $1,033   $636   $131   $1,321   $388   $189   $10,406 
                                                        
Loans:                                                       
Individually evaluated  $615   $-   $-   $-   $-   $-   $-   $-   $-   $-   $615 
Collectively evaluated   470,085    221,556    11,605    23,876    98,328    55,387    27,129    180,509    60,207    17,092    1,165,774 
Total loans  $470,700   $221,556   $11,605   $23,876   $98,328   $55,387   $27,129   $180,509   $60,207   $17,092   $1,166,389 
                                                        
Less ALLL  $4,236   $2,120   $141   $211   $1,033   $636   $131   $1,321   $388   $189   $10,406 
Net loans  $466,464   $219,436   $11,464   $23,665   $97,295   $54,751   $26,998   $179,188   $59,819   $16,903   $1,155,983 
                                                        
   Acquired – Nine Months Ended September 30, 2017 
(in thousands)
ALLL:
  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 
Beginning balance  $769   $604   $28   $63   $231   $118   $38   $412   $88   $20   $2,371 
Provision   55    (86)   (3)   (6)   (8)   1    (2)   (80)   (9)   8    (130)
Charge-offs   (54)   -    -    -    -    (13)   -    -    -    -    (67)
Recoveries   19    5    -    -    1    -    -    5    -    -    30 
Net charge-offs   (35)   5    -    -    1    (13)   -    5    -    -    (37)
Ending balance  $789   $523   $25   $57   $224   $106   $36   $337   $79   $28   $2,204 
As percent of ALLL   35.8%   23.7%   1.1%   2.6%   10.2%   4.8%   1.6%   15.3%   3.6%   1.3%   100.0%
                                                        
Loans:                                                       
Individually evaluated  $4,456   $1,116   $-   $218   $4,845   $723   $80   $1,619   $60   $-   $13,117 
Collectively evaluated   150,573    205,382    24,747    24,349    200,275    31,539    5,954    180,988    42,387    5,422    871,616 
Total loans  $155,029   $206,498   $24,747   $24,567   $205,120   $32,262   $6,034   $182,607   $42,447   $5,422   $884,733 
                                                        
Less ALLL  $789   $523   $25   $57   $224   $106   $36   $337   $79   $28   $2,204 
Net loans  $154,240   $205,975   $24,722   $24,510   $204,896   $32,156   $5,998   $182,270   $42,368   $5,394   $882,529 

 

 17 

 

 

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 nine months ended September 30, 2016.

 

   TOTAL – Nine Months Ended September 30, 2016 
(in  thousands)
ALLL:
  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 
Beginning balance  $3,721   $1,933   $85   $380   $785   $1,446   $147   $1,240   $496   $74   $10,307 
Provision   745    710    40    (77)   23    (586)   176    188    42    89    1,350 
Charge-offs   (279)   (61)   -    -    -    -    -    -    (53)   (39)   (432)
Recoveries   17    3    -    -    221    -    -    5    7    3    256 
Net charge-offs   (262)   (58)   -    -    221    -    -    5    (46)   (36)   (176)
Ending balance  $4,204   $2,585   $125   $303   $1,029   $860   $323   $1,433   $492   $127   $11,481 
As percent of ALLL   36.6%   22.5%   1.1%   2.6%   9.0%   7.5%   2.8%   12.5%   4.3%   1.1%   100.0%
                                                        
ALLL:                                                       
Individually evaluated  $96   $-   $-   $-   $-   $-   $-   $-   $-   $-   $96 
Collectively evaluated   4,108    2,585    125    303    1,029    860    323    1,433    492    127    11,385 
Ending balance  $4,204   $2,585   $125   $303   $1,029   $860   $323   $1,433   $492   $127   $11,481 
                                                        
Loans:                                                       
Individually evaluated  $662   $2,666   $53   $240   $13,466   $722   $287   $2,303   $181   $-   $20,580 
Collectively evaluated   423,128    359,888    34,024    45,431    184,418    67,439    27,044    282,350    95,720    14,102    1,533,544 
Total loans  $423,790   $362,554   $34,077   $45,671   $197,884   $68,161   $27,331   $284,653   $95,901   $14,102   $1,554,124 
                                                        
Less ALLL  $4,204   $2,585   $125   $303   $1,029   $860   $323   $1,433   $492   $127   $11,481 
Net loans  $419,586   $359,969   $33,952   $45,368   $196,855   $67,301   $27,008   $283,220   $95,409   $13,975   $1,542,643 
                                                        
   Originated – Nine Months Ended September 30, 2016 
(in thousands)
ALLL:
  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 
Beginning balance  $3,135   $1,567   $71   $299   $646   $1,381   $147   $987   $418   $63   $8,714 
Provision   426    408    29    (73)   (70)   (633)   130    85    16    80    398 
Charge-offs   (262)   (3)   -    -    -    -    -    -    (53)   (38)   (356)
Recoveries   -    3    -    -    221    -    -    -    6    2    232 
Net charge-offs   (262)   -    -    -    221    -    -    -    (47)   (36)   (124)
Ending balance  $3,299   $1,975   $100   $226   $797   $748   $277   $1,072   $387   $107   $8,988 
As percent of ALLL   36.7%   22.0%   1.1%   2.5%   8.9%   8.3%   3.1%   11.9%   4.3%   1.2%   100.0%
                                                        
ALLL:                                                       
Individually evaluated  $96   $-   $-   $-   $-   $-   $-   $-   $-   $-   $96 
Collectively evaluated   3,203    1,975    100    226    797    748    277    1,072    387    107    8,892 
Ending balance  $3,299   $1,975   $100   $226   $797   $748   $277   $1,072   $387   $107   $8,988 
                                                        
Loans:                                                       
Individually evaluated  $319   $-   $-   $-   $-   $-   $-   $-   $-   $-   $319 
Collectively evaluated   321,203    181,107    8,857    18,222    72,182    34,916    20,964    138,103    47,346    9,179    852,079 
Total loans  $321,522   $181,107   $8,857   $18,222   $72,182   $34,916   $20,964   $138,103   $47,346   $9,179   $852,398 
                                                        
Less ALLL  $3,299   $1,975   $100   $226   $797   $748   $277   $1,072   $387   $107   $8,988 
Net loans  $318,223   $179,132   $8,757   $17,996   $71,385   $34,168   $20,687   $137,031   $46,959   $9,072   $843,410 

 

 18 

 

 

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

 

   Acquired – Nine Months Ended September 30, 2016 
(in thousands)
ALLL:
  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 
Beginning balance  $586   $366   $14   $81   $139   $65   $-   $253   $78   $11   $1,593 
Provision   319    302    11    (4)   93    47    46    103    26    9    952 
Charge-offs   (17)   (58)   -    -    -    -    -    -    -    (1)   (76)
Recoveries   17    -    -    -    -    -    -    5    1    1    24 
Net charge-offs   -    (58)   -    -    -    -    -    5    1    -    (52)
Ending balance  $905   $610   $25   $77   $232   $112   $46   $361   $105   $20   $2,493 
As percent of ALLL   36.3%   24.5%   1.0%   3.1%   9.3%   4.5%   1.8%   14.5%   4.2%   0.8%   100.0%
                                                        
Loans:                                                       
Individually evaluated  $343   $2,666   $53   $240   $13,466   $722   $287   $2,303   $181   $-   $20,261 
Collectively evaluated   101,925    178,781    25,167    27,209    112,236    32,523    6,080    144,247    48,374    4,923    681,465 
Total loans  $102,268   $181,447   $25,220   $27,449   $125,702   $33,245   $6,367   $146,550   $48,555   $4,923   $701,726 
                                                        
Less ALLL  $905   $610   $25   $77   $232   $112   $46   $361   $105   $20   $2,493 
Net loans  $101,363   $180,837   $25,195   $27,372   $125,470   $33,133   $6,321   $146,189   $48,450   $4,903   $699,233 

 

 19 

 

 

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 September 30, 2017 and December 31, 2016.

 

   Total Nonaccrual Loans 
(in thousands)  September 30,
2017
   % to Total   December 31,
2016
   % to Total 
Commercial & industrial  $5,078    35.2%  $358    1.8%
Owner-occupied CRE   1,276    8.8    2,894    14.3 
AG production   2    -    9    0.1 
AG real estate   186    1.3    208    1.0 
CRE investment   4,537    31.4    12,317    60.6 
Construction & land development   723    5.0    1,193    5.9 
Residential construction   80    0.6    260    1.3 
Residential first mortgage   2,301    16.0    2,990    14.7 
Residential junior mortgage   239    1.7    56    0.3 
Retail & other   -    -    -    - 
Nonaccrual loans - Total  $14,422    100.0%  $20,285    100.0%
                     
   Originated 
(in thousands)  September 30,
2017
   % to Total   December 31,
2016
   % to Total 
Commercial & industrial  $615    62.3%  $4    1.6%
Owner-occupied CRE   38    3.8    42    16.3 
AG production   2    0.2    7    2.7 
AG real estate   -    -    -    - 
CRE investment   -    -    -    - 
Construction & land development   -    -    -    - 
Residential construction   -    -    -    - 
Residential first mortgage   333    33.7    204    79.4 
Residential junior mortgage   -    -    -    - 
Retail & other   -    -    -    - 
Nonaccrual loans - Originated  $988    100.0%  $257    100.0%
                     
   Acquired 
(in thousands)  September 30,
2017
   % to Total   December 31,
2016
   % to Total 
Commercial & industrial  $4,463    33.2%  $354    1.8%
Owner-occupied CRE   1,238    9.2    2,852    14.2 
AG production   -    -    2    0.1 
AG real estate   186    1.4    208    1.0 
CRE investment   4,537    33.8    12,317    61.4 
Construction & land development   723    5.4    1,193    6.0 
Residential construction   80    0.6    260    1.3 
Residential first mortgage   1,968    14.6    2,786    13.9 
Residential junior mortgage   239    1.8    56    0.3 
Retail & other   -    -    -    - 
Nonaccrual loans – Acquired  $13,434    100.0%  $20,028    100.0%

 

 20 

 

 

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

 

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

   September 30, 2017 
(in thousands)  30-89 Days
Past Due
(accruing)
   90 Days &
Over or
nonaccrual
   Current   Total 
Commercial & industrial  $303   $5,078   $620,348   $625,729 
Owner-occupied CRE   229    1,276    426,549    428,054 
AG production   -    2    36,350    36,352 
AG real estate   -    186    48,257    48,443 
CRE investment   -    4,537    298,911    303,448 
Construction & land development   38    723    86,888    87,649 
Residential construction   1,085    80    31,998    33,163 
Residential first mortgage   537    2,301    360,278    363,116 
Residential junior mortgage   23    239    102,392    102,654 
Retail & other   4    -    22,510    22,514 
Total loans  $2,219   $14,422   $2,034,481   $2,051,122 
As a percent of total loans   0.1%   0.7%   99.2%   100.0%
                     
   December 31, 2016 
(in thousands)  30-89 Days
Past Due
(accruing)
   90 Days &
Over or
nonaccrual
   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.

 

 21 

 

 

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 September 30, 2017 and December 31, 2016:

 

   September 30, 2017 
(in thousands)  Grades 1- 4   Grade 5   Grade 6   Grade 7   Grade 8   Grade 9   Total 
Commercial & industrial  $594,129   $15,356   $4,585   $11,659   $-   $-   $625,729 
Owner-occupied CRE   402,021    22,058    1,348    2,627    -    -    428,054 
AG production   31,245    4,067    -    1,040    -    -    36,352 
AG real estate   40,982    4,845    -    2,616    -    -    48,443 
CRE investment   288,346    9,191    -    5,911    -    -    303,448 
Construction & land development   85,932    627    17    1,073    -    -    87,649 
Residential construction   33,083    -    -    80    -    -    33,163 
Residential first mortgage   356,985    2,207    779    3,145    -    -    363,116 
Residential junior mortgage   102,281    17    -    356    -    -    102,654 
Retail & other   22,514    -    -    -    -    -    22,514 
Total loans  $1,957,518   $58,368   $6,729   $28,507   $-   $-   $2,051,122 
Percent of total   95.4%   2.9%   0.3%   1.4%   -    -    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.

 

 22 

 

 

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

 

The following tables present impaired loans and then as a further breakdown by originated or acquired as of September 30, 2017 and December 31, 2016.

 

   Total Impaired Loans – September 30, 2017 
(in thousands)  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
Commercial & industrial  $5,071   $12,275   $226   $5,057   $469 
Owner-occupied CRE   1,116    2,793    -    1,185    96 
AG production   -    15    -    -    - 
AG real estate   218    308    -    229    25 
CRE investment   4,845    8,863    -    5,099    353 
Construction & land development   723    1,189    -    743    44 
Residential construction   80    983    -    94    27 
Residential first mortgage   1,619    2,971    -    1,699    121 
Residential junior mortgage   60    500    -    64    6 
Retail & Other   -    14    -    -    - 
Total  $13,732   $29,911   $226   $14,170   $1,141 
                          
   Originated Impaired Loans – September 30, 2017 
(in thousands)  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
Commercial & industrial  $615   $615   $226   $615   $91 
Owner-occupied CRE   -    -    -    -    - 
AG production   -    -    -    -    - 
AG real estate   -    -    -    -    - 
CRE investment   -    -    -    -    - 
Construction & land development   -    -    -    -    - 
Residential construction   -    -    -    -    - 
Residential first mortgage   -    -    -    -    - 
Residential junior mortgage   -    -    -    -    - 
Retail & Other   -    -    -    -    - 
Total  $615   $615   $226   $615   $91 
                          
   Acquired Impaired Loans – September 30, 2017 
(in thousands)  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
Commercial & industrial  $4,456   $11,660   $-   $4,442   $378 
Owner-occupied CRE   1,116    2,793    -    1,185    96 
AG production   -    15    -    -    - 
AG real estate   218    308    -    229    25 
CRE investment   4,845    8,863    -    5,099    353 
Construction & land development   723    1,189    -    743    44 
Residential construction   80    983    -    94    27 
Residential first mortgage   1,619    2,971    -    1,699    121 
Residential junior mortgage   60    500    -    64    6 
Retail & Other   -    14    -    -    - 
Total  $13,117   $29,296   $-   $13,555   $1,050 

 

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

 

   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