10-Q 1 tv491617_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 March 31, 2018

 

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 47-0871001
(State or other jurisdiction of incorporation or organization) (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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 April 24, 2018 there were 9,643,374 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 March 31, 2018 (unaudited) and December 31, 2017 3
       
    Consolidated Statements of IncomeThree Months Ended March 31, 2018 and 2017 (unaudited) 4
       
    Consolidated Statements of Comprehensive IncomeThree Months Ended March 31, 2018 and 2017 (unaudited) 5
       
    Consolidated Statement of Stockholders’ Equity Three Months Ended March 31, 2018 (unaudited) 6
       
    Consolidated Statements of Cash FlowsThree Months Ended March 31, 2018 and 2017 (unaudited) 7
       
    Notes to Unaudited Consolidated Financial Statements 8-28
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 29-43
       
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 43
       
  Item 4. Controls and Procedures 43
       
PART II OTHER INFORMATION  
     
  Item 1. Legal Proceedings 43
       
  Item 1A. Risk Factors 43
       
  Item 2. Unregistered Sales of Equity Securities and Use of  Proceeds 44
       
  Item 3. Defaults Upon Senior Securities 44
       
  Item 4. Mine Safety Disclosures 44
       
  Item 5. Other Information 44
       
  Item 6. Exhibits 44
       
    Signatures 45

 

 2 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS:

 

NICOLET BANKSHARES, INC.

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

 

   March 31, 2018
(Unaudited)
   December 31, 2017
(Audited)
 
Assets          
Cash and due from banks  $51,523   $86,191 
Interest-earning deposits   380,755    68,008 
Federal funds sold   737    734 
Cash and cash equivalents   433,015    154,933 
Certificates of deposit in other banks   1,248    1,746 
Securities available for sale (“AFS”), at fair value   401,130    405,153 
Other investments   17,431    14,837 
Loans held for sale   7,880    4,666 
Loans   2,100,597    2,087,925 
Allowance for loan losses   (12,765)   (12,653)
Loans, net   2,087,832    2,075,272 
Premises and equipment, net   46,263    47,151 
Bank owned life insurance (“BOLI”)   64,895    64,453 
Goodwill and other intangibles, net   127,224    128,406 
Accrued interest receivable and other assets   37,017    35,816 
Total assets  $3,223,935   $2,932,433 
           
Liabilities and Stockholders’ Equity          
Liabilities:          
Noninterest-bearing demand deposits  $899,481   $631,831 
Interest-bearing deposits   1,865,609    1,839,233 
Total deposits   2,765,090    2,471,064 
Short-term borrowings   -    - 
Long-term borrowings   77,112    78,046 
Accrued interest payable and other liabilities   17,082    18,444 
Total liabilities   2,859,284    2,567,554 
           
Stockholders’ Equity:          
Common stock   97    98 
Additional paid-in capital   257,470    263,835 
Retained earnings   112,905    102,391 
Accumulated other comprehensive loss   (6,484)   (2,146)
Total Nicolet Bankshares, Inc. stockholders’ equity   363,988    364,178 
Noncontrolling interest   663    701 
Total stockholders’ equity and noncontrolling interest   364,651    364,879 
Total liabilities, noncontrolling interest and stockholders’ equity  $3,223,935   $2,932,433 
           
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   9,698,997    9,818,247 
Common shares issued   9,726,783    9,849,167 

 

See accompanying notes to unaudited consolidated financial statements.

 

 3 

 

 

ITEM 1. Financial Statements Continued:

 

NICOLET BANKSHARES, INC.

Consolidated Statements of Income

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

 

   Three Months Ended
March 31,
 
   2018   2017 
Interest income:          
Loans, including loan fees  $28,454   $21,095 
Investment securities:          
Taxable   1,342    1,069 
Tax-exempt   588    565 
Other interest income   401    354 
Total interest income   30,785    23,083 
Interest expense:          
Deposits   3,089    1,187 
Short-term borrowings   3    21 
Long-term borrowings   819    558 
Total interest expense   3,911    1,766 
Net interest income   26,874    21,317 
Provision for loan losses   510    450 
Net interest income after provision for loan losses   26,364    20,867 
Noninterest income:          
Service charges on deposit accounts   1,190    1,008 
Mortgage income, net   1,080    842 
Trust services fee income   1,606    1,467 
Brokerage fee income   1,604    1,259 
Card interchange income   1,243    980 
BOLI income   442    401 
Rent income   308    272 
Gain (loss) on sale, disposal or write-down of assets, net   204    (6)
Other income   1,147    546 
Total noninterest income   8,824    6,769 
Noninterest expense:          
Personnel   12,492    9,933 
Occupancy, equipment and office   3,787    2,831 
Business development and marketing   1,342    929 
Data processing   2,320    1,983 
FDIC assessments   273    232 
Intangibles amortization   1,182    1,163 
Other expense   1,246    1,252 
Total noninterest expense   22,642    18,323 
Income before income tax expense   12,546    9,313 
Income tax expense   2,908    3,032 
Net income   9,638    6,281 
Less: Net income attributable to noncontrolling interest   61    73 
Net income attributable to Nicolet Bankshares, Inc.  $9,577   $6,208 
           
Earnings per common share:          
Basic  $0.98   $0.72 
Diluted  $0.94   $0.69 
Weighted average common shares outstanding:          
Basic   9,765,375    8,584,289 
Diluted   10,224,788    8,958,425 

 

See accompanying notes to unaudited consolidated financial statements.

 

 4 

 

 

ITEM 1. Financial Statements Continued:

 

NICOLET BANKSHARES, INC.

Consolidated Statements of Comprehensive Income

(In thousands) (Unaudited)

 

   Three Months Ended
March 31,
 
   2018   2017 
Net income  $9,638   $6,281 
Other comprehensive income (loss), net of tax:          
Unrealized gains (losses) on securities AFS:          
Net unrealized holding gains (losses) arising during the period   (4,658)   2,870 
Income tax (expense) benefit   1,257    (1,120)
Total other comprehensive income (loss)   (3,401)   1,750 
Comprehensive income  $6,237   $8,031 

 

See accompanying notes to unaudited consolidated financial statements.

 

 5 

 

 

ITEM 1. Financial Statements Continued:

 

NICOLET BANKSHARES, INC.

Consolidated Statement of Stockholders’ Equity

(In thousands) (Unaudited)

 

   Nicolet Bankshares, Inc. Stockholders’ Equity         
   Common
Stock
   Additional
Paid-In
Capital
   Retained
Earnings
   Accumulated
Other
Comprehensive
Loss
   Noncontrolling
Interest
   Total 
Balance December 31, 2017  $98   $263,835   $102,391   $(2,146)  $701   $364,879 
Comprehensive income:                              
Net income   -    -    9,577    -    61    9,638 
Other comprehensive loss   -    -    -    (3,401)   -    (3,401)
Stock compensation expense   -    1,220    -    -    -    1,220 
Exercise of stock options, net   -    427    -    -    -    427 
Issuance of common stock   -    51    -    -    -    51 
Purchase and retirement of common stock   (1)   (8,063)   -    -    -    (8,064)
Distribution from noncontrolling interest   -    -    -    -    (99)   (99)
Adoption of ASU 2016-01 (See Notes 1 and 5)   -    -    937    (937)   -    - 
Balance, March 31, 2018  $97   $257,470   $112,905   $(6,484)  $663   $364,651 

 

See accompanying notes to unaudited consolidated financial statements.

 

 6 

 

 

ITEM 1. Financial Statements Continued:

 

NICOLET BANKSHARES, INC.

Consolidated Statements of Cash Flows

(In thousands) (Unaudited)

 

   Three Months Ended March 31, 
   2018   2017 
Cash Flows From Operating Activities:          
Net income  $9,638   $6,281 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation, amortization, and accretion   1,741    1,598 
Provision for loan losses   510    450 
Increase in cash surrender value of life insurance   (442)   (401)
Stock compensation expense   1,220    384 
(Gain) loss on sale, disposal or write-down of assets, net   (204)   6 
Gain on sale of loans held for sale, net   (905)   (553)
Proceeds from sale of loans held for sale   47,396    39,269 
Origination of loans held for sale   (49,808)   (38,857)
Net change in:          
Accrued interest receivable and other assets   (985)   (377)
Accrued interest payable and other liabilities   (105)   (904)
Net cash provided by operating activities   8,056    6,896 
Cash Flows From Investing Activities:          
Net decrease in certificates of deposit in other banks   498    749 
Purchases of securities AFS   (15,901)   (48,222)
Proceeds from calls and maturities of securities AFS   11,835    11,133 
Proceeds from sales of other investments   -    5,829 
Purchases of other investments   (36)   - 
Net increase in loans   (11,313)   (44,795)
Net (increase) decrease in premises and equipment   (400)   344 
Net (increase) decrease in other real estate and other assets   (15)   224 
Net cash used by investing activities   (15,332)   (74,738)
Cash Flows From Financing Activities:          
Net increase (decrease) in deposits   294,105    (23,715)
Net increase in short-term borrowings   -    6,000 
Repayments of long-term borrowings   (1,062)   - 
Purchase and retirement of common stock   (8,064)   (79)
Proceeds from issuance of common stock, net   478    812 
Distribution from noncontrolling interest   (99)   - 
Net cash provided (used) by financing activities   285,358    (16,982)
Net increase (decrease) in cash and cash equivalents   278,082    (84,824)
Cash and cash equivalents:          
Beginning  $154,933   $129,103 
Ending *  $433,015   $44,279 
Supplemental Disclosures of Cash Flow Information:          
Cash paid for interest  $3,956   $1,938 
Cash paid for taxes   54    - 
Transfer of loans and bank premises to other real estate owned   32    513 
Capitalized mortgage servicing rights   103    185 
Transfer of loans from held for sale to held for investment   -    3,236 

 

* Cash and cash equivalents include restricted cash of $7.5 million and $0 million at March 31, 2018 and 2017, respectively, for the reserve balance required with the Federal Reserve Bank.

 

See accompanying notes to unaudited consolidated financial statements.

 

 7 

 

 

NICOLET BANKSHARES, INC.

 

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 the consolidated balance sheets, statements of income, comprehensive income, changes in stockholders’ equity and cash flows of Nicolet Bankshares, Inc. (the “Company” or “Nicolet”) and its subsidiaries, 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, 2017.

 

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, valuation of loans in acquisition transactions, useful lives for depreciation and amortization, fair value of financial instruments, other-than-temporary impairment calculations, valuation of 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 determination and assessment of deferred tax assets and liabilities, and the valuation of loans acquired in acquisition transactions; 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 or tax 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, 2017.

 

Recent Accounting Developments Adopted

In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09, Compensation – Stock Compensation (Topic 718). ASU 2017-09 applies to entities that change the terms or conditions of a share-based payment award to provide clarity and reduce diversity in practice as well as cost and complexity when applying the guidance in Topic 718 to the modification to the terms and conditions of a share-based payment award. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The Company adopted the updated guidance effective January 1, 2018 with no material impact on its consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-01 to clarify the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets versus businesses. The update narrows the definition of a business by adding three principal clarifications (1) if substantially all the fair value of the gross assets in the asset group is concentrated in either a single identifiable asset or group of similar identifiable assets the transaction does not involve a business, (2) if the asset group does not include a minimum of an input and a substantive process, it does not represent a business, and (3) if the integrated set of activities (including its inputs and processes) does not create, or have the ability to create, goods or services to customers, investment income (e.g., dividends or interest) or other revenue, it is not a business. The overall intention is to provide consistency in applying the guidance and make the definition of a business more operable. This update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and should be applied prospectively. The Company adopted the updated guidance effective January 1, 2018 with no material impact on its consolidated financial statements.

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash to provide guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows to reduce diversity in practice. The amendment requires that a statement of cash flow explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash or restricted cash equivalents should be included in cash and cash equivalents when reconciling the beginning and end of period total amounts shown on the statement of cash flow. This amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and should be applied retrospectively to each period presented. The Company adopted the updated guidance effective January 1, 2018 with no material impact on its consolidated financial statements.

 

 8 

 

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide guidance on specific cash flow issues, including: debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies, and distributions received from equity method investees. The amendments are effective for public business entities for fiscal years beginning after December 31, 2017, and interim periods within those fiscal years. The Company adopted the updated guidance effective January 1, 2018 with no material impact on its consolidated financial statements.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This amendment supersedes the guidance to classify equity securities with readily determinable fair values into different categories, requires equity securities to be measured at fair value with changes in the fair value recognized through net income, and simplifies the impairment assessment of equity investments without readily determinable fair values. The amendment also requires public business entities that are required to disclose the fair value of financial instruments measured at amortized cost on the balance sheet to measure that fair value using the exit price notion. The amendment requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements. This amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities are required to apply the amendment by means of a cumulative-effect adjustment as of the beginning of the fiscal year of adoption, with the exception of the amendment related to equity securities without readily determinable fair values, which should be applied prospectively to equity investments that exist as of the date of adoption. The Company adopted the updated guidance effective January 1, 2018 and recognized a cumulative-effect adjustment of approximately $0.9 million for the after tax impact of the unrealized gain on equity securities. See the consolidated statement of stockholders’ equity and Note 5 for additional disclosures related to this ASU.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. In August 2015, the FASB issued an amendment to defer the effective date for all entities by one year. The updated guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company adopted the updated guidance using the modified retrospective approach effective January 1, 2018 with no material impact on its consolidated financial statements. See Note 10 for the new disclosures related to this ASU.

 

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 2017 consolidated financial statements have been reclassified to conform to the 2018 presentation.

 

Note 2 – Acquisition

 

On April 28, 2017, the Company consummated its merger with First Menasha Bancshares, Inc. (“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 in Calumet and Winnebago Counties, Wisconsin. The Company closed one of its Calumet County locations concurrently with the First Menasha merger.

 

 9 

 

 

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.

 

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 are 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
March 31,
 
(In thousands except per share data)  2018   2017 
Net income attributable to Nicolet Bankshares, Inc.  $9,577   $6,208 
Weighted average common shares outstanding   9,765    8,584 
Effect of dilutive common stock awards   460    374 
Diluted weighted average common shares outstanding   10,225    8,958 
Basic earnings per common share*  $0.98   $0.72 
Diluted earnings per common share*  $0.94   $0.69 

 

*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.

 

For the three months ended March 31, 2018, options to purchase approximately 0.1 million shares are excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive. There was no anti-dilutive effect of options outstanding at March 31, 2017.

 

 10 

 

 

Note 4 – Stock-based Compensation

 

The Company may grant stock options and restricted stock under its stock-based compensation plans to certain officers, employees and directors. A Black-Scholes model is utilized to estimate the fair value of stock option grants, while 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 Black-Scholes model for valuing stock option grants for the three months ended March 31, 2018 were as follows. There were no stock options granted during the three months ended March 31, 2017.

 

   Three Months Ended
March 31, 2018
 
Dividend yield   0%
Expected volatility   25%
Risk-free interest rate   2.48%
Expected average life   7 years 
Weighted average per share fair value of options  $17.60 

 

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

 

Stock Options  Option Shares
Outstanding
   Weighted
Average
Exercise Price
   Weighted
Average
Remaining
Life (Years)
   Aggregate
Intrinsic
Value (in
thousands)
 
Outstanding – December 31, 2017   1,643,255   $39.82           
Granted   10,000    54.06           
Exercise of stock options *   (19,796)   21.61           
Forfeited   (3,500)   42.32           
Outstanding – March 31, 2018   1,629,959   $40.12    7.9   $24,569 
Exercisable – March 31, 2018   380,909   $23.63    5.3   $11,674 

 

* 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 no share were surrendered to the Company for the three months ended March 31, 2018.

 

Intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the exercise price of the stock options. The intrinsic value of options exercised for the three months ended March 31, 2018 and 2017 was approximately $0.7 million and $1.2 million, respectively.

 

Restricted Stock  Weighted-
Average Grant
Date Fair Value
   Restricted
Shares
Outstanding
 
Outstanding – December 31, 2017  $34.26    30,920 
Granted   56.01    3,000 
Vested *   31.45    (6,134)
Forfeited   -    - 
Outstanding – March 31, 2018  $37.24    27,786 

 

* 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, 1,492 shares were surrendered during the three months ended March 31, 2018.

 

The Company recognized approximately $1.2 million and $384,000 of stock-based compensation expense during the three months ended March 31, 2018 and 2017, respectively, associated with its common stock awards. As of March 31, 2018, there was approximately $15.8 million of unrecognized compensation cost related to equity award grants. The cost is expected to be recognized over the remaining vesting period of approximately four years. The Company recognized a tax benefit of approximately $0.2 million and $0.1 million for the three months ended March 31, 2018 and 2017, respectively, for the tax impact of stock option exercises and vesting of restricted stock.

 

 11 

 

 

Note 5 - Securities Available for Sale

 

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

 

   March 31, 2018 
(in thousands)  Amortized Cost   Gross
Unrealized
Gains
   Gross 
Unrealized 
Losses
   Fair Value 
U.S. government agency securities  $26,707   $-   $522   $26,185 
State, county and municipals   179,951    75    4,117    175,909 
Mortgage-backed securities   155,040    106    4,023    151,123 
Corporate debt securities   48,314    210    611    47,913 
Total  $410,012   $391   $9,273   $401,130 

 

   December 31, 2017 
(in thousands)  Amortized Cost   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair Value 
U.S. government agency securities  $26,586   $-   $377   $26,209 
State, county and municipals   186,128    180    2,264    184,044 
Mortgage-backed securities   157,705    160    2,333    155,532 
Corporate debt securities   36,387    449    39    36,797 
Equity securities *   1,287    1,284    -    2,571 
Total  $408,093   $2,073   $5,013   $405,153 

 

* Effective January 1, 2018, the Company adopted ASU 2016-01, which requires equity securities with readily determinable fair values to be measured at fair value with changes in the fair value recognized through net income. Such securities are no longer reflected as securities AFS. As a result of this accounting change, in the first quarter of 2018 the Company recognized a cumulative-effect adjustment from accumulated other comprehensive income to retained earnings of approximately $0.9 million in the consolidated statement of stockholders’ equity for the net of tax impact of the unrealized gain on equity securities as of the date of adoption and recognized a loss of $25,000 in the consolidated statements of income for the change in fair value on equity securities since adoption. In addition, the approximately $2.5 million current fair value of equity securities is now reflected within other investments on the consolidated balance sheets rather than as securities AFS. Prior periods have not been restated for the impact of this accounting change. See Note 1 for additional information on this new accounting standard.

 

The following table represents gross unrealized losses and the related estimated 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.

 

   March 31, 2018 
   Less than 12 months   12 months or more   Total 
($ in thousands)  Fair 
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Number of
Securities
 
U.S. government agency securities  $10,364   $162   $15,821   $360   $26,185   $522    2 
State, county and municipals   110,719    2,137    48,123    1,980    158,842    4,117    468 
Mortgage-backed securities   73,606    1,522    65,367    2,501    138,973    4,023    228 
Corporate debt securities   31,632    611    -    -    31,632    611    16 
Total  $226,321   $4,432   $129,311   $4,841   $355,632   $9,273    714 

 

   December 31, 2017 
   Less than 12 months   12 months or more   Total 
($ in thousands)  Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
 Value
   Unrealized
Losses
   Number of
Securities
 
U.S. government agency securities  $26,209   $377   $-   $-   $26,209   $377    2 
State, county and municipals   110,157    1,097    49,326    1,167    159,483    2,264    465 
Mortgage-backed securities   72,210    735    65,537    1,598    137,747    2,333    215 
Corporate debt securities   10,172    39    -    -    10,172    39    5 
Total  $218,748   $2,248   $114,863   $2,765   $333,611   $5,013    687 

 

As of March 31, 2018, the Company does not consider its securities AFS 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, market spreads and 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 three-month periods ended March 31, 2018 or 2017.

 

 12 

 

 

The amortized cost and fair values of securities AFS by contractual maturity at March 31, 2018 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; as this is particularly inherent in mortgage-backed securities, these securities are not included in the maturity categories below.

 

   March 31, 2018 
(in thousands)  Amortized Cost   Fair Value 
Due in less than one year  $17,307   $17,278 
Due in one year through five years   128,152    126,324 
Due after five years through ten years   102,246    98,947 
Due after ten years   7,267    7,458 
    254,972    250,007 
Mortgage-backed securities   155,040    151,123 
Securities available for sale  $410,012   $401,130 

 

There were no sales of securities during the three-month periods ended March 31, 2018 or 2017.

 

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

 

The loan composition as of March 31, 2018 and December 31, 2017 is summarized as follows.

 

   Total 
   March 31, 2018   December 31, 2017 
(in thousands)  Amount   % of
Total
   Amount   % of
Total
 
Commercial & industrial  $650,197    31.0%  $637,337    30.5%
Owner-occupied commercial real estate (“CRE”)   437,672    20.8    430,043    20.6 
Agricultural (“AG”) production   33,741    1.6    35,455    1.7 
AG real estate   53,412    2.5    51,778    2.5 
CRE investment   323,048    15.4    314,463    15.1 
Construction & land development   77,708    3.7    89,660    4.3 
Residential construction   31,075    1.5    36,995    1.8 
Residential first mortgage   365,318    17.4    363,352    17.4 
Residential junior mortgage   105,903    5.0    106,027    5.1 
Retail & other   22,523    1.1    22,815    1.0 
Loans  $2,100,597    100.0%  $2,087,925    100.0%
Less allowance for loan losses   12,765         12,653      
Loans, net  $2,087,832        $2,075,272      
Allowance for loan losses to loans   0.61%        0.61%     

 

   March 31, 2018   December 31, 2017 
(in thousands)  Originated 
Amount
   % of 
Total
   Acquired 
Amount
   % of
 Total
   Originated 
Amount
   % of 
Total
   Acquired 
Amount
   % of 
Total
 
Commercial & industrial  $507,460    39.2%  $142,737    17.7%  $488,600    39.3%  $148,737    17.6%
Owner-occupied CRE   247,049    19.1    190,623    23.7    237,548    19.1    192,495    22.8 
AG production   10,515    0.8    23,226    2.9    11,102    0.9    24,353    2.9 
AG real estate   30,014    2.3    23,398    2.9    27,831    2.2    23,947    2.8 
CRE investment   131,426    10.2    191,622    23.8    113,862    9.2    200,601    23.8 
Construction & land development   50,348    3.9    27,360    3.4    56,061    4.5    33,599    4.0 
Residential construction   29,104    2.2    1,971    0.2    33,615    2.7    3,380    0.4 
Residential first mortgage   202,567    15.7    162,751    20.2    191,186    15.4    172,166    20.4 
Residential junior mortgage   67,654    5.2    38,249    4.7    65,643    5.3    40,384    4.8 
Retail & other   18,611    1.4    3,912    0.5    18,254    1.4    4,561    0.5 
Loans   1,294,748    100.0%   805,849    100.0%   1,243,702    100.0%   844,223    100.0%
Less ALLL   10,699         2,066         10,542         2,111      
Loans, net  $1,284,049        $803,783        $1,233,160        $842,112      
ALLL to loans   0.83%        0.26%        0.85%        0.25%     

 

 13 

 

 

A roll forward of the allowance for loan losses for the three months ended March 31, 2018 and 2017, and the year ended December 31, 2017, respectively, is summarized as follows.

 

   Three Months Ended   Year Ended 
(in thousands)  March 31, 2018   March 31, 2017   December 31, 2017 
Beginning balance  $12,653   $11,820   $11,820 
Provision for loan losses   510    450    2,325 
Charge-offs   (430)   (111)   (1,604)
Recoveries   32    30    112 
Net charge-offs   (398)   (81)   (1,492)
Ending balance  $12,765   $12,189   $12,653 

 

Practically all of the Company’s loans, commitments, and 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 following tables present the balance and activity in the ALLL by portfolio segment and the recorded investment in loans by portfolio segment at or for the three months ended March 31, 2018:

 

   TOTAL – Three Months Ended March 31, 2018 

(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  $4,934   $2,607   $129   $296   $1,388   $726   $251   $1,609   $488   $225   $12,653 
Provision   545    34    (8)   16    133    (232)   (39)   19    (31)   73    510 
Charge-offs   (343)   (31)   -    -    -    -    -    -    -    (56)   (430)
Recoveries   1    1    -    -    -    -    -    -    28    2    32 
Net charge-offs   (342)   (30)   -    -    -    -    -    -    28    (54)   (398)
Ending balance  $5,137   $2,611   $121   $312   $1,521   $494   $212   $1,628   $485   $244   $12,765 
As percent of ALLL   40.2%   20.5%   0.9%   2.4%   11.9%   3.9%   1.7%   12.8%   3.8%   1.9%   100.0%
                                                        
ALLL:                                                       
Individually evaluated  $115   $-   $-   $-   $35   $-   $-   $-   $-   $-   $150 
Collectively evaluated   5,022    2,611    121    312    1,486    494    212    1,628    485    244    12,615 
Ending balance  $5,137   $2,611   $121   $312   $1,521   $494   $212   $1,628   $485   $244   $12,765 
                                                        
Loans:                                                       
Individually evaluated  $6,273   $1,886   $-   $235   $2,798   $1,049   $80   $3,060   $87   $12   $15,480 
Collectively evaluated   643,924    435,786    33,741    53,177    320,250    76,659    30,995    362,258    105,816    22,511    2,085,117 
Total loans  $650,197   $437,672   $33,741   $53,412   $323,048   $77,708   $31,075   $365,318   $105,903   $22,523   $2,100,597 
Less ALLL  $5,137   $2,611   $121   $312   $1,521   $494   $212   $1,628   $485   $244   $12,765 
Net loans  $645,060   $435,061   $33,620   $53,100   $321,527   $77,214   $30,863   $363,690   $105,418   $22,279   $2,087,832 

 

 14 

 

 

As a further breakdown, the March 31, 2018 ALLL is summarized by originated and acquired as follows:

 

   Originated – Three Months Ended March 31, 2018 
(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  $4,192   $2,115   $112   $235   $1,154   $628   $200   $1,297   $409   $200   $10,542 
Provision   565    47    (6)   16    116    (216)   (30)   20    (28)   73    557 
Charge-offs   (343)   (31)   -    -    -    -    -    -    -    (56)   (430)
Recoveries   -    -    -    -    -    -    -    -    28    2    30 
Net charge-offs   (343)   (31)   -    -    -    -    -    -    28    (54)   (400)
Ending balance  $4,414   $2,131   $106   $251   $1,270   $412   $170   $1,317   $409   $219   $10,699 
As percent of ALLL   41.3%   19.9%   1.0%   2.3%   11.9%   3.9%   1.6%   12.3%   3.8%   2.0    100.0%
                                                        
ALLL:                                                       
Individually evaluated  $115   $-   $-   $-   $35   $-   $-   $-   $-   $-   $150 
Collectively evaluated   4,299    2,131    106    251    1,235    412    170    1,317    409    219    10,549 
Ending balance  $4,414   $2,131   $106   $251   $1,270   $412   $170   $1,317   $409   $219   $10,699 
                                                        
Loans:                                                       
Individually evaluated  $2,686   $343   $-   $-   $1,522   $-   $-   $511   $-   $-   $5,062 
Collectively evaluated   504,774    246,706    10,515    30,014    129,904    50,348    29,104    202,056    67,654    18,611    1,289,686 
Total loans  $507,460   $247,049   $10,515   $30,014   $131,426   $50,348   $29,104   $202,567   $67,654   $18,611   $1,294,748 
                                                        
Less ALLL  $4,414   $2,131   $106   $251   $1,270   $412   $170   $1,317   $409   $219   $10,699 
Net loans  $503,046   $244,918   $10,409   $29,763   $130,156   $49,936   $28,934   $201,250   $67,245   $18,392   $1,284,049 

 

   Acquired – Three Months Ended March 31, 2018 
(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  $742   $492   $17   $61   $234   $98   $51   $312   $79   $25   $2,111 
Provision   (20)   (13)   (2)   -    17    (16)   (9)   (1)   (3)   -    (47)
Charge-offs   -    -    -    -    -    -    -    -    -    -    - 
Recoveries   1    1    -    -    -    -    -    -    -    -    2 
Net charge-offs   1    1    -    -    -    -    -    -    -    -    2 
Ending balance  $723   $480   $15   $61   $251   $82   $42   $311   $76   $25   $2,066 
As percent of ALLL   35.0%   23.2%   0.7%   3.0%   12.1%   4.0%   2.0%   15.1%   3.7%   1.2%   100.0%
                                                        
ALLL:                                                       
Individually evaluated  $-   $-   $-   $-   $-   $-   $-   $-   $-   $-   $- 
Collectively evaluated   723    480    15    61    251    82    42    311    76    25    2,066 
Ending balance  $723   $480   $15   $61   $251   $82   $42   $311   $76   $25   $2,066 
                                                        
Loans:                                                       
Individually evaluated  $3,587   $1,543   $-   $235   $1,276   $1,049   $80   $2,549   $87   $12   $10,418 
Collectively evaluated   139,150    189,080    23,226    23,163    190,346    26,311    1,891    160,202    38,162    3,900    795,431 
Total loans  $142,737   $190,623   $23,226   $23,398   $191,622   $27,360   $1,971   $162,751   $38,249   $3,912   $805,849 
Less ALLL  $723   $480   $15   $61   $251   $82   $42   $311   $76   $25   $2,066 
Net loans  $142,014   $190,143   $23,211   $23,337   $191,371   $27,278   $1,929   $162,440   $38,173   $3,887   $803,783 

 

 15 

 

 

The following tables present the balance and activity in the ALLL by portfolio segment and the recorded investment in loans by portfolio segment at or for the year ended December 31, 2017:

 

   TOTAL – Year Ended December 31, 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   2,419    (290)   (21)   11    263    (35)   (53)   (192)   96    127    2,325 
Charge-offs   (1,442)   -    -    -    -    (13)   -    (8)   (72)   (69)   (1,604)
Recoveries   38    30    -    -    1    -    -    25    3    15    112 
Net charge-offs   (1,404)   30    -    -    1    (13)   -    17    (69)   (54)   (1,492)
Ending balance  $4,934   $2,607   $129   $296   $1,388   $726   $251   $1,609   $488   $225   $12,653 
As percent of ALLL   39.0%   20.6%   1.0%   2.3%   11.0%   5.7%   2.0%   12.7%   3.9%   1.8%   100.0%
                                                        
ALLL:                                                       
Individually evaluated  $163   $-   $-   $-   $-   $-   $-   $-   $-   $-   $163 
Collectively evaluated   4,771    2,607    129    296    1,388    726    251    1,609    488    225    12,490 
Ending balance  $4,934   $2,607   $129   $296   $1,388   $726   $251   $1,609   $488   $225   $12,653 
                                                        
Loans:                                                       
Individually evaluated  $5,870   $1,689   $-   $248   $5,290   $1,053   $80   $2,801   $178   $12   $17,221 
Collectively evaluated   631,467    428,354    35,455    51,530    309,173    88,607    36,915    360,551    105,849    22,803    2,070,704 
Total loans  $637,337   $430,043   $35,455   $51,778   $314,463   $89,660   $36,995   $363,352   $106,027   $22,815   $2,087,925 
Less ALLL  $4,934   $2,607   $129   $296   $1,388   $726   $251   $1,609   $488   $225   $12,653 
Net loans  $632,403   $427,436   $35,326   $51,482   $313,075   $88,934   $36,744   $361,743   $105,539   $22,590   $2,075,272 

 

 16 

 

 

As a further breakdown, the December 31, 2017 ALLL is summarized by originated and acquired as follows:

 

   Originated – Year Ended December 31, 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   2,429    (172)   (10)   13    261    (28)   (66)   (69)   105    122    2,585 
Charge-offs   (1,388)   -    -    -    -    -    -    (8)   (72)   (69)   (1,537)
Recoveries   1    24    -    -    -    -    -    2    3    15    45 
Net charge-offs   (1,387)   24    -    -    -    -    -    (6)   (69)   (54)   (1,492)
Ending balance  $4,192   $2,115   $112   $235   $1,154   $628   $200   $1,297   $409   $200   $10,542 
As percent of   ALLL   39.8%   20.1%   1.1%   2.2%   10.9%   6.0%   1.9%   12.3%   3.9%   1.8%   100.0%
                                                        
ALLL:                                                       
Individually evaluated  $163   $-   $-   $-   $-   $-   $-   $-   $-   $-   $163 
Collectively evaluated   4,029    2,115    112    235    1,154    628    200    1,297    409    200    10,379 
Ending balance  $4,192   $2,115   $112   $235   $1,154   $628   $200   $1,297   $409   $200   $10,542 
                                                        
Loans:                                                       
Individually evaluated  $2,189   $-   $-   $-   $549   $-   $-   $253   $12   $-   $3,003 
Collectively evaluated   486,411    237,548    11,102    27,831    113,313    56,061    33,615    190,933    65,631    18,254    1,240,699 
Total loans  $488,600   $237,548   $11,102   $27,831   $113,862   $56,061   $33,615   $191,186   $65,643   $18,254   $1,243,702 
Less ALLL  $4,192   $2,115   $112   $235   $1,154   $628   $200   $1,297   $409   $200   $10,542 
Net loans  $484,408   $235,433   $10,990   $27,596   $112,708   $55,433   $33,415   $189,889   $65,234   $18,054   $1,233,160 

 

   Acquired – Year Ended December 31, 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   (10)   (118)   (11)   (2)   2    (7)   13    (123)   (9)   5    (260)
Charge-offs   (54)   -    -    -    -    (13)   -    -    -    -    (67)
Recoveries   37    6    -    -    1    -    -    23    -    -    67 
Net charge-offs   (17)   6    -    -    1    (13)   -    23    -    -    - 
Ending balance  $742   $492   $17   $61   $234   $98   $51   $312   $79   $25   $2,111 
As percent of ALLL   35.1%   23.3%   0.8%   2.9%   11.1%   4.6%   2.4%   14.8%   3.7%   1.3%   100.0%
                                                        
ALLL:                                                       
Individually evaluated  $-   $-   $-   $-   $-   $-   $-   $-   $-   $-   $- 
Collectively evaluated   742    492    17    61    234    98    51    312    79    25    2,111 
Ending balance  $742   $492   $17   $61   $234   $98   $51   $312   $79   $25   $2,111 
                                                        
                                                        
Loans:                                                       
Individually evaluated  $3,681   $1,689   $-   $248   $4,741   $1,053   $80   $2,548   $166   $12   $14,218 
Collectively evaluated   145,056    190,806    24,353    23,699    195,860    32,546    3,300    169,618    40,218    4,549    830,005 
Total loans  $148,737   $192,495   $24,353   $23,947   $200,601   $33,599   $3,380   $172,166   $40,384   $4,561   $844,223 
Less ALLL  $742   $492   $17   $61   $234   $98   $51   $312   $79   $25   $2,111 
Net loans  $147,995   $192,003   $24,336   $23,886   $200,367   $33,501   $3,329   $171,854   $40,305   $4,536   $842,112 

 

 17 

 

 

The following table presents nonaccrual loans by portfolio segment in total and then as a further breakdown by originated or acquired as of March 31, 2018 and December 31, 2017.

 

   Total Nonaccrual Loans 
(in thousands)  March 31, 2018   % of Total   December 31, 2017   % of Total 
Commercial & industrial  $6,434    55.2%  $6,016    46.0%
Owner-occupied CRE   744    6.4    533    4.1 
AG production   -    -    -    - 
AG real estate   175    1.5    186    1.4 
CRE investment   2,105    18.1    4,531    34.6 
Construction & land development   -    -    -    - 
Residential construction   108    0.9    80    0.6 
Residential first mortgage   1,883    16.1    1,587    12.1 
Residential junior mortgage   212    1.8    158    1.2 
Retail & other   -    -    4    - 
Nonaccrual loans   11,661    100.0%   13,095    100.0%
Percent of total loans   0.6%        0.6%     

 

   March 31, 2018   December 31, 2017 
(in thousands)  Originated 
Amount
   % of 
Total
   Acquired 
Amount
   % of
 Total
   Originated 
Amount
   % of 
Total
   Acquired 
Amount
   % of 
Total
 
Commercial & industrial  $2,814    51.7%  $3,620    58.3%  $2,296    70.0%  $3,720    37.9%
Owner-occupied CRE   411    7.5    333    5.4    86    2.6    447    4.6 
AG production   -    -    -    -    -    -    -    - 
AG real estate   -    -    175    2.8    -    -    186    1.9 
CRE investment   1,522    28.0    583    9.3    549    16.8    3,982    40.6 
Construction & land development   -    -    -    -    -    -    -    - 
Residential construction   28    0.5    80    1.3    -    -    80    0.8 
Residential first mortgage   672    12.3    1,211    19.5    331    10.1    1,256    12.8 
Residential junior mortgage   -    -    212    3.4    12    0.4    146    1.4 
Retail & other   -    -    -    -    4    0.1    -    - 
    Nonaccrual loans  $5,447    100.0%  $6,214    100.0%  $3,278    100.0%  $9,817    100.0%

 

 18 

 

 

The following tables present past due loans by portfolio segment as of March 31, 2018 and December 31, 2017:

 

   March 31, 2018 
(in thousands)  30-89 Days Past
Due (accruing)
   90 Days &
Over or nonaccrual
   Current   Total 
Commercial & industrial  $470   $6,434   $643,293   $650,197 
Owner-occupied CRE   -    744    436,928    437,672 
AG production   -    -    33,741    33,741 
AG real estate   -    175    53,237    53,412 
CRE investment   -    2,105    320,943    323,048 
Construction & land development   437    -    77,271    77,708 
Residential construction   -    108    30,967    31,075 
Residential first mortgage   1,258    1,883    362,177    365,318 
Residential junior mortgage   72    212    105,619    105,903 
Retail & other   127    -    22,396    22,523 
Total loans  $2,364   $11,661   $2,086,572   $2,100,597 
Percent of total loans   0.1%   0.6%   99.3%   100.0%

 

   December 31, 2017 
(in thousands)  30-89 Days Past
Due (accruing)
   90 Days &
Over or nonaccrual
   Current   Total 
Commercial & industrial  $211   $6,016   $631,110   $637,337 
Owner-occupied CRE   671    533    428,839    430,043 
AG production   30    -    35,425    35,455 
AG real estate   -    186    51,592    51,778 
CRE investment   -    4,531    309,932    314,463 
Construction & land development   76    -    89,584    89,660 
Residential construction   587    80    36,328    36,995 
Residential first mortgage   1,039    1,587    360,726    363,352 
Residential junior mortgage   14    158    105,855    106,027 
Retail & other   4    4    22,807    22,815 
Total loans  $2,632   $13,095   $2,072,198   $2,087,925 
Percent of total loans   0.1%   0.6%   99.3%   100.0%

 

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

 

Grades 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.

 

Grade 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.

 

Grade 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.

 

Grade 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 nonaccrual loans are considered to be categorized in this rating, regardless of collateral sufficiency.

 

Grade 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.

 

Grade 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.

 

 19 

 

 

The following tables present total loans by risk categories as of March 31, 2018 and December 31, 2017:

 

   March 31, 2018 
(in thousands)  Grades 1- 4   Grade 5   Grade 6   Grade 7   Grade 8   Grade 9   Total 
Commercial & industrial  $610,654   $18,692   $11,621   $9,230   $-   $-   $650,197 
Owner-occupied CRE   399,911    28,718    4,566    4,477    -    -    437,672 
AG production   28,348    2,342    1,383    1,668    -    -    33,741 
AG real estate   45,924    2,645    2,316    2,527    -    -    53,412 
CRE investment   312,103    7,220    1,215    2,510    -    -    323,048 
Construction & land development   73,832    3,092    17    767    -    -    77,708 
Residential construction   30,967    -    -    108    -    -    31,075 
Residential first mortgage   360,169    1,522    672    2,955    -    -    365,318 
Residential junior mortgage   105,659    17    -    227    -    -    105,903 
Retail & other   22,523    -    -    -    -    -    22,523 
Total loans  $1,990,090   $64,248   $21,790   $24,469   $-   $-   $2,100,597 
Percent of total   94.7%   3.1%   1.0%   1.2%   -    -    100.0%

 

   December 31, 2017 
(in thousands)  Grades 1- 4   Grade 5   Grade 6   Grade 7   Grade 8   Grade 9   Total 
Commercial & industrial  $597,854   $12,999   $16,129   $10,355   $-   $-   $637,337 
Owner-occupied CRE   397,357    23,340    6,442    2,904    -    -    430,043 
AG production   30,431    4,000    -    1,024    -    -    35,455 
AG real estate   44,321    4,873    -    2,584    -    -    51,778 
CRE investment   299,926    8,399    190    5,948    -    -    314,463 
Construction & land development   86,011    2,758    17    874    -    -    89,660 
Residential construction   36,915    -    -    80    -    -    36,995 
Residential first mortgage   358,067    1,868    683    2,734    -    -    363,352 
Residential junior mortgage   105,736    117    -    174    -    -    106,027 
Retail & other   22,811    -    -    4    -    -    22,815 
Total loans  $1,979,429   $58,354   $23,461   $26,681   $-   $-   $2,087,925 
Percent of total   94.8%   2.8%   1.1%   1.3%   -    -    100.0%

 

 20 

 

 

The following tables present impaired loans as of March 31, 2018 and December 31, 2017.

 

   Total Impaired Loans – March 31, 2018 
(in thousands)  Recorded
Investment
   Unpaid Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest Income
Recognized
 
Commercial & industrial  $6,273   $10,457   $115   $6,535   $164 
Owner-occupied CRE   1,886    2,397    -    1,908    45 
AG production   -    9    -    -    - 
AG real estate   235    295    -    242    12 
CRE investment   2,798    4,142    35    2,811    128 
Construction & land development   1,049    1,049    -    1,051    12 
Residential construction   80    983    -    80    - 
Residential first mortgage   3,060    3,847    -    3,062    55 
Residential junior mortgage   87    407    -    88    7 
Retail & Other   12    14    -    12    - 
Total  $15,480   $23,600   $150   $15,789   $423 
Originated impaired loans  $5,062   $5,062   $150   $5,283   $74 
Acquired impaired loans   10,418    18,538    -    10,506    349 
Total  $15,480   $23,600   $150   $15,789   $423 

 

   Total Impaired Loans – December 31, 2017 
(in thousands)  Recorded
Investment
   Unpaid Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest Income
Recognized
 
Commercial & industrial  $5,870   $10,063   $163   $6,586   $718 
Owner-occupied CRE   1,689    2,256    -    1,333    132 
AG production   -    10    -    -    - 
AG real estate   248    307    -    233    26 
CRE investment   5,290    8,102    -    5,411    465 
Construction & land development   1,053    1,053    -    813    57 
Residential construction   80    983    -    91    27 
Residential first mortgage   2,801    3,653    -    2,177    180 
Residential junior mortgage   178    507    -    154    17 
Retail & Other   12    14    -    12    1 
Total  $17,221   $26,948   $163   $16,810   $1,623 
Originated impaired loans  $3,003   $3,003   $163   $2,964   $241 
Acquired impaired loans   14,218    23,945    -    13,846    1,382 
Total  $17,221   $26,948   $163   $16,810   $1,623 

 

Total purchased credit impaired loans (in aggregate since the Company’s 2013 acquisitions) were initially recorded at a fair value of $43.6 million on their respective acquisition dates, net of an initial $34.4 million non-accretable mark and a zero accretable mark. At March 31, 2018, $10.4 million of the $43.6 million remain in impaired loans.

 

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

 

   Three Months Ended   Year Ended 
(in thousands)  March 31, 2018   March 31, 2017   December 31, 2017 
Balance at beginning of period  $9,471   $14,327   $14,327 
Acquired balance, net   -    -    8,352 
Accretion to loan interest income   (1,544)   (2,160)   (7,995)
Transferred to accretable   (55)   -    (1,936)
Disposals of loans   -    (242)   (3,277)
Balance at end of period  $7,872   $11,925   $9,471 

 

 21 

 

 

Troubled Debt Restructurings

 

At March 31, 2018, there were seven loans classified as troubled debt restructurings with a current outstanding balance of $2.1 million and pre-modification balance of $3.4 million. In comparison, at December 31, 2017, there were eight loans classified as troubled debt restructurings with an outstanding balance of $5.6 million and pre-modification balance of $6.9 million. There were no loans classified as troubled debt restructurings during the previous twelve months that subsequently defaulted during the three months ended March 31, 2018. As of March 31, 2018, there were no commitments to lend additional funds to debtors whose terms have been modified in troubled debt restructurings.

 

Note 7 – Goodwill and Other Intangibles and Mortgage Servicing Rights

 

Management periodically reviews the carrying value of its 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 quarterly assessment indicated no impairment charge on goodwill, core deposit intangibles or customer list intangibles was required for the year ended December 31, 2017 or the three months ended March 31, 2018.

 

   Three Months Ended   Year Ended 
(in thousands)  March 31, 2018   December 31, 2017 
Goodwill  $107,366   $107,366 
Core deposit intangibles   15,407    16,477 
Customer list intangibles   4,451    4,563 
Other intangibles   19,858    21,040 
Goodwill and other intangibles, net  $127,224   $128,406 

 

Goodwill: Goodwill was $107.4 million at both March 31, 2018 and December 31, 2017. During 2017, goodwill increased due to the First Menasha acquisition. See Note 2 for additional information on the First Menasha acquisition.

 

Other intangible assets: Other intangible assets, consisting of core deposit intangibles (related to branch or bank acquisitions) and customer list intangibles (related to the customer relationships acquired in connection with the 2016 financial advisor business acquisition), are amortized over their estimated finite lives. During 2017, core deposit intangibles increased due to the First Menasha acquisition and customer list intangibles increased due to a modification to the contingent earn-out payment on the financial advisor business acquired in 2016, fixing the previously variable earn-out payment on a portion of the purchase price. See Note 2 for additional information on the First Menasha acquisition.

 

   Three Months Ended   Year Ended 
(in thousands)  March 31, 2018   December 31, 2017 
Core deposit intangibles:          
Gross carrying amount  $29,015   $29,015 
Accumulated amortization   (13,608)   (12,538)
Net book value  $15,407   $16,477 
Additions during the period  $-   $3,670 
Amortization during the period  $1,070   $4,294 
Customer list intangibles:          
Gross carrying amount  $5,233   $5,233 
Accumulated amortization   (782)   (670)
Net book value  $4,451   $4,563 
Additions during the period  $-   $870 
Amortization during the period  $112   $401 

 

 22 

 

 

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 statements of income. 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 year ended December 31, 2017 and the three months ended March 31, 2018 was as follows:

 

   Three Months Ended   Year Ended 
(in thousands)  March 31, 2018   December 31, 2017 
Mortgage servicing rights (MSR) asset:          
MSR asset at beginning of year  $3,187   $1,922 
Capitalized MSR   103    876 
MSR asset acquired   -    874 
Amortization during the period    (150)   (485)
MSR asset at end of period   $3,140   $3,187 
Fair value of MSR asset at end of period  $4,039   $4,097 
Residential mortgage loans serviced for others  $515,263   $518,419 
Net book value of MSR asset to loans serviced for others   0.61%   0.61%

  

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 the year ended December 31, 2017 or the three months ended March 31, 2018. See Note 9 for additional information on the fair value of the MSR asset.

 

The following table shows the estimated future amortization expense for amortizing intangible assets and the MSR asset. The projections are based on existing asset balances, the current interest rate environment and prepayment speeds as of the March 31, 2018. 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
   Customer list
intangibles
   MSR asset 
Year ending December 31,               
2018 (remaining nine months)  $2,845   $337   $434 
2019   3,337    449    578 
2020   2,657    449    728 
2021   2,167    449    326 
2022   1,735    449    326 
Thereafter   2,666    2,318    748 
Total  $15,407   $4,451   $3,140 


 23 

 

 

Note 8 – Short and Long-Term Borrowings

 

Short-Term Borrowings:

The Company did not have any short-term borrowings (borrowing with an original maturity of one year or less) outstanding at March 31, 2018 or December 31, 2017.

 

Long-Term Borrowings:

The components of long-term borrowings (borrowing with an original maturity greater than one year) at March 31, 2018 and December 31, 2017 were as follows:

 

(in thousands)  March 31, 2018   December 31, 2017 
FHLB advances  $35,445   $36,509 
Junior subordinated debentures   29,736    29,616 
Subordinated notes   11,931    11,921 
    Total long-term borrowings  $77,112   $78,046 

 

FHLB Advances: The FHLB advances bear fixed rates and require interest-only monthly payments. The weighted average rate of the FHLB advances was 1.72% and 1.71% at March 31, 2018 and December 31, 2017, respectively.

 

The following table shows the maturity schedule of the FHLB advances as of March 31, 2018.

 

Maturing in:  (in thousands) 
2018 (remaining nine months)  $17 
2019   - 
2020   10,000 
2021   - 
2022   25,428 
   $35,445 

 

Junior Subordinated Debentures: The following table shows the breakdown of junior subordinated debentures as of March 31, 2018 and December 31, 2017. Interest on all debentures is current. Any applicable discounts (initially recorded to carry an acquired debenture at its then estimated fair market value) are being accreted to interest expense over the remaining life of the debentures. All the debentures below are currently callable and may be redeemed in part or in full at par plus any accrued but unpaid interest.

 

      Junior Subordinated Debentures 
(in thousands) 

Maturity

Date

  Par  

3/31/2018

Unamortized
Discount

  

3/31/2018

Carrying
Value

  

12/31/2017

Carrying
Value

 
2004 Nicolet Bankshares Statutory Trust(1)  7/15/2034  $6,186   $-   $6,186   $6,186 
2005 Mid-Wisconsin Financial Services, Inc.(2)  12/15/2035   10,310    (3,521)   6,789    6,739 
2006 Baylake Corp.(3)  9/30/2036   16,598    (4,297)   12,301    12,242 
2004 First Menasha Bancshares, Inc.(4)  3/17/2034   5,155    (695)   4,460    4,449 
         Total     $38,249   $(8,513)  $29,736   $29,616 

 

(1)The interest rate is 8.00% fixed.
(2)The debentures, assumed in April 2013 as the result of an acquisition, have a floating rate of the three-month LIBOR plus 1.43%, adjusted quarterly. The interest rates were 3.55% and 3.02% as of March 31, 2018 and December 31, 2017, respectively.
(3)The debentures, assumed in April 2016 as a result of an acquisition, have a floating rate of the three-month LIBOR plus 1.35%, adjusted quarterly. The interest rates were 3.66% and 3.04% as of March 31, 2018 and December 31, 2017, respectively.
(4)The debentures, assumed in April 2017 as the result of an acquisition, have a floating rate of the three-month LIBOR plus 2.79%, adjusted quarterly. The interest rate was 4.98% and 4.39% as of March 31, 2018 and December 31, 2017, respectively.

 

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. The carrying value of these subordinated Notes was $11.9 million at both March 31, 2018 and December 31, 2017.

 

 24 

 

 

Note 9 - 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.

 

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.

 

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.

 

(in thousands)      Fair Value Measurements Using 
Measured at Fair Value on a Recurring Basis:  Total   Level 1   Level 2   Level 3 
March 31, 2018:                
U.S. government agency securities  $26,185   $-   $26,185   $- 
State, county and municipals   175,909    -    175,778    131 
Mortgage-backed securities   151,123    -    151,123    - 
Corporate debt securities   47,913    -    39,449    8,464 
    Securities AFS  $401,130   $-   $392,535   $8,595 
Other investments (equity securities) *  $2,546   $2,546   $-   $- 
                     
December 31, 2017:                    
U.S. government agency securities  $26,209   $-   $26,209   $- 
State, county and municipals   184,044    -    183,386    658 
Mortgage-backed securities   155,532    -    155,529    3 
Corporate debt securities   36,797    -    28,307    8,490 
Equity securities  *   2,571    2,571    -    - 
    Securities AFS  $405,153   $2,571   $393,431   $9,151 

 

* Effective January 1, 2018, the Company adopted ASU 2016-01, which requires equity securities with readily determinable fair values to be measured at fair value with changes in the fair value recognized through net income. In addition, the approximately $2.5 million current fair value of equity securities is now reflected within other investments on the consolidated balance sheets compared to securities AFS at December 31, 2017. Prior periods have not been restated for the impact of this accounting change. See Note 1 for additional information on this new accounting standard and see Note 5 for additional information on the impact to securities AFS.

 

The following is a description of the valuation methodologies used by the Company for the securities AFS and equity securities measured at fair value on a recurring basis, as noted in the tables above. Where quoted market prices on securities exchanges are available, the investment is classified as Level 1. Level 1 investments primarily include exchange-traded equity securities. If quoted market prices are not available, fair value is generally determined using prices obtained from independent pricing vendors who use pricing models (with typical inputs including benchmark yields, reported trades for similar securities, issuer spreads or relationship to other benchmark quoted securities), or discounted cash flows, and are classified as Level 2. Examples of these investments include U.S. government agency securities, mortgage-backed securities, obligations of state, county and municipals, and certain corporate debt securities. Finally, in certain cases where there is limited activity or less transparency around inputs to the estimated fair value, investments are classified within Level 3 of the hierarchy. Examples of these include private municipal bonds and corporate debt securities, which include trust preferred security investments. At March 31, 2018 and December 31, 2017, it was determined that carrying value was the best approximation of fair value for these Level 3 securities, based primarily on the internal analysis on these securities.

 

 25 

 

 

The following table presents the changes in the Level 3 securities AFS measured at fair value on a recurring basis:

 

(in thousands)  Three Months Ended   Year Ended 
Level 3 Fair Value Measurements:  March 31, 2018   December 31, 2017 
Balance at beginning of year  $9,151   $9,108 
Acquired balance   -    189 
Paydowns/Sales/Settlements   (556)   (146)
Balance at end of period  $8,595   $9,151 

 

Nonrecurring basis fair value measurements:

The following table presents the Company’s assets measured at fair value on a nonrecurring basis for the periods presented, aggregated by level in the fair value hierarchy within which those measurements fall.

 

       Fair Value Measurements Using 
Measured at Fair Value on a Nonrecurring Basis:  Total   Level 1   Level 2   Level 3 
(in thousands)                
March 31, 2018:                    
Impaired loans  $15,330   $-   $-   $15,330 
Other real estate owned (“OREO”)   1,367    -    -    1,367 
MSR asset   3,140    -    -    3,140 
                     
December 31, 2017:                    
Impaired loans  $17,058   $-   $-   $17,058 
OREO   1,294    -    -    1,294 
MSR asset   3,187    -    -    3,187 

 

The following is a description of the valuation methodologies used by the Company for the items noted in the table above. For individually evaluated impaired loans, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, the estimated fair value of the underlying collateral for collateral-dependent loans, or the estimated liquidity of the note. For OREO, the fair value is based upon the estimated fair value of the underlying collateral adjusted for the expected costs to sell. To estimate the fair value of the MSR asset, the underlying serviced loan pools are stratified by interest rate tranche and term of the loan, and a valuation model is used to calculate the present value of the expected future cash flows for each stratum.

 

Financial instruments:

The carrying amounts and estimated fair values of the Company’s financial instruments are shown below.

 

March 31, 2018
(in thousands)  Carrying
Amount
   Estimated
Fair Value
   Level 1   Level 2   Level 3 
Financial assets:                         
Cash and cash equivalents  $433,015   $433,015   $433,015   $-   $- 
Certificates of deposit in other banks   1,248    1,234    -    1,234    - 
Securities AFS   401,130    401,130    -    392,535    8,595 
Other investments, including equity securities   17,431    17,431    2,546    13,177    1,708 
Loans held for sale   7,880    7,920    -    7,920    - 
Loans, net   2,087,832    2,082,372    -    -    2,082,372 
BOLI   64,895    64,895    64,895    -    - 
MSR asset   3,140    4,039    -    -    4,039 
                          
Financial liabilities:                         
Deposits  $2,765,090   $2,763,061   $-   $-   $2,763,061 
FHLB advances   35,445    35,447    -    35,447    - 
Junior subordinated debentures   29,736    29,141    -    -    29,141 
Subordinated notes   11,931    11,504    -    -    11,504 

 

 26 

 

 

December 31, 2017
(in thousands)  Carrying
Amount
   Estimated
Fair Value
   Level 1   Level 2   Level 3 
Financial assets:                         
Cash and cash equivalents  $154,933   $154,933   $154,933   $-   $- 
Certificates of deposit in other banks   1,746    1,746    -    1,746    - 
Securities AFS   405,153    405,153    2,571    393,431    9,151 
Other investments   14,837    14,837    -    13,142    1,695 
Loans held for sale   4,666    4,750    -    4,750    - 
Loans, net   2,075,272    2,068,382    -    -    2,068,382 
BOLI   64,453    64,453    64,453    -    - 
MSR asset   3,187    4,097    -    -    4,097 
                          
Financial liabilities:                         
Deposits  $2,471,064   $2,469,456   $-   $-   $2,469,456 
FHLB advances   36,509    36,510    -    36,510    - 
Junior subordinated debentures   29,616    29,024    -    -    29,024 
Subordinated notes   11,921    11,495    -    -    11,495 

 

Not all the financial instruments listed in the table above are subject to the disclosure provisions of ASC 820, as certain assets and liabilities result in their carrying value approximating fair value. These include cash and cash equivalents, bank owned life insurance, short-term borrowings, and nonmaturing deposits. For those financial instruments not previously disclosed the following is a description of the valuation methodologies used.

 

Certificates of deposits in other banks: Fair values are estimated using discounted cash flow analysis based on current interest rates being offered by instruments with similar terms and represents a Level 2 measurement.

 

Other investments: The valuation methodologies utilized for exchange-traded equity securities are discussed under “Recurring Basis Fair Value Measurements” above. The carrying amount of Federal Reserve Bank, Bankers Bank, Federal Agricultural Mortgage Corporation, and FHLB stock is a reasonably accepted fair value estimate given their restricted nature. Fair value is the redeemable (carrying) value based on the redemption provisions of the instruments which is considered a Level 2 measurement. The carrying amount of the remaining other investments (particularly common stocks of companies or other banks that are not publicly traded) approximates their fair value, determined primarily by analysis of company financial statements and recent capital issuances of the respective companies or banks, if any, and represents a Level 3 measurement.

 

Loans held for sale: The fair value estimation process for the loans held for sale portfolio is segregated by loan type. The estimated fair value was based on what secondary markets are currently offering for portfolios with similar characteristics and represents a Level 2 measurement.

 

Loans, net: For variable-rate loans that reprice frequently and with no significant change in credit risk or other optionality, fair values are based on carrying values. Fair values for all other loans are estimated by discounting contractual cash flows using estimated market discount rates, which reflect the credit and interest rate risk inherent in the loan. Collateral-dependent impaired loans are included in loans, net. The fair value of loans is considered to be a Level 3 measurement due to internally developed discounted cash flow measurements.

 

MSR asset: To estimate the fair value of the MSR asset, the underlying serviced loan pools are stratified by interest rate tranche and term of the loan, and a valuation model is used to calculate the present value of expected future cash flows for each stratum. When the carrying value of the MSR asset related to a stratum exceeds its fair value, the stratum is recorded at fair value, generally through a valuation allowance. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as costs to service, a discount rate, ancillary income, default rates and losses, and prepayment speeds. Although some of these assumptions are based on observable market data, other assumptions are based on unobservable estimates of what market participants would use to measure fair value. As a result, the fair value measurement of MSR asset is considered a Level 3 measurement.

 

Deposits: The fair value of deposits with no stated maturity (such as demand deposits, savings, interest and non-interest checking, and money market accounts) is, by definition, equal to the amount payable on demand at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market place on certificates of similar remaining maturities. Use of internal discounted cash flows provides a Level 3 fair value measurement.

 

FHLB advances: The fair value of the FHLB advances is obtained from the FHLB which uses a discounted cash flow analysis based on current market rates of similar maturity debt securities and represents a Level 2 measurement.

 

 27 

 

 

Junior subordinated debentures and subordinated notes: The fair values of these debt instruments utilize a discounted cash flow analysis based on an estimate of current interest rates being offered by instruments with similar terms and credit quality. Since the market for these instruments is limited, the internal evaluation represents a Level 3 measurement.

 

Lending-related commitments: At March 31, 2018 and December 31, 2017, the estimated fair value of letters of credit, loan commitments on which the committed interest rate is less than the current market rate, and outstanding mandatory commitments to sell residential mortgage loans into the secondary market was insignificant.

 

Limitations: Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Fair value estimates may not be realizable in an immediate settlement of the instrument. In some instances, there are no quoted market prices for the Company’s various financial instruments, in which case fair values may be based on estimates using present value or other valuation techniques, or based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of the financial instruments, or other factors. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. Subsequent changes in assumptions could significantly affect the estimates.

 

Note 10 – Revenue Recognition

 

As of January 1, 2018, the Company adopted ASU 2014-09 using the modified retrospective approach. The adoption of the guidance had no material impact on the measurement or recognition of revenue; however, additional disclosures have been added in accordance with the ASU. See Note 1 for additional information on this new accounting standard.

 

The main types of revenue contracts are:

 

Service charges on deposit accounts: The deposit contract obligates the Company to serve as a custodian of the customer’s deposited funds and is generally terminable at will be either party. The contract permits the customer to access the funds on deposit and request additional services related to the deposit account. Income for deposit accounts is recognized over the statement cycle period (typically on a monthly basis) or at the time the service is provided, if additional services are requested.

 

Trust services and brokerage fee income: A contract between the Company and its customers for fiduciary and / or investment administration services on trust accounts and brokerage accounts. Trust services and brokerage fee income is determined as a percentage of assets under management and is recognized over the period the underlying trust or brokerage account is serviced. Such contracts are generally cancellable at any time, with the customer subject to a pro-rated fee in the month of termination.

 

Card interchange income: A contract between the Company, as a card-issuing bank, and its customers whereby the Company receives a transaction fee from the merchant’s bank whenever a customer uses a debit or credit card to make a purchase. These fees are earned as the service is provided (i.e., when the customer uses a debit or credit card).

 

Other noninterest income: Other noninterest income includes several items, such as wire transfer income, check cashing fees, check printing fees, safe deposit box rental fees, management fee income, and consulting fees. These fees are generally recognized at the time the service is provided.

 

 28 

 


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Nicolet Bankshares, Inc. (the “Company” or “Nicolet”) is a bank holding company headquartered in Green Bay, Wisconsin. Nicolet provides a diversified range of traditional banking and wealth management services to individuals and businesses in its market area and through the branch offices of its banking subsidiary, Nicolet National Bank (the “Bank”), in northeastern and central Wisconsin and in Menominee, Michigan.

 

Forward-Looking Statements

 

Statements made in this document and in any documents that are incorporated by reference which are not purely historical are forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, including any statements regarding descriptions of management’s plans, objectives, or goals for future operations, products or services, and forecasts of its revenues, earnings, or other measures of performance. Forward-looking statements are based on current management expectations and, by their nature, are subject to risks and uncertainties. These statements generally may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “should,” “will,” “intend,” or similar expressions. Shareholders should note that many factors, some of which are discussed elsewhere in this document, could affect the future financial results of Nicolet and could cause those results to differ materially from those expressed in forward-looking statements contained in this document. These factors, many of which are beyond Nicolet’s control, include, but are not necessarily limited to the following:

 

·operating, legal and regulatory risks, including the effects of legislative or regulatory developments affecting the financial industry generally or Nicolet specifically;
·economic, political and competitive forces affecting Nicolet’s banking and wealth management businesses;
·changes in interest rates, monetary policy and general economic conditions, which may impact Nicolet’s net interest income;
·potential difficulties in integrating the operations of Nicolet with those of acquired entities, if any;
·compliance or operational risks related to new products, services, ventures, or lines of business, if any, that Nicolet may pursue or implement; and
·the risk that Nicolet’s analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.


These factors should be considered in evaluating the forward-looking statements, and you should not place undue reliance on such statements. Nicolet specifically disclaims any obligation to update factors or to publicly announce the results of revisions to any of the forward-looking statements or comments included herein to reflect future events or developments.

 

Overview

 

The following discussion is management’s analysis of the consolidated financial condition as of March 31, 2018 and December 31, 2017 and results of operations for the three-month periods ended March 31, 2018 and 2017. It should be read in conjunction with Nicolet’s audited consolidated financial statements included in Nicolet’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

The timing of Nicolet’s April 2017 acquisition of First Menasha Bancshares, Inc. (“First Menasha”), at approximately 20% of pre-merger assets at the time of acquisition, impacts financial comparisons. Certain income statement results, average balances and related ratios for the first quarter of 2018 and for the third and fourth quarters of 2017 each include three months of First Menasha operations, versus no contribution of First Menasha in the first quarter 2017 period and two months of contribution in the second quarter of 2017. Given the merger activity, quarterly results included non-recurring other direct merger and integration pre-tax expenses of $0.2 million and $0.3 million in the first and second quarters of 2017, respectively.

 

 29 

 

 

Performance Summary

 

Table 1: Earnings Summary and Selected Financial Data

 

(In thousands, except per share data)  At and for the Quarter Ended 
  

March 31,

2018

   December 31,
2017
   September 30,
2017
  

June 30,

2017

  

March 31,

2017

 
Results of operations:                         
Interest income  $30,785   $29,836   $29,454   $26,880   $23,083 
Interest expense   3,911    3,329    3,063    2,353    1,766 
Net interest income   26,874    26,507    26,391    24,527    21,317 
Provision for loan losses   510    450    975    450    450 
Net interest income after provision for loan losses   26,364    26,057    25,416    24,077    20,867 
Noninterest income   8,824    8,621    10,164    9,085    6,769 
Noninterest expense   22,642    21,858    20,862    20,313    18,323 
Income before income tax expense   12,546    12,820    14,718    12,849    9,313 
Income tax expense   2,908    3,662    5,133    4,440    3,032 
Net income   9,638    9,158    9,585    8,409    6,281 
Net income attributable to noncontrolling interest   61    55    74    81    73 
Net income attributable to Nicolet Bankshares, Inc.  $9,577   $9,103   $9,511   $8,328   $6,208 
Earnings per common share:                         
Basic  $0.98   $0.93   $0.97   $0.88   $0.72 
Diluted  $0.94   $0.88   $0.91   $0.83   $0.69 
Common Shares:                         
Basic weighted average   9,765    9,805    9,837    9,516    8,584 
Diluted weighted average   10,225    10,368    10,409    9,992    8,958 
Outstanding   9,699    9,818    9,799    9,863    8,605 
Period-End Balances:                         
Loans  $2,100,597   $2,087,925   $2,051,122   $2,009,964   $1,618,279 
Allowance for loan losses   12,765    12,653    12,610    12,591    12,189 
Goodwill and other intangibles, net   127,224    128,406    129,588    128,871    86,776 
Total assets   3,223,935    2,932,433    2,845,730    2,825,917    2,292,644 
Deposits   2,765,090    2,471,064    2,366,951    2,389,971    1,946,271 
Stockholders’ equity   363,988    364,178    360,426    352,384    285,022 
Book value per common share   37.53    37.09    36.78    35.73    33.12 
Tangible book value per common share   24.41    24.01    23.56    22.66    23.04 
Average Balances:                         
Loans  $2,114,345   $2,066,974   $2,035,277   $1,888,320   $1,599,701 
Interest-earning assets   2,584,070    2,531,066    2,505,073    2,336,124    2,028,291 
Goodwill and other intangibles, net   127,801    128,980    129,158    115,698    87,344 
Total assets   2,896,533    2,852,400    2,825,542    2,635,925    2,272,836 
Deposits   2,436,103    2,385,821    2,377,229    2,214,865    1,929,062 
Interest-bearing liabilities   1,925,443    1,835,375    1,854,340    1,779,366    1,526,780 
Stockholders’ equity   366,002    361,455    358,227    329,201    280,188 
Financial Ratios *:                         
Return on average assets   1.34%   1.27%   1.34%   1.27%   1.11%
Return on average common equity   10.61%   9.99%   10.53%   10.15%   8.99%
Return on average tangible common equity   16.31%   15.53%   16.47%   15.64%   13.06%
Stockholders’ equity to assets   11.29%   12.42%   12.67%   12.47%   12.43%
Average equity to average assets   12.64%   12.67%   12.68%   12.49%   12.33%
Net interest margin   4.20%   4.21%   4.24%   4.27%   4.32%
Net loan charge-offs to average loans   0.08%   0.08%   0.19%   0.01%   0.02%
Nonperforming loans to total loans   0.56%   0.63%   0.70%   0.84%   0.85%
Nonperforming assets to total assets   0.40%   0.49%   0.55%   0.66%   0.70%
Effective tax rate   23.18%   28.56%   34.88%   34.56%   32.56%
Selected Tax Items:                         
Tax expense (benefit) on stock-based compensation  $(159)  $(1,678)  $(15)  $(64)  $(97)
Tax expense (benefit) of tax reform items   -    896    -    -    - 

 

* Income statement-related ratios for partial-year periods are annualized.                                        

 

Net income was $9.6 million for the first quarter of 2018, up $0.5 million over $9.1 million for the fourth quarter of 2017. Net income increased 5% between the linked quarters, while diluted weighted average shares declined 1%, resulting in a 7% increase in diluted earnings per share of $0.94 for first quarter 2018 compared to $0.88 for fourth quarter 2017. Compared to the first quarter of 2017, net income increased 54%, while diluted weighted average shares increased 14% from shares issued in the April 2017 acquisition offset partly by shares repurchased over the year, resulting in a 36% increase in diluted earnings per share between the first quarter periods.

 

·Net interest income increased $0.4 million or 1% over fourth quarter 2017, despite fewer earning days, comprised of a $0.9 million increase in interest income (attributable to $0.3 million higher aggregate discount income and higher earning asset volumes) and a $0.5 million increase in interest expense (driven mostly by rising rates). Compared to first quarter 2017, net interest income increased $5.6 million or 26%, predominantly due to the addition of acquired net interest-earning assets, as well as organic growth. For additional information regarding net interest income, see “Income Statement Analysis — Net Interest Income.”

 

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·Noninterest income increased $0.2 million or 2% over fourth quarter 2017, most notably due to $0.2 million of net gains on the sale of fixed assets and $0.3 million of annual card incentives, offset by $0.3 million lower net mortgage income on slower seasonal volumes. Compared to first quarter 2017, noninterest income grew $2.1 million or 30%, aided by the 2017 acquisition and stronger wealth management revenues, as well as the net gain and card incentive in first quarter 2018. For additional information regarding noninterest income, see “Income Statement Analysis — Noninterest Income.”

 

·Noninterest expense increased $0.8 million or 4% over fourth quarter 2017, as expenses reset with the new year, including increases of $0.4 million or 4% in personnel expense, $0.1 million in occupancy (largely elevated utilities and snowplowing), and $0.3 million or 4% across all other noninterest expense categories combined. Compared to first quarter 2017, noninterest expense was up $4.3 million or 24%, primarily attributable to the larger operating base resulting from the 2017 acquisition. For additional information regarding noninterest expense, see “Income Statement Analysis — Noninterest Expense.”

 

·Income tax expense for first quarter 2018 benefited from the lower corporate tax rate effective in 2018, due to the passage of the Tax Cuts and Jobs Act in December 2017, as well as a $0.2 million tax benefit for the tax impact of stock option exercises. Fourth quarter 2017 income tax expense was impacted by $0.9 million of additional tax expense from the Company’s evaluation of its deferred tax positions under the lower corporate tax rate and a $1.7 million benefit for the tax impact of large stock option exercises during that quarter. First quarter 2017 income tax expense included a $0.1 million tax benefit for the tax impact of stock option exercises. As a result, the effective tax rate was 23.2% for first quarter 2018, 28.6% for fourth quarter 2017, and 32.6% for first quarter 2017.

 

·At March 31, 2018, assets were $3.2 billion and deposits were $2.8 billion, both increasing $0.3 billion over December 31, 2017, attributable to a $0.3 billion short-term transaction deposit of a long-standing commercial customer. Excluding the impact of this deposit transaction, total assets and deposits were minimally changed compared to year-end 2017. Compared to March 31, 2017, assets increased $0.9 billion primarily due to the 2017 acquisition, organic growth and the customer deposit noted above.

 

·Loans were $2.1 billion at March 31, 2018, 1% higher than year-end 2017 and 30% higher than March 31, 2017 (primarily due to the 2017 acquisition and strong organic growth). Quarterly average loans continued on a rising trend, up 2% over fourth quarter 2017, or 9% annualized, and up 32% from first quarter 2017. For additional information regarding loans, see “Balance Sheet Analysis — Loans.”

 

·Total deposits were $2.8 billion at March 31, 2018, $0.3 billion or 12% higher than year-end 2017 (attributable to the customer deposit noted above) and $0.8 billion or 42% higher than March 31, 2017 (primarily due to the 2017 acquisition and strong organic growth). Quarterly average deposits grew 2% over fourth quarter 2017 and increased 26% from first quarter 2017. For additional information regarding deposits, see “Balance Sheet Analysis – Deposits.”

 

·Asset quality remains sound. Nonperforming assets declined to $13 million, representing 0.40% of total assets at March 31, 2018, down favorably from 0.49% at December 31, 2017 and 0.70% at March 31, 2017. For additional information regarding nonperforming assets, see “Balance Sheet Analysis – Nonperforming Assets.”

 

INCOME STATEMENT ANALYSIS

 

Net Interest Income

 

Tax-equivalent net interest income is a non-GAAP measure, but is a preferred industry measurement of net interest income (and its use in calculating a net interest margin) as it enhances the comparability of net interest income arising from taxable and tax-exempt sources.

 

Tables 2 through 4 present information to facilitate the review and discussion of selected average balance sheet items, tax-equivalent net interest income, interest rate spread and net interest margin.

 

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Table 2: Quarterly Average Balance Sheet and Net Interest Income Analysis – Tax-Equivalent Basis

   For the Three Months Ended March 31, 
   2018   2017 
(in thousands)  Average
Balance
   Interest   Average
Yield/Rate
   Average
Balance
   Interest   Average
Yield/Rate
 
ASSETS                        
Earning assets                              
Loans, including loan fees (1)(2)  $2,114,345   $28,500    5.39%  $1,599,701   $21,185    5.30%
Investment securities: <