10-Q 1 tv499318_10q.htm FORM 10-Q

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 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

(State or Other Jurisdiction of Incorporation or Organization)

47-0871001

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

   

111 North Washington Street

Green Bay, Wisconsin

(Address of Principal Executive Offices) 

54301

(Zip Code)

   

(920) 430-1400

(Registrant’s Telephone Number, Including Area Code)

 

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

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 every Interactive Data File required to be submitted 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 such files). Yes x No ¨

 

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

 

Large accelerated filer ¨ Accelerated filer x
   
Non-accelerated filer ¨ Smaller reporting company ¨
   

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 July 31, 2018 there were 9,644,774 shares of $0.01 par value common stock outstanding.

 

 

 

 

 

 

Nicolet Bankshares, Inc.

 

TABLE OF CONTENTS

 

PAGE
PART I FINANCIAL INFORMATION  
     
  Item 1. Financial Statements:  
       
    Consolidated Balance Sheets June 30, 2018 (unaudited) and December 31, 2017 3
       
    Consolidated Statements of IncomeThree and Six Months Ended June 30, 2018 and 2017 (unaudited) 4
       
    Consolidated Statements of Comprehensive IncomeThree and Six Months Ended June 30, 2018 and 2017 (unaudited) 5
       
    Consolidated Statement of Stockholders’ Equity Six Months Ended June 30, 2018 (unaudited) 6
       
    Consolidated Statements of Cash FlowsSix Months Ended June 30, 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 29-44
       
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 44
       
  Item 4. Controls and Procedures 44
       
PART II OTHER INFORMATION  
     
  Item 1. Legal Proceedings 45
       
  Item 1A. Risk Factors 45
       
  Item 2. Unregistered Sales of Equity Securities and Use of  Proceeds 45
       
  Item 3. Defaults Upon Senior Securities 45
       
  Item 4. Mine Safety Disclosures 45
       
  Item 5. Other Information 45
       
  Item 6. Exhibits 46
       
    Signatures 47

 

 2 

 

 

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS:

 

NICOLET BANKSHARES, INC.

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

 

   June 30, 2018
(Unaudited)
  

December 31, 2017

(Audited)

 
Assets          
Cash and due from banks  $62,668   $86,191 
Interest-earning deposits   40,661    68,008 
Federal funds sold   740    734 
Cash and cash equivalents   104,069    154,933 
Certificates of deposit in other banks   1,247    1,746 
Securities available for sale (“AFS”), at fair value   401,975    405,153 
Other investments   17,749    14,837 
Loans held for sale   6,037    4,666 
Loans   2,128,624    2,087,925 
Allowance for loan losses   (12,875)   (12,653)
Loans, net   2,115,749    2,075,272 
Premises and equipment, net   46,785    47,151 
Bank owned life insurance (“BOLI”)   65,363    64,453 
Goodwill and other intangibles, net   126,124    128,406 
Accrued interest receivable and other assets   37,053    35,816 
Total assets  $2,922,151   $2,932,433 
           
Liabilities and Stockholders’ Equity          
Liabilities:          
Noninterest-bearing demand deposits  $621,576   $631,831 
Interest-bearing deposits   1,833,960    1,839,233 
Total deposits   2,455,536    2,471,064 
Short-term borrowings   -    - 
Long-term borrowings   77,176    78,046 
Accrued interest payable and other liabilities   18,154    18,444 
Total liabilities   2,550,866    2,567,554 
           
Stockholders’ Equity:          
Common stock   96    98 
Additional paid-in capital   254,564    263,835 
Retained earnings   122,642    102,391 
Accumulated other comprehensive loss   (6,718)   (2,146)
Total Nicolet Bankshares, Inc. stockholders’ equity   370,584    364,178 
Noncontrolling interest   701    701 
Total stockholders’ equity and noncontrolling interest   371,285    364,879 
Total liabilities, noncontrolling interest and stockholders’ equity  $2,922,151   $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   9,642,834    9,818,247 
Common shares issued   9,669,350    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

June 30,

  

Six Months Ended

June 30,

 
   2018   2017   2018   2017 
Interest income:                    
Loans, including loan fees  $27,193   $24,673   $55,647   $45,768 
Investment securities:                    
Taxable   1,597    1,239    2,939    2,308 
Tax-exempt   577    592    1,165    1,157 
Other interest income   1,178    376    1,579    730 
Total interest income   30,545    26,880    61,330    49,963 
Interest expense:                    
Deposits   3,868    1,665    6,957    2,852 
Short-term borrowings   5    51    8    72 
Long-term borrowings   869    637    1,688    1,195 
Total interest expense   4,742    2,353    8,653    4,119 
Net interest income   25,803    24,527    52,677    45,844 
Provision for loan losses   510    450    1,020    900 
Net interest income after provision for loan losses   25,293    24,077    51,657    44,944 
Noninterest income:                    
Trust services fee income   1,671    1,485    3,277    2,952 
Brokerage fee income   1,738    1,433    3,342    2,692 
Mortgage income, net   1,528    1,406    2,608    2,248 
Service charges on deposit accounts   1,200    1,121    2,390    2,129 
Card interchange income   1,358    1,173    2,601    2,153 
BOLI income   468    454    910    855 
Rent income   340    295    648    567 
Asset gains (losses), net   972    772    1,176    766 
Other income   964    946    2,111    1,492 
Total noninterest income   10,239    9,085    19,063    15,854 
Noninterest expense:                    
Personnel   12,674    10,983    25,166    20,916 
Occupancy, equipment and office   3,454    3,223    7,241    6,054 
Business development and marketing   1,463    1,317    2,805    2,246 
Data processing   2,399    2,207    4,719    4,190 
FDIC assessments   282    145    555    377 
Intangibles amortization   1,100    1,178    2,282    2,341 
Other expense   1,079    1,260    2,325    2,512 
Total noninterest expense   22,451    20,313    45,093    38,636 
Income before income tax expense   13,081    12,849    25,627    22,162 
Income tax expense   3,255    4,440    6,163    7,472 
Net income   9,826    8,409    19,464    14,690 
Less: Net income attributable to noncontrolling interest   89    81    150    154 
Net income attributable to Nicolet Bankshares, Inc.  $9,737   $8,328   $19,314   $14,536 
                     
Earnings per common share:                    
Basic  $1.01   $0.88   $1.99   $1.61 
Diluted  $0.98   $0.83   $1.93   $1.53 
                     
Weighted average common shares outstanding:                    
Basic   9,639,098    9,515,745    9,701,888    9,052,590 
Diluted   9,969,854    9,991,625    10,032,304    9,521,206 

 

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

June 30,

  

Six Months Ended

June 30,

 
   2018   2017   2018   2017 
Net income  $9,826   $8,409   $19,464   $14,690 
Other comprehensive income (loss), net of tax:                    
Unrealized gains (losses) on securities AFS:                    
Net unrealized holding gains (losses) arising during the period   (320)   1,981    (4,978)   4,851 
Reclassification adjustment for net gains included in income   -    2    -    2 
Income tax (expense) benefit   86    (746)   1,343    (1,866)
Total other comprehensive income (loss)   (234)   1,237    (3,635)   2,987 
Comprehensive income  $9,592   $9,646   $15,829   $17,677 

 

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   -    -    19,314    -    150    19,464 
Other comprehensive loss   -    -    -    (3,635)   -    (3,635)
Stock-based compensation expense   -    2,314    -    -    -    2,314 
Exercise of stock options, net   -    962    -    -    -    962 
Issuance of common stock   -    108    -    -    -    108 
Purchase and retirement of common stock   (2)   (12,655)   -    -    -    (12,657)
Distribution to noncontrolling interest   -    -    -    -    (150)   (150)
Adoption of ASU 2016-01 (See Notes 1 and 5)   -    -    937    (937)   -    - 
Balance, June 30, 2018  $96   $254,564   $122,642   $(6,718)  $701   $371,285 

 

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)

 

   Six Months Ended June 30, 
  2018   2017 
Cash Flows From Operating Activities:        
Net income  $19,464   $14,690 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation, amortization, and accretion   3,121    3,677 
Provision for loan losses   1,020    900 
Increase in cash surrender value of life insurance   (910)   (855)
Stock-based compensation expense   2,314    919 
Asset gains (losses), net   (1,176)   (766)
Gain on sale of loans held for sale, net   (2,235)   (2,005)
Proceeds from sale of loans held for sale   115,515    94,371 
Origination of loans held for sale   (114,926)   (95,399)
Net change in:          
Accrued interest receivable and other assets   (3,223)   1,729 
Accrued interest payable and other liabilities   1,054    (1,840)
Net cash provided by operating activities   20,018    15,421 
Cash Flows From Investing Activities:          
Net increase in loans   (37,458)   (84,385)
Net decrease in certificates of deposit in other banks   499    999 
Purchases of securities AFS   (33,697)   (48,436)
Proceeds from sales of securities AFS   -    10,798 
Proceeds from calls and maturities of securities AFS   27,657    25,002 
Purchases of other investments   (629)   (891)
Proceeds from sales of other investments   386    6,146 
Net increase in premises and equipment   (814)   (1,895)
Net decrease in other real estate and other assets   1,486    2,791 
Net cash received in business combination   -    9,119 
Net cash used by investing activities   (42,570)   (80,752)
Cash Flows From Financing Activities:          
Net increase (decrease) in deposits   (15,449)   45,074 
Proceeds from long-term borrowings   -    10,000 
Repayments of long-term borrowings   (1,126)   (4,297)
Purchase and retirement of common stock   (12,657)   (3,895)
Capitalized issuance costs, net   -    (186)
Proceeds from issuance of common stock, net   108    114 
Proceeds from exercise of stock options, net   962    1,060 
Distribution to noncontrolling interest   (150)   - 
Net cash provided (used) by financing activities   (28,312)   47,870 
Net decrease in cash and cash equivalents   (50,864)   (17,461)
Cash and cash equivalents:          
Beginning   154,933    129,103 
Ending *  $104,069   $111,642 
Supplemental Disclosures of Cash Flow Information:          
Cash paid for interest  $8,574   $4,083 
Cash paid for taxes   5,325    4,521 
Transfer of loans and bank premises to other real estate owned   537    828 
Capitalized mortgage servicing rights   275    413 
Transfer of loans from held for sale to held for investment   -    3,236 
Acquisitions:          
Fair value of assets acquired  $-   $439,000 
Fair value of liabilities assumed   -    397,000 
Net assets acquired   -    42,000 

 

* Cash and cash equivalents include restricted cash of $6.8 million and $1.7 million at June 30, 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 have been 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, Business Combinations (Topic 805): Clarifying the Definition of a Business, 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.

 

 8 

 

 

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. See the consolidated statements of cash flows for additional disclosures related to this ASU.

 

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 at adoption 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), with several subsequent updates. 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. Topic 606 provides a five-step model to apply to revenue recognition, consisting of the following: (1) identify the contract; (2) identify the performance obligation in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when or as the performance obligation is satisfied. The 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-operating 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 common 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
 June 30,
   Six Months Ended
 June 30,
 
 (In thousands, except per share data)  2018   2017   2018   2017 
Net income attributable to Nicolet Bankshares, Inc.  $9,737   $8,328   $19,314   $14,536 
                     
Weighted average common shares outstanding   9,639    9,516    9,702    9,053 
Effect of dilutive common stock awards   331    476    330    468 
Diluted weighted average common shares outstanding   9,970    9,992    10,032    9,521 
                     
Basic earnings per common share*  $1.01   $0.88   $1.99   $1.61 
Diluted earnings per common share*  $0.98   $0.83   $1.93   $1.53 

 

*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 and six months ended June 30, 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 for the three and six months ended June 30, 2017.

 

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. At June 30, 2018, approximately 145,000 shares were available for grant under these stock-based compensation plans.

 

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 six months ended June 30, 2018 and 2017, respectively, were as follows.

 

   Six Months Ended
June 30, 2018
   Six Months Ended
June 30, 2017
 
Dividend yield   0%   0%
Expected volatility   25%   25%
Risk-free interest rate   2.48%   2.13%
Expected average life   7 years    7 years 
Weighted average per share fair value of options  $17.60   $15.44 

 

 10 

 

 

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 *   (44,161)   21.79           
Forfeited   (3,500)   42.32           
Outstanding – June 30, 2018   1,605,594   $40.39    7.8   $23,805 
Exercisable – June 30, 2018   531,506   $31.48    6.4   $12,558 

 

* 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. No such shares were surrendered to the Company for the six months ended June 30, 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 six months ended June 30, 2018 and 2017 was approximately $1.4 million and $1.8 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 *   28.89    (7,404)
Forfeited   -    - 
Outstanding – June 30, 2018  $38.23    26,516 

 

* 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, 1,615 shares were surrendered during the six months ended June 30, 2018.

 

The Company recognized approximately $2.3 million and $0.9 million of stock-based compensation expense during the six months ended June 30, 2018 and 2017, respectively, associated with its common stock awards. As of June 30, 2018, there was approximately $14.7 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 for both the six months ended June 30, 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 cost and fair value of securities available for sale are summarized as follows:

 

   June 30, 2018 
(in thousands)  Amortized Cost  

Gross

Unrealized

Gains

   Gross
Unrealized
Losses
   Fair Value 
U.S. government agency securities  $26,986   $-   $636   $26,350 
State, county and municipals   170,679    66    3,846    166,899 
Mortgage-backed securities   147,420    106    4,276    143,250 
Corporate debt securities   66,092    214    830    65,476 
Total  $411,177   $386   $9,588   $401,975 

 

   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, the Company recognized a cumulative-effect adjustment at adoption 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 gain of approximately $330,000 for the six months ended June 30, 2018, in the consolidated statements of income for the change in fair value on equity securities since adoption. In addition, the approximately $3.1 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.

 

   June 30, 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  $-   $-   $26,350   $636   $26,350   $636    2 
State, county and municipals   104,455    1,934    48,091    1,912    152,546    3,846    449 
Mortgage-backed securities   71,975    1,715    61,657    2,561    133,632    4,276    223 
Corporate debt securities   47,319    830    -    -    47,319    830    25 
Total  $223,749   $4,479   $136,098   $5,109   $359,847   $9,588    699 

 

   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 June 30, 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 six-month periods ended June 30, 2018 or 2017.

 

 12 

 

 

The amortized cost and fair value of securities AFS by contractual maturity at June 30, 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.

 

   June 30, 2018 
(in thousands)  Amortized Cost   Fair Value 
Due in less than one year  $16,297   $16,276 
Due in one year through five years   150,725    148,289 
Due after five years through ten years   89,470    86,698 
Due after ten years   7,265    7,462 
    263,757    258,725 
Mortgage-backed securities   147,420    143,250 
 Securities available for sale  $411,177   $401,975 

 

Proceeds from the sale of securities AFS were as follows.

 

   Six Months Ended June 30, 
(in thousands)  2018   2017 
Gross gains  $-   $5 
Gross losses   -    (7)
Gains (losses) on sales of securities AFS, net  $-   $(2)
Proceeds from sales of securities AFS  $-   $10,798 

 

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

 

The loan composition as of June 30, 2018 and December 31, 2017 is summarized as follows.

   June 30, 2018   December 31, 2017 
(in thousands)  Amount  

% of

Total

   Amount  

% of

Total

 
Commercial & industrial  $666,249    31.3%  $637,337    30.5%
Owner-occupied commercial real estate (“CRE”)   448,367    21.1    430,043    20.6 
Agricultural (“AG”) production   34,016    1.6    35,455    1.7 
AG real estate   53,019    2.5    51,778    2.5 
CRE investment   333,893    15.7    314,463    15.1 
Construction & land development   75,053    3.5    89,660    4.3 
Residential construction   28,701    1.4    36,995    1.8 
Residential first mortgage   358,537    16.8    363,352    17.4 
Residential junior mortgage   106,592    5.0    106,027    5.1 
Retail & other   24,197    1.1    22,815    1.0 
Loans  $2,128,624    100.0%  $2,087,925    100.0%
Less allowance for loan losses (“ALLL”)   12,875         12,653      
Loans, net  $2,115,749        $2,075,272      
Allowance for loan losses to loans   0.60%        0.61%     

 

   June 30, 2018   December 31, 2017 
(in thousands)  Originated
Amount
   % of
Total
   Acquired
Amount
  

% of

Total

   Originated
Amount
   % of
Total
   Acquired
Amount
   % of
Total
 
Commercial & industrial  $534,454    39.3%  $131,795    17.1%  $488,600    39.3%  $148,737    17.6%
Owner-occupied CRE   265,155    19.5    183,212    23.8    237,548    19.1    192,495    22.8 
AG production   9,841    0.7    24,175    3.1    11,102    0.9    24,353    2.9 
AG real estate   29,598    2.2    23,421    3.0    27,831    2.2    23,947    2.8 
CRE investment   144,339    10.6    189,554    24.6    113,862    9.2    200,601    23.8 
Construction & land development   50,758    3.8    24,295    3.2    56,061    4.5    33,599    4.0 
Residential construction   28,358    2.1    343    0.1    33,615    2.7    3,380    0.4 
Residential first mortgage   204,794    15.1    153,743    20.0    191,186    15.4    172,166    20.4 
Residential junior mortgage   70,391    5.2    36,201    4.7    65,643    5.3    40,384    4.8 
Retail & other   20,765    1.5    3,432    0.4    18,254    1.4    4,561    0.5 
Loans   1,358,453    100.0%   770,171    100.0%   1,243,702    100.0%   844,223    100.0%
Less ALLL   10,893         1,982         10,542         2,111      
Loans, net  $1,347,560        $768,189        $1,233,160        $842,112      
ALLL to loans   0.80%        0.26%        0.85%        0.25%     

 

 13 

 

 

A roll forward of the allowance for loan losses for the six months ended June 30, 2018 and 2017, and the year ended December 31, 2017, respectively, is summarized as follows.

 

   Six Months Ended   Year Ended 
(in thousands)  June 30, 2018   June 30, 2017   December 31, 2017 
Beginning balance  $12,653   $11,820   $11,820 
Provision for loan losses   1,020    900    2,325 
Charge-offs   (877)   (176)   (1,604)
Recoveries   79    47    112 
Net charge-offs   (798)   (129)   (1,492)
Ending balance  $12,875   $12,591   $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 six months ended June 30, 2018:

 

   TOTAL – Six Months Ended June 30, 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   881   199   (17)  8   34   (236)  (47)  57   (45)  186   1,020 
Charge-offs   (594)  (64)  -   -   (37)  -   -   (48)  -   (134)  (877)
Recoveries   30   10   -   -   -   -   -   1   29   9   79 
Net charge-offs   (564)  (54)  -   -   (37)  -   -   (47)  29   (125)  (798)
Ending balance  $5,251  $2,752  $112  $304  $1,385  $490  $204  $1,619  $472  $286  $12,875 
As percent of ALLL   40.7%  21.4%  0.9%  2.4%  10.8%  3.8%  1.6%  12.6%  3.7%  2.1%  100.0%
                                              
ALLL:                                             
Individually evaluated  $-  $-  $-  $-  $-  $-  $-  $-  $-  $-  $- 
Collectively evaluated   5,251   2,752   112   304   1,385   490   204   1,619   472   286   12,875 
Ending balance  $5,251  $2,752  $112  $304  $1,385  $490  $204  $1,619  $472  $286  $12,875 
                                              
Loans:                                             
Individually evaluated  $5,713  $1,685  $-  $235  $2,736  $522  $80  $2,801  $60  $12  $13,844 
Collectively evaluated   660,536   446,682   34,016   52,784   331,157   74,531   28,621   355,736   106,532   24,185   2,114,780 
Total loans  $666,249  $448,367  $34,016  $53,019  $333,893  $75,053  $28,701  $358,537  $106,592  $24,197  $2,128,624 
                                              
Less ALLL  $5,251  $2,752  $112  $304  $1,385  $490  $204  $1,619  $472  $286  $12,875 
Net loans  $660,998  $445,615  $33,904  $52,715  $332,508  $74,563  $28,497  $356,918  $106,120  $23,911  $2,115,749 

 

 14 

 

 

As a further breakdown, the June 30, 2018 ALLL is summarized by originated and acquired as follows:

 

   Originated – Six Months Ended June 30, 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   929   232   (13)  14   14   (214)  (33)  83   (37)  183   1,158 
Charge-offs   (594)  (64)  -   -   (37)  -   -   (48)  -   (131)  (874)
Recoveries   29   -   -   -   -   -   -   1   28   9   67 
Net charge-offs   (565)  (64)  -   -   (37)  -   -   (47)  28   (122)  (807)
Ending balance  $4,556  $2,283  $99  $249  $1,131  $414  $167  $1,333  $400  $261  $10,893 
As percent of ALLL   41.8%  21.0%  0.9%  2.3%  10.4%  3.8%  1.5%  12.2%  3.7%  2.4%  100.0%
                                              
Loans:                                             
Individually evaluated  $2,373  $338  $-  $-  $951  $-  $-  $255  $-  $-  $3,917 
Collectively evaluated   532,081   264,817   9,841   29,598   143,388   50,758   28,358   204,539   70,391   20,765   1,354,536 
Total loans  $534,454  $265,155  $9,841  $29,598  $144,339  $50,758  $28,358  $204,794  $70,391  $20,765  $1,358,453 
                                              
Less ALLL  $4,556  $2,283  $99  $249  $1,131  $414  $167  $1,333  $400  $261  $10,893 
Net loans  $529,898  $262,872  $9,742  $29,349  $143,208  $50,344  $28,191  $203,461  $69,991  $20,504  $1,347,560 

 

   Acquired – Six Months Ended June 30, 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   (48)  (33)  (4)  (6)  20   (22)  (14)  (26)  (8)  3   (138)
Charge-offs   -   -   -   -   -   -   -   -   -   (3)  (3)
Recoveries   1   10   -   -   -   -   -   -   1   -   12 
Net charge-offs   1   10   -   -   -   -   -   -   1   (3)  9 
Ending balance  $695  $469  $13  $55  $254  $76  $37  $286  $72  $25  $1,982 
As percent of ALLL   35.1%  23.7%  0.7%  2.8%  12.8%  3.8%  1.9%  14.4%  3.6%  1.2%  100.0%
                                              
Loans:                                             
Individually evaluated  $3,340  $1,347  $-  $235  $1,785  $522  $80  $2,546  $60  $12  $9,927 
Collectively evaluated   128,455   181,865   24,175   23,186   187,769   23,773   263   151,197   36,141   3,420   760,244 
Total loans  $131,795  $183,212  $24,175  $23,421  $189,554  $24,295  $343  $153,743  $36,201  $3,432  $770,171 
                                              
Less ALLL  $695  $469  $13  $55  $254  $76  $37  $286  $72  $25  $1,982 
Net loans  $131,100  $182,743  $24,162  $23,366  $189,300  $24,219  $306  $153,457  $36,129  $3,407  $768,189 

 

 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 June 30, 2018 and December 31, 2017.

 

   Total Nonaccrual Loans 
(in thousands)  June 30, 2018   % of Total   December 31, 2017   % of Total 
Commercial & industrial  $6,119    56.2%  $6,016    46.0%
Owner-occupied CRE   588    5.4    533    4.1 
AG production   66    0.6    -    - 
AG real estate   175    1.6    186    1.4 
CRE investment   1,487    13.7    4,531    34.6 
Construction & land development   -    -    -    - 
Residential construction   108    1.0    80    0.6 
Residential first mortgage   2,063    19.0    1,587    12.1 
Residential junior mortgage   276    2.5    158    1.2 
Retail & other   -    -    4    - 
Nonaccrual loans  $10,882    100.0%  $13,095    100.0%
Percent of total loans   0.5%        0.6%     

 

   June 30, 2018   December 31, 2017 
(in thousands)  Originated
Amount
   % of
Total
   Acquired
Amount
  

% of

Total

   Originated
Amount
   % of
Total
   Acquired
Amount
   % of
Total
 
Commercial & industrial  $2,608    53.6%  $3,511    58.4%  $2,296    70.0%  $3,720    37.9%
Owner-occupied CRE   372    7.6    216    3.6    86    2.6    447    4.6 
AG production   66    1.4    -    -    -    -    -    - 
AG real estate   -    -    175    2.9    -    -    186    1.9 
CRE investment   950    19.5    537    8.9    549    16.8    3,982    40.6 
Construction & land development   -    -    -    -    -    -    -    - 
Residential construction   28    0.6    80    1.3    -    -    80    0.8 
Residential first mortgage   826    17.0    1,237    20.6    331    10.1    1,256    12.8 
Residential junior mortgage   17    0.3    259    4.3    12    0.4    146    1.4 
Retail & other   -    -    -    -    4    0.1    -    - 
Nonaccrual loans  $4,867    100.0%  $6,015    100.0%  $3,278    100.0%  $9,817    100.0%
Percent of nonaccrual loans   44.7%        55.3%        25.0%        75.0%     

 

 18 

 

 

The following tables present past due loans by portfolio segment as of June 30, 2018 and December 31, 2017:

   June 30, 2018 
(in thousands)  30-89 Days Past
Due (accruing)
   90 Days &
Over or nonaccrual
   Current   Total 
Commercial & industrial  $-   $6,119   $660,130   $666,249 
Owner-occupied CRE   64    588    447,715    448,367 
AG production   -    66    33,950    34,016 
AG real estate   -    175    52,844    53,019 
CRE investment   2    1,487    332,404    333,893 
Construction & land development   24    -    75,029    75,053 
Residential construction   606    108    27,987    28,701 
Residential first mortgage   319    2,063    356,155    358,537 
Residential junior mortgage   56    276    106,260    106,592 
Retail & other   88    -    24,109    24,197 
Total loans  $1,159   $10,882   $2,116,583   $2,128,624 
Percent of total loans   0.1%   0.5%   99.4%   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 June 30, 2018 and December 31, 2017:

 

   June 30, 2018 
(in thousands)  Grades 1- 4   Grade 5   Grade 6   Grade 7   Grade 8   Grade 9   Total 
Commercial & industrial  $626,176   $24,512   $3,133   $12,428   $-   $-   $666,249 
Owner-occupied CRE   410,885    28,442    2,491    6,549    -    -    448,367 
AG production   28,999    3,314    1,324    379    -    -    34,016 
AG real estate   46,575    3,501    2,300    643    -    -    53,019 
CRE investment   323,229    7,271    1,202    2,191    -    -    333,893 
Construction & land development   69,606    5,276    17    154    -    -    75,053 
Residential construction   28,593    -    -    108    -    -    28,701 
Residential first mortgage   353,793    1,348    662    2,734    -    -    358,537 
Residential junior mortgage   106,285    17    -    290    -    -    106,592 
Retail & other   24,197    -    -    -    -    -    24,197 
Total loans  $2,018,338   $73,681   $11,129   $25,476   $-   $-   $2,128,624 
Percent of total   94.8%   3.5%   0.5%   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 June 30, 2018 and December 31, 2017.

 

   Total Impaired Loans – June 30, 2018 
(in thousands)  Recorded
Investment
   Unpaid Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest Income
Recognized
 
Commercial & industrial  $5,713   $9,890   $-   $6,168   $318 
Owner-occupied CRE   1,685    2,191    -    1,729    73 
AG production   -    7    -    -    - 
AG real estate   235    294    -    239    13 
CRE investment   2,736    4,078    -    2,799    106 
Construction & land development   522    522    -    522    10 
Residential construction   80    983    -    80    - 
Residential first mortgage   2,801    3,329    -    2,839    95 
Residential junior mortgage   60    371    -    63    4 
Retail & other   12    14    -    12    1 
Total  $13,844   $21,679   $-   $14,451   $620 
                          
Originated impaired loans  $3,917   $3,918   $-   $4,198   $112 
Acquired impaired loans   9,927    17,761    -    10,253    508 
Total  $13,844   $21,679   $-   $14,451   $620 

 

   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 June 30, 2018, $9.9 million of the $43.6 million remain in impaired loans.

 

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

 

   Six Months Ended   Year Ended 
(in thousands)  June 30, 2018   June 30, 2017   December 31, 2017 
Balance at beginning of period  $9,471   $14,327   $14,327 
Acquired balance, net   -    5,932    8,352 
Accretion to loan interest income   (1,580)   (3,830)   (7,995)
Transferred to accretable   (56)   -    (1,936)
Disposals of loans   -    (1,104)   (3,277)
Balance at end of period  $7,835   $15,325   $9,471 

 

 21 

 

 

Troubled Debt Restructurings

 

At June 30, 2018, there were five loans classified as troubled debt restructurings with a current outstanding balance of $0.9 million and pre-modification balance of $2.7 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 six months ended June 30, 2018. As of June 30, 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 six months ended June 30, 2018.

 

   Six Months Ended   Year Ended 
(in thousands)  June 30, 2018   December 31, 2017 
Goodwill  $107,366   $107,366 
Core deposit intangibles   14,420    16,477 
Customer list intangibles   4,338    4,563 
 Other intangibles   18,758    21,040 
Goodwill and other intangibles, net  $126,124   $128,406 

 

Goodwill: Goodwill was $107.4 million at both June 30, 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.

 

   Six Months Ended   Year Ended 
(in thousands)  June 30, 2018   December 31, 2017 
Core deposit intangibles:          
Gross carrying amount  $29,015   $29,015 
Accumulated amortization   (14,595)   (12,538)
Net book value  $14,420   $16,477 
Additions during the period  $-   $3,670 
Amortization during the period  $2,057   $4,294 
           
Customer list intangibles:          
Gross carrying amount  $5,233   $5,233 
Accumulated amortization   (895)   (670)
Net book value  $4,338   $4,563 
Additions during the period  $-   $870 
Amortization during the period  $225   $401 

 

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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 six months ended June 30, 2018 was as follows:

 

   Six Months Ended   Year Ended 
(in thousands)  June 30, 2018   December 31, 2017 
Mortgage servicing rights (MSR) asset:          
MSR asset at beginning of year  $3,187   $1,922 
Capitalized MSR   275    876 
MSR asset acquired   -    874 
Amortization during the period   (301)   (485)
MSR asset at end of period  $3,161   $3,187 
Fair value of MSR asset at end of period  $4,414   $4,097 
Residential mortgage loans serviced for others  $527,986   $518,419 
Net book value of MSR asset to loans serviced for others   0.60%   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 allowance or impairment charge was recorded for the year ended December 31, 2017 or the six months ended June 30, 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 June 30, 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 six months)  $1,858   $224   $299 
2019   3,337    449    597 
2020   2,657    449    754 
2021   2,167    449    342 
2022   1,735    449    342 
Thereafter   2,666    2,318    827 
Total  $14,420   $4,338   $3,161 

 

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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 June 30, 2018 or December 31, 2017.

 

Long-Term Borrowings:

The components of long-term borrowings (borrowing with an original maturity greater than one year) at June 30, 2018 and December 31, 2017 were as follows:

 

(in thousands)  June 30, 2018   December 31, 2017 
FHLB advances  $35,381   $36,509 
Junior subordinated debentures   29,856    29,616 
Subordinated notes   11,939    11,921 
Total long-term borrowings  $77,176   $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 June 30, 2018 and December 31, 2017, respectively.

 

The following table shows the maturity schedule of the FHLB advances as of June 30, 2018.

 

Maturing in:  (in thousands) 
2018 (remaining six months)  $- 
2019   - 
2020   10,000 
2021   - 
2022   25,381 
Total  $35,381 

 

Junior Subordinated Debentures: The following table shows the breakdown of junior subordinated debentures as of June 30, 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. At June 30, 2018 and December 31, 2017, $28.7 million and $28.5 million, respectively, qualify as Tier 1 capital.

 

      Junior Subordinated Debentures 
(in thousands)  Maturity
Date
  Par  

6/30/2018

Unamortized
Discount

  

6/30/2018

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    (3,471)   6,839    6,739 
2006 Baylake Corp.(3)  9/30/2036   16,598    (4,238)   12,360    12,242 
2004 First Menasha Bancshares, Inc.(4)  3/17/2034   5,155    (684)   4,471    4,449 
 Total     $38,249   $(8,393)  $29,856   $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 3.77% and 3.02% as of June 30, 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 3.69% and 3.04% as of June 30, 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 5.12% and 4.39% as of June 30, 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 June 30, 2018 and December 31, 2017.

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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 
June 30, 2018:                    
U.S. government agency securities  $26,350   $-   $26,350   $- 
State, county and municipals   166,899    -    166,768    131 
Mortgage-backed securities   143,250    -    143,250    - 
Corporate debt securities   65,476    -    57,025    8,451 
Securities AFS  $401,975   $-   $393,393   $8,582 
Other investments (equity securities) *  $3,053   $3,053   $-   $- 
                     
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. As a result, the approximately $3.1 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 investments are 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 June 30, 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.

 

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

 

(in thousands)  Six Months Ended   Year Ended 
Level 3 Fair Value Measurements:  June 30, 2018   December 31, 2017 
Balance at beginning of year  $9,151   $9,108 
Acquired balance   -    189 
Paydowns/Sales/Settlements   (569)   (146)
Balance at end of period  $8,582   $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)                
June 30, 2018:                            
Impaired loans  $13,844   $-   $-   $13,844 
Other real estate owned (“OREO”)   1,230    -    -    1,230 
MSR asset   4,414    -    -    4,414 
                     
December 31, 2017:                    
Impaired loans  $17,058   $-   $-   $17,058 
OREO   1,294    -    -    1,294 
MSR asset   4,097    -    -    4,097 

 

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. 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.

 

Financial instruments:

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

 

June 30, 2018
(in thousands)  Carrying
Amount
   Estimated
Fair Value
   Level 1   Level 2   Level 3 
Financial assets:                         
Cash and cash equivalents  $104,069   $104,069   $104,069   $-   $- 
Certificates of deposit in other banks   1,247    1,231    -    1,231    - 
Securities AFS   401,975    401,975    -    393,393    8,582 
Other investments, including equity securities   17,749    17,749    3,053    13,112    1,584 
Loans held for sale   6,037    6,092    -    6,092    - 
Loans, net   2,115,749    2,099,434    -    -    2,099,434 
BOLI   65,363    65,363    65,363    -    - 
MSR asset   3,161    4,414    -    -    4,414 
                          
Financial liabilities:                         
Deposits  $2,455,536   $2,456,846   $-   $-   $2,456,846 
Long-term borrowings   77,176    76,152    -    35,380    40,772 

 

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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 
Long-term borrowings   78,046    77,029    -    36,510    40,519 

 

The carrying value of certain assets and liabilities such as cash and cash equivalents, bank owned life insurance, short-term borrowings, and nonmaturing deposits, approximate their estimated fair value. 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.

 

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.

 

Long-term borrowings: 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. The fair values of the junior subordinated debentures and subordinated notes 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 June 30, 2018 and December 31, 2017, the estimated fair value of letters of credit 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.

 

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Note 10 – Revenue Recognition

 

As of January 1, 2018, the Company adopted ASU 2014-09 (Topic 606) using the modified retrospective approach. The adoption of the guidance had no material impact on the measurement, timing, 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.

 

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income categories such as gains or losses associated with mortgage servicing rights, derivatives, and income from bank owned life insurance are not within the scope of the new guidance. The main types of revenue contracts within the scope of Topic 606 include trust services income, brokerage fee income, service charges on deposit accounts, card interchange income, and certain other noninterest income. These contracts are discussed in detail below:

 

Trust services and brokerage fee income: A contract between the Company and its customers to provide fiduciary and / or investment administration services on trust accounts and brokerage accounts in exchange for a fee. Trust services and brokerage fee income is based upon the month-end market value of the assets under management and the applicable fee rate, which is recognized over the period the underlying trust or brokerage account is serviced (generally on a monthly basis). Such contracts are generally cancellable at any time, with the customer subject to a pro-rated fee in the month of termination.

 

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 by either party. This contract permits the customer to access the funds on deposit and request additional services related to the deposit account. Service charges on deposit accounts consist of account analysis fees (net fees earned on analyzed business and public checking accounts), monthly service charges, nonsufficient fund (“NSF”) charges, and other deposit account related charges. The Company’s performance obligation for account analysis fees and monthly service charges is generally satisfied, and the related revenue recognized, over the period in which the service is provided (typically on a monthly basis); while NSF charges and other deposit account related charges are largely transactional based and the related revenue is recognized at the time the service is provided.

 

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. The performance obligation is completed and the fees are recognized 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.

 

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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 June 30, 2018 and December 31, 2017 and results of operations for the three and six-month periods ended June 30, 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 to 2017 periods. Certain income statement results, average balances and related ratios for 2018 and the last two 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. See Note 2, “Acquisition,” in the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional information on this acquisition.

 

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Performance Summary

 

Table 1: Earnings Summary and Selected Financial Data

 

   At or for the Three Months Ended   At or for the Six Months Ended 
(In thousands, except per share data)  6/30/2018   3/31/2018   12/31/2017   9/30/2017   6/30/2017   6/30/2018   6/30/2017 
Results of operations:                                   
Interest income  $30,545   $30,785   $29,836   $29,454   $26,880   $61,330   $49,963 
Interest expense   4,742    3,911    3,329    3,063    2,353    8,653    4,119 
Net interest income   25,803    26,874    26,507    26,391    24,527    52,677    45,844 
Provision for loan losses   510    510    450    975    450    1,020    900 
Net interest income after provision for loan losses   25,293    26,364    26,057    25,416    24,077    51,657    44,944 
Noninterest income   10,239    8,824    8,621    10,164    9,085    19,063    15,854 
Noninterest expense   22,451    22,642    21,858    20,862    20,313    45,093    38,636 
Income before income tax expense   13,081    12,546    12,820    14,718    12,849    25,627    22,162 
Income tax expense   3,255    2,908    3,662    5,133    4,440    6,163    7,472 
Net income   9,826    9,638    9,158    9,585    8,409    19,464    14,690 
Net income attributable to noncontrolling interest   89    61    55    74    81    150    154 
Net income attributable to Nicolet Bankshares, Inc.  $9,737   $9,577   $9,103   $9,511   $8,328   $19,314   $14,536 
Earnings per common share:                                   
Basic  $1.01   $0.98   $0.93   $0.97   $0.88   $1.99   $1.61 
Diluted  $0.98   $0.94   $0.88   $0.91   $0.83   $1.93   $1.53 
Common Shares:                                   
Basic weighted average   9,639    9,765    9,805    9,837    9,516    9,702    9,053 
Diluted weighted average   9,970    10,225    10,368    10,409    9,992    10,032    9,521 
Outstanding   9,643    9,699    9,818    9,799    9,863    9,643    9,863 
Period-End Balances:                                   
Loans  $2,128,624   $2,100,597   $2,087,925   $2,051,122   $2,009,964   $2,128,624   $2,009,964 
Allowance for loan losses   12,875    12,765    12,653    12,610    12,591