10-Q 1 ncbs-03312019x10q.htm 10-Q Document


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
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)
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
NCBS
The NASDAQ Stock Market LLC
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 ý 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 ý 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 ¨
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 ý
As of April 30, 2019 there were 9,397,147 shares of $0.01 par value common stock outstanding.





Nicolet Bankshares, Inc.
TABLE OF CONTENTS
 
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS:
NICOLET BANKSHARES, INC.
Consolidated Balance Sheets
(In thousands, except share and per share data)
 
March 31, 2019
 
December 31, 2018
 
(Unaudited)
 
(Audited)
Assets
 
 
 
Cash and due from banks
$
51,896

 
$
85,896

Interest-earning deposits
102,865

 
163,630

Cash and cash equivalents
154,761


249,526

Certificates of deposit in other banks
992

 
993

Securities available for sale (“AFS”), at fair value
407,693

 
400,144

Other investments
18,219

 
17,997

Loans held for sale
1,831

 
1,639

Loans
2,189,688

 
2,166,181

Allowance for loan losses ("ALLL")
(13,370
)
 
(13,153
)
Loans, net
2,176,318


2,153,028

Premises and equipment, net
49,443

 
48,173

Bank owned life insurance (“BOLI”)
66,769

 
66,310

Goodwill and other intangibles, net
123,254

 
124,307

Accrued interest receivable and other assets
41,811

 
34,418

Total assets
$
3,041,091


$
3,096,535

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Liabilities:
 
 
 
Noninterest-bearing demand deposits
$
696,111

 
$
753,065

Interest-bearing deposits
1,842,375

 
1,861,073

Total deposits
2,538,486


2,614,138

Long-term borrowings
77,369

 
77,305

Accrued interest payable and other liabilities
25,643

 
17,740

Total liabilities
2,641,498


2,709,183

 
 
 
 
Stockholders’ Equity:
 
 
 
Common stock
94

 
95

Additional paid-in capital
244,063

 
247,790

Retained earnings
154,631

 
144,364

Accumulated other comprehensive loss
(21
)
 
(5,640
)
Total Nicolet Bankshares, Inc. stockholders’ equity
398,767


386,609

Noncontrolling interest
826

 
743

Total stockholders’ equity and noncontrolling interest
399,593


387,352

Total liabilities, noncontrolling interest and stockholders’ equity
$
3,041,091

 
$
3,096,535

 
 
 
 
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
9,430,851

 
9,495,265

Common shares issued
9,455,955

 
9,524,777

See accompanying notes to unaudited consolidated financial statements.

3

ITEM 1. Financial Statements Continued:


NICOLET BANKSHARES, INC.
Consolidated Statements of Income
(In thousands, except share and per share data) (Unaudited)
 
Three Months Ended
March 31,
 
2019
 
2018
Interest income:
 
 
 
Loans, including loan fees
$
29,968

 
$
28,454

Investment securities:
 
 
 
Taxable
1,633

 
1,342

Tax-exempt
549

 
588

Other interest income
1,009

 
401

Total interest income
33,159


30,785

Interest expense:
 
 
 
Deposits
4,777

 
3,089

Short-term borrowings

 
3

Long-term borrowings
907

 
819

Total interest expense
5,684


3,911

Net interest income
27,475

 
26,874

Provision for loan losses
200

 
510

Net interest income after provision for loan losses
27,275


26,364

Noninterest income:
 
 
 
Trust services fee income
1,468

 
1,606

Brokerage fee income
1,810

 
1,604

Mortgage income, net
1,203

 
1,080

Service charges on deposit accounts
1,170

 
1,190

Card interchange income
1,420

 
1,243

BOLI income
459

 
442

Asset gains (losses), net
172

 
204

Other income
1,484

 
1,455

Total noninterest income
9,186

 
8,824

Noninterest expense:
 
 
 
Personnel
12,537

 
12,492

Occupancy, equipment and office
3,750

 
3,787

Business development and marketing
1,281

 
1,342

Data processing
2,355

 
2,320

Intangibles amortization
1,053

 
1,182

Other expense
1,783

 
1,519

Total noninterest expense
22,759


22,642

Income before income tax expense
13,702

 
12,546

Income tax expense
3,352

 
2,908

Net income
10,350


9,638

Less: Net income attributable to noncontrolling interest
83

 
61

Net income attributable to Nicolet Bankshares, Inc.
$
10,267


$
9,577

Earnings per common share:
 
 
 
Basic
$
1.09

 
$
0.98

Diluted
$
1.05

 
$
0.94

Weighted average common shares outstanding:
 
 
 
Basic
9,461,485

 
9,765,375

Diluted
9,758,351

 
10,224,788

See accompanying notes to unaudited consolidated financial statements.

4

ITEM 1. Financial Statements Continued:


NICOLET BANKSHARES, INC.
Consolidated Statements of Comprehensive Income
(In thousands) (Unaudited)
 
Three Months Ended
March 31,
 
2019
 
2018
Net income
$
10,350

 
$
9,638

Other comprehensive income (loss), net of tax:
 
 
 
Unrealized gains (losses) on securities AFS:
 
 
 
Net unrealized holding gains (losses) arising during the period
7,711

 
(4,658
)
Reclassification adjustment for net (gains) losses included in income
(13
)
 

Income tax (expense) benefit
(2,079
)
 
1,257

Total other comprehensive income (loss)
5,619


(3,401
)
Comprehensive income
$
15,969


$
6,237

See accompanying notes to unaudited consolidated financial statements.

5

ITEM 1. Financial Statements Continued:


NICOLET BANKSHARES, INC.
Consolidated Statements of Stockholders’ Equity
(In thousands) (Unaudited)
 
Nicolet Bankshares, Inc. Stockholders’ Equity
 
 
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interest
 
Total
Balance, December 31, 2017
$
98

 
$
263,835

 
$
102,391

 
$
(2,146
)
 
$
701

 
$
364,879

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 
9,577

 

 
61

 
9,638

Other comprehensive income (loss)

 

 

 
(3,401
)
 

 
(3,401
)
Stock-based compensation expense

 
1,220

 

 

 

 
1,220

Exercise of stock options, net

 
427

 

 

 

 
427

Issuance of common stock

 
51

 

 

 

 
51

Purchase and retirement of common stock
(1
)
 
(8,063
)
 

 

 

 
(8,064
)
Distribution to noncontrolling interest

 

 

 

 
(99
)
 
(99
)
Adoption of new accounting pronouncement

 

 
937

 
(937
)
 

 

Balance, March 31, 2018
$
97

 
$
257,470

 
$
112,905

 
$
(6,484
)
 
$
663

 
$
364,651

 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
$
95

 
$
247,790

 
$
144,364

 
$
(5,640
)
 
$
743

 
$
387,352

Comprehensive income:
 
 
 
 
 
 
 
 
 
 


Net income

 

 
10,267

 

 
83

 
10,350

Other comprehensive income (loss)

 

 

 
5,619

 

 
5,619

Stock-based compensation expense

 
1,108

 

 

 

 
1,108

Exercise of stock options, net

 
698

 

 

 

 
698

Issuance of common stock

 
148

 

 

 

 
148

Purchase and retirement of common stock
(1
)
 
(5,681
)
 

 

 

 
(5,682
)
Balance, March 31, 2019
$
94


$
244,063


$
154,631


$
(21
)

$
826


$
399,593

See accompanying notes to unaudited consolidated financial statements.


6

ITEM 1. Financial Statements Continued:


NICOLET BANKSHARES, INC.
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Three Months Ended March 31,
 
2019
 
2018
Cash Flows From Operating Activities:
 
 
 
Net income
$
10,350

 
$
9,638

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization, and accretion
1,108

 
1,741

Provision for loan losses
200

 
510

Increase in cash surrender value of life insurance
(459
)
 
(442
)
Stock-based compensation expense
1,108

 
1,220

Asset (gains) losses, net
(172
)
 
(204
)
Gain on sale of loans held for sale, net
(1,102
)
 
(905
)
Proceeds from sale of loans held for sale
37,338

 
47,396

Origination of loans held for sale
(36,747
)
 
(49,808
)
Net change in:
 
 
 
Accrued interest receivable and other assets
(1,748
)
 
(985
)
Accrued interest payable and other liabilities
421

 
(105
)
Net cash provided by operating activities
10,297


8,056

Cash Flows From Investing Activities:
 
 
 
Net increase in loans
(21,728
)
 
(11,313
)
Net decrease in certificates of deposit in other banks
1

 
498

Purchases of securities AFS
(19,064
)
 
(15,901
)
Proceeds from sales of securities AFS
8,076

 

Proceeds from calls and maturities of securities AFS
10,636

 
11,835

Purchases of other investments
(63
)
 
(36
)
Net increase in premises and equipment
(2,368
)
 
(400
)
Net increase in other real estate and other assets

 
(15
)
Net cash used in investing activities
(24,510
)

(15,332
)
Cash Flows From Financing Activities:
 
 
 
Net increase (decrease) in deposits
(75,652
)
 
294,105

Repayments of long-term borrowings
(64
)
 
(1,062
)
Purchase and retirement of common stock
(5,682
)
 
(8,064
)
Proceeds from issuance of common stock
148

 
478

Proceeds from exercise of stock options
698

 

Distribution to noncontrolling interest

 
(99
)
Net cash provided by (used in) financing activities
(80,552
)

285,358

Net increase (decrease) in cash and cash equivalents
(94,765
)
 
278,082

Cash and cash equivalents:
 
 
 
Beginning
249,526

 
154,933

Ending *
$
154,761


$
433,015

Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid for interest
$
5,466

 
$
3,956

Cash paid for taxes

 
54

Transfer of loans and bank premises to other real estate owned

 
32

Capitalized mortgage servicing rights
319

 
103

Initial recognition of operating lease right of use asset
5,403

 

Initial recognition of operating lease liability
5,403

 

* Cash and cash equivalents include restricted cash of $9.0 million and $7.5 million at March 31, 2019 and 2018, 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 1Basis 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, 2018.
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, 2018.
Recent Accounting Developments Adopted
In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 expands the activities that qualify for hedge accounting and simplifies the rules for reporting hedging transactions. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company adopted the updated guidance effective January 1, 2019 with no material impact on its consolidated financial statements, because the Company does not have any significant derivatives and does not currently apply hedge accounting to derivatives.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), with several subsequent updates. Topic 842 introduced a new accounting model for lessors and lessees. For lessees, almost all leases are now recognized on the balance sheet as a right-of-use ("ROU") asset and lease liability, unlike previous GAAP which required only capital leases to be recognized on the balance sheet. The accounting applied by lessors is largely unchanged from existing guidance. Topic 842 also requires additional disclosures concerning the amount, timing and uncertainty of cash flows arising from leases. The updated guidance is effective for annual reporting periods beginning after December 15, 2018, and provides a modified retrospective transition approach that allows lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption (the "effective date" method), with the option to elect certain practical expedients. Nicolet adopted the new guidance prospectively as of January 1, 2019, using the effective date method; thus, prior comparative periods have not been restated.
Upon adoption, Nicolet recognized an ROU asset and lease liability of approximately $5 million. There was no impact to its consolidated statements of income or cash flows compared to the prior lease accounting model. The ROU asset and lease liability are recorded in other assets and other liabilities, respectively, in the consolidated balance sheets. As part of the adoption, Nicolet elected the package of practical expedients permitted under the transition guidance of the new standard which allowed the carry forward of the historical lease classification. Nicolet also elected the practical expedient to group lease and non-lease components as a single lease component; thus, the Company's leases include both lease (e.g., fixed payments including rent, taxes, and insurance

8



costs) and non-lease components (e.g., common area or other maintenance costs). See Note 9 for the new disclosures required by Topic 842.
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 2018 consolidated financial statements have been reclassified to conform to the 2019 presentation.
Note 2Earnings 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 March 31,
(In thousands, except per share data)
2019
 
2018
Net income attributable to Nicolet Bankshares, Inc.
$
10,267

 
$
9,577

Weighted average common shares outstanding
9,461

 
9,765

Effect of dilutive common stock awards
297

 
460

Diluted weighted average common shares outstanding
9,758

 
10,225

Basic earnings per common share*
$
1.09

 
$
0.98

Diluted earnings per common share*
$
1.05

 
$
0.94

*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 earnings per share data for the quarters will not necessarily equal the year to date earnings per share data.
For the three months ended March 31, 2019 and 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.
Note 3Stock-Based Compensation
The Company may grant stock options and restricted stock under its stock-based compensation plans to certain officers, employees and directors. These plans are administered by a committee of the Board of Directors. At March 31, 2019, approximately 129,000 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 fair value of restricted stock awards. The weighted average assumptions used in the Black-Scholes model for valuing stock option grants were as follows. There were no stock options granted during the three months ended March 31, 2019.
 
Three Months Ended March 31,
 
2019
 
2018
Dividend yield
%
 
%
Expected volatility
%
 
25
%
Risk-free interest rate
%
 
2.48
%
Expected average life
0 years

 
7 years

Weighted average per share fair value of options
$

 
$
17.60


9



A summary of the Company’s stock option activity is summarized below.
Stock Options
 
Option Shares
Outstanding
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Life (Years)
 
Aggregate
Intrinsic
Value (in
thousands)
Outstanding - December 31, 2018
 
1,581,699

 
$
40.77

 
 
 
 
Granted
 

 

 
 
 
 
Exercise of stock options *
 
(32,623
)
 
21.41

 
 
 
 
Forfeited
 
(2,938
)
 
25.44

 
 
 
 
Outstanding - March 31, 2019
 
1,546,138

 
$
41.20

 
7.2
 
$
28,445

Exercisable - March 31, 2019
 
597,788

 
$
33.14

 
6.1
 
$
15,816

* 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. For the three months ended March 31, 2019, no such shares were surrendered to the Company.
Intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the exercise price of the stock options. The intrinsic value of options exercised for the three months ended March 31, 2019 and 2018 was approximately $1.1 million and $0.7 million, respectively.
A summary of the Company’s restricted stock activity is summarized below.
Restricted Stock
 
Weighted
Average Grant
Date Fair Value
 
Restricted
Shares
Outstanding
Outstanding - December 31, 2018
 
$
39.37

 
29,512

Granted
 

 

Vested *
 
34.75

 
(4,000
)
Forfeited
 
16.50

 
(408
)
Outstanding - March 31, 2019
 
$
40.48

 
25,104

* 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, 1,373 shares were surrendered during the three months ended March 31, 2019.
The Company recognized approximately $1.1 million and $1.2 million of stock-based compensation expense (included in personnel on the consolidated statements of income) during the three months ended March 31, 2019 and 2018, respectively, associated with its common stock awards granted to officers and employees. As of March 31, 2019, there was approximately $11.9 million of unrecognized compensation cost related to equity award grants. The cost is expected to be recognized over the remaining vesting period of approximately three years.
Note 4Securities Available for Sale
Amortized cost and fair value of securities available for sale are summarized as follows.
 
March 31, 2019
(in thousands)
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
U.S. government agency securities
$
16,596

 
$

 
$
208

 
$
16,388

State, county and municipals
158,652

 
248

 
1,355

 
157,545

Mortgage-backed securities
147,721

 
1,277

 
1,487

 
147,511

Corporate debt securities
84,753

 
1,598

 
102

 
86,249

Total
$
407,722

 
$
3,123

 
$
3,152

 
$
407,693


10



 
December 31, 2018
(in thousands)
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
U.S. government agency securities
$
22,467

 
$

 
$
818

 
$
21,649

State, county and municipals
163,702

 
76

 
3,252

 
160,526

Mortgage-backed securities
134,350

 
328

 
3,034

 
131,644

Corporate debt securities
87,352

 
66

 
1,093

 
86,325

Total
$
407,871

 
$
470

 
$
8,197

 
$
400,144

The following table represents gross unrealized losses and the related estimated fair value of investment securities available for sale, aggregated by investment category and length of time individual securities have been in a continuous unrealized loss position.
 
March 31, 2019
 
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
$

 
$

 
$
16,388

 
$
208

 
$
16,388

 
$
208

 
3

State, county and municipals
4,428

 
8

 
114,613

 
1,347

 
119,041

 
1,355

 
340

Mortgage-backed securities
10,311

 
16

 
82,041

 
1,471

 
92,352

 
1,487

 
190

Corporate debt securities

 

 
5,999

 
102

 
5,999

 
102

 
3

Total
$
14,739

 
$
24

 
$
219,041

 
$
3,128

 
$
233,780

 
$
3,152

 
536

 
December 31, 2018
 
Less than 12 months
 
12 months or more
 
Total
($ in thousands)
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Number of
Securities
U.S. government agency securities
$

 
$

 
$
21,649

 
$
818

 
$
21,649

 
$
818

 
3

State, county and municipals
16,136

 
98

 
130,975

 
3,154

 
147,111

 
3,252

 
440

Mortgage-backed securities
20,568

 
132

 
89,189

 
2,902

 
109,757

 
3,034

 
204

Corporate debt securities
51,592

 
677

 
9,757

 
416

 
61,349

 
1,093

 
33

Total
$
88,296

 
$
907

 
$
251,570

 
$
7,290

 
$
339,866

 
$
8,197

 
680

As of March 31, 2019, the Company does not consider its securities AFS with unrealized losses to be other-than-temporarily impaired, as the unrealized losses in each category have occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration. The Company has the ability and intent to hold its securities to maturity. There were no other-than-temporary impairments charged to earnings during the three months ended March 31, 2019 or 2018.
The amortized cost and fair value of securities AFS by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties; as this is particularly inherent in mortgage-backed securities, these securities are not included in the maturity categories below.
 
March 31, 2019
(in thousands)
Amortized Cost
 
Fair Value
Due in less than one year
$
20,418

 
$
20,401

Due in one year through five years
181,031

 
181,210

Due after five years through ten years
52,144

 
51,918

Due after ten years
6,408

 
6,653

 
260,001

 
260,182

Mortgage-backed securities
147,721

 
147,511

Securities AFS
$
407,722

 
$
407,693


11



Proceeds and realized gains / losses from the sale of securities AFS were as follows.
 
Three Months Ended March 31,
(in thousands)
2019
 
2018
Gross gains
$
133

 
$

Gross losses
(120
)
 

Gains (losses) on sales of securities AFS, net
$
13

 
$

Proceeds from sales of securities AFS
$
8,076

 
$

Note 5Loans, Allowance for Loan Losses, and Credit Quality
The loan composition is summarized as follows.
 
March 31, 2019
 
December 31, 2018
(in thousands)
Amount
 
% of
Total
 
Amount
 
% of
Total
Commercial & industrial
$
711,505

 
32
%
 
$
684,920

 
32
%
Owner-occupied commercial real estate (“CRE”)
439,440

 
20

 
441,353

 
20

Agricultural (“AG”) production
35,143

 
2

 
35,625

 
2

AG real estate
53,935

 
2

 
53,444

 
2

CRE investment
342,343

 
16

 
343,652

 
16

Construction & land development
82,308

 
4

 
80,599

 
4

Residential construction
34,425

 
2

 
30,926

 
1

Residential first mortgage
350,661

 
16

 
357,841

 
17

Residential junior mortgage
113,628

 
5

 
111,328

 
5

Retail & other
26,300

 
1

 
26,493

 
1

Loans
2,189,688

 
100
%
 
2,166,181

 
100
%
Less allowance for loan losses (“ALLL”)
13,370

 
 
 
13,153

 
 
Loans, net
$
2,176,318

 
 
 
$
2,153,028

 
 
Allowance for loan losses to loans
0.61
%
 
 
 
0.61
%
 
 
As a further breakdown, loans are summarized by originated and acquired as follows.
 
March 31, 2019
 
December 31, 2018
(in thousands)
Originated
Amount
 
% of
Total
 
Acquired
Amount
 
% of
Total
 
Originated
Amount
 
% of
Total
 
Acquired
Amount
 
% of
Total
Commercial & industrial
$
594,419

 
39
%
 
$
117,086

 
18
%
 
$
568,100

 
38
%
 
$
116,820

 
17
%
Owner-occupied CRE
290,387

 
19

 
149,053

 
22

 
283,531

 
19

 
157,822

 
23

AG production
10,934

 
1

 
24,209

 
4

 
11,113

 
1

 
24,512

 
4

AG real estate
32,868

 
2

 
21,067

 
3

 
31,374

 
2

 
22,070

 
3

CRE investment
171,009

 
11

 
171,334

 
26

 
171,087

 
12

 
172,565

 
25

Construction & land development
68,396

 
5

 
13,912

 
2

 
66,478

 
4

 
14,121

 
2

Residential construction
34,310

 
2

 
115

 

 
30,926

 
2

 

 

Residential first mortgage
219,115

 
14

 
131,546

 
20

 
220,368

 
15

 
137,473

 
20

Residential junior mortgage
82,860

 
5

 
30,768

 
5

 
78,379

 
5

 
32,949

 
5

Retail & other
24,243

 
2

 
2,057

 

 
23,809

 
2

 
2,684

 
1

Loans
1,528,541

 
100
%
 
661,147

 
100
%
 
1,485,165

 
100
%
 
681,016

 
100
%
Less ALLL
11,669

 
 
 
1,701

 
 
 
11,448

 
 
 
1,705

 
 
Loans, net
$
1,516,872

 
 
 
$
659,446

 
 
 
$
1,473,717

 
 
 
$
679,311

 
 
ALLL to loans
0.76
%
 
 
 
0.26
%
 
 
 
0.77
%
 
 
 
0.25
%
 
 
As a percent of total loans
70
%
 
 
 
30
%
 
 
 
69
%
 
 
 
31
%
 
 
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.

12



A roll forward of the allowance for loan losses is summarized as follows.
 
Three Months Ended
 
Year Ended
(in thousands)
March 31, 2019
 
March 31, 2018
 
December 31, 2018
Beginning balance
$
13,153

 
$
12,653

 
$
12,653

Provision for loan losses
200

 
510

 
1,600

Charge-offs
(10
)
 
(430
)
 
(1,213
)
Recoveries
27

 
32

 
113

Net (charge-offs) recoveries
17

 
(398
)
 
(1,100
)
Ending balance
$
13,370

 
$
12,765

 
$
13,153

The following tables present the balance and activity in the ALLL by portfolio segment and the recorded investment in loans by portfolio segment.
 
TOTAL – Three Months Ended March 31, 2019
(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
$
5,271

 
$
2,847

 
$
121

 
$
301

 
$
1,470

 
$
510

 
$
211

 
$
1,646

 
$
472

 
$
304

 
$
13,153

Provision
(49
)
 
20

 
120

 
19

 
77

 
11

 
22

 
(20
)
 
19

 
(19
)
 
200

Charge-offs

 

 

 

 

 

 

 

 

 
(10
)
 
(10
)
Recoveries
16

 
1

 

 

 

 

 

 

 
2

 
8

 
27

Net (charge-offs) recoveries
16

 
1

 

 

 

 

 

 

 
2

 
(2
)
 
17

Ending balance
$
5,238

 
$
2,868

 
$
241

 
$
320

 
$
1,547

 
$
521

 
$
233

 
$
1,626

 
$
493

 
$
283

 
$
13,370

As % of ALLL
39.2
%
 
21.5
%
 
1.8
%
 
2.4
%
 
11.6
%
 
3.9
%
 
1.7
%
 
12.2
%
 
3.7
%
 
2.0
%
 
100.0
%
ALLL:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated
$

 
$

 
$
152

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$
152

Collectively evaluated
5,238

 
2,868

 
89

 
320

 
1,547

 
521

 
233

 
1,626

 
493

 
283

 
13,218

Ending balance
$
5,238

 
$
2,868

 
$
241

 
$
320

 
$
1,547

 
$
521

 
$
233

 
$
1,626

 
$
493

 
$
283

 
$
13,370

Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated
$
3,973

 
$
3,041

 
$
1,100

 
$
950

 
$
1,670

 
$
578

 
$

 
$
2,675

 
$
230

 
$
12

 
$
14,229

Collectively evaluated
707,532

 
436,399

 
34,043

 
52,985

 
340,673

 
81,730

 
34,425

 
347,986

 
113,398

 
26,288

 
2,175,459

Total loans
$
711,505

 
$
439,440

 
$
35,143

 
$
53,935

 
$
342,343

 
$
82,308

 
$
34,425

 
$
350,661

 
$
113,628

 
$
26,300

 
$
2,189,688

Less ALLL
5,238

 
2,868

 
241

 
320

 
1,547

 
521

 
233

 
1,626

 
493

 
283

 
13,370

Net loans
$
706,267

 
$
436,572

 
$
34,902

 
$
53,615

 
$
340,796

 
$
81,787

 
$
34,192

 
$
349,035

 
$
113,135

 
$
26,017

 
$
2,176,318


13




As a further breakdown, the ALLL is summarized by originated and acquired as follows.
 
Originated – Three Months Ended March 31, 2019
(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
$
4,683

 
$
2,439

 
$
110

 
$
255

 
$
1,230

 
$
431

 
$
211

 
$
1,400

 
$
408

 
$
281

 
$
11,448

Provision
(46
)
 
32

 
118

 
18

 
88

 
13

 
(12
)
 
(8
)
 
20

 
(18
)
 
205

Charge-offs

 

 

 

 

 

 

 

 

 
(10
)
 
(10
)
Recoveries
16

 
1

 

 

 

 

 

 

 
1

 
8

 
26

Net (charge-offs) recoveries
16

 
1

 

 

 

 

 

 

 
1

 
(2
)
 
16

Ending balance
$
4,653

 
$
2,472

 
$
228

 
$
273

 
$
1,318

 
$
444

 
$
199

 
$
1,392

 
$
429

 
$
261

 
$
11,669

As % of ALLL
39.9
%
 
21.2
%
 
2.0
%
 
2.3
%
 
11.3
%
 
3.8
%
 
1.7
%
 
11.9
%
 
3.7
%
 
2.2
%
 
100.0
%
ALLL:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated
$

 
$

 
$
152

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$
152

Collectively evaluated
4,653

 
2,472

 
76

 
273

 
1,318

 
444

 
199

 
1,392

 
429

 
261

 
11,517

Ending balance
$
4,653

 
$
2,472

 
$
228

 
$
273

 
$
1,318

 
$
444

 
$
199

 
$
1,392

 
$
429

 
$
261

 
$
11,669

Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated
$
1,210

 
$
1,890

 
$
1,100

 
$
893

 
$

 
$

 
$

 
$

 
$

 
$

 
$
5,093

Collectively evaluated
593,209

 
288,497

 
9,834

 
31,975

 
171,009

 
68,396

 
34,310

 
219,115

 
82,860

 
24,243

 
1,523,448

Total loans
$
594,419

 
$
290,387

 
$
10,934

 
$
32,868

 
$
171,009

 
$
68,396

 
$
34,310

 
$
219,115

 
$
82,860

 
$
24,243

 
$
1,528,541

Less ALLL
4,653

 
2,472

 
228

 
273

 
1,318

 
444

 
199

 
1,392

 
429

 
261

 
11,669

Net loans
$
589,766

 
$
287,915

 
$
10,706

 
$
32,595

 
$
169,691

 
$
67,952

 
$
34,111

 
$
217,723

 
$
82,431

 
$
23,982

 
$
1,516,872

 
Acquired – Three Months Ended March 31, 2019
(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
$
588

 
$
408

 
$
11

 
$
46

 
$
240

 
$
79

 
$

 
$
246

 
$
64

 
$
23

 
$
1,705

Provision
(3
)
 
(12
)
 
2

 
1

 
(11
)
 
(2
)
 
34

 
(12
)
 
(1
)
 
(1
)
 </