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Loans, Allowance for Credit Losses - Loans, and Credit Quality
 6 Months Ended
Jun. 30, 2020
Receivables [Abstract]  
Loans, Allowance for Credit Losses - Loans, and Credit Quality Loans, Allowance for Credit Losses - Loans, and Credit Quality
The loan composition is summarized as follows.
June 30, 2020December 31, 2019
(in thousands)Amount% of
Total		Amount% of
Total
Commercial & industrial$729,264  26 %$806,189  31 %
Paycheck Protection Program (“PPP”) loans329,157  12  —  —  
Owner-occupied commercial real estate (“CRE”)495,722  17  496,372  19  
Agricultural99,020  3  95,450  4  
CRE investment447,900  16  443,218  17  
Construction & land development107,277  4  92,970  4  
Residential construction51,332  2  54,403  2  
Residential first mortgage417,694  15  432,167  17  
Residential junior mortgage114,323  4  122,771  5  
Retail & other29,812  1  30,211  1  
Loans
2,821,501  100 %2,573,751  100 %
Less allowance for credit losses - Loans (“ACL-Loans”)29,130  13,972  
Loans, net
$2,792,371  $2,559,779  
Allowance for credit losses - Loans to loans1.03 %0.54 %
Accrued interest on loans totaled $9 million and $7 million at June 30, 2020 and December 31, 2019, respectively, and is included in accrued interest receivable and other assets on the consolidated balance sheets. See Note 1 for for the Company's accounting policy on accrued interest with respect to loans and the allowance for credit losses.
Allowance for Credit Losses-Loans:
The majority 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.
A roll forward of the allowance for credit losses is summarized as follows.
Six Months EndedYear Ended
(in thousands)June 30, 2020June 30, 2019December 31, 2019
Beginning balance$13,972  $13,153  $13,153  
Adoption of CECL8,488  —  —  
Initial PCD ACL797  —  —  
Total impact for adoption of CECL9,285  —  —  
Provision for credit losses6,000  500  1,200  
Charge-offs(216) (232) (927) 
Recoveries89  150  546  
Net (charge-offs) recoveries
(127) (82) (381) 
Ending balance$29,130  $13,571  $13,972  
The following table presents the balance and activity in the ACL-Loans by portfolio segment.
Six Months Ended June 30, 2020
(in thousands)Commercial
& industrial		Owner-
occupied
CRE		AgriculturalCRE
investment		Construction & land
development		Residential
construction		Residential
first mortgage		Residential
junior
mortgage		Retail
& other		Total
ACL-Loans *
Beginning balance$5,471  $3,010  $579  $1,600  $414  $368  $1,669  $517  $344  $13,972  
Adoption of CECL2,962  1,249  361  1,970  51  124  1,286  351  134  8,488  
Initial PCD ACL797  —  —  —  —  —  —  —  —  797  
Provision1,010  919  399  1,542  325  21  1,348  294  142  6,000  
Charge-offs(97) —  —  (20) —  —  —  —  (99) (216) 
Recoveries60  —  —  —  —  —  4  15  10  89  
Net (charge-offs) recoveries(37) —  —  (20) —  —  4  15  (89) (127) 
Ending balance$10,203  $5,178  $1,339  $5,092  $790  $513  $4,307  $1,177  $531  $29,130  
As % of ACL-Loans35 %18 %4 %17 %3 %2 %15 %4 %2 %100 %
*The PPP loans are fully guaranteed by the SBA; thus, no ACL-Loans has been allocated to these loans.

For comparison purposes, the following table presents the balance and activity in the ACL-Loans by portfolio segment for the prior year-end period.
Year Ended December 31, 2019
(in thousands)Commercial
& industrial		Owner-
occupied
CRE		AgriculturalCRE
investment		Construction
& land
development		Residential
construction		Residential
first
mortgage		Residential
junior
mortgage		Retail &
other		 
Total
ACL-Loans
Beginning balance$5,271  $2,847  $422  $1,470  $510  $211  $1,646  $472  $304  $13,153  
Provision(61) 254  157  130  (96) 383  9  86  338  1,200  
Charge-offs(159) (93) —  —  —  (226) (22) (80) (347) (927) 
Recoveries420  2  —  —  —  —  36  39  49  546  
Net (charge-offs) recoveries261  (91) —  —  —  (226) 14  (41) (298) (381) 
Ending balance$5,471  $3,010  $579  $1,600  $414  $368  $1,669  $517  $344  $13,972  
As % of ACL-Loans39 %22 %4 %11 %3 %3 %12 %4 %2 %100 %
The ACL-Loans at June 30, 2020 was estimated using the current expected credit loss model. See Note 1 for the Company's accounting policy on loans and the allowance for credit losses.
The ACL-Loans represents management’s estimate of expected credit losses in the Company’s loan portfolio at the balance sheet date. To assess the appropriateness of the ACL-Loans, an allocation methodology is applied by Nicolet which focuses on evaluation of qualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to specific loans; (ii) management’s ongoing review and grading of the loan portfolio; (iii) consideration of historical loan loss and delinquency experience on each portfolio segment; (iv) trends in past due and nonperforming loans; (v) the risk characteristics of the various loan segments; (vi) changes in the size and character of the loan portfolio; (vii) concentrations of loans to specific borrowers or industries; (viii) existing economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect expected credit losses. Assessing these numerous factors involves significant judgment.
Management allocates the ACL-Loans by pools of risk within each loan portfolio segment. The allocation methodology consists of the following components. First, a specific reserve is established for individually evaluated credit-deteriorated loans, which management defines as nonaccrual credit relationships over $250,000, all loans determined to be troubled debt restructurings (“restructured loans”), plus other loans with evidence of credit deterioration. The specific reserve in the ACL-Loans for these credit deteriorated loans is equal to the aggregate collateral or discounted cash flow shortfall. Second, management allocates the ACL-Loans with historical loss rates by loan segment. The loss factors are measured on a quarterly basis and applied to each loan segment based on current loan balances and projected for their expected remaining life. Next, management allocates the ACL-Loans using the qualitative factors mentioned above. Consideration is given to those current qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the historical loss experience of each loan segment. Lastly, management considers reasonable and supportable forecasts to assess the collectability of future cash flows.
A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. For collateral dependent loans, expected credit losses are based on the fair value of the collateral at the balance sheet date, with consideration for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. The following table presents collateral dependent loans by portfolio segment and collateral type, including those loans with and without a related allowance allocation as of June 30, 2020.
June 30, 2020Collateral Type
(in thousands)Real EstateOther Business AssetsTotalWithout an AllowanceWith an AllowanceAllowance Allocation
Commercial & industrial$—  $3,688  $3,688  $—  $3,688  $1,231  
PPP loans—  —  —  —  —  —  
Owner-occupied CRE2,524  —  2,524  339  2,185  148  
Agricultural600  835  1,435  1,435  —  —  
CRE investment975  —  975  975  —  —  
Construction & land development533  —  533  533  —  —  
Residential construction—  —  —  —  —  —  
Residential first mortgage—  —  —  —  —  —  
Residential junior mortgage—  —  —  —  —  —  
Retail & other—  —  —  —  —  —  
Total loans$4,632  $4,523  $9,155  $3,282  $5,873  $1,379  

The following table presents impaired loans and their respective allowance for credit loss allocations at December 31, 2019, as determined in accordance with historical accounting guidance.
Total Impaired Loans – December 31, 2019
(in thousands)Recorded
Investment		Unpaid Principal
Balance		Related
Allowance		Average Recorded
Investment		Interest Income
Recognized
Commercial & industrial$5,932  $7,950  $625  $5,405  $1,170  
Owner-occupied CRE3,430  4,016  —  3,677  256  
Agricultural2,134  2,172  116  2,311  37  
CRE investment2,426  2,790  —  2,497  364  
Construction & land development382  382  —  460  —  
Residential construction—  —  —  —  —  
Residential first mortgage2,357  2,629  —  2,412  178  
Residential junior mortgage218  349  —  224  58  
Retail & other12  12  —  12  —  
Total
$16,891  $20,300  $741  $16,998  $2,063  
Past Due and Nonaccrual Loans:
The following tables present past due loans by portfolio segment.
June 30, 2020
(in thousands)30-89 Days Past
Due (accruing)		90 Days & Over or nonaccrualCurrentTotal
Commercial & industrial$162  $4,142  $724,960  $729,264  
PPP loans—  —  329,157  329,157  
Owner-occupied CRE71  3,005  492,646  495,722  
Agricultural35  1,711  97,274  99,020  
CRE investment—  975  446,925  447,900  
Construction & land development196  533  106,548  107,277  
Residential construction549  —  50,783  51,332  
Residential first mortgage354  1,067  416,273  417,694  
Residential junior mortgage—  565  113,758  114,323  
Retail & other85  —  29,727  29,812  
Total loans$1,452  $11,998  $2,808,051  $2,821,501  
Percent of total loans0.1 %0.4 %99.5 %100.0 %
December 31, 2019
(in thousands)30-89 Days Past
Due (accruing)		90 Days & Over or nonaccrualCurrentTotal
Commercial & industrial$1,729  $6,249  $798,211  $806,189  
Owner-occupied CRE112  3,311  492,949  496,372  
Agricultural—  1,898  93,552  95,450  
CRE investment—  1,073  442,145  443,218  
Construction & land development2,063  20  90,887  92,970  
Residential construction302  —  54,101  54,403  
Residential first mortgage2,736  1,090  428,341  432,167  
Residential junior mortgage217  480  122,074  122,771  
Retail & other110  1  30,100  30,211  
Total loans$7,269  $14,122  $2,552,360  $2,573,751  
Percent of total loans0.3 %0.5 %99.2 %100.0 %
The following table presents nonaccrual loans by portfolio segment. The nonaccrual loans without a related allowance for credit losses have been reflected in the collateral dependent loans table above.
June 30, 2020December 31, 2019
(in thousands)Nonaccrual Loans% of TotalNonaccrual Loans% of Total
Commercial & industrial$4,142  35 %$6,249  44 %
PPP loans—  —  —  —  
Owner-occupied CRE3,005  25  3,311  23  
Agricultural1,711  14  1,898  14  
CRE investment975  8  1,073  8  
Construction & land development533  4  20  —  
Residential construction—  —  —  —  
Residential first mortgage1,067  9  1,090  8  
Residential junior mortgage565  5  480  3  
Retail & other—  —  1  —  
Nonaccrual loans
$11,998  100 %$14,122  100 %
Percent of total loans0.4 %0.5 %
Credit Quality Information:
The following table presents total loans by risk categories and year of origination.
June 30, 2020Amortized Cost Basis by Origination Year
(in thousands)20202019201820172016PriorRevolvingRevolving to TermTOTAL
Commercial & industrial (a)
Grades 1-4$397,577  $150,186  $109,524  $68,689  $28,748  $58,379  $183,671  $—  $996,774  
Grade 5229  5,398  7,778  625  1,524  2,777  16,707  —  35,038  
Grade 651  23  796  5,698  1  35  4,136  —  10,740  
Grade 71,732  1,215  1,112  1,382  545  6,057  3,826  —  15,869  
Total$399,589  $156,822  $119,210  $76,394  $30,818  $67,248  $208,340  $—  $1,058,421  
Owner-occupied CRE
Grades 1-4$36,065  $67,425  $82,360  $62,980  $49,060  $164,982  $1,499  $—  $464,371  
Grade 5—  574  1,646  6,572  379  7,086  488  —  16,745  
Grade 6—  —  —  1,736  —  734  —  —  2,470  
Grade 7—  337  281  2,189  1,776  7,553  —  —  12,136  
Total$36,065  $68,336  $84,287  $73,477  $51,215  $180,355  $1,987  $—  $495,722  
Agricultural
Grades 1-4$8,766  $5,484  $7,266  $9,697  $2,240  $29,722  $20,775  $—  $83,950  
Grade 520  375  36  573  689  4,772  633  —  7,098  
Grade 6—  —  —  328  392  —  —  —  720  
Grade 7—  —  34  115  1,200  5,824  79  —  7,252  
Total$8,786  $5,859  $7,336  $10,713  $4,521  $40,318  $21,487  $—  $99,020  
CRE investment
Grades 1-4$42,819  $76,688  $41,581  $69,179  $39,866  $158,663  $6,303  $—  $435,099  
Grade 5—  —  106  1,307  388  6,396  45  —  8,242  
Grade 6—  104  —  913  654  —  —  —  1,671  
Grade 7—  —  —  —  144  2,744  —  —  2,888  
Total$42,819  $76,792  $41,687  $71,399  $41,052  $167,803  $6,348  $—  $447,900  
Construction & land development
Grades 1-4$25,720  $40,447  $19,330  $3,442  $2,261  $9,282  $1,799  $—  $102,281  
Grade 5—  219  2,699  45  —  26  —  —  2,989  
Grade 6—  1,100  —  —  —  —  —  —  1,100  
Grade 7—  —  —  —  —  907  —  —  907  
Total$25,720  $41,766  $22,029  $3,487  $2,261  $10,215  $1,799  $—  $107,277  
Residential construction
Grades 1-4$14,455  $34,545  $1,459  $351  $19  $133  $—  $—  $50,962  
Grade 5—  314  —  56  —  —  —  —  370  
Grade 6—  —  —  —  —  —  —  —  —  
Grade 7—  —  —  —  —  —  —  —  —  
Total$14,455  $34,859  $1,459  $407  $19  $133  $—  $—  $51,332  
Residential first mortgage
Grades 1-4$54,206  $71,663  $49,497  $53,126  $52,588  $128,667  $919  $—  $410,666  
Grade 5—  825  1,331  258  760  1,689  —  —  4,863  
Grade 6—  —  —  —  —  —  —  —  —  
Grade 7—  656  197  19  65  1,228  —  —  2,165  
Total$54,206  $73,144  $51,025  $53,403  $53,413  $131,584  $919  $—  $417,694  
Residential junior mortgage
Grades 1-4$2,470  $5,261  $4,799  $1,642  $1,753  $3,203  $92,924  $1,669  $113,721  
Grade 5—  —  —  —  —  33  —  —  33  
Grade 6—  —  —  —  —  —  —  —  —  
Grade 7—  —  —  28  —  339  202  —  569  
Total$2,470  $5,261  $4,799  $1,670  $1,753  $3,575  $93,126  $1,669  $114,323  
Retail & other
Grades 1-4$5,090  $6,205  $2,403  $1,869  $941  $1,522  $11,782  $—  $29,812  
Grade 5—  —  —  —  —  —  —  —  —  
Grade 6—  —  —  —  —  —  —  —  —  
Grade 7—  —  —  —  —  —  —  —  —  
Total$5,090  $6,205  $2,403  $1,869  $941  $1,522  $11,782  $—  $29,812  
Total loans$589,200  $469,044  $334,235  $292,819  $185,993  $602,753  $345,788  $1,669  $2,821,501  
(a) For purposes of this table, the $329 million net carrying value of PPP loans were originated in 2020, have a Pass risk grade (Grades 1-4) and have been included with the Commercial & industrial loan category.
The following tables present total loans by risk categories.
June 30, 2020
(in thousands)Grades 1- 4Grade 5Grade 6Grade 7Total
Commercial & industrial$667,617  $35,038  $10,740  $15,869  $729,264  
PPP loans329,157  —  —  —  329,157  
Owner-occupied CRE464,371  16,745  2,470  12,136  495,722  
Agricultural83,950  7,098  720  7,252  99,020  
CRE investment435,099  8,242  1,671  2,888  447,900  
Construction & land development102,281  2,989  1,100  907  107,277  
Residential construction50,962  370  —  —  51,332  
Residential first mortgage410,666  4,863  —  2,165  417,694  
Residential junior mortgage113,721  33  —  569  114,323  
Retail & other29,812  —  —  —  29,812  
Total loans$2,687,636  $75,378  $16,701  $41,786  $2,821,501  
Percent of total95.2 %2.7 %0.6 %1.5 %100.0 %
December 31, 2019
(in thousands)Grades 1- 4Grade 5Grade 6Grade 7Total
Commercial & industrial$765,073  $20,199  $7,663  $13,254  $806,189  
Owner-occupied CRE464,661  20,855  953  9,903  496,372  
Agricultural77,082  6,785  3,275  8,308  95,450  
CRE investment430,794  8,085  2,578  1,761  443,218  
Construction & land development90,523  2,213  15  219  92,970  
Residential construction53,286  1,117  —  —  54,403  
Residential first mortgage424,044  4,677  668  2,778  432,167  
Residential junior mortgage122,249  35  —  487  122,771  
Retail & other30,210  —  —  1  30,211  
Total loans$2,457,922  $63,966  $15,152  $36,711  $2,573,751  
Percent of total95.5 %2.5 %0.6 %1.4 %100.0 %
An internal loan review function rates loans using a grading system based on different risk categories. Loans with a Substandard grade are considered to have a greater risk of loss and may be assigned allocations for loss based on specific review of the weaknesses observed in the individual credits. Such loans are constantly monitored by the loan review function to ensure early identification of any deterioration. 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.
Troubled Debt Restructurings: At June 30, 2020, there were five loans classified as troubled debt restructurings with a current outstanding balance of $1.1 million and pre-modification balance of $1.7 million. In comparison, at December 31, 2019, there were five loans classified as troubled debt restructurings with an outstanding balance of $1.1 million and pre-modification balance of $1.4 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, 2020. As of June 30, 2020, there were no commitments to lend additional funds to debtors whose terms have been modified in troubled debt restructurings.