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Loans, Allowance for Credit Losses - Loans, and Credit Quality
 9 Months Ended
Sep. 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.
September 30, 2020December 31, 2019
(in thousands)Amount% of
Total		Amount% of
Total
Commercial & industrial$735,531 25 %$806,189 31 %
Paycheck Protection Program (“PPP”) loans335,236 12 — — 
Owner-occupied commercial real estate (“CRE”)499,605 17 496,372 19 
Agricultural111,022 4 95,450 4 
CRE investment475,050 16 443,218 17 
Construction & land development121,647 4 92,970 4 
Residential construction57,496 2 54,403 2 
Residential first mortgage428,017 15 432,167 17 
Residential junior mortgage112,173 4 122,771 5 
Retail & other33,016 1 30,211 1 
Loans
2,908,793 100 %2,573,751 100 %
Less allowance for credit losses - Loans (“ACL-Loans”)31,388 13,972 
Loans, net
$2,877,405 $2,559,779 
Allowance for credit losses - Loans to loans1.08 %0.54 %
Accrued interest on loans totaled $8 million and $7 million at September 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 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 - loans is summarized as follows.
Nine Months EndedYear Ended
(in thousands)September 30, 2020September 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 losses9,000 900 1,200 
Charge-offs(1,002)(629)(927)
Recoveries133 196 546 
Net (charge-offs) recoveries
(869)(433)(381)
Ending balance$31,388 $13,620 $13,972 
The following table presents the balance and activity in the ACL-Loans by portfolio segment.
Nine Months Ended September 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 
Provision2,061 1,616 636 2,205 462 93 1,561 182 184 9,000 
Charge-offs(602)(257)— (20)— — — — (123)(1,002)
Recoveries90 — — — — — 7 18 18 133 
Net (charge-offs) recoveries(512)(257)— (20)— — 7 18 (105)(869)
Ending balance$10,779 $5,618 $1,576 $5,755 $927 $585 $4,523 $1,068 $557 $31,388 
As % of ACL-Loans34 %18 %5 %18 %3 %2 %14 %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 September 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 $250,000, collateral dependent loans, and other loans with evidence of credit deterioration. The specific reserve in the ACL-Loans for these credit deteriorated loans is equal to the aggregate collateral or discounted cash flow shortfall. Management allocates the ACL-Loans with historical loss rates by loan segment. The loss factors are measured on a quarterly basis and applied to each loan segment based on current loan balances and projected for their expected remaining life. Next, management allocates the ACL-Loans using the qualitative factors mentioned above. Consideration is given to those current qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the historical loss experience of each loan segment. Lastly, management considers reasonable and supportable forecasts to assess the collectability of future cash flows.
A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. For collateral dependent loans, expected credit losses are based on the fair value of the collateral at the balance sheet date, with consideration for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. The following table presents collateral dependent loans by portfolio segment and collateral type, including those loans with and without a related allowance allocation as of September 30, 2020.
September 30, 2020Collateral Type
(in thousands)Real EstateOther Business AssetsTotalWithout an AllowanceWith an AllowanceAllowance Allocation
Commercial & industrial$— $2,579 $2,579 $— $2,579 $848 
PPP loans— — — — — — 
Owner-occupied CRE1,986 — 1,986 1,986 — — 
Agricultural625 1,455 2,080 727 1,353 164 
CRE investment897 — 897 897 — — 
Construction & land development533 — 533 533 — — 
Residential construction— — — — — — 
Residential first mortgage— — — — — — 
Residential junior mortgage— — — — — — 
Retail & other— — — — — — 
Total loans$4,041 $4,034 $8,075 $4,143 $3,932 $1,012 

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.
September 30, 2020
(in thousands)30-89 Days Past
Due (accruing)		90 Days & Over or nonaccrualCurrentTotal
Commercial & industrial$40 $3,011 $732,480 $735,531 
PPP loans— — 335,236 335,236 
Owner-occupied CRE1,380 2,471 495,754 499,605 
Agricultural127 2,297 108,598 111,022 
CRE investment— 911 474,139 475,050 
Construction & land development68 533 121,046 121,647 
Residential construction— — 57,496 57,496 
Residential first mortgage543 1,312 426,162 428,017 
Residential junior mortgage75 411 111,687 112,173 
Retail & other401 51 32,564 33,016 
Total loans$2,634 $10,997 $2,895,162 $2,908,793 
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.
September 30, 2020December 31, 2019
(in thousands)Nonaccrual Loans% of TotalNonaccrual Loans% of Total
Commercial & industrial$3,011 27 %$6,249 44 %
PPP loans— — — — 
Owner-occupied CRE2,471 23 3,311 23 
Agricultural2,297 21 1,898 14 
CRE investment911 8 1,073 8 
Construction & land development533 5 20 — 
Residential construction— — — — 
Residential first mortgage1,312 12 1,090 8 
Residential junior mortgage411 4 480 3 
Retail & other51 — 1 — 
Nonaccrual loans
$10,997 100 %$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.
September 30, 2020Amortized Cost Basis by Origination Year
(in thousands)20202019201820172016PriorRevolvingRevolving to TermTOTAL
Commercial & industrial (a)
Grades 1-4$429,518 $135,539 $107,712 $78,205 $26,209 $55,141 $188,738 $— $1,021,062 
Grade 5649 3,300 3,584 588 1,427 2,483 15,098 — 27,129 
Grade 673 21 765 5,604 176 33 2,405 — 9,077 
Grade 71,959 1,153 1,562 714 460 4,941 2,710 — 13,499 
Total$432,199 $140,013 $113,623 $85,111 $28,272 $62,598 $208,951 $— $1,070,767 
Owner-occupied CRE
Grades 1-4$52,625 $67,705 $82,734 $56,258 $47,267 $160,406 $1,796 $— $468,791 
Grade 542 842 1,060 7,416 361 6,883 489 — 17,093 
Grade 6— — — 1,723 — 729 — — 2,452 
Grade 7— 334 279 2,170 1,747 6,739 — — 11,269 
Total$52,667 $68,881 $84,073 $67,567 $49,375 $174,757 $2,285 $— $499,605 
Agricultural
Grades 1-4$11,683 $6,138 $8,095 $9,328 $3,046 $33,620 $22,828 $— $94,738 
Grade 5304 375 717 570 667 5,374 683 — 8,690 
Grade 6— — — 328 392 — — — 720 
Grade 7— — 33 111 1,139 5,543 48 — 6,874 
Total$11,987 $6,513 $8,845 $10,337 $5,244 $44,537 $23,559 $— $111,022 
CRE investment
Grades 1-4$67,988 $81,809 $44,047 $69,685 $35,332 $156,073 $6,742 $— $461,676 
Grade 5— — 101 1,295 840 5,636 — — 7,872 
Grade 6— 104 — 804 652 1,122 — — 2,682 
Grade 7— — — — 142 2,678 — — 2,820 
Total$67,988 $81,913 $44,148 $71,784 $36,966 $165,509 $6,742 $— $475,050 
Construction & land development
Grades 1-4$46,088 $36,507 $15,573 $3,067 $2,192 $8,930 $4,211 $— $116,568 
Grade 5— 470 2,683 545 — 24 457 — 4,179 
Grade 6— — — — — — — — — 
Grade 7— — — — — 900 — — 900 
Total$46,088 $36,977 $18,256 $3,612 $2,192 $9,854 $4,668 $— $121,647 
Residential construction
Grades 1-4$29,372 $26,039 $1,216 $449 $— $50 $— $— $57,126 
Grade 5— 315 — 55 — — — — 370 
Grade 6— — — — — — — — — 
Grade 7— — — — — — — — — 
Total$29,372 $26,354 $1,216 $504 $— $50 $— $— $57,496 
Residential first mortgage
Grades 1-4$94,370 $69,301 $45,425 $45,798 $47,449 $118,317 $364 $— $421,024 
Grade 5— 821 908 197 324 2,232 — — 4,482 
Grade 6— — 261 — — — — — 261 
Grade 7— 653 198 17 — 1,382 — — 2,250 
Total$94,370 $70,775 $46,792 $46,012 $47,773 $121,931 $364 $— $428,017 
Residential junior mortgage
Grades 1-4$3,650 $4,613 $4,390 $1,475 $1,730 $3,794 $90,596 $1,478 $111,726 
Grade 5— — — — — 33 — — 33 
Grade 6— — — — — — — — — 
Grade 7— — — 28 — 258 128 — 414 
Total$3,650 $4,613 $4,390 $1,503 $1,730 $4,085 $90,724 $1,478 $112,173 
Retail & other
Grades 1-4$7,693 $6,027 $2,208 $1,808 $876 $1,514 $12,839 $— $32,965 
Grade 5— — — — — — — — — 
Grade 6— — — — — — — — — 
Grade 7— — — — — 51 — — 51 
Total$7,693 $6,027 $2,208 $1,808 $876 $1,565 $12,839 $— $33,016 
Total loans$746,014 $442,066 $323,551 $288,238 $172,428 $584,886 $350,132 $1,478 $2,908,793 
(a) For purposes of this table, the $335 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.
September 30, 2020
(in thousands)Grades 1- 4Grade 5Grade 6Grade 7Total
Commercial & industrial$685,826 $27,129 $9,077 $13,499 $735,531 
PPP loans335,236 — — — 335,236 
Owner-occupied CRE468,791 17,093 2,452 11,269 499,605 
Agricultural94,738 8,690 720 6,874 111,022 
CRE investment461,676 7,872 2,682 2,820 475,050 
Construction & land development116,568 4,179 — 900 121,647 
Residential construction57,126 370 — — 57,496 
Residential first mortgage421,024 4,482 261 2,250 428,017 
Residential junior mortgage111,726 33 — 414 112,173 
Retail & other32,965 — — 51 33,016 
Total loans$2,785,676 $69,848 $15,192 $38,077 $2,908,793 
Percent of total95.8 %2.4 %0.5 %1.3 %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 September 30, 2020, there were six loans classified as troubled debt restructurings with a current outstanding balance of $1.1 million and pre-modification balance of $1.9 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 nine months ended September 30, 2020. As of September 30, 2020, there were no commitments to lend additional funds to debtors whose terms have been modified in troubled debt restructurings.