10-Q 1 t77095_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, 2013

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 333-90052
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 54301
(920) 430-1400
(Address, including zip code, and telephone number, including area code, of
Registrant’s principal executive offices)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o      Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
 
As of August 5, 2013 there were 4,227,622 shares of $0.01 par value common stock outstanding.
 
 
 

 

 
Nicolet Bankshares, Inc.
 
TABLE OF CONTENTS
         
PART I
FINANCIAL INFORMATION
 
PAGE
         
 
Item 1.
Financial Statements:
   
         
   
Consolidated Balance Sheets
   
   
June 30, 2013 (unaudited) and December 31, 2012
 
3
         
   
Consolidated Statements of Income
   
   
Three Months and Six Months Ended June  30, 2013 and 2012 (unaudited)
 
4
         
   
Consolidated Statements of Comprehensive Income
   
   
Three Months and Six Months Ended June 30, 2013 and 2012 (unaudited)
 
5
         
   
Consolidated Statement of Changes in Stockholders’ Equity
   
   
Six Months Ended June 30, 2013 (unaudited)
 
6
         
   
Consolidated Statements of Cash Flows
   
   
Six Months Ended June 30, 2013 and 2012 (unaudited)
 
7
         
   
Notes to Consolidated Financial Statements
 
8-26
         
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
27-50
         
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
51
         
 
Item 4.
Controls and Procedures
 
51
         
PART II
OTHER INFORMATION
   
         
 
Item 1.
Legal Proceedings
 
51
         
 
Item 1A.
Risk Factors
 
51
         
 
Item 2.
Unregistered Sales of Equity Securities and Use of  Proceeds
 
51
         
 
Item 3.
Defaults Upon Senior Securities
 
51
         
 
Item 4.
Mine Safety Disclosures
 
51
         
 
Item 5.
Other Information
 
51
         
 
Item 6.
Exhibits
 
52
         
   
Signatures
 
52
 
 
 

 

 
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements:
 
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)
 
   
June 30, 2013
(Unaudited)
   
December 31, 2012
(Audited)
 
Assets
           
Cash and due from banks
  $ 7,511     $ 26,988  
Interest-earning deposits
    27,998       54,516  
Federal funds sold
    637       499  
Cash and cash equivalents
    36,146       82,003  
Certificates of deposit in other banks
    1,960       -  
Securities available for sale (“AFS”)
    129,988       55,901  
Other investments
    7,531       5,221  
Loans held for sale
    3,142       7,323  
Loans
    840,546       552,601  
Allowance for loan losses
    (7,658 )     (7,120 )
Loans, net
    832,888       545,481  
Premises and equipment, net
    29,224       19,602  
Bank owned life insurance
    23,352       18,697  
Accrued interest receivable and other assets
    24,209       11,027  
Total assets
  $ 1,088,440     $ 745,255  
 
Liabilities and Stockholders’ Equity
               
Liabilities:
               
Demand
  $ 150,460     $ 108,234  
Money market and NOW accounts
    387,378       322,507  
Savings
    90,201       46,907  
Time
    280,044       138,445  
Total deposits
    908,083       616,093  
Short-term borrowings
    33,231       4,035  
Notes payable
    25,040       35,155  
Junior subordinated debentures
    12,029       6,186  
Accrued interest payable and other liabilities
    8,730       6,408  
     Total liabilities
    987,113       667,877  
                 
Stockholders’ Equity:
               
Preferred equity
    24,400       24,400  
Common stock
    42       34  
Additional paid-in capital
    49,147       36,243  
Retained earnings
    26,575       14,973  
Accumulated other comprehensive income (“AOCI”)
    1,140       1,683  
Total Nicolet Bankshares Inc. stockholders’ equity
    101,304       77,333  
Noncontrolling interest
    23       45  
Total stockholders’ equity and noncontrolling interest
    101,327       77,378  
                 
Total liabilities, noncontrolling interest and stockholders’ equity
  $ 1,088,440     $ 745,255  
                 
Preferred shares authorized (no par value)
    10,000,000       10,000,000  
Preferred shares issued
    24,400       24,400  
Common shares authorized (par value $0.01 per share)
    30,000,000       30,000,000  
Common shares outstanding
    4,227,622       3,425,413  
Common shares issued
    4,279,745       3,479,888  
 
See accompanying notes to consolidated financial statements.
 
3
 

 

 
ITEM 1.  Financial Statements Continued:
 
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except share and per share data) (Unaudited)
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
Interest income:
                       
    Loans, including loan fees
  $ 9,828     $ 6,530     $ 16,609     $ 12,986  
    Investment securities:
                               
      Taxable
    278       157       405       319  
      Non-taxable
    187       205       360       419  
   Other interest income
    65       51       145       123  
         Total interest income
    10,358       6,943       17,519       13,847  
Interest expense:
                               
    Money market and NOW accounts
    463       398       977       804  
    Savings and time deposits
    562       747       1,049       1,713  
    Short term borrowings
    6       1       7       2  
    Junior subordinated debentures
    165       125       289       250  
    Notes payable
    344       338       627       675  
         Total interest expense
    1,540       1,609       2,949       3,444  
                Net interest income
    8,818       5,334       14,570       10,403  
Provision for loan losses
    975       1,125       1,950       2,375  
         Net interest income after provision for loan losses
    7,843       4,209       12,620       8,028  
Noninterest income:
                               
    Service charges on deposit accounts
    470       280       754       567  
    Trust services fee income
    1,074       724       1,876       1,454  
    Mortgage income
    714       671       1,586       1,408  
    Brokerage fee income
    115       81       217       165  
    Gain on sale of assets, net
    45       237       49       383  
    Bank owned life insurance
    212       183       381       336  
    Rent income
    274       240       524       480  
    Investment advisory fees
    76       85       162       171  
    Bargain purchase gain
    10,435       -       10,435       -  
    Other
    351       176       538       337  
         Total noninterest income
    13,766       2,677       16,522       5,301  
Noninterest expense:
                               
    Salaries and employee benefits
    5,555       3,393       9,114       6,666  
    Occupancy, equipment and office
    1,466       1,102       2,570       2,241  
    Business development and marketing
    473       352       898       697  
    Data processing
    572       410       995       812  
  FDIC assessments
    130       138       240       274  
    Core deposit intangible amortization
    286       168       434       336  
    Other
    1,104       446       1,675       768  
         Total noninterest expense
    9,586       6,009       15,926       11,794  
                                 
         Income before income tax expense
    12,023       877       13,216       1,535  
Income tax expense
    547       232       966       375  
         Net income
    11,476       645       12,250       1,160  
Less: Net income attributable to noncontrolling interest
    19       13       38       26  
         Net income attributable to Nicolet Bankshares, Inc.
    11,457       632       12,212       1,134  
Less:  Preferred stock dividends and discount accretion
    305       305       610       610  
         Net income available to common shareholders
  $ 11,152     $ 327     $ 11,602     $ 524  
                                 
Basic earnings per common share
  $ 2.79     $ 0.09     $ 3.12     $ 0.16  
Diluted earnings per common share
  $ 2.78     $ 0.09     $ 3.11     $ 0.16  
 
Weighted average common shares outstanding:
                               
    Basic
    3,999,732       3,452,209       3,717,627       3,466,282  
    Diluted
    4,008,426       3,463,137       3,728,599       3,481,791  
 
See accompanying notes to consolidated financial statements.
 
4
 

 

 
ITEM 1.  Financial Statements Continued:
 
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands) (Unaudited)
 
   
Three Months Ended
    Six Months Ended  
   
June 30,
   
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
Net income
  $ 11,476     $ 645     $ 12,250     $ 1,160  
Other comprehensive income, net of tax:
                               
Securities available for sale:
                               
Net unrealized holding gains/(losses) arising during the period
    (1,645 )     119       (1,130 )     633  
Less: reclassification adjustment for net (gains)/losses realized in net income
    239       (232 )     239       (440 )
Net unrealized gains/losses on securities before tax expense
    (1,406 )     (113 )     (891 )     193  
Income tax expense/(benefit)
    549       39       348       (65 )
Total other comprehensive income
    (857 )     (74 )     (543 )     128  
Comprehensive income
  $ 10,619     $ 571     $ 11,707     $ 1,288  
 
See accompanying notes to consolidated financial statements.
 
5
 

 

 
ITEM 1.  Financial Statements Continued:
 
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders’ Equity
(In thousands) (Unaudited)
                                                       
   
Nicolet Bankshares, Inc. Stockholders’ Equity
             
   
Preferred
Equity
   
Common
Stock
   
Additional
Paid-In
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income
   
 
 
Noncontrolling
Interest
   
 
 
 
Total
 
Balance, December 31, 2012
  $ 24,400     $ 34     $ 36,243     $ 14,973     $ 1,683     $ 45     $ 77,378  
Comprehensive income
    -       -       -       12,212       (543 )     38       11,707  
Stock compensation expense
    -       -       342       -       -       -       342  
Exercise of stock options
    -       -       206       -       -       -       206  
Purchase and retirement of common stock
    -       -       (63 )     -       -       -       (63 )
Common stock issued, net of capitalized issuance costs of $401
    -       8       12,419       -       -       -       12,427  
Preferred stock dividends
    -       -       -       (610 )     -       -       (610 )
Distribution from noncontrolling interest
    -       -       -       -       -       (60 )     (60 )
Balance, June 30, 2013
  $ 24,400     $ 42     $ 49,147     $ 26,575     $ 1,140     $ 23     $ 101,327  
 
See accompanying notes to consolidated financial statements.
 
6
 

 

 
ITEM 1.  Financial Statements Continued:
 
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(In thousands) (Unaudited)
 
                 
   
Six Months Ended June 30,
 
   
2013
   
2012
 
Cash Flows From Operating Activities:
           
Net income
  $ 12,250     $ 1,160  
Adjustments to reconcile net income to net cash provided by operating activities:
               
     Depreciation, amortization, and accretion
    1,985       1,233  
     Provision for loan losses
    1,950       2,375  
     Increase in cash surrender value of life insurance
    (381 )     (336 )
     Stock compensation expense
    342       241  
     Gain on sale of assets, net
    (49 )     (383 )
     Gain on sale of loans held for sale, net
    (1,586 )     (1,408 )
     Proceeds from sale of loans held for sale
    95,965       90,266  
     Origination of loans held for sale
    (90,198 )     (81,727 )
     Bargain purchase gain
    (10,435 )     -  
     Net change in:
               
          Accrued interest receivable and other assets
    366       256  
  Accrued interest payable and other liabilities
    1,354       2,489  
          Net cash provided by operating activities
    11,563       14,166  
Cash Flows From Investing Activities:
               
Net decrease in certificates of deposit in other banks
    -       248  
Net increase in loans
    (19,689 )     (47,901 )
Purchases of securities available for sale
    (8,711 )     (11,830 )
Proceeds from sales of securities available for sale
    43,945       5,415  
Proceeds from calls and maturities of securities available for sale
    8,089       3,692  
Purchase of other investments
    (8 )     (2 )
Purchase of bank owned life insurance
    -       (3,750 )
Purchase of premises and equipment
    (1,246 )     (1,632 )
Proceeds from sale of other real estate and other assets
    993       877  
Net cash received in business combination
    13,898       -  
          Net cash provided (used) by investing activities
    37,271       (54,883 )
Cash Flows From Financing Activities:
               
Net decrease in deposits
    (54,152 )     (11,641 )
Net change in short term borrowings
    3,091       (2,451 )
Proceeds from notes payable
    -       3,800  
Repayments of notes payable
    (45,809 )     (108 )
Purchase of common stock
    (63 )     (814 )
Stock issuance costs
    (401 )     -  
Issuance of common stock
    3,107       -  
Proceeds from exercise of common stock options
    206       -  
Noncontrolling interest in joint venture
    (60 )     (100 )
Cash dividends paid on preferred stock
    (610 )     (610 )
          Net cash used by financing activities
    (94,691 )     (11,924 )
        Net decrease in cash and cash equivalents
    (45,857 )     (52,641 )
Cash and cash equivalents:
               
Beginning
  $ 82,003     $ 92,129  
Ending
  $ 36,146     $ 39,488  
Supplemental Disclosures of Cash Flow Information:
               
 Cash paid for interest
  $ 2,241     $ 3,477  
 Cash paid for taxes
    1,018       726  
 Transfer of loans to other real estate owned
    2,116       1,169  
 Acquisition:
               
   Fair value of assets acquired
    435,692       -  
   Fair value of liabilities assumed
    415,067       -  
   Net assets acquired
    20,625       -  
See accompanying notes to consolidated financial statements.
               
 
7
 

 

 
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
 
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 Nicolet Bankshares, Inc. (the “Company”) and its subsidiaries, consolidated balance sheets, and statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the periods presented, and all such adjustments are of a normal recurring nature.  All material intercompany transactions and balances are eliminated.  The results of operations for the interim periods are not necessarily indicative of the results to be expected for the entire year.
 
These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been omitted or abbreviated.  These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes for the year ended December 31, 2012 which is contained in the Joint Proxy Statement-Prospectus dated March 26, 2013, as filed with the Securities and Exchange Commission pursuant to Rule 424(b)(5) under the Securities Act of 1933, as amended (the “Securities Act”) on March 27, 2013.
 
Preparation of 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, useful lives for depreciation and amortization, fair value of financial instruments, 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 and the assessment of deferred tax assets and liabilities, and therefore are critical accounting policies.  Management does not anticipate any material changes to estimates in the near term. 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, and changes in applicable banking regulations. 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.
 
The following information related to critical accounting policies has been expanded within this document to include the discussion on policies which were impacted by the acquisition.
 
Business Combinations and Method of Accounting for Loans Acquired
 
The Company accounts for its acquisitions under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets and liabilities acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in FASB ASC Topic 820, Fair Value Measurements and Disclosures. The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of expected principal, interest and other cash flows.
 
Acquired loans are recorded at their estimated fair value at the acquisition date, and are initially classified as either purchase credit impaired (“PCI”) loans (i.e. loans that reflect credit deterioration since origination and it is probable at acquisition that the Company will be unable to collect all contractually required payments) or purchased non-impaired loans. PCI loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality, formerly American Institute of Certified Public Accountants (“AICPA”) Statement of Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer.  The Company estimates the amount and timing of expected principal, interest and other cash flows for each loan or pool of loans meeting the criteria above, and determines the excess of the loan’s scheduled contractual
 
principal and contractual interest payments over all cash flows expected to be collected at acquisition as an amount that should not be accreted.   These credit discounts (“nonaccretable marks”) are included in the determination of initial fair value for acquired loans; therefore, an allowance for loan losses is not recorded at the acquisition date. Differences between the estimated fair values and expected cash flows of acquired loans at the acquisition date that are not credit-based (“accretable marks”) are subsequently accreted to interest income over the estimated life of the loans using a method that approximates a level yield method if the timing and amount of the future cash flows is reasonably estimable.
 
8
 

 

 
Subsequent to the acquisition date for PCI loans, increases in cash flows over those expected at the acquisition date are recognized prospectively as interest income. Decreases in expected cash flows after the acquisition date are recognized through the provision for loan losses.
 
Loans acquired through business combinations that do not meet the specific criteria of FASB ASC Topic 310-30, but for which a discount is attributable at least in part to credit quality, are also accounted for under this guidance. All fair value discounts on acquired loans were deemed to be credit related at acquisition in the Mid-Wisconsin merger.  The nonaccretable difference represents cash flows not expected to be collected. Subsequently, based on re-evaluation of cash flows and facts available, some nonaccretable differences may be reclassified to accretable.
 
Allowance for loan losses
 
The allowance for loan and lease losses related to PCI loans is based on an analysis that is performed each period to estimate the expected cash flows for each loan deemed PCI. To the extent that the expected cash flows of a PCI loan have decreased since the acquisition date, the Company establishes or increases the allowance for loan losses.
 
For acquired loans that are not deemed credit impaired at acquisition, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value. Subsequent to the purchase date, the methods utilized to estimate the required allowance for loan losses for these loans is similar to originated loans.  The remaining differences between the purchase price and the unpaid principal balance at the date of acquisition are recorded in interest income over the economic life of the loans.
 
Income Taxes
 
Deferred income taxes are recognized for the tax consequences of temporary differences between financial statement carrying amounts and the tax bases of existing assets and liabilities that will result in taxable or deductible amounts in future years. These temporary differences are multiplied by the enacted income tax rate expected to be in effect when the taxes become payable or receivable. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced, if necessary, by the amount of such benefits that are not expected to be realized based on available evidence.  At acquisition, deferred taxes were evaluated in respect to the acquired assets and assumed liabilities (including the acquired net operating losses), and a net deferred tax asset was recorded.  Certain limitations within the provisions of the tax code are placed on the amount of net operating losses which can be utilized as part of acquisition accounting rules and were incorporated into the calculation of the deferred tax asset.  In addition, a portion of the fair market value discounts on PCI loans which resolve in the first twelve months after the acquisition may be disallowed under provisions of the tax code.
 
9
 

 

 
Note 2 – Acquisition
 
On April 26, 2013, the Company consummated its acquisition of Mid-Wisconsin Financial Services, Inc. (“Mid-Wisconsin”), pursuant to the Agreement and Plan of Merger by and among the Company and Mid-Wisconsin dated November 28, 2012, as amended January 17, 2013 (the “Merger Agreement”), whereby Mid-Wisconsin was merged with and into the Company, and Mid-Wisconsin Bank, Mid-Wisconsin’s wholly owned commercial bank subsidiary serving central Wisconsin, was merged with and into Nicolet National Bank.  The system integration was completed, and the eleven branches of Mid-Wisconsin opened on April 29, 2013 as Nicolet National Bank branches, doubling the Bank’s footprint to 22 branch locations.
 
The purpose of the merger was for strategic reasons beneficial to the Company. The acquisition is consistent with its growth plans to build a community bank of sufficient size to flourish in various economic environments, serve its expanded customer base with a wide variety of products and services, and effectively and efficiently meet growing regulatory compliance and capital requirements.  The Company believes it is well-positioned to achieve stronger financial performance and enhance shareholder value through synergies of the combined operations.
 
Pursuant to the terms of the Merger Agreement, the outstanding shares of Mid-Wisconsin common stock, other than dissenting shares as defined in the merger agreement, were converted into the right to receive 0.3727 shares of Company common stock (and in lieu of any fractional share of Company common stock, $16.50 in cash) per share of Mid-Wisconsin common stock or, for record holders of 200 or fewer shares of Mid-Wisconsin common stock, $6.15 in cash per share of Mid-Wisconsin common stock.  As a result, the total value of the consideration to Mid-Wisconsin shareholders was $10.2 million, consisting of $0.5 million in cash and 589,159 shares of the Company’s common stock. The Company’s common stock was valued at $16.50 per share, which was the value assigned in the merger agreement and considered to be the fair value of the stock on the date of the acquisition.  Concurrently with the merger, the Company also closed a private placement of 174,016 shares of its common stock at an offering price of $16.50 per share, for an aggregate of $2.9 million in proceeds.    Approximately $401,000 in direct stock issuance costs for the merger and private placement were incurred and charged against additional paid in capital.
 
The Company accounted for the transaction under the acquisition method of accounting, and thus, the financial position and results of operations of Mid-Wisconsin 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 fair values at the date of acquisition. The Company determined the fair value of core deposit intangibles, securities, premises and equipment, loans, OREO, deposits, debt and deferred taxes with the assistance of third party valuations, appraisals, and third party advisors.  The estimated fair values will be subject to refinement as additional information relative to the closing date fair values becomes available through the measurement period of approximately one year from consummation.
 
The fair value of the assets acquired and liabilities assumed on April 26, 2013 was as follows:
                             
 
(in millions)
 
As recorded by
Mid-Wisconsin
   
Fair Value
Adjustments
     
As recorded
by Nicolet
 
Cash, cash equivalents and securities available for sale
  $ 134     $ (1 )     $ 133  
Loans,net
    284       (12 )       272  
Other real estate owned
    5       (3 )       2  
Core deposit intangible
    -       4         4  
Premises, equipment, and other assets
    17       7   (1)     24  
Total assets acquired
  $ 440     $ (5 )     $ 435  
                           
Deposits
  $ 345     $ 1       $ 346  
Junior subordinated debentures, borrowings and other liabilities
    72       (3 ) (2)     69  
Total liabilities acquired
  $ 417     $ (2 )     $ 415  
                           
Excess of assets acquired over liabilities acquired
  $ 23     $ (3 )     $ 20  
Less: purchase price
                    $ 10  
Bargain purchase gain
                    $ 10  
 
(1) Includes premises and equipment adjustment of $2 million and deferred tax asset of $5 million.
(2) Includes borrowings adjustment increase of $2 million and subordinated debentures adjustment decrease of $5 million.
 
10
 

 

 
The following unaudited pro forma information presents the results of operations for three months ended and six months ended June 30, 2013 and 2012, as if the acquisition had occurred January 1 of each year. The Company expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts.  These unaudited pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined company that would have been achieved had the acquisition occurred at the beginning of each period presented, nor are they intended to represent or be indicative of future results of operations.
                                 
   
Three Months Ended
   
Six Months Ended
 
   
June 30, 2013
   
June 30, 2012
   
June 30, 2013
   
June 30, 2012
 
(in thousands)
                       
Total revenues, net of interest expense
  $ 23,709     $ 12,581     $ 36,681     $ 24,911  
Net income
    10,599       (539 )     11,247       (240 )
 
11
 

 

 
Note 3 – Earnings per Common Share
 
Basic earnings per common share are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period.  Diluted earnings per share is 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,
 
   
2013
   
2012
   
2013
   
2012
 
(In thousands except per share data)
                       
Net income, net of noncontrolling interest
  $ 11,457     $ 632     $ 12,212     $ 1,134  
Less: preferred stock dividends
    305       305       610       610  
Net income available to common shareholders
  $ 11,152     $ 327     $ 11,602     $ 524  
Weighted average common shares outstanding
    4,000       3,452       3,718       3,466  
Effect of dilutive stock instruments
    8       11       11       16  
Diluted weighted average common shares outstanding
    4,008       3,463       3,729       3,482  
Basic earnings per common share*
  $ 2.79     $ 0.09     $ 3.12     $ 0.16  
Diluted earnings per common share*
  $ 2.78     $ 0.09     $ 3.11     $ 0.16  
 
*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.
 
Note 4 – Stock-based compensation
 
Activity of the Company’s Stock Incentive Plans is summarized in the following tables:
                                   
 
Stock Options
 
 
Weighted-
Average Fair
Value of Options
Granted
   
 
Option Shares
Outstanding
   
Weighted-
Average
Exercise Price
   
 
 
Exercisable
Shares
 
Balance – December 31, 2011
          702,907     $ 17.78       533,074  
  Granted
  $ 4.87       184,625       16.50          
  Exercise of stock options
            (25,750 )     12.50          
  Forfeited
            (36,250 )     16.84          
Balance – December 31, 2012
            825,532       17.70       548,623  
  Granted
    -       -       -          
  Exercise of stock options
            (15,625 )     13.20          
  Forfeited
            (3,000 )     12.50          
Balance – June 30, 2013
            806,907     $ 17.80       567,985  
 
Options outstanding at June 30, 2013 are exercisable at option prices ranging from $12.50 to $26.00.  There are 363,583 options outstanding in the range from $12.50 - $17.00, 396,824 options outstanding in the range from $17.01 - $22.00, and 46,500 options outstanding in the range from $22.01 - $26.00.  The exercisable options have a weighted average remaining contractual life of approximately 5 years as of June 30, 2013.
 
Intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the exercise price of the stock options.  The total intrinsic value of options exercised in the first six months of 2013, and full year of  2012 was approximately $48,000, and $103,000, respectively. The weighted average exercise price of stock options exercisable at June 30, 2013 was $18.22.
 
12
 

 

 
Note 4 – Stock-based compensation, continued
               
Restricted Stock
 
 
Weighted-
Average Grant
Date Fair Value
   
Restricted
Shares
Outstanding
 
Balance – December 31, 2011
  $ -       -  
   Granted
    16.50       54,725  
   Vested
    -       -  
   Forfeited
    16.50       (250 )
Balance – December 31, 2012
    16.50       54,475  
   Granted
    16.50       10,606  
   Vested *
    16.50       (12,958 )
   Forfeited
    -       -  
Balance – June 30, 2013
  $ 16.50       52,123  
 
*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 statuatory withholding rate, and 3,812 shares were surrendered accordingly during the six months ended June 30, 2013.
 
The Company recognized approximately $342,000 and $241,000 of stock-based employee compensation expense during the six months ended June 30, 2013 and 2012, respectively, associated with its stock equity awards.  As of June 30, 2013, there was approximately $1.7 million of unrecognized compensation cost related to equity award grants.  The cost is expected to be recognized over the weighted average remaining vesting period of approximately five years.
 
Note 5- Securities Available for Sale
 
Amortized costs and fair values of securities available for sale are summarized as follows:
                                 
   
June 30, 2013
 
(in thousands)
 
Amortized Cost
   
Gross
Unrealized
Gains
   
Gross Unrealized Losses
   
Fair Value
 
U.S. government sponsored enterprises
  $ 1,000     $ 1     $ -     $ 1,001  
State, county and municipals
    51,741       1,159       560       52,340  
Mortgage-backed securities
    73,581       594       912       73,263  
Corporate debt securities
    220       -       -       220  
Equity securities
    1,576       1,588       -       3,164  
    $ 128,118     $ 3,342     $ 1,472     $ 129,988  
                                 
   
December 31, 2012
 
(in thousands)
 
Amortized Cost
   
Gross
Unrealized
Gains
   
Gross Unrealized Losses
   
Fair Values
 
State, county and municipals
  $ 31,642     $ 1,079     $ 34     $ 32,687  
Mortgage-backed securities
    19,876       803       11       20,668  
Equity securities
    1,624       922       -       2,546  
    $ 53,142     $ 2,804     $ 45     $ 55,901  
 
13
 

 

 
Note 5- Securities Available for Sale, continued
 
The following table represents gross unrealized losses and the related 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, at June 30, 2013 and December 31, 2012.
                                               
   
June 30, 2013
 
   
Less than 12 months
   
12 months or more
   
Total
 
(in thousands)
 
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
State, county and municipals
  $ 20,356     $ 560     $ -     $ -     $ 20,356     $ 560  
Mortgage-backed securities
    47,157       912       -       -       47,157       912  
    $ 67,513     $ 1,472     $ -     $ -     $ 67,513     $ 1,472  
       
   
December 31, 2012
 
   
Less than 12 months
   
12 months or more
   
Total
 
(in thousands)
 
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
State, county and municipals
  $ 4,250     $ 34     $ -     $ -     $ 4,250     $ 34  
Mortgage-backed securities
    3,507       11       -       -       3,507       11  
    $ 7,757     $ 45     $ -     $ -     $ 7,757     $ 45  
 
As of June 30, 2013 the Company does not consider securities with unrealized losses to be other-than-temporarily impaired.  The unrealized losses in each category have occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase. 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 and six month periods ending June 30, 2013 or 2012.
 
The amortized cost and fair values of securities available for sale at June 30, 2013 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.  Fair values of securities are estimated based on financial models or prices paid for the same or similar securities.  It is possible interest rates could change considerably, resulting in a material change in estimated fair value.
                 
   
June 30, 2013
 
(in thousands)
 
Amortized Cost
   
Fair Value
 
Due in less than one year
  $ 5,263     $ 5,320  
Due in one year through five years
    38,268       39,124  
Due after five years through ten years
    8,835       8,522  
Due after ten years
    595       595  
      52,961       53,561  
Mortgage-backed securities
    73,581       73,263  
Equity securities
    1,576       3,164  
   Securities available for sale
  $ 128,118     $ 129,988  
 
Proceeds from sales of securities available for sale during the first six months of 2013 and 2012 were approximately $43.9 million and $5.4 million respectively.  Net gains of approximately $239,000 and $440,000 were realized on sales of securities during the first six months of 2013 and 2012.
 
14
 

 

 
Note 6 – Loans, Allowance for Loan Losses, and Credit Quality
 
The loan composition as of June 30, 2013 and December 31, 2012 is summarized as follows.
                         
   
2013
         
2012
       
(in thousands)
 
Amount
   
% of
Total
   
Amount
   
% of
Total
 
Commercial & industrial
  $ 245,856       29.3 %   $ 197,301       35.7 %
Agricultural production
    13,114       1.6       215       0.1  
Owner-occupied commercial real estate (“CRE”)
    181,101       21.5       106,888       19.3  
Agricultural real estate
    38,983       4.6       11,354       2.1  
CRE investment
    117,264       14.0       76,618       13.9  
Construction & land development
    37,754       4.5       21,791       3.9  
Residential construction
    10,288       1.2       7,957       1.4  
Residential first mortgage
    141,255       16.8       85,588       15.5  
Residential junior mortgage
    48,929       5.8       39,352       7.1  
Retail & other
    6,002       0.7       5,537       1.0  
    Loans
    840,546       100.0 %     552,601       100.0 %
Less allowance for loan losses
    7,658               7,120          
    Loans, net
  $ 832,888             $ 545,481          
Allowance for loan losses to loans
    0.91 %             1.29 %        
 
Practically, all of the Company’s loans, commitments, and standby 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 allowance for loan and lease losses (“ALLL”) represents management’s estimate of probable and inherent credit losses in the Company’s loan portfolio at the balance sheet date. In general, estimating the amount of the ALLL is a function of a number of factors, including but not limited to changes in the loan portfolio, net charge-offs, trends in past due and impaired loans, and the level of potential problem loans, all of which may be susceptible to significant change.  To the extent actual outcomes differ from management estimates, additional provisions for loan losses could be required that could adversely affect our earnings or financial position in future periods. Allocations to the ALLL may be made for specific loans but the entire ALLL is available for any loan that, in management’s judgment, should be charged-off or for which an actual loss is realized.
 
The allocation methodology used by the Company includes specific allocations for impaired loans evaluated individually for impairment based on collateral values and for the remaining loan portfolio collectively evaluated for impairment primarily based on historical loss rates and other qualitative factors.  Loan charge-offs and recoveries are based on actual amounts charged-off or recovered by loan category.  Management allocates the ALLL by pools of risk within each loan portfolio.  Due to the short period of time since the acquisition and consistent with acquisition accounting rules, no ALLL has been recorded on acquired loans at June 30, 2013.
 
15
 

 

 
Note 6 – Loans, Allowance for Loan Losses, and Credit Quality, continued
 
The following table presents the balance and activity in the ALLL by portfolio segment and the recorded investment in loans by portfolio segment based on the impairment method for the periods indicated:
 
   
Six Months ended June 30, 2013
 
(in thousands)
ALLL:
 
Commercial
& industrial
   
Agricultural production
   
Owner- occupied
CRE
   
 
Agricultural real estate
   
CRE investment
   
Construction & land development
   
Residential construction
   
Residential first mortgage
   
Residential junior mortgage
   
Retail &
other
   
 
Total
 
Beginning balance
  $ 1,969     $ -     $ 1,069     $ -     $ 337     $ 2,580     $ 137     $ 685     $ 312     $ 31     $ 7,120  
Provision
    170       5       259       12       485       802       36       128       57       (4 )     1,950  
Charge-offs
    (475 )     -       (113 )     -       (639 )     (36 )     -       (86 )     (83 )     (11 )     (1,443 )
Recoveries
    21       -       2       -       -       -       -       6       1       1       31  
Ending balance
  $ 1,685     $ 5     $ 1,217     $ 12     $ 183     $ 3,346     $ 173     $ 733     $ 287     $ 17     $ 7,658  
As percent of ALLL
    22.0 %     0.1 %     15.9 %     0.2 %     2.4 %     43.7 %     2.3 %     9.5 %     3.7 %     0.2 %     100.0 %
                                                                                         
ALLL: Individually evaluated
  $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
ALLL: PCI loans
    -       -       -       -       -       -       -       -       -       -       -  
Collectively evaluated    
    1,685       5       1,217       12       183       3,346       173       733       287       17       7,658  
Ending balance
  $ 1,685     $ 5     $ 1,217     $ 12     $ 183     $ 3,346     $ 173     $ 733     $ 287     $ 17     $ 7,658  
                                                                                         
Loans:
                                                                                       
Individually evaluated
  $ 3     $ -     $ 1,800     $ -     $ 688     $ -     $ -     $ 1,099     $ -     $ 137     $ 3,727  
PCI loans
    1       22       1,746       611       4,858       790       -       2,295       257       -       10,580  
Collectively evaluated
    245,852       13,092       177,555       38,372       111,718       36,964       10,288       137,861       48,672       5,865       826,239  
Total loans
  $ 245,856     $ 13,114     $ 181,101     $ 38,983     $ 117,264     $ 37,754     $ 10,288     $ 141,255     $ 48,929     $ 6,002     $ 840,546  
                                                                                         
Less ALLL
  $ 1,685     $ 5     $ 1,217     $ 12     $ 183     $ 3,346     $ 173     $ 733     $ 287     $ 17     $ 7,658  
Net loans
  $ 244,171     $ 13,109     $ 179,884     $ 38,971     $ 117,081     $ 34,408     $ 10,115     $ 140,522     $ 48,642     $ 5,985     $ 832,888  
 
   
Six Months ended June 30, 2012
 
(in thousands)
ALLL:
 
Commercial
& industrial
   
Agricultural production
   
Owner- occupied
CRE
   
Agricultural real estate
   
CRE investment
   
Construction & land development
   
Residential construction
   
Residential first mortgage
   
Residential junior mortgage
   
Retail &
other
   
Total
 
Beginning balance
  $ 1,965     $ -     $ 347     $ -     $ 393     $ 2,035     $ 311     $ 405     $ 419     $ 24     $ 5,899  
Provision
    729       -       1,096       127       24       (67 )     163       171       96       36       2,375  
Charge-offs
    (77 )     -       (899 )     (127 )     (155 )     (307 )     (395 )     (168 )     (118 )     (38 )     (2,284 )
Recoveries
    30       -       8       -       -       5       -       7       4       1       55  
Ending balance
  $ 2,647     $ -     $ 552     $ -     $ 262     $ 1,666     $ 79     $ 415     $ 401     $ 23     $ 6,045  
As percent of ALLL
    43.8 %     0.0 %     9.1 %     0.0 %     4.3 %     27.6 %     1.3 %     6.9 %     6.6 %     0.4 %     100.0 %
                                                                                         
ALLL: Individually evaluated
  $ -     $ -     $ 165     $ -     $ -     $ -     $ -     $ -     $