10-Q 1 t77761_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 September 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 November 12, 2013 there were 4,233,044 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
September 30, 2013 (unaudited) and December 31, 2012
 
 
3
 
   
 
Consolidated Statements of Income
Three Months and Nine Months Ended September  30, 2013 and 2012 (unaudited)
 
 
4
 
         
   
Consolidated Statements of Comprehensive Income
Three Months and Nine Months Ended September 30, 2013 and 2012 (unaudited)
5
 
         
   
Consolidated Statement of Changes in Stockholders’ Equity
Nine Months Ended September 30, 2013 (unaudited)
 
6
 
         
   
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2013 and 2012 (unaudited)
7
 
   
 
Notes to Unaudited Consolidated Financial Statements
 
8-25
 
 
 
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
26-49
 
 
 
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
50
 
 
 
Item 4.
 
Controls and Procedures
 
50
 
         
PART II
OTHER INFORMATION
   
 
 
Item 1.
 
Item 1A.
 
Legal Proceedings
 
Risk Factors
 
50
 
50
 
 
 
Item 2.
 
Unregistered Sales of Equity Securities and Use of  Proceeds
 
50
 
 
 
Item 3.
 
Defaults Upon Senior Securities
 
50
 
 
 
Item 4.
 
Item 5.
 
Item 6.
 
Mine Safety Disclosures
 
Other Information
 
Exhibits
 
Signatures
 
50
 
50
 
51
 
51
 
 

  2
 

 

 
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements:
 
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)
             
   
September 30, 2013
(Unaudited)
   
December 31, 2012
(Audited)
 
Assets
           
Cash and due from banks
  $ 13,524     $ 26,988  
Interest-earning deposits
    35,321       54,516  
Federal funds sold
    655       499  
Cash and cash equivalents
    49,500       82,003  
Certificates of deposit in other banks
    1,960       -  
Securities available for sale (“AFS”)
    132,356       55,901  
Other investments
    7,982       5,221  
Loans held for sale
    3,333       7,323  
Loans
    871,932       552,601  
Allowance for loan losses
    (9,187 )     (7,120 )
Loans, net
    862,745       545,481  
Premises and equipment, net
    29,486       19,602  
Bank owned life insurance
    23,576       18,697  
Accrued interest receivable and other assets
    23,732       11,027  
Total assets
  $ 1,134,670     $ 745,255  
 
Liabilities and Stockholders’ Equity
               
Liabilities:
               
Demand
  $ 173,002     $ 108,234  
Money market and NOW accounts
    425,125       322,507  
Savings
    95,435       46,907  
Time
    266,628       138,445  
Total deposits
    960,190       616,093  
Short-term borrowings
    17,693       4,035  
Notes payable
    32,482       35,155  
Junior subordinated debentures
    12,079       6,186  
Accrued interest payable and other liabilities
    8,685       6,408  
     Total liabilities
    1,031,129       667,877  
                 
Stockholders’ Equity:
               
Preferred equity
    24,400       24,400  
Common stock
    42       34  
Additional paid-in capital
    49,301       36,243  
Retained earnings
    29,217       14,973  
Accumulated other comprehensive income (“AOCI”)
    580       1,683  
Total Nicolet Bankshares Inc. stockholders’ equity
    103,540       77,333  
Noncontrolling interest
    1       45  
Total stockholders’ equity and noncontrolling interest
    103,541       77,378  
Total liabilities, noncontrolling interest and stockholders’ equity
  $ 1,134,670     $ 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
    4,228,535       3,425,413  
Common shares issued
    4,280,658       3,479,888  
 
See accompanying notes to unaudited 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
September 30,
   
Nine Months Ended
September 30,
 
   
2013
   
2012
   
2013
   
2012
 
Interest income:
                       
   Loans, including loan fees
  $ 12,856     $ 6,815     $ 29,465     $ 19,801  
   Investment securities:
                               
     Taxable
    309       149       714       450  
     Non-taxable
    195       201       555       640  
   Other interest income
    77       47       222       168  
        Total interest income
    13,437       7,212       30,956       21,059  
Interest expense:
                               
   Money market and NOW accounts
    525       418       1,502       1,222  
   Savings and time deposits
    618       694       1,667       2,407  
   Short term borrowings
    11       1       18       3  
   Junior subordinated debentures
    221       127       510       377  
   Notes payable
    259       322       886       997  
       Total interest expense
    1,634       1,562       4,583       5,006  
                Net interest income
    11,803       5,650       26,373       16,053  
Provision for loan losses
    1,975       975       3,925       3,350  
        Net interest income after provision for loan losses
    9,828       4,675       22,448       12,703  
Noninterest income:
                               
    Service charges on deposit accounts
    510       293       1,264       859  
    Trust services fee income
    1,060       759       2,936       2,213  
    Mortgage income
    353       846       1,939       2,254  
    Brokerage fee income
    114       77       331       241  
    Gain on sale of assets, net
    1,333       5       1,382       388  
    Bank owned life insurance
    224       186       605       523  
    Rent income
    204       264       728       744  
    Investment advisory fees
    82       83       244       254  
    Bargain purchase gains
    1,480       -       11,915       -  
    Other
    382       172       920       509  
        Total noninterest income
    5,742       2,685       22,264       7,985  
Noninterest expense:
                               
    Salaries and employee benefits
    5,333       3,325       14,447       9,991  
    Occupancy, equipment and office
    1,822       1,094       4,392       3,335  
    Business development and marketing
    573       437       1,471       1,134  
    Data processing
    724       444       1,719       1,255  
 FDIC assessments
    240       134       480       408  
    Core deposit intangible amortization
    342       155       776       490  
    Other
    1,190       340       2,865       1,109  
        Total noninterest expense
    10,224       5,929       26,150       17,722  
                                 
        Income before income tax expense
    5,346       1,431       18,562       2,966  
Income tax expense
    2,421       453       3,387       828  
        Net income
    2,925       978       15,175       2,138  
Less: net income (loss) attributable to noncontrolling interest
    (22 )     13       16       39  
        Net income attributable to Nicolet Bankshares, Inc.
    2,947       965       15,159       2,099  
Less:  preferred stock dividends and discount accretion
    305       305       915       915  
        Net income available to common shareholders
  $ 2,642     $ 660     $ 14,244     $ 1,184  
                                 
Basic earnings per common share
  $ 0.62     $ 0.19     $ 3.66     $ 0.34  
Diluted earnings per common share
  $ 0.62     $ 0.19     $ 3.65     $ 0.34  
                                 
Weighted average common shares outstanding:
                               
     Basic
    4,228,386       3,414,561       3,889,751       3,449,916  
     Diluted
    4,238,009       3,431,321       3,900,289       3,465,031  
 
See accompanying notes to unaudited 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
September 30,
   
Nine Months Ended
September 30,
 
   
2013
   
2012
   
2013
   
2012
 
Net income
  $ 2,925     $ 978     $ 15,175     $ 2,138  
Other comprehensive (loss) income, net of tax:
                               
Securities available for sale:
                               
  Net unrealized holding gains/(losses) arising during the period
    (475 )     471       (1,604 )     1,105  
    Less: reclassification adjustment for net (gains)/losses realized in net income
    (442 )     -       (203 )     (440 )
Net unrealized gains/losses on securities before tax expense
    (917 )     471       (1,807 )     665  
  Income tax expense/(benefit)
    357       (160 )     704       (226 )
Total other comprehensive (loss) income
    (560 )     311       (1,103 )     439  
Comprehensive income
  $ 2,365     $ 1,289     $ 14,072     $ 2,577  
 
See accompanying notes to unaudited 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
    -       -       -       15,159       (1,103 )     16       14,072  
Stock compensation expense
    -       -       480       -       -       -       480  
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       12,435       -       -       -       12,443  
Preferred stock dividends
    -       -       -       (915 )     -       -       (915 )
Distribution from noncontrolling interest
    -       -       -       -       -       (60 )     (60 )
Balance, September 30, 2013
  $ 24,400     $ 42     $ 49,301     $ 29,217     $ 580     $ 1     $ 103,541  
 
See accompanying notes to unaudited consolidated financial statements.
 
6
 

 

 
ITEM 1.  Financial Statements Continued:
 
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(In thousands) (Unaudited)
       
   
Nine Months Ended September 30,
 
   
2013
   
2012
 
Cash Flows From Operating Activities:
           
Net income
  $ 15,175     $ 2,138  
Adjustments to reconcile net income to net cash provided by operating activities:
               
     Depreciation, amortization, and accretion
    3,149       1,825  
     Provision for loan losses
    3,925       3,350  
     Increase in cash surrender value of life insurance
    (605 )     (523 )
     Stock compensation expense
    480       376  
     Gain on sale of assets, net
    (1,382 )     (388 )
     Gain on sale of loans held for sale, net
    (1,939 )     (2,254 )
     Proceeds from sale of loans held for sale
    120,246       144,716  
     Origination of loans held for sale
    (114,317 )     (134,572 )
     Bargain purchase gain
    (11,915 )     -  
     Net change in:
               
          Accrued interest receivable and other assets
    2,585       (43 )
          Accrued interest payable and other liabilities
    (31 )     320  
          Net cash provided by operating activities
    15,371       14,945  
Cash Flows From Investing Activities:
               
Net decrease in certificates of deposit in other banks
    -       248  
Net increase in loans
    (39,992 )     (77,484 )
Purchases of securities available for sale
    (9,608 )     (11,830 )
Proceeds from sales of securities available for sale
    44,833       5,415  
Proceeds from calls and maturities of securities available for sale
    14,485       7,075  
Purchase of other investments
    (797 )     (9 )
Purchase of bank owned life insurance
    -       (3,750 )
Purchase of premises and equipment
    (2,115 )     (1,720 )
Proceeds from sales of other real estate and other assets
    2,902       1,479  
Net cash received in business combinations
    37,622       -  
          Net cash provided (used) by investing activities
    47,330       (80,576 )
Cash Flows From Financing Activities:
               
Net increase (decrease) in deposits
    (43,780 )     3,322  
Net change in short term borrowings
    (12,447 )     182  
Proceeds from notes payable
    5,000       5,000  
Repayments of notes payable
    (45,867 )     (5,162 )
Purchase of common stock
    (63 )     (1,329 )
Stock issuance costs
    (401 )     -  
Proceeds from issuance of common stock
    3,123       -  
Proceeds from exercise of common stock options
    206       56  
Noncontrolling interest in joint venture
    (60 )     (100 )
Cash dividends paid on preferred stock
    (915 )     (915 )
          Net cash provided (used) by financing activities
    (95,204 )     1,054  
        Net decrease in cash and cash equivalents
    (32,503 )     (64,577 )
Cash and cash equivalents:
               
Beginning
  $ 82,003       92,129  
Ending
  $ 49,500     $ 27,552  
Supplemental Disclosures of Cash Flow Information:
               
Cash paid for interest
  $ 4,759     $ 5,075  
Cash paid for taxes
    2,013       705  
Transfer of loans to other real estate owned
    3,097       1,506  
                 
Acquisitions:
               
  Fair value of assets acquired
    483,446       -  
  Fair value of liabilities assumed
    462,269       -  
  Net assets acquired
    21,177       -  
                 
See accompanying notes to unaudited 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, 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.
 
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 initially recorded in 2013 on acquired loans were deemed to be credit related.  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.
 
Note 2 – Acquisitions
 
Bank of Wausau: On August 9, 2013, Nicolet National Bank entered into an agreement with the Federal Deposit Insurance Corporation (“FDIC”), purchasing selected Bank of Wausau assets and assuming all of its deposits, in a transaction that was effective immediately.  The financial position and results of operations of Bank of Wausau prior to its acquisition date were not included in the accompanying consolidated financial statements. The FDIC-assisted transaction carried no loss-share provisions.  With the addition of Bank of Wausau’s one branch, Nicolet National Bank now operates two branches in Wausau, WI.  As of the acquisition date, the transaction added approximately $47 million in assets at fair value, including mostly cash as well as $9.4 million of investments and $12.5 million in loans, of which $1.4 million were classified as PCI loans.  Of the $42 million of deposits assumed, $18 million were immediately repriced certificates of deposit that were rate-sensitive in nature, and were subsequently redeemed in full by September 30, 2013. Given the nature and rates of the remaining deposits assumed, no core deposit intangible was recorded. The third quarter of 2013 included approximately $0.2 million pre-tax acquisition costs and a $2.4 million pre-tax bargain purchase gain.
 
Mid-Wisconsin Financial Services, Inc. (“Mid-Wisconsin”): On April 26, 2013, the Company consummated its acquisition of 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.
 
9
 

 

 
Note 2 – Acquisitions, continued

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, other real estate owned, 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       8       (1)(3)     25  
Total assets acquired
  $ 440     $ (4 )           $ 436  
                                 
Deposits
  $ 345     $ 1             $ 346  
Junior subordinated debentures, borrowings and other liabilities
    72       (2 )     (2)(3)     70  
Total liabilities acquired
  $ 417     $ (1 )           $ 416  
                                 
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 $6 million.
(2) Includes borrowings adjustment increase of $2 million and subordinated debentures adjustment decrease of $5 million.
(3) Includes a $0.9 million adjustment due to a change in estimate as discussed in Note 11.

The following unaudited pro forma information presents the results of operations for three months ended and nine months ended September 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.
 
10
 

 


Note 2 – Acquisitions, continued

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2013
   
2012
   
2013
   
2012
 
(in thousands)
                       
Total revenues, net of interest expense
  $ 17,697     $ 13,654     $ 46,538     $ 40,290  
Net income
    3,138       1,127       13,347       270  

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
 September 30,
   
Nine Months Ended
 September 30,
 
   
2013
   
2012
   
2013
   
2012
 
(In thousands except per share data)
                       
Net income, net of noncontrolling interest
  $ 2,947     $ 965     $ 15,159     $ 2,099  
Less: preferred stock dividends
    305       305       915       915  
Net income available to common shareholders
  $ 2,642     $ 660     $ 14,244     $ 1,184  
Weighted average common shares outstanding
    4,228       3,415       3,890       3,450  
Effect of dilutive stock instruments
    10       16       10       15  
Diluted weighted average common shares outstanding
    4,238       3,431       3,900       3,465  
Basic earnings per common share*
  $ 0.62     $ 0.19     $ 3.66     $ 0.34  
Diluted earnings per common share*
  $ 0.62     $ 0.19     $ 3.65     $ 0.34  

*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.

Options to purchase approximately 0.5 million shares were outstanding at the quarters and nine months ending September 30, 2013 and 2012, but excluded from the calculation of diluted earnings per common share as the effect would have been anti-dilutive.

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
            (4,250 )     15.06          
Balance – September 30, 2013
            805,657     $ 17.80       570,635  
                                 
Options outstanding at September 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, 396,074 options outstanding in the range from $17.01 - $22.00, and 46,000 options outstanding in the range from $22.01 - $26.00.  The exercisable options have a weighted average remaining contractual life of approximately 4 years as of September 30, 2013.
 
11
 

 


Note 4 – Stock-based Compensation, continued

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 nine 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 September 30, 2013 was $18.24.
 
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 – September 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 statutory withholding rate, and 3,812 shares were surrendered accordingly during the nine months ended September 30, 2013.

The Company recognized approximately $480,000 and $376,000 of stock-based employee compensation expense during the nine months ended September 30, 2013 and 2012, respectively, associated with its stock equity awards.  As of September 30, 2013, there was approximately $1.6 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:

   
September 30, 2013
 
(in thousands)
 
Amortized Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
U.S. government sponsored enterprises
  $ 2,327     $ 4     $ 8     $ 2,323  
State, county and municipals
    55,134       1,072       696       55,510  
Mortgage-backed securities
    72,592       594       1,374       71,812  
Corporate debt securities
    220       -       -       220  
Equity securities
    1,131       1,360       -       2,491  
    $ 131,404     $ 3,030     $ 2,078     $ 132,356  
                                 
   
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  

12
 

 


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 September 30, 2013 and December 31, 2012.

   
September 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
 
U.S. government sponsored enterprises
  $ 509     $ 8     $ -     $ -     $ 509     $ 8  
State, county and municipals
    20,750       696       -       -       20,750       696  
Mortgage-backed securities
    45,334       1,374       -       -       45,334       1,374  
    $ 66,593     $ 2,078     $ -     $ -     $ 66,593     $ 2,078  
       
   
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 September 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 nine month periods ending September 30, 2013 or 2012.

The amortized cost and fair values of securities available for sale at September 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.
   
September 30, 2013
 
(in thousands)
 
Amortized Cost
   
Fair Value
 
Due in less than one year
  $ 10,304     $ 10,377  
Due in one year through five years
    33,682       34,356  
Due after five years through ten years
    12,517       12,159  
Due after ten years
    1,178       1,161  
      57,681       58,053  
Mortgage-backed securities
    72,592       71,812  
Equity securities
    1,131       2,491  
Securities available for sale
  $ 131,404     $ 132,356  
 
Proceeds from sales of securities available for sale during the first nine months of 2013 and 2012 were approximately $44.8 million and $5.4 million respectively.  Net gains of approximately $203,000 and $440,000 were realized on sales of securities during the first nine months of 2013 and 2012.
 
13
 

 


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

The loan composition as of September 30, 2013 and December 31, 2012 is summarized as follows.

   
2013
         
2012
       
(in thousands)
 
Amount
   
% of
Total
   
Amount
   
% of
Total
 
Commercial & industrial
  $ 251,590       28.9 %   $ 197,301       35.7 %
Agricultural production
    14,071       1.6       215       0. 1  
Owner-occupied commercial real estate (“CRE”)
    203,715       23.4       106,888       19.3  
Agricultural real estate
    37,738       4.3       11,354       2.1  
CRE investment
    106,763       12.2       76,618       13.9  
Construction & land development
    38,757       4.4       21,791       3.9  
Residential construction
    12,831       1.5       7,957       1.4  
Residential first mortgage
    150,117       17.2       85,588       15.5  
Residential junior mortgage
    49,518       5.7       39,352       7.1  
Retail & other
    6,832       0.8       5,537       1.0  
Loans
    871,932       100.0 %     552,601       100.0 %
Less allowance for loan losses
    9,187               7,120          
Loans, net
  $ 862,745             $ 545,481          
Allowance for loan losses to loans
    1.05 %             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 acquisitions and consistent with acquisition accounting rules, no ALLL has been recorded on acquired loans at September 30, 2013.

14
 

 


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:
 
   
Nine Months ended September 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
    194       8       (398 )     -       642       3,498       62       (168 )     50       37       3,925  
Charge-offs
    (474 )     -       (113 )     -       (798 )     (319 )     -       (86 )     (142 )     (46 )     (1,978 )
Recoveries
    27       -       83       -       -       -       -       8       1       1       120  
Ending balance
  $ 1,716     $ 8     $ 641     $ -     $ 181     $ 5,759     $ 199     $ 439     $ 221     $ 23     $ 9,187  
As percent of  ALLL
    18.7 %     0.1 %     7.0 %     - %     2.0 %     62.5 %     2.2 %     4.8 %     2.4 %     0.3 %     100.0 %
                                                                                         
ALLL: Individually evaluated
  $ -     $ -     $ -     $ -     $ -     $ 3,230     $ -     $ -     $ -     $ -     $ 3,230  
 Acquired loans subsequently impaired
    -       -       -       -       -       -       -       -       -       -       -  
 PCI loans
    -       -       -       -       -       -       -       -       -       -       -  
Collectively evaluated
    1,716       8       641       -       181       2,529       199       439       221       23       5,957  
Ending balance
  $ 1,716     $ 8     $ 641     $ -     $ 181     $ 5,759     $ 199     $ 439     $ 221     $ 23     $ 9,187  
                                                                                         
Loans:
                                                                                       
Individually
  evaluated
  $ -     $ -     $ -     $ -     $ 857     $ 8,213     $ -     $ 371     $ -     $ -     $ 9,441  
Acquired loans subsequently impaired
    100       -       4,300       -       1,562       529       -       -       -       -       6,491  
PCI loans
    1       13       1,334       444       4,030       691       -       2,216       232       -       8,961  
Collectively evaluated
    251,489       14,058       198,081       37,294       100,314       29,324       12,831       147,530       49,286       6,832       847,039  
Total loans
  $ 251,590     $ 14,071     $ 203,715     $ 37,738     $ 106,763     $ 38,757     $ 12,831     $ 150,117     $ 49,518     $ 6,832     $ 871,932  
                                                                                         
Less ALLL
  $ 1,716     $ 8     $ 641     $ -     $ 181     $ 5,759     $ 199     $ 439     $ 221     $ 23     $ 9,187  
Net loans
  $ 249,874     $ 14,063     $ 203,074     $ 37,738     $ 106,582     $ 32,998     $ 12,632     $ 149,678     $ 49,297     $ 6,809     $ 862,745  
 
   
Nine Months ended September 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
    (533 )     -       1,979       127       394       931       134       334       (29 )     13       3,350  
Charge-offs
    (129 )     -       (1,200 )     (127 )     (305 )     (307 )     (396 )     (216 )     (118 )     (38 )     (2,836 )
Recoveries
    34       -       9       -       -       22       -       7       5       1       78  
Ending balance
  $ 1,337     $ -     $ 1,135     $ -     $ 482     $ 2,681     $ 49     $ 530     $ 277     $ -     $ 6,491  
As percent of ALLL
    20.6 %     - %     17.5 %     - %     7.4 %     41.2 %     0.8 %     8.2 %     4.3 %     0.0 %     100.0 %
                                                                                         
ALLL: Individually evaluated
  $ -     $ -     $ 165     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ 165  
Collectively
  evaluated
    1,337       -       970