10-Q 1 t79216_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 March 31, 2014

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 T No £

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 T No £

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 £           Accelerated filer £
Non-accelerated filer £ (Do not check if a smaller reporting company) Smaller reporting company S

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No S

As of April 30, 2014 there were 4,238,911 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
 
   
March 31, 2014 (unaudited) and December 31, 2013
3
       
   
Consolidated Statements of Income
 
   
Three Months Ended March 31, 2014 and 2013 (unaudited)
4
       
   
Consolidated Statements of Comprehensive Income
 
   
Three Months Ended March 31, 2014 and 2013 (unaudited)
5
       
   
Consolidated Statement of Changes in Stockholders’ Equity
 
   
Three Months Ended March 31, 2014 (unaudited)
6
       
   
Consolidated Statements of Cash Flows
 
   
Three Months Ended March 31, 2014 and 2013 (unaudited)
7
       
   
Notes to Unaudited Consolidated Financial Statements
8-27
       
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
28-47
       
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
48
       
 
Item 4.
Controls and Procedures
48
       
PART II
OTHER INFORMATION
 
       
 
Item 1.
Legal Proceedings
48
       
 
Item 1A.
Risk Factors
48
       
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
48
       
 
Item 3.
Defaults Upon Senior Securities
48
       
 
Item 4.
Mine Safety Disclosures
48
       
 
Item 5.
Other Information
48
       
 
Item 6.
Exhibits
49
       
   
Signatures
49-53
 
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)

   
March 31, 2014
(Unaudited)
   
December 31, 2013
(Audited)
 
Assets
           
Cash and due from banks
  $ 24,343     $ 26,556  
Interest-earning deposits
    129,355       119,364  
Federal funds sold
    2,285       1,058  
Cash and cash equivalents
    155,983       146,978  
Certificates of deposit in other banks
    1,960       1,960  
Securities available for sale (“AFS”)
    133,387       127,515  
Other investments
    8,015       7,982  
Loans held for sale
    3,996       1,486  
Loans
    850,092       847,358  
Allowance for loan losses
    (9,344 )     (9,232 )
Loans, net
    840,748       838,126  
Premises and equipment, net
    29,776       29,845  
Bank owned life insurance
    24,010       23,796  
Accrued interest receivable and other assets
    19,834       21,115  
Total assets
  $ 1,217,709     $ 1,198,803  
 
Liabilities and Stockholders’ Equity
               
Liabilities:
               
Demand
  $ 171,140     $ 171,321  
Money market and NOW accounts
    500,267       492,499  
Savings
    105,787       97,601  
Time
    265,050       273,413  
Total deposits
    1,042,244       1,034,834  
Short-term borrowings
    11,438       7,116  
Notes payable
    32,360       32,422  
Junior subordinated debentures
    12,178       12,128  
Accrued interest payable and other liabilities
    12,211       7,424  
     Total liabilities
    1,110,431       1,093,924  
                 
Stockholders’ Equity:
               
Preferred equity
    24,400       24,400  
Common stock
    42       42  
Additional paid-in capital
    49,674       49,616  
Retained earnings
    32,291       30,138  
Accumulated other comprehensive income (“AOCI”)
    823       666  
Total Nicolet Bankshares, Inc. stockholders’ equity
    107,230       104,862  
Noncontrolling interest
    48       17  
Total stockholders’ equity and noncontrolling interest
    107,278       104,879  
Total liabilities, noncontrolling interest and stockholders’ equity
  $ 1,217,709     $ 1,198,803  
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
    4,240,484       4,241,044  
Common shares issued
    4,299,311       4,303,407  
 
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
March 31,
 
   
2014
   
2013
 
Interest income:
           
Loans, including loan fees
  $ 11,007     $ 6,781  
Investment securities:
               
Taxable
    418       127  
Non-taxable
    173       173  
Other interest income
    135       80  
Total interest income
    11,733       7,161  
Interest expense:
               
Money market and NOW accounts
    593       514  
Savings and time deposits
    688       487  
Short-term borrowings
    3       1  
Junior subordinated debentures
    217       124  
Notes payable
    252       283  
Total interest expense
    1,753       1,409  
Net interest income
    9,980       5,752  
Provision for loan losses
    675       975  
Net interest income after provision for loan losses
    9,305       4,777  
Noninterest income:
               
Service charges on deposit accounts
    494       284  
Trust services fee income
    1,105       802  
Mortgage income
    215       872  
    Brokerage fee income
    160       102  
    Gain on sale of assets, net
    750       4  
    Bank owned life insurance
    214       169  
    Rent income
    300       250  
    Investment advisory fees
    110       86  
    Other
    412       187  
Total noninterest income
    3,760       2,756  
Noninterest expense:
               
    Salaries and employee benefits
    5,295       3,559  
    Occupancy, equipment and office
    1,898       1,104  
    Business development and marketing
    535       425  
    Data processing
    754       423  
 FDIC assessments
    184       110  
    Core deposit intangible amortization
    335       148  
    Other
    587       571  
Total noninterest expense
    9,588       6,340  
                 
        Income before income tax expense
    3,477       1,193  
Income tax expense
    1,232       419  
        Net income
    2,245       774  
Less: net income attributable to noncontrolling interest
    31       19  
        Net income attributable to Nicolet Bankshares, Inc.
    2,214       755  
Less:  preferred stock dividends and discount accretion
    61       305  
        Net income available to common shareholders
  $ 2,153     $ 450  
                 
Basic earnings per common share
  $ 0.51     $ 0.13  
Diluted earnings per common share
  $ 0.50     $ 0.13  
Weighted average common shares outstanding:
               
     Basic
    4,242,887       3,432,387  
     Diluted
    4,283,888       3,445,664  

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
March 31,
 
   
2014
   
2013
 
Net income
  $ 2,245     $ 774  
Other comprehensive income, net of tax:
               
Securities available for sale:
               
Net unrealized holding gains arising during the period
    599       515  
Less: reclassification adjustment for net gains realized in net income
    (341 )     -  
Net unrealized gains on securities before tax expense
    258       515  
Income tax expense
    (101 )     (201 )
Total other comprehensive income
    157       314  
Comprehensive income
  $ 2,402     $ 1,088  

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, 2013
  $ 24,400     $ 42     $ 49,616     $ 30,138     $ 666     $ 17     $ 104,879  
Net income
    -       -       -       2,214       -       31       2,245  
Other comprehensive income
    -       -       -       -       157       -       157  
Stock compensation expense
    -       -       154       -       -       -       154  
Exercise of stock options
    -       -       298       -       -       -       298  
Issuance of common stock
    -       -       16       -       -       -       16  
Purchase and retirement of common stock
    -       -       (410 )     -       -       -       (410 )
Preferred stock dividends
    -       -       -       (61 )     -       -       (61 )
Balance, March 31, 2014
  $ 24,400     $ 42     $ 49,674     $ 32,291     $ 823     $ 48     $ 107,278  

See accompanying notes to unaudited consolidated financial statements.
 
6
 

 

 
ITEM 1.  Financial Statements Continued:
 
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands) (Unaudited)
   
Three Months Ended March 31,
 
   
2014
   
2013
 
Cash Flows From Operating Activities:
 
 
   
 
 
Net income
  $ 2,245     $ 774  
Adjustments to reconcile net income to net cash provided by operating activities:
               
     Depreciation, amortization, and accretion
    829       636  
     Provision for loan losses
    675       975  
 Provision for deferred taxes
    348       -  
     Increase in cash surrender value of life insurance
    (214 )     (169 )
     Stock compensation expense
    154       198  
     Gain on sale of assets, net
    (750 )     (4 )
     Gain on sale of loans held for sale, net
    (215 )     (872 )
     Proceeds from sale of loans held for sale
    10,842       48,338  
     Origination of loans held for sale
    (13,137 )     (42,751 )
     Net change in:
               
Accrued interest receivable and other assets
    (159 )     (419 )
Accrued interest payable and other liabilities
    (1,478 )     (569 )
Net cash provided (used) by operating activities
    (860 )     6,137  
Cash Flows From Investing Activities:
               
Net (increase) decrease in loans
    (3,517 )     7,972  
Purchases of securities AFS
    (6,481 )     (5,992 )
Proceeds from sales of securities AFS
    4,021       -  
Proceeds from calls and maturities of securities AFS
    2,983       1,961  
Purchase of other investments
    (33 )     (8 )
Purchase of premises and equipment
    (513 )     (476 )
Proceeds from sales of other real estate and other assets
    1,762       109  
Net cash provided (used) by investing activities
    (1,778 )     3,566  
Cash Flows From Financing Activities:
               
Net increase (decrease) in deposits
    7,540       (52,895 )
Net change in short-term borrowings
    4,322       (906 )
Repayments of notes payable
    (62 )     (10,059 )
Purchase and retirement of common stock
    (410 )     (19 )
Proceeds from issuance of common stock, net
    16       -  
Proceeds from exercise of common stock options
    298       62  
Cash dividends paid on preferred stock
    (61 )     (305 )
Net cash provided (used) by financing activities
    11,643       (64,122 )
Net increase (decrease) in cash and cash equivalents
    9,005       (54,419 )
Cash and cash equivalents:
               
Beginning
  $ 146,978     $ 82,003  
Ending
  $ 155,983     $ 27,584  
Supplemental Disclosures of Cash Flow Information:
               
Cash paid for interest
  $ 1,930     $ 1,374  
Cash paid for taxes
    125       770  
Transfer of loans to other real estate owned
    601       1,950  
                 
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 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Critical Accounting Policies and Estimates

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, the assessment of deferred tax assets and liabilities, and the valuation of loans acquired in the 2013 acquisitions; therefore, these are critical accounting policies.  Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: external market factors such as market interest rates and employment rates, changes to operating policies and procedures, changes in applicable banking regulations, and changes to deferred tax estimates within the first twelve months after acquisition as allowed by purchase accounting guidelines. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period presented.

There have been no material changes or developments with respect to the assumptions or methodologies that the Company uses when applying what management believes are critical accounting policies and developing critical accounting estimates as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Recent Accounting Developments

Accounting Standards Update (“ASU”) 2013-11 Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This ASU was issued to clarify the balance sheet presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 is applicable to all entities that have an unrecognized tax benefit due to a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company adopted this as required in the first quarter of 2014 with no material impact on the Company’s financial position, results of operations, or disclosures.

8
 

 


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 purchased credit impaired (“PCI”) loans.  Of the $42 million of deposits assumed, $18 million were immediately repriced rate-sensitive certificates of deposit which 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.

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.

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 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.

As of the acquisition date, the transaction added approximately $436 million in assets at fair value, including cash and investments of $133 million, $272 million in loans, of which $15 million were classified as PCI loans, and $31 million of other assets.  Deposits of $346 million and junior subordinated debentures, borrowings and other liabilities of $70 million were acquired in the merger. The excess of assets over liabilities acquired of $20 million less the purchase price of $10 million resulted in a bargain purchase gain (“BPG”) of $10 million.

Proforma results for 2014 periods are not necessary as the 2014 actual results fully include both 2013 acquisitions.  The following unaudited pro forma information presents the results of operations for three months ended March 31, 2013, including BPG, as if the acquisitions had occurred January 1, 2013, the beginning of the annual period prior to the acquisitions. 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 acquisitions 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
March 31, 2013
 
(in thousands)
     
Total revenues, net of interest expense
  $ 24,309  
Net income
    10,496  
 
9
 

 


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
 March 31,
 
   
2014
   
2013
 
(In thousands except per share data)
           
Net income, net of noncontrolling interest
  $ 2,214     $ 755  
Less: preferred stock dividends
    61       305  
Net income available to common shareholders
  $ 2,153     $ 450  
Weighted average common shares outstanding
    4,243       3,432  
Effect of dilutive stock instruments
    41       14  
Diluted weighted average common shares outstanding
    4,284       3,446  
Basic earnings per common share*
  $ 0.51     $ 0.13  
Diluted earnings per common share*
  $ 0.50     $ 0.13  

*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 three months ending March 31, 2014 and 2013, 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, 2012
          825,532     $ 17.70       548,623  
Granted
    -       -       -          
Exercise of stock options
            (23,625 )     12.96          
Forfeited
            (8,750 )     15.78          
Balance – December 31, 2013
            793,157       17.86       600,846  
Granted
    -       -       -          
Exercise of stock options
            (18,215 )     16.35          
Forfeited
            (4,250 )     16.59          
Balance – March 31, 2014
            770,692     $ 17.90       582,381  
                                 
Options outstanding at March 31, 2014 are exercisable at option prices ranging from $12.50 to $26.00.  There are 328,618 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 3 years as of March 31, 2014.
 
10
 

 


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 three months of 2014, and full year of 2013 was approximately $19,000, and $80,000, respectively. The weighted average exercise price of stock options exercisable at March 31, 2014 was $18.31.
 
Restricted Stock
 
Weighted-
Average Grant
Date Fair Value
   
Restricted
Shares
Outstanding
 
Balance – December 31, 2012
  $ 16.50       54,475  
Granted
    16.51       26,506  
Vested*
    16.50       (18,258 )
Forfeited
    16.50       (360 )
Balance – December 31, 2013
    16.50       62,363  
Granted
    -       -  
Vested *
    16.50       (3,536 )
Forfeited
    -       -  
Balance – March 31, 2014
  $ 16.50       58,827  
                 
*The terms of the restricted stock agreements permit the surrender of shares to the Company upon vesting in order to satisfy applicable tax withholding requirements at the minimum statutory withholding rate, and accordingly 1,196 shares were surrendered during the three months ended March 31, 2014 and 5,606 shares were surrendered during 2013.

The Company recognized approximately $154,000 and $198,000 of stock-based employee compensation expense during the three months ended March 31, 2014 and 2013, respectively, associated with its stock equity awards.  As of March 31, 2014, there was approximately $1.4 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 four years.

Note 5- Securities Available for Sale

Amortized costs and fair values of securities available for sale are summarized as follows:

   
March 31, 2014
 
(in thousands)
 
Amortized Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
U.S. government sponsored enterprises
  $ 2,047     $ 3     $ 4     $ 2,046  
State, county and municipals
    62,737       1,030       415       63,352  
Mortgage-backed securities
    66,318       585       1,060       65,843  
Corporate debt securities
    220       -       -       220  
Equity securities
    715       1,211       -       1,926  
    $ 132,037     $ 2,829     $ 1,479     $ 133,387  
                                 
   
December 31, 2013
 
(in thousands)
 
Amortized Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Values
 
U.S. government sponsored enterprises
  $ 2,062     $ 3     $ 8     $ 2,057  
State, county and municipals
    54,594       1,058       613       55,039  
Mortgage-backed securities
    68,642       585       1,348       67,879  
Corporate debt securities
    220       -       -       220  
Equity securities
    905       1,415       -       2,320  
    $ 126,423     $ 3,061     $ 1,969     $ 127,515  
 
11
 

 

 
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 March 31, 2014 and December 31, 2013.

   
March 31, 2014
 
   
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
  $ 516     $ 4     $ -     $ -     $ 516     $ 4  
State, county and municipals
    22,294       415       -       -       22,294       415  
Mortgage-backed securities
    34,860       991       2,845       69       37,705       1,060  
    $ 57,670     $ 1,410     $ 2,845     $ 69     $ 60,515     $ 1,479  
       
   
December 31, 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
  $ 511     $ 8     $ -     $ -     $ 511     $ 8  
State, county and municipals
    17,697       613        -       -       17,697       613  
Mortgage-backed securities
    36,687       1,240       2,920       108       39,607       1,348  
    $ 54,895     $ 1,861     $ 2,920     $ 108     $ 57,815     $ 1,969  

As of March 31, 2014 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-month period ending March 31, 2014 or 2013.

The amortized cost and fair values of securities available for sale at March 31, 2014 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.
 
   
March 31, 2014
 
(in thousands)
 
Amortized Cost
   
Fair Value
 
Due in less than one year
  $ 5,904     $ 5,954  
Due in one year through five years
    45,685       46,404  
Due after five years through ten years
    12,330       12,179  
Due after ten years
    1,085       1,081  
      65,004       65,618  
Mortgage-backed securities
    66,318       65,843  
Equity securities
    715       1,926  
Securities available for sale
  $ 132,037     $ 133,387  
 
Proceeds from sales of securities available for sale during the first three months of 2014 and 2013 were approximately $4.0 million and zero, respectively.  Net gains of approximately $341,000 were realized on sales of securities during the first three months of 2014.
 
12
 

 

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

The loan composition as of March 31, 2014 and December 31, 2013 is summarized as follows.

   
Total
 
   
3/31/2014
         
12/31/2013
       
(in thousands)
 
Amount
   
% of
Total
   
Amount
   
% of
Total
 
Commercial & industrial
  $ 255,652       30.1 %   $ 253,674       29.9 %
Owner-occupied commercial real estate (“CRE”)
    183,056       21.5       187,476       22.1  
Agricultural production
    15,422       1.8       14,256       1.7  
Agricultural real estate
    42,392       5.0       37,057       4.4  
CRE investment
    90,281       10.6       90,295       10.7  
Construction & land development
    42,817       5.0       42,881       5.1  
Residential construction
    12,376       1.5       12,535       1.5  
Residential first mortgage
    155,051       18.2       154,403       18.2  
Residential junior mortgage
    48,174       5.7       49,363       5.8  
Retail & other
    4,871       0.6       5,418       0.6  
Loans
    850,092       100.0 %     847,358       100.0 %
Less allowance for loan losses
    9,344               9,232          
Loans, net
  $ 840,748             $ 838,126          
Allowance for loan losses to loans     1.10 %             1.09 %        

   
Originated
 
   
3/31/2014
         
12/31/2013
       
(in thousands)
 
Amount
   
% of
Total
   
Amount
   
% of
Total
 
Commercial & industrial
  $ 230,980       36.6 %   $ 227,572       36.5 %
Owner-occupied CRE
    123,002       19.5       127,759       20.5  
Agricultural production
    4,515       0.7       3,230       0.5  
Agricultural real estate
    17,515       2.8       13,596       2.2  
CRE investment
    61,479       9.8       60,390       9.7  
Construction & land development
    31,028       4.9       30,277       4.9  
Residential construction
    12,210       2.0       12,475       2.0  
Residential first mortgage
    107,513       17.0       104,180       16.7  
Residential junior mortgage
    38,451       6.1       39,207       6.3  
Retail & other
    3,997       0.6       4,192       0.7  
Loans
  $ 630,690       100.0 %   $ 622,878       100.0 %

   
Acquired
 
   
3/31/2014
         
12/31/2013
       
(in thousands)
 
Amount
   
% of
Total
   
Amount
   
% of
Total
 
Commercial & industrial
  $ 24,672       11.2 %   $ 26,102       11.6 %
Owner-occupied CRE
    60,054       27.4       59,717       26.6  
Agricultural production
    10,907       5.0       11,026       4.9  
Agricultural real estate
    24,877       11.3       23,461       10.5  
CRE investment
    28,802       13.1       29,905       13.3  
Construction & land development
    11,789       5.4       12,604       5.6  
Residential construction
    166       0.1       60       0.1  
Residential first mortgage
    47,538       21.7       50,223       22.4  
Residential junior mortgage
    9,723       4.4       10,156       4.5  
Retail & other
    874       0.4       1,226       0.5  
Loans
  $ 219,402       100.0 %   $ 224,480       100.0 %

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.
 
13
 

 

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

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 management’s assessment, no ALLL has been recorded on acquired loans at March 31, 2014.
 
The following table presents the balance and activity in the ALLL by portfolio segment and the recorded investment in loans by portfolio segment for the periods indicated:
 
                                                                   
   
Total – March 31, 2014
 
(in  thousands)
ALLL:
 
Commercial
& industrial
   
Owner-
occupied
CRE
   
AG production
   
AG real estate
   
CRE
investment
   
Construction & land development
   
Residential construction
   
Residential first
mortgage
   
Residential junior mortgage
   
Retail
& other
   
Total
 
Beginning balance
  $ 1,798     $ 766     $ 18     $ 59     $ 505     $ 4,970     $ 229     $ 544     $ 321     $ 22     $ 9,232  
Provision
    1,847       271       25       200       165       (2,408 )     61       295       116       103       675  
Charge-offs
    (510 )     -       -       -       -       (12 )     -       (29 )     (9 )     (14 )     (574 )
Recoveries
    1       2       -       -       4       -       -       1       -       3       11  
Net charge-offs
    (509 )     2       -       -       4       (12 )     -       (28 )     (9 )     (11 )     (563 )
Ending balance
  $ 3,136     $ 1,039     $ 43     $ 259     $ 674     $ 2,550     $ 290     $ 811     $ 428     $ 114     $ 9,344  
As percent of ALLL
    33.6 %     11.1 %     0.5 %     2.8 %     7.2 %     27.2 %     3.1 %     8.7 %     4.6 %     1.2 %     100 %
                                                                                         
ALLL:
                                                                                       
Individually evaluated
  $ 214     $ -     $ -     $ -     $ -     $ 460     $ -     $ -     $ -     $ -     $ 674  
Collectively evaluated
    2,922       1,039       43       259       674       2,090       290       811       428       114       8,670  
Ending balance
  $ 3,136     $ 1,039     $ 43     $ 259     $ 674     $ 2,550     $ 290     $ 811     $ 428     $ 114     $ 9,344  
                                                                                         
Loans:
                                                                                       
Individually evaluated
  $ 299     $ 1,036     $ 32     $ 459     $ 3,729     $ 4,856     $ -     $ 1,422     $ 167     $ -     $ 12,000  
Collectively evaluated
    255,353       182,020       15,390       41,933       86,552       37,961       12,376       153,629       48,007       4,871       838,092  
Total loans
  $ 255,652     $ 183,056     $ 15,422     $ 42,392     $ 90,281     $ 42,817     $ 12,376     $ 155,051     $ 48,174     $ 4,871     $ 850,092  
                                                                                         
Less ALLL
  $ 3,136     $ 1,039     $ 43     $ 259     $ 674     $ 2,550     $ 290     $ 811     $ 428     $ 114     $ 9,344  
Net loans
  $ 252,516     $ 182,017     $ 15,379     $ 42,133     $ 89,607     $ 40,267     $ 12,086     $ 154,240     $ 47,746     $ 4,757     $ 840,748  
 
14
 

 

 
Note 6 – Loans, Allowance for Loan Losses, and Credit Quality, continued
 
   
Originated – 3/31/2014
 
(in thousands)
ALLL:
  Commercial & industrial    
Owner-
occupied
CRE
   
AG
production
   
AG real estate
   
CRE
investment
   
Construction & land development
   
Residential
construction
   
Residential
first
mortgage
   
Residential
junior
mortgage
   
Retail
& other
   
Total
 
Beginning balance
  $ 1,798     $ 766     $ 18     $ 59     $ 505     $ 4,970     $ 229     $ 544     $ 321     $ 22     $ 9,232  
Provision
    1,847       272       25       200       165       (2,420 )     61       266       107       103       626  
Charge-offs
    (510 )     -       -       -       -       -       -       -       -       (14 )     (524 )
Recoveries
    1       1       -       -       4       -       -       1       -       3       10  
Net charge-offs
    (509 )     1       -       -       4       -       -       1       -       (11 )     (514 )
Ending balance
  $ 3,136     $ 1,039     $ 43     $ 259     $ 674     $ 2,550     $ 290     $ 811     $ 428     $ 114     $ 9,344  
As percent of ALLL
    33.6 %     11.1 %     0.5 %     2.8 %     7.2 %     27.2 %     3.1 %     8.7 %     4.6 %     1.2 %     100 %
                                                                                         
ALLL:
                                                                                       
Individually evaluated
  $ 214     $ -     $ -     $ -     $ -     $ 460     $ -     $ -     $ -     $ -     $ 674  
Collectively evaluated
    2,922       1,039       43       259       674       2,090       290       811       428       114       8,670  
Ending balance
  $ 3,136     $ 1,039     $ 43     $ 259     $ 674     $ 2,550     $ 290     $ 811     $ 428     $ 114     $ 9,344  
                                                                                         
Loans:
                                                                                       
Individually evaluated
  $ 298     $ -     $ -     $ -     $ -     $ 3,925     $ -     $ -     $ -     $ -     $ 4,223  
Collectively evaluated
    230,682       123,002       4,515       17,515       61,479       27,103       12,210       107,513       38,451       3,997       626,467  
Total loans
  $ 230,980     $ 123,002     $ 4,515     $ 17,515     $ 61,479     $ 31,028     $ 12,210     $ 107,513     $ 38,451     $ 3,997     $ 630,690  
                                                                                         
Less ALLL
  $ 3,136     $ 1,039     $ 43     $ 259     $ 674     $ 2,550     $ 290     $ 811     $ 428     $ 114     $ 9,344  
Net loans
  $ 227,844     $ 121,963     $ 4,472     $ 17,256     $ 60,805     $ 28,478     $ 11,920     $ 106,702     $ 38,023     $ 3,883     $ 621,346  
 
   
Acquired – 3/31/2014
 
(in thousands)
ALLL:
 
Commercial
& industrial
   
Owner-
occupied
CRE
   
AG
production
   
AG real estate
   
CRE
investment
   
Construction & land development
   
Residential
construction
   
Residential
first
mortgage
   
Residential
junior
mortgage
   
Retail &
other
   
Total
 
Provision
    -       (1 )     -       -       -       12       -       29       9       -       49  
Charge-offs
    -       -       -       -       -       (12 )     -       (29