10-Q 1 t79910_10q.htm FORM 10-Q



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 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 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 July 31, 2014 there were 4,114,846 shares of $0.01 par value common stock outstanding.
 
 
 

 


 Nicolet Bankshares, Inc.
 
TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION
 
PAGE
 
 
Item 1.
 
Financial Statements:
   
   
 
Consolidated Balance Sheets
June 30, 2014 (unaudited) and December 31, 2013
 
 
3
 
   
 
Consolidated Statements of Income
Three Months and Six Months Ended June 30, 2014 and 2013 (unaudited)
 
 
4
 
         
   
Consolidated Statements of Comprehensive Income
Three Months and Six Months Ended June 30, 2014 and 2013 (unaudited)
 
 
5
 
   
Consolidated Statement of Changes in Stockholders’ Equity
Six Months Ended June 30, 2014 (unaudited)
 
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2014 and 2013 (unaudited)
 
 
6
 
 
7
 
   
 
Notes to Unaudited Consolidated Financial Statements
 
8-26
 
 
 
Item 2.
 
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
 
27-51
 
 
 
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
52
 
 
 
Item 4.
 
Controls and Procedures
 
52
 
 
PART II
 
OTHER INFORMATION
   
 
 
Item 1.
 
Item 1A.
 
Legal Proceedings
 
Risk Factors
 
52
 
52
 
 
 
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
52
 
 
 
Item 3.
 
Defaults Upon Senior Securities
 
52
 
 
 
Item 4.
 
Item 5.
 
Item 6.
 
Mine Safety Disclosures
 
Other Information
 
Exhibits
 
Signatures
 
52
 
52
 
53
 
53-57
 
 

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)

   
June 30, 2014
(Unaudited)
   
December 31, 2013
(Audited)
 
Assets
           
Cash and due from banks
  $ 21,235     $ 26,556  
Interest-earning deposits
    60,270       119,364  
Federal funds sold
    4,083       1,058  
Cash and cash equivalents
    85,588       146,978  
Certificates of deposit in other banks
    7,144       1,960  
Securities available for sale (“AFS”)
    143,655       127,515  
Other investments
    8,056       7,982  
Loans held for sale
    3,589       1,486  
Loans
    860,086       847,358  
Allowance for loan losses
    (9,642 )     (9,232 )
Loans, net
    850,444       838,126  
Premises and equipment, net
    28,617       29,845  
Bank owned life insurance
    26,980       23,796  
Accrued interest receivable and other assets
    19,699       21,115  
Total assets
  $ 1,173,772     $ 1,198,803  
 
Liabilities and Stockholders’ Equity
               
Liabilities:
               
Demand
  $ 190,464     $ 171,321  
Money market and NOW accounts
    451,791       492,499  
Savings
    112,232       97,601  
Time
    256,634       273,413  
Total deposits
    1,011,121       1,034,834  
Short-term borrowings
    3,399       7,116  
Notes payable
    27,299       32,422  
Junior subordinated debentures
    12,228       12,128  
Accrued interest payable and other liabilities
    11,588       7,424  
Total liabilities
    1,065,635       1,093,924  
                 
Stockholders’ Equity:
               
Preferred equity
    24,400       24,400  
Common stock
    41       42  
Additional paid-in capital
    47,746       49,616  
Retained earnings
    34,784       30,138  
Accumulated other comprehensive income (“AOCI”)
    1,096       666  
Total Nicolet Bankshares, Inc. stockholders’ equity
    108,067       104,862  
Noncontrolling interest
    70       17  
Total stockholders’ equity and noncontrolling interest
    108,137       104,879  
Total liabilities, noncontrolling interest and stockholders’ equity
  $ 1,173,772     $ 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
    4,147,226       4,241,044  
Common shares issued
    4,196,670       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
June 30,
   
Six Months Ended
June 30,
 
   
2014
   
2013
   
2014
   
2013
 
Interest income:
                       
Loans, including loan fees
  $ 11,616     $ 9,828     $ 22,623     $ 16,609  
Investment securities:
                               
Taxable
    415       278       833       405  
Non-taxable
    170       187       343       360  
Other interest income
    128       65       263       145  
Total interest income
    12,329       10,358       24,062       17,519  
Interest expense:
                               
Money market and NOW accounts
    572       463       1,165       977  
Savings and time deposits
    793       562       1,481       1,049  
Short term borrowings
    4       6       7       7  
Junior subordinated debentures
    218       165       435       289  
Notes payable
    246       344       498       627  
Total interest expense
    1,833       1,540       3,586       2,949  
 Net interest income
    10,496       8,818       20,476       14,570  
Provision for loan losses
    675       975       1,350       1,950  
 Net interest income after provision for loan losses
    9,821       7,843       19,126       12,620  
Noninterest income:
                               
Service charges on deposit accounts
    544       470       1,038       754  
Trust services fee income
    1,119       1,074       2,224       1,876  
Mortgage income
    431       714       646       1,586  
Brokerage fee income
    166       115       326       217  
Bank owned life insurance
    220       212       434       381  
Rent income
    288       274       588       524  
Investment advisory fees
    102       76       212       162  
Gain (loss) on sale or writedown of assets, net
    (442 )     45       308       49  
Bargain purchase gain
    -       10,435       -       10,435  
Other
    452       351       864       538  
 Total noninterest income
    2,880       13,766       6,640       16,522  
Noninterest expense:
                               
Salaries and employee benefits
    5,384       5,555       10,679       9,114  
Occupancy, equipment and office
    1,737       1,466       3,635       2,570  
Business development and marketing
    537       473       1,072       898  
Data processing
    775       572       1,529       995  
 FDIC assessments
    203       130       387       240  
Core deposit intangible amortization
    315       286       650       434  
Other
    533       1,104       1,120       1,675  
Total noninterest expense
    9,484       9,586       19,072       15,926  
                                 
Income before income tax expense
    3,217       12,023       6,694       13,216  
Income tax expense
    641       547       1,873       966  
Net income
    2,576       11,476       4,821       12,250  
Less: net income attributable to noncontrolling interest
    22       19       53       38  
Net income attributable to Nicolet Bankshares, Inc.
    2,554       11,457       4,768       12,212  
Less: preferred stock dividends
    61       305       122       610  
Net income available to common shareholders
  $ 2,493     $ 11,152     $ 4,646     $ 11,602  
                                 
Basic earnings per common share
  $ 0.59     $ 2.79     $ 1.10     $ 3.12  
Diluted earnings per common share
  $ 0.58     $ 2.78     $ 1.08     $ 3.11  
Weighted average common shares outstanding:
                               
Basic
    4,212,174       3,999,732       4,227,446       3,717,627  
Diluted
    4,332,016       4,008,426       4,312,005       3,728,599  

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
June 30,
   
Six Months Ended
June 30,
 
   
2014
   
2013
   
2014
   
2013
 
Net income
  $ 2,576     $ 11,476     $ 4,821     $ 12,250  
Other comprehensive income (loss), net of tax:
                               
Securities available for sale:
                               
Net unrealized holding gains (losses) arising during the period
    446       (1,645     1,045       (1,130 )
Less: reclassification adjustment for net (gains) losses realized in net income
    -       239       (341     239  
Net unrealized gains (losses) on securities before tax expense
    446       (1,406     704       (891 )
Income tax (expense) benefit
    (173 )     549       (274     348  
Total other comprehensive income (loss)
    273       (857     430       (543 )
Comprehensive income
  $ 2,849     $ 10,619     $ 5,251     $ 11,707  

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  
Comprehensive income:
                                                       
Net income
    -       -       -       4,768       -       53       4,821  
Other comprehensive income
    -       -       -       -       430       -       430  
Stock compensation expense
    -       -       306       -       -       -       306  
Exercise of stock options
    -       -       298       -       -       -       298  
Issuance of common stock
    -       -       29       -       -       -       29  
Purchase and retirement of common stock
    -       (1 )     (2,503 )     -       -       -       (2,504 )
Preferred stock dividends
    -       -       -       (122 )     -       -       (122 )
Balance, June 30, 2014
  $ 24,400     $ 41     $ 47,746     $ 34,784     $ 1,096     $ 70     $ 108,137  

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)
 
   
Six Months Ended June 30,
 
   
2014
   
2013
 
Cash Flows From Operating Activities:
 
 
   
 
 
Net income
  $ 4,821     $ 12,250  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation, amortization, and accretion
    1,796       1,985  
Provision for loan losses
    1,350       1,950  
Increase in cash surrender value of life insurance
    (434 )     (381 )
Stock compensation expense
    306       342  
Gain on sale or writedown of assets, net
    (308 )     (49 )
Gain on sale of loans held for sale, net
    (646 )     (1,586 )
Proceeds from sale of loans held for sale
    31,322       95,965  
Origination of loans held for sale
    (32,779 )     (90,198 )
Bargain purchase gain
    -       (10,435 )
Net change in:
               
Accrued interest receivable and other assets
    270       366  
Accrued interest payable and other liabilities
    (1,136 )     1,354  
Net cash provided by operating activities
    4,562       11,563  
Cash Flows From Investing Activities:
               
Net increase in certificates of deposit in other banks
    (5,184 )     -  
Net increase in loans
    (13,800 )     (19,689 )
Purchases of securities AFS
    (23,107 )     (8,711 )
Proceeds from sales of securities AFS
    4,021       43,945  
Proceeds from calls and maturities of securities AFS
    8,276       8,089  
Purchase of other investments
    (74 )     (8 )
Purchase of premises and equipment
    (778 )     (1,246 )
Proceeds from sales of premises and equipment
    7       -  
Proceeds from sales of other real estate and other assets
    2,159       993  
Purchase of bank owned life insurance
    (2,750 )     -  
Net cash received in business combination
    -       13,898  
Net cash provided (used) by investing activities
    (31,230 )     37,271  
Cash Flows From Financing Activities:
               
Net decrease in deposits
    (23,583 )     (54,152 )
Net change in short-term borrowings
    (3,717 )     3,091  
Repayments of notes payable
    (5,123 )     (45,809 )
Purchase and retirement of common stock
    (2,504 )     (63 )
Stock issuance costs
    -       (401 )
Proceeds from issuance of common stock, net
    29       3,107  
Proceeds from exercise of common stock options
    298       206  
Noncontrolling interest in joint venture
    -       (60 )
Cash dividends paid on preferred stock
    (122 )     (610 )
Net cash used by financing activities
    (34,722 )     (94,691 )
Net decrease in cash and cash equivalents
    (61,390 )     (45,857 )
Cash and cash equivalents:
               
Beginning
  $ 146,978     $ 82,003  
Ending
  $ 85,588     $ 36,146  
Supplemental Disclosures of Cash Flow Information:
               
Cash paid for interest
  $ 3,761     $ 2,241  
Cash paid for taxes
    2,060       1,018  
Transfer of loans and bank premises to other real estate owned
    1,061       2,116  
Acquisitions:
               
Fair value of assets acquired
    -       435,692  
Fair value of liabilities assumed
    -       415,067  
Net assets acquired
    -       20,625  
                 
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 consolidated 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 Adopted

The Company has implemented all new accounting pronouncements that are in effect and that may impact its consolidated financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

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 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 Purchase 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.

8
 

 

 
Note 2 – Acquisitions, continued

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.
 
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 $0.4 million in direct stock issuance costs for the merger and private placement were incurred and charged against additional paid in capital. Also as a condition of the merger, Mid-Wisconsin redeemed by the closing of the merger its preferred stock (issued to the Department of U.S. Treasury (“UST”) as part of its participation in the federal government’s Capital Purchase Program (“CPP”) with par value of $10.5 million) plus all accrued and unpaid dividends thereon.

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 were subject to refinement as additional information relative to the closing date fair values became available through the measurement period of approximately one year from consummation. During the fourth quarter of 2013, there were developments related to an ongoing legal matter acquired in the Mid-Wisconsin transaction. Such litigation was pre-existing at the time of acquisition. The events in the fourth quarter supported a change in estimate of loss on this litigation to $0.9 million, net of tax, which was recorded against the bargain purchase gain of the Mid-Wisconsin transaction and imposed back against 2013 third quarter earnings. No other adjustments to the bargain purchase gain have been recorded.

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, $4 million of core deposit intangible; and $27 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 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 the six months ended June 30, 2013, as if the acquisitions had occurred January 1 of that year. 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.

   
Six Months Ended
June 30, 2013
 
(in thousands)
     
Total revenues, net of interest expense
  $ 34,117  
Net income
    11,413  

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
 June 30,
   
Six Months Ended
 June 30,
 
 
 
2014
   
2013
   
2014
   
2013
 
(In thousands except per share data)
 
 
   
 
             
Net income, net of noncontrolling interest
  $ 2,554     $ 11,457     $ 4,768     $ 12,212  
Less: preferred stock dividends
    61       305       122       610  
Net income available to common shareholders
  $ 2,493     $ 11,152     $ 4,646     $ 11,602  
Weighted average common shares outstanding
    4,212       4,000       4,227       3,718  
Effect of dilutive stock instruments
    120       8       85       11  
Diluted weighted average common shares outstanding
    4,332       4,008       4,312       3,729  
Basic earnings per common share*
  $ 0.59     $ 2.79     $ 1.10     $ 3.12  
Diluted earnings per common share*
  $ 0.58     $ 2.78     $ 1.08     $ 3.11  

*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 0.3 million and 0.5 million shares were outstanding at June 30, 2014 and 2013, respectively, but were excluded from the calculation of diluted earnings per common share as the effect would have been anti-dilutive.

Note 4 – Stock-based Compensation

Activity in 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
            (4,750 )     16.65          
Balance – June 30, 2014
            770,192     $ 17.90       614,243  

10
 

 


Note 4 – Stock-based Compensation, continued

Options outstanding at June 30, 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, 395,574 options outstanding in the range from $17.01 - $22.00, and 46,000 options outstanding in the range from $22.01 - $26.00. At June 30, 2014, the exercisable options have a weighted average remaining contractual life of approximately 3 years and a weighted average exercise price of $18.21.

Intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the exercise price of the stock options. The total intrinsic value of options exercised in the first six months of 2014, and full year of 2013 was approximately $19,000, and $80,000, respectively.
 
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       (12,919 )
Forfeited
    -       -  
Balance – June 30, 2014
  $ 16.50       49,444  
                 
*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 2,519 shares were surrendered during the six months ended June 30, 2014 and 5,606 shares were surrendered during 2013.

The Company recognized approximately $306,000 and $342,000 of stock-based employee compensation expense during the six months ended June 30, 2014 and 2013, respectively, associated with its stock equity awards. As of June 30, 2014, there was approximately $1.3 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:

   
June 30, 2014
 
(in thousands)
 
Amortized Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized Losses
   
Fair Value
 
U.S. government sponsored enterprises
  $ 1,532     $ 6     $ 1     $ 1,537  
State, county and municipals
    76,446       996       375       77,067  
Mortgage-backed securities
    62,946       676       694       62,928  
Corporate debt securities
    220       -       -       220  
Equity securities
    715       1,188       -       1,903  
    $ 141,859     $ 2,866     $ 1,070     $ 143,655  
 
                               
   
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 June 30, 2014 and December 31, 2013.

   
June 30, 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
  $ 143     $ 1     $ -     $ -     $ 143     $ 1  
State, county and municipals
    17,281       94       12,938       281       30,219       375  
Mortgage-backed securities
    2,752       20       26,753       674       29,505       694  
    $ 20,176     $ 115     $ 39,691     $ 955     $ 59,867     $ 1,070  
       
   
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 June 30, 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 six-month period ending June 30, 2014 or 2013.

The amortized cost and fair values of securities available for sale at June 30, 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.
 
   
June 30, 2014
 
(in thousands)
 
Amortized Cost
   
Fair Value
 
Due in less than one year
  $ 5,220     $ 5,276  
Due in one year through five years
    62,344       62,986  
Due after five years through ten years
    9,549       9,471  
Due after ten years
    1,085       1,091  
      78,198       78,824  
Mortgage-backed securities
    62,946       62,928  
Equity securities
    715       1,903  
Securities available for sale
  $ 141,859     $ 143,655  
 
Proceeds from sales of securities available for sale during the first six months of 2014 and 2013 were approximately $4.0 million and $43.9 million, respectively. Net gains of approximately $341,000 and $239,000 were realized on sales of securities during the first six months of 2014 and 2013, respectively.
 
12
 

 

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

The loan composition as of June 30, 2014 and December 31, 2013 is summarized as follows.
 
   
Total
   
June 30, 2014
 
December 31, 2013
(in thousands)
 
Amount
   
% of
Total
   
Amount
   
% of
Total
 
Commercial & industrial
  $ 269,377       31.3 %   $ 253,674       29.9 %
Owner-occupied commercial real estate (“CRE”)
    187,225       21.8       187,476       22.1  
Agricultural (“AG”) production
    13,982       1.6       14,256       1.7  
AG real estate
    41,934       4.9       37,057       4.4  
CRE investment
    79,639       9.3       90,295       10.7  
Construction & land development
    45,504       5.3       42,881       5.1  
Residential construction
    11,895       1.4       12,535       1.5  
Residential first mortgage
    154,713       18.0       154,403       18.2  
Residential junior mortgage
    50,244       5.8       49,363       5.8  
Retail & other
    5,573       0.6       5,418       0.6  
Loans
    860,086       100.0
%
    847,358       100.0
%
Less allowance for loan losses
    9,642               9,232          
Loans, net
  $ 850,444             $ 838,126          
Allowance for loan losses to loans
    1.12 %             1.09 %        

   
Originated
   
June 30, 2014
 
December 31, 2013
(in thousands)
 
Amount
   
% of
Total
   
Amount
 
% of
Total
 
Commercial & industrial
  $ 242,150       37.4
%
  $ 227,572   36.5
%
Owner-occupied CRE
    129,315       20.0       127,759   20.5  
AG production
    4,653       0.7       3,230   0.5  
AG real estate
    18,189       2.8       13,596   2.2  
CRE investment
    50,929       7.9       60,390   9.7  
Construction & land development
    34,501       5.3       30,277   4.9  
Residential construction
    11,895       1.8       12,475   2.0  
Residential first mortgage
    110,084       17.0       104,180   16.7  
Residential junior mortgage
    40,913       6.3       39,207   6.3  
Retail & other
    4,847       0.8       4,192   0.7  
Loans
  $ 647,476       100.0
%
  $ 622,878   100.0
%

   
Acquired
 
   
June 30, 2014
 
December 31, 2013
(in thousands)
 
Amount
   
% of
Total
   
Amount
   
% of
Total
 
Commercial & industrial
  $ 27,227       12.8
%
  $ 26,102       11.6
%
Owner-occupied CRE
    57,910       27.2       59,717       26.6  
AG production
    9,329       4.4       11,026       4.9  
AG real estate
    23,745       11.2       23,461       10.5  
CRE investment
    28,710       13.5       29,905       13.3  
Construction & land development
    11,003       5.2       12,604       5.6  
Residential construction
    -       -       60       0.1  
Residential first mortgage
    44,629       21.0       50,223       22.4  
Residential junior mortgage
    9,331       4.4       10,156       4.5  
Retail & other
    726       0.3       1,226       0.5  
Loans
  $ 212,610       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 consistent with acquisition accounting rules, no ALLL has been recorded on acquired loans since acquisition or at June 30, 2014.
 
14
 

 

 
Note 6 – Loans, Allowance for Loan Losses, and Credit Quality, continued
 
The following tables present the balance and activity in the ALLL by portfolio segment and the recorded investment in loans by portfolio at or for the six months ended June 30, 2014:
                                                                   
   
TOTAL – Six Months Ended June 30, 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
    2,007       584       26       213       62       (2,174 )     (62 )     411       136       147       1,350  
Charge-offs
    (534 )     (268 )     -       -       -       (12 )     -       (123 )     (9 )     (33 )     (979 )
Recoveries
    10       14       -       -       8       -       -       1       -       6       39  
Net charge-offs
    (524 )     (254 )     -       -       8       (12 )     -       (122 )     (9 )     (27 )     (940 )
Ending balance
  $ 3,281     $ 1,096     $ 44     $ 272     $ 575     $ 2,784     $ 167     $ 833     $ 448     $ 142     $ 9,642  
As percent of ALLL
    34.0 %     11.4 %     0.5 %     2.8 %     6.0 %     28.9 %     1.7 %     8.6 %     4.6 %     1.5 %     100 %
                                                                                         
ALLL:
                                                                                       
Individually evaluated
  $ 213     $ -     $ -     $ -     $ -     $ 420     $ -     $ -     $ -     $ -     $ 633  
Collectively evaluated
    3,068       1,096       44       272       575       2,364       167       833       448       142       9,009  
Ending balance
  $ 3,281     $ 1,096     $ 44     $ 272     $ 575     $ 2,784     $ 167     $ 833     $ 448     $ 142     $ 9,642  
                                                                                         
Loans:
                                                                                       
Individually evaluated
  $ 332     $ 1,999     $ 27     $ 459     $ 1,913     $ 4,358     $ -     $ 1,319     $ 438     $ -     $ 10,845  
Collectively evaluated
    269,045       185,226       13,955       41,475       77,726       41,146       11,895       153,394       49,806       5,573       849,241  
Total loans
  $ 269,377     $ 187,225     $ 13,982     $ 41,934     $ 79,639     $ 45,504     $ 11,895     $ 154,713     $ 50,244     $ 5,573     $ 860,086  
                                                                                         
Less ALLL
  $ 3,281     $ 1,096     $ 44     $ 272     $ 575     $ 2,784     $ 167     $ 833     $ 448     $ 142     $ 9,642  
Net loans
  $ 266,096     $ 186,129     $ 13,938     $ 41,662     $ 79,064     $ 42,720     $ 11,728     $ 153,880     $ 49,796     $ 5,431     $ 850,444  
 
   
Originated – Six Months Ended June 30, 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
    1,983       577       26       213       62       (2,186 )     (62 )     320       127       147       1,207  
Charge-offs
    (510 )     (252 )     -       -       -       -       -       (32 )     -       (33 )     (827 )
Recoveries
    10       5       -       -       8       -       -       1       -       6       30  
Net charge-offs
    (500 )     (247 )     -       -       8       -       -       (31 )     -       (27 )     (797 )
Ending balance
  $ 3,281     $ 1,096     $ 44     $ 272     $ 575     $ 2,784     $ 167     $ 833     $ 448     $ 142     $ 9,642  
As percent of ALLL
    34.0 %