10-Q 1 t80647_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, 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 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 T 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 S

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

As of October 31, 2014 there were 4,103,573 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, 2014 (unaudited) and December 31, 2013
3
       
   
Consolidated Statements of Income
Three Months and Nine Months Ended September 30, 2014 and 2013 (unaudited)
4
       
   
Consolidated Statements of Comprehensive Income
Three Months and Nine Months Ended September 30, 2014 and 2013 (unaudited)
5
       
   
Consolidated Statement of Changes in Stockholders’ Equity
Nine Months Ended September 30, 2014 (unaudited)
6
       
   
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2014 and 2013 (unaudited)
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.
Legal Proceedings
52
       
 
Item 1A.
Risk Factors
52
       
 
Item 2.
Unregistered Sales of Equity Securities and Use of  Proceeds
52
       
 
Item 3.
Defaults Upon Senior Securities
52
       
 
Item 4.
Mine Safety Disclosures
52
       
 
Item 5.
Other Information
52
 
 
 
 
 
Item 6.
Exhibits
53
       
   
Signatures
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)

   
September 30, 2014
(Unaudited)
   
December 31, 2013
(Audited)
 
Assets
           
Cash and due from banks
  $ 30,168     $ 26,556  
Interest-earning deposits
    36,631       119,364  
Federal funds sold
    421       1,058  
Cash and cash equivalents
    67,220       146,978  
Certificates of deposit in other banks
    8,638       1,960  
Securities available for sale (“AFS”)
    150,649       127,515  
Other investments
    8,056       7,982  
Loans held for sale
    2,570       1,486  
Loans
    865,085       847,358  
Allowance for loan losses
    (10,052 )     (9,232 )
Loans, net
    855,033       838,126  
Premises and equipment, net
    31,378       29,845  
Bank owned life insurance
    27,230       23,796  
Accrued interest receivable and other assets
    18,846       21,115  
Total assets
  $ 1,169,620     $ 1,198,803  
 
Liabilities and Stockholders’ Equity
               
Liabilities:
               
Demand
  $ 195,048     $ 171,321  
Money market and NOW accounts
    445,069       492,499  
Savings
    119,901       97,601  
Time
    251,491       273,413  
Total deposits
    1,011,509       1,034,834  
Short-term borrowings
    -       7,116  
Notes payable
    22,238       32,422  
Junior subordinated debentures
    12,278       12,128  
Accrued interest payable and other liabilities
    13,886       7,424  
     Total liabilities
    1,059,911       1,093,924  
                 
Stockholders’ Equity:
               
Preferred equity
    24,400       24,400  
Common stock
    41       42  
Additional paid-in capital
    46,683       49,616  
Retained earnings
    37,488       30,138  
Accumulated other comprehensive income (“AOCI”)
    1,064       666  
Total Nicolet Bankshares, Inc. stockholders’ equity
    109,676       104,862  
Noncontrolling interest
    33       17  
Total stockholders’ equity and noncontrolling interest
    109,709       104,879  
Total liabilities, noncontrolling interest and stockholders’ equity
  $ 1,169,620     $ 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
    4,097,801       4,241,044  
Common shares issued
    4,147,245       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
September 30,
   
Nine Months Ended
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
Interest income:
                       
   Loans, including loan fees
  $ 11,945     $ 12,856     $ 34,568     $ 29,465  
   Investment securities:
                               
     Taxable
    379       309       1,212       714  
     Non-taxable
    208       195       551       555  
   Other interest income
    91       77       354       222  
        Total interest income
    12,623       13,437       36,685       30,956  
Interest expense:
                               
   Money market and NOW accounts
    544       525       1,709       1,502  
   Savings and time deposits
    790       618       2,271       1,667  
   Short-term borrowings
    2       11       9       18  
   Junior subordinated debentures
    220       221       655       510  
   Notes payable
    174       259       672       886  
       Total interest expense
    1,730       1,634       5,316       4,583  
                Net interest income
    10,893       11,803       31,369       26,373  
Provision for loan losses
    675       1,975       2,025       3,925  
        Net interest income after provision for loan losses
    10,218       9,828       29,344       22,448  
Noninterest income:
                               
    Service charges on deposit accounts
    564       510       1,602       1,264  
    Trust services fee income
    1,179       1,060       3,403       2,936  
    Mortgage income
    505       353       1,151       1,939  
    Brokerage fee income
    152       114       478       331  
    Bank owned life insurance
    250       224       684       605  
    Rent income
    292       204       880       728  
    Investment advisory fees
    104       82       316       244  
    Gain on sale or writedown of assets, net
    140       1,333       448       1,382  
    Bargain purchase gain
    -       1,480       -       11,915  
    Other
    459       382       1,323       920  
        Total noninterest income
    3,645       5,742       10,285       22,264  
Noninterest expense:
                               
    Salaries and employee benefits
    5,366       5,333       16,045       14,447  
    Occupancy, equipment and office
    1,735       1,822       5,370       4,392  
    Business development and marketing
    548       573       1,620       1,471  
    Data processing
    816       724       2,345       1,719  
 FDIC assessments
    160       240       547       480  
    Core deposit intangible amortization
    284       342       934       776  
    Other
    614       1,190       1,734       2,865  
        Total noninterest expense
    9,523       10,224       28,595       26,150  
                                 
        Income before income tax expense
    4,340       5,346       11,034       18,562  
Income tax expense
    1,552       2,421       3,425       3,387  
        Net income
    2,788       2,925       7,609       15,175  
Less: net income (loss) attributable to noncontrolling interest
    23       (22 )     76       16  
        Net income attributable to Nicolet Bankshares, Inc.
    2,765       2,947       7,533       15,159  
Less:  preferred stock dividends
    61       305       183       915  
        Net income available to common shareholders
  $ 2,704     $ 2,642     $ 7,350     $ 14,244  
                                 
Basic earnings per common share
  $ 0.66     $ 0.62     $ 1.75     $ 3.66  
Diluted earnings per common share
  $ 0.63     $ 0.62     $ 1.70     $ 3.65  
Weighted average common shares outstanding:
                               
     Basic
    4,118,792       4,228,386       4,190,830       3,889,751  
     Diluted
    4,319,975       4,238,009       4,313,298       3,900,289  

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
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
Net income
  $ 2,788     $ 2,925     $ 7,609     $ 15,175  
Other comprehensive income (loss), net of tax:
                               
Securities available for sale:
                               
  Net unrealized holding gains (losses) arising during the period
    (51 )     (475 )     994       (1,604 )
  Less: reclassification adjustment for net gains realized in net income
    -       (442 )     (341 )     (203 )
    Net unrealized gains (losses) on securities before tax expense
    (51 )     (917 )     653       (1,807 )
  Income tax (expense) benefit
    19       357       (255 )     704  
                                 
Total other comprehensive income (loss)
    (32 )     (560 )     398       (1,103 )
                                 
Comprehensive income
  $ 2,756     $ 2,365     $ 8,007     $ 14,072  

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
    -       -       -       7,533       -       76       7,609  
    Other comprehensive income
    -       -       -       -       398       -       398  
Stock compensation expense
    -       -       459       -       -       -       459  
Exercise of stock options
    -       -       380       -       -       -       380  
Issuance of common stock
    -       -       225       -       -       -       225  
Purchase and retirement of common stock
    -       (1 )     (3,997 )     -       -       -       (3,998 )
Preferred stock dividends
    -       -       -       (183 )     -       -       (183 )
Repayment from noncontrolling interest
    -       -       -       -       -       (60 )     (60 )
Balance, September 30, 2014
  $
 
24,400
    $ 41     $ 46,683     $ 37,488     $ 1,064     $ 33     $ 109,709  

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)
 
 
   
Nine Months Ended September 30,
 
   
2014
   
2013
 
Cash Flows From Operating Activities:
 
 
   
 
 
Net income
  $ 7,609     $ 15,175  
Adjustments to reconcile net income to net cash provided by operating activities:
               
     Depreciation, amortization, and accretion
    2,793       3,149  
     Provision for loan losses
    2,025       3,925  
     Increase in cash surrender value of life insurance
    (684 )     (605 )
     Stock compensation expense
    459       480  
     Gain on sale or writedown of assets, net
    (448 )     (1,382 )
     Gain on sale of loans held for sale, net
    (1,151 )     (1,939 )
     Proceeds from sale of loans held for sale
    55,652       120,246  
     Origination of loans held for sale
    (55,585 )     (114,317 )
 Bargain purchase gain
    -       (11,915 )
     Net change in:
               
          Accrued interest receivable and other assets
    295       2,585  
          Accrued interest payable and other liabilities
    (639 )     (31 )
          Net cash provided by operating activities
    10,326       15,371  
Cash Flows From Investing Activities:
               
Net increase in certificates of deposit in other banks
    (6,678 )     -  
Net increase in loans
    (19,175 )     (39,992 )
Purchases of securities AFS
    (33,650 )     (9,608 )
Proceeds from sales of securities AFS
    4,821       44,833  
Proceeds from calls and maturities of securities AFS
    12,387       14,485  
Purchase of other investments
    (74 )     (797 )
Purchase of premises and equipment
    (4,112 )     (2,115 )
Proceeds from sales of premises and equipment
    10       15  
Proceeds from sales of other real estate and other assets
    3,268       2,887  
Purchase of bank owned life insurance
    (2,750 )     -  
Net cash received in business combination
    -       37,622  
          Net cash provided (used) by investing activities
    (45,953 )     47,330  
Cash Flows From Financing Activities:
               
Net decrease in deposits
    (23,195 )     (43,780 )
Net change in short-term borrowings
    (7,116 )     (12,447 )
Proceeds from notes payable
    -       5,000  
Repayments of notes payable
    (10,184 )     (45,867 )
Purchase and retirement of common stock
    (3,998 )     (63 )
Stock issuance costs
    -       (401 )
Proceeds from issuance of common stock, net
    225       3,123  
Proceeds from exercise of common stock options
    380       206  
Noncontrolling interest in joint venture
    (60 )     (60 )
Cash dividends paid on preferred stock
    (183 )     (915 )
            Net cash used by financing activities
    (44,131 )     (95,204 )
Net decrease in cash and cash equivalents
    (79,758 )     (32,503 )
Cash and cash equivalents:
               
Beginning
  $ 146,978     $ 82,003  
Ending
  $ 67,220     $ 49,500  
Supplemental Disclosures of Cash Flow Information:
               
Cash paid for interest
  $ 5,562     $ 4,759  
Cash paid for taxes
    3,535       2,013  
Transfer of loans and bank premises to other real estate owned
    1,291       3,097  
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 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 consolidated 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 (“BPG”).
 
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 BPG of the Mid-Wisconsin transaction and imposed back against 2013 third quarter earnings.  No other adjustments to the BPG 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 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 the nine months ended September 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.

   
Nine Months Ended
September 30, 2013
 
(in thousands)
     
Total revenues, net of interest expense
  $ 46,538  
Net income
    13,347  
 
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
 September 30,
   
Nine Months Ended
 September 30,
 
   
2014
   
2013
   
2014
   
2013
 
(In thousands except per share data)
                       
Net income, net of noncontrolling interest
  $ 2,765     $ 2,947     $ 7,533     $ 15,159  
Less: preferred stock dividends
    61       305       183       915  
Net income available to common shareholders
  $ 2,704     $ 2,642     $ 7,350     $ 14,244  
Weighted average common shares outstanding
    4,119       4,228       4,191       3,890  
Effect of dilutive stock instruments
    201       10       122       10  
Diluted weighted average common shares outstanding
    4,320       4,238       4,313       3,900  
Basic earnings per common share*
  $ 0.66     $ 0.62     $ 1.75     $ 3.66  
Diluted earnings per common share*
  $ 0.63     $ 0.62     $ 1.70     $ 3.65  

*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 0.4 million and 0.5 million shares were outstanding at September 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
            (23,715 )     16.04          
  Forfeited
            (6,750 )     16.80          
Balance – September 30, 2014
            762,692     $ 17.92       607,743  
 
10
 

 

 
Note 4 – Stock-based Compensation, continued

Options outstanding at September 30, 2014 are exercisable at option prices ranging from $16.50 to $26.00.  There are 323,118 options outstanding in the range from $16.50 - $17.00, 393,574 options outstanding in the range from $17.01 - $22.00, and 46,000 options outstanding in the range from $22.01 - $26.00.  At September 30, 2014, the exercisable options have a weighted average remaining contractual life of approximately 3 years and a weighted average exercise price of $18.24.

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 2014, and full year of 2013 was approximately $66,000, 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 – September 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 nine months ended September 30, 2014 and 5,606 shares were surrendered during the twelve months ended December 31, 2013.

The Company recognized approximately $459,000 and $480,000 of stock-based employee compensation expense during the nine months ended September 30, 2014 and 2013, respectively, associated with its stock equity awards.  As of September 30, 2014, there was approximately $1.1 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:
 
   
September 30, 2014
 
(in thousands)
 
Amortized Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized Losses
   
Fair Value
 
U.S. government sponsored enterprises
  $ 1,027     $ 4     $ 2     $ 1,029  
State, county and municipals
    82,429       1,033       274       83,188  
Mortgage-backed securities
    64,206       581       718       64,069  
Corporate debt securities
    220       -       -       220  
Equity securities
    1,022       1,121       -       2,143  
    $ 148,904     $ 2,739     $ 994     $ 150,649  
                                 
   
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 September 30, 2014 and December 31, 2013.

   
September 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
  $ 142     $ 2     $ -     $ -     $ 142     $ 2  
State, county and municipals
    16,698       49       10,644       225       27,342       274  
Mortgage-backed securities
    3,082       12       26,912       706       29,994       718  
    $ 19,922     $ 63     $ 37,556     $ 931     $ 57,478     $ 994  
       
   
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  

At September 30, 2014 we had $1 million of gross unrealized losses related to 96 securities.  As of September 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 nine-month period ending September 30, 2014 or the year ended December 31, 2013.

The amortized cost and fair values of securities available for sale at September 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.
   
September 30, 2014
 
(in thousands)
 
Amortized Cost
   
Fair Value
 
Due in less than one year
  $ 4,522     $ 4,555  
Due in one year through five years
    69,728       70,482  
Due after five years through ten years
    8,642       8,607  
Due after ten years
    784       793  
      83,676       84,437  
Mortgage-backed securities
    64,206       64,069  
Equity securities
    1,022       2,143  
   Securities available for sale
  $ 148,904     $ 150,649  
 
Proceeds from sales of securities available for sale during the first nine months of 2014 and 2013 were approximately $4.8 million and $44.8 million, respectively.  Gross gains of approximately $0.3 million and $0.5 million were realized on sales of securities during the first nine months of 2014 and 2013, respectively.  There were no losses recognized during the first nine months of 2014 and gross losses of $0.3 million were recognized during the first nine months of 2013.
 
12
 

 

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

The loan composition as of September 30, 2014 and December 31, 2013 is summarized as follows.

   
Total
 
   
September 30, 2014
 
December 31, 2013
 
(in thousands)
 
Amount
   
% of
Total
   
Amount
   
% of
Total
 
Commercial & industrial
  $ 282,357       32.6 %   $ 253,674       29.9 %
Owner-occupied commercial real estate (“CRE”)
    179,166       20.7       187,476       22.1  
Agricultural (“AG”) production
    14,632       1.7       14,256       1.7  
AG real estate
    42,195       4.9       37,057       4.4  
CRE investment
    77,067       8.9       90,295       10.7  
Construction & land development
    42,462       4.9       42,881       5.1  
Residential construction
    11,260       1.3       12,535       1.5  
Residential first mortgage
    157,730       18.2       154,403       18.2  
Residential junior mortgage
    52,523       6.1       49,363       5.8  
Retail & other
    5,693       0.7       5,418       0.6  
    Loans
    865,085       100.0 %     847,358       100.0 %
Less allowance for loan losses
    10,052               9,232          
    Loans, net
  $ 855,033             $ 838,126          
Allowance for loan losses to loans
    1.16 %             1.09 %        

   
Originated
 
   
September 30, 2014
 
December 31, 2013
 
(in thousands)
 
Amount
   
% of
Total
   
Amount
   
% of
Total
 
Commercial & industrial
  $ 259,705       38.6 %   $ 227,572       36.5 %
Owner-occupied CRE
    131,321       19.5       127,759       20.5  
AG production
    4,882       0.7       3,230       0.5  
AG real estate
    19,134       2.8       13,596       2.2  
CRE investment
    50,004       7.4       60,390       9.7  
Construction & land development
    31,941       4.7       30,277       4.9  
Residential construction
    11,260       1.7       12,475       2.0  
Residential first mortgage
    116,279       17.3       104,180       16.7  
Residential junior mortgage
    43,923       6.5       39,207       6.3  
Retail & other
    5,107       0.8       4,192       0.7  
    Loans
  $ 673,556       100.0 %   $ 622,878       100.0 %

   
Acquired
 
   
September 30, 2014
 
December 31, 2013
 
(in thousands)
 
Amount
   
% of
Total
   
Amount
   
% of
Total
 
Commercial & industrial
  $ 22,652       11.8 %   $ 26,102       11.6 %
Owner-occupied CRE
    47,845       25.0       59,717       26.6  
AG production
    9,750       5.1       11,026       4.9  
AG real estate
    23,061       12.0       23,461       10.5  
CRE investment
    27,063       14.1       29,905       13.3  
Construction & land development
    10,521       5.5       12,604       5.6  
Residential construction
    -       -       60       0.1  
Residential first mortgage
    41,451       21.7       50,223       22.4  
Residential junior mortgage
    8,600       4.5       10,156       4.5  
Retail & other
    586       0.3       1,226       0.5  
    Loans
  $ 191,529       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.  No ALLL has been recorded on acquired loans since acquisition or at September 30, 2014 since the remaining pool discounts exceed the required amount calculated based on the actual charge off experience in the acquired loan portfolio.
 
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 nine months ended September 30, 2014:
 
                                                                   
   
TOTAL – Nine Months Ended September 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
    2,318       1,057       36       213       121       (2,445 )     (73 )     610       129       59       2,025  
Charge-offs
    (567 )     (468 )     -       -       -       (12 )     -       (191 )     (18 )     (35 )     (1,291 )
Recoveries
    50       15       -       -       12       -       -       1       1       7       86  
Net charge-offs
    (517 )     (453 )     -       -       12       (12 )     -       (190 )     (17 )     (28 )     (1,205 )
Ending balance
  $ 3,599     $ 1,370     $ 54     $ 272     $ 638     $ 2,513     $ 156     $ 964     $ 433     $ 53     $ 10,052  
As percent of ALLL
    35.8 %     13.6 %     0.5 %     2.7 %     6.3 %     25.0 %     1.6 %     9.6 %     4.3 %     0.6 %     100 %
                                                                                         
ALLL:
                                                                                       
Individually evaluated
  $ 238     $ -     $ -     $ -     $ -     $ 389     $ -     $ -     $ -     $ -     $ 627  
Collectively evaluated
    3,361       1,370       54       272       638       2,124       156       964       433       53       9,425  
Ending balance
  $ 3,599     $ 1,370     $ 54     $ 272     $ 638     $ 2,513     $ 156     $ 964     $ 433     $ 53     $ 10,052  
                                                                                         
Loans:
                                                                                       
Individually evaluated
  $ 353     $ 1,604     $ 62     $ 394     $ 1,740     $ 4,778     $ -     $ 1,495     $ 156     $ -     $ 10,582  
Collectively evaluated
    282,004       177,562       14,570       41,801       75,327       37,684       11,260       156,235       52,367       5,693       854,503  
Total loans
  $ 282,357     $ 179,166     $ 14,632     $ 42,195     $ 77,067     $ 42,462     $ 11,260     $ 157,730     $ 52,523     $ 5,693     $ 865,085  
                                                                                         
Less ALLL
  $ 3,599     $ 1,370     $ 54     $ 272     $ 638     $ 2,513     $ 156     $ 964     $ 433     $ 53     $ 10,052  
Net loans
  $ 278,758     $ 177,796     $ 14,578     $ 41,923     $ 76,429     $ 39,949     $ 11,104     $ 156,766     $ 52,090     $ 5,640     $ 855,033  
 
   
Originated – Nine Months Ended September 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
    2,261       1,050       36       213       121       (2,457 )     (73 )     457       112       59       1,779  
Charge-offs
    (510 )     (452 )     -       -       -       -       -       (38 )     -       (35 )     (1,035 )
Recoveries
    50       6       -       -       12       -       -       1       -       7       76  
Net charge-offs