10-Q 1 t82212_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, 2015

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 x
Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company o

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 April 30, 2015 there were 4,016,741 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, 2015 (unaudited) and December 31, 2014
 
 
 
3
         
   
Consolidated Statements of Income
Three Months Ended March 31, 2015 and 2014 (unaudited)
 
4
         
   
Consolidated Statements of Comprehensive Income
Three Months Ended March 31, 2015 and 2014 (unaudited)
 
5
         
   
Consolidated Statement of Changes in Stockholders’ Equity
Three Months Ended March 31, 2015 (unaudited)
 
6
         
   
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2015 and 2014 (unaudited)
 
7
         
   
Notes to Unaudited Consolidated Financial Statements
 
8-26
   
 
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
 
27-46
 
 
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
47
         
 
Item 4.
Controls and Procedures
 
47
 
PART II
 
OTHER INFORMATION
   
         
 
Item 1.
Legal Proceedings
 
47
         
 
Item 1A.
Risk Factors
 
47
         
 
Item 2.
Unregistered Sales of Equity Securities and Use of  Proceeds
  47
 
 
Item 3.
 
Defaults Upon Senior Securities
 
 
47
         
  Item 4.
Mine Safety Disclosures
  47 
         
  Item 5.
Other Information
  47
         
 
Item 6.
Exhibits
  48
         
   
Signatures
 
48

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, 2015
(Unaudited)
   
December 31, 2014
(Audited)
 
Assets
           
Cash and due from banks
  $ 13,613     $ 23,975  
Interest-earning deposits
    44,545       43,169  
Federal funds sold
    1,686       1,564  
Cash and cash equivalents
    59,844       68,708  
Certificates of deposit in other banks
    7,401       10,385  
Securities available for sale (“AFS”)
    171,946       168,475  
Other investments
    8,080       8,065  
Loans held for sale
    8,436       7,272  
Loans
    879,806       883,341  
Allowance for loan losses
    (9,537 )     (9,288 )
Loans, net
    870,269       874,053  
Premises and equipment, net
    31,713       31,924  
Bank owned life insurance
    27,721       27,479  
Accrued interest receivable and other assets
    18,992       18,924  
Total assets
  $ 1,204,402     $ 1,215,285  
                 
Liabilities and Stockholders’ Equity
               
Liabilities:
               
Demand
  $ 199,776     $ 203,502  
Money market and NOW accounts
    475,780       494,945  
Savings
    127,621       120,258  
Time
    237,601       241,198  
Total deposits
    1,040,778       1,059,903  
Notes payable
    21,109       21,175  
Junior subordinated debentures
    12,377       12,328  
Subordinated notes
    7,884       -  
Accrued interest payable and other liabilities
    8,514       10,812  
     Total liabilities
    1,090,662       1,104,218  
                 
Stockholders’ Equity:
               
Preferred equity
    24,400       24,400  
Common stock
    40       41  
Additional paid-in capital
    44,751       45,693  
Retained earnings
    42,862       39,843  
Accumulated other comprehensive income (“AOCI”)
    1,595       1,031  
Total Nicolet Bankshares, Inc. stockholders’ equity
    113,648       111,008  
Noncontrolling interest
    92       59  
Total stockholders’ equity and noncontrolling interest
    113,740       111,067  
Total liabilities, noncontrolling interest and stockholders’ equity
  $ 1,204,402     $ 1,215,285  
Preferred shares authorized (no par value)
    10,000,000       10,000,000  
Preferred shares issued and outstanding
    24,400       24,400  
Common shares authorized (par value $0.01 per share)
    30,000,000       30,000,000  
Common shares outstanding
    4,020,504       4,058,208  
Common shares issued
    4,083,201       4,124,439  
 
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,
 
   
2015
   
2014
 
Interest income:
           
Loans, including loan fees
  $ 11,979     $ 11,007  
Investment securities:
               
  Taxable
    394       418  
  Non-taxable
    271       173  
Other interest income
    100       135  
Total interest income
    12,744       11,733  
Interest expense:
               
Money market and NOW accounts
    566       593  
Savings and time deposits
    743       688  
Short-term borrowings
    -       3  
Junior subordinated debentures
    217       217  
Subordinated notes
    51       -  
Notes payable
    164       252  
Total interest expense
    1,741       1,753  
Net interest income
    11,003       9,980  
Provision for loan losses
    450       675  
Net interest income after provision for loan losses
    10,553       9,305  
Noninterest income:
               
Service charges on deposit accounts
    509       494  
Trust services fee income
    1,204       1,105  
Mortgage income
    874       215  
Brokerage fee income
    170       160  
Bank owned life insurance
    242       214  
Rent income
    284       300  
Investment advisory fees
    118       110  
Gain on sale or writedown of assets, net
    211       750  
Other
    458       412  
Total noninterest income
    4,070       3,760  
Noninterest expense:
               
    Salaries and employee benefits
    5,691       5,295  
    Occupancy, equipment and office
    1,785       1,898  
    Business development and marketing
    485       535  
    Data processing
    831       754  
 FDIC assessments
    164       184  
    Core deposit intangible amortization
    275       335  
    Other
    571       587  
        Total noninterest expense
    9,802       9,588  
                 
Income before income tax expense
    4,821       3,477  
Income tax expense
    1,708       1,232  
Net income
    3,113       2,245  
Less: net income attributable to noncontrolling interest
    33       31  
Net income attributable to Nicolet Bankshares, Inc.
    3,080       2,214  
Less:  preferred stock dividends
    61       61  
Net income available to common shareholders
  $ 3,019     $ 2,153  
                 
Basic earnings per common share
  $ 0.75     $ 0.51  
Diluted earnings per common share
  $ 0.70     $ 0.50  
Weighted average common shares outstanding:
               
     Basic
    4,031,323       4,242,887  
     Diluted
    4,307,274       4,283,888  

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,
 
     
2015
     
2014
 
Net income
  $ 3,113     $ 2,245  
Other comprehensive income, net of tax:
               
   Unrealized gains on securities AFS:
               
        Net unrealized holding gains arising during the period
    925       599  
        Reclassification adjustment for net gains included in net income
    -       (341 )
   Net unrealized gains on securities before tax expense
    925       258  
   Income tax expense
    (361     (101 )
Total other comprehensive income
    564       157  
Comprehensive income
  $ 3,677     $ 2,402  

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, 2014
  $ 24,400     $ 41     $ 45,693     $ 39,843     $ 1,031     $ 59     $ 111,067  
Comprehensive income:
                                                       
Net income
    -       -       -       3,080       -       33       3,113  
Other comprehensive income
    -       -       -       -       564       -       564  
Stock compensation expense
    -       -       290       -       -       -       290  
Exercise of stock options
    -       -       369       -       -       -       369  
Issuance of common stock
    -       -       19       -       -       -       19  
Purchase and retirement of common stock
    -       (1 )     (1,620 )     -       -       -       (1,621 )
Preferred stock dividends
    -       -       -       (61 )     -       -       (61 )
                                                         
Balance, March 31, 2015
  $ 24,400     $ 40     $ 44,751     $ 42,862     $ 1,595     $ 92     $ 113,740  

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,
 
   
2015
   
2014
 
Cash Flows From Operating Activities:
 
 
   
 
 
Net income
  $ 3,113     $ 2,245  
Adjustments to reconcile net income to net cash provided (used) by operating activities:
               
     Depreciation, amortization, and accretion
    1,078       829  
     Provision for loan losses
    450       675  
     Provision for deferred taxes
    (19 )     348  
     Increase in cash surrender value of life insurance
    (242 )     (214 )
     Stock compensation expense
    290       154  
     Gain on sale or writedown of assets, net
    (211 )     (750 )
     Gain on sale of loans held for sale, net
    (874 )     (215 )
     Proceeds from sale of loans held for sale
    48,703       10,842  
     Origination of loans held for sale
    (48,993 )     (13,137 )
     Net change in:
               
          Accrued interest receivable and other assets
    (723 )     (159 )
          Accrued interest payable and other liabilities
    (1,132 )     (1,478 )
          Net cash provided (used) by operating activities
    1,440       (860 )
Cash Flows From Investing Activities:
               
Net decrease in certificates of deposit in other banks
    2,984       -  
Net decrease (increase) in loans
    3,064       (3,517 )
Purchases of securities AFS
    (11,097 )     (6,481 )
Proceeds from sales of securities AFS
    -       531  
Proceeds from calls and maturities of securities AFS
    6,585       6,473  
Purchase of other investments
    (15 )     (33 )
Purchase of premises and equipment
    (411 )     (513 )
Proceeds from sales of other real estate and other assets
    1,191       1,762  
Net cash provided (used) by investing activities
    2,301       (1,778 )
Cash Flows From Financing Activities:
               
Net increase (decrease) in deposits
    (19,125 )     7,540  
Net change in short-term borrowings
    -       4,322  
Repayments of notes payable
    (66 )     (62 )
Proceeds from issuance of subordinated notes, net
    7,880       -  
Purchase and retirement of common stock
    (1,621 )     (410 )
Proceeds from issuance of common stock, net
    19       16  
Proceeds from exercise of common stock options
    369       298  
Cash dividends paid on preferred stock
    (61 )     (61 )
Net cash provided (used) by financing activities
    (12,605 )     11,643  
Net increase (decrease) in cash and cash equivalents
    (8,864 )     9,005  
Cash and cash equivalents:
               
Beginning
  $ 68,708     $ 146,978  
Ending
  $ 59,844     $ 155,983  
Supplemental Disclosures of Cash Flow Information:
               
Cash paid for interest
  $ 1,766     $ 1,930  
Cash paid for taxes
    1,600       125  
Transfer of loans and bank premises to other real estate owned
    576       601  
 
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, 2014.

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. 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, 2014.

Recent Accounting Developments Adopted

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, Simplifying the Presentation of Debt Issuance Costs. The update simplifies the presentation of debt issuance costs by requiring that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. For public companies, this update is effective for interim and annual periods beginning after December 15, 2015, and is to be applied retrospectively. Early adoption is permitted. The Company adopted this update in the first quarter of 2015.  See Note 8 of the notes to the unaudited consolidated financial statements for further details on the impact of adopting this accounting update.

In August 2014, the FASB issued ASU 2014-14, Receivables - Troubled Debt Restructurings by Creditors to clarify how creditors are to classify certain government-guaranteed mortgage loans upon foreclosure. This amendment requires that a mortgage loan be derecognized and a separate other receivable be recognized upon foreclosure under certain conditions. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. This amendment is effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2014. The Company adopted the accounting standard during the first quarter of 2015 with no material impact.
 
8
 

 

 
In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing to clarify the current accounting and disclosures for certain repurchase agreements. The amendments in this update require two accounting changes: (1) change the accounting for repurchase-to-maturity transactions to secured borrowing accounting and (2) require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. The amendments in this update also require additional disclosures for certain transactions on the transfer of financial assets, as well as new disclosures for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions that are accounted for as secured borrowings. This amendment is effective for public business entities for the first interim or annual period beginning after December 15, 2014. The Company adopted the accounting standard during the first quarter of 2015 with no material impact.

Note 2 – 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,
 
   
2015
   
2014
 
(In thousands except per share data)
           
Net income, net of noncontrolling interest
  $ 3,080     $ 2,214  
Less: preferred stock dividends
    61       61  
Net income available to common shareholders
  $ 3,019     $ 2,153  
Weighted average common shares outstanding
    4,031       4,243  
Effect of dilutive stock instruments
    276       41  
Diluted weighted average common shares outstanding
    4,307       4,284  
Basic earnings per common share*
  $ 0.75     $ 0.51  
Diluted earnings per common share*
  $ 0.70     $ 0.50  

*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 March 31, 2015 and 2014, respectively, but were excluded from the calculation of diluted earnings per common share as the effect would have been anti-dilutive.

Note 3 – 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, 2013
          793,157     $ 17.86       600,846  
Granted
  $ 7.42       221,000       23.80          
Exercise of stock options
            (39,548 )     16.01          
Forfeited
            (6,750 )     16.80          
Balance – December 31, 2014
            967,859       19.30       630,121  
Granted
  $ 7.82       137,000       25.90          
Exercise of stock options
            (21,000 )     17.57          
Forfeited
            -       -          
Balance – March 31, 2015
            1,083,859     $ 20.17       609,121  
 
9
 

 

 
Note 3 – Stock-based Compensation, continued

Options outstanding at March 31, 2015 are exercisable at option prices ranging from $16.50 to $26.00.  There are 301,035 options outstanding in the range from $16.50 - $17.00, 378,824 options outstanding in the range from $17.01 - $22.00, and 404,000 options outstanding in the range from $22.01 - $26.00.  At March 31, 2015, the exercisable options have a weighted average remaining contractual life of approximately 2 years and a weighted average exercise price of $18.26.

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 2015, and full year of 2014 was approximately $179,000, and $193,000, respectively.
 
Restricted Stock
 
Weighted-Average Grant Date Fair Value
   
Restricted Shares Outstanding
 
Balance – December 31, 2013
  $ 16.50       62,363  
Granted
    23.80       33,136  
Vested*
    19.26       (29,268 )
Forfeited
    -       -  
Balance – December 31, 2014
    18.94       66,231  
Granted
    -       -  
Vested *
    16.50       (3,534 )
Forfeited
    -       -  
Balance – March 31, 2015
  $ 19.07       62,697  
                 
*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 1,175 shares were surrendered during the three months ended March 31, 2015 and 5,821 shares were surrendered during the twelve months ended December 31, 2014.

The Company recognized approximately $290,000 and $154,000 of stock-based employee compensation expense during the three months ended March 31, 2015 and 2014, respectively, associated with its stock equity awards.  As of March 31, 2015, there was approximately $3.8 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 4- Securities Available for Sale

Amortized costs and fair values of securities available for sale are summarized as follows:
       
   
March 31, 2015
 
(in thousands)
 
Amortized Cost
   
Gross
Unrealized
Gains
   
Gross Unrealized Losses
   
Fair Value
 
U.S. government sponsored enterprises
  $ 524     $ 22     $ -     $ 546  
State, county and municipals
    107,108       919       215       107,812  
Mortgage-backed securities
    57,667       813       259       58,221  
Corporate debt securities
    1,140       -       -       1,140  
Equity securities
    2,892       1,348       13       4,227  
    $ 169,331     $ 3,102     $ 487     $ 171,946  
                                 
   
December 31, 2014
 
(in thousands)
 
Amortized Cost
   
Gross
Unrealized
Gains
   
Gross Unrealized Losses
   
Fair Values
 
U.S. government sponsored enterprises
  $ 1,025     $ 14     $ -     $ 1,039  
State, county and municipals
    102,472       778       474       102,776  
Mortgage-backed securities
    61,497       639       459       61,677  
Corporate debt securities
    220       -       -       220  
Equity securities
    1,571       1,192       -       2,763  
    $ 166,785     $ 2,623     $ 933     $ 168,475  
 
10
 

 

 
Note 4- 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, 2015 and December 31, 2014.
       
   
March 31, 2015
 
   
Less than 12 months
   
12 months or more
   
Total
 
(in thousands)
 
Fair
Value
   
Unrealized Losses
   
Fair
Value
   
Unrealized Losses
   
Fair
Value
   
Unrealized Losses
 
State, county and municipals
  $ 31,800     $ 144     $ 8,164     $ 71     $ 39,964     $ 215  
Mortgage-backed securities
    1,515       1       16,196       258       17,711       259  
Equity securities
    195       13       -       -       195       13  
    $ 33,510     $ 158     $ 24,360     $ 329     $ 57,870     $ 487  
       
   
December 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
 
State, county and municipals
  $ 48,531     $ 288     $ 10,338     $ 186     $ 58,869     $ 474  
Mortgage-backed securities
    5,944       20       19,351       439       25,295       459  
    $ 54,475     $ 308     $ 29,689     $ 625     $ 84,164     $ 933  

At March 31, 2015 we had $0.5 million of gross unrealized losses related to 112 securities.  As of March 31, 2015, 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 periods ending March 31, 2015 or March 31, 2014.

The amortized cost and fair values of securities available for sale at March 31, 2015 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, 2015
 
(in thousands)
 
Amortized Cost
   
Fair Value
 
Due in less than one year
  $ 5,378     $ 5,412  
Due in one year through five years
    88,633       89,188  
Due after five years through ten years
    13,057       13,172  
Due after ten years
    1,704       1,726  
      108,772       109,498  
Mortgage-backed securities
    57,667       58,221  
Equity securities
    2,892       4,227  
Securities available for sale
  $ 169,331     $ 171,946  
 
There were no sales of securities during the first three months of 2015.  Proceeds from sales of securities available for sale during the first three months of 2014 were approximately $0.5 million and gross gains of approximately $0.3 million were realized on sales of securities during the first three months of 2014.  There were no losses recognized during the first three months of 2014.
 
11
 

 

 
Note 5 – Loans, Allowance for Loan Losses, and Credit Quality

The loan composition as of March 31, 2015 and December 31, 2014 is summarized as follows.
       
   
Total
 
   
March 31, 2015
   
December 31, 2014
 
(in thousands)
 
Amount
   
% of
Total
   
Amount
   
% of
Total
 
Commercial & industrial
  $ 292,218       33.2 %   $ 289,379       32.7 %
Owner-occupied commercial real estate (“CRE”)
    179,194       20.4       182,574       20.7  
Agricultural (“AG”) production
    14,228       1.6       14,617       1.6  
AG real estate
    41,141       4.7       42,754       4.8  
CRE investment
    81,068       9.2       81,873       9.3  
Construction & land development
    44,518       5.1       44,114       5.0  
Residential construction
    13,118       1.5       11,333       1.3  
Residential first mortgage
    155,186       17.6       158,683       18.0  
Residential junior mortgage
    53,452       6.1       52,104       5.9  
Retail & other
    5,683       0.6       5,910       0.7  
Loans
    879,806       100.0 %     883,341       100.0 %
Less allowance for loan losses
    9,537               9,288          
Loans, net
  $ 870,269             $ 874,053          
Allowance for loan losses to loans
    1.08 %             1.05 %        

   
Originated
 
   
March 31, 2015
   
December 31, 2014
 
(in thousands)
 
Amount
   
% of
Total
   
Amount
   
% of
Total
 
Commercial & industrial
  $ 273,243       38.8 %   $ 268,654       38.3 %
Owner-occupied CRE
    137,430       19.5       140,203       20.0  
AG production
    4,128       0.6       5,580       0.8  
AG real estate
    19,897       2.8       20,060       2.8  
CRE investment
    54,808       7.8       53,339       7.6  
Construction & land development
    34,486       4.9       33,865       4.8  
Residential construction
    13,118       1.9       11,333       1.6  
Residential first mortgage
    116,388       16.5       119,866       17.1  
Residential junior mortgage
    45,286       6.4       43,411       6.2  
Retail & other
    5,285       0.8       5,395       0.8  
    Loans
    704,069       100.0 %   $ 701,706       100.0 %
Less allowance for loan losses
    9,537               9,288          
    Loans, net
  $ 694,532             $ 692,418          
Allowance for loan losses to loans
    1.35 %             1.32 %        

   
Acquired
 
   
March 31, 2015
   
December 31, 2014
 
(in thousands)
 
Amount
   
% of
Total
   
Amount
   
% of
Total
 
Commercial & industrial
  $ 18,975       10.8 %   $ 20,725       11.4 %
Owner-occupied CRE
    41,764       23.8       42,371       23.3  
AG production
    10,100       5.7       9,037       5.0  
AG real estate
    21,244       12.1       22,694       12.5  
CRE investment
    26,260       14.9       28,534       15.7  
Construction & land development
    10,032       5.7       10,249       5.6  
Residential construction
    -       -       -       -  
Residential first mortgage
    38,798       22.2       38,817       21.4  
Residential junior mortgage
    8,166       4.6       8,693       4.8  
Retail & other
    398       0.2       515       0.3  
    Loans
  $ 175,737       100.0 %   $ 181,635       100.0 %
Less allowance for loan losses
    -               -          
    Loans, net
  $ 175,737             $ 181,635          
Allowance for loan losses to loans
    0.00 %             0.00 %        
 
12
 

 

 
Note 5 – Loans, Allowance for Loan Losses, and Credit Quality, continued

Practically all of the Company’s loans, commitments, financial letters of credit and standby letters of credit have been granted to customers in the Company’s market area.  Although the Company has a diversified loan portfolio, the credit risk in the loan portfolio is largely influenced by general economic conditions and trends of the counties and markets in which the debtors operate, and the resulting impact on the operations of borrowers or on the value of underlying collateral, if any.

The allowance for loan and lease losses (“ALLL”) represents management’s estimate of probable and inherent credit losses in the Company’s loan portfolio at the balance sheet date. In general, estimating the amount of the ALLL is a function of a number of factors, including but not limited to changes in the loan portfolio, net charge-offs, trends in past due and impaired loans, and the level of potential problem loans, all of which may be susceptible to significant change.  To the extent actual outcomes differ from management estimates, additional provisions for loan losses could be required that could adversely affect our earnings or financial position in future periods. Allocations to the ALLL may be made for specific loans but the entire ALLL is available for any loan that, in management’s judgment, should be charged-off or for which an actual loss is realized.

The allocation methodology used by the Company includes specific allocations for impaired loans evaluated individually for impairment based on collateral values and for the remaining loan portfolio collectively evaluated for impairment primarily based on historical loss rates and other qualitative factors.  Loan charge-offs and recoveries are based on actual amounts charged-off or recovered by loan category.  Management allocates the ALLL by pools of risk within each loan portfolio.  No ALLL has been recorded on acquired loans since acquisition or at March 31, 2015 since the remaining pool discounts exceed the required amount calculated based on the actual charge off experience in the acquired loan portfolio.
 
13
 

 

 
Note 5 – 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 three months ended March 31, 2015:
                                                                    
   
TOTAL – Three Months Ended March 31, 2015
 
(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
  $ 3,191     $ 1,230     $ 53     $ 226     $ 511     $ 2,685     $ 140     $ 866     $ 337     $ 49     $ 9,288  
Provision
    207       171       (17 )     6       23       23       24       (16 )     22       7       450  
Charge-offs
    (14 )     (154 )     -       -       -       -       -       (32 )     -       (12 )     (212 )
Recoveries
    -       1       -       -       5       -       -       -       -       5       11  
Net charge-offs
    (14 )     (153 )     -       -       5       -       -       (32 )     -       (7 )     (201 )
Ending balance
  $ 3,384     $ 1,248     $ 36     $ 232     $ 539     $ 2,708     $ 164     $ 818     $ 359     $ 49     $ 9,537  
As percent of ALLL
    35.5 %     13.1 %     0.4 %     2.4 %     5.7 %     28.4 %     1.7 %     8.6 %     3.8 %     0.4 %     100 %
                                                                                         
ALLL:
                                                                                       
Individually evaluated
  $ 382     $ -     $ -     $ -     $ -     $ 320     $ -     $ -     $ -     $ -     $ 702  
Collectively evaluated
    3,002       1,248       36       232       539       2,388       164       818       359       49       8,835  
Ending balance
  $ 3,384     $ 1,248     $ 36     $ 232     $ 539     $ 2,708     $ 164     $ 818     $ 359     $ 49     $ 9,537  
                                                                                         
Loans:
                                                                                       
Individually evaluated
  $ 488     $ 994     $ 39     $ 402     $ 1,108     $ 4,028     $ -     $ 801     $ 151     $ -     $ 8,011  
Collectively evaluated
    291,730       178,200       14,189       40,739       79,960       40,490       13,118       154,385       53,301       5,683       871,795  
Total loans
  $ 292,218     $ 179,194     $ 14,228     $ 41,141     $ 81,068     $ 44,518     $ 13,118     $ 155,186     $ 53,452     $ 5,683     $ 879,806  
                                                                                         
Less ALLL
  $ 3,384     $ 1,248     $ 36     $ 232     $ 539     $ 2,708     $ 164     $ 818     $ 359     $ 49     $ 9,537  
Net loans
  $ 288,834     $ 177,946     $ 14,192     $ 40,909     $ 80,529     $ 41,810     $ 12,954     $ 154,368     $ 53,093     $ 5,634     $ 870,269  
                                                                   
   
Originated – Three Months Ended March 31, 2015
 
(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
  $ 3,191     $ 1,230     $ 53     $ 226     $ 511     $ 2,685     $ 140     $ 866     $ 337     $ 49     $ 9,288  
Provision
    207       171       (17 )     6       23       23       24       (16 )     22       7       450  
Charge-offs
    (14 )     (154 )     -       -       -       -       -       (32 )     -       (12 )     (212 )
Recoveries
    -       1       -       -       5       -       -       -       -       5       11  
Net charge-offs
    (14 )     (153 )     -       -       5       -       -       (32 )     -       (7 )     (201 )
Ending balance
  $ 3,384     $ 1,248     $ 36     $ 232     $ 539     $ 2,708     $ 164     $ 818     $ 359     $ 49     $ 9,537  
As percent of ALLL
    35.5 %     13.1 %     0.4 %     2.4 %     5.7 %     28.4 %     1.7 %     8.6 %     3.8 %     0.4 %     100 %
                                                                                         
ALLL:
                                                                                       
Individually evaluated
  $ 382     $ -     $ -     $ -     $ -     $ 320     $ -     $ -     $ -     $ -     $ 702  
Collectively evaluated
    3,002       1,248       36       232       539       2,388       164       818       359       49       8,835  
Ending balance
  $ 3,384     $ 1,248     $ 36     $ 232     $ 539     $ 2,708     $ 164     $ 818     $ 359     $ 49     $ 9,537  
                                                                                         
Loans:
                                                                                       
Individually evaluated
  $ 485     $ -     $ -     $ -     $ -     $ 3,715     $ -     $ -     $ -     $ -     $ 4,200  
Collectively evaluated
    272,758       137,430       4,128       19,897       54,808       30,771       13,118       116,388       45,286       5,285       699,869  
Total loans
  $ 273,243     $ 137,430     $ 4,128     $ 19,897     $ 54,808     $ 34,486     $ 13,118     $ 116,388     $ 45,286     $ 5,285     $ 704,069  
                                                                                         
Less ALLL
  $ 3,384     $ 1,248     $ 36     $ 232     $ 539     $ 2,708     $ 164     $ 818     $ 359