10-Q 1 t82878_10q.htm FORM 10-Q

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 
 

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended June 30, 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 47-0871001
(State or other jurisdiction of incorporation or organization) (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 ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐      Accelerated filer ☒
Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company ☐

 

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

 

As of July 31, 2015 there were 3,960,701 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, 2015 (unaudited) and December 31, 2014
  3
         
    Consolidated Statements of Income
Three Months and Six Months Ended June 30, 2015 and 2014 (unaudited)
  4
         
    Consolidated Statements of Comprehensive Income
Three Months and Six Months Ended June 30, 2015 and 2014 (unaudited)
  5
         
    Consolidated Statement of Changes in Stockholders’ Equity
Six Months Ended June 30, 2015 (unaudited)
  6
         
    Consolidated Statements of Cash Flows
Six Months Ended June 30, 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

  27-49
         
  Item 3. Quantitative and Qualitative Disclosures About Market Risk   50
         
  Item 4. Controls and Procedures   50
       
PART II OTHER INFORMATION    
         
  Item 1. Legal Proceedings   50
         
  Item 1A. Risk Factors   50
         
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   50
         
  Item 3. Defaults Upon Senior Securities   50
         
  Item 4. Mine Safety Disclosures   50
         
  Item 5. Other Information   50
         
  Item 6. Exhibits   51
         
    Signatures   51-55

 

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, 2015
(Unaudited)
  December 31, 2014
(Audited)
 
Assets              
Cash and due from banks   $ 22,998   $ 23,975  
Interest-earning deposits     35,364     43,169  
Federal funds sold     404     1,564  
Cash and cash equivalents     58,766     68,708  
Certificates of deposit in other banks     4,168     10,385  
Securities available for sale (“AFS”)     159,687     168,475  
Other investments     8,117     8,065  
Loans held for sale     3,884     7,272  
Loans     883,302     883,341  
Allowance for loan losses     (9,723 )   (9,288 )
Loans, net     873,579     874,053  
Premises and equipment, net     31,198     31,924  
Bank owned life insurance (“BOLI”)     27,976     27,479  
Accrued interest receivable and other assets     17,901     18,924  
Total assets   $ 1,185,276   $ 1,215,285  
               
Liabilities and Stockholders’ Equity              
Liabilities:              
Demand   $ 220,477   $ 203,502  
Money market and NOW accounts     417,231     494,945  
Savings     129,788     120,258  
Time     232,443     241,198  
Total deposits     999,939     1,059,903  
Short term borrowings     10,000     -  
Notes payable     21,045     21,175  
Junior subordinated debentures     12,427     12,328  
Subordinated notes     11,831     -  
Accrued interest payable and other liabilities     16,039     10,812  
 Total liabilities     1,071,281     1,104,218  
               
Stockholders’ Equity:              
Preferred equity     24,400     24,400  
Common stock     40     41  
Additional paid-in capital     43,097     45,693  
Retained earnings     45,736     39,843  
Accumulated other comprehensive income     595     1,031  
Total Nicolet Bankshares, Inc. stockholders’ equity     113,868     111,008  
Noncontrolling interest     127     59  
Total stockholders’ equity and noncontrolling interest     113,995     111,067  
Total liabilities, noncontrolling interest and stockholders’ equity   $ 1,185,276   $ 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     3,966,785     4,058,208  
Common shares issued     4,020,100     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
June 30,
  Six Months Ended
June 30,
 
    2015   2014   2015   2014  
Interest income:                          
Loans, including loan fees   $ 10,783   $ 11,616   $ 22,762   $ 22,623  
Investment securities:                          
Taxable     365     415     759     833  
Non-taxable     264     170     535     343  
Other interest income     119     128     219     263  
Total interest income     11,531     12,329     24,275     24,062  
Interest expense:                          
Money market and NOW accounts     558     572     1,124     1,165  
Savings and time deposits     750     793     1,493     1,481  
Short-term borrowings     -     4     -     7  
Junior subordinated debentures     219     218     436     435  
Subordinated notes     125     -     176     -  
Notes payable     166     246     330     498  
Total interest expense     1,818     1,833     3,559     3,586  
   Net interest income     9,713     10,496     20,716     20,476  
Provision for loan losses     450     675     900     1,350  
Net interest income after provision for loan losses     9,263     9,821     19,816     19,126  
Noninterest income:                          
Service charges on deposit accounts     612     544     1,121     1,038  
Trust services fee income     1,236     1,119     2,440     2,224  
Mortgage income     985     431     1,859     646  
Brokerage fee income     169     166     339     326  
Bank owned life insurance     255     220     497     434  
Rent income     282     288     566     588  
Investment advisory fees     85     102     203     212  
Gain (loss) on sale or writedown of assets, net     740     (442 )   951     308  
Other     530     452     988     864  
Total noninterest income     4,894     2,880     8,964     6,640  
Noninterest expense:                          
Salaries and employee benefits     5,668     5,384     11,359     10,679  
Occupancy, equipment and office     1,733     1,737     3,518     3,635  
Business development and marketing     550     537     1,035     1,072  
Data processing     890     775     1,721     1,529  
FDIC assessments     163     203     327     387  
Core deposit intangible amortization     260     315     535     650  
Other     460     533     1,031     1,120  
Total noninterest expense     9,724     9,484     19,526     19,072  
                           
Income before income tax expense     4,433     3,217     9,254     6,694  
Income tax expense     1,463     641     3,171     1,873  
Net income     2,970     2,576     6,083     4,821  
Less: net income attributable to noncontrolling interest     35     22     68     53  
Net income attributable to Nicolet Bankshares, Inc.     2,935     2,554     6,015     4,768  
Less: preferred stock dividends     61     61     122     122  
Net income available to common shareholders   $ 2,874   $ 2,493   $ 5,893   $ 4,646  
                           
Basic earnings per common share   $ 0.72   $ 0.59   $ 1.47   $ 1.10  
Diluted earnings per common share   $ 0.66   $ 0.58   $ 1.36   $ 1.08  
Weighted average common shares outstanding:                          
Basic     4,007,368     4,212,174     4,019,279     4,227,446  
Diluted     4,366,295     4,332,016     4,337,780     4,312,005  

 

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,
 
    2015   2014   2015   2014  
Net income   $ 2,970   $ 2,576   $ 6,083   $ 4,821  
Other comprehensive income, net of tax:                          
Unrealized gains (losses) on securities AFS:                          
Net unrealized holding gains (loss) arising during the period     (1,010 )   446     (85 )   1,045  
Reclassification adjustment for net gains included in net income     (630 )   -     (630 )   (341 )
Net unrealized gains (losses) on securities before tax expense     (1,640 )   446     (715 )   704  
Income tax (expense) benefit     640     (173 )   279     (274 )
Total other comprehensive income (loss)     (1,000 )   273     (436 )   430  
Comprehensive income   $ 1,970   $ 2,849   $ 5,647   $ 5,251  

 

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     -     -     -     6,015     -     68     6,083  
Other comprehensive income     -     -     -     -     (436 )   -     (436 )
Stock compensation expense     -     -     593     -     -     -     593  
Exercise of stock options, net     -     -     550     -     -     -     550  
Issuance of common stock     -     -     54     -     -     -     54  
Purchase and retirement of common stock     -     (1)     (3,793 )   -     -     -     (3,794 )
Preferred stock dividends     -     -     -     (122 )   -     -     (122 )
                                             
Balance, June 30, 2015   $  24,400   $ 40   $ 43,097   $ 45,736   $ 595   $ 127   $ 113,995  

 

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,  
    2015     2014  
Cash Flows From Operating Activities:                
Net income   $ 6,083     $ 4,821  
Adjustments to reconcile net income to net cash provided by operating activities:                
 Depreciation, amortization, and accretion     2,220       1,796  
 Provision for loan losses     900       1,350  
 Increase in cash surrender value of life insurance     (497 )     (434 )
 Stock compensation expense     593       306  
 Gain on sale or writedown of assets, net     (951 )     (308 )
 Gain on sale of loans held for sale, net     (1,859 )     (646 )
 Proceeds from sale of loans held for sale     110,426       31,322  
 Origination of loans held for sale     (105,255 )     (32,779 )
 Net change in:                
Accrued interest receivable and other assets     (441 )     270  
Accrued interest payable and other liabilities     1,028       (1,136 )
Net cash provided by operating activities     12,247       4,562  
Cash Flows From Investing Activities:                
Net decrease (increase) in certificates of deposit in other banks     6,217       (5,184 )
Net increase in loans     (707 )     (13,800 )
Purchases of securities AFS     (15,460 )     (23,107 )
Proceeds from sales of securities AFS     13,883       515  
Proceeds from calls and maturities of securities AFS     13,863       11,782  
Purchase of other investments     (52 )     (74 )
Net increase in premises and equipment     (503 )     (771 )
Proceeds from sales of other real estate and other assets     2,156       2,159  
Purchase of BOLI     -       (2,750 )
Net cash provided (used) by investing activities     19,397       (31,230 )
Cash Flows From Financing Activities:                
Net decrease in deposits     (59,964 )     (23,583 )
Net change in short-term borrowings     10,000       (3,717 )
Repayments of notes payable     (130 )     (5,123 )
Proceeds from issuance of subordinated notes, net     11,820       -  
Purchase of common stock     (3,794 )     (2,504 )
Proceeds from issuance of common stock     54       29  
Proceeds from exercise of common stock options, net     550       298  
Cash dividends paid on preferred stock     (122 )     (122 )
Net cash used by financing activities     (41,586 )     (34,722 )
Net decrease in cash and cash equivalents     (9,942 )     (61,390 )
Cash and cash equivalents:                
Beginning   $ 68,708     $ 146,978  
Ending   $ 58,766     $ 85,588  
Supplemental Disclosures of Cash Flow Information:                
Cash paid for interest   $ 3,579     $ 3,761  
Cash paid for taxes     2,040       2,060  
Transfer of loans and bank premises to other real estate owned     830       1,061  

 

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

 

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.

 

8
 

  

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
 June 30,
  Six Months Ended
 June 30,
 
    2015   2014   2015   2014  
(In thousands except per share data)                          
Net income, net of noncontrolling interest   $ 2,935   $ 2,554   $ 6,015   $ 4,768  
Less: preferred stock dividends     61     61     122     122  
Net income available to common shareholders   $ 2,874   $ 2,493   $ 5,893   $ 4,646  
Weighted average common shares outstanding     4,007     4,212     4,019     4,227  
Effect of dilutive stock instruments     359     120     319     85  
Diluted weighted average common shares outstanding     4,366     4,332     4,338     4,312  
Basic earnings per common share*   $ 0.72   $ 0.59   $ 1.47   $ 1.10  
Diluted earnings per common share*   $ 0.66   $ 0.58   $ 1.36   $ 1.08  

 

*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 0.2 million shares and 0.3 million shares were outstanding at June 30, 2015 and June 30, 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

 

The fair value of stock options granted is estimated on the date of grant using a Black-Scholes option pricing model. The fair values of stock options are amortized as compensation expense on a straight-line basis over the vesting period of the grants. Compensation expense recognized is included in personnel expense in the consolidated statements of income. Assumptions are used in estimating the fair value of stock options granted. The weighted average expected life of the 2015 stock options granted were 7 years and represent the period of time that stock options are expected to be outstanding. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grants and for the options granted in 2015 was a weighted average rate of 1.68%. The expected volatility was 25% and is based on the implied volatility of the Corporation’s stock, and the dividend yield used in the fair value calculation was 0%. The weighted average per share fair value of the options granted in 2015 was $8.11.

 

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   $ 8.11     162,000     26.66        
 Exercise of stock options*           (29,700 )   18.71        
 Forfeited           -     -        
Balance – June 30, 2015           1,100,159   $ 20.40     631,784  

 

*The terms of the stock option agreements permit having a number of shares of stock withheld, the fair market value of which as of the date of exercise is sufficient to satisfy the exercise price and/or tax withholding requirements. Accordingly, 170 shares were withheld during the six months ended June 30, 2015 and no shares were withheld during the twelve months ended December 31, 2014.

 

9
 

  

Note 3 – Stock-based Compensation, continued

 

Options outstanding at June 30, 2015 are exercisable at option prices ranging from $16.50 to $30.80. There are 676,659 options outstanding in the range from $16.50 - $22.00 and 423,500 options outstanding in the range from $22.01 - $30.80. At June 30, 2015, the exercisable options have a weighted average remaining contractual life of approximately 2 years and a weighted average exercise price of $18.13.

 

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 2015, and full year of 2014 was approximately $246,000, 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     (12,916 )
Forfeited     -     -  
Balance – June 30, 2015   $ 19.53     53,315  

 

*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 2,562 shares were surrendered during the six months ended June 30, 2015 and 5,821 shares were surrendered during the twelve months ended December 31, 2014.

 

The Company recognized approximately $593,000 and $306,000 of stock-based employee compensation expense during the six months ended June 30, 2015 and 2014, respectively, associated with its stock equity awards. As of June 30, 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:

                           
    June 30, 2015  
(in thousands)   Amortized Cost   Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair Value  
U.S. government sponsored enterprises   $ 285   $ 8   $ -   $ 293  
State, county and municipals     100,067     261     544     99,784  
Mortgage-backed securities     54,478     563     498     54,543  
Corporate debt securities     1,140     -     -     1,140  
Equity securities     2,742     1,213     28     3,927  
    $ 158,712   $ 2,045   $ 1,070   $ 159,687  

 

                           
    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 June 30, 2015 and December 31, 2014.

                                       
    June 30, 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   $ 55,917   $ 369   $ 10,402   $ 175   $ 66,319   $ 544  
Mortgage-backed securities     10,288     71     15,131     427     25,419     498  
Equity securities     180     28     -     -     180     28  
    $ 66,385   $ 468   $ 25,533   $ 602   $ 91,918   $ 1,070  

 

                                       
    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 June 30, 2015 we had $1.1 million of gross unrealized losses related to 184 securities. As of June 30, 2015, the Company does not consider securities with unrealized losses to be other-than-temporarily impaired as 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 periods ending June 30, 2015 or June 30, 2014.

 

The amortized cost and fair values of securities available for sale at June 30, 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.

               
    June 30, 2015  
(in thousands)   Amortized Cost   Fair Value  
Due in less than one year   $ 4,814   $ 4,857  
Due in one year through five years     76,386     76,103  
Due after five years through ten years     18,591     18,537  
Due after ten years     1,701     1,720  
      101,492     101,217  
Mortgage-backed securities     54,478     54,543  
Equity securities     2,742     3,927  
Securities available for sale   $ 158,712   $ 159,687  

 

Proceeds from sales of securities available for sale during the first six months of 2015 and 2014 were approximately $13.9 million and $0.5 million respectively. Gains of approximately $0.6 million and $0.3 million were realized during the first six months of 2015 and 2014, respectively, and no losses were realized on sales of securities during the first six months of 2015 or 2014.

 

11
 

 

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

 

The loan composition as of June 30, 2015 and December 31, 2014 is summarized as follows.

                           
    Total  
    June 30, 2015   December 31, 2014  
(in thousands)   Amount   % of
Total
  Amount   % of
Total
 
Commercial & industrial   $ 309,103     35.0 % $ 289,379     32.7 %
Owner-occupied commercial real estate (“CRE”)     175,809     19.9     182,574     20.7  
Agricultural (“AG”) production     14,432     1.6     14,617     1.6  
AG real estate     40,783     4.6     42,754     4.8  
CRE investment     82,486     9.3     81,873     9.3  
Construction & land development     38,387     4.4     44,114     5.0  
Residential construction     10,321     1.2     11,333     1.3  
Residential first mortgage     153,857     17.4     158,683     18.0  
Residential junior mortgage     52,433     6.0     52,104     5.9  
Retail & other     5,691     0.6     5,910     0.7  
Loans     883,302     100.0 %   883,341     100.0 %
Less allowance for loan losses     9,723           9,288        
Loans, net   $ 873,579         $ 874,053        
Allowance for loan losses to loans     1.10 %         1.05 %      

                           
    Originated  
    June 30, 2015   December 31, 2014  
(in thousands)   Amount   % of
Total
  Amount   % of
Total
 
Commercial & industrial   $ 292,535     40.7 % $ 268,654     38.3 %
Owner-occupied CRE     138,081     19.2     140,203     20.0  
AG production     5,287     0.7     5,580     0.8  
AG real estate     20,467     2.8     20,060     2.8  
CRE investment     56,211     7.8     53,339     7.6  
Construction & land development     28,662     4.0     33,865     4.8  
Residential construction     10,321     1.4     11,333     1.6  
Residential first mortgage     116,872     16.3     119,866     17.1  
Residential junior mortgage     44,629     6.3     43,411     6.2  
Retail & other     5,344     0.8     5,395     0.8  
Loans     718,409     100.0 %   701,706     100.0 %
Less allowance for loan losses     7,945           9,288        
Loans, net   $ 710,464         $ 692,418        
Allowance for loan losses to loans     1.11 %         1.32 %      

                           
    Acquired  
    June 30, 2015   December 31, 2014  
(in thousands)   Amount   % of
Total
  Amount   % of
Total
 
Commercial & industrial   $ 16,568     10.0 % $ 20,725     11.4 %
Owner-occupied CRE     37,728     22.9     42,371     23.3  
AG production     9,145     5.6     9,037     5.0  
AG real estate     20,316     12.3     22,694     12.5  
CRE investment     26,275     15.9     28,534     15.7  
Construction & land development     9,725     5.9     10,249     5.6  
Residential construction     -     -     -     -  
Residential first mortgage     36,985     22.5     38,817     21.4  
Residential junior mortgage     7,804     4.7     8,693     4.8  
Retail & other     347     0.2     515     0.3  
Loans     164,893     100.0 %   181,635     100.0 %
Less allowance for loan losses     1,778           -        
Loans, net   $ 163,115         $ 181,635        
Allowance for loan losses to loans     1.08 %         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. As events have occurred in the acquired loan portfolios, an ALLL has been established for this pool of assets reflecting an increase in risk as some credits migrate to higher grades.

 

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 six months ended June 30, 2015:

                                                                     
    TOTAL – Six Months Ended June 30, 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     646     453     3     66     151     (639 )   (16 )   151     74     11     900  
Charge-offs     (288 )   (154 )   -     -     -     -     -     (32 )   (13 )   (22 )   (509 )
Recoveries     4     2     -     -     9     -     -     17     1     11     44  
Net charge-offs     (284 )   (152 )   -     -     9     -     -     (15 )   (12 )   (11 )   (465 )
Ending balance   $ 3,553   $ 1,531   $ 56   $ 292   $ 671   $ 2,046   $ 124   $ 1,002   $ 399   $ 49   $ 9,723  
As percent of ALLL     36.5 %   15.7 %   0.6 %   3.0 %   6.9 %   21.0 %   1.4 %   10.3 %   4.1 %   0.5 %   100 %
                                                                     
ALLL:                                                                    
Individually evaluated   $ -   $ -   $ -   $ -   $ -   $ 287   $ -   $ -   $ -   $ -   $ 287  
Collectively evaluated     3,553     1,531     56     292     671     1,759     124     1,002     399     49     9,436  
Ending balance   $ 3,553   $ 1,531   $ 56   $ 292   $ 671   $ 2,046   $ 124   $ 1,002   $ 399   $ 49   $ 9,723  
                                                                     
Loans:                                                                    
Individually evaluated   $ 48   $ 697   $ 38   $ 403   $ 1,050   $ 4,361   $ -   $ 723   $ 148   $ -   $ 7,468  
Collectively evaluated     309,055     175,112     14,394     40,380     81,436     34,026     10,321     153,134     52,285     5,691     875,834  
Total loans   $ 309,103   $ 175,809   $ 14,432   $ 40,783   $ 82,486   $ 38,387   $ 10,321   $ 153,857   $ 52,433   $ 5,691   $ 883,302  
                                                                     
Less ALLL   $ 3,553   $ 1,531   $ 56   $ 292   $ 671   $ 2,046   $ 124   $ 1,002   $ 399   $ 49   $ 9,723  
Net loans   $ 305,550   $ 174,278   $ 14,376   $ 40,491   $ 81,815   $ 36,341   $ 10,197   $ 152,855   $ 52,034   $ 5,642   $ 873,579  
                                                                     
    Originated – Six Months Ended June 30, 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     (41 )   57     (9 )   (19 )   (10 )   (711 )   (16 )   (121 )   (19 )   1     (888 )
Charge-offs     (288 )   (154 )   -     -     -     -     -     (32 )   -     (22 )   (496 )
Recoveries     4     2     -     -     9     -     -     15     -     11     41  
Net charge-offs     (284 )   (152 )   -     -     9     -     -     (17 )   -     (11 )   (455 )
Ending balance   $ 2,866   $ 1,135   $ 44   $ 207   $ 510   $ 1,974   $ 124   $ 728   $ 318   $ 39   $ 7,945  
As percent of ALLL     36.1 %   14.3 %   0.6 %   2.6 %   6.4 %   24.8 %   1.6 %   9.2 %   4.0 %   0.4 %   100 %
                                                                     
ALLL:                                                                    
Individually evaluated   $ -   $ -   $ -   $ -   $ -   $ 287   $ -   $ -   $ -   $ -   $ 287  
Collectively evaluated     2,866     1,135     44     207     510     1,687     124     728     318     39     7,658  
Ending balance   $ 2,866   $ 1,135   $ 44   $ 207   $ 510   $ 1,974   $ 124   $ 728   $ 318   $ 39   $ 7,945  
                                                                     
Loans:                                                                    
Individually evaluated   $ 47   $ -   $ -   $ -   $ -   $ 3,652   $ -   $ -   $ -   $ -   $ 3,699  
Collectively evaluated     292,488     138,081     5,287     20,467     56,211     25,010     10,321     116,872     44,629     5,344     714,710  
Total loans   $ 292,535   $ 138,081   $ 5,287   $ 20,467   $ 56,211   $ 28,662   $ 10,321   $ 116,872   $ 44,629   $ 5,344   $ 718,409  
                                                                     
Less ALLL   $ 2,866   $ 1,135   $ 44   $ 207   $ 510   $ 1,974   $ 124   $ 728   $ 318   $ 39   $ 7,945  
Net loans   $ 289,669   $ 136,946   $ 5,243   $ 20,260   $ 55,701   $ 26,688   $ 10,197   $ 116,144   $ 44,311   $ 5,305   $ 710,464  

 

14
 

 

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

                                                                     
    Acquired – Six Months Ended June 30, 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   $ -   $ -   $ -   $ -   $ -   $ -   $ -   $ -   $ -   $ -   $ -  
Provision     687     396     12     85     161     72     -     272     93     10     1,788  
Charge-offs     -     -     -     -     -     -     -     -     (13 )   -     (13 )
Recoveries     -     -     -     -     -     -     -     2     1     -     3  
Net charge-offs     -     -     -     -     -     -     -     2     (12 )   -     (10 )
Ending balance   $ 687   $ 396   $ 12   $ 85   $ 161   $ 72   $ -   $ 274   $ 81   $ 10   $ 1,778  
As percent of ALLL     38.6 %   22.3 %   0.7 %   4.8 %   9.1 %   4.0 %   - %   15.4 %   4.6 %   0.5 %   100 %
                                                                     
Loans:                                                                    
Individually evaluated   $ 1   $ 697   $ 38   $ 403   $ 1,050   $ 709   $ -   $ 723   $ 148   $ -   $ 3,769  
Collectively evaluated     16,567     37,031     9,107     19,913     25,225     9,016     -     36,262     7,656     347     161,124  
Total loans   $ 16,568   $ 37,728   $ 9,145   $ 20,316   $ 26,275   $ 9,725   $ -   $ 36,985   $ 7,804   $ 347   $ 164,893  
                                                                     
Less ALLL   $ 687   $ 396   $ 12   $ 85   $ 161   $ 72   $ -   $ 274   $ 81   $ 10   $ 1,778  
Net loans   $ 15,881   $ 37,332   $ 9,133   $ 20,231   $ 26,114   $ 9,653   $ -   $ 36,711   $ 7,723   $ 337   $ 163,115  

 

There was no ALLL allocated to individually evaluated loans at June 30, 2015, therefore the table reflecting the ALLL between individually evaluated loans and collectively evaluated loans was omitted.

The following table presents 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  

 

15
 

 

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

                                                                     
    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 %   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   $ 323   $ 1,042   $ -   $ -   $ -   $ 3,879   $ -   $ -   $ -   $ -   $ 5,244  
Collectively evaluated     241,827     128,273     4,653     18,189     50,929     30,622     11,895     110,084     40,913     4,847     642,232  
Total loans   $ 242,150   $ 129,315   $ 4,653   $ 18,189   $ 50,929   $ 34,501   $ 11,895   $ 110,084   $ 40,913   $ 4,847   $ 647,476  
                                                                     
Less ALLL   $ 3,281   $ 1,096   $ 44   $ 272   $ 575   $ 2,784   $ 167   $ 833   $ 448   $ 142   $ 9,642  
Net loans   $ 238,869   $ 128,219   $ 4,609   $ 17,917   $ 50,354   $ 31,717   $ 11,728   $ 109,251   $ 40,465   $ 4,705   $ 637,834  
                                                                     
    Acquired – 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  
Provision   $ 24   $ 7   $ -   $ -   $ -   $ 12   $ -   $ 91   $ 9   $ -   $ 143  
Charge-offs     (24 )   (16 )   -     -     -     (12 )   -     (91 )   (9 )   -     (152 )
Recoveries     -     9     -     -     -     -     -     -     -     -     9  
Loans:                                                                    
Individually evaluated   $ 9   $ 957   $ 27   $ 459   $ 1,913   $ 479   $ -   $ 1,319   $ 438   $ -   $ 5,601  
Collectively evaluated     27,218     56,953     9,302     23,286     26,797     10,524     -     43,310     8,893     726     207,009  
Total loans   $ 27,227   $ 57,910   $ 9,329   $ 23,745   $ 28,710   $ 11,003   $ -   $ 44,629   $ 9,331   $ 726   $ 212,610  

 

16
 

 

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

 

The following table presents nonaccrual loans by portfolio segment in total and then as a further breakdown by originated or acquired as of June 30, 2015 and December 31, 2014.

                           
    Total    
(in thousands)   June 30, 2015   % to Total   December 31, 2014   % to Total  
Commercial & industrial   $ 324     7.6 % $ 171     3.2 %
Owner-occupied CRE     813     19.1     1,667     30.9  
AG production     16     0.4     21     0.4  
AG real estate     383     9.0     392     7.3  
CRE investment     738     17.4     911     16.9  
Construction & land development     709     16.7     934     17.3  
Residential construction     -     -     -     -  
Residential first mortgage     1,112     26.2     1,155     21.4  
Residential junior mortgage     152     3.6     141     2.6  
Retail & other     -     -     -     -  
Nonaccrual loans - Total   $ 4,247     100.0 % $ 5,392     100.0 %
                           
    Originated    
(in thousands)   June 30, 2015   % to Total   December 31, 2014   % to Total  
Commercial & industrial   $ 292     61.2 % $ 130     11.5 %
Owner-occupied CRE     13     2.7     673     59.7  
AG production     16     3.4     -     -  
AG real estate     -     -     -     -  
CRE investment     -     -     -     -  
Construction & land development     -     -     165     14.6  
Residential construction     -     -     -     -  
Residential first mortgage     156     32.7     160     14.2  
Residential junior mortgage     -     -     -     -  
Retail & other     -     -     -     -  
Nonaccrual loans - Originated   $ 477     100.0 % $ 1,128     100.0 %
                           
    Acquired    
(in thousands)   June 30, 2015   % to Total   December 31, 2014   % to Total  
Commercial & industrial   $ 32     0.8 % $ 41     1.0 %
Owner-occupied CRE     800     21.2     994     23.3  
AG production     -     -     21     0.5  
AG real estate     383     10.2     392     9.2  
CRE investment     738     19.6     911     21.4  
Construction & land development     709     18.8     769     18.0  
Residential construction     -     -     -     -  
Residential first mortgage     956     25.4     995     23.3  
Residential junior mortgage     152     4.0     141     3.3  
Retail & other     -     -     -     -  
Nonaccrual loans – Acquired   $ 3,770     100.0 % $ 4,264     100.0 %

 

17
 

 

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

 

The following tables present total past due loans by portfolio segment as of June 30, 2015 and December 31, 2014:

                           
    June 30, 2015  
(in thousands)   30-89 Days Past
Due (accruing)
  90 Days & Over
or non-accrual
  Current   Total  
Commercial & industrial   $ 203   $ 324   $ 308,576   $ 309,103  
Owner-occupied CRE     -     813     174,996     175,809  
AG production     -     16     14,416     14,432  
AG real estate     -     383     40,400     40,783  
CRE investment     403     738     81,345     82,486  
Construction & land development     -     709     37,678     38,387  
Residential construction     -     -     10,321     10,321  
Residential first mortgage     180     1,112     152,565     153,857  
Residential junior mortgage     321     152     51,960     52,433  
Retail & other     7     -     5,684     5,691  
Total loans   $ 1,114   $ 4,247   $ 877,941   $ 883,302  
As a percent of total loans     0.1 %   0.5 %   99.4 %   100.0 %
                           
    December 31, 2014  
(in thousands)   30-89 Days Past
Due (accruing)
  90 Days & Over
or nonaccrual
  Current   Total  
Commercial & industrial   $ 167   $ 171   $ 289,041   $ 289,379  
Owner-occupied CRE     54     1,667     180,853     182,574  
AG production     -     21     14,596     14,617  
AG real estate     118     392     42,244     42,754  
CRE investment     426     911     80,536     81,873  
Construction & land development     -     934     43,180     44,114  
Residential construction     -     -     11,333     11,333  
Residential first mortgage     399     1,155     157,129     158,683  
Residential junior mortgage     -     141     51,963     52,104  
Retail & other     -     -     5,910     5,910  
Total loans   $ 1,164   $ 5,392   $ 876,785   $ 883,341  
As a percent of total loans     0.1 %   0.6 %   99.3 %   100.0 %

A description of the loan risk categories used by the Company follows:

1-4 Pass: Credits exhibit adequate cash flows, appropriate management and financial ratios within industry norms and/or are supported by sufficient collateral. Some credits in these rating categories may require a need for monitoring but elements of concern are not severe enough to warrant an elevated rating.

5 Watch: Credits with this rating are adequately secured and performing but are being monitored due to the presence of various short-term weaknesses which may include unexpected, short-term adverse financial performance, managerial problems, potential impact of a decline in the entire industry or local economy and delinquency issues. Loans to individuals or loans supported by guarantors with marginal net worth or collateral may be included in this rating category.

6 Special Mention: Credits with this rating have potential weaknesses that, without the Company’s attention and correction may result in deterioration of repayment prospects. These assets are considered Criticized Assets. Potential weaknesses may include adverse financial trends for the borrower or industry, repeated lack of compliance with Company requests, increasing debt to net worth, serious management conditions and decreasing cash flow.

7 Substandard: Assets with this rating are characterized by the distinct possibility the Company will sustain some loss if deficiencies are not corrected. All foreclosures, liquidations, and non-accrual loans are considered to be categorized in this rating, regardless of collateral sufficiency.

8 Doubtful: Assets with this rating exhibit all the weaknesses as one rated Substandard with the added characteristic that such weaknesses make collection or liquidation in full highly questionable.

9 Loss: Assets in this category are considered uncollectible. Pursuing any recovery or salvage value is impractical but does not preclude partial recovery in the future.

 

18
 

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

 

The following tables present total loans by loan grade as of June 30, 2015 and December 31, 2014:

                                             
    June 30, 2015  
(in thousands)   Grades 1- 4   Grade 5   Grade 6   Grade 7   Grade 8   Grade 9   Total  
Commercial & industrial   $ 287,019   $ 16,928   $ 709   $ 4,447   $ -   $ -   $ $309,103  
Owner-occupied CRE     164,410     7,075     1,279     3,045     -     -     175,809  
AG production     13,703     691     -     38     -     -     14,432  
AG real estate     39,515     385     57     826     -     -     40,783  
CRE investment     79,477     859     907     1,243     -     -     82,486  
Construction & land development     30,466     7,103     109     709     -     -     38,387  
Residential construction     9,411     910     -     -     -     -     10,321  
Residential first mortgage     150,697     987     459     1,714     -     -     153,857  
Residential junior mortgage     52,038     219     -     176     -     -     52,433  
Retail & other     5,691     -     -     -     -     -     5,691  
Total loans   $ 832,427   $ 35,157   $ 3,520   $ 12,198   $ -   $ -   $ 883,302  
Percent of total     94.2 %   4.0 %   0.4 %   1.4 %   -     -     100 %
                                             
    December 31, 2014  
(in thousands)   Grades 1- 4   Grade 5   Grade 6   Grade 7   Grade 8   Grade 9   Total  
Commercial & industrial   $ 268,140   $  15,940   $  2,588   $  2,711   $ -   $ -   $ 289,379  
Owner-occupied CRE     170,544     6,197     2,919     2,914     -     -     182,574  
AG production     14,018     244     -     355     -     -     14,617  
AG real estate     32,315     9,548     59     832     -     -     42,754  
CRE investment     78,229     2,203     -     1,441     -     -     81,873  
Construction & land development     35,649     7,417     114     934     -     -     44,114  
Residential construction     10,101     1,232     -     -     -     -     11,333  
Residential first mortgage     155,916     686     592     1,489     -     -     158,683  
Residential junior mortgage     51,843     99     -     162     -     -     52,104  
Retail & other     5,904     6     -     -     -     -     5,910  
Total loans   $ 822,659   $ 43,572   $ 6,272   $ 10,838   $ -   $ -   $ 883,341  
Percent of total     93.2 %   4.9 %   0.7 %   1.2 %   -     -     100 %

Management considers a loan to be impaired when it is probable the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. For determining the adequacy of the ALLL, management defines impaired loans as nonaccrual credit relationships over $250,000, plus additional loans with impairment risk characteristics. At the time an individual loan goes into nonaccrual status, however, management evaluates the loan for impairment and possible charge-off regardless of loan size.

In determining the appropriateness of the ALLL, management includes allocations for specifically identified impaired loans and loss factor allocations for all remaining loans, with a component primarily based on historical loss rates and another component primarily based on other qualitative factors. Impaired loans are individually assessed and are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.

Loans that are determined not to be impaired are collectively evaluated for impairment, stratified by type and allocated loss ranges based on the Company’s actual historical loss ratios for each strata, and adjustments are also provided for certain current environmental and qualitative factors. An internal loan review function rates loans using a grading system based on nine different categories. Loans with grades of seven or higher (“classified loans”) represent loans with a greater risk of loss and may be assigned allocations for loss based on specific review of the weaknesses observed in the individual credits if classified as impaired. Classified loans are constantly monitored by the loan review function to ensure early identification of any deterioration.

 

19
 

 

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

The following tables present impaired loans as of June 30, 2015 and December 31, 2014. As a further breakdown, impaired loans are also summarized by originated and acquired for the periods presented. Purchased credit impaired loans acquired were initially recorded at a fair value of $16.7 million on their respective acquisition dates, net of an initial $12.2 million non-accretable mark and a zero accretable mark. At June 30, 2015, $3.1 million of the $16.7 million remain in impaired loans and $0.7 million of acquired loans have subsequently become impaired, bringing acquired impaired loans to $3.8 million. Included in the June 30, 2015 and December 31, 2014 impaired loans is one troubled debt restructuring totaling $3.7 million and $3.8 million, respectively, described below under “Troubled Debt Restructurings.”

                                 
    Total Impaired Loans – June 30, 2015  
(in thousands)   Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
  Average
Recorded
Investment
  Interest Income
Recognized
 
Commercial & industrial   $  48   $  59   $ -   $  40   $ 4  
Owner-occupied CRE      697      1,763     -      782     65  
AG production      38      58     -      38     2  
AG real estate      403      511     -      406     13  
CRE investment      1,050      2,869     -      1,110     73  
Construction & land development*      4,361      4,903      287      4,163     49  
Residential construction     -     -     -     -     -  
Residential first mortgage      723      2,037     -      753     47  
Residential junior mortgage      148      489     -      151     11  
Retail & Other     -      15      -      -     1  
Total   $ 7,468   $ 12,704   $ 287   $ 7,443   $ 265  
                                 
    Originated – June 30, 2015  
(in thousands)   Recorded
Investment
  Unpaid
Principal

Balance
  Related
Allowance
  Average
Recorded
Investment
  Interest Income
Recognized
 
Commercial & industrial   $  47   $  47   $ -   $  37   $  1  
Owner-occupied CRE     -     -     -     -     -  
AG production     -     -     -     -     -  
AG real estate     -     -     -     -     -  
CRE investment     -     -     -     -     -  
Construction & land development*      3,652      3,652      287      3,715      19  
Residential construction     -     -     -     -     -  
Residential first mortgage     -     -     -     -     -  
Residential junior mortgage     -     -     -     -     -  
Retail & Other      -      -      -      -      -  
Total   $ 3,699   $ 3,699   $ 287   $ 3,752   $ 20  
                                 
    Acquired – June 30, 2015  
(in thousands)   Recorded
Investment
  Unpaid
Principal

Balance
  Related
Allowance
  Average
Recorded
Investment
  Interest Income
Recognized
 
Commercial & industrial   $  1   $  12   $ -   $  3   $ 3  
Owner-occupied CRE      697      1,763     -      782     65  
AG production      38      58     -      38     2  
AG real estate      403      511     -      406     13  
CRE investment      1,050      2,869     -      1,110     73  
Construction & land development      709      1,251     -      448     30  
Residential construction     -     -     -     -     -  
Residential first mortgage      723      2,037     -      753     47  
Residential junior mortgage      148      489     -      151     11  
Retail & Other      -      15      -      -     1  
Total   $ 3,769   $ 9,005   $ -   $ 3,691   $ 245  

*One construction and land development loan with a balance of $3.7 million had a specific reserve of $287,000. No other loans had a related allowance at June 30, 2015 and, therefore, the above disclosure was not expanded to include loans with and without a related allowance.

 

20
 

 

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