10-Q 1 t83448_10q.htm FORM 10-Q

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 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 ¨

 

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 ¨

 

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 S

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 x

 

As of October 31, 2015 there were 3,978,752 shares of $0.01 par value common stock outstanding.

   

 

 

   

 

 

Nicolet Bankshares, Inc.

 

TABLE OF CONTENTS

 

PART I FINANCIAL INFORMATION   PAGE
       
  Item 1. Financial Statements:  
       
    Consolidated Balance Sheets
September 30, 2015 (unaudited) and December 31, 2014
3
       
    Consolidated Statements of Income
Three Months and Nine Months Ended September 30, 2015 and 2014 (unaudited)
4
       
    Consolidated Statements of Comprehensive Income
Three Months and Nine Months Ended September 30, 2015 and 2014 (unaudited)
5
       
    Consolidated Statement of Changes in Stockholders’ Equity
Nine Months Ended September 30, 2015 (unaudited)
6
       
    Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2015 and 2014 (unaudited)
7
       
    Notes to Unaudited Consolidated Financial Statements 8-28
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 29-55
       
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 56
       
  Item 4. Controls and Procedures 56
       
PART II OTHER INFORMATION    
       
  Item 1 Legal Proceedings 56
       
  Item 1A. Risk Factors 56
       
  Item 2. Unregistered Sales of Equity Securities and Use of  Proceeds 56
       
  Item 3. Defaults Upon Senior Securities 56
       
  Item 4. Mine Safety Disclosures 56
       
  Item 5 Other Information 56
       
  Item 6. Exhibits 57
       
    Signatures 57-61

 

 2 

 

 

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS:

 

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets
(In thousands, except share and per share data)

 

  

September 30, 2015

(Unaudited)

   December 31, 2014
(Audited)
 
Assets          
Cash and due from banks  $9,527   $23,975 
Interest-earning deposits   24,683    43,169 
Federal funds sold   425    1,564 
Cash and cash equivalents   34,635    68,708 
Certificates of deposit in other banks   4,159    10,385 
Securities available for sale (“AFS”)   167,572    168,475 
Other investments   8,126    8,065 
Loans held for sale   3,055    7,272 
Loans   884,448    883,341 
Allowance for loan losses   (10,005)   (9,288)
Loans, net   874,443    874,053 
Premises and equipment, net   29,891    31,924 
Bank owned life insurance (“BOLI”)   28,228    27,479 
Accrued interest receivable and other assets   16,743    18,924 
Total assets  $1,166,852   $1,215,285 
           
Liabilities and Stockholders’ Equity          
Liabilities:          
Demand  $227,610   $203,502 
Money market and NOW accounts   444,616    494,945 
Savings   127,827    120,258 
Time   212,128    241,198 
Total deposits   1,012,181    1,059,903 
Notes payable   15,480    21,175 
Junior subordinated debentures   12,477    12,328 
Subordinated notes   11,840    - 
Accrued interest payable and other liabilities   9,862    10,812 
Total liabilities   1,061,840    1,104,218 
           
Stockholders’ Equity:          
Preferred equity   12,200    24,400 
Common stock   40    41 
Additional paid-in capital   43,055    45,693 
Retained earnings   48,270    39,843 
Accumulated other comprehensive income   1,292    1,031 
Total Nicolet Bankshares, Inc. stockholders’ equity   104,857    111,008 
Noncontrolling interest   155    59 
Total stockholders’ equity and noncontrolling interest   105,012    111,067 
Total liabilities, noncontrolling interest and stockholders’ equity  $1,166,852   $1,215,285 
           
Preferred shares authorized (no par value)   10,000,000    10,000,000 
Preferred shares issued and outstanding   12,200    24,400 
Common shares authorized (par value $0.01 per share)   30,000,000    30,000,000 
Common shares outstanding   3,957,520    4,058,208 
Common shares issued   4,010,835    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
September 30,
   Nine Months Ended
September 30,
 
   2015   2014   2015   2014 
Interest income:                    
Loans, including loan fees  $11,159   $11,945   $33,921   $34,568 
Investment securities:                    
Taxable   339    379    1,098    1,212 
Non-taxable   253    208    788    551 
Other interest income   108    91    327    354 
Total interest income   11,859    12,623    36,134    36,685 
Interest expense:                    
Money market and NOW accounts   569    544    1,693    1,709 
Savings and time deposits   732    790    2,225    2,271 
Short-term borrowings   2    2    2    9 
Junior subordinated debentures   222    220    658    655 
Subordinated notes   159    -    335    - 
Notes payable   158    174    488    672 
Total interest expense   1,842    1,730    5,401    5,316 
Net interest income   10,017    10,893    30,733    31,369 
Provision for loan losses   450    675    1,350    2,025 
Net interest income after provision for loan losses   9,567    10,218    29,383    29,344 
Noninterest income:                    
Service charges on deposit accounts   631    564    1,752    1,602 
Trust services fee income   1,196    1,179    3,636    3,403 
Mortgage income, net   811    505    2,670    1,151 
Brokerage fee income   170    152    509    478 
Bank owned life insurance   252    250    749    684 
Rent income   324    292    890    880 
Investment advisory fees   98    104    301    316 
Gain on sale or writedown of assets, net   91    140    1,042    448 
Other   612    459    1,600    1,323 
Total noninterest income   4,185    3,645    13,149    10,285 
Noninterest expense:                    
Salaries and employee benefits   5,637    5,366    16,996    16,045 
Occupancy, equipment and office   1,745    1,735    5,263    5,370 
Business development and marketing   549    548    1,584    1,620 
Data processing   864    816    2,585    2,345 
FDIC assessments   142    160    469    547 
Core deposit intangible amortization   248    284    783    934 
Other   664    614    1,695    1,734 
Total noninterest expense   9,849    9,523    29,375    28,595 
                     
Income before income tax expense   3,903    4,340    13,157    11,034 
Income tax expense   1,281    1,552    4,452    3,425 
Net income   2,622    2,788    8,705    7,609 
Less: net income attributable to noncontrolling interest   28    23    96    76 
Net income attributable to Nicolet Bankshares, Inc.   2,594    2,765    8,609    7,533 
Less:  preferred stock dividends   60    61    182    183 
Net income available to common shareholders  $2,534   $2,704   $8,427   $7,350 
                     
Basic earnings per common share  $0.64   $0.66   $2.11   $1.75 
Diluted earnings per common share  $0.58   $0.63   $1.93   $1.70 
Weighted average common shares outstanding:                    
Basic   3,961,004    4,118,792    3,999,641    4,190,830 
Diluted   4,397,906    4,319,975    4,358,082    4,313,298 

 

See accompanying notes to unaudited consolidated financial statements.

 

 4 

 

 

ITEM 1. Financial Statements Continued:

 

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands) (Unaudited)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2015   2014   2015   2014 
Net income  $2,622   $2,788   $8,705   $7,609 
Other comprehensive income, net of tax:                    
Unrealized gains (losses) on securities AFS:                    
Net unrealized holding gains (losses) arising during the period   1,143    (51)   1,058    994 
Reclassification adjustment for net gains included in net income   -    -    (630)   (341)
Net unrealized gains (losses) on securities before tax expense   1,143    (51)   428    653 
Income tax (expense) benefit   (446)   19    (167)   (255)
Total other comprehensive income (loss)   697    (32)   261    398 
Comprehensive income  $3,319   $2,756   $8,966   $8,007 

 

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   -    -    -    8,609    -    96    8,705 
Other comprehensive income   -    -    -    -    261    -    261 
Stock compensation expense   -    -    907    -    -    -    907 
Exercise of stock options, net   -    -    610    -    -    -    610 
Issuance of common stock   -    -    122    -    -    -    122 
Purchase and retirement of common stock   -    (1)   (4,277)   -    -    -    (4,278)
Redemption of preferred stock   (12,200)                            (12,200)
Preferred stock dividends   -    -    -    (182)   -    -    (182)
Balance, September 30, 2015  $12,200   $40   $43,055   $48,270   $1,292   $155   $105,012 

 

See accompanying notes to unaudited consolidated financial statements.

 

 6 

 

 

ITEM 1. Financial Statements Continued:

 

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands) (Unaudited)

 

   Nine Months Ended September 30, 
   2015   2014 
Cash Flows From Operating Activities:          
Net income  $8,705   $7,609 
Adjustments to reconcile net income to net cash provided by operating activities:          
 Depreciation, amortization, and accretion   3,083    2,793 
 Provision for loan losses   1,350    2,025 
 Increase in cash surrender value of life insurance   (749)   (684)
 Stock compensation expense   907    459 
 Gain on sale or writedown of assets, net   (1,042)   (448)
 Gain on sale of loans held for sale, net   (2,670)   (1,151)
 Income from branch sale   (123)   - 
 Proceeds from sale of loans held for sale   149,509    55,652 
 Origination of loans held for sale   (142,759)   (55,585)
 Net change in:          
 Accrued interest receivable and other assets   (244)   295 
 Accrued interest payable and other liabilities   2,330    (639)
 Net cash provided by operating activities   18,297    10,326 
Cash Flows From Investing Activities:          
Net decrease (increase) in certificates of deposit in other banks   6,226    (6,678)
Net increase in loans   (14,388)   (19,175)
Purchases of securities AFS   (34,238)   (33,650)
Proceeds from sales of securities AFS   13,883    515 
Proceeds from calls and maturities of securities AFS   17,643    16,693 
Purchase of other investments   (61)   (74)
Purchases of premises and equipment   (831)   (4,112)
Net decrease in premises and equipment   353    10 
Proceeds from sales of other real estate and other assets   2,470    3,268 
Net cash used in branch sale   (19,865)   - 
Purchase of BOLI   -    (2,750)
 Net cash used by investing activities   (28,808)   (45,953)
Cash Flows From Financing Activities:          
Net decrease in deposits   (13,728)   (23,195)
Net change in short-term borrowings   -    (7,116)
Repayments of notes payable   (5,695)   (10,184)
Proceeds from issuance of subordinated notes, net   11,820    - 
Redemption of preferred stock   (12,200)   - 
Purchase of common stock   (4,278)   (3,998)
Proceeds from issuance of common stock   122    225 
Proceeds from exercise of common stock options   610    380 
Noncontrolling interest in joint venture   -    (60)
Cash dividends paid on preferred stock   (213)   (183)
 Net cash used by financing activities   (23,562)   (44,131)
Net decrease in cash and cash equivalents   (34,073)   (79,758)
Cash and cash equivalents:          
 Beginning  $68,708   $146,978 
 Ending  $34,635   $67,220 
Supplemental Disclosures of Cash Flow Information:          
Cash paid for interest  $5,458   $5,562 
Cash paid for taxes   2,430    3,535 
Transfer of loans and bank premises to other real estate owned   870    1,291 

 

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 Pronouncements Adopted

 

In May 2015, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-08 Business Combinations (Topic 805): Pushdown Accounting – Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin 115. Amendments in this update amend SEC paragraphs pursuant to Staff Accounting Bulletin (“SAB”) 115, which supersedes several paragraphs in ASC 805-50 in response to the SEC’s November 2014 publication of SAB 115.The SEC issued SAB 115 in connection with the release of FASB ASU 2014-17, “Pushdown Accounting.” This guidance is effective immediately. The adoption of this guidance did not have a significant impact on the consolidated financial condition, results of operations or liquidity of the Company

 

In April 2015, the FASB issued 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 for further details on the impact of adopting this accounting update.

 

 8 

 

 

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.

 

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.

 

Operating Segment

 

While the chief decision makers monitor the revenue streams of the various products and services, and evaluate costs, balance sheet positions and quality, all such products, services and activities are directly or indirectly related to the business of community banking, with no regular, formal or material segment delineations. Operations are managed and financial performance is evaluated on a company-wide basis, and accordingly, all the financial service operations are considered by management to be aggregated in one reportable operating segment.

 

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
 September 30,
   Nine Months Ended
 September 30,
 
   2015   2014   2015   2014 
(In thousands except per share data)                
Net income, net of noncontrolling interest  $2,594   $2,765   $8,609   $7,533 
Less: preferred stock dividends   60    61    182    183 
Net income available to common shareholders  $2,534   $2,704   $8,427   $7,350 
Weighted average common shares outstanding   3,961    4,119    4,000    4,191 
Effect of dilutive stock instruments   437    201    358    122 
Diluted weighted average common shares outstanding   4,398    4,320    4,358    4,313 
Basic earnings per common share*  $0.64   $0.66   $2.11   $1.75 
Diluted earnings per common share*  $0.58   $0.63   $1.93   $1.70 

 

*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.

 

For the nine months ended September 30, 2015 and 2014, respectively, there were 0.2 million and 0.4 million outstanding stock options that were not included in the computation of diluted earnings per share because they were considered anti-dilutive.

 

 9 

 

 

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 salaries and employee benefits 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 rates are based on the U.S. Treasury yield curve in effect at the time of grants and had a weighted average rate of 1.68% for the two grant issuance dates in 2015. 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*        (33,200)   18.55      
Forfeited        (600)   16.50      
Balance – September 30, 2015        1,096,059   $20.41    629,284 

 

*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 nine months ended September 30, 2015 and no shares were withheld during the twelve months ended December 31, 2014.

 

Options outstanding at September 30, 2015 are exercisable at option prices ranging from $16.50 to $30.80. There are 672,559 options outstanding in the range from $16.50 - $22.00 and 423,500 options outstanding in the range from $22.01 - $30.80. At September 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 nine months of 2015, and full year of 2014 was approximately $301,000, 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 – September 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 nine months ended September 30, 2015 and 5,821 shares were surrendered during the twelve months ended December 31, 2014.

 

 10 

 

 

Note 3 – Stock-based Compensation, continued

 

The Company recognized approximately $907,000 and $459,000 of stock-based employee compensation expense during the nine months ended September 30, 2015 and 2014, respectively, associated with its stock equity awards. As of September 30, 2015, there was approximately $3.5 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:

 

   September 30, 2015 
(in thousands)  Amortized Cost   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair Value 
U.S. government sponsored enterprises  $286   $11   $-   $297 
State, county and municipals   106,763    480    227    107,016 
Mortgage-backed securities   54,523    668    284    54,907 
Corporate debt securities   1,140    -    -    1,140 
Equity securities   2,742    1,507    37    4,212 
   $165,454   $2,666   $548   $167,572 

 

   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 

 

The following table represents gross unrealized losses and the related fair value of investment securities available for sale, aggregated by investment category and length of time individual securities have been in a continuous unrealized loss position, at September 30, 2015 and December 31, 2014.

 

   September 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  $33,281   $126   $12,292   $101   $45,573   $227 
Mortgage-backed securities   5,873    42    14,638    242    20,511    284 
Equity securities   171    37    -    -    171    37 
   $39,325   $205   $26,930   $343   $66,255   $548 

 

   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 

 

 11 

 

 

Note 4- Securities Available for Sale, continued

 

At September 30, 2015 we had $0.5 million of gross unrealized losses related to 123 securities. As of September 30, 2015, the Company does not consider any of its securities with unrealized losses of 12 months or more 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 nine-month periods ending September 30, 2015 or September 30, 2014.

 

The amortized cost and fair values of securities available for sale at September 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.

 

   September 30, 2015 
(in thousands)  Amortized Cost   Fair Value 
Due in less than one year  $4,805   $4,833 
Due in one year through five years   76,769    76,852 
Due after five years through ten years   24,914    25,040 
Due after ten years   1,701    1,728 
    108,189    108,453 
Mortgage-backed securities   54,523    54,907 
Equity securities   2,742    4,212 
Securities available for sale  $165,454   $167,572 

 

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

 

 12 

 

 

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

 

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

   Total 
   September 30, 2015   December 31, 2014 
(in thousands)  Amount   % of
Total
   Amount   % of
Total
 
Commercial & industrial  $304,858    34.5%  $289,379    32.7%
Owner-occupied commercial real estate (“CRE”)   179,569    20.3    182,574    20.7 
Agricultural (“AG”) production   15,709    1.8    14,617    1.6 
AG real estate   39,715    4.5    42,754    4.8 
CRE investment   83,278    9.4    81,873    9.3 
Construction & land development   39,487    4.5    44,114    5.0 
Residential construction   8,106    0.9    11,333    1.3 
Residential first mortgage   153,562    17.3    158,683    18.0 
Residential junior mortgage   54,170    6.1    52,104    5.9 
Retail & other   5,994    0.7    5,910    0.7 
Loans   884,448    100.0%   883,341    100.0%
Less allowance for loan losses   10,005         9,288      
Loans, net  $874,443        $874,053      
Allowance for loan losses to loans   1.13%        1.05%     

 

   Originated 
   September 30, 2015   December 31, 2014 
(in thousands)  Amount  

% of

Total

   Amount   % of
Total
 
Commercial & industrial  $294,160    39.9%  $268,654    38.3%
Owner-occupied CRE   146,155    19.8    140,203    20.0 
AG production   7,334    1.0    5,580    0.8 
AG real estate   21,541    2.9    20,060    2.8 
CRE investment   59,894    8.1    53,339    7.6 
Construction & land development   28,314    3.8    33,865    4.8 
Residential construction   8,106    1.1    11,333    1.6 
Residential first mortgage   119,503    16.2    119,866    17.1 
Residential junior mortgage   47,096    6.4    43,411    6.2 
Retail & other   5,752    0.8    5,395    0.8 
Loans   737,855    100.0%   701,706    100.0%
Less allowance for loan losses   8,372         9,288      
Loans, net  $729,483        $692,418      
Allowance for loan losses to loans   1.13%        1.32%     

 

   Acquired 
   September 30, 2015   December 31, 2014 
(in thousands)  Amount  

% of

Total

   Amount   % of
Total
 
Commercial & industrial  $10,698    7.3%  $20,725    11.4%
Owner-occupied CRE   33,414    22.8    42,371    23.3 
AG production   8,375    5.7    9,037    5.0 
AG real estate   18,174    12.4    22,694    12.5 
CRE investment   23,384    16.0    28,534    15.7 
Construction & land development   11,173    7.6    10,249    5.6 
Residential construction   -    -    -    - 
Residential first mortgage   34,059    23.2    38,817    21.4 
Residential junior mortgage   7,074    4.8    8,693    4.8 
Retail & other   242    0.2    515    0.3 
Loans   146,593    100.0%   181,635    100.0%
Less allowance for loan losses   1,633         -      
Loans, net  $144,960        $181,635      
Allowance for loan losses to loans   1.11%        0.00%     

 

 13 

 

 

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.

 

 14 

 

  

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 nine months ended September 30, 2015:

 

   TOTAL – At or for the Nine Months Ended September 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   781    682    31    76    227    (975)   (34)   291    244    27    1,350 
Charge-offs   (305)   (219)   -    -    -    -    -    (60)   (104)   (29)   (717)
Recoveries   37    3    -    -    13    -    -    18    1    12    84 
Net charge-offs   (268)   (216)   -    -    13    -    -    (42)   (103)   (17)   (633)
Ending balance  $3,704   $1,696   $84   $302   $751   $1,710   $106   $1,115   $478   $59   $10,005 
As percent of ALLL   37.0%   17.0%   0.8%   3.0%   7.5%   17.1%   1.1%   11.1%   4.8%   0.6%   100%
                                                        
ALLL:                                                       
Individually evaluated  $-   $-   $-   $-   $-   $-   $-   $-   $-   $-   $- 
Collectively evaluated   3,704    1,696    84    302    751    1,710    106    1,115    478    59    10,005 
Ending balance  $3,704   $1,696   $84   $302   $751   $1,710   $106   $1,115   $478   $59   $10,005 
                                                        
Loans:                                                       
Individually evaluated  $147   $1,224   $39   $392   $982   $686   $-   $627   $144   $-   $4,241 
Collectively evaluated   304,711    178,345    15,670    39,323    82,296    38,801    8,106    152,935    54,026    5,994    880,207 
Total loans  $304,858   $179,569   $15,709   $39,715   $83,278   $39,487   $8,106   $153,562   $54,170   $5,994   $884,448 
                                                        
Less ALLL  $3,704   $1,696   $84   $302   $751   $1,710   $106   $1,115   $478   $59   $10,005 
Net loans  $301,154   $177,873   $15,625   $39,413   $82,527   $37,777   $8,000   $152,447   $53,692   $5,935   $874,443 

 

 

   Originated – At or for the Nine Months Ended September 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   160    260    15    4    79    (1,045)   (34)   41    149    17    (354)
Charge-offs   (305)   (157)   -    -    -    -    -    (60)   (91)   (29)   (642)
Recoveries   37    3    -    -    13    -    -    15    -    12    80 
Net charge-offs   (268)   (154)   -    -    13    -    -    (45)   (91)   (17)   (562)
Ending balance  $3,083   $1,336   $68   $230   $603   $1,640   $106   $862   $395   $49   $8,372 
As percent of ALLL   36.8%   16.0%   0.8%   2.7%   7.2%   19.6%   1.3%   10.3%   4.7%   0.6%   100%
                                                        
ALLL:                                                       
Individually evaluated  $-   $-   $-   $-   $-   $-   $-   $-   $-   $-   $- 
Collectively evaluated   3,083    1,336    68    230    603    1,640    106    862    395    49    8,372 
Ending balance  $3,083   $1,336   $68   $230   $603   $1,640   $106   $862   $395   $49   $8,372 
                                                        
Loans:                                                       
Individually evaluated  $-   $-   $-   $-   $-   $-   $-   $-   $-   $-   $- 
Collectively evaluated   294,160    146,155    7,334    21,541    59,894    28,314    8,106    119,503    47,096    5,752    737,855 
Total loans  $294,160   $146,155   $7,334   $21,541   $59,894   $28,314   $8,106   $119,503   $47,096   $5,752   $737,855 
                                                        
Less ALLL  $3,083   $1,336   $68   $230   $603   $1,640   $106   $862   $395   $49   $8,372 
Net loans  $291,077   $144,819   $7,266   $21,311   $59,291   $26,674   $8,000   $118,641   $46,701   $5,703   $729,483 
                                                        

 

 15 

 

 

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

 

   Acquired – At or for the Nine Months Ended September 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   621    422    16    72    148    70    -    250    95    10    1,704 
Charge-offs   -    (62)   -    -    -    -    -    -    (13)   -    (75)
Recoveries   -    -    -    -    -    -    -    3    1    -    4 
Net charge-offs   -    (62)   -    -    -    -    -    3    (12)   -    (71)
Ending balance  $621   $360   $16   $72   $148   $70   $-   $253   $83   $10   $1,633 
As percent of ALLL   38.0%   22.0%   1.0%   4.4%   9.1%   4.3%   -%   15.5%   5.1%   0.6%   100%
                                                        
Loans:                                                       
Individually evaluated  $147   $1,224   $39   $392   $982   $686   $-   $627   $144   $-   $4,241 
Collectively evaluated   10,551    32,190    8,336    17,782    22,402    10,487    -    33,432    6,930    242    142,352 
Total loans  $10,698   $33,414   $8,375   $18,174   $23,384   $11,173   $-   $34,059   $7,074   $242   $146,593 
                                                        
Less ALLL  $621   $360   $16   $72   $148   $70   $-   $253   $83   $10   $1,633 
Net loans  $10,077   $33,054   $8,359   $18,102   $23,236   $11,103   $-   $33,806   $6,991   $232   $144,960 

 

There was no ALLL allocated to individually evaluated loans at September 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 nine months ended September 30, 2014.

  

   Total – At or for the Nine Months Ended September 30, 2014 
(in thousands)
ALLL:
  Commercial 
& industrial
   Owner-
occupied
CRE
   AG
production
   AG real
estate
   CRE
investment
   Construction
& land
development
   Residential
construction
   Residential
first
mortgage
   Residential
junior
mortgage
   Retail
& other
   Total 
Beginning balance  $1,798   $766   $18   $59   $505   $4,970   $229   $544   $321   $22   $9,232 
Provision   2,318    1,057    36    213    121    (2,445)   (73)   610    129    59    2,025 
Charge-offs   (567)   (468)   -    -    -    (12)   -    (191)   (18)   (35)   (1,291)
Recoveries   50    15    -    -    12    -    -    1    1    7    86 
Net charge-offs   (517)   (453)   -    -    12    (12)   -    (190)   (17)   (28)   (1,205)
Ending balance  $3,599   $1,370   $54   $272   $638   $2,513   $156   $964   $433   $53   $10,052 
As percent of ALLL   35.8%   13.6%   0.5%   2.7%   6.3%   25.0%   1.6%   9.6%   4.3%   0.6%   100%
                                                        
ALLL:                                                       
Individually evaluated  $238   $-   $-   $-   $-   $389   $-   $-   $-   $-   $627 
Collectively evaluated   3,361    1,370    54    272    638    2,124    156    964    433    53    9,425 
Ending balance  $3,599   $1,370   $54   $272   $638   $2,513   $156   $964   $433   $53   $10,052 
                                                        
Loans:                                                       
Individually evaluated  $353   $1,604   $62   $394   $1,740   $4,778   $-   $1,495   $156   $-   $10,582 
Collectively evaluated   282,004    177,562    14,570    41,801    75,327    37,684    11,260    156,235    52,367    5,693    854,503 
Total loans  $282,357   $179,166   $14,632   $42,195   $77,067   $42,462   $11,260   $157,730   $52,523   $5,693   $865,085 
                                                        
Less ALLL  $3,599   $1,370   $54   $272   $638   $2,513   $156   $964   $433   $53   $10,052 
Net loans  $278,758   $177,796   $14,578   $41,923   $76,429   $39,949   $11,104   $156,766   $52,090   $5,640   $855,033 

 

 16 

 

 

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

 

   Originated – At or for the Nine Months Ended September 30, 2014 
(in thousands)
ALLL:
  Commercial 
& industrial
   Owner-
occupied
CRE
   AG
production
   AG real
estate
   CRE
investment
   Construction
& land
development
   Residential
construction
   Residential
first
mortgage
   Residential
junior
mortgage
   Retail
& other
   Total 
Beginning balance  $1,798   $766   $18   $59   $505   $4,970   $229   $544   $321   $22   $9,232 
Provision   2,261    1,050    36    213    121    (2,457)   (73)   457    112    59    1,779 
Charge-offs   (510)   (452)   -    -    -    -    -    (38)   -    (35)   (1,035)
Recoveries   50    6    -    -    12    -    -    1    -    7    76 
Net charge-offs   (460)   (446)   -    -    12    -    -    (37)   -    (28)   (959)
Ending balance  $3,599   $1,370   $54   $272   $638   $2,513   $156   $964   $433   $53   $10,052 
As percent of ALLL   35.8%   13.6%   0.5%   2.7%   6.3%   25.0%   1.6%   9.6%   4.3%   0.6%   100%
                                                        
ALLL:                                                       
Individually evaluated  $238   $-   $-   $-   $-   $389   $-   $-   $-   $-   $627 
Collectively evaluated   3,361    1,370    54    272    638    2,124    156    964    433    53    9,425 
Ending balance  $3,599   $1,370   $54   $272   $638   $2,513   $156   $964   $433   $53   $10,052 
                                                        
Loans:                                                       
Individually evaluated  $347   $830   $-   $-   $-   $3,999   $-   $201   $-   $-   $5,377 
Collectively evaluated   259,358    130,491    4,882    19,134    50,004    27,942    11,260    116,078    43,923    5,107    668,179 
Total loans  $259,705   $131,321   $4,882   $19,134   $50,004   $31,941   $11,260   $116,279   $43,923   $5,107   $673,556 
                                                        
Less ALLL  $3,599   $1,370   $54   $272   $638   $2,513   $156   $964   $433   $53   $10,052 
Net loans  $256,106   $129,951   $4,828   $18,862   $49,366   $29,428   $11,104   $115,315   $43,490   $5,054   $663,504 

 

   Acquired – At or for the Nine Months Ended September 30, 2014 
(in thousands)
ALLL:
  Commercial 
& industrial
   Owner-
occupied
CRE
   AG
production
   AG real
estate
   CRE
investment
   Construction
& land
development
   Residential
construction
   Residential
first
mortgage
   Residential
junior
mortgage
   Retail
& other
   Total 
Provision  $57   $7   $-   $-   $-   $12   $-   $153   $17   $-   $246 
Charge-offs   (57)   (16)   -    -    -    (12)   -    (153)   (18)   -    (256)
Recoveries   -    9    -    -    -    -    -    -    1    -    10 
Loans:                                                       
Individually evaluated  $6   $774   $62   $394   $1,740   $779   $-   $1,294   $156   $-   $5,205 
Collectively evaluated   22,646    47,071    9,688    22,667    25,323    9,742    -    40,157    8,444    586    186,324 
Total loans  $22,652   $47,845   $9,750   $23,061   $27,063   $10,521   $-   $41,451   $8,600   $586   $191,529 

 

 17 

 

 

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 September 30, 2015 and December 31, 2014.

 

   Total 
   September 30, 2015   December 31, 2014 
(in thousands)  Amount   % to Total   Amount   % to Total 
Commercial & industrial  $223    5.2%  $171    3.2%
Owner-occupied CRE   1,223    28.4    1,667    30.9 
AG production   15    0.3    21    0.4 
AG real estate   372    8.7    392    7.3 
CRE investment   771    17.9    911    16.9 
Construction & land development   686    16.0    934    17.3 
Residential construction   -    -    -    - 
Residential first mortgage   861    20.1    1,155    21.4 
Residential junior mortgage   148    3.4    141    2.6 
Retail & other   -    -    -    - 
 Nonaccrual loans - Total  $4,299    100.0%  $5,392    100.0%

 

   Originated 
   September 30, 2015   December 31, 2014 
(in thousands)  Amount   % to Total   Amount   % to Total 
Commercial & industrial  $47    34.8%  $130    11.5%
Owner-occupied CRE   -    -    673    59.7 
AG production   15    11.1    -    - 
AG real estate   -    -    -    - 
CRE investment   -    -    -    - 
Construction & land development   -    -    165    14.6 
Residential construction   -    -    -    - 
Residential first mortgage   73    54.1    160    14.2 
Residential junior mortgage   -    -    -    - 
Retail & other   -    -    -    - 
 Nonaccrual loans - Originated  $135    100.0%  $1,128    100.0%

 

   Acquired 
   September 30, 2015   December 31, 2014 
(in thousands)  Amount   % to Total   Amount   % to Total 
Commercial & industrial  $176    4.2%  $41    1.0%
Owner-occupied CRE   1,223    29.4    994    23.3 
AG production   -    -    21    0.5 
AG real estate   372    8.9    392    9.2 
CRE investment   771    18.5    911    21.4 
Construction & land development   686    16.5    769    18.0 
Residential construction   -    -    -    - 
Residential first mortgage   788    18.9    995    23.3 
Residential junior mortgage   148    3.6    141    3.3 
Retail & other   -    -    -    - 
 Nonaccrual loans – Acquired  $4,164    100.0%  $4,264    100.0%

 

 18 

 

 

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

 

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

   September 30, 2015 
(in thousands)  30-89 Days
Past Due
(accruing)
   90 Days &
Over or non-
accrual
   Current   Total 
Commercial & industrial  $61   $223   $304,574   $304,858 
Owner-occupied CRE   19    1,223    178,327    179,569 
AG production   -    15    15,694    15,709 
AG real estate   114    372    39,229    39,715 
CRE investment   392    771    82,115    83,278 
Construction & land development   -    686    38,801    39,487 
Residential construction   -    -    8,106    8,106 
Residential first mortgage   170    861    152,531    153,562 
Residential junior mortgage   3    148    54,019    54,170 
Retail & other   -    -    5,994    5,994 
Total loans  $759   $4,299   $879,390   $884,448 
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.

 

 19 

 

 

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

 

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.

 

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

 

   September 30, 2015 
(in thousands)  Grades 1- 4   Grade 5   Grade 6   Grade 7   Grade 8   Grade 9   Total 
Commercial & industrial  $279,955   $20,594   $608   $3,701   $-   $-   $304,858 
Owner-occupied CRE   169,669    5,836    1,253    2,811    -    -    179,569 
AG production   14,985    686    -    38    -    -    15,709 
AG real estate   38,411    443    -    861    -    -    39,715 
CRE investment   80,091    1,132    891    1,164    -    -    83,278 
Construction & land development   33,936    4,865    -    686    -    -    39,487 
Residential construction   7,354    752    -    -    -    -    8,106 
Residential first mortgage   150,358    1,019    518    1,667    -    -    153,562 
Residential junior mortgage   53,832    167    -    171    -    -    54,170 
Retail & other   5,994    -    -    -    -    -    5,994 
Total loans  $834,585   $35,494   $3,270   $11,099   $-   $-   $884,448 
Percent of total   94.3%   4.0%   0.4%   1.3%   -    -    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.

 

 20 

 

 

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

 

The following tables present impaired loans as of September 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 September 30, 2015, $2.8 million of the $16.7 million remain in impaired loans and $1.4 million of acquired loans have subsequently become impaired, bringing acquired impaired loans to $4.2 million. There were no allowances in excess of the non-accretable marks on acquired loans at December 31, 2014 or September 30, 2015. Included in the December 31, 2014 originated impaired loans is one troubled debt restructuring totaling $3.8 million. This loan was paid off in the third quarter of 2015 and there are no originated impaired loans at September 30, 2015.

 

   Total Impaired Loans – September 30, 2015 
(in thousands)  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest Income
Recognized
 
Commercial & industrial  $147   $147   $-   $147   $6 
Owner-occupied CRE   1,224    2,276    -    1,281    129 
AG production   39    55    -    39    3 
AG real estate   392    499    -    403    25 
CRE investment   982    2,795    -    1,078    110 
Construction & land development   686    1,228    -    507    40 
Residential construction   -    -    -    -    - 
Residential first mortgage   627    1,911    -    673    68 
Residential junior mortgage   144    479    -    148    19 
Retail & Other   -    13    -    -    1 
Total  $4,241   $9,403   $-   $4,276   $401 

 

   Originated – September 30, 2015 
(in thousands)  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest Income
Recognized
 
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  $-   $-   $-   $-   $- 

 

   Acquired – September 30, 2015 
(in thousands)  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest Income
Recognized
 
Commercial & industrial  $147   $147   $-   $147   $6 
Owner-occupied CRE   1,224    2,276    -    1,281    129 
AG production   39    55    -    39    3 
AG real estate   392    499    -    403    25 
CRE investment   982    2,795    -    1,078    110 
Construction & land development   686    1,228    -    507    40 
Residential construction   -    -    -    -    - 
Residential first mortgage   627    1,911    -    673    68 
Residential junior mortgage   144    479    -    148    19 
Retail & Other   -    13    -    -    1 
Total  $4,241   $9,403   $-   $4,276   $401 

 

 21 

 

 

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

 

   Total Impaired Loans – December 31, 2014 
(in thousands)  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest Income
Recognized
 
Commercial & industrial*  $35   $35   $30   $36   $2 
Owner-occupied CRE   1,724    2,838    -    2,029    226 
AG production   60    126    -    45    10 
AG real estate   392    460    -    398    22 
CRE investment   1,219    3,807    -    1,344    217 
Construction & land development*   4,098    4,641    358    4,236    90 
Residential construction   -    -    -    -    - 
Residential first mortgage   985    2,723    -    1,107    155 
Residential junior mortgage   153    502    -    156    20 
Retail & Other   -    22    -    -    2 
Total  $8,666   $15,154   $388   $9,351   $744 

 

   Originated – December 31, 2014 
(in thousands)  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest Income
Recognized
 
Commercial & industrial*  $30   $30   $30   $30   $- 
Owner-occupied CRE   673    673    -    859    47 
AG production   -    -    -    -    - 
AG real estate   -    -    -    -    - 
CRE investment   -    -    -    -    - 
Construction & land development*   3,777    3,777    358    3,854    39 
Residential construction   -    -    -    -    - 
Residential first mortgage   -    -    -    -    - 
Residential junior mortgage   -    -    -    -    - 
Retail & Other   -    -    -    -    - 
Total  $4,480   $4,480   $388   $4,743   $86 

 

   Acquired – December 31, 2014 
(in thousands)  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest Income
Recognized
 
Commercial & industrial  $5   $5   $-   $6   $2 
Owner-occupied CRE   1,051    2,165    -    1,170    179 
AG production   60    126    -    45    10 
AG real estate   392    460    -    398    22 
CRE investment   1,219    3,807    -    1,344    217 
Construction & land development   321    864    -    382    51 
Residential construction   -    -    -    -    - 
Residential first mortgage   985    2,723    -    1,107    155 
Residential junior mortgage   153    502    -    156    20 
Retail & other   -    22    -    -    2 
Total  $4,186   $10,674   $-   $4,608   $658 

 

* One commercial & industrial loan with a balance of $30,000 had a specific reserve of $30,000. One construction & land development loan with a balance of $3.8 million had a specific reserve of $358,000. No other loans had a related allowance at December 31, 2014, and therefore, the above disclosure was not expanded to include loans with and without a related allowance.

 

 22 

 

 

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

 

Troubled Debt Restructurings

 

At September 30, 2015, there were eleven loans classified as troubled debt restructurings totaling $0.7 million. The eleven loans had a combined pre-modification balance of $1.8 million and a combined outstanding balance of $696,000 at September 30, 2015. There were no other loans which were modified and classified as troubled debt restructurings at September 30, 2015. There were no loans classified as troubled debt restructurings during the previous twelve months that subsequently defaulted as of September 30, 2015. As of September 30, 2015 and December 31, 2014, there were no commitments to lend additional funds to debtors whose terms have been modified in trouble debt restructurings. At September 30, 2014, there were five loans classified as troubled debt restructurings totaling $4.2 million. One loan had a premodification balance of $3.9 million and at September 30, 2014, had a balance of $3.8 million, was in compliance with its modified terms, was not past due, and was included in impaired loans with a specific reserve allocation of approximately $389,000. This loan was performing but was disclosed as impaired as a result of its classification as a troubled debt restructuring. This loan was paid off in the third quarter of 2015. The remaining four loans had a combined premodification balance of $438,000 and a combined outstanding balance of $389,000 at September 30, 2014.

 

Note 6 - Notes Payable

 

The Company had the following long-term notes payable:

 

(in thousands)  September 30, 2015   December 31, 2014 
Joint venture note  $9,480   $9,675 
Federal Home Loan Bank (“FHLB”) advances   6,000    11,500 
Notes payable  $15,480   $21,175 

 

At the completion of the construction of the Company’s headquarters building in 2005 and as part of a joint venture investment related to the building, the Company and the other joint venture partners guaranteed a joint venture note to finance certain costs of the building. This note is secured by the building, bears a fixed rate of 5.81% and requires monthly principal and interest payments until its maturity on June 1, 2016.

 

The Company’s FHLB advances are all fixed rate, require interest-only monthly payments, and have maturities through February 2018. The weighted average rate of FHLB advances was 0.83% and 0.71% at September 30, 2015 and December 31, 2014, respectively. The FHLB advances are collateralized by a blanket lien on qualifying first mortgages, home equity loans, multi-family loans and certain farmland loans which totaled approximately $162.1 million and $164.2 million at September 30, 2015 and December 31, 2014, respectively.

 

The following table shows the maturity schedule of the notes payable as of September 30, 2015:

 

Maturing in  (in thousands) 
2015  $68 
2016   14,412 
2017   - 
2018   1,000 
   $15,480 

 

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Note 7 - Junior Subordinated Debentures

 

The Company’s carrying value of junior subordinated debentures was $12.5 million at September 30, 2015 and $12.3 million at December 31, 2014. In July 2004 Nicolet Bankshares Statutory Trust I (the “Statutory Trust”), issued $6.0 million of guaranteed preferred beneficial interests (“trust preferred securities”) that qualify as Tier I capital under Federal Reserve Board guidelines. All of the common securities of the Statutory Trust are owned by the Company. The proceeds from the issuance of the common securities and the trust preferred securities were used by the Statutory Trust to purchase $6.2 million of junior subordinated debentures of the Company, which pay an 8% fixed rate. Interest on these debentures is current. The debentures may be redeemed in part or in full, on or after July 15, 2009 at par plus any accrued but unpaid interest. The maturity date of the debenture, if not redeemed, is July 15, 2034.

 

As part of the 2013 acquisition of Mid-Wisconsin Financial Services, Inc., the Company assumed $10.3 million of junior subordinated debentures related to $10.0 million of issued trust preferred securities. The trust preferred securities and the debentures mature on December 15, 2035 and have a floating rate of the three-month LIBOR plus 1.43% adjusted quarterly. Interest on these debentures is current. The debentures may be called at par in part or in full, on or after December 15, 2010 or within 120 days of certain events. At acquisition in April 2013 the debentures were recorded at a fair value of $5.8 million, with the discount being accreted to interest expense over the remaining life of the debentures. At September 30, 2015, the carrying value of these junior debentures was $6.3 million, and the $6.0 million carrying value of related trust preferred securities qualifies as Tier 1 capital.

 

Note 8 – Subordinated Notes

 

On February 17, April 28, and June 29, 2015, the Company placed an aggregate of $12 million in subordinated Notes in private placements with certain accredited investors. All Notes were issued with 10-year maturities, have a fixed annual interest rate of 5% payable quarterly, are callable on or after the fifth anniversary of their respective issuances dates, and qualify for Tier 2 capital for regulatory purposes.

 

The Company elected to early adopt ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The $180,000 debt issuance costs associated with the $12 million Notes are being amortized on a straight line basis over the first five years, representing the no-call periods, as additional interest expense. As of September 30, 2015, $160,000 of unamortized debt issuance costs remain and are reflected as a deduction to the carrying value of the outstanding debt.

 

Note 9 - Fair Value Measurements

 

As provided for by accounting standards, the Company records and/or discloses financial instruments on a fair value basis. These financial assets and financial liabilities are measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the assumptions used to determine fair value. These levels are: Level 1 - quoted market prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date; Level 2 - inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; Level 3 – significant unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the fair value measurement is based on inputs from different levels, the level within which the entire fair value measurement will be categorized is based on the lowest level input that is significant to the fair value measurement in its entirety; this assessment of the significance of an input requires management judgment.

 

Disclosure of the fair value of financial instruments, whether recognized or not recognized in the balance sheet, is required for those instruments for which it is practicable to estimate that value, with the exception of certain financial instruments and all nonfinancial instruments as provided for by the accounting standards. For financial instruments recognized at fair value in the consolidated balance sheets, the fair value disclosure requirements also apply.

 

Fair value (i.e. the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date), among other things, is based on exit price versus entry price, should include assumptions about risk such as nonperformance risk in liability fair values, and is a market-based measurement versus an entity-specific measurement.

 

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Note 9 - Fair Value Measurements, continued

 

The following table presents the balances of assets and liabilities measured at fair value on a recurring basis for the periods presented. One security classified as Level 3 was purchased at a discount to its par value for $0.9 million during the first nine months of 2015. There were no other changes in Level 3 values to report during the first nine months of 2015.

 

       Fair Value Measurements Using 
Measured at Fair Value on a Recurring Basis:  Total   Level 1   Level 2   Level 3 
(in thousands)                
U.S. government sponsored enterprises  $297   $-   $297   $- 
State, county and municipals   107,016    -    106,440    576 
Mortgage-backed securities   54,907    -    54,907    - 
Corporate debt securities   1,140    -    -    1,140 
Equity securities   4,212    4,212    -    - 
Securities AFS, September 30, 2015  $167,572   $4,212   $161,644   $1,716 
                     
(in thousands)                    
U.S. government sponsored enterprises  $1,039   $-   $1,039   $- 
State, county and municipals   102,776    -    102,200    576 
Mortgage-backed securities   61,677    -    61,677    - 
Corporate debt securities   220    -    -    220 
Equity securities   2,763    2,763    -    - 
Securities AFS, December 31, 2014  $168,475   $2,763   $164,916   $796 
                     

The following is a description of the valuation methodologies used by the Company for the Securities AFS noted in the tables of this footnote. Where quoted market prices on securities exchanges are available, the investment is classified as Level 1. Level 1 investments primarily include exchange-traded equity securities available for sale. If quoted market prices are not available, fair value is generally determined using prices obtained from independent pricing vendors who use pricing models (with typical inputs including benchmark yields, reported trades for similar securities, issuer spreads or relationship to other benchmark quoted securities), or discounted cash flows, and are classified as Level 2. Examples of these investments include mortgage-related securities and obligations of state, county and municipals. Finally, in certain cases where there is limited activity or less transparency around inputs to the estimated fair value, investments are classified within Level 3 of the hierarchy. Examples of these include auction rate securities available for sale (for which there has been no liquid market since 2008) and corporate debt securities, which include trust preferred security investments. At September 30, 2015 and December 31, 2014, it was determined that carrying value was the best approximation of fair value for these Level 3 securities, based primarily on receipt of par from refinances for the auction rate securities and the internal analysis on the corporate debt securities.

 

The following table presents the Company’s impaired loans and other real estate owned (“OREO”) measured at fair value on a nonrecurring basis for the periods presented.

 

Measured at Fair Value on a Nonrecurring Basis
       Fair Value Measurements Using 
(in thousands)  Total   Level 1   Level 2   Level 3 
September 30, 2015:                
Impaired loans  $4,241   $-   $-   $4,241 
OREO   714    -    -    714 
December 31, 2014:                    
Impaired loans  $8,278   $-   $-   $8,278 
OREO   1,966    -    -    1,966 

 

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Note 9 - Fair Value Measurements, continued

 

The following is a description of the valuation methodologies used by the Company for the items noted in the table above, including the general classification of such instruments in the fair value hierarchy. For individually evaluated impaired loans, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, the estimated fair value of the underlying collateral for collateral-dependent loans, or the estimated liquidity of the note. For OREO, the fair value is based upon the estimated fair value of the underlying collateral adjusted for the expected costs to sell.

 

The carrying amounts and estimated fair values of the Company’s financial instruments at September 30, 2015 and December 31, 2014 are shown below.

 

September 30, 2015             
(in thousands)  Carrying 
Amount
   Estimated
Fair Value
   Level 1   Level 2   Level 3 
Financial assets:                         
Cash and cash equivalents  $34,635   $34,635   $34,635   $-   $- 
Certificates of deposit in other banks   4,159    4,172    -    4,172    - 
Securities AFS   167,572    167,572    4,212    161,644    1,716 
Other investments   8,126    8,126    -    5,985    2,141 
Loans held for sale   3,055    3,120    -    3,120    - 
Loans, net   874,443    882,543    -    -    882,543 
Bank owned life insurance   28,228    28,228    28,228    -    - 
                          
Financial liabilities:                         
Deposits  $1,012,181   $1,014,523   $-   $-   $1,014,523 
Notes payable   15,480    18,377    -    6,026    12,351 
Junior subordinated debentures   12,477    11,853    -    -    11,853 
Subordinated notes   11,840    11,554    -    -    11,554 

  

December 31, 2014             
(in thousands)  Carrying 
Amount
   Estimated
Fair Value
   Level 1   Level 2   Level 3 
Financial assets:                         
Cash and cash equivalents  $68,708   $68,708   $68,708   $-   $- 
Certificates of deposit in other banks   10,385    10,421    -    10,421