10-Q 1 t1600483_10q.htm FORM 10-Q

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2016

 

¨ 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 001-37700

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 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 x

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 July 31, 2016 there were 8,607,501 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, 2016 (unaudited) and December 31, 2015

3
       
   

Consolidated Statements of Income

Three Months and Six Months Ended June 30, 2016 and 2015 (unaudited)

4
       
   

Consolidated Statements of Comprehensive Income

Three Months and Six Months Ended June 30, 2016 and 2015 (unaudited)

5
       
   

Consolidated Statement of Changes in Stockholders’ Equity

Six Months Ended June 30, 2016 (unaudited)

6
       
   

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2016 and 2015 (unaudited)

7
       
    Notes to Unaudited Consolidated Financial Statements 8-30
       
  Item 2.

Management’s Discussion and Analysis of Financial Condition

and Results of Operations

31-54
       
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 54
       
  Item 4. Controls and Procedures 54
     
PART II OTHER INFORMATION  
       
  Item 1. Legal Proceedings 55
       
  Item 1A. Risk Factors 55
       
  Item 2. Unregistered Sales of Equity Securities and Use of  Proceeds 55
       
  Item 3. Defaults Upon Senior Securities 55
       
  Item 4. Mine Safety Disclosures 55
       
  Item 5. Other Information 55
       
  Item 6. Exhibits 56
       
    Signatures 56-60

  

 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, 2016

(Unaudited)

   December 31, 2015
(Audited)
 
Assets          
Cash and due from banks  $62,290   $11,947 
Interest-earning deposits   34,265    70,755 
Federal funds sold   5,308    917 
Cash and cash equivalents   101,863    83,619 
Certificates of deposit in other banks   4,926    3,416 
Securities available for sale (“AFS”)   371,387    172,596 
Other investments   14,637    8,135 
Loans held for sale   6,890    4,680 
Loans   1,560,557    877,061 
Allowance for loan losses   (10,947)   (10,307)
Loans, net   1,549,610    866,754 
Premises and equipment, net   47,118    29,613 
Bank owned life insurance (“BOLI”)   33,412    28,475 
Goodwill and other intangibles   90,271    3,793 
Accrued interest receivable and other assets   36,671    13,358 
Total assets  $2,256,785   $1,214,439 
           
Liabilities and Stockholders’ Equity          
Liabilities:          
Demand  $437,810   $226,554 
Money market and NOW accounts   912,044    486,677 
Savings   211,905    136,733 
Time   332,476    206,453 
Total deposits   1,894,235    1,056,417 
Short-term borrowings   11,170    - 
Notes payable   6,000    15,412 
Junior subordinated debentures   24,514    12,527 
Subordinated notes   11,867    11,849 
Accrued interest payable and other liabilities   24,726    8,547 
Total liabilities   1,972,512    1,104,752 
           
Stockholders’ Equity:          
Preferred equity   12,200    12,200 
Common stock   86    42 
Additional paid-in capital   212,173    45,220 
Retained earnings   56,584    51,059 
Accumulated other comprehensive income (“AOCI”)   2,933    980 
Total Nicolet Bankshares, Inc. stockholders’ equity   283,976    109,501 
Noncontrolling interest   297    186 
Total stockholders’ equity and noncontrolling interest   284,273    109,687 
Total liabilities, noncontrolling interest and stockholders’ equity  $2,256,785   $1,214,439 
Preferred shares authorized (no par value)   10,000,000    10,000,000 
Preferred shares issued and outstanding   12,200    12,200 
Common shares authorized (par value $0.01 per share)   30,000,000    30,000,000 
Common shares outstanding   8,598,688    4,154,377 
Common shares issued   8,648,503    4,191,067 

 

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,
 
   2016   2015   2016   2015 
Interest income:                    
Loans, including loan fees  $16,836   $10,783   $28,406   $22,762 
Investment securities:                    
Taxable   762    365    1,166    759 
Non-taxable   391    264    653    535 
Other interest income   362    119    555    219 
Total interest income   18,351    11,531    30,780    24,275 
Interest expense:                    
Money market and NOW accounts   605    558    1,095    1,124 
Savings and time deposits   718    750    1,383    1,493 
Short-term borrowings   5    -    5    - 
Notes payable   74    166    224    330 
Junior subordinated debentures   324    219    550    436 
Subordinated notes   159    125    318    176 
Total interest expense   1,885    1,818    3,575    3,559 
Net interest income   16,466    9,713    27,205    20,716 
Provision for loan losses   450    450    900    900 
Net interest income after provision for loan losses   16,016    9,263    26,305    19,816 
Noninterest income:                    
Service charges on deposit accounts   870    612    1,463    1,121 
Trust services fee income   1,465    1,236    2,627    2,440 
Mortgage income, net   1,132    985    1,703    1,859 
Brokerage fee income   788    169    1,098    339 
Bank owned life insurance   312    255    562    497 
Rent income   273    282    535    566 
Investment advisory fees   95    85    195    203 
Gain on sale or writedown of assets, net   100    740    95    951 
Other income   1,335    530    1,970    988 
Total noninterest income   6,370    4,894    10,248    8,964 
Noninterest expense:                    
Salaries and employee benefits   8,884    5,668    14,232    11,359 
Occupancy, equipment and office   2,508    1,733    4,306    3,518 
Business development and marketing   790    550    1,368    1,035 
Data processing   1,421    890    2,577    1,721 
FDIC assessments   239    163    382    327 
Intangibles amortization   874    260    1,123    535 
Other expense   2,803    460    3,549    1,031 
Total noninterest expense   17,519    9,724    27,537    19,526 
                     
Income before income tax expense   4,867    4,433    9,016    9,254 
Income tax expense   1,545    1,463    2,994    3,171 
Net income   3,322    2,970    6,022    6,083 
Less: net income attributable to noncontrolling interest   65    35    111    68 
Net income attributable to Nicolet Bankshares, Inc.   3,257    2,935    5,911    6,015 
Less:  preferred stock dividends   274    61    386    122 
Net income available to common shareholders  $2,983   $2,874   $5,525   $5,893 
                     
Basic earnings per common share  $0.41   $0.72   $0.97   $1.47 
Diluted earnings per common share  $0.39   $0.66   $0.91   $1.36 
Weighted average common shares outstanding:                    
Basic   7,257,218    4,007,368    5,719,651    4,019,279 
Diluted   7,629,175    4,366,295    6,041,543    4,337,780 

 

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   Six Months Ended 
   June 30,   June 30, 
   2016   2015   2016   2015 
Net income  $3,322   $2,970   $6,022   $6,083 
Other comprehensive income, net of tax:                    
Unrealized gains (losses) on securities AFS:                    
Net unrealized holding gains (losses) arising during the period   1,770    (1,010)   3,242    (85)
Reclassification adjustment for net gains included in net income   (40)   (630)   (40)   (630)
Income tax (expense) benefit   (675)   640    (1,249)   279 
Total other comprehensive income (loss)   1,055    (1,000)   1,953    (436)
Comprehensive income  $4,377   $1,970   $7,975   $5,647 

 

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, 2015  $12,200   $42   $45,220   $51,059   $980   $186   $109,687 
Comprehensive income:                                   
Net income   -    -    -    5,911    -    111    6,022 
Other comprehensive income   -    -    -    -    1,953    -    1,953 
Stock compensation expense   -    -    768    -    -    -    768 
Exercise of stock options, net   -    -    227    -    -    -    227 
Issuance of common stock   -    1    65    -    -    -    66 
Issuance of  common stock in acquisitions, net of capitalized issuance costs of $260   -    44    164,991    -    -    -    165,035 
Purchase and retirement of common stock   -    (1)   (280)   -    -    -    (281)
Equity awards assumed in acquisition   -    -    1,182    -    -    -    1,182 
Preferred stock dividends   -    -    -    (386)   -    -    (386)
Balance, June 30, 2016  $12,200   $86   $212,173   $56,584   $2,933   $297   $284,273 

   

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, 
   2016   2015 
Cash Flows From Operating Activities:          
Net income  $6,022   $6,083 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation, amortization, and accretion   3,166    2,220 
Provision for loan losses   900    900 
Increase in cash surrender value of life insurance   (562)   (497)
Stock compensation expense   768    593 
Gain on sale of assets, net   (95)   (951)
Gain on sale of loans held for sale, net   (1,642)   (1,859)
Proceeds from sale of loans held for sale   89,012    110,426 
Origination of loans held for sale   (88,830)   (105,255)
Net change in:          
Accrued interest receivable and other assets   (392)   (441)
Accrued interest payable and other liabilities   (2,797)   1,028 
Net cash provided by operating activities   5,550    12,247 
Cash Flows From Investing Activities:          
Net decrease in certificates of deposit in other banks   490    6,217 
Net decrease (increase) in loans   6,811    (707)
Purchases of securities AFS   (35,738)   (15,460)
Proceeds from sales of securities AFS   15,849    13,883 
Proceeds from calls and maturities of securities AFS   14,327    13,863 
Purchase of other investments   (85)   (52)
Net increase in premises and equipment   (2,999)   (503)
Proceeds from sales of other real estate and other assets   314    2,156 
Proceeds from redemption of BOLI   21,549    - 
Net cash received in business combination   66,517    - 
Net cash provided by investing activities   87,035    19,397 
Cash Flows From Financing Activities:          
Net increase (decrease) in deposits   15,485    (59,964)
Net increase (decrease) in short-term borrowings   (37,917)   10,000 
Repayments of notes payable   (51,519)   (130)
Proceeds from issuance of subordinated notes, net   -    11,820 
Purchase  and retirement of common stock   (281)   (3,794)
Capitalized issuance costs   (260)   - 
Proceeds from issuance of common stock   66    54 
Proceeds from exercise of common stock options, net   227    550 
Cash dividends paid on preferred stock   (142)   (122)
Net cash used by financing activities   (74,341)   (41,586)
Net increase (decrease) in cash and cash equivalents   18,244    (9,942)
Cash and cash equivalents:          
Beginning  $83,619   $68,708 
Ending  $101,863   $58,766 
Supplemental Disclosures of Cash Flow Information:          
Cash paid for interest  $3,375   $3,579 
Cash paid for taxes   3,150    2,040 
Transfer of loans and bank premises to other real estate owned   33    830 
Acquisitions          
Fair value of assets acquired   1,035,517     
Fair value of liabilities assumed   936,621     
Net assets acquired   98,896     

 

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, 2015.

 

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 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, 2015.

 

Recent Accounting Developments Adopted

 

The Company has implemented all new accounting pronouncements that are in effect and that may impact its consolidated financial statements or results of operations.

 

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.

 

 8 
   

  

Note 2 – Acquisitions

 

On April 29, 2016, the Company consummated its merger with Baylake Corp. (“Baylake”), pursuant to the Agreement and Plan of Merger by and between the Company and Baylake dated September 8, 2015, (the “Merger Agreement”), whereby Baylake was merged with and into the Company, and Baylake Bank, Baylake’s wholly owned commercial bank subsidiary serving northeastern Wisconsin, was merged with and into Nicolet National Bank. The system integration was completed, and 21 branches of Baylake opened, on May 2, 2016, as Nicolet National Bank branches, expanding its presence into Door, Kewaunee, and Manitowoc Counties, Wisconsin. Concurrently, Nicolet closed one of its Brown County locations, bringing the Bank’s footprint to 42 branches.

 

The purpose of the merger was for strategic reasons beneficial to the Company. The acquisition is consistent with its plan to drive growth and efficiency through increased scale, leverage the strengths of each bank across the combined customer base, enhance profitability, and add liquidity and shareholder value.

 

Pursuant to the terms of the Merger Agreement, Baylake shareholders received 0.4517 shares of the Company’s common stock for each outstanding share of Baylake common stock (except for Baylake shares pre-owned by the Company at the time of the merger), and cash in lieu of any fractional share. Pre-existing Baylake equity awards (restricted stock units and stock options) immediately vested upon consummation of the merger. The Company issued 0.4517 shares of its common stock for each vesting Baylake restricted stock unit, and Nicolet assumed, after appropriate adjustment by the 0.4517 exchange ratio, all pre-existing Baylake stock options. As a result, the Company issued 4,344,243 shares of the Company’s common stock, for common stock consideration of $163.3 million (based on $37.58 per share, the volume weighted average closing price of the Company’s common stock over the preceding 20 trading day period, and recorded an additional $1.2 million consideration for the assumed stock options. Approximately $0.3 million in direct stock issuance costs for the merger were incurred and charged against additional paid in capital, bringing the total purchase price to $164.2 million.

 

The Company accounted for the transaction under the acquisition method of accounting, and thus, the financial position and results of operations of Baylake prior to the consummation date were not included in the accompanying consolidated financial statements. The accounting required assets purchased and liabilities assumed to be recorded at their respective fair values at the date of acquisition. The Company determined the fair value of core deposit intangibles, securities, premises and equipment, loans, OREO, BOLI and other assets, deposits, debt and deferred taxes with the assistance of third party valuations, appraisals, and third party advisors. The estimated fair values will be subject to refinement as additional information relative to the closing date fair values becomes available through the measurement period of approximately one year from consummation.

 

The fair value of the assets acquired and liabilities assumed on April 29, 2016 was as follows:

 

(in millions)  As recorded by
Baylake Corp
   Fair Value
Adjustments
   As Recorded
by Nicolet
 
Cash, cash equivalents and securities available for sale  $262   $1   $263 
Loans   710    (19)   691 
Other real estate owned   3    (2)   1 
Core deposit intangible   1    16    17 
Fixed assets and other assets   71    (8)   63 
Total assets acquired  $1,047   $(12)  $1,035 
                
Deposits  $822   $-   $822 
Junior subordinated debentures, borrowings and other liabilities   116    (1)   115 
Total liabilities acquired  $938   $(1)  $937 
                
Excess of assets acquired over liabilities acquired  $109   $(11)  $98 
Less: purchase price             164 
Goodwill            $66 

 

 9 
   

  

Note 2 – Acquisitions continued

 

The following unaudited pro forma information presents the results of operations for three months and six months ended June 30, 2016 and 2015, as if the acquisition had occurred January 1 of each period. The Company expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts. These unaudited pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined company that would have been achieved had the acquisition occurred at the beginning of each period presented, nor are they intended to represent or be indicative of future results of operations.

 

   Three Months Ended   Six Months Ended 
   June 30, 2016   June 30, 2015   June 30, 2016   June 30, 2015 
(in thousands, except per share data)                
Total revenues, net of interest expense  $26,831   $26,294   $53,434   $52,685 
Net income   4,343    5,704    10,214    11,400 
Diluted earnings per share  $0.46   $0.64   $1.10   $1.28 

 

During the first quarter of 2016, Nicolet agreed in a private transaction to hire a select group of financial advisors and purchase their respective books of business, as well as their operating platform, to enhance the leadership and future growth of the Company’s wealth management business. The transaction was effected in phases and completed April 1, 2016. The Company paid $4.9 million total initial consideration, including $0.8 million cash, $2.6 million of Nicolet common stock, and recorded a $1.5 million earn-out liability payable to one principal in the future (which may require adjustment based on change in initial business purchased over a period, but not contingent upon the principal’s employment). The Company initially recorded $0.4 million of goodwill, $0.2 million of fixed assets, and $4.3 million of customer intangible (a portion amortizing straight-line over 10 years and a portion over 15 years). The transaction will impact the income statement primarily within brokerage income, personnel expense, and intangibles amortization.

 

Note 3 – Earnings per Common Share

 

Basic earnings per common share are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of shares adjusted for the dilutive effect of common stock awards (outstanding stock options and unvested restricted stock), if any. Presented below are the calculations for basic and diluted earnings per common share.

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2016   2015   2016   2015 
(In thousands except per share data)                
Net income, net of noncontrolling interest  $3,257   $2,935   $5,911   $6,015 
Less: preferred stock dividends   274    61    386    122 
Net income available to common shareholders  $2,983   $2,874   $5,525   $5,893 
Weighted average common shares outstanding   7,257    4,007    5,720    4,019 
Effect of dilutive stock instruments   372    359    322    319 
Diluted weighted average common shares outstanding   7,629    4,366    6,042    4,338 
Basic earnings per common share*  $0.41   $0.72   $0.97   $1.47 
Diluted earnings per common share*  $0.39   $0.66   $0.91   $1.36 

 

*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.

 

No shares were outstanding at June 30, 2016 which were excluded from the calculation of diluted earnings per common share as anti-dilutive. Options to purchase approximately 0.2 million shares were outstanding at June 30, 2015, but were excluded from the calculation of diluted earnings per common share as the effect would have been anti-dilutive.

 

 10 
   

 

Note 4 – Stock-based Compensation

 

A Black-Scholes model is utilized to estimate the fair value of stock options and the market price of the Company’s stock at the date of grant is used to estimate the value of restricted stock awards. The weighted average assumptions used in the model for valuing option grants were as follows:

 

   Six months ended
June 30, 2016
   Year ended
December 31, 2015
 
Dividend yield   0%   0%
Expected volatility   25%   25%
Risk-free interest rate   1.61%   1.68%
Expected average life   7 years    7 years 
Weighted average per share fair value of options  $10.75   $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, 2014        967,859   $19.30    630,121 
Granted  $8.11    162,000    26.66      
Exercise of stock options*        (381,505)   18.00      
Forfeited        (2,350)   19.61      
Balance – December 31, 2015        746,004    21.56    325,979 
Granted  $10.75    35,000    35.63      
Options assumed in acquisition        91,701    21.03      
Exercise of stock options*        (23,052)   22.46      
Forfeited        (656)   19.17      
Balance – June 30, 2016        848,997   $22.06    457,510 

 

*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.

 

Options outstanding at June 30, 2016 are exercisable at option prices ranging from $9.19 to $38.10. There are 329,163 options outstanding in the range from $9.19 - $20.00, 268,397 in the range from $20.01 - $25.00, 172,332 in the range from $25.01 - $30.00, and 79,105 options outstanding in the range from $30.01 - $38.10. At June 30, 2016, the exercisable options have a weighted average remaining contractual life of approximately 5 years and a weighted average exercise price of $19.66.

 

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 2016, and full year of 2015 was approximately $0.3 million, and $5.2 million, respectively.

 

Restricted Stock  Weighted-
Average Grant
Date Fair Value
   Restricted
Shares
Outstanding
 
Balance – December 31, 2014  $18.62    66,231 
Granted   -    - 
Vested*   19.26    (29,261)
Forfeited   16.50    (280)
Balance – December 31, 2015   18.70    36,690 
Granted   31.33    25,202 
Vested *   20.01    (12,077)
Forfeited   -    - 
Balance – June 30, 2016  $24.77    49,815 

 

*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 3,653 shares were surrendered during the six months ended June 30, 2016 and 7,715 shares were surrendered during the twelve months ended December 31, 2015.

 

 11 
   

  

Note 4 – Stock-based Compensation, continued

 

The Company recognized approximately $0.8 million and $0.6 million of stock-based employee compensation expense during the six months ended June 30, 2016 and 2015, respectively, associated with its stock equity awards. As of June 30, 2016, 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 three years.

 

Note 5 – Securities Available for Sale

 

Amortized costs and fair values of securities available for sale are summarized as follows:

 

   June 30, 2016 
(in thousands)  Amortized Cost   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair Value 
U.S. government sponsored enterprises  $2,473   $27   $-   $2,500 
State, county and municipals   184,704    2,266    37    186,933 
Mortgage-backed securities   166,315    2,023    73    168,265 
Corporate debt securities   10,457    135    -    10,592 
Equity securities   2,631    479    13    3,097 
   $366,580   $4,930   $123   $371,387 

 

   December 31, 2015 
(in thousands)  Amortized Cost   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair Values 
U.S. government sponsored enterprises  $287   $7   $-   $294 
State, county and municipals   104,768    497    244    105,021 
Mortgage-backed securities   61,600    418    554    61,464 
Corporate debt securities   1,140    -    -    1,140 
Equity securities   3,196    1,504    23    4,677 
   $170,991   $2,426   $821   $172,596 

 

 12 
   

  

Note 5 – Securities Available for Sale, continued

 

The following table represents gross unrealized losses and the related fair value of investment securities available for sale, aggregated by investment category and length of time individual securities have been in a continuous unrealized loss position, at June 30, 2016 and December 31, 2015.

 

   June 30, 2016 
   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  $10,539   $12   $6,133   $25   $16,672   $37 
Mortgage-backed securities   10,288    17    4,254    56    14,542    73 
Equity securities   195    13    -    -    195    13 
   $21,022   $42   $10,387   $81   $31,409   $123 

 

   December 31, 2015 
   Less than 12 months   12 months or more   Total 
(in thousands)  Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
 
State, county and municipals  $34,283   $112   $12,702   $132   $46,985   $244 
Mortgage-backed securities   22,228    167    13,750    387    35,978    554 
Equity securities   408    23    -    -    408    23 
   $56,919   $302   $26,452   $519   $83,371   $821 

 

At June 30, 2016 the Company had $0.1 million of gross unrealized losses related to 64 securities. As of June 30, 2016, 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, 2016 or June 30, 2015.

 

The amortized cost and fair values of securities available for sale at June 30, 2016 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, 2016 
(in thousands)  Amortized Cost   Fair Value 
Due in less than one year  $12,859   $12,878 
Due in one year through five years   90,720    91,586 
Due after five years through ten years   85,057    86,341 
Due after ten years   8,998    9,220 
    197,634    200,025 
Mortgage-backed securities   166,315    168,265 
Equity securities   2,631    3,097 
Securities available for sale  $366,580   $371,387 

 

Proceeds from sales of securities available for sale during the first six months of 2016 and 2015 were approximately $15.8 million and $13.9 million, respectively. Gains of approximately $50,000 and $0.6 million were realized during the first six months of 2016 and 2015, respectively. Losses of approximately $10,000 were realized on sales of securities during the first six months of 2016. No losses were realized on sales of securities during the first six months of 2015.

 

 13 
   

 

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

 

The loan composition as of June 30, 2016 and December 31, 2015 is summarized as follows.

   Total 
   June 30, 2016   December 31, 2015 
(in thousands)  Amount  

% of

Total

   Amount   % of
Total
 
Commercial & industrial  $427,093    27.4%  $294,419    33.6%
Owner-occupied commercial real estate (“CRE”)   359,401    23.0    185,285    21.1 
Agricultural (“AG”) production   32,646    2.1    15,018    1.7 
AG real estate   53,005    3.4    43,272    4.9 
CRE investment   199,585    12.8    78,711    9.0 
Construction & land development   68,957    4.4    36,775    4.2 
Residential construction   20,434    1.3    10,443    1.2 
Residential first mortgage   287,722    18.4    154,658    17.6 
Residential junior mortgage   97,509    6.3    51,967    5.9 
Retail & other   14,205    0.9    6,513    0.8 
Loans   1,560,557    100.0%   877,061    100.0%
Less allowance for loan losses   10,947         10,307      
Loans, net  $1,549,610        $866,754      
Allowance for loan losses to loans   0.70%        1.18%     

 

   Originated 
   June 30, 2016   December 31, 2015 
(in thousands)  Amount  

% of

Total

   Amount   % of
Total
 
Commercial & industrial  $305,517    38.1%  $284,023    38.4%
Owner-occupied CRE   163,046    20.3    153,563    20.7 
AG production   7,102    0.9    6,849    0.9 
AG real estate   26,063    3.3    25,464    3.4 
CRE investment   65,153    8.1    58,949    8.0 
Construction & land development   33,000    4.1    27,231    3.7 
Residential construction   14,391    1.8    10,443    1.4 
Residential first mortgage   132,422    16.5    122,373    16.5 
Residential junior mortgage   46,230    5.8    44,889    6.1 
Retail & other   8,496    1.1    6,351    0.9 
Loans   801,420    100.0%   740,135    100.0%
Less allowance for loan losses   9,337         8,714      
Loans, net  $792,083        $731,421      
Allowance for loan losses to loans   1.17%        1.18%     

 

   Acquired 
   June 30, 2016   December 31, 2015 
(in thousands)  Amount  

% of

Total

   Amount   % of
Total
 
Commercial & industrial  $121,576    16.0%  $10,396    7.6%
Owner-occupied CRE   196,355    25.9    31,722    23.2 
AG production   25,544    3.4    8,169    6.0 
AG real estate   26,942    3.5    17,808    13.0 
CRE investment   134,432    17.7    19,762    14.4 
Construction & land development   35,957    4.8    9,544    7.0 
Residential construction   6,043    0.8    -    - 
Residential first mortgage   155,300    20.5    32,285    23.5 
Residential junior mortgage   51,279    6.7    7,078    5.2 
Retail & other   5,709    0.7    162    0.1 
Loans   759,137    100.0%   136,926    100.0%
Less allowance for loan losses   1,610         1,593      
Loans, net  $757,527        $135,333      
Allowance for loan losses to loans   0.21%        1.16%     

 

 14 
   

  

Note 6 – 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.

 

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, 2016:

 

   TOTAL – Six Months Ended June 30, 2016 
(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  $3,721   $1,933   $85   $380   $785   $1,446   $147   $1,240   $496   $74   $10,307 
Provision   345    491    12    40    170    (385)   72    85    11    59    900 
Charge-offs   (262)   -    -    -    -    -    -    -    (12)   (24)   (298)
Recoveries   17    2    -    -    8    -    -    3    6    2    38 
Net charge-offs   (245)   2    -    -    8    -    -    3    (6)   (22)   (260)
Ending balance  $3,821   $2,426   $97   $420   $963   $1,061   $219   $1,328   $501   $111   $10,947 
As percent of ALLL   34.9%   22.2%   0.9%   3.8%   8.8%   9.7%   2.0%   12.1%   4.6%   1.0%   100.0%
                                                        
ALLL:                                                       
Individually evaluated  $-   $119   $-   $-   $-   $-   $-   $-   $-   $-   $119 
Collectively evaluated   3,821    2,307    97    420    963    1,061    219    1,328    501    111    10,828 
Ending balance  $3,821   $2,426   $97   $420   $963   $1,061   $219   $1,328   $501   $111   $10,947 
                                                        
Loans:                                                       
Individually evaluated  $1,407   $3,836   $64   $252   $14,595   $1,074   $313   $2,482   $185   $-   $24,208 
Collectively evaluated   425,686    355,565    32,582    52,753    184,990    67,883    20,121    285,240    97,324    14,205    1,536,349 
Total loans  $427,093   $359,401   $32,646   $53,005   $199,585   $68,957   $20,434   $287,722   $97,509   $14,205   $1,560,557 
                                                        
Less ALLL  $3,821   $2,426   $97   $420   $963   $1,061   $219   $1,328   $501   $111   $10,947 
Net loans  $423,272   $356,975   $32,549   $52,585   $198,622   $67,896   $20,215   $286,394   $97,008   $14,094   $1,549,610 

 

 15 
   

 

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

 

   Originated – Six Months Ended June 30, 2016 
(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  $3,135   $1,567   $71   $299   $646   $1,381   $147   $987   $418   $63   $8,714 
Provision   361    481    12    46    166    (393)   50    104    20    58    905 
Charge-offs   (262)   -    -    -    -    -    -    -    (12)   (24)   (298)
Recoveries   -    2    -    -    8    -    -    -    5    1    16 
Net charge-offs   (262)   2    -    -    8    -    -    -    (7)   (23)   (282)
Ending balance  $3,234   $2,050   $83   $345   $820   $988   $197   $1,091   $431   $98   $9,337 
As percent of ALLL   34.6%   22.0%   0.9%   3.7%   8.8%   10.6%   2.1%   11.7%   4.6%   1.0%   100.0%
                                                        
ALLL:                                                       
Individually evaluated  $-   $119   $-   $-   $-   $-   $-   $-   $-   $-   $119 
Collectively evaluated   3,234    1,931    83    345    820    988    197    1,091    431    98    9,218 
Ending balance  $3,234   $2,050   $83   $345   $820   $988   $197   $1,091   $431   $98   $9,337 
                                                        
Loans:                                                       
Individually evaluated  $440   $623   $-   $-   $-   $-   $-   $-   $-   $-   $1,063 
Collectively evaluated   305,077    162,423    7,102    26,063    65,153    33,000    14,391    132,422    46,230    8,496    800,357 
Total loans  $305,517   $163,046   $7,102   $26,063   $65,153   $33,000   $14,391   $132,422   $46,230   $8,496   $801,420 
                                                        
Less ALLL  $3,234   $2,050   $83   $345   $820   $988   $197   $1,091   $431   $98   $9,337 
Net loans  $302,283   $160,996   $7,019   $25,718   $64,333   $32,012   $14,194   $131,331   $45,799   $8,398   $792,083 

 

   Acquired – Six Months Ended June 30, 2016 
(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  $586   $366   $14   $81   $139   $65   $-   $253   $78   $11   $1,593 
Provision   (16)   10    -    (6)   4    8    22    (19)   (9)   1    (5)
Charge-offs   -    -    -    -    -    -    -    -    -    -    - 
Recoveries   17    -    -    -    -    -    -    3    1    1    22 
Net charge-offs   17    -    -    -    -    -    -    3    1    1    22 
Ending balance  $587   $376   $14   $75   $143   $73   $22   $237   $70   $13   $1,610 
As percent of ALLL   36.5%   23.4%   0.9%   4.7%   8.9%   4.5%   1.4%   14.7%   4.3%   0.7%   100.0%
                                                        
Loans:                                                       
Individually evaluated  $967   $3,213   $64   $252   $14,595   $1,074   $313   $2,482   $185   $-   $23,145 
Collectively evaluated   120,609    193,142    25,480    26,690    119,837    34,883    5,730    152,818    51,094    5,709    735,992 
Total loans  $121,576   $196,355   $25,544   $26,942   $134,432   $35,957   $6,043   $155,300   $51,279   $5,709   $759,137 
                                                        
Less ALLL  $587   $376   $14   $75   $143   $73   $22   $237   $70   $13   $1,610 
Net loans  $120,989   $195,979   $25,530   $26,867   $134,289   $35,884   $6,021   $155,063   $51,209   $5,696   $757,527 

 

 16 
   

  

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

 

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, 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%   100.0%
                                                        
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%   100.0%
                                                        
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 

  

 17 
   

  

Note 6 – 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%   100.0%
                                                        
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 

  

 18 
   

 

Note 6 – 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, 2016 and December 31, 2015.

 

   Total Nonaccrual Loans 
(in thousands)  June 30, 2016   % to Total   December 31, 2015   % to Total 
Commercial & industrial  $1,419    5.8%  $204    5.8%
Owner-occupied CRE   3,906    16.1    951    26.9 
AG production   35    0.1    13    0.4 
AG real estate   219    0.9    230    6.5 
CRE investment   14,343    59.1    1,040    29.4 
Construction & land development   1,074    4.4    280    7.9 
Residential construction   313    1.3    -    - 
Residential first mortgage   2,755    11.3    674    19.1 
Residential junior mortgage   218    1.0    141    4.0 
Retail & other   -    -    -    - 
Nonaccrual loans - Total  $24,282    100.0%  $3,533    100.0%

 

   Originated 
(in thousands)  June 30, 2016   % to Total   December 31, 2015   % to Total 
Commercial & industrial  $447    33.1%  $49    8.4%
Owner-occupied CRE   666    49.3    -    - 
AG production   10    0.7    13    2.2 
AG real estate   -    -    -    - 
CRE investment   -    -    387    66.7 
Construction & land development   -    -    -    - 
Residential construction   -    -    -    - 
Residential first mortgage   228    16.9    132    22.7 
Residential junior mortgage   -    -    -    - 
Retail & other   -    -    -    - 
Nonaccrual loans - Originated  $1,351    100.0%  $581    100.0%

 

   Acquired 
(in thousands)  June 30, 2016   % to Total   December 31, 2015   % to Total 
Commercial & industrial  $972    4.2%  $155    5.3%
Owner-occupied CRE   3,240    14.1    951    32.1 
AG production   25    0.1    -    - 
AG real estate   219    1.0    230    7.8 
CRE investment   14,343    62.5    653    22.1 
Construction & land development   1,074    4.7    280    9.5 
Residential construction   313    1.4    -    - 
Residential first mortgage   2,527    11.0    542    18.4 
Residential junior mortgage   218    1.0    141    4.8 
Retail & other   -    -    -    - 
Nonaccrual loans – Acquired  $22,931    100.0%  $2,952    100.0%

 

 19 
   

 

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

 

The following tables present total past due loans by portfolio segment as of June 30, 2016 and December 31, 2015:

   June 30, 2016 
(in thousands)  30-89 Days
Past Due
(accruing)
   90 Days &
Over or non-
accrual
   Current   Total 
Commercial & industrial  $31   $1,419   $425,643   $427,093 
Owner-occupied CRE   117    3,906    355,378    359,401 
AG production   -    35    32,611    32,646 
AG real estate   -    219    52,786    53,005 
CRE investment   -    14,343    185,242    199,585 
Construction & land development   -    1,074    67,883    68,957 
Residential construction   -    313    20,121    20,434 
Residential first mortgage   350    2,755    284,617    287,722 
Residential junior mortgage   32    218    97,259    97,509 
Retail & other   14    -    14,191    14,205 
Total loans  $544   $24,282   $1,535,731   $1,560,557 
As a percent of total loans   0.1%   1.6%   98.3%   100.0%

 

   December 31, 2015 
(in thousands)  30-89 Days Past
Due (accruing)
   90 Days &
Over or
nonaccrual
   Current   Total 
Commercial & industrial  $50   $204   $294,165   $294,419 
Owner-occupied CRE   -    951    184,334    185,285 
AG production   16    13    14,989    15,018 
AG real estate   -    230    43,042    43,272 
CRE investment   -    1,040    77,671    78,711 
Construction & land development   -    280    36,495    36,775 
Residential construction   -    -    10,443    10,443 
Residential first mortgage   150    674    153,834    154,658 
Residential junior mortgage   10    141    51,816    51,967 
Retail & other   12    -    6,501    6,513 
Total loans  $238   $3,533   $873,290   $877,061 
As a percent of total loans   0.1%   0.4%   99.5%   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.

 

 20 
   

 

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

 

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 June 30, 2016 and December 31, 2015:

 

   June 30, 2016 
(in thousands)  Grades 1- 4   Grade 5   Grade 6   Grade 7   Grade 8   Grade 9   Total 
Commercial & industrial  $392,681   $23,015   $4,364   $7,033   $-   $-   $427,093 
Owner-occupied CRE   333,610    18,598    599    6,594    -    -    359,401 
AG production   31,311    699    76    560    -    -    32,646 
AG real estate   51,650    472    -    883    -    -    53,005 
CRE investment   178,399    4,306    1,364    15,516    -    -    199,585 
Construction & land development   63,009    4,661    -    1,287    -    -    68,957 
Residential construction   19,681    440    -    313    -    -    20,434 
Residential first mortgage   281,875    1,791    196    3,860    -    -    287,722 
Residential junior mortgage   97,156    -    93    260    -    -    97,509 
Retail & other   14,205    -    -    -    -    -    14,205 
Total loans  $1,463,577   $53,982   $6,692   $36,306   $-   $-   $1,560,557 
Percent of total   93.8%   3.5%   0.4%   2.3%   -    -    100.0%

 

   December 31, 2015 
(in thousands)  Grades 1- 4   Grade 5   Grade 6   Grade 7   Grade 8   Grade 9   Total 
Commercial & industrial  $278,118   $9,267   $2,490   $4,544   $-   $-   $294,419 
Owner-occupied CRE   176,371    5,072    253    3,589    -    -    185,285 
AG production   13,238    1,765    -    15    -    -    15,018 
AG real estate   39,958    2,600    -    714    -    -    43,272 
CRE investment   74,778    2,020    -    1,913    -    -    78,711 
Construction & land development   31,897    4,598    -    280    -    -    36,775 
Residential construction   9,792    651    -    -    -    -    10,443 
Residential first mortgage   151,835    860    457    1,506    -    -    154,658 
Residential junior mortgage   51,736    68    -    163    -    -    51,967 
Retail & other   6,513    -    -    -    -    -    6,513 
Total loans  $834,236   $26,901   $3,200   $12,724   $-   $-   $877,061 
Percent of total   95.0%   3.1%   0.4%   1.5%   -    -    100.0%

 

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.

 

 21 
   

 

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

 

The following tables present impaired loans as of June 30, 2016 and December 31, 2015. As a further breakdown, impaired loans are also summarized by originated and acquired for the periods presented. In April 2016, the Baylake merger added purchased credit impaired loans at a fair value of $20.8 million, net of an initial $12.9 million non-accretable mark. Including these credit impaired loans acquired in the Baylake merger, total purchased credit impaired loans acquired in aggregate were initially recorded at a fair value of $37.5 million on their respective acquisition dates, net of an initial $25.1 million non-accretable mark and a zero accretable mark. At June 30, 2016, $21.8 million of the $37.5 million remain in impaired loans and $1.3 million of acquired loans have subsequently become impaired, bringing acquired impaired loans to $23.1 million.

 

   Total Impaired Loans – June 30, 2016 
(in thousands)  Recorded
Investment
   Unpaid Principal
Balance
   Related Allowance   Average Recorded
Investment
   Interest Income
Recognized
 
Commercial & industrial  $1,407   $2,713   $-   $1,406   $88 
Owner-occupied CRE*   3,836    6,014    119    3,654    181 
AG production   64    201    -    64    8 
AG real estate   252    345    -    248    13 
CRE investment   14,595    23,148    -    14,635    597 
Construction & land development   1,074    3,035    -    1,077    57 
Residential construction   313    1,400    -    313    39 
Residential first mortgage   2,482    4,329    -    2,495    119 
Residential junior mortgage   185    708    -    188    28 
Retail & Other   -    42    -    -    3 
Total  $24,208   $41,935   $119   $24,080   $1,133 

 

As a further breakdown, impaired loans as of June 30, 2016 are summarized by originated and acquired as follows:

 

   Originated – June 30, 2016 
(in thousands)  Recorded
Investment
   Unpaid Principal
Balance
   Related Allowance   Average Recorded
Investment
   Interest Income
Recognized
 
Commercial & industrial  $440   $440   $-   $437   $25 
Owner-occupied CRE*   623    623    119    415    6 
AG production   -    -    -    -    - 
AG real estate   -    -    -    -    - 
CRE investment   -    -    -    -    - 
Construction & land development   -    -    -    -    - 
Residential construction   -    -    -    -    - 
Residential first mortgage   -    -    -    -    - 
Residential junior mortgage   -    -    -    -    - 
Retail & Other   -    -    -    -    - 
Total  $1,063   $1,063   $119   $852   $31 

 

   Acquired – June 30, 2016 
(in thousands)  Recorded
Investment
   Unpaid Principal
Balance
   Related Allowance   Average Recorded
Investment
   Interest Income
Recognized
 
Commercial & industrial  $967   $2,273   $-   $969   $63 
Owner-occupied CRE*   3,213    5,391    -    3,239    175 
AG production   64    201    -    64    8 
AG real estate   252    345    -    248    13 
CRE investment   14,595    23,148    -    14,635    597 
Construction & land development   1,074    3,035    -    1,077    57 
Residential construction   313    1,400    -    313    39 
Residential first mortgage   2,482    4,329    -    2,495    119 
Residential junior mortgage   185    708    -    188    28 
Retail & other   -    42    -    -    3 
Total  $23,145   $40,872   $-   $23,228   $1,102 

 

*One owner-occupied CRE loan with a balance of $0.6 million had a specific reserve of $119,000. No other loans had a related allowance at June 30, 2016 and, therefore, the above disclosure was not expanded to include loans with and without a related allowance.

 

 22 
   

 

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

 

   Total Impaired Loans – December 31, 2015 
(in thousands)  Recorded
Investment
   Unpaid Principal
Balance
   Related Allowance   Average Recorded
Investment
   Interest Income
Recognized
 
Commercial & industrial  $142   $142   $-   $144   $10 
Owner-occupied CRE   950    1,688    -    1,111    135 
AG production   39    53    -    38    4 
AG real estate   252    348    -    260    27 
CRE investment   1,301    3,109    -    1,432    175 
Construction & land development   280    822    -    301    18 
Residential construction   -    -    -    -    - 
Residential first mortgage   460    1,150    -    515    79 
Residential junior mortgage   142    471    -    147    26 
Retail & Other   -    12    -    -    1 
Total  $3,566   $7,795   $-   $3,948   $475 

 

As a further breakdown, impaired loans as of December 31, 2015 are summarized by originated and acquired as follows:

 

   Originated – December 31, 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   387    387    -    387    29 
Construction & land development   -    -    -    -    - 
Residential construction   -    -    -    -    - 
Residential first mortgage   -    -    -    -    - 
Residential junior mortgage   -    -    -    -    - 
Retail & Other   -    -    -    -    - 
Total  $387   $387   $-   $387   $29 

 

   Acquired – December 31, 2015 
(in thousands)  Recorded
Investment
   Unpaid Principal
Balance
   Related Allowance   Average Recorded
Investment
   Interest Income
Recognized
 
Commercial & industrial  $142   $142   $-   $144   $10 
Owner-occupied CRE   950    1,688    -    1,111    135 
AG production   39    53    -    38    4 
AG real estate   252    348    -    260    27 
CRE investment   914    2,722    -    1,045    146 
Construction & land development   280    822    -    301    18 
Residential construction   -    -    -    -    - 
Residential first mortgage   460    1,150    -    515    79 
Residential junior mortgage   142    471    -    147    26 
Retail & other   -    12    -    -    1 
Total  $3,179   $7,408   $-   $3,561   $446 

 

 23 
   

 

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

 

Troubled Debt Restructurings

 

At June 30, 2016, there were eight loans classified as troubled debt restructurings totaling $563,000. These eight loans had a combined premodification balance of $703,000 and a combined outstanding balance of $563,000 at June 30, 2016. There were no other loans which were modified and classified as troubled debt restructurings at June 30, 2016. There were no loans classified as troubled debt restructurings during the previous twelve months that subsequently defaulted as of June 30, 2016. Loans which were considered troubled debt restructurings by Baylake prior to the acquisition are not required to be classified as troubled debt restructurings in the Company’s consolidated financial statements unless and until such loans would subsequently meet criteria to be classified as such, since acquired loans were recorded at their estimated fair values at the time of the acquisition.

 

Note 7 – Goodwill and Intangible Assets

 

The excess of the purchase price in an acquisition over the fair value of net assets acquired consists primarily of goodwill, core deposit intangibles and other identifiable intangibles (primarily related to customer relationships acquired). Goodwill is not amortized but is instead subject to impairment tests on at least an annual basis. Core deposit intangibles, which arise from value ascribed to the deposit base of a bank acquired, have estimated finite lives and are amortized on an accelerated basis to expense over a 10-year period. The other intangibles, which represent value ascribed to financial advisor books of business purchased in 2016 in a private transaction, have estimated finite lives and are amortized on a straight-line basis to expense over their weighted average life (of approximately 12 years for 2016).

 

Management periodically reviews the carrying value of its long-lived and intangible assets to determine if any impairment has occurred, in which case an impairment charge would be recorded as an expense in the period of impairment, or whether changes in circumstances have occurred that would require a revision to the remaining useful life which would impact expense prospectively. In making such determination, management evaluates whether there are any adverse qualitative factors indicating that an impairment may exist, as well as the performance, on an undiscounted basis, of the underlying operations or assets which give rise to the intangible. The Company’s annual assessments indicated no impairment charge on goodwill or core deposit intangible was required for 2015 or the first six months of 2016.

 

Goodwill: Goodwill was $66.7 million at June 30, 2016 and $0.8 million at December 31, 2015. There were additions to the carrying amount of goodwill in 2016 of $0.4 million related to the acquisition of financial advisor business and of approximately $65.5 million related to the Baylake merger. See Note 2 for additional information on the 2016 acquisitions.

 

Other intangible assets: Other intangible assets, consisting of core deposit intangibles and other intangibles (primarily related to the customer relationships acquired in connection with the 2016 acquisition of financial advisor business), are amortized over their estimated finite lives. Due to the 2016 acquisitions, there was an addition to the gross carrying amount of core deposit intangibles of $17.3 million and of other intangibles of $4.4 million. Amortization on core deposit intangibles was $0.8 million and $1.0 million for the three and six months ended June 30, 2016, respectively, and $0.3 million and $0.5 million for the three and six months ended June 30, 2015, respectively. Amortization on other intangible assets was $0.07 million for both the three and six months ended June 30, 2016 and zero in 2015. See Note 2 for additional information on the 2016 acquisitions.

 

(in thousands)  June 30, 2016   December 31, 2015 
Core deposit intangibles:          
Gross carrying amount  $25,345   $8,086 
Accumulated amortization   (6,104)   (5,055)
Net book value  $19,241