UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
UNITED STATESWashington, D.C. 20549
FORM 10-Q 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, 2013
2014
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from___________ to___________from__________to___________
Commission file number 333-90052
NICOLET BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
WISCONSIN
(State (State or other jurisdiction of incorporation or organization) | 47-0871001 (I.R.S. (I.R.S. Employer Identification No.)
|
111 North Washington Street Green Bay, Wisconsin 54301 (920) 430-1400 (Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices) |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of August 5, 2013July 31, 2014 there were 4,227,6224,114,846 shares of $0.01 par value common stock outstanding.
Nicolet Bankshares, Inc.
TABLE OF CONTENTS
| | | | |
PART I | FINANCIAL INFORMATION | | PAGE |
| Item 1. | Financial Statements: | | |
| Item 1. | Financial Statements:Consolidated Balance Sheets June 30, 2014 (unaudited) and December 31, 2013 | 3 | |
| | Consolidated Statements of Income Three Months and Six Months Ended June 30, 2014 and 2013 (unaudited) | 4 | |
| | | | |
| | Consolidated Balance Sheets | | |
| | June 30, 2013 (unaudited) and December 31, 2012
| | 3 |
| | | | |
| | Consolidated Statements of Comprehensive Income | | |
| | Three Months and Six Months Ended June 30, 2014 and 2013 and 2012 (unaudited) | | 4 |
| | | | |
| | Consolidated Statements of Comprehensive Income | 5 | |
| | Three Months and Six Months Ended June 30, 2013 and 2012 (unaudited)
| | 5 |
| | | | |
| | Consolidated Statement of Changes in Stockholders’ Equity | | |
| | Six Months Ended June 30, 20132014 (unaudited) | | 6 |
| | | | |
| | Consolidated Statements of Cash Flows Six Months Ended June 30, 2014 and 2013 (unaudited) | 6 7 | |
| | Six Months Ended June 30, 2013 and 2012 (unaudited)Notes to Unaudited Consolidated Financial Statements
| 8-26 | | 7 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 27-51 | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 52 | |
| Item 4. | Controls and Procedures | 52 | |
PART II | OTHER INFORMATION | | |
| Item 1. Item 1A. | Notes to Consolidated Financial StatementsLegal Proceedings Risk Factors | | 8-26 |
| | | 52 52 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 27-50 |
| | | | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | | 51 |
| | | | |
| Item 4. | Controls and Procedures | | 51 |
| | | | |
PART II | OTHER INFORMATION | | |
| | | | |
| Item 1. | Legal Proceedings | | 51 |
| | | | |
| Item 1A. | Risk Factors | | 51 |
| | | | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | | 51 |
| | | 52 | |
| Item 3. | Defaults Upon Senior Securities | | 51 |
| | | 52 | |
| Item 4. Item 5. Item 6. | Mine Safety Disclosures Other Information Exhibits Signatures | | 51 |
| | | 52 52 53 53-57 | |
| Item 5. | Other Information | | 51 |
| | | | |
| Item 6. | Exhibits | | 52 |
| | | | |
| | Signatures | | 52 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements:FINANCIAL STATEMENTS:
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)
| | June 30, 2013 (Unaudited) | | | December 31, 2012 (Audited) | | | June 30, 2014 (Unaudited) | | | December 31, 2013 (Audited) | |
Assets | | | | | | | | | | | | |
Cash and due from banks | | $ | 7,511 | | | $ | 26,988 | | | $ | 21,235 | | | $ | 26,556 | |
Interest-earning deposits | | | 27,998 | | | | 54,516 | | | | 60,270 | | | | 119,364 | |
Federal funds sold | | | 637 | | | | 499 | | | | 4,083 | | | | 1,058 | |
Cash and cash equivalents | | | 36,146 | | | | 82,003 | | | | 85,588 | | | | 146,978 | |
Certificates of deposit in other banks | | | 1,960 | | | | - | | | | 7,144 | | | | 1,960 | |
Securities available for sale (“AFS”) | | | 129,988 | | | | 55,901 | | | | 143,655 | | | | 127,515 | |
Other investments | | | 7,531 | | | | 5,221 | | | | 8,056 | | | | 7,982 | |
Loans held for sale | | | 3,142 | | | | 7,323 | | | | 3,589 | | | | 1,486 | |
Loans | | | 840,546 | | | | 552,601 | | | | 860,086 | | | | 847,358 | |
Allowance for loan losses | | | (7,658 | ) | | | (7,120 | ) | | | (9,642 | ) | | | (9,232 | ) |
Loans, net | | | 832,888 | | | | 545,481 | | | | 850,444 | | | | 838,126 | |
Premises and equipment, net | | | 29,224 | | | | 19,602 | | | | 28,617 | | | | 29,845 | |
Bank owned life insurance | | | 23,352 | | | | 18,697 | | | | 26,980 | | | | 23,796 | |
Accrued interest receivable and other assets | | | 24,209 | | | | 11,027 | | | | 19,699 | | | | 21,115 | |
Total assets | | $ | 1,088,440 | | | $ | 745,255 | | | $ | 1,173,772 | | | $ | 1,198,803 | |
Liabilities and Stockholders’ Equity | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Demand | | $ | 150,460 | | | $ | 108,234 | | | $ | 190,464 | | | $ | 171,321 | |
Money market and NOW accounts | | | 387,378 | | | | 322,507 | | | | 451,791 | | | | 492,499 | |
Savings | | | 90,201 | | | | 46,907 | | | | 112,232 | | | | 97,601 | |
Time | | | 280,044 | | | | 138,445 | | | | 256,634 | | | | 273,413 | |
Total deposits | | | 908,083 | | | | 616,093 | | | | 1,011,121 | | | | 1,034,834 | |
Short-term borrowings | | | 33,231 | | | | 4,035 | | | | 3,399 | | | | 7,116 | |
Notes payable | | | 25,040 | | | | 35,155 | | | | 27,299 | | | | 32,422 | |
Junior subordinated debentures | | | 12,029 | | | | 6,186 | | | | 12,228 | | | | 12,128 | |
Accrued interest payable and other liabilities | | | 8,730 | | | | 6,408 | | | | 11,588 | | | | 7,424 | |
Total liabilities | | | 987,113 | | | | 667,877 | | | | 1,065,635 | | | | 1,093,924 | |
| | | | | | | | | | | | | | | | |
Stockholders’ Equity: | | | | | | | | | | | | | | | | |
Preferred equity | | | 24,400 | | | | 24,400 | | | | 24,400 | | | | 24,400 | |
Common stock | | | 42 | | | | 34 | | | | 41 | | | | 42 | |
Additional paid-in capital | | | 49,147 | | | | 36,243 | | | | 47,746 | | | | 49,616 | |
Retained earnings | | | 26,575 | | | | 14,973 | | | | 34,784 | | | | 30,138 | |
Accumulated other comprehensive income (“AOCI”) | | | 1,140 | | | | 1,683 | | | | 1,096 | | | | 666 | |
Total Nicolet Bankshares Inc. stockholders’ equity | | | 101,304 | | | | 77,333 | | |
Total Nicolet Bankshares, Inc. stockholders’ equity | | | | 108,067 | | | | 104,862 | |
Noncontrolling interest | | | 23 | | | | 45 | | | | 70 | | | | 17 | |
Total stockholders’ equity and noncontrolling interest | | | 101,327 | | | | 77,378 | | | | 108,137 | | | | 104,879 | |
| | | | | | | | | |
Total liabilities, noncontrolling interest and stockholders’ equity | | $ | 1,088,440 | | | $ | 745,255 | | | $ | 1,173,772 | | | $ | 1,198,803 | |
| | | | | | | | | |
Preferred shares authorized (no par value) | | | 10,000,000 | | | | 10,000,000 | | | | 10,000,000 | | | | 10,000,000 | |
Preferred shares issued | | | 24,400 | | | | 24,400 | | | | 24,400 | | | | 24,400 | |
Common shares authorized (par value $0.01 per share) | | | 30,000,000 | | | | 30,000,000 | | | | 30,000,000 | | | | 30,000,000 | |
Common shares outstanding | | | 4,227,622 | | | | 3,425,413 | | | | 4,147,226 | | | | 4,241,044 | |
Common shares issued | | | 4,279,745 | | | | 3,479,888 | | | | 4,196,670 | | | | 4,303,407 | |
See accompanying notes to unaudited consolidated financial statements.
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, | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2013 | | | 2012 | | | 2013 | | | 2012 | | | 2014 | | | 2013 | | | 2014 | | | 2013 | |
Interest income: | | | | | | | | | | | | | | | | | | | | | | | | |
Loans, including loan fees | | $ | 9,828 | | | $ | 6,530 | | | $ | 16,609 | | | $ | 12,986 | | | $ | 11,616 | | | $ | 9,828 | | | $ | 22,623 | | | $ | 16,609 | |
Investment securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable | | | 278 | | | | 157 | | | | 405 | | | | 319 | | | | 415 | | | | 278 | | | | 833 | | | | 405 | |
Non-taxable | | | 187 | | | | 205 | | | | 360 | | | | 419 | | | | 170 | | | | 187 | | | | 343 | | | | 360 | |
Other interest income | | | 65 | | | | 51 | | | | 145 | | | | 123 | | | | 128 | | | | 65 | | | | 263 | | | | 145 | |
Total interest income | | | 10,358 | | | | 6,943 | | | | 17,519 | | | | 13,847 | | | | 12,329 | | | | 10,358 | | | | 24,062 | | | | 17,519 | |
Interest expense: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Money market and NOW accounts | | | 463 | | | | 398 | | | | 977 | | | | 804 | | | | 572 | | | | 463 | | | | 1,165 | | | | 977 | |
Savings and time deposits | | | 562 | | | | 747 | | | | 1,049 | | | | 1,713 | | | | 793 | | | | 562 | | | | 1,481 | | | | 1,049 | |
Short term borrowings | | | 6 | | | | 1 | | | | 7 | | | | 2 | | | | 4 | | | | 6 | | | | 7 | | | | 7 | |
Junior subordinated debentures | | | 165 | | | | 125 | | | | 289 | | | | 250 | | | | 218 | | | | 165 | | | | 435 | | | | 289 | |
Notes payable | | | 344 | | | | 338 | | | | 627 | | | �� | 675 | | | | 246 | | | | 344 | | | | 498 | | | | 627 | |
Total interest expense | | | 1,540 | | | | 1,609 | | | | 2,949 | | | | 3,444 | | | | 1,833 | | | | 1,540 | | | | 3,586 | | | | 2,949 | |
Net interest income | | | 8,818 | | | | 5,334 | | | | 14,570 | | | | 10,403 | | | | 10,496 | | | | 8,818 | | | | 20,476 | | | | 14,570 | |
Provision for loan losses | | | 975 | | | | 1,125 | | | | 1,950 | | | | 2,375 | | | | 675 | | | | 975 | | | | 1,350 | | | | 1,950 | |
Net interest income after provision for loan losses | | | 7,843 | | | | 4,209 | | | | 12,620 | | | | 8,028 | | | | 9,821 | | | | 7,843 | | | | 19,126 | | | | 12,620 | |
Noninterest income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Service charges on deposit accounts | | | 470 | | | | 280 | | | | 754 | | | | 567 | | | | 544 | | | | 470 | | | | 1,038 | | | | 754 | |
Trust services fee income | | | 1,074 | | | | 724 | | | | 1,876 | | | | 1,454 | | | | 1,119 | | | | 1,074 | | | | 2,224 | | | | 1,876 | |
Mortgage income | | | 714 | | | | 671 | | | | 1,586 | | | | 1,408 | | | | 431 | | | | 714 | | | | 646 | | | | 1,586 | |
Brokerage fee income | | | 115 | | | | 81 | | | | 217 | | | | 165 | | | | 166 | | | | 115 | | | | 326 | | | | 217 | |
Gain on sale of assets, net | | | 45 | | | | 237 | | | | 49 | | | | 383 | | |
Bank owned life insurance | | | 212 | | | | 183 | | | | 381 | | | | 336 | | | | 220 | | | | 212 | | | | 434 | | | | 381 | |
Rent income | | | 274 | | | | 240 | | | | 524 | | | | 480 | | | | 288 | | | | 274 | | | | 588 | | | | 524 | |
Investment advisory fees | | | 76 | | | | 85 | | | | 162 | | | | 171 | | | | 102 | | | | 76 | | | | 212 | | | | 162 | |
Gain (loss) on sale or writedown of assets, net | | | | (442 | ) | | | 45 | | | | 308 | | | | 49 | |
Bargain purchase gain | | | 10,435 | | | | - | | | | 10,435 | | | | - | | | | - | | | | 10,435 | | | | - | | | | 10,435 | |
Other | | | 351 | | | | 176 | | | | 538 | | | | 337 | | | | 452 | | | | 351 | | | | 864 | | | | 538 | |
Total noninterest income | | | 13,766 | | | | 2,677 | | | | 16,522 | | | | 5,301 | | | | 2,880 | | | | 13,766 | | | | 6,640 | | | | 16,522 | |
Noninterest expense: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Salaries and employee benefits | | | 5,555 | | | | 3,393 | | | | 9,114 | | | | 6,666 | | | | 5,384 | | | | 5,555 | | | | 10,679 | | | | 9,114 | |
Occupancy, equipment and office | | | 1,466 | | | | 1,102 | | | | 2,570 | | | | 2,241 | | | | 1,737 | | | | 1,466 | | | | 3,635 | | | | 2,570 | |
Business development and marketing | | | 473 | | | | 352 | | | | 898 | | | | 697 | | | | 537 | | | | 473 | | | | 1,072 | | | | 898 | |
Data processing | | | 572 | | | | 410 | | | | 995 | | | | 812 | | | | 775 | | | | 572 | | | | 1,529 | | | | 995 | |
FDIC assessments | | | 130 | | | | 138 | | | | 240 | | | | 274 | | | | 203 | | | | 130 | | | | 387 | | | | 240 | |
Core deposit intangible amortization | | | 286 | | | | 168 | | | | 434 | | | | 336 | | | | 315 | | | | 286 | | | | 650 | | | | 434 | |
Other | | | 1,104 | | | | 446 | | | | 1,675 | | | | 768 | | | | 533 | | | | 1,104 | | | | 1,120 | | | | 1,675 | |
Total noninterest expense | | | 9,586 | | | | 6,009 | | | | 15,926 | | | | 11,794 | | | | 9,484 | | | | 9,586 | | | | 19,072 | | | | 15,926 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income before income tax expense | | | 12,023 | | | | 877 | | | | 13,216 | | | | 1,535 | | | | 3,217 | | | | 12,023 | | | | 6,694 | | | | 13,216 | |
Income tax expense | | | 547 | | | | 232 | | | | 966 | | | | 375 | | | | 641 | | | | 547 | | | | 1,873 | | | | 966 | |
Net income | | | 11,476 | | | | 645 | | | | 12,250 | | | | 1,160 | | | | 2,576 | | | | 11,476 | | | | 4,821 | | | | 12,250 | |
Less: Net income attributable to noncontrolling interest | | | 19 | | | | 13 | | | | 38 | | | | 26 | | |
Less: net income attributable to noncontrolling interest | | | | 22 | | | | 19 | | | | 53 | | | | 38 | |
Net income attributable to Nicolet Bankshares, Inc. | | | 11,457 | | | | 632 | | | | 12,212 | | | | 1,134 | | | | 2,554 | | | | 11,457 | | | | 4,768 | | | | 12,212 | |
Less: Preferred stock dividends and discount accretion | | | 305 | | | | 305 | | | | 610 | | | | 610 | | |
Less: preferred stock dividends | | | | 61 | | | | 305 | | | | 122 | | | | 610 | |
Net income available to common shareholders | | $ | 11,152 | | | $ | 327 | | | $ | 11,602 | | | $ | 524 | | | $ | 2,493 | | | $ | 11,152 | | | $ | 4,646 | | | $ | 11,602 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic earnings per common share | | $ | 2.79 | | | $ | 0.09 | | | $ | 3.12 | | | $ | 0.16 | | | $ | 0.59 | | | $ | 2.79 | | | $ | 1.10 | | | $ | 3.12 | |
Diluted earnings per common share | | $ | 2.78 | | | $ | 0.09 | | | $ | 3.11 | | | $ | 0.16 | | | $ | 0.58 | | | $ | 2.78 | | | $ | 1.08 | | | $ | 3.11 | |
Weighted average common shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 3,999,732 | | | | 3,452,209 | | | | 3,717,627 | | | | 3,466,282 | | | | 4,212,174 | | | | 3,999,732 | | | | 4,227,446 | | | | 3,717,627 | |
Diluted | | | 4,008,426 | | | | 3,463,137 | | | | 3,728,599 | | | | 3,481,791 | | | | 4,332,016 | | | | 4,008,426 | | | | 4,312,005 | | | | 3,728,599 | |
See accompanying notes to unaudited consolidated financial statements.
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, | |
| | 2013 | | | 2012 | | | 2013 | | | 2012 | |
Net income | | $ | 11,476 | | | $ | 645 | | | $ | 12,250 | | | $ | 1,160 | |
Other comprehensive income, net of tax: | | | | | | | | | | | | | | | | |
Securities available for sale: | | | | | | | | | | | | | | | | |
Net unrealized holding gains/(losses) arising during the period | | | (1,645 | ) | | | 119 | | | | (1,130 | ) | | | 633 | |
Less: reclassification adjustment for net (gains)/losses realized in net income | | | 239 | | | | (232 | ) | | | 239 | | | | (440 | ) |
Net unrealized gains/losses on securities before tax expense | | | (1,406 | ) | | | (113 | ) | | | (891 | ) | | | 193 | |
Income tax expense/(benefit) | | | 549 | | | | 39 | | | | 348 | | | | (65 | ) |
Total other comprehensive income | | | (857 | ) | | | (74 | ) | | | (543 | ) | | | 128 | |
Comprehensive income | | $ | 10,619 | | | $ | 571 | | | $ | 11,707 | | | $ | 1,288 | |
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2014 | | | 2013 | | | 2014 | | | 2013 | |
Net income | | $ | 2,576 | | | $ | 11,476 | | | $ | 4,821 | | | $ | 12,250 | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | | | | |
Securities available for sale: | | | | | | | | | | | | | | | | |
Net unrealized holding gains (losses) arising during the period | | | 446 | | | | (1,645 | ) | | | 1,045 | | | | (1,130 | ) |
Less: reclassification adjustment for net (gains) losses realized in net income | | | - | | | | 239 | | | | (341 | ) | | | 239 | |
Net unrealized gains (losses) on securities before tax expense | | | 446 | | | | (1,406 | ) | | | 704 | | | | (891 | ) |
Income tax (expense) benefit | | | (173 | ) | | | 549 | | | | (274 | ) | | | 348 | |
Total other comprehensive income (loss) | | | 273 | | | | (857 | ) | | | 430 | | | | (543 | ) |
Comprehensive income | | $ | 2,849 | | | $ | 10,619 | | | $ | 5,251 | | | $ | 11,707 | |
See accompanying notes to unaudited consolidated financial statements.
ITEM 1. Financial Statements Continued:
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders’ Equity
(In thousands) (Unaudited)
| | Nicolet Bankshares, Inc. Stockholders’ Equity | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | Preferred Equity | | | Common Stock | | | Additional Paid-In Capital | | | Retained Earnings | | | Accumulated Other Comprehensive Income | | | Noncontrolling Interest | | | Total | |
Balance December 31, 2013 | | $ | 24,400 | | | $ | 42 | | | $ | 49,616 | | | $ | 30,138 | | | $ | 666 | | | $ | 17 | | | $ | 104,879 | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | - | | | | - | | | | - | | | | 4,768 | | | | - | | | | 53 | | | | 4,821 | |
Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 430 | | | | - | | | | 430 | |
Stock compensation expense | | | - | | | | - | | | | 306 | | | | - | | | | - | | | | - | | | | 306 | |
Exercise of stock options | | | - | | | | - | | | | 298 | | | | - | | | | - | | | | - | | | | 298 | |
Issuance of common stock | | | - | | | | - | | | | 29 | | | | - | | | | - | | | | - | | | | 29 | |
Purchase and retirement of common stock | | | - | | | | (1 | ) | | | (2,503 | ) | | | - | | | | - | | | | - | | | | (2,504 | ) |
Preferred stock dividends | | | - | | | | - | | | | - | | | | (122 | ) | | | - | | | | - | | | | (122 | ) |
Balance, June 30, 2014 | | $ | 24,400 | | | $ | 41 | | | $ | 47,746 | | | $ | 34,784 | | | $ | 1,096 | | | $ | 70 | | | $ | 108,137 | |
See accompanying notes to unaudited consolidated financial statements.
ITEM 1. Financial Statements Continued:
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated StatementStatements of Stockholders’ EquityCash Flows
(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, 2012 | | $ | 24,400 | | | $ | 34 | | | $ | 36,243 | | | $ | 14,973 | | | $ | 1,683 | | | $ | 45 | | | $ | 77,378 | |
Comprehensive income | | | - | | | | - | | | | - | | | | 12,212 | | | | (543 | ) | | | 38 | | | | 11,707 | |
Stock compensation expense | | | - | | | | - | | | | 342 | | | | - | | | | - | | | | - | | | | 342 | |
Exercise of stock options | | | - | | | | - | | | | 206 | | | | - | | | | - | | | | - | | | | 206 | |
Purchase and retirement of common stock | | | - | | | | - | | | | (63 | ) | | | - | | | | - | | | | - | | | | (63 | ) |
Common stock issued, net of capitalized issuance costs of $401 | | | - | | | | 8 | | | | 12,419 | | | | - | | | | - | | | | - | | | | 12,427 | |
Preferred stock dividends | | | - | | | | - | | | | - | | | | (610 | ) | | | - | | | | - | | | | (610 | ) |
Distribution from noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | (60 | ) | | | (60 | ) |
Balance, June 30, 2013 | | $ | 24,400 | | | $ | 42 | | | $ | 49,147 | | | $ | 26,575 | | | $ | 1,140 | | | $ | 23 | | | $ | 101,327 | |
| | Six Months Ended June 30, | |
| | 2014 | | | 2013 | |
Cash Flows From Operating Activities: | | | | | | |
Net income | | $ | 4,821 | | | $ | 12,250 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation, amortization, and accretion | | | 1,796 | | | | 1,985 | |
Provision for loan losses | | | 1,350 | | | | 1,950 | |
Increase in cash surrender value of life insurance | | | (434 | ) | | | (381 | ) |
Stock compensation expense | | | 306 | | | | 342 | |
Gain on sale or writedown of assets, net | | | (308 | ) | | | (49 | ) |
Gain on sale of loans held for sale, net | | | (646 | ) | | | (1,586 | ) |
Proceeds from sale of loans held for sale | | | 31,322 | | | | 95,965 | |
Origination of loans held for sale | | | (32,779 | ) | | | (90,198 | ) |
Bargain purchase gain | | | - | | | | (10,435 | ) |
Net change in: | | | | | | | | |
Accrued interest receivable and other assets | | | 270 | | | | 366 | |
Accrued interest payable and other liabilities | | | (1,136 | ) | | | 1,354 | |
Net cash provided by operating activities | | | 4,562 | | | | 11,563 | |
Cash Flows From Investing Activities: | | | | | | | | |
Net increase in certificates of deposit in other banks | | | (5,184 | ) | | | - | |
Net increase in loans | | | (13,800 | ) | | | (19,689 | ) |
Purchases of securities AFS | | | (23,107 | ) | | | (8,711 | ) |
Proceeds from sales of securities AFS | | | 4,021 | | | | 43,945 | |
Proceeds from calls and maturities of securities AFS | | | 8,276 | | | | 8,089 | |
Purchase of other investments | | | (74 | ) | | | (8 | ) |
Purchase of premises and equipment | | | (778 | ) | | | (1,246 | ) |
Proceeds from sales of premises and equipment | | | 7 | | | | - | |
Proceeds from sales of other real estate and other assets | | | 2,159 | | | | 993 | |
Purchase of bank owned life insurance | | | (2,750 | ) | | | - | |
Net cash received in business combination | | | - | | | | 13,898 | |
Net cash provided (used) by investing activities | | | (31,230 | ) | | | 37,271 | |
Cash Flows From Financing Activities: | | | | | | | | |
Net decrease in deposits | | | (23,583 | ) | | | (54,152 | ) |
Net change in short-term borrowings | | | (3,717 | ) | | | 3,091 | |
Repayments of notes payable | | | (5,123 | ) | | | (45,809 | ) |
Purchase and retirement of common stock | | | (2,504 | ) | | | (63 | ) |
Stock issuance costs | | | - | | | | (401 | ) |
Proceeds from issuance of common stock, net | | | 29 | | | | 3,107 | |
Proceeds from exercise of common stock options | | | 298 | | | | 206 | |
Noncontrolling interest in joint venture | | | - | | | | (60 | ) |
Cash dividends paid on preferred stock | | | (122 | ) | | | (610 | ) |
Net cash used by financing activities | | | (34,722 | ) | | | (94,691 | ) |
Net decrease in cash and cash equivalents | | | (61,390 | ) | | | (45,857 | ) |
Cash and cash equivalents: | | | | | | | | |
Beginning | | $ | 146,978 | | | $ | 82,003 | |
Ending | | $ | 85,588 | | | $ | 36,146 | |
Supplemental Disclosures of Cash Flow Information: | | | | | | | | |
Cash paid for interest | | $ | 3,761 | | | $ | 2,241 | |
Cash paid for taxes | | | 2,060 | | | | 1,018 | |
Transfer of loans and bank premises to other real estate owned | | | 1,061 | | | | 2,116 | |
Acquisitions: | | | | | | | | |
Fair value of assets acquired | | | - | | | | 435,692 | |
Fair value of liabilities assumed | | | - | | | | 415,067 | |
Net assets acquired | | | - | | | | 20,625 | |
| | | | | | | | |
See accompanying notes to unaudited consolidated financial statements.
ITEM 1. Financial Statements Continued:
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(In thousands) (Unaudited)
| | | | | | | | |
| | Six Months Ended June 30, | |
| | 2013 | | | 2012 | |
Cash Flows From Operating Activities: | | | | | | |
Net income | | $ | 12,250 | | | $ | 1,160 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation, amortization, and accretion | | | 1,985 | | | | 1,233 | |
Provision for loan losses | | | 1,950 | | | | 2,375 | |
Increase in cash surrender value of life insurance | | | (381 | ) | | | (336 | ) |
Stock compensation expense | | | 342 | | | | 241 | |
Gain on sale of assets, net | | | (49 | ) | | | (383 | ) |
Gain on sale of loans held for sale, net | | | (1,586 | ) | | | (1,408 | ) |
Proceeds from sale of loans held for sale | | | 95,965 | | | | 90,266 | |
Origination of loans held for sale | | | (90,198 | ) | | | (81,727 | ) |
Bargain purchase gain | | | (10,435 | ) | | | - | |
Net change in: | | | | | | | | |
Accrued interest receivable and other assets | | | 366 | | | | 256 | |
Accrued interest payable and other liabilities | | | 1,354 | | | | 2,489 | |
Net cash provided by operating activities | | | 11,563 | | | | 14,166 | |
Cash Flows From Investing Activities: | | | | | | | | |
Net decrease in certificates of deposit in other banks | | | - | | | | 248 | |
Net increase in loans | | | (19,689 | ) | | | (47,901 | ) |
Purchases of securities available for sale | | | (8,711 | ) | | | (11,830 | ) |
Proceeds from sales of securities available for sale | | | 43,945 | | | | 5,415 | |
Proceeds from calls and maturities of securities available for sale | | | 8,089 | | | | 3,692 | |
Purchase of other investments | | | (8 | ) | | | (2 | ) |
Purchase of bank owned life insurance | | | - | | | | (3,750 | ) |
Purchase of premises and equipment | | | (1,246 | ) | | | (1,632 | ) |
Proceeds from sale of other real estate and other assets | | | 993 | | | | 877 | |
Net cash received in business combination | | | 13,898 | | | | - | |
Net cash provided (used) by investing activities | | | 37,271 | | | | (54,883 | ) |
Cash Flows From Financing Activities: | | | | | | | | |
Net decrease in deposits | | | (54,152 | ) | | | (11,641 | ) |
Net change in short term borrowings | | | 3,091 | | | | (2,451 | ) |
Proceeds from notes payable | | | - | | | | 3,800 | |
Repayments of notes payable | | | (45,809 | ) | | | (108 | ) |
Purchase of common stock | | | (63 | ) | | | (814 | ) |
Stock issuance costs | | | (401 | ) | | | - | |
Issuance of common stock | | | 3,107 | | | | - | |
Proceeds from exercise of common stock options | | | 206 | | | | - | |
Noncontrolling interest in joint venture | | | (60 | ) | | | (100 | ) |
Cash dividends paid on preferred stock | | | (610 | ) | | | (610 | ) |
Net cash used by financing activities | | | (94,691 | ) | | | (11,924 | ) |
Net decrease in cash and cash equivalents | | | (45,857 | ) | | | (52,641 | ) |
Cash and cash equivalents: | | | | | | | | |
Beginning | | $ | 82,003 | | | $ | 92,129 | |
Ending | | $ | 36,146 | | | $ | 39,488 | |
Supplemental Disclosures of Cash Flow Information: | | | | | | | | |
Cash paid for interest | | $ | 2,241 | | | $ | 3,477 | |
Cash paid for taxes | | | 1,018 | | | | 726 | |
Transfer of loans to other real estate owned | | | 2,116 | | | | 1,169 | |
Acquisition: | | | | | | | | |
Fair value of assets acquired | | | 435,692 | | | | - | |
Fair value of liabilities assumed | | | 415,067 | | | | - | |
Net assets acquired | | | 20,625 | | | | - | |
See accompanying notes to consolidated financial statements. | | | | | | | | |
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, and 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, 2012 which is contained in the Joint Proxy Statement-Prospectus dated March 26, 2013, as filed with the Securities2013.
Critical Accounting Policies and Exchange Commission pursuant to Rule 424(b)(5) under the Securities Act of 1933, as amended (the “Securities Act”) on March 27, 2013.Estimates
Preparation of 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, and the assessment of deferred tax assets and liabilities, and the valuation of loans acquired in the 2013 acquisitions; therefore, these are critical accounting policies. Management does not anticipate any material changes to estimates in the near term. 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, and changes in applicable banking regulations.regulations, and changes to deferred tax estimates within the first twelve months after acquisition as allowed by purchase accounting guidelines. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period presented.
The following information relatedThere 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 has been expanded within this document to includeand developing critical accounting estimates as disclosed in the discussionCompany’s Annual Report on policies which were impacted byForm 10-K for the acquisition.year ended December 31, 2013.
Business Combinations and Method ofRecent Accounting for Loans AcquiredDevelopments Adopted
The Company accounts forhas implemented all new accounting pronouncements that are in effect and that may impact its acquisitions under Financial Accounting Standards Boardconsolidated financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
Note 2 – Acquisitions
Bank of Wausau: On August 9, 2013, Nicolet National Bank entered into an agreement with the Federal Deposit Insurance Corporation (“FASB”FDIC”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, which requires the use, purchasing selected Bank of the acquisition method of accounting. All identifiableWausau assets and liabilities acquired, including loans, are recorded at fair value. No allowance for loan losses relatedassuming all of its deposits, in a transaction that was effective immediately. The financial position and results of operations of Bank of Wausau prior to the acquired loans is recorded on theits acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in FASB ASC Topic 820, Fair Value Measurements and Disclosures. The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of expected principal, interest and other cash flows.
Acquired loans are recorded at their estimated fair value at the acquisition date, and are initially classified as either purchase credit impaired (“PCI”) loans (i.e. loans that reflect credit deterioration since origination and it is probable at acquisition that the Company will be unable to collect all contractually required payments) or purchased non-impaired loans. PCI loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality, formerly American Institute of Certified Public Accountants (“AICPA”) Statement of Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer. The Company estimates the amount and timing of expected principal, interest and other cash flows for each loan or pool of loans meeting the criteria above, and determines the excess of the loan’s scheduled contractual
principal and contractual interest payments over all cash flows expected to be collected at acquisition as an amount that shouldwere not be accreted. These credit discounts (“nonaccretable marks”) are included in the determinationaccompanying consolidated financial statements. The FDIC-assisted transaction carried no loss-share provisions. With the addition of initial fair value for acquired loans; therefore, an allowance for loan losses is not recorded at the acquisition date. Differences between the estimated fair values and expected cash flowsBank of acquired loans at the acquisition date that are not credit-based (“accretable marks”) are subsequently accreted to interest income over the estimated lifeWausau’s one branch, Nicolet National Bank operates two branches in Wausau, WI. As of the loans using a method that approximates a level yield method if the timing and amount of the future cash flows is reasonably estimable.
Subsequent to the acquisition date for PCI loans, increases in cash flows over those expected at the acquisition date are recognized prospectively as interest income. Decreases in expected cash flows after the acquisition date are recognized through the provision for loan losses.
Loans acquired through business combinations that do not meet the specific criteria of FASB ASC Topic 310-30, but for which a discount is attributable at least in part to credit quality, are also accounted for under this guidance. All fair value discounts on acquired loans were deemed to be credit related at acquisition in the Mid-Wisconsin merger. The nonaccretable difference represents cash flows not expected to be collected. Subsequently, based on re-evaluation of cash flows and facts available, some nonaccretable differences may be reclassified to accretable.
Allowance for loan losses
The allowance for loan and lease losses related to PCI loans is based on an analysis that is performed each period to estimate the expected cash flows for each loan deemed PCI. To the extent that the expected cash flows of a PCI loan have decreased since the acquisition date, the Company establishes or increasestransaction added approximately $47 million in assets at fair value, including mostly cash as well as $9.4 million of investments and $12.5 million in loans, of which $1.4 million were classified as Purchase Credit Impaired (“PCI”) loans. Of the allowance for loan losses.
For acquired loans that are not deemed credit impaired at acquisition, credit discounts representing$42 million of deposits assumed, $18 million were immediately repriced rate-sensitive certificates of deposit which were subsequently redeemed in full by September 30, 2013. Given the principal losses expected over the lifenature and rates of the loan are a componentremaining deposits assumed, no core deposit intangible was recorded. The third quarter of the initial fair value. Subsequent to the purchase date, the methods utilized to estimate the required allowance for loan losses for these loans is similar to originated loans. The remaining differences between the purchase price and the unpaid principal balance at the date of2013 included approximately $0.2 million pre-tax acquisition are recorded in interest income over the economic life of the loans.
Income Taxes
Deferred income taxes are recognized for the tax consequences of temporary differences between financial statement carrying amounts and the tax bases of existing assets and liabilities that will result in taxable or deductible amounts in future years. These temporary differences are multiplied by the enacted income tax rate expected to be in effect when the taxes become payable or receivable. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced, if necessary, by the amount of such benefits that are not expected to be realized based on available evidence. At acquisition, deferred taxes were evaluated in respect to the acquired assets and assumed liabilities (including the acquired net operating losses),costs and a net deferred tax asset was recorded. Certain limitations within the provisions of the tax code are placed on the amount of net operating losses which can be utilized as part of acquisition accounting rules and were incorporated into the calculation of the deferred tax asset. In addition, a portion of the fair market value discounts on PCI loans which resolve in the first twelve months after the acquisition may be disallowed under provisions of the tax code.$2.4 million pre-tax bargain purchase gain.
Note 2 – AcquisitionAcquisitions, continued
Mid-Wisconsin Financial Services, Inc. (“Mid-Wisconsin”):On April 26, 2013, the Company consummated its acquisition of Mid-Wisconsin, Financial Services, Inc. (“Mid-Wisconsin”), pursuant to the Agreement and Plan of Merger by and among the Company and Mid-Wisconsin dated November 28, 2012, as amended January 17, 2013 (the “Merger Agreement”), whereby Mid-Wisconsin was merged with and into the Company, and Mid-Wisconsin Bank, Mid-Wisconsin’s wholly owned commercial bank subsidiary serving central Wisconsin, was merged with and into Nicolet National Bank. The system integration was completed, and the eleven branches of Mid-Wisconsin opened on April 29, 2013 as Nicolet National Bank branches, doubling the Bank’s footprint to 22 branch locations.branches.
The purpose of the merger was for strategic reasons beneficial to the Company. The acquisition is consistent with its growth plans to build a community bank of sufficient size to flourish in various economic environments, serve its expanded customer base with a wide variety of products and services, and effectively and efficiently meet growing regulatory compliance and capital requirements. The Company believes it is well-positioned to achieve stronger financial performance and enhance shareholder value through synergies of the combined operations.
Pursuant to the terms of the Merger Agreement, the outstanding shares of Mid-Wisconsin common stock, other than dissenting shares as defined in the merger agreement, were converted into the right to receive 0.3727 shares of Company common stock (and in lieu of any fractional share of Company common stock, $16.50 in cash) per share of Mid-Wisconsin common stock or, for record holders of 200 or fewer shares of Mid-Wisconsin common stock, $6.15 in cash per share of Mid-Wisconsin common stock. As a result, the total value of the consideration to Mid-Wisconsin shareholders was $10.2 million, consisting of $0.5 million in cash and 589,159 shares of the Company’s common stock. The Company’s common stock was valued at $16.50 per share, which was the value assigned in the merger agreement and considered to be the fair value of the stock on the date of the acquisition. Concurrently with the merger, the Company also closed a private placement of 174,016 shares of its common stock at an offering price of $16.50 per share, for an aggregate of $2.9 million in proceeds. Approximately $401,000$0.4 million in direct stock issuance costs for the merger and private placement were incurred and charged against additional paid in capital. Also as a condition of the merger, Mid-Wisconsin redeemed by the closing of the merger its preferred stock (issued to the Department of U.S. Treasury (“UST”) as part of its participation in the federal government’s Capital Purchase Program (“CPP”) with par value of $10.5 million) plus all accrued and unpaid dividends thereon.
The Company accounted for the transaction under the acquisition method of accounting, and thus, the financial position and results of operations of Mid-Wisconsin prior to the consummation date were not included in the accompanying consolidated financial statements. The accounting required assets purchased and liabilities assumed to be recorded at their respective fair values at the date of acquisition. The Company determined the fair value of core deposit intangibles, securities, premises and equipment, loans, OREO, deposits, debt and deferred taxes with the assistance of third party valuations, appraisals, and third party advisors. The estimated fair values will bewere subject to refinement as additional information relative to the closing date fair values becomesbecame available through the measurement period of approximately one year from consummation. During the fourth quarter of 2013, there were developments related to an ongoing legal matter acquired in the Mid-Wisconsin transaction. Such litigation was pre-existing at the time of acquisition. The events in the fourth quarter supported a change in estimate of loss on this litigation to $0.9 million, net of tax, which was recorded against the bargain purchase gain of the Mid-Wisconsin transaction and imposed back against 2013 third quarter earnings. No other adjustments to the bargain purchase gain have been recorded.
TheAs of the acquisition date, the transaction added approximately $436 million in assets at fair value, including cash and investments of the assets acquired$133 million, $272 million in loans, of which $15 million were classified as PCI loans, $4 million of core deposit intangible; and liabilities assumed on April 26, 2013 was as follows:
| | | | | | | | | | | | | | |
| (in millions) | | As recorded by Mid-Wisconsin | | | Fair Value Adjustments | | | | As recorded by Nicolet | |
Cash, cash equivalents and securities available for sale | | $ | 134 | | | $ | (1 | ) | | | $ | 133 | |
Loans,net | | | 284 | | | | (12 | ) | | | | 272 | |
Other real estate owned | | | 5 | | | | (3 | ) | | | | 2 | |
Core deposit intangible | | | - | | | | 4 | | | | | 4 | |
Premises, equipment, and other assets | | | 17 | | | | 7 | | (1) | | | 24 | |
Total assets acquired | | $ | 440 | | | $ | (5 | ) | | | $ | 435 | |
| | | | | | | | | | | | | |
Deposits | | $ | 345 | | | $ | 1 | | | | $ | 346 | |
Junior subordinated debentures, borrowings and other liabilities | | | 72 | | | | (3 | ) | (2) | | | 69 | |
Total liabilities acquired | | $ | 417 | | | $ | (2 | ) | | | $ | 415 | |
| | | | | | | | | | | | | |
Excess of assets acquired over liabilities acquired | | $ | 23 | | | $ | (3 | ) | | | $ | 20 | |
Less: purchase price | | | | | | | | | | | $ | 10 | |
Bargain purchase gain | | | | | | | | | | | $ | 10 | |
(1) Includes premises and equipment adjustment$27 million of $2other assets. Deposits of $346 million and deferred tax asset of $5 million.
(2) Includes borrowings adjustment increase of $2 million andjunior subordinated debentures, adjustment decreaseborrowings and other liabilities of $5$70 million were acquired in the merger. The excess of assets over liabilities acquired of $20 million less the purchase price of $10 million resulted in a bargain purchase gain of $10 million.
Proforma results for 2014 periods are not necessary as the 2014 actual results fully include both 2013 acquisitions. The following unaudited pro forma information presents the results of operations for three months ended andthe six months ended June 30, 2013, and 2012, as if the acquisitionacquisitions had occurred January 1 of eachthat year. 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 acquisitionacquisitions 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, 2013 | | | June 30, 2012 | | | June 30, 2013 | | | June 30, 2012 | | | Six Months Ended June 30, 2013 | |
(in thousands) | | | | | | | | | | | | | | | |
Total revenues, net of interest expense | | $ | 23,709 | | | $ | 12,581 | | | $ | 36,681 | | | $ | 24,911 | | | $ | 34,117 | |
Net income | | | 10,599 | | | | (539 | ) | | | 11,247 | | | | (240 | ) | | | 11,413 | |
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 June 30, | | | Six Months Ended June 30, | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2013 | | | 2012 | | | 2013 | | | 2012 | | | 2014 | | | 2013 | | | 2014 | | | 2013 | |
(In thousands except per share data) | | | | | | | | | | | | | | | | | | | | | | | | |
Net income, net of noncontrolling interest | | $ | 11,457 | | | $ | 632 | | | $ | 12,212 | | | $ | 1,134 | | | $ | 2,554 | | | $ | 11,457 | | | $ | 4,768 | | | $ | 12,212 | |
Less: preferred stock dividends | | | 305 | | | | 305 | | | | 610 | | | | 610 | | | | 61 | | | | 305 | | | | 122 | | | | 610 | |
Net income available to common shareholders | | $ | 11,152 | | | $ | 327 | | | $ | 11,602 | | | $ | 524 | | | $ | 2,493 | | | $ | 11,152 | | | $ | 4,646 | | | $ | 11,602 | |
Weighted average common shares outstanding | | | 4,000 | | | | 3,452 | | | | 3,718 | | | | 3,466 | | | | 4,212 | | | | 4,000 | | | | 4,227 | | | | 3,718 | |
Effect of dilutive stock instruments | | | 8 | | | | 11 | | | | 11 | | | | 16 | | | | 120 | | | | 8 | | | | 85 | | | | 11 | |
Diluted weighted average common shares outstanding | | | 4,008 | | | | 3,463 | | | | 3,729 | | | | 3,482 | | | | 4,332 | | | | 4,008 | | | | 4,312 | | | | 3,729 | |
Basic earnings per common share* | | $ | 2.79 | | | $ | 0.09 | | | $ | 3.12 | | | $ | 0.16 | | | $ | 0.59 | | | $ | 2.79 | | | $ | 1.10 | | | $ | 3.12 | |
Diluted earnings per common share* | | $ | 2.78 | | | $ | 0.09 | | | $ | 3.11 | | | $ | 0.16 | | | $ | 0.58 | | | $ | 2.78 | | | $ | 1.08 | | | $ | 3.11 | |
*Cumulative quarterly per share performance may not equal annual per share totals due to the effects of the amount and timing of capital increases. When computing earnings per share for an interim period, the denominator is based on the weighted-average shares outstanding during the interim period, and not on an annualized weighted-average basis. Accordingly, the sum of the quarters’ earnings per share data will not necessarily equal the year to date earnings per share data.
Options to purchase approximately 0.3 million and 0.5 million shares were outstanding at June 30, 2014 and 2013, respectively, but were excluded from the calculation of diluted earnings per common share as the effect would have been anti-dilutive.
Note 4 – Stock-based compensationCompensation
Activity ofin 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 | | | Weighted- Average Fair Value of Options Granted | | | Option Shares Outstanding | | | Weighted- Average Exercise Price | | | Exercisable Shares | |
Balance – December 31, 2011 | | | | | | 702,907 | | | $ | 17.78 | | | | 533,074 | | |
Granted | | $ | 4.87 | | | | 184,625 | | | | 16.50 | | | | | | |
Exercise of stock options | | | | | | | (25,750 | ) | | | 12.50 | | | | | | |
Forfeited | | | | | | | (36,250 | ) | | | 16.84 | | | | | | |
Balance – December 31, 2012 | Balance – December 31, 2012 | | | | | | | 825,532 | | | | 17.70 | | | | 548,623 | | | | | | | 825,532 | | | $ | 17.70 | | | | 548,623 | |
Granted | Granted | | | - | | | | - | | | | - | | | | | | | | - | | | | - | | | | - | | | | | |
Exercise of stock options | Exercise of stock options | | | | | | | (15,625 | ) | | | 13.20 | | | | | | | | | | | | (23,625 | ) | | | 12.96 | | | | | |
Forfeited | Forfeited | | | | | | | (3,000 | ) | | | 12.50 | | | | | | | | | | | | (8,750 | ) | | | 15.78 | | | | | |
Balance – June 30, 2013 | | | | | | | 806,907 | | | $ | 17.80 | | | | 567,985 | | |
Balance – December 31, 2013 | | | | | | | | 793,157 | | | | 17.86 | | | | 600,846 | |
Granted | | | | - | | | | - | | | | - | | | | | |
Exercise of stock options | | | | | | | | (18,215 | ) | | | 16.35 | | | | | |
Forfeited | | | | | | | | (4,750 | ) | | | 16.65 | | | | | |
Balance – June 30, 2014 | | | | | | | | 770,192 | | | $ | 17.90 | | | | 614,243 | |
Options outstanding at June 30, 2013 are exercisable at option prices ranging from $12.50 to $26.00. There are 363,583 options outstanding in the range from $12.50 - $17.00, 396,824 options outstanding in the range from $17.01 - $22.00, and 46,500 options outstanding in the range from $22.01 - $26.00. The exercisable options have a weighted average remaining contractual life of approximately 5 years as of June 30, 2013.
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 2013, and full year of 2012 was approximately $48,000, and $103,000, respectively. The weighted average exercise price of stock options exercisable at June 30, 2013 was $18.22.
Note 4 – Stock-based compensation,Compensation, continued
| | | | | | | |
Restricted Stock | | | Weighted- Average Grant Date Fair Value | | | Restricted Shares Outstanding | |
Balance – December 31, 2011 | | $ | - | | | | - | |
Granted | | | 16.50 | | | | 54,725 | |
Vested | | | - | | | | - | |
Forfeited | | | 16.50 | | | | (250 | ) |
Balance – December 31, 2012 | | | 16.50 | | | | 54,475 | |
Granted | | | 16.50 | | | | 10,606 | |
Vested * | | | 16.50 | | | | (12,958 | ) |
Forfeited | | | - | | | | - | |
Balance – June 30, 2013 | | $ | 16.50 | | | | 52,123 | |
Options outstanding at June 30, 2014 are exercisable at option prices ranging from $12.50 to $26.00. There are 328,618 options outstanding in the range from $12.50 - $17.00, 395,574 options outstanding in the range from $17.01 - $22.00, and 46,000 options outstanding in the range from $22.01 - $26.00. At June 30, 2014, the exercisable options have a weighted average remaining contractual life of approximately 3 years and a weighted average exercise price of $18.21.
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 2014, and full year of 2013 was approximately $19,000, and $80,000, respectively.
Restricted Stock | | Weighted-Average Grant Date Fair Value | | | Restricted Shares Outstanding | |
Balance – December 31, 2012 | | $ | 16.50 | | | | 54,475 | |
Granted | | | 16.51 | | | | 26,506 | |
Vested* | | | 16.50 | | | | (18,258 | ) |
Forfeited | | | 16.50 | | | | (360 | ) |
Balance – December 31, 2013 | | | 16.50 | | | | 62,363 | |
Granted | | | - | | | | - | |
Vested * | | | 16.50 | | | | (12,919 | ) |
Forfeited | | | - | | | | - | |
Balance – June 30, 2014 | | $ | 16.50 | | | | 49,444 | |
| | | | | | | | |
*The terms of the restricted stock agreements permit the surrender of shares to the Company upon vesting in order to satisfy applicable tax withholding requirements at the minimum statuatorystatutory withholding rate, and 3,812accordingly 2,519 shares were surrendered accordingly during the six months ended June 30, 2014 and 5,606 shares were surrendered during 2013.
The Company recognized approximately $342,000$306,000 and $241,000$342,000 of stock-based employee compensation expense during the six months ended June 30, 20132014 and 2012,2013, respectively, associated with its stock equity awards. As of June 30, 2013,2014, there was approximately $1.7$1.3 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 fivefour years.
Note 5- Securities Available for Sale
Amortized costs and fair values of securities available for sale are summarized as follows:
| | | | | | | | | | |
| | June 30, 2013 | | | June 30, 2014 | |
(in thousands) | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | |
U.S. government sponsored enterprises | | $ | 1,000 | | | $ | 1 | | | $ | - | | | $ | 1,001 | | | $ | 1,532 | | | $ | 6 | | | $ | 1 | | | $ | 1,537 | |
State, county and municipals | | | 51,741 | | | | 1,159 | | | | 560 | | | | 52,340 | | | | 76,446 | | | | 996 | | | | 375 | | | | 77,067 | |
Mortgage-backed securities | | | 73,581 | | | | 594 | | | | 912 | | | | 73,263 | | | | 62,946 | | | | 676 | | | | 694 | | | | 62,928 | |
Corporate debt securities | | | 220 | | | | - | | | | - | | | | 220 | | | | 220 | | | | - | | | | - | | | | 220 | |
Equity securities | | | 1,576 | | | | 1,588 | | | | - | | | | 3,164 | | | | 715 | | | | 1,188 | | | | - | | | | 1,903 | |
| | $ | 128,118 | | | $ | 3,342 | | | $ | 1,472 | | | $ | 129,988 | | | $ | 141,859 | | | $ | 2,866 | | | $ | 1,070 | | | $ | 143,655 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2012 | | | December 31, 2013 | |
(in thousands) | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Values | | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Values | |
U.S. government sponsored enterprises | | | $ | 2,062 | | | $ | 3 | | | $ | 8 | | | $ | 2,057 | |
State, county and municipals | | $ | 31,642 | | | $ | 1,079 | | | $ | 34 | | | $ | 32,687 | | | | 54,594 | | | | 1,058 | | | | 613 | | | | 55,039 | |
Mortgage-backed securities | | | 19,876 | | | | 803 | | | | 11 | | | | 20,668 | | | | 68,642 | | | | 585 | | | | 1,348 | | | | 67,879 | |
Corporate debt securities | | | | 220 | | | | - | | | | - | | | | 220 | |
Equity securities | | | 1,624 | | | | 922 | | | | - | | | | 2,546 | | | | 905 | | | | 1,415 | | | | - | | | | 2,320 | |
| | $ | 53,142 | | | $ | 2,804 | | | $ | 45 | | | $ | 55,901 | | | $ | 126,423 | | | $ | 3,061 | | | $ | 1,969 | | | $ | 127,515 | |
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, 20132014 and December 31, 2012.2013.
| | | | | | | | | | | | | | |
| | June 30, 2013 | | | June 30, 2014 | |
| | Less than 12 months | | | 12 months or more | | | Total | | | Less than 12 months | | | 12 months or more | | | Total | |
(in thousands) | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | |
U.S. government sponsored enterprises | | | $ | 143 | | | $ | 1 | | | $ | - | | | $ | - | | | $ | 143 | | | $ | 1 | |
State, county and municipals | | $ | 20,356 | | | $ | 560 | | | $ | - | | | $ | - | | | $ | 20,356 | | | $ | 560 | | | | 17,281 | | | | 94 | | | | 12,938 | | | | 281 | | | | 30,219 | | | | 375 | |
Mortgage-backed securities | | | 47,157 | | | | 912 | | | | - | | | | - | | | | 47,157 | | | | 912 | | | | 2,752 | | | | 20 | | | | 26,753 | | | | 674 | | | | 29,505 | | | | 694 | |
| | $ | 67,513 | | | $ | 1,472 | | | $ | - | | | $ | - | | | $ | 67,513 | | | $ | 1,472 | | | $ | 20,176 | | | $ | 115 | | | $ | 39,691 | | | $ | 955 | | | $ | 59,867 | | | $ | 1,070 | |
| | | | | | |
| | December 31, 2012 | | | December 31, 2013 | |
| | Less than 12 months | | | 12 months or more | | | Total | | | Less than 12 months | | | 12 months or more | | | Total | |
(in thousands) | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | |
U.S. government sponsored enterprises | | | $ | 511 | | | $ | 8 | | | $ | - | | | $ | - | | | $ | 511 | | | $ | 8 | |
State, county and municipals | | $ | 4,250 | | | $ | 34 | | | $ | - | | | $ | - | | | $ | 4,250 | | | $ | 34 | | | | 17,697 | | | | 613 | | | | - | | | | - | | | | 17,697 | | | | 613 | |
Mortgage-backed securities | | | 3,507 | | | | 11 | | | | - | | | | - | | | | 3,507 | | | | 11 | | | | 36,687 | | | | 1,240 | | | | 2,920 | | | | 108 | | | | 39,607 | | | | 1,348 | |
| | $ | 7,757 | | | $ | 45 | | | $ | - | | | $ | - | | | $ | 7,757 | | | $ | 45 | | | $ | 54,895 | | | $ | 1,861 | | | $ | 2,920 | | | $ | 108 | | | $ | 57,815 | | | $ | 1,969 | |
As of June 30, 20132014, the Company does not consider securities with unrealized losses to be other-than-temporarily impaired. The unrealized losses in each category have occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase. The Company has the ability and intent to hold its securities to maturity. There were no other-than-temporary impairments charged to earnings during the three and six month periodssix-month period ending June 30, 20132014 or 2012.2013.
The amortized cost and fair values of securities available for sale at June 30, 20132014 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, 2013 | | | June 30, 2014 | |
(in thousands) | | Amortized Cost | | | Fair Value | | | Amortized Cost | | | Fair Value | |
Due in less than one year | | $ | 5,263 | | | $ | 5,320 | | | $ | 5,220 | | | $ | 5,276 | |
Due in one year through five years | | | 38,268 | | | | 39,124 | | | | 62,344 | | | | 62,986 | |
Due after five years through ten years | | | 8,835 | | | | 8,522 | | | | 9,549 | | | | 9,471 | |
Due after ten years | | | 595 | | | | 595 | | | | 1,085 | | | | 1,091 | |
| | | 52,961 | | | | 53,561 | | | | 78,198 | | | | 78,824 | |
Mortgage-backed securities | | | 73,581 | | | | 73,263 | | | | 62,946 | | | | 62,928 | |
Equity securities | | | 1,576 | | | | 3,164 | | | | 715 | | | | 1,903 | |
Securities available for sale | | $ | 128,118 | | | $ | 129,988 | | | $ | 141,859 | | | $ | 143,655 | |
Proceeds from sales of securities available for sale during the first six months of 20132014 and 20122013 were approximately $43.9$4.0 million and $5.4$43.9 million, respectively. Net gains of approximately $239,000$341,000 and $440,000$239,000 were realized on sales of securities during the first six months of 2014 and 2013, and 2012.respectively.
Note 6 – Loans, Allowance for Loan Losses, and Credit Quality
The loan composition as of June 30, 20132014 and December 31, 20122013 is summarized as follows.
| | | | | | | | | | | | |
| | 2013 | | | | | | 2012 | | | | |
(in thousands) | | Amount | | | % of Total | | | Amount | | | % of Total | |
Commercial & industrial | | $ | 245,856 | | | | 29.3 | % | | $ | 197,301 | | | | 35.7 | % |
Agricultural production | | | 13,114 | | | | 1.6 | | | | 215 | | | | 0.1 | |
Owner-occupied commercial real estate (“CRE”) | | | 181,101 | | | | 21.5 | | | | 106,888 | | | | 19.3 | |
Agricultural real estate | | | 38,983 | | | | 4.6 | | | | 11,354 | | | | 2.1 | |
CRE investment | | | 117,264 | | | | 14.0 | | | | 76,618 | | | | 13.9 | |
Construction & land development | | | 37,754 | | | | 4.5 | | | | 21,791 | | | | 3.9 | |
Residential construction | | | 10,288 | | | | 1.2 | | | | 7,957 | | | | 1.4 | |
Residential first mortgage | | | 141,255 | | | | 16.8 | | | | 85,588 | | | | 15.5 | |
Residential junior mortgage | | | 48,929 | | | | 5.8 | | | | 39,352 | | | | 7.1 | |
Retail & other | | | 6,002 | | | | 0.7 | | | | 5,537 | | | | 1.0 | |
Loans | | | 840,546 | | | | 100.0 | % | | | 552,601 | | | | 100.0 | % |
Less allowance for loan losses | | | 7,658 | | | | | | | | 7,120 | | | | | |
Loans, net | | $ | 832,888 | | | | | | | $ | 545,481 | | | | | |
Allowance for loan losses to loans | | | 0.91 | % | | | | | | | 1.29 | % | | | | |
| | Total |
| | June 30, 2014 | | December 31, 2013 |
(in thousands) | | Amount | | | % of Total | | | Amount | | | % of Total | |
Commercial & industrial | | $ | 269,377 | | | | 31.3 | % | | $ | 253,674 | | | | 29.9 | % |
Owner-occupied commercial real estate (“CRE”) | | | 187,225 | | | | 21.8 | | | | 187,476 | | | | 22.1 | |
Agricultural (“AG”) production | | | 13,982 | | | | 1.6 | | | | 14,256 | | | | 1.7 | |
AG real estate | | | 41,934 | | | | 4.9 | | | | 37,057 | | | | 4.4 | |
CRE investment | | | 79,639 | | | | 9.3 | | | | 90,295 | | | | 10.7 | |
Construction & land development | | | 45,504 | | | | 5.3 | | | | 42,881 | | | | 5.1 | |
Residential construction | | | 11,895 | | | | 1.4 | | | | 12,535 | | | | 1.5 | |
Residential first mortgage | | | 154,713 | | | | 18.0 | | | | 154,403 | | | | 18.2 | |
Residential junior mortgage | | | 50,244 | | | | 5.8 | | | | 49,363 | | | | 5.8 | |
Retail & other | | | 5,573 | | | | 0.6 | | | | 5,418 | | | | 0.6 | |
Loans | | | 860,086 | | | | 100.0 | % | | | 847,358 | | | | 100.0 | % |
Less allowance for loan losses | | | 9,642 | | | | | | | | 9,232 | | | | | |
Loans, net | | $ | 850,444 | | | | | | | $ | 838,126 | | | | | |
Allowance for loan losses to loans | | | 1.12 | % | | | | | | | 1.09 | % | | | | |
| | Originated |
| | June 30, 2014 | | December 31, 2013 |
(in thousands) | | Amount | | | % of Total | | | Amount | | % of Total | |
Commercial & industrial | | $ | 242,150 | | | | 37.4 | % | | $ | 227,572 | | 36.5 | % |
Owner-occupied CRE | | | 129,315 | | | | 20.0 | | | | 127,759 | | 20.5 | |
AG production | | | 4,653 | | | | 0.7 | | | | 3,230 | | 0.5 | |
AG real estate | | | 18,189 | | | | 2.8 | | | | 13,596 | | 2.2 | |
CRE investment | | | 50,929 | | | | 7.9 | | | | 60,390 | | 9.7 | |
Construction & land development | | | 34,501 | | | | 5.3 | | | | 30,277 | | 4.9 | |
Residential construction | | | 11,895 | | | | 1.8 | | | | 12,475 | | 2.0 | |
Residential first mortgage | | | 110,084 | | | | 17.0 | | | | 104,180 | | 16.7 | |
Residential junior mortgage | | | 40,913 | | | | 6.3 | | | | 39,207 | | 6.3 | |
Retail & other | | | 4,847 | | | | 0.8 | | | | 4,192 | | 0.7 | |
Loans | | $ | 647,476 | | | | 100.0 | % | | $ | 622,878 | | 100.0 | % |
| | Acquired | |
| | June 30, 2014 | | December 31, 2013 |
(in thousands) | | Amount | | | % of Total | | | Amount | | | % of Total | |
Commercial & industrial | | $ | 27,227 | | | | 12.8 | % | | $ | 26,102 | | | | 11.6 | % |
Owner-occupied CRE | | | 57,910 | | | | 27.2 | | | | 59,717 | | | | 26.6 | |
AG production | | | 9,329 | | | | 4.4 | | | | 11,026 | | | | 4.9 | |
AG real estate | | | 23,745 | | | | 11.2 | | | | 23,461 | | | | 10.5 | |
CRE investment | | | 28,710 | | | | 13.5 | | | | 29,905 | | | | 13.3 | |
Construction & land development | | | 11,003 | | | | 5.2 | | | | 12,604 | | | | 5.6 | |
Residential construction | | | - | | | | - | | | | 60 | | | | 0.1 | |
Residential first mortgage | | | 44,629 | | | | 21.0 | | | | 50,223 | | | | 22.4 | |
Residential junior mortgage | | | 9,331 | | | | 4.4 | | | | 10,156 | | | | 4.5 | |
Retail & other | | | 726 | | | | 0.3 | | | | 1,226 | | | | 0.5 | |
Loans | | $ | 212,610 | | | | 100.0 | % | | $ | 224,480 | | | | 100.0 | % |
Practically all of the Company’s loans, commitments, and standby letters of credit have been granted to customers in the Company’s market area. Although the Company has a diversified loan portfolio, the credit risk in the loan portfolio is largely influenced by general economic conditions and trends of the counties and markets in which the debtors operate, and the resulting impact on the operations of borrowers or on the value of underlying collateral, if any.
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. Due to the short period of time since the acquisition and consistent with acquisition accounting rules, no ALLL has been recorded on acquired loans at June 30, 2013.
Note 6 – Loans, Allowance for Loan Losses, and Credit Quality, continued
The allowance for loan and lease losses (“ALLL”) represents management’s estimate of probable and inherent credit losses in the Company’s loan portfolio at the balance sheet date. In general, estimating the amount of the ALLL is a function of a number of factors, including but not limited to changes in the loan portfolio, net charge-offs, trends in past due and impaired loans, and the level of potential problem loans, all of which may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses could be required that could adversely affect our earnings or financial position in future periods. Allocations to the ALLL may be made for specific loans but the entire ALLL is available for any loan that, in management’s judgment, should be charged-off or for which an actual loss is realized.
The allocation methodology used by the Company includes specific allocations for impaired loans evaluated individually for impairment based on collateral values and for the remaining loan portfolio collectively evaluated for impairment primarily based on historical loss rates and other qualitative factors. Loan charge-offs and recoveries are based on actual amounts charged-off or recovered by loan category. Management allocates the ALLL by pools of risk within each loan portfolio. Due to the short period of time since the acquisitions and consistent with acquisition accounting rules, no ALLL has been recorded on acquired loans since acquisition or at June 30, 2014.
Note 6 – Loans, Allowance for Loan Losses, and Credit Quality, continued
The following tables present the balance and activity in the ALLL by portfolio segment and the recorded investment in loans by portfolio at or for the six months ended June 30, 2014:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | TOTAL – Six Months Ended June 30, 2014 | |
(in thousands) ALLL: | | Commercial & industrial | | | Owner- occupied CRE | | | AG production | | | AG real estate | | | CRE investment | | | Construction & land development | | | Residential construction | | | Residential first mortgage | | | Residential junior mortgage | | | Retail & other | | | Total | |
Beginning balance | | $ | 1,798 | | | $ | 766 | | | $ | 18 | | | $ | 59 | | | $ | 505 | | | $ | 4,970 | | | $ | 229 | | | $ | 544 | | | $ | 321 | | | $ | 22 | | | $ | 9,232 | |
Provision | | | 2,007 | | | | 584 | | | | 26 | | | | 213 | | | | 62 | | | | (2,174 | ) | | | (62 | ) | | | 411 | | | | 136 | | | | 147 | | | | 1,350 | |
Charge-offs | | | (534 | ) | | | (268 | ) | | | - | | | | - | | | | - | | | | (12 | ) | | | - | | | | (123 | ) | | | (9 | ) | | | (33 | ) | | | (979 | ) |
Recoveries | | | 10 | | | | 14 | | | | - | | | | - | | | | 8 | | | | - | | | | - | | | | 1 | | | | - | | | | 6 | | | | 39 | |
Net charge-offs | | | (524 | ) | | | (254 | ) | | | - | | | | - | | | | 8 | | | | (12 | ) | | | - | | | | (122 | ) | | | (9 | ) | | | (27 | ) | | | (940 | ) |
Ending balance | | $ | 3,281 | | | $ | 1,096 | | | $ | 44 | | | $ | 272 | | | $ | 575 | | | $ | 2,784 | | | $ | 167 | | | $ | 833 | | | $ | 448 | | | $ | 142 | | | $ | 9,642 | |
As percent of ALLL | | | 34.0 | % | | | 11.4 | % | | | 0.5 | % | | | 2.8 | % | | | 6.0 | % | | | 28.9 | % | | | 1.7 | % | | | 8.6 | % | | | 4.6 | % | | | 1.5 | % | | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
ALLL: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated | | $ | 213 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 420 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 633 | |
Collectively evaluated | | | 3,068 | | | | 1,096 | | | | 44 | | | | 272 | | | | 575 | | | | 2,364 | | | | 167 | | | | 833 | | | | 448 | | | | 142 | | | | 9,009 | |
Ending balance | | $ | 3,281 | | | $ | 1,096 | | | $ | 44 | | | $ | 272 | | | $ | 575 | | | $ | 2,784 | | | $ | 167 | | | $ | 833 | | | $ | 448 | | | $ | 142 | | | $ | 9,642 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated | | $ | 332 | | | $ | 1,999 | | | $ | 27 | | | $ | 459 | | | $ | 1,913 | | | $ | 4,358 | | | $ | - | | | $ | 1,319 | | | $ | 438 | | | $ | - | | | $ | 10,845 | |
Collectively evaluated | | | 269,045 | | | | 185,226 | | | | 13,955 | | | | 41,475 | | | | 77,726 | | | | 41,146 | | | | 11,895 | | | | 153,394 | | | | 49,806 | | | | 5,573 | | | | 849,241 | |
Total loans | | $ | 269,377 | | | $ | 187,225 | | | $ | 13,982 | | | $ | 41,934 | | | $ | 79,639 | | | $ | 45,504 | | | $ | 11,895 | | | $ | 154,713 | | | $ | 50,244 | | | $ | 5,573 | | | $ | 860,086 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Less ALLL | | $ | 3,281 | | | $ | 1,096 | | | $ | 44 | | | $ | 272 | | | $ | 575 | | | $ | 2,784 | | | $ | 167 | | | $ | 833 | | | $ | 448 | | | $ | 142 | | | $ | 9,642 | |
Net loans | | $ | 266,096 | | | $ | 186,129 | | | $ | 13,938 | | | $ | 41,662 | | | $ | 79,064 | | | $ | 42,720 | | | $ | 11,728 | | | $ | 153,880 | | | $ | 49,796 | | | $ | 5,431 | | | $ | 850,444 | |
| | Originated – Six Months Ended June 30, 2014 |
(in thousands) ALLL: | | Commercial & industrial | | | Owner- occupied CRE | | | AG production | | | AG real estate | | | CRE investment | | | Construction & land development | | | Residential construction | | | Residential first mortgage | | | Residential junior mortgage | | | Retail & other | | | Total | |
Beginning balance | | $ | 1,798 | | | $ | 766 | | | $ | 18 | | | $ | 59 | | | $ | 505 | | | $ | 4,970 | | | $ | 229 | | | $ | 544 | | | $ | 321 | | | $ | 22 | | | $ | 9,232 | |
Provision | | | 1,983 | | | | 577 | | | | 26 | | | | 213 | | | | 62 | | | | (2,186 | ) | | | (62 | ) | | | 320 | | | | 127 | | | | 147 | | | | 1,207 | |
Charge-offs | | | (510 | ) | | | (252 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (32 | ) | | | - | | | | (33 | ) | | | (827 | ) |
Recoveries | | | 10 | | | | 5 | | | | - | | | | - | | | | 8 | | | | - | | | | - | | | | 1 | | | | - | | | | 6 | | | | 30 | |
Net charge-offs | | | (500 | ) | | | (247 | ) | | | - | | | | - | | | | 8 | | | | - | | | | - | | | | (31 | ) | | | - | | | | (27 | ) | | | (797 | ) |
Ending balance | | $ | 3,281 | | | $ | 1,096 | | | $ | 44 | | | $ | 272 | | | $ | 575 | | | $ | 2,784 | | | $ | 167 | | | $ | 833 | | | $ | 448 | | | $ | 142 | | | $ | 9,642 | |
As percent of ALLL | | | 34.0 | % | | | 11.4 | % | | | 0.5 | % | | | 2.8 | % | | | 6.0 | % | | | 28.9 | % | | | 1.7 | % | | | 8.6 | % | | | 4.6 | % | | | 1.5 | % | | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
ALLL: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated | | $ | 213 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 420 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 633 | |
Collectively evaluated | | | 3,068 | | | | 1,096 | | | | 44 | | | | 272 | | | | 575 | | | | 2,364 | | | | 167 | | | | 833 | | | | 448 | | | | 142 | | | | 9,009 | |
Ending balance | | $ | 3,281 | | | $ | 1,096 | | | $ | 44 | | | $ | 272 | | | $ | 575 | | | $ | 2,784 | | | $ | 167 | | | $ | 833 | | | $ | 448 | | | $ | 142 | | | $ | 9,642 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated | | $ | 323 | | | $ | 1,042 | | | $ | - | | | $ | - | | | $ | - | | | $ | 3,879 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 5,244 | |
Collectively evaluated | | | 241,827 | | | | 128,273 | | | | 4,653 | | | | 18,189 | | | | 50,929 | | | | 30,622 | | | | 11,895 | | | | 110,084 | | | | 40,913 | | | | 4,847 | | | | 642,232 | |
Total loans | | $ | 242,150 | | | $ | 129,315 | | | $ | 4,653 | | | $ | 18,189 | | | $ | 50,929 | | | $ | 34,501 | | | $ | 11,895 | | | $ | 110,084 | | | $ | 40,913 | | | $ | 4,847 | | | $ | 647,476 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Less ALLL | | $ | 3,281 | | | $ | 1,096 | | | $ | 44 | | | $ | 272 | | | $ | 575 | | | $ | 2,784 | | | $ | 167 | | | $ | 833 | | | $ | 448 | | | $ | 142 | | | $ | 9,642 | |
Net loans | | $ | 238,869 | | | $ | 128,219 | | | $ | 4,609 | | | $ | 17,917 | | | $ | 50,354 | | | $ | 31,717 | | | $ | 11,728 | | | $ | 109,251 | | | $ | 40,465 | | | $ | 4,705 | | | $ | 637,834 | |
Note 6 – Loans, Allowance for Loan Losses, and Credit Quality, continued
| | Acquired – Six Months Ended June 30, 2014 | |
(in thousands) ALLL: | | Commercial & industrial | | | Owner- occupied CRE | | | AG production | | | AG real estate | | | CRE investment | | | Construction & land development | | | Residential construction | | | Residential first mortgage | | | Residential junior mortgage | | | Retail & other | | | Total | |
Provision | | $ | 24 | | | $ | 7 | | | $ | - | | | $ | - | | | $ | - | | | $ | 12 | | | $ | - | | | $ | 91 | | | $ | 9 | | | $ | - | | | $ | 143 | |
Charge-offs | | | (24 | ) | | | (16 | ) | | | - | | | | - | | | | - | | | | (12 | ) | | | - | | | | (91 | ) | | | (9 | ) | | | - | | | | (152 | ) |
Recoveries | | | - | | | | 9 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 9 | |
Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated | | $ | 9 | | | $ | 957 | | | $ | 27 | | | $ | 459 | | | $ | 1,913 | | | $ | 479 | | | $ | - | | | $ | 1,319 | | | $ | 438 | | | $ | - | | | $ | 5,601 | |
Collectively evaluated | | | 27,218 | | | | 56,953 | | | | 9,302 | | | | 23,286 | | | | 26,797 | | | | 10,524 | | | | - | | | | 43,310 | | | | 8,893 | | | | 726 | | | | 207,009 | |
Total loans | | $ | 27,227 | | | $ | 57,910 | | | $ | 9,329 | | | $ | 23,745 | | | $ | 28,710 | | | $ | 11,003 | | | $ | - | | | $ | 44,629 | | | $ | 9,331 | | | $ | 726 | | | $ | 212,610 | |
The following table presents the balance and activity in the ALLL by portfolio segment at or for the six months ended June 30, 2013.
| | TOTAL – Six Months Ended June 30, 2013 |
(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 | | $ | 1,969 | | | $ | 1,069 | | | $ | - | | | $ | - | | | $ | 337 | | | $ | 2,580 | | | $ | 137 | | | $ | 685 | | | $ | 312 | | | $ | 31 | | | $ | 7,120 | |
Provision | | | 170 | | | | 259 | | | | 5 | | | | 12 | | | | 485 | | | | 802 | | | | 36 | | | | 128 | | | | 57 | | | | (4 | ) | | | 1,950 | |
Charge-offs | | | (475 | ) | | | (113 | ) | | | - | | | | - | | | | (639 | ) | | | (36 | ) | | | - | | | | (86 | ) | | | (83 | ) | | | (11 | ) | | | (1,443 | ) |
Recoveries | | | 21 | | | | 2 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 6 | | | | 1 | | | | 1 | | | | 31 | |
Net charge-offs | | | (454 | ) | | | (111 | ) | | | - | | | | - | | | | (639 | ) | | | (36 | ) | | | - | | | | (80 | ) | | | (82 | ) | | | (10 | ) | | | (1,412 | ) |
Ending balance | | $ | 1,685 | | | $ | 1,217 | | | $ | 5 | | | $ | 12 | | | $ | 183 | | | $ | 3,346 | | | $ | 173 | | | $ | 733 | | | $ | 287 | | | $ | 17 | | | $ | 7,658 | |
As percent of ALLL | | | 22.0 | % | | | 15.9 | % | | | 0.1 | % | | | 0.2 | % | | | 2.4 | % | | | 43.7 | % | | | 2.3 | % | | | 9.5 | % | | | 3.7 | % | | | 0.2 | % | | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
ALLL: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Collectively evaluated | | | 1,685 | | | | 1,217 | | | | 5 | | | | 12 | | | | 183 | | | | 3,346 | | | | 173 | | | | 733 | | | | 287 | | | | 17 | | | | 7,658 | |
Ending balance | | $ | 1,685 | | | $ | 1,217 | | | $ | 5 | | | $ | 12 | | | $ | 183 | | | $ | 3,346 | | | $ | 173 | | | $ | 733 | | | $ | 287 | | | $ | 17 | | | $ | 7,658 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated | | $ | 3 | | | $ | 1,800 | | | $ | - | | | $ | - | | | $ | 688 | | | $ | - | | | $ | - | | | $ | 1,099 | | | $ | - | | | $ | 137 | | | $ | 3,727 | |
PCI Loans | | | 1 | | | | 1,746 | | | | 22 | | | | 611 | | | | 4,858 | | | | 790 | | | | - | | | | 2,295 | | | | 257 | | | | - | | | | 10,580 | |
Collectively evaluated | | | 245,852 | | | | 177,555 | | | | 13,092 | | | | 38,372 | | | | 111,718 | | | | 36,964 | | | | 10,288 | | | | 137,861 | | | | 48,672 | | | | 5,865 | | | | 826,239 | |
Total loans | | $ | 245,856 | | | $ | 181,101 | | | $ | 13,114 | | | $ | 38,983 | | | $ | 117,264 | | | $ | 37,754 | | | $ | 10,288 | | | $ | 141,255 | | | $ | 48,929 | | | $ | 6,002 | | | $ | 840,546 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Less ALLL | | $ | 1,685 | | | $ | 1,217 | | | $ | 5 | | | $ | 12 | | | $ | 183 | | | $ | 3,346 | | | $ | 173 | | | $ | 733 | | | $ | 287 | | | $ | 17 | | | $ | 7,658 | |
Net loans | | $ | 244,171 | | | $ | 179,884 | | | $ | 13,109 | | | $ | 38,971 | | | $ | 117,081 | | | $ | 34,408 | | | $ | 10,115 | | | $ | 140,522 | | | $ | 48,642 | | | $ | 5,985 | | | $ | 832,888 | |
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 innonaccrual loans by portfolio segment based on the impairment method for the periods indicated:in total and then as a further breakdown by originated or acquired as of June 30, 2014 and December 31, 2013.
| | Six Months ended June 30, 2013 | |
(in thousands) ALLL: | | Commercial & industrial | | | Agricultural production | | | Owner- occupied CRE | | | Agricultural real estate | | | CRE investment | | | Construction & land development | | | Residential construction | | | Residential first mortgage | | | Residential junior mortgage | | | Retail & other | | | Total | |
Beginning balance | | $ | 1,969 | | | $ | - | | | $ | 1,069 | | | $ | - | | | $ | 337 | | | $ | 2,580 | | | $ | 137 | | | $ | 685 | | | $ | 312 | | | $ | 31 | | | $ | 7,120 | |
Provision | | | 170 | | | | 5 | | | | 259 | | | | 12 | | | | 485 | | | | 802 | | | | 36 | | | | 128 | | | | 57 | | | | (4 | ) | | | 1,950 | |
Charge-offs | | | (475 | ) | | | - | | | | (113 | ) | | | - | | | | (639 | ) | | | (36 | ) | | | - | | | | (86 | ) | | | (83 | ) | | | (11 | ) | | | (1,443 | ) |
Recoveries | | | 21 | | | | - | | | | 2 | | | | - | | | | - | | | | - | | | | - | | | | 6 | | | | 1 | | | | 1 | | | | 31 | |
Ending balance | | $ | 1,685 | | | $ | 5 | | | $ | 1,217 | | | $ | 12 | | | $ | 183 | | | $ | 3,346 | | | $ | 173 | | | $ | 733 | | | $ | 287 | | | $ | 17 | | | $ | 7,658 | |
As percent of ALLL | | | 22.0 | % | | | 0.1 | % | | | 15.9 | % | | | 0.2 | % | | | 2.4 | % | | | 43.7 | % | | | 2.3 | % | | | 9.5 | % | | | 3.7 | % | | | 0.2 | % | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
ALLL: Individually evaluated | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
ALLL: PCI loans | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Collectively evaluated | | | 1,685 | | | | 5 | | | | 1,217 | | | | 12 | | | | 183 | | | | 3,346 | | | | 173 | | | | 733 | | | | 287 | | | | 17 | | | | 7,658 | |
Ending balance | | $ | 1,685 | | | $ | 5 | | | $ | 1,217 | | | $ | 12 | | | $ | 183 | | | $ | 3,346 | | | $ | 173 | | | $ | 733 | | | $ | 287 | | | $ | 17 | | | $ | 7,658 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated | | $ | 3 | | | $ | - | | | $ | 1,800 | | | $ | - | | | $ | 688 | | | $ | - | | | $ | - | | | $ | 1,099 | | | $ | - | | | $ | 137 | | | $ | 3,727 | |
PCI loans | | | 1 | | | | 22 | | | | 1,746 | | | | 611 | | | | 4,858 | | | | 790 | | | | - | | | | 2,295 | | | | 257 | | | | - | | | | 10,580 | |
Collectively evaluated | | | 245,852 | | | | 13,092 | | | | 177,555 | | | | 38,372 | | | | 111,718 | | | | 36,964 | | | | 10,288 | | | | 137,861 | | | | 48,672 | | | | 5,865 | | | | 826,239 | |
Total loans | | $ | 245,856 | | | $ | 13,114 | | | $ | 181,101 | | | $ | 38,983 | | | $ | 117,264 | | | $ | 37,754 | | | $ | 10,288 | | | $ | 141,255 | | | $ | 48,929 | | | $ | 6,002 | | | $ | 840,546 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Less ALLL | | $ | 1,685 | | | $ | 5 | | | $ | 1,217 | | | $ | 12 | | | $ | 183 | | | $ | 3,346 | | | $ | 173 | | | $ | 733 | | | $ | 287 | | | $ | 17 | | | $ | 7,658 | |
Net loans | | $ | 244,171 | | | $ | 13,109 | | | $ | 179,884 | | | $ | 38,971 | | | $ | 117,081 | | | $ | 34,408 | | | $ | 10,115 | | | $ | 140,522 | | | $ | 48,642 | | | $ | 5,985 | | | $ | 832,888 | |
(in thousands) | | June 30, 2014 | | | % to Total | | | December 31, 2013 | | | % to Total | |
Commercial & industrial | | $ | 517 | | | | 7.2 | % | | $ | 68 | | | | 0.7 | % |
Owner-occupied CRE | | | 1,975 | | | | 27.4 | | | | 1,087 | | | | 10.6 | |
AG production | | | 27 | | | | 0.4 | | | | 11 | | | | 0.1 | |
AG real estate | | | 461 | | | | 6.4 | | | | 448 | | | | 4.3 | |
CRE investment | | | 1,607 | | | | 22.3 | | | | 4,631 | | | | 45.1 | |
Construction & land development | | | 479 | | | | 6.7 | | | | 1,265 | | | | 12.3 | |
Residential construction | | | - | | | | - | | | | - | | | | - | |
Residential first mortgage | | | 1,671 | | | | 23.2 | | | | 2,365 | | | | 23.0 | |
Residential junior mortgage | | | 461 | | | | 6.4 | | | | 262 | | | | 2.6 | |
Retail & other | | | - | | | | - | | | | 129 | | | | 1.3 | |
Nonaccrual loans - Total | | $ | 7,198 | | | | 100.0 | % | | $ | 10,266 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | |
| | | | | | Originated | | | | | | | | | |
(in thousands) | | June 30, 2014 | | | % to Total | | | December 31, 2013 | | | % to Total | |
Commercial & industrial | | $ | 486 | | | | 26.0 | % | | $ | 67 | | | | 8.9 | % |
Owner-occupied CRE | | | 1,042 | | | | 56.0 | | | | - | | | | - | |
AG production | | | - | | | | - | | | | - | | | | - | |
AG real estate | | | - | | | | - | | | | - | | | | - | |
CRE investment | | | - | | | | - | | | | 40 | | | | 5.3 | |
Construction & land development | | | - | | | | - | | | | - | | | | - | |
Residential construction | | | - | | | | - | | | | - | | | | - | |
Residential first mortgage | | | 299 | | | | 16.1 | | | | 442 | | | | 58.9 | |
Residential junior mortgage | | | 35 | | | | 1.9 | | | | 73 | | | | 9.7 | |
Retail & other | | | - | | | | - | | | | 129 | | | | 17.2 | |
Nonaccrual loans - Originated | | $ | 1,862 | | | | 100.0 | % | | $ | 751 | | | | 100.0 | % |
| | | | | | | | | | | | | | | |
| | | | | | Acquired | | | | | | | | | |
(in thousands) | | June 30, 2014 | | | % to Total | | | December 31, 2013 | | | % to Total | |
Commercial & industrial | | $ | 31 | | | | 0.6 | % | | $ | 1 | | | | 0.1 | % |
Owner-occupied CRE | | | 933 | | | | 17.5 | | | | 1,087 | | | | 11.4 | |
AG production | | | 27 | | | | 0.5 | | | | 11 | | | | 0.1 | |
AG real estate | | | 461 | | | | 8.6 | | | | 448 | | | | 4.7 | |
CRE investment | | | 1,607 | | | | 30.1 | | | | 4,591 | | | | 48.2 | |
Construction & land development | | | 479 | | | | 9.0 | | | | 1,265 | | | | 13.3 | |
Residential construction | | | - | | | | - | | | | - | | | | - | |
Residential first mortgage | | | 1,372 | | | | 25.7 | | | | 1,923 | | | | 20.2 | |
Residential junior mortgage | | | 426 | | | | 8.0 | | | | 189 | | | | 2.0 | |
Retail & other | | | - | | | | - | | | | - | | | | - | |
Nonaccrual loans - Acquired | | $ | 5,336 | | | | 100.0 | % | | $ | 9,515 | | | | 100.0 | % |
| | Six Months ended June 30, 2012 | |
(in thousands) ALLL: | | Commercial & industrial | | | Agricultural production | | | Owner- occupied CRE | | | Agricultural real estate | | | CRE investment | | | Construction & land development | | | Residential construction | | | Residential first mortgage | | | Residential junior mortgage | | | Retail & other | | | Total | |
Beginning balance | | $ | 1,965 | | | $ | - | | | $ | 347 | | | $ | - | | | $ | 393 | | | $ | 2,035 | | | $ | 311 | | | $ | 405 | | | $ | 419 | | | $ | 24 | | | $ | 5,899 | |
Provision | | | 729 | | | | - | | | | 1,096 | | | | 127 | | | | 24 | | | | (67 | ) | | | 163 | | | | 171 | | | | 96 | | | | 36 | | | | 2,375 | |
Charge-offs | | | (77 | ) | | | - | | | | (899 | ) | | | (127 | ) | | | (155 | ) | | | (307 | ) | | | (395 | ) | | | (168 | ) | | | (118 | ) | | | (38 | ) | | | (2,284 | ) |
Recoveries | | | 30 | | | | - | | | | 8 | | | | - | | | | - | | | | 5 | | | | - | | | | 7 | | | | 4 | | | | 1 | | | | 55 | |
Ending balance | | $ | 2,647 | | | $ | - | | | $ | 552 | | | $ | - | | | $ | 262 | | | $ | 1,666 | | | $ | 79 | | | $ | 415 | | | $ | 401 | | | $ | 23 | | | $ | 6,045 | |
As percent of ALLL | | | 43.8 | % | | | 0.0 | % | | | 9.1 | % | | | 0.0 | % | | | 4.3 | % | | | 27.6 | % | | | 1.3 | % | | | 6.9 | % | | | 6.6 | % | | | 0.4 | % | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
ALLL: Individually evaluated | | $ | - | | | $ | - | | | $ | 165 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 165 | |
Collectively evaluated | | | 2,647 | | | | - | | | | 387 | | | | - | | | | 262 | | | | 1,666 | | | | 79 | | | | 415 | | | | 401 | | | | 23 | | | | 5,880 | |
Ending balance | | $ | 2,647 | | | $ | - | | | $ | 552 | | | $ | - | | | $ | 262 | | | $ | 1,666 | | | $ | 79 | | | $ | 415 | | | $ | 401 | | | $ | 23 | | | $ | 6,045 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated | | $ | 4,383 | | | $ | - | | | $ | 60 | | | $ | 34 | | | $ | 544 | | | $ | 8,527 | | | $ | 799 | | | $ | 797 | | | $ | 36 | | | $ | 151 | | | $ | 15,331 | |
Collectively evaluated | | | 194,645 | | | | 183 | | | | 115,110 | | | | 1,247 | | | | 62,313 | | | | 16,085 | | | | 5,162 | | | | 62,359 | | | | 38,046 | | | | 6,511 | | | | 501,661 | |
Total loans | | $ | 199,028 | | | $ | 183 | | | $ | 115,170 | | | $ | 1,281 | | | $ | 62,857 | | | $ | 24,612 | | | $ | 5,961 | | | $ | 63,156 | | | $ | 38,082 | | | $ | 6,662 | | | $ | 516,992 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Less ALLL | | $ | 2,647 | | | $ | 0 | | | $ | 552 | | | $ | 0 | | | $ | 262 | | | $ | 1,666 | | | $ | 79 | | | $ | 415 | | | $ | 401 | | | $ | 23 | | | $ | 6,045 | |
Net loans | | $ | 196,381 | | | $ | 183 | | | $ | 114,618 | | | $ | 1,281 | | | $ | 62,595 | | | $ | 2,946 | | | $ | 5,882 | | | $ | 62,741 | | | $ | 37,681 | | | $ | 6,639 | | | $ | 510,947 | |
Note 6 – Loans, Allowance for Loan Losses, and Credit Quality, continued
Loans are generally placed on nonaccrual status when management has determined collection of the interest on a loan is doubtful or when a loan is contractuallyThe following tables present total past due 90 days or more as to interest or principal payments. When loans are placed on nonaccrual status or charged-off, all current year unpaid accrued interest is reversed against interest income. The interest on these loans is subsequently accounted for on the cash basis until qualifying for return to accrual status. If collectability of the principal is in doubt, payments received are applied to loan principal. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. 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.
The following table presents nonaccrual loans by portfolio segment as of June 30, 20132014 and December 31, 2012. The June 30, 2013 nonaccrual loans of $14.3 million include $10.6 million of loans acquired at fair value in the Mid-Wisconsin merger:2013:
(in thousands) | | 2013 | | | % to Total | | | 2012 | | | % to Total | |
Commercial & industrial | | $ | 4 | | | | - | % | | $ | 784 | | | | 11.2 | % |
Agricultural production | | | 22 | | | | 0.2 | | | | - | | | | - | |
Owner-occupied CRE | | | 3,546 | | | | 24.8 | | | | 1,960 | | | | 27.9 | |
Agricultural real estate | | | 611 | | | | 4.3 | | | | - | | | | - | |
CRE investment | | | 5,546 | | | | 38.8 | | | | - | | | | - | |
Construction & land development | | | 790 | | | | 5.5 | | | | 2,560 | | | | 36.4 | |
Residential construction | | | - | | | | - | | | | - | | | | - | |
Residential first mortgage | | | 3,394 | | | | 23.7 | | | | 1,580 | | | | 22.5 | |
Residential junior mortgage | | | 257 | | | | 1.8 | | | | - | | | | - | |
Retail & other | | | 137 | | | | 0.9 | | | | 142 | | | | 2.0 | |
Nonaccrual loans | | $ | 14,307 | | | | 100.0 | % | | $ | 7,026 | | | | 100.0 | % |
The following tables present past due loans by portfolio segment: | | June 30, 2014 | |
(in thousands) | | 30-89 Days Past Due (accruing) | | | 90 Days & Over or non-accrual | | | Current | | | Total | |
Commercial & industrial | | $ | 377 | | | $ | 517 | | | $ | 268,483 | | | $ | 269,377 | |
Owner-occupied CRE | | | - | | | | 1,975 | | | | 185,250 | | | | 187,225 | |
AG production | | | 20 | | | | 27 | | | | 13,935 | | | | 13,982 | |
AG real estate | | | - | | | | 461 | | | | 41,473 | | | | 41,934 | |
CRE investment | | | 767 | | | | 1,607 | | | | 77,265 | | | | 79,639 | |
Construction & land development | | | 165 | | | | 479 | | | | 44,860 | | | | 45,504 | |
Residential construction | | | - | | | | - | | | | 11,895 | | | | 11,895 | |
Residential first mortgage | | | 201 | | | | 1,671 | | | | 152,841 | | | | 154,713 | |
Residential junior mortgage | | | - | | | | 461 | | | | 49,783 | | | | 50,244 | |
Retail & other | | | - | | | | - | | | | 5,573 | | | | 5,573 | |
Total loans | | $ | 1,530 | | | $ | 7,198 | | | $ | 851,358 | | | $ | 860,086 | |
As a percent of total loans | | | 0.2 | % | | | 0.8 | % | | | 99.0 | % | | | 100.0 | % |
| | June 30, 2013 | |
(in thousands) | | 30-89 Days Past Due (accruing) | | | 90 Days & Over or non-accrual | | | Current | | | Total | |
Commercial & industrial | | $ | 23 | | | $ | 4 | | | $ | 245,829 | | | $ | 245,856 | |
Agricultural production | | | 7 | | | | 22 | | | | 13,085 | | | | 13,114 | |
Owner-occupied CRE | | | 89 | | | | 3,546 | | | | 177,466 | | | | 181,101 | |
Agricultural real estate | | | 87 | | | | 611 | | | | 38,285 | | | | 38,983 | |
CRE investment | | | 634 | | | | 5,546 | | | | 111,084 | | | | 117,264 | |
Construction & land development | | | 387 | | | | 790 | | | | 36,577 | | | | 37,754 | |
Residential construction | | | - | | | | - | | | | 10,288 | | | | 10,288 | |
Residential first mortgage | | | 661 | | | | 3,394 | | | | 137,200 | | | | 141,255 | |
Residential junior mortgage | | | 69 | | | | 257 | | | | 48,603 | | | | 48,929 | |
Retail & other | | | 8 | | | | 137 | | | | 5,857 | | | | 6,002 | |
Total loans | | $ | 1,965 | | | $ | 14,307 | | | $ | 824,274 | | | $ | 840,546 | |
As a percent of total loans | | | 0.2 | % | | | 1.7 | % | | | 98.1 | % | | | 100.0 | % |
| | December 31, 2012 | |
(in thousands) | | 30-89 Days Past Due (accruing) | | | 90 Days & Over or nonaccrual | | | Current | | | Total | |
Commercial & industrial | | $ | - | | | $ | 784 | | | $ | 196,517 | | | $ | 197,301 | |
Agricultural production | | | - | | | | - | | | | 215 | | | | 215 | |
Owner-occupied CRE | | | - | | | | 1,960 | | | | 104,928 | | | | 106,888 | |
Agricultural real estate | | | - | | | | - | | | | 11,354 | | | | 11,354 | |
CRE investment | | | - | | | | - | | | | 76,618 | | | | 76,618 | |
Construction & land development | | | - | | | | 2,560 | | | | 19,231 | | | | 21,791 | |
Residential construction | | | - | | | | - | | | | 7,957 | | | | 7,957 | |
Residential first mortgage | | | - | | | | 1,580 | | | | 84,008 | | | | 85,588 | |
Residential junior mortgage | | | - | | | | - | | | | 39,352 | | | | 39,352 | |
Retail & other | | | 6 | | | | 142 | | | | 5,389 | | | | 5,537 | |
Total loans | | $ | 6 | | | $ | 7,026 | | | $ | 545,569 | | | $ | 552,601 | |
As a percent of total loans | | | 0.0 | % | | | 1.3 | % | | | 98.7 | % | | | 100.0 | % |
Note 6 – Loans, Allowance for Loan Losses, and Credit Quality, continued | | December 31, 2013 | |
(in thousands) | | 30-89 Days Past Due (accruing) | | | 90 Days & Over or nonaccrual | | | Current | | | Total | |
Commercial & industrial | | $ | - | | | $ | 68 | | | $ | 253,606 | | | $ | 253,674 | |
Owner-occupied CRE | | | 1,247 | | | | 1,087 | | | | 185,142 | | | | 187,476 | |
AG production | | | - | | | | 11 | | | | 14,245 | | | | 14,256 | |
AG real estate | | | - | | | | 448 | | | | 36,609 | | | | 37,057 | |
CRE investment | | | 491 | | | | 4,631 | | | | 85,173 | | | | 90,295 | |
Construction & land development | | | - | | | | 1,265 | | | | 41,616 | | | | 42,881 | |
Residential construction | | | - | | | | - | | | | 12,535 | | | | 12,535 | |
Residential first mortgage | | | 387 | | | | 2,365 | | | | 151,651 | | | | 154,403 | |
Residential junior mortgage | | | 12 | | | | 262 | | | | 49,089 | | | | 49,363 | |
Retail & other | | | 12 | | | | 129 | | | | 5,277 | | | | 5,418 | |
Total loans | | $ | 2,149 | | | $ | 10,266 | | | $ | 834,943 | | | $ | 847,358 | |
As a percent of total loans | | | 0.3 | % | | | 1.2 | % | | | 98.5 | % | | | 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 termshort-term weaknesses which may include unexpected, short termshort-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.
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:grade as of June 30, 2014 and December 31, 2013:
| | June 30, 2013 | | | June 30, 2014 | |
(in thousands) | | Grades 1- 4 | | | Grade 5 | | | Grade 6 | | | Grade 7 | | | Grade 8 | | | Grade 9 | | | Total | | | Grades 1- 4 | | | Grade 5 | | | Grade 6 | | | Grade 7 | | | Grade 8 | | | Grade 9 | | | Total | |
Commercial & industrial | | $ | 231,391 | | | $ | 12,319 | | | $ | 700 | | | $ | 1,446 | | | $ | - | | | $ | - | | | $ | 245,856 | | | $ | 253,077 | | | $ | 10,232 | | | $ | 802 | | | $ | 5,266 | | | $ | - | | | $ | - | | | $ | 269,377 | |
Agricultural production | | | 12,436 | | | | 291 | | | | 279 | | | | 108 | | | | - | | | | - | | | | 13,114 | | |
Owner-occupied CRE | | | 163,633 | | | | 6,545 | | | | 4,607 | | | | 6,316 | | | | - | | | | - | | | | 181,101 | | | | 177,898 | | | | 3,891 | | | | 1,758 | | | | 3,678 | | | | - | | | | - | | | | 187,225 | |
Agricultural real estate | | | 25,514 | | | | 10,289 | | | | 1,827 | | | | 1,353 | | | | - | | | | - | | | | 38,983 | | |
AG production | | | | 13,569 | | | | 42 | | | | - | | | | 371 | | | | - | | | | - | | | | 13,982 | |
AG real estate | | | | 31,408 | | | | 9,679 | | | | 61 | | | | 786 | | | | - | | | | - | | | | 41,934 | |
CRE investment | | | 97,074 | | | | 11,283 | | | | 317 | | | | 8,590 | | | | - | | | | - | | | | 117,264 | | | | 75,434 | | | | 2,141 | | | | - | | | | 2,064 | | | | - | | | | - | | | | 79,639 | |
Construction & land development | | | 28,061 | | | | 2,416 | | | | 859 | | | | 6,418 | | | | - | | | | - | | | | 37,754 | | | | 34,717 | | | | 2,463 | | | | - | | | | 8,324 | | | | - | | | | - | | | | 45,504 | |
Residential construction | | | 8,906 | | | | - | | | | - | | | | 1,382 | | | | - | | | | - | | | | 10,288 | | | | 11,378 | | | | - | | | | - | | | | 517 | | | | - | | | | - | | | | 11,895 | |
Residential first mortgage | | | 134,511 | | | | 2,299 | | | | - | | | | 4,445 | | | | - | | | | - | | | | 141,255 | | | | 151,525 | | | | 1,203 | | | | - | | | | 1,985 | | | | - | | | | - | | | | 154,713 | |
Residential junior mortgage | | | 48,366 | | | | 287 | | | | - | | | | 276 | | | | - | | | | - | | | | 48,929 | | | | 49,241 | | | | 42 | | | | - | | | | 961 | | | | - | | | | - | | | | 50,244 | |
Retail & other | | | 5,854 | | | | - | | | | - | | | | 148 | | | | - | | | | - | | | | 6,002 | | | | 5,562 | | | | 11 | | | | - | | | | - | | | | - | | | | - | | | | 5,573 | |
Total loans | | $ | 755,746 | | | $ | 45,729 | | | $ | 8,589 | | | $ | 30,482 | | | $ | - | | | $ | - | | | $ | 840,546 | | | $ | 803,809 | | | $ | 29,704 | | | $ | 2,621 | | | $ | 23,952 | | | $ | - | | | $ | - | | | $ | 860,086 | |
Percent of total | | | 89.9 | % | | | 5.5 | % | | | 1.0 | % | | | 3.6 | % | | | - | | | | - | | | | 100 | % | | | 93.5 | % | | | 3.4 | % | | | 0.3 | % | | | 2.8 | % | | | - | | | | - | | | | 100 | % |
| | December 31, 2012 | | | December 31, 2013 | |
(in thousands) | | Grades 1- 4 | | | Grade 5 | | | Grade 6 | | | Grade 7 | | | Grade 8 | | | Grade 9 | | | Total | | | Grades 1- 4 | | | Grade 5 | | | Grade 6 | | | Grade 7 | | | Grade 8 | | | Grade 9 | | | Total | |
Commercial & industrial | | $ | 192,426 | | | $ | 1,969 | | | $ | 604 | | | $ | 2,517 | | | $ | - | | | $ | - | | | $ | 197,516 | | | $ | 240,626 | | | $ | 7,134 | | | $ | 722 | | | $ | 5,192 | | | $ | - | | | $ | - | | | $ | 253,674 | |
Owner-occupied CRE | | | 96,313 | | | | 16,502 | | | | 1,832 | | | | 3,595 | | | | - | | | | - | | | | 118,242 | | | | 174,070 | | | | 6,605 | | | | 2,644 | | | | 4,157 | | | | - | | | | - | | | | 187,476 | |
AG production | | | | 13,631 | | | | 267 | | | | - | | | | 358 | | | | - | | | | - | | | | 14,256 | |
AG real estate | | | | 26,058 | | | | 10,159 | | | | 62 | | | | 778 | | | | - | | | | - | | | | 37,057 | |
CRE investment | | | 66,358 | | | | 8,545 | | | | - | | | | 1,715 | | | | - | | | | - | | | | 76,618 | | | | 83,475 | | | | 1,202 | | | | 15 | | | | 5,603 | | | | - | | | | - | | | | 90,295 | |
Construction & land development | | | 12,351 | | | | 855 | | | | 877 | | | | 7,708 | | | | - | | | | - | | | | 21,791 | | | | 31,051 | | | | 2,229 | | | | 119 | | | | 9,482 | | | | - | | | | - | | | | 42,881 | |
Residential construction | | | 6,775 | | | | - | | | | - | | | | 1,182 | | | | - | | | | - | | | | 7,957 | | | | 12,187 | | | | - | | | | - | | | | 348 | | | | - | | | | - | | | | 12,535 | |
Residential first mortgage | | | 82,914 | | | | 1,094 | | | | - | | | | 1,580 | | | | - | | | | - | | | | 85,588 | | | | 150,343 | | | | 1,365 | | | | - | | | | 2,695 | | | | - | | | | - | | | | 154,403 | |
Residential junior mortgage | | | 38,582 | | | | 199 | | | | 249 | | | | 322 | | | | - | | | | - | | | | 39,352 | | | | 48,886 | | | | 215 | | | | - | | | | 262 | | | | - | | | | - | | | | 49,363 | |
Retail & other | | | 5,537 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 5,537 | | | | 5,274 | | | | 15 | | | | - | | | | 129 | | | | - | | | | - | | | | 5,418 | |
Total loans | | $ | 501,256 | | | $ | 29,164 | | | $ | 3,562 | | | $ | 18,619 | | | $ | - | | | $ | - | | | $ | 552,601 | | | $ | 785,601 | | | $ | 29,191 | | | $ | 3,562 | | | $ | 29,004 | | | $ | - | | | $ | - | | | $ | 847,358 | |
Percent of total | | | 90.7 | % | | | 5.3 | % | | | 0.6 | % | | | 3.4 | % | | | - | | | | - | | | | 100 | % | | | 92.8 | % | | | 3.4 | % | | | 0.4 | % | | | 3.4 | % | | | - | | | | - | | | | 100 | % |
Note 6 – Loans, AllowanceManagement 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. Management instituted the nonaccrual scope criteria in the second quarter of 2013, particularly in response to the higher volume of smaller nonaccrual loans acquired in the 2013 acquisitions. At the time an individual loan goes into nonaccrual status, however, management evaluates the loan for Loan Losses,impairment and Credit Quality, continuedpossible charge-off regardless of loan size.
In determining the appropriateness of the allowance for loan losses,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.
Note 6 – Loans, Allowance for Loan Losses, and Credit Quality, continued
The following tables present impaired loans as of June 30, 2014 and December 31, 2013. As a further breakdown, impaired loans are also summarized by originated and acquired for the periods presented. PCI loans acquired in the 2013 acquisitions were initially recorded at a fair value of $16.7 million on their respective acquisition dates, indicated:net of an initial $12.2 million nonaccretable mark and a zero accretable mark. At June 30, 2014, $5.6 million of the $16.7 million remain in impaired loans. Included in the June 30, 2014 and December 31, 2013 impaired loans is one troubled debt restructuring totaling $3.9 million described below under “Troubled Debt Restructurings.”
| | Total Impaired Loans – June 30, 2014 | |
(in thousands) | | Recorded Investment | | | Unpaid Principal Balance | | | Related Allowance | | | Average Recorded Investment | | | Interest Income Recognized | |
Commercial & industrial* | | $ | 332 | | | $ | 341 | | | $ | 213 | | | $ | 167 | | | $ | 14 | |
Owner-occupied CRE | | | 1,999 | | | | 3,033 | | | | - | | | | 1,543 | | | | 111 | |
AG production | | | 27 | | | | 95 | | | | - | | | | 18 | | | | 5 | |
AG real estate | | | 459 | | | | 560 | | | | - | | | | 451 | | | | 12 | |
CRE investment | | | 1,913 | | | | 5,351 | | | | - | | | | 3,210 | | | | 131 | |
Construction & land development* | | | 4,358 | | | | 4,939 | | | | 420 | | | | 6,869 | | | | 65 | |
Residential construction | | | - | | | | - | | | | - | | | | - | | | | - | |
Residential first mortgage | | | 1,319 | | | | 2,664 | | | | - | | | | 1,514 | | | | 86 | |
Residential junior mortgage | | | 438 | | | | 847 | | | | - | | | | 305 | | | | 11 | |
Retail & Other | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 10,845 | | | $ | 17,830 | | | $ | 633 | | | $ | 14,077 | | | $ | 435 | |
| | Originated – June 30, 2014 | |
(in thousands) | | Recorded Investment | | | Unpaid Principal Balance | | | Related Allowance | | | Average Recorded Investment | | | Interest Income Recognized | |
Commercial & industrial* | | $ | 323 | | | $ | 323 | | | $ | 213 | | | $ | 162 | | | $ | 13 | |
Owner-occupied CRE | | | 1,042 | | | | 1,042 | | | | - | | | | 521 | | | | 45 | |
AG production | | | - | | | | - | | | | - | | | | - | | | | - | |
AG real estate | | | - | | | | - | | | | - | | | | - | | | | - | |
CRE investment | | | - | | | | - | | | | - | | | | - | | | | - | |
Construction & land development* | | | 3,879 | | | | 3,879 | | | | 420 | | | | 6,048 | | | | 20 | |
Residential construction | | | - | | | | - | | | | - | | | | - | | | | - | |
Residential first mortgage | | | - | | | | - | | | | - | | | | - | | | | - | |
Residential junior mortgage | | | - | | | | - | | | | - | | | | - | | | | - | |
Retail & Other | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 5,244 | | | $ | 5,244 | | | $ | 633 | | | $ | 6,731 | | | $ | 78 | |
| | | Acquired – June 30, 2014 | |
(in thousands) | | Recorded Investment | | | Unpaid Principal Balance | | | Related Allowance | | | Average Recorded Investment | | | Interest Income Recognized | | | Recorded Investment | | | Unpaid Principal Balance | | | Related Allowance | | | Average Recorded Investment | | | Interest Income Recognized | |
June 30, 2013 | | | | | | | | | | | | | |
With no related allowance: | | | | | | | | | | | | | | | | |
Commercial & industrial | | $ | 4 | | | $ | 5 | | | $ | - | | | $ | 9 | | | $ | - | | | $ | 9 | | | $ | 18 | | | $ | - | | | $ | 5 | | | $ | 1 | |
Agricultural production | | | 22 | | | | 62 | | | | - | | | | 36 | | | | 4 | | |
Owner-occupied CRE | | | 3,546 | | | | 4,993 | | | | - | | | | 3,673 | | | | 72 | | | | 957 | | | | 1,991 | | | | - | | | | 1,022 | | | | 66 | |
Agricultural real estate | | | 611 | | | | 619 | | | | - | | | | 524 | | | | 15 | | |
CRE investment | | | 5,546 | | | | 7,967 | | | | - | | | | 5,558 | | | | 255 | | |
Construction & land development | | | 790 | | | | 1,100 | | | | - | | | | 619 | | | | 49 | | |
Residential construction | | | - | | | | - | | | | - | | | | - | | | | - | | |
Residential first mortgage | | | 3,394 | | | | 4,313 | | | | - | | | | 3,206 | | | | 157 | | |
Residential junior mortgage | | | 257 | | | | 275 | | | | - | | | | 263 | | | | 15 | | |
Retail & Other | | | 137 | | | | 147 | | | | - | | | | 149 | | | | 4 | | |
With a related allowance: | | | | | | | | | | | - | | | | | | | | | | |
Commercial & industrial | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | |
Agricultural production | | | - | | | | - | | | | - | | | | - | | | | - | | |
Owner-occupied CRE | | | - | | | | - | | | | - | | | | - | | | | - | | |
Agricultural real estate | | | - | | | | - | | | | - | | | | - | | | | - | | |
CRE investment | | | - | | | | - | | | | - | | | | - | | | | - | | |
Construction & land development | | | - | | | | - | | | | - | | | | - | | | | - | | |
Residential construction | | | - | | | | - | | | | - | | | | - | | | | - | | |
Residential first mortgage | | | - | | | | - | | | | - | | | | - | | | | - | | |
Residential junior mortgage | | | - | | | | - | | | | - | | | | - | | | | - | | |
Retail & Other | | | - | | | | - | | | | - | | | | - | | | | - | | |
Total: | | | | | | | | | | | | | | | | | | | | | |
Commercial & industrial | | $ | 4 | | | $ | 5 | | | $ | - | | | $ | 9 | | | $ | - | | |
Agricultural production | | | 22 | | | | 62 | | | | - | | | | 36 | | | | 4 | | |
Owner-occupied CRE | | | 3,546 | | | | 4,993 | | | | - | | | | 3,673 | | | | 72 | | |
Agricultural real estate | | | 611 | | | | 619 | | | | - | | | | 524 | | | | 15 | | |
AG production | | | | 27 | | | | 95 | | | | - | | | | 18 | | | | 5 | |
AG real estate | | | | 459 | | | | 560 | | | | - | | | | 451 | | | | 12 | |
CRE investment | | | 5,546 | | | | 7,967 | | | | - | | | | 5,558 | | | | 255 | | | | 1,913 | | | | 5,351 | | | | - | | | | 3,210 | | | | 131 | |
Construction & land development | | | 790 | | | | 1,100 | | | | - | | | | 619 | | | | 49 | | | | 479 | | | | 1,060 | | | | - | | | | 821 | | | | 45 | |
Residential construction | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Residential first mortgage | | | 3,394 | | | | 4,313 | | | | - | | | | 3,206 | | | | 157 | | | | 1,319 | | | | 2,664 | | | | - | | | | 1,514 | | | | 86 | |
Residential junior mortgage | | | 257 | | | | 275 | | | | - | | | | 263 | | | | 15 | | | | 438 | | | | 847 | | | | - | | | | 305 | | | | 11 | |
Retail & Other | | | 137 | | | | 147 | | | | - | | | | 149 | | | | 4 | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 14,307 | | | $ | 19,481 | | | $ | - | | | $ | 14,037 | | | $ | 571 | | | $ | 5,601 | | | $ | 12,586 | | | $ | - | | | $ | 7,346 | | | $ | 357 | |
*One commercial and industrial loan with a balance of $323,000 had a specific reserve of $213,000. One construction and land development loan with a balance of $3.9 million had a specific reserve of $420,000. No other loans had a related allowance at June 30, 2014 and, therefore, the above disclosure was not expanded to include loans with and without a related allowance.
Note 6 – Loans, Allowance for Loan Losses, and Credit Quality, continued
| | | | | | | | | | | | | | | |
| | Total Impaired Loans – December 31, 2013 | |
(in thousands) | | Recorded Investment | | | Unpaid Principal Balance | | | Related Allowance | | | Average Recorded Investment | | | Interest Income Recognized | |
Commercial & industrial | | $ | 1 | | | $ | 140 | | | $ | - | | | $ | 1 | | | $ | 3 | |
Owner-occupied CRE | | | 1,086 | | | | 4,151 | | | | - | | | | 1,268 | | | | 169 | |
AG production | | | 9 | | | | 76 | | | | - | | | | 11 | | | | 5 | |
AG real estate | | | 443 | | | | 558 | | | | - | | | | 443 | | | | 9 | |
CRE investment | | | 4,507 | | | | 9,056 | | | | - | | | | 4,592 | | | | 451 | |
Construction & land development** | | | 9,379 | | | | 10,580 | | | | 3,204 | | | | 9,406 | | | | 178 | |
Residential construction | | | - | | | | - | | | | - | | | | - | | | | - | |
Residential first mortgage | | | 1,708 | | | | 4,177 | | | | - | | | | 1,827 | | | | 215 | |
Residential junior mortgage | | | 172 | | | | 703 | | | | - | | | | 198 | | | | 26 | |
Retail & Other | | | - | | | | 36 | | | | - | | | | - | | | | 3 | |
Total | | $ | 17,305 | | | $ | 29,477 | | | $ | 3,204 | | | $ | 17,746 | | | $ | 1,059 | |
| | | | | | | | | | | | | | | | |
| | | Originated – December 31, 2013 | |
(in thousands) | | Recorded Investment | | | Unpaid Principal Balance | | | Related Allowance | | | Average Recorded Investment | | | Interest Income Recognized | | | Recorded Investment | | | Unpaid Principal Balance | | | Related Allowance | | | Average Recorded Investment | | | Interest Income Recognized | |
December 31, 2012 | | | | | | | | | | | | | |
With no related allowance: | | | | | | | | | | | | | | | | |
Commercial & industrial | | $ | 784 | | | $ | 1,287 | | | $ | - | | | $ | 3,015 | | | $ | 265 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Owner-occupied CRE | | | 1,960 | | | | 1,960 | | | | - | | | | 636 | | | | 95 | | | | - | | | | - | | | | - | | | | - | | | | - | |
AG production | | | | - | | | | - | | | | - | | | | - | | | | - | |
AG real estate | | | | - | | | | - | | | | - | | | | - | | | | - | |
CRE investment | | | - | | | | - | | | | - | | | | 439 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Construction & land development | | | 2,560 | | | | 2,560 | | | | - | | | | 6,333 | | | | - | | |
Construction & land development** | | | | 8,217 | | | | 8,217 | | | | 3,204 | | | | 8,215 | | | | 43 | |
Residential construction | | | - | | | | - | | | | - | | | | 620 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Residential first mortgage | | | 1,580 | | | | 1,696 | | | | - | | | | 1,298 | | | | 88 | | | | - | | | | - | | | | - | | | | - | | | | - | |
Residential junior mortgage | | | - | | | | - | | | | - | | | | 58 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Retail & Other | | | 142 | | | | 150 | | | | - | | | | 120 | | | | 7 | | | | - | | | | - | | | | - | | | | - | | | | - | |
With a related allowance: | | | | | | | | | | | - | | | | | | | | | | |
Commercial & industrial | | $ | - | | | $ | - | | | $ | - | | | $ | 177 | | | $ | - | | |
Owner-occupied CRE | | | - | | | | - | | | | - | | | | 162 | | | | - | | |
CRE investment | | | - | | | | - | | | | - | | | | - | | | | - | | |
Construction & land development. | | | - | | | | - | | | | - | | | | - | | | | - | | |
Residential construction | | | - | | | | - | | | | - | | | | - | | | | - | | |
Residential first mortgage | | | - | | | | - | | | | - | | | | - | | | | - | | |
Residential junior mortgage | | | - | | | | - | | | | - | | | | - | | | | - | | |
Retail & other | | | - | | | | - | | | | - | | | | - | | | | - | | |
Total: | | | | | | | | | | | | | | | | | | | | | |
Commercial & industrial | | $ | 784 | | | $ | 1,287 | | | $ | - | | | $ | 3,192 | | | $ | 265 | | |
Owner-occupied CRE | | | 1,960 | | | | 1,960 | | | | - | | | | 798 | | | | 95 | | |
CRE investment | | | - | | | | - | | | | - | | | | 439 | | | | - | | |
Construction & land development | | | 2,560 | | | | 2,560 | | | | - | | | | 6,333 | | | | - | | |
Residential construction | | | - | | | | - | | | | - | | | | 620 | | | | - | | |
Residential first mortgage | | | 1,580 | | | | 1,696 | | | | - | | | | 1,298 | | | | 88 | | |
Residential junior mortgage | | | - | | | | - | | | | - | | | | 58 | | | | - | | |
Retail & other | | | 142 | | | | 150 | | | | - | | | | 120 | | | | 7 | | |
Total | | $ | 7,026 | | | $ | 7,653 | | | $ | - | | | $ | 12,858 | | | $ | 455 | | | $ | 8,217 | | | $ | 8,217 | | | $ | 3,204 | | | $ | 8,215 | | | $ | 43 | |
| | Acquired – December 31, 2013 | |
(in thousands) | | Recorded Investment | | | Unpaid Principal Balance | | | Related Allowance | | | Average Recorded Investment | | | Interest Income Recognized | |
Commercial & industrial | | $ | 1 | | | $ | 140 | | | $ | - | | | $ | 1 | | | $ | 3 | |
Owner-occupied CRE | | | 1,086 | | | | 4,151 | | | | - | | | | 1,268 | | | | 169 | |
AG production | | | 9 | | | | 76 | | | | - | | | | 11 | | | | 5 | |
AG real estate | | | 443 | | | | 558 | | | | - | | | | 443 | | | | 9 | |
CRE investment | | | 4,507 | | | | 9,056 | | | | - | | | | 4,592 | | | | 451 | |
Construction & land development | | | 1,162 | | | | 2,363 | | | | - | | | | 1,191 | | | | 135 | |
Residential construction | | | - | | | | - | | | | - | | | | - | | | | - | |
Residential first mortgage | | | 1,708 | | | | 4,177 | | | | - | | | | 1,827 | | | | 215 | |
Residential junior mortgage | | | 172 | | | | 703 | | | | - | | | | 198 | | | | 26 | |
Retail & other | | | - | | | | 36 | | | | - | | | | - | | | | 3 | |
Total | | $ | 9,088 | | | $ | 21,260 | | | $ | - | | | $ | 9,531 | | | $ | 1,016 | |
**One loan with a balance of $3.9 million and a reserve of $3.2 million is included within the construction and land development category. No other loans had a related allowance at December 31, 2013 and, therefore, the above disclosure was not expanded to include loans with and without a related allowance.
Note 6 – Loans, Allowance for Loan Losses, and Credit Quality, continued
Troubled Debt Restructurings
At June 30, 2013, and December 31, 2012,2014, there were nofive loans classified or reported as troubled debt restructurings.restructurings totaling $4.3 million. One loan had a premodification balance of $3.9 million and at June 30, 2014, had a balance of $3.9 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 $420,000. This loan is performing but is disclosed as impaired as a result of its classification as a troubled debt restructuring. The remaining four loans had a combined premodification balance of $438,000 and a combined outstanding balance of $407,000 at June 30, 2014. There were no other loans which were modified and classified as troubletroubled debt restructurings at June 30, 2013.2014. There were no loans which were classified as troubled debt restructurings during the previous twelve months that subsequently defaulted during the six months endedas of June 30, 2013.2014. Loans which were considered troubled debt restructurings by Mid-Wisconsin prior to the acquisition arewere not required to be classified as troubled debt restructurings in the Company’s financial statements unless or 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- Other Real Estate Owned (“OREO”)Notes Payable
A summary of OREO, net of valuation allowances, for the periods indicated is as follows:
| | | | | | | | | | | | | | | | |
| | Three Months ended | | | Six Months ended | |
(in thousands) | | June 30, 2013 | | | June 30, 2012 | | | June 30, 2013 | | | June 30, 2012 | |
Balance at beginning of period | | $ | 2,038 | | | $ | 260 | | | $ | 193 | | | $ | 641 | |
Transfer of loans at net realizable value to OREO | | | 166 | | | | 744 | | | | 2,116 | | | | 1,123 | |
Sale proceeds | | | (884 | ) | | | (120 | ) | | | (993 | ) | | | (820 | ) |
Net gain (loss) from sale of OREO | | | 284 | | | | 6 | | | | 288 | | | | (54 | ) |
Acquired balance, net | | | 1,756 | | | | - | | | | 1,756 | | | | - | |
Balance at end of period | | $ | 3,360 | | | $ | 890 | | | $ | 3,360 | | | $ | 890 | |
Note 8- Borrowings
At June 30, 2013 the Company had short-term borrowings maturing within twelve months consisting of Federal Home Loan Bank (“FHLB”) advances of $20.0 million and short term repurchase agreements of approximately $13.2 million.
The Company had the following long term notes payable:
(in thousands) | | June 30, 2013 | | | December 31, 2012 | |
Joint Venture note | | $ | 10,040 | | | $ | 10,155 | |
FHLB advances | | | 15,000 | | | | 25,000 | |
Notes Payable | | $ | 25,040 | | | $ | 35,155 | |
(in thousands) | | June 30, 2014 | | | December 31, 2013 | |
Joint venture note | | $ | 9,799 | | | $ | 9,922 | |
Federal Home Loan Bank (“FHLB”) advances | | | 17,500 | | | | 22,500 | |
Notes payable | | $ | 27,299 | | | $ | 32,422 | |
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.
At June 30, 2013 and December 31, 2012, theThe Company’s fixed-rate FHLB advances totaled $15 million and $25 million, respectively,are all fixed rate, require interest-only monthly payments, and have maturities through August 2016.February 2018. The weighted average rate of FHLB advances was 2.45% and 2.87%1.36% at June 30, 20132014 and 1.85% at December 31, 2012, respectively.2013. 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 $80.3$91.5 million and $54.2$85.9 million at June 30, 20132014 and December 31, 2012,2013, respectively.
The following table shows the maturity schedule of the notes payable as of June 30, 2013:2014:
Maturing in | | (in thousands) | |
2014 | | $ | 6,125 | |
2015 | | | 5,762 | |
2016 | | | 14,412 | |
2017 | | | - | |
2018 | | | 1,000 | |
| | $ | 27,299 | |
Years Ending December 31, | | (in thousands) | |
2013 | | $ | 118 | |
2014 | | | 10,248 | |
2015 | | | 262 | |
2016 | | | 14,412 | |
| | $ | 25,040 | |
Note 98 - Junior Subordinated Debentures
At June 30, 2013 theThe Company’s carrying value of junior subordinated debentures was $12.0 million.$12.2 million at June 30, 2014 and $12.1 million at December 31, 2013. 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 Mid-Wisconsin acquisition, 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. TheAt June 30, 2014, the carrying value of these junior debentures was $6.0 million and the $5.7 million carrying value of related trust preferred securities qualifies as Tier 1 capital. Interest on these debentures is current.
Note 109 - Fair Value Measurements
The relevantAs provided for by accounting standard (codified in ASC Topic 820, “Fair Value Measurements and Disclosures”) definesstandards, the Company records and/or discloses financial instruments on a fair value establishes a framework for measuringbasis. These financial assets and financial liabilities are measured at fair value and expands disclosures about fair value measurements. This standard applies under other accounting pronouncements that require or permit fair value measurements; accordingly, the standard amends numerous accounting pronouncements but does not require any new fair value measurements of reported balances. The standard emphasizes that 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, isthree levels, based on exit price versus entry price, should includethe markets in which the assets and liabilities are traded and the observability of the assumptions about risk such as nonperformance risk in liability fair values, and is a market-based measurement versus an entity-specific measurement.
The fair value hierarchy prioritizes inputs used to measuredetermine fair value into three broad levels.value. These levels are: Level 1 inputs are- quoted market prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date.date; Level 2 inputs are- inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.indirectly; Level 3 inputs are– 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.
The following table presents items measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012, aggregated by the level in the fair value hierarchy within which those measurements fall.
Assets Measured at Fair Value on a Recurring Basis | | | | | | | | | |
| | June 30, 2013 | |
| | | | | Fair Value Measurements Using | |
(in thousands) | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
U.S. government sponsored enterprises | | $ | 1,001 | | | $ | - | | | $ | 1,001 | | | $ | - | |
State, county and municipals | | | 52,340 | | | | | | | | 51,965 | | | | 375 | |
Mortgage-backed securities | | | 73,263 | | | | - | | | | 73,263 | | | | - | |
Corporate debt securities | | | 220 | | | | - | | | | - | | | | 220 | |
Equity securities | | | 3,164 | | | | 3,164 | | | | - | | | | - | |
Securities available for sale, June 30, 2013 | | $ | 129,988 | | | $ | 3,164 | | | $ | 126,229 | | | $ | 595 | |
| | December 31, 2012 | |
| | | | | Fair Value Measurements Using | |
(in thousands) | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
State, county and municipals | | $ | 32,687 | | | $ | - | | | $ | 32,312 | | | $ | 375 | |
Mortgage-backed securities | | | 20,668 | | | | - | | | | 20,668 | | | | - | |
Equity securities | | | 2,546 | | | | 2,546 | | | | - | | | | - | |
Securities available for sale, December 31, 2012 | | $ | 55,901 | | | $ | 2,546 | | | $ | 52,980 | | | $ | 375 | |
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. Where quoted market prices on securities exchanges are available, the investment is classified in Level 1Disclosure of the fair value hierarchy. Level 1 investments primarily include exchange-traded equity securities availableof financial instruments, whether recognized or not recognized in the balance sheet, is required for sale. If quoted market prices are not available,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 is generally determined using pricing models (such as matrix pricing which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities), quoted market prices of securities with similar characteristic (adjusted for differences between the quoted instruments and the instrument being valued), or discounted cash flows, and are classified in Level 2 ofconsolidated balance sheets, the fair value hierarchy. Finally,disclosure requirements also apply.
Fair value (i.e. the price that would be received in certain cases where therean orderly transaction that is limited activitynot a forced liquidation or less transparency around inputs todistressed sale at the estimatedmeasurement date), among other things, is based on exit price versus entry price, should include assumptions about risk such as nonperformance risk in liability 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)values, and corporate debt securities. At June 30, 2013 and December 31, 2012, 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.is a market-based measurement versus an entity-specific measurement.
Note 109 - 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. There were no changes in Level 3 values to report during the first six months of 2014.
| | | | | 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 | | $ | 1,537 | | | $ | - | | | $ | 1,537 | | | $ | - | |
State, county and municipals | | | 77,067 | | | | - | | | | 76,190 | | | | 877 | |
Mortgage-backed securities | | | 62,928 | | | | - | | | | 62,928 | | | | - | |
Corporate debt securities | | | 220 | | | | - | | | | - | | | | 220 | |
Equity securities | | | 1,903 | | | | 1,903 | | | | - | | | | - | |
Securities AFS, June 30, 2014 | | $ | 143,655 | | | $ | 1,903 | | | $ | 140,655 | | | $ | 1,097 | |
| | | | | | | | | | | | | | | | |
(in thousands) | | | | | | | | | | | | | | | | |
U.S. government sponsored enterprises | | $ | 2,057 | | | $ | - | | | $ | 2,057 | | | $ | - | |
State, county and municipals | | | 55,039 | | | | - | | | | 54,162 | | | | 877 | |
Mortgage-backed securities | | | 67,879 | | | | - | | | | 67,879 | | | | - | |
Corporate debt securities | | | 220 | | | | - | | | | - | | | | 220 | |
Equity securities | | | 2,320 | | | | 2,320 | | | | - | | | | - | |
Securities AFS, December 31, 2013 | | $ | 127,515 | | | $ | 2,320 | | | $ | 124,098 | | | $ | 1,097 | |
The following is a description of the valuation methodologies used by the Company for the items noted in the tables above. 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. At June 30, 2014 and December 31, 2013, 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 collateral-dependent impaired loans and other real estate owned (“OREO”) measured at fair value on a nonrecurring basis as of June 30, 2013 and December 31, 2012, aggregated byfor the level in the fair value hierarchy within which those measurements fall.periods presented.
Assets Measured at Fair Value on a Nonrecurring Basis | |
| | June 30, 2013 | |
| | | | | Fair Value Measurements Using | |
(in thousands) | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
Collateral-dependent impaired loans | | $ | 14,307 | | | $ | - | | | $ | - | | | $ | 14,307 | |
Other real estate owned | | | 3,360 | | | | - | | | | - | | | | 3,360 | |
Measured at Fair Value on a Nonrecurring Basis | |
| | | | | Fair Value Measurements Using | |
(in thousands) | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
June 30, 2014: | | | | | | | | | | | | |
Impaired loans | | $ | 10,212 | | | $ | - | | | $ | - | | | $ | 10,212 | |
OREO | | | 1,502 | | | | - | | | | - | | | | 1,502 | |
December 31, 2013: | | | | | | | | | | | | | | | | |
Impaired loans | | $ | 14,101 | | | $ | - | | | $ | - | | | $ | 14,101 | |
OREO | | | 1,987 | | | | - | | | | - | | | | 1,987 | |
| | December 31, 2012 | |
| | | | | Fair Value Measurements Using | |
(in thousands) | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
Collateral-dependent impaired loans | | $ | 7,026 | | | $ | - | | | $ | - | | | $ | 7,026 | |
Other real estate owned | | | 193 | | | | - | | | | - | | | | 193 | |
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 other real estate owned,OREO, the fair value is based upon the estimated fair value of the underlying collateral adjusted for the expected costs to sell.
Summarized below areNote 9 - Fair Value Measurements, continued
The Company is required under accounting guidance to report the fair value of all financial instruments in the consolidated balance sheets, including those financial instruments carried at cost. The carrying amounts and estimated fair values of the Company’s financial instruments at June 30, 20132014 and December 31, 2012, along with the methods and assumptions used by the Company in estimating the fair value disclosures.2013 are shown below.
| | June 30, 2014 | |
(in thousands) | | Carrying Amount | | | Estimated Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | |
Financial assets: | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 85,588 | | | $ | 85,588 | | | $ | 85,588 | | | $ | - | | | $ | - | |
Certificates of deposit in other banks | | | 7,144 | | | | 7,172 | | | | - | | | | 7,172 | | | | - | |
Securities AFS | | | 143,655 | | | | 143,655 | | | | 1,903 | | | | 140,655 | | | | 1,097 | |
Other investments | | | 8,056 | | | | 8,056 | | | | - | | | | 5,915 | | | | 2,141 | |
Loans held for sale | | | 3,589 | | | | 3,589 | | | | 3,589 | | | | - | | | | - | |
Loans, net | | | 850,444 | | | | 854,732 | | | | - | | | | - | | | | 854,732 | |
Bank owned life insurance | | | 26,980 | | | | 26,980 | | | | 26,980 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | |
Deposits | | $ | 1,011,121 | | | $ | 1,013,407 | | | $ | - | | | $ | - | | | $ | 1,013,407 | |
Short-term borrowings | | | 3,399 | | | | 3,399 | | | | 3,399 | | | | - | | | | - | |
Notes payable | | | 27,299 | | | | 30,316 | | | | - | | | | 30,316 | | | | - | |
Junior subordinated debentures | | | 12,228 | | | | 12,215 | | | | - | | | | - | | | | 12,215 | |
| | December 31, 2013 | |
(in thousands) | | Carrying Amount | | | Estimated Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | |
Financial assets: | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 146,978 | | | $ | 146,978 | | | $ | 146,978 | | | $ | - | | | $ | - | |
Certificates of deposit in other banks | | | 1,960 | | | | 1,983 | | | | - | | | | 1,983 | | | | - | |
Securities AFS | | | 127,515 | | | | 127,515 | | | | 2,320 | | | | 124,098 | | | | 1,097 | |
Other investments | | | 7,982 | | | | 7,982 | | | | - | | | | 5,841 | | | | 2,141 | |
Loans held for sale | | | 1,486 | | | | 1,486 | | | | 1,486 | | | | - | | | | - | |
Loans, net | | | 838,126 | | | | 842,758 | | | | - | | | | - | | | | 842,758 | |
Bank owned life insurance | | | 23,796 | | | | 23,796 | | | | 23,796 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | |
Deposits | | $ | 1,034,834 | | | $ | 1,036,564 | | | $ | - | | | $ | - | | | $ | 1,036,564 | |
Short-term borrowings | | | 7,116 | | | | 7,116 | | | | 7,116 | | | | - | | | | - | |
Notes payable | | | 32,422 | | | | 32,548 | | | | - | | | | 32,548 | | | | - | |
Junior subordinated debentures | | | 12,128 | | | | 12,704 | | | | - | | | | - | | | | 12,704 | |
| | June 30, 2013 | |
| | Carrying | | | Estimated | | | Fair Value Measurements Using | |
(in thousands) | | Amount | | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | |
| | | | | | | | | | | | | | | |
Financial assets: | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 36,146 | | | $ | 36,146 | | | $ | 36,146 | | | $ | - | | | $ | - | |
Certificates of deposit in other banks | | | 1,960 | | | | 2,005 | | | | - | | | | - | | | | 2,005 | |
Securities available for sale | | | 129,988 | | | | 129,988 | | | | 3,164 | | | | 126,229 | | | | 595 | |
Other investments | | | 7,531 | | | | 7,531 | | | | - | | | | 4,864 | | | | 2,667 | |
Loans held for sale | | | 3,142 | | | | 3,142 | | | | 3,142 | | | | - | | | | - | |
Loans, net | | | 832,888 | | | | 819,981 | | | | - | | | | - | | | | 819,981 | |
Bank owned life insurance | | | 23,352 | | | | 23,352 | | | | 23,352 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | |
Deposits | | $ | 908,083 | | | $ | 910,248 | | | $ | - | | | $ | - | | | $ | 910,248 | |
Short-term borrowings | | | 33,231 | | | | 33,231 | | | | 33,231 | | | | - | | | | - | |
Notes payable | | | 25,040 | | | | 25,268 | | | | - | | | | 25,268 | | | | - | |
Junior subordinated debentures | | | 12,029 | | | | 11,617 | | | | - | | | | - | | | | 11,617 | |
Note 10 - Fair Value Measurements, continued
| | December 31, 2012 | |
| | Carrying | | | Estimated | | | Fair Value Measurements Using | |
(in thousands) | | Amount | | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | |
Financial assets: | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 82,003 | | | $ | 82,003 | | | $ | 82,003 | | | $ | - | | | $ | - | |
Securities available for sale | | | 55,901 | | | | 55,901 | | | | 2,546 | | | | 52,980 | | | | 375 | |
Other investments | | | 5,221 | | | | 5,221 | | | | - | | | | 3,243 | | | | 1,978 | |
Loans held for sale | | | 7,323 | | | | 7,323 | | | | 7,323 | | | | - | | | | - | |
Loans, net | | | 545,481 | | | | 540,887 | | | | - | | | | - | | | | 540,887 | |
Bank owned life insurance | | | 18,697 | | | | 18,697 | | | | 18,697 | | | | - | | | | - | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | |
Deposits | | $ | 616,093 | | | $ | 617,677 | | | $ | - | | | $ | - | | | $ | 617,677 | |
Short-term borrowings | | | 4,035 | | | | 4,035 | | | | 4,035 | | | | - | | | | - | |
Notes payable | | | 35,155 | | | | 36,017 | | | | - | | | | 36,017 | | | | - | |
Junior subordinated debentures | | | 6,186 | | | | 6,186 | | | | - | | | | - | | | | 6,186 | |
TheNot all the financial instruments listed in the table above are subject to the disclosure provisions of ASC 820, as certain assets and liabilities result in their carrying value approximating fair value. These include cash and cash equivalents, other investments, loans held for sale, BOLI, nonmaturing deposits, and short-term borrowings. For those financial instruments not previously disclosed the following is a description of the valuationevaluation methodologies used for assets and liabilities which are either recorded or disclosed at fair value.used.
Cash and cash equivalents and certificatesCertificates of depositdeposits in other banksbanks:: For these short-term Fair values are estimated using discounted cash flow analysis based on current interest rates being offered by instruments the carrying amount iswith similar terms and represents a reasonable estimate of fair value.Level 2 measurement.
Securities available for sale and other investmentsAFS: Fair values for securities are based on quoted market prices on securities exchanges, when available, which is considered a Level 1 measurement. If quoted market prices are not available, fair value is generally determined using pricing models widely used in the industry, quoted market prices of securities with similar characteristics, or discounted cash flows, which is considered a Level 2 measurement, and Level 3 was deemed appropriate for auction rate securities (for which there has been no liquid market since 2008) and corporate debt securities which include trust preferred security investments.instruments. The corporate debt securities were acquired in the Mid-Wisconsin acquisition and valued based on a discounted cash flowsflow analysis and the underlying credit quality of the underlying issuer. The fair value approximates the acquired cost at June 30, 2013.acquisition. For other investments, the carrying amount of Federal Reserve Bank, Bankers Bank, Farmer Mac, and FHLB stock is a reasonably accepted fair value estimate given their restricted nature. Fair value is the redeemable (carrying) value based on the redemption provisions of the instruments which is considered a Level 2 measurement. The carrying amount of the remaining other investments (particularly common stocks of companies or other banks that are not publicly traded) approximates their fair value, determined primarily by analysis of company financial statements and recent capital issuances of the respective companies or banks, if any, and represents a Level 3 measurement.
Loans held for sale: The carrying amount of loans held for sale approximates the fair value, given the short-term nature of the loans between origination and sale, which is considered a Level 1 measurement.Note 9 - Fair Value Measurements, continued
Loans, net: For variable-rate loans that reprice frequently and with no significant change in credit risk or other optionality, fair values are based on carrying values. Fair values for all other loans are estimated by discounting contractual cash flows using estimated market discount rates, which reflect the credit and interest rate risk inherent in the loan. Collateral-dependent impaired loans are included in loans, net. The fair value of loans is considered to be a Level 3 measurement due to internally developed discounted cash flow measurements.
Bank owned life insurance: The carrying value of these assets approximates fair value, which is considered a Level 1 measurement.
Deposits: The fair value of deposits with no stated maturity (such as demand deposits, savings, interest and non-interest checking, and money market accounts) is, by definition, equal to the amount payable on demand at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market place on certificates within the market place.of similar remaining maturities. Use of internal discounted cash flows provides a Level 3 fair value measurement.
Short-term borrowings: Due to the short-term nature of these instruments, the carrying amount is a reasonable estimate of fair value.
Note 10 - Fair Value Measurements, continued
Notes payable: The fair value of the Federal Home Loan Bank advances is obtained from the Federal Home Loan Bank which uses a discounted cash flow analysis based on current market rates of similar maturity debt securities and represents a Level 2 measurement. The fair values of remaining notes payable are estimated using discounted cash flow analysis based on current interest rates being offered by instruments with similar terms and credit quality which represents a Level 2 measurement.
Junior subordinated debentures: The fair values of junior subordinated debentures are estimated based on an evaluation of current interest rates being offered by instruments with similar terms and credit quality. Since the market for these instruments is limited, the internal evaluation represents a Level 3 measurement.
Off-balance-sheet instruments: The estimated fair value of letters of credit at June 30, 20132014 and December 31, 20122013 was insignificant. Loan commitments on which the committed interest rate is less than the current market rate are also insignificant at June 30, 20132014 and December 31, 2012.2013.
Limitations: Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Fair value estimates may not be realizable in an immediate settlement of the instrument. In some instances, there are no quoted market prices for the Company’s various financial instruments, in which case fair values may be based on estimates using present value or other valuation techniques, or based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of the financial instruments, or other factors. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. Subsequent changes in assumptions could significantly affect the estimates.
Note 11 - Subsequent Event
On August 9, 2013, Nicolet National Bank (the “Bank”) announced that it entered into an agreement with the Federal Deposit Insurance Corporation (“FDIC”) to purchase certain assets and assume certain liabilities of a one-branch bank in Wausau, Wisconsin, effective immediately. Subject to final settlements, the Bank acquired approximately $29.9 million of the failed bank assets.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Nicolet Bankshares, Inc. is a bank holding company headquartered in Green Bay, Wisconsin, providing a diversified range of traditional banking and wealth management services to individuals and businesses in its market area through the 2223 branch offices of its banking subsidiary, Nicolet National Bank, in northeastern and central Wisconsin and Menominee, Michigan.
The primary revenue sources of Nicolet Bankshares, Inc. and its subsidiaries (“Nicolet” or the “Company”) are net interest income, representing interest income from loans and other interest earning assets such as investments, less interest expense on deposits and other borrowings, and noninterest income, including, among others, trust fees, secondary mortgage income and other fees or revenue from financial services provided to customers or ancillary to loans and deposits. Business volumes and pricing drive revenue potential and tend to be influenced by overall economic factors, including market interest rates, business spending, consumer confidence, economic growth and competitive conditions within the marketplace.
At June 30, 2013,2014, total assets were $1.1$1.2 billion and net income for the six months ended June 30, 2014 was $4.8 million. When comparing 2014 results to prior year periods, the timing of Nicolet’s 2013 was $12.2 million. Financialacquisitions impacts the 2013 financial results and comparisons to 2014. These acquisitions (collectively referred to as the “2013 acquisitions”) consisted of June 30, 2013 and for the three and six months ended June 30, 2013, are largely impacted by the Company’spredominantly stock-for-stock acquisition of Mid-Wisconsin Financial Services, Inc. (“Mid-Wisconsin”), which was consummated on April 26, 2013, and the FDIC-assisted transaction to acquire Bank of Wausau, which was effective August 9, 2013. The eleven banking branches of Mid-Wisconsin opened as Nicolet National Bank on April 29, 2013. The transaction wastransactions were accounted for under the acquisition method of accounting, and thus, the results of operations of Mid-Wisconsinthe acquired entities prior to thetheir respective consummation datedates were not included in the accompanying consolidated financial statements. The eleven banking branches of Mid-Wisconsin and the one branch of Bank of Wausau opened as Nicolet National Bank branches on April 29 and August 10, 2013, respectively. At acquisition, the Mid-Wisconsin transaction increased total assets by $435 million, total liabilities by $415 million, common equity by approximately $9.3 million, and resulted in a bargain purchase gain of $10.4 million during the second quarter of 2013. In the third quarter of 2013, a $0.9 million negative adjustment was recorded to that bargain purchase gain relative to a change in estimate of a now settled legal action. The 2013 income statement also includesincluded approximately $1.7 million (approximately $0.1 million and $1.6 million in the first and second quarters, respectively, of 2013) of pre-tax, non-recurring merger related expenses tied to preparation for, consummation of and integration of Mid-Wisconsin into the Company. Additionally,On a smaller scale, the Bank of Wausau transaction increased total assets by $47 million at acquisition (of which $18 million of cash was used during the month of September 2013 to immediately redeem rate-sensitive certificates of deposit), and resulted in a pre-tax bargain purchase gain of $2.4 million and approximately $0.2 million of pre-tax, non-recurring merger related expenses recorded in the third quarter of 2013. Finally, acquisition accounting requires assets purchased and liabilities assumed to be recorded at their respective fair values at the date of acquisition, which impacted various ratios, but most notably asset quality measures (as loans are recorded directly at their estimated fair value and no addition to the allowance for loan losses is recorded at consummation) and taxes. Therefore, the 2014 results include both acquisitions fully, while the six months ended June 30, 2013, includes approximately two months of Mid-Wisconsin and no results of Bank of Wausau. For additional details, see “Note 2 – Acquisition”, NoteAcquisitions” and “Note 6 – Loans, Allowance for Loan Losses, and Credit Quality”, in the Notes to the Unaudited Consolidated Financial Statements, and Income Taxes“--Income Taxes” within this document.
On November 28, 2012, Nicolet entered into a merger agreement with Mid-Wisconsin Financial Services, Inc. (“Mid-Wisconsin”), and initially filed a Registration Statement on Form S-4 (Regis. No. 333-186401) (the “Registration Statement”) with the Securities and Exchange Commission under the provisions of the Securities Act. On March 26, 2013, the Registration Statement became effective and Nicolet became a public reporting company under Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Forward-Looking Statements
Statements made in this document and in documents that are incorporated by reference which are not purely historical are forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, including any statements regarding descriptions of management’s plans, objectives, or goals for future operations, products or services, and forecasts of its revenues, earnings, or other measures of performance. Forward-looking statements are based on current management expectations and, by their nature, are subject to risks and uncertainties. These statements generally may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “should,” “will,” “intend,” or similar expressions. Stockholders should note that many factors, some of which are discussed elsewhere in this document, could affect the future financial results of Nicolet and could cause those results to differ materially from those expressed in forward-looking statements contained in this document. These factors, many of which are beyond Nicolet’s control, include, but are not necessarily limited to the following:
| ● | operating, legal and regulatory risks, including the effects of the Dodd-Frank Wall Street Reform and Consumer Protection Act and regulations promulgated thereunder, as well as the rules by the Federal bank regulatory agencies to implement the Basel III capital accord; |
| ● | economic, political and competitive forces affecting Nicolet’s banking and wealth management businesses; |
| ● | changes in interest rates, monetary policy and general economic conditions, which may impact Nicolet’s net interest income; |
| ● | potential difficulties in integrating the operations of Nicolet and Mid-Wisconsin; with those of acquired entities, if any; |
| ● | compliance or operational risks related to new products, services, ventures, or lines of business, if any, that Nicolet may pursue or implement; and |
| ● | the risk that Nicolet’s analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful; andunsuccessful. |
● |
other factors discussed under “Risk Factors” included in the Joint Proxy Statement-Prospectus contained in the Registration Statement.
|
These factors should be considered in evaluating the forward-looking statements, and you should not place undue reliance on such statements. Nicolet specifically disclaims any obligation to update factors or to publicly announce the results of revisions to any of the forward-looking statements or comments included herein to reflect future events or developments.
Critical Accounting Policies
The consolidated financial statements of Nicolet Bankshares, Inc. and its subsidiaries are prepared in conformity with U.S. GAAP and follow general practices within the industry in which it operates. This preparation requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the consolidated financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the consolidated financial statements. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates that are particularly susceptible to significant change include the valuation of loans acquired in the Mid-Wisconsin transaction,2013 acquisitions, as well as the determination of the allowance for loan losses and income taxes and, therefore, are critical accounting policies.
Business Combinations and Valuation of Loans Acquired in Business CombinationCombinations
We account for acquisitions under FASB ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. Assets acquired and liabilities assumed in a business combination are recorded at estimated fair value on their purchase date. As provided for under GAAP, management has up to 12 months following the date of the acquisition to finalize the fair values of acquired assets and assumed liabilities, where it was not possible to estimate the acquisition date fair value upon consummation. Once management has finalized the fair values of acquired assets and assumed liabilities within this 12-month period, management considers such values to be the Day 1 Fair Values. This was completed for the Mid-Wisconsin transaction during the second quarter of 2014 and will be completed for the Bank of Wausau transaction in the third quarter of 2014.
In particular, the valuation of acquired loans involves significant estimates, assumptions and judgment based on information available as of the acquisition date. Substantially all loans acquired in the transaction are evaluated either individually or in pools of loans with similar characteristics; and since the estimated fair value of acquired loans includes a credit consideration, no carryover of any previously recorded allowance for loan losses is recorded at acquisition. A number of factors are considered in determining the estimated fair value of purchased loans including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, contractual interest rates compared to market interest rates, and net present value of cash flows expected to be received.
In determining the Day 1 Fair Values of acquired loans, management calculates a non-accretable difference (the credit mark component of the acquired loans) and an accretable difference (the market rate or yield component of the acquired loans). The non-accretable difference is the difference between the undiscounted contractually required payments and the undiscounted cash flows expected to be collected in accordance with management’s determination of the Day 1 Fair Values. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows will result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to the accretable, yield, and nonaccretable differencedifferences which would have a positive impact on interest income.
The accretable yield on acquired loans is the difference between the expected cash flows and the initial investment in the acquired loans. The accretable yield is recognized into earnings using the effective yield method over the term of the loans. Management separately monitors the acquired loan portfolio and periodically reviews loans contained within this portfolio against the factors and assumptions used in determining the Day 1 Fair Values.
Allowance for Loan Losses
The allowance for loan losses (the “ALLL”)ALLL is a reserve for estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the loan portfolio. Actual credit losses, net of recoveries, are deducted from the ALLL. Loans are charged off when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the ALLL. A provision for loan losses, which is a charge against earnings, is recorded to bring the ALLL to a level that, in management’s judgment, is adequate to absorb probable losses in the loan portfolio. Management’s evaluation process used to determine the appropriateness of the ALLL is subject to the use of estimates, assumptions, and judgment. The evaluation process involves gathering and interpreting many qualitative and quantitative factors which could affect probable credit losses. Because interpretation and analysis involves judgment, current economic or business conditions can change, and future events are inherently difficult to predict, the anticipated amount of estimated loan losses and therefore the appropriateness of the ALLL could change significantly.
The allocation methodology applied by Nicolet is designed to assess the appropriateness of the ALLL and 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 a component primarily based on other qualitative factors. The methodology includes evaluation and consideration of several factors, such as, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and nonaccrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or circumstances underlying the collectability of loans. Because each of the criteria used is subject to change, the allocation of the ALLL is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular loan category. The total allowance is available to absorb losses from any segment of the loan portfolio. Management believes the ALLL is appropriate.appropriate at June 30, 2014. The allowance analysis is reviewed by the board of directors on a quarterly basis in compliance with regulatory requirements. In addition, various regulatory agencies periodically review the ALLL. These agencies may require Nicolet to make additions to the ALLL based on their judgments of collectability based on information available to them at the time of their examination.
Income taxes
The assessment of income tax assets and liabilities involves the use of estimates, assumptions, interpretation, and judgment concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the consolidated results of operations and reported earnings.
Nicolet files a consolidated federal income tax return and a combined state income tax return (both of which include Nicolet and its wholly owned subsidiaries). Accordingly, amounts equal to tax benefits of those companies having taxable federal losses or credits are reimbursed by the companies that incur federal tax liabilities. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax law rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through provision for income tax expense. Valuation allowances are established when it is more likely than not that a portion of the full amount of the deferred tax asset will not be realized. In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. Nicolet may also recognize a liability for unrecognized tax benefits from uncertain tax positions. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the financial statements. Penalties related to unrecognized tax benefits are classified as income tax expense.
The following discussion is Nicolet management’s analysis of the consolidated financial condition as of June 30, 20132014 and December 31, 20122013 and results of operations for the three-monththree and six-month periods ended June 30, 20132014 and 2012.2013. It should be read in conjunction with Nicolet’s audited consolidated financial statements as of December 31, 20122013 and 2011,2012, and for the threetwo years ended December 31, 2012,2013, included in the Registration Statement.Nicolet’s Annual Report on Form 10-K.
Performance Summary
Nicolet reported net income of $12.2$4.8 million for the six months ended June 30, 2013,2014, compared to $1.2$12.2 million for the comparable periodfirst six months of 2012. Net2013. After $122,000 of preferred stock dividends, first half 2014 net income available to common shareholders for the six monthswas $4.6 million, or $1.08 per diluted common share. Comparatively, after $610,000 of preferred stock dividends, first half 2013 net income available to common shareholders was $11.6 million, or $3.11 per diluted common share,share. Beginning in the fourth quarter of 2013, given growth in qualifying small business loans, Nicolet qualified for a 1% annual dividend rate on its preferred stock issued to the U.S. Treasury related to its participation in the Small Business Lending Fund (“SBLF”), compared to net income available to common shareholders of $0.5 million, or $0.16 per diluted common share, forthe previous 5% annual rate, resulting in the $488,000 reduction in preferred stock dividends between the first six months of 2012.2014 and 2013. Income statement results and average balances for the first half 2014 fully include the 2013 includeacquisitions, while, as noted previously, the first half of 2013 included approximately two months of the Mid-Wisconsin activity (as resultsacquisition only, as well as the related $10.4 million of operations of Mid-Wisconsin prior to consummation are appropriately not included in the accompanying consolidated financial statements). Results from the first half 2013 included a bargain purchase gain of $10.4 million and pre-tax non-recurring expenses of approximately $1.7 million specifically related to the consummation and integration of the Mid-Wisconsin transaction.million.
● | Net interest income was $20.5 million for the first half of 2014, an increase of $5.9 million or 40% over $14.6 million for the first six monthshalf of 2013, an increase of $4.2 million or 40% over the first six months of 2012.2013. The improvement was predominantly volume related, given the timing of the acquisition,2013 acquisitions, but was also favorably impacted by an increase in interest rate spread on higher average earning assets. On a tax-equivalent basis, the net interest margin for the first half 2013of 2014 was 3.74%3.79%, up 205 basis points (“bps”) from 3.54%3.74% for first half 2012.the comparable 2013 period. The cost of interest-bearing liabilities was 0.91%0.79%, 4812 bps lower than the first half 2012,of 2013, while the average yield on earning assets was 4.49%4.45%, 204 bps lower than first half 2012,2013, resulting in a 28an 8 bps improvement in the interest rate spread.spread between the comparable six-month periods. |
● | Loans were $860 million at June 30, 2014, up $13 million or 2% over $847 million at December 31, 2013, and up $19 million or 2% over $841 million at June 30, 2013, up $288 million or 52% over $553 million at December 31, 2012, with $2722013. Removing the $284 million of loans added at acquisition (i.e. removing $272 million from Mid-Wisconsin at acquisition.from both June 30, 2014 and 2013, and $12 million from Bank of Wausau from June 30, 2014), loans grew organically 1% between the first six-month periods. Between the comparative six monthsix-month periods, average loans weregrew 31%, at $851 million in 2014 yielding 5.31%, compared to $651 million in 2013 yielding 5.09%, compared to $495 million in 2012 yielding 5.24%. |
● | Total deposits were $908 million$1.01 billion at June 30, 2013, up $2922014, down $24 million or 47% over $616 million2% from $1.03 billion at December 31, 2012, with $346 million of deposits added from Mid-Wisconsin at acquisition, offset in part by2013 (following a customary pattern of deposit decline historically following year ends through the first six-month periods), and up $103 million or 11% over $908 million in total deposits a year ago. Removing the $370 million of deposits added at acquisition (i.e. removing $346 million from Mid-Wisconsin from both June 30, 2014 and 2013, and $24 million net deposits acquired from Bank of Wausau given the quick redemption of $18 million of rate-sensitive certificates of deposit from June 30, 2014), deposits grew organically 14% between the first six-month periods. For perspective,Between the comparative six-month periods, average total deposits grew $368 million since June 30, 2012, $22 million more than the acquired balances. Average total47%, at $1.02 billion in 2014, with interest-bearing deposits for first half 2013 werecosting 0.62%, compared to $699 million compared to $523 million for first half 2012, up 34%in 2013, with interest-bearing deposits costing 0.69%. |
● | WhileAsset quality measures were strong at June 30, 2014, though were impacted initially by the merger, asset quality measures remained strong, with nonperforming2013 acquisitions. Nonperforming assets were $8.7 million at June 30, 2014, down 29% from year end 2013 and down 51% from a year ago. Nonperforming assets represented 0.74%, 1.02% and 1.62% of total assets at June 30, 2014, December 31, 2013, compared to 0.97% at year end 2012.and June 30, 2013, respectively. The allowance for loan losses was $7.7$9.6 million or 0.91%1.12% of loans at June 30, 20132014 (impacted by the merger2013 acquisitions adding no allowance for loan losses while adding $272$284 million to loans at acquisition), compared to $7.1$9.2 million or 1.29%1.09%, respectively at December 31, 2012.year end 2013, and $7.7 million or 0.91%, respectively at June 30, 2013. The provision for loan losses was $2.0$1.4 million with net charge offs of $1.4$0.9 million for the first half of 2013,2014, versus provision of $2.4$2.0 million with $2.2$1.4 million of net charge offs for the first half of 2012.comparable 2013 period. |
● | Noninterest income was $16.5$6.6 million for the first six months of 2013, up $11.22014 (including $0.3 million overnet gain on sales or writedowns of assets) compared to $16.5 million for the first six monthshalf of 2012, with2013 (including $10.4 million of this variance attributable to the bargain purchase gain recorded in conjunction with the merger. With the exception of investment advisory fees and net gainsgain on salessale of assets, all other categories werecombined). Removing these net gains, noninterest income was up $0.3 million or 5% between the six-month periods. Notable increases over prior year, largely due to increased business from the prior year, includingexpanded size of the Company, were in service charges (up $0.2$0.3 million or 33%38%), trust fee income (up $0.4$0.3 million or 29%19%), and mortgagebrokerage fee income (up $0.2$0.1 million or 13%50%) comparedand other income (up $0.3 million or 61%, mostly attributable to income from higher debit card volumes). Mortgage income was down $0.9 million or 59% between the first six monthssix-month periods, resulting from a significantly more robust mortgage market a year ago where production was strong until the start of 2012.third quarter 2013 when production slowed dramatically largely in response to rising mortgage rates. |
● | Noninterest expense was $15.9$19.1 million for the first six monthshalf of 2013,2014, up $4.1$3.1 million or 20% over the first half of 2012, as the first half of 2013 included approximately two months of increased operations from the Mid-Wisconsin transaction and approximately2013; however, excluding $1.7 million of non-recurring merger-related expenses. Most notably, salaries and benefits accounted for $2.4 million of the increasemerger-based expenses (of which approximately $1 million was attributable to non-recurring merger expenses),in personnel and Other expenses increased $0.9 million (of which nearly $0.7 million was in other expense) incurred in the 2013 period, expenses were up 35%. The increase in most all noninterest expense line items is predominantly due to the larger operating base from the 2013 acquisitions being fully included in 2014 and only partially included in the first half of 2013. Most notably, between the six-month periods, salaries and benefits were up $1.6 million or 17% (or up 32% excluding the 2013 merger-based expense, given the larger workforce and merit increases between the years), occupancy was up $0.6 million or 42% (given the larger operating base and a harsher winter), office expense was up $0.4 million or 41% (given the larger operating base, as well as continued integration on systems and phones), processing costs were up $0.5 million or 54% (mostly commensurate with growth in the number of accounts), and core deposit intangible amortization increased $0.2 million or 50%, fully attributable to the Mid-Wisconsin merger. Other expense was down $0.7 million, as the 2013 period included $0.7 million of non-recurring merger expenses).merger-based expense. |
Net Interest Income
Nicolet’s earnings are substantially dependent on net interest income. Net interest income whichis the primary source of Nicolet’s revenue and is the difference between interest income earned on interest earning assets, such as loans and investments, and loans and the interest paidexpense on interest-bearing liabilities, such as deposits and other interest-bearing liabilities.borrowings. Net interest income is directly impacted by the sensitivity of the balance sheet to changes in interest rates and by the amount and composition of earning assets and interest-bearing liabilities, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities, and repricing frequencies.
Comparison of the six months ending June 30, 20132014 versus 20122013
Net interest income in the consolidated statements of income (which excludes any taxable equivalent adjustment) was $20.5 million in the first six months of 2014, 40% higher than $14.6 million in the first six months of 2013, compared to $10.4 million in the first half of 2012.2013. Taxable equivalent adjustments (adjustments to bring tax-exempt interest to a level that would yield the same after-tax income had that been subject to a 34% tax rate) were $275,000$329,000 and $316,000$275,000 for the first six months of 20132014 and 2012,2013, respectively, resulting in taxable equivalent net interest income of $20.8 million and $14.8 million, for first half of 2013 and $10.7 million for first half of 2012.
respectively.
Taxable equivalent net interest income is a non-GAAP measure, but is a preferred industry measurement of net interest income (and its use in calculating a net interest margin) as it enhances the comparability of net interest income arising from taxable and tax-exempt sources.
Net interest income is the primary source of Nicolet’s revenue, and is the difference between interest income on earning assets, such as loans and investment securities, and interest expense on interest-bearing liabilities, such as deposits and other borrowings. Net interest income is directly impacted by the sensitivity of the balance sheet to changes in interest rates and by the amount, mix and composition of interest earning assets and interest-bearing liabilities, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities, and repricing frequencies.
Tables 1through 51 through 3 present information to facilitate the review and discussion of selected average balance sheet items, taxable equivalent net interest income, interest rate spread and net interest margin.
Table 1: Year-To-Date Net Interest Income Analysis
| | | | | | | | | | | | | | | | | | |
| | For the Six Months Ended June 30, | |
| | 2014 | | | 2013 | |
(in thousands) | | Average Balance | | | Interest | | | Average Rate | | | Average Balance | | | Interest | | | Average Rate | |
ASSETS | | | | | | | | | | | | | | | | | | |
Earning assets | | | | | | | | | | | | | | | | | | |
Loans, including loan fees (1)(2) | | $ | 851,033 | | | $ | 22,686 | | | | 5.31 | % | | $ | 651,256 | | | $ | 16,658 | | | | 5.09 | % |
Investment securities | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable | | | 86,676 | | | | 833 | | | | 1.92 | % | | | 57,508 | | | | 402 | | | | 1.40 | % |
Tax-exempt (2) | | | 41,539 | | | | 609 | | | | 2.93 | % | | | 28,889 | | | | 585 | | | | 4.05 | % |
Other interest-earning assets | | | 112,790 | | | | 263 | | | | 0.47 | % | | | 51,205 | | | | 149 | | | | 0.58 | % |
Total interest-earning assets | | | 1,092,038 | | | $ | 24,391 | | | | 4.45 | % | | | 788,858 | | | $ | 17,794 | | | | 4.49 | % |
Cash and due from banks | | | 36,078 | | | | | | | | | | | | 4,449 | | | | | | | | | |
Other assets | | | 64,996 | | | | | | | | | | | | 59,991 | | | | | | | | | |
Total assets | | $ | 1,193,112 | | | | | | | | | | | $ | 853,298 | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
Savings | | $ | 103,854 | | | $ | 128 | | | | 0.25 | % | | $ | 63,812 | | | $ | 98 | | | | 0.31 | % |
Interest-bearing demand | | | 205,956 | | | | 752 | | | | 0.74 | % | | | 135,395 | | | | 591 | | | | 0.88 | % |
MMA | | | 273,851 | | | | 396 | | | | 0.29 | % | | | 197,793 | | | | 370 | | | | 0.38 | % |
Core CDs and IRAs | | | 231,590 | | | | 1,123 | | | | 0.98 | % | | | 156,038 | | | | 851 | | | | 1.10 | % |
Brokered deposits | | | 43,871 | | | | 247 | | | | 1.13 | % | | | 35,589 | | | | 116 | | | | 0.66 | % |
Total interest-bearing deposits | | | 859,122 | | | | 2,646 | | | | 0.62 | % | | | 588,627 | | | | 2,026 | | | | 0.69 | % |
Other interest-bearing liabilities | | | 53,722 | | | | 940 | | | | 3.48 | % | | | 61,679 | | | | 923 | | | | 2.98 | % |
Total interest-bearing liabilities | | | 912,844 | | | | 3,586 | | | | 0.79 | % | | | 650,306 | | | | 2,949 | | | | 0.91 | % |
Noninterest-bearing demand | | | 165,177 | | | | | | | | | | | | 110,189 | | | | | | | | | |
Other liabilities | | | 7,997 | | | | | | | | | | | | 6,656 | | | | | | | | | |
Total equity | | | 107,094 | | | | | | | | | | | | 86,147 | | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 1,193,112 | | | | | | | | | | | $ | 853,298 | | | | | | | | | |
Net interest income and rate spread | | | | | | $ | 20,805 | | | | 3.66 | % | | | | | | $ | 14,845 | | | | 3.58 | % |
Net interest margin | | | | | | | | | | | 3.79 | % | | | | | | | | | | | 3.74 | % |
| | | |
| | For the Six Months Ended June 30, | |
| | 2013 | | | 2012 | |
(in thousands) | | Average Balance | | | Interest | | | Average Rate | | | Average Balance | | | Interest | | | Average Rate | |
ASSETS | | | | | | | | | | | | | | | | | | |
Earning assets | | | | | | | | | | | | | | | | | | |
Loans (1) (2) (3)(4) | | $ | 651,256 | | | $ | 16,658 | | | | 5.09 | % | | $ | 494,647 | | | $ | 13,065 | | | | 5.24 | % |
Investment securities | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable | | | 57,508 | | | | 402 | | | | 1.40 | % | | | 20,802 | | | | 321 | | | | 3.09 | % |
Tax-exempt (2) | | | 28,889 | | | | 585 | | | | 4.05 | % | | | 26,423 | | | | 656 | | | | 4.96 | % |
Other interest-earning assets | | | 51,205 | | | | 149 | | | | 0.58 | % | | | 56,847 | | | | 121 | | | | 0.43 | % |
Total interest-earning assets | | | 788,858 | | | $ | 17,794 | | | | 4.49 | % | | | 598,719 | | | $ | 14,163 | | | | 4.69 | % |
Cash and due from banks | | | 4,449 | | | | | | | | | | | | 11,558 | | | | | | | | | |
Other assets | | | 59,991 | | | | | | | | | | | | 39,603 | | | | | | | | | |
Total assets | | $ | 853,298 | | | | | | | | | | | $ | 649,880 | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
Savings | | $ | 63,812 | | | $ | 98 | | | | 0.31 | % | | $ | 26,940 | | | $ | 59 | | | | 0.44 | % |
Interest-bearing demand | | | 135,395 | | | | 591 | | | | 0.88 | % | | | 84,149 | | | | 389 | | | | 0.93 | % |
MMA | | | 197,793 | | | | 370 | | | | 0.38 | % | | | 164,487 | | | | 402 | | | | 0.49 | % |
Core CDs and IRAs | | | 156,038 | | | | 851 | | | | 1.10 | % | | | 139,310 | | | | 1,292 | | | | 1.86 | % |
Brokered deposits | | | 35,589 | | | | 116 | | | | 0.66 | % | | | 33,197 | | | | 375 | | | | 2.27 | % |
Total interest-bearing deposits | | | 588,627 | | | | 2,026 | | | | 0.69 | % | | | 448,083 | | | | 2,517 | | | | 1.13 | % |
Other interest-bearing liabilities | | | 61,679 | | | | 923 | | | | 2.98 | % | | | 46,373 | | | | 927 | | | | 3.96 | % |
Total interest-bearing liabilities | | | 650,306 | | | | 2,949 | | | | 0.91 | % | | | 494,456 | | | | 3,444 | | | | 1.39 | % |
Noninterest-bearing demand | | | 110,189 | | | | | | | | | | | | 74,719 | | | | | | | | | |
Other liabilities | | | 6,656 | | | | | | | | | | | | 4,388 | | | | | | | | | |
Total equity | | | 86,147 | | | | | | | | | | | | 76,317 | | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 853,298 | | | | | | | | | | | $ | 649,880 | | | | | | | | | |
Net interest income and rate spread | | | | | | $ | 14,845 | | | | 3.58 | % | | | | | | $ | 10,719 | | | | 3.30 | % |
Net interest margin | | | | | | | | | | | 3.74 | % | | | | | | | | | | | 3.54 | % |
(1) | Nonaccrual loans are included in the daily average loan balances outstanding. |
(2) | The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 34% and adjusted for the disallowance of interest expense. |
Table 2: Year-To-Date Volume/Rate Variance
Comparison of the six months ended June 30, 2014 versus 2013 follows: | |
| | Increase (decrease) Due to Changes in | |
(in thousands) | | Volume | | | Rate | | | Net | |
Earning assets | | | | | | | | | |
| | | | | | | | | |
Loans | | $ | 5,296 | | | $ | 732 | | | $ | 6,028 | |
Investment securities | | | | | | | | | | | | |
Taxable | | | 251 | | | | 180 | | | | 431 | |
Tax-exempt | | | 213 | | | | (189 | ) | | | 24 | |
Other interest-earning assets | | | 100 | | | | 14 | | | | 114 | |
| | | | | | | | | | | | |
Total interest-earning assets | | $ | 5,860 | | | $ | 737 | | | $ | 6,597 | |
| | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | |
Savings deposits | | $ | 52 | | | $ | (22 | ) | | $ | 30 | |
Interest-bearing demand | | | 270 | | | | (109 | ) | | | 161 | |
MMA | | | 122 | | | | (96 | ) | | | 26 | |
Core CDs and IRAs | | | 375 | | | | (103 | ) | | | 272 | |
Brokered deposits | | | 32 | | | | 99 | | | | 131 | |
| | | | | | | | | | | | |
Total interest-bearing deposits | | | 851 | | | | (231 | ) | | | 620 | |
Other interest-bearing liabilities | | | (30 | ) | | | 47 | | | | 17 | |
| | | | | | | | | | | | |
Total interest-bearing liabilities | | | 821 | | | | (184 | ) | | | 637 | |
Net interest income | | $ | 5,039 | | | $ | 921 | | | $ | 5,960 | |
Table 3: Quarterly Net Interest Income Analysis
| | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended June 30, | |
| | 2014 | | | 2013 | |
(in thousands) | | Average Balance | | | Interest | | | Average Rate | | | Average Balance | | | Interest | | | Average Rate | |
ASSETS | | | | | | | | | | | | | | | | | | |
Earning assets | | | | | | | | | | | | | | | | | | |
Loans, including loan fees (1)(2) | | $ | 855,315 | | | $ | 11,647 | | | | 5.40 | % | | $ | 754,352 | | | $ | 9,860 | | | | 5.18 | % |
Investment securities | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable | | | 85,326 | | | | 415 | | | | 1.95 | % | | | 88,622 | | | | 275 | | | | 1.24 | % |
Tax-exempt (2) | | | 46,062 | | | | 312 | | | | 2.71 | % | | | 31,792 | | | | 309 | | | | 3.89 | % |
Other interest-earning assets | | | 96,859 | | | | 128 | | | | 0.52 | % | | | 32,580 | | | | 69 | | | | 0.85 | % |
Total interest-earning assets | | | 1,083,562 | | | $ | 12,502 | | | | 4.58 | % | | | 907,346 | | | $ | 10,513 | | | | 4.60 | % |
Cash and due from banks | | | 29,367 | | | | | | | | | | | | 2,271 | | | | | | | | | |
Other assets | | | 64,725 | | | | | | | | | | | | 78,244 | | | | | | | | | |
Total assets | | $ | 1,177,654 | | | | | | | | | | | $ | 987,861 | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
Savings | | $ | 107,025 | | | $ | 67 | | | | 0.25 | % | | $ | 78,476 | | | $ | 50 | | | | 0.25 | % |
Interest-bearing demand | | | 208,668 | | | | 384 | | | | 0.74 | % | | | 154,196 | | | | 286 | | | | 0.74 | % |
MMA | | | 262,779 | | | | 185 | | | | 0.28 | % | | | 203,043 | | | | 172 | | | | 0.34 | % |
Core CDs and IRAs | | | 229,251 | | | | 614 | | | | 1.08 | % | | | 195,713 | | | | 443 | | | | 0.91 | % |
Brokered deposits | | | 36,509 | | | | 115 | | | | 1.26 | % | | | 41,876 | | | | 74 | | | | 0.71 | % |
Total interest-bearing deposits | | | 844,232 | | | | 1,365 | | | | 0.65 | % | | | 673,304 | | | | 1,025 | | | | 0.61 | % |
Other interest-bearing liabilities | | | 50,815 | | | | 468 | | | | 3.64 | % | | | 82,810 | | | | 515 | | | | 2.46 | % |
Total interest-bearing liabilities | | | 895,047 | | | | 1,833 | | | | 0.82 | % | | | 756,114 | | | | 1,540 | | | | 0.81 | % |
Noninterest-bearing demand | | | 165,909 | | | | | | | | | | | | 129,978 | | | | | | | | | |
Other liabilities | | | 8,885 | | | | | | | | | | | | 7,196 | | | | | | | | | |
Total equity | | | 107,813 | | | | | | | | | | | | 94,573 | | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 1,177,654 | | | | | | | | | | | $ | 987,861 | | | | | | | | | |
Net interest income and rate spread | | | | | | $ | 10,669 | | | | 3.76 | % | | | | | | $ | 8,973 | | | | 3.79 | % |
Net interest margin | | | | | | | | | | | 3.90 | % | | | | | | | | | | | 3.92 | % |
(1) Nonaccrual loans are included in the daily average loan balances outstanding.
(2) The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 34% and adjusted for the disallowance of interest expense.
(3) Interest income for the period ending June 30, includes loan fees of $250,000 in 2013, and $115,000 in 2012.
(4) Includes accretable yield from acquired loans
Table 2: Volume/Rate Variance
Comparison of six months ended June 30, 2013 versus 2012:
| | | | | | | | | |
| | Increase (decrease) Due to Changes in | |
(in thousands) | | Volume | | | Rate | | | Net(3) | |
Earning assets | | | | | | | | | |
| | | | | | | | | |
Loans (1)(2)(4) | | $ | 3,959 | | | $ | (366 | ) | | $ | 3,593 | |
Investment securities | | | | | | | | | | | | |
Taxable | | | 260 | | | | (179 | ) | | | 81 | |
Tax-exempt (2) | | | 57 | | | | (128 | ) | | | (71 | ) |
Other interest-earning assets | | | 11 | | | | 17 | | | | 28 | |
| | | | | | | | | | | | |
Total interest-earning assets | | $ | 4,287 | | | $ | (656 | ) | | $ | 3,631 | |
| | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | |
Interest-bearing demand | | $ | 224 | | | $ | (22 | ) | | $ | 202 | |
Savings deposits | | | 61 | | | | (22 | ) | | | 39 | |
MMA | | | 72 | | | | (104 | ) | | | (32 | ) |
Core CDs and IRAs | | | 140 | | | | (581 | ) | | | (441 | ) |
| | | | | | | | | | | | |
Brokered deposits | | | 25 | | | | (284 | ) | | | (259 | ) |
| | | | | | | | | | | | |
Total interest-bearing deposits | | | 522 | | | | (1,013 | ) | | | (491 | ) |
Other interest-bearing liabilities | | | 203 | | | | (207 | ) | | | (4 | ) |
| | | | | | | | | | | | |
Total interest-bearing liabilities | | | 725 | | | | (1,220 | ) | | | (495 | ) |
Net interest income | | $ | 3,562 | | | $ | 564 | | | $ | 4,126 | |
(1) Nonaccrual loans are included in the daily average loan balances outstanding.
(2) The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 34% adjusted for the disallowance of interest expense.
(3) The change in interest due to both rate and volume has been allocated in proportion to the relationship of dollar amounts of change in each.
(4) Includes accretable yield from acquired loans
Table 3: Quarterly Net Interest Income Analysis
| | | | | | |
| | For the Three Months Ended June 30, | |
| | 2013 | | | 2012 | |
(in thousands) | | Average Balance | | | Interest | | | Average Rate | | | Average Balance | | | Interest | | | Average Rate | |
ASSETS | | | | | | | | | | | | | | | | | | |
Earning assets | | | | | | | | | | | | | | | | | | |
Loans (1) (2) (3)(4) | | $ | 754,352 | | | $ | 9,860 | | | | 5.18 | % | | $ | 504,876 | | | $ | 6,570 | | | | 5.16 | % |
Investment securities | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable | | | 88,622 | | | | 275 | | | | 1.24 | % | | | 22,249 | | | | 158 | | | | 2.84 | % |
Tax-exempt (2) | | | 31,792 | | | | 309 | | | | 3.89 | % | | | 26,118 | | | | 321 | | | | 4.91 | % |
Other interest-earning assets | | | 32,580 | | | | 69 | | | | 0.85 | % | | | 35,831 | | | | 50 | | | | 0.56 | % |
Total interest-earning assets | | | 907,346 | | | $ | 10,513 | | | | 4.60 | % | | | 589,074 | | | $ | 7,099 | | | | 4.78 | % |
Cash and due from banks | | | 2,271 | | | | | | | | | | | | 11,091 | | | | | | | | | |
Other assets | | | 78,244 | | | | | | | | | | | | 43,001 | | | | | | | | | |
Total assets | | $ | 987,861 | | | | | | | | | | | $ | 643,166 | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
Savings | | $ | 78,476 | | | $ | 50 | | | | 0.25 | % | | $ | 29,645 | | | $ | 34 | | | | 0.46 | % |
Interest-bearing demand | | | 154,196 | | | | 286 | | | | 0.74 | % | | | 87,807 | | | | 211 | | | | 0.96 | % |
MMA | | | 203,043 | | | | 172 | | | | 0.34 | % | | | 156,466 | | | | 181 | | | | 0.46 | % |
Core CDs and IRAs | | | 195,713 | | | | 443 | | | | 0.91 | % | | | 135,002 | | | | 606 | | | | 1.81 | % |
Brokered deposits | | | 41,876 | | | | 74 | | | | 0.71 | % | | | 30,934 | | | | 112 | | | | 1.45 | % |
Total interest-bearing deposits | | | 673,304 | | | | 1,025 | | | | 0.61 | % | | | 439,854 | | | | 1,144 | | | | 1.05 | % |
Other interest-bearing liabilities | | | 82,810 | | | | 515 | | | | 2.46 | % | | | 47,051 | | | | 464 | | | | 3.90 | % |
Total interest-bearing liabilities | | | 756,114 | | | | 1,540 | | | | 0.81 | % | | | 486,905 | | | | 1,608 | | | | 1.32 | % |
Noninterest-bearing demand | | | 129,978 | | | | | | | | | | | | 75,101 | | | | | | | | | |
Other liabilities | | | 7,196 | | | | | | | | | | | | 4,797 | | | | | | | | | |
Total equity | | | 94,573 | | | | | | | | | | | | 76,363 | | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 987,861 | | | | | | | | | | | $ | 643,166 | | | | | | | | | |
Net interest income and rate spread | | | | | | $ | 8,973 | | | | 3.79 | % | | | | | | $ | 5,491 | | | | 3.46 | % |
Net interest margin | | | | | | | | | | | 3.92 | % | | | | | | | | | | | 3.69 | % |
(1) Nonaccrual loans are included in the daily average loan balances outstanding.
(2) The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 34% and adjusted for the disallowance of interest expense.
(3) Interest income for the period ending June 30, includes loan fees of $170,000 in 2013, and $103,000 in 2012.
(4) Includes accretable yield from acquired loans(2) | The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 34% and adjusted for the disallowance of interest expense. |
Table 4: Quarterly Volume/Rate Variance
Comparison of three months ended June 30, 2013 versus 2012:
Comparison of the three months ended June 30, 2014 versus 2013 follows: | |
| | Increase (decrease) Due to Changes in | |
(in thousands) | | Volume | | | Rate | | | Net | |
Earning assets | | | | | | | | | |
| | | | | | | | | |
Loans | | $ | 1,343 | | | $ | 444 | | | $ | 1,787 | |
Investment securities | | | | | | | | | | | | |
Taxable | | | (1 | ) | | | 141 | | | | 140 | |
Tax-exempt | | | 113 | | | | (110 | ) | | | 3 | |
Other interest-earning assets | | | 44 | | | | 15 | | | | 59 | |
| | | | | | | | | | | | |
Total interest-earning assets | | $ | 1,499 | | | $ | 490 | | | $ | 1,989 | |
| | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | |
Savings deposits | | $ | 18 | | | $ | (1 | ) | | $ | 17 | |
Interest-bearing demand | | | 100 | | | | (2 | ) | | | 98 | |
MMA | | | 45 | | | | (32 | ) | | | 13 | |
Core CDs and IRAs | | | 83 | | | | 88 | | | | 171 | |
Brokered deposits | | | (11 | ) | | | 52 | | | | 41 | |
| | | | | | | | | | | | |
Total interest-bearing deposits | | | 235 | | | | 105 | | | | 340 | |
Other interest-bearing liabilities | | | (137 | ) | | | 90 | | | | (47 | ) |
| | | | | | | | | | | | |
Total interest-bearing liabilities | | | 98 | | | | 195 | | | | 293 | |
Net interest income | | $ | 1,401 | | | $ | 295 | | | $ | 1,696 | |
| | | | | | | | | |
| | Increase (decrease) Due to Changes in | |
(in thousands) | | Volume | | | Rate | | | Net(3) | |
Earning assets | | | | | | | | | |
| | | | | | | | | |
Loans (1)(2)(4) | | $ | 3,263 | | | $ | 27 | | | $ | 3,290 | |
Investment securities | | | | | | | | | | | | |
Taxable | | | 214 | | | | (97 | ) | | | 117 | |
Tax-exempt (2) | | | 62 | | | | (74 | ) | | | (12 | ) |
Other interest-earning assets | | | 14 | | | | 5 | | | | 19 | |
| | | | | | | | | | | | |
Total interest-earning assets | | $ | 3,553 | | | $ | (139 | ) | | $ | 3,414 | |
| | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | |
Interest-bearing demand | | $ | 133 | | | $ | (58 | ) | | $ | 75 | |
Savings deposits | | | 36 | | | | (20 | ) | | | 16 | |
MMA | | | 46 | | | | (55 | ) | | | (9 | ) |
Core CDs and IRAs | | | 209 | | | | (372 | ) | | | (163 | ) |
| | | | | | | | | | | | |
Brokered deposits | | | 31 | | | | (69 | ) | | | (38 | ) |
| | | | | | | | | | | | |
Total interest-bearing deposits | | | 455 | | | | (574 | ) | | | (119 | ) |
Other interest-bearing liabilities | | | 211 | | | | (160 | ) | | | 51 | |
| | | | | | | | | | | | |
Total interest-bearing liabilities | | | 666 | | | | (734 | ) | | | (68 | ) |
Net interest income | | $ | 2,887 | | | $ | 595 | | | $ | 3,482 | |
(1) Nonaccrual loans are included in the daily average loan balances outstanding.
(2) The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 34% adjusted for the disallowance of interest expense.
(3) The change in interest due to both rate and volume has been allocated in proportion to the relationship of dollar amounts of change in each.
(4) Includes accretable yield from acquired loans
Table 5: Interest Rate Spread, Margin and Average Balance Mix — Taxable-Equivalent Basis
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2013 | | | 2012 | | | 2014 | | | 2013 | |
(in thousands) | | Average Balance | | | % of Earning Assets | | | Yield/Rate | | | Average Balance | | | % of Earning Assets | | | Yield/Rate | | | Average Balance | | | % of Earning Assets | | | Yield/Rate | | | Average Balance | | | % of Earning Assets | | | Yield/Rate | |
Total loans | | $ | 651,256 | | | | 82.6 | % | | | 5.09 | % | | $ | 494,647 | | | | 82.6 | % | | | 5.24 | % | | $ | 851,033 | | | | 77.9 | % | | | 5.31 | % | | $ | 651,256 | | | | 82.6 | % | | | 5.09 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Securities and other earning assets | | | 137,602 | | | | 17.4 | % | | | 1.65 | % | | | 104,072 | | | | 17.4 | % | | | 2.11 | % | | | 241,005 | | | | 22.1 | % | | | 1.42 | % | | | 137,602 | | | | 17.4 | % | | | 1.65 | % |
Total interest-earning assets | | $ | 788,858 | | | | 100 | % | | | 4.49 | % | | $ | 598,719 | | | | 100 | % | | | 4.69 | % | | $ | 1,092,038 | | | | 100 | % | | | 4.45 | % | | $ | 788,858 | | | | 100 | % | | | 4.49 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities | | $ | 650,306 | | | | 82.4 | % | | | 0.91 | % | | $ | 494,456 | | | | 82.6 | % | | | 1.39 | % | | $ | 912,844 | | | | 83.6 | % | | | 0.79 | % | | $ | 650,306 | | | | 82.4 | % | | | 0.91 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Noninterest-bearing funds, net | | | 138,552 | | | | 17.6 | % | | | | | | | 104,263 | | | | 17.4 | % | | | | | | | 179,194 | | | | 16.4 | % | | | | | | | 138,552 | | | | 17.6 | % | | | | |
Total funds sources | | $ | 788,858 | | | | 100 | % | | | 0.75 | % | | $ | 598,719 | | | | 100 | % | | | 1.15 | % | | $ | 1,092,038 | | | | 100 | % | | | 0.66 | % | | $ | 788,858 | | | | 100 | % | | | 0.75 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate spread | | | | | | | | | | | 3.58 | % | | | | | | | | | | | 3.30 | % | | | | | | | | | | | 3.66 | % | | | | | | | | | | | 3.58 | % |
Contribution from net free funds | | | | | | | | | | | 0.16 | % | | | | | | | | | | | 0.24 | % | | | | | | | | | | | 0.13 | % | | | | | | | | | | | 0.16 | % |
Net interest margin | | | | | | | | | | | 3.74 | % | | | | | | | | | | | 3.54 | % | | | | | | | | | | | 3.79 | % | | | | | | | | | | | 3.74 | % |
Taxable-equivalent net interest income was $14.8$20.8 million for the first six months of 2013,2014, an increase of $4.1$6.0 million or 38%40% over the same period in 2012.2013. The $4.1 million increase in taxable-equivalent net interest income was predominantly volume related, given the timing of the acquisition,acquisitions, but was also favorably impacted by an increase in interest rate spread on higher average earning assets.spread. Taxable equivalent interest income increased $3.6$6.6 million (or 37%) between the six-month periods driven by loans (including $4.0$5.3 million more interest income from higher loan volumes and $0.7 million from higher loan volumes, less $0.4 million from loweryields, aided by higher levels of purchase-accounting loan yields)accretion on acquired loans). Interest expense fell $0.5increased only $0.6 million (or 22%) between the six-month periods due to beneficial growth in the mix of lower-costing funds (with $1.2 million less interest expense from favorable rate changes, but $0.7driven mainly by interest-bearing deposits (including $0.8 million more interest expense from higher interest-bearing liabilities volume).volumes, offset by $0.2 million less interest expense from lower deposit rates.)
The taxable-equivalent net interest margin was 3.74%3.79% for the six months of 2014, up 5 bps over the first six months of 2013, up 20 bps over the first half of 2012, with improvementa decrease in the cost of funds at 0.91%to 0.79% (down 4812 bps), offset partly by a lower earning asset yield at 4.49%of 4.45% (down 204 bps) and an 8a 3 bps decrease in net free funds. The cost of funds between the six-month periods has benefited from a lower rate structure acquired with the 2013 acquisitions and rate reductions made particularly in commercial deposit products. In general, there has been and will continue to be considerableunderlying downward margin pressure as assets mature in this prolonged low-rate environment, with current reinvestment rates substantially lower than previous rates and less opportunity to offset such with similar changes in the already low cost of funds.funds; however, in 2014 such pressure continues to be mitigated partly by the favorable income from acquired loans.
The earning asset yield was comprisedinfluenced mainly ofby loans, representing 82.6%78% of average earning assets and yielding 5.09%5.31% for first half 2013,six months of 2014, compared to 82.6%83% and 5.24%5.09%, respectively, for the first half 2012, butsix months of 2013. The 22 bps improvement in loan yield between the six-month periods was aided in 2013part by the timing of the acquisition and the positive rate profile of acquired loans. If acquired loans marked to estimated fair value at acquisition resolve or performThe earning asset yield was also supported by a higher mix of investments (representing 12% versus 11% of average earning assets between the six-month periods) which yield more favorably than originally anticipated, there isother interest earning assets (representing 10% versus 6% of average earning assets, and will continue to be potential for favorable loan yield adjustments.which carried a higher proportion of low-earning cash in the first half of 2014 versus 2013). All other interest earning assets combined yielded 1.65%1.42%, down 4623 bps compared to the first half 2012, but aided inof 2013, by amainly from the higher mix of investments (representing 11.0% of average earning assets, compared to 7.9% for first half 2012) that earn more than the other cash-equivalent earning assets.low-earning cash noted above.
Nicolet’s cost of funds continued its favorable decline during the low-rate environment, at 0.91%0.79% for the first halfsix months of 2013, 482014, 12 bps lower than the first half 2012.six months of 2013. The average cost of interest-bearing deposits (which represent over 90% of average interest-bearing liabilities for both years)periods), was 0.69%0.62% for the first halfsix months of 2013,2014, down 447 bps versus the first half 2012,six months of 2013, with favorable rate variances in all deposit categories and higher mix of balances in lower-costingexcept brokered deposits. Lower-costing transactional deposits (savings, checking and MMA). saw rate declines in response to reductions made across products between the years, while such balances continued to rise. Average brokered deposit balances remained stableincreased nominally for the comparable six-month periods however,but their cost decreasedincreased from 2.27% in 2012 to 0.66% in 2013 to 1.13% in 2014, as a significant portion of the higher rate brokered deposit balances matured since June 30, 2012, and werelonger-termed funding replaced withmaturing shorter-term less-costly brokereds in anticipation of the merger and seasonal deposit declines.instruments. The cost of other interest-bearing liabilities (comprised of short- and long-term borrowings) decreasedincreased to 2.98%3.48%, down 98up 50 bps between the six-month periods, mainly from increased usage of2013 favorable rates on short-term advances, at favorable ratesprepayment in addition to the prepayment2013 of $10 million in higher-costing advances, duringand the first quarter 2013 and the acquisition at fair value of a lower-rate junior subordinated debenture in second quarter 2013.debenture.
Average interest-earning assets were $789 million$1.1 billion for the first halfsix months of 2013, $1902014, $303 million or 32%38% higher than the first halfsix months of 2012,2013, led by a $157$200 million increase in average loans (to $651$851 million or 83%78% of interest earning assets) and a $39$103 million increase in average investmentsall other interest-earning assets combined (to $86$241 million or 11%22% of earning assets), both heavily influenced by the size and timing of the acquisition in 2013.2013 acquisitions, and a higher level of low-earning cash balances.
Average interest-bearing liabilities were $650$913 million, up $156$263 million or 32%40% over the first halfsix months of 2012,2013, led by a $138$262 million increase in non-brokered interest-bearing deposits (to $553$815 million or 85%89% of average interest-bearing liabilities), an $8 million increase in average brokered deposits (to $44 million), and a $15an $8 million increasedecrease in average other interest-bearing liabilities (to $62$54 million), both heavily influenced by the size and timing of the acquisitionacquisitions in 2013.
Provision for Loan Losses
The provision for loan losses for the six months ended June 30, 2014 and 2013 was $1.4 million and $2.0 million, respectively, exceeding net charge offs of $0.9 million and $1.4 million, respectively. Asset quality trends remained relatively strong with continued resolutions of problem loans. The ALLL was $9.6 million (1.12% of loans) at June 30, 2014, compared to $9.2 million (1.09% of loans) at December 31, 2013 and 2012 was $2.0notably higher than $7.7 million and $2.4 million respectively. The provision for loan losses has been trending down, with asset quality trends improving in the non-acquired portfolio (primarily from work-outs(0.91% of problem loans and declining net charge-offs), as well as credit discounts being included directly in the estimated fair value of recently acquired loans (and accordingly no allowance for loan losses recorded at acquisition). At December 31, 2012, the ALLL was $7.1 million which grew to $7.7 millionloans) at June 30, 2013, givenwhich was shortly after the $2.0 million provision for loan losses and net charge offsacquisition of $1.4 million during the first six months of 2013.Mid-Wisconsin. The ALLL to loans ratio was impacted most after each of the ALLL to total loans was 0.91%2013 acquisitions, which combined at June 30, 2013, impacted most notably by the 2013their acquisition whichdates added no allowance for loan lossesALLL to the numerator (as noted above) and $272$284 million of loans into the denominator as of the date of acquisition.denominator. As events occur in the acquired loan portfolio,portfolios, an ALLL will be established for this pool of assets as appropriate. Comparatively,Growth in the ALLL to total loans was 1.29% at December 31, 2012.ratio is mostly a result of the provision for loan losses exceeding net charge offs.
Nonperforming loans continue to improve. Nonperforming loans were improvingdeclining prior to the acquisition,acquisitions, starting at $7.0 million (or 1.3% of total loans) at December 31, 2012, decreasing to $2.7 million (or 0.5% of loans) at March 31, 2013, and then increasedincreasing to $14.3a high of $17.4 million (or 1.7%2.0% of loans) at September 30, 2013, and declining to $7.2 million (or 0.84% of loans) at June 30, 2013. The $11.62014. Of the nonaccrual loans initially acquired in the 2013 acquisitions, $5.3 million increase from March 31 toremain which is included in the $7.2 million of nonaccruals at June 30, 2013, included approximately $10.9 million of acquired loans brought on in a nonaccruing and impaired status at acquisition.
2014.
The provision for loan losses is predominantly a function of Nicolet’s methodology and judgment as to qualitative and quantitative factors used to determine the adequacy of the ALLL. The adequacy of the ALLL is affected by changes in the size and character of the loan portfolio, changes in levels of impaired and other nonperforming loans, historical losses and delinquencies in each portfolio segment, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing and future economic conditions, the fair value of underlying collateral, and other factors which could affect potential credit losses. For additional information regarding asset quality and the ALLL, see “Balance Sheet Analysis — Loans,” “— Allowance for Loan and “Balance Sheet Analysis —Lease Losses,” and “— Impaired Loans and Nonperforming Assets.”
Noninterest Income
Table 6: Noninterest Income
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended June 30, | | | For the six months ended June 30, | | | For the three months ended June 30, | | | For the six months ended June 30, | |
| | 2013 | | | 2012 | | | $ Change | | | % Change | | | 2013 | | | 2012 | | | $ Change | | | % Change | | | 2014 | | | 2013 | | | $ Change | | | % Change | | | 2014 | | | 2013 | | | $ Change | | | % Change | |
(in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Service charges on deposit accounts | | $ | 470 | | | $ | 280 | | | $ | 190 | | | | 67.9 | % | | $ | 754 | | | $ | 567 | | | $ | 187 | | | | 33.0 | % | | $ | 544 | | | $ | 470 | | | $ | 74 | | | | 15.7 | % | | $ | 1,038 | | | $ | 754 | | | $ | 284 | | | | 37.7 | % |
Trust services fee income | | | 1,074 | | | | 724 | | | | 350 | | | | 48.3 | | | | 1,876 | | | | 1,454 | | | | 422 | | | | 29.0 | | | | 1,119 | | | | 1,074 | | | | 45 | | | | 4.2 | | | | 2,224 | | | | 1,876 | | | | 348 | | | | 18.6 | |
Mortgage income | | | 714 | | | | 671 | | | | 43 | | | | 6.4 | | | | 1,586 | | | | 1,408 | | | | 178 | | | | 12.6 | | | | 431 | | | | 714 | | | | (283 | ) | | | (39.6 | ) | | | 646 | | | | 1,586 | | | | (940 | ) | | | (59.3 | ) |
Brokerage fee income | | | 115 | | | | 81 | | | | 34 | | | | 42.0 | | | | 217 | | | | 165 | | | | 52 | | | | 31.5 | | | | 166 | | | | 115 | | | | 51 | | | | 44.3 | | | | 326 | | | | 217 | | | | 109 | | | | 50.2 | |
Gain on sale of assets, net | | | 45 | | | | 237 | | | | (192 | ) | | | (81.0 | ) | | | 49 | | | | 383 | | | | (334 | ) | | | (87.2 | ) | |
Bank owned life insurance (“BOLI”) | | | 212 | | | | 183 | | | | 29 | | | | 15.8 | | | | 381 | | | | 336 | | | | 45 | | | | 13.4 | | | | 220 | | | | 212 | | | | 8 | | | | 3.8 | | | | 434 | | | | 381 | | | | 53 | | | | 13.9 | |
Rent income | | | 274 | | | | 240 | | | | 34 | | | | 14.2 | | | | 524 | | | | 480 | | | | 44 | | | | 9.2 | | | | 288 | | | | 274 | | | | 14 | | | | 5.1 | | | | 588 | | | | 524 | | | | 64 | | | | 12.2 | |
Investment advisory fees | | | 76 | | | | 85 | | | | (9 | ) | | | (10.6 | ) | | | 162 | | | | 171 | | | | (9 | ) | | | (5.3 | ) | | | 102 | | | | 76 | | | | 26 | | | | 34.2 | | | | 212 | | | | 162 | | | | 50 | | | | 30.9 | |
Bargain purchase gain | | | 10,435 | | | | - | | | | 10,435 | | | | 100.0 | | | | 10,435 | | | | - | | | | 10,435 | | | | 100.0 | | |
Other | | | 351 | | | | 176 | | | | 175 | | | | 99.4 | | | | 538 | | | | 337 | | | | 201 | | | | 59.6 | | |
Gain on sale or writedown of assets, net | | | | (442 | ) | | | 45 | | | | (487 | ) | | | N/M | * | | | 308 | | | | 49 | | | | 259 | | | | N/M | * |
Bargain purchase gain (“BPG”) | | | | - | | | | 10,435 | | | | (10,435 | ) | | | N/M | * | | | - | | | | 10,435 | | | | (10,435 | ) | | | N/M | * |
Other income | | | | 452 | | | | 351 | | | | 101 | | | | 28.8 | | | | 864 | | | | 538 | | | | 326 | | | | 60.6 | |
Total noninterest income | | $ | 13,766 | | | $ | 2,677 | | | $ | 11,089 | | | | 414.2 | % | | $ | 16,522 | | | $ | 5,301 | | | $ | 11,221 | | | | 211.7 | % | | $ | 2,880 | | | $ | 13,766 | | | $ | (10,886 | ) | | | (79.1 | )% | | $ | 6,640 | | | $ | 16,522 | | | $ | (9,882 | ) | | | (59.8 | )% |
Noninterest income without BPG and net gains | | | $ | 3,322 | | | $ | 3,286 | | | $ | 36 | | | | 1.1 | % | | $ | 6,332 | | | $ | 6,038 | | | $ | 294 | | | | 4.9 | % |
*N/M means not meaningful.
Comparison of the six months ending June 30, 20132014 versus 20122013
Noninterest income was $6.6 million for the first six months of 2014 (including $0.3 million of net gain on sales of assets), compared to $16.5 million for the six monthsfirst half of 2013 an increase(including $10.5 million of $11.2 million from 2012 or 211.7%, with a $10.4 millioncombined bargain purchase gain included inand net gain on sale of assets). Removing these net gains, noninterest income was up $0.3 million or 4.9% between the second quarter 2013. six-month periods.
The bargain purchase gain recognized from the Mid-Wisconsin acquisition was calculated as the net difference in the fair value of the net assets acquired of $20.6 million less the consideration paidpaid. Net gain on sale or writedown of $10.2assets was $0.3 million resulting inand $49,000 for the net bargain purchasesix months of 2014 and 2013, respectively. The 2014 activity consisted of a $0.3 million gain on the sale of $10.4 million. The details of the acquisition accounting are located in Note 2 of the notes to the unaudited consolidated financial statements. Without the bargain purchase gain, noninterest income was up $0.8an equity security holding, a $0.6 million or 14.8% between the six-month periods ended June 30, 2013 and 2012, impacted mostly by the size and timing of the Mid-Wisconsin transaction but offset partly by a negative swing in net gain on assets soldsales of OREO, and a $0.6 million write-down of an acquired former branch building moved to OREO in second quarter 2014. The 2013 activity consisted of $0.3 million.million of net gains on OREO sales, offset by $0.2 million net losses on sales of investments (mainly the result of selling a large portion of the acquired investment portfolio in second quarter to prepay higher costing debt assumed in the Mid-Wisconsin acquisition).
Service feescharges on deposit accounts were $0.8 million for the six months ended June 30, 2013, up $0.2 million (or 33.0%) over the first six months of 2012. The increase is primarily from increased service charges on deposits given the increase in deposit balances and accounts mainly from the merger, and higher non-sufficient funds (“NSF”) fees.
Trust service fees increased to $1.9$1.0 million for the first six months of 2013,2014, up $0.4$0.3 million or 29.0%37.7% over the comparable period of 2013. The increase resulted from greater service charges on deposits given the higher deposit balances and number of accounts from the acquisitions and from higher non-sufficient funds fees.
Trust service fees increased to $2.2 million for the first half 2012.six months of 2014, up $0.3 million or 18.6% over the comparable 2013 period. In addition to the larger base of customers acquired through the merger, there was continued market improvement over last year on assets under management, on which fees are based. Similarly, brokerage fees were $0.2$0.3 million, up $52,000$0.1 million or 31.5%50.2% over the first half 2012, mainlysix months of 2013, from increased legacy business, market improvements and to a lesser degree from the merger. TheManagement believes the expanded footprint of the bank willshould provide growth potential for wealth management in future periods.
Mortgage income represents net gains received from the sale of residential real estate loans service-released into the secondary market and to a small degree, some related income. Residential refinancing activity and new purchase activity continues to remainremained steady despite mortgage rates being higher than a year ago and trending upward. Mortgage income was $1.6 million for the first six months of 2013; however, mortgage production slowed considerably during the last half of 2013 up $0.2and into 2014, largely in response to rising mortgage rates and certain mortgage regulation changes. As a result, mortgage income in the first six months of 2014 was $0.6 million or 12.6% overcompared to $1.6 million for the first half of 2012, though slowing slightly for2013. While business has picked up in the second versus first quarter of 2014, levels still trail 2013. The increasechange between six-month periods was not significantly impacted by the acquisition.acquisitions.
DuringThe remaining income categories included modest first half 2014 increases compared to the first half of 2013, Nicolet recognized a $49,000 net gain on sale of assets in the first six months of 2013 compared to $383,000 net gain in the comparable period of 2012. The activity in 2013 consisted of $239,000 of net losses on sales of investments (mainly the result of selling a large portion of the acquired investment portfolio in second quarter to prepay higher costing debt assumed in the merger), more than offset by $288,000 of net gains on sales of OREO (as properties were resolved at better than expected terms). Investments were recorded at fair value at the time of acquisition but an increase in rates during second quarter resulted in additional market declines realized on investments sold during the second quarter related to planned balance sheet reductions. For the first six months of 2012, securities sales produced net gains of $440,000, while net losses on OREO were $57,000.
2013. BOLI income was $0.4 million for the first six months of 2013,2014, up $45,000$53,000 or 13.9% from the comparable period in 2012, or 13.4%, mainly from2013 as a result of the timing of additional BOLI procured. New BOLI investment of $3.8 million was procured in the first quarter 2012 and $4.3 million wasincrease of BOLI acquired in the Mid-Wisconsin transaction (bringing the 2013 six-month averagetransaction. An additional $2.8 million of BOLI investment to $20.4 million, up 21% overwas purchased during June 2014 but given the comparable period last year).timing did not impact the 2014 year-to-date average balance. Rent income, investment advisory fees and other noninterest income combined were $1.7 million for the first six months of 2014 compared to $1.2 million for the first half ofcomparable 2013 compared to $1.0 million for the first half 2012,period, with the majority of the increase due to ancillary fees tied to deposit-related products, most particularly debit card, check cashing and wire fee income.
Noninterest Expense
Table 7: Noninterest Expense
| | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended June 30, | | | For the six months ended June 30, | | | For the three months ended June 30, | | | For the six months ended June 30, | |
| | 2013 | | | 2012 | | | $ Change | | | % Change | | | 2013 | | | 2012 | | | $ Change | | | % Change | | | 2014 | | | 2013 | | | $ Change | | | % Change | | | 2014 | | | 2013 | | | $ Change | | | % Change | |
(in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Salaries and employee benefits | | $ | 5,555 | | | $ | 3,393 | | | $ | 2,162 | | | | 63.7 | % | | $ | 9,114 | | | $ | 6,666 | | | $ | 2,448 | | | | 36.7 | % | | $ | 5,384 | | | $ | 5,555 | | | $ | (171 | ) | | | (3.1 | )% | | $ | 10,679 | | | $ | 9,114 | | | $ | 1,565 | | | | 17.2 | % |
Occupancy, equipment and office | | | 1,466 | | | | 1,102 | | | | 364 | | | | 33.0 | | | | 2,570 | | | | 2,241 | | | | 329 | | | | 14.7 | | | | 1,737 | | | | 1,466 | | | | 271 | | | | 18.5 | | | | 3,635 | | | | 2,570 | | | | 1,065 | | | | 41.4 | |
Business development and marketing | | | 473 | | | | 352 | | | | 121 | | | | 34.4 | | | | 898 | | | | 697 | | | | 201 | | | | 28.8 | | �� | | 537 | | | | 473 | | | | 64 | | | | 13.5 | | | | 1,072 | | | | 898 | | | | 174 | | | | 19.4 | |
Data processing | | | 572 | | | | 410 | | | | 162 | | | | 39.5 | | | | 995 | | | | 812 | | | | 183 | | | | 22.5 | | | | 775 | | | | 572 | | | | 203 | | | | 35.5 | | | | 1,529 | | | | 995 | | | | 534 | | | | 53.7 | |
FDIC assessments | | | 130 | | | | 138 | | | | (8 | ) | | | (5.8 | ) | | | 240 | | | | 274 | | | | (34 | ) | | | (12.4 | ) | | | 203 | | | | 130 | | | | 73 | | | | 56.2 | | | | 387 | | | | 240 | | | | 147 | | | | 61.3 | |
Core deposit intangible amortization | | | 286 | | | | 168 | | | | 118 | | | | 70.2 | | | | 434 | | | | 336 | | | | 98 | | | | 29.2 | | | | 315 | | | | 286 | | | | 29 | | | | 10.1 | | | | 650 | | | | 434 | | | | 216 | | | | 49.8 | |
Other | | | 1,104 | | | | 446 | | | | 658 | | | | 147.5 | | | | 1,675 | | | | 768 | | | | 907 | | | | 118.1 | | | | 533 | | | | 1,104 | | | | (571 | ) | | | (51.7 | ) | | | 1,120 | | | | 1,675 | | | | (555 | ) | | | (33.1 | ) |
Total noninterest expense | | $ | 9,586 | | | $ | 6,009 | | | $ | 3,577 | | | | 59.5 | % | | $ | 15,926 | | | $ | 11,794 | | | $ | 4,132 | | | | 35.0 | % | | $ | 9,484 | | | $ | 9,586 | | | $ | (102 | ) | | | (1.1 | )% | | $ | 19,072 | | | $ | 15,926 | | | $ | 3,146 | | | | 19.8 | % |
Comparison of the six months ending June 30, 20132014 versus 20122013
Total noninterest expense was $19.1 million for the first six months ending June 30, 2013 and 2012 was $15.9 million and $11.8 million, respectively,of 2014, up $4.1$3.1 million, or 35.0%, as19.8% over the first half of 2013 included approximately twosix months of increased operations from2013; however, excluding the Mid-Wisconsin transaction and approximately $1.7 million of non-recurring merger-related expenses. Most notably, salaries and benefits accounted for $2.4 million of the increasemerger-based expenses (of which approximately $1 million was attributable to non-recurring merger expenses, such as stay bonuses, severancesin personnel and related payroll taxes), and other expense increased $0.9 million (of which nearly $0.7 million was attributablein other expense) incurred in the 2013 period, expenses were up 35%. The increase in most all noninterest expense line items is predominantly due to non-recurring merger expenses, predominantly legal or consultantthe larger operating base from the 2013 acquisitions being fully included in nature for consummation2014 and integration).only partially included in the first half of 2013.
Salaries and employee benefits expense increased by $2.4was $10.7 million or 36.7%, overfor the first half of 2012, with approximately $12014, up $1.6 million attributable to nonrecurring merger-related costs as noted above.or 17.2% (or up 32.1% excluding the 2013 non-recurring merger-based expense), over the comparable 2013 period. The increase was otherwise commensurate withpartially attributable to the growing workforce from the acquisitions (though less than a one-to-one increase as a result of realization of operating efficiencies) and was also impacted by merit increases between the years, higher health insurance premiums, and higher overtime in preparation for the merger.increased 401k expense. Average full time equivalent employees for the first half of 2014 were 289, up 28% versus 226 for the comparable 2013 were 226, versus 158 for first half 2012 (up 43%).period.
Occupancy, equipment and office expense increased $0.3$1.1 million to $2.6$3.6 million for the first six months of 20132014 compared to first half 2012.2013. This 14.7%41.4% increase is in line with the addition of 1112 branches from the acquisitions which nearlymore than doubled ourthe physical facilities and depreciation expense for two of the first six months in 2013.related expenses. Utilities, rent, snowplowing, and other occupancy expenses increased proportionately in conjunction with the merger.acquisitions, however, a harsher 2014 winter, continued integration on systems and phones, and postage resulted in higher expense between the six-month periods.
Business development and marketing expense increased $0.2 million between the comparable six-month periods. This 19.4% increase includes a greater focus on growth in new markets, including television costs, and higher expense on promotional materials.
Data processing expenses, which are primarily volume-based, rose $0.5 million or 53.7% between the six-month periods, in line with the increase in number of accounts and continued integration of systems. FDIC assessments increased by $0.1 million, mainly given the increase in assets (on which the assessments are based) between the six-month periods. Core deposit intangible amortization increased $0.2 million, attributable to the core deposit intangible recorded with the Mid-Wisconsin acquisition.
Other expense decreased $0.6 million (or 33.1%) to $1.1 million for the first six months of 2014. The first half of 2013 carried non-recurring merger-based expenses (mainly consulting and legal fees) of $0.7 million; without these direct costs, other expense increased modestly by $0.1 million, with the largest variance being an $89,000 increase in foreclosure and OREO expense given the higher amount of OREO acquired and worked.
Income Taxes
For the first six months of 2014, income tax expense was $1.9 million compared to $1.0 million for the same period of 2013. Tax expense for 2014 includes a $0.5 million tax benefit recorded to the deferred tax asset in the second quarter due to the increased ability to utilize net operating losses under the Internal Revenue Code section 382 following the one-year evaluation period related to the acquisition. Tax expense for the first six months of 2013 increased $0.2was influenced by the $10 million compared to the same period in 2012. This 28.8% increase was a result of the greater focus on growth in loans, sales seminars and events, higher charitable donations in 2013, and merger-related travel and business development costs.
Data processing, FDIC assessments and core deposit intangible amortization combined increased from $1.4 million for the first six months in 2012 to $1.7 million for the same period in 2013. Core deposit intangible amortization increased given the new $4.0 million core deposit intangible recorded at acquisition being amortized over a 10-year period. Data processing expenses (which are primarily volume based) rose individually 22.5%, in line with two months of increased size. FDIC assessments declined slightly (down $34,000) despite the rise in assets as Nicolet experienced a reduction in the assessment rate beginning in first quarter 2013.
Other expense increased $0.9 million for the first half of 2013, compared to the same time period in 2012. Legal, consulting, and accounting fees combined accounted for $0.7 million of the increase and were predominantlybargain purchase gain related to the merger activity. The remaining increase is primarily from higher foreclosure expenses and higher insurance costs related to Nicolet’s increased size and public nature.
Income Taxes
For the first six months of 2013 income tax expense was $1.0 million compared to $0.4 for the same period of 2012. The effective tax rates were 7.3% and 24.4% for first six months of 2013 and 2012, respectively, influenced largely by the bargain purchase gainMid-Wisconsin acquisition which was a tax free transaction. The effective tax rate was 28% for the first six monthshalf of 2013 without2014 compared to 7% for the same period in 2013. Excluding the deferred tax adjustment and the bargain purchase gain, would have been 34.7%.effective tax rates were approximately 35% for both six-month periods. GAAP requires that deferred income taxes be analyzed to determine if a valuation allowance is required. A valuation allowance is required if it is more likely than not that some portion of the deferred tax asset will not be realized. No valuation allowance was determined to be necessary.necessary as of June 30, 2014 or December 31, 2013.
Comparison of the three months ending June 30, 20132014 versus 20122013
Nicolet reported net income of $11.5$2.6 million for the three months ended June 30, 2013,2014, compared to $0.6$11.5 million for the comparable period of 2012,2013, with second quarter 2013 including the $10.4 million bargain purchase gain and approximately $1.5 million of non-recurring pre-tax merger-related expenses. Net income available to common shareholders for the second quarter of 20132014 was $11.2$2.5 million, or $2.78$0.58 per diluted common share, compared to net income available to common shareholders of $0.3$11.2 million, or $0.09$2.78 per diluted common share, for the second quarter of 2012.2013. Income statement results and average balances for second quarter 2013 include approximately two months of activity from Mid-Wisconsin.Mid-Wisconsin, while those for the second quarter of 2014 include fully the results of both the Mid-Wisconsin and Bank of Wausau acquisitions.
Taxable equivalent net interest income was $9.0$10.7 million for second quarter 2013,2014, up $3.5$1.7 million or 65.3%19% over second quarter 2012,2013, with $2.9$1.4 million of the increase fromdue to volume variances (givenfrom the larger post-merger balance sheet following the acquisition), and $0.6$0.3 million improvement from rate variances (predominantly from lower cost of funds between the comparable quarters).driven by a higher loan yield.
For the second quarter of 2013, theThe earning asset yield was 4.60%, 184.58% for second quarter 2014, 2 bps lower than the second quarter of last year,2013, mainly due to a decline in the yield on non-loan earning assets (whichwhich had a combined cost 1.71%yield of 1.50%, down 8021 bps from second quarter 2012), and pressured additionally2013. The earning asset yield was also influenced by the non-loan earning assets (which earn less than loans) representingasset mix which represented a higher percentage of average earning assets (to 16.9%(21% for first half 2013second quarter 2014 versus 14.3%17% for first half 2012).second quarter 2013) and carried a higher proportion of low-earning cash between the three-month periods. Loans yielded 5.18%5.40%, up 222 bps over the second quarter 2012,2013, aided mostly by the timing of the acquisition and the positive rate profile of acquired loans.
Between the second quarter periods, the cost of funds declined 51 bpsincreased 1 bp to 0.81%0.82% in 20132014 versus 1.32%2013. This relatively unchanged position is due to a higher proportion of interest bearing liabilities in 2012. Allour lower costing transaction-based deposits (i.e. savings, checking and MMA balances combined represented 65% of average interest bearing liabilities versus 58%, and all showed equal or lower rates than the year ago period in response to rate reductions made to related products). Rates on all term-based funding categories showed significantly lower rates(i.e. core CDs and IRAs, brokered deposits and other wholesale funding) rose between the second quarter periods, asthough their combined balances represented 35% of average interest bearing liabilities versus 42% in the majoritysecond quarter 2013. A portion of brokered deposits and other wholesale funds were paid down post-acquisition (with second quarter 2013 carrying a $0.2 million recovery of prepayment penalty on delayed payoff of acquired FHLB advances), and those renewed were generally at extended maturities, offor interest rate risk considerations, at higher costingrates. Core CDs or wholesale debt were renewed in full or in part into shorter-term, lower-costing funding, and rates offered on many transaction deposit products (within savings, checking and MMA) were lowered by Nicolet over the year since June 30, 2012. Average other interest-bearing liabilities (consisting primarily of FHLB advances, junior subordinated debentures and notes payable) increased $35.8 millionIRAs cost more between the second quarter periods, as approximately 80%largely from the conclusion in February 2014 of Mid-Wisconsin debt acquired was paid off during the quarter and thus inflated the average balance of second quarter 2013. FHLB advances acquired in the Mid-Wisconsin transaction were marked ata favorable fair value assuming immediate payoff; however, they were repaid later in the second quarter, with the most notable result being a $0.2 million ‘recovery’ of prepayment penalty recorded in other expense as required by accounting standards.mark on acquired CDs.
Noninterest income was $13.8$2.9 million for second quarter 2014 as compared to $13.8 million for the second quarter 2013, and(or $3.3 million without the bargain purchase gain). Mortgage fee income was down $0.3 million due to lower production. Net gain was $3.3 million, compared to $2.7 millionon sale or writedown of assets for second quarter 2012. Aside from investment advisory fees and the lower2014 consisted of a $0.6 million writedown of an acquired former branch building moved to OREO offset by a $0.2 million net gain on OREO resolutions, while second quarter 2013 included $0.3 million of net gains on saleOREO sales offset by $0.2 million net losses on sales of assets, all otherinvestments (mainly the result of selling a large portion of the acquired investment portfolio in second quarter to prepay higher costing debt assumed in the Mid-Wisconsin acquisition). The remaining noninterest income categories increased mainlywere comparable between the second quarters, in light of being athe larger institution with increased volumes. Other income for second quarteroperating base and timing of 2013 nearly doubled to $0.4 million versus the second quarter of 2012, mainly due to higher fee income ancillary to deposit activity (such as debit cards, wires and checking cashing, and safe deposit boxes) given our increased size.acquisitions.
Noninterest expense was $9.6$9.5 million for the second quarter of 2013, up $3.62014, down $0.1 million overfrom second quarter 2012, including approximately2013; however, excluding the $1.5 million of non-recurring merger-based expenses (approximately $1 million in personnel costs and $0.5 million other expenses) incurred in the 2013 period, expenses were up 16.7%, reflecting proportionate increases as a result of the timing and size of the merger. For2013 acquisitions. Salaries and employee benefits declined slightly between the second quarter periods, but were up 18.2% excluding the impact of the above-noted merger costs, and reflective of only two months of merged activity in 2013 and merit increases between the years. Period end full time equivalent employees have remained nearly unchanged from June 30, 2013 to June 30, 2014. FDIC assessments were down 5.8% minimallyup 56.2% from the prior year but increased from the first quarter of 2013 by $20,000 as a result of the larger asset size.size upon which assessments are based. Other expenses include(including legal, consulting and audit expense and increased $0.7expense) decreased $0.6 million forbetween the second quarter of 2013 when comparedperiods, primarily due to the above-noted merger costs in the 2013 period. The remaining expense categories reflected proportional increases, considering second quarter 2013 only included two months of 2012. These expenses included approximately $0.4 million in the second quarter alone with the primary expense related to the payment of the investment banker on consummation of the merger. Additional consulting and legal expenses were up $0.1 million when compared to the first quarter of 2013 and represented approximately $0.6 million in total for the year. We did realize a net gain on repayment of FHLB advances of $0.2 million as a result of incurring less prepayment penalty than determined at the time of merger due to a slight lag in paying off the debt, however much of this was captured in increased interest expenses while we maintained the advances.merged activity.
The provision for loan losses for the three months ended June 30, 2014 and 2013 was $0.7 million and 2012 was $1.0 million and $1.1 million respectively. At June 30, 2013, the ALLL was $7.7 million (or 0.91% of total loans) compared to $6.0 million (or 1.19% of total loans) at June 30, 2012. Net charge offs for the quarter ending June 30, 20132014 were $0.9$0.3 million compared to $1.1$0.9 million for the same period in 2012.2013. At June 30, 2014, the ALLL was $9.6 million (or 1.12% of total loans) compared to $7.7 million (or 0.91% of total loans) at June 30, 2013.
Income tax expense was $0.5$0.6 million and $0.2$0.5 million for the second quarters of 20132014 and 2012,2013, respectively. The effective tax rates were 4.5% (or 34.4% when removing19.9% for second quarter 2014 (impacted by the impact of$0.5 million tax benefit recorded to the deferred tax free bargain purchase gain)asset in the quarter related to net operating loss utilization potential) and 4.5% for second quarter 2013 and 26.5% for second quarter 2012. (impacted by the tax free nature of the Mid-Wisconsin acquisition).
BALANCE SHEET ANALYSIS
Loans
Nicolet services a diverse customer base throughout Northeast and Central Wisconsin and in Menominee, Michigan including the following industries: manufacturing, agriculture, wholesaling, retail, service, and businesses supporting the general building industry. It continues to concentrate its efforts in originating loans in its local markets and assisting its current loan customers. It actively utilizes government loan programs such as those provided by the U.S. Small Business Administration to help customers weather current economic conditions and position their businesses for the future.
Nicolet’s primary lending function is to make commercial loans, consisting of commercial and industrial business loans, agricultural production, and owner-occupied commercial real estate loans; commercial real estate (“CRE”)CRE loans, consisting of commercial investment real estate loans, agricultural real estate, and construction and land development loans; residential real estate loans, including residential first mortgages, residential junior mortgages (such as home equity loans and lines), and to a lesser degree residential construction loans; and retail and other loans.
Total loans were $841$860 million at June 30, 20132014 compared to $553$847 million at December 31, 2012.2013. This balance included acquired loans of $272$13 million at acquisition, representing a net increase of $16 million of originated loans. The increase was largely due to strong loanrepresented 2% growth in the second quarterfirst half of $272014 and $20 million offsettingor 2% growth over the $11balance at June 30, 2013. Removing the $284 million decrease which occurred inof loans added at acquisition (i.e. removing $272 million from Mid-Wisconsin from both June 30, 2014 and 2013, and $12 million from Bank of Wausau from June 30, 2014), loans grew organically 1% between the first quarter versus year end 2012.June 30 periods.
Table 8: Period End Loan Composition
| | | | | | June 30, 2014 | | | December 31, 2013 | | | June 30, 2013 | |
| | For the three months ended, | | | Amount | | | % of Total | | | Amount | | | % of Total | | | Amount | | | % of Total | |
| | June 30, 2013 | | | March 31, 2013 | | | December 31, 2012 | | | September 30, 2012 | | | June 30, 2012 | | |
(in thousands) | | Amount | | | % of Total | | | Amount | | | % of Total | | | Amount | | | % of Total | | | Amount | | | % of Total | | | Amount | | | % of Total | | |
Commercial & industrial | | $ | 245,856 | | | | 29.3 | % | | $ | 193,288 | | | | 35.7 | % | | $ | 197,301 | | | | 35.8 | % | | $ | 201,049 | | | | 36.8 | % | | $ | 199,028 | | | | 38.5 | % | | $ | 269,377 | | | | 31.3 | % | | $ | 253,674 | | | | 29.9 | % | | $ | 245,856 | | | | 29.3 | % |
Agricultural production | | | 13,114 | | | | 1.6 | | | | 219 | | | | - | | | | 215 | | | | - | | | | 315 | | | | 0.1 | | | | 183 | | | | - | | |
Owner-occupied CRE | | | 181,101 | | | | 21.5 | | | | 107,523 | | | | 19.8 | | | | 106,888 | | | | 19.3 | | | | 105,585 | | | | 19.3 | | | | 115,170 | | | | 22.3 | | | | 187,225 | | | | 21.8 | | | | 187,476 | | | | 22.1 | | | | 181,101 | | | | 21.5 | |
Total commercial loans | | | 440,071 | | | | 52.4 | | | | 301,030 | | | | 55.5 | | | | 304,404 | | | | 55.1 | | | | 306,949 | | | | 56.2 | | | | 314,381 | | | | 60.8 | | |
Agricultural real estate | | | 38,983 | | | | 4.6 | | | | 9,866 | | | | 1.8 | | | | 11,354 | | | | 2.1 | | | | 1,201 | | | | 0.2 | | | | 1,281 | | | | 0.2 | | |
Ag production | | | | 13,982 | | | | 1.6 | | | | 14,256 | | | | 1.7 | | | | 13,114 | | | | 1.6 | |
Ag real estate | | | | 41,934 | | | | 4.9 | | | | 37,057 | | | | 4.4 | | | | 38,983 | | | | 4.6 | |
CRE investment | | | 117,264 | | | | 14.0 | | | | 73,410 | | | | 13.5 | | | | 76,618 | | | | 13.9 | | | | 76,773 | | | | 14.1 | | | | 62,857 | | | | 12.2 | | | | 79,639 | | | | 9.3 | | | | 90,295 | | | | 10.7 | | | | 117,264 | | | | 14.0 | |
Construction & land development | | | 37,754 | | | | 4.5 | | | | 22,286 | | | | 4.1 | | | | 21,791 | | | | 3.9 | | | | 26,964 | | | | 4.9 | | | | 24,612 | | | | 4.8 | | | | 45,504 | | | | 5.3 | | | | 42,881 | | | | 5.1 | | | | 37,754 | | | | 4.5 | |
Total CRE loans | | | 194,001 | | | | 23.1 | | | | 105,562 | | | | 19.4 | | | | 109,763 | | | | 19.9 | | | | 104,938 | | | | 19.2 | | | | 88,750 | | | | 17.2 | | |
Residential construction | | | 10,288 | | | | 1.2 | | | | 7,445 | | | | 1.4 | | | | 7,957 | | | | 1.4 | | | | 7,670 | | | | 1.4 | | | | 5,961 | | | | 1.2 | | | | 11,895 | | | | 1.4 | | | | 12,535 | | | | 1.5 | | | | 10,288 | | | | 1.2 | |
Residential first mortgage | | | 141,255 | | | | 16.8 | | | | 86,202 | | | | 15.9 | | | | 85,588 | | | | 15.5 | | | | 79,543 | | | | 14.6 | | | | 63,156 | | | | 12.2 | | | | 154,713 | | | | 18.0 | | | | 154,403 | | | | 18.2 | | | | 141,255 | | | | 16.8 | |
Residential junior mortgage | | | 48,929 | | | | 5.8 | | | | 39,026 | | | | 7.2 | | | | 39,352 | | | | 7.1 | | | | 40,928 | | | | 7.5 | | | | 38,082 | | | | 7.4 | | | | 50,244 | | | | 5.8 | | | | 49,363 | | | | 5.8 | | | | 48,929 | | | | 5.8 | |
Total residential real estate loans | | | 200,472 | | | | 23.8 | | | | 132,673 | | | | 24.5 | | | | 132,897 | | | | 24.0 | | | | 128,141 | | | | 23.5 | | | | 107,199 | | | | 20.8 | | |
Retail & other | | | 6,002 | | | | 0.7 | | | | 2,859 | | | | 0.6 | | | | 5,537 | | | | 1.0 | | | | 5,680 | | | | 1.1 | | | | 6,662 | | | | 1.2 | | | | 5,573 | | | | 0.6 | | | | 5,418 | | | | 0.6 | | | | 6,002 | | | | 0.7 | |
Total loans | | $ | 840,546 | | | | 100.0 | % | | $ | 542,124 | | | | 100.0 | % | | $ | 552,601 | | | | 100.0 | % | | $ | 545,708 | | | | 100.0 | % | | $ | 516,992 | | | | 100.0 | % | | $ | 860,086 | | | | 100 | % | | $ | 847,358 | | | | 100 | % | | $ | 840,546 | | | | 100 | % |
TotalBroadly, commercial-based loans (i.e. commercial, agricultural, CRE and total CREconstruction loans combinedcombined) versus retail-based loans (i.e. residential real estate and other retail loans) were 75.5%unchanged at 74% commercial-based and 26% retail-based at June 30, 2013 compared to 74.9% of the total loan portfolio at2014 and December 31, 2012. Mid-Wisconsin had a higher proportion of CRE2013. Commercial-based loans thus post-merger total CRE rose to 23.1% at June 30, 2013 compared to 19.9% at December 31, 2012 while total commercial loans declined to 52.4% versus 55.1% for the respective periods. All commercial loans (commercial and CRE combined) are considered to have more inherent risk of default than residential mortgage or retailretail-based loans, in part because the commercial balance per borrower is typically larger than that for residential and mortgageretail-based loans, implying higher potential losses on an individual customer basis, and the underlying dependence of the commercial borrower’s success on many influences such as health of the economy, real estate values, and efficient business practices.basis.
TotalCommercial and industrial loans consist primarily of commercial loans were 52.4% of total loans at June 30, 2013. The increase in commercial loan balances from June 2012 to June 2013 has resulted primarily from the acquisition, but also renewed loan demand from business borrowers based on cautious optimism for improving economic conditions versussmall businesses and, to a year ago. The increase in agricultural production loans was almost entirely the result of the acquisition with the central region of the state having a strong farming base. All commercial loan segments includelesser degree, to municipalities within a diverse range of industries. The credit risk related to commercial and industrial loans agricultural productionis largely influenced by general economic conditions and the resulting impact on a borrower’s operations, or on the value of underlying collateral, if any. Commercial and industrial loans increased $16 million since year end 2013. Commercial and industrial loans continue to be the largest segment of Nicolet’s portfolio and increased to 31.3% of the total portfolio at June 30, 2014, up from 29.9% at December 31, 2013.
Owner-occupied CRE loans declined to 21.8% of loans at June 30, 2014 from 22.1% at December 31, 2013 and primarily consist of loans within a diverse range of industries secured by business real estate that is occupied by borrowers (i.e. who operate their businesses out of the underlying collateral) and who may also have commercial and industrial loans. Thecredit risk related to owner-occupied CRE loans is largely influenced by general economic conditions and the resulting impact on a borrower’s operations, or on the value of underlying collateral, if any.collateral.
Total CREAgricultural production and agricultural real estate loans were 23.1%combined consist of loans secured by farmland and related farming operations. The credit risk related to agricultural loans is largely influenced by the prices farmers can get for their production and/or the underlying value of the farmland. In total, the agricultural loans increased $5 million since year end 2013, representing 6.5% of total loans at June 30, 2013. CRE investment loans comprised 14.0% of the portfolio at June 30, 2013 compared to 13.9%2014, versus 6.1% at December 31, 2012. 2013.
The CRE investment loan classification primarily includes commercial-based mortgage loans that are secured by non-owner occupied, nonfarm/nonresidential real estate properties, and multi-family residential properties. The increaseLending in agriculturalthis segment has been focused on loans that are secured by commercial income-producing properties as opposed to speculative real estate development. The balance of these loans (at 4.6%declined $11 million since year end 2013, declining as a percent of loans from 10.7% to 9.3% at June 30, 2014.
Loans in the construction and land development portfolio represent 5.3% of total loans versus 2.1% at June 30, 20132014 and year end 2012, respectively) was almost entirely the result of the acquisition with the central region of Wisconsin having a strong farming base. Construction and land developmentsuch loans were 4.5% at June 30, 2013 compared to 3.9% December 31, 2012. Loans in this classification provide financing for the development of commercial income properties, multi-family residential development, and land designated for future development. CreditNicolet controls the credit risk on these types of loans is controlled by making loans in familiar markets, reviewing the merits of individual projects, controlling loan structure, and monitoring the progress of projects through the analysis of construction advances. This category has been decreasing as Nicolet has limited new lending to reduce its credit exposure and the acquisition did not significantly impact this category. Lending in this segment has been focused on loans that are secured by commercial income-producing properties as opposed to speculative real estate development. Credit risk on both CRE investment loans and construction and land development loans is managed by employing sound underwriting guidelines, lending primarily to borrowers in local markets, periodically evaluating the underlying collateral, and formally reviewing the borrower’s financial soundness and relationships on an ongoing basis. Lending on originated loans in this area declined steadily both in total dollars and as a percentage of the portfolio over the past several years, with the 2013 increase attributable to the 2013 acquisitions. Since December 31, 2013, balances have increased $3 million but remained relatively consistent as a percent of loans given the overall increase in total loan balances since year end.
Residential constructionOn a combined basis, Nicolet’s residential real estate loans were 1.2%represent 25.2% of total loans at June 30, 2013 compared to 1.4% at2014, down 0.3% from December 31, 2012 representing a continued downward trend in these types of loans.
Residential first mortgage real estate loans increased slightly from 15.5% at December 31, 2012 to 16.8% largely as a result of acquired balances.2013. Residential first mortgage loans include conventional first-lien home mortgages and exclude loans held for sale in the secondary market. Since early 2012, Nicolet has retained specific high quality residential mortgages, in part as an alternative to investing in greater volumes of mortgage-backed securities.mortgages. Residential junior mortgage real estate loans increased slightly in balance but declined as a percent of loans from 7.1% at December 31, 2012 to 5.8% of loans at June 30, 2013. Residential junior mortgage real estate loans consist mainly of home equity lines and term loans secured by junior mortgage liens. WhileAcross the industry, home equities generally involve loans that are in second or junior lien positions, but Nicolet has secured many such loans in a first lien position, further mitigating the portfolio risks. Nicolet has not experienced significant losses in theits residential real estate category,loans; however, if declines in market values that have occurred in the residential real estate markets worsen,decline, particularly in Nicolet’s market area, the value of collateral securing its real estate loans could decline further, whichfalling loan-to-value ratios could cause an increase in the provision for loan losses. In light of the uncertainty that exists in the economy and credit markets, there can be no guarantee that Nicolet will not experience additional deterioration resulting from a downturn in credit performance by its residential real estate loan customers. As part of its management of originating residential mortgage loans, the vast majority of Nicolet’s long-term, fixed-rate residential real estate mortgage loans are sold in the secondary market without retaining the servicing rights. At JuneMortgage loans retained in the portfolio are typically of high quality and have historically had low net charge off rates. While mortgage loans normally hold terms of 30 2013, $3.1 millionyears, Nicolet’s portfolio mortgages have an average contractual life of residential mortgages were held for resale to the secondary market, compared to $7.3 million at December 31, 2012.less than 15 years.
RetailLoans in the retail and other loans totaled $6.0 million at June 30, 2013, an increaseclassification represent less than 1% of $0.5 million since December 31, 2012,the total loan portfolio, and represented 0.7% and 1.0% of total loans, respectively. Loans in this classification include predominantly short-term and other personal installment loans not secured by real estate. The decline in retail and other loans is largely a result of consumers preferring home equity-based loans over consumer installment loans, as well as the uncertain and difficult economic conditions reducing consumer demand for leverage in general. Credit risk is primarily controlled by reviewing the creditworthiness of the borrowers, monitoring payment histories, and taking appropriate collateral andand/or guaranty positions. The loan balances in this portfolio remained relatively unchanged from December 31, 2013 to June 30, 2014.
Factors that are important to managing overall credit quality are sound loan underwriting and administration, systematic monitoring of existing loans and commitments, effective loan review on an ongoing basis, early problem loan identification and remedial action to minimize losses, an adequate ALLL, and sound nonaccrual and charge-off policies. An active credit risk management process is used for commercial loans to further ensure that sound and consistent credit decisions are made. The credit management process is regularly reviewed and the process has been modified over the past several years to further strengthen the controls.
The loan portfolio is widely diversified by types of borrowers, industry groups, and market areas. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to multiple numbers of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At June 30, 2013,2014, no significant industry concentrations existed in Nicolet’s portfolio in excess of 25% of total loans. Nicolet has also developed guidelines to manage its exposure to various types of concentration risks.
Allowance for Loan and Lease Losses
In addition to the discussion that follows, see also Note 1, “Basis of Presentation,” and Note 6, “Loans, Allowance for Loan Losses and Credit Quality,” in the Notes to the Unaudited Consolidated Financial Statements.
Credit risks within the loan portfolio are inherently different for each loan type.type as described under “Balance Sheet Analysis-Loans.” Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and on-going review of loan payment performance. Active asset quality administration, including early problem loan identification and timely resolution of problems, aids in the management of credit risk and minimization of loan losses.
The ALLL is established through a provision for loan losses charged to expense to appropriately provide for potential credit losses in the existing loan portfolio. Loans are charged off against the ALLL when management believes that the collection of principal is unlikely. The level of the ALLL represents management’s estimate of an amount of reserves that provides for estimated probable credit losses in the loan portfolio at the balance sheet date. To assess the ALLL, an allocation methodology is applied by Nicolet which focuses on evaluation of qualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to specific loans; (ii) management’s ongoing review and grading of the loan portfolio; (iii) consideration of historical loan loss and delinquency experience on each portfolio segment; (iv) trends in past due and nonperforming loans; (v) the risk characteristics of the various loan segments; (vi) changes in the size and character of the loan portfolio; (vii) concentrations of loans to specific borrowers or industries; (viii) existing and forecasted economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect potential credit losses. Nicolet’s methodology reflects guidance by regulatory agencies to all financial institutions.
At June 30, 2013, the ALLL was $7.7 million, an increase of $0.6 million since December 31, 2012 and $0.2 million since March 31, 2013. The ALLL as a percentage of total loans was 0.91% at June 30, 2013. This is a decline from 1.39% at March 31, 2013 and 1.29% at December 31, 2012. This was largely the result of the acquisition, as loans are recorded directly at their estimated fair value (inclusive of credit-related marks) and no addition to the allowance for loan losses is recorded at consummation. Loss history on the acquired loans will be developed as charge offs occur and an allocation will be made for these loans in future periods as or if needed. The provision for loan losses for the first six months of 2013 was $2.0 million compared to $2.4 million for the same period in 2012. Gross charge-offs were $1.4 million for the first six months of 2013 compared to $2.3 million for the first six months of 2012. Recoveries were $31,000 and $55,000 for the two periods, respectively. As a result, net charge-offs for the first six months of 2013 were $1.4 million compared to $2.2 million for the comparable period in 2012. Commercial and industrial and CRE investment loan charge offs increased compared to 2012 while all other categories saw improvement. Loans charged off are subject to continuous review, and specific efforts are taken to achieve maximum recovery of principal, accrued interest, and related expenses. The level of the provision for loan losses is directly correlated to the assessment of the adequacy of the allowance, including, but not limited to, consideration of the amount of net charge-offs, loan growth, levels of nonperforming loans, and trends in the risk profile of the loan portfolio.
The ALLL was 43.53% and 98.63% of nonperforming assets at June 30, 2013 and December 31, 2012, respectively. Issues impacting asset quality over the past few years have included historically depressed economic factors, such as weakened commercial and residential real estate markets, volatile energy prices, heightened unemployment, and depressed consumer confidence, leading to long resolution periods at low returns. Declining collateral values significantly contributed to elevated levels of nonperforming loans, net charge-offs, and ALLL. Nicolet pursued rigorous workout and resolution plans on problem credits and implemented enhanced underwriting and credit monitoring, particularly in 2010 and 2011. As a result, asset quality stabilized during 2012 and continues to improve in 2013.
Nicolet’s managementManagement allocates the ALLL by pools of risk within each loan portfolio segment. The allocation methodology consists of the following components. First, a specific reserve for the estimated collateral shortfall is established for all loans determined to be impaired. The specific reserve in the ALLL is equal to the aggregate collateral or discounted cash flow shortfall calculated from the impairment analysis.analyses. Loans measured for impairment include nonaccrual loans, non-performing troubled debt-restructurings (“restructured loans”), or other loans determined to be impaired by management. Second, Nicolet’s management allocates ALLL with historical loss rates by loan segment. The loss factors applied in the methodology are periodically re-evaluated and adjusted to reflect changes in historical loss levels on an annual basis. Beginning in the first quarter of 2014, management extended the look-back period on which the average historical loss rates are determined, from a prior three-year period to a rolling 20-quarter (5 year) average, as a means of capturing more of a full credit cycle now that recent period loss levels are stabilizing. Contrarily, the three-year average (used by the Company’s methodology during 2009-2013) was considered more appropriate for the severe and prolonged economic downturn particularly evidenced by higher net charge off levels in 2008 through 2011. Lastly, management allocates ALLL to the remaining loan portfolio using the qualitative factors mentioned above. Consideration is given to those current qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the historical loss experience of each loan segment.
At June 30, 2013, the largest portion of the ALLL is allocated to construction and land development loans at $3.3 million, representing 43.5% of the ALLL (compared to 36.2% allocated to this segment at December 31, 2012), and commensurate with risks in this segment, past loss history and nonaccrual activity. Owner-occupied CRE, CRE investment, and residential first mortgage loans all show significant increase in nonperforming levels, however, the majority of the increase was due to acquired loans which have been marked to fair value and did not require additional allowance at June 30, 2013. At June 30, 2013, $10.6 million of the $14.3 million total nonaccrual loans were acquired loans, thus the remaining $3.7 million are originated nonaccrual loans, down $3.3 million from the $7.0 million nonaccrual loans at December 31, 2012.
Management performs ongoing intensive analyses of its loan portfolio to allow for early identification of customers experiencing financial difficulties, maintains prudent underwriting standards, understands the economy in its markets, and considers the trend of deterioration in loan quality in establishing the level of the ALLL.
Consolidated net income and stockholders’ equity could be affected if Nicolet’s management’s estimate of the ALLL necessary to cover expected losses is subsequently materially different, requiring a change in the level of provision for loan losses to be recorded. While management uses currently available information to recognize losses on loans, future adjustments to the ALLL may be necessary based on newly received appraisals, updated commercial customer financial statements, rapidly deteriorating customer cash flow, and changes in economic conditions that affect Nicolet’s customers. As an integral part of their examination process, federal regulatory agencies also review the ALLL. Such agencies may require additions to the ALLL or may require that certain loan balances be charged-off or downgraded into criticized loan categories when their credit evaluations differ from those of management based on their judgments about information available to them at the time of their examination.
At June 30, 2014, the ALLL was $9.6 million compared to $9.2 million at December 31, 2013. The six-month increase was a result of a 2014 provision of $1.4 million offset by 2014 net charge offs of $0.9 million. Comparatively, the provision for loan losses in the first six months of 2013 was $2.0 million and net charge offs were $1.4 million. Annualized net charge offs as a percent of average loans were 0.22% in the first half of 2014 compared to 0.49% for the first half of 2013 and 0.54% for the entire year of 2013. Loans charged off are subject to continuous review, and specific efforts are taken to achieve maximum recovery of principal, accrued interest, and related expenses. The level of the provision for loan losses is directly correlated to the assessment of the adequacy of the allowance, including, but not limited to, consideration of the amount of net charge-offs, loan growth, levels of nonperforming loans, and trends in the risk profile of the loan portfolio.
The ratio of the ALLL as a percentage of period-end loans was 1.12% at June 30, 2014 compared to 1.09% at December 31, 2013 and 0.91% at June 30, 2013. The ALLL to loans ratio was impacted most after each of the 2013 acquisitions, which combined at their acquisition dates added no ALLL to the numerator and $284 million to the denominator. As events occur in the acquired loan portfolios, an ALLL will be established for this pool of assets as appropriate. At June 30, 2014 $9.6 million of the ALLL was reserved against loans (representing 1.49% of originated loans).
The largest portions of the ALLL were allocated to construction and land development loans and commercial & industrial loans combined, representing 62.9% and 73.3% of the ALLL at June 30, 2014 and December 31, 2013, respectively. The decrease allocation to these categories since December 31, 2013 was the result of changes to allowance allocations as additional qualitative factors are refined, creating a more ratable distribution of the provision across categories.
Table 9: Loan Loss Experience
| | | | | |
| | For the three months ended, | | | For the six months ended | | | Year ended | |
(in thousands) | | June 30, 2013 | | | March 31, 2013 | | | December 31, 2012 | | | September 30, 2012 | | | June 30, 2012 | | | June 30, 2014 | �� | June 30, 2013 | | | December 31, 2013 | |
Allowance for loan losses (ALLL): | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at beginning of period | | $ | 7,540 | | | $ | 7,120 | | | $ | 6,491 | | | $ | 6,045 | | | $ | 5,973 | | | $ | 9,232 | | | $ | 7,120 | | | $ | 7,120 | |
| | | | | | | | | | | | | | | | | | | | | |
Provision for loan losses | | | 975 | | | | 975 | | | | 975 | | | | 975 | | | | 1,125 | | | | 1,350 | | | | 1,950 | | | | 6,200 | |
Charge offs | | | 876 | | | | 567 | | | | 671 | | | | 552 | | | | 1,077 | | |
Charge-offs | | | | 979 | | | | 1,443 | | | | 4,238 | |
Recoveries | | | 19 | | | | 12 | | | | 325 | | | | 23 | | | | 24 | | | | 39 | | | | 31 | | | | 150 | |
Net charge offs | | | 857 | | | | 555 | | | | 346 | | | | 529 | | | | 1,053 | | |
Net charge-offs | | | | 940 | | | | 1,412 | | | | 4,088 | |
Balance at end of period | | $ | 7,658 | | | $ | 7,540 | | | $ | 7,120 | | | $ | 6,491 | | | $ | 6,045 | | | $ | 9,642 | | | $ | 7,658 | | | $ | 9,232 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loan charge offs: | | | | | | | | | | | | | | | | | | | | | |
Net loan charge-offs (recoveries): | | | | | | | | | | | | | |
Commercial & industrial | | $ | (16 | ) | | $ | 470 | | | $ | 164 | | | $ | 48 | | | $ | 66 | | | $ | 524 | | | $ | 454 | | | $ | 534 | |
Owner-occupied CRE | | | | 254 | | | | 111 | | | | 1,851 | |
Agricultural production | | | — | | | | — | | | | — | | | | — | | | | — | | | | - | | | | - | | | | - | |
Owner-occupied CRE | | | 56 | | | | 55 | | | | (291 | ) | | | 300 | | | | 666 | | |
Agricultural real estate | | | — | | | | — | | | | 1 | | | | — | | | | — | | | | - | | | | - | | | | - | |
CRE investment | | | 639 | | | | — | | | | (27 | ) | | | 150 | | | | — | | | | (8 | ) | | | 639 | | | | 992 | |
Construction & land development | | | 36 | | | | — | | | | 406 | | | | (17 | ) | | | 176 | | | | 12 | | | | 36 | | | | 304 | |
Residential construction | | | — | | | | — | | | | — | | | | 1 | | | | 30 | | | | - | | | | - | | | | - | |
Residential first mortgage | | | 44 | | | | 36 | | | | 45 | | | | 48 | | | | 64 | | | | 122 | | | | 80 | | | | 148 | |
Residential junior mortgage | | | 88 | | | | (6 | ) | | | 47 | | | | (1 | ) | | | 13 | | | | 9 | | | | 82 | | | | 189 | |
Retail & other | | | 10 | | | | — | | | | 1 | | | | — | | | | 38 | | | | 27 | | | | 10 | | | | 70 | |
Total net loans charged off | | $ | 857 | | | $ | 555 | | | $ | 346 | | | $ | 529 | | | $ | 1,053 | | |
Total net loans charged-off | | | $ | 940 | | | $ | 1,412 | | | $ | 4,088 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
ALLL to total loans | | | 0.91 | % | | | 1.39 | % | | | 1.29 | % | | | 1.19 | % | | | 1.17 | % | | | 1.12 | % | | | 0.91 | % | | | 1.09 | % |
ALLL to net charge offs | | | 223.40 | % | | | 339.64 | % | | | 514.45 | % | | | 306.76 | % | | | 143.52 | % | |
Net charge offs to average loans, annualized | | | 0.49 | % | | | 0.41 | % | | | 0.25 | % | | | 0.40 | % | | | 0.83 | % | |
ALLL to net charge-offs | | | | 1,026 | % | | | 542 | % | | | 226 | % |
Net charge-offs to average loans, annualized | | | | 0.22 | % | | | 0.49 | % | | | 0.54 | % |
The allocation of the ALLL for each of the past five periods is based on Nicolet’s estimate of loss exposure by category of loans and is shown in Table 10.10 for June 30, 2014 and December 31, 2013.
Table 10: Allocation of the Allowance for Loan Losses
| | | | | | | | | | | | | |
(in thousands) | | June 30, 2013 | | | % of Loan Type to Total Loans | | | December 31, 2012 | | | % of Loan Type to Total Loans | | | June 30, 2014 | | | % of Loan Type to Total Loans | | | December 31, 2013 | | | % of Loan Type to Total Loans | |
ALLL allocation | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial & industrial | | $ | 1,685 | | | | 29.3 | % | | $ | 1,969 | | | | 35.7 | % | | $ | 3,281 | | | | 31.3 | % | | $ | 1,798 | | | | 29.9 | % |
Owner-occupied CRE | | | | 1,096 | | | | 21.8 | | | | 766 | | | | 22.1 | |
Agricultural production | | | 5 | | | | 1.6 | | | | - | | | | 0.1 | | | | 44 | | | | 1.6 | | | | 18 | | | | 1.7 | |
Owner-occupied CRE | | | 1,217 | | | | 21.5 | | | | 1,069 | | | | 19.3 | | |
Agricultural real estate | | | 12 | | | | 4.6 | | | | - | | | | 2.1 | | | | 272 | | | | 4.9 | | | | 59 | | | | 4.4 | |
CRE investment | | | 183 | | | | 14.0 | | | | 337 | | | | 13.9 | | | | 575 | | | | 9.3 | | | | 505 | | | | 10.7 | |
Construction & land development | | | 3,346 | | | | 4.5 | | | | 2,580 | | | | 3.9 | | | | 2,784 | | | | 5.3 | | | | 4,970 | | | | 5.1 | |
Residential construction | | | 173 | | | | 1.2 | | | | 137 | | | | 1.4 | | | | 167 | | | | 1.4 | | | | 229 | | | | 1.5 | |
Residential first mortgage | | | 733 | | | | 16.8 | | | | 685 | | | | 15.5 | | | | 833 | | | | 18.0 | | | | 544 | | | | 18.2 | |
Residential junior mortgage | | | 287 | | | | 5.8 | | | | 312 | | | | 7.1 | | | | 448 | | | | 5.8 | | | | 321 | | | | 5.8 | |
Retail & other | | | 17 | | | | 0.7 | | | | 31 | | | | 1.0 | | | | 142 | | | | 0.6 | | | | 22 | | | | 0.6 | |
Total ALLL | | $ | 7,658 | | | | 100.0 | % | | $ | 7,120 | | | | 100.0 | % | | $ | 9,642 | | | | 100 | % | | $ | 9,232 | | | | 100 | % |
| | | | | | | | | | | | | | | | | |
ALLL category as a percent of total ALLL: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial & industrial | | | 22.0 | % | | | | | | | 27.7 | % | | | | | | | 34.0 | % | | | | | | | 19.5 | % | | | | |
Owner-occupied CRE | | | | 11.4 | | | | | | | | 8.3 | | | | | |
Agricultural production | | | 0.1 | | | | | | | | - | | | | | | | | 0.5 | | | | | | | | 0.2 | | | | | |
Owner-occupied CRE | | | 15.9 | | | | | | | | 15.0 | | | | | | |
Agricultural real estate | | | 0.2 | | | | | | | | - | | | | | | | | 2.8 | | | | | | | | 0.6 | | | | | |
CRE investment | | | 2.4 | | | | | | | | 4.7 | | | | | | | | 6.0 | | | | | | | | 5.5 | | | | | |
Construction & land development | | | 43.5 | | | | | | | | 36.2 | | | | | | | | 28.9 | | | | | | | | 53.8 | | | | | |
Residential construction | | | 2.3 | | | | | | | | 1.9 | | | | | | | | 1.7 | | | | | | | | 2.5 | | | | | |
Residential first mortgage | | | 9.6 | | | | | | | | 9.6 | | | | | | | | 8.6 | | | | | | | | 5.9 | | | | | |
Residential junior mortgage | | | 3.8 | | | | | | | | 4.4 | | | | | | | | 4.6 | | | | | | | | 3.5 | | | | | |
Retail & other | | | 0.2 | | | | | | | | 0.5 | | | | | | | | 1.5 | | | | | | | | 0.2 | | | | | |
Total ALLL | | | 100.0 | % | | | | | | | 100.0 | % | | | | | | | 100 | % | | | | | | | 100 | % | | | | |
Impaired Loans and Nonperforming Assets
As part of its overall credit risk management process, Nicolet’s management has been committed to an aggressive problem loan identification philosophy. This philosophy has been implemented through the ongoing monitoring and review of all pools of risk in the loan portfolio to ensure that problem loans are identified early and the risk of loss is minimized.
Nonperforming loans are considered one indicator of potential future loan losses. Nonperforming loans are defined as nonaccrual loans, including those defined as impaired under current accounting standards, and loans 90 days or more past due but still accruing interest. Loans measured for impairment include significant nonaccrual loans, troubled debt-restructurings (“restructured loans”), or other loans determined to be impaired by management. Loans are generally placed on nonaccrual status when contractually past due 90 days or more as to interest or principal payments. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on loans, it is management’s practice to place such loans on nonaccrual status immediately. Previously accrued and uncollected interest on such loans is reversed, amortization of related loan fees is suspended, and income is recorded only to the extent that interest payments are subsequently received in cash after a determination has been made that the principal balance of the loan is collectible. If collectability of the principal is in doubt, payments received are applied to loan principal.
NonperformingNonaccrual loans were $14.3$7.2 million (consisting of $1.9 million originated loans and $7.0$5.3 million acquired loans) at June 30, 2014 compared to $10.3 million at December 31, 2013. Nonperforming assets (which include nonperforming loans and OREO) were $8.7 million at June 30, 2013 and2014 compared to $12.3 million at December 31, 2012, respectively. This balance2013. OREO decreased from $2.0 million at year end 2013 to $1.5 million at June 30, 2014. OREO at June 30, 2014 included $10.6a branch which was moved from active to inactive status and written to a fair value of $0.2 million of nonperforming loans acquiredresulting in the merger representing a net decline of $3.3$0.6 million in nonperforming originated loans. This continues the improving trendcharge to second quarter earnings. Nonperforming assets as a resultpercent of Nicolet’s aggressive workout efforts over the past three years.total assets were 0.74% at June 30, 2014 compared to 1.02% at December 31, 2013.
The level of potential problem loans is another predominant factor in determining the relative level of risk in the loan portfolio and in determining the adequacy of the ALLL. Potential problem loans are generally defined by management to include loans rated as Substandard by management but that are in performing status; however, there are circumstances present which might adversely affect the ability of the borrower to comply with present repayment terms. The decision of management to include performing loans in potential problem loans does not necessarily mean that Nicolet expects losses to occur, but that management recognizes a higher degree of risk associated with these loans. The loans that have been reported as potential problem loans are predominantly commercialcommercial-based loans covering a diverse range of businesses and real estate property types.
Potential problem loans totaled $16.2were $16.8 million (or 1.9%(2.0% of totalloans) and $18.7 million (2.2% of loans) at June 30, 20132014 and $11.6 million (or 2.1% of total loans) at December 31, 2012.2013, respectively. Potential problem loans require a heightened management review of the pace at which a credit may deteriorate, the duration of asset quality stress, and uncertainty around the magnitude and scope of economic stress that may be felt by Nicolet’s customers and on underlying real estate values.
OREO increased to $3.4 million at June 30, 2013 from $0.2 million at December 31, 2012. The increase was related to one originated loan which had been on nonaccrual and was taken into possession in the first quarter of 2013 with the remaining balance of $1.7 million being acquired in the merger. Total nonperforming assets increased from $7.2 million at December 31, 2012 to $17.7 million at June 30, 2013. The increase in nonperforming assets included acquired loans with a balance of $10.6 million at June 30, 2013. Nicolet’s management actively seeks to ensure properties held are monitored to minimize Nicolet’s risk of loss. Evaluations of the fair market value of the OREO properties are done quarterly and valuation adjustments, if necessary, are recorded in Nicolet’s consolidated financial statements.
Table 11: Nonperforming Assets
| | | | | | | | | | | | | | | | | | |
(in thousands) | | June 30, 2013 | | | March 31, 2013 | | | December 31, 2012 | | | September 30, 2012 | | | June 30, 2012 | | | June 30, 2014 | | | December 31, 2013 | | | June 30, 2013 | |
Nonaccrual loans considered impaired: | | | | | | | | | | | | | | | | |
Nonaccrual loans: | | | | | | | | | | |
Commercial & industrial | | $ | 4 | | | $ | 93 | | | $ | 784 | | | $ | 3,986 | | | $ | 4,088 | | | $ | 517 | | | $ | 68 | | | $ | 4 | |
Owner-occupied CRE | | | | 1,975 | | | | 1,087 | | | | 3,546 | |
Agricultural production | | | 22 | | | | — | | | | — | | | | — | | | | — | | | | 27 | | | | 11 | | | | 22 | |
Owner-occupied CRE | | | 3,546 | | | | 1,857 | | | | 1,960 | | | | 354 | | | | 389 | | |
Agricultural real estate | | | 611 | | | | — | | | | — | | | | — | | | | — | | | | 461 | | | | 448 | | | | 611 | |
CRE investment | | | 5,546 | | | | — | | | | — | | | | 380 | | | | 544 | | | | 1,607 | | | | 4,631 | | | | 5,546 | |
Construction & land development | | | 790 | | | | — | | | | 2,560 | | | | 8,558 | | | | 8,531 | | | | 479 | | | | 1,265 | | | | 790 | |
Residential construction | | | — | | | | — | | | | — | | | | 397 | | | | 1,200 | | | | — | | | | — | | | | — | |
Residential first mortgage | | | 3,394 | | | | 628 | | | | 1,580 | | | | 1,326 | | | | 396 | | | | 1,671 | | | | 2,365 | | | | 3,394 | |
Residential junior mortgage | | | 257 | | | | — | | | | — | | | | — | | | | 36 | | | | 461 | | | | 262 | | | | 257 | |
Retail & other | | | 135 | | | | 149 | | | | 142 | | | | 151 | | | | 151 | | | | — | | | | 129 | | | | 135 | |
Total nonaccrual loans considered impaired | | | 14,307 | | | | 2,727 | | | | 7,026 | | | | 15,152 | | | | 15,335 | | |
Impaired loans still accruing interest | | | — | | | | — | | | | — | | | | — | | | | — | | |
Total nonaccrual loans | | | | 7,198 | | | | 10,266 | | | | 14,307 | |
Accruing loans past due 90 days or more | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Total nonperforming loans | | $ | 14,307 | | | $ | 2,727 | | | $ | 7,026 | | | $ | 15,152 | | | $ | 15,335 | | | $ | 7,198 | | | $ | 10,266 | | | $ | 14,307 | |
CRE investment | | $ | 360 | | | $ | 121 | | | $ | 71 | | | $ | 393 | | | $ | 393 | | | $ | 558 | | | $ | 935 | | | $ | 360 | |
Owner-occupied CRE | | | 604 | | | | — | | | | — | | | | — | | | | — | | | | 259 | | | | — | | | | 604 | |
Construction & land development | | | 1,925 | | | | 1,917 | | | | 17 | | | | 19 | | | | 44 | | | | 418 | | | | 854 | | | | 1,925 | |
Residential real estate owned | | | 471 | | | | — | | | | 105 | | | | 205 | | | | 453 | | | | 67 | | | | 198 | | | | 471 | |
Bank property real estate owned | | | | 200 | | | | — | | | | — | |
OREO | | | 3,360 | | | | 2,038 | | | | 193 | | | | 617 | | | | 890 | | | | 1,502 | | | | 1,987 | | | | 3,360 | |
Total nonperforming assets | | $ | 17,667 | | | $ | 4,765 | | | $ | 7,219 | | | $ | 15,769 | | | $ | 16,225 | | | $ | 8,700 | | | $ | 12,253 | | | $ | 17,667 | |
Total restructured loans accruing | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 3,879 | | | $ | 3,862 | | | $ | — | |
Ratios | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nonperforming loans to total loans | | | 1.7 | % | | | 0.5 | % | | | 1.3 | % | | | 2.8 | % | | | 3.0 | % | | | 0.84 | % | | | 1.21 | % | | | 1.70 | % |
Nonperforming assets to total loans plus OREO | | | 2.09 | % | | | 0.88 | % | | | 1.31 | % | | | 2.89 | % | | | 3.13 | % | | | 1.01 | % | | | 1.44 | % | | | 2.09 | % |
Nonperforming assets to total assets | | | 1.62 | % | | | 0.70 | % | | | 0.97 | % | | | 2.46 | % | | | 2.42 | % | | | 0.74 | % | | | 1.02 | % | | | 1.62 | % |
ALLL to nonperforming assets | | | 43.35 | % | | | 158.24 | % | | | 98.63 | % | | | 41.16 | % | | | 37.27 | % | |
ALLL to total loans at end of year | | | 0.91 | % | | | 1.39 | % | | | 1.29 | % | | | 1.19 | % | | | 1.17 | % | |
ALLL to nonperforming loans | | | | 134.0 | % | | | 89.9 | % | | | 43.4 | % |
ALLL to total loans | | | | 1.12 | % | | | 1.09 | % | | | 0.91 | % |
Table 12: Investment Securities Portfolio
| | | | | | | | | | | | | | | | | | | |
| | June 30, 2013 | | | December 31, 2012 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | June 30, 2014 | | | December 31, 2013 | |
(in thousands) | | Amortized Cost | | | Fair Value | | | % of Total | | | Amortized Cost | | | Fair Value | | | % of Total | | | Amortized Cost | | | Fair Value | | | % of Total | | | Amortized Cost | | | Fair Value | | | % of Total | |
U.S. government sponsored enterprises | | $ | 1,000 | | | $ | 1,001 | | | | 1 | % | | $ | - | | | $ | - | | | | - | % | |
U.S. Government sponsored enterprises | | | $ | 1,532 | | | $ | 1,537 | | | | 1 | % | | $ | 2,062 | | | $ | 2,057 | | | | 2 | % |
State, county and municipals | | | 51,742 | | | | 52,340 | | | | 40 | % | | | 31,642 | | | $ | 32,687 | | | | 58 | % | | | 76,446 | | | | 77,067 | | | | 54 | % | | | 54,594 | | | | 55,039 | | | | 43 | % |
Mortgage-backed securities | | | 73,581 | | | | 73,263 | | | | 57 | % | | | 19,876 | | | | 20,668 | | | | 37 | % | | | 62,946 | | | | 62,928 | | | | 44 | % | | | 68,642 | | | | 67,879 | | | | 53 | % |
Corporate debt securities | | | 220 | | | | 220 | | | | - | % | | | - | | | | - | | | | - | % | | | 220 | | | | 220 | | | | - | | | | 220 | | | | 220 | | | | - | |
Equity securities | | | 1,576 | | | | 3,164 | | | | 2 | % | | | 1,624 | | | | 2,546 | | | | 5 | % | | | 715 | | | | 1,903 | | | | 1 | % | | | 905 | | | | 2,320 | | | | 2 | % |
Total | | $ | 128,119 | | | $ | 129,988 | | | | 100 | % | | $ | 53,142 | | | $ | 55,901 | | | | 100 | % | | $ | 141,859 | | | $ | 143,655 | | | | 100 | % | | $ | 126,423 | | | $ | 127,515 | | | | 100 | % |
At June 30, 20132014 the total carrying value of investment securities was $130.0$144 million, up from $55.9$128 million at December 31, 2012,2013, and represented 11.9%12.2% and 7.5%10.6% of total assets at June 30, 20132014 and December 31, 2012,2013, respectively. As part of the merger, securities with a fair value of $119 million were acquired and as of June 30, 2013 approximately $44 million had been sold in conjunction with planned reductions.
At June 30, 2013,2014, the securities portfolio did not contain securities of any single issuer that were payable from and secured by the same source of revenue or taxing authority where the aggregate carrying value of such securities exceeded 10% of shareholders’ equity.
In addition to securities available for sale, Nicolet had other investments of $7.5 million and $5.2$8.0 million at June 30, 20132014 and December 31, 2012, respectively,2013, consisting of capital stock in the Federal Reserve and the FHLB (required as members of the Federal Reserve Bank System and the Federal Home Loan Bank System), and the Federal Agricultural Mortgage Corporation, as well as equity investments in other privateprivately-traded companies. The FHLB and Federal Reserve investments are “restricted” in that they can only be sold back to the respective institutions or another member institution at par, and are thus, not liquid, have no ready market or quoted market value, and are carried at cost. The remaining investments in private companies have no quoted market prices, and are carried at cost less other than temporary impairment (“OTTI”) charges, if any. Nicolet’s management evaluates all these other investments periodically for impairment, considering financial condition and other available relevant information. There were no OTTI charges recorded in 20122013 or year to date 2013.
2014.
Table 13: Investment Securities Portfolio Maturity Distribution
| | As of June 30, 2014 | |
| | Within One Year | | | After One but Within Five Years | | | After Five but Within Ten Years | | | After Ten Years | | | Mortgage- related and Equity Securities | | | Total Amortized Cost | | | Total Fair Value Amount | |
| | Amount | | Yield | | | Amount | | Yield | | | Amount | | Yield | | | Amount | | Yield | | | Amount | | Yield | | | Amount | | Yield | |
(in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. government sponsored enterprises | | $ | 1,011 | | | 4.1 | % | | $ | — | | | — | % | | $ | 521 | | | 1.8 | % | | $ | — | | | — | % | | $ | — | | | — | % | | $ | 1,532 | | | 3.3 | % | | $ | 1,537 | |
State and county municipals (1) | | | 4,209 | | | 3.2 | | | | 62,344 | | | 2.5 | | | | 9,028 | | | 3.0 | | | | 865 | | | 3.0 | | | | — | | | — | | | | 76,446 | | | 2.6 | | | | 77,067 | |
Corporate debt securities | | | — | | | — | | | | — | | | — | | | | — | | | — | | | | 220 | | | 2.0 | | | | — | | | — | | | | 220 | | | 2.0 | | | | 220 | |
Mortgage-backed securities | | | — | | | — | | | | — | | | — | | | | — | | | — | | | | — | | | — | | | | 62,946 | | | 3.4 | | | | 62,946 | | | 3.4 | | | | 62,928 | |
Equity securities | | | — | | | — | | | | — | | | — | | | | — | | | — | | | | — | | | — | | | | 715 | | | — | | | | 715 | | | — | | | | 1,903 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total amortized cost | | $ | 5,220 | | | 3.4 | % | | $ | 62,344 | | | 2.5 | % | | $ | 9,549 | | | 2.9 | % | | $ | 1,085 | | | 2.8 | % | | $ | 63,661 | | | 3.4 | % | | $ | 141,859 | | | 3.0 | % | | $ | 143,655 | |
Total fair value and carrying value | | $ | 5,276 | | | | | | $ | 62,986 | | | | | | $ | 9,471 | | | | | | $ | 1,091 | | | | | | $ | 64,831 | | | | | | | | | | | | | $ | 143,655 | |
| | As of June 30, 2013 | |
| | Within One Year | | | After One but Within Five Years | | | After Five but Within Ten Years | | | After Ten Years | | | Mortgage- related and Equity Securities | | | Total Amortized Cost | | | Total Fair Value Amount | |
| | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | |
(in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. government sponsored enterprises | | $ | — | | | | — | % | | $ | 1,000 | | | | 0.3 | % | | $ | — | | | | — | % | | $ | — | | | | — | % | | $ | — | | | | — | % | | $ | 1,000 | | | | 0.3 | % | | $ | 1,001 | |
State and county municipals (1) | | | 5,263 | | | | 3.3 | | | | 37,268 | | | | 2.3 | | | | 8,835 | | | | 1.7 | | | | 375 | | | | 4.1 | | | | — | | | | — | | | | 51,741 | | | | 4.0 | | | | 52,340 | |
Corporate debt securities | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 220 | | | | 9.9 | | | | — | | | | — | | | | 220 | | | | 9.9 | | | | 220 | |
Mortgage-backed securities | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 73,581 | | | | 1.7 | | | | 73,581 | | | | 1.7 | | | | 73,263 | |
Equity securities | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,576 | | | | — | | | | 1,576 | | | | — | | | | 3,164 | |
Total amortized cost | | $ | 5,263 | | | | 3.3 | % | | $ | 38,268 | | | | 2.2 | % | | $ | 8,835 | | | | 1.7 | % | | $ | 595 | | | | 6.2 | % | | $ | 75,157 | | | | 1.7 | % | | $ | 128,118 | | | | 2.6 | % | | $ | 129,988 | |
Total fair value and carrying value | | $ | 5,320 | | | | | | | $ | 39,124 | | | | | | | $ | 8,522 | | | | | | | $ | 595 | | | | | | | $ | 76,427 | | | | | | | | | | | | | | | $ | 129,988 | |
(1) | The yield on tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 34% adjusted for the disallowance of interest expense. |
Deposits
Deposits represent Nicolet’s largest source of funds. Nicolet competes with other bank and nonbank institutions for deposits, as well as with a growing number of non-deposit investment alternatives available to depositors, such as mutual funds, money market funds, annuities, and other brokerage investment products. Challenges to deposit growth include price changes on deposit products given movements in the rate environment and other competitive pricing pressures, and customer preferences regarding higher-costing deposit products or non-deposit investment alternatives. Included in total deposits in Table 14 are brokered deposits of $61.9$29 million at June 30, 20132014 and $32.6$50 million at December 31, 2012.2013.
Table 14: Deposits
| | June 30, 2013 | | | December 31, 2012 | | | June 30, 2014 | | | December 31, 2013 | |
(in thousands) | | Amount | | | % of Total | | | Amount | | | % of Total | | | Amount | | | % of Total | | | Amount | | | % of Total | |
Demand | | $ | 150,460 | | | | 16.6 | % | | $ | 108,234 | | | | 17.6 | % | | $ | 190,464 | | | | 18.8 | % | | $ | 171,321 | | | | 16.6 | % |
Money market and NOW accounts | | | 387,377 | | | | 42.7 | % | | | 322,507 | | | | 52.3 | % | | | 451,791 | | | | 44.7 | % | | | 492,499 | | | | 47.6 | % |
Savings | | | 90,202 | | | | 9.9 | % | | | 46,907 | | | | 7.6 | % | | | 112,232 | | | | 11.1 | % | | | 97,601 | | | | 9.4 | % |
Time | | | 280,044 | | | | 30.8 | % | | | 138,445 | | | | 22.5 | % | | | 256,634 | | | | 25.4 | % | | | 273,413 | | | | 26.4 | % |
Total deposits | | $ | 908,083 | | | | 100.0 | % | | $ | 616,093 | | | | 100.0 | % | | $ | 1,011,121 | | | | 100 | % | | $ | 1,034,834 | | | | 100 | % |
Total deposits were $908 million$1.01 billion at June 30, 2013, an increase of $292 million2014, with no significant change since December 31, 2012, with $346 million of deposits from Mid-Wisconsin at acquisition. The decline of $54 million in deposits mirrors seasonality within the customer base with deposits typically seen.2013. On average for the quarter,first six months of 2014, total deposits were $699 million, an increase of $176 million over 2012 averages, which includes two months of average deposit balances from merged activity. The mix of average deposits continues to be impacted by a continued shift in customer preferences, predominantly away from time deposits.$1.03 billion.
Table 15: Average Deposits
| | For the six months ended, | | For the six months ended, | |
| | June 30, 2013 | | June 30, 2012 | | June 30, 2014 | | June 30, 2013 | |
(in thousands) | | Amount | | % of Total | | Amount | | % of Total | | Amount | | % of Total | | Amount | | % of Total | |
Demand | | $ | 110,189 | | | | 15.8 | % | | $ | 74,719 | | | | 14.3 | % | | $ | 165,177 | | | | 16.1 | % | | $ | 110,189 | | | | 15.8 | % |
Money market and NOW accounts | | | 340,787 | | | | 48.8 | % | | | 253,982 | | | | 48.6 | % | | | 485,895 | | | | 47.5 | % | | | 340,787 | | | | 48.8 | % |
Savings | | | 64,602 | | | | 9.2 | % | | | 27,694 | | | | 5.3 | % | | | 103,854 | | | | 10.1 | % | | | 64,602 | | | | 9.2 | % |
Time | | | 183,238 | | | | 26.2 | % | | | 166,407 | | | | 31.8 | % | | | 269,373 | | | | 26.3 | % | | | 183,238 | | | | 26.2 | % |
Total | | $ | 698,816 | | | | 100.0 | % | | $ | 522,802 | | | | 100.0 | % | | $ | 1,024,299 | | | | 100 | % | | $ | 698,816 | | | | 100 | % |
Table 16: Maturity Distribution of Certificates of Deposit
| | | | |
(in thousands) | | June 30, 2013 | | | June 30, 2014 | |
3 months or less | | $ | 84,217 | | | $ | 39,140 | |
Over 3 months through 6 months | | 32,448 | | | 37,496 | |
Over 6 months through 12 months | | 74,532 | | | 52,765 | |
Over 12 months | | | 88,847 | | | | 127,233 | |
| | | | | | |
Total | | $ | 280,044 | | | $ | 256,634 | |
Other Funding Sources
Other funding sources, which include short-term and long-term borrowings (notes payable and junior subordinated debentures), were $70.3$43 million and $45.4$52 million at June 30, 20132014 and December 31, 2012,2013, respectively. Short-term borrowings, consisting mainly of customer repurchase agreements and FHLB advances maturing in less than three months, totaled $33.2$3 million at June 30, 20132014 and $4.0$7 million at December 31, 2012.2013. Long-term borrowings include a joint venture note and FHLB advances, totaling $25.0$27 million and $32 million at June 30, 2013 compared to $35.2 million at2014 and December 31, 2012, attributable to scheduled principal payments on the joint venture note payable and repayment of $10 million of longer term FHLB advances during first quarter 2013, (with a prepayment penalty of $96,000 recorded in other expense). At acquisition, $48 million of short and long term debt (excluding subordinated debentures) was assumed and then paid off by June 30, 2013. FHLB advances acquired in the Mid-Wisconsin transaction were marked at fair value assuming immediate payoff; however, they were repaid later in the second quarter, with the most notable result being a $0.2 million ‘recovery’ of prepayment penalty recorded in other expense.respectively. Junior subordinated debentures are another long-term funding source.source totaling $12 million at June 30, 2014 and December 31, 2013. Junior subordinated debentures of $6.2 million were issued in July 2004 in connection with the $6 million of trust preferred securities. Acquired junior subordinated debentures of $10.3 million in connection with $10 million of trust preferred securities were assumed in the Mid-Wisconsin merger and subsequentlyinitially recorded at the fair market value of $5.8 million.million, with the discount being accreted to interest expense over the remaining life of the debentures. Further information regarding these junior subordinated debentures is located in Note 9 of“Note 8 – Junior Subordinated Debentures” in the unaudited consolidated financial statements.Notes to the Unaudited Consolidated Financial Statements.
Off-Balance Sheet Obligations
As of June 30, 20132014 and December 31, 2012,2013, Nicolet had the following commitments that did not appear on its balance sheet:
Table 17: Commitments
| | June 30, | | | December 31, | |
| | 2013 | | | 2012 | |
(in thousands) | | | | | | |
Commitments to extend credit — Fixed and variable rate | | $ | 232,629 | | | $ | 178,676 | |
Standby and irrevocable letters of credit-fixed rate | | | 7,582 | | | | 4,050 | |
Contractual Obligations
Nicolet is party to various contractual obligations requiring the use of funds as part of its normal operations. Most of these obligations are routinely refinanced into similar replacement obligations. However, renewal of these obligations is dependent on its ability to offer competitive interest rates, liquidity needs, or availability of collateral for pledging purposes supporting the long-term advances.
At the completion of the construction of Nicolet’s headquarters building in 2005 and as part of a joint venture investment related to the building, Nicolet 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 balance of this joint venture note was $10.0 million and $10.2 million as of June 30, 2013 and December 31, 2012, respectively. | | June 30, | | | December 31, | |
| | 2014 | | | 2013 | |
(in thousands) | | | | | | |
Commitments to extend credit — Fixed and variable rate | | $ | 226,255 | | | $ | 234,930 | |
Standby and irrevocable letters of credit-fixed rate | | | 5,906 | | | | 6,371 | |
Liquidity and Interest Rate Sensitivity
Liquidity management refers to the ability to ensure that cash is available in a timely and cost-effective manner to meet cash flow requirements of depositors and borrowers and to meet other commitments as they fall due, including the ability to pay dividends to shareholders, service debt, invest in subsidiaries, repurchase common stock, and satisfy other operating requirements.
Funds are available from a number of basic banking activity sources including but not limited to the core deposit base, the repayment and maturity of loans, investment securities calls, maturities, and sales, and sales offunds obtained through brokered deposits. All investment securities are classified as available for sale and are reported at fair value on the consolidated balance sheet. Approximately $60$55 million of the $130$144 million investment securities portfolio on hand at June 30, 20132014 was pledged to secure public deposits, short-term borrowings, repurchase agreements, and for other purposes as required by law. Other funding sources available include short-term borrowings, federal funds purchased, and long-term borrowings.
Cash and cash equivalents at June 30, 20132014 and December 31, 20122013 were approximately $36$86 million and $82$147 million, respectively. The increased cash and cash equivalents at year end compared to historical levels were2013 was predominantly due to strong customer deposit growth outpacing the loan demand. These levels returned to more historical levels duringhave declined through the first quarter.half of 2014 as is typical of Nicolet’s historical deposit behaviors. Nicolet’s liquidity resources were sufficient as of June 30, 20132014 to fund loans and to meet other cash needs as necessary.
Interest Rate Sensitivity Gap Analysis
Table 18 represents a schedule of Nicolet’s assets and liabilities repricing over various time intervals. The primary market risk faced by Nicolet is interest rate risk. The static gap analysis starts with contractual repricing information for assets, liabilities, and off-balance sheet instruments. These items are then combined with repricing estimations for administered rate (interest-bearing demand deposits, savings, and money market accounts) and non-rate related products (demand deposit accounts, other assets, and other liabilities) to create a baseline repricing balance sheet. In addition to the contractual information, residential mortgage whole loan products and mortgage-backed securities are adjusted based on industry estimates of prepayment speeds that capture the expected prepayment of principal above the contractual amount based on how far away the contractual coupon is from market coupon rates. The interest rate sensitivity assumptions for savings accounts, money market accounts, and interest-bearing demand deposits accounts are based on current and historical experiences regarding portfolio retention and interest rate repricing behavior. Based on these experiences, a portion of these balances are considered to be long-term and fairly stable and are, therefore, included in categories beyond the immediate contractual repricing category.
At December 31, 2013, the indicated time intervalsone year cumulative gap was $85 million with a cumulative ratio of rate sensitive assets to rate sensitive liabilities of 114% representing a slightly asset sensitive position. At December 31, 2013 the cumulative maturityone year gap to total assets ratio was 7% which was within Nicolet’s established guidelines of not greater than +25% or -25%. of total assets. During the first six months of 2014, interest bearing cash equivalents declined in conjunction with Nicolet’s cyclical decline in deposits. The one year cumulative gap at June 30, 2014 increased slightly to $120 million and represented a cumulative ratio of rate sensitive assets to rate sensitive liabilities of 123%, versus 114% at year end 2013. At June 30, 2014 the cumulative one year gap to total assets ratio was 10% which was within Nicolet’s established guidelines of not greater than +25% or -25% of total assets.
Table 18: Interest Rate Sensitivity Gap Analysis
| | June 30, 2013 | |
(in thousands) | | 0-90 Days | | | 91-180 Days | | | 181-365 Days | | | 1-5 years | | | Beyond 5 Years | | | Total | |
Earning Assets: | | | | | | | | | | | | | | | | | | |
Loans | | $ | 365,528 | | | $ | 76,137 | | | $ | 43,979 | | | $ | 285,395 | | | $ | 61,849 | | | $ | 832,888 | |
Securities at fair value | | | 4,387 | | | | 10,694 | | | | 3,619 | | | | 60,628 | | | | 50,660 | | | | 129,988 | |
Other earnings assets | | | 31,777 | | | | — | | | | — | | | | — | | | | 7,531 | | | | 39,308 | |
Total | | $ | 401,692 | | | $ | 86,831 | | | $ | 47,598 | | | $ | 346,023 | | | $ | 120,040 | | | $ | 1,002,184 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative rate sensitive assets | | $ | 401,692 | | | $ | 488,523 | | | $ | 536,121 | | | $ | 882,144 | | | $ | 1,002,184 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
Interest bearing deposits (1) | | $ | 411,901 | | | $ | 77,936 | | | $ | 29,046 | | | $ | 88,017 | | | $ | 150,723 | | | $ | 757,623 | |
Borrowings | | | 33,398 | | | | 1,908 | | | | 3,735 | | | | 14,210 | | | | 5,020 | | | | 58,271 | |
Subordinated debentures | | | 1,504 | | | | 1,504 | | | | 3,007 | | | | 6,014 | | | | — | | | | 12,029 | |
Total | | $ | 446,803 | | | $ | 81,348 | | | $ | 35,788 | | | $ | 108,241 | | | $ | 155,743 | | | $ | 827,923 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative interest sensitive liabilities | | $ | 446,803 | | | $ | 528,151 | | | $ | 563,939 | | | $ | 672,180 | | | $ | 827,923 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest sensitivity gap | | $ | (45,111 | ) | | $ | 5,483 | | | $ | 11,810 | | | $ | 237,782 | | | $ | (35,703 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative interest sensitivity gap | | $ | (45,111 | ) | | $ | (39,628 | ) | | $ | (27,818 | ) | | $ | 209,964 | | | $ | 174,261 | | | | | |
Cumulative ratio of rate sensitive assets to rate sensitive liabilities | | | 90 | % | | | 92 | % | | | 95 | % | | | 131 | % | | | 121 | % | | | | |
(1) | The interest rate sensitivity assumptions for savings accounts, money market accounts, and interest-bearing demand deposits accounts are based on current and historical experiences regarding portfolio retention and interest rate repricing behavior. Based on these experiences, a portion of these balances are considered to be long-term and fairly stable and are, therefore, included in the “1-5 Years” and “Beyond 5 Years” categories.
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In order to limit exposure to interest rate risk, management monitors the liquidity and gap analysis on a monthly basis and adjustsmay adjust pricing, term and product offerings when necessary to stay within applicable guidelines and maximize the effectiveness of asset/liability management.
Along with the static gap analysis, Nicolet’s management also estimates the effect a gradual change and a sudden change in interest rates could have on expected net interest income through income simulation. The simulation is run using the prime rate as the base with the assumption of rates increasing 100, 200, and 300 bps or decreasing 100, 200 and 300 bps. All rates are increased or decreased parallel to the change in prime rate. The simulation assumes a static mix of assets and liabilities. As a result of the simulation, over a 12-month time period ending June 30, 2013,2015, net interest income was estimated to decrease 6.19%2.6% if rates increase 100 bps in an immediate shock scenario, and was estimated to decrease 0.33%2.6% in a 100 bps declining rate environment assumption. These results are in line with Nicolet’s increasing interest rate sensitivity position, including relatively short (though extending) loan maturities and level of variable rate loans with interest floors; as rates remain low, and asset maturities extend, whileand deposit maturities contract, thispressuring the position continues to become more liability-sensitive. These results are based solely on the modeled changes in the market rates and do not reflect the earnings sensitivity that may arise from other factors such as changes in the shape of the yield curve, changes in spreads between key market rates, or changes in consumer or business behavior. Interest rates did increase significantly in June with longer term rates rising over 100 bps and there was not a corresponding rise in deposit rates. These results also do not include any management action to mitigate potential income variances within the modeled process. The simulation results are one indicator of interest rate risk, and actual net interest income is largely impacted by the allocation of assets, liabilities and product mix. Nicolet’s managementManagement continually reviews its interest rate risk position through the Asset/Liability Committee process, and such Committee reports to the full board of directors on a monthly basis.
Capital
Nicolet’s managementManagement regularly reviews the adequacy of its capital to ensure that sufficient capital is available for current and future needs and is in compliance with regulatory guidelines. Nicolet’s management actively reviews capital strategies in light of perceived business risks associated with current and prospective earning levels, liquidity, asset quality, economic conditions in the markets served, and level of dividendsreturns available to shareholders. Nicolet’s management intends to maintain an optimal capital and leverage mix for growth and for shareholder return.
The Small Business Lending Fund (“SBLF”) is a U.S. Treasury program made available to community banks, designed to boost lending to small businesses by providing participating banks with capital and liquidity. In particular, the SBLF program targets commercial, industrial, owner-occupied real-estate and agricultural-based lending to qualifying small businesses, which include businesses with less than $50 million in revenue, and promotes outreach to women-owned, veteran-owned and minority-owned businesses.
On September 1, 2011, underFor participating banks, the SBLF, Nicolet received $24.4 million from the Treasury for the issuance of 24,400 shares of Non-Cumulative Perpetual Preferred Stock, Series C, with $1,000 per share liquidation value. The annual dividend rate upon funding and for the following nine full calendar quarters iswas 5%, unless there iswas growth in qualifying small business loans outstanding over a baseline which could reduce the rate to as low as 1% (as determined under the terms of the Securities Purchase Agreement (the “Agreement”)), adjusted quarterly. The dividend rate is fixedfixes for the tenth full quarter after funding through the end of the first four and one-half years based on the amount of qualifying small business loans at 7% (unless fixed at a lower rate given increased lending as similarly described above); and finallythat time per the terms of the agreement. The dividend rate is then fixed at 9% after four and one-half years if the preferred stock is not repaid. Nicolet’s weighted averageOn September 1, 2011, under the SBLF, Nicolet received $24.4 million from the Treasury for the issuance of 24,400 shares of Non-Cumulative Perpetual Preferred Stock, Series C, with $1,000 per share liquidation value. Nicolet paid an annual dividend rate of 5% from funding through September 30, 2013, paid 1% for the quarter ended December 31, 2013, (i.e. the ninth full quarter after funding) and has been 5% between fundingqualified beginning in the first quarter of 2014 for the 1% fixed annual dividend rate for the remainder of the first four and June 30, 2013.one-half years. Nicolet does not have current plans to repay its SBLF funding. Under the terms of the Agreement, Nicolet is required to provide various information, certifications, and reporting to the Treasury. At December 31, 2012 and June 30, 2013,2014, Nicolet believes it was in compliance with the requirements set by the Treasury in the Agreement. The preferred stock (under SBLF) qualifies as Tier 1 capital for regulatory purposes.
On April 26, 2013, $9.7 million of common stock was issued as part of the merger with Mid-Wisconsin. Concurrently with the merger, Nicolet also closedthrough a private placement, for an aggregate ofthe Company raised $2.9 million in proceeds. Approximately $401,000capital, issuing 174,016 shares of common stock.
On April 26, 2013, in directconnection with its acquisition of Mid-Wisconsin, the Company issued 589,159 shares of its common stock at a value of $9.7 million. The $0.4 million of incurred issuance costs for the merger and private placement were incurred andwas charged against additional paid in capital. Despite the additional equity issued the effect of the merger transaction reduced overall capital ratios asAs a result of this merger, Nicolet became an SEC-reporting company again and listed its common stock on the increased asset size; however, minimum capital levels were maintained and Nicolet maintains sufficient regulatory capital for current and future needs.Over-the-Counter markets under the trading symbol of “NCBS.”
On July 9, 2013 banking regulators issued final guidance on how regulatory capital will be calculated going forward. Full provisionsJanuary 21, 2014, Nicolet’s board of these regulations will go into effect beginningdirectors approved a resolution authorizing a stock repurchase program whereby Nicolet may utilize up to $6 million to purchase up to 350,000 shares of its outstanding common stock from time to time in 2015. Nicolet is determining the effect these regulations will have on future capital needs.open market or block transactions as market conditions warrant or in private transactions. During the first six months of 2014, $2.46 million was used to repurchase 124,035 shares with a weighted average price of $19.82 per share including commissions.
A summary of Nicolet’s and Nicolet National Bank’s regulatory capital amounts and ratios as of June 30, 20132014 and December 31, 20122013 are presented in the following table.
Table 19: Capital
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| | Actual | | | For Capital Adequacy Purposes | | | To Be Well Capitalized Under Prompt Corrective Action Provisions (2) | | | Actual | | | For Capital Adequacy Purposes | | | To Be Well Capitalized Under Prompt Corrective Action Provisions (2) | |
(in thousands) | | Amount | | | Ratio (1) | | | Amount | | | Ratio (1) | | | Amount | | | Ratio (1) | | | Amount | | | Ratio (1) | | | Amount | | | Ratio (1) | | | Amount | | | Ratio (1) | |
As of June 30, 2013: | | | | | | | | | | | | | | | | | | | |
As of June 30, 2014: | | | | | | | | | | | | | | | | | | | |
Nicolet | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total capital | | $ | 112,672 | | | | 13.2 | % | | $ | 68,202 | | | | 8.0 | % | | | N/A | | | | N/A | | | $ | 123,037 | | | | 14.0 | % | | $ | 70,131 | | | | 8.0 | % | | | N/A | | | | N/A | |
Tier I capital | | | 105,014 | | | | 12.3 | % | | | 34,101 | | | | 4.0 | % | | | N/A | | | | N/A | | | | 113,395 | | | | 12.9 | | | | 35,065 | | | | 4.0 | | | | N/A | | | | N/A | |
Leverage | | | 105,014 | | | | 10.7 | % | | | 39,120 | | | | 4.0 | % | | | N/A | | | | N/A | | | | 113,395 | | | | 9.7 | | | | 46,825 | | | | 4.0 | | | | N/A | | | | N/A | |
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Nicolet National Bank | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total capital | | $ | 101,855 | | | | 12.1 | % | | $ | 67, 275 | | | | 8.0 | % | | $ | 84,094 | | | | 10.0 | % | | $ | 118,656 | | | | 13.7 | % | | $ | 69,218 | | | | 8.0 | % | | $ | 86,522 | | | | 10.0 | % |
Tier I capital | | | 94,197 | | | | 11.2 | % | | | 33,637 | | | | 4.0 | % | | | 50,456 | | | | 6.0 | % | | | 109,014 | | | | 12.6 | | | | 34,609 | | | | 4.0 | | | | 51,913 | | | | 6.0 | |
Leverage | | | 94,197 | | | | 9.8 | % | | | 38,531 | | | | 4.0 | % | | | 48,164 | | | | 5.0 | % | | | 109,014 | | | | 9.4 | | | | 46,366 | | | | 4.0 | | | | 57,957 | | | | 5.0 | |
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As of December 31, 2012: | | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2013: | | | | | | | | | | | | | | | | | | | | | | | | | |
Nicolet | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total capital | | $ | 85,738 | | | | 15.2 | % | | $ | 45,098 | | | | 8.0 | % | | | N/A | | | | N/A | | | $ | 119,050 | | | | 13.8 | % | | $ | 69,075 | | | | 8.0 | % | | | N/A | | | | N/A | |
Tier I capital | | | 78,691 | | | | 14.0 | % | | | 22,549 | | | | 4.0 | % | | | N/A | | | | N/A | | | | 109,817 | | | | 12.7 | | | | 34,538 | | | | 4.0 | | | | N/A | | | | N/A | |
Leverage | | | 78,691 | | | | 11.0 | % | | | 28,622 | | | | 4.0 | % | | | N/A | | | | N/A | | | | 109,817 | | | | 9.5 | | | | 46,322 | | | | 4.0 | | | | N/A | | | | N/A | |
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Nicolet National Bank | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total capital | | $ | 77,500 | | | | 14.1 | % | | $ | 43,984 | | | | 8.0 | % | | $ | 54,981 | | | | 10.0 | % | | $ | 111,343 | | | | 13.1 | % | | $ | 68,110 | | | | 8.0 | % | | $ | 85,138 | | | | 10.0 | % |
Tier I capital | | | 70,624 | | | | 12.8 | % | | | 21,992 | | | | 4.0 | % | | | 32,988 | | | | 6.0 | % | | | 102,111 | | | | 12.0 | | | | 34,055 | | | | 4.0 | | | | 51,083 | | | | 6.0 | |
Leverage | | | 70,624 | | | | 10.1 | % | | | 27,916 | | | | 4.0 | % | | | 34,895 | | | | 5.0 | % | | | 102,111 | | | | 8.9 | | | | 43,858 | | | | 4.0 | | | | 57,323 | | | | 5.0 | |
(1) | The total capital ratio is defined as tier1 capital plus tier 2 capital divided by total risk-weighted assets. The tier 1 capital ratio is defined as tier1 capital divided by total risk-weighted assets. The leverage ratio is defined as tier1 capital divided by the most recent quarter’s average total assets. |
(2) | Prompt corrective action provisions are not applicable at the bank holding company level. |
On July 2, 2013, the Federal Reserve approved final rules that substantially amend the regulatory risk-based capital rules applicable to Nicolet and Nicolet National Bank. On July 9, 2013, the FDIC also approved, as an interim final rule, the regulatory capital requirements for U.S. banks, following the actions of the Federal Reserve. The final rules implement the “Basel III” regulatory capital reforms, as well as certain changes required by the Dodd-Frank Act.
The final rules include new risk-based capital and leverage ratios that will be phased in from 2015 to 2019. The rules include a new minimum common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets, which is in addition to the Tier 1 and Tier 2 risk-based capital requirements. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The required minimum ratio of total capital to risk-weighted assets will remain 8.0%. The new risk-based capital requirements (except for the capital conservation buffer) will become effective for Nicolet on January 1, 2015. The capital conservation buffer will be phased in over four years beginning on January 1, 2016, with a maximum buffer of 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on discretionary bonuses to executive officers.
The final rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses and instruments that will no longer qualify as Tier 1 capital. The final rules provide that depository holding companies with less than $15 billion in total assets as of December 31, 2009, such as Nicolet, may permanently include trust preferred securities and certain other non-qualifying instruments issued and included in Tier 1 or Tier 2 capital before May 19, 2010 in additional Tier 1 (subject to a maximum of 25% of Tier 1 capital) or Tier 2 capital until maturity or redemption.
The final rules also set forth certain changes for the calculation of risk-weighted assets that the Company will be required to implement beginning January 1, 2015. Based on Nicolet’s current capital composition and levels, management does not presently anticipate that the final rules present a material risk to Nicolet’s financial condition or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable for smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management, under the supervision, and with the participation, of our Chief Executive Officer and President and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term in Rule 13a-15(e) and 15d-15(e) under the Exchange Act pursuant to Exchange Act Rule 13a-15. Based upon, and as of the date of such evaluation, the Chief Executive Officer and President and the Chief Financial Officer concluded that our disclosure controls and procedures were effective.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We and our subsidiaries may be involved from time to time in various routine legal proceedings incidental to our respective businesses. Neither we nor any of our subsidiaries are currently engaged in any legal proceedings that are expected to have a material adverse effect on our results of operations or financial position.
ITEM 1A. RISK FACTORS
Not applicable for smaller reporting company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
The following exhibits are filed herewith:
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Exhibit | | |
Number | | Description |
3.1 | | Amended and Restated Articles of Incorporation of Nicolet Bankshares, Inc., as amended |
31.1 | | Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002 |
31.2 | | Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002 |
32.1 | | Certification of CEO Pursuant to 18 U.S.C Section 1350 as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
32.2 | | Certification of CFO Pursuant to 18 U.S.C Section 1350 as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
101* | | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statement of Cash Flows, and (vi) Notes to Consolidated Financial Statements tagged as blocks of text. |
*Indicates information that is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| NICOLET BANKSHARES, INC. |
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August 12, 20138, 2014 | /s/ Robert B. Atwell | |
| Robert B. Atwell |
| Chairman, President and Chief Executive Officer |
8, 2014 | /s/ Ann K. Lawson | |
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