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Section 1: 10-Q (FORM 10-Q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                           to                          
Commission file number: 001-37700
NICOLET BANKSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
WISCONSIN
(State or Other Jurisdiction of Incorporation or Organization)
47-0871001
(I.R.S. Employer Identification No.)
 
 
111 North Washington Street
Green Bay, Wisconsin
(Address of Principal Executive Offices) 
54301
(Zip Code)
 
 
(920) 430-1400
(Registrant’s Telephone Number, Including Area Code)
 
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
NCBS
The NASDAQ Stock Market LLC
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 ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
Accelerated filer x
 
 
Non-accelerated filer ¨
Smaller reporting company ¨
 
 
Emerging Growth Company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
As of October 30, 2019 there were 9,366,490 shares of $0.01 par value common stock outstanding.





Nicolet Bankshares, Inc.
Quarterly Report on Form 10-Q
September 30, 2019
TABLE OF CONTENTS
 
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS:
NICOLET BANKSHARES, INC.
Consolidated Balance Sheets
(In thousands, except share and per share data)
 
September 30, 2019
 
December 31, 2018
 
(Unaudited)
 
(Audited)
Assets
 
 
 
Cash and due from banks
$
88,371

 
$
85,896

Interest-earning deposits
55,598

 
163,630

Cash and cash equivalents
143,969


249,526

Certificates of deposit in other banks
5,395

 
993

Securities available for sale (“AFS”), at fair value
419,300

 
400,144

Other investments
20,697

 
17,997

Loans held for sale
10,564

 
1,639

Loans
2,242,931

 
2,166,181

Allowance for loan losses ("ALLL")
(13,620
)
 
(13,153
)
Loans, net
2,229,311


2,153,028

Premises and equipment, net
47,680

 
48,173

Bank owned life insurance (“BOLI”)
71,796

 
66,310

Goodwill and other intangibles, net
121,371

 
124,307

Accrued interest receivable and other assets
35,588

 
34,418

Total assets
$
3,105,671


$
3,096,535

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Liabilities:
 
 
 
Noninterest-bearing demand deposits
$
782,968

 
$
753,065

Interest-bearing deposits
1,801,479

 
1,861,073

Total deposits
2,584,447


2,614,138

Long-term borrowings
57,495

 
77,305

Accrued interest payable and other liabilities
34,987

 
17,740

Total liabilities
2,676,929


2,709,183

 
 
 
 
Stockholders’ Equity:
 
 
 
Common stock
94

 
95

Additional paid-in capital
236,534

 
247,790

Retained earnings
186,710

 
144,364

Accumulated other comprehensive income (loss)
4,676

 
(5,640
)
Total Nicolet Bankshares, Inc. stockholders’ equity
428,014


386,609

Noncontrolling interest
728

 
743

Total stockholders’ equity and noncontrolling interest
428,742


387,352

Total liabilities, noncontrolling interest and stockholders’ equity
$
3,105,671

 
$
3,096,535

 
 
 
 
Preferred shares authorized (no par value)
10,000,000

 
10,000,000

Preferred shares issued and outstanding

 

Common shares authorized (par value $0.01 per share)
30,000,000

 
30,000,000

Common shares outstanding
9,363,407

 
9,495,265

Common shares issued
9,387,096

 
9,524,777

See accompanying notes to unaudited consolidated financial statements.

3

ITEM 1. Financial Statements Continued:


NICOLET BANKSHARES, INC.
Consolidated Statements of Income
(In thousands, except share and per share data) (Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Interest income:
 
 
 
 
 
 
 
Loans, including loan fees
$
31,334

 
$
28,997

 
$
92,511

 
$
84,644

Investment securities:
 
 
 
 
 
 
 
Taxable
1,904

 
1,564

 
5,578

 
4,503

Tax-exempt
503

 
572

 
1,574

 
1,737

Other interest income
926

 
747

 
2,733

 
2,326

Total interest income
34,667


31,880


102,396


93,210

Interest expense:
 
 
 
 
 
 
 
Deposits
4,596

 
4,055

 
14,103

 
11,012

Short-term borrowings

 

 

 
8

Long-term borrowings
881

 
883

 
2,684

 
2,571

Total interest expense
5,477


4,938


16,787


13,591

Net interest income
29,190

 
26,942

 
85,609

 
79,619

Provision for loan losses
400

 
340

 
900

 
1,360

Net interest income after provision for loan losses
28,790


26,602


84,709


78,259

Noninterest income:
 
 
 
 
 
 
 
Trust services fee income
1,594

 
1,638

 
4,631

 
4,915

Brokerage fee income
2,113

 
1,732

 
5,925

 
5,074

Mortgage income, net
3,700

 
1,902

 
6,962

 
4,510

Service charges on deposit accounts
1,223

 
1,247

 
3,587

 
3,637

Card interchange income
1,735

 
1,481

 
4,815

 
4,082

BOLI income
495

 
1,019

 
1,834

 
1,929

Asset gains (losses), net
286

 
146

 
8,030

 
1,322

Other income
1,166

 
1,484

 
4,274

 
4,243

Total noninterest income
12,312

 
10,649

 
40,058

 
29,712

Noninterest expense:
 
 
 
 
 
 
 
Personnel
12,914

 
12,983

 
40,809

 
38,149

Occupancy, equipment and office
3,454

 
3,660

 
10,961

 
10,901

Business development and marketing
1,428

 
1,334

 
4,288

 
4,139

Data processing
2,515

 
2,375

 
7,220

 
7,094

Intangibles amortization
914

 
1,054

 
2,936

 
3,336

Other expense
1,662

 
1,638

 
5,159

 
4,518

Total noninterest expense
22,887


23,044


71,373


68,137

Income before income tax expense
18,215

 
14,207

 
53,394

 
39,834

Income tax expense
4,603

 
3,268

 
10,788

 
9,431

Net income
13,612


10,939


42,606


30,403

Less: Net income attributable to noncontrolling interest
82

 
80

 
260

 
230

Net income attributable to Nicolet Bankshares, Inc.
$
13,530


$
10,859


$
42,346


$
30,173

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
1.45

 
$
1.13

 
$
4.51

 
$
3.12

Diluted
$
1.40

 
$
1.09

 
$
4.36

 
$
3.02

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
9,346,814

 
9,633,158

 
9,393,795

 
9,678,726

Diluted
9,696,850

 
9,949,295

 
9,706,795

 
10,004,316

See accompanying notes to unaudited consolidated financial statements.

4

ITEM 1. Financial Statements Continued:


NICOLET BANKSHARES, INC.
Consolidated Statements of Comprehensive Income
(In thousands) (Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
13,612

 
$
10,939

 
$
42,606

 
$
30,403

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gains (losses) on securities AFS:
 
 
 
 
 
 
 
Net unrealized holding gains (losses)
2,053

 
(1,836
)
 
14,165

 
(6,814
)
Net realized (gains) losses included in income

 

 
(32
)
 

Income tax (expense) benefit
(555
)
 
497

 
(3,817
)
 
1,840

Total other comprehensive income (loss)
1,498


(1,339
)

10,316


(4,974
)
Comprehensive income
$
15,110


$
9,600


$
52,922


$
25,429

See accompanying notes to unaudited consolidated financial statements.

5

ITEM 1. Financial Statements Continued:


NICOLET BANKSHARES, INC.
Consolidated Statements of Stockholders’ Equity
(In thousands) (Unaudited)
 
Nicolet Bankshares, Inc. Stockholders’ Equity
 
 
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Non-
controlling
Interest
 
Total
Balances at June 30, 2019
$
94

 
$
234,963

 
$
173,180

 
$
3,178

 
$
733

 
$
412,148

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income, three months ended September 30, 2019

 

 
13,530

 

 
82

 
13,612

Other comprehensive income (loss)

 

 

 
1,498

 

 
1,498

Stock-based compensation expense

 
1,144

 

 

 

 
1,144

Exercise of stock options, net

 
1,200

 

 

 

 
1,200

Issuance of common stock

 
166

 

 

 

 
166

Purchase and retirement of common stock

 
(939
)
 

 

 

 
(939
)
Distribution to noncontrolling interest

 

 

 

 
(87
)
 
(87
)
Balances at September 30, 2019
$
94

 
$
236,534

 
$
186,710

 
$
4,676

 
$
728

 
$
428,742

 
 
 
 
 
 
 
 
 
 
 
 
Balances at June 30, 2018
$
96

 
$
254,564

 
$
122,642

 
$
(6,718
)
 
$
701

 
$
371,285

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income, three months ended September 30, 2018

 

 
10,859

 

 
80

 
10,939

Other comprehensive income (loss)

 

 

 
(1,339
)
 

 
(1,339
)
Stock-based compensation expense

 
1,299

 

 

 

 
1,299

Exercise of stock options, net
1

 
261

 

 

 

 
262

Issuance of common stock

 
59

 

 

 

 
59

Purchase and retirement of common stock
(1
)
 
(4,552
)
 

 

 

 
(4,553
)
Distribution to noncontrolling interest

 

 

 

 
(49
)
 
(49
)
Balances at September 30, 2018
$
96

 
$
251,631

 
$
133,501

 
$
(8,057
)
 
$
732

 
$
377,903

 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2018
$
95

 
$
247,790

 
$
144,364

 
$
(5,640
)
 
$
743

 
$
387,352

Comprehensive income:
 
 
 
 
 
 
 
 
 
 


Net income, nine months ended September 30, 2019

 

 
42,346

 

 
260

 
42,606

Other comprehensive income (loss)

 

 

 
10,316

 

 
10,316

Stock-based compensation expense

 
3,643

 

 

 

 
3,643

Exercise of stock options, net
2

 
4,380

 

 

 

 
4,382

Issuance of common stock

 
449

 

 

 

 
449

Purchase and retirement of common stock
(3
)
 
(19,728
)
 

 

 

 
(19,731
)
Distribution to noncontrolling interest

 

 

 

 
(275
)
 
(275
)
Balances at September 30, 2019
$
94


$
236,534


$
186,710


$
4,676


$
728


$
428,742

 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2017
$
98

 
$
263,835

 
$
102,391

 
$
(2,146
)
 
$
701

 
$
364,879

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income, nine months ended September 30, 2018

 

 
30,173

 

 
230

 
30,403

Other comprehensive income (loss)

 

 

 
(4,974
)
 

 
(4,974
)
Stock-based compensation expense

 
3,613

 

 

 

 
3,613

Exercise of stock options, net
1

 
1,223

 

 

 

 
1,224

Issuance of common stock

 
167

 

 

 

 
167

Purchase and retirement of common stock
(3
)
 
(17,207
)
 

 

 

 
(17,210
)
Distribution to noncontrolling interest

 

 

 

 
(199
)
 
(199
)
Adoption of new accounting pronouncement

 

 
937

 
(937
)
 

 

Balances at September 30, 2018
$
96

 
$
251,631

 
$
133,501

 
$
(8,057
)
 
$
732

 
$
377,903

See accompanying notes to unaudited consolidated financial statements.


6

ITEM 1. Financial Statements Continued:


NICOLET BANKSHARES, INC.
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended September 30,
 
2019
 
2018
Cash Flows From Operating Activities:
 
 
 
Net income
$
42,606

 
$
30,403

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization, and accretion
5,260

 
4,643

Provision for loan losses
900

 
1,360

Increase in cash surrender value of life insurance
(1,432
)
 
(1,367
)
Stock-based compensation expense
3,643

 
3,613

Asset (gains) losses, net
(8,030
)
 
(1,322
)
Gain on sale of loans held for sale, net
(7,042
)
 
(4,026
)
Proceeds from sale of loans held for sale
255,775

 
184,314

Origination of loans held for sale
(259,465
)
 
(178,911
)
Net change in:
 
 
 
Accrued interest receivable and other assets
(5,020
)
 
(4,952
)
Accrued interest payable and other liabilities
9,310

 
6,798

Net cash provided by (used in) operating activities
36,505


40,553

Cash Flows From Investing Activities:
 
 
 
Net (increase) decrease in loans
(74,131
)
 
(50,703
)
Net (increase) decrease in certificates of deposit in other banks
(4,402
)
 
751

Purchases of securities AFS
(57,875
)
 
(57,891
)
Proceeds from sales of securities AFS
13,240

 

Proceeds from calls and maturities of securities AFS
38,128

 
40,302

Purchases of other investments
(1,941
)
 
(634
)
Proceeds from sales of other investments
17,144

 
807

Purchases of BOLI
(5,000
)
 

Proceeds from redemption of BOLI
1,348

 
561

Net (increase) decrease in premises and equipment
(3,529
)
 
(2,974
)
Net (increase) decrease in other real estate and other assets
15

 
1,486

Net cash provided by (used in) investing activities
(77,003
)

(68,295
)
Cash Flows From Financing Activities:
 
 
 
Net increase (decrease) in deposits
(29,691
)
 
51,171

Repayments of long-term borrowings
(20,193
)
 
(1,189
)
Purchase and retirement of common stock
(19,731
)
 
(17,210
)
Proceeds from issuance of common stock
449

 
167

Proceeds from exercise of stock options
4,382

 
1,224

Distribution to noncontrolling interest
(275
)
 
(199
)
Net cash provided by (used in) financing activities
(65,059
)

33,964

Net increase (decrease) in cash and cash equivalents
(105,557
)
 
6,222

Cash and cash equivalents:
 
 
 
Beginning
249,526

 
154,933

Ending *
$
143,969


$
161,155

Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid for interest
$
16,682

 
$
13,294

Cash paid for taxes
11,690

 
9,325

Transfer of loans and bank premises to other real estate owned
1,025

 
587

Capitalized mortgage servicing rights
1,807

 
696

Initial recognition of operating lease right of use asset
5,403

 

Initial recognition of operating lease liability
5,403

 

* Cash and cash equivalents include restricted cash of $6.3 million and $7.4 million at September 30, 2019 and 2018, respectively, for the reserve balance required with the Federal Reserve Bank. At September 30, 2019, cash and cash equivalents also includes restricted cash of $1.3 million pledged as collateral on interest rate swaps.
See accompanying notes to unaudited consolidated financial statements.

7



NICOLET BANKSHARES, INC.
Notes to Unaudited Consolidated Financial Statements

Note 1Basis of Presentation
General
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated balance sheets, statements of income, comprehensive income, changes in stockholders’ equity and cash flows of Nicolet Bankshares, Inc. (the “Company” or “Nicolet”) and its subsidiaries, for the periods presented, and all such adjustments are of a normal recurring nature. All material intercompany transactions and balances have been 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, 2018.
Critical Accounting Policies and Estimates
Preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, the allowance for loan losses, valuation of loans in acquisition transactions, useful lives for depreciation and amortization, fair value of financial instruments, other-than-temporary impairment calculations, valuation of deferred tax assets, uncertain income tax positions and contingencies. Estimates that are particularly susceptible to significant change for the Company include the determination of the allowance for loan losses, the determination and assessment of deferred tax assets and liabilities, and the valuation of loans acquired in acquisition transactions; therefore, these are critical accounting policies. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: external market factors such as market interest rates and employment rates, changes to operating policies and procedures, changes in applicable banking or tax regulations, and changes to deferred tax estimates. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period presented.
There have been no material changes or developments with respect to the assumptions or methodologies that the Company uses when applying what management believes are critical accounting policies and developing critical accounting estimates as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Recent Accounting Developments Adopted
In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 expands the activities that qualify for hedge accounting and simplifies the rules for reporting hedging transactions. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company adopted the updated guidance effective January 1, 2019 with no material impact on its consolidated financial statements, because the Company does not have any significant derivatives and does not currently apply hedge accounting to derivatives.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), with several subsequent updates. Topic 842 introduced a new accounting model for lessors and lessees. For lessees, almost all leases are now recognized on the balance sheet as a right-of-use ("ROU") asset and lease liability, unlike previous GAAP which required only capital leases to be recognized on the balance sheet. The accounting applied by lessors is largely unchanged from existing guidance. Topic 842 also requires additional disclosures concerning the amount, timing and uncertainty of cash flows arising from leases. The updated guidance is effective for annual reporting periods beginning after December 15, 2018, and provides a modified retrospective transition approach that allows lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption (the "effective date" method), with the option to elect certain practical expedients. Nicolet adopted the new guidance prospectively as of January 1, 2019, using the effective date method; thus, prior comparative periods have not been restated.
Upon adoption, Nicolet recognized an ROU asset and lease liability of approximately $5 million. There was no impact to its consolidated statements of income or cash flows compared to the prior lease accounting model. The ROU asset and lease liability are recorded in other assets and other liabilities, respectively, in the consolidated balance sheets. As part of the adoption, Nicolet elected the package of practical expedients permitted under the transition guidance of the new standard which allowed the carry forward of the historical lease classification. Nicolet also elected the practical expedient to group lease and non-lease components as a single lease component; thus, the Company's leases include both lease (e.g., fixed payments including rent, taxes, and insurance

8



costs) and non-lease components (e.g., common area or other maintenance costs). See Note 10 for the new disclosures required by Topic 842.
Reclassifications
Certain amounts in the 2018 consolidated financial statements have been reclassified to conform to the 2019 presentation.
Note 2Pending Acquisition
Nicolet entered into an Agreement and Plan of Merger with Choice Bancorp, Inc. ("Choice" (OTC Pink "CBKW")) on June 26, 2019 (the "Merger Agreement"), pursuant to which Choice will merge with and into Nicolet (the "Merger") to create the largest community bank in the Oshkosh, Wisconsin marketplace. Immediately following the Merger, Choice Bank, the wholly owned bank subsidiary of Choice, will merge with and into Nicolet's wholly owned bank subsidiary (the "Bank Merger"), with Nicolet National Bank as the surviving entity in the Bank Merger.

The transaction will involve stock-for-stock consideration at a fixed exchange ratio, subject to cap and collar provisions provided for in the Merger Agreement. At September 30, 2019, Choice had total assets of $436 million, loans of $352 million, deposits of $306 million, and equity of $41 million. Choice assets represented approximately 14% of Nicolet assets at September 30, 2019.

As of September 17, 2019, Nicolet received all regulatory approvals for the Merger and Bank Merger, and Choice shareholders approved the Merger on October 22, 2019. The merger is expected to close on November 8, 2019, pending satisfaction of customary closing conditions.
Note 3Earnings 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 common share are calculated by dividing net income available to common shareholders by the weighted average number of shares adjusted for the dilutive effect of common stock awards (outstanding stock options and unvested restricted stock), if any. Presented below are the calculations for basic and diluted earnings per common share.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands, except per share data)
2019
 
2018
 
2019
 
2018
Net income attributable to Nicolet Bankshares, Inc.
$
13,530

 
$
10,859

 
$
42,346

 
$
30,173

Weighted average common shares outstanding
9,347

 
9,633

 
9,394

 
9,679

Effect of dilutive common stock awards
350

 
316

 
313

 
325

Diluted weighted average common shares outstanding
9,697

 
9,949

 
9,707

 
10,004

Basic earnings per common share*
$
1.45

 
$
1.13

 
$
4.51

 
$
3.12

Diluted earnings per common share*
$
1.40

 
$
1.09

 
$
4.36

 
$
3.02

*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 earnings per share data for the quarters will not necessarily equal the year to date earnings per share data.
For the three and nine months ended September 30, 2019, options to purchase less than 0.1 million shares are excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive. For the three and nine months ended September 30, 2018, options to purchase approximately 0.1 million shares are excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive.
Note 4Stock-Based Compensation
The Company may grant stock options and restricted stock under its stock-based compensation plans to certain officers, employees and directors. These plans are administered by a committee of the Board of Directors. In February 2019, with subsequent shareholder approval, the 2011 Long-Term Incentive Plan was amended to increase the shares reserved for potential stock-based awards from 1,500,000 shares to 3,000,000 shares. At September 30, 2019, approximately 1.6 million shares were available for grant under these stock-based compensation plans.

9



A Black-Scholes model is utilized to estimate the fair value of stock option grants, while the market price of the Company’s stock at the date of grant is used to estimate the fair value of restricted stock awards. The weighted average assumptions used in the Black-Scholes model for valuing stock option grants were as follows.
 
Nine Months Ended September 30,
 
2019
 
2018
Dividend yield
%
 
%
Expected volatility
25
%
 
25
%
Risk-free interest rate
2.37
%
 
2.48
%
Expected average life
7 years

 
7 years

Weighted average per share fair value of options
$
19.23

 
$
17.60

A summary of the Company’s stock option activity is summarized below.
Stock Options
 
Option Shares
Outstanding
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Life (Years)
 
Aggregate
Intrinsic
Value (in
thousands)
Outstanding - December 31, 2018
 
1,581,699

 
$
40.77

 
 
 
 
Granted
 
15,000

 
59.55

 
 
 
 
Exercise of stock options *
 
(185,328
)
 
23.64

 
 
 
 
Forfeited
 
(3,538
)
 
27.43

 
 
 
 
Outstanding - September 30, 2019
 
1,407,833

 
$
43.25

 
7.0
 
$
32,829

Exercisable - September 30, 2019
 
644,033

 
$
39.28

 
6.5
 
$
17,577

* The terms of the stock option agreements permit having a number of shares of stock withheld, the fair market value of which as of the date of exercise is sufficient to satisfy the exercise price and/or tax withholding requirements. For the nine months ended September 30, 2019, 70,068 such shares were surrendered to the Company.
Intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the exercise price of the stock options. The intrinsic value of options exercised for the nine months ended September 30, 2019 and 2018 was approximately $6.9 million and $1.8 million, respectively.
A summary of the Company’s restricted stock activity is summarized below.
Restricted Stock
 
Weighted
Average Grant
Date Fair Value
 
Restricted
Shares
Outstanding
Outstanding - December 31, 2018
 
$
39.37

 
29,512

Granted
 
61.96

 
4,257

Vested *
 
45.05

 
(9,672
)
Forfeited
 
16.50

 
(408
)
Outstanding - September 30, 2019
 
$
41.50

 
23,689

* The terms of the restricted stock agreements permit the surrender of shares to the Company upon vesting in order to satisfy applicable tax withholding requirements at the minimum statutory withholding rate, and accordingly, 1,637 shares were surrendered during the nine months ended September 30, 2019.
The Company recognized approximately $3.4 million of stock-based compensation expense (included in personnel on the consolidated statements of income) for both the nine months ended September 30, 2019 and 2018, associated with its common stock awards granted to officers and employees. In addition, during 2019 the Company recognized approximately $0.3 million of director expense (included in other expense on the consolidated statements of income) for a total restricted stock grant of 4,257 shares with immediate vesting to non-employee directors. During 2018, the Company recognized approximately $0.2 million of director expense for a total restricted stock grant of 3,510 shares with immediate vesting to non-employee directors. As of September 30, 2019, there was approximately $9.9 million of unrecognized compensation cost related to equity award grants. The cost is expected to be recognized over the remaining vesting period of approximately three years. The Company recognized a tax benefit of approximately $1.0 million and $0.2 million for the nine months ended September 30, 2019 and 2018, respectively, for the tax impact of stock option exercises and vesting of restricted stock.

10



Note 5Securities Available for Sale
Amortized cost and fair value of securities available for sale are summarized as follows.
 
September 30, 2019
(in thousands)
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
U.S. government agency securities
$
16,697

 
$

 
$
207

 
$
16,490

State, county and municipals
147,186

 
798

 
198

 
147,786

Mortgage-backed securities
169,262

 
3,267

 
652

 
171,877

Corporate debt securities
79,749

 
3,408

 
10

 
83,147

Total
$
412,894

 
$
7,473

 
$
1,067

 
$
419,300

 
December 31, 2018
(in thousands)
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
U.S. government agency securities
$
22,467

 
$

 
$
818

 
$
21,649

State, county and municipals
163,702

 
76

 
3,252

 
160,526

Mortgage-backed securities
134,350

 
328

 
3,034

 
131,644

Corporate debt securities
87,352

 
66

 
1,093

 
86,325

Total
$
407,871

 
$
470

 
$
8,197

 
$
400,144

The following table presents gross unrealized losses and the related estimated 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.
 
September 30, 2019
 
Less than 12 months
 
12 months or more
 
Total
($ in thousands)
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Number of
Securities
U.S. government agency securities
$

 
$

 
$
16,490

 
$
207

 
$
16,490

 
$
207

 
3

State, county and municipals
44,012

 
138

 
8,370

 
60

 
52,382

 
198

 
139

Mortgage-backed securities
38,515

 
127

 
40,783

 
525

 
79,298

 
652

 
150

Corporate debt securities
2,044

 
10

 

 

 
2,044

 
10

 
1

Total
$
84,571

 
$
275

 
$
65,643

 
$
792

 
$
150,214

 
$
1,067

 
293

 
December 31, 2018
 
Less than 12 months
 
12 months or more
 
Total
($ in thousands)
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Number of
Securities
U.S. government agency securities
$

 
$

 
$
21,649

 
$
818

 
$
21,649

 
$
818

 
3

State, county and municipals
16,136

 
98

 
130,975

 
3,154

 
147,111

 
3,252

 
440

Mortgage-backed securities
20,568

 
132

 
89,189

 
2,902

 
109,757

 
3,034

 
204

Corporate debt securities
51,592

 
677

 
9,757

 
416

 
61,349

 
1,093

 
33

Total
$
88,296

 
$
907

 
$
251,570

 
$
7,290

 
$
339,866

 
$
8,197

 
680

As of September 30, 2019, the Company does not consider its securities AFS with unrealized losses to be other-than-temporarily impaired, as the unrealized losses in each category have occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration. The Company has the ability and intent to hold its securities to maturity. There were no other-than-temporary impairments charged to earnings during the nine months ended September 30, 2019 or 2018.

11



The amortized cost and fair value of securities AFS 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; as this is particularly inherent in mortgage-backed securities, these securities are not included in the maturity categories below.
 
September 30, 2019
(in thousands)
Amortized Cost
 
Fair Value
Due in less than one year
$
18,762

 
$
18,770

Due in one year through five years
184,588

 
187,185

Due after five years through ten years
33,877

 
34,314

Due after ten years
6,405

 
7,154

 
243,632

 
247,423

Mortgage-backed securities
169,262

 
171,877

Securities AFS
$
412,894

 
$
419,300

Proceeds and realized gains / losses from the sale of securities AFS were as follows.
 
Nine Months Ended September 30,
(in thousands)
2019
 
2018
Gross gains
$
152

 
$

Gross losses
(120
)
 

Gains (losses) on sales of securities AFS, net
$
32

 
$

Proceeds from sales of securities AFS
$
13,240

 
$

Note 6Loans, Allowance for Loan Losses, and Credit Quality
The loan composition is summarized as follows.
 
September 30, 2019
 
December 31, 2018
(in thousands)
Amount
 
% of
Total
 
Amount
 
% of
Total
Commercial & industrial
$
763,742

 
34
%
 
$
684,920

 
32
%
Owner-occupied commercial real estate (“CRE”)
456,508

 
20

 
441,353

 
20

Agricultural (“AG”) production
36,050

 
2

 
35,625

 
2

AG real estate
58,591

 
3

 
53,444

 
2

CRE investment
336,442

 
15

 
343,652

 
16

Construction & land development
61,810

 
3

 
80,599

 
4

Residential construction
41,496

 
2

 
30,926

 
1

Residential first mortgage
343,400

 
15

 
357,841

 
17

Residential junior mortgage
116,179

 
5

 
111,328

 
5

Retail & other
28,713

 
1

 
26,493

 
1

Loans
2,242,931

 
100
%
 
2,166,181

 
100
%
Less allowance for loan losses (“ALLL”)
13,620

 
 
 
13,153

 
 
Loans, net
$
2,229,311

 
 
 
$
2,153,028

 
 
Allowance for loan losses to loans
0.61
%
 
 
 
0.61
%
 
 

12



As a further breakdown, loans are summarized by originated and acquired as follows.
 
September 30, 2019
 
December 31, 2018
(in thousands)
Originated
Amount
 
% of
Total
 
Acquired
Amount
 
% of
Total
 
Originated
Amount
 
% of
Total
 
Acquired
Amount
 
% of
Total
Commercial & industrial
$
660,040

 
40
%
 
$
103,702

 
18
%
 
$
568,100

 
38
%
 
$
116,820

 
17
%
Owner-occupied CRE
321,323

 
19

 
135,185

 
23

 
283,531

 
19

 
157,822

 
23

AG production
11,450

 
1

 
24,600

 
4

 
11,113

 
1

 
24,512

 
4

AG real estate
38,616

 
2

 
19,975

 
3

 
31,374

 
2

 
22,070

 
3

CRE investment
180,427

 
11

 
156,015

 
26

 
171,087

 
12

 
172,565

 
25

Construction & land development
52,806

 
3

 
9,004

 
2

 
66,478

 
4

 
14,121

 
2

Residential construction
41,246

 
3

 
250

 

 
30,926

 
2

 

 

Residential first mortgage
228,312

 
14

 
115,088

 
19

 
220,368

 
15

 
137,473

 
20

Residential junior mortgage
89,241

 
5

 
26,938

 
5

 
78,379

 
5

 
32,949

 
5

Retail & other
27,232

 
2

 
1,481

 

 
23,809

 
2

 
2,684

 
1

Loans
1,650,693

 
100
%
 
592,238

 
100
%
 
1,485,165

 
100
%
 
681,016

 
100
%
Less ALLL
12,064

 
 
 
1,556

 
 
 
11,448

 
 
 
1,705

 
 
Loans, net
$
1,638,629

 
 
 
$
590,682

 
 
 
$
1,473,717

 
 
 
$
679,311

 
 
ALLL to loans
0.73
%
 
 
 
0.26
%
 
 
 
0.77
%
 
 
 
0.25
%
 
 
Loans as a percent of total loans
74
%
 
 
 
26
%
 
 
 
69
%
 
 
 
31
%
 
 
Practically all of the Company’s loans, commitments, and 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.
A roll forward of the allowance for loan losses is summarized as follows.
 
Nine Months Ended
 
Year Ended
(in thousands)
September 30, 2019
 
September 30, 2018
 
December 31, 2018
Beginning balance
$
13,153

 
$
12,653

 
$
12,653

Provision for loan losses
900

 
1,360

 
1,600

Charge-offs
(629
)
 
(1,110
)
 
(1,213
)
Recoveries
196

 
89

 
113

Net (charge-offs) recoveries
(433
)
 
(1,021
)
 
(1,100
)
Ending balance
$
13,620

 
$
12,992

 
$
13,153


13



The following tables present the balance and activity in the ALLL by portfolio segment and the recorded investment in loans by portfolio segment.
 
TOTAL – Nine Months Ended September 30, 2019
(in thousands)
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
ALLL:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
5,271

 
$
2,847

 
$
121

 
$
301

 
$
1,470

 
$
510

 
$
211

 
$
1,646

 
$
472

 
$
304

 
$
13,153

Provision
356

 
(57
)
 
85

 
46

 
32

 
(140
)
 
357

 
(75
)
 
71

 
225

 
900

Charge-offs
(59
)
 
(13
)
 

 

 

 

 
(226
)
 

 
(80
)
 
(251
)
 
(629
)
Recoveries
90

 
2

 

 

 

 

 

 
36

 
32

 
36

 
196

Net (charge-offs) recoveries
31

 
(11
)
 

 

 

 

 
(226
)
 
36

 
(48
)
 
(215
)
 
(433
)
Ending balance
$
5,658

 
$
2,779

 
$
206

 
$
347

 
$
1,502

 
$
370

 
$
342

 
$
1,607

 
$
495

 
$
314

 
$
13,620

As % of ALLL
42
%
 
20
%
 
1
%
 
3
%
 
11
%
 
3
%
 
2
%
 
12
%
 
4
%
 
2
%
 
100
%
ALLL:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated
$
308

 
$

 
$
119

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$
427

Collectively evaluated
5,350

 
2,779

 
87

 
347

 
1,502

 
370

 
342

 
1,607

 
495

 
314

 
13,193

Ending balance
$
5,658

 
$
2,779

 
$
206

 
$
347

 
$
1,502

 
$
370

 
$
342

 
$
1,607

 
$
495

 
$
314

 
$
13,620

Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated
$
2,143

 
$
2,552

 
$
1,251

 
$
1,089

 
$
2,483

 
$
427

 
$

 
$
2,560

 
$
221

 
$
12

 
$
12,738

Collectively evaluated
761,599

 
453,956

 
34,799

 
57,502

 
333,959

 
61,383

 
41,496

 
340,840

 
115,958

 
28,701

 
2,230,193

Total loans
$
763,742

 
$
456,508

 
$
36,050

 
$
58,591

 
$
336,442

 
$
61,810

 
$
41,496

 
$
343,400

 
$
116,179

 
$
28,713

 
$
2,242,931

Less ALLL
5,658

 
2,779

 
206

 
347

 
1,502

 
370

 
342

 
1,607

 
495