Quarterly Report (10-q)

Date : 08/02/2019 @ 4:00PM
Source : Edgar (US Regulatory)
Stock : Nicolet Bankshares Inc (NCBS)
Quote : 73.92  -0.45 (-0.61%) @ 9:30PM

Quarterly Report (10-q)



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 June 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 July 31, 2019 there were 9,345,621 shares of $0.01 par value common stock outstanding.





Nicolet Bankshares, Inc.
Quarterly Report on Form 10-Q
June 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)
 
June 30, 2019
 
December 31, 2018
 
(Unaudited)
 
(Audited)
Assets
 
 
 
Cash and due from banks
$
75,074

 
$
85,896

Interest-earning deposits
79,846

 
163,630

Cash and cash equivalents
154,920


249,526

Certificates of deposit in other banks
5,396

 
993

Securities available for sale (“AFS”), at fair value
403,989

 
400,144

Other investments
19,841

 
17,997

Loans held for sale
4,699

 
1,639

Loans
2,203,273

 
2,166,181

Allowance for loan losses ("ALLL")
(13,571
)
 
(13,153
)
Loans, net
2,189,702


2,153,028

Premises and equipment, net
49,109

 
48,173

Bank owned life insurance (“BOLI”)
69,222

 
66,310

Goodwill and other intangibles, net
122,285

 
124,307

Accrued interest receivable and other assets
35,650

 
34,418

Total assets
$
3,054,813


$
3,096,535

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Liabilities:
 
 
 
Noninterest-bearing demand deposits
$
743,380

 
$
753,065

Interest-bearing deposits
1,793,259

 
1,861,073

Total deposits
2,536,639


2,614,138

Long-term borrowings
77,432

 
77,305

Accrued interest payable and other liabilities
28,594

 
17,740

Total liabilities
2,642,665


2,709,183

 
 
 
 
Stockholders’ Equity:
 
 
 
Common stock
94

 
95

Additional paid-in capital
234,963

 
247,790

Retained earnings
173,180

 
144,364

Accumulated other comprehensive income (loss)
3,178

 
(5,640
)
Total Nicolet Bankshares, Inc. stockholders’ equity
411,415


386,609

Noncontrolling interest
733

 
743

Total stockholders’ equity and noncontrolling interest
412,148


387,352

Total liabilities, noncontrolling interest and stockholders’ equity
$
3,054,813

 
$
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
9,327,420

 
9,495,265

Common shares issued
9,351,359

 
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
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Interest income:
 
 
 
 
 
 
 
Loans, including loan fees
$
31,209

 
$
27,193

 
$
61,177

 
$
55,647

Investment securities:
 
 
 
 
 
 
 
Taxable
2,041

 
1,597

 
3,674

 
2,939

Tax-exempt
522

 
577

 
1,071

 
1,165

Other interest income
798

 
1,178

 
1,807

 
1,579

Total interest income
34,570


30,545


67,729


61,330

Interest expense:
 
 
 
 
 
 
 
Deposits
4,730

 
3,868

 
9,507

 
6,957

Short-term borrowings

 
5

 

 
8

Long-term borrowings
896

 
869

 
1,803

 
1,688

Total interest expense
5,626


4,742


11,310


8,653

Net interest income
28,944

 
25,803

 
56,419

 
52,677

Provision for loan losses
300

 
510

 
500

 
1,020

Net interest income after provision for loan losses
28,644


25,293


55,919


51,657

Noninterest income:
 
 
 
 
 
 
 
Trust services fee income
1,569

 
1,671

 
3,037

 
3,277

Brokerage fee income
2,002

 
1,738

 
3,812

 
3,342

Mortgage income, net
2,059

 
1,528

 
3,262

 
2,608

Service charges on deposit accounts
1,194

 
1,200

 
2,364

 
2,390

Card interchange income
1,660

 
1,358

 
3,080

 
2,601

BOLI income
880

 
468

 
1,339

 
910

Asset gains (losses), net
7,572

 
972

 
7,744

 
1,176

Other income
1,624

 
1,304

 
3,108

 
2,759

Total noninterest income
18,560

 
10,239

 
27,746

 
19,063

Noninterest expense:
 
 
 
 
 
 
 
Personnel
15,358

 
12,674

 
27,895

 
25,166

Occupancy, equipment and office
3,757

 
3,454

 
7,507

 
7,241

Business development and marketing
1,579

 
1,463

 
2,860

 
2,805

Data processing
2,350

 
2,399

 
4,705

 
4,719

Intangibles amortization
969

 
1,100

 
2,022

 
2,282

Other expense
1,714

 
1,361

 
3,497

 
2,880

Total noninterest expense
25,727


22,451


48,486


45,093

Income before income tax expense
21,477

 
13,081

 
35,179

 
25,627

Income tax expense
2,833

 
3,255

 
6,185

 
6,163

Net income
18,644


9,826


28,994


19,464

Less: Net income attributable to noncontrolling interest
95

 
89

 
178

 
150

Net income attributable to Nicolet Bankshares, Inc.
$
18,549


$
9,737


$
28,816


$
19,314

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
1.98

 
$
1.01

 
$
3.06

 
$
1.99

Diluted
$
1.91

 
$
0.98

 
$
2.97

 
$
1.93

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
9,374,348

 
9,639,098

 
9,417,676

 
9,701,888

Diluted
9,692,378

 
9,969,854

 
9,710,827

 
10,032,304

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
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
18,644

 
$
9,826

 
$
28,994

 
$
19,464

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gains (losses) on securities AFS:
 
 
 
 
 
 
 
Net unrealized holding gains (losses)
4,401

 
(320
)
 
12,112

 
(4,978
)
Net realized (gains) losses included in income
(19
)
 

 
(32
)
 

Income tax (expense) benefit
(1,183
)
 
86

 
(3,262
)
 
1,343

Total other comprehensive income (loss)
3,199


(234
)

8,818


(3,635
)
Comprehensive income
$
21,843


$
9,592


$
37,812


$
15,829

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
Balance, December 31, 2017
$
98

 
$
263,835

 
$
102,391

 
$
(2,146
)
 
$
701

 
$
364,879

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 
9,577

 

 
61

 
9,638

Other comprehensive income (loss)

 

 

 
(3,401
)
 

 
(3,401
)
Stock-based compensation expense

 
1,220

 

 

 

 
1,220

Exercise of stock options, net

 
427

 

 

 

 
427

Issuance of common stock

 
51

 

 

 

 
51

Purchase and retirement of common stock
(1
)
 
(8,063
)
 

 

 

 
(8,064
)
Distribution to noncontrolling interest

 

 

 

 
(99
)
 
(99
)
Adoption of new accounting pronouncement

 

 
937

 
(937
)
 

 

Balance, March 31, 2018
$
97

 
$
257,470

 
$
112,905

 
$
(6,484
)
 
$
663

 
$
364,651

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 
9,737

 

 
89

 
9,826

Other comprehensive income (loss)

 

 

 
(234
)
 

 
(234
)
Stock-based compensation expense

 
1,094

 

 

 

 
1,094

Exercise of stock options, net

 
535

 

 

 

 
535

Issuance of common stock

 
57

 

 

 

 
57

Purchase and retirement of common stock
(1
)
 
(4,592
)
 

 

 

 
(4,593
)
Distribution to noncontrolling interest

 

 

 

 
(51
)
 
(51
)
Balance, June 30, 2018
$
96

 
$
254,564

 
$
122,642

 
$
(6,718
)
 
$
701

 
$
371,285

 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
$
95

 
$
247,790

 
$
144,364

 
$
(5,640
)
 
$
743

 
$
387,352

Comprehensive income:
 
 
 
 
 
 
 
 
 
 


Net income

 

 
10,267

 

 
83

 
10,350

Other comprehensive income (loss)

 

 

 
5,619

 

 
5,619

Stock-based compensation expense

 
1,108

 

 

 

 
1,108

Exercise of stock options, net

 
698

 

 

 

 
698

Issuance of common stock

 
148

 

 

 

 
148

Purchase and retirement of common stock
(1
)
 
(5,681
)
 

 

 

 
(5,682
)
Balance, March 31, 2019
$
94


$
244,063


$
154,631


$
(21
)

$
826


$
399,593

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 
18,549

 

 
95

 
18,644

Other comprehensive income (loss)

 

 

 
3,199

 

 
3,199

Stock-based compensation expense

 
1,391

 

 

 

 
1,391

Exercise of stock options, net
2

 
2,482

 

 

 

 
2,484

Issuance of common stock

 
135

 

 

 

 
135

Purchase and retirement of common stock
(2
)
 
(13,108
)
 

 

 

 
(13,110
)
Distribution to noncontrolling interest

 

 

 

 
(188
)
 
(188
)
Balance, June 30, 2019
$
94

 
$
234,963

 
$
173,180

 
$
3,178

 
$
733

 
$
412,148

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)
Six Months Ended June 30,
 
2019
 
2018
Cash Flows From Operating Activities:
 
 
 
Net income
$
28,994

 
$
19,464

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization, and accretion
3,194

 
3,121

Provision for loan losses
500

 
1,020

Increase in cash surrender value of life insurance
(938
)
 
(910
)
Stock-based compensation expense
2,499

 
2,314

Asset (gains) losses, net
(7,744
)
 
(1,176
)
Gain on sale of loans held for sale, net
(3,246
)
 
(2,235
)
Proceeds from sale of loans held for sale
120,753

 
115,515

Origination of loans held for sale
(121,438
)
 
(114,926
)
Net change in:
 
 
 
Accrued interest receivable and other assets
(6,595
)
 
(3,223
)
Accrued interest payable and other liabilities
3,135

 
1,054

Net cash provided by operating activities
19,114


20,018

Cash Flows From Investing Activities:
 
 
 
Net increase in loans
(34,459
)
 
(37,458
)
Net (increase) decrease in certificates of deposit in other banks
(4,403
)
 
499

Purchases of securities AFS
(29,087
)
 
(33,697
)
Proceeds from sales of securities AFS
13,240

 

Proceeds from calls and maturities of securities AFS
23,055

 
27,657

Purchases of other investments
(1,373
)
 
(629
)
Proceeds from sales of other investments
17,144

 
386

Purchases of BOLI
(2,000
)
 

Proceeds from redemption of BOLI
428

 

Net (increase) decrease in premises and equipment
(3,137
)
 
(814
)
Net (increase) decrease in other real estate and other assets
15

 
1,486

Net cash provided by (used in) investing activities
(20,577
)

(42,570
)
Cash Flows From Financing Activities:
 
 
 
Net increase (decrease) in deposits
(77,499
)
 
(15,449
)
Repayments of long-term borrowings
(129
)
 
(1,126
)
Purchase and retirement of common stock
(18,792
)
 
(12,657
)
Proceeds from issuance of common stock
283

 
108

Proceeds from exercise of stock options
3,182

 
962

Distribution to noncontrolling interest
(188
)
 
(150
)
Net cash provided by (used in) financing activities
(93,143
)

(28,312
)
Net increase (decrease) in cash and cash equivalents
(94,606
)
 
(50,864
)
Cash and cash equivalents:
 
 
 
Beginning
249,526

 
154,933

Ending *
$
154,920


$
104,069

Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid for interest
$
11,091

 
$
8,574

Cash paid for taxes
6,340

 
5,325

Transfer of loans and bank premises to other real estate owned

 
537

Capitalized mortgage servicing rights
871

 
275

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 $5.8 million and $6.8 million at June 30, 2019 and 2018 , respectively, for the reserve balance required with the Federal Reserve Bank. At June 30, 2019 , cash and cash equivalents also includes restricted cash of $950,000 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 1 Basis 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 2 Pending Acquisition
On June 26, 2019, Nicolet entered into a definitive merger agreement with Choice Bancorp, Inc. ("Choice" (OTC Pink "CBKW")) pursuant to which Choice will merge with and into Nicolet to create the largest community bank in the Oshkosh, Wisconsin marketplace. The acquisition will involve stock-for-stock consideration at a fixed exchange ratio, subject to cap and collar provisions provided for in the merger agreement. At June 30, 2019, Choice had total assets of $444 million , loans of $349 million , deposits of $312 million , and equity of $39 million . The merger is expected to close in the fourth quarter of 2019 and remains subject to customary closing conditions, including approval by Choice shareholders and regulatory approvals.

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 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 June 30,
 
Six Months Ended June 30,
(In thousands, except per share data)
2019
 
2018
 
2019
 
2018
Net income attributable to Nicolet Bankshares, Inc.
$
18,549

 
$
9,737

 
$
28,816

 
$
19,314

Weighted average common shares outstanding
9,374

 
9,639

 
9,418

 
9,702

Effect of dilutive common stock awards
318

 
331

 
293

 
330

Diluted weighted average common shares outstanding
9,692

 
9,970

 
9,711

 
10,032

Basic earnings per common share*
$
1.98

 
$
1.01

 
$
3.06

 
$
1.99

Diluted earnings per common share*
$
1.91

 
$
0.98

 
$
2.97

 
$
1.93

*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 six months ended June 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 six months ended June 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 4 Stock-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 June 30, 2019 , approximately 1.6 million shares were available for grant under these stock-based compensation plans.
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.
 
Six Months Ended June 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


9



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 *
 
(137,443
)
 
23.15

 
 
 
 
Forfeited
 
(3,538
)
 
27.43

 
 
 
 
Outstanding - June 30, 2019
 
1,455,718

 
$
42.65

 
7.1
 
$
28,249

Exercisable - June 30, 2019
 
667,418

 
$
38.34

 
6.5
 
$
15,833

* 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 six months ended June 30, 2019 , 64,681 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 six months ended June 30, 2019 and 2018 was approximately $5.0 million and $1.4 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 *
 
44.79

 
(9,422
)
Forfeited
 
16.50

 
(408
)
Outstanding - June 30, 2019
 
$
41.64

 
23,939

* 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, 1,553 shares were surrendered during the six months ended June 30, 2019 .
The Company recognized approximately $2.2 million and $2.3 million of stock-based compensation expense (included in personnel on the consolidated statements of income) during the six months ended June 30, 2019 and 2018 , respectively, associated with its common stock awards granted to officers and employees. In addition, during the first half of 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 directors. As of June 30, 2019 , there was approximately $11.0 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 $0.9 million and $0.2 million for the six months ended June 30, 2019 and 2018 , respectively, for the tax impact of stock option exercises and vesting of restricted stock.
Note 5 Securities Available for Sale
Amortized cost and fair value of securities available for sale are summarized as follows.
 
June 30, 2019
(in thousands)
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
U.S. government agency securities
$
16,834

 
$

 
$
205

 
$
16,629

State, county and municipals
147,959

 
597

 
386

 
148,170

Mortgage-backed securities
150,094

 
2,507

 
772

 
151,829

Corporate debt securities
84,749

 
2,629

 
17

 
87,361

Total
$
399,636

 
$
5,733

 
$
1,380

 
$
403,989


10



 
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.
 
June 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
$

 
$

 
$
16,629

 
$
205

 
$
16,629

 
$
205

 
3

State, county and municipals
1,917

 
2

 
64,560

 
384

 
66,477

 
386

 
181

Mortgage-backed securities
13,180

 
25

 
64,028

 
747

 
77,208

 
772

 
166

Corporate debt securities

 

 
2,041

 
17

 
2,041

 
17

 
1

Total
$
15,097

 
$
27

 
$
147,258

 
$
1,353

 
$
162,355

 
$
1,380

 
351

 
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 June 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 six months ended June 30, 2019 or 2018 .
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.
 
June 30, 2019
(in thousands)
Amortized Cost
 
Fair Value
Due in less than one year
$
21,526

 
$
21,528

Due in one year through five years
187,172

 
189,049

Due after five years through ten years
34,437

 
34,702

Due after ten years
6,407

 
6,881

 
249,542

 
252,160

Mortgage-backed securities
150,094

 
151,829

Securities AFS
$
399,636

 
$
403,989


11



Proceeds and realized gains / losses from the sale of securities AFS were as follows.
 
Six Months Ended June 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 6 Loans, Allowance for Loan Losses, and Credit Quality
The loan composition is summarized as follows.
 
June 30, 2019
 
December 31, 2018
(in thousands)
Amount
 
% of
Total
 
Amount
 
% of
Total
Commercial & industrial
$
737,928

 
34
%
 
$
684,920

 
32
%
Owner-occupied commercial real estate (“CRE”)
447,554

 
20

 
441,353

 
20

Agricultural (“AG”) production
35,765

 
2

 
35,625

 
2

AG real estate
53,485

 
2

 
53,444

 
2

CRE investment
326,820

 
15

 
343,652

 
16

Construction & land development
73,108

 
3

 
80,599

 
4

Residential construction
38,246

 
2

 
30,926

 
1

Residential first mortgage
345,061

 
16

 
357,841

 
17

Residential junior mortgage
116,433

 
5

 
111,328

 
5

Retail & other
28,873

 
1

 
26,493

 
1

Loans
2,203,273

 
100
%
 
2,166,181

 
100
%
Less allowance for loan losses (“ALLL”)
13,571

 
 
 
13,153

 
 
Loans, net
$
2,189,702

 
 
 
$
2,153,028

 
 
Allowance for loan losses to loans
0.62
%
 
 
 
0.61
%
 
 
As a further breakdown, loans are summarized by originated and acquired as follows.
 
June 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
$
625,450

 
40
%
 
$
112,478

 
18
%
 
$
568,100

 
38
%
 
$
116,820

 
17
%
Owner-occupied CRE
306,634

 
19

 
140,920

 
22

 
283,531

 
19

 
157,822

 
23

AG production
11,383

 
1

 
24,382

 
4

 
11,113

 
1

 
24,512

 
4

AG real estate
33,907

 
2

 
19,578

 
3

 
31,374

 
2

 
22,070

 
3

CRE investment
165,687

 
10

 
161,133

 
26

 
171,087

 
12

 
172,565

 
25

Construction & land development
60,297

 
4

 
12,811

 
2

 
66,478

 
4

 
14,121

 
2

Residential construction
37,996

 
2

 
250

 

 
30,926

 
2

 

 

Residential first mortgage
221,613

 
14

 
123,448

 
20

 
220,368

 
15

 
137,473

 
20

Residential junior mortgage
88,053

 
6

 
28,380

 
5

 
78,379

 
5

 
32,949

 
5

Retail & other
27,115

 
2

 
1,758

 

 
23,809

 
2

 
2,684

 
1

Loans
1,578,135

 
100
%
 
625,138

 
100
%
 
1,485,165

 
100
%
 
681,016

 
100
%
Less ALLL
11,934

 
 
 
1,637

 
 
 
11,448

 
 
 
1,705

 
 
Loans, net
$
1,566,201

 
 
 
$
623,501

 
 
 
$
1,473,717

 
 
 
$
679,311

 
 
ALLL to loans
0.76
%
 
 
 
0.26
%
 
 
 
0.77
%
 
 
 
0.25
%
 
 
As a percent of total loans
72
%
 
 
 
28
%
 
 
 
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.

12



A roll forward of the allowance for loan losses is summarized as follows.
 
Six Months Ended
 
Year Ended
(in thousands)
June 30, 2019
 
June 30, 2018
 
December 31, 2018
Beginning balance
$
13,153

 
$
12,653

 
$
12,653

Provision for loan losses
500

 
1,020

 
1,600

Charge-offs
(232
)
 
(877
)
 
(1,213
)
Recoveries
150

 
79

 
113

Net (charge-offs) recoveries
(82
)
 
(798
)
 
(1,100
)
Ending balance
$
13,571

 
$
12,875

 
$
13,153

The following tables present the balance and activity in the ALLL by portfolio segment and the recorded investment in loans by portfolio segment.
 
TOTAL – Six Months Ended June 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
371

 
17

 
15

 
23

 
(19
)
 
(65
)
 
35

 
(79
)
 
66

 
136

 
500

Charge-offs

 
(13
)
 

 

 

 

 

 

 
(60
)
 
(159
)
 
(232
)
Recoveries
50

 
2

 

 

 

 

 

 
35

 
29

 
34

 
150

Net (charge-offs) recoveries
50

 
(11
)
 

 

 

 

 

 
35

 
(31
)
 
(125
)
 
(82
)
Ending balance
$
5,692

 
$
2,853

 
$
136

 
$
324

 
$
1,451

 
$
445

 
$
246

 
$
1,602

 
$
507

 
$
315

 
$
13,571

As % of ALLL
42
%
 
21
%
 
1
%
 
2
%
 
11
%
 
3
%
 
2
%
 
12
%
 
4
%
 
2
%
 
100
%
ALLL:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated
$
382

 
$

 
$
38

 
$

 
$

 
$

 
$