Nicolet Bankshares Earnings 2019-06-30

NCBS 10Q Quarterly Report

Balance Sheet	Income Statement	Cash Flow

10-Q 1 ncbs-06302019x10q.htm FORM 10-Q Document

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
PART I	FINANCIAL INFORMATION

	Item 1.	Financial Statements:

		Consolidated Balance Sheets	3

		Consolidated Statements of Income	4

		Consolidated Statements of Comprehensive Income	5

		Consolidated Statements of Stockholders’ Equity	6

		Consolidated Statements of Cash Flows	7

		Notes to Unaudited Consolidated Financial Statements	8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44

	Item 4.	Controls and Procedures	44

PART II	OTHER INFORMATION

	Item 1.	Legal Proceedings	44

	Item 1A.	Risk Factors	44

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44

	Item 3.	Defaults Upon Senior Securities	45

	Item 4.	Mine Safety Disclosures	45

	Item 5.	Other Information	45

	Item 6.	Exhibits	45

		Signatures	46

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.

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.

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.

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.

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.

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

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

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



	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

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.

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		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	420
Collectively evaluated	5,310			2,853			98			324			1,451			445			246			1,602			507			315			13,151
Ending balance	$	5,692		$	2,853		$	136		$	324		$	1,451		$	445		$	246		$	1,602		$	507		$	315		$	13,571
Loans:

Closing Price ($)	Shares Out (MM)	Market Cap ($MM)
$62.98	9	$592

10-Q	2019-06-30	Quarter: 2019-06-30
10-Q	2019-03-31	Quarter: 2019-03-31
10-K	2018-12-31	Annual: 2018-12-31
10-Q	2018-09-30	Quarter: 2018-09-30
10-Q	2018-06-30	Quarter: 2018-06-30
10-Q	2018-03-31	Quarter: 2018-03-31
10-K	2017-12-31	Annual: 2017-12-31
10-Q	2017-09-30	Quarter: 2017-09-30
10-Q	2017-06-30	Quarter: 2017-06-30
10-Q	2017-03-31	Quarter: 2017-03-31
10-K	2016-12-31	Annual: 2016-12-31
10-Q	2016-09-30	Quarter: 2016-09-30
10-Q	2016-06-30	Quarter: 2016-06-30
10-Q	2016-03-31	Quarter: 2016-03-31
10-K	2015-12-31	Annual: 2015-12-31
10-Q	2015-09-30	Quarter: 2015-09-30
10-Q	2015-06-30	Quarter: 2015-06-30
10-Q	2015-03-31	Quarter: 2015-03-31
10-K	2014-12-31	Annual: 2014-12-31
10-Q	2014-09-30	Quarter: 2014-09-30
10-Q	2014-06-30	Quarter: 2014-06-30
10-Q	2014-03-31	Quarter: 2014-03-31
10-K	2013-12-31	Annual: 2013-12-31

8-K	2019-10-07	Accountant, Exhibits
8-K	2019-09-19	Other Events
8-K	2019-07-16	Earnings, Other Events, Exhibits
8-K	2019-06-27	Enter Agreement, Other Events, Exhibits
8-K	2019-05-16	Shareholder Vote
8-K	2019-05-13	Regulation FD
8-K	2019-04-16	Earnings, Exhibits
8-K	2019-01-15	Earnings, Officers, Exhibits
8-K	2018-10-16	Earnings, Exhibits
8-K	2018-07-17	Earnings, Exhibits
8-K	2018-05-08	Shareholder Vote
8-K	2018-04-17	Earnings, Exhibits
8-K	2018-01-16	Earnings, Exhibits

DB	Deutsche Bank Aktiengesellschaft	14,912
EWBC	East West Bancorp	5,646
CSFL	Centerstate Bank	2,956
TCBK	Trico Bancshares	1,066
GABC	German American Bancorp	758
CAC	Camden National	646
FBMS	First Bancshares	531
SFST	Southern First Bancshares	342
PKBK	Parke Bank	236
CIZN	Citizens Holding	111

EX-31.1	ncbs-06302019x10qxexhibit311.htm
EX-31.2	ncbs-06302019x10qxexhibit312.htm
EX-32.1	ncbs-06302019x10qxexhibit321.htm
EX-32.2	ncbs063102019x10qxexhibit322.htm