NICOLET BANKSHARES INC - 10-K filing on 2017-03-10

LOANS AND ALLOWANCE FOR LOAN LOSSES

12 Months Ended

Dec. 31, 2016

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES

The loan composition as of December 31 is summarized as follows:

	2016						2015
(in thousands)	Amount			% of Total			Amount			% of Total
Commercial & industrial	$	428,270			27.3	%	$	294,419			33.6	%
Owner-occupied commercial real estate (“CRE”)		360,227			23.0			185,285			21.1
Agricultural (“AG”) production		34,767			2.2			15,018			1.7
AG real estate		45,234			2.9			43,272			4.9
CRE investment		195,879			12.5			78,711			9.0
Construction & land development		74,988			4.8			36,775			4.2
Residential construction		23,392			1.5			10,443			1.2
Residential first mortgage		300,304			19.1			154,658			17.6
Residential junior mortgage		91,331			5.8			51,967			5.9
Retail & other		14,515			0.9			6,513			0.8
Loans		1,568,907			100.0	%		877,061			100.0	%
Less ALLL		11,820						10,307
Loans, net	$	1,557,087					$	866,754
ALLL to loans		0.75	%					1.18	%

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

	2016												2015
(in thousands)	Originated Amount			% of Total			Acquired Amount			% of Total			Originated Amount			% of Total			Acquired Amount			% of Total
Commercial & industrial	$	330,073			36.6	%	$	98,197			14.7	%	$	284,023			38.4	%	$	10,396			7.6	%
Owner-occupied CRE		182,776			20.3			177,451			26.6			153,563			20.7			31,722			23.2
AG production		9,192			1.0			25,575			3.8			6,849			0.9			8,169			6.0
AG real estate		18,858			2.1			26,376			4.0			25,464			3.4			17,808			13.0
CRE investment		72,930			8.1			122,949			18.4			58,949			8.0			19,762			14.4
Construction & land development		44,147			4.9			30,841			4.6			27,231			3.7			9,544			7.0
Residential construction		20,768			2.3			2,624			0.4			10,443			1.4			-			-
Residential first mortgage		164,949			18.3			135,355			20.3			122,373			16.5			32,285			23.5
Residential junior mortgage		48,199			5.3			43,132			6.5			44,889			6.1			7,078			5.2
Retail & other		10,095			1.1			4,420			0.7			6,351			0.9			162			0.1
Loans		901,987			100.0	%		666,920			100.0	%		740,135			100.0	%		136,926			100.0	%
Less ALLL		9,449						2,371						8,714						1,593
Loans, net		892,538						664,549						731,421						135,333
ALLL to loans		1.05	%					0.36	%					1.18	%					1.16	%

Practically all of the Company’s loans, commitments, financial letters of credit, and standby letters of credit have been granted to customers in the Company’s market area. Although the Company has a diversified loan portfolio, the credit risk in the loan portfolio is largely influenced by general economic conditions and trends of the counties and markets in which the debtors operate, and the resulting impact on the operations of borrowers or on the value of underlying collateral, if any.

The ALLL represents management’s estimate of probable and inherent credit losses in the Company’s loan portfolio at the balance sheet date. In general, estimating the amount of the ALLL is a function of a number of factors, including but not limited to changes in the loan portfolio, net charge-offs, trends in past due and impaired loans, and the level of potential problem loans, all of which may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses could be required that could adversely affect our earnings or financial position in future periods. Allocations to the ALLL may be made for specific loans but the entire ALLL is available for any loan that, in management’s judgment, should be charged-off or for which an actual loss is realized.

The allocation methodology used by the Company includes specific allocations for impaired loans evaluated individually for impairment based on collateral values and for the remaining loan portfolio collectively evaluated for impairment primarily based on historical loss rates and other qualitative factors. Loan charge-offs and recoveries are based on actual amounts charged-off or recovered by loan category. Management allocates the ALLL by pools of risk within each loan portfolio.

The following tables present the balance and summary of activity in the ALLL in total as of December 31:

(in thousands)
ALLL:	2016			2015			2014
Beginning balance	$	10,307		$	9,288		$	9,232
Provision		1,800			1,800			2,700
Charge-offs		(584	)		(883	)		(2,743	)
Recoveries		297			102			99
Net charge-offs		(287	)		(781	)		(2,644	)
Ending balance	$	11,820		$	10,307		$	9,288

The following tables present the balance and activity in the ALLL by portfolio segment and the recorded investment in loans by portfolio segment based on the impairment method as of December 31, 2016:

	TOTAL – 2016
(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	$	3,721		$	1,933		$	85		$	380		$	785		$	1,446		$	147		$	1,240		$	496		$	74		$	10,307
Provision		451			1,037			65			(95	)		118			(672	)		157			593			14			132			1,800
Charge-offs		(279	)		(108	)		-			-			-			-			-			(80	)		(57	)		(60	)		(584	)
Recoveries		26			5			-			-			221			-			-			31			8			6			297
Net charge-offs		(253	)		(103	)		-			-			221			-			-			(49	)		(49	)		(54	)		(287	)
Ending balance	$	3,919		$	2,867		$	150		$	285		$	1,124		$	774		$	304		$	1,784		$	461		$	152		$	11,820
As percent of ALLL		33.2	%		24.3	%		1.3	%		2.4	%		9.5	%		6.5	%		2.6	%		15.1	%		3.9	%		1.2	%		100.0	%

ALLL:
Individually evaluated	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-
Collectively evaluated		3,919			2,867			150			285			1,124			774			304			1,784			461			152			11,820
Ending balance	$	3,919		$	2,867		$	150		$	285		$	1,124		$	774		$	304		$	1,784		$	461		$	152		$	11,820

Loans:
Individually evaluated	$	338		$	2,588		$	41		$	240		$	12,552		$	694		$	261		$	2,204		$	299		$	-		$	19,217
Collectively evaluated		427,932			357,639			34,726			44,994			183,327			74,294			23,131			298,100			91,032			14,515			1,549,690
Total loans	$	428,270		$	360,227		$	34,767		$	45,234		$	195,879		$	74,988		$	23,392		$	300,304		$	91,331		$	14,515		$	1,568,907

Less ALLL	$	3,919		$	2,867		$	150		$	285		$	1,124		$	774		$	304		$	1,784		$	461		$	152		$	11,820
Net loans	$	424,351		$	357,360		$	34,617		$	44,949		$	194,755		$	74,214		$	23,088		$	298,520		$	90,870		$	14,363		$	1,557,087

As a further breakdown, the December 31, 2016 ALLL is summarized by originated and acquired as follows:

	Originated – 2016
(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	$	3,135		$	1,567		$	71		$	299		$	646		$	1,381		$	147		$	987		$	418		$	63		$	8,714
Provision		268			695			51			(77	)		26			(725	)		119			360			1			123			841
Charge-offs		(262	)		(3	)		-			-			-			-			-			-			(53	)		(59	)		(377	)
Recoveries		9			4			-			-			221			-			-			25			7			5			271
Net charge-offs		(253	)		1			-			-			221			-			-			25			(46	)		(54	)		(106	)
Ending balance	$	3,150		$	2,263		$	122		$	222		$	893		$	656		$	266		$	1,372		$	373		$	132		$	9,449
As percent of ALLL		33.4	%		23.9	%		1.3	%		2.3	%		9.5	%		6.9	%		2.8	%		14.5	%		3.9	%		1.5	%		100.0	%

ALLL:
Individually evaluated	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-
Collectively evaluated		3,150			2,263			122			222			893			656			266			1,372			373			132			9,449
Ending balance	$	3,150		$	2,263		$	122		$	222		$	893		$	656		$	266		$	1,372		$	373		$	132		$	9,449

Loans:
Individually evaluated	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-
Collectively evaluated		330,073			182,776			9,192			18,858			72,930			44,147			20,768			164,949			48,199			10,095			901,987
Total loans	$	330,073		$	182,776		$	9,192		$	18,858		$	72,930		$	44,147		$	20,768		$	164,949		$	48,199		$	10,095		$	901,987

Less ALLL	$	3,150		$	2,263		$	122		$	222		$	893		$	656		$	266		$	1,372		$	373		$	132		$	9,449
Net loans	$	326,923		$	180,513		$	9,070		$	18,636		$	72,037		$	43,491		$	20,502		$	163,577		$	47,826		$	9,963		$	892,538

	Acquired - 2016
(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	$	586		$	366		$	14		$	81		$	139		$	65		$	-		$	253		$	78		$	11		$	1,593
Provision		183			342			14			(18	)		92			53			38			233			13			9			959
Charge-offs		(17	)		(105	)		-			-			-			-			-			(80	)		(4	)		(1	)		(207	)
Recoveries		17			1			-			-			-			-			-			6			1			1			26
Net charge-offs		-			(104	)		-			-			-			-			-			(74	)		(3	)		-			(181	)
Ending balance	$	769		$	604		$	28		$	63		$	231		$	118		$	38		$	412		$	88		$	20		$	2,371
As percent of ALLL		32.4	%		25.5	%		1.2	%		2.7	%		9.7	%		5.0	%		1.6	%		17.4	%		3.7	%		0.8	%		100.0	%

Loans:
Individually evaluated	$	338		$	2,588		$	41		$	240		$	12,552		$	694		$	261		$	2,204		$	299		$	-		$	19,217
Collectively evaluated		97,859			174,863			25,534			26,136			110,397			30,147			2,363			133,151			42,833			4,420			647,703
Total loans	$	98,197		$	177,451		$	25,575		$	26,376		$	122,949		$	30,841		$	2,624		$	135,355		$	43,132		$	4,420		$	666,920

Less ALLL	$	769		$	604		$	28		$	63		$	231		$	118		$	38		$	412		$	88		$	20		$	2,371
Net loans	$	97,428		$	176,847		$	25,547		$	26,313		$	122,718		$	30,723		$	2,586		$	134,943		$	43,044		$	4,400		$	664,549

There was no ALLL allocated to individually evaluated loans at December 31, 2016, therefore the table reflecting the ALLL between individually evaluated loans and collectively evaluated loans was omitted.

	TOTAL – 2015
(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	$	3,191		$	1,230		$	53		$	226		$	511		$	2,685		$	140		$	866		$	337		$	49		$	9,288
Provision		868			928			32			154			307			(1,239	)		7			438			258			47			1,800
Charge-offs		(374	)		(229	)		-			-			(50	)		-			-			(84	)		(111	)		(35	)		(883	)
Recoveries		36			4			-			-			17			-			-			20			12			13			102
Net charge-offs		(338	)		(225	)		-			-			(33	)		-			-			(64	)		(99	)		(22	)		(781	)
Ending balance	$	3,721		$	1,933		$	85		$	380		$	785		$	1,446		$	147		$	1,240		$	496		$	74		$	10,307
As percent of ALLL		36.2	%		18.8	%		0.8	%		3.7	%		7.6	%		14.0	%		1.4	%		12.0	%		4.8	%		0.7	%		100.0	%

ALLL:
Individually evaluated	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-
Collectively evaluated		3,721			1,933			85			380			785			1,446			147			1,240			496			74			10,307
Ending balance	$	3,721		$	1,933		$	85		$	380		$	785		$	1,446		$	147		$	1,240		$	496		$	74		$	10,307

Loans:
Individually evaluated	$	142		$	950		$	39		$	252		$	1,301		$	280		$	-		$	460		$	142		$	-		$	3,566
Collectively evaluated		294,277			184,335			14,979			43,020			77,410			36,495			10,443			154,198			51,825			6,513			873,495
Total loans	$	294,419		$	185,285		$	15,018		$	43,272		$	78,711		$	36,775		$	10,443		$	154,658		$	51,967		$	6,513		$	877,061

Less ALLL	$	3,721		$	1,933		$	85		$	380		$	785		$	1,446		$	147		$	1,240		$	496		$	74		$	10,307
Net loans	$	290,698		$	183,352		$	14,933		$	42,892		$	77,926		$	35,329		$	10,296		$	153,418		$	51,471		$	6,439		$	866,754

As a further breakdown, the December 31, 2015 ALLL is summarized by originated and acquired as follows:

	Originated – 2015
(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	$	3,191		$	1,230		$	53		$	226		$	511		$	2,685		$	140		$	866		$	337		$	49		$	9,288
Provision		282			490			18			73			118			(1,304	)		7			189			171			36			80
Charge-offs		(374	)		(157	)		-			-			-			-			-			(84	)		(91	)		(35	)		(741	)
Recoveries		36			4			-			-			17			-			-			16			1			13			87
Net charge-offs		(338	)		(153	)		-			-			17			-			-			(68	)		(90	)		(22	)		(654	)
Ending balance	$	3,135		$	1,567		$	71		$	299		$	646		$	1,381		$	147		$	987		$	418		$	63		$	8,714
As percent of ALLL		36.1	%		18.0	%		0.8	%		3.4	%		7.4	%		15.8	%		1.7	%		11.3	%		4.8	%		0.7	%		100.0	%

ALLL:
Individually evaluated	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-
Collectively evaluated		3,135			1,567			71			299			646			1,381			147			987			418			63			8,714
Ending balance	$	3,135		$	1,567		$	71		$	299		$	646		$	1,381		$	147		$	987		$	418		$	63		$	8,714

Loans:
Individually evaluated	$	-		$	-		$	-		$	-		$	387		$	-		$	-		$	-		$	-		$	-		$	387
Collectively evaluated		284,023			153,563			6,849			25,464			58,562			27,231			10,443			122,373			44,889			6,351			739,748
Total loans	$	284,023		$	153,563		$	6,849		$	25,464		$	58,949		$	27,231		$	10,443		$	122,373		$	44,889		$	6,351		$	740,135

Less ALLL	$	3,135		$	1,567		$	71		$	299		$	646		$	1,381		$	147		$	987		$	418		$	63		$	8,714
Net loans	$	280,888		$	151,996		$	6,778		$	25,165		$	58,303		$	25,850		$	10,296		$	121,386		$	44,471		$	6,288		$	731,421

	Acquired - 2015
(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	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-
Provision		586			438			14			81			189			65			-			249			87			11			1,720
Charge-offs		-			(72	)		-			-			(50	)		-			-			-			(20	)		-			(142	)
Recoveries		-			-			-			-			-			-			-			4			11			-			15
Net charge-offs		-			(72	)		-			-			(50	)		-			-			4			(9	)		-			(127	)
Ending balance	$	586		$	366		$	14		$	81		$	139		$	65		$	-		$	253		$	78		$	11		$	1,593
As percent of ALLL		36.7	%		23.0	%		0.9	%		5.1	%		8.7	%		4.1	%		-	%		15.9	%		4.9	%		0.7	%		100.0	%

Loans:
Individually evaluated	$	142		$	950		$	39		$	252		$	914		$	280		$	-		$	460		$	142		$	-		$	3,179
Collectively evaluated		10,254			30,772			8,130			17,556			18,848			9,264			-			31,825			6,936			162			133,747
Total loans	$	10,396		$	31,722		$	8,169		$	17,808		$	19,762		$	9,544		$	-		$	32,285		$	7,078		$	162		$	136,926

Less ALLL	$	586		$	366		$	14		$	81		$	139		$	65		$	-		$	253		$	78		$	11		$	1,593
Net loans	$	9,810		$	31,356		$	8,155		$	17,727		$	19,623		$	9,479		$	-		$	32,032		$	7,000		$	151		$	135,333

The following table presents nonaccrual loans by portfolio segment as of December 31, 2016 and 2015. Acquired impaired loans that are performing to their contractual terms are not included in the below table and are accruing interest based on their performance and management’s determination.

		Total Nonaccrual Loans
(in thousands)		2016	% to Total			2015	% to Total
Commercial & industrial	$	358	1.8	%	$	204	5.8	%
Owner-occupied CRE		2,894	14.3			951	26.9
AG production		9	0.1			13	0.4
AG real estate		208	1.0			230	6.5
CRE investment		12,317	60.6			1,040	29.4
Construction & land development		1,193	5.9			280	7.9
Residential construction		260	1.3			-	-
Residential first mortgage		2,990	14.7			674	19.1
Residential junior mortgage		56	0.3			141	4.0
Retail & other		-	-			-	-
Nonaccrual loans	$	20,285	100.0	%	$	3,533	100.0	%

As a further breakdown, nonaccrual loans as of December 31, 2016 and 2015 are summarized by originated and acquired as follows:

	2016
(in thousands)	Originated		% to Total			Acquired		% to Total
Commercial & industrial	$	4		1.6	%	$	354		1.8	%
Owner-occupied CRE		42		16.3			2,852		14.2
AG production		7		2.7			2		0.1
AG real estate		-		-			208		1.0
CRE investment		-		-			12,317		61.4
Construction & land development		-		-			1,193		6.0
Residential construction		-		-			260		1.3
Residential first mortgage		204		79.4			2,786		13.9
Residential junior mortgage		-		-			56		0.3
Retail & other		-		-			-		-
Nonaccrual loans	$	257		100.0	%	$	20,028		100.0	%

	2015
(in thousands)	Originated		% to Total			Acquired		% to Total
Commercial & industrial	$	49		8.4	%	$	155		5.3	%
Owner-occupied CRE		-		-			951		32.1
AG production		13		2.2			-		-
AG real estate		-		-			230		7.8
CRE investment		387		66.7			653		22.1
Construction & land development		-		-			280		9.5
Residential construction		-		-			-		-
Residential first mortgage		132		22.7			542		18.4
Residential junior mortgage		-		-			141		4.8
Retail & other		-		-			-		-
Nonaccrual loans	$	581		100.0	%	$	2,952		100.0	%

The following tables present past due loans by portfolio segment as of December 31, 2016:

	Total Past Due Loans - 2016
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or non- accrual			Current			Total
Commercial & industrial	$	22		$	358		$	427,890		$	428,270
Owner-occupied CRE		268			2,894			357,065			360,227
AG production		-			9			34,758			34,767
AG real estate		-			208			45,026			45,234
CRE investment		-			12,317			183,562			195,879
Construction & land development		-			1,193			73,795			74,988
Residential construction		-			260			23,132			23,392
Residential first mortgage		486			2,990			296,828			300,304
Residential junior mortgage		200			56			91,075			91,331
Retail & other		15			-			14,500			14,515
Total loans	$	991		$	20,285		$	1,547,631		$	1,568,907
As a percent of total loans		0.1	%		1.3	%		98.6	%		100.0	%

As a further breakdown, past due loans as of December 31, 2016 are summarized by originated and acquired as follows:

	Originated – 2016
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or non-accrual			Current			Total
Commercial & industrial	$	-		$	4		$	330,069		$	330,073
Owner-occupied CRE		-			42			182,734			182,776
AG production		-			7			9,185			9,192
AG real estate		-			-			18,858			18,858
CRE investment		-			-			72,930			72,930
Construction & land development		-			-			44,147			44,147
Residential construction		-			-			20,768			20,768
Residential first mortgage		81			204			164,664			164,949
Residential junior mortgage		13			-			48,186			48,199
Retail & other		3			-			10,092			10,095
Total loans	$	97		$	257		$	901,633		$	901,987
As a percent of total loans		0.1	%		0.1	%		99.8	%		100.0	%

	Acquired – 2016
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or non- accrual			Current			Total
Commercial & industrial	$	22		$	354		$	97,821		$	98,197
Owner-occupied CRE		268			2,852			174,331			177,451
AG production		-			2			25,573			25,575
AG real estate		-			208			26,168			26,376
CRE investment		-			12,317			110,632			122,949
Construction & land development		-			1,193			29,648			30,841
Residential construction		-			260			2,364			2,624
Residential first mortgage		405			2,786			132,164			135,355
Residential junior mortgage		187			56			42,889			43,132
Retail & other		12			-			4,408			4,420
Total loans	$	894		$	20,028		$	645,998		$	666,920
As a percent of total loans		0.1	%		3.0	%		96.9	%		100.0	%

The following table presents past due loans by portfolio segment as of December 31, 2015:

	Total Past Due Loans - 2015
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or non- accrual			Current			Total
Commercial & industrial	$	50		$	204		$	294,165		$	294,419
Owner-occupied CRE		-			951			184,334			185,285
AG production		16			13			14,989			15,018
AG real estate		-			230			43,042			43,272
CRE investment		-			1,040			77,671			78,711
Construction & land development		-			280			36,495			36,775
Residential construction		-			-			10,443			10,443
Residential first mortgage		150			674			153,834			154,658
Residential junior mortgage		10			141			51,816			51,967
Retail & other		12			-			6,501			6,513
Total loans	$	238		$	3,533		$	873,290		$	877,061
As a percent of total loans		0.1	%		0.4	%		99.5	%		100.0	%

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

	Originated – 2015
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or non- accrual			Current			Total
Commercial & industrial	$	50		$	49		$	283,924		$	284,023
Owner-occupied CRE		-			-			153,563			153,563
AG production		-			13			6,836			6,849
AG real estate		-			-			25,464			25,464
CRE investment		-			387			58,562			58,949
Construction & land development		-			-			27,231			27,231
Residential construction		-			-			10,443			10,443
Residential first mortgage		-			132			122,241			122,373
Residential junior mortgage		10			-			44,879			44,889
Retail & other		12			-			6,339			6,351
Total loans	$	72		$	581		$	739,482		$	740,135
As a percent of total loans		0.1	%		0.1	%		99.8	%		100.0	%

	Acquired – 2015
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or non- accrual			Current			Total
Commercial & industrial	$	-		$	155		$	10,241		$	10,396
Owner-occupied CRE		-			951			30,771			31,722
AG production		16			-			8,153			8,169
AG real estate		-			230			17,578			17,808
CRE investment		-			653			19,109			19,762
Construction & land development		-			280			9,264			9,544
Residential construction		-			-			-			-
Residential first mortgage		150			542			31,593			32,285
Residential junior mortgage		-			141			6,937			7,078
Retail & other		-			-			162			162
Total loans	$	166		$	2,952		$	133,808		$	136,926
As a percent of total loans		0.1	%		2.2	%		97.7	%		100.0	%

A description of the loan risk categories used by the Company follows:

1-4 Pass: Credits exhibit adequate cash flows, appropriate management and financial ratios within industry norms and/or are supported by sufficient collateral. Some credits in these rating categories may require a need for monitoring but elements of concern are not severe enough to warrant an elevated rating.

5 Watch: Credits with this rating are adequately secured and performing but are being monitored due to the presence of various short term weaknesses which may include unexpected, short term adverse financial performance, managerial problems, potential impact of a decline in the entire industry or local economy and delinquency issues. Loans to individuals or loans supported by guarantors with marginal net worth or collateral may be included in this rating category.

6 Special Mention: Credits with this rating have potential weaknesses that, without the Company’s attention and correction may result in deterioration of repayment prospects. These assets are considered Criticized Assets. Potential weaknesses may include adverse financial trends for the borrower or industry, repeated lack of compliance with Company requests, increasing debt to net worth, serious management conditions and decreasing cash flow.

7 Substandard: Assets with this rating are characterized by the distinct possibility the Company will sustain some loss if deficiencies are not corrected. All foreclosures, liquidations, and non-accrual loans are considered to be categorized in this rating, regardless of collateral sufficiency.

8 Doubtful: Assets with this rating exhibit all the weaknesses as one rated Substandard with the added characteristic that such weaknesses make collection or liquidation in full highly questionable.

9 Loss: Assets in this category are considered uncollectible. Pursuing any recovery or salvage value is impractical but does not preclude partial recovery in the future.

The following tables present loans by loan grade as of December 31:

	2016
(in thousands)	Grades 1- 4			Grade 5			Grade 6			Grade 7			Grade 8		Grade 9		Total
Commercial & industrial	$	401,954		$	16,633		$	2,133		$	7,550		$	-	$	-	$	428,270
Owner-occupied CRE		340,846			14,758			193			4,430			-		-		360,227
AG production		31,026			3,191			70			480			-		-		34,767
AG real estate		41,747			2,727			-			760			-		-		45,234
CRE investment		173,652			8,137			-			14,090			-		-		195,879
Construction & land development		69,097			4,318			-			1,573			-		-		74,988
Residential construction		22,030			1,102			-			260			-		-		23,392
Residential first mortgage		295,109			1,348			192			3,655			-		-		300,304
Residential junior mortgage		91,123			-			114			94			-		-		91,331
Retail & other		14,515			-			-			-			-		-		14,515
Total loans	$	1,481,099		$	52,214		$	2,702		$	32,892		$	-	$	-	$	1,568,907
Percent of total		94.4	%		3.3	%		0.2	%		2.1	%		-		-		100.0	%

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

The following table presents impaired loans as of December 31, 2016. For purposes of these impaired loan tables, all PCI loans and all originated nonaccrual loans over $250,000 are included below for December 31, 2016 and 2015. No loans had a related allowance at December 31, 2016, and therefore, the below disclosures were not expanded to include loans with and without a related allowance.

	Total Impaired Loans - 2016
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial & industrial	$	338	$	720	$	-	$	348	$	34
Owner-occupied CRE		2,588		4,661		-		2,700		271
AG production		41		163		-		48		6
AG real estate		240		332		-		245		26
CRE investment		12,552		19,695		-		12,982		1,051
Construction & land development		694		2,122		-		752		112
Residential construction		261		1,348		-		287		82
Residential first mortgage		2,204		3,706		-		2,312		190
Residential junior mortgage		299		639		-		209		17
Retail & Other		-		36		-		-		-
Total	$	19,217	$	33,422	$	-	$	19,883	$	1,789

There were no originated impaired loans as of December 31, 2016. All loans in the table above were acquired loans.

The following table presents impaired loans as of December 31, 2015:

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

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

	Originated - 2015
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance*		Average Recorded Investment		Interest Income Recognized
Commercial & industrial	$	-	$	-	$	-	$	-	$	-
Owner-occupied CRE		-		-		-		-		-
AG production		-		-		-		-		-
AG real estate		-		-		-		-		-
CRE investment		387		387		-		387		29
Construction & land development		-		-		-		-		-
Residential construction		-		-		-		-		-
Residential first mortgage		-		-		-		-		-
Residential junior mortgage		-		-		-		-		-
Retail & Other		-		-		-		-		-
Total	$	387	$	387	$	-	$	387	$	29

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

Interest income of $2.0 million, $0.4 million and $0.7 million would have been earned on the year-end nonaccrual loans had they been performing in accordance with their original terms during the years ended December 31, 2016, 2015 and 2014, respectively. Interest of approximately $1.8 million, $0.4 million, and $0.7 million was earned on year-end nonaccrual loans and included in income for each of the years ended December 31, 2016, 2015 and 2014, respectively.

In April 2016, the Baylake merger added PCI loans at a fair value of $20.8 million, net of an initial $13.9 million non-accretable mark. Combining the 2013 and 2016 acquisitions, total PCI loans acquired in aggregate were initially recorded at a fair value of $37.5 million on their respective acquisition dates, net of an initial $26.1 million non-accretable mark and a zero accretable mark. At December 31, 2016, $18.8 million of the $37.5 million remain in impaired loans and $0.4 million of acquired loans have subsequently become impaired, bringing acquired impaired loans to $19.2 million, net of a $14.3 million non-accretable mark and a zero accretable mark.

Non-accretable discount on PCI loans:	Years Ended December 31,
(in thousands)	2016			2015
Balance at beginning of period	$	4,229		$	6,596
Acquired balance, net		13,923			-
Reclassifications from (to) non-accretable		-			-
Accretion to loan interest income		(3,458	)		(1,737	)
Disposals of loans		(367	)		(630	)
Balance at end of period	$	14,327		$	4,229

Troubled Debt Restructurings

At December 31, 2016, there were five loans classified as troubled debt restructurings and nine loans at December 31, 2015. These five loans had a pre-modification balance of $1.3 million and at December 31, 2016, had a balance of $0.8 million. There were no loans which were classified as troubled debt restructurings during the previous twelve months that subsequently defaulted during 2016. As of December 31, 2016 there were no commitments to lend additional funds to debtors whose terms have been modified in troubled debt restructurings. Loans which were considered troubled debt restructurings prior to the acquisitions are not required to be classified as troubled debt restructurings in the Company’s consolidated financial statements unless or until such loans would subsequently meet criteria to be classified as such, since acquired loans were recorded at their estimated fair values at the time of the acquisition.