Nicolet Bankshares, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Financial amounts below are in millions of dollars unless otherwise noted. Nicolet is a Wisconsin-based bank holding company providing banking and wealth-management services primarily in Wisconsin and Menominee, Michigan.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $29.2 | $26.9 | $85.6 | $79.6 |
| Provision for loan losses | $0.4 | $0.3 | $0.9 | $1.4 |
| Noninterest income | $12.3 | $10.6 | $40.1 | $29.7 |
| Noninterest expense | $22.9 | $23.0 | $71.4 | $68.1 |
| Net income attributable to Nicolet | $13.5 | $10.9 | $42.3 | $30.2 |
| Diluted earnings per share | $1.40 | $1.09 | $4.36 | $3.02 |
| Net interest margin, tax-equivalent | 4.19% | 4.02% | 4.17% | 3.99% |
Balance sheet, cash flow and capital
- At September 30, total assets were $3.106 billion; loans were $2.243 billion; deposits were $2.584 billion; and stockholders’ equity was $428.0 million. Loans increased 4% from year-end 2018, while deposits declined 1%.
- Cash and cash equivalents were $144.0 million, down from $249.5 million at year-end 2018. For the nine months, operating cash flow was $36.5 million, investing cash use was $77.0 million, and financing cash use was $65.1 million.
- Long-term borrowings were $57.5 million, down from $77.3 million at year-end; there were no short-term borrowings. The decline primarily reflected repayment of a $20 million FHLB advance in Q3.
- Management reported sufficient liquidity, including $175 million of unused Federal funds lines, $185 million of available FHLB borrowing capacity, and a $10 million unused holding-company credit line. About 32% of the securities portfolio was pledged.
- The Bank met the regulatory definition of well-capitalized. Its total capital ratio was 10.8% and Tier 1 leverage ratio was 9.2% at September 30. Nicolet repurchased and retired $15.3 million of common stock during the first nine months.
Material changes and management commentary
- Year-to-date net income rose 40% and diluted EPS rose 44% year over year. Net interest income increased 8%, reflecting loan growth and higher asset yields; the tax-equivalent net interest margin increased 18 basis points.
- Year-to-date noninterest income rose 35%, substantially reflecting a $7.4 million after-tax gain from selling 80% of Nicolet’s equity investment in UFS, LLC. Excluding net asset gains, noninterest income increased 13%, with mortgage income a key contributor. Q3 mortgage income was up 95% year over year, which management attributed largely to increased secondary-market sales and refinancing activity.
- The UFS sale was accompanied by $2.75 million of retirement-related employee compensation expense in Q2. Management said this action benefited employees; together, the sale and compensation actions increased first-nine-month net income by $5.4 million, or $0.55 per diluted share.
- Asset quality remained low-risk by reported ratios but weakened from year-end: nonaccrual loans increased to $9.2 million from $5.5 million, and nonperforming assets rose to $10.6 million from $5.9 million. Nonperforming assets were 0.34% of total assets. The allowance was $13.6 million, or 0.61% of loans; annualized net charge-offs were 0.03% of average loans.
- Nicolet had a pending stock-for-stock merger with Choice Bancorp. Regulatory approvals had been received and Choice shareholders approved the deal on October 22; closing was expected November 8, 2019, subject to customary conditions. Choice reported $436 million of assets, $352 million of loans, and $306 million of deposits at September 30.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management’s forward-looking statements are subject to economic, competitive, regulatory, interest-rate, credit, and merger-integration risks.
- Nicolet expected to adopt the CECL credit-loss standard on January 1, 2020. Based on its September 2019 portfolio and assumptions, it estimated reserves could increase 40%–60% at adoption, while cautioning that the estimate could change.
- Management reported no material legal proceedings expected to adversely affect results or financial position, no material changes to previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- How much of earnings growth is sustainable after excluding the UFS gain, related employee compensation, and other asset gains?
- Whether rising nonaccrual loans, nonperforming assets, and potential problem loans lead to higher credit losses or allowance needs.
- The eventual CECL reserve increase and its effects on retained earnings, capital, and future provisions.
- Completion of the Choice merger, integration costs and risks, and the resulting financial and capital impact.
- Whether loan growth, deposit trends, funding costs, and mortgage refinancing activity support future margins and liquidity.