Nicolet Bankshares, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; includes fourth-quarter results. Nicolet is a Wisconsin-based community bank serving northeastern and central Wisconsin and Menominee, Michigan. It reported 39 branches and completed its acquisition of Choice Bancorp in November 2019.
Financial performance and condition
- Profit: Net income attributable to Nicolet was $54.6 million, up 33% from $41.0 million in 2018. Diluted EPS rose 34% to $5.52. Return on average assets was 1.75%, compared with 1.38%.
- Fourth quarter: Net income attributable to Nicolet was $12.3 million and diluted EPS was $1.18, versus $10.9 million and $1.11 a year earlier. Quarterly net interest margin was 4.06%, up 8 basis points year over year.
- Interest income and margins: Net interest income increased 9% to $116.1 million. Net interest margin was 4.19%, up from 4.04%; earning-asset yield rose 26 basis points to 5.00%, while the cost of funds increased 19 basis points to 1.16%.
- Other income and expenses: Noninterest income increased 35% to $53.4 million, including $7.9 million in net asset gains. Excluding asset gains, it rose 19% to $45.5 million, led by mortgage income, up 87% to $11.9 million. Noninterest expense grew 8% to $96.8 million.
- Cash flow: Operating activities provided $58.1 million; investing activities used $63.2 million and financing activities used $62.5 million. Cash and cash equivalents fell $67.5 million to $182.1 million at year-end, primarily reflecting loan growth, debt repayments, and share repurchases. Management said liquidity was sufficient.
- Balance sheet and funding: Total assets were $3.58 billion, loans $2.57 billion, deposits $2.95 billion, and stockholders’ equity $516.3 million. Long-term borrowings were $67.6 million; there were no short-term borrowings. Available funding included $175 million in federal funds lines, $169 million in FHLB capacity, and an unused $10 million holding-company line.
- Capital and shareholder returns: Nicolet’s total capital ratio was 13.4%, CET1 ratio 11.6%, and leverage ratio 11.9%; the Bank was classified as well-capitalized. The company repurchased 310,781 shares for $18.7 million during 2019. It has not paid common dividends since inception.
- Credit quality: Net charge-offs were 0.02% of average loans, versus 0.05% in 2018. However, nonperforming assets increased to $15.1 million, or 0.42% of assets, from $5.9 million, or 0.19%. The allowance for loan losses was $14.0 million, 0.54% of loans, down from 0.61%; coverage of nonperforming loans fell to 98.9% from 240.4%.
Material changes and unusual items
- Choice added approximately $457 million in assets, $348 million in loans, and $289 million in deposits at acquisition. Nicolet issued 1.18 million shares valued at $79.8 million and paid $1.7 million in cash. Excluding Choice’s acquired balances, year-end loans grew 3% and deposits 2% organically.
- Second-quarter results included a $7.4 million after-tax gain from selling 80% of Nicolet’s interest in a data-processing investment and a $2.0 million after-tax retirement-related compensation cost. Excluding these two items, management reported 2019 net income of $49.2 million, diluted EPS of $4.98, and return on average assets of 1.58%.
- Other notable expenses included a $0.7 million branch lease-termination charge and a $0.8 million goodwill write-off following a change in strategy. Year-end goodwill increased to $151.2 million, primarily due to Choice.
- Net interest income benefited from asset growth and higher loan yields, while deposit costs rose amid rate competition. The Federal Reserve cut rates by 75 basis points in the second half of 2019.
Outlook, risks, and contingencies
- Management’s 2020 priorities were core organic growth, acquisition opportunities, digital investment, talent and leadership development, and a branch renovation. It described the 2020 political and economic environment as uncertain and “choppy”; the filing provides no specific earnings or growth guidance.
- On January 1, 2020, Nicolet adopted CECL. It expected an approximately $9 million increase in the loan-loss allowance and an approximately $6 million after-tax reduction to retained earnings; the company said its review of model assumptions was still being finalized. CECL may increase earnings volatility.
- On February 17, 2020, Nicolet agreed to acquire Commerce Financial Holdings, with $713 million in assets, $604 million in loans, and $610 million in deposits at December 31, 2019. The stock-for-stock transaction was expected to close in the third quarter of 2020, subject to shareholder and regulatory approvals.
- Key risks include local economic and industry exposure, commercial lending and real-estate credit risk, rising nonperforming loans, interest-rate sensitivity, acquisition integration and execution, competition, cybersecurity and vendor reliance, regulation, and the transition from LIBOR. The company also identified potential CECL effects and deposit-cost pressures.
- Commitments to extend credit totaled $773.6 million; standby letters of credit totaled $19.2 million. These are contingent exposures, and the filing notes that commitments may expire undrawn. Management reported no material-adverse-effect legal proceedings.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Track nonperforming loans and assets, criticized and potential problem loans, and allowance coverage as the portfolio expands.
- Confirm CECL’s final adoption adjustment and subsequent effects on provisions, capital, and earnings.
- Separate recurring earnings from the UFS investment-sale gain and related employee compensation; assess the sustainability of mortgage income and expense growth.
- Review Choice integration and the terms, approvals, expected costs, and pro forma impact of the proposed Commerce acquisition.
- Monitor deposit pricing and mix, liquidity, capital ratios, and the use of remaining share-repurchase authorization.