Nicolet Bankshares, Inc. — Q1 2015 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2015, with income and cash-flow comparisons to Q1 2014 and balance-sheet comparisons to December 31, 2014. Nicolet is a Wisconsin bank holding company providing banking and wealth-management services through 23 branches in Wisconsin and Menominee, Michigan. Unless otherwise noted, amounts below are in millions.
Financial performance and condition
| Metric | Q1 2015 / March 31, 2015 | Comparable period / prior date |
|---|---|---|
| Net interest income | $11.0; up 10% | $10.0 in Q1 2014 |
| Net interest margin, taxable-equivalent | 4.10% | 3.68% in Q1 2014 |
| Net income | $3.1 | $2.2 in Q1 2014 |
| Net income available to common shareholders | $3.0; diluted EPS $0.70 | $2.2; diluted EPS $0.50 in Q1 2014 |
| Noninterest income / expense | $4.1 / $9.8 | $3.8 / $9.6 in Q1 2014 |
| Operating cash flow | $1.4 provided | $0.9 used in Q1 2014 |
| Cash and cash equivalents | $59.8 | $68.7 at December 31, 2014 |
| Total assets | $1,204.4 | $1,215.3 at December 31, 2014 |
| Loans / allowance for loan losses | $879.8 / $9.5; allowance 1.08% of loans | $883.3 / $9.3; 1.05% at December 31, 2014 |
| Deposits | $1,040.8 | $1,059.9 at December 31, 2014 |
| Borrowings and subordinated debt | $41.4 carrying value in total | Subordinated notes were nil at December 31, 2014 |
| Stockholders’ equity and noncontrolling interest | $113.7 | $111.1 at December 31, 2014 |
Cash flows and liquidity. Investing activities provided $2.3 million, while financing activities used $12.6 million, including a $19.1 million net deposit outflow, $1.6 million of common-stock repurchases, and $7.9 million of net proceeds from subordinated notes. Cash and cash equivalents declined $8.9 million during the quarter. Management said liquidity was sufficient to fund loans and other cash needs. Available sources included unused lines and borrowing capacity; $11.5 million of the $65 million FHLB capacity was in use at quarter-end.
Material changes and management commentary
- Net interest income increased $1.0 million year over year, primarily due to favorable asset volumes. The taxable-equivalent margin rose 42 basis points; management attributed higher asset yields in part to two acquired loans resolved about $0.9 million above carrying value.
- Average loans grew 5% year over year to $889 million, although period-end loans were down slightly from year-end. Average deposits were approximately unchanged year over year; period-end deposits fell 2%, which management described as a customary post-year-end pattern.
- Noninterest income increased 8% overall. Excluding gains on asset sales and writedowns, it rose 28%, driven especially by mortgage income, which increased to $0.9 million from $0.2 million amid stronger mortgage production. Asset-sale gains were $0.2 million versus $0.7 million in Q1 2014.
- Noninterest expense increased 2%. Salaries and benefits rose 8%, reflecting merit increases and higher stock compensation; data-processing costs also increased. Other expense categories generally declined.
- Asset quality improved year over year: nonperforming assets were $6.8 million, or 0.56% of assets, versus $10.3 million, or 0.85%, at March 31, 2014. Net charge-offs were $0.2 million, compared with $0.6 million in Q1 2014. Nonaccrual loans were $5.2 million; potential problem loans were $5.1 million.
- The company issued $8 million of 5% subordinated notes in February, due in 2025 and callable beginning in 2020. A further $2 million issuance on April 28, 2015 brought 2015 principal issued to $10 million, net of issuance costs.
Outlook, risks, contingencies, and unusual items
- No specific earnings or revenue guidance is provided. Management cautioned that prolonged low interest rates may pressure margins as assets mature and are reinvested at lower rates; acquired-loan purchase-accounting accretion can be sporadic and is expected to diminish over time.
- Key risks identified include economic and competitive conditions, interest-rate and monetary-policy changes, banking regulation (including Dodd-Frank and Basel III), acquisition integration, and operational or compliance risks. Credit performance is exposed to regional economic conditions and collateral values; management’s allowance estimates may require adjustment, and regulators may require additional reserves or charge-offs.
- Credit metrics included $4.1 million across six troubled debt restructurings. One performing restructured loan of $3.7 million remained classified as impaired and had a specific reserve of approximately $0.3 million. Acquired loans had no allowance recorded because remaining purchase discounts exceeded the calculated requirement, per management.
- Off-balance-sheet commitments included $276.4 million to extend credit, $2.7 million of financial letters of credit, and $4.2 million of standby letters of credit.
- The bank’s regulatory capital ratios met the filing’s well-capitalized thresholds. Company common equity to assets was 7.41%; the bank’s total capital ratio was 13.0% and leverage ratio 9.5%. The SBLF preferred-stock dividend rate was 1% but is scheduled to rise to 9% on March 1, 2016 if the preferred stock is not redeemed.
- Management reported effective disclosure controls and no material change in internal controls. The filing reported no legal proceedings expected to have a material adverse effect and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much Q1 earnings and margin improvement depended on the approximately $0.9 million acquired-loan resolution benefit, and whether that benefit is repeatable.
- Whether deposit and cash balances stabilize after the seasonal first-quarter decline, and how the company uses available borrowing capacity.
- Subsequent credit trends, including nonaccrual and potential problem loans, acquired-loan purchase discounts, and adequacy of the allowance.
- The terms and capital impact of the additional $2 million subordinated-note issuance after quarter-end, along with the 2026 preferred-stock dividend-rate step-up if shares remain outstanding.
- Whether mortgage-income growth and expense trends persist, and how lower-for-longer rates affect net interest margin and funding costs.