Nicolet Bankshares, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Amounts are in U.S. dollars; financial amounts are in millions unless noted. Nicolet is a Wisconsin-based bank holding company providing banking and wealth management services through 23 branches.
Financial results and position
| Metric | Q2 2014 / June 30, 2014 | Comparison |
|---|---|---|
| Net interest income | $10.50 | Up 19% from Q2 2013’s $8.82 |
| Net interest margin, tax-equivalent | 3.90% | 3.92% in Q2 2013 |
| Net income | $2.58 | $11.48 in Q2 2013 |
| Net income available to common shareholders | $2.49; diluted EPS $0.58 | $11.15; diluted EPS $2.78 in Q2 2013 |
| Total assets | $1,173.8 | Down from $1,198.8 at Dec. 31, 2013 |
| Loans / deposits | $860.1 / $1,011.1 | Loans up $12.7; deposits down $23.7 from year-end |
| Cash and cash equivalents | $85.6 | Down from $147.0 at year-end |
For the first half, net interest income was $20.5 million, up 40%; net income was $4.8 million versus $12.3 million; and diluted EPS was $1.08 versus $3.11. Tax-equivalent net interest margin was 3.79%, compared with 3.74% in first-half 2013. First-half operating cash flow was $4.6 million; investing and financing cash flows were uses of $31.2 million and $34.7 million, respectively, contributing to the $61.4 million decline in cash.
At June 30, total deposits were $1.01 billion. Borrowings included $3.4 million of short-term borrowings, $27.3 million of notes payable and $12.2 million of junior subordinated debentures. The allowance for loan losses was $9.6 million, or 1.12% of loans. Nicolet reported total capital of 14.0% and Tier 1 capital of 12.9%; the bank’s corresponding ratios were 13.7% and 12.6%.
Material changes versus the prior comparable period
- Comparisons are materially affected by the 2013 acquisitions: 2014 includes Mid-Wisconsin and Bank of Wausau for the full period, while first-half 2013 included only about two months of Mid-Wisconsin and no Bank of Wausau results.
- Q2 and first-half 2013 income included a $10.4 million Mid-Wisconsin bargain-purchase gain. Excluding bargain-purchase and other net asset-sale gains, first-half noninterest income increased 4.9% to $6.3 million.
- First-half noninterest expense rose 19.8% to $19.1 million; management attributed much of the increase to the expanded post-acquisition operating base. The 2013 period included $1.7 million of merger-related expenses.
- Nonperforming assets improved to $8.7 million, or 0.74% of assets, from $12.3 million and 1.02% at year-end 2013. Nonaccrual loans were $7.2 million, down from $10.3 million. Net charge-offs for the first half were $0.9 million versus $1.4 million.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management noted that continued low rates may pressure margins as assets reprice, with acquired-loan income partly mitigating pressure.
- Interest-rate simulations estimated net interest income would decline 2.6% over the modeled 12-month period under either an immediate 100-basis-point increase or decrease. These estimates exclude potential management actions and other market or customer-behavior changes.
- Credit estimates, particularly the allowance and acquired-loan valuations, are sensitive to economic conditions, collateral values and borrower performance. Acquired loans were recorded at fair value with no allowance established at acquisition; the company says reserves may be established as warranted by subsequent events.
- Five troubled debt restructurings totaled $4.3 million. A performing $3.9 million loan was classified as impaired and carried a specific reserve of approximately $420,000.
- A former branch building transferred to other real estate owned was written down, resulting in a $0.6 million Q2 charge. A $0.5 million deferred-tax benefit was also recorded in Q2 related to expected use of net operating losses.
- Nicolet repurchased 124,035 shares for $2.46 million in the first half under a program authorizing up to $6 million. It reported no legal proceedings expected to have a material adverse effect and stated disclosure controls were effective.
Important facts for investors to verify
- Separate underlying operating trends from acquisition timing and the 2013 bargain-purchase gain when assessing earnings growth.
- Track acquired-loan performance, allowance adequacy, nonperforming assets and the $16.8 million of potential problem loans.
- Assess the sustainability of net interest margin, including acquired-loan accretion and sensitivity to rate changes.
- Monitor liquidity and funding trends following the first-half cash decline and deposit reduction, as well as upcoming note maturities.
- Review capital requirements under Basel III and the terms of the $24.4 million SBLF preferred stock, including its dividend rate and repayment plans.