Nicolet Bankshares, Inc. — Q1 2014 Form 10-Q
Business context and reporting period
Reports the three months ended March 31, 2014, with balance-sheet comparisons to December 31, 2013. Nicolet is a Wisconsin bank holding company providing banking and wealth-management services through 23 branches. Unless otherwise noted, financial amounts below are in U.S. dollars; income-statement and cash-flow amounts are for the quarter.
Year-over-year comparisons are materially affected by the 2013 Mid-Wisconsin and Bank of Wausau acquisitions: Q1 2014 includes both acquired businesses, while Q1 2013 includes neither. Management reports that the acquisitions added approximately $284 million in loans and $370 million in deposits.
Financial performance and condition
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior date |
|---|---|---|
| Total interest income | $11.7 million | $7.2 million in Q1 2013 |
| Net interest income | $10.0 million | $5.8 million in Q1 2013 |
| Tax-equivalent net interest margin | 3.68% | 3.50% in Q1 2013 |
| Noninterest income | $3.8 million | $2.8 million in Q1 2013 |
| Noninterest expense | $9.6 million | $6.3 million in Q1 2013 |
| Net income | $2.2 million; $2.2 million attributable to Nicolet | $0.8 million; $0.8 million attributable to Nicolet in Q1 2013 |
| Net income available to common shareholders | $2.2 million; diluted EPS $0.50 | $0.45 million; diluted EPS $0.13 in Q1 2013 |
| Total assets | $1.218 billion | $1.199 billion at December 31, 2013 |
| Loans, gross | $850.1 million | $847.4 million at December 31, 2013 |
| Deposits | $1.042 billion | $1.035 billion at December 31, 2013 |
| Cash and cash equivalents | $156.0 million | $147.0 million at December 31, 2013 |
| Stockholders’ equity and noncontrolling interest | $107.3 million | $104.9 million at December 31, 2013 |
Net interest income rose 74% year over year, primarily from the larger earning-asset base following the acquisitions; management also cited a wider interest-rate spread. Tax-equivalent earning-asset yield was 4.32%, down 4 basis points, while the cost of interest-bearing liabilities declined 29 basis points to 0.76%. Noninterest income growth included $750,000 in net gains on asset sales; excluding those gains, it increased 9.4%. Mortgage income fell 75% to $215,000. Expense growth primarily reflected the expanded operating base, branch costs, staffing, and ongoing systems integration.
Operating cash flow was negative $0.9 million, versus positive $6.1 million in Q1 2013; investing cash flow was negative $1.8 million, versus positive $3.6 million. Financing provided $11.6 million, compared with $64.1 million used in Q1 2013, and cash increased $9.0 million during the quarter. The filing does not report a conventional profit margin or provide an explicit earnings forecast.
Total borrowings and subordinated debentures were approximately $56.0 million: $11.4 million short-term borrowings, $32.4 million notes payable, and $12.2 million junior subordinated debentures. The bank’s regulatory capital ratios at March 31 were 13.5% total capital, 12.4% Tier 1 capital, and 8.9% leverage; each exceeded the stated “well capitalized” thresholds. The company reported liquidity sufficient to fund loans and other cash needs.
Material changes, outlook, and risks
- Asset quality improved from year-end: nonaccrual loans declined to $9.1 million from $10.3 million; nonperforming assets fell to $10.3 million from $12.3 million, or 0.85% of assets versus 1.02%. Nonaccruals were higher than the $2.7 million reported at March 31, 2013, in part because acquired nonaccrual loans remained in the portfolio.
- The allowance for loan losses was $9.3 million, or 1.10% of gross loans, versus $9.2 million, or 1.09%, at year-end. Q1 provision was $675,000 and net charge-offs were $563,000. Management recorded no allowance on acquired loans at acquisition; it said acquired loans will be reserved as appropriate based on subsequent events. This makes acquisition accounting and allowance judgments important areas to monitor.
- Five troubled debt restructurings totaled $4.3 million. A $3.9 million loan was performing under modified terms but remained classified as impaired and had a specific reserve of approximately $460,000. Potential problem loans totaled $18.7 million, or 2.2% of loans.
- Management described ongoing downward margin pressure in the low-rate environment, partly offset by favorable income from acquired loans. Its 12-month simulation estimated net interest income would decline 2.89% under an immediate 100-basis-point rate increase and 2.06% under a 100-basis-point decline; modeled outcomes exclude potential management actions and other market or customer changes.
- Other disclosed risks include economic and competitive conditions in Nicolet’s markets, interest-rate and funding changes, loan losses and collateral values, regulatory changes including Basel III, and execution of acquisition integration. Mortgage production had slowed following higher rates and regulatory changes. Management provided no specific earnings or revenue guidance.
- The company authorized a stock-repurchase program of up to $6 million and 350,000 shares; management reported approximately $390,000 used to repurchase 22,050 shares in Q1. Management said disclosure controls were effective and that no pending legal proceedings were expected to have a material adverse effect.
Important facts for investors to verify
- How much of earnings growth is sustainable apart from the acquisition-driven increase in scale and the $750,000 of asset-sale gains.
- Credit performance in acquired loans, the rationale for no allowance on that acquired portfolio, and potential changes to reserves as it seasons.
- Trends in nonaccrual loans, the $18.7 million of potential problem loans, the $4.3 million of troubled debt restructurings, and collateral-dependent exposures.
- Whether the 3.68% net interest margin can be maintained as acquired-loan accretion changes and low-rate reinvestment pressure continues; compare modeled rate sensitivity with subsequent results.
- Integration costs, operating efficiency, deposit retention and pricing, and the effect of continued share repurchases on capital and liquidity.