Nicolet Bankshares, Inc. — Q1 2019 Form 10-Q
Business context and reporting period
Nicolet is a Wisconsin-based bank holding company providing community banking and wealth-management services, primarily in northeastern and central Wisconsin and Menominee, Michigan. This unaudited filing covers the three months ended March 31, 2019; balance-sheet comparisons are primarily against December 31, 2018. Amounts below are in millions unless otherwise stated.
Financial performance and condition
| Metric | Q1 2019 / March 31, 2019 | Comparable / prior date |
|---|---|---|
| Net interest income | $27.5 | $26.9 in Q1 2018 |
| Net interest margin | 4.05% | 4.20% in Q1 2018 |
| Noninterest income | $9.2 | $8.8 in Q1 2018 |
| Noninterest expense | $22.8 | $22.6 in Q1 2018 |
| Net income attributable to Nicolet | $10.3 | $9.6 in Q1 2018 |
| Diluted earnings per share | $1.05 | $0.94 in Q1 2018 |
| Total assets | $3,041 | $3,097 at December 31, 2018 |
| Loans / allowance for loan losses | $2,190 / $13.4 | $2,166 / $13.2 at December 31, 2018 |
| Deposits | $2,538 | $2,614 at December 31, 2018 |
| Long-term borrowings | $77.4 | $77.3 at December 31, 2018 |
| Cash and cash equivalents | $154.8 | $249.5 at December 31, 2018 |
Q1 operating cash flow was $10.3 million; investing activities used $24.5 million and financing activities used $80.6 million, resulting in a $94.8 million decrease in cash and cash equivalents. The decrease largely reflected deposit outflows and loan growth. Management stated liquidity was sufficient; available sources included $175 million of unused Federal funds lines, $178 million of FHLB borrowing capacity, and a $10 million unused holding-company line. About 37% of the securities portfolio was pledged.
Net interest income rose 2% year over year, while the tax-equivalent net interest margin fell 15 basis points to 4.05%. Average earning assets grew 6%, but the average cost of interest-bearing liabilities rose 36 basis points to 1.18%, reflecting deposit repricing and mix. Annualized return on average assets was 1.37%; return on average common equity was 10.65%. The company reported $399 million of total stockholders’ equity; its equity-to-assets ratio was 13.11%.
The Bank was classified as well-capitalized at quarter-end. Its total risk-based, Tier 1, common equity Tier 1, and leverage ratios were 11.2%, 10.7%, 10.7%, and 9.4%, respectively. Nicolet repurchased 102,655 shares for $5.6 million during the quarter; $14.1 million remained authorized under the repurchase program.
Material changes versus comparable periods
- Compared with Q1 2018, net income attributable to Nicolet increased 7% and diluted EPS increased 12%, supported by higher interest and noninterest income and fewer diluted weighted-average shares.
- Interest expense increased $1.8 million year over year. Management attributed higher net interest income partly to loan growth and asset repricing, while noting $1.6 million less aggregate discount accretion income than in Q1 2018.
- Compared with year-end 2018, loans increased 1%, while deposits declined 3% and assets declined 2%. The year-over-year deposit decline was largely related to a large, temporary commercial-customer transaction deposit received in late March 2018 and distributed in Q2 2018.
- Nonaccrual loans increased to $8.7 million from $5.5 million at year-end; nonperforming assets rose to $9.2 million from $5.9 million. Potential problem loans increased to $30.1 million from $21.9 million. The allowance remained 0.61% of loans; Q1 net recoveries were $17,000.
- Accumulated other comprehensive loss narrowed to $21,000 from $5.6 million at year-end, primarily reflecting a quarter’s improvement in unrealized available-for-sale securities marks.
Outlook, commentary, risks, and unusual items
The filing gives no quantified earnings or operating guidance. Management described asset quality trends as strong, but noted increased nonaccrual and potential problem loans. Interest-rate sensitivity modeling showed projected one-year net interest income changes of -0.1% and +0.1% under gradual 100- and 200-basis-point increases, and -0.1% and -0.7% under corresponding decreases. Management cautioned that actual outcomes may differ with rate movements, customer behavior, and market conditions.
Key risks include economic and competitive conditions in Nicolet’s markets, borrower and collateral performance, interest-rate and deposit-cost movements, regulatory and operational risks, and uncertainty in estimates for credit losses, acquired loans, taxes, and fair value. The company expects to adopt the current expected credit loss standard in 2020 and was developing models and implementation processes. A $0.3 million fraud contingency loss contributed to a 17% increase in other expense year over year. Management reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls. The company adopted lease accounting guidance in 2019, recognizing approximately $5 million of lease assets and liabilities, with no material income-statement or cash-flow impact.
Important facts for investors to verify
- Whether higher nonaccrual loans and potential problem loans persist or worsen, and how concentrations and credit grades evolve.
- Whether the 0.61% allowance remains adequate as loan growth and credit conditions change, particularly for acquired versus originated loans.
- Whether deposit outflows stabilize and whether deposit pricing continues to pressure net interest margin.
- Whether the fraud contingency is resolved without additional losses or control-related effects.
- How the CECL transition affects the allowance, retained earnings, and regulatory capital when implemented.
- Whether cash reduction, repurchases, and planned growth remain consistent with liquidity and capital needs.