Nicolet Bankshares, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparisons are primarily with 2016. Nicolet is a Wisconsin-based community bank holding company operating 38 branches in Wisconsin and Michigan. Its April 28, 2017 acquisition of First Menasha materially affected year-over-year comparisons.
Financial performance and condition
- Earnings: Net income attributable to Nicolet was $33.2 million, versus $18.5 million in 2016, an increase of about 80%. Diluted EPS rose 41% to $3.33 from $2.37. Return on average assets improved to 1.25% from 0.95%; return on average common equity was 9.96% versus 8.20%.
- Revenue and margin: Net interest income increased 45% to $98.7 million. Taxable-equivalent net interest margin rose to 4.30% from 4.01%; earning-asset yield increased to 4.75%, while cost of funds rose to 0.60%. Noninterest income grew 30% to $34.6 million, including $2.0 million of net gains on asset sales, disposals or write-downs.
- Costs and credit provision: Noninterest expense increased 25% to $81.4 million, primarily reflecting a larger business after acquisitions. Provision for loan losses was $2.3 million, compared with $1.8 million; 2017 net charge-offs were $1.5 million, including a $1.0 million commercial and industrial loan charge-off.
- Fourth quarter: Net income was $9.1 million, or $0.88 diluted EPS, versus $6.1 million, or $0.68, in fourth-quarter 2016. Quarterly net interest margin was 4.21%, up 16 basis points year over year.
- Balance sheet at year-end: Assets were $2.93 billion, loans $2.09 billion, deposits $2.47 billion and stockholders’ equity $364.2 million. These were up 27%, 33%, 25% and 32%, respectively, from 2016. Excluding First Menasha balances, loans grew 11% and deposits 6%.
- Cash flow and liquidity: Cash and cash equivalents were $154.9 million, up $25.8 million. Operating cash flow was $40.7 million; investing activities used $151.0 million, mainly reflecting loan growth; financing activities provided $136.1 million, largely from deposits. Management said liquidity was sufficient for lending, deposit activity and other cash needs. Available additional funding included a $10 million unused holding-company line, $158 million in federal funds lines and $125 million of FHLB borrowing capacity.
- Debt and capital: Year-end borrowings included $36.5 million of FHLB advances, $29.6 million of junior subordinated debentures and $11.9 million of subordinated notes. The Bank was categorized as well-capitalized; its total risk-based capital ratio was 11.5%, CET1 ratio 10.9% and leverage ratio 9.3%. The Bank had minimal capacity to pay dividends to the parent without regulatory approval.
- Asset quality: Nonperforming assets declined to $14.4 million, or 0.49% of assets, from $22.3 million, or 0.97%. The allowance for loan losses was $12.7 million, or 0.61% of loans, versus $11.8 million, or 0.75%, in 2016. Acquired loans were recorded at fair value without carrying over the acquired allowance, affecting the coverage ratio.
Material changes and unusual items
- First Menasha added approximately $480 million of assets, $351 million of loans and $375 million of deposits. Consideration included about $62 million in Nicolet stock and $19 million in cash; the acquisition added approximately $41 million of goodwill.
- Reported growth reflects acquisition timing as well as organic growth. Nicolet reported $5.8 million more aggregate purchased-loan discount accretion in 2017; management cautioned that this income can be sporadic and diminish over time.
- 2017 income tax expense included a $1.9 million benefit from the tax accounting for stock-option exercises and $0.9 million of expense related to the Tax Cuts and Jobs Act, including remeasurement of deferred tax balances. The net deferred tax asset fell to $5.0 million from $10.9 million.
- Management estimated an approximately 25% effective tax rate for 2018, anticipating benefit from the reduction in the federal corporate tax rate to 21%. This is an outlook estimate, not a guarantee.
- Management cited approximately $0.5 million in 2017 direct merger costs, compared with $1.3 million in 2016; 2016 also included a $1.7 million branch lease-termination charge. The 2017 $2.0 million net gain on asset transactions included a $1.2 million gain on the pre-acquisition interest in First Menasha.
- Management’s 2018 priorities were organic growth in loans, deposits and wealth services, cost-effective profitability, competitive compensation and renovations at two branches. It also stated that it may pursue further acquisitions. The company repurchased $10.0 million of stock in 2017; the board expanded the authorization in February 2018. Nicolet had not paid common dividends and did not expect to do so in the foreseeable future.
Risks and contingencies
- Key risks include local economic deterioration, borrower defaults and collateral values, commercial real estate and business-lending exposure, competition, interest-rate and funding-cost changes, acquisition integration and growth execution, regulation, third-party service providers, and information-security disruptions.
- Commercial-based loans were 74.7% of the portfolio. Management identified $13.6 million of performing potential problem loans at year-end, or 0.7% of loans. The adequacy of the allowance depends on estimates and may change with borrower or economic conditions.
- Off-balance-sheet commitments included $680.3 million to extend credit, $8.8 million of financial standby letters of credit and $9.1 million of performance standby letters. Many commitments may expire undrawn; amounts are not necessarily expected cash requirements.
- Management reported no legal proceedings expected to have a material adverse effect. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- How much of earnings growth is sustainable after separating acquisition effects, purchased-loan discount accretion, asset-sale gains and tax-related benefits?
- Whether organic loan and deposit growth continues, and how deposit pricing and brokered deposits affect funding costs and net interest margin.
- Credit performance in commercial and acquired loan portfolios, the movement in nonperforming and potential problem loans, and the adequacy of the allowance as acquired loans run off.
- Whether acquisition integration, goodwill and intangible balances, and planned compensation and branch investments meet management’s profitability expectations.
- Actual 2018 effective tax rate versus management’s estimate, and the impact of tax reform and remaining deferred-tax items.
- Current regulatory capital and liquidity, dividend restrictions, and the amount and timing of any stock repurchases or future acquisitions.