Nicolet Bankshares, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2017. Nicolet is a Wisconsin-based community bank holding company providing banking and wealth-management services through 38 branches. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Financial performance and condition
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $24.5 | $16.5 | $45.8 | $27.2 |
| Provision for loan losses | $0.45 | $0.45 | $0.9 | $0.9 |
| Noninterest income | $9.1 | $6.4 | $15.9 | $10.2 |
| Noninterest expense | $20.3 | $17.5 | $38.6 | $27.5 |
| Net income | $8.4 | $3.3 | $14.7 | $6.0 |
| Net income attributable to Nicolet | $8.3 | $3.3 | $14.5 | $5.9 |
| Diluted earnings per share | $0.83 | $0.39 | $1.53 | $0.91 |
- Balance sheet at June 30: Assets $2.83 billion; loans $2.01 billion gross and $2.00 billion net; deposits $2.39 billion; stockholders’ equity and noncontrolling interest $353.0 million. Compared with December 31, 2016, assets increased 23%, loans 28%, deposits 21%, and total equity 28%.
- Interest performance: First-half taxable-equivalent net interest margin was 4.29%, up 45 basis points year over year; interest-rate spread was 4.17%. Q2 taxable-equivalent margin was 4.27%, versus 3.75% in Q2 2016. Management attributed improvement to acquired and organic asset growth, higher earning-asset yields, a lower first-half cost of funds, and acquired-loan discount accretion.
- Cash flow and liquidity: First-half operating cash flow was $15.4 million; investing activities used $80.8 million, mainly reflecting loan and securities growth; financing provided $47.9 million, principally from deposit growth. Cash and cash equivalents ended at $111.6 million, down from $129.1 million at year-end. Management said liquidity was sufficient. Available sources included a $10 million unused holding-company line, $143 million of unused federal funds lines, and $193 million of remaining FHLB borrowing capacity.
- Debt and capital: Long-term borrowings totaled about $63.1 million, including $21.8 million of FHLB advances, $29.4 million of junior subordinated debentures, and $11.9 million of subordinated notes. Nicolet’s reported regulatory ratios were 12.7% total capital, 11.6% Tier 1, 10.3% CET1, and 10.3% leverage. The Bank was reported as well-capitalized.
- Credit quality: Nonperforming assets were $18.8 million, or 0.66% of assets, down from $22.3 million and 0.97% at year-end. Nonaccrual loans were $16.9 million; past-due accruing loans 30–89 days totaled $1.3 million, and none were 90 days or more past due and accruing. The allowance for loan losses was $12.6 million, 0.63% of loans, versus $11.8 million and 0.75% at year-end. First-half net charge-offs were $0.1 million.
Material changes versus comparable periods
- Reported earnings and balance-sheet growth benefited significantly from acquisitions, making year-over-year comparisons less like-for-like. First Menasha closed April 28, 2017, adding approximately $479 million of assets, $351 million of loans, and $375 million of deposits. The purchase consideration included $62.2 million in Nicolet shares and $19.3 million in cash; $40 million of goodwill was recorded. Baylake, acquired in April 2016, also affected comparisons.
- Excluding First Menasha, loans increased $90 million, or 6%, from year-end 2016; deposits increased $45 million, or 2%. First-half average full-time equivalent employees rose 46% year over year, and personnel expense increased 47%. Excluding identified merger-related costs, first-half noninterest expense rose approximately 52%.
- First-half noninterest income increased 55%; excluding gains on asset sales or write-downs, it increased 49%. Brokerage fees, service charges, mortgage income, and interchange income were notable contributors. Q2 included a $0.5 million gain on the sale of a former branch and a $0.2 million gain on investments; first-half gains also included a $0.9 million branch-sale gain, partly offset by asset and OREO write-downs.
- Merger-related expenses were $0.5 million in the first half of 2017 versus $2.5 million in 2016; the 2016 amount included a $1.7 million lease-termination charge. First-half 2017 income also included $4.2 million more acquired-loan discount accretion than the comparable period, which management said may be sporadic and diminish over time.
- The allowance-to-loans ratio declined partly because acquired loans are recorded at fair value without carrying over the acquired lender’s allowance. Nonaccrual loans remained predominantly acquired loans; acquired impaired loans were $16.6 million at June 30.
Outlook, commentary, and risks
The filing provides no quantified earnings or revenue guidance. Management said it remains focused on efficiencies from increased scale, organic growth in expanded markets, and brokerage services. Key risks identified include economic, competitive, regulatory, legal, and operational developments; changes in interest rates and monetary policy; acquisition integration; credit losses; and the sensitivity of loan, acquired-loan, tax, and allowance estimates. The Company’s interest-rate simulation projected one-year net-interest-income changes of -0.2%, +0.1%, +0.2%, and +0.4% under -200, -100, +100, and +200 basis-point scenarios, respectively; management cautioned actual results may differ. No material changes to previously disclosed risk factors were reported, and management said there were no legal proceedings expected to have a material adverse effect.
Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported during the quarter. The 2017 adoption of share-based-payment guidance reduced income tax expense by $0.2 million for the first half.
Important facts for investors to verify
- How much of earnings growth persists after acquired-loan discount accretion and one-time asset-sale gains, and as merger integration progresses.
- Whether First Menasha integration produces the expected efficiencies, and how organic loan and deposit growth develops apart from acquisitions.
- Credit trends in acquired commercial and CRE loans, the composition of nonaccrual and potential problem loans, and the adequacy of the allowance given its lower ratio to total loans.
- Deposit pricing, brokered-deposit levels, funding costs, and the effects of further interest-rate changes on net interest margin.
- The filing’s capital discussion contains small differences between narrative and table figures for Bank capital ratios; confirm the applicable reported ratios. Also monitor acquisition fair-value estimates, goodwill, and related amortization.