NICOLET BANKSHARES INC annual report, FY2016

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Nicolet Bankshares, Inc. — 2016 Form 10-K

Reporting period: Fiscal year ended December 31, 2016. The filing was signed March 10, 2017. It reports the full year and includes fourth-quarter results; it is not a standalone quarterly filing.

Business context and reporting period

Nicolet is a Wisconsin bank holding company operating mainly through Nicolet National Bank, a community bank serving northeastern and central Wisconsin and Menominee, Michigan. The Bank offers commercial and consumer lending, deposits, and wealth-management services.

The April 29, 2016 Baylake merger was the primary driver of the year’s step-change in scale. Nicolet also acquired a financial-advisor business in April. At year-end, it had 36 branches after closing six locations in the fourth quarter; one additional branch had closed at the Baylake merger.

Financial and operating metrics

  • Scale at December 31: Total assets were $2.301 billion, loans $1.569 billion, deposits $1.970 billion, and Nicolet stockholders’ equity $275.9 million. Consolidated equity including noncontrolling interest was $276.4 million.
  • Earnings: Net income attributable to Nicolet was $18.5 million, up 62% from $11.4 million in 2015. Net income available to common shareholders was $17.8 million; diluted EPS was $2.37 versus $2.57. Management attributed the EPS decline principally to a 72% increase in diluted weighted-average shares and higher preferred dividends. Return on average assets was 0.95%; return on average common equity was 8.20%.
  • Revenue and margins: Net interest income was $68.1 million, up 64.6%; net interest margin was 4.01%, versus 3.88%. Noninterest income was $26.7 million, up 50.6% (up 66.6% excluding net asset-sale/write-down gains). Noninterest expense was $64.9 million, up 63.8%.
  • Credit costs and asset quality: Provision for loan losses was $1.8 million, unchanged from 2015; net charge-offs were $0.3 million, or 0.02% of average loans. Nonperforming assets rose to $22.3 million, or 0.97% of assets, from $3.9 million, or 0.32%; most nonaccrual loans were acquired. The allowance for loan losses was $11.8 million, 0.75% of loans, versus $10.3 million, 1.18%, in 2015. Management said the lower allowance-to-loans ratio largely reflects acquisition accounting, under which acquired loans were recorded at fair value without carrying over the acquired allowance.
  • Cash flow and liquidity: Cash and cash equivalents ended the year at $129.1 million, up $45.5 million. Cash provided by operating activities was $24.8 million; investing activities provided $51.4 million, including net cash received in business combinations; financing activities used $30.8 million. The company reported $10 million of unused holding-company credit, $143 million of unused federal-funds lines, and $181 million of FHLB capacity, of which $9 million was used or committed.
  • Debt and capital: Year-end long-term borrowings were approximately $37.6 million: $1.0 million notes payable, $24.7 million junior subordinated debentures, and $11.9 million subordinated notes; short-term borrowings were zero. Nicolet reported consolidated regulatory ratios of 13.9% total risk-based capital, 12.5% Tier 1, 11.2% CET1, and 10.3% leverage. The Bank was categorized as well-capitalized; its regulatory capital table reports ratios of 12.1%, 11.4%, 11.4%, and 9.4%, respectively.

Material changes versus 2015

  • Year-end assets increased 89%, loans 79%, deposits 86%, and consolidated stockholders’ equity 152%, primarily reflecting Baylake. Excluding acquired balances, year-end loans were essentially flat and deposits grew 8.7%.
  • Average earning assets rose 59%. Lower funding costs helped lift net interest margin, although earning-asset yield declined from 4.54% to 4.44% as the mix shifted toward lower-yielding assets.
  • Noninterest income excluding net asset gains increased 66.6%, with notable contributions from the acquired brokerage business, mortgage production, deposit fees, card interchange, and UFS equity income.
  • Noninterest expense excluding cited merger expenses and the lease charge increased approximately 59%, reflecting the larger operating base and acquisition timing. Goodwill rose to $66.7 million, and goodwill plus other intangibles to $87.9 million.
  • Nonperforming loans increased from $3.5 million to $20.3 million, primarily due to acquired loans; $20.0 million of year-end nonaccruals were acquired loans. Net charge-offs, by contrast, declined from $0.8 million to $0.3 million.

Outlook, commentary, risks, and unusual items

  • Management’s 2017 priorities were to close and integrate First Menasha, realize scale efficiencies, and pursue organic growth in expanded markets and brokerage. The merger was expected to close in April 2017, subject to shareholder, regulatory, and other customary approvals. Pro forma year-end figures cited were approximately $2.8 billion in assets, $1.9 billion in loans, and $2.4 billion in deposits, before purchase-accounting marks.
  • Unusual 2016 items included $1.3 million of direct merger expenses, a $1.7 million lease-termination charge, and a $0.5 million other-than-temporary impairment on a private-company investment. Merger costs were $0.8 million in 2015. The filing also notes a $3.7 million other comprehensive loss, primarily related to investment-portfolio market-value declines.
  • The fourth quarter recorded net income attributable to Nicolet of $6.1 million and diluted EPS of $0.68, versus $2.8 million and $0.64 in the prior-year quarter. Fourth-quarter noninterest expense included $0.4 million of merger-related costs.
  • Interest-rate sensitivity modeling estimated net interest income changes of -1.7%, -0.8%, -0.6%, and -1.1% under gradual -200, -100, +100, and +200 basis-point scenarios, respectively; management cautioned that actual outcomes could differ.
  • Key risks include integration and execution of acquisitions, acquired-loan performance and allowance estimates, local economic and commercial-real-estate exposure, competition, interest-rate changes, regulation, and technology/vendor and cybersecurity risks. The filing reports no legal proceedings expected to have a material adverse effect.
  • Nicolet had not paid common dividends and did not expect to do so in the foreseeable future. It suspended its common-stock repurchase program in light of the pending First Menasha merger. It redeemed the remaining $12.2 million of preferred stock in September 2016.

Most important facts for investors to verify

  • Track acquired-loan delinquencies, nonaccruals, collateral values, and any resulting provision or charge-offs—especially the acquired CRE investment exposures.
  • Assess whether Baylake integration savings and operating efficiencies materialize, and compare expense growth with revenue growth as the combined business seasons.
  • Confirm First Menasha’s closing, final consideration and purchase-accounting marks, integration costs, and realized synergies.
  • Reconcile capital disclosures: the regulatory-capital table reports the Bank’s total risk-based ratio as 12.1%, while management narrative cites 12.2%; the company CET1 ratio is 11.2% in the table.
  • Review liquidity and funding after acquisition-related growth, the maturity and cost of deposits and borrowings, and the effect of interest-rate changes on margin and securities values.
  • Verify the assumptions underlying the allowance for loan losses, acquired-loan fair values, deferred tax assets, and goodwill/intangible impairment assessments.