Nicolet Bankshares, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. Nicolet is a community bank holding company serving Wisconsin and Menominee, Michigan.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income | $25.8 | $24.5 | $52.7 | $45.8 |
| Provision for loan losses | $0.5 | $0.5 | $1.0 | $0.9 |
| Noninterest income | $10.2 | $9.1 | $19.1 | $15.9 |
| Noninterest expense | $22.5 | $20.3 | $45.1 | $38.6 |
| Net income attributable to Nicolet | $9.7 | $8.3 | $19.3 | $14.5 |
| Diluted EPS | $0.98 | $0.83 | $1.93 | $1.53 |
- For the first half, net interest margin was 3.98%, versus 4.29% in 2017; Q2 margin was 3.77%, versus 4.27%. Rising deposit costs and a large, low-spread temporary customer deposit weighed on margin. Management estimated the deposit reduced first-half margin by about 12 basis points and Q2 margin by about 20 basis points.
- First-half return on average assets was 1.31% (1.19% in 2017); Q2 was 1.28% (1.27% in 2017). First-half effective tax rate fell to 24.0% from 33.7%, principally due to the lower federal corporate tax rate.
- At June 30, assets were $2.92 billion, loans $2.13 billion, deposits $2.46 billion, and stockholders’ equity $371 million. Loans were up 2% from year-end; deposits were down less than 1%. Assets and deposits fell about $0.3 billion from March 31 as a large short-term customer deposit was distributed.
- Cash and cash equivalents were $104.1 million, down from $154.9 million at year-end. First-half operating cash flow was $20.0 million; net cash decreased $50.9 million, mainly reflecting loan growth, investment purchases, lower deposits, and share repurchases.
- Long-term borrowings totaled $77.2 million, principally $35.4 million of FHLB advances, $29.9 million of junior subordinated debentures, and $11.9 million of subordinated notes. No short-term borrowings were outstanding.
- Regulatory capital ratios remained above minimums. The Bank’s total risk-based, Tier 1, common equity Tier 1, and leverage ratios were 11.5%, 10.9%, 10.9%, and 9.1%, respectively; the filing says the Bank qualified as well-capitalized.
Changes, credit quality, and unusual items
- First-half net income attributable to Nicolet rose 33% and diluted EPS rose 26% year over year. Net interest income increased 15%, supported by loan growth; interest expense rose more quickly as funding costs increased. Noninterest income rose 20%, while noninterest expense increased 17%, mainly reflecting the larger workforce and operating base.
- Comparisons are affected by the April 2017 First Menasha acquisition. First-half 2018 included six months of its operations, while first-half 2017 included only two months; 2017 also included $0.5 million of merger and integration expense.
- Nonperforming assets were $12.1 million, or 0.41% of assets, compared with $14.4 million and 0.49% at year-end 2017. Nonaccrual loans declined to $10.9 million from $13.1 million, primarily following resolution of a large acquired impaired commercial loan. Potential problem loans were $14.6 million, or 0.7% of loans.
- The allowance for loan losses was $12.9 million, 0.60% of loans, versus $12.7 million and 0.61% at year-end. First-half net charge-offs were $0.8 million, up from $0.1 million in the prior-year period; the annualized charge-off ratio was 0.08% versus 0.01%.
- Available-for-sale securities had $9.6 million of gross unrealized losses at June 30; management attributed these to interest rates, market spreads, and market conditions rather than credit deterioration, and stated it had the ability and intent to hold the securities to maturity. Accumulated other comprehensive loss was $6.7 million.
- The company repurchased about 226,500 shares for $12.5 million in the first half. On July 17, 2018, the board expanded the repurchase authorization by $12 million; $17.4 million remained authorized after the increase.
Outlook, risks, and other disclosures
- The filing provides no specific earnings or revenue guidance. Management said liquidity was sufficient to fund lending, accommodate deposit trends, and meet other cash needs. Available facilities included a $10 million holding-company line, $158 million in unused Federal funds lines, and $177 million of FHLB borrowing capacity.
- Interest-rate sensitivity analysis estimated one-year net interest income changes of -0.5% and -1.6% under gradual 100- and 200-basis-point declines, and +0.1% and +0.4% under equivalent increases. These are modeled scenarios, not forecasts; actual outcomes may differ with rates, market conditions, and customer behavior.
- Stated risks include economic and competitive conditions, interest-rate changes, banking regulation, credit quality, and integration of acquisitions. Management identified the allowance for loan losses, acquired-loan valuations, and income taxes as estimates subject to judgment.
- There were no legal proceedings expected to materially adversely affect results or financial position, no material changes to previously disclosed risk factors, and no material changes in internal control over financial reporting. Disclosure controls were assessed as effective.
- Adoption of new accounting guidance in 2018 had no material effect apart from a roughly $0.9 million after-tax cumulative adjustment to retained earnings for the equity-security accounting change. The company was assessing the future credit-loss standard, expected to adopt in 2020.
Important facts for investors to verify
- Whether loan growth and earnings can continue while deposit costs rise and net interest margin remains below prior-year levels.
- The persistence and economics of large, temporary deposits, and the effect of their withdrawal on liquidity and margins.
- Credit performance, especially commercial and industrial exposures, the increase in net charge-offs, and adequacy of the allowance relative to acquired and originated loans.
- The sustainability of noninterest income, including asset-sale gains and other items, alongside growth in personnel and operating expenses.
- Capital, liquidity, and share-repurchase capacity after the expanded authorization; also monitor unrealized securities losses and their effect on equity.
- Year-over-year comparisons should be interpreted in light of the First Menasha acquisition and differing periods of included operations.