Nicolet Bankshares, Inc. — Q3 2016 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2016; financial statements are unaudited. Nicolet is a Wisconsin community bank holding company. Results were materially affected by the April 29 acquisition of Baylake Corp.; Baylake’s operations are included only from the acquisition date. A smaller wealth-management acquisition was completed April 1.
Financial performance and condition
Amounts are in millions, except per-share data.
- Q3 2016: Net interest income was $20.9 versus $10.0 a year earlier; noninterest income was $8.5 versus $4.2. Net income was $6.5 versus $2.6, and diluted EPS was $0.69 versus $0.58.
- First nine months: Net interest income was $48.1 versus $30.7; noninterest income was $18.8 versus $13.1. Net income was $12.6 versus $8.7. Net income available to common shareholders was $11.7 versus $8.4; diluted EPS was $1.67 versus $1.93.
- Margins: Tax-equivalent net interest margin was 4.19% in Q3 versus 3.78% in Q3 2015, and 3.99% for nine months versus 3.85%. Management cited lower funding costs and acquired-loan discount accretion, while warning of ongoing pressure from the low-rate environment.
- Expenses and credit provision: Nine-month noninterest expense rose 59% to $46.6, largely reflecting the larger acquired business. It included $0.8 of merger expenses and a $1.7 lease-termination charge. Provision for loan losses was $1.35 in both nine-month periods.
- Balance sheet at September 30: Assets were $2.27 billion, loans $1.55 billion, deposits $1.93 billion, and stockholders’ equity $276.3 million. Compared with year-end 2015, assets rose 87%, loans 77%, deposits 83%, and equity 152%, predominantly due to Baylake.
- Asset quality: Nonperforming assets were $23.7 (1.04% of assets), versus $3.9 (0.32%) at year-end 2015. Nonaccrual loans were $21.5, mostly acquired; $13.2 was in CRE investment loans. The allowance was $11.5, or 0.74% of loans, versus 1.18% at year-end; acquired loans were recorded at fair value without carrying over Baylake’s prior allowance. Nine-month net charge-offs were $0.2.
- Cash, liquidity, and debt: Cash and equivalents were $104.4 versus $83.6 at year-end. Nine-month operating cash flow was $11.8; investing provided $73.8 and financing used $64.8. Notes payable were $1.0, junior subordinated debentures $24.6, and subordinated notes $11.9. The company also reported an unused $10 million line of credit and substantial available FHLB and federal-funds borrowing capacity.
- Capital: Bank CET1 capital was 11.8% and leverage capital 9.6%; the filing states the Bank remained well-capitalized. Preferred stock was fully redeemed in Q3, eliminating future preferred dividends. Common shares issued in acquisitions increased the share count substantially.
Material changes and unusual items
- Baylake added approximately $1.0 billion of assets, $691 million of loans, and $822 million of deposits at acquisition; Nicolet issued about 4.34 million common shares. Purchase accounting recorded approximately $66 million of goodwill, and acquired fair values remain subject to refinement during the measurement period.
- Growth in reported income and expenses largely reflects the partial-year contribution from acquisitions. Nine-month noninterest income excluding net asset-sale gains rose 51%; brokerage income benefited from the wealth-management acquisition.
- Q3 loan yield and margin benefited from $1.6 million of discount accretion on three favorably resolved acquired loans. This benefit may not recur at the same level.
- Nicolet announced plans to close six overlapping branches by year-end 2016; one had closed by October 28. On November 4, it announced a definitive agreement to acquire First Menasha Bancshares, expected to close in Q2 2017.
Outlook, risks, and contingencies
No quantitative earnings guidance is provided. Management expected acquisition-related cost savings and synergies, which were not reflected in the pro forma acquisition results. Key risks include integrating acquisitions and achieving savings, credit losses and acquired-loan valuation estimates, interest-rate and margin sensitivity, local economic and competitive conditions, and regulatory and operational risks. Management reported effective disclosure controls and no material change in internal controls; it also reported no material legal proceedings or material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether acquired CRE investment and other nonperforming loans resolve as expected, and whether the allowance remains adequate as acquired loans season.
- How much of earnings and margin depend on acquisition-related accretion, and whether underlying revenue growth offsets integration, amortization, and operating costs.
- Realized branch-closure savings and progress on Baylake integration, alongside the status, terms, and closing conditions of the First Menasha transaction.
- The effect of acquisition share issuance on per-share earnings, capital ratios, and future shareholder returns.