Business context and reporting period
Nicolet Bankshares, Inc. is a Wisconsin-based bank holding company providing community banking and wealth management services. This unaudited Form 10-Q covers the quarter ended March 31, 2017; income and cash flow figures are for the three months ended that date. Amounts below are in U.S. dollars.
Results reflect the full-quarter contribution of the 2016 Baylake and wealth-advisory acquisitions. Baylake was acquired in April 2016, so first-quarter 2017 results are not directly comparable with first-quarter 2016 results.
Financial results and position
- Revenue and earnings: Net interest income was $21.3 million, up 99% from $10.7 million. Noninterest income was $6.8 million, up 74.5% from $3.9 million. Net income was $6.3 million, compared with $2.7 million; net income attributable to Nicolet was $6.2 million. Diluted EPS was $0.69 versus $0.57; basic EPS was $0.72 versus $0.61.
- Net interest performance: Tax-equivalent net interest margin was 4.32%, up 45 basis points year over year; interest rate spread was 4.20%, up 50 basis points. Management attributed the improvement to acquired and organic balance growth, higher earning-asset yields, and lower funding costs. Acquired-loan discount accretion was $2.1 million higher than in the prior-year quarter.
- Expenses and profitability: Noninterest expense increased 82.9% to $18.3 million, primarily reflecting the enlarged operating base and acquisition-related intangible amortization. The filing does not provide a clear standalone operating-margin figure.
- Credit costs and asset quality: Provision for loan losses was $0.45 million in both comparison periods. Net charge-offs were $0.08 million versus $0.23 million. Nonperforming assets were $16.0 million, or 0.70% of assets, down from $22.3 million and 0.97% at year-end 2016, but above $4.8 million and 0.39% a year earlier. The allowance for loan losses was $12.2 million, or 0.75% of loans; management considered it adequate.
- Balance sheet and liquidity: Total assets were $2.293 billion, loans $1.618 billion, deposits $1.946 billion, and stockholders’ equity including noncontrolling interest $285.5 million. Loans rose $49 million and deposits fell $24 million from December 31, 2016. Cash and cash equivalents fell to $44.3 million from $129.1 million, principally as funds were deployed into loan growth and securities purchases and deposits declined seasonally. Management stated liquidity was sufficient, including for the cash portion of the pending First Menasha acquisition. Available sources included a $10 million unused holding-company line, $143 million of unused federal funds lines, and FHLB borrowing capacity of approximately $285 million.
- Cash flow: Operating activities provided $6.9 million; investing activities used $74.7 million, including $48.2 million of securities purchases and $44.8 million of net loan growth; financing activities used $17.0 million. Cash and cash equivalents decreased $84.8 million during the quarter.
- Debt and capital: At quarter-end, short-term borrowings were $6.0 million, notes payable $1.0 million, junior subordinated debentures $24.8 million, and subordinated notes $11.9 million. Nicolet’s regulatory total capital, Tier 1, CET1, and leverage ratios were 13.8%, 12.5%, 11.2%, and 10.6%, respectively. The Bank’s respective ratios were 12.0%, 11.4%, 11.4%, and 9.6%; it qualified as well-capitalized under applicable prompt-corrective-action thresholds.
Material changes versus the prior comparable period
- Year-over-year increases in loans, deposits, interest income, fee income, and expenses largely reflect the Baylake acquisition and expanded wealth-advisory business, rather than solely organic growth. Average loans and deposits each increased about 81% year over year.
- Noninterest income growth included brokerage fees up $0.9 million, service charges up $0.4 million, and other income up $0.7 million. Expense growth included personnel costs up $4.6 million and intangible amortization up $0.9 million.
- Compared with year-end 2016, securities available for sale increased to $404.4 million from $365.3 million, while other investments decreased to $11.7 million from $17.5 million, mainly due to redeemed FHLB stock.
- Asset quality improved from year-end, including lower nonaccrual loans of $13.7 million versus $20.3 million. The allowance-to-loans ratio is not directly comparable with the prior-year period because acquired loans were recorded at fair value without carrying over the acquired allowance.
Outlook, commentary, risks, and unusual items
- Management identified integration of First Menasha, realizing scale efficiencies, and organic growth in expanded markets and brokerage services as priorities. The merger had received required regulatory and shareholder approvals and was expected to close April 28, 2017, after the reporting date. Management estimated the combined company would have approximately $2.7 billion in assets, $2.0 billion in loans, and $2.3 billion in deposits, before purchase-accounting adjustments. No quantified earnings guidance was provided.
- First-quarter 2017 expenses included approximately $0.2 million of nonrecurring merger costs and $0.2 million for customer-relationship-system implementation. The 2016 comparison included approximately $0.4 million of merger costs; management also identified a $1.7 million lease-termination charge in second-quarter 2016.
- The quarter included a $0.1 million income-tax benefit from adoption of stock-compensation accounting guidance. Management said acquired-loan discount accretion can be sporadic and will diminish over time.
- Key stated risks include economic and competitive conditions, interest-rate and monetary-policy changes, regulatory and operational risks, credit-loss estimates, and challenges integrating acquisitions. The company reported no material change to previously disclosed risk factors, no material legal proceedings expected to adversely affect results or financial position, and effective disclosure controls.
Important facts for investors to verify
- Separate acquisition-driven growth from organic growth and assess whether anticipated First Menasha synergies and integration efficiencies are achieved.
- Track net interest margin, funding costs, loan pricing, and the pace at which acquired-loan discount accretion declines.
- Review credit quality—especially acquired commercial real estate exposures, nonaccrual trends, and allowance adequacy—as the portfolio grows.
- Monitor liquidity and deposit trends, including the decline in quarter-end cash, use of borrowings, and funding of the pending merger.
- Assess whether higher operating expenses and acquisition-related amortization are offset by recurring revenue and cost efficiencies.