Nicolet Bankshares, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015 unless otherwise noted. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise. Nicolet was a Wisconsin community bank holding company with 21 branches and one reportable segment.
Financial performance and position
- Revenue and earnings: Net interest income was $10.74 million, down 2.4% from $11.00 million in Q1 2015. Noninterest income was $3.88 million versus $4.07 million; excluding gains and losses on asset sales, it was essentially flat at $3.88 million versus $3.86 million. Combined net interest and noninterest income was approximately $14.62 million, compared with $15.07 million. Net income was $2.70 million versus $3.11 million; net income attributable to Nicolet was $2.65 million versus $3.08 million. After preferred dividends, income available to common shareholders was $2.54 million versus $3.02 million. Diluted EPS was $0.57 versus $0.70.
- Margins: Tax-equivalent net interest margin was 3.87%, down 23 basis points from 4.10%. Earning-asset yield fell 27 basis points to 4.47%, while the cost of interest-bearing liabilities declined 3 basis points to 0.77%. Loan yield was 5.19%, compared with 5.41%.
- Expenses and credit costs: Noninterest expense rose 2.2% to $10.02 million, including about $0.4 million of merger-related costs; excluding those costs, expense declined about 2%. Provision for loan losses was $0.45 million, unchanged year over year. Net charge-offs were $0.23 million, versus $0.20 million.
- Cash flow: Operating activities provided $2.04 million; investing activities used $12.54 million; financing activities provided $25.06 million. Cash and cash equivalents increased $14.56 million to $98.18 million.
- Balance sheet and liquidity: Total assets were $1.244 billion, up from $1.214 billion. Loans were $888.71 million, up 1.3% from year-end; deposits were $1.081 billion, up 2.4%. Management said liquidity was sufficient. Available additional sources included a $10 million unused holding-company line, $143 million of unused federal funds lines, and $65 million of FHLB borrowing capacity, of which $6 million was used.
- Credit quality: Allowance for loan losses was $10.53 million, or 1.18% of loans, versus $10.31 million and 1.18% at year-end. Nonaccrual loans increased to $4.42 million from $3.53 million; nonperforming assets rose to $4.79 million from $3.90 million, but were below $6.80 million a year earlier. Potential problem loans were $9.0 million, about 1.0% of loans. Eight troubled debt restructurings totaled $0.58 million.
- Debt and capital: Notes payable were $15.34 million; junior subordinated debentures were $12.58 million; subordinated notes were $11.86 million. Total borrowings across these categories were about $39.8 million. The notes payable maturity schedule included $14.34 million in 2016. Company regulatory ratios were 14.9% total capital, 12.6% Tier 1, 10.0% CET1 and 9.9% leverage; the bank met the filing’s “well-capitalized” thresholds.
Material changes and notable items
- Compared with Q1 2015, lower loan yields and acquired-loan discount accretion weighed on net interest income and margin. Deposit pricing changes reduced deposit funding costs, partly offsetting the decline.
- Mortgage income fell 34.7% to $0.57 million, reflecting a less robust mortgage market and lower production. Brokerage fees increased 82.4% to $0.31 million, partly from the acquired financial-advisor business. Service charges and other deposit-related income also increased.
- Average deposits increased $25 million year over year, driven by noninterest-bearing demand balances; deposit costs benefited from pricing changes. Average loans were slightly lower year over year.
- Preferred dividends increased to $112,000 from $61,000 as the annual preferred-stock dividend rate rose from 1% to 9% effective March 1, 2016. Nicolet had redeemed half of its then-outstanding preferred stock in September 2015.
- Nicolet recorded part of a financial-advisor and wealth-management business acquisition in Q1 for approximately $1.4 million of consideration, including cash and stock; the remainder was recorded in April. The transaction included $0.4 million goodwill and $0.8 million of customer-list intangibles.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management described continuing underlying net interest margin pressure as assets reprice or mature in a prolonged low-rate environment, with limited scope to offset lower asset yields through already-low funding costs. Discount accretion on acquired loans may be sporadic and diminish over time.
- The Baylake Corp. stock-for-stock merger, announced in 2015, had regulatory and shareholder approvals and was expected to close April 29, 2016. It was not included in Q1 results or balances. Management projected a combined company with approximately $2.3 billion in assets, $1.9 billion in deposits, $1.6 billion in loans and 42 branches. Integration and realization of expected benefits remain risks.
- Rate sensitivity analysis estimated one-year net interest income changes of -1.4%, -0.5%, 0.0% and +0.1% under gradual -200, -100, +100 and +200 basis-point scenarios, respectively; actual results may differ. Other disclosed risks include economic and competitive conditions, regulation, credit losses, acquired-loan valuation and execution of acquisitions.
- The filing reports no material legal proceedings, no material change in previously disclosed risk factors, and effective disclosure controls. Management stated the allowance was appropriate, while noting that estimates and regulatory review could lead to future adjustments.
Important facts for investors to verify
- Whether the Baylake merger closed as expected and its final purchase accounting, integration costs and realized synergies.
- Whether net interest margin and loan yields continued to decline, and whether deposit-cost reductions could offset that pressure.
- Subsequent trends in nonaccrual loans, nonperforming assets, potential problem loans, charge-offs and allowance adequacy.
- Repayment or refinancing of the $14.34 million of notes payable scheduled to mature in 2016, including the joint-venture note due June 2016.
- The lasting earnings contribution and expense impact of the wealth-management acquisition and the preferred dividend increase.