Nicolet Bankshares, Inc. — Q1 2013 Form 10-Q
Business context and reporting period
The filing covers the three months ended March 31, 2013. Nicolet was a Wisconsin bank holding company operating through Nicolet National Bank, with 11 branches before its subsequent acquisition of Mid-Wisconsin. Interim results are unaudited and may not indicate full-year results.
Financial performance and condition
- Earnings: Net income was $774,000, versus $515,000 in Q1 2012. Net income attributable to Nicolet was $755,000; after $305,000 of preferred dividends and discount accretion, income available to common shareholders was $450,000, or $0.13 per diluted share, compared with $197,000, or $0.06, a year earlier.
- Revenue and margin: Net interest income was $5.75 million, up 13% year over year; noninterest income was $2.76 million, up 5%. Tax-equivalent net interest margin increased to 3.50% from 3.40%. The average earning-asset yield fell 25 basis points to 4.36%, while the cost of interest-bearing liabilities fell 41 basis points to 1.05%.
- Expenses and credit costs: Noninterest expense rose 9.6% to $6.34 million, largely from increased staffing and merger-related costs. Provision for loan losses was $975,000, compared with $1.25 million. Net charge-offs were $555,000, down from $1.18 million.
- Assets and credit quality: Total assets were $682.1 million, down from $745.3 million at year-end. Loans were $542.1 million, down $10.5 million. Nonaccrual loans declined to $2.7 million from $7.0 million; nonperforming assets were $4.8 million, or 0.70% of total assets, versus $7.2 million, or 0.97%, at year-end. The allowance for loan losses was $7.54 million, or 1.39% of loans, compared with $7.12 million, or 1.29%.
- Liquidity and funding: Cash and cash equivalents fell to $27.6 million from $82.0 million. Deposits declined $52.9 million to $563.2 million, including approximately $15.6 million of brokered-deposit runoff. Management attributed the decline mainly to normal first-quarter seasonality and deliberate cash reduction, and said liquidity was sufficient. Average Q1 deposits were $593.2 million, up from $530.6 million a year earlier.
- Debt and capital: Notes payable were $25.1 million, down from $35.2 million after repayment of $10 million of FHLB advances; short-term borrowings were $3.1 million and junior subordinated debentures were $6.2 million. Stockholders’ equity, including noncontrolling interest, was $78.4 million. At March 31, Nicolet National Bank reported total capital of 14.6%, Tier 1 capital of 13.4%, and leverage capital of 10.3%, above the stated well-capitalized thresholds.
- Cash flow: Operating activities provided $6.1 million and investing activities provided $3.6 million; financing activities used $64.1 million, primarily reflecting deposit outflows and debt repayment. Cash and cash equivalents decreased $54.4 million during the quarter.
Material changes and unusual items
- Net interest income benefited from lower funding costs and higher average loan balances, partly offset by lower asset yields. Management warned that prolonged low rates could continue to pressure margins as assets reprice or mature.
- Q1 expenses included a $96,000 prepayment penalty on FHLB advances and increased merger-related legal, consulting, audit, and personnel costs. Merger-related costs also contributed to the higher effective tax rate of 35.7%, versus 22.2% in Q1 2012.
- After quarter-end, on April 26, Nicolet completed its acquisition of Mid-Wisconsin Financial Services. Eleven branches joined Nicolet, doubling its branch footprint to 22. Estimated consideration was $10.2 million, primarily about 589,000 Nicolet shares, plus estimated cash consideration; Nicolet also raised $2.9 million through a private placement of 174,016 shares. Preliminary acquisition accounting estimated $436 million of assets and $415 million of liabilities acquired and an $11 million bargain-purchase gain; values remained subject to refinement. Mid-Wisconsin’s pre-acquisition results are not included in Q1 statements.
- No troubled debt restructurings were reported at March 31, 2013. Management identified credit-loss estimates, borrower and collateral conditions, interest-rate movements, deposit competition, regulation, and merger execution as risks. It gave no quantitative earnings or revenue guidance.
Important facts for investors to verify
- Track post-acquisition integration, final purchase-price allocation, the bargain-purchase gain, and expected synergies and costs.
- Monitor deposit retention and liquidity after the substantial quarter-on-quarter cash and deposit declines.
- Review credit trends, especially construction and land-development exposure, for which $3.44 million—45.6% of the allowance—was allocated; assess whether the improving nonperforming-loan trend persists.
- Assess margin sensitivity to low rates and competition, and the effects of loan and deposit repricing.
- The filing’s cover page appears to mark “No” for having filed all required reports during the preceding 12 months; confirm the reporting-status context, given Nicolet became a public reporting company in March 2013.