Nicolet Bankshares, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. Nicolet is a Wisconsin bank holding company providing banking and wealth-management services, primarily in northeastern and central Wisconsin and Menominee, Michigan. This unaudited filing covers the quarter and six months ended June 30, 2019; balance-sheet comparisons are principally with December 31, 2018. Financial amounts below are in U.S. dollars.
Financial performance and position
- Q2 earnings: Net income attributable to Nicolet was $18.5 million, up 91% from $9.7 million a year earlier. Diluted EPS was $1.91 versus $0.98.
- First-half earnings: Net income attributable to Nicolet was $28.8 million, up 49% from $19.3 million; diluted EPS was $2.97 versus $1.93.
- Interest income and margins: First-half net interest income rose 7% to $56.4 million. Net interest margin was 4.16%, compared with 3.98% in first-half 2018; Q2 margin was 4.28% versus 3.77%. Management attributed improvement to loan growth and higher yields, partly offset by increased deposit funding costs.
- Noninterest income and expense: First-half noninterest income rose 46% to $27.7 million, substantially reflecting the UFS investment sale. Excluding net asset gains, it increased 12%. Noninterest expense rose 8% to $48.5 million, including retirement-related compensation actions.
- Credit costs and quality: First-half loan-loss provision was $0.5 million versus $1.0 million in 2018; net charge-offs were $82,000 and the allowance for loan losses was $13.6 million, or 0.62% of loans. Nonperforming assets were $8.0 million (0.26% of assets), up from $5.9 million (0.19%) at year-end; nonaccrual loans were $7.7 million. Potential problem loans rose to $26.5 million from $21.9 million.
- Balance sheet and funding: Total assets were $3.055 billion, loans $2.203 billion, and deposits $2.537 billion. Since year-end, loans rose 2%, deposits fell 3%, and cash and cash equivalents declined to $154.9 million from $249.5 million. Stockholders’ equity was $411.4 million; long-term borrowings were $77.4 million, with no short-term borrowings outstanding.
- Cash flow: For the six months, operating activities provided $19.1 million, investing activities used $20.6 million, and financing activities used $93.1 million. Cash and cash equivalents decreased $94.6 million.
- Capital and liquidity: The Bank qualified as well-capitalized. Its total risk-based capital ratio was 11.2%, Tier 1 leverage ratio 9.6%; the Company’s corresponding ratios were 13.2% and 11.0%. Management reported $170 million of available FHLB borrowing capacity, $175 million of unused Federal funds lines, and a $10 million unused holding-company line of credit.
Material changes and unusual items
- In Q2, Nicolet sold approximately 80% of its equity investment in UFS, LLC, recording $7.6 million of net asset gains, principally from the sale. It also recorded $2.75 million of retirement-related compensation expense. Management said these items, net of taxes, increased Q2 net income by $5.4 million and diluted EPS by $0.55.
- First-half operating results also benefited from stronger mortgage, brokerage, card-interchange, and BOLI income. The BOLI increase included a death benefit.
- On June 26, 2019, Nicolet agreed to acquire Choice Bancorp, Inc. in a stock-for-stock merger with a fixed exchange ratio subject to cap and collar provisions. Choice reported $444 million of assets, $349 million of loans, and $312 million of deposits at June 30. Closing was expected in Q4 2019, subject to shareholder and regulatory approvals and other customary conditions.
- Nicolet repurchased $14.7 million of stock during the first half and authorized an additional $20 million or up to 325,000 shares for repurchase. At quarter-end, approximately $25 million remained authorized.
Outlook, commentary, and risks
The filing provides no specific earnings or revenue guidance. Management described asset quality as sound, reported liquidity sufficient for funding needs, and noted that the interest-rate environment and deposit pricing affect net interest income. Its one-year sensitivity analysis estimated net interest income changes of -1.1% and +1.1% for gradual 100-basis-point decreases and increases, respectively, and -2.4% and +2.2% for 200-basis-point decreases and increases. These are model scenarios, not forecasts.
Risks identified include economic and competitive conditions, interest-rate and monetary-policy changes, regulation and operations, credit quality and collateral values, and integration of Choice if the merger closes. Management expects adoption of the expected-credit-loss standard in 2020; the filing does not provide a clear quantified estimate of its financial impact. The company reported no material change to previously disclosed risk factors and no legal proceeding expected to have a material adverse effect.
Important facts for investors to verify
- How much future earnings depend on recurring operations versus the UFS gain and related compensation and tax effects.
- Whether loan delinquencies, nonaccrual loans, and potential problem loans continue to rise, and whether the allowance remains adequate.
- The causes and sustainability of deposit outflows, deposit pricing, and net interest margin performance.
- Completion terms, approvals, timing, and integration risks for the proposed Choice merger.
- Capital and liquidity after ongoing share repurchases, loan growth, and any acquisition; also the eventual quantified impact of the 2020 credit-loss accounting adoption.