Nicolet Bankshares, Inc. — 2018 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2018, with fourth-quarter results also disclosed. Nicolet is a Wisconsin-based community bank holding company operating mainly through Nicolet National Bank, serving northeastern and central Wisconsin and Menominee, Michigan. It operated 38 branches and reported $3.10 billion in assets at year-end. The 2018 year-over-year growth was organic; comparisons with 2017 were partly affected by First Menasha, acquired in April 2017.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Net interest income | $106.6 million | $98.7 million |
| Provision for loan losses | $1.6 million | $2.3 million |
| Noninterest income | $39.5 million | $34.6 million |
| Noninterest expense | $89.8 million | $81.4 million |
| Income before taxes | $54.8 million | $49.7 million |
| Net income attributable to Nicolet | $41.0 million | $33.2 million |
| Diluted earnings per share | $4.12 | $3.33 |
| Net interest margin | 4.04% | 4.30% |
- Return on average assets improved to 1.38% from 1.25%; return on average equity was 11.04%, versus 9.96%.
- Fourth-quarter net income attributable to Nicolet was $10.9 million, or $1.11 diluted EPS, compared with $9.1 million and $0.88 in fourth-quarter 2017. Fourth-quarter net interest margin was 3.98%, down 23 basis points year over year.
- At year-end, total assets were $3.10 billion, loans $2.17 billion, deposits $2.61 billion, and Nicolet stockholders’ equity $386.6 million. Versus year-end 2017, assets and deposits rose 6%, loans 4%, and equity 6%.
- Cash and cash equivalents were $249.5 million, up $94.6 million. Operating cash flow was $51.0 million; investing activities used $77.1 million and financing activities provided $120.7 million.
- Long-term borrowings totaled $77.3 million; there were no short-term borrowings outstanding. Available liquidity included unused Federal funds lines of $175 million, FHLB borrowing capacity of $177 million, and a $10 million unused holding-company line of credit.
- Net charge-offs were 0.05% of average loans; nonperforming assets were 0.19% of assets, down from 0.49%. The allowance for loan losses was $13.2 million, or 0.61% of loans.
- The Bank was “well-capitalized” under prompt corrective action rules. Its total risk-based, CET1, and leverage ratios were 10.8%, 10.3%, and 9.1%, respectively.
Material changes versus 2017
- Net income attributable to Nicolet rose 24%. Net interest income increased 8%, supported by higher average earning assets and loan growth, while interest expense rose $8.4 million as deposit costs increased in a rising-rate environment.
- Net interest margin contracted 26 basis points to 4.04%; the cost of funds rose 37 basis points to 0.97%. Management cited rate pressure and a greater share of lower-yielding cash among earning assets.
- Noninterest income increased 14%, with growth in brokerage, mortgage, card interchange, and trust fees. Excluding asset gains, it increased 18%.
- Noninterest expense increased 10%, including higher personnel costs and a $0.5 million fraud contingency loss. The provision for loan losses declined from 2017.
- Asset quality improved: nonperforming loans fell to $5.5 million from $13.1 million, and nonperforming assets to $5.9 million from $14.4 million.
- The effective tax rate declined to 24.5% from 32.7%, primarily reflecting the federal corporate tax rate reduction from 35% to 21%. The 2017 comparison included a $0.9 million tax-law-related deferred tax adjustment.
Outlook, risks, contingencies, and unusual items
- Management’s 2019 priorities are organic growth in loans, deposits, wealth management, and other revenues; cost-effective profitability; and continued evaluation of acquisitions. Planned investment includes innovation, personnel, and upgrades at two branches. No numerical earnings or growth guidance is provided.
- Key risks include local economic and borrower conditions, commercial real estate and other credit exposures, deposit competition and rising funding costs, interest-rate sensitivity, acquisition execution, regulation, cybersecurity and fraud, and competition from larger and technology-focused institutions.
- Management’s interest-rate simulations projected limited one-year net-interest-income sensitivity at December 31, 2018: approximately flat for a 100-basis-point decrease or 200-basis-point increase, and down 0.6% for a 200-basis-point decrease. Actual results may differ.
- Off-balance-sheet commitments to extend credit were $721.1 million; standby letters of credit totaled $15.7 million. Management notes that commitments may expire undrawn and are not necessarily future cash requirements.
- Unusual items included a $0.6 million BOLI death benefit, the $0.5 million fraud contingency loss, and lower purchased-loan discount accretion of $4.2 million versus 2017. Nicolet repurchased about 408,100 shares for $22.2 million during 2018; $7.7 million remained under the authorization at year-end. The company has not paid common dividends since inception.
- The company reported no legal proceedings expected to have a material adverse effect. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting. Nicolet expects to adopt the current expected credit loss standard in 2020.
Important facts for investors to verify
- Whether deposit pricing and funding costs continue to outpace asset-yield improvement, and the resulting effect on net interest margin.
- Whether improving credit indicators persist, particularly given the increase in potential problem loans to $21.9 million from $13.6 million.
- The assumptions and adequacy of the allowance for loan losses, including the acquired-loan portfolio and the effect of the expected-loss accounting standard.
- The sustainability of fee-income growth and the impact of unusual contributions such as the BOLI death benefit and asset gains.
- Capital and liquidity capacity after share repurchases, and the balance between organic investment, acquisitions, and further repurchases.