Nicolet Bankshares, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Comparative balance-sheet figures are as of December 31, 2017. Unless stated otherwise, amounts below are in millions of dollars. Nicolet is a Wisconsin-based community banking and wealth management company. Comparisons with 2017 are affected by the April 2017 First Menasha acquisition: 2018 includes its full-period contribution, while the first nine months of 2017 include five months.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $26.9 | $26.4 | $79.6 | $72.2 |
| Provision for loan losses | $0.3 | $1.0 | $1.4 | $1.9 |
| Noninterest income | $10.6 | $10.2 | $29.7 | $26.0 |
| Noninterest expense | $23.0 | $20.9 | $68.1 | $59.5 |
| Net income attributable to Nicolet | $10.9 | $9.5 | $30.2 | $24.0 |
| Diluted earnings per share | $1.09 | $0.91 | $3.02 | $2.45 |
- Q3 net income rose 14%; nine-month net income increased 25%. Nine-month diluted EPS increased 23%.
- Net interest margin was 4.02% in Q3 versus 4.24% a year earlier, and 3.99% for the first nine months versus 4.27%. Higher asset volumes lifted net interest income, but deposit repricing and higher funding costs pressured margin. A large short-term customer deposit in 2018 also reduced the reported earning-asset yield and margin by about 8 basis points.
- For the first nine months, average interest-earning assets increased 16% and average loans increased 15% year over year. Net interest income rose 10% despite lower purchased-credit-impaired loan discount income. Noninterest income rose 14%; noninterest expense rose 15%, mainly reflecting a larger workforce and operating base.
- The effective tax rate was 23.7% for the first nine months, compared with 34.2% in 2017, primarily reflecting the lower federal corporate tax rate. Q3 also benefited from a nontaxable bank-owned life insurance death benefit.
Financial position, liquidity and capital
- At September 30, total assets were $3.00 billion, loans were $2.14 billion, deposits were $2.52 billion, and Nicolet stockholders’ equity was $377.2 million. From year-end 2017, assets rose 2%, loans 3%, and deposits 2%.
- Cash and cash equivalents were $161.2 million. Nine-month cash flows were $40.6 million provided by operating activities, $68.3 million used in investing activities, and $34.0 million provided by financing activities; cash increased $6.2 million. Cash equivalents include $7.4 million of restricted Federal Reserve balances.
- Long-term borrowings totaled $77.2 million, comprising FHLB advances, junior subordinated debentures and subordinated notes. There were no short-term borrowings outstanding.
- Management reported $10 million of unused holding-company credit, $158 million of available Federal funds lines and $180 million of available FHLB borrowing capacity. About 33% of the securities portfolio was pledged. Management stated liquidity was sufficient for lending, deposit needs and other cash requirements.
- The Bank qualified as well-capitalized. At quarter-end, its total risk-based capital ratio was 11.3%, Tier 1 ratio 10.8%, common equity Tier 1 ratio 10.8%, and Tier 1 leverage ratio 9.4%. The company’s corresponding ratios were 12.8%, 11.8%, 10.6% and 10.3%.
- Nicolet repurchased approximately 307,800 shares for $16.9 million during the first nine months. About $12.9 million remained authorized under the repurchase program at quarter-end.
Material changes, credit quality and unusual items
- Nonperforming assets declined to $11.5 million, or 0.38% of assets, from $14.4 million and 0.49% at year-end 2017. Nonaccrual loans were $10.2 million, down from $13.1 million; management attributed the reduction primarily to resolution of a large acquired commercial loan. Potential problem loans were $14.0 million, or 0.7% of loans.
- The allowance for loan losses was $13.0 million, or 0.61% of loans, unchanged as a percentage from year-end. Nine-month net charge-offs were $1.0 million; annualized net charge-offs were 0.06% of average loans.
- Available-for-sale securities had $11.3 million of gross unrealized losses at quarter-end, versus $5.0 million at year-end 2017. Management attributed the losses to interest-rate and market-spread changes rather than credit deterioration and said it had the ability and intent to hold the securities. No other-than-temporary impairment was recorded.
- Reported income included a BOLI death benefit, a favorable fair-value mark on equity securities, and other asset gains. The 2017 comparison included a gain on Nicolet’s pre-acquisition interest in First Menasha and merger-related expenses. These items affect period-to-period comparability.
- During Q3, Nicolet bought a small brokerage book and recorded a $0.29 million customer-list intangible. No material goodwill or other intangible impairment was identified.
Outlook, risks and contingencies
- The filing gives no specific earnings, revenue or margin guidance. Management described asset quality as sound and liquidity and capital as adequate, while noting continued rate and funding-cost pressures.
- Management’s one-year interest-rate simulation estimated net interest income changes of -0.2% and +0.1% under gradual 100-basis-point decreases and increases, respectively, and -1.1% and +0.5% under 200-basis-point decreases and increases. These are scenarios, not forecasts; actual results may differ with market changes and customer behavior.
- Risks identified include economic and competitive conditions, interest-rate and monetary-policy changes, regulatory and legal developments, credit quality and collateral values, and integration or operational risks. Management said previously disclosed risk factors had not materially changed.
- Off-balance-sheet commitments included $696.7 million to extend credit and $17.7 million in standby letters of credit. Management reported no material legal proceedings expected to adversely affect financial position or results.
- The company expected to adopt the current expected credit loss standard in 2020 and was developing models and processes. It planned to adopt the lease standard in 2019; it reported approximately $5 million of minimum lease payments due from 2019 onward as of year-end 2017, with recognized lease assets and liabilities dependent on adoption assumptions.
Important facts for investors to verify
- Whether loan and deposit growth is organic and sustainable, given the First Menasha comparison and the temporary $0.3 billion customer deposit.
- Whether deposit repricing continues to outpace asset-yield improvement and further compresses net interest margin.
- Credit trends in commercial and commercial real-estate portfolios, including potential problem loans, acquired-loan performance and allowance adequacy.
- Whether unrealized securities losses change with rates or spreads, and whether management’s stated ability and intent to hold remains valid.
- The recurring earnings contribution of the BOLI death benefit and other gains, and the ongoing expense and capital impact of share repurchases and accounting-standard adoption.