Nicolet Bankshares, Inc. — Q1 2018 Form 10-Q
Business context and reporting period
Community banking and wealth-management company headquartered in Green Bay, Wisconsin; operates primarily in northeastern and central Wisconsin and Menominee, Michigan. This unaudited quarterly report covers the three months ended March 31, 2018, with balance-sheet comparisons to December 31, 2017 and income comparisons to Q1 2017. Year-over-year comparisons include the effect of the April 2017 First Menasha acquisition, whose operations were not in Q1 2017.
Financial results and position
Unless noted otherwise, amounts are in U.S. dollars; financial statement amounts below are rounded to millions.
| Metric | Q1 2018 / March 31, 2018 | Comparable period / prior date |
|---|---|---|
| Interest income | $30.8 million | $23.1 million in Q1 2017 |
| Net interest income | $26.9 million | $21.3 million in Q1 2017 |
| Net interest margin, tax-equivalent | 4.20% | 4.32% in Q1 2017 |
| Noninterest income | $8.8 million | $6.8 million in Q1 2017 |
| Noninterest expense | $22.6 million | $18.3 million in Q1 2017 |
| Net income attributable to Nicolet | $9.6 million; diluted EPS $0.94 | $6.2 million; diluted EPS $0.69 in Q1 2017 |
| Operating cash flow | $8.1 million | $6.9 million in Q1 2017 |
| Total assets | $3.224 billion | $2.932 billion at December 31, 2017 |
| Loans / allowance for loan losses | $2.101 billion / $12.8 million | $2.088 billion / $12.7 million at December 31, 2017 |
| Deposits | $2.765 billion | $2.471 billion at December 31, 2017 |
| Cash and cash equivalents | $433.0 million | $154.9 million at December 31, 2017 |
| Long-term borrowings | $77.1 million; no short-term borrowings | $78.0 million at December 31, 2017 |
| Stockholders’ equity | $364.0 million | $364.2 million at December 31, 2017 |
Net income rose 54% year over year and diluted EPS rose 36%; both comparisons reflect acquisition-related scale as well as operating performance. The effective tax rate was 23.2%, versus 32.6% in Q1 2017, reflecting the lower federal corporate tax rate and stock-compensation tax benefits. The quarter included a $0.2 million net gain on asset sales, including fixed-asset sales, and $0.3 million in annual card-contract incentives.
Changes, liquidity, and capital
- Loans increased 1% from year-end and 30% year over year. Deposits increased 12% from year-end and 42% year over year. Management said a roughly $300 million short-term transaction deposit from a long-standing commercial customer largely explains the sequential increase in deposits, assets, and cash; excluding it, assets and deposits were minimally changed from year-end.
- Cash flow from investing was negative $15.3 million and financing provided $285.4 million, principally reflecting a $294.1 million net increase in deposits. Cash and cash equivalents include $7.5 million of restricted cash at March 31.
- Management reported sufficient liquidity. Available funding included $10 million of unused holding-company credit, $158 million of unused Federal funds lines, and $140 million of FHLB borrowing capacity. Approximately 38% of the securities portfolio was pledged.
- Company regulatory capital ratios were 12.8% total risk-based, 11.8% Tier 1, 10.5% common equity Tier 1, and 10.0% Tier 1 leverage. The bank qualified as well-capitalized under prompt-corrective-action standards.
- The company repurchased approximately 144,600 shares for about $8.0 million during the quarter. At quarter-end, approximately $9.9 million remained under the repurchase authorization.
Management commentary, risks, and unusual items
- Net interest income increased 26% year over year, primarily from acquired and organic loan growth. The tax-equivalent net interest margin declined 12 basis points as funding costs rose faster than earning-asset yields; management cited rising rates and deposit-rate pressure.
- Noninterest expense increased 24% year over year, mainly due to the larger post-acquisition operating base, higher personnel and occupancy costs, and technology spending. The quarter included approximately $0.2 million of merger-related expense.
- Asset quality indicators improved overall: nonperforming assets were $13.0 million, or 0.40% of assets, versus $14.4 million and 0.49% at year-end. Nonaccrual loans were $11.7 million; net charge-offs were $398,000. The allowance was 0.61% of loans. Management attributed the lower allowance-to-loans ratio versus Q1 2017 partly to acquired loans being recorded at fair value without an acquired allowance.
- Management reported $9.3 million of gross unrealized losses on available-for-sale securities, attributed to interest rates, spreads, and market conditions rather than credit deterioration; it stated the company could and intended to hold the securities. Other comprehensive loss was $3.4 million after tax.
- Interest-rate sensitivity modeling estimated that a gradual 200-basis-point rate decrease or increase would reduce one-year net interest income by 0.7% or 0.2%, respectively; management cautioned actual outcomes may differ from the simulation.
- No specific earnings or growth guidance was provided. The filing identifies risks including economic and competitive conditions, interest-rate changes, regulation, credit quality, and integration of acquisitions. Management reported effective disclosure controls, no material change in internal controls, and no material legal proceedings expected to adversely affect results or financial position.
Important facts for investors to verify
- How much of the $300 million customer transaction deposit remained after quarter-end and whether it was genuinely temporary.
- Underlying loan and deposit growth excluding acquisition effects and the large customer deposit; also the cost and persistence of deposit repricing as rates rise.
- Credit trends in commercial and industrial loans, nonaccrual balances, charge-offs, and the adequacy of the allowance, particularly for acquired loans.
- The sustainability of quarterly earnings after considering acquisition scale, discount accretion on acquired loans, one-time card incentives, asset-sale gains, and lower tax rates.
- Interest-rate and securities valuation exposure, including the unrealized securities losses and the assumptions behind management’s sensitivity analysis.
- Repurchase activity, capital ratios, and liquidity after excluding the large customer deposit.