Nicolet Bankshares, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Figures are in millions of dollars unless otherwise stated. Year-over-year results are materially affected by the April 29 Baylake merger; Baylake’s results are included only from the acquisition date.
Business context and reporting period
Nicolet is a Wisconsin-based community banking and wealth-management company. The Baylake merger added 21 branches and expanded the bank’s presence in northeastern Wisconsin; the combined bank had 42 branches after one location closed. Nicolet also completed a wealth-management acquisition on April 1.
Key financial metrics
| Metric | Q2 2016 | Six months 2016 | Comparison |
|---|---|---|---|
| Net interest income | $16.5 | $27.2 | Q2 +69%; first half +31% year over year |
| Net interest margin, tax-equivalent | 3.75% | 3.84% | Q2 +8 bps; first half -5 bps year over year |
| Noninterest income | $6.4 | $10.2 | First half +14%; excluding asset-sale gains, +27% |
| Noninterest expense | $17.5 | $27.5 | First half +41%, including acquisition-related costs |
| Net income | $3.3 | $6.0 | Q2 +11%; first half slightly below $6.1 in 2015 |
| Net income available to common shareholders | $3.0 | $5.5 | After preferred dividends |
| Diluted EPS | $0.39 | $0.91 | Versus $0.66 and $1.36, respectively, in 2015 |
| Provision for loan losses | $0.45 | $0.90 | Same as comparable 2015 periods |
- At June 30, total assets were $2.26 billion, loans $1.56 billion, deposits $1.89 billion, and stockholders’ equity $284 million. Growth from year-end 2015 was driven mainly by the Baylake acquisition.
- Cash and cash equivalents were $101.9 million, up from $83.6 million at year-end. First-half operating cash flow was $5.6 million, investing cash flow was $87.0 million, and financing cash flow was negative $74.3 million.
- Allowance for loan losses was $10.9 million, or 0.70% of loans, versus $10.3 million and 1.18% at year-end. First-half net charge-offs were $0.26 million.
- Reported borrowings included $11.2 million of short-term borrowings, $6.0 million of notes payable, $24.5 million of junior subordinated debentures, and $11.9 million of subordinated notes. Nicolet also reported $10 million available on its holding-company credit line and $99 million of FHLB borrowing capacity, of which $14 million was used, including letters of credit.
- Regulatory capital ratios were above minimums: company total capital 14.0%, Tier 1 12.7%, CET1 10.7%, and leverage 11.8%. The bank was classified as well-capitalized.
Material changes versus comparable periods
- Baylake added approximately $1.0 billion of assets, $691 million of loans, and $822 million of deposits at acquisition. The merger consideration was approximately $164 million, principally Nicolet shares; acquisition accounting added about $66 million of goodwill and $17 million of core deposit intangibles. Fair-value estimates remain subject to refinement during the measurement period.
- First-half net interest income rose $6.5 million, primarily from increased balances following the merger. Tax-equivalent margin declined five basis points year over year as earning-asset yields fell more than funding costs.
- First-half common diluted EPS declined to $0.91 from $1.36. The comparison reflects a larger share count after the stock merger and preferred dividends that increased when the preferred-stock dividend rate rose from 1% to 9% effective March 1, 2016.
- Noninterest income growth reflected higher brokerage, deposit-service, and other fee income, partly offset by lower asset-sale gains than in 2015. Brokerage growth also reflects the wealth-management acquisition.
- First-half expenses included approximately $0.8 million of direct merger costs and a $1.7 million lease-termination charge related to a branch closure; higher amortization also followed the acquisitions.
- Nonperforming assets increased to $27.3 million, or 1.21% of assets, from $3.9 million at year-end. Nonaccrual loans were $24.3 million, including $22.9 million acquired loans; the increase was largely acquisition-related. CRE investment loans accounted for $14.3 million of nonaccrual loans.
Outlook, risks, and unusual items
- No specific earnings or financial guidance is provided. Management expects further cost savings and other synergies from the Baylake merger, but does not quantify them; pro forma results are illustrative and exclude expected synergies.
- Management noted continuing downward margin pressure in the low-rate environment, as maturing assets may be reinvested at lower yields and deposit-cost reductions have limited room to offset this. It also cited integration and operating-cost risks following the acquisitions.
- Key risks include economic and competitive conditions in Nicolet’s markets, interest-rate changes, acquired-loan valuation and credit performance, integration execution, regulatory and operational requirements, and the estimation of the loan-loss allowance. Management states that actual results may differ from estimates.
- At June 30, the company had $475.4 million of commitments to extend credit, $13.6 million of financial letters of credit, and $3.9 million of standby letters of credit. Management reported liquidity resources sufficient for anticipated funding needs.
- Management was considering redeeming at least half and up to all of the outstanding preferred stock by December 31, 2016. It also stated the common-stock repurchase program would resume after the merger; no program repurchases had occurred since the merger announcement.
- The filing reports no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls. The filing provides no quantified outlook for future revenue, earnings, or margins.
Important facts for investors to verify
- Whether Baylake integration delivers the expected cost savings and revenue opportunities, and how much of reported expense growth is recurring versus merger-related.
- Performance and credit quality of acquired loans, especially the acquired nonaccrual and CRE investment exposures; assess the adequacy of the allowance given its lower ratio after purchase accounting.
- Whether net interest margin stabilizes as acquisition effects, loan yields, funding costs, and reinvestment rates evolve.
- How preferred-stock redemption decisions, the 9% dividend rate, and the expanded common share count affect capital allocation and per-share earnings.
- Final acquisition-date fair values and any resulting changes to goodwill, intangible assets, acquired-loan marks, and future amortization.