Nicolet Bankshares, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited consolidated financial statements; dollar amounts below are in millions unless stated otherwise. Nicolet is a Wisconsin community banking and wealth management company.
Financial performance and condition
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $10.0 | $10.9 | $30.7 | $31.4 |
| Provision for loan losses | $0.45 | $0.68 | $1.35 | $2.03 |
| Noninterest income | $4.2 | $3.6 | $13.1 | $10.3 |
| Noninterest expense | $9.8 | $9.5 | $29.4 | $28.6 |
| Net income | $2.6 | $2.8 | $8.7 | $7.6 |
| Net income available to common shareholders | $2.5 | $2.7 | $8.4 | $7.4 |
| Diluted EPS | $0.58 | $0.63 | $1.93 | $1.70 |
- Margins: Tax-equivalent net interest margin was 3.78% in Q3 versus 4.17% a year earlier, and 3.85% for the first nine months versus 3.91%. Nine-month net interest income fell 2%; management attributed pressure chiefly to lower loan yields and acquired-loan discount accretion, alongside higher funding costs.
- Revenue and expenses: Nine-month noninterest income rose 28%; excluding net gains on asset sales/write-downs, it increased 23%, led by mortgage income, up $1.5 million (132%). Noninterest expense rose 3%, mainly from salaries, benefits and data processing.
- Balance sheet at September 30: Total assets were $1,166.9; loans $884.4; deposits $1,012.2; and stockholders’ equity including noncontrolling interest $105.0. Compared with December 31, 2014, loans were nearly flat, deposits declined $47.7, and total assets declined $48.4.
- Credit quality: Allowance for loan losses was $10.0, or 1.13% of loans, versus $9.3 and 1.05% at year-end 2014. Nine-month net charge-offs were $0.63 versus $1.21 a year earlier. Nonperforming assets were $5.0 (0.43% of assets), down from $7.4 (0.61%) at year-end; potential problem loans increased to $6.8 from $5.4.
- Cash flow and liquidity: Nine-month operating cash flow was $18.3; investing cash flow was negative $28.8; financing cash flow was negative $23.6. Cash and cash equivalents fell $34.1 to $34.6. Management said liquidity was sufficient; available funding included a $10 million holding-company line, $75 million of federal funds lines and $65 million of FHLB borrowing capacity.
- Debt and capital: At quarter-end, notes payable were $15.5, junior subordinated debentures $12.5 and subordinated notes $11.8. The company issued $12 million of 5% subordinated notes in 2015, qualifying as Tier 2 capital. Company regulatory ratios included total capital of 14.3%, Tier 1 of 12.0%, CET1 of 9.4% and leverage of 9.7%; the bank was reported well-capitalized.
Material changes, outlook and risks
- In August, Nicolet sold its Neillsville and Fairchild branches, reducing deposits by $34 million, loans by $13 million and cash by $20 million; it recorded approximately $0.1 million of income from the sale.
- On September 28, the company redeemed $12.2 million, half of its outstanding SBLF preferred stock. It repurchased about 146,400 common shares for $4.2 million during the first nine months, then suspended the repurchase program in connection with the pending merger.
- Nicolet agreed to acquire Baylake Corp. in a stock transaction: each Baylake share is to receive 0.4517 Nicolet shares, subject to the merger agreement. Closing was expected in Q2 2016 and remained subject to shareholder and regulatory approvals and other conditions. Management cited potential scale, efficiency, growth and profitability benefits; these are expectations, not assured outcomes.
- No specific earnings or financial guidance is provided in the supplied filing text. Management warned that prolonged low rates could continue to compress margins and that acquired-loan discount accretion may diminish over time. Other cited risks include credit deterioration, economic weakness, competition, regulatory changes, and merger integration, approval, customer-retention and cost-savings risks.
- Management considered the allowance for loan losses appropriate but noted it depends on estimates and could require additions if economic conditions, collateral values or borrower performance worsen. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter; routine legal proceedings were not expected to materially affect results or financial position.
Important facts for investors to verify
- Merger progress, approvals, exchange mechanics, expected costs and whether anticipated synergies are realized.
- Whether the downward trend in net interest margin and loan yields continues, including the effects of rates, funding costs and acquired-loan accretion.
- Credit migration and loss experience, especially potential problem loans, acquired credits, and allowance adequacy.
- Deposit trends and liquidity after the branch sale, and the effect of the preferred-stock redemption and new subordinated debt on capital and funding costs.
- How sustainable mortgage-related and other noninterest income growth is, given its contribution to year-to-date improvement.