Nicolet Bankshares, Inc. — FY 2015 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2015; fourth-quarter results are also summarized. Nicolet is a Wisconsin community bank holding company operating primarily through Nicolet National Bank, serving northeastern and central Wisconsin and Menominee, Michigan, through 21 branches and digital channels. Its principal activities are commercial and consumer banking, lending, deposits, and wealth management.
Financial performance and condition
| Metric | 2015 | 2014 |
|---|---|---|
| Net interest income | $41.4 million | $41.9 million |
| Provision for loan losses | $1.8 million | $2.7 million |
| Noninterest income | $17.7 million | $14.2 million |
| Noninterest expense | $39.6 million | $38.7 million |
| Net income attributable to Nicolet | $11.4 million | $9.9 million |
| Net income available to common shareholders | $11.2 million | $9.7 million |
| Diluted earnings per common share | $2.57 | $2.25 |
| Net interest margin, taxable-equivalent | 3.88% | 3.89% |
| Return on average assets | 0.96% | 0.84% |
| Return on average common equity | 12.35% | 11.55% |
- Revenue and earnings: Net income attributable to Nicolet rose 15%, while diluted EPS increased 14%. Noninterest income growth reflected stronger mortgage production and higher gains on asset sales; 2015 included $1.7 million in net gains on asset sales or writedowns. Mortgage production for secondary-market sale was $173 million, up 88% from 2014.
- Margins and interest income: Net interest income declined 1%. Taxable-equivalent net interest income was $42.5 million, down 0.4%. The average earning-asset yield remained 4.54%, but funding cost rose to 0.84% from 0.79%, partly due to new 5% subordinated notes. Loan yield declined 20 basis points to 5.12%.
- Cash flow: Operating activities provided $15.1 million; investing activities used $21.6 million; financing activities provided $21.5 million. Cash and cash equivalents increased $14.9 million to $83.6 million.
- Balance sheet and liquidity: At year-end, assets were $1.214 billion, loans $877.1 million, deposits $1.056 billion, and stockholders’ equity including noncontrolling interest $109.7 million. Cash and cash equivalents were $83.6 million, and available unused funding included a $10 million parent-company line, $75 million in federal funds lines, and substantial FHLB capacity. Management said liquidity was sufficient for lending and other cash needs.
- Credit quality: Nonperforming assets declined 47% to $3.9 million, or 0.32% of assets; nonperforming loans were 0.40% of total loans. Net charge-offs fell to $0.8 million from $2.6 million. The allowance for loan losses rose to $10.3 million, or 1.18% of loans, from $9.3 million, or 1.05%.
- Debt and capital: Year-end notes payable were $15.4 million, junior subordinated debentures $12.5 million, and subordinated notes $11.8 million. The company issued $12 million of 5%, 10-year subordinated notes in 2015. The Bank was well-capitalized; its total risk-based, Tier 1, CET1, and leverage ratios were 13.1%, 12.0%, 12.0%, and 9.5%, respectively.
Changes versus the prior comparable period
- Common earnings improved despite a slight decline in net interest income, as the lower loan-loss provision and stronger noninterest income more than offset higher expenses.
- Noninterest income increased 24.8%; excluding net gains on asset sales or writedowns, it increased 17.1%. Noninterest expense rose 2.4%, including approximately $0.8 million of Baylake merger costs; management said expenses excluding those costs were up 0.4%.
- Year-end loans and deposits were nearly flat compared with 2014. Excluding the August branch sale, management reported loan growth of 0.8% and deposit growth of 2.9%.
- Asset quality improved, with lower nonperforming assets and net charge-offs; the allowance increased, including reserves established for acquired credits as their risk profile evolved.
- Capital actions included redeeming $12.2 million of SBLF preferred stock, repurchasing $4.2 million of common stock, and selling two branches. The common-stock repurchase program was suspended in September pending the Baylake merger.
Outlook, risks and unusual items
- Outlook: Management identified completion and integration of the Baylake merger as a principal 2016 priority. The stock-for-stock transaction provides 0.4517 Nicolet shares per Baylake share and was expected to close in the second quarter of 2016, subject to shareholder, regulatory, and other customary approvals. Management projected a combined company with approximately $2.3 billion in assets, $1.6 billion in loans, and $1.9 billion in deposits, before purchase-accounting marks. Nicolet also planned to add a group of financial advisors and their books of business in 2016. These transactions were not included in 2015 results.
- Preferred stock: The remaining SBLF preferred stock carried a 1% annual dividend rate, scheduled to rise to 9% effective March 1, 2016 if not redeemed. Management said further redemptions could be evaluated following the merger.
- Interest-rate and credit risks: Earnings are sensitive to interest rates and funding costs. Management’s modeled one-year net-interest-income changes ranged from -2.3% under a 200-basis-point decline to +0.3% under a 200-basis-point increase. Credit risks include the local and regional economy, commercial and real-estate concentrations, collateral values, and assumptions underlying the allowance. Management also noted $9.2 million of potential problem loans at year-end, up from $5.4 million.
- Other risks and contingencies: The filing identifies acquisition integration, competition, regulatory and compliance burdens, technology and cybersecurity, third-party vendors, and limited stock liquidity as risks. Commitments to extend credit totaled $302.6 million; letters of credit totaled $6.9 million. The company reported routine legal proceedings but no proceedings expected to have a material adverse effect.
- Unusual items: 2015 included $0.8 million of merger-related expenses, $1.7 million in net asset-sale or writedown gains, and a $12.2 million preferred-stock redemption. 2014 results included a $0.5 million deferred-tax benefit related to utilization of net operating losses. No bargain-purchase gain was recorded in 2015; 2013 earnings included substantial acquisition-related bargain-purchase gains.
- Audit and controls: The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective at December 31, 2015.
Key facts for investors to verify
- Whether the Baylake merger closed as expected, the final exchange and purchase-accounting effects, and realized integration costs and synergies.
- Whether the remaining SBLF preferred stock was redeemed before the scheduled 9% dividend rate took effect, and the subsequent use of capital.
- Trends in net interest margin, loan yields, funding costs, and deposit mix as rates and competition change.
- Performance of acquired loans, the $9.2 million of potential problem loans, allowance adequacy, and subsequent credit losses.
- Recurring earnings after excluding asset-sale gains and merger costs, alongside cash generation and liquidity after the branch sale and acquisition activity.