Nicolet Bankshares, Inc. — 2014 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2014; fourth-quarter results are also summarized. Nicolet is a Wisconsin-based community bank holding company operating through Nicolet National Bank, with 23 branches in Wisconsin and Michigan. The 2014 comparison is affected by the 2013 Mid-Wisconsin and Bank of Wausau acquisitions, which contributed for only part of 2013 but a full year in 2014.
Financial performance and position
- Earnings: Net income attributable to Nicolet was $9.9 million, down from $16.1 million in 2013. Net income available to common shareholders was $9.7 million, or $2.25 diluted EPS, versus $15.2 million, or $3.80, in 2013. The prior-year result included $11.9 million of bargain purchase gains; management says acquisition-related gains and asset-sale gains accounted for $9.7 million of 2013 net income after tax.
- Fourth quarter: Net income was $2.4 million versus $1.0 million in Q4 2013; common earnings were $2.4 million, or $0.55 diluted EPS, versus $0.9 million, or $0.22.
- Revenue and margin: Net interest income rose 13% to $41.9 million. Taxable-equivalent net interest margin declined 17 basis points to 3.89%, as lower earning-asset yields outweighed a modest reduction in funding costs. Noninterest income fell to $14.2 million from $25.7 million, principally reflecting the absence of 2013 bargain purchase gains. Excluding bargain purchase gains and net gains on asset sales or writedowns, noninterest income increased 12.3% to $13.6 million.
- Expenses and taxes: Noninterest expense increased 6.3% to $38.7 million; excluding $1.9 million of 2013 merger costs, it rose 12.1%, largely due to a full year of operating the acquired businesses. Income before tax was $14.7 million versus $20.0 million. Income tax expense was $4.6 million, with an effective rate of 31.4%, compared with $3.8 million and 19.2% in 2013; the prior-year rate benefited from the tax-free Mid-Wisconsin bargain gain.
- Balance sheet and growth: Assets were $1.215 billion, up 1%; loans were $883.3 million, up 4%, and deposits were $1.060 billion, up 2%. Management reports 9% organic loan growth after accounting for the runoff of acquired loans. Available-for-sale securities increased 32% to $168.5 million.
- Credit quality: Provision for loan losses declined to $2.7 million from $6.2 million; net charge-offs were $2.6 million versus $4.1 million. Nonperforming loans fell to $5.4 million, or 0.61% of loans, from $10.3 million, or 1.21%. Nonperforming assets were $7.4 million, or 0.61% of assets, versus $12.3 million, or 1.02%. The allowance was $9.3 million, equal to 1.05% of loans, versus $9.2 million, or 1.09%.
- Cash flow and liquidity: Operating cash flow was $11.0 million, compared with $20.2 million in 2013. Investing activities used $91.0 million, while financing activities provided $1.6 million. Cash and cash equivalents declined to $68.7 million from $147.0 million, reflecting deployment into loans and securities. Management stated liquidity was sufficient. Available unused funding included a $10 million parent-company credit line, $75 million of federal-funds lines, and $53.5 million of additional FHLB capacity.
- Debt and capital: Notes payable were $21.2 million, down from $32.4 million; junior subordinated debentures were $12.3 million. Total deposits were $1.060 billion. Nicolet’s regulatory total capital, Tier 1 risk-based, and leverage ratios were 14.0%, 13.0%, and 9.7%, respectively; the Bank was categorized as well-capitalized. Stockholders’ equity was $111.0 million; book value per common share rose to $21.34 from $18.97.
Material changes versus 2013
- Reported earnings and noninterest income declined mainly because 2013 included acquisition-related bargain purchase gains and other nonrecurring gains. The comparison also reflects partial-year acquired operations in 2013 versus a full year in 2014.
- Net interest income benefited from larger average balances, but margin narrowed as loan yields fell and a greater share of earning assets was held in lower-yielding cash and securities.
- Asset quality improved, with lower nonperforming loans, nonperforming assets, provision expense, and net charge-offs.
- Year-end cash fell as the company deployed liquidity into loans and investments. Notes payable also declined, and short-term borrowings were zero at year-end versus $7.1 million in 2013.
- Nicolet repurchased and cancelled 257,291 common shares for $5.6 million during 2014 under a program authorizing up to $12 million for as many as 625,000 shares.
Outlook, risks, contingencies, and unusual items
- Outlook: Management identified organic loan growth, balance-sheet management, revenue maximization, and continued evaluation of acquisition opportunities as 2015 priorities. The filing provides no quantified earnings or revenue guidance.
- Interest-rate and credit risks: Management expects ongoing margin pressure in a prolonged low-rate environment. The loan book is concentrated in regional commercial and real-estate-related lending and is exposed to local economic conditions, collateral values, and borrower performance. A one-year simulation estimated net interest income changes of -2.7%, -1.0%, -1.0%, and -1.6% under -200, -100, +100, and +200 basis-point scenarios, respectively; actual results may differ.
- Operational and regulatory risks: The filing highlights competition, acquisition integration and growth execution, cybersecurity and third-party service-provider dependence, extensive regulation, and the implementation of Basel III capital requirements. Management’s preliminary assessment was that the company and Bank would meet the new requirements.
- Unusual items and contingencies: A merchant data breach led to a $0.5 million debit-card fraud loss in Q4 2014. The company reported $269.6 million of commitments to extend credit, plus $3.0 million of financial letters of credit and $3.6 million of standby letters of credit; these are not equivalent to funded obligations. Management said routine legal proceedings were not expected to materially affect the company.
- Subsequent event: On February 17, 2015, Nicolet issued $8 million of subordinated notes due 2025 at a fixed 5.00% interest rate.
- Shareholder distributions: Nicolet had not paid common dividends and did not expect to do so in the foreseeable future. SBLF preferred dividends and regulatory and contractual restrictions also affect capital distributions.
Important facts for investors to verify
- How much of future earnings growth can come from organic lending and fee businesses, rather than acquisition effects or unusual gains?
- Can the bank sustain its net interest margin as earning-asset yields and funding costs reprice?
- Are the allowance and remaining acquired-loan discounts adequate given credit trends, collateral values, and the commercial-heavy loan portfolio?
- What are the expected costs, capital effects, and integration risks of any future acquisitions, and how will the $8 million subordinated-note issuance affect funding costs?
- How will Basel III requirements, dividend restrictions, and the remaining share-repurchase authorization affect capital flexibility?
- Monitor the company’s comparatively limited OTCQB share trading volume and the effects of repurchases on liquidity and per-share measures.