Nicolet Bankshares, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual filing, not a standalone quarterly filing; selected fourth-quarter results are included below. Nicolet is a Wisconsin community bank holding company operating through Nicolet National Bank, with 23 branches in Wisconsin and Michigan.
Business context and performance
2013 results were substantially affected by the April acquisition of Mid-Wisconsin Financial Services and the August FDIC-assisted acquisition of selected Bank of Wausau assets and liabilities. Together, the transactions added approximately $483 million of assets, $284 million of loans and $388 million of deposits at acquisition. The year’s results include about eight months of Mid-Wisconsin operations and five months of Bank of Wausau operations.
| Metric | 2013 | 2012 |
|---|---|---|
| Total assets, year end | $1.199 billion | $745.3 million |
| Loans, year end | $847.4 million | $552.6 million |
| Deposits, year end | $1.035 billion | $616.1 million |
| Net interest income | $36.9 million | $22.3 million |
| Provision for loan losses | $6.2 million | $4.3 million |
| Noninterest income | $25.7 million | $10.7 million |
| Noninterest expense | $36.4 million | $24.1 million |
| Net income attributable to Nicolet | $16.1 million | $3.0 million |
| Net income available to common shareholders | $15.2 million | $1.8 million |
| Diluted earnings per common share | $3.80 | $0.53 |
Margins, cash flow, debt and liquidity
- Net interest margin: 4.06% on a taxable-equivalent basis, up 39 basis points from 3.67%. The improvement reflected growth in earning assets and lower funding costs; acquired-loan accretion also helped.
- Profitability: Return on average assets was 1.62%, versus 0.45%; return on average equity was 16.97%, versus 3.97%. Results included acquisition gains, so headline profitability was not solely recurring.
- Cash flow: Operating activities provided $20.2 million; investing activities provided $76.4 million, including $37.6 million net cash received in business combinations; financing activities used $31.6 million. Cash and cash equivalents increased to $147.0 million from $82.0 million.
- Debt: Year-end short-term borrowings were $7.1 million, notes payable were $32.4 million, and junior subordinated debentures were $12.1 million. The company also reported $49.5 million of brokered deposits.
- Capital: Consolidated total risk-based capital was 13.8%, Tier 1 risk-based capital 12.7%, and leverage capital 9.5%. The Bank was categorized as well-capitalized under prompt corrective action rules.
- Liquidity: Management said liquidity was sufficient to fund loans and other cash needs. Available unused funding included a $10 million holding-company line, $76 million of federal funds lines and $42.5 million of unused FHLB borrowing capacity. About 43% of the securities portfolio was pledged.
Material changes and notable items
- Assets increased 61%, loans 53% and deposits 68%, principally due to the acquisitions. Excluding acquired balances, loans grew organically 2% and deposits 8% from year-end 2012.
- Noninterest income included $11.9 million of bargain purchase gains: $9.5 million related to Mid-Wisconsin and $2.4 million to Bank of Wausau. Excluding these gains, noninterest income was $13.8 million, up 28.6% year over year.
- Noninterest expense rose 51%, reflecting the larger operating base and approximately $1.9 million of direct merger and integration costs. The reported figures also reflect higher staffing, occupancy, data processing and acquired core deposit intangible amortization.
- The effective tax rate fell to 19.2% from 33.1%; the tax-free Mid-Wisconsin bargain purchase gain was a significant factor.
- Fourth-quarter net income was $982,000 and diluted EPS was $0.22, versus $937,000 and $0.18 in fourth-quarter 2012. Fourth-quarter 2013 noninterest income was $3.5 million, compared with $5.7 million in the third quarter, when acquisition gains contributed substantially.
Credit quality, outlook and risks
- Nonperforming assets were $12.3 million, or 1.02% of assets, at year end, compared with $7.2 million, or 0.97%, in 2012. Nonaccrual loans were $10.3 million, including $9.5 million from acquired portfolios. Management reported that nonperforming assets had peaked at 1.88% of assets in the third quarter and declined through year end following resolution efforts.
- The allowance for loan losses was $9.2 million, or 1.09% of loans, compared with $7.1 million, or 1.29%, in 2012. Acquired loans were recorded at fair value without an initial allowance; management said the lower coverage ratio was affected by the acquired loans added to the portfolio. Net charge-offs were $4.1 million, versus $3.1 million.
- The provision included approximately $1.0 million for a deteriorating construction and land development relationship, which was restructured at $3.9 million, and $1.8 million for a charge-off on an acquired grain credit. Construction and land development accounted for 53.8% of the year-end allowance.
- Management cited ongoing margin pressure in a prolonged low-rate environment, as asset yields may decline faster than funding costs. Its model estimated net interest income would decline 3.61% under a 100-basis-point rate increase and 1.72% under a 100-basis-point decrease over 12 months; the filing cautions that actual results may differ and the model excludes management actions.
- Key risks include credit deterioration, economic and interest-rate changes, competition, regulatory changes and integration of acquired operations. The filing describes an acquired Mid-Wisconsin legal matter; a fourth-quarter estimate of $0.9 million net of tax was recorded against the acquisition gain and attributed back to third-quarter earnings. Management said routine legal proceedings were not expected to have a material adverse effect.
- Off-balance-sheet commitments included $234.9 million to extend credit and $6.4 million of standby letters of credit. These amounts are contractual commitments and do not necessarily represent expected future cash requirements.
- No common dividends had been paid since inception, and management reported no foreseeable plan to begin them. In January 2014, the Board authorized repurchases of up to $6 million, capped at 350,000 shares. Basel III capital requirements were scheduled to begin taking effect in 2015.
- No specific earnings guidance was provided. Management described 2013 as a year of executing strategic growth initiatives and expected further cost savings and synergies from the acquisitions, but the filing does not quantify those expected benefits.
Most important facts for investors to verify
- How much of the $16.1 million attributable net income and $3.80 diluted EPS is repeatable after excluding acquisition gains, acquisition accretion and one-time costs.
- Whether acquired nonperforming loans and other credit exposures continue to resolve as expected, and whether the allowance remains adequate given acquired loans were initially recorded without an allowance.
- Whether organic loan and deposit growth, funding costs and net interest margin remain durable after the full-year integration of the acquisitions.
- The final outcome and any further changes in the estimate for the acquired litigation matter, as well as the status of other contingencies and off-balance-sheet commitments.
- Capital and liquidity effects of the authorized share repurchase, dividend restrictions, and implementation of Basel III requirements.