Nicolet Bankshares, Inc. — Q3 2017 Form 10-Q
Business context and reporting period. Community banking and wealth management company based in Wisconsin; results cover the quarter and nine months ended September 30, 2017. Unless stated otherwise, financial amounts below are in millions. The April 28, 2017 First Menasha acquisition materially increased the company’s scale; 2017 results include five months of First Menasha operations.
Key financial metrics
- Third-quarter results: Net interest income was $26.4 million, up 26% from $20.9 million. Noninterest income was $10.2 million, up 19%. Net income attributable to Nicolet was $9.5 million versus $6.5 million; diluted EPS was $0.91 versus $0.69.
- Nine-month results: Net interest income was $72.2 million, up 50%; noninterest income was $26.0 million, up 39%. Net income attributable to Nicolet was $24.0 million versus $12.4 million; diluted EPS was $2.45 versus $1.67. Growth reflects acquisitions as well as organic activity.
- Margins and costs: Tax-equivalent net interest margin was 4.24% in Q3 versus 4.19% a year earlier, and 4.27% for the first nine months versus 3.99%. Nine-month noninterest expense rose 28% to $59.5 million, mainly from the larger acquired operating base. Management said expense growth was 34% excluding merger-related expenses in both periods.
- Balance sheet at September 30: Total assets were $2.85 billion, loans $2.05 billion, deposits $2.37 billion, and stockholders’ equity $360.4 million. Compared with December 31, 2016, loans increased 31% and deposits 20%; excluding First Menasha, loans grew 8% organically and deposits 1%.
- Credit quality: Allowance for loan losses was $12.6 million, or 0.61% of loans, versus $11.8 million and 0.75% at year-end 2016. Nine-month provision was $1.9 million and net charge-offs were $1.1 million, including a large commercial loan charge-off in Q3. Nonperforming assets declined to $15.7 million, or 0.55% of assets, from $22.3 million and 0.97% at year-end.
- Cash flow and liquidity: Nine-month operating cash flow was $30.0 million; investing used $117.0 million and financing provided $54.1 million. Cash and cash equivalents ended at $96.1 million, down from $129.1 million at year-end. The company reported $115 million of remaining FHLB borrowing capacity, $158 million of unused federal funds lines, and an unused $10 million holding-company credit line.
- Debt and capital: At quarter-end, borrowings included $12.9 million short-term, $41.6 million FHLB advances, $29.5 million junior subordinated debentures, and $11.9 million subordinated notes. Bank regulatory capital ratios included 11.6% CET1 and 9.9% leverage; the bank qualified as well-capitalized. Common equity was 12.7% of assets.
Material changes and unusual items
- First Menasha added approximately $480 million in assets, $351 million in loans, and $375 million in deposits at acquisition. The merger consideration included $62.2 million of Nicolet stock and $19.3 million cash. Integration was completed and five acquired branches opened as Nicolet branches.
- Q3 noninterest income included a $1.2 million pretax gain from remeasuring Nicolet’s previously held First Menasha equity interest. Nine-month gains on asset sales or write-downs totaled $2.1 million, compared with $0.5 million in 2016.
- Management reported $0.5 million of nonrecurring merger expenses in the first nine months of 2017, compared with $2.6 million in 2016, including a $1.7 million lease termination charge in 2016.
- Acquired-loan discount accretion increased net interest income by $4.5 million year over year for the first nine months. Management cautioned that this income can be sporadic and will diminish over time.
Outlook, risks, and contingencies
The filing provides no numerical earnings or revenue guidance. Management said it remains focused on acquisition-related efficiencies, organic growth in expanded markets, and brokerage services. Key uncertainties include integration and realization of acquisition benefits, interest-rate and competitive pressures on loan yields and deposit costs, economic conditions in the company’s markets, and credit-loss estimates—particularly for acquired loans. Management noted that acquired-loan valuations and the allowance for loan losses rely on estimates and could require future adjustments. It reported no legal proceedings expected to have a material adverse effect and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How much future earnings growth is organic versus acquisition-driven, and whether First Menasha integration produces the anticipated efficiencies.
- Whether loan growth and credit performance remain sound, especially in commercial and commercial real estate lending; monitor the large Q3 commercial charge-off and acquired-loan quality.
- How net interest margin responds to further rate changes, competitive loan pricing, and deposit repricing; assess the sustainability of acquired-loan discount accretion.
- Whether expense growth moderates and whether reported earnings remain resilient without acquisition-related gains or other unusual items.
- Liquidity and funding trends, including declining cash, increased borrowings, brokered deposits, and the timing of large certificates of deposit.
- Acquisition fair-value estimates, goodwill and intangible balances, and the company’s capital position after acquisitions and share repurchases.