Nicolet Bankshares, Inc. — Q2 2015 Form 10-Q
Business context and period: Regional bank holding company serving northeastern and central Wisconsin and Menominee, Michigan. This unaudited report covers the quarter and six months ended June 30, 2015; income and cash-flow comparisons are against the corresponding 2014 periods, and balance-sheet comparisons are generally against December 31, 2014. Unless otherwise noted, amounts are in U.S. dollars.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $9.7m | $10.5m | $20.7m | $20.5m |
| Provision for loan losses | $0.45m | $0.68m | $0.90m | $1.35m |
| Noninterest income | $4.9m | $2.9m | $9.0m | $6.6m |
| Noninterest expense | $9.7m | $9.5m | $19.5m | $19.1m |
| Net income | $3.0m | $2.6m | $6.1m | $4.8m |
| Net income available to common shareholders | $2.9m | $2.5m | $5.9m | $4.6m |
| Diluted earnings per common share | $0.66 | $0.58 | $1.36 | $1.08 |
- Margins: Tax-equivalent net interest margin was 3.67% in Q2 2015 versus 3.90% a year earlier; for the first half it was 3.89% versus 3.79%. First-half interest-rate spread rose to 3.72% from 3.66%.
- Balance sheet at June 30: Total assets were $1.185bn, loans $883.3m, deposits $999.9m, cash and cash equivalents $58.8m, and stockholders’ equity plus noncontrolling interest $114.0m. Loans were essentially unchanged from year-end; deposits declined $60.0m (6%) and total assets fell $30.0m.
- Credit: Allowance for loan losses was $9.7m, or 1.10% of loans, versus $9.3m and 1.05% at year-end. First-half net charge-offs were $0.47m, down from $0.94m; annualized net charge-offs were 0.11% of average loans. Nonaccrual loans were $4.25m, down from $5.39m at year-end. Nonperforming assets totaled $5.21m, including $0.96m of other real estate owned (OREO); the table reports nonperforming assets at 0.44% of assets. Potential problem loans increased to $8.0m from $5.4m.
- Funding and liquidity: First-half operating cash flow was $12.2m; cash and equivalents decreased $9.9m to $58.8m. Financing activities used $41.6m, including a $60.0m net deposit decline, partly offset by $10.0m in short-term borrowings and $11.8m net proceeds from subordinated notes. Management said liquidity was sufficient. Available facilities included a $10m holding-company line, $75m of federal funds lines, and $65m of FHLB capacity, of which $21.5m was used.
- Debt and capital: At June 30, short-term borrowings were $10.0m; notes payable $21.0m; junior subordinated debentures $12.4m; and subordinated notes $11.8m. The company issued $12m of 10-year subordinated notes at a 5% fixed rate; these qualify as Tier 2 capital. Bank capital ratios were 13.1% total, 12.0% Tier 1 and CET1, and 9.7% leverage; the bank met “well-capitalized” thresholds. Company ratios were 15.2%, 12.9%, 9.1% and 10.4%, respectively.
Material changes and management commentary
- First-half net income rose about 26%; diluted EPS increased from $1.08 to $1.36. Higher noninterest income and lower credit provision more than offset slightly higher expenses and modest net interest income growth.
- Q2 net interest income fell about 7% year over year. Management attributed the decline mainly to lower loan yields and less acquired-loan discount accretion than in Q2 2014; higher earning-asset volume partly offset the rate impact. Management cautioned that low reinvestment rates and the eventual decline of acquired-loan accretion could pressure margins.
- First-half noninterest income increased 35%, including $0.95m of net gains on asset sales or writedowns. Excluding those gains, it grew 26.5%, led by mortgage income, which rose to $1.86m as mortgage originations increased to $105m from $33m. Q2 gains included $0.6m from investment sales and approximately $0.2m from OREO resolutions.
- First-half noninterest expense increased 2.4%, with salaries and benefits up 6.4% and data processing up 12.6%; management cited pay and incentive costs, higher stock compensation, account growth and fraud software. Several other expense categories declined.
- On July 21, 2015, the board expanded the common-share repurchase authorization by $6m, to a total of up to $18m and 800,000 shares. Through June 30, the company had repurchased 390,595 shares for $9.4m. On August 7, 2015, the bank sold two Wisconsin branches; the buyer assumed $38m of deposits and purchased $13m of loans and other assets, producing an approximately $0.2m gain.
- No earnings guidance is provided in the supplied filing text. Management identified interest-rate, economic, competitive, regulatory, operational and acquisition-integration risks. It stated the allowance was appropriate but warned that changed economic conditions, borrower performance, collateral values or regulatory reviews could require additional provisions. The 1% preferred-stock dividend rate is scheduled to increase to 9% effective March 1, 2016 if the shares are not redeemed.
- Interest-rate simulations estimated one-year net interest income changes of -2.0%, -1.0%, -0.1% and -0.2% under -200, -100, +100 and +200 basis-point scenarios, respectively; management cautioned that actual results may differ. No material change in risk factors was reported, and management stated disclosure controls were effective.
Important facts for investors to verify
- Whether recurring fee growth, particularly mortgage income, can continue and offset the Q2 decline in net interest income and margin.
- How the rise in potential problem loans and the allowance’s coverage compare with subsequent credit performance, especially in commercial and construction lending and acquired loans.
- The sustainability of deposit funding and liquidity after the reported $60m first-half deposit decline, including the effects of the branch sale and available borrowing capacity.
- The impact of new subordinated debt costs, the preferred dividend step-up in 2016, share repurchases and the expanded repurchase authorization on earnings and capital.
- The filing’s nonperforming-asset ratio is not fully consistent across its text: the performance discussion cites 0.44% at June 30, while another passage cites 0.48%; verify the intended measure and denominator against the underlying statements.