Nicolet Bankshares, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Financial statements are unaudited. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise indicated.
Business context and reporting period
Nicolet is a Wisconsin bank holding company providing banking and wealth-management services through 23 branches in northeastern and central Wisconsin and Menominee, Michigan. The 2014 results include the Mid-Wisconsin and Bank of Wausau acquisitions for the full period; 2013 comparisons include only partial periods from those acquisitions. Comparisons are also affected by acquisition-related bargain purchase gains and costs recorded in 2013.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net interest income | 2014: $10.9; 2013: $11.8 | 2014: $31.4; 2013: $26.4 |
| Net income | 2014: $2.8; 2013: $2.9 | 2014: $7.6; 2013: $15.2 |
| Net income available to common shareholders | 2014: $2.7; 2013: $2.6 | 2014: $7.4; 2013: $14.2 |
| Diluted earnings per common share | 2014: $0.63; 2013: $0.62 | 2014: $1.70; 2013: $3.65 |
| Tax-equivalent net interest margin | 2014: 4.17%; 2013: 4.63% | 2014: 3.91%; 2013: 4.09% |
Balance sheet at September 30, 2014: Total assets were $1.170 billion, loans were $865.1 million, deposits were $1.012 billion, and stockholders’ equity including noncontrolling interest was $109.7 million. The allowance for loan losses was $10.1 million, or 1.16% of loans.
Cash flow, nine months: Operating activities provided $10.3 million; investing activities used $46.0 million; financing activities used $44.1 million. Cash and cash equivalents fell $79.8 million to $67.2 million.
Debt and liquidity: There were no short-term borrowings at quarter-end. Notes payable were $22.2 million and junior subordinated debentures were $12.3 million. Management stated liquidity was sufficient to fund loans and other cash needs. Approximately $51 million of securities were pledged. The company reported regulatory capital ratios for Nicolet National Bank of 13.5% total capital, 12.4% Tier 1 capital, and 9.4% leverage.
Material changes versus comparable periods
- Third-quarter net income was slightly lower year over year, while diluted EPS increased to $0.63 from $0.62. Net interest income and margin declined, with management attributing the income pressure mainly to lower loan yields, including the absence of approximately $1 million of favorable acquired-loan resolutions in Q3 2013.
- Nine-month net income fell to $7.6 million from $15.2 million. The 2013 period included $11.9 million of bargain purchase gains and higher asset-sale gains. Excluding bargain purchase gains and net gains on asset sales, nine-month noninterest income increased 9.7% to $9.8 million.
- Nine-month net interest income rose 19%, predominantly because 2014 included the acquired businesses for longer. Tax-equivalent margin nevertheless declined 18 basis points to 3.91%, as earning-asset yield fell more than funding costs improved.
- Loans increased 2% from December 31, 2013; deposits decreased 2% over that period, which management described as a customary seasonal pattern. Average organic loan and deposit growth for the nine-month comparison was approximately 3% and 8%, respectively, excluding acquired balances.
- Nonperforming assets declined to $7.8 million from $12.3 million at year-end 2013 and $21.3 million a year earlier. Nonaccrual loans were $6.9 million, down from $10.3 million at year-end.
Outlook, commentary, risks, and unusual items
- No specific earnings or financial guidance was provided. Management noted ongoing margin pressure in the prolonged low-rate environment and said favorable purchase-accounting accretion on acquired loans may diminish over time.
- Management considered the allowance for loan losses appropriate. The allowance rose from $9.2 million at year-end; nine-month provision was $2.0 million and net charge-offs were $1.2 million. Changes in economic conditions, collateral values, borrower performance, or regulatory assessments could require additional provision.
- Potential problem loans were $16.3 million, or 1.9% of loans. The loan portfolio is concentrated in the company’s local markets and is exposed to local economic conditions and collateral values. Commercial-based loans represented approximately 74% of the portfolio.
- Interest-rate simulation estimated net interest income would decline 1.7% under an immediate 100-basis-point rate increase and 2.9% under a 100-basis-point decrease over 12 months. These estimates exclude possible management actions and other market or customer behavior changes.
- Five troubled debt restructurings totaled $4.2 million at quarter-end. The largest was a performing $3.8 million loan classified as impaired, with a specific reserve of approximately $389,000. Management reported no legal proceedings expected to have a material adverse effect.
- The company repurchased 187,543 shares for $4.0 million during the first nine months under a $6 million authorization. A Form S-3 effective October 21, 2014 registered up to $50 million of securities for possible future issuance; the filing does not indicate that this amount was issued.
- Management said Basel III requirements beginning in 2015 were not expected to pose a material risk based on current capital levels and composition. Disclosure controls were deemed effective, with no material changes to internal controls reported for the quarter.
Most important facts for investors to verify
- How much of year-over-year earnings and balance-sheet growth reflects acquisition timing, and how results compare excluding acquisition gains, expenses, and purchase-accounting effects.
- Whether net interest margin and loan yields stabilize, particularly as acquired-loan accretion declines and deposit funding costs change.
- Credit quality trends, including the allowance, nonaccrual and potential problem loans, troubled debt restructurings, and concentrations in commercial and construction lending.
- Liquidity and funding trends, including deposit composition, brokered deposits, pledged securities, and the effect of the decline in cash balances.
- Capital and shareholder funding decisions, including the $6 million repurchase authorization, the $24.4 million Treasury preferred stock, and any future use of the $50 million shelf registration.