Nicolet Bankshares, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; interim financial statements are unaudited. Nicolet is a Wisconsin community bank holding company. Comparisons with 2012 and year-end 2012 are materially affected by the April 26, 2013 acquisition of Mid-Wisconsin Financial Services. Mid-Wisconsin’s results are included only from the acquisition date.
Financial performance
- Second quarter: Net income was $11.5 million, versus $0.6 million a year earlier; diluted EPS was $2.78 versus $0.09. Results included a $10.4 million bargain-purchase gain and approximately $1.5 million of nonrecurring merger costs.
- First half: Net income was $12.3 million versus $1.2 million; net income available to common shareholders was $11.6 million, or $3.11 diluted EPS, versus $0.5 million, or $0.16. The half-year included the $10.4 million gain and approximately $1.7 million of merger-related costs. The gain was tax-free and materially reduced the reported effective tax rate.
- Net interest income: $8.8 million in Q2 and $14.6 million for the first half, up 65% and 40%, respectively, year over year. On a taxable-equivalent basis, first-half net interest margin was 3.74% versus 3.54%; Q2 margin was 3.92% versus 3.69%. Growth reflected the larger acquired balance sheet and lower funding costs, while yields on earning assets declined year over year.
- Other income and expenses: First-half noninterest income was $16.5 million, including the bargain-purchase gain; excluding that gain, it increased about $0.8 million year over year. Noninterest expense rose 35% to $15.9 million, reflecting added operations and merger costs.
- Credit costs: First-half provision for loan losses was $2.0 million, compared with $2.4 million; net charge-offs were $1.4 million versus $2.2 million. The allowance was $7.7 million, or 0.91% of loans, down from 1.29% at year-end. Acquired loans were recorded at fair value without an acquisition-date allowance.
Financial condition, funding and capital
- Scale and lending: Total assets were $1.088 billion, up from $745 million at December 31, 2012. Loans were $840.5 million versus $552.6 million; the acquisition added $272 million of loans. Deposits were $908.1 million versus $616.1 million; the acquisition added $346 million of deposits. Nicolet’s branch network expanded from 11 to 22 locations.
- Liquidity and cash flow: Cash and cash equivalents were $36.1 million, down from $82.0 million at year-end. First-half operating cash flow was $11.6 million, investing cash flow was positive $37.3 million, and financing cash flow was negative $94.7 million; cash declined $45.9 million. Management stated liquidity was sufficient to fund loans and other needs. Deposit changes in the cash-flow statement reflect acquisition and other cash flows and should not be read as the balance-sheet deposit movement alone.
- Debt: At June 30, short-term borrowings were $33.2 million, notes payable $25.0 million, and junior subordinated debentures $12.0 million. Mid-Wisconsin borrowings were largely repaid during the quarter. Deposits remained the primary funding source.
- Asset quality: Nonperforming loans were $14.3 million and nonperforming assets $17.7 million, versus $7.0 million and $7.2 million at year-end; nonperforming assets were 1.62% of total assets. The filing attributes most of the increase to acquired loans, including $10.6 million of acquired nonaccrual loans. Potential problem loans were $16.2 million.
- Capital: Nicolet reported a 13.2% total capital ratio, 12.3% Tier 1 ratio and 10.7% leverage ratio at June 30. The bank subsidiary’s respective ratios were 12.1%, 11.2% and 9.8%. Management said minimum requirements were maintained, while the larger post-merger asset base reduced capital ratios. The company also had $24.4 million of preferred stock under the Treasury’s Small Business Lending Fund.
Changes, outlook and risks
- The Mid-Wisconsin transaction was accounted for as a business combination. The $10.4 million bargain-purchase gain arose from estimated net assets acquired of $20.6 million less consideration of $10.2 million. Fair values remained subject to refinement during the measurement period of up to one year.
- Management expected operating savings and other synergies from the acquisition but provided no quantified earnings guidance. Pro forma results are illustrative, not forecasts.
- Management cited continuing margin pressure in a prolonged low-rate environment. Its interest-rate simulation estimated net interest income would decline 6.19% over 12 months under a 100-basis-point rate increase and 0.33% under a 100-basis-point decrease, before any management action.
- Key risks include acquired-loan valuation and credit performance, integration and realization of merger synergies, commercial real estate and other credit exposures, economic and collateral-value changes, interest-rate sensitivity, competition, and banking regulation, including Basel III implementation. Management noted that regulatory capital rules were scheduled to take effect beginning in 2015 and that their impact was still being assessed.
- Subsequent event: On August 9, 2013, Nicolet National Bank agreed to purchase certain assets and assume certain liabilities of a failed one-branch bank in Wausau; approximately $29.9 million of assets were acquired, subject to final settlement.
- Management reported disclosure controls were effective. The company disclosed no legal proceedings expected to have a material adverse effect and no formal earnings guidance.
Most important facts for investors to verify
- How much reported earnings and EPS depend on the one-time bargain-purchase gain, and the ongoing cost and savings profile after integration.
- Final purchase accounting marks, acquired-loan cash-flow assumptions, and whether acquired nonaccrual loans require future provisions or charge-offs.
- Underlying asset quality and reserve adequacy, especially given the 0.91% allowance-to-loans ratio and the acquisition-related increase in nonperforming assets.
- Post-acquisition loan and deposit growth, liquidity, funding mix, and capital ratios, including the effect of the subsequent failed-bank transaction.
- Actual net interest income performance if rates rise or fall, compared with management’s modeled sensitivity and assumptions.