Nicolet(NIC) - 2019 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION Financial Statements This section presents the unaudited consolidated financial statements for Nicolet Bankshares, Inc. as of September 30, 2019, including balance sheets, income statements, and cash flows Consolidated Balance Sheets Total assets increased to $3.11 billion driven by higher net loans, while liabilities decreased and equity grew to $428.7 million Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2019 (Unaudited) | Dec 31, 2018 (Audited) | | :--- | :--- | :--- | | Total Assets | $3,105,671 | $3,096,535 | | Cash and cash equivalents | $143,969 | $249,526 | | Loans, net | $2,229,311 | $2,153,028 | | Total Liabilities | $2,676,929 | $2,709,183 | | Total deposits | $2,584,447 | $2,614,138 | | Long-term borrowings | $57,495 | $77,305 | | Total Stockholders' Equity | $428,742 | $387,352 | Consolidated Statements of Income Net income for the nine months ended September 30, 2019, significantly increased to $42.3 million, driven by higher net interest and noninterest income, with diluted EPS rising to $4.36 Income Statement Summary (in thousands, except per share data) | Metric | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net Interest Income | $85,609 | $79,619 | | Provision for loan losses | $900 | $1,360 | | Total Noninterest Income | $40,058 | $29,712 | | Total Noninterest Expense | $71,373 | $68,137 | | Net Income Attributable to Nicolet | $42,346 | $30,173 | | Diluted EPS | $4.36 | $3.02 | Q3 Income Statement Summary (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net Interest Income | $29,190 | $26,942 | | Total Noninterest Income | $12,312 | $10,649 | | Net Income Attributable to Nicolet | $13,530 | $10,859 | | Diluted EPS | $1.40 | $1.09 | Consolidated Statements of Cash Flows Cash and cash equivalents decreased by $105.6 million for the nine months ended September 30, 2019, primarily due to net cash used in investing and financing activities Cash Flow Summary (in thousands) | Activity | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net cash from Operating Activities | $36,505 | $40,553 | | Net cash from Investing Activities | ($77,003) | ($68,295) | | Net cash from Financing Activities | ($65,059) | $33,964 | | Net (decrease) increase in cash | ($105,557) | $6,222 | | Cash at beginning of period | $249,526 | $154,933 | | Cash at end of period | $143,969 | $161,155 | Notes to Unaudited Consolidated Financial Statements This section details financial statement notes, including the pending Choice Bancorp acquisition, loan portfolio analysis, and new lease accounting standard adoption - The company adopted ASU 2016-02, Leases (Topic 842), on January 1, 2019, which resulted in the recognition of a right-of-use (ROU) asset and a lease liability of approximately $5 million, with no impact on the income statement or cash flows[31][32] - On June 26, 2019, Nicolet entered into a merger agreement with Choice Bancorp, Inc., which received all regulatory approvals by September 17, 2019, and is expected to close on November 8, 2019, with Choice having total assets of $436 million at September 30, 2019[35][36][37] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance for the nine months ended September 30, 2019, highlighting net income growth, asset quality, and key balance sheet trends - Net income for the first nine months of 2019 was $42.3 million, a 40% increase from $30.2 million in the prior year period, with diluted EPS rising 44% to $4.36[142] - A significant contributor to 2019 income was the sale of 80% of an equity investment in UFS, LLC, which resulted in a $7.4 million after-tax gain, partially offset by a $2.0 million after-tax cost for retirement-related compensation[144] - Asset quality remains strong, with nonperforming assets at 0.34% of total assets as of September 30, 2019[144] Net Interest Income Tax-equivalent net interest income increased to $86.4 million for the first nine months of 2019, expanding the net interest margin to 4.17% due to favorable loan volumes and rates Net Interest Margin Analysis (Nine Months Ended Sep 30) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Tax-Equivalent Net Interest Income | $86,395 thousand | $80,491 thousand | | Average Interest-Earning Assets | $2,733,870 thousand | $2,664,081 thousand | | Yield on Earning Assets | 4.99% | 4.67% | | Cost of Interest-Bearing Liabilities | 1.17% | 0.92% | | Net Interest Margin | 4.17% | 3.99% | Provision for Loan Losses The provision for loan losses decreased to $0.9 million for the nine months ended September 30, 2019, reflecting strong asset quality, with the ALLL at 0.61% of total loans - Provision for loan losses for the first nine months of 2019 was $0.9 million, compared to $1.4 million for the same period in 2018[159] Noninterest Income Noninterest income increased by 35% to $40.1 million for the first nine months of 2019, driven by an equity investment gain and higher net mortgage income Noninterest Income Breakdown (in thousands) | Category | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | % Change | | :--- | :--- | :--- | :--- | | Mortgage income, net | $6,962 | $4,510 | 54% | | Brokerage fee income | $5,925 | $5,074 | 17% | | Card interchange income | $4,815 | $4,082 | 18% | | Asset gains (losses), net | $8,030 | $1,322 | N/M | | Total Noninterest Income | $40,058 | $29,712 | 35% | Noninterest Expense Noninterest expense rose 5% to $71.4 million for the first nine months of 2019, primarily due to increased personnel costs, including one-time retirement-related compensation - Personnel expense increased by $2.7 million (7%) year-over-year, with $2.75 million of the increase attributable to one-time retirement-related compensation actions in Q2 2019[169] - Intangibles amortization decreased by $0.4 million (12%) due to the aging of intangibles from previous acquisitions[172] BALANCE SHEET ANALYSIS As of September 30, 2019, total assets were $3.1 billion, with strong loan growth to $2.2 billion, and stockholders' equity increased to $428 million Loan Composition (in thousands) | Loan Category | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Commercial-based loans | $1,713,143 | $1,639,593 | | Retail-based loans | $529,788 | $526,588 | | Total loans | $2,242,931 | $2,166,181 | Deposit Composition (in thousands) | Deposit Category | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Noninterest-bearing demand | $782,968 | $753,065 | | Money market & interest-bearing demand | $1,079,233 | $1,163,369 | | Savings | $329,122 | $294,068 | | Time | $393,124 | $403,636 | | Total deposits | $2,584,447 | $2,614,138 | Nonperforming Assets (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total nonperforming loans | $9,238 | $5,471 | | Total OREO | $1,325 | $420 | | Total nonperforming assets | $10,563 | $5,891 | | Nonperforming assets to total assets | 0.34% | 0.19% | Capital The company maintained strong capital levels, exceeding 'well-capitalized' thresholds, with the Tier 1 leverage ratio improving to 11.3%, and repurchased $15.3 million in common stock Company Regulatory Capital Ratios | Ratio | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Common equity tier 1 capital ratio | 11.4% | 10.7% | | Tier 1 capital ratio | 12.6% | 11.9% | | Total capital ratio | 13.5% | 12.9% | | Tier 1 leverage ratio | 11.3% | 10.4% | - The company repurchased 263,053 shares for $15.3 million during the first nine months of 2019, with $24.4 million remaining authorized under the repurchase program as of September 30, 2019[220] Future Accounting Pronouncements The company is preparing to adopt the CECL standard on January 1, 2020, anticipating a material impact and an estimated 40-60% increase to aggregate reserve levels - The company will adopt the new CECL standard (ASU 2016-13) on January 1, 2020[225] - Nicolet estimates a 40-60% increase to its aggregate reserve levels upon adoption of CECL, though this estimate is subject to change based on economic conditions and portfolio changes by the adoption date[225] Quantitative and Qualitative Disclosures About Market Risk The company is asset-sensitive, projecting a 1.0% increase in net interest income in a +100 bps rate scenario and a 1.2% decrease in a -100 bps scenario Interest Rate Sensitivity Analysis (Projected Change in NII over 1 year) | Rate Change Scenario | Impact as of Sep 30, 2019 | | :--- | :--- | | +200 bps | +2.1% | | +100 bps | +1.0% | | -100 bps | -1.2% | | -200 bps | -2.3% | Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2019, with no material changes to internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2019[227] PART II OTHER INFORMATION Legal Proceedings The company and its subsidiaries are not currently involved in any material legal proceedings that would adversely affect financial condition or operations - There are no material legal proceedings currently underway[230] Risk Factors No material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2018 were reported - No material changes to risk factors were reported[231] Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2019, the company repurchased 14,771 shares at an average price of $63.57 per share, including 9,300 shares under its publicly announced program Common Stock Purchases (Q3 2019) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 2019 | 5,057 | $63.98 | | August 2019 | 7,447 | $61.99 | | September 2019 | 2,267 | $67.81 | | Total Q3 | 14,771 | $63.57 |