Nicolet Bankshares, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; unaudited. Nicolet is a Wisconsin-based bank holding company serving northeastern and central Wisconsin and Menominee, Michigan. Comparisons with 2020 are affected by the August 2020 Advantage acquisition, which contributed to 2021 results but not the comparable 2020 periods.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $35.6 million | $31.5 million | $69.2 million | $62.8 million |
| Provision for credit losses | $0 | $3.0 million | $0.5 million | $6.0 million |
| Noninterest income | $20.2 million | $17.5 million | $37.3 million | $27.1 million |
| Noninterest expense | $30.7 million | $27.8 million | $56.8 million | $51.7 million |
| Net income attributable to Nicolet | $18.3 million | $13.5 million | $36.5 million | $24.0 million |
| Diluted EPS | $1.77 | $1.28 | $3.52 | $2.25 |
| Net interest margin | 3.45% | 3.21% | 3.38% | 3.53% |
Q2 net income increased 36% year over year; first-half net income increased 52%. First-half net interest income rose 10%, mainly reflecting lower funding costs and higher average asset volumes. The six-month margin declined 15 basis points as elevated cash balances and the low-rate environment weighed on asset yields. The Q2 margin improved year over year.
First-half noninterest income increased 38%, including $4.9 million of net asset gains versus $1.4 million of losses in the 2020 period. Excluding those gains and losses, noninterest income grew 14%, supported by wealth-management and card-interchange income. Noninterest expense rose 10%; higher personnel expense, FDIC assessments and other costs were partly offset by lower marketing and occupancy expenses. The efficiency ratio was 59.37% in Q2 and 55.66% for the first half.
Financial condition, cash flow and capital
- At June 30, 2021, total assets were $4.59 billion, loans $2.82 billion, deposits $3.94 billion and stockholders’ equity $559.4 million. From year-end 2020, assets rose 1%, loans 1% and deposits 1%.
- Cash and cash equivalents were $792.4 million, approximately 17% of assets. Six-month operating cash flow was $43.0 million; investing cash use was $57.6 million; financing cash provided was $4.1 million.
- Long-term borrowings were $45.1 million, down from $53.9 million at year-end; no short-term borrowings were outstanding. On July 7, 2021, Nicolet issued $100 million of 3.125% fixed-to-floating subordinated notes due 2031.
- The loan-loss allowance was $32.6 million, or 1.15% of loans (1.22% excluding PPP loans). Nonperforming assets were $9.8 million, or 0.21% of assets, versus $13.1 million and 0.29% at year-end. Net charge-offs were minimal; management recorded no credit-loss provision in Q2.
- Customer deposits were 94% of total deposits; brokered deposits were 6%. Management reported $175 million of unused Federal funds lines and $206 million of available FHLB borrowing capacity, and considered liquidity sufficient.
- At June 30, company capital ratios included a 13.4% total risk-based capital ratio and 12.0% common equity Tier 1 ratio. The Bank’s ratios were 11.4% and 10.8%, respectively; management said the Bank qualified as well-capitalized.
- Nicolet repurchased $16.6 million of stock during the first half. Tangible book value per share was $39.18, compared with $35.30 at June 30, 2020.
Material changes, outlook and risks
- PPP loan balances declined to $150 million from $186 million at year-end as forgiveness exceeded new originations. Management said forgiveness improved borrower equity and credit quality; PPP loans are SBA-guaranteed.
- Nonaccrual loans fell to $6.9 million from $9.5 million at year-end. Only one loan remained under a temporary pandemic-related payment modification at June 30, 2021.
- Q2 asset gains included a $3.5 million favorable mark associated with an equity investment’s IPO. Other expense included a $2.1 million contract-termination charge. Mortgage income fell 44% year over year in Q2 as mortgage-sale gains declined with lower secondary-market volume.
- Nicolet’s Mackinac merger had shareholder approval and regulatory approvals by July 19, with a Q3 2021 expected close, subject to customary conditions. The County Bancorp merger was expected to close in Q4, subject to regulatory and shareholder approvals. Each transaction contemplated approximately 80% stock and 20% cash consideration.
- The filing gives no earnings or revenue guidance. Management cited continued margin and loan-pricing pressure, pandemic and economic uncertainty, changing interest rates, credit conditions, and execution and timing risks for the pending acquisitions. It reported no material change in previously disclosed risk factors and no legal proceedings expected to materially harm results or financial position.
Key facts for investors to verify
- Whether the Mackinac and County mergers close on the expected timelines and on the disclosed terms.
- How sustainable earnings are after separating recurring fee income from investment gains, including the IPO-related mark.
- Whether net interest margin stabilizes as cash levels, deposit pricing and market rates change.
- Whether credit quality and the $32.6 million allowance remain adequate as pandemic support and PPP forgiveness effects unwind.
- The impact of the $100 million subordinated-note issuance, share repurchases and acquisition funding on capital and future interest expense.