Nicolet Bankshares, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Amounts are in U.S. dollars; financial amounts below are in millions unless stated otherwise. Nicolet is a regional bank holding company serving Wisconsin and Michigan markets.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $35.2 | $32.6 | $104.4 | $95.3 |
| Provision for credit losses | $6.0 | $3.0 | $6.5 | $9.0 |
| Noninterest income | $14.0 | $18.7 | $51.3 | $45.7 |
| Noninterest expense | $33.1 | $23.7 | $89.9 | $75.4 |
| Net income attributable to Nicolet | $7.8 | $18.1 | $44.3 | $42.1 |
| Diluted earnings per share | $0.73 | $1.72 | $4.22 | $3.97 |
| Net interest margin | 2.94% | 3.06% | 3.22% | 3.35% |
Third-quarter net income fell substantially year over year, reflecting lower mortgage income, higher operating and merger-related expenses, a larger credit-loss provision, and a net loss on asset marks. For the first nine months, net income and diluted EPS increased despite higher expenses; net interest income and total noninterest income grew, with the latter including favorable asset gains.
Balance sheet, cash flow, and capital
- At September 30, 2021, total assets were $6.41 billion, loans were $3.53 billion, deposits were $5.43 billion, and stockholders’ equity was $729 million. Assets, loans, and deposits rose sharply from year-end 2020, substantially due to the Mackinac acquisition.
- Cash and cash equivalents were $1.35 billion, up from $803 million at year-end. Nine-month operating cash flow was $52 million; investing cash flow was $267 million, including $395 million of net cash received in the Mackinac combination; financing cash flow was $228 million.
- Long-term borrowings totaled $144 million, compared with $54 million at year-end, including $99 million of subordinated notes issued in July. The $100 million notes are due 2031, carry a 3.125% fixed rate for five years, then reset to three-month SOFR plus 0.2375%.
- Management said liquidity was sufficient. Available sources included $175 million of unused Federal funds lines and $219 million of FHLB borrowing capacity. The Bank’s regulatory capital ratios qualified it as well-capitalized.
- Nicolet repurchased $34 million of common stock in the first nine months. At quarter-end, approximately $47 million remained authorized under its repurchase program.
Material changes and asset quality
- Nicolet completed its Mackinac merger on September 3, 2021, issuing approximately 2.34 million shares and paying $49 million cash for a total purchase price of approximately $229 million. Mackinac contributed approximately $1.5 billion of assets, including $930 million of loans and $1.37 billion of deposits. The preliminary purchase-price allocation included $92 million of goodwill and remains subject to adjustment.
- Period-end loans increased 27% from December 31, 2020, while the allowance for loan losses rose to $38.4 million. The allowance equaled 1.09% of loans; year-to-date net charge-offs were $170,000, or 0.01% of average loans on an annualized basis.
- Nonperforming assets were $21.2 million, or 0.33% of assets, versus $13.1 million and 0.29% at year-end. Nonaccrual loans were $16.7 million. Management attributed much of the increase to Mackinac.
- Noninterest margin pressure reflected low rates and a higher proportion of low-yielding cash. The nine-month net interest margin declined 13 basis points year over year, although lower deposit costs helped net interest income rise.
Outlook, commentary, and risks
- The filing provides no formal earnings or financial guidance. Management described continued margin pressure and noted that rates, balance-sheet mix, customer behavior, and economic conditions could affect results.
- Nicolet had a pending County Bancorp merger, with shareholder approvals obtained October 5, 2021. The company expected to close on December 3, subject to customary conditions. County reported $1.5 billion of assets, $1.0 billion of loans, and $1.1 billion of deposits at June 30.
- Nicolet agreed to sell its Birmingham, Michigan branch and related assets and deposits; closing was expected in Q1 2022, subject to regulatory approval and other conditions. Approximately $177 million of loans and $47 million of deposits were associated with the branch at September 30.
- Material sensitivities include COVID-19 and its economic effects, interest-rate changes, credit quality, acquisition integration and execution, regulatory matters, and the completion and timing of announced transactions. Management reported effective disclosure controls and no material change in risk factors from the prior annual report.
- Unusual items included $3.45 million of nine-month merger-related expense, a $2.1 million contract-termination charge in other expense, and $3.7 million of nine-month net asset gains, primarily from favorable equity-security marks. Q3 recorded $1.2 million of net asset losses.
Investor facts to verify
- Whether Mackinac integration, preliminary fair-value measurements, and expected acquisition benefits develop as planned.
- Whether loan delinquencies and nonperforming assets remain manageable, and whether the allowance remains appropriate as the acquired portfolio is integrated.
- How deposit costs, cash levels, loan growth, and interest-rate movements affect future net interest margin.
- Whether County Bancorp and Birmingham transactions close on the stated timelines and on expected terms.
- The sustainability of earnings given lower mortgage activity, elevated expenses, share repurchases, and the effect of asset-value changes.