Nicolet Bankshares, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are primarily against December 31, 2019. Nicolet is a Wisconsin-based bank holding company. Results include a full quarter of Choice Bancorp, acquired in November 2019, unlike Q1 2019.
Financial performance and position
- Earnings: Net income was $10.7 million, up 3% from $10.4 million in Q1 2019. Net income attributable to Nicolet was $10.6 million. Diluted EPS was $0.98 versus $1.05, as diluted weighted-average shares increased 11% to 10.8 million.
- Interest income and margin: Net interest income rose 14% to $31.3 million, primarily on higher loan volumes, including Choice. Net interest margin was 3.94%, down 11 basis points year over year; lower asset yields more than offset reduced funding costs.
- Credit costs: Provision for credit losses was $3.0 million, compared with $0.2 million in Q1 2019. The allowance for credit losses was $26.2 million, or 1.00% of loans, versus $14.0 million, or 0.54%, at year-end. The increase reflects both CECL adoption and pandemic-related economic uncertainty.
- Noninterest income and expense: Noninterest income increased 4% to $9.6 million; excluding net asset losses, it increased 14% to $10.2 million. Noninterest expense rose 5% to $23.9 million. Q1 included $0.7 million of net asset losses, mainly from market movements in equity securities.
- Loans and deposits: Total loans were $2.61 billion, up 1% from year-end; deposits were $3.02 billion, up 2%. Brokered deposits increased $121 million as part of liquidity actions, while core customer deposits declined $52 million.
- Liquidity and cash flow: Cash and cash equivalents were $242.0 million, up from $182.1 million at year-end. Operating cash flow was $12.2 million; investing activities used $97.2 million and financing activities provided $144.9 million, resulting in a $59.9 million net cash increase. Management said liquidity resources were sufficient.
- Debt and capital: Short- and long-term borrowings totaled $157.7 million, versus $67.6 million of long-term borrowings and no short-term borrowings at year-end. The Bank remained well-capitalized; its total capital ratio was 11.2%. Company total capital ratio was 13.3%. Stockholders’ equity was $511.0 million, down $5.3 million since year-end, mainly due to CECL adoption and share repurchases.
- Other metrics: Total assets were $3.73 billion, up 4% since year-end. Return on average assets was 1.19%; nonperforming loans were 0.57% of loans and nonperforming assets were 0.42% of assets.
Material changes and unusual items
- Q1 2020 earnings and balance-sheet comparisons reflect Choice, which added $348 million of loans and $289 million of deposits at acquisition. Year-over-year asset growth was 23%, while loan and deposit growth was 19% each.
- Nicolet adopted CECL on January 1, 2020, recording a $6.2 million cumulative reduction to retained earnings and a $9.3 million increase to the loan allowance, including the initial allowance on purchased credit-deteriorated loans. The new model uses expected lifetime losses and forward-looking forecasts.
- COVID-19 prompted a larger credit provision, increased liquidity, operational changes to protect employees and customers, and elimination of senior management incentive accruals for the quarter. The company repurchased and retired approximately 207,000 shares for $13.9 million, then suspended its repurchase program on March 21.
- Mortgage activity benefited from refinancing-related loan sales, but volatile rates and higher prepayments led to mortgage derivative losses and a $0.2 million MSR valuation allowance. Management reported no goodwill or other intangible impairment indicated at quarter-end, while noting pandemic effects remained evolving.
Outlook, risks, and contingencies
- The filing provides no quantified earnings or full-year guidance. Management expected COVID-19 effects to continue weighing on margins, credit costs, fee income, and expenses, with possible unusual loan and deposit volume or pricing effects.
- Management identified a collective exposure to restaurants, retail, arts, recreation, tourism, and other hospitality businesses of approximately 15% of loans. It had begun customer discussions and temporary payment modifications; the extent to which PPP participation would mitigate credit risk was uncertain.
- Two acquisitions were pending: Commerce Financial Holdings, with an expected Q3 2020 close only if Nicolet’s share price met the merger agreement’s $62 collar and other conditions were met; management said it expected to exercise its termination right if the share price remained below the collar. Advantage Community Bancshares, an all-cash transaction with undisclosed terms, was expected to close in Q3, subject to approvals and customary conditions.
- Additional risks include pandemic severity and duration, borrower performance, market volatility, interest-rate changes, regulatory responses, and the judgment inherent in CECL estimates. Management disclosed no legal proceedings expected to have a material adverse effect and no material changes to previously reported risk factors other than the COVID-19 risk.
Most important facts for investors to verify
- How subsequent economic conditions, loan payment deferrals, and PPP participation affect credit quality, charge-offs, and the $26.2 million allowance.
- Whether net interest margin and funding costs hold up after the Federal Reserve’s March rate cuts and the increased reliance on brokered deposits and borrowings.
- Whether asset quality deteriorates, particularly in the disclosed pandemic-sensitive business exposure; potential problem loans had risen to $34.6 million from $22.6 million at year-end.
- Whether the Commerce and Advantage transactions close, are terminated, or have revised terms, and how any outcome affects capital and growth plans.
- Whether mortgage gains, MSR valuations, and equity-related market losses remain unusual or recur in subsequent quarters.