Nicolet Bankshares, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Nicolet is a Wisconsin-based bank holding company providing banking and wealth-management services. Unless noted otherwise, amounts are in U.S. dollars.
Financial results and position
| Metric | Q2 2020 / June 30, 2020 | Comparable period / prior date |
|---|---|---|
| Net interest income | $31.5 million | Q2 2019: $28.9 million |
| Provision for credit losses | $3.0 million | Q2 2019: $0.3 million |
| Net income attributable to Nicolet | $13.5 million; diluted EPS $1.28 | Q2 2019: $18.5 million; diluted EPS $1.91 |
| Net interest margin | 3.21% | Q2 2019: 4.28% |
| Assets | $4.54 billion | December 31, 2019: $3.58 billion |
| Loans / allowance for credit losses | $2.82 billion / $29.1 million | December 31, 2019: $2.57 billion / $14.0 million |
| Deposits / cash and cash equivalents | $3.54 billion / $822.7 million | December 31, 2019: $2.95 billion / $182.1 million |
| Long-term borrowings | $417.8 million | December 31, 2019: $67.6 million |
| Nicolet stockholders’ equity | $532.0 million | December 31, 2019: $516.3 million |
For the six months, net interest income was $62.8 million, up 11% year over year; net income attributable to Nicolet was $24.0 million, down 17%, and diluted EPS was $2.25 versus $2.97. Six-month net interest margin was 3.53% versus 4.16%. Mortgage income rose to $12.3 million from $3.3 million, while total noninterest income was $27.1 million versus $27.7 million.
Six-month cash flows were $20.2 million from operations, negative $299.1 million from investing, and positive $919.6 million from financing, resulting in a $640.6 million increase in cash and cash equivalents. The company reported no short-term borrowings. The $417.8 million of long-term borrowings included $336.0 million under the Federal Reserve’s Paycheck Protection Program Liquidity Facility (PPPLF).
At June 30, the allowance was 1.03% of total loans, or 1.17% excluding PPP loans. Nonaccrual loans were $12.0 million; nonperforming assets were $13.0 million, or 0.29% of assets. The Bank’s regulatory capital ratios qualified it as well-capitalized: total capital 11.6%, common equity Tier 1 11.0%, and Tier 1 leverage 8.5%.
Material changes and business developments
- Assets increased 27% from year-end, with cash up $640.6 million and deposits up $583.4 million. Loans grew $247.8 million; $329.2 million of PPP loans more than offset declines in other loan balances.
- Average loan volume, including Choice acquisition balances and PPP loans, supported higher net interest income. However, Federal Reserve rate cuts and a larger low-yielding cash balance pressured asset yields and margins; Q2 net interest margin fell 107 basis points year over year.
- Nicolet originated approximately $340 million of PPP loans for nearly 2,550 business customers. These SBA-guaranteed loans had a low 1% coupon; the company received $12.2 million in processing fees, deferred and accreted over the loan lives, and recognized $1.1 million in Q2 interest income from those fees.
- Mortgage activity benefited from strong refinancing demand. Management reported nearly 1,500 mortgage loans processed in Q2 and record mortgage income for the first half.
- The 2020 results include Choice, acquired in November 2019; 2019 comparable periods do not. Choice added $457 million in assets at acquisition.
Outlook, management commentary, and risks
- Management said pandemic effects and their duration remained uncertain and expected continued pressure on margins, with potential unusual impacts on loan and deposit volumes or pricing. The filing provides no quantified earnings or revenue guidance.
- In response to COVID-19, Nicolet recorded $6.0 million of first-half credit-loss provision, including $3.0 million in each quarter. Management cited limited forward visibility and economic uncertainty; credit metrics had not materially deteriorated by Q2.
- Nicolet adopted CECL on January 1, 2020, recording an $8.5 million increase to the loan allowance and a $6.2 million cumulative reduction to retained earnings. The initial allowance also included a $0.8 million PCD-loan component.
- Over 900 loans totaling $447 million received payment modifications. As of July 9, 24% had returned to normal payments, 11% received a further interest-only extension, and the remainder were expected to complete initial modifications by early September.
- The company permanently closed seven of its 39 branches in Q2, reducing headcount by 56. Q2 included $1.7 million of branch-closure costs; management also reported $0.6 million of pandemic-related safety and on-site employee costs. First-half noninterest expense included $4.0 million of one-time costs related to closures, safety efforts, the micro-grant program, and termination of the Commerce merger.
- Nicolet provided $1.25 million in micro-grants to 325 customers. It mutually terminated the Commerce merger agreement in May, paid $0.5 million, and wrote off its $0.1 million Commerce investment. The pending Advantage acquisition had regulatory and shareholder approvals; management expected closing on August 21, 2020, subject to closing conditions.
- Liquidity actions included obtaining approximately $200 million of brokered deposits in March–April. Management said liquidity was sufficient; additional disclosed capacity included $175 million of unused Federal funds lines and $164 million of FHLB borrowing capacity. The share-repurchase program was suspended March 21; $7.1 million remained authorized.
- COVID-19, economic and credit conditions, interest rates, regulatory developments, and execution of acquisition plans were identified as risks. Management reported no material legal proceedings and no material changes to other previously disclosed risk factors.
Q2 and first-half comparisons are affected by unusual 2019 items: the second quarter and first half of 2019 included a $7.4 million gain from selling most of an equity interest in a data-processing business, partly offset by $2.75 million of retirement-related compensation. Accordingly, reported year-over-year profit comparisons do not reflect only ongoing operating trends.
Important facts for investors to verify
- How the pandemic, loan modifications, and the economic outlook affect future credit losses, criticized loans, and the adequacy of the $29.1 million allowance.
- Whether mortgage refinancing and fee income remain elevated, and how deferred PPP fees are recognized as loans are forgiven or repaid.
- The sustainability of net interest margin amid low rates, high cash balances, deposit repricing, and brokered funding costs.
- Whether deposit and liquidity levels normalize, and how PPPLF borrowings change as PPP loans are forgiven or mature.
- Completion and integration of the Advantage acquisition, and any further branch-closure, restructuring, or merger-related costs.
- Capital and asset-quality trends, including the impact of the CECL estimate and the resumption, if any, of share repurchases.