Nicolet Bankshares, Inc. — FY2021 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2021; it does not provide standalone fourth-quarter results. Nicolet is a community bank operating in Wisconsin and Michigan, with wealth-management and related services. Year-end network: 52 branches. Unless noted, amounts below are in U.S. dollars.
Financial performance and position
| Metric | FY2021 / Dec. 31, 2021 | FY2020 / Dec. 31, 2020 |
|---|---|---|
| Net interest income | $158.0 million | $129.3 million |
| Provision for credit losses | $14.9 million | $10.3 million |
| Noninterest income | $67.4 million | $62.6 million |
| Noninterest expense | $129.3 million | $100.7 million |
| Net income | $60.7 million | $60.5 million |
| Diluted EPS | $5.44 | $5.70 |
| Net interest margin | 3.37% | 3.38% |
| Return on average assets | 1.15% | 1.41% |
| Total assets | $7.70 billion | $4.55 billion |
| Loans | $4.62 billion | $2.79 billion |
| Deposits | $6.47 billion | $3.91 billion |
| Stockholders’ equity | $891.9 million | $539.2 million |
| Cash and cash equivalents | $595.3 million | $802.9 million |
| Long-term borrowings | $216.9 million | $53.9 million |
Net cash provided by operating activities was $97.7 million; investing activities used $370.6 million; and financing activities provided $65.4 million. The company reported ample liquidity, including $85 million of parent-company cash and available unused Federal funds lines of $195 million and FHLB capacity of $355 million at year-end.
The Bank’s regulatory capital ratios were 12.2% total risk-based, 11.6% Tier 1 and CET1, and 10.3% Tier 1 leverage; it qualified as well-capitalized. Nicolet repurchased about 793,000 shares for $61.5 million during 2021. Approximately $69 million remained authorized at year-end. The company said it did not intend to pay cash dividends for the foreseeable future.
Material changes versus the prior year
- Growth was dominated by the September acquisition of Mackinac Financial Corporation and December acquisition of County Bancorp. They added approximately $3.0 billion of assets combined at acquisition; their results are included only from their respective closing dates. Year-end assets rose 69%, loans 66%, and deposits 65%, largely due to these transactions.
- Net interest income increased 22%, primarily from acquired and organic loan growth and lower deposit funding costs. The net interest margin was nearly unchanged, as lower asset yields and elevated cash balances offset funding-cost benefits.
- Net income was essentially flat, while diluted EPS declined from $5.70 to $5.44. Adjusted diluted EPS, a non-GAAP measure, was $6.57 versus $5.94. Management’s adjustments included acquisition-related provision, merger and integration costs, branch costs, and asset gains or losses.
- Noninterest expense increased 28%, reflecting the larger operating base, higher personnel costs, acquisition and integration expense, and other costs. Mortgage income fell 26% from the exceptional mortgage activity of 2020; trust and brokerage fees and card interchange income increased.
- Nonperforming assets rose to $56.1 million, or 0.73% of assets, from $13.1 million, or 0.29%. The increase was largely tied to acquired agricultural nonaccrual loans and closed branch properties. The allowance for loan losses was $49.7 million, or 1.07% of loans, up from $32.2 million; net charge-offs remained low at $0.16 million.
- Accumulated other comprehensive income declined, with 2021 comprehensive income of $51.0 million versus $68.8 million in 2020, reflecting unrealized losses on available-for-sale securities.
Outlook, risks, and unusual items
- Management’s 2022 priorities included integrating the Mackinac and County acquisitions, retaining and developing employees, and pursuing organic growth in loans, deposits, wealth-management fees, and other revenue. No specific earnings or revenue guidance was provided.
- Management described Nicolet as asset sensitive and expected higher interest rates to benefit net interest income over time, while acknowledging that the magnitude was uncertain. Year-end simulation results showed a 0.1% decline in projected one-year net interest income under a 100-basis-point increase and a 0.3% decline under a 200-basis-point increase; actual results may differ.
- COVID-19 aftereffects, inflation, supply-chain disruption, labor pressures, local economic and borrower conditions, interest-rate movements, and real-estate collateral values could affect credit quality, margins, and fee income. Agricultural credit warrants attention: agricultural loans rose to 17% of the portfolio, and acquired agricultural loans drove much of the increase in nonaccruals.
- Other material risks include acquisition execution and integration, regulatory changes affecting bank mergers, competition, cybersecurity and third-party technology dependence, and the transition from LIBOR. Management said it had stopped originating new LIBOR-based loans and expected most existing LIBOR lines to transition at renewal.
- Unusual items included $14.4 million of acquisition-related “Day 2” credit provision, $5.7 million of merger-related expense, and $0.9 million of branch-closure costs. A $3.5 million gain related to the IPO of an equity investment contributed to 2021 asset gains. Nicolet closed 15 branches during 2021. Its Birmingham branch and associated business sale closed on January 21, 2022.
- The acquisitions’ purchase-price allocations were preliminary at year-end and could be adjusted. The external auditor issued unqualified opinions on the financial statements and internal control, but the internal-control audit excluded the acquired businesses, which represented about 40% of year-end assets and 10% of 2021 revenue.
Important facts for investors to verify
- How the acquired agricultural nonaccrual loans, potential problem loans, and higher nonperforming assets perform, and whether the allowance remains adequate.
- Whether integration of Mackinac and County delivers the expected growth and operating benefits, and the final purchase-price allocations and acquired-asset valuations.
- How rising rates, deposit pricing, elevated liquidity, and securities valuations affect net interest income, margin, and capital.
- Whether organic fee and loan growth offsets weaker mortgage activity and higher post-acquisition operating expenses.
- How the Birmingham sale, share repurchases, and any further strategic investment or acquisition activity affect liquidity and capital.