Nicolet Bankshares, Inc. — Q1 2022 Form 10-Q
Business context and reporting period
Reports the three months ended March 31, 2022. Nicolet is a bank holding company serving Wisconsin and Michigan markets through banking and wealth-management businesses. Comparisons with Q1 2021 are materially affected by the Mackinac and County acquisitions completed in September and December 2021; those companies’ results were included only from their respective acquisition dates.
Financial performance and condition
- Earnings: Net income was $24.2 million, versus $18.2 million in Q1 2021. Diluted EPS was $1.70, down from $1.75, reflecting a larger weighted-average share count. Return on average assets was 1.30%, versus 1.64%.
- Net interest: Net interest income was $53.8 million, up 60% year over year, largely reflecting the acquisitions and loan growth. Net interest margin was 3.23%, down 8 basis points from 3.31%; management cited lower earning-asset yields, partly offset by a lower cost of funds.
- Other revenue and expenses: Noninterest income was $15.9 million, down 7%, mainly because net mortgage income declined 55% amid slowing mortgage activity. Noninterest expense rose 44% to $37.6 million, driven largely by the larger employee and operating base following acquisitions.
- Loans and credit: Loans were $4.68 billion, up $61 million from year-end 2021. The allowance for loan losses was $49.9 million, or 1.07% of loans. Nonperforming assets were $49.5 million, or 0.68% of assets, down from $56.1 million, or 0.73%, at year-end. Net charge-offs remained low at 0.01% of average loans, annualized.
- Deposits and liquidity: Deposits totaled $6.23 billion, down $235 million from year-end, attributed primarily to repricing of acquired deposits and normal cyclical deposit declines. Cash and cash equivalents were $395.9 million, versus $595.3 million at year-end. Management said liquidity was sufficient; available FHLB borrowing capacity was $373 million, and the parent company had $27 million in cash.
- Debt and capital: Long-term borrowings were $206.9 million, down from $216.9 million at year-end; there were no short-term borrowings. The Bank’s total capital ratio was 13.0% and it qualified as well-capitalized. Company total risk-based capital ratio was 13.7%.
- Cash flow: Operating activities provided $21.9 million; investing activities provided $70.9 million, including $147.8 million net cash received from the Birmingham branch sale; financing activities used $292.2 million, including deposit reductions and share repurchases. Cash declined by $199.4 million during the quarter.
Material changes, outlook, and risks
- Total assets were $7.32 billion, down 5% from December 31, 2021, partly reflecting the January Birmingham branch sale and lower cash. Loans grew, led by agricultural and commercial and industrial lending.
- Unrealized losses on available-for-sale securities increased amid market and interest-rate changes. The securities’ gross unrealized losses were $37.3 million at March 31, compared with $5.5 million at year-end; accumulated other comprehensive income moved from positive $3.1 million to a loss of $26.1 million. Comprehensive income was a loss of $5.0 million. Management attributed the securities losses to noncredit factors and stated it did not intend, and was not likely required, to sell the securities before recovery. Held-to-maturity securities also had $32.9 million of gross unrealized losses.
- Nicolet agreed to acquire Charter Bankshares on March 29, 2022, with closing expected in Q3 2022 subject to customary conditions, including regulatory approval. Consideration is expected to include approximately 1.26 million Nicolet shares and $38.8 million cash. Integration, approval, execution, and synergy risks are identified.
- Nicolet repurchased 593,713 shares for approximately $54 million during Q1 at an average price of $91.66. On April 19, the board increased the repurchase authorization by $40 million.
- The filing provides no earnings or revenue guidance. Management noted the Federal Reserve’s March rate increase and described continued sensitivity to rates, economic conditions, inflation, borrower credit quality, acquisitions, cybersecurity, and regulatory requirements. Simulated one-year net-interest-income effects ranged from a 0.6% decline for a 100-basis-point increase to a 1.2% decline for a 200-basis-point increase.
- The company reported no material change in previously disclosed risk factors and no legal proceedings expected to materially adversely affect results or financial position. Management reported disclosure controls were effective.
Important facts for investors to verify
- Whether loan growth, deposit stability, and the margin trend continue as interest rates and deposit pricing change.
- How unrealized securities losses, including the HTM portfolio’s losses, affect capital, liquidity, and potential flexibility to sell securities.
- Credit trends in agricultural and other commercial lending, including nonperforming assets, criticized loans, and the adequacy of the allowance.
- Charter merger approvals, timing, consideration, integration costs, and realization of expected benefits.
- The sustainability of earnings after considering acquisition-driven scale, higher operating expenses, lower mortgage income, and share repurchases.