Nicolet Bankshares, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results. Nicolet is a Wisconsin-based community bank holding company operating primarily in northeastern and central Wisconsin and Menominee, Michigan.
Financial performance and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Net interest income | $129.3 million | $116.1 million |
| Noninterest income | $62.6 million | $53.4 million |
| Provision for credit losses | $10.3 million | $1.2 million |
| Net income attributable to Nicolet | $60.1 million | $54.6 million |
| Diluted EPS | $5.70 | $5.52 |
| Net interest margin | 3.38% | 4.19% |
| Return on average assets | 1.41% | 1.75% |
| Cash and cash equivalents at year-end | $802.9 million | $182.1 million |
| Total assets at year-end | $4.55 billion | $3.58 billion |
| Loans at year-end | $2.79 billion | $2.57 billion |
| Deposits at year-end | $3.91 billion | $2.95 billion |
| Borrowings at year-end | $53.9 million | $67.6 million |
Net interest income plus noninterest income was approximately $192.0 million before provision and noninterest expense. The 2020 net interest margin declined 81 basis points, chiefly reflecting lower market rates and a larger share of low-yield cash. Mortgage income rose to $29.8 million from $11.9 million, supporting higher noninterest income; asset gains swung to a $1.8 million net loss from a $7.9 million net gain in 2019. Noninterest expense increased 4% to $100.7 million.
Net cash provided by operating activities was $78.9 million; investing activities used $208.7 million; and financing activities provided $750.6 million. Cash increased $620.8 million during the year, largely as deposits expanded. At year-end, the Bank’s regulatory capital ratios met the “well-capitalized” standard: total capital 11.2%, Tier 1 capital 10.5%, CET1 10.5%, and leverage 7.8%. The company reported $539.2 million of stockholders’ equity.
Material changes versus 2019
- Net income attributable to Nicolet rose 10%, while diluted EPS increased 3%. Return on average assets declined as average assets—especially cash—grew substantially.
- Year-end assets increased 27%, loans 8%, and deposits 32%. Deposits rose $956 million, including growth associated with stimulus-related liquidity and retained PPP proceeds.
- Net interest income increased 11% despite margin compression. Interest expense fell 12%, but average interest-earning assets shifted toward lower-yielding cash.
- The credit-loss allowance rose to $32.2 million, or 1.15% of loans, from $14.0 million, or 0.54%. The increase reflected CECL adoption and pandemic-related economic uncertainty; net charge-offs were $1.4 million.
- Nicolet completed the all-cash Advantage acquisition in August 2020, adding approximately $172 million of assets, $88 million of loans, and $141 million of deposits. It mutually terminated a planned Commerce acquisition in May and recorded a $0.5 million charge.
Outlook, commentary, risks, and unusual items
- Management gave no numerical earnings or revenue guidance. For 2021, it emphasized potential acquisitions, organic growth in loans, core deposits and wealth services, automation and data analysis, talent and succession planning, and disciplined capital management. Management cautioned that health, economic, political and social uncertainty could make the year challenging.
- COVID-19 response included temporary relief on nearly 1,000 loans; by year-end, $15 million remained under temporary modification and $4 million had become troubled debt restructurings. PPP originations peaked at 2,725 loans totaling $351 million; the year-end net carrying balance was $186 million.
- Fourth-quarter 2020 net income attributable to Nicolet was $18.0 million, or $1.74 diluted EPS, versus $12.3 million, or $1.18, in fourth-quarter 2019. Q4 net interest margin was 3.29%, down 77 basis points year over year.
- Unusual 2020 items included $4 million of second-quarter expenses related to the pandemic, the terminated transaction and branch closures; $1.25 million in business micro-grants; and $1 million of mortgage servicing-rights valuation allowance. Eight branches were permanently closed.
- Management identified credit losses and CECL estimates, economic and pandemic effects, interest-rate sensitivity, commercial real estate and local-market exposures, acquisition execution, competition, cybersecurity and operational risks, and LIBOR transition as important risks. Commercial-based loans were 78% of the portfolio.
- Nicolet repurchased approximately 646,700 shares for $40.5 million in 2020; $20.4 million remained authorized at year-end. The company said it had not paid common dividends since inception.
Important facts for investors to verify
- Whether the elevated allowance adequately reflects future expected credit losses as pandemic-related borrower support and loan modifications unwind.
- How much of the 2020 deposit and cash growth persists, and the effect of excess low-yield liquidity on margins and earnings.
- Whether unusually strong mortgage revenue is sustainable as refinancing activity and market conditions change.
- PPP loan forgiveness, fee recognition and repayment trends, along with remaining borrower stress and troubled restructurings.
- Advantage integration, future acquisition discipline, capital deployment and the implications of share repurchases for regulatory capital.
- Any material developments in legal contingencies, LIBOR-linked contracts, and the disclosed commercial real estate and local economic exposures.