Nicolet Bankshares, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Nicolet is a Wisconsin bank holding company providing banking and wealth management services, primarily in northeastern and central Wisconsin and Menominee, Michigan. Results include a full quarter of contributions from Advantage Community Bancshares, acquired in August 2020; Q1 2020 did not include Advantage.
Financial performance
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Net interest income | $33.6 million | $31.3 million, up 8% |
| Noninterest income | $17.1 million | $9.6 million, up 79% |
| Provision for credit losses | $0.5 million | $3.0 million |
| Noninterest expense | $26.1 million | $23.9 million, up 9% |
| Net income attributable to Nicolet | $18.2 million | $10.6 million, up 73% |
| Diluted EPS | $1.75 | $0.98 |
| Net interest margin | 3.31% | 3.94%, down 63 basis points |
Mortgage income rose to $7.2 million from $2.3 million, driven by mortgage sales and refinancing activity. Lower deposit and borrowing costs helped net interest income, while lower earning-asset yields and unusually high cash balances pressured margin. Return on average assets was 1.64%, compared with 1.19% a year earlier.
Balance sheet, liquidity and capital
- Total assets were $4.54 billion, broadly unchanged from year-end 2020 and 22% above March 2020. Loans were $2.85 billion, up $57 million from year-end; deposits were $3.90 billion, down $10 million.
- Cash and cash equivalents were $735.9 million, down $67.0 million from year-end. Q1 operating cash flow was $38.2 million; investing cash outflow was $82.2 million and financing cash outflow was $23.1 million.
- Core customer deposits increased $54 million from year-end, while brokered deposits declined $64 million. Management reported $175 million of unused Federal funds lines and $185 million of available FHLB borrowing capacity, and considered liquidity sufficient.
- Long-term borrowings were $44.0 million, down from $53.9 million at year-end, mainly reflecting repayment of an FHLB advance. There were no short-term borrowings.
- Stockholders’ equity was $550.0 million; company total risk-based capital ratio was 13.4% and the Bank’s was 11.5%. The Bank qualified as well-capitalized. Nicolet repurchased and retired 56,886 shares for approximately $4.1 million during the quarter.
Asset quality and material developments
- The allowance for credit losses was $32.6 million, or 1.15% of loans (1.25% excluding PPP loans). Net charge-offs were $47,000; nonperforming loans were $9.0 million, or 0.31% of loans, versus 0.57% a year earlier.
- Nonperforming assets totaled $12.8 million, or 0.28% of assets. Potential problem loans were $13 million, down from $21 million at year-end. Nine loans totaling $3 million remained under temporary payment modification at March 31.
- PPP loans had a $229 million net carrying value, 8% of loans. Nicolet originated 1,928 PPP loans totaling $145 million in Q1 and recognized $3.4 million of PPP fees in interest income. The loans are SBA-guaranteed.
- Other comprehensive income included a $5.4 million after-tax loss, principally from unrealized AFS securities valuation changes. Management attributed securities unrealized losses to noncredit factors and reported no credit-loss allowance on securities.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management said mortgage activity, PPP lending, high cash balances, and improving asset quality supported Q1 results, while continued margin pressure was expected in the low-rate environment. Interest-rate simulations estimated a 2.0% increase in one-year net interest income under a 100-basis-point rate increase and a 0.4% decrease under a 100-basis-point decrease; these are modeled scenarios, not forecasts.
On April 12, 2021, Nicolet agreed to acquire Mackinac Financial Corporation in a cash-and-stock transaction, expected to close in Q3 2021 subject to regulatory and shareholder approvals and other customary conditions. Mackinac reported year-end 2020 assets of $1.5 billion, loans of $1.1 billion, and deposits of $1.3 billion. Principal disclosed risks include COVID-19 effects, economic and interest-rate conditions, credit quality, regulation and operations, and whether the Mackinac transaction closes on expected terms and timing. Management reported effective disclosure controls, no material change in internal controls, and no material litigation expected to adversely affect financial condition or results.
Key facts for investors to verify
- Whether mortgage production and gains remain strong, and how refinancing trends affect servicing-rights valuations and income.
- Whether net interest margin stabilizes as cash balances, PPP fees, deposit costs, and market rates change.
- Credit quality, including criticized and potential problem loans, modifications, nonperforming assets, and adequacy of the allowance.
- Progress, approvals, expected timing, consideration, and integration risks for the Mackinac acquisition.
- Deposit mix, liquidity usage, capital ratios, and the pace of share repurchases.