Nicolet Bankshares, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Nicolet is a Wisconsin-based bank holding company serving northeastern and central Wisconsin and Menominee, Michigan. Unless stated otherwise, amounts below are in millions.
Financial performance
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net interest income | $32.6 | $29.2 | $95.3 | $85.6 |
| Provision for credit losses | $3.0 | $0.4 | $9.0 | $0.9 |
| Noninterest income | $18.7 | $12.3 | $45.7 | $40.1 |
| Noninterest expense | $23.7 | $22.9 | $75.4 | $71.4 |
| Net income attributable to Nicolet | $18.1 | $13.5 | $42.1 | $42.3 |
| Diluted EPS | $1.72 | $1.40 | $3.97 | $4.36 |
- Q3 net income rose 34% year over year, aided by strong mortgage income. Nine-month net income was nearly flat year over year; 2019 benefited from a $7.4 million gain on an equity investment sale.
- Net interest margin was 3.06% in Q3 versus 4.19% a year earlier, and 3.35% for nine months versus 4.17%. Lower rates and a larger mix of low-yielding cash pressured margins. The Q3 efficiency ratio was 46.18%, compared with 55.19%.
- Nine-month noninterest income excluding asset gains/losses increased 47% to $46.9 million, primarily on mortgage activity. Net mortgage income was $22.0 million, up $15.0 million year over year. Deposit service charges fell, partly reflecting customer fee waivers.
Financial position, cash flow and capital
- At September 30, total assets were $4.706 billion, loans $2.909 billion, deposits $3.713 billion, and cash and cash equivalents $853.6 million. Since year-end 2019, assets rose 32%, loans 13%, and deposits 26%.
- Cash increased $671.5 million over the first nine months. Operating cash flow was $64.3 million; investing cash outflow was $318.4 million; financing cash inflow was $925.6 million, reflecting deposit growth and borrowing proceeds.
- Long-term borrowings were $405.8 million, including $333.9 million under the Federal Reserve’s PPP Liquidity Facility (PPPLF); there were no short-term borrowings. Management intended to repay PPPLF funding in Q4 2020. September 30 liquidity included $175 million of unused Federal funds lines and $160 million of FHLB borrowing capacity.
- Company total risk-based capital ratio was 13.4%; the Bank’s was 11.5%, and management said the Bank remained well-capitalized. Company stockholders’ equity was $538.1 million. The company repurchased approximately 442,000 shares for $27.6 million during the first nine months.
Material changes and credit quality
- Advantage Community Bancshares was acquired on August 21, 2020, adding approximately $172 million in assets, $88 million in loans, $141 million in deposits, and $12 million in goodwill. Choice Bancorp, acquired in November 2019, also affects year-over-year comparisons.
- PPP lending added $335 million in net carrying value at quarter-end. Nicolet originated $351 million of PPP loans for 2,725 businesses; the loans are SBA-guaranteed. The related $334 million PPPLF balance funded these loans.
- The allowance for credit losses on loans was $31.4 million, or 1.08% of loans (1.22% excluding PPP loans), versus $14.0 million at year-end 2019. The increase reflects CECL adoption, pandemic-related provisions, and the Advantage acquisition. CECL adoption reduced retained earnings by $6.2 million; the allowance included an $8.5 million adoption adjustment and a $0.8 million initial PCD allowance.
- Nonperforming loans were $11.0 million, or 0.38% of loans; nonperforming assets were $12.0 million, or 0.25% of assets. Since the pandemic began, about 980 loans totaling $462 million received payment modifications; $60 million remained modified at quarter-end. Management reported $27 million of potential problem loans.
Outlook, risks and unusual items
- The filing provides no formal earnings or revenue guidance. Management expects continued margin pressure and says the pandemic’s effects on credit costs, fees, expenses, and loan and deposit pricing remain uncertain. It cited strong mortgage income, rising net interest income, and expense management as support for year-to-date earnings, while emphasizing that potential credit challenges were difficult to quantify.
- COVID-19 uncertainty drove elevated credit-loss provisions. Management highlighted borrower and industry exposure to pandemic disruption; restaurants, retail, arts, recreation, tourism, and hospitality represented about 15% of the loan portfolio at the pandemic’s outset.
- Seven branches were permanently closed in Q2, reducing headcount by 56; related branch, safety, micro-grant, and merger-termination costs totaled approximately $4.0 million in Q2. Nicolet planned another branch closure and an Appleton opening in Q4. The Commerce merger agreement was terminated, resulting in a $0.5 million payment and write-off of its investment.
- Management intended to redeem $12 million of 5% subordinated notes and $6 million of 8% junior subordinated debentures before year-end 2020. These redemptions were expected to reduce company Tier 1 risk-based capital by $6 million and total risk-based capital by $16 million, without affecting Bank capital ratios.
- COVID-19 is identified as a material risk, alongside interest-rate, economic, regulatory, operational, and credit risks. Management reported effective disclosure controls and no material legal proceedings expected to adversely affect results or financial position.
Investor verification priorities
- Track whether pandemic-related borrower stress increases as payment modifications expire, and whether the allowance remains adequate relative to losses and forecast conditions.
- Assess the sustainability of mortgage income and the effect of refinance activity on mortgage servicing rights; the filing reports an $0.8 million MSR valuation allowance.
- Monitor net interest margin, the unusually high cash balance, deposit mix and cost, and repayment of the PPPLF and other planned debt redemptions.
- Separate organic growth and operating performance from the effects of Choice and Advantage acquisitions, PPP lending, and one-time expenses or prior-year investment gains.
- Confirm execution and capital effects of share repurchases, branch actions, and announced debt redemptions; compare realized results with management’s stated plans.