Nicolet Bankshares, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. Nicolet is a Wisconsin-based bank holding company providing banking and wealth management services across Wisconsin, Michigan, and Minnesota. This unaudited report covers the quarter and six months ended June 30, 2023. Results include Charter Bankshares, acquired in August 2022, so comparisons with 2022 are affected by the acquisition.
Financial performance and condition
- Q2 earnings: Net income was $22.6 million, down from $24.0 million in Q2 2022; diluted EPS was $1.51 versus $1.73. Tax-equivalent net interest income increased to $59.6 million from $55.5 million, while net interest margin declined to 3.14% from 3.34%.
- First-half earnings: Net income was $13.7 million versus $48.1 million; diluted EPS was $0.91 versus $3.43. The comparison was heavily affected by the first-quarter securities sale loss. Adjusted net income, a non-GAAP measure, was $44.7 million versus $46.5 million; adjusted diluted EPS was $2.98 versus $3.31.
- Interest income and costs: First-half net interest income was $115.8 million, up 6% year over year. Higher loan yields and balances supported interest income, but interest expense rose to $63.7 million from $8.6 million as funding costs increased. First-half net interest margin fell to 3.02% from 3.29%.
- Other income and expenses: First-half noninterest income was negative $5.0 million, principally reflecting the securities-sale loss; excluding asset gains and losses, it was $33.8 million, up 24%. Noninterest expense increased 21% to $89.8 million, including higher personnel, occupancy, data-processing, and amortization costs.
- Balance sheet: Total assets were $8.48 billion, down 3% from year-end 2022. Loans were $6.22 billion, up $42 million; deposits were $7.20 billion, nearly unchanged. Stockholders’ equity was $977.6 million. Cash and cash equivalents rose to $505.2 million from $154.7 million.
- Credit quality: The allowance for loan losses was $62.8 million, or 1.01% of loans. Nonperforming assets were $26.8 million, 0.32% of assets, down from $40.1 million at year-end. Potential problem loans increased to $79 million from $53 million, primarily following a downgrade of one commercial relationship.
- Funding, liquidity, and capital: Total borrowings were $247.6 million, down from $542.3 million at year-end. Uninsured deposits were $2.0 billion, or 28% of deposits; brokered deposits were $739.5 million, or 10%. Management reported $2.05 billion of contingent funding availability and considered liquidity adequate. The Bank remained well-capitalized; its total capital ratio was 11.8% and CET1 ratio was 11.0%.
- Cash flow: First-half operating cash flow was $48.4 million and investing cash flow was $581.5 million, largely reflecting securities sale proceeds. Financing cash flow was negative $279.4 million, primarily due to repayment of short-term borrowings.
Material changes and unusual items
- In March 2023, Nicolet sold $500 million par value of held-to-maturity U.S. Treasury securities for a $37.7 million pretax loss ($28 million after tax). Proceeds reduced FHLB borrowings, with the remainder held as investable cash. Management estimated an annual net benefit of $16.7 million from the repositioning and an approximately 2.26-year earn-back period.
- The remaining $177 million book-value HTM portfolio was reclassified to available for sale, with an approximately $20 million unrealized loss at reclassification recorded in accumulated other comprehensive loss, net of tax. At June 30, AOCI was negative $65.3 million; AFS securities had $89.7 million of gross unrealized losses.
- First-half provision for credit losses was $3.5 million, including a $2.3 million provision and full charge-off of the Signature Bank subordinated debt investment. Loan provision was $1.2 million.
- Deposits shifted toward time deposits, and customer transaction accounts declined from year-end. First-half average funding costs rose sharply, while loan yields improved.
Outlook, risks, and contingencies
- Management described economic growth and labor markets as stronger than expected, inflation as easing more slowly than anticipated, and a slowing U.S. economy in late 2023 as the most likely scenario. The filing provides no specific earnings or revenue guidance.
- Management highlighted liquidity and deposit-retention risks, interest-rate and economic uncertainty, potential recession and credit deterioration, regulatory changes, acquisition integration, cybersecurity, and legal and operational risks. Interest-rate simulations projected one-year net interest income changes of +1.1% and +2.3% for rate increases of 100 and 200 basis points, and -1.1% and -2.1% for equivalent decreases; actual results may differ.
- Commitments to extend credit totaled $1.83 billion. The company disclosed routine pending and threatened legal matters and stated it did not expect them to have a material adverse effect. No material changes to previously reported risk factors were identified.
Important facts for investors to verify
- How deposit pricing, uninsured and brokered deposit levels, and funding costs evolve, and whether liquidity remains adequate.
- Whether the estimated benefit and earn-back period from the securities repositioning are realized, including the effect of interest rates on AOCI and securities values.
- Trends in net interest margin, loan growth, potential problem loans, nonperforming assets, and the adequacy of the credit-loss allowance.
- Whether expense growth and Charter integration costs moderate, and how reported results compare with non-GAAP adjusted results.
- The impact of economic conditions, regulatory actions, and the company’s off-balance-sheet lending commitments on capital and credit quality.