Nicolet Bankshares, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This filing reports full-year results; it does not provide a clear standalone fourth-quarter income statement. Nicolet is a community bank operating primarily in Wisconsin, Michigan, and Minnesota, with 56 branches. Figures below are in U.S. dollars.
Financial performance and condition
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Net interest income | $241.5 million | $240.0 million | Up 1% |
| Net interest margin | 3.18% | 3.40% | Down 22 basis points |
| Provision for credit losses | $5.0 million | $11.5 million | Down $6.5 million |
| Noninterest income | $36.0 million | $57.9 million | Down 38% |
| Noninterest expense | $185.9 million | $160.6 million | Up 16% |
| Net income | $61.5 million | $94.3 million | Down 35% |
| Diluted earnings per share | $4.08 | $6.56 | Down 38% |
| Adjusted net income (non-GAAP) | $101.2 million | $99.2 million | Up 2% |
| Adjusted diluted EPS (non-GAAP) | $6.72 | $6.90 | Down 3% |
- Interest income and funding: Tax-equivalent interest income rose 40% to $385.0 million, while interest expense increased to $141.3 million from $34.0 million, primarily reflecting higher deposit costs. Average loan yield rose to 5.48% from 4.64%; cost of funds rose to 2.65% from 0.71%. Quarterly NIM improved from 2.91% in Q1 to 3.30% in Q4.
- Fee income: Noninterest income excluding net asset gains and losses increased 26% to $68.8 million. Wealth management fees rose 14% to $23.7 million and card interchange income rose 12% to $13.0 million; mortgage income fell 16% to $7.2 million.
- Assets and lending: Year-end assets were $8.47 billion, down 3%; loans were $6.35 billion, up 3%; and deposits were $7.20 billion, up slightly. Commercial-based loans were 76% of the portfolio.
- Credit quality: Nonperforming assets declined to $27.9 million, or 0.33% of assets, from $40.1 million, or 0.46%. The loan allowance was $63.6 million, equal to 1.00% of loans, unchanged as a percentage. Net charge-offs were 0.01% of average loans. Potential problem loans increased to $68 million from $53 million, mainly following the downgrade of one commercial relationship.
- Cash flow and liquidity: Operating cash flow was $108.0 million, investing cash flow was $591.5 million, and financing cash flow was negative $362.7 million. Cash and cash equivalents increased to $491.4 million from $154.7 million. Management said liquidity was adequate; disclosed contingent funding availability was $2.24 billion.
- Deposits and debt: Approximately 29% of deposits were uninsured, down from 32%. Brokered deposits were $615 million, about 8% of deposits. Total borrowings declined to $166.9 million from $542.3 million, including repayment of $317 million of short-term FHLB advances.
- Capital and returns: Stockholders’ equity was $1.04 billion. Tangible common equity to tangible assets was 7.98%, up from 6.82%. The Bank’s CET1 ratio was 10.7% and it was categorized as well-capitalized. Return on average assets declined to 0.73% from 1.20%.
Material changes and unusual items
- On March 7, 2023, Nicolet sold $500 million par value of held-to-maturity U.S. Treasury securities, recording a $37.7 million pretax loss, and used proceeds mainly to repay FHLB borrowings. Remaining HTM securities were reclassified to available-for-sale. The AFS portfolio had $74.7 million of gross unrealized losses at year-end.
- The securities sale and other asset items drove a $32.8 million net asset loss in 2023, compared with $3.1 million of net asset gains in 2022. A $9.4 million gain on the sale of Nicolet’s UFS, LLC interest partly offset 2023 losses.
- Wisconsin tax legislation enacted in July 2023, retroactive to January 1, reduced state taxes on qualifying business and agricultural loans. Establishing a related deferred-tax valuation allowance resulted in a one-time $9.1 million tax charge. The reported effective tax rate was 29.0%; management estimated a future rate of about 19.5%, subject to circumstances and tax law.
- Noninterest expense included a $2.7 million early contract termination charge. The company also recorded a $2.3 million provision and charged off an acquired bank subordinated-debt investment.
- Management said it made no acquisition announcement or completed acquisition in 2023, after major acquisitions in 2021 and 2022, and used the pause to review operations and remove duplicative processes and systems.
Outlook, commentary, and risks
Management expects quarterly NIM to continue improving in 2024, but more slowly than in 2023, and forecasts improved margin and higher net income. It said that outlook is largely agnostic to unchanged or slightly lower interest rates, while rapid rate cuts would add uncertainty. Management is selectively considering acquisitions in 2024, alongside organic growth, repurchases, and dividends; it emphasized pricing discipline and the implications of approaching $10 billion in assets. The company began paying common dividends in 2023, totaling $0.75 per share, and said it intends to continue comparable quarterly dividends subject to Board approval.
- Key exposures include deposit competition and reliance on uninsured deposits, interest-rate and securities valuation risk, and the potential for funding costs to pressure margins.
- Credit risks include commercial and real-estate concentration, regional economic conditions, and possible deterioration in borrowers’ ability to repay. Management noted higher potential problem loans despite lower nonperforming assets.
- Other risks include acquisition integration and execution, regulatory changes, technology and cybersecurity incidents, third-party service disruptions, fraud, and competition for customers and personnel.
- The filing reports no known cybersecurity incident or threat resulting in a reportable event or material operational or financial impact. Routine legal proceedings are disclosed; management did not expect them to have a material adverse effect.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; the auditor identified the loan allowance estimate as a critical audit matter.
Important facts for investors to verify
- Whether quarterly NIM gains persist as deposits reprice and loans reset, and how rate cuts affect the margin and earnings outlook.
- The level, mix, and stability of uninsured and brokered deposits, including deposit pricing and liquidity needs.
- Credit migration in commercial, CRE, and agricultural portfolios; potential problem loans; and the adequacy of the $63.6 million loan allowance.
- The consequences of the Treasury sale, remaining securities’ unrealized losses, and any future need to sell securities or obtain additional funding.
- Whether the estimated 19.5% future tax rate is realized and how the Wisconsin tax change and valuation allowance affect future reported earnings.
- Progress toward the $10 billion asset threshold, including resulting regulatory, cost, and strategic implications, and any acquisition plans or capital-allocation changes.
- Reconcile GAAP earnings with management’s non-GAAP adjusted results; the 2023 adjusted measure excludes material losses and tax-related items and is not a substitute for GAAP results.