Nicolet Bankshares, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Nicolet is a bank holding company providing banking and wealth management services in Wisconsin, Michigan, and Minnesota. Results include the partial-period effects of its August 2022 Charter acquisition; year-over-year comparisons are therefore affected by acquisition timing.
Financial performance and condition
- Q3 earnings: Net income was $17.2 million, down 7% from $18.5 million a year earlier; diluted EPS was $1.14 versus $1.29. Nine-month net income was $30.9 million versus $66.7 million, and diluted EPS was $2.05 versus $4.72. Management reported nine-month adjusted net income of $73.2 million and adjusted diluted EPS of $4.87, both non-GAAP measures.
- Net interest: Q3 net interest income was $61.5 million, down from $63.0 million. Tax-equivalent net interest margin was 3.16%, compared with 3.48%. For the first nine months, net interest income rose 3% to $177.2 million, while tax-equivalent margin declined to 3.07% from 3.36%. Higher deposit funding costs and liabilities repricing faster than assets pressured margins.
- Other income and expenses: Q3 noninterest income increased 27% to $16.5 million; noninterest expense increased 7% to $45.7 million. Nine-month noninterest income was $11.5 million, heavily affected by the $38.8 million net asset loss from the securities sale; excluding net asset gains and losses, it was $50.3 million, up 25%. Nine-month noninterest expense rose 16% to $135.6 million.
- Balance sheet: Total assets were $8.42 billion, down 4% from year-end 2022. Loans were $6.24 billion, up $59 million; deposits were $7.18 billion, essentially unchanged. Cash and cash equivalents increased to $545.9 million from $154.7 million.
- Credit quality: The loan allowance was $63.2 million, or 1.01% of loans. Nonaccrual loans were $29.5 million (0.47% of loans), down from $38.1 million at year-end; nonperforming assets were $31.5 million, or 0.37% of assets. Potential problem loans increased to $72 million from $53 million, primarily after one commercial relationship was downgraded.
- Debt, liquidity, and capital: Nicolet had no short-term borrowings and $197.8 million of long-term borrowings. Management reported $766 million of immediate funding availability and $2.14 billion of total contingent funding availability, and said liquidity was adequate for projected needs. The Bank’s CET1 ratio was 11.4% and it qualified as well-capitalized.
- Cash flow and shareholder returns: Nine-month operating cash flow was $70.2 million, investing cash flow was $670.2 million, and financing cash flow was negative $349.2 million. Nicolet paid $7.4 million in common dividends and repurchased $1.5 million of stock during the nine months.
Material changes and unusual items
- In March 2023, Nicolet sold $500 million par value of Treasury securities classified as held to maturity, recording a $37.7 million pretax loss ($28 million after tax). Proceeds were used primarily to repay FHLB borrowings, with the remainder held as cash. The remaining $177 million book-value HTM portfolio was reclassified to available for sale, adding approximately $15 million, net of tax, to accumulated other comprehensive loss. Management estimated an annual net benefit of $16.7 million from the repositioning and an earn-back period of 2.26 years.
- A Wisconsin tax law change prompted a $9.1 million income-tax charge to establish a valuation allowance in Q3, partly offset by a $3.0 million reversal of amounts recorded in the first half. Management estimated a future effective tax rate of approximately 19.5%, compared with 25% previously; the nine-month effective rate was 37.3%.
- Nicolet recorded a $2.3 million provision for the expected loss on a Signature Bank subordinated-debt investment and charged off the full investment in Q1.
- On October 2, 2023, after quarter-end, Nicolet sold its interest in UFS, LLC for $10 million, expecting to recognize an approximately $9 million pretax gain in Q4.
- A November 6, 2023 agreement provides for Executive Chairman Robert Atwell to transition from active employment after December 31, 2023 and serve as an advisor for three years at an annual fee of $680,000, along with specified benefits. He will remain on the Board.
Outlook, commentary, and risks
Management described a slowing economy as the most likely U.S. scenario entering 2024, citing elevated interest rates, inflation above the Federal Reserve’s target, consumer pressures, and tightening credit conditions. It also noted ongoing banking-sector concerns about liquidity, deposit outflows, unrealized securities losses, asset quality, and possible higher capital requirements. The filing provides no specific earnings or revenue guidance. Key risks include deposit and liquidity pressures, interest-rate changes and their effect on net interest income, economic conditions and borrower credit quality, regulatory developments, cybersecurity, and execution of future acquisitions. Management disclosed routine legal proceedings but did not expect them to have a material adverse effect; it reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether deposit pricing and funding costs continue to compress net interest margin, and how deposit balances and uninsured deposits evolve; uninsured deposits were $2.0 billion, or 29% of deposits.
- Whether the estimated benefit and 2.26-year earn-back period for the securities repositioning are realized, and how market movements affect the $111.1 million of unrealized AFS losses and accumulated other comprehensive loss.
- Credit trends, especially the increase in potential problem loans, commercial and commercial-real-estate exposures, and the adequacy of the $63.2 million loan allowance.
- The effect of the Wisconsin tax-law change on future tax expense and the expected 19.5% effective tax rate.
- The Q4 recognition of the anticipated UFS gain and the costs and terms of the Atwell advisory arrangement.