Nicolet Bankshares, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Nicolet is a regional bank holding company serving Wisconsin, Michigan, and Minnesota. Amounts below are in millions unless noted. Results are not fully comparable year over year because of the Mackinac and County acquisitions in 2021 and the Charter acquisition, completed August 26, 2022.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $63.0 | $35.2 | $171.9 | $104.4 |
| Provision for credit losses | $8.6 | $6.0 | $9.7 | $6.5 |
| Noninterest income | $13.0 | $14.0 | $43.1 | $51.3 |
| Noninterest expense | $42.6 | $33.1 | $116.7 | $89.9 |
| Net income | $18.5 | $7.8 | $66.7 | $44.3 |
| Diluted earnings per share | $1.29 | $0.73 | $4.72 | $4.22 |
- Q3 net interest margin was 3.48% on a tax-equivalent basis, up from 2.94% a year earlier; the nine-month margin was 3.36%, versus 3.22%. Management attributed higher net interest income primarily to larger loan and securities balances, with Q3 also benefiting from higher asset yields as rates rose.
- Nine-month noninterest income fell 16%, primarily because higher interest rates reduced mortgage sales and related gains. Noninterest expense rose 30%, reflecting a larger workforce and branch network, acquisition-related amortization, and operating costs.
- Q3 provision included $8.0 million of merger-related Day 2 provision associated with Charter. The filing’s adjusted net income and adjusted EPS are non-GAAP measures; reported GAAP results are shown above.
Financial position, cash flow, and capital
- At September 30, total assets were $8.90 billion, loans $5.98 billion, and deposits $7.40 billion, up 16%, 29%, and 14%, respectively, from December 31, 2021. The Charter acquisition contributed approximately $1.1 billion of assets, $827 million of loans, and $870 million of deposits; management also reported organic loan growth.
- Cash and cash equivalents were $438 million, down from $595 million at year-end. For the first nine months, operating cash flow was $87 million, investing cash flow was negative $382 million, and financing cash flow was positive $137 million. Investing outflows included loan growth and cash paid for Charter, partly offset by proceeds from the Birmingham branch sale.
- Deposits included $6.76 billion of customer core deposits and $639 million of brokered deposits (8% of deposits). Short-term borrowings were $280 million and long-term borrowings $225 million. Management reported $554 million of available FHLB borrowing capacity and said liquidity was sufficient to meet expected needs.
- Stockholders’ equity was $938 million. Accumulated other comprehensive loss was $62 million, reflecting significant market-value declines in securities. AFS securities had $85 million of unrealized losses; HTM securities had $59 million. Management attributed losses to interest rates and market factors rather than credit deterioration and reported no securities credit-loss allowance.
- The loan allowance was $60 million, or 1.01% of loans. Nonaccrual loans were $38 million; nonperforming assets were $40 million, or 0.45% of assets, down from $56 million and 0.73% at year-end. Net charge-offs were low at $0.1 million for the nine-month period.
- The Bank remained well-capitalized under regulatory standards. The company repurchased $61 million of stock during the first nine months; $48 million remained authorized at quarter-end.
Material developments, outlook, and risks
- Charter expanded Nicolet into western Wisconsin and Minnesota. The purchase price was $137 million, including $98 million of stock and $39 million cash; preliminary acquisition goodwill was $53 million. Charter’s results are included only from the acquisition date.
- Management described persistent inflation, supply-chain and labor constraints, geopolitical uncertainty, and rapid Federal Reserve rate increases. It warned that tighter policy and economic instability increase recession risk; the filing provides no specific earnings or revenue guidance.
- Interest-rate modeling estimated one-year net interest income changes of +0.5% and +1.1% under parallel rate increases of 100 and 200 basis points, and −0.7% and −1.7% under corresponding decreases. Actual results may differ as rates, customer behavior, and market conditions change.
- Principal risks include credit deterioration from economic weakness, deposit competition and funding costs, interest-rate sensitivity, acquisition integration and purchase-accounting estimates, cybersecurity, regulatory developments, and the effect of inflation and market volatility. Management reported no material change in previously disclosed risk factors, no material legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- How much future net interest income growth depends on continued loan growth and rate repricing, versus acquisition-related balance growth.
- Deposit mix, brokered-deposit levels, funding costs, and liquidity capacity as interest rates and competition change.
- Credit quality and allowance adequacy, particularly commercial and agricultural exposures and the impact of a potential economic slowdown.
- The duration and potential capital effects of unrealized securities losses, including the distinction between AFS and HTM carrying values.
- Charter integration progress, realization of expected benefits, and final purchase-accounting valuations; the filing gives no quantified synergy target.