Nicolet Bankshares, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Nicolet is a bank holding company serving customers in Wisconsin, Michigan, and Minnesota. Results include the Charter acquisition completed in August 2022; comparisons with Q1 2022 are therefore affected by the different periods of ownership.
Financial performance
- Net loss: $8.9 million, or $0.61 per diluted share, versus net income of $24.2 million, or $1.70 per diluted share, in Q1 2022. The loss primarily reflected a $37.7 million pretax loss on the sale of held-to-maturity U.S. Treasury securities.
- Adjusted earnings: Management reported non-GAAP adjusted net income of $21.8 million, or $1.45 per diluted share, excluding specified items. This measure is not a substitute for GAAP results.
- Net interest income: $56.7 million, up 5% from $53.8 million. Net interest margin was 2.91%, down 32 basis points year over year. Higher asset yields and loan growth were more than offset in margin terms by faster increases in funding costs.
- Noninterest income: Negative $21.8 million, versus positive $15.9 million in Q1 2022, largely due to the securities-sale loss. Excluding net asset gains and losses, noninterest income was $16.6 million, up 14%.
- Expenses and credit: Noninterest expense rose 20% to $44.9 million. Provision for credit losses was $3.1 million, including $2.3 million for the Signature Bank subordinated-debt investment, which was fully charged off.
- Loans and credit quality: Loans were $6.22 billion, up $43 million from year-end. The loan allowance was $62.4 million, or 1.00% of loans. Nonperforming assets were $40.9 million, or 0.50% of total assets; potential problem loans increased to $76 million from $53 million at year-end.
Balance sheet, funding, and liquidity
- At March 31, total assets were $8.19 billion, deposits $6.93 billion, and stockholders’ equity $961.8 million. Assets declined 7% and deposits declined $250 million from December 31, 2022.
- Cash and cash equivalents were $114.2 million. Short-term borrowings were $50 million and long-term borrowings $197.4 million, compared with $317 million and $225.3 million, respectively, at year-end.
- Uninsured deposits were $1.9 billion, or 27% of deposits; brokered deposits were $522.6 million, or 8%. Management stated that liquidity was adequate and reported $2.25 billion of total contingent funding availability.
- Operating cash flow was $15.5 million; investing activities provided $488.8 million, mainly from securities sales; financing activities used $544.9 million, reflecting deposit outflows and reduced borrowings.
- The Bank remained well-capitalized under regulatory standards. Its common equity Tier 1 ratio was 10.5%; the Company’s was 8.9%.
Material changes and unusual items
- On March 7, Nicolet sold $500 million par value of HTM U.S. Treasuries at 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 approximately $16.7 million and a 2.26-year earn-back period.
- The remaining $177 million book-value HTM portfolio was reclassified to available for sale, with a carrying value of approximately $157 million. The resulting $20 million unrealized loss increased accumulated other comprehensive loss by $15 million after tax and remains subject to market changes.
- Deposits fell $250 million during the quarter, mainly in noninterest-bearing demand accounts. Management cited seasonal municipal deposit runoff and noted industry-wide liquidity and confidence concerns.
- Q1 2023 net interest expense on deposits rose sharply year over year as rates increased and customers shifted to higher-rate products. Management reported that the cost of funds increased 195 basis points.
Outlook, commentary, and risks
- No specific earnings or revenue guidance is provided. Management described the economic outlook as highly uncertain; it noted slowing in real estate and manufacturing and that many economists anticipated a mild recession over the following year.
- Management said the securities sale repositioned the balance sheet for future growth and strengthened liquidity. Its estimated benefit is forward-looking and depends on assumptions about yields, funding costs, and investable cash.
- Key disclosed risks include deposit retention and liquidity, interest-rate and economic changes, credit quality and collateral values, regulatory actions, acquisition integration and purchase accounting, cybersecurity, and legal or operational matters. Management said pending routine legal proceedings were not expected to have a material adverse effect.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether deposit balances, deposit mix, and funding costs stabilize or continue to pressure net interest margin and liquidity.
- Whether the projected recurring benefit and 2.26-year earn-back estimate for the securities repositioning are realized.
- Changes in unrealized securities losses and accumulated other comprehensive loss, including sensitivity to interest rates.
- Trends in potential problem loans, nonperforming assets, loan-loss allowances, and commercial real estate and other borrower exposures.
- The assumptions and exclusions behind management’s non-GAAP adjusted earnings measure, and the remaining purchase-accounting estimates for the Charter acquisition.