Nicolet(NIC) - 2023 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents Nicolet Bankshares, Inc.'s unaudited consolidated financial statements and management's analysis Item 1. Financial Statements This section presents Nicolet Bankshares, Inc.'s unaudited consolidated financial statements and related notes for the reporting period Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and equity at specific reporting dates | Metric | September 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Total assets | $8,416,162 | $8,763,969 | | Cash and cash equivalents | $545,880 | $154,723 | | Securities AFS, at fair value | $793,826 | $917,618 | | Securities HTM, at amortized cost | — | $679,128 | | Loans, net | $6,176,097 | $6,118,670 | | Total deposits | $7,182,388 | $7,178,921 | | Short-term borrowings | — | $317,000 | | Long-term borrowings | $197,754 | $225,342 | | Total liabilities | $7,441,701 | $7,791,440 | | Total stockholders' equity | $974,461 | $972,529 | - Total assets decreased by $347.8 million (4%) from December 31, 2022, to September 30, 2023, primarily due to a decrease in securities held to maturity (HTM) and available for sale (AFS) securities, partially offset by an increase in cash and cash equivalents[10] - Cash and cash equivalents significantly increased by $391.1 million, while HTM securities were eliminated and AFS securities decreased by $123.8 million[10] Consolidated Statements of Income This section details the company's financial performance over specific periods, showing revenues, expenses, and net income | Metric | Three Months Ended Sep 30, 2023 (in thousands) | Three Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Total interest income | $99,884 | $70,718 | $279,317 | $188,162 | | Total interest expense | $38,410 | $7,728 | $102,083 | $16,293 | | Net interest income | $61,474 | $62,990 | $177,234 | $171,869 | | Provision for credit losses | $450 | $8,600 | $3,990 | $9,650 | | Total noninterest income | $16,541 | $13,000 | $11,538 | $43,074 | | Total noninterest expense | $45,738 | $42,567 | $135,570 | $116,655 | | Net income | $17,158 | $18,510 | $30,855 | $66,659 | | Basic EPS | $1.16 | $1.33 | $2.10 | $4.88 | | Diluted EPS | $1.14 | $1.29 | $2.05 | $4.72 | - Net interest income for the nine months ended September 30, 2023, increased by $5.4 million (3.1%) year-over-year, driven by a significant rise in total interest income (up $91.2 million) largely offset by a substantial increase in total interest expense (up $85.8 million)[12] - Net income for the nine months ended September 30, 2023, decreased by $35.8 million (53.7%) year-over-year, primarily due to a $41.6 million decrease in net asset gains (losses) and higher noninterest expenses, despite an increase in net interest income[12] Consolidated Statements of Comprehensive Income (Loss) This section presents the company's comprehensive income, including net income and other comprehensive income (loss) items | Metric | Three Months Ended Sep 30, 2023 (in thousands) | Three Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net income | $17,158 | $18,510 | $30,855 | $66,659 | | Total other comprehensive income (loss) | $(18,082) | $(19,098) | $(25,881) | $(65,441) | | Comprehensive income (loss) | $(924) | $(588) | $4,974 | $1,218 | - For the nine months ended September 30, 2023, comprehensive income was $4.974 million, a significant increase from $1.218 million in the prior year, despite a lower net income, due to a smaller total other comprehensive loss[14] - Total other comprehensive loss for the nine months ended September 30, 2023, was $(25.881) million, a substantial improvement from $(65.441) million in the prior year, primarily driven by changes in unrealized gains/losses on AFS securities and reclassification adjustments[14] Consolidated Statements of Stockholders' Equity This section outlines changes in the company's equity, including common stock, retained earnings, and other comprehensive income | Metric | Balances at Sep 30, 2023 (in thousands) | Balances at Dec 31, 2022 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Common Stock | $147 | $147 | | Additional Paid-In Capital | $626,348 | $621,988 | | Retained Earnings | $431,317 | $407,864 | | Accumulated Other Comprehensive Income (Loss) | $(83,351) | $(57,470) | | Total Stockholders' Equity | $974,461 | $972,529 | - Total stockholders' equity increased slightly by $1.932 million from December 31, 2022, to September 30, 2023, primarily due to an increase in retained earnings and additional paid-in capital, partially offset by a larger accumulated other comprehensive loss[17] - Retained earnings increased by $23.453 million for the nine months ended September 30, 2023, reflecting net income less cash dividends paid[17] Consolidated Statements of Cash Flows This section reports the cash inflows and outflows from operating, investing, and financing activities over a period | Cash Flow Activity | Nine Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by (used in) operating activities | $70,203 | $87,349 | | Net cash provided by (used in) investing activities | $670,192 | $(381,844) | | Net cash provided by (used in) financing activities | $(349,238) | $137,485 | | Net increase (decrease) in cash and cash equivalents | $391,157 | $(157,010) | | Ending cash and cash equivalents | $545,880 | $438,282 | - Net cash provided by investing activities significantly increased to $670.192 million for the nine months ended September 30, 2023, compared to a net outflow of $(381.844) million in the prior year, primarily driven by proceeds from sales and maturities of securities[19] - Net cash used in financing activities was $(349.238) million for the nine months ended September 30, 2023, a reversal from a net inflow of $137.485 million in the prior year, mainly due to a decrease in short-term borrowings and cash dividends paid[19] Notes to Unaudited Consolidated Financial Statements This section provides detailed explanations and additional information supporting the unaudited consolidated financial statements Note 1 – Basis of Presentation This note outlines the accounting principles and policies used in preparing the interim consolidated financial statements - The interim consolidated financial statements are prepared in accordance with SEC rules and U.S. GAAP, with certain information and footnote disclosures omitted or abbreviated, and should be read with the 2022 Annual Report on Form 10-K[24] - Critical accounting estimates, including allowance for credit losses, valuation of acquired loans, and income taxes, involve significant management judgment, with no material changes in assumptions or methodologies since December 31, 2022[25][26] - The Company adopted ASU 2022-02, which eliminated accounting guidance for Troubled Debt Restructurings (TDRs) and enhanced disclosures for loan modifications, without material impact on financial statements but resulting in new disclosures[27] Note 2 – Acquisition This note details the acquisition of Charter Bankshares, Inc., including the purchase price allocation and resulting goodwill - Nicolet completed its merger with Charter Bankshares, Inc. on August 26, 2022, issuing approximately 1.26 million shares of common stock and $39 million in cash for a total purchase price of $137 million, expanding its presence in Western Wisconsin and Minnesota[31] | Metric | Acquired from Charter (in millions) | Fair Value Adjustments (in millions) | Estimated Fair Value (in millions) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Total assets acquired | $1,110 | $11 | $1,121 | | Total liabilities assumed | $1,033 | $1 | $1,034 | | Net assets acquired | | | $87 | | Total purchase price | | | $137 | | Goodwill | | | $50 | - The acquisition resulted in $50 million in goodwill, which is not deductible for tax purposes, and included $24.031 million in purchased credit deteriorated (PCD) loans with an allowance for credit losses of $1.709 million at acquisition[33][34] Note 3 – Earnings per Common Share This note provides details on the calculation of basic and diluted earnings per common share for the reporting periods | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net income (in thousands) | $17,158 | $18,510 | $30,855 | $66,659 | | Basic EPS | $1.16 | $1.33 | $2.10 | $4.88 | | Diluted EPS | $1.14 | $1.29 | $2.05 | $4.72 | | Weighted average common shares outstanding (basic) | 14,740 | 13,890 | 14,716 | 13,648 | | Weighted average common shares outstanding (diluted) | 15,100 | 14,310 | 15,044 | 14,127 | - For the nine months ended September 30, 2023, diluted EPS decreased to $2.05 from $4.72 in the prior year, despite an increase in diluted weighted average common shares outstanding[36] - Approximately 0.1 million and 0.2 million options were excluded from diluted EPS calculations for the three and nine months ended September 30, 2023, respectively, due to their anti-dilutive effect[37] Note 4 – Stock-Based Compensation This note outlines the stock-based compensation expense recognized and the unrecognized compensation cost for equity awards | Metric | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Stock-based compensation expense (in thousands) | $4,200 | $4,600 | | Director expense (in thousands) | $600 | $700 | | Tax benefit (in thousands) | $500 | $400 | | Unrecognized compensation cost (in thousands) | $14,000 | | | Remaining vesting period | ~3 years | | - The Company recognized $4.2 million in stock-based compensation expense for the nine months ended September 30, 2023, slightly down from $4.6 million in the prior year[44] - As of September 30, 2023, there was approximately $14.0 million of unrecognized compensation cost related to equity awards, expected to be recognized over a remaining vesting period of about three years[44] Note 5 – Securities and Other Investments This note provides details on the company's securities portfolio, including available-for-sale and held-to-maturity investments | Metric | September 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Total securities AFS (fair value) | $793,826 | $917,618 | | Total securities HTM (amortized cost) | — | $679,128 | | Total other investments | $58,367 | $65,286 | | Gross unrealized losses on AFS securities | $111,138 | $78,862 | | Gross unrealized losses on HTM securities | — | $55,822 | - On March 7, 2023, Nicolet sold $500 million (par value) U.S. Treasury HTM securities for a pre-tax loss of $38 million, reclassifying the remaining $177 million HTM portfolio to AFS with a $20 million unrealized loss[47] - Gross unrealized losses on AFS securities increased to $111.138 million at September 30, 2023, from $78.862 million at December 31, 2022, primarily due to changes in noncredit-related factors like interest rates[47][53] Note 6 – Loans, Allowance for Credit Losses - Loans, and Credit Quality This note details the loan portfolio, allowance for credit losses, and an assessment of credit quality and nonperforming assets | Loan Category | September 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Commercial & industrial | $1,237,789 | $1,304,819 | | Agricultural | $1,108,261 | $1,088,607 | | CRE investment | $1,130,938 | $1,149,949 | | Residential first mortgage | $1,136,748 | $1,016,935 | | Total Loans | $6,239,257 | $6,180,499 | | ACL-Loans | $63,160 | $61,829 | | ACL-Loans to loans ratio | 1.01% | 1.00% | - Total loans increased by $58.758 million (1%) from December 31, 2022, to September 30, 2023, with residential first mortgage loans showing significant growth[60] | Metric | Nine Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Beginning ACL-Loans balance | $61,829 | $49,672 | | Provision for credit losses | $1,650 | $9,100 | | Net (charge-offs) recoveries | $(319) | $(133) | | Ending ACL-Loans balance | $63,160 | $60,348 | | Total nonaccrual loans | $29,507 | $38,080 | | Nonperforming loans to total loans | 0.47% | 0.62% | - Nonaccrual loans decreased to $29.507 million at September 30, 2023, from $38.080 million at December 31, 2022, contributing to a lower nonperforming loans to total loans ratio of 0.47%[74] Note 7 – Goodwill and Other Intangibles and Servicing Rights This note provides information on goodwill, core deposit intangibles, customer list intangibles, and mortgage and loan servicing rights | Metric | September 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Goodwill | $367,387 | $367,387 | | Core deposit intangibles (net) | $26,842 | $32,701 | | Customer list intangibles (net) | $1,979 | $2,350 | | Total Goodwill and other intangibles, net | $396,208 | $402,438 | | Mortgage servicing rights asset (net) | $11,936 | $12,580 | | Loan servicing rights asset (net) | $9,383 | $11,039 | - Goodwill remained stable at $367.387 million, with no impairment indicated for the nine months ended September 30, 2023[90] - Core deposit intangibles decreased by $5.859 million due to amortization, while mortgage servicing rights (MSR) asset decreased by $644 thousand, and loan servicing rights (LSR) asset decreased by $1.656 million due to amortization[92][94][95] Note 8 – Short and Long-Term Borrowings This note details the company's short-term and long-term debt obligations, including FHLB advances and subordinated notes | Borrowing Type | September 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Short-term borrowings | — | $317,000 | | FHLB advances (long-term) | $5,000 | $33,000 | | Junior subordinated debentures | $40,344 | $39,720 | | Subordinated notes | $152,410 | $152,622 | | Total long-term borrowings | $197,754 | $225,342 | - The Company had no short-term borrowings outstanding at September 30, 2023, a significant reduction from $317 million at December 31, 2022[97] - Long-term FHLB advances decreased from $33 million to $5 million, with a weighted average rate of 1.55% at September 30, 2023[99] - Subordinated notes include $100 million fixed-to-floating rate notes due 2031 and two assumed issuances due 2028 ($30 million) and 2030 ($22.4 million), with the 2028 notes intended for redemption in Q4 2023[101][102] Note 9 – Commitments and Contingencies This note outlines the company's off-balance sheet commitments, including credit extensions, letters of credit, and legal proceedings | Commitment Type | September 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Commitments to extend credit | $1,810,068 | $1,850,601 | | Financial standby letters of credit | $18,235 | $26,530 | | Performance standby letters of credit | $15,814 | $9,375 | | Interest rate lock commitments (mortgage derivatives) | $16,000 | $9,000 | | Forward commitments to sell (mortgage derivatives) | $17,000 | $9,000 | - Commitments to extend credit decreased by $40.533 million, while financial standby letters of credit decreased by $8.295 million[109] - Mortgage derivatives (interest rate lock and forward commitments) increased significantly from $9 million each to $16 million and $17 million, respectively, with a net fair value gain of $0.2 million at September 30, 2023[112] - Management believes any liability from pending legal proceedings would not have a material adverse effect on the Company's financial position or results of operations[114] Note 10 – Fair Value Measurements This note describes the methodologies and categorization of assets and liabilities measured at fair value - Fair value measurements are categorized into three levels based on observability of inputs: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (significant unobservable inputs)[115] | Asset/Liability | September 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Securities AFS (Total Fair Value) | $793,826 | $917,618 | | Securities AFS (Level 2) | $788,176 | $909,465 | | Securities AFS (Level 3) | $5,650 | $8,153 | | Collateral dependent loans (Level 3) | $22,925 | $30,951 | | MSR asset (Level 3) | $11,936 | $12,580 | - Securities AFS are primarily classified as Level 2, with a smaller portion in Level 3, while collateral dependent loans and MSR assets are classified as Level 3 due to unobservable inputs in their valuation[118][123] Note 11 – Subsequent Event This note discloses a significant event occurring after the balance sheet date but before the financial statements were issued - On October 2, 2023, Nicolet sold its member interest in UFS, LLC for $10 million, expecting a pre-tax gain of approximately $9 million to be realized in the fourth quarter of 2023[127] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of Nicolet Bankshares, Inc.'s financial condition and results of operations, including economic outlook and performance Overview This section provides a general introduction to Nicolet Bankshares, Inc. and the factors impacting its financial performance - Nicolet Bankshares, Inc. is a bank holding company offering traditional banking and wealth management services in Wisconsin, Michigan, and Minnesota[128] - Financial performance and balance sheet items were impacted by the August 26, 2022, acquisition of Charter Bankshares, Inc., with certain income statement results and average balances including partial contributions from Charter[132] Forward-Looking Statements This section contains cautionary statements regarding future events and financial performance, subject to risks and uncertainties Economic Outlook and Recent Industry Developments This section discusses the current economic environment, Federal Reserve actions, and challenges facing the banking sector - Economic growth in 2023 remains stronger than expected, driven by consumer spending, with a strong labor market and low unemployment[133] - The Federal Reserve aggressively raised interest rates from 0.00%-0.25% in March 2022 to 5.25%-5.50% by September 2023 to combat inflation, which has slowed but remains above the 2% target[134] - The banking sector faces challenges including tightening credit conditions, declining asset quality, slowing economic demand, interest rate risk, and potential for higher capital requirements, exacerbated by high-profile bank failures in Q1 2023[135] Performance Summary This section summarizes the company's financial results, highlighting key metrics and strategic actions impacting performance | Metric | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net income (in thousands) | $30,855 | $66,659 | | Diluted EPS | $2.05 | $4.72 | | Adjusted net income (Non-GAAP, in thousands) | $73,207 | $71,386 | | Adjusted diluted EPS (Non-GAAP) | $4.87 | $5.05 | - Net income for the nine months ended September 30, 2023, was $31 million ($2.05 diluted EPS), significantly impacted by a Q1 balance sheet repositioning and a $9.1 million charge due to a Wisconsin tax law change[144][145] - The Company executed a balance sheet repositioning on March 7, 2023, selling $500 million U.S. Treasury HTM securities for a $38 million pre-tax loss (after-tax $28 million) to reduce FHLB borrowings and hold investable cash, with an estimated earn-back period of 2.26 years[147][148] Income Statement Analysis This section provides a detailed analysis of the company's revenues, expenses, and profitability drivers Net Interest Income This section analyzes the components of net interest income, including interest-earning assets and interest-bearing liabilities | Metric | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Tax-equivalent net interest income (in thousands) | $178,856 | $173,127 | | Net interest margin | 3.07% | 3.36% | | Interest-earning asset yield | 4.85% | 3.67% | | Cost of funds | 2.56% | 0.47% | | Average loans (in thousands) | $6,223,396 | $4,975,432 | | Average interest-bearing liabilities (in thousands) | $5,329,540 | $4,613,360 | - Tax-equivalent net interest income increased by $5.729 million (3%) for the nine months ended September 30, 2023, driven by favorable loan volumes and higher rates, but tempered by increased funding costs[159] - Net interest margin decreased by 29 bps to 3.07% for the first nine months of 2023, as liabilities repriced faster than assets in a rising interest rate environment, with the cost of funds increasing by 209 bps to 2.56%[162] Provision for Credit Losses This section discusses the provision for credit losses, reflecting changes in the allowance for credit losses on loans and securities | Metric | Nine Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Provision for credit losses | $3,990 | $9,650 | | - Loans | $1,650 | $9,100 | | - Investment securities | $2,340 | — | | - Unfunded commitments | — | $550 | - The provision for credit losses decreased to $4.0 million for the nine months ended September 30, 2023, from $9.7 million in the prior year, primarily due to a lower provision for loans and the absence of unfunded commitments provision[164] - The 2023 provision included $2.3 million for the ACL on AFS securities, related to the expected loss on the Signature Bank subordinated debt investment, which was fully charged-off in Q1 2023[164] Noninterest Income This section analyzes the various sources of noninterest income, including fees, service charges, and net gains (losses) on assets | Metric | Nine Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Total noninterest income | $11,538 | $43,074 | | Noninterest income without net gains (losses) | $50,293 | $40,204 | | Asset gains (losses), net | $(38,755) | $2,870 | | Wealth management fee income | $17,439 | $15,700 | | Mortgage income, net | $5,308 | $7,186 | | Card interchange income | $9,685 | $8,543 | | LSR income, net | $3,398 | $(1,042) | - Total noninterest income decreased by $31.5 million (73%) for the nine months ended September 30, 2023, primarily due to net asset losses of $38.8 million from the balance sheet repositioning[168][174] - Excluding net asset gains (losses), noninterest income increased by $10.1 million (25%), driven by growth in wealth management fee income (up 11%), card interchange income (up 13%), and a significant increase in LSR income (up $4.4 million) due to lower amortization[168][169][171][172] Noninterest Expense This section examines the various categories of noninterest expenses, including personnel, occupancy, and data processing costs | Metric | Nine Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Total noninterest expense | $135,570 | $116,655 | | Personnel | $72,172 | $65,008 | | Occupancy, equipment and office | $26,655 | $21,476 | | Data processing | $12,849 | $10,647 | | Intangibles amortization | $6,230 | $4,399 | | FDIC assessments | $3,049 | $1,440 | | Other expense | $8,490 | $6,344 | | Average FTE employees | 955 | 863 | - Total noninterest expense increased by $18.9 million (16%) for the nine months ended September 30, 2023, with personnel costs up $7.2 million (11%) and non-personnel expenses up $11.8 million (23%)[175] - Key drivers of expense increases include higher salaries from a larger employee base (up 11% FTE, partly from Charter acquisition), increased occupancy and equipment costs due to expanded branch network and technology, higher data processing charges, and increased intangibles amortization[176][177][178][179] Income Taxes This section discusses the company's income tax expense and effective tax rate, including the impact of specific tax law changes | Metric | Nine Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Income tax expense | $18,357 | $21,979 | | Effective tax rate | 37.3% | 24.8% | - Income tax expense decreased to $18.4 million for the nine months ended September 30, 2023, from $22.0 million in the prior year, despite a higher effective tax rate of 37.3% (vs. 24.8%)[180] - The 2023 income tax expense included a $9.1 million charge to establish a tax valuation allowance related to a Wisconsin tax law change, which provides an exemption for certain state taxable income[145][180] Income Statement Analysis – Three Months Ended September 30, 2023 versus Three Months Ended September 30, 2022 This section compares the company's income statement performance for the three-month periods ended September 30, 2023 and 2022 | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net income (in thousands) | $17,158 | $18,510 | | Diluted EPS | $1.14 | $1.29 | | Tax-equivalent net interest income (in thousands) | $61,978 | $63,483 | | Net interest margin | 3.16% | 3.48% | | Provision for credit losses (in thousands) | $450 | $8,600 | | Total noninterest income (in thousands) | $16,541 | $13,000 | | Total noninterest expense (in thousands) | $45,738 | $42,567 | | Income tax expense (in thousands) | $14,669 | $6,313 | - Net income for Q3 2023 decreased to $17.2 million from $18.5 million in Q3 2022, with diluted EPS falling from $1.29 to $1.14[181] - Tax-equivalent net interest income decreased by $1.5 million, and net interest margin declined by 32 bps to 3.16%, due to liabilities repricing faster than assets[182] - Noninterest income increased by $3.5 million (27%), driven by wealth management fees and LSR income, while noninterest expense rose by $3.2 million (7%) due to occupancy, data processing, and other operating costs[183] Balance Sheet Analysis This section provides a detailed analysis of the company's assets, liabilities, and equity, and their changes over time Loans This section analyzes the composition and changes in the company's loan portfolio by category | Loan Category | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Sep 30, 2022 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Commercial-based loans | $4,775,132 | $4,816,574 | $4,680,080 | | Residential real estate | $1,408,469 | $1,308,659 | $1,248,098 | | Retail & other | $55,656 | $55,266 | $56,259 | | Total loans | $6,239,257 | $6,180,499 | $5,984,437 | | Commercial & industrial (% of total) | 20% | 21% | 21% | | Agricultural (% of total) | 18% | 18% | 17% | | CRE investment (% of total) | 18% | 19% | 19% | - Total loans increased by $59 million from December 31, 2022, to September 30, 2023, driven by growth in residential mortgage loans, partially offset by slower commercial loan demand and specific loan payoffs[184][193] - The loan portfolio remains diversified, with commercial-based loans constituting 77% of the total, and the largest segments being commercial & industrial (20%), agricultural (18%), and CRE investment (18%)[192][193] Allowance for Credit Losses - Loans This section discusses the allowance for credit losses on loans and the methodology used for its estimation | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Sep 30, 2022 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | ACL-Loans | $63,160 | $61,829 | $60,348 | | ACL-Loans to total loans | 1.01% | 1.00% | 1.01% | | Net charge-offs to average loans, annualized | 0.01% | 0.01% | —% | - The ACL-Loans was $63.160 million at September 30, 2023, representing 1.01% of total loans, a slight increase from $61.829 million (1.00%) at December 31, 2022[201] - Management's allocation methodology for ACL-Loans considers specific reserves for credit-deteriorated loans, historical loss rates by loan segment, qualitative and environmental factors, and reasonable and supportable forecasts[200] Nonperforming Assets This section provides an overview of nonperforming loans, other real estate owned (OREO), and potential problem loans | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Sep 30, 2022 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Total nonperforming loans | $29,507 | $38,080 | $38,326 | | Total OREO | $2,031 | $1,975 | $2,134 | | Total nonperforming assets | $31,538 | $40,055 | $40,460 | | Nonperforming assets to total assets | 0.37% | 0.46% | 0.45% | | ACL-Loans to nonperforming loans | 214% | 162% | 157% | - Total nonperforming assets decreased to $31.538 million (0.37% of total assets) at September 30, 2023, from $40.055 million (0.46% of total assets) at December 31, 2022, primarily due to the sale of select nonaccrual loans[203] - Potential problem loans, defined as performing loans rated Substandard, increased to $72 million at September 30, 2023, from $53 million at December 31, 2022, mainly due to the downgrade of one commercial credit relationship[204] Deposits This section analyzes the composition of the company's deposit base, including noninterest-bearing, time, and uninsured deposits | Deposit Type | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Sep 30, 2022 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Total deposits | $7,182,388 | $7,178,921 | $7,395,902 | | Noninterest-bearing demand | $2,020,074 | $2,361,816 | $2,477,507 | | Time deposits | $1,484,296 | $898,219 | $966,158 | | Total brokered deposits | $603,950 | $591,895 | $638,992 | | Total customer deposits (core) | $6,578,438 | $6,587,026 | $6,756,910 | | Estimated uninsured deposits | $2,000,000 | $2,300,000 | | - Total deposits remained largely unchanged at $7.182 billion from December 31, 2022, to September 30, 2023, with a shift towards higher-rate time deposits and money market accounts, offsetting lower transaction account balances[184][206] - Estimated uninsured deposits decreased to $2.0 billion (29% of total deposits) at September 30, 2023, from $2.3 billion (32% of total deposits) at December 31, 2022[207] Lending-Related Commitments This section details the company's commitments to extend credit and various types of standby letters of credit | Commitment Type | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Commitments to extend credit | $1,810,068 | $1,850,601 | | Financial standby letters of credit | $18,235 | $26,530 | | Performance standby letters of credit | $15,814 | $9,375 | - Commitments to extend credit decreased by $40.533 million, while financial standby letters of credit decreased by $8.295 million from December 31, 2022, to September 30, 2023[209] - Performance standby letters of credit increased by $6.439 million during the same period[209] Liquidity Management This section discusses the company's strategies and resources for managing liquidity, including cash and borrowing availability - Cash and due from banks and interest-earning deposits, the most liquid assets, totaled $546 million at September 30, 2023, significantly up from $155 million at December 31, 2022[210] - The $391 million increase in cash and cash equivalents was driven by $670 million net cash from investing activities (mostly investment sales) and $70 million from operating activities, partially offset by $349 million used in financing activities (repayment of FHLB borrowings)[211] | Liquidity Source | September 30, 2023 (in millions) | | :-------------------------------- | :-------------------------------- | | FHLB Borrowing Availability | $560 | | Fed Funds Lines | $195 | | Fed Discount Window | $11 | | Immediate Funding Availability | $766 | | Short-Term Funding Availability | $1,375 | | Total Contingent Funding Availability | $2,141 | Interest Rate Sensitivity Management and Impact of Inflation This section describes how the company manages interest rate risk and the potential impact of inflation on its financial performance - Nicolet manages interest rate risk through asset-liability management policies, aiming for a reasonable balance between interest rate risk, credit risk, liquidity risk, and yield maintenance[217][218] | Interest Rate Change | September 30, 2023 (Change in Net Interest Income) | December 31, 2022 (Change in Net Interest Income) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | 200 bps decrease | (1.8)% | (0.7)% | | 100 bps decrease | (0.9)% | (0.4)% | | 100 bps increase | 1.1% | —% | | 200 bps increase | 2.3% | 0.1% | - Simulation results indicate that a 200 bps increase in interest rates would lead to a 2.3% increase in net interest income over a one-year horizon, while a 200 bps decrease would result in a 1.8% decrease, both within management's guidelines[220][221] Capital This section details the company's regulatory capital ratios and compliance with capital requirements - The Company and the Bank maintain regulatory capital ratios above minimum requirements, qualifying the Bank as well-capitalized under prompt-corrective action framework[223] | Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Company Total capital ratio | 13.0% | 12.3% | | Company Tier 1 capital ratio | 10.1% | 9.5% | | Company Common equity tier 1 capital ratio | 9.6% | 9.0% | | Company Tier 1 leverage ratio | 8.8% | 8.2% | | Bank Total capital ratio | 12.2% | 11.3% | | Bank Tier 1 capital ratio | 11.4% | 10.6% | | Bank Common equity tier 1 capital ratio | 11.4% | 10.6% | | Bank Tier 1 leverage ratio | 9.9% | 9.1% | - As of September 30, 2023, $46 million (approximately 659,000 shares) remained authorized under the common stock repurchase program[226][235] Critical Accounting Estimates This section confirms the consistency of critical accounting policies and estimates since the prior annual report - There have been no changes in the Company's critical accounting policies and estimates, including business combinations, valuation of acquired loans, allowance for credit losses, and income taxes, since December 31, 2022[227] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section confirms no material changes in the company's market risk profile compared to the 2022 Annual Report on Form 10-K - No material changes in market risk were reported at September 30, 2023, compared to the 2022 Annual Report on Form 10-K[228] Item 4. Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures and reports no material changes in internal control over financial reporting - Management concluded that disclosure controls and procedures were effective as of September 30, 2023[229] - There were no material changes in internal control over financial reporting during the quarter ended September 30, 2023[230] PART II – OTHER INFORMATION This section includes disclosures on legal proceedings, risk factors, equity sales, defaults, and other relevant information Item 1. Legal Proceedings This section confirms no legal proceedings are expected to have a material adverse effect on the company's financial results or position - The Company is not engaged in any legal proceedings expected to have a material adverse effect on its financial results[232] Item 1A. Risk Factors This section confirms no material changes to the risk factors previously disclosed in the 2022 Annual Report on Form 10-K - No material changes to risk factors were reported since the 2022 Annual Report on Form 10-K[233] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details common stock purchases related to stock option exercises and updates on the remaining share repurchase program authorization | Period | Total Number of Shares Purchased | Average Price Paid per Share ($) | Maximum Number of Shares that May Yet Be Purchased Under the Plans () | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | July 1 – July 31, 2023 | 39,745 | $80.60 | | | August 1 – August 31, 2023 | — | — | | | September 1 – September 30, 2023 | — | — | | | Total | 39,745 | $80.60 | 659,000 | - During Q3 2023, the Company withheld 39,745 common shares to satisfy stock option exercise prices and tax withholding requirements, which are not considered repurchases under the Board's authorization[235] - As of September 30, 2023, approximately $46 million, or 659,000 shares, remained available under the common stock repurchase program[235] Item 3. Defaults Upon Senior Securities This section confirms that no defaults upon senior securities occurred during the reporting period - No defaults upon senior securities were reported[236] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the Company's operations - Mine safety disclosures are not applicable[237] Item 5. Other Information This section discloses an advisor agreement with Robert B. Atwell and confirms no Rule 10b5-1 or non-Rule 10b5-1 trading arrangements - Robert B. Atwell, Executive Chairman, transitioned to an advisor role for three years starting January 1, 2024, receiving an annual fee of $680,000, health insurance, and life insurance premiums, in exchange for services and restrictive covenants[238] - Mr. Atwell will remain a member of the Company's Board of Directors[238] - No Rule 10b5-1 or non-Rule 10b5-1 trading arrangements were reported[240] Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including key agreements and certifications - Exhibits include the Succession Plan and Executive Advisory Services Letter Agreement (Exhibit 10.1), CEO and CFO certifications (Exhibits 31.1, 31.2, 32.1, 32.2), and Interactive Data Files (Exhibit 101, 104)[241] Signatures This section contains the duly authorized signatures of the company's President, CEO, and CFO, affirming the report's filing - The report is signed by Michael E. Daniels, President and CEO, and H. Phillip Moore, Jr., CFO, on November 7, 2023[244]