NICOLET BANKSHARES, INC. Nicolet Bankshares, Inc. (the "Company" or "Nicolet") is a bank holding company headquartered inGreen Bay, Wisconsin . Nicolet provides a diversified range of traditional banking and wealth management services to individuals and businesses in its market area and through the branch offices of its banking subsidiary,Nicolet National Bank (the "Bank"), inWisconsin ,Michigan , andMinnesota . In this Quarterly Report on Form 10-Q, unless the context indicates otherwise, all references to "we," "us" and "our" refer to the Company.
Forward-Looking Statements
Statements made in this document and in any documents that are incorporated by reference which are not purely historical are forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, including any statements regarding descriptions of management's plans, objectives, or goals for future operations, products or services, and forecasts of its revenues, earnings, or other measures of performance. Forward-looking statements are based on current management expectations and, by their nature, are subject to risks and uncertainties. These statements are neither statements of historical fact nor assurance of future performance and generally may be identified by the use of words such as "believe," "expect," "anticipate," "plan," "estimate," "should," "will," "intend," or similar expressions. Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of various transactions or events, and statements about our future performance, operations, products and services, and should be viewed with caution. Shareholders should note that many factors, some of which are discussed elsewhere in this document, could affect the future financial results of Nicolet and could cause those results to differ materially from those implied or anticipated by the statements. Except as required by law, we expressly disclaim any obligations to publicly update any forward-looking statements whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise. Important factors, many of which are beyond Nicolet's control, that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements, in addition to those described in detail under Item 1A, "Risk Factors" of Nicolet's 2022 Annual Report on Form 10-K include, but are not necessarily limited to the following: •operating, legal and regulatory risks, including the effects of legislative or regulatory developments affecting the financial industry generally or Nicolet specifically; •our ability to maintain liquidity, primarily through deposits, in light of recent events in the banking industry; •economic, market, political and competitive forces affecting Nicolet's banking and wealth management businesses; •changes in interest rates, monetary policy and general economic conditions, which may impact Nicolet's net interest income; •potential difficulties in identifying and integrating the operations of future acquisition targets with those of Nicolet; •the impact of purchase accounting with respect to our merger activities, or any change in the assumptions used regarding the assets purchased and liabilities assumed to determine their fair value; •cybersecurity risks and the vulnerability of our network and online banking portals, and the systems or parties with whom we contract, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches that could adversely affect our business and financial performance or reputation; •changes in accounting standards, rules and interpretations and the related impact on Nicolet's financial statements; •compliance or operational risks related to new products, services, ventures, or lines of business, if any, that Nicolet may pursue or implement; •changes in monetary and tax policies; •changes occurring in business conditions and inflation and the possibility of a recession; •our ability to attract and retain key personnel; •examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for credit losses, write-down assets, or take other actions; •risks associated with actual or potential information gatherings, investigations or legal proceedings by customers, regulatory agencies or others; •the potential effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as weather events, natural disasters, epidemics and pandemics (including COVID-19), war or terrorist activities, disruptions in our customers' supply chains, disruptions in transportation, essential utility outages or trade disputes and related tariffs; •each of the factors and risks under Item 1A, "Risk Factors" of Nicolet's 2022 Annual Report on Form 10-K and in subsequent filings we make with theSEC ; and •the risk that Nicolet's analysis of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.
These factors should be considered in evaluating the forward-looking statements, and you should not place undue reliance on such statements.
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--------------------------------------------------------------------------------Overview
The following discussion is management's analysis of the consolidated financial condition as ofMarch 31, 2023 andDecember 31, 2022 and results of operations for the three-month periods endedMarch 31, 2023 and 2022. It should be read in conjunction with Nicolet's audited consolidated financial statements included in Nicolet's 2022 Annual Report on Form 10-K. Our financial performance and certain balance sheet line items were impacted by the timing and size of our acquisition ofCharter Bankshares, Inc. ("Charter") onAugust 26, 2022 . Certain income statement results, average balances and related ratios include partial contributions from Charter from the acquisition date. Additional information on our acquisition activity is included in Note 2, "Acquisition" in the Notes to Unaudited Consolidated Financial Statements, under Part I, Item 1.
Economic Outlook and Recent Industry Developments
The current economic outlook is highly uncertain. A strong labor market is contributing to continuing positive economic activity and demand for goods and services; however, certain sectors are beginning to show signs of weakening. Real estate and manufacturing are slowing. Unemployment rates have not increased despite the significant increase in interest rates by theFederal Reserve to combat inflation (from a target range of 0.00%-0.25% in earlyMarch 2022 to 4.75%-5.00% at the end ofMarch 2023 ). Many economists are anticipating a mild recession over the next year, but the long-term outlook is still positive as entrepreneurial activity remains strong. During first quarter 2023, the banking industry experienced significant volatility with high-profile bank failures and industry wide concerns related to liquidity, deposit outflows, unrealized securities losses, and eroding consumer confidence in the banking system. Despite these negative industry developments, Nicolet strengthened its balance sheet and maintained a solid liquidity position. During first quarter 2023, the Company sold$500 million in held to maturity securities and used the net proceeds to reduce wholesale funding, which repositioned the balance sheet for future growth. This reduction in wholesale funding also enhanced the Company's already strong liquidity position. 31 --------------------------------------------------------------------------------
Table 1: Earnings Summary and Selected Financial Data
At or for the Three Months Ended
(In thousands, except per share data) 3/31/2023 12/31/2022 9/30/2022 6/30/2022 3/31/2022
Results of operations:
Net interest income $ 56,721 $ 68,092 $ 62,990 $ 55,084 $ 53,795
Provision for credit losses 3,090 1,850 8,600 750 300
Noninterest income (21,844) 14,846 13,000 14,131 15,943
Noninterest expense 44,875 43,989 42,567 36,538 37,550
Income (loss) before income tax expense (13,088) 37,099 24,823 31,927 31,888
Income tax expense (benefit) (4,190) 9,498 6,313 7,942 7,724
Net income (loss) $ (8,898) $ 27,601 $ 18,510 $ 23,985 $ 24,164
Earnings (loss) per common share:
Basic $ (0.61) $ 1.88 $ 1.33 $ 1.79 $ 1.77
Diluted $ (0.61) $ 1.83 $ 1.29 $ 1.73 $ 1.70
Common Shares:
Basic weighted average 14,694 14,685 13,890 13,402 13,649
Diluted weighted average 14,694 15,110 14,310 13,852 14,215
Outstanding (period end) 14,698 14,691 14,673 13,407 13,457
Period-End Balances:
Loans $ 6,223,732 $ 6,180,499
62,412 61,829 60,348 50,655 49,906
Total assets 8,192,354 8,763,969 8,895,916 7,370,252 7,320,212
Deposits 6,928,579 7,178,921 7,395,902 6,286,266 6,231,120
Stockholders' equity (common) 961,792 972,529 938,463 839,387 836,310
Book value per common share 65.44 66.20 63.96 62.61 62.15
Tangible book value per common share (2) 38.20 38.81 36.21 37.49 37.03
Financial Ratios: (1)
Return on average assets (0.42) % 1.26 % 0.93 % 1.32 % 1.30 %
Return on average common equity (3.72) 11.47 8.25 11.48 11.38
Return on average tangible common equity
(2) (6.34) 19.85 13.93 19.21 18.75
Stockholders' equity to assets 11.74 11.10 10.55 11.39 11.42
Tangible common equity to tangible assets
(2) 7.21 6.82 6.26 7.15 7.14
Reconciliation of Non-GAAP Financial
Measures:
Adjusted net income (loss) reconciliation:
(3)
Net income (loss) (GAAP) $ (8,898) $ 27,601 $ 18,510 $ 23,985 $ 24,164
Adjustments:
Provision expense (4) 2,340 - 8,000 - -
Assets (gains) losses, net 38,468 (260) 46 (1,603) (1,313)
Merger-related expense 163 492 519 555 98
Adjustments subtotal 40,971 232 8,565 (1,048) (1,215)
Tax on Adjustments (25% effective tax
rate) 10,243 58 2,141 (262) (304)
Adjustments, net of tax 30,728 174 6,424 (786) (911)
Core banking operations / Adjusted net
income (Non-GAAP) $ 21,830 $ 27,775 $ 24,934 $ 23,199 $ 23,253
Adjusted diluted earnings per common share
(Non-GAAP) $ 1.45 $ 1.84 $ 1.74 $ 1.67 $ 1.64
Tangible assets: (2)
Total assets $ 8,192,354 $ 8,763,969
400,277 402,438 407,117 336,721 338,068
Tangible assets $ 7,792,077 $ 8,361,531 $ 961,792 $ 972,529
400,277 402,438 407,117 336,721 338,068
Tangible common equity $ 561,515 $ 570,091
401,212 403,243 363,211 337,289 338,694
Average tangible common equity $ 568,896 $ 551,727
(1) Income statement-related ratios for partial-year periods are annualized.
(2) The ratios of tangible book value per common share, return on average
tangible common equity, and tangible common equity to tangible assets are
non-GAAP financial measures that exclude goodwill and other intangibles, net.
These financial ratios have been included as management considers them to be
useful metrics with which to analyze and evaluate our financial condition and
capital strength. See section "Non-GAAP Financial Measures" below.
(3) The adjusted net income / core banking operations measure is a non-GAAP
financial measure that provides information that management believes is useful
to investors in understanding our operating performance and trends and also aids
investors in the comparison of our financial performance to the financial
performance of peer banks. See section "Non-GAAP Financial Measures" below.
(4) Provision expense for 2023 is attributable to the expected loss on our
investment in Signature Bank sub debt, and the provision expense for 2022 is
attributable to the Day 2 allowance from the acquisition of Charter.
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--------------------------------------------------------------------------------Non-GAAP Financial Measures
We identify "tangible book value per common share," "return on average tangible common equity," "tangible common equity to tangible assets" "adjusted net income / core banking operations," and "adjusted diluted earnings per common share" as "non-GAAP financial measures." In accordance with theSEC's rules, we identify certain financial measures as non-GAAP financial measures if such financial measures exclude or include amounts in the most directly comparable measures calculated and presented in accordance with generally accepted accounting principles ("GAAP") in effect inthe United States in our statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures, ratios or statistical measures calculated using exclusively financial measures calculated in accordance with GAAP. Management believes that the presentation of these non-GAAP financial measures (a) are important metrics used to analyze and evaluate our financial condition and capital strength and provide important supplemental information that contributes to a proper understanding of our operating performance and trends, (b) enables a more complete understanding of factors and trends affecting our business, and (c) allows investors to compare our financial performance to the financial performance of our peers and to evaluate our performance in a manner similar to management, the financial services industry, bank stock analysts, and bank regulators. Management uses non-GAAP measures as follows: in the preparation of our operating budgets, monthly financial performance reporting, and in our presentation to investors of our performance. However, we acknowledge that these non-GAAP financial measures have a number of limitations. Limitations associated with non-GAAP financial measures include the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently. These disclosures should not be considered an alternative to our GAAP results. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is presented in the table above.
Performance Summary
Nicolet recognized a net loss of$9 million (or loss per diluted common share of$0.61 ) for first quarter 2023, compared to net income of$28 million (or earnings per diluted common share of$1.83 ) for fourth quarter 2022, and net income of$24 million (or earnings per diluted common share of$1.70 ) for first quarter 2022. Core banking operations (or adjusted net income (Non-GAAP)) earned$22 million on growth in loans and wealth management fee revenue. Asset quality continued to be very good as nonperforming assets were 0.50% of total assets. Net income reflected non-core items and the related tax effect of each, includingU.S. Treasury securities sale loss, expected loss (provision expense) on the Signature Bank sub debt investment (acquired in an acquisition), merger-related expenses, Day 2 credit provision expense required under the CECL model, as well as gains / (losses) on other assets and investments. These non-core items negatively impacted earnings per diluted common share$2.06 for first quarter 2023 and$0.01 for fourth quarter 2022, and positively impacted earnings per diluted common share$0.06 for first quarter 2022. OnMarch 7, 2023 , Nicolet executed the sale of$500 million (par value)U.S. Treasury held to maturity securities for a pre-tax loss of$38 million or an after-tax loss of$28 million to reposition the balance sheet for future growth. The$500 million portfolio yielded approximately 88 bps with scheduled maturities in 2024 and 2025 (or average duration of 2 years). Proceeds from the sale were used to reduce existing FHLB borrowings with the remainder held in investable cash. The following table summarizes the estimated annual impact of this balance sheet repositioning. Sale Metrics $ in Millions
Assumptions
Sale of $500 million U.S. Treasury securities
Loss on sale of U.S.Treasury securities $ (37,723) yielding 88 bps
Lost interest from U.S. Treasury
securities $ (4,380) Assumes $500 million at 88 bps
Lower interest expense on FHLB Assumes $377 million at 456 bps (at time of
borrowings 17,128 sale)
Interest income from investable cash 3,905 Assumes $83 million at 465 bps (at time of sale)
Projected net impact from repositioning
2.26
As a result of the sale of securities previously classified as held to maturity,
the remaining unsold portfolio of held to maturity securities, with a book value
of $177 million , was reclassified to available for sale with a carrying value of
approximately $157 million . The unrealized loss on this portfolio of $20 million
increased the balance of accumulated other comprehensive loss (AOCI) $15
million , net of the deferred tax effect, and is subject to future market
changes.
•At March 31, 2023 , assets were $8.2 billion , a decrease of $572 million (7%)
from December 31, 2022 , mostly in investment securities due to the balance sheet
repositioning. Compared to March 31, 2022 , assets increased $872 million (12%)
due to the acquisition of Charter as well as strong organic loan growth.
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•At March 31, 2023 , loans were $6.2 billion , an increase of $43 million (3%
annualized) from December 31, 2022 . Compared to March 31, 2022 , loans increased
$1.5 billion (33%), largely due to the Charter acquisition and strong organic
loan growth. For additional information regarding loans, see "BALANCE SHEET
ANALYSIS - Loans."
•Total deposits were $6.9 billion at March 31, 2023 , down $250 million from
December 31, 2022 , mostly in noninterest-bearing demand deposits. Compared to
March 31, 2022 , deposits increased $697 million (11%), largely due to the
Charter acquisition. For additional information regarding deposits, see "BALANCE
SHEET ANALYSIS - Deposits."
•The net interest margin was 2.91% for first quarter 2023, 32 bps lower than the
comparable 2022 period. The favorable increase in the earning asset yield of 101
bps, was more than offset by a 195 bps increase in the cost of funds, and the
net free funds improved 62 bps. Net interest income increased $2.9 million (5%)
over first quarter 2022, including a $29.5 million increase in interest income
offset by a $26.5 million increase in interest expense. For additional
information regarding net interest income, see "INCOME STATEMENT ANALYSIS - Net
Interest Income."
•Noninterest income was a negative $21.8 million for first quarter 2023, a $37.8
million unfavorable change compared to first quarter 2022. Excluding net asset
gains (losses), noninterest income for first quarter 2023 was $16.6 million , a
$2.0 million increase over first quarter 2022. For additional information
regarding noninterest income, see "INCOME STATEMENT ANALYSIS - Noninterest
Income."
•Noninterest expense was
INCOME STATEMENT ANALYSIS
Net Interest Income
Tax-equivalent net interest income is a non-GAAP measure, but is a preferred
industry measurement of net interest income (and its use in calculating a net
interest margin) as it enhances the comparability of net interest income arising
from taxable and tax-exempt sources. The tax-equivalent adjustments bring
tax-exempt interest to a level that would yield the same after-tax income by
applying the effective Federal corporate tax rates to the underlying assets.
Tables 2 and 3 present information to facilitate the review and discussion of
selected average balance sheet items, tax-equivalent net interest income,
interest rate spread and net interest margin.
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--------------------------------------------------------------------------------Table 2: Average Balance Sheet and Net Interest Income Analysis - Tax-Equivalent Basis
For the Three Months Ended
2023 2022
Average Average Average Average
(in thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate
ASSETS
Interest-earning assets
Commercial-based loans $ 5,145,341 $ 65,512 5.09 % $ 3,920,744 $ 43,197 4.41 %
Retail-based loans 1,056,439 13,674 5.18 % 768,040 8,137 4.24 %
Total loans, including loan fees
(1)(2) 6,201,780 79,186 5.11 % 4,688,784 51,334 4.38 %
Investment securities:
Taxable 1,224,395 4,961 1.63 % 1,386,593 5,127 1.48 %
Tax-exempt (2) 284,140 2,285 3.22 % 189,031 1,031 2.18 %
Total investment securities 1,508,535 7,246 1.93 % 1,575,624 6,158 1.57 %
Other interest-earning assets 120,275 1,536 5.11 % 446,783 817 0.73 %
Total non-loan earning assets 1,628,810 8,782 2.16 % 2,022,407 6,975 1.38 %
Total interest-earning assets 7,830,590 $ 87,968 4.49 % 6,711,191 $ 58,309 3.48 %
Other assets, net 740,033 808,445
Total assets $ 8,570,623 $ 7,519,636
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Savings $ 888,979 $ 2,365 1.08 % $ 821,452 $ 105 0.05 %
Interest-bearing demand 985,778 3,339 1.37 % 1,052,076 701 0.27 %
Money market accounts ("MMA") 1,847,701 11,190 2.46 % 1,540,506 323 0.09 %
Core time deposits 602,882 2,693 1.81 % 595,864 508 0.35 %
Total interest-bearing core
deposits 4,325,340 19,587 1.84 % 4,009,898 1,637 0.17 %
Brokered deposits 566,282 5,350 3.83 % 459,460 555 0.49 %
Total interest-bearing deposits 4,891,622 24,937 2.07 % 4,469,358 2,192 0.20 %
Other interest-bearing liabilities 499,485 5,718 4.58 % 214,557 1,931 3.60 %
Total interest-bearing liabilities 5,391,107 30,655 2.30 % 4,683,915 4,123 0.35 %
Noninterest-bearing demand 2,168,640 1,923,186
Other liabilities 40,768 51,216
Stockholders' equity 970,108 861,319
Total liabilities and
stockholders' equity $ 8,570,623 $ 7,519,636
Net interest income and rate
spread $ 57,313 2.19 % $ 54,186 3.13 %
Tax-equivalent adjustment & net
free funds 592 0.72 % 391 0.10 %
Net interest income and net
interest margin $ 56,721 2.91 % $ 53,795 3.23 %
(1)Nonaccrual loans and loans held for sale are included in the daily average
loan balances outstanding.
(2)The yield on tax-exempt loans and tax-exempt investment securities is
computed on a tax-equivalent basis using a federal tax rate of 21% and adjusted
for the disallowance of interest expense.
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--------------------------------------------------------------------------------Table 3: Volume/Rate Variance - Tax-Equivalent Basis
For the Three
Months Ended
Compared
to
Increase (Decrease) Due to Changes in
(in thousands) Volume Rate Net (1)
Interest-earning assets
Commercial-based loans$ 14,894 $ 7,421 $ 22,315 Retail-based loans 3,481 2,056 5,537 Total loans, including loan fees (2) (3) 18,375 9,477 27,852 Investment securities: Taxable (1,243) 1,077 (166) Tax-exempt (3) 646 608 1,254 Total investment securities (597) 1,685 1,088 Other interest-earning assets (100) 819 719 Total non-loan earning assets (697) 2,504 1,807 Total interest-earning assets$ 17,678 $ 11,981 $ 29,659 Interest-bearing liabilities Savings $ 9$ 2,251 $ 2,260 Interest-bearing demand (41) 2,679 2,638 MMA 78 10,789 10,867 Core time deposits 6 2,179 2,185 Total interest-bearing core deposits 52 17,898 17,950 Brokered deposits 158 4,637 4,795 Total interest-bearing deposits 210 22,535 22,745 Other interest-bearing liabilities 3,143 644 3,787 Total interest-bearing liabilities 3,353 23,179 26,532 Net interest income$ 14,325 $ (11,198) $ 3,127 (1)The change in interest due to both rate and volume has been allocated in proportion to the relationship of dollar amounts of change in each. (2)Nonaccrual loans and loans held for sale are included in the daily average loan balances outstanding. (3)The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 21% and adjusted for the disallowance of interest expense. TheFederal Reserve raised short-term interest rates a total of 425 bps during 2022, increasing the Federal Funds rate to a range of 4.25% to 4.50% as ofDecember 31, 2022 . Additional increases totaling 50 bps were made in first quarter 2023, resulting in a Federal Funds range of 4.75% to 5.00% as ofMarch 31, 2023 . Tax-equivalent net interest income was$57 million for first quarter 2023, an increase of$3 million (6%) over first quarter 2022). The$3 million increase in tax-equivalent net interest income was attributable to net favorable volumes (which added$14 million to net interest income, mostly from the Charter acquisition and solid loan growth) and net unfavorable rates (which decreased net interest income$11 million from higher deposit costs and the lag in repricing the loan portfolio to current market interest rates). Average interest-earning assets increased to$7.8 billion , up$1.1 billion (17%) over the comparable 2022 period, primarily due to the timing of the acquisition of Charter. Between the comparable three-month periods, average loans increased$1.5 billion (32%), mostly due to timing of the Charter acquisition (which added loans of$827 million at acquisition) and strong organic loan growth throughout 2022. Average investment securities decreased$67 million between the comparable three-month periods, while other interest-earning assets declined$327 million , mostly due to lower cash. As a result, the mix of average interest-earning assets shifted to 79% loans, 19% investments and 2% other interest-earning assets (mostly cash) for first quarter 2023, compared to 70%, 23% and 7%, respectively, for first quarter 2022. Average interest-bearing liabilities were$5.4 billion for first quarter 2023, an increase of$707 million (15%) over first quarter 2022, primarily due to the timing of the acquisition of Charter. Average interest-bearing core deposits increased$315 million and average brokered deposits increased$107 million between the comparable three-month periods, reflecting the impact of the Charter acquisition and brokered funding to support the strong loan growth. Other interest-bearing liabilities increased$285 million between the comparable first quarter periods, partly due to wholesale funding acquired with Charter and partly due to FHLB borrowings to support the strong loan growth. The mix of average interest-bearing liabilities was 80% core deposits, 11% brokered deposits and 9% wholesale funding for the first quarter 2023, compared to 86%, 10%, and 4%, respectively, for the first quarter 2022. 36 -------------------------------------------------------------------------------- The interest rate spread decreased 94 bps between the comparable first quarter periods, as our liabilities have repriced faster than our assets in the rapidly rising interest rate environment. The interest-earning asset yield increased 101 bps to 4.49% for the first three months of 2023, primarily due to the changing mix of interest-earning assets (mostly the reduction in cash noted above). The loan yield improved 73 bps to 5.11% between the comparable three-month periods, largely due to the repricing of new and renewed loans in a rising interest rate environment, while the yield on investment securities increased 36 bps to 1.93%. The cost of funds increased 195 bps to 2.30% for first quarter 2023, also reflecting the rising interest rate environment, a migration of customer deposits into higher rate deposit products, and a shift in the mix of interest-bearing liabilities (mostly the increase in wholesale funding noted above). The contribution from net free funds increased 62 bps, mostly due to the higher value in the rising interest rate environment. As a result, the tax-equivalent net interest margin was 2.91% for first quarter 2023, down 32 bps compared to 3.23% for first quarter 2022. Tax-equivalent interest income was$88 million for first quarter 2023, up$30 million from first quarter 2022, comprised of$18 million higher volumes and$12 million higher average rates. Interest income on loans increased$28 million over first quarter 2022, mostly due to higher average balances from the Charter acquisition and strong organic loan growth. Interest expense increased to$31 million for first quarter 2023, up$27 million compared to first quarter 2022, comprised of$23 million higher overall cost of funds and$3 million higher volumes. Interest expense on deposits increased$23 million from first quarter 2022 mostly due to a much higher interest rate environment. Interest expense on wholesale funding increased between the comparable three-month periods, mostly due to higher average balances.
Provision for Credit Losses
The provision for credit losses was$3.1 million for the three months endedMarch 31, 2023 (comprised of$0.8 million related to the ACL-Loans and$2.3 million for the ACL on securities AFS), compared to$0.3 million for the three months endedMarch 31, 2022 (all related to the ACL-Loans). The provision for credit losses on loans was attributable to growth and changes in the underlying loan portfolio, while the provision for credit losses on securities AFS was due to the expected loss on our Signature Bank sub debt investment which was fully charged-off during first quarter 2023. The provision for credit losses is predominantly a function of Nicolet's methodology and judgment as to qualitative and quantitative factors used to determine the appropriateness of the ACL. The appropriateness of the ACL-Loans is affected by changes in the size and character of the loan portfolio, changes in levels of collateral dependent and other nonperforming loans, historical losses and delinquencies in each portfolio segment, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing and future economic conditions, the fair value of underlying collateral, and other factors which could affect expected credit losses. The ACL for securities is affected by risk of the underlying issuer, while the ACL for unfunded commitments is affected by many of the same factors as the ACL-Loans, as well as funding assumptions relative to lines of credit. See also Note 6, "Loans, Allowance for Credit Losses - Loans, and Credit Quality" of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures. For additional information regarding asset quality and the ACL-Loans, see "BALANCE SHEET ANALYSIS - Loans," "- Allowance for Credit Losses - Loans," and "- Nonperforming Assets." Noninterest Income Table 4: Noninterest Income Three Months Ended March 31, (in thousands) 2023 2022 $ Change % Change Trust services fee income$ 2,033 $ 2,011 $ 22 1 % Brokerage fee income 3,479 3,688 (209) (6) Wealth management fee income 5,512 5,699 (187) (3) Mortgage income, net 1,466 3,253 (1,787) (55) Service charges on deposit accounts 1,480 1,477 3 - Card interchange income 3,033 2,581 452 18 BOLI income 1,200 933 267 29 Deferred compensation plan asset market valuations 946 (467) 1,413 (303) LSR income, net 1,155 (382) 1,537 N/M Other income 1,832 1,536 296 19 Subtotal 16,624 14,630 1,994 14 Asset gains (losses), net (38,468) 1,313 (39,781) N/M Total noninterest income$ (21,844) $ 15,943 $ (37,787) (237) % N/M means not meaningful. 37
-------------------------------------------------------------------------------- Noninterest income was a negative$21.8 million for the first three months of 2023, an unfavorable change of$37.8 million compared to the first three months of 2022, primarily due to the balance sheet repositioning. Excluding net asset gains (losses), noninterest income for first quarter 2023 was$16.6 million , a$2.0 million (14%) increase over first quarter 2022.
Wealth management fee income was
Mortgage income represents net gains received from the sale of residential real
estate loans into the secondary market, capitalized mortgage servicing rights
("MSR"), servicing fees net of MSR amortization, fair value marks on the
mortgage interest rate lock commitments and forward commitments ("mortgage
derivatives"), and MSR valuation changes, if any. Net mortgage income of $1.5
million , decreased $1.8 million (55%) between the comparable first quarter
periods, mostly due to the rising interest rate environment reducing secondary
market volumes and the related gains on sales. See also "Lending-Related
Commitments" and Note 7, "Goodwill and Other Intangibles and Servicing Rights"
of the Notes to Unaudited Consolidated Financial Statements under Part I, Item
1, for additional disclosures on the MSR asset.
Card interchange income grew
BOLI income was up
Loan servicing rights ("LSR") income increased $1.5 million between the
comparable first quarter periods mostly due to lower LSR amortization from the
much slower prepayments speeds in the higher interest rate environment. See also
Note 7, "Goodwill and Other Intangibles and Servicing Rights" of the Notes to
Unaudited Consolidated Financial Statements under Part I, Item 1, for additional
information on the LSR asset.
Other income of
Net asset losses of$38.5 million for the first three months of 2023 were primarily attributable to losses on the sale of approximately$500 million (par value)U.S. Treasury held to maturity securities executed in early March as part of a balance sheet repositioning, while net asset gains of$1.3 million for the first three months of 2022 were primarily attributable to gains on sales of other real estate owned (mostly closed bank branch locations). Noninterest Expense Table 5: Noninterest Expense Three Months Ended March 31, ($ in thousands) 2023 2022 Change % Change Personnel$ 24,328 $ 21,191 $ 3,137 15 % Occupancy, equipment and office 8,783 6,944 1,839 26 Business development and marketing 2,121 1,831 290 16 Data processing 3,988 3,387 601 18 Intangibles amortization 2,161 1,424 737 52 FDIC assessments 540 480 60 13 Merger-related expense 163 98 65 66 Other expense 2,791 2,195 596 27 Total noninterest expense$ 44,875 $ 37,550 $ 7,325 20 % Non-personnel expenses$ 20,547 $ 16,359 $ 4,188 26 % Average full-time equivalent ("FTE") employees 943 833 110 13 % Noninterest expense was$44.9 million , an increase of$7.3 million (20%) over the first three months of 2022. Personnel costs increased$3.1 million (15%), while non-personnel expenses combined increased$4.2 million (26%) compared to the first three months of 2022. Personnel expense was$24.3 million for the three months endedMarch 31, 2023 , an increase of$3.1 million from the comparable period in 2022. Salary expense increased$3.0 million (17%) over the first three months of 2022, reflecting higher salaries from the larger employee base (with average full-time equivalent employees up 13%, mostly due to the Charter acquisition), investments in our wealth team, and merit increases between the years, partly offset by lower incentive 38 -------------------------------------------------------------------------------- compensation given the current period net loss. Fringe benefits increased$0.1 million (3%) over the first three months of 2022, commensurate with the larger employee base. Salary expense was also impacted by the change in the fair value of nonqualified deferred compensation plan liabilities from the recent market declines. See also "Noninterest Income" for the offsetting fair value change to the nonqualified deferred compensation plan assets. Occupancy, equipment and office expense was$8.8 million for the first three months of 2023, up$1.8 million (26%) compared to the first three months of 2022, largely due to the expanded branch network with the Charter acquisition, as well as additional expense for software and technology solutions. Business development and marketing expense was$2.1 million , up$0.3 million (16%) between the comparable first quarter periods, largely attributable to the timing and extent of marketing donations, promotions, and media to support our expanded branch network and community base.
Data processing expense was
Intangibles amortization increased$0.7 million between the comparable first quarter periods due to higher amortization from the intangibles added with the recent acquisitions.
Other expense was
Income Taxes
Income tax was a benefit of$4.2 million (effective tax rate of 32.0%) for the first three months of 2023, compared to expense of$7.7 million (effective tax rate of 24.2%) for the comparable period of 2022. The change in the effective tax rate was largely due to the increase in tax benefits with a pre-tax loss. BALANCE SHEET ANALYSIS
At
Compared toMarch 31, 2022 , assets increased$872 million (12%), largely due to the acquisition of Charter and strong loan growth, partly offset by lower investment securities related to the balance sheet repositioning. Total loans increased$1.5 billion and total deposits increased$697 million fromMarch 31, 2022 , also largely due to the acquisition of Charter. Stockholders' equity increased$125 million fromMarch 31, 2022 , primarily due to common stock issued in the Charter acquisition and net income, partially offset by negative net fair value investment changes. Loans
Nicolet services a diverse customer base throughout
An active credit risk management process is used to ensure that sound and
consistent credit decisions are made. The credit management process is regularly
reviewed and has been modified over the past several years to further strengthen
the controls. Factors that are important to managing overall credit quality are
sound loan underwriting and administration, systematic monitoring of existing
loans and commitments, effective loan review on an ongoing basis, early problem
loan identification and remedial action to minimize losses, an appropriate
ACL-Loans, and sound nonaccrual and charge-off policies.
For additional disclosures on loans, see also Note 6, "Loans, Allowance for
Credit Losses - Loans, and Credit Quality," in the Notes to Unaudited
Consolidated Financial Statements under Part I, Item 1. For information
regarding the allowance for credit losses and nonperforming assets see "BALANCE
SHEET ANALYSIS - Allowance for Credit Losses - Loans" and "BALANCE SHEET
ANALYSIS - Nonperforming Assets." A detailed discussion of the loan portfolio
accounting policies, general loan portfolio characteristics, and credit risk are
described in Note 1, "Nature of Business and Significant Accounting Policies,"
of the Notes to Consolidated Financial Statements, included in Part II, Item 8
of the Company's 2022 Annual Report on Form 10-K.
39
--------------------------------------------------------------------------------Table 6: Period End Loan Composition
March 31, 2023 December 31, 2022 March 31, 2022
(in thousands) Amount % of Total Amount % of Total Amount % of Total
Commercial & industrial $ 1,330,052 21 % $ 1,304,819 21 % $ 1,063,300 23 %
Owner-occupied CRE 969,064 16 954,599 15 794,946 17
Agricultural 1,065,909 17 1,088,607 18 826,364 18
Commercial 3,365,025 54 3,348,025 54 2,684,610 58
CRE investment 1,146,388 19 1,149,949 19 807,602 17
Construction & land development 333,370 5 318,600 5 211,640 4
Commercial real estate 1,479,758 24 1,468,549 24 1,019,242 21
Commercial-based loans 4,844,783 78 4,816,574 78 3,703,852 79
Residential construction 134,782 2 114,392 2 72,660 2
Residential first mortgage 1,014,166 16 1,016,935 16 721,107 15
Residential junior mortgage 177,026 3 177,332 3 133,817 3
Residential real estate 1,325,974 21 1,308,659 21 927,584 20
Retail & other 52,975 1 55,266 1 51,879 1
Retail-based loans 1,378,949 22 1,363,925 22 979,463 21
Total loans $ 6,223,732 100 % $ 6,180,499 100 % $ 4,683,315 100 %
As noted in Table 6 above, the loan portfolio at March 31, 2023 , was 78%
commercial-based and 22% retail-based. Commercial-based loans are considered to
have more inherent risk of default than retail-based loans, in part because of
the broader list of factors that could impact a commercial borrower negatively.
In addition, the commercial balance per borrower is typically larger than that
for retail-based loans, implying higher potential losses on an individual
customer basis. Credit risk on commercial-based loans is largely influenced by
general economic conditions and the resulting impact on a borrower's operations
or on the value of underlying collateral, if any.
Total loans of $6.2 billion at March 31, 2023 , increased $43 million (3%
annualized) from December 31, 2022 . At March 31, 2023 , commercial and industrial
loans represented the largest segment of Nicolet's loan portfolio at 21% of the
total portfolio, followed by CRE investment at 19% of the total portfolio. The
loan portfolio is widely diversified and included the following industries:
manufacturing, wholesaling, paper, packaging, food production and processing,
agriculture, forest products, hospitality, retail, service, and businesses
supporting the general building industry. The following chart provides the
industry distribution of our commercial loan portfolio at March 31, 2023 .
Commercial Loan Portfolio by Industry Type (based on NAICS codes)
[[Image Removed: Commercial Loan Portfolio by Industry_03.31.2023.jpg]]
40
--------------------------------------------------------------------------------The following table presents the maturity distribution of the loan portfolio.
Table 7: Loan Maturity Distribution
As of March 31, 2023 Loan Maturity
One Year After One Year After Five Years After Fifteen
(in thousands) or Less to Five Years to Fifteen Years Years Total
Commercial & industrial $ 461,831 $ 658,961 $ 196,521 $ 12,739 $ 1,330,052
Owner-occupied CRE 75,722 658,076 207,699 27,567 969,064
Agricultural 322,511 333,575 368,658 41,165 1,065,909
CRE investment 137,888 734,765 243,544 30,191 1,146,388
Construction & land development 47,607 147,750 107,855 30,158 333,370
Residential construction * 39,145 8,368 3,232 84,037 134,782
Residential first mortgage 21,559 261,782 197,860 532,965 1,014,166
Residential junior mortgage 8,956 19,200 34,158 114,712 177,026
Retail & other 26,525 14,449 7,615 4,386 52,975
Total loans $ 1,141,744 $ 2,836,926 $ 1,367,142 $ 877,920 $ 6,223,732
Percent by maturity distribution 18 % 46 % 22 % 14 % 100 %
Total fixed rate loans $ 496,022 $ 2,659,905 $ 986,196 $ 306,850 $ 4,448,973
Total floating rate loans $ 645,722 $ 177,021 $ 380,946 $ 571,070 $ 1,774,759
As of December 31, 2022 Loan Maturity
One Year After OneYear After Five Years After Fifteen (in thousands)
or Less to Five Years to Fifteen Years Years Total
Commercial & industrial $ 433,319 $ 660,560 $ 197,352 $ 13,588 $ 1,304,819
Owner-occupied CRE 78,759 639,093 208,719 28,028 954,599
Agricultural 350,752 328,495 367,913 41,447 1,088,607
CRE investment 129,770 737,869 250,256 32,054 1,149,949
Construction & land development 64,169 131,889 92,379 30,163 318,600
Residential construction * 41,049 6,922 2,091 64,330 114,392
Residential first mortgage 22,985 263,810 202,514 527,626 1,016,935
Residential junior mortgage 6,814 19,941 33,201 117,376 177,332
Retail & other 27,814 15,002 8,021 4,429 55,266
Total loans $ 1,155,431 $ 2,803,581 $ 1,362,446 $ 859,041 $ 6,180,499
Percent by maturity distribution 19 % 45 % 22 % 14 % 100 %
Total fixed rate loans $ 520,535 $ 2,631,295 $ 987,225 $ 315,982 $ 4,455,037
Total floating rate loans $ 634,896 $ 172,286 $ 375,221 $ 543,059 $ 1,725,462 * The residential construction loans with a loan maturity after five years represent a construction to permanent loan product.
Allowance for Credit Losses - Loans
For additional disclosures on the allowance for credit losses, see Note 6, "Loans, Allowance for Credit Losses - Loans, and Credit Quality," in the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1. A detailed discussion of the loan portfolio accounting policies, general loan portfolio characteristics, and credit risk are described in Note 1, "Nature of Business and Significant Accounting Policies," of the Notes to Consolidated Financial Statements, included in Part II, Item 8 of the Company's 2022 Annual Report on Form 10-K. Credit risks within the loan portfolio are inherently different for each loan type. Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and ongoing review of loan payment performance. Active asset quality administration, including early problem loan identification and timely resolution of problems, aids in the management of credit risk and minimization of loan losses. Loans charged off are subject to continuous review, and specific efforts are taken to achieve maximum recovery of principal, interest, and related expenses. For additional information regarding nonperforming assets see also "BALANCE SHEET ANALYSIS - Nonperforming Assets." The ACL-Loans represents management's estimate of expected credit losses in the Company's loan portfolio at the balance sheet date. To assess the overall appropriateness of the ACL-Loans, management applies an allocation methodology which focuses on evaluation of qualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to specific loans; (ii) management's ongoing review and grading of the loan portfolio; (iii) consideration of historical loan loss and delinquency experience on each portfolio segment; (iv) trends in past due and nonaccrual loans; (v) the risk characteristics of the various loan segments; (vi) changes in the size and character of the loan portfolio; (vii) concentrations of loans to specific borrowers or industries; (viii) existing economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect expected credit losses. Assessing these numerous factors involves significant judgment; therefore, management considers the ACL-Loans a critical accounting estimate. 41 -------------------------------------------------------------------------------- Management allocates the ACL-Loans by pools of risk within each loan portfolio segment. The allocation methodology consists of the following components. First, a specific reserve is established for individually evaluated credit deteriorated loans, which management defines as nonaccrual credit relationships over$250,000 , collateral dependent loans, purchased credit deteriorated loans, and other loans with evidence of credit deterioration. The specific reserve in the ACL-Loans for these credit deteriorated loans is equal to the aggregate collateral or discounted cash flow shortfall. Second, management allocates the ACL-Loans with historical loss rates by loan segment. The loss factors are measured on a quarterly basis and applied to each loan segment based on current loan balances and projected for their expected remaining life. Next, management allocates the ACL-Loans using the qualitative and environmental factors mentioned above. Consideration is given to those current qualitative or environmental factors that are likely to cause estimated credit losses at the evaluation date to differ from the historical loss experience of each loan segment. Lastly, management considers reasonable and supportable forecasts to assess the collectability of future cash flows. AtMarch 31, 2023 , the ACL-Loans was$62 million (representing 1.00% of period end loans), unchanged from$62 million (or 1.00% of period end loans) atDecember 31, 2022 and up from$50 million (or 1.07% of period end loans) atMarch 31, 2022 . The increase in the ACL-Loans fromMarch 31, 2022 was mostly due to the Charter acquisition, which added$8 million of provision for the Day 2 allowance and$2 million related to purchased credit deteriorated loans. The components of the ACL-Loans are detailed further in Table 8 below.
Table 8: Allowance for Credit Losses - Loans
Three Months Ended Year Ended
(in thousands) March 31, 2023 March 31, 2022 December 31, 2022
ACL-Loans:
Balance at beginning of period $ 61,829 $ 49,672 $ 49,672
ACL on PCD loans acquired - - 1,937
Provision for credit losses 750 300 10,950
Charge-offs (184) (100) (1,033)
Recoveries 17 34 303
Net (charge-offs) recoveries (167) (66) (730)
Balance at end of period $ 62,412 $ 49,906 $ 61,829
Net loan (charge-offs) recoveries:
Commercial & industrial $ (108) $ 20 $ (86)
Owner-occupied CRE - (36) (555)
Agricultural 2 - -
CRE investment - - 169
Construction & land development - - -
Residential construction - - -
Residential first mortgage 1 4 (57)
Residential junior mortgage - - 1
Retail & other (62) (54) (202)
Total net (charge-offs) recoveries $ (167) $ (66) $ (730)
Ratios:
ACL-Loans to total loans 1.00 % 1.07 % 1.00 %
Net charge-offs to average loans, annualized 0.01 % 0.01 % 0.01 %
Nonperforming Assets
As part of its overall credit risk management process, management is committed
to an aggressive problem loan identification philosophy. This philosophy has
been implemented through the ongoing monitoring and review of all pools of risk
in the loan portfolio to identify problem loans early and minimize the risk of
loss. Management continues to actively work with customers and monitor credit
risk from the ongoing economic uncertainty. For additional disclosures on credit
quality, see Note 6, "Loans, Allowance for Credit Losses - Loans, and Credit
Quality" of the Notes to Unaudited Consolidated Financial Statements under Part
I, Item 1. For additional information on loans see "BALANCE SHEET ANALYSIS -
Loans" and for additional information on the ACL-Loans see "BALANCE SHEET
ANALYSIS - Allowance for Credit Losses-Loans."
Nonperforming loans are considered one indicator of potential future loan
losses. Nonperforming loans are defined as nonaccrual loans and loans 90 days or
more past due but still accruing interest. Loans are generally placed on
nonaccrual status when contractually past due 90 days or more as to interest or
principal payments. Additionally, whenever management becomes aware of facts or
circumstances that may adversely impact the collectability of principal or
interest on loans, it is management's
42
--------------------------------------------------------------------------------
practice to place such loans on nonaccrual status immediately. Nonperforming
assets include nonperforming loans and other real estate owned ("OREO"). At
March 31, 2023 , nonperforming assets were $41 million and represented 0.50% of
total assets, compared to $40 million or 0.46% of total assets at December 31,
2022 .
The level of potential problem loans is another predominant factor in
determining the relative level of risk in the loan portfolio and in determining
the appropriate level of the ACL-Loans. Potential problem loans are generally
defined by management to include loans rated as Substandard by management but
that are in performing status; however, there are circumstances present which
might adversely affect the ability of the borrower to comply with present
repayment terms. The decision of management to include performing loans in
potential problem loans does not necessarily mean that Nicolet expects losses to
occur, but that management recognizes a higher degree of risk associated with
these loans. The loans that have been reported as potential problem loans are
predominantly commercial-based loans covering a diverse range of businesses and
real estate property types. Potential problem loans were $76 million (1% of
loans) and $53 million (1% of loans) at March 31, 2023 and December 31, 2022 ,
respectively, with the increase primarily due to the downgrade of one commercial
credit relationship. Potential problem loans require heightened management
review given the pace at which a credit may deteriorate, the potential duration
of asset quality stress, and uncertainty around the magnitude and scope of
economic stress that may be felt by Nicolet's customers and on underlying real
estate values.
Table 9: Nonperforming Assets
(in thousands) March 31, 2023 December 31, 2022 March 31, 2022
Nonperforming loans:
Commercial & industrial $ 2,874 $ 3,328 $ 1,849
Owner-occupied CRE 7,128 5,647 5,007
Agricultural 18,782 20,416 23,570
Commercial 28,784 29,391 30,426
CRE investment 4,126 3,832 3,914
Construction & land development 748 771 1,054
Commercial real estate 4,874 4,603 4,968
Commercial-based loans 33,658 33,994 35,394
Residential construction - - -
Residential first mortgage 4,986 3,780 3,919
Residential junior mortgage 196 224 242
Residential real estate 5,182 4,004 4,161
Retail & other 55 82 115
Retail-based loans 5,237 4,086 4,276
Total nonaccrual loans 38,895 38,080 39,670
Accruing loans past due 90 days or more - - -
Total nonperforming loans $ 38,895 $ 38,080 $ 39,670
Nonaccrual loans (included above) covered by
guarantees $ 5,372 $ 5,459 $ 4,675
OREO:
Commercial real estate owned $ 628 $ 628 $ 797
Bank property real estate owned 1,347 1,347 9,019
Total OREO 1,975 1,975 9,816
Total nonperforming assets $ 40,870 $ 40,055 $ 49,486
Ratios:
Nonperforming loans to total loans 0.62 % 0.62 % 0.85 %
Nonperforming assets to total loans plus OREO 0.66 % 0.65 % 1.05 %
Nonperforming assets to total assets 0.50 % 0.46 % 0.68 %
ACL-Loans to nonperforming loans 160 % 162 % 126 %
43
--------------------------------------------------------------------------------Deposits
Deposits represent Nicolet's largest source of funds, and the strong core
deposit base provides a stable funding source. As of
Core deposit balances of$6.4 billion atMarch 31, 2023 declined$181 million (3%) fromDecember 31, 2022 , partly due to the seasonal run-off of municipal deposits. Compared toMarch 31, 2022 , core deposits increased$584 million (10%), largely due to the Charter acquisition. The deposit composition is presented in Table 10 below.
Table 10: Period End Deposit Composition
March 31, 2023 December 31, 2022 March 31, 2022
(in thousands) Amount % of Total Amount % of Total Amount % of Total
Noninterest-bearing demand $ 2,094,623 30 % $ 2,361,816 33 % $ 1,912,995 31 %
Interest-bearing demand 1,138,415 17 % 1,279,850 18 % 1,239,582 20 %
Money market 1,886,879 27 % 1,707,619 24 % 1,500,442 24 %
Savings 865,824 12 % 931,417 13 % 841,369 13 %
Time 942,838 14 % 898,219 12 % 736,732 12 %
Total deposits $ 6,928,579 100 % $ 7,178,921 100 % $ 6,231,120 100 %
Brokered transaction accounts $ 233,393 4 % $ 252,829 3 % $ 228,079 4 %
Brokered and listed time deposits 289,181 4 % 339,066 5 % 180,823 3 %
Total brokered deposits $ 522,574 8 % $ 591,895 8 % $ 408,902 7 %
Customer transaction accounts $ 5,752,348 83 % $ 6,027,873 84 % $ 5,266,309 84 %
Customer time deposits 653,657 9 % 559,153 8 % 555,909 9 %
Total customer deposits (core) $ 6,406,005 92 % $ 6,587,026 92 % $ 5,822,218 93 %
Total uninsured deposits were $1.9 billion (representing 27% of total deposits)
at March 31, 2023 , compared to $2.1 billion (representing 29% of total deposits)
at December 31, 2022 .
Lending-Related Commitments
As of
Table 11: Commitments (in thousands) March 31, 2023 December 31, 2022 Commitments to extend credit$ 1,850,215 $ 1,850,601 Financial standby letters of credit 23,246
26,530
Performance standby letters of credit 9,952
9,375
Interest rate lock commitments to originate residential mortgage loans held for
sale (included above in commitments to extend credit) and forward commitments to
sell residential mortgage loans held for sale are considered derivative
instruments ("mortgage derivatives") and the notional amounts represented $18
million and $17 million , respectively, at March 31, 2023 . In comparison,
interest rate lock commitments to originate residential mortgage loans held for
sale and forward commitments to sell residential mortgage loans held for sale
both represented $9 million at December 31, 2022 . The net fair value of these
mortgage derivatives combined was a gain of $72,000 at March 31, 2023 compared
to a gain of $50,000 at December 31, 2022 .
Liquidity Management
Liquidity management refers to the ability to ensure that adequate liquid funds are available to meet the current and future cash flow obligations arising in the daily operations of the Company. These cash flow obligations include the ability to meet the commitments to borrowers for extensions of credit, accommodate deposit cycles and trends, fund capital expenditures, pay dividends to stockholders (if any), and satisfy other operating expenses. The Company's most liquid assets are cash and due from banks and interest-earning deposits, which totaled$114 million and$155 million atMarch 31, 2023 andDecember 31, 2022 , respectively. Balances of these liquid assets are dependent on our operating, investing, and financing activities during any given period. The$41 million decrease in cash and cash equivalents since year-end 2022 included$16 million net cash provided by operating activities and$489 million net cash provided by investing activities (mostly investment sales from the balance sheet repositioning), more than offset by$545 million net cash used in financing activities (repayment of FHLB borrowings from the 44 -------------------------------------------------------------------------------- balance sheet repositioning and a net decrease in deposits). As ofMarch 31, 2023 , management believed that adequate liquidity existed to meet all projected cash flow obligations. Nicolet's primary sources of funds include the core deposit base, repayment and maturity of loans, investment securities calls, maturities, and sales, and procurement of brokered deposits or other wholesale funding. AtMarch 31, 2023 , approximately 40% of the investment securities portfolio was pledged as collateral to secure public deposits and borrowings, as applicable, and for liquidity or other purposes as required by regulation. Liquidity sources available to the Company atMarch 31, 2023 , are presented in Table 12 below. Table 12: Liquidity Sources (in millions) March 31, 2023 FHLB Borrowing Availability (1) $ 547 Fed Funds Lines 155 Fed Discount Window 11 Immediate Funding Availability $ 713 Unencumbered AFS Securities $ 609 Less: AFS Securities retained per policy (2) (403) Brokered Capacity 1,210 Guaranteed portion of SBA loans 89 Other funding sources 28 Short-Term Funding Availability (3)
$ 1,533
Total Contingent Funding Availability
$ 2,246
(1) Excludes outstanding FHLB borrowings of$55 million atMarch 31, 2023 . (2) Excludes$403 million of AFS securities retained in accordance with internal treasury liquidity policy. (3) Short-term funding availability defined as funding that could be secured between 2 and 30 days. Management is committed to the Parent Company being a source of strength to the Bank and its other subsidiaries, and therefore, regularly evaluates capital and liquidity positions of the Parent Company in light of current and projected needs, growth or strategies.The Parent Company uses cash for normal expenses, debt service requirements and, when opportune, for common stock repurchases or investment in other strategic actions such as mergers or acquisitions. AtMarch 31, 2023 , the Parent Company had$62 million in cash. Additional cash sources available to the Parent Company include access to the public or private markets to issue new equity, subordinated notes or other debt. Dividends from the Bank and, to a lesser extent, stock option exercises, represent significant sources of cash flows for the Parent Company. The Bank is required by federal law to obtain prior approval of the OCC for payments of dividends if the total of all dividends declared by the Bank in any year will exceed certain thresholds. Management does not believe that regulatory restrictions on dividends from the Bank will adversely affect its ability to meet its cash obligations.
Interest Rate Sensitivity Management and Impact of Inflation
A reasonable balance between interest rate risk, credit risk, liquidity risk and maintenance of yield, is highly important to Nicolet's business success and profitability. As an ongoing part of our financial strategy and risk management, we attempt to understand and manage the impact of fluctuations in market interest rates on our net interest income. The consolidated balance sheet consists mainly of interest-earning assets (loans, investments and cash) which are primarily funded by interest-bearing liabilities (deposits and other borrowings). Such financial instruments have varying levels of sensitivity to changes in market rates of interest. Market rates are highly sensitive to many factors beyond our control, including but not limited to general economic conditions and policies of governmental and regulatory authorities. Our operating income and net income depends, to a substantial extent, on "rate spread" (i.e., the difference between the income earned on loans, investments and other earning assets and the interest expense paid to obtain deposits and other funding liabilities). Asset-liability management policies establish guidelines for acceptable limits on the sensitivity to changes in interest rates on earnings and market value of assets and liabilities. Such policies are set and monitored by management and the Board of Directors'Asset and Liability Committee . To understand and manage the impact of fluctuations in market interest rates on net interest income, we measure our overall interest rate sensitivity through a net interest income analysis, which calculates the change in net interest income in the event of hypothetical changes in interest rates under different scenarios versus a baseline scenario. Such scenarios can involve static balance sheets, balance sheets with projected growth, parallel (or non-parallel) yield curve slope changes, immediate or gradual changes in market interest rates, and one-year or longer time horizons. The simulation modeling uses assumptions involving 45 --------------------------------------------------------------------------------
market spreads, prepayments of rate-sensitive instruments, renewal rates on maturing or new loans, deposit retention rates, and other assumptions.
Among other scenarios, we assessed the impact on net interest income in the event of a gradual +/-100 bps and +/-200 bps change in market rates (parallel to the change in prime rate) over a one-year time horizon to a static (flat) balance sheet. The results provided include the liquidity measures mentioned above and reflect the changed interest rate environment. The interest rate scenarios are used for analytical purposes only and do not necessarily represent management's view of future market interest rate movements. Based on financial data atMarch 31, 2023 andDecember 31, 2022 , the projected changes in net interest income over a one-year time horizon, versus the baseline, are presented in Table 13 below. The results are within Nicolet's guidelines of not greater than -10% for +/- 100 bps and not greater than -15% for +/- 200 bps.
Table 13: Interest Rate Sensitivity
March 31, 2023 December 31 ,
2022
200 bps decrease in interest rates (0.1) % (0.7) % 100 bps decrease in interest rates (0.1) % (0.4) % 100 bps increase in interest rates (0.2) % -
%
200 bps increase in interest rates (0.3) % 0.1
%
Actual results may differ from these simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and their impact on customer behavior and management strategies. The effect of inflation on a financial institution differs significantly from the effect on an industrial company. While a financial institution's operating expenses, particularly salary and employee benefits, are affected by general inflation, the asset and liability structure of a financial institution consists largely of monetary items. Monetary items, such as cash, investments, loans, deposits and other borrowings, are those assets and liabilities which are or will be converted into a fixed number of dollars regardless of changes in prices. As a result, changes in interest rates have a more significant impact on a financial institution's performance than does general inflation. Inflation may also have impacts on the Bank's customers, on businesses and consumers and their ability or willingness to invest, save or spend, and perhaps on their ability to repay loans. As such, there would likely be impacts on the general appetite for banking products and the credit health of the Bank's customer base.
Capital
Management regularly reviews the adequacy of its capital to ensure that sufficient capital is available for current and future needs and is in compliance with regulatory guidelines. The capital position and strategies are actively reviewed in light of perceived business risks associated with current and prospective earning levels, liquidity, asset quality, economic conditions in the markets served, and level of returns available to shareholders. Management intends to maintain an optimal capital and leverage mix for growth and shareholder return. For details on the change in capital see "BALANCE SHEET ANALYSIS." The Company's and the Bank's regulatory capital ratios remain above minimum regulatory ratios, including the capital conservation buffer. AtMarch 31, 2023 , the Bank's regulatory capital ratios qualify the Bank as well-capitalized under the prompt-corrective action framework. This strong base of capital has allowed Nicolet to be opportunistic in strategic growth. A summary of the Company's and the Bank's regulatory capital amounts and ratios, as well as selected capital metrics are presented in the following table. 46 --------------------------------------------------------------------------------
Table 14: Capital
At or for the Three At or for the
Months Ended Year Ended
($ in thousands) March 31, 2023 December 31, 2022
Company Stock Repurchases: *
Common stock repurchased during the period (dollars) $ - $ 61,483
Common stock repurchased during the period (full shares) - 671,662
Company Risk-Based Capital :
Total risk-based capital $ 886,051 $ 889,763
Tier 1 risk-based capital 676,114 684,280
Common equity Tier 1 capital 637,967 646,341
Total capital ratio 12.3 % 12.3 %
Tier 1 capital ratio 9.4 % 9.5 %
Common equity tier 1 capital ratio 8.9 % 9.0 %
Tier 1 leverage ratio 8.2 % 8.2 %
Bank Risk-Based Capital :
Total risk-based capital $ 813,992 $ 816,951
Tier 1 risk-based capital 756,575 764,090
Common equity Tier 1 capital 756,575 764,090
Total capital ratio 11.3 % 11.3 %
Tier 1 capital ratio 10.5 % 10.6 %
Common equity tier 1 capital ratio 10.5 % 10.6 %
Tier 1 leverage ratio 9.2 % 9.1 %
* Reflects common stock repurchased under board of director authorizations for the common stock repurchase program.
In managing capital for optimal return, we evaluate capital sources and uses, pricing and availability of our stock in the market, and alternative uses of capital (such as the level of organic growth or acquisition opportunities) in light of strategic plans. AtMarch 31, 2023 , there remains$47 million authorized under this repurchase program, as modified, to be utilized from time-to-time to repurchase shares in the open market, through block transactions or in private transactions. Critical Accounting Estimates The preparation of financial statements in conformity withU.S. GAAP requires management to make estimates, assumptions or judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates and assumptions are based on historical experience, current information, and other factors deemed to be relevant; accordingly, as this information changes, actual results could differ from those estimates. Nicolet considers accounting estimates to be critical to reported financial results if the accounting estimate requires management to make assumptions about matters that are highly uncertain and different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the financial statements. The accounting estimates we consider to be critical include business combinations and the valuation of loans acquired, the determination of the allowance for credit losses, and income taxes. A discussion of these estimates can be found in the "Critical Accounting Estimates" section in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's 2022 Annual Report on Form 10-K. There have been no changes in the Company's determination of critical accounting policies and estimates sinceDecember 31, 2022 .
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