UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20222023
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-37700
NICOLET BANKSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
| | | | | | | | | | | | | | |
Wisconsin | 47-0871001 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
| | | | |
111 North Washington Street | |
| Green Bay, | Wisconsin | | 54301 |
(Address of Principal Executive Offices) | (Zip Code) |
| | | | |
(920) | 430-1400 | |
(Registrant’s Telephone Number, Including Area Code) |
| | | |
N/A (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) |
| | | | | | | | |
Securities registered pursuant to Section 12(b) of the Act: |
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | NIC | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
Large accelerated filer | ☐☒ | Accelerated filer | ☒☐ |
| | | |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | | |
Emerging growth company | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of OctoberJuly 31, 20222023 there were 14,676,91014,740,465 shares of $0.01 par value common stock outstanding.
Nicolet Bankshares, Inc.
Quarterly Report on Form 10-Q
SeptemberJune 30, 20222023
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS:
NICOLET BANKSHARES, INC.
Consolidated Balance Sheets
(In thousands, except share and per share data)
| | | September 30, 2022 | | December 31, 2021 | | June 30, 2023 | | December 31, 2022 |
| | (Unaudited) | | (Audited) | | (Unaudited) | | (Audited) |
Assets | Assets | | | | Assets | | | |
Cash and due from banks | Cash and due from banks | $ | 118,537 | | | $ | 209,349 | | Cash and due from banks | $ | 122,021 | | | $ | 121,211 | |
Interest-earning deposits | Interest-earning deposits | 319,745 | | | 385,943 | | Interest-earning deposits | 383,185 | | | 33,512 | |
| Cash and cash equivalents | Cash and cash equivalents | 438,282 | | | 595,292 | | Cash and cash equivalents | 505,206 | | | 154,723 | |
Certificates of deposit in other banks | Certificates of deposit in other banks | 13,510 | | | 21,920 | | Certificates of deposit in other banks | 9,808 | | | 12,518 | |
Securities available for sale (“AFS”), at fair value | Securities available for sale (“AFS”), at fair value | 949,597 | | | 921,661 | | Securities available for sale (“AFS”), at fair value | 921,108 | | | 917,618 | |
Securities held to maturity (“HTM”), at amortized cost | Securities held to maturity (“HTM”), at amortized cost | 686,424 | | | 651,803 | | Securities held to maturity (“HTM”), at amortized cost | — | | | 679,128 | |
Other investments | Other investments | 79,279 | | | 44,008 | | Other investments | 57,578 | | | 65,286 | |
Loans held for sale | Loans held for sale | 3,709 | | | 6,447 | | Loans held for sale | 3,849 | | | 1,482 | |
Other assets held for sale | — | | | 199,833 | | |
| Loans | Loans | 5,984,437 | | | 4,621,836 | | Loans | 6,222,776 | | | 6,180,499 | |
Allowance for credit losses - loans (“ACL-Loans”) | Allowance for credit losses - loans (“ACL-Loans”) | (60,348) | | | (49,672) | | Allowance for credit losses - loans (“ACL-Loans”) | (62,811) | | | (61,829) | |
Loans, net | Loans, net | 5,924,089 | | | 4,572,164 | | Loans, net | 6,159,965 | | | 6,118,670 | |
Premises and equipment, net | Premises and equipment, net | 106,648 | | | 94,566 | | Premises and equipment, net | 117,278 | | | 108,956 | |
Bank owned life insurance (“BOLI”) | Bank owned life insurance (“BOLI”) | 165,166 | | | 134,476 | | Bank owned life insurance (“BOLI”) | 167,192 | | | 165,137 | |
Goodwill and other intangibles, net | Goodwill and other intangibles, net | 407,117 | | | 339,492 | | Goodwill and other intangibles, net | 398,194 | | | 402,438 | |
Accrued interest receivable and other assets | Accrued interest receivable and other assets | 122,095 | | | 113,375 | | Accrued interest receivable and other assets | 142,450 | | | 138,013 | |
Total assets | Total assets | $ | 8,895,916 | | | $ | 7,695,037 | | Total assets | $ | 8,482,628 | | | $ | 8,763,969 | |
| Liabilities and Stockholders’ Equity | Liabilities and Stockholders’ Equity | | Liabilities and Stockholders’ Equity | |
Liabilities: | Liabilities: | | Liabilities: | |
Noninterest-bearing demand deposits | Noninterest-bearing demand deposits | $ | 2,477,507 | | | $ | 1,975,705 | | Noninterest-bearing demand deposits | $ | 2,059,939 | | | $ | 2,361,816 | |
Interest-bearing deposits | Interest-bearing deposits | 4,918,395 | | | 4,490,211 | | Interest-bearing deposits | 5,138,665 | | | 4,817,105 | |
Total deposits | Total deposits | 7,395,902 | | | 6,465,916 | | Total deposits | 7,198,604 | | | 7,178,921 | |
Short-term borrowings | Short-term borrowings | 280,000 | | | — | | Short-term borrowings | 50,000 | | | 317,000 | |
Long-term borrowings | Long-term borrowings | 225,236 | | | 216,915 | | Long-term borrowings | 197,577 | | | 225,342 | |
Other liabilities held for sale | — | | | 51,586 | | |
| Accrued interest payable and other liabilities | Accrued interest payable and other liabilities | 56,315 | | | 68,729 | | Accrued interest payable and other liabilities | 58,809 | | | 70,177 | |
Total liabilities | Total liabilities | 7,957,453 | | | 6,803,146 | | Total liabilities | 7,504,990 | | | 7,791,440 | |
| Stockholders’ Equity: | Stockholders’ Equity: | | Stockholders’ Equity: | |
Common stock | Common stock | 147 | | | 140 | | Common stock | 147 | | | 147 | |
Additional paid-in capital | Additional paid-in capital | 620,392 | | | 575,045 | | Additional paid-in capital | 624,897 | | | 621,988 | |
Retained earnings | Retained earnings | 380,263 | | | 313,604 | | Retained earnings | 417,863 | | | 407,864 | |
Accumulated other comprehensive income (loss) | Accumulated other comprehensive income (loss) | (62,339) | | | 3,102 | | Accumulated other comprehensive income (loss) | (65,269) | | | (57,470) | |
Total stockholders’ equity | Total stockholders’ equity | 938,463 | | | 891,891 | | Total stockholders’ equity | 977,638 | | | 972,529 | |
Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 8,895,916 | | | $ | 7,695,037 | | Total liabilities and stockholders’ equity | $ | 8,482,628 | | | $ | 8,763,969 | |
| Preferred shares authorized (no par value) | Preferred shares authorized (no par value) | 10,000,000 | | | 10,000,000 | | Preferred shares authorized (no par value) | 10,000,000 | | | 10,000,000 | |
Preferred shares issued and outstanding | Preferred shares issued and outstanding | — | | | — | | Preferred shares issued and outstanding | — | | | — | |
Common shares authorized (par value $0.01 per share) | Common shares authorized (par value $0.01 per share) | 30,000,000 | | | 30,000,000 | | Common shares authorized (par value $0.01 per share) | 30,000,000 | | | 30,000,000 | |
Common shares outstanding | Common shares outstanding | 14,673,197 | | | 13,994,079 | | Common shares outstanding | 14,717,938 | | | 14,690,614 | |
Common shares issued | Common shares issued | 14,746,123 | | | 14,019,880 | | Common shares issued | 14,788,928 | | | 14,764,104 | |
See accompanying notes to unaudited consolidated financial statements.
ITEM 1. Financial Statements Continued:
NICOLET BANKSHARES, INC.
Consolidated Statements of Income
(In thousands, except share and per share data) (Unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
Interest income: | Interest income: | | | | | | | | Interest income: | | | | | | | |
Loans, including loan fees | Loans, including loan fees | $ | 63,060 | | | $ | 35,294 | | | $ | 167,313 | | | $ | 104,267 | | Loans, including loan fees | $ | 84,091 | | | $ | 52,954 | | | $ | 163,233 | | | $ | 104,253 | |
Investment securities: | Investment securities: | | Investment securities: | |
Taxable | Taxable | 5,350 | | | 2,061 | | | 15,612 | | | 5,935 | | Taxable | 4,133 | | | 5,135 | | | 9,094 | | | 10,262 | |
Tax-exempt | Tax-exempt | 1,181 | | | 517 | | | 2,503 | | | 1,582 | | Tax-exempt | 1,476 | | | 647 | | | 3,213 | | | 1,322 | |
Other interest income | Other interest income | 1,127 | | | 869 | | | 2,734 | | | 2,140 | | Other interest income | 2,357 | | | 790 | | | 3,893 | | | 1,607 | |
Total interest income | Total interest income | 70,718 | | | 38,741 | | | 188,162 | | | 113,924 | | Total interest income | 92,057 | | | 59,526 | | | 179,433 | | | 117,444 | |
Interest expense: | Interest expense: | | Interest expense: | |
Deposits | Deposits | 4,638 | | | 2,444 | | | 9,240 | | | 7,799 | | Deposits | 29,340 | | | 2,410 | | | 54,277 | | | 4,602 | |
Short-term borrowings | Short-term borrowings | 594 | | | — | | | 622 | | | — | | Short-term borrowings | 1,108 | | | 28 | | | 4,320 | | | 28 | |
Long-term borrowings | Long-term borrowings | 2,496 | | | 1,113 | | | 6,431 | | | 1,729 | | Long-term borrowings | 2,570 | | | 2,004 | | | 5,076 | | | 3,935 | |
Total interest expense | Total interest expense | 7,728 | | | 3,557 | | | 16,293 | | | 9,528 | | Total interest expense | 33,018 | | | 4,442 | | | 63,673 | | | 8,565 | |
Net interest income | Net interest income | 62,990 | | | 35,184 | | | 171,869 | | | 104,396 | | Net interest income | 59,039 | | | 55,084 | | | 115,760 | | | 108,879 | |
Provision for credit losses | Provision for credit losses | 8,600 | | | 6,000 | | | 9,650 | | | 6,500 | | Provision for credit losses | 450 | | | 750 | | | 3,540 | | | 1,050 | |
Net interest income after provision for credit losses | Net interest income after provision for credit losses | 54,390 | | | 29,184 | | | 162,219 | | | 97,896 | | Net interest income after provision for credit losses | 58,589 | | | 54,334 | | | 112,220 | | | 107,829 | |
Noninterest income: | Noninterest income: | | Noninterest income: | |
Trust services fee income | 1,969 | | | 2,043 | | | 5,984 | | | 5,724 | | |
Brokerage fee income | 3,040 | | | 3,154 | | | 9,716 | | | 8,938 | | |
Wealth management fee income | | Wealth management fee income | 5,870 | | | 4,992 | | | 11,382 | | | 10,691 | |
Mortgage income, net | Mortgage income, net | 1,728 | | | 4,808 | | | 7,186 | | | 17,637 | | Mortgage income, net | 1,822 | | | 2,205 | | | 3,288 | | | 5,458 | |
Service charges on deposit accounts | Service charges on deposit accounts | 1,589 | | | 1,314 | | | 4,602 | | | 3,541 | | Service charges on deposit accounts | 1,529 | | | 1,536 | | | 3,009 | | | 3,013 | |
Card interchange income | Card interchange income | 3,012 | | | 2,299 | | | 8,543 | | | 6,492 | | Card interchange income | 3,331 | | | 2,950 | | | 6,364 | | | 5,531 | |
BOLI income | BOLI income | 966 | | | 572 | | | 2,667 | | | 1,658 | | BOLI income | 1,073 | | | 768 | | | 2,273 | | | 1,701 | |
Deferred compensation plan asset market valuations | | Deferred compensation plan asset market valuations | 499 | | | (1,316) | | | 1,445 | | | (1,783) | |
LSR income, net | | LSR income, net | 1,135 | | | (143) | | | 2,290 | | | (525) | |
Asset gains (losses), net | Asset gains (losses), net | (46) | | | (1,187) | | | 2,870 | | | 3,716 | | Asset gains (losses), net | (318) | | | 1,603 | | | (38,786) | | | 2,916 | |
Other income | Other income | 742 | | | 993 | | | 1,506 | | | 3,594 | | Other income | 1,900 | | | 1,536 | | | 3,732 | | | 3,072 | |
Total noninterest income | Total noninterest income | 13,000 | | | 13,996 | | | 43,074 | | | 51,300 | | Total noninterest income | 16,841 | | | 14,131 | | | (5,003) | | | 30,074 | |
Noninterest expense: | Noninterest expense: | | Noninterest expense: | |
Personnel | Personnel | 24,136 | | | 16,927 | | | 65,008 | | | 49,127 | | Personnel | 23,900 | | | 19,681 | | | 48,228 | | | 40,872 | |
Occupancy, equipment and office | Occupancy, equipment and office | 7,641 | | | 5,749 | | | 21,476 | | | 13,939 | | Occupancy, equipment and office | 8,845 | | | 6,891 | | | 17,628 | | | 13,835 | |
Business development and marketing | Business development and marketing | 2,281 | | | 1,654 | | | 6,169 | | | 3,853 | | Business development and marketing | 1,946 | | | 2,057 | | | 4,067 | | | 3,888 | |
Data processing | Data processing | 3,664 | | | 2,939 | | | 10,647 | | | 8,408 | | Data processing | 4,218 | | | 3,596 | | | 8,206 | | | 6,983 | |
Intangibles amortization | Intangibles amortization | 1,628 | | | 758 | | | 4,399 | | | 2,400 | | Intangibles amortization | 2,083 | | | 1,347 | | | 4,244 | | | 2,771 | |
FDIC assessments | FDIC assessments | 480 | | | 480 | | | 1,440 | | | 1,555 | | FDIC assessments | 1,009 | | | 480 | | | 1,549 | | | 960 | |
Merger-related expense | Merger-related expense | 519 | | | 2,793 | | | 1,172 | | | 3,449 | | Merger-related expense | 26 | | | 555 | | | 189 | | | 653 | |
Other expense | Other expense | 2,218 | | | 1,761 | | | 6,344 | | | 7,158 | | Other expense | 2,930 | | | 1,931 | | | 5,721 | | | 4,126 | |
Total noninterest expense | Total noninterest expense | 42,567 | | | 33,061 | | | 116,655 | | | 89,889 | | Total noninterest expense | 44,957 | | | 36,538 | | | 89,832 | | | 74,088 | |
Income before income tax expense | Income before income tax expense | 24,823 | | | 10,119 | | | 88,638 | | | 59,307 | | Income before income tax expense | 30,473 | | | 31,927 | | | 17,385 | | | 63,815 | |
Income tax expense | Income tax expense | 6,313 | | | 2,295 | | | 21,979 | | | 14,960 | | Income tax expense | 7,878 | | | 7,942 | | | 3,688 | | | 15,666 | |
Net income | Net income | $ | 18,510 | | | $ | 7,824 | | | $ | 66,659 | | | $ | 44,347 | | Net income | $ | 22,595 | | | $ | 23,985 | | | $ | 13,697 | | | $ | 48,149 | |
Earnings per common share: | Earnings per common share: | | | | | | | | Earnings per common share: | | | | | | | |
Basic | Basic | $ | 1.33 | | | $ | 0.75 | | | $ | 4.88 | | | $ | 4.39 | | Basic | $ | 1.54 | | | $ | 1.79 | | | $ | 0.93 | | | $ | 3.56 | |
Diluted | Diluted | $ | 1.29 | | | $ | 0.73 | | | $ | 4.72 | | | $ | 4.22 | | Diluted | $ | 1.51 | | | $ | 1.73 | | | $ | 0.91 | | | $ | 3.43 | |
Weighted average common shares outstanding: | Weighted average common shares outstanding: | | Weighted average common shares outstanding: | |
Basic | Basic | 13,890,066 | | | 10,391,896 | | | 13,647,973 | | | 10,098,492 | | Basic | 14,711,490 | | | 13,402,455 | | | 14,703,018 | | | 13,524,919 | |
Diluted | Diluted | 14,310,275 | | | 10,775,591 | | | 14,126,772 | | | 10,503,163 | | Diluted | 14,959,778 | | | 13,852,179 | | | 15,011,418 | | | 14,035,086 | |
See accompanying notes to unaudited consolidated financial statements.
ITEM 1. Financial Statements Continued:
NICOLET BANKSHARES, INC.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands) (Unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
Net income | Net income | $ | 18,510 | | | $ | 7,824 | | | $ | 66,659 | | | $ | 44,347 | | Net income | $ | 22,595 | | | $ | 23,985 | | | $ | 13,697 | | | $ | 48,149 | |
Other comprehensive income (loss), net of tax: | Other comprehensive income (loss), net of tax: | | Other comprehensive income (loss), net of tax: | |
Unrealized gains (losses) on securities AFS: | Unrealized gains (losses) on securities AFS: | | Unrealized gains (losses) on securities AFS: | |
Net unrealized holding gains (losses) | Net unrealized holding gains (losses) | (26,162) | | | (3,074) | | | (89,630) | | | (8,581) | | Net unrealized holding gains (losses) | (5,893) | | | (23,520) | | | 9,401 | | | (63,468) | |
Net realized (gains) losses included in income | Net realized (gains) losses included in income | — | | | 13 | | | (15) | | | 13 | | Net realized (gains) losses included in income | 135 | | | — | | | 348 | | | (15) | |
Reclassification adjustment for securities transferred from held to maturity to available for sale | | Reclassification adjustment for securities transferred from held to maturity to available for sale | — | | | — | | | (20,434) | | | — | |
Income tax (expense) benefit | Income tax (expense) benefit | 7,064 | | | 827 | | | 24,204 | | | 2,313 | | Income tax (expense) benefit | 1,556 | | | 6,350 | | | 2,886 | | | 17,140 | |
Total other comprehensive income (loss) | Total other comprehensive income (loss) | (19,098) | | | (2,234) | | | (65,441) | | | (6,255) | | Total other comprehensive income (loss) | (4,202) | | | (17,170) | | | (7,799) | | | (46,343) | |
Comprehensive income (loss) | Comprehensive income (loss) | $ | (588) | | | $ | 5,590 | | | $ | 1,218 | | | $ | 38,092 | | Comprehensive income (loss) | $ | 18,393 | | | $ | 6,815 | | | $ | 5,898 | | | $ | 1,806 | |
See accompanying notes to unaudited consolidated financial statements.
ITEM 1. Financial Statements Continued:
NICOLET BANKSHARES, INC.
Consolidated Statements of Stockholders’ Equity
(In thousands) (Unaudited)
| | | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total |
Balances at June 30, 2022 | $ | 134 | | | $ | 520,741 | | | $ | 361,753 | | | $ | (43,241) | | | $ | 839,387 | | |
Balances at March 31, 2023 | | Balances at March 31, 2023 | $ | 147 | | | $ | 623,746 | | | $ | 398,966 | | | $ | (61,067) | | | $ | 961,792 | |
Comprehensive income: | Comprehensive income: | | Comprehensive income: | |
Net income, three months ended September 30, 2022 | — | | | — | | | 18,510 | | | — | | | 18,510 | | |
Net income, three months ended June 30, 2023 | | Net income, three months ended June 30, 2023 | — | | | — | | | 22,595 | | | — | | | 22,595 | |
Other comprehensive income (loss) | Other comprehensive income (loss) | — | | | — | | | — | | | (19,098) | | | (19,098) | | Other comprehensive income (loss) | — | | | — | | | — | | | (4,202) | | | (4,202) | |
Issuance of common stock in acquisition | 13 | | | 98,136 | | | — | | | — | | | 98,149 | | |
| Stock-based compensation expense | Stock-based compensation expense | — | | | 1,329 | | | — | | | — | | | 1,329 | | Stock-based compensation expense | — | | | 2,006 | | | — | | | — | | | 2,006 | |
Cash dividends on common stock, $0.25 per share | | Cash dividends on common stock, $0.25 per share | — | | | — | | | (3,698) | | | — | | | (3,698) | |
Exercise of stock options, net | Exercise of stock options, net | — | | | 1 | | | — | | | — | | | 1 | | Exercise of stock options, net | 1 | | | 451 | | | — | | | — | | | 452 | |
Issuance of common stock | Issuance of common stock | — | | | 185 | | | — | | | — | | | 185 | | Issuance of common stock | — | | | 214 | | | — | | | — | | | 214 | |
Purchase and retirement of common stock | | Purchase and retirement of common stock | (1) | | | (1,520) | | | — | | | — | | | (1,521) | |
| Balances at June 30, 2023 | | Balances at June 30, 2023 | $ | 147 | | | $ | 624,897 | | | $ | 417,863 | | | $ | (65,269) | | | $ | 977,638 | |
Balances at March 31, 2022 | | Balances at March 31, 2022 | $ | 135 | | | $ | 524,478 | | | $ | 337,768 | | | $ | (26,071) | | | $ | 836,310 | |
Comprehensive income: | | Comprehensive income: | |
Net income, three months ended June 30, 2022 | | Net income, three months ended June 30, 2022 | — | | | — | | | 23,985 | | | — | | | 23,985 | |
Other comprehensive income (loss) | | Other comprehensive income (loss) | — | | | — | | | — | | | (17,170) | | | (17,170) | |
| Balances at September 30, 2022 | $ | 147 | | | $ | 620,392 | | | $ | 380,263 | | | $ | (62,339) | | | $ | 938,463 | | |
Balances at June 30, 2021 | $ | 98 | | | $ | 261,096 | | | $ | 289,475 | | | $ | 8,726 | | | $ | 559,395 | | |
Comprehensive income: | | |
Net income, three months ended September 30, 2021 | — | | | — | | | 7,824 | | | — | | | 7,824 | | |
Other comprehensive income (loss) | — | | | — | | | — | | | (2,234) | | | (2,234) | | |
Issuance of common stock in acquisition | 23 | | | 179,411 | | | — | | | — | | | 179,434 | | |
Stock-based compensation expense | Stock-based compensation expense | — | | | 1,826 | | | — | | | — | | | 1,826 | | Stock-based compensation expense | — | | | 2,154 | | | — | | | — | | | 2,154 | |
Exercise of stock options, net | Exercise of stock options, net | 1 | | | 160 | | | — | | | — | | | 161 | | Exercise of stock options, net | — | | | 190 | | | — | | | — | | | 190 | |
Issuance of common stock | Issuance of common stock | — | | | 163 | | | — | | | — | | | 163 | | Issuance of common stock | — | | | 197 | | | — | | | — | | | 197 | |
Purchase and retirement of common stock | Purchase and retirement of common stock | (2) | | | (17,289) | | | — | | | — | | | (17,291) | | Purchase and retirement of common stock | (1) | | | (6,278) | | | — | | | — | | | (6,279) | |
| Balances at September 30, 2021 | $ | 120 | | | $ | 425,367 | | | $ | 297,299 | | | $ | 6,492 | | | $ | 729,278 | | |
Balances at December 31, 2021 | $ | 140 | | | $ | 575,045 | | | $ | 313,604 | | | $ | 3,102 | | | $ | 891,891 | | |
Balances at June 30, 2022 | | Balances at June 30, 2022 | $ | 134 | | | $ | 520,741 | | | $ | 361,753 | | | $ | (43,241) | | | $ | 839,387 | |
Balances at December 31, 2022 | | Balances at December 31, 2022 | $ | 147 | | | $ | 621,988 | | | $ | 407,864 | | | $ | (57,470) | | | $ | 972,529 | |
Comprehensive income: | Comprehensive income: | | Comprehensive income: | |
Net income, nine months ended September 30, 2022 | — | | | — | | | 66,659 | | | — | | | 66,659 | | |
Net income, six months ended June 30, 2023 | | Net income, six months ended June 30, 2023 | — | | | — | | | 13,697 | | | — | | | 13,697 | |
Other comprehensive income (loss) | Other comprehensive income (loss) | — | | | — | | | — | | | (65,441) | | | (65,441) | | Other comprehensive income (loss) | — | | | — | | | — | | | (7,799) | | | (7,799) | |
Issuance of common stock in acquisition | 13 | | | 98,136 | | | — | | | — | | | 98,149 | | |
| Stock-based compensation expense | Stock-based compensation expense | — | | | 5,282 | | | — | | | — | | | 5,282 | | Stock-based compensation expense | — | | | 3,430 | | | — | | | — | | | 3,430 | |
Cash dividends on common stock, $0.25 per share | | Cash dividends on common stock, $0.25 per share | — | | | — | | | (3,698) | | | — | | | (3,698) | |
Exercise of stock options, net | Exercise of stock options, net | 1 | | | 2,077 | | | — | | | — | | | 2,078 | | Exercise of stock options, net | 1 | | | 599 | | | — | | | — | | | 600 | |
Issuance of common stock | Issuance of common stock | — | | | 557 | | | — | | | — | | | 557 | | Issuance of common stock | — | | | 400 | | | — | | | — | | | 400 | |
Purchase and retirement of common stock | Purchase and retirement of common stock | (7) | | | (60,705) | | | — | | | — | | | (60,712) | | Purchase and retirement of common stock | (1) | | | (1,520) | | | — | | | — | | | (1,521) | |
| Balances at September 30, 2022 | $ | 147 | | | $ | 620,392 | | | $ | 380,263 | | | $ | (62,339) | | | $ | 938,463 | | |
Balances at December 31, 2020 | $ | 100 | | | $ | 273,390 | | | $ | 252,952 | | | $ | 12,747 | | | $ | 539,189 | | |
Balances at June 30, 2023 | | Balances at June 30, 2023 | $ | 147 | | | $ | 624,897 | | | $ | 417,863 | | | $ | (65,269) | | | $ | 977,638 | |
Balances at December 31, 2021 | | Balances at December 31, 2021 | $ | 140 | | | $ | 575,045 | | | $ | 313,604 | | | $ | 3,102 | | | $ | 891,891 | |
Comprehensive income: | Comprehensive income: | | Comprehensive income: | |
Net income, nine months ended September 30, 2021 | — | | | — | | | 44,347 | | | — | | | 44,347 | | |
Net income, six months ended June 30, 2022 | | Net income, six months ended June 30, 2022 | — | | | — | | | 48,149 | | | — | | | 48,149 | |
Other comprehensive income (loss) | Other comprehensive income (loss) | — | | | — | | | — | | | (6,255) | | | (6,255) | | Other comprehensive income (loss) | — | | | — | | | — | | | (46,343) | | | (46,343) | |
Issuance of common stock in acquisition | 23 | | | 179,411 | | | — | | | — | | | 179,434 | | |
| Stock-based compensation expense | Stock-based compensation expense | — | | | 5,222 | | | — | | | — | | | 5,222 | | Stock-based compensation expense | — | | | 3,953 | | | — | | | — | | | 3,953 | |
Exercise of stock options, net | Exercise of stock options, net | 1 | | | 1,385 | | | — | | | — | | | 1,386 | | Exercise of stock options, net | 1 | | | 2,076 | | | — | | | — | | | 2,077 | |
Issuance of common stock | Issuance of common stock | — | | | 395 | | | — | | | — | | | 395 | | Issuance of common stock | — | | | 372 | | | — | | | — | | | 372 | |
Purchase and retirement of common stock | Purchase and retirement of common stock | (4) | | | (34,436) | | | — | | | — | | | (34,440) | | Purchase and retirement of common stock | (7) | | | (60,705) | | | — | | | — | | | (60,712) | |
| Balances at September 30, 2021 | $ | 120 | | | $ | 425,367 | | | $ | 297,299 | | | $ | 6,492 | | | $ | 729,278 | | |
Balances at June 30, 2022 | | Balances at June 30, 2022 | $ | 134 | | | $ | 520,741 | | | $ | 361,753 | | | $ | (43,241) | | | $ | 839,387 | |
See accompanying notes to unaudited consolidated financial statements.
ITEM 1. Financial Statements Continued:
NICOLET BANKSHARES, INC.
Consolidated Statements of Cash Flows (Unaudited)
| (In thousands) | (In thousands) | Nine Months Ended September 30, | (In thousands) | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2023 | | 2022 |
Cash Flows From Operating Activities: | Cash Flows From Operating Activities: | | | | Cash Flows From Operating Activities: | | | |
Net income | Net income | $ | 66,659 | | | $ | 44,347 | | Net income | $ | 13,697 | | | $ | 48,149 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |
Depreciation, amortization, and accretion | Depreciation, amortization, and accretion | 16,994 | | | 9,301 | | Depreciation, amortization, and accretion | 9,274 | | | 11,804 | |
Provision for credit losses | Provision for credit losses | 9,650 | | | 6,500 | | Provision for credit losses | 3,540 | | | 1,050 | |
Increase in cash surrender value of life insurance | Increase in cash surrender value of life insurance | (2,551) | | | (1,658) | | Increase in cash surrender value of life insurance | (2,159) | | | (1,701) | |
Stock-based compensation expense | Stock-based compensation expense | 5,282 | | | 5,222 | | Stock-based compensation expense | 3,430 | | | 3,953 | |
Asset (gains) losses, net | Asset (gains) losses, net | (2,870) | | | (3,716) | | Asset (gains) losses, net | 38,786 | | | (2,916) | |
Gain on sale of loans held for sale, net | Gain on sale of loans held for sale, net | (4,520) | | | (16,289) | | Gain on sale of loans held for sale, net | (1,860) | | | (3,468) | |
Net change due to: | Net change due to: | | Net change due to: | |
Proceeds from sale of loans held for sale | Proceeds from sale of loans held for sale | 188,093 | | | 503,405 | | Proceeds from sale of loans held for sale | 64,117 | | | 150,037 | |
Origination of loans held for sale | Origination of loans held for sale | (182,962) | | | (485,641) | | Origination of loans held for sale | (65,244) | | | (146,891) | |
Accrued interest receivable and other assets | Accrued interest receivable and other assets | 7,719 | | | (6,721) | | Accrued interest receivable and other assets | (3,846) | | | 8,112 | |
Accrued interest payable and other liabilities | Accrued interest payable and other liabilities | (14,145) | | | (2,488) | | Accrued interest payable and other liabilities | (11,368) | | | (18,787) | |
Net cash provided by (used in) operating activities | Net cash provided by (used in) operating activities | 87,349 | | | 52,262 | | Net cash provided by (used in) operating activities | 48,367 | | | 49,342 | |
Cash Flows From Investing Activities: | Cash Flows From Investing Activities: | | Cash Flows From Investing Activities: | |
Net (increase) decrease in loans | Net (increase) decrease in loans | (537,001) | | | 10,406 | | Net (increase) decrease in loans | (39,223) | | | (359,145) | |
Net (increase) decrease in certificates of deposit in other banks | Net (increase) decrease in certificates of deposit in other banks | 8,419 | | | 8,561 | | Net (increase) decrease in certificates of deposit in other banks | 2,710 | | | 6,427 | |
Purchases of securities AFS | Purchases of securities AFS | (8,623) | | | (214,343) | | Purchases of securities AFS | — | | | (8,017) | |
Purchases of securities HTM | Purchases of securities HTM | (56,479) | | | (20,996) | | Purchases of securities HTM | — | | | (56,479) | |
Proceeds from sales of securities AFS | Proceeds from sales of securities AFS | 23,984 | | | 15,975 | | Proceeds from sales of securities AFS | 26,798 | | | 3,400 | |
Proceeds from sales of securities HTM | | Proceeds from sales of securities HTM | 460,051 | | | — | |
Proceeds from calls and maturities of securities AFS | Proceeds from calls and maturities of securities AFS | 70,781 | | | 81,681 | | Proceeds from calls and maturities of securities AFS | 133,027 | | | 47,052 | |
Proceeds from calls and maturities of securities HTM | Proceeds from calls and maturities of securities HTM | 21,378 | | | — | | Proceeds from calls and maturities of securities HTM | 2,916 | | | 12,509 | |
Purchases of other investments | Purchases of other investments | (30,327) | | | (4,787) | | Purchases of other investments | (12,022) | | | (11,303) | |
Proceeds from sales of other investments | Proceeds from sales of other investments | 4,014 | | | 1,534 | | Proceeds from sales of other investments | 18,883 | | | 1,734 | |
| Proceeds from redemption of BOLI | Proceeds from redemption of BOLI | 578 | | | — | | Proceeds from redemption of BOLI | 117 | | | 117 | |
Net (increase) decrease in premises and equipment | Net (increase) decrease in premises and equipment | (7,965) | | | (6,894) | | Net (increase) decrease in premises and equipment | (12,565) | | | (6,173) | |
Net (increase) decrease in other real estate and other assets | Net (increase) decrease in other real estate and other assets | 9,785 | | | 1,046 | | Net (increase) decrease in other real estate and other assets | 794 | | | 9,836 | |
Net cash (paid) received in branch sale | Net cash (paid) received in branch sale | 147,833 | | | — | | Net cash (paid) received in branch sale | — | | | 147,833 | |
Net cash (paid) received in business combination | (28,221) | | | 394,868 | | |
| Net cash provided by (used in) investing activities | Net cash provided by (used in) investing activities | (381,844) | | | 267,051 | | Net cash provided by (used in) investing activities | 581,486 | | | (212,209) | |
Cash Flows From Financing Activities: | Cash Flows From Financing Activities: | | Cash Flows From Financing Activities: | |
Net increase (decrease) in deposits | Net increase (decrease) in deposits | 68,428 | | | 199,698 | | Net increase (decrease) in deposits | 19,849 | | | (173,145) | |
Net increase (decrease) in short-term borrowings | Net increase (decrease) in short-term borrowings | 147,134 | | | — | | Net increase (decrease) in short-term borrowings | (267,000) | | | — | |
Proceeds from long-term borrowings | — | | | 103,953 | | |
| Repayments of long-term borrowings | Repayments of long-term borrowings | (20,000) | | | (42,559) | | Repayments of long-term borrowings | (28,000) | | | (20,000) | |
Purchase and retirement of common stock | Purchase and retirement of common stock | (60,712) | | | (34,440) | | Purchase and retirement of common stock | (1,521) | | | (60,712) | |
Cash dividends paid on common stock | | Cash dividends paid on common stock | (3,698) | | | — | |
| Proceeds from issuance of common stock | Proceeds from issuance of common stock | 557 | | | 395 | | Proceeds from issuance of common stock | 400 | | | 372 | |
Proceeds from exercise of stock options | Proceeds from exercise of stock options | 2,078 | | | 1,386 | | Proceeds from exercise of stock options | 600 | | | 2,077 | |
| Net cash provided by (used in) financing activities | Net cash provided by (used in) financing activities | 137,485 | | | 228,433 | | Net cash provided by (used in) financing activities | (279,370) | | | (251,408) | |
Net increase (decrease) in cash and cash equivalents | Net increase (decrease) in cash and cash equivalents | (157,010) | | | 547,746 | | Net increase (decrease) in cash and cash equivalents | 350,483 | | | (414,275) | |
Cash and cash equivalents: | Cash and cash equivalents: | | Cash and cash equivalents: | |
Beginning | Beginning | 595,292 | | | 802,859 | | Beginning | 154,723 | | | 595,292 | |
Ending * | Ending * | $ | 438,282 | | | $ | 1,350,605 | | Ending * | $ | 505,206 | | | $ | 181,017 | |
Supplemental Disclosures of Cash Flow Information: | Supplemental Disclosures of Cash Flow Information: | | | | Supplemental Disclosures of Cash Flow Information: | | | |
Cash paid for interest | Cash paid for interest | $ | 19,785 | | | $ | 9,320 | | Cash paid for interest | $ | 61,769 | | | $ | 11,367 | |
Cash paid for taxes | Cash paid for taxes | 25,660 | | | 24,116 | | Cash paid for taxes | 12,400 | | | 19,610 | |
Transfer of securities from HTM to AFS | | Transfer of securities from HTM to AFS | 177,727 | | | — | |
Transfer of loans and bank premises to other real estate owned | Transfer of loans and bank premises to other real estate owned | 432 | | | 302 | | Transfer of loans and bank premises to other real estate owned | — | | | 432 | |
Capitalized mortgage servicing rights | Capitalized mortgage servicing rights | 2,127 | | | 3,191 | | Capitalized mortgage servicing rights | 620 | | | 1,685 | |
| Acquisitions: | | |
Fair value of assets acquired | $ | 1,118,000 | | | $ | 1,556,000 | | |
Fair value of liabilities assumed | 1,034,000 | | | 1,409,000 | | |
Net assets acquired | 84,000 | | | 147,000 | | |
|
* There was no restricted cash in cash and cash equivalents at Septembereither June 30, 2022, while cash and cash equivalents at September2023 or June 30, 2021, included restricted cash of $1.9 million pledged as collateral on interest rate swaps. No reserve balance was required with the Federal Reserve Bank at either September 30, 2022 or September 30, 2021.2022.
See accompanying notes to unaudited consolidated financial statements.
NICOLET BANKSHARES, INC.
Notes to Unaudited Consolidated Financial Statements
Note 1 – Basis of Presentation
General
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated balance sheets, statements of income, comprehensive income (loss), changes in stockholders’ equity, and cash flows of Nicolet Bankshares, Inc. (the “Company” or “Nicolet”) and its subsidiaries, as of and for the periods presented, and all such adjustments are of a normal recurring nature. All material intercompany transactions and balances have been eliminated. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the entire year.
These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been omitted or abbreviated. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.2022.
Critical Accounting Policies and Estimates
Preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions, and assumptionsjudgments that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, the allowance for credit losses, valuation of loans in acquisition transactions, useful lives for depreciation and amortization, fair value of financial instruments, impairment calculations, valuation of deferred tax assets, uncertain income tax positions and contingencies. Estimates thatThese estimates are particularly susceptiblebased on management’s knowledge of historical experience, current information, and other factors deemed to significant change for the Company include the determination of the allowance for credit losses, the determination and assessment of deferred tax assets and liabilities, and the valuation of loans acquired in acquisition transactions; therefore, these are critical accounting policies.be relevant; accordingly, as this information changes, actual results could differ from those estimates. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: external market factors such as market interest rates and employment rates, changes to operating policies and procedures, changes in applicable banking or tax regulations, and changes to deferred tax estimates. ActualNicolet considers accounting estimates to be critical to reported financial results may ultimately differif the accounting estimate requires management to make assumptions about matters that are highly uncertain and different estimates that are reasonably likely to occur from period to period, could have a material impact on the financial statements. The accounting estimates although management does not generally believe such differences would materially affectwe consider to be critical include business combinations and the consolidated financial statements in any individual reporting period presented.valuation of loans acquired, the determination of the allowance for credit losses, and income taxes.
There have been no material changes or developments with respect to the assumptions or methodologies that the Company uses when applying what management believes are critical accounting policies and developing critical accounting estimates as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.2022.
FutureRecent Accounting Pronouncements Adopted
In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures. This ASU eliminateseliminated the accounting guidance for TDRs by creditors while enhancingand enhanced the disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower ismodifications to borrowers experiencing financial difficulty. The ASU also requires public business entities to expand the vintage disclosures to include gross charge-offs by year of origination. The updated guidance is effective for fiscal years beginning after December 15, 2022, with early adoption permitted.2022. Adoption of this amendment isASU did not expected to have a material impact on the Company’s consolidated financial statements; though,however, it will resultresulted in new disclosures. See Note 6 for the new disclosures.
Future Accounting Pronouncements
In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. This ASU permits reporting entities to elect to account for tax equity investments, regardless of the tax credit program for which the income tax credits are received, using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the income statement as a component of income tax expense. A reporting entity makes an accounting policy election to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis rather than electing to apply the proportional amortization method at the reporting entity level or to individual investments. This ASU also requires specific disclosures of gross charge-offs by year of originationinvestments that generate income tax credits and onother income tax benefits from a tax credit program for which the types of loan modificationsentity has elected to borrowers experiencing financial difficulties. Current TDR disclosures will be also removed.apply the proportional amortization method. The updated guidance is effective for fiscal years beginning after December 15, 2023.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The updatedIn December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which defers the sunset date of the original guidance is effective for all entities as of March 12, 2020 throughfrom December 31, 2022.2022 to December 31, 2024. The Company continues to work through the cessation of LIBOR, including the modification of its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR. The Company expects to utilize the reference rate reform transition guidance, as applicable, and does not expect such adoption to have a material impact on its consolidated financial statements or financial disclosures. The Company will continue to assess the impact as the reference rate transition approaches June 30, 2023.
Reclassifications
Certain amounts in the 20212022 consolidated financial statements have been reclassified to conform to the 20222023 presentation. These reclassifications were not material and did not impact previously reported net income or comprehensive income.
Note 2 – Acquisitions
Completed Acquisitions:Acquisition
Charter Bankshares, Inc. (“Charter”): On August 26, 2022, Nicolet completed its merger with Charter, pursuant to the Agreement and Plan of Merger dated March 29, 2022, (the “Charter Merger Agreement”), at which time Charter merged with and into Nicolet, and Charter Bank, the wholly owned bank subsidiary of Charter, was merged with and into Nicolet National Bank (the “Bank”), the wholly owned bank subsidiary of Nicolet.
Pursuant to the Charter Merger Agreement, each share of Charter common stock issued and outstanding immediately prior to the effective time of In the merger, was converted into the right to receiveCharter stockholders received 15.458 shares of Nicolet common stock and $475 in cash.cash for each share of Charter owned. As a result, Nicolet issued approximately 1.26 million shares of Nicolet common stock for stock consideration of $98 million and cash consideration of $39 million, for a total purchase price of $137 million. With the Charter merger, Nicolet expanded to Western Wisconsin and Minnesota.
A summary of the assets acquired and liabilities assumed in the Charter transaction, as of the acquisition date, including the purchase price allocation was as follows.
| (In millions, except share data) | (In millions, except share data) | Acquired from Charter | Fair Value Adjustments | Estimated Fair Value | (In millions, except share data) | Acquired from Charter | Fair Value Adjustments | Estimated Fair Value |
Assets Acquired: | Assets Acquired: | | Assets Acquired: | |
Cash and cash equivalents | Cash and cash equivalents | $ | 10 | | $ | — | | $ | 10 | | Cash and cash equivalents | $ | 10 | | $ | — | | $ | 10 | |
Investment securities | Investment securities | 218 | | — | | 218 | | Investment securities | 218 | | — | | 218 | |
Loans | Loans | 848 | | (21) | | 827 | | Loans | 848 | | (21) | | 827 | |
ACL-Loans | ACL-Loans | (9) | | 7 | | (2) | | ACL-Loans | (9) | | 7 | | (2) | |
Premises and equipment | Premises and equipment | 9 | | 1 | | 10 | | Premises and equipment | 9 | | 1 | | 10 | |
BOLI | BOLI | 29 | | — | | 29 | | BOLI | 29 | | — | | 29 | |
Core deposit intangible | Core deposit intangible | — | | 19 | | 19 | | Core deposit intangible | — | | 19 | | 19 | |
Other assets | Other assets | 5 | | 2 | | 7 | | Other assets | 5 | | 5 | | 10 | |
Total assets | Total assets | $ | 1,110 | | $ | 8 | | $ | 1,118 | | Total assets | $ | 1,110 | | $ | 11 | | $ | 1,121 | |
Liabilities Assumed: | Liabilities Assumed: | | Liabilities Assumed: | |
Deposits | Deposits | $ | 869 | | $ | 1 | | $ | 870 | | Deposits | $ | 869 | | $ | 1 | | $ | 870 | |
Borrowings | Borrowings | 161 | | — | | 161 | | Borrowings | 161 | | — | | 161 | |
Other liabilities | Other liabilities | 3 | | — | | 3 | | Other liabilities | 3 | | — | | 3 | |
Total liabilities | Total liabilities | $ | 1,033 | | $ | 1 | | $ | 1,034 | | Total liabilities | $ | 1,033 | | $ | 1 | | $ | 1,034 | |
Net assets acquired | Net assets acquired | | $ | 84 | | Net assets acquired | | $ | 87 | |
Purchase Price: | Purchase Price: | | | Purchase Price: | | |
Nicolet common stock issued (in shares) | Nicolet common stock issued (in shares) | | 1,262,360 | | Nicolet common stock issued (in shares) | | 1,262,360 | |
Value of Nicolet common stock consideration | Value of Nicolet common stock consideration | | $ | 98 | | Value of Nicolet common stock consideration | | $ | 98 | |
Cash consideration paid | Cash consideration paid | | 39 | | Cash consideration paid | | 39 | |
Total purchase price | Total purchase price | | $ | 137 | | Total purchase price | | $ | 137 | |
Preliminary goodwill | | $ | 53 | | |
Goodwill | | Goodwill | | $ | 50 | |
The Company purchased loans through the acquisition of Charter for which there was, at the date of acquisition, more than insignificant deterioration of credit quality since origination (purchased credit deteriorated loans or “PCD” loans). The carrying amount of these loans at acquisition was as follows.
| | | | | | | | |
(In thousands) | | August 26, 2022 |
Purchase price of PCD loans at acquisition | | $ | 24,031 | |
Allowance for credit losses on PCD loans at acquisition | | 1,709 | |
Par value of PCD acquired loans at acquisition | | $ | 25,740 | |
The Company accounted for the Charter acquisition under the acquisition method of accounting, and thus, the financial position and results of operations of Charter prior to the consummation date were not included in the accompanying consolidated financial statements. The accounting required assets purchased and liabilities assumed to be recorded at their respective estimated fair values at the date of acquisition. The estimated fair value was determined with the assistance of third party
valuations, appraisals, and third party advisors. Goodwill arising as a result of the Charter acquisition is not deductible for tax purposes.
County Bancorp, Inc. (“County”): On December 3, 2021, Nicolet completed its merger with County, pursuant to the Agreement and Plan of Merger dated June 22, 2021 (the “County Merger Agreement”), at which time County merged with and into Nicolet, and Investors Community Bank, the wholly owned bank subsidiary of County, was merged with and into the Bank.
Pursuant to the County Merger Agreement, each share of County common stock issued and outstanding immediately prior to the effective time of the merger was converted into the right to receive, at the election of the shareholder, either cash of $37.18 or 0.48 shares of Nicolet common stock, subject to proration procedures such that 1,237,000 shares of County common stock were exchanged for cash, and the remaining shares were exchanged for Nicolet common stock. As a result, Nicolet issued approximately 2.4 million shares of Nicolet common stock for stock consideration of $176 million and cash consideration of $48 million, or a total purchases price of $224 million. With the County merger, Nicolet became the premier agriculture lender throughout Wisconsin.
A summary of the assets acquired and liabilities assumed in the County transaction, as of the acquisition date, including the purchase price allocation was as follows.
| | | | | | | | | | | |
(In millions, except share data) | Acquired from County | Fair Value Adjustments | Estimated Fair Value |
Assets Acquired: | | | |
Cash and cash equivalents | $ | 20 | | $ | — | | $ | 20 | |
Investment securities | 301 | | (1) | | 300 | |
Loans | 1,015 | | (1) | | 1,014 | |
ACL-Loans | (11) | | 8 | | (3) | |
Premises and equipment | 21 | | (4) | | 17 | |
BOLI | 33 | | — | | 33 | |
Core deposit intangible | — | | 7 | | 7 | |
Loan servicing rights | 20 | | — | | 20 | |
Other assets | 6 | | (2) | | 4 | |
Total assets | $ | 1,405 | | $ | 7 | | $ | 1,412 | |
Liabilities Assumed: | | | |
Deposits | $ | 1,027 | | $ | 3 | | $ | 1,030 | |
Borrowings | 218 | | 1 | | 219 | |
Other liabilities | 8 | | — | | 8 | |
Total liabilities | $ | 1,253 | | $ | 4 | | $ | 1,257 | |
Net assets acquired | | | $ | 155 | |
Purchase Price: | | | |
Nicolet common stock issued (in shares) | | | 2,366,243 | |
Value of Nicolet common stock consideration | | | $ | 176 | |
Cash consideration paid | | | 48 | |
Total purchase price | | | $ | 224 | |
Write-off prior investment in County | | | (1) | |
Goodwill | | | $ | 70 | |
The Company purchased loans through the acquisition of County for which there was, at the date of acquisition, more than insignificant deterioration of credit quality since origination (PCD loans). The carrying amount of these loans at acquisition was as follows.
| | | | | | | | |
(In thousands) | | December 3, 2021 |
Purchase price of PCD loans at acquisition | | $ | 64,948 | |
Allowance for credit losses on PCD loans at acquisition | | 3,262 | |
Par value of PCD acquired loans at acquisition | | $ | 68,210 | |
The Company accounted for the County acquisition under the acquisition method of accounting, and thus, the financial position and results of operations of County prior to the consummation date were not included in the accompanying consolidated
financial statements. The accounting required assets purchased and liabilities assumed to be recorded at their respective estimated fair values at the date of acquisition. The estimated fair value was determined with the assistance of third party valuations, appraisals, and third party advisors. Goodwill arising as a result of the County acquisition is not deductible for tax purposes.
Mackinac Financial Corporation (“Mackinac”): On September 3, 2021, Nicolet completed its merger with Mackinac, pursuant to the terms of the Agreement and Plan of Merger dated April 12, 2021 (the “Mackinac Merger Agreement”), at which time Mackinac merged with and into Nicolet, and mBank, the wholly owned bank subsidiary of Mackinac, was merged with and into the Bank.
Pursuant to the Mackinac Merger Agreement, Mackinac shareholders received fixed consideration of 0.22 shares of Nicolet common stock and $4.64 in cash for each share of Mackinac common stock owned, resulting in the issuance of approximately 2.3 million shares of Nicolet common stock for stock consideration of $180 million and cash consideration of $49 million, or a total purchase price of $229 million. The Mackinac merger expanded Nicolet prominently into Northern Michigan and the Upper Peninsula of Michigan, and added to Nicolet’s presence in upper northeastern Wisconsin.
A summary of the assets acquired and liabilities assumed in the Mackinac transaction, as of the acquisition date, including the purchase price allocation was as follows.
| | | | | | | | | | | |
(In millions, except share data) | Acquired from Mackinac | Fair Value Adjustments | Estimated Fair Value |
Assets Acquired: | | | |
Cash and cash equivalents | $ | 448 | | $ | — | | $ | 448 | |
Investment securities | 104 | | — | | 104 | |
Loans | 930 | | 10 | | 940 | |
ACL-Loans | (6) | | 4 | | (2) | |
Premises and equipment | 24 | | (3) | | 21 | |
BOLI | 16 | | — | | 16 | |
Goodwill | 20 | | (20) | | — | |
Other intangibles | 4 | | 3 | | 7 | |
Other assets | 25 | | (3) | | 22 | |
Total assets | $ | 1,565 | | $ | (9) | | $ | 1,556 | |
Liabilities Assumed: | | | |
Deposits | $ | 1,365 | | $ | 1 | | $ | 1,366 | |
Borrowings | 28 | | 1 | | 29 | |
Other liabilities | 13 | | 1 | | 14 | |
Total liabilities | $ | 1,406 | | $ | 3 | | $ | 1,409 | |
Net assets acquired | | | $ | 147 | |
Purchase Price: | | | |
Nicolet common stock issued (in shares) | | | 2,337,230 | |
Value of Nicolet common stock consideration | | | $ | 180 | |
Cash consideration paid | | | 49 | |
Total purchase price | | | $ | 229 | |
Write-off prior investment in Mackinac | | | (2) | |
Goodwill | | | $ | 84 | |
The Company purchased loans through the acquisition of Mackinac for which there was, at the date of acquisition, more than insignificant deterioration of credit quality since origination (PCD loans). The carrying amount of these loans at acquisition was as follows.
| | | | | | | | |
(In thousands) | | September 3, 2021 |
Purchase price of PCD loans at acquisition | | $ | 10,605 | |
Allowance for credit losses on PCD loans at acquisition | | 1,896 | |
Par value of PCD acquired loans at acquisition | | $ | 12,501 | |
The Company accounted for the Mackinac acquisition under the acquisition method of accounting, and thus, the financial position and results of operations of Mackinac prior to the consummation date were not included in the accompanying
consolidated financial statements. The accounting required assets purchased and liabilities assumed to be recorded at their respective estimated fair values at the date of acquisition. The estimated fair value was determined with the assistance of third party valuations, appraisals, and third party advisors. Goodwill arising as a result of the Mackinac acquisition is not deductible for tax purposes.
Summary Unaudited Pro Forma Information: The following unaudited pro forma information is presented for illustrative purposes only, and gives effect to the acquisitions of County and Mackinac as if the acquisitions had occurred on January 1, 2021, the beginning of the earliest period presented. The pro forma information should not be relied upon as being indicative of the historical results of operations the companies would have had if the acquisitions had occurred before such periods or the future results of operations that the companies will experience as a result of the mergers. The pro forma information, although helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect the benefits of expected cost savings, opportunities to earn additional revenue, the impact of restructuring and merger-related expenses, or other factors that may result as a consequence of the mergers and, accordingly, does not attempt to predict or suggest future results.
| | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(In thousands, except per share data) | | September 30, 2021 | | September 30, 2021 |
Total revenue, net of interest expense | | $ | 84,802 | | | $ | 241,287 | |
Net income | | $ | 16,470 | | | $ | 62,243 | |
Diluted earnings per common share | | $ | 1.06 | | | $ | 4.09 | |
Note 3 – Earnings per Common Share
Basic earnings per common share are calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share are calculated by dividing net income by the weighted average number of shares adjusted for the dilutive effect of common stock awards (outstanding stock options and unvested restricted stock), if any. Presented below are the calculations for basic and diluted earnings per common share.
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands, except per share data) | (In thousands, except per share data) | 2022 | | 2021 | | 2022 | | 2021 | (In thousands, except per share data) | 2023 | | 2022 | | 2023 | | 2022 |
Net income | Net income | $ | 18,510 | | | $ | 7,824 | | | $ | 66,659 | | | $ | 44,347 | | Net income | $ | 22,595 | | | $ | 23,985 | | | $ | 13,697 | | | $ | 48,149 | |
Weighted average common shares outstanding | Weighted average common shares outstanding | 13,890 | | | 10,392 | | | 13,648 | | | 10,098 | | Weighted average common shares outstanding | 14,711 | | | 13,402 | | | 14,703 | | | 13,525 | |
Effect of dilutive common stock awards | Effect of dilutive common stock awards | 420 | | | 384 | | | 479 | | | 405 | | Effect of dilutive common stock awards | 249 | | | 450 | | | 308 | | | 510 | |
Diluted weighted average common shares outstanding | Diluted weighted average common shares outstanding | 14,310 | | | 10,776 | | | 14,127 | | | 10,503 | | Diluted weighted average common shares outstanding | 14,960 | | | 13,852 | | | 15,011 | | | 14,035 | |
Basic earnings per common share* | Basic earnings per common share* | $ | 1.33 | | | $ | 0.75 | | | $ | 4.88 | | | $ | 4.39 | | Basic earnings per common share* | $ | 1.54 | | | $ | 1.79 | | | $ | 0.93 | | | $ | 3.56 | |
Diluted earnings per common share* | Diluted earnings per common share* | $ | 1.29 | | | $ | 0.73 | | | $ | 4.72 | | | $ | 4.22 | | Diluted earnings per common share* | $ | 1.51 | | | $ | 1.73 | | | $ | 0.91 | | | $ | 3.43 | |
*Cumulative quarterly per share performance may not equal annual per share totals due to the effects of the amount and timing of capital increases. When computing earnings per share for an interim period, the denominator is based on the weighted average shares outstanding during the interim period, and not on an annualized weighted average basis. Accordingly, the sum of the earnings per share data for the quarters will not necessarily equal the year to date earnings per share data.
For both the three and six months ended SeptemberJune 30, 2022 and 2021, respectively,2023, options to purchase approximately 0.20.3 million shares arewere excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive. For both the ninethree and six months ended SeptemberJune 30, 2022, and 2021, respectively, options to purchase approximately 0.1 million shares arewere excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive.
Note 4 – Stock-Based Compensation
The Company may grant stock options and restricted stock under its stock-based compensation plans to certain officers, employees and directors. These plans are administered by a committee of the Board of Directors, and at SeptemberJune 30, 2022,2023, approximately 0.7 million shares were available for grant under these stock-based compensation plans.
A Black-Scholes model is utilized to estimate the fair value of stock option grants, while the market price of the Company’s stock at the date of grant is used to estimate the fair value of restricted stock awards. The weighted average assumptions used in the Black-Scholes model for valuing stock option grants for the nine months ended September 30, 2022 and 2021 were as follows.
| | | Nine Months Ended September 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2023 | | 2022 |
Dividend yield | Dividend yield | — | % | | — | % | Dividend yield | 1.6 | % | | — | % |
Expected volatility | Expected volatility | 30 | % | | 30 | % | Expected volatility | 30 | % | | 30 | % |
Risk-free interest rate | Risk-free interest rate | 3.03 | % | | 1.16 | % | Risk-free interest rate | 3.74 | % | | 1.77 | % |
Expected average life | Expected average life | 7 years | | 7 years | Expected average life | 7 years | | 7 years |
Weighted average per share fair value of options | Weighted average per share fair value of options | $ | 30.99 | | | $ | 26.55 | | Weighted average per share fair value of options | $ | 20.94 | | | $ | 32.99 | |
A summary of the Company’s stock option activity is summarized below.
| Stock Options | Stock Options | | Option Shares Outstanding | | Weighted Average Exercise Price | | Weighted Average Remaining Life (Years) | | Aggregate Intrinsic Value (in thousands) | Stock Options | | Option Shares Outstanding | | Weighted Average Exercise Price | | Weighted Average Remaining Life (Years) | | Aggregate Intrinsic Value (in thousands) |
Outstanding - December 31, 2021 | | 1,833,246 | | | $ | 57.69 | | | | | | |
Outstanding - December 31, 2022 | | Outstanding - December 31, 2022 | | 1,853,064 | | | $ | 59.79 | | | | | |
Granted | Granted | | 132,929 | | | 81.04 | | | Granted | | 7,000 | | | 64.36 | | |
Exercise of stock options * | Exercise of stock options * | | (65,661) | | | 41.26 | | | Exercise of stock options * | | (48,979) | | | 31.67 | | |
Forfeited | Forfeited | | (8,500) | | | 77.62 | | | Forfeited | | (13,000) | | | 78.32 | | |
Outstanding - September 30, 2022 | | 1,892,014 | | | $ | 59.81 | | | 6.2 | | $ | 24,920 | | |
Exercisable - September 30, 2022 | | 1,207,585 | | | $ | 50.84 | | | 4.9 | | $ | 24,324 | | |
Outstanding - June 30, 2023 | | Outstanding - June 30, 2023 | | 1,798,085 | | | $ | 60.44 | | | 5.5 | | $ | 19,976 | |
Exercisable - June 30, 2023 | | Exercisable - June 30, 2023 | | 1,310,642 | | | $ | 54.41 | | | 4.6 | | $ | 19,862 | |
* The terms of the stock option agreements permit having a number of shares of stock withheld, the fair market value of which as of the date of exercise is sufficient to satisfy the exercise price and/or tax withholding requirements. For the ninesix months ended SeptemberJune 30, 2022, 6,0732023, 14,772 such shares were withheld by the Company.
Intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the exercise price of the stock options. The intrinsic value of options exercised for the ninesix months ended SeptemberJune 30, 20222023 and 20212022 was approximately $3.3$1.4 million and $1.7$3.3 million, respectively.
A summary of the Company’s restricted stock activity is summarized below.
| | | | | | | | | | | | | | |
Restricted Stock | | Weighted Average Grant Date Fair Value | | Restricted Shares Outstanding |
Outstanding - December 31, 2021 | | $ | 71.42 | | | 25,801 | |
Granted | | 75.99 | | | 60,852 | |
Vested * | | 71.51 | | | (13,127) | |
Forfeited | | 56.01 | | | (600) | |
Outstanding - September 30, 2022 | | $ | 75.34 | | | 72,926 | |
* The terms of the restricted stock agreements permit the surrender of shares to the Company upon vesting in order to satisfy applicable tax withholding requirements at the minimum statutory withholding rate, and accordingly, 465 shares were surrendered during the nine months ended September 30, 2022. | | | | | | | | | | | | | | |
Restricted Stock | | Weighted Average Grant Date Fair Value | | Restricted Shares Outstanding |
Outstanding - December 31, 2022 | | $ | 76.49 | | | 73,490 | |
Granted | | 55.65 | | | 11,674 | |
Vested | | 59.50 | | | (14,174) | |
| | | | |
Outstanding - June 30, 2023 | | $ | 76.45 | | | 70,990 | |
The Company recognized approximately $4.6$2.8 million and $4.5$3.3 million of stock-based compensation expense (included in personnel on the consolidated statements of income) for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively, associated with its common stock awards granted to officers and employees. In addition, duringfor the ninesix months ended SeptemberJune 30, 2022,2023, the Company recognized approximately $0.7$0.6 million of director expense (included in other expense on the consolidated statements of income) for restricted stock grants totaling 8,85211,674 shares with immediate vesting to directors, while duringfor the first ninesix months of 2021,ended June 30, 2022, the Company recognized approximately $0.7$0.6 million of director expense for restricted stock grants totaling 9,5958,424 shares with immediate vesting to directors, in each case representing the annual stock retainer fee paid to external board members for that year. As of SeptemberJune 30, 2022,2023, there was approximately $19.9$15.6 million of unrecognized compensation cost related to equity award grants, which is expected to be recognized over the remaining vesting period of approximately fourthree years. The Company recognized a tax benefit of approximately $0.4$0.2 million and $0.3$0.4 million for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively, for the tax impact of stock option exercises and vesting of restricted stock.
Note 5 – Securities and Other Investments
Securities
Securities are classified as AFS or HTM on the consolidated balance sheets at the time of purchase. AFS securities include those securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity, and are carried at fair value on the consolidated balance sheets. HTM securities include those securities which the Company has both the positive intent and ability to hold to maturity, and are carried at amortized cost on the consolidated balance sheets. Premiums and discounts on investment securities are amortized or accreted into interest income over the estimated life of the related securities using the effective interest method.
The amortized cost and fair value of securities AFS and HTM are summarized as follows.
| | | September 30, 2022 | | June 30, 2023 |
(in thousands) | (in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | Fair Value as % of Total | (in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Securities AFS: | Securities AFS: | | | | | | | | | | Securities AFS: | | | | | | | |
U.S. Treasury securities | | U.S. Treasury securities | $ | 142,197 | | | $ | — | | | $ | 4,999 | | | $ | 137,198 | |
U.S. government agency securities | U.S. government agency securities | $ | 194,295 | | | $ | — | | | $ | 9,532 | | | $ | 184,763 | | | 19 | % | U.S. government agency securities | 8,807 | | | 29 | | | 44 | | | 8,792 | |
State, county and municipals | State, county and municipals | 454,740 | | | 32 | | | 42,908 | | | 411,864 | | | 43 | % | State, county and municipals | 401,293 | | | 263 | | | 32,718 | | | 368,838 | |
Mortgage-backed securities | Mortgage-backed securities | 239,430 | | | 1 | | | 25,996 | | | 213,435 | | | 23 | % | Mortgage-backed securities | 342,945 | | | — | | | 41,161 | | | 301,784 | |
Corporate debt securities | Corporate debt securities | 146,528 | | | — | | | 6,993 | | | 139,535 | | | 15 | % | Corporate debt securities | 115,277 | | | — | | | 10,781 | | | 104,496 | |
Total securities AFS | Total securities AFS | $ | 1,034,993 | | | $ | 33 | | | $ | 85,429 | | | $ | 949,597 | | | 100 | % | Total securities AFS | $ | 1,010,519 | | | $ | 292 | | | $ | 89,703 | | | $ | 921,108 | |
Securities HTM: | | | | | | | | | | |
U.S. government agency securities | $ | 506,952 | | | $ | 65 | | | $ | 38,590 | | | $ | 468,427 | | | 74 | % | |
State, county and municipals | 39,121 | | | 1 | | | 3,363 | | | 35,759 | | | 6 | % | |
Mortgage-backed securities | 140,351 | | | — | | | 16,898 | | | 123,453 | | | 20 | % | |
| Total securities HTM | $ | 686,424 | | | $ | 66 | | | $ | 58,851 | | | $ | 627,639 | | | 100 | % | |
|
| | | December 31, 2021 | | December 31, 2022 |
(in thousands) | (in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | Fair Value as % of Total | (in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Securities AFS: | Securities AFS: | | | | | | | | | | Securities AFS: | | | | | | | |
U.S. Treasury securities | | U.S. Treasury securities | $ | 192,116 | | | $ | — | | | $ | 8,286 | | | $ | 183,830 | |
U.S. government agency securities | U.S. government agency securities | $ | 192,506 | | | $ | 6 | | | $ | 1,235 | | | $ | 191,277 | | | 21 | % | U.S. government agency securities | 2,133 | | | — | | | 33 | | | 2,100 | |
State, county and municipals | State, county and municipals | 311,717 | | | 3,222 | | | 2,202 | | | 312,737 | | | 34 | % | State, county and municipals | 433,733 | | | 123 | | | 35,668 | | | 398,188 | |
Mortgage-backed securities | Mortgage-backed securities | 270,017 | | | 3,090 | | | 1,845 | | | 271,262 | | | 29 | % | Mortgage-backed securities | 227,650 | | | 10 | | | 26,728 | | | 200,932 | |
Corporate debt securities | Corporate debt securities | 143,172 | | | 3,459 | | | 246 | | | 146,385 | | | 16 | % | Corporate debt securities | 140,712 | | | 3 | | | 8,147 | | | 132,568 | |
Total securities AFS | Total securities AFS | $ | 917,412 | | | $ | 9,777 | | | $ | 5,528 | | | $ | 921,661 | | | 100 | % | Total securities AFS | $ | 996,344 | | | $ | 136 | | | $ | 78,862 | | | $ | 917,618 | |
Securities HTM: | Securities HTM: | | | | | | | | | | Securities HTM: | | | | | | | |
U.S. Treasury securities | | U.S. Treasury securities | $ | 497,648 | | | $ | — | | | $ | 35,722 | | | $ | 461,926 | |
U.S. government agency securities | U.S. government agency securities | $ | 508,810 | | | $ | — | | | $ | 2,740 | | | $ | 506,070 | | | 78 | % | U.S. government agency securities | 8,744 | | | 46 | | | — | | | 8,790 | |
State, county and municipals | State, county and municipals | 42,876 | | | 10 | | | 173 | | | 42,713 | | | 7 | % | State, county and municipals | 34,874 | | | — | | | 3,349 | | | 31,525 | |
Mortgage-backed securities | Mortgage-backed securities | 100,117 | | | 89 | | | 595 | | | 99,611 | | | 15 | % | Mortgage-backed securities | 137,862 | | | — | | | 16,751 | | | 121,111 | |
Total securities HTM | Total securities HTM | $ | 651,803 | | | $ | 99 | | | $ | 3,508 | | | $ | 648,394 | | | 100 | % | Total securities HTM | $ | 679,128 | | | $ | 46 | | | $ | 55,822 | | | $ | 623,352 | |
On March 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. Proceeds from the sale were used to reduce existing FHLB borrowings with the remainder held in investable cash. 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 (at the time of reclassification) increased the balance of accumulated other comprehensive loss $15 million, net of the deferred tax effect, and is subject to future market changes.
Proceeds and realized gains or losses from the sale of AFS and HTM securities were as follows.
| | | | | | | | | | | |
| Six Months Ended June 30, |
(in thousands) | 2023 | | 2022 |
Securities AFS: | | | |
Gross gains | $ | 148 | | | $ | 20 | |
Gross losses | (496) | | | (5) | |
Gains (losses) on sales of securities AFS, net | $ | (348) | | | $ | 15 | |
Proceeds from sales of securities AFS | $ | 26,798 | | | $ | 3,400 | |
Securities HTM: | | | |
Gross gains | $ | — | | | $ | — | |
Gross losses | (37,723) | | | — | |
Gains (losses) on sales of securities HTM, net | $ | (37,723) | | | $ | — | |
Proceeds from sales of securities HTM | $ | 460,051 | | | $ | — | |
All mortgage-backed securities included in the tables abovesecurities portfolio were issued by U.S. government agencies and corporations. Investment securities with a carrying value of $786$396 million and $277$883 million, as of SeptemberJune 30, 20222023 and December 31, 2021,2022, respectively, were pledged as collateral to secure public deposits and borrowings, as applicable, and for liquidity or other purposes as required by regulation. Accrued interest on investment securities totaled $7$5 million and $6 million at SeptemberJune 30, 20222023 and $5 million at December 31, 2021,2022, respectively, and is included in accrued interest receivable and other assets on the consolidated balance sheets.
The following table presents gross unrealized losses and the related estimated fair value of investment securities for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time individual securities have been in a continuous unrealized loss position.
| | | September 30, 2022 | | June 30, 2023 |
| | Less than 12 months | | 12 months or more | | Total | | Less than 12 months | | 12 months or more | | Total |
($ in thousands) | ($ in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Number of Securities | ($ in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Number of Securities |
Securities AFS: | Securities AFS: | | | | | | | | | | | | | | Securities AFS: | | | | | | | | | | | | | |
U.S. Treasury securities | | U.S. Treasury securities | $ | 453 | | | $ | 14 | | | $ | 136,733 | | | $ | 4,985 | | | $ | 137,186 | | | $ | 4,999 | | | 7 | |
U.S. government agency securities | U.S. government agency securities | $ | 73,427 | | | $ | 3,649 | | | $ | 111,307 | | | $ | 5,883 | | | $ | 184,734 | | | $ | 9,532 | | | 18 | | U.S. government agency securities | 1,771 | | | 38 | | | 106 | | | 6 | | | 1,877 | | | 44 | | | 8 | |
State, county and municipals | State, county and municipals | 325,212 | | | 29,803 | | | 66,031 | | | 13,105 | | | 391,243 | | | 42,908 | | | 906 | | State, county and municipals | 89,871 | | | 2,286 | | | 244,861 | | | 30,432 | | | 334,732 | | | 32,718 | | | 661 | |
Mortgage-backed securities | Mortgage-backed securities | 163,160 | | | 17,180 | | | 49,315 | | | 8,816 | | | 212,475 | | | 25,996 | | | 384 | | Mortgage-backed securities | 10,915 | | | 616 | | | 290,862 | | | 40,545 | | | 301,777 | | | 41,161 | | | 445 | |
Corporate debt securities | Corporate debt securities | 123,488 | | | 5,218 | | | 11,668 | | | 1,775 | | | 135,156 | | | 6,993 | | | 94 | | Corporate debt securities | 33,133 | | | 1,231 | | | 66,984 | | | 9,550 | | | 100,117 | | | 10,781 | | | 70 | |
Total | Total | $ | 685,287 | | | $ | 55,850 | | | $ | 238,321 | | | $ | 29,579 | | | $ | 923,608 | | | $ | 85,429 | | | 1,402 | | Total | $ | 136,143 | | | $ | 4,185 | | | $ | 739,546 | | | $ | 85,518 | | | $ | 875,689 | | | $ | 89,703 | | | 1,191 | |
Securities HTM: | | | | | | | | | | | | | | |
U.S. government agency securities | $ | 459,059 | | | $ | 38,590 | | | $ | — | | | $ | — | | | $ | 459,059 | | | $ | 38,590 | | | 6 | | |
State, county and municipals | 25,308 | | | 2,663 | | | 4,495 | | | 700 | | | 29,803 | | | 3,363 | | | 58 | | |
Mortgage-backed securities | 117,168 | | | 15,696 | | | 6,285 | | | 1,202 | | | 123,453 | | | 16,898 | | | 106 | | |
| Total | $ | 601,535 | | | $ | 56,949 | | | $ | 10,780 | | | $ | 1,902 | | | $ | 612,315 | | | $ | 58,851 | | | 170 | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Less than 12 months | | 12 months or more | | Total |
($ in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Number of Securities |
Securities AFS: | | | | | | | | | | | | | |
U.S. government agency securities | $ | 190,432 | | | $ | 1,235 | | | $ | — | | | $ | — | | | $ | 190,432 | | | $ | 1,235 | | | 11 | |
State, county and municipals | 103,950 | | | 2,119 | | | 1,777 | | | 83 | | | 105,727 | | | 2,202 | | | 132 | |
Mortgage-backed securities | 137,561 | | | 1,616 | | | 6,068 | | | 229 | | | 143,629 | | | 1,845 | | | 159 | |
Corporate debt securities | 23,267 | | | 246 | | | — | | | — | | | 23,267 | | | 246 | | | 13 | |
Total | $ | 455,210 | | | $ | 5,216 | | | $ | 7,845 | | | $ | 312 | | | $ | 463,055 | | | $ | 5,528 | | | 315 | |
Securities HTM: | | | | | | | | | | | | | |
U.S. government agency securities | $ | 505,938 | | | $ | 2,740 | | | $ | — | | | $ | — | | | $ | 505,938 | | | $ | 2,740 | | | 9 | |
State, county and municipals | 30,898 | | | 173 | | | — | | | — | | | 30,898 | | | 173 | | | 46 | |
Mortgage-backed securities | 69,333 | | | 595 | | | — | | | — | | | 69,333 | | | 595 | | | 72 | |
Total | $ | 606,169 | | | $ | 3,508 | | | $ | — | | | $ | — | | | $ | 606,169 | | | $ | 3,508 | | | 127 | |
Quarterly, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Less than 12 months | | 12 months or more | | Total |
($ in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Number of Securities |
Securities AFS: | | | | | | | | | | | | | |
U.S. Treasury securities | $ | 448 | | | $ | 14 | | | $ | 183,382 | | | $ | 8,272 | | | $ | 183,830 | | | $ | 8,286 | | | 9 | |
U.S. government agency securities | 2,083 | | | 32 | | | 17 | | | 1 | | | 2,100 | | | 33 | | | 9 | |
State, county and municipals | 277,546 | | | 18,041 | | | 86,569 | | | 17,627 | | | 364,115 | | | 35,668 | | | 812 | |
Mortgage-backed securities | 102,108 | | | 11,320 | | | 95,614 | | | 15,408 | | | 197,722 | | | 26,728 | | | 376 | |
Corporate debt securities | 114,887 | | | 6,186 | | | 12,938 | | | 1,961 | | | 127,825 | | | 8,147 | | | 90 | |
Total | $ | 497,072 | | | $ | 35,593 | | | $ | 378,520 | | | $ | 43,269 | | | $ | 875,592 | | | $ | 78,862 | | | 1,296 | |
Securities HTM: | | | | | | | | | | | | | |
U.S. Treasury securities | $ | — | | | $ | — | | | $ | 461,926 | | | $ | 35,722 | | | $ | 461,926 | | | $ | 35,722 | | | 6 | |
| | | | | | | | | | | | | |
State, county and municipals | 17,591 | | | 1,594 | | | 11,654 | | | 1,755 | | | 29,245 | | | 3,349 | | | 58 | |
Mortgage-backed securities | 68,108 | | | 8,029 | | | 53,003 | | | 8,722 | | | 121,111 | | | 16,751 | | | 106 | |
Total | $ | 85,699 | | | $ | 9,623 | | | $ | 526,583 | | | $ | 46,199 | | | $ | 612,282 | | | $ | 55,822 | | | 170 | |
During first quarter 2023, the Company evaluates securities AFSrecognized provision expense of $2.3 million related to the expected credit loss on its Signature Bank sub debt investment (acquired in unrealized loss positions to determine whetheran acquisition), and immediately charged-off the impairment is due to credit-related factors or noncredit-related factors. In making this evaluation, management considers the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. As of September 30, 2022 and December 31, 2021, no allowance for credit losses on securities AFS was recognized.full investment. The Company does not consider its remaining securities AFS with unrealized losses to be attributable to credit-related factors, as the unrealized losses in each category have occurred as a result of changes in noncredit-related factors such as changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration. Furthermore, the Company does not have the intent to sell any of these AFS securities AFS and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost.
The Company also evaluates securities HTM quarterly to determine whether an As of June 30, 2023 and December 31, 2022, no allowance for credit losses is necessary. In making this determination, management considerson AFS securities was recognized.
The Company evaluated the factsHTM securities and circumstances of the underlying investment securities.determined no allowance for credit losses was necessary at December 31, 2022. The U.S. Treasury and U.S. government agency securities include U.S. Treasury Notes which are guaranteed by the U.S. government. For the state, county and municipal securities, management considersconsidered issuer bond ratings, historical loss rates by bond ratings, whether issuers continue to make timely principal and interest payments per the contractual terms of the investment securities, internal forecasts, and whether or not such investment securities provide insurance, other credit enhancement, or are pre-refunded by the issuers. For the mortgage-backed securities, all such securities were issued by U.S. government agencies and corporations,
which are currently explicitly or implicitly guaranteed by the U.S. government and have a long history of no credit losses. Therefore, management determined no allowance for credit losses was necessary for the securities HTM.
The amortized cost and fair value of investment securities by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties; as this is particularly inherent in mortgage-backed securities, these securities are not included in the maturity categories below.
| As of September 30, 2022 | Securities AFS | | Securities HTM | |
As of June 30, 2023 | | As of June 30, 2023 | Securities AFS | |
(in thousands) | (in thousands) | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | (in thousands) | Amortized Cost | | Fair Value | |
Due in less than one year | Due in less than one year | $ | 220,008 | | | $ | 214,856 | | | $ | 5,032 | | | $ | 5,022 | | Due in less than one year | $ | 172,412 | | | $ | 170,901 | | |
Due in one year through five years | Due in one year through five years | 189,795 | | | 180,208 | | | 510,548 | | | 471,106 | | Due in one year through five years | 163,610 | | | 151,145 | | |
Due after five years through ten years | Due after five years through ten years | 233,100 | | | 206,362 | | | 26,740 | | | 24,404 | | Due after five years through ten years | 209,473 | | | 185,108 | | |
Due after ten years | Due after ten years | 152,660 | | | 134,736 | | | 3,753 | | | 3,654 | | Due after ten years | 122,079 | | | 112,170 | | |
| | 795,563 | | | 736,162 | | | 546,073 | | | 504,186 | | | 667,574 | | | 619,324 | | |
Mortgage-backed securities | Mortgage-backed securities | 239,430 | | | 213,435 | | | 140,351 | | | 123,453 | | Mortgage-backed securities | 342,945 | | | 301,784 | | |
Total investment securities | Total investment securities | $ | 1,034,993 | | | $ | 949,597 | | | $ | 686,424 | | | $ | 627,639 | | Total investment securities | $ | 1,010,519 | | | $ | 921,108 | | |
Proceeds and realized gains or losses from the sale of AFS securities were as follows.
| | | | | | | | | | | |
| Nine Months Ended September 30, |
(in thousands) | 2022 | | 2021 |
Gross gains | $ | 20 | | | $ | 4 | |
Gross losses | (5) | | | (17) | |
Gains (losses) on sales of securities AFS, net | $ | 15 | | | $ | (13) | |
Proceeds from sales of securities AFS * | $ | 23,984 | | | $ | 15,975 | |
* Includes proceeds of $21 million recognized on the sale of securities AFS upon acquisition of Charter for which no gain or loss was recognized in the income statement as the securities were marked to fair value through purchase accounting.
Other Investments
Other investments include “restricted” equity securities, equity securities with readily determinable fair values, and private company securities. As a member of the Federal Reserve Bank System and the Federal Home Loan Bank (“FHLB”) System, Nicolet is required to maintain an investment in the capital stock of these entities. These equity securities are “restricted” in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other exchange traded equity securities. As no ready market exists for these stocks, and they have no quoted market value, these investments are carried at cost. Also included are investments in other private companies that do not have quoted market prices, which are carried at cost less impairment charges, if any. The carrying value of other investments are summarized as follows.
| | | September 30, 2022 | | December 31, 2021 | | June 30, 2023 | | December 31, 2022 |
(in thousands) | (in thousands) | Amount | | Amount | (in thousands) | Amount | | Amount |
Federal Reserve Bank stock | Federal Reserve Bank stock | $ | 34,722 | | | $ | 20,973 | | Federal Reserve Bank stock | $ | 32,411 | | | $ | 32,219 | |
Federal Home Loan Bank (“FHLB”) stock | Federal Home Loan Bank (“FHLB”) stock | 22,939 | | | 10,545 | | Federal Home Loan Bank (“FHLB”) stock | 9,674 | | | 18,625 | |
Equity securities with readily determinable fair values | Equity securities with readily determinable fair values | 4,482 | | | 5,660 | | Equity securities with readily determinable fair values | 3,748 | | | 4,376 | |
Other investments | Other investments | 17,136 | | | 6,830 | | Other investments | 11,745 | | | 10,066 | |
Total other investments | Total other investments | $ | 79,279 | | | $ | 44,008 | | Total other investments | $ | 57,578 | | | $ | 65,286 | |
Note 6 – Loans, Allowance for Credit Losses - Loans, and Credit Quality
The loan composition is summarized as follows.
| | | September 30, 2022 | | December 31, 2021 | | June 30, 2023 | | December 31, 2022 |
(in thousands) | (in thousands) | Amount | | % of Total | | Amount | | % of Total | (in thousands) | Amount | | % of Total | | Amount | | % of Total |
Commercial & industrial | Commercial & industrial | $ | 1,268,252 | | | 21 | % | | $ | 1,042,256 | | | 23 | % | Commercial & industrial | $ | 1,318,567 | | | 21 | % | | $ | 1,304,819 | | | 21 | % |
Owner-occupied commercial real estate (“CRE”) | Owner-occupied commercial real estate (“CRE”) | 954,933 | | | 16 | | | 787,189 | | | 17 | | Owner-occupied commercial real estate (“CRE”) | 969,202 | | | 16 | | | 954,599 | | | 15 | |
Agricultural | Agricultural | 1,017,498 | | | 17 | | | 794,728 | | | 17 | | Agricultural | 1,068,999 | | | 17 | | | 1,088,607 | | | 18 | |
CRE investment | CRE investment | 1,132,951 | | | 19 | | | 818,061 | | | 18 | | CRE investment | 1,108,692 | | | 18 | | | 1,149,949 | | | 19 | |
Construction & land development | Construction & land development | 306,446 | | | 5 | | | 213,035 | | | 5 | | Construction & land development | 337,389 | | | 5 | | | 318,600 | | | 5 | |
Residential construction | Residential construction | 101,286 | | | 2 | | | 70,353 | | | 1 | | Residential construction | 108,095 | | | 2 | | | 114,392 | | | 2 | |
Residential first mortgage | Residential first mortgage | 970,384 | | | 16 | | | 713,983 | | | 15 | | Residential first mortgage | 1,072,609 | | | 17 | | | 1,016,935 | | | 16 | |
Residential junior mortgage | Residential junior mortgage | 176,428 | | | 3 | | | 131,424 | | | 3 | | Residential junior mortgage | 184,873 | | | 3 | | | 177,332 | | | 3 | |
Retail & other | Retail & other | 56,259 | | | 1 | | | 50,807 | | | 1 | | Retail & other | 54,350 | | | 1 | | | 55,266 | | | 1 | |
Loans | Loans | 5,984,437 | | | 100 | % | | 4,621,836 | | | 100 | % | Loans | 6,222,776 | | | 100 | % | | 6,180,499 | | | 100 | % |
Less allowance for credit losses - Loans (“ACL-Loans”) | Less allowance for credit losses - Loans (“ACL-Loans”) | 60,348 | | | 49,672 | | | Less allowance for credit losses - Loans (“ACL-Loans”) | 62,811 | | | 61,829 | | |
Loans, net | Loans, net | $ | 5,924,089 | | | $ | 4,572,164 | | | Loans, net | $ | 6,159,965 | | | $ | 6,118,670 | | |
Allowance for credit losses - Loans to loans | Allowance for credit losses - Loans to loans | 1.01 | % | | 1.07 | % | | Allowance for credit losses - Loans to loans | 1.01 | % | | 1.00 | % | |
Commercial and industrial loans included less than $1 million and $25 million of PPP loans at September 30, 2022 and December 31, 2021, respectively. Accrued interest on loans totaled $14$16 million and $11$15 million at SeptemberJune 30, 20222023 and December 31, 2021,2022, respectively, and is included in accrued interest receivable and other assets on the consolidated balance sheets.
Allowance for Credit Losses - Loans:
The majority of the Company’s loans, commitments, and letters of credit have been granted to customers in the Company’s market area. Although the Company has a diversified loan portfolio, the credit risk in the loan portfolio is largely influenced by general economic conditions and trends of the counties and markets in which the debtors operate, and the resulting impact on the operations of borrowers or on the value of underlying collateral, if any.
A roll forward of the allowance for credit losses - loans is summarized as follows.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | | Year Ended |
(in thousands) | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 | | December 31, 2021 |
Beginning balance | $ | 50,655 | | | $ | 32,561 | | | $ | 49,672 | | | $ | 32,173 | | | $ | 32,173 | |
ACL on PCD loans acquired | 1,709 | | | 1,896 | | | 1,709 | | | 1,896 | | | 5,159 | |
Provision for credit losses | 8,200 | | | 4,000 | | | 9,100 | | | 4,500 | | | 12,500 | |
Charge-offs | (300) | | | (107) | | | (442) | | | (436) | | | (513) | |
Recoveries | 84 | | | 49 | | | 309 | | | 266 | | | 353 | |
Net (charge-offs) recoveries | (216) | | | (58) | | | (133) | | | (170) | | | (160) | |
Ending balance | $ | 60,348 | | | $ | 38,399 | | | $ | 60,348 | | | $ | 38,399 | | | $ | 49,672 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended | | Year Ended |
(in thousands) | June 30, 2023 | | June 30, 2022 | | June 30, 2023 | | June 30, 2022 | | December 31, 2022 |
Beginning balance | $ | 62,412 | | | $ | 49,906 | | | $ | 61,829 | | | $ | 49,672 | | | $ | 49,672 | |
ACL on PCD loans acquired | — | | | — | | | — | | | — | | | 1,937 | |
Provision for credit losses | 450 | | | 600 | | | 1,200 | | | 900 | | | 10,950 | |
Charge-offs | (561) | | | (42) | | | (745) | | | (142) | | | (1,033) | |
Recoveries | 510 | | | 191 | | | 527 | | | 225 | | | 303 | |
Net (charge-offs) recoveries | (51) | | | 149 | | | (218) | | | 83 | | | (730) | |
Ending balance | $ | 62,811 | | | $ | 50,655 | | | $ | 62,811 | | | $ | 50,655 | | | $ | 61,829 | |
The following tables present the balance and activity in the ACL-Loans by portfolio segment.
| | | Nine Months Ended September 30, 2022 | | Six Months Ended June 30, 2023 |
(in thousands) | (in thousands) | Commercial & industrial | | Owner- occupied CRE | | Agricultural | | CRE investment | | Construction & land development | | Residential construction | | Residential first mortgage | | Residential junior mortgage | | Retail & other | | Total | (in thousands) | Commercial & industrial | | Owner- occupied CRE | | Agricultural | | CRE investment | | Construction & land development | | Residential construction | | Residential first mortgage | | Residential junior mortgage | | Retail & other | | Total |
ACL-Loans * | | | | | | | | | | | | | | | | | | | | |
ACL-Loans | | ACL-Loans | | | | | | | | | | | | | | | | | | | |
Beginning balance | Beginning balance | $ | 12,613 | | | $ | 7,222 | | | $ | 9,547 | | | $ | 8,462 | | | $ | 1,812 | | | $ | 900 | | | $ | 6,844 | | | $ | 1,340 | | | $ | 932 | | | $ | 49,672 | | Beginning balance | $ | 16,350 | | | $ | 9,138 | | | $ | 9,762 | | | $ | 12,744 | | | $ | 2,572 | | | $ | 1,412 | | | $ | 6,976 | | | $ | 1,846 | | | $ | 1,029 | | | $ | 61,829 | |
ACL on PCD loans | 1,408 | | | 156 | | | — | | | 38 | | | 2 | | | — | | | 93 | | | 12 | | | — | | | 1,709 | | |
| Provision | Provision | 621 | | | 1,356 | | | 847 | | | 3,004 | | | 603 | | | 446 | | | 1,415 | | | 517 | | | 291 | | | 9,100 | | Provision | (387) | | | (307) | | | 1,865 | | | (301) | | | 127 | | | (69) | | | (46) | | | 136 | | | 182 | | | 1,200 | |
Charge-offs | Charge-offs | (152) | | | (36) | | | — | | | — | | | — | | | — | | | (65) | | | — | | | (189) | | | (442) | | Charge-offs | (403) | | | — | | | (66) | | | — | | | — | | | — | | | — | | | (96) | | | (180) | | | (745) | |
Recoveries | Recoveries | 103 | | | — | | | — | | | 169 | | | — | | | — | | | 7 | | | 9 | | | 21 | | | 309 | | Recoveries | 518 | | | — | | | 3 | | | — | | | — | | | — | | | 2 | | | — | | | 4 | | | 527 | |
Net (charge-offs) recoveries | Net (charge-offs) recoveries | (49) | | | (36) | | | — | | | 169 | | | — | | | — | | | (58) | | | 9 | | | (168) | | | (133) | | Net (charge-offs) recoveries | 115 | | | — | | | (63) | | | — | | | — | | | — | | | 2 | | | (96) | | | (176) | | | (218) | |
Ending balance | Ending balance | $ | 14,593 | | | $ | 8,698 | | | $ | 10,394 | | | $ | 11,673 | | | $ | 2,417 | | | $ | 1,346 | | | $ | 8,294 | | | $ | 1,878 | | | $ | 1,055 | | | $ | 60,348 | | Ending balance | $ | 16,078 | | | $ | 8,831 | | | $ | 11,564 | | | $ | 12,443 | | | $ | 2,699 | | | $ | 1,343 | | | $ | 6,932 | | | $ | 1,886 | | | $ | 1,035 | | | $ | 62,811 | |
As % of ACL-Loans | As % of ACL-Loans | 24 | % | | 15 | % | | 17 | % | | 19 | % | | 4 | % | | 2 | % | | 14 | % | | 3 | % | | 2 | % | | 100 | % | As % of ACL-Loans | 26 | % | | 14 | % | | 18 | % | | 20 | % | | 4 | % | | 2 | % | | 11 | % | | 3 | % | | 2 | % | | 100 | % |
*The PPP loans are fully guaranteed by the SBA; thus, no ACL-Loans has been allocated to these loans.
| | | Year Ended December 31, 2021 | | Year Ended December 31, 2022 |
(in thousands) | (in thousands) | Commercial & industrial | | Owner- occupied CRE | | Agricultural | | CRE investment | | Construction & land development | | Residential construction | | Residential first mortgage | | Residential junior mortgage | | Retail & other | | Total | (in thousands) | Commercial & industrial | | Owner- occupied CRE | | Agricultural | | CRE investment | | Construction & land development | | Residential construction | | Residential first mortgage | | Residential junior mortgage | | Retail & other | | Total |
ACL-Loans * | | | | | | | | | | | | | | | | | | | | |
ACL-Loans | | ACL-Loans | | | | | | | | | | | | | | | | | | | |
Beginning balance | Beginning balance | $ | 11,644 | | | $ | 5,872 | | | $ | 1,395 | | | $ | 5,441 | | | $ | 984 | | | $ | 421 | | | $ | 4,773 | | | $ | 1,086 | | | $ | 557 | | | $ | 32,173 | | Beginning balance | $ | 12,613 | | | $ | 7,222 | | | $ | 9,547 | | | $ | 8,462 | | | $ | 1,812 | | | $ | 900 | | | $ | 6,844 | | | $ | 1,340 | | | $ | 932 | | | $ | 49,672 | |
ACL on PCD loans | ACL on PCD loans | 723 | | | 1,045 | | | 2,585 | | | 415 | | | 103 | | | — | | | 272 | | | 13 | | | 3 | | | 5,159 | | ACL on PCD loans | 1,408 | | | 384 | | | — | | | 38 | | | 2 | | | — | | | 93 | | | 12 | | | — | | | 1,937 | |
Provision | Provision | 196 | | | 305 | | | 5,615 | | | 2,608 | | | 725 | | | 479 | | | 1,892 | | | 237 | | | 443 | | | 12,500 | | Provision | 2,415 | | | 2,087 | | | 215 | | | 4,075 | | | 758 | | | 512 | | | 96 | | | 493 | | | 299 | | | 10,950 | |
Charge-offs | Charge-offs | (242) | | | — | | | (48) | | | (4) | | | — | | | — | | | (113) | | | — | | | (106) | | | (513) | | Charge-offs | (190) | | | (555) | | | — | | | — | | | — | | | — | | | (65) | | | — | | | (223) | | | (1,033) | |
Recoveries | Recoveries | 292 | | | — | | | — | | | 2 | | | — | | | — | | | 20 | | | 4 | | | 35 | | | 353 | | Recoveries | 104 | | | — | | | — | | | 169 | | | — | | | — | | | 8 | | | 1 | | | 21 | | | 303 | |
Net (charge-offs) recoveries | Net (charge-offs) recoveries | 50 | | | — | | | (48) | | | (2) | | | — | | | — | | | (93) | | | 4 | | | (71) | | | (160) | | Net (charge-offs) recoveries | (86) | | | (555) | | | — | | | 169 | | | — | | | — | | | (57) | | | 1 | | | (202) | | | (730) | |
Ending balance | Ending balance | $ | 12,613 | | | $ | 7,222 | | | $ | 9,547 | | | $ | 8,462 | | | $ | 1,812 | | | $ | 900 | | | $ | 6,844 | | | $ | 1,340 | | | $ | 932 | | | $ | 49,672 | | Ending balance | $ | 16,350 | | | $ | 9,138 | | | $ | 9,762 | | | $ | 12,744 | | | $ | 2,572 | | | $ | 1,412 | | | $ | 6,976 | | | $ | 1,846 | | | $ | 1,029 | | | $ | 61,829 | |
As % of ACL-Loans | As % of ACL-Loans | 25 | % | | 14 | % | | 19 | % | | 17 | % | | 4 | % | | 2 | % | | 14 | % | | 3 | % | | 2 | % | | 100 | % | As % of ACL-Loans | 26 | % | | 15 | % | | 16 | % | | 21 | % | | 4 | % | | 2 | % | | 11 | % | | 3 | % | | 2 | % | | 100 | % |
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 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 nonperforming 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.
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. 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 factors mentioned above. Consideration is given to those current qualitative or environmental factors that are likely to cause estimated credit losses as of 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.
Allowance for Credit Losses-Unfunded Commitments:
In addition to the ACL-Loans, the Company has established an ACL-Unfunded commitments, classified in accrued interest payable and other liabilities on the consolidated balance sheets. This reserve is maintained at a level that management believes is sufficient to absorb losses arising from unfunded loan commitments, and is determined quarterly based on methodology similar to the methodology for determining the ACL-Loans. The reserve for unfunded commitments was $3.0 million at Septemberboth June 30, 20222023 and $2.4 million at December 31, 2021.
Provision for Credit Losses:
The provision for credit losses is determined by the Company as the amount to be added to the ACL loss accounts for various types of financial instruments including loans, investment securities, and off-balance sheet credit exposures after net charge-offs have been deducted to bring the ACL to a level that, in management’s judgment, is necessary to absorb expected credit losses over the lives of the respective financial instruments. See Note 5 for additional information regarding the ACL related to investment securities. The following table presents the components of the provision for credit losses.
| | | Three Months Ended | | Nine Months Ended | | Year Ended | | Three Months Ended | | Six Months Ended | | Year Ended |
(in thousands) | (in thousands) | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 | | December 31, 2021 | (in thousands) | June 30, 2023 | | June 30, 2022 | | June 30, 2023 | | June 30, 2022 | | December 31, 2022 |
Provision for credit losses on: | Provision for credit losses on: | | | | | | | | | | Provision for credit losses on: | | | | | | | | | |
Loans | Loans | $ | 8,200 | | | $ | 4,000 | | | $ | 9,100 | | | $ | 4,500 | | | $ | 12,500 | | Loans | $ | 450 | | | $ | 600 | | | $ | 1,200 | | | $ | 900 | | | $ | 10,950 | |
Unfunded Commitments | 400 | | | 2,000 | | | 550 | | | 2,000 | | | 2,400 | | |
Unfunded commitments | | Unfunded commitments | — | | | 150 | | | — | | | 150 | | | 550 | |
Investment securities | Investment securities | — | | | — | | | — | | | — | | | — | | Investment securities | — | | | — | | | 2,340 | | | — | | | — | |
Total | Total | $ | 8,600 | | | $ | 6,000 | | | $ | 9,650 | | | $ | 6,500 | | | $ | 14,900 | | Total | $ | 450 | | | $ | 750 | | | $ | 3,540 | | | $ | 1,050 | | | $ | 11,500 | |
Collateral Dependent Loans:
A loan is considered to be collateral dependent when, based upon management’s assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. For collateral dependent loans, expected credit losses are based on the estimated fair value of the collateral at the balance sheet date, with consideration for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. The following tables present collateral dependent loans by portfolio segment and collateral type, including those loans with and without a related allowance allocation.
| September 30, 2022 | Collateral Type | | |
June 30, 2023 | | June 30, 2023 | Collateral Type | |
(in thousands) | (in thousands) | Real Estate | Other Business Assets | Total | | Without an Allowance | With an Allowance | Allowance Allocation | (in thousands) | Real Estate | Other Business Assets | Total | | Without an Allowance | With an Allowance | Allowance Allocation |
Commercial & industrial | Commercial & industrial | $ | — | | $ | 3,032 | | $ | 3,032 | | | $ | 1,443 | | $ | 1,589 | | $ | 661 | | Commercial & industrial | $ | — | | $ | 1,989 | | $ | 1,989 | | | $ | 561 | | $ | 1,428 | | $ | 461 | |
Owner-occupied CRE | Owner-occupied CRE | 5,205 | | — | | 5,205 | | | 3,526 | | 1,679 | | 297 | | Owner-occupied CRE | 5,236 | | — | | 5,236 | | | 5,236 | | — | | — | |
Agricultural | Agricultural | 13,974 | | 6,439 | | 20,413 | | | 16,900 | | 3,513 | | 205 | | Agricultural | 5,805 | | 3,069 | | 8,874 | | | 3,871 | | 5,003 | | 91 | |
CRE investment | CRE investment | 2,196 | | — | | 2,196 | | | 404 | | 1,792 | | 242 | | CRE investment | 2,434 | | — | | 2,434 | | | 1,911 | | 523 | | 7 | |
Construction & land development | Construction & land development | 685 | | — | | 685 | | | 685 | | — | | — | | Construction & land development | — | | — | | — | | | — | | — | | — | |
Residential construction | — | | — | | — | | | — | | — | | — | | |
| Residential first mortgage | Residential first mortgage | 91 | | — | | 91 | | | 91 | | — | | — | | Residential first mortgage | 693 | | — | | 693 | | | 693 | | — | | — | |
Residential junior mortgage | Residential junior mortgage | — | | — | | — | | | — | | — | | — | | Residential junior mortgage | — | | — | | — | | | — | | — | | — | |
Retail & other | — | | — | | — | | | — | | — | | — | | |
| Total loans | Total loans | $ | 22,151 | | $ | 9,471 | | $ | 31,622 | | | $ | 23,049 | | $ | 8,573 | | $ | 1,405 | | Total loans | $ | 14,168 | | $ | 5,058 | | $ | 19,226 | | | $ | 12,272 | | $ | 6,954 | | $ | 559 | |
| December 31, 2021 | Collateral Type | | |
December 31, 2022 | | December 31, 2022 | Collateral Type | |
(in thousands) | (in thousands) | Real Estate | Other Business Assets | Total | | Without an Allowance | With an Allowance | Allowance Allocation | (in thousands) | Real Estate | Other Business Assets | Total | | Without an Allowance | With an Allowance | Allowance Allocation |
Commercial & industrial | Commercial & industrial | $ | — | | $ | 2,296 | | $ | 2,296 | | | $ | 1,842 | | $ | 454 | | $ | 258 | | Commercial & industrial | $ | — | | $ | 3,475 | | $ | 3,475 | | | $ | 1,927 | | $ | 1,548 | | $ | 595 | |
Owner-occupied CRE | Owner-occupied CRE | 3,537 | | — | | 3,537 | | | 1,315 | | 2,222 | | 552 | | Owner-occupied CRE | 4,907 | | — | | 4,907 | | | 4,699 | | 208 | | 53 | |
Agricultural | Agricultural | 19,637 | | 8,518 | | 28,155 | | | 25,310 | | 2,845 | | 841 | | Agricultural | 13,758 | | 6,458 | | 20,216 | | | 14,358 | | 5,858 | | 261 | |
CRE investment | CRE investment | 3,000 | | — | | 3,000 | | | 1,684 | | 1,316 | | 407 | | CRE investment | 2,713 | | — | | 2,713 | | | 979 | | 1,734 | | 212 | |
Construction & land development | Construction & land development | 1,038 | | — | | 1,038 | | | 655 | | 383 | | 211 | | Construction & land development | 670 | | — | | 670 | | | 670 | | — | | — | |
Residential construction | — | | — | | — | | | — | | — | | — | | |
| Residential first mortgage | Residential first mortgage | 473 | | — | | 473 | | | 473 | | — | | — | | Residential first mortgage | 91 | | — | | 91 | | | 91 | | — | | — | |
Residential junior mortgage | — | | — | | — | | | — | | — | | — | | |
Retail & other | — | | — | | — | | | — | | — | | — | | |
| Total loans | Total loans | $ | 27,685 | | $ | 10,814 | | $ | 38,499 | | | $ | 31,279 | | $ | 7,220 | | $ | 2,269 | | Total loans | $ | 22,139 | | $ | 9,933 | | $ | 32,072 | | | $ | 22,724 | | $ | 9,348 | | $ | 1,121 | |
Past Due and Nonaccrual Loans:
The following tables present past due loans by portfolio segment. | | | September 30, 2022 | | June 30, 2023 |
(in thousands) | (in thousands) | 30-89 Days Past Due (accruing) | | 90 Days & Over or nonaccrual | | Current | | Total | (in thousands) | 30-89 Days Past Due (accruing) | | 90 Days & Over or nonaccrual | | Current | | Total |
Commercial & industrial | Commercial & industrial | $ | 954 | | | $ | 3,052 | | | $ | 1,264,246 | | | $ | 1,268,252 | | Commercial & industrial | $ | 260 | | | $ | 3,157 | | | $ | 1,315,150 | | | $ | 1,318,567 | |
Owner-occupied CRE | Owner-occupied CRE | 513 | | | 5,806 | | | 948,614 | | | 954,933 | | Owner-occupied CRE | 28 | | | 6,573 | | | 962,601 | | | 969,202 | |
Agricultural | Agricultural | — | | | 20,646 | | | 996,852 | | | 1,017,498 | | Agricultural | 151 | | | 9,092 | | | 1,059,756 | | | 1,068,999 | |
CRE investment | CRE investment | 27 | | | 3,343 | | | 1,129,581 | | | 1,132,951 | | CRE investment | 56 | | | 2,535 | | | 1,106,101 | | | 1,108,692 | |
Construction & land development | Construction & land development | — | | | 794 | | | 305,652 | | | 306,446 | | Construction & land development | 121 | | | 95 | | | 337,173 | | | 337,389 | |
Residential construction | Residential construction | 557 | | | — | | | 100,729 | | | 101,286 | | Residential construction | — | | | — | | | 108,095 | | | 108,095 | |
Residential first mortgage | Residential first mortgage | 1,621 | | | 4,309 | | | 964,454 | | | 970,384 | | Residential first mortgage | 868 | | | 3,638 | | | 1,068,103 | | | 1,072,609 | |
Residential junior mortgage | Residential junior mortgage | 249 | | | 277 | | | 175,902 | | | 176,428 | | Residential junior mortgage | 118 | | | 87 | | | 184,668 | | | 184,873 | |
Retail & other | Retail & other | 138 | | | 99 | | | 56,022 | | | 56,259 | | Retail & other | 215 | | | 101 | | | 54,034 | | | 54,350 | |
Total loans | Total loans | $ | 4,059 | | | $ | 38,326 | | | $ | 5,942,052 | | | $ | 5,984,437 | | Total loans | $ | 1,817 | | | $ | 25,278 | | | $ | 6,195,681 | | | $ | 6,222,776 | |
Percent of total loans | Percent of total loans | 0.1 | % | | 0.6 | % | | 99.3 | % | | 100.0 | % | Percent of total loans | — | % | | 0.4 | % | | 99.6 | % | | 100.0 | % |
| | | December 31, 2021 | | December 31, 2022 |
(in thousands) | (in thousands) | 30-89 Days Past Due (accruing) | | 90 Days & Over or nonaccrual | | Current | | Total | (in thousands) | 30-89 Days Past Due (accruing) | | 90 Days & Over or nonaccrual | | Current | | Total |
Commercial & industrial | Commercial & industrial | $ | 94 | | | $ | 1,908 | | | $ | 1,040,254 | | | $ | 1,042,256 | | Commercial & industrial | $ | 210 | | | $ | 3,328 | | | $ | 1,301,281 | | | $ | 1,304,819 | |
Owner-occupied CRE | Owner-occupied CRE | — | | | 4,220 | | | 782,969 | | | 787,189 | | Owner-occupied CRE | 833 | | | 5,647 | | | 948,119 | | | 954,599 | |
Agricultural | Agricultural | 108 | | | 28,367 | | | 766,253 | | | 794,728 | | Agricultural | 20 | | | 20,416 | | | 1,068,171 | | | 1,088,607 | |
CRE investment | CRE investment | 114 | | | 4,119 | | | 813,828 | | | 818,061 | | CRE investment | — | | | 3,832 | | | 1,146,117 | | | 1,149,949 | |
Construction & land development | Construction & land development | — | | | 1,071 | | | 211,964 | | | 213,035 | | Construction & land development | — | | | 771 | | | 317,829 | | | 318,600 | |
Residential construction | Residential construction | 246 | | | — | | | 70,107 | | | 70,353 | | Residential construction | — | | | — | | | 114,392 | | | 114,392 | |
Residential first mortgage | Residential first mortgage | 2,592 | | | 4,132 | | | 707,259 | | | 713,983 | | Residential first mortgage | 3,628 | | | 3,780 | | | 1,009,527 | | | 1,016,935 | |
Residential junior mortgage | Residential junior mortgage | 23 | | | 243 | | | 131,158 | | | 131,424 | | Residential junior mortgage | 236 | | | 224 | | | 176,872 | | | 177,332 | |
Retail & other | Retail & other | 115 | | | 94 | | | 50,598 | | | 50,807 | | Retail & other | 261 | | | 82 | | | 54,923 | | | 55,266 | |
Total loans | Total loans | $ | 3,292 | | | $ | 44,154 | | | $ | 4,574,390 | | | $ | 4,621,836 | | Total loans | $ | 5,188 | | | $ | 38,080 | | | $ | 6,137,231 | | | $ | 6,180,499 | |
Percent of total loans | Percent of total loans | 0.1 | % | | 0.9 | % | | 99.0 | % | | 100.0 | % | Percent of total loans | 0.1 | % | | 0.6 | % | | 99.3 | % | | 100.0 | % |
The following table presents nonaccrual loans by portfolio segment.
| | | September 30, 2022 | | December 31, 2021 | | June 30, 2023 | | December 31, 2022 |
(in thousands) | (in thousands) | Nonaccrual Loans | % of Total | | Nonaccrual Loans | % of Total | (in thousands) | Nonaccrual Loans | % of Total | | Nonaccrual Loans | % of Total |
Commercial & industrial | Commercial & industrial | $ | 3,052 | | 8 | % | | $ | 1,908 | | 4 | % | Commercial & industrial | $ | 3,157 | | 12 | % | | $ | 3,328 | | 9 | % |
Owner-occupied CRE | Owner-occupied CRE | 5,806 | | 15 | | | 4,220 | | 10 | | Owner-occupied CRE | 6,573 | | 26 | | | 5,647 | | 15 | |
Agricultural | Agricultural | 20,646 | | 54 | | | 28,367 | | 64 | | Agricultural | 9,092 | | 36 | | | 20,416 | | 53 | |
CRE investment | CRE investment | 3,343 | | 9 | | | 4,119 | | 9 | | CRE investment | 2,535 | | 10 | | | 3,832 | | 10 | |
Construction & land development | Construction & land development | 794 | | 2 | | | 1,071 | | 3 | | Construction & land development | 95 | | 1 | | | 771 | | 2 | |
Residential construction | Residential construction | — | | — | | | — | | — | | Residential construction | — | | — | | | — | | — | |
Residential first mortgage | Residential first mortgage | 4,309 | | 11 | | | 4,132 | | 9 | | Residential first mortgage | 3,638 | | 14 | | | 3,780 | | 10 | |
Residential junior mortgage | Residential junior mortgage | 277 | | 1 | | | 243 | | 1 | | Residential junior mortgage | 87 | | — | | | 224 | | 1 | |
Retail & other | Retail & other | 99 | | — | | | 94 | | — | | Retail & other | 101 | | 1 | | | 82 | | — | |
Nonaccrual loans | Nonaccrual loans | $ | 38,326 | | 100 | % | | $ | 44,154 | | 100 | % | Nonaccrual loans | $ | 25,278 | | 100 | % | | $ | 38,080 | | 100 | % |
Percent of total loans | Percent of total loans | 0.6 | % | | | 0.9 | % | | Percent of total loans | 0.4 | % | | | 0.6 | % | |
Credit Quality Information:
The following tables present total loans by risk categories and gross charge-offs by year of origination. Loans acquired from Charter, Mackinac and CountyAcquired loans have been included in the September 30, 2022 and December 31, 2021 tables based upon the actual origination date.
| September 30, 2022 | Amortized Cost Basis by Origination Year | | |
June 30, 2023 | | June 30, 2023 | Amortized Cost Basis by Origination Year | |
(in thousands) | (in thousands) | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving | Revolving to Term | TOTAL | (in thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving | Revolving to Term | TOTAL |
Commercial & industrial | Commercial & industrial | | Commercial & industrial | |
Grades 1-4 | Grades 1-4 | $ | 254,713 | | $ | 246,195 | | $ | 108,418 | | $ | 76,355 | | $ | 52,099 | | $ | 83,341 | | $ | 349,324 | | $ | — | | $ | 1,170,445 | | Grades 1-4 | $ | 97,859 | | $ | 292,993 | | $ | 198,515 | | $ | 85,707 | | $ | 59,568 | | $ | 102,696 | | $ | 383,527 | | $ | — | | $ | 1,220,865 | |
Grade 5 | Grade 5 | 7,187 | | 7,423 | | 11,052 | | 2,084 | | 2,734 | | 4,344 | | 18,807 | | — | | 53,631 | | Grade 5 | 5,318 | | 6,973 | | 6,397 | | 1,929 | | 1,156 | | 7,678 | | 27,520 | | — | | 56,971 | |
Grade 6 | Grade 6 | 158 | | 1,649 | | 675 | | 638 | | 453 | | 11,972 | | 14,718 | | — | | 30,263 | | Grade 6 | — | | 1,688 | | 1,361 | | 837 | | 5 | | 1,127 | | 4,907 | | — | | 9,925 | |
Grade 7 | Grade 7 | 552 | | 352 | | 3,384 | | 2,666 | | 802 | | 1,149 | | 5,008 | | — | | 13,913 | | Grade 7 | 605 | | 3,578 | | 2,590 | | 2,319 | | 2,189 | | 13,912 | | 5,613 | | — | | 30,806 | |
Total | Total | $ | 262,610 | | $ | 255,619 | | $ | 123,529 | | $ | 81,743 | | $ | 56,088 | | $ | 100,806 | | $ | 387,857 | | $ | — | | $ | 1,268,252 | | Total | $ | 103,782 | | $ | 305,232 | | $ | 208,863 | | $ | 90,792 | | $ | 62,918 | | $ | 125,413 | | $ | 421,567 | | $ | — | | $ | 1,318,567 | |
Current period gross charge-offs | | Current period gross charge-offs | $ | — | | $ | (77) | | $ | (114) | | $ | — | | $ | — | | $ | (197) | | $ | (15) | | $ | — | | $ | (403) | |
Owner-occupied CRE | Owner-occupied CRE | | Owner-occupied CRE | |
Grades 1-4 | Grades 1-4 | $ | 128,054 | | $ | 189,922 | | $ | 111,622 | | $ | 104,840 | | $ | 93,619 | | $ | 269,617 | | $ | 7,952 | | $ | — | | $ | 905,626 | | Grades 1-4 | $ | 60,120 | | $ | 160,217 | | $ | 189,378 | | $ | 100,814 | | $ | 92,047 | | $ | 302,445 | | $ | 3,210 | | $ | — | | $ | 908,231 | |
Grade 5 | Grade 5 | 2,868 | | 4,750 | | 2,824 | | 2,826 | | 3,875 | | 14,325 | | 172 | | — | | 31,640 | | Grade 5 | 1,398 | | 4,237 | | 9,020 | | 5,009 | | 1,139 | | 16,269 | | 509 | | — | | 37,581 | |
Grade 6 | Grade 6 | — | | — | | — | | 2,388 | | — | | 887 | | — | | — | | 3,275 | | Grade 6 | — | | 261 | | 352 | | 546 | | 1,561 | | 954 | | 150 | | — | | 3,824 | |
Grade 7 | Grade 7 | 440 | | 414 | | 6,244 | | 377 | | 85 | | 6,832 | | — | | — | | 14,392 | | Grade 7 | — | | 221 | | 2,069 | | 6,806 | | 577 | | 9,893 | | — | | — | | 19,566 | |
Total | Total | $ | 131,362 | | $ | 195,086 | | $ | 120,690 | | $ | 110,431 | | $ | 97,579 | | $ | 291,661 | | $ | 8,124 | | $ | — | | $ | 954,933 | | Total | $ | 61,518 | | $ | 164,936 | | $ | 200,819 | | $ | 113,175 | | $ | 95,324 | | $ | 329,561 | | $ | 3,869 | | $ | — | | $ | 969,202 | |
Current period gross charge-offs | | Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
Agricultural | Agricultural | | Agricultural | |
Grades 1-4 | Grades 1-4 | $ | 238,387 | | $ | 154,364 | | $ | 93,529 | | $ | 26,185 | | $ | 20,967 | | $ | 135,426 | | $ | 195,784 | | $ | — | | $ | 864,642 | | Grades 1-4 | $ | 34,882 | | $ | 281,777 | | $ | 139,350 | | $ | 82,481 | | $ | 24,247 | | $ | 152,130 | | $ | 230,863 | | $ | — | | $ | 945,730 | |
Grade 5 | Grade 5 | 12,109 | | 15,525 | | 2,823 | | 2,028 | | 1,504 | | 42,561 | | 23,090 | | — | | 99,640 | | Grade 5 | 2,335 | | 12,391 | | 6,359 | | 741 | | 373 | | 39,105 | | 14,380 | | — | | 75,684 | |
Grade 6 | Grade 6 | 49 | | 1,491 | | 31 | | 33 | | — | | 5,322 | | 425 | | — | | 7,351 | | Grade 6 | — | | 109 | | 1,144 | | — | | 52 | | 2,320 | | 129 | | — | | 3,754 | |
Grade 7 | Grade 7 | 7,072 | | 2,651 | | 863 | | 2,024 | | 3,655 | | 20,388 | | 9,212 | | — | | 45,865 | | Grade 7 | 2,570 | | 7,057 | | 6,827 | | 589 | | 1,890 | | 15,082 | | 9,816 | | — | | 43,831 | |
Total | Total | $ | 257,617 | | $ | 174,031 | | $ | 97,246 | | $ | 30,270 | | $ | 26,126 | | $ | 203,697 | | $ | 228,511 | | $ | — | | $ | 1,017,498 | | Total | $ | 39,787 | | $ | 301,334 | | $ | 153,680 | | $ | 83,811 | | $ | 26,562 | | $ | 208,637 | | $ | 255,188 | | $ | — | | $ | 1,068,999 | |
Current period gross charge-offs | | Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | (66) | | $ | — | | $ | — | | $ | (66) | |
CRE investment | CRE investment | | CRE investment | |
Grades 1-4 | Grades 1-4 | $ | 167,931 | | $ | 228,709 | | $ | 195,020 | | $ | 141,749 | | $ | 79,790 | | $ | 261,027 | | $ | 13,890 | | $ | — | | $ | 1,088,116 | | Grades 1-4 | $ | 17,613 | | $ | 196,825 | | $ | 217,555 | | $ | 181,239 | | $ | 123,758 | | $ | 305,218 | | $ | 13,699 | | $ | — | | $ | 1,055,907 | |
Grade 5 | Grade 5 | 784 | | 1,664 | | 5,252 | | 3,131 | | 983 | | 24,997 | | — | | — | | 36,811 | | Grade 5 | 2,814 | | 559 | | 13,092 | | 3,908 | | 3,812 | | 19,960 | | 49 | | — | | 44,194 | |
Grade 6 | Grade 6 | — | | — | | — | | 1,183 | | 2,029 | | 1,078 | | 206 | | — | | 4,496 | | Grade 6 | — | | — | | — | | — | | 497 | | 3,693 | | 73 | | — | | 4,263 | |
Grade 7 | Grade 7 | — | | — | | — | | 73 | | 249 | | 2,991 | | 215 | | — | | 3,528 | | Grade 7 | — | | — | | 21 | | 523 | | 2,403 | | 1,381 | | — | | — | | 4,328 | |
Total | Total | $ | 168,715 | | $ | 230,373 | | $ | 200,272 | | $ | 146,136 | | $ | 83,051 | | $ | 290,093 | | $ | 14,311 | | $ | — | | $ | 1,132,951 | | Total | $ | 20,427 | | $ | 197,384 | | $ | 230,668 | | $ | 185,670 | | $ | 130,470 | | $ | 330,252 | | $ | 13,821 | | $ | — | | $ | 1,108,692 | |
Current period gross charge-offs | | Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
Construction & land development | Construction & land development | | Construction & land development | |
Grades 1-4 | Grades 1-4 | $ | 82,695 | | $ | 139,561 | | $ | 15,958 | | $ | 9,979 | | $ | 27,553 | | $ | 14,936 | | $ | 14,361 | | $ | — | | $ | 305,043 | | Grades 1-4 | $ | 19,928 | | $ | 132,395 | | $ | 129,347 | | $ | 9,924 | | $ | 8,498 | | $ | 31,872 | | $ | 3,237 | | $ | — | | $ | 335,201 | |
Grade 5 | Grade 5 | 40 | | — | | — | | 513 | | — | | 22 | | — | | — | | 575 | | Grade 5 | — | | 30 | | 128 | | 1,285 | | 511 | | 91 | | — | | — | | 2,045 | |
Grade 6 | Grade 6 | — | | — | | — | | — | | — | | — | | — | | — | | — | | Grade 6 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Grade 7 | Grade 7 | 34 | | — | | — | | — | | — | | 794 | | — | | — | | 828 | | Grade 7 | 48 | | — | | — | | — | | — | | 95 | | — | | — | | 143 | |
Total | Total | $ | 82,769 | | $ | 139,561 | | $ | 15,958 | | $ | 10,492 | | $ | 27,553 | | $ | 15,752 | | $ | 14,361 | | $ | — | | $ | 306,446 | | Total | $ | 19,976 | | $ | 132,425 | | $ | 129,475 | | $ | 11,209 | | $ | 9,009 | | $ | 32,058 | | $ | 3,237 | | $ | — | | $ | 337,389 | |
Current period gross charge-offs | | Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
Residential construction | Residential construction | | Residential construction | |
Grades 1-4 | Grades 1-4 | $ | 61,266 | | $ | 32,309 | | $ | 1,490 | | $ | 125 | | $ | 338 | | $ | 664 | | $ | 5,094 | | $ | — | | $ | 101,286 | | Grades 1-4 | $ | 15,583 | | $ | 80,786 | | $ | 8,244 | | $ | 1,064 | | $ | 127 | | $ | 1,513 | | $ | — | | $ | — | | $ | 107,317 | |
Grade 5 | Grade 5 | — | | — | | — | | — | | — | | — | | — | | — | | — | | Grade 5 | 162 | | — | | 616 | | — | | — | | — | | — | | — | | 778 | |
Grade 6 | Grade 6 | — | | — | | — | | — | | — | | — | | — | | — | | — | | Grade 6 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Grade 7 | Grade 7 | — | | — | | — | | — | | — | | — | | — | | — | | — | | Grade 7 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Total | Total | $ | 61,266 | | $ | 32,309 | | $ | 1,490 | | $ | 125 | | $ | 338 | | $ | 664 | | $ | 5,094 | | $ | — | | $ | 101,286 | | Total | $ | 15,745 | | $ | 80,786 | | $ | 8,860 | | $ | 1,064 | | $ | 127 | | $ | 1,513 | | $ | — | | $ | — | | $ | 108,095 | |
Current period gross charge-offs | | Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
Residential first mortgage | Residential first mortgage | | Residential first mortgage | |
Grades 1-4 | Grades 1-4 | $ | 261,535 | | $ | 266,465 | | $ | 151,436 | | $ | 73,915 | | $ | 32,871 | | $ | 167,038 | | $ | 2,595 | | $ | 3 | | $ | 955,858 | | Grades 1-4 | $ | 76,867 | | $ | 338,815 | | $ | 264,697 | | $ | 137,536 | | $ | 62,134 | | $ | 176,793 | | $ | 805 | | $ | 3 | | $ | 1,057,650 | |
Grade 5 | Grade 5 | 928 | | 1,349 | | 1,006 | | 2,147 | | 2,295 | | 418 | | — | | — | | 8,143 | | Grade 5 | — | | 1,305 | | 1,055 | | 1,272 | | 2,874 | | 2,858 | | — | | — | | 9,364 | |
Grade 6 | Grade 6 | — | | — | | — | | 717 | | — | | — | | — | | — | | 717 | | Grade 6 | — | | — | | — | | — | | 562 | | — | | — | | — | | 562 | |
Grade 7 | Grade 7 | — | | 332 | | 211 | | 410 | | 225 | | 4,488 | | — | | — | | 5,666 | | Grade 7 | — | | 151 | | 471 | | 276 | | 424 | | 3,711 | | — | | — | | 5,033 | |
Total | Total | $ | 262,463 | | $ | 268,146 | | $ | 152,653 | | $ | 77,189 | | $ | 35,391 | | $ | 171,944 | | $ | 2,595 | | $ | 3 | | $ | 970,384 | | Total | $ | 76,867 | | $ | 340,271 | | $ | 266,223 | | $ | 139,084 | | $ | 65,994 | | $ | 183,362 | | $ | 805 | | $ | 3 | | $ | 1,072,609 | |
Current period gross charge-offs | | Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
Residential junior mortgage | Residential junior mortgage | | Residential junior mortgage | |
Grades 1-4 | Grades 1-4 | $ | 7,864 | | $ | 4,875 | | $ | 5,314 | | $ | 3,227 | | $ | 1,745 | | $ | 3,439 | | $ | 144,053 | | $ | 5,293 | | $ | 175,810 | | Grades 1-4 | $ | 7,841 | | $ | 9,094 | | $ | 4,026 | | $ | 4,821 | | $ | 2,955 | | $ | 4,387 | | $ | 144,869 | | $ | 6,590 | | $ | 184,583 | |
Grade 5 | Grade 5 | — | | — | | — | | — | | — | | 144 | | — | | — | | 144 | | Grade 5 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Grade 6 | Grade 6 | — | | — | | — | | — | | — | | — | | — | | — | | — | | Grade 6 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Grade 7 | Grade 7 | — | | 209 | | — | | 27 | | — | | 86 | | 152 | | — | | 474 | | Grade 7 | — | | 32 | | 204 | | — | | — | | 15 | | 39 | | — | | 290 | |
Total | Total | $ | 7,864 | | $ | 5,084 | | $ | 5,314 | | $ | 3,254 | | $ | 1,745 | | $ | 3,669 | | $ | 144,205 | | $ | 5,293 | | $ | 176,428 | | Total | $ | 7,841 | | $ | 9,126 | | $ | 4,230 | | $ | 4,821 | | $ | 2,955 | | $ | 4,402 | | $ | 144,908 | | $ | 6,590 | | $ | 184,873 | |
Current period gross charge-offs | | Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | (96) | | $ | — | | $ | — | | $ | (96) | |
Retail & other | Retail & other | | Retail & other | |
Grades 1-4 | Grades 1-4 | $ | 11,363 | | $ | 9,873 | | $ | 4,751 | | $ | 3,677 | | $ | 1,220 | | $ | 24,608 | | $ | 667 | | $ | — | | $ | 56,159 | | Grades 1-4 | $ | 4,078 | | $ | 9,654 | | $ | 7,001 | | $ | 3,212 | | $ | 2,378 | | $ | 4,282 | | $ | 23,638 | | $ | — | | $ | 54,243 | |
Grade 5 | Grade 5 | — | | — | | — | | — | | — | | — | | — | | — | | — | | Grade 5 | — | | — | | 19 | | — | | — | | — | | — | | — | | 19 | |
Grade 6 | Grade 6 | — | | — | | — | | — | | — | | — | | — | | — | | — | | Grade 6 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Grade 7 | Grade 7 | — | | — | | 16 | | 2 | | 30 | | 52 | | — | | — | | 100 | | Grade 7 | 30 | | — | | 21 | | 11 | | 1 | | 25 | | — | | — | | 88 | |
Total | Total | $ | 11,363 | | $ | 9,873 | | $ | 4,767 | | $ | 3,679 | | $ | 1,250 | | $ | 24,660 | | $ | 667 | | $ | — | | $ | 56,259 | | Total | $ | 4,108 | | $ | 9,654 | | $ | 7,041 | | $ | 3,223 | | $ | 2,379 | | $ | 4,307 | | $ | 23,638 | | $ | — | | $ | 54,350 | |
| Current period gross charge-offs | | Current period gross charge-offs | $ | (6) | | $ | (1) | | $ | — | | $ | (1) | | $ | — | | $ | (52) | | $ | (120) | | $ | — | | $ | (180) | |
Total loans | Total loans | $ | 1,246,029 | | $ | 1,310,082 | | $ | 721,919 | | $ | 463,319 | | $ | 329,121 | | $ | 1,102,946 | | $ | 805,725 | | $ | 5,296 | | $ | 5,984,437 | | Total loans | $ | 350,051 | | $ | 1,541,148 | | $ | 1,209,859 | | $ | 632,849 | | $ | 395,738 | | $ | 1,219,505 | | $ | 867,033 | | $ | 6,593 | | $ | 6,222,776 | |
| December 31, 2021 | Amortized Cost Basis by Origination Year | | |
December 31, 2022 | | December 31, 2022 | Amortized Cost Basis by Origination Year | |
(in thousands) | (in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving | Revolving to Term | TOTAL | (in thousands) | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving | Revolving to Term | TOTAL |
Commercial & industrial | Commercial & industrial | | Commercial & industrial | |
Grades 1-4 | Grades 1-4 | $ | 282,369 | | $ | 146,131 | | $ | 99,702 | | $ | 69,478 | | $ | 50,557 | | $ | 71,247 | | $ | 288,115 | | $ | — | | $ | 1,007,599 | | Grades 1-4 | $ | 317,394 | | $ | 226,065 | | $ | 101,374 | | $ | 68,884 | | $ | 50,189 | | $ | 77,589 | | $ | 360,978 | | $ | — | | $ | 1,202,473 | |
Grade 5 | Grade 5 | 1,685 | | 1,905 | | 4,369 | | 5,809 | | 4,860 | | 2,097 | | 8,408 | | — | | 29,133 | | Grade 5 | 9,938 | | 5,902 | | 10,811 | | 1,530 | | 3,986 | | 4,562 | | 20,617 | | — | | 57,346 | |
Grade 6 | Grade 6 | 598 | | 54 | | 16 | | 687 | | 67 | | 91 | | 391 | | — | | 1,904 | | Grade 6 | 1,459 | | 2,283 | | 629 | | 511 | | 402 | | 11,653 | | 14,047 | | — | | 30,984 | |
Grade 7 | Grade 7 | — | | 440 | | 692 | | 337 | | 976 | | 743 | | 432 | | — | | 3,620 | | Grade 7 | 556 | | 293 | | 3,211 | | 2,990 | | 775 | | 1,070 | | 5,121 | | — | | 14,016 | |
Total | Total | $ | 284,652 | | $ | 148,530 | | $ | 104,779 | | $ | 76,311 | | $ | 56,460 | | $ | 74,178 | | $ | 297,346 | | $ | — | | $ | 1,042,256 | | Total | $ | 329,347 | | $ | 234,543 | | $ | 116,025 | | $ | 73,915 | | $ | 55,352 | | $ | 94,874 | | $ | 400,763 | | $ | — | | $ | 1,304,819 | |
Current period gross charge-offs | | Current period gross charge-offs | $ | (38) | | $ | (41) | | $ | (2) | | $ | — | | $ | (109) | | $ | — | | $ | — | | $ | — | | $ | (190) | |
Owner-occupied CRE | Owner-occupied CRE | | Owner-occupied CRE | |
Grades 1-4 | Grades 1-4 | $ | 154,578 | | $ | 94,300 | | $ | 105,226 | | $ | 92,128 | | $ | 75,583 | | $ | 202,816 | | $ | 6,945 | | $ | — | | $ | 731,576 | | Grades 1-4 | $ | 151,391 | | $ | 190,313 | | $ | 105,156 | | $ | 100,606 | | $ | 91,479 | | $ | 252,574 | | $ | 6,734 | | $ | — | | $ | 898,253 | |
Grade 5 | Grade 5 | 7,753 | | 3,019 | | 6,529 | | 2,543 | | 2,515 | | 13,905 | | 656 | | — | | 36,920 | | Grade 5 | 5,241 | | 3,192 | | 4,287 | | 2,163 | | 4,791 | | 14,632 | | 348 | | — | | 34,654 | |
Grade 6 | Grade 6 | — | | — | | 1,642 | | — | | 20 | | 805 | | — | | — | | 2,467 | | Grade 6 | — | | — | | 763 | | 2,361 | | — | | 877 | | — | | — | | 4,001 | |
Grade 7 | Grade 7 | — | | 3,124 | | 1,914 | | — | | 3,526 | | 6,672 | | 990 | | — | | 16,226 | | Grade 7 | 227 | | 706 | | 6,344 | | 616 | | — | | 9,798 | | — | | — | | 17,691 | |
Total | Total | $ | 162,331 | | $ | 100,443 | | $ | 115,311 | | $ | 94,671 | | $ | 81,644 | | $ | 224,198 | | $ | 8,591 | | $ | — | | $ | 787,189 | | Total | $ | 156,859 | | $ | 194,211 | | $ | 116,550 | | $ | 105,746 | | $ | 96,270 | | $ | 277,881 | | $ | 7,082 | | $ | — | | $ | 954,599 | |
Current period gross charge-offs | | Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | (555) | | $ | — | | $ | — | | $ | (555) | |
Agricultural | Agricultural | | Agricultural | |
Grades 1-4 | Grades 1-4 | $ | 128,404 | | $ | 87,844 | | $ | 28,416 | | $ | 22,887 | | $ | 36,298 | | $ | 86,104 | | $ | 235,743 | | $ | — | | $ | 625,696 | | Grades 1-4 | $ | 275,208 | | $ | 145,272 | | $ | 85,413 | | $ | 25,463 | | $ | 19,687 | | $ | 130,849 | | $ | 249,033 | | $ | — | | $ | 930,925 | |
Grade 5 | Grade 5 | 14,796 | | 4,183 | | 2,391 | | 915 | | 3,912 | | 48,373 | | 26,778 | | — | | 101,348 | | Grade 5 | 13,295 | | 18,178 | | 2,694 | | 1,992 | | 517 | | 43,927 | | 21,199 | | — | | 101,802 | |
Grade 6 | Grade 6 | 38 | | 38 | | 36 | | — | | 86 | | 1,049 | | 85 | | — | | 1,332 | | Grade 6 | 115 | | 1,457 | | 28 | | 33 | | — | | 5,258 | | 429 | | — | | 7,320 | |
Grade 7 | Grade 7 | 3,284 | | 3,971 | | 3,490 | | 4,201 | | 7,215 | | 31,672 | | 12,519 | | — | | 66,352 | | Grade 7 | 7,165 | | 2,632 | | 720 | | 1,977 | | 4,611 | | 19,948 | | 11,507 | | — | | 48,560 | |
Total | Total | $ | 146,522 | | $ | 96,036 | | $ | 34,333 | | $ | 28,003 | | $ | 47,511 | | $ | 167,198 | | $ | 275,125 | | $ | — | | $ | 794,728 | | Total | $ | 295,783 | | $ | 167,539 | | $ | 88,855 | | $ | 29,465 | | $ | 24,815 | | $ | 199,982 | | $ | 282,168 | | $ | — | | $ | 1,088,607 | |
Current period gross charge-offs | | Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
CRE investment | CRE investment | | CRE investment | |
Grades 1-4 | Grades 1-4 | $ | 192,274 | | $ | 139,127 | | $ | 136,306 | | $ | 56,148 | | $ | 65,026 | | $ | 162,991 | | $ | 11,289 | | $ | — | | $ | 763,161 | | Grades 1-4 | $ | 205,930 | | $ | 229,252 | | $ | 192,527 | | $ | 134,301 | | $ | 79,649 | | $ | 248,595 | | $ | 11,383 | | $ | — | | $ | 1,101,637 | |
Grade 5 | Grade 5 | 11,081 | | 3,001 | | 6,497 | | 3,945 | | 6,726 | | 17,527 | | — | | — | | 48,777 | | Grade 5 | 567 | | 1,649 | | 3,578 | | 4,266 | | 3,086 | | 24,897 | | — | | — | | 38,043 | |
Grade 6 | Grade 6 | — | | — | | — | | — | | — | | — | | — | | — | | — | | Grade 6 | — | | — | | — | | 1,170 | | 2,396 | | 2,483 | | 206 | | — | | 6,255 | |
Grade 7 | Grade 7 | — | | — | | 456 | | 141 | | 1,352 | | 3,943 | | 231 | | — | | 6,123 | | Grade 7 | — | | — | | 121 | | 299 | | 245 | | 3,140 | | 209 | | — | | 4,014 | |
Total | Total | $ | 203,355 | | $ | 142,128 | | $ | 143,259 | | $ | 60,234 | | $ | 73,104 | | $ | 184,461 | | $ | 11,520 | | $ | — | | $ | 818,061 | | Total | $ | 206,497 | | $ | 230,901 | | $ | 196,226 | | $ | 140,036 | | $ | 85,376 | | $ | 279,115 | | $ | 11,798 | | $ | — | | $ | 1,149,949 | |
Current period gross charge-offs | | Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
Construction & land development | Construction & land development | | Construction & land development | |
Grades 1-4 | Grades 1-4 | $ | 81,891 | | $ | 72,415 | | $ | 12,547 | | $ | 19,511 | | $ | 1,184 | | $ | 11,274 | | $ | 10,943 | | $ | — | | $ | 209,765 | | Grades 1-4 | $ | 104,804 | | $ | 140,727 | | $ | 12,188 | | $ | 9,747 | | $ | 23,811 | | $ | 13,138 | | $ | 13,235 | | $ | — | | $ | 317,650 | |
Grade 5 | Grade 5 | 640 | | — | | 521 | | 919 | | — | | 119 | | — | | — | | 2,199 | | Grade 5 | 37 | | — | | — | | 14 | | — | | 95 | | — | | — | | 146 | |
Grade 6 | Grade 6 | — | | — | | — | | — | | — | | — | | — | | — | | — | | Grade 6 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Grade 7 | Grade 7 | — | | — | | — | | — | | 17 | | 1,054 | | — | | — | | 1,071 | | Grade 7 | 33 | | — | | — | | — | | — | | 771 | | — | | — | | 804 | |
Total | Total | $ | 82,531 | | $ | 72,415 | | $ | 13,068 | | $ | 20,430 | | $ | 1,201 | | $ | 12,447 | | $ | 10,943 | | $ | — | | $ | 213,035 | | Total | $ | 104,874 | | $ | 140,727 | | $ | 12,188 | | $ | 9,761 | | $ | 23,811 | | $ | 14,004 | | $ | 13,235 | | $ | — | | $ | 318,600 | |
Current period gross charge-offs | | Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
Residential construction | Residential construction | | Residential construction | |
Grades 1-4 | Grades 1-4 | $ | 58,352 | | $ | 9,998 | | $ | 155 | | $ | 344 | | $ | 1,072 | | $ | 380 | | $ | — | | $ | — | | $ | 70,301 | | Grades 1-4 | $ | 92,417 | | $ | 16,774 | | $ | 966 | | $ | 123 | | $ | 336 | | $ | 229 | | $ | 3,547 | | $ | — | | $ | 114,392 | |
Grade 5 | Grade 5 | — | | — | | 52 | | — | | — | | — | | — | | — | | 52 | | Grade 5 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Grade 6 | Grade 6 | — | | — | | — | | — | | — | | — | | — | | — | | — | | Grade 6 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Grade 7 | Grade 7 | — | | — | | — | | — | | — | | — | | — | | — | | — | | Grade 7 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Total | Total | $ | 58,352 | | $ | 9,998 | | $ | 207 | | $ | 344 | | $ | 1,072 | | $ | 380 | | $ | — | | $ | — | | $ | 70,353 | | Total | $ | 92,417 | | $ | 16,774 | | $ | 966 | | $ | 123 | | $ | 336 | | $ | 229 | | $ | 3,547 | | $ | — | | $ | 114,392 | |
Current period gross charge-offs | | Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
Residential first mortgage | Residential first mortgage | | Residential first mortgage | |
Grades 1-4 | Grades 1-4 | $ | 256,082 | | $ | 152,932 | | $ | 168,705 | | $ | 22,568 | | $ | 20,147 | | $ | 82,479 | | $ | 1,840 | | $ | 4 | | $ | 704,757 | | Grades 1-4 | $ | 318,628 | | $ | 272,011 | | $ | 147,857 | | $ | 68,975 | | $ | 31,208 | | $ | 162,153 | | $ | 2,080 | | $ | 3 | | $ | 1,002,915 | |
Grade 5 | Grade 5 | 713 | | 529 | | 3,094 | | — | | — | | 1,508 | | — | | — | | 5,844 | | Grade 5 | 1,494 | | 758 | | 997 | | 1,803 | | 2,272 | | 465 | | — | | — | | 7,789 | |
Grade 6 | Grade 6 | — | | — | | — | | — | | — | | — | | — | | — | | — | | Grade 6 | — | | — | | — | | 711 | | — | | — | | — | | — | | 711 | |
Grade 7 | Grade 7 | — | | — | | 560 | | 225 | | 73 | | 2,524 | | — | | — | | 3,382 | | Grade 7 | 154 | | 329 | | 188 | | 349 | | 197 | | 4,303 | | — | | — | | 5,520 | |
Total | Total | $ | 256,795 | | $ | 153,461 | | $ | 172,359 | | $ | 22,793 | | $ | 20,220 | | $ | 86,511 | | $ | 1,840 | | $ | 4 | | $ | 713,983 | | Total | $ | 320,276 | | $ | 273,098 | | $ | 149,042 | | $ | 71,838 | | $ | 33,677 | | $ | 166,921 | | $ | 2,080 | | $ | 3 | | $ | 1,016,935 | |
Current period gross charge-offs | | Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | (65) | | $ | — | | $ | — | | $ | (65) | |
Residential junior mortgage | Residential junior mortgage | | Residential junior mortgage | |
Grades 1-4 | Grades 1-4 | $ | 3,194 | | $ | 3,139 | | $ | 3,021 | | $ | 1,501 | | $ | 512 | | $ | 1,969 | | $ | 115,817 | | $ | 1,426 | | $ | 130,579 | | Grades 1-4 | $ | 10,119 | | $ | 4,580 | | $ | 5,207 | | $ | 3,151 | | $ | 1,573 | | $ | 3,409 | | $ | 142,784 | | $ | 5,762 | | $ | 176,585 | |
Grade 5 | Grade 5 | — | | — | | 29 | | — | | — | | — | | 439 | | — | | 468 | | Grade 5 | — | | — | | — | | — | | — | | 143 | | 165 | | — | | 308 | |
Grade 6 | Grade 6 | — | | — | | — | | — | | — | | — | | — | | — | | — | | Grade 6 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Grade 7 | Grade 7 | — | | — | | 172 | | — | | 23 | | 44 | | 138 | | — | | 377 | | Grade 7 | — | | 206 | | — | | — | | — | | 24 | | 209 | | — | | 439 | |
Total | Total | $ | 3,194 | | $ | 3,139 | | $ | 3,222 | | $ | 1,501 | | $ | 535 | | $ | 2,013 | | $ | 116,394 | | $ | 1,426 | | $ | 131,424 | | Total | $ | 10,119 | | $ | 4,786 | | $ | 5,207 | | $ | 3,151 | | $ | 1,573 | | $ | 3,576 | | $ | 143,158 | | $ | 5,762 | | $ | 177,332 | |
Current period gross charge-offs | | Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
Retail & other | Retail & other | | Retail & other | |
Grades 1-4 | Grades 1-4 | $ | 13,676 | | $ | 6,886 | | $ | 5,826 | | $ | 2,053 | | $ | 1,882 | | $ | 20,102 | | $ | 275 | | $ | — | | $ | 50,700 | | Grades 1-4 | $ | 12,318 | | $ | 8,957 | | $ | 4,221 | | $ | 3,188 | | $ | 1,035 | | $ | 24,950 | | $ | 492 | | $ | — | | $ | 55,161 | |
Grade 5 | Grade 5 | — | | — | | — | | — | | — | | — | | — | | — | | — | | Grade 5 | — | | 23 | | — | | — | | — | | — | | — | | — | | 23 | |
Grade 6 | Grade 6 | — | | — | | — | | — | | — | | — | | — | | — | | — | | Grade 6 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Grade 7 | Grade 7 | — | | 24 | | 2 | | 19 | | — | | 62 | | — | | — | | 107 | | Grade 7 | — | | 23 | | 22 | | 2 | | 30 | | 5 | | — | | — | | 82 | |
Total | Total | $ | 13,676 | | $ | 6,910 | | $ | 5,828 | | $ | 2,072 | | $ | 1,882 | | $ | 20,164 | | $ | 275 | | $ | — | | $ | 50,807 | | Total | $ | 12,318 | | $ | 9,003 | | $ | 4,243 | | $ | 3,190 | | $ | 1,065 | | $ | 24,955 | | $ | 492 | | $ | — | | $ | 55,266 | |
| Current period gross charge-offs | | Current period gross charge-offs | $ | — | | $ | (1) | | $ | (6) | | $ | (1) | | $ | — | | $ | — | | $ | (215) | | $ | — | | $ | (223) | |
Total loans | Total loans | $ | 1,211,408 | | $ | 733,060 | | $ | 592,366 | | $ | 306,359 | | $ | 283,629 | | $ | 771,550 | | $ | 722,034 | | $ | 1,430 | | $ | 4,621,836 | | Total loans | $ | 1,528,490 | | $ | 1,271,582 | | $ | 689,302 | | $ | 437,225 | | $ | 322,275 | | $ | 1,061,537 | | $ | 864,323 | | $ | 5,765 | | $ | 6,180,499 | |
The following tables present total loans by risk categories.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
(in thousands) | Grades 1- 4 | | Grade 5 | | Grade 6 | | Grade 7 | | Total |
Commercial & industrial | $ | 1,170,445 | | | $ | 53,631 | | | $ | 30,263 | | | $ | 13,913 | | | $ | 1,268,252 | |
Owner-occupied CRE | 905,626 | | | 31,640 | | | 3,275 | | | 14,392 | | | 954,933 | |
Agricultural | 864,642 | | | 99,640 | | | 7,351 | | | 45,865 | | | 1,017,498 | |
CRE investment | 1,088,116 | | | 36,811 | | | 4,496 | | | 3,528 | | | 1,132,951 | |
Construction & land development | 305,043 | | | 575 | | | — | | | 828 | | | 306,446 | |
Residential construction | 101,286 | | | — | | | — | | | — | | | 101,286 | |
Residential first mortgage | 955,858 | | | 8,143 | | | 717 | | | 5,666 | | | 970,384 | |
Residential junior mortgage | 175,810 | | | 144 | | | — | | | 474 | | | 176,428 | |
Retail & other | 56,159 | | | — | | | — | | | 100 | | | 56,259 | |
Total loans | $ | 5,622,985 | | | $ | 230,584 | | | $ | 46,102 | | | $ | 84,766 | | | $ | 5,984,437 | |
Percent of total | 93.9 | % | | 3.9 | % | | 0.8 | % | | 1.4 | % | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
(in thousands) | Grades 1- 4 | | Grade 5 | | Grade 6 | | Grade 7 | | Total |
Commercial & industrial | $ | 1,007,599 | | | $ | 29,133 | | | $ | 1,904 | | | $ | 3,620 | | | $ | 1,042,256 | |
Owner-occupied CRE | 731,576 | | | 36,920 | | | 2,467 | | | 16,226 | | | 787,189 | |
Agricultural | 625,696 | | | 101,348 | | | 1,332 | | | 66,352 | | | 794,728 | |
CRE investment | 763,161 | | | 48,777 | | | — | | | 6,123 | | | 818,061 | |
Construction & land development | 209,765 | | | 2,199 | | | — | | | 1,071 | | | 213,035 | |
Residential construction | 70,301 | | | 52 | | | — | | | — | | | 70,353 | |
Residential first mortgage | 704,757 | | | 5,844 | | | — | | | 3,382 | | | 713,983 | |
Residential junior mortgage | 130,579 | | | 468 | | | — | | | 377 | | | 131,424 | |
Retail & other | 50,700 | | | — | | | — | | | 107 | | | 50,807 | |
Total loans | $ | 4,294,134 | | | $ | 224,741 | | | $ | 5,703 | | | $ | 97,258 | | | $ | 4,621,836 | |
Percent of total | 92.9 | % | | 4.9 | % | | 0.1 | % | | 2.1 | % | | 100.0 | % |
An internal loan review function rates loans using a grading system based on different risk categories. Loans with a Substandard grade are considered to have a greater risk of loss and may be assigned allocations for loss based on specific review of the weaknesses observed in the individual credits. Such loans are monitored by the loan review function to help ensure early identification of any deterioration. A description of the loan risk categories used by the Company follows.
Grades 1-4, Pass: Credits exhibit adequate cash flows, appropriate management and financial ratios within industry norms and/or are supported by sufficient collateral. Some credits in these rating categories may require a need for monitoring but elements of concern are not severe enough to warrant an elevated rating.
Grade 5, Watch: Credits with this rating are adequately secured and performing but are being monitored due to the presence of various short-term weaknesses which may include unexpected, short-term adverse financial performance, managerial problems, potential impact of a decline in the entire industry or local economy and delinquency issues. Loans to individuals or loans supported by guarantors with marginal net worth or collateral may be included in this rating category.
Grade 6, Special Mention: Credits with this rating have potential weaknesses that, without the Company’s attention and correction may result in deterioration of repayment prospects. These assets are considered Criticized Assets. Potential weaknesses may include adverse financial trends for the borrower or industry, repeated lack of compliance with Company requests, increasing debt to net worth, serious management conditions and decreasing cash flow.
Grade 7, Substandard: Assets with this rating are characterized by the distinct possibility the Company will sustain some loss if deficiencies are not corrected. All foreclosures, liquidations, and nonaccrual loans are considered to be categorized in this rating, regardless of collateral sufficiency.
Troubled Debt RestructuringsModifications to Borrowers Experiencing Financial Difficulty:
Loans are considered troubled debt restructurings if concessions have been grantedOn January 1, 2023, the Company adopted ASU 2022-02, which eliminated the accounting guidance for TDRs by creditors and enhanced the disclosure requirements for certain loan modifications to borrowers who are experiencing financial difficulties.difficulty. The following table presents the loan compositionamortized cost of nonaccrualloans that were both experiencing financial difficulty and performing TDRs.were modified during the six months ended June 30, 2023, aggregated by portfolio segment and type of modification.
| | | September 30, 2022 | | December 31, 2021 | | | | | | | | | | | | | | | | | | | | |
(in thousands) | (in thousands) | Performing | | Nonaccrual | | Total | | Performing | | Nonaccrual | | Total | (in thousands) | Payment Delay | Term Extension | Interest Rate Reduction | Term Extension & Interest Rate Reduction | Total | % of Total Loans |
Commercial & industrial | Commercial & industrial | $ | — | | | $ | 223 | | | $ | 223 | | | $ | — | | | $ | 197 | | | $ | 197 | | Commercial & industrial | $ | 454 | | $ | — | | $ | 88 | | $ | — | | $ | 542 | | 0.04 | % |
Owner-occupied CRE | Owner-occupied CRE | — | | | 2,639 | | | 2,639 | | | 3,466 | | | 2,888 | | | 6,354 | | Owner-occupied CRE | — | | — | | — | | — | | — | | — | % |
Agricultural | Agricultural | — | | | 14,181 | | | 14,181 | | | — | | | 16,835 | | | 16,835 | | Agricultural | 109 | | — | | — | | — | | 109 | | 0.01 | % |
CRE investment | CRE investment | — | | | 299 | | | 299 | | | 918 | | | — | | | 918 | | CRE investment | — | | — | | — | | — | | — | | — | % |
Construction & land development | Construction & land development | — | | | 75 | | | 75 | | | — | | | 308 | | | 308 | | Construction & land development | — | | — | | — | | — | | — | | — | % |
| Residential first mortgage | Residential first mortgage | — | | | 13 | | | 13 | | | 913 | | | 15 | | | 928 | | Residential first mortgage | — | | — | | — | | — | | — | | — | % |
Residential junior mortgage | — | | | — | | | — | | | 146 | | | — | | | 146 | | |
| Total | Total | $ | — | | | $ | 17,430 | | | $ | 17,430 | | | $ | 5,443 | | | $ | 20,243 | | | $ | 25,686 | | Total | $ | 563 | | $ | — | | $ | 88 | | $ | — | | $ | 651 | | 0.01 | % |
The followingloans presented in the table presentsabove have had more than insignificant payment delays (which the numberCompany has defined as payment delays in excess of six months). These modified loans are closely monitored by the Company to understand the effectiveness of its modification efforts, and such loans generally remain in nonaccrual status pending a sustained period of performance in accordance with the modified in a TDR, pre-modification loan balance, and post-modification loan balance by loan composition.terms.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
($ in thousands) | Number of Loans | | Pre-Modification Balance | | Current Balance | | Number of Loans | | Pre-Modification Balance | | Current Balance |
Commercial & industrial | 4 | | | $ | 240 | | | $ | 223 | | | 2 | | | $ | 200 | | | $ | 197 | |
Owner-occupied CRE | 3 | | | 5,138 | | | 2,639 | | | 6 | | | 6,913 | | | 6,354 | |
Agricultural | 26 | | | 16,237 | | | 14,181 | | | 31 | | | 17,228 | | | 16,835 | |
CRE investment | 1 | | | 301 | | | 299 | | | 1 | | | 919 | | | 918 | |
Construction & land development | 1 | | | 533 | | | 75 | | | 1 | | | 533 | | | 308 | |
Residential first mortgage | 1 | | | 17 | | | 13 | | | 2 | | | 931 | | | 928 | |
Residential junior mortgage | — | | | — | | | — | | | 1 | | | 166 | | | 146 | |
Total | 36 | | | $ | 22,466 | | | $ | 17,430 | | | 44 | | | $ | 26,890 | | | $ | 25,686 | |
TDR concessions may include payment schedule modifications, interest rate concessions, maturity date extensions, bankruptcies, or some combinationAs of these concessions. ThereJune 30, 2023, there were no loans whichmade to borrowers experiencing financial difficulty that were classified as troubled debt restructuringsmodified during the previous twelve months thatcurrent period and subsequently defaulted, during 2021 or through September 30, 2022. As of September 30, 2022,and there were no commitments to lend additional funds to debtors whose terms have beensuch debtors.
Troubled Debt Restructuring Disclosures Prior to Adoption of ASU 2022-02:
As of December 31, 2022, the Company had restructured loans totaling $18 million, with a pre-modification balance of $24 million, all of which were also reflected as nonaccrual loans. There were no restructured loans modified in troubled debt restructurings.
during 2022 that subsequently defaulted, and there were no commitments to lend additional funds to such debtors.
Note 7 – Goodwill and Other Intangibles and Servicing Rights
Management periodically reviews the carrying value of its intangible assets to determine if any impairment has occurred, in which case an impairment charge would be recorded as an expense in the period of impairment, or whether changes in circumstances have occurred that would require a revision to the remaining useful life that would affect expense prospectively. In making such determination, management evaluates whether there are any adverse qualitative factors indicating that an impairment may exist, as well as the performance on an undiscounted basis, of the underlying operations or assets which give rise to the intangible. Management also regularly monitors economic factors for potential impairment indications on the value of our franchise, stability of deposits, and the wealth client base, underlying our goodwill core deposit intangible, and customer list intangibles,other intangibles. Management concluded no impairment was indicated for the six months ended June 30, 2023 and determined no impairments were indicated.the year ended December 31, 2022. A summary of goodwill and other intangibles was as follows.
| | | | | | | | | | | |
| | | |
(in thousands) | September 30, 2022 | | December 31, 2021 |
Goodwill | $ | 369,849 | | | $ | 317,189 | |
Core deposit intangibles | 34,791 | | | 19,445 | |
Customer list intangibles | 2,477 | | | 2,858 | |
Other intangibles | 37,268 | | | 22,303 | |
Goodwill and other intangibles, net | $ | 407,117 | | | $ | 339,492 | |
| | | | | | | | | | | |
| | | |
(in thousands) | June 30, 2023 | | December 31, 2022 |
Goodwill | $ | 367,387 | | | $ | 367,387 | |
Core deposit intangibles | 28,710 | | | 32,701 | |
Customer list intangibles | 2,097 | | | 2,350 | |
Other intangibles | 30,807 | | | 35,051 | |
Goodwill and other intangibles, net | $ | 398,194 | | | $ | 402,438 | |
Goodwill: A summary of goodwill was as follows. During 2022, goodwill increased due to the Charter acquisition, while during 2021, goodwill increased due to the acquisitions of Mackinac and County. See Note 2 for additional information on the Company’s acquisitions.acquisition.
| | | Nine Months Ended | | Year Ended | | Six Months Ended | | Year Ended |
(in thousands) | (in thousands) | September 30, 2022 | | December 31, 2021 | (in thousands) | June 30, 2023 | | December 31, 2022 |
Goodwill: | Goodwill: | | | | Goodwill: | | | |
Goodwill at beginning of year | Goodwill at beginning of year | $ | 317,189 | | | $ | 163,151 | | Goodwill at beginning of year | $ | 367,387 | | | $ | 317,189 | |
Acquisitions | Acquisitions | 52,660 | | | 154,038 | | Acquisitions | — | | | 49,970 | |
| Purchase accounting adjustment | | Purchase accounting adjustment | — | | | 228 | |
Goodwill at end of period | Goodwill at end of period | $ | 369,849 | | | $ | 317,189 | | Goodwill at end of period | $ | 367,387 | | | $ | 367,387 | |
Other intangible assets: Other intangible assets, consisting of core deposit intangibles and customer list intangibles, are amortized over their estimated finite lives. A summary of other intangible assets was as follows. During 2022, core deposit intangibles increased due to the Charter acquisition, while during 2021, core deposit intangibles increased due to the acquisitions of Mackinac and County. See Note 2 for additional information on the Company’s acquisitions.acquisition. | | | Nine Months Ended | | Year Ended | | Six Months Ended | | Year Ended |
(in thousands) | (in thousands) | September 30, 2022 | | December 31, 2021 | (in thousands) | June 30, 2023 | | December 31, 2022 |
Core deposit intangibles: | Core deposit intangibles: | | | | Core deposit intangibles: | | | |
Gross carrying amount | Gross carrying amount | $ | 60,724 | | | $ | 41,360 | | Gross carrying amount | $ | 60,724 | | | $ | 60,724 | |
Accumulated amortization | Accumulated amortization | (25,933) | | | (21,915) | | Accumulated amortization | (32,014) | | | (28,023) | |
Net book value | Net book value | $ | 34,791 | | | $ | 19,445 | | Net book value | $ | 28,710 | | | $ | 32,701 | |
Additions during the period | Additions during the period | $ | 19,364 | | | $ | 13,595 | | Additions during the period | $ | — | | | $ | 19,364 | |
Amortization during the period | Amortization during the period | $ | 4,018 | | | $ | 2,987 | | Amortization during the period | $ | 3,991 | | | $ | 6,108 | |
Customer list intangibles: | Customer list intangibles: | | Customer list intangibles: | |
Gross carrying amount | Gross carrying amount | $ | 5,523 | | | $ | 5,523 | | Gross carrying amount | $ | 5,523 | | | $ | 5,523 | |
Accumulated amortization | Accumulated amortization | (3,046) | | | (2,665) | | Accumulated amortization | (3,426) | | | (3,173) | |
Net book value | Net book value | $ | 2,477 | | | $ | 2,858 | | Net book value | $ | 2,097 | | | $ | 2,350 | |
| Amortization during the period | Amortization during the period | $ | 381 | | | $ | 507 | | Amortization during the period | $ | 253 | | | $ | 508 | |
Mortgage servicing rights (“MSR”): Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income, and assessed for impairment at each reporting date, with the amortization recorded in mortgage income, net, in the consolidated statements of income. Mortgage servicing rights are carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value, and are included in other assets in the consolidated balance sheets. A summary of the changes in the mortgage servicing rights asset was as follows.
| | | | | | | | | | | |
| Nine Months Ended | | Year Ended |
(in thousands) | September 30, 2022 | | December 31, 2021 |
Mortgage servicing rights asset: | | | |
MSR asset at beginning of year | $ | 13,636 | | | $ | 10,230 | |
Capitalized MSR | 2,127 | | | 4,329 | |
MSR asset acquired | — | | | 1,322 | |
Amortization during the period | (2,145) | | | (2,245) | |
MSR asset at end of period | $ | 13,618 | | | $ | 13,636 | |
Valuation allowance at beginning of year | $ | (1,200) | | | $ | (1,000) | |
Additions | — | | | (500) | |
Reversals | 700 | | | 300 | |
Valuation allowance at end of period | $ | (500) | | | $ | (1,200) | |
MSR asset, net | $ | 13,118 | | | $ | 12,436 | |
Fair value of MSR asset at end of period | $ | 16,740 | | | $ | 15,599 | |
Residential mortgage loans serviced for others | $ | 1,649,187 | | | $ | 1,583,577 | |
Net book value of MSR asset to loans serviced for others | 0.80 | % | | 0.79 | % |
The Company periodically evaluates its mortgage servicing rights asset for impairment. At each reporting date, impairment is assessed based on estimated fair value using estimated prepayment speeds of the underlying mortgage loans serviced and stratification based on the risk characteristics of the underlying loans (predominantly loan type and note interest rate). See Note 9 for additional information on the fair valueA summary of the MSR asset.changes in the mortgage servicing rights asset was as follows.
| | | | | | | | | | | |
| Six Months Ended | | Year Ended |
(in thousands) | June 30, 2023 | | December 31, 2022 |
Mortgage servicing rights asset: | | | |
MSR asset at beginning of year | $ | 13,080 | | | $ | 13,636 | |
Capitalized MSR | 620 | | | 2,327 | |
| | | |
Amortization during the period | (1,489) | | | (2,883) | |
MSR asset at end of period | $ | 12,211 | | | $ | 13,080 | |
Valuation allowance at beginning of year | $ | (500) | | | $ | (1,200) | |
| | | |
Reversals | 500 | | | 700 | |
Valuation allowance at end of period | $ | — | | | $ | (500) | |
MSR asset, net | $ | 12,211 | | | $ | 12,580 | |
Fair value of MSR asset at end of period | $ | 16,200 | | | $ | 17,215 | |
Residential mortgage loans serviced for others | $ | 1,615,985 | | | $ | 1,637,109 | |
Net book value of MSR asset to loans serviced for others | 0.76 | % | | 0.77 | % |
Loan servicing rights (“LSR”): The Company acquired an LSR asset in connection with its acquisition of County on December 3, 2021 (see Note 2 for additional information on the County acquisition). The LSR asset was $13 million at September 30, 2022, and related to approximately $553 million of unpaid principal balances of loans serviced for others. The LSR assetwhich will
be amortized on an accelerated basis over the estimated remaining loan service period as theperiod. The Company does not expect to add new loans to this servicing portfolio. See Note 9 for additional information on the fair valueA summary of the changes in the LSR asset.asset were as follows.
| | | | | | | | | | | |
| Six Months Ended | | Year Ended |
(in thousands) | June 30, 2023 | | December 31, 2022 |
Loan servicing rights asset: | | | |
LSR asset at beginning of year | $ | 11,039 | | | $ | 20,055 | |
Amortization during the period | (1,104) | | | (9,016) | |
LSR asset at end of period | $ | 9,935 | | | $ | 11,039 | |
Agricultural loans serviced for others | $ | 512,766 | | | $ | 538,392 | |
The following table shows the estimated future amortization expense for amortizing intangible assets and the servicing assets. The projections are based on existing asset balances, the current interest rate environment and estimated prepayment speeds as of SeptemberJune 30, 2022.2023. The actual amortization expense the Company recognizes in any given period may be significantly different depending upon acquisition or sale activities, changes in interest rates, prepayment speeds, market conditions, regulatory requirements and events or circumstances that indicate the carrying amount of an asset may not be recoverable.
| (in thousands) | (in thousands) | Core deposit intangibles | | Customer list intangibles | | MSR asset | | LSR asset | (in thousands) | Core deposit intangibles | | Customer list intangibles | | MSR asset | | LSR asset |
Year ending December 31, | Year ending December 31, | | | | | | | | Year ending December 31, | | | | | | | |
2022 (remaining three months) | $ | 2,091 | | | $ | 126 | | | $ | 386 | | | $ | 2,004 | | |
2023 | 7,589 | | | 483 | | | 2,735 | | | 6,345 | | |
2023 (remaining six months) | | 2023 (remaining six months) | $ | 3,598 | | | $ | 230 | | | $ | 945 | | | $ | 1,104 | |
2024 | 2024 | 6,298 | | | 449 | | | 2,635 | | | 3,673 | | 2024 | 6,298 | | | 449 | | | 2,725 | | | 1,962 | |
2025 | 2025 | 5,161 | | | 449 | | | 1,884 | | | 1,020 | | 2025 | 5,161 | | | 449 | | | 1,998 | | | 1,717 | |
2026 | 2026 | 3,983 | | | 249 | | | 1,394 | | | — | | 2026 | 3,983 | | | 249 | | | 1,474 | | | 1,472 | |
2027 | 2027 | 3,218 | | | 166 | | | 1,394 | | | — | | 2027 | 3,218 | | | 166 | | | 1,473 | | | 1,227 | |
2028 | | 2028 | 2,622 | | | 166 | | | 1,472 | | | 981 | |
Thereafter | Thereafter | 6,451 | | | 555 | | | 3,190 | | | — | | Thereafter | 3,830 | | | 388 | | | 2,124 | | | 1,472 | |
Total | Total | $ | 34,791 | | | $ | 2,477 | | | $ | 13,618 | | | $ | 13,042 | | Total | $ | 28,710 | | | $ | 2,097 | | | $ | 12,211 | | | $ | 9,935 | |
Note 8 – Short and Long-Term Borrowings
Short-Term Borrowings:
Short-term borrowings include any borrowing with an original maturity of one year or less. At June 30, 2023, short-term borrowings included $50 million of short-term FHLB advances due in September 30,2023 with a weighted average rate of 4.26%. At December 31, 2022, short-term borrowings included $280$317 million of short-term FHLB advances, comprised of $80$117 million due in October 2022January 2023 at a weighted average rate of 2.70%4.29% and $200 million due in September 2023 at a weighted average rate of 4.30%. The Company did not have any outstanding short-term borrowings at December 31, 2021.
Long-Term Borrowings:
Long-term borrowings include any borrowing with an original maturity greater than one year. The components of long-term borrowings were as follows.
| (in thousands) | (in thousands) | September 30, 2022 | | December 31, 2021 | (in thousands) | June 30, 2023 | | December 31, 2022 |
FHLB advances | FHLB advances | $ | 33,000 | | | $ | 25,000 | | FHLB advances | $ | 5,000 | | | $ | 33,000 | |
Junior subordinated debentures | Junior subordinated debentures | 39,512 | | | 38,885 | | Junior subordinated debentures | 40,136 | | | 39,720 | |
Subordinated notes | Subordinated notes | 152,724 | | | 153,030 | | Subordinated notes | 152,441 | | | 152,622 | |
Total long-term borrowings | Total long-term borrowings | $ | 225,236 | | | $ | 216,915 | | Total long-term borrowings | $ | 197,577 | | | $ | 225,342 | |
FHLB Advances: The Federal Home Loan Bank (“FHLB”) advances bear fixed rates, require interest-only monthly payments, and have maturity dates through February 2030.March 2025. The weighted average rate of the FHLB advances was 1.09%1.55% at SeptemberJune 30, 20222023 and 0.59%1.09% at December 31, 2021.2022.
Junior Subordinated Debentures: Each of the junior subordinated debentures was issued to an underlying statutory trust (the “statutory trusts”), which issued trust preferred securities and common securities and used the proceeds from the issuance of the common and the trust preferred securities to purchase the junior subordinated debentures of the Company. The debentures represent the sole asset of the statutory trusts. All of the common securities of the statutory trusts are owned by the Company. The statutory trusts are not included in the consolidated financial statements. The net effect of all the documents entered into with respect to the trust preferred securities is that the Company, through payments on its debentures, is liable for the distributions and other payments required on the trust preferred securities. Interest on all debentures is current. Any applicable discounts (initially recorded to carry an acquired debenture at its then estimated fair value) are being accreted to interest expense over the remaining life of the debenture. All the junior subordinated debentures are currently callable and may be redeemed in part or in full, at par, plus any accrued but unpaid interest. At Septemberboth June 30, 20222023 and December 31, 2021,2022, approximately $38 million and $37 million, respectively, of trust preferred securities qualify as Tier 1 capital.
Subordinated Notes (the “Notes”): In July 2021, the Company completed the private placement of $100 million in fixed-to-floating rate subordinated notes due in 2031, with a fixed annual rate of 3.125% for the first five years, and will reset quarterly thereafter to the then current three-month Secured Overnight Financing Rate (“SOFR”) plus 237.5 basis points. The Notes due in 2031 are redeemable beginning July 15, 2026 and quarterly thereafter on any interest payment date.
In December 2021, Nicolet assumed two subordinated note issuances at a premium as the result of the Countyan acquisition. One issuance was $30 million in fixed-to-floating rate subordinated notes due in 2028, with a fixed annual interest rate of 5.875% for the first five years, and will reset quarterly thereafter to the then current three-month LIBOR plus 2.88% The second issuance was $22 million in fixed-to-floating rate subordinated notes due in 2030, with a fixed annual interest rate of 7.00% for the first five years, and will reset quarterly thereafter to the then current SOFR plus 687.5 basis points. The Notes due in 2028 are redeemable beginning June 1, 2023, and quarterly thereafter on any interest payment date, while the Notes due in 2030 are redeemable beginning June 30, 2025, and quarterly thereafter on any interest payment date. All Notes qualify as Tier 2 capital for regulatory purposes.purposes, and are discounted in accordance with regulations when the debt has five years or less remaining to maturity.
The following table shows the breakdown of junior subordinated debentures and subordinated notes.
| | | As of September 30, 2022 | | As of December 31, 2021 | | As of June 30, 2023 | | As of December 31, 2022 |
(in thousands) | (in thousands) | Maturity Date | Interest Rate | Par | Unamortized Premium /(Discount) / Debt Issue Costs (1) | Carrying Value | | Interest Rate | Carrying Value | (in thousands) | Maturity Date | Interest Rate | Par | Unamortized Premium /(Discount) / Debt Issue Costs (1) | Carrying Value | | Interest Rate | Carrying Value |
Junior Subordinated Debentures: | Junior Subordinated Debentures: | | | | Junior Subordinated Debentures: | | | |
Mid-Wisconsin Statutory Trust I (2) | Mid-Wisconsin Statutory Trust I (2) | 12/15/2035 | 4.72 | % | $ | 10,310 | | $ | (2,625) | | $ | 7,685 | | | 1.63 | % | $ | 7,537 | | Mid-Wisconsin Statutory Trust I (2) | 12/15/2035 | 6.98 | % | $ | 10,310 | | $ | (2,478) | | $ | 7,832 | | | 6.20 | % | $ | 7,734 | |
Baylake Capital Trust II (3) | Baylake Capital Trust II (3) | 9/30/2036 | 5.02 | % | 16,598 | | (3,233) | | 13,365 | | | 1.57 | % | 13,187 | | Baylake Capital Trust II (3) | 9/30/2036 | 6.89 | % | 16,598 | | (3,056) | | 13,542 | | | 6.08 | % | 13,424 | |
First Menasha Statutory Trust (4) | First Menasha Statutory Trust (4) | 3/17/2034 | 6.32 | % | 5,155 | | (498) | | 4,657 | | | 3.01 | % | 4,624 | | First Menasha Statutory Trust (4) | 3/17/2034 | 8.30 | % | 5,155 | | (465) | | 4,690 | | | 7.53 | % | 4,668 | |
County Bancorp Statutory Trust II (5) | County Bancorp Statutory Trust II (5) | 9/15/2035 | 4.82 | % | 6,186 | | (948) | | 5,238 | | | 1.73 | % | 5,061 | | County Bancorp Statutory Trust II (5) | 9/15/2035 | 7.08 | % | 6,186 | | (831) | | 5,355 | | | 6.30 | % | 5,277 | |
County Bancorp Statutory Trust III (6) | County Bancorp Statutory Trust III (6) | 6/15/2036 | 4.98 | % | 6,186 | | (1,006) | | 5,180 | | | 1.89 | % | 5,121 | | County Bancorp Statutory Trust III (6) | 6/15/2036 | 7.24 | % | 6,186 | | (889) | | 5,297 | | | 6.46 | % | 5,219 | |
Fox River Valley Capital Trust (7) | Fox River Valley Capital Trust (7) | 5/30/2033 | 6.40 | % | 3,610 | | (223) | | 3,387 | | | 6.40 | % | 3,355 | | Fox River Valley Capital Trust (7) | 5/30/2033 | 6.40 | % | 3,610 | | (190) | | 3,420 | | | 6.40 | % | 3,398 | |
Total | Total | | $ | 48,045 | | $ | (8,533) | | $ | 39,512 | | | $ | 38,885 | | Total | | $ | 48,045 | | $ | (7,909) | | $ | 40,136 | | | $ | 39,720 | |
Subordinated Notes: | Subordinated Notes: | | | | | Subordinated Notes: | | | | |
Subordinated Notes due 2031 | Subordinated Notes due 2031 | 7/15/2031 | 3.13 | % | $ | 100,000 | | $ | (785) | | $ | 99,215 | | | 3.13 | % | $ | 99,057 | | Subordinated Notes due 2031 | 7/15/2031 | 3.13 | % | $ | 100,000 | | $ | (628) | | $ | 99,372 | | | 3.13 | % | $ | 99,267 | |
County Subordinated Notes due 2028 | County Subordinated Notes due 2028 | 6/1/2028 | 5.88 | % | 30,000 | | 189 | | 30,189 | | | 5.88 | % | 30,402 | | County Subordinated Notes due 2028 | 6/1/2028 | 8.38 | % | 30,000 | | — | | 30,000 | | | 5.88 | % | 30,119 | |
County Subordinated Notes due 2030 | County Subordinated Notes due 2030 | 6/30/2030 | 7.00 | % | 22,400 | | 920 | | 23,320 | | | 7.00 | % | 23,571 | | County Subordinated Notes due 2030 | 6/30/2030 | 7.00 | % | 22,400 | | 669 | | 23,069 | | | 7.00 | % | 23,236 | |
Total | Total | | $ | 152,400 | | $ | 324 | | $ | 152,724 | | | $ | 153,030 | | Total | | $ | 152,400 | | $ | 41 | | $ | 152,441 | | | $ | 152,622 | |
(1) Represents the remaining unamortized premium or discount on debt issuances assumed in acquisitions, and represents the unamortized debt issue costs for the debt issued directly by Nicolet.
(2) The debentures, assumed in April 2013 as the result of an acquisition, have a floating rate of three-month LIBOR plus 1.43%, adjusted quarterly.
(3) The debentures, assumed in April 2016 as a result of an acquisition, have a floating rate of three-month LIBOR plus 1.35%, adjusted quarterly.
(4) The debentures, assumed in April 2017 as the result of an acquisition, have a floating rate of three-month LIBOR plus 2.79%, adjusted quarterly.
(5) The debentures, assumed in December 2021 as the result of an acquisition, have a floating rate of three-month LIBOR plus 1.53%, adjusted quarterly.
(6) The debentures, assumed in December 2021 as the result of an acquisition, have a floating rate of three-month LIBOR plus 1.69%, adjusted quarterly.
(7) The debentures, assumed in December 2021 as the result of an acquisition, have a floating rate of 5-year LIBORswap rate plus 3.40%, which resets every five years.
Note 9 – Commitments and Contingencies
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, financial guarantees, and standby letters of credit. Such commitments may involve, to varying degrees, elements of credit risk in excess of amounts recognized on the consolidated balance sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and issuing letters of credit as they do for on-balance sheet financial instruments. See Note 6 for information on the allowance for credit losses-unfunded commitments.
A summary of the contract or notional amount of the Company’s exposure to off-balance sheet risk was as follows.
| | | | | | | | | | | |
(in thousands) | June 30, 2023 | | December 31, 2022 |
Commitments to extend credit | $ | 1,826,995 | | | $ | 1,850,601 | |
Financial standby letters of credit | 22,777 | | | 26,530 | |
Performance standby letters of credit | 12,824 | | | 9,375 | |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract, and predominantly included commercial lines of credit with a term of one year or less. The commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Financial and performance standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Financial standby letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party, while performance standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party. Both of these guarantees are primarily issued to support public and private
borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds collateral, which may include accounts receivable, inventory, property, equipment, and income-producing properties, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third-party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount. If the commitment is funded, the Company would be entitled to seek recovery from the customer.
Interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans held for sale are considered derivative instruments (“mortgage derivatives”) and the contractual amounts were $24 million and $18 million, respectively, at June 30, 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 totaled $9 million and $9 million, respectively, at December 31, 2022. The net fair value of these mortgage derivatives combined was a net gain of $0.2 million and $0.1 million at June 30, 2023 and December 31, 2022, respectively.
Nicolet is party to various pending and threatened claims and legal proceedings arising in the normal course of business activities, some of which may involve claims for substantial amounts. Although Nicolet has developed policies and procedures to minimize legal noncompliance and the impact of claims and other proceedings and endeavored to procure reasonable amounts of insurance coverage, litigation and regulatory actions present an ongoing risk. With respect to all such claims, Nicolet continuously assesses its potential liability based on the allegations and evidence available. If the facts indicate that it is probable that Nicolet will incur a loss and the amount of such loss can be reasonably estimated, Nicolet will establish an accrual for the probable loss. For matters where a loss is not probable, or the amount of the loss cannot be reasonably estimated, Nicolet does not establish an accrual.
Future developments could result in an unfavorable outcome for or resolution of any one or more of the legal proceedings in which Nicolet is a defendant, which may be material to Nicolet’s business or consolidated results of operations or financial condition for a particular fiscal period or periods. Although it is not possible to predict the outcome of any of these legal proceedings or the range of possible loss, if any, based on the most recent information available, advice of counsel and available insurance coverage, if applicable, management believes that any liability resulting from such proceedings would not have a material adverse effect on our financial position or results of operations.
Note 910 – Fair Value Measurements
Fair value represents the estimated price at which an orderly transaction to sell an asset or transfer a liability would take place between market participants at the measurement date under current market conditions (i.e., an exit price concept), and is a market-based measurement versus an entity-specific measurement. The Company records and/or discloses certain financial instruments on a fair value basis. These financial assets and financial liabilities are measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the assumptions used to determine fair value. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect assumptions of the reporting entity about how market participants would price the asset or liability based on the best information available under the circumstances. The three fair value levels are:
•Level 1 – quoted market prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date
•Level 2 – inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly
•Level 3 – significant unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity
In instances where the fair value measurement is based on inputs from different levels, the level within which the entire fair value measurement will be categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. This assessment of the significance of an input requires management judgment.
Recurring basis fair value measurements:
The following table presents the balances of assets and liabilities measured at fair value on a recurring basis for the periods presented.
| (in thousands) | (in thousands) | | Fair Value Measurements Using | (in thousands) | | Fair Value Measurements Using |
Measured at Fair Value on a Recurring Basis: | Measured at Fair Value on a Recurring Basis: | | Total | | Level 1 | | Level 2 | | Level 3 | Measured at Fair Value on a Recurring Basis: | | Total | | Level 1 | | Level 2 | | Level 3 |
September 30, 2022 | | | | | | | | | |
June 30, 2023 | | June 30, 2023 | | | | | | | | |
U.S. Treasury securities | | U.S. Treasury securities | | $ | 137,198 | | | $ | — | | | $ | 137,198 | | | $ | — | |
U.S. government agency securities | U.S. government agency securities | | $ | 184,763 | | | $ | — | | | $ | 184,763 | | | $ | — | | U.S. government agency securities | | 8,792 | | | — | | | 8,792 | | | — | |
State, county and municipals | State, county and municipals | | 411,864 | | | — | | | 410,021 | | | 1,843 | | State, county and municipals | | 368,838 | | | — | | | 367,417 | | | 1,421 | |
Mortgage-backed securities | Mortgage-backed securities | | 213,435 | | | — | | | 212,453 | | | 982 | | Mortgage-backed securities | | 301,784 | | | — | | | 300,805 | | | 979 | |
Corporate debt securities | Corporate debt securities | | 139,535 | | | — | | | 134,214 | | | 5,321 | | Corporate debt securities | | 104,496 | | | — | | | 99,241 | | | 5,255 | |
Securities AFS | Securities AFS | | $ | 949,597 | | | $ | — | | | $ | 941,451 | | | $ | 8,146 | | Securities AFS | | $ | 921,108 | | | $ | — | | | $ | 913,453 | | | $ | 7,655 | |
Other investments (equity securities) | Other investments (equity securities) | | $ | 4,482 | | | $ | 4,482 | | | $ | — | | | $ | — | | Other investments (equity securities) | | $ | 3,748 | | | $ | 3,748 | | | $ | — | | | $ | — | |
Derivative assets | | — | | | — | | | — | | | — | | |
Derivative liabilities | | — | | | — | | | — | | | — | | |
December 31, 2021 | | |
| December 31, 2022 | | December 31, 2022 | |
U.S. Treasury securities | | U.S. Treasury securities | | $ | 183,830 | | | $ | — | | | $ | 183,830 | | | $ | — | |
U.S. government agency securities | U.S. government agency securities | | $ | 191,277 | | | $ | — | | | $ | 191,277 | | | $ | — | | U.S. government agency securities | | 2,100 | | | — | | | 2,100 | | | — | |
State, county and municipals | State, county and municipals | | 312,737 | | | — | | | 310,316 | | | 2,421 | | State, county and municipals | | 398,188 | | | — | | | 396,315 | | | 1,873 | |
Mortgage-backed securities | Mortgage-backed securities | | 271,262 | | | — | | | 270,260 | | | 1,002 | | Mortgage-backed securities | | 200,932 | | | — | | | 199,951 | | | 981 | |
Corporate debt securities | Corporate debt securities | | 146,385 | | | — | | | 141,743 | | | 4,642 | | Corporate debt securities | | 132,568 | | | — | | | 127,269 | | | 5,299 | |
Securities AFS | Securities AFS | | $ | 921,661 | | | $ | — | | | $ | 913,596 | | | $ | 8,065 | | Securities AFS | | $ | 917,618 | | | $ | — | | | $ | 909,465 | | | $ | 8,153 | |
Other investments (equity securities) | Other investments (equity securities) | | $ | 5,660 | | | $ | 5,660 | | | $ | — | | | $ | — | | Other investments (equity securities) | | $ | 4,376 | | | $ | 4,376 | | | $ | — | | | $ | — | |
Derivative assets | | 1,064 | | | — | | | 1,064 | | | — | | |
Derivative liabilities | | 1,064 | | | — | | | 1,064 | | | — | | |
|
The following is a description of the valuation methodologies used by the Company for the assets and liabilities measured at fair value on a recurring basis, noted in the tables above. Where quoted market prices on securities exchanges are available, the investments are classified as Level 1. Level 1 investments primarily include exchange-traded equity securities. If quoted market prices are not available, fair value is generally determined using prices obtained from independent pricing vendors who use pricing models (with typical inputs including benchmark yields, reported trades for similar securities, issuer spreads or relationship to other benchmark quoted securities), or discounted cash flows, and are classified as Level 2. Examples of these investments include U.S. Treasury securities, U.S. government agency securities, mortgage-backed securities, obligations of state, county and municipals, and certain corporate debt securities. Finally, in certain cases where there is limited activity or less transparency around inputs to the estimated fair value, investments are classified within Level 3 of the hierarchy. Examples of these include private corporate debt securities, which are primarily trust preferred security investments, as well as certain municipal bonds and mortgage-backed securities. At SeptemberJune 30, 20222023 and December 31, 2021,2022, it was determined that carrying value was the best approximation of fair value for these Level 3 securities, based primarily on the internal analysis on these securities. The fair value of the derivative assets and liabilities is determined using a discounted cash flow analysis of the expected cash flows of each derivative, which considers the contractual terms of the underlying derivative financial instrument and observable market-based inputs, such as interest rate curves.
The following table presents the changes in Level 3 securities AFS measured at fair value on a recurring basis.
| | Nine Months Ended | | Year Ended | |
(in thousands) | | (in thousands) | | Six Months Ended | | Year Ended |
Level 3 Fair Value Measurements: | Level 3 Fair Value Measurements: | | September 30, 2022 | | December 31, 2021 | Level 3 Fair Value Measurements: | | June 30, 2023 | | December 31, 2022 |
Balance at beginning of year | Balance at beginning of year | | $ | 8,065 | | | $ | 3,130 | | Balance at beginning of year | | $ | 8,153 | | | $ | 8,065 | |
Acquired balance | Acquired balance | | 750 | | | 4,935 | | Acquired balance | | — | | | 750 | |
Maturities / Paydowns | Maturities / Paydowns | | (442) | | | — | | Maturities / Paydowns | | (451) | | | (451) | |
Unrealized gain / (loss) | Unrealized gain / (loss) | | (227) | | | — | | Unrealized gain / (loss) | | (47) | | | (211) | |
Balance at end of period | Balance at end of period | | $ | 8,146 | | | $ | 8,065 | | Balance at end of period | | $ | 7,655 | | | $ | 8,153 | |
Nonrecurring basis fair value measurements:
The following table presents the Company’s assets measured at fair value on a nonrecurring basis, aggregated by level in the fair value hierarchy within which those measurements fall.
| (in thousands) | (in thousands) | | Fair Value Measurements Using | (in thousands) | | Fair Value Measurements Using |
Measured at Fair Value on a Nonrecurring Basis: | Measured at Fair Value on a Nonrecurring Basis: | | Total | | Level 1 | | Level 2 | | Level 3 | Measured at Fair Value on a Nonrecurring Basis: | | Total | | Level 1 | | Level 2 | | Level 3 |
September 30, 2022 | | | | | | | | | |
June 30, 2023 | | June 30, 2023 | | | | | | | | |
Collateral dependent loans | Collateral dependent loans | | $ | 30,217 | | | $ | — | | | $ | — | | | $ | 30,217 | | Collateral dependent loans | | $ | 18,667 | | | $ | — | | | $ | — | | | $ | 18,667 | |
Other real estate owned (“OREO”) | Other real estate owned (“OREO”) | | 2,134 | | | — | | | — | | | 2,134 | | Other real estate owned (“OREO”) | | 1,478 | | | — | | | — | | | 1,478 | |
MSR asset | MSR asset | | 13,118 | | | — | | | — | | | 13,118 | | MSR asset | | 12,211 | | | — | | | — | | | 12,211 | |
LSR asset | | 13,042 | | | — | | | — | | | 13,042 | | |
December 31, 2021 | | |
December 31, 2022 | | December 31, 2022 | |
Collateral dependent loans | Collateral dependent loans | | $ | 36,230 | | | $ | — | | | $ | — | | | $ | 36,230 | | Collateral dependent loans | | $ | 30,951 | | | $ | — | | | $ | — | | | $ | 30,951 | |
OREO | OREO | | 11,955 | | | — | | | — | | | 11,955 | | OREO | | 1,975 | | | — | | | — | | | 1,975 | |
MSR asset | MSR asset | | 12,436 | | | — | | | — | | | 12,436 | | MSR asset | | 12,580 | | | — | | | — | | | 12,580 | |
LSR asset | | 20,055 | | | — | | | — | | | 20,055 | | |
The following is a description of the valuation methodologies used by the Company for the items noted in the table above. For collateral dependent loans, the estimated fair value is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, the estimated fair value of the underlying collateral with consideration for estimated selling costs if satisfaction of the loan depends on the sale of the collateral, or the estimated liquidity of the note. For OREO, the fair value is based upon the estimated fair value of the underlying collateral adjusted for the expected costs to sell. To estimate the fair value of the MSR asset, the underlying serviced loan pools are stratified by interest rate tranche and term of the loan, and a valuation model is used to calculate the present value of the expected future cash flows for each stratum. The servicing valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as costs to service, a discount rate, ancillary income, default rates and losses, and prepayment speeds. Although some of these assumptions are based on observable market data, other assumptions are based on unobservable estimates of what market participants would use to measure fair value.
Financial instruments:
The carrying amounts and estimated fair values of the Company’s financial instruments are shown below.
| September 30, 2022 | |
June 30, 2023 | | June 30, 2023 |
(in thousands) | (in thousands) | | Carrying Amount | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 | (in thousands) | | Carrying Amount | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 |
Financial assets: | Financial assets: | | | | | | | | | | | Financial assets: | | | | | | | | | | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 438,282 | | | $ | 438,282 | | | $ | 438,282 | | | $ | — | | | $ | — | | Cash and cash equivalents | | $ | 505,206 | | | $ | 505,206 | | | $ | 505,206 | | | $ | — | | | $ | — | |
Certificates of deposit in other banks | Certificates of deposit in other banks | | 13,510 | | | 13,409 | | | — | | | 13,409 | | | — | | Certificates of deposit in other banks | | 9,808 | | | 9,710 | | | — | | | 9,710 | | | — | |
Securities AFS | Securities AFS | | 949,597 | | | 949,597 | | | — | | | 941,451 | | | 8,146 | | Securities AFS | | 921,108 | | | 921,108 | | | — | | | 913,453 | | | 7,655 | |
Securities HTM | | 686,424 | | | 627,639 | | | — | | | 627,639 | | | — | | |
| Other investments, including equity securities | Other investments, including equity securities | | 79,279 | | | 79,279 | | | 4,482 | | | 58,910 | | | 15,887 | | Other investments, including equity securities | | 57,578 | | | 57,578 | | | 3,748 | | | 43,334 | | | 10,496 | |
Loans held for sale | Loans held for sale | | 3,709 | | | 3,770 | | | — | | | 3,770 | | | — | | Loans held for sale | | 3,849 | | | 3,944 | | | — | | | 3,944 | | | — | |
Loans, net | Loans, net | | 5,924,089 | | | 5,638,877 | | | — | | | — | | | 5,638,877 | | Loans, net | | 6,159,965 | | | 5,854,647 | | | — | | | — | | | 5,854,647 | |
MSR asset | MSR asset | | 13,118 | | | 16,740 | | | — | | | — | | | 16,740 | | MSR asset | | 12,211 | | | 16,200 | | | — | | | — | | | 16,200 | |
LSR asset | | 13,042 | | | 13,042 | | | — | | | — | | | 13,042 | | |
Accrued interest receivable | Accrued interest receivable | | 21,542 | | | 21,542 | | | 21,542 | | | — | | | — | | Accrued interest receivable | | 21,511 | | | 21,511 | | | 21,511 | | | — | | | — | |
Financial liabilities: | Financial liabilities: | | Financial liabilities: | |
Deposits | Deposits | | $ | 7,395,902 | | | $ | 7,390,443 | | | $ | — | | | $ | — | | | $ | 7,390,443 | | Deposits | | $ | 7,198,604 | | | $ | 7,167,820 | | | $ | — | | | $ | — | | | $ | 7,167,820 | |
Short-term borrowings | Short-term borrowings | | 280,000 | | | 280,000 | | | — | | | 280,000 | | | — | | Short-term borrowings | | 50,000 | | | 50,000 | | | — | | | 50,000 | | | — | |
Long-term borrowings | Long-term borrowings | | 225,236 | | | 220,616 | | | — | | | 33,104 | | | 187,512 | | Long-term borrowings | | 197,577 | | | 188,603 | | | — | | | 4,701 | | | 183,902 | |
Accrued interest payable | Accrued interest payable | | 3,533 | | | 3,533 | | | 3,533 | | | — | | | — | | Accrued interest payable | | 6,335 | | | 6,335 | | | 6,335 | | | — | | | — | |
| December 31, 2021 | |
December 31, 2022 | | December 31, 2022 |
(in thousands) | (in thousands) | | Carrying Amount | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 | (in thousands) | | Carrying Amount | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 |
Financial assets: | Financial assets: | | | | | | | | | | | Financial assets: | | | | | | | | | | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 595,292 | | | $ | 595,292 | | | $ | 595,292 | | | $ | — | | | $ | — | | Cash and cash equivalents | | $ | 154,723 | | | $ | 154,723 | | | $ | 154,723 | | | $ | — | | | $ | — | |
Certificates of deposit in other banks | Certificates of deposit in other banks | | 21,920 | | | 22,236 | | | — | | | 22,236 | | | — | | Certificates of deposit in other banks | | 12,518 | | | 12,407 | | | — | | | 12,407 | | | — | |
Securities AFS | Securities AFS | | 921,661 | | | 921,661 | | | — | | | 913,596 | | | 8,065 | | Securities AFS | | 917,618 | | | 917,618 | | | — | | | 909,465 | | | 8,153 | |
Securities HTM | Securities HTM | | 651,803 | | | 648,394 | | | — | | | 648,394 | | | — | | Securities HTM | | 679,128 | | | 623,352 | | | — | | | 623,352 | | | — | |
Other investments, including equity securities | Other investments, including equity securities | | 44,008 | | | 44,008 | | | 5,660 | | | 32,110 | | | 6,238 | | Other investments, including equity securities | | 65,286 | | | 65,286 | | | 4,376 | | | 52,093 | | | 8,817 | |
Loans held for sale | Loans held for sale | | 6,447 | | | 6,616 | | | — | | | 6,616 | | | — | | Loans held for sale | | 1,482 | | | 1,529 | | | — | | | 1,529 | | | — | |
Loans, net | Loans, net | | 4,572,164 | | | 4,606,851 | | | — | | | — | | | 4,606,851 | | Loans, net | | 6,118,670 | | | 5,863,570 | | | — | | | — | | | 5,863,570 | |
MSR asset | MSR asset | | 12,436 | | | 15,599 | | | — | | | — | | | 15,599 | | MSR asset | | 12,580 | | | 17,215 | | | — | | | — | | | 17,215 | |
LSR asset | | 20,055 | | | 20,055 | | | — | | | — | | | 20,055 | | |
Accrued interest receivable | Accrued interest receivable | | 15,277 | | | 15,277 | | | 15,277 | | | — | | | — | | Accrued interest receivable | | 21,275 | | | 21,275 | | | 21,275 | | | — | | | — | |
Financial liabilities: | Financial liabilities: | | Financial liabilities: | |
Deposits | Deposits | | $ | 6,465,916 | | | $ | 6,463,064 | | | $ | — | | | $ | — | | | $ | 6,463,064 | | Deposits | | $ | 7,178,921 | | | $ | 7,172,779 | | | $ | — | | | $ | — | | | $ | 7,172,779 | |
| Short-term borrowings | | Short-term borrowings | | 317,000 | | | 317,000 | | | 317,000 | | | — | | | — | |
Long-term borrowings | Long-term borrowings | | 216,915 | | | 216,092 | | | — | | | 25,097 | | | 190,995 | | Long-term borrowings | | 225,342 | | | 220,513 | | | — | | | 33,001 | | | 187,512 | |
Accrued interest payable | Accrued interest payable | | 3,078 | | | 3,078 | | | 3,078 | | | — | | | — | | Accrued interest payable | | 4,265 | | | 4,265 | | | 4,265 | | | — | | | — | |
The valuation methodologies for the financial instruments disclosed in the above table are described in Note 18, Fair Value Measurements, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Note 10 – Other Assets and Other Liabilities Held for Sale
On September 7, 2021, Nicolet entered into a Purchase and Assumption Agreement (the “Birmingham Agreement”) with Bank of Ann Arbor to sell Nicolet’s Birmingham, Michigan branch, including legacy mBank’s asset-based lending team (the “Birmingham Sale”). Pursuant to the terms of the Birmingham Agreement, Bank of Ann Arbor agreed to assume certain deposit liabilities and to acquire certain loans, as well as cash, personal property and other fixed assets associated with the Birmingham branch. The combined loan and deposit balances of the Birmingham branch (excluding certain loans and deposits not subject to the Birmingham Agreement) were approximately $199 million and $51 million, respectively, as of December 31, 2021. The Birmingham Sale closed on January 21, 2022.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nicolet Bankshares, Inc. (the “Company” or “Nicolet”) is a bank holding company headquartered in Green 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”), in Wisconsin, Michigan, and Minnesota. 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 20212022 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;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 20212022 Annual Report on Form 10-K and in subsequent filings we make with the SEC; and
•risks related to our merger with Charter, including:
◦possible negative impact on our stock price and future business and financial results;
◦unexpected costs associated with the merger;
◦diversion of management’s attention from ongoing business operations and opportunities;
◦possible inability to achieve expected synergies and operating efficiencies in the merger within the expected timeframes or at all;
◦the impact of, or problems arising from the integration of the two companies;
◦the outcome of litigation or of matters before regulatory agencies, whether currently existing or commencing in the future, including litigation related to the merger;
◦potential adverse reactions or changes to business or employee relationships, including those resulting from the completion of the merger; and
◦current or future adverse legislation or regulation.
•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.
Overview
The following discussion is management’s analysis of the consolidated financial condition as of SeptemberJune 30, 20222023 and December 31, 20212022 and results of operations for the three and nine-monthsix-month periods ended SeptemberJune 30, 20222023 and 2021.2022. It should be read in conjunction with Nicolet’s audited consolidated financial statements included in Nicolet’s 20212022 Annual Report on Form 10-K.
Our financial performance and certain balance sheet line items were impacted by the timing and size of our 2021 acquisitions of Mackinac Financial Corporation (“Mackinac”) on September 3, 2021 and County Bancorp, Inc. (“County”) on December 3, 2021, as well as our 2022 acquisition of Charter Bankshares, Inc. (“Charter”) on August 26, 2022. Certain income statement results, average balances and related ratios include partial contributions from Mackinac, County, and Charter each from the respective acquisition date. Additional information on our acquisition activity is included in Note 2, “Acquisitions”“Acquisition” in the Notes to Unaudited Consolidated Financial Statements, under Part I, Item 1.
Economic Outlook and Recent Industry Developments
Growth inFor year-to-date 2023, economic activity andgrowth remains stronger than expected, driven by spending within the consumer sector. The labor market remains tighter than expected, which is fueling additional consumer spending through continued demand for goods and services, combined with labor shortages, supply chain complications and geopolitical matters, have contributedservices. Inflation has started to rising inflation.come down; however, the progress has been slower than anticipated despite the significant increase in interest rates by the Federal Reserve. In response,an effort to combat inflation, the Federal Reserve has raisedtightened monetary policy by raising interest rates from a target range of 0.00%-0.25% in early March 2022 to 3.00%-3.25%5.00%-5.25% at the end of September 2022.June 2023, followed by another 0.25% increase (to a target rate of 5.25%-5.50%) at the end of July 2023. All these factors are indicating a slowing in economic activity is the most likely scenario for the U.S. economy in late 2023.
These macroeconomic challenges are fueling additional concerns within the banking sector. 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. This banking crisis has the potential for tighter lending standards and higher capital requirements, which further complicates the current economic outlook. In addition, the Federal Reserve has signaled that it anticipates additional increases inongoing geopolitical issues also have the target range are likely to mitigate the hardships caused by the ongoing Russia-Ukraine conflict, continued supply chain disruptions, and increased inflationary pressure. The tightening of the Federal Reserve’s monetary policies, including these increases in the target range and the tapering of the Federal Reserve’s balance sheet, combined with ongoingpotential for further economic and political instability, increases the risk of an economic recession. While forecasts vary, many economists are projecting that U.S. economic growth will slow and inflation will remain elevated in the coming quarters, potentially resulting in a contraction of the U.S. gross domestic output by 2023, if not earlier. The timing and impact of inflation and rising interest rates on our business and related financial results will depend on future developments, which are highly uncertain and difficult to predict.disruptions.
| Table 1: Earnings Summary and Selected Financial Data | Table 1: Earnings Summary and Selected Financial Data | | Table 1: Earnings Summary and Selected Financial Data | |
| | At or for the Three Months Ended | | At or for the Nine Months Ended | | At or for the Three Months Ended | | At or for the Six Months Ended |
(In thousands, except per share data) | (In thousands, except per share data) | 9/30/2022 | | 6/30/2022 | | 3/31/2022 | | 12/31/2021 | | 9/30/2021 | | 9/30/2022 | | 9/30/2021 | (In thousands, except per share data) | 6/30/2023 | | 3/31/2023 | | 12/31/2022 | | 9/30/2022 | | 6/30/2022 | | 6/30/2023 | | 6/30/2022 |
Results of operations: | Results of operations: | | | | | | | | | | | | | | Results of operations: | | | | | | | | | | | | | |
Net interest income | Net interest income | $ | 62,990 | | | $ | 55,084 | | | $ | 53,795 | | | $ | 53,559 | | | $ | 35,184 | | | $ | 171,869 | | | $ | 104,396 | | Net interest income | $ | 59,039 | | | $ | 56,721 | | | $ | 68,092 | | | $ | 62,990 | | | $ | 55,084 | | | $ | 115,760 | | | $ | 108,879 | |
Provision for credit losses | Provision for credit losses | 8,600 | | | 750 | | | 300 | | | 8,400 | | | 6,000 | | | 9,650 | | | 6,500 | | Provision for credit losses | 450 | | | 3,090 | | | 1,850 | | | 8,600 | | | 750 | | | 3,540 | | | 1,050 | |
Noninterest income | Noninterest income | 13,000 | | | 14,131 | | | 15,943 | | | 16,064 | | | 13,996 | | | 43,074 | | | 51,300 | | Noninterest income | 16,841 | | | (21,844) | | | 14,846 | | | 13,000 | | | 14,131 | | | (5,003) | | | 30,074 | |
Noninterest expense | Noninterest expense | 42,567 | | | 36,538 | | | 37,550 | | | 39,408 | | | 33,061 | | | 116,655 | | | 89,889 | | Noninterest expense | 44,957 | | | 44,875 | | | 43,989 | | | 42,567 | | | 36,538 | | | 89,832 | | | 74,088 | |
Income before income tax expense | 24,823 | | | 31,927 | | | 31,888 | | | 21,815 | | | 10,119 | | | 88,638 | | | 59,307 | | |
Income tax expense | 6,313 | | | 7,942 | | | 7,724 | | | 5,510 | | | 2,295 | | | 21,979 | | | 14,960 | | |
Net income | $ | 18,510 | | | $ | 23,985 | | | $ | 24,164 | | | $ | 16,305 | | | $ | 7,824 | | | $ | 66,659 | | | $ | 44,347 | | |
Earnings per common share ("EPS"): | | | | | | | | | | | | | | |
Income (loss) before income tax expense | | Income (loss) before income tax expense | 30,473 | | | (13,088) | | | 37,099 | | | 24,823 | | | 31,927 | | | 17,385 | | | 63,815 | |
Income tax expense (benefit) | | Income tax expense (benefit) | 7,878 | | | (4,190) | | | 9,498 | | | 6,313 | | | 7,942 | | | 3,688 | | | 15,666 | |
Net income (loss) | | Net income (loss) | $ | 22,595 | | | $ | (8,898) | | | $ | 27,601 | | | $ | 18,510 | | | $ | 23,985 | | | $ | 13,697 | | | $ | 48,149 | |
Earnings (loss) per common share ("EPS"): | | Earnings (loss) per common share ("EPS"): | | | | | | | | | | | | |
Basic | Basic | $ | 1.33 | | | $ | 1.79 | | | $ | 1.77 | | | $ | 1.29 | | | $ | 0.75 | | | $ | 4.88 | | | $ | 4.39 | | Basic | $ | 1.54 | | | $ | (0.61) | | | $ | 1.88 | | | $ | 1.33 | | | $ | 1.79 | | | $ | 0.93 | | | $ | 3.56 | |
Diluted | Diluted | $ | 1.29 | | | $ | 1.73 | | | $ | 1.70 | | | $ | 1.25 | | | $ | 0.73 | | | $ | 4.72 | | | $ | 4.22 | | Diluted | $ | 1.51 | | | $ | (0.61) | | | $ | 1.83 | | | $ | 1.29 | | | $ | 1.73 | | | $ | 0.91 | | | $ | 3.43 | |
Common Shares: | Common Shares: | | | | | | | | | | | | | | Common Shares: | |
Basic weighted average | Basic weighted average | 13,890 | | | 13,402 | | | 13,649 | | | 12,626 | | | 10,392 | | | 13,648 | | | 10,098 | | Basic weighted average | 14,711 | | | 14,694 | | | 14,685 | | | 13,890 | | | 13,402 | | | 14,703 | | | 13,525 | |
Diluted weighted average | Diluted weighted average | 14,310 | | | 13,852 | | | 14,215 | | | 13,049 | | | 10,776 | | | 14,127 | | | 10,503 | | Diluted weighted average | 14,960 | | | 14,694 | | | 15,110 | | | 14,310 | | | 13,852 | | | 15,011 | | | 14,035 | |
Outstanding (period end) | Outstanding (period end) | 14,673 | | | 13,407 | | | 13,457 | | | 13,994 | | | 11,952 | | | 14,673 | | | 11,952 | | Outstanding (period end) | 14,718 | | | 14,698 | | | 14,691 | | | 14,673 | | | 13,407 | | | 14,718 | | | 13,407 | |
Period-End Balances: | Period-End Balances: | | | | | | | | | | | | | | Period-End Balances: | | | | | | | | | | | | | |
Loans | Loans | $ | 5,984,437 | | | $ | 4,978,654 | | | $ | 4,683,315 | | | $ | 4,621,836 | | | $ | 3,533,198 | | | $ | 5,984,437 | | | $ | 3,533,198 | | Loans | $ | 6,222,776 | | | $ | 6,223,732 | | | $ | 6,180,499 | | | $ | 5,984,437 | | | $ | 4,978,654 | | | $ | 6,222,776 | | | $ | 4,978,654 | |
Allowance for credit losses - loans | Allowance for credit losses - loans | 60,348 | | | 50,655 | | | 49,906 | | | 49,672 | | | 38,399 | | | 60,348 | | | 38,399 | | Allowance for credit losses - loans | 62,811 | | | 62,412 | | | 61,829 | | | 60,348 | | | 50,655 | | | 62,811 | | | 50,655 | |
Total assets | Total assets | 8,895,916 | | | 7,370,252 | | | 7,320,212 | | | 7,695,037 | | | 6,407,820 | | | 8,895,916 | | | 6,407,820 | | Total assets | 8,482,628 | | | 8,192,354 | | | 8,763,969 | | | 8,895,916 | | | 7,370,252 | | | 8,482,628 | | | 7,370,252 | |
Deposits | Deposits | 7,395,902 | | | 6,286,266 | | | 6,231,120 | | | 6,465,916 | | | 5,428,774 | | | 7,395,902 | | | 5,428,774 | | Deposits | 7,198,604 | | | 6,928,579 | | | 7,178,921 | | | 7,395,902 | | | 6,286,266 | | | 7,198,604 | | | 6,286,266 | |
Stockholders’ equity (common) | Stockholders’ equity (common) | 938,463 | | | 839,387 | | | 836,310 | | | 891,891 | | | 729,278 | | | 938,463 | | | 729,278 | | Stockholders’ equity (common) | 977,638 | | | 961,792 | | | 972,529 | | | 938,463 | | | 839,387 | | | 977,638 | | | 839,387 | |
Book value per common share | Book value per common share | 63.96 | | | 62.61 | | | 62.15 | | | 63.73 | | | 61.01 | | | 63.96 | | | 61.01 | | Book value per common share | 66.42 | | | 65.44 | | | 66.20 | | | 63.96 | | | 62.61 | | | 66.42 | | | 62.61 | |
Tangible book value per common share (2) | Tangible book value per common share (2) | 36.21 | | | 37.49 | | | 37.03 | | | 39.47 | | | 38.43 | | | 36.21 | | | 38.43 | | Tangible book value per common share (2) | 39.37 | | | 38.20 | | | 38.81 | | | 36.21 | | | 37.49 | | | 39.37 | | | 37.49 | |
Financial Ratios: (1) | Financial Ratios: (1) | | | | | | | | | | | | | | Financial Ratios: (1) | | | | | | | | | | | | | |
Return on average assets | Return on average assets | 0.93 | % | | 1.32 | % | | 1.30 | % | | 0.96 | % | | 0.59 | % | | 1.18 | % | | 1.24 | % | Return on average assets | 1.10 | % | | (0.42) | % | | 1.26 | % | | 0.93 | % | | 1.32 | % | | 0.33 | % | | 1.31 | % |
Return on average common equity | Return on average common equity | 8.25 | | | 11.48 | | | 11.38 | | | 8.24 | | | 5.10 | | | 10.32 | | | 10.43 | | Return on average common equity | 9.37 | | | (3.72) | | | 11.47 | | | 8.25 | | | 11.48 | | | 2.85 | | | 11.43 | |
Return on average tangible common equity (2) | Return on average tangible common equity (2) | 13.93 | | | 19.21 | | | 18.75 | | | 13.19 | | | 7.62 | | | 17.25 | | | 15.41 | | Return on average tangible common equity (2) | 15.95 | | | (6.34) | | | 19.85 | | | 13.93 | | | 19.21 | | | 4.86 | | | 18.98 | |
Stockholders' equity to assets | Stockholders' equity to assets | 10.55 | | | 11.39 | | | 11.42 | | | 11.59 | | | 11.38 | | | 10.55 | | | 11.38 | | Stockholders' equity to assets | 11.53 | | | 11.74 | | | 11.10 | | | 10.55 | | | 11.39 | | | 11.53 | | | 11.39 | |
Tangible common equity to tangible assets (2) | Tangible common equity to tangible assets (2) | 6.26 | | | 7.15 | | | 7.14 | | | 7.51 | | | 7.48 | | | 6.26 | | | 7.48 | | Tangible common equity to tangible assets (2) | 7.17 | | | 7.21 | | | 6.82 | | | 6.26 | | | 7.15 | | | 7.17 | | | 7.15 | |
Reconciliation of Non-GAAP Financial Measures: | Reconciliation of Non-GAAP Financial Measures: | | Reconciliation of Non-GAAP Financial Measures: | |
Adjusted net income reconciliation (3) | | |
Net income (GAAP) | $ | 18,510 | | | $ | 23,985 | | | $ | 24,164 | | | $ | 16,305 | | | $ | 7,824 | | | $ | 66,659 | | | $ | 44,347 | | |
Adjusted net income (loss) reconciliation (3) | | Adjusted net income (loss) reconciliation (3) | |
Net income (loss) (GAAP) | | Net income (loss) (GAAP) | $ | 22,595 | | | $ | (8,898) | | | $ | 27,601 | | | $ | 18,510 | | | $ | 23,985 | | | $ | 13,697 | | | $ | 48,149 | |
Adjustments: | Adjustments: | | Adjustments: | |
Provision expense related to merger | 8,000 | | | — | | | — | | | 8,400 | | | 6,000 | | | 8,000 | | | 6,000 | | |
Provision expense (4) | | Provision expense (4) | — | | | 2,340 | | | — | | | 8,000 | | | — | | | 2,340 | | | — | |
Assets (gains) losses, net | Assets (gains) losses, net | 46 | | | (1,603) | | | (1,313) | | | (465) | | | 1,187 | | | (2,870) | | | (3,716) | | Assets (gains) losses, net | 318 | | | 38,468 | | | (260) | | | 46 | | | (1,603) | | | 38,786 | | | (2,916) | |
Merger-related expense | Merger-related expense | 519 | | | 555 | | | 98 | | | 2,202 | | | 2,793 | | | 1,172 | | | 3,449 | | Merger-related expense | 26 | | | 163 | | | 492 | | | 519 | | | 555 | | | 189 | | | 653 | |
Branch closure expense | — | | | — | | | — | | | — | | | 944 | | | — | | | 944 | | |
| Adjustments subtotal | Adjustments subtotal | 8,565 | | | (1,048) | | | (1,215) | | | 10,137 | | | 10,924 | | | 6,302 | | | 6,677 | | Adjustments subtotal | 344 | | | 40,971 | | | 232 | | | 8,565 | | | (1,048) | | | 41,315 | | | (2,263) | |
Tax on Adjustments (25% effective tax rate) | Tax on Adjustments (25% effective tax rate) | 2,141 | | | (262) | | | (304) | | | 2,534 | | | 2,731 | | | 1,576 | | | 1,669 | | Tax on Adjustments (25% effective tax rate) | 86 | | | 10,243 | | | 58 | | | 2,141 | | | (262) | | | 10,329 | | | (566) | |
Adjustments, net of tax | Adjustments, net of tax | 6,424 | | | (786) | | | (911) | | | 7,603 | | | 8,193 | | | 4,727 | | | 5,008 | | Adjustments, net of tax | 258 | | | 30,728 | | | 174 | | | 6,424 | | | (786) | | | 30,986 | | | (1,697) | |
Adjusted net income (Non-GAAP) | Adjusted net income (Non-GAAP) | $ | 24,934 | | | $ | 23,199 | | | $ | 23,253 | | | $ | 23,908 | | | $ | 16,017 | | | $ | 71,386 | | | $ | 49,355 | | Adjusted net income (Non-GAAP) | $ | 22,853 | | | $ | 21,830 | | | $ | 27,775 | | | $ | 24,934 | | | $ | 23,199 | | | $ | 44,683 | | | $ | 46,452 | |
Adjusted diluted EPS (Non-GAAP) | Adjusted diluted EPS (Non-GAAP) | $ | 1.74 | | | $ | 1.67 | | | $ | 1.64 | | | $ | 1.83 | | | $ | 1.49 | | | $ | 5.05 | | | $ | 4.70 | | Adjusted diluted EPS (Non-GAAP) | $ | 1.53 | | | $ | 1.45 | | | $ | 1.84 | | | $ | 1.74 | | | $ | 1.67 | | | $ | 2.98 | | | $ | 3.31 | |
Tangible Assets: | Tangible Assets: | | | | | | | | | | | | | | Tangible Assets: | | | | | | | | | | | | | |
Total assets | Total assets | $ | 8,895,916 | | | $ | 7,370,252 | | | $ | 7,320,212 | | | $ | 7,695,037 | | | $ | 6,407,820 | | | Total assets | $ | 8,482,628 | | | $ | 8,192,354 | | | $ | 8,763,969 | | | $ | 8,895,916 | | | $ | 7,370,252 | | |
Goodwill and other intangibles, net | Goodwill and other intangibles, net | 407,117 | | | 336,721 | | | 338,068 | | | 339,492 | | | 269,954 | | | Goodwill and other intangibles, net | 398,194 | | | 400,277 | | | 402,438 | | | 407,117 | | | 336,721 | | |
Tangible assets | Tangible assets | $ | 8,488,799 | | | $ | 7,033,531 | | | $ | 6,982,144 | | | $ | 7,355,545 | | | $ | 6,137,866 | | | Tangible assets | $ | 8,084,434 | | | $ | 7,792,077 | | | $ | 8,361,531 | | | $ | 8,488,799 | | | $ | 7,033,531 | | |
Tangible Common Equity: | Tangible Common Equity: | | | | | | | | | | | Tangible Common Equity: | | | | | | | | | | |
Stockholders’ equity (common) | Stockholders’ equity (common) | $ | 938,463 | | | $ | 839,387 | | | $ | 836,310 | | | $ | 891,891 | | | $ | 729,278 | | | Stockholders’ equity (common) | $ | 977,638 | | | $ | 961,792 | | | $ | 972,529 | | | $ | 938,463 | | | $ | 839,387 | | |
Goodwill and other intangibles, net | Goodwill and other intangibles, net | 407,117 | | | 336,721 | | | 338,068 | | | 339,492 | | | 269,954 | | | Goodwill and other intangibles, net | 398,194 | | | 400,277 | | | 402,438 | | | 407,117 | | | 336,721 | | |
Tangible common equity | Tangible common equity | $ | 531,346 | | | $ | 502,666 | | | $ | 498,242 | | | $ | 552,399 | | | $ | 459,324 | | | Tangible common equity | $ | 579,444 | | | $ | 561,515 | | | $ | 570,091 | | | $ | 531,346 | | | $ | 502,666 | | |
Average Tangible Common Equity: | Average Tangible Common Equity: | | | | | | | | | | | | | | Average Tangible Common Equity: | | | | | | | | | | | | | |
Stockholders’ equity (common) | Stockholders’ equity (common) | $ | 890,205 | | | $ | 837,975 | | | $ | 861,319 | | | $ | 784,666 | | | $ | 608,946 | | | $ | 863,272 | | | $ | 568,390 | | Stockholders’ equity (common) | $ | 967,142 | | | $ | 970,108 | | | $ | 954,970 | | | $ | 890,205 | | | $ | 837,975 | | | $ | 968,617 | | | $ | 849,582 | |
Goodwill and other intangibles, net | Goodwill and other intangibles, net | 363,211 | | | 337,289 | | | 338,694 | | | 294,051 | | | 201,748 | | | 346,488 | | | 183,632 | | Goodwill and other intangibles, net | 399,080 | | | 401,212 | | | 403,243 | | | 363,211 | | | 337,289 | | | 400,140 | | | 337,988 | |
Average tangible common equity | Average tangible common equity | $ | 526,994 | | | $ | 500,686 | | | $ | 522,625 | | | $ | 490,615 | | | $ | 407,198 | | | $ | 516,784 | | | $ | 384,758 | | Average tangible common equity | $ | 568,062 | | | $ | 568,896 | | | $ | 551,727 | | | $ | 526,994 | | | $ | 500,686 | | | $ | 568,477 | | | $ | 511,594 | |
Note: Numbers may not sum due to rounding.(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 financial condition and capital strength. See section “Non-GAAP Financial Measures” below.
(3) The adjusted net income 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.
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,” and “adjusted diluted earnings per common share” as “non-GAAP financial measures.” In accordance with the SEC’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 in the 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
Net income was $66.7$14 million for the nine months ended September 30, 2022, compared to $44.3 million for the nine months ended September 30, 2021. Earnings(or earnings per diluted common share was $4.72of $0.91) for the first ninesix months of 2022,ended June 30, 2023, compared to $4.22net income of $48 million (or earnings per diluted common share of $3.43) for the six months ended June 30, 2022, with 2023 significantly impacted by the first ninequarter balance sheet repositioning actions (detailed below).
Net income reflected non-core items and the related tax effect of each, including U.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 $2.07 for the six months ended June 30, 2023 and positively impacted earnings per diluted common share $0.12 for the six months ended June 30, 2022.
On March 7, 2023, Nicolet executed the sale of 2021.$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 Thousands | Assumptions |
Loss on sale of U.S.Treasury securities | $ | (37,723) | | Sale of $500 million U.S. Treasury securities yielding 88 bps |
| | |
Lost interest from U.S. Treasury securities | $ | (4,380) | | Assumes $500 million at 88 bps |
Lower interest expense on FHLB borrowings | 17,128 | | Assumes $377 million at 456 bps (at time of sale) |
Interest income from investable cash | 3,905 | | Assumes $83 million at 465 bps (at time of sale) |
Projected net impact from repositioning | $ | 16,653 | | |
Estimated earn back (in years) | 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 (at the time of reclassification) increased the balance of accumulated other comprehensive loss $15 million, net of the deferred tax effect, and is subject to future market changes.
•Net interest income was $171.9$116 million for the first ninesix months of 2022,2023, up $67.5$7 million (65%(6%) over the first ninesix months of 2021.2022. Interest income grew $74.2$62 million attributable to favorable volumes (mostly higher loan volumes), partly offset by net unfavorable rates (asfrom new and renewed loans reprice at varying intervals to reflect the recent Federal Reservein a rising interest rate increases)environment, as well as favorable loan volumes (partly from the Charter acquisition). Interest expense increased $6.8$55 million between the nine-monthcomparable six-month periods mostly from the largerhigher average funding base.costs. Net interest margin was 3.36%3.02% for the ninesix months ended SeptemberJune 30, 2022,2023, compared to 3.22%3.29% for the ninesix months ended SeptemberJune 30, 2021.2022. For additional information regarding net interest income, see “Income Statement Analysis — Net Interest Income.”
•Noninterest income was $43.1a negative $5 million for the first ninesix months of 2022, down $8.22023, a $35 million (16%)unfavorable change from the comparable 20212022 period, primarily due to lowerthe balance sheet repositioning (noted above). Excluding net mortgage income.asset gains (losses), noninterest income for the first six months of 2023 was $34 million, a $7 million increase over the first six months of 2022. For additional information regarding noninterest income, see “Income Statement Analysis — Noninterest Income.”
•Noninterest expense was $116.7$90 million, $26.8$16 million (30%(21%) higher than the first ninesix months of 2021.2022. Personnel costs increased $15.9$7 million, and non-personnel expenses combined increased $10.9$8 million (27%(25%) over the comparable 20212022 period. For additional information regarding noninterest expense, see “Income Statement Analysis — Noninterest Expense.”
•Nonperforming assets were $40$27 million, representing 0.45%0.32% of total assets at SeptemberJune 30, 2022,2023, compared to 0.73%$40 million or 0.46% of total assets at December 31, 2021 and 0.33% at September 30, 2021.2022. The reduction in nonperforming assets was due to the sale of select nonaccrual loans (net book value of approximately $13 million). For additional information regarding nonperforming assets, see “Balance Sheet Analysis – Nonperforming Assets.”
•At SeptemberJune 30, 2022,2023, assets were $8.9$8.5 billion, up $1.2 billion (16%down $281 million (3%) from December 31, 2021, largely2022, mostly due to the Charter acquisition, which added total assetssale of $1.1 billion at acquisition. Total assets increased $2.5 billion (39%) from September 30, 2021, mainly due to the acquisitionsinvestment securities as part of Charter and County.our balance sheet repositioning, partly offset by higher cash balances. For additional balance sheet discussion see “Balance Sheet Analysis.”
•At SeptemberJune 30, 2022,2023, loans were $6.0$6.2 billion, an increase of $1.4 billion (29%)up $42 million from December 31, 2021, including2022, with growth in residential mortgage loans partly offset by lower commercial-based loans from the Charter acquisition (which addedsale of specific nonaccrual loans (noted above) as well as the payoff of $827 million at acquisition) and solid organictwo larger loan growth. Total loans were $2.5 billion (69%) higher than September 30, 2021, largely due to the acquisitions of Charter and County.relationships. On average, loans grew $2.1$1.5 billion (70%(31%) over the first ninesix months of 2021.2022. For additional information regarding loans, see “Balance Sheet Analysis — Loans.”
•Total deposits were $7.4of $7.2 billion at SeptemberJune 30, 2022, an increase of $930 million (14%)2023, were minimally changed from December 31, 2021, including the Charter acquisition (which added2022, with growth in customer and brokered time deposits of $870 million at acquisition) and higher brokered deposits. Total deposits were $2.0 billion (36%) higher than September 30, 2021, largely due to the Charter and County
acquisitions.partly offset by lower transaction account balances. Year-to-date average deposits were $2.3 billion (57%$711 million (11%) higher than the first ninesix months of 2021.2022. For additional information regarding deposits, see “Balance Sheet Analysis – Deposits.”
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.
Table 2: Average Balance Sheet and Net Interest Income Analysis - Tax-Equivalent Basis
| | | For the Nine Months Ended September 30, | | For the Six Months Ended June 30, |
| | 2022 | | 2021 | | 2023 | | 2022 |
(in thousands) | (in thousands) | Average Balance | | Interest | | Average Yield/Rate | | Average Balance | | Interest | | Average Yield/Rate | (in thousands) | Average Balance | | Interest | | Average Yield/Rate | | Average Balance | | Interest | | Average Yield/Rate |
ASSETS | ASSETS | | | | | | | | | | | | ASSETS | | | | | | | | | | | |
Interest-earning assets | Interest-earning assets | | Interest-earning assets | |
Commercial PPP Loans | $ | 6,433 | | | $ | 1,391 | | | 28.51 | % | | $ | 173,463 | | | $ | 11,123 | | | 8.46 | % | |
All other commercial-based loans | 4,143,934 | | | 138,881 | | | 4.42 | % | | 2,222,290 | | | 75,845 | | | 4.50 | % | |
Retail-based loans | 825,065 | | | 27,141 | | | 4.39 | % | | 528,895 | | | 17,357 | | | 4.38 | % | |
| Total loans, including loan fees (1)(2) | Total loans, including loan fees (1)(2) | 4,975,432 | | | 167,413 | | | 4.45 | % | | 2,924,648 | | | 104,325 | | | 4.71 | % | Total loans, including loan fees (1)(2) | $ | 6,219,868 | | | $ | 163,318 | | | 5.23 | % | | $ | 4,764,073 | | | $ | 104,318 | | | 4.36 | % |
Investment securities: | Investment securities: | | Investment securities: | |
Taxable | Taxable | 1,389,540 | | | 15,612 | | | 1.50 | % | | 418,897 | | | 5,935 | | | 1.89 | % | Taxable | 1,022,188 | | | 9,094 | | | 1.78 | % | | 1,388,630 | | | 10,262 | | | 1.48 | % |
Tax-exempt (2) | Tax-exempt (2) | 202,011 | | | 3,661 | | | 2.42 | % | | 140,691 | | | 2,252 | | | 2.13 | % | Tax-exempt (2) | 264,935 | | | 4,246 | | | 3.21 | % | | 185,689 | | | 2,022 | | | 2.18 | % |
Total investment securities | Total investment securities | 1,591,551 | | | 19,273 | | | 1.62 | % | | 559,588 | | | 8,187 | | | 1.95 | % | Total investment securities | 1,287,123 | | | 13,340 | | | 2.07 | % | | 1,574,319 | | | 12,284 | | | 1.56 | % |
Other interest-earning assets | Other interest-earning assets | 251,983 | | | 2,734 | | | 1.44 | % | | 829,382 | | | 2,140 | | | 0.34 | % | Other interest-earning assets | 156,353 | | | 3,893 | | | 4.96 | % | | 306,662 | | | 1,607 | | | 1.05 | % |
Total non-loan earning assets | Total non-loan earning assets | 1,843,534 | | | 22,007 | | | 1.59 | % | | 1,388,970 | | | 10,327 | | | 0.99 | % | Total non-loan earning assets | 1,443,476 | | | 17,233 | | | 2.39 | % | | 1,880,981 | | | 13,891 | | | 1.48 | % |
Total interest-earning assets | Total interest-earning assets | 6,818,966 | | | $ | 189,420 | | | 3.67 | % | | 4,313,618 | | | $ | 114,652 | | | 3.51 | % | Total interest-earning assets | 7,663,344 | | | $ | 180,551 | | | 4.69 | % | | 6,645,054 | | | $ | 118,209 | | | 3.54 | % |
Other assets, net | Other assets, net | 731,928 | | | 452,047 | | | Other assets, net | 735,323 | | | 750,693 | | |
Total assets | Total assets | $ | 7,550,894 | | | $ | 4,765,665 | | | Total assets | $ | 8,398,667 | | | $ | 7,395,747 | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Interest-bearing liabilities | Interest-bearing liabilities | | Interest-bearing liabilities | |
Savings | Savings | $ | 854,307 | | | $ | 827 | | | 0.13 | % | | $ | 595,385 | | | $ | 272 | | | 0.06 | % | Savings | $ | 865,588�� | | | $ | 4,867 | | | 1.13 | % | | $ | 831,335 | | | $ | 339 | | | 0.08 | % |
Interest-bearing demand | Interest-bearing demand | 1,010,372 | | | 2,647 | | | 0.35 | % | | 681,079 | | | 2,114 | | | 0.41 | % | Interest-bearing demand | 929,728 | | | 6,449 | | | 1.40 | % | | 1,020,273 | | | 1,499 | | | 0.30 | % |
Money market accounts (“MMA”) | Money market accounts (“MMA”) | 1,502,038 | | | 2,132 | | | 0.19 | % | | 889,022 | | | 363 | | | 0.05 | % | Money market accounts (“MMA”) | 1,836,405 | | | 23,191 | | | 2.55 | % | | 1,482,431 | | | 823 | | | 0.11 | % |
Core time deposits | Core time deposits | 556,970 | | | 1,240 | | | 0.30 | % | | 318,477 | | | 2,165 | | | 0.91 | % | Core time deposits | 670,071 | | | 7,808 | | | 2.35 | % | | 563,846 | | | 833 | | | 0.30 | % |
Total interest-bearing core deposits | Total interest-bearing core deposits | 3,923,687 | | | 6,846 | | | 0.23 | % | | 2,483,963 | | | 4,914 | | | 0.26 | % | Total interest-bearing core deposits | 4,301,792 | | | 42,315 | | | 1.98 | % | | 3,897,885 | | | 3,494 | | | 0.18 | % |
Brokered deposits | Brokered deposits | 450,311 | | | 2,394 | | | 0.71 | % | | 284,738 | | | 2,885 | | | 1.35 | % | Brokered deposits | 603,668 | | | 11,962 | | | 4.00 | % | | 441,316 | | | 1,108 | | | 0.51 | % |
Total interest-bearing deposits | Total interest-bearing deposits | 4,373,998 | | | 9,240 | | | 0.28 | % | | 2,768,701 | | | 7,799 | | | 0.38 | % | Total interest-bearing deposits | 4,905,460 | | | 54,277 | | | 2.23 | % | | 4,339,201 | | | 4,602 | | | 0.21 | % |
Wholesale funding | Wholesale funding | 239,362 | | | 7,053 | | | 3.91 | % | | 79,882 | | | 1,729 | | | 2.87 | % | Wholesale funding | 395,742 | | | 9,396 | | | 4.72 | % | | 214,767 | | | 3,963 | | | 3.69 | % |
Total interest-bearing liabilities | Total interest-bearing liabilities | 4,613,360 | | | 16,293 | | | 0.47 | % | | 2,848,583 | | | 9,528 | | | 0.45 | % | Total interest-bearing liabilities | 5,301,202 | | | 63,673 | | | 2.42 | % | | 4,553,968 | | | 8,565 | | | 0.38 | % |
Noninterest-bearing demand deposits | Noninterest-bearing demand deposits | 2,034,865 | | | 1,307,222 | | | Noninterest-bearing demand deposits | 2,094,860 | | | 1,950,528 | | |
Other liabilities | Other liabilities | 39,397 | | | 41,470 | | | Other liabilities | 33,988 | | | 41,669 | | |
Stockholders’ equity | Stockholders’ equity | 863,272 | | | 568,390 | | | Stockholders’ equity | 968,617 | | | 849,582 | | |
Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 7,550,894 | | | $ | 4,765,665 | | | Total liabilities and stockholders’ equity | $ | 8,398,667 | | | $ | 7,395,747 | | |
Interest rate spread | Interest rate spread | | | 3.20 | % | | | | 3.06 | % | Interest rate spread | | | 2.27 | % | | | | 3.16 | % |
Net free funds | Net free funds | | 0.16 | % | | 0.16 | % | Net free funds | | 0.75 | % | | 0.13 | % |
Tax-equivalent net interest income and net interest margin | Tax-equivalent net interest income and net interest margin | | $ | 173,127 | | | 3.36 | % | | $ | 105,124 | | | 3.22 | % | Tax-equivalent net interest income and net interest margin | | $ | 116,878 | | | 3.02 | % | | $ | 109,644 | | | 3.29 | % |
Tax-equivalent adjustment | Tax-equivalent adjustment | | $ | 1,258 | | | | | $ | 728 | | | | Tax-equivalent adjustment | | $ | 1,118 | | | | | $ | 765 | | | |
Net interest income | Net interest income | | $ | 171,869 | | | $ | 104,396 | | | Net interest income | | $ | 115,760 | | | $ | 108,879 | | |
(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.
Table 2: Average Balance Sheet and Net Interest Income Analysis - Tax-Equivalent Basis (Continued)
| | | For the Three Months Ended September 30, | | For the Three Months Ended June 30, |
| | 2022 | | 2021 | | 2023 | | 2022 |
(in thousands) | (in thousands) | Average Balance | | Interest | | Average Yield/Rate | | Average Balance | | Interest | | Average Yield/Rate | (in thousands) | Average Balance | | Interest | | Average Yield/Rate | | Average Balance | | Interest | | Average Yield/Rate |
ASSETS | ASSETS | | | | | | | | | | | | ASSETS | | | | | | | | | | | |
Interest-earning assets | Interest-earning assets | | Interest-earning assets | |
Commercial PPP Loans | $ | 605 | | | $ | 1 | | | 0.93 | % | | $ | 109,318 | | | $ | 2,310 | | | 8.27 | % | |
All other commercial-based loans | 4,484,746 | | | 52,673 | | | 4.60 | % | | 2,378,480 | | | 26,759 | | | 4.40 | % | |
Retail-based loans | 905,907 | | | 10,421 | | | 4.60 | % | | 588,624 | | | 6,242 | | | 4.24 | % | |
| Total loans, including loan fees (1)(2) | Total loans, including loan fees (1)(2) | 5,391,258 | | | 63,095 | | | 4.60 | % | | 3,076,422 | | | 35,311 | | | 4.51 | % | Total loans, including loan fees (1)(2) | $ | 6,237,757 | | | $ | 84,132 | | | 5.35 | % | | $ | 4,838,535 | | | $ | 52,984 | | | 4.34 | % |
Investment securities: | Investment securities: | | Investment securities: | |
Taxable | Taxable | 1,391,330 | | | 5,350 | | | 1.54 | % | | 472,598 | | | 2,061 | | | 1.74 | % | Taxable | 822,204 | | | 4,133 | | | 2.01 | % | | 1,390,642 | | | 5,135 | | | 1.48 | % |
Tax-exempt (2) | Tax-exempt (2) | 234,123 | | | 1,639 | | | 2.80 | % | | 139,272 | | | 744 | | | 2.14 | % | Tax-exempt (2) | 245,940 | | | 1,961 | | | 3.19 | % | | 182,385 | | | 991 | | | 2.17 | % |
Total investment securities | Total investment securities | 1,625,453 | | | 6,989 | | | 1.72 | % | | 611,870 | | | 2,805 | | | 1.83 | % | Total investment securities | 1,068,144 | | | 6,094 | | | 2.28 | % | | 1,573,027 | | | 6,126 | | | 1.56 | % |
Other interest-earning assets | Other interest-earning assets | 144,409 | | | 1,127 | | | 3.09 | % | | 1,046,476 | | | 869 | | | 0.33 | % | Other interest-earning assets | 192,034 | | | 2,357 | | | 4.87 | % | | 168,082 | | | 790 | | | 1.87 | % |
Total non-loan earning assets | Total non-loan earning assets | 1,769,862 | | | 8,116 | | | 1.83 | % | | 1,658,346 | | | 3,674 | | | 0.88 | % | Total non-loan earning assets | 1,260,178 | | | 8,451 | | | 2.68 | % | | 1,741,109 | | | 6,916 | | | 1.59 | % |
Total interest-earning assets | Total interest-earning assets | 7,161,120 | | | $ | 71,211 | | | 3.91 | % | | 4,734,768 | | | $ | 38,985 | | | 3.24 | % | Total interest-earning assets | 7,497,935 | | | $ | 92,583 | | | 4.90 | % | | 6,579,644 | | | $ | 59,900 | | | 3.61 | % |
Other assets, net | Other assets, net | 695,011 | | | 511,425 | | | Other assets, net | 730,665 | | | 693,575 | | |
Total assets | Total assets | $ | 7,856,131 | | | $ | 5,246,193 | | | Total assets | $ | 8,228,600 | | | $ | 7,273,219 | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Interest-bearing liabilities | Interest-bearing liabilities | | Interest-bearing liabilities | |
Savings | Savings | $ | 899,503 | | | $ | 488 | | | 0.22 | % | | $ | 662,260 | | | $ | 100 | | | 0.06 | % | Savings | $ | 842,454 | | | $ | 2,502 | | | 1.19 | % | | $ | 841,109 | | | $ | 234 | | | 0.11 | % |
Interest-bearing demand | Interest-bearing demand | 990,891 | | | 1,148 | | | 0.46 | % | | 711,442 | | | 685 | | | 0.38 | % | Interest-bearing demand | 874,294 | | | 3,110 | | | 1.43 | % | | 988,820 | | | 798 | | | 0.32 | % |
MMA | MMA | 1,540,610 | | | 1,309 | | | 0.34 | % | | 962,538 | | | 135 | | | 0.06 | % | MMA | 1,825,233 | | | 12,001 | | | 2.64 | % | | 1,424,995 | | | 500 | | | 0.14 | % |
Core time deposits | Core time deposits | 543,444 | | | 408 | | | 0.30 | % | | 329,012 | | | 630 | | | 0.76 | % | Core time deposits | 736,521 | | | 5,115 | | | 2.79 | % | | 532,179 | | | 325 | | | 0.24 | % |
Total interest-bearing core deposits | Total interest-bearing core deposits | 3,974,448 | | | 3,353 | | | 0.33 | % | | 2,665,252 | | | 1,550 | | | 0.23 | % | Total interest-bearing core deposits | 4,278,502 | | | 22,728 | | | 2.13 | % | | 3,787,103 | | | 1,857 | | | 0.20 | % |
Brokered deposits | Brokered deposits | 468,010 | | | 1,285 | | | 1.09 | % | | 284,164 | | | 894 | | | 1.25 | % | Brokered deposits | 640,643 | | | 6,612 | | | 4.14 | % | | 423,372 | | | 553 | | | 0.52 | % |
Total interest-bearing deposits | Total interest-bearing deposits | 4,442,458 | | | 4,638 | | | 0.41 | % | | 2,949,416 | | | 2,444 | | | 0.33 | % | Total interest-bearing deposits | 4,919,145 | | | 29,340 | | | 2.39 | % | | 4,210,475 | | | 2,410 | | | 0.23 | % |
Wholesale funding | Wholesale funding | 287,751 | | | 3,090 | | | 4.25 | % | | 143,615 | | | 1,113 | | | 3.08 | % | Wholesale funding | 293,140 | | | 3,678 | | | 4.96 | % | | 214,975 | | | 2,032 | | | 3.77 | % |
Total interest-bearing liabilities | Total interest-bearing liabilities | 4,730,209 | | | 7,728 | | | 0.65 | % | | 3,093,031 | | | 3,557 | | | 0.46 | % | Total interest-bearing liabilities | 5,212,285 | | | 33,018 | | | 2.54 | % | | 4,425,450 | | | 4,442 | | | 0.40 | % |
Noninterest-bearing demand deposits | Noninterest-bearing demand deposits | 2,200,789 | | | 1,499,052 | | | Noninterest-bearing demand deposits | 2,021,892 | | | 1,977,569 | | |
Other liabilities | Other liabilities | 34,928 | | | 45,164 | | | Other liabilities | 27,281 | | | 32,225 | | |
Stockholders’ equity | Stockholders’ equity | 890,205 | | | 608,946 | | | Stockholders’ equity | 967,142 | | | 837,975 | | |
Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 7,856,131 | | | $ | 5,246,193 | | | Total liabilities and stockholders’ equity | $ | 8,228,600 | | | $ | 7,273,219 | | |
Interest rate spread | Interest rate spread | | | 3.26 | % | | | | 2.78 | % | Interest rate spread | | | 2.36 | % | | | | 3.21 | % |
Net free funds | Net free funds | | 0.22 | % | | 0.16 | % | Net free funds | | 0.78 | % | | 0.13 | % |
Tax-equivalent net interest income and net interest margin | Tax-equivalent net interest income and net interest margin | | $ | 63,483 | | | 3.48 | % | | $ | 35,428 | | | 2.94 | % | Tax-equivalent net interest income and net interest margin | | $ | 59,565 | | | 3.14 | % | | $ | 55,458 | | | 3.34 | % |
Tax-equivalent adjustment | Tax-equivalent adjustment | | $ | 493 | | | | | $ | 244 | | | | Tax-equivalent adjustment | | $ | 526 | | | | | $ | 374 | | | |
Net interest income | Net interest income | | $ | 62,990 | | | $ | 35,184 | | | Net interest income | | $ | 59,039 | | | $ | 55,084 | | |
(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.
Table 3: Volume/Rate Variance - Tax-Equivalent Basis
| | | For the Three Months Ended September 30, 2022 Compared to September 30, 2021: | | For the Nine Months Ended September 30, 2022 Compared to September 30, 2021: | | For the Three Months Ended June 30, 2023 Compared to June 30, 2022: | | For the Six Months Ended June 30, 2023 Compared to June 30, 2022: |
| | Increase (Decrease) Due to Changes in | | Increase (Decrease) Due to Changes in | | Increase (Decrease) Due to Changes in | | Increase (Decrease) Due to Changes in |
(in thousands) | (in thousands) | Volume | | Rate | | Net (1) | | Volume | | Rate | | Net (1) | (in thousands) | Volume | | Rate | | Net (1) | | Volume | | Rate | | Net (1) |
Interest-earning assets | Interest-earning assets | | | | | | | | | | | | Interest-earning assets | | | | | | | | | | | |
Commercial PPP Loans | $ | (1,220) | | | $ | (1,089) | | | $ | (2,309) | | | $ | (18,046) | | | $ | 8,314 | | | $ | (9,732) | | |
All other commercial-based loans | 24,677 | | | 1,237 | | | 25,914 | | | 77,726 | | | (14,690) | | | 63,036 | | |
Retail-based loans | 3,562 | | | 617 | | | 4,179 | | | 9,667 | | | 117 | | | 9,784 | | |
| Total loans (2) | Total loans (2) | 27,019 | | | 765 | | | 27,784 | | | 69,347 | | | (6,259) | | | 63,088 | | Total loans (2) | $ | 24,153 | | | $ | 6,995 | | | $ | 31,148 | | | $ | 35,730 | | | $ | 23,270 | | | $ | 59,000 | |
Investment securities: | Investment securities: | | Investment securities: | |
Taxable | Taxable | 2,871 | | | 418 | | | 3,289 | | | 9,228 | | | 449 | | | 9,677 | | Taxable | (1,054) | | | 52 | | | (1,002) | | | (1,598) | | | 430 | | | (1,168) | |
Tax-exempt (2) | Tax-exempt (2) | 615 | | | 280 | | | 895 | | | 1,081 | | | 328 | | | 1,409 | | Tax-exempt (2) | 414 | | | 556 | | | 970 | | | 1,056 | | | 1,168 | | | 2,224 | |
Total investment securities | Total investment securities | 3,486 | | | 698 | | | 4,184 | | | 10,309 | | | 777 | | | 11,086 | | Total investment securities | (640) | | | 608 | | | (32) | | | (542) | | | 1,598 | | | 1,056 | |
Other interest-earning assets | Other interest-earning assets | (454) | | | 712 | | | 258 | | | (343) | | | 937 | | | 594 | | Other interest-earning assets | (57) | | | 1,624 | | | 1,567 | | | 171 | | | 2,115 | | | 2,286 | |
Total non-loan earning assets | Total non-loan earning assets | 3,032 | | | 1,410 | | | 4,442 | | | 9,966 | | | 1,714 | | | 11,680 | | Total non-loan earning assets | (697) | | | 2,232 | | | 1,535 | | | (371) | | | 3,713 | | | 3,342 | |
Total interest-earning assets | Total interest-earning assets | $ | 30,051 | | | $ | 2,175 | | | $ | 32,226 | | | $ | 79,313 | | | $ | (4,545) | | | $ | 74,768 | | Total interest-earning assets | $ | 23,456 | | | $ | 9,227 | | | $ | 32,683 | | | $ | 35,359 | | | $ | 26,983 | | | $ | 62,342 | |
Interest-bearing liabilities | Interest-bearing liabilities | | | | | | | | | | | | Interest-bearing liabilities | | | | | | | | | | | |
Savings | Savings | $ | 47 | | | $ | 341 | | | $ | 388 | | | $ | 155 | | | $ | 400 | | | $ | 555 | | Savings | $ | 2 | | | $ | 2,266 | | | $ | 2,268 | | | $ | 14 | | | $ | 4,514 | | | $ | 4,528 | |
Interest-bearing demand | Interest-bearing demand | 305 | | | 158 | | | 463 | | | 901 | | | (368) | | | 533 | | Interest-bearing demand | (103) | | | 2,415 | | | 2,312 | | | (145) | | | 5,095 | | | 4,950 | |
MMA | MMA | 125 | | | 1,049 | | | 1,174 | | | 385 | | | 1,384 | | | 1,769 | | MMA | 179 | | | 11,322 | | | 11,501 | | | 241 | | | 22,127 | | | 22,368 | |
Core time deposits | Core time deposits | 278 | | | (500) | | | (222) | | | 1,047 | | | (1,972) | | | (925) | | Core time deposits | 171 | | | 4,619 | | | 4,790 | | | 184 | | | 6,791 | | | 6,975 | |
Total interest-bearing core deposits | Total interest-bearing core deposits | 755 | | | 1,048 | | | 1,803 | | | 2,488 | | | (556) | | | 1,932 | | Total interest-bearing core deposits | 249 | | | 20,622 | | | 20,871 | | | 294 | | | 38,527 | | | 38,821 | |
Brokered deposits | Brokered deposits | 516 | | | (125) | | | 391 | | | 1,239 | | | (1,730) | | | (491) | | Brokered deposits | 420 | | | 5,639 | | | 6,059 | | | 546 | | | 10,308 | | | 10,854 | |
Total interest-bearing deposits | Total interest-bearing deposits | 1,271 | | | 923 | | | 2,194 | | | 3,727 | | | (2,286) | | | 1,441 | | Total interest-bearing deposits | 669 | | | 26,261 | | | 26,930 | | | 840 | | | 48,835 | | | 49,675 | |
Wholesale funding | Wholesale funding | 1,395 | | | 582 | | | 1,977 | | | 4,735 | | | 589 | | | 5,324 | | Wholesale funding | 674 | | | 972 | | | 1,646 | | | 3,790 | | | 1,643 | | | 5,433 | |
Total interest-bearing liabilities | Total interest-bearing liabilities | 2,666 | | | 1,505 | | | 4,171 | | | 8,462 | | | (1,697) | | | 6,765 | | Total interest-bearing liabilities | 1,343 | | | 27,233 | | | 28,576 | | | 4,630 | | | 50,478 | | | 55,108 | |
Net interest income | Net interest income | $ | 27,385 | | | $ | 670 | | | $ | 28,055 | | | $ | 70,851 | | | $ | (2,848) | | | $ | 68,003 | | Net interest income | $ | 22,113 | | | $ | (18,006) | | | $ | 4,107 | | | $ | 30,729 | | | $ | (23,495) | | | $ | 7,234 | |
(1)The change in interest due to both rate and volume has been allocated in proportion to the relationship of dollar amountsamount of change in each.
(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.
The Federal Reserve raised short-term interest rates a total of 300425 bps since mid-Marchduring 2022, increasing the Federal Funds rate to a range of 3.00%4.25% to 3.25%4.50% as of September 30,December 31, 2022. Prior to this, short-term interest rates remained steady since March 2020, withAdditional increases totaling 75 bps were made in the first half of 2023, resulting in a Federal Funds range of 0.00%5.00% to 0.25%.5.25% as of June 30, 2023.
Tax-equivalent net interest income was $173.1$117 million for the first ninesix months June 30, 2023, an increase of 2022, comprised of net interest income of $171.9$7 million ($67.5 million or 65% higher than(7%) over the first ninesix months of 2021), and a $1.3 million tax-equivalent adjustment.ended June 30, 2022. The $68.0$7 million increase in tax-equivalent net interest income was attributable to net favorable volumes (which added $70.9$31 million to net interest income, mostly from interest-earning asset volumes added with the recent acquisitions, as well asCharter acquisition and solid loan growth and strategic investment purchases)growth) and net unfavorable rates (which decreased net interest income $2.8$23 million from competitive pricing pressurehigher deposit costs and the lag in repricing the loan portfolio to current market interest rates).
Average interest-earning assets increased to $6.8$7.7 billion, up $2.5$1.0 billion (58%(15%) over the 2021 comparable 2022 period, primarily due to the acquisitionstiming of Mackinac, County, and Charter (in September 2021, December 2021, and August 2022, respectively).the acquisition of Charter. Between the comparable nine-monthsix-month periods, average loans increased $2.1$1.5 billion (70%(31%), mostly due to timing of the Mackinac, County, and Charter acquisitions, whichacquisition (which added loans of $0.9 billion, $1.0 billion,$827 million at acquisition) and $0.8 billion respectively, at acquisition. In addition, average loans reflected strong organic loan growth and the repurchase of previously participated agricultural loans, which more than offset the reduction in PPP loans from continued loan forgiveness.throughout 2022. Average investment securities increased $1.0 billiondecreased $287 million between the comparable nine-monthsix-month periods, partly due to the acquisitions, and partly due to the strategic re-investment of approximately $0.5 billion excess cash liquidity into U.S. Treasury securities of varying yields and durations during fourth quarter 2021. Otherwhile other interest-earning assets declined $0.6 billion with the additional assets added with the acquisitions, more than offset by$150 million, mostly due to lower cash mostly from the re-investment of excess cash liquidity noted above.cash. As a result, the mix of average interest-earning assets shifted to 73%81% loans, 23%17% investments and 4%2% other interest-earning assets (mostly cash) for the first nine monthshalf of 2022,2023, compared to 68%72%, 13%24% and 19%4%, respectively, for the first nine monthshalf of 2021.2022.
Average interest-bearing liabilities were $5.3 billion for the first half of 2023, an increase of $747 million (16%) over the first half of 2022, primarily due to the timing of the acquisition of Charter. Average interest-bearing core deposits increased $404 million and average brokered deposits increased $162 million between the comparable six-month periods, reflecting the impact of the Charter acquisition and brokered funding to support the strong loan growth in 2022. Other interest-bearing liabilities increased $181 million between the comparable six-month periods, partly due to wholesale funding acquired with Charter and partly due to FHLB borrowings to support the strong loan growth in 2022. The mix of average interest-bearing liabilities was 81% core deposits, 11% brokered deposits and 8% wholesale funding for the first half of 2023, compared to 86%, 10%, and 4%, respectively, for the first half of 2022.
Average interest-bearing liabilities were $4.6 billion for the first nine months of 2022, an increase of $1.8 billion (62%) over the first nine months of 2021, primarily due to the acquisitions of Mackinac, County, and Charter. Average interest-bearing core deposits increased $1.4 billion and average brokered deposits increased $166 millionThe interest rate spread decreased 89 bps between the comparable nine-monthsix-month periods, largely due toas our liabilities have repriced faster than our assets in the acquisitions. Other interest-bearing liabilities grew $159 million between the comparable nine-month periods, partly due to the private placement of $100 million in fixed-to-floating rate subordinated notes in July 2021, and partly due to wholesale funding acquired with the acquisitions. The mix of average interest-bearing liabilities was 85% core deposits, 10% brokered deposits and 5% wholesale funding for the first nine months of 2022, compared to 87%, 10% and 3%, respectively, for the first nine months of 2021.
Between the comparable nine-month periods, therapidly rising interest rate spread increased 14 bps.environment. The interest-earning asset yield increased 16115 bps to 3.67%4.69% for the first ninesix months of 2022, primarily2023, due to the changing mix of interest-earning assets (mostly the reduction in cash due tonoted above), as well as the re-investment of excess cash liquidity noted above).higher interest rate environment. The loan yield declined 26improved 87 bps to 4.45%5.23% between the comparable nine-monthsix-month periods, largely due to the impactrepricing of the lownew and renewed loans in a rising interest rate environment, through early 2022 and competitive pricing pressures on new, renewed, and variable rate loans, while the yield on investment securities declined 33increased 51 bps to 1.62%, also attributable to the low interest rate environment through early 2022, as well as the strategic re-investment of cash into U.S. Treasury securities.2.07%. The cost of funds increased 2204 bps to 0.47%2.42% for the first nine monthshalf of 2022, as lower rates on core interest-bearing2023, also reflecting the rising interest rate environment, a migration of customer deposits and brokered deposits, were more than offset byinto higher wholesale funding ratesrate 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 3.36%3.02% for the first nine monthshalf of 2022, up 142023, down 27 bps compared to 3.22%3.29% for the first nine monthshalf of 2021.2022.
Tax-equivalent interest income was $189.4$181 million for the first nine monthshalf of 2023, up $62 million from comparable period of 2022, up $74.8 million from the first nine months of 2021, comprised of $79.3$35 million higher volumes partly offset by lowerand $27 million higher average rates.rates (mostly in the loan portfolio). Interest income on loans increased $63.1$59 million over the first nine monthshalf of 2021,2022, mostly due to higher average balances from the acquisitions, as well as solidCharter acquisition and strong organic loan growth. Between the comparable nine-month periods, interest income on investment securities grew $11.1 million, also attributable to the acquisitions, as well as the re-investment of excess cash liquidity (noted above). Interest expense increased to $16.3$64 million for the first nine monthshalf of 2022,2023, up $6.8$55 million compared to the first nine monthshalf of 2021, comprised of $8.5 million2022, mostly due to a much higher volumes, partly offset by $1.7 million from lower overall cost of funds. Interest expense on deposits increased $1.4$50 million (18%) from the first nine months of 2021 given higher average interest-bearing deposit balances at a lower cost as product and rate changes were made during 2021 in the low rate environment, while brokered deposits cost less largely from maturities of higher-costing term brokered funds procured under competitive conditions in mid-2020 during the pandemic. Interest expense on wholesale funding increased between the comparable nine-monthsix-month periods mostly due to higher average balances from the July 2021 subordinated notes issuance, as well as wholesale funding acquired with the acquisitions.rapidly rising interest rate environment.
Provision for Credit Losses
The provision for credit losses was $9.7$3.5 million for the ninesix months ended SeptemberJune 30, 20222023 (comprised of $9.1$1.2 million related to the ACL-Loans and $0.6$2.3 million for the ACL on unfunded commitments)securities AFS), compared to $6.5$1.1 million for the ninesix months ended SeptemberJune 30, 20212022 (comprised of $4.5$0.9 million related to the ACL-Loans and $2.0 millionthe remainder for the ACL on unfunded commitments). The 20222023 provision for credit losses on loans was mostly dueattributable to growth and changes in the Day 2 ACL increase from the Charter acquisition,underlying loan portfolio, while the 2021 provision for credit losses on securities AFS was mostly due to the Day 2 ACL increase for the Mackinac acquisition.expected loss on our Signature Bank subordinated 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-Loans and unfunded commitments.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 September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | (in thousands) | 2022 | | 2021 | | $ Change | | % Change | | 2022 | | 2021 | | $ Change | | % Change | (in thousands) | 2023 | | 2022 | | $ Change | | % Change | | 2023 | | 2022 | | $ Change | | % Change |
Trust services fee income | Trust services fee income | $ | 1,969 | | | $ | 2,043 | | | $ | (74) | | | (4) | % | | $ | 5,984 | | | $ | 5,724 | | | $ | 260 | | | 5 | % | Trust services fee income | $ | 2,148 | | | $ | 2,004 | | | $ | 144 | | | 7 | % | | $ | 4,181 | | | $ | 4,015 | | | $ | 166 | | | 4 | % |
Brokerage fee income | Brokerage fee income | 3,040 | | | 3,154 | | | (114) | | | (4) | | | 9,716 | | | 8,938 | | | 778 | | | 9 | | Brokerage fee income | 3,722 | | | 2,988 | | | 734 | | | 25 | | | 7,201 | | | 6,676 | | | 525 | | | 8 | |
Wealth management fee income | | Wealth management fee income | 5,870 | | | 4,992 | | | 878 | | | 18 | | | 11,382 | | | 10,691 | | | 691 | | | 6 | |
Mortgage income, net | Mortgage income, net | 1,728 | | | 4,808 | | | (3,080) | | | (64) | | | 7,186 | | | 17,637 | | | (10,451) | | | (59) | | Mortgage income, net | 1,822 | | | 2,205 | | | (383) | | | (17) | | | 3,288 | | | 5,458 | | | (2,170) | | | (40) | |
Service charges on deposit accounts | Service charges on deposit accounts | 1,589 | | | 1,314 | | | 275 | | | 21 | | | 4,602 | | | 3,541 | | | 1,061 | | | 30 | | Service charges on deposit accounts | 1,529 | | | 1,536 | | | (7) | | | — | | | 3,009 | | | 3,013 | | | (4) | | | — | |
Card interchange income | Card interchange income | 3,012 | | | 2,299 | | | 713 | | | 31 | | | 8,543 | | | 6,492 | | | 2,051 | | | 32 | | Card interchange income | 3,331 | | | 2,950 | | | 381 | | | 13 | | | 6,364 | | | 5,531 | | | 833 | | | 15 | |
BOLI income | BOLI income | 966 | | | 572 | | | 394 | | | 69 | | | 2,667 | | | 1,658 | | | 1,009 | | | 61 | | BOLI income | 1,073 | | | 768 | | | 305 | | | 40 | | | 2,273 | | | 1,701 | | | 572 | | | 34 | |
Deferred compensation plan asset market valuations | | Deferred compensation plan asset market valuations | 499 | | | (1,316) | | | 1,815 | | | N/M | | 1,445 | | | (1,783) | | | 3,228 | | | N/M |
LSR income, net | LSR income, net | (517) | | | — | | | (517) | | | N/M | | (1,042) | | | — | | | (1,042) | | | N/M | LSR income, net | 1,135 | | | (143) | | | 1,278 | | | N/M | | 2,290 | | | (525) | | | 2,815 | | | N/M |
Other income | Other income | 1,259 | | | 993 | | | 266 | | | 27 | | | 2,548 | | | 3,594 | | | (1,046) | | | (29) | | Other income | 1,900 | | | 1,536 | | | 364 | | | 24 | | | 3,732 | | | 3,072 | | | 660 | | | 21 | |
Noninterest income without net gains | 13,046 | | | 15,183 | | | (2,137) | | | (14) | | | 40,204 | | | 47,584 | | | (7,380) | | | (16) | | |
Noninterest income without net gains (losses) | | Noninterest income without net gains (losses) | 17,159 | | | 12,528 | | | 4,631 | | | 37 | | | 33,783 | | | 27,158 | | | 6,625 | | | 24 | |
Asset gains (losses), net | Asset gains (losses), net | (46) | | | (1,187) | | | 1,141 | | | N/M | | 2,870 | | | 3,716 | | | (846) | | | (23) | | Asset gains (losses), net | (318) | | | 1,603 | | | (1,921) | | | N/M | | (38,786) | | | 2,916 | | | (41,702) | | | N/M |
Total noninterest income | Total noninterest income | $ | 13,000 | | | $ | 13,996 | | | $ | (996) | | | (7) | % | | $ | 43,074 | | | $ | 51,300 | | | $ | (8,226) | | | (16) | % | Total noninterest income | $ | 16,841 | | | $ | 14,131 | | | $ | 2,710 | | | 19 | % | | $ | (5,003) | | | $ | 30,074 | | | $ | (35,077) | | | (117) | % |
Trust services fee income & Brokerage fee income combined | $ | 5,009 | | | $ | 5,197 | | | $ | (188) | | | (4) | % | | $ | 15,700 | | | $ | 14,662 | | | $ | 1,038 | | | 7 | % | |
N/M means not meaningful.
Noninterest income was $43.1a negative $5.0 million for the first ninesix months of 2023, an unfavorable change of $35.1 million compared to the first six months of 2022, a decrease of $8.2 million (16%) compared to $51.3 million for the first nine months of 2021, primarily due to lowerthe balance sheet repositioning. Excluding net mortgage income.asset gains (losses), noninterest income for first half 2023 was $33.8 million, a $6.6 million (24%) increase over first half 2022.
Trust servicesWealth management fee income and brokerage fee income combined were $15.7was $11.4 million, up $1.0$0.7 million (7%(6%) overfrom the first ninesix months of 2021, consistent with the2022, including favorable market-related changes, as well as growth in accounts and assets under management, though tempered by unfavorable market-related declines.management.
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 $7.2$3.3 million, decreased $10.5$2.2 million (59%(40%) between the comparable nine-monthsix-month periods, mostly due to the rising interest rate environment reducing secondary market volumes and the related gains on sales. Gains on sales and capitalized gains combined decreased $10.9 million and the fair value of the mortgage derivatives decreased $0.4 million, while MSR impairment was $0.9 million favorable on slower paydown activity. 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.
Service charges on deposit accounts were up $1.1 million to $4.6 million for the nine months ended September 30, 2022, mostly due to the larger deposit base from the acquisitions.
Card interchange income grew $2.1$0.8 million (32%(15%) between the comparable nine-monthsix-month periods due to higher volume and activity.
BOLI income was up $1.0$0.6 million between the comparable nine-monthsix-month periods, attributable to higher average balances from BOLI acquired with the acquisitions and also benefiting from the rising interest rate environment.Charter acquisition.
Loan servicing rights (“LSR”) income includes agricultural loan servicing fees net ofincreased $2.8 million between the related LSR amortization. Nicolet is not adding new loanscomparable first half periods mostly due to this servicing portfolio and repurchased approximately $100 million of these previously participated loans during second quarter 2022; thus, thelower LSR amortization is currently outpacingfrom the loan servicing fees.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 $2.5$3.7 million for the ninesix months ended SeptemberJune 30, 20222023 was down $1.0up $0.7 million from the comparable 20212022 period, largely due to unfavorable changes inbroker fees and card incentive income.
Net asset losses of $38.8 million for the fair valuefirst six months of nonqualified deferred compensation plan assets from the recent market declines, partly offset by new revenue from crop insurance sales (related2023 were primarily attributable to the County acquisition). See also “Noninterest Expense” for discussionlosses on the offsetting fair value changesale of approximately $500 million (par value) U.S. Treasury held to the nonqualified deferred compensation plan liabilities.
Netmaturity securities executed in early March as part of a balance sheet repositioning, while net asset gains of $2.9 million for the first ninesix months of 2022 were primarily attributable to gains on sales of other real estate owned (mostly closed bank branch locations), while net asset gains of $3.7 million for the first nine months of 2021 were primarily attributable to favorable fair value marks on equity securities..
Noninterest Expense
Table 5: Noninterest Expense
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
($ in thousands) | ($ in thousands) | 2022 | | 2021 | | Change | | % Change | | 2022 | | 2021 | | Change | | % Change | ($ in thousands) | 2023 | | 2022 | | Change | | % Change | | 2023 | | 2022 | | Change | | % Change |
Personnel | Personnel | $ | 24,136 | | | $ | 16,927 | | | $ | 7,209 | | | 43 | % | | $ | 65,008 | | | $ | 49,127 | | | $ | 15,881 | | | 32 | % | Personnel | $ | 23,900 | | | $ | 19,681 | | | $ | 4,219 | | | 21 | % | | $ | 48,228 | | | $ | 40,872 | | | $ | 7,356 | | | 18 | % |
Occupancy, equipment and office | Occupancy, equipment and office | 7,641 | | | 5,749 | | | 1,892 | | | 33 | | | 21,476 | | | 13,939 | | | 7,537 | | | 54 | | Occupancy, equipment and office | 8,845 | | | 6,891 | | | 1,954 | | | 28 | | | 17,628 | | | 13,835 | | | 3,793 | | | 27 | |
Business development and marketing | Business development and marketing | 2,281 | | | 1,654 | | | 627 | | | 38 | | | 6,169 | | | 3,853 | | | 2,316 | | | 60 | | Business development and marketing | 1,946 | | | 2,057 | | | (111) | | | (5) | | | 4,067 | | | 3,888 | | | 179 | | | 5 | |
Data processing | Data processing | 3,664 | | | 2,939 | | | 725 | | | 25 | | | 10,647 | | | 8,408 | | | 2,239 | | | 27 | | Data processing | 4,218 | | | 3,596 | | | 622 | | | 17 | | | 8,206 | | | 6,983 | | | 1,223 | | | 18 | |
Intangibles amortization | Intangibles amortization | 1,628 | | | 758 | | | 870 | | | 115 | | | 4,399 | | | 2,400 | | | 1,999 | | | 83 | | Intangibles amortization | 2,083 | | | 1,347 | | | 736 | | | 55 | | | 4,244 | | | 2,771 | | | 1,473 | | | 53 | |
FDIC assessments | FDIC assessments | 480 | | | 480 | | | — | | | — | | | 1,440 | | | 1,555 | | | (115) | | | (7) | | FDIC assessments | 1,009 | | | 480 | | | 529 | | | 110 | | | 1,549 | | | 960 | | | 589 | | | 61 | |
Merger-related expense | Merger-related expense | 519 | | | 2,793 | | | (2,274) | | | (81) | | | 1,172 | | | 3,449 | | | (2,277) | | | (66) | | Merger-related expense | 26 | | | 555 | | | (529) | | | (95) | | | 189 | | | 653 | | | (464) | | | (71) | |
Other expense | Other expense | 2,218 | | | 1,761 | | | 457 | | | 26 | | | 6,344 | | | 7,158 | | | (814) | | | (11) | | Other expense | 2,930 | | | 1,931 | | | 999 | | | 52 | | | 5,721 | | | 4,126 | | | 1,595 | | | 39 | |
Total noninterest expense | Total noninterest expense | $ | 42,567 | | | $ | 33,061 | | | $ | 9,506 | | | 29 | % | | $ | 116,655 | | | $ | 89,889 | | | $ | 26,766 | | | 30 | % | Total noninterest expense | $ | 44,957 | | | $ | 36,538 | | | $ | 8,419 | | | 23 | % | | $ | 89,832 | | | $ | 74,088 | | | $ | 15,744 | | | 21 | % |
Non-personnel expenses | Non-personnel expenses | $ | 18,431 | | | $ | 16,134 | | | $ | 2,297 | | | 14 | % | | $ | 51,647 | | | $ | 40,762 | | | $ | 10,885 | | | 27 | % | Non-personnel expenses | $ | 21,057 | | | $ | 16,857 | | | $ | 4,200 | | | 25 | % | | $ | 41,604 | | | $ | 33,216 | | | $ | 8,388 | | | 25 | % |
Average full-time equivalent (“FTE”) employees | Average full-time equivalent (“FTE”) employees | 907 | | | 646 | | | 261 | | | 40 | % | | 863 | | | 591 | | | 272 | | | 46 | % | Average full-time equivalent (“FTE”) employees | 943 | | | 850 | | | 93 | | | 11 | % | | 943 | | | 842 | | | 101 | | | 12 | % |
Noninterest expense was $116.7$89.8 million, an increase of $26.8$15.7 million (30%(21%) over the first ninesix months of 2021.2022. Personnel costs increased $15.9$7.4 million (32%(18%), while non-personnel expenses combined increased $10.9$8.4 million (27%(25%) compared to the first ninesix months of 2021.2022.
Personnel expense was $65.0$48.2 million for the ninesix months ended SeptemberJune 30, 2022,2023, an increase of $15.9$7.4 million from the comparable period in 2021.2022. Salary expense increased $16.4$6.1 million (58%(18%) over the first ninesix months of 2021,2022, reflecting higher salaries from the larger employee base (with average full-time equivalent employees up 46%12%, mostly due to the timing of the 2022 and 2021 acquisitions)Charter acquisition), investments in our wealth team, and merit increases between the years. Salary expense also reflected increases in hourly pay and base salaries effective atyears, partly offset by lower incentive compensation commensurate with the end of March 2022, which benefited 67% of our employee base.lower current period earnings. Fringe benefits increased $3.4$1.3 million (50%(20%) over the first ninesix months of 2021, commensurate with2022, reflecting higher overall health care expenses as well as the larger employee base. PersonnelSalary expense was also impacted by the change in the fair value of nonqualified deferred compensation plan liabilities from the recent market declines.improvements. See also “Noninterest Income” for discussion on the offsetting fair value change to the nonqualified deferred compensation plan assets.
Occupancy, equipment and office expense was $21.5$17.6 million for the first ninesix months of 2022,2023, up $7.5$3.8 million (54%(27%) compared to the first ninesix months of 2021,2022, largely due to the expanded branch network with the recent acquisitions,Charter acquisition, as well as additional expense for software and technology solutions.
Business development and marketing expense was $6.2$4.1 million, up $2.3$0.2 million (60%(5%), between the comparable nine-monthfirst half periods, largely dueattributable to higher travelthe timing and entertainment expenses, as well as additionalextent of marketing donations, promotions, and media to support our expanded branch network and community base.
Data processing expense was $10.6$8.2 million, up $2.2$1.2 million (27%(18%) between the comparable nine-monthsix-month periods, mostly due to volume-based increases in core and card processing charges, includingpartly from the larger operating base following the Mackinac, County, and Charter acquisitions.acquisition.
Intangibles amortization increased $2.0$1.5 million between the comparable nine-monthfirst half periods due to higher amortization from the intangibles added with the recent acquisitions.
Other expense was $6.3$5.7 million, down $0.8up $1.6 million (11%(39%) between the comparable nine-monthsix-month periods, mostly due to a $2.1 million contract termination charge incurred in 2021, partly offset by higher professional fees, costs to carry closed bank branches, and overall higher expenses related to our larger operating base.fees.
Income Taxes
Income tax expense was $22.0$3.7 million (effective tax rate of 24.8%21.2%) for the first ninesix months of 2022,2023, compared to $15.0expense of $15.7 million (effective tax rate of 25.2%24.5%) for the comparable period of 2021.2022. The change in income tax expense was largely due to the lower pretax earnings between the years.
Income Statement Analysis – Three Months Ended SeptemberJune 30, 20222023 versus Three Months Ended SeptemberJune 30, 20212022
Net income was $18.5$22.6 million for the three months ended SeptemberJune 30, 2022,2023, compared to $7.8$24.0 million for the three months ended SeptemberJune 30, 2021.2022. Earnings per diluted common share was $1.29$1.51 for thirdsecond quarter 2022,2023, compared to $0.73$1.73 for thirdsecond quarter 2021.2022.
Tax-equivalent net interest income was $63.5$59.6 million for thirdsecond quarter 2023, an increase of $4.1 million over second quarter 2022. Interest income increased $32.7 million over second quarter 2022, comprised of net interest income of $63.0 million ($27.8 million or 79% over third quarter 2021), and a tax-equivalent adjustment of $0.5 million. Tax-equivalent interest income increased $32.2 million between the third quarter periods, with $30.1$23.5 million from stronger volumes (led by average loans which grew $2.3$1.4 billion or 75%29% over thirdsecond quarter 2021,2022, mostly due to the acquisitions)Charter acquisition) and $2.2$9.2 million from higher yields. Average investment securities increased $1.0 billiondecreased $505 million between the comparable thirdsecond quarter periods, partlymostly due to the acquisitions, and partly due to the strategic re-investment of approximately $0.5 billion excess cash liquidity into U.S. Treasury securities of varying yields and durations during fourthbalance sheet repositioning actions in first quarter 2021.2023. Interest expense increased $4.2$28.6 million from thirdsecond quarter 2021, including $2.7 million from higher volumes (mostly from higher average deposit balances from the acquisitions) and $1.5 million2022, mostly due to $27.2 million higher overall funding costs. For additional information regarding average balances, net interest income and net interest margin, see “INCOME STATEMENT ANALYSIS — Net Interest Income.”
The net interest margin for thirdsecond quarter 20222023 was 3.48%3.14%, compared to 2.94%3.34% for thirdsecond quarter 2021,2022, influenced by the rising interest rate increasesenvironment and the changing balance sheet mix. The mix of average interest-earning assets shifted from 65%74% loans, 13%24% investments and 22%2% other interest-earning assets (mostly cash) for thirdsecond quarter 2021,2022, to 75%83%, 23%14% and 2%3%, respectively, for thirdsecond quarter 2022. As a result, the2023. The yield on interest-earning assets of 3.91%4.90% increased 67129 bps from thirdsecond quarter 2021.2022. The yield on loans was 4.60%5.35%, 9101 bps higher than thirdsecond quarter 2021,2022, largely due to the impact of the rising interest rate environment. The cost of funds of 0.65%2.54% increased 19214 bps between the comparable quarters, also due to the rising interest rates.
Provision for credit losses was $8.6$0.5 million for thirdsecond quarter 2023 (all related to the ACL-Loans), compared to $0.8 million provision for credit losses for second quarter 2022 (comprised of $8.2$0.6 million related to the ACL-Loans, and $0.4$0.2 million for the ACL on unfunded commitments), compared to $6.0 million provision for credit losses for third quarter 2021. The 2022 provision for credit losses was mostly due to the Day 2 ACL increase from the Charter acquisition, while the 2021 provision for credit losses was mostly due to the Day 2 ACL increase for the Mackinac acquisition.. For additional information regarding the allowance for credit losses-loans and asset quality, see “BALANCE SHEET ANALYSIS — Allowance for Credit Losses - Loans” and “BALANCE SHEET ANALYSIS — Nonperforming Assets.”
Noninterest income was $13.0$16.8 million for thirdsecond quarter 2022, a decrease2023, an increase of $1.0$2.7 million (7%(19%) from thirdsecond quarter 2021. Net mortgage income of $1.7 million for third quarter 2022 was down $3.1 million (64%) from third quarter 2021, primarily due to the rising interest rate environment reducing secondary market volumes and the related gains on sales. Trust services2022. Wealth management fee income and brokerage fee income combined was down $0.2grew $0.9 million (4%(18%), including favorable market-related changes, as unfavorable market-related declines outpaced thewell as growth in accounts and assets under management. Service chargesMarket valuations improved $1.8 million between the comparable second quarter periods from favorable fair value changes on deposit accounts grew $0.3the deferred compensation plan assets. LSR income increased $1.3 million to $1.6 million for thirdbetween the comparable second quarter 2022,periods mostly due to the larger deposit baselower LSR amortization from the acquisitions. Card interchange income grew $0.7 million (31%) due tomuch slower prepayments speeds in the higher volume and activity.interest rate environment. Net asset losses were minimal in third quarter 2022, while net asset losses of $1.2$0.3 million in thirdsecond quarter 20212023 were primarily attributable to unfavorable fair value marks on equity securities.securities, while net asset gains of $1.6 million in second quarter 2022 were primarily attributable to gains on sales of other real estate owned (mostly closed bank branch locations). For additional information regarding noninterest income, see “INCOME STATEMENT ANALYSIS — Noninterest Income.”
Noninterest expense was $42.6$45.0 million for thirdsecond quarter 2022,2023, an increase of $9.5$8.4 million (29%(23%) from thirdsecond quarter 2021,2022, including a $7.2$4.2 million increase in personnel expense and a $2.3$4.2 million increase in non-personnel expenses. The increase in personnel was due to higher salaries and fringe benefits from the larger employee base (with average full-time equivalent employees up 40%11%), investments in our wealth team, and merit increases between the years. Occupancy, equipment, and office of $7.6$8.8 million was up $1.9$2.0 million (33%(28%), largely due to the expanded branch network with the recentCharter acquisitions as well as additional expense for software and technology solutions. Business development and marketing of $2.3 million increased $0.6 million over third quarter 2021, largely due to higher travel and entertainment expenses, as well as additional marketing donations, promotions, and media to support our expanded branch network and community base. Data processing expense was $3.7$4.2 million, up $0.7$0.6 million (25%(17%) between the comparable thirdsecond quarter periods, mostly due to volume-based increases in core and card processing charges, including the larger operating base following the Mackinac, County, and Charter acquisitions.acquisition. Other expense was $2.2$2.9 million, up $0.5an increase of $1.0 million between the comparable thirdsecond quarter periods, primarily due to higher professional fees and overall higher expenses related to our larger operating base. For additional information regarding noninterest expense, see “INCOME STATEMENT ANALYSIS — Noninterest Expense.”
Income tax expense for third quarter 2022 was $6.3 million, with an effective tax rate of 25.4%, compared to income tax expense of $2.3 million and an effective tax rate of 22.7% for third quarter 2021.
BALANCE SHEET ANALYSIS
At SeptemberJune 30, 2022,2023, period end assets were $8.9$8.5 billion, an increasea decrease of $1.2 billion (16%$281 million (3%) from December 31, 2021,2022, mostly due to the sale of investment securities as part of our balance sheet repositioning, partly offset by higher cash balances. Total loans increased $42 million from December 31, 2022, with growth in residential mortgage loans partly offset by lower commercial-based loans from the sale of specific nonaccrual loans as well as the payoff of two larger loan relationships. Total deposits of $7.2 billion at June 30, 2023, were minimally changed from December 31, 2022, with growth in customer and brokered time deposits partly offset by lower transaction account balances. Total borrowings decreased $295 million from December 31, 2022 in FHLB advances (as part of the balance sheet repositioning). Total stockholders’ equity was $978 million at June 30, 2023, an increase of $5 million since December 31, 2022.
Compared to June 30, 2022, assets increased $1.1 billion (15%), largely due to the acquisition of Charter acquisition, which added total assets of $1.1 billion at acquisition.and strong loan growth, partly offset by lower investment securities related to the balance sheet repositioning. Total loans increased $1.4$1.2 billion and total deposits increased $912 million from December 31, 2021,June 30, 2022, also largely due to the Charter acquisition (which added loans of $827Charter. Stockholders’ equity increased $138 million at acquisition) and solid organic loan growth. Total deposits of $7.4 billion at Septemberfrom June 30, 2022, increased $930 million from December 31, 2021, including the Charter acquisition (which added deposits of $870 million at acquisition) and higher brokered deposits. Total borrowings increased $288 million from December 31, 2021, with approximately half acquired with Charter and the remainder related to new FHLB advances. Total stockholders’ equity was $938 million at September 30, 2022, an increase of $47 million since December 31, 2021, primarily due to common stock issued in the Charter acquisition and current year earnings, partly offset by stock repurchase activity and unfavorable changes in the fair value of securities AFS.
Compared to September 30, 2021, assets were up $2.5 billion (39%) from September 30, 2021, largely due to the acquisitions of Charter and County. Total loans increased $2.5 billion and total deposits increased $2.0 billion from September 30, 2021, also largely due to the acquisitions of Charter and County. Stockholders’ equity increased $209 million from September 30, 2021, primarily due to common stock issued in the Charter and County acquisitions and net income, partially offset by stock repurchases over the year and negative net fair value investment changes.
Loans
In addition to the discussion that follows, 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 additional disclosures on loans. For additional information regarding the allowance for credit losses and nonperforming assets see also “BALANCE SHEET ANALYSIS – Allowance for Credit Losses - Loans” and “BALANCE SHEET ANALYSIS – Nonperforming Assets.”
Nicolet services a diverse customer base inthroughout Wisconsin, Michigan and Minnesota. We concentrate on originating loans in our local markets and assisting current loan customers. TheNicolet actively utilizes government loan portfolio is widely diversifiedprograms such as those provided by typesthe U.S. Small Business Administration (“SBA”) and the U.S. Department of borrowers, industry groups, and market areas.Agriculture’s Farm Service Agency (“FSA”).
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.
Table 6: Period End Loan Composition
| | | September 30, 2022 | | December 31, 2021 | | September 30, 2021 | | June 30, 2023 | | December 31, 2022 | | June 30, 2022 |
(in thousands) | (in thousands) | Amount | | % of Total | | Amount | | % of Total | | Amount | | % of Total | (in thousands) | Amount | | % of Total | | Amount | | % of Total | | Amount | | % of Total |
Commercial & industrial | Commercial & industrial | $ | 1,268,252 | | | 21 | % | | $ | 1,042,256 | | | 23 | % | | $ | 956,257 | | | 27 | % | Commercial & industrial | $ | 1,318,567 | | | 21 | % | | $ | 1,304,819 | | | 21 | % | | $ | 1,118,360 | | | 23 | % |
Owner-occupied CRE | Owner-occupied CRE | 954,933 | | | 16 | | | 787,189 | | | 17 | | | 697,816 | | | 20 | | Owner-occupied CRE | 969,202 | | | 16 | | | 954,599 | | | 15 | | | 790,680 | | | 16 | |
Agricultural | Agricultural | 1,017,498 | | | 17 | | | 794,728 | | | 17 | | | 112,409 | | | 3 | | Agricultural | 1,068,999 | | | 17 | | | 1,088,607 | | | 18 | | | 967,192 | | | 19 | |
Commercial | Commercial | 3,240,683 | | | 54 | | | 2,624,173 | | | 57 | | | 1,766,482 | | | 50 | | Commercial | 3,356,768 | | | 54 | | | 3,348,025 | | | 54 | | | 2,876,232 | | | 58 | |
CRE investment | CRE investment | 1,132,951 | | | 19 | | | 818,061 | | | 18 | | | 662,871 | | | 19 | | CRE investment | 1,108,692 | | | 18 | | | 1,149,949 | | | 19 | | | 818,562 | | | 16 | |
Construction & land development | Construction & land development | 306,446 | | | 5 | | | 213,035 | | | 5 | | | 173,971 | | | 5 | | Construction & land development | 337,389 | | | 5 | | | 318,600 | | | 5 | | | 228,575 | | | 5 | |
Commercial real estate | Commercial real estate | 1,439,397 | | | 24 | | | 1,031,096 | | | 23 | | | 836,842 | | | 24 | | Commercial real estate | 1,446,081 | | | 23 | | | 1,468,549 | | | 24 | | | 1,047,137 | | | 21 | |
Commercial-based loans | Commercial-based loans | 4,680,080 | | | 78 | | | 3,655,269 | | | 80 | | | 2,603,324 | | | 74 | | Commercial-based loans | 4,802,849 | | | 77 | | | 4,816,574 | | | 78 | | | 3,923,369 | | | 79 | |
Residential construction | Residential construction | 101,286 | | | 2 | | | 70,353 | | | 1 | | | 59,611 | | | 2 | | Residential construction | 108,095 | | | 2 | | | 114,392 | | | 2 | | | 69,423 | | | 1 | |
Residential first mortgage | Residential first mortgage | 970,384 | | | 16 | | | 713,983 | | | 15 | | | 688,491 | | | 19 | | Residential first mortgage | 1,072,609 | | | 17 | | | 1,016,935 | | | 16 | | | 785,591 | | | 16 | |
Residential junior mortgage | Residential junior mortgage | 176,428 | | | 3 | | | 131,424 | | | 3 | | | 130,279 | | | 4 | | Residential junior mortgage | 184,873 | | | 3 | | | 177,332 | | | 3 | | | 148,732 | | | 3 | |
Residential real estate | Residential real estate | 1,248,098 | | | 21 | | | 915,760 | | | 19 | | | 878,381 | | | 25 | | Residential real estate | 1,365,577 | | | 22 | | | 1,308,659 | | | 21 | | | 1,003,746 | | | 20 | |
Retail & other | Retail & other | 56,259 | | | 1 | | | 50,807 | | | 1 | | | 51,493 | | | 1 | | Retail & other | 54,350 | | | 1 | | | 55,266 | | | 1 | | | 51,539 | | | 1 | |
Retail-based loans | Retail-based loans | 1,304,357 | | | 22 | | | 966,567 | | | 20 | | | 929,874 | | | 26 | | Retail-based loans | 1,419,927 | | | 23 | | | 1,363,925 | | | 22 | | | 1,055,285 | | | 21 | |
Total loans | Total loans | $ | 5,984,437 | | | 100 | % | | $ | 4,621,836 | | | 100 | % | | $ | 3,533,198 | | | 100 | % | Total loans | $ | 6,222,776 | | | 100 | % | | $ | 6,180,499 | | | 100 | % | | $ | 4,978,654 | | | 100 | % |
As noted in Table 6 above, the loan portfolio at SeptemberJune 30, 2022,2023, was 78%77% commercial-based and 22%23% 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 June 30, 2023, increased $42 million from December 31, 2022, with growth in residential mortgage loans partly offset by lower commercial-based loans from the sale of specific nonaccrual loans (net book value of approximately $13 million) as well as the payoff of two larger loan relationships. At June 30, 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 18% 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 June 30, 2023.
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Commercial Loan Portfolio by Industry Type (based on NAICS codes) |
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The following table presents the maturity distribution of the loan portfolio.
Table 7: Loan Maturity Distribution
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As of June 30, 2023 | Loan Maturity |
(in thousands) | One Year or Less | | After One Year to Five Years | | After Five Years to Fifteen Years | | After Fifteen Years | | Total |
Commercial & industrial | $ | 464,614 | | | $ | 652,126 | | | $ | 190,494 | | | $ | 11,333 | | | $ | 1,318,567 | |
Owner-occupied CRE | 74,675 | | | 657,889 | | | 203,445 | | | 33,193 | | | 969,202 | |
Agricultural | 330,163 | | | 336,515 | | | 361,578 | | | 40,743 | | | 1,068,999 | |
CRE investment | 131,458 | | | 724,139 | | | 226,416 | | | 26,679 | | | 1,108,692 | |
Construction & land development | 32,270 | | | 187,928 | | | 91,499 | | | 25,692 | | | 337,389 | |
Residential construction * | 28,627 | | | 8,088 | | | 4,014 | | | 67,366 | | | 108,095 | |
Residential first mortgage | 20,151 | | | 260,733 | | | 193,751 | | | 597,974 | | | 1,072,609 | |
Residential junior mortgage | 9,681 | | | 20,068 | | | 33,646 | | | 121,478 | | | 184,873 | |
Retail & other | 28,946 | | | 13,454 | | | 7,699 | | | 4,251 | | | 54,350 | |
Total loans | $ | 1,120,585 | | | $ | 2,860,940 | | | $ | 1,312,542 | | | $ | 928,709 | | | $ | 6,222,776 | |
Percent by maturity distribution | 18 | % | | 46 | % | | 21 | % | | 15 | % | | 100 | % |
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Total fixed rate loans | $ | 452,373 | | | $ | 2,692,047 | | | $ | 929,155 | | | $ | 322,487 | | | $ | 4,396,062 | |
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Total floating rate loans | $ | 668,212 | | | $ | 168,893 | | | $ | 383,387 | | | $ | 606,222 | | | $ | 1,826,714 | |
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At September 30, 2022, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2022 | Loan Maturity |
(in thousands) | One Year or Less | | After One Year to Five Years | | After Five Years to Fifteen Years | | After Fifteen 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 | % |
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Total fixed rate loans | $ | 520,535 | | | $ | 2,631,295 | | | $ | 987,225 | | | $ | 315,982 | | | $ | 4,455,037 | |
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Total floating rate loans | $ | 634,896 | | | $ | 172,286 | | | $ | 375,221 | | | $ | 543,059 | | | $ | 1,725,462 | |
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* The residential construction loans were $6.0 billion, $1.4 billion higher than December 31, 2021, largely duewith a loan maturity after five years represent a construction to the Charter acquisition (which added loans of $827 million at acquisition) and solid organicpermanent loan growth. Excluding the $827 million of loans Charter added at acquisition, loans increased $536 million (16% annualized) from year-end 2021 on solid organic growth, as well as the repurchase of approximately $100 million previously participated agricultural loans. Commercial and industrial loans continue to be the largest segment of Nicolet’s portfolio and represented 21% of the total portfolio at September 30, 2022.
Residential real estate loans of $1.2 billion grew $332 million from year-end 2021, including the Charter acquisition and organic growth, to represent 21% of total loans at September 30, 2022. Residential first mortgage loans include conventional first-lien home mortgages, while residential junior mortgage loans consist mainly of home equity lines and term loans secured by junior mortgage liens. As part of our management of residential mortgage loans, the majority of Nicolet’s long-term, fixed-rate residential first mortgage loans are sold in the secondary market with servicing rights retained. Nicolet’s mortgage loans are typically of high quality and have historically had low net charge-off rates.
Retail and other loans were up slightly ($5 million) from year-end 2021, representing approximately 1% of the total loan portfolio, and include predominantly short-term and other personal installment loans not secured by real estate.product.
Allowance for Credit Losses - Loans
In addition toFor additional disclosures on the discussion that follows,allowance for credit losses, 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. A detailed discussion of the loan portfolio accounting policies, general loan portfolio characteristics, and credit risk are described in Note 1, for additional disclosures“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 the allowance for credit losses.Form 10-K.
Credit risks within the loan portfolio are inherently different for each loan type as summarized under “BALANCE SHEET ANALYSIS — Loans.” A discussion of the loan portfolio credit risk can be found in the “Loans” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2021 Annual Report on Form 10-K.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.
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. ManagementSecond, 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 as ofat 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.
At SeptemberJune 30, 2022,2023, the ACL-Loans was $60$63 million (representing 1.01% of period end loans) compared to $50, minimally changed from $62 million (or 1.00% of period end loans) at December 31, 20212022 and $38up from $51 million (or 1.02% of period end loans) at SeptemberJune 30, 2021.2022. The increase in the ACL-Loans from year-end 2021June 30, 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 increase in the ACL-Loans from September 30, 2021 was largely due to the acquisitions of Charter and County, which combined added $16 million of provision for the Day 2 allowance and $5 million related to purchased credit deteriorated loans. The components of the ACL-Loans are detailed further in Table 78 below.
Table 7:8: Allowance for Credit Losses - Loans
| | | Nine Months Ended | | Year Ended | | Six Months Ended | | Year Ended |
(in thousands) | (in thousands) | September 30, 2022 | | September 30, 2021 | | December 31, 2021 | (in thousands) | June 30, 2023 | | June 30, 2022 | | December 31, 2022 |
ACL-Loans: | ACL-Loans: | | | | | | ACL-Loans: | | | | | |
Balance at beginning of period | Balance at beginning of period | $ | 49,672 | | | $ | 32,173 | | | $ | 32,173 | | Balance at beginning of period | $ | 61,829 | | | $ | 49,672 | | | $ | 49,672 | |
ACL on PCD loans acquired | ACL on PCD loans acquired | 1,709 | | | 1,896 | | | 5,159 | | ACL on PCD loans acquired | — | | | — | | | 1,937 | |
Provision for credit losses | Provision for credit losses | 9,100 | | | 4,500 | | | 12,500 | | Provision for credit losses | 1,200 | | | 900 | | | 10,950 | |
Charge-offs | Charge-offs | (442) | | | (436) | | | (513) | | Charge-offs | (745) | | | (142) | | | (1,033) | |
Recoveries | Recoveries | 309 | | | 266 | | | 353 | | Recoveries | 527 | | | 225 | | | 303 | |
Net (charge-offs) recoveries | Net (charge-offs) recoveries | (133) | | | (170) | | | (160) | | Net (charge-offs) recoveries | (218) | | | 83 | | | (730) | |
Balance at end of period | Balance at end of period | $ | 60,348 | | | $ | 38,399 | | | $ | 49,672 | | Balance at end of period | $ | 62,811 | | | $ | 50,655 | | | $ | 61,829 | |
Net loan (charge-offs) recoveries: | Net loan (charge-offs) recoveries: | | | | | | Net loan (charge-offs) recoveries: | | | | | |
Commercial & industrial | Commercial & industrial | $ | (49) | | | $ | (31) | | | $ | 50 | | Commercial & industrial | $ | 115 | | | $ | 30 | | | $ | (86) | |
Owner-occupied CRE | Owner-occupied CRE | (36) | | | — | | | — | | Owner-occupied CRE | — | | | (36) | | | (555) | |
Agricultural | Agricultural | — | | | (48) | | | (48) | | Agricultural | (63) | | | — | | | — | |
CRE investment | CRE investment | 169 | | | (2) | | | (2) | | CRE investment | — | | | 169 | | | 169 | |
Construction & land development | Construction & land development | — | | | — | | | — | | Construction & land development | — | | | — | | | — | |
Residential construction | Residential construction | — | | | — | | | — | | Residential construction | — | | | — | | | — | |
Residential first mortgage | Residential first mortgage | (58) | | | (34) | | | (93) | | Residential first mortgage | 2 | | | 5 | | | (57) | |
Residential junior mortgage | Residential junior mortgage | 9 | | | 4 | | | 4 | | Residential junior mortgage | (96) | | | 1 | | | 1 | |
Retail & other | Retail & other | (168) | | | (59) | | | (71) | | Retail & other | (176) | | | (86) | | | (202) | |
Total net (charge-offs) recoveries | Total net (charge-offs) recoveries | $ | (133) | | | $ | (170) | | | $ | (160) | | Total net (charge-offs) recoveries | $ | (218) | | | $ | 83 | | | $ | (730) | |
Ratios: | Ratios: | | | | | | Ratios: | | | | | |
ACL-Loans to total loans | ACL-Loans to total loans | 1.01 | % | | 1.09 | % | | 1.07 | % | ACL-Loans to total loans | 1.01 | % | | 1.02 | % | | 1.00 | % |
Net charge-offs to average loans, annualized | Net charge-offs to average loans, annualized | 0.00 | % | | 0.01 | % | | 0.01 | % | Net charge-offs to average loans, annualized | 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 disruptions related to the pandemic, as well as economic, political, and social turmoil. See alsomacroeconomic challenges. 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 further disclosures on credit quality.1. For additional information on loans see also “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 practice to place such loans on nonaccrual status immediately. Nonperforming assets include nonperforming loans and other real estate owned (“OREO”). At SeptemberJune 30, 2022,2023, nonperforming assets were $40$27 million and represented 0.45%0.32% of total assets, compared to $56$40 million or 0.73%0.46% of total assets at December 31, 2021.2022. The reduction in nonperforming assets was mostly due to the nonaccrual loan sale (as noted under “BALANCE SHEET ANALYSIS – Loans” above).
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 $46$79 million (0.8%(1% of loans) and $53 million (1.1%(1% of loans) at SeptemberJune 30, 20222023 and December 31, 2021, respectively.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 8:9: Nonperforming Assets
| (in thousands) | (in thousands) | September 30, 2022 | | December 31, 2021 | | September 30, 2021 | (in thousands) | June 30, 2023 | | December 31, 2022 | | June 30, 2022 |
Nonperforming loans: | Nonperforming loans: | | | | | | Nonperforming loans: | | | | | |
Commercial & industrial | Commercial & industrial | $ | 3,052 | | | $ | 1,908 | | | $ | 1,778 | | Commercial & industrial | $ | 3,157 | | | $ | 3,328 | | | $ | 1,784 | |
Owner-occupied CRE | Owner-occupied CRE | 5,806 | | | 4,220 | | | 2,990 | | Owner-occupied CRE | 6,573 | | | 5,647 | | | 5,183 | |
Agricultural | Agricultural | 20,646 | | | 28,367 | | | 1,782 | | Agricultural | 9,092 | | | 20,416 | | | 21,054 | |
Commercial | Commercial | 29,504 | | | 34,495 | | | 6,550 | | Commercial | 18,822 | | | 29,391 | | | 28,021 | |
CRE investment | CRE investment | 3,343 | | | 4,119 | | | 4,249 | | CRE investment | 2,535 | | | 3,832 | | | 3,617 | |
Construction & land development | Construction & land development | 794 | | | 1,071 | | | 1,093 | | Construction & land development | 95 | | | 771 | | | 1,044 | |
Commercial real estate | Commercial real estate | 4,137 | | | 5,190 | | | 5,342 | | Commercial real estate | 2,630 | | | 4,603 | | | 4,661 | |
Commercial-based loans | Commercial-based loans | 33,641 | | | 39,685 | | | 11,892 | | Commercial-based loans | 21,452 | | | 33,994 | | | 32,682 | |
Residential construction | Residential construction | — | | | — | | | — | | Residential construction | — | | | — | | | — | |
Residential first mortgage | Residential first mortgage | 4,309 | | | 4,132 | | | 4,495 | | Residential first mortgage | 3,638 | | | 3,780 | | | 3,580 | |
Residential junior mortgage | Residential junior mortgage | 277 | | | 243 | | | 232 | | Residential junior mortgage | 87 | | | 224 | | | 221 | |
Residential real estate | Residential real estate | 4,586 | | | 4,375 | | | 4,727 | | Residential real estate | 3,725 | | | 4,004 | | | 3,801 | |
Retail & other | Retail & other | 99 | | | 94 | | | 96 | | Retail & other | 101 | | | 82 | | | 97 | |
Retail-based loans | Retail-based loans | 4,685 | | | 4,469 | | | 4,823 | | Retail-based loans | 3,826 | | | 4,086 | | | 3,898 | |
Total nonaccrual loans | Total nonaccrual loans | 38,326 | | | 44,154 | | | 16,715 | | Total nonaccrual loans | 25,278 | | | 38,080 | | | 36,580 | |
Accruing loans past due 90 days or more | Accruing loans past due 90 days or more | — | | | — | | | — | | Accruing loans past due 90 days or more | — | | | — | | | — | |
Total nonperforming loans | Total nonperforming loans | $ | 38,326 | | | $ | 44,154 | | | $ | 16,715 | | Total nonperforming loans | $ | 25,278 | | | $ | 38,080 | | | $ | 36,580 | |
Nonaccrual loans (included above) covered by guarantees | Nonaccrual loans (included above) covered by guarantees | $ | 5,493 | | | $ | 6,776 | | | $ | 1,729 | | Nonaccrual loans (included above) covered by guarantees | $ | 3,110 | | | $ | 5,459 | | | $ | 4,883 | |
OREO: | OREO: | | OREO: | |
Commercial real estate owned | Commercial real estate owned | $ | 628 | | | $ | 1,549 | | | $ | 1,219 | | Commercial real estate owned | $ | 520 | | | $ | 628 | | | $ | 628 | |
Residential real estate owned | — | | | 99 | | | 355 | | |
| Bank property real estate owned | Bank property real estate owned | 1,506 | | | 10,307 | | | 2,895 | | Bank property real estate owned | 958 | | | 1,347 | | | 4,378 | |
Total OREO | Total OREO | 2,134 | | | 11,955 | | | 4,469 | | Total OREO | 1,478 | | | 1,975 | | | 5,006 | |
Total nonperforming assets | Total nonperforming assets | $ | 40,460 | | | $ | 56,109 | | | $ | 21,184 | | Total nonperforming assets | $ | 26,756 | | | $ | 40,055 | | | $ | 41,586 | |
Performing troubled debt restructurings | $ | — | | | $ | 5,443 | | | $ | 2,103 | | |
| Ratios: | Ratios: | | | | | | Ratios: | | | | | |
Nonperforming loans to total loans | Nonperforming loans to total loans | 0.64 | % | | 0.96 | % | | 0.47 | % | Nonperforming loans to total loans | 0.41 | % | | 0.62 | % | | 0.73 | % |
Nonperforming assets to total loans plus OREO | Nonperforming assets to total loans plus OREO | 0.68 | % | | 1.21 | % | | 0.60 | % | Nonperforming assets to total loans plus OREO | 0.43 | % | | 0.65 | % | | 0.83 | % |
Nonperforming assets to total assets | Nonperforming assets to total assets | 0.45 | % | | 0.73 | % | | 0.33 | % | Nonperforming assets to total assets | 0.32 | % | | 0.46 | % | | 0.56 | % |
ACL-Loans to nonperforming loans | ACL-Loans to nonperforming loans | 157 | % | | 112 | % | | 230 | % | ACL-Loans to nonperforming loans | 248 | % | | 162 | % | | 138 | % |
Deposits
Deposits represent Nicolet’s largest source of funds. Total depositsfunds, and the strong core deposit base provides a stable funding source. Core deposit balances of $7.4$6.5 billion at SeptemberJune 30, 2022, increased $9302023 declined $128 million (2%) from December 31, 2021, primarily due to2022, including lower commercial balances, as well as the Charter acquisition, and included a $735 million increase in core customer deposits and a $195 million increase in brokeredseasonal run-off of municipal deposits. Compared to SeptemberJune 30, 2021, total2022, core deposits increased $2.0 billion (36%$656 million (11%), largely due to the Charter and County acquisitions.acquisition. The deposit composition is presented in Table 910 below.
Table 9:10: Period End Deposit Composition
| | | September 30, 2022 | | December 31, 2021 | | September 30, 2021 | | June 30, 2023 | | December 31, 2022 | | June 30, 2022 |
(in thousands) | (in thousands) | Amount | | % of Total | | Amount | | % of Total | | Amount | | % of Total | (in thousands) | Amount | | % of Total | | Amount | | % of Total | | Amount | | % of Total |
Noninterest-bearing demand | Noninterest-bearing demand | $ | 2,477,507 | | | 33 | % | | $ | 1,975,705 | | | 31 | % | | $ | 1,852,119 | | | 34 | % | Noninterest-bearing demand | $ | 2,059,939 | | | 29 | % | | $ | 2,361,816 | | | 33 | % | | $ | 2,045,732 | | | 33 | % |
Money market and interest-bearing demand | 3,012,405 | | | 41 | % | | 2,834,824 | | | 44 | % | | 2,154,557 | | | 40 | % | |
Interest-bearing demand | | Interest-bearing demand | 1,030,919 | | | 14 | % | | 1,279,850 | | | 18 | % | | 1,230,822 | | | 20 | % |
Money market | | Money market | 1,835,523 | | | 26 | % | | 1,707,619 | | | 24 | % | | 1,411,688 | | | 22 | % |
Savings | Savings | 939,832 | | | 13 | % | | 803,197 | | | 12 | % | | 775,281 | | | 14 | % | Savings | 821,803 | | | 11 | % | | 931,417 | | | 13 | % | | 858,160 | | | 13 | % |
Time | Time | 966,158 | | | 13 | % | | 852,190 | | | 13 | % | | 646,817 | | | 12 | % | Time | 1,450,420 | | | 20 | % | | 898,219 | | | 12 | % | | 739,864 | | | 12 | % |
Total deposits | Total deposits | $ | 7,395,902 | | | 100 | % | | $ | 6,465,916 | | | 100 | % | | $ | 5,428,774 | | | 100 | % | Total deposits | $ | 7,198,604 | | | 100 | % | | $ | 7,178,921 | | | 100 | % | | $ | 6,286,266 | | | 100 | % |
Brokered transaction accounts | Brokered transaction accounts | $ | 252,891 | | | 3 | % | | $ | 234,306 | | | 4 | % | | $ | 152,858 | | | 3 | % | Brokered transaction accounts | $ | 173,107 | | | 2 | % | | $ | 252,829 | | | 3 | % | | $ | 265,240 | | | 4 | % |
Brokered and listed time deposits | Brokered and listed time deposits | 386,101 | | | 5 | % | | 209,857 | | | 3 | % | | 204,202 | | | 4 | % | Brokered and listed time deposits | 566,405 | | | 8 | % | | 339,066 | | | 5 | % | | 218,198 | | | 4 | % |
Total brokered deposits | Total brokered deposits | $ | 638,992 | | | 8 | % | | $ | 444,163 | | | 7 | % | | $ | 357,060 | | | 7 | % | Total brokered deposits | $ | 739,512 | | | 10 | % | | $ | 591,895 | | | 8 | % | | $ | 483,438 | | | 8 | % |
Customer transaction accounts | Customer transaction accounts | $ | 6,176,853 | | | 84 | % | | $ | 5,379,420 | | | 83 | % | | $ | 4,629,099 | | | 85 | % | Customer transaction accounts | $ | 5,575,077 | | | 78 | % | | $ | 6,027,873 | | | 84 | % | | $ | 5,281,162 | | | 84 | % |
Customer time deposits | Customer time deposits | 580,057 | | | 8 | % | | 642,333 | | | 10 | % | | 442,615 | | | 8 | % | Customer time deposits | 884,015 | | | 12 | % | | 559,153 | | | 8 | % | | 521,666 | | | 8 | % |
Total customer deposits (core) | Total customer deposits (core) | $ | 6,756,910 | | | 92 | % | | $ | 6,021,753 | | | 93 | % | | $ | 5,071,714 | | | 93 | % | Total customer deposits (core) | $ | 6,459,092 | | | 90 | % | | $ | 6,587,026 | | | 92 | % | | $ | 5,802,828 | | | 92 | % |
Total estimated uninsured deposits were $2.0 billion (representing 28% of total deposits) at June 30, 2023, compared to $2.3 billion (representing 32% of total deposits) at December 31, 2022.
Lending-Related Commitments
As of SeptemberJune 30, 20222023 and December 31, 2021,2022, Nicolet had the following off-balance sheet lending-related commitments.
Table 10:11: Commitments
| (in thousands) | (in thousands) | September 30, 2022 | | December 31, 2021 | (in thousands) | June 30, 2023 | | December 31, 2022 |
Commitments to extend credit | Commitments to extend credit | $ | 1,854,064 | | | $ | 1,433,881 | | Commitments to extend credit | $ | 1,826,995 | | | $ | 1,850,601 | |
Financial standby letters of credit | Financial standby letters of credit | 26,250 | | | 13,562 | | Financial standby letters of credit | 22,777 | | | 26,530 | |
Performance standby letters of credit | Performance standby letters of credit | 9,059 | | | 7,336 | | Performance standby letters of credit | 12,824 | | | 9,375 | |
Interest rate lockFor additional disclosures on lending-related commitments, see Note 9, “Commitments and Contingencies” of the Notes 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 $12 million and $10 million, respectively, at September 30, 2022. 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 represented $50 million and $1 million, respectively, at December 31, 2021. The net fair value of these mortgage derivatives combined was a gain of $121,000 at September 30, 2022 compared to a gain of $149,000 at December 31, 2021.Unaudited Consolidated Financial Statements under Part I, Item 1.
Liquidity Management
Liquidity management refers to the ability to ensure that cash isadequate liquid funds are available in a timely and cost-effective manner to meet the current and future cash flow requirementsobligations arising in the daily operations of depositors and borrowers and to meet other commitments as they fall due, includingthe Company. These cash flow obligations include the ability to service debt, invest in subsidiaries, repurchase common stock,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 requirements.expenses. The Company’s most liquid assets are cash and due from banks and interest-earning deposits, which totaled $505 million and $155 million at June 30, 2023 and December 31, 2022, respectively. Balances of these liquid assets are dependent on our operating, investing, and financing activities during any given period.
Funds are availableThe $350 million increase in cash and cash equivalents since year-end 2022 included $48 million net cash provided by operating activities and $581 million net cash provided by investing activities (mostly investment sales from a numberthe balance sheet repositioning), partly offset by $279 million net cash used in financing activities (mostly repayment of basic banking activityFHLB borrowings from the balance sheet repositioning). As of June 30, 2023, management believed that adequate liquidity existed to meet all projected cash flow obligations.
Nicolet’s primary sources including, but not limited to,of funds include the core deposit base;base, repayment and maturity of loans;loans, investment securities calls, maturities, and sales;sales, and procurement of additional brokered deposits or other wholesale funding. At SeptemberJune 30, 2022,2023, approximately 48%43% of the $1.6 billion 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. Additional fundingLiquidity sources available to the Company at SeptemberJune 30, 2022, consist of available and unused Federal funds lines, borrowing capacity at the FHLB of $554 million, and borrowing capacity2023, are presented in the brokered deposit market.Table 12 below.
Table 12: Liquidity Sources
| | | | | | | | |
(in millions) | | June 30, 2023 |
FHLB Borrowing Availability (1) | | $ | 581 | |
Fed Funds Lines | | 155 |
Fed Discount Window | | 11 |
Immediate Funding Availability | | $ | 747 | |
| | |
Unencumbered AFS Securities | | $ | 525 | |
Less: AFS Securities retained per policy (2) | | (443) | |
Brokered Capacity | | 1,060 | |
Guaranteed portion of SBA loans | | 88 | |
Other funding sources | | 75 | |
Short-Term Funding Availability (3) | | $ | 1,305 | |
| | |
Total Contingent Funding Availability | | $ | 2,052 | |
| | |
(1) Excludes outstanding FHLB borrowings of $55 million at June 30, 2023. | | |
(2) Excludes $443 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, repayment of debt, or investment in other strategic actions such as mergers or acquisitions. At SeptemberJune 30, 2022,2023, the Parent Company had $38$56 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. During 2021, Nicolet completed the private placement of $100 million in fixed-to-floating rate subordinated notes (the “Notes”) due in 2031. (See Note 8, “Short and Long-Term Borrowings” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional information on the Notes). Dividends from the Bank and, to a
lesser extent, stock option exercises, also represent significant sources of cash flows for the Parent Company.
Cash and cash equivalents at September 30, 2022 and December 31, 2021 were $438 million and $595 million, respectively. The decreaseBank 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 cash and cash equivalents since year-end 2021 included $87 million net cash provided by operating activities (mostly earnings), $382 million net cash used in investing activities (with strong loan growth and cash paid for the Charter acquisition partly offset by net cash receivedany year will exceed certain thresholds. Management does not believe that regulatory restrictions on dividends from the Birmingham branch sale), and $137 million net cash provided by financing activities (mostly deposit and short-term borrowings partly offset by cash outflows for common stock repurchases). Management believesBank will adversely affect its liquidity resources were sufficient as of September 30, 2022 to fund loans, accommodate deposit cycles and trends, andability to meet otherits cash needs as necessary.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 boardBoard of directors’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 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 earlierabove and reflect the changedhigher 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 at SeptemberJune 30, 20222023 and December 31, 2021,2022, the projected changes in net interest income over a one-year time horizon, versus the baseline, are presented in Table 1113 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 11:13: Interest Rate Sensitivity
| | | September 30, 2022 | | December 31, 2021 | | June 30, 2023 | | December 31, 2022 |
200 bps decrease in interest rates | 200 bps decrease in interest rates | (1.7) | % | | (0.3) | % | 200 bps decrease in interest rates | (2.1) | % | | (0.7) | % |
100 bps decrease in interest rates | 100 bps decrease in interest rates | (0.7) | % | | (0.3) | % | 100 bps decrease in interest rates | (1.1) | % | | (0.4) | % |
100 bps increase in interest rates | 100 bps increase in interest rates | 0.5 | % | | (0.1) | % | 100 bps increase in interest rates | 1.1 | % | | — | % |
200 bps increase in interest rates | 200 bps increase in interest rates | 1.1 | % | | (0.3) | % | 200 bps increase in interest rates | 2.3 | % | | 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 impacthave 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 capital 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. At SeptemberJune 30, 2022,2023, 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 the current environment and 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.
Table 12:14: Capital
| | | At or for the Nine Months Ended | | At or for the Year Ended | | At or for the Six Months Ended | | At or for the Year Ended |
($ in thousands) | ($ in thousands) | September 30, 2022 | | December 31, 2021 | ($ in thousands) | June 30, 2023 | | December 31, 2022 |
Company Stock Repurchases: * | Company Stock Repurchases: * | | | | Company Stock Repurchases: * | | | |
Common stock repurchased during the period (dollars) | Common stock repurchased during the period (dollars) | $ | 60,697 | | | $ | 61,464 | | Common stock repurchased during the period (dollars) | $ | 1,519 | | | $ | 61,483 | |
Common stock repurchased during the period (full shares) | Common stock repurchased during the period (full shares) | 661,662 | | | 793,064 | | Common stock repurchased during the period (full shares) | 26,853 | | | 671,662 | |
Company Risk-Based Capital: | Company Risk-Based Capital: | | Company Risk-Based Capital: | |
Total risk-based capital | Total risk-based capital | $ | 855,119 | | | $ | 793,410 | | Total risk-based capital | $ | 902,726 | | | $ | 889,763 | |
Tier 1 risk-based capital | Tier 1 risk-based capital | 651,016 | | | 604,199 | | Tier 1 risk-based capital | 698,469 | | | 684,280 | |
Common equity Tier 1 capital | Common equity Tier 1 capital | 613,284 | | | 567,095 | | Common equity Tier 1 capital | 660,114 | | | 646,341 | |
Total capital ratio | Total capital ratio | 12.0 | % | | 13.8 | % | Total capital ratio | 12.7 | % | | 12.3 | % |
Tier 1 capital ratio | Tier 1 capital ratio | 9.2 | % | | 10.5 | % | Tier 1 capital ratio | 9.8 | % | | 9.5 | % |
Common equity tier 1 capital ratio | Common equity tier 1 capital ratio | 8.6 | % | | 9.9 | % | Common equity tier 1 capital ratio | 9.3 | % | | 9.0 | % |
Tier 1 leverage ratio | Tier 1 leverage ratio | 8.6 | % | | 9.4 | % | Tier 1 leverage ratio | 8.8 | % | | 8.2 | % |
Bank Risk-Based Capital: | Bank Risk-Based Capital: | | Bank Risk-Based Capital: | |
Total risk-based capital | Total risk-based capital | $ | 801,952 | | | $ | 700,869 | | Total risk-based capital | $ | 841,973 | | | $ | 816,951 | |
Tier 1 risk-based capital | Tier 1 risk-based capital | 750,572 | | | 664,688 | | Tier 1 risk-based capital | 784,157 | | | 764,090 | |
Common equity Tier 1 capital | Common equity Tier 1 capital | 750,572 | | | 664,688 | | Common equity Tier 1 capital | 784,157 | | | 764,090 | |
Total capital ratio | Total capital ratio | 11.3 | % | | 12.2 | % | Total capital ratio | 11.8 | % | | 11.3 | % |
Tier 1 capital ratio | Tier 1 capital ratio | 10.6 | % | | 11.6 | % | Tier 1 capital ratio | 11.0 | % | | 10.6 | % |
Common equity tier 1 capital ratio | Common equity tier 1 capital ratio | 10.6 | % | | 11.6 | % | Common equity tier 1 capital ratio | 11.0 | % | | 10.6 | % |
Tier 1 leverage ratio | Tier 1 leverage ratio | 10.0 | % | | 10.3 | % | Tier 1 leverage ratio | 9.9 | % | | 9.1 | % |
* Reflects common stock repurchased under board of director authorizations for the common stock repurchase program. | * Reflects common stock repurchased under board of director authorizations for the common stock repurchase program. | * 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)opportunities, dividends, or repayment of equity-equivalent debt) in light of strategic plans. During the first nine months of 2022, $61 million was utilized to repurchase and cancel 661,662 shares of common stock, pursuant to our common stock repurchase program. At SeptemberJune 30, 2022,2023, there remains $48$46 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
In preparing the consolidatedThe preparation of financial statements in conformity with U.S. GAAP requires management is required to make estimates, and assumptions or judgments that affect the amounts reported amounts of assetsin the financial statements and liabilitiesaccompanying notes. These estimates and assumptions are based on historical experience, current information, and other factors deemed to be relevant; accordingly, as of the date of the balance sheet and revenues and expenses for the period. Actualthis information changes, actual results could differ significantly from those estimates. EstimatesNicolet considers accounting estimates to be critical to reported financial results if the accounting estimate requires management to make assumptions about matters that are particularly susceptiblehighly 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 significant changeoccur 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, the determination and assessment of deferred tax assets and liabilities, and the valuation of loans acquired in acquisition transactions.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 20212022 Annual Report on Form 10-K. There have been no changes in the Company’s determination of critical accounting policies and estimates since December 31, 2021.2022.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risk at SeptemberJune 30, 2022,2023, from that presented in our 20212022 Annual Report on Form 10-K. See section “Interest Rate Sensitivity Management and Impact of Inflation” within Management’s Discussion and Analysis of Financial Condition and Results of Operations under Part I, Item 2, for our interest rate sensitivity position at SeptemberJune 30, 2022.2023.
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. Management, under the supervision, and with the participation, of our principal executive officer and principal financial officer, evaluated our disclosure controls and procedures (as such term is defined in Exchange Act Rule 13a-15(e) and 15d-15(e)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
(b) Changes in Internal Control Over Financial Reporting. There were no changes in the Company’s internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controlscontrol over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
WeThe Company and ourits subsidiaries may be involved from time to time in various routine legal proceedings incidental to our respective businesses. Neither wethe Company nor any of ourits subsidiaries are currently engaged in any legal proceedings that are expected to have a material adverse effect on our results of operations or financial position.
ITEM 1A. RISK FACTORS
There have been no material changes in the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table contains information regarding purchases of Nicolet’s common stock made during thirdsecond quarter 20222023 by or on behalf of the Company or any “affiliated purchaser,” as defined by Rule 10b-18(a)(3) of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | |
| Total Number of Shares Purchased (a) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (b) |
| (#) | | ($) | | (#) | | (#) |
Period | | | | | | | |
July 1 – July 31, 2022 | — | | | $ | — | | | — | | | |
August 1 – August 31, 2022 | — | | | $ | — | | | — | | | |
September 1 – September 30, 2022 | 72 | | | $ | 76.66 | | | — | | | |
Total | 72 | | | $ | 76.66 | | | — | | | 686,000 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total Number of Shares Purchased (a) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (b) |
| (#) | | ($) | | (#) | | (#) |
Period | | | | | | | |
April 1 – April 30, 2023 | 21,031 | | | $ | 59.63 | | | 12,116 | | | |
May 1 – May 31, 2023 | 18,430 | | | $ | 57.48 | | | 14,737 | | | |
June 1 – June 30, 2023 | 1,672 | | | $ | 72.36 | | | — | | | |
Total | 41,133 | | | $ | 59.18 | | | 26,853 | | | 677,000 | |
a.During thirdsecond quarter 2022,2023, the Company withheld 72no common shares for minimum tax withholding settlements on restricted stock.stock, and withheld 14,280 common shares to satisfy the exercise price and tax withholding requirements on stock option exercises. These are not considered “repurchases” and, therefore, do not count against the maximum number of shares that may yet be purchased under the boardBoard of directors’Directors’ authorization.
b.The boardBoard of directorsDirectors approved a common stock repurchase program which authorized, with subsequent modifications, the use of up to $276 million to repurchase outstanding shares of common stock. This common stock repurchase program was last modified on April 19, 2022, and has no expiration date. At SeptemberJune 30, 2022,2023, approximately $48$46 million remained available under this common stock repurchase program, or approximately 686,000677,000 shares of common stock (based upon the closing stock price of $70.44$67.91 on SeptemberJune 30, 2022)2023).
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The following exhibits are filed herewith:
| | | | | | | | |
Exhibit Number | | Description |
2.1 | | |
31.1 | | |
31.2 | | |
32.1 | | |
32.2 | | |
101.INS | | The XBRL Instance Document does not appear in the Interactive Date File because its XBRL tags are embedded within the Inline XBRL document (2)(1) |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
(1) Incorporated by reference to the exhibit of the same number in the Registrant’s Current Report on Form 8-K filed on March 30, 2022.
(2) Includes the following financial information included in the Company’s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2022,2023, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial Statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | |
| NICOLET BANKSHARES, INC. |
| |
November 1, 2022August 4, 2023 | /s/ Michael E. Daniels |
| Michael E. Daniels |
| President and Chief Executive Officer |
| |
November 1, 2022August 4, 2023 | /s/ H. Phillip Moore, Jr. |
| H. Phillip Moore, Jr. |
| Chief Financial Officer |