Nicolet Bankshares Inc: Form 10-Q for the period ended Sep 30, 2024

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”), primarily 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, or with respect to expectations regarding the economic factors such as inflation and changes in interest rates. 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 (including their underlying assumptions) should be viewed with caution. Investors 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 any forward-looking 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 2023 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;
• 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 inflation and recessions, weather events, natural disasters, epidemics and pandemics, terrorist activities, wars or other foreign conflicts, 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 2023 Annual Report on Form 10-K and in subsequent filings we make with the SEC; and
• the risk that Nicolet’s analysis of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.

These factors should be considered in evaluating the forward-looking statements, and you should not place undue reliance on such statements.

Overview

The following discussion is management’s analysis of Nicolet’s consolidated financial condition as of September 30, 2024 and December 31, 2023 and results of operations for the three and nine-month periods ended September 30, 2024 and 2023. It should be read in conjunction with our audited consolidated financial statements included in Nicolet’s 2023 Annual Report on Form 10-K.

Economic Outlook

At the beginning of 2024, there were serious concerns for a recession in 2024, which have since abated. Interest rates shifted higher after the Federal Reserve cut short-term interest rates 50 bps in mid-September, influenced by a strong employment report and higher than expected Consumer Price Index (“CPI” ) release. While labor market are cooling, some metrics continue to show strength and the latest employment report was stronger than expected. The CPI for September increased 0.2%, with shelter and food components driving much of this increase, and the CPI is expected to increase 2.6% (annualized) for the second half of 2024. The U.S. election will likely provide additional volatility to the economy over the coming weeks.

(In thousands, except per share data)

Note: Numbers may not sum due to rounding.

(1) The adjusted net income and diluted EPS measures are non-GAAP financial measures that provide 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 for a reconciliation of these financial measures.

(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 for a reconciliation of these financial measures.

(3) Income statement-related ratios for partial-year periods are annualized.

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 below.

(In thousands, except per share data)

Note: Numbers may not sum due to rounding.

(1) Provision expense for 2023 is attributable to the expected loss on a bank subordinated debt investment.

(2) Includes the gains / (losses) on other assets and investments, as well as the impact of the March 2023 balance sheet repositioning which included 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, with the net proceeds used to reduce FHLB borrowings and the remainder held in investable cash.

(3) In July 2023, a new Wisconsin tax law change was signed which provided financial institutions with an exemption from state taxable income for interest, fees, and penalties earned on specific loans to existing Wisconsin-based business or agriculture purpose loans. The effective tax rate for periods prior to July 1, 2023, effective date of this tax law change, assumed an effective tax rate of 25%, and periods subsequent to the effective date assumed an effective tax rate of 19.5%. The adjusted net income reconciliation for first and second quarter 2023 is as originally reported, and has not been restated to reflect the $3 million excess tax expense of those quarters that was subsequently reversed in third quarter 2023 due to the Wisconsin tax law change. Thus, the adjusted net income reconciliation for the quarters of 2023 will not sum to the full year impact.

Performance Summary

Net income was $90 million (or earnings per diluted common share of $5.84) for the nine months ended September 30, 2024, compared to net income of $31 million (or earnings per diluted common share of $2.05) for the nine months ended September 30, 2023, with 2023 significantly impacted by the first quarter balance sheet repositioning (as detailed in Table 1A, Reconciliation of Non-GAAP Financial Measures above).

Net income reflected non-core items and the related tax effect of each, including the first quarter 2023 balance sheet repositioning and third quarter 2023 change in Wisconsin tax law (as detailed in section Non-GAAP Financial Measures above), as well as gains / (losses) on other assets and investments in all periods. These non-core items positively impacted earnings per diluted common share $0.19 for the nine months ended September 30, 2024 and negatively impacted earnings per diluted common share $2.82 for the nine months ended September 30, 2023.

• Net interest income was $197 million for the first nine months of 2024, up $19 million (11%) over the first nine months of 2023. Interest income grew $46 million mostly due to the repricing of new and renewed loans in a higher interest rate environment. Interest expense increased $27 million between the comparable nine-month periods also mostly from the higher average funding costs. Net interest margin was 3.35% for the nine months ended September 30, 2024, compared to 3.07% for the nine months ended September 30, 2023. For additional information regarding net interest income, see “Income Statement Analysis — Net Interest Income.”
• Noninterest income was $61 million for the first nine months of 2024, a $50 million favorable change from the comparable 2023 period, primarily due to the first quarter 2023 balance sheet repositioning (noted above). Excluding net asset gains (losses), noninterest income for the first nine months of 2024 was $58 million, a $7 million increase

over the first nine months of 2023. For additional information regarding noninterest income, see “Income Statement Analysis — Noninterest Income.”

• Noninterest expense was $143 million, $8 million (6%) higher than the first nine months of 2023. Personnel costs increased $10 million, while non-personnel expenses combined decreased $2 million (3%) from the comparable 2023 period. For additional information regarding noninterest expense, see “Income Statement Analysis — Noninterest Expense.”
• Nonperforming assets were $26 million, representing 0.31% of total assets at September 30, 2024, compared to $28 million or 0.33% of total assets at December 31, 2023. For additional information regarding nonperforming assets, see “Balance Sheet Analysis – Nonperforming Assets.”
• At September 30, 2024, assets were $8.6 billion, an increase of $168 million (2%) from December 31, 2023, mostly from solid loan growth, partly offset by lower cash balances. For additional balance sheet discussion see “Balance Sheet Analysis.”
• At September 30, 2024, loans were $6.6 billion, an increase of $203 million from December 31, 2023, with growth in agricultural, commercial and industrial, and residential real estate loans. On average, loans grew $256 million (4%) over the first nine months of 2023. For additional information regarding loans, see “Balance Sheet Analysis — Loans.”
• Total deposits of $7.3 billion at September 30, 2024, increased $62 million from December 31, 2023, with growth in money market and time deposits, partly offset by lower noninterest-bearing demand deposits from seasonal trends as well as some migration to higher rate deposit products. Year-to-date average deposits were $129 million (2%) higher than the first nine months of 2023. 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

(in thousands)

(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.

(3) Loan purchase accounting accretion included in Total loans interest above, and the related impact to net interest margin.

(4) Loan nonaccrual interest included in Total loans interest above, and the related impact to net interest margin.

Table 2: Average Balance Sheet and Net Interest Income Analysis - Tax-Equivalent Basis (Continued)

(in thousands)

(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.

(3) Loan purchase accounting accretion included in Total loans interest above, and the related impact to net interest margin.

(4) Loan nonaccrual interest included in Total loans interest above, and the related impact to net interest margin.

Table 3: Volume/Rate Variance - Tax-Equivalent Basis

(in thousands)

(1) The change in interest due to both rate and volume has been allocated in proportion to the relationship of dollar amount 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 425 bps during 2022, increasing the Federal Funds rate to a range of 4.25% to 4.50% as of December 31, 2022. Additional increases totaling 100 bps were made during 2023, resulting in a Federal Funds range of 5.25% to 5.50% as of December 31, 2023, while the Federal Reserve decreased short-term interest rates in September 2024, resulting in a Federal Funds range of 4.75% to 5.00% at September 30, 2024.

Tax-equivalent net interest income was $198 million for the nine months ended September 30, 2024, an increase of $19 million (11%) over the nine months ended September 30, 2023. The $19 million increase in tax-equivalent net interest income was mostly attributable to favorable rates (which added $24 million to net interest income), partly offset by unfavorable volumes.

Average interest-earning assets increased $61 million to $7.7 billion over the comparable 2023 period, with solid loan growth partly offset by lower investment securities due to the first quarter 2023 balance sheet repositioning (as discussed in further detail under “Performance Summary” above). Between the comparable nine-month periods, average loans increased $256 million (4%), on solid organic loan growth. Average investment securities decreased $298 million between the comparable nine-month periods, while other interest-earning assets increased $103 million, with both attributable to the first quarter 2023 balance sheet repositioning. As a result, the mix of average interest-earning assets shifted to 84% loans, 11% investments and 5% other interest-earning assets (mostly cash) for the first nine months of 2024, compared to 81%, 15% and 4%, respectively, for the first nine months of 2023.

Average interest-bearing liabilities were $5.6 billion for the first nine months of 2024, an increase of $278 million (5%) over the first nine months of 2023. Average interest-bearing core deposits increased $319 million and average brokered deposits increased $140 million between the comparable nine-month periods, reflecting growth in higher cost deposit products and a shift in funding strategy. Wholesale funding decreased $181 million between the comparable nine-month periods, mostly due to the repayment of FHLB borrowings as part of the first quarter 2023 balance sheet repositioning. The mix of average interest-bearing liabilities was 84% core deposits, 14% brokered deposits and 2% wholesale funding for the first nine months of 2024, compared to 82%, 12%, and 6%, respectively, for the first nine months of 2023.

The interest rate spread increased 22 bps between the comparable nine-month periods, as the repricing of liabilities has slowed, while new and renewed loans continue to reprice in a higher interest rate environment. The interest-earning asset yield increased 73 bps to 5.58% for the first nine months of 2024, due to the changing mix of interest-earning assets (noted above), as well as the higher interest rate environment. The loan yield improved 62 bps to 5.95% between the comparable nine-month periods, largely due to the repricing of new and renewed loans, while the yield on investment securities increased 73 bps to 2.95%. The cost of funds increased 51 bps to 3.07% for the first nine months of 2024, also reflecting the higher interest rate environment as well as a migration of customer deposits into higher rate deposit products. The contribution from net free funds increased 6 bps, mostly due to the higher value in the current interest rate environment. As a result, the tax-equivalent net interest margin was 3.35% for the first nine months of 2024, a 28 bps increase over 3.07% for the first nine months of 2023.

Tax-equivalent interest income was $327 million for the first nine months of 2024, up $46 million from the comparable period of 2023, comprised of $43 million higher average rates and $3 million higher average volume. Interest income on loans increased $42 million over the first nine months of 2023, mostly due to higher rates from the rising interest rate environment, as well as solid loan growth. Interest expense increased to $129 million for the first nine months of 2024, up $27 million compared to the first nine months of 2023, mostly due to a higher cost of funds, as well as growth in deposits.

Provision for Credit Losses

The provision for credit losses was $2.9 million for the nine months ended September 30, 2024 (entirely related to the ACL-Loans), compared to $4.0 million for the nine months ended September 30, 2023 (comprised of $1.7 million related to the ACL-Loans and $2.3 million for the ACL on securities AFS). The provision for credit losses on loans was attributable to growth and changes in the underlying loan portfolio, while the 2023 provision for credit losses on securities AFS was due to the expected loss on a 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. 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 5, “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

(in thousands)

N/M means not meaningful.

Noninterest income was $61.4 million for the first nine months of 2024, a favorable change of $49.9 million compared to the first nine months of 2023, primarily due to the 2023 balance sheet repositioning. Noninterest income without net gains (losses) was $57.7 million for the first nine months of 2024, a $7.4 million (15%) increase over the comparable period in 2023.

Wealth management fee income was $20.2 million, up $2.8 million (16%) from the first nine months of 2023, including favorable market-related changes, as well as growth in accounts and assets under management.

Mortgage income includes 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 $6.9 million, increased $1.5 million (29%) between the comparable nine-month periods, mostly due to higher secondary market volumes and the related gains on sales, partly offset by changes in the MSR valuation (2023 included a $0.5 million recovery to the MSR valuation while 2024 included a $0.1 million addition to the MSR valuation). See also Note 6, “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.

Services charges on deposit accounts were $5.3 million, up $0.8 million (18%) from the first nine months of 2023, on growth in both accounts and account analysis fees.

BOLI income was $4.0 million, a $0.7 million (20%) increase over the first nine months of 2023, on higher average balances from the $11.5 million new BOLI purchased in mid-2024 and improvements in BOLI assets linked to market performance.

The Company sponsors a nonqualified deferred compensation (“NQDC”) plan for certain employees that fluctuates based upon market valuations of the underlying plan assets. See also “Noninterest Expense” for the offsetting fair value change to the nonqualified deferred compensation plan liabilities.

Other income of $6.4 million for the nine months ended September 30, 2024 was up $0.8 million from the comparable 2023 period, largely due to card incentive income.

Net asset gains of $3.7 million for the first nine months of 2024 included gains of $1.6 million on sales of investments, a $1.3 million gain on the early extinguishment of Nicolet subordinated notes, and $0.7 million of favorable fair value marks on equity securities. Net asset losses of $38.8 million for the first nine months of 2023 were primarily attributable to losses on the sale of approximately $500 million (par value) U.S. Treasury held to maturity securities as part of a balance sheet repositioning.

Noninterest Expense

Table 5: Noninterest Expense

($ in thousands)

Noninterest expense was $143.1 million, an increase of $7.6 million (6%) over the first nine months of 2023. Personnel costs increased $9.6 million (13%), while non-personnel expenses combined decreased $2.0 million (3%) compared to the first nine months of 2023.

Personnel expense was $81.7 million for the nine months ended September 30, 2024, an increase of $9.6 million from the comparable period in 2023. Salary expense increased $6.8 million (11%) over the first nine months of 2023, reflecting merit increases between the years and higher incentives commensurate with current period earnings. Fringe benefits increased $2.8 million over the first nine months of 2023, mostly due to higher overall health care expenses. Salary expense was also impacted by the change in the fair value of nonqualified deferred compensation plan liabilities. See also “Noninterest Income” for the offsetting fair value change to the nonqualified deferred compensation plan assets.

Data processing expense was $13.1 million, up $0.2 million (2%) between the comparable nine-month periods, mostly due to volume-based increases in core and brokerage processing charges.

Intangibles amortization decreased $0.9 million between the comparable nine-month periods due to lower amortization from the aging intangibles.

Other expense was $7.6 million, down $0.9 million (11%) between the comparable nine-month periods, mostly due to lower professional fees.

Income Taxes

Income tax expense was $22.3 million (effective tax rate of 20.0%) for the first nine months of 2024, compared to income tax expense of $18.4 million (effective tax rate of 37.3%) for the comparable period of 2023. The change in income tax was mostly due to the lower pretax earnings in 2023, as well as the $9.1 million charge to income tax expense during 2023 to establish a tax valuation allowance related to the Wisconsin tax law change noted above in the “Performance Summary” section. In addition, the Wisconsin tax law change resulted in a lower effective tax rate beginning in the second half of 2023.

Income Statement Analysis – Three Months Ended September 30, 2024 versus Three Months Ended September 30, 2023

Net income was $32.5 million, or adjusted net income (non-GAAP) of $31.6 million, for the three months ended September 30, 2024, compared to net income of $17.2 million, or adjusted net income (non-GAAP) of $23.3 million for the three months ended September 30, 2023. Earnings per diluted common share was $2.10 for third quarter 2024, compared to $1.14 for third quarter 2023.

Tax-equivalent net interest income was $68.9 million for third quarter 2024, an increase of $6.9 million from third quarter 2023. Interest income increased $12.7 million over third quarter 2023, while interest expense increased $5.8 million from third quarter 2023. The increase in interest income included $9.7 million from higher yields (reflecting the rising interest rate environment) and $3.0 million from stronger volumes (led by average loans which grew $312 million or 5% over third quarter 2023). Average investment securities decreased $89 million between the comparable third quarter periods, mostly due to investment securities maturities and paydowns, while other interest-earning assets decreased $75 million (primarily investable cash) between the comparable third quarter periods. The $5.8 million increase in interest expense from third quarter 2023, included $3.3 million from higher overall funding costs and $2.6 million from growth in average funding. 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 third quarter 2024 was 3.44%, compared to 3.16% for third quarter 2023, impacted by the rising interest rate environment and the changing balance sheet mix. The mix of average interest-earning assets shifted from 81% loans, 13% investments and 6% other interest-earning assets (mostly investable cash) for third quarter 2023, to 84%, 11% and 5%, respectively, for third quarter 2024. The mix of average interest-bearing liabilities shifted from 83% core deposits, 12% brokered deposits, and 5% wholesale funding for third quarter 2023, to 83%, 14%, and 3%, respectively, for third quarter 2024, including a continued migration to higher rate deposit products. The yield on interest-earning assets of 5.68% increased 53 bps from third quarter 2023, while the cost of funds of 3.11% increased 28 bps between the comparable quarters.

Provision for credit losses was $0.8 million for third quarter 2024 (all related to the ACL-Loans), compared to $0.5 million provision for credit losses for third quarter 2023 (also all related to the ACL-Loans). 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 $22.4 million for third quarter 2024, an increase of $5.8 million (35%) from third quarter 2023. Wealth management fee income grew $1.0 million (17%), including favorable market-related changes, as well as growth in accounts and assets under management. Net mortgage income of $2.9 million, increased $0.8 million (41%) between the comparable third quarter periods, mostly due to higher secondary market volumes and the related gains on sales. Services charges on deposit accounts were $1.9 million, up $0.4 million (28%) from third quarter 2023, on growth in both accounts and account analysis fees. BOLI income was $1.5 million, a $0.4 million (33%) increase over third quarter 2023, on higher average balances from the $11.5 million new BOLI purchased in mid-2024 and improvements in BOLI assets linked to market performance. For additional information regarding noninterest income, see “INCOME STATEMENT ANALYSIS — Noninterest Income.”

Noninterest expense was $49.1 million for third quarter 2024, an increase of $3.4 million (7%) from third quarter 2023, including a $5.0 million increase in personnel expense and a $1.6 million decrease in non-personnel expenses. The increase in personnel was mostly due to higher salaries, incentives, and fringe benefits. The decrease in non-personnel expenses was mostly due to lower intangible amortization, office expense, and professional fees. For additional information regarding noninterest expense, see “INCOME STATEMENT ANALYSIS — Noninterest Expense.”

Income tax expense was $8.3 million (effective tax rate of 20.4%) for third quarter 2024, compared to $14.7 million (effective tax rate of 46.1%) for third quarter 2023. The change in income tax expense included a $9.1 million charge to income tax expense to establish a valuation allowance, partly offset by a $3.0 million reduction to income tax expense to reverse amounts recorded in the first half of 2023, both related to the Wisconsin tax law change noted above in the “Performance Summary” section.

BALANCE SHEET ANALYSIS

At September 30, 2024, period end assets were $8.6 billion, an increase of $168 million (2%) from December 31, 2023, mostly from solid growth in loans, partly offset by lower cash balances. Total loans increased $203 million (3%) from December 31, 2023, with growth in agricultural, commercial and industrial, and residential real estate loans. Total deposits of $7.3 billion at September 30, 2024, increased $62 million from December 31, 2023, with growth in time and money market deposits partly offset by lower noninterest-bearing demand deposits. Total stockholders’ equity was $1.1 billion at September 30, 2024, an increase of $110 million over December 31, 2023, with solid earnings and improvements in the securities portfolio valuation partly offset by the quarterly common stock dividend.

Loans

Nicolet services a diverse customer base primarily throughout Wisconsin, Michigan and Minnesota. We concentrate on originating loans in our local markets and assisting current loan customers. Nicolet actively utilizes government loan programs such as those provided by the U.S. Small Business Administration (“SBA”) and the U.S. Department of 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 5, “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 2023 Annual Report on Form 10-K.

Table 6: Period End Loan Composition

(in thousands)

40

As noted in Table 6 above, the loan portfolio at September 30, 2024, was 76% commercial-based and 24% 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 $6.6 billion at September 30, 2024, increased $203 million (3%) from December 31, 2023, with growth in agricultural, commercial and industrial, and residential real estate loans. At September 30, 2024, commercial and industrial loans represented the largest segment of Nicolet’s loan portfolio at 21% of the total portfolio, followed by agricultural and CRE investment at 19% of the loan 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 September 30, 2024.

Commercial Loan Portfolio by Industry Type (based on NAICS codes)

The following tables present the maturity distribution of the loan portfolio.

Table 7**: Loan Maturity Distribution**

(in thousands)

41

(in thousands)

* The residential construction loans with a loan maturity after five years represent a construction to permanent loan product.

Allowance for Credit Losses - Loans

For additional disclosures on the allowance for credit losses, see Note 5, “Loans, Allowance for Credit Losses - Loans, and Credit Quality,” in the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1. A detailed discussion of the loan portfolio accounting policies, general loan portfolio characteristics, and credit risk are described in Note 1, “Nature of Business and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements, included in Part II, Item 8 of the Company’s 2023 Annual Report on Form 10-K.

Credit risks within the loan portfolio are inherently different for each loan type. Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and ongoing review of loan payment performance. Active asset quality administration, including early problem loan identification and timely resolution of problems, aids in the management of credit risk and minimization of loan losses. Loans charged off are subject to continuous review, and specific efforts are taken to achieve maximum recovery of principal, interest, and related expenses. For additional information regarding nonperforming assets see also “BALANCE SHEET ANALYSIS – Nonperforming Assets.”

The ACL-Loans represents management’s estimate of expected credit losses in the Company’s loan portfolio at the balance sheet date. To assess the overall appropriateness of the ACL-Loans, management applies an allocation methodology which focuses on evaluation of qualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to specific loans; (ii) management’s ongoing review and grading of the loan portfolio; (iii) consideration of historical loan loss and delinquency experience on each portfolio segment; (iv) trends in past due and nonaccrual loans; (v) the risk characteristics of the various loan segments; (vi) changes in the size and character of the loan portfolio; (vii) concentrations of loans to specific borrowers or industries; (viii) existing economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect expected credit losses. Assessing these numerous factors involves significant judgment; therefore, management considers the ACL-Loans a critical accounting estimate.

Management performs ongoing intensive analysis of the loan portfolio to allow for early identification of customers experiencing financial difficulties, maintains prudent underwriting standards, understands the economy of its markets, and considers the trend of deterioration in loan quality in establishing the level of the ACL-Loans. In addition, various regulatory agencies periodically review the ACL-Loans, and may require the Company to make additions to the ACL-Loans or may require that certain loan balances be charged off or downgraded into classified loan categories when their credit evaluations differ from those of management based on their judgments of collectability from information available to them at the time of their examination.

At September 30, 2024, the ACL-Loans was $66 million (representing 1.00% of period end loans), compared to $64 million (or 1.00% of period end loans) at December 31, 2023 and $63 million (or 1.01% of period end loans) at September 30, 2023. The components of the ACL-Loans are detailed further in Table 8 below.

Table 8: Allowance for Credit Losses - Loans

(in thousands)

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. For additional disclosures on credit quality, see Note 5, “Loans, Allowance for Credit Losses - Loans, and Credit Quality” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1. For additional information on loans see “BALANCE SHEET ANALYSIS – Loans” and for additional information on the ACL-Loans see “BALANCE SHEET ANALYSIS – Allowance for Credit Losses-Loans.”

Nonperforming loans are considered one indicator of potential future loan losses. Nonperforming loans are defined as nonaccrual loans and loans 90 days or more past due but still accruing interest. Loans are generally placed on nonaccrual status when contractually past due 90 days or more as to interest or principal payments. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on loans, it is management’s practice to place such loans on nonaccrual status immediately. Nonperforming assets include nonperforming loans and other real estate owned (“OREO”). At September 30, 2024, nonperforming assets were $26 million and represented 0.31% of total assets, compared to $28 million or 0.33% of total assets at December 31, 2023, and $32 million or 0.37% of total assets at September 30, 2023.

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 $66 million (1% of loans) and $68 million (1% of loans) at September 30, 2024 and December 31, 2023, respectively. Potential problem loans require heightened management review given the pace at which a credit may deteriorate, the potential duration of asset quality stress, and uncertainty around the magnitude and scope of economic stress that may be felt by Nicolet’s customers and on underlying real estate values.

Table 9: Nonperforming Assets

(in thousands)

44

Deposits

Deposits represent Nicolet’s largest source of funds, and provide a stable, lower-cost funding source. Deposit levels may be impacted by competition with other bank and nonbank institutions, as well as with a number of non-deposit investment alternatives available to depositors. Deposit challenges include competitive deposit product features, price changes on deposit products given movements in the interest rate environment and other competitive pricing pressures, and customer preferences regarding higher rate deposit products or non-deposit investment alternatives.

Total deposits of $7.3 billion at September 30, 2024, increased $62 million from December 31, 2023, with growth in money market and time deposits, partly offset by lower noninterest-bearing demand deposits from seasonal trends as well as some migration to higher rate deposit products. Core deposit balances of $6.6 billion at September 30, 2024, decreased $32 million from December 31, 2023, while brokered deposits increased $94 million. Compared to September 30, 2023, total deposits increased $78 million, the net of a $106 million increase in brokered deposits and a $28 million decrease in core deposits. The deposit composition is presented in Table 10 below.

Table 10: Period End Deposit Composition

(in thousands)

Total estimated uninsured deposits were $2.1 billion (representing 29% of total deposits) at September 30, 2024, compared to $2.1 billion (representing 29% of total deposits) at December 31, 2023.

Liquidity Management

Liquidity management refers to the ability to ensure that adequate liquid funds are available to meet the current and future cash flow obligations arising in the daily operations of the Company. These cash flow obligations include the ability to meet the commitments to borrowers for extensions of credit, accommodate deposit cycles and trends, fund capital expenditures, pay dividends to stockholders (if any), and satisfy other operating expenses. The Company’s most liquid assets are cash and due from banks and interest-earning deposits, which totaled $428 million and $491 million at September 30, 2024 and December 31, 2023, respectively. Balances of these liquid assets are dependent on our operating, investing, and financing activities during any given period.

The $63 million decrease in cash and cash equivalents since year-end 2023 included $100 million net cash provided by operating activities and $54 million net cash provided by financing activities (mostly higher deposit balances), partly offset by $218 million net cash used in investing activities (mostly to fund loan growth). As of September 30, 2024, management believed that adequate liquidity existed to meet all projected cash flow obligations.

Nicolet’s primary sources of funds include the core deposit base, repayment and maturity of loans, investment securities calls, maturities, and sales, and procurement of brokered deposits or other wholesale funding. At September 30, 2024, approximately 39% of the investment securities portfolio was pledged as collateral to secure public deposits and borrowings, as applicable, and for liquidity or other purposes as required by regulation. Liquidity sources available to the Company at September 30, 2024, are presented in Table 11 below.

Table 11: Liquidity Sources

(in millions)

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, dividend payments, 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 September 30, 2024, the Parent Company had $155 million in cash. Additional cash sources available to the Parent Company include access to the public or private markets to issue new equity, subordinated notes or other debt. Dividends from the Bank and, to a lesser extent, stock option exercises, represent significant sources of cash flows for the Parent Company. The Bank is required by federal law to obtain prior approval of the OCC for payments of dividends if the total of all dividends declared by the Bank in any year will exceed certain thresholds. Management does not believe that regulatory restrictions on dividends from the Bank will adversely affect its ability to meet its cash obligations.

Interest Rate Sensitivity Management and Impact of Inflation

A reasonable balance between interest rate risk, credit risk, liquidity risk and maintenance of yield, is highly important to Nicolet’s business success and profitability. As an ongoing part of our financial strategy and risk management, we attempt to understand and manage the impact of fluctuations in market interest rates on our net interest income. The consolidated balance sheet consists mainly of interest-earning assets (loans, investments and cash) which are primarily funded by interest-bearing liabilities (deposits and other borrowings). Such financial instruments have varying levels of sensitivity to changes in market rates of interest. Market rates are highly sensitive to many factors beyond our control, including but not limited to general economic conditions and policies of governmental and regulatory authorities. Our operating income and net income depends, to a substantial extent, on “rate spread” (i.e., the difference between the income earned on loans, investments and other earning assets and the interest expense paid to obtain deposits and other funding liabilities).

Asset-liability management policies establish guidelines for acceptable limits on the sensitivity to changes in interest rates on earnings and market value of assets and liabilities. Such policies are set and monitored by management and the Board of Directors’ Asset and Liability Committee.

To understand and manage the impact of fluctuations in market interest rates on net interest income, we measure our overall interest rate sensitivity through a net interest income analysis, which calculates the change in net interest income in the event of hypothetical changes in interest rates under different scenarios versus a baseline scenario. Such scenarios can involve static balance sheets, balance sheets with projected growth, parallel (or non-parallel) yield curve slope changes, immediate or gradual changes in market interest rates, and one-year or longer time horizons. The simulation modeling uses assumptions involving market spreads, prepayments of rate-sensitive instruments, renewal rates on maturing or new loans, deposit retention rates, and other assumptions.

Among other scenarios, we assessed the impact on net interest income in the event of a gradual +/-100 bps and +/-200 bps change in market rates (parallel to the change in prime rate) over a one-year time horizon to a static (flat) balance sheet. The results provided include the liquidity measures mentioned above and reflect the current 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 September 30, 2024 and December 31, 2023, the projected changes in net interest income over a one-year time horizon, versus the baseline, are presented in Table 12 below. The results are in compliance with Nicolet’s policy guidelines.

Table 12: Interest Rate Sensitivity

Actual results may differ from these simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and their impact on customer behavior and management strategies.

The effect of inflation on a financial institution differs significantly from the effect on an industrial company. While a financial institution’s operating expenses, particularly salary and employee benefits, are affected by general inflation, the asset and liability structure of a financial institution consists largely of monetary items. Monetary items, such as cash, investments, loans, deposits and other borrowings, are those assets and liabilities which are or will be converted into a fixed number of dollars regardless of changes in prices. As a result, changes in interest rates have a more significant impact on a financial institution’s performance than does general inflation. Inflation may also have impacts on the Bank’s customers, on businesses and consumers and their ability or willingness to invest, save or spend, and perhaps on their ability to repay loans. As such, there would likely be impacts on the general appetite for banking products and the credit health of the Bank’s customer base.

Capital

Management regularly reviews the adequacy of its capital to ensure that sufficient capital is available for current and future needs and is in compliance with regulatory guidelines. The capital position and strategies are actively reviewed in light of perceived business risks associated with current and prospective earning levels, liquidity, asset quality, economic conditions in the markets served, and level of returns available to shareholders. Management intends to maintain an optimal capital and leverage mix for growth and shareholder return. For details on the change in capital see “BALANCE SHEET ANALYSIS.”

The Company’s and the Bank’s regulatory capital ratios remain above minimum regulatory ratios, including the capital conservation buffer. At September 30, 2024, the Bank’s regulatory capital ratios qualify the Bank as well-capitalized under the prompt-corrective action framework. This strong base of capital has allowed Nicolet to be opportunistic in strategic growth. A summary of the Company’s and the Bank’s regulatory capital amounts and ratios, as well as selected capital metrics are presented in the following table.

Table 13: Capital

($ in thousands)

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, dividends, or repayment of equity-equivalent debt) in light of strategic plans. Through an ongoing repurchase program, the Board has authorized the repurchase of Nicolet’s common stock as an alternative use of capital. At September 30, 2024, there remained $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

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions or judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates and assumptions are based on historical experience, current information, and other factors deemed to be relevant; accordingly, as this information changes, actual results could differ from those estimates. Nicolet considers accounting estimates to be critical to reported financial results if the accounting estimate requires management to make assumptions about matters that are highly uncertain and different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the financial statements. The accounting estimates we consider to be critical include business combinations and the valuation of loans acquired, the determination of the allowance for credit losses, and income taxes. A discussion of these estimates can be found in the “Critical Accounting Estimates” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2023 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, 2023.

There have been no material changes in our market risk at September 30, 2024, from that presented in our 2023 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 September 30, 2024.

(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)). 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 control over financial reporting.

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, 2023.