10-Q 1 ncbs-09302018x10q.htm FORM 10-Q Document


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
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
(State or Other Jurisdiction of Incorporation or Organization)
47-0871001
(I.R.S. Employer Identification No.)
 
 
111 North Washington Street
Green Bay, Wisconsin
(Address of Principal Executive Offices) 
54301
(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)
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 ý 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 ý 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 x
 
 
Non-accelerated filer ¨
Smaller reporting company ¨
 
 
Emerging Growth Company x
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 ý
As of October 31, 2018 there were 9,525,855 shares of $0.01 par value common stock outstanding.





Nicolet Bankshares, Inc.
TABLE OF CONTENTS
 
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS:
NICOLET BANKSHARES, INC.
Consolidated Balance Sheets
(In thousands, except share and per share data)
 
September 30, 2018
 
December 31, 2017
 
(Unaudited)
 
(Audited)
Assets
 
 
 
Cash and due from banks
$
60,346

 
$
86,191

Interest-earning deposits
100,066

 
68,008

Federal funds sold
743

 
734

Cash and cash equivalents
161,155


154,933

Certificates of deposit in other banks
995

 
1,746

Securities available for sale (“AFS”), at fair value
410,911

 
405,153

Other investments
17,479

 
14,837

Loans held for sale
2,593

 
4,666

Loans
2,143,457

 
2,087,925

Allowance for loan losses
(12,992
)
 
(12,653
)
Loans, net
2,130,465


2,075,272

Premises and equipment, net
47,305

 
47,151

Bank owned life insurance (“BOLI”)
65,820

 
64,453

Goodwill and other intangibles, net
125,360

 
128,406

Accrued interest receivable and other assets
38,819

 
35,816

Total assets
$
3,000,902


$
2,932,433

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Liabilities:
 
 
 
Noninterest-bearing demand deposits
$
664,788

 
$
631,831

Interest-bearing deposits
1,857,368

 
1,839,233

Total deposits
2,522,156


2,471,064

Short-term borrowings

 

Long-term borrowings
77,241

 
78,046

Accrued interest payable and other liabilities
23,602

 
18,444

Total liabilities
2,622,999


2,567,554

 
 
 
 
Stockholders’ Equity:
 
 
 
Common stock
96

 
98

Additional paid-in capital
251,631

 
263,835

Retained earnings
133,501

 
102,391

Accumulated other comprehensive loss
(8,057
)
 
(2,146
)
Total Nicolet Bankshares, Inc. stockholders’ equity
377,171


364,178

Noncontrolling interest
732

 
701

Total stockholders’ equity and noncontrolling interest
377,903


364,879

Total liabilities, noncontrolling interest and stockholders’ equity
$
3,000,902

 
$
2,932,433

 
 
 
 
Preferred shares authorized (no par value)
10,000,000

 
10,000,000

Preferred shares issued and outstanding

 

Common shares authorized (par value $0.01 per share)
30,000,000

 
30,000,000

Common shares outstanding
9,576,644

 
9,818,247

Common shares issued
9,604,160

 
9,849,167

See accompanying notes to unaudited consolidated financial statements.

3

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,
 
2018
 
2017
 
2018
 
2017
Interest income:
 
 
 
 
 
 
 
Loans, including loan fees
$
28,997

 
$
27,329

 
$
84,644

 
$
73,098

Investment securities:
 
 
 
 
 
 
 
Taxable
1,564

 
1,114

 
4,503

 
3,422

Tax-exempt
572

 
604

 
1,737

 
1,761

Other interest income
747

 
407

 
2,326

 
1,136

Total interest income
31,880


29,454


93,210


79,417

Interest expense:
 
 
 
 
 
 
 
Deposits
4,055

 
2,364

 
11,012

 
5,216

Short-term borrowings

 

 
8

 
72

Long-term borrowings
883

 
699

 
2,571

 
1,894

Total interest expense
4,938


3,063


13,591


7,182

Net interest income
26,942

 
26,391

 
79,619

 
72,235

Provision for loan losses
340

 
975

 
1,360

 
1,875

Net interest income after provision for loan losses
26,602


25,416


78,259


70,360

Noninterest income:
 
 
 
 
 
 
 
Trust services fee income
1,638

 
1,479

 
4,915

 
4,431

Brokerage fee income
1,732

 
1,500

 
5,074

 
4,192

Mortgage income, net
1,902

 
1,774

 
4,510

 
4,022

Service charges on deposit accounts
1,247

 
1,238

 
3,637

 
3,367

Card interchange income
1,481

 
1,225

 
4,082

 
3,378

BOLI income
1,019

 
459

 
1,929

 
1,314

Rent income
303

 
285

 
951

 
852

Asset gains (losses), net
146

 
1,305

 
1,322

 
2,071

Other income
1,181

 
899

 
3,292

 
2,391

Total noninterest income
10,649


10,164


29,712


26,018

Noninterest expense:
 
 
 
 
 
 
 
Personnel
12,983

 
11,488

 
38,149

 
32,404

Occupancy, equipment and office
3,660

 
3,559

 
10,901

 
9,613

Business development and marketing
1,334

 
1,113

 
4,139

 
3,359

Data processing
2,375

 
2,238

 
7,094

 
6,428

FDIC expense
245

 
205

 
800

 
582

Intangibles amortization
1,054

 
1,173

 
3,336

 
3,514

Other expense
1,393

 
1,086

 
3,718

 
3,598

Total noninterest expense
23,044


20,862


68,137


59,498

Income before income tax expense
14,207

 
14,718

 
39,834

 
36,880

Income tax expense
3,268

 
5,133

 
9,431

 
12,605

Net income
10,939


9,585


30,403


24,275

Less: Net income attributable to noncontrolling interest
80

 
74

 
230

 
228

Net income attributable to Nicolet Bankshares, Inc.
$
10,859


$
9,511


$
30,173


$
24,047

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
1.13

 
$
0.97

 
$
3.12

 
$
2.58

Diluted
$
1.09

 
$
0.91

 
$
3.02

 
$
2.45

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
9,633,158

 
9,836,646

 
9,678,726

 
9,316,814

Diluted
9,949,295

 
10,408,683

 
10,004,316

 
9,820,724

See accompanying notes to unaudited consolidated financial statements.

4

ITEM 1. Financial Statements Continued:


NICOLET BANKSHARES, INC.
Consolidated Statements of Comprehensive Income
(In thousands) (Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
10,939

 
$
9,585

 
$
30,403

 
$
24,275

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gains (losses) on securities AFS:
 
 
 
 
 
 
 
Net unrealized holding gains (losses) arising during
 the period
(1,836
)
 
834

 
(6,814
)
 
5,685

Reclassification adjustment for net gains included in
 income

 
(1,222
)
 

 
(1,220
)
Income tax (expense) benefit
497

 
125

 
1,840

 
(1,741
)
Total other comprehensive income (loss)
(1,339
)

(263
)

(4,974
)

2,724

Comprehensive income
$
9,600


$
9,322


$
25,429


$
26,999

See accompanying notes to unaudited consolidated financial statements.

5

ITEM 1. Financial Statements Continued:


NICOLET BANKSHARES, INC.
Consolidated Statement of Stockholders’ Equity
(In thousands) (Unaudited)
 
Nicolet Bankshares, Inc. Stockholders’ Equity
 
 
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Noncontrolling
Interest
 
Total
Balance December 31, 2017
$
98

 
$
263,835

 
$
102,391

 
$
(2,146
)
 
$
701

 
$
364,879

Comprehensive income:
 
 
 
 
 
 
 
 
 
 


Net income

 

 
30,173

 

 
230

 
30,403

Other comprehensive loss

 

 

 
(4,974
)
 

 
(4,974
)
Stock-based compensation expense

 
3,613

 

 

 

 
3,613

Exercise of stock options
1

 
1,223

 

 

 

 
1,224

Issuance of common stock

 
167

 

 

 

 
167

Purchase and retirement of common stock
(3
)
 
(17,207
)
 

 

 

 
(17,210
)
Distribution to noncontrolling interest

 

 

 

 
(199
)
 
(199
)
Adoption of ASU 2016-01 (See Notes 1 and 5)

 

 
937

 
(937
)
 

 

Balance, September 30, 2018
$
96


$
251,631


$
133,501


$
(8,057
)

$
732


$
377,903

See accompanying notes to unaudited consolidated financial statements.


6

ITEM 1. Financial Statements Continued:


NICOLET BANKSHARES, INC.
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended September 30,
 
2018
 
2017
Cash Flows From Operating Activities:
 
 
 
Net income
$
30,403

 
$
24,275

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization, and accretion
4,643

 
7,038

Provision for loan losses
1,360

 
1,875

Increase in cash surrender value of life insurance
(1,367
)
 
(1,314
)
Stock-based compensation expense
3,613

 
1,871

Asset (gains) losses, net
(1,322
)
 
(2,071
)
Gain on sale of loans held for sale, net
(4,026
)
 
(3,614
)
Proceeds from sale of loans held for sale
184,314

 
164,726

Origination of loans held for sale
(178,911
)
 
(164,806
)
Net change in:
 
 
 
Accrued interest receivable and other assets
(4,952
)
 
239

Accrued interest payable and other liabilities
6,798

 
1,733

Net cash provided by operating activities
40,553


29,952

Cash Flows From Investing Activities:
 
 
 
Net increase in loans
(50,703
)
 
(126,499
)
Net decrease in certificates of deposit in other banks
751

 
1,490

Purchases of securities AFS
(57,891
)
 
(49,119
)
Proceeds from sales of securities AFS

 
10,798

Proceeds from calls and maturities of securities AFS
40,302

 
34,426

Purchases of other investments
(634
)
 
(3,256
)
Proceeds from sales of other investments
807

 
6,519

Proceeds from redemption of BOLI
561

 

Net increase in premises and equipment
(2,974
)
 
(2,958
)
Net decrease in other real estate and other assets
1,486

 
2,470

Net cash received in business combination

 
9,119

Net cash used by investing activities
(68,295
)

(117,010
)
Cash Flows From Financing Activities:
 
 
 
Net increase in deposits
51,171

 
22,054

Net increase in short-term borrowings

 
12,900

Proceeds from long-term borrowings

 
30,000

Repayments of long-term borrowings
(1,189
)
 
(4,487
)
Purchase and retirement of common stock
(17,210
)
 
(7,462
)
Capitalized issuance costs, net

 
(186
)
Proceeds from issuance of common stock
167

 
175

Proceeds from exercise of stock options
1,224

 
1,064

Distribution to noncontrolling interest
(199
)
 

Net cash provided by financing activities
33,964


54,058

Net increase (decrease) in cash and cash equivalents
6,222

 
(33,000
)
Cash and cash equivalents:
 
 
 
Beginning
154,933

 
129,103

Ending *
$
161,155


$
96,103

Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid for interest
$
13,294

 
$
7,117

Cash paid for taxes
9,325

 
8,805

Transfer of loans and bank premises to other real estate owned
587

 
828

Capitalized mortgage servicing rights
696

 
679

Transfer of loans from held for sale to held for investment

 
3,236

Acquisitions:
 
 
 
Fair value of assets acquired
$

 
$
439,000

Fair value of liabilities assumed

 
398,000

Net assets acquired

 
41,000

* Cash and cash equivalents include restricted cash of $7.4 million and $2.4 million at September 30, 2018 and 2017, respectively, for the reserve balance required with the Federal Reserve Bank.
See accompanying notes to unaudited consolidated financial statements.

7



NICOLET BANKSHARES, INC.
Notes to Unaudited Consolidated Financial Statements

Note 1Basis 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, changes in stockholders’ equity and cash flows of Nicolet Bankshares, Inc. (the “Company” or “Nicolet”) and its subsidiaries, 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, 2017.
Critical Accounting Policies and Estimates
Preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions 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 loan losses, valuation of loans in acquisition transactions, useful lives for depreciation and amortization, fair value of financial instruments, other-than-temporary impairment calculations, valuation of deferred tax assets, uncertain income tax positions and contingencies. Estimates that are particularly susceptible to significant change for the Company include the determination of the allowance for loan 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. 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. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period presented.
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, 2017.
Recent Accounting Developments Adopted
In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09, Compensation – Stock Compensation (Topic 718). ASU 2017-09 applies to entities that change the terms or conditions of a share-based payment award to provide clarity and reduce diversity in practice as well as cost and complexity when applying the guidance in Topic 718 to the modification to the terms and conditions of a share-based payment award. The updated guidance was effective for interim and annual reporting periods beginning after December 15, 2017. The Company adopted the updated guidance effective January 1, 2018 with no material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, to clarify the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets versus businesses. The update narrows the definition of a business by adding three principal clarifications: (1) if substantially all the fair value of the gross assets in the asset group is concentrated in either a single identifiable asset or group of similar identifiable assets the transaction does not involve a business, (2) if the asset group does not include a minimum of an input and a substantive process, it does not represent a business, and (3) if the integrated set of activities (including its inputs and processes) does not create, or have the ability to create, goods or services to customers, investment income (e.g., dividends or interest) or other revenue, it is not a business. The overall intention is to provide consistency in applying the guidance and make the definition of a business more operable. This update was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and should be applied prospectively. The Company adopted the updated guidance effective January 1, 2018 with no material impact on its consolidated financial statements.

8



In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash to provide guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows to reduce diversity in practice. The amendment requires that a statement of cash flow explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash or restricted cash equivalents should be included in cash and cash equivalents when reconciling the beginning and end of period total amounts shown on the statement of cash flow. This amendment was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and should be applied retrospectively to each period presented. The Company adopted the updated guidance effective January 1, 2018 with no material impact on its consolidated financial statements. See the consolidated statements of cash flows for additional disclosures related to this ASU.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide guidance on specific cash flow issues, including: debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies, and distributions received from equity method investees. The amendments were effective for public business entities for fiscal years beginning after December 31, 2017, and interim periods within those fiscal years. The Company adopted the updated guidance effective January 1, 2018 with no material impact on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This amendment supersedes the guidance to classify equity securities with readily determinable fair values into different categories, requires equity securities to be measured at fair value with changes in the fair value recognized through net income, and simplifies the impairment assessment of equity investments without readily determinable fair values. The amendment also requires public business entities that are required to disclose the fair value of financial instruments measured at amortized cost on the balance sheet to measure that fair value using the exit price notion. The amendment requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements. This amendment was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities were required to apply the amendment by means of a cumulative-effect adjustment as of the beginning of the fiscal year of adoption, with the exception of the amendment related to equity securities without readily determinable fair values, which should be applied prospectively to equity investments that exist as of the date of adoption. The Company adopted the updated guidance effective January 1, 2018 and recognized a cumulative-effect adjustment at adoption of approximately $0.9 million for the after tax impact of the unrealized gain on equity securities. See the consolidated statement of stockholders’ equity and Note 5 for additional disclosures related to this ASU.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), with several subsequent updates. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Topic 606 provides a five-step model to apply to revenue recognition, consisting of the following: (1) identify the contract; (2) identify the performance obligation in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when or as the performance obligation is satisfied. The guidance was effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company adopted the updated guidance using the modified retrospective approach effective January 1, 2018, with no material impact on its consolidated financial statements. See Note 10 for the new disclosures related to Topic 606.
Operating Segment
While the chief-operating decision makers monitor the revenue streams of the various products and services, and evaluate costs, balance sheet positions and quality, all such products, services and activities are directly or indirectly related to the business of community banking, with no regular, formal or material segment delineations. Operations are managed and financial performance is evaluated on a company-wide basis, and accordingly, all the financial service operations are considered by management to be aggregated in one reportable operating segment.
Reclassifications
Certain amounts in the 2017 consolidated financial statements have been reclassified to conform to the 2018 presentation.
Note 2Acquisitions
During the third quarter of 2018, Nicolet purchased a small brokerage book of business from a retiring financial advisor in support of the Company's initiative to expand its wealth management business. As a result of this purchase, the Company recorded a customer list intangible of $290,000 which will be amortized on a straight-line basis.
On April 28, 2017, the Company consummated its merger with First Menasha Bancshares, Inc. (“First Menasha”) pursuant to the Agreement and Plan of Merger by and between the Company and First Menasha dated November 3, 2016, (the “Merger Agreement”), whereby First Menasha was merged with and into the Company, and The First National Bank-Fox Valley, the wholly

9



owned commercial bank subsidiary of First Menasha serving the Fox Valley area of Wisconsin, was merged with and into Nicolet National Bank (the “Bank”). The system integration was completed, and five branches of First Menasha opened on May 1, 2017, as Nicolet National Bank branches, expanding its presence in Calumet and Winnebago Counties, Wisconsin. The Company closed one of its Calumet County locations concurrently with the First Menasha merger.
The purpose of the merger was to continue Nicolet’s interest in strategic growth, consistent with its plan to improve profitability through efficiency, leverage the strengths of each bank across the combined customer base, and add shareholder value. With the merger, Nicolet became the leading community bank to serve the Fox Valley area of Wisconsin.
Pursuant to the Merger Agreement, the final purchase price consisted of issuing 1,309,885 shares of the Company’s common stock (given the final stock-for-stock exchange ratio of 3.126 except for First Menasha shares owned by the Company immediately prior to the time of the merger), for common stock consideration of $62.2 million (based on $47.52 per share, the volume weighted average closing price of the Company’s common stock over the preceding 20 trading day period) plus cash consideration of $19.3 million. Approximately $0.2 million in direct stock issuance costs for the merger were incurred and charged against additional paid-in capital.
Upon consummation, the Company added $480 million in assets, $351 million in loans, $375 million in deposits, $4 million in core deposit intangible, and $41 million of goodwill. The Company accounted for the transaction under the acquisition method of accounting, and thus, the financial position and results of operations of First Menasha 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.
Note 3Earnings per Common Share
Basic earnings per common share are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share are calculated by dividing net income available to common shareholders 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,
(In thousands, except per share data)
2018
 
2017
 
2018
 
2017
Net income attributable to Nicolet Bankshares, Inc.
$
10,859

 
$
9,511

 
$
30,173

 
$
24,047

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
9,633

 
9,837

 
9,679

 
9,317

Effect of dilutive common stock awards
316

 
572

 
325

 
504

Diluted weighted average common shares outstanding
9,949

 
10,409

 
10,004

 
9,821

 
 
 
 
 
 
 
 
Basic earnings per common share*
$
1.13

 
$
0.97

 
$
3.12

 
$
2.58

Diluted earnings per common share*
$
1.09

 
$
0.91

 
$
3.02

 
$
2.45

*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 the three and nine months ended September 30, 2018, options to purchase approximately 0.1 million shares are excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive. There was no anti-dilutive effect of options outstanding for the three and nine months ended September 30, 2017.
Note 4Stock-Based Compensation
The Company may grant stock options and restricted stock under its stock-based compensation plans to certain officers, employees and directors. At September 30, 2018, approximately 144,000 shares were available for grant under these stock-based compensation plans.

10



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 were as follows.
 
Nine Months Ended September 30,
 
2018
 
2017
Dividend yield
%
 
%
Expected volatility
25
%
 
25
%
Risk-free interest rate
2.48
%
 
2.13
%
Expected average life
7 years

 
7 years

Weighted average per share fair value of options
$
17.60

 
$
15.44

Activity in the Company’s Stock Incentive Plans is summarized in the following tables.
Stock Options
 
Option Shares
Outstanding
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Life (Years)
 
Aggregate
Intrinsic
Value (in
thousands)
Outstanding - December 31, 2017
 
1,643,255

 
$
39.82

 
 
 
 
Granted
 
10,000

 
54.06

 
 
 
 
Exercise of stock options *
 
(56,881
)
 
21.53

 
 
 
 
Forfeited
 
(6,500
)
 
39.43

 
 
 
 
Outstanding - September 30, 2018
 
1,589,874

 
$
40.57

 
7.6
 
$
22,429

Exercisable - September 30, 2018
 
543,886

 
$
32.00

 
6.4
 
$
12,243

* 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; accordingly, 2,194 such shares were surrendered to the Company during the nine months ended September 30, 2018.
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 both the nine months ended September 30, 2018 and 2017 was approximately $1.8 million.
Restricted Stock
 
Weighted
Average Grant
Date Fair Value
 
Restricted
Shares
Outstanding
Outstanding - December 31, 2017
 
$
34.26

 
30,920

Granted
 
55.64

 
7,510

Vested *
 
37.44

 
(10,911
)
Forfeited
 
16.50

 
(3
)
Outstanding - September 30, 2018
 
$
38.84

 
27,516

* 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, 1,615 shares were surrendered during the nine months ended September 30, 2018.
The Company recognized approximately $3.4 million and $1.9 million of stock-based compensation expense (included in personnel on the consolidated statements of income) during the nine months ended September 30, 2018 and 2017, respectively, associated with its common stock awards granted to officers and employees. In addition, during the third quarter of 2018, the Company recognized approximately $0.2 million of director expense (included in other expense on the consolidated statements of income) for a total restricted stock grant of 3,510 shares with immediate vesting to directors. As of September 30, 2018, there was approximately $13.7 million of unrecognized compensation cost related to equity award grants. The cost is expected to be recognized over the remaining vesting period of approximately three years. The Company recognized a tax benefit of approximately $0.2 million for both the nine months ended September 30, 2018 and 2017, respectively, for the tax impact of stock option exercises and vesting of restricted stock.

11



Note 5Securities Available for Sale
Amortized cost and fair value of securities available for sale are summarized as follows.
 
September 30, 2018
(in thousands)
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
U.S. government agency securities
$
27,133

 
$

 
$
879

 
$
26,254

State, county and municipals
169,431

 
38

 
4,647

 
164,822

Mortgage-backed securities
140,427

 
85

 
4,667

 
135,845

Corporate debt securities
84,957

 
165

 
1,132

 
83,990

Total
$
421,948

 
$
288

 
$
11,325

 
$
410,911

 
December 31, 2017
(in thousands)
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
U.S. government agency securities
$
26,586

 
$

 
$
377

 
$
26,209

State, county and municipals
186,128

 
180

 
2,264

 
184,044

Mortgage-backed securities
157,705

 
160

 
2,333

 
155,532

Corporate debt securities
36,387

 
449

 
39

 
36,797

Equity securities *
1,287

 
1,284

 

 
2,571

Total
$
408,093

 
$
2,073

 
$
5,013

 
$
405,153

* Effective January 1, 2018, the Company adopted ASU 2016-01, which requires equity securities with readily determinable fair values to be measured at fair value with changes in the fair value recognized through net income. Such securities are no longer reflected as securities AFS. As a result of this accounting change, the Company recognized a cumulative-effect adjustment at adoption from accumulated other comprehensive income to retained earnings of approximately $0.9 million in the consolidated statement of stockholders’ equity for the net of tax impact of the unrealized gain on equity securities as of the date of adoption and recognized a gain of approximately $475,000 for the nine months ended September 30, 2018, in the consolidated statements of income for the change in fair value on equity securities since adoption. In addition, the approximately $2.8 million current fair value of equity securities is now reflected within other investments on the consolidated balance sheets rather than as securities AFS. Prior periods have not been restated for the impact of this accounting change. See Note 1 for additional information on this new accounting standard.
The following table represents gross unrealized losses and the related estimated fair value of investment securities available for sale, aggregated by investment category and length of time individual securities have been in a continuous unrealized loss position.
 
September 30, 2018
 
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
U.S. government agency securities
$

 
$

 
$
26,254

 
$
879

 
$
26,254

 
$
879

 
2

State, county and municipals
71,359

 
1,168

 
81,418

 
3,479

 
152,777

 
4,647

 
453

Mortgage-backed securities
32,929

 
727

 
93,312

 
3,940

 
126,241

 
4,667

 
212

Corporate debt securities
69,816

 
1,132

 

 

 
69,816

 
1,132

 
37

Total
$
174,104

 
$
3,027

 
$
200,984

 
$
8,298

 
$
375,088

 
$
11,325

 
704


12



 
December 31, 2017
 
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
U.S. government agency securities
$
26,209

 
$
377

 
$

 
$

 
$
26,209

 
$
377

 
2

State, county and municipals
110,157

 
1,097

 
49,326

 
1,167

 
159,483

 
2,264

 
465

Mortgage-backed securities
72,210

 
735

 
65,537

 
1,598

 
137,747

 
2,333

 
215

Corporate debt securities
10,172

 
39

 

 

 
10,172

 
39

 
5

Total
$
218,748

 
$
2,248

 
$
114,863

 
$
2,765

 
$
333,611

 
$
5,013

 
687

As of September 30, 2018, the Company does not consider its securities AFS with unrealized losses to be other-than-temporarily impaired, as the unrealized losses in each category have occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration. The Company has the ability and intent to hold its securities to maturity. There were no other-than-temporary impairments charged to earnings during the nine months ended September 30, 2018 or 2017.
The amortized cost and fair value of securities AFS 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.
 
September 30, 2018
(in thousands)
Amortized Cost
 
Fair Value
Due in less than one year
$
21,592

 
$
21,559

Due in one year through five years
157,636

 
154,294

Due after five years through ten years
95,324

 
92,078

Due after ten years
6,969

 
7,135

 
281,521

 
275,066

Mortgage-backed securities
140,427

 
135,845

Securities available for sale
$
421,948

 
$
410,911

Proceeds from the sale of securities AFS were as follows.
 
Nine Months Ended September 30,
(in thousands)
2018
 
2017
Gross gains
$

 
$
1,227

Gross losses

 
(7
)
Gains (losses) on sales of securities AFS, net
$

 
$
1,220

Proceeds from sales of securities AFS
$

 
$
10,798


13



Note 6Loans, Allowance for Loan Losses, and Credit Quality
The loan composition is summarized as follows.
 
September 30, 2018
 
December 31, 2017
(in thousands)
Amount
 
% of
Total
 
Amount
 
% of
Total
Commercial & industrial
$
665,754

 
31.1
%
 
$
637,337

 
30.5
%
Owner-occupied commercial real estate (“CRE”)
449,151

 
21.0

 
430,043

 
20.6

Agricultural (“AG”) production
35,727

 
1.7

 
35,455

 
1.7

AG real estate
52,378

 
2.4

 
51,778

 
2.5

CRE investment
331,312

 
15.5

 
314,463

 
15.1

Construction & land development
86,533

 
4.0

 
89,660

 
4.3

Residential construction
30,295

 
1.4

 
36,995

 
1.8

Residential first mortgage
357,163

 
16.6

 
363,352

 
17.4

Residential junior mortgage
109,692

 
5.1

 
106,027

 
5.1

Retail & other
25,452

 
1.2

 
22,815

 
1.0

Loans
2,143,457

 
100.0
%
 
2,087,925

 
100.0
%
Less allowance for loan losses (“ALLL”)
12,992

 
 
 
12,653

 
 
Loans, net
$
2,130,465

 
 
 
$
2,075,272

 
 
Allowance for loan losses to loans
0.61
%
 
 
 
0.61
%
 
 
As a further breakdown, loans are summarized by originated and acquired as follows.
 
September 30, 2018
 
December 31, 2017
(in thousands)
Originated
Amount
 
% of
Total
 
Acquired
Amount
 
% of
Total
 
Originated
Amount
 
% of
Total
 
Acquired
Amount
 
% of
Total
Commercial & industrial
$
551,395

 
38.9
%
 
$
114,359

 
15.8
%
 
$
488,600

 
39.3
%
 
$
148,737

 
17.6
%
Owner-occupied CRE
274,036

 
19.3

 
175,115

 
24.2

 
237,548

 
19.1

 
192,495

 
22.8

AG production
10,821

 
0.8

 
24,906

 
3.4

 
11,102

 
0.9

 
24,353

 
2.9

AG real estate
29,685

 
2.1

 
22,693

 
3.1

 
27,831

 
2.2

 
23,947

 
2.8

CRE investment
151,335

 
10.7

 
179,977

 
24.8

 
113,862

 
9.2

 
200,601

 
23.8

Construction & land development
63,106

 
4.4

 
23,427

 
3.2

 
56,061

 
4.5

 
33,599

 
4.0

Residential construction
30,245

 
2.1

 
50

 
0.1

 
33,615

 
2.7

 
3,380

 
0.4

Residential first mortgage
211,474

 
14.9

 
145,689

 
20.1

 
191,186

 
15.4

 
172,166

 
20.4

Residential junior mortgage
74,366

 
5.2

 
35,326

 
4.9

 
65,643

 
5.3

 
40,384

 
4.8

Retail & other
22,464

 
1.6

 
2,988

 
0.4

 
18,254

 
1.4

 
4,561

 
0.5

Loans
1,418,927

 
100.0
%
 
724,530

 
100.0
%
 
1,243,702

 
100.0
%
 
844,223

 
100.0
%
Less ALLL
11,118

 
 
 
1,874

 
 
 
10,542

 
 
 
2,111

 
 
Loans, net
$
1,407,809

 
 
 
$
722,656

 
 
 
$
1,233,160

 
 
 
$
842,112

 
 
ALLL to loans
0.78
%
 
 
 
0.26
%
 
 
 
0.85
%
 
 
 
0.25
%
 
 
A roll forward of the allowance for loan losses is summarized as follows.
 
Nine Months Ended
 
Year Ended
(in thousands)
September 30, 2018
 
September 30, 2017
 
December 31, 2017
Beginning balance
$
12,653

 
$
11,820

 
$
11,820

Provision for loan losses
1,360

 
1,875

 
2,325

Charge-offs
(1,110
)
 
(1,156
)
 
(1,604
)
Recoveries
89

 
71

 
112

Net charge-offs
(1,021
)
 
(1,085
)
 
(1,492
)
Ending balance
$
12,992

 
$
12,610

 
$
12,653


14



Practically all 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.
The following tables present the balance and activity in the ALLL by portfolio segment and the recorded investment in loans by portfolio segment.
 
TOTAL – Nine Months Ended September 30, 2018
(in thousands)
Commercial
& industrial
 
Owner-
occupied
CRE
 
AG
production
 
AG real
estate
 
CRE
investment
 
Construction & land
development
 
Residential
construction
 
Residential
first mortgage
 
Residential
junior
mortgage
 
Retail
& other
 
Total
ALLL:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
4,934

 
$
2,607

 
$
129

 
$
296

 
$
1,388

 
$
726

 
$
251

 
$
1,609

 
$
488

 
$
225

 
$
12,653

Provision
1,043

 
293

 
(8
)
 
(2
)
 
(8
)
 
(230
)
 
(41
)
 
119

 
(55
)
 
249

 
1,360

Charge-offs
(743
)
 
(64
)
 

 

 
(37
)
 

 

 
(85
)
 

 
(181
)
 
(1,110
)
Recoveries
30

 
12

 

 

 

 

 

 
3

 
31

 
13

 
89

Net charge-offs
(713
)
 
(52
)
 

 

 
(37
)
 

 

 
(82
)
 
31

 
(168
)
 
(1,021
)
Ending balance
$
5,264

 
$
2,848

 
$
121

 
$
294

 
$
1,343

 
$
496

 
$
210

 
$
1,646

 
$
464

 
$
306

 
$
12,992

As percent of ALLL
40.5
%
 
21.9
%
 
0.9
%
 
2.3
%
 
10.3
%
 
3.8
%
 
1.6
%
 
12.7
%
 
3.6
%
 
2.4
%
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALLL:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

Collectively evaluated
5,264

 
2,848

 
121

 
294

 
1,343

 
496

 
210

 
1,646

 
464

 
306

 
12,992

Ending balance
$
5,264

 
$
2,848

 
$
121

 
$
294

 
$
1,343

 
$
496

 
$
210

 
$
1,646

 
$
464

 
$
306

 
$
12,992

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated
$
5,858

 
$
1,548

 
$

 
$
234

 
$
2,876

 
$
603

 
$

 
$
2,663

 
$
57

 
$
12

 
$
13,851

Collectively evaluated
659,896

 
447,603

 
35,727

 
52,144

 
328,436

 
85,930

 
30,295

 
354,500

 
109,635

 
25,440

 
2,129,606

Total loans
$
665,754

 
$
449,151

 
$
35,727

 
$
52,378

 
$
331,312

 
$
86,533

 
$
30,295

 
$
357,163

 
$
109,692

 
$
25,452

 
$
2,143,457

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less ALLL
5,264

 
2,848

 
121

 
294

 
1,343

 
496

 
210

 
1,646

 
464

 
306

 
12,992

Net loans
$
660,490

 
$
446,303

 
$
35,606

 
$
52,084

 
$
329,969

 
$
86,037

 
$
30,085

 
$
355,517

 
$
109,228

 
$
25,146

 
$
2,130,465

As a further breakdown, the ALLL is summarized by originated and acquired as follows.
 
Originated – Nine Months Ended September 30, 2018
(in thousands)
Commercial
& industrial
 
Owner-
occupied
CRE
 
AG
production
 
AG real
estate
 
CRE
investment
 
Construction
& land
development
 
Residential
construction
 
Residential
first
mortgage
 
Residential
junior
mortgage
 
Retail
& other
 
Total
ALLL:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
4,192

 
$
2,115

 
$
112

 
$
235

 
$
1,154

 
$
628

 
$
200

 
$
1,297

 
$
409

 
$
200

 
$
10,542

Provision
1,143

 
349

 
(4
)
 
9

 
(13
)
 
(217
)
 
(25
)
 
165

 
(43
)
 
247

 
1,611

Charge-offs
(743
)
 
(64
)
 

 

 
(37
)
 

 

 
(85
)
 

 
(178
)
 
(1,107
)
Recoveries
29

 
1

 

 

 

 

 

 

 
29

 
13

 
72

Net charge-offs
(714
)
 
(63
)
 

 

 
(37
)
 

 

 
(85
)
 
29

 
(165
)
 
(1,035
)
Ending balance
$
4,621

 
$
2,401

 
$
108

 
$
244

 
$
1,104

 
$
411

 
$
175

 
$
1,377

 
$
395

 
$
282

 
$
11,118

As percent of ALLL
41.6
%
 
21.6
%
 
1.0
%
 
2.2
%
 
9.9
%
 
3.7
%
 
1.6
%
 
12.4
%
 
3.5
%
 
2.5
%
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated
$
2,553

 
$
328

 
$

 
$