10-K 1 t1600110_10k.htm FORM 10-K

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________

FORM 10-K

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the fiscal year ended December 31, 2015

 

¨ 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 333-90052

NICOLET BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

 

WISCONSIN 47-0871001
 (State or other jurisdiction of incorporation or organization)  (I.R.S. Employer Identification No.)

 

111 North Washington Street

Green Bay, Wisconsin 54301

(920) 430-1400

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

Title of each class   Name of each exchange on which registered
Common Stock, par value $0.01 per share   The NASDAQ Stock Market LLC

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d). Yes £ No x

 

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 x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

As of June 30, 2015, (the last business day of the registrant’s most recently completed second fiscal quarter) the aggregate market value of the common stock held by nonaffiliates of the registrant was approximately $100.4 million based on the closing sale price of $30.80 per share as reported on the OTCBB on June 30, 2015. The registrant’s common stock commenced trading on the Nasdaq Capital Market on February 24, 2016.

 

As of February 29, 2016, 4,194,045 shares of common stock were outstanding.

  

 

 

 

 

 

Nicolet Bankshares, Inc.

 

TABLE OF CONTENTS

 

    PAGE
PART I
       
  Item 1. Business 3-11
       
  Item 1A. Risk Factors 12-18
       
  Item 1B. Unresolved Staff Comments 18
       
  Item 2. Properties 19
       
  Item 3. Legal Proceedings 19
       
  Item 4. Mine Safety Disclosures 19
       
PART II
     
  Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 20
       

 

 

Item 6. Selected Financial Data 20-21
       
  Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation 22-49
       
  Item 7A. Quantitative and Qualitative Disclosures about Market Risk 49
       
  Item 8. Financial Statements and Supplementary Data 50-101
       
  Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 102
       
  Item 9A. Controls and Procedures 102
       
  Item 9B. Other Information 102
       
PART III
       
  Item 10. Directors, Executive Officers and Corporate Governance 103-104
       
  Item 11. Executive Compensation 105-108
       
  Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 109-110
       
  Item 13. Certain Relationships and Related Transactions, and Director Independence 110
       
  Item 14.       Principal Accountant Fees and Services 111
       
PART IV
       
  Item 15. Exhibits and Financial Statement Schedules 112-113
       
  Signatures 114

 

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Forward-Looking Statements

 

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities law. Statements in this report that are not strictly historical are forward-looking and based upon current expectations that may differ materially from actual results. These forward-looking statements, identified by words such as “will”, “expect”, “believe” and “prospects”, involve risks and uncertainties that could cause actual results to differ materially from those anticipated by the statement made herein. These risks and uncertainties include, but are not limited to, general economic trends and changes in interest rates, increased competition, regulatory or legislative developments affecting the financial industry generally or Nicolet Bankshares, Inc. specifically, changes in consumer demand for financial services, the possibility of unforeseen events affecting the industry generally or Nicolet Bankshares, Inc. specifically, the uncertainties associated with newly developed or acquired operations and market disruptions. Nicolet Bankshares, Inc. undertakes no obligation to release revisions to these forward-looking statements publicly to reflect events or circumstances after the date hereof or to reflect the occurrence of unforeseen events, except as required to be reported under the rules and regulations of the Securities and Exchange Commission (“SEC”).

 

PART I

 

ITEM 1. BUSINESS

 

General

 

Nicolet Bankshares, Inc. (individually referred to herein as the “Parent Company” and together with all its subsidiaries collectively referred to herein as “Nicolet,” the “Company,” “we,” “us” or “our”) is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and under the bank holding company laws of the State of Wisconsin.

 

Nicolet is a Wisconsin corporation, originally incorporated on April 5, 2000 as Green Bay Financial Corporation, a Wisconsin corporation, to serve as the holding company for and the sole shareholder of Nicolet National Bank. It amended and restated its articles of incorporation and changed its name to Nicolet Bankshares, Inc. on March 14, 2002. It subsequently became the holding company for Nicolet National Bank upon the completion of the bank’s reorganization into a holding company structure on June 6, 2002. Nicolet elected to become a financial holding company in 2008.

 

Nicolet conducts operations through its wholly owned subsidiary, Nicolet National Bank, a commercial bank which was organized in 2000 as a national bank under the laws of the United States and opened for business, in Green Bay, Brown County, Wisconsin, on November 1, 2000 (referred to herein as “Nicolet National Bank,” or the “Bank”). Structurally, Nicolet also wholly owns a registered investment advisory firm that principally provides investment strategy and transactional services to select community banks, wholly owns an investment subsidiary of the Bank that is based in Nevada, and entered into a joint venture that provides for 50% ownership of the building in which Nicolet is headquartered. These subsidiaries are closely related to or incidental to the business of banking and none are individually or collectively significant to Nicolet’s financial position or results.

 

Nicolet National Bank is a full-service community bank, offering traditional banking products and services, and wealth management products and services, to businesses and individuals in the markets it serves, delivered through a branch network serving northeast and central Wisconsin communities and Menominee, Michigan, as well as through on-line and mobile banking capabilities.

 

Since its opening in late 2000, Nicolet has supplemented its organic growth with the December 2003 purchase of a branch and deposits in Menominee, Michigan, the July 2010 purchase of 4 branches and deposits in Brown County, the April 2013 merger transaction with Mid-Wisconsin Financial Services, Inc. (“Mid-Wisconsin”), and the August 2013 acquisition of selected assets and liabilities of Bank of Wausau through a transaction with the Federal Deposit Insurance Corporation (“FDIC”).

 

On September 8, 2015, Nicolet announced the signing of an Agreement and Plan of Merger with Baylake Corp. (“Baylake” (NASDAQ: BYLK) pursuant to which Baylake will merge with and into Nicolet. As of December 31, 2015, Baylake had total assets of $1.1 billion, loans of $743 million, deposits of $866 million and total stockholders’ equity of $114 million. The merger with Baylake is expected to close in April 2016.

 

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At December 31, 2015, Nicolet had total assets of $1.2 billion, loans of $877 million, deposits of $1.1 billion and total stockholders’ equity of $110 million. Nicolet’s profitability is significantly dependent upon net interest income (interest income earned on loans and other interest-earning assets such as investments, net of interest expense on deposits and other borrowed funds), and noninterest income sources (including but not limited to service charges on deposits, trust and brokerage fees, and mortgage income from sales of residential mortgages into the secondary market), offset by the level of the provision for loan losses, noninterest expenses (largely employee compensation and overhead expenses tied to processing and operating the Bank’s business), and income taxes. For the year ended December 31, 2015, Nicolet earned net income of $11.4 million, and after $0.2 million of preferred stock dividends, net income available to common shareholders was $11.2 million or $2.57 per diluted common share.

 

Products and Services Overview

 

Nicolet’s principal business is banking, consisting of lending and deposit gathering, as well as ancillary banking-related products and services, to businesses and individuals of the communities it serves, and the operational support to deliver, fund and manage such banking products and services. Additionally, the Bank offers trust, brokerage and other investment management services for individuals and retirement plan services for business customers. Nicolet delivers its products and services through 21 branch locations, on-line banking, mobile banking and an interactive website. Nicolet’s call center also services customers.

 

Nicolet offers a variety of loans, deposits and related services to business customers (especially small and medium-sized businesses and professional concerns), including but not limited to: business checking and other business deposit products and cash management services, international banking services, business loans, lines of credit, commercial real estate financing, construction loans, agricultural real estate or production loans, and letters of credit, as well as retirement plan services. Similarly, Nicolet offers a variety of banking products and services to consumers, including but not limited to: residential mortgage loans and mortgage refinancing, home equity loans and lines of credit, residential construction loans, personal loans, checking, savings and money market accounts, various certificates of deposit and individual retirement accounts, safe deposit boxes, and personal brokerage, trust and fiduciary services. Nicolet also provides on-line services including commercial, retail and trust on-line banking, automated bill payment, mobile banking deposits and account access, remote deposit capture, and telephone banking, and other services such as wire transfers, courier services, debit cards, credit cards, pre-paid gift cards, direct deposit, official bank checks and U.S. savings bonds.

 

Lending is critical to Nicolet’s balance sheet and earnings potential. Nicolet seeks creditworthy borrowers principally within the geographic area of its branch locations. As a community bank with experienced commercial lenders and residential mortgage lenders, the Bank’s primary lending function is to make commercial loans [consisting of commercial, industrial, and business loans and lines of credit, owner-occupied commercial real estate (“owner-occupied CRE”), and agricultural (“AG”) production loans]; commercial real estate (“CRE”) loans [consisting of investment real estate loans (“CRE investment”), AG real estate, and construction and land development loans]; residential real estate loans (consisting of residential first lien mortgages, junior lien mortgages, home equity loans and lines of credit, and to a lesser degree residential construction loans); and other loans, mainly consumer in nature. As of December 31, 2015, Nicolet’s loan portfolio mix was as follows:

 

Loan category  % of Total Loans 
Commercial & industrial   34%
Owner-occupied CRE   21%
AG production   1%
Total commercial loans   56%
AG real estate   5%
CRE investment   9%
Construction & land development   4%
Total CRE loans   18%
Residential construction   1%
Residential first mortgages   18%
Residential junior mortgages   6%
Total residential real estate loans   25%
Other   1%

 

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Lending involves credit risk. Nicolet has and follows extensive loan policies and procedures to standardize processes, meet compliance requirements and prudently manage underwriting, credit and other risks. Credit risk is further controlled and monitored through active asset quality management including the use of lending standards, thorough review of current and potential borrowers through Nicolet’s underwriting process, close relationships with and regular check-ins with borrowers, and active asset quality administration. For further discussion of credit risk management, see “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” under Part II, Item 7.

 

Employees

 

At December 31, 2015, Nicolet had approximately 280 full-time equivalent employees. None of our employees are represented by unions.

 

Market Area and Competition

 

Nicolet National Bank is a full-service community bank, providing a full range of traditional commercial and retail banking services, as well as wealth management services, throughout northeastern and central Wisconsin and the upper peninsula of Michigan. Nicolet markets its services to owner-managed companies, the individual owners of these businesses, and other residents of its market area, which at December 31, 2015 is through 21 branches located within 9 Wisconsin counties (Brown, Outagamie, Marinette, Taylor, Clark, Marathon, Oneida, Price and Vilas) and in Menominee, Michigan. Based on deposit market share data published by the FDIC as of June 30, 2015, the Bank ranks in the top three of market share for Brown, Taylor and Clark counties and in the top five for Menominee, Marinette and Price counties.

 

The financial services industry is highly competitive. Nicolet competes for loans, deposits and wealth management or financial services in all its principal markets. Nicolet competes directly with other bank and nonbank institutions located within our markets (some that may have an established customer base or name recognition), internet-based banks, out-of-market banks that advertise or otherwise serve its markets, money market and other mutual funds, brokerage houses, mortgage companies, insurance companies or other commercial entities that offer financial services products. Competition involves efforts to retain current or procure new customers, obtain new loans and deposits, increase the scope and type of products or services offered, and offer competitive interest rates paid on deposits or earned on loans, as well as to deliver other aspects of banking competitively. Many of Nicolet’s competitors may enjoy competitive advantages, including greater financial resources, broader geographic presence, more accessible branches or more advanced technologic delivery of products or services, more favorable pricing alternatives and lower origination or operating costs.

 

We believe our competitive pricing, personalized service and community engagement enable us to effectively compete in our markets. Nicolet employs seasoned banking and wealth management professionals with experience in its market areas and who are active in their communities. Nicolet’s emphasis on meeting customer needs in a relationship-focused manner, combined with local decision making on extensions of credit, distinguishes Nicolet from its competitors, particularly in the case of large financial institutions. Nicolet believes it further distinguishes itself by providing a range of products and services characteristic of a large financial institution while providing the personalized service, real conversation, and convenience characteristic of a local, community bank.

 

Supervision and Regulation

 

Set forth below is an explanation of the major pieces of legislation and regulation affecting the banking industry and how that legislation and regulation affects Nicolet’s actions. The following summary is qualified by reference to the statutory and regulatory provisions discussed. Changes in applicable laws or regulations may have a material effect on the business and prospects of Nicolet or Nicolet National Bank, and legislative changes and the policies of various regulatory authorities may significantly affect their operations. We cannot predict the effect that fiscal or monetary policies, or new federal or state legislation may have on the future business and earnings of Nicolet or Nicolet National Bank.

 

On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which contains a comprehensive set of provisions designed to govern the practices and oversight of financial institutions and other participants in the financial markets. The Dodd-Frank Act made extensive changes in the regulation of financial institutions and their holding companies.

 

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Uncertainty remains as to the ultimate impact of the Dodd-Frank Act, which could have a material adverse impact on the financial services industry as a whole or on Nicolet’s and Nicolet National Bank’s business, results of operations, and financial condition. Many aspects of the Dodd-Frank Act are in the process of being implemented while other aspects remain subject to further rulemaking. These regulations will take effect over several years, making it difficult to anticipate the overall financial impact on Nicolet, its customers or the financial industry more generally. However, it is likely that the Dodd-Frank Act will increase the regulatory burden, compliance costs and interest expense for Nicolet and Nicolet National Bank. Some of the rules that have been adopted to comply with the Dodd-Frank Act’s mandates are discussed below.

 

Regulation of Nicolet

 

Because Nicolet owns all of the capital stock of Nicolet National Bank, it is a bank holding company under the federal Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”). As a result, Nicolet is primarily subject to the supervision, examination, and reporting requirements of the Bank Holding Company Act and the regulations of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). As a bank holding company located in Wisconsin, the Wisconsin Department of Financial Institutions (the “WDFI”) also regulates and monitors all significant aspects of its operations.

 

Acquisitions of Banks. The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before:

 

·acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the bank’s voting shares;
·acquiring all or substantially all of the assets of any bank; or
·merging or consolidating with any other bank holding company.

 

Additionally, the Bank Holding Company Act provides that the Federal Reserve may not approve any of these transactions if it would result in or tend to create a monopoly, substantially lessen competition, or otherwise function as a restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served.  The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks involved in the transaction and the convenience and needs of the community to be served.  The Federal Reserve’s consideration of financial resources generally focuses on capital adequacy, which is discussed below.

 

Under the Bank Holding Company Act, if adequately capitalized and adequately managed, Nicolet or any other bank holding company located in Wisconsin may purchase a bank located outside of Wisconsin.  Conversely, an adequately capitalized and adequately managed bank holding company located outside of Wisconsin may purchase a bank located inside Wisconsin.  In each case, however, restrictions may be placed on the acquisition of a bank that has only been in existence for a limited amount of time or will result in specified concentrations of deposits.  

 

Change in Bank Control.   Subject to various exceptions, the Bank Holding Company Act and the Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control is rebuttably presumed to exist if a person or company acquires 10% or more, but less than 25%, of any class of voting securities of the bank holding company. The regulations provide a procedure for challenging rebuttable presumptions of control.

 

Permitted Activities. The Bank Holding Company Act has generally prohibited a bank holding company from engaging in activities other than banking or managing or controlling banks or other permissible subsidiaries and from acquiring or retaining direct or indirect control of any company engaged in any activities other than those determined by the Federal Reserve to be closely related to banking or managing or controlling banks as to be a proper incident thereto.  Provisions of the Gramm-Leach-Bliley Act have expanded the permissible activities of a bank holding company that qualifies as a financial holding company to engage in activities that are financial in nature or incidental or complementary to financial activities. Those activities include, among other activities, certain insurance, advisory and security activities. 

 

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Nicolet meets the qualification standards applicable to financial holding companies, and elected to become a financial holding company in 2008. In order to remain a financial holding company, Nicolet must continue to be considered well managed and well capitalized by the Federal Reserve, and Nicolet National Bank must continue to be considered well managed and well capitalized by the Office of the Comptroller of the Currency (the “OCC”) and have at least a “satisfactory” rating under the Community Reinvestment Act.

 

Support of Subsidiary Institutions.   Under Federal Reserve policy and the Dodd-Frank Act, Nicolet is expected to act as a source of financial strength for Nicolet National Bank and to commit resources to support Nicolet National Bank. This support may be required at times when, without this Federal Reserve policy or the related rules, Nicolet might not be inclined to provide it.

 

In addition, any capital loans made by Nicolet to Nicolet National Bank will be repaid only after Nicolet National Bank’s deposits and various other obligations are repaid in full.

 

Capital Adequacy. Nicolet is subject to capital requirements applied on a consolidated basis, which are substantially similar to those required of Nicolet National Bank, which are summarized below.

 

Dividend Restrictions. Under Federal Reserve policies, bank holding companies may pay cash dividends on common stock only out of income available over the past year if prospective earnings retention is consistent with the organization's expected future needs and financial condition and if the organization is not in danger of not meeting its minimum regulatory capital requirements. Federal Reserve policy also provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company's ability to serve as a source of strength to its banking subsidiaries.

 

In addition, when Nicolet received a capital investment from the U.S. Department of the Treasury (the “Treasury”) under the Small Business Lending Fund (the “SBLF”) on September 1, 2011, it became subject to certain contractual limitations on the payment of dividends. These limitations require, among other things, that (1) all dividends for the SBLF Preferred Stock be paid before other dividends can be paid and (2) no dividends on or repurchases of Nicolet common stock will be permitted if such repurchase or payment of such dividends would reduce Nicolet’s Tier 1 capital by more than 10% from the level on the SBLF closing date.

 

Regulation of Nicolet National Bank

 

Because Nicolet National Bank is chartered as a national bank, it is primarily subject to the supervision, examination, and reporting requirements of the National Bank Act and the regulations of the OCC. The OCC regularly examines Nicolet National Bank’s operations and has the authority to approve or disapprove mergers, the establishment of branches and similar corporate actions. The OCC also has the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law. Because Nicolet National Bank’s deposits are insured by the FDIC to the maximum extent provided by law, it is also subject to certain FDIC regulations and the FDIC also has examination authority and back-up enforcement power over Nicolet National Bank. Nicolet National Bank is also subject to numerous state and federal statutes and regulations that affect Nicolet, its business, activities, and operations.

 

Branching. National banks are required by the National Bank Act to adhere to branching laws applicable to state banks in the states in which they are located. Under Wisconsin law and the Dodd-Frank Act, and with the prior approval of the OCC, Nicolet National Bank may open branch offices within or outside of Wisconsin, provided that a state bank chartered by the state in which the branch is to be located would also be permitted to establish a branch. In addition, with prior regulatory approval, Nicolet National Bank may acquire branches of existing banks located in Wisconsin or other states.

 

Capital Adequacy. Banks and bank holding companies, as regulated institutions, are required to maintain minimum levels of capital. The Federal Reserve and the OCC have adopted minimum risk-based capital requirements (Tier 1 capital, common equity Tier 1 capital (“CET1”) and total capital) and leverage capital requirements, as well as guidelines that define components of the calculation of capital and the level of risk associated with various types of assets. Financial institutions are expected to maintain a level of capital commensurate with the risk profile assigned to their assets in accordance with the guidelines.

 

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In addition to the minimum risk-based capital and leverage ratios, banking organizations must maintain a “capital conservation buffer” consisting of CET1 in an amount equal to 2.5% of risk-weighted assets in order to avoid restrictions on their ability to make capital distributions and to pay certain discretionary bonus payments to executive officers. In order to avoid those restrictions, the capital conservation buffer effectively increases the minimum CET1 capital, Tier 1 capital, and total capital ratios for U.S. banking organizations to 7.0%, 8.5%, and 10.5%, respectively. Banking organizations with capital levels that fall within the buffer will be required to limit dividends, share repurchases or redemptions (unless replaced within the same calendar quarter by capital instruments of equal or higher quality), and discretionary bonus payments. The capital conservation buffer is phased in over a 5-year period beginning January 1, 2016.

 

The following table presents the risk-based and leverage capital requirements applicable to the Bank:

 

  Adequately Capitalized
Requirement
Well-Capitalized
Requirement
Well-Capitalized
with Buffer, fully
phased in 2019
Leverage 4.0% 5.0% 5.0%
CET1 4.5% 6.5% 7.0%
Tier 1 6.0% 8.0% 8.5%
Total Capital 8.0% 10.0% 10.5%

 

Although capital instruments such as trust preferred securities and cumulative preferred shares were required by the Dodd-Frank Act to be phased-out of Tier 1 capital by January 1, 2016, for certain larger banking organizations, Nicolet’s trust preferred securities are permanently grandfathered as Tier 1 capital (provided they do not exceed 25% of Tier 1 capital) as a result of Nicolet qualifying as a smaller entity.

 

The capital rules require that goodwill and other intangible assets (other than mortgage servicing assets), net of associated deferred tax liabilities (“DTLs”), be deducted from CET1 capital. Additionally, deferred tax assets (“DTAs”) that arise from net operating loss and tax credit carryforwards, net of associated DTLs and valuation allowances, are fully deducted from CET1 capital. However, DTAs arising from temporary differences that could not be realized through net operating loss carrybacks, along with mortgage servicing assets and “significant” (defined as greater than 10% of the issued and outstanding common stock of the unconsolidated financial institution) investments in the common stock of unconsolidated “financial institutions” are partially includible in CET1 capital, subject to deductions defined in the rules.

 

The OCC also considers interest rate risk (arising when the interest rate sensitivity of the Bank’s assets does not match the sensitivity of its liabilities or its off-balance-sheet position) in the evaluation of the bank’s capital adequacy. Banks with excessive interest rate risk exposure are required to hold additional amounts of capital against their exposure to losses resulting from that risk. Through the risk-weighting of assets, the regulators also require banks to incorporate market risk components into their risk-based capital. Under these market risk requirements, capital is allocated to support the amount of market risk related to a bank’s lending and trading activities.

 

The Bank’s capital categories are determined solely for the purpose of applying the “prompt corrective action” rules described below and they are not necessarily an accurate representation of its overall financial condition or prospects for other purposes. Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and certain other restrictions on its business. See “Prompt Corrective Action” below.

 

Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) establishes a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, in which all institutions are placed. The federal banking agencies have also specified by regulation the relevant capital levels for each category.

 

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A “well-capitalized” bank is one that is not required to meet and maintain a specific capital level for any capital measure, pursuant to any written agreement, order, capital directive, or prompt corrective action directive, and, for 2015, has a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 8%, a common equity Tier 1 capital ratio of at least 6.5%, and a Tier 1 leverage ratio of at least 5%. Generally, a classification as well capitalized will place a bank outside of the regulatory zone for purposes of prompt corrective action. However, a well-capitalized bank may be reclassified as “adequately capitalized” based on criteria other than capital, if the federal regulator determines that a bank is in an unsafe or unsound condition, or is engaged in unsafe or unsound practices, which requires certain remedial action.

 

As of December 31, 2015, Nicolet National Bank satisfied the requirements of “well-capitalized” under the regulatory framework for prompt corrective action. See Note 18, “Regulatory Capital Requirements and Restrictions of Dividends,” in the Notes to Consolidated Financial Statements, under Part II, Item 8, for Nicolet and Nicolet National Bank regulatory capital ratios.

 

As a bank’s capital position deteriorates, federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories: undercapitalized, significantly undercapitalized, and critically undercapitalized. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized.

 

FDIC Insurance Assessments. Nicolet National Bank’s deposits are insured by the Deposit Insurance Fund of the FDIC up to the maximum amount permitted by law, which was permanently increased to $250,000 by the Dodd-Frank Act. The FDIC uses the Deposit Insurance Fund to protect against the loss of insured deposits if an FDIC-insured bank or savings association fails. Nicolet National Bank is thus subject to FDIC deposit premium assessments. The cost of premium assessments are impacted by, among other things, a bank’s capital category under the prompt corrective action system.

 

Commercial Real Estate Lending. The federal banking regulators have issued the following guidance to help identify institutions that are potentially exposed to significant commercial real estate lending risk and may warrant greater supervisory scrutiny:

 

·total reported loans for construction, land development and other land represent 100% or more of the institution’s total capital, or

 

·total commercial real estate loans represent 300% or more of the institution’s total capital, and the outstanding balance of the institution’s commercial real estate loan portfolio has increased by 50% or more.

 

At December 31, 2015 Nicolet National Bank’s commercial real estate lending levels are below the guidance levels noted above.

 

Enforcement Powers. The Financial Institution Reform Recovery and Enforcement Act (“FIRREA”) expanded and increased civil and criminal penalties available for use by the federal regulatory agencies against depository institutions and certain “institution-affiliated parties.” Institution-affiliated parties primarily include management, employees, and agents of a financial institution, as well as independent contractors and consultants such as attorneys and accountants and others who participate in the conduct of the financial institution’s affairs. These practices can include the failure of an institution to timely file required reports or the filing of false or misleading information or the submission of inaccurate reports. Civil penalties may be as high as $1,100,000 per day for such violations. Criminal penalties for some financial institution crimes have been increased to 20 years.

 

Community Reinvestment Act. The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their respective jurisdictions, the federal banking agencies evaluate the record of each financial institution in meeting the credit needs of its local community, including low- and moderate-income neighborhoods. These facts are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on Nicolet National Bank. Additionally, Nicolet National Bank must publicly disclose the terms of various Community Reinvestment Act-related agreements.

 

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Payment of Dividends. Statutory and regulatory limitations apply to Nicolet National Bank’s payment of dividends to Nicolet. If, in the opinion of the OCC, Nicolet National Bank were engaged in or about to engage in an unsafe or unsound practice, the OCC could require that Nicolet National Bank stop or refrain from engaging in the practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice.

 

Nicolet National 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 Nicolet National Bank in any year will exceed (1) the total of Nicolet National Bank’s net profits for that year, plus (2) Nicolet National Bank’s retained net profits of the preceding two years, less any required transfers to surplus. The payment of dividends may also be affected by other factors, such as the requirement to maintain adequate capital above regulatory guidelines or any conditions or restrictions that may be imposed by regulatory authorities.

 

Transactions with Affiliates and Insiders. Nicolet National Bank is subject to the provisions of Regulation W promulgated by the Federal Reserve, which encompasses Sections 23A and 23B of the Federal Reserve Act. Regulation W places limits and conditions on the amount of loans or extensions of credit to, investments in, or certain other transactions with, affiliates and on the amount of advances to third parties collateralized by the securities or obligations of affiliates. Regulation W also prohibits, among other things, an institution from engaging in certain transactions with certain affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies. Federal law also places restrictions on Nicolet National Bank’s ability to extend credit to its executive officers, directors, principal shareholders and their related interests. These extensions of credit: must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated third parties; and must not involve more than the normal risk of repayment or present other unfavorable features.

 

USA PATRIOT Act. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA PATRIOT Act") requires each financial institution to: (i) establish an anti-money laundering program; and (ii) establish due diligence policies, procedures and controls with respect to its private and correspondent banking accounts involving foreign individuals and certain foreign banks. In addition, the USA PATRIOT Act encourages cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities.

 

Customer Protection. Nicolet National Bank is also subject to consumer laws and regulations intended to protect consumers in transactions with depository institutions, as well as other laws or regulations affecting customers of financial institutions generally. While the list set forth herein is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement and Procedures Act, the Fair Credit Reporting Act and the Federal Trade Commission Act, among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers.

 

Consumer Financial Protection Bureau. The Dodd-Frank Act centralized responsibility for consumer financial protection including implementing, examining and enforcing compliance with federal consumer financial laws with the Consumer Financial Protection Bureau (the “CFPB”). Depository institutions with less than $10 billion in assets, such as Nicolet National Bank, will be subject to rules promulgated by the CFPB but will continue to be examined and supervised by federal banking regulators for consumer compliance purposes.

 

UDAP and UDAAP. Bank regulatory agencies have increasingly used a general consumer protection statute to address "unethical" or otherwise "bad" business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. The law of choice for enforcement against such business practices has been Section 5 of the Federal Trade Commission Act—the primary federal law that prohibits unfair or deceptive acts or practices and unfair methods of competition in or affecting commerce ("UDAP" or "FTC Act"). "Unjustified consumer injury" is the principal focus of the FTC Act. Prior to the Dodd-Frank Act, there was little formal guidance to provide insight to the parameters for compliance with the UDAP law. However, the UDAP provisions have been expanded under the Dodd-Frank Act to apply to "unfair, deceptive or abusive acts or practices" ("UDAAP"), which has been delegated to the CFPB for supervision. The CFPB has brought a variety of enforcement actions for violations of UDAAP provisions and CFPB guidance continues to evolve.

 

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Mortgage Reform. The CFPB has adopted final rules implementing minimum standards for the origination of residential mortgages, including standards regarding a customer's ability to repay, restricting variable-rate lending by requiring that the ability to repay variable-rate loans be determined by using the maximum rate that will apply during the first five years of a variable-rate loan term, and making more loans subject to provisions for higher cost loans, new disclosures, and certain other revisions. In addition, the Dodd-Frank Act allows borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB.

 

Available Information

 

Nicolet became a public reporting company under Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) on March 26, 2013, when Nicolet’s registration statement related to its acquisition of Mid-Wisconsin Financial Services, Inc. (Registration Statement on Form S-4, “Regis. No. 333-186401”) became effective. Nicolet registered its common stock under Section 12(b) of the Exchange Act on February 24, 2016 in connection with listing on the Nasdaq Capital Market. Nicolet files annual, quarterly, and current reports, and other information with the SEC. These filings are available to the public on the Internet at the SEC’s website at www.sec.gov. Shareholders may also read and copy any document that we file at the SEC’s public reference rooms located at 100 F Street, NE, Washington, DC 20549. Shareholders may call the SEC at 1-800-SEC-0330 for further information on the public reference room.

 

Nicolet’s internet address is www.nicoletbank.com. We make available free of charge on or through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

 

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ITEM 1A. RISK FACTORS

 

An investment in our common stock involves risks. If any of the following risks, or other risks which have not been identified or which we may believe are immaterial or unlikely, actually occurs, our business, financial condition and results of operations could be harmed. In such a case, the trading price of our common stock could decline, and you could lose all or part of your investment. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.

 

Risks Relating to Nicolet’s Business

 

Nicolet may not be able to sustain its historical rate of growth, or may encounter issues associated with its growth, either of which could adversely affect our financial condition, results of operations, and share price.

 

We have grown over the past several years and intend to continue to pursue a significant growth strategy for our business. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in significant growth stages of development. We may not be able to further expand our market presence in existing markets or to enter new markets successfully, nor can we guarantee that any such expansion would not adversely affect our results of operations. Failure to manage growth effectively could have a material adverse effect on the business, future prospects, financial condition or results of our operations, and could adversely affect our ability to successfully implement business strategies. Also, if such growth occurs more slowly than anticipated or declines, our operating results could be materially adversely affected.

 

Our ability to grow successfully will depend on a variety of factors including the continued availability of desirable business opportunities, the competitive responses from other financial institutions in our market areas and the ability to manage our growth. While we believe we have the management resources and internal systems in place to manage future growth successfully, there can be no assurance that growth opportunities will be available or that any growth will be managed successfully. In addition, our recent growth may distort some of our historical financial ratios and statistics.

 

As part of our growth strategy, we regularly evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, negotiations may take place and future mergers or acquisitions involving cash, debt, or equity securities may occur at any time. We seek merger or acquisition partners that are culturally similar, have experienced management, and possess either significant market presence or have potential for improved profitability through financial management, economies of scale, or expanded services.

 

As noted above in Item 1, Business, on September 8, 2015, we announced the signing of a definitive merger agreement pursuant to which Baylake will merge with and into Nicolet. As evidenced by our pending acquisition of Baylake, we intend to continue pursuing a growth strategy for our business through attractive acquisition opportunities.

 

Acquiring other banks, businesses, or branches involves potential adverse impact to our financial results and various other risks commonly associated with acquisitions, including, among other things, difficulty in estimating the value of the target company, payment of a premium over book and market values that may dilute our tangible book value and earnings per share in the short and long term, potential exposure to unknown or contingent liabilities of the target company, exposure to potential asset quality issues of the target company, potential volatility in reported income as goodwill impairment losses could occur irregularly and in varying amounts, difficulty and expense of integrating the operations and personnel of the target company, inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and / or other projected benefits, potential disruption to our business, potential diversion of our management’s time and attention, and the possible loss of key employees and customers of the target company.

 

As a community bank, Nicolet’s success depends upon local and regional economic conditions and has different lending risks than larger banks.

 

We provide services to our local communities. Our ability to diversify economic risks is limited by our own local markets and economies. We lend primarily to individuals and small- to medium-sized businesses, which may expose us to greater lending risks than those of banks lending to larger, better-capitalized businesses with longer operating histories.

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We manage our credit exposure through careful monitoring of loan applicants and loan concentrations in particular industries, and through loan approval and review procedures. We have established an evaluation process designed to determine the adequacy of our allowance for loan losses. While this evaluation process uses historical and other objective information, the classification of loans and the establishment of loan losses is an estimate based on experience, judgment and expectations regarding borrowers and economic conditions, as well as regulator judgments. We can make no assurance that our loan loss reserves will be sufficient to absorb future loan losses or prevent a material adverse effect on its business, profitability or financial condition.

 

The core industries in our market area are manufacturing, wholesaling, paper, packaging, food production and processing, agriculture, forest products, retail, service, and businesses supporting the general building industry. The area has a broad range of diversified equipment manufacturing services related to these core industries and others. The residential and commercial real estate markets throughout these areas depend primarily on the strength of these core industries. A material decline in any of these sectors will affect the communities we serve and could negatively impact our financial results and have a negative impact on profitability.

 

If the communities in which we operate do not grow or if the prevailing economic conditions locally or nationally are less favorable than we have assumed, our ability to maintain our low volume of non-performing loans and other real estate owned and implement our business strategies may be adversely affected and our actual financial performance may be materially different from our projections.

 

Nicolet may experience increased delinquencies and credit losses, which could have a material adverse effect on our capital, financial condition, results of operations, and share price.

 

Our success depends to a significant extent upon the quality of our assets, particularly loans. In originating loans, there is a substantial likelihood that we will experience credit losses. The risk of loss will vary with, among other things, general economic conditions, the type of loan, the creditworthiness of the borrower over the term of the loan, and, in the case of a collateralized loan, the quality of the collateral for the loan.

 

Our loan customers may not repay their loans according to the terms of these loans, and the collateral securing the payment of these loans may be insufficient to assure repayment. As a result, we may experience significant loan losses, which could have a material adverse effect on our operating results. Management makes various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. We maintain an allowance for loan losses in an attempt to cover any loan losses that may occur. In determining the size of the allowance, we rely on an analysis of our loan portfolio based on historical loss experience, volume and types of loans, trends in classification, volume and trends in delinquencies and non-accruals, national and local economic conditions, and other pertinent information.

 

If management’s assumptions are wrong, our current allowance may not be sufficient to cover future loan losses, and we may need to make adjustments to allow for different economic conditions or adverse developments in our loan portfolio. Material additions to our allowance would materially decrease net income. We expect our allowance to continue to fluctuate; however, given current and future market conditions, we can make no assurance that our allowance will be adequate to cover future loan losses.

 

In addition, the market value of the real estate securing our loans as collateral continues to be adversely affected by the slow economy and unfavorable changes in economic conditions in our market areas and could be further adversely affected in the future. As of December 31, 2015, approximately 34% of our loans were secured by commercial-based real estate, 5% of loans were secured by agriculture-based real estate, and 25% of our loans were secured by residential real estate. Any sustained period of increased payment delinquencies, foreclosures, or losses caused by adverse market and economic conditions, including another downturn in the real estate market, in our markets could adversely affect the value of our assets, revenues, results of operations, and financial condition.

 

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Nicolet is subject to extensive regulation that could limit or restrict our activities, which could have a material adverse effect on our results of operations or share price.

 

We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various regulatory agencies. Our compliance with these regulations, including compliance with regulatory commitments, is costly and restricts certain of our activities, including the declaration and payment of cash dividends to stockholders, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits, and locations of offices. We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our growth and operations.

 

The laws and regulations applicable to the banking industry have recently changed and may continue to change, and we cannot predict the effects of these changes on our business and profitability. Some or all of the changes, including the new rulemaking authority granted to the newly-created CFPB, may result in greater reporting requirements, assessment fees, operational restrictions, capital requirements, and other regulatory burdens for us, and many of our competitors that are not banks or bank holding companies may remain free from such limitations. This could affect our ability to attract and retain depositors, to offer competitive products and services, and to expand our business. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, the cost of compliance could adversely affect our ability to operate profitably.

 

Congress may consider additional proposals to substantially change the financial institution regulatory system and to expand or contract the powers of banking institutions and bank holding companies. Such legislation may change existing banking statutes and regulations, as well as the current operating environment significantly. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand our permissible activities, or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot predict whether new legislation will be enacted and, if enacted, the effect that it, or any regulations, would have on our business, financial condition, or results of operations.

 

Nicolet’s profitability is sensitive to changes in the interest rate environment.

 

As a financial institution, our earnings significantly depend on net interest income, which is the difference between the interest income that we earn on interest-earning assets, such as investment securities and loans, and the interest expense that we pay on interest-bearing liabilities, such as deposits and borrowings. Therefore, any change in general market interest rates, including changes in federal fiscal and monetary policies, affects us more than non-financial institutions and can have a significant effect on our net interest income and total income. Our assets and liabilities may react differently to changes in overall market rates or conditions because there may be mismatches between the repricing or maturity characteristics of the assets and liabilities. As a result, an increase or decrease in market interest rates could have material adverse effects on our net interest margin and results of operations.

 

In addition, we cannot predict whether interest rates will continue to remain at present levels, or the timing of any anticipated changes. Changes in interest rates may cause significant changes, up or down, in our net interest income. Depending on our portfolio of loans and investments, our results of operations may be adversely affected by changes in interest rates. If there is a substantial increase in interest rates, our investment portfolio is at risk of experiencing price declines that may negatively impact our total capital position through changes in other comprehensive income. In addition, any significant increase in prevailing interest rates could adversely affect our mortgage banking business because higher interest rates could cause customers to request fewer refinancings and purchase money mortgage originations.

 

We rely on other companies to provide key components of our business infrastructure.

 

Third party vendors provide key components of our business infrastructure such as internet connections, network access and core application processing. While we have selected these third party vendors carefully, we do not control their actions. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to our customers and otherwise to conduct our business. Replacing these third party vendors could also entail significant delay and expense.

 

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Negative publicity could damage our reputation.

 

Reputation risk, or the risk to our earnings and capital from negative public opinion, is inherent in our business. Negative public opinion could adversely affect our ability to keep and attract customers and expose us to adverse legal and regulatory consequences. Negative public opinion could result from our actual or alleged conduct in any number of activities, including lending or foreclosure practices, corporate governance, regulatory compliance, mergers and acquisitions, and disclosure, sharing or inadequate protection of customer information, and from actions taken by government regulators and community organizations in response to that conduct.

 

Competition in the banking industry is intense and Nicolet faces strong competition from larger, more established competitors.

 

The banking business is highly competitive, and we experience strong competition from many other financial institutions. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other financial institutions that operate in our primary market areas and elsewhere.

 

We compete with these institutions both in attracting deposits and in making loans. In addition, we have to attract our customer base from other existing financial institutions and from new residents. Many of our competitors are well-established, much larger financial institutions. While we believe we can and do successfully compete with these other financial institutions in its markets, we may face a competitive disadvantage as compared to large national or regional banks as a result of our smaller size and lack of geographic diversification.

 

Although we compete by concentrating our marketing efforts in our primary market area with local advertisements, personal contacts, and greater flexibility in working with local customers, we can give no assurance that this strategy will be successful.

 

Nicolet continually encounters technological change and we may have fewer resources than our competition to continue to invest in technological improvements; as well, Nicolet’s information systems may experience an interruption or breach in security.

 

The banking and financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that enhance customer convenience, as well as create additional efficiencies in operations. Many of our competitors have greater resources to invest in technological improvements, and we may not be able to effectively implement new technology-driving products and services, which could reduce our ability to effectively compete.

 

In addition, we rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in customer relationship management, general ledger, deposit, loan functionality and the effective operation of other systems. While we have policies and procedures designed to prevent or limit the effect of a failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

 

Risks Related to Ownership of Nicolet’s Common Stock

 

Our stock price can be volatile.

 

Stock price volatility may make it more difficult for you to sell your common stock when you want and at prices you find attractive. Our stock price can fluctuate widely in response to a variety of factors including, among other things:

 

actual or anticipated variations in quarterly results of operations or financial condition;
operating results and stock price performance of other companies that investors deem comparable to us;
news reports relating to trends, concerns, and other issues in the financial services industry;
perceptions in the marketplace regarding us and / or our competitors;

 

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new technology used or services offered by competitors;
significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by or involving us or our competitors;
failure to integrate acquisitions or realize anticipated benefits from acquisitions;
changes in government regulations;
geopolitical conditions such as acts or threats of terrorism or military conflicts;
our own participation in the market through our buyback program; and
recommendations by securities analysts.

 

General market fluctuations, industry factors, and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes, or credit loss trends, could also cause our stock price to decrease regardless of our operating results.

 

The trading volume of Nicolet’s common stock is less than that of other larger companies.

 

The trading volume of our common stock is less than that of other larger banks. For the public trading market for our common stock to have the desired characteristics of depth, liquidity and orderliness requires the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Although trading of our common stock on the Nasdaq Capital Market commenced on February 24, 2016, there is no guarantee that the trading volume of our common stock will increase as a result.

 

Given the lower trading volume of our common stock, significant sales of our common stock, or the expectation of these sales, could cause our stock price to fall more than would otherwise be expected. Conversely, significant purchases of our common stock, or the absence of willing sellers, could cause our stock price to be greater than would otherwise be expected in a liquid trading market. Such pricing may make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. Finally we may, through a board-approved stock purchase program, be a buyer of our own common stock from time to time; as such, our own activity through the open market purchases can influence actual and/or perceived trading volume and pricing expectations.

 

Nicolet has not historically paid dividends to our common shareholders and cannot guarantee that we will pay dividends to such shareholders in the future.

 

The holders of our common stock receive dividends if and when declared by the Nicolet board of directors out of legally available funds. Nicolet’s board of directors has not declared a dividend on the common stock since our inception in 2000 and does not expect to do so in the foreseeable future. Any future determination relating to dividend policy will be made at the discretion of Nicolet’s board of directors and will depend on a number of factors, including the company’s future earnings, capital requirements, financial condition, future prospects, regulatory restrictions and other factors that the board of directors may deem relevant.

 

Our principal business operations are conducted through Nicolet National Bank. Cash available to pay dividends to our shareholders is derived primarily, if not entirely, from dividends paid by Nicolet National Bank. The ability of Nicolet National Bank to pay dividends to us, as well as our ability to pay dividends to our shareholders, is subject to and limited by certain legal and regulatory restrictions, as well as contractual restrictions related to our junior subordinated debentures and SBLF Preferred Stock. Further, any lenders making loans to us may impose financial covenants that may be more restrictive than regulatory requirements with respect to the payment of dividends by us. There can be no assurance of whether or when we may pay dividends in the future.

 

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Nicolet may need to raise additional capital in the future but that capital may not be available when it is needed or may be dilutive to our shareholders.

 

We are required by federal and state regulatory authorities to maintain adequate capital levels to support our operations. In order to support our operations and comply with regulatory standards, we may need to raise capital in the future. Our ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital, if needed, on favorable terms. The capital and credit markets have experienced significant volatility in recent years. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. If current levels of volatility worsen, our ability to raise additional capital may be disrupted. If we cannot raise additional capital when needed, our results of operations and financial condition may be adversely affected, and our banking regulators may subject us to regulatory enforcement action, including receivership. In addition, the issuance of additional shares of our equity securities will dilute the economic ownership interest of our common and preferred shareholders.

 

Nicolet’s directors and executive officers own a significant portion of our common stock and can influence shareholder decisions.

 

Our directors and executive officers, as a group, beneficially owned approximately 25% of our fully diluted issued and outstanding common stock as of December 31, 2015. As a result of their ownership, our directors and executive officers have the ability, if they voted their shares in concert, to influence the outcome of all matters submitted to our shareholders for approval, including the election of directors.

 

Holders of Nicolet’s subordinated debentures have rights that are senior to those of its common shareholders.

 

We have supported our continued growth by issuing trust preferred securities and accompanying junior subordinated debentures. As of December 31, 2015, we had outstanding trust preferred securities and associated junior subordinated debentures with an aggregate par principal amount of approximately $16.5 million.

 

We have unconditionally guaranteed the payment of principal and interest on our trust preferred securities. Also, the junior debentures issued to the special purpose trusts that relate to those trust preferred securities are senior to our common stock. As a result, we must make payments on the junior subordinated debentures before we can pay any dividends on our common stock, and in the event of our bankruptcy, dissolution or liquidation, holders of our junior subordinated debentures must be satisfied before any distributions can be made on our common stock. We do have the right to defer distributions on our junior subordinated debentures (and related trust preferred securities) for up to five years, but during that time would not be able to pay dividends on our common or preferred stock.

 

Holders of Nicolet’s SBLF Preferred Stock have rights that are senior to those of its common stock, and contractual restrictions relative to Nicolet’s SBLF Preferred Stock may limit or prevent Nicolet from paying dividends on and repurchasing its common stock.

 

We have supported our capital operations by issuing preferred stock to the Treasury pursuant to the SBLF program.

 

The SBLF Preferred Stock issued to and currently held by the Treasury has dividend rights that are senior to those of our common stock; therefore, we must pay dividends on the SBLF Preferred Stock before we can pay any dividends to holders of our common stock. In the event of our bankruptcy, dissolution, or liquidation, the holders of the SBLF Preferred Stock must be satisfied before we can make any distributions to holders of our common stock. In addition, under the terms of the SBLF Preferred Stock and the securities purchase agreement between Nicolet and the Treasury in connection with the SBLF transaction, we are generally unable to pay dividends on or repurchase our common stock where such payment or repurchase would result in a reduction of our Tier 1 capital from the level on September 1, 2011, the date on which the SBLF Preferred Stock was issued, by more than 10%.

 

Holders of Nicolet’s SBLF Preferred Stock have limited voting rights.

 

Other than under certain limited circumstances, holders of our SBLF Preferred Stock have no voting rights except with respect to matters that would involve certain fundamental changes to the terms of the SBLF Preferred Stock or as required by law. These matters include the authorization of stock senior to the SBLF Preferred Stock, amendments that adversely affect the rights of the holders of the SBLF Preferred Stock, and certain business combination transactions. These rights could make it more difficult to consummate a transaction that our common shareholders wish to approve.

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Because Nicolet is a regulated bank holding company, your ability to obtain “control” or to act in concert with others to obtain control over Nicolet without the prior consent of the Federal Reserve or other applicable bank regulatory authorities is limited and may subject you to regulatory oversight.

 

Nicolet is a bank holding company and, as such, is subject to significant regulation of its business and operations. In addition, under the provisions of the Bank Holding Company Act and the Change in Bank Control Act, certain regulatory provisions may become applicable to individuals or groups who are deemed by the regulatory authorities to “control” Nicolet or our subsidiary bank. The Federal Reserve and other bank regulatory authorities have very broad interpretive discretion in this regard and it is possible that the Federal Reserve or some other bank regulatory authority may, whether through a merger or through subsequent acquisition of Nicolet’s shares, deem one or more of Nicolet’s shareholders to control or to be acting in concert for purposes of gaining or exerting control over Nicolet. Such a determination may require a shareholder or group of shareholders, among other things, to make voluminous regulatory filings under the Change in Bank Control Act, including disclosure to the regulatory authorities of significant amounts of confidential personal or corporate financial information. In addition, certain groups or entities may also be required to either register as a bank holding company under the Bank Holding Company Act, becoming themselves subject to regulation by the Federal Reserve under that Act and the rules and regulations promulgated thereunder, which may include requirements to materially limit other operations or divest other business concerns, or to divest immediately their investments in Nicolet.

 

In addition, these limitations on the acquisition of our stock may generally serve to reduce the potential acquirers of our stock or to reduce the volume of our stock that any potential acquirer may be able to acquire. These restrictions may serve to generally limit the liquidity of our stock and, consequently, may adversely affect its value.

 

We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive.

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and we have taken advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, even if we comply with the greater obligations of public companies that are not emerging growth companies, we may avail ourselves of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as we are an emerging growth company. We will remain an emerging growth company for up to five years following the first sale of our common stock pursuant to an effective registration statement filed under the Securities Act, though we may cease to be an emerging growth company earlier under certain circumstances, including if, before the end of such five years, we are deemed to be a large accelerated filer under the rules of the SEC (which depends on, among other things, having a market value of common stock held by non-affiliates in excess of $700 million) or if our total annual gross revenues equal or exceed $1 billion in a fiscal year. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

Nicolet’s securities are not FDIC insured.

 

Our securities are not savings or deposit accounts or other obligations of Nicolet National Bank, and are not insured by the Deposit Insurance Fund, or any other agency or private entity and are subject to investment risk, including the possible loss of some or all of the value of your investment.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

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ITEM 2. PROPERTIES

 

The headquarters of both Nicolet and Nicolet National Bank is located at 111 North Washington Street, Green Bay, Wisconsin. At year-end 2015, including the main office, Nicolet National Bank operates 21 owned or leased branch locations noted below, most of which are free-standing, newer buildings that provide adequate access, customer parking, and drive-through and/or ATM services. In addition, Nicolet owns or leases other real property that, when considered in aggregate, is not significant to its financial position. No property listed below as owned is subject to a mortgage or similar encumbrance.

 

Green Bay (main office)   111 N. Washington Street   Green Bay   WI   Leased*
De Pere   1011 N. Broadway Avenue   De Pere   WI   Owned
West De Pere   1610 Lawrence Drive   De Pere   WI   Leased
Howard   2380 Duck Creek Parkway   Green Bay   WI   Owned
Ashwaubenon   2363 Holmgren Way   Green Bay   WI   Leased
Bellevue   2082 Monroe Road   De Pere   WI   Leased
Appleton   900 W. College Avenue   Appleton   WI   Leased
Appleton - Kensington   2400 S. Kensington Drive, Suite 100   Appleton   WI   Leased*
Crivitz   315 US Hwy 141 N.   Crivitz   WI   Owned
Marinette   2009 Hall Avenue   Marinette   WI   Owned
Menominee   1015 10th Avenue   Menominee   MI   Owned
Eagle River   325 W. Pine Street   Eagle River   WI   Owned
Minocqua   8744 US Hwy 51 N.   Minocqua   WI   Leased
Rhinelander   2170 Lincoln Street   Rhinelander   WI   Owned
Phillips   864 N. Lake Avenue   Phillips   WI   Owned
Rib Lake   717 McComb Avenue   Rib Lake   WI   Owned
Medford   134 S. 8th Street   Medford   WI   Owned
Wausau   2100 Stewart Avenue, Suite 100   Wausau   WI   Leased*
Rib Mountain   3845 Rib Mountain Drive   Wausau   WI   Owned
Abbotsford   119 N. First Street   Abbotsford   WI   Owned
Colby   101 S. First Street   Colby   WI   Owned

 

*These leased locations involve related parties. For additional disclosure, see Note 16, “Related Party Transactions,” of the Notes to Consolidated Financial Statements under Item 8.

 

ITEM 3. LEGAL PROCEEDINGS

 

We and our subsidiaries may be involved from time to time in various routine legal proceedings incidental to our respective businesses. Neither we nor any of our subsidiaries are currently engaged in any legal proceedings that are expected to have a material adverse effect on our results of operations or financial position.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

19 

 

  

PART II

 

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Nicolet registered its common stock under Section 12(b) of the Exchange Act on February 24, 2016, in connection with listing on the Nasdaq Capital Market, and trades under the symbol “NCBS”. Prior to February 24, 2016, Nicolet’s common stock was traded on the Over-The-Counter Markets (“OTCBB”), also under the symbol “NCBS”. The common stock was authorized to commence trading on the OTCBB on April 26, 2013, with the first trade completed on May 17, 2013. Prior to such trading, there was no established market for Nicolet’s common stock. The trading volume of Nicolet’s common stock is less than that of banks with larger market capitalizations, even though Nicolet has improved accessibility to its common stock first through the OTCBB and more recently through its listing on Nasdaq. As of February 29, 2016, Nicolet had approximately 600 shareholders of record.

 

The following table sets forth the high and low bid prices and quarter end closing prices of Nicolet’s common stock as reported by the OTCBB for the periods presented.

 

For The Quarter Ended

  High Bid 
Prices
   Low Bid
Prices
   Closing 
Sales Prices
 
             
December 31, 2015  $32.49   $30.60   $31.79 
September 30, 2015   34.75    30.80    32.00 
June 30, 2015   31.50    27.00    30.80 
March 31, 2015   27.50    25.00    27.50 
                
December 31, 2014  $25.00   $23.10   $25.00 
September 30, 2014   24.74    22.35    23.20 
June 30, 2014   27.25    19.05    24.55 
March 31, 2014   19.44    16.51    19.44 

 

Nicolet has not paid dividends on its common stock since its inception in 2000, nor does it currently have any plans to pay dividends on Nicolet common stock in the foreseeable future. Any cash dividends paid by Nicolet on its common stock must comply with applicable Federal Reserve policies and with certain contractual limitations on the payment of dividends related to the SBLF, both described further in “Business—Regulation of Nicolet—Dividend Restrictions.” Nicolet National Bank is also subject to regulatory restrictions on the amount of dividends it is permitted to pay to Nicolet as further described in “Business—Regulation of Nicolet National Bank – Payment of Dividends” and in Note 18, “Regulatory Capital Requirements and Restrictions on Dividends,” in the Notes to Consolidated Financial Statements under Item 8.

 

During early 2014, a common stock repurchase program was approved which authorized, with subsequent modifications, the use of up to $18 million to repurchase up to 800,000 shares of outstanding common stock. During 2015, $4.2 million was used to repurchase and cancel 146,404 shares at a weighted average price per share of $28.35 including commissions, bringing the life-to-date totals through December 31, 2015, to $9.8 million used to repurchase and cancel 403,695 shares at a weighted average price per share of $24.27 including commissions. Given the pending merger with Baylake, Nicolet has suspended its repurchase program.

 

Nicolet had no repurchases of equity securities that were registered pursuant to Section 12 of the Exchange Act in 2015.

 

ITEM 6.SELECTED FINANCIAL DATA

 

The selected consolidated financial data presented as of December 31, 2015 and 2014 and for each of the years in the three-year period ended December 31, 2015 is derived from the audited consolidated financial statements and related notes included in this report and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected consolidated financial data as of December 31, 2012 and 2011 is derived from audited consolidated financial statements that are not required to be included in this report.

 

20 

 

 

EARNINGS SUMMARY AND SELECTED FINANCIAL DATA

 

(In thousands, except per share data)  At and for the year ended December 31, 
   2015   2014   2013   2012   2011 
Results of operations:                         
Interest income  $48,597   $48,949   $43,196   $28,795   $29,830 
Interest expense   7,213    7,067    6,292    6,530    8,383 
Net interest income   41,384    41,882    36,904    22,265    21,447 
Provision for loan losses   1,800    2,700    6,200    4,325    6,600 
Net interest income after provision for loan losses   39,584    39,182    30,704    17,940    14,847 
Other income   17,708    14,185    25,736    10,744    8,444 
Other expense   39,648    38,709    36,431    24,062    21,443 
Income before income taxes   17,644    14,658    20,009    4,622    1,848 
Income tax expense   6,089    4,607    3,837    1,529    318 
Net income   11,555    10,051    16,172    3,093    1,530 
Net income attributable to noncontrolling interest   127    102    31    57    40 
Net income attributable to Nicolet Bankshares, Inc.   11,428    9,949    16,141    3,036    1,490 
Preferred stock dividends and discount accretion   212    244    976    1,220    1,461 
Net income available to common equity  $11,216   $9,705   $15,165   $1,816   $29 
Earnings per common share:                         
Basic  $2.80   $2.33   $3.81   $0.53   $0.01 
Diluted   2.57    2.25    3.80    0.53    0.01 
Weighted average common shares outstanding:                         
Basic   4,004    4,165    3,977    3,440    3,469 
Diluted   4,362    4,311    3,988    3,442    3,488 
Year-End Balances:                         
Loans  $877,061   $883,341   $847,358   $552,601   $472,489 
Allowance for loan losses   10,307    9,288    9,232    7,120    5,899 
Investment securities available for sale, at fair value   172,596    168,475    127,515    55,901    56,759 
Total assets   1,214,439    1,215,285    1,198,803    745,255    678,249 
Deposits   1,056,417    1,059,903    1,034,834    616,093    551,536 
Other debt   15,412    21,175    39,538    39,190    39,506 
Junior subordinated debentures   12,527    12,328    12,128    6,186    6,186 
Subordinated notes   11,849    -    -    -    - 
Common equity   97,301    86,608    80,462    52,933    51,623 
Stockholders’ equity   109,501    111,008    104,862    77,333    76,023 
Book value per common share   23.42    21.34    18.97    15.45    14.83 
Average Balances:                         
Loans  $883,904   $859,256   $753,284   $521,209   $503,362 
Interest-earning assets   1,083,967    1,084,408    913,104    614,252    582,486 
Total assets   1,185,921    1,191,348    997,372    674,222    642,353 
Deposits   1,021,155    1,028,336    830,884    545,896    522,297 
Interest-bearing liabilities   851,957    892,872    756,606    511,572    500,895 
Common equity   90,787    84,033    70,737    52,135    50,968 
Stockholders’ equity   112,012    108,433    95,137    76,535    69,284 
Financial Ratios:                         
Return on average assets   0.96%   0.84%   1.62%   0.45%   0.23%
Return on average equity   10.20%   9.18%   16.97%   3.97%   2.15%
Return on average common equity   12.35%   11.55%   21.44%   3.48%   0.06%
Average equity to average assets   9.45%   9.10%   9.54%   11.35%   10.79%
Net interest margin   3.88%   3.89%   4.06%   3.67%   3.75%
Stockholders’ equity to assets   9.02%   9.13%   8.75%   10.38%   11.21%
Net loan charge-offs to average loans   0.09%   0.31%   0.54%   0.60%   1.85%
Nonperforming loans to total loans   0.40%   0.61%   1.21%   1.27%   2.01%
Nonperforming assets to total assets   0.32%   0.61%   1.02%   0.97%   1.49%

 

21 

 

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

The following discussion is management’s analysis to assist in the understanding and evaluation of the consolidated financial condition and results of operations of Nicolet. It should be read in conjunction with the consolidated financial statements and footnotes and the selected financial data presented elsewhere in this report.

 

The detailed financial discussion that follows focuses on 2015 results compared to 2014. See “2014 Compared to 2013” for the summary comparing 2014 and 2013 results. Some tabular information is shown for trends of three years or for five years as required under SEC regulations.

 

Overview

 

Nicolet is a bank holding company headquartered in Green Bay, Wisconsin, providing a diversified range of traditional commercial and retail banking services, as well as wealth management services, to individuals, business owners, and businesses in its market area through the 21 branch offices of its banking subsidiary, Nicolet National Bank, located within 9 Wisconsin counties (Brown, Outagamie, Marinette, Taylor, Clark, Marathon, Oneida, Price and Vilas) and in Menominee, Michigan.

 

Nicolet’s primary revenue sources are net interest income, representing interest income from loans and other interest-earning assets such as investments, less interest expense on deposits and other borrowings, and noninterest income, including, among others, trust and brokerage fees, service charges on deposit accounts, secondary mortgage income and other fees or revenue from financial services provided to customers or ancillary to loans and deposits. Business volumes and pricing drive revenue potential and tend to be influenced by overall economic factors, including market interest rates, business spending, consumer confidence, economic growth and competitive conditions within the marketplace.

 

2015 was a year for balance sheet and capital management, with continued focus on financial performance and acquisitions. At December 31, 2015, Nicolet had assets of $1.2 billion, loans of $877 million and deposits of $1.1 billion. Net income attributed to Nicolet was $11.4 million for 2015, 15% higher than 2014, and after preferred stock dividends, diluted earnings per common share was $2.57, 14% higher than 2014. Earnings for 2015 were especially characterized by steady return over an improved mix of average interest-earning assets with slightly lower aggregate discount accretion on acquired loans between the years, strong secondary mortgage income, net gains on sales of investments and other real estate owned (“OREO”), and expense management, while also accommodating costs related to the pending Baylake merger. Strong asset quality metrics resulted in a lower 2015 loan loss provision than for 2014. As part of its active capital management, Nicolet sold two outlying branches in August 2015, issued $12 million of subordinated debt in the first half of 2015, redeemed $12.2 million of its preferred stock in September 2015 at par, and continued to repurchase its common stock until September 2015. As a result, total equity was $110 million at December 31, 2015, with preferred equity down $12 million and common equity up $11 million net (from retained earnings and issued common equity exceeding common stock repurchases for the year) compared to year end 2014. Return on average assets of 0.96% and return on average common equity of 12.35% indicates solid performance traction in 2015.

 

For 2016, Nicolet’s focus will remain on the consummation and integration of its previously announced acquisitions. Nicolet and Baylake announced and signed a definitive merger agreement, under which Baylake will merge with and into Nicolet to create the fourth largest bank headquartered in Wisconsin by deposit market share. The transaction is a stock-for-stock merger (with cash in lieu of fractional shares) at a fixed exchange ratio of 0.4517 shares of Nicolet common stock for each share of Baylake common stock outstanding, and is on target for an April 2016 consummation subject to customary closing conditions, including approvals by shareholders of each company. The merger is expected to drive growth and efficiency through increased scale, leverage the strengths of each bank across the combined customer base, enhance post-integration profitability, and add liquidity and shareholder value. Based upon the financial results as of December 31, 2015, the combined company would have approximately $2.3 billion in assets, $1.6 billion in loans and $1.9 billion in deposits, prior to any purchase accounting fair value marks. Additionally impacting 2016, but on a significantly smaller scale, will be Nicolet’s hiring, during the first quarter of 2016, of a select group of financial advisors and purchase of their respective books of business, as well as their operating platform, which is expected to enhance the future growth of Nicolet’s wealth management business. Appropriately, neither transaction will be included in Nicolet’s financial position or financial results until their respective consummation dates in 2016.

 

22 

 

 

Performance Summary

 

Net income attributable to Nicolet was $11.4 million for 2015, and after $0.2 million of preferred stock dividends, net income available to common shareholders was $11.2 million, or $2.57 per diluted common share. Comparatively, 2014 net income attributable to Nicolet was $9.9 million, and after $0.2 million of preferred stock dividends, net income available to common shareholders was $9.7 million or $2.25 per diluted common share. Between the years, net income increased 15% and diluted earnings per common share increased 14%. Return on average assets improved to 0.96% for 2015, compared to 0.84% for 2014. Return on average common equity was 12.35% for 2015, compared to 11.55% for 2014. Book value per common share was $23.42 at December 31, 2015, up 10% over $21.34 at December 31, 2014.

 

As part of its capital management, Nicolet sold two outlying branches in August 2015 (at that time reducing deposits by $34 million, loans by $13 million, fixed assets by $1 million and cash by $20 million), issued $12 million of 5% fixed-rate, 10-year subordinated debt in the first half of 2015 (increasing its regulatory Tier 2 capital), redeemed $12.2 million or half of its then outstanding SBLF Series C Preferred Stock in September 2015 at par (reducing total capital, regulatory Tier 1 capital, and the future cost of capital), and used $4.2 million to repurchase 146,404 common shares at a weighted average per share price of $28.35 including commissions.

 

Net interest income was $41.4 million for 2015, a decrease of $0.5 million or 1% compared to 2014. The earning asset yield was unchanged at 4.54% for both 2015 and 2014, influenced mainly by the earning asset mix, with more balances in higher-yielding assets. Loans, investments and other interest-earning assets (mostly low-earning cash) represented 82%, 15% and 3% of average earning assets, respectively for 2015, compared to 79%, 13% and 8%, respectively, for 2014. The cost of funds was 0.84% for 2015, 5 bps higher than 2014, impacted by the new 5% subordinated debt and a 1 bp increase in the cost of interest-bearing deposits. As a result, the interest rate spread was 3.70% for 2015, 5 bps lower than 2014. The net interest margin was 3.88% for 2015 compared to 3.89% for 2014, with a higher contribution from net free funds partly offsetting the decline in interest rate spread.

 

Loans were $877 million at December 31, 2015, essentially unchanged (down only $6 million or 0.7%) from December 31, 2014; however, excluding the impact of the August 2015 branch sale noted earlier, loans grew 0.8%. Average loans were $884 million in 2015 yielding 5.12%, compared to $859 million in 2014 yielding 5.32%, a 3% increase in average balances. The 20 bps decline in loan yield was due to continued downward pressure on rates of new and renewing loans in the 2015 rate environment and $0.5 million lower aggregate discount accretion on acquired loans between 2015 and 2014.

 

Total deposits were $1.1 billion at December 31, 2015, essentially unchanged (down only $3 million or 0.3%) from December 31, 2014; however, excluding the impact of the August 2015 branch sale noted earlier, deposits grew 2.9%. Between 2015 and 2014, average deposits were down $7 million or 0.7%, with interest-bearing deposits down $39 million and noninterest-bearing deposits up $32 million, driving the improvement in net free funds. Interest-bearing deposits cost 0.64% for 2015 and 0.63% for 2014.

 

Asset quality measures remained strong. Nonperforming assets fell 47% to $3.9 million (or 0.32% of total assets) at December 31, 2015, compared to $7.4 million (or 0.61% of assets) at December 31, 2014. For 2015, the provision for loan losses was $1.8 million, exceeding net charge offs of $0.8 million, versus provision of $2.7 million and net charge offs of $2.6 million for 2014. The allowance for loan losses (“ALLL”) was $10.3 million (representing 1.18% of loans) at December 31, 2015, compared to $9.3 million (representing 1.05% of loans) at December 31, 2014.

 

Noninterest income was $17.7 million (including $1.7 million of net gain on sale or writedown of assets), compared to $14.2 million for 2014 (including $0.5 million of net gain on sale or writedown of assets). Removing these net gains, noninterest income was up $2.3 million or 17.1%, with increases in all line items, except rental income and investment advisory fees, but driven by the $1.3 million increase in net mortgage income largely due to increased volumes. Increases in service charges on deposit accounts (up 10%, trust revenues (up 6%) and brokerage income (up 6%) collectively accounted for another $0.5 million increase between 2015 and 2014.

 

23 

 

 

Noninterest expense was $39.6 million, compared to $38.7 million for 2014. The increase between the years was modest (up $0.9 million or 2.4%, with approximately $0.8 million in 2015 attributable to non-recurring merger-based expenses such as the fairness opinion, legal and conversion costs related to the in-process merger with Baylake), exhibiting expense management. Most notably, salaries and employee benefits were up 4.9% over 2014 (including a base salary increase of 3%, and higher equity and cash incentive awards between the years) while average full-time equivalent employees were minimally changed. All other non-personnel expenses combined were down by less than 1%, and after excluding the 2015 merger-related expenses, were down 5% from 2014.

 

Net Interest Income

 

Net interest income in the consolidated statements of income (which excludes any taxable equivalent adjustments) was $41.4 million in 2015, down 1% compared to $41.9 million in 2014. Taxable equivalent adjustments (adjustments to bring tax-exempt interest to a level that would yield the same after-tax income had that been subject to a 34% tax rate) were $1.1 million for 2015 and $0.8 million for 2014, resulting in taxable equivalent net interest income of $42.5 million for 2015 and $42.7 million for 2014.

 

Taxable 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.

 

Net interest income is the primary source of Nicolet’s revenue, and is the difference between interest income on earning assets, such as loans and investment securities, and interest expense on interest-bearing liabilities, such as deposits and other borrowings. Net interest income is directly impacted by the sensitivity of the balance sheet to changes in interest rates and by the amount, mix and composition of interest-earning assets and interest-bearing liabilities, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities, and repricing frequencies.

 

Tables 1, 2, and 3 present information to facilitate the review and discussion of selected average balance sheet items, taxable equivalent net interest income, interest rate spread and net interest margin.

 

24 

 

  

Table 1: Average Balance Sheet and Net Interest Income Analysis — Taxable-Equivalent Basis

(dollars in thousands)

 

   Years Ended December 31, 
   2015   2014   2013 
   Average
Balance
   Interest   Average
Rate
   Average
Balance
   Interest   Average
Rate
   Average
Balance
   Interest   Average
Rate
 
ASSETS                                             
Earning assets                                             
Loans (1)(2)(3)  $883,904   $45,745    5.12%  $859,256   $46,206    5.32%  $753,284   $41,119    5.40%
Investment securities                                             
Taxable   75,069    1,460    1.94%   83,692    1,606    1.92%   76,016    1,107    1.46%
Tax-exempt (2)   87,609    2,083    2.38%   55,678    1,463    2.63%   31,989    1,234    3.86%
Other interest-earning assets   37,385    443    1.18%   85,782    469    0.55%   51,815    344    0.66%
Total interest-earning assets   1,083,967   $49,731    4.54%   1,084,408   $49,744    4.54%   913,104   $43,804    4.75%
Cash and due from banks   25,172              39,954              22,178           
Other assets   76,782              66,986              62,090           
Total assets  $1,185,921             $1,191,348             $997,372           
LIABILITIES AND STOCKHOLDERS’ EQUITY                                             
Interest-bearing liabilities                                             
Savings  $126,894   $305    0.24%  $110,969   $274    0.25%  $79,164   $216    0.27%
Interest-bearing demand   204,844    1,703    0.83%   207,121    1,541    0.74%   154,991    1,251    0.81%
MMA   250,500    557    0.22%   265,693    711    0.27%   222,299    780    0.35%
Core time deposits   197,862    2,211    1.12%   226,112    2,348    1.04%   195,226    1,776    0.91%
Brokered deposits   29,431    414    1.41%   38,319    468    1.22%   41,029    370    0.90%
Total interest-bearing deposits   809,531    5,190    0.64%   848,214    5,342    0.63%   692,709    4,393    0.63%
Other interest-bearing liabilities   42,426    2,023    4.72%   44,658    1,725    3.81%   63,897    1,899    2.93%
Total interest-bearing liabilities   851,957    7,213    0.84%   892,872    7,067    0.79%   756,606    6,292    0.83%
Noninterest-bearing demand   211,624              180,122              138,175           
Other liabilities   10,328              9,921              7,454           
Total equity   112,012              108,433              95,137           
                                              
Total liabilities and stockholders’ equity  $1,185,921             $1,191,348             $997,372           
Net interest income and rate spread       $42,518    3.70%       $42,677    3.75%       $37,512    3.92%
Net interest margin             3.88%             3.89%             4.06%

   

 

(1)Nonaccrual loans 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 34% and adjusted for the disallowance of interest expense.

 

(3)Interest income includes loan fees of $736,000 in 2015, $745,000 in 2014 and $453,000 in 2013.

 

25 

 

 

 

Table 2: Volume/Rate Variance — Taxable-Equivalent Basis
(dollars in thousands)

 

  2015 Compared to 2014
Increase (decrease)
Due to Changes in
  2014 Compared to 2013
Increase (decrease)
Due to Changes in
  Volume  Rate*  Net(1)  Volume  Rate*  Net(1)
Earning assets                              
Loans (2)  $1,307   $(1,768)  $(461)  $5,681   $(594)  $5,087 
Investment securities                              
Taxable   (156)   10    (146)   153    346    499 
Tax-exempt (2)   770    (150)   620    710    (481)   229 
Other interest-earning assets   (50)   24    (26)   120    5    125 
Total interest-earning assets  $1,871   $(1,884)  $(13)  $6,664   $(724)  $5,940 
                               
Interest-bearing liabilities                              
Savings deposits  $38   $(7)  $31   $80   $(22)  $58 
Interest-bearing demand   (17)   179    162    394    (104)   290 
MMA   (39)   (115)   (154)   136    (205)   (69)
Core time deposits   (308)   171    (137)   303    269    572 
Brokered deposits   (119)   65    (54)   (26)   124    98 
Total interest-bearing deposits   (445)   293    (152)   887    62    949 
Other interest-bearing liabilities   403    (105)   298    (140)   (34)   (174)
Total interest-bearing liabilities   (42)   188    146    747    28    775 
Net interest income  $1,913   $(2,072)  $(159)  $5,917   $(752)  $5,165 

 

 

 

*Nonaccrual loans are included in the daily average loan balances outstanding.

 

(1)The change in interest due to both rate and volume has been allocated in proportion to the relationship of dollar amounts of change in each.

 

(2)The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 34% adjusted for the disallowance of interest expense.

 

Table 3: Interest Rate Spread, Margin and Average Balance Mix — Taxable-Equivalent Basis
(dollars in thousands)

 

   Years Ended December 31, 
   2015 Average   2014 Average   2013 Average 
   Balance   % of
Earning
Assets
   Yield/Rate   Balance   % of
Earning
Assets
   Yield/Rate   Balance   % of
Earning
Assets
   Yield/Rate 
Total loans  $883,904    81.5%   5.12%  $859,256    79.2%   5.32%  $753,284    82.5%   5.40%
Securities and other earning assets   200,063    18.5%   1.99%   225,152    20.8%   1.57%   159,820    17.5%   1.68%
Total interest-earning assets  $1,083,967    100.0%   4.54%  $1,084,408    100.0%   4.54%  $913,104    100.0%   4.75%
                                              
Interest-bearing liabilities  $851,957    78.6%   0.84%  $892,872    82.3%   0.79%  $756,606    82.9%   0.83%
Noninterest-bearing funds, net   232,010    21.4%        191,536    17.7%        156,498    17.1%     
Total funds sources  $1,083,967    100.0%   0.64%  $1,084,408    100.0%   0.65%  $913,104    100.0%   0.69%
Interest rate spread             3.70%             3.75%             3.92%
Contribution from net
free funds
             0.18%             0.14%             0.14%
Net interest margin           3.88%          3.89%           4.06%

 

26 

 

  

Comparison of 2015 versus 2014

 

Taxable-equivalent net interest income was $42.5 million for 2015, down $0.2 million or 0.4%, compared to 2014. Between 2015 and 2014, volume variances were favorable adding $1.9 million to net interest income (with $1.3 million due to higher average loan balances and $0.6 million due to higher investment securities balances), while rate variances were unfavorable reducing net interest income by $2.1 million (with $1.8 million due to lower loan yields, $0.1 million from lower investment yields, and $0.2 million from higher costing funds).

 

The taxable-equivalent net interest margin was 3.88% for 2015, down 1 bp from 2014. The earning asset yield was unchanged at 4.54% for both 2015 and 2014, influenced mainly by the earning asset mix, with more balances in higher yielding assets. Loans, investments and other interest-earning assets (mostly low-earning cash) represented 82%, 15% and 3% of average earning assets, respectively for 2015, compared to 79%, 13% and 8%, respectively, for 2015. The cost of funds was 0.84% for 2015, 5 bps higher than 2014, impacted by the new 5% subordinated debt replacing lower costing borrowings and a 1 bp increase in the cost of interest-bearing deposits. As a result, the interest rate spread was 3.70%, 5 bps lower than 2014. The net interest margin was down 1 bp, with a higher contribution from net free funds partly offsetting the decline in interest rate spread.

 

The earning asset yield held steady with more balances in higher yielding assets. Loans represented 82% of average earning assets and yielded 5.12% for 2015, compared to 79% and 5.32%, respectively, for 2014. The 20 bps decline in loan yield between the years was due to continued downward pressure on rates of new and renewing loans in the 2015 rate environment and $0.5 million lower aggregate discount accretion on acquired loans between 2015 and 2014. All other interest-earning assets combined represented 18% of average earning assets and yielded 1.99% versus 21% and 1.57%, respectively, for 2014. This 42 bps increase in the non-loan yield was driven by a significantly lower proportion of low-earning cash between the years.

 

Nicolet’s cost of funds was 0.84% for 2015, 5 bps higher than 2014, largely due to new 5% subordinated debt in 2015 replacing lower costing borrowings. Average interest-bearing deposits (which represented 95% of average interest-bearing liabilities for both years), was 0.64% for 2015, 1 bp higher than 2014. Deposit rate changes included decreases in savings and money market accounts of 1 bp and 5 bps, respectively (largely from product pricing changes), increases in core time and brokered deposits of 8 bps and 19 bps, respectively (predominantly from non-renewal of lower rate maturities), and a 9 bps increase in interest-bearing demand accounts (mostly from product mix). Other interest-bearing liabilities balances decreased while their cost increased to 4.72% (up 91 bps from 3.81% in 2014) mainly from the addition of 5% subordinated notes in the first half of 2015 replacing lower costing advances and repurchase agreements.

 

Average interest-earning assets were $1.1 billion for 2015, $0.4 million (or less than 1%) lower than 2014, consisting of a $25 million increase in average loans (up 3% to $884 million and representing 82% of interest-earning assets), a $23 million increase in investment securities (up 17% to $163 million and representing 15% of interest-earning assets), and a $48 million decrease in other interest-earning assets, predominantly the result of less low-earning cash.

 

Average interest-bearing liabilities were $852 million, down $41 million or 5% from 2014, led by interest-bearing deposits, while the mix remained unchanged with 95% from interest-bearing deposits and 5% from other funds for both years. Between 2015 and 2014, average total deposits were down $7 million or 0.7%, with interest-bearing deposits down $39 million and noninterest-bearing deposits up $32 million driving the improvement in net free funds. Average other interest-bearing liabilities were down $2 million (to $42 million), which included a $9 million increase from subordinated notes, an $8 million decrease in FHLB advances and a $3 million net decrease in low-costing repurchase agreements and Federal funds purchased.

 

Provision for Loan Losses

 

The provision for loan losses in 2015 was $1.8 million, exceeding $0.8 million of net charge offs. Comparatively, 2014 provision and net charge offs were $2.7 million and $2.6 million, respectively. The lower provision in 2015 was reflective of continued improved loan portfolio quality. At December 31, 2015, the ALLL was $10.3 million or 1.18% of loans compared to $9.3 million or 1.05% of loans at December 31, 2014.

 

27 

 

  

Nonperforming loans were $3.5 million (or 0.40% of total loans) at December 31, 2015, down 34% from $5.4 million (or 0.61% of total loans) at December 31, 2014. The reduction in nonperforming loans was the result of a continued commitment to work distressed assets to resolution, particularly acquired nonaccrual loans. Of the $16.7 million nonaccrual loans initially acquired in the 2013 acquisitions, $2.9 million remain included in the $3.5 million of nonaccruals at December 31, 2015, compared to $4.3 million included in the $5.4 million of nonaccruals at December 31, 2014.

 

The provision for loan losses is predominantly a function of Nicolet’s methodology and judgment as to qualitative and quantitative factors used to determine the adequacy of the ALLL. The adequacy of the ALLL is affected by changes in the size and character of the loan portfolio, changes in levels of impaired 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 potential credit losses. For additional information regarding asset quality and the ALLL, see “Balance Sheet Analysis — Loans,” and “— Allowance for Loan and Lease Losses” and “—Nonperforming Assets.”

 

Noninterest Income

 

Table 4: Noninterest Income
(dollars in thousands)

 

   Years ended December 31,   Change From Prior Year 
   2015   2014   2013   $ Change
2015
   % Change
2015
   $ Change
2014
   % Change
2014
 
                             
Service charges on deposit accounts  $2,348   $2,128   $1,793   $220    10.3%  $335    18.7%
Trust services fee income   4,822    4,569    4,028    253    5.5    541    13.4 
Mortgage income, net   3,258    1,926    2,336    1,332    69.2    (410)   (17.6)
Brokerage fee income   670    631    477    39    6.2    154    32.3 
Bank owned life insurance (“BOLI”)   996    933    825    63    6.8    108    13.1 
Rent income   1,156    1,239    1,036    (83)   (6.7)   203    19.6 
Investment advisory fees   408    440    348    (32)   (7.3)   92    26.4 
Gain on sale or writedown of assets, net   1,726    539    1,669    1,187    220.2    (1,130)   (67.7)
Bargain purchase gains (“BPG”)   -    -    11,915    -    -    (11,915)   N/M 
Other income   2,324    1,780    1,309    544    30.6    471    36.0 
Total noninterest income  $17,708   $14,185   $25,736   $3,523    24.8%  $(11,551)   (44.9)%
Noninterest income without BPG  $17,708   $14,185   $13,821   $3,523    24.8%  $364    2.6%
Noninterest income without BPG
and net gains
  $15,982   $13,646   $12,152   $2,336    17.1%  $1,494    12.3%

 

*N/M means not meaningful

 

Comparison of 2015 versus 2014

 

Noninterest income was $17.7 million for 2015 (including $1.7 million of net gain on sale or writedown of assets), compared to $14.2 million for 2014 (including $0.5 million of net gain on sale or writedown of assets). Removing these net gains, noninterest income was up $2.3 million or 17.1%, with increases in all line items, except rental income and investment advisory fees, but driven by the $1.3 million increase in net mortgage income largely due to increased volumes. Increases in service charges on deposit accounts, trust revenues and brokerage income collectively accounted for an additional $0.5 million increase between 2015 and 2014.

 

BPG is calculated as the net difference in the fair value of the net assets acquired less the consideration paid, which resulted in a non-taxable BPG of $9.5 million for Mid-Wisconsin and a taxable BPG of $2.4 million for Bank of Wausau. For additional details, see Note 2, “Acquisitions,” of the Notes to Consolidated Financial Statements, under Item 8.

 

Service charges on deposit accounts for 2015 were $2.3 million, up $0.2 million or 10.3% over 2014, resulting from the higher number of transaction accounts and increased non-sufficient funds and overdraft activity.

 

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Mortgage income represents predominantly net gains received from the sale of residential real estate loans service-released into the secondary market and, to a small degree, some related income. Residential refinancing activity and new purchase activity vary with movements in mortgage rates, changes in mortgage regulation, and the impact of economic conditions on consumers. The mortgage market was more robust in 2015, with secondary mortgage production of $173 million, up 88% from 2014’s production of $92 million. Net mortgage income was $3.2 million for 2015, up $1.3 million or 69.2%, compared to $1.9 million for 2014, largely due to increased volumes.

 

Trust service fees were $4.8 million for 2015, up $0.2 million or 5.5% over 2014. Brokerage fees were $0.7 million for 2015, up 6.2% over 2014. Both benefited from net new business but more notably from market improvement over last year, increasing the assets under management on which wealth management fees are primarily based.

 

BOLI income was $1.0 million, up $0.1 million or 6.8% over 2014 and in line with the 9% increase in the average BOLI investment balance to $28.0 million for 2015. Rent income and investment advisory fees were each down modestly versus 2014. Other income was $2.3 million, up $0.6 million or 30.6% over 2014, with the majority of the increase due to ancillary fees tied to deposit-related products, most particularly debit card interchange fees (up $0.3 million aided in part by a greater volume related to a popular checking product design), credit card interchange, and wire fee income, and a $0.1 million net gain recorded in other income from the August 2015 branch sale.

 

Nicolet recognized $1.7 million net gain on sale or writedown of assets in 2015, compared to $0.5 million in 2014. The 2015 activity consisted of a $0.6 million gain on sale of equity securities and $1.1 million net gains on sales/writedowns of OREO and other assets. The 2014 activity consisted of $0.3 million net gains on sales of equity securities, $0.8 million net gains on OREO sales and $0.6 million writedown on a bank premise which was subsequently sold prior to year end.

 

Noninterest Expense

 

Table 5: Noninterest Expense
(dollars in thousands)

 

   Years ended December 31,   Change From Prior Year 
   2015   2014   2013   $ Change
2015
   % Change
2015
   $ Change
2014
   % Change
2014
 
                             
Salaries and employee benefits  $22,523   $21,472   $19,615   $1,051    4.9%  $1,857    9.5%
Occupancy, equipment and office   6,928    7,086    6,407    (158)   (2.2)   679    10.6 
Business development and marketing   2,244    2,267    2,348    (23)   1.0    (81)   (3.4)
Data processing   3,565    3,178    2,477    387    12.2    701    28.3 
FDIC assessments   615    715    700    (100)   (14.0)   15    2.1 
Core deposit intangible amortization   1,027    1,209    1,111    (182)   (15.1)   98    8.8 
Other expense   2,746    2,782    3,773    (36)   (1.3)   (991)   (26.3)
Total noninterest expense  $39,648   $38,709   $36,431   $939    2.4%  $2,278    6.3%
Non-personnel expenses  $17,125   $17,237   $16,816   $(112)   (0.6)%  $421    2.5%

 

Comparison of 2015 versus 2014

 

Total noninterest expense was $39.6 million for 2015, an increase of $0.9 million or 2.4%, over 2014; however, excluding $0.8 million in 2015 attributable to non-recurring merger-based expenses such as the fairness opinion, legal and conversion costs related to the in-process merger with Baylake, expenses were up 0.4%, exhibiting expense management. Most notably, salaries and employee benefits were up 4.9% over 2014, while all other non-personnel expenses combined were down by less than 1% (but down 5% from 2014 excluding the $0.8 million of 2015 merger-related expenses).

 

Salaries and employee benefits expense was $22.5 million for 2015, up $1.0 million or 4.9% over 2014. The increase is due to a base salary increase of 3%, and higher equity and cash incentive awards between the years while average full-time equivalent employees were minimally changed.

 

Occupancy, equipment and office expense was $6.9 million for 2015, down $0.2 million or 2.2% from 2014, due to lower utilities, snowplowing and maintenance-related costs. Also, 2014 included final integration costs on systems and phones not recurring in 2015.

 

29 

 

  

Data processing expenses, which are primarily volume-based, were $3.6 million for 2015, up $0.4 million or 12.2% over 2014, which included $0.2 million of the $0.8 million merger-related expenses. The increase is otherwise in line with the increase in number of accounts, enhanced fraud software implemented in 2015 and increased services.

 

Business development and marketing expense was unchanged compared to 2014. FDIC assessments were lower between the years mostly due to a lower assessment rate in 2015. The core deposit intangible (“CDI”) amortization declined by $0.2 million as the intangible has aged under an accelerated amortization schedule.

 

Other expense was $2.7 million for 2015, including approximately $0.6 million of the $0.8 million merger-related expenses. Thus, without these merger costs, other expenses declined $0.7 million compared to 2014, attributable to lower fraud losses (2014 included a large $0.5 million debit card fraud loss from a merchant breach in the fourth quarter, not recurring in 2015) and $0.3 million lower OREO and foreclosure costs (given lower OREO volume).

 

Income Taxes

 

Income tax expense was $6.1 million for 2015 and $4.6 million for 2014. The effective tax rates were 34.5% for 2015 and 31.4% for 2014. Impacting tax expense and the effective tax rate for 2015 was the non-deductibility of certain merger-related costs. Impacting tax expense and the effective tax rate for 2014 was a $0.5 million tax benefit recorded to the deferred tax asset in the second quarter due to the increased ability to utilize net operating losses under the Internal Revenue Code section 382 following the one-year evaluation period related to the Mid-Wisconsin acquisition. The net deferred tax asset was $5.2 million at December 31, 2015 compared to $5.8 million at the end of 2014. The basic principles for accounting for income taxes require that deferred income taxes be analyzed to determine if a valuation allowance is required. A valuation allowance is required if it is more likely than not that some portion of the deferred tax asset will not be realized. At December 31, 2015 and 2014, no valuation allowance was determined to be necessary.

 

BALANCE SHEET ANALYSIS

 

Loans

 

Nicolet services a diverse customer base throughout Northern Wisconsin and in Menominee, Michigan including the following industries: manufacturing, wholesaling, paper, packaging, food production and processing, agriculture, forest products, retail, service, and businesses supporting the general building industry. It continues to concentrate its efforts in originating loans in its local markets and assisting its current loan customers. It actively utilizes government loan programs such as those provided by the U.S. Small Business Administration to help customers weather current economic conditions and position their businesses for the future.

 

Nicolet’s primary lending function is to make 1) commercial loans, consisting of commercial, industrial and business loans and lines of credit, owner-occupied CRE loans and AG production loans; 2) CRE loans, consisting of CRE investment loans, AG real estate, and construction and land development loans; 3) residential real estate loans, including residential first mortgages, residential junior mortgages (such as home equity loans and lines), and to a lesser degree residential construction loans; and 4) retail and other loans. Using these four broad categories the mix of loans at December 31, 2015 was 56% commercial, 18% CRE loans, 25% residential real estate loans, and 1% retail and other loans; and grouped further the loan mix is 74% commercial-based and 26% retail-based. Comparatively, at December 31, 2014, loans were 55% commercial, 19% CRE, 25% residential real estate, and 1% retail and other, and more broadly remained 74% commercial-based and 26% retail-based.

 

Total gross loans were $877 million at December 31, 2015, a decrease of $6 million, or 0.7%, compared to total gross loans of $883 million at December 31, 2014. Loans acquired in 2013 totaled $284 million at the time of acquisition and had an outstanding balance of $137 million and $182 million at December 31, 2015 and 2014, respectively given amortization, refinances, and payoffs.

 

30 

 

  

Table 6: Loan Composition
As of December 31,
(dollars in thousands)

 

   2015   2014   2013   2012   2011 
   Amount   % of
Total
   Amount   % of
Total
   Amount   % of
Total
   Amount   % of
Total
   Amount   % of
Total
 
Commercial & industrial  $294,419    33.6%  $289,379    32.7%  $253,674    29.9%  $197,301    35.7%  $153,810    32.6%
Owner-occupied CRE   185,285    21.1    182,574    20.7    187,476    22.1    106,888    19.3    110,094    23.3 
AG production   15,018    1.7    14,617    1.6    14,256    1.7    215    0.1    201    0.0 
AG real estate   43,272    4.9    42,754    4.8    37,057    4.4    11,354    2.1    1,085    0.2 
CRE investment   78,711    9.0    81,873    9.3    90,295    10.7    76,618    13.9    66,577    14.1 
Construction & land development   36,775    4.2    44,114    5.0    42,881    5.1    21,791    3.9    24,774    5.2 
Residential construction   10,443    1.2    11,333    1.3    12,535    1.5    7,957    1.4    9,363    2.0 
Residential first mortgage   154,658    17.6    158,683    18.0    154,403    18.2    85,588    15.5    56,392    11.9 
Residential junior mortgage   51,967    5.9    52,104    5.9    49,363    5.8    39,352    7.1    42,699    9.0 
Retail & other   6,513    0.8    5,910    0.7    5,418    0.6    5,537    1.0    7,494    1.7 
Total loans  $877,061    100.0%  $883,341    100.0%  $847,358    100.0%  $552,601    100.0%  $472,489    100.0%

 

As noted above, year-end 2015 and 2014 loans were broadly 74% commercial based and 26% retail-based. Commercial-based loans are considered to have more inherent risk of default than retail-based loans, in part because the commercial balance per borrower is typically larger than that for retail-based loans, implying higher potential losses on an individual customer basis.

 

Commercial and industrial loans consist primarily of commercial loans to small businesses and, to a lesser degree, to municipalities within a diverse range of industries. The credit risk related to commercial and industrial 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. Commercial and industrial loans continue to be the largest segment of Nicolet’s portfolio and increased to 33.6% of the portfolio at year end 2015 compared to 32.7% of the total portfolio at year end 2014. This continues to be a strong growth area for Nicolet.

 

Owner-occupied CRE loans increased to 21.1% of loans at year end 2015 compared to 20.7% of loans at year end 2014. This category primarily consists of loans within a diverse range of industries secured by business real estate that is occupied by borrowers who operate their businesses out of the underlying collateral and who may also have commercial and industrial loans. The credit risk related to owner-occupied CRE loans is largely influenced by general economic conditions and the resulting impact on a borrower’s operations, or on the value of underlying collateral.

 

Agricultural production and agricultural real estate loans consist of loans secured by farmland and related farming operations. The credit risk related to agricultural loans is largely influenced by the prices farmers can get for their production and/or the underlying value of the farmland. The $1.0 million increase in these portfolios between year ends was driven by internal growth. Agriculture is more prevalent in the markets acquired in 2013, offering a growth area for Nicolet. In total, these loans increased minimally to 6.6% from 6.4% of total loans at December 31, 2015 and 2014, respectively.

 

The CRE investment loan classification primarily includes commercial-based mortgage loans that are secured by non-owner occupied, nonfarm/nonresidential real estate properties, and multi-family residential properties. Lending in this segment has been focused on loans that are secured by commercial income-producing properties as opposed to speculative real estate development. From December 31, 2014 to December 31, 2015, these loans decreased $3.2 million. At December 31, 2015 CRE investment loans represented 9.0% of loans compared to 9.3% a year ago.

 

Loans in the construction and land development portfolio represent 4.2% of total loans at year end 2015 compared to 5.0% at year-end 2014. Construction and land development loans provide financing for the development of commercial income properties, multi-family residential development, and land designated for future development. Nicolet controls the credit risk on these types of loans by making loans in familiar markets, reviewing the merits of individual projects, controlling loan structure, and monitoring the progress of projects through the analysis of construction advances. Credit risk is managed by employing sound underwriting guidelines, lending primarily to borrowers in local markets, periodically evaluating the underlying collateral, and formally reviewing the borrower’s financial soundness and relationships on an ongoing basis.

 

31 

 

  

On a combined basis, Nicolet’s residential real estate loans represent 24.7% of total loans at year end 2015 compared to 25.2% of total loans at year end 2014. Residential first mortgage loans include conventional first-lien home mortgages. Residential junior mortgage real estate loans consist of home equity lines and term loans secured by junior mortgage liens. Across the industry, home equities involve loans that are often in second or junior lien positions, but Nicolet has secured many of these types of loans in a first lien position, further mitigating the portfolio risks. Nicolet has not experienced significant losses in its residential real estate loans; however, residential real estate, if declines in market values in the residential real estate markets worsen, particularly in Nicolet’s market area, the value of collateral securing its real estate loans could decline, which could cause an increase in the provision for loan losses. As part of its management of originating residential mortgage loans, the vast majority of Nicolet’s long-term, fixed-rate residential real estate mortgage loans are sold in the secondary market without retaining the servicing rights. Nicolet’s mortgage loans have historically had low net charge off rates and typically are of high quality.

 

Loans in the retail and other classification represent less than 1% of the total loan portfolio, and include predominantly short-term and other personal installment loans not secured by real estate. Credit risk is primarily controlled by reviewing the creditworthiness of the borrowers, monitoring payment histories, and taking appropriate collateral and/or guaranty positions. The loan balances in this portfolio remained relatively unchanged between year-end 2015 and 2014 and the portfolio has remained stable as a percent of total loans.

 

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 adequate ALLL, and sound nonaccrual and charge-off policies. An active credit risk management process is used for commercial loans to further ensure that sound and consistent credit decisions are made. The credit management process is regularly reviewed and the process has been modified over the past several years to further strengthen the controls.

 

The loan portfolio is widely diversified by types of borrowers, industry groups, and market areas. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to multiple numbers of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At December 31, 2015, no significant industry concentrations existed in Nicolet’s portfolio in excess of 25% of total loans. Nicolet has also developed guidelines to manage its exposure to various types of concentration risks.

 

Table 7: Loan Maturity Distribution

 

The following table presents the maturity distribution of the loan portfolio at December 31, 2015:

(dollars in thousands)

 

  Loan Maturity
  One Year
or Less
  Over One
Year
to Five Years
  Over
Five Years
  Totals
Commercial & industrial  $141,586   $144,523   $8,310   $294,419 
Owner-occupied CRE   28,382    122,533    34,370    185,285 
AG production   6,251    7,455    1,312    15,018 
AG real estate   19,082    23,795    395    43,272 
CRE investment   17,505    52,229    8,977    78,711 
Construction & land development   14,504    19,560    2,711    36,775 
Residential construction   9,977    466    -    10,443 
Residential first mortgage   10,410    31,441    112,807    154,658 
Residential junior mortgage   3,288    26,193    22,486    51,967 
Retail & other   3,185    3,205    123    6,513 
Total loans  $254,170   $431,400   $191,491   $877,061 
Percent by maturity distribution   29%   49%   22%   100%
Fixed rate  $106,929   $338,651   $107,211   $552,791 
Floating rate   147,241    92,749    84,280    324,270 
Total  $254,170   $431,400   $191,491   $877,061 

 

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Allowance for Loan Losses

 

In addition to the discussion that follows, accounting policies behind loans and the allowance for loan losses are described in Note 1, “Nature of Business and Significant Accounting Policies,” and additional disclosures are included in Note 4, “Loans and Allowance for Loan Losses,” in the Notes to Consolidated Financial Statements, under Item 8.

 

Credit risks within the loan portfolio are inherently different for each loan type as described under “Balance Sheet Analysis-Loans.” Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and on-going 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.

 

The ALLL is established through a provision for loan losses charged to expense to appropriately provide for potential credit losses in the existing loan portfolio. Loans are charged against the ALLL when management believes that the collection of principal is unlikely. The level of the ALLL represents management’s estimate of an amount of reserves that provides for estimated probable credit losses in the loan portfolio at the balance sheet date. To assess the ALLL, an allocation methodology is applied by Nicolet which focuses on evaluation of qualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to specific loans; (ii) management’s ongoing review and grading of the loan portfolio; (iii) consideration of historical loan loss and delinquency experience on each portfolio segment; (iv) trends in past due and nonperforming loans; (v) the risk characteristics of the various loan segments; (vi) changes in the size and character of the loan portfolio; (vii) concentrations of loans to specific borrowers or industries; (viii) existing and forecasted economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect potential credit losses. Nicolet’s methodology reflects guidance by regulatory agencies to all financial institutions.

 

Management allocates the ALLL by pools of risk within each loan portfolio segment. The allocation methodology consists of the following components. First, a specific reserve for the estimated shortfall is established for all loans determined to be impaired. The specific reserve in the ALLL is equal to the aggregate collateral or discounted cash flow shortfall calculated from the impairment analyses. Loans measured for impairment include nonaccrual loans, non-performing troubled debt-restructurings (“restructured loans”), or other loans determined to be impaired by management. Second, management allocates ALLL with historical loss rates by loan segment. The loss factors applied in the methodology are periodically re-evaluated and adjusted to reflect changes in historical loss levels on an annual basis. Lastly, management allocates ALLL to the remaining loan portfolio using the qualitative factors mentioned above. Consideration is given to those current qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the historical loss experience of each loan segment.

 

Management performs ongoing intensive analyses of its loan portfolio to allow for early identification of customers experiencing financial difficulties, maintains prudent underwriting standards, understands the economy in its markets, and considers the trend of deterioration in loan quality in establishing the level of the ALLL.

 

Consolidated net income and stockholders’ equity could be affected if management’s estimate of the ALLL necessary to cover expected losses is subsequently materially different, requiring a change in the level of provision for loan losses to be recorded. While management uses currently available information to recognize losses on loans, future adjustments to the ALLL may be necessary based on newly received appraisals, updated commercial customer financial statements, rapidly deteriorating customer cash flow, and changes in economic conditions that affect Nicolet’s customers. As an integral part of their examination process, federal regulatory agencies also review the ALLL. Such agencies may require additions to the ALLL or may require that certain loan balances be charged-off or downgraded into criticized loan categories when their credit evaluations differ from those of management based on their judgments about information available to them at the time of their examination.

 

At December 31, 2015, the ALLL was $10.3 million compared to $9.3 million at December 31, 2014. The increase was a result of the 2015 provision of $1.8 million exceeding 2015 net charge offs of $0.8 million. Comparatively, the 2014 provision for loan losses was $2.7 million and 2014 net charge offs were $2.6 million. Net charge offs as a percent of average loans were 0.09% in 2015 compared to 0.31% in 2014. Loans charged off are subject to continuous review, and specific efforts are taken to achieve maximum recovery of principal, accrued interest, and related expenses. The level of the provision for loan losses is directly correlated to the assessment of the adequacy of the allowance, including, but not limited to, consideration of the amount of net charge-offs, loan growth, levels of nonperforming loans, and trends in the risk profile of the loan portfolio.

 

33 

 

  

The ratio of the ALLL as a percentage of period-end loans was 1.18% and 1.05% at December 31, 2015 and 2014, respectively. The ALLL to loans ratio is impacted by the accounting treatment of the 2013 acquisitions, which combined at their acquisition dates added no ALLL to the numerator and $284 million of loans into the denominator at their then estimated fair values, net of applicable discounts for credit quality. Such acquired loans have declined to $137 million and $182 million at December 31, 2015 and 2014, respectively, given amortization, refinances and payoffs. However, since their acquisition, the performance trends of acquired loans have been evolving and evaluated. As events have occurred in the acquired loan portfolio, beginning in mid-2015, an ALLL was provided directly for this portfolio, reflecting an increase in risk as acquired credits age and several larger and other loans migrate to a watch or worse loan. Therefore, the provision for loan losses against net charge offs for 2015 were $1.7 million and $0.1 million, respectively, for acquired loans, and $0.1 million and $0.7 million, respectively, for originated loans. Comparatively, the provision for loan losses and net charge offs for 2014, were $0.3 million and $0.3 million, respectively, for acquired loans, and $2.4 million and $2.3 million, respectively, for originated loans. At December 31, 2015, the ALLL was $10.3 million (or 1.18% of total loans), with $1.6 million for acquired loans (1.16% of acquired loans) and $8.7 million for originated loans (1.18% of originated loans). In particular, see additional disclosures in Note 4, “Loans and Allowance for Loan Losses,” in the Notes to Consolidated Financial Statements, under Item 8.

 

Table 8: Loan Loss Experience
For the Years Ended December 31,
(dollars in thousands)

 

   2015   2014   2013   2012   2011 
Allowance for loan losses (ALLL):                         
Beginning balance  $9,288   $9,232   $7,120   $5,899   $8,635 
Loans charged off:                         
Commercial & industrial   374    1,923    574    295    2,553 
Owner-occupied CRE   229    470    1,936    1,328    428 
AG production                    
AG real estate                    
CRE investment   50        992    305    181 
Construction & land development       12    319    713    5,243 
Residential construction               396    42 
Residential first mortgage   84    218    156    265    488 
Residential junior mortgage   111    81    190    166    459 
Retail & other   35    39    71    39    7 
Total loans charged off   883    2,743    4,238    3,507    9,401 
Recoveries of loans previously charged off:                         
Commercial & industrial   36    55    40    36    23 
Owner-occupied CRE   4    17    85    300    3 
AG production                    
AG real estate                    
CRE investment   17    14        27     
Construction & land development           15    22    28 
Residential construction                    
Residential first mortgage   20    2    8    11    10 
Residential junior mortgage   12    1    1    6    1 
Retail & other   13    10    1    1     
Total recoveries   102    99    150    403    65 
Total net charge offs   781    2,644    4,088    3,104    9,336 
Provision for loan losses   1,800    2,700    6,200    4,325    6,600 
Ending balance of ALLL  $10,307   $9,288   $9,232   $7,120   $5,899 
Ratios:                         
ALLL to total loans at December 31   1.18%   1.05%   1.09%   1.29%   1.25%
ALLL to net charge offs for the year ended December 31   1,319.7%   351.3%   225.8%   229.4%   63.2%
Net charge offs to average loans for the year ended December 31   0.09%   0.31%   0.54%   0.60%   1.85%

 

The allocation of the ALLL for each of the past five years is based on Nicolet’s estimate of loss exposure by category of loans and is shown in Table 9.

 

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As a commercial bank, Nicolet continues to carry the largest allocation of ALLL against commercial & industrial loans (the largest loan type at roughly one-third of loans for both year-ends) of $3.7 million (or 36.2% of ALLL) and $3.2 million (or 34.4% of ALLL) at December 31, 2015 and 2014, respectively. While the balances of construction & land development loans have been relatively steady to declining over time (at 4% of loans at year-end 2015), the category carries higher historical loss rates, which are improving with better current loan performance and granularity; hence, the allocation declined by $1.2 million to represent 14.0% of ALLL at December 31, 2015, from 28.9% at year-end 2014. With less allocated to construction & land development, allocations increased to other loan types that would be more affected by management’s growing concerns that the recent period of economic recovery is slowing and may come to an end in light of current economic data and events that pressure collateral values or businesses’ and consumers’ ability to perform on loans. Management allocated additional amounts in 2015 to owner-occupied CRE (up $0.7 million to $1.9 million, or 18.8% of ALLL), residential first and junior mortgages (up $0.4 million and $0.2 million, respectively, and representing 16.8% of ALLL combined), CRE investment (up $0.3 million, representing 7.6% of ALLL), and AG production and real estate (up $0.2 million combined to represent 4.5% of ALLL at year-end 2015). The remaining allocated ALLL balances were consistent with changes in outstanding loan balances at December 31, 2015.

 

Table 9: Allocation of the Allowance for Loan Losses

As of December 31,

(dollars in thousands)

 

   2015   % of
Loan
Type to
Total
Loans
   2014   % of
Loan
Type to
Total
Loans
   2013   % of
Loan
Type to
Total
Loans
   2012   % of
Loan
Type to
Total
Loans
   2011   % of
Loan
Type to
Total
Loans
 
ALLL allocation                                                  
Commercial & industrial   $3,721    33.6%  $3,191    32.7%  $1,798    29.9%  $1,969    35.7%  $1,965    32.6%
Owner-occupied CRE*    1,933    21.1    1,230    20.7    766    22.1    1,069    19.3    347    23.3 
AG production    85    1.7    53    1.6    18    1.7        0.1         
AG real estate    380    4.9    226    4.8    59    4.4        2.1        0.2 
CRE investment    785    9.0    511    9.3    505    10.7    337    13.9    393    14.1 
Construction & land development    1,446    4.2    2,685    5.0    4,970    5.1    2,580    3.9    2,035    5.2 
Residential construction*    147    1.2    140    1.3    229    1.5    137    1.4    311    2.0 
Residential first mortgage    1,240    17.6    866    18.0    544    18.2    685    15.5    405    11.9 
Residential junior mortgage*    496    5.9    337    5.9    321    5.8    312    7.1    419    9.0 
Retail & other    74    0.8    49    0.7    22    0.6    31    1.0    24    1.7 
Total ALLL   $10,307    100.0%  $9,288    100.0%  $9,232    100.0%  $7,120    100.0%  $5,899    100.0%
ALLL category as a percent of total ALLL:                                                  
Commercial & industrial    36.2%        34.4%        19.5%        27.7%        33.3%     
Owner-occupied CRE    18.8         13.2         8.3         15.0         5.9      
AG production    0.8         0.6         0.2                        
AG real estate    3.7         2.4         0.6                        
CRE investment    7.6         5.5         5.5         4.7         6.6      
Construction & land development    14.0         28.9         53.8         36.2         34.5      
Residential construction    1.4         1.5         2.5         1.9         5.3      
Residential first mortgage    12.0         9.3         5.9         9.6         6.9      
Residential junior mortgage    4.8         3.6         3.5         4.4         7.1      
Retail & other    0.7         0.6         0.2         0.5         0.4      
Total ALLL    100.0%        100.0%        100.0%        100.0%        100.0%     

 

 

 

Nonperforming Assets

 

As part of its overall credit risk management process, management has been 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 ensure that problem loans are identified early and the risk of loss is minimized.

 

35 

 

  

Nonperforming loans are considered one indicator of potential future loan losses. Nonperforming loans are defined as nonaccrual loans, including those defined as impaired under current accounting standards, 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. Nonaccrual loans were $3.5 million (consisting of $0.6 million originated loans and $2.9 million acquired loans) at December 31, 2015, down $1.9 million or 34%, compared to $5.4 million (consisting of $1.1 million originated loans and $4.3 million acquired loans) at December 31, 2014. OREO was $0.4 million at December 31, 2015, down $1.6 million or 81%, compared to $2.0 million at December 31, 2014. Consequently, nonperforming assets (i.e. nonperforming loans plus OREO) were $3.9 million at December 31, 2015, down $3.5 million or 47%, compared to $7.4 million at December 31, 2014, with the decrease attributable to resolutions of both OREO and nonaccrual loans. Nonperforming assets as a percent of total assets improved to 0.32% at December 31, 2015 compared to 0.61% at December 31, 2014. Included in Table 10 for December 31, 2014 was one performing troubled debt restructuring of $3.8 million. This loan was paid off in the third quarter of 2015.

 

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 adequacy of the ALLL. 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 totaled $9.2 million and $5.4 million, and represented 1.0% and 0.6% of total outstanding loans at December 31, 2015 and 2014, respectively. Potential problem loans require a heightened management review of the pace at which a credit may deteriorate, the 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 10: Nonperforming Assets

As of December 31,

(dollars in thousands)

 

   2015   2014   2013   2012   2011 
Nonaccrual loans:                         
Commercial & industrial  $204   $171   $68   $784   $1,744 
Owner-occupied CRE   951    1,667    1,087    1,960    934 
AG production   13    21    11         
AG real estate   230    392    448         
CRE investment   1,040    911    4,631        716 
Construction & land development   280    934    1,265    2,560    3,367 
Residential construction                   1,480 
Residential first mortgage   674    1,155    2,365    1,580    1,129 
Residential junior mortgage   141    141    262        105 
Retail & other           129    142    1 
Total nonaccrual loans considered impaired   3,533    5,392    10,266    7,026    9,476 
Accruing loans past due 90 days or more                    
Total nonperforming loans   3,533    5,392    10,266    7,026    9,476 
Commercial real estate owned   52    697    935    71    139 
Construction & land development real estate owned       139    854    17    427 
Residential real estate owned       630    198    105    75 
Bank property real estate owned   315    500             
OREO   367    1,966    1,987    193    641 
Total nonperforming assets  $3,900   $7,358   $12,253   $7,219   $10,117 
Performing troubled debt restructurings       3,777    3,970         
Ratios                         
Nonperforming loans to total loans   0.40%   0.61%   1.21%   1.27%   2.01%
Nonperforming assets to total loans plus OREO   0.44%   0.83%   1.44%   1.31%   2.14%
Nonperforming assets to total assets   0.32%   0.61%   1.02%   0.97%   1.49%
ALLL to nonperforming loans   291.7%   172.3%   89.9%   101.3%   62.3%
ALLL to total loans   1.18%   1.05%   1.09%   1.29%   1.25%

 

36 

 

  

The following table shows the approximate gross interest that would have been recorded if the loans accounted for on a nonaccrual basis for the years ended as indicated had performed in accordance with their original terms, in contrast to the amount of interest income that was included in interest income for the period. The interest income recognized included prior nonaccrual interest on acquired loans which existed at acquisition and was subsequently collected.

 

Table 11: Foregone Loan Interest

For the Years Ended December 31,

(dollars in thousands)

 

   2015   2014   2013 
Interest income in accordance with original terms  $429   $709   $1,062 
Interest income recognized   (416)   (667)   (699)
Reduction (increase) in interest income  $13   $42   $363 

 

Investment Securities Portfolio

 

The investment securities portfolio is intended to provide Nicolet with adequate liquidity, flexible asset/liability management and a source of stable income. The portfolio is structured with minimal credit exposure to Nicolet. All securities are classified as available for sale (“AFS”) and are carried at fair value.

 

Table 12: Investment Securities Portfolio

As of December 31,

(dollars in thousands)

 

   2015   2014   2013 
   Amortized
Cost
   Fair
Value
   % of
Total
   Amortized
Cost
   Fair
Value
   % of
Total
   Amortized
Cost
   Fair
Value
   % of
Total
 
U.S. Government sponsored enterprises  $287   $294    -%  $1,025   $1,039    1%  $2,062   $2,057    2%
State, county and municipals   104,768    105,021    61%   102,472    102,776    61%   54,594    55,039    43%
Mortgage-backed securities   61,600    61,464    36%   61,497    61,677    37%   68,642    67,879    53%
Corporate debt securities   1,140    1,140    1%   220    220    -%   220    220    -%
Equity securities   3,196    4,677    2%   1,571    2,763    1%   905    2,320    2%
Total securities AFS  $170,991   $172,596    100%  $166,785   $168,475    100%  $126,423   $127,515    100%

 

At December 31, 2015, the total carrying value of investment securities was $173 million, up $5 million or 2% from December 31, 2014, reflecting deployment of cash in 2015. At December 31, 2015, the securities portfolio did not contain securities of any single issuer, including any securities issued by a state or political subdivision that were payable from and secured by the same source of revenue or taxing authority where the aggregate carrying value of such securities exceeded 10% of shareholders’ equity.

 

In addition to AFS securities, Nicolet had other investments of $8.1 million at December 31, 2015 and 2014, consisting of capital stock in the Federal Reserve, Federal Agricultural Mortgage Corporation, and the FHLB (required as members of the Federal Reserve Bank System and the FHLB System), and to a lesser degree equity investments in other private companies. The FHLB and Federal Reserve investments are “restricted” in that they can only be sold back to the respective institutions or another member institution at par, and are thus, not liquid, have no ready market or quoted market value, and are carried at cost. The remaining investments have no quoted market prices, and are carried at cost less other than temporarily impaired (“OTTI”) charges, if any. These other investments are evaluated periodically for impairment, considering financial condition and other available relevant information. There were no OTTI charges recorded in 2015, 2014 or 2013.

 

37 

 

  

Table 13: Investment Securities Portfolio Maturity Distribution

As of December 31, 2015

(dollars in thousands)

 

   Within
One Year
   After One
but Within
Five Years
   After Five
but Within
Ten Years
   After
Ten Years
   Mortgage-
related
and Equity
Securities
   Total
Amortized
Cost
   Total
Fair
Value
 
   Amount   Yield   Amount   Yield   Amount   Yield   Amount   Yield   Amount   Yield   Amount   Yield   Amount 
                                                     
U.S. Government sponsored enterprises  $    %  $146    1.5%  $141    2.1%               %  $287    1.8%  $294 
State and county municipals  $5,085    2.7%  $74,439    2.4%  $24,734    2.6%  $510    4.6%  $    %  $104,768    2.4%  $105,021 
Mortgage-backed securities                                   61,600    3.1%  $61,600    3.1%  $61,464 
Corporate debt securities                          $1,140    6.0%          $1,140    6.0%  $1,140 
Equity securities                                   3,196    6.2%  $3,196    6.2%  $4,677 
Total amortized cost  $5,085    2.7%  $74,585    2.4%  $24,875    2.6%  $1,650    5.6%  $64,796    3.3%  $170,991    2.7%  $172,596 
Total fair value and carrying value  $5,107        $74,528        $25,148        $1,672        $66,141                  $172,596 
    3%        43%        15%        1%        38%                  100%

  

 

 

(1)The yield on tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 34% adjusted for the disallowance of interest expense.

 

Deposits

 

Deposits represent Nicolet’s largest source of funds. Nicolet competes with other bank and nonbank institutions for deposits, as well as with a growing number of non-deposit investment alternatives available to depositors, such as mutual funds, money market funds, annuities, and other brokerage investment products. Challenges to deposit growth include price changes on deposit products given movements in the rate environment and other competitive pricing pressures, and customer preferences regarding higher-costing deposit products or non-deposit investment alternatives.

 

Table 14: Deposits

At December 31,

(dollars in thousands)

 

   2015   2014   2013 
   Amount   % of
Total
   Amount   % of
Total
   Amount   % of
Total
 
Demand  $226,554    21.5%  $203,502    19.2%  $171,321    16.6%
Money market and NOW accounts   486,677    46.1%   494,945    46.7%   492,499    47.6%
Savings   136,733    12.9%   120,258    11.3%   97,601    9.4%
Time   206,453    19.5%   241,198    22.8%   273,413    26.4%
Total  $1,056,417    100.0%  $1,059,903    100.0%  $1,034,834    100.0%

 

Total deposits were $1.1 billion at December 31, 2015, down $3.5 million or 0.3% over December 31, 2014. On average for the year, total deposits were $1.0 billion, a decrease of $7.2 million or 0.7% over 2014. As noted in Table 1, average brokered deposits decreased $8.9 million or 23% to $29.4 million for 2015, as maturing deposits were not renewed, and as such, customer-based deposits continue to grow organically from stable customer relationships.

 

38 

 

  

Table 15: Average Deposits

For the Years Ended December 31,

(dollars in thousands)

 

   2015 Average   2014 Average   2013 Average 
   Amount   % of
Total
   Amount   % of
Total
   Amount   % of
Total
 
Demand  $211,624    20.7%  $180,122    17.5%  $138,175    16.7%
Money market and NOW accounts   455,344    44.6%   472,814    46.0%   377,290    45.4%
Savings   126,894    12.4%   110,969    10.8%   79,164    9.5%
Time   227,293    22.3%   264,431    25.7%   236,255    28.4%
Total  $1,021,155    100.0%  $1,028,336    100.0%  $830,884    100.0%

 

Table 16: Maturity Distribution of Certificates of Deposit of $100,000 or More

At December 31,

(dollars in thousands)

 

   2015   2014   2013 
3 months or less  $6,856   $11,134   $19,932 
Over 3 months through 6 months   5,733    7,632    11,825 
Over 6 months through 12 months   19,319    15,783    23,739 
Over 12 months   58,934    41,855    34,960 
                
Total  $90,842   $76,404   $90,456 

 

Other Funding Sources

 

Other funding sources, which may include short-term borrowings (mostly federal funds purchased or repurchase agreements) and long-term borrowings (notes payable, junior subordinated debentures, and subordinated notes), totaled $40 million and $34 million at December 31, 2015 and 2014, respectively. There were no short-term borrowings at December 31, 2015 and 2014. Notes payable (consisting of a joint venture note and FHLB advances) totaled $15.4 million at December 31, 2015, down $5.8 million from December 31, 2014 attributable to scheduled principal payments on the joint venture note and non-renewal of maturing FHLB advances. The junior subordinated debentures had carrying values of $12.5 million and $12.3 million at December 31, 2015 and 2014, respectively, and $12 million of the underlying trust preferred securities qualify as Tier 1 capital for regulatory purposes at year-end 2015 and 2014. These debentures, one existing since July 2004 and one acquired in the 2013 Mid-Wisconsin transaction, mature in July 2034 and December 2035, respectively, and though both may be called at par plus any accrued but unpaid interest, there are no current plans to redeem these debentures early. Subordinated notes provide additional funding and qualify as Tier 2 capital for regulatory purposes. At December 31, 2015, total subordinated notes were $11.8 million, net of issuance costs, with $8 million and $4 million issued in the first and second quarters of 2015, respectively. See Note 8, “Notes Payable,” Note 9, “Junior Subordinated Debentures”, and Note 10, “Subordinated Notes” of the Notes to Consolidated Financial Statements, under Item 8, for additional details.

 

Additional funding sources consist of a $10 million available and unused line of credit at the holding company, $75 million of available and unused Federal funds purchased lines, available total borrowing capacity at the FHLB of $65 million of which $6.0 million was used at December 31, 2015, and borrowing capacity in the brokered deposit market.

 

Off-Balance Sheet Obligations

 

As of December 31, 2015, 2014 and 2013, Nicolet had the following commitments that did not appear on its balance sheet:

 

Table 17: Commitments

At December 31,

(dollars in thousands)

 

   2015   2014   2013 
Commitments to extend credit — Fixed and variable rate  $302,591   $269,648   $234,930 
Financial letters of credit — fixed rate   2,610    2,996    2,493 
Standby letters of credit — fixed rate   4,314    3,629    3,878 

 

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Further discussion of these commitments is included in Note 15, “Commitments and Contingencies” of the Notes to Consolidated Financial Statements, under Item 8.

 

Contractual Obligations

 

Nicolet is party to various contractual obligations requiring the use of funds as part of its normal operations. The table below outlines principal amounts and timing of these obligations, excluding amounts due for interest, if applicable. Most of these obligations are routinely refinanced into similar replacement obligations. However, renewal of these obligations is dependent on its ability to offer competitive interest rates, liquidity needs, or availability of collateral for pledging purposes supporting the long-term advances.

 

Table 18: Contractual Obligations
As of December 31, 2015
(dollars in thousands)

 

   Maturity by Years 
   Total   1 or less   1-3   3-5   Over 5 
Junior subordinated debentures  $12,527   $   $   $   $12,527 
Subordinated notes   11,849                11,849 
Joint venture note   9,412    9,412           
FHLB borrowings   6,000    5,000    1,000        
Operating leases   4,434    653    1,088    1,032    1,661 
Total long-term contractual obligations  $44,222   $15,065   $2,088   $1,032   $26,037 

 

Liquidity

 

Liquidity management refers to the ability to ensure that cash is available in a timely and cost-effective manner to meet cash flow requirements of depositors and borrowers and to meet other commitments as they fall due, including the ability to pay dividends to shareholders, service debt, invest in subsidiaries, repurchase common stock, and satisfy other operating requirements.

 

Funds are available from a number of basic banking activity sources including, but not limited to, the core deposit base; amortization, repayment and maturity of loans; maturing investments and investments sales; and procurement of brokered deposits. All investment securities are classified as available for sale and are reported at fair value on the consolidated balance sheet. At December 31, 2015, approximately 14% of the $173 million investment securities carrying value was pledged to secure public deposits, short-term borrowings, and repurchase agreements, as applicable, and for other purposes as required by law. Other funding sources available include the ability to procure short-term borrowings, federal funds purchased, and long-term borrowings (such as FHLB advances).

 

Dividends from Nicolet National Bank represent a significant source of cash flow 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, as more fully described in “Business—Regulation of Nicolet National Bank – Payment of Dividends” and in Note 18, “Regulatory Capital Requirements and Restrictions on Dividends,” in the Notes to the Consolidated Financial Statements under Item 8. Management does not believe that regulatory restrictions on dividends from the Bank will adversely affect its ability to meet its cash obligations.

 

Cash and cash equivalents at December 31, 2015 and 2014 were approximately $84 million and $69 million, respectively. The increased cash and cash equivalents for 2015 when compared to historical levels was predominantly due to strong customer deposit growth (despite the net cash outflow from the August 2015 branch sale) and the procurement of $12 million of new subordinated debt, followed by deployment of that cash in 2015 into loans and investments, repurchase of common stock under its outstanding repurchase program, and the redemption of $12.2 million of Nicolet’s preferred stock. Nicolet’s liquidity resources were sufficient as of December 31, 2015 to fund loans and to meet other cash needs as necessary.

 

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Interest Rate Sensitivity Management

 

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 its financial strategy and risk management, Nicolet attempts to understand and manage the impact of fluctuations in market interest rates on its 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 depend, 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, Nicolet measures its 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.

 

The following analysis assessed the impact on net interest income in the event of a gradual +/-100 bps and +/-200 bps decrease in market rates (parallel to the change in prime rate) over a one-year time horizon to a static (flat) balance sheet. 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 December 31, 2015, the projected changes in net interest income over a one-year time horizon, versus the baseline, was -2.3%, -1.2%, +0.1% and +0.3 % for the -200, -100, +100 and +200 bps scenarios, respectively; such results are within Nicolet’s guidelines of not greater than -15% for +/- 100 bps and not greater than -20% for +/- 200 bps.

 

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.

 

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 and actively reviews capital strategies 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 for shareholder return.

 

Recent changes in capital are described in Note 13, “Stockholders’ Equity,” and a summary of Nicolet’s and Nicolet National Bank’s regulatory capital amounts and ratios as of December 31, 2015 and 2014 are presented in Note 18, “Regulatory Capital Requirements and Restrictions of Dividends” of the Notes to Consolidated Financial Statements, under Item 8. The most notable capital-related actions in 2015 were the issuance of $12 million in 5% fixed rate, 10-year subordinated debt during the first half of 2015 (which qualifies as Tier 2 regulatory capital), along with the September 28, 2015 partial redemption of $12.2 million, or half, of its SBLF Series C Preferred stock at par (which qualifies as Tier 1 regulatory capital), and common stock repurchases.

 

At December 31, 2015, Nicolet’s capital structure included $12.2 million (or 11%) of preferred equity and $97.3 million (or 89%) of common equity, for total capital of $109.5 million, compared to year-end 2014 of $24.4 million preferred, $86.6 million common, and $111.0 million total capital. The slight decline in total equity between year ends includes the $12.2 million partial redemption of preferred stock and a $10.7 million net increase in common equity from retained earnings and issued common equity exceeding common stock repurchases during 2015. Beginning in the fourth quarter of 2013, given growth in qualifying small business loans, Nicolet qualified for a 1% annual dividend rate on its preferred stock issued to the Treasury related to its participation in the SBLF, compared to the previous 5% annual rate paid by Nicolet. This 1% annual rate will adjust to 9% effective March 1, 2016 according to the terms of the Securities Purchase Agreement, if the preferred stock is not redeemed prior to that time. Nicolet redeemed half of the preferred stock in September 2015 to reduce the future cost of capital. After the Baylake merger consummation, additional preferred stock redemptions may be evaluated for 2016.

 

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Nicolet’s common equity to total assets at December 31, 2015 of 8.01% increased from 7.13% at December 31, 2014 and continues to reflect capacity to capitalize on opportunities. Further, Nicolet’s investors have demonstrated a strong commitment to capital, providing common capital when needed, with the two most recent examples being a December 2008 private placement raising $9.5 million in common capital as we entered the economic crisis and the April 2013 private placement raising $2.9 million in common capital alongside the predominately stock-for-stock Mid-Wisconsin merger which added $9.7 million in common capital. Book value per common share increased to $23.42 at year end 2015, up 9.7% over $21.34 at year end 2014. In early 2014, a common stock repurchase program was authorized, and with subsequent modifications (the latest being July 21, 2015 for an additional $6 million to repurchase up to 175,000 more shares of common stock), authorizes use of up to $18 million to repurchase up to 800,000 shares of Nicolet common stock as an alternative use of capital. During 2015, $4.2 million was used to repurchase and cancel 146,404 shares at a weighted average price per share of $28.35 including commissions, bringing the life-to-date totals through December 31, 2015, to $9.8 million used to repurchase and cancel 403,695 shares at a weighted average price per share of $24.27 including commissions. Given the pending merger with Baylake, Nicolet has suspended its repurchase program beginning in September 2015.

 

Nicolet’s regulatory capital ratios remain strong and well above minimum regulatory ratios. At December 31, 2015, Nicolet’s Total, Tier 1, Common Equity Tier 1 (“CET1”) risk-based ratios and its leverage ratio were 14.8%, 12.5%, 9.9% and 10.0%, respectively, compared to the minimum regulatory requirements of 8.0%, 6.0%, 4.5% and 4.0%, respectively. Also, at December 31, 2105, Nicolet National Bank’s Total, Tier 1, CETI and leverage ratios were 13.1%, 12.0%, 12.0% and 9.5%, respectively, and qualify the Bank as well-capitalized under the prompt-corrective action framework with hurdles of 10%, 8%, 6.5% and 5%, respectively. This strong base of capital has allowed Nicolet to be opportunistic in the current environment and in strategic growth.

 

A source of income and funds for Nicolet as the parent company of Nicolet National Bank are dividends from the Bank. Dividends declared by the Bank that exceed the retained net income for the most current year plus retained net income for the preceding two years must be approved by federal regulatory agencies. At December 31, 2015, the Bank could pay dividends of approximately $9.0 million without seeking regulatory approval. The Bank paid dividends to the parent company of $11.0 million in 2015 and $9.0 million in 2014.

 

In July 2013, the Federal Reserve Board and the OCC issued final rules implementing the Basel III regulatory capital framework and related Dodd-Frank Act changes. The final rules took effect for Nicolet and the Bank on January 1, 2015, subject to a transition period for certain parts of the rules. See Part I, Item 1, “Business”, “- Supervision and Regulation”, for additional information. The rules permitted certain banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income. Nicolet and the Bank made the election in 2015 to retain the existing treatment for accumulated other comprehensive income.

 

Effects of Inflation

 

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. For additional information regarding interest rates and changes in net interest income see “Interest Rate Sensitivity Management.” Inflation may 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 of banking products and the credit health of the Bank’s customer base.

 

Fourth Quarter 2015 Results

 

Nicolet recorded net income of $2.8 million for the fourth quarter of 2015, compared to net income of $2.4 million for the fourth quarter of 2014. Net income available to common equity for the fourth quarter of 2015 was $2.8 million, or $0.64 for diluted earnings per common share, compared to $2.4 million, or $0.55, respectively for the fourth quarter of 2014. See Table 19 for selected quarterly information.

 

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Taxable equivalent net interest income for the fourth quarter of 2015 was $10.9 million, similar to $10.8 million for the same quarter of 2014. Positive changes from balance sheet volume and mix improvements were offset by unfavorable changes in rates. The net interest margin between the comparable quarters was up 17 bps to 4.00% in the fourth quarter of 2015, comprised of a 14 bps higher interest rate spread (to 3.82%, as the yield on earning assets increased by 21 bps and the rate on interest-bearing liabilities increased by 7 bps) and a 3 bps higher contribution from net free funds (mainly from higher noninterest-bearing deposits).

 

Average earning assets were $1.1 billion for both the fourth quarter of 2015 and 2014, with average loans up $22 million (including increases in commercial and residential mortgages, of $18 million and $3 million, respectively) and investments up $22 million but interest-bearing cash down $16 million. On the funding side, average interest-bearing deposits were down $16 million, average demand deposits increased $49 million and average short and long-term funding balances increased (up $3 million combined).

 

The provision for loan losses decreased $0.2 million between the comparable fourth quarter periods. The provision was $0.5 million, while net charge offs were $0.1 million for the fourth quarter of 2015. For the fourth quarter of 2014, the provision was $0.7 million, while net charge offs were $1.4 million, which included one net charge off of $1.3 million on a commercial credit that was being monitored and provided for during the year.

 

Noninterest income for the fourth quarter of 2015 increased $0.7 million (16.9%) to $4.6 million versus the fourth quarter of 2014. Net gain on sale and write-down of assets increased $0.6 million due to an OREO property being sold for a large gain offset partly by a writedown on a bank premise OREO both recorded in the fourth quarter of 2015. All remaining noninterest income categories on a combined basis were up $0.1 million from the fourth quarter of 2014.

 

On a comparable quarter basis, noninterest expense increased $0.2 million (1.6%) to $10.3 million in the fourth quarter of 2015 over the fourth quarter of 2014. Personnel expense increased $0.1 million (1.8%) from the fourth quarter of 2014, primarily merit increases and higher net incentives. All remaining noninterest expense categories on a combined basis were up $0.1 million compared to the fourth quarter of 201 primarily from offsetting expenses, most notably, fourth quarter 2014 had $0.5 million cost related to a debit card fraud event, while fourth quarter 2015 included $0.6 million of the $0.8 million merger-related expenses, indicating good cost control efforts in all other expense items.

 

For the fourth quarter of 2015, Nicolet recognized income tax expense of $1.6 million, compared to income tax expense of $1.2 million for the fourth quarter of 2014. The change in income tax was primarily due to the level of pretax income between the comparable quarters. The effective tax rate was 36.5% for the fourth quarter of 2015 (including the non-deductibility of certain merger-related costs), compared to an effective tax rate of 32.6% for the fourth quarter of 2014.

 

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Selected Quarterly Financial Data

 

The following is selected financial data summarizing the results of operations for each quarter in the years ended December 31, 2015 and 2014.

 

Table 19: Selected Quarterly Financial Data
(dollars in thousands, except per share data)

 

   2015 Quarter Ended 
   December 31,   September 30,   June 30,   March 31, 
Interest income  $12,463   $11,859   $11,531   $12,744 
Interest expense   1,812    1,842    1,818    1,741 
Net interest income   10,651    10,017    9,713    11,003 
Provision for loan losses   450    450    450    450 
Noninterest income   4,559    4,185    4,894    4,070 
Noninterest expense   10,273    9,849    9,724    9,802 
Net income attributable to Nicolet Bankshares, Inc.   2,819    2,594    2,935    3,080 
Net income available to common shareholders   2,789    2,534    2,874    3,019 
Basic earnings per common share*   0.70    0.64    0.72    0.75 
Diluted earnings per common share*   0.64    0.58    0.66    0.70 

 

   2014 Quarter Ended 
   December 31,   September 30,   June 30,   March 31, 
Interest income  $12,264   $12,623   $12,329   $11,733 
Interest expense   1,751    1,730    1,833    1,753 
Net interest income   10,513    10,893    10,496    9,980 
Provision for loan losses   675    675    675    675 
Noninterest income   3,900    3,645    2,880    3,760 
Noninterest expense   10,114    9,523    9,484    9,588 
Net income attributable to Nicolet Bankshares, Inc.   2,416    2,765    2,554    2,214 
Net income available to common shareholders   2,355    2,704    2,493    2,153 
Basic earnings per common share*   0.58    0.66    0.59    0.51 
Diluted earnings per common share*   0.55    0.63    0.58    0.50 

 

*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 quarters' earnings per share data will not necessarily equal the year to date earnings per share data.

 

2014 Compared to 2013

 

Evaluation of financial performance between 2014 and 2013 was impacted in general from the timing of Nicolet’s 2013 acquisition of two distressed financial institutions – the predominantly stock-for-stock merger with Mid-Wisconsin consummated in April 2013 and the smaller FDIC-assisted acquisition of Bank of Wausau completed in August 2013 (collectively the “2013 acquisitions”). Combined, as of their respective acquisition dates, these transactions added 12 branch locations to Nicolet’s footprint and approximately $483 million in assets, $284 million in loans and $388 million in deposits. Since the results of operations of both entities prior to consummation are appropriately not included in the accompanying consolidated financial statements, income statement results and average balances for 2013 include partial year contributions from the 2013 acquisitions versus a full year in 2014. Notably, 2013 includes approximately 8 months of Mid-Wisconsin operations and 5 months of Bank of Wausau operations, which analytically could reasonably explain roughly 20% increases in certain average balances and income statement lines between 2014 and 2013.

 

At December 31, 2014, total assets were $1.2 billion, up only 1% over year end 2013, but with an improved asset mix. Since year end 2013, loans grew 4% to $883 million (predominantly in commercial and industrial loans and lines of credit) and securities available for sale grew 32% to $168 million, both funded mainly by higher deposits, which grew 2% to $1.06 billion, and continued deployment of cash. Return on average assets was 0.84% and return on average common equity was 11.55% for 2014. As part of its capital management, Nicolet began and executed on a common stock repurchase program in 2014.

 

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Net income attributable to Nicolet was $9.9 million for 2014, and after $0.2 million of preferred stock dividends, net income available to common shareholders was $9.7 million, or $2.25 per diluted common share. Comparatively, 2013 net income was $16.1 million, and after $1.0 million of preferred stock dividends, net income available to common shareholders was $15.1 million or $3.80 per diluted common share for 2013. The 2013 acquisitions impacted 2013 net income most directly from inclusion of non-recurring bargain purchase gains (“BPG”) and direct merger expenses, which after tax accounted for $9.7 million of the $16.1 million net income in 2013. Beginning in the fourth quarter of 2013 Nicolet qualified for a 1% annual dividend rate on its preferred stock issued to the Treasury related to its participation in the SBLF, compared to the previous 5% annual rate paid by Nicolet. A full year of the 1% rate in 2014 resulted in a $0.7 million reduction in preferred stock dividends between 2014 and 2013, with 2013 only reflecting the lower rate for one quarter.

 

Net interest income was $41.9 million for 2014, an increase of $5.0 million or 13% compared to 2013. The improvement was primarily volume related, with average interest-earning assets up $171 million or 19%, but at a lower interest rate spread between 2014 and 2013, driven mainly by lower loan yields and a higher mix of low-earning interest-bearing cash balances, though partly offset by a lower cost of funds. On a tax-equivalent basis, the 2015 net interest margin was 3.89%, down 17 bps from 4.06% in 2013 while the cost of interest-bearing liabilities was 0.79%, 4 bps lower than 2013. The average yield on earning assets was 4.54%, 21 bps lower than in 2013, resulting in a 17 bps decline in the interest rate spread.

 

Loans were $883 million at December 31, 2014, up $36 million or 4% over December 31, 2013. The strongest growth came in commercial and industrial loans which increased $36 million and grew to 33% of the loan portfolio at December 31, 2014 versus 30% at December 31, 2013. Since year-end 2013, acquired loans declined $43 million or 19% to $182 million at December 31, 2014 through amortization, refinances, and payoffs. Average loans were $859 million in 2014 yielding 5.32%, compared to $753 million in 2013 yielding 5.40%, an increase of 14% in average balances.

 

Total deposits were $1.1 billion at December 31, 2014, an increase of $25 million or 2% over December 31, 2013. Between 2014 and 2013, average deposits were up $197 million or 24%, with average total deposits of $1.0 billion for 2014 and $831 million for 2013. Interest-bearing deposits cost 0.63% for both 2014 and 2013.

 

Nonperforming assets were 0.61% of assets at December 31, 2014 compared to 1.02% of assets at year end 2013, a result of dedicated work on asset resolution. For 2014, the provision for loan losses was $2.7 million, exceeding net charge offs of $2.6 million (or 0.31% of average loans). For 2013, the provision for loan losses was $6.2 million, exceeding net charge offs of $4.1 million (or 0.54% of average loans). The ALLL was $9.3 million or 1.05% of loans at December 31, 2014, compared to an ALLL of $9.2 million representing 1.09% of loans at December 31, 2013.

 

Noninterest income was $14.2 million for 2014 (including $0.5 million of net gain on sale or writedown of assets), compared to $25.7 million for 2013 (including $13.6 million of combined net gain on sale or writedown of assets and BPG). Removing these net gains, noninterest income was up $1.5 million or 12%, with increases in all line items, except mortgage income, largely due to increased business from Nicolet’s expanded size, timing of the 2013 acquisitions and improved market performance.

 

Noninterest expense was $38.7 million for 2015, up $2.3 million or 6% over 2013; however, excluding $1.9 million of non-recurring merger-based expenses (of which $1 million was in personnel and $0.9 million was in other expense) incurred in 2013, expenses were up 12%. The increase in almost all line items was predominantly due to the larger operating base from the 2013 acquisitions being included for a full year in 2014, net of cost efficiency efforts made during 2014. Most notably, salaries and employee benefits were up 9% (or up 15% over 2013 excluding the $1 million merger-based expense), while average full-time equivalent employees grew only 10% between the years. All other non-personnel expenses combined were up 3% (or 8% over 2013 excluding the $0.9 million merger-based expense) and accounted for $0.4 million of the total variance between years.

 

Income tax expense was $4.6 million for 2014 and $3.8 million for 2013, resulting in an effective tax rate of 31.4% for 2014 and 19.2% for 2013. Significantly impacting the effective tax rate for 2013 was the tax free nature of the Mid-Wisconsin acquisition, whereby tax expense was not directly charged on the $9.5 million BPG. The $2.4 million BPG from the Bank of Wausau acquisition was taxable. Tax expense for 2014 included a $0.5 million tax benefit recorded to the deferred tax asset in the second quarter due to the increased ability to utilize net operating losses under the Internal Revenue Code section 382 following the one-year evaluation period related to the acquisition. In addition to the 2013 impact of the tax free BPG, these tax rates are also influenced by the amount of income before tax and the mix of tax-exempt income each year, and to a smaller degree by the non-deductibility of certain merger-related costs.

 

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Critical Accounting Policies

 

The consolidated financial statements of Nicolet are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and follow general practices within the industry in which it operates. This preparation requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the consolidated financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the consolidated financial statements. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates that are particularly susceptible to significant change include the valuation of loans acquired in the 2013 acquisitions, as well as the determination of the allowance for loan losses and income taxes and, therefore, are critical accounting policies. The critical accounting policies are discussed directly with Nicolet’s Audit Committee.

 

Business Combinations and Valuation of Loans Acquired in Business Combinations

 

We account for acquisitions under Financial Accounting Standards Board (“FASB”) ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. Assets acquired and liabilities assumed in a business combination are recorded at estimated fair value on their purchase date. As provided for under GAAP, management has up to 12 months following the date of the acquisition to finalize the fair values of acquired assets and assumed liabilities, where it was not possible to estimate the acquisition date fair value upon consummation. Management finalized the fair values of acquired assets and assumed liabilities within this 12-month period and management considers such values to be the Day 1 Fair Values. This was completed for the Mid-Wisconsin transaction during the second quarter of 2013 and was completed for the Bank of Wausau transaction in the third quarter of 2013.

 

In particular, the valuation of acquired loans involves significant estimates, assumptions and judgment based on information available as of the acquisition date. Substantially all loans acquired in the transaction are evaluated either individually or in pools of loans with similar characteristics; and since the estimated fair value of acquired loans includes a credit consideration, no carryover of any previously recorded allowance for loan losses is recorded at acquisition. A number of factors are considered in determining the estimated fair value of purchased loans including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, contractual interest rates compared to market interest rates, and net present value of cash flows expected to be received.

 

In determining the Day 1 Fair Values of acquired loans, management calculates a nonaccretable difference (the credit mark component of the acquired loans) and an accretable difference (the market rate or yield component of the acquired loans). The nonaccretable difference is the difference between the undiscounted contractually required payments and the undiscounted cash flows expected to be collected in accordance with management’s determination of the Day 1 Fair Values. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows will result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield, and nonaccretable difference which would have a positive impact on interest income.

 

The accretable yield on acquired loans is the difference between the expected cash flows and the initial investment in the acquired loans. The accretable yield is recognized into earnings using the effective yield method over the term of the loans. Management separately monitors the acquired loan portfolio and periodically reviews loans contained within this portfolio against the factors and assumptions used in determining the Day 1 Fair Values.

 

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Allowance for Loan Losses

 

The allowance for loan losses is a reserve for estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the loan portfolio. Actual credit losses, net of recoveries, are deducted from the ALLL. Loans are charged off when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the ALLL. A provision for loan losses, which is a charge against earnings, is recorded to bring the ALLL to a level that, in management’s judgment, is adequate to absorb probable losses in the loan portfolio. Management’s evaluation process used to determine the appropriateness of the ALLL is subject to the use of estimates, assumptions, and judgment. The evaluation process involves gathering and interpreting many qualitative and quantitative factors which could affect probable credit losses. Because interpretation and analysis involves judgment, current economic or business conditions can change, and future events are inherently difficult to predict, the anticipated amount of estimated loan losses and therefore the appropriateness of the ALLL could change significantly.

 

The allocation methodology applied by Nicolet is designed to assess the appropriateness of the ALLL and includes allocations for specifically identified impaired loans and loss factor allocations for all remaining loans, with a component primarily based on historical loss rates and a component primarily based on other qualitative factors. The methodology includes evaluation and consideration of several factors, such as, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and nonaccrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or circumstances underlying the collectability of loans. Because each of the criteria used is subject to change, the allocation of the ALLL is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular loan category. The total allowance is available to absorb losses from any segment of the loan portfolio. Management believes the ALLL is appropriate at December 31, 2015. The allowance analysis is reviewed by the board of directors on a quarterly basis in compliance with regulatory requirements. In addition, various regulatory agencies periodically review the ALLL. These agencies may require Nicolet to make additions to the ALLL based on their judgments of collectability based on information available to them at the time of their examination.

 

Income taxes

 

The assessment of income tax assets and liabilities involves the use of estimates, assumptions, interpretation, and judgment concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the consolidated results of operations and reported earnings.

 

Nicolet files a consolidated federal income tax return and a combined state income tax return (both of which include Nicolet and its wholly owned subsidiaries). Accordingly, amounts equal to tax benefits of those companies having taxable federal losses or credits are reimbursed by the companies that incur federal tax liabilities. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax law rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through provision for income tax expense. Valuation allowances are established when it is more likely than not that a portion of the full amount of the deferred tax asset will not be realized. In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. Nicolet may also recognize a liability for unrecognized tax benefits from uncertain tax positions. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the financial statements. Penalties related to unrecognized tax benefits are classified as income tax expense.

 

Future Accounting Pronouncements

 

Recent accounting pronouncements adopted are included in Note 1, “Nature of Business and Significant Accounting Policies” of the Notes to Consolidated Financial Statements.

 

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In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases: Amendments to the FASB Accounting Standards Codification which requires companies to recognize all leases as assets and liabilities on the consolidated balance sheet. This ASU retains a distinction between finance leases and operating leases, and the classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the current accounting literature. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting model, the effect of leases in a consolidated statement of comprehensive income and a consolidated statement of cash flows is largely unchanged from previous GAAP. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted. Nicolet is currently evaluating the impact that the adoption of this ASU will have on its consolidated financial statements.

 

In January 2016, FASB issued ASU 2016-01, Financial Instruments: 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 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 an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option. 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. The amendment reduces diversity in current practice by clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets. This amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities should 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. Nicolet is currently evaluating the impact of this guidance on its consolidated financial statements.

 

In November 2015, FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. This ASU requires entities to present deferred tax assets (DTAs) and deferred tax liabilities (DTLs), along with any related valuation allowance, as noncurrent in a balance sheet. This ASU eliminates current guidance requiring deferred taxes for each jurisdiction to be presented as a net current asset or liability and a net noncurrent asset or liability. As a result, each jurisdiction would have one net noncurrent DTA or DTL balance. The ASU does not change the existing requirement that only permits offsetting DTAs and DTLs within a particular jurisdiction. For Nicolet, this standard is effective January 1, 2017, with early adoption permitted. The adoption of this guidance is not expected to have a significant impact on Nicolet’s consolidated financial statements.

 

In September 2015, FASB issued ASU 2015-16 Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments. The amendments in this update require that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the estimated amounts, calculated as if the account had been completed at the acquisition date. The amendments also require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the estimated amounts had been recognized as of the acquisition date. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The adoption of this guidance is not expected to have a significant impact on the consolidated financial condition, results of operations or liquidity of Nicolet.

 

In August 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest: Presentation and subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements-Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 8, 2015 EITF Meeting (SEC Update). The guidance in ASU 2015-03, issued in April of 2015 did not address the presentation or subsequent measurement of debt issuance costs related to line-of- credit arrangements. Given the absence of authoritative guidance within SU 2015-03 for debit issuance costs related to line-of- credit arrangements, the SEC staff stated that they would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-15 adds these SEC comments to the “S” section of the codification.

 

In June 2015, the FASB issued ASU 2015-10: Technical Corrections and Improvements. The amendments in this Update cover a wide range of topics in the Codification including guidance clarification and reference corrections, simplification and minor improvements. Transition guidance varies based on the amendments. The amendments that require transition guidance are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. All other amendments will be effective upon issuance. The adoption of this update is not expected to have a material impact on Nicolet’s consolidated financial statements.

 

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In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities that Calculate Net Asset Value Per Share (or its Equivalent). ASU 2015-07 removes the requirement to categorize within the fair value hierarchy investments for which fair values are estimated using the net asset value practical expedient provided by ASC 820. Disclosures about investments in certain entities that calculate net asset value per share are limited under ASU 2015-07 to those investments for which the entity has elected to estimate the fair value using the net asset value practical expedient. ASU 2015-07 is effective for fiscal years beginning after December 15, 2015, with retrospective application to all periods presented. Early application is permitted. The adoption of this update is not expected to have a material impact on Nicolet’s consolidated financial statements.

 

In April 2015, the FASB issued ASU 2015-05 Intangibles - Goodwill and Other Internal-Use Software. The amendments in this update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change U.S. GAAP for a customer’s accounting for service contracts. In addition, the guidance in this update supersedes paragraph 350-40-25-16. Consequently, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The adoption of this guidance is not expected to have a significant impact on the consolidated financial condition, results of operations or liquidity of Nicolet.

 

In April 2015, the FASB issued ASU 2015-04 Compensation - Retirement Benefits. The amendments in this update provide a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year end and apply that practical expedient consistently from year to year. The amendments in this update also provide a practical expedient that permits the entity to remeasure defined benefit plan assets and obligations using the month-end that is closest to the date of the significant event. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The adoption of this guidance is not expected to have a significant impact on the consolidated financial condition, results of operations or liquidity of Nicolet.

 

In February 2015, the FASB issued ASU No. 2015-02, Consolidation: Amendments to the Consolidation Analysis, effective for fiscal years beginning after December 15, 2015 and interim periods within those years with early adoption permitted. The new standard is intended to improve targeted areas of the consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures. The amendments in the ASU affect the consolidation evaluation for reporting organizations. In addition, the amendments in this ASU simplify and improve current GAAP by reducing the number of consolidation models. Nicolet is currently evaluating the impact of this guidance on its consolidated financial statements.

 

In January 2015, the FASB issued ASU 2015-01 Income Statement - Extraordinary and Unusual Items: Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. The amendment eliminates from U.S. GAAP the concept of extraordinary items. Subtopic 225-20, Income Statement – Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also is required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The adoption of this guidance is not expected to have a significant impact on the consolidated financial condition, results of operations or liquidity of Nicolet.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

For additional disclosure, see section, “Interest Rate Sensitivity Management,” of the Management’s Discussion and Analysis of Financial Condition and Results of Operation under Part II, Item 7.

 

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ITEM 8. FINANCIAL STATEMENTS

 

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2015 and 2014

 

(In thousands, except share and per share data)  2015   2014 
Assets          
Cash and due from banks  $11,947   $23,975 
Interest-earning deposits   70,755    43,169 
Federal funds sold   917    1,564 
Cash and cash equivalents   83,619    68,708 
Certificates of deposit in other banks   3,416    10,385 
Securities available for sale (“AFS”)   172,596    168,475 
Other investments   8,135    8,065 
Loans held for sale   4,680    7,272 
Loans   877,061    883,341 
Allowance for loan losses   (10,307)   (9,288)
Loans, net   866,754    874,053 
Premises and equipment, net   29,613    31,924 
Bank owned life insurance (“BOLI”)   28,475    27,479 
Accrued interest receivable and other assets   17,151    18,924 
Total assets  $1,214,439   $1,215,285 
           
Liabilities and Stockholders’ Equity          
Liabilities:          
Demand  $226,554   $203,502 
Money market and NOW accounts   486,677    494,945 
Savings   136,733    120,258 
Time   206,453    241,198 
Total deposits   1,056,417    1,059,903 
Notes payable   15,412    21,175 
Junior subordinated debentures   12,527    12,328 
Subordinated notes   11,849    - 
Accrued interest payable and other liabilities   8,547    10,812 
Total liabilities   1,104,752    1,104,218 
           
Stockholders’ Equity:          
Preferred equity   12,200    24,400 
Common stock   42    41 
Additional paid-in capital   45,220    45,693 
Retained earnings   51,059    39,843 
Accumulated other comprehensive income   980    1,031 
Total Nicolet Bankshares, Inc. stockholders’ equity   109,501    111,008 
Noncontrolling interest   186    59 
Total stockholders’ equity and noncontrolling interest   109,687    111,067 
Total liabilities, noncontrolling interest and stockholders’ equity  $1,214,439   $1,215,285 
           
Preferred shares authorized (no par value)   10,000,000    10,000,000 
Preferred shares issued and outstanding   12,200    24,400 
Common shares authorized (par value $0.01 per share)   30,000,000    30,000,000 
Common shares outstanding   4,154,377    4,058,208 
Common shares issued   4,191,067    4,124,439 

 

See Notes to Consolidated Financial Statements.

 

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NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Income

Years Ended December 31,

 

(In thousands, except share and per share data)  2015   2014   2013 
Interest income:               
Loans, including loan fees  $45,638   $46,081   $41,000 
Investment securities:               
Taxable   1,460    1,606    1,107 
Non-taxable   1,056    793    745 
Other interest income   443    469    344