UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For the fiscal year ended December 31 , 2020
For the transition period from…………to………….
Commission file number 001-37700
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(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 | Trading Symbol | Name of each exchange on which registered | ||||||
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 ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☒
Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2020, (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 $509 million based on the closing sale price of $54.80 per share as reported on Nasdaq on June 30, 2020.
As of February 24, 2021 9,979,672 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Nicolet Bankshares, Inc.
TABLE OF CONTENTS
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Forward-Looking Statements
Statements made in this Annual Report on Form 10-K and in any documents that are incorporated by reference which are not purely historical are forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, including any statements regarding descriptions of management's plans, objectives, or goals for future operations, products or services, and forecasts of its revenues, earnings, or other measures of performance. Forward-looking statements are based on current management expectations and, by their nature, are subject to risks and uncertainties. These statements generally may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “should,” “will,” “intend,” or similar expressions. Shareholders should note that many factors, some of which are discussed elsewhere in this document, could affect the future financial results of Nicolet and could cause those results to differ materially from those expressed in forward-looking statements contained in this document. These factors, many of which are beyond Nicolet’s control, include but are not necessarily limited to the following:
•the effects of the COVID-19 pandemic on the business, customers, employees and third-party service providers of Nicolet or any of its acquisition targets;
•operating, legal and regulatory risks, including the effects of legislative or regulatory developments affecting the financial industry generally or Nicolet specifically;
•economic, market, political and competitive forces affecting Nicolet’s banking and wealth management businesses;
•changes in interest rates, monetary policy and general economic conditions, which may impact Nicolet’s net interest income;
•diversion of management time on pandemic-related issues;
•potential difficulties in integrating the operations of Nicolet with future acquisition targets following any merger;
•adoption of new accounting standards, including the effects from the adoption of the current expected credit losses (“CECL”) model on January 1, 2020, or changes in existing standards;
•changes to statutes, regulations or regulatory policies or practices resulting from the COVID-19 pandemic;
•compliance or operational risks related to new products, services, ventures, or lines of business, if any, that Nicolet may pursue or implement; and
•the risk that Nicolet’s analysis of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.
These factors should be considered in evaluating the forward-looking statements, and you should not place undue reliance on such statements. Nicolet specifically disclaims any obligation to update factors or to publicly announce the results of revisions to any of the forward-looking statements or comments included herein to reflect future events or developments.
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. At December 31, 2020, Nicolet had total assets of $4.6 billion, loans of $2.8 billion, deposits of $3.9 billion and total stockholders’ equity of $539 million. For the year ended December 31, 2020, Nicolet earned net income of $60.1 million, or $5.70 per diluted common share. For 2020, Nicolet’s return on average assets was 1.41%.
Nicolet was founded upon five core values (Be Real, Be Responsive, Be Personal, Be Memorable, and Be Entrepreneurial) which are embodied within each of our employees and create a distinct competitive positioning in the markets within which we operate. Our mission is to be the leading community bank within the communities we serve, while our vision is to optimize the long-term return to our customers and communities, employees and shareholders (the “3 Circles”).
The Parent Company 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. The Parent Company 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 its primary 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, Wisconsin, on
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November 1, 2000 (referred to herein as the “Bank”). At December 31, 2020, the Parent Company also wholly owns a registered investment advisory firm, Nicolet Advisory Services, LLC (“Nicolet Advisory”), that conducts brokerage and financial advisory services primarily to individual consumers and retirement plan services to business customers. At December 31, 2020, the Bank wholly owns an investment subsidiary based in Nevada, an entity that owns the building in which Nicolet is headquartered, and a subsidiary in Green Bay that provides a web-based investment management platform for financial advisor trades and related activity. Other than the Bank, 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 as of December 31, 2020.
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 credit losses, noninterest expense (largely employee compensation and overhead expenses tied to processing and operating the Bank’s business), and income taxes.
Since its opening in late 2000, though more prominently since 2013, Nicolet has supplemented its organic growth with branch purchase and acquisition transactions. Merger and acquisition (“M&A”) activity has continued to be a source of strong growth for Nicolet. Since 2012 through year end 2020, Nicolet has successfully completed seven acquisitions. For information on recent transactions, see Note 2, “Acquisitions,” of the Notes to Consolidated Financial Statements under Part II, Item 8. In third quarter 2020, Nicolet completed the all-cash acquisition of Advantage Community Bancshares, Inc. (“Advantage”) and its wholly-owned bank subsidiary, Advantage Community Bank, which added total assets of $172 million at consummation (representing 4% of then pre-merger assets).
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, trust, brokerage and other investment management services predominantly for individuals and retirement plan services for business customers are offered. Nicolet delivers its products and services principally through 36 bank 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 other services such as wire transfers, debit cards, credit cards, pre-paid gift cards, direct deposit, and official bank checks.
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 primary lending function is to make loans in the following categories:
•commercial-related loans, consisting of:
◦commercial, industrial, and business loans and lines, including Paycheck Protection Program (“PPP”) loans;
◦owner-occupied commercial real estate (“owner-occupied CRE”);
◦agricultural (“AG”) production and AG real estate;
◦commercial real estate investment loans (“CRE investment”);
◦construction and land development loans;
•residential real estate loans, consisting of:
◦residential first lien mortgages;
◦residential junior lien mortgages;
◦home equity loans and lines of credit;
◦residential construction loans; and
•other loans (mainly consumer in nature).
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
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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 the loan portfolio composition and credit risk management, see “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” under Part II, Item 7.
Human Capital Resources
At December 31, 2020, Nicolet had 556 full-time equivalent employees and 573 headcount employees. None of our employees are represented by unions.
Nicolet believes that diversity is directly linked to organizational performance and is committed to diversity and inclusion, including women, minorities, age, individuals with disabilities, culture, and life experiences, among others. In support of this, all employees complete annual diversity training, managers complete additional diversity training in management foundation training, and we expect our employees to be active in promoting diversity within the Company and communities we serve. Nicolet also analyzes pay practices to ensure it is fair and equitable among our diverse employee population. Our workforce at year end 2020 was 70% women, 30% men, and 42% of all officer titles were women.
As noted under "General", our mission is to be the leading community bank within the communities we serve, while our vision is to optimize the long-term return to our customers and communities, employees and shareholders (the “3 Circles”), guided by our five core value. Meaningful execution on the mission and vision comes from all employees embodying the core values and the 3 Circles in their decision-making and daily actions for their customers and communities.
We support the communities we serve through our employees’ dedication to giving back and their ties to the local communities.
In order to develop a workforce that aligns with our corporate values, we regularly sponsor local community events so that our employees can better integrate themselves in our communities. We believe that our employees’ well-being and personal and professional development is fostered by our outreach to the communities we serve. Our employees’ desire for active community involvement is supported and encouraged – such as, promoting causes of interest to employees, flexible schedules to support volunteerism, and giving of money to charities, community events or community organizations also served by employee volunteers. This includes Nicolet National Foundation, Inc., a public charity formed near our opening as a way for employees to give back, with 100% of the monies given by employees going directly back into our communities based on recommendations from our employees, and a 100% match of employee giving by the Bank to further support our community giving over time.
The health and well-being of our employees is of utmost importance to us. In response to the COVID-19 pandemic, we have taken significant steps to protect and promote the health and well-being of our employees and customers, including implementation of various management actions for safety, remote work, temporary branch changes, and on-site bonus pay.
Market Area and Competition
The Bank is a full-service community bank, providing a full range of traditional commercial, wealth (directly and through Nicolet Advisory) and retail banking products and services throughout northeastern and central Wisconsin and in Menominee, 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, 2020 is through 36 branches located principally in its trade area of northeastern and central Wisconsin, and in Menominee, Michigan. Based on deposit market share data published by S&P Global Market Intelligence as of June 30, 2020 for the 13 counties served by Nicolet, the Bank ranks in the top three of market share for 8 counties (Brown, Calumet, Clark, Door, Kewaunee, Menominee, Taylor, and Winnebago) and in the top five for 2 other counties (Marinette and Oneida).
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, fewer regulatory requirements, 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
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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 business. 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 the 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 or regulation may have on the future business and earnings of Nicolet or the Bank.
Regulation of Nicolet
Because Nicolet owns all of the capital stock of the 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.
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.
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 the 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 the Bank and to commit resources to support the 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 the Bank will be repaid only after the Bank’s deposits and various other obligations are repaid in full.
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Capital Adequacy. Nicolet is subject to capital requirements applied on a consolidated basis, which are substantially similar to those required of the Bank, which are summarized under “Regulation of the Bank” 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. Under Federal Reserve policy, bank holding companies are expected to inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period (e.g., quarter) for which the dividend is being paid or that could result in a material adverse change to the organization's capital structure.
Stock Buybacks and Other Capital Redemptions. Under Federal Reserve policies and regulations, bank holding companies must seek regulatory approval prior to any redemption that would reduce the bank holding company's consolidated net worth by 10% or more, prior to the redemption of most instruments included in Tier 1 or Tier 2 capital with features permitting redemption at the option of the issuing bank holding company, or prior to the redemption of equity or other capital instruments included in Tier 1 or Tier 2 capital prior to stated maturity, if such redemption could have a material effect on the level or composition of the organization's capital base. Bank holding companies are also expected to inform the Federal Reserve reasonably in advance of a redemption or repurchase of common stock if such buyback results in a net reduction of the company's outstanding amount of common stock below the amount outstanding at the beginning of the fiscal quarter.
Regulation of the Bank
Because the 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 the 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 the 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 the Bank. The 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, the 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, the 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.
In addition to the minimum risk-based capital and leverage ratios, effective January 1, 2019 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 well-capitalized 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 following table presents the risk-based and leverage capital requirements applicable to the Bank:
| Adequately Capitalized Requirement | Well-Capitalized Requirement | Well-Capitalized with Buffer | |||||||||||||||
| 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 | % | |||||||||||
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Although capital instruments such as trust preferred securities and cumulative preferred shares are excluded from Tier 1 capital for certain larger banking organizations, Nicolet’s trust preferred securities are grandfathered as Tier 1 capital (provided they do not exceed 25% of Tier 1 capital) so long as Nicolet has less than $15 billion in total assets.
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.
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 has a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 8%, a CET1 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, 2020, the Bank satisfied the requirements of “well-capitalized” under the regulatory framework for prompt corrective action. See Note 16, “Regulatory Capital Requirements,” in the Notes to Consolidated Financial Statements, under Part II, Item 8, for Nicolet and the 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.
CECL. The Financial Accounting Standards Board (“FASB”) adopted a new credit loss accounting standard applicable to all banks, savings associations, credit unions, and financial holding companies, regardless of size. This standard became effective for the Bank for our fiscal year beginning on January 1, 2020. The final rule allows for an optional three-year phase in of the day-one adverse effects on a bank’s regulatory capital. This Current Expected Credit Losses (“CECL”) standard requires financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as an allowance for credit losses.
The CECL rules changed the prior “incurred losses” method of providing Allowances for Credit Losses (“ACL”), which has required us to increase our allowance, and to greatly increase the data we need to collect and review to determine the appropriate level of the ACL. Under CECL, the allowance for credit losses is an estimate of the expected credit losses on financial assets measured at amortized cost, which is measured using relevant information about past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that
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affect the collectability of the remaining cash flows over the contractual term of the financial assets. CECL requires an allowance to be created upon the origination or acquisition of a financial asset measured at amortized cost, which may significantly impact the cost of M&A activity in the future. Any increase in our ACL, or expenses incurred to determine the appropriate level of the ACL, may have a material adverse effect on our financial condition and results of operations. For additional discussion of CECL, see section “New Accounting Pronouncements Adopted” within Note 1 “Nature of Business and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements under Part II, Item 8.
FDIC Insurance Assessments. The Bank’s deposits are insured by the Deposit Insurance Fund of the FDIC up to $250,000, the maximum amount permitted by law. The FDIC uses the Deposit Insurance Fund to protect against the loss of insured deposits if an FDIC-insured bank or savings association fails. The 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, 2020 the 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 over $1.9 million 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 (“CRA”) 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 the Bank. Additionally, the Bank must publicly disclose the terms of various Community Reinvestment Act-related agreements. The Bank received an “outstanding” CRA rating in its most recent evaluation.
Payment of Dividends. Statutory and regulatory limitations apply to the Bank’s payment of dividends to the Parent Company. If, in the opinion of the OCC, the Bank were engaged in or about to engage in an unsafe or unsound practice, the OCC could require that the 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.
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 (1) the total of the Bank’s net profits for that year, plus (2) the Bank’s retained net profits of the preceding two years. 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. The Bank is subject to the provisions of Regulation W promulgated by the Federal Reserve, which implements 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 the 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.
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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. The 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 the Bank, are 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”). The CFPB has brought a variety of enforcement actions for violations of UDAAP provisions and CFPB guidance continues to evolve.
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.
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.
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.
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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. However, it is possible that some acquisitions might not close as a result of failure to meet closing conditions or the market could negatively affect the banking environment so much that an acquisition that may have, at one time, been beneficial to both institutions is now no longer prudent. The costs and effects of a such not completed acquisitions could negatively affect Nicolet.
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.
The global coronavirus outbreak could harm business and results of operations for Nicolet.
In March 2020, the World Health Organization declared the coronavirus to be a pandemic. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the coronavirus pandemic on the businesses of Nicolet and on its customers, and there is no guarantee that efforts by Nicolet to address the adverse impacts of the coronavirus will be effective. The impact to date has included periods of significant volatility in financial, commodities and other markets. This volatility, if it continues, could have an adverse impact on Nicolet’s customers and on Nicolet’s business, financial condition and results of operations. Nicolet may also incur additional costs to remedy damages caused by business disruptions.
In addition, actions by U.S. federal, state and foreign governments to address the pandemic, including travel bans and school, business and entertainment venue closures, may also have a significant adverse effect on the markets in which Nicolet conducts its businesses. The extent of impacts resulting from the coronavirus pandemic and other events beyond the control of Nicolet will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus pandemic and actions taken to contain the coronavirus or its impact, among others.
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.
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 appropriateness of our allowance for credit losses. While this evaluation process uses historical and other objective information, the classification of
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loans and the establishment of credit 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 credit loss reserves will be sufficient to absorb future credit losses or prevent a material adverse effect on our 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 nonperforming 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 credit 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 credit 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 nonaccruals, national and local economic conditions, reasonable and supportable forecasts, 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 appropriate to cover future credit losses.
In addition, the market value of the real estate securing our loans as collateral could be adversely affected by the economy and unfavorable changes in economic conditions in our market areas. As of December 31, 2020, approximately 40% of our loans were secured by commercial-based real estate, 3% of loans were secured by agriculture-based real estate, and 21% 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, results of operations, and financial condition.
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 changed and are likely to 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 rule-making authority granted to the 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.
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Congress may consider additional proposals to substantially change the financial institution regulatory system and to expand or contract the powers of banking institutions, bank holding companies and financial 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 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. If the interest rates paid on deposits and borrowings increase at a faster rate than the interest rates received on loans and investment securities, our net interest income, and therefore earnings, could be adversely affected. Earnings also could be adversely affected if the interest rates received on loans and investment securities fall more quickly than the interest rates paid on deposits and borrowings. In addition, 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. Any significant increase in prevailing interest rates could also adversely affect our mortgage banking business because higher interest rates could cause customers to request fewer refinancing and purchase money mortgage originations.
Nicolet may be required to transition from the use of LIBOR interest rate index in the future.
Certain of our trust preferred securities, loans, investment securities, and junior subordinated debentures are currently indexed to LIBOR to calculate the interest rate. The continued availability of the LIBOR index is not guaranteed after 2021. We cannot predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR (with the exception of overnight repurchase agreements, which are expected to be based on the Secured Overnight Financing Rate, or SOFR). The language in our LIBOR-based contracts and financial instruments has developed over time and may have various events that trigger when a successor rate to the designated rate would be selected. If a trigger is satisfied, contracts and financial instruments may give the calculation agent discretion over the substitute index or indices for the calculation of interest rates to be selected.
Nicolet faces significant operational risk, including risk of loss related to cybersecurity breaches, due to the financial services industry’s increased reliance on technology.
We rely heavily on communications and information systems to conduct our business, and we rely on third party vendors to provide key components of these systems, including our core application processing. 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. We rely on third parties to compile, process or store computer systems, company data and infrastructure, and such information may be vulnerable to attack by hackers or unauthorized access. 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, damage vendor relationships, 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.
We do not control the actions of the third party vendors we have selected to provide key components of our business infrastructure. 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, or any failure, interruption or breach in security of the services they provide, 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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Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.
As a financial institution, we are also susceptible to fraudulent activity that may be committed against us, our third party vendors, or our clients, which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our clients' information, misappropriation of assets, privacy breaches against our clients, litigation, or damage to our reputation. These risks may increase in the future as we continue to increase our mobile-payment and other internet-based product offerings and expand our internal usage of web-based products and applications.
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, as well as financial technology companies (“fintechs”). 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. Because technology and other changes have lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, we also compete with fintechs seeking to disrupt conventional banking markets. In particular, the activity of fintechs has grown significantly over recent years and is expected to continue to grow. Fintechs have and may continue to offer bank or bank-like products and a number of fintechs have applied for bank or industrial loan charters. In addition, other fintechs have partnered with existing banks to allow them to offer deposit products to their customers.
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, we may face a competitive disadvantage as compared to large national or regional banks as a result of our smaller size and relative 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, we may have fewer resources than our competition to continue to invest in technological improvements.
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-driven products and services, which could reduce our ability to effectively compete.
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;
•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;
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•changes in government regulations;
•geopolitical conditions such as acts or threats of terrorism or military conflicts;
•available supply and demand of investors interested in trading our common stock;
•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.
Nicolet has not historically paid dividends to our common shareholders, and we cannot guarantee that it 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. 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 the Bank. Cash available to pay dividends to our shareholders is derived primarily, if not entirely, from dividends paid by the Bank. The ability of the 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. 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.
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 growth and operations and to 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 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 16% of our fully diluted issued and outstanding common stock as of December 31, 2020. 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 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 and by assuming the trust preferred securities and accompanying junior subordinated debentures issued by companies we have acquired. As of December 31, 2020, we had outstanding trust preferred securities and associated junior subordinated debentures with an aggregate par principal amount of approximately $33.0 million and $32.1 million, respectively.
We have unconditionally guaranteed the payment of principal and interest on our trust preferred securities. Also, the junior subordinated 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 stock.
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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.
Nicolet’s securities are not FDIC insured.
Our securities are not savings or deposit accounts or other obligations of the 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.
ITEM 2. PROPERTIES
The corporate headquarters of both the Parent Company and the Bank are located at 111 North Washington Street, Green Bay, Wisconsin. At year-end 2020, including the main office, the Bank operated 36 bank branch locations, 28 of which are owned and eight that are leased. In addition, Nicolet owns or leases other real property that, when considered in aggregate, is not significant to its financial position. Most of the offices are free-standing, newer buildings that provide adequate access, customer parking, and drive-through and/or ATM services. The properties are in good condition and considered adequate for present and near term requirements. None of the owned properties are subject to a mortgage or similar encumbrance.
One leased location involves a director, with lease terms that management considers arms-length. For additional disclosure, see Note 14, “Related Party Transactions,” of the Notes to Consolidated Financial Statements under Part II, 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.
PART II
ITEM 5. MARKET FOR 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”. As of February 22, 2021, Nicolet had approximately 2,200 shareholders of record.
Nicolet has not paid dividends on its common stock since its inception in 2000. Any cash dividends paid by Nicolet on its common stock must comply with applicable Federal Reserve policies described further in “Business—Regulation of Nicolet—Dividend Restrictions.” The Bank is also subject to regulatory restrictions on the amount of dividends it is permitted to pay to Nicolet as
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further described in “Business—Regulation of the Bank—Payment of Dividends” and in Note 16, “Regulatory Capital Requirements,” in the Notes to Consolidated Financial Statements under Part II, Item 8.
Following are Nicolet’s monthly common stock purchases during the fourth quarter of 2020.
| Period: | Total Number of Shares Purchased (#) (a) (b) | Average Price Paid per Share ($) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (#) (b) | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (#) (a) (b) | |||||||||||||||||||
| October 1 – October 31, 2020 | 123,759 | $ | 60.61 | 123,759 | 308,400 | ||||||||||||||||||
| November 1– November 30, 2020 | 48,608 | $ | 65.27 | 46,043 | 587,400 | ||||||||||||||||||
| December 1 – December 31, 2020 | 37,138 | $ | 68.50 | 35,199 | 552,200 | ||||||||||||||||||
| Total | 209,505 | $ | 63.09 | 205,001 | 552,200 | ||||||||||||||||||
(a) During fourth quarter 2020, the Company repurchased 3,251 shares for minimum tax withholding settlements on restricted stock and repurchased 1,253 shares to satisfy the exercise price and/or tax withholding requirements of stock options, respectively. These purchases do not count against the maximum number of shares that may yet be purchased under the board of directors’ authorization.
(b) During 2014 the board of directors approved a common stock repurchase program which authorized, with subsequent modifications, the use of up to $126 million to repurchase up to 2,625,000 shares of outstanding common stock. The common stock repurchase program has no expiration date. During fourth quarter 2020, Nicolet spent $12.9 million to repurchase and cancel 205,001 shares at a weighted average price of $62.97 per share, bringing the life-to-date cumulative totals to $105.6 million to repurchase and cancel 2.1 million shares at a weighted average price of $50.92 per share. At December 31, 2020, approximately $20.4 million remained available to repurchase common shares.
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Performance Graph
The following graph shows the cumulative stockholder return on our common stock compared with the KBW NASDAQ Bank Index and the S&P 500 Index for the period of December 31, 2015 to December 31, 2020. The graph assumes the value of the investment in the Company’s common stock and in each index was $100 on December 31, 2015. Historical stock price performance shown on the graph is not necessarily indicative of the future price performance.
| Period Ending | ||||||||||||||||||||||||||||||||||||||
| Index | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | ||||||||||||||||||||||||||||||||
| Nicolet Bankshares, Inc. | $ | 100.00 | $ | 150.02 | $ | 172.19 | $ | 153.51 | $ | 232.31 | $ | 208.71 | ||||||||||||||||||||||||||
| S&P 500 Index | 100.00 | 111.96 | 136.40 | 130.42 | 171.49 | 203.04 | ||||||||||||||||||||||||||||||||
| KBW Nasdaq Bank Index | 100.00 | 128.51 | 152.40 | 125.41 | 170.71 | 153.11 | ||||||||||||||||||||||||||||||||
Source: S&P Global Market Intelligence
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented as of December 31, 2020 and 2019 and for each of the years in the three-year period ended December 31, 2020 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 for all other periods shown is derived from audited consolidated financial statements that are not required to be included in this report.
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EARNINGS SUMMARY AND SELECTED FINANCIAL DATA
| At and for the years ended December 31, | |||||||||||||||||||||||||||||
| (in thousands, except per share data) | 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||
| Results of operations: | |||||||||||||||||||||||||||||
| Interest income | $ | 149,202 | $ | 138,588 | $ | 125,537 | $ | 109,253 | $ | 75,467 | |||||||||||||||||||
| Interest expense | 19,864 | 22,510 | 18,889 | 10,511 | 7,334 | ||||||||||||||||||||||||
| Net interest income | 129,338 | 116,078 | 106,648 | 98,742 | 68,133 | ||||||||||||||||||||||||
| Provision for credit losses | 10,300 | 1,200 | 1,600 | 2,325 | 1,800 | ||||||||||||||||||||||||
| Noninterest income | 62,626 | 53,367 | 39,509 | 34,639 | 26,674 | ||||||||||||||||||||||||
| Noninterest expense | 100,719 | 96,799 | 89,758 | 81,356 | 64,942 | ||||||||||||||||||||||||
| Income before income tax expense | 80,945 | 71,446 | 54,799 | 49,700 | 28,065 | ||||||||||||||||||||||||
| Income tax expense | 20,476 | 16,458 | 13,446 | 16,267 | 9,371 | ||||||||||||||||||||||||
| Net income | 60,469 | 54,988 | 41,353 | 33,433 | 18,694 | ||||||||||||||||||||||||
| Net income attributable to noncontrolling interest | 347 | 347 | 317 | 283 | 232 | ||||||||||||||||||||||||
| Net income attributable to Nicolet Bankshares, Inc. | 60,122 | 54,641 | 41,036 | 33,150 | 18,462 | ||||||||||||||||||||||||
| Preferred stock dividends | — | — | — | — | 633 | ||||||||||||||||||||||||
| Net income available to common shareholders | $ | 60,122 | $ | 54,641 | $ | 41,036 | $ | 33,150 | $ | 17,829 | |||||||||||||||||||
| Earnings per common share: | |||||||||||||||||||||||||||||
| Basic | $ | 5.82 | $ | 5.71 | $ | 4.26 | $ | 3.51 | $ | 2.49 | |||||||||||||||||||
| Diluted | $ | 5.70 | $ | 5.52 | $ | 4.12 | $ | 3.33 | $ | 2.37 | |||||||||||||||||||
| Common shares: | |||||||||||||||||||||||||||||
| Basic weighted average | 10,337 | 9,562 | 9,640 | 9,440 | 7,158 | ||||||||||||||||||||||||
| Diluted weighted average | 10,541 | 9,900 | 9,956 | 9,958 | 7,514 | ||||||||||||||||||||||||
| Outstanding | 10,011 | 10,588 | 9,495 | 9,818 | 8,553 | ||||||||||||||||||||||||
| Year-End Balances: | |||||||||||||||||||||||||||||
| Loans | $ | 2,789,101 | $ | 2,573,751 | $ | 2,166,181 | $ | 2,087,925 | $ | 1,568,907 | |||||||||||||||||||
Allowance for credit losses - loans (“ACL-Loans”) | 32,173 | 13,972 | 13,153 | 12,653 | 11,820 | ||||||||||||||||||||||||
| Securities available for sale, at fair value | 539,337 | 449,302 | 400,144 | 405,153 | 365,287 | ||||||||||||||||||||||||
| Goodwill and other intangibles, net | 175,353 | 165,967 | 124,307 | 128,406 | 87,938 | ||||||||||||||||||||||||
| Total assets | 4,551,789 | 3,577,260 | 3,096,535 | 2,932,433 | 2,300,879 | ||||||||||||||||||||||||
| Deposits | 3,910,399 | 2,954,453 | 2,614,138 | 2,471,064 | 1,969,986 | ||||||||||||||||||||||||
| Short-term and long-term borrowings | 53,869 | 67,629 | 77,305 | 78,046 | 37,617 | ||||||||||||||||||||||||
| Stockholders’ equity | 539,189 | 516,262 | 386,609 | 364,178 | 275,947 | ||||||||||||||||||||||||
| Book value per common share | $ | 53.86 | $ | 48.76 | $ | 40.72 | $ | 37.09 | $ | 32.26 | |||||||||||||||||||
| Tangible book value per common share * | $ | 36.34 | $ | 33.08 | $ | 27.62 | $ | 24.01 | $ | 21.98 | |||||||||||||||||||
| Average Balances: | |||||||||||||||||||||||||||||
| Loans | $ | 2,787,587 | $ | 2,257,033 | $ | 2,127,470 | $ | 1,899,225 | $ | 1,346,304 | |||||||||||||||||||
| Interest-earning assets | 3,849,812 | 2,794,641 | 2,671,560 | 2,351,451 | 1,723,600 | ||||||||||||||||||||||||
| Goodwill and other intangibles, net | 168,802 | 129,112 | 126,284 | 115,447 | 61,588 | ||||||||||||||||||||||||
| Total assets | 4,255,207 | 3,126,535 | 2,977,457 | 2,648,754 | 1,934,770 | ||||||||||||||||||||||||
| Deposits | 3,439,748 | 2,598,271 | 2,508,952 | 2,228,408 | 1,641,894 | ||||||||||||||||||||||||
| Interest-bearing liabilities | 2,660,508 | 1,939,639 | 1,951,846 | 1,750,099 | 1,307,471 | ||||||||||||||||||||||||
| Common equity | 527,428 | 423,952 | 371,635 | 332,897 | 217,432 | ||||||||||||||||||||||||
| Stockholders’ equity | 527,428 | 423,952 | 371,635 | 332,897 | 226,265 | ||||||||||||||||||||||||
| Financial Ratios: | |||||||||||||||||||||||||||||
| Return on average assets | 1.41 | % | 1.75 | % | 1.38 | % | 1.25 | % | 0.95 | % | |||||||||||||||||||
| Return on average equity | 11.40 | 12.89 | 11.04 | 9.96 | 8.16 | ||||||||||||||||||||||||
| Return on average common equity | 11.40 | 12.89 | 11.04 | 9.96 | 8.20 | ||||||||||||||||||||||||
| Return on average tangible common equity * | 16.76 | 18.53 | 16.73 | 15.24 | 11.44 | ||||||||||||||||||||||||
| Average equity to average assets | 12.39 | 13.56 | 12.48 | 12.57 | 11.69 | ||||||||||||||||||||||||
| Net interest margin | 3.38 | 4.19 | 4.04 | 4.30 | 4.01 | ||||||||||||||||||||||||
| Stockholders’ equity to assets | 11.85 | 14.43 | 12.49 | 12.42 | 11.99 | ||||||||||||||||||||||||
| Tangible common equity to tangible assets * | 8.31 | 10.27 | 8.83 | 8.41 | 8.50 | ||||||||||||||||||||||||
| Net charge-offs to average loans | 0.05 | 0.02 | 0.05 | 0.08 | 0.02 | ||||||||||||||||||||||||
| Nonperforming loans to total loans | 0.34 | 0.55 | 0.25 | 0.63 | 1.29 | ||||||||||||||||||||||||
| Nonperforming assets to total assets | 0.29 | 0.42 | 0.19 | 0.49 | 0.97 | ||||||||||||||||||||||||
| Allowance for credit losses-loans to loans | 1.15 | 0.54 | 0.61 | 0.61 | 0.75 | ||||||||||||||||||||||||
* The ratios of tangible book value per common share, return on average tangible common equity, and tangible common equity to tangible assets exclude goodwill and other intangibles, net. These financial ratios have been included as they are considered to be critical metrics with which to analyze and evaluate financial condition and capital strength.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
Evaluation of financial performance and certain balance sheet line items was impacted by the timing and size of Nicolet's acquisitions, Choice Bancorp, Inc. (“Choice”) on November 8, 2019, at 12% of Nicolet’s then pre-merger asset size, and Advantage Community Bancshares, Inc. (“Advantage”) on August 21, 2020, at 4% of Nicolet’s then pre-merger asset size. Certain income statement results, average balances and related ratios for 2020 include full contribution from Choice and a partial contribution from Advantage, while 2019 includes partial contribution from Choice and no contribution from Advantage. At consummation, Choice added $457 million in assets, loans of $348 million, deposits of $289 million, core deposit intangible of $1.7 million, goodwill of $45 million, and one net new branch. At consummation, Advantage added $172 million in assets, loans of $88 million, deposits of $141 million, core deposit intangible of $1 million, goodwill of $12 million, and four branches.
The detailed financial discussion that follows focuses on 2020 results compared to 2019. See “2019 Compared to 2018” for the summary comparing 2019 and 2018 results. Some tabular information is shown for trends of three years or for five years as required under SEC regulations.
Overview
Nicolet provides 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 primarily through, as of year-end 2020, the 36 bank branch offices of its banking subsidiary, located in northeast and central Wisconsin and Menominee, Michigan.
The 2020 year was marked by significant events (health pandemic, large sudden rate drop by the Federal Reserve, unprecedented government stimulus, political changes and social issues, and other market and economic disruptions), volatility, and uncertainty, that turned 2020 into a very tactical year for Nicolet management. Management took several actions to respond: added $0.2 billion of liquidity (which later proved to not be necessary, leading to a reduction in non-deposit leverage in the second half of the year), temporarily (and later permanently) closed 8 branches, provided temporary relief to customers through loan payment modifications on nearly 1,000 loans (with only a fraction remaining on modified terms at year end), dramatically elevated the credit loss provision given pervading uncertainty (though slowed the provision in fourth quarter as potential deterioration of loan quality metrics initially anticipated had not materialized), channeled significant resources to originate PPP loans (peaking at 2,725 loans totaling $351 million during 2020) and residential mortgages (over $1 billion originated to consumers under atypical conditions), granted $1.25 million of aid to expedite funds to smaller businesses who would have otherwise waited for small PPP loans, kept people safe (with $0.6 million of expense in second quarter for onsite-bonuses, testing and protective supplies), and prioritized full return to on-site work by June to allow us to move forward on goals and improvements (with offsite workforce peaking at 52%, comprised of 34% remote and 18% paid to stay home and not work due to risk concerns or location closure). During 2020, we still executed on our acquisition strategy, completing the all-cash acquisition of Advantage. While we announced a merger agreement with a $0.7 billion bank in February 2020, we exercised discipline, mutually terminating that deal in May 2020, (given the level of uncertainty and pricing in the significantly depressed market that made the transaction unlikely to close) and incurred a $0.5 million charge. Nicolet has used acquisitions as part of its growth strategy over the past few years and has successfully integrated and realized cost efficiencies related to scale quickly after each acquisition.
In 2020, despite the turbulent year and through the many actions noted above, Nicolet delivered on growth, profitability, capital positioning, and sound asset quality management. At December 31, 2020, Nicolet had total assets of $4.6 billion, loans of $2.8 billion, deposits of $3.9 billion and stockholders’ equity of $539 million, representing increases over December 31, 2019 of 27%, 8%, 32% and 4%, in assets, loans, deposits and total equity, respectively, largely due to the significant increase in liquidity, and only partly due to the Advantage acquisition. At December 31, 2020, cash and cash equivalents grew significantly, up $0.6 billion to $0.8 billion or 18% of assets (compared to $0.2 billion or 5% of assets at year end 2019), while loans increased $0.2 billion and investments grew $0.1 billion, funded by the surge in deposits (up $956 million) over year end 2019. Asset quality remained sound, with nonperforming assets to assets of 0.29% at December 31, 2020 (down from 0.42% at year-end 2019), as the borrowing base has largely remained resilient, profitable and liquid in the uncertain times. The allowance for credit losses-loans grew to $32.2 million (1.15% of loans, or 1.24% of loans excluding PPP loans) compared to $14.0 million or 0.54% of loans at December 31, 2019. The large increase in the allowance resulted from the $10.3 million provision exceeding $1.4 million of net charge-offs (or 0.05% of average loans), and a $9.3 million addition upon adoption of the current expected credit losses (“CECL”) model. Nicolet repurchased approximately 646,700 shares of common stock for $40.5 million in 2020 under its common stock repurchase program, given the opportunity of a depressed market. At December 31, 2020 there remained $20.4 million authorized under the repurchase program, as modified. With total stockholders’ equity to assets of 11.85% at year-end 2020, Nicolet has capacity to act on targets of interest in relevant or growth markets that provide a path to or support our position as the lead-local community bank.
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For 2020, net income was record-breaking at $60.1 million (10% higher than $54.6 million for 2019), and return on average assets was 1.41% (compared to 1.75% for 2019), with 2020 impacted by the sizable increase in average assets (mainly cash). Diluted earnings per common share for 2020 was $5.70 (3% higher than 2019), benefiting from the stronger net income, while covering a 6% increase in average diluted shares, mostly due to the timing of the 1.2 million shares issued in the Choice acquisition net of strong repurchase activity throughout 2020 (totaling 0.6 million shares). Notably, second quarter 2020 net income unfavorably included $4 million of isolated expenses ($3 million after tax) related to the onset of the pandemic, a terminated acquisition and branch closure decisions. During second quarter 2019, net income favorably included $5.4 million (or $0.55 of diluted earnings per share) related to two one-time actions combined, the sale of 80% of Nicolet's equity investment in a data processing entity ($7.4 million after-tax gain) and $2.75 million retirement-related compensation declared to benefit all employees after that sale ($2.0 million after-tax cost).
Net income before taxes for 2020 was $80.9 million ($9.5 million or 13% higher than 2019), predominantly due to increased net interest income (up $13 million or 11% aided mainly on higher volumes, despite an 81bps decline in net interest margin between the years, dominated by the very high proportion of low-earning cash in total interest-earning assets), record net mortgage income (at $30 million versus $12 million in 2019) and strong wealth revenues (up $2 million or 13%), which more than covered a $10 million negative swing in net asset gains or losses (at $2 million net loss for 2020 versus $8 million net gain for 2019), higher credit loss provision (up $9 million) and a $4 million or 4% increase in overall expenses, evidencing diligent expense management and improved efficiencies in a difficult year.
For 2021, Nicolet’s focus will return to its long-term strategies, especially M&A, as we believe such opportunities have grown in light of industry stress, and we have remained well-positioned to capitalize on it through a solid core franchise, strong asset quality, and an experienced team. That said, when evaluating transactions, quantitative and qualitative factors need to make sense in combination with each other, including but not limited to the economics of the transaction, cultural and strategic fit, geographic and business line relevance, and current or potential talent. We will remain committed on driving growth in core earnings through our expanded customer base. Our objective is to achieve solid organic growth in loans, core deposits, wealth management services and other revenue lines within all our markets, in a cost-effective, profitable manner to sustain a healthy return on average assets. We plan to remain active on-site as a differentiator to many of our competitors, remain adaptable for our customers in the continuing uncertainty, and deliver on our long-term leadership succession plans. Additional resources are planned in 2021 for furthering automation and data analysis (to enhance customer experiences and company efficiencies and decision-making), for personnel expenses (in support of deepening talent and leadership in light of growth and succession needs), and for capital management (to balance safety and opportunity for the long-term). While Nicolet believes delivering strong earnings, return on assets, and disciplined capital management aligned with growth will provide upward pressure on our common stock performance throughout the year, ongoing uncertainties remain for 2021 across many environments (health, social, political and economic), which will likely heighten potential challenges for the year.
INCOME STATEMENT ANALYSIS
Net Interest Income
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. Tax-equivalent net interest income is a non-GAAP measure, but is a preferred industry measurement of net interest income (and is used in calculating a net interest margin) as it enhances the comparability of net interest income arising from taxable and tax-exempt sources. Tables 1, 2, and 3 present information to facilitate the review and discussion of selected average balance sheet items, tax-equivalent net interest income, interest rate spread, and net interest margin.
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Table 1: Average Balance Sheet and Net Interest Income Analysis - Tax-Equivalent Basis
| Years Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Average Balance | Interest | Average Yield/Rate | Average Balance | Interest | Average Yield/Rate | Average Balance | Interest | Average Yield/Rate | |||||||||||||||||||||||||||||||||||||||||||||
| ASSETS | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-earning assets | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| PPP Loans | $ | 220,544 | $ | 8,062 | 3.66 | % | $ | — | $ | — | — | % | $ | — | $ | — | — | % | |||||||||||||||||||||||||||||||||||
| Commercial-based loans ex PPP | 2,088,149 | 105,643 | 5.06 | % | 1,802,747 | 101,509 | 5.63 | % | 1,657,207 | 91,349 | 5.51 | % | |||||||||||||||||||||||||||||||||||||||||
| Retail-based loans | 478,894 | 22,776 | 4.76 | % | 454,286 | 24,206 | 5.33 | % | 470,263 | 22,791 | 4.85 | % | |||||||||||||||||||||||||||||||||||||||||
Total loans, including loan fees (1)(2) | 2,787,587 | 136,481 | 4.90 | % | 2,257,033 | 125,715 | 5.57 | % | 2,127,470 | 114,140 | 5.37 | % | |||||||||||||||||||||||||||||||||||||||||
| Investment securities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Taxable | 354,430 | 8,118 | 2.29 | % | 276,742 | 7,584 | 2.74 | % | 261,107 | 6,068 | 2.32 | % | |||||||||||||||||||||||||||||||||||||||||
Tax-exempt (2) | 135,779 | 2,961 | 2.18 | % | 132,419 | 2,927 | 2.21 | % | 149,900 | 3,259 | 2.17 | % | |||||||||||||||||||||||||||||||||||||||||
| Total investment securities | 490,209 | 11,079 | 2.26 | % | 409,161 | 10,511 | 2.57 | % | 411,007 | 9,327 | 2.27 | % | |||||||||||||||||||||||||||||||||||||||||
| Other interest-earning assets | 572,016 | 2,611 | 0.46 | % | 128,447 | 3,405 | 2.65 | % | 133,083 | 3,220 | 2.42 | % | |||||||||||||||||||||||||||||||||||||||||
| Total non-loan earning assets | 1,062,225 | 13,690 | 1.29 | % | 537,608 | 13,916 | 2.59 | % | 544,090 | 12,547 | 2.31 | % | |||||||||||||||||||||||||||||||||||||||||
| Total interest-earning assets | 3,849,812 | $ | 150,171 | 3.90 | % | 2,794,641 | $ | 139,631 | 5.00 | % | 2,671,560 | $ | 126,687 | 4.74 | % | ||||||||||||||||||||||||||||||||||||||
| Other assets, net | 405,395 | 331,894 | 305,897 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 4,255,207 | $ | 3,126,535 | $ | 2,977,457 | |||||||||||||||||||||||||||||||||||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Savings | $ | 422,171 | $ | 700 | 0.17 | % | $ | 318,525 | $ | 1,528 | 0.48 | % | $ | 285,777 | $ | 1,181 | 0.41 | % | |||||||||||||||||||||||||||||||||||
| Interest-bearing demand | 562,370 | 3,938 | 0.70 | % | 486,139 | 4,852 | 1.00 | % | 524,924 | 4,530 | 0.86 | % | |||||||||||||||||||||||||||||||||||||||||
| Money market accounts (“MMA”) | 749,877 | 1,502 | 0.20 | % | 582,646 | 3,676 | 0.63 | % | 634,947 | 3,926 | 0.62 | % | |||||||||||||||||||||||||||||||||||||||||
| Core time deposits | 390,216 | 6,023 | 1.54 | % | 402,141 | 8,136 | 2.02 | % | 337,100 | 5,266 | 1.56 | % | |||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing core deposits | 2,124,634 | 12,163 | 0.57 | % | 1,789,451 | 18,192 | 1.02 | % | 1,782,748 | 14,903 | 0.84 | % | |||||||||||||||||||||||||||||||||||||||||
| Brokered deposits | 289,489 | 4,478 | 1.55 | % | 75,159 | 773 | 1.03 | % | 91,379 | 517 | 0.57 | % | |||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing deposits | 2,414,123 | 16,641 | 0.69 | % | 1,864,610 | 18,965 | 1.02 | % | 1,874,127 | 15,420 | 0.82 | % | |||||||||||||||||||||||||||||||||||||||||
| PPPLF | 161,634 | 571 | 0.35 | % | — | — | — | % | — | — | — | % | |||||||||||||||||||||||||||||||||||||||||
| Other interest-bearing liabilities | 84,751 | 2,652 | 3.13 | % | 75,029 | 3,545 | 4.72 | % | 77,719 | 3,469 | 4.46 | % | |||||||||||||||||||||||||||||||||||||||||
| Total wholesale funding | 246,385 | 3,223 | 1.31 | % | 75,029 | 3,545 | 4.72 | % | 77,719 | 3,469 | 4.46 | % | |||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 2,660,508 | 19,864 | 0.75 | % | 1,939,639 | 22,510 | 1.16 | % | 1,951,846 | 18,889 | 0.97 | % | |||||||||||||||||||||||||||||||||||||||||
| Noninterest-bearing demand deposits | 1,025,625 | 733,661 | 634,825 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other liabilities | 41,646 | 29,283 | 19,151 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Stockholders’ equity | 527,428 | 423,952 | 371,635 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 4,255,207 | $ | 3,126,535 | $ | 2,977,457 | |||||||||||||||||||||||||||||||||||||||||||||||
| Tax-equivalent net interest income and rate spread | $ | 130,307 | 3.15 | % | $ | 117,121 | 3.84 | % | $ | 107,798 | 3.77 | % | |||||||||||||||||||||||||||||||||||||||||
| Tax-equivalent adjustment and net free funds | 969 | 0.23 | % | 1,043 | 0.35 | % | 1,150 | 0.27 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Net interest income and net interest margin | $ | 129,338 | 3.38 | % | $ | 116,078 | 4.19 | % | $ | 106,648 | 4.04 | % | |||||||||||||||||||||||||||||||||||||||||
| Selected Additional Information: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total loans ex PPP | $ | 2,567,043 | $ | 128,419 | 5.00 | % | $ | 2,257,033 | $ | 125,715 | 5.57 | % | $ | 2,127,470 | $ | 114,140 | 5.37 | % | |||||||||||||||||||||||||||||||||||
| Total interest-earning assets ex PPP | 3,629,268 | 142,109 | 3.92 | % | 2,794,641 | 139,631 | 5.00 | % | 2,671,560 | 126,687 | 4.74 | % | |||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities ex PPPLF | 2,498,874 | 19,293 | 0.77 | % | 1,939,639 | 22,510 | 1.16 | % | 1,951,846 | 18,889 | 0.97 | % | |||||||||||||||||||||||||||||||||||||||||
| Net interest rate spread ex PPP & PPPLF | 3.15 | % | 3.84 | % | 3.77 | % | |||||||||||||||||||||||||||||||||||||||||||||||
(1)Nonaccrual loans and loans held for sale are included in the daily average loan balances outstanding.
(2)The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 21% and adjusted for the disallowance of interest expense.
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Table 2: Volume/Rate Variance - Tax-Equivalent Basis
| (in thousands) | 2020 Compared to 2019 Increase (Decrease) Due to Changes in | 2019 Compared to 2018 Increase (Decrease) Due to Changes in | |||||||||||||||||||||||||||||||||
| Volume | Rate | Net (1) | Volume | Rate | Net (1) | ||||||||||||||||||||||||||||||
| Interest-earning assets | |||||||||||||||||||||||||||||||||||
| PPP Loans | $ | 8,062 | $ | — | $ | 8,062 | $ | — | $ | — | $ | — | |||||||||||||||||||||||
| Commercial-based loans ex PPP | 18,251 | (14,117) | 4,134 | 7,114 | 3,046 | 10,160 | |||||||||||||||||||||||||||||
| Retail-based loans | 1,300 | (2,730) | (1,430) | 233 | 1,182 | 1,415 | |||||||||||||||||||||||||||||
Total loans, including loan fees (2) (3) | 27,613 | (16,847) | 10,766 | 7,347 | 4,228 | 11,575 | |||||||||||||||||||||||||||||
| Investment securities: | |||||||||||||||||||||||||||||||||||
| Taxable | 1,175 | (641) | 534 | 638 | 878 | 1,516 | |||||||||||||||||||||||||||||
Tax-exempt (3) | 74 | (40) | 34 | (385) | 53 | (332) | |||||||||||||||||||||||||||||
| Total investment securities | 1,249 | (681) | 568 | 253 | 931 | 1,184 | |||||||||||||||||||||||||||||
| Other interest-earning assets | 2,894 | (3,688) | (794) | (33) | 218 | 185 | |||||||||||||||||||||||||||||
| Total non-loan earning assets | 4,143 | (4,369) | (226) | 220 | 1,149 | 1,369 | |||||||||||||||||||||||||||||
| Total interest-earning assets | $ | 31,756 | $ | (21,216) | $ | 10,540 | $ | 7,567 | $ | 5,377 | $ | 12,944 | |||||||||||||||||||||||
| Interest-bearing liabilities | |||||||||||||||||||||||||||||||||||
| Savings | $ | 389 | $ | (1,217) | $ | (828) | $ | 145 | $ | 202 | $ | 347 | |||||||||||||||||||||||
| Interest-bearing demand | 683 | (1,597) | (914) | (352) | 674 | 322 | |||||||||||||||||||||||||||||
| MMA | 842 | (3,016) | (2,174) | (329) | 79 | (250) | |||||||||||||||||||||||||||||
| Core time deposits | (235) | (1,878) | (2,113) | 1,134 | 1,736 | 2,870 | |||||||||||||||||||||||||||||
| Total interest-bearing core deposits | 1,679 | (7,708) | (6,029) | 598 | 2,691 | 3,289 | |||||||||||||||||||||||||||||
| Brokered deposits | 3,148 | 557 | 3,705 | (105) | 361 | 256 | |||||||||||||||||||||||||||||
| Total interest-bearing deposits | 4,827 | (7,151) | (2,324) | 493 | 3,052 | 3,545 | |||||||||||||||||||||||||||||
| PPPLF | 571 | — | 571 | — | — | — | |||||||||||||||||||||||||||||
| Other interest-bearing liabilities | 37 | (930) | (893) | (32) | 108 | 76 | |||||||||||||||||||||||||||||
| Total wholesale funding | 608 | (930) | (322) | (32) | 108 | 76 | |||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 5,435 | (8,081) | (2,646) | 461 | 3,160 | 3,621 | |||||||||||||||||||||||||||||
| Net interest income | $ | 26,321 | $ | (13,135) | $ | 13,186 | $ | 7,106 | $ | 2,217 | $ | 9,323 | |||||||||||||||||||||||
(1)The change in interest due to both rate and volume has been allocated in proportion to the relationship of dollar amounts of change in each.
(2)Nonaccrual loans and loans held for sale are included in the daily average loan balances outstanding.
(3)The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 21% and adjusted for the disallowance of interest expense.
Table 3: Interest Rate Spread, Margin and Average Balance Mix - Tax-Equivalent Basis
| Years Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2020 Average | 2019 Average | 2018 Average | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance | % of Earning Assets | Yield/Rate | Balance | % of Earning Assets | Yield/Rate | Balance | % of Earning Assets | Yield/Rate | |||||||||||||||||||||||||||||||||||||||||||||
| Loans | $ | 2,787,587 | 72 | % | 4.90 | % | $ | 2,257,033 | 81 | % | 5.57 | % | $ | 2,127,470 | 80 | % | 5.37 | % | |||||||||||||||||||||||||||||||||||
| Non-loan earning assets | 1,062,225 | 28 | % | 1.29 | % | 537,608 | 19 | % | 2.59 | % | 544,090 | 20 | % | 2.31 | % | ||||||||||||||||||||||||||||||||||||||
| Total interest-earning assets | $ | 3,849,812 | 100 | % | 3.90 | % | $ | 2,794,641 | 100 | % | 5.00 | % | $ | 2,671,560 | 100 | % | 4.74 | % | |||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities | $ | 2,660,508 | 69 | % | 0.75 | % | $ | 1,939,639 | 69 | % | 1.16 | % | $ | 1,951,846 | 73 | % | 0.97 | % | |||||||||||||||||||||||||||||||||||
| Noninterest-bearing funds, net | 1,189,304 | 31 | % | 855,002 | 31 | % | 719,714 | 27 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total funds sources | $ | 3,849,812 | 100 | % | 0.54 | % | $ | 2,794,641 | 100 | % | 0.84 | % | $ | 2,671,560 | 100 | % | 0.73 | % | |||||||||||||||||||||||||||||||||||
| Interest rate spread | 3.15 | % | 3.84 | % | 3.77 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Contribution from net free funds | 0.23 | % | 0.35 | % | 0.27 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Net interest margin | 3.38 | % | 4.19 | % | 4.04 | % | |||||||||||||||||||||||||||||||||||||||||||||||
Comparison of 2020 versus 2019
Net interest income was up 11% over 2019, despite an 81 bps decline in net interest margin. Overall asset volumes increased net interest income while the mix of interest-earning assets (particularly the very high cash levels) squeezed the related net interest margin. In general, the lower interest rate environment pressured both net interest income and net interest margin.
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The interest rate environment experienced dramatic change in 2020. Prior to the pandemic, the Federal Reserve steadily raised short-term interest rates during 2017 and 2018 in support of a growing economy (up 175 bps total to 2.50% at December 31, 2018), and then reduced rates by 75 bps in three moves during the second half of 2019 (to 1.75% at December 31, 2019) largely responding to global issues and slowing growth, which contributed to a flattened yield curve with periods of inversion. In response to the pandemic in March 2020, the Federal Reserve dropped short-term rates by 150 bps (to 25 bps at March 31, 2020) in two emergency moves, which brought slope back into the yield curve, though still fairly flat. Comparatively, short-term rates were 150 bps lower at December 31, 2020 than at December 31, 2019. While the following paragraphs will discuss the comparison of 2020 and 2019, we expect that the pandemic impacts will continue to evolve and pressure future quarters even further, including continued margin pressure in the low rate environment and potential unusual loan or deposit volume or pricing impacts.
At the onset of the pandemic, but prior to the announcement of government stimulus, we added liquidity to ensure we could meet customer needs. The action demonstrated our capacity to support our communities, but proved later to not be necessary, leading us to reduce non-deposit leverage in the second half of 2020. Efforts to minimize pressure on net interest income during the changes throughout 2020 included prudent pricing actions on deposits and loans, allowing brokered deposits to mature without renewal, prepayment of selected FHLB advances, and full payback of the PPPLF funding (approximately $335 million used for 5 months at a cost of 35 bps). In addition, we fully redeemed our subordinated notes ($12 million at 5% fixed) in November 2020 and one of our junior subordinated debenture issuances ($6 million at 8% fixed) in December 2020, which combined will reduce annual interest expense by approximately $1.1 million going forward.
Tax-equivalent net interest income was $130.3 million for 2020, up $13.2 million (11%), compared to 2019, comprised of net interest income of $129.3 million ($13.3 million or 11% higher than 2019) and a $1.0 million tax-equivalent adjustment (down nearly $0.1 million between the years). The $13.2 million increase in tax-equivalent net interest income was comprised of $10.6 million higher interest income and $2.6 million lower interest expense. Higher volumes added $26.3 million to net interest income, including a $31.8 million increase to interest income on higher interest-earning assets (mostly from higher loan volumes, due to the inclusion of loans acquired with Choice and Advantage, as well as PPP loans), offset partly by a $5.4 million increase to interest expense on higher interest-bearing liabilities (mostly from higher deposit volumes also related to the inclusion of Choice and Advantage, as well as overall deposit growth from increased liquidity of consumers and businesses). Rate changes reduced net interest income $13.1 million, comprised of $21.2 million lower interest income (with $16.8 million was from lower rates on loans and $3.7 million from the dramatically reduced cash rate earned), but also lower interest expense on funding of $8.1 million (including $7.7 million savings from non-brokered interest-bearing core deposits and $0.9 million savings from wholesale funding, partly offset by $0.6 million more interest expense from term brokered deposits).
The interest rate spread decreased 69 bps between the periods, as the interest-earning asset yield decreased 110 bps to 3.90% and the cost of funds declined favorably 41 bps to 0.75%. The significantly higher mix of cash assets (to 15% of interest-earning assets versus 4% in 2019) combined with their dramatic decline in yield (to 0.46% versus 2.65% in 2019), has pressured the net interest margin most. Loans yielded 4.90% for 2020, down 67 bps from 2019, in part from the inclusion of lower-earning PPP loans (yielding 3.66%) in 2020, while all other loans earned 5.00%, down 57 bps from 2019. Investments yielded 2.26%, 31 bps lower than 2019. The 41 bps favorable decline in the 2020 cost of funds was primarily attributable to prudent pricing actions on core interest-bearing deposits (down 45 bps to 0.57%) and lower wholesale funding rates (down 159 bps to 3.13% for funding costs excluding PPPLF), offset partly by higher-costing brokered deposits (acquired with the Choice acquisition and procured with the March-April 2020 liquidity actions under competitive conditions). The contribution from net free funds decreased 12 bps, due mostly to the reduced value in the lower interest rate environment, though offset partly by the increase in average net free funds (largely from average noninterest-bearing demand deposits and stockholders' equity) between the years. As a result, the net interest margin was 3.38% for 2020, down 81 bps compared to 4.19% for 2019.
Average interest-earning assets were $3.8 billion for 2020, $1.1 billion (38%) higher than 2019, primarily due to the timing of the acquisitions (Choice in November 2019 and Advantage in August 2020), addition of PPP loans (beginning in second quarter 2020), and significantly higher cash starting in second quarter 2020. Average loans increased $531 million (24%) to $2.8 billion (which includes $348 million of Choice loans at acquisition, $88 million of Advantage loans at acquisition, and $186 million of net PPP loans at December 31, 2020), investments increased $81 million, and other interest-earning assets (which are predominantly cash) increased $444 million. The mix of average interest-earning assets shifted to lower-yielding assets, at 72% loans (comprised of 6% PPP loans and 66% all other loans), 13% investments, and 15% other interest-earning assets (mostly cash) for 2020, compared to 81%, 15%, and 4%, respectively, for 2019.
Tax-equivalent interest income was $150.2 million, up $10.5 million (8%) over 2019, while the related interest-earning asset yield decreased 110 bps to 3.90%. Interest income on loans increased $10.8 million (9%) over 2019, aided by strong volumes, including the Choice and Advantage acquisitions, as well as PPP loans. The 2020 loan yield was 4.90%, down 67 bps from 2019, largely from the significantly lower interest rate environment impacting yields on new, renewed, and variable rate loans, as well as from inclusion of PPP loans at a 3.66% yield. Between the years, interest income on non-loan earning assets combined decreased $0.2
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million to $13.7 million, impacted by a 130 bps decline in the yield (to 1.29%) in the lower rate environment, partially offset by higher average volumes (up 98%) from the significantly higher cash.
Average interest-bearing liabilities were $2.7 billion for 2020, an increase of $721 million (37%) from 2019, primarily due to the timing of the acquisitions (Choice in November 2019 and Advantage in August 2020), as well as the significant increase in deposits from government stimulus activities and deposited PPP loan proceeds. Average core interest-bearing deposits increased $335 million, brokered deposits grew $214 million, and funding increased $171 million (mostly PPPLF funding). The mix of average interest-bearing liabilities was 80% core deposits, 11% brokered deposits, and 9% other funding for 2020, compared to 92% core deposits, 4% brokered deposits, and 4% other funding in 2019, with the mix changes (especially increased money markets and brokered deposits) influenced by the composition of the $289 million of Choice deposits acquired, and the procurement of brokered deposits in March-April 2020 as part of previously discussed liquidity actions.
Interest expense was $20 million for 2020, down $3 million (12%) from 2019, on larger average interest-bearing liabilities volumes (up 37% to $2.7 billion) but at a lower overall cost (down 41 bps to 0.75%). Interest expense on deposits decreased $2.3 million from 2019 given 29% higher average interest-bearing deposit balances, but at a lower cost (down 33 bps to 0.69%). The 2020 cost of savings, interest-bearing demand, money market accounts, and core time deposits decreased from 2019 by 31 bps, 30 bps, 43 bps, and 48 bps, respectively, as product rate changes were made in the lower interest rate environment, and brokered deposits cost 52 bps more than 2019 largely from higher-costing term brokered funds acquired with the Choice acquisition in November 2019 and procured during March-April 2020 under competitive conditions as part of previously discussed liquidity actions. Interest expense on other interest-bearing liabilities decreased $0.3 million (9%), as additional interest expense on higher average balances (up $171 million) was substantially offset by lower rates (down 341 bps to 1.31%), mostly impacted by the inclusion of the low-costing PPPLF (average balance of $162 million for 2020 at a 0.35% rate), and variable rate debt repricing and maturing advances replaced in the lower rate environment.
Provision for Credit Losses
The provision for credit losses in 2020 was $10.3 million, exceeding $1.4 million of net charge-offs. Comparatively, 2019 provision for credit losses and net charge-offs were $1.2 million and $0.4 million, respectively. The increase in the provision for credit losses between the years was largely due to the unprecedented economic disruptions and uncertainty surrounding the COVID pandemic, and to a lesser extent, to the acquisition of Advantage.
The provision for credit losses is predominantly a function of Nicolet’s methodology and judgment as to qualitative and quantitative factors used to determine the appropriateness of the ACL-Loans. The appropriateness of the ACL-Loans is affected by changes in the size and character of the loan portfolio, changes in levels of collateral-dependent and other nonperforming loans, historical losses and delinquencies in each portfolio segment, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing and future economic conditions, the fair value of underlying collateral, and other factors which could affect potential credit losses. For additional information regarding asset quality and the ACL-Loans, see “BALANCE SHEET ANALYSIS — Loans,” and “— Allowance for Credit Losses - Loans” and “—Nonperforming Assets.”
Noninterest Income
Table 4: Noninterest Income
| (in thousands) | Years Ended December 31, | Change From Prior Year | |||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | $ Change 2020 | % Change 2020 | $ Change 2019 | % Change 2019 | |||||||||||||||||||||||||||||||||||
| Trust services fee income | $ | 6,463 | $ | 6,227 | $ | 6,498 | $ | 236 | 4 | % | $ | (271) | (4) | % | |||||||||||||||||||||||||||
| Brokerage fee income | 9,753 | 8,115 | 7,042 | 1,638 | 20 | % | 1,073 | 15 | % | ||||||||||||||||||||||||||||||||
| Mortgage income, net | 29,807 | 11,878 | 6,344 | 17,929 | 151 | % | 5,534 | 87 | % | ||||||||||||||||||||||||||||||||
| Service charges on deposit accounts | 4,208 | 4,824 | 4,845 | (616) | (13) | % | (21) | — | % | ||||||||||||||||||||||||||||||||
| Card interchange income | 6,998 | 6,498 | 5,665 | 500 | 8 | % | 833 | 15 | % | ||||||||||||||||||||||||||||||||
| Bank owned life insurance (“BOLI”) income | 2,710 | 2,369 | 2,418 | 341 | 14 | % | (49) | (2) | % | ||||||||||||||||||||||||||||||||
| Other income | 4,492 | 5,559 | 5,528 | (1,067) | (19) | % | 31 | 1 | % | ||||||||||||||||||||||||||||||||
| Noninterest income without net gains | 64,431 | 45,470 | 38,340 | 18,961 | 42 | % | 7,130 | 19 | % | ||||||||||||||||||||||||||||||||
| Asset gains (losses), net | (1,805) | 7,897 | 1,169 | (9,702) | N/M | 6,728 | N/M | ||||||||||||||||||||||||||||||||||
| Total noninterest income | $ | 62,626 | $ | 53,367 | $ | 39,509 | $ | 9,259 | 17 | % | $ | 13,858 | 35 | % | |||||||||||||||||||||||||||
| Trust services fee income & Brokerage fee income combined | $ | 16,216 | $ | 14,342 | $ | 13,540 | $ | 1,874 | 13 | % | $ | 802 | 6 | % | |||||||||||||||||||||||||||
| N/M means not meaningful. | |||||||||||||||||||||||||||||||||||||||||
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Comparison of 2020 versus 2019
Noninterest income was $62.6 million for 2020, an increase of $9.3 million (17%) over 2019, which included a $7.4 million gain on the equity investment sale previously noted in the “Overview” section. Noninterest income excluding net asset gains increased $19.0 million (42%) between 2020 and 2019. Notable contributions to the change in noninterest income were:
•Trust services fee income and brokerage fee income combined were $16.2 million for 2020, up $1.9 million (13%) from 2019, consistent with the growth in assets under management.
•Mortgage income represents net gains received from the sale of residential real estate loans into the secondary market, capitalized mortgage servicing rights (“MSRs”), servicing fees net of MSR amortization, fair value marks on the mortgage interest rate lock commitments and forward commitments (“mortgage derivatives”), and MSR valuation changes, if any. Net mortgage income was $29.8 million for 2020, up $17.9 million (151%) over 2019, predominantly from higher sale gains and capitalized gains combined (up $18.9 million or 168%, commensurate with the increase in volumes sold into the secondary market, aided by the current refinance boom and better pricing between the years), partially offset by a $1.0 million MSR asset valuation allowance given faster paydown activity. See also “Off-Balance Sheet Arrangements, Lending-Related Commitments and Contractual Obligations” and Note 6, “Goodwill and Other Intangibles and Mortgage Servicing Rights” in the Notes to Consolidated Financial Statements, under Part II, Item 8
•Service charges on deposit accounts were down $0.6 million (13%) to $4.2 million for 2020, mainly as we waived certain fees during second quarter 2020 to provide economic relief to our customers.
•Card interchange income grew $0.5 million (8%) to $7.0 million in 2020 due to higher volume and activity.
•BOLI income increased $0.3 million (14%) to $2.7 million for 2020, attributable to the difference in BOLI death benefits received in each year (up $0.2 million) and income on higher average balances from $5 million new BOLI purchased in mid-2019, $6 million BOLI acquired with Choice, and $3 million BOLI acquired with Advantage.
•Other income of $4.5 million was down $1.1 million (19%) from 2019, largely due to $0.5 million lower income from the smaller equity interest in a data processing entity after the partial sale in 2019 and $0.3 million attributable to the fee earned on a customer loan interest rate swap in 2019.
•The $1.8 million net asset losses in 2020 were comprised primarily of $1.0 million market losses on equity securities held in the lower, more volatile market and $0.9 million of net losses on branch other real estate owned write-downs. Net asset gains in 2019 of $7.9 million were comprised primarily of the $7.4 million gain on the equity investment sale in second quarter 2019 and $1.1 million of favorable fair value marks on equity securities, partially offset by losses of $0.6 million on the disposal and write-down of fixed assets, OREO, and an other investment. Additional information on the net gains is also included in Note 15, “Asset Gains (Losses), Net,” in the Notes to Consolidated Financial Statements, under Part II, Item 8.
Noninterest Expense
Table 5: Noninterest Expense
| ($ in thousands) | Years Ended December 31, | Change From Prior Year | |||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | Change 2020 | % Change 2020 | Change 2019 | % Change 2019 | |||||||||||||||||||||||||||||||||||
| Personnel | $ | 57,121 | $ | 54,437 | $ | 49,476 | $ | 2,684 | 5 | % | $ | 4,961 | 10 | % | |||||||||||||||||||||||||||
| Occupancy, equipment and office | 16,718 | 14,788 | 14,574 | 1,930 | 13 | % | 214 | 1 | % | ||||||||||||||||||||||||||||||||
| Business development and marketing | 5,396 | 5,685 | 5,324 | (289) | (5) | % | 361 | 7 | % | ||||||||||||||||||||||||||||||||
| Data processing | 10,694 | 9,950 | 9,514 | 744 | 7 | % | 436 | 5 | % | ||||||||||||||||||||||||||||||||
| Intangibles amortization | 3,567 | 3,872 | 4,389 | (305) | (8) | % | (517) | (12) | % | ||||||||||||||||||||||||||||||||
| Other expense | 7,223 | 8,067 | 6,481 | (844) | (10) | % | 1,586 | 24 | % | ||||||||||||||||||||||||||||||||
| Total noninterest expense | $ | 100,719 | $ | 96,799 | $ | 89,758 | $ | 3,920 | 4 | % | $ | 7,041 | 8 | % | |||||||||||||||||||||||||||
| Non-personnel expenses | $ | 43,598 | $ | 42,362 | $ | 40,282 | $ | 1,236 | 3 | % | $ | 2,080 | 5 | % | |||||||||||||||||||||||||||
| Average full-time equivalent employees | 553 | 560 | 553 | (7) | (1) | % | 7 | 1 | % | ||||||||||||||||||||||||||||||||
Comparison of 2020 versus 2019
Noninterest expense was $100.7 million, an increase of $3.9 million (4%) over 2019, with second quarter 2020 including $4 million of isolated expenses related to the onset of the pandemic, a terminated acquisition, and branch closure decisions. Personnel costs increased $2.7 million, and non-personnel expenses combined increased $1.2 million over 2019. Notable contributions to the change in noninterest expense were:
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•Personnel expense (including salaries, overtime, cash and equity incentives, and employee benefit and payroll-related expenses) was $57.1 million for 2020, an increase of $2.7 million (5%) over 2019. Salaries increased $2.3 million (7%) over 2019, of which $0.6 million was attributable to branch closure severances and on-site bonus pay in second quarter 2020, and $1.7 million (representing a 5% increase over 2019) was due to merit increases and hires between the years. Cash and equity award incentives increased $1.5 million, while retirement-based compensation (401k, profit sharing and nonqualified deferred compensation) declined $1.0 million between the years, rewarding strong performance of both years and matching the mix of incentive compensation to be meaningful to recipients. Overtime pay doubled to $0.6 million (up $0.3 million over 2019), largely to cover the effort of processing PPP originations and significant mortgage volume. All other fringe benefits combined declined $0.4 million from 2019, mainly on lower health costs between the years.
•Occupancy, equipment and office expense was $16.7 million for 2020, up $1.9 million (13%) from 2019, with 2020 including $0.5 million of accelerated depreciation and write-offs related to the branch closures, higher expense for software and technology to drive operational efficiencies and enhance products or services, and for additional licenses and equipment to expand remote workers in response to the pandemic. 2019 also included $0.4 million of accelerated depreciation for branch facility upgrades.
•Business development and marketing expense was $5.4 million for 2020, down $0.3 million (5%), largely due to lower business development costs from less travel and entertainment during the pandemic, partly offset by $1.25 million for the micro-grant program.
•Data processing expense was $10.7 million for 2020, up $0.7 million (7%) over 2019, mostly due to volume-based increases in core processing charges.
•Intangible amortization decreased $0.3 million mainly from declining amortization on the aging intangibles of previous acquisitions, partly offset by amortization from the new intangibles of the August 2020 Advantage and November 2019 Choice acquisitions.
•Other expense was $7.2 million for 2020, down $0.8 million (10%) from 2019. Other expense for 2020 included $1.0 million of lease termination charges related to the branch closures and $0.5 million to terminate the Commerce merger agreement. Other expense for 2019 included a $0.7 million lease termination charge for the closure of Nicolet's Oshkosh branch in conjunction with the Choice acquisition, an $0.8 million full write-off of non-bank goodwill, and $0.7 million related to a fraud loss contingency.
Income Taxes
Income tax expense was $20.5 million, up 4.0 million (24%) over 2019, partly due to 13% higher pre-tax earnings. The 2020 effective tax rate was 25.3%, higher than 23.0% for 2019. The increase in effective tax rate was due to the favorable tax treatment of the partial equity investment sale of a data processing company in 2019, as well as the change in tax benefit on stock-based compensation (see Note 10, “Stock-Based Compensation” for additional information on the tax benefit on stock-based compensation), and nondeductible compensation from compensation limits between the years.
The accounting for income taxes requires deferred income taxes to 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. This analysis involves the use of estimates, assumptions, interpretation, and judgment concerning accounting pronouncements and federal and state tax codes; therefore, income taxes are considered a critical accounting policy. At December 31, 2020 and 2019, no valuation allowance was determined to be necessary. Additional information on the subjectivity of income taxes is discussed further under “Critical Accounting Policies-Income Taxes.” The Company’s accounting policy for income taxes are described in Note 1, “Nature of Business and Significant Accounting Policies,” and additional disclosures relative to income taxes are included in Note 12, “Income Taxes” in the Notes to Consolidated Financial Statements, under Part II, Item 8.
BALANCE SHEET ANALYSIS
Loans
Nicolet services a diverse customer base throughout northeastern and central 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. The Company concentrates on originating loans in its local markets and assisting current loan customers. Nicolet actively utilizes government loan programs such as those provided by the U.S. Small Business Administration (“SBA”), including the Paycheck Protection Program, to help customers with current economic conditions and positioning their businesses for the future. In addition to the discussion that follows, accounting policies for loans are described in Note 1, “Nature of Business and Significant Accounting Policies,” and additional disclosures are included in Note 4, “Loans, Allowance for Credit Losses - Loans, and Credit Quality,” in the Notes to Consolidated Financial Statements, under Part II, Item 8.
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Table 6: Period End Loan Composition
| December 31, 2020 | December 31, 2019 | December 31, 2018 | December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | Amount | % of Total | Amount | % of Total | Amount | % of Total | Amount | % of Total | Amount | % of Total | |||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial & industrial | $ | 750,718 | 27 | % | $ | 806,189 | 31 | % | $ | 684,920 | 32 | % | $ | 637,337 | 30 | % | $ | 428,270 | 28 | % | |||||||||||||||||||||||||||||||||||||||
| PPP loans | 186,016 | 7 | % | — | — | % | — | — | % | — | — | % | — | — | % | ||||||||||||||||||||||||||||||||||||||||||||
| Owner-occupied CRE | 521,300 | 19 | % | 496,372 | 19 | % | 441,353 | 20 | % | 430,043 | 21 | % | 360,227 | 23 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Agricultural | 109,629 | 4 | % | 95,450 | 4 | % | 89,069 | 4 | % | 87,233 | 5 | % | 80,001 | 5 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial | 1,567,663 | 57 | % | 1,398,011 | 54 | % | 1,215,342 | 56 | % | 1,154,613 | 56 | % | 868,498 | 56 | % | ||||||||||||||||||||||||||||||||||||||||||||
| CRE investment | 460,721 | 16 | % | 443,218 | 17 | % | 343,652 | 16 | % | 314,463 | 15 | % | 195,879 | 12 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Construction & land development | 131,283 | 5 | % | 92,970 | 4 | % | 80,599 | 4 | % | 89,660 | 4 | % | 74,988 | 5 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial real estate | 592,004 | 21 | % | 536,188 | 21 | % | 424,251 | 20 | % | 404,123 | 19 | % | 270,867 | 17 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial-based loans | 2,159,667 | 78 | % | 1,934,199 | 75 | % | 1,639,593 | 76 | % | 1,558,736 | 75 | % | 1,139,365 | 73 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Residential construction | 41,707 | 1 | % | 54,403 | 2 | % | 30,926 | 1 | % | 36,995 | 2 | % | 23,392 | 1 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Residential first mortgage | 444,155 | 16 | % | 432,167 | 17 | % | 357,841 | 17 | % | 363,352 | 17 | % | 300,304 | 19 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Residential junior mortgage | 111,877 | 4 | % | 122,771 | 5 | % | 111,328 | 5 | % | 106,027 | 5 | % | 91,331 | 6 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Residential real estate | 597,739 | 21 | % | 609,341 | 24 | % | 500,095 | 23 | % | 506,374 | 24 | % | 415,027 | 26 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Retail & other | 31,695 | 1 | % | 30,211 | 1 | % | 26,493 | 1 | % | 22,815 | 1 | % | 14,515 | 1 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Retail-based loans | 629,434 | 22 | % | 639,552 | 25 | % | 526,588 | 24 | % | 529,189 | 25 | % | 429,542 | 27 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total loans | $ | 2,789,101 | 100 | % | $ | 2,573,751 | 100 | % | $ | 2,166,181 | 100 | % | $ | 2,087,925 | 100 | % | $ | 1,568,907 | 100 | % | |||||||||||||||||||||||||||||||||||||||
| Total loans ex. PPP loans | $ | 2,603,085 | 93 | % | $ | 2,573,751 | 100 | % | $ | 2,166,181 | 100 | % | $ | 2,087,925 | 100 | % | $ | 1,568,907 | 100 | % | |||||||||||||||||||||||||||||||||||||||
Total loans were $2.8 billion at December 31, 2020, an increase of $215 million (8%), compared to total loans of $2.6 billion at December 31, 2019. During 2020, we acquired Advantage, which added total loans of $88 million at acquisition. In addition, we originated 2,725 PPP loans totaling $351 million, bearing a 1% contractual rate, and earned a $12.3 million fee, of which $5.7 million was accreted into interest income during 2020. At December 31, 2020, the net carrying value of PPP loans was $186 million, or 7% of loans, with the decline in balance coming almost exclusively from SBA loan forgiveness, boosting overall borrower equity in their businesses. Given strong participation in the PPP and caution around debt levels, utilization of conventional lines of credit fell. For the first time in recent history, commercial lines of credit declined between year-end periods to $221 million (down $104 million or 32% from December 31, 2019). Excluding PPP loans and commercial lines of credit, all other loans combined increased $133 million (6%) over December 31, 2019 (or up 2%, further excluding loans acquired from Advantage).
As noted in Table 6 above, year-end 2020 loans were broadly 78% commercial-based and 22% retail-based compared to 75% commercial-based and 25% retail-based at year-end 2019. 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, PPP loans, 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, including the PPP loans, continue to be the largest segment of Nicolet’s portfolio, representing 34% of the portfolio at year-end 2020.
Owner-occupied CRE loans represented 19% of loans at year-end 2020, unchanged from year-end 2019. 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 loans consist of loans secured by farmland and the 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. These loans represented 4% of loans at year-end 2020, unchanged from a year ago.
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. These loans represented 16% of loans at December 31, 2020, compared to 17% of loans at year-end 2019.
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Loans in the construction and land development portfolio represented 5% of total loans at year-end 2020. 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.
On a combined basis, Nicolet’s residential real estate loans represented 21% of total loans at year-end 2020 compared to 24% of total loans at year-end 2019. Residential first mortgage loans include conventional first-lien home mortgages. Residential junior mortgage loans consist of home equity lines and term loans secured by junior mortgage liens. As part of its management of originating residential mortgage loans, the vast majority of Nicolet’s long-term, fixed-rate residential first mortgage loans are sold in the secondary market with the servicing rights retained. Nicolet’s mortgage loans are typically of high quality and have historically had low net charge-off rates.
Loans in the retail and other classification represented approximately 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.
Factors that are important to managing overall credit quality are sound loan underwriting and administration, systematic monitoring of existing loans and commitments, effective loan review on an ongoing basis, early problem loan identification and remedial action to minimize losses, an appropriate ACL-Loans, and sound nonaccrual and charge-off policies. 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, 2020, no significant industry concentrations existed in Nicolet’s portfolio in excess of 10% 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, 2020.
| (in thousands) | Loan Maturity | ||||||||||||||||||||||
| One Year or Less | Over One Year to Five Years | Over Five Years | Total | ||||||||||||||||||||
| Commercial & industrial, including PPP loans | $ | 257,087 | $ | 606,888 | $ | 72,759 | $ | 936,734 | |||||||||||||||
| Owner-occupied CRE | 72,228 | 373,933 | 75,139 | 521,300 | |||||||||||||||||||
| Agricultural | 30,842 | 70,786 | 8,001 | 109,629 | |||||||||||||||||||
| CRE investment | 114,169 | 264,753 | 81,799 | 460,721 | |||||||||||||||||||
| Construction & land development | 76,143 | 42,639 | 12,501 | 131,283 | |||||||||||||||||||
| Residential construction * | 38,906 | 286 | 2,515 | 41,707 | |||||||||||||||||||
| Residential first mortgage | 30,417 | 140,754 | 272,984 | 444,155 | |||||||||||||||||||
| Residential junior mortgage | 7,132 | 7,200 | 97,545 | 111,877 | |||||||||||||||||||
| Retail & other | 17,584 | 9,430 | 4,681 | 31,695 | |||||||||||||||||||
| Total loans | $ | 644,508 | $ | 1,516,669 | $ | 627,924 | $ | 2,789,101 | |||||||||||||||
| Percent by maturity distribution | 23 | % | 54 | % | 23 | % | 100 | % | |||||||||||||||
| Fixed rate | $ | 341,351 | $ | 1,439,306 | $ | 339,952 | $ | 2,120,609 | |||||||||||||||
| Floating rate | 303,157 | 77,363 | 287,972 | 668,492 | |||||||||||||||||||
| Total | $ | 644,508 | $ | 1,516,669 | $ | 627,924 | $ | 2,789,101 | |||||||||||||||
| Fixed rate percent | 53 | % | 95 | % | 54 | % | 76 | % | |||||||||||||||
| Floating rate percent | 47 | % | 5 | % | 46 | % | 24 | % | |||||||||||||||
* The residential construction loans with a loan maturity over five years represent a construction to permanent loan product.
Allowance for Credit Losses - Loans
In addition to the discussion that follows, accounting policies for the allowance for credit losses - loans are described in Note 1, “Nature of Business and Significant Accounting Policies,” and additional ACL-Loans disclosures are included in Note 4, “Loans, Allowance for Credit Losses - Loans, and Credit Quality,” in the Notes to Consolidated Financial Statements, under Part II, Item 8.
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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 ongoing review of loan payment performance. Active asset quality administration, including early problem loan identification and timely resolution of problems, aids in the management of credit risk and minimization of loan losses. Loans charged off are subject to continuous review, and specific efforts are taken to achieve maximum recovery of principal, interest, and related expenses. For additional information regarding nonperforming assets see “BALANCE SHEET ANALYSIS – Nonperforming Assets.”
The ACL-Loans represents management’s estimate of expected credit losses in the Company’s loan portfolio at the balance sheet date. To assess the overall appropriateness of the ACL-Loans, management applies an allocation methodology which focuses on evaluation of qualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to specific loans; (ii) management's ongoing review and grading of the loan portfolio; (iii) consideration of historical loan loss and delinquency experience on each portfolio segment; (iv) trends in past due and nonaccrual loans; (v) the risk characteristics of the various loan segments; (vi) changes in the size and character of the loan portfolio; (vii) concentrations of loans to specific borrowers or industries; (viii) existing economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect expected credit losses. Assessing these factors involves significant judgment; therefore, management considers the ACL-Loans a critical accounting policy, as further discussed under “Critical Accounting Policies – Allowance for Credit Losses - Loans.”
Management allocates the ACL-Loans by pools of risk within each loan portfolio segment. The allocation methodology consists of the following components. First, a specific reserve is established for individually evaluated and other credit-deteriorated loans, which management defines as nonaccrual credit relationships over $250,000, collateral dependent loans, and other loans with evidence of credit deterioration. The specific reserve in the ACL-Loans for these credit deteriorated loans is equal to the aggregate collateral or discounted cash flow shortfall. Management allocates the ACL-Loans with historical loss rates by loan segment. The loss factors are measured on a quarterly basis and applied to each loan segment based on current loan balances and projected for their expected remaining life. Next, management allocates the ACL-Loans using the qualitative and environmental factors mentioned above. Consideration is given to those current qualitative or environmental factors that are likely to cause estimated credit losses at the evaluation date to differ from the historical loss experience of each loan segment. Lastly, management considers reasonable and supportable forecasts to assess the collectability of future cash flows.
Management performs ongoing intensive analysis 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 ACL-Loans. In addition, various regulatory agencies periodically review the ACL-Loans. These agencies may require the Company to make additions to the ACL-Loans or may require that certain loan balances be charged off or downgraded into classified loan categories when their credit evaluations differ from those of management based on their judgments of collectability from information available to them at the time of their examination.
At December 31, 2020, the ACL-Loans was $32.2 million (representing 1.15% of period end loans and 1.24% of period end loans excluding PPP loans) compared to $14.0 million at December 31, 2019. The increase in the ACL-Loans was largely due to the $9.3 million impact from the adoption of CECL (comprised of $8.5 million for the CECL impact on the loan portfolio and $0.8 million for the PCD gross-up) and a much higher provision for credit losses in 2020 given the unprecedented economic disruption and uncertainty surrounding the COVID pandemic. The components of the ACL-Loans are detailed further in Tables 8 and 9 below.
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Table 8: Allowance for Credit Losses - Loans
| (in thousands) | Years Ended December 31, | ||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||
| Allowance for credit losses - loans: | |||||||||||||||||||||||||||||
| Beginning balance | $ | 13,972 | $ | 13,153 | $ | 12,653 | $ | 11,820 | $ | 10,307 | |||||||||||||||||||
| Adoption of CECL | 8,488 | — | — | — | — | ||||||||||||||||||||||||
| Initial PCD ACL | 797 | — | — | — | — | ||||||||||||||||||||||||
| Total impact for adoption of CECL | 9,285 | — | — | — | — | ||||||||||||||||||||||||
| Loans charged off: | |||||||||||||||||||||||||||||
| Commercial & industrial | (812) | (159) | (813) | (1,442) | (279) | ||||||||||||||||||||||||
| Owner-occupied CRE | (530) | (93) | (74) | — | (108) | ||||||||||||||||||||||||
| Agricultural | — | — | — | — | — | ||||||||||||||||||||||||
| CRE investment | (190) | — | (37) | — | — | ||||||||||||||||||||||||
| Construction & land development | — | — | — | (13) | — | ||||||||||||||||||||||||
| Residential construction | — | (226) | — | — | — | ||||||||||||||||||||||||
| Residential first mortgage | (2) | (22) | (85) | (8) | (80) | ||||||||||||||||||||||||
| Residential junior mortgage | — | (80) | — | (72) | (57) | ||||||||||||||||||||||||
| Retail & other | (155) | (347) | (204) | (69) | (60) | ||||||||||||||||||||||||
| Total loans charged off | (1,689) | (927) | (1,213) | (1,604) | (584) | ||||||||||||||||||||||||
| Recoveries of loans previously charged off: | |||||||||||||||||||||||||||||
| Commercial & industrial | 120 | 420 | 43 | 38 | 26 | ||||||||||||||||||||||||
| Owner-occupied CRE | 81 | 2 | 14 | 30 | 5 | ||||||||||||||||||||||||
| Agricultural | — | — | — | — | — | ||||||||||||||||||||||||
| CRE investment | — | — | — | 1 | 221 | ||||||||||||||||||||||||
| Construction & land development | — | — | — | — | — | ||||||||||||||||||||||||
| Residential construction | — | — | — | — | — | ||||||||||||||||||||||||
| Residential first mortgage | 11 | 36 | 5 | 25 | 31 | ||||||||||||||||||||||||
| Residential junior mortgage | 67 | 39 | 35 | 3 | 8 | ||||||||||||||||||||||||
| Retail & other | 26 | 49 | 16 | 15 | 6 | ||||||||||||||||||||||||
| Total recoveries | 305 | 546 | 113 | 112 | 297 | ||||||||||||||||||||||||
| Total net charge-offs | (1,384) | (381) | (1,100) | (1,492) | (287) | ||||||||||||||||||||||||
| Provision for credit losses | 10,300 | 1,200 | 1,600 | 2,325 | 1,800 | ||||||||||||||||||||||||
| Ending balance of ACL-Loans | $ | 32,173 | $ | 13,972 | $ | 13,153 | $ | 12,653 | $ | 11,820 | |||||||||||||||||||
| Ratios: | |||||||||||||||||||||||||||||
| ACL-Loans to total loans | 1.15 | % | 0.54 | % | 0.61 | % | 0.61 | % | 0.75 | % | |||||||||||||||||||
| ACL-Loans to total loans ex. PPP loans | 1.24 | % | 0.54 | % | 0.61 | % | 0.61 | % | 0.75 | % | |||||||||||||||||||
| ACL-Loans to net charge-offs | 2,325 | % | 3,667 | % | 1,196 | % | 848 | % | 4,118 | % | |||||||||||||||||||
| Net charge-offs to average loans | 0.05 | % | 0.02 | % | 0.05 | % | 0.08 | % | 0.02 | % | |||||||||||||||||||
| Net charge-offs to average loans ex. PPP loans | 0.05 | % | 0.02 | % | 0.05 | % | 0.08 | % | 0.02 | % | |||||||||||||||||||
The allocation of the ACL-Loans by loan category for each of the past five years is shown in Table 9. The largest portions of the ACL-Loans were allocated to commercial & industrial loans and owner-occupied CRE loans combined, representing 54% and 61% of the ACL-Loans at December 31, 2020 and 2019, respectively. The change in allocated ACL-Loans from December 31, 2019 to December 31, 2020 was consistent with changes related to the adoption of CECL, as well as changes in outstanding loan balances between the years and risk trends within loan categories.
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Table 9: Allocation of the Allowance for Credit Losses - Loans
| (in thousands) | December 31, 2020 | ACL Category as a % of Total ACL * | December 31, 2019 | ACL Category as a % of Total ACL * | December 31, 2018 | ACL Category as a % of Total ACL * | December 31, 2017 | ACL Category as a % of Total ACL * | December 31, 2016 | ACL Category as a % of Total ACL * | |||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial & industrial ** | $ | 11,644 | 36 | % | $ | 5,471 | 39 | % | $ | 5,271 | 40 | % | $ | 4,934 | 39 | % | $ | 3,919 | 33 | % | |||||||||||||||||||||||||||||||||||||||
| Owner-occupied CRE | 5,872 | 18 | % | 3,010 | 22 | % | 2,847 | 22 | % | 2,607 | 21 | % | 2,867 | 24 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Agricultural | 1,395 | 4 | % | 579 | 4 | % | 422 | 3 | % | 425 | 3 | % | 435 | 3 | % | ||||||||||||||||||||||||||||||||||||||||||||
| CRE investment | 5,441 | 17 | % | 1,600 | 11 | % | 1,470 | 11 | % | 1,388 | 11 | % | 1,124 | 10 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Construction & land development | 984 | 3 | % | 414 | 3 | % | 510 | 4 | % | 726 | 5 | % | 774 | 7 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Residential construction | 421 | 1 | % | 368 | 3 | % | 211 | 2 | % | 251 | 2 | % | 304 | 3 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Residential first mortgage | 4,773 | 15 | % | 1,669 | 12 | % | 1,646 | 12 | % | 1,609 | 13 | % | 1,784 | 15 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Residential junior mortgage | 1,086 | 4 | % | 517 | 4 | % | 472 | 4 | % | 488 | 4 | % | 461 | 4 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Retail & other | 557 | 2 | % | 344 | 2 | % | 304 | 2 | % | 225 | 2 | % | 152 | 1 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total ACL-Loans | $ | 32,173 | 100 | % | $ | 13,972 | 100 | % | $ | 13,153 | 100 | % | $ | 12,653 | 100 | % | $ | 11,820 | 100 | % | |||||||||||||||||||||||||||||||||||||||
| * See Table 6 for the ratio of loans by category to total loans. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ** The PPP loans are fully guaranteed by the SBA; thus, no ACL-Loans has been allocated to these loans. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Nonperforming Assets
As part of its overall credit risk management process, management is committed to an aggressive problem loan identification philosophy. This philosophy has been implemented through the ongoing monitoring and review of all pools of risk in the loan portfolio to ensure that problem loans are identified early and the risk of loss is minimized. Management is actively working with customers and monitoring credit risk from the unprecedented economic disruptions surrounding the COVID pandemic (as also discussed in the Overview section). Since the pandemic started, nearly 1,000 loans with a current balance of $456 million were provided temporary payment modifications. Initial metrics reflected the loan modifications as 88% commercial and 12% retail, with 67% on interest only payments and 33% on full payment deferrals. As of December 31, 2020, $408 million (90%) had returned to normal payment structures, $29 million (6%) were paid off, $15 million (3%) remain under temporary modification structure, and only $4 million (1%) became troubled debt restructurings (included in Table 10 below). The combined $19 million under modification or restructure represented less than 1% of total loans at December 31, 2020. In addition to the discussion that follows, accounting policies for loans and the ACL-Loans are described in Note 1, “Nature of Business and Significant Accounting Policies,” and additional credit quality disclosures are included in Note 4, “Loans, Allowance for Credit Losses - Loans, and Credit Quality,” in the Notes to Consolidated Financial Statements, under Part II, Item 8.
Nonperforming loans are considered one indicator of potential future loan losses. Nonperforming loans are defined as nonaccrual loans and loans 90 days or more past due but still accruing interest. Loans are generally placed on nonaccrual status when contractually past due 90 days or more as to interest or principal payments. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on loans, it is management’s practice to place such loans on nonaccrual status immediately. Nonaccrual loans were $9 million at December 31, 2020, compared to $14 million at December 31, 2019. Nonperforming assets (which include nonperforming loans and other real estate owned “OREO”) were $13 million at December 31, 2020, compared to $15 million at December 31, 2019. OREO was $4 million at December 31, 2020, up from $1 million at year-end 2019, with the increase primarily due to the addition of closed bank branch properties. Nonperforming assets as a percent of total assets was 0.29% at December 31, 2020, compared to 0.42% at December 31, 2019.
The level of potential problem loans is another predominant factor in determining the relative level of risk in the loan portfolio and in determining the appropriate level of the ACL-Loans. Potential problem loans are generally defined by management to include loans rated as Substandard by management but that are in performing status; however, there are circumstances present which might adversely affect the ability of the borrower to comply with present repayment terms. The decision of management to include performing loans in potential problem loans does not necessarily mean that Nicolet expects losses to occur, but that management recognizes a higher degree of risk associated with these loans. The loans that have been reported as potential problem loans are predominantly commercial-based loans covering a diverse range of businesses and real estate property types. Potential problem loans were $21 million (0.7% of total loans) and $23 million (0.9% of total loans) at December 31, 2020 and 2019, 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.
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Table 10: Nonperforming Assets
| (in thousands) | December 31, 2020 | December 31, 2019 | December 31, 2018 | December 31, 2017 | December 31, 2016 | ||||||||||||||||||||||||
| Nonaccrual assets: | |||||||||||||||||||||||||||||
| Commercial & industrial | $ | 2,646 | $ | 6,249 | $ | 2,816 | $ | 6,016 | $ | 358 | |||||||||||||||||||
| PPP loans | — | — | — | — | — | ||||||||||||||||||||||||
| Owner-occupied CRE | 1,869 | 3,311 | 673 | 533 | 2,894 | ||||||||||||||||||||||||
| Agricultural | 1,830 | 1,898 | 164 | 186 | 217 | ||||||||||||||||||||||||
| CRE investment | 1,488 | 1,073 | 210 | 4,531 | 12,317 | ||||||||||||||||||||||||
| Construction & land development | 327 | 20 | 80 | — | 1,193 | ||||||||||||||||||||||||
| Residential construction | — | — | 1 | 80 | 260 | ||||||||||||||||||||||||
| Residential first mortgage | 823 | 1,090 | 1,265 | 1,587 | 2,990 | ||||||||||||||||||||||||
| Residential junior mortgage | 384 | 480 | 262 | 158 | 56 | ||||||||||||||||||||||||
| Retail & other | 88 | 1 | — | 4 | — | ||||||||||||||||||||||||
| Total nonaccrual loans | 9,455 | 14,122 | 5,471 | 13,095 | 20,285 | ||||||||||||||||||||||||
| Accruing loans past due 90 days or more | — | — | — | — | — | ||||||||||||||||||||||||
| Total nonperforming loans | 9,455 | 14,122 | 5,471 | 13,095 | 20,285 | ||||||||||||||||||||||||
| OREO: | |||||||||||||||||||||||||||||
| Commercial real estate owned | — | — | 420 | 185 | 991 | ||||||||||||||||||||||||
| Residential real estate owned | — | — | — | 70 | 29 | ||||||||||||||||||||||||
| Bank property real estate owned | 3,608 | 1,000 | — | 1,039 | 1,039 | ||||||||||||||||||||||||
| Total OREO | 3,608 | 1,000 | 420 | 1,294 | 2,059 | ||||||||||||||||||||||||
| Total nonperforming assets (NPAs) | $ | 13,063 | $ | 15,122 | $ | 5,891 | $ | 14,389 | $ | 22,344 | |||||||||||||||||||
| Performing troubled debt restructurings | $ | 2,120 | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||
| Ratios: | |||||||||||||||||||||||||||||
| Nonperforming loans to total loans | 0.34 | % | 0.55 | % | 0.25 | % | 0.63 | % | 1.29 | % | |||||||||||||||||||
| NPAs to total loans plus OREO | 0.47 | % | 0.59 | % | 0.27 | % | 0.69 | % | 1.42 | % | |||||||||||||||||||
| NPAs to total assets | 0.29 | % | 0.42 | % | 0.19 | % | 0.49 | % | 0.97 | % | |||||||||||||||||||
| ACL-Loans to nonperforming loans | 340 | % | 99 | % | 240 | % | 97 | % | 58 | % | |||||||||||||||||||
Table 11 shows the approximate gross interest that would have been recorded if the loans accounted for on a nonaccrual basis at the end of each year shown had performed in accordance with their original terms, in contrast to the amount of interest income that was included in interest income on such loans for the period. The interest income recognized generally includes cash interest received and potentially includes prior nonaccrual interest on acquired loans which existed at acquisition and was subsequently collected.
Table 11: Foregone Loan Interest
| (in thousands) | Years Ended December 31, | ||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Interest income in accordance with original terms | $ | 651 | $ | 1,178 | $ | 1,046 | |||||||||||
| Interest income recognized | (580) | (935) | (948) | ||||||||||||||
| Reduction in interest income | $ | 71 | $ | 243 | $ | 98 | |||||||||||
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. In addition to the discussion that follows, the investment securities portfolio accounting policies are described in Note 1, “Nature of Business and Significant Accounting Policies,” and additional disclosures are included in Note 3, “Securities Available for Sale,” in the Notes to Consolidated Financial Statements, under Part II, Item 8.
Table 12: Investment Securities Portfolio
| (in thousands) | December 31, 2020 | December 31, 2019 | December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortized Cost | Fair Value | % of Total | Amortized Cost | Fair Value | % of Total | Amortized Cost | Fair Value | % of Total | |||||||||||||||||||||||||||||||||||||||||||||
| U.S. government agency securities | $ | 63,162 | $ | 63,451 | 12 | % | $ | 16,516 | $ | 16,460 | 4 | % | $ | 22,467 | $ | 21,649 | 6 | % | |||||||||||||||||||||||||||||||||||
| State, county and municipals | 226,493 | 231,868 | 43 | % | 155,501 | 156,393 | 35 | % | 163,702 | 160,526 | 40 | % | |||||||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | 156,148 | 162,495 | 30 | % | 193,223 | 195,018 | 43 | % | 134,350 | 131,644 | 33 | % | |||||||||||||||||||||||||||||||||||||||||
| Corporate debt securities | 76,073 | 81,523 | 15 | % | 78,009 | 81,431 | 18 | % | 87,352 | 86,325 | 21 | % | |||||||||||||||||||||||||||||||||||||||||
| Total securities AFS | $ | 521,876 | $ | 539,337 | 100 | % | $ | 443,249 | $ | 449,302 | 100 | % | $ | 407,871 | $ | 400,144 | 100 | % | |||||||||||||||||||||||||||||||||||
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At December 31, 2020, the total fair value of investment securities was $539 million (representing 12% of total assets), compared to $449 million (representing 13% of total assets) at December 31, 2019. The increase in securities AFS from year-end 2019 was primarily due to the purchase of approximately $50 million U.S. Treasury securities in early 2020, $24 million of investments Advantage added at acquisition and an $11 million change in the unrealized gain position (from an unrealized gain of $6 million at December 31, 2019 to an unrealized gain of $17 million at December 31, 2020). At December 31, 2020, the securities AFS 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 stockholders’ equity.
In addition to securities AFS, Nicolet had other investments of $28 million and $24 million at December 31, 2020 and 2019, respectively, consisting of capital stock in the Federal Reserve and the Federal Home Loan Bank (“FHLB”) (required as members of the Federal Reserve Bank System and the FHLB System), equity securities with readily determinable fair values, 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 private company equity investments have no quoted market prices, and are carried at cost less impairment charges, if any. The other investments are evaluated periodically for impairment, considering financial condition and other available relevant information. A $0.1 million write-off was recorded on the surrender of our Commerce common stock in connection with the terms of the mutual termination of the Commerce merger agreement during 2020, and a $0.1 million impairment charge was recorded on a private company equity investment during 2019.
Table 13: Investment Securities Portfolio Maturity Distribution (1)
| December 31, 2020 | Within One Year | After One but Within Five Years | After Five but Within Ten Years | After Ten Years | Mortgage- backed Securities | Total Amortized Cost | Total Fair Value | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. government agency securities | $ | 61,736 | 1.4 | % | $ | 1,226 | 2.8 | % | $ | 200 | 2.5 | % | $ | — | — | % | $ | — | — | % | $ | 63,162 | 1.4 | % | $ | 63,451 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| State, county and municipals | 19,599 | 2.6 | % | 101,685 | 2.4 | % | 97,462 | 2.3 | % | 7,747 | 1.9 | % | — | — | % | 226,493 | 2.4 | % | 231,868 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | — | — | % | — | — | % | — | — | % | — | — | % | 156,148 | 2.9 | % | 156,148 | 2.9 | % | 162,495 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate debt securities | 3,982 | 1.9 | % | 65,391 | 3.2 | % | — | — | % | 6,700 | 4.1 | % | — | — | % | 76,073 | 3.2 | % | 81,523 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total amortized cost | $ | 85,317 | 1.7 | % | $ | 168,302 | 2.7 | % | $ | 97,662 | 2.4 | % | $ | 14,447 | 3.0 | % | $ | 156,148 | 2.9 | % | $ | 521,876 | 2.5 | % | $ | 539,337 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Total fair value and carrying value | $ | 85,712 | $ | 174,975 | $ | 100,445 | $ | 15,710 | $ | 162,495 | $ | 539,337 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 16 | % | 32 | % | 19 | % | 3 | % | 30 | % | 100 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(1) The yield on tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 21% 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 number of non-deposit investment alternatives available to depositors, such as mutual funds, money market funds, annuities, and other brokerage investment products. Deposit challenges include competitive deposit product features, 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. Additional disclosures on deposits are included in Note 7, “Deposits,” in the Notes to Consolidated Financial Statements, under Part II, Item 8.
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Table 14: Period End Deposit Composition
| (in thousands) | December 31, 2020 | December 31, 2019 | December 31, 2018 | ||||||||||||||||||||||||||||||||
| Amount | % of Total | Amount | % of Total | Amount | % of Total | ||||||||||||||||||||||||||||||
| Noninterest-bearing demand | $ | 1,212,787 | 31 | % | $ | 819,055 | 28 | % | $ | 753,065 | 29 | % | |||||||||||||||||||||||
| Money market and interest-bearing demand | 1,551,325 | 40 | % | 1,241,642 | 42 | % | 1,163,369 | 45 | % | ||||||||||||||||||||||||||
| Savings | 521,814 | 13 | % | 343,199 | 11 | % | 294,068 | 11 | % | ||||||||||||||||||||||||||
| Time | 624,473 | 16 | % | 550,557 | 19 | % | 403,636 | 15 | % | ||||||||||||||||||||||||||
| Total deposits | $ | 3,910,399 | 100 | % | $ | 2,954,453 | 100 | % | $ | 2,614,138 | 100 | % | |||||||||||||||||||||||
| Brokered transaction accounts | $ | 46,340 | 1 | % | $ | 48,497 | 1 | % | $ | 62,021 | 2 | % | |||||||||||||||||||||||
| Brokered time deposits | 278,521 | 7 | % | 111,694 | 4 | % | 19,328 | 1 | % | ||||||||||||||||||||||||||
| Total brokered deposits | $ | 324,861 | 8 | % | $ | 160,191 | 5 | % | $ | 81,349 | 3 | % | |||||||||||||||||||||||
| Customer transaction accounts | $ | 3,239,586 | 83 | % | $ | 2,355,399 | 80 | % | $ | 2,148,481 | 82 | % | |||||||||||||||||||||||
| Customer time deposits | 345,952 | 9 | % | 438,863 | 15 | % | 384,308 | 15 | % | ||||||||||||||||||||||||||
| Total customer deposits (core) | $ | 3,585,538 | 92 | % | $ | 2,794,262 | 95 | % | $ | 2,532,789 | 97 | % | |||||||||||||||||||||||
Total deposits were $3.9 billion at December 31, 2020, an increase of $956 million (32%) over year-end 2019. Since December 31, 2019, customer transaction accounts increased $884 million (38%), including $490 million in interest-bearing transaction accounts and $394 million in noninterest-bearing transaction accounts, influenced by the very uncertain times, government stimulus payments and pandemic stay-at-home orders, which reduced spending and increased liquidity of many consumers and businesses, and by PPP loan proceeds retained on deposit by commercial borrowers. In addition, during 2020, we acquired Advantage, which added customer deposits of $141 million at acquisition. Total brokered deposits increased $165 million over year-end 2019, largely due to our liquidity build executed at the onset of the pandemic. In the second half of 2020, given continued growth in core deposit funding, brokered deposits were allowed to mature without renewal and nearly half of the brokered time deposits outstanding at year-end 2020 are expected to mature in 2021.
On average, deposits grew $841 million (32%) between 2020 and 2019 (as detailed in Table 1), primarily due to the timing of the acquisitions (Choice in November 2019 and Advantage in August 2020) and the signficant increase in deposits from government stimulus activities and deposited PPP loan proceeds. Noninterest-bearing demand deposits increased $292 million (40%) and core interest-bearing deposits (savings, interest-bearing demand, money market) increased $347 million (25%), while core time deposits decreased $12 million (3%). Average brokered deposits grew $214 million, attributable to the mix of deposits acquired with Choice and the procurement of brokered deposits at the onset of the pandemic as part of liquidity actions.
Table 15: Maturity Distribution of Certificates of Deposit of $100,000 or More
| (in thousands) | December 31, 2020 | December 31, 2019 | December 31, 2018 | ||||||||||||||
| 3 months or less | $ | 46,575 | $ | 55,464 | $ | 28,466 | |||||||||||
| Over 3 months through 6 months | 38,586 | 55,000 | 30,438 | ||||||||||||||
| Over 6 months through 12 months | 40,795 | 54,700 | 68,983 | ||||||||||||||
| Over 12 months | 79,326 | 120,346 | 57,992 | ||||||||||||||
| Total | $ | 205,282 | $ | 285,510 | $ | 185,879 | |||||||||||
Other Funding Sources
Other funding sources include short-term borrowings (zero at both December 31, 2020 and 2019) and long-term borrowings (totaling $54 million and $68 million at December 31, 2020 and 2019, respectively). Short-term borrowings consist mainly of short-term FHLB advances, customer repurchase agreements maturing in less than nine months or federal funds purchased. Long-term borrowings include FHLB advances, PPP Liquidity Facility (“PPPLF”) funding (credit provided by the Federal Reserve to financial institutions participating in the PPP loan program), junior subordinated debentures (largely qualifying as Tier 1 capital for regulatory purposes given their long maturity dates, even though they are redeemable in whole or in part at par), and subordinated notes (issued in 2015 with 10-year maturities, callable on or after the fifth anniversary date of their respective issuance dates, and qualifying as Tier 2 capital for regulatory purposes). The interest on all long-term borrowings is current.
During 2020, the Company added $24 million in long-term FHLB advances to support liquidity actions initiated at the onset of the pandemic (prior to the announcement of government stimulus) and $344 million of PPPLF funding to support the PPP loans. Based on growth in core deposits during the year, select long-term FHLB advances and the full PPPLF funding was repaid in the second half of 2020. In addition, the subordinated notes ($12 million at 5% fixed) were fully redeemed on November 16, 2020, and one issuance of junior subordinated debentures ($6 million at 8% fixed) was redeemed in full on December 31, 2020. See Note 8, “Short
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and Long-Term Borrowings,” of the Notes to Consolidated Financial Statements under Part II, Item 8 for additional details. See section “Liquidity Management,” for information on available other funding sources at December 31, 2020.
RISK MANAGEMENT AND CAPITAL
Liquidity Management
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 service debt, invest in subsidiaries, repurchase common stock, pay dividends to shareholders (if any), and satisfy other operating requirements.
Given the stable core customer deposit base, fairly consistent patterns of activity in the core deposit base (including extra growth in core deposits during the pandemic as previously discussed), and the minimal use of capacity available in numerous non-core funding sources, Nicolet's liquidity levels and resources have been sufficient to fund loans, accommodate deposit trends and cycles, and to meet other cash needs as necessary. At the onset of the pandemic, but prior to the announcement of government stimulus, management initiated preparatory actions to increase on-balance sheet liquidity to ensure we could meet customer needs, and brokered deposits of approximately $200 million were procured, increasing liquid cash. These actions proved later to not be necessary, leading us to reduce non-deposit leverage in the second half of 2020. In addition to the on-balance sheet liquidity build, remaining liquidity facilities continue to provide capacity and flexibility in an uncertain time.
Funds are available from a number of basic banking activity sources including, but not limited to, the core deposit base; repayment and maturity of loans; investment securities calls, maturities, and sales; and procurement of additional brokered deposits or other wholesale funding. All securities AFS and equity securities (included in other investments) are reported at fair value on the consolidated balance sheet. At December 31, 2020, approximately 27% of the $539 million securities AFS portfolio was pledged to secure public deposits and short-term borrowings, as applicable, and for other purposes as required by law. Additional funding sources at December 31, 2020, consist of a $10 million available and unused line of credit at the holding company, $175 million of available and unused Federal funds lines, available borrowing capacity at the FHLB of $163 million, and borrowing capacity in the brokered deposit market.
In consideration of the funds availability for the Bank and the current high levels of cash in a very low interest rate environment, management has taken prudent pricing actions on deposits and loans, as well as actions to reduce non-deposit funding. Brokered deposits have matured without renewal, selected FHLB advances were repaid early, and the PPPLF funding was fully paid back (approximately $335 million used for 5 months at a cost of 35 bps). In addition, we fully redeemed our subordinated notes ($12 million at 5% fixed) in November and one of our junior subordinated debenture issuances ($6 million at 8% fixed) in December.
Management is committed to the Parent Company being a source of strength to the Bank and its other subsidiaries, and therefore, regularly evaluates capital and liquidity positions of the Parent Company in light of current and projected needs, growth or strategies. The Parent Company uses cash for normal expenses, debt service requirements and, when opportune, for common stock repurchases or investment in other strategic actions such as mergers or acquisitions. At December 31, 2020, the Parent Company had $50 million in cash. Additional cash sources, among others, available to the Parent Company include its $10 million available and unused line of credit, and access to the public or private markets to issue new equity, subordinated notes or other debt. Dividends from the Bank and, to a lesser extent, stock option exercises, represent significant sources of cash flows for the Parent Company. The Bank is required by federal law to obtain prior approval of the OCC for payments of dividends if the total of all dividends declared by the Bank in any year will exceed certain thresholds, as more fully described in “Business—Regulation of the Bank – Payment of Dividends” and in Note 16, “Regulatory Capital Requirements,” in the Notes to the Consolidated Financial Statements under Part II, 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, 2020 and 2019 were approximately $803 million and $182 million, respectively. The $621 million increase in cash and cash equivalents since year-end 2019 included $79 million net cash provided by operating activities (mostly earnings), more than offset by $209 million net cash used in investing activities (primarily to fund loan growth, mostly PPP loans) and $751 million net cash provided by financing activities (with funds from increased deposits partly offset by the early redemption of selected debt and common stock repurchases). Nicolet’s liquidity resources were sufficient as of December 31, 2020 to fund loans, accommodate deposit trends and cycles, and to meet other cash needs as necessary.
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Interest Rate Sensitivity Management and Impact of Inflation
A reasonable balance between interest rate risk, credit risk, liquidity risk and maintenance of yield, is highly important to Nicolet’s business success and profitability. As an ongoing part of 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 depends, to a substantial extent, on “rate spread” (i.e., the difference between the income earned on loans, investments and other earning assets and the interest expense paid to obtain deposits and other funding liabilities).
Asset-liability management policies establish guidelines for acceptable limits on the sensitivity to changes in interest rates on earnings and market value of assets and liabilities. Such policies are set and monitored by management and the board of directors’ Asset and Liability Committee.
To understand and manage the impact of fluctuations in market interest rates on net interest income, 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.
Among other scenarios, Nicolet assessed the impact on net interest income in the event of a gradual +/-100 bps and +/-200 bps change in market rates (parallel to the change in prime rate) over a one-year time horizon to a static (flat) balance sheet. The results provided include the liquidity measures mentioned above and reflect the changed interest rate environment in response to the current crisis. 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, 2020 and 2019, the projected changes in net interest income over a one-year time horizon, versus the baseline, are presented in Table 16 below. The results were within Nicolet’s guidelines of not greater than -10% for +/- 100 bps and not greater than -15% for +/- 200 bps, and given the relatively short nature of the Company’s balance sheet, reflect a largely unchanged risk position as expected.
Table 16: Interest Rate Sensitivity
| December 31, 2020 | December 31, 2019 | ||||||||||
| 200 bps decrease in interest rates | (0.8) | % | (1.8) | % | |||||||
| 100 bps decrease in interest rates | (0.8) | % | (1.0) | % | |||||||
| 100 bps increase in interest rates | 4.0 | % | 0.8 | % | |||||||
| 200 bps increase in interest rates | 8.1 | % | 1.7 | % | |||||||
Actual results may differ from these simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and their impact on customer behavior and management strategies.
The effect of inflation on a financial institution differs significantly from the effect on an industrial company. While a financial institution’s operating expenses, particularly salary and employee benefits, are affected by general inflation, the asset and liability structure of a financial institution consists largely of monetary items. Monetary items, such as cash, investments, loans, deposits and other borrowings, are those assets and liabilities which are or will be converted into a fixed number of dollars regardless of changes in prices. As a result, changes in interest rates have a more significant impact on a financial institution’s performance than does general inflation. Inflation may also have impacts on the Bank’s customers, on businesses and consumers and their ability or willingness to invest, save or spend, and perhaps on their ability to repay loans. As such, there would likely be impacts on the general appetite of banking products and the credit health of the Bank’s customer base.
Capital
Management regularly reviews the adequacy of its capital to ensure that sufficient capital is available for current and future needs and is in compliance with regulatory guidelines 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.
Capital balances and changes in capital are presented in the Consolidated Statements of Changes in Stockholders’ Equity in Part II, Item 8. Further discussion of capital components is included in Note 11, “Stockholders' Equity,” and a summary of dividend
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restrictions, as well as regulatory capital amounts and ratios for Nicolet and the Bank is presented in Note 16, “Regulatory Capital Requirements,” of the Notes to Consolidated Financial Statements under Part II, Item 8.
The Company’s regulatory capital ratios remain well above minimum regulatory ratios, including the capital conservation buffer. At December 31, 2020, the Bank’s regulatory capital ratios qualify the Bank as well-capitalized under the prompt-corrective action framework. This strong base of capital has allowed Nicolet to be opportunistic in the current environment and in strategic growth. For a discussion of the regulatory restrictions applicable to the Company and the Bank, see section “Business-Regulation of Nicolet” and “Business-Regulation of the Bank,” included within Part I, Item 1. A summary of Nicolet’s and the Bank’s regulatory capital amounts and ratios, as well as selected capital metrics are presented in Table 17.
Table 17: Capital
| ($ in thousands) | December 31, 2020 | December 31, 2019 | |||||||||
| Company Stock Repurchases: * | |||||||||||
| Common stock repurchased during the year (dollars) | $ | 40,544 | $ | 18,701 | |||||||
| Common stock repurchased during the year (shares) | 646,748 | 310,781 | |||||||||
| Company Risk-Based Capital: | |||||||||||
| Total risk-based capital | $ | 406,325 | $ | 404,573 | |||||||
| Tier 1 risk-based capital | 385,068 | 378,608 | |||||||||
| Common equity Tier 1 capital | 361,162 | 348,454 | |||||||||
| Total capital ratio | 12.9 | % | 13.4 | % | |||||||
| Tier 1 capital ratio | 12.2 | % | 12.6 | % | |||||||
| Common equity tier 1 capital ratio | 11.4 | % | 11.6 | % | |||||||
| Tier 1 leverage ratio | 9.0 | % | 11.9 | % | |||||||
| Bank Risk-Based Capital: | |||||||||||
| Total risk-based capital | $ | 351,081 | $ | 323,432 | |||||||
| Tier 1 risk-based capital | 329,824 | 309,460 | |||||||||
| Common equity Tier 1 capital | 329,824 | 309,460 | |||||||||
| Total capital ratio | 11.2 | % | 10.8 | % | |||||||
| Tier 1 capital ratio | 10.5 | % | 10.3 | % | |||||||
| Common equity tier 1 capital ratio | 10.5 | % | 10.3 | % | |||||||
| Tier 1 leverage ratio | 7.8 | % | 9.8 | % | |||||||
| * Reflects only the common stock repurchased under board of director authorizations. | |||||||||||
At December 31, 2020, Nicolet’s total capital was $539 million, compared to $516 million at December 31, 2019 (mostly due to solid earnings and favorable changes in the fair value AFS securities, partly offset by common stock repurchase activity and the $6 million net impact of adopting CECL). Book value per common share increased to $53.86 at year-end 2020, up 10% over $48.76 at year-end 2019.
In managing capital for optimal return, we evaluate capital sources and uses, pricing and availability of our stock in the market, and alternative uses of capital (such as the level of organic growth or acquisition opportunities) in light of strategic plans. Based on this evaluation, the Company early redeemed certain capital-equivalent debt during fourth quarter 2020, including its higher-costing subordinated Notes ($12 million at 5% fixed) and one issuance of junior subordinated debentures ($6 million at 8% fixed). These redemptions reduced the Company’s Tier 1 risk-based capital $6 million and Total risk-based capital $16 million. The redemptions had no impact on the Bank’s risk-based capital.
Through an ongoing repurchase program, the Board has authorized the repurchase of Nicolet’s common stock as an alternative use of capital. During 2020, $40.5 million was used to repurchase and cancel nearly 646,700 shares at a weighted average price per share of $62.69. At December 31, 2020, there remained $20.4 million authorized under this repurchase program, as modified, to be utilized from time to time to repurchase shares in the open market, through block transactions or in private transactions.
Off-Balance Sheet Arrangements, Lending-Related Commitments and Contractual Obligations
Nicolet is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. At December 31, 2020, interest rate lock commitments to originate residential mortgage loans held for sale of $113 million (included in the commitments to extend credit) and forward commitments to sell residential mortgage loans held for sale of $20 million are considered derivative instruments. Further information and discussion of these commitments is included in Note 13, “Commitments and Contingencies” of the Notes to Consolidated Financial Statements, under Part II, Item 8.
The table below outlines the principal amounts and timing of Nicolet’s contractual obligations. The amounts presented below exclude amounts due for interest, if applicable, and include any unamortized premiums / discounts or other similar carrying value
38
adjustments. Most of these obligations are routinely refinanced into similar replacement obligations. However, renewal of these obligations is dependent on the ability to procure competitive interest rates, liquidity needs, availability of collateral for pledging purposes supporting the long-term advances, or other borrowing alternatives. As of December 31, 2020, Nicolet had the following contractual obligations.
Table 18: Contractual Obligations
| (in thousands) | Note | Maturity by Years | |||||||||||||||||||||||||||||||||
| Reference | Total | 1 or less | 1-3 | 3-5 | Over 5 | ||||||||||||||||||||||||||||||
| Time deposits | 7 | $ | 624,473 | $ | 335,433 | $ | 233,330 | $ | 54,713 | $ | 997 | ||||||||||||||||||||||||
| Long-term borrowings | 8 | 53,869 | 4,000 | — | 5,000 | 44,869 | |||||||||||||||||||||||||||||
| Operating leases | 5 | 3,201 | 920 | 1,277 | 497 | 507 | |||||||||||||||||||||||||||||
| Total long-term contractual obligations | $ | 681,543 | $ | 340,353 | $ | 234,607 | $ | 60,210 | $ | 46,373 | |||||||||||||||||||||||||
Fourth Quarter 2020 Results
Nicolet recorded net income of $18.0 million for fourth quarter 2020, or $1.74 for diluted earnings per common share, compared to $12.3 million, or $1.18, respectively for fourth quarter 2019. Return on average assets was 1.58% and 1.46% for fourth quarter 2020 and 2019, respectively, even with the elevated cash assets in 2020. See Table 19 for selected quarterly information.
Net interest income increased $3.5 million (12%) between the comparable fourth quarter periods, despite a 77 bps decline in net interest margin, mostly due to the high cash levels and much lower interest rate environment. Interest income increased $1.8 million (including $6.3 million on higher volumes, partly offset by $4.5 million lower rates), while interest expense decreased $1.7 million (with $2.8 million from lower rates more than covering the $1.1 million higher volumes). The net interest margin between the comparable quarters decreased 77 bps to 3.29% in fourth quarter 2020, comprised of 60 bps lower interest rate spread (to 3.10%, as the yield on earning assets decreased 114 bps and the rate on interest-bearing liabilities decreased 54 bps) and a 17 bps lower contribution from net free funds (with the higher balances worth less in the very low interest rate environment).
Average interest-earning assets increased $1.1 billion to $4.1 billion for fourth quarter 2020, largely due to growth in loans (up $430 million) and other interest-earning assets, which is mostly cash (up $591 million). The mix of average earning assets between fourth quarter periods shifted from 82% in average loans, 14% in average investments, and 4% in other interest-earning assets (mostly low-earning cash assets) to 70% in loans, 13% in investments, and 17% in other interest-earning assets for fourth quarter 2020. On the funding side, average interest-bearing deposits were up $651 million and average demand deposits increased $386 million.
Noninterest income for fourth quarter 2020 increased $3.6 million (27%) to $16.9 million versus fourth quarter 2019. Net mortgage income increased $2.9 million (60%), mostly on higher sale gains and capitalized gains combined (up $3.6 million) from strong refinance activity and better pricing between the comparable quarters, partly offset by an unfavorable change in the fair values on the mortgage derivatives and mortgage servicing asset combined (down $0.8 million). Trust services fee income and brokerage fee income combined grew $0.6 million (17%), consistent with growth in accounts and assets under management in a volatile market.
On a comparable quarter basis, noninterest expense was minimally changed (down $0.1 million) to $25.4 million for fourth quarter 2020. Personnel expense of $15.2 million, increased $1.6 million (12%) from fourth quarter 2019, reflecting changes in the timing (with 2019 including a mid-year profit sharing contribution after the partial equity sale of a data processing entity versus a fourth quarter contribution in 2020) and mix of incentive compensation. All nonpersonnel expense categories combined were down $1.7 million (14%), as fourth quarter 2019 included a $0.7 million lease termination charge for the closure of Nicolet's Oshkosh branch in conjunction with the Choice acquisition and a $0.8 million full write-off of non-bank goodwill.
For fourth quarter 2020, Nicolet recognized income tax expense of $6.1 million with an effective tax rate of 25.4%, compared to income tax expense of $5.7 million with an effective tax rate of 31.4% for fourth quarter 2019. The increase in income tax expense was attributable to a 34% increase in pretax income, partly offset by salary deduction limitations that exceeded the tax benefit on stock-based compensation between the comparable fourth quarter periods (tax benefit of $0.1 million and $1.3 million in fourth quarter 2020 and 2019, respectively, mainly due to large stock option exercises in fourth quarter 2019). Additional information on income taxes is also included in “Income Taxes,” and Note 12, “Income Taxes” in the Notes to Consolidated Financial Statements, under Part II, Item 8.
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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, 2020 and 2019.
Table 19: Selected Quarterly Financial Data
| (in thousands, except per share data) | 2020 Quarter Ended | ||||||||||||||||||||||
| December 31, | September 30, | June 30, | March 31, | ||||||||||||||||||||
| Interest income | $ | 38,037 | $ | 37,270 | $ | 36,892 | $ | 37,003 | |||||||||||||||
| Interest expense | 4,019 | 4,710 | 5,395 | 5,740 | |||||||||||||||||||
| Net interest income | 34,018 | 32,560 | 31,497 | 31,263 | |||||||||||||||||||
| Provision for credit losses | 1,300 | 3,000 | 3,000 | 3,000 | |||||||||||||||||||
| Noninterest income | 16,879 | 18,691 | 17,471 | 9,585 | |||||||||||||||||||
| Noninterest expense | 25,367 | 23,685 | 27,813 | 23,854 | |||||||||||||||||||
| Income before income tax expense | 24,230 | 24,566 | 18,155 | 13,994 | |||||||||||||||||||
| Income tax expense | 6,145 | 6,434 | 4,576 | 3,321 | |||||||||||||||||||
| Net income | 18,085 | 18,132 | 13,579 | 10,673 | |||||||||||||||||||
| Less: Net income attributable to noncontrolling interest | 98 | 30 | 101 | 118 | |||||||||||||||||||
| Net income attributable to Nicolet Bankshares, Inc. | $ | 17,987 | $ | 18,102 | $ | 13,478 | $ | 10,555 | |||||||||||||||
| Basic earnings per common share* | $ | 1.79 | $ | 1.75 | $ | 1.29 | $ | 1.00 | |||||||||||||||
| Diluted earnings per common share* | $ | 1.74 | $ | 1.72 | $ | 1.28 | $ | 0.98 | |||||||||||||||
2019 Quarter Ended | |||||||||||||||||||||||
| December 31, | September 30, | June 30, | March 31, | ||||||||||||||||||||
| Interest income | $ | 36,192 | $ | 34,667 | $ | 34,570 | $ | 33,159 | |||||||||||||||
| Interest expense | 5,723 | 5,477 | 5,626 | 5,684 | |||||||||||||||||||
| Net interest income | 30,469 | 29,190 | 28,944 | 27,475 | |||||||||||||||||||
| Provision for credit losses | 300 | 400 | 300 | 200 | |||||||||||||||||||
| Noninterest income | 13,309 | 12,312 | 18,560 | 9,186 | |||||||||||||||||||
| Noninterest expense | 25,426 | 22,887 | 25,727 | 22,759 | |||||||||||||||||||
| Income before income tax expense | 18,052 | 18,215 | 21,477 | 13,702 | |||||||||||||||||||
| Income tax expense | 5,670 | 4,603 | 2,833 | 3,352 | |||||||||||||||||||
| Net income | 12,382 | 13,612 | 18,644 | 10,350 | |||||||||||||||||||
| Less: Net income attributable to noncontrolling interest | 87 | 82 | 95 | 83 | |||||||||||||||||||
| Net income attributable to Nicolet Bankshares, Inc. | $ | 12,295 | $ | 13,530 | $ | 18,549 | $ | 10,267 | |||||||||||||||
| Basic earnings per common share* | $ | 1.22 | $ | 1.45 | $ | 1.98 | $ | 1.09 | |||||||||||||||
| Diluted earnings per common share* | $ | 1.18 | $ | 1.40 | $ | 1.91 | $ | 1.05 | |||||||||||||||
*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.
2019 Compared to 2018
Net income attributable to Nicolet was $54.6 million for 2019, or $5.52 per diluted common share. Comparatively, 2018 net income attributable to Nicolet was $41.0 million or $4.12 per diluted common share. Return on average assets was 1.75% and 1.38% for 2019 and 2018, respectively, while return on average common equity was 12.89% for 2019 and 11.04% for 2018. Book value per common share was $48.76 at December 31, 2019, up 20% over $40.72 at December 31, 2018.
Key factors contributing to the 2019 versus 2018 results are discussed below.
•Net income for 2019 benefited from the net of two nonrecurring items in the second quarter, a $7.4 million after-tax gain on the partial sale of our equity interest in a data processing company, and $2.75 million ($2.0 million after-tax) in personnel expense for retirement-related compensation declared to benefit all employees after that sale. Excluding these two nonrecurring items, 2019 net income would be $49.2 million (20% over 2018), return on average assets would be 1.58% and diluted earnings per share would be $4.98 (or 21% over 2018).
•Net interest income was $116.1 million for 2019, an increase of $9.4 million or 9% compared to 2018, as we exercised discipline in the challenging rate environment. Interest income grew $13.1 million (overcoming $0.9 million lower aggregate discount income on purchased loans), aided by a 5% increase in average interest-earning assets and the elevated rate environment particularly on new, renewed and variable rate loans through the first half of 2019, before rates declined
40
during the second half. Interest expense increased $3.6 million, primarily due to the initially rising rates on a relatively unchanged funding base. The improvement consisted of $7.1 million from net favorable volume and mix variances, and $2.2 million from favorable rate variances. The interest rate spread increased 7 bps to 3.84% for 2019, due to the increase in the interest-earning asset yield (up 26 bps to 5.00% for 2019), exceeding the rise in the cost of funds (up 19 bps to 1.16% for 2019). The contribution from net free funds increased 8 bps due to stronger net free fund balances (led by a 16% increase in average noninterest-bearing demand deposits) and the higher cost of funds. As a result, the net interest margin increased 15 bps to 4.19% for 2019, compared to 4.04% for 2018. Tables 1, 2, and 3 show additional average balance sheet, net interest income, and net interest margin information.
•Loans were $2.6 billion at December 31, 2019, an increase of $408 million (19%) compared to $2.2 billion at December 31, 2018, largely due to the acquisition of Choice. Excluding the $348 million loans Choice added at acquisition in 2019, loans increased $60 million (3%) over year-end 2018, reflective of the growth in Nicolet's markets. Average loans were $2.3 billion in 2019 yielding 5.57%, compared to $2.1 billion in 2018 yielding 5.37%, a 6% increase in average balances. Table 6 shows additional information on loans.
•Total deposits were $3.0 billion at December 31, 2019, an increase of $340 million (13%) over December 31, 2018, largely due to the acquisition of Choice. Excluding the $289 million deposits Choice added at acquisition in 2019, deposits increased $51 million (2%) over 2018. Between 2019 and 2018, average deposits increased $89 million (4%), with average cored deposits up $106 million from solid growth in noninterest-bearing demand deposits (up $99 million to represent 28% of total deposits for 2019 versus 25% for 2018), partly offset by a reduction in brokered deposits. Tables 14 and 15 show additional information on deposits.
•Asset quality measures remained strong. Nonperforming assets were $15 million, representing 0.42% of total assets at December 31, 2019, compared to $6 million, representing 0.19% of assets at December 31, 2018. For 2019, the provision for credit losses was $1.2 million, exceeding net charge-offs of $0.4 million, versus provision of $1.6 million and net charge-offs of $1.1 million for 2018. The ACL-Loans was $14.0 million at December 31, 2019 (representing 0.54% of loans), compared to $13.2 million (representing 0.61% of loans) at December 31, 2018. Tables 8, 9, 10, and 11 show additional information on asset quality measures.
•Noninterest income was $53.4 million for 2019 (including $7.9 million of net asset gains, largely from the equity interest sale noted above), compared to $39.5 million for 2018 (including $1.2 million of net asset gains). Excluding the net asset gains, noninterest income was up $7.1 million (19%), most notably in net mortgage income (up $5.5 million or 87% on significantly higher volumes), trust and brokerage fees combined (up $0.8 million or 6%), and card interchange income (up $0.8 million or 15%), benefiting from increased business and activity. Table 4 shows additional noninterest income information.
•Noninterest expense was $96.8 million for 2019, an increase of $7.0 million (8%) over 2018 noninterest expense of $89.8 million, mostly due to the continued investment in people and improvements. Personnel expense was $54.4 million for 2019, up $5.0 million (10%) over 2018, including the one-time compensation action noted above, as well as merit increases on a minimally changed workforce (with average full-time equivalent employees up 1% between the years), and higher cash and equity incentives supporting strong performance. Non-personnel expenses also increased on a combined basis (up $2.1 million or 5%), mostly due to volume-based processing costs partially offset by process efficiencies, as well as a $0.7 million lease termination charge on a branch closure related to the Choice acquisition and $0.8 million full write-off of non-bank goodwill for a change in business strategy. Table 5 shows additional noninterest expense information.
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 loan acquisition transactions, as well as the determination of the allowance for credit losses and income taxes and, therefore, are critical accounting policies. The critical accounting policies are discussed directly with Nicolet’s Audit Committee. In addition to the discussion that follows, these critical accounting policies are further described in Note 1, “Nature of Business and Significant Accounting Policies,” in the Notes to Consolidated Financial Statements, under Part II, Item 8.
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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 the 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 currently considers such values to be the Day 1 Fair Values for the acquisition transactions.
In particular, the valuation of acquired loans involves significant estimates, assumptions and judgment based on information available as of the acquisition date. Loans acquired in a business combination transaction are evaluated either individually or in pools of loans with similar characteristics; including consideration of a credit component. 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.
Allowance for Credit Losses - Loans
Management’s evaluation process used to determine the appropriateness of the ACL-Loans 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 credit losses and therefore the appropriateness of the ACL-Loans could change significantly. Effective January 1, 2020, the Company changed its methodology for accounting for the allowance for credit losses-loans due to the adoption of a new accounting standard, which requires use of a lifetime expected credit losses model versus the historical incurred credit losses model. See section Recent Accounting Pronouncements Adopted within Note 1, “Nature of Business and Significant Accounting Policies,” in the Notes to Consolidated Financial Statements, under Part II, Item 8 for additional information on this new accounting standard.
The allocation methodology applied by Nicolet is designed to assess the appropriateness of the ACL-Loans and includes allocations for individually evaluated credit-deteriorated 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 and environmental factors. The methodology includes evaluation and consideration of several factors, including but not limited to: management’s ongoing review and grading of the loan portfolio, evaluation of facts and issues related to specific loans, consideration of historical loan loss and delinquency experience on each portfolio segment, trends in past due and nonaccrual loans, the risk characteristics of specific loans or various loan segments, changes in the size and character of the loan portfolio, concentrations of loans to specific borrowers or industries, the fair value of underlying collateral, existing economic conditions, and other qualitative and quantitative factors which could affect expected credit losses. In addition, with adoption of CECL in 2020, the model also now considers reasonable and supportable forecasts to assess the collectability of future cash flows. While management uses the best information available to make its evaluation, future adjustments to the ACL-Loans may be necessary if there are significant changes in economic conditions (both existing and forecast) or circumstances underlying the collectability of loans. Because each of the criteria used is subject to change, the allocation of the ACL-Loans is made for analytical purposes and is not necessarily indicative of the trend of future credit losses in any particular loan category. The ACL-Loans is available to absorb losses from any segment of the loan portfolio. Management believes the ACL-Loans is appropriate at December 31, 2020. The allowance analysis is reviewed by the board of directors on a quarterly basis in compliance with regulatory requirements.
Consolidated net income and stockholders’ equity could be affected if management’s estimate of the ACL-Loans necessary to cover expected credit losses is subsequently materially different, requiring a change in the level of provision for credit losses to be recorded. While management uses currently available information to recognize expected credit losses on loans, future adjustments to the ACL-Loans may be necessary based on newly received appraisals, updated commercial customer financial statements, rapidly deteriorating customer cash flow, and changes in economic conditions or forecassts that affect Nicolet’s customers. As an integral part of their examination process, federal regulatory agencies also review the ACL-Loans. Such agencies may require additions to the ACL-Loans or may require that certain loan balances be charged-off or downgraded into classified loan categories when their credit evaluations differ from those of management based on their judgments about 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.
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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 quarterly 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 uncertainty in income taxes. 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 under Part II, Item 8.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The updated guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company continues to evaluate the impact of reference rate reform on its consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For additional disclosure, see section, “Interest Rate Sensitivity Management and Impact of Inflation,” 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 AND SUPPLEMENTARY DATA
| NICOLET BANKSHARES, INC. Consolidated Balance Sheets | |||||||||||
| (In thousands, except share and per share data) | December 31, 2020 | December 31, 2019 | |||||||||
| Assets | |||||||||||
| Cash and due from banks | $ | $ | |||||||||
| Interest-earning deposits | |||||||||||
| Federal funds sold | |||||||||||
| Cash and cash equivalents | |||||||||||
| Certificates of deposit in other banks | |||||||||||
| Securities available for sale (“AFS”), at fair value | |||||||||||
| Other investments | |||||||||||
| Loans held for sale | |||||||||||
| Loans | |||||||||||
| Allowance for credit losses - loans (“ACL-Loans”) | ( | ( | |||||||||
| Loans, net | |||||||||||
| Premises and equipment, net | |||||||||||
| Bank owned life insurance (“BOLI”) | |||||||||||
| Goodwill and other intangibles, net | |||||||||||
| Accrued interest receivable and other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Liabilities: | |||||||||||
| Noninterest-bearing demand deposits | $ | $ | |||||||||
| Interest-bearing deposits | |||||||||||
| Total deposits | |||||||||||
| Short-term borrowings | |||||||||||
| Long-term borrowings | |||||||||||
| Accrued interest payable and other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Stockholders’ Equity: | |||||||||||
| Common stock | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive income (loss) | |||||||||||
| Total Nicolet Bankshares, Inc. stockholders’ equity | |||||||||||
| Noncontrolling interest | |||||||||||
| Total stockholders’ equity and noncontrolling interest | |||||||||||
| Total liabilities, noncontrolling interest and stockholders’ equity | $ | $ | |||||||||
Preferred shares authorized (no par value) | |||||||||||
| Preferred shares issued and outstanding | |||||||||||
Common shares authorized (par value $ | |||||||||||
| Common shares outstanding | |||||||||||
| Common shares issued | |||||||||||
See accompanying Notes to Consolidated Financial Statements.
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| NICOLET BANKSHARES, INC. Consolidated Statements of Income | Years Ended December 31, | ||||||||||||||||
| (In thousands, except share and per share data) | December 31, 2020 | December 31, 2019 | December 31, 2018 | ||||||||||||||
| Interest income: | |||||||||||||||||
| Loans, including loan fees | $ | $ | $ | ||||||||||||||
| Investment securities: | |||||||||||||||||
| Taxable | |||||||||||||||||
| Tax-exempt | |||||||||||||||||
| Other interest income | |||||||||||||||||
| Total interest income | |||||||||||||||||
| Interest expense: | |||||||||||||||||
| Deposits | |||||||||||||||||
| Short-term borrowings | |||||||||||||||||
| Long-term borrowings | |||||||||||||||||
| Total interest expense | |||||||||||||||||
| Net interest income | |||||||||||||||||
| Provision for credit losses | |||||||||||||||||
| Net interest income after provision for credit losses | |||||||||||||||||
| Noninterest income: | |||||||||||||||||
| Trust services fee income | |||||||||||||||||
| Brokerage fee income | |||||||||||||||||
| Mortgage income, net | |||||||||||||||||
| Service charges on deposit accounts | |||||||||||||||||
| Card interchange income | |||||||||||||||||
| BOLI income | |||||||||||||||||
| Asset gains (losses), net | ( | ||||||||||||||||
| Other income | |||||||||||||||||
| Total noninterest income | |||||||||||||||||
| Noninterest expense: | |||||||||||||||||
| Personnel | |||||||||||||||||
| Occupancy, equipment and office | |||||||||||||||||
| Business development and marketing | |||||||||||||||||
| Data processing | |||||||||||||||||
| Intangibles amortization | |||||||||||||||||
| Other expense | |||||||||||||||||
| Total noninterest expense | |||||||||||||||||
| Income before income tax expense | |||||||||||||||||
| Income tax expense | |||||||||||||||||
| Net income | |||||||||||||||||
| Less: Net income attributable to noncontrolling interest | |||||||||||||||||
| Net income attributable to Nicolet Bankshares, Inc. | $ | $ | $ | ||||||||||||||
| Earnings per common share: | |||||||||||||||||
| Basic | $ | $ | $ | ||||||||||||||
| Diluted | $ | $ | $ | ||||||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||
| Basic | |||||||||||||||||
| Diluted | |||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
45
| NICOLET BANKSHARES, INC. Consolidated Statements of Comprehensive Income | Years Ended December 31, | ||||||||||||||||
| (In thousands) | 2020 | 2019 | 2018 | ||||||||||||||
| Net income | $ | $ | $ | ||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||
| Unrealized gains (losses) on securities AFS: | |||||||||||||||||
| Net unrealized holding gains (losses) | ( | ||||||||||||||||
| Net (gains) losses included in income | ( | ||||||||||||||||
| Income tax (expense) benefit | ( | ( | |||||||||||||||
| Total other comprehensive income (loss), net of tax | ( | ||||||||||||||||
| Comprehensive income | $ | $ | $ | ||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
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| NICOLET BANKSHARES, INC. Consolidated Statements of Changes in Stockholders’ Equity | |||||||||||||||||||||||||||||||||||
| Nicolet Bankshares, Inc. Stockholders’ Equity | |||||||||||||||||||||||||||||||||||
| (In thousands) | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Non- controlling Interest | Total | |||||||||||||||||||||||||||||
| Balances at December 31, 2017 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Exercise of stock options, net | — | — | — | ||||||||||||||||||||||||||||||||
| Issuance of common stock | — | — | — | — | |||||||||||||||||||||||||||||||
| Purchase and retirement of common stock | ( | ( | — | — | — | ( | |||||||||||||||||||||||||||||
| Distribution to noncontrolling interest | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Adoption of new accounting pronouncement | — | — | ( | — | |||||||||||||||||||||||||||||||
| Balances at December 31, 2018 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | |||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Exercise of stock options, net | — | — | — | ||||||||||||||||||||||||||||||||
Issuance of common stock in acquisitions, net of capitalized issuance costs of $ | — | — | — | ||||||||||||||||||||||||||||||||
| Issuance of common stock | — | — | — | — | |||||||||||||||||||||||||||||||
| Purchase and retirement of common stock | ( | ( | — | — | — | ( | |||||||||||||||||||||||||||||
| Distribution to noncontrolling interest | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balances at December 31, 2019 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | |||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Exercise of stock options, net | — | — | — | — | |||||||||||||||||||||||||||||||
| Issuance of common stock | — | — | — | — | |||||||||||||||||||||||||||||||
| Purchase and retirement of common stock | ( | ( | — | — | — | ( | |||||||||||||||||||||||||||||
| Purchase of noncontrolling interest | — | ( | — | — | ( | ( | |||||||||||||||||||||||||||||
| Distribution to noncontrolling interest | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| — | — | ( | — | ( | |||||||||||||||||||||||||||||||
| Balances at December 31, 2020 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
47
| NICOLET BANKSHARES, INC. Consolidated Statements of Cash Flows | Years Ended December 31, | ||||||||||||||||
| (In thousands) | 2020 | 2019 | 2018 | ||||||||||||||
| Cash Flows From Operating Activities: | |||||||||||||||||
| Net income | $ | $ | $ | ||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||
| Depreciation, amortization and accretion | |||||||||||||||||
| Provision for credit losses | |||||||||||||||||
| Provision for deferred taxes | ( | ( | |||||||||||||||
| Increase in cash surrender value of life insurance | ( | ( | ( | ||||||||||||||
| Stock-based compensation expense | |||||||||||||||||
| Assets (gains) losses, net | ( | ( | |||||||||||||||
| Gain on sale of loans held for sale, net | ( | ( | ( | ||||||||||||||
| Proceeds from sale of loans held for sale | |||||||||||||||||
| Origination of loans held for sale | ( | ( | ( | ||||||||||||||
| Net change in accrued interest receivable and other assets | ( | ( | |||||||||||||||
| Net change in accrued interest payable and other liabilities | |||||||||||||||||
| Net cash provided by (used in) operating activities | |||||||||||||||||
| Cash Flows From Investing Activities: | |||||||||||||||||
| Net (increase) decrease in certificates of deposit in other banks | ( | ||||||||||||||||
| Purchases of securities AFS | ( | ( | ( | ||||||||||||||
| Proceeds from sales of securities AFS | |||||||||||||||||
| Proceeds from calls and maturities of securities AFS | |||||||||||||||||
| Net (increase) decrease in loans | ( | ( | ( | ||||||||||||||
| Purchases of other investments | ( | ( | ( | ||||||||||||||
| Proceeds from sales of other investments | |||||||||||||||||
| Net increase in premises and equipment | ( | ( | ( | ||||||||||||||
| Proceeds from sales of other real estate and other assets | |||||||||||||||||
| Purchase of BOLI | ( | ||||||||||||||||
| Proceeds from redemption of BOLI | |||||||||||||||||
| Net cash (paid) received in business combination | ( | ||||||||||||||||
| Net cash provided by (used in) investing activities | ( | ( | ( | ||||||||||||||
| Cash Flows From Financing Activities: | |||||||||||||||||
| Net increase (decrease) in deposits | |||||||||||||||||
| Net increase (decrease) in short-term borrowings | ( | ||||||||||||||||
| Proceeds from long-term borrowings | |||||||||||||||||
| Repayments of long-term borrowings | ( | ( | ( | ||||||||||||||
| Distribution to noncontrolling interest | ( | ( | ( | ||||||||||||||
| Purchase of noncontrolling interest | ( | ||||||||||||||||
| Capitalized issuance costs, net | ( | ||||||||||||||||
| Purchase and retirement of common stock | ( | ( | ( | ||||||||||||||
| Proceeds from issuance of common stock, net | |||||||||||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ||||||||||||||||
| Beginning cash and cash equivalents | |||||||||||||||||
| Ending cash and cash equivalents * | $ | $ | $ | ||||||||||||||
| Supplemental Disclosures of Cash Flow Information: | |||||||||||||||||
| Cash paid for interest | $ | $ | $ | ||||||||||||||
| Cash paid for taxes | |||||||||||||||||
| Transfer of loans and bank premises to other real estate owned | |||||||||||||||||
| Capitalized mortgage servicing rights | |||||||||||||||||
| Acquisitions: | |||||||||||||||||
| Fair value of assets acquired | $ | $ | $ | ||||||||||||||
| Fair value of liabilities assumed | |||||||||||||||||
| Net assets acquired | $ | $ | $ | ||||||||||||||
| Common stock issued in acquisitions | |||||||||||||||||
* Cash and cash equivalents at December 31, 2020 include restricted cash of $1.9 million pledged as collateral on interest rate swaps and no reserve balance was required with the Federal Reserve. At December 31, 2019 cash and cash equivalents included restricted cash of $1.3 million pledged as collateral on interest rate swaps and $6.0 million for the reserve balance required with the Federal Reserve, while at December 31, 2018, cash and cash equivalents included $6.3 million for the reserve balance required with the Federal Reserve and no cash was pledged as collateral on interest rate swaps.
See accompanying Notes to Consolidated Financial Statements.
48
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Banking Activities and Subsidiaries: Nicolet Bankshares, Inc. (the “Company” or “Nicolet”) was incorporated on April 5, 2000, to serve as the holding company and sole shareholder of Nicolet National Bank (the “Bank”). The Bank opened for business on November 1, 2000. Since its opening in late 2000, Nicolet has supplemented its organic growth with branch purchase and acquisition transactions. See Note 2 for additional information on the Company’s recent acquisitions.
At December 31, 2020, the Company had two wholly owned subsidiaries, the Bank and Nicolet Advisory Services, LLC (“Nicolet Advisory”). At December 31, 2020, the Bank wholly owns an investment subsidiary based in Nevada, a subsidiary in Green Bay that provides a web-based investment management platform for financial advisor trades and related activity, and an entity that owns the building in which Nicolet is headquartered, Nicolet Joint Ventures, LLC (the “JV”). The JV was owned 50 % by a real estate development and investment firm (the “Firm”) through the JV until late 2020 when the Bank became the 100 % owner and sole managing member of the JV. The Firm is considered a related party, as one of its principals is a Board member and shareholder of the Company. See Note 14 for additional related party disclosures, including details of the 50 % interest purchased from the Firm.
Nicolet Advisory is a registered investment advisor subsidiary that provides brokerage and investment advisory services to customers. In late 2020, to improve process efficiencies and organizational structure, the Company dissolved its wholly owned subsidiary, Brookfield Investment Partners, LLC, which provided limited investment services (transactional and strategy) to a few smaller banks, and Nicolet Advisory assumed those additional investment services contracts.
49
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
50
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
Loans – Originated: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are carried at their amortized cost basis, which is the unpaid principal amount outstanding, net of deferred loan fees and costs, and any direct principal charge-off. The Company made an accounting policy election to exclude accrued interest from the amortized cost basis of loans and report such accrued interest as part of accrued interest receivable and other assets on the consolidated balance sheets.
Interest income is accrued on the unpaid principal balance using the simple interest method. The accrual of interest income on loans is discontinued when, in the opinion of management, there is reasonable doubt as to the borrower’s ability to meet payment of interest or principal when due. Loans are generally placed on nonaccrual status when contractually past due 90 days or more as to interest or principal, though may be placed in such status earlier based on the circumstances. Loans past due 90 days or more may continue on accrual only when they are well secured and/or in process of collection or renewal. When interest accrual is discontinued, all previously accrued but uncollected interest is reversed against current period interest income. Except in very limited circumstances, cash collections on nonaccrual loans are credited to the loan receivable balance and no interest income is recognized on those loans until the principal balance is paid in full. Accrual of interest may be resumed when the customer is current on all principal and interest payments and has been paying on a timely basis for a sustained period of time. See Note 4 for additional information and disclosures on loans.
Loans – Acquired: Loans purchased in acquisition transactions are acquired loans, and are recorded at their estimated fair value on the acquisition date.
Subsequent to January 1, 2020, acquired loans that have evidence of more-than-insignificant deterioration in credit quality since origination are considered purchased credit deteriorated (“PCD”) loans. At acquisition, an estimate of expected credit losses is made for PCD loans. This initial allowance for credit losses is allocated to individual PCD loans and added to the purchase price or acquisition date fair value to establish the initial amortized cost basis of the PCD loans. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors, resulting in a discount or premium that is amortized to interest income. For acquired loans not deemed PCD loans at acquisition, the difference between the initial fair value mark and the unpaid principal balance are recognized in interest income over the estimated life of the loans. In addition, an initial allowance for expected credit losses is estimated and recorded as provision expense at the acquisition date. The subsequent measurement of expected credit losses for all acquired loans is the same as the subsequent measurement of expected credit losses for originated loans. See Note 4 for additional information and disclosures on loans.
51
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
on the amortized cost basis of the underlying loan and has made an accounting policy election to exclude accrued interest from the loan’s amortized cost basis and the related measurement of the ACL-Loans. Estimating the amount of the ACL-Loans is a function of a number of factors, including but not limited to changes in the loan portfolio, net charge-offs, trends in past due and nonaccrual loans, and the level of potential problem loans, all of which may be susceptible to significant change. Actual credit losses, net of recoveries, are deducted from the ACL-Loans. Loans are charged-off when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the ACL-Loans. A provision for credit losses, which is a charge against income, is recorded to bring the ACL-Loans to a level that, in management’s judgment, is appropriate to absorb expected credit losses in the loan portfolio.
Prior to January 1, 2020, the Company used an incurred loss impairment model to estimate the ACL-Loans. This methodology assessed the overall appropriateness of the allowance for credit losses and included allocations for specifically identified impaired loans and loss factors for all remaining loans, with a component primarily based on historical loss rates and another component primarily based on other qualitative factors. Impaired loans were individually assessed and measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral if the loan was collateral dependent. Loans that were determined not to be impaired were collectively evaluated for impairment, stratified by type and allocated loss ranges based on the Company’s actual historical loss ratios for each strata, and adjustments were also provided for certain environmental and other qualitative factors.
Effective January 1, 2020, the Company uses a current expected credit loss model (“CECL”) to estimate the ACL-Loans. This methodology also considers historical loss rates and other qualitative adjustments, as well as a new forward-looking component that considers reasonable and supportable forecasts over the expected life of each loan. To develop the ACL-Loans estimate under the CECL model, the Company segments the loan portfolio into loan pools based on loan type and similar credit risk elements; performs an individual evaluation of PCD and other credit-deteriorated loans; calculates the historical loss rates for the segmented loan pools; applies the loss rates over the calculated life of the pooled loans; adjusts for forecasted macro-level economic conditions; and determines qualitative adjustments based on factors and conditions unique to Nicolet's portfolio.
To assess the overall appropriateness of the ACL-Loans, management applies an allocation methodology which focuses on evaluation of qualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to specific loans; (ii) management's ongoing review and grading of the loan portfolio; (iii) consideration of historical loan loss and delinquency experience on each portfolio segment; (iv) trends in past due and nonaccrual loans; (v) the risk characteristics of the various loan segments; (vi) changes in the size and character of the loan portfolio; (vii) concentrations of loans to specific borrowers or industries; (viii) existing economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect expected credit losses. Assessing these numerous factors involves significant judgment.
Management allocates the ACL-Loans by pools of risk within each loan portfolio segment. The allocation methodology consists of the following components. First, a specific reserve is established for individually evaluated PCD and other credit-deteriorated loans, which management defines as nonaccrual credit relationships over $250,000 , collateral dependent loans, and other loans with evidence of credit deterioration. The specific reserve in the ACL-Loans for these credit deteriorated loans is equal to the aggregate collateral or discounted cash flow shortfall. Management allocates the ACL-Loans with historical loss rates by loan segment. The loss factors are measured on a quarterly basis and applied to each loan segment based on current loan balances and projected for their expected remaining life. Next, management allocates the ACL-Loans using the qualitative and environmental factors mentioned above. Consideration is given to those current qualitative or environmental factors that are likely to cause estimated credit losses at the evaluation date to differ from the historical loss experience of each loan segment. Lastly, management considers reasonable and supportable forecasts to assess the collectability of future cash flows. See Note 4 for additional information and disclosures on the ACL-Loans.
Allocations to the ACL-Loans may be made for specific loans but the entire ACL-Loans is available for any loan that, in management’s judgment, should be charged-off or for which an actual loss is realized. The allowance analysis is reviewed by the Board on a quarterly basis in compliance with internal and regulatory requirements.
52
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation and amortization. Premises and equipment from acquisitions were recorded at estimated fair value on the respective dates of acquisition. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful lives of the improvements or the terms of the related leases. Maintenance and repairs are expensed as incurred. See Note 5 for additional information on premises and equipment.
Estimated useful lives of new premises and equipment generally range as follows:
| Building and improvements | ||||||||
| Leasehold improvements | ||||||||
| Furniture and equipment | ||||||||
53
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
Income Taxes: The Company files a consolidated federal income tax return and a combined state income tax return (both of which include the Company 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 quarterly 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 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 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.
54
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
New Accounting Pronouncements Adopted: In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. The updated guidance was effective for annual reporting periods, including interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted the updated guidance effective January 1, 2020, with no material impact on its consolidated financial statements as the new ASU only revises disclosure requirements. See Note 17 for fair value disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments intended to improve the financial reporting by requiring earlier recognition of credit losses on loans and certain other financial assets. Topic 326 replaced the incurred loss impairment model (which recognized losses when a probable threshold was met) with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. The measurement of lifetime expected credit losses is based on historical experience, current conditions, and reasonable and supportable forecasts. The ASU was effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted the new accounting standard on January 1, 2020, as required, and recorded a cumulative-effect adjustment of $6 million to retained earnings. See Securities Available for Sale, Loans, and Allowance for Credit Losses above for changes to accounting policies and see Notes 3 and 4 for additional disclosures related to this new accounting pronouncement.
55
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
NOTE 2. ACQUISITIONS
Completed Acquisitions:
Advantage Community Bancshares, Inc. (“Advantage”): On August 21, 2020, Nicolet completed its merger with Advantage, pursuant to the terms of the definitive merger agreement dated March 2, 2020, whereby Advantage merged with and into Nicolet, and Advantage Community Bank, the wholly owned bank subsidiary of Advantage, was merged with and into the Company's banking subsidiary, Nicolet National Bank. Advantage’s four branches in Dorchester, Edgar, Mosinee, and Wausau opened as Nicolet National Bank branches on August 24, 2020, expanding our presence in Central Wisconsin and the Wausau area. Due to the small size of the transaction, terms of the all-cash deal were not disclosed.
Upon consummation, Advantage added total assets of approximately $172 million (representing 4 % of Nicolet’s then pre-merger asset size), loans of $88 million, deposits of $141 million, core deposit intangible of $1 million, and goodwill of $12 million.
Choice Bancorp, Inc. (“Choice”): On November 8, 2019, the Company consummated its merger with Choice, pursuant to the terms of the Agreement and Plan of Merger dated June 26, 2019, (the “Choice Merger Agreement”), whereby Choice (at 12 % of Nicolet’s then pre-merger asset size) was merged with and into Nicolet, and Choice Bank, the wholly owned bank subsidiary of Choice, was merged with and into the Bank. The system integration was completed, and the two branches of Choice opened on November 12, 2019, as Nicolet National Bank branches, expanding its presence in the Oshkosh marketplace. The Company closed its legacy Oshkosh location concurrently with the consummation of the Choice merger.
The purpose of the merger was to continue Nicolet’s interest in strategic growth, consistent with its plan to improve profitability through efficiency, leverage the strengths of each bank across the combined customer base, and add shareholder value. With the merger, Nicolet became the leading community bank to serve the Oshkosh marketplace.
Pursuant to the Choice Merger Agreement, the final purchase price consisted of issuing 1,184,102 shares of the Company’s common stock (given the final stock-for-stock exchange ratio of 0.497 , and not exchanging the Choice shares owned by the Company immediately prior to the time of the merger), for common stock consideration of $79.8 million (based on $67.39 per share, the volume weighted average closing price of the Company’s common stock over the preceding 30 trading day period) plus cash consideration of $1.7 million. Approximately $0.2 million in direct stock issuance costs for the merger were incurred and charged against additional paid-in capital.
Upon consummation, Choice added $457 million in assets, including $348 million in loans, $289 million in deposits, $1.7 million in core deposit intangible, and $45 million of goodwill. The Company accounted for the transaction under the acquisition method of accounting, and thus, the financial position and results of operations of Choice prior to the consummation date were not included in the accompanying consolidated financial statements. The accounting required assets purchased and liabilities assumed to be recorded at their respective estimated fair values at the date of acquisition.
Terminated Acquisition:
Commerce Financial Holdings, Inc. (“Commerce”): On February 17, 2020, Nicolet entered into a definitive merger agreement (“Merger Agreement”) with Commerce pursuant to which Nicolet would acquire Commerce and its wholly owned bank subsidiary, Commerce State Bank. On May 18, 2020, Nicolet and Commerce announced a mutual agreement to terminate their Merger Agreement. Nicolet paid Commerce $0.5 million and surrendered its $0.1 million of Commerce common stock.
NOTE 3. SECURITIES AVAILABLE FOR SALE
Amortized cost and fair value of securities available for sale are summarized as follows.
| December 31, 2020 | |||||||||||||||||||||||||||||
| (in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Fair Value as % of Total | ||||||||||||||||||||||||
| U.S. government agency securities | $ | $ | $ | $ | % | ||||||||||||||||||||||||
| State, county and municipals | % | ||||||||||||||||||||||||||||
| Mortgage-backed securities | % | ||||||||||||||||||||||||||||
| Corporate debt securities | % | ||||||||||||||||||||||||||||
| $ | $ | $ | $ | % | |||||||||||||||||||||||||
56
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
| December 31, 2019 | |||||||||||||||||||||||||||||
| (in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Fair Value as % of Total | ||||||||||||||||||||||||
| U.S. government agency securities | $ | $ | $ | $ | % | ||||||||||||||||||||||||
| State, county and municipals | % | ||||||||||||||||||||||||||||
| Mortgage-backed securities | % | ||||||||||||||||||||||||||||
| Corporate debt securities | % | ||||||||||||||||||||||||||||
| $ | $ | $ | $ | % | |||||||||||||||||||||||||
All mortgage-backed securities included in the tables above were issued by U.S. government agencies and corporations. Securities AFS with a fair value of $146 million and $166 million as of December 31, 2020 and 2019, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law. Accrued interest on securities AFS totaled $2.3 million and $2.2 million at December 31, 2020 and 2019, respectively, and is included in accrued interest receivable and other assets on the consolidated balance sheets.
The following tables present gross unrealized losses and the related estimated fair value of investment securities AFS for which an allowance for credit losses has not been recorded, aggregated by investment category and the length of time the individual securities have been in a continuous unrealized loss position.
| December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||
| Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Number of Securities | ||||||||||||||||||||||||||||||||||
| State, county and municipals | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | |||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||
| Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Number of Securities | ||||||||||||||||||||||||||||||||||
| U.S. government agency securities | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| State, county and municipals | |||||||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | |||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
The Company evaluates securities AFS in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. In making this evaluation, management considers the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.
As of December 31, 2020, no allowance for credit losses on securities AFS was recognized. The Company does not consider its securities AFS with unrealized losses to be attributable to credit-related factors as the unrealized losses in each category have occurred as a result of changes in noncredit-related factors such as changes in interest rates, market spreads, and market conditions subsequent to purchase, not credit deterioration. Furthermore, the Company does not have the intent to sell any of these securities AFS and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost. There were no
57
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
| December 31, 2020 | |||||||||||
| (in thousands) | Amortized Cost | Fair Value | |||||||||
| Due in less than one year | $ | $ | |||||||||
| Due in one year through five years | |||||||||||
| Due after five years through ten years | |||||||||||
| Due after ten years | |||||||||||
| Mortgage-backed securities | |||||||||||
| Securities AFS | $ | $ | |||||||||
Proceeds and realized gains / losses from the sale of securities AFS were as follows.
| Years Ended December 31, | |||||||||||||||||
| (in thousands) | 2020 | 2019 | 2018 | ||||||||||||||
| Gross gains | $ | $ | $ | ||||||||||||||
| Gross losses | ( | ( | |||||||||||||||
| Gains (losses) on sales of securities AFS, net | $ | $ | ( | $ | ( | ||||||||||||
| Proceeds from sales of securities AFS | $ | $ | $ | ||||||||||||||
58
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
NOTE 4. LOANS, ALLOWANCE FOR CREDIT LOSSES - LOANS, AND CREDIT QUALITY
Loans:
The loan composition was as follows.
| December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||
| (in thousands) | Amount | % of Total | Amount | % of Total | |||||||||||||||||||
| Commercial & industrial | $ | % | $ | % | |||||||||||||||||||
| Paycheck Protection Program (“PPP”) loans | |||||||||||||||||||||||
| Owner-occupied commercial real estate (“CRE”) | |||||||||||||||||||||||
| Agricultural | |||||||||||||||||||||||
| CRE investment | |||||||||||||||||||||||
| Construction & land development | |||||||||||||||||||||||
| Residential construction | |||||||||||||||||||||||
| Residential first mortgage | |||||||||||||||||||||||
| Residential junior mortgage | |||||||||||||||||||||||
| Retail & other | |||||||||||||||||||||||
| Loans | % | % | |||||||||||||||||||||
| Less ACL-Loans | |||||||||||||||||||||||
| Loans, net | $ | $ | |||||||||||||||||||||
| ACL-Loans to loans | % | % | |||||||||||||||||||||
Accrued interest on loans totaled $7
Allowance for Credit Losses-Loans:
The majority of the Company’s loans, commitments, and letters of credit have been granted to customers in the Company’s market area. Although the Company has a diversified loan portfolio, the credit risk in the loan portfolio is largely influenced by general economic conditions and trends of the counties and markets in which the debtors operate, and the resulting impact on the operations of borrowers or on the value of underlying collateral, if any.
A roll forward of the allowance for credit losses - loans was as follows.
| Years Ended December 31, | |||||||||||||||||
| (in thousands) | 2020 | 2019 | 2018 | ||||||||||||||
| Beginning balance | $ | $ | $ | ||||||||||||||
| Adoption of CECL | — | — | |||||||||||||||
| Initial PCD ACL | — | — | |||||||||||||||
| Total impact for adoption of CECL | — | — | |||||||||||||||
| Provision for credit losses | |||||||||||||||||
| Charge-offs | ( | ( | ( | ||||||||||||||
| Recoveries | |||||||||||||||||
| Net (charge-offs) recoveries | ( | ( | ( | ||||||||||||||
| Ending balance | $ | $ | $ | ||||||||||||||
59
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
The following table presents the balance and activity in the ACL-Loans by portfolio segment.
Year Ended December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | Commercial & industrial | Owner- occupied CRE | Agricultural | CRE investment | Construction & land development | Residential construction | Residential first mortgage | Residential junior mortgage | Retail & other | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
| ACL-Loans * | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| Adoption of CECL | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Initial PCD ACL | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Provision | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Charge-offs | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Recoveries | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net (charge-offs) recoveries | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| As % of ACL-Loans | % | % | % | % | % | % | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||||||||||
* The PPP loans are fully guaranteed by the SBA; thus, no ACL-Loans has been allocated to these loans.
For comparison purposes, the following table presents the balance and activity in the ACL-Loans by portfolio segment for the prior year-end period.
Year Ended December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | Commercial & industrial | Owner- occupied CRE | Agricultural | CRE investment | Construction & land development | Residential construction | Residential first mortgage | Residential junior mortgage | Retail & other | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
| ACL-Loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| Provision | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Charge-offs | ( | ( | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Recoveries | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net (charge-offs) recoveries | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| As % of ACL-Loans | % | % | % | % | % | % | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||||||||||
The ACL-Loans at December 31, 2020 was estimated using the current expected credit loss model, while the ACL-Loans at December 31, 2019 was estimated using the incurred loss model. See Note 1 for the Company’s accounting policy on loans and the allowance for credit losses.
A loan is considered to be collateral dependent when, based upon management’s assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. For collateral dependent loans, expected credit losses are based on the fair value of the collateral at the balance sheet date, with consideration for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. The following table presents collateral dependent loans by portfolio segment and collateral type, including those loans with and without a related allowance allocation as of December 31, 2020.
60
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2020 | Collateral Type | ||||||||||||||||||||||
| (in thousands) | Real Estate | Other Business Assets | Total | Without an Allowance | With an Allowance | Allowance Allocation | |||||||||||||||||
| Commercial & industrial | $ | $ | $ | $ | $ | $ | |||||||||||||||||
| PPP loans | |||||||||||||||||||||||
| Owner-occupied CRE | |||||||||||||||||||||||
| Agricultural | |||||||||||||||||||||||
| CRE investment | |||||||||||||||||||||||
| Construction & land development | |||||||||||||||||||||||
| Residential construction | |||||||||||||||||||||||
| Residential first mortgage | |||||||||||||||||||||||
| Residential junior mortgage | |||||||||||||||||||||||
| Retail & other | |||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | |||||||||||||||||
The following table presents impaired loans and their respective allowance for credit loss allocations at December 31, 2019, as determined in accordance with historical accounting guidance.
| December 31, 2019 | |||||||||||||||||||||||||||||
| (in thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | ||||||||||||||||||||||||
| Commercial & industrial | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Owner-occupied CRE | |||||||||||||||||||||||||||||
| Agricultural | |||||||||||||||||||||||||||||
| CRE investment | |||||||||||||||||||||||||||||
| Construction & land development | |||||||||||||||||||||||||||||
| Residential construction | |||||||||||||||||||||||||||||
| Residential first mortgage | |||||||||||||||||||||||||||||
| Residential junior mortgage | |||||||||||||||||||||||||||||
| Retail & other | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Past Due and Nonaccrual Loans:
The following tables present past due loans by portfolio segment.
| December 31, 2020 | |||||||||||||||||||||||
| (in thousands) | 30-89 Days Past Due (accruing) | 90 Days & Over or nonaccrual | Current | Total | |||||||||||||||||||
| Commercial & industrial | $ | $ | $ | $ | |||||||||||||||||||
| PPP loans | |||||||||||||||||||||||
| Owner-occupied CRE | |||||||||||||||||||||||
| Agricultural | |||||||||||||||||||||||
| CRE investment | |||||||||||||||||||||||
| Construction & land development | |||||||||||||||||||||||
| Residential construction | |||||||||||||||||||||||
| Residential first mortgage | |||||||||||||||||||||||
| Residential junior mortgage | |||||||||||||||||||||||
| Retail & other | |||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | |||||||||||||||||||
| Percent of total loans | % | % | % | % | |||||||||||||||||||
61
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
| December 31, 2019 | |||||||||||||||||||||||
| (in thousands) | 30-89 Days Past Due (accruing) | 90 Days & Over or nonaccrual | Current | Total | |||||||||||||||||||
| Commercial & industrial | $ | $ | $ | $ | |||||||||||||||||||
| Owner-occupied CRE | |||||||||||||||||||||||
| Agricultural | |||||||||||||||||||||||
| CRE investment | |||||||||||||||||||||||
| Construction & land development | |||||||||||||||||||||||
| Residential construction | |||||||||||||||||||||||
| Residential first mortgage | |||||||||||||||||||||||
| Residential junior mortgage | |||||||||||||||||||||||
| Retail & other | |||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | |||||||||||||||||||
| Percent of total loans | % | % | % | % | |||||||||||||||||||
The following table presents nonaccrual loans by portfolio segment. The nonaccrual loans without a related allowance for credit losses have been reflected in the collateral dependent loans table above.
| Total Nonaccrual Loans | |||||||||||||||||||||||
| (in thousands) | December 31, 2020 | % to Total | December 31, 2019 | % to Total | |||||||||||||||||||
| Commercial & industrial | $ | % | $ | % | |||||||||||||||||||
| PPP loans | |||||||||||||||||||||||
| Owner-occupied CRE | |||||||||||||||||||||||
| Agricultural | |||||||||||||||||||||||
| CRE investment | |||||||||||||||||||||||
| Construction & land development | |||||||||||||||||||||||
| Residential construction | |||||||||||||||||||||||
| Residential first mortgage | |||||||||||||||||||||||
| Residential junior mortgage | |||||||||||||||||||||||
| Retail & other | |||||||||||||||||||||||
| Nonaccrual loans | $ | % | $ | % | |||||||||||||||||||
| Percent of total loans | % | % | |||||||||||||||||||||
62
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
Credit Quality Information:
The following table presents total loans by risk categories and year of origination.
December 31, 2020 | Amortized Cost Basis by Origination Year | ||||||||||||||||||||||||||||
| (in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving | Revolving to Term | TOTAL | ||||||||||||||||||||
Commercial & industrial (a) | |||||||||||||||||||||||||||||
| Grades 1-4 | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Grade 5 | |||||||||||||||||||||||||||||
| Grade 6 | |||||||||||||||||||||||||||||
| Grade 7 | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Owner-occupied CRE | |||||||||||||||||||||||||||||
| Grades 1-4 | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Grade 5 | |||||||||||||||||||||||||||||
| Grade 6 | |||||||||||||||||||||||||||||
| Grade 7 | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Agricultural | |||||||||||||||||||||||||||||
| Grades 1-4 | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Grade 5 | |||||||||||||||||||||||||||||
| Grade 6 | |||||||||||||||||||||||||||||
| Grade 7 | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| CRE investment | |||||||||||||||||||||||||||||
| Grades 1-4 | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Grade 5 | |||||||||||||||||||||||||||||
| Grade 6 | |||||||||||||||||||||||||||||
| Grade 7 | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Construction & land development | |||||||||||||||||||||||||||||
| Grades 1-4 | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Grade 5 | |||||||||||||||||||||||||||||
| Grade 6 | |||||||||||||||||||||||||||||
| Grade 7 | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Residential construction | |||||||||||||||||||||||||||||
| Grades 1-4 | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Grade 5 | |||||||||||||||||||||||||||||
| Grade 6 | |||||||||||||||||||||||||||||
| Grade 7 | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Residential first mortgage | |||||||||||||||||||||||||||||
| Grades 1-4 | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Grade 5 | |||||||||||||||||||||||||||||
| Grade 6 | |||||||||||||||||||||||||||||
| Grade 7 | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Residential junior mortgage | |||||||||||||||||||||||||||||
| Grades 1-4 | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Grade 5 | |||||||||||||||||||||||||||||
| Grade 6 | |||||||||||||||||||||||||||||
| Grade 7 | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Retail & other | |||||||||||||||||||||||||||||
| Grades 1-4 | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Grade 5 | |||||||||||||||||||||||||||||
| Grade 6 | |||||||||||||||||||||||||||||
| Grade 7 | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
(a) For purposes of this table, the $186 million net carrying value of PPP loans were originated in 2020, have a Pass risk grade (Grades 1-4) and have been included with the Commercial & industrial loan category.
63
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
The following tables present total loans by risk categories.
| December 31, 2020 | |||||||||||||||||||||||||||||
| (in thousands) | Grades 1-4 | Grade 5 | Grade 6 | Grade 7 | Total | ||||||||||||||||||||||||
| Commercial & industrial | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| PPP loans | |||||||||||||||||||||||||||||
| Owner-occupied CRE | |||||||||||||||||||||||||||||
| Agricultural | |||||||||||||||||||||||||||||
| CRE investment | |||||||||||||||||||||||||||||
| Construction & land development | |||||||||||||||||||||||||||||
| Residential construction | |||||||||||||||||||||||||||||
| Residential first mortgage | |||||||||||||||||||||||||||||
| Residential junior mortgage | |||||||||||||||||||||||||||||
| Retail & other | |||||||||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Percent of total loans | % | % | % | % | % | ||||||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||
| (in thousands) | Grades 1-4 | Grade 5 | Grade 6 | Grade 7 | Total | ||||||||||||||||||||||||
| Commercial & industrial | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Owner-occupied CRE | |||||||||||||||||||||||||||||
| Agricultural | |||||||||||||||||||||||||||||
| CRE investment | |||||||||||||||||||||||||||||
| Construction & land development | |||||||||||||||||||||||||||||
| Residential construction | |||||||||||||||||||||||||||||
| Residential first mortgage | |||||||||||||||||||||||||||||
| Residential junior mortgage | |||||||||||||||||||||||||||||
| Retail & other | |||||||||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Percent of total loans | % | % | % | % | % | ||||||||||||||||||||||||
An internal loan review function rates loans using a grading system based on different risk categories. Loans with a Substandard grade are considered to have a greater risk of loss and may be assigned allocations for loss based on specific review of the weaknesses observed in the individual credits. Such loans are constantly monitored by the loan review function to ensure early identification of any deterioration. A description of the loan risk categories used by the Company follows.
Grades 1-4, Pass: Credits exhibit adequate cash flows, appropriate management and financial ratios within industry norms and/or are supported by sufficient collateral. Some credits in these rating categories may require a need for monitoring but elements of concern are not severe enough to warrant an elevated rating.
Grade 5, Watch: Credits with this rating are adequately secured and performing but are being monitored due to the presence of various short-term weaknesses which may include unexpected, short-term adverse financial performance, managerial problems, potential impact of a decline in the entire industry or local economy and delinquency issues. Loans to individuals or loans supported by guarantors with marginal net worth or collateral may be included in this rating category.
Grade 6, Special Mention: Credits with this rating have potential weaknesses that, without the Company’s attention and correction may result in deterioration of repayment prospects. These assets are considered Criticized Assets. Potential weaknesses may include adverse financial trends for the borrower or industry, repeated lack of compliance with Company requests, increasing debt to net worth, serious management conditions and decreasing cash flow.
64
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
Grade 7, Substandard: Assets with this rating are characterized by the distinct possibility the Company will sustain some loss if deficiencies are not corrected. All foreclosures, liquidations, and nonaccrual loans are considered to be categorized in this rating, regardless of collateral sufficiency.
Troubled Debt Restructurings:
At December 31, 2020, there were eleven loans classified as troubled debt restructurings with a current outstanding balance of $5.5 million (including $3.4 million on nonaccrual and $2.1 million performing) and a pre-modification balance of $6.5 million. In comparison, at December 31, 2019, there were five loans classified as troubled debt restructurings with an outstanding balance of $1.1 million (all nonaccrual) and a pre-modification balance of $1.4 million. There were no loans which were classified as troubled debt restructurings during the previous twelve months that subsequently defaulted during 2020. As of December 31, 2020, there were no commitments to lend additional funds to debtors whose terms have been modified in troubled debt restructurings.
NOTE 5. PREMISES AND EQUIPMENT
Premises and equipment, less accumulated depreciation and amortization, is summarized as follows.
| (in thousands) | December 31, 2020 | December 31, 2019 | |||||||||
| Land | $ | $ | |||||||||
| Land improvements | |||||||||||
| Building and improvements | |||||||||||
| Leasehold improvements | |||||||||||
| Furniture and equipment | |||||||||||
| Less accumulated depreciation and amortization | |||||||||||
| Premises and equipment, net | $ | $ | |||||||||
Depreciation and amortization expense was $4.4 million in 2020, $3.8 million in 2019, and $4.4 million in 2018. The Company and certain of its subsidiaries are obligated under non-cancelable operating leases for facilities, certain of which provide for rental adjustments based upon increases in cost of living adjustments and other indices. Rent expense under leases totaled $1.0 million in 2020, $1.2 million in 2019, and $1.4 million in 2018. See Note 1 for the Company’s accounting policy on premises and equipment.
Nicolet leases space under non-cancelable operating lease agreements for certain bank and nonbank branch facilities with remaining lease terms of 1 to 10 years. Certain lease arrangements contain extension options which typically range from 5 to 10 years at the then fair market rental rates. The lease asset and liability considers renewal options when they are reasonably certain of being exercised. See Note 1 for the Company’s accounting policy on operating leases.
A summary of net lease cost and selected other information related to operating leases was as follows.
| Years Ended | ||||||||
| ($ in thousands) | December 31, 2020 | December 31, 2019 | ||||||
| Net lease cost: | ||||||||
| Operating lease cost | $ | $ | ||||||
| Variable lease cost | ||||||||
| Net lease cost | $ | $ | ||||||
| Selected other operating lease information: | ||||||||
| Weighted average remaining lease term (years) | ||||||||
| Weighted average discount rate | % | % | ||||||
65
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
The following table summarizes the maturity of remaining lease liabilities.
| Years Ending December 31, | (in thousands) | ||||
| 2021 | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| Total future minimum lease payments | |||||
| Less: amount representing interest | ( | ||||
| Present value of net future minimum lease payments | $ | ||||
During 2020, the Company permanently closed eight branch locations (five owned locations and three leased locations) given changing customer needs, partly from the pandemic. These closures resulted in accelerated depreciation of $0.5 million (recorded to occupancy, equipment and office expense), a $1.0 million lease termination charge (recorded to other expense), and a $1.0 million write-down upon transfer of the owned locations to OREO (recorded to asset gains (losses), net). During 2019, a $0.7 million lease termination charge was recorded to other expense due to the closure of a branch, concurrent with the consummation date of the Choice merger.
NOTE 6. GOODWILL AND OTHER INTANGIBLES AND MORTGAGE SERVICING RIGHTS
Management periodically reviews the carrying value of its intangible assets to determine if any impairment has occurred, in which case an impairment charge would be recorded as an expense in the period of impairment. During 2020, management considered the potential impact of the COVID-19 pandemic on the valuation of our franchise value, stability of deposits, and of the wealth client base, underlying our goodwill, core deposit intangibles, and customer list intangibles, and determined no impairments were indicated. However, the impacts of the COVID-19 pandemic, which began in March 2020, continue to evolve.
A summary of goodwill and other intangibles was as follows.
| (in thousands) | December 31, 2020 | December 31, 2019 | |||||||||
| Goodwill | $ | $ | |||||||||
| Core deposit intangibles | |||||||||||
| Customer list intangibles | |||||||||||
| Other intangibles | |||||||||||
| Goodwill and other intangibles, net | $ | $ | |||||||||
Goodwill: Goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis or more frequently if certain events or circumstances occur. During 2020, goodwill increased due to the Advantage acquisition, while during 2019, goodwill increased from the Choice acquisition and impairment was recognized on goodwill initially recorded in 2008 for a change in business strategy. See Note 1 for the Company’s accounting policy for goodwill and see Note 2 for additional information on the Company’s acquisitions.
| (in thousands) | December 31, 2020 | December 31, 2019 | |||||||||
| Goodwill: | |||||||||||
| Goodwill at beginning of year | $ | $ | |||||||||
| Acquisition | |||||||||||
| Impairment | ( | ||||||||||
| Goodwill at end of year | $ | $ | |||||||||
Other intangibles: Other intangible assets, consisting of core deposit intangibles and customer list intangibles, are amortized over their estimated finite lives. During 2020, core deposit intangibles increased due to the Advantage acquisition, while during 2019, core deposit intangibles increased from the Choice acquisition. See Note 1 for the Company’s accounting policy for other intangibles and see Note 2 for additional information on the Company’s acquisitions.
66
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
| (in thousands) | December 31, 2020 | December 31, 2019 | |||||||||
| Core deposit intangibles: | |||||||||||
| Gross carrying amount | $ | $ | |||||||||
| Accumulated amortization | ( | ( | |||||||||
| Net book value | $ | $ | |||||||||
| Additions during the period | $ | $ | |||||||||
| Amortization during the period | $ | $ | |||||||||
| Customer list intangibles: | |||||||||||
| Gross carrying amount | $ | $ | |||||||||
| Accumulated amortization | ( | ( | |||||||||
| Net book value | $ | $ | |||||||||
| Amortization during the period | $ | $ | |||||||||
Mortgage servicing rights: A summary of the changes in the MSR asset was as follows.
| (in thousands) | December 31, 2020 | December 31, 2019 | |||||||||
| MSR asset: | |||||||||||
| MSR asset at beginning of year | $ | $ | |||||||||
| Capitalized MSR | |||||||||||
| MSR asset acquired | |||||||||||
| Amortization during the period | ( | ( | |||||||||
| MSR asset at end of year | $ | $ | |||||||||
| Valuation allowance at beginning of year | $ | $ | |||||||||
| Additions | ( | ||||||||||
| Valuation allowance at end of year | $ | ( | $ | ||||||||
| MSR asset, net | $ | $ | |||||||||
| Fair value of MSR asset at end of period | $ | $ | |||||||||
| Residential mortgage loans serviced for others | $ | $ | |||||||||
| Net book value of MSR asset to loans serviced for others | % | % | |||||||||
The Company periodically evaluates its mortgage servicing rights asset for impairment. A valuation allowance of $1.0 million was recorded for 2020, while no valuation allowance was recorded for 2019. See Note 1 for the Company’s accounting policy for MSRs, see Note 2 for additional information on the Company’s acquisitions, and see Note 17 for additional information on the fair value of the MSR asset.
The following table shows the estimated future amortization expense for amortizing intangible assets and the MSR asset. The projections are based on existing asset balances, the current interest rate environment and prepayment speeds as of December 31, 2020. The actual amortization expense the Company recognizes in any given period may be significantly different depending upon acquisition or sale activities, changes in interest rates, prepayment speeds, market conditions, regulatory requirements and events or circumstances that indicate the carrying amount of an asset may not be recoverable.
| (in thousands) | Core deposit intangibles | Customer list intangibles | MSR asset | ||||||||||||||
| Years Ending December 31, | |||||||||||||||||
| 2021 | $ | $ | $ | ||||||||||||||
| 2022 | |||||||||||||||||
| 2023 | |||||||||||||||||
| 2024 | |||||||||||||||||
| 2025 | |||||||||||||||||
| Thereafter | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
67
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
NOTE 7. DEPOSITS
At December 31, 2020, the scheduled maturities of time deposits were as follows.
| Years Ending December 31, | (in thousands) | ||||
| 2021 | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| Total time deposits | $ | ||||
Time deposits of $250,000 or more were $55.6 million and $91.2 million at December 31, 2020 and 2019, respectively.
NOTE 8. SHORT AND LONG-TERM BORROWINGS
Short-Term Borrowings:
The Company did no
Long-Term Borrowings:
The components of long-term borrowings (borrowing with an original contractual maturity greater than one year) were as follows.
| (in thousands) | December 31, 2020 | December 31, 2019 | |||||||||
| FHLB advances | $ | $ | |||||||||
| Junior subordinated debentures | |||||||||||
| Subordinated notes | |||||||||||
Total long-term borrowings | $ | $ | |||||||||
PPP Liquidity Facility (“PPPLF”): To support the effectiveness of the PPP loans, the Federal Reserve introduced the PPPLF to extend credit to financial institutions that made PPP loans, with the related PPP loans used as collateral on the borrowings. The PPPLF borrowings had a fixed interest rate of 0.35% and a maturity date equal to the maturity date of the related PPP loans, with the PPP loans maturing either two or five years from the origination date of the PPP loan. The Company received PPPLF funds of $344 million during second quarter 2020 which was subsequently repaid in full during fourth quarter 2020, given the level of all other funding.
FHLB Advances: The FHLB advances bear fixed rates, require interest-only monthly payments, and have maturity dates through March 2027. The weighted average rate of the FHLB advances was 0.73 % and 1.57 % at December 31, 2020 and 2019, respectively. The FHLB advances are collateralized by a blanket lien on qualifying first mortgages, home equity loans, multi-family loans and certain farmland loans which had a pledged balance of $272.9 million and $273.5 million at December 31, 2020 and 2019, respectively.
The following table shows the maturity schedule of the FHLB advances as of December 31, 2020.
| Maturing in: | (in thousands) | ||||
| 2021 | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| $ | |||||
The Company has a $10 million line of credit with a third party bank, bearing a variable rate of interest and quarterly payments of interest only. At December 31, 2020, the interest rate was based on the Prime Rate plus a 0.25 % margin, and subject to a floor rate of 3.50 %, while at December 31, 2019, the interest rate was based on one-month LIBOR plus a 2.25 % margin and subject to a floor
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NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
rate of 3.25 %. At December 31, 2020, the available line was $10 million. The outstanding balance was zero
Junior Subordinated Debentures: The following table shows the breakdown of junior subordinated debentures. Interest on all debentures is current. Any applicable discounts (initially recorded to carry an acquired debenture at its then estimated fair value) are being accreted to interest expense over the remaining life of the debentures. All the debentures below are currently callable and may be redeemed in part or in full, at par, plus any accrued but unpaid interest. On December 31, 2020, the Company redeemed in full its 2004 Nicolet Bankshares Statutory Trust junior subordinated debentures.
| Junior Subordinated Debentures | |||||||||||||||||||||||||||||
| (in thousands) | Maturity Date | Par | 12/31/2020 Unamortized Discount | 12/31/2020 Carrying Value | 12/31/2019 Carrying Value | ||||||||||||||||||||||||
2004 Nicolet Bankshares Statutory Trust(1) | 7/15/2034 | $ | $ | $ | $ | ||||||||||||||||||||||||
2005 Mid-Wisconsin Financial Services, Inc.(2) | 12/15/2035 | ( | |||||||||||||||||||||||||||
2006 Baylake Corp.(3) | 9/30/2036 | ( | |||||||||||||||||||||||||||
2004 First Menasha Bancshares, Inc.(4) | 3/17/2034 | ( | |||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | ||||||||||||||||||||||||
(1)The interest rate is 8.00 % fixed.
(2)The debentures, assumed in April 2013 as the result of an acquisition, have a floating rate of the three-month LIBOR plus 1.43 %, adjusted quarterly. The interest rates were 1.65 % and 3.32 % as of December 31, 2020 and 2019, respectively.
(3)The debentures, assumed in April 2016 as a result of an acquisition, have a floating rate of the three-month LIBOR plus 1.35 %, adjusted quarterly. The interest rates were 1.59 % and 3.31 % as of December 31, 2020 and 2019, respectively.
(4)The debentures, assumed in April 2017 as the result of an acquisition, have a floating rate of the three-month LIBOR plus 2.79 %, adjusted quarterly. The interest rate was 3.02 % and 4.69 % as of December 31, 2020 and 2019, respectively.
Each of the junior subordinated debentures was issued to an underlying statutory trust (the “statutory trusts”), which issued trust preferred securities and common securities and used the proceeds from the issuance of the common and the trust preferred securities to purchase the junior subordinated debentures of the Company. The debentures represent the sole asset of the statutory trusts. All of the common securities of the statutory trusts are owned by the Company. The statutory trusts are not included in the consolidated financial statements. The net effect of all the documents entered into with respect to the trust preferred securities is that the Company, through payments on its debentures, is liable for the distributions and other payments required on the trust preferred securities. At December 31, 2020 and 2019, $23.9 million and $29.4 million, respectively, of trust preferred securities qualify as Tier 1 capital.
Subordinates Notes: In 2015, the Company placed an aggregate of $12 million in subordinated Notes in private placements with certain accredited investors. All Notes were issued with 10 -year maturities, had a fixed annual interest rate of 5 % payable quarterly, and were callable on or after the fifth anniversary of their respective issuances dates. On November 16, 2020, the Company fully redeemed the subordinated Notes.
NOTE 9. EMPLOYEE AND DIRECTOR BENEFIT PLANS
The Company sponsors two deferred compensation plans, one for certain key management employees and another for directors. Under the management plan, employees designated by the Board of Directors may elect to defer compensation and the Company may at its discretion make nonelective contributions on behalf of one or more eligible plan participants. Upon retirement, termination of employment or at their election, the employee shall become entitled to receive the deferred amounts plus earnings thereon. The liability for the cumulative employee contributions and earnings thereon at December 31, 2020 and 2019 totaled approximately $1.5 million and $0.9 million, respectively, and is included in other liabilities on the consolidated balance sheets. The Company made discretionary contributions totaling $1.4 million and $1.8 million during 2020 and 2019, respectively, to selected recipients, which vested immediately and were fully expensed upon grant.
Under the director plan, participating directors may defer up to 100 % of their Board compensation towards the purchase of Company common stock at market prices on a quarterly basis that is held in a Rabbi Trust and distributed when each such participating director ends his or her board service. During 2020 and 2019, the director plan purchased 2,561 and 3,769 shares of Company common stock valued at approximately $149,000 and $220,000 , respectively. Common stock valued at approximately $20,157 (and representing 282 shares) and $33,000 (and representing 672 shares) was distributed to past directors during 2020 and 2019, respectively. The common stock outstanding and the related director deferred compensation liability are offsetting
69
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
NOTE 10. STOCK-BASED COMPENSATION
The Company may grant stock options and restricted stock under its stock-based compensation plans to certain officers, employees and directors. These plans are administered by a committee of the Board of Directors. The Company’s stock-based compensation plans at December 31, 2020 are described below.
2011 Long-Term Incentive Plan (“2011 LTIP”): The Company’s 2011 LTIP, as subsequently amended with shareholder approval, has reserved 3,000,000 shares of the Company’s common stock for potential stock-based awards. This plan provides for certain stock-based awards such as, but not limited to, stock options, stock appreciation rights and restricted common stock, as well as cash performance awards. As of December 31, 2020, approximately 1.3 million shares were available for grant under this plan.
2002 Stock Incentive Plan: The Company’s 2002 Stock Incentive Plan, as subsequently amended with shareholder approval, reserved a total of 1,175,000 shares of the Company’s common stock for potential stock options. This plan became fully utilized in 2012 and no further awards may be granted under this plan.
Acquired Equity Incentive Plan: In 2016, the Company assumed sponsorship of an equity incentive plan of an acquired company to allow for that company’s already granted awards that became exercisable upon acquisition to be honored. No further awards may be granted under this assumed plan.
In general, for stock option grants the exercise price will not be less than the fair value of the Company’s common stock on the date of grant, the options will become exercisable based upon vesting terms determined by the committee, and the options will expire ten years after the date of grant. In general, for restricted stock grants the shares are issued at the fair value of the Company’s common stock on the date of grant, are restricted as to transfer, but are not restricted as to dividend payments or voting rights, and the transfer restrictions lapse over time, depending upon vesting terms provided for in the grant and contingent upon continued employment.
A Black-Scholes model is utilized to estimate the fair value of stock option grants. See Note 1 for the Company’s accounting policy on stock-based compensation. The weighted average assumptions used in the model for valuing stock option grants were as follows.
| 2020 | 2019 | 2018 | |||||||||||||||
| Dividend yield | % | % | % | ||||||||||||||
| Expected volatility | % | % | % | ||||||||||||||
| Risk-free interest rate | % | % | % | ||||||||||||||
| Expected average life | |||||||||||||||||
| Weighted average per share fair value of options | $ | $ | $ | ||||||||||||||
70
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
A summary of the Company’s stock option activity is summarized below.
| Stock Options | Option Shares Outstanding | Weighted Average Exercise Price | Weighted Average Remaining Life (Years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||||||||
Outstanding – December 31, 2017 | $ | ||||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Exercise of stock options * | ( | ||||||||||||||||||||||
| Forfeited | ( | ||||||||||||||||||||||
Outstanding – December 31, 2018 | $ | $ | |||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Exercise of stock options * | ( | ||||||||||||||||||||||
| Forfeited | ( | ||||||||||||||||||||||
Outstanding – December 31, 2019 | $ | $ | |||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Exercise of stock options * | ( | ||||||||||||||||||||||
| Forfeited | |||||||||||||||||||||||
Outstanding – December 31, 2020 | $ | $ | |||||||||||||||||||||
Exercisable – December 31, 2020 | $ | $ | |||||||||||||||||||||
*The terms of the stock option agreements permit having a number of shares of stock withheld, the fair market value of which as of the date of exercise is sufficient to satisfy the exercise price and/or tax withholding requirements, and accordingly 18,952 shares, 142,752 shares, and 6,411 shares were surrendered during 2020, 2019, and 2018, respectively.
Intrinsic value represents the amount by which the fair value of the underlying stock exceeds the exercise price of the stock options. The intrinsic value of options exercised in 2020, 2019, and 2018 was approximately $2.5 million, $13.9 million, and $2.2 million, respectively.
The following options were outstanding at December 31, 2020.
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Life (Years) | |||||||||||||||||||||||||||||||||
| Outstanding | Exercisable | Outstanding | Exercisable | Outstanding | Exercisable | ||||||||||||||||||||||||||||||
$ | $ | $ | |||||||||||||||||||||||||||||||||
$ | |||||||||||||||||||||||||||||||||||
$ | |||||||||||||||||||||||||||||||||||
$ | |||||||||||||||||||||||||||||||||||
$ | |||||||||||||||||||||||||||||||||||
| $ | $ | ||||||||||||||||||||||||||||||||||
71
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
A summary of the Company’s restricted stock activity is summarized below.
| Restricted Stock | Restricted Shares Outstanding | Weighted Average Grant Date Fair Value | |||||||||
Outstanding – December 31, 2017 | $ | ||||||||||
| Granted | |||||||||||
| Vested * | ( | ||||||||||
| Forfeited | ( | ||||||||||
Outstanding – December 31, 2018 | $ | ||||||||||
| Granted | |||||||||||
| Vested * | ( | ||||||||||
| Forfeited | ( | ||||||||||
Outstanding – December 31, 2019 | $ | ||||||||||
| Granted | |||||||||||
| Vested * | ( | ||||||||||
| Forfeited | |||||||||||
Outstanding – December 31, 2020 | $ | ||||||||||
*The terms of the restricted stock agreements permit the surrender of shares to the Company upon vesting in order to satisfy applicable tax withholding at the minimum statutory withholding rate, and accordingly 4,733 shares, 4,688 shares, and 3,948 shares were surrendered during 2020, 2019, and 2018, respectively.
72
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
NOTE 11. STOCKHOLDERS' EQUITY
The Board of Directors has authorized the repurchase of Nicolet’s outstanding common stock through its common stock repurchase program. During 2020, $40.5 million was utilized to repurchase and cancel over 646,700 common shares at a weighted average price of $62.69 . As of December 31, 2020, there remained $20.4 million authorized under the repurchase program to be utilized from time-to-time to repurchase common shares in the open market, through block transactions or in private transactions. See Note 14, “Related Party Transactions” for additional information on common stock repurchases in private transactions with related parties.
On November 8, 2019, in connection with its acquisition of Choice, the Company issued 1,184,102 shares of its common stock for consideration of $79.8 million plus cash consideration of $1.7 million for outstanding stock options. Approximately $0.2 million in direct stock issuance costs for the merger were incurred and charged against additional paid-in capital. See Note 2 for additional information on the Company’s acquisitions.
NOTE 12. INCOME TAXES
The current and deferred amounts of income tax expense were as follows.
| Years Ended December 31, | |||||||||||||||||
| (in thousands) | 2020 | 2019 | 2018 | ||||||||||||||
| Current | $ | $ | $ | ||||||||||||||
| Deferred | ( | ( | |||||||||||||||
| Income tax expense | $ | $ | $ | ||||||||||||||
The differences between the income tax expense recognized and the amount computed by applying the statutory federal income tax rate of 21% to the income before income tax expense, less noncontrolling interest, for the years ended as indicated are included in the following table.
| Years Ended December 31, | |||||||||||||||||
| (in thousands) | 2020 | 2019 | 2018 | ||||||||||||||
| Tax on pretax income, less noncontrolling interest, at statutory rates | $ | $ | $ | ||||||||||||||
| State income taxes, net of federal effect | |||||||||||||||||
| Tax-exempt interest income | ( | ( | ( | ||||||||||||||
| Non-deductible interest disallowance | |||||||||||||||||
| Increase in cash surrender value life insurance | ( | ( | ( | ||||||||||||||
| Non-deductible business entertainment | |||||||||||||||||
| Stock-based employee compensation | ( | ( | ( | ||||||||||||||
| Non-deductible compensation | |||||||||||||||||
| Sale of UFS | ( | ( | |||||||||||||||
| Other, net | ( | ||||||||||||||||
| Income tax expense | $ | $ | $ | ||||||||||||||
73
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
The net deferred tax asset includes the following amounts of deferred tax assets and liabilities.
| (in thousands) | December 31, 2020 | December 31, 2019 | |||||||||
| Deferred tax assets: | |||||||||||
| ACL-Loans | $ | $ | |||||||||
| Net operating loss carryforwards | |||||||||||
| Credit carryforwards | |||||||||||
| Compensation | |||||||||||
| Purchase of noncontrolling interest | |||||||||||
| Other | |||||||||||
| Other real estate | |||||||||||
| Total deferred tax assets | |||||||||||
| Deferred tax liabilities: | |||||||||||
| Premises and equipment | ( | ( | |||||||||
| Prepaid expenses | ( | ( | |||||||||
| Investment securities | ( | ( | |||||||||
| Core deposit and other intangibles | ( | ( | |||||||||
| Purchase accounting adjustments to liabilities | ( | ( | |||||||||
| MSR asset | ( | ( | |||||||||
| Other | ( | ||||||||||
| Unrealized gain on securities AFS | ( | ( | |||||||||
| Total deferred tax liabilities | ( | ( | |||||||||
| Net deferred tax assets | $ | $ | |||||||||
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, 2020 and 2019, no
At December 31, 2020, the Company had a federal and state net operating loss carryforward of $3.3 million and $15.7 million, respectively. The entire federal and state net operating loss carryforwards were the result of the Company’s acquisitions. The federal and state net operating loss carryovers resulting from the acquisitions have been included in the IRC section 382 limitation calculation and are being limited to the overall amount expected to be realized.
NOTE 13. COMMITMENTS AND CONTINGENCIES
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, financial guarantees, and standby letters of credit. Such commitments may involve, to varying degrees, elements of credit risk in excess of amounts recognized on the consolidated balance sheets. See Note 1 for the Company’s accounting policy on commitments and contingencies.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and issuing letters of credit as they do for on-balance sheet instruments.
A summary of the contract or notional amount of the Company’s exposure to off-balance sheet risk was as follows.
| (in thousands) | December 31, 2020 | December 31, 2019 | |||||||||
| Commitments to extend credit | $ | $ | |||||||||
| Financial standby letters of credit | |||||||||||
| Performance standby letters of credit | |||||||||||
Interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans held for sale are considered derivative instruments (“mortgage derivatives”) and the contractual amounts were $113 million and $20 million, respectively, at December 31, 2020. In comparison, interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans held for sale totaled $43 million and $16
74
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
million, respectively, at December 31, 2019. The net fair value of these mortgage derivatives combined was a net loss of $0.2 million at December 31, 2020, compared to a net gain of $0.1 million at December 31, 2019.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commercial-related commitments to extend credit represented 78 % and 74 % of the total year-end commitments for 2020 and 2019, respectively, and were predominantly commercial lines of credit that carry a term of one year or less. The commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Financial and performance standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Financial standby letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party, while performance standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party. Both of these guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds collateral, which may include accounts receivable, inventory, property, equipment, and income-producing properties, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third-party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount. If the commitment is funded, the Company would be entitled to seek recovery from the customer. At December 31, 2020 and 2019, no amounts have been recorded as liabilities for the Company’s potential obligations under these guarantees.
The Company has federal funds lines available with other financial institutions where funds may be borrowed on a short-term basis at the market rate in effect at the time of the borrowing. Federal funds lines of $175
In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the consolidated financial statements.
NOTE 14. RELATED PARTY TRANSACTIONS
The Company conducts transactions, in the normal course of business, with its directors and officers, including companies in which they have a beneficial interest. The Company is required to disclose material related party transactions, other than certain compensation arrangements, entered into in the normal course of business. It is the Company’s policy to comply with federal regulations that require that these transactions with directors and executive officers be made on substantially the same terms as those prevailing at the time made for comparable transactions to other persons. Related party loans totaled approximately $89 million and $86 million at December 31, 2020 and 2019, respectively.
Nicolet has an active common stock repurchase program that allows for the repurchase of common stock in the open market, through block transactions, or in private transactions. During 2020, Nicolet repurchased common stock in private transactions from two executives under this repurchase program, including 5,851 shares for $0.4 million (or an average cost per share of $71.45 ) from Robert B. Atwell and 5,852 shares for $0.4 million (or an average cost per share of $71.45 ) from Michael E. Daniels. In comparison, during 2019, Nicolet repurchased common stock in private transactions from two executives, including 32,415 shares for $2.2 million (or an average cost per share of $69.21 ) from Robert B. Atwell and 33,993 shares for $2.2 million (or an average cost per share of $64.02 ) from Michael E. Daniels. These private transactions were made in conjunction with large stock option exercises by the executives. See Note 10 for additional information on stock option activity and see Note 11 for additional information on the common stock repurchase program.
As described in Note 1, the Company had a 50 % ownership in a joint venture with the Firm in connection with the Company’s headquarters facility. The Firm is considered a related party, as one of its principals is a Board member and shareholder of the Company. Effective December 31, 2020, the Bank purchased the 50 % ownership interest from the Firm for $8 million, to improve efficiencies in process and organizational structure, and to reflect that the Bank had expanded to occupy the majority of the building. Thus, at December 31, 2020, the Bank was the sole owner and managing member of the JV, with the JV operating as a wholly owned subsidiary of the Bank solely to hold the headquarters facility. Prior to this purchase, the Bank incurred approximately $1.3 million, $1.2 million, and $1.1 million in annual rent expense to the JV during 2020, 2019, and 2018, respectively.
75
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
NOTE 15. ASSET GAINS (LOSSES), NET
Components of the net gains (losses) on assets are as follows.
| Years Ended December 31, | |||||||||||||||||
| (in thousands) | 2020 | 2019 | 2018 | ||||||||||||||
| Gains (losses) on sales of securities AFS, net | $ | $ | ( | $ | ( | ||||||||||||
| Gains (losses) on equity securities, net | ( | ||||||||||||||||
| Gains (losses) on sales of OREO, net | ( | ||||||||||||||||
| Write-downs of OREO | ( | ( | ( | ||||||||||||||
| Write-down of other investment | ( | ( | |||||||||||||||
| Gains (losses) on sales of other investments, net | |||||||||||||||||
| Gains (losses) on sales or dispositions of other assets, net | ( | ( | |||||||||||||||
| Asset gains (losses), net | $ | ( | $ | $ | |||||||||||||
NOTE 16. REGULATORY CAPITAL REQUIREMENTS
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios of Total, Tier 1 and common equity Tier 1 (“CET1”) capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined). Management believes the Company and the Bank met all capital adequacy requirements to which they are subject as of December 31, 2020 and 2019.
As of December 31, 2020 and 2019, the most recent notifications from the regulatory agencies categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, an institution must maintain minimum Total risk-based, Tier 1 risk-based, CET1 risk-based and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since these notifications that management believes have changed the Bank’s category.
76
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
The Company’s and the Bank’s actual regulatory capital amounts and ratios are presented in the following table.
| Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions (2) | |||||||||||||||||||||||||||||||||
| (in thousands) | Amount | Ratio (1) | Amount | Ratio (1) | Amount | Ratio (1) | |||||||||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||||||||
| Company | |||||||||||||||||||||||||||||||||||
| Total risk-based capital | $ | % | $ | % | |||||||||||||||||||||||||||||||
| Tier 1 risk-based capital | |||||||||||||||||||||||||||||||||||
| Common equity Tier 1 capital | |||||||||||||||||||||||||||||||||||
| Leverage | |||||||||||||||||||||||||||||||||||
| Bank | |||||||||||||||||||||||||||||||||||
| Total risk-based capital | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||
| Tier 1 risk-based capital | |||||||||||||||||||||||||||||||||||
| Common equity Tier 1 capital | |||||||||||||||||||||||||||||||||||
| Leverage | |||||||||||||||||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||||||||
| Company | |||||||||||||||||||||||||||||||||||
| Total risk-based capital | $ | % | $ | % | |||||||||||||||||||||||||||||||
| Tier 1 risk-based capital | |||||||||||||||||||||||||||||||||||
| Common equity Tier 1 capital | |||||||||||||||||||||||||||||||||||
| Leverage | |||||||||||||||||||||||||||||||||||
| Bank | |||||||||||||||||||||||||||||||||||
| Total risk-based capital | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||
| Tier 1 risk-based capital | |||||||||||||||||||||||||||||||||||
| Common equity Tier 1 capital | |||||||||||||||||||||||||||||||||||
| Leverage | |||||||||||||||||||||||||||||||||||
(1)The Total risk-based capital ratio is defined as Tier 1 capital plus tier 2 capital divided by total risk-weighted assets. The Tier 1 risk-based capital ratio is defined as Tier 1 capital divided by total risk-weighted assets. CET1 risk-based capital ratio is defined as Tier 1 capital, with deductions for goodwill and other intangible assets (other than mortgage servicing assets), net of associated deferred tax liabilities, and limitations on the inclusion of deferred tax assets, mortgage servicing assets and investments in other financial institutions, in each case as provided further in the rules, divided by total risk-weighted assets. The Leverage ratio is defined as Tier 1 capital divided by the most recent quarter’s average total assets as adjusted.
(2)Prompt corrective action provisions are not applicable at the bank holding company level.
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, 2020, the Bank could pay dividends of approximately $11 million to the Company without seeking regulatory approval.
NOTE 17. FAIR VALUE MEASUREMENTS
Fair value represents the estimated price at which an orderly transaction to sell an asset or transfer a liability would take place between market participants at the measurement date under current market conditions (i.e., an exit price concept), and is a market-based measurement versus an entity-specific measurement.
The Company records and/or discloses financial instruments on a fair value basis. These financial assets and financial liabilities are measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the assumptions used to determine fair value. These levels are:
•Level 1 - quoted market prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date
•Level 2 - inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly
•Level 3 – significant unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity
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NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
In instances where the fair value measurement is based on inputs from different levels, the level within which the entire fair value measurement will be categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. This assessment of the significance of an input requires management judgment.
Recurring basis fair value measurements:
The following table presents the balances of assets and liabilities measured at fair value on a recurring basis for the periods presented.
| (in thousands) | Fair Value Measurements Using | |||||||||||||||||||||||||
| Measured at Fair Value on a Recurring Basis: | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||
| U.S. government agency securities | $ | $ | $ | $ | ||||||||||||||||||||||
| State, county and municipals | ||||||||||||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||||||||||||
| Corporate debt securities | ||||||||||||||||||||||||||
| Securities AFS | $ | $ | $ | $ | ||||||||||||||||||||||
| Other investments (equity securities) | $ | $ | $ | $ | ||||||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||
| U.S. government agency securities | $ | $ | $ | $ | ||||||||||||||||||||||
| State, county and municipals | ||||||||||||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||||||||||||
| Corporate debt securities | ||||||||||||||||||||||||||
| Securities AFS | $ | $ | $ | $ | ||||||||||||||||||||||
| Other investments (equity securities) | $ | $ | $ | $ | ||||||||||||||||||||||
The following is a description of the valuation methodologies used by the Company for the Securities AFS and equity securities measured at fair value on a recurring basis, noted in the tables above. Where quoted market prices on securities exchanges are available, the investments are classified as Level 1. Level 1 investments primarily include exchange-traded equity securities. If quoted market prices are not available, fair value is generally determined using prices obtained from independent pricing vendors who use pricing models (with typical inputs including benchmark yields, reported trades for similar securities, issuer spreads or relationship to other benchmark quoted securities), or discounted cash flows, and are classified as Level 2. Examples of these investments include U.S. government agency securities, mortgage-backed securities, obligations of state, county and municipals, and certain corporate debt securities. Finally, in certain cases where there is limited activity or less transparency around inputs to the estimated fair value, investments are classified within Level 3 of the hierarchy. Examples of these include private corporate debt securities, which are primarily trust preferred security investments. At December 31, 2020 and 2019, it was determined that carrying value was the best approximation of fair value for these Level 3 securities, based primarily on the internal analysis on these securities.
The following table presents the changes in Level 3 securities AFS measured at fair value on a recurring basis.
| (in thousands) | Years Ended | ||||||||||
| Level 3 Fair Value Measurements: | December 31, 2020 | December 31, 2019 | |||||||||
| Balance at beginning of year | $ | $ | |||||||||
| Acquired balances | |||||||||||
| Paydowns/Sales/Settlements | ( | ||||||||||
| Balance at end of year | $ | $ | |||||||||
Nonrecurring basis fair value measurements:
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NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
| (in thousands) | Fair Value Measurements Using | |||||||||||||||||||||||||
| Measured at Fair Value on a Nonrecurring Basis: | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||
| Collateral dependent loans | $ | $ | $ | $ | ||||||||||||||||||||||
| OREO | ||||||||||||||||||||||||||
| MSR asset | ||||||||||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||
| Impaired loans | $ | $ | $ | $ | ||||||||||||||||||||||
| OREO | ||||||||||||||||||||||||||
| MSR asset | ||||||||||||||||||||||||||
The following is a description of the valuation methodologies used by the Company for the items noted in the table above. For individually evaluated collateral dependent and impaired loans, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, the estimated fair value of the underlying collateral for collateral dependent loans, or the estimated liquidity of the note. For OREO, the fair value is based upon the estimated fair value of the underlying collateral adjusted for the expected costs to sell. To estimate the fair value of the MSR asset, the underlying serviced loan pools are stratified by interest rate tranche and term of the loan, and a valuation model is used to calculate the present value of the expected future cash flows for each stratum. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as costs to service, a discount rate, ancillary income, default rates and losses, and prepayment speeds. Although some of these assumptions are based on observable market data, other assumptions are based on unobservable estimates of what market participants would use to measure fair value.
Financial instruments:
The carrying amounts and estimated fair values of the Company's financial instruments are shown below.
| December 31, 2020 | |||||||||||||||||||||||||||||
| (in thousands) | Carrying Amount | Estimated Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Certificates of deposit in other banks | |||||||||||||||||||||||||||||
| Securities AFS | |||||||||||||||||||||||||||||
| Other investments | |||||||||||||||||||||||||||||
| Loans held for sale | |||||||||||||||||||||||||||||
| Loans, net | |||||||||||||||||||||||||||||
| BOLI | |||||||||||||||||||||||||||||
| MSR asset | |||||||||||||||||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||||||||
| Deposits | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Long-term borrowings | |||||||||||||||||||||||||||||
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NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
| December 31, 2019 | |||||||||||||||||||||||||||||
| (in thousands) | Carrying Amount | Estimated Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Certificates of deposit in other banks | |||||||||||||||||||||||||||||
| Securities AFS | |||||||||||||||||||||||||||||
| Other investments | |||||||||||||||||||||||||||||
| Loans held for sale | |||||||||||||||||||||||||||||
| Loans, net | |||||||||||||||||||||||||||||
| BOLI | |||||||||||||||||||||||||||||
| MSR asset | |||||||||||||||||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||||||||
| Deposits | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Long-term borrowings | |||||||||||||||||||||||||||||
The carrying value of certain assets and liabilities such as cash and cash equivalents, BOLI, nonmaturing deposits, and short-term borrowings, approximate their estimated fair value. For those financial instruments not previously disclosed, the following is a description of the valuation methodologies used.
Certificates of deposits in other banks: Fair values are estimated using discounted cash flow analysis based on current interest rates being offered by instruments with similar terms and represents a Level 2 measurement.
Other investments: The valuation methodologies utilized for the exchange-traded equity securities are discussed under “Recurring basis fair value measurements” above. The carrying amount of Federal Reserve Bank and FHLB stock is a reasonably accepted fair value estimate given their restricted nature. Fair value is the redeemable (carrying) value based on the redemption provisions of the instruments which is considered a Level 2 measurement. The carrying amount of the remaining other investments (particularly common stocks of companies or other banks that are not publicly traded) approximates their fair value, determined primarily by analysis of company financial statements and recent capital issuances of the respective companies or banks, if any, and represents a Level 3 measurement.
Loans held for sale: The fair value estimation process for the loans held for sale portfolio is segregated by loan type. The estimated fair value was based on what secondary markets are currently offering for portfolios with similar characteristics and represents a Level 2 measurement.
Loans, net: For variable-rate loans that reprice frequently and with no significant change in credit risk or other optionality, fair values are based on carrying values. Fair values for all other loans are estimated by discounting contractual cash flows using estimated market discount rates, which reflect the credit and interest rate risk inherent in the loan. Collateral-dependent and impaired loans are included in loans, net. The fair value of loans is considered to be a Level 3 measurement due to internally developed discounted cash flow measurements.
Deposits: The fair value of deposits with no stated maturity (such as demand deposits, savings, interest and noninterest checking, and money market accounts) is, by definition, equal to the amount payable on demand at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market place on certificates of similar remaining maturities. Use of internal discounted cash flows provides a Level 3 fair value measurement.
Long-term borrowings: The fair value of the FHLB advances is obtained from the FHLB which uses a discounted cash flow analysis based on current market rates of similar maturity debt securities and represents a Level 2 measurement. The fair values of the junior subordinated debentures and subordinated notes utilize a discounted cash flow analysis based on an estimate of current interest rates being offered by instruments with similar terms and credit quality. Since the market for these instruments is limited, the internal valuation represents a Level 3 measurement.
Lending-related commitments: At December 31, 2020 and 2019, the estimated fair value of letters of credit, interest rate lock commitments on residential mortgage loans, outstanding mandatory commitments to sell residential mortgage loans into the secondary market, and mirror interest rate swap agreements were not significant.
80
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
NOTE 18. PARENT COMPANY ONLY FINANCIAL INFORMATION
Condensed Parent Company only financial statements of Nicolet Bankshares, Inc. follow.
| Balance Sheets | December 31, | ||||||||||
| (in thousands) | 2020 | 2019 | |||||||||
| Assets | |||||||||||
| Cash and due from subsidiary | $ | $ | |||||||||
| Investments | |||||||||||
| Investments in subsidiaries | |||||||||||
| Goodwill | ( | ( | |||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Junior subordinated debentures | $ | $ | |||||||||
| Subordinated notes | |||||||||||
| Other liabilities | |||||||||||
| Stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
| Statements of Income | Years Ended December 31, | ||||||||||||||||
| (in thousands) | 2020 | 2019 | 2018 | ||||||||||||||
| Interest income | $ | $ | $ | ||||||||||||||
| Interest expense | |||||||||||||||||
| Net interest expense | ( | ( | ( | ||||||||||||||
| Dividend income from subsidiaries | |||||||||||||||||
| Operating expense | ( | ( | ( | ||||||||||||||
| Gain (loss) on investments, net | ( | ||||||||||||||||
| Income tax benefit | |||||||||||||||||
| Earnings before equity in undistributed income (loss) of subsidiaries | |||||||||||||||||
| Equity in undistributed income (loss) of subsidiaries | |||||||||||||||||
| Net income attributable to Nicolet Bankshares, Inc. | $ | $ | $ | ||||||||||||||
81
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
| Statements of Cash Flows | Years Ended December 31, | ||||||||||||||||
| (in thousands) | 2020 | 2019 | 2018 | ||||||||||||||
| Cash Flows From Operating Activities: | |||||||||||||||||
| Net income attributable to Nicolet Bankshares, Inc. | $ | $ | $ | ||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||
| Accretion of discounts | |||||||||||||||||
| (Gain) loss on investments, net | ( | ( | |||||||||||||||
| Change in other assets and liabilities, net | ( | ( | |||||||||||||||
| Equity in undistributed (income) loss of subsidiaries, net of dividends | ( | ( | ( | ||||||||||||||
| Net cash provided by operating activities | |||||||||||||||||
| Cash Flows from Investing Activities: | |||||||||||||||||
| Proceeds from sale of investments | |||||||||||||||||
| Purchases of investments | ( | ( | ( | ||||||||||||||
| Net cash paid in business combinations | ( | ( | |||||||||||||||
| Net cash used in investing activities | ( | ( | ( | ||||||||||||||
| Cash Flows From Financing Activities: | |||||||||||||||||
| Purchase and retirement of common stock | ( | ( | ( | ||||||||||||||
| Proceeds from issuance of common stock, net | |||||||||||||||||
| Repayment of long-term borrowings | ( | ||||||||||||||||
| Net cash used in financing activities | ( | ( | ( | ||||||||||||||
| Net increase (decrease) in cash and due from subsidiary | ( | ||||||||||||||||
| Beginning cash and due from subsidiary | |||||||||||||||||
| Ending cash and due from subsidiary | $ | $ | $ | ||||||||||||||
NOTE 19. EARNINGS PER COMMON SHARE
See Note 1 for the Company’s accounting policy on earnings per common share. Presented below are the calculations for basic and diluted earnings per common share.
| Years Ended December 31, | |||||||||||||||||
| (in thousands, except per share data) | 2020 | 2019 | 2018 | ||||||||||||||
| Net income attributable to Nicolet Bankshares, Inc. | $ | $ | $ | ||||||||||||||
| Weighted average common shares outstanding | |||||||||||||||||
| Effect of dilutive common stock awards | |||||||||||||||||
| Diluted weighted average common shares outstanding | |||||||||||||||||
| Basic earnings per common share | $ | $ | $ | ||||||||||||||
| Diluted earnings per common share | $ | $ | $ | ||||||||||||||
Options to purchase 0.1 million shares for the year ended December 31, 2020 were excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive. Options to purchase less than 0.1 million shares outstanding for year ended December 31, 2019 and options to purchase 0.1 million shares outstanding for the year ended December 31, 2018, respectively, were excluded from the calculation of diluted earnings per share as the effect of their exercise would have been anti-dilutive.
82
NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
NOTE 20. REVENUE RECOGNITION
See Note 1 for the Company’s accounting policy on revenue recognition in accordance with Topic 606. This guidance does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income categories such as gains or losses associated with mortgage servicing rights, derivatives, and income from BOLI are not within the scope of the new guidance. The main types of revenue contracts within the scope of Topic 606 include trust services fee income, brokerage fee income, service charges on deposit accounts, card interchange income, and certain other noninterest income. These contracts are discussed in detail below:
Trust services and brokerage fee income: A contract between the Company and its customers to provide fiduciary and / or investment administration services on trust accounts and brokerage accounts in exchange for a fee. Trust services and brokerage fee income is generally based upon the month-end market value of the assets under management and the applicable fee rate, which is recognized over the period the underlying trust or brokerage account is serviced (generally on a monthly basis). Such contracts are generally cancellable at any time, with the customer subject to a pro-rated fee in the month of termination.
Service charges on deposit accounts: The deposit contract obligates the Company to serve as a custodian of the customer’s deposited funds and generally can be terminated at will by either party. This contract permits the customer to access the funds on deposit and request additional services related to the deposit account. Service charges on deposit accounts consist of account analysis fees (net fees earned on analyzed business and public checking accounts), monthly service charges, nonsufficient fund (“NSF”) charges, and other deposit account related charges. The Company’s performance obligation for account analysis fees and monthly service charges is generally satisfied, and the related revenue recognized, over the period in which the service is provided (typically on a monthly basis); while NSF charges and other deposit account related charges are largely transactional based and the related revenue is recognized at the time the service is provided.
Card interchange income: A contract between the Company, as a card-issuing bank, and its customers whereby the Company receives a transaction fee from the merchant’s bank whenever a customer uses a debit or credit card to make a purchase. The performance obligation is completed and the fees are recognized as the service is provided (i.e., when the customer uses a debit or credit card).
Other noninterest income: Other noninterest income includes several items, such as wire transfer income, check cashing fees, check printing fees, safe deposit box rental fees, management fee income, and consulting fees. These fees are generally recognized at the time the service is provided.
83
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Nicolet Bankshares, Inc.
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Nicolet Bankshares, Inc. and subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the years then ended and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and measurement of allowance for credit losses as of January 1, 2020 due to the adoption of ASC Topic 326, Financial Instruments – Credit Losses.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
84
consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Estimate of the allowance for credit losses – loans related to loans collectively evaluated for impairment
As described in Notes 1 and 4 to the consolidated financial statements, the Company’s allowance for credit losses – loans (ACL-Loans) totaled $32.2 million of which $30.9 million relates to loans collectively evaluated for impairment (general reserve). The Company estimated the general reserve using the weighted average remaining life method which utilizes historical loss rates of pools of loans with similar risk characteristics and then applied to the respective loan pool balances. These amounts are then adjusted for certain qualitative factors related to current conditions in addition to adjustments for reasonable and supportable forecasts for future periods.
We identified the estimate of the general reserve portion of the ACL-Loans as a critical audit matter because auditing it required significant auditor judgment and involved significant estimation uncertainty requiring industry knowledge and experience.
The primary audit procedures we performed to address this critical audit matter included:
•We evaluated the design and tested the operating effectiveness of key controls relating to the Company’s ACL-Loans calculation, including controls over the segmentation of the loan portfolio, the periods used in the calculation, the determination of qualitative factors including reasonable and supportable forecasts, and the precision of management’s review and approval of the calculation and resulting estimate
•We tested the completeness and accuracy of the data used by management to calculate historical loss rates adjusted for the remaining life of the loan pools
•We tested the completeness and accuracy of the data used by management in determining qualitative factor adjustments, including the reasonable and supportable factors, by agreeing them to internal and external information
•We analyzed the qualitative factors in comparison to historical periods to evaluate the directional consistency in relation to the Company’s loan portfolio and local economy
We have served as the Company’s auditor since 2005.
Atlanta, Georgia
February 26, 2021
85
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Nicolet Bankshares, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the year ended December 31, 2018 and the related notes (collectively, the consolidated financial statements) of Nicolet Bankshares, Inc. and subsidiaries (the “Company”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of the Company‘s operations and cash flows for the year ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audit of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
We have served as the Company’s auditor since 2005.
Atlanta, Georgia
March 8, 2019
86
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management, under the supervision, and with the participation, of our Chief Executive Officer and President and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon, and as of the date of such evaluation, the Chief Executive Officer and President and the Chief Financial Officer concluded that our disclosure controls and procedures were effective in timely alerting them to material information relating to Nicolet that is required to be included in Nicolet’s periodic filings with the SEC. During the fourth quarter of 2020 there were no significant changes in the Company’s internal controls that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
As of December 31, 2020, management assessed the effectiveness of the Company’s internal control over financial reporting based on criteria for effective internal control over financial reporting established in “Internal Control — Integrated Framework,” issued by the Committee of Sponsoring Organization of the Treadway Commission (COSO) in 2013. Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2020, was effective.
Wipfli LLP, the independent registered public accounting firm that audited the consolidated financial statements of the Company included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. The report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 is included under the heading “Report of Independent Registered Public Accounting Firm.”
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Code of Ethics
The Company has adopted a Code of Ethics that applies to its senior financial officers. A copy is available, without charge, upon telephonic or written request addressed to Ann K. Lawson, Chief Financial Officer, Nicolet Bankshares, Inc., 111 North Washington Street, Green Bay, Wisconsin 54301, telephone (920) 430-1400.
The remaining information required in Part III, Item 10 is incorporated by reference to the registrant’s definitive proxy statement for the 2021 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required in Part III, Item 11 is incorporated by reference to the registrant’s definitive proxy statement for the 2021 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) (1) | Weighted average exercise price of outstanding options, warrants and rights (b) (2) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | |||||||||
| Plan Category | |||||||||||
| Equity compensation plans approved by security holders | 1,456,385 | $ | 50.47 | 1,339,994 | |||||||
| Equity compensation plans not approved by security holders | — | — | — | ||||||||
| Total at December 31, 2020 | 1,456,385 | $ | 50.47 | 1,339,994 | |||||||
(1) Includes 18,925 shares potentially issuable upon the vesting of outstanding restricted stock.
(2) The weighted average exercise price relates only to the exercise of outstanding options included in column (a).
The remaining information required in Part III, Item 12 is incorporated by reference to the registrant’s definitive proxy statement for the 2021 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required in Part III, Item 13 is incorporated by reference to the registrant’s definitive proxy statement for the 2021 Annual Meeting of Shareholders.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required in Part III, Item 14 is incorporated by reference to the registrant’s definitive proxy statement for the 2021 Annual Meeting of Shareholders.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| EXHIBIT INDEX | |||||
| Exhibit | Description of Exhibit | ||||
| 2.1 | |||||
| 2.2 | |||||
| 3.1 | |||||
| 3.2 | |||||
| 4.1 | |||||
| 4.8 | |||||
| 10.1 | [Reserved] | ||||
| 10.2 | [Reserved] | ||||
| 10.3 | [Reserved] | ||||
| 10.4† | |||||
| 10.5† | |||||
| 10.6† | |||||
| 10.7† | |||||
| 10.8† | |||||
| 10.9† | |||||
| 10.10 | [Reserved] | ||||
| 10.11 | [Reserved] | ||||
| 10.12† | |||||
| 10.13† | |||||
| 10.14 | [Reserved] | ||||
| 10.15† | |||||
| 10.16† | |||||
| 10.17† | |||||
| 21.1 | |||||
| 23.1 | |||||
| 23.2 | |||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 32.2 | |||||
| 101.INS | The XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. (11) | ||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | ||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | ||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | ||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | ||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | ||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | ||||
† Denotes a management compensatory agreement.
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(1) Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on June 27, 2019 (File No. 001-37700).
(2) Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on February 18, 2020 (File No. 001-37700).
(3) Incorporated by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed on March 12, 2014 (File No. 333-90052).
(4) Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on May 2, 2016 (File No. 001-37700).
(5) Incorporated by reference to the exhibit of the same number in the Registrant’s Registration Statement on Form S-4, filed on February 1, 2013 (Regis. No. 333-186401).
(6) Incorporated by reference to the Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed on March 9, 2015 (File No. 333-90052).
(7) Incorporated by reference to Exhibit 10.6 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on March 10, 2017 (File No. 001-37700).
(8) Incorporated by reference to the exhibit of the same number in the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed on March 8, 2019 (File No. 001-37700).
(9) Incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed on May 2, 2016 (File No. 001-37700).
(10) Incorporated by reference to Appendix A of the Registrant’s Proxy Statement filed March 7, 2018.
(11) Includes the following financial information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, formatted in iXBRL (Inline eXtensible Business Reporting Language: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements.
ITEM 16. FORM 10-K SUMMARY
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| NICOLET BANKSHARES, INC. | |||||||||||
| February 26, 2021 | By: | /s/ Robert B. Atwell | |||||||||
| Robert B. Atwell, Chairman and Chief Executive Officer | |||||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
February 26, 2021
| /s/ Robert B. Atwell | /s/ Andrew F. Hetzel, Jr. | |||||||
| Robert B. Atwell | Andrew F. Hetzel, Jr. | |||||||
| Chairman, President and Chief Executive Officer | Director | |||||||
| (Principal Executive Officer) | ||||||||
| /s/ Ann K. Lawson | /s/ Donald J. Long, Jr. | |||||||
| Ann K. Lawson | Donald J. Long, Jr. | |||||||
| Chief Financial Officer | Director | |||||||
| (Principal Financial and Accounting Officer) | ||||||||
| /s/ Michael E. Daniels | /s/ Dustin J. McClone | |||||||
| Michael E. Daniels | Dustin J. McClone | |||||||
| Director, Executive Vice President and Secretary | Director | |||||||
| /s/ Rachel Campos-Duffy | /s/ Susan L. Merkatoris | |||||||
| Rachel Campos-Duffy | Susan L. Merkatoris | |||||||
| Director | Director | |||||||
| /s/ John N. Dykema | /s/ Oliver Pierce Smith | |||||||
| John N. Dykema | Oliver Pierce Smith | |||||||
| Director | Director | |||||||
| /s/ Terrence R. Fulwiler | /s/ Robert J. Weyers | |||||||
| Terrence R. Fulwiler | Robert J. Weyers | |||||||
| Director | Director | |||||||
| /s/ Christopher J. Ghidorzi | ||||||||
| Christopher J. Ghidorzi | ||||||||
| Director | ||||||||
91