Nicolet Bankshares Inc.
Annual Report 2014

Plain-text annual report

111 N. Washington Street P.O. Box 23900 Green Bay, WI 54305-3900 920-430-1400 1-800-369-0226 Statements made in this Annual Report which are not purely historical are forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. This includes any statements regarding management’s plans, objectives, or goals for future operations, products or services, and forecasts of its revenues, earnings, or other measures of performance. Such forward-looking statements may be identified by the use of words such as “believe,” “expect,” “anticipate,” “intend,” “target,” “estimate,” “continue,” “positions,” “prospects,” “potential,” “plan,” “outlook,” “would”, “should,” “could,” “will,” “may,” or similar expressions. Forward-looking statements speak only as of the date they are made and Nicolet Bankshares, Inc. (“Nicolet”) has no duty to update forward-looking statements. Forward-looking statements are based on current management expectations and, by their nature, are subject to risks and uncertainties. Actual results may differ materially from those contained in the forward-looking statements. Factors which may cause actual results to differ materially from those contained in such forward-looking statements include those identified in the Nicolet’s most recent Form 10-K and subsequent SEC filings. Forward-looking Statements VINTAGE Why would a 14-year-old bank choose a word like “Vintage” to describe itself ? Over the past year, we not only expanded in asset size and geography, but we also grew older. One of the banks that was acquired by Nicolet National Bank was founded in 1890. So which are we: a 14-year-old entrepreneurial growth story or a 124-year-old legacy bank? This juxtaposition is part of a great story. In our case, the word Vintage refers to our core values, in how we act every day, in how we treat our customers. Though technology, regulation and public sentiment have all changed the landscape that is community banking, our core values remain timeless. BE REAL. BE RESPONSIVE. BE PERSONAL. BE MEMORABLE. BE ENTREPRENEURIAL. In a sense, Nicolet National Bank was founded to be a great balancing act. To take the interests of customers, employees and shareholders and balance them so that all will win. Is it easy? No. Is it the right way to do business? Yes. Is it timeless? We think so. Our core values guide the actions that create a successful balancing act. It’s why we were founded 14 years ago. It’s the legacy that we carry forward from the banks we acquired. It’s the “Why” that makes our story great. It’s the Vintage aspect of who we will always be. We welcome you to join us. 3 Dear Shareholders, This is an easy year to write about numbers. Net income, asset quality and growth results are all strong. While hanging tough through the initial years of the economic crisis, we mapped out a growth strategy. We grew organically and made three acquisitions aimed at driving long term value. 2014 is the year when the fruits of these efforts emerged in the stock price. During the calendar year the stock price rose over 50%. This, to many shareholders, is the ultimate metric. You can be certain that our stock price matters to the people who work here and to the board that governs this institution. Our employees plus current and past board members are vested like you, owning over 40% of outstanding shares. Before detailing the 2014 numbers, we want to place them in the context of the strategies that really drive the math. We do not pursue numbers that drive strategies; we pursue strategies that produce results. This letter addresses the question that many of you ask – “what do these numbers really mean?” When the numbers are good, it is especially important to remind you of a core idea that we have consistently expressed. The numbers are not the reality of what we do; they are the results of strategy and a way to assess if our strategy is working. That said, we love numbers. This business is awash in numbers—but our focus is on people and strategy. We have found that customers actually expect and value human contact, personal judgment and accountability—and reward us with their business. We are a growth company in the shrinking corner of a mature industry, and our growth comes from successfully attracting customers, bankers and owners who value our way of thinking and acting. We are pragmatic idealists. We seek real understanding of our industry and environment, not to follow the herd but to find sound ideas that have enduring merit—and then we can make a difference to our customers in a manner that results in shareholder return. People are definitely feeling more optimistic about their own financial affairs, as are we. Even so, we are all well-advised to remember lessons learned from the crisis we came through. The pain of the crisis has abated for most, but the crisis itself has not so much been solved as it has been nationalized. You can see it on the Federal Reserve’s balance sheet and in the growth of the national debt. You can see it in the desperate effort to stimulate growth by holding interest rates at near-zero for over six years. You can hear it rustling through the 2,300 pages of Dodd Frank which was passed on the false premise that it would stabilize the banking industry and end Too Big to Fail. These macro-economic matters and industry trends are concerns that we cannot control. However, we can diligently understand and map out strategies that are in the realm of our control and influence. All of our strategies are built around the straightforward idea that we must deliver a meaningful difference to our customers and the communities we serve, and clearly communicate the value we provide. Doing so has resulted in consistent growth and broader customer relationships over our history even in the face of the crisis. And so, with momentum from a great 2014, we are optimistic about our future. We continue to evaluate our business in the three main areas we have discussed in prior letters: growth, quality and earnings. Growth – We are an outstanding growth story in a mature industry—literally from a white sheet of paper in 2000 to a $1.2 billion community bank spanning the northern two thirds of the state. We are the largest community bank in Wisconsin north of Fond du Lac. We continue to see enormous opportunity for growth. We have accomplished this at a time when small banks have seen their market share plunge. We have done exceptionally well at organic growth. In the Green Bay area we have built a formidable book of nearly $500 million of loans over our 14 years by out-executing our larger competitors in winning business and personal relationships. We have built a wealth management business with over $1 billion of total assets under management and over $5 million in annual revenue. We are four years into building a market presence in Appleton, and have a $125 million high-quality loan book in a market that is ripe for an alternative to the large banks that dominate it. And we are a leading home mortgage originator, with over $400 million in secondary market mortgage production in the past three years, a key part of the consumer’s banking relationship. We get a lot of questions about whether we are emphasizing organic growth or acquisitions. Our answer is “yes”. Wisconsin is considered a low growth market. We continue to take market share in core deposits, C&I lending and wealth management. We have done organic growth exceptionally well over our history. That said, we do see the coming years as a very fertile time to create value through acquisitions. There are many institutions that are either struggling with sustaining value creation in a pressured industry or that simply lack management depth and succession. We are focused on sellers in relevant geography that are willing to really look at what we have done for the Mid-Wisconsin shareholders who had the foresight to entrust us with their legacy. Our Board has directed us to continue to prioritize growth through acquisition. We believe we have plenty of access to any additional equity capital we may need for future growth; however, being owners ourselves, we are pretty fussy about broadening our shareholder base at the expense of current shareholders. 5 2014 was our first full year of operation with the two acquisitions we closed in 2013. The successful Quality – A few short years ago it seemed that all investment analysts talked about was capital integration of the 12 acquired branches is evident in our earnings and loan quality. Not everything and asset quality. The analytics were really centered on whether the problem loans would wipe we plan flows flawlessly, but the Mid-Wisconsin acquisition has worked exceptionally well. out capital and sink the institution. Those years were very trying for us and for our customers. Since this was largely an exchange of stock, it is very important to look back on the results for We took some loan losses but we always made money. We worked through problems without shareholders of both Nicolet (NCBS) and Mid-Wisconsin (MWFS). The chart below is of great consuming our owners’ capital. importance to our future acquisitions because it clearly shows the value of our stock to institutions considering selling to us. MWFS was a small cap public company that accepted the stock of a Banks are all feeling margin and competitive pressure that Fed policy is intended to create. small cap private company. The Board and shareholders of MWFS heard plenty of suggestions We have to remember the folly of the past, but it is expensive to sit out a bull market. What this about waiting for a better time to sell and about seeking a more liquid buyer. In the two years means in practice for a prudent banker is careful risk evaluation and extreme focus on our customer since the announcement MWFS shareholders have enjoyed a 137% increase in share value and relationships. We absorbed nearly $300 million of loans from troubled institutions in 2013. greater liquidity for anyone who wanted to sell. The composition of our ownership base will change At year end our non-performing asset ratio stood at 0.61% of total assets, the lowest level since 2007. as opportunity demands, but we know that liquidity for shareholders is an important part of our commitment to creating shareholder value. The nature of merger and acquisition negotiations can give the appearance of a struggle between winners and losers. The Mid-Wisconsin merger is a great example of how both sides win. We work hard to avoid originating problem loans. We know how to handle problems when they arise. We have also learned how to evaluate and price problem loans at other institutions. We have learned to make money by acquiring and profitably resolving problem loans. The investment community is not very focused on asset quality at the moment, but we are. Long term investors and selling institutions should look carefully at the quality track record of management. It is important to have the fortitude to resist the pressure when federal policy so strongly incentivizes risk. We survived and defended shareholder value and liquidity not just because we knew what to do in a crisis, but because we also knew what not to do before the crisis. We are a lot smarter today than we were in 2007. Our quality track record is strong; in light of our rapid growth, it is outstanding. Earnings – So finally, back to it being an easy year to write about the numbers: • $ 9.9 million net income, representing 0.84% return on average assets for 2014 • $ 2.25 diluted earnings per common share and 11.55% return on average common equity for 2014 • 4% increase in loans and 2% increase in deposits between December 31, 2014 and 2013 • 14% increase in average loans and 24% increase in average deposits for 2014 over 2013 • 3.89% net interest margin • 0.61% nonperforming assets to assets at year end • $ 5.6 million used to repurchase 257,000 common shares during 2014 • $ 21.34 book value per common share, 12% higher than at December 31, 2013 • 51% increase in closing stock price between December 31, 2014 and 2013 We are very pleased with the results from 2014, and there remains upside in our earnings potential as our longer-term strategies mature. Our $9.9 million net income represents, by far, our strongest profit year and is a 50% improvement over 2013’s operating earnings (that is, 2013’s reported net income of $16.1 million, less the nonrecurring bargain purchase gains and direct pre-tax merger expenses, which net after tax were $9.7 million of 2013’s net income). When assessing our performance, we look at various metrics. Return on Average Assets (ROA) Shrinking the denominator also increases the risk of financial failure since it removes is the most common for bank profitability (i.e. the profitability of the asset base), while Return “cushion” for tough times, but this risk is not measured or accounted for in the ratio. on Average Common Equity (ROCE, i.e. the return earned on the investment made by common Quality delivery on this ratio is maximization of net income and prudent management of equity. shareholders) and Diluted Earnings Per Share (DEPS, i.e. the net earnings available to each Our 2014 common share repurchases are an example of prudent management—returning common shareholder’s share) are very relevant to you as an individual shareholder. These measures capital to the shareholders that is simply not necessary for the support of current revenue are of great importance for differing reasons, including their relevance to stock price, but excessive streams. We have never paid a common stock dividend, which isn’t to say we never will. To date focus on any one ratio can lead to actions which could actually harm shareholder return in the we view dividends as a mandatory stock redemption. Our share repurchase program is a way to long run for short term improvement. return capital to the shareholders through voluntary redemption, and support liquidity. We are proud of our track record of thinking like a shareholder and preserving shareholder value because Our 2014 ROA was a healthy 0.84%. High performing banks generally earn around 1% ROA. we are shareholders. As we strive for continued improvement, we manage the relationship between current earnings and long term investment. A prominent example occurred during the heart of the crisis in 2009 In conclusion, we have gone into some detail to address questions we hear from you. 2014 was and 2010—we prioritized rapid resolution of our loan problems, but we also invested in people a very good year for continued execution on growth and performance, further evidenced in a we would need to take advantage of the extraordinary growth potential once the crisis abated. favorable stock price trend. For 2015 we are focused on organic loan growth, comprehensive We “spent” ROA in those years to generate the growth, earnings and share price increase you balance sheet and capital management, revenue maximization in our markets, and on acquisition have seen in the last two years. In our early years we seldom looked at ROA because we were opportunities for strategic growth. If you have more questions, let us know. You will find we do determined to build the base of business that is driving your return today; yet ignoring ROA answer phone calls and emails. can indicate a bank that is always promising good things in a future that never seems to arrive. We are maturing earnings nicely, but willingly invest in the rich opportunities growth and As always, we appreciate your investment in Nicolet. acquisitions provide long term. Our ROCE was 11.55% for 2014. If we can clear 10% ROCE every year with sound execution of banking fundamentals, we will have no problem looking you in the eye at our annual shareholder meetings. Banking is a mature industry which until 2008 was actually thought to have a low risk profile. There have been more than 500 bank failures since 2008. Our industry is not low risk. With increased risk, there are regulatory requirements to hold more capital. With more capital, returns decline. Finance theory suggests too that in higher risk industries investors should expect a higher ROE. This is why we see community banks accessing common equity through Private Equity Funds, pricing their common stock at less than book value. While we agree our industry is both mature and has risk, the answer to the last crisis is not to price new bank equity at an unrealistic return. We think the answer is to operate the bank in a manner that drives the risk profile down. In the meantime, we have been able take advantage of the environment by acquiring and integrating institutions that simply can’t afford the high cost of capital from alternative sources. ROCE is an exceptionally useful tool, that is dangerous when mismanaged. One could summarize the roots of the most recent crisis as a market-wide misapplication of this ratio. There are two mathematical ways to increase ROCE—increase net income and reduce equity. When you can’t impact the amount of earnings appreciably, you may look to reduce equity. However, we can diligently understand and map out strategies that are in the realm of our control and influence. All of our strategies are built around the straightforward idea that we must deliver a meaningful difference to our customers and the communities we serve, and clearly communicate the value we provide. Doing so has resulted in consistent growth and broader customer relationships over our history even in the face of the crisis. And so, with momentum from a great 2014, we are optimistic about our future. Dear Shareholders, This is an easy year to write about numbers. Net income, asset quality and growth results are all strong. While hanging tough through the initial years of the economic crisis, we mapped out a We continue to evaluate our business in the three main areas we have discussed in prior letters: growth strategy. We grew organically and made three acquisitions aimed at driving long term growth, quality and earnings. value. 2014 is the year when the fruits of these efforts emerged in the stock price. During the calendar year the stock price rose over 50%. This, to many shareholders, is the ultimate metric. Growth – We are an outstanding growth story in a mature industry—literally from a white You can be certain that our stock price matters to the people who work here and to the board sheet of paper in 2000 to a $1.2 billion community bank spanning the northern two thirds of that governs this institution. Our employees plus current and past board members are vested the state. We are the largest community bank in Wisconsin north of Fond du Lac. We continue like you, owning over 40% of outstanding shares. Before detailing the 2014 numbers, we want to see enormous opportunity for growth. We have accomplished this at a time when small banks to place them in the context of the strategies that really drive the math. We do not pursue have seen their market share plunge. numbers that drive strategies; we pursue strategies that produce results. This letter addresses the question that many of you ask – “what do these numbers really mean?” We have done exceptionally well at organic growth. In the Green Bay area we have built a formidable book of nearly $500 million of loans over our 14 years by out-executing our larger When the numbers are good, it is especially important to remind you of a core idea that we have competitors in winning business and personal relationships. We have built a wealth management consistently expressed. The numbers are not the reality of what we do; they are the results of business with over $1 billion of total assets under management and over $5 million in annual strategy and a way to assess if our strategy is working. That said, we love numbers. This business revenue. We are four years into building a market presence in Appleton, and have a $125 million is awash in numbers—but our focus is on people and strategy. We have found that customers high-quality loan book in a market that is ripe for an alternative to the large banks that dominate actually expect and value human contact, personal judgment and accountability—and reward us it. And we are a leading home mortgage originator, with over $400 million in secondary market with their business. We are a growth company in the shrinking corner of a mature industry, mortgage production in the past three years, a key part of the consumer’s banking relationship. and our growth comes from successfully attracting customers, bankers and owners who value our way of thinking and acting. We are pragmatic idealists. We seek real understanding of our industry We get a lot of questions about whether we are emphasizing organic growth or acquisitions. and environment, not to follow the herd but to find sound ideas that have enduring merit—and then Our answer is “yes”. Wisconsin is considered a low growth market. We continue to take market we can make a difference to our customers in a manner that results in shareholder return. share in core deposits, C&I lending and wealth management. We have done organic growth People are definitely feeling more optimistic about their own financial affairs, as are we. Even so, to create value through acquisitions. There are many institutions that are either struggling with we are all well-advised to remember lessons learned from the crisis we came through. The pain sustaining value creation in a pressured industry or that simply lack management depth and of the crisis has abated for most, but the crisis itself has not so much been solved as it has been succession. We are focused on sellers in relevant geography that are willing to really look at what nationalized. You can see it on the Federal Reserve’s balance sheet and in the growth of the we have done for the Mid-Wisconsin shareholders who had the foresight to entrust us with their national debt. You can see it in the desperate effort to stimulate growth by holding interest rates legacy. Our Board has directed us to continue to prioritize growth through acquisition. We at near-zero for over six years. You can hear it rustling through the 2,300 pages of Dodd Frank believe we have plenty of access to any additional equity capital we may need for future growth; which was passed on the false premise that it would stabilize the banking industry and end Too Big however, being owners ourselves, we are pretty fussy about broadening our shareholder base at to Fail. These macro-economic matters and industry trends are concerns that we cannot control. the expense of current shareholders. exceptionally well over our history. That said, we do see the coming years as a very fertile time 2014 was our first full year of operation with the two acquisitions we closed in 2013. The successful integration of the 12 acquired branches is evident in our earnings and loan quality. Not everything we plan flows flawlessly, but the Mid-Wisconsin acquisition has worked exceptionally well. Since this was largely an exchange of stock, it is very important to look back on the results for shareholders of both Nicolet (NCBS) and Mid-Wisconsin (MWFS). The chart below is of great importance to our future acquisitions because it clearly shows the value of our stock to institutions considering selling to us. MWFS was a small cap public company that accepted the stock of a small cap private company. The Board and shareholders of MWFS heard plenty of suggestions about waiting for a better time to sell and about seeking a more liquid buyer. In the two years since the announcement MWFS shareholders have enjoyed a 137% increase in share value and greater liquidity for anyone who wanted to sell. The composition of our ownership base will change as opportunity demands, but we know that liquidity for shareholders is an important part of our commitment to creating shareholder value. The nature of merger and acquisition negotiations can give the appearance of a struggle between winners and losers. The Mid-Wisconsin merger is a great example of how both sides win. Quality – A few short years ago it seemed that all investment analysts talked about was capital and asset quality. The analytics were really centered on whether the problem loans would wipe out capital and sink the institution. Those years were very trying for us and for our customers. We took some loan losses but we always made money. We worked through problems without consuming our owners’ capital. Banks are all feeling margin and competitive pressure that Fed policy is intended to create. We have to remember the folly of the past, but it is expensive to sit out a bull market. What this means in practice for a prudent banker is careful risk evaluation and extreme focus on our customer relationships. We absorbed nearly $300 million of loans from troubled institutions in 2013. At year end our non-performing asset ratio stood at 0.61% of total assets, the lowest level since 2007. We work hard to avoid originating problem loans. We know how to handle problems when they arise. We have also learned how to evaluate and price problem loans at other institutions. We have learned to make money by acquiring and profitably resolving problem loans. The investment community is not very focused on asset quality at the moment, but we are. Long term investors and selling institutions should look carefully at the quality track record of management. It is important to have the fortitude to resist the pressure when federal policy so strongly incentivizes risk. We survived and defended shareholder value and liquidity not just because we knew what to do in a crisis, but because we also knew what not to do before the crisis. We are a lot smarter today than we were in 2007. Our quality track record is strong; in light of our rapid growth, it is outstanding. Earnings – So finally, back to it being an easy year to write about the numbers: • $ 9.9 million net income, representing 0.84% return on average assets for 2014 • $ 2.25 diluted earnings per common share and 11.55% return on average common equity for 2014 • 4% increase in loans and 2% increase in deposits between December 31, 2014 and 2013 • 14% increase in average loans and 24% increase in average deposits for 2014 over 2013 • 3.89% net interest margin • 0.61% nonperforming assets to assets at year end • $ 5.6 million used to repurchase 257,000 common shares during 2014 • $ 21.34 book value per common share, 12% higher than at December 31, 2013 • 51% increase in closing stock price between December 31, 2014 and 2013 We are very pleased with the results from 2014, and there remains upside in our earnings potential as our longer-term strategies mature. Our $9.9 million net income represents, by far, our strongest profit year and is a 50% improvement over 2013’s operating earnings (that is, 2013’s reported net income of $16.1 million, less the nonrecurring bargain purchase gains and direct pre-tax merger expenses, which net after tax were $9.7 million of 2013’s net income). 7 When assessing our performance, we look at various metrics. Return on Average Assets (ROA) Shrinking the denominator also increases the risk of financial failure since it removes is the most common for bank profitability (i.e. the profitability of the asset base), while Return “cushion” for tough times, but this risk is not measured or accounted for in the ratio. on Average Common Equity (ROCE, i.e. the return earned on the investment made by common Quality delivery on this ratio is maximization of net income and prudent management of equity. shareholders) and Diluted Earnings Per Share (DEPS, i.e. the net earnings available to each Our 2014 common share repurchases are an example of prudent management—returning common shareholder’s share) are very relevant to you as an individual shareholder. These measures capital to the shareholders that is simply not necessary for the support of current revenue are of great importance for differing reasons, including their relevance to stock price, but excessive streams. We have never paid a common stock dividend, which isn’t to say we never will. To date focus on any one ratio can lead to actions which could actually harm shareholder return in the we view dividends as a mandatory stock redemption. Our share repurchase program is a way to long run for short term improvement. return capital to the shareholders through voluntary redemption, and support liquidity. We are proud of our track record of thinking like a shareholder and preserving shareholder value because Our 2014 ROA was a healthy 0.84%. High performing banks generally earn around 1% ROA. we are shareholders. As we strive for continued improvement, we manage the relationship between current earnings and long term investment. A prominent example occurred during the heart of the crisis in 2009 In conclusion, we have gone into some detail to address questions we hear from you. 2014 was and 2010—we prioritized rapid resolution of our loan problems, but we also invested in people a very good year for continued execution on growth and performance, further evidenced in a we would need to take advantage of the extraordinary growth potential once the crisis abated. favorable stock price trend. For 2015 we are focused on organic loan growth, comprehensive We “spent” ROA in those years to generate the growth, earnings and share price increase you balance sheet and capital management, revenue maximization in our markets, and on acquisition have seen in the last two years. In our early years we seldom looked at ROA because we were opportunities for strategic growth. If you have more questions, let us know. You will find we do determined to build the base of business that is driving your return today; yet ignoring ROA answer phone calls and emails. can indicate a bank that is always promising good things in a future that never seems to arrive. We are maturing earnings nicely, but willingly invest in the rich opportunities growth and As always, we appreciate your investment in Nicolet. acquisitions provide long term. Our ROCE was 11.55% for 2014. If we can clear 10% ROCE every year with sound execution of banking fundamentals, we will have no problem looking you in the eye at our annual shareholder meetings. Banking is a mature industry which until 2008 was actually thought to have a low risk profile. There have been more than 500 bank failures since 2008. Our industry is not low risk. With increased risk, there are regulatory requirements to hold more capital. With more capital, returns decline. Finance theory suggests too that in higher risk industries investors should expect a higher ROE. This is why we see community banks accessing common equity through Private Equity Funds, pricing their common stock at less than book value. While we agree our industry is both mature and has risk, the answer to the last crisis is not to price new bank equity at an unrealistic return. We think the answer is to operate the bank in a manner that drives the risk profile down. In the meantime, we have been able take advantage of the environment by acquiring and integrating institutions that simply can’t afford the high cost of capital from alternative sources. ROCE is an exceptionally useful tool, that is dangerous when mismanaged. One could summarize the roots of the most recent crisis as a market-wide misapplication of this ratio. There are two mathematical ways to increase ROCE—increase net income and reduce equity. When you can’t impact the amount of earnings appreciably, you may look to reduce equity. However, we can diligently understand and map out strategies that are in the realm of our control and influence. All of our strategies are built around the straightforward idea that we must deliver a meaningful difference to our customers and the communities we serve, and clearly communicate the value we provide. Doing so has resulted in consistent growth and broader customer relationships over our history even in the face of the crisis. And so, with momentum from a great 2014, we are optimistic about our future. Dear Shareholders, This is an easy year to write about numbers. Net income, asset quality and growth results are all strong. While hanging tough through the initial years of the economic crisis, we mapped out a We continue to evaluate our business in the three main areas we have discussed in prior letters: growth strategy. We grew organically and made three acquisitions aimed at driving long term growth, quality and earnings. value. 2014 is the year when the fruits of these efforts emerged in the stock price. During the calendar year the stock price rose over 50%. This, to many shareholders, is the ultimate metric. Growth – We are an outstanding growth story in a mature industry—literally from a white You can be certain that our stock price matters to the people who work here and to the board sheet of paper in 2000 to a $1.2 billion community bank spanning the northern two thirds of that governs this institution. Our employees plus current and past board members are vested the state. We are the largest community bank in Wisconsin north of Fond du Lac. We continue like you, owning over 40% of outstanding shares. Before detailing the 2014 numbers, we want to see enormous opportunity for growth. We have accomplished this at a time when small banks to place them in the context of the strategies that really drive the math. We do not pursue have seen their market share plunge. numbers that drive strategies; we pursue strategies that produce results. This letter addresses the question that many of you ask – “what do these numbers really mean?” We have done exceptionally well at organic growth. In the Green Bay area we have built a formidable book of nearly $500 million of loans over our 14 years by out-executing our larger When the numbers are good, it is especially important to remind you of a core idea that we have competitors in winning business and personal relationships. We have built a wealth management consistently expressed. The numbers are not the reality of what we do; they are the results of business with over $1 billion of total assets under management and over $5 million in annual strategy and a way to assess if our strategy is working. That said, we love numbers. This business revenue. We are four years into building a market presence in Appleton, and have a $125 million is awash in numbers—but our focus is on people and strategy. We have found that customers high-quality loan book in a market that is ripe for an alternative to the large banks that dominate actually expect and value human contact, personal judgment and accountability—and reward us it. And we are a leading home mortgage originator, with over $400 million in secondary market with their business. We are a growth company in the shrinking corner of a mature industry, mortgage production in the past three years, a key part of the consumer’s banking relationship. and our growth comes from successfully attracting customers, bankers and owners who value our way of thinking and acting. We are pragmatic idealists. We seek real understanding of our industry We get a lot of questions about whether we are emphasizing organic growth or acquisitions. and environment, not to follow the herd but to find sound ideas that have enduring merit—and then Our answer is “yes”. Wisconsin is considered a low growth market. We continue to take market we can make a difference to our customers in a manner that results in shareholder return. share in core deposits, C&I lending and wealth management. We have done organic growth People are definitely feeling more optimistic about their own financial affairs, as are we. Even so, to create value through acquisitions. There are many institutions that are either struggling with we are all well-advised to remember lessons learned from the crisis we came through. The pain sustaining value creation in a pressured industry or that simply lack management depth and of the crisis has abated for most, but the crisis itself has not so much been solved as it has been succession. We are focused on sellers in relevant geography that are willing to really look at what nationalized. You can see it on the Federal Reserve’s balance sheet and in the growth of the we have done for the Mid-Wisconsin shareholders who had the foresight to entrust us with their national debt. You can see it in the desperate effort to stimulate growth by holding interest rates legacy. Our Board has directed us to continue to prioritize growth through acquisition. We at near-zero for over six years. You can hear it rustling through the 2,300 pages of Dodd Frank believe we have plenty of access to any additional equity capital we may need for future growth; which was passed on the false premise that it would stabilize the banking industry and end Too Big however, being owners ourselves, we are pretty fussy about broadening our shareholder base at to Fail. These macro-economic matters and industry trends are concerns that we cannot control. the expense of current shareholders. exceptionally well over our history. That said, we do see the coming years as a very fertile time 2014 was our first full year of operation with the two acquisitions we closed in 2013. The successful Quality – A few short years ago it seemed that all investment analysts talked about was capital integration of the 12 acquired branches is evident in our earnings and loan quality. Not everything and asset quality. The analytics were really centered on whether the problem loans would wipe we plan flows flawlessly, but the Mid-Wisconsin acquisition has worked exceptionally well. out capital and sink the institution. Those years were very trying for us and for our customers. Since this was largely an exchange of stock, it is very important to look back on the results for We took some loan losses but we always made money. We worked through problems without shareholders of both Nicolet (NCBS) and Mid-Wisconsin (MWFS). The chart below is of great consuming our owners’ capital. importance to our future acquisitions because it clearly shows the value of our stock to institutions considering selling to us. MWFS was a small cap public company that accepted the stock of a Banks are all feeling margin and competitive pressure that Fed policy is intended to create. small cap private company. The Board and shareholders of MWFS heard plenty of suggestions We have to remember the folly of the past, but it is expensive to sit out a bull market. What this about waiting for a better time to sell and about seeking a more liquid buyer. In the two years means in practice for a prudent banker is careful risk evaluation and extreme focus on our customer since the announcement MWFS shareholders have enjoyed a 137% increase in share value and relationships. We absorbed nearly $300 million of loans from troubled institutions in 2013. greater liquidity for anyone who wanted to sell. The composition of our ownership base will change At year end our non-performing asset ratio stood at 0.61% of total assets, the lowest level since 2007. as opportunity demands, but we know that liquidity for shareholders is an important part of our commitment to creating shareholder value. The nature of merger and acquisition negotiations can give the appearance of a struggle between winners and losers. The Mid-Wisconsin merger is a great example of how both sides win. We work hard to avoid originating problem loans. We know how to handle problems when they arise. We have also learned how to evaluate and price problem loans at other institutions. We have learned to make money by acquiring and profitably resolving problem loans. The investment community is not very focused on asset quality at the moment, but we are. Long term investors and selling institutions should look carefully at the quality track record of management. It is important to have the fortitude to resist the pressure when federal policy so strongly incentivizes risk. We survived and defended shareholder value and liquidity not just because we knew what to do in a crisis, but because we also knew what not to do before the crisis. We are a lot smarter today than we were in 2007. Our quality track record is strong; in light of our rapid growth, it is outstanding. Earnings – So finally, back to it being an easy year to write about the numbers: • $ 9.9 million net income, representing 0.84% return on average assets for 2014 • $ 2.25 diluted earnings per common share and 11.55% return on average common equity for 2014 • 4% increase in loans and 2% increase in deposits between December 31, 2014 and 2013 • 14% increase in average loans and 24% increase in average deposits for 2014 over 2013 • 3.89% net interest margin • 0.61% nonperforming assets to assets at year end • $ 5.6 million used to repurchase 257,000 common shares during 2014 • $ 21.34 book value per common share, 12% higher than at December 31, 2013 • 51% increase in closing stock price between December 31, 2014 and 2013 We are very pleased with the results from 2014, and there remains upside in our earnings potential as our longer-term strategies mature. Our $9.9 million net income represents, by far, our strongest profit year and is a 50% improvement over 2013’s operating earnings (that is, 2013’s reported net income of $16.1 million, less the nonrecurring bargain purchase gains and direct pre-tax merger expenses, which net after tax were $9.7 million of 2013’s net income). When assessing our performance, we look at various metrics. Return on Average Assets (ROA) is the most common for bank profitability (i.e. the profitability of the asset base), while Return on Average Common Equity (ROCE, i.e. the return earned on the investment made by common shareholders) and Diluted Earnings Per Share (DEPS, i.e. the net earnings available to each common shareholder’s share) are very relevant to you as an individual shareholder. These measures are of great importance for differing reasons, including their relevance to stock price, but excessive focus on any one ratio can lead to actions which could actually harm shareholder return in the long run for short term improvement. Our 2014 ROA was a healthy 0.84%. High performing banks generally earn around 1% ROA. As we strive for continued improvement, we manage the relationship between current earnings and long term investment. A prominent example occurred during the heart of the crisis in 2009 and 2010—we prioritized rapid resolution of our loan problems, but we also invested in people we would need to take advantage of the extraordinary growth potential once the crisis abated. We “spent” ROA in those years to generate the growth, earnings and share price increase you have seen in the last two years. In our early years we seldom looked at ROA because we were determined to build the base of business that is driving your return today; yet ignoring ROA can indicate a bank that is always promising good things in a future that never seems to arrive. We are maturing earnings nicely, but willingly invest in the rich opportunities growth and acquisitions provide long term. Our ROCE was 11.55% for 2014. If we can clear 10% ROCE every year with sound execution of banking fundamentals, we will have no problem looking you in the eye at our annual shareholder meetings. Banking is a mature industry which until 2008 was actually thought to have a low risk profile. There have been more than 500 bank failures since 2008. Our industry is not low risk. With increased risk, there are regulatory requirements to hold more capital. With more capital, returns decline. Finance theory suggests too that in higher risk industries investors should expect a higher ROE. This is why we see community banks accessing common equity through Private Equity Funds, pricing their common stock at less than book value. While we agree our industry is both mature and has risk, the answer to the last crisis is not to price new bank equity at an unrealistic return. We think the answer is to operate the bank in a manner that drives the risk profile down. In the meantime, we have been able take advantage of the environment by acquiring and integrating institutions that simply can’t afford the high cost of capital from alternative sources. ROCE is an exceptionally useful tool, that is dangerous when mismanaged. One could summarize the roots of the most recent crisis as a market-wide misapplication of this ratio. There are two mathematical ways to increase ROCE—increase net income and reduce equity. When you can’t impact the amount of earnings appreciably, you may look to reduce equity. Shrinking the denominator also increases the risk of financial failure since it removes “cushion” for tough times, but this risk is not measured or accounted for in the ratio. Quality delivery on this ratio is maximization of net income and prudent management of equity. Our 2014 common share repurchases are an example of prudent management—returning capital to the shareholders that is simply not necessary for the support of current revenue streams. We have never paid a common stock dividend, which isn’t to say we never will. To date we view dividends as a mandatory stock redemption. Our share repurchase program is a way to return capital to the shareholders through voluntary redemption, and support liquidity. We are proud of our track record of thinking like a shareholder and preserving shareholder value because we are shareholders. In conclusion, we have gone into some detail to address questions we hear from you. 2014 was a very good year for continued execution on growth and performance, further evidenced in a favorable stock price trend. For 2015 we are focused on organic loan growth, comprehensive balance sheet and capital management, revenue maximization in our markets, and on acquisition opportunities for strategic growth. If you have more questions, let us know. You will find we do answer phone calls and emails. As always, we appreciate your investment in Nicolet. Sincerely, Robert B. Atwell Chairman, President and Chief Executive Officer Michael E. Daniels Executive Vice President and Secretary 9 Robert Atwell Chairman, President and Chief Executive Officer Nicolet Bankshares, Inc. Michael Felhofer Owner Candleworks of Door County, Inc. Susan Merkatoris Certified Public Accountant Owner and Managing Member Larboard Enterprises, LLC Michael Daniels President and Chief Operating Officer Nicolet National Bank John Dykema President and Owner Campbell Wrapper Corp and Circle Packaging Machinery, Inc. Gary Fairchild President and CEO Fairchild Equipment, Inc. Chris Ghidorzi Director Ghidorzi Companies Therese Pandl President and CEO HSHS EW Division Randy Rose Retired President and CEO Schwabe North America Robert Weyers Owner Commercial Horizons, Inc. Dr. Kim Gowey Owner Cosmetic and Implant Dentistry of Wisconsin Andrew Hetzel, Jr. President and CEO NPS Corporation Donald Long, Jr. Former Owner and CEO Century Drill and Tool Co., Inc. Robert Atwell Chairman, President and Chief Executive Officer Michael Daniels Executive Vice President and Secretary Ann K. Lawson Chief Financial Officer Robert Atwell Chairman and CEO Jon Biskner Vice President Information Technology Michael Daniels President and COO Brad Hutjens Senior Vice President Chief Credit Officer Mike Vogel Senior Vice President Commercial Banking Ann Lawson Chief Financial Officer Kate Lombardi Vice President Human Resources Michael Waters Senior Vice President Fox Cities Market Executive Eric Witczak Executive Vice President Tom Zellner Senior Vice President Retail Banking – Central Region Wendell Ellsworth Manager WEE Enterprises, LLC AHI Properties, LLC Philip Hendrickson Retired Chairman, CEO and President KI Krueger International Deanna Favre CEO Favre 4 HOPE Foundation Ronald Miller Retired Owner Four Corporation Jeff Gahnz Vice President Marketing and Public Relations Michael Steppe Chief Investment Officer Kristi Hansen Vice President Operations 11 Nicolet National Bank shows me they are real by being honest and up front with their conversations. They don’ t blow smoke just to get or keep my business. They do what they say they’ ll do and deliver on their promises. They back up their words with actions, not just hollow guarantees. We have a very strong relationship with them. It’s real. 13 John West President, Fox Valley Metal Tech., Inc. Be RealThrough my years in business, it’s become clear to me that the formula for success is not a rigid set of ingredients. Following our instincts, we all tinker with the recipe. For our company, the essential component has been responsiveness. It extends beyond being accommodating, it also means being responsive to trends and changing customer needs. Our business principles have been a template for what we look for in business partners. We have been doing business with Nicolet Bank for over twelve years. It is clear by their actions that Nicolet applies the concept of responsiveness globally and unconditionally. 15 Kris Maz Co-Owner, Launch Photography, Film, and Video Inc. Be ResponsiveNicolet National Bank has a knack for hiring great people. Everyone is pleasant, personable and engaging. It’s really nice. We defi- nitely don’ t feel like “just another number” or “just another customer”. From LaForce’ s perspective, it feels like we’ re vested together, and I guess in many ways we are. It feels like we are a team. That feeling is very personal to us. 17 Ken Metzler CEO, LaForce Inc. Be PersonalAs a mother of young children, “creating memories” is like my Super Bowl. Some days that means blowing bubbles when I meant to have us run errands, an extra book at bedtime, or the occasional ice cream sundae that is bigger than my kid’s heads. What I didn’t expect was to find that shared value within my bank. At Nicolet, they deliver memorable service in a personal way. It’s as simple as a quick return call back to my tenth question that day and as poignant as working together to fight illiteracy for underprivileged children in our community with the Give a Kid a Book Campaign. That moves me to view them less as a bank and more as a partner. Is that as memorable as a gigantic ice cream sundae to a four year old? You bet. 19 Molly Crosby Mom, Community Volunteer Be MemorableTo be an entrepreneur takes trust and stubbornness and taking chances. Nicolet National Bank shows me that every day in how they treat me. They are willing to take a risk on a person. What helped me succeed most was stubbornness. I just kept looking to find ways to succeed and refused to quit. Nicolet is like that. Our business needs to invest in equipment. There was a trust factor there because they knew me and my business. Helping out in hard times helped build that trust. Nicolet looks out for me. 21 Dale Baumann President & CEO, WADAL Plastics, Inc Be EntrepreneurialREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors Nicolet Bankshares, Inc. Green Bay, Wisconsin We have audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Nicolet Bankshares, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the years then ended (not presented herein); and in our report dated March 9, 2015, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed financial statements is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived. IN 2014, THE NI COLET FOU NDATIO N HE L D TWO GO LF OUT ING S TH AT BENEFIT TED UNI TY H OSPI C E , CP, IN C. AND A VERY S PE CIAL PL ACE . THANK YOU TO OUR FR IEN DS FOR M AKI NG THIS POSSI BLE. Atlanta, Georgia March 9, 2015 C E R T I F I E D P U B L I C A C C O U N T A N T S 23 (In thousands, except share and per share data) 2014 2013 2014 2013 NI COL ET BA NKS HARE S, INC . AND S UBS IDI AR I ES (De ce mber 31 , 20 14 and 2013) Assets Cash and due from banks $ 23,975 $ 26,556 Interest-earning deposits Federal funds sold 43,169 119,364 1,564 1,058 Cash and cash equivalents 68,708 146,978 Certificates of deposit in other banks 10,385 1,960 Securities available for sale (“AFS”) 168,475 127,515 Other investments Loans held for sale Loans 8,065 7,272 7,982 1,486 883,341 847,358 Allowance for loan losses (9,288) (9,232) Loans, net 874,053 838,126 Premises and equipment, net Bank owned life insurance Accrued interest receivable and other assets 31,924 27,479 18,924 29,845 23,796 21,115 Total assets $ 1,215,285 $ 1,198,803 Liabilities and Stockholders’ Equity Liabilities: Demand Money market and NOW accounts Savings Time Total deposits Short-term borrowings Notes payable Junior subordinated debentures Accrued interest payable and other liabilities Total liabilities Stockholders’ Equity: Preferred equity Common stock Additional paid-in capital Retained earnings Accumulated other comprehensive income Total Nicolet Bankshares Inc. stockholders’ equity Noncontrolling interest Total stockholders’ equity and noncontrolling interest $ 203,502 $ 171,321 494,945 120,258 241,198 492,499 97,601 273,413 1,059,903 1,034,834 - 21,175 12,328 10,812 7,116 32,422 12,128 7,424 1,104,218 1,093,924 24,400 41 45,693 39,843 1,031 111,008 59 111,067 24,400 42 49,616 30,138 666 104,862 17 104,879 Total liabilities, noncontrolling interest and stockholders’ equity $ 1,215,285 $ 1,198,803 Preferred shares authorized (no par value) Preferred shares issued and outstanding 10,000,000 10,000,000 24,400 24,400 Common shares authorized (par value $0.01 per share) 30,000,000 30,000,000 Common shares outstanding Common shares issued 4,058,208 4,124,439 4,241,044 4,303,407 25 (In thousands, except share and per share data) 2014 2013 Interest income: Loans, including loan fees Investment securities: Taxable Non-taxable Other interest income Total interest income Interest expense: Money market and NOW accounts Savings and time deposits Short-term borrowings Junior subordinated debentures Notes payable Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Noninterest income: Service charges on deposit accounts Trust services fee income Mortgage income Brokerage fee income Gain on sale or writedown of assets, net Bank owned life insurance Rent income Investment advisory fees Bargain purchase gain Other income Total noninterest income $ 46,081 $ 41,000 1,606 793 469 48,949 2,275 3,067 8 875 842 7,067 41,882 2,700 39,182 2,128 4,569 1,926 631 539 933 1,239 440 - 1,780 14,185 1,107 745 344 43,196 2,065 2,328 25 730 1,144 6,292 36,904 6,200 30,704 1,793 4,028 2,336 477 1,669 825 1,036 348 11,915 1,309 25,736 NI COL ET BA NKS HARE S, I NC. AN D S UBS ID IA RIE S ( Yea rs E nd ed Dec embe r 3 1 , 20 1 4 an d 2013) Noninterest expense: Salaries and employee benefits Occupancy, equipment and office Business development and marketing Data processing FDIC assessments Core deposit intangible amortization Other expense Total noninterest expense 2014 2013 21,472 19,615 7,086 2,267 3,178 715 1,209 2,782 6,407 2,348 2,477 700 1,111 3,773 38,709 36,431 Income before income tax expense Income tax expense Net income Less: Net income attributable to noncontrolling interest Net income attributable to Nicolet Bankshares, Inc. Less: Preferred stock dividends and discount accretion 14,658 4,607 10,051 102 9,949 244 20,009 3,837 16,172 31 16,141 976 Net income available to common shareholders $ 9,705 $ 15,165 Basic earnings per common share Diluted earnings per common share $ 2.33 $ 2.25 $ 3.81 $ 3.80 Weighted average common shares outstanding: Basic Diluted 4,165,254 4,311,347 3,976,845 3,988,119 27 Annual Meeting Shareholders’ Meeting – Monday, May 11, 2015. (5:00 p.m.) Meyer Theatre 117 South Washington Street • Green Bay, WI 54301 Independent Auditor Porter Keadle Moore, LLC 235 Peachtree Street, NE • Suite 1800 • Atlanta, GA 30303 Transfer Agent Computershare P.O. Box 30170 • College Station, TX 77842-3170 Overnight Delivery Computershare 211 Quality Circle, Suite 210 College Station, TX 77845 Shareholder website: www.computershare.com/investor Shareholder online inquiries: https://www-us.computershare.com/investor/Contact Toll free in the US + 1.800.962.4284 Outside the US + 781.575.3120 Fax + 312.604.2312 LEGACY 

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