Nicolet Bankshares Inc.
Annual Report 2015

Plain-text annual report

111 N. Washington Street / P.O. Box 23900 / Green Bay, WI 54305 -3900 920-430-1400 / 1-800-369-0226 www.n icoletba nk.com 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 2 0 1 5 A N N U A L R E P O R T In 2015, the Nicolet National Foundation was proud to host our annual golf outing to benefit Willow Tree Cornerstone Child Advocacy Center in Green Bay. Willow Tree provides assistance for child abuse victims and their families. Each pinwheel represents a child who was served there. The visual image of the blue pinwheels against the green grass was a stunning and humbling reminder of what great work Willow Tree does for our communities. It is a pleasure to partner with great organizations like Willow Tree to help make our communities a better place. 15 years ago... after moving out of Mike’s basement, Nicolet National Bank’s first office was located in the Historic Bellin Building. This picture was taken where our first office used to be. Today, it is the Black and Tan Lounge. While much has changed in 15 years, our commitment to serve our customers, the communities and our employees remains the same. Thank you for your continued support. 3 Dear Shareholders, Return on average common equity (ROCE) was 12.35%, compared to 11.55% last year. Book value per common share was $23.42 at year-end 2015, up 10% over last year end. Our core asset quality measures were at historically strong levels, resulting in a lower 2015 loan loss provision than for 2014. Nonperforming assets fell 47% to only $3.9 million (or 0.32% of total assets) at December 31, 2015, compared to $7.4 million (or 0.61% of 2015 was a very busy and successful year. With strong financial performance and quality assets) at December 31, 2014. Our results reflect the strength of our customer relationships management of our balance sheet and capital in 2015, we solidified our position as a and the success of our strategic moves in recent years. strategic leader in Wisconsin banking. We also have become adept at consolidation as we have completed three acquisitions from 2010 through 2013. As we write this letter, As part of our active capital management this year, we sold two outlying branches in we are in the middle of two merger transactions; by the time you read this, both will have August, issued $12 million of 5% fixed-rate, 10-year subordinated debt in the first half of closed. In all the excitement of mergers, it is critical to run a really sound, profitable and 2015 (increasing our regulatory Tier 2 capital), redeemed $12.2 million or half of our then growing core banking franchise. We also have to be very clear about what we are doing, outstanding SBLF preferred stock in September at par (reducing total and regulatory Tier 1 why and the outcomes we expect. There is a lot of math involved in banking and even more capital and the future cost of capital), and used $4.2 million during 2015 to repurchase 146,404 in bank mergers. Amidst all the math, we have to stay focused on what our company does common shares at a weighted average per share price of $28.35 including commissions. for customers, the community and shareholders. We have always been a high growth story, but we do not grow for the sake of growth. share price of 27% during 2015 (from $25 to $31.79 at year end 2015). We are building out a financial services company that has the capital strength, profitability, The following chart reflects our long term stock price performance product offerings, understanding and presence to endure. We will not lose sight of the against the SNL bank index and the S&P over the past five years. This fact that all of our strategies depend on really making a difference to the people and relative performance is not driven by clever financial engineering. It is places we serve. This year’s letter will address 2015 results, offer our perspective on the driven by commitment to our core values, as well as our understanding regional economic climate and the banking industry within it. Most importantly, we will of and belief in the people we work with, live with and serve. A benefit of a very strong year was a continued sharp rise in our push more deeply into the motivating purposes of our two recent transactions. We remain in a season of extraordinary opportunity for regional consolidation of a rapidly changing and stressed banking industry. Seizing on such opportunity, we announced our agreement to merge with Baylake Corp. in September 2015. And in January 2016 we announced the integration of a select group of financial advisors from Navigator Planning Group in order to accelerate the growth of our wealth management business. While it encourages industry consolidation, the current economic condition also challenges the ability to make a sound return on the core banking business. Even so, we exceeded our expectations for profitability and quality in 2015. 2015 Results Nicolet’s net income was $11.4 million for 2015, 15% higher than 2014, and after preferred stock dividends, diluted earnings per share were $2.57, 14% higher than 2014. Return on average assets (ROA) improved to 0.96% for 2015, compared to 0.84% for 2014. 5 Nicolet turned 15 years old in November 2015. In its earlier years, Nicolet’s shares were Building the Base held by under 300 shareholders. With the April 2013 Mid-Wisconsin Financial Services, Nicolet started as a very high growth, business oriented bank with a single location in Inc. (Mid-Wisconsin) acquisition, a large number of new shareholders joined Nicolet. downtown Green Bay. Our main strategy was to gather veteran commercial bankers who At year-end 2015, we had 4.2 million outstanding shares of common stock held by had earned the respect and loyalty of people who run businesses. Along the way we approximately 600 shareholders, most of whom are long-term investors, and the core of attracted a number of veteran bankers from different organizations who were motivated those shares are held by founding investors, employees and current or former board by a desire to return to the foundational discipline of understanding and meeting members. In April 2016 the current Baylake shareholders become Nicolet shareholders customer needs. For reasons that defy understanding and explanation, this customer- in our merger of equals. Those new shareholders will own 50% of the combined voting focused mindset was rapidly abandoned in the later 1990s by the larger banks. We knew shares. We want to take the opportunity to express to our newer shareholders who we the changing culture of banking was not connecting with customers and that the best are and how we think. Reflecting first on where we have been will provide insight into bankers found it frustrating and demeaning. Hence, Nicolet was founded and by 2007, the current position of the company and the way we approach the future, especially as our commercial lending strategy had propelled our growth to $700 million in assets with a steward of the investment you have in Nicolet. an estimated 25% market share of owner managed business in the Green Bay area at that time. In our early years we used a lot of wholesale funds, as our local loan growth exceeded our ability to grow local deposits. To accelerate our deposit growth, we began investing in branches (nearly one per year) and in retail products. We also entered the wealth management business in 2001, to serve the needs of our growing customer base. So in this early growth phase, with our strong commercial business and growing retail and wealth management businesses, we were profitable and we had resilient asset quality. But clearly, our strategic imperative was growth. The Great Recession In 2007 the banking industry and the economy in general stood on the edge of a major financial crisis rooted in the banking industry’s loss of its ethical bearings, which was further aggravated by federal policies that stimulated irresponsible lending. Beginning in 2005 we had dramatically slowed the loan growth at Nicolet to approximately 13% each year, which was still strong but well below our historical growth rate. It would not be accurate to say that we clearly foresaw the coming collapse. It would be accurate to say that the prevailing competitive environment did not make sense to us. We saw lending happening at rates and terms that we did not think made sense for our shareholders. We just knew that wasn’t sustainable. With the support of a board that owned a high percentage of our stock, we simply accepted a much lower rate of loan growth than we had budgeted for, and we focused on deposit growth and on maturing our profitability. As one of our directors said at the time, “Stupid hurts. What is stupid for customers can’t be good for shareholders and what is stupid for shareholders can’t be good for custom- ers”. This was our Forrest Gump moment, “I am not a very smart man, but I know what The Nicolet Story The Nicolet story is best understood in three phases—Building the Base, the Great banking should be.” This confidence that good business must be fair for shareholders, Recession and Leading Consolidation. customers and employees is foundational to who we are and drives our decision-making, and as a result has supported much of our success. This notion of economic fairness runs contrary to the national economic climate, but it remains a deeply rooted part of culture in the northeastern and north central Wisconsin markets we serve—and is deeply rooted in Nicolet. we see nationally has its local effects. The economic health of our customer base is as strong as it has ever been because that is what happens in a well-run bank. We can and we do work at reaching the lower income parts of our community, but we cannot really build a business banking only the unbankable. Banking is a frequent target of current political rhetoric. Recently there was a debate in Milwaukee between two Presidential candidates. After two hours one could summarize this event as a heated exercise in asserting who hates banks more and who will do more to punish bankers. By early 2008, we knew our industry was in a major Here is the key to understanding the pressure on community banks. There are 240 crisis that would adversely affect us and our customers. independent banks in Wisconsin. Most of the communities they serve are aging and have Being a commercial bank, we could see by the second flat or declining population. The entrepreneurial business climate in our markets is not half of 2008 our customers experiencing collapsing flourishing as it was in the 1990s. Plenty of companies are doing really well, but we are sales volume by around 25%. While we knew that we not spawning new small businesses at the rate we once were. Bankers running community would have loan problems, we knew our customer base banks are also aging and there is fatigue for many who have just come through a would be resilient if we helped them face their harrowing industry crisis where they saw many of their peer banks fail and bankers they problems and if we faced ours. During 2008 we acted know sued by the FDIC. The crisis was caused by a combination of federal pressure to lend aggressively to strengthen our capital, build our liquidity and deal with our emerging aggressively, as well as the failure of the industry to live up to its ethical responsibilities. problem loans. We also decided that there would be an extraordinary opportunity for There are many fine banks run by upstanding people, but the industry has become the strategic growth in the aftermath of the crisis. We knew if we had the talent, the capital target of a massive effort to regulate all financial institutions as if they had caused a crisis and regulatory credibility, there would be a great need and opportunity to lead the that largely originated in the large banks, unregulated mortgage houses and in the federal consolidation of a deeply distressed Wisconsin banking industry. government itself. This has raised the cost of operation and created real risk for the people Leading Consolidation who own, run and govern banks. The use of personal judgment in lending is critically needed, but increasingly discouraged based on the idea that if a banker acts outside of It is impossible to formulate a coherent strategy without a clear understanding of the “the standard” based upon knowledge of, trust for and experience with a particular economic, social and political environment in which we operate. There is not much we customer, then that is unfair to people that the banker has neither knowledge of nor can do to alter these macro trends. What we can do is understand what the trends mean experience with. In other words this regulatory overlay promotes a standardized, boilerplate for our company, the companies we bank, our region and our communities. Traditional model which by design supplants the customer intimacy and flexibility that are the principle economic measures such as unemployment, inflation, corporate earnings and the stock competitive advantages of a good community bank. market would indicate that the economy is largely recovered from the Great Recession. Other measures provide insight into why the political and economic climate remains Most of the banks that didn’t fail during the crisis are now profitable and have strong disturbingly chaotic. The labor force participation rate is at its lowest level in decades. capital. The vast majority of community banks are very interest rate spread dependent. Politicians talk about creating jobs; business owners talk privately about not being able to That means they make most of their money on the difference between their loan rates find people who can and will fill the jobs they have. Politicians speak of the concentration earned and their deposit rates paid. They don’t have the proportion of fee revenue sources of wealth in the top 1% of the population and loss of hope among poor. The political that larger banks have. Federal policy has held interest rates at near zero for over seven climate is characterized by deep anger and division. I wish that I could write that this years in an effort to stimulate the borrowing they believe causes economic growth. sense of alienation seen across the political spectrum were without foundation. As economists point out, setting rates so low effectively taxes savers to subsidize Wisconsin has historically been a pretty cohesive place, but the disintegration of culture borrowers. Despite this unprecedented effort to induce borrowing, loan growth is quite soft. There is apparently no rate low enough to cause our customers to borrow money they eight Nicolet directors to govern the combined company. This is a very challenging don’t want to borrow. Meanwhile, prolonged low rates compress bank lending spreads, and emotional process. So why is this happening? causing bank earnings to flatten and decline. For years banks have been hoping and expecting that economic recovery would cause rates and lending spreads to rise. News This is happening because both boards understand each other, the challenges in the of slowing growth in China and negative interest rates in Europe are causing the Fed to industry and the extraordinary financial and strategic opportunities in bringing the two have second thoughts about letting rates rise. It is not prudent for banks to only count organizations together. Both boards believe we are stronger together than we can be on higher lending spreads to restore earnings. individually. This combination has very compelling economics rooted in greater efficiency and greater size. Efficiency is the tough part because it really means eliminating Community banks have largely recovered, but have a totally different attitude about the unnecessary positions. As we have worked our way through the difficult decisions, we risks and returns in the business they grew up in. Bank stock values have recovered very have found that the job market is very strong for qualified people, but it still means some nicely on a relative scale, but price-to-earnings (P/E) multiples lag the general market. people leave at a time they didn’t chose. Both boards focused on the strong economics The investment markets accurately perceive banking to be a mature industry with of the combination and insisted that management face the hard decisions about people softening earnings, much higher regulatory costs and higher capital requirements. thoughtfully and generously. At one critical juncture in the negotiations as we struggled When we attend bank strategy conferences, the presentations and the private with personnel questions, one of the directors looked square at management of both conversations are all about the need to grow in order to gain efficiency or else sell. companies and said, “If this deal doesn’t come together, you had better have a very Many banks are talking about being a buyer, but lack a real understanding of how good reason.” He wasn’t being heartless. He was keeping our focus on the intrinsic difficult it is to garner the talent, the capital and regulatory credibility to be a successful impact the combination has on profitability, share value, capital strength and the ability acquirer. This difficult environment represents an extraordinary opportunity for of the combined company to serve its core markets for the long term. profitable consolidation. In 2010 we acquired four Green Bay area branches from Anchor Bank. In 2011 we looked material market presence in Brown and Kewaunee counties as well. The company has served closely at six troubled banks that we expected might fail. In April 2013 we acquired Door County for over 140 years earning over 62% deposit market share. That represents Mid-Wisconsin Bank in an exchange of equity. We also purchased assets and liabilities of an extraordinary amount of trust that the people in Door County have placed in one the Bank of Wausau from the FDIC. Mid-Wisconsin was a troubled institution that saw institution. All directors are well aware of the responsibility that comes with this community the opportunity to recover share value more rapidly by accepting Nicolet common stock. trust. All of the branches in Door County are staying open, and we expect to build on Since that merger was announced in November 2012, former Mid-Wisconsin shareholders Baylake’s legacy of community support and engagement. The decision to combine under have seen their Nicolet stock value more than triple. Mergers are often discussed with the Nicolet name was difficult but well thought out. The directors of both companies the military language of conquest. We approach mergers the way we approach customer decided that it is critical to run one integrated bank. The Baylake name has real meaning relationships. We are looking to be creative, sincere, gutsy and fair. We will do them in and resonance. Nicolet is a name that has strong resonance throughout Wisconsin. places where we can make a real difference for the customers and communities and we We decided that Nicolet better fit our broader geography and strategic growth goals. Baylake grew out of the Bank of Sturgeon Bay. In the last 25 years Baylake earned a will not side step the difficult decisions. We intend to honor the Baylake legacy through careful attention to all our communities. We will be particularly aware of the legacy of trust between this bank and the people of The Baylake and Nicolet Merger Door County. Many people believe “merger” is just a more polite term than “acquisition” and many times it is. While Nicolet is the surviving entity and the name we will use is Nicolet; this combination When the Baylake merger was announced, we said we expected to achieve over $7 million is as close to a true merger as I have seen. At consummation, each shareholder group of pre-tax cost savings through combination. We will achieve that goal. While we do not will own 50% of the combined entity and eight former Baylake directors will be joining make public earnings projections, improved share values have materialized for banks with additional scale that can execute with efficiency. The Nicolet/Baylake organization together will have stronger earnings and capital and will be in a great position to continue building the leading community bank in the State of Wisconsin. In January we announced the integration of a select group of financial advisors of Navigator Planning Group and the purchase of their respective books of business, as well as their operating platform into Nicolet. Navigator has been a family-owned wealth advisory firm based in Green Bay. We have had long standing personal and professional relationships with the Madson family. This move will accelerate the growth of our wealth management business, which is already substantial and profitable. We have been looking for ways to grow and gain market share. Navigator brings an existing profitable revenue stream and above all the right people to build on what we have. To our original Nicolet shareholders, we are very grateful for getting us going and sustaining us through the Great Recession. To the shareholders who joined us through the 2013 combination with Mid-Wisconsin, thank you for trusting us to serve your communities and increase your share price. I hope you are pleased with the results. To the Baylake shareholders joining us, thank you for trusting us. We expect to make you proud. Return on average common equity (ROCE) was 12.35%, compared to 11.55% last year. Book value per common share was $23.42 at year-end 2015, up 10% over last year end. Our core asset quality measures were at historically strong levels, resulting in a lower 2015 loan loss provision than for 2014. Nonperforming assets fell 47% to only $3.9 million (or 0.32% of total assets) at December 31, 2015, compared to $7.4 million (or 0.61% of Dear Shareholders, 2015 was a very busy and successful year. With strong financial performance and quality assets) at December 31, 2014. Our results reflect the strength of our customer relationships management of our balance sheet and capital in 2015, we solidified our position as a and the success of our strategic moves in recent years. strategic leader in Wisconsin banking. We also have become adept at consolidation as we have completed three acquisitions from 2010 through 2013. As we write this letter, As part of our active capital management this year, we sold two outlying branches in we are in the middle of two merger transactions; by the time you read this, both will have August, issued $12 million of 5% fixed-rate, 10-year subordinated debt in the first half of closed. In all the excitement of mergers, it is critical to run a really sound, profitable and 2015 (increasing our regulatory Tier 2 capital), redeemed $12.2 million or half of our then growing core banking franchise. We also have to be very clear about what we are doing, outstanding SBLF preferred stock in September at par (reducing total and regulatory Tier 1 why and the outcomes we expect. There is a lot of math involved in banking and even more capital and the future cost of capital), and used $4.2 million during 2015 to repurchase 146,404 in bank mergers. Amidst all the math, we have to stay focused on what our company does common shares at a weighted average per share price of $28.35 including commissions. for customers, the community and shareholders. We have always been a high growth story, but we do not grow for the sake of growth. share price of 27% during 2015 (from $25 to $31.79 at year end 2015). We are building out a financial services company that has the capital strength, profitability, The following chart reflects our long term stock price performance product offerings, understanding and presence to endure. We will not lose sight of the against the SNL bank index and the S&P over the past five years. This fact that all of our strategies depend on really making a difference to the people and relative performance is not driven by clever financial engineering. It is places we serve. This year’s letter will address 2015 results, offer our perspective on the driven by commitment to our core values, as well as our understanding regional economic climate and the banking industry within it. Most importantly, we will of and belief in the people we work with, live with and serve. A benefit of a very strong year was a continued sharp rise in our push more deeply into the motivating purposes of our two recent transactions. We remain in a season of extraordinary opportunity for regional consolidation of a rapidly changing and stressed banking industry. Seizing on such opportunity, we announced our agreement to merge with Baylake Corp. in September 2015. And in January 2016 we announced the integration of a select group of financial advisors from Navigator Planning Group in order to accelerate the growth of our wealth management business. While it encourages industry consolidation, the current economic condition also challenges the ability to make a sound return on the core banking business. Even so, we exceeded our expectations for profitability and quality in 2015. 2015 Results Nicolet’s net income was $11.4 million for 2015, 15% higher than 2014, and after preferred stock dividends, diluted earnings per share were $2.57, 14% higher than 2014. Return on average assets (ROA) improved to 0.96% for 2015, compared to 0.84% for 2014. Nicolet turned 15 years old in November 2015. In its earlier years, Nicolet’s shares were Building the Base held by under 300 shareholders. With the April 2013 Mid-Wisconsin Financial Services, Nicolet started as a very high growth, business oriented bank with a single location in Inc. (Mid-Wisconsin) acquisition, a large number of new shareholders joined Nicolet. downtown Green Bay. Our main strategy was to gather veteran commercial bankers who At year-end 2015, we had 4.2 million outstanding shares of common stock held by had earned the respect and loyalty of people who run businesses. Along the way we approximately 600 shareholders, most of whom are long-term investors, and the core of attracted a number of veteran bankers from different organizations who were motivated those shares are held by founding investors, employees and current or former board by a desire to return to the foundational discipline of understanding and meeting members. In April 2016 the current Baylake shareholders become Nicolet shareholders customer needs. For reasons that defy understanding and explanation, this customer- in our merger of equals. Those new shareholders will own 50% of the combined voting focused mindset was rapidly abandoned in the later 1990s by the larger banks. We knew shares. We want to take the opportunity to express to our newer shareholders who we the changing culture of banking was not connecting with customers and that the best are and how we think. Reflecting first on where we have been will provide insight into bankers found it frustrating and demeaning. Hence, Nicolet was founded and by 2007, the current position of the company and the way we approach the future, especially as our commercial lending strategy had propelled our growth to $700 million in assets with a steward of the investment you have in Nicolet. The Nicolet Story an estimated 25% market share of owner managed business in the Green Bay area at that time. In our early years we used a lot of wholesale funds, as our local loan growth exceeded our ability to grow local deposits. To accelerate our deposit growth, we began investing in branches (nearly one per year) and in retail products. We also entered the wealth management business in 2001, to serve the needs of our growing customer base. So in this early growth phase, with our strong commercial business and growing retail and wealth management businesses, we were profitable and we had resilient asset quality. But clearly, our strategic imperative was growth. The Great Recession In 2007 the banking industry and the economy in general stood on the edge of a major financial crisis rooted in the banking industry’s loss of its ethical bearings, which was further aggravated by federal policies that stimulated irresponsible lending. Beginning in 2005 we had dramatically slowed the loan growth at Nicolet to approximately 13% each year, which was still strong but well below our historical growth rate. It would not be accurate to say that we clearly foresaw the coming collapse. It would be accurate to say that the prevailing competitive environment did not make sense to us. We saw lending happening at rates and terms that we did not think made sense for our shareholders. We just knew that wasn’t sustainable. With the support of a board that owned a high percentage of our stock, we simply accepted a much lower rate of loan growth than we had budgeted for, and we focused on deposit growth and on maturing our profitability. As one of our directors said at the time, “Stupid hurts. What is stupid for customers can’t be good for shareholders and what is stupid for shareholders can’t be good for custom- ers”. This was our Forrest Gump moment, “I am not a very smart man, but I know what The Nicolet story is best understood in three phases—Building the Base, the Great banking should be.” This confidence that good business must be fair for shareholders, Recession and Leading Consolidation. customers and employees is foundational to who we are and drives our decision-making, 7 and as a result has supported much of our success. This notion of economic fairness runs contrary to the national economic climate, but it remains a deeply rooted part of culture in the northeastern and north central Wisconsin markets we serve—and is deeply rooted in Nicolet. we see nationally has its local effects. The economic health of our customer base is as strong as it has ever been because that is what happens in a well-run bank. We can and we do work at reaching the lower income parts of our community, but we cannot really build a business banking only the unbankable. Banking is a frequent target of current political rhetoric. Recently there was a debate in Milwaukee between two Presidential candidates. After two hours one could summarize this event as a heated exercise in asserting who hates banks more and who will do more to punish bankers. By early 2008, we knew our industry was in a major Here is the key to understanding the pressure on community banks. There are 240 crisis that would adversely affect us and our customers. independent banks in Wisconsin. Most of the communities they serve are aging and have Being a commercial bank, we could see by the second flat or declining population. The entrepreneurial business climate in our markets is not half of 2008 our customers experiencing collapsing flourishing as it was in the 1990s. Plenty of companies are doing really well, but we are sales volume by around 25%. While we knew that we not spawning new small businesses at the rate we once were. Bankers running community would have loan problems, we knew our customer base banks are also aging and there is fatigue for many who have just come through a would be resilient if we helped them face their harrowing industry crisis where they saw many of their peer banks fail and bankers they problems and if we faced ours. During 2008 we acted know sued by the FDIC. The crisis was caused by a combination of federal pressure to lend aggressively to strengthen our capital, build our liquidity and deal with our emerging aggressively, as well as the failure of the industry to live up to its ethical responsibilities. problem loans. We also decided that there would be an extraordinary opportunity for There are many fine banks run by upstanding people, but the industry has become the strategic growth in the aftermath of the crisis. We knew if we had the talent, the capital target of a massive effort to regulate all financial institutions as if they had caused a crisis and regulatory credibility, there would be a great need and opportunity to lead the that largely originated in the large banks, unregulated mortgage houses and in the federal consolidation of a deeply distressed Wisconsin banking industry. government itself. This has raised the cost of operation and created real risk for the people Leading Consolidation who own, run and govern banks. The use of personal judgment in lending is critically needed, but increasingly discouraged based on the idea that if a banker acts outside of It is impossible to formulate a coherent strategy without a clear understanding of the “the standard” based upon knowledge of, trust for and experience with a particular economic, social and political environment in which we operate. There is not much we customer, then that is unfair to people that the banker has neither knowledge of nor can do to alter these macro trends. What we can do is understand what the trends mean experience with. In other words this regulatory overlay promotes a standardized, boilerplate for our company, the companies we bank, our region and our communities. Traditional model which by design supplants the customer intimacy and flexibility that are the principle economic measures such as unemployment, inflation, corporate earnings and the stock competitive advantages of a good community bank. market would indicate that the economy is largely recovered from the Great Recession. Other measures provide insight into why the political and economic climate remains Most of the banks that didn’t fail during the crisis are now profitable and have strong disturbingly chaotic. The labor force participation rate is at its lowest level in decades. capital. The vast majority of community banks are very interest rate spread dependent. Politicians talk about creating jobs; business owners talk privately about not being able to That means they make most of their money on the difference between their loan rates find people who can and will fill the jobs they have. Politicians speak of the concentration earned and their deposit rates paid. They don’t have the proportion of fee revenue sources of wealth in the top 1% of the population and loss of hope among poor. The political that larger banks have. Federal policy has held interest rates at near zero for over seven climate is characterized by deep anger and division. I wish that I could write that this years in an effort to stimulate the borrowing they believe causes economic growth. sense of alienation seen across the political spectrum were without foundation. As economists point out, setting rates so low effectively taxes savers to subsidize Wisconsin has historically been a pretty cohesive place, but the disintegration of culture borrowers. Despite this unprecedented effort to induce borrowing, loan growth is quite soft. There is apparently no rate low enough to cause our customers to borrow money they eight Nicolet directors to govern the combined company. This is a very challenging don’t want to borrow. Meanwhile, prolonged low rates compress bank lending spreads, and emotional process. So why is this happening? causing bank earnings to flatten and decline. For years banks have been hoping and expecting that economic recovery would cause rates and lending spreads to rise. News This is happening because both boards understand each other, the challenges in the of slowing growth in China and negative interest rates in Europe are causing the Fed to industry and the extraordinary financial and strategic opportunities in bringing the two have second thoughts about letting rates rise. It is not prudent for banks to only count organizations together. Both boards believe we are stronger together than we can be on higher lending spreads to restore earnings. individually. This combination has very compelling economics rooted in greater efficiency and greater size. Efficiency is the tough part because it really means eliminating Community banks have largely recovered, but have a totally different attitude about the unnecessary positions. As we have worked our way through the difficult decisions, we risks and returns in the business they grew up in. Bank stock values have recovered very have found that the job market is very strong for qualified people, but it still means some nicely on a relative scale, but price-to-earnings (P/E) multiples lag the general market. people leave at a time they didn’t chose. Both boards focused on the strong economics The investment markets accurately perceive banking to be a mature industry with of the combination and insisted that management face the hard decisions about people softening earnings, much higher regulatory costs and higher capital requirements. thoughtfully and generously. At one critical juncture in the negotiations as we struggled When we attend bank strategy conferences, the presentations and the private with personnel questions, one of the directors looked square at management of both conversations are all about the need to grow in order to gain efficiency or else sell. companies and said, “If this deal doesn’t come together, you had better have a very Many banks are talking about being a buyer, but lack a real understanding of how good reason.” He wasn’t being heartless. He was keeping our focus on the intrinsic difficult it is to garner the talent, the capital and regulatory credibility to be a successful impact the combination has on profitability, share value, capital strength and the ability acquirer. This difficult environment represents an extraordinary opportunity for of the combined company to serve its core markets for the long term. profitable consolidation. In 2010 we acquired four Green Bay area branches from Anchor Bank. In 2011 we looked material market presence in Brown and Kewaunee counties as well. The company has served closely at six troubled banks that we expected might fail. In April 2013 we acquired Door County for over 140 years earning over 62% deposit market share. That represents Mid-Wisconsin Bank in an exchange of equity. We also purchased assets and liabilities of an extraordinary amount of trust that the people in Door County have placed in one the Bank of Wausau from the FDIC. Mid-Wisconsin was a troubled institution that saw institution. All directors are well aware of the responsibility that comes with this community the opportunity to recover share value more rapidly by accepting Nicolet common stock. trust. All of the branches in Door County are staying open, and we expect to build on Since that merger was announced in November 2012, former Mid-Wisconsin shareholders Baylake’s legacy of community support and engagement. The decision to combine under have seen their Nicolet stock value more than triple. Mergers are often discussed with the Nicolet name was difficult but well thought out. The directors of both companies the military language of conquest. We approach mergers the way we approach customer decided that it is critical to run one integrated bank. The Baylake name has real meaning relationships. We are looking to be creative, sincere, gutsy and fair. We will do them in and resonance. Nicolet is a name that has strong resonance throughout Wisconsin. places where we can make a real difference for the customers and communities and we We decided that Nicolet better fit our broader geography and strategic growth goals. Baylake grew out of the Bank of Sturgeon Bay. In the last 25 years Baylake earned a will not side step the difficult decisions. We intend to honor the Baylake legacy through careful attention to all our communities. We will be particularly aware of the legacy of trust between this bank and the people of The Baylake and Nicolet Merger Door County. Many people believe “merger” is just a more polite term than “acquisition” and many times it is. While Nicolet is the surviving entity and the name we will use is Nicolet; this combination When the Baylake merger was announced, we said we expected to achieve over $7 million is as close to a true merger as I have seen. At consummation, each shareholder group of pre-tax cost savings through combination. We will achieve that goal. While we do not will own 50% of the combined entity and eight former Baylake directors will be joining make public earnings projections, improved share values have materialized for banks with additional scale that can execute with efficiency. The Nicolet/Baylake organization together will have stronger earnings and capital and will be in a great position to continue building the leading community bank in the State of Wisconsin. In January we announced the integration of a select group of financial advisors of Navigator Planning Group and the purchase of their respective books of business, as well as their operating platform into Nicolet. Navigator has been a family-owned wealth advisory firm based in Green Bay. We have had long standing personal and professional relationships with the Madson family. This move will accelerate the growth of our wealth management business, which is already substantial and profitable. We have been looking for ways to grow and gain market share. Navigator brings an existing profitable revenue stream and above all the right people to build on what we have. To our original Nicolet shareholders, we are very grateful for getting us going and sustaining us through the Great Recession. To the shareholders who joined us through the 2013 combination with Mid-Wisconsin, thank you for trusting us to serve your communities and increase your share price. I hope you are pleased with the results. To the Baylake shareholders joining us, thank you for trusting us. We expect to make you proud. Return on average common equity (ROCE) was 12.35%, compared to 11.55% last year. Book value per common share was $23.42 at year-end 2015, up 10% over last year end. Our core asset quality measures were at historically strong levels, resulting in a lower 2015 loan loss provision than for 2014. Nonperforming assets fell 47% to only $3.9 million (or 0.32% of total assets) at December 31, 2015, compared to $7.4 million (or 0.61% of Dear Shareholders, 2015 was a very busy and successful year. With strong financial performance and quality assets) at December 31, 2014. Our results reflect the strength of our customer relationships management of our balance sheet and capital in 2015, we solidified our position as a and the success of our strategic moves in recent years. strategic leader in Wisconsin banking. We also have become adept at consolidation as we have completed three acquisitions from 2010 through 2013. As we write this letter, As part of our active capital management this year, we sold two outlying branches in we are in the middle of two merger transactions; by the time you read this, both will have August, issued $12 million of 5% fixed-rate, 10-year subordinated debt in the first half of closed. In all the excitement of mergers, it is critical to run a really sound, profitable and 2015 (increasing our regulatory Tier 2 capital), redeemed $12.2 million or half of our then growing core banking franchise. We also have to be very clear about what we are doing, outstanding SBLF preferred stock in September at par (reducing total and regulatory Tier 1 why and the outcomes we expect. There is a lot of math involved in banking and even more capital and the future cost of capital), and used $4.2 million during 2015 to repurchase 146,404 in bank mergers. Amidst all the math, we have to stay focused on what our company does common shares at a weighted average per share price of $28.35 including commissions. for customers, the community and shareholders. We have always been a high growth story, but we do not grow for the sake of growth. share price of 27% during 2015 (from $25 to $31.79 at year end 2015). We are building out a financial services company that has the capital strength, profitability, The following chart reflects our long term stock price performance product offerings, understanding and presence to endure. We will not lose sight of the against the SNL bank index and the S&P over the past five years. This fact that all of our strategies depend on really making a difference to the people and relative performance is not driven by clever financial engineering. It is places we serve. This year’s letter will address 2015 results, offer our perspective on the driven by commitment to our core values, as well as our understanding regional economic climate and the banking industry within it. Most importantly, we will of and belief in the people we work with, live with and serve. A benefit of a very strong year was a continued sharp rise in our push more deeply into the motivating purposes of our two recent transactions. We remain in a season of extraordinary opportunity for regional consolidation of a rapidly changing and stressed banking industry. Seizing on such opportunity, we announced our agreement to merge with Baylake Corp. in September 2015. And in January 2016 we announced the integration of a select group of financial advisors from Navigator Planning Group in order to accelerate the growth of our wealth management business. While it encourages industry consolidation, the current economic condition also challenges the ability to make a sound return on the core banking business. Even so, we exceeded our expectations for profitability and quality in 2015. 2015 Results Nicolet’s net income was $11.4 million for 2015, 15% higher than 2014, and after preferred stock dividends, diluted earnings per share were $2.57, 14% higher than 2014. Return on average assets (ROA) improved to 0.96% for 2015, compared to 0.84% for 2014. Nicolet turned 15 years old in November 2015. In its earlier years, Nicolet’s shares were Building the Base held by under 300 shareholders. With the April 2013 Mid-Wisconsin Financial Services, Nicolet started as a very high growth, business oriented bank with a single location in Inc. (Mid-Wisconsin) acquisition, a large number of new shareholders joined Nicolet. downtown Green Bay. Our main strategy was to gather veteran commercial bankers who At year-end 2015, we had 4.2 million outstanding shares of common stock held by had earned the respect and loyalty of people who run businesses. Along the way we approximately 600 shareholders, most of whom are long-term investors, and the core of attracted a number of veteran bankers from different organizations who were motivated those shares are held by founding investors, employees and current or former board by a desire to return to the foundational discipline of understanding and meeting members. In April 2016 the current Baylake shareholders become Nicolet shareholders customer needs. For reasons that defy understanding and explanation, this customer- in our merger of equals. Those new shareholders will own 50% of the combined voting focused mindset was rapidly abandoned in the later 1990s by the larger banks. We knew shares. We want to take the opportunity to express to our newer shareholders who we the changing culture of banking was not connecting with customers and that the best are and how we think. Reflecting first on where we have been will provide insight into bankers found it frustrating and demeaning. Hence, Nicolet was founded and by 2007, the current position of the company and the way we approach the future, especially as our commercial lending strategy had propelled our growth to $700 million in assets with a steward of the investment you have in Nicolet. an estimated 25% market share of owner managed business in the Green Bay area at that time. In our early years we used a lot of wholesale funds, as our local loan growth exceeded our ability to grow local deposits. To accelerate our deposit growth, we began investing in branches (nearly one per year) and in retail products. We also entered the wealth management business in 2001, to serve the needs of our growing customer base. So in this early growth phase, with our strong commercial business and growing retail and wealth management businesses, we were profitable and we had resilient asset quality. But clearly, our strategic imperative was growth. The Great Recession In 2007 the banking industry and the economy in general stood on the edge of a major financial crisis rooted in the banking industry’s loss of its ethical bearings, which was further aggravated by federal policies that stimulated irresponsible lending. Beginning in 2005 we had dramatically slowed the loan growth at Nicolet to approximately 13% each year, which was still strong but well below our historical growth rate. It would not be accurate to say that we clearly foresaw the coming collapse. It would be accurate to say that the prevailing competitive environment did not make sense to us. We saw lending happening at rates and terms that we did not think made sense for our shareholders. We just knew that wasn’t sustainable. With the support of a board that owned a high percentage of our stock, we simply accepted a much lower rate of loan growth than we had budgeted for, and we focused on deposit growth and on maturing our profitability. As one of our directors said at the time, “Stupid hurts. What is stupid for customers can’t be good for shareholders and what is stupid for shareholders can’t be good for custom- ers”. This was our Forrest Gump moment, “I am not a very smart man, but I know what The Nicolet Story The Nicolet story is best understood in three phases—Building the Base, the Great banking should be.” This confidence that good business must be fair for shareholders, Recession and Leading Consolidation. customers and employees is foundational to who we are and drives our decision-making, and as a result has supported much of our success. This notion of economic fairness runs contrary to the national economic climate, but it remains a deeply rooted part of culture in the northeastern and north central Wisconsin markets we serve—and is deeply rooted in Nicolet. we see nationally has its local effects. The economic health of our customer base is as strong as it has ever been because that is what happens in a well-run bank. We can and we do work at reaching the lower income parts of our community, but we cannot really build a business banking only the unbankable. Banking is a frequent target of current political rhetoric. Recently there was a debate in Milwaukee between two Presidential candidates. After two hours one could summarize this event as a heated exercise in asserting who hates banks more and who will do more to punish bankers. By early 2008, we knew our industry was in a major Here is the key to understanding the pressure on community banks. There are 240 crisis that would adversely affect us and our customers. independent banks in Wisconsin. Most of the communities they serve are aging and have Being a commercial bank, we could see by the second flat or declining population. The entrepreneurial business climate in our markets is not half of 2008 our customers experiencing collapsing flourishing as it was in the 1990s. Plenty of companies are doing really well, but we are sales volume by around 25%. While we knew that we not spawning new small businesses at the rate we once were. Bankers running community would have loan problems, we knew our customer base banks are also aging and there is fatigue for many who have just come through a OUR VIEW OF THE BANKING WORLD would be resilient if we helped them face their harrowing industry crisis where they saw many of their peer banks fail and bankers they problems and if we faced ours. During 2008 we acted know sued by the FDIC. The crisis was caused by a combination of federal pressure to lend aggressively to strengthen our capital, build our liquidity and deal with our emerging aggressively, as well as the failure of the industry to live up to its ethical responsibilities. problem loans. We also decided that there would be an extraordinary opportunity for There are many fine banks run by upstanding people, but the industry has become the strategic growth in the aftermath of the crisis. We knew if we had the talent, the capital target of a massive effort to regulate all financial institutions as if they had caused a crisis and regulatory credibility, there would be a great need and opportunity to lead the that largely originated in the large banks, unregulated mortgage houses and in the federal consolidation of a deeply distressed Wisconsin banking industry. government itself. This has raised the cost of operation and created real risk for the people Leading Consolidation who own, run and govern banks. The use of personal judgment in lending is critically needed, but increasingly discouraged based on the idea that if a banker acts outside of It is impossible to formulate a coherent strategy without a clear understanding of the “the standard” based upon knowledge of, trust for and experience with a particular economic, social and political environment in which we operate. There is not much we customer, then that is unfair to people that the banker has neither knowledge of nor can do to alter these macro trends. What we can do is understand what the trends mean experience with. In other words this regulatory overlay promotes a standardized, boilerplate for our company, the companies we bank, our region and our communities. Traditional model which by design supplants the customer intimacy and flexibility that are the principle economic measures such as unemployment, inflation, corporate earnings and the stock competitive advantages of a good community bank. market would indicate that the economy is largely recovered from the Great Recession. Other measures provide insight into why the political and economic climate remains Most of the banks that didn’t fail during the crisis are now profitable and have strong disturbingly chaotic. The labor force participation rate is at its lowest level in decades. capital. The vast majority of community banks are very interest rate spread dependent. Politicians talk about creating jobs; business owners talk privately about not being able to That means they make most of their money on the difference between their loan rates find people who can and will fill the jobs they have. Politicians speak of the concentration earned and their deposit rates paid. They don’t have the proportion of fee revenue sources of wealth in the top 1% of the population and loss of hope among poor. The political that larger banks have. Federal policy has held interest rates at near zero for over seven climate is characterized by deep anger and division. I wish that I could write that this years in an effort to stimulate the borrowing they believe causes economic growth. sense of alienation seen across the political spectrum were without foundation. As economists point out, setting rates so low effectively taxes savers to subsidize Wisconsin has historically been a pretty cohesive place, but the disintegration of culture borrowers. Despite this unprecedented effort to induce borrowing, loan growth is quite soft. 9 There is apparently no rate low enough to cause our customers to borrow money they eight Nicolet directors to govern the combined company. This is a very challenging don’t want to borrow. Meanwhile, prolonged low rates compress bank lending spreads, and emotional process. So why is this happening? causing bank earnings to flatten and decline. For years banks have been hoping and expecting that economic recovery would cause rates and lending spreads to rise. News This is happening because both boards understand each other, the challenges in the of slowing growth in China and negative interest rates in Europe are causing the Fed to industry and the extraordinary financial and strategic opportunities in bringing the two have second thoughts about letting rates rise. It is not prudent for banks to only count organizations together. Both boards believe we are stronger together than we can be on higher lending spreads to restore earnings. individually. This combination has very compelling economics rooted in greater efficiency and greater size. Efficiency is the tough part because it really means eliminating Community banks have largely recovered, but have a totally different attitude about the unnecessary positions. As we have worked our way through the difficult decisions, we risks and returns in the business they grew up in. Bank stock values have recovered very have found that the job market is very strong for qualified people, but it still means some nicely on a relative scale, but price-to-earnings (P/E) multiples lag the general market. people leave at a time they didn’t chose. Both boards focused on the strong economics The investment markets accurately perceive banking to be a mature industry with of the combination and insisted that management face the hard decisions about people softening earnings, much higher regulatory costs and higher capital requirements. thoughtfully and generously. At one critical juncture in the negotiations as we struggled When we attend bank strategy conferences, the presentations and the private with personnel questions, one of the directors looked square at management of both conversations are all about the need to grow in order to gain efficiency or else sell. companies and said, “If this deal doesn’t come together, you had better have a very Many banks are talking about being a buyer, but lack a real understanding of how good reason.” He wasn’t being heartless. He was keeping our focus on the intrinsic difficult it is to garner the talent, the capital and regulatory credibility to be a successful impact the combination has on profitability, share value, capital strength and the ability acquirer. This difficult environment represents an extraordinary opportunity for of the combined company to serve its core markets for the long term. profitable consolidation. In 2010 we acquired four Green Bay area branches from Anchor Bank. In 2011 we looked material market presence in Brown and Kewaunee counties as well. The company has served closely at six troubled banks that we expected might fail. In April 2013 we acquired Door County for over 140 years earning over 62% deposit market share. That represents Mid-Wisconsin Bank in an exchange of equity. We also purchased assets and liabilities of an extraordinary amount of trust that the people in Door County have placed in one the Bank of Wausau from the FDIC. Mid-Wisconsin was a troubled institution that saw institution. All directors are well aware of the responsibility that comes with this community the opportunity to recover share value more rapidly by accepting Nicolet common stock. trust. All of the branches in Door County are staying open, and we expect to build on Since that merger was announced in November 2012, former Mid-Wisconsin shareholders Baylake’s legacy of community support and engagement. The decision to combine under have seen their Nicolet stock value more than triple. Mergers are often discussed with the Nicolet name was difficult but well thought out. The directors of both companies the military language of conquest. We approach mergers the way we approach customer decided that it is critical to run one integrated bank. The Baylake name has real meaning relationships. We are looking to be creative, sincere, gutsy and fair. We will do them in and resonance. Nicolet is a name that has strong resonance throughout Wisconsin. places where we can make a real difference for the customers and communities and we We decided that Nicolet better fit our broader geography and strategic growth goals. Baylake grew out of the Bank of Sturgeon Bay. In the last 25 years Baylake earned a will not side step the difficult decisions. We intend to honor the Baylake legacy through careful attention to all our communities. We will be particularly aware of the legacy of trust between this bank and the people of The Baylake and Nicolet Merger Door County. Many people believe “merger” is just a more polite term than “acquisition” and many times it is. While Nicolet is the surviving entity and the name we will use is Nicolet; this combination When the Baylake merger was announced, we said we expected to achieve over $7 million is as close to a true merger as I have seen. At consummation, each shareholder group of pre-tax cost savings through combination. We will achieve that goal. While we do not will own 50% of the combined entity and eight former Baylake directors will be joining make public earnings projections, improved share values have materialized for banks with additional scale that can execute with efficiency. The Nicolet/Baylake organization together will have stronger earnings and capital and will be in a great position to continue building the leading community bank in the State of Wisconsin. In January we announced the integration of a select group of financial advisors of Navigator Planning Group and the purchase of their respective books of business, as well as their operating platform into Nicolet. Navigator has been a family-owned wealth advisory firm based in Green Bay. We have had long standing personal and professional relationships with the Madson family. This move will accelerate the growth of our wealth management business, which is already substantial and profitable. We have been looking for ways to grow and gain market share. Navigator brings an existing profitable revenue stream and above all the right people to build on what we have. To our original Nicolet shareholders, we are very grateful for getting us going and sustaining us through the Great Recession. To the shareholders who joined us through the 2013 combination with Mid-Wisconsin, thank you for trusting us to serve your communities and increase your share price. I hope you are pleased with the results. To the Baylake shareholders joining us, thank you for trusting us. We expect to make you proud. Return on average common equity (ROCE) was 12.35%, compared to 11.55% last year. Book value per common share was $23.42 at year-end 2015, up 10% over last year end. Our core asset quality measures were at historically strong levels, resulting in a lower 2015 loan loss provision than for 2014. Nonperforming assets fell 47% to only $3.9 million (or 0.32% of total assets) at December 31, 2015, compared to $7.4 million (or 0.61% of Dear Shareholders, 2015 was a very busy and successful year. With strong financial performance and quality assets) at December 31, 2014. Our results reflect the strength of our customer relationships management of our balance sheet and capital in 2015, we solidified our position as a and the success of our strategic moves in recent years. strategic leader in Wisconsin banking. We also have become adept at consolidation as we have completed three acquisitions from 2010 through 2013. As we write this letter, As part of our active capital management this year, we sold two outlying branches in we are in the middle of two merger transactions; by the time you read this, both will have August, issued $12 million of 5% fixed-rate, 10-year subordinated debt in the first half of closed. In all the excitement of mergers, it is critical to run a really sound, profitable and 2015 (increasing our regulatory Tier 2 capital), redeemed $12.2 million or half of our then growing core banking franchise. We also have to be very clear about what we are doing, outstanding SBLF preferred stock in September at par (reducing total and regulatory Tier 1 why and the outcomes we expect. There is a lot of math involved in banking and even more capital and the future cost of capital), and used $4.2 million during 2015 to repurchase 146,404 in bank mergers. Amidst all the math, we have to stay focused on what our company does common shares at a weighted average per share price of $28.35 including commissions. for customers, the community and shareholders. We have always been a high growth story, but we do not grow for the sake of growth. share price of 27% during 2015 (from $25 to $31.79 at year end 2015). We are building out a financial services company that has the capital strength, profitability, The following chart reflects our long term stock price performance product offerings, understanding and presence to endure. We will not lose sight of the against the SNL bank index and the S&P over the past five years. This fact that all of our strategies depend on really making a difference to the people and relative performance is not driven by clever financial engineering. It is places we serve. This year’s letter will address 2015 results, offer our perspective on the driven by commitment to our core values, as well as our understanding regional economic climate and the banking industry within it. Most importantly, we will of and belief in the people we work with, live with and serve. A benefit of a very strong year was a continued sharp rise in our push more deeply into the motivating purposes of our two recent transactions. We remain in a season of extraordinary opportunity for regional consolidation of a rapidly changing and stressed banking industry. Seizing on such opportunity, we announced our agreement to merge with Baylake Corp. in September 2015. And in January 2016 we announced the integration of a select group of financial advisors from Navigator Planning Group in order to accelerate the growth of our wealth management business. While it encourages industry consolidation, the current economic condition also challenges the ability to make a sound return on the core banking business. Even so, we exceeded our expectations for profitability and quality in 2015. 2015 Results Nicolet’s net income was $11.4 million for 2015, 15% higher than 2014, and after preferred stock dividends, diluted earnings per share were $2.57, 14% higher than 2014. Return on average assets (ROA) improved to 0.96% for 2015, compared to 0.84% for 2014. Nicolet turned 15 years old in November 2015. In its earlier years, Nicolet’s shares were Building the Base held by under 300 shareholders. With the April 2013 Mid-Wisconsin Financial Services, Nicolet started as a very high growth, business oriented bank with a single location in Inc. (Mid-Wisconsin) acquisition, a large number of new shareholders joined Nicolet. downtown Green Bay. Our main strategy was to gather veteran commercial bankers who At year-end 2015, we had 4.2 million outstanding shares of common stock held by had earned the respect and loyalty of people who run businesses. Along the way we approximately 600 shareholders, most of whom are long-term investors, and the core of attracted a number of veteran bankers from different organizations who were motivated those shares are held by founding investors, employees and current or former board by a desire to return to the foundational discipline of understanding and meeting members. In April 2016 the current Baylake shareholders become Nicolet shareholders customer needs. For reasons that defy understanding and explanation, this customer- in our merger of equals. Those new shareholders will own 50% of the combined voting focused mindset was rapidly abandoned in the later 1990s by the larger banks. We knew shares. We want to take the opportunity to express to our newer shareholders who we the changing culture of banking was not connecting with customers and that the best are and how we think. Reflecting first on where we have been will provide insight into bankers found it frustrating and demeaning. Hence, Nicolet was founded and by 2007, the current position of the company and the way we approach the future, especially as our commercial lending strategy had propelled our growth to $700 million in assets with a steward of the investment you have in Nicolet. an estimated 25% market share of owner managed business in the Green Bay area at that time. In our early years we used a lot of wholesale funds, as our local loan growth exceeded our ability to grow local deposits. To accelerate our deposit growth, we began investing in branches (nearly one per year) and in retail products. We also entered the wealth management business in 2001, to serve the needs of our growing customer base. So in this early growth phase, with our strong commercial business and growing retail and wealth management businesses, we were profitable and we had resilient asset quality. But clearly, our strategic imperative was growth. The Great Recession In 2007 the banking industry and the economy in general stood on the edge of a major financial crisis rooted in the banking industry’s loss of its ethical bearings, which was further aggravated by federal policies that stimulated irresponsible lending. Beginning in 2005 we had dramatically slowed the loan growth at Nicolet to approximately 13% each year, which was still strong but well below our historical growth rate. It would not be accurate to say that we clearly foresaw the coming collapse. It would be accurate to say that the prevailing competitive environment did not make sense to us. We saw lending happening at rates and terms that we did not think made sense for our shareholders. We just knew that wasn’t sustainable. With the support of a board that owned a high percentage of our stock, we simply accepted a much lower rate of loan growth than we had budgeted for, and we focused on deposit growth and on maturing our profitability. As one of our directors said at the time, “Stupid hurts. What is stupid for customers can’t be good for shareholders and what is stupid for shareholders can’t be good for custom- ers”. This was our Forrest Gump moment, “I am not a very smart man, but I know what The Nicolet Story The Nicolet story is best understood in three phases—Building the Base, the Great banking should be.” This confidence that good business must be fair for shareholders, Recession and Leading Consolidation. customers and employees is foundational to who we are and drives our decision-making, and as a result has supported much of our success. This notion of economic fairness runs contrary to the national economic climate, but it remains a deeply rooted part of culture in the northeastern and north central Wisconsin markets we serve—and is deeply rooted in Nicolet. we see nationally has its local effects. The economic health of our customer base is as strong as it has ever been because that is what happens in a well-run bank. We can and we do work at reaching the lower income parts of our community, but we cannot really build a business banking only the unbankable. Banking is a frequent target of current political rhetoric. Recently there was a debate in Milwaukee between two Presidential candidates. After two hours one could summarize this event as a heated exercise in asserting who hates banks more and who will do more to punish bankers. By early 2008, we knew our industry was in a major Here is the key to understanding the pressure on community banks. There are 240 crisis that would adversely affect us and our customers. independent banks in Wisconsin. Most of the communities they serve are aging and have Being a commercial bank, we could see by the second flat or declining population. The entrepreneurial business climate in our markets is not half of 2008 our customers experiencing collapsing flourishing as it was in the 1990s. Plenty of companies are doing really well, but we are sales volume by around 25%. While we knew that we not spawning new small businesses at the rate we once were. Bankers running community would have loan problems, we knew our customer base banks are also aging and there is fatigue for many who have just come through a would be resilient if we helped them face their harrowing industry crisis where they saw many of their peer banks fail and bankers they problems and if we faced ours. During 2008 we acted know sued by the FDIC. The crisis was caused by a combination of federal pressure to lend aggressively to strengthen our capital, build our liquidity and deal with our emerging aggressively, as well as the failure of the industry to live up to its ethical responsibilities. problem loans. We also decided that there would be an extraordinary opportunity for There are many fine banks run by upstanding people, but the industry has become the strategic growth in the aftermath of the crisis. We knew if we had the talent, the capital target of a massive effort to regulate all financial institutions as if they had caused a crisis and regulatory credibility, there would be a great need and opportunity to lead the that largely originated in the large banks, unregulated mortgage houses and in the federal consolidation of a deeply distressed Wisconsin banking industry. government itself. This has raised the cost of operation and created real risk for the people Leading Consolidation who own, run and govern banks. The use of personal judgment in lending is critically needed, but increasingly discouraged based on the idea that if a banker acts outside of It is impossible to formulate a coherent strategy without a clear understanding of the “the standard” based upon knowledge of, trust for and experience with a particular economic, social and political environment in which we operate. There is not much we customer, then that is unfair to people that the banker has neither knowledge of nor can do to alter these macro trends. What we can do is understand what the trends mean experience with. In other words this regulatory overlay promotes a standardized, boilerplate for our company, the companies we bank, our region and our communities. Traditional model which by design supplants the customer intimacy and flexibility that are the principle economic measures such as unemployment, inflation, corporate earnings and the stock competitive advantages of a good community bank. market would indicate that the economy is largely recovered from the Great Recession. Other measures provide insight into why the political and economic climate remains Most of the banks that didn’t fail during the crisis are now profitable and have strong disturbingly chaotic. The labor force participation rate is at its lowest level in decades. capital. The vast majority of community banks are very interest rate spread dependent. Politicians talk about creating jobs; business owners talk privately about not being able to That means they make most of their money on the difference between their loan rates find people who can and will fill the jobs they have. Politicians speak of the concentration earned and their deposit rates paid. They don’t have the proportion of fee revenue sources of wealth in the top 1% of the population and loss of hope among poor. The political that larger banks have. Federal policy has held interest rates at near zero for over seven climate is characterized by deep anger and division. I wish that I could write that this years in an effort to stimulate the borrowing they believe causes economic growth. sense of alienation seen across the political spectrum were without foundation. As economists point out, setting rates so low effectively taxes savers to subsidize Wisconsin has historically been a pretty cohesive place, but the disintegration of culture borrowers. Despite this unprecedented effort to induce borrowing, loan growth is quite soft. There is apparently no rate low enough to cause our customers to borrow money they eight Nicolet directors to govern the combined company. This is a very challenging don’t want to borrow. Meanwhile, prolonged low rates compress bank lending spreads, and emotional process. So why is this happening? causing bank earnings to flatten and decline. For years banks have been hoping and expecting that economic recovery would cause rates and lending spreads to rise. News This is happening because both boards understand each other, the challenges in the of slowing growth in China and negative interest rates in Europe are causing the Fed to industry and the extraordinary financial and strategic opportunities in bringing the two have second thoughts about letting rates rise. It is not prudent for banks to only count organizations together. Both boards believe we are stronger together than we can be on higher lending spreads to restore earnings. individually. This combination has very compelling economics rooted in greater efficiency and greater size. Efficiency is the tough part because it really means eliminating Community banks have largely recovered, but have a totally different attitude about the unnecessary positions. As we have worked our way through the difficult decisions, we risks and returns in the business they grew up in. Bank stock values have recovered very have found that the job market is very strong for qualified people, but it still means some nicely on a relative scale, but price-to-earnings (P/E) multiples lag the general market. people leave at a time they didn’t chose. Both boards focused on the strong economics The investment markets accurately perceive banking to be a mature industry with of the combination and insisted that management face the hard decisions about people softening earnings, much higher regulatory costs and higher capital requirements. thoughtfully and generously. At one critical juncture in the negotiations as we struggled When we attend bank strategy conferences, the presentations and the private with personnel questions, one of the directors looked square at management of both conversations are all about the need to grow in order to gain efficiency or else sell. companies and said, “If this deal doesn’t come together, you had better have a very Many banks are talking about being a buyer, but lack a real understanding of how good reason.” He wasn’t being heartless. He was keeping our focus on the intrinsic difficult it is to garner the talent, the capital and regulatory credibility to be a successful impact the combination has on profitability, share value, capital strength and the ability acquirer. This difficult environment represents an extraordinary opportunity for of the combined company to serve its core markets for the long term. profitable consolidation. In 2010 we acquired four Green Bay area branches from Anchor Bank. In 2011 we looked material market presence in Brown and Kewaunee counties as well. The company has served closely at six troubled banks that we expected might fail. In April 2013 we acquired Door County for over 140 years earning over 62% deposit market share. That represents Mid-Wisconsin Bank in an exchange of equity. We also purchased assets and liabilities of an extraordinary amount of trust that the people in Door County have placed in one the Bank of Wausau from the FDIC. Mid-Wisconsin was a troubled institution that saw institution. All directors are well aware of the responsibility that comes with this community the opportunity to recover share value more rapidly by accepting Nicolet common stock. trust. All of the branches in Door County are staying open, and we expect to build on Since that merger was announced in November 2012, former Mid-Wisconsin shareholders Baylake’s legacy of community support and engagement. The decision to combine under have seen their Nicolet stock value more than triple. Mergers are often discussed with the Nicolet name was difficult but well thought out. The directors of both companies the military language of conquest. We approach mergers the way we approach customer decided that it is critical to run one integrated bank. The Baylake name has real meaning relationships. We are looking to be creative, sincere, gutsy and fair. We will do them in and resonance. Nicolet is a name that has strong resonance throughout Wisconsin. places where we can make a real difference for the customers and communities and we We decided that Nicolet better fit our broader geography and strategic growth goals. Baylake grew out of the Bank of Sturgeon Bay. In the last 25 years Baylake earned a will not side step the difficult decisions. We intend to honor the Baylake legacy through careful attention to all our communities. We will be particularly aware of the legacy of trust between this bank and the people of The Baylake and Nicolet Merger Door County. Many people believe “merger” is just a more polite term than “acquisition” and many times it is. While Nicolet is the surviving entity and the name we will use is Nicolet; this combination When the Baylake merger was announced, we said we expected to achieve over $7 million is as close to a true merger as I have seen. At consummation, each shareholder group of pre-tax cost savings through combination. We will achieve that goal. While we do not will own 50% of the combined entity and eight former Baylake directors will be joining make public earnings projections, improved share values have materialized for banks with 11 additional scale that can execute with efficiency. The Nicolet/Baylake organization together will have stronger earnings and capital and will be in a great position to continue building the leading community bank in the State of Wisconsin. In January we announced the integration of a select group of financial advisors of Navigator Planning Group and the purchase of their respective books of business, as well as their operating platform into Nicolet. Navigator has been a family-owned wealth advisory firm based in Green Bay. We have had long standing personal and professional relationships with the Madson family. This move will accelerate the growth of our wealth management business, which is already substantial and profitable. We have been looking for ways to grow and gain market share. Navigator brings an existing profitable revenue stream and above all the right people to build on what we have. To our original Nicolet shareholders, we are very grateful for getting us going and sustaining us through the Great Recession. To the shareholders who joined us through the 2013 combination with Mid-Wisconsin, thank you for trusting us to serve your communities and increase your share price. I hope you are pleased with the results. To the Baylake shareholders joining us, thank you for trusting us. We expect to make you proud. Return on average common equity (ROCE) was 12.35%, compared to 11.55% last year. Book value per common share was $23.42 at year-end 2015, up 10% over last year end. Our core asset quality measures were at historically strong levels, resulting in a lower 2015 loan loss provision than for 2014. Nonperforming assets fell 47% to only $3.9 million (or 0.32% of total assets) at December 31, 2015, compared to $7.4 million (or 0.61% of Dear Shareholders, 2015 was a very busy and successful year. With strong financial performance and quality assets) at December 31, 2014. Our results reflect the strength of our customer relationships management of our balance sheet and capital in 2015, we solidified our position as a and the success of our strategic moves in recent years. strategic leader in Wisconsin banking. We also have become adept at consolidation as we have completed three acquisitions from 2010 through 2013. As we write this letter, As part of our active capital management this year, we sold two outlying branches in we are in the middle of two merger transactions; by the time you read this, both will have August, issued $12 million of 5% fixed-rate, 10-year subordinated debt in the first half of closed. In all the excitement of mergers, it is critical to run a really sound, profitable and 2015 (increasing our regulatory Tier 2 capital), redeemed $12.2 million or half of our then growing core banking franchise. We also have to be very clear about what we are doing, outstanding SBLF preferred stock in September at par (reducing total and regulatory Tier 1 why and the outcomes we expect. There is a lot of math involved in banking and even more capital and the future cost of capital), and used $4.2 million during 2015 to repurchase 146,404 in bank mergers. Amidst all the math, we have to stay focused on what our company does common shares at a weighted average per share price of $28.35 including commissions. for customers, the community and shareholders. We have always been a high growth story, but we do not grow for the sake of growth. share price of 27% during 2015 (from $25 to $31.79 at year end 2015). We are building out a financial services company that has the capital strength, profitability, The following chart reflects our long term stock price performance product offerings, understanding and presence to endure. We will not lose sight of the against the SNL bank index and the S&P over the past five years. This fact that all of our strategies depend on really making a difference to the people and relative performance is not driven by clever financial engineering. It is places we serve. This year’s letter will address 2015 results, offer our perspective on the driven by commitment to our core values, as well as our understanding regional economic climate and the banking industry within it. Most importantly, we will of and belief in the people we work with, live with and serve. A benefit of a very strong year was a continued sharp rise in our push more deeply into the motivating purposes of our two recent transactions. We remain in a season of extraordinary opportunity for regional consolidation of a rapidly changing and stressed banking industry. Seizing on such opportunity, we announced our agreement to merge with Baylake Corp. in September 2015. And in January 2016 we announced the integration of a select group of financial advisors from Navigator Planning Group in order to accelerate the growth of our wealth management business. While it encourages industry consolidation, the current economic condition also challenges the ability to make a sound return on the core banking business. Even so, we exceeded our expectations for profitability and quality in 2015. 2015 Results Nicolet’s net income was $11.4 million for 2015, 15% higher than 2014, and after preferred stock dividends, diluted earnings per share were $2.57, 14% higher than 2014. Return on average assets (ROA) improved to 0.96% for 2015, compared to 0.84% for 2014. Nicolet turned 15 years old in November 2015. In its earlier years, Nicolet’s shares were Building the Base held by under 300 shareholders. With the April 2013 Mid-Wisconsin Financial Services, Nicolet started as a very high growth, business oriented bank with a single location in Inc. (Mid-Wisconsin) acquisition, a large number of new shareholders joined Nicolet. downtown Green Bay. Our main strategy was to gather veteran commercial bankers who At year-end 2015, we had 4.2 million outstanding shares of common stock held by had earned the respect and loyalty of people who run businesses. Along the way we approximately 600 shareholders, most of whom are long-term investors, and the core of attracted a number of veteran bankers from different organizations who were motivated those shares are held by founding investors, employees and current or former board by a desire to return to the foundational discipline of understanding and meeting members. In April 2016 the current Baylake shareholders become Nicolet shareholders customer needs. For reasons that defy understanding and explanation, this customer- in our merger of equals. Those new shareholders will own 50% of the combined voting focused mindset was rapidly abandoned in the later 1990s by the larger banks. We knew shares. We want to take the opportunity to express to our newer shareholders who we the changing culture of banking was not connecting with customers and that the best are and how we think. Reflecting first on where we have been will provide insight into bankers found it frustrating and demeaning. Hence, Nicolet was founded and by 2007, the current position of the company and the way we approach the future, especially as our commercial lending strategy had propelled our growth to $700 million in assets with a steward of the investment you have in Nicolet. an estimated 25% market share of owner managed business in the Green Bay area at that time. In our early years we used a lot of wholesale funds, as our local loan growth exceeded our ability to grow local deposits. To accelerate our deposit growth, we began investing in branches (nearly one per year) and in retail products. We also entered the wealth management business in 2001, to serve the needs of our growing customer base. So in this early growth phase, with our strong commercial business and growing retail and wealth management businesses, we were profitable and we had resilient asset quality. But clearly, our strategic imperative was growth. The Great Recession In 2007 the banking industry and the economy in general stood on the edge of a major financial crisis rooted in the banking industry’s loss of its ethical bearings, which was further aggravated by federal policies that stimulated irresponsible lending. Beginning in 2005 we had dramatically slowed the loan growth at Nicolet to approximately 13% each year, which was still strong but well below our historical growth rate. It would not be accurate to say that we clearly foresaw the coming collapse. It would be accurate to say that the prevailing competitive environment did not make sense to us. We saw lending happening at rates and terms that we did not think made sense for our shareholders. We just knew that wasn’t sustainable. With the support of a board that owned a high percentage of our stock, we simply accepted a much lower rate of loan growth than we had budgeted for, and we focused on deposit growth and on maturing our profitability. As one of our directors said at the time, “Stupid hurts. What is stupid for customers can’t be good for shareholders and what is stupid for shareholders can’t be good for custom- ers”. This was our Forrest Gump moment, “I am not a very smart man, but I know what The Nicolet Story The Nicolet story is best understood in three phases—Building the Base, the Great banking should be.” This confidence that good business must be fair for shareholders, Recession and Leading Consolidation. customers and employees is foundational to who we are and drives our decision-making, and as a result has supported much of our success. This notion of economic fairness runs contrary to the national economic climate, but it remains a deeply rooted part of culture in the northeastern and north central Wisconsin markets we serve—and is deeply rooted in Nicolet. we see nationally has its local effects. The economic health of our customer base is as strong as it has ever been because that is what happens in a well-run bank. We can and we do work at reaching the lower income parts of our community, but we cannot really build a business banking only the unbankable. Banking is a frequent target of current political rhetoric. Recently there was a debate in Milwaukee between two Presidential candidates. After two hours one could summarize this event as a heated exercise in asserting who hates banks more and who will do more to punish bankers. By early 2008, we knew our industry was in a major Here is the key to understanding the pressure on community banks. There are 240 crisis that would adversely affect us and our customers. independent banks in Wisconsin. Most of the communities they serve are aging and have Being a commercial bank, we could see by the second flat or declining population. The entrepreneurial business climate in our markets is not half of 2008 our customers experiencing collapsing flourishing as it was in the 1990s. Plenty of companies are doing really well, but we are sales volume by around 25%. While we knew that we not spawning new small businesses at the rate we once were. Bankers running community would have loan problems, we knew our customer base banks are also aging and there is fatigue for many who have just come through a would be resilient if we helped them face their harrowing industry crisis where they saw many of their peer banks fail and bankers they problems and if we faced ours. During 2008 we acted know sued by the FDIC. The crisis was caused by a combination of federal pressure to lend aggressively to strengthen our capital, build our liquidity and deal with our emerging aggressively, as well as the failure of the industry to live up to its ethical responsibilities. problem loans. We also decided that there would be an extraordinary opportunity for There are many fine banks run by upstanding people, but the industry has become the strategic growth in the aftermath of the crisis. We knew if we had the talent, the capital target of a massive effort to regulate all financial institutions as if they had caused a crisis and regulatory credibility, there would be a great need and opportunity to lead the that largely originated in the large banks, unregulated mortgage houses and in the federal consolidation of a deeply distressed Wisconsin banking industry. government itself. This has raised the cost of operation and created real risk for the people Leading Consolidation who own, run and govern banks. The use of personal judgment in lending is critically needed, but increasingly discouraged based on the idea that if a banker acts outside of It is impossible to formulate a coherent strategy without a clear understanding of the “the standard” based upon knowledge of, trust for and experience with a particular economic, social and political environment in which we operate. There is not much we customer, then that is unfair to people that the banker has neither knowledge of nor can do to alter these macro trends. What we can do is understand what the trends mean experience with. In other words this regulatory overlay promotes a standardized, boilerplate for our company, the companies we bank, our region and our communities. Traditional model which by design supplants the customer intimacy and flexibility that are the principle economic measures such as unemployment, inflation, corporate earnings and the stock competitive advantages of a good community bank. market would indicate that the economy is largely recovered from the Great Recession. Other measures provide insight into why the political and economic climate remains Most of the banks that didn’t fail during the crisis are now profitable and have strong disturbingly chaotic. The labor force participation rate is at its lowest level in decades. capital. The vast majority of community banks are very interest rate spread dependent. Politicians talk about creating jobs; business owners talk privately about not being able to That means they make most of their money on the difference between their loan rates find people who can and will fill the jobs they have. Politicians speak of the concentration earned and their deposit rates paid. They don’t have the proportion of fee revenue sources of wealth in the top 1% of the population and loss of hope among poor. The political that larger banks have. Federal policy has held interest rates at near zero for over seven climate is characterized by deep anger and division. I wish that I could write that this years in an effort to stimulate the borrowing they believe causes economic growth. sense of alienation seen across the political spectrum were without foundation. As economists point out, setting rates so low effectively taxes savers to subsidize Wisconsin has historically been a pretty cohesive place, but the disintegration of culture borrowers. Despite this unprecedented effort to induce borrowing, loan growth is quite soft. There is apparently no rate low enough to cause our customers to borrow money they eight Nicolet directors to govern the combined company. This is a very challenging don’t want to borrow. Meanwhile, prolonged low rates compress bank lending spreads, and emotional process. So why is this happening? causing bank earnings to flatten and decline. For years banks have been hoping and expecting that economic recovery would cause rates and lending spreads to rise. News This is happening because both boards understand each other, the challenges in the of slowing growth in China and negative interest rates in Europe are causing the Fed to industry and the extraordinary financial and strategic opportunities in bringing the two have second thoughts about letting rates rise. It is not prudent for banks to only count organizations together. Both boards believe we are stronger together than we can be on higher lending spreads to restore earnings. individually. This combination has very compelling economics rooted in greater efficiency and greater size. Efficiency is the tough part because it really means eliminating Community banks have largely recovered, but have a totally different attitude about the unnecessary positions. As we have worked our way through the difficult decisions, we risks and returns in the business they grew up in. Bank stock values have recovered very have found that the job market is very strong for qualified people, but it still means some nicely on a relative scale, but price-to-earnings (P/E) multiples lag the general market. people leave at a time they didn’t chose. Both boards focused on the strong economics The investment markets accurately perceive banking to be a mature industry with of the combination and insisted that management face the hard decisions about people softening earnings, much higher regulatory costs and higher capital requirements. thoughtfully and generously. At one critical juncture in the negotiations as we struggled When we attend bank strategy conferences, the presentations and the private with personnel questions, one of the directors looked square at management of both conversations are all about the need to grow in order to gain efficiency or else sell. companies and said, “If this deal doesn’t come together, you had better have a very Many banks are talking about being a buyer, but lack a real understanding of how good reason.” He wasn’t being heartless. He was keeping our focus on the intrinsic difficult it is to garner the talent, the capital and regulatory credibility to be a successful impact the combination has on profitability, share value, capital strength and the ability acquirer. This difficult environment represents an extraordinary opportunity for of the combined company to serve its core markets for the long term. profitable consolidation. In 2010 we acquired four Green Bay area branches from Anchor Bank. In 2011 we looked material market presence in Brown and Kewaunee counties as well. The company has served closely at six troubled banks that we expected might fail. In April 2013 we acquired Door County for over 140 years earning over 62% deposit market share. That represents Mid-Wisconsin Bank in an exchange of equity. We also purchased assets and liabilities of an extraordinary amount of trust that the people in Door County have placed in one the Bank of Wausau from the FDIC. Mid-Wisconsin was a troubled institution that saw institution. All directors are well aware of the responsibility that comes with this community the opportunity to recover share value more rapidly by accepting Nicolet common stock. trust. All of the branches in Door County are staying open, and we expect to build on Since that merger was announced in November 2012, former Mid-Wisconsin shareholders Baylake’s legacy of community support and engagement. The decision to combine under have seen their Nicolet stock value more than triple. Mergers are often discussed with the Nicolet name was difficult but well thought out. The directors of both companies the military language of conquest. We approach mergers the way we approach customer decided that it is critical to run one integrated bank. The Baylake name has real meaning relationships. We are looking to be creative, sincere, gutsy and fair. We will do them in and resonance. Nicolet is a name that has strong resonance throughout Wisconsin. places where we can make a real difference for the customers and communities and we We decided that Nicolet better fit our broader geography and strategic growth goals. Baylake grew out of the Bank of Sturgeon Bay. In the last 25 years Baylake earned a will not side step the difficult decisions. We intend to honor the Baylake legacy through careful attention to all our communities. We will be particularly aware of the legacy of trust between this bank and the people of The Baylake and Nicolet Merger Door County. Many people believe “merger” is just a more polite term than “acquisition” and many times it is. While Nicolet is the surviving entity and the name we will use is Nicolet; this combination When the Baylake merger was announced, we said we expected to achieve over $7 million is as close to a true merger as I have seen. At consummation, each shareholder group of pre-tax cost savings through combination. We will achieve that goal. While we do not will own 50% of the combined entity and eight former Baylake directors will be joining make public earnings projections, improved share values have materialized for banks with additional scale that can execute with efficiency. The Nicolet/Baylake organization together will have stronger earnings and capital and will be in a great position to continue building the leading community bank in the State of Wisconsin. In January we announced the integration of a select group of financial advisors of Navigator Robert Atwell Chairman, President Michael Felhofer Owner Susan Merkatoris Certified Public Accountant Planning Group and the purchase of their respective books of business, as well as their and Chief Executive Officer Candleworks of Owner and Managing Member operating platform into Nicolet. Navigator has been a family-owned wealth advisory firm based in Green Bay. We have had long standing personal and professional relationships with the Madson family. This move will accelerate the growth of our wealth management business, which is already substantial and profitable. We have been looking for ways to grow and gain market share. Navigator brings an existing profitable revenue stream and above all the right people to build on what we have. To our original Nicolet shareholders, we are very grateful for getting us going and sustaining us through the Great Recession. To the shareholders who joined us through the 2013 combination with Mid-Wisconsin, thank you for trusting us to serve your communities and increase your share price. I hope you are pleased with the results. To the Baylake shareholders joining us, thank you for trusting us. We expect to make you proud. Sincerely, Robert B. Atwell Chairman, President Michael E. Daniels Executive Vice President and Chief Executive Officer and Secretary Nicolet Bankshares, Inc. Door County, Inc. Larboard Enterprises, LLC Michael Daniels President Chris Ghidorzi Director and Chief Operating Officer Ghidorzi Companies Therese Pandl President and CEO HSHS EW Division Nicolet National Bank John Dykema President and Owner Dr. Kim Gowey Owner Randy Rose Retired President and CEO Cosmetic and Implant Schwabe North America Campbell Wrapper Corp Dentistry of Wisconsin and Circle Packaging Machinery, Inc. Gary Fairchild President and CEO Fairchild Equipment, Inc. Andrew Hetzel, Jr. President and CEO NPS Corporation Donald Long, Jr. Former Owner and CEO Century Drill and Tool Co., Inc. Robert Weyers Owner Commercial Horizons, Inc. 13 Robert Atwell Chairman, President Michael Daniels Executive Vice President Ann K. Lawson Chief Financial Officer and Chief Executive Officer and Secretary Robert Atwell Chairman and CEO Jon Biskner Vice President Information Technology Michael Daniels President and COO Jeff Gahnz Vice President Marketing and Public Relations Kristi Hansen Vice President Operations Brad Hutjens Executive Vice President Chief Credit Officer Compliance and Risk Manager Ann Lawson Chief Financial Officer Kate Lombardi Vice President Human Resources PJ Madson Senior Vice President Wealth Management Eric Radzak Corporate Development Officer Michael Steppe Chief Investment Officer Mike Vogel Senior Vice President Commercial Banking Michael Waters Senior Vice President Fox Cities Market Executive Eric Witczak Executive Vice President Retail and Private Banking Tom Zellner Senior Vice President Retail Banking – Central Region 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, 2015 and 2014, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2015 (not presented herein); and in our report dated March 7, 2016, 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. Atlanta, Georgia March 7, 2016 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 15 NICO LET BANKS HARE S, INC . A ND SUB SIDIAR I ES ( De ce mb er 31 , 2015 and 2014) (In thousands, except share and per share data) 2015 2014 2015 2014 Assets Liabilities and Stockholders’ Equity Cash, cash equivalents & certificates in other banks $ 87,035 $ 79,093 Liabilities: Total deposits Securities available for sale (“AFS”) 172,596 168,475 Notes and debentures Other investments 8,135 8,065 Loans including loans held for sale 881,741 890,613 Allowance for loan losses (10,307) (9,288) Premises and equipment, net 29,613 31,924 Accrued interest payable and other liabilities Total liabilities Stockholders’ Equity: Preferred equity Common stock Additional paid-in capital Retained earnings Bank owned life insurance 28,475 27,479 Accumulated other comprehensive income $ 1,056,417 $ 1,059,903 39,788 8,547 33,503 10,812 1,104,752 1,104,218 12,200 24,400 42 45,220 51,059 980 41 45,693 39,843 1,031 Accrued interest receivable and other assets 17,151 18,924 Nicolet Bankshares, Inc. stockholders’ equity 109,501 111,008 Total assets $ 1,214,439 $ 1,215,285 Noncontrolling interest (“NCI”) 186 59 Total stockholders’ equity and NCI 109,687 111,067 Total liabilities, NCI and stockholders’ equity $ 1,214,439 $ 1,215,285 Preferred shares issued and outstanding 12,200 24,400 Common shares outstanding 4,154,377 4,058,208 Common shares issued 4,191,067 4,124,439 17 NICOLET BANKSHARES, INC. AND SUBSIDIARIES (Years Ended December 31, 2015 and 2014) (In thousands, except share and per share data) 2015 2014 2015 2014 Total interest income $ 48,597 $ 48,949 Noninterest expense: Salaries and employee benefits 22,523 21,472 Total interest expense 7,213 7,067 Net interest income 41,384 41,882 Provision for loan losses (“PFLL”) 1,800 2,700 Occupancy, equipment and office Business development and marketing Data processing Net interest income after PFLL 39,584 39,182 Other expense Noninterest income: Service charges on deposit accounts Trust services & brokerage fee income Mortgage income, net Gains, net Other income 2,348 5,492 3,258 1,726 2,128 5,200 1,926 539 Total noninterest expense Income before income tax expense Income tax expense Net income Less: Net income attributable to NCI 4,884 4,392 Less: Preferred stock dividends 212 Net income attributable to Nicolet Bankshares, Inc. 11,428 Total noninterest income 17,708 14,185 Net income available to common shareholders $ 11,216 $ 9,705 Basic earnings per common share $ 2.80 $ 2.33 Diluted earnings per common share $ 2.57 $ 2.25 Weighted average common shares outstanding: Basic Diluted 4,003,988 4,165,254 4,362,213 4,311,347 19 6,928 2,244 3,565 4,388 39,648 17,644 6,089 11,555 127 7,086 2,267 3,178 4,706 38,709 14,658 4,607 10,051 102 9,949 244 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: 800.962.4284 Outside the US: 781.575.3120 Fax: 312.604.2312 

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