Nicolet Bankshares Inc. Annual Report 2016

FY2016 Annual Report · Nicolet Bankshares Inc.

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2 0 1 6 A n n u a l R e p o r t
2 0 1 6 A n n u a l R e p o r t

111 N. Washington Street / P.O. Box 23900 / Green Bay, WI 54305 -3900
920-430-1400 / 1 -800-369-0226

ww w.n icoletban k.c om

Forward-looking Statements

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.

No matter how big we get, the core of Nicolet Bank will not change.

Real people having Real conversations. Be Responsive to our customers’ needs.

Build Personal relationships. Create Memorable experiences.

Have an Entrepreneurial mindset to innovatively create solutions.

No matter how big we get, the core of Nicolet Bank will not change.

Real people having Real conversations. Be Responsive to our customers’ needs.

Build Personal relationships. Create Memorable experiences.

Have an Entrepreneurial mindset to innovatively create solutions.

LETTER TO SHAREHOLDERS

Dear Shareholders,

This would be a great year for us to just write about the remarkable successes Nicolet has

achieved over the last 16 years and especially in the last five years. It has been rewarding to see

our plans come together and have that reflected in our share price. It was a very personal thing

to sit at the kitchen table with hundreds of people in our community in 2000 and ask them to

invest in our plans for a new bank. It is tremendously gratifying to show those people the rewards

for trusting and hanging with us. From the beginning we have set high ideals and made big plans.

Sometimes we nail it, sometimes we fall forward and sometimes we just put one foot in front of

the other. Last year’s shareholder letter was particularly written for the thousands of new

Our strategy is shifting as we move into 2017. We plan to complete the acquisition of First

shareholders who have joined us through the combinations with Mid-Wisconsin (April 2013)

Menasha Bancshares/First National Bank-Fox Valley this April 2017. At that point we will have

and Baylake (April 2016). Today, our shareholder base has grown too large to sit at every kitchen

grown from $700 million to $2.8 billion in assets in four years (a 300% increase). This represented

table, but we still want to address our owners in that same spirit. This year’s letter will be less

about the past and more about how we see the industry today and our position in it. I also want

to invite you to visit our website (https://www.nicoletbank.com/annual-report-videos/) to hear

directly from key leaders in the company about their particular area.

We finalized the agreement to merge with Baylake Bank in August of 2015. At that time,

we told both boards of directors that we should have a $40 stock by the end of 2016. We were

right on target until the election surprise of 2016 suddenly moved bank stocks up by 20%.

This sector move reflected optimism for corporate tax reform, an interest rate environment that

would favor the banking industry, and regulatory relief. As a more actively traded stock, we will

need to get used to our share price fluctuating more over matters we have little control over.

our drive for scale during a time of exceptional opportunity for value in mergers and acquisitions.

In the meantime, we remain largely owned by the individuals who have chosen to invest in us

We have achieved a sufficient size to operate within our markets with great efficiency and

through our founding, our periods of rapid growth and through our more recent acquisitions.

effectiveness, but we have not yet optimized the scale we have acquired. In 2011 we were

These individuals are overwhelmingly people who live and work in the communities we serve.

financially invested in and strategically committed to finding the acquisitions we had decided

We want to remain responsible to creating value for all our shareholders by staying focused on

we must have. We showed that we are good at finding accretive deals and integrating them

the things that provide value to our customers in the communities that we too live in, understand

effectively. The difference now is that, while we still want to acquire, we don’t have to. We see

and support.

acquisitions as additive rather than essential. There is a lot of low hanging fruit in optimizing

execution within the footprint we now have. Management has established clear targets for

acquisition of a wealth management business which brought us the talent we needed to propel

earnings and share value over the coming five years. These are some of the execution areas we

growth in this area, though it was overshadowed by the larger Baylake merger also in progress

are focused on as we look forward:

at that time. We have long had a quality fiduciary platform, but we lacked the right sales

culture and staffing to move market share. We now have the pieces in place to drive growth.

1) Cultural Integration — We are a very mission, purpose and values-driven enterprise. We are

We are entering 2017 with a monthly revenue run rate of about $1 million, which is a big part

not just another community bank marking time in the twilight of our days. We understand

of our income growth plans this year and into the future. We understand the community

our core purpose is to serve customers more effectively within a place we understand and are

banking sector is littered with broken dreams of community bank wealth strategies that

committed to. We made a lot of rapid and, in some cases, tough decisions on staffing as we

under-delivered. We look forward to catching people off guard with our growth and quality of

acquired and drove efficiency. This has not always given us the time to help people new to our

financial advisory service.

organization understand who we are or how and why we do what we do. We need all of our people

to feel the commitment to our mission deep in their bones. Hence, the cultural integration

3) Organic Growth — Wisconsin continues to be a healthy though slow growth economy.

effort remains a key focus area.

We have had seasons of extraordinary organic growth achieved by moving market share to

Nicolet. These last years have seen greater opportunity in acquired size than in organic growth.

With the growth, we are also looking for greater development of our future leadership team.

We have never de-emphasized organic growth, but the reality is our best talent has been busy

In these last four years we functioned as a very nimble, cohesive team of professionals running

integrating acquired loans, lenders and the retail network. Running in the wide open fields of

a good core franchise while quadrupling in size. We trusted each other to get done those things

acquired growth has been fun and rewarding, but we have always been pretty good at market

that pertained to our individual areas during this time. This is very different from focusing on

share trench warfare. We have always positioned ourselves against the large banks and have

personal and team development in order to sustain the mission beyond the current generation

done well. With our growth in scale and lending capacity, our value proposition has never been

of leadership. We haven’t grown from a blank sheet of paper to our market’s largest and most

more compelling to the family-owned businesses and the spirited people who own them and

impactful community bank by worrying a lot about succession—but it is time to be intentional

work in them. The local dialect is our native tongue. We learned “cheesehead” on our

about it. One of the problems in banking is that the industry has generally not invested in the

mother’s knee.

long-term training and development of the next generation of talent. Another problem is that

we are reluctant to hire bankers who really haven’t worked in a healthy customer-centric

The banking industry is currently basking in an atmosphere of unexpected euphoria. We are

banking environment. We must be open to acquiring and coaching up seasoned talent, but we

obviously big believers in community banking, but we are just not built to rest in a euphoric

really prefer to, and need to, develop people we are sure understand our culture and mission.

state. We do foresee some easing of the regulatory constraints shackling the industry, but we do

2) Wealth Management — Our 2016 combined trust and brokerage revenues totaled

often pointless and counter-productive aspects of regulation, but the changes under consideration

$9 million, up 65% over 2015. This growth in wealth management revenue was under the radar

really do not address the fundamental causes of pressure on the community banking sector.

of the professional investors who follow us. By April 1, 2016 we completed a very strategic

The bad news is that we really do not anticipate a fundamental relaxing of the pressures driving

not foresee a wholesale repeal of Dodd Frank. We are all for eliminating the irritating,

the decline of community banking. The good news is that the recipe we have developed for

3) “Fintech” is a term used for companies that deliver technology solutions differently than

prosperity in a declining sector of a stagnant industry still has legs. Our recipe includes remaining

from what banks historically have. Technology delivery patterns continue to show volume moving

ready to capitalize on continued consolidation needed in the number of community banks and

out of branches and even out of the banking system. Few banks are prepared to either benefit from

growing organically through the value proposition we can and do deliver to customers in the

these changes or deliver a compelling value proposition to prosper alongside them. But embracing

communities we serve. Let’s revisit this.

1) The community banking sector will likely not participate in regulatory relief to the degree

technology offerings as meaningful delivery channels is important, especially where the financial

transaction is straightforward and speed or convenience is desired by our customers.

that larger banks will. Community banks are competing on tighter margins and with less

This landscape has played out somewhat differently in our northern market. To the larger

diversity in revenues. Couple these with the demographic pressure of the aging of management

banks that are in our footprint, ours is a peripheral market with little potential for growth and

and the almost complete absence of younger talent interested in the life of a community banker

almost no possibility of moving the math that guides their actions. The result is a consistent

and, as a result, we can expect consolidation to remain necessary in the community banking

pattern of disinvestment by our larger competitors. None of them hold a press conference

sector. Our legs have been tested in this race. We have been attentive to our capital strength,

announcing they are not interested in the areas north of Milwaukee and Madison, but the salary

our stock price and our relationship with our regulators. We are a proven consolidator.

dollars, the investments and the attention go to other places. In effect they have been fine

While we will be selective, there is value to be created for shareholders within this

conceding market share as long as their cost reductions are greater than the margin lost. They

sector opportunity.

compete hard on the customers that fit their target screens but passively withdraw from the

rest. I wouldn’t say they are wrong. They are just making decisions based on the metrics that

2) There are a number of forces and entities trying to commoditize the community bank,

guide them. We feel the squeeze of the implied capital subsidy they enjoy, but we feel it less

hence making banking all about pricing. This is largely how the biggest banks (the too-big-to-fail

acutely than we would in the urban centers to the south of us.

or TBTF banks) and credit unions compete—by spending much of the subsidies they enjoy,

like lower implied capital requirements for TBTF banks and a nearly tax free environment for

We are very devoted to our core geography. Our people are almost universally convinced that

credit unions, into pricing. We are not here to complain about this, but it is part of our chal-

this is the best place in the world to live and work. This geographic focus has served us very well.

lenge and our opportunity. Real people are not only about price. They want someone to listen

We understand what is going on in our industry and in our geography. With this understanding

and provide alternatives and solutions. They want their banker to be there when times are

and the courage to have real conversations with our current and potential customers, we are

tough. We didn’t grow towards $2.8 billion in assets by providing price-only or cookie cutter

best positioned to be the key financial intermediary for our communities. Our vision is to

solutions. We deliver boots on the ground, face-to-face commitment to our neighbors and

continue building out the northern powerhouse we envisioned Nicolet to be 16 years ago

communities. We provide what is needed, not just what can be sold. Banking family owned

when we started.

businesses is our core strength. We do mortgage banking well and we deliver efficient wealth

management solutions.

We started this letter by talking about our meetings around the kitchen table with investors.

We want to end this letter in that spirit. Just as it was personal to ask people to invest in our