Nicolet Bankshares Inc. Annual Report 2017

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FY2017 Annual Report · Nicolet Bankshares Inc.

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S H A R E D S U C C E S S

The concept of shared success is a big part of the foundation

of Nicolet Bankshares, Inc. Our value to the community and

to each other is balancing the success between customers,

shareholders, and employees. The shared success we intentionally

create and grow with our 3 Circles is real. It is seen in our

results for 2017 and felt in the communities that we serve.

We believe, as the banking industry consolidates and gets

more competitive, that the interconnectedness between our

3 Circles is the one thing that very few companies can

replicate. There is beauty in its simplicity. There is challenge

in its execution.

The shared success of our 3 Circles is the reason we have

been able to weather storms and forge bold strategies in the

past. It is the reason we are optimistic about our future.

It is, by definition, what a great community bank should be.

This photo was taken

in the building that was the home

of Algoma Hardwoods. The previous owner,

Wendell Ellsworth, was a founding director of Nicolet.

The company was one of our early customers.

Wendell and the employees who worked

here were a part of the early

shared success of Nicolet.

D E A R S H A R E H O L D E R S

2017 was a great year no matter how you slice it. Net income was $33.1 million for

2017, 80% higher than 2016. Earnings per diluted common share were $3.33, 40%

higher than last year. Return on average assets was 1.25%, compared to 0.95% for

2016. Nicolet reached $2.9 billion in assets, $2.1 billion in loans (33% higher than

2017

2012

Increase Approximate Multiple

Year-end assets ($millions)

$2,932 $745

$2,187

Year-end common equity ($millions) $364

$53

$311

Year-end outstanding shares (thousands) 9,818

3,425

6,393

4 times

7 times

3 times

Net income ($millions)

$33

$30

Over tenfold

Earnings per diluted common share

$3.33

$0.53

$2.80

Return on average assets

1.25% 0.45% 0.80%

Year-end closing stock price

$54.74 $16.50 $38.24

6 times

3 times

2 times

year-end 2016, with 11% organic and the remainder from acquisition), and $2.5

KBW Bank Index

230

100

billion in deposits (25% higher than year-end 2016, with 6% organic).

Effective execution and integration of our recent acquisitions, as well as organic

growth, revenue growth, and effective cost management have all been meaningful

contributors to this exceptional performance. Asset quality remained strong. These

results are directly attributable to our focus on customer service, employee attitude,

and long-term values — our 3 Circles.

The main goal of this letter is to help you understand where we have been, particularly

in the last five years, so that you can develop a feel for the trajectory we are on.

We have aggressive expectations that we are managing toward, and we understand

how we intend to achieve them. We invite you also to study what we are saying

about today, our outlook, and draw your own conclusions about the future of your

ownership in Nicolet.

Prior to writing this letter, we reviewed past annual reports, to track what we wrote

about and how it since turned out. We have had a remarkable record of delivering

on what we said. While we are surrounded by numbers and love numbers, we live on

our core values and mission—the knowledge that we exist to serve our customers

and the communities they live in. We do this with efficiency, discipline, and heart.

Our purpose remains constant, our strategies and tactics revolve around living our

values in the current circumstances, and this consistency produces results.

This is a very opportune time to look back at how our Bank has changed in the last

five years. Some people like to look at math while others prefer interpretative prose.

The following table summarizes the math.

Our Bank has really emerged as a high performance company with a strong share

price. The industry recovered nicely during this five-year period. While the timing of

our aggressive growth was good, we didn’t just ride the industry tide. The KBW bank

index doubled over the five-year period, while the growth in our share price more

than tripled.

Why did it work so well?

We create shared success. Every Nicolet employee is constantly exposed to the 3 Circles

shown on the front cover. The different circles acknowledge that the interests of

shareholders, customers, and employees can be divergent. The overlapped space in

the center depicts our relentless drive to grow the space of shared success. We approach

customer relationships and mergers with the same mindset. We are looking to create

a fair win, and we are looking for people who understand what fair means.

That is why we do the fair deal that can be done rather than the perfect deal that

doesn’t happen. Negotiation for us is not a competitive sport. It is the process by

which we seek to create shared success.

We were willing to act during a period when action felt risky. We nearly

We are effective at growth and it pays. Finding ways to work more effectively and

quadrupled our asset size (organically and through acquisitions), projecting our brand

efficiently is a low-risk way to improve customer experience, shareholder return,

and value proposition into new communities and deeper into existing markets.

and employee motivation and satisfaction. Finally, we will invest for sustainability—

This broader scope and depth strengthened our earning power. Net income increased

this includes product and delivery enhancements, pricing, technology, succession

more than tenfold, which in turn dramatically improved our return on average

sequencing, and additional investment in our people. At the end of 2017, a discretionary

assets (ROA) to 1.25% in 2017.

$0.5 million profit sharing contribution was made to non-leadership, eligible participants

of the 401k plan, rewarding the job well done. An employee stock purchase plan was

We were disciplined about capital. Growth requires capital but growth for the sake

developed in 2017 and taken to shareholders in 2018 to provide a deeper ownership

of growth is often destructive of shareholder value. We have grown in a capital

opportunity within Nicolet. Equity ownership meaningfully aligns shareholder

efficient manner. All our acquisitions were accretive to earnings per share. Our stock

interests with company strategy. In 2017, 0.9 million options with 5-year vesting

price (the primary consideration used) was relatively strong at the time of each

were granted to nearly 40 selected leaders, underscoring both their opportunity and

merger, often leading to fewer shares being issued. Our common equity grew nearly

responsibility to deliver results on a sustainable basis. The use of episodic option grants

seven times over the five-year period, while outstanding shares increased by less

on the front end of performance periods is consistent with option grants authorized

than three times. This was largely due to just-in-time capital—that is, shareholders

in the past and with Nicolet’s entrepreneurial culture. Some call this dilution. We view

of acquired banks accepting our stock for theirs. This may have been a leap of faith

it as the engine for future value.

on their part, but we have consistently produced a solid return to them and our

legacy shareholders. Investing in communities who are now literally invested in our

What else influences our future plans?

stock is a win-win because it keeps those new communities, shareholders, and

Yesterday’s recipe cannot simply be repeated tomorrow because the industry context

customers aligned with the continued success of Nicolet. Our board, employees, and

has changed dramatically. The industry is really at an inflection point. Acquisition

prior board members continue to have a substantial ownership in Nicolet. This keeps

prices have increased (fortunately our share price has risen faster). Competition for

us mindful of how profitability, share management, and short- and long-term

quality loans is fierce. Interest rates are rising, perhaps more quickly on deposits

decisions impact our share price. We have very high expectations for our future

than on loans. After a long and tepid economic recovery, we are finally seeing wages

value, which keeps us disciplined about issuing new shares.

and salaries rise. The following themes formed the framework for our strategy

In 2012 the road map seemed crystal clear—gain scale and profits by buying other

1. General economic outlook. The fusion of politics and economics seems to

institutions that had strong core funding but struggled with other issues (such as

grow consistently more complete. We need to run and grow our businesses in

loan quality, succession, or compliance). We followed that road map to the destination

the knowledge that national and global currents have a stronger and more

you see today. We gained efficiency, increased profits by tackling loan problems of

immediate impact than in earlier decades. With the November 2016 election and

the acquired institutions, and lowered our funding cost on a more stable, granular

the December 2017 passage of tax reform, the long, slow recovery from the 2008

articulated above:

deposit base along the way.

So what’s next?

systemic shock has given way to more rapid growth. The corporate tax rate cut

will stimulate investment and growth, but rising concerns about deficits and

inflation have sound foundation. The potential for major political instability

Having finished the 2012 plan, we are now setting a new one. Our course for

nationally and internationally is also a legitimate concern in the publics’ mind.

the future includes maturing into a consistent high performer. This includes a

What we see in the moment is strong performance by our commercial customers

continued willingness to act with an urgent desire to get things done. Over the next

and more aggressive attitude toward investment in plant and equipment as well

five years we will prioritize organic growth across our markets and all revenue lines,

as strong acquisition activity. With very tight labor markets and a 100%

especially wealth management, as well as prioritize targeted acquisition opportunities.

deductibility of equipment purchases, the case for automation is compelling.

The rise in labor costs cuts both ways. It increases business cost but supports

4. Technology. Mobile banking and online banking are ways technology is already

the kind of broad base prosperity that healthy communities depend on. While we

improving efficiency and access for our customers and for the Bank. The advantages

ride this wave of prosperity, it is important for bankers and their customers to

technology offers also bring risk. Cyber risk is particularly acute for banks for

remember how quickly underlying weaknesses can turn markets. Recession is

the simple reason that we have both valuable information and actual money.

too polite a word to describe the systemic shocks of the 2007 to 2011 period.

There are also non-bank technology companies seeking to either partner with

There are clear systemic weaknesses below the surface of current prosperity. We

or bypass traditional banking space. Not all tech that glitters is gold, but we

don’t live as killjoys, but we remember well how important it was for us to

must stay on the lookout for ways to improve the customer experience.

prepare for and work through the last economic setback. We plan on being there

for our customers for the next round of problems. We are experiencing strong loan

The core of our shareholder base consists of people who live in the communities we

growth through real relationships and the strong regional brand we have earned

serve. Our original shareholders invested $10 per share in 2000 when we started.

for being “aggressively prudent” in support of our customers and community.

For many of these shareholders, we are their major investment and their best investment.

These investors are typically great customers and great brand advocates. When we

2. Banking Industry Landscape. Nicolet is one of the rare institutions that was

raised the capital to start, we quickly learned that people who asked about our exit

able to turn the financial crisis into a profitable growth opportunity. The deep

strategy didn’t invest. We came right out and told people we don’t have an exit

loan quality crisis has passed and along with it the opportunity to make money

strategy. We were explicit that we weren’t starting the business to sell it; we were

fixing loan problems. We don’t look forward to the next recession, but we have

starting it because we thought it was needed and important. Today we are one of

demonstrated the ability to harvest counter-cyclical opportunity. Banks continue

Wisconsin’s larger public companies, and we have sufficient liquidity that people

to consolidate at a rapid pace due to the need for great efficiency and often

can readily exit if they wish. When people ask about our exit strategy now, our

due to the lack of management depth and succession. Acquisitions often model

answer really hasn’t changed. We understand that performance is required for

20% to 50% cost savings for a reason. Size also gives banks the ability to

sustainability. We think our Company is as necessary as it was when founded in

maintain investments in technology and in talent development. Loan charge offs

2000 and far more impactful. We continue to make the kind of long-term decisions

are down industry-wide, but many small banks are struggling to generate the

and investments that built our Company. Having a long-term perspective and the

profitability necessary to warrant continued independence. We expect continued

discipline to maintain it provides real advantages in tactical execution. The right

opportunity for growth through acquisition. The underlying trend is not abating,

ideas do not grow old, but people do. We actually have a relatively young senior

but more turbulent times provide urgency.

team, but long term planning requires real investment of money, time and heart in

the people needed to carry on the mission. The kind of market talent we need cannot

3. Tax Reform. Tax reform is stimulating investment by our customers. Lower

simply be bought off the shelf. Through our initial years our attraction of veteran

corporate tax rates also reduce the amount of tax our Company will pay. This has

talent carried us far. Today we are raising leaders within our culture. We built our

created some confusion about income statement benchmarks. In the past an ROA

Company using option equity to incentivize our people. We needed entrepreneurial

of 1% had been the benchmark for a solid bank, and 1.25% for the high-performing

leadership thinking as owners. This has worked tremendously well, and we continue

bank. Before tax reform, we established the long-term goal of becoming a

to use ownership to keep people focused on our vision for the future.

consistent high-performing bank; post-tax reform the ROA benchmark will rise.

Given that the basic premise of tax reform was to stimulate wages and investment,

As always, we appreciate your banking with us and your trust in us with your

it is unknown how much of the tax savings will go directly to the shareholder.

investment. In our constant effort to improve both, we also invite you to share your

Regardless of where the new ROA settles, we are starting this goal from a very

ideas and thoughts at any time.

strong core base, and hold ourselves to get to the top performing tier. But we

also know and appreciate that the last 10 to 15 basis points of ROA will be the

hardest to harness, especially while continuing to invest in our long term future.

Sincerely,

Robert B. Atwell

Michael E. Daniels