A N E W B E G I N N I N G
In 2018, we went back to our beginnings and purchased our original
office at 110 S. Washington Street in Green Bay. We moved our innovation,
integration and digital teams there to focus on the digital customer
experience. We named the building CX@NicoletBank because our mantra
for this group is, “Everything we do starts with the Customer Experience.”
CX has become a common acronym for customer experience. It also
happens to be the Roman numeral for the number 110.
We understand that our purpose is to serve and that our presence
makes a real difference, whether in person or digitally. The results that
you will see in our numbers reflect a high-performing bank focused
on relentlessly believing in our purpose. We enjoy the challenge of
repeating a great year.
Now, more than ever, we are optimistic about Nicolet’s position in a
rapidly changing industry.
Bob and Mike
inside CX@NicoletBank.
3
D E A R S H A R E H O L D E R S
2018 was a great year for Nicolet. We delivered on organic growth, asset quality,
capital management and profitability. Assets, loans and deposits were $3.1 billion,
$2.2 billion and $2.6 billion, respectively, up 6%, 4% and 6%, respectively, over
year-end 2017. Asset quality improved over an already strong level last year, with
net charge-offs to average loans of 0.05% for 2018 and nonperforming assets to
assets at 0.19%. Net income grew 24% to $41.0 million in 2018, as a result of
margin management, organic loan and deposit growth, strong fee income growth, as
well as benefiting from corporate tax reform. Diluted earnings per share was $4.12,
$0.79 or 24% higher than 2017, with increased earnings and flat diluted average
shares, aided by common stock repurchases in 2018 offsetting the acquisition shares
issued in mid-2017.
We are very proud of our current performance. Return on average assets (“ROAA”)
for the year was 1.38%, which placed Nicolet in the top 23% of publicly traded
banks in terms of profitability. While ROAA is a useful profitability benchmark, the
better comparative measure of shareholder outcome is return on average tangible
common equity (“ROATCE”). In 2018, ROATCE was 16.7%, placing Nicolet in the top
10% of publicly traded banks and in the top 2% of banks headquartered in Wisconsin.
Even with this exceptional performance, we believe there is still opportunity for
growth and improvement. Our record of shareholder return is very strong, but our
share price went backwards in 2018 despite strong earnings. We will address this
apparent paradox after touching on the major themes of 2018. We will also offer
some broader commentary on the operating environment as it affects our region,
and will close with our focus for 2019.
in becoming “just another bank in the south.” The bank we are becoming in this next
phase is a $5-7 billion, highly profitable and even more vital community resource in
the region we know best. That means generating more market share organically within
our current footprint, supplementing with acquisitions to deepen our existing presence,
and expanding into adjacent markets with similar characteristics. We don’t say “never”
to the larger markets, but we know what our priorities are.
A few comments on the characteristics of our northern footprint should help explain
our core geography focus. The credit metrics in Wisconsin are perpetually among the
top in the country and are especially favorable in the northern two-thirds of the state.
Unemployment is historically very low and the pragmatic work ethic here is legendary.
The education system has historically been strong. The business culture is characterized
by people who want to figure out how working together can drive shared success.
This attitude permeates customer relationships, supplier relationships and employees.
Our economy shows modest growth in the aggregate with pockets of vibrant
entrepreneurial activity interspersed. To our advantage, the competitive banking
environment here is characterized by the active or passive disinvestment by our large
bank competitors. The large banks show up vigorously on business they target to retain
or acquire, but they otherwise seek to “rationalize” their legacy market position by
cutting costs faster than the market share they lose. We do well at competitive
hand-to-hand combat, but it helps to have the other players more focused on other fronts.
While our earnings rose 24% in 2018, our stock price went down 11% between
year-end 2018 and 2017. The stock price has since rebounded in the first two months
of 2019, but the late-2018 decline has naturally caused some shareholders to wonder
why. There are some important points to be made—about Nicolet and the market
generally. First, Nicolet has far outperformed bank stock and broader market indices
over its 18-year life. Even last year, which was a difficult year for bank stocks and the
U.S. equities market in general (particularly the fourth quarter), Nicolet managed to
outperform relative to the broader bank stock market.
We are excited about our future. Our 2019 priorities include:
1. Organic execution. There are many aspects to organic execution—customer
growth, systems, branches, products—but it comes down to people. We have
made a lot of progress on integrating what we have acquired, but there is still
opportunity to get the right people all in concert with our mission and culture.
Banking is a people-oriented business. It is also conservative. In banking,
the costs of mistakes usually dwarf the benefits of aggression, but we, as an
entrepreneurial organization, focus on prudent aggression through people, to
understand risk yet get things done for the customer in a profitable manner.
We need and expect people to have the willingness to undertake initiative
within their function. When we acquire an organization, we expect this same
level of high performance. Over time, people either fall in love with our culture
or they move on. The harder part has been calling forth the talent needed for
vital positions that are not eliminated in acquisitions. There are plenty of
financial organizations where people are comfortable being comfortable. Ours is
not one of them. We are experiencing solid growth in loans, deposits and wealth
services. This will accelerate as our people collectively live the culture and
continue to grow and improve. Leadership is about helping people around us
get better. People who can’t or don’t want to get better, don’t make it.
2. M&A. As we enter 2019, we continue to engage in active discussions with
potential sellers. We remain disciplined in our approach—both in the size of a
target bank, as well as the geographic market the target offers. Scale continues
to matter for banks and for their customers. Some banks are not doing well in the
current environment, and those banks cannot count on stronger industry-wide
tailwinds to help them. Credit quality cannot get any better and the varying
interest rate environment is becoming more challenging for those banks without
the benefit of a strong core deposit base like we enjoy.
3. Innovation. In 2018, we formally put together a team of people focused on
innovation and the customer experience. This multi-functional, multi-generational
group, which we call CX, is an extension of our core belief that our purpose is
to serve customers. More of our customers are moving to digital channels as
their primary means of connecting with us. We intend to serve these customers
digitally with the same high-level experience they see in our branches.
The expectation of the customer is shifting, and we are shifting with it. While all
of our people need to be innovative and look for better ways to serve, the CX
team is primarily tasked with making sure that the strategy and tools needed
to do this are in place.
4. Talent acquisition and development. We built Nicolet by attracting high-level,
quality banking professionals we knew either as colleagues or competitors.
Our rapid growth is testimony to the talent and credibility of seasoned,
We entered 2018 with strong earnings momentum, following merger and acquisition
(“M&A”) activity over the previous five years, which quadrupled our size. While we
benefited from the earnings impact of our serial acquisitions, more importantly they
provided us sufficient scale to run a sustainable, high performance bank. We want to
continue growing through M&A, however, we did not announce or complete a deal
in 2018, as expectations of banks looking to sell remained high. The absence of an
attractive deal this year gave us an opportunity to focus on our efficiency and to
continue elevating the quality of the customer experience we deliver. It also
highlighted that our core profitability is not deal driven. Our profits are real and
rising. The professional investment class has harbored skepticism about whether we
could sustain profitability without continual M&A. This was a great year to validate
our consistent assertion that, while we make money on deals, we are actually driven
by the vision of being a highly efficient “northern powerhouse” that matters to the
people of our area.
We have previously written of the strategic journey we have been on since 2000. For
the first eight years, it was all about achieving initial scale. We grew organically at
lightning speed to $700 million in assets clustered tightly around Green Bay. In 2008
through 2011, we powered through a brutal resiliency test by supporting our customers,
resolving our mistakes, and staying profitable when most of the industry posted red ink.
Throughout our initial 11 years, we made money, but we were not a high-earning bank.
We were a stunningly successful growth story, proving through the financial crisis
that we knew how to lend money, get through the worst recession since the 1930s,
and launch an aggressive initiative to grow in size, profitability and strength in the
aftermath. From 2012 to 2017, we did five acquisitions that provided us meaningful
scale. The deals themselves created a lot of profit and capital. What did not show in
that rich acquisition math was our quiet journey to a bank almost entirely funded
by community-based deposits. We entered 2018, the start of our next phase, with a
very strong regional brand and a growing customer base of people and businesses
committed to us as their trusted intermediary for deposit, borrowing and wealth
services. We have a platform for sustained profitability, owning the lead local bank
position in most of our core geography and we still have opportunity to improve.
We also have the proven experience to continue with acquisition growth in a region
that needs greater efficiency and effectiveness in its community institutions.
We have built the third largest bank headquartered in Wisconsin without entering
its two largest markets (Madison and metropolitan Milwaukee). We have been
forthright in our position that we see greater opportunity for us in the northern
two-thirds of the state than in the south. It is certainly true that Milwaukee,
Madison and Minneapolis/St. Paul are attractive markets. One could even say they
are dynamic by Midwestern standards. What they do not appear to offer us is a
pathway to a lead local market position. There is more value for our customers and
shareholders in building out our position as the “bulwark of the north” than there is
5
There are a number of macro factors that weighed on bank stocks during 2018, including:
1. Recession Fears. Both broad economic indicators and the stock market have
been in a 10-year upward trend. Although current indicators remain positive,
there is a pervasive sense that things can’t stay this good. At investor conferences,
a common remark is that “every day is one day closer to the next recession.”
Investor sentiment can be “performative”, which means it tends to bring
forth what it foresees. Sentiment affects capital flows and capital flows affect
stock prices.
2. Global Markets. While current U.S. data is strong, emerging weakness is very
evident in Europe, China and other areas. Trade policy does create winners and
losers and uncertainty undermines confidence.
3. Political Instability. As the federal government’s engagement in economic
life has grown larger, it is not surprising that political acrimony has increased.
As the government role in allocating economic outcomes grows, the financial
stakes in policy outcomes are much higher. Historians accurately tell us that
we have seen far more contentious times, but the instantaneous nature of
modern communication has made it seem more real and present. The Midwest
is not a place where people are used to a high level of public acrimony.
An atmosphere of conflict does undermine the culture of community cooperation.
A factor influencing Nicolet’s stock performance is a shift in ownership mix, particularly
to institutional investors. We became a Nasdaq-traded stock in 2016 and, shortly
thereafter, we entered the Russell 2000 index, which brought institutional ownership.
Being a publicly traded company has certainly helped our liquidity and acquisition
strategy, as we can offer our common stock as currency to potential selling banks.
Historically, our shareholder base has consisted of founding or early investors,
employees, or shareholders of banks we acquired with stock. To many of these
shareholders, we have been one of the best investments they have made. Our share
price today, however, is largely influenced by trading among the institutional
shareholders (roughly 25% of the shareholder base), who often trade in and out of
our stock in larger increments, over shorter holding horizons, and based on general
industry sector sentiment. As a company that has long outperformed the broad
market and sector benchmarks, we typically see a gap between the current ticker
price and the future value we are busy bringing to fruition in our day-to-day activities.
It is our awareness of this gap that motivates our stock repurchases. We have made
money for our long-term investors primarily by building and operating a great bank,
but we have also made them money by buying back our shares when our more transient
owners misprice the value. We are happy everyone has liquidity. We do our best to
explain our plans, but our focus is more on the execution of our long-term strategies
rather than the day-to-day movement in the share price.
market-connected people. The banking industry really stopped training
well-rounded bankers in the early 1990s and much of that talent pool has
aged out of the workforce. Employment markets across our area have become
very tight and, coupled with heavy bank consolidation over the past several
years, there are fewer strong community bankers available. Culture and results
require leadership and alignment with our shareholders. Our way of doing
business depends on attracting and developing quality leaders. Specifically,
we need people with a strong sense of initiative and an intense customer
focus. We have been training and developing our own talent more in recent
years, and we are more open to drawing people from other industries that we
think can fit within our culture. Throughout our history, we have offered key
employees a pathway to meaningful equity. We want our current and emerging
leadership more focused on what their stock options will be worth over the
long-term, rather than on their annual compensation. Our compensation
philosophy is more fully explained in the proxy statement for our annual
shareholder meeting. We remain convinced that a core leadership team focused
on future share appreciation is one of the main reasons our share price has
eclipsed the broad market and banking indices. The market is full of bank
leadership focused on their salary and bonuses that seem to roll on despite a
paltry return to shareholders. Stock options are a powerful way of creating
meaningful wealth for key employees that is completely contingent on a
similar outcome for our shareholders. Our management team only wins when
our shareholders win.
We are well along our journey to build this sustainable northern powerhouse that is
an essential community resource. 2018 was a great year to prove how effective this
vision is. We have the opportunity to grow and further improve profitability. There is
plenty of value to realize in acquiring and rejuvenating other community banks.
2017’s annual report laid out our vision of shared success across our 3 Circles—customers,
employees, shareholders. The purpose of our organization is to serve our customers
through an exceptional team of people. The result has been a tremendous outcome
for the people who trust us with their ownership and a great place to work for people
who are up to the challenge. We are both a reflection and an amplifier of the way
people think in the places we serve. We capture this spirit of the north and play our
part to reinforce that trust and mutual care work best in business as in life.
As always, thank you for your investment in Nicolet and the journey.
Robert B. Atwell
Michael E. Daniels
2018 was a great year for Nicolet. We delivered on organic growth, asset quality,
capital management and profitability. Assets, loans and deposits were $3.1 billion,
$2.2 billion and $2.6 billion, respectively, up 6%, 4% and 6%, respectively, over
year-end 2017. Asset quality improved over an already strong level last year, with
net charge-offs to average loans of 0.05% for 2018 and nonperforming assets to
assets at 0.19%. Net income grew 24% to $41.0 million in 2018, as a result of
margin management, organic loan and deposit growth, strong fee income growth, as
well as benefiting from corporate tax reform. Diluted earnings per share was $4.12,
$0.79 or 24% higher than 2017, with increased earnings and flat diluted average
shares, aided by common stock repurchases in 2018 offsetting the acquisition shares
issued in mid-2017.
We are very proud of our current performance. Return on average assets (“ROAA”)
for the year was 1.38%, which placed Nicolet in the top 23% of publicly traded
banks in terms of profitability. While ROAA is a useful profitability benchmark, the
better comparative measure of shareholder outcome is return on average tangible
common equity (“ROATCE”). In 2018, ROATCE was 16.7%, placing Nicolet in the top
10% of publicly traded banks and in the top 2% of banks headquartered in Wisconsin.
Even with this exceptional performance, we believe there is still opportunity for
growth and improvement. Our record of shareholder return is very strong, but our
share price went backwards in 2018 despite strong earnings. We will address this
apparent paradox after touching on the major themes of 2018. We will also offer
some broader commentary on the operating environment as it affects our region,
and will close with our focus for 2019.
We entered 2018 with strong earnings momentum, following merger and acquisition
(“M&A”) activity over the previous five years, which quadrupled our size. While we
benefited from the earnings impact of our serial acquisitions, more importantly they
provided us sufficient scale to run a sustainable, high performance bank. We want to
continue growing through M&A, however, we did not announce or complete a deal
in 2018, as expectations of banks looking to sell remained high. The absence of an
attractive deal this year gave us an opportunity to focus on our efficiency and to
continue elevating the quality of the customer experience we deliver. It also
highlighted that our core profitability is not deal driven. Our profits are real and
rising. The professional investment class has harbored skepticism about whether we
could sustain profitability without continual M&A. This was a great year to validate
our consistent assertion that, while we make money on deals, we are actually driven
by the vision of being a highly efficient “northern powerhouse” that matters to the
people of our area.
We have previously written of the strategic journey we have been on since 2000. For
the first eight years, it was all about achieving initial scale. We grew organically at
lightning speed to $700 million in assets clustered tightly around Green Bay. In 2008
through 2011, we powered through a brutal resiliency test by supporting our customers,
resolving our mistakes, and staying profitable when most of the industry posted red ink.
Throughout our initial 11 years, we made money, but we were not a high-earning bank.
We were a stunningly successful growth story, proving through the financial crisis
that we knew how to lend money, get through the worst recession since the 1930s,
and launch an aggressive initiative to grow in size, profitability and strength in the
aftermath. From 2012 to 2017, we did five acquisitions that provided us meaningful
scale. The deals themselves created a lot of profit and capital. What did not show in
that rich acquisition math was our quiet journey to a bank almost entirely funded
by community-based deposits. We entered 2018, the start of our next phase, with a
very strong regional brand and a growing customer base of people and businesses
committed to us as their trusted intermediary for deposit, borrowing and wealth
services. We have a platform for sustained profitability, owning the lead local bank
position in most of our core geography and we still have opportunity to improve.
We also have the proven experience to continue with acquisition growth in a region
that needs greater efficiency and effectiveness in its community institutions.
We have built the third largest bank headquartered in Wisconsin without entering
its two largest markets (Madison and metropolitan Milwaukee). We have been
forthright in our position that we see greater opportunity for us in the northern
two-thirds of the state than in the south. It is certainly true that Milwaukee,
Madison and Minneapolis/St. Paul are attractive markets. One could even say they
are dynamic by Midwestern standards. What they do not appear to offer us is a
pathway to a lead local market position. There is more value for our customers and
shareholders in building out our position as the “bulwark of the north” than there is
in becoming “just another bank in the south.” The bank we are becoming in this next
phase is a $5-7 billion, highly profitable and even more vital community resource in
the region we know best. That means generating more market share organically within
our current footprint, supplementing with acquisitions to deepen our existing presence,
and expanding into adjacent markets with similar characteristics. We don’t say “never”
to the larger markets, but we know what our priorities are.
A few comments on the characteristics of our northern footprint should help explain
our core geography focus. The credit metrics in Wisconsin are perpetually among the
top in the country and are especially favorable in the northern two-thirds of the state.
Unemployment is historically very low and the pragmatic work ethic here is legendary.
The education system has historically been strong. The business culture is characterized
by people who want to figure out how working together can drive shared success.
This attitude permeates customer relationships, supplier relationships and employees.
Our economy shows modest growth in the aggregate with pockets of vibrant
entrepreneurial activity interspersed. To our advantage, the competitive banking
environment here is characterized by the active or passive disinvestment by our large
bank competitors. The large banks show up vigorously on business they target to retain
or acquire, but they otherwise seek to “rationalize” their legacy market position by
cutting costs faster than the market share they lose. We do well at competitive
hand-to-hand combat, but it helps to have the other players more focused on other fronts.
While our earnings rose 24% in 2018, our stock price went down 11% between
year-end 2018 and 2017. The stock price has since rebounded in the first two months
of 2019, but the late-2018 decline has naturally caused some shareholders to wonder
why. There are some important points to be made—about Nicolet and the market
generally. First, Nicolet has far outperformed bank stock and broader market indices
over its 18-year life. Even last year, which was a difficult year for bank stocks and the
U.S. equities market in general (particularly the fourth quarter), Nicolet managed to
outperform relative to the broader bank stock market.
There are a number of macro factors that weighed on bank stocks during 2018, including:
1. Recession Fears. Both broad economic indicators and the stock market have
been in a 10-year upward trend. Although current indicators remain positive,
there is a pervasive sense that things can’t stay this good. At investor conferences,
a common remark is that “every day is one day closer to the next recession.”
Investor sentiment can be “performative”, which means it tends to bring
forth what it foresees. Sentiment affects capital flows and capital flows affect
stock prices.
2. Global Markets. While current U.S. data is strong, emerging weakness is very
evident in Europe, China and other areas. Trade policy does create winners and
losers and uncertainty undermines confidence.
3. Political Instability. As the federal government’s engagement in economic
life has grown larger, it is not surprising that political acrimony has increased.
As the government role in allocating economic outcomes grows, the financial
stakes in policy outcomes are much higher. Historians accurately tell us that
we have seen far more contentious times, but the instantaneous nature of
modern communication has made it seem more real and present. The Midwest
is not a place where people are used to a high level of public acrimony.
An atmosphere of conflict does undermine the culture of community cooperation.
A factor influencing Nicolet’s stock performance is a shift in ownership mix, particularly
to institutional investors. We became a Nasdaq-traded stock in 2016 and, shortly
thereafter, we entered the Russell 2000 index, which brought institutional ownership.
Being a publicly traded company has certainly helped our liquidity and acquisition
strategy, as we can offer our common stock as currency to potential selling banks.
Historically, our shareholder base has consisted of founding or early investors,
employees, or shareholders of banks we acquired with stock. To many of these
shareholders, we have been one of the best investments they have made. Our share
price today, however, is largely influenced by trading among the institutional
shareholders (roughly 25% of the shareholder base), who often trade in and out of
our stock in larger increments, over shorter holding horizons, and based on general
industry sector sentiment. As a company that has long outperformed the broad
market and sector benchmarks, we typically see a gap between the current ticker
price and the future value we are busy bringing to fruition in our day-to-day activities.
It is our awareness of this gap that motivates our stock repurchases. We have made
money for our long-term investors primarily by building and operating a great bank,
but we have also made them money by buying back our shares when our more transient
owners misprice the value. We are happy everyone has liquidity. We do our best to
explain our plans, but our focus is more on the execution of our long-term strategies
rather than the day-to-day movement in the share price.
7
We are excited about our future. Our 2019 priorities include:
1. Organic execution. There are many aspects to organic execution—customer
growth, systems, branches, products—but it comes down to people. We have
made a lot of progress on integrating what we have acquired, but there is still
opportunity to get the right people all in concert with our mission and culture.
Banking is a people-oriented business. It is also conservative. In banking,
the costs of mistakes usually dwarf the benefits of aggression, but we, as an
entrepreneurial organization, focus on prudent aggression through people, to
understand risk yet get things done for the customer in a profitable manner.
We need and expect people to have the willingness to undertake initiative
within their function. When we acquire an organization, we expect this same
level of high performance. Over time, people either fall in love with our culture
or they move on. The harder part has been calling forth the talent needed for
vital positions that are not eliminated in acquisitions. There are plenty of
financial organizations where people are comfortable being comfortable. Ours is
not one of them. We are experiencing solid growth in loans, deposits and wealth
services. This will accelerate as our people collectively live the culture and
continue to grow and improve. Leadership is about helping people around us
get better. People who can’t or don’t want to get better, don’t make it.
2. M&A. As we enter 2019, we continue to engage in active discussions with
potential sellers. We remain disciplined in our approach—both in the size of a
target bank, as well as the geographic market the target offers. Scale continues
to matter for banks and for their customers. Some banks are not doing well in the
current environment, and those banks cannot count on stronger industry-wide
tailwinds to help them. Credit quality cannot get any better and the varying
interest rate environment is becoming more challenging for those banks without
the benefit of a strong core deposit base like we enjoy.
3. Innovation. In 2018, we formally put together a team of people focused on
innovation and the customer experience. This multi-functional, multi-generational
group, which we call CX, is an extension of our core belief that our purpose is
to serve customers. More of our customers are moving to digital channels as
their primary means of connecting with us. We intend to serve these customers
digitally with the same high-level experience they see in our branches.
The expectation of the customer is shifting, and we are shifting with it. While all
of our people need to be innovative and look for better ways to serve, the CX
team is primarily tasked with making sure that the strategy and tools needed
to do this are in place.
4. Talent acquisition and development. We built Nicolet by attracting high-level,
quality banking professionals we knew either as colleagues or competitors.
Our rapid growth is testimony to the talent and credibility of seasoned,
market-connected people. The banking industry really stopped training
well-rounded bankers in the early 1990s and much of that talent pool has
aged out of the workforce. Employment markets across our area have become
very tight and, coupled with heavy bank consolidation over the past several
years, there are fewer strong community bankers available. Culture and results
require leadership and alignment with our shareholders. Our way of doing
business depends on attracting and developing quality leaders. Specifically,
we need people with a strong sense of initiative and an intense customer
focus. We have been training and developing our own talent more in recent
years, and we are more open to drawing people from other industries that we
think can fit within our culture. Throughout our history, we have offered key
employees a pathway to meaningful equity. We want our current and emerging
leadership more focused on what their stock options will be worth over the
long-term, rather than on their annual compensation. Our compensation
philosophy is more fully explained in the proxy statement for our annual
shareholder meeting. We remain convinced that a core leadership team focused
on future share appreciation is one of the main reasons our share price has
eclipsed the broad market and banking indices. The market is full of bank
leadership focused on their salary and bonuses that seem to roll on despite a
paltry return to shareholders. Stock options are a powerful way of creating
meaningful wealth for key employees that is completely contingent on a
similar outcome for our shareholders. Our management team only wins when
our shareholders win.
We are well along our journey to build this sustainable northern powerhouse that is
an essential community resource. 2018 was a great year to prove how effective this
vision is. We have the opportunity to grow and further improve profitability. There is
plenty of value to realize in acquiring and rejuvenating other community banks.
2017’s annual report laid out our vision of shared success across our 3 Circles—customers,
employees, shareholders. The purpose of our organization is to serve our customers
through an exceptional team of people. The result has been a tremendous outcome
for the people who trust us with their ownership and a great place to work for people
who are up to the challenge. We are both a reflection and an amplifier of the way
people think in the places we serve. We capture this spirit of the north and play our
part to reinforce that trust and mutual care work best in business as in life.
As always, thank you for your investment in Nicolet and the journey.
Robert B. Atwell
Michael E. Daniels
2018 was a great year for Nicolet. We delivered on organic growth, asset quality,
capital management and profitability. Assets, loans and deposits were $3.1 billion,
$2.2 billion and $2.6 billion, respectively, up 6%, 4% and 6%, respectively, over
year-end 2017. Asset quality improved over an already strong level last year, with
net charge-offs to average loans of 0.05% for 2018 and nonperforming assets to
assets at 0.19%. Net income grew 24% to $41.0 million in 2018, as a result of
margin management, organic loan and deposit growth, strong fee income growth, as
well as benefiting from corporate tax reform. Diluted earnings per share was $4.12,
$0.79 or 24% higher than 2017, with increased earnings and flat diluted average
shares, aided by common stock repurchases in 2018 offsetting the acquisition shares
issued in mid-2017.
We are very proud of our current performance. Return on average assets (“ROAA”)
for the year was 1.38%, which placed Nicolet in the top 23% of publicly traded
banks in terms of profitability. While ROAA is a useful profitability benchmark, the
better comparative measure of shareholder outcome is return on average tangible
common equity (“ROATCE”). In 2018, ROATCE was 16.7%, placing Nicolet in the top
10% of publicly traded banks and in the top 2% of banks headquartered in Wisconsin.
Even with this exceptional performance, we believe there is still opportunity for
growth and improvement. Our record of shareholder return is very strong, but our
share price went backwards in 2018 despite strong earnings. We will address this
apparent paradox after touching on the major themes of 2018. We will also offer
some broader commentary on the operating environment as it affects our region,
and will close with our focus for 2019.
in becoming “just another bank in the south.” The bank we are becoming in this next
phase is a $5-7 billion, highly profitable and even more vital community resource in
the region we know best. That means generating more market share organically within
our current footprint, supplementing with acquisitions to deepen our existing presence,
and expanding into adjacent markets with similar characteristics. We don’t say “never”
to the larger markets, but we know what our priorities are.
A few comments on the characteristics of our northern footprint should help explain
our core geography focus. The credit metrics in Wisconsin are perpetually among the
top in the country and are especially favorable in the northern two-thirds of the state.
Unemployment is historically very low and the pragmatic work ethic here is legendary.
The education system has historically been strong. The business culture is characterized
by people who want to figure out how working together can drive shared success.
This attitude permeates customer relationships, supplier relationships and employees.
Our economy shows modest growth in the aggregate with pockets of vibrant
entrepreneurial activity interspersed. To our advantage, the competitive banking
environment here is characterized by the active or passive disinvestment by our large
bank competitors. The large banks show up vigorously on business they target to retain
or acquire, but they otherwise seek to “rationalize” their legacy market position by
cutting costs faster than the market share they lose. We do well at competitive
hand-to-hand combat, but it helps to have the other players more focused on other fronts.
While our earnings rose 24% in 2018, our stock price went down 11% between
year-end 2018 and 2017. The stock price has since rebounded in the first two months
of 2019, but the late-2018 decline has naturally caused some shareholders to wonder
why. There are some important points to be made—about Nicolet and the market
generally. First, Nicolet has far outperformed bank stock and broader market indices
over its 18-year life. Even last year, which was a difficult year for bank stocks and the
U.S. equities market in general (particularly the fourth quarter), Nicolet managed to
outperform relative to the broader bank stock market.
We entered 2018 with strong earnings momentum, following merger and acquisition
(“M&A”) activity over the previous five years, which quadrupled our size. While we
benefited from the earnings impact of our serial acquisitions, more importantly they
provided us sufficient scale to run a sustainable, high performance bank. We want to
continue growing through M&A, however, we did not announce or complete a deal
in 2018, as expectations of banks looking to sell remained high. The absence of an
attractive deal this year gave us an opportunity to focus on our efficiency and to
continue elevating the quality of the customer experience we deliver. It also
highlighted that our core profitability is not deal driven. Our profits are real and
rising. The professional investment class has harbored skepticism about whether we
could sustain profitability without continual M&A. This was a great year to validate
our consistent assertion that, while we make money on deals, we are actually driven
by the vision of being a highly efficient “northern powerhouse” that matters to the
people of our area.
We have previously written of the strategic journey we have been on since 2000. For
the first eight years, it was all about achieving initial scale. We grew organically at
lightning speed to $700 million in assets clustered tightly around Green Bay. In 2008
through 2011, we powered through a brutal resiliency test by supporting our customers,
resolving our mistakes, and staying profitable when most of the industry posted red ink.
Throughout our initial 11 years, we made money, but we were not a high-earning bank.
We were a stunningly successful growth story, proving through the financial crisis
that we knew how to lend money, get through the worst recession since the 1930s,
and launch an aggressive initiative to grow in size, profitability and strength in the
aftermath. From 2012 to 2017, we did five acquisitions that provided us meaningful
scale. The deals themselves created a lot of profit and capital. What did not show in
that rich acquisition math was our quiet journey to a bank almost entirely funded
by community-based deposits. We entered 2018, the start of our next phase, with a
very strong regional brand and a growing customer base of people and businesses
committed to us as their trusted intermediary for deposit, borrowing and wealth
services. We have a platform for sustained profitability, owning the lead local bank
position in most of our core geography and we still have opportunity to improve.
We also have the proven experience to continue with acquisition growth in a region
that needs greater efficiency and effectiveness in its community institutions.
We have built the third largest bank headquartered in Wisconsin without entering
its two largest markets (Madison and metropolitan Milwaukee). We have been
forthright in our position that we see greater opportunity for us in the northern
two-thirds of the state than in the south. It is certainly true that Milwaukee,
Madison and Minneapolis/St. Paul are attractive markets. One could even say they
are dynamic by Midwestern standards. What they do not appear to offer us is a
pathway to a lead local market position. There is more value for our customers and
shareholders in building out our position as the “bulwark of the north” than there is
There are a number of macro factors that weighed on bank stocks during 2018, including:
1. Recession Fears. Both broad economic indicators and the stock market have
been in a 10-year upward trend. Although current indicators remain positive,
there is a pervasive sense that things can’t stay this good. At investor conferences,
a common remark is that “every day is one day closer to the next recession.”
Investor sentiment can be “performative”, which means it tends to bring
forth what it foresees. Sentiment affects capital flows and capital flows affect
stock prices.
2. Global Markets. While current U.S. data is strong, emerging weakness is very
evident in Europe, China and other areas. Trade policy does create winners and
losers and uncertainty undermines confidence.
3. Political Instability. As the federal government’s engagement in economic
life has grown larger, it is not surprising that political acrimony has increased.
As the government role in allocating economic outcomes grows, the financial
stakes in policy outcomes are much higher. Historians accurately tell us that
we have seen far more contentious times, but the instantaneous nature of
modern communication has made it seem more real and present. The Midwest
is not a place where people are used to a high level of public acrimony.
An atmosphere of conflict does undermine the culture of community cooperation.
A factor influencing Nicolet’s stock performance is a shift in ownership mix, particularly
to institutional investors. We became a Nasdaq-traded stock in 2016 and, shortly
thereafter, we entered the Russell 2000 index, which brought institutional ownership.
Being a publicly traded company has certainly helped our liquidity and acquisition
strategy, as we can offer our common stock as currency to potential selling banks.
Historically, our shareholder base has consisted of founding or early investors,
employees, or shareholders of banks we acquired with stock. To many of these
shareholders, we have been one of the best investments they have made. Our share
price today, however, is largely influenced by trading among the institutional
shareholders (roughly 25% of the shareholder base), who often trade in and out of
our stock in larger increments, over shorter holding horizons, and based on general
industry sector sentiment. As a company that has long outperformed the broad
market and sector benchmarks, we typically see a gap between the current ticker
price and the future value we are busy bringing to fruition in our day-to-day activities.
It is our awareness of this gap that motivates our stock repurchases. We have made
money for our long-term investors primarily by building and operating a great bank,
but we have also made them money by buying back our shares when our more transient
owners misprice the value. We are happy everyone has liquidity. We do our best to
explain our plans, but our focus is more on the execution of our long-term strategies
rather than the day-to-day movement in the share price.
We are excited about our future. Our 2019 priorities include:
1. Organic execution. There are many aspects to organic execution—customer
growth, systems, branches, products—but it comes down to people. We have
made a lot of progress on integrating what we have acquired, but there is still
opportunity to get the right people all in concert with our mission and culture.
Banking is a people-oriented business. It is also conservative. In banking,
the costs of mistakes usually dwarf the benefits of aggression, but we, as an
entrepreneurial organization, focus on prudent aggression through people, to
understand risk yet get things done for the customer in a profitable manner.
We need and expect people to have the willingness to undertake initiative
within their function. When we acquire an organization, we expect this same
level of high performance. Over time, people either fall in love with our culture
or they move on. The harder part has been calling forth the talent needed for
vital positions that are not eliminated in acquisitions. There are plenty of
financial organizations where people are comfortable being comfortable. Ours is
not one of them. We are experiencing solid growth in loans, deposits and wealth
services. This will accelerate as our people collectively live the culture and
continue to grow and improve. Leadership is about helping people around us
get better. People who can’t or don’t want to get better, don’t make it.
2. M&A. As we enter 2019, we continue to engage in active discussions with
potential sellers. We remain disciplined in our approach—both in the size of a
target bank, as well as the geographic market the target offers. Scale continues
to matter for banks and for their customers. Some banks are not doing well in the
current environment, and those banks cannot count on stronger industry-wide
tailwinds to help them. Credit quality cannot get any better and the varying
interest rate environment is becoming more challenging for those banks without
the benefit of a strong core deposit base like we enjoy.
3. Innovation. In 2018, we formally put together a team of people focused on
innovation and the customer experience. This multi-functional, multi-generational
group, which we call CX, is an extension of our core belief that our purpose is
to serve customers. More of our customers are moving to digital channels as
their primary means of connecting with us. We intend to serve these customers
digitally with the same high-level experience they see in our branches.
The expectation of the customer is shifting, and we are shifting with it. While all
of our people need to be innovative and look for better ways to serve, the CX
team is primarily tasked with making sure that the strategy and tools needed
to do this are in place.
4. Talent acquisition and development. We built Nicolet by attracting high-level,
quality banking professionals we knew either as colleagues or competitors.
Our rapid growth is testimony to the talent and credibility of seasoned,
market-connected people. The banking industry really stopped training
well-rounded bankers in the early 1990s and much of that talent pool has
aged out of the workforce. Employment markets across our area have become
very tight and, coupled with heavy bank consolidation over the past several
years, there are fewer strong community bankers available. Culture and results
require leadership and alignment with our shareholders. Our way of doing
business depends on attracting and developing quality leaders. Specifically,
we need people with a strong sense of initiative and an intense customer
focus. We have been training and developing our own talent more in recent
years, and we are more open to drawing people from other industries that we
think can fit within our culture. Throughout our history, we have offered key
employees a pathway to meaningful equity. We want our current and emerging
leadership more focused on what their stock options will be worth over the
long-term, rather than on their annual compensation. Our compensation
philosophy is more fully explained in the proxy statement for our annual
shareholder meeting. We remain convinced that a core leadership team focused
on future share appreciation is one of the main reasons our share price has
eclipsed the broad market and banking indices. The market is full of bank
leadership focused on their salary and bonuses that seem to roll on despite a
paltry return to shareholders. Stock options are a powerful way of creating
meaningful wealth for key employees that is completely contingent on a
similar outcome for our shareholders. Our management team only wins when
our shareholders win.
We are well along our journey to build this sustainable northern powerhouse that is
an essential community resource. 2018 was a great year to prove how effective this
vision is. We have the opportunity to grow and further improve profitability. There is
plenty of value to realize in acquiring and rejuvenating other community banks.
2017’s annual report laid out our vision of shared success across our 3 Circles—customers,
employees, shareholders. The purpose of our organization is to serve our customers
through an exceptional team of people. The result has been a tremendous outcome
for the people who trust us with their ownership and a great place to work for people
who are up to the challenge. We are both a reflection and an amplifier of the way
people think in the places we serve. We capture this spirit of the north and play our
part to reinforce that trust and mutual care work best in business as in life.
As always, thank you for your investment in Nicolet and the journey.
Robert B. Atwell
Michael E. Daniels
9
B O A R D O F D I R E C T O R S
N I C O L E T B A N K S H A R E S , I N C . O F F I C E R S
Robert Atwell
Chairman, President
and Chief Executive Officer,
Nicolet Bankshares, Inc.
Michael Daniels
President
and Chief Executive Officer,
Nicolet National Bank
Robert Agnew
President
Tipperary Partners, LLC
Rachel Campos-Duffy
Media & Communications
Consultant
FOX News Contributor
Robert Atwell
Chairman, President
and Chief Executive Officer
Michael Daniels
Executive Vice President
and Secretary
Ann K. Lawson
Chief Financial Officer
John Dykema
President and Owner,
Campbell Wrapper Corp
and Circle Packaging
Machinery, Inc.
Terrence Fulwiler
Retired CEO,
WS Packaging Group
Chris Ghidorzi
Vice President,
Ghidorzi Companies
Michael Gilson
Retired Executive
Vice President,
Nicolet National Bank
N I C O L E T N A T I O N A L B A N K E X E C U T I V E O F F I C E R S
11
Thomas Herlache
Retired Chairman, President
and Chief Executive Officer,
Baylake Corp.
Andrew Hetzel, Jr.
President
and Chief Executive Officer,
NPS Corporation
Donald Long, Jr.
Former Owner and CEO,
Century Drill and Tool Co., Inc.
Dustin McClone
President and CEO,
McClone Insurance Group
Susan Merkatoris
Certified Public Accountant,
Owner and Managing Member,
Larboard Enterprises, LLC
Randy Rose
Retired President and CEO,
Schwabe North America
Oliver “Pierce” Smith
Director of Real Estate &
Acquisitions, Menasha
Packaging Company
Robert Weyers
Owner,
Commercial Horizons, Inc.
Robert Atwell
Chairman
Michael Daniels
President
and Chief Executive Officer
Brad Hutjens
Executive Vice President
Chief Credit Officer,
Chief Compliance and
Risk Manager
Ann Lawson
Chief Financial Officer
Patrick Madson
Senior Vice President
Wealth Management
Michael Steppe
Senior Vice President
Chief Investment Officer
Michael Vogel
Senior Vice President
Commercial Banking Manager
Eric Witczak
Executive Vice President
F I N A N C I A L S
A C C O U N T A N T ’ S L E T T E R
Nicolet Bankshares, Inc.
(In thousands, except per share data)
At and for the Years Ended December 31,
Condensed Consolidated Statements of Income
2018
2017 % Change
Interest income
Interest expense
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Income before income tax expense
Income tax expense
Net income
Net income attributable to noncontrolling interest
$125,537
$109,253
18,889
106,648
1,600
39,509
89,758
54,799
13,446
41,353
317
10,511
98,742
2,325
34,639
81,356
49,700
16,267
33,433
283
Net income attributable to Nicolet Bankshares, Inc.
$41,036
$33,150
Basic earnings per common share
Diluted earnings per common share
Basic weighted average common shares
Diluted weighted average common shares
Outstanding common shares
Condensed Consolidated Balance Sheets
Cash and cash equivalents
Securities available for sale
Loans
Allowance for loan losses
Goodwill and other intangibles
All other assets
Total assets
Deposits
Other liabilities
Nicolet Bankshares, Inc. common equity
Noncontrolling interest
$4.26
$4.12
9,640
9,956
9,495
$3.51
$3.33
9,440
9,958
9,818
$249,526
$154,933
400,144
405,153
2,166,181
2,087,925
(13,153)
(12,653)
124,307
169,530
128,406
168,669
$3,096,535
$2,932,433
$2,614,138
$2,471,064
95,045
386,609
743
96,490
364,178
701
Total liabilities, noncontrolling interest and stockholders' equity
$3,096,535
$2,932,433
15%
80%
8%
-31%
14%
10%
10%
-17%
24%
12%
24%
21%
24%
2%
0%
-3%
61%
-1%
4%
4%
-3%
1%
6%
6%
-1%
6%
6%
6%
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Nicolet Bankshares, Inc.
We have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Nicolet Bankshares,
Inc. and subsidiaries as of December 31, 2018 and 2017, and the related consolidated
statements of income, comprehensive income, changes in stockholders’ equity and cash
13
flows for each of the three years in the period ended December 31, 2018 (not presented
herein); and in our report, dated March 8, 2019, 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 8, 2019
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
SHARED SUCCESS
15
CUSTOMERS
EMPLOYEES
SHAREHOLDERS
$10 million in interest paid
in 8 years to customers in
Real Rewards checking.
110 non-profit, 501(c)3,
organizations helped through
the Nicolet Foundation.
25% increase in mobile
users in 2018.
28,870 volunteer hours by
Nicolet Bank employees.
Top mortgage originator in
Brown and Door Counties.
$1.3 million in donations to
the communities we serve.
Net Income of $41 million and
Earnings Per Share of $4.12.
Return on Average Assets
of 1.38%.
408,100 shares repurchased
in 2018.
S H A R E H O L D E R I N F O R M A T I O N
Annual Meeting
Shareholders’ Meeting – Monday, May 13, 2019 (5:00 p.m.)
Meyer Theatre
117 South Washington Street / Green Bay, WI 54301
Independent Auditor
Porter Keadle Moore, LLC
235 Peachtree Street, NE / Suite 1800 / Atlanta, GA 30303
Transfer Agent
Computershare
C/O Shareholder Services
P.O. Box 505002 / Louisville, KY 40233-5002
Overnight Delivery
Computershare
C/O Shareholder Services
462 South 4th Street / Suite 1600 / Louisville, KY 40202
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