www.nicole tba nk.com
111 N. Washington Street / P.O. Box 23900 / Green Bay, WI 54305 -3900
920-430-1400 / 1 -800-369-0226
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 generally 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”) assumes 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 Nicolet’s most recent Form 10-K and subsequent SEC filings.
2020 Annual Report
The 3 Circles is a visual image representing Nicolet’s core
purpose: to serve our Customers, Employees, and Shareholders.
We invite people into the space of cooperation and
shared success, where together, we all achieve a better outcome.
Nicolet is living proof that this way of thinking creates
sustainable success.
Our actions, guided by our Core Values (Be Real, Be Responsive,
Be Personal, Be Memorable, Be Entrepreneurial), are how we
grow that space of shared success.
3
Mike & Bob on the top floor of LAUNCH Photography,
Film and Video—a long-time Nicolet Bank customer.
conditions that began in late March 2020. In the turbulent and extremely busy second
quarter, we were present personally and digitally to help our customers work through
struggles and assist them with new opportunities. By early April, we had put 18% of our
loan balances on modified payment terms to give customers breathing room to adapt in
a quickly changing environment. During the second quarter, we helped our business
customers process more than $350 million in loan requests through the Paycheck
Protection Program (“PPP”). We also created a micro-grant program and spent $1.25
million to more quickly get funds into the hands of our smallest business customers.
PPP loans, micro-grants and payment relief augmented our customers’ pre-pandemic
financial strength. Customers adapted beautifully and by the end of 2020, 0.5% of loans
remained on modified terms. Our year-end 2020 key loan quality measures were as good
as or better than a year ago. We originated over $1 billion in mortgage volume—largely
refinances—enhancing the cash flow of the customers we serve, and generating $30 million
of pre-tax net mortgage revenue for the Bank. Our passionate commitment to shared
success among the 3 Circles drove this outstanding performance.
HOW THE PANDEMIC AFFECTED NICOLET AND OUR CUSTOMERS
Opinions vary widely on how policy makers have addressed these conditions. We will
shed some light on how the pandemic and the policy response has played out among our
customers, because our strong market share throughout the regions we serve gives us such
insight at a very granular level. There are some very important and surprising observations
to offer based on the data and the feedback from our customers.
In the dark days of last April, banking industry analysts predicted that for 2020-2021
cumulative loan losses would be 3% to 5%. This would have implied loan losses at Nicolet
between $80 million and $130 million over 24 months. Our actual loan losses for 2020
totaled $1.4 million (or 0.05% of average loans), and we elevated our loan loss provision
to $10.3 million, which helped increase our year-end reserve for potential loan losses to 1.24%
of loans (excluding PPP loans). We simply have not experienced material deterioration
in our problem loan levels thus far. While industry analysts acknowledge that they really
don’t know, they still state high expected loss levels for the industry well beyond what we
can responsibly discern. Analysts presume that PPP funds are offsetting operating losses
for our business customers and that the loan losses among these customers will become
apparent when federal transfusions are exhausted. The analysts’ fears that PPP largely
funded losses is simply not evident in our customer base. Most customers paid down
their debt or stockpiled the funds into their Nicolet business checking accounts, inflating
cash assets that are still on our balance sheet at year-end. A large majority of our
customers operated profitably as essential businesses. As a group, our commercial base
was cash flow positive and profitable despite the challenges of the pandemic, which is
why our loan modifications dropped from the 18% peak to 0.5% of non-PPP loans at
year-end. Let’s take a more in-depth look into certain areas of our customer base,
5
commercial customers, having learned from prior tough times. Consumers generally cut
costs, refinanced their mortgages and largely saved the funds received from stimulus checks.
The net of that activity for the consumer was better positioning to weather a potentially
longer storm, with or without more government assistance, and for the Bank was a dramatic
increase in cash deposits and no discernible increase in past due loans.
NICOLET FINANCIAL PERFORMANCE
Our 10K and proxy materials provide a more detailed analysis of what became an
outstanding year. We want to draw your attention to the particular aspects of this
performance that support our optimism about the future.
Mortgage - The dramatic cut in interest rates and other actions taken by the Federal
Reserve gave all mortgage originators a tremendous opportunity to generate loans.
We entered this period as a leading mortgage originator in our core geography, as many
of our bankers are very experienced mortgage lenders. Coming off a very strong 2019
mortgage year, we had budgeted for a continuation, but could not have foreseen the level
of refinance activity emerging or the desire of many consumers to trade up for larger homes.
We used flexible staffing, digital access, and technological efficiency to dramatically
increase capacity, which drove in $30 million of pre-tax mortgage revenue over a very
active 2020. In this extreme mortgage volume year, it was all hands on deck for our
bankers and back office to underwrite and close mortgages. Our mortgage originators
are bankers who are compensated with a salary and bonus structure more appropriate to
a genuine banking culture. This is different from the broker “pay-for-production”
model prevalent in our industry. Our model follows the 3 Circles, and better serves
our customers and our shareholders. We expect another strong
mortgage revenue year in 2021, as home purchases and new
home construction remain a steady portion of our volume
but refinances will likely not be as robust.
Efficiency - Much like our customers, the pandemic challenged
us to respond more aggressively to change. In April and part
of May we closed the lobbies in each of our 39 locations and
operated through our drive-through windows and in person by
appointment only. When we re-opened our lobbies in mid-May,
we elected to permanently close seven of our locations to gain efficiency and respond to
the growing customer preference for digital access. Our efficiency ratio has improved as
our strategy has matured and, with the steps taken in 2020, reached 51.7%, placing us in
the 15th percentile of community banks. Sustained low interest rates are driving spread
compression across banking, and the shift toward digital delivery is bringing competitive
pressure from non-banks. The viability of branches is particularly challenging in more rural
competitors are pressuring traditional banking in deposit gathering, lending, payments
and wealth management. We can still create value through acquiring less adaptive
institutions and by relentlessly deepening our customer relationships. Our digital access
is growing, and we are investing in the talent to support our growth and to sustain the
mission beyond the current generation of leadership.
Many of our customers and shareholders look to us for an
understanding of the environment we face. The past 12 months
have been a particularly challenging period to offer meaningful
insight. We are all dealing with circumstances and events
beyond our control. The responses of federal, state and local
governments to the pandemic have been variable and confusing,
but people still need to think and act. We learn a lot from
talking with and seeing the results of the decisions our customers
make. We do not intend to ignore or diminish the heavy impact
of the pandemic on some people and businesses. We are compelled to emphasize that, as
a group, our customers are doing far better than they understand. We respect those charged
with setting medical, social and economic policy, but we observe that people are far more
capable, adaptable and resilient than public officials presume.
The federal government took dramatic action in 2020 to offset the effects of Covid and
the pandemic response. Some of these measures were necessary and effective. The scale
of stimulus spending and the aggressive actions by the Federal Reserve to cut rates and
expand its balance sheet were unprecedented. However, the aftermath remains largely
unknown. Macro-economic thought is less a science than it is a highly malleable
language that is adaptable to the political and social considerations of the moment.
There is a sense in which policy makers’ convictions that cheap debt, consumption and
heavy spending create prosperity runs contrary to the reality of how people actually
thrive on a sustainable basis. Stimulus stimulates and money can facilitate opportunity,
but the belief that consumption and debt cause production and prosperity is true only in
a narrow sense. In the long run, it is not money that causes work anymore than eating
causes food. People and their work cause prosperity which can then be stored in the
form of money. It is people working together cooperatively that is the real engine of
economic prosperity and social stability. The spectacle of political parties outbidding each
other with money borrowed so freely from our collective future is very troubling, and it
must end responsibly or it will likely end painfully.
Stimulus has been massive and broadly spread, but the negative impact of Covid has
been severe for only some people and businesses. It seems that the more wealthy and
powerful “non-essential” workers sheltered at home while the lower-paid “essential”
workers made it possible for this minority to do so. There are many aspects of a banker’s
work that can be done remotely, but the heart of our company’s strategy is to be personally
present, available, cheerful, creative and connected with our customers. We knew the vast
majority of our customers were on-site and working hard, so we have been right there with
them, in the manner they want and need. We cannot afford to become non-essential to
D E A R S H A R E H O L D E R S
In 2020, Nicolet National Bank celebrated the 20th anniversary of our founding,
a very proud milestone. Over the years, we have learned from experience, and adapted to the
problems and opportunities we have faced in both the macro environment and competitive
landscape. Our strategies and our tactics have been aggressive, opportunistic and highly
successful. Our core beliefs and principles have been contrarian, compelling and consistent.
We believe in people, and we believe in cooperating together to create shared success as a
fearsome competitor in a mature industry. Our passion about and commitment to our
customers and employees has resulted in an outstanding return to our initial shareholders
and to those who have invested along the way. This desire for shared success among our
customers, employees and shareholders—the 3 Circles—is embedded in our foundation
and drives us. We have high expectations for ourselves and our customers, and this has
translated into strong results for those who understand that our work matters.
The remainder of this letter will set forth the important factors that contributed to
such a strange year turning into a great year. Net income for 2020 was $60.1 million, 10%
stronger than 2019 which was the previous record high in our history. Diluted earnings
per share were $5.70, 3% stronger than last year, benefiting from increased earnings,
while covering the 6% increase in average diluted shares (mostly due to the timing of
shares issued in our 2019 acquisition, net of strong 2020 stock repurchases). The return
on average assets was a healthy 1.41%, even on very elevated average assets (which were
up 36% over 2019, mainly in cash). At December 31, 2020, we had $4.6 billion in assets,
$2.8 billion in loans, $3.9 billion in deposits and $539 million in stockholders’ equity,
representing increases over last year of 27%, 8%, 32% and 4% respectively, including the
successful integration of a small bank acquisition. How did this
exceptional performance materialize under pandemic-based,
atypical conditions? As will be described in more detail below,
it was largely the combination of taking timely, relevant actions
under uncertain and changing conditions, and being present
for and with our employees, customers and communities.
Not much about 2020 went the way we and our customers had
initially planned. We have each lived our own version of the last
year’s medical, economic, social and political turmoil. These
challenges revealed which organizations were capable of adapting
rapidly and effectively to unexpected conditions. We have a talented and dedicated
workforce serving incredibly resilient and creative customers. Our core values drove us
to stay personally engaged digitally and face-to-face. Our people have been fully onsite
and our doors open since June, after a temporary by-appointment-only period. We have
kept our people safe, and customers can see our smiling eyes if not our masked faces.
Being present matters and will continue to differentiate us. Since day one, we have
not wavered from the presence embedded in our 5 Core Values—Be Personal, Be Real,
Be Memorable, Be Responsive and Be Entrepreneurial—not even under pandemic
creative customers.
We have a talented and
dedicated workforce serving
incredibly resilient and
those that should have been hardest hit, to demonstrate just how resilient and adaptive
the people in our region have been during the past 12 months.
Hospitality - It is widely understood that restaurants, lodging, small retail, travel and
entertainment businesses were the most severely impacted. This is certainly the case
across our markets. What is not as widely understood is that our customer base in these
segments is heavily concentrated in our Door County and Northwoods recreation
markets. The summer and fall recreation seasons for many operators were record breaking.
People living in the major urban areas that support our recreation markets were particularly
anxious to get out of the city and enjoy some fun “up north.” People either could not or
would not travel far for recreation, and instead spent time and money in places they
could drive to. Occupancy of hotel and rental properties in the north was very tight and
property sales were exceptional. People were more likely to enjoy the option of working
from home, and for many that meant living at their lake home or finally buying the
second property they had been contemplating. Boat, recreational vehicle, power equipment,
and cycling sales were also exceptionally strong. Those restaurants that chose to open up
and adapt their operations to the conditions often reported better than expected results,
limited only by social distancing, or more likely, the availability of people to work. The best
adapters were those that offered a great welcoming experience with fewer menu choices,
takeout options, and tighter hours. Some even enjoyed higher volume and many experienced
higher profit on lower volume because of efficiency. Outside of our recreational markets,
our hospitality exposure in and around our Green Bay and Fox Valley locations is modest
and characterized by seasoned operators with strong financial positions. An empty
Lambeau Field had a significant negative impact on the metro Green Bay tourist
economy. There is no question that hotels, restaurants and entertainment venues have
been hard hit, particularly in the cities and if they had marginal profits pre-pandemic.
But, our approach to lending in this segment has insulated us from material deterioration.
Commercial and Industrial (C&I) customers - Nicolet has, since inception, been heavily
concentrated in lending to operating businesses and the smaller businesses that support
them. The regional economy is heavily centered on manufacturing, transportation,
paper production and converting, packaging, food processing, specialized equipment
manufacturing and construction. These companies comprise the core of our lending
activity, and most were operating as essential businesses. There simply was no slowdown
or shutdown for the majority of these borrowers. They took the necessary measures to
keep people safe and productive, operate efficiently, meet demand, and remain profitable.
Covid provided the opportunity to carefully evaluate how to become more efficient and
to adapt strategy more rapidly to market changes.
Consumers - The pandemic certainly had a wide-ranging effect on consumers throughout our
region. The most vulnerable people have been severely impacted medically, psychologically,
and economically. Our retail customers as a group showed the same resilience as our
locations. We must continue to emphasize that the heart of our value proposition is not our
physical locations, but the availability of talented people who are driven to serve.
Wealth - We have been in the wealth management business for 19 years. Scale and
leadership were added through our 2016 acquisition and integration of a new team of
financial advisors. This strengthened the customer experience and expanded our market
share. While our mortgage operation was the star of our fee-income show, our wealth
business now demonstrates consistent growth and is making a strong contribution to our
profitability. Wealth generated $16.2 million of revenue in 2020, which is up significantly
(80%) from $9.1 million in 2016.
Growth - 2020 is a difficult year in which to evaluate organic growth. The year saw our
asset base grow by nearly $1 billion. We closed the acquisition of Advantage Community
Bank in Central Wisconsin, adding $172 million in assets, but the bulk of growth
consisted of increased deposits as customers received PPP loans and stimulus checks while
reducing spending. In recent years, the growth of our core deposits has contributed to
strong profitability, but in the current low-rate environment, generating incremental
profit on the strength of core deposits is difficult. Core loan growth (excluding PPP) was
softer than usual, as customers grew cautious and liquid while using PPP funds to pay
down existing debt. That said, we expect to serve our communities and will continue to
pursue solid relationship-based organic loan growth. We also expect 2021 to be an active
year for mergers and acquisitions (“M&A”).
THE ROAD AHEAD
After coming off an outstanding year, we are well-positioned to prosper in the complex
conditions all banks are facing. We continue to selectively add strong talent to support both
organic growth and potential acquisitions. Our stock price reflects market recognition that
we are a high performing company with opportunity for profitable growth. The banking
industry is facing serious challenges beyond macro-economic uncertainty. Prior to the
pandemic, community banks were consolidating at a rapid pace due to technology
changes, regulatory complexity and the competitive advantages enjoyed by the largest
banks. Covid has only increased the risk level and complexity community banks are
facing in the coming years. Community banks typically depend on the spread between
the loan yield and the cost of funds for a vast majority of their revenue. As community
banks wrestle with declining spread income for the foreseeable future, we expect M&A
to become even more active in the coming quarters. Acquisitions are not a substitute for
running a growing, highly-profitable bank that is impactful for customers. We know that
to continue as a strong acquirer, we must be a great bank.
Banking is a mature industry facing serious headwinds. Community banks have
consistently lost market share to the largest banks over the last few decades, and non-bank
our customers. We are inspired by their ingenuity and resilience. The vast majority worked
straight through 2020 as we did. As we write in early 2021, the vaccine is becoming more
broadly available, which should mean more people returning to work, and even more
importantly, all children returning to school. We hope and expect 2021 to be a strong year
of recovery and growth.
The nation and our region remain painfully agitated and divided. The medical,
political and racial tensions in 2020 starkly revealed how far we have to go to live genuine
tolerance and respect for the diverse persons in our nation. Intentional communication
regarding respect and tolerance for all people has been a consistent part of our training
and our culture. We are deepening and strengthening this training and communication in
the current year to emphasize our desire and responsibility to remove barriers to success
for racial minorities and other marginalized persons. Strong corporate governance has
always been foundational to our community impact and our financial results. Nicolet has
consistently worked to improve the physical and social environments in our communities.
We are proud of the financial support we provide to organizations and institutions
serving the marginalized and the vulnerable among us. Even more than our donations
and volunteer leadership, it is the way we live and teach our core values that strengthens,
nurtures and spreads community solidarity. The 3 Circles approach to shared success is
stakeholder capitalism in action.
2020 turned into a curveball stress test year that we passed with flying colors. We are
very pleased and proud of how our people responded to the turmoil that we and our
customers faced. We are keenly aware of the medical, social, political and macro-economic
cost of the pandemic. While shuttered storefronts and social turmoil may not fall
heavily on most of our particular customers, the toll on the community and particularly
those most exposed is very high. We have a broad variety of opinions within our
leadership and among our customers. But, we are united in our desire to serve our customers
well and serve as a vessel of community prosperity and solidarity.
On behalf of all of us at Nicolet, we want to express our heartfelt admiration for our
customers, as well as our gratitude for the continued support of our investors.
Robert B. Atwell
Michael E. Daniels
conditions that began in late March 2020. In the turbulent and extremely busy second
quarter, we were present personally and digitally to help our customers work through
struggles and assist them with new opportunities. By early April, we had put 18% of our
loan balances on modified payment terms to give customers breathing room to adapt in
a quickly changing environment. During the second quarter, we helped our business
customers process more than $350 million in loan requests through the Paycheck
Protection Program (“PPP”). We also created a micro-grant program and spent $1.25
million to more quickly get funds into the hands of our smallest business customers.
PPP loans, micro-grants and payment relief augmented our customers’ pre-pandemic
financial strength. Customers adapted beautifully and by the end of 2020, 0.5% of loans
remained on modified terms. Our year-end 2020 key loan quality measures were as good
as or better than a year ago. We originated over $1 billion in mortgage volume—largely
refinances—enhancing the cash flow of the customers we serve, and generating $30 million
of pre-tax net mortgage revenue for the Bank. Our passionate commitment to shared
success among the 3 Circles drove this outstanding performance.
HOW THE PANDEMIC AFFECTED NICOLET AND OUR CUSTOMERS
Opinions vary widely on how policy makers have addressed these conditions. We will
shed some light on how the pandemic and the policy response has played out among our
customers, because our strong market share throughout the regions we serve gives us such
insight at a very granular level. There are some very important and surprising observations
to offer based on the data and the feedback from our customers.
In the dark days of last April, banking industry analysts predicted that for 2020-2021
cumulative loan losses would be 3% to 5%. This would have implied loan losses at Nicolet
between $80 million and $130 million over 24 months. Our actual loan losses for 2020
totaled $1.4 million (or 0.05% of average loans), and we elevated our loan loss provision
to $10.3 million, which helped increase our year-end reserve for potential loan losses to 1.24%
of loans (excluding PPP loans). We simply have not experienced material deterioration
in our problem loan levels thus far. While industry analysts acknowledge that they really
don’t know, they still state high expected loss levels for the industry well beyond what we
can responsibly discern. Analysts presume that PPP funds are offsetting operating losses
for our business customers and that the loan losses among these customers will become
apparent when federal transfusions are exhausted. The analysts’ fears that PPP largely
funded losses is simply not evident in our customer base. Most customers paid down
their debt or stockpiled the funds into their Nicolet business checking accounts, inflating
cash assets that are still on our balance sheet at year-end. A large majority of our
customers operated profitably as essential businesses. As a group, our commercial base
was cash flow positive and profitable despite the challenges of the pandemic, which is
why our loan modifications dropped from the 18% peak to 0.5% of non-PPP loans at
year-end. Let’s take a more in-depth look into certain areas of our customer base,
commercial customers, having learned from prior tough times. Consumers generally cut
costs, refinanced their mortgages and largely saved the funds received from stimulus checks.
The net of that activity for the consumer was better positioning to weather a potentially
longer storm, with or without more government assistance, and for the Bank was a dramatic
increase in cash deposits and no discernible increase in past due loans.
NICOLET FINANCIAL PERFORMANCE
Our 10K and proxy materials provide a more detailed analysis of what became an
outstanding year. We want to draw your attention to the particular aspects of this
performance that support our optimism about the future.
Mortgage - The dramatic cut in interest rates and other actions taken by the Federal
Reserve gave all mortgage originators a tremendous opportunity to generate loans.
We entered this period as a leading mortgage originator in our core geography, as many
of our bankers are very experienced mortgage lenders. Coming off a very strong 2019
mortgage year, we had budgeted for a continuation, but could not have foreseen the level
of refinance activity emerging or the desire of many consumers to trade up for larger homes.
We used flexible staffing, digital access, and technological efficiency to dramatically
increase capacity, which drove in $30 million of pre-tax mortgage revenue over a very
active 2020. In this extreme mortgage volume year, it was all hands on deck for our
bankers and back office to underwrite and close mortgages. Our mortgage originators
are bankers who are compensated with a salary and bonus structure more appropriate to
a genuine banking culture. This is different from the broker “pay-for-production”
model prevalent in our industry. Our model follows the 3 Circles, and better serves
our customers and our shareholders. We expect another strong
mortgage revenue year in 2021, as home purchases and new
home construction remain a steady portion of our volume
but refinances will likely not be as robust.
Our (mortgage) model
follows the 3 Circles, and
7
better serves our customers
and our shareholders.
Efficiency - Much like our customers, the pandemic challenged
us to respond more aggressively to change. In April and part
of May we closed the lobbies in each of our 39 locations and
operated through our drive-through windows and in person by
appointment only. When we re-opened our lobbies in mid-May,
we elected to permanently close seven of our locations to gain efficiency and respond to
the growing customer preference for digital access. Our efficiency ratio has improved as
our strategy has matured and, with the steps taken in 2020, reached 51.7%, placing us in
the 15th percentile of community banks. Sustained low interest rates are driving spread
compression across banking, and the shift toward digital delivery is bringing competitive
pressure from non-banks. The viability of branches is particularly challenging in more rural
competitors are pressuring traditional banking in deposit gathering, lending, payments
and wealth management. We can still create value through acquiring less adaptive
institutions and by relentlessly deepening our customer relationships. Our digital access
is growing, and we are investing in the talent to support our growth and to sustain the
mission beyond the current generation of leadership.
Many of our customers and shareholders look to us for an
understanding of the environment we face. The past 12 months
have been a particularly challenging period to offer meaningful
insight. We are all dealing with circumstances and events
beyond our control. The responses of federal, state and local
governments to the pandemic have been variable and confusing,
but people still need to think and act. We learn a lot from
talking with and seeing the results of the decisions our customers
make. We do not intend to ignore or diminish the heavy impact
of the pandemic on some people and businesses. We are compelled to emphasize that, as
a group, our customers are doing far better than they understand. We respect those charged
with setting medical, social and economic policy, but we observe that people are far more
capable, adaptable and resilient than public officials presume.
The federal government took dramatic action in 2020 to offset the effects of Covid and
the pandemic response. Some of these measures were necessary and effective. The scale
of stimulus spending and the aggressive actions by the Federal Reserve to cut rates and
expand its balance sheet were unprecedented. However, the aftermath remains largely
unknown. Macro-economic thought is less a science than it is a highly malleable
language that is adaptable to the political and social considerations of the moment.
There is a sense in which policy makers’ convictions that cheap debt, consumption and
heavy spending create prosperity runs contrary to the reality of how people actually
thrive on a sustainable basis. Stimulus stimulates and money can facilitate opportunity,
but the belief that consumption and debt cause production and prosperity is true only in
a narrow sense. In the long run, it is not money that causes work anymore than eating
causes food. People and their work cause prosperity which can then be stored in the
form of money. It is people working together cooperatively that is the real engine of
economic prosperity and social stability. The spectacle of political parties outbidding each
other with money borrowed so freely from our collective future is very troubling, and it
must end responsibly or it will likely end painfully.
Stimulus has been massive and broadly spread, but the negative impact of Covid has
been severe for only some people and businesses. It seems that the more wealthy and
powerful “non-essential” workers sheltered at home while the lower-paid “essential”
workers made it possible for this minority to do so. There are many aspects of a banker’s
work that can be done remotely, but the heart of our company’s strategy is to be personally
present, available, cheerful, creative and connected with our customers. We knew the vast
majority of our customers were on-site and working hard, so we have been right there with
them, in the manner they want and need. We cannot afford to become non-essential to
In 2020, Nicolet National Bank celebrated the 20th anniversary of our founding,
a very proud milestone. Over the years, we have learned from experience, and adapted to the
problems and opportunities we have faced in both the macro environment and competitive
landscape. Our strategies and our tactics have been aggressive, opportunistic and highly
successful. Our core beliefs and principles have been contrarian, compelling and consistent.
We believe in people, and we believe in cooperating together to create shared success as a
fearsome competitor in a mature industry. Our passion about and commitment to our
customers and employees has resulted in an outstanding return to our initial shareholders
and to those who have invested along the way. This desire for shared success among our
customers, employees and shareholders—the 3 Circles—is embedded in our foundation
and drives us. We have high expectations for ourselves and our customers, and this has
translated into strong results for those who understand that our work matters.
The remainder of this letter will set forth the important factors that contributed to
such a strange year turning into a great year. Net income for 2020 was $60.1 million, 10%
stronger than 2019 which was the previous record high in our history. Diluted earnings
per share were $5.70, 3% stronger than last year, benefiting from increased earnings,
while covering the 6% increase in average diluted shares (mostly due to the timing of
shares issued in our 2019 acquisition, net of strong 2020 stock repurchases). The return
on average assets was a healthy 1.41%, even on very elevated average assets (which were
up 36% over 2019, mainly in cash). At December 31, 2020, we had $4.6 billion in assets,
$2.8 billion in loans, $3.9 billion in deposits and $539 million in stockholders’ equity,
representing increases over last year of 27%, 8%, 32% and 4% respectively, including the
successful integration of a small bank acquisition. How did this
exceptional performance materialize under pandemic-based,
atypical conditions? As will be described in more detail below,
it was largely the combination of taking timely, relevant actions
under uncertain and changing conditions, and being present
for and with our employees, customers and communities.
Not much about 2020 went the way we and our customers had
initially planned. We have each lived our own version of the last
year’s medical, economic, social and political turmoil. These
challenges revealed which organizations were capable of adapting
rapidly and effectively to unexpected conditions. We have a talented and dedicated
workforce serving incredibly resilient and creative customers. Our core values drove us
to stay personally engaged digitally and face-to-face. Our people have been fully onsite
and our doors open since June, after a temporary by-appointment-only period. We have
kept our people safe, and customers can see our smiling eyes if not our masked faces.
Being present matters and will continue to differentiate us. Since day one, we have
not wavered from the presence embedded in our 5 Core Values—Be Personal, Be Real,
Be Memorable, Be Responsive and Be Entrepreneurial—not even under pandemic
those that should have been hardest hit, to demonstrate just how resilient and adaptive
the people in our region have been during the past 12 months.
Hospitality - It is widely understood that restaurants, lodging, small retail, travel and
entertainment businesses were the most severely impacted. This is certainly the case
across our markets. What is not as widely understood is that our customer base in these
segments is heavily concentrated in our Door County and Northwoods recreation
markets. The summer and fall recreation seasons for many operators were record breaking.
People living in the major urban areas that support our recreation markets were particularly
anxious to get out of the city and enjoy some fun “up north.” People either could not or
would not travel far for recreation, and instead spent time and money in places they
could drive to. Occupancy of hotel and rental properties in the north was very tight and
property sales were exceptional. People were more likely to enjoy the option of working
from home, and for many that meant living at their lake home or finally buying the
second property they had been contemplating. Boat, recreational vehicle, power equipment,
and cycling sales were also exceptionally strong. Those restaurants that chose to open up
and adapt their operations to the conditions often reported better than expected results,
limited only by social distancing, or more likely, the availability of people to work. The best
adapters were those that offered a great welcoming experience with fewer menu choices,
takeout options, and tighter hours. Some even enjoyed higher volume and many experienced
higher profit on lower volume because of efficiency. Outside of our recreational markets,
our hospitality exposure in and around our Green Bay and Fox Valley locations is modest
and characterized by seasoned operators with strong financial positions. An empty
Lambeau Field had a significant negative impact on the metro Green Bay tourist
economy. There is no question that hotels, restaurants and entertainment venues have
been hard hit, particularly in the cities and if they had marginal profits pre-pandemic.
But, our approach to lending in this segment has insulated us from material deterioration.
Commercial and Industrial (C&I) customers - Nicolet has, since inception, been heavily
concentrated in lending to operating businesses and the smaller businesses that support
them. The regional economy is heavily centered on manufacturing, transportation,
paper production and converting, packaging, food processing, specialized equipment
manufacturing and construction. These companies comprise the core of our lending
activity, and most were operating as essential businesses. There simply was no slowdown
or shutdown for the majority of these borrowers. They took the necessary measures to
keep people safe and productive, operate efficiently, meet demand, and remain profitable.
Covid provided the opportunity to carefully evaluate how to become more efficient and
to adapt strategy more rapidly to market changes.
Consumers - The pandemic certainly had a wide-ranging effect on consumers throughout our
region. The most vulnerable people have been severely impacted medically, psychologically,
and economically. Our retail customers as a group showed the same resilience as our
locations. We must continue to emphasize that the heart of our value proposition is not our
physical locations, but the availability of talented people who are driven to serve.
Wealth - We have been in the wealth management business for 19 years. Scale and
leadership were added through our 2016 acquisition and integration of a new team of
financial advisors. This strengthened the customer experience and expanded our market
share. While our mortgage operation was the star of our fee-income show, our wealth
business now demonstrates consistent growth and is making a strong contribution to our
profitability. Wealth generated $16.2 million of revenue in 2020, which is up significantly
(80%) from $9.1 million in 2016.
Growth - 2020 is a difficult year in which to evaluate organic growth. The year saw our
asset base grow by nearly $1 billion. We closed the acquisition of Advantage Community
Bank in Central Wisconsin, adding $172 million in assets, but the bulk of growth
consisted of increased deposits as customers received PPP loans and stimulus checks while
reducing spending. In recent years, the growth of our core deposits has contributed to
strong profitability, but in the current low-rate environment, generating incremental
profit on the strength of core deposits is difficult. Core loan growth (excluding PPP) was
softer than usual, as customers grew cautious and liquid while using PPP funds to pay
down existing debt. That said, we expect to serve our communities and will continue to
pursue solid relationship-based organic loan growth. We also expect 2021 to be an active
year for mergers and acquisitions (“M&A”).
THE ROAD AHEAD
After coming off an outstanding year, we are well-positioned to prosper in the complex
conditions all banks are facing. We continue to selectively add strong talent to support both
organic growth and potential acquisitions. Our stock price reflects market recognition that
we are a high performing company with opportunity for profitable growth. The banking
industry is facing serious challenges beyond macro-economic uncertainty. Prior to the
pandemic, community banks were consolidating at a rapid pace due to technology
changes, regulatory complexity and the competitive advantages enjoyed by the largest
banks. Covid has only increased the risk level and complexity community banks are
facing in the coming years. Community banks typically depend on the spread between
the loan yield and the cost of funds for a vast majority of their revenue. As community
banks wrestle with declining spread income for the foreseeable future, we expect M&A
to become even more active in the coming quarters. Acquisitions are not a substitute for
running a growing, highly-profitable bank that is impactful for customers. We know that
to continue as a strong acquirer, we must be a great bank.
Banking is a mature industry facing serious headwinds. Community banks have
consistently lost market share to the largest banks over the last few decades, and non-bank
our customers. We are inspired by their ingenuity and resilience. The vast majority worked
straight through 2020 as we did. As we write in early 2021, the vaccine is becoming more
broadly available, which should mean more people returning to work, and even more
importantly, all children returning to school. We hope and expect 2021 to be a strong year
of recovery and growth.
The nation and our region remain painfully agitated and divided. The medical,
political and racial tensions in 2020 starkly revealed how far we have to go to live genuine
tolerance and respect for the diverse persons in our nation. Intentional communication
regarding respect and tolerance for all people has been a consistent part of our training
and our culture. We are deepening and strengthening this training and communication in
the current year to emphasize our desire and responsibility to remove barriers to success
for racial minorities and other marginalized persons. Strong corporate governance has
always been foundational to our community impact and our financial results. Nicolet has
consistently worked to improve the physical and social environments in our communities.
We are proud of the financial support we provide to organizations and institutions
serving the marginalized and the vulnerable among us. Even more than our donations
and volunteer leadership, it is the way we live and teach our core values that strengthens,
nurtures and spreads community solidarity. The 3 Circles approach to shared success is
stakeholder capitalism in action.
2020 turned into a curveball stress test year that we passed with flying colors. We are
very pleased and proud of how our people responded to the turmoil that we and our
customers faced. We are keenly aware of the medical, social, political and macro-economic
cost of the pandemic. While shuttered storefronts and social turmoil may not fall
heavily on most of our particular customers, the toll on the community and particularly
those most exposed is very high. We have a broad variety of opinions within our
leadership and among our customers. But, we are united in our desire to serve our customers
well and serve as a vessel of community prosperity and solidarity.
On behalf of all of us at Nicolet, we want to express our heartfelt admiration for our
customers, as well as our gratitude for the continued support of our investors.
Robert B. Atwell
Michael E. Daniels
conditions that began in late March 2020. In the turbulent and extremely busy second
quarter, we were present personally and digitally to help our customers work through
struggles and assist them with new opportunities. By early April, we had put 18% of our
loan balances on modified payment terms to give customers breathing room to adapt in
a quickly changing environment. During the second quarter, we helped our business
customers process more than $350 million in loan requests through the Paycheck
Protection Program (“PPP”). We also created a micro-grant program and spent $1.25
million to more quickly get funds into the hands of our smallest business customers.
PPP loans, micro-grants and payment relief augmented our customers’ pre-pandemic
financial strength. Customers adapted beautifully and by the end of 2020, 0.5% of loans
remained on modified terms. Our year-end 2020 key loan quality measures were as good
as or better than a year ago. We originated over $1 billion in mortgage volume—largely
refinances—enhancing the cash flow of the customers we serve, and generating $30 million
of pre-tax net mortgage revenue for the Bank. Our passionate commitment to shared
success among the 3 Circles drove this outstanding performance.
HOW THE PANDEMIC AFFECTED NICOLET AND OUR CUSTOMERS
Opinions vary widely on how policy makers have addressed these conditions. We will
shed some light on how the pandemic and the policy response has played out among our
customers, because our strong market share throughout the regions we serve gives us such
insight at a very granular level. There are some very important and surprising observations
to offer based on the data and the feedback from our customers.
In the dark days of last April, banking industry analysts predicted that for 2020-2021
cumulative loan losses would be 3% to 5%. This would have implied loan losses at Nicolet
between $80 million and $130 million over 24 months. Our actual loan losses for 2020
totaled $1.4 million (or 0.05% of average loans), and we elevated our loan loss provision
to $10.3 million, which helped increase our year-end reserve for potential loan losses to 1.24%
of loans (excluding PPP loans). We simply have not experienced material deterioration
in our problem loan levels thus far. While industry analysts acknowledge that they really
don’t know, they still state high expected loss levels for the industry well beyond what we
can responsibly discern. Analysts presume that PPP funds are offsetting operating losses
for our business customers and that the loan losses among these customers will become
apparent when federal transfusions are exhausted. The analysts’ fears that PPP largely
funded losses is simply not evident in our customer base. Most customers paid down
their debt or stockpiled the funds into their Nicolet business checking accounts, inflating
cash assets that are still on our balance sheet at year-end. A large majority of our
customers operated profitably as essential businesses. As a group, our commercial base
was cash flow positive and profitable despite the challenges of the pandemic, which is
why our loan modifications dropped from the 18% peak to 0.5% of non-PPP loans at
year-end. Let’s take a more in-depth look into certain areas of our customer base,
commercial customers, having learned from prior tough times. Consumers generally cut
costs, refinanced their mortgages and largely saved the funds received from stimulus checks.
The net of that activity for the consumer was better positioning to weather a potentially
longer storm, with or without more government assistance, and for the Bank was a dramatic
increase in cash deposits and no discernible increase in past due loans.
NICOLET FINANCIAL PERFORMANCE
Our 10K and proxy materials provide a more detailed analysis of what became an
outstanding year. We want to draw your attention to the particular aspects of this
performance that support our optimism about the future.
Mortgage - The dramatic cut in interest rates and other actions taken by the Federal
Reserve gave all mortgage originators a tremendous opportunity to generate loans.
We entered this period as a leading mortgage originator in our core geography, as many
of our bankers are very experienced mortgage lenders. Coming off a very strong 2019
mortgage year, we had budgeted for a continuation, but could not have foreseen the level
of refinance activity emerging or the desire of many consumers to trade up for larger homes.
We used flexible staffing, digital access, and technological efficiency to dramatically
increase capacity, which drove in $30 million of pre-tax mortgage revenue over a very
active 2020. In this extreme mortgage volume year, it was all hands on deck for our
bankers and back office to underwrite and close mortgages. Our mortgage originators
are bankers who are compensated with a salary and bonus structure more appropriate to
a genuine banking culture. This is different from the broker “pay-for-production”
model prevalent in our industry. Our model follows the 3 Circles, and better serves
our customers and our shareholders. We expect another strong
mortgage revenue year in 2021, as home purchases and new
home construction remain a steady portion of our volume
but refinances will likely not be as robust.
Efficiency - Much like our customers, the pandemic challenged
us to respond more aggressively to change. In April and part
of May we closed the lobbies in each of our 39 locations and
operated through our drive-through windows and in person by
appointment only. When we re-opened our lobbies in mid-May,
we elected to permanently close seven of our locations to gain efficiency and respond to
the growing customer preference for digital access. Our efficiency ratio has improved as
our strategy has matured and, with the steps taken in 2020, reached 51.7%, placing us in
the 15th percentile of community banks. Sustained low interest rates are driving spread
compression across banking, and the shift toward digital delivery is bringing competitive
pressure from non-banks. The viability of branches is particularly challenging in more rural
competitors are pressuring traditional banking in deposit gathering, lending, payments
and wealth management. We can still create value through acquiring less adaptive
institutions and by relentlessly deepening our customer relationships. Our digital access
is growing, and we are investing in the talent to support our growth and to sustain the
mission beyond the current generation of leadership.
We are well-positioned to
prosper in the complex
conditions all banks are facing.
Many of our customers and shareholders look to us for an
understanding of the environment we face. The past 12 months
have been a particularly challenging period to offer meaningful
insight. We are all dealing with circumstances and events
beyond our control. The responses of federal, state and local
governments to the pandemic have been variable and confusing,
but people still need to think and act. We learn a lot from
talking with and seeing the results of the decisions our customers
make. We do not intend to ignore or diminish the heavy impact
of the pandemic on some people and businesses. We are compelled to emphasize that, as
a group, our customers are doing far better than they understand. We respect those charged
with setting medical, social and economic policy, but we observe that people are far more
capable, adaptable and resilient than public officials presume.
The federal government took dramatic action in 2020 to offset the effects of Covid and
the pandemic response. Some of these measures were necessary and effective. The scale
of stimulus spending and the aggressive actions by the Federal Reserve to cut rates and
expand its balance sheet were unprecedented. However, the aftermath remains largely
unknown. Macro-economic thought is less a science than it is a highly malleable
language that is adaptable to the political and social considerations of the moment.
There is a sense in which policy makers’ convictions that cheap debt, consumption and
heavy spending create prosperity runs contrary to the reality of how people actually
thrive on a sustainable basis. Stimulus stimulates and money can facilitate opportunity,
but the belief that consumption and debt cause production and prosperity is true only in
a narrow sense. In the long run, it is not money that causes work anymore than eating
causes food. People and their work cause prosperity which can then be stored in the
form of money. It is people working together cooperatively that is the real engine of
economic prosperity and social stability. The spectacle of political parties outbidding each
other with money borrowed so freely from our collective future is very troubling, and it
must end responsibly or it will likely end painfully.
Stimulus has been massive and broadly spread, but the negative impact of Covid has
been severe for only some people and businesses. It seems that the more wealthy and
powerful “non-essential” workers sheltered at home while the lower-paid “essential”
workers made it possible for this minority to do so. There are many aspects of a banker’s
work that can be done remotely, but the heart of our company’s strategy is to be personally
present, available, cheerful, creative and connected with our customers. We knew the vast
majority of our customers were on-site and working hard, so we have been right there with
them, in the manner they want and need. We cannot afford to become non-essential to
9
In 2020, Nicolet National Bank celebrated the 20th anniversary of our founding,
a very proud milestone. Over the years, we have learned from experience, and adapted to the
problems and opportunities we have faced in both the macro environment and competitive
landscape. Our strategies and our tactics have been aggressive, opportunistic and highly
successful. Our core beliefs and principles have been contrarian, compelling and consistent.
We believe in people, and we believe in cooperating together to create shared success as a
fearsome competitor in a mature industry. Our passion about and commitment to our
customers and employees has resulted in an outstanding return to our initial shareholders
and to those who have invested along the way. This desire for shared success among our
customers, employees and shareholders—the 3 Circles—is embedded in our foundation
and drives us. We have high expectations for ourselves and our customers, and this has
translated into strong results for those who understand that our work matters.
The remainder of this letter will set forth the important factors that contributed to
such a strange year turning into a great year. Net income for 2020 was $60.1 million, 10%
stronger than 2019 which was the previous record high in our history. Diluted earnings
per share were $5.70, 3% stronger than last year, benefiting from increased earnings,
while covering the 6% increase in average diluted shares (mostly due to the timing of
shares issued in our 2019 acquisition, net of strong 2020 stock repurchases). The return
on average assets was a healthy 1.41%, even on very elevated average assets (which were
up 36% over 2019, mainly in cash). At December 31, 2020, we had $4.6 billion in assets,
$2.8 billion in loans, $3.9 billion in deposits and $539 million in stockholders’ equity,
representing increases over last year of 27%, 8%, 32% and 4% respectively, including the
successful integration of a small bank acquisition. How did this
exceptional performance materialize under pandemic-based,
atypical conditions? As will be described in more detail below,
it was largely the combination of taking timely, relevant actions
under uncertain and changing conditions, and being present
for and with our employees, customers and communities.
Not much about 2020 went the way we and our customers had
initially planned. We have each lived our own version of the last
year’s medical, economic, social and political turmoil. These
challenges revealed which organizations were capable of adapting
rapidly and effectively to unexpected conditions. We have a talented and dedicated
workforce serving incredibly resilient and creative customers. Our core values drove us
to stay personally engaged digitally and face-to-face. Our people have been fully onsite
and our doors open since June, after a temporary by-appointment-only period. We have
kept our people safe, and customers can see our smiling eyes if not our masked faces.
Being present matters and will continue to differentiate us. Since day one, we have
not wavered from the presence embedded in our 5 Core Values—Be Personal, Be Real,
Be Memorable, Be Responsive and Be Entrepreneurial—not even under pandemic
those that should have been hardest hit, to demonstrate just how resilient and adaptive
the people in our region have been during the past 12 months.
Hospitality - It is widely understood that restaurants, lodging, small retail, travel and
entertainment businesses were the most severely impacted. This is certainly the case
across our markets. What is not as widely understood is that our customer base in these
segments is heavily concentrated in our Door County and Northwoods recreation
markets. The summer and fall recreation seasons for many operators were record breaking.
People living in the major urban areas that support our recreation markets were particularly
anxious to get out of the city and enjoy some fun “up north.” People either could not or
would not travel far for recreation, and instead spent time and money in places they
could drive to. Occupancy of hotel and rental properties in the north was very tight and
property sales were exceptional. People were more likely to enjoy the option of working
from home, and for many that meant living at their lake home or finally buying the
second property they had been contemplating. Boat, recreational vehicle, power equipment,
and cycling sales were also exceptionally strong. Those restaurants that chose to open up
and adapt their operations to the conditions often reported better than expected results,
limited only by social distancing, or more likely, the availability of people to work. The best
adapters were those that offered a great welcoming experience with fewer menu choices,
takeout options, and tighter hours. Some even enjoyed higher volume and many experienced
higher profit on lower volume because of efficiency. Outside of our recreational markets,
our hospitality exposure in and around our Green Bay and Fox Valley locations is modest
and characterized by seasoned operators with strong financial positions. An empty
Lambeau Field had a significant negative impact on the metro Green Bay tourist
economy. There is no question that hotels, restaurants and entertainment venues have
been hard hit, particularly in the cities and if they had marginal profits pre-pandemic.
But, our approach to lending in this segment has insulated us from material deterioration.
Commercial and Industrial (C&I) customers - Nicolet has, since inception, been heavily
concentrated in lending to operating businesses and the smaller businesses that support
them. The regional economy is heavily centered on manufacturing, transportation,
paper production and converting, packaging, food processing, specialized equipment
manufacturing and construction. These companies comprise the core of our lending
activity, and most were operating as essential businesses. There simply was no slowdown
or shutdown for the majority of these borrowers. They took the necessary measures to
keep people safe and productive, operate efficiently, meet demand, and remain profitable.
Covid provided the opportunity to carefully evaluate how to become more efficient and
to adapt strategy more rapidly to market changes.
Consumers - The pandemic certainly had a wide-ranging effect on consumers throughout our
region. The most vulnerable people have been severely impacted medically, psychologically,
and economically. Our retail customers as a group showed the same resilience as our
locations. We must continue to emphasize that the heart of our value proposition is not our
physical locations, but the availability of talented people who are driven to serve.
Wealth - We have been in the wealth management business for 19 years. Scale and
leadership were added through our 2016 acquisition and integration of a new team of
financial advisors. This strengthened the customer experience and expanded our market
share. While our mortgage operation was the star of our fee-income show, our wealth
business now demonstrates consistent growth and is making a strong contribution to our
profitability. Wealth generated $16.2 million of revenue in 2020, which is up significantly
(80%) from $9.1 million in 2016.
Growth - 2020 is a difficult year in which to evaluate organic growth. The year saw our
asset base grow by nearly $1 billion. We closed the acquisition of Advantage Community
Bank in Central Wisconsin, adding $172 million in assets, but the bulk of growth
consisted of increased deposits as customers received PPP loans and stimulus checks while
reducing spending. In recent years, the growth of our core deposits has contributed to
strong profitability, but in the current low-rate environment, generating incremental
profit on the strength of core deposits is difficult. Core loan growth (excluding PPP) was
softer than usual, as customers grew cautious and liquid while using PPP funds to pay
down existing debt. That said, we expect to serve our communities and will continue to
pursue solid relationship-based organic loan growth. We also expect 2021 to be an active
year for mergers and acquisitions (“M&A”).
THE ROAD AHEAD
After coming off an outstanding year, we are well-positioned to prosper in the complex
conditions all banks are facing. We continue to selectively add strong talent to support both
organic growth and potential acquisitions. Our stock price reflects market recognition that
we are a high performing company with opportunity for profitable growth. The banking
industry is facing serious challenges beyond macro-economic uncertainty. Prior to the
pandemic, community banks were consolidating at a rapid pace due to technology
changes, regulatory complexity and the competitive advantages enjoyed by the largest
banks. Covid has only increased the risk level and complexity community banks are
facing in the coming years. Community banks typically depend on the spread between
the loan yield and the cost of funds for a vast majority of their revenue. As community
banks wrestle with declining spread income for the foreseeable future, we expect M&A
to become even more active in the coming quarters. Acquisitions are not a substitute for
running a growing, highly-profitable bank that is impactful for customers. We know that
to continue as a strong acquirer, we must be a great bank.
Banking is a mature industry facing serious headwinds. Community banks have
consistently lost market share to the largest banks over the last few decades, and non-bank
our customers. We are inspired by their ingenuity and resilience. The vast majority worked
straight through 2020 as we did. As we write in early 2021, the vaccine is becoming more
broadly available, which should mean more people returning to work, and even more
importantly, all children returning to school. We hope and expect 2021 to be a strong year
of recovery and growth.
The nation and our region remain painfully agitated and divided. The medical,
political and racial tensions in 2020 starkly revealed how far we have to go to live genuine
tolerance and respect for the diverse persons in our nation. Intentional communication
regarding respect and tolerance for all people has been a consistent part of our training
and our culture. We are deepening and strengthening this training and communication in
the current year to emphasize our desire and responsibility to remove barriers to success
for racial minorities and other marginalized persons. Strong corporate governance has
always been foundational to our community impact and our financial results. Nicolet has
consistently worked to improve the physical and social environments in our communities.
We are proud of the financial support we provide to organizations and institutions
serving the marginalized and the vulnerable among us. Even more than our donations
and volunteer leadership, it is the way we live and teach our core values that strengthens,
nurtures and spreads community solidarity. The 3 Circles approach to shared success is
stakeholder capitalism in action.
2020 turned into a curveball stress test year that we passed with flying colors. We are
very pleased and proud of how our people responded to the turmoil that we and our
customers faced. We are keenly aware of the medical, social, political and macro-economic
cost of the pandemic. While shuttered storefronts and social turmoil may not fall
heavily on most of our particular customers, the toll on the community and particularly
those most exposed is very high. We have a broad variety of opinions within our
leadership and among our customers. But, we are united in our desire to serve our customers
well and serve as a vessel of community prosperity and solidarity.
On behalf of all of us at Nicolet, we want to express our heartfelt admiration for our
customers, as well as our gratitude for the continued support of our investors.
Robert B. Atwell
Michael E. Daniels
In 2020, Nicolet National Bank celebrated the 20th anniversary of our founding,
a very proud milestone. Over the years, we have learned from experience, and adapted to the
problems and opportunities we have faced in both the macro environment and competitive
landscape. Our strategies and our tactics have been aggressive, opportunistic and highly
successful. Our core beliefs and principles have been contrarian, compelling and consistent.
We believe in people, and we believe in cooperating together to create shared success as a
fearsome competitor in a mature industry. Our passion about and commitment to our
customers and employees has resulted in an outstanding return to our initial shareholders
and to those who have invested along the way. This desire for shared success among our
customers, employees and shareholders—the 3 Circles—is embedded in our foundation
and drives us. We have high expectations for ourselves and our customers, and this has
translated into strong results for those who understand that our work matters.
The remainder of this letter will set forth the important factors that contributed to
such a strange year turning into a great year. Net income for 2020 was $60.1 million, 10%
stronger than 2019 which was the previous record high in our history. Diluted earnings
per share were $5.70, 3% stronger than last year, benefiting from increased earnings,
while covering the 6% increase in average diluted shares (mostly due to the timing of
shares issued in our 2019 acquisition, net of strong 2020 stock repurchases). The return
on average assets was a healthy 1.41%, even on very elevated average assets (which were
up 36% over 2019, mainly in cash). At December 31, 2020, we had $4.6 billion in assets,
$2.8 billion in loans, $3.9 billion in deposits and $539 million in stockholders’ equity,
representing increases over last year of 27%, 8%, 32% and 4% respectively, including the
successful integration of a small bank acquisition. How did this
exceptional performance materialize under pandemic-based,
atypical conditions? As will be described in more detail below,
it was largely the combination of taking timely, relevant actions
under uncertain and changing conditions, and being present
for and with our employees, customers and communities.
Not much about 2020 went the way we and our customers had
initially planned. We have each lived our own version of the last
year’s medical, economic, social and political turmoil. These
challenges revealed which organizations were capable of adapting
rapidly and effectively to unexpected conditions. We have a talented and dedicated
workforce serving incredibly resilient and creative customers. Our core values drove us
to stay personally engaged digitally and face-to-face. Our people have been fully onsite
and our doors open since June, after a temporary by-appointment-only period. We have
kept our people safe, and customers can see our smiling eyes if not our masked faces.
Being present matters and will continue to differentiate us. Since day one, we have
not wavered from the presence embedded in our 5 Core Values—Be Personal, Be Real,
Be Memorable, Be Responsive and Be Entrepreneurial—not even under pandemic
those that should have been hardest hit, to demonstrate just how resilient and adaptive
the people in our region have been during the past 12 months.
Hospitality - It is widely understood that restaurants, lodging, small retail, travel and
entertainment businesses were the most severely impacted. This is certainly the case
across our markets. What is not as widely understood is that our customer base in these
segments is heavily concentrated in our Door County and Northwoods recreation
markets. The summer and fall recreation seasons for many operators were record breaking.
People living in the major urban areas that support our recreation markets were particularly
anxious to get out of the city and enjoy some fun “up north.” People either could not or
would not travel far for recreation, and instead spent time and money in places they
could drive to. Occupancy of hotel and rental properties in the north was very tight and
property sales were exceptional. People were more likely to enjoy the option of working
from home, and for many that meant living at their lake home or finally buying the
second property they had been contemplating. Boat, recreational vehicle, power equipment,
and cycling sales were also exceptionally strong. Those restaurants that chose to open up
and adapt their operations to the conditions often reported better than expected results,
limited only by social distancing, or more likely, the availability of people to work. The best
adapters were those that offered a great welcoming experience with fewer menu choices,
takeout options, and tighter hours. Some even enjoyed higher volume and many experienced
higher profit on lower volume because of efficiency. Outside of our recreational markets,
our hospitality exposure in and around our Green Bay and Fox Valley locations is modest
and characterized by seasoned operators with strong financial positions. An empty
Lambeau Field had a significant negative impact on the metro Green Bay tourist
economy. There is no question that hotels, restaurants and entertainment venues have
been hard hit, particularly in the cities and if they had marginal profits pre-pandemic.
But, our approach to lending in this segment has insulated us from material deterioration.
Commercial and Industrial (C&I) customers - Nicolet has, since inception, been heavily
concentrated in lending to operating businesses and the smaller businesses that support
them. The regional economy is heavily centered on manufacturing, transportation,
paper production and converting, packaging, food processing, specialized equipment
manufacturing and construction. These companies comprise the core of our lending
activity, and most were operating as essential businesses. There simply was no slowdown
or shutdown for the majority of these borrowers. They took the necessary measures to
keep people safe and productive, operate efficiently, meet demand, and remain profitable.
Covid provided the opportunity to carefully evaluate how to become more efficient and
to adapt strategy more rapidly to market changes.
Consumers - The pandemic certainly had a wide-ranging effect on consumers throughout our
region. The most vulnerable people have been severely impacted medically, psychologically,
and economically. Our retail customers as a group showed the same resilience as our
locations. We must continue to emphasize that the heart of our value proposition is not our
physical locations, but the availability of talented people who are driven to serve.
Wealth - We have been in the wealth management business for 19 years. Scale and
leadership were added through our 2016 acquisition and integration of a new team of
financial advisors. This strengthened the customer experience and expanded our market
share. While our mortgage operation was the star of our fee-income show, our wealth
business now demonstrates consistent growth and is making a strong contribution to our
profitability. Wealth generated $16.2 million of revenue in 2020, which is up significantly
(80%) from $9.1 million in 2016.
Growth - 2020 is a difficult year in which to evaluate organic growth. The year saw our
asset base grow by nearly $1 billion. We closed the acquisition of Advantage Community
Bank in Central Wisconsin, adding $172 million in assets, but the bulk of growth
consisted of increased deposits as customers received PPP loans and stimulus checks while
reducing spending. In recent years, the growth of our core deposits has contributed to
strong profitability, but in the current low-rate environment, generating incremental
profit on the strength of core deposits is difficult. Core loan growth (excluding PPP) was
softer than usual, as customers grew cautious and liquid while using PPP funds to pay
down existing debt. That said, we expect to serve our communities and will continue to
pursue solid relationship-based organic loan growth. We also expect 2021 to be an active
year for mergers and acquisitions (“M&A”).
THE ROAD AHEAD
After coming off an outstanding year, we are well-positioned to prosper in the complex
conditions all banks are facing. We continue to selectively add strong talent to support both
organic growth and potential acquisitions. Our stock price reflects market recognition that
we are a high performing company with opportunity for profitable growth. The banking
industry is facing serious challenges beyond macro-economic uncertainty. Prior to the
pandemic, community banks were consolidating at a rapid pace due to technology
changes, regulatory complexity and the competitive advantages enjoyed by the largest
banks. Covid has only increased the risk level and complexity community banks are
facing in the coming years. Community banks typically depend on the spread between
the loan yield and the cost of funds for a vast majority of their revenue. As community
banks wrestle with declining spread income for the foreseeable future, we expect M&A
to become even more active in the coming quarters. Acquisitions are not a substitute for
running a growing, highly-profitable bank that is impactful for customers. We know that
to continue as a strong acquirer, we must be a great bank.
Banking is a mature industry facing serious headwinds. Community banks have
consistently lost market share to the largest banks over the last few decades, and non-bank
our customers. We are inspired by their ingenuity and resilience. The vast majority worked
straight through 2020 as we did. As we write in early 2021, the vaccine is becoming more
broadly available, which should mean more people returning to work, and even more
importantly, all children returning to school. We hope and expect 2021 to be a strong year
of recovery and growth.
The nation and our region remain painfully agitated and divided. The medical,
political and racial tensions in 2020 starkly revealed how far we have to go to live genuine
tolerance and respect for the diverse persons in our nation. Intentional communication
regarding respect and tolerance for all people has been a consistent part of our training
and our culture. We are deepening and strengthening this training and communication in
the current year to emphasize our desire and responsibility to remove barriers to success
for racial minorities and other marginalized persons. Strong corporate governance has
always been foundational to our community impact and our financial results. Nicolet has
consistently worked to improve the physical and social environments in our communities.
We are proud of the financial support we provide to organizations and institutions
serving the marginalized and the vulnerable among us. Even more than our donations
and volunteer leadership, it is the way we live and teach our core values that strengthens,
nurtures and spreads community solidarity. The 3 Circles approach to shared success is
stakeholder capitalism in action.
2020 turned into a curveball stress test year that we passed with flying colors. We are
very pleased and proud of how our people responded to the turmoil that we and our
customers faced. We are keenly aware of the medical, social, political and macro-economic
cost of the pandemic. While shuttered storefronts and social turmoil may not fall
heavily on most of our particular customers, the toll on the community and particularly
those most exposed is very high. We have a broad variety of opinions within our
leadership and among our customers. But, we are united in our desire to serve our customers
well and serve as a vessel of community prosperity and solidarity.
On behalf of all of us at Nicolet, we want to express our heartfelt admiration for our
customers, as well as our gratitude for the continued support of our investors.
Robert B. Atwell
Michael E. Daniels
conditions that began in late March 2020. In the turbulent and extremely busy second
quarter, we were present personally and digitally to help our customers work through
struggles and assist them with new opportunities. By early April, we had put 18% of our
loan balances on modified payment terms to give customers breathing room to adapt in
a quickly changing environment. During the second quarter, we helped our business
customers process more than $350 million in loan requests through the Paycheck
Protection Program (“PPP”). We also created a micro-grant program and spent $1.25
million to more quickly get funds into the hands of our smallest business customers.
PPP loans, micro-grants and payment relief augmented our customers’ pre-pandemic
financial strength. Customers adapted beautifully and by the end of 2020, 0.5% of loans
remained on modified terms. Our year-end 2020 key loan quality measures were as good
as or better than a year ago. We originated over $1 billion in mortgage volume—largely
refinances—enhancing the cash flow of the customers we serve, and generating $30 million
of pre-tax net mortgage revenue for the Bank. Our passionate commitment to shared
success among the 3 Circles drove this outstanding performance.
HOW THE PANDEMIC AFFECTED NICOLET AND OUR CUSTOMERS
Opinions vary widely on how policy makers have addressed these conditions. We will
shed some light on how the pandemic and the policy response has played out among our
customers, because our strong market share throughout the regions we serve gives us such
insight at a very granular level. There are some very important and surprising observations
to offer based on the data and the feedback from our customers.
In the dark days of last April, banking industry analysts predicted that for 2020-2021
cumulative loan losses would be 3% to 5%. This would have implied loan losses at Nicolet
between $80 million and $130 million over 24 months. Our actual loan losses for 2020
totaled $1.4 million (or 0.05% of average loans), and we elevated our loan loss provision
to $10.3 million, which helped increase our year-end reserve for potential loan losses to 1.24%
of loans (excluding PPP loans). We simply have not experienced material deterioration
in our problem loan levels thus far. While industry analysts acknowledge that they really
don’t know, they still state high expected loss levels for the industry well beyond what we
can responsibly discern. Analysts presume that PPP funds are offsetting operating losses
for our business customers and that the loan losses among these customers will become
apparent when federal transfusions are exhausted. The analysts’ fears that PPP largely
funded losses is simply not evident in our customer base. Most customers paid down
their debt or stockpiled the funds into their Nicolet business checking accounts, inflating
cash assets that are still on our balance sheet at year-end. A large majority of our
customers operated profitably as essential businesses. As a group, our commercial base
was cash flow positive and profitable despite the challenges of the pandemic, which is
why our loan modifications dropped from the 18% peak to 0.5% of non-PPP loans at
year-end. Let’s take a more in-depth look into certain areas of our customer base,
commercial customers, having learned from prior tough times. Consumers generally cut
costs, refinanced their mortgages and largely saved the funds received from stimulus checks.
The net of that activity for the consumer was better positioning to weather a potentially
longer storm, with or without more government assistance, and for the Bank was a dramatic
increase in cash deposits and no discernible increase in past due loans.
NICOLET FINANCIAL PERFORMANCE
Our 10K and proxy materials provide a more detailed analysis of what became an
outstanding year. We want to draw your attention to the particular aspects of this
performance that support our optimism about the future.
Mortgage - The dramatic cut in interest rates and other actions taken by the Federal
Reserve gave all mortgage originators a tremendous opportunity to generate loans.
We entered this period as a leading mortgage originator in our core geography, as many
of our bankers are very experienced mortgage lenders. Coming off a very strong 2019
mortgage year, we had budgeted for a continuation, but could not have foreseen the level
of refinance activity emerging or the desire of many consumers to trade up for larger homes.
We used flexible staffing, digital access, and technological efficiency to dramatically
increase capacity, which drove in $30 million of pre-tax mortgage revenue over a very
active 2020. In this extreme mortgage volume year, it was all hands on deck for our
bankers and back office to underwrite and close mortgages. Our mortgage originators
are bankers who are compensated with a salary and bonus structure more appropriate to
a genuine banking culture. This is different from the broker “pay-for-production”
model prevalent in our industry. Our model follows the 3 Circles, and better serves
our customers and our shareholders. We expect another strong
mortgage revenue year in 2021, as home purchases and new
home construction remain a steady portion of our volume
but refinances will likely not be as robust.
Efficiency - Much like our customers, the pandemic challenged
us to respond more aggressively to change. In April and part
of May we closed the lobbies in each of our 39 locations and
operated through our drive-through windows and in person by
appointment only. When we re-opened our lobbies in mid-May,
we elected to permanently close seven of our locations to gain efficiency and respond to
the growing customer preference for digital access. Our efficiency ratio has improved as
our strategy has matured and, with the steps taken in 2020, reached 51.7%, placing us in
the 15th percentile of community banks. Sustained low interest rates are driving spread
compression across banking, and the shift toward digital delivery is bringing competitive
pressure from non-banks. The viability of branches is particularly challenging in more rural
competitors are pressuring traditional banking in deposit gathering, lending, payments
and wealth management. We can still create value through acquiring less adaptive
institutions and by relentlessly deepening our customer relationships. Our digital access
is growing, and we are investing in the talent to support our growth and to sustain the
mission beyond the current generation of leadership.
Many of our customers and shareholders look to us for an
understanding of the environment we face. The past 12 months
have been a particularly challenging period to offer meaningful
insight. We are all dealing with circumstances and events
beyond our control. The responses of federal, state and local
governments to the pandemic have been variable and confusing,
but people still need to think and act. We learn a lot from
talking with and seeing the results of the decisions our customers
make. We do not intend to ignore or diminish the heavy impact
of the pandemic on some people and businesses. We are compelled to emphasize that, as
a group, our customers are doing far better than they understand. We respect those charged
with setting medical, social and economic policy, but we observe that people are far more
capable, adaptable and resilient than public officials presume.
The federal government took dramatic action in 2020 to offset the effects of Covid and
the pandemic response. Some of these measures were necessary and effective. The scale
of stimulus spending and the aggressive actions by the Federal Reserve to cut rates and
expand its balance sheet were unprecedented. However, the aftermath remains largely
unknown. Macro-economic thought is less a science than it is a highly malleable
language that is adaptable to the political and social considerations of the moment.
There is a sense in which policy makers’ convictions that cheap debt, consumption and
heavy spending create prosperity runs contrary to the reality of how people actually
thrive on a sustainable basis. Stimulus stimulates and money can facilitate opportunity,
but the belief that consumption and debt cause production and prosperity is true only in
a narrow sense. In the long run, it is not money that causes work anymore than eating
causes food. People and their work cause prosperity which can then be stored in the
form of money. It is people working together cooperatively that is the real engine of
economic prosperity and social stability. The spectacle of political parties outbidding each
other with money borrowed so freely from our collective future is very troubling, and it
must end responsibly or it will likely end painfully.
Stimulus has been massive and broadly spread, but the negative impact of Covid has
been severe for only some people and businesses. It seems that the more wealthy and
powerful “non-essential” workers sheltered at home while the lower-paid “essential”
workers made it possible for this minority to do so. There are many aspects of a banker’s
work that can be done remotely, but the heart of our company’s strategy is to be personally
present, available, cheerful, creative and connected with our customers. We knew the vast
majority of our customers were on-site and working hard, so we have been right there with
them, in the manner they want and need. We cannot afford to become non-essential to
B O A R D O F D I R E C T O R S
Robert Atwell
Chairman, President and Chief Executive Officer, Nicolet Bankshares, Inc.
Michael Daniels
President and Chief Executive Officer, Nicolet National Bank
Rachel Campos-Duffy
Media & Communications Consultant, FOX News Contributor
John Dykema
President and Owner, Campbell Wrapper Corp and Circle Packaging Machinery, Inc.
Terrence Fulwiler
Retired CEO, WS Packaging Group
Chris Ghidorzi
President of Property Development, Ghidorzi Companies
Andrew Hetzel, Jr.
CEO, FyterTech Nonwovens LLC
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
Oliver “Pierce” Smith
Director of Purchasing, Menasha Packaging Company
Robert Weyers
Owner, Commercial Horizons, Inc.
11
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
Michael Daniels
Executive Vice President and Secretary
Ann K. Lawson
Chief Financial Officer
NICOLET NATIONAL BANK EXECUTIVE OFFICERS
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
Eric Witczak
Executive Vice President
F I N A N C I A L S
AC C O U N TA 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
2020
2019 % 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
$149,202
$138,588
19,864
22,510
129,338
116,078
10,300
62,626
100,719
80,945
20,476
60,469
347
1,200
53,367
96,799
71,446
16,458
54,988
347
Net income attributable to Nicolet Bankshares, Inc.
$60,122
$54,641
8%
-12%
11%
758%
17%
4%
13%
24%
10%
0%
10%
2%
3%
8%
6%
-5%
$5.82
$5.70
10,337
10,541
10,011
$5.71
$5.52
9,562
9,900
10,588
$802,859
$182,059
341%
539,337
449,302
2,789,101
2,573,751
20%
8%
(32,173)
(13,972)
130%
175,353
277,312
165,967
220,153
$4,551,789
$3,577,260
$3,910,399
$2,954,453
102,201
539,189
105,817
516,262
6%
26%
27%
32%
-3%
4%
–
728
-100%
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
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, 2020 and 2019, and the related consolidated
statements of income, comprehensive income, changes in stockholders’ equity and cash
13
flows for the two years in the period ended December 31, 2020 (not presented herein);
and in our report, dated February 26, 2021, we expressed an unqualified opinion on those
consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed 2020 financial
statements is fairly stated, in all material respects, in relation to the consolidated financial
statements from which it has been derived.
Atlanta, Georgia
February 26, 2021
Total liabilities, noncontrolling interest and stockholders' equity
$4,551,789
$3,577,260
27%
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
S H A R E H O L D E R I N F O
Annual Meeting
Shareholders’ Meeting – Monday, May 10, 2021 (5:00 p.m.)
Meyer Theatre
117 South Washington Street / Green Bay, WI 54301
Independent Auditor
Wipfli LLP
235 Peachtree Street, NE / Suite 1800 / Atlanta, GA 30303
Transfer Agent
Computershare
C/O Shareholder Services
P.O. Box 505002 / Louisville, KY 40233-5002
15
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
This mural is on the outside of our College Avenue
This mural is on the outside of our College Avenue
branch in Appleton, WI. Special thanks to artist
branch in Appleton, WI. Special thanks to artist
Spencer Young, ELEVATE97 (led by Courtney Trepanier),
Spencer Young, ELEVATE97 (led by Courtney Trepanier),
and Performa Inc. (Brian Netzel and Scott Wohr).
and Performa Inc. (Brian Netzel and Scott Wohr).