Nicolet Bankshares Inc. Annual Report 2022

FY2022 Annual Report · Nicolet Bankshares Inc.

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The 3 Circles image on the cover hangs in our Grand Chute branch, located in a
region of Wisconsin known as the Paper Valley. This region is where many paper mills
started and where some still operate. The economy flourished in this area because
of the paper industry.

As a nod to this region, we made the 3 Circles from virgin pulp—one of the main
natural resources for making paper. The pulp is set dimensionally on a photo of
the Fox River, the location of many of the first paper mills.

The 3 Circles represents a visual image of Nicolet’s purpose—to serve our
customers, employees, and shareholders in a manner that creates
shared success.

Thank you to our customers CoLab and Kris Maz,
for their inspiration, design, and production.

S h a r e h o l d e rs ' L e t t e r

Dear Shareholders,

ratios, and statistics banks can be measured by, we believe these three areas encompass the core of what

Before we dive into the annual letter, we want to level set expectations of our responsibilities to our

we want to achieve each year-a growth-oriented, highly profitable community bank with a strong balance

readers. Each year we strive to provide meaningful insight into the numbers that appear in the annual

sheet that can withstand all economic environments.

report. As a bank, we are awash with numbers, but the WHY behind them is important to us as founders

and shareholders. Therefore, we choose to start this letter by taking you back 22 years to our first annual

Growth: The period spanning 2021 and 2022 was a period of rapid growth in size and profitability.

letter to set the foundation for what is to come.

Assets nearly doubled from $4.6 billion at the end of 2020 to $8.8 billion at year-end 2022. Net Income

In our first annual report letter, we said we founded the bank because there was an extraordinary

increased 57% from $60.1 million in 2020 to $94.3 million in 2022. Organic loan growth grew by 14%

opportunity for a highly focused community bank. This entrepreneurial insight became our belief that was

last year-something we haven’t seen in more than a decade. In 2022, Wealth Management increased net

later validated in our initial meetings with prospective customers and shareholders. The directive we heard

new assets by $624 million, and assets under management grew by 8%, which is impressive considering

and felt focused more on building a great community bank that emphasized relationships and serving the

the overall underperformance in the stock market. In our Retail Banking area, we increased new deposit

community over simply a return on investment. We still see that opportunity today, and our actions

relationships by more than 7% in 2022.

continue to deliver on that initial directive.

In this letter, we will concentrate on three basic topics. First, we will review the financial highlights

Quality: Despite the media’s constant reminder of an impending recession, or how many economists

from 2022. We will next summarize the purpose and the strategic significance of our investment in

believe the Fed’s recent actions are surely going to cause our economy to decline, our credit quality continues

dramatic growth. We will then close with some comments on the extraordinarily turbulent economic

to remain strong. Nonperforming loans to total assets were 0.46% at the end of 2022 versus 0.73% twelve

environment as it has evolved from the early stimulus period brought by the pandemic into the recent

months prior. This ratio directly reflects our culture of strong bankers having real conversations with

period of historically aggressive rapid rate increases as the Fed struggles to throttle inflation.

high-quality customers. Our customers remain resilient in the face of higher input costs, employee shortages,

2022 FINANCIAL RESULTS

We have always assessed our financial performance based on financial results centered around three

main categories: growth, quality (or “soundness”), and earnings. While there are myriad financial metrics,

and ongoing supply chain issues. While 2023 may bring some relief in these areas, we understand what

keeps our customers up at night and commit to working with them through turbulent times.

Earnings: As we have said in the past, the most meaningful measure of profitability is our growth in

We approximately doubled the size of Nicolet from 2012 through 2014, primarily by purchasing banks

Earnings Per Share (EPS). Since the number of outstanding shares can and has increased, it is best to

considered the “lead local” community banks in their geography. Generally, the leadership and employees

assess the earnings attributable to an individual share. From 2020 to 2022, EPS increased 15% from

aligned with our vision of mattering to the communities we serve. During this time, we were able to continue

$5.70 to $6.56. There are many moving parts within these numbers, including all the “noise” that comes

to sustain organic market share growth and generate strong earnings and capital. From 2016 to 2017,

with the one-time merger related costs of acquisitions (severance, contract termination fees, advisory fees,

we also doubled the size of the bank largely through a merger of equals. The acquired growth in this

and all those merger accounting adjustments we are required to record). At the announcement of each

period was primarily about gaining scale and efficiency through general economies of scale. Through this

acquisition, we announce the approximate EPS “accretion” we expect, or how much higher our EPS may

2016 acquisition, we became a true public company that traded on a national stock exchange and began to

be with the deal than without it. Just like forecasting the weather, it is difficult to see what the future may

see value being created in a premium stock price. The doubling and redoubling of the asset size in 2012

hold, but our financial models tend to get us close. We are confident those EPS targets are being achieved

to 2017 also brought us additional valuable and sticky core deposits. These acquired deposits strengthened

but are only partially visible in the reported financial statements given what has transpired in the market

our balance sheet as core deposits outgrew even our strong loan growth.

over the last year.

STRATEGIC GROWTH

Embedded in the math behind the acquisitions was the belief that we would find good people in each of

these banks—people who were aligned with our purpose to serve and matter to our customers, communities,

and each other, with the results of that service being the return we provide to shareholders. This foundational

Nicolet has been a very high-growth company since our inception. While acquisitions have been the

purpose resonated with many of the people who were at the banks we acquired, and they have become

focus of our growth during the last 10 years, we have always executed very well on organic growth. This

important to the continued success of Nicolet.

organic growth is achieved by earning the business of new customers and supporting the growth of existing

The point of this history is to assure our newer shareholders that we have had a clear purpose for each

customers. Our early years of 2000 to 2008 were all about building a base of quality business as we grew

of our acquisitions. The past two years is now the third period in which we have doubled the size of

from $0 to just under $700 million in assets. The quality of this customer base has always served us well

Nicolet in the past decade. There are always surprises, but we have consistently achieved what we

and was especially important during the Great Recession of 2008 to 2012. We emerged from the financial

intended in each acquisition. While our strategy and math have always worked, what keeps us pointing

crisis very well-positioned to take advantage of opportunities we knew would be coming. Still, we always

true north is the unwavering commitment to matter to the people we serve, the places we live, and the

focused on growing by providing superior service to existing and new customers in our local markets.

people with whom we work. Acquisitions always create stress and disruption. Jobs are eliminated,

core systems are integrated, and the signs change on the first day. Employees, communities, and customers

CURRENT ECONOMIC ENVIRONMENT

are paying attention to our actions rather than our words. We are clear and quick about the changes we

We want to end this letter with a look at the current economic environment to understand the banking

make and are consistently transparent about why and how this change is happening. Most of these

sector and Nicolet’s place in it. When we talk with analysts about Nicolet, a common theme is this: the

acquisitions are in smaller cities, where people know each other. We don’t promise comfort and security but

analysts want to see what we’ve built once the dust settles. In short, with all the acquisitions and moving

offer opportunity and growth. Some people need time to sort out if they can and want to opt into the

parts around the financial data, what does Nicolet look like when things are “normal”? It’s a great question,

culture and strategy. We always need good people, but Nicolet is not always an easy place to work.

but it’s clear that the banking sector is experiencing anything but normal right now.

Those who trust the culture and put into action a servant mindset find an extraordinary level of satisfaction

The scale of federal stimulus during the pandemic has aptly been compared to that of World War II.

and joy in working with people to make a difference. Customers can tell when people are proud and happy

In the second quarter of 2020, our balance sheet grew by more than 20%. On June 30, 2020, cash represented

to work together on their behalf. In nearly every market we have entered through acquisition, a two-year

nearly 20% of our total assets. Nearly all our region’s employers functioned as essential businesses through

look-back has typically shown market share growth.

the pandemic. Three of the key pillars of our regional economy-paper and wood fiber production,

Our acquisition of Charter Bankshares, Inc. (Charter Bank) was a perfect example of that fair deal.

food production, and recreation (along with businesses supporting these pillars)-thrived during these times.

We closed on the acquisition of this privately held, well-run, commercially oriented bank in August 2022.

Our customer base stayed quite profitable and simply left their cash in accounts. Labor supply was tight in

It commands the lead local position in the vibrant city of Eau Claire in northwestern Wisconsin and

our regions even before the pandemic due to a very high labor force participation. There simply were not

brought us into the far southwest suburbs of the Twin Cities. The economics of this transaction were based

more people to draw into the workplace. Combine this with generous unemployment benefits and global

on the strength of our currency, the focused performance of the bank, cost takeouts, and the strategic

supply chain disruptions, and you get an imbalance between consumer demand and the productive capacity

relevance of the Eau Claire market.

of our commercial customers. While labor costs, shipping costs, and supply chain disruptions drove up

Over our long careers in this region, we have learned much about how and how not to acquire banks.

production costs, companies that could produce and deliver products enjoyed sufficient pricing power

Successful acquisitions require great clarity of purpose, negotiating a fair deal, clear and consistent

to more than cover costs. As our customer base moved through 2022, production bottlenecks eased,

communication, and rapid execution. Successful cultural integration requires both urgency and a deep

and consumer demand slackened. Inventory turnover has slowed, and labor cost increases have as well.

understanding of people, but it doesn’t happen in six months. We acquire not just to get bigger but

Consequently, the pricing power that suppliers enjoyed has also lessened.

to get better.

The Federal Reserve has belatedly awakened to the reality of inflation even as the inflation outlook

little consumer lending (especially higher-risk lending). Our regional real estate exposure does not follow

seems to improve. That the Fed and other policy experts insisted that inflation was not a serious concern

national trends. Our investment real estate exposure is small and focuses on customers with real equity and

until 2022 is inexplicable. Instead of looking at complicated charts and data, they might have simply

cash flow. A prolonged recession certainly could affect credit quality. We simply don’t see this evident in

considered what inevitably happens when so much money is generously infused into the system.

our customers, and we are confident in the resilience we and they have demonstrated over the last 22 years

The resulting rapid inflation was predictable to even a first-year economics student. Consensus forecasts

should conditions deteriorate. In the early months of the year, we spent time with other banks and bank

call for inflation to subside and the Fed to lighten up in late 2023. Unfortunately, the consensus of experts

investors. There is real concern about interest margins dampening bank profitability, and there is evidence

seems to be increasingly unreliable.

of that in our experience.

Sudden and pronounced policy changes affect the banking industry and our bank. For much of the

While we are subject to the same economic conditions as our competitors, we by no means use this as

past two years, through mid-2022, we carried all the surplus cash of our customers with little ability to

a way to excuse any performance. We will continue to control what we can control and own every decision

reinvest those funds. In the last several months, we increased deposit rates as the Fed raised rates. As we

that we make. We are very confident about our future. This confidence rests on the quality of our people,

enter 2023, we and the rest of the banking industry are experiencing significant margin compression as

our customers, and the core ideas that guide our daily actions. We know the people and the places we serve.

customers deploy funds into higher interest-bearing accounts and investments. While the rates we receive

We know that we matter to our customers, we matter to our communities, and we matter to each other.

on loans have also increased, the interest income we receive from loans takes time to increase, as more than

70% of our loans are fixed rate, meaning they reprice when they mature.

Throughout 2022, investment markets have disfavored bank stocks. The S&P Regional Bank index

was down more than 17% last year. The market sentiment reflects concern about recessionary credit

conditions in our customer base to date. Nearly all our customers are coming off several very strong years.

They are seeing margin pressure, and so are we. Customers have low leverage, relatively strong profits,

liquidity, and real equity. Nationally, there are signs of some stress in consumer lending (credit cards) and

certain real estate sectors (i.e., office buildings). This is not evident in our customer base because we do

problems for banks. We and our most respected peer banks have seen no indication of deteriorating credit

Robert B. Atwell Michael E. Daniels