Nicolet Bankshares Earnings 2020-03-31

Balance Sheet	Income Statement	Cash Flow

10-Q 1 ncbs-03312020x10q.htm FORM 10-Q Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-37700

NICOLET BANKSHARES, INC.

(Exact Name of Registrant as Specified in its Charter)



WISCONSIN (State or Other Jurisdiction of Incorporation or Organization)	47-0871001 (I.R.S. Employer Identification No.)

111 North Washington Street Green Bay, Wisconsin (Address of Principal Executive Offices)	54301 (Zip Code)

(920) 430-1400 (Registrant’s Telephone Number, Including Area Code)

N/A (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)



Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	NCBS	The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer ¨	Accelerated filer x

Non-accelerated filer ¨	Smaller reporting company ¨

Emerging Growth Company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

As of April 27, 2020 there were 10,412,885 shares of $0.01 par value common stock outstanding.

Nicolet Bankshares, Inc.

Quarterly Report on Form 10-Q

March 31, 2020

TABLE OF CONTENTS



			PAGE
PART I	FINANCIAL INFORMATION

	Item 1.	Financial Statements:

		Consolidated Balance Sheets	3

		Consolidated Statements of Income	4

		Consolidated Statements of Comprehensive Income	5

		Consolidated Statements of Stockholders’ Equity	6

		Consolidated Statements of Cash Flows	7

		Notes to Unaudited Consolidated Financial Statements	8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43

	Item 4.	Controls and Procedures	43

PART II	OTHER INFORMATION

	Item 1.	Legal Proceedings	43

	Item 1A.	Risk Factors	43

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44

	Item 3.	Defaults Upon Senior Securities	44

	Item 4.	Mine Safety Disclosures	44

	Item 5.	Other Information	44

	Item 6.	Exhibits	44

		Signatures	45

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS:

NICOLET BANKSHARES, INC.

Consolidated Balance Sheets

(In thousands, except share and per share data)



	March 31, 2020			December 31, 2019
	(Unaudited)			(Audited)
Assets
Cash and due from banks	$	53,741		$	75,433
Interest-earning deposits	188,219			106,626
Cash and cash equivalents	241,960			182,059
Certificates of deposit in other banks	18,804			19,305
Securities available for sale (“AFS”), at fair value	511,860			449,302
Other investments	27,176			24,072
Loans held for sale	3,929			2,706
Loans	2,607,424			2,573,751
Allowance for credit losses - loans (“ACL-Loans”)	(26,202		)	(13,972		)
Loans, net	2,581,222			2,559,779
Premises and equipment, net	60,276			56,469
Bank owned life insurance (“BOLI”)	78,665			78,140
Goodwill and other intangibles, net	164,974			165,967
Accrued interest receivable and other assets	43,688			39,461
Total assets	$	3,732,554		$	3,577,260

Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing demand deposits	$	791,563		$	819,055
Interest-bearing deposits	2,231,903			2,135,398
Total deposits	3,023,466			2,954,453
Short-term borrowings	75,000			—
Long-term borrowings	82,741			67,629
Accrued interest payable and other liabilities	39,607			38,188
Total liabilities	3,220,814			3,060,270

Stockholders’ Equity:
Common stock	104			106
Additional paid-in capital	299,903			312,733
Retained earnings	203,385			199,005
Accumulated other comprehensive income (loss)	7,579			4,418
Total Nicolet Bankshares, Inc. stockholders’ equity	510,971			516,262
Noncontrolling interest	769			728
Total stockholders’ equity and noncontrolling interest	511,740			516,990
Total liabilities, noncontrolling interest and stockholders’ equity	$	3,732,554		$	3,577,260

Preferred shares authorized (no par value)	10,000,000			10,000,000
Preferred shares issued and outstanding	—			—
Common shares authorized (par value $0.01 per share)	30,000,000			30,000,000
Common shares outstanding	10,408,375			10,587,738
Common shares issued	10,428,896			10,610,259

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.

Consolidated Statements of Income

(In thousands, except share and per share data) (Unaudited)



	Three Months Ended March 31,
	2020			2019
Interest income:
Loans, including loan fees	$	33,778		$	29,968
Investment securities:
Taxable	2,072			1,633
Tax-exempt	491			549
Other interest income	662			1,009
Total interest income	37,003			33,159
Interest expense:
Deposits	4,957			4,777
Short-term borrowings	27			—
Long-term borrowings	756			907
Total interest expense	5,740			5,684
Net interest income	31,263			27,475
Provision for credit losses	3,000			200
Net interest income after provision for credit losses	28,263			27,275
Noninterest income:
Trust services fee income	1,579			1,468
Brokerage fee income	2,322			1,810
Mortgage income, net	2,327			1,203
Service charges on deposit accounts	1,225			1,170
Card interchange income	1,562			1,420
BOLI income	703			459
Asset gains (losses), net	(654		)	172
Other income	521			1,484
Total noninterest income	9,585			9,186
Noninterest expense:
Personnel	13,323			12,537
Occupancy, equipment and office	4,204			3,750
Business development and marketing	1,359			1,281
Data processing	2,563			2,355
Intangibles amortization	993			1,053
Other expense	1,412			1,783
Total noninterest expense	23,854			22,759
Income before income tax expense	13,994			13,702
Income tax expense	3,321			3,352
Net income	10,673			10,350
Less: Net income attributable to noncontrolling interest	118			83
Net income attributable to Nicolet Bankshares, Inc.	$	10,555		$	10,267
Earnings per common share:
Basic	$	1.00		$	1.09
Diluted	$	0.98		$	1.05
Weighted average common shares outstanding:
Basic	10,515,778			9,461,485
Diluted	10,800,636			9,758,351

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.

Consolidated Statements of Comprehensive Income

(In thousands) (Unaudited)



	Three Months Ended March 31,
	2020			2019
Net income	$	10,673		$	10,350
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities AFS:
Net unrealized holding gains (losses)	4,329			7,711
Net realized (gains) losses included in income	—			(13		)
Income tax (expense) benefit	(1,168		)	(2,079		)
Total other comprehensive income (loss)	3,161			5,619
Comprehensive income	$	13,834		$	15,969

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.

Consolidated Statements of Stockholders’ Equity

(In thousands) (Unaudited)



	Nicolet Bankshares, Inc. Stockholders’ Equity
	Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Non- controlling Interest			Total
Balances at December 31, 2019	$	106		$	312,733		$	199,005		$	4,418		$	728		$	516,990
Comprehensive income:
Net income, three months ended March 31, 2020	—			—			10,555			—			118			10,673
Other comprehensive income (loss)	—			—			—			3,161			—			3,161
Stock-based compensation expense	—			1,299			—			—			—			1,299
Exercise of stock options, net	—			851			—			—			—			851
Issuance of common stock	—			215			—			—			—			215
Purchase and retirement of common stock	(2		)	(15,195		)	—			—			—			(15,197		)
Distribution to noncontrolling interest	—			—			—			—			(77		)	(77		)
Adoption of new accounting pronouncement (see Note 1)	—			—			(6,175		)	—			—			(6,175		)
Balances at March 31, 2020	$	104		$	299,903		$	203,385		$	7,579		$	769		$	511,740

Balances at December 31, 2018	$	95		$	247,790		$	144,364		$	(5,640	)	$	743		$	387,352
Comprehensive income:
Net income, three months ended March 31, 2019	—			—			10,267			—			83			10,350
Other comprehensive income (loss)	—			—			—			5,619			—			5,619
Stock-based compensation expense	—			1,108			—			—			—			1,108
Exercise of stock options, net	—			698			—			—			—			698
Issuance of common stock	—			148			—			—			—			148
Purchase and retirement of common stock	(1		)	(5,681		)	—			—			—			(5,682		)
Balances at March 31, 2019	$	94		$	244,063		$	154,631		$	(21	)	$	826		$	399,593

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.

Consolidated Statements of Cash Flows (Unaudited)



(In thousands)	Three Months Ended March 31,
	2020			2019
Cash Flows From Operating Activities:
Net income	$	10,673		$	10,350
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion	2,156			1,108
Provision for credit losses	3,000			200
Increase in cash surrender value of life insurance	(525		)	(459		)
Stock-based compensation expense	1,299			1,108
Asset (gains) losses, net	654			(172		)
Gain on sale of loans held for sale, net	(3,017		)	(1,102		)
Proceeds from sale of loans held for sale	103,950			37,338
Origination of loans held for sale	(102,715		)	(36,747		)
Net change in:
Accrued interest receivable and other assets	(5,567		)	(1,748		)
Accrued interest payable and other liabilities	2,257			421
Net cash provided by (used in) operating activities	12,165			10,297
Cash Flows From Investing Activities:
Net (increase) decrease in loans	(32,238		)	(21,728		)
Net (increase) decrease in certificates of deposit in other banks	501			1
Purchases of securities AFS	(74,759		)	(19,064		)
Proceeds from sales of securities AFS	—			8,076
Proceeds from calls and maturities of securities AFS	17,931			10,636
Purchases of other investments	(3,673		)	(63		)
Net (increase) decrease in premises and equipment	(4,961		)	(2,368		)
Net cash provided by (used in) investing activities	(97,199		)	(24,510		)
Cash Flows From Financing Activities:
Net increase (decrease) in deposits	69,143			(75,652		)
Net increase in short-term borrowings	75,000			—
Proceeds from long-term borrowings	20,000			—
Repayments of long-term borrowings	(5,000		)	(64		)
Purchase and retirement of common stock	(15,197		)	(5,682		)
Proceeds from issuance of common stock	215			148
Proceeds from exercise of stock options	851			698
Distribution to noncontrolling interest	(77		)	—
Net cash provided by (used in) financing activities	144,935			(80,552		)
Net increase (decrease) in cash and cash equivalents	59,901			(94,765		)
Cash and cash equivalents:
Beginning	182,059			249,526
Ending *	$	241,960		$	154,761
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	6,077		$	5,466
Cash paid for taxes	—			—
Capitalized mortgage servicing rights	559			319

* Cash and cash equivalents at March 31, 2020 include restricted cash of $1.9 million pledged as collateral on interest rate swaps and no reserve balance was required with the Federal Reserve Bank. At March 31, 2019, cash and cash equivalents include $9.0 million for the reserve balance required with the Federal Reserve Bank.

See accompanying notes to unaudited consolidated financial statements.

NICOLET BANKSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

Note 1 – Basis of Presentation

General

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated balance sheets, statements of income, comprehensive income, changes in stockholders’ equity and cash flows of Nicolet Bankshares, Inc. (the “Company” or “Nicolet”) and its subsidiaries, for the periods presented, and all such adjustments are of a normal recurring nature. All material intercompany transactions and balances have been eliminated. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the entire year.

These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been omitted or abbreviated. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Critical Accounting Policies and Estimates

Preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, the allowance for credit losses, valuation of loans in acquisition transactions, useful lives for depreciation and amortization, fair value of financial instruments, other-than-temporary impairment calculations, valuation of deferred tax assets, uncertain income tax positions and contingencies. Estimates that are particularly susceptible to significant change for the Company include the determination of the allowance for credit losses, the determination and assessment of deferred tax assets and liabilities, and the valuation of loans acquired in acquisition transactions; therefore, these are critical accounting policies. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: external market factors such as market interest rates and employment rates, changes to operating policies and procedures, changes in applicable banking or tax regulations, and changes to deferred tax estimates. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period presented.

There have been no material changes or developments with respect to the assumptions or methodologies that the Company uses when applying what management believes are critical accounting policies and developing critical accounting estimates as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, except as disclosed in Updates to Significant Accounting Policies and Recent Accounting Developments Adopted below.

Updates to Significant Accounting Policies

Securities Available for Sale: Securities classified as AFS are those securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as AFS would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors.

The Company evaluates securities AFS in unrealized loss positions on a quarterly basis to determine whether the decline in fair value below the amortized costs basis (impairment) is due to credit-related factors or noncredit-related factors. In making this evaluation, management considers the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. Any impairment that is not credit-related is recognized in other comprehensive income, net of related deferred income taxes. Credit-related impairment is recognized as an allowance for credit losses (“ACL”) on the balance sheet based on the amount by which the amortized cost basis exceeds the fair value, with a corresponding charge to net income. Both the ACL and the charge to net income may be reversed if conditions change. However, if the Company intends to sell an impaired AFS security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount must be recognized in net income with a corresponding adjustment to the security's amortized cost basis rather than through the establishment of an ACL. See Note 5 for additional disclosures on AFS securities.

Loans – Originated: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are carried at their amortized cost basis, which is the unpaid principal balance outstanding, net of deferred loan fees and costs and any direct principal charge-offs. The Company made an accounting policy election to exclude accrued interest from the amortized cost basis of loans and report such accrued interest as part of accrued interest receivable and other assets on the consolidated balance sheets.

Interest income is accrued on the unpaid principal balance using the simple interest method. The accrual of interest income on loans is discontinued when, in the opinion of management, there is reasonable doubt as to the borrower’s ability to meet payment of interest or principal when due. Loans are generally placed on nonaccrual status when contractually past due 90 days or more as to interest or principal, though may be placed in such status earlier based on the circumstances. Loans past due 90 days or more may continue on accrual only when they are well secured and/or in process of collection or renewal. When interest accrual is discontinued, all previously accrued but uncollected interest is reversed against current period interest income. Except in very limited circumstances, cash collections on nonaccrual loans are credited to the loan receivable balance and no interest income is recognized on those loans until the principal balance is paid in full. Accrual of interest may be resumed when the customer is current on all principal and interest payments and has been paying on a timely basis for a sustained period of time. See Note 6 for additional information and disclosures on loans.

Loans – Acquired: Loans purchased in acquisition transactions are acquired loans, and are recorded at their estimated fair value at the acquisition date.

Prior to January 1, 2020, as described in further detail in the Company’s 2019 Annual Report on Form 10-K, the Company initially classified acquired loans as either purchased credit impaired (“PCI”) loans (i.e., loans that reflect credit deterioration since origination and it is probable at acquisition that the Company will be unable to collect all contractually required payments) or purchased non-impaired loans (i.e., “performing acquired loans”). The Company estimated the fair value of PCI loans based on the amount and timing of expected principal, interest and other cash flows for each loan. The excess of the loan’s contractual principal and interest payments over all cash flows expected to be collected at acquisition was considered an amount that should not be accreted. These credit discounts (“nonaccretable marks”) were included in the determination of the initial fair value for acquired loans; therefore, no allowance for credit losses was recorded at the acquisition date. Differences between the estimated fair values and expected cash flows of acquired loans at the acquisition date that were not credit-based (“accretable marks”) were subsequently accreted to interest income over the estimated life of the loans. Subsequent to the acquisition date for PCI loans, increases in cash flows over those expected at the acquisition date resulted in a move of the discount from nonaccretable to accretable, while decreases in expected cash flows after the acquisition date were recognized through the provision for credit losses.

Subsequent to January 1, 2020, acquired loans that have evidence of more-than-insignificant deterioration in credit quality since origination are considered purchased credit deteriorated (“PCD”) loans. At acquisition, an estimate of expected credit losses is made for PCD loans. This initial allowance for credit losses is allocated to individual PCD loans and added to the purchase price or acquisition date fair value to establish the initial amortized cost basis of the PCD loans. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors, resulting in a discount or premium that is amortized to interest income. For acquired loans not deemed PCD loans at acquisition, the difference between the initial fair value mark and the unpaid principal balance are recognized in interest income over the estimated life of the loans. In addition, an initial allowance for expected credit losses is estimated and recorded as provision expense at the acquisition date. The subsequent measurement of expected credit losses for all acquired loans is the same as the subsequent measurement of expected credit losses for originated loans. See Note 6 for additional information and disclosures on loans.

Allowance for Credit Losses - Loans: The ACL-Loans represents management’s estimate of expected credit losses in the Company’s loan portfolio at the balance sheet date. The Company estimates the ACL-Loans based on the amortized costs basis of the underlying loan and has made an accounting policy election to exclude accrued interest from the loan’s amortized cost basis and the related measurement of the ACL-Loans. Estimating the amount of the ACL-Loans is a function of a number of factors, including but not limited to changes in the loan portfolio, net charge-offs, trends in past due and nonaccrual loans, and the level of potential problem loans, all of which may be susceptible to significant change.

Prior to January 1, 2020, as described in further detail in the Company’s 2019 Annual Report on Form 10-K, the Company used an incurred loss impairment model. This methodology assessed the overall appropriateness of the allowance for credit losses and included allocations for specifically identified impaired loans and loss factors for all remaining loans, with a component primarily based on historical loss rates and another component primarily based on other qualitative factors. Impaired loans were individually assessed and measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral if the loan was collateral dependent. Loans that were determined not to be impaired were collectively evaluated for impairment, stratified by type and allocated loss ranges based on the Company’s actual historical loss ratios for each strata, and adjustments were also provided for certain environmental and other qualitative factors.

Subsequent to January 1, 2020, the Company uses a current expected loss model (“CECL”). This methodology also considers historical loss rates and other qualitative adjustments, as well as a new forward-looking component that considers reasonable and supportable forecasts over the expected life of each loan. To develop the ACL-Loans estimate under the current expected loss model, the Company segments the loan portfolio into loan pools based on loan type and similar credit risk elements; performs an

individual evaluation of PCD loans; calculates the historical loss rates for the segmented loan pools; applies the loss rates over the calculated life of the pooled loans; adjusts for forecasted macro-level economic conditions; and determines qualitative adjustments based on factors and conditions unique to Nicolet's portfolio.

Recent Accounting Developments Adopted

In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. The updated guidance was effective for annual reporting periods, including interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted the updated guidance effective January 1, 2020, with no material impact on its consolidated financial statements as the new ASU only revises disclosure requirements. See Note 9 for fair value disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments intended to improve the financial reporting by requiring earlier recognition of credit losses on loans and certain other financial assets. Topic 326 replaces the incurred loss impairment model (which recognizes losses when a probable threshold is met) with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. The measurement of lifetime expected credit losses is based on historical experience, current conditions, and reasonable and supportable forecasts. The ASU was effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted the new accounting standard on January 1, 2020, as required, and recorded a cumulative-effect adjustment of $6 million to retained earnings. See Updates to Significant Accounting Policies above for changes to accounting policies and see Note 6 for additional disclosures on this new accounting pronouncement.

Reclassifications

Certain amounts in the 2019 consolidated financial statements have been reclassified to conform to the 2020 presentation.

Note 2 – Acquisitions

Choice Bancorp, Inc. (“Choice”):

On November 8, 2019, the Company consummated its merger with Choice, pursuant to the terms of the Agreement and Plan of Merger dated June 26, 2019, (the “Choice Merger Agreement”), whereby Choice (at 12% of Nicolet’s then pre-merger asset size) was merged with and into Nicolet, and Choice Bank, the wholly owned bank subsidiary of Choice, was merged with and into the Bank. The system integration was completed, and the two branches of Choice opened on November 12, 2019, as Nicolet National Bank branches, expanding its presence in the Oshkosh marketplace. The Company closed its legacy Oshkosh location concurrently with the consummation of the Choice merger.

The purpose of the merger was to continue Nicolet’s interest in strategic growth, consistent with its plan to improve profitability through efficiency, leverage the strengths of each bank across the combined customer base, and add shareholder value. With the merger, Nicolet became the leading community bank to serve the Oshkosh marketplace.

Pursuant to the Choice Merger Agreement, the final purchase price consisted of issuing 1,184,102 shares of the Company's common stock (given the final stock-for-stock exchange ratio of 0.497, and not exchanging the Choice shares owned by the Company immediately prior to the time of the merger), for common stock consideration of $79.8 million (based on $67.39 per share, the volume weighted average closing price of the Company's common stock over the preceding 30 trading day period) plus cash consideration of $1.7 million. Approximately $0.2 million in direct stock issuance costs for the merger were incurred and charged against additional paid-in capital.

Upon consummation, the Company added $457 million in assets, including $348 million in loans, $289 million in deposits, $1.7 million in core deposit intangible, and $45 million of goodwill. The Company accounted for the transaction under the acquisition method of accounting, and thus, the financial position and results of operations of Choice prior to the consummation date were not included in the accompanying consolidated financial statements. The accounting required assets purchased and liabilities assumed to be recorded at their respective estimated fair values at the date of acquisition.

Pending Acquisitions:

Commerce Financial Holdings, Inc. (“Commerce”): On February 17, 2020, Nicolet entered into a definitive merger agreement with Commerce Financial Holdings, Inc. (“Commerce”) pursuant to which Commerce will merge with and into Nicolet, providing entry into Wisconsin's largest MSA. The acquisition will involve stock-for-stock consideration at a fixed exchange ratio, subject to a $62 per share collar and an $82 per share cap provision provided for in the merger agreement. Stock markets significantly declined in early March following the declaration of COVID-19 as a pandemic, and remain volatile. Since mid-March, Nicolet’s stock price has been below the collar price. If our price, as defined in the merger agreement, moves above the $62 collar, we expect the transaction will close in third quarter 2020, pending fulfillment of all other closing conditions, including approvals by Commerce shareholders and regulators. As we have communicated to Commerce management, if our price remains below the $62 collar, we expect we will invoke our termination right provided in the merger agreement and the transaction will not close,

despite meeting all other closing conditions. Nicolet believes if its common stock price is below $62 per share, such pricing is a signal of the farther reaching and prolonged impacts of the COVID–19 pandemic, which are still volatile and uncertain. If Nicolet’s stock price is below $62, Nicolet believes that consummating a transaction at a fixed exchange ratio reflecting comparative valuations set before the onset of the COVID–19 pandemic is not prudent for Nicolet’s shareholders in today’s unsettled environment

Commerce would represent approximately 16% of the combined company's assets at March 31, 2020. At March 31, 2020, Commerce had total assets of $729 million, loans of $618 million, deposits of $620 million, and equity of $71 million.

Advantage Community Bancshares, Inc. (“Advantage”): On March 2, 2020, Nicolet entered into a definitive merger agreement with Advantage pursuant to which Advantage will merge with and into Nicolet. Due to the relative small size of the transaction, terms of the all-cash deal were not disclosed. At March 31, 2020, Advantage had total assets of $149 million, loans of $94 million, deposits of $126 million, and equity of $20 million. The merger is expected to close in the third quarter of 2020 and remains subject to customary closing conditions, including approval by Advantage shareholders and regulatory approvals.

Note 3 – Earnings per Common Share

Basic earnings per common share are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share are calculated by dividing net income available to common shareholders by the weighted average number of shares adjusted for the dilutive effect of common stock awards (outstanding stock options and unvested restricted stock), if any. Presented below are the calculations for basic and diluted earnings per common share.



	Three Months Ended March 31,
(In thousands, except per share data)	2020		2019
Net income attributable to Nicolet Bankshares, Inc.	$	10,555	$	10,267
Weighted average common shares outstanding	10,516		9,461
Effect of dilutive common stock awards	285		297
Diluted weighted average common shares outstanding	10,801		9,758
Basic earnings per common share*	$	1.00	$	1.09
Diluted earnings per common share*	$	0.98	$	1.05

*Cumulative quarterly per share performance may not equal annual per share totals due to the effects of the amount and timing of capital increases. When computing earnings per share for an interim period, the denominator is based on the weighted average shares outstanding during the interim period, and not on an annualized weighted average basis. Accordingly, the sum of the earnings per share data for the quarters will not necessarily equal the year to date earnings per share data.

For the three months ended March 31, 2020 and 2019, options to purchase approximately 0.1 million shares are excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive.

Note 4 – Stock-Based Compensation

The Company may grant stock options and restricted stock under its stock-based compensation plans to certain officers, employees and directors. These plans are administered by a committee of the Board of Directors. In February 2019, with subsequent shareholder approval, the 2011 Long-Term Incentive Plan was amended to increase the shares reserved for potential stock-based awards from 1,500,000 shares to 3,000,000 shares. At March 31, 2020, approximately 1.4 million shares were available for grant under these stock-based compensation plans.

A Black-Scholes model is utilized to estimate the fair value of stock option grants, while the market price of the Company’s stock at the date of grant is used to estimate the fair value of restricted stock awards. The weighted average assumptions used in the Black-Scholes model for valuing stock option grants were as follows.



	Three Months Ended March 31,
	2020			2019
Dividend yield	—		%	—		%
Expected volatility	25		%	—		%
Risk-free interest rate	1.67		%	—		%
Expected average life	7 years			0 years
Weighted average per share fair value of options	$	21.83		$	—

A summary of the Company’s stock option activity is summarized below.



Stock Options	Option Shares Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Life (Years)	Aggregate Intrinsic Value (in thousands)
Outstanding - December 31, 2019	1,443,733		$	48.75
Granted	39,500		71.89
Exercise of stock options *	(38,702	)	23.83
Forfeited	—		—
Outstanding - March 31, 2020	1,444,531		$	50.06	7.3	$	10,543
Exercisable - March 31, 2020	554,331		$	43.43	6.5	$	6,293

* The terms of the stock option agreements permit having a number of shares of stock withheld, the fair market value of which as of the date of exercise is sufficient to satisfy the exercise price and/or tax withholding requirements. For the three months ended March 31, 2020, 16,671 such shares were surrendered to the Company.

Intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the exercise price of the stock options. The intrinsic value of options exercised for the three months ended March 31, 2020 and 2019 was approximately $1.8 million and $1.1 million, respectively.

A summary of the Company’s restricted stock activity is summarized below.



Restricted Stock	Weighted Average Grant Date Fair Value		Restricted Shares Outstanding
Outstanding - December 31, 2019	$	44.94	22,521
Granted	72.00		2,500
Vested *	38.89		(4,500	)
Forfeited	—		—
Outstanding - March 31, 2020	$	49.56	20,521

* The terms of the restricted stock agreements permit the surrender of shares to the Company upon vesting in order to satisfy applicable tax withholding requirements at the minimum statutory withholding rate, and accordingly, 1,341 shares were surrendered during the three months ended March 31, 2020.

The Company recognized approximately $1.3 million and $1.1 million of stock-based compensation expense (included in personnel on the consolidated statements of income) for the three months ended March 31, 2020 and 2019, respectively, associated with its common stock awards granted to officers and employees. As of March 31, 2020, there was approximately $12.8 million of unrecognized compensation cost related to equity award grants. The cost is expected to be recognized over the remaining vesting period of approximately 3.2 years. The Company recognized a tax benefit of approximately $0.3 million for the three months ended March 31, 2020 for the tax impact of stock option exercises and vesting of restricted stock.

Note 5 – Securities Available for Sale

Amortized cost and fair value of securities available for sale are summarized as follows.



	March 31, 2020
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. government agency securities	$	64,180	$	288	$	216	$	64,252
State, county and municipals	155,700		1,661		25		157,336
Mortgage-backed securities	203,575		6,499		121		209,953
Corporate debt securities	78,023		2,516		220		80,319
Total	$	501,478	$	10,964	$	582	$	511,860



	December 31, 2019
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. government agency securities	$	16,516	$	4	$	60	$	16,460
State, county and municipals	155,501		1,049		157		156,393
Mortgage-backed securities	193,223		2,492		697		195,018
Corporate debt securities	78,009		3,422		—		81,431
Total	$	443,249	$	6,967	$	914	$	449,302

The following table presents gross unrealized losses and the related estimated fair value of securities AFS for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time individual securities have been in a continuous unrealized loss position.



	March 31, 2020
	Less than 12 months				12 months or more				Total
($ in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Number of Securities
U.S. government agency securities	$	—	$	—	$	10,854	$	216	$	10,854	$	216	2
State, county and municipals	12,286		25		—		—		12,286		25		30
Mortgage-backed securities	9,261		32		17,829		89		27,090		121		50
Corporate debt securities	16,777		220		—		—		16,777		220		9
Total	$	38,324	$	277	$	28,683	$	305	$	67,007	$	582	91



	December 31, 2019
	Less than 12 months				12 months or more				Total
($ in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Number of Securities
U.S. government agency securities	$	1,035	$	2	$	11,091	$	58	$	12,126	$	60	6
State, county and municipals	22,451		132		7,605		25		30,056		157		56
Mortgage-backed securities	49,626		245		47,271		452		96,897		697		150
Corporate debt securities	—		—		—		—		—		—		—
Total	$	73,112	$	379	$	65,967	$	535	$	139,079	$	914	212

The Company evaluates securities AFS in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. In making this evaluation, management considers the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.

As of March 31, 2020, the Company does not consider its securities AFS with unrealized losses to be attributable to credit-related factors, as the unrealized losses in each category have occurred as a result of changes in noncredit-related factors such as changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration; thus, no allowance for credit losses on securities AFS was recorded. The Company has the ability and intent to hold its securities to maturity. There were no other-than-temporary impairments charged to earnings during the full year 2019.

The amortized cost and fair value of securities AFS by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties; as this is particularly inherent in mortgage-backed securities, these securities are not included in the maturity categories below.



	March 31, 2020
(in thousands)	Amortized Cost		Fair Value
Due in less than one year	$	16,942	$	16,982
Due in one year through five years	235,471		237,604
Due after five years through ten years	35,066		35,929
Due after ten years	10,424		11,392
	297,903		301,907
Mortgage-backed securities	203,575		209,953
Securities AFS	$	501,478	$	511,860

Proceeds and realized gains / losses from the sale of securities AFS were as follows.



	Three Months Ended March 31,
(in thousands)	2020		2019
Gross gains	$	—	$	133
Gross losses	—		(120		)
Gains (losses) on sales of securities AFS, net	$	—	$	13
Proceeds from sales of securities AFS	$	—	$	8,076

Note 6 – Loans, Allowance for Credit Losses - Loans, and Credit Quality

The loan composition is summarized as follows.



	March 31, 2020					December 31, 2019
(in thousands)	Amount			% of Total		Amount			% of Total
Commercial & industrial	$	831,257		32	%	$	806,189		31	%
Owner-occupied CRE	499,705			19		496,372			19
Agricultural	95,991			3		95,450			4
CRE investment	448,758			17		443,218			17
Construction & land development	96,055			4		92,970			4
Residential construction	52,945			2		54,403			2
Residential first mortgage	432,126			17		432,167			17
Residential junior mortgage	121,105			5		122,771			5
Retail & other	29,482			1		30,211			1
Loans	2,607,424			100	%	2,573,751			100	%
Less allowance for credit losses - Loans (“ACL-Loans”)	26,202					13,972
Loans, net	$	2,581,222				$	2,559,779
Allowance for credit losses - Loans to loans	1.00		%			0.54		%

Accrued interest on loans of $7 million at both March 31, 2020 and December 31, 2019 is included in accrued interest receivable and other assets on the consolidated balance sheets. See Note 1 for for the Company's accounting policy on accrued interest with respect to loans and the allowance for credit losses.

Allowance for Credit Losses-Loans:

The majority of the Company’s loans, commitments, and letters of credit have been granted to customers in the Company’s market area. Although the Company has a diversified loan portfolio, the credit risk in the loan portfolio is largely influenced by general economic conditions and trends of the counties and markets in which the debtors operate, and the resulting impact on the operations of borrowers or on the value of underlying collateral, if any.

A roll forward of the allowance for credit losses is summarized as follows.



	Three Months Ended						Year Ended
(in thousands)	March 31, 2020			March 31, 2019			December 31, 2019
Beginning balance	$	13,972		$	13,153		$	13,153
Adoption of CECL	8,488			—			—
Initial PCD ACL	797			—			—
Total impact for adoption of CECL	9,285			—			—
Provision for credit losses	3,000			200			1,200
Charge-offs	(93		)	(10		)	(927		)
Recoveries	38			27			546
Net (charge-offs) recoveries	(55		)	17			(381		)
Ending balance	$	26,202		$	13,370		$	13,972

The following table presents the balance and activity in the ACL-Loans by portfolio segment.



	TOTAL – Three Months Ended March 31, 2020
(in thousands)	Commercial & industrial			Owner- occupied CRE			Agricultural			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total
ACL-Loans:
Beginning balance	$	5,471		$	3,010		$	579		$	1,600		$	414		$	368		$	1,669		$	517		$	344		$	13,972
Adoption of CECL	2,962			1,249			361			1,970			51			124			1,286			351			134			8,488
Initial PCD ACL	797			—			—			—			—			—			—			—			—			797
Provision	1,253			163			95			795			82			(50		)	533			102			27			3,000
Charge-offs	—			—			—			(20		)	—			—			—			—			(73		)	(93		)
Recoveries	30			—			—			—			—			—			1			3			4			38
Net (charge-offs) recoveries	30			—			—			(20		)	—			—			1			3			(69		)	(55		)
Ending balance	$	10,513		$	4,422		$	1,035		$	4,345		$	547		$	442		$	3,489		$	973		$	436		$	26,202
As % of ACL-Loans	40		%	17		%	4		%	16		%	2		%	2		%	13		%	4		%	2		%	100		%

For comparison purposes, the following table presents the balance and activity in the ACL-Loans by portfolio segment for the prior year-end period.



	TOTAL – Year Ended December 31, 2019
(in thousands)	Commercial & industrial			Owner- occupied CRE			Agricultural			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total
ACL-Loans:
Beginning balance	$	5,271		$	2,847		$	422		$	1,470		$	510		$	211		$	1,646		$	472		$	304		$	13,153
Provision	(61		)	254			157			130			(96		)	383			9			86			338			1,200
Charge-offs	(159		)	(93		)	—			—			—			(226		)	(22		)	(80		)	(347		)	(927		)
Recoveries	420			2			—			—			—			—			36			39			49			546
Net (charge-offs) recoveries	261			(91		)	—			—			—			(226		)	14			(41		)	(298		)	(381		)
Ending balance	$	5,471		$	3,010		$	579		$	1,600		$	414		$	368		$	1,669		$	517		$	344		$	13,972
As % of ACL-Loans	39		%	22		%	4		%	11		%	3		%	3		%	12		%	4		%	2		%	100		%

The ACL-Loans at March 31, 2020 was estimated using the current expected credit loss model. See Note 1 for the Company's accounting policy on loans and the allowance for credit losses.

The ACL-Loans represents management’s estimate of expected credit losses in the Company’s loan portfolio at the balance sheet date. To assess the appropriateness of the ACL-Loans, an allocation methodology is applied by Nicolet which focuses on evaluation of qualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to specific loans; (ii) management’s ongoing review and grading of the loan portfolio; (iii) consideration of historical loan loss and delinquency experience on each portfolio segment; (iv) trends in past due and nonperforming loans; (v) the risk characteristics of the various loan segments; (vi) changes in the size and character of the loan portfolio; (vii) concentrations of loans to specific borrowers or industries; (viii) existing economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect expected credit losses. Assessing these numerous factors involves significant judgment.

Management allocates the ACL-Loans by pools of risk within each loan portfolio segment. The allocation methodology consists of the following components. First, a specific reserve is established for individually evaluated credit-deteriorated loans, which management defines as nonaccrual credit relationships over $250,000, all loans determined to be troubled debt restructurings (“restructured loans”), plus other loans with evidence of credit deterioration. The specific reserve in the ACL-Loans for these credit deteriorated loans is equal to the aggregate collateral or discounted cash flow shortfall. Second, management allocates the ACL-Loans with historical loss rates by loan segment. The loss factors are measured on a quarterly basis and applied to each loan segment based on current loan balances and projected for their expected remaining life. Next, management allocates ACL-Loans using the qualitative factors mentioned above. Consideration is given to those current qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the historical loss experience of each loan segment. Lastly, management considers reasonable and supportable forecasts to assess the collectability of future cash flows.

A loan is considered collateral dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table presents collateral dependent loans by portfolio segment and collateral type, including those loans with and without a related allowance allocation as of March 31, 2020.



March 31, 2020	Collateral Type
(in thousands)	Real Estate		Other Business Assets		Total		Without an Allowance		With an Allowance		Allowance Allocation
Commercial & industrial	$	—	$	5,544	$	5,544	$	978	$	4,566	$	1,683
Owner-occupied CRE	3,168		—		3,168		3,168		—		—
Agricultural	611		921		1,532		663		869		61
CRE investment	1,029		—		1,029		1,029		—		—
Construction & land development	533		—		533		533		—		—
Residential construction	—		—		—		—		—		—
Residential first mortgage	—		—		—		—		—		—
Residential junior mortgage	—		—		—		—		—		—
Retail & other	—		—		—		—		—		—
Total loans	$	5,341	$	6,465	$	11,806	$	6,371	$	5,435	$	1,744

The following table presents impaired loans and their respective allowance for credit loss allocations at December 31, 2019, as determined in accordance with historical accounting guidance.



	Total Impaired Loans – December 31, 2019
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial & industrial	$	5,932	$	7,950	$	625	$	5,405	$	1,170
Owner-occupied CRE	3,430		4,016		—		3,677		256
Agricultural	2,134		2,172		116		2,311		37
CRE investment	2,426		2,790		—		2,497		364
Construction & land development	382		382		—		460		—
Residential construction	—		—		—		—		—
Residential first mortgage	2,357		2,629		—		2,412		178
Residential junior mortgage	218		349		—		224		58
Retail & other	12		12		—		12		—
Total	$	16,891	$	20,300	$	741	$	16,998	$	2,063

Past Due and Nonaccrual Loans:

The following tables present past due loans by portfolio segment.



	March 31, 2020
(in thousands)	30-89 Days Past Due (accruing)		90 Days & Over or nonaccrual		Current		Total
Commercial & industrial	$	1,060	$	6,050	$	824,147	$	831,257
Owner-occupied CRE	1,961		3,837		493,907		499,705
Agricultural	1		1,801		94,189		95,991
CRE investment	484		1,029		447,245		448,758
Construction & land development	210		533		95,312		96,055
Residential construction	100		—		52,845		52,945
Residential first mortgage	1,985		953		429,188		432,126
Residential junior mortgage	249		566		120,290		121,105
Retail & other	80		—		29,402		29,482
Total loans	$	6,130	$	14,769	$	2,586,525

Price	66.55	EPS	4
Shares	10	P/E	15
MCap	646	P/FCF	18
Net Debt	-86	EBIT	74
TEV	560	TEV/EBIT	8
TTM 2019-09-30, in MM, except price, ratios

10-Q	2020-03-31	Filed 2020-04-30
10-K	2019-12-31	Filed 2020-02-28
10-Q	2019-09-30	Filed 2019-10-31
10-Q	2019-06-30	Filed 2019-08-02
10-Q	2019-03-31	Filed 2019-05-03
10-K	2018-12-31	Filed 2019-03-08
10-Q	2018-09-30	Filed 2018-11-02
10-Q	2018-06-30	Filed 2018-08-03
10-Q	2018-03-31	Filed 2018-04-27
10-K	2017-12-31	Filed 2018-03-07
10-Q	2017-09-30	Filed 2017-11-03
10-Q	2017-06-30	Filed 2017-08-04
10-Q	2017-03-31	Filed 2017-04-27
10-K	2016-12-31	Filed 2017-03-10
10-Q	2016-09-30	Filed 2016-11-04
10-Q	2016-06-30	Filed 2016-08-04
10-Q	2016-03-31	Filed 2016-04-28
10-K	2015-12-31	Filed 2016-03-07
10-Q	2015-09-30	Filed 2015-11-06
10-Q	2015-06-30	Filed 2015-08-07
10-Q	2015-03-31	Filed 2015-05-07
10-K	2014-12-31	Filed 2015-03-09
10-Q	2014-09-30	Filed 2014-11-07
10-Q	2014-06-30	Filed 2014-08-08
10-Q	2014-03-31	Filed 2014-05-09
10-K	2013-12-31	Filed 2014-03-13
10-Q	2013-09-30	Filed 2013-11-12
10-Q	2013-06-30	Filed 2013-08-12
10-Q	2013-03-31	Filed 2013-05-14

8-K	2020-05-18
8-K	2020-05-11
8-K	2020-04-21
8-K	2020-04-21
8-K	2020-03-25
8-K	2020-03-02
8-K	2020-02-18
8-K	2020-01-21
8-K	2019-11-12
8-K	2019-10-15
8-K	2019-10-07
8-K	2019-09-19
8-K	2019-07-16
8-K	2019-06-27
8-K	2019-05-16
8-K	2019-05-13
8-K	2019-04-16
8-K	2019-01-15
8-K	2018-10-16
8-K	2018-07-17
8-K	2018-05-08
8-K	2018-04-17
8-K	2018-01-16

EX-31.1	ncbs-03312020x10qxexhibit311.htm
EX-31.2	ncbs-03312020x10qxexhibit312.htm
EX-32.1	ncbs-03312020x10qxexhibit321.htm
EX-32.2	ncbs-03312020x10qxexhibit322.htm

NCBS 10Q Quarterly Report

Nicolet Bankshares Earnings 2020-03-31