As filed with the Securities and Exchange Commission on February 1, 2013
Registration No. 333-____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
UNDER
THE SECURITIES ACT OF 1933
NICOLET BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
(Exact name of registrant as specified in its charter)
Wisconsin (State or other jurisdiction of incorporation or organization) | 6021 (Primary Standard Industrial Classification Code Number) | 47-0871001 (I.R.S. Employer Identification No.) | |||||||||
111 North Washington Street Green Bay, Wisconsin 54301 (920) 430-1400 (Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices) |
Robert B. Atwell
Chairman, President, and Chief Executive Officer
Nicolet Bankshares, Inc.
111 North Washington Street
Green Bay, Wisconsin 54301
(920) 430-1400
Chairman, President, and Chief Executive Officer
Nicolet Bankshares, Inc.
111 North Washington Street
Green Bay, Wisconsin 54301
(920) 430-1400
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
area code, of agent for service)
Copies to: | |||||||
Katherine M. Koops, Esq. Bryan Cave LLP 1201 West Peachtree Street, NW Atlanta, Georgia (404) 572-6600 | Robert M. Fleetwood, Esq. Barack Ferrazzano Kirschbaum & Nagelberg, LLP 220 West Madison Street, Suite 3900 Chicago, Illinois 60606 (312) 984-3100 |
Approximate Date of Commencement of Proposed Sale of the Securities to the Public: As soon as practicable after the effective date of this Registration Statement and the satisfaction or waiver of all other conditions to the proposed merger described herein.
If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, please check the following box.o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.o __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | |||||||||||||
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company [X] |
Title of each class of securities to be registered | | Amount to be registered(1) | | Proposed maximum offering price per unit | | Proposed maximum aggregate offering price(2) | | Amount of registration fee(3) | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Common stock, $0.01 par value | 617,608 | Not applicable | $9,611,290.20 | $1,310.98 |
(1) | The maximum number of shares of Nicolet Bankshares, Inc. (“Nicolet”) common stock estimated to be issuable upon completion of the merger of Nicolet and Mid-Wisconsin Financial Services, Inc. (“MWFS”), as described herein. This number is based on 617,608 shares of Nicolet common stock issuable in exchange for all shares of MWFS common stock issued and outstanding immediately prior to the completion of the merger, pursuant to the terms of the Agreement and Plan of Merger by and between Nicolet and MWFS, dated as of November 28, 2012, and, as amended, attached to the joint proxy statement-prospectus as Appendix A, and assuming that no cash will be paid by the registrant in connection with the merger. |
(2) | The proposed maximum aggregate offering price of the registrant’s common stock was calculated based upon the market value of shares of MWFS common stock (the securities to be cancelled in the merger) in accordance with Rules 457(c) and 457(f) under the Securities Act as follows: (A) the product of (i) $5.80, the average of the high and low prices per share of MWFS common stock as reported on the OTCQB on January 30, 2013, and (ii) 1,657,119, the estimated maximum number of shares of MWFS common stock that may be exchanged for the merger consideration. |
(3) | Computed pursuant to Rules 457(f) and 457(c) under the Securities Act, based on a rate of $136.40 per $1,000,000 of the proposed maximum aggregate offering price. |
The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this joint proxy statement-prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This joint proxy statement-prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Preliminary — Subject to Completion Dated February __, 2013
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PROXY STATEMENT OF MID-WISCONSIN FINANCIAL SERVICES, INC. | PROXY STATEMENT AND PROSPECTUS OF NICOLET BANKSHARES, INC. |
PROPOSED MERGER — YOUR VOTE IS VERY IMPORTANT
The boards of directors of Mid-Wisconsin Financial Services, Inc. (“Mid-Wisconsin”) and Nicolet Bankshares, Inc. (“Nicolet”) have each unanimously approved a transaction that will result in the merger of Mid-Wisconsin with and into Nicolet. Nicolet will be the surviving bank holding company in the merger. If the merger is completed, Mid-Wisconsin shareholders will receive for each of their shares 0.3727 shares of Nicolet common stock or, for holders of 200 or fewer shares of Mid-Wisconsin common stock (subject to adjustment as described herein) or residents of states in which the Nicolet common stock cannot be offered without unreasonable effort or expense, $6.15 in cash. After the merger is completed, we expect that current Nicolet shareholders will own approximately 84.9% of the issued and outstanding common stock of the combined company and current Mid-Wisconsin shareholders will own approximately 15.1% of the combined issued and outstanding shares of common stock of the company.
The Nicolet common stock issued pursuant to the merger will be registered under the Securities Act of 1933, as amended. Although Nicolet plans to cause its common stock to be quoted on the Over-the-Counter Bulletin Board or other quotation system at or before the closing of the merger, its common stock is not currently traded on any securities exchange or quotation system.
We cannot complete the merger unless we obtain the necessary governmental approvals and unless the shareholders of both companies approve the merger agreement. Each of us is asking our shareholders to consider and vote on this merger proposal at our respective companies’ special meetings of shareholders. Whether or not you plan to attend your company’s meeting, please take the time to vote by following the voting instructions included in the enclosed proxy card. If you sign, date and mail your proxy card without indicating how you want to vote, your proxy will be counted as a voteFOR the merger agreement. If you do not vote your shares as instructed in the enclosed proxy card, or if you do not instruct your broker how to vote any shares held for you in “street name,” the effect will be a vote against the merger agreement.
The places, dates and times of the shareholders’ meetings are as follows:
For shareholders of Nicolet: For shareholders of Mid-Wisconsin:
This document contains a more complete description of the shareholders’ meetings and the terms of the merger. We urge you to review this entire document carefully. You may also obtain information about Mid-Wisconsin from documents that it has filed with the Securities and Exchange Commission and information about Nicolet’s and Mid-Wisconsin’s respective bank subsidiaries from Call Reports that they have filed with the Federal Deposit Insurance Corporation.
Nicolet and the Mid-Wisconsin boards of directors recommend that the Nicolet and Mid-Wisconsin shareholders, respectively, voteFOR approval of the merger agreement.
[Signature] | [Signature] | |||||||||
Robert B. Atwell Chairman, President and Chief Executive Officer Nicolet Bankshares, Inc. | Kim A. Gowey Chairman of the Board Mid-Wisconsin Financial Services, Inc. |
You should read this entire joint proxy statement-prospectus carefully because it contains important information about the merger.In particular, you should read carefully the information under the section entitled “Risk Factors,” beginning on page 15.
Neither the Securities and Exchange Commission nor any state securities regulators have approved or disapproved of the securities to be issued in the merger or determined if this document is truthful or complete. Any representation to the contrary is a criminal offense.
The shares of Nicolet common stock to be issued in the merger are not deposits or savings accounts or other obligations of any bank or savings association and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.
This joint proxy statement-prospectus is dated ______________, 2013 and is first being mailed to Mid-Wisconsin’s shareholders on or about _____________, 2013 and to Nicolet’s shareholders on or about ______________, 2013.
PLEASE NOTE
We have not authorized anyone to provide you with any information other than the information included in this joint proxy statement-prospectus and the documents to which we refer you herein. If someone provides you with other information, please do not rely on it as being authorized by us.
This joint proxy statement—prospectus has been prepared as of the date on the cover page. There may be changes in the affairs of Nicolet or Mid-Wisconsin since that date that are not reflected in this document.
As used in this joint proxy statement-prospectus, the terms “Nicolet” and “Mid-Wisconsin” refer to Nicolet Bankshares, Inc. and Mid-Wisconsin Financial Services, Inc., respectively, and, where the context requires, “Nicolet” may refer to Nicolet Bankshares, Inc. and its subsidiary, Nicolet National Bank. Similarly, where context requires, “Mid-Wisconsin” may refer to Mid-Wisconsin Financial Services, Inc. and its subsidiary, Mid-Wisconsin Bank.
Unless the context indicates otherwise, all references to the “merger agreement” refer to the Agreement and Plan of Merger dated November 28, 2012 by and among Nicolet and Mid-Wisconsin, as amended by Amendment No. 1 thereto dated January 17, 2013.
MID-WISCONSIN FINANCIAL SERVICES, INC.
132 West State Street
Medford, Wisconsin 54451
132 West State Street
Medford, Wisconsin 54451
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON ______________, 2013
TO BE HELD ON ______________, 2013
To the Shareholders of Mid-Wisconsin Financial Services, Inc.:
Mid-Wisconsin Financial Services, Inc. will hold a special meeting of shareholders at ______________________, on ___________, 2013 at ____ __.m., local time, for the following purposes:
1. Merger. To authorize, approve and adopt the Agreement and Plan of Merger, as amended, by and among Nicolet Bankshares, Inc. and Mid-Wisconsin Financial Services, Inc., pursuant to which Mid-Wisconsin will merge with and into Nicolet on and subject to the terms and conditions contained therein. A copy of the merger agreement, as amended, is attached to the accompanying joint proxy statement-prospectus asAppendix A.
2. Other business. To transact such other business as may properly come before the special meeting or any adjournments or postponements of the special meeting.
Only shareholders of record at the close of business on __________, 2013, the record date, are entitled to notice of and to vote at the special meeting or any adjournments or postponements of the special meeting. The approval of the Agreement and Plan of Merger requires the affirmative vote of at least a majority of the shares of Mid-Wisconsin common stock issued and outstanding on the record date.
After careful consideration, your board of directors supports the merger and unanimously recommends that you vote FOR approval of the Agreement and Plan of Merger.
YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the special meeting, please take the time to vote by following the instructions in the enclosed proxy card. You may revoke your proxy at any time before it is voted by giving written notice of revocation to Mid-Wisconsin’s Corporate Secretary or by filing a properly executed proxy card of a later date with Mid-Wisconsin’s Corporate Secretary at or before the meeting. You may also revoke your proxy by attending the meeting, giving oral notice of your revocation, and voting your shares in person at the meeting.
Mid-Wisconsin’s shareholders have dissenters’ rights with respect to the merger under Wisconsin law. Shareholders who wish to assert their dissenters’ rights and comply with the procedural requirements of Subchapter XIII of the Wisconsin Business Corporation Law will be entitled to receive payment of the fair value of their shares in cash in accordance with Wisconsin law. A copy of Subchapter XIII of the Wisconsin Business Corporation Law is attached asAppendix B to the joint proxy statement-prospectus.
We do not know of any other matters to be presented at the special meeting, but if other matters are properly presented, the persons named as proxies will vote on such matters at their discretion.
By Order of the Board of Directors | ||||||
Kim A. Gowey | ||||||
Chairman of the Board |
Medford, Wisconsin
__________, 2013
__________, 2013
NICOLET BANKSHARES, INC.
111 North Washington Street
Green Bay, Wisconsin 54301
111 North Washington Street
Green Bay, Wisconsin 54301
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON ______________, 2013
TO BE HELD ON ______________, 2013
To the Shareholders of Nicolet Bankshares, Inc.:
Nicolet Bankshares, Inc. will hold a special meeting of shareholders at ________________________, on ________, 2013 at ____ __.m., local time, for the following purposes:
1. Merger. To authorize, approve and adopt the Agreement and Plan of Merger, as amended, by and among Nicolet Bankshares, Inc. and Mid-Wisconsin Financial Services, Inc., pursuant to which Mid-Wisconsin will merge with and into Nicolet on and subject to the terms and conditions contained therein. A copy of the merger agreement, as amended, is attached to the accompanying joint proxy statement-prospectus asAppendix A.
2. Other business. To transact such other business as may properly come before the special meeting or any adjournments or postponements of the special meeting.
Only shareholders of record at the close of business on __________, 2013, the record date, are entitled to notice of and to vote at the special meeting or any adjournments or postponements of the special meeting. The approval of the Agreement and Plan of Merger requires the affirmative vote of at least a majority of the shares of Nicolet common stock issued and outstanding on the record date.
After careful consideration, your board of directors supports the merger and unanimously recommends that you vote FOR approval of the Agreement and Plan of Merger.
YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the special meeting, please take the time to vote by following the voting instructions included in the enclosed proxy card. You may revoke your proxy at any time before it is voted by giving written notice of revocation to Nicolet’s Corporate Secretary or by filing a properly executed proxy card of a later date with Nicolet’s Corporate Secretary at or before the meeting. You may also revoke your proxy by attending the meeting, giving oral notice of your revocation, and voting your shares in person at the meeting.
Nicolet’s shareholders have dissenters’ rights with respect to the merger under Wisconsin law. Shareholders who wish to assert their dissenters’ rights and comply with the procedural requirements of Subchapter XIII of the Wisconsin Business Corporation Law will be entitled to receive payment of the fair value of their shares in cash in accordance with Wisconsin law. A copy of Subchapter XIII of the Wisconsin Business Corporation Law is attached asAppendix B to the joint proxy statement-prospectus.
We do not know of any other matters to be presented at the special meeting, but if other matters are properly presented, the persons named as proxies will vote on such matters at their discretion.
By Order of the Board of Directors | ||||||
Robert B. Atwell Chairman, President and Chief Executive Officer |
Green Bay, Wisconsin
_______, 2013
_______, 2013
TABLE OF CONTENTS
Page | ||||||
---|---|---|---|---|---|---|
QUESTIONS AND ANSWERS | i | |||||
SUMMARY | 1 | |||||
THE COMPANIES | 1 | |||||
THE MERGER AGREEMENT | 2 | |||||
WHAT YOU WILL RECEIVE IN THE MERGER | 2 | |||||
EFFECT OF THE MERGER ON MID-WISCONSIN OPTIONS | 2 | |||||
YOUR EXPECTED TAX TREATMENT AS A RESULT OF THE MERGER | 3 | |||||
DISSENTERS’ RIGHTS | 3 | |||||
COMPARATIVE STOCK PRICES | 3 | |||||
REASONS FOR THE MERGER | 3 | |||||
OPINION OF MID-WISCONSIN’S FINANCIAL ADVISOR | 5 | |||||
OPINION OF NICOLET’S FINANCIAL ADVISOR | 5 | |||||
BOTH BOARDS OF DIRECTORS RECOMMEND SHAREHOLDER APPROVAL OF THE MERGER AGREEMENT | 5 | |||||
INFORMATION ABOUT THE SHAREHOLDERS’ MEETINGS | 5 | |||||
QUORUM AND VOTE REQUIRED AT THE MEETINGS | 6 | |||||
SHARE OWNERSHIP OF MANAGEMENT | 6 | |||||
STRUCTURE OF THE MERGER | 6 | |||||
WE MUST OBTAIN REGULATORY APPROVAL TO COMPLETE THE MERGER | 7 | |||||
WE MUST MEET SEVERAL CONDITIONS TO COMPLETE THE MERGER | 7 | |||||
TERMINATION AND TERMINATION FEE | 8 | |||||
MID-WISCONSIN’S DIRECTORS AND EXECUTIVE OFFICERS HAVE INTERESTS IN THE MERGER THAT DIFFER FROM ITS SHAREHOLDERS’ INTERESTS | 8 | |||||
EMPLOYEE BENEFITS OF MID-WISCONSIN EMPLOYEES AFTER THE MERGER | 8 | |||||
DIFFERENCES IN RIGHTS OF MID-WISCONSIN��S SHAREHOLDERS AFTER THE MERGER | 9 | |||||
ACCOUNTING TREATMENT | 9 | |||||
UNAUDITED COMPARATIVE PER SHARE DATA | 10 | |||||
SELECTED UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION | 11 | |||||
RISK FACTORS | 15 | |||||
A WARNING ABOUT FORWARD-LOOKING STATEMENTS | 26 | |||||
THE MID-WISCONSIN SPECIAL SHAREHOLDERS’ MEETING | 27 | |||||
PURPOSE | 27 | |||||
RECORD DATE; QUORUM AND VOTE REQUIRED | 27 | |||||
SOLICITATION AND REVOCATION OF PROXIES | 28 | |||||
DISSENTERS’ RIGHTS | 29 | |||||
RECOMMENDATION OF THE BOARD OF DIRECTORS OF MID-WISCONSIN | 29 | |||||
THE NICOLET SPECIAL SHAREHOLDERS’ MEETING | 30 | |||||
PROPOSAL 1: THE MERGER AGREEMENT | 33 | |||||
BACKGROUND OF THE MERGER | 33 | |||||
REASONS FOR THE MERGER | 35 | |||||
OPINION OF MID-WISCONSIN’S FINANCIAL ADVISOR | 37 | |||||
OPINION OF NICOLET’S FINANCIAL ADVISOR | 45 | |||||
THE MERGER AGREEMENT | 54 | |||||
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER | 66 | |||||
CERTAIN DIFFERENCES IN RIGHTS OF SHAREHOLDERS | 71 | |||||
DISSENTERS’ RIGHTS | 76 |
Page | ||||||
---|---|---|---|---|---|---|
BUSINESS OF NICOLET | 83 | |||||
GENERAL | 83 | |||||
BUSINESS AND PROPERTIES | 84 | |||||
COMPETITION | 86 | |||||
EMPLOYEES | 86 | |||||
LEGAL PROCEEDINGS | 86 | |||||
MARKET PRICES OF AND DIVIDENDS DECLARED ON NICOLET COMMON STOCK | 86 | |||||
CERTAIN PROVISIONS OF NICOLET’S ARTICLES OF INCORPORATION AND BYLAWS REGARDING CHANGE OF CONTROL | 87 | |||||
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT | 88 | |||||
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF NICOLET | 90 | |||||
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION | 92 | |||||
MANAGEMENT OF NICOLET | 137 | |||||
CONTINUING DIRECTORS | 137 | |||||
NEW DIRECTORS OF THE COMBINED ENTITY | 138 | |||||
NOMINATIONS | 139 | |||||
DIRECTOR COMPENSATION | 140 | |||||
EXECUTIVE OFFICERS | 140 | |||||
EXECUTIVE COMPENSATION | 141 | |||||
RELATED PARTY TRANSACTIONS | �� | 144 | ||||
INFORMATION ABOUT MID-WISCONSIN | 145 | |||||
AVAILABLE INFORMATION | 145 | |||||
MARKET PRICES OF AND DIVIDENDS DECLARED ON MID-WISCONSIN COMMON STOCK | 146 | |||||
SUPERVISION AND REGULATION | 147 | |||||
OTHER MATTERS | 159 | |||||
EXPERTS | 159 | |||||
LEGAL MATTERS | 159 | |||||
IMPORTANT NOTICE FOR MID-WISCONSIN’S SHAREHOLDERS | 159 | |||||
WHERE YOU CAN FIND ADDITIONAL INFORMATION | 160 | |||||
CONSOLIDATED FINANCIAL STATEMENTS OF NICOLET BANKSHARES, INC. | F-1 |
APPENDIX A | AGREEMENT AND PLAN OF MERGER BY AND AMONG NICOLET BANKSHARES, INC. AND MID-WISCONSIN FINANCIAL SERVICES, INC., AS AMENDED | |||||
APPENDIX B | FULL TEXT OF SUBCHAPTER XIII OF THE WISCONSIN BUSINESS CORPORATION LAW | |||||
APPENDIX C | FAIRNESS OPINION OF RAYMOND JAMES & ASSOCIATES, INC. | |||||
APPENDIX D | FAIRNESS OPINION OF SANDLER O’NEILL + PARTNERS, L.P. | |||||
APPENDIX E | ANNUAL REPORT ON FORM 10-K OF MID-WISCONSIN FINANCIAL SERVICES, INC. FOR THE YEAR ENDED DECEMBER 31, 2011 (WITHOUT EXHIBITS) | |||||
APPENDIX F | QUARTERLY REPORT ON FORM 10-Q OF MID-WISCONSIN FINANCIAL SERVICES, INC. FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 (WITHOUT EXHIBITS) |
QUESTIONS AND ANSWERS
Q: | On what am I being asked to vote? |
A: | You are being asked to approve the Agreement and Plan of Merger, as amended, by and between Nicolet and Mid-Wisconsin which we may refer to as the merger agreement, and which provides for the merger of Mid-Wisconsin with and into Nicolet. |
Q: | Why have Nicolet and Mid-Wisconsin decided to merge? |
A: | Nicolet and Mid-Wisconsin agreed to merge for strategic reasons that benefit both parties. Their boards of directors believe that the merger will stabilize Mid-Wisconsin’s operations while allowing Nicolet to expand and enter into new markets. |
Q: | How does my board of directors recommend I vote on the merger agreement? |
A: | The boards of directors of Mid-Wisconsin and Nicolet have unanimously approved and adopted the merger agreement and recommend that their respective shareholders vote“FOR” approval of the merger agreement. |
Q: | What will happen to Nicolet National Bank and Mid-Wisconsin Bank as a result of the merger? |
A: | If the merger occurs, Mid-Wisconsin Bank, which is a wholly owned subsidiary of Mid-Wisconsin, will be merged with and into Nicolet National Bank, which is a wholly owned subsidiary of Nicolet. We may refer to this transaction as the bank merger. Nicolet National Bank will be the surviving entity in the bank merger. |
Q: | What vote is required to approve the merger agreement? |
A: | Approval of the merger agreement requires the affirmative vote of a majority of the issued and outstanding shares of Mid-Wisconsin common stock as of[MWFS record date] and the affirmative vote of a majority of the issued and outstanding shares of Nicolet common stock as of[Nicolet record date]. |
Q: | What will I receive in the merger? |
A: | Mid-Wisconsin shareholders will receive for each of their shares either (i) 0.3727 shares of Nicolet common stock or, (ii) for holders of 200 or fewer shares of Mid-Wisconsin common stock (subject to adjustment as described herein) or residents of states in which the Nicolet common stock cannot be offered without unreasonable effort or expense, $6.15 in cash. In lieu of any fractional shares of Nicolet common stock, Mid-Wisconsin shareholders will receive $16.50 per share in cash, which is the per share value assigned the Nicolet common stock for purposes of the merger. After the merger is completed, we expect that current Nicolet shareholders will own approximately 84.9% of the issued and outstanding shares of common stock of the combined company and current Mid-Wisconsin shareholders will own approximately 15.1% of the issued and outstanding shares of common stock of the combined company. See page __ for further explanation. |
Q: | What are the federal income tax consequences of the merger to me? |
A: | Bryan Cave LLP has issued an opinion, which it will confirm as of the effective date of the merger, that the merger will qualify as a reorganization under Section 368(a) of the Internal Revenue Code. Mid-Wisconsin shareholders receiving stock consideration in the merger will not recognize gain for U.S. federal income tax purposes as a result of the surrender of Mid-Wisconsin common stock for receipt of Nicolet common stock. However, to the extent that shareholders may receive cash either as a result of the exercise of dissenters’ rights, in lieu of a state-restricted fractional share, because they hold fewer than 200 shares of Mid-Wisconsin common stock, or because they are residents of states in which Nicolet common stock cannot be offered without unreasonable effort or expense, they may recognize gain for U.S. federal income tax purposes. Your tax treatment will depend on your specific situation and many variables not within our control. You should consult your own tax advisor for a full understanding of the tax consequences of the merger to you. |
i
Q: | When do you expect the merger to be completed? |
A: | We are working to complete the merger in the second quarter of 2013, shortly after the special shareholders’ meetings, assuming Mid-Wisconsin and Nicolet shareholders and the applicable bank regulatory agencies approve the merger and other conditions to closing are met. We could experience delays in meeting these conditions or be unable to meet them at all. See “Risk Factors” beginning on page 15 for a discussion of these and other risks relating to the merger. |
Q: | Will I be able to sell the Nicolet common stock I receive pursuant to the merger? |
A: | Yes. The Nicolet common stock issued pursuant to the merger will be registered under the Securities Act of 1933, as amended, and Nicolet plans to cause its common stock to be quoted on the Over-the-Counter Bulletin Board or other quotation system at or before closing of the merger. All shares of Nicolet common stock that you receive pursuant to the merger will be freely transferable unless you are deemed an affiliate of Nicolet. Affiliates of Nicolet may, however, be able to sell the shares they receive pursuant to the merger subject to applicable securities regulations. See “Resale of Nicolet Common Stock” on page 63. |
Q: | What should I do now? |
A: | After carefully reading and considering the information in this joint proxy statement-prospectus, follow the voting instructions included in the enclosed proxy card in order to vote your shares as soon as possible, so that your shares will be represented at your company’s special meeting. |
NOTE: If you sign and send in your proxy card and do not indicate how you want to vote, your proxy will be voted “FOR” the proposal to approve the merger agreement. |
Q: | What if I do not vote? |
A: | If you do not vote, it will have the same effect as voting your shares against the merger. |
Q: | If my shares are held in “street name” by my broker, will my broker automatically vote my shares for me? |
A: | No. Your broker will vote your shares of stock on the merger agreement only if you provide instructions on how to vote. You should instruct your broker on how to vote your shares, following the directions your broker provides. If you do not provide instructions to your broker, and your broker submits an unvoted proxy, the resulting broker nonvote will not be counted toward a quorum and your shares will not be voted at your company’s special meeting, which will have the same effect as voting your shares against the merger. |
Q: | Can I change my vote after I deliver my proxy? |
A: | Yes. You can change your vote at any time before your proxy is voted at the special meeting. You can do this in three ways. First, you can revoke your proxy by giving written notice of revocation to your company’s Corporate Secretary. Second, you can submit a new properly executed proxy with a later date to your company’s Corporate Secretary at or before your company’s special meeting. The latest proxy actually received before the meeting will be counted, and any earlier proxies will be revoked. Third, you can attend your company’s special meeting, give oral notice of your revocation, and vote your shares in person. Any earlier proxy will be thereby revoked. However, simply attending the meeting without voting will not revoke your proxy. If you hold shares in “street name,” you must contact your broker prior to your company’s special meeting if you wish to revoke your proxy or change your vote. |
Q: | Should I send in my stock certificates now? |
A: | No. If you are a Nicolet shareholder, your shares of Nicolet common stock will remain outstanding and unchanged in the merger. Consequently, you do not need to surrender your stock certificates or exchange them for new ones. |
If you are a Mid-Wisconsin shareholder and the merger is completed, Nicolet’s exchange agent will send all Mid-Wisconsin shareholders written instructions for exchanging Mid-Wisconsin common stock |
ii
certificates for the merger consideration they are entitled to receive. In any event, donot send your stock certificates with your proxy card. |
Q: | Who can help answer my questions? |
A: | If you would like additional copies of this document, or if you would like to ask any questions about the merger and related matters, you should contact: |
For Mid-Wisconsin shareholders: _______________, Mid-Wisconsin Financial Services, Inc., 132 West State Street, Medford, Wisconsin, 54451, telephone: (____) ____________. |
For Nicolet shareholders: Robert B. Atwell, Nicolet Bankshares, Inc., 111 North Washington Street, Green Bay, Wisconsin 54301, telephone: (920) 430-1400. |
iii
SUMMARY
We have prepared this summary of certain material information to assist you in your review of this joint proxy statement-prospectus. It is necessarily general and abbreviated, and it is not intended to be a complete explanation of all of the matters covered in this joint proxy statement-prospectus. To understand the merger and the issuance of cash and shares of Nicolet common stock in the merger, please see the more complete and detailed information in the sections that follow this summary, as well as the financial statements and appendices included in this joint proxy statement-prospectus by reference. For more information about Nicolet or Mid-Wisconsin, please see the section entitled “Where You Can Find Additional Information.” We urge you to read all of these documents in their entirety prior to returning your proxy or voting at the special meeting of your company’s shareholders.
Each item in this summary refers to the page of this document on which that subject is discussed in more detail.
The Companies
(See page ___ for Nicolet and page ___ for Mid-Wisconsin)
(See page ___ for Nicolet and page ___ for Mid-Wisconsin)
NICOLET BANKSHARES, INC.
111 North Washington Street
Green Bay, Wisconsin 54301
(920) 430-1400
111 North Washington Street
Green Bay, Wisconsin 54301
(920) 430-1400
Nicolet is a Wisconsin corporation and was incorporated as Green Bay Financial Corporation, a Wisconsin corporation, on April 5, 2000 to serve as the holding company for and the sole shareholder of Nicolet National Bank. It amended and restated its articles of incorporation and changed its name to Nicolet Bankshares, Inc. on March 14, 2002. It subsequently became the holding company for Nicolet National Bank upon completion of Nicolet National Bank’s reorganization into a holding company structure on June 6, 2002.
Nicolet is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and under the bank holding company laws of the State of Wisconsin. It conducts operations through its wholly-owned subsidiary, Nicolet National Bank, which was organized in 2000 as a national bank under the laws of the United States and opened for business on November 1, 2000. Nicolet National Bank provides a full range of traditional banking services throughout northeastern Wisconsin and the upper peninsula of Michigan. Nicolet offers commercial, retail and wealth management services through 11 branch locations in Green Bay, De Pere, Appleton, Marinette and Crivitz, Wisconsin and Menominee, Michigan.
As of September 30, 2012, Nicolet had consolidated total assets of approximately $683 million, consolidated total gross loans of approximately $546 million, consolidated total deposits of approximately $555 million and consolidated shareholders’ equity of approximately $77 million.
MID-WISCONSIN FINANCIAL SERVICES, INC.
132 West State Street
Medford, Wisconsin 54451
(715) 748-8300
132 West State Street
Medford, Wisconsin 54451
(715) 748-8300
Mid-Wisconsin Financial Services, Inc. is a registered bank holding company headquartered in Medford, Wisconsin. Mid-Wisconsin Bank, Mid-Wisconsin’s wholly-owned banking subsidiary was incorporated on September 1, 1890, as a state bank under the laws of Wisconsin. Mid-Wisconsin Bank operates 11 retail banking locations throughout North Central Wisconsin serving markets in Clark, Eau Claire, Marathon, Oneida, Price, Taylor and Vilas Counties.
As of September 30, 2012, Mid-Wisconsin had consolidated total assets of approximately $464 million, consolidated total gross loans of approximately $308 million, consolidated total deposits of approximately $364 million and consolidated shareholders’ equity of approximately $37 million.
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The Merger Agreement
(See page 54)
(See page 54)
Under the terms of the merger agreement, Mid-Wisconsin will merge with and into Nicolet with Nicolet being the surviving corporation. Following the merger of Mid-Wisconsin with and into Nicolet, Mid-Wisconsin Bank will merge with and into Nicolet National Bank with Nicolet National Bank being the surviving bank. Both Nicolet and Nicolet National Bank will continue their existence under Wisconsin law and the laws of the United States, respectively, while Mid-Wisconsin and Mid-Wisconsin Bank will cease to exist. The merger agreement is attached to this document asAppendix A and is incorporated into this joint proxy statement-prospectus by reference. We encourage you to read the entire merger agreement carefully as it is the legal document that governs the proposed merger.
What You Will Receive in the Merger
(See page 54)
(See page 54)
If the merger is completed, Mid-Wisconsin shareholders will receive 0.3727 shares of Nicolet common stock for each of their shares except in the circumstances described below.
Fractional Shares. No fractional shares of Nicolet common stock will be issued in connection with the merger. Instead, Nicolet will make a cash payment without interest to each shareholder of Mid-Wisconsin who would otherwise receive a fractional share of Nicolet common stock. The amount of such cash payment will be determined by multiplying the fraction of a share of Nicolet common stock otherwise issuable to such shareholder by $16.50, the value attributed to each share of Nicolet common stock solely for purposes of this transaction.
State-Restricted Shares. A record holder of shares of Mid-Wisconsin common stock who resides in a state in which shares of Nicolet common stock cannot be issued in the merger under that state’s securities laws without commercially unreasonable effort or expense will receive, in lieu of shares of Nicolet common stock, $6.15 in cash for each share of Mid-Wisconsin common stock he, she or it owns. In this joint proxy statement-prospectus, we refer to these shares as “state-restricted shares.” Nicolet will be permitted to issue its common stock in the merger based on a self-executing exemption that is available in all states except the District of Columbia, Minnesota, New Hampshire, New York, and Utah. In those states, a notice or other filing is required. Although Nicolet presently anticipates that it will be able to issue stock in the merger in those states as well without unreasonable commercial effort or expense, it is possible that it could encounter a condition to issuance that would make it economically unreasonable to issue shares to any shareholders residing in that state.
Cash-Out Shares. As a means of reducing the administrative burden and expense relating to servicing holders of small numbers of shares of Nicolet common stock after the merger, Nicolet intends to pay cash in the amount of $6.15 per share to Mid-Wisconsin shareholders who own 200 or fewer shares of Mid-Wisconsin common stock of record as of the closing date of the merger. In this joint proxy statement-prospectus, we refer to these shares as “cash-out shares.” This cash payment is in lieu of the issuance of shares of Nicolet common stock in the merger. Nicolet may adjust the 200-share threshold to the extent necessary to limit the amount of cash paid to Mid-Wisconsin shareholders in the merger to a maximum of $500,000. See “The Merger Agreement—What Mid-Wisconsin’s Shareholders Will Receive in the Merger” on page 54 for additional information.
Effect of the Merger on Mid-Wisconsin Options
(See page 56)
(See page 56)
As of September 30, 2012, there were 30,510 outstanding options to purchase Mid-Wisconsin common stock, with a weighted average exercise price of $28.13 per share. The merger agreement requires that all outstanding options to acquire Mid-Wisconsin common stock be cancelled effective upon the closing of the merger without payment.
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Your Expected Tax Treatment as a Result of the Merger
(See page ___)
(See page ___)
We expect that Mid-Wisconsin shareholders who receive only Nicolet common stock for their shares of Mid-Wisconsin common stock will not recognize any gain or loss for U.S. federal income tax purposes as a result of the merger. The completion of the merger is conditioned on receipt of a tax opinion from Bryan Cave LLP that the merger qualifies as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”) and that Mid-Wisconsin shareholders will not recognize gain or loss in connection with the exchange of their shares (except with respect to any cash received). The opinion will not bind the Internal Revenue Service, which could take a different view. This tax treatment will not apply to any Mid-Wisconsin shareholder who receives cash consideration in the merger in exchange for Mid-Wisconsin common stock, or who receives cash pursuant to the exercise of dissenters’ rights.
Any shareholder of Mid-Wisconsin who receives cash in the merger, as a result of perfecting dissenters’ rights under Wisconsin law, or otherwise, will recognize gain to the extent the cash received exceeds the shareholder’s tax basis in his or her Mid-Wisconsin common stock. See “Material Federal Income Tax Consequences of the Merger” for a more detailed discussion of the tax consequences of the merger.
Determining the actual tax consequences of the merger to you as an individual taxpayer can be complicated. The tax treatment will depend on your specific situation and many variables not within our control. For these reasons, we recommend that you consult your tax advisor concerning the federal and any applicable state, local or other tax consequences of the merger to you.
Dissenters’ Rights
(See page ___)
(See page ___)
If the merger is completed, shareholders of Mid-Wisconsin or Nicolet who do not vote for the merger and who follow certain procedures as required by Wisconsin law and described in this joint proxy statement-prospectus will be entitled to exercise dissenters’ rights and receive the “fair value” of their shares in cash under Wisconsin law. If you assert and perfect your dissenters’ rights, you will not receive any merger consideration but will be entitled to receive the “fair value” of your shares of stock in cash as determined in accordance with Wisconsin law. The “fair value” of your shares may be more or less than the consideration to be paid in the merger.Appendix B includes the relevant provisions of Wisconsin law regarding these rights. See “Dissenters’ Rights” beginning on page __ of this joint proxy statement-prospectus.
Comparative Stock Prices
(See page __ for Nicolet and page __ for Mid-Wisconsin)
(See page __ for Nicolet and page __ for Mid-Wisconsin)
Nicolet. The Nicolet common stock does not currently trade on any securities exchange or interdealer quotation system, but Nicolet plans to cause its common stock to be quoted on the Over-the-Counter Bulletin Board or other quotation system on or before the closing date of the merger. The last known sale price for a share of Nicolet common stock prior to the mailing of this joint proxy statement-prospectus was $ ______ on _________, 2013.
Mid-Wisconsin. The Mid-Wisconsin common stock currently trades on the OTCQB market of the OTC Markets Group, Inc. under the symbol “MWFS.” The last known sale price for a share of Mid-Wisconsin common stock prior to the mailing of this joint proxy statement-prospectus was $_____ on ___________, 2013.
Reasons for the Merger
(See page 35)
(See page 35)
Nicolet
In deciding to pursue an acquisition of Mid-Wisconsin, Nicolet’s management and board of directors noted, among other things, the following:
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• | information concerning the business, operations, earnings, asset quality, and financial condition of Mid-Wisconsin and Mid-Wisconsin Bank; |
• | the financial terms of the merger, including the relationship of the value of the consideration issuable in the merger to the market value, tangible book value, and earnings per share of Mid-Wisconsin’s common stock; |
• | the ability of Mid-Wisconsin’s operations to contribute to Nicolet’s earnings after the merger; |
• | the recent comparative earnings and financial performance of Mid-Wisconsin and Nicolet; |
• | the financial terms of recent business combinations in the financial services industry and a comparison of the multiples of selected combinations with the terms of the proposed merger; |
• | the various effects of Nicolet becoming a public reporting company under the regulation of the Securities and Exchange Commission (the “SEC”) as a result of the merger, including increased liquidity for holders of Nicolet’s common stock; |
• | evaluation of redemption strategies available to Mid-Wisconsin and Nicolet for the preferred stock issued by Mid-Wisconsin to the U.S. Treasury (“Treasury”) under the Troubled Asset Relief Program Capital Purchase Program (“TARP”); |
• | the compatibility of Mid-Wisconsin’s management team, strategic objectives and geographic footprint with those of Nicolet; |
• | the opportunity to leverage the infrastructure of Nicolet; |
• | the nonfinancial terms of the merger, including the treatment of the merger as a tax-free reorganization for U.S. federal income tax purposes; |
• | the opinion of Sandler O’Neill + Partners, L.P. (“Sandler O’Neill”) that the consideration to be received by Mid-Wisconsin’s common shareholders in the merger is fair, from a financial point of view, to the shareholders of Nicolet; and |
• | the likelihood of the merger being approved by applicable regulatory authorities without undue conditions or delay. |
Mid-Wisconsin
In deciding to engage in the merger transaction, Mid-Wisconsin’s board of directors consulted with its management, as well as its legal counsel and financial advisor, and considered numerous factors, including the following:
• | the value of the consideration to be received by Mid-Wisconsin’s shareholders compared to shareholder value for Mid-Wisconsin as an independent entity; |
• | information concerning business, operations, earnings, asset quality, and financial condition, prospects, and capital levels of Mid-Wisconsin and Nicolet, both individually and as a combined entity; |
• | the perceived risks and uncertainties attendant to Mid-Wisconsin’s operation as an independent banking organization, including risks and uncertainties related to the continuing deferral of dividends and interests on its Fixed Rate Cumulative Preferred Stock, Series A (the “Series A Preferred Stock”) and its Fixed Rate Cumulative Perpetual Preferred Stock, Series B (the “Series B Preferred Stock” and together with the Series A Preferred Stock, the “Preferred Stock”) and Floating/Fixed Rate Junior Subordinated Deferrable Interest Debentures, due 2035 (the “Debentures”), the continuing low-interest rate environment, operating under enhanced regulatory scrutiny and the formal written agreements between Mid-Wisconsin and the Federal Deposit Insurance Corporation (the “FDIC”) and the Wisconsin Department of Financial Institutions (“WDFI”), and increased capital requirements; |
• | the financial terms of recent business combinations in the financial services industry and a comparison of the multiples of selected combinations with the terms of the proposed merger; |
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• | the receipt of the stock consideration by Mid-Wisconsin’s shareholders on a tax-free basis; |
• | the opinion of Raymond James & Associates, Inc. (“Raymond James”) that the consideration to be received by Mid-Wisconsin’s common shareholders in the merger is fair from a financial point of view; and |
• | the likelihood of the merger being approved by applicable regulatory authorities without undue conditions or delay. |
Opinion of Mid-Wisconsin’s Financial Advisor
(See page 37)
(See page 37)
In deciding to approve the merger, the board of directors of Mid-Wisconsin considered the opinion of its financial advisor, Raymond James. Raymond James, an investment banking and financial advisory firm, has given a fairness opinion to the Mid-Wisconsin board of directors that the terms of the merger are fair, from a financial point of view, to the shareholders of Mid-Wisconsin. The opinion is based on and subject to the procedures, matters and limitations described in the opinion and other matters that Raymond James considered relevant. The fairness opinion is attached to this joint proxy statement-prospectus asAppendix C. We urge all shareholders of Mid-Wisconsin to read the entire opinion, which describes the procedures followed, matters considered and limitations on the review undertaken by Raymond James in providing its opinion.
Opinion of Nicolet’s Financial Advisor
(See page 45)
(See page 45)
In deciding to approve the merger, the board of directors of Nicolet considered the opinion of its financial advisor, Sandler O’Neill. Sandler O’Neill, an investment banking and financial advisory firm, has given a fairness opinion to the Nicolet board of directors that the consideration to be provided to Mid-Wisconsin’s common shareholders in the merger is fair, from a financial point of view, to the shareholders of Nicolet. The opinion is based on and subject to the procedures, matters and limitations described in the opinion and other matters that Sandler O’Neill considered relevant. The fairness opinion is attached to this joint proxy statement-prospectus asAppendix D. We urge all shareholders of Nicolet to read the entire opinion, which describes the procedures followed, matters considered and limitations on the review undertaken by Sandler O’Neill in providing its opinion.
Both Boards of Directors Recommend Shareholder Approval of the Merger Agreement
(See page __)
(See page __)
Mid-Wisconsin. The board of directors of Mid-Wisconsin has unanimously approved the merger agreement and believes that the merger is in the best interests of Mid-Wisconsin’s shareholders. The board unanimously recommends that you voteFOR approval of the merger agreement.
Nicolet. The board of directors of Nicolet has unanimously approved the merger agreement and believes that the merger is in the best interests of Nicolet’s shareholders. The board unanimously recommends that you voteFOR approval of the merger agreement.
Information About the Shareholders’ Meetings
(See pages __ and ___)
(See pages __ and ___)
A special meeting of the shareholders of Mid-Wisconsin will be held on _________, 2013, at __.m., central time. The meeting will be held at _____________________. At the meeting, the shareholders of Mid-Wisconsin will vote on the merger agreement described herein. If Mid-Wisconsin’s shareholders approve the merger agreement and the conditions to completing the merger are satisfied, we expect to complete the merger shortly after the special shareholders’ meeting.
A special meeting of the shareholders of Nicolet will be held on ________, 2013, at __.m., local time. The meeting will be held at _____________________. At the meeting, the shareholders of Nicolet will vote on the merger agreement described above and in the notice for the meeting. If Nicolet’s shareholders approve
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the merger agreement and the other conditions to completing the merger are satisfied, we expect to complete the merger shortly after the special shareholders’ meeting.
Quorum and Vote Required at the Meetings
(See pages __ and __)
(See pages __ and __)
Mid-Wisconsin. Shareholders who own Mid-Wisconsin common stock at the close of business on _________________, 2013, the record date, will be entitled to vote at the meeting. A majority of the issued and outstanding shares of Mid-Wisconsin common stock, as of the record date for the meeting, must be present in person or by proxy at the meeting in order for a quorum to be present. If a quorum is not present at the meeting, the meeting will be adjourned, and no vote will be taken until and unless a quorum is present.
Approval of the merger agreement requires the affirmative vote of a majority of the shares of Mid-Wisconsin common stock issued and outstanding on the record date.
Nicolet. Shareholders who own Nicolet common stock at the close of business on ______________, 2013, the record date, will be entitled to vote at the meeting. A majority of the issued and outstanding shares of Nicolet common stock, as of the record date for the meeting, must be present in person or by proxy at the meeting in order for a quorum to be present. If a quorum is not present at the meeting, the meeting will be adjourned, and no vote will be taken until and unless a quorum is present.
Approval of the merger agreement requires the affirmative vote of a majority of the shares of Nicolet common stock issued and outstanding on the record date.
Share Ownership of Management
(See page __)
(See page __)
Mid-Wisconsin. As of the record date for the special meeting, directors and executive officers of Mid-Wisconsin had or shared voting or dispositive power over approximately ____% of the issued and outstanding Mid-Wisconsin common stock. It is anticipated that these individuals will vote their shares of Mid-Wisconsin common stock in favor of the merger agreement. Certain of these individuals have entered into a written agreement with Nicolet providing that they will vote the shares over which they have voting power, subject to their fiduciary duties, in favor of the merger agreement. A copy of the form of such agreement is included as an exhibit to the merger agreement.
As of the record date for the meeting, directors and executive officers of Nicolet had or shared no voting or dispositive power over any of the issued and outstanding shares of Mid-Wisconsin common stock.
Nicolet. As of the record date for the special meeting, directors and executive officers of Nicolet had or shared voting or dispositive power over approximately ____% of the issued and outstanding Nicolet common stock. It is anticipated that these individuals will vote their shares of Nicolet common stock in favor of the merger agreement. Certain of these individuals have entered into a written agreement with Mid-Wisconsin providing that they will vote the shares over which they have voting power, subject to their fiduciary duties, in favor of the merger agreement. A copy of the form of such agreement is included as an exhibit to the merger agreement.
The directors and executive officers of Mid-Wisconsin do not have or share voting or dispositive power over any of the issued and outstanding shares of Nicolet common stock.
Structure of the Merger
(See page 33)
(See page 33)
• | Mid-Wisconsin Financial Services, Inc. and Mid-Wisconsin Bank will cease to exist after the merger. |
• | Subsequent to the merger, the business of Mid-Wisconsin Bank will be conducted through Nicolet National Bank. |
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• | Two current Mid-Wisconsin directors, Kim A. Gowey and Christopher Ghidorzi, will be appointed to Nicolet’s board of directors upon consummation of the merger. They will also be appointed to Nicolet National Bank’s board of directors upon consummation of the bank merger. |
We Must Obtain Regulatory Approval to Complete the Merger
(See page ___)
(See page ___)
We cannot complete the merger unless we receive the approval of the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and other applicable governmental authorities. The merger also requires approval from the Office of the Comptroller of the Currency (“OCC”) and WDFI and non-objection from the FDIC. All regulatory applications and notices required to be filed prior to the merger have been filed. Although we do not know of any reason why we could not obtain the necessary regulatory approvals in a timely manner, we cannot be certain whether or when we will obtain them.
We Must Meet Several Conditions to Complete the Merger
(See page ___)
(See page ___)
In addition to the required regulatory approvals, the merger will only be completed if certain mutual conditions are met, including the following:
• | approval by Mid-Wisconsin’s shareholders and Nicolet’s shareholders of the merger agreement by the required vote; |
• | approval of the merger and the transactions contemplated thereby by applicable regulatory authorities without imposing conditions that in the opinion of the board of directors of either Nicolet or Mid-Wisconsin would materially adversely affect the economic or business benefits of the transaction to either Nicolet or Mid-Wisconsin (a “Materially Burdensome Condition”); |
• | receipt of all third-party consents (other than the regulatory consents described above) necessary to consummate the merger, other than those that would not have a material adverse effect on the party required to obtain the consent; |
• | receipt by Mid-Wisconsin and Nicolet of an opinion from Bryan Cave LLP that the merger qualifies as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code; |
• | the absence of a stop order suspending the effectiveness of Nicolet’s registration statement under the Securities Act with respect to the shares of Nicolet common stock to be issued to the Mid-Wisconsin shareholders; |
• | the absence of an order, decree or injunction enjoining or prohibiting completion of the merger; |
• | Mid-Wisconsin’s redemption of its outstanding Preferred Stock in accordance with its terms or, if such redemption is not permitted by applicable regulatory authorities, the purchase of such stock by Nicolet for a maximum payment of $12.0 million; |
• | payment by Mid-Wisconsin of all accrued but unpaid interest on its Debentures or, if such payment is not permitted by applicable regulatory authorities, by Nicolet, and Nicolet’s execution of a supplemental indenture assuming the related indebtedness; |
• | receipt by each party of an opinion from its independent financial advisor (which opinion shall not have been withdrawn) that the consideration to be paid to Mid-Wisconsin’s shareholders in the merger is fair to that party’s shareholders from a financial standpoint; |
• | cancellation of all outstanding Mid-Wisconsin stock options; |
• | the appointment of Kim A. Gowey and Christopher Ghidorzi to Nicolet’s Board of Directors to serve following the merger; |
• | issuance of certain legal opinions by counsel for Mid-Wisconsin and Nicolet; and |
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• | each party’s certification to the other as to the continued accuracy of the representations and warranties contained in the merger agreement, compliance with covenants and closing conditions and the satisfaction of all other matters applicable to the transaction. |
If all regulatory approvals are received and the other conditions to completion are satisfied, Nicolet and Mid-Wisconsin contemplate that they will complete the merger in the second quarter of 2013, shortly after their special shareholders’ meetings.
Termination and Termination Fee
(See page ___)
(See page ___)
The merger agreement may be terminated, either before or after shareholder approval, under certain circumstances described in detail later in this joint proxy statement-prospectus. If either party terminates the merger agreement because Mid-Wisconsin’s board withdraws or changes its recommendation of the merger agreement, cancels the meeting at which Mid-Wisconsin’s shareholders or board will vote on the merger agreement, or recommends, approves or announces a transaction for the sale to or merger with an entity other than the Nicolet merger (such transaction, an “acquisition transaction”), or if Mid-Wisconsin terminates the agreement because it has received an offer for such an acquisition transaction, then Mid-Wisconsin (or its successor) must pay Nicolet a termination fee of $750,000. Similarly, if Mid-Wisconsin terminates the merger agreement because Nicolet’s board withdraws or changes its recommendation of the merger agreement, cancels the meeting at which Nicolet’s shareholders or board will vote on the merger agreement, or resolves to do any of those things, then Nicolet (or its successor) must pay Mid-Wisconsin a termination fee of $750,000. In addition, if the merger agreement is terminated by a party based on a material breach by the other party, then the breaching party will be required to pay the non-breaching party liquidated damages of $1.0 million plus documented out-of-pocket legal, investment banking, accounting, consulting and other expenses incurred by the non-breaching party in connection or associated with the preparation, negotiation, and execution of the merger agreement.
Mid-Wisconsin’s Directors and Executive Officers Have Interests in the Merger that Differ from its Shareholders’ Interests
(See page ___)
(See page ___)
The executive officers and directors of Mid-Wisconsin have interests in the merger in addition to their interests as shareholders of Mid-Wisconsin generally. The members of the Mid-Wisconsin board of directors knew about these additional interests and considered them when they adopted the merger agreement. Such interests include, among others:
• | payments to directors under Mid-Wisconsin’s Deferred Compensation Plan and its Director Retirement Benefit Policy; |
• | the continuation of employee benefits; |
• | provisions in the merger agreement relating to director and officer liability insurance and the indemnification of officers and directors of Mid-Wisconsin for certain liabilities; and |
• | the appointment of Kim Gowey and Christopher Ghidorzi to Nicolet’s Board of Directors. |
These interests are more fully described in this joint proxy statement-prospectus under the heading “The Merger Agreement — Interests of Certain Persons in the Merger” at page 60.
Employee Benefits of Mid-Wisconsin Employees after the Merger
(See page __)
(See page __)
Nicolet has agreed to offer to all current employees of Mid-Wisconsin who become Nicolet employees as a result of the merger substantially similar employee benefits to those that Nicolet offers to its employees in similar positions.
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Differences in Rights of Mid-Wisconsin’s Shareholders after the Merger
(See page ___)
(See page ___)
Mid-Wisconsin shareholders who receive Nicolet common stock in the merger will become Nicolet shareholders as a result of the merger. Their rights as shareholders after the merger will be governed by Wisconsin law and by Nicolet’s articles of incorporation and bylaws. The rights of Nicolet shareholders are different in certain respects from the rights of Mid-Wisconsin’s shareholders. The material differences are described later in this joint proxy statement-prospectus.
Accounting Treatment
(See page 65)
(See page 65)
Nicolet is required to account for the merger as a purchase transaction for accounting and financial reporting purposes under accounting principles generally accepted in the United States of America (“GAAP”). Under purchase accounting, the assets (including any identifiable intangible assets) and liabilities (including executory contracts and other commitments) of Mid-Wisconsin at the effective time of the merger will be recorded at their respective fair values and added to those of Nicolet. Any excess of purchase price over the fair values is recorded as goodwill. Any excess of the fair values over the purchase price is recorded in earnings as a bargain purchase gain. Consolidated financial statements of Nicolet issued after the merger will reflect those fair values and will not be restated retroactively to reflect the historical consolidated financial position or results of operations of Mid-Wisconsin.
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UNAUDITED COMPARATIVE PER SHARE DATA
The following summary presents per share information for Nicolet and Mid-Wisconsin on a historical, pro forma combined and pro forma diluted equivalent basis for the periods and as of the dates indicated below. The pro forma information gives effect to the merger using the purchase method of accounting. This information should be read in conjunction with the companies’ historical financial statements and related notes as well as financial data included elsewhere in this joint proxy statement-prospectus. The pro forma information should not be relied upon as being indicative of the historical results the companies would have had if the merger had occurred before such periods or the future results that the companies will experience after the merger.
The pro forma combined net income per diluted share has been computed based on the diluted average number of outstanding common shares of Nicolet adjusted for the additional shares to be issued in connection with the acquisition of Mid-Wisconsin, assuming no Mid-Wisconsin shares are converted to cash under the limited circumstances provided for in the merger agreement. The Mid-Wisconsin merger equivalent net income per diluted share is based on the number of shares of Nicolet common stock into which each share of Mid-Wisconsin common stock will be converted in the merger.
The pro forma combined net book value per share is based upon the pro forma combined equity of Nicolet divided by the pro forma number of outstanding shares of the combined companies. The Mid-Wisconsin merger equivalent net book value per share is based on the number of shares of Nicolet common stock into which each share of Mid-Wisconsin common stock will be converted in the merger.
The foregoing assumes that the shares of Nicolet common stock to be issued will have a value of $16.50 per share, which was the value assigned to the Nicolet common stock in the merger agreement.
Nine Months Ended September 30, 2012 | Year Ended December 31, 2011 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Net income per common share: | ||||||||||
Income (loss) per diluted common share: | ||||||||||
Nicolet | $ | 0.34 | $ | 0.01 | ||||||
Mid-Wisconsin | (1.63 | ) | (2.78 | ) | ||||||
Pro forma combined | (0.11 | ) | (0.68 | ) | ||||||
Mid-Wisconsin merger equivalent(1) | (0.04 | ) | (0.25 | ) |
As of September 30, 2012 | As of December 31, 2011 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Balance Sheet Data: | ||||||||||
Net book value per common share: | ||||||||||
Nicolet | $ | 15.38 | $ | 14.83 | ||||||
Mid-Wisconsin | 16.04 | 17.65 | ||||||||
Pro forma combined | 18.61 | 17.79 | ||||||||
Mid-Wisconsin merger equivalent(1) | 6.94 | 6.63 |
(1) | Calculated by multiplying the pro forma combined information by the exchange ratio of 0.3727. |
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SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated balance sheet and statements of income as of and for the nine months ended September 30, 2012 and for the year ended December 31, 2011 have been prepared to reflect the acquisition by Nicolet of Mid-Wisconsin after giving effect to the adjustments described in the notes to the pro forma condensed consolidated financial statements. In the acquisition, Mid-Wisconsin common shareholders will receive total consideration of up to 617,608 shares of Nicolet common stock, subject to adjustments as set forth herein, having an estimated aggregate value of approximately $10.19 million. The foregoing assumes that the shares of Nicolet common stock to be issued will have a value of $16.50 per share, which is the per-share value that was assigned to Nicolet common stock in the merger agreement, and assumes no Mid-Wisconsin shares are converted to cash under the limited circumstances provided for in the merger agreement.
The acquisition will be accounted for as a purchase transaction. Under the acquisition method of accounting, Nicolet records the assets and liabilities of the acquired entities at their fair values on the closing date of the acquisition. The pro forma condensed consolidated balance sheet has been prepared assuming the transaction was consummated on September 30, 2012. The pro forma condensed consolidated statement of income has been prepared assuming the transaction was consummated on January 1, 2011.
The selected unaudited pro forma condensed consolidated financial information is presented for illustrative purposes only and does not indicate either the operating results that would have occurred had the acquisition been consummated before September 30, 2012 or at January 1, 2011, as the case may be, or future results of operations or financial condition. The selected unaudited pro forma condensed financial information is based upon assumptions and adjustments that Nicolet believes are reasonable. Only such adjustments as have been noted in the accompanying footnotes have been applied in order to give effect to the proposed transaction described in this joint proxy statement-prospectus. Such assumptions and adjustments are subject to change as future events materialize and fair value estimates are refined.
These selected unaudited pro forma condensed consolidated financial statements should be read in conjunction with Mid-Wisconsin’s Annual Report on Form 10-K for the year ended December 31, 2011, and its Form 10-Q for the nine months ended September 30, 2012, which are attached asAppendices E and F, respectively, to this joint proxy statement-prospectus as well as the financial information for Nicolet, including the audited consolidated financial statements for the year ended December 31, 2011 and related notes and the unaudited consolidated financial statements for the nine months ended September 30, 2012 beginning on page F-1 of this joint proxy statement-prospectus.
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NICOLET BANKSHARES, INC. AND SUBSIDIARIES
COMBINED WITH MID-WISCONSIN FINANCIAL SERVICES, INC. AND SUBSIDIARY
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
AS OF SEPTEMBER 30, 2012
(Dollars in Thousands)
COMBINED WITH MID-WISCONSIN FINANCIAL SERVICES, INC. AND SUBSIDIARY
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
AS OF SEPTEMBER 30, 2012
(Dollars in Thousands)
Historical | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Nicolet | Mid- Wisconsin | Pro Forma Adjustments | Pro Forma Combined | ||||||||||||||||
Assets | |||||||||||||||||||
Cash and due from banks | $ | 27,552 | $ | 33,352 | $ | (13,700 | )(1,2) | $ | 47,204 | ||||||||||
Investment securities | 57,075 | 110,335 | (600 | )(4) | 166,810 | ||||||||||||||
Loans held for sale | 3,484 | 2,287 | — | 5,771 | |||||||||||||||
Loans, net | 539,217 | 297,060 | (14,071 | )(4) | 822,206 | ||||||||||||||
Other real estate owned | 617 | 4,472 | (2,500 | )(4) | 2,589 | ||||||||||||||
Goodwill and intangible assets | 3,152 | — | 6,100 | (4) | 9,252 | ||||||||||||||
Other assets | 51,705 | 16,556 | 6,040 | (4, 5) | 74,301 | ||||||||||||||
Total assets | $ | 682,802 | $ | 464,062 | $ | (18,731 | ) | $ | 1,128,133 | ||||||||||
Liabilities and Equity | |||||||||||||||||||
Deposits | $ | 554,858 | $ | 364,404 | $ | — | $ | 919,262 | |||||||||||
Junior subordinated debentures | 6,186 | 10,310 | (5,500 | )(4) | 10,996 | ||||||||||||||
Other borrowings & debt | 39,525 | 49,228 | 2,400 | (4) | 91,153 | ||||||||||||||
Other liabilities | 5,354 | 3,191 | (1,200 | )(2) | 7,345 | ||||||||||||||
Total liabilities | 605,923 | 427,133 | (4,300 | ) | 1,028,756 | ||||||||||||||
Equity | |||||||||||||||||||
Preferred equity | 24,400 | 10,349 | (10,349 | )(1) | 24,400 | ||||||||||||||
Common equity | 52,349 | 26,580 | (4,082 | )(1,3) | 74,847 | ||||||||||||||
Stockholders’ equity | 76,749 | 36,929 | (14,431 | ) | 99,247 | ||||||||||||||
Noncontrolling interest | 130 | — | — | 130 | |||||||||||||||
Total equity and non-controlling interest | 76,879 | 36,929 | (14,431 | ) | 99,377 | ||||||||||||||
$ | 682,802 | $ | 464,062 | $ | (18,731 | ) | $ | 1,128,133 |
(1) | Mid-Wisconsin’s redemption by consummation of its outstanding Preferred Stock for cash at $10,500 stated value (which includes $151 of unaccreted discount against common equity). Common equity and cash also reflect $2 million estimated one-time merger related expenses. |
(2) | Payment by Mid-Wisconsin by consummation of accrued and unpaid dividends on Preferred Stock $900 and of accrued and unpaid interest on its Debentures $300. |
(3) | Issuance of 617,608 shares of Nicolet common stock (with an assumed market value of $16.50 per share) for total consideration of $10,191, in exchange for 100% of the common equity of Mid-Wisconsin, assuming no Mid-Wisconsin shares are converted to cash under the limited circumstances provided for in the merger agreement. Net adjustments of footnotes (4) and (5) result in $1,931 debit to common equity. Mid-Wisconsin common equity eliminated ($26,429). Excess of the fair value of net assets acquired over the purchase price, $14,389, recorded directly to common equity. |
(4) | Adjustments to mark acquired assets and assumed liabilities to estimated fair values at September 30, 2012 (All such estimates are subject to change as fair market value estimates are refined): a) Mid-Wisconsin’s investments ($600), fixed assets $5,000, long-term debt $2,400 and junior subordinated debentures ($5,500); b) Core deposit intangible estimated at $6,100; c) Estimated fair market value adjustment to the loan portfolio of ($24,600) and other real estate owned of ($2,500) and reversal of Mid-Wisconsin’s allowances of $10,529 (net $16,571 pre-tax credit). |
(5) | A deferred tax estimate of 35% or $1,040 debit, calculated on the pre-tax aggregate of the fair value marks totaling $2,971 credit. |
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NICOLET BANKSHARES, INC. AND SUBSIDIARIES
COMBINED WITH MID-WISCONSIN FINANCIAL SERVICES, INC. AND SUBSIDIARY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME (Unaudited)
(In Thousands, Except Per Share Data)
COMBINED WITH MID-WISCONSIN FINANCIAL SERVICES, INC. AND SUBSIDIARY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME (Unaudited)
(In Thousands, Except Per Share Data)
Nine months ended September 30, 2012 | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Historical | |||||||||||||||||||
Nicolet | Mid- Wisconsin | Pro Forma Adjustments | Pro Forma Combined | ||||||||||||||||
Interest income | $ | 21,059 | $ | 14,836 | $ | — | $ | 35,895 | |||||||||||
Interest expense | 5,006 | 3,671 | 187 | (2,4) | 8,864 | ||||||||||||||
Net interest income | 16,053 | 11,165 | — | 27,031 | |||||||||||||||
Provision for loan loss | 3,350 | 3,680 | — | (5) | 7,030 | ||||||||||||||
Net interest income after provision for loan losses | 12,703 | 7,485 | — | 20,001 | |||||||||||||||
Other income | 7,985 | 2,911 | — | 10,896 | |||||||||||||||
Other expense | 17,722 | 11,458 | 928 | (1,3) | 30,108 | ||||||||||||||
Income from continuing operations before income taxes | 2,966 | (1,062 | ) | — | 789 | ||||||||||||||
Income taxes | 828 | 1,152 | (1,712 | )* | 268 | ||||||||||||||
Income from continuing operations | 2,138 | (2,214 | ) | — | 521 | ||||||||||||||
Net income from noncontrolling interest | 39 | — | — | 39 | |||||||||||||||
Preferred stock dividends and discount accretion | 915 | 487 | (487 | )(6) | 915 | ||||||||||||||
Net income available to common shareholders | $ | 1,184 | $ | (2,701 | ) | $ | (433 | ) | |||||||||||
Weighted average number of common shares outstanding — | |||||||||||||||||||
basic | 3,449 | 1,657 | (1,039 | )(7) | 4,067 | ||||||||||||||
diluted | 3,465 | 1,657 | (1,039 | )(7) | 4,067 | ||||||||||||||
Net income (loss) per common share from continuing operations — | |||||||||||||||||||
basic | $ | 0.34 | $ | (1.63 | ) | $ | (0.11 | ) | |||||||||||
diluted | $ | 0.34 | $ | (1.63 | ) | $ | (0.11 | ) |
Year Ended December 31, 2011 | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Historical | |||||||||||||||||||
Nicolet | Mid- Wisconsin | Pro Forma Adjustments | Pro Forma Combined | ||||||||||||||||
Interest income | $ | 29,830 | $ | 22,039 | $ | — | $ | 51,869 | |||||||||||
Interest expense | 8,383 | 6,485 | 250 | (2,4) | 15,118 | ||||||||||||||
Net interest income | 21,447 | 15,554 | — | 36,751 | |||||||||||||||
Provision for loan loss | 6,600 | 4,750 | — | (5) | 11,350 | ||||||||||||||
Net interest income after provision for loan losses | 14,847 | 10,804 | — | 25,401 | |||||||||||||||
Other income | 8,444 | 4,287 | — | 12,731 | |||||||||||||||
Other expense | 21,443 | 17,187 | 1,420 | (1,3) | 40,050 | ||||||||||||||
Income from continuing operations before income taxes | 1,848 | (2,096 | ) | — | (1,918 | ) | |||||||||||||
Income taxes | 318 | 1,861 | (2,831 | )* | (652 | ) | |||||||||||||
Income from continuing operations | 1,530 | (3,957 | ) | — | (1,266 | ) | |||||||||||||
Net income from noncontrolling interest | 40 | — | — | 40 | |||||||||||||||
Preferred stock dividends and discount accretion | 1,461 | 644 | (644 | )(6) | 1,461 | ||||||||||||||
Net income (loss) available to common shareholders | $ | 29 | $ | (4,601 | ) | — | $ | (2,767 | ) | ||||||||||
Weighted average number of common shares outstanding — | |||||||||||||||||||
basic | 3,469 | 1,654 | (1,036 | )(7) | 4,087 | ||||||||||||||
diluted | 3,488 | 1,654 | (1,036 | )(7) | 4,087 | ||||||||||||||
Net income (loss) per common share from continuing operations — | |||||||||||||||||||
basic | $ | 0.01 | $ | (2.78 | ) | $ | (0.68 | ) | |||||||||||
diluted | $ | 0.01 | $ | (2.78 | ) | $ | (0.68 | ) |
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* | Reflects the tax impact at a tax rate of 34%. |
(1) | Estimated depreciation expense resulting from premises pro forma adjustment using straight-line over 25-year estimated useful life. |
(2) | Estimated fair value adjustment on FHLB advances assuming straight-line over 3-year weighted average life. |
(3) | Estimated amortization of core deposit intangible resulting from the fair value pro forma adjustment amortized over 10 years using sum-of-years-digits. |
(4) | Estimated fair value adjustment on Trust Preferred Securities (TruPS) using straight line amortization over 10 years. |
(5) | No adjustment for the provision for loan loss is reflected in the pro-forma statement of income. Upon consummation of this transaction, Nicolet expects reduction in the provision. |
(6) | Reversal of dividends on Mid-Wisconsin’s outstanding Preferred Stock, which will be repurchased prior to consummation as part of the transaction in accordance with the terms of the merger agreement. |
(7) | Mid-Wisconsin common stock will be exchanged in the merger at a ratio of 0.3727 shares of Nicolet common stock for each share of Mid-Wisconsin common stock. |
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RISK FACTORS
In addition to the other information included in this joint proxy statement-prospectus, you should carefully consider the matters described below in determining whether to adopt and approve the merger agreement.
Risk Relating to the Merger
The merger consideration is fixed despite any changes in Nicolet’s or Mid-Wisconsin’s stock prices.
Each share of Mid-Wisconsin common stock owned by Mid-Wisconsin shareholders will be converted into the right to receive 0.3727 shares of Nicolet common stock or, in certain limited circumstances, $6.15 in cash. The market price of the Nicolet common stock received, as well as the market price of the Mid-Wisconsin common stock currently owned, may vary between the date of this joint proxy statement-prospectus, the date of Mid-Wisconsin’s special meeting and the closing of the merger. Such variations in the prices of Nicolet and Mid-Wisconsin common stock may result from changes in the business, operations or prospects of Nicolet or Mid-Wisconsin, regulatory considerations, general market and economic conditions as well as other factors. Despite any such variations, the merger consideration Mid-Wisconsin’s shareholders are entitled to receive will not change.
In addition, there is currently no established public trading market for shares of Nicolet common stock, and the market for the Mid-Wisconsin common stock on the OTCQB market of the OTC Markets Group, Inc. has been illiquid and irregular. There is no guarantee that a more liquid or regular market for Nicolet common stock will develop after the merger. At the time of the special meeting, you will not know the exact market value of Nicolet common stock. See “The Merger Agreement — What Mid-Wisconsin Shareholders will Receive in the Merger” at page 54.
Because there is no public market for Nicolet common stock, it is difficult to determine how the fair value of Nicolet common stock compares with the merger consideration.
The outstanding shares of Nicolet common stock are privately held and are not traded in any public market. This lack of public market makes it difficult to determine the fair value of Nicolet common stock. Nicolet’s and Mid-Wisconsin’s boards of directors, respectively, did obtain fairness opinions from their financial advisors; however, because there is no public market for Nicolet’s common stock such opinions may not be indicative of the fair value of the shares of Nicolet common stock.
Combining our two companies may be more difficult, costly, or time-consuming than we expect.
Nicolet and Mid-Wisconsin have operated, and, until completion of the merger, will continue to operate, independently. It is possible that the integration process could result in the loss of key employees or disruption of each company’s ongoing business or inconsistencies in standards, procedures and policies that would adversely affect our ability to maintain relationships with clients and employees or to achieve the anticipated benefits of the merger. If we have difficulties with the integration process, we might not achieve the economic benefits we expect to result from the acquisition. As with any merger of banking institutions, there also may be business disruptions that cause the combined entity to lose customers or cause customers to take their deposits out of our banks and move their business to other financial institutions.
Nicolet and Mid-Wisconsin will be subject to business uncertainties while the merger is pending, which could adversely affect their respective businesses.
Uncertainty about the effect of the merger on employees and customers may have an adverse effect on Mid-Wisconsin and Nicolet and consequently on the business and stock price of the combined company after the merger. Although Mid-Wisconsin and Nicolet intend to take steps to reduce any adverse effects, these uncertainties may impair their ability to attract, retain, and motivate key personnel until the merger is consummated and for a period of time thereafter, and could cause customers and others that deal with them to seek to change their existing business relationships. Employee retention could be particularly challenging during the merger, as employees may experience uncertainty about their roles in the combined company
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following the merger. If key employees depart because of issues relating to the perceived uncertainty and difficulty of integration or a desire not to remain with the combined company, the combined company’s business following the merger could be harmed and the market price of its common stock could decrease.
Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated.
The merger must be approved by the Federal Reserve, the OCC and the WDFI. The Federal Reserve, the OCC and the WDFI will consider, among other factors, the competitive impact of the merger, our financial and managerial resources and the convenience and needs of the communities to be served. As part of that consideration, we expect that the Federal Reserve, the OCC and the WDFI will review the capital position, safety and soundness, and legal and regulatory compliance matters and Community Reinvestment Act (“CRA”) matters. There can be no assurance as to whether other necessary approvals will be received, the timing of those approvals, or whether any conditions will be imposed.
The market price of Nicolet common stock after the merger may be affected by factors different from those affecting the market price of Mid-Wisconsin common stock or the Nicolet common stock currently.
The businesses of Nicolet and Mid-Wisconsin differ in some respects and, accordingly, the results of operations of Nicolet and the market price of Nicolet’s shares of common stock after the merger may be affected by factors different from those currently affecting the independent results of operations of each of Nicolet or Mid-Wisconsin. For a discussion of the businesses of Nicolet and Mid-Wisconsin and of certain factors to consider in connection with those businesses, see, “Information About Mid-Wisconsin,” at page 145, as well as, “Information About Nicolet,” at page __.
The merger agreement limits Mid-Wisconsin’s ability to pursue alternatives to the merger.
The merger agreement contains provisions that limit Mid-Wisconsin’s ability to discuss competing third-party proposals to acquire all or a significant part of Mid-Wisconsin. In addition, Mid-Wisconsin has agreed to pay Nicolet a fee of $750,000 if the transaction is terminated because Mid-Wisconsin decides to pursue another acquisition transaction, among other things. These provisions might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of Mid-Wisconsin from considering or proposing that acquisition, even if it were prepared to pay consideration with a higher per share price than that proposed in the merger, or might result in a potential competing acquirer proposing to pay a lower per share price to acquire Mid-Wisconsin than it might otherwise have proposed to pay.
Certain directors and executive officers of Mid-Wisconsin have interests in the merger other than their interests as shareholders.
Certain directors and executive officers of Mid-Wisconsin have interests in the merger other than their interests as shareholders. The board of directors of Mid-Wisconsin was aware of these interests at the time it approved the merger. These interests may cause Mid-Wisconsin’s directors and executive officers to view the merger proposal differently than you may view it. See, “The Merger Agreement — Interests of Certain Persons in the Merger,” at page 60.
You will experience a substantial reduction in percentage ownership and voting power with respect to your shares as a result of the merger.
Mid-Wisconsin shareholders will experience a substantial reduction in their respective percentage ownership interests and effective voting power through their stock ownership in Nicolet relative to their percentage ownership interest in Mid-Wisconsin prior to the merger. If the merger is consummated, discounting the potential impact of the exercise of dissenters’ rights or the payment of cash for Mid-Wisconsin shares under the terms of the merger agreement, current Mid-Wisconsin shareholders would own approximately 15.1% of Nicolet’s issued and outstanding common stock, on a fully diluted basis, based on the number of shares of outstanding Nicolet common stock as of September 30, 2012 and assuming no Mid-Wisconsin shares are converted to cash under the limited circumstances provided for in the merger agreement.
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Accordingly, even if such shareholders were to vote as a group, such a group could still be outvoted by other Nicolet shareholders.
In addition, the current holders of Nicolet common stock will have their ownership interest in Nicolet diluted by the issuance of common stock to the common stock holders of Mid-Wisconsin. Consequently, while the current Nicolet shareholders will still own a majority of the Nicolet common stock after the merger, they will have less voting power per share. See, “The Merger Agreement — What Mid-Wisconsin Shareholders will Receive in the Merger,” at page 54.
Risk Relating to Nicolet and the Combined Company
Nicolet’s recent results may not be indicative of its future results.
Nicolet may not be able to sustain its historical rate of growth and may not even be able to grow its business at all following the merger. In addition, Nicolet’s recent growth may distort some of its historical financial ratios and statistics. In the future, Nicolet may not have the benefit of a generally predictable interest rate environment or the ability to find suitable expansion opportunities. Various factors, such as economic conditions, regulatory and legislative considerations and competition, may also impede or prohibit Nicolet’s ability to expand its market presence. If Nicolet experiences a significant decrease in its historical rate of growth, its results of operations, financial condition, and share price may be adversely affected due to the prolonged low-rate environment pressuring net interest margins and to a high percentage of its operating costs, such as salaries, lease payment and insurance premiums, being fixed expenses.
Nicolet’s financial projections are based on numerous assumptions about future events and its actual financial performance may differ materially from its projections if its assumptions are inaccurate.
If the communities in which Nicolet operates do not grow or if the prevailing economic conditions locally or nationally are less favorable than we have assumed, Nicolet’s ability to reduce its non-performing loans and other real estate owned (“OREO”) and implement its business strategies may be adversely affected and its actual financial performance may be materially different from its projections.
Moreover, Nicolet cannot give any assurance that it will benefit from any market growth or favorable economic conditions in its market areas even if they do occur. If its senior management team is unable to provide the effective leadership necessary to implement its strategic plan, including the successful integration of Mid-Wisconsin, its actual financial performance may be materially adversely different from its projections. Additionally, to the extent that any component of its strategic plan requires regulatory approval, if it is unable to obtain necessary approval, it will be unable to completely implement its strategy, which may adversely affect its actual financial results. Nicolet’s inability to successfully implement its strategic plan could adversely affect the price of its common stock.
Nicolet may experience increased delinquencies and credit losses, which could have a material adverse effect on its capital, financial condition, and results of operations.
Like other lenders, Nicolet faces the risk that its customers will not repay their loans. A customer’s failure to repay Nicolet is usually preceded by missed monthly payments. In some instances, however, a customer may declare bankruptcy prior to missing payments, and, following a borrower filing bankruptcy, a lender’s recovery of the credit extended is often limited. Since its loans are secured by collateral, Nicolet may attempt to seize the collateral when and if customers default on their loans. However, the value of the collateral may not equal the amount of the unpaid loan, and Nicolet may be unsuccessful in recovering the remaining balance from its customers. Rising delinquencies and rising rates of bankruptcy in its market area, generally and among its customers specifically, can be precursors of future charge-offs and may require Nicolet to increase its allowance for loan losses. Higher charge-off rates and an increase in its allowance for loan losses may hurt its overall financial performance if Nicolet is unable to increase revenue to compensate for these losses and may also increase its cost of funds.
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The impact of the current economic environment on performance of other financial institutions in its markets; actions taken by its competitors to address the current economic downturn; and public perception of and confidence in the economy generally, and the banking industry specifically, may present significant challenges for Nicolet and could adversely affect its performance.
Nicolet is operating in a challenging and uncertain economic environment, including generally uncertain national conditions and adverse local conditions in its primary markets. Financial institutions continue to be affected by decreasing valuations in real estate markets and constrained financial markets. While Nicolet is taking steps to decrease and limit its exposure to certain types of loans secured by commercial real estate collateral, Nicolet nonetheless retains direct exposure to the real estate markets, and is affected by these events. Continued declines in real estate values and financial stress on borrowers as a result of the uncertain economic environment, including job losses, could have an adverse effect on its borrowers or their customers, which could adversely affect its financial condition and results of operations.
The impact of events in recent years relating to housing and commercial real estate markets has not been limited to those directly involved in the real estate industry, but rather it has affected a number of related businesses such as building materials suppliers, equipment leasing firms, and real estate attorneys, among others. All of these affected businesses have banking relationships, and when their businesses suffer from recession, the banking relationship suffers as well.
In addition, the market value of the real estate securing Nicolet’s loans as collateral has been adversely affected by the slowing economy and unfavorable changes in economic conditions in its market areas and could be further adversely affected in the future. As of September 30, 2012, approximately 38% of its loans were secured by commercial-based real estate and 24% of its loans receivable were secured by residential real estate. Any sustained period of increased payment delinquencies, foreclosures, or losses caused by the adverse market and economic conditions, including the downturn in the real estate market, in its markets will continue to adversely affect the value of its assets, revenues, results of operations, and financial condition. Its market area has for the past several years experienced, and certain portions of its market area are currently experiencing such a sustained economic downturn, and if it continues or if economic conditions otherwise worsen, its earnings could be further adversely affected.
The overall deterioration in economic conditions may subject Nicolet to increasing regulatory scrutiny. In addition, further deterioration in national economic conditions or the economic conditions in its local markets could drive losses beyond the amount provided for in its allowance for loan losses, resulting in the following other consequences: increased loan delinquencies, problem assets, and foreclosures; decline in demand for its products and services; decrease in deposits, adversely affecting its liquidity position; and decline in value of collateral, reducing its customers’ borrowing power and the value of assets and collateral associated with its existing loans. These consequences could also result in decreased earnings or a decline in the market value of Nicolet’s common stock. As a community bank, Nicolet National Bank is less able to spread the risk of unfavorable economic conditions than larger national or regional banks. Moreover, Nicolet cannot give any assurance that it will benefit from any market growth or favorable economic conditions in its primary market areas even if they do occur.
Nicolet’s business strategy includes the continuation of significant growth plans, and its financial condition and results of operations could be negatively affected if it fails to manage its growth effectively.
Nicolet has grown over the past several years and intends to continue to pursue a significant growth strategy for its business. Nicolet’s prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in significant growth stages of development. Nicolet may not be able to further expand its market presence in existing markets or to enter new markets successfully, nor can it guarantee that any such expansion would not adversely affect its results of operations. Failure to manage growth effectively could have a material adverse effect on the business, future prospects, financial condition or results of operations of Nicolet, and could adversely affect its ability to successfully implement business strategies. Also, if such growth occurs more slowly than anticipated or declines, Nicolet’s operating results could be materially adversely affected.
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Nicolet’s ability to grow successfully will depend on a variety of factors including the continued availability of desirable business opportunities, the competitive responses from other financial institutions in its market areas and the ability to manage its growth. While management believes it has the management resources and internal systems in place to manage future growth successfully, there can be no assurance that growth opportunities will be available or that any growth will be managed successfully.
Nicolet is subject to extensive regulation that could limit or restrict its activities.
Nicolet operates in a highly regulated industry and is subject to examination, supervision, and comprehensive regulation by various regulatory agencies. Its compliance with these regulations, including compliance with its regulatory commitments, is costly and restricts certain of its activities, including the declaration and payment of cash dividends to stockholders, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits, and locations of offices. Nicolet is also subject to capitalization guidelines established by its regulators, which require Nicolet to maintain adequate capital to support its growth and operations.
The laws and regulations applicable to the banking industry have recently changed and may continue to change, and Nicolet cannot predict the effects of these changes on its business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, the cost of compliance could adversely affect its ability to operate profitably.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was enacted on July 21, 2010. The full implications of the Dodd-Frank Act, or its implementing regulations, on Nicolet’s business are unclear at this time, but it may adversely affect its business, results of operations, and the underlying value of its stock. The full effect of this legislation will not be even reasonably certain until all implementing regulations are promulgated, which could take several years in some cases.
Some or all of the changes, including the new rulemaking authority granted to the newly-created Consumer Financial Protection Bureau, may result in greater reporting requirements, assessment fees, operational restrictions, capital requirements, and other regulatory burdens for Nicolet National Bank and Nicolet, and many of their competitors that are not banks or bank holding companies may remain free from such limitations. This could affect Nicolet’s ability to attract and maintain depositors, to offer competitive products and services, and to expand its business.
Congress may consider additional proposals to substantially change the financial institution regulatory system and to expand or contract the powers of banking institutions and bank holding companies. Such legislation may change existing banking statutes and regulations, as well as the current operating environment significantly. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand its permissible activities, or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. Nicolet cannot predict whether new legislation will be enacted and, if enacted, the effect that it, or any regulations, would have on its business, financial condition, or results of operations.
Its financial condition and results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve. Actions by monetary and fiscal authorities, including the Federal Reserve, could have an adverse effect on its deposit levels, loan demand, stock price, ability to pay dividends, or business and earnings. See “Supervision and Regulation” at page 147.
Changes in the interest rate environment could reduce its net interest income, which could reduce its profitability.
As a financial institution, Nicolet’s earnings significantly depend on net interest income, which is the difference between the interest income that it earns on interest-earning assets, such as investment securities and loans, and the interest expense that it pays on interest-bearing liabilities, such as deposits and borrowings. Therefore, any change in general market interest rates, including changes in federal fiscal and monetary policies, affects Nicolet more than non-financial institutions and can have a significant effect on its net interest income and total income. Its assets and liabilities may react differently to changes in overall market rates or conditions because there may be mismatches between the repricing or maturity characteristics of the assets
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and liabilities. As a result, an increase or decrease in market interest rates could have material adverse effects on its net interest margin and results of operations.
In addition, Nicolet cannot predict whether interest rates will continue to remain at present levels. Changes in interest rates may cause significant changes, up or down, in its net interest income. Depending on its portfolio of loans and investments, its results of operations may be adversely affected by changes in interest rates. If there is a substantial increase in interest rates, its investment portfolio is at risk of experiencing price declines that may negatively impact Nicolet’s total capital position of Nicolet through changes in other comprehensive income. In addition, any significant increase in prevailing interest rates could adversely affect its mortgage banking business because higher interest rates could cause customers to request fewer refinancings and purchase money mortgage originations.
Changes in the allowance for loan losses could adversely affect the profitability of Nicolet and Nicolet National Bank.
Nicolet’s success depends to a significant extent upon the quality of its assets, particularly loans. In originating loans, there is a substantial likelihood that Nicolet will experience credit losses. The risk of loss will vary with, among other things, general economic conditions, the type of loan, the creditworthiness of the borrower over the term of the loan, and, in the case of a collateralized loan, the quality of the collateral for the loan.
Its loan customers may not repay their loans according to the terms of these loans, and the collateral securing the payment of these loans may be insufficient to assure repayment. As a result, Nicolet may experience significant loan losses, which could have a material adverse effect on its operating results. Management makes various assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of its loans. Nicolet maintains an allowance for loan losses in an attempt to cover any loan losses that may occur. In determining the size of the allowance, it relies on an analysis of its loan portfolio based on historical loss experience, volume and types of loans, trends in classification, volume and trends in delinquencies and non-accruals, national and local economic conditions, and other pertinent information. Nicolet has reviewed Mid-Wisconsin’s loan portfolio and allowance for loan losses and will include Mid-Wisconsin’s portfolio in its analysis after the merger. However, Nicolet cannot predict what effect, if any, the integration of Mid-Wisconsin’s loan portfolio will have on Nicolet.
If management’s assumptions are wrong, or if the inclusion of Mid-Wisconsin’s loan portfolio after the merger results in unanticipated asset quality issues, Nicolet’s current allowance may not be sufficient to cover future loan losses, and it may need to make adjustments to allow for different economic conditions or adverse developments in its loan portfolio. Material additions to its allowance would materially decrease its net income. Nicolet expects its allowance to continue to fluctuate; however, given current and future market conditions, Nicolet can make no assurance that its allowance will be adequate to cover future loan losses.
In addition, federal and state regulators periodically review its allowance for loan losses and may require Nicolet to increase its provision for loan losses or recognize further loan charge-offs, based on judgments different than those of its management. Any increase in its allowance for loan losses or loan charge-offs as required by these regulators could have a negative effect on its operating results.
Nicolet currently holds a significant amount of bank-owned life insurance.
At September 30, 2012, Nicolet held $18.5 million of bank-owned life insurance on certain key and former employees and executives, with a cash surrender value of $18.5 million. The eventual repayment of the cash surrender value is subject to the ability of the various insurance companies to pay death benefits or to return the cash surrender value to Nicolet if needed for liquidity purposes. Nicolet monitors the financial strength of the various companies with whom it carries these policies. However, any one of these companies could experience a decline in financial strength, which could impair its ability to pay benefits or return Nicolet’s cash surrender value. If Nicolet needs to liquidate these policies for liquidity purposes, it would be subject to taxation on the increase in cash surrender value and penalties for early termination, both of which would adversely impact earnings.
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Nicolet is subject to liquidity risk in its operations
Liquidity risk is the possibility of being unable, at a reasonable cost and within acceptable risk tolerances, to pay obligations as they come due, to capitalize on growth opportunities as they arise, or to pay regular dividends because of an inability to liquidate assets or obtain adequate funding on a timely basis. Liquidity is required to fund various obligations, including credit obligations to borrowers, mortgage originations, withdrawals by depositors, repayment of debt, dividends to stockholders, operating expenses, and capital expenditures. Liquidity is derived primarily from retail deposit growth and retention, principal and interest payments on loans and investment securities, net cash provided from operations, and access to other funding sources. Nicolet’s access to funding sources in amounts adequate to finance its activities could be impaired by factors that affect Nicolet specifically or the financial services industry in general. Factors that could detrimentally affect its access to liquidity sources include a decrease in the level of its business activity due to a market downturn or adverse regulatory action. Nicolet’s ability to borrow could also be impaired by factors that are not specific to Nicolet, such as a severe disruption in the financial markets or negative views and expectations about the prospects for the financial services industry as a whole, given the recent turmoil faced by banking organizations in the domestic and worldwide credit markets. Currently, Nicolet has access to liquidity to meet its current anticipated needs; however, its access to additional borrowed funds could become limited in the future, and Nicolet may be required to pay above market rates for additional borrowed funds, if Nicolet is able to obtain them at all, which may adversely affect its results of operations.
Competition in the banking industry is intense and Nicolet faces strong competition from larger, more established competitors.
The banking business is highly competitive, and Nicolet experiences strong competition from many other financial institutions. Nicolet competes with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other financial institutions that operate in its primary market areas and elsewhere.
Nicolet competes with these institutions both in attracting deposits and in making loans. In addition, Nicolet has to attract its customer base from other existing financial institutions and from new residents. Many of its competitors are well-established, much larger financial institutions. While Nicolet believes it can and does successfully compete with these other financial institutions in its markets, it may face a competitive disadvantage as compared to large national or regional banks as a result of its smaller size and lack of geographic diversification.
Although Nicolet competes by concentrating its marketing efforts in its primary market area with local advertisements, personal contacts, and greater flexibility in working with local customers, Nicolet can give no assurance that this strategy will be successful.
As a community bank, Nicolet has different lending risks than larger banks.
Nicolet National Bank provides services to its local communities. It’s ability to diversify its economic risks is limited by its own local markets and economies. Nicolet National Bank lends primarily to individuals and to small to medium-sized businesses, which may expose it to greater lending risks than those of banks lending to larger, better-capitalized businesses with longer operating histories.
Nicolet National Bank manages its credit exposure through careful monitoring of loan applicants and loan concentrations in particular industries, and through loan approval and review procedures. It has established an evaluation process designed to determine the adequacy of its allowance for loan losses. While this evaluation process uses historical and other objective information, the classification of loans and the establishment of loan losses is an estimate based on experience, judgment and expectations regarding borrowers and economic conditions, as well as regulator judgments. Nicolet National Bank can make no assurance that its loan loss reserves will be sufficient to absorb future loan losses or prevent a material adverse effect on its business, profitability or financial condition.
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Nicolet’s success depends upon local and regional economic conditions.
The core industries in Nicolet’s market area are paper, packaging, food production, food processing, and tourism. The area has a broad range of diversified equipment manufacturing services related to these core industries and others. The Mid-Wisconsin market areas are concentrated in agriculture, tourism, and forest products, as well as diversified small manufacturing. The residential and commercial real estate markets throughout these areas depend primarily on the strength of these core industries. A material decline in any of these sectors will affect the communities Nicolet serves and could negatively impact its financial results and have a negative impact on profitability.
Nicolet may not be able to maintain its historical growth rate, which may adversely affect its results of operations and financial condition.
Nicolet has grown substantially in the recent past from approximately $471 million in total consolidated assets at December 31, 2005 to approximately $683 million in total consolidated assets at September 30, 2012. This growth has been achieved primarily through internal organic growth. Nicolet’s future profitability will depend in part on its continued ability to grow. Nicolet may not be able to sustain its historical rate of growth or may not be able to grow its business at all after the merger. Nicolet may also not be able to obtain the capital or financing necessary to fund additional growth and may not be able to find suitable candidates for additional acquisitions in the future. Various factors, such as economic conditions, regulatory and legislative considerations and competition, may impede or prohibit Nicolet’s ability to acquire additional banks and bank holding companies and open new branch offices. The acquisition of Mid-Wisconsin and the transactional costs associated therewith, both from the perspective of tangible costs such as technology conversion as well as less tangible but very real costs to management time, may likewise impede the ability of Nicolet to maintain its historic growth rate.
The FDIC Deposit Insurance assessments that Nicolet National Bank is required to pay may continue to materially increase in the future, which would have an adverse effect on its earnings.
As a member institution of the FDIC, Nicolet is assessed a quarterly deposit insurance premium. Failed banks nationwide have significantly depleted the insurance fund and reduced the ratio of reserves to insured deposits. As a result, Nicolet National Bank may be required to pay significantly higher premiums or additional special assessments that could adversely affect its earnings.
On October 19, 2010, the FDIC adopted a Deposit Insurance Fund (“DIF”) Restoration Plan, which requires the DIF to attain a 1.35% reserve ratio by September 30, 2020. In addition, the FDIC modified the method by which assessments are determined and, effective April 1, 2011, adjusted assessment rates, which will range from 2.5 to 45 basis points (annualized), subject to adjustments for unsecured debt and, in the case of small institutions outside the lowest risk category and certain large and highly complex institutions, brokered deposits. Further increased FDIC assessment premiums, due to its risk classification, emergency assessments, or implementation of the modified DIF reserve ratio, could adversely impact its earnings.
Nicolet may need to raise additional capital in the future, including through proposed increased minimum capital thresholds established by its regulators as part of their implementation of Basel III, but that capital may not be available when it is needed or may be dilutive to its shareholders.
Nicolet is required by federal and state regulatory authorities to maintain adequate capital levels to support its operations. New regulations implementing the proposed Basel III capital standards could require financial institutions to maintain higher minimum capital rations and may place a greater emphasis on common equity as a component of Tier 1 capital. In order to support its operations and comply with regulatory standards, Nicolet may need to raise capital in the future. Its ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside its control, on its financial performance and on the successful integration of Mid-Wisconsin. Accordingly, Nicolet cannot assure you of its ability to raise additional capital, if needed, on favorable terms. The capital and credit markets have experienced significant volatility in recent years. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying
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financial strength. If current levels of volatility continue or worsen, its ability to raise additional capital may be disrupted. If Nicolet cannot raise additional capital when needed, its results of operations and financial condition may be adversely affected, and its banking regulators may subject Nicolet to regulatory enforcement action, including receivership. In addition, the issuance of additional shares of its equity securities will dilute the economic ownership interest of its common and preferred shareholders.
Nicolet’s directors and executive officers own a significant portion of its common stock and can influence stockholder decisions.
The directors and executive officers of Nicolet, as a group, beneficially owned approximately 23.1% of its fully diluted issued and outstanding common stock as of December 31, 2012. Following the merger, the directors and executive officers of the combined company, as a group, are expected to beneficially own approximately 20.5% of the fully diluted outstanding common stock of the combined company. As a result of their ownership, the directors and executive officers of Nicolet have the ability, if they voted their shares in concert, to influence the outcome of all matters submitted to its shareholders for approval, including the election of directors.
Nicolet continually encounters technological change and it may have fewer resources than its competition to continue to invest in technological improvements; Nicolet’s information systems may experience an interruption or breach in security.
The banking and financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Nicolet’s future success will depend, in part, upon its ability to address the needs of its customers by using technology to provide products and services that enhance customer convenience, as well as create additional efficiencies in operations. Many of Nicolet’s competitors have greater resources to invest in technological improvements, and Nicolet may not be able to effectively implement new technology-driving products and services, which could reduce its ability to effectively compete.
In addition, Nicolet relies heavily on communications and information systems to conduct its business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in customer relationship management, general ledger, deposit, loan functionality and the effective operation of other systems. While Nicolet has policies and procedures designed to prevent or limit the effect of a failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of Nicolet’s information systems could damage its reputation, result in a loss of customer business, subject Nicolet and/or Nicolet National Bank to additional regulatory scrutiny, or expose Nicolet to civil litigation and possible financial liability, any of which could have a material adverse effect on Nicolet’s financial condition and results of operations.
Risks Related to Ownership of Nicolet’s Common Stock
The Nicolet common stock does not currently have an established trading market, and a liquid market for its common stock may not develop after the merger.
Nicolet plans to cause its common stock to be quoted on the Over-the-Counter Bulletin Board or other quotation system at or before closing of the merger, but is not currently traded on any securities exchange or quotation system. Although price quotations will be available, a liquid market for the stock may not develop after the merger. As a result, it may be difficult for you to sell your shares of Nicolet common stock at the times or prices that you desire.
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Substantial sales of Nicolet common stock could cause its stock price to fall.
If shareholders sell substantial amounts of Nicolet common stock in the public market following the merger, the market price of Nicolet common stock could fall. Such sales also might make it more difficult for Nicolet to sell equity or equity-related securities in the future at a time and price that it deems appropriate.
Nicolet has not historically paid dividends to its common shareholders and cannot guarantee that it will pay dividends to such shareholders in the future, including after the merger.
The holders of Nicolet common stock, including those who will receive Nicolet common stock pursuant to the merger agreement, receive dividends if and when declared by the Nicolet board of directors out of legally available funds. Nicolet’s board of directors has not declared a dividend on the common stock since its inception in 2000 and does not expect to do so in the foreseeable future. Any future determination relating to dividend policy will be made at the discretion of Nicolet’s board of directors and will depend on a number of factors, including the company’s future earnings, capital requirements, financial condition, future prospects, regulatory restrictions and other factors that the board of directors may deem relevant.
The principal business operations of Nicolet are conducted through Nicolet National Bank. Cash available to pay dividends to shareholders of Nicolet is derived primarily, if not entirely, from dividends paid by Nicolet National Bank. After the merger, the ability of Nicolet National Bank to pay dividends to Nicolet, as well as Nicolet’s ability to pay dividends to its shareholders, will continue to be subject to and limited by certain legal and regulatory restrictions. Further, any lenders making loans to Nicolet may impose financial covenants that may be more restrictive than regulatory requirements with respect to the payment of dividends by Nicolet. There can be no assurance of whether or when Nicolet may pay dividends after the merger.
Holders of Nicolet’s subordinated debentures have rights that are senior to those of its common stockholders.
Nicolet has supported its continued growth by issuing trust preferred securities and accompanying junior subordinated debentures. As of September 30, 2012, Nicolet had outstanding trust preferred securities and associated junior subordinated debentures with an aggregate principal amount of approximately $6.2 million, and Nicolet will assume Mid-Wisconsin’s obligations with respect to an additional $10.3 million in principal amount of junior subordinated debentures associated with Mid-Wisconsin’s outstanding trust preferred securities in the merger.
Nicolet has unconditionally guaranteed the payment of principal and interest on its trust preferred securities and will do the same when it assumes Mid-Wisconsin’s obligations as described above. Also, the junior debentures issued to the special purpose trusts that relate to those trust preferred securities are senior to Nicolet common stock, including shares that it issues to holders of Mid-Wisconsin common stock in the merger. As a result, Nicolet must make payments on the junior subordinated debentures before it can pay any dividends on its common stock, and in the event of Nicolet’s bankruptcy, dissolution or liquidation, holders of its junior subordinated debentures must be satisfied before any distributions can be made on its common stock. Nicolet does have the right to defer distributions on its junior subordinated debentures (and related trust preferred securities) for up to five years, but during that time would not be able to pay dividends on its common or preferred stock.
Holders of Nicolet’s SBLF Preferred Stock have rights that are senior to those of its common stock, and contractual restrictions relative to Nicolet’s SBLF Preferred Stock may limit or prevent Nicolet from paying dividends on and repurchasing its common stock.
Nicolet has supported its capital operations by issuing preferred stock to the Treasury pursuant to the Small Business Lending Fund (“SBLF”) program (such preferred stock, the “SBLF Preferred Stock”).
The SBLF Preferred Stock issued to and currently held by the Treasury has dividend rights that are senior to those of Nicolet’s common stock; therefore, Nicolet must pay dividends on the SBLF Preferred Stock before it can pay any dividends to holders of its common stock. In the event of Nicolet’s bankruptcy, dissolution, or liquidation, the holders of the SBLF Preferred Stock must be satisfied before Nicolet can make
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any distributions to holders of its common stock. In addition, under the terms of the SBLF Preferred Stock and the securities purchase agreement between Nicolet and the Treasury in connection with the SBLF transaction, Nicolet is generally unable to pay dividends on or repurchase its common stock where such payment or repurchase would result in a reduction of Nicolet’s Tier 1 capital from the level on September 1, 2011, the date on which the SBLF Preferred Stock was issued, by more than 10%. Under the terms of the SBLF Preferred Stock, Treasury does not have voting rights with respect to the proposed merger.
Holders of Nicolet’s SBLF Preferred Stock have limited voting rights.
Other than under certain limited circumstances, holders of Nicolet’s SBLF Preferred Stock have no voting rights except with respect to matters that would involve certain fundamental changes to the terms of the SBLF Preferred Stock or as required by law. These matters include the authorization of stock senior to the SBLF Preferred Stock, amendments that adversely affect the rights of the holders of the SBLF Preferred Stock, and certain business combination transactions. These rights could make it more difficult to consummate a transaction that the common shareholders wish to approve.
Because Nicolet is a regulated bank holding company, your ability to obtain “control” or to act in concert with others to obtain control over Nicolet without the prior consent of the Federal Reserve or other applicable bank regulatory authorities is limited and may subject you to regulatory oversight.
Nicolet is a bank holding company and, as such, is subject to significant regulation of its business and operations. In addition, under the provisions of the Bank Holding Company Act of 1956, as amended, and the Change in Bank Control Act, certain regulatory provisions may become applicable to individuals or groups who are deemed by the regulatory authorities to “control” Nicolet or its subsidiary bank. Nicolet does not believe that the merger would result in any unwitting acquisitions by any current Mid-Wisconsin shareholders of “control” of Nicolet, as that term is defined under applicable law and regulation. However, the Federal Reserve and other bank regulatory authorities have very broad interpretive discretion in this regard and it is possible that the Federal Reserve or some other bank regulatory authority may, whether through the merger or through subsequent acquisition of Nicolet’s shares, deem one or more of Nicolet’s shareholders to control or to be acting in concert for purposes of gaining or exerting control over Nicolet. Such a determination may require a shareholder or group of shareholders, among other things, to make voluminous regulatory filings under the Change in Bank Control Act, including disclosure to the regulatory authorities of significant amounts of confidential personal or corporate financial information. In addition, certain groups or entities may also be required to either register as a bank holding company under the Bank Holding Company Act of 1956, as amended, becoming themselves subject to regulation by the Federal Reserve under that Act and the rules and regulations promulgated thereunder, which may include requirements to materially limit other operations or divest other business concerns, or to divest immediately their investments in Nicolet. Furthermore, in the event that Nicolet or Nicolet National Bank may seek to undertake the acquisition of the assets of failed financial institutions through submitting bids on such assets to the FDIC, whether pursuant to a loss-sharing agreement or otherwise, it is possible that individuals deemed to “control” Nicolet may become further subject to the FDIC’s 2009 Statement of Policy on Qualifications for Failed Bank Acquisitions. Failure to abide by these requirements may subject such shareholders to sanctions up to and including the imposition of civil money penalties.
In addition, these limitations on the acquisition of Nicolet’s stock may generally serve to reduce the potential acquirers of its stock or to reduce the volume of its stock that any potential acquirer may be able to acquire. These restrictions may serve to generally limit the liquidity of its stock and, consequently, may adversely affect its value.
Nicolet’s securities are not FDIC insured.
Nicolet’s securities, including the shares of Nicolet common stock to be issued in the merger, are not savings or deposit accounts or other obligations of Nicolet National Bank, and are not insured by the Deposit Insurance Fund, or any other agency or private entity and are subject to investment risk, including the possible loss of some or all of the value of your investment.
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A WARNING ABOUT FORWARD-LOOKING STATEMENTS
This joint proxy statement-prospectus includes “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements discuss future expectations, describe future plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Forward-looking statements are generally identifiable by the use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “endeavor,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “objective,” “potential,” “predict,” “project,” “seek,” “should,” “will” and other similar words and expressions of future intent.
The ability of Nicolet and Mid-Wisconsin to predict results or the actual effect of future plans or strategies is inherently uncertain. Although Nicolet and Mid-Wisconsin believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, actual results and performance could differ materially from those set forth in the forward-looking statements. Factors that could cause actual results and performance to differ from those expressed in the forward-looking statements include, but are not limited to:
• | The costs of integrating Nicolet’s and Mid-Wisconsin’s operations, which may be greater than expected. |
• | Potential customer loss and deposit attrition as a result of the merger, and the failure to achieve expected gains, revenue growth and/or expense savings from such transactions. |
• | Nicolet’s ability to effectively manage interest rate risk and other market risk, credit risk and operational risk both before and after the merger. |
• | Nicolet’s ability to manage fluctuations in the value of assets and liabilities and off-balance sheet exposure so as to maintain sufficient capital and liquidity to support Nicolet’s business. |
• | Nicolet’s ability to keep pace with technological changes. |
• | Nicolet’s ability to develop competitive new products and services in a timely manner and the acceptance of such products and services by its customers and potential customers. |
• | Nicolet’s ability to expand into new markets. |
• | The cost and other effects of material contingencies, including litigation contingencies. |
• | Further easing of restrictions on participants in the financial services industry, such as banks, securities brokers and dealers, investment companies and finance companies, which may increase competitive pressures and affect Nicolet’s ability to preserve its customer relationships and margins. |
• | Possible changes in general economic and business conditions in the United States in general and in the larger region and communities Nicolet serves in particular, which may lead to deterioration in credit quality, thereby requiring increases in its provision for credit losses, or a reduced demand for credit, thereby reducing earning assets. |
• | The threat or occurrence of war or acts of terrorism and the existence or exacerbation of general geopolitical instability and uncertainty. |
• | Possible changes in trade, monetary and fiscal policies, laws, and regulations, and other activities of governments, agencies, and similar organizations, including changes in accounting standards. |
The cautionary statements in the “Risk Factors” section and elsewhere in this joint proxy statement-prospectus also identify important factors and possible events that involve risk and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. Nicolet and Mid-Wisconsin do not intend, and undertake no obligation, to update or revise any forward-looking statements, whether as a result of differences in actual results, changes in assumptions or changes in other factors affecting such statements.
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THE MID-WISCONSIN SPECIAL SHAREHOLDERS’ MEETING
Purpose
Mid-Wisconsin shareholders are receiving this joint proxy statement-prospectus because on ____________, 2013, the record date for a special meeting of shareholders to be held on ______________, 2013, at__________ at __.m., they owned shares of the common stock of Mid-Wisconsin Financial Services, Inc., and the board of directors of Mid-Wisconsin is soliciting proxies for the matter to be voted on at this special meeting, as described in more detail below. Each copy of this joint proxy statement-prospectus was mailed to holders of Mid-Wisconsin common stock on [______________] and is accompanied by a proxy card for use at the meeting and at any adjournment(s) of the meeting.
At the meeting, Mid-Wisconsin shareholders will consider and vote upon the merger agreement and any other matters that are properly brought before the meeting, or any adjournments(s) of the meeting.
When you sign the enclosed proxy card or otherwise vote pursuant to the instructions set forth on the proxy card, you appoint the proxy holder as your representative at the meeting. The proxy holder will vote your shares as you have instructed in the proxy card, thereby ensuring that your shares will be voted whether or not you attend the meeting. Even if you plan to attend the meeting, we ask that you instruct the proxies how to vote your shares in advance of the meeting just in case your plans change. In the event that other matters arise at the special meeting, the proxy holder will vote your shares according to his or her discretion.
If you have not already done so, please complete, date and sign the accompanying proxy card and return it promptly in the enclosed, postage paid envelope. If you do not return your properly executed card, or if you do not attend and cast your vote at the special meeting, the effect will be a vote against the merger agreement.
Record Date; Quorum and Vote Required
The record date for the Mid-Wisconsin special meeting is ____________, 2013. Mid-Wisconsin’s shareholders of record as of the close of business on that day will receive notice of and will be entitled to vote at the special meeting. As of December 31, 2012, there were 1,657,119 shares of Mid-Wisconsin common stock issued and outstanding and entitled to vote at the meeting. The issued and outstanding shares are held by approximately 840 holders of record.
The presence, in person or by proxy, of a majority of the shares of Mid-Wisconsin common stock entitled to vote on the merger agreement is necessary to constitute a quorum at the meeting. Each share of Mid-Wisconsin common stock outstanding on the record date, entitles its holder to one vote on the merger agreement and any other proposal that may properly come before the meeting.
To determine the presence of a quorum at the meeting, Mid-Wisconsin will also count as present at the meeting the shares of Mid-Wisconsin common stock present in person but not voting, and the shares of common stock for which Mid-Wisconsin has received proxies but with respect to which the holders of such shares have abstained or signed without providing instructions as described in “— Solicitation and Revocation of Proxies” below. On ____________, 2013, the record date for the meeting, there were __________ shares of Mid-Wisconsin common stock issued and outstanding. Therefore at least __________ shares need to be present at the special meeting, whether in person or by proxy, to constitute a quorum.
Approval of the merger agreement requires the affirmative vote of the holders of a majority of the issued and outstanding shares of Mid-Wisconsin common stock as of the record date for the special meeting.
As of the record date for the meeting, Mid-Wisconsin’s directors and executive officers beneficially owned a total of _________ shares, or approximately __% of the issued and outstanding shares, of Mid-Wisconsin common stock. We anticipate that these individuals will vote their shares in favor of the merger agreement. Certain of these individuals have entered into a written agreement with Nicolet that they will vote their shares in favor of the merger agreement, except as may be limited by their fiduciary obligations.
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Solicitation and Revocation of Proxies
If you have delivered a signed proxy card for the Mid-Wisconsin special meeting, you may revoke it at any time before it is voted by:
• | attending the meeting and voting in person; |
• | giving written notice revoking your proxy to Mid-Wisconsin’s Corporate Secretary prior to the date of the meeting; or |
• | submitting a signed proxy card that is dated later than your initial proxy card to Mid-Wisconsin’s Corporate Secretary. |
The proxy holders will vote as directed on all valid proxies that are received at or prior to the meeting and that are not subsequently revoked. If you complete, date and sign your proxy card but do not provide instructions as to your vote, the proxy holders will vote your sharesFOR approval of the merger agreement. If any other matters are properly presented at the meeting for consideration, the persons named in the proxy card will have discretionary authority to vote your shares on those matters. Mid-Wisconsin’s board of directors is not aware of any matter to be presented at the meeting other than the proposal to approve the merger agreement.
If you hold shares in “street name” with a broker, bank, or other fiduciary, you will receive voting instructions from the holder of record of your shares. Under the rules of various national and regional securities exchanges, brokers, banks and other fiduciaries may generally vote your shares on routine matters, such as the ratification of an independent registered public accounting firm, even if you provide no instructions, but may not vote on non-routine matters, such as the matters being brought before the special meeting, unless you provide voting instructions. Shares for which a broker does not have the authority to vote are recorded as “broker nonvotes,” are not counted in the vote by shareholders but will count for purposes of a quorum. As a result, any broker nonvotes will have the practical effect of a vote against the merger proposal but will not affect the adjournment proposal. We therefore encourage you to provide directions to your broker as to how you want your shares voted on all matters to be brought before the special meeting. You should do this by carefully following the instructions your broker gives you concerning its procedures. If you hold shares in “street name” and wish to change your vote at any time, you must contact your broker.
Mid-Wisconsin will bear the cost of soliciting proxies from its shareholders. Mid-Wisconsin will solicit shareholder votes by mail, and may also solicit certain shareholders by other means of communication, including telephone or in person. If anyone solicits your vote in person, by telephone, or by other means of communication, they will receive no additional compensation for doing so. Mid-Wisconsin will reimburse brokerage firms and other persons representing beneficial owners of shares for their reasonable expenses in forwarding solicitation material to those beneficial owners.
How to Vote Your Shares
Shareholders of record (i.e., those who own shares in their own name) can vote by telephone, on the internet, or by mail as follows:
• | Voting by Telephone. Call the toll-free number listed on the proxy card and follow the instructions. You will need to have your proxy card with you when you call. |
• | Voting on the Internet. Go to www.___________.com and follow the instructions. You will need to have your proxy card with you when you link to the website. |
• | Voting by Mail. Complete, sign, date, and return the enclosed proxy card in the envelope provided. |
• | Voting at the Mid-Wisconsin Special Meeting. If you decide to attend the special meeting and vote in person, you may deposit your proxy card with a representative of Mid-Wisconsin at the special meeting registration desk. You may also complete a ballot that will be distributed at the meeting. Whether or not you plan to attend the special meeting, please submit your proxy promptly in the enclosed envelope or vote telephonically or through the Internet by following the instructions on the proxy card. |
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“Street name” shareholders (i.e., those who own their shares in the name of a broker, bank, or other fiduciary) should refer to the information you receive from your broker to see which voting methods are available to you. Please note, if you are a street name shareholder, and wish to vote in person at the special meeting, you must obtain a proxy executed in your favor from your broker to be able to vote at the special meeting.
You should not send any stock certificates with your proxy card. If the merger agreement is approved, you will receive instructions for exchanging your stock certificates after the merger has been completed.
Dissenters’ Rights
Mid-Wisconsin’s shareholders have dissenters’ rights with respect to the merger under Wisconsin law. Shareholders who wish to assert their dissenters’ rights and comply with the procedural requirements of Subchapter XIII of the Wisconsin Business Corporation Law (“WBCL”) will be entitled to receive payment of the fair value of their shares in cash in accordance with Wisconsin law. For more information regarding the exercise of these rights, see, “Dissenters’ Rights,” at page 76.
Recommendation of the Board of Directors of Mid-Wisconsin
Mid-Wisconsin’s board of directors has unanimously approved the merger agreement and the transactions contemplated thereby, believes that the merger is in the best interests of Mid-Wisconsin and its shareholders, and recommends that you voteFOR approval of the merger agreement.
In the course of reaching its decision to approve the merger agreement and the transactions contemplated in the merger agreement, Mid-Wisconsin’s board of directors, among other things, consulted with its legal advisor, Barack Ferrazzano Kirschbaum & Nagelberg LLP, regarding the legal terms of the merger agreement, and with its financial advisor, Raymond James., regarding the fairness of the merger consideration to Mid-Wisconsin’s common shareholders from a financial point of view. For a discussion of the factors considered by the board of directors in reaching its conclusion, see, “Background of and Reasons for the Merger — Background of the Merger,” at page 33, and “- Mid-Wisconsin’s Reasons for the Merger,” at page 35.
Shareholders should note that Mid-Wisconsin’s directors have certain interests in, and may derive benefits as a result of, the merger that are in addition to their interests as shareholders of Mid-Wisconsin. See, “The Merger Agreement — Interests of Certain Persons in the Merger,” at page __.
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THE NICOLET SPECIAL SHAREHOLDERS’ MEETING
Purpose
Nicolet shareholders have received this joint proxy statement-prospectus because on ______________, 2013, the record date for a special meeting of shareholders to be held on ________, 2013, at ______________ at ____ __.m., they owned shares of the common stock of Nicolet Bankshares, Inc, and the board of directors of Nicolet is soliciting proxies for the matter to be voted on at this special meeting, as described in more detail below. Each copy of this joint proxy statement-prospectus was mailed to holders of Nicolet common stock on [____________] and is accompanied by a proxy card for use at the meeting and at any adjournment(s) of the meeting.
At the meeting, Nicolet shareholders will consider and vote upon the merger agreement and any other matters that are properly brought before the meeting or any adjournment(s) of the meeting.
When you sign the enclosed proxy card or otherwise vote pursuant to the instructions set forth on the proxy card, you appoint the proxy holder as your representative at the meeting. The proxy holder will vote your shares as you have instructed in the proxy card, thereby ensuring that your shares will be voted whether or not you attend the meeting. Even if you plan to attend the meeting, we ask that you instruct the proxies how to vote your shares in advance of the meeting just in case your plans change. In the event that other matters arise at the special meeting, the proxy holder will vote your shares according to his or her discretion
If you have not already done so, please complete, date and sign the accompanying proxy card and return it promptly in the enclosed, postage paid envelope or otherwise vote pursuant to the instructions set forth on the proxy card. If you do not vote your shares as instructed on the proxy card, or if you do not attend and cast your vote at the special meeting, the effect will be a vote against the merger agreement.
Record Date; Quorum and Vote Required
The record date for the Nicolet special meeting is ___________, 2013. Nicolet’s shareholders of record as of the close of business on that day will receive notice of and will be entitled to vote at the special meeting. As of ______________, 2013, there were ________ shares of Nicolet common stock issued and outstanding and entitled to vote at the meeting. The issued and outstanding shares are held by approximately ________ holders of record.
The presence, in person or by proxy, of a majority of the shares of Nicolet common stock entitled to vote on the merger agreement is necessary to constitute a quorum at the meeting. Each share of Nicolet common stock outstanding on the record date, entitles its holder to one vote on the merger agreement and any other proposal that may properly come before the meeting.
To determine the presence of a quorum at the meeting, Nicolet will also count as present at the meeting the shares of Nicolet common stock present in person but not voting, and the shares of common stock for which Nicolet has received proxies but with respect to which the holders of such shares have abstained or signed without providing instructions as described in “— Solicitation and Revocation of Proxies” below. On ____________, 2013, the record date for the meeting, there were _______ shares of Nicolet common stock issued and outstanding. Therefore at least _____ shares need to be present at the special meeting, whether in person or by proxy, to constitute a quorum.
Approval of the merger agreement requires the affirmative vote of the holders of a majority of the issued and outstanding shares of Nicolet common stock as of the record date for the special meeting.
As of the record date for the meeting, Nicolet’s directors and executive officers beneficially owned a total of __________ shares, or approximately ____% of the issued and outstanding shares, of Nicolet common stock. We anticipate that these individuals will vote their shares in favor of the merger agreement. Certain of these individuals have entered into a written agreement with Mid-Wisconsin that they will vote their shares in favor of the merger agreement, except as may be limited by their fiduciary obligations.
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Solicitation and Revocation of Proxies
If you have delivered a signed proxy card for the Nicolet special meeting or otherwise voted pursuant to the instructions set forth on the proxy card, you may revoke it at any time before it is voted by:
• | attending the meeting and voting in person; |
• | giving written notice revoking your proxy to Nicolet’s Corporate Secretary prior to the date of the meeting; or |
• | submitting a signed proxy card that is dated later than your initial proxy card to Nicolet’s Corporate Secretary. |
The proxy holders will vote as directed on all valid proxies that are received at or prior to the meeting and that are not subsequently revoked. If you complete, date and sign your proxy card but do not provide instructions as to your vote, the proxy holders will vote your sharesFOR approval of the merger agreement. If any other matters are properly presented at the meeting for consideration, the persons named in the proxy card will have discretionary authority to vote your shares on those matters. Nicolet’s board of directors is not aware of any matter to be presented at the meeting other than the proposal to approve the merger agreement.
If you hold shares in “street name” with a broker, bank, or other fiduciary, you will receive voting instructions from the holder of record of your shares. Under the rules of various national and regional securities exchanges, brokers, banks and other fiduciaries may generally vote your shares on routine matters, such as the ratification of an independent registered public accounting firm, even if you provide no instructions, but may not vote on non-routine matters, such as the matters being brought before the special meeting, unless you provide voting instructions. Shares for which a broker does not have the authority to vote are recorded as “broker nonvotes,” are not counted in the vote by shareholders but will count for purposes of a quorum. As a result, any broker nonvotes will have the practical effect of a vote against the merger proposal but will not affect the adjournment proposal. We therefore encourage you to provide directions to your broker as to how you want your shares voted on all matters to be brought before the special meeting. You should do this by carefully following the instructions your broker gives you concerning its procedures. If you hold shares in “street name” and wish to change your vote at any time, you must contact your broker.
Nicolet will bear the cost of soliciting proxies from its shareholders. Nicolet will solicit shareholder votes by mail, and may also solicit certain shareholders by other means of communication, including telephone or in person. If anyone solicits your vote in person, by telephone, or by other means of communication, they will receive no additional compensation for doing so. Nicolet will reimburse brokerage firms and other persons representing beneficial owners of shares for their reasonable expenses in forwarding solicitation material to those beneficial owners.
How to Vote Your Shares
Shareholders of record (i.e., those who own shares in their own name) can vote by telephone, on the Internet, or by mail as follows:
• | Voting by Telephone. Call the toll-free number listed on the proxy card and follow the instructions. You will need to have your proxy card with you when you call. |
• | Voting on the Internet. Go to www.________.com and follow the instructions. You will need to have your proxy card with you when you link to the website. |
• | Voting by Mail. Complete, sign, date, and return the enclosed proxy card in the envelope provided. |
• | Voting at the Nicolet Special Meeting. If you decide to attend the special meeting and vote in person, you may deposit your proxy card with a representative of Nicolet at the special meeting registration desk. You may also complete a ballot that will be distributed at the meeting. Whether or not you plan to attend the special meeting, please submit your proxy promptly in the enclosed envelope or vote telephonically or through the internet by following the instructions on the proxy card. |
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“Street name” shareholders (i.e., those who own their shares in the name of a broker, bank, or other fiduciary) should refer to the information you receive from your broker to see which voting methods are available to you. Please note, if you are a street name shareholder, and wish to vote in person at the special meeting, you must obtain a proxy executed in your favor from your broker to be able to vote at the special meeting.
Dissenters’ Rights
Nicolet’s shareholders have dissenters’ rights with respect to the merger under Wisconsin law. Shareholders who wish to assert their dissenters’ rights and comply with the procedural requirements of Subchapter XIII of the WBCL will be entitled to receive payment of the fair value of their shares in cash in accordance with Wisconsin law. For more information regarding the exercise of these rights, see, “Dissenters’ Rights,” at page 29.
Recommendation of the Board of Directors of Nicolet
Nicolet’s board of directors has unanimously approved the merger agreement and the transactions contemplated thereby, believes that the merger is in the best interests of Nicolet and its shareholders, and recommends that you voteFOR approval of the merger agreement.
In the course of reaching its decision to approve the merger agreement and the transactions contemplated in the merger agreement, Nicolet’s board of directors, among other things, consulted with its legal advisor, Bryan Cave LLP, regarding the legal terms of the merger agreement, and with its financial advisor, Sandler O’Neill regarding the fairness of the merger consideration to Nicolet’s common shareholders from a financial point of view. For a discussion of the factors considered by the board of directors in reaching its conclusion, see, “Background of and Reasons for the Merger — Background of the Merger,” at page 33, and “- Nicolet’s Reasons for the Merger,” at page 35.
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PROPOSAL 1: THE MERGER AGREEMENT
Structure of the Merger
The merger agreement provides for the merger of Mid-Wisconsin with and into Nicolet, with Nicolet being the surviving entity in the merger. After the merger, Mid-Wisconsin Bank will merge with and into Nicolet National Bank, with Nicolet National Bank being the surviving entity. Each share of Mid-Wisconsin common stock issued and outstanding at the effective time of the merger will be converted into the right to receive either 0.3727 shares of Nicolet common stock or, in certain limited circumstances, $6.15 in cash. Nicolet will appoint Kim A. Gowey and Christopher Ghidorzi, who are both current Mid-Wisconsin directors, to the boards of directors of Nicolet and Nicolet National Bank.
Background of the Merger
Mid-Wisconsin’s board regularly assesses strategic alternatives for maximizing shareholder value. During the past two years, Mid-Wisconsin, like many other banks, has experienced certain stresses, such as the matters addressed in Mid-Wisconsin’s formal written agreement with the Federal Reserve dated May 10, 2011 and Mid-Wisconsin Bank’s written agreement with the FDIC and WDFI on November 9, 2010 (together, the “Consent Order”) that led to the need for additional capital and a more robust infrastructure during a difficult time for the banking industry as a whole. Consequently, Mid-Wisconsin was required to defer its regularly scheduled quarterly payments on its Preferred Stock and the Debentures and is in arrears with the dividend payments on the Preferred Stock and the interest payments on the Debentures. In light of these challenges, Mid-Wisconsin’s board determined that it was in the best interest of its shareholders to more actively explore its strategic options to determine whether there was a possible merger partner that shared their desire to maximize shareholder value while providing exemplary service to the communities and customers that they serve.
Like the Mid-Wisconsin board, Nicolet’s board of directors engages in regular assessments of strategic alternatives for maximizing shareholder value. Since Nicolet’s inception in 2000, its objective has been to build, through organic growth and acquisitions, a community bank of sufficient size to address efficiently the compliance and capital requirements presented by an uncertain regulatory and economic environment while enhancing shareholder value, expanding product lines and continuing to deliver personalized customer service with local decision-making. From time to time, Nicolet’s Chairman, President, and Chief Executive Officer, Robert B. Atwell, would engage in informal, non-binding discussions with potential acquisition candidates, with limited due diligence occurring on such occasions. Until discussions of the proposed merger with Mid-Wisconsin began, however, none of these potential transactions progressed beyond a non-binding expression of interest.
In late 2011, the Mid-Wisconsin board of directors invited representatives of Raymond James to make a presentation to the board regarding potential strategic alternatives. On December 21, 2011, representatives of Raymond James met with the Mid-Wisconsin board and discussed various strategic alternatives. On January 6, 2012, Mid-Wisconsin retained Raymond James to serve as its financial advisor and to ascertain potential market interest in an acquisition of Mid-Wisconsin and its subsidiary bank.
From January through May 2012, Raymond James contacted potential likely acquirers, with one potential acquirer conducting limited off-site due diligence on Mid-Wisconsin Bank’s asset quality and other business matters during the first quarter. Following this due diligence and several discussions between the parties, the third party elected not to pursue an opportunity with Mid-Wisconsin at that time, citing its need to raise additional capital to facilitate the transaction as well as possible difficulties receiving regulatory approval for a transaction at this time. On May 30, 2012, Raymond James updated the Mid-Wisconsin board on the process and was authorized by the board to continue to contact potential acquirers.
As part of this process, representatives of Raymond James met with Mr. Atwell in Green Bay, Wisconsin to discuss a potential acquisition of Mid-Wisconsin by Nicolet. On June 21, 2012, following the execution of confidentiality agreements, Mr. Atwell and Michael E. Daniels, President and Chief Operating Officer of Nicolet National Bank, met with representatives of Raymond James, Dr. Gowey, Mid-Wisconsin’s chairman, and Scot Thompson, the President of Mid-Wisconsin Bank, in Wausau, Wisconsin.
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Following that meeting, Nicolet commenced initial onsite due diligence on Mid-Wisconsin in Medford, Wisconsin, which concluded during the week of July 9, 2012. Nicolet retained Sandler O’Neill as its independent financial advisor to assist in the evaluation of the proposed merger on July 17, 2012.
On July 23, 2012, Nicolet submitted a draft letter of intent to Mid-Wisconsin, and on July 25, 2012, Mid-Wisconsin’s board approved continued negotiations with Nicolet.
After further negotiations, Nicolet and Mid-Wisconsin signed a non-binding letter of intent setting forth the proposed terms of the merger on August 3, 2012. The letter of intent contemplated that the merger consideration would consist of Nicolet common stock at an exchange ratio to be determined based on an assumed value of $6.50 to $8.00 per share for the Mid-Wisconsin common stock and an assumed value of $16.50 per share for the Nicolet common stock. The letter of intent contemplated that Mid-Wisconsin’s Preferred Stock issued to the Treasury would be purchased by Nicolet for up to $5.0 million, representing a discount to its $10.5 million face value.
During the remainder of the month of August, Nicolet and its advisors conducted legal and business due diligence on Mid-Wisconsin and discussed with Mid-Wisconsin and its legal and financial advisors various alternative approaches to the Preferred Stock. On August 21, 2012, representatives of Sandler O’Neill met with Nicolet’s board of directors to discuss these alternatives, which included a cash purchase of the Preferred Stock at a discount negotiated with Treasury, Nicolet’s participation as the “designated bidder” in Treasury’s private “Dutch auction” process, delaying a possible merger to allow negotiation with third-party purchasers of the securities following the Treasury auction process, and assuming Mid-Wisconsin’s obligations under the securities. Based on these discussions, as well as discussions with Treasury representatives, the parties agreed that Nicolet would act as the “designated bidder” for the Preferred Stock in Treasury’s private auction process.
From September 4 through September 6, 2012, representatives of Nicolet conducted additional onsite loan due diligence in Medford, Wisconsin. Nicolet’s management team and legal and financial advisors also continued their due diligence review of documents provided by Mid-Wisconsin. From September 10 through September 14, 2012, Nicolet’s compliance officer and internal auditor, and an external compliance auditor performed a limited scope review on Mid-Wisconsin’s compliance to selected regulations. On September 17 and 18, 2012, Mid-Wisconsin’s management team and legal and financial advisors conducted onsite due diligence on Nicolet in Green Bay, Wisconsin. On September 25, 2012, Mid-Wisconsin notified Treasury of its intent to opt out of the pooled auction process and identified Nicolet as the “designated bidder” for the Preferred Stock.
During the month of October, counsel to Nicolet drafted the form of merger agreement and circulated the initial draft to all parties on October 23, 2012. During the following week, the parties continued their discussions with representatives of Treasury regarding Nicolet’s potential purchase of the Mid-Wisconsin Preferred Stock. Based on these discussions, the parties agreed that a purchase of the securities at a discount to the stated value was unlikely and that their respective interests would best be served by structuring the merger to contemplate Mid-Wisconsin’s redemption of the Preferred Stock at its $10.5 million stated value, together with accrued and unpaid dividends, and an exchange ratio for the Nicolet common stock based on an assumed value of $6.15 per share for the Mid-Wisconsin common stock. On October 31, 2012, following consultation with its legal and financial advisors, the Mid-Wisconsin board authorized management to proceed with the negotiation of a definitive merger agreement on the revised terms described above. The parties subsequently notified Treasury of their decision and Nicolet withdrew as the designated bidder for the Preferred Stock.
During the month of November, the parties and their advisors negotiated the terms of the merger agreement and continued the due diligence process. On November 20, 2012, Nicolet’s board of directors met with representatives of Sandler O’Neill and counsel from Bryan Cave LLP to review the terms of the merger agreement. At the meeting, representatives of Sandler O’Neill provided the board with its analysis of the fairness of the merger consideration to Nicolet’s shareholders from a financial point of view and counsel reviewed the board’s fiduciary duties and the terms and conditions of the merger agreement. Following a discussion of these matters and the other factors listed under “—Nicolet’s Reasons for the Merger,” the board concluded that the proposed merger would be in the best interest of Nicolet and its shareholders and approved
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the merger agreement in substantially the form presented, with Nicolet’s executive officers being authorized to negotiate, execute and deliver the final agreement on behalf of Nicolet.
On November 28, 2012, Mid-Wisconsin’s board of directors met with representatives of Raymond James and counsel from Barack Ferrazzano Kirschbaum & Nagelberg LLP to review the terms of the merger agreement. At the meeting, representatives of Raymond James provided the board with its analysis of the fairness of the merger consideration to Mid-Wisconsin’s shareholders from a financial point of view and counsel reviewed the board’s fiduciary duties and the terms and conditions of the merger agreement. Following a discussion of these matters and the other factors listed under “—Mid-Wisconsin’s Reasons for the Merger,” the board concluded that the proposed merger would be in the best interest of Mid-Wisconsin and its shareholders and approved the merger agreement in substantially the form presented, with Mid-Wisconsin’s executive officers being authorized to negotiate, execute and deliver the final agreement on behalf of Mid-Wisconsin.
The parties executed the merger agreement on November 28, 2012 and issued a press release announcing the proposed merger on November 29, 2012. Mid-Wisconsin also filed a Current Report on Form 8-K attaching the merger agreement and press release with the SEC on November 29, 2012. Nicolet’s board of directors unanimously ratified the merger agreement, as executed, at a board meeting on December 18, 2012 and approved a technical amendment to the merger agreement that was executed by the parties on January 17, 2013.
Reasons for the Merger
General
The financial and other terms of the merger agreement resulted from arm’s-length negotiations between Nicolet’s and Mid-Wisconsin’s representatives. The following discussion of the information and factors considered by the Nicolet and Mid-Wisconsin boards of directors is not intended to be exhaustive but includes all of the material factors the respective boards considered in determining whether to enter into the merger agreement. In reaching their determinations to approve the merger and to recommend that their respective shareholders approve the merger, neither the Nicolet board of directors nor the Mid-Wisconsin board of directors assigned any relative or specific weight to the following factors, and individual directors may have given.
Nicolet
In deciding to pursue an acquisition of Mid-Wisconsin, Nicolet’s management and board of directors considered, among other things, the following:
• | information concerning the business, operations, earnings, asset quality, and financial condition of Mid-Wisconsin and Mid-Wisconsin Bank; |
• | the financial terms of the merger, including the relationship of the value of the consideration issuable in the merger to the market value, tangible book value, and earnings per share of Mid-Wisconsin’s common stock; |
• | the ability of Mid-Wisconsin’s operations to contribute to Nicolet’s earnings after the merger; |
• | the recent comparative earnings and financial performance of Mid-Wisconsin and Nicolet; |
• | the financial terms of recent business combinations in the financial services industry and a comparison of the financial terms of such business combinations with the terms of the proposed merger; |
• | the market for alternative merger or acquisition transactions in the banking industry and the likelihood of other material strategic transactions; |
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• | the increased importance of scale in the banking industry, the fact that the merger would increase Nicolet’s size to over $1 billion in total assets, and would provide Nicolet’s banking franchise with additional access to a broader base of middle market and small business prospects; |
• | the various effects of Nicolet becoming a public reporting company under the regulation of the SEC as a result of the merger, including increased liquidity for holders of Nicolet’s common stock; |
• | the compatibility of Mid-Wisconsin’s management team, strategic objectives, culture, and geographic footprint with those of Nicolet; |
• | Mid-Wisconsin’s familiarity with the central Wisconsin market; |
• | the opportunity to leverage the infrastructure of Nicolet; |
• | the nonfinancial terms of the merger, including the treatment of the merger as a tax-free reorganization for U.S. federal income tax purposes; |
• | the opinion of Sandler O’Neill that the consideration to be provided to Mid-Wisconsin’s common shareholders in the merger is fair, from a financial point of view, to the shareholders of Nicolet; and |
• | the likelihood of the merger being approved by applicable regulatory authorities without undue conditions or delay. |
Mid-Wisconsin
In deciding to engage in the merger transaction, Mid-Wisconsin’s board of directors consulted with its management, as well as its legal counsel and financial advisor, and considered numerous factors, including the following:
• | the value of the consideration to be received by Mid-Wisconsin’s shareholders compared to shareholder value for Mid-Wisconsin as an independent entity; |
• | information concerning business, operations, earnings, asset quality, and financial condition, prospects, and capital levels of Mid-Wisconsin and Nicolet, both individually and as a combined entity; |
• | the perceived risks and uncertainties attendant to Mid-Wisconsin’s operation as an independent banking organization, including risks and uncertainties related to the continuing deferral of dividends and interests on its Preferred Stock, and Debentures, the continuing low-interest rate environment, operating under enhanced regulatory scrutiny and the formal written agreements between Mid-Wisconsin and the FDIC and the WDFI, and increased capital requirements; |
• | the financial terms of recent business combinations in the financial services industry and a comparison of the multiples of selected combinations with the terms of the proposed merger; |
• | the receipt of the stock consideration by Mid-Wisconsin’s shareholders on a tax-free basis; |
• | the opinion of Raymond James that the consideration to be received by Mid-Wisconsin’s common shareholders in the merger is fair from a financial point of view; and |
• | the likelihood of the merger being approved by applicable regulatory authorities without undue conditions or delay. |
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OPINION OF MID-WISCONSIN’S FINANCIAL ADVISOR
Mid-Wisconsin retained Raymond James as financial advisor on January 6, 2012. In connection with that engagement, the Mid-Wisconsin Board of Directors requested that Raymond James evaluate the fairness, from a financial point of view, to the holders of Mid-Wisconsin’s outstanding common stock of the price per share merger consideration to be received by such holders pursuant to the merger agreement.
At the November 28, 2012 meeting of the Mid-Wisconsin Board of Directors, Raymond James gave its opinion that, as of such date and based upon and subject to various qualifications and assumptions described with respect to its opinion, the merger consideration to be received by the holders of Mid-Wisconsin common stock pursuant to the merger agreement was fair, from a financial point of view, to the holders of Mid-Wisconsin’s outstanding common stock.
The full text of the written opinion of Raymond James, dated November 28, 2012, which sets forth assumptions made, matters considered, and limits on the scope of review undertaken, is attached asAppendix C to this joint proxy statement-prospectus. The summary of the opinion of Raymond James set forth in this joint proxy statement-prospectus is qualified in its entirety by reference to the full text of such opinion.
Holders of Mid-Wisconsin common stock are urged to read Raymond James’ written opinion in its entirety. Raymond James’ opinion, which is addressed to the Mid-Wisconsin Board of Directors, is directed only to the fairness, from a financial point of view, of the merger consideration to be received by holders of Mid-Wisconsin common stock in connection with the proposed merger. Raymond James’ opinion does not constitute a recommendation to any holder of Mid-Wisconsin common stock as to how such stockholder should vote at the special meeting of Mid-Wisconsin shareholders and does not address any other aspect of the proposed merger or any related transaction. Raymond James does not express any opinion as to the likely trading range of Nicolet common stock following the merger, which may vary depending on numerous factors that generally impact the price of securities or on the financial condition of Nicolet at that time.
In connection with rendering its opinion, Raymond James, among other things:
• | reviewed the financial terms and conditions as stated in the merger agreement; |
• | reviewed the audited financial statements of Mid-Wisconsin as of and for the years ended December 31, 2010 and December 31, 2011, and the unaudited financial statements for the quarter ending September 30, 2012; |
• | reviewed Mid-Wisconsin’s Annual Reports filed on Form 10-K for the years ended December 31, 2010 and December 31, 2011 and Quarterly Reports filed on Form 10-Q for the quarters ended March 31, June 30, and September 30, 2012; |
• | reviewed other Mid-Wisconsin financial and operating information requested from and/or provided by Mid-Wisconsin; |
• | reviewed certain other publicly available information on Mid-Wisconsin; |
• | reviewed financial projections of Mid-Wisconsin provided to Nicolet by Mid-Wisconsin’s management; |
• | reviewed financial information for comparable companies with similar publicly-traded securities; |
• | reviewed the financial terms of recent business combinations involving companies deemed to be similar; |
• | discussed with members of the senior management of Mid-Wisconsin certain information relating to the aforementioned factors and any other matters which we have deemed relevant to our inquiry; and |
• | reviewed other information and conducted such other analyses we deemed relevant. |
In connection with its review, Raymond James assumed and relied upon the accuracy and completeness of all information supplied or otherwise made available to Raymond James by Mid-Wisconsin, Nicolet or any
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other party, and did not undertake any duty or responsibility to verify independently any of such information. Raymond James has not made or obtained an independent appraisal of the assets or liabilities (contingent or otherwise) of Mid-Wisconsin. With respect to financial forecasts and other information and data provided to or otherwise reviewed by or discussed with Raymond James, Raymond James assumed that such forecasts and other information and data were reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of management, and relied upon each party to advise Raymond James promptly if any information previously provided became inaccurate or was required to be updated during the period of its review.
In rendering its opinion, Raymond James assumed that the merger would be consummated on the terms described in the merger agreement. Furthermore, Raymond James assumed, in all respects material to its analysis, that the representations and warranties of each party contained in the merger agreement were true and correct, that each party will perform all of the covenants and agreements required to be performed by it under the merger agreement and that all conditions to the consummation of the merger will be satisfied without being waived. Raymond James also assumed that all material governmental, regulatory or other consents and approvals will be obtained and that, in the course of obtaining any necessary governmental, regulatory or other consents and approvals, or any amendments, modifications or waivers to any documents to which Mid-Wisconsin is a party, as contemplated by the merger agreement, no restrictions will be imposed or amendments, modifications or waivers made that would have any material adverse effect on Mid-Wisconsin. In its financial analyses, Raymond James assumed the merger consideration had a value of $6.15 per Mid-Wisconsin common share. Raymond James expressed no opinion as to the underlying business decision to effect the merger, the structure or tax consequences of the merger agreement, or the availability or advisability of any alternatives to the merger. In rendering the opinion, Raymond James reviewed the terms of the merger agreement and offered no judgment as to the negotiations resulting in such terms.
In conducting its investigation and analyses and in arriving at its opinion, Raymond James took into account such accepted financial and investment banking procedures and considerations as it deemed relevant, including the review of: (i) historical and projected revenues, operating earnings, net income and capitalization of Mid-Wisconsin and certain other publicly held companies in businesses Raymond James believed to be comparable to Mid-Wisconsin; (ii) the current and projected financial position and results of operations of Mid-Wisconsin; (iii) the historical market prices and trading activity of the common stock of Mid-Wisconsin; (iv) financial and operating information concerning selected business combinations which Raymond James deemed comparable in whole or in part; and (v) the general condition of the securities markets.
The following summarizes the material financial analyses presented by Raymond James to the Mid-Wisconsin Board of Directors at its meeting on November 28, 2012, which was considered by Raymond James in rendering the opinion described below. No company or transaction used in the analyses described below is directly comparable to Mid-Wisconsin, Nicolet or the contemplated merger.
Trading Analysis
Raymond James analyzed historical closing prices of Mid-Wisconsin common stock and compared them to the value of the proposed merger consideration. The results of this analysis are summarized below:
Price Per Share | Implied Premium | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Merger consideration value | $ | 6.15 | — | |||||||
Mid-Wisconsin closing stock price as of November 27, 2012 | $ | 4.00 | 53.8 | % | ||||||
52-week high Mid-Wisconsin stock price (May 18, 2012) | $ | 6.50 | –5.4 | % | ||||||
52-week low Mid-Wisconsin stock price (December 27, 2011 and November 27, 2012) | $ | 4.00 | 53.8 | % |
Comparable Company Analysis
Raymond James reviewed and compared certain financial information of Mid-Wisconsin to corresponding financial information, ratios and public market multiples observed for two sets of publicly-traded banks.
The first set included publicly-traded banks and thrifts headquartered in the Midwest with assets between $200.0 million and $1.0 billion, nonperforming assets to total assets between 4.0% and 10.0%, a return on
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average assets less than 0.50% over the last-twelve-months, and an average daily trading volume of their respective common stock of at least 100 shares per day. The financial data used was as of September 30, 2012 (or in four instances, June 30, 2012 when more current financial information was not readily available). The institutions included in the first set of comparable companies included:
• Centrue Financial Corp. | • Mercantile Bancorp, Inc. | • Fentura Financial Inc. | ||||||||
• First Community Financial Partners | • HMN Financial, Inc. | • Wolverine Bancorp Inc. | ||||||||
• Camco Financial Corp | • CIB Marine Bancshares, Inc. | • Bremen Bancorp | ||||||||
• Baraboo Bancorp. | • Ameriana Bancorp | • Central Federal Corp. |
The second set included publicly-traded banks and thrifts based nationwide that have some amount of outstanding preferred stock issued through TARP, assets between $200.0 million and $1.0 billion, nonperforming assets to total assets between 4.0% and 10.0%, a return on average assets less than 0.50% over the last-twelve-months, and an average daily trading volume of their respective common stock of at least 100 shares per day. The financial data used was as of September 30, 2012 (or in six instances, June 30, 2012 when more current financial information was not readily available). The institutions included in the second set of comparable companies included:
• Centrue Financial Corp. | • SouthCrest Financial Group Inc | • IBW Financial Corp | ||||||||
• Royal Bancshares of PA | • First Reliance Bancshares | • M&F Bancorp Inc | ||||||||
• Unity Bancorp Inc | • Delmar Bancorp | • Carolina Trust Bank | ||||||||
• Baraboo Bancorp | • Citizens Bancshares Corp | • United American Bank | ||||||||
• 1st Financial Services Corp. | • Northwest Bancorp | |||||||||
• HMN Financial Inc. | • Provident Community Bancshares |
Raymond James attained various financial multiples and ratios for the selected public companies and Mid-Wisconsin based on publicly available financial information, information provided by Mid-Wisconsin’s management, and common stock closing prices on November 27, 2012. For each of the selected public companies and Mid-Wisconsin, Raymond James reviewed:
• | Common stock price as a multiple of tangible book value as of September 30, 2012 or, in certain instances, June 30, 2012; and |
• | Common stock price as a multiple of earnings per share for the last-twelve-months as of September 30, 2012 or, in certain instances, June 30, 2012. |
The results of these analyses are summarized below:
Trading Multiples of Comp. Publicly-Traded Companies | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Proposed Transaction | Low | Mean | Median | High | |||||||||||||||||||
Comparable Companies — Midwest Banks | |||||||||||||||||||||||
Price/Tangible Book Value Per Share | 38.3 | % | 11.7 | % | 46.5 | % | 39.8 | % | 81.4 | % | |||||||||||||
Price/LTM Earnings Per Share(1) | NM | 6.5 | x | 19.4 | x | 20.5 | x | 30.0 | x | ||||||||||||||
Comparable Companies — TARP Banks | |||||||||||||||||||||||
Price/Tangible Book Value Per Share | 38.3 | % | 7.3 | % | 36.9 | % | 33.9 | % | 82.5 | % | |||||||||||||
Price/LTM Earnings Per Share(1) | NM | 4.9 | x | 23.6 | x | 22.4 | x | 43.2 | x |
(1) | Mid-Wisconsin’s last-twelve-months (“LTM”) earnings as of September 30, 2012 were negative, thus its price / LTM earnings per share was not material. |
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Raymond James also applied the mean, median, minimum, and maximum relative multiples for each of the metrics to Mid-Wisconsin’s actual financial results and determined the implied market value of Mid-Wisconsin common stock and then compared those implied prices per share to Mid-Wisconsin’s closing stock price of $4.00 on November 27, 2012, one day before the merger announcement. These results are summarized below:
Implied Mid-Wisconsin Price Per Share Based on Trading Multiples of Comp. Publicly Traded Companies | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Low | Mean | Median | High | ||||||||||||||||
Comparable Companies — Midwest Banks | |||||||||||||||||||
Price/Tangible Book Value Per Share | $ | 1.87 | $ | 7.46 | $ | 6.39 | $ | 13.06 | |||||||||||
Price/LTM Earnings Per Share(1) | NM | NM | NM | NM | |||||||||||||||
Comparable Companies — TARP Banks | |||||||||||||||||||
Price/Tangible Book Value Per Share | $ | 1.18 | $ | 5.91 | $ | 5.44 | $ | 13.24 | |||||||||||
Price/LTM Earnings Per Share(1) | NM | NM | NM | NM |
(1) | Mid-Wisconsin’s LTM earnings as of September 30, 2012 were negative, thus rendering the implied values as not material |
Precedent Transactions Analysis
Raymond James analyzed publicly available information relating to two sets of selected acquisitions of bank and thrift targets announced since January 1, 2010. The first set included targets which had outstanding preferred stock issued through the TARP, assets between $200.0 million and $1.0 billion and nonperforming assets to total assets greater than 4.0% at the time of the announced acquisition. The transactions included in the first set include:
Announce Date | Acquirer/Target | Announce Date | Acquirer/Target | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6/5/12 | Equity Bancshares Inc. (KS)/First Community Bancshares Inc (KS) | 6/24/11 | SCJ Inc. (CA)/Santa Lucia Bancorp (CA) | |||||||||||
2/9/12 | Horizon Bancorp (IN)/Heartland Bancshares (IN) | 2/23/11 | Piedmont Cmnty Bk Hldgs Inc. (NC)/Crescent Financial Corp. (NC) | |||||||||||
1/12/12 | First Volunteer Corp. (TN)/Gateway Bancshares Inc. (GA) | 2/10/11 | CBM Florida Holding Co. (FL)/First Community Bk of America (FL) | |||||||||||
12/19/11 | SCBT Financial Corp. (SC)/Peoples Bancorporation Inc. (SC) |
Note: Only transactions with available pricing data shown
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The second set included targets with assets between $200.0 million and $1.0 billion and nonperforming assets to total assets between 4.0% and 10.0% and a return on average assets of less than 0.50% for the last-twelve-months prior to the announced acquisition. The transactions included in the second set include:
Announce Date | Acquirer/Target | Announce Date | Acquirer/Target | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
8/7/12 | SCBT Financial Corp. (SC)/Savannah Bancorp Inc. (GA) | 3/30/11 | Home Bancorp Inc. (LA)/GS Financial Corp. (LA) | |||||||||||
7/19/12 | SKBHC Holdings LLC (WA)/ICB Financial (CA) | 3/30/11 | Park Sterling Corporation (NC)/Community Capital Corp. (SC) | |||||||||||
6/5/12 | Equity Bancshares Inc. (KS)/First Community Bancshares Inc (KS) | 2/21/11 | IBERIABANK Corp. (LA)/Omni Bancshares Inc. (LA) | |||||||||||
4/4/12 | Washington Federal Inc. (WA)/South Valley Bancorp Inc. (OR) | 2/10/11 | CBM Florida Holding Co. (FL)/First Community Bk of America (FL) | |||||||||||
3/19/12 | IBERIABANK Corp. (LA)/Florida Gulf Bancorp Inc. (FL) | 12/15/10 | American National Bankshares (VA)/MidCarolina Financial Corp. (NC) | |||||||||||
2/9/12 | Horizon Bancorp (IN)/Heartland Bancshares (IN) | 10/20/10 | Modern Capital Partners L.P. (NY)/Madison National Bancorp Inc. (NY) | |||||||||||
1/24/12 | Old National Bancorp (IN)/Indiana Community Bancorp (IN) | 10/5/10 | Old National Bancorp (IN)/Monroe Bancorp (IN) | |||||||||||
1/12/12 | First Volunteer Corp. (TN)/Gateway Bancshares Inc. (GA) | 9/30/10 | FNB United Corp. (NC)/Bank of Granite Corp. (NC) | |||||||||||
12/21/11 | BNC Bancorp (NC)/KeySource Financial Inc. (NC) | 9/1/10 | Old Line Bancshares Inc (MD)/Maryland Bankcorp Inc. (MD) | |||||||||||
12/19/11 | SCBT Financial Corp. (SC)/Peoples Bancorporation Inc. (SC) | 7/14/10 | Grandpoint Capital Inc. (CA)/First Commerce Bancorp (CA) | |||||||||||
12/14/11 | First Farmers Financial Corp (IN)/First Citizens of Paris Inc. (IL) | 5/10/10 | Jacksonville Bancorp Inc. (FL)/Atlantic BancGroup Inc. (FL) | |||||||||||
7/25/11 | Wintrust Financial Corp. (IL)/Elgin State Bancorp Inc. (IL) | 3/17/10 | Roma Financial Corp. (MHC) (NJ)/Sterling Banks Inc. (NJ) | |||||||||||
6/9/11 | SKBHC Holdings LLC (AZ)/Sunrise Bank(CA) |
Note: Only transactions with available pricing data shown
For the first set of precedent transactions, Raymond James examined multiples of:
• | transaction value as a multiple of tangible book value; and |
• | transaction value as a multiple of the target’s earnings for the last-twelve-months. |
For the second set of precedent transactions, Raymond James examined multiples of:
• | transaction value as a multiple of tangible book value; |
• | transaction value as a multiple of the target’s earnings for the last-twelve-months; and |
• | transaction value premium over tangible book value as a percentage of core deposits. |
Raymond James reviewed the means, medians, minimums, and maximums of these multiples for the selected transactions and compared them to the corresponding multiples for Mid-Wisconsin implied by the merger consideration.
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Multiples of Precedent Transactions | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Proposed Transaction | Low | Mean | Median | High | |||||||||||||||||||
TARP Related M&A Transactions | |||||||||||||||||||||||
Transaction Value/ | |||||||||||||||||||||||
Tangible Book Value Per Share | 38.3 | % | 21.5 | % | 54.6 | % | 52.8 | % | 96.0 | % | |||||||||||||
LTM Earnings Per Share(1) | NM | 14.4 | x | 20.2 | x | 22.0 | x | 24.3 | x | ||||||||||||||
General M&A Transactions | |||||||||||||||||||||||
Transaction Value/ | |||||||||||||||||||||||
Tangible Book Value Per Share | 38.3 | % | 27.8 | % | 90.2 | % | 92.2 | % | 161.7 | % | |||||||||||||
LTM Earnings Per Share(1) | NM | 14.4 | x | 39.4 | x | 45.0 | x | 69.1 | x | ||||||||||||||
Transaction Value less TBV/ | |||||||||||||||||||||||
Core Deposits(2) | –4.7 | % | –5.5 | % | –0.6 | % | –0.8 | % | 6.2 | % |
(1) | Mid-Wisconsin’s LTM earnings as of September 30, 2012 were negative, thus its transaction value / LTM earnings per share was not material |
(2) | Core deposits defined as total deposits less time deposits greater than $100,000 |
Raymond James also applied the mean, median, minimum, and maximum relative multiples for each of the metrics to Mid-Wisconsin’s actual financial results and determined the implied change of control price per share of Mid- Wisconsin as indicated by the precedent transactions and then compared those implied prices per share to the merger consideration of $6.15 per share.
Implied Mid-Wisconsin Price Per Share Based on Precedent Transaction Multiples | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Low | Mean | Median | High | ||||||||||||||||
TARP Related M&A Transactions | |||||||||||||||||||
Transaction Value/ | |||||||||||||||||||
Tangible Book Value Per Share | $ | 3.44 | $ | 8.75 | $ | 8.47 | $ | 15.39 | |||||||||||
LTM Earnings Per Share(1) | NM | NM | NM | NM | |||||||||||||||
General M&A Transactions | |||||||||||||||||||
Transaction Value/ | |||||||||||||||||||
Tangible Book Value Per Share | $ | 4.45 | $ | 14.47 | $ | 14.79 | $ | 25.93 | |||||||||||
LTM Earnings Per Share(1) | NM | NM | NM | NM | |||||||||||||||
Transaction Value less TBV/ | |||||||||||||||||||
Core Deposits(2) | $ | 4.62 | $ | 14.79 | $ | 14.29 | $ | 29.09 |
(1) | Mid-Wisconsin’s LTM earnings as of September 30, 2012 were negative, thus its transaction value / LTM earnings per share was not material |
(2) | Core deposits defined as total deposits less time deposits greater than $100,000 |
Net Present Value Analysis
Raymond James performed a net present value analysis to estimate a range of implied fully-diluted equity values for the holders of Mid-Wisconsin common stock. The analysis used financial projections provided by Mid-Wisconsin’s management for the years ending December 31, 2012 through 2015, which represented the best available estimates and judgment of management. The net income projections were modeled assuming Mid-Wisconsin continues to operate as an independent entity. The valuation range was determined by adding (i) the present value of estimated economic dividends from the time period December 31, 2012 to December 31, 2015 and (ii) the present value of the “terminal value” of Mid-Wisconsin. In calculating terminal values, Raymond James used tangible book value multiples of estimated 2015 year end tangible equity and price/earnings multiples of estimated 2015 net income. The tangible book value multiples ranged from 50.0% to 110.0%, while the price/earnings multiples ranged from 8.0x to 14.0x.
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The projected dividends paid and terminal values were discounted using discount rates ranging from 16.0% to 22.0%, which are rates Raymond James viewed as appropriate for a company with Mid-Wisconsin’s risk characteristics and size. This analysis yielded a range of implied present values of Mid-Wisconsin price per share of common stock of $1.01 to $2.09 when applying a price / earnings multiple and $5.84 to $15.14 when applying a price / tangible book value multiple. Greater weight was placed on the price-to-earnings multiple analysis as a bank’s ability to generate earnings has historically had a more significant impact on its resulting stock price than its tangible book value.
Premium Paid Analysis
Raymond James analyzed the stock price premiums paid in the 25 merger and acquisition transactions used in the second set of precedent transactions above. These transactions were all announced since January 1, 2010 and included targets with assets between $200.0 million and $1.0 billion and nonperforming assets to total assets between 4.0% and 10.0% and a return on average assets of less than 0.50% for the last-twelve-months prior to the announced acquisition. In those transactions where the selling institution was a publicly-traded bank or thrift, Raymond James measured each transaction price per share relative to each target’s closing price per share one day, five days and 30 days prior to announcement of the transaction. Raymond James compared the mean, median, minimum and maximum premiums paid from this set of transactions to the Mid-Wisconsin merger consideration expressed as a premium relative to the closing stock price of Mid-Wisconsin on November 27, November 23, and October 29, 2012. The results of the premium paid analysis are summarized below:
Premiums Paid in Precedent Transactions | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
1-day | 5-day | 30-day | |||||||||||||
Minimum | –49.6 | % | 16.8 | % | –40.3 | % | |||||||||
Mean | 29.2 | % | 58.2 | % | 53.4 | % | |||||||||
Median | 24.0 | % | 55.2 | % | 61.7 | % | |||||||||
Maximum | 69.1 | % | 143.0 | % | 149.2 | % |
Proposed Transaction | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
1-day | 5-day | 30-day | |||||||||||||
Merger consideration | $ | 6.15 | $ | 6.15 | $ | 6.15 | |||||||||
Mid-Wisconsin closing stock price per share | $ | 4.00 | $ | 4.50 | $ | 4.95 | |||||||||
Implied Transaction premium | 53.8 | % | 36.7 | % | 24.2 | % |
Furthermore, Raymond James applied the mean, median, minimum, and maximum premiums for each of the metrics to Mid-Wisconsin’s actual corresponding closing stock prices to determine the implied equity price per share and then compared those implied equity values per share to the merger consideration of $6.15 per share. The results of this are summarized below:
Implied Mid-Wisconsin Price Per Share Based on Premiums Paid in Precedent Transactions | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
1-day | 5-day | 30-day | |||||||||||||
Minimum | $ | 2.02 | $ | 5.26 | $ | 2.95 | |||||||||
Mean | $ | 5.17 | $ | 7.12 | $ | 7.59 | |||||||||
Median | $ | 4.96 | $ | 6.98 | $ | 8.00 | |||||||||
Maximum | $ | 6.76 | $ | 10.94 | $ | 12.34 |
Proposed Transaction | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
1-day | 5-day | 30-day | |||||||||||||
Merger consideration | $ | 6.15 | $ | 6.15 | $ | 6.15 | |||||||||
Implied Transaction Premium | 53.8 | % | 36.7 | % | 24.2 | % |
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Additional Considerations
The preparation of a fairness opinion is a complex process and is not necessarily susceptible to a partial analysis or summary description. Raymond James believes that its analyses must be considered as a whole and that selecting portions of its analyses, without considering the analyses taken as a whole, would create an incomplete view of the process underlying the analyses set forth in its opinion. In addition, Raymond James considered the results of all such analyses and did not assign relative weights to any of the analyses, but rather made qualitative judgments as to significance and relevance of each analysis and factor. As such, the ranges of valuations resulting from any particular analysis described above should not be taken to be Raymond James’ view of the actual value of Mid-Wisconsin.
In performing its analyses, Raymond James made numerous assumptions with respect to industry performance, general business, economic and regulatory conditions and other matters, many of which are beyond the control of Mid-Wisconsin. The analyses performed by Raymond James are not necessarily indicative of actual values, trading values or actual future results which might be achieved, all of which may be significantly more or less favorable than suggested by such analyses. Such analyses were provided to the Mid-Wisconsin Board of Directors and were prepared solely as part of Raymond James’ analysis of the fairness, from a financial point of view, to the holders of Mid-Wisconsin common stock of the price per share merger consideration to be received by such holders in connection with the proposed merger. The analyses do not purport to be appraisals or to reflect the prices at which companies may actually be sold, and such estimates are inherently subject to uncertainty. The opinion of Raymond James was one of many factors taken into consideration by the Mid-Wisconsin Board of Directors in making its determination to approve the merger. Consequently, the analyses described above should not be viewed as determinative of the Mid-Wisconsin Board of Directors’ or Mid-Wisconsin management’s opinion with respect to the value of Mid-Wisconsin. Mid-Wisconsin placed no limits on the scope of the analysis performed, or opinion expressed, by Raymond James.
Raymond James’ opinion was necessarily based upon market, economic, financial, and other circumstances and conditions existing and disclosed to it on November 27, 2012, and any material change in such circumstances and conditions may affect Raymond James’ opinion, but Raymond James does not have any obligation to update, revise or reaffirm that opinion.
For services rendered in connection with the delivery of its opinion, Mid-Wisconsin paid Raymond James a customary investment banking fee upon delivery of its opinion. Mid-Wisconsin will also pay Raymond James a customary fee for advisory services in connection with the merger, which is contingent upon the closing of the merger. Mid-Wisconsin also agreed to reimburse Raymond James for its expenses incurred in connection with its services, including the fees and expenses of its counsel, and will indemnify Raymond James against certain liabilities arising out of its engagement.
Raymond James is actively involved in the investment banking business and regularly undertakes the valuation of investment securities in connection with public offerings, private placements, business combinations and similar transactions. In the ordinary course of business, Raymond James may trade in the securities of Mid-Wisconsin and Nicolet for its own account and for the accounts of its customers and, accordingly, may at any time hold a long or short position in such securities.
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OPINION OF NICOLET’S FINANCIAL ADVISOR
By letter dated July 17, 2012, Nicolet retained Sandler O’Neill to act as its financial advisor in connection with a potential merger with Mid-Wisconsin. Sandler O’Neill is a nationally recognized investment banking firm whose principal business specialty is financial institutions. In the ordinary course of its investment banking business, Sandler O’Neill is regularly engaged in the valuation of financial institutions and their securities in connection with mergers and acquisitions and other corporate transactions.
Sandler O’Neill acted as financial advisor to Nicolet in connection with the proposed transaction and participated in certain of the negotiations leading to the execution of the merger agreement. At a meeting of the Nicolet board of directors on November 20, 2012, Sandler O’Neill delivered to the Nicolet board of directors its oral opinion, followed by delivery of its written opinion, that, as of such date, the common stock consideration was fair to the holders of Nicolet common stock from a financial point of view. The full text of Sandler O’Neill’s written opinion dated November 28, 2012 is attached asAppendix D to this joint proxy statement prospectus. The opinion outlines the procedures followed, assumptions made, matters considered and qualifications and limitations on the review undertaken by Sandler O’Neill in rendering its opinion. The description of the opinion set forth below is qualified in its entirety by reference to the opinion. Nicolet stockholders are urged to read the entire opinion carefully in connection with their consideration of the proposed merger.
Sandler O’Neill’s opinion speaks only as of the date of the opinion. The opinion was directed to the Nicolet board of directors and is directed only to the fairness, from a financial point of view, to the holders of Nicolet common stock of the common stock consideration to be paid to the holders of Mid-Wisconsin common stock. It does not address the underlying business decision of Nicolet to engage in the merger or any other aspect of the merger and is not a recommendation to any Nicolet stockholder as to how such stockholder should vote at the special meeting with respect to the merger or any other matter.
In connection with rendering its November 28, 2012 opinion, Sandler O’Neill reviewed and considered, among other things:
• | the merger agreement; |
• | certain publicly available financial statements and other historical financial information of Nicolet that Sandler O’Neill deemed relevant; |
• | certain publicly available financial statements and other historical financial information of Mid-Wisconsin that Sandler O’Neill deemed relevant; |
• | internal financial projections for Nicolet for the years ending December 31, 2012 through December 31, 2014 as provided by and discussed with senior management of Nicolet; |
• | internal financial projections for Mid-Wisconsin for the years ending December 31, 2012 through 2016 as provided by and discussed with senior management of Mid-Wisconsin; |
• | the pro forma financial impact of the merger on Nicolet, based on assumptions relating to transaction expenses, purchase accounting adjustments, cost savings and other synergies as determined by the management of Nicolet; |
• | a comparison of certain financial information for Nicolet and Mid-Wisconsin with similar institutions for which public information is available; |
• | the financial terms of certain recent business combinations in the commercial banking industry, to the extent publicly available; |
• | the current market environment generally and the banking environment in particular; and |
• | such other information, financial studies, analyses and investigations and financial, economic and market criteria as Sandler O’Neill considered relevant. |
Sandler O’Neill also discussed with certain members of senior management of Nicolet the business, financial condition, results of operations and prospects of Nicolet.
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In performing its review, Sandler O’Neill has relied upon the accuracy and completeness of all of the financial and other information that was available to Sandler O’Neill from public sources, that was provided to Sandler O’Neill by Nicolet and by Mid-Wisconsin or their financial representatives or that was otherwise reviewed by Sandler O’Neill and Sandler O’Neill assumed such accuracy and completeness for purposes of rendering its opinion. Sandler O’Neill has further relied on the assurances of management of each of Nicolet and Mid-Wisconsin that they were not aware of any facts or circumstances that would make any of such information inaccurate or misleading. Sandler O’Neill has not been asked to and has not undertaken an independent verification of any of such information and it did not assume any responsibility or liability for the accuracy or completeness thereof. Sandler O’Neill did not make an independent evaluation or appraisal of the specific assets, the collateral securing assets or the liabilities (contingent or otherwise) of Nicolet and Mid-Wisconsin or any of their subsidiaries, or the collectability of any such assets, nor was it furnished with any such evaluations or appraisals.
Sandler O’Neill did not make an independent evaluation of the adequacy of the allowance for credit losses of Nicolet and Mid-Wisconsin and has not reviewed any individual credit files relating to Nicolet and Mid-Wisconsin. Sandler O’Neill assumed, with Nicolet’s consent, that the respective allowances for credit losses for both Nicolet and Mid-Wisconsin are adequate to cover such losses.
With respect to the internal financial projections for Nicolet and Mid-Wisconsin and as provided by and discussed with the respective managements of Nicolet and Mid-Wisconsin and used by Sandler O’Neill in its analyses, the respective managements of Nicolet and Mid-Wisconsin confirmed to Sandler O’Neill that they reflected the best currently available estimates and judgments of such respective management of the future financial performances of Nicolet and Mid-Wisconsin, respectively, and Sandler O’Neill assumed that such performances would be achieved. With respect to the projections of transaction expenses, purchase accounting adjustments and cost savings provided by the management of Nicolet, management confirmed to Sandler O’Neill that they reflected the best currently available estimates and judgments of such management and Sandler O’Neill assumed that such performances would be achieved. Sandler O’Neill expressed no opinion as to such financial projections or the assumptions on which they are based. Sandler O’Neill has also assumed that there has been no material change in Nicolet and Mid-Wisconsin assets, financial condition, results of operations, business or prospects since the date of the most recent financial statements made available to Sandler O’Neill. Sandler O’Neill has assumed in all respects material to its analysis that Nicolet and Mid-Wisconsin will remain as going concerns for all periods relevant to the analyses, that all of the representations and warranties contained in the merger agreement are true and correct, that each party to the merger agreement will perform all of the covenants required to be performed by such party under the merger agreement and that the conditions precedent in the merger agreement are not waived. Sandler O’Neill expressed no opinion as to any of the legal, accounting or tax matters relating to the merger and the other transactions contemplated by the merger agreement.
Sandler O’Neill’s opinion was necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to Sandler O’Neill as of, the date of the opinion. Events occurring after the date of the opinion could materially affect the opinion. Sandler O’Neill has not undertaken to update, revise, reaffirm or withdraw the opinion or otherwise comment upon events occurring after the date of the opinion. Sandler O’Neill expressed no opinion as to what the value of Nicolet common stock will be when issued to Mid-Wisconsin stockholders pursuant to the merger agreement or the prices at which Nicolet and Mid-Wisconsin common stock may trade at any time.
Sandler O’Neill’s opinion is directed only to the fairness, from a financial point of view, of the merger consideration to Nicolet and does not address the underlying business decision of Nicolet to engage in the merger, the relative merits of the merger as compared to any other alternative business strategies that might exist for Nicolet or the effect of any other transaction in which Nicolet might engage. Sandler O’Neill’s opinion was approved by Sandler O’Neill’s fairness opinion committee. Sandler O’Neill has consented to inclusion of its opinion and a summary thereof in this joint proxy statement/prospectus and in the registration statement on Form S-4 which includes this joint proxy statement/prospectus. Sandler O’Neill did not express any opinion as to the fairness of the amount or nature of the consideration to be received in the merger by any Nicolet or Mid-Wisconsin officer, director, or employee, or class of such persons, relative to the consideration to be received in the merger by any other stockholders.
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In rendering its November 28, 2012 opinion, Sandler O’Neill performed a variety of financial analyses. The following is a summary of the material analyses performed by Sandler O’Neill, but is not a complete description of all the analyses underlying Sandler O’Neill’s opinion. The summary includes information presented in tabular format.In order to fully understand the financial analyses, these tables must be read together with the accompanying text. The tables alone do not constitute a complete description of the financial analyses. The preparation of a fairness opinion is a complex process involving subjective judgments as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances. In arriving at its opinion, Sandler O’Neill did not attribute any particular weight to any analysis or factor that it considered. Rather Sandler O’Neill made qualitative judgments as to the significance and relevance of each analysis and factor. Sandler O’Neill did not form an opinion as to whether any individual analysis or factor (positive or negative) considered in isolation supported or failed to support its opinion; rather Sandler O’Neill made its determination as to the fairness of the common stock consideration on the basis of its experience and professional judgment after considering the results of all its analyses taken as a whole. The process, therefore, is not necessarily susceptible to a partial analysis or summary description. Sandler O’Neill believes that its analyses must be considered as a whole and that selecting portions of the factors and analyses to be considered without considering all factors and analyses, or attempting to ascribe relative weights to some or all such factors and analyses, could create an incomplete view of the evaluation process underlying its opinion. Also, no company included in Sandler O’Neill’s comparative analyses described below is identical to Nicolet or Mid-Wisconsin and no transaction is identical to the merger. Accordingly, an analysis of comparable companies or transactions involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies and other factors that could affect the public trading values or merger transaction values, as the case may be, of Nicolet or Mid-Wisconsin and the companies to which they are being compared.
In performing its analyses, Sandler O’Neill also made numerous assumptions with respect to industry performance, business and economic conditions and various other matters, many of which cannot be predicted and are beyond the control of Nicolet, Mid-Wisconsin and Sandler O’Neill. The analysis performed by Sandler O’Neill is not necessarily indicative of actual values or future results, both of which may be significantly more or less favorable than suggested by such analyses. Sandler O’Neill prepared its analyses solely for purposes of rendering its opinion and provided such analyses to the Nicolet board of directors at the November 20, 2012 meeting. Estimates on the values of companies do not purport to be appraisals or necessarily reflect the prices at which companies or their securities may actually be sold. Such estimates are inherently subject to uncertainty and actual values may be materially different. The analysis and opinion of Sandler O’Neill was among a number of factors taken into consideration by the Nicolet board of directors in making its determination to adopt the plan of merger contained in the merger agreement and the analyses described below should not be viewed as determinative of the decision the Nicolet board of directors with respect to the fairness of the merger.
At the November 20, 2012 meeting of the Nicolet board of directors, Sandler O’Neill presented certain financial analyses of the merger. The summary below is not a complete description of the analyses underlying the opinions of Sandler O’Neill or the presentation made by Sandler O’Neill to the Nicolet board of directors, but is instead a summary of the material analyses performed and presented in connection with the opinion.
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Summary of Proposal
Sandler O’Neill reviewed the financial terms of the proposed transaction. Using the per share cash consideration of the fixed exchange ratio of 0.3727x multiplied by Nicolet’s stock price of $16.50 as agreed upon in the merger agreement, as amended, Sandler O’Neill calculated that Nicolet would pay a transaction value of $6.15 per share, or a transaction value of $10.2 million for the common shares of Mid-Wisconsin, plus the redemption of $10.5 million for the Mid-Wisconsin Preferred Stock and $1.2 million for deferred Preferred Stock dividends and accured and unpaid interest on the Debentures. Based upon financial information for Mid-Wisconsin as or for the quarter ended September 30, 2012, Sandler O’Neill calculated the following ratios related to the transaction:
Nicolet/ Mid-Wisconsin | Nationwide Comparable Transactions (4) | Midwest Comparable Transactions (5) | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Transaction price/Last twelve months EPS | NM | 23.9 | x | 16.4 | x | |||||||||
Transaction price/Estimated 2012 EPS | NM | — | — | |||||||||||
Transaction price/Book value | 38 | % | 76 | % | 109 | % | ||||||||
Transaction price/Tangible book value | 38 | % | 76 | % | 109 | % | ||||||||
Transaction price/Adj. tangible book value (1) | 52 | % | — | — | ||||||||||
Core deposit premium (2) | (5.4 | )% | (2.1 | )% | 0.9 | % | ||||||||
Premium to market (3) | 28.1 | % | 37.2 | % | — |
(1) | Stated 9/30/12 Tangible Common Equity adjusted for estimated purchase accounting adjustments; includes impact of pre-tax mark-to-market of –$24.6 mm on gross loans (–7.94%), –$2.5 mm on OREO (–55.9%), $0.6 mm on Investment Securities; $5.0 mm on fixed assets; $2.4 mm on FHLB borrowings and –$5.5 mm on Trust Preferred Securities. |
(2) | Core deposits measured as total deposits less all time deposits greater than $100,000. |
(3) | Based on Mid-Wisconsin’s closing price as of November 14, 2012 of $4.80. |
(4) | Includes all bank and thrift transactions announced since January 1, 2011 with Target NPAs / Assets > 5.5% and disclosed Deal Values $5 mm–$50 mm (31 transactions). |
(5) | Includes all bank and thrift transactions announced since January 1, 2011 for institutions headquartered in WI, MN and MI with disclosed Deal Values $5 mm–$50 mm (6 transactions). |
The aggregate transaction value for the common stock of Mid-Wisconsin of approximately $10.2 million is based upon the offer price per share of $6.15 and 1,657,119 shares of Mid-Wisconsin common stock outstanding.
Comparable Company Analysis
Sandler O’Neill used publicly available information to perform a comparison of selected financial and market trading information for Mid-Wisconsin and Nicolet. Sandler O’Neill also used publicly available information to compare selected financial and market trading information for Mid-Wisconsin and a group of financial institutions selected by Sandler O’Neill. The Mid-Wisconsin peer group consisted of the following publicly-traded commercial banks headquartered in Wisconsin and Michigan with total assets greater than $300 million and less than $1.0 billion as selected by Sandler O’Neill1:
Baylake Corporation | Citizens Community Bancorp | |||||
First Manitowoc Bancorp Inc. | Southern Michigan Bancorp Inc. | |||||
United Bancorp Inc. | ChoiceOne Financial Services | |||||
Baraboo Bancorp | CIB Marine Bancshares Inc. | |||||
PSB Holdings Inc. | Denmark Bancshares Inc. | |||||
HMN Financial Inc. | Commercial National Financial | |||||
Blackhawk Bancorp Inc. | West Shore Bank Corporation | |||||
Mackinac Financial Corp. | Sturgis Bancorp |
The analysis compared publicly available financial information for Mid-Wisconsin, Nicolet and the median financial and market trading data for the Mid-Wisconsin peer group as of and for the last twelve months ended September 30, 2012. The table below sets forth the data for Mid-Wisconsin, Nicolet and the
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median data for the Mid-Wisconsin peer group as of and for the last twelve months ended September 30, 2012, with pricing data as of November 12, 2012.
Mid-Wisconsin | Nicolet | Comparable Group Median | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Total assets(in millions) | $ | 464 | $ | 682 | $ | 542 | ||||||||
Tangible common equity/tangible assets | 5.73 | % | 7.25 | % | 8.19 | % | ||||||||
Total risk based capital ratio | 16.14 | % | 15.12 | % | 14.67 | % | ||||||||
Return on average assets | 0.32 | % | 0.57 | % | 0.7 | % | ||||||||
Net interest margin | 3.32 | % | 3.81 | % | 3.68 | % | ||||||||
Efficiency ratio | 73.2 | % | 68.1 | % | 67.5 | % | ||||||||
Non-performing assets/assets | 5.64 | % | 2.31 | % | 2.91 | % | ||||||||
Loan loss reserve/total loans | 3.40 | % | 1.18 | % | 1.75 | % | ||||||||
Net charge-offs/average loans | 1.47 | % | 0.40 | % | 0.83 | % | ||||||||
Market capitalization(in millions) | $ | 8.0 | NA | $ | 30.7 | |||||||||
Price/Last twelve months earnings per share | NM | NA | 10.0 | |||||||||||
Price/tangible book value | 30 | % | NA | 73 | % |
Financial data as of or for period ending September 30, 2012
Pricing data as of November 12, 2012
Pricing data as of November 12, 2012
Balance Sheet | Capital Adequacy | Profitability (MRQ) | Asset Quality | Valuation | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Price/ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Company | City, State | Ticker | Total Assets ($mm) | Loans/ Deposits (%) | TCE/ TA (%) | Leverage Ratio (%) | Total RBC (%) | ROAA (%) | ROAE (%) | NIM (%) | Eff. Ratio (%) | Res./ Loans (%) | NPAs/ Assets (%) | NCOs/ Loans (%) | TBV (%) | LTM EPS (x) | Market Cap. ($mm) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Baylake Corp. | Sturgeon Bay, WI | BYLK | 985 | 75.2 | 8.63 | 8.48 | 15.28 | 0.80 | 9.3 | 3.53 | 64.2 | 1.77 | 2.73 | 2.03 | 73 | 10.3 | 61.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
First Manitowoc Bancorp Inc. | Manitowoc, WI | FMWC | 938 | 90.1 | 9.72 | 9.28 | 12.28 | 0.97 | 9.3 | 3.78 | 51.6 | 1.09 | 1.14 | 0.27 | 111 | 9.8 | 100.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
United Bancorp Inc. | Ann Arbor, MI | UBMI | 899 | 76.3 | 8.50 | 10.10 | 16.40 | 0.62 | 5.8 | 3.65 | 67.4 | 3.72 | 4.32 | 1.10 | 73 | 13.3 | 55.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Baraboo Bancorp. | Baraboo, WI | BAOB | 746 | 81.8 | 6.07 | 8.81 | 12.63 | 0.67 | 7.3 | 3.41 | 67.1 | 2.47 | 8.51 | 1.19 | 30 | NM | 13.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
PSB Holdings Inc. | Wausau, WI | PSBQ | 693 | 87.7 | 7.77 | 8.58 | 14.72 | 0.70 | 9.2 | 3.39 | 59.9 | 1.54 | 2.48 | 0.19 | 83 | 7.8 | 44.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
HMN Financial Inc.2 | Rochester, MN | HMNF | 644 | 97.9 | 5.38 | 9.55 | 14.61 | 0.40 | 4.2 | 3.71 | 74.4 | 4.10 | 7.38 | 1.29 | 45 | NM | 15.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Blackhawk Bancorp Inc.3 | Beloit, WI | BHWB | 559 | 73.4 | 5.72 | 7.93 | 12.29 | 0.50 | 6.0 | 3.63 | 69.0 | 1.74 | 4.47 | 2.64 | 45 | 6.4 | 14.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mackinac Financial Corp | Manistique, MI | MFNC | 551 | 98.8 | 11.24 | 11.93 | 15.15 | 0.76 | 6.1 | 4.10 | 67.5 | 1.20 | 1.60 | 0.04 | 65 | 5.0 | 40.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Citizens Community Bncp2 4 | Eau Claire, WI | CZWI | 533 | 101.1 | 10.09 | 10.18 | 15.00 | 0.26 | 2.6 | 3.90 | 74.2 | 1.32 | 2.15 | 0.81 | 54 | NM | 29.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Southern Michigan Bancorp Inc. | Coldwater, MI | SOMC | 516 | 81.3 | 7.89 | 9.00 | 13.70 | 0.91 | 8.6 | 3.83 | 67.2 | 1.52 | 2.20 | 0.18 | 81 | 7.6 | 32.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
ChoiceOne Financial Services4 | Sparta, MI | COFS | 510 | 72.2 | 9.05 | 8.47 | 13.40 | 0.88 | 7.5 | 4.06 | 65.2 | 1.90 | 1.91 | 0.44 | 107 | 11.4 | 47.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
CIB Marine Bancshares Inc. | Waukesha, WI | CIBH | 495 | 80.2 | 3.25 | 13.80 | 18.55 | 0.76 | 5.7 | 3.75 | 103.2 | 3.69 | 6.10 | 1.35 | 34 | NM | 5.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Denmark Bancshares Inc.4 | �� | Denmark, WI | DMKB | 430 | 91.2 | 13.50 | 13.79 | 19.92 | 0.91 | 6.8 | 3.42 | 61.5 | 2.11 | 3.09 | 0.53 | 64 | 10.2 | 37.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial National Financial2 4 | Ithaca, MI | CEFC | 365 | 89.4 | 5.65 | 8.08 | 14.59 | 0.51 | 8.9 | 3.61 | 71.1 | 0.84 | 3.89 | 0.86 | 127 | 12.5 | 26.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
West Shore Bank Corporation | Ludington, MI | WSSH | 345 | 81.7 | 9.20 | 8.85 | 15.26 | 0.69 | 7.5 | 3.84 | 70.4 | 1.34 | 2.50 | 0.84 | 86 | 12.3 | 27.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sturgis Bancorp | Sturgis, MI | STBI | 317 | 109.5 | 6.84 | 8.69 | 13.26 | 0.66 | 7.9 | 3.61 | 72.4 | 2.10 | 6.06 | 0.07 | 76 | 7.7 | 16.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
High | 985 | 109.5 | 13.50 | 13.80 | 19.92 | 0.97 | 9.3 | 4.10 | 103.2 | 4.10 | 8.51 | 2.64 | 127 | 13.3 | 100.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Low | 317 | 72.2 | 3.25 | 7.93 | 12.28 | 0.26 | 2.6 | 3.39 | 51.6 | 0.84 | 1.14 | 0.04 | 30 | 5.0 | 5.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mean | 595 | 86.7 | 8.03 | 9.72 | 14.82 | 0.69 | 7.0 | 3.70 | 69.1 | 2.03 | 3.78 | 0.86 | 72 | 9.5 | 35.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Median | 542 | 84.8 | 8.19 | 8.93 | 14.67 | 0.70 | 7.4 | 3.68 | 67.5 | 1.75 | 2.91 | 0.83 | 73 | 10.0 | 30.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mid-Wisconsin Financial | Medford, WI | MWFS | 464 | 84.4 | 5.73 | 9.70 | 16.14 | 0.32 | 4.1 | 3.32 | 73.2 | 3.40 | 5.64 | 1.47 | 30 | NM | 8.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Nicolet Bankshares, Inc. | Green Bay, WI | — | 678 | 98.9 | 7.25 | 11.54 | 15.12 | 0.57 | 5.1 | 3.81 | 68.1 | 1.18 | 2.31 | 0.40 | — | — | — |
(1) | Includes public banks and thrifts headquartered in WI, MN, and MI with assets between $300 mm—$1.0 bn. Excludes companies with less than 1.0% of one year average trading volume / total shares. |
49
(2) | Bank level regulatory financial data for the period ended September 30, 2012. |
(3) | Regulatory financial data for the period ended September 30, 2012. |
(4) | GAAP Financial data for the period ended June 30, 2012. |
Net Present Value Analysis of Mid-Wisconsin Common Stock
Sandler O’Neill performed an analysis that estimated the present value per share of Mid-Wisconsin common stock through December 31, 2016. Sandler O’Neill based the analysis on Mid-Wisconsin projected earnings stream as derived from the internal financial projections provided by Mid-Wisconsin management for the years ending December 31, 2012 through 2016. To approximate the terminal value of Mid-Wisconsin common stock at December 31, 2016, Sandler O’Neill applied price to forward earnings multiples of 12.0x to 16.0x and multiples of tangible book value ranging from 100% to 180%. The income streams and terminal values were then discounted to present values using different discount rates ranging from 12.0% to 15.0%, which were assumed deviations, both up and down, as selected by Sandler O’Neill based on the Mid-Wisconsin discount rate of 13.4% as determined by Sandler O’Neill. The discount rate is determined by adding the 10 year Treasury Bond rate (1.61%), the published Ibbotson 60 year equity risk premium (5.70%), the published Ibbotson size premium (3.89%) and the published Ibbotson Industry Premium (2.20%).
Earnings Per Share Multiples
(Value shown in $ per share)
(Value shown in $ per share)
Discount Rate | 12.0x | 13.0x | 14.0x | 15.0x | 16.0x | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
12.0% | 12.65 | 13.71 | 14.76 | 15.82 | 16.87 | |||||||||||||||||
13.0% | 12.18 | 13.20 | 14.22 | 15.23 | 16.25 | |||||||||||||||||
13.4% | 12.00 | 13.00 | 14.00 | 15.00 | 16.00 | |||||||||||||||||
14.0% | 11.74 | 12.71 | 13.69 | 14.67 | 15.65 | |||||||||||||||||
15.0% | 11.31 | 12.25 | 13.19 | 14.14 | 15.08 |
Sandler O’Neill also considered and discussed with Nicolet’s board of directors how this analysis would be affected by changes in the underlying assumptions, including variations with respect to net income. To illustrate this impact, Sandler O’Neill performed a similar analysis assuming Mid-Wisconsin net income varied from 20% above projections to 20% below projections. This analysis resulted in the following reference ranges of indicated per share values for Mid-Wisconsin common stock, using a discount rate of 13.40%:
Earnings Per Share Multiples
(Value shown in $ per share)
(Value shown in $ per share)
EPS Projection Change from Base Case | 100% | 120% | 140% | 160% | 180% | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
–20.0% | 9.60 | 10.40 | 11.20 | 12.00 | 12.80 | |||||||||||||||||
–10.0% | 10.80 | 11.70 | 12.60 | 13.50 | 14.40 | |||||||||||||||||
0.0% | 12.00 | 13.00 | 14.00 | 15.00 | 16.00 | |||||||||||||||||
10.0% | 13.20 | 14.30 | 15.40 | 16.50 | 17.60 | |||||||||||||||||
20.0% | 14.40 | 15.60 | 16.80 | 18.00 | 19.20 |
Analysis of Selected Merger Transactions
Sandler O’Neill reviewed the terms of merger transactions announced from January 1, 2011 through November 20, 2012 involving Midwest banks with announced transaction values of greater than $5 million and less than $50 million and nationwide banks where the target had an Nonperforming Assets/Assets ratio greater than 5.5% with announced transaction values of greater than $5 million and less than $50 million. Sandler O’Neill deemed these transactions to be reflective of the proposed Mid-Wisconsin and Nicolet combination. Sandler O’Neill reviewed the following ratios and multiples: transaction price to stated book value, transaction price to stated tangible book value, transaction price to last twelve months earnings per share, and market price premium at announcement. As illustrated in the following table, Sandler O’Neill compared the proposed merger multiples to the median multiples of the comparable transactions.
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Nicolet / Mid-Wisconsin | Nationwide Comparable Transactions | Midwest Comparable Transactions | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Transaction price/book value | 38 | % | 76 | % | 109 | % | ||||||||
Transaction price/tangible book value | 38 | % | 76 | % | 109 | % | ||||||||
Transaction price/last twelve months earnings per share | NM | 23.9 | x | 16.4 | x | |||||||||
Core deposit premium | (5.4 | )% | (2.1 | )% | 0.9 | % | ||||||||
Premium to market | 28.1 | % | 37.2 | % | NA |
Transactions Announced with a Nationwide Bank Target with NPAs/Assets > 5.5%
Announced Deal Value $5mm-$50mm
Transaction Information | Seller Information | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Price/ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquiror | Target | State | Annc. Date | Deal Value ($mm) | LTM EPS (x) | Book Value (%) | TBV (%) | Core Deposit Premium (%) | 1 Day Market Premium (%) | Total Assets ($mm) | TCE/ TA (%) | YTD ROAA (%) | NPAs/ Assets (%) | ||||||||||||||||||||||||||||||||||||||||||
Talmer Bancorp Inc. | First Place Bank | OH | 10/26/12 | 45.0 | 1.6 | 29 | 29 | (5.3 | ) | — | 2,639 | 5.79 | 1.31 | 7.74 | |||||||||||||||||||||||||||||||||||||||||
BBCN Bancorp Inc. | Pacific International Bancorp | WA | 10/22/12 | 14.7 | NM | 37 | 37 | (7.2 | ) | — | 209 | 11.68 | (2.83 | ) | 12.04 | ||||||||||||||||||||||||||||||||||||||||
Sterling Financial Corp. | American Heritage Holdings | CA | 10/22/12 | 6.5 | NM | 51 | 51 | (5.1 | ) | — | 150 | 9.88 | (0.34 | ) | 11.97 | ||||||||||||||||||||||||||||||||||||||||
Strategic Growth Bank Inc. | Mile High Banks | CO | 09/27/12 | 5.5 | NM | 27 | 27 | (1.9 | ) | — | 844 | 2.41 | (0.49 | ) | 15.71 | ||||||||||||||||||||||||||||||||||||||||
Old Line Bancshares Inc | WSB Holdings Inc. | MD | 09/10/12 | 49.0 | 43.7 | 89 | 89 | (2.8 | ) | — | 374 | 14.76 | 0.24 | 10.04 | |||||||||||||||||||||||||||||||||||||||||
City Holding Co. | Community Financial Corp. | VA | 08/02/12 | 37.9 | 23.9 | 66 | 66 | (3.8 | ) | 46.8 | 504 | 7.53 | 0.35 | 7.27 | |||||||||||||||||||||||||||||||||||||||||
Hana Financial Group Inc. | BNB Financial Services Corp. | NY | 07/21/12 | 11.3 | NM | 42 | 42 | (7.7 | ) | — | 355 | 11.97 | (0.54 | ) | 6.59 | ||||||||||||||||||||||||||||||||||||||||
Drummond Banking Co. | Williston Holding Co. | FL | 06/14/12 | 15.6 | NM | 83 | 83 | (2.1 | ) | — | 188 | 7.45 | (2.55 | ) | 7.21 | ||||||||||||||||||||||||||||||||||||||||
BNC Bancorp | First Trust Bank | NC | 06/04/12 | 36.0 | 14.0 | 76 | 76 | (4.3 | ) | 27.7 | 437 | 10.86 | 0.76 | 10.43 | |||||||||||||||||||||||||||||||||||||||||
Northfield Bancorp Inc. (MHC) | Flatbush Fed Bncp Inc. (MHC) | NY | 02/29/12 | 18.2 | NM | 120 | 120 | 3.8 | 90.1 | 144 | 10.53 | (0.73 | ) | 7.17 | |||||||||||||||||||||||||||||||||||||||||
Arvest Bank Group Inc. | Union Bank | MO | 01/30/12 | 34.0 | NM | 189 | 189 | 3.9 | — | 459 | 3.91 | (3.13 | ) | 25.59 | |||||||||||||||||||||||||||||||||||||||||
First Volunteer Corp. | Gateway Bancshares Inc. | GA | 01/12/12 | 16.4 | 24.3 | 69 | 69 | (3.2 | ) | — | 267 | 9.24 | (0.44 | ) | 6.09 | ||||||||||||||||||||||||||||||||||||||||
BNC Bancorp | KeySource Financial Inc. | NC | 12/21/11 | 12.2 | 14.4 | 60 | 60 | (5.0 | ) | — | 206 | 10.86 | 0.18 | 7.36 | |||||||||||||||||||||||||||||||||||||||||
First Farmers Financial Corp | First Citizens of Paris Inc. | IL | 12/14/11 | 16.9 | 49.0 | 88 | 90 | (1.1 | ) | — | 219 | 10.13 | 0.33 | 5.89 | |||||||||||||||||||||||||||||||||||||||||
Bitterroot Holding Co. | Ravalli County Bankshares Inc. | MT | 10/12/11 | 18.1 | NM | 89 | 89 | (1.7 | ) | — | 187 | 10.92 | 0.10 | 8.66 | |||||||||||||||||||||||||||||||||||||||||
SKBHC Holdings LLC | Viking Fncl. Services Corp. | WA | 09/08/11 | 7.2 | NM | 68 | 68 | (1.0 | ) | — | 405 | 2.62 | (1.91 | ) | 11.61 | ||||||||||||||||||||||||||||||||||||||||
Investors Bancorp Inc. (MHC) | BFS Bancorp MHC | NY | 08/16/11 | 10.3 | NM | 25 | 25 | (9.5 | ) | — | 470 | 8.67 | (1.58 | ) | 24.93 | ||||||||||||||||||||||||||||||||||||||||
Wintrust Financial Corp. | Elgin State Bancorp Inc. | IL | 07/25/11 | 15.5 | NM | 92 | 92 | (0.6 | ) | — | 288 | 6.44 | 0.02 | 6.41 | |||||||||||||||||||||||||||||||||||||||||
Security Star Bancshares Inc. | Bank of Texas Bcshs Inc. | TX | 07/22/11 | 5.1 | NM | 113 | 113 | 1.7 | — | 50 | 9.15 | (2.06 | ) | 5.71 | |||||||||||||||||||||||||||||||||||||||||
SKBHC Holdings LLC | Sunrise Bank | CA | 06/09/11 | 18.5 | NM | 92 | 92 | (1.0 | ) | — | 232 | 8.67 | 0.95 | 6.07 | |||||||||||||||||||||||||||||||||||||||||
SKBHC Holdings LLC | Bank of the Northwest | WA | 05/24/11 | 16.8 | NM | 111 | 111 | 1.5 | — | 146 | 10.38 | 0.22 | 5.72 | ||||||||||||||||||||||||||||||||||||||||||
North American Finl Hldgs Inc. | Green Bankshares Inc | TN | 05/05/11 | 9.9 | NM | 8 | 8 | (7.6 | ) | — | 2,406 | 2.89 | (3.21 | ) | 10.77 | ||||||||||||||||||||||||||||||||||||||||
Banco do Brasil S.A. | EuroBank | FL | 04/06/11 | 6.0 | NM | 109 | 109 | 1.3 | — | 102 | 5.39 | (3.47 | ) | 12.39 | |||||||||||||||||||||||||||||||||||||||||
First Bank Lubbock Bcshs Inc. | Jefferson Bank | TX | 04/03/11 | 11.0 | NM | 92 | 92 | (1.1 | ) | — | 205 | 5.83 | (0.91 | ) | 10.55 | ||||||||||||||||||||||||||||||||||||||||
Park Sterling Corporation | Community Capital Corp. | SC | 03/30/11 | 32.3 | NM | 68 | 70 | (3.2 | ) | 21.2 | 656 | 7.05 | (0.75 | ) | 6.62 | ||||||||||||||||||||||||||||||||||||||||
First Foundation Inc. | Desert Commercial Bank | CA | 03/22/11 | 20.1 | NM | 126 | 126 | 4.8 | — | 153 | 10.40 | (1.01 | ) | 5.98 | |||||||||||||||||||||||||||||||||||||||||
Embarcadero Bank | Coronado First Bank | CA | 03/22/11 | 9.3 | NM | 100 | 100 | (0.0 | ) | 48.4 | 83 | 11.21 | (0.12 | ) | 7.45 | ||||||||||||||||||||||||||||||||||||||||
Opus Bank | Cascade Financial Corp. | WA | 03/03/11 | 21.8 | NM | 26 | 27 | (3.4 | ) | (19.9 | ) | 1,498 | 1.39 | (4.27 | ) | 9.76 | |||||||||||||||||||||||||||||||||||||||
Piedmont Cmnty Bk Hldgs Inc. | Crescent Financial Corp. | NC | 02/23/11 | 30.6 | NM | 44 | 44 | (10.4 | ) | — | 973 | 5.65 | (1.00 | ) | 5.51 | ||||||||||||||||||||||||||||||||||||||||
IBERIABANK Corp. | Omni Bancshares Inc. | LA | 02/21/11 | 40.0 | NM | 121 | 121 | 1.4 | — | 746 | 4.42 | (0.04 | ) | 8.71 | |||||||||||||||||||||||||||||||||||||||||
CBM Florida Holding Co. | First Community Bk of America | FL | 02/10/11 | 10.0 | NM | 37 | 37 | (5.5 | ) | — | 471 | 5.74 | (3.48 | ) | 9.75 | ||||||||||||||||||||||||||||||||||||||||
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Transaction Information | Seller Information | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Price/ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquiror | Target | State | Annc. Date | Deal Value ($mm) | LTM EPS (x) | Book Value (%) | TBV (%) | Core Deposit Premium (%) | 1 Day Market Premium (%) | Total Assets ($mm) | TCE/ TA (%) | YTD ROAA (%) | NPAs/ Assets (%) | ||||||||||||||||||||||||||||||||||||||||||
High | 49.0 | 49.0 | 189 | 189 | 4.8 | 90.1 | 2,639 | 14.76 | 1.31 | 25.59 | |||||||||||||||||||||||||||||||||||||||||||||
Low | 5.1 | 1.6 | 8 | 8 | (10.4 | ) | (19.9 | ) | 50 | 1.39 | (4.27 | ) | 5.51 | ||||||||||||||||||||||||||||||||||||||||||
Mean | 19.4 | 24.4 | 76 | 76 | (2.4 | ) | 35.7 | 518 | 7.86 | (0.98 | ) | 9.60 | |||||||||||||||||||||||||||||||||||||||||||
Median | 16.4 | 23.9 | 76 | 76 | (2.1 | ) | 37.2 | 288 | 8.67 | (0.54 | ) | 7.74 |
Transactions Announced with a Bank Target with Headquarters located in Wisconsin, Michigan or Minnesota
Announced Deal Value $5mm-$50mm
Transaction Information | Seller Information | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Price/ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquiror | Target | State | Annc. Date | Deal Value ($mm) | LTM EPS (x) | Book Value (%) | TBV (%) | Core Deposit Premium (%) | 1 Day Market Premium (%) | Total Assets ($mm) | TCE/ TA (%) | YTD ROAA (%) | NPAs/ Assets (%) | ||||||||||||||||||||||||||||||||||||||||||
Centra Ventures Inc | Richmond Bank Holding Co. | MN | 09/14/12 | 8.3 | 10.4 | 70 | 70 | (5.0 | ) | — | 86 | 14.27 | 0.81 | 0.30 | |||||||||||||||||||||||||||||||||||||||||
Heartland Financial USA Inc. | First Shares Inc. | WI | 07/31/12 | 11.0 | 34.7 | 85 | 85 | (1.8 | ) | — | 130 | 11.00 | 0.26 | 1.96 | |||||||||||||||||||||||||||||||||||||||||
Frandsen Financial Corporation | Clinton Bancshares Inc. | MN | 07/27/12 | 11.2 | 11.9 | 120 | 120 | 3.5 | — | 66 | 14.16 | 2.92 | 0.88 | ||||||||||||||||||||||||||||||||||||||||||
PSB Holdings Inc. | Marathon State Bank | WI | 03/15/12 | 5.6 | 9.9 | 100 | 100 | 0.0 | — | 108 | 18.42 | 0.54 | 0.00 | ||||||||||||||||||||||||||||||||||||||||||
Golden Oak Bancshares, Inc | Park Bank | WI | 05/18/11 | 6.3 | 21.0 | 123 | 123 | 4.6 | — | 44 | 14.45 | 0.82 | 5.17 | ||||||||||||||||||||||||||||||||||||||||||
Finlayson Bancshares Inc. | First NB of the North | MN | 01/20/11 | 7.1 | 51.6 | 119 | 119 | 1.9 | — | 70 | 8.60 | 0.64 | 2.59 | ||||||||||||||||||||||||||||||||||||||||||
High | 11.2 | 51.6 | 123 | 123 | 4.6 | — | 130 | 18.42 | 2.92 | 5.17 | |||||||||||||||||||||||||||||||||||||||||||||
Low | 5.6 | 9.9 | 70 | 70 | (5.0 | ) | — | 44 | 8.60 | 0.26 | 0.00 | ||||||||||||||||||||||||||||||||||||||||||||
Mean | 8.3 | 23.2 | 103 | 103 | 0.5 | — | 84 | 13.48 | 1.00 | 1.82 | |||||||||||||||||||||||||||||||||||||||||||||
Median | 7.7 | 16.4 | 109 | 109 | 0.9 | — | 78 | 14.21 | 0.73 | 1.42 |
Pro Forma Merger Analysis
Sandler O’Neill analyzed certain potential pro forma effects of the merger, assuming the following: (1) the merger is completed at the end of the first quarter of 2013; (2) the deal value per share is equal to $6.15 per Mid-Wisconsin share, given an exchange ratio of 0.3727 of a share of Nicolet common stock for each share of Mid-Wisconsin common stock; (3) management prepared earnings projections for Mid-Wisconsin for the years ending December 31, 2013 through 2016 as adjusted by senior management of Nicolet; (4) certain purchase accounting adjustments, including a credit mark against Mid-Wisconsin’s loan portfolio, and additional marks on securities, fixed assets, and borrowings; (5) cost savings of 20% of Mid-Wisconsin’s annual operating expenses, fully phased-in in 2013; (6) approximately $2.0 million in pre-tax transaction costs and expenses; and (7) certain other assumptions pertaining to costs and expenses associated with the transaction, intangible amortization, opportunity cost of cash and other items.
For each of the years 2013 and 2014, Sandler O’Neill compared the earnings per share of Nicolet common stock to the earnings per share, on the basis of GAAP, of the combined company common stock using the foregoing assumptions.
The following table sets forth the results of the analysis:
GAAP Basis Accretion | ||||||
---|---|---|---|---|---|---|
2013 Estimated EPS | $ | 1.14 | ||||
2014 Estimated EPS | $ | 1.53 |
The analyses indicated that the merger would be accretive to Nicolet’s projected 2011 and 2012 earnings per share. The actual results achieved by the combined company may vary from projected results and the variations may be material.
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At the anticipated close of the transaction, Sandler O’Neill compared the estimated tangible book value (“TBV”) per share of Nicolet to the estimated pro forma tangible book value of the combined company using the foregoing assumptions. The following table sets forth the results of the analysis:
TBV per Share at March 31, 2013 | ||||||
---|---|---|---|---|---|---|
Nicolet stand alone estimate | $ | 14.66 | ||||
Pro forma combined estimate | $ | 16.48 |
Sandler O’Neill’s Compensation and Other Relationships with Nicolet
Nicolet’s board of directors selected Sandler O’Neill as financial advisor in connection with the merger based on Sandler O’Neill’s qualifications, expertise, reputation and experience in mergers and acquisitions. Nicolet agreed to pay Sandler O’Neill a transaction fee of $500,000. $150,000 of the transaction fee was payable upon the signing of the merger agreement and delivery of Sandler O’Neill’s fairness opinion to the board of directors. The remainder of the transaction fee is contingent upon completion of the merger. Nicolet has also agreed to reimburse Sandler O’Neill for its expenses and to indemnify Sandler O’Neill against certain liabilities arising out of its engagement. Sandler O’Neill’s fairness opinion was approved by Sandler O’Neill’s fairness opinion committee.
In the ordinary course of their respective broker and dealer businesses, Sandler O’Neill may purchase securities from and sell securities to Mid-Wisconsin and Nicolet and their affiliates. Sandler O’Neill may also actively trade the debt and/or equity securities of Mid-Wisconsin and Nicolet or their affiliates for their own accounts and for the accounts of their customers and, accordingly, may at any time hold a long or short position in such securities. Sandler O’Neill in the past has provided and in the future may provide investment banking and other financial services to Nicolet. In the past two years, Sandler O’Neill has received no compensation other than fees referenced above for such services and in the future may receive compensation for rendering of such services.
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THE MERGER AGREEMENT
This section of the proxy statement-prospectus describes certain terms of the merger agreement. It is not intended to include every term of the merger, but rather addresses only the significant aspects of the merger. This discussion is qualified in its entirety by reference to the merger agreement, which is attached asAppendix A to this joint proxy statement-prospectus and is incorporated herein by reference, and the opinions of the parties’ respective financial advisors, which are attached asAppendices C and D to this joint proxy statement-prospectus and are incorporated herein by reference. We urge you to read these documents as well as the discussion in this document carefully.
General; Business and Operations after the Merger
If the shareholders of Mid-Wisconsin and Nicolet approve the merger agreement and the other conditions to the consummation of the merger are satisfied, Nicolet will acquire Mid-Wisconsin. Nicolet will exchange 0.3727 shares of Nicolet common stock for each outstanding share of Mid-Wisconsin common stock, except for fractional shares, dissenting shares, state-restricted shares and cash-out shares which will receive cash as described further below. Each share of Nicolet common stock issued and outstanding immediately prior to the effective date of the merger, except for shares as to which dissenters’ rights have been exercised, will remain issued and outstanding and unchanged as a result of the merger.
Following the consummation of the merger, Mid-Wisconsin Bank will merge with and into Nicolet National Bank with Nicolet National Bank surviving the merger. Mid-Wisconsin Financial Services, Inc. and Mid-Wisconsin Bank will cease to exist after the merger, and the business of Mid-Wisconsin Bank will be conducted through Nicolet National Bank. Two current Mid-Wisconsin directors, Kim A. Gowey and Christopher Ghidorzi, will be appointed to the boards of directors of Nicolet Bankshares, Inc. and Nicolet National Bank to serve on their respective boards following the merger. With the exception of the aforementioned additions, it is expected that the current directors and executive officers of Nicolet and Nicolet National Bank will remain in place following the merger.
What Mid-Wisconsin’s Shareholders Will Receive in the Merger
Stock Merger Consideration
If the merger is completed, holders of Mid-Wisconsin common stock will receive for each of their shares 0.3727 shares of Nicolet common stock, except in the cases referred to under “— Cash Merger Consideration” and “Dissenters’ Rights” below.
Although the Mid-Wisconsin common stock is traded on the Over-the-Counter Bulletin Board on the OTCQB marketplace, historical transactions in its stock have been sporadic and irregular. Nicolet plans to cause its common stock to be quoted on the Over-the-Counter Bulletin Board or other quotation system at or before the closing of the merger, but its common stock is not currently traded on any securities exchange or quotation system. The last sale of Nicolet common stock known to management prior to the mailing of this joint proxy statement-prospectus occurred on ________, 2013 at $_____ per share, and the last sale of Mid-Wisconsin common stock reported on the OTCQB occurred on ________, 2013 at $_____ per share. However, given the historical absence of a fully liquid market for Nicolet and Mid-Wisconsin common stock, neither the price at which Nicolet or Mid-Wisconsin common stock was last sold nor the price of Nicolet common stock for the purposes of cashing out fractional shares in this transaction should be considered indicative of the value of Nicolet common stock following this transaction.
Any shares of Mid-Wisconsin common stock held in the treasury of Mid-Wisconsin immediately prior to the effective time of the merger will be canceled and extinguished. No payment will be made with respect to such shares. In addition, all outstanding options to purchase Mid-Wisconsin common stock will be cancelled effective upon the closing of the merger without payment.
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Cash Merger Consideration
Fractional Shares. No fractional shares of Nicolet common stock will be issued in connection with the merger. Instead, Nicolet will make a cash payment without interest to each shareholder of Mid-Wisconsin who would otherwise receive a fractional share. The amount of such cash payment will be determined by multiplying the fraction of a share of Nicolet common stock otherwise issuable to such shareholder by $16.50, the value attributed to each share of Nicolet common stock solely for purposes of this transaction.
State-Restricted Shares. A record holder of shares of Mid-Wisconsin common stock who resides in a state in which shares of Nicolet common stock cannot be issued in the merger under that state’s securities laws without commercially unreasonable effort or expense will receive, in lieu of shares of Nicolet common stock, $6.15 in cash, which reflects the value attributed to a share of Mid-Wisconsin’s common stock for purposes of this transaction, for each share of Mid-Wisconsin common stock he, she or it owns. Nicolet will be permitted to issue its common stock in the merger based on a self-executing exemption that is available in all states except the District of Columbia, Minnesota, New Hampshire, New York, and Utah. In those states, a notice or other filing is required. Although Nicolet presently anticipates that it will be able to issue stock in the merger in those states as well without unreasonable commercial effort or expense, it is possible that it could encounter a condition to issuance that would make it economically unreasonable to issue shares to any shareholders residing in that state.
Cash-Out Shares. As a means of reducing the administrative burden and expense relating to servicing holders of small numbers of shares of Nicolet common stock after the merger, Nicolet intends to pay cash in the amount of $6.15 per share to Mid-Wisconsin shareholders who own 200 or fewer shares of Mid-Wisconsin common stock of record as of the closing date of the merger. This cash payment is in lieu of the issuance of shares of Nicolet common stock in the merger. Nicolet may adjust the 200-share threshold if, after deducting payments for fractional shares and state-restricted shares and estimated payments for Mid-Wisconsin dissenting shares from $500,000, the amount of cash payable for cash-out shares at that threshold would not enable each holder of cash-out shares to receive $6.15 per share for all of their shares. In such a case, Nicolet may either: (i) change the 200-share threshold to the highest number of shares that would enable all Mid-Wisconsin shareholders with record ownership of Mid-Wisconsin common stock below the new threshold to receive the cash merger consideration of $6.15 per share for all of their shares or (ii) deliver shares of Nicolet common stock as merger consideration to all holders of cash-out shares in accordance with the terms of the merger agreement.
Series A and B Preferred Stock
Treasury, as the holder of Mid-Wisconsin’s Preferred Stock, will be paid the $10.5 million stated value of those shares, together with accrued and unpaid dividends, by Mid-Wisconsin (or by Nicolet if Mid-Wisconsin is unable to obtain regulatory approval for such payment, not to exceed a total of $12.0 million) at or before the effective time of the merger.
Debentures
Mid-Wisconsin will pay all accrued and unpaid interest on its Debentures at or before the effective time of the merger, subject to regulatory approval. If Mid-Wisconsin is unable to obtain regulatory approval to pay the accrued and unpaid interest on the Debentures, Nicolet will make such payment.
Dissenters’ Rights
Holders of shares of Mid-Wisconsin common stock who properly elect to exercise the dissenters’ rights provided for in Subchapter XIII of the WBCL will not have their shares converted into the right to receive merger consideration. If a holder’s dissenters’ rights are lost or withdrawn, such holder will receive his, hers or its pro rata portion of the merger consideration. Nicolet shareholders will also have dissenters’ rights in connection with their vote on the merger. See “Dissenters’ Rights” on page 76 andAppendix B for additional information.
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Effect of the Merger on Mid-Wisconsin Options
As of September 30, 2012, Mid-Wisconsin had 30,510 options to purchase Mid-Wisconsin common stock outstanding at a weighted average exercise price of $28.13 per share. The merger agreement requires that all outstanding options to acquire shares of Mid-Wisconsin common stock, whether or not then exercisable, be cancelled effective upon the closing of the merger without payment.
Closing and Effective Time of the Merger
The merger will be completed only if all of the following occur:
• | the merger agreement is approved by Mid-Wisconsin’s and Nicolet’s shareholders; |
• | all required regulatory consents and approvals are obtained; and |
• | all other conditions to the merger discussed in this joint proxy statement-prospectus and the merger agreement are either satisfied or waived. |
If all of these conditions are met, the closing of the merger will occur as soon as practicable thereafter on a date mutually agreeable to Nicolet and Mid-Wisconsin.
Representations and Warranties in the Merger Agreement
Mid-Wisconsin and Nicolet have made customary representations and warranties to each other as part of the merger agreement. Mid-Wisconsin’s representations and warranties are contained in Section 5 of the merger agreement and relate to, among other things:
• | its organization and authority to enter into the merger agreement; |
• | its capitalization, subsidiaries, properties and financial statements; |
• | pending and threatened litigation against Mid-Wisconsin and its subsidiaries; |
• | Mid-Wisconsin Bank’s loan portfolio and allowance for loan losses; |
• | its insurance, employee benefits, tax and environmental matters; |
• | Mid-Wisconsin Bank’s privacy of customer information and the status of technology systems; |
• | its legal and regulatory compliance; |
• | its contractual obligations and contingent liabilities; and |
• | its public reports filed with the SEC. |
Nicolet’s representations and warranties are contained in Section 6 of the merger agreement and relate to, among other things:
• | its organization and authority to enter into the merger agreement; |
• | its capitalization, subsidiaries and financial statements; |
• | pending and threatened litigation against Nicolet and its subsidiaries; |
• | Nicolet National Bank’s loan portfolio and allowance for loan losses; |
• | tax matters; |
• | legal and regulatory compliance; and |
• | the shares of Nicolet common stock to be issued in the merger. |
Each party’s representations and warranties are for the benefit of the other; they are not for the benefit of and may not be relied upon by shareholders. The representations and warranties of the parties will not survive the closing of the merger.
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Conditions to the Merger
The merger agreement contains a number of conditions that must be satisfied or waived (if they are waivable) to complete the merger. The conditions include, among other things:
• | approval by Mid-Wisconsin’s shareholders and Nicolet’s shareholders of the merger agreement by the required vote; |
• | approval of the merger and the transactions contemplated thereby by the OCC, the Federal Reserve and the WDFI without imposing conditions that would materially adversely affect the economic or business benefits of the transaction to either Nicolet or Mid-Wisconsin (a “Materially Burdensome Condition”); |
• | receipt of all third-party consents (other than the regulatory consents described above) necessary to consummate the merger, other than those that would not have a material adverse effect on the party required to obtain the consent; |
• | receipt by Mid-Wisconsin and Nicolet of a tax opinion from counsel to Nicolet that the merger qualifies as a tax-free reorganization under the Internal Revenue Code; |
• | the absence of a stop order suspending the effectiveness of Nicolet’s registration statement under the Securities Act with respect to the shares of Nicolet common stock to be issued to the Mid-Wisconsin shareholders; |
• | the absence of an order, decree or injunction enjoining or prohibiting completion of the merger; |
• | Mid-Wisconsin’s redemption of its outstanding Preferred Stock in accordance with its terms or, if such redemption is not permitted by applicable regulatory authorities, the purchase of such stock by Nicolet for a maximum payment of $12.0 million; |
• | payment by Mid-Wisconsin of all accrued but unpaid interest on its Debentures or, if such payment is not permitted by applicable regulatory authorities, by Nicolet, and Nicolet’s execution of a supplemental indenture assuming the related indebtedness; |
• | receipt by Mid-Wisconsin of an opinion from Raymond James. dated November 28, 2012 (which opinion shall not have been withdrawn) that the consideration to be paid to Mid-Wisconsin’s shareholders in the merger is fair to such shareholders from a financial standpoint; |
• | receipt by Nicolet of an opinion from Sandler O’Neill dated November 20, 2012 (which opinion shall not have been withdrawn) that the consideration to be paid to Mid-Wisconsin’s shareholders in the merger is fair to Nicolet’s shareholders from a financial standpoint; |
• | cancellation of all outstanding Mid-Wisconsin stock options; |
• | appointment of Kim A. Gowey and Christopher Ghidorzi to Nicolet’s Board of Directors; |
• | continued accuracy in all material respects of the representations and warranties set forth in the merger agreement and fulfillment in all material respects of the parties’ covenants set forth in the merger agreement as of the closing date; |
• | the absence of any material adverse change in the financial condition, results of operations, business or prospects of either Mid-Wisconsin or Nicolet; |
• | each party’s receipt of affiliate agreements from certain affiliates of the other party (see “— Affiliate Agreements”); and |
• | issuance of certain legal opinions by counsel for Mid-Wisconsin and Nicolet. |
The conditions to the merger are set forth in Article 9 of the merger agreement. The parties intend to complete the merger as soon as practicable after all conditions have been satisfied or waived; however, we cannot assure you that all conditions will be satisfied or waived.
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Waiver and Amendment
Nearly all of the conditions to completing the merger may be waived at any time by the party for whose benefit they were created; however, the merger agreement provides that the parties may not waive any condition that would result in the violation of any law or regulation. Also, the parties may amend or supplement the merger agreement at any time by written agreement. Any material change in the terms of the merger agreement after the Mid-Wisconsin special shareholders’ meeting may require a re-solicitation of votes from Mid-Wisconsin’s shareholders with respect to the amended merger agreement.
Business of Mid-Wisconsin Pending the Merger
The merger agreement requires Mid-Wisconsin to continue to operate its business as usual and to preserve its business organization, rights and franchises pending the merger and to refrain from taking any action that would materially adversely affect the receipt of required regulatory or other consents or materially adversely affect either party’s ability to perform its covenants and agreements under the merger agreement. Among other things, and subject to certain specified exceptions, Mid-Wisconsin may not, without Nicolet’s consent, take or agree to take any of the following actions:
• | amend its articles of incorporation or bylaws or other governing instruments; |
• | incur any additional debt or other obligation in excess of $50,000 or allow any lien or encumbrance to be placed on any asset, except in the ordinary course of business and consistent with past practices; |
• | redeem, repurchase, or otherwise acquire any shares of its capital stock (except exchanges in the ordinary course under employee benefit plans) or pay any distribution or dividend on its capital stock, except for dividends on the Preferred Stock; |
• | issue, sell, pledge, encumber, authorize the issuance of, or otherwise permit to become outstanding, any additional shares of its common stock, except pursuant to the exercise of currently outstanding options; |
• | adjust, split, combine, substitute or reclassify any shares of its common stock or dispose of any asset having a book value in excess of $50,000 except in the ordinary course of business for reasonable and adequate consideration; |
• | except in the ordinary course of business, purchase investment securities or make any material investments; |
• | enter into or modify any agreement requiring the payment of any salary, bonus, extra compensation, pension or severance payment to any of its current or former directors, employees or service providers, or, subject to certain exceptions, increase the compensation of any such person in any manner inconsistent with its past practices; |
• | adopt any new employee benefit plan or terminate or amend any existing plans, except as required by law; |
• | make any significant change to tax or accounting methods or internal accounting controls, except as required by law, regulation or GAAP; |
• | commence any litigation inconsistent with past practices or settle any litigation for over $50,000 in money damages or any restrictions on its operations; or |
• | except in the ordinary course of business, enter into, modify, amend, or terminate any contract or waive, release, or assign any right or claim in any amount exceeding $50,000. |
The restrictions on Mid-Wisconsin’s business activities are set forth in Section 7.2 of the merger agreement.
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Business of Nicolet Pending the Merger
The merger agreement requires Nicolet to continue to operate its business as usual and to preserve its business organization, rights and franchises pending the merger and to refrain from taking any action that would materially adversely affect the receipt of required regulatory or other consents or materially adversely affect either party’s ability to perform its covenants and agreements under the merger agreement. Among other things, and subject to certain specified exceptions, Nicolet may not, without Mid-Wisconsin’s consent, take or agree to take any of the following actions:
• | amend its articles of incorporation or bylaws or other governing instruments; |
• | redeem, repurchase, or otherwise acquire any shares of its capital stock (except exchanges in the ordinary course under employee benefit plans and repurchases of up to an aggregate of 10,000 shares of common stock) or pay any distribution or dividend on its capital stock; except for dividends on its SBLF Preferred Stock; |
• | issue, sell, pledge, encumber, authorize the issuance of, or otherwise permit to become outstanding, any additional shares of its common stock, except pursuant to the exercise of currently outstanding stock options, transactions in the ordinary course of administration of Nicolet’s employee benefit plans, and potential incentive grants to executive officers in connection with annual compensation determinations by Nicolet’s Compensation Committee; |
• | adjust, split, combine, substitute or reclassify any shares of its common stock or dispose of any asset having a book value in excess of $50,000 except in the ordinary course of business for reasonable and adequate consideration; or |
• | make any significant change to tax or accounting methods or internal accounting controls, except as required by law, regulation or GAAP. |
The restrictions on Nicolet’s business activities are set forth in Section 7.3 of the merger agreement.
No Solicitation of Alternative Transactions
Mid-Wisconsin was required to immediately cease any negotiations with any person regarding any acquisition transaction existing at the time the merger agreement was executed. In addition, Mid-Wisconsin may not solicit, directly or indirectly, inquiries or proposals with respect to, or, except to the extent determined by Mid-Wisconsin’s board of directors in good faith, after consultation with its legal counsel, to be required to discharge properly the directors’ fiduciary duties, furnish any information relating to, or participate in any negotiations or discussions concerning, any sale of all or substantially all of its assets, any purchase of a substantial equity interest in it or any merger or other combination with it. Subject to the same fiduciary duties, Mid-Wisconsin’s board may not withdraw its recommendation to its shareholders of the merger or recommend to its shareholders any such other transaction.
Mid-Wisconsin was also required to instruct its respective officers, directors, agents, and affiliates to refrain from taking action prohibited by Mid-Wisconsin and is required to notify Nicolet immediately if it receives any inquires from third parties. However, no director or officer of Mid-Wisconsin is prohibited from taking any action that the board of directors of Mid-Wisconsin determines in good faith, after consultation with counsel, is required by law or is required to discharge such director’s or officer’s fiduciary duties.
Termination of the Merger Agreement; Termination Fee
The merger agreement specifies the circumstances under which the parties may terminate the agreement and abandon the merger. Those circumstances are:
• | by mutual consent of Mid-Wisconsin’s board of directors and Nicolet’s board of directors; |
• | by either party if the other party materially breaches any representation, warranty or covenant, such breach cannot be, or is not, cured within 30 days after written notice and the existence of such breach would result in a “material adverse effect,” as defined in the merger agreement, on the breaching party; |
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• | by either party if Mid-Wisconsin’s or Nicolet’s shareholders do not approve the merger agreement or if any required consent of any regulatory authority is denied or issued subject to a Materially Burdensome Condition; |
• | by either party if the merger has not been consummated or a condition precedent cannot be satisfied or waived by April 30, 2013 (or May 31, 2013 if the impediment is the result of a delay in receiving regulatory approval or effectiveness of the Registration Statement), so long as the failure to consummate is not caused by a breach of the merger agreement by the party electing to terminate; |
• | by Nicolet if Mid-Wisconsin’s board of directors withdraws, modifies or changes its recommendation to its shareholders of the merger agreement; cancels the shareholders’ or board meeting at which the shareholders or directors will vote on the merger agreement; recommends or approves a merger, sale of assets or other business combination or substantial investment by a third party (other than the Nicolet merger); or resolves or announces any agreement to do any of those things; |
• | by Mid-Wisconsin if Mid-Wisconsin receives a bona fide written offer for an acquisition transaction that the Mid-Wisconsin board determines in good faith, after consultation with its financial advisors and counsel, to be more favorable to the Mid-Wisconsin shareholders than the Nicolet merger |
• | by Nicolet if the holders of more than 5% of the outstanding Mid-Wisconsin common stock or if more than 2% of the outstanding Nicolet common stock exercise dissenters’ rights; or |
• | by Mid-Wisconsin if Nicolet’s board of directors withdraws, modifies or changes its recommendation to its shareholders of the merger agreement; cancels the shareholders’ or board meeting at which the shareholders or directors will vote on the merger agreement, or resolves to do any of those things. |
If either party terminates the merger agreement because Mid-Wisconsin’s board withdraws or changes its recommendation of the merger agreement, cancels the meeting at which Mid-Wisconsin’s shareholders or board will vote on the merger agreement, or recommends, approves or announces an acquisition transaction other than the Nicolet merger, or if Mid-Wisconsin terminates the agreement because it has received an offer for such an acquisition transaction, then Mid-Wisconsin (or its successor) must pay Nicolet a termination fee of $750,000. Similarly, if Mid-Wisconsin terminates the merger agreement because Nicolet’s board withdraws or changes its recommendation of the merger agreement, cancels the meeting at which Nicolet’s shareholders or board will vote on the merger agreement, or resolves to do any of those things, then Nicolet (or its successor) must pay Mid-Wisconsin a termination fee of $750,000. In addition, if the merger agreement is terminated by a party based on a Material Breach by the other party, then the breaching party will be required to pay the non-breaching party liquidated damages of $1.0 million plus documented out-of-pocket legal, investment banking, accounting, consulting and other expenses incurred by the non-breaching party in connection or associated with the preparation, negotiation, and execution of the merger agreement.
Provisions of the merger agreement regarding confidentiality, payment of the termination fee and indemnification of Mid-Wisconsin and its controlling persons will survive any termination of the merger agreement.
Payment of Expenses Relating to the Merger
Subject to their obligations in the event of a Material Breach as described above, the parties will pay all of their own expenses related to negotiating and completing the merger.
Interests of Certain Persons in the Merger
Some of Mid-Wisconsin’s directors and executive officers have interests in the transaction in addition to their interests generally as shareholders of Mid-Wisconsin. These interests are described below. Mid-Wisconsin’s board of directors was aware of these interests and considered them, in addition to other matters, in approving the merger agreement.
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Mid-Wisconsin Directors’ Deferred Compensation Plan
Mid-Wisconsin has a Directors’ Deferred Compensation Plan in which certain directors participated prior to 2005 and that is considered grandfathered for purposes of Code Section 409A. The plan is a nonqualified deferred compensation plan that allowed directors to elect to defer all or a portion of their compensation for service as directors before 2005 into either a cash account or an account tied to Mid-Wisconsin’s stock price, with payment of their accrued balances being made after their resignation from the board in a lump-sum or in installments over a period not in excess of five years. In the event of a director’s termination of service in connection with a change in control (such as the proposed Nicolet merger), the director’s account balance is to be paid in a lump sum to the director as of the last day of the month in which the director’s termination of service occurs. The board may terminate this plan at any time and pay all amounts deferred under the plan to directors.
Mid-Wisconsin also has a Directors’ Deferred Compensation Plan in which its directors currently participate. The plan is a nonqualified deferred compensation plan that allows directors to elect to defer all or a portion of their compensation for service as directors after 2004 into either a cash account or an account tied to Mid-Wisconsin’s stock price, with payment of their accrued balances being made after their resignation from the board in a lump-sum or in installments over a period not in excess of five years. In the event of a director’s termination of service in connection with a change in control (such as the proposed Nicolet merger), the director’s account balance is to be paid in a lump sum to the director as of the last day of the month in which the director’s termination of service occurs. In connection with a change in control (such as the proposed Nicolet merger), the board may terminate this plan in accordance with Code Section 409A within the 30 days preceding or the 12 months following the change in control and pay all amounts deferred under the plan to directors within 12 months of the date the board takes action to terminate the plan.
Nicolet has requested that Mid-Wisconsin terminate the Directors’ Deferred Compensation Plan prior to the closing of the merger. As a result of such termination, no directors are expected to receive any compensation based on or related to the merger that has not already accrued to or vested in them. As of December 31, 2012, lump sum distributions due to Dr. Gowey and Messrs. Hallgren, Mertens, Ghidorzi, Hager and Sczygelski in connection with such termination were $157,347; $85,107; $89,622; $12,697; $26,323; and $515, respectively.
Mid-Wisconsin Directors’ Retirement Policy
Mid-Wisconsin directors who complete at least 20 years of service as non-employee directors are eligible for a cash retirement benefit equal to the retainer fees in effect during the first year following the director’s termination of service. Directors who complete less than 20 years of service as non-employee directors are eligible for a benefit equal to the product of (a) the retainer fees in effect during the first year following the director’s termination of service, multiplied by (b) a fraction, the numerator of which is the greater of (i) 10 or (ii) the director’s full and partial years of service as a director, and the denominator of which is 20. The benefit is payable on the same schedule as applies to payments of retainer fees to directors who continue to serve on the board. In connection with a change in control (such as the proposed Nicolet merger) , the board may terminate this policy in accordance with Code Section 409A within the 30 days preceding or the 12 months following the change in control and pay all amounts deferred under the plan to directors within 12 months of the date the board takes action to terminate the plan.
Nicolet has requested that Mid-Wisconsin terminate this policy prior to the closing of the merger. As a result of such termination, no directors are expected to receive any compensation based on or related to the merger that has not already accrued to or vested to them. As of December 31, 2012, lump sum distributions due to Dr. Gowey and Messrs. Hallgren, Mertens, Ghidorzi, Hager, and Sczygelski in connection with such termination were $3,746; $3,435; $4,693; $2,850; $3,889; and $2,850, respectively.
Mid-Wisconsin Stock Options
As of the date of the merger agreement, Mid-Wisconsin’s directors and executive officers held options to purchase an aggregate of 30,510 shares of Mid-Wisconsin common stock, with a weighted average exercise
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price of $28.13 per share. The merger agreement requires Mid-Wisconsin to take such actions as may be necessary to cancel these options effective upon consummation of the merger without payment.
Indemnification and Insurance
Nicolet has agreed that all rights to indemnification and all limitations of liability existing in favor of indemnified parties under Mid-Wisconsin’s articles of incorporation and bylaws as in effect on November 28, 2012 with respect to matters occurring prior to or at the effective time of the merger will survive for a period concurrent with the applicable statute of limitations. In addition, Nicolet has agreed to indemnify, under certain conditions, Mid-Wisconsin’s directors, officers and controlling persons against certain expenses and liabilities, including certain liabilities arising under federal securities laws. Mid-Wisconsin will use its best efforts to cause the officers and directors of Mid-Wisconsin to be covered by Mid-Wisconsin’s directors and officers liability insurance policy (or a substitute policy) for six years following the effective time of the merger, subject to certain conditions.
Trading Market for Nicolet Stock
The shares of Nicolet common stock issued pursuant to the merger will be registered under the Securities Act of 1933, as amended, and will be freely transferable under applicable securities laws, except to the extent of any limitations or restrictions applicable to any shares received by any shareholder who may be deemed an affiliate of Nicolet following completion of the merger. See “—Resale of Nicolet Common Stock,” at page ___.
Although Nicolet plans to cause its common stock to be quoted on the Over-the-Counter Bulletin Board or other quotation system at or before the closing of the merger, its common stock is not currently traded on any securities exchange or quotation system. There is, however, no guarantee that a liquid market for shares of Nicolet common stock will develop.
Nicolet Dividends
The holders of Nicolet common stock receive dividends if and when declared by the Nicolet board of directors out of legally available funds. Nicolet’s board of directors has not declared a dividend since its inception in 2000 and does not currently expect to do so in the foreseeable future. Instead, the board currently anticipates that all earnings, if any, will be used for working capital, to support Nicolet’s operations and to finance the growth and development of its business, including the merger and integration of Mid-Wisconsin. Any future determination relating to dividend policy will be made at the discretion of Nicolet’s board of directors and will depend on a number of factors, including the company’s future earnings, capital requirements, financial condition, future prospects, regulatory restrictions and other factors that the board of directors may deem relevant.
Surrender and Exchange of Mid-Wisconsin Stock Certificates
At the effective time of the merger, Mid-Wisconsin shareholders who will receive Nicolet common stock in the merger will automatically become entitled to all of the rights and privileges afforded to Nicolet shareholders as of that time, and Mid-Wisconsin shareholders who will receive cash in the merger will be entitled to receipt of that cash upon their surrender of their Mid-Wisconsin stock certificates. However, the actual physical exchange of Mid-Wisconsin common stock certificates for cash and certificates representing shares of Nicolet common stock will occur after the merger.
Computershare Investor Services, Inc. will serve as exchange agent for the merger. Within five business days after the effective date of the merger, Nicolet will send or cause to be sent to all Mid-Wisconsin’s shareholders (other than any shareholders who have exercised their dissenters’ rights) a letter of transmittal with instructions for exchanging their Mid-Wisconsin stock certificates for the merger consideration to which they are entitled. Each Mid-Wisconsin stock certificate issued and outstanding immediately prior to the effective time of the merger will be deemed for all purposes to evidence the right to receive the merger consideration to which such holder is entitled, regardless of when they are actually exchanged.
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Nicolet will delay paying former shareholders of Mid-Wisconsin who become holders of Nicolet common stock pursuant to the merger any dividends or other distributions that may become payable to holders of record of Nicolet common stock following the effective time of the merger until they have surrendered their certificates evidencing their Mid-Wisconsin common stock, at which time Nicolet will pay any such dividends or other distributions without interest.
You should not send in your Mid-Wisconsin stock certificate(s) until you have received a letter of transmittal and further written instructions after the effective date of the merger. Please do NOT send in your stock certificates with your proxy card.
After the exchange agent receives your Mid-Wisconsin certificate(s), together with a properly completed election form/letter of transmittal, it will deliver to you the merger consideration to which you are entitled, consisting of any Nicolet common stock certificates (together with any withheld dividends or other distributions, but without interest thereon) and any cash payments due for a fractional share, state-restricted shares or cash-out shares without interest.
Because the determination of the appropriate share threshold for ownership of cash-out shares will be made based on record ownership of Mid-Wisconsin common stock on the closing date of the merger, it is not presently possible to state with certainty whether a Mid-Wisconsin shareholder who owns 200 or fewer shares will receive cash instead of Nicolet stock as merger consideration. The letter of transmittal that is mailed after the merger will specify the form of consideration that the recipient will receive.
Shareholders who cannot locate their stock certificates are urged to contact promptly:
Mid-Wisconsin Financial Services, Inc. 132 West State Street Medford, Wisconsin 54451 Attention: _____________ Telephone: (____) ___________ |
Mid-Wisconsin will issue a new stock certificate to replace the lost certificate(s) only if the shareholder of Mid-Wisconsin signs an affidavit certifying that his, her or its certificate(s) cannot be located and containing an agreement to indemnify Mid-Wisconsin and Nicolet against any claim that may be made against Mid-Wisconsin or Nicolet by the owner of the certificate(s) alleged to have been lost or destroyed. Mid-Wisconsin or Nicolet may also require the shareholder to post a bond in an amount sufficient to support the shareholder’s agreement to indemnify Mid-Wisconsin and Nicolet.
Resale of Nicolet Common Stock
The shares of Nicolet common stock to be issued in the merger will be registered under the Securities Act. Mid-Wisconsin shareholders who are not affiliates of Nicolet may generally freely trade their Nicolet common stock upon completion of the merger. The term “affiliate” generally means each person who is an executive officer, director or 10% shareholder of Nicolet after the merger.
Those shareholders who are deemed to be affiliates of Nicolet may only sell their Nicolet common stock as provided by Rule 144 under the Securities Act or as otherwise permitted under the Securities Act. Rule 144 requires the availability of current public information about the issuer, a holding period for shares issued without SEC registration, volume limitations and other restrictions on the manner of sale of the shares.
Affiliate Agreements
Mid-Wisconsin has caused each executive officer and director of Mid-Wisconsin to execute an Affiliate Agreement, in which each such officer or director agrees to vote all of his or her shares of Mid-Wisconsin common stock in favor of the merger agreement. Nicolet has obtained similar Affiliate Agreements from its directors and certain executive officers relating to their shares of Nicolet common stock.
Forms of the Affiliate Agreements are attached asExhibits C-1 and C-2 to the merger agreement, which is attached to this joint proxy statement-prospectus asAppendix A. These agreements may have the effect of
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discouraging third parties from making a proposal for an acquisition transaction involving Mid-Wisconsin. The following is a brief summary of the material provisions of the agreements:
• | The executive officer or director agrees to vote, or cause to be voted, in person or by proxy, all of the Mid-Wisconsin or Nicolet common stock as to which he or she owns beneficially or of record in favor of the merger agreement unless Mid-Wisconsin or Nicolet, as applicable, is then in breach of the agreement. |
• | The executive officer or director agrees, except for certain specific transfers set forth in the agreement, not to directly or indirectly transfer any of his or her Mid-Wisconsin or Nicolet common stock until the closing date of the merger without prior written consent of Nicolet or Mid-Wisconsin, as applicable. |
Regulatory and Other Required Approvals
Federal Reserve
The Federal Reserve must approve the merger before it can be completed. Nicolet and Mid-Wisconsin must then wait at least 30 days after the date of Federal Reserve approval before they may complete the merger. During this waiting period, the U.S. Department of Justice may object to the merger on antitrust grounds. Nicolet filed an application for approval of the merger with the Federal Reserve on January 24, 2013. In reviewing that application, the Federal Reserve is required to consider the following:
• | competitive factors, such as whether the merger will result in a monopoly or whether the benefits of the merger to the public in meeting the needs and convenience of the community clearly outweigh the merger’s anticompetitive effects or restraints on trade; and |
• | banking and community factors, which includes an evaluation of: |
• | the financial and managerial resources of Nicolet, including its subsidiaries, and of Mid-Wisconsin, and the effect of the proposed transaction on these resources; |
• | management expertise; |
• | internal control and risk management systems; |
• | the capital of Nicolet; |
• | the convenience and needs of the communities to be served; and |
• | the effectiveness of Nicolet and Mid-Wisconsin in combating money laundering activities. |
The application process includes publication and opportunity for comment by the public. The Federal Reserve may receive, and must consider, properly filed comments and protests from community groups and others regarding (among other issues) each institution’s performance under the Community Reinvestment Act of 1977, as amended. The Federal Reserve is also required to ensure that the proposed transaction would not violate Wisconsin law regarding the number of years a bank must be in operation before it can be acquired, deposit concentration limits, Wisconsin community reinvestment laws and any Wisconsin antitrust statutes.
OCC and WDFI
The merger of Mid-Wisconsin Bank with and into Nicolet National Bank requires the approval of the OCC and the WDFI. Nicolet filed an Interagency Bank Merger Application for approval of the bank merger with the OCC (which will forward the application to the WDFI) on January 17, 2013. In evaluating the bank merger, the OCC and the WDFI must consider, among other factors, the financial and managerial resources and future prospects of the institutions and the convenience and needs of the communities to be served. The relevant statutes prohibit the OCC from approving the bank merger if:
• | it would result in a monopoly or be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any part of the United States; or |
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• | its effect in any section of the country could be to substantially lessen competition or to tend to create a monopoly, or if it would result in a restraint of trade in any other manner. |
However, if the OCC should find that any anticompetitive effects are outweighed clearly by the public interest and the probable effect of the transaction in meeting the convenience and needs of the communities to be served, it may approve the bank merger. The bank merger may not be consummated until the 30th day (which the OCC may reduce to 15 days) following the later of the date of OCC approval, during which time the U.S. Department of Justice would be afforded the opportunity to challenge the transaction on antitrust grounds. The commencement of any antitrust action would stay the effectiveness of the approval of the agencies, unless a court of competent jurisdiction should specifically order otherwise.
In connection with or as a result of the merger, Nicolet or Mid-Wisconsin may be required, pursuant to other laws and regulations, either to notify or obtain the consent of other regulatory authorities and organizations to which such companies or subsidiaries of either or both of them may be subject. The Nicolet common stock to be issued in exchange for Mid-Wisconsin common stock in the merger has been registered with the SEC and will be issued pursuant to available exemptions from registration under state securities laws.
Preferred Stock and Debentures
Pursuant to the terms of the merger agreement, Mid-Wisconsin will seek regulatory approval to redeem the Preferred Stock and to pay all accrued but unpaid interest on the Debentures at or before the effective time of the merger. If Mid-Wisconsin is unable to obtain regulatory approval for such payment or redemption, Nicolet will purchase the Preferred Stock and pay all accrued but unpaid interest on the Debentures.
Status and Effect of Approvals
All regulatory applications and notices required to be filed prior to the merger have been filed. Nicolet and Mid-Wisconsin contemplate that they will complete the merger shortly after the later of the Mid-Wisconsin or Nicolet special shareholders’ meeting, assuming all required approvals are received.
Nicolet and Mid-Wisconsin believe that the proposed merger is compatible with the regulatory requirements described in the preceding paragraphs; however, we cannot assure you that we will be able to comply with any required conditions or that compliance or noncompliance with any such conditions would not have adverse consequences for the combined company after the merger.
While Nicolet and Mid-Wisconsin believe that the requisite regulatory approvals for the merger will be obtained, we can give you no assurance regarding the timing of the approvals, our ability to obtain the approvals on satisfactory terms or the absence of litigation challenging those approvals or otherwise. Similarly, we cannot assure you that any state attorney general or other regulatory authority will not attempt to challenge the merger on antitrust grounds or for other reasons, or, if such a challenge is made, project the result thereof. The merger is conditioned upon the receipt of all consents, approvals and actions of governmental authorities and the filing of all other notices with such authorities in respect of the merger.
We are not aware of any regulatory approvals that would be required for completion of the transactions contemplated by the merger agreement other than as described above. Should any other approvals be required, those approvals would be sought, but we cannot assure you that they will be obtained.
Accounting Treatment of the Merger
Nicolet is required to account for the merger as a purchase transaction for accounting and financial reporting purposes under GAAP. Under purchase accounting, the assets (including any identifiable intangible assets) and liabilities (including executory contracts and other commitments) of Mid-Wisconsin at the effective time of the merger will be recorded at their respective fair values and added to those of Nicolet. Any excess of purchase price over the fair values is recorded as goodwill. Any excess of the fair values over the purchase price is recorded in earnings as a bargain purchase gain. Consolidated financial statements of Nicolet issued after the merger will reflect those fair values and will not be restated retroactively to reflect the historical consolidated financial position or results of operations of Mid-Wisconsin.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following is a summary description of the anticipated material U.S. federal income tax consequences of the merger generally applicable to U.S. Shareholders (as defined below) of Mid-Wisconsin who hold the common stock as capital assets within the meaning of Section 1221 of the Internal Revenue Code. This summary description deals only with the U.S. federal income tax consequences of the merger. No information is provided regarding the tax consequences of the merger under state, local, gift, estate, foreign or other tax laws. We do not intend it to be a complete description of the U.S. federal income tax consequences of the merger to all Mid-Wisconsin shareholders in light of their particular circumstances or to Mid-Wisconsin shareholders subject to special treatment under U.S. federal income tax laws, such as:
• | Non-U.S. Shareholders (as defined below) (except to the extent discussed under the subheading “Tax Implications to Non-U.S. Shareholders,” below); |
• | entities treated as partnerships for U.S. federal income tax purposes or Mid-Wisconsin shareholders who hold their shares through entities treated as partnerships for U.S. federal income tax purposes; |
• | qualified insurance plans; |
• | tax-exempt organizations; |
• | qualified retirement plans and individual retirement accounts; |
• | brokers or dealers in securities or currencies; |
• | traders in securities that elect to use a mark-to-market method of accounting; |
• | regulated investment companies; |
• | real estate investment trusts; |
• | persons whose functional currency is not the U.S. dollar; |
• | shareholders who received their stock upon the exercise of employee stock options or otherwise acquired their stock as compensation; |
• | persons who purchased or sell their shares of Mid-Wisconsin common stock as part of a wash sale; or |
• | shareholders who hold the common stock as part of a “hedge,” “straddle” or other risk reduction, “constructive sale,” or “conversion transaction,” as these terms are used in the Internal Revenue Code. |
This discussion is based upon, and subject to, the Internal Revenue Code, the treasury regulations promulgated under the Internal Revenue Code, existing interpretations, administrative rulings and judicial decisions all of which are in effect as of the date of this statement, and all of which are subject to change, possibly with retroactive effect. Any such change could affect the continuing validity of this discussion. Tax laws are complex, and your individual circumstances may affect the tax consequences to you. We urge you to consult a tax advisor regarding the tax consequences of the merger to you.
U.S. Shareholders
For purposes of this discussion, the term “U.S. Shareholder” means a beneficial owner of Mid-Wisconsin common stock that is:
• | a citizen or resident of the U.S.; |
• | a corporation (including any entity treated as a corporation for U.S. federal income tax purposes) created or organized under the laws of the U.S. or any of its political subdivisions; |
• | a trust that (i) is subject to both the primary supervision of a court within the U.S. and the control of one or more U.S. persons, or (ii) has a valid election in effect under applicable U.S. treasury regulations to be treated as a U.S. person; or |
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• | an estate that is subject to U.S. federal income tax on its income regardless of its source. |
If a partnership (including any entity or arrangement, domestic or foreign, that is treated as a partnership for U.S. federal income tax purposes) holds Mid-Wisconsin common stock, the tax treatment of a partner will generally depend on the status of the partners and the activities of the partnership. Partnerships and partners in such a partnership should consult their tax advisors regarding the tax consequences of the merger to them.
Qualification of the Merger as a Reorganization
Nicolet and Mid-Wisconsin have structured the merger to qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code. The obligation of Nicolet and Mid-Wisconsin to complete the merger is condition upon the receipt of a tax opinion from Bryan Cave LLP to the effect that:
• | the merger will constitute a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code; and |
• | the exchange in the merger of Mid-Wisconsin common stock for Nicolet common stock will not give rise to a gain or loss to the shareholders of Mid-Wisconsin with respect to such exchange, except to the extent of any cash received. |
The tax opinion will be based upon law existing on the date of the opinion and upon certain facts, assumptions, limitations, representations and covenants including those contained in representation letters executed by officers of Mid-Wisconsin and Nicolet that, if incorrect in certain material respects, would jeopardize the conclusions reached by Bryan Cave LLP in its opinion. The tax opinion will not bind the Internal Revenue Service or prevent the Internal Revenue Service from successfully asserting a contrary opinion. No ruling will be requested from the Internal Revenue Service in connection with the merger.
Tax Implications to U.S. Shareholders
The following discussion summarizes the material U.S. federal income tax consequences of the merger to U.S. Shareholders, assuming the merger qualifies as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code.
Tax Consequences to U.S. Shareholders. The U.S. federal income tax consequences of the merger to an owner of Mid-Wisconsin common stock that is a U.S. Shareholder generally will depend on whether the U.S. Shareholder exchanges Mid-Wisconsin common stock for cash, Nicolet common stock or a combination of cash and Nicolet common stock.
• | Exchange Solely for Nicolet Stock. No gain or loss will be recognized by U.S. Shareholders upon the exchange of shares of Mid-Wisconsin common stock solely for shares of Nicolet common stock pursuant to the merger, except in respect of cash received in lieu of the issuance of a fractional share of Nicolet common stock (as discussed below). |
• | Exchange for Cash and Nicolet Common Stock. A U.S. Shareholder who receives a combination of cash (not including cash received in lieu of the issuance of a fractional share of Nicolet common stock) and Nicolet common stock in exchange for Mid-Wisconsin common stock will generally recognize gain (but not loss) in an amount equal to the lesser of: (i) the excess, if any, of (a) the sum of the amount of cash treated as received in exchange for Mid-Wisconsin common stock in the merger (excluding cash received in lieu of a fractional share) plus the fair market value of Nicolet common stock (including the fair market value of any fractional share) received in the merger, over (b) the U.S. Shareholder’s adjusted tax basis in the shares of Mid-Wisconsin common stock exchanged, or (ii) the amount of cash (excluding cash received in lieu of a fractional share) received in the merger. Any taxable gain to a U.S. Shareholder on the exchange of Mid-Wisconsin common stock generally will be treated as capital gain (either long-term or short-term capital gain depending on whether the shareholder has held such Mid-Wisconsin common stock for more than one (1) year in the case of long-term capital gain or one (1) year or less in the case of short-term capital gain). If a U.S. Shareholder acquired different blocks of Mid-Wisconsin common stock at different times or at different prices, such U.S. Shareholder’s basis and holding period in its shares of Nicolet common |
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stock may be determined with reference to each block of Mid-Wisconsin common stock. Such U.S. Shareholder should consult its individual tax advisor regarding the manner in which gain or loss should be determined. If, however, the cash received has the effect of the distribution of a dividend (as discussed below), the gain will be treated as a dividend to the extent of the U.S. Shareholder’s ratable share of accumulated earnings and profits as calculated for U.S. federal income tax purposes. |
• | Exchange of Cash in Lieu of Fractional Share. A U.S. Shareholder who receives cash in lieu of the issuance of a fractional share of Nicolet common stock will generally be treated as having received such factional share pursuant to the merger and then as having received cash in exchange for such fractional share. Gain or loss generally will be recognized in an amount equal to the difference between the amount of cash received instead of the fractional share and the portion of the U.S. Shareholder’s aggregate adjusted tax basis of the Mid-Wisconsin shares exchanged in the merger which is allocable to the fractional share of Nicolet common stock. Such gain or loss generally will be capital gain or loss, and will be long-term capital gain or loss if, as of the effective date of the merger, the holding period for such shares of Mid-Wisconsin common stock is more than one year. |
• | Tax Basis of Nicolet Common Stock Received in the Merger. The aggregate tax basis of the Nicolet common stock (including a fractional share deemed received and sold for cash as described above) received in the merger will equal the aggregate tax basis of the Mid-Wisconsin common stock surrendered in the exchange, reduced by the amount of cash received, if any, that is treated as received in exchange for Mid-Wisconsin common stock (excluding any cash received in lieu of a fractional share of Nicolet common stock), and increased by the amount of gain, if any, recognized in the exchange (including any portion of the gain that is treated as a dividend but excluding any gain resulting from a fractional share deemed received and sold for cash as described above). |
• | Holding Period of Nicolet Common Stock Received in the Merger. The holding period for any Nicolet common stock received in the merger will include the holding period of the Mid-Wisconsin common stock surrendered in the exchange. |
• | Possible Treatment of Cash as a Dividend. There are certain circumstances in which all or part of the gain recognized by a U.S. Shareholder will be treated as a dividend rather than capital gain. In general, the determination of whether the gain recognized in the exchange (other than gain with respect to fractional shares) will be treated as capital gain or has the effect of a distribution of a dividend depends upon whether, and to what extent, the exchange reduces the U.S. Shareholder’s deemed percentage stock ownership in Nicolet. These rules are complex and dependent upon the specific factual circumstances particular to each U.S. Shareholder, including the application of certain constructive ownership rules. Consequently, each U.S. Shareholder should consult its tax advisor regarding the potential tax consequences of the merger to such shareholder. |
• | Exchange Solely for Cash. A U.S. Shareholder who receives solely cash in exchange for Mid-Wisconsin common stock, whether as a result of exercising dissenter’s rights, state-restricted shares, cash-out shares, or otherwise, will generally recognize gain or loss in an amount equal to the difference between the cash received and the U.S. Shareholder’s adjusted tax basis in the shares of Mid-Wisconsin common stock surrendered by such shareholder. Any taxable gain to a U.S. Shareholder on the exchange of Mid-Wisconsin common stock will generally be treated as capital gain, either long-term or short-term capital gain depending on such shareholder’s holding period for the Mid-Wisconsin common stock. Each holder of Mid-Wisconsin common stock who contemplates exercising statutory dissenters’ or appraisal rights should consult its tax advisor as to the possibility that all or a portion of the payment received pursuant to the exercise of such rights will be treated as dividend income. |
Tax Consequences to Nicolet and Mid-Wisconsin. Neither Nicolet nor Mid-Wisconsin will recognize taxable gain or loss as a result of the merger, except for, in the case of Mid-Wisconsin, gain, if any, that has been deferred in accordance with the consolidated return regulations.
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Tax Implications to Non-U.S. Shareholders
For purposes of this discussion, the term “Non-U.S. Shareholder” means a beneficial owner of Mid-Wisconsin common stock (other than an entity treated as a partnership for U.S. federal income tax purposes) that is not a U.S. Shareholder. The rules governing the U.S. federal income taxation of Non-U.S. Shareholders are complex, and no attempt will be made herein to provide more than a limited summary of those rules.
Tax Consequences to Non-U.S. Shareholders. Any gain a Non-U.S. Shareholder recognizes from the exchange of Mid-Wisconsin common stock for Nicolet common stock and cash in the merger generally will not be subject to U.S. federal income tax unless (a) the gain is effectively connected with a trade or business conducted by the Non-U.S. Shareholder in the United States, or (b) in the case of a Non- U.S. Shareholder who is an individual, such shareholder is present in the United States for 183 days or more in the taxable year of the sale and other conditions are met. Non-U.S. Shareholders described in (a) above will be subject to tax on gain recognized at applicable U.S. federal income tax rates and, in addition, Non-U.S. Shareholders that are corporations (or treated as corporations for U.S. federal income tax purposes) may be subject to a branch profits tax equal to 30% (or a lesser rate under an applicable income tax treaty) on their effectively connected earnings and profits for the taxable year, which would include such gain. Non-U.S. Shareholders described in (b) above will be subject to a flat 30% tax on any gain recognized, which may be offset by U.S. source capital losses.
Dividends Paid with Respect to Nicolet Common Stock. As a result of the merger, current shareholders of Mid-Wisconsin common stock will hold Nicolet common stock. Dividends paid to Non-U.S. Shareholders (to the extent paid out of Nicolet’s current or accumulated earnings and profits, as determined for U.S. federal income tax purposes) with respect to such shares of Nicolet common stock will be subject to withholding at a 30% rate or such lower rate as may be specified by an applicable income tax treaty unless the dividends are effectively connected with the conduct of a trade or business within the United States and, if certain tax treaties apply, are attributable to a U.S. permanent establishment, as discussed below. Even if a Non-U.S. Shareholder is eligible for a lower treaty rate, Nicolet will generally be required to withhold at a 30% rate (rather than the lower treaty rate) on dividend payments unless Nicolet has received a valid IRS Form W-8BEN or other documentary evidence establishing entitlement to a lower treaty rate with respect to such payments. If a Non-U.S. Shareholder holds the Nicolet common stock through a foreign financial institution or other foreign non-financial entity, a 30% withholding tax will be imposed on dividends paid after December 31, 2012, to such “foreign financial institution” or other foreign non-financial entity unless (i) the foreign financial institution undertakes certain diligence and reporting obligations or (ii) the foreign non-financial entity either certifies it does not have any substantial U.S. owners or furnishes identifying information regarding each substantial U.S. owner.
If a Non-U.S. Shareholder is subject to withholding at a rate in excess of a reduced rate for which it is eligible under a tax treaty or otherwise, it may be able to obtain a refund of or credit for any amounts withheld in excess of the applicable rate. Investors are encouraged to consult with their own tax advisers regarding the possible implications of these withholding requirements.
Dividends that are effectively connected with the conduct of a trade or business within the United States and, if certain tax treaties apply, are attributable to a U.S. permanent establishment, are not subject to withholding tax, but instead are subject to U.S. federal income tax on a net income basis at applicable graduated rates. Special certification and disclosure requirements must be satisfied for effectively connected income to be exempt from withholding. Any such effectively connected dividend received by a Non-U.S. Shareholder that is a corporation for U.S. federal income tax purposes may be subject to an additional branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.
Tax Consequences if the Merger Does Not Qualify as a Reorganization
If the merger fails to qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code, the merger will be a fully taxable transaction to the shareholders of Mid-Wisconsin common stock. In such case, U.S. Shareholders will recognize gain or loss measured by the difference between the total consideration received in the merger and such shareholders’ tax basis in the shares of Mid-Wisconsin common stock surrendered in the merger. Each shareholder of Mid-Wisconsin common stock is urged to
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consult its tax advisor regarding the manner in which gain or loss should be calculated among different blocks of Mid-Wisconsin common stock surrendered in the merger. The aggregate tax basis in the shares of Nicolet common stock received pursuant to the merger will be equal to the fair market value of such Nicolet common stock as of the closing date of the merger. The holding period of such shares of Nicolet common stock will begin on the date immediately following the closing date of the merger.
Backup Withholding and Information Reporting
In general, information reporting requirements may apply to the cash payments made to shareholders of Mid-Wisconsin common stock in connection with the merger, unless an exemption applies. Backup withholding may be imposed on the above payments at a rate of 31% if a U.S. Shareholder or Non-U.S. Shareholder (i) fails to provide a taxpayer identification number or appropriate certificates, or (ii) otherwise fails to comply with all applicable requirements of the backup withholding rules.
Any amounts withheld from payments to shareholders of Mid-Wisconsin common stock under the backup withholding rules are not an additional tax and will be allowed as a refund or credit against your applicable U.S. federal income tax liability, provided the required information is furnished to the Internal Revenue Service. Both U.S. Shareholders and Non-U.S. Shareholders should consult their own tax advisors regarding the application of backup withholding based on their particular circumstances and the availability and procedure for obtaining an exemption from backup withholding.
Recent Tax Legislation
Under recently enacted legislation, net long term capital gains and qualified dividend income recognized in taxable years beginning on or after January 1, 2013 will be taxed generally at a maximum rate of 20% (for individuals earning $400,000 or more per year and married individuals filing jointly earning $450,000 or more or $250,000 or more per year for married individuals filing separately). Shareholders of Mid-Wisconsin common stock should consult their own tax advisors regarding the availability of the preferential tax rates in light of such shareholders’ particular circumstances.
Beginning in 2013, a U.S. Shareholder will be subject to a 3.8% Medicare tax on certain net investment income earned by individuals, estates and trusts. For these purpose, net investment income generally includes a shareholder’s allocable share of income and gain realized by a shareholder from a sale of stock. In the case of an individual, the tax will be imposed on the lesser of (i) the shareholder’s net investment income, or (ii) the amount by which the shareholder’s modified adjusted gross income exceeds a certain threshold (which is $250,000 in the case of married individuals filing jointly, $125,000 in the case of married individuals filing separately, and $200,000 in all other cases).
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CERTAIN DIFFERENCES IN RIGHTS OF SHAREHOLDERS
If the merger is completed, Mid-Wisconsin’s shareholders (other than those exercising dissenters’ rights or who receive only cash for their Mid-Wisconsin shares) will become Nicolet shareholders. Their rights as shareholders will then be governed by Nicolet’s articles of incorporation and bylaws rather than by Mid-Wisconsin’s articles of incorporation and bylaws.
Nicolet and Mid-Wisconsin are both Wisconsin corporations organized under the laws of the State of Wisconsin. The corporate affairs of Nicolet and Mid-Wisconsin are governed generally by the provisions of the WBCL. The following is a summary of differences between the rights of Mid-Wisconsin shareholders and Nicolet shareholders not described elsewhere in this joint proxy statement-prospectus. The summary is necessarily general, and it is not intended to be a complete statement of all differences affecting the rights of shareholders. It is qualified in its entirety by reference to the WBCL, as well as the articles of incorporation and bylaws of each corporation. Mid-Wisconsin shareholders should consult their own legal counsel with respect to specific differences and changes in their rights as shareholders that would result from the proposed merger.
Authorized Capital Stock
Nicolet. Nicolet’s articles of incorporation authorize it to issue 30,000,000 shares of common stock, $0.01 par value, and 10,000,000 shares of preferred stock, no par value, with such preferences, limitations and relative rights as determined by the board of directors. As of the date of the merger agreement, there were 3,479,888 shares (including 54,475 shares of restricted stock granted but not yet vested under Nicolet’s employee benefit plans) of common stock issued and 3,425,413 shares of common stock outstanding. Of the authorized preferred stock, (i) 14,964 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, and 748 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series B, were authorized but no shares of either series were issued or outstanding, and (ii) 24,400 shares of Non-Cumulative Perpetual Preferred Stock, Series C, were authorized, issued and outstanding as of the date of the merger agreement. In addition, as of the date of the merger agreement, 839,107 shares of Nicolet common stock were subject to outstanding options.
Mid-Wisconsin. Mid-Wisconsin’s articles of incorporation authorize it to issue 6,000,000 shares of common stock, $0.10 par value, and 50,000 shares of preferred stock, no par value. As of the date of the merger agreement, there were 1,657,119 shares of Mid-Wisconsin common stock issued and outstanding. Of the authorized preferred stock, 10,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, and 500 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series B, were authorized, issued and outstanding as of the date of the merger agreement. In addition, as of the date of the merger agreement, 30,510 shares of Mid-Wisconsin common stock were subject to outstanding options.
Composition and Election of the Board of Directors
Nicolet. Nicolet’s articles of incorporation and bylaws provide that the board of directors shall consist of not fewer than two nor more than 25 directors, with the exact number of directors to be set by resolution of the board. Its articles of incorporation provide for the election of directors by cumulative voting, which means that the number of votes each common shareholder may cast is determined by multiplying the number of shares he, she or it owns by the number of directors to be elected. Those votes may be cumulated and cast for a single candidate or may be distributed among two or more candidates in the manner selected by the shareholder.
Mid-Wisconsin. Mid-Wisconsin’s articles of incorporation provide that the board shall consist of such number of directors as the bylaws of Mid-Wisconsin may provide, but not fewer than three or more than 11, and that the board shall be divided into three classes. Each class of directors serves a three-year term, and directors of each class are elected by plurality vote at successive annual meetings of shareholders. Cumulative voting for directors is denied under Mid-Wisconsin’s articles of incorporation.
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Director Nominations
Nicolet. Under Nicolet’s bylaws, either directors or shareholders may nominate persons for election as Nicolet directors. Nominations that are not made by or on behalf of Nicolet’s management must be delivered in writing to Nicolet’s President no less than 14 and no more than 50 days before the meeting at which directors will be elected. If less than 21 days’ notice of such meeting is given, then the delivery deadline for the shareholder’s written notice is the close of business on the seventh day after the date on which notice of the meeting was mailed. The shareholder’s nomination must specify (to the extent known to the shareholder) the nominee’s name, address and principal occupation; the number of shares of capital stock that will be voted in favor of the nominee; and the nominating shareholder’s name, address and beneficial ownership of Nicolet capital stock.
Mid-Wisconsin. Shareholder nominations of directors are subject to the provisions of Mid-Wisconsin’s bylaws described under “—Advance Notice of Shareholder Proposals” below. In addition to the matters specified in that paragraph, a shareholder’s nomination of a director must include all information relating to the nominee that would be required to be disclosed in solicitations of proxies for the election of directors under the Securities Exchange Act of 1934, as amended, including the nominee’s written consent to being named in a proxy statement as a nominee and to serving as a director if elected. If the number of directors to be elected is increased and Mid-Wisconsin does not issue a public announcement identifying all of the nominees or specifying the size of the increased board at least 70 days before the first anniversary of the preceding year’s annual meeting, a shareholder’s notice of nomination will also be considered timely, but only as to nominees for any new positions created by such increase, if it is delivered to Mid-Wisconsin’s Corporate Secretary no later than the 10th day following the day on which Mid-Wisconsin first made such public announcement.
Board Committees
Nicolet. Under the WBCL, unless the articles of incorporation or bylaws provide otherwise, a board of directors may create one or more committees, appoint members of the board of directors to serve on the committees and designate other members of the board of directors to serve as alternates. The WBCL provides that a committee may exercise the authority of the full board of directors except that it cannot approve or recommend to shareholders matters that require shareholder approval under the WBCL and it cannot adopt, amend or repeal a corporate bylaw. In addition to these restrictions, Nicolet’s bylaws provide that no board committee may approve dividends, fill board vacancies without express authorization by the full board, amend the articles of incorporation, approve a plan of merger not requiring shareholder approval, approve the reacquisition of outstanding Nicolet capital stock except pursuant to parameters established by the full board, or approve the issuance of capital stock except to the extent authorized by the full board.
Mid-Wisconsin. Subject to the provisions of the WBCL as described above, Mid-Wisconsin’s bylaws permit the board of directors to establish an Executive Committee that may exercise the authority of the full board of directors to the extent provided in the resolution appointing the committee, except that it may not take action with respect to dividends to shareholders, election of principal officer or the filling of vacancies in the board of directors or any committee thereof.
Director Removal
Nicolet. Directors may be removed for cause by the affirmative vote of the holders of a majority of the issued and outstanding shares of Nicolet common stock entitled to vote in the election of directors, except that a director may not be removed if a number of cumulative votes sufficient to elect him or her is cast against his or her removal. Removal must be voted upon at a special shareholders’ meeting called for that purpose, and any vacancy so created may be filled by majority vote of the remaining directors. “Cause” is defined as conviction of a felony, a demand for removal by regulatory authorities or a determination by two-thirds of the directors then in office (excluding the director whose removal is being sought) that the director’s conduct was inimical to the best interests of Nicolet.
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Mid-Wisconsin. Directors may be removed with or without cause by the affirmative vote of a majority of the outstanding shares entitled to vote at a special meeting called for that purpose, and any vacancy so created may be filled by the shareholders at such meeting or by majority vote of the remaining directors.
Advance Notice of Shareholder Proposals
Nicolet. Nicolet’s bylaws provide that in addition to any other requirements generally applicable to matters to be brought before an annual meeting of shareholders under Nicolet’s articles of incorporation or bylaws or the WBCL, a Nicolet shareholder who wishes to present a matter for consideration at such meeting must notify Nicolet’s Corporate Secretary in writing no later than 60 days before the meeting. The shareholder’s notice must specify the nature and reason for the business proposed to be conducted; the shareholder’s name, address and beneficial ownership of Nicolet stock; and any material interest of the shareholder in the matter proposed for consideration. See “—Director Nominations” above for special provisions relating to shareholder nominations of candidates for the board of directors.
Mid-Wisconsin. Mid-Wisconsin’s bylaws contain a similar advance notice provision for shareholder proposals relating to the annual meeting. The notice to Mid-Wisconsin’s Corporate Secretary must be delivered no less than 60 and no more than 90 days prior to the first anniversary of the preceding year’s annual meeting; provided, however, than if the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice must be delivered no earlier than the 90th day prior to such annual meeting and no later than the close of business on the later of: (i) the 60th day prior to such annual meeting; or (ii) the 10th day following the day on which public announcement of the date of such meeting is first made. The shareholder’s notice must set forth the same matters as are described above with respect to Nicolet. See “—Director Nominations” above for special provisions relating to shareholder nominations of candidates for the board of directors.
Meetings of Shareholders
Nicolet. Nicolet’s bylaws provide that annual meetings of shareholders will be held at such date as may be specified by the board of directors or Corporate Secretary. Subject to any contrary requirements of the WBCL, special meetings of shareholders may be called by either Nicolet’s Chief Executive Officer or President at the direction of the board of directors or by the holder(s) of at least 10% of Nicolet’s outstanding stock. Nicolet’s bylaws require at least 10 and not more than 60 days’ notice of any meeting of shareholders.
Mid-Wisconsin. Mid-Wisconsin’s bylaws provide that annual meetings of shareholders will be held on the fourth Tuesday in April each year or on such other date as the board of directors designates. Special meetings of shareholders may be called by either Mid-Wisconsin’s President or Board of Directors or by the Corporate Secretary at the request of the holder(s) of at least 10% of the outstanding shares entitled to vote at the meeting. Mid-Wisconsin’s bylaws require at least 10 and not more than 50 days’ notice of any meeting of shareholders, except that if the meeting is called to consider a proposal for a merger, consolidation or sale of substantially all assets of Mid-Wisconsin, at least 20 days’ notice is required.
Shareholder Vote Requirements
Nicolet. Except as described under “—Board of Directors” above and “—Mergers, Consolidations and Sales of Assets” below, and unless a greater number of votes is required under Nicolet’s articles of incorporation or the WBCL, a matter voted upon by Nicolet shareholders will be approved if more votes are cast in favor of a matter than against it, assuming a quorum is present.
Mid-Wisconsin. Except as described under “—Board of Directors” above, and unless a greater number of votes is required under Mid-Wisconsin’s articles of incorporation, the bylaws or the WBCL, a matter voted upon by Mid-Wisconsin shareholders will be approved if more votes are cast in favor of a matter than against it, assuming a quorum is present.
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Mergers, Consolidations and Sales of Assets
Nicolet. Nicolet’s articles of incorporation provide that any merger or share exchange of Nicolet with or into any other corporation, or any sale, lease, exchange or other disposition of substantially all of its assets to any other person or entity will require the approval of either: (i) two-thirds of the directors then in office and a majority of the issued and outstanding shares entitled to vote; or (ii) a majority of the directors then in office and two-thirds of the issued and outstanding shares entitled to vote. A merger of Nicolet into another corporation would also require the approval of the Federal Reserve and the OCC and the non-objection of the FDIC.
Mid-Wisconsin. The merger of Mid-Wisconsin requires the affirmative vote of a majority of the board of directors and a majority of the issued and outstanding shares entitled to vote. Such a merger must also be approved by the Federal Reserve and the WDFI.
Dividends
Nicolet. The holders of Nicolet common stock are entitled to receive dividends when, as and if declared by Nicolet’s board of directors and paid by Nicolet out of funds legally available therefor. Under Federal Reserve policy, a bank holding company such as Nicolet generally should not maintain a rate of cash dividends unless the available net income of the bank holding company is sufficient to fully fund the dividends. Further, the prospective rate of earnings retention should appear to be consistent with its capital needs, asset quality, and overall financial condition. In addition, Nicolet may not pay dividends that would render it insolvent. Nicolet has not declared a dividend on its common stock since its inception in 2000 and does not expect to do so in the foreseeable future. Instead, Nicolet anticipates that all earnings, if any, will be used for working capital, to support operations and to finance the growth and development of its business.
Mid-Wisconsin. Mid-Wisconsin is subject to a written agreement with the Federal Reserve Bank of Minneapolis dated May 10, 2011 that prohibits Mid-Wisconsin from paying dividends without the Federal Reserve’s prior written approval. Subject to the foregoing, holders of Mid-Wisconsin common stock are entitled to receive dividends when, as and if declared by Mid-Wisconsin’s board of directors and paid by Mid-Wisconsin out of funds legally available therefor. Similar to Nicolet, Mid-Wisconsin must adhere to the Federal Reserve Policy for bank holding companies and cannot pay dividends that would render it insolvent.
Indemnification
Nicolet. Nicolet’s bylaws provide for the mandatory indemnification of a director, officer, employee or agent of Nicolet (or a person concurrently serving in such a capacity with another entity at Nicolet’s request), to the extent such person has been successful on the merits or otherwise in the defense of any threatened, pending or completed civil, criminal, administrative or investigative action, suit, arbitration or other proceeding brought by or in the right of Nicolet or by any other person or entity to which such person is a party because he or she is a director, officer, employee or agent, for all reasonable fees, costs, charges, disbursements, attorneys’ fees and other expenses incurred in connection with proceeding. In all other cases, Nicolet shall indemnify a director or officer, and may indemnify and employee or agent, of Nicolet against all liability and reasonable fees, costs, charges, disbursements, attorneys’ fees and other expenses incurred by such person in any proceeding brought by or in the right of Nicolet or by any other person or entity to which such person is a party because he or she is a director, officer, employee or agent, unless it has been proven by final adjudication that such person breached or failed to perform a duty owed to Nicolet that constituted:
• | a willful failure to deal fairly with Nicolet or its shareholders in connection with a matter in which the director, officer, employee or agent has a material conflict of interest; |
• | a violation of criminal law, unless the director, officer, employee or agent had reasonable cause to believe his or her conduct was lawful or no reasonable cause to believe his or her conduct was unlawful; |
• | a transaction from which the director, officer, employee or agent derived an improper personal profit; or |
• | willful misconduct. |
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Unless modified by written agreement, the determination as to whether indemnification is proper shall be made in accordance with the WBCL. The right to indemnification under Nicolet’s bylaws may only be amended by the vote of two-thirds of the outstanding shares of Nicolet capital stock entitled to vote on the matter. Nicolet is authorized to purchase and maintain insurance on behalf of its directors, officers, employees or agents in connection with the foregoing indemnification obligations.
Mid-Wisconsin. Mid-Wisconsin’s bylaws state that any person who has served as a director, officer, employee or agent of Mid-Wisconsin, or of any other enterprise at Mid-Wisconsin’s request, shall be indemnified by Mid-Wisconsin in accordance with, and to the fullest extent permitted by, the provisions of the WBCL. The WBCL requires indemnification of a director or officer to the extent that he or she has been successful on the merits or otherwise in the defense of a proceeding, for all reasonable expenses incurred in the proceeding if the director or officer was a party because he or she is a director or officer of the corporation. In other cases, the WBCL requires indemnification of a director or officer against liability incurred in a proceeding to which he or she was a party because of his or her status as a director or officer of the corporation, unless liability was incurred because he or she breached or failed to perform a duty owed to the corporation and the breach or failure to perform constitutes any of the following:
• | a willful failure to deal fairly with the corporation or its shareholders in connection with a matter in which the director, officer, employee or agent has a material conflict of interest; |
• | a violation of criminal law, unless the director, officer, employee or agent had reasonable cause to believe his or her conduct was lawful or no reasonable cause to believe his or her conduct was unlawful; |
• | a transaction from which the director, officer, employee or agent derived an improper personal profit; or |
• | willful misconduct. |
The merger agreement provides that Nicolet will assume Mid-Wisconsin’s indemnification obligations after the merger.
Amendments to Articles of Incorporation and Bylaws
Nicolet. Nicolet’s articles of incorporation may be amended as provided in the WBCL, which provides that unless the articles of incorporation, bylaws or WBCL require a higher vote, and subject to any rights of a class to vote separately on the amendment under the WBCL, an amendment to the articles of incorporation will be approved if the number of votes cast in favor of the amendment exceed the votes cast against it. Nicolet’s bylaws may be amended by the shareholders or by majority vote of the board of directors, except as otherwise provided in the WBCL and except as specified under “—Indemnification” above. The WBCL requires shareholder approval for an amendment to any shareholder-adopted bylaw that states that the board may not amend it. Additionally, a bylaw that fixes a greater or lower quorum requirement or a greater voting requirement for shareholders may not be adopted, amended or repealed by the board of directors. A bylaw that fixes a greater or lower quorum requirement or a greater voting requirement for the board of directors may be amended or repealed as follows: (i) if originally adopted by the shareholders, only by the shareholders, unless the bylaw also permits board approval of the amendment, or (ii) if originally adopted by the board of directors, either by the shareholders or by the board of directors.
Mid-Wisconsin. Mid-Wisconsin’s articles of incorporation and bylaws may be amended as provided in the WBCL, as summarized for Nicolet above. Mid-Wisconsin’s bylaws also state that they may be amended by the shareholders or by majority vote of the board of directors, except that the board may not amend or repeal any bylaw adopted by the shareholders unless such authority has been conferred upon the directors by that bylaw.
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DISSENTERS’ RIGHTS
The following discussion is not a complete description of the law relating to dissenters’ rights available to holders and beneficial holders of Mid-Wisconsin and Nicolet common stock under Wisconsin law. This description is qualified in its entirety by the full text of the relevant provisions of the WBCL, which are reprinted in their entirety asAppendix B to this joint proxy statement-prospectus. If you desire to exercise dissenters’ rights, you should review carefully the WBCL and consult a legal advisor before electing or attempting to exercise these rights.
Mid-Wisconsin
Pursuant to the provisions of sections. 180.1301 to 180.1331 of the WBCL, holders and beneficial holders of Mid-Wisconsin common stock have the right to dissent from the merger and to receive the fair value of their shares in cash. Holders and beneficial holders of Mid-Wisconsin common stock who fulfill the requirements of the WBCL summarized below and set forth inAppendix B will be entitled to assert dissenters’ rights in connection with the merger. Shareholders or beneficial shareholders considering initiation of a dissenters’ proceeding should review this section and should also reviewAppendix B in its entirety. A dissenters’ proceeding may involve litigation.
Preliminary Procedural Steps
Pursuant to the provisions of the WBCL, if the merger is consummated, in order to exercise dissenter’s rights you must have:
• | Given to Mid-Wisconsin, prior to the vote at the special meeting with respect to the approval of the merger, written notice of your intent to demand payment for your shares of common stock (hereinafter referred to as “shares”); |
• | Not voted in favor of the merger; and |
• | Complied with the statutory requirements summarized below. |
If you have perfected your dissenters’ rights and the merger is consummated, you will receive the fair value of your shares as of the effective date of the merger. A shareholder or beneficial shareholder who fails to deliver written notice of his, her or its intent to demand payment for his, her or its shares if the merger is consummated in accordance with the requirements of the WBCL is not entitled to payment for his or her shares pursuant to the provisions of the WBCL.
Brokers or others who hold shares in their name that are beneficially owned by others may assert dissenters’ rights as to fewer than all of the shares registered in your name only if they dissent with respect to all shares beneficially owned by any one person and notify Mid-Wisconsin in writing of the name and address of each person on whose behalf they are asserting dissenters’ rights. The rights of a shareholder who asserts dissenters’ rights as to fewer than all of the shares registered in his, her or its name are determined as if the shares as to which that holder dissents and that holder’s other shares were registered in the names of different shareholders.
Written Dissent Demand
Voting against the merger will not satisfy the written demand requirement. In addition to not voting in favor of the merger, if you wish to preserve the right to dissent and seek appraisal, you must give a separate written notice of your intent to demand payment for your shares if the merger is effected.
Any written notice of intent to dissent to the merger, satisfying the requirements discussed above, should be addressed to Mid-Wisconsin Financial Services, Inc., 132 West State Street, Medford, Wisconsin 54451, Attn: Corporate Secretary.
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Dissenters’ Notice
If the shareholders of Mid-Wisconsin approve the merger at the special meeting, Mid-Wisconsin (or Nicolet as its successor) must deliver a written dissenters’ notice (the “Dissenters’ Notice”) to all of its shareholders who satisfy the foregoing requirements. The Dissenters’ Notice must be sent no later than 10 days after the date that the merger is approved by Mid-Wisconsin’s shareholders and must:
• | State where dissenting shareholders should send the demand for payment and where and when dissenting shareholders should deposit certificates for the shares; |
• | Inform holders of uncertificated shares as to what extent transfer of these shares will be restricted after the demand for payment is received; |
• | Include a form for demanding payment that includes the date of the first announcement to news media or to shareholders of the terms of the merger and requires the shareholder or beneficial shareholder asserting dissenters’ rights to certify whether he, she or it acquired beneficial ownership of the shares prior to that date; |
• | Set a date by which Mid-Wisconsin (or Nicolet as its successor) must receive the demand for payment (which date may not be fewer than 30 nor more than 60 days after the Dissenters’ Notice is delivered); and |
• | Be accompanied by a copy of sections 180.1301 to 180.1331 of the WBCL. |
A shareholder or beneficial shareholder who receives the Dissenters’ Notice or a beneficial shareholder whose shares are held by a nominee who is sent a Dissenters’ Notice must demand payment and certify as to his or her ownership of the shares in accordance with the Dissenters’ Notice. A shareholder or beneficial shareholder who holds certificated shares must also deposit his, her or its share certificates with Mid-Wisconsin (or Nicolet as its successor) in accordance with the terms of the Dissenters’ Notice.
A dissenting shareholder or beneficial shareholder who demands payment and deposits his, her or its share certificate in accordance with the terms of the Dissenters’ Notice will retain all of the rights of a shareholder or beneficial shareholder, respectively, until those rights are canceled or modified by the consummation of the merger. Mid-Wisconsin may restrict the transfer of uncertificated shares from the date that the demand for payment for those shares is received until the merger is effected or the restrictions released, in the event that it does not consummate the merger.
A shareholder or beneficial shareholder with certificated or uncertificated shares who does not demand payment by the date set forth in the Dissenters’ Notice is not entitled to payment for his, her or its shares under sections 180.1301 to 180.1331 of the WBCL. A shareholder or beneficial shareholder with certificated shares who does not deposit his, her or its share certificates where required and by the date set forth in the Dissenters’ Notice is not entitled to payment for his, her or its shares under sections 180.1301 to 180.1331 of the WBCL. Mid-Wisconsin (or Nicolet as its successor) may elect to withhold payment from a dissenter and instead make an offer of payment if that dissenter was not the beneficial owner of his, her or its shares prior to the date specified in the Dissenters’ Notice as the date on which the first announcement of the merger was made to the news media or to Mid-Wisconsin’s shareholders.
Payment
Except as described below, Mid-Wisconsin (or Nicolet as its successor) must, as soon as the merger is effected or upon receipt of a payment demand, whichever is later, pay each shareholder who has complied with the payment demand and deposit requirements described above the amount Mid-Wisconsin (or Nicolet as its successor) estimates to be the fair value of the shares, plus accrued interest. The offer of payment must be accompanied by:
• | Recent financial statements of Mid-Wisconsin; |
• | A statement of the estimate of the fair value of the shares; |
• | An explanation of how the interest was calculated; |
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• | A statement of the dissenter’s right to demand payment under section 180.1328 of the WBCL; and |
• | A copy of sections 180.1301 to 180.1331 of the WBCL. |
If the merger is not consummated within 60 days after the date set for demanding payment and depositing share certificates, Mid-Wisconsin must return the deposited certificates and release the transfer restrictions imposed on uncertificated shares. Mid-Wisconsin (or Nicolet as its successor) must send a new Dissenters’ Notice if the merger is consummated after the return of certificates and any dissenting shareholders must repeat the payment demand procedure described above.
Section 180.1328 of the WBCL provides that a dissenter may notify Mid-Wisconsin (or Nicolet as its successor) in writing of his, her or its own estimate of the fair value of such holder’s shares and the interest due, and may demand payment of such holder’s estimate, less any payment received from Mid-Wisconsin (or Nicolet as its successor), if:
• | He or she believes that the amount paid or offered by Mid-Wisconsin (or Nicolet as its successor) is less than the fair value of his or her shares or that Mid-Wisconsin (or Nicolet as its successor) has calculated incorrectly the interest due; |
• | Mid-Wisconsin (or Nicolet as its successor) fails to make payment within 60 days after the date set in the Dissenters’ Notice for demanding payment; or |
• | Mid-Wisconsin, having failed to consummate the merger, does not return the deposited certificates or release the transfer restrictions imposed on uncertificated shares within 60 days after the date set for demanding payment in the Dissenters’ Notice. |
A dissenting shareholder waives his or her right to demand payment under sections 180.1328 unless his, her or its provides Mid-Wisconsin (or Nicolet as its successor) with notice of his or her demand, in conformance with the notice requirements of section 180.0141, within 30 days after Mid-Wisconsin (or Nicolet as its successor) making or offering of payment for the dissenting shareholder’s shares.
Litigation
If a demand for payment under section 180.1328 remains unsettled, Mid-Wisconsin (or Nicolet as its successor) must commence a nonjury equity valuation proceeding in the Circuit Court of Taylor County, Wisconsin (in the case of Mid-Wisconsin) or Brown County, Wisconsin (in the case of Nicolet), within 60 days after having received the payment demand under section 180.1328 and must petition the court to determine the fair value of the shares and accrued interest. If Mid-Wisconsin (or Nicolet as its successor) does not commence the proceeding within those 60 days, the WBCL requires Mid-Wisconsin (or Nicolet as its successor) to pay each dissenting shareholder whose demand remains unsettled the amount demanded. Mid-Wisconsin (or Nicolet as its successor) is required to make all dissenting shareholders whose demands remain unsettled parties to the proceeding and to serve a copy of the petition upon each of them.
The jurisdiction of the court in which the proceeding is brought is plenary and exclusive. The court may appoint one or more appraisers to receive evidence and to recommend a decision on fair value. An appraiser has the powers delegated to such appraiser in the court order appointing him or her or in any amendment to the order. Dissenters are entitled to the same discovery rights as parties in other civil proceedings.
Each dissenting shareholder made a party to the proceeding is entitled to judgment for the amount, if any, by which the court finds the fair value of such holder’s shares, plus interest, exceeds the amount paid or offered, as applicable, by Mid-Wisconsin (or Nicolet as its successor) .
The court in an appraisal proceeding commenced under the foregoing provision must determine the costs of the proceeding, excluding fees and expenses of attorneys and experts for the respective parties, and must assess those costs against Mid-Wisconsin (or Nicolet as its successor), except that the court may assess the costs against all or some of the dissenting shareholders to the extent the court finds they acted arbitrarily, vexatiously, or not in good faith in demanding payment under section 180.1328 of the WBCL. The court also may assess the fees and expenses of attorneys and experts for the respective parties against Mid-Wisconsin (or Nicolet as its successor) if the court finds Mid-Wisconsin (or Nicolet as its successor) did not substantially
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comply with the requirements of the WBCL, or against either Mid-Wisconsin (or Nicolet as its successor) or a dissenting shareholder if the court finds that such party acted arbitrarily, vexatiously, or not in good faith with respect to the rights provided by the WBCL.
If the court finds that the services of attorneys or experts for any dissenter were of substantial benefit to other dissenters similarly situated, the court may award those attorneys reasonable fees out of the amounts awarded the dissenters who were benefited.
This is a summary of the material rights of a dissenting shareholder and is qualified in its entirety by reference to the applicable portions of the WBCL, which are included asAppendix B to this joint proxy statement-prospectus. If you intend to dissent from approval of the merger, you should review carefully the text ofAppendix B and should also consult with your attorney. We will not give you any further notice of the events giving rise to dissenters’ rights or any steps associated with perfecting dissenters’ rights, except as indicated above or otherwise required by law.
We have not made any provision to grant you access to any of the corporate files of Nicolet or Mid-Wisconsin, except as may be required by the WBCL, or to obtain legal counsel or appraisal services at the expense of Mid-Wisconsin (or Nicolet as its successor).
Any dissenting shareholder who perfects his, her or its right to be paid the “fair value” of his, her or its shares will recognize taxable gain or loss upon receipt of cash for such shares for federal income tax purposes. See “Material Federal Income Tax Consequences of the Merger” at page 66.
You must do all of the things described in this section and as set forth in the WBCL in order to preserve your dissenters’ rights and to receive the fair value of your shares in cash (as determined in accordance with those provisions). If you do not follow each of the steps as described above, you will have no right to receive cash for your shares as provided in the WBCL. In view of the complexity of these provisions of Wisconsin law, shareholders of Mid-Wisconsin who are considering exercising their dissenters’ rights should consult their legal advisors.
Nicolet
Pursuant to the provisions of sections 180.1301 to 180.1331 of the WBCL, holders and beneficial holders of Nicolet’s common stock have the right to dissent from the merger and to receive the fair value of their shares in cash. Holders and beneficial holders of Nicolet common stock who fulfill the requirements of the WBCL summarized below and set forth inAppendix B will be entitled to assert dissenters’ rights in connection with the merger. Shareholders or beneficial shareholders considering initiation of a dissenters’ proceeding should review this section and should also reviewAppendix B in its entirety. A dissenters’ proceeding may involve litigation.
Preliminary Procedural Steps
Pursuant to the provisions of the WBCL, if the merger is consummated, in order to exercise your dissenter’s rights you must have:
• | Given to Nicolet, prior to the vote at the special meeting with respect to the approval of the merger, written notice of your intent to demand payment for your shares of common stock (hereinafter referred to as “shares”); |
• | Not voted in favor of the merger; and |
• | Complied with the statutory requirements summarized below. |
If you have perfected your dissenters’ rights and the merger is consummated, you will receive the fair value of your shares as of the effective date of the merger. A shareholder or beneficial shareholder who fails to deliver written notice of his, her or its intent to demand payment for his, her or its shares if the merger is consummated in accordance with the requirements of the WBCL is not entitled to payment for his, her or its shares pursuant to the provisions of the WBCL.
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You may assert dissenters’ rights as to fewer than all of the shares registered in your name only if you dissent with respect to all shares beneficially owned by any one person and you notify Nicolet in writing of the name and address of each person on whose behalf you are asserting dissenters’ rights. The rights of a shareholder who asserts dissenters’ rights as to fewer than all of the shares registered in his or her name are determined as if the shares as to which that holder dissents and that holder’s other shares were registered in the names of different shareholders.
Written Dissent Demand
Voting against the merger will not satisfy the written demand requirement. In addition to not voting in favor of the merger, if you wish to preserve the right to dissent and seek appraisal, you must give a separate written notice of your intent to demand payment for your shares if the merger is effected.
Any written notice of intent to dissent to the merger, satisfying the requirements discussed above, should be addressed to Nicolet Bankshares, Inc., 111 North Washington Street, Green Bay, WI 54301, Attn: Corporate Secretary.
Dissenters’ Notice
If the shareholders of Nicolet approve the merger at the special meeting, Nicolet must deliver a written dissenters’ notice (the “Dissenters’ Notice”) to all of its shareholders who satisfy the foregoing requirements. The Dissenters’ Notice must be sent no later than 10 days after the date that the merger is approved by Nicolet’s shareholders and must:
• | State where dissenting shareholders should send the demand for payment and where and when dissenting shareholders should deposit certificates for the shares; |
• | Inform holders of uncertificated shares as to what extent transfer of these shares will be restricted after the demand for payment is received; |
• | Include a form for demanding payment that includes the date of the first announcement to news media or to shareholders of the terms of the merger and requires the shareholder or beneficial shareholder asserting dissenters’ rights to certify whether he or she acquired beneficial ownership of the shares prior to that date; |
• | Set a date by which Nicolet must receive the demand for payment (which date may not be fewer than 30 nor more than 60 days after the Dissenters’ Notice is delivered); and |
• | Be accompanied by a copy of sections 180.1301 to 180.1331 of the WBCL. |
A shareholder or beneficial shareholder who receives the Dissenters’ Notice or a beneficial shareholder whose shares are held by a nominee who is sent a Dissenters’ Notice must demand payment and certify as to his or her ownership of the shares in accordance with the Dissenters’ Notice. A shareholder or beneficial shareholder who holds certificated shares must also deposit his, her or its share certificates with Nicolet in accordance with the terms of the Dissenters’ Notice.
A dissenting shareholder or beneficial shareholder who demands payment and deposits his, her or its share certificate in accordance with the terms of the Dissenters’ Notice will retain all of the rights of a shareholder or beneficial shareholder, respectively, until those rights are canceled or modified by the consummation of the merger. Nicolet may restrict the transfer of uncertificated shares from the date that the demand for payment for those shares is received until the merger is effected or the restrictions released, in the event that Nicolet does not consummate the merger.
A shareholder or beneficial shareholder with certificated or uncertificated shares who does not demand payment by the date set forth in the Dissenters’ Notice is not entitled to payment for his, her or its shares under sections 180.1301 to 180.1331 of the WBCL. A shareholder or beneficial shareholder with certificated shares who does not deposit his, her or its share certificates where required and by the date set forth in the Dissenters’ Notice is not entitled to payment for his, her or its shares under sections 180.1301 to 180.1331 of the WBCL. Nicolet may elect to withhold payment from a dissenter and instead make an offer of payment if
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that dissenter was not the beneficial owner of his, her or its shares prior to the date specified in the Dissenters’ Notice as the date on which the first announcement of the merger was made to the news media or to Nicolet’s shareholders.
Payment
Except as described below, Nicolet must, as soon as the merger is effected or upon receipt of a payment demand, whichever is later, pay each shareholder who has complied with the payment demand and deposit requirements described above the amount Nicolet estimates to be the fair value of the shares, plus accrued interest. Nicolet’s offer of payment must be accompanied by:
• | Recent financial statements of Nicolet; |
• | A statement of Nicolet’s estimate of the fair value of the shares; |
• | An explanation of how the interest was calculated; |
• | A statement of the dissenter’s right to demand payment under sections 180.1328 of the WBCL; and |
• | A copy of sections 180.1301 to 180.1331 of the WBCL. |
If the merger is not consummated within 60 days after the date set for demanding payment and depositing share certificates, Nicolet must return the deposited certificates and release the transfer restrictions imposed on uncertificated shares. Nicolet must send a new Dissenters’ Notice if the merger is consummated after the return of certificates and any dissenting shareholders must repeat the payment demand procedure described above.
Section 180.1328 of the WBCL provides that a dissenter may notify Nicolet in writing of his or her own estimate of the fair value of such holder’s shares and the interest due, and may demand payment of such holder’s estimate, less any payment received from Nicolet, if:
• | He or she believes that the amount paid or offered by Nicolet is less than the fair value of his or her shares or that Nicolet has calculated incorrectly the interest due; |
• | Nicolet fails to make payment within 60 days after the date set in the Dissenters’ Notice for demanding payment; or |
• | Nicolet, having failed to consummate the merger, does not return the deposited certificates or release the transfer restrictions imposed on uncertificated shares within 60 days after the date set for demanding payment in the Dissenters’ Notice. |
A dissenting shareholder waives his or her right to demand payment under section 180.1328 unless he or she provides Nicolet with notice of his or her demand, in conformance with the notice requirements of section 180.0141, within 30 days after Nicolet making or offering of payment for the dissenting shareholder’s shares.
Litigation
If a demand for payment under section 180.1328 remains unsettled, Nicolet must commence a nonjury equity valuation proceeding in the Circuit Court of Brown County, Wisconsin, within 60 days after having received the payment demand under section 180.1328 and must petition the court to determine the fair value of the shares and accrued interest. If Nicolet does not commence the proceeding within those 60 days, the WBCL requires Nicolet to pay each dissenting shareholder whose demand remains unsettled the amount demanded. Nicolet is required to make all dissenting shareholders whose demands remain unsettled parties to the proceeding and to serve a copy of the petition upon each of them.
The jurisdiction of the court in which the proceeding is brought is plenary and exclusive. The court may appoint one or more appraisers to receive evidence and to recommend a decision on fair value. An appraiser has the powers delegated to such appraiser in the court order appointing him or her or in any amendment to the order. Dissenters are entitled to the same discovery rights as parties in other civil proceedings.
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Each dissenting shareholder made a party to the proceeding is entitled to judgment for the amount, if any, by which the court finds the fair value of such holder’s shares, plus interest, exceeds the amount paid or offered, as applicable, by Nicolet.
The court in an appraisal proceeding commenced under the foregoing provision must determine the costs of the proceeding, excluding fees and expenses of attorneys and experts for the respective parties, and must assess those costs against Nicolet, except that the court may assess the costs against all or some of the dissenting shareholders to the extent the court finds they acted arbitrarily, vexatiously, or not in good faith in demanding payment under section 180.1328 of the WBCL. The court also may assess the fees and expenses of attorneys and experts for the respective parties against Nicolet if the court finds Nicolet did not substantially comply with the requirements the WBCL, or against either Nicolet or a dissenting shareholder if the court finds that such party acted arbitrarily, vexatiously, or not in good faith with respect to the rights provided by the WBCL.
If the court finds that the services of attorneys or experts for any dissenter were of substantial benefit to other dissenters similarly situated, the court may award those attorneys reasonable fees out of the amounts awarded the dissenters who were benefited.
This is a summary of the material rights of a dissenting shareholder and is qualified in its entirety by reference to the applicable portions of the WBCL, which are included asAppendix B to this joint proxy statement-prospectus. If you intend to dissent from approval of the merger, you should review carefully the text ofAppendix B and should also consult with your attorney. We will not give you any further notice of the events giving rise to dissenters’ rights or any steps associated with perfecting dissenters’ rights, except as indicated above or otherwise required by law.
We have not made any provision to grant you access to any of the corporate files of Nicolet or Mid-Wisconsin, except as may be required by the WBCL, or to obtain legal counsel or appraisal services at the expense of Nicolet.
Any dissenting shareholder who perfects his, her or its right to be paid the “fair value” of his, her or its shares will recognize taxable gain or loss upon receipt of cash for such shares for federal income tax purposes. See “Material Federal Income Tax Consequences of the Merger” at page 66.
You must do all of the things described in this section and as set forth in the WBCL in order to preserve your dissenters’ rights and to receive the fair value of your shares in cash (as determined in accordance with those provisions). If you do not follow each of the steps as described above, you will have no right to receive cash for your shares as provided in the WBCL. In view of the complexity of these provisions of Wisconsin law, shareholders of Nicolet who are considering exercising their dissenters’ rights should consult their legal advisors.
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BUSINESS OF NICOLET
General
Nicolet is a Wisconsin corporation and was incorporated as Green Bay Financial Corporation, a Wisconsin corporation, on April 5, 2000 to serve as the holding company for and the sole shareholder of Nicolet National Bank. It amended and restated its articles of incorporation and changed its name to Nicolet Bankshares, Inc. on March 14, 2002. It subsequently became the holding company for Nicolet National Bank upon completion of the Nicolet National Bank’s reorganization into a holding company structure on June 6, 2002.
Nicolet is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and under the bank holding company laws of the State of Wisconsin. It conducts operations through its wholly-owned subsidiary, Nicolet National Bank, which was organized in 2000 as a national bank under the laws of the United States and opened for business on November 1, 2000. Nicolet National Bank provides a full range of traditional commercial and retail banking services, as well as wealth management services, throughout northeastern Wisconsin and the upper peninsula of Michigan. Nicolet primarily markets its services to owner-managed companies as well as the individual owners of these businesses and other residents of its market area through 11 branch locations in Green Bay, De Pere, Appleton, Marinette and Crivitz, Wisconsin and Menominee, Michigan.
Since its opening in late 2000, Nicolet has grown to $683 million in assets as of September 30, 2012. Over this time, to supplement its organic growth, Nicolet National Bank purchased a Menominee, Michigan branch office and deposits from a Michigan-based bank in December 2003. In July 2010, Nicolet National Bank purchased four Brown County, Wisconsin branch offices from a Madison-based thrift, acquiring assets with a fair value of approximately $107 million, including $25 million of loans, $4 million of core deposit intangible and $78 million in cash, and assumed liabilities with a fair value of approximately $107 million, including $106 million of deposits. In 2005, Nicolet effected a reorganization through a cash-out merger to shareholders owning 1,500 or fewer shares of common stock as a means of reducing its number of shareholders of record to a level that would permit Nicolet to suspend its SEC filing obligations, which it did in March 2005. In late 2007, Nicolet effected a voluntary stock repurchase. In December 2008, Nicolet raised $9.5 million in capital through a private placement of common stock and also raised $14.96 million through the issuance of preferred stock to Treasury under TARP. On September 1, 2011, Nicolet redeemed this preferred stock for its $15.7 million stated value and issued $24.4 million of SBLF Preferred Stock to Treasury in connection with its participation in the federal government’s Small Business Lending Fund.
As of September 30, 2012, Nicolet had consolidated total assets of $683 million, consolidated total gross loans of $546 million, consolidated total deposits of $555 million and consolidated shareholders’ equity of $77 million.
Target Markets
Nicolet, through its subsidiary Nicolet National Bank, provides a full range of traditional banking services throughout northeastern Wisconsin and the upper peninsula of Michigan. Based on deposit market share data published by the FDIC as of June 30, 2012, Nicolet National Bank ranks third in the Brown County, Wisconsin market and in the top six in the Marinette, Wisconsin and Menominee, Michigan county markets. With its second branch opened in Appleton in December 2011, Nicolet National Bank is increasing its market share in Outagamie County, Wisconsin. It employs seasoned banking and wealth management professionals with experience in the market area and who are active in their communities.
This emphasis on meeting customer needs in a relationship-focused manner, combined with local decision-making on extensions of credit, distinguishes Nicolet from its competitors, particularly in the case of large financial institutions. Nicolet believe it further distinguishes itself by providing a range of products and services characteristic of a large financial institution while providing the personalized service and convenience characteristic of a community bank.
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Products and Services Overview
Nicolet National Bank is a full-service community bank. Its principal business is banking, consisting of lending and deposit gathering (as well as other banking-related products and services) to businesses and individuals of the communities it serves, and the operational support to deliver, fund and manage such banking services. Additionally, Nicolet National Bank offers wealth management services to the businesses and individuals it serves. Profitability is significantly dependent upon net interest income (interest income earned on loans and other interest-earning assets such as investments, net of interest expense on deposits and other borrowed funds), noninterest income sources (including but not limited to service charges on deposits, trust and brokerage fees, and mortgage fee income from sales of residential mortgages into the secondary market), the level of the provision for loan losses, noninterest expense (largely employee compensation and overhead expenses tied to processing and operating Nicolet National Bank’s business).
Nicolet National Bank offers a variety of loans, deposits and related services to business customers (especially small and medium-sized businesses and professional concerns), including but not limited to: business checking and other business deposit products and services, business loans, lines of credit, commercial real estate loans, construction loans and letters of credit, and retirement planning services. Similarly, it offers a variety of banking products and services to consumers, including but not limited to: home equity loans and lines, residential mortgage loans and mortgage refinancing, residential construction loans, personal loans, checking, savings and money market accounts, various certificate of deposit and individual retirement accounts and safe deposit boxes, and personal brokerage, trust and fiduciary services. It also provides on-line services, including commercial, retail and trust on-line banking, automated bill payment, remote deposit capture, and telephone banking, and other services such as wire transfers, courier services, debit cards, credit cards, direct deposit, official bank checks, and U.S. Savings Bonds.
Business and Properties
The main office of both Nicolet and Nicolet National Bank is located at 111 North Washington Street, Green Bay, Wisconsin 54301. Including the main office, Nicolet National Bank operates eleven branches, most are free-standing, newer buildings that provide adequate access, customer parking, and drive-through and/or ATM service. The following table summarizes pertinent details of Nicolet National Bank’s branches.
Office Address | Owned/ Leased | Square Footage | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
111 North Washington Street Green Bay, Brown County, Wisconsin (main office) | Leased | 38,000 | ||||||||
2380 Dousman Street, Suites 100 and 200 Green Bay, Brown County, Wisconsin1 | Owned | 7,700 | ||||||||
2363 Holmgren Way Green Bay, Brown County, Wisconsin1 | Leased | 4,200 | ||||||||
1610 Lawrence Drive De Pere, Brown County, Wisconsin1 | Leased | 4,100 | ||||||||
1011 North Broadway De Pere, Brown County, Wisconsin | Owned | 3,500 | ||||||||
2082 Monroe Road De Pere, Brown County, Wisconsin1 | Leased | 4,200 | ||||||||
2400 S. Kensington Ave., Suite 100 Appleton, Outagamie County, Wisconsin | Leased | 3,500 | ||||||||
900 West College Avenue Appleton, Outagamie County, Wisconsin | Leased | 3,800 |
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Office Address | Owned/ Leased | Square Footage | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
315 N. US Highway 141 Crivitz, Marinette County, Wisconsin | Owned | 2,900 | ||||||||
2009 Hall Avenue Marinette, Marinette County, Wisconsin | Owned | 3,000 | ||||||||
1015 Tenth Avenue Menominee, Menominee County, Michigan2 | Owned | 1,400 |
(1) | Branch was acquired through a purchase and assumption transaction from a thrift, which was consummated in July 2010. |
(2) | Branch was acquired through a purchase and assumption transaction from another bank, which was consummated in December 2003. |
Lending Services
Lending. Nicolet National Bank seeks creditworthy borrowers within a limited geographic area. Its primary lending function is to make commercial loans, consisting of commercial and business loans and owner-occupied commercial real estate loans; commercial real estate (“CRE”) loans, consisting of commercial investment real estate loans and construction and land development loans; residential real estate, including residential first mortgages, residential junior mortgages (such as home equity loans and lines), and to a lesser degree residential construction loans; and other loans, mainly consumer in nature. As of September 30, 2012, Nicolet National Bank’s loan portfolio mix was as follows:
Loan Category | Ratio | |||||
---|---|---|---|---|---|---|
Commercial and industrial | 37 | % | ||||
Owner-occupied commercial real estate | 20 | % | ||||
Total commercial loans | 57 | % | ||||
CRE-investment | 13 | % | ||||
Construction and land development | 5 | % | ||||
Total CRE loans | 18 | % | ||||
Residential first mortgages | 15 | % | ||||
Residential junior mortgages | 8 | % | ||||
Residential construction | 1 | % | ||||
Total residential real estate loans | 24 | % | ||||
Other | 1 | % |
Loan Policies and Procedures. Nicolet National Bank has and follows extensive loan policies and procedures to standardize processes, meet compliance requirements and prudently manage underwriting, credit and other risks. These include, but are not limited to: loan approval policies at various levels (individual officers and committees), lending limits (some imposed by law and others to address risks based on loan type or nature of borrower; such limits may increase or decrease with the capital level of the bank or for other reasons), appraisal policies (some imposed by law, but including quality of appraiser and loan-to-appraised value guidelines for different loan types), and various review and documentation procedures.
Credit Risks. The principal economic risk associated with lending in each type of loan Nicolet National Bank makes is the creditworthiness of the borrower. The ability of borrowers to repay their loans is influenced and affected by numerous things, including but not limited to: general economic conditions, such as the health of the economy as a whole, levels and trends in the interest rate environment, inflation, employment rates and trends; demand for a commercial borrower’s product or services; factors affecting a borrower’s customers, suppliers or employees; business management abilities; tenant vacancy rates; supply, demand and price of residential or commercial real estate; and in general a borrower’s financial stability, as well as personal factors (such as job loss, divorce, illness and other personal hardships). Credit risk is controlled and monitored through active asset quality management, including the use of lending standards, the thorough review of
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potential borrowers through Nicolet’s underwriting process, close relationships with and regular check-ins with borrowers, and active asset quality administration. For further discussion of credit risk management, see “Management’s Discussion and Analysis of Financial Condition and Results of Operation” at page 92.
Competition
The financial services industry is highly competitive. Nicolet competes for loans, deposits, and financial services in all of its principal markets. It competes directly with other bank and nonbank institutions located within its markets, internet-based banks, out-of-market banks and bank holding companies that advertise or otherwise serve its markets, along with money market and mutual funds, brokerage houses, mortgage companies, and insurance companies or other commercial entities that offer financial services products. Competition involves efforts to retain current customers, obtain new loans and deposits, increase the scope and type of services offered, and offer competitive interest rates paid on deposits and charged on loans. Many of Nicolet’s competitors enjoy competitive advantages, including greater financial resources, a wider geographic presence, more accessible branch office locations, the ability to offer additional services, more favorable pricing alternatives and lower origination and operating costs. Some of Nicolet’s competitors have been in business for a long time and have an established customer base and name recognition. Nicolet believes that its competitive pricing, personalized service and community involvement enable it to effectively compete in the communities in which it operates.
Employees
Nicolet and Nicolet National Bank currently employ approximately 175 persons on a full-time or part-time basis.
Legal Proceedings
From time to time, Nicolet is involved in litigation relating to claims arising out of operations in the normal course of business. As of the date hereof, Nicolet is not engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on Nicolet National Bank.
Market Prices of and Dividends Declared on Nicolet Common Stock
There is no established public trading market for shares of Nicolet common stock. As a result, any market in Nicolet common stock prior to the merger should be characterized as illiquid and irregular. As of ________, 2013, Nicolet had approximately ________ shareholders of record. The last known privately negotiated trade of Nicolet common stock prior to the mailing of this joint proxy statement-prospectus occurred on ________, 2013 at a price of $____ per share, and the last known privately negotiated trade of which management was aware prior to the November 28, 2012 announcement of the proposed merger occurred on October 29, 2012 at a price of $16.50 per share. Additional information available to management regarding the high and low trade prices (to the extent known to management) for Nicolet common stock is provided below. For quarters where there were no sales of Nicolet common stock to management’s knowledge, neither high nor low prices are given.
High | Low | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
2012 | ||||||||||
Fourth Quarter | $ | 16.50 | $ | 16.50 | ||||||
Third Quarter | 16.50 | 16.50 | ||||||||
Second Quarter | 16.50 | 16.50 | ||||||||
First Quarter | 16.50 | 16.50 | ||||||||
2011 | ||||||||||
Fourth Quarter | $ | 15.00 | $ | 15.00 | ||||||
Third Quarter | — | — | ||||||||
Second Quarter | 16.50 | 16.50 | ||||||||
First Quarter | 16.50 | 16.50 |
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High | Low | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
2010 | ||||||||||
Fourth Quarter | $ | 17.15 | $ | 16.00 | ||||||
Third Quarter | 17.15 | 17.15 | ||||||||
Second Quarter | 16.80 | 16.50 | ||||||||
First Quarter | 16.80 | 16.80 |
The payment of dividends by Nicolet and Nicolet National Bank are subject to certain regulations that may limit or prevent the payment of dividends except in certain circumstances. See “Supervision and Regulation — Payment of Dividends” at page 156. Moreover, the payment of dividends is further subject to the discretion of the boards of directors of Nicolet and Nicolet National Bank, and the payment of dividends on the common stock of Nicolet is subject to the rights of the holders of its senior securities. Nicolet has not paid any dividends on its common stock since its inception in 2000, nor does it currently have any plans to pay dividends to its holders of its common stock in the foreseeable future.
Nicolet anticipates that its earnings, if any, will be held for purposes of enhancing its capital. No assurances can be given that any dividends on Nicolet’s common stock will be declared in the future or, if declared, what the amount of such dividends will be or whether such dividends will continue for future periods.
Certain Provisions of Nicolet’s Articles of Incorporation and Bylaws Regarding Change of Control.
Supermajority Voting Requirements
Any transaction that would involve the merger or share exchange of Nicolet with or into any other corporation or any sale, lease, exchange or other disposition of substantially all of the assets of Nicolet to any other corporation, person or other entity would require either (i) the affirmative vote of at least two-thirds (2/3) of the directors of Nicolet and the affirmative vote of at least a majority of the issued and outstanding shares of Nicolet entitled to vote or (ii) the affirmative vote of at least the majority of the directors of Nicolet and the affirmative vote of at least two-thirds (2/3) of the issued and outstanding shares of Nicolet entitled to vote. This provision could make such a transaction that did not have the support of at least a super-majority of the board of directors more difficult for the shareholders to approve, and without the approval of at least a supermajority of the board of directors, such a transaction may not be approved, even if more than a majority (but less than a supermajority) of the shareholders of Nicolet supported such a transaction.
Ability to Consider Other Constituencies
Nicolet’s articles of incorporation require its board of directors, when evaluating a tender or exchange offer for the securities of Nicolet or a proposed merger, share exchange or combination of Nicolet with any other corporation, or an offer to purchase or otherwise acquire all or substantially all of the assets of Nicolet and in determining what is believed to be in the best interest of Nicolet and its shareholders to give due consideration to all relevant factors, including (but not necessarily limited to) the short- and long-term social and economic effects of such a transaction on Nicolet’s employees, customers, shareholders and other constituencies, and on the communities in which it and its subsidiaries operate in addition to the consideration being offered by the other party in relation to the current and estimated future value of Nicolet as an independent entity. This provision requires Nicolet’s board of directors to consider numerous judgmental or subjective factors affecting a proposal, including some non-financial matters, and on the basis of these considerations Nicolet’s board of directors may oppose a business combination or some other transaction which, viewed exclusively from a financial perspective, might be attractive to some, or even a majority, of its shareholders.
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Limitations on Matters Brought Before Nicolet’s Shareholders
Nicolet’s bylaws limit the way in which matters may properly be brought before its shareholders by individuals other than management or the board of directors of Nicolet. Under Nicolet’s bylaws, matters other than the election of directors may only be brought before the shareholders of Nicolet for consideration at Nicolet’s annual meeting by Nicolet’s management or board of directors or by a shareholder that has complied with the notice requirements of Nicolet’s bylaws. These provisions require that a shareholder deliver to the secretary of Nicolet no less than 60 days prior to the date fixed for the annual meeting a notice (i) describing briefly the business desired to be brought before the meeting and the reasons for conducting such business at the annual meeting, (ii) the name and the record address of the shareholder proposing such business, (iii) the classes and number of shares of each class of shares beneficially owned by the shareholder and (iv) any material interest the shareholder has in the business being proposed. The chairman of the annual meeting has final interpretive discretion as to the propriety of matters brought before the shareholders, and any matters determined by the chairman to be not properly brought before the meeting shall not be transacted at the meeting. In addition, special meetings of Nicolet’s shareholders may only be called by the management and board of directors of Nicolet or by shareholders owning, in the aggregate, no less than ten percent (10%) of Nicolet’s stock. These provisions may limit the ability of a shareholder of Nicolet to bring proposed transactions before the shareholders for approval, whether as initial offers or as competing transactions, unless such proposed transactions are also supported by the board and management of Nicolet.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information with respect to the beneficial ownership, as of December 31, 2012, of shares of Nicolet common stock by (i) each person known by Nicolet to be the beneficial owner of more than 5% of Nicolet’s issued and outstanding common stock; (ii) each of Nicolet’s current directors and executive officers; (iii) all current Nicolet directors and executive officers as a group; (iv) each new director to be appointed to the Nicolet board of directors upon the closing of the merger; and (v) all current and prospective Nicolet directors and executive officers as a group. Except as noted below, management believes that each person listed below has sole investment and voting power with respect to the shares included in the table.
Information relating to beneficial ownership of Nicolet common stock is based upon “beneficial owner” concepts set forth in rules under the Securities and Exchange Act of 1934, as amended. Under these rules, a person is deemed to be a “beneficial owner” of a security if that person has sole or shared “voting power” or “investment power” over the security. Voting power includes the power to vote or to direct the voting of the security, and investment power includes the power to dispose or to direct the disposition of the security. Under the rules, more than one person may be deemed to be a beneficial owner of the same securities.
Percentage of Issued and Outstanding Shares(1) | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name | Number of Shares | Before Merger | After Merger | ||||||||||||
Current Directors and Executive Officers | |||||||||||||||
Robert B. Atwell | 173,243 | (2) | 4.6 | % | 4.0 | % | |||||||||
Michael E. Daniels | 176,263 | (3) | 4.7 | 4.0 | |||||||||||
John N. Dykema | 49,905 | (4) | 1.3 | 1.1 | |||||||||||
Gary L. Fairchild | 2,104 | (5) | * | * | |||||||||||
Michael F. Felhofer | 72,000 | 1.9 | 1.7 | ||||||||||||
Andrew F. Hetzel, Jr. | 42,074 | (6) | 1.1 | * | |||||||||||
Donald J. Long, Jr. | 89,407 | (7) | 2.4 | 2.0 | |||||||||||
Benjamin P. Meeuwsen | 5,200 | (8) | * | * | |||||||||||
Susan L. Merkatoris | 125,000 | (9) | 3.3 | 2.9 | |||||||||||
Therese Pandl | 1,022 | (10) | * | * | |||||||||||
Randy J. Rose | 30,451 | (11) | * | * | |||||||||||
Robert J. Weyers | 73,978 | (12) | 2.0 | 1.7 |
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Percentage of Issued and Outstanding Shares(1) | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name | Number of Shares | Before Merger | After Merger | ||||||||||||
Current Non-Director Executive Officers | |||||||||||||||
Ann K. Lawson | 23,900 | (13) | * | * | |||||||||||
All Current Directors and Executive Officers as a Group (13 persons) | 864,547 | (14) | 23.1 | 19.8 | |||||||||||
Prospective Directors | |||||||||||||||
Kim A. Gowey | 0 | 0 | *(15 | ) | |||||||||||
Christopher Ghidorzi | 0 | 0 | 0 | (15) | |||||||||||
All Current and Prospective Directors and Executive Officers as a Group (15 persons) | 864,547 | (14) | 23.1 | 20.5 | (15) |
* | Represents less than one percent. |
(1) | For purposes of this table, the percentages shown treat shares subject to exercisable options held by the indicated director or executive officer as if they were issued and outstanding. Unvested shares of restricted stock are entitled to vote and are therefore included with the issued and outstanding shares reflected in this table. Percentage ownership after the merger assumes that 617,608 shares of common stock are issued in the merger and that each director and executive officer’s beneficial ownership of Nicolet common stock does not change prior to consummation of the merger. |
(2) | Includes exercisable options to purchase 124,014 shares of common stock, 6,379 shares Mr. Atwell owns in his Nicolet 401(k) plan, and 19,550 shares of unvested restricted stock. |
(3) | Includes 3,420 shares held by his minor children, 9,803 shares held in his spouse’s IRA, exercisable options to purchase 124,014 shares of common stock, 4,910 shares Mr. Daniels owns in his Nicolet 401(k) plan, and 19,550 shares of unvested restricted stock. |
(4) | Includes 3,055 shares Mr. Dykema purchased through the Deferred Compensation Plan for Non-Employee Directors. |
(5) | Includes 1,854 shares Mr. Fairchild purchased through the Deferred Compensation Plan for Non-Employee Directors. |
(6) | Includes 2,074 shares Mr. Hetzel purchased through the Deferred Compensation Plan for Non-Employee Directors. |
(7) | Includes 2,007 shares Mr. Long purchased through the Deferred Compensation Plan for Non-Employee Directors. |
(8) | Includes 1,825 shares Mr. Meeuwsen purchased through the Deferred Compensation Plan for Non-Employee Directors. |
(9) | Includes 13,000 shares held by Ms. Merkatoris’ children. |
(10) | Includes 922 shares Ms. Pandl purchased through the Deferred Compensation Plan for Non-Employee Directors. |
(11) | Includes 151 shares Mr. Rose purchased through the Deferred Compensation Plan for Non-Employee Directors. |
(12) | Includes 3,228 shares Mr. Weyers purchased through the Deferred Compensation Plan for Non-Employee Directors. |
(13) | Includes exercisable options to purchase 18,500 shares of common stock held by Ms. Lawson, 1,650 shares of unvested restricted stock, and exercisable options to purchase 1,250 shares of common stock held by Ms. Lawson’s spouse. |
(14) | Includes exercisable options to purchase 267,778 shares of common stock and 40,750 shares of unvested restricted stock. |
(15) | Reflects the conversion of 80,544 shares of Mid-Wisconsin common stock held by Dr. Gowey into 30,018 shares of Nicolet common stock pursuant to the terms of the merger. Mr. Ghidorzi does not own any shares of Mid-Wisconsin common stock and will not receive any Nicolet common stock in the merger. Neither Dr. Gowey nor Mr. Ghidorzi currently owns any shares of Nicolet common stock. |
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF NICOLET
The following table presents Nicolet’s selected historical consolidated financial data as of and for the periods indicated and should be read in conjunction with its consolidated financial statements and the notes thereto included elsewhere in this joint proxy statement-prospectus. The financial data as of December 31, 2011 and 2010 and for the years ended December 31, 2011, 2010 and 2009 is derived from Nicolet’s audited consolidated financial statements beginning on page F-1 of this joint proxy statement-prospectus, and the financial data as of December 31, 2009, 2008 and 2007 and for the years ended December 31, 2008 and 2007 is derived from Nicolet’s audited consolidated financial statements that are not included in this joint proxy-statement prospectus. The financial data as of and for the nine months ended September 30, 2012 and 2011 is unaudited, but management of Nicolet believes that such amounts reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of its results of operations and financial condition as of and for the periods indicated. You should not assume the results of operations for past periods and for the nine months ended September 30, 2012 indicate results for any future period.
(dollars in thousands, except per share data) | At and for the nine month period ended September 30, | At and for the year ended December 31, | |||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2012 | 2011 | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||||||||||||
(unaudited) | |||||||||||||||||||||||||||||||
Results of operations: | |||||||||||||||||||||||||||||||
Interest income | $ | 21,059 | $ | 22,668 | $ | 29,830 | $ | 31,420 | $ | 31,582 | �� $ | 33,384 | $ | 36,463 | |||||||||||||||||
Interest expense | 5,006 | 6,451 | 8,383 | 11,291 | 15,218 | 19,872 | 20,229 | ||||||||||||||||||||||||
Net interest income | 16,053 | 16,217 | 21,447 | 20,129 | 16,364 | 13,512 | 16,234 | ||||||||||||||||||||||||
Provision for loan losses | 3,350 | 4,800 | 6,600 | 8,500 | 6,000 | 4,029 | 1,160 | ||||||||||||||||||||||||
Net interest income after provision for loan losses | 12,703 | 11,417 | 14,847 | 11,629 | 10,364 | 9,483 | 15,074 | ||||||||||||||||||||||||
Other income | 7,985 | 6,015 | 8,444 | 8,968 | 7,531 | 6,124 | 6,312 | ||||||||||||||||||||||||
Other expense | 17,722 | 16,287 | 21,443 | 19,316 | 16,684 | 16,440 | 14,813 | ||||||||||||||||||||||||
Income (loss) before income taxes | 2,966 | 1,145 | 1,848 | 1,281 | 1,211 | (833 | ) | 6,573 | |||||||||||||||||||||||
Income tax (benefit) expense | 828 | 133 | 318 | 136 | 45 | (996 | ) | 2,106 | |||||||||||||||||||||||
Net income (loss) | 2,138 | 1,012 | 1,530 | 1,145 | 1,166 | 163 | 4,467 | ||||||||||||||||||||||||
Net income (loss) attributable to noncontrolling interest | 39 | 30 | 40 | 35 | (11 | ) | (26 | ) | (80 | ) | |||||||||||||||||||||
Net income attributable to Nicolet Bankshares, Inc. | 2,099 | 982 | 1,490 | 1,110 | 1,177 | 189 | 4,547 | ||||||||||||||||||||||||
Preferred stock dividends and discount accretion | 915 | 1,156 | 1,461 | 985 | 1,001 | — | — | ||||||||||||||||||||||||
Net income (loss) available to common equity | $ | 1,184 | $ | (174 | ) | $ | 29 | $ | 125 | $ | 176 | $ | 189 | $ | 4,547 | ||||||||||||||||
Earnings (loss) per common share: | |||||||||||||||||||||||||||||||
Basic | $ | 0.34 | $ | (0.05 | ) | $ | 0.01 | $ | 0.04 | $ | 0.05 | $ | 0.07 | $ | 1.53 | ||||||||||||||||
Diluted | 0.34 | (0.05 | ) | 0.01 | 0.04 | 0.05 | 0.06 | 1.41 | |||||||||||||||||||||||
Weighted average common shares outstanding: | |||||||||||||||||||||||||||||||
Basic | 3,449 | 3,467 | 3,469 | 3,452 | 3,500 | 2,899 | 2,970 | ||||||||||||||||||||||||
Weighted | 3,445 | 3,487 | 3,488 | 3,481 | 3,528 | 3,045 | 3,228 | ||||||||||||||||||||||||
Year-End Balances: | |||||||||||||||||||||||||||||||
Loans | $ | 545,708 | $ | 479,052 | $ | 472,489 | $ | 513,761 | $ | 486,571 | $ | 479,179 | $ | 442,357 | |||||||||||||||||
Allowance for loan losses | 6,491 | 5,746 | 5,899 | 8,635 | 6,232 | 5,546 | 5,383 | ||||||||||||||||||||||||
Investment securities available-for-sale, at fair value | 57,074 | 57,060 | 56,759 | 52,388 | 54,273 | 50,525 | 55,756 | ||||||||||||||||||||||||
Total assets | 682,802 | 615,508 | 678,249 | 674,754 | 675,403 | 694,019 | 561,555 | ||||||||||||||||||||||||
Deposits | 554,858 | 490,551 | 551,536 | 558,464 | 556,984 | 571,248 | 450,921 | ||||||||||||||||||||||||
Other debt | 39,525 | 38,693 | 39,506 | 39,972 | 43,486 | 47,076 | 59,969 | ||||||||||||||||||||||||
Junior subordinated debentures | 6,186 | 6,186 | 6,186 | 6,186 | 6,186 | 6,186 | 6,186 | ||||||||||||||||||||||||
Common equity | 52,349 | 51,187 | 51,623 | 50,417 | 49,790 | 50,557 | 39,182 | ||||||||||||||||||||||||
Stockholders’ equity | 76,749 | 75,768 | 76,023 | 65,620 | 64,824 | 65,420 | 39,194 | ||||||||||||||||||||||||
Book value per common share | 15.38 | 14.74 | 14.83 | 14.57 | 14.47 | 14.43 | 13.26 | ||||||||||||||||||||||||
Average Balances: | |||||||||||||||||||||||||||||||
Loans | $ | 509,536 | $ | 510,852 | $ | 503,362 | $ | 499,193 | $ | 478,267 | $ | 455,247 | $ | 416,942 | |||||||||||||||||
Earning assets | 606,227 | 586,540 | 582,486 | 603,182 | 579,803 | 578,639 | 482,673 | ||||||||||||||||||||||||
Total assets | 659,400 | 642,298 | 642,353 | 653,710 | 633,284 | 624,476 | 525,225 | ||||||||||||||||||||||||
Deposits | 531,795 | 524,727 | 522,297 | 530,682 | 510,741 | 516,887 | 422,231 | ||||||||||||||||||||||||
Interest-bearing liabilities | 502,011 | 505,639 | 500,895 | 524,461 | 507,223 | 532,278 | 443,955 | ||||||||||||||||||||||||
Common equity | 51,928 | 50,920 | 50,968 | 51,661 | 50,441 | 40,931 | 38,937 | ||||||||||||||||||||||||
Stockholders’ equity | 76,328 | 67,185 | 69,284 | 66,923 | 65,387 | 40,931 | 41,140 |
90
(dollars in thousands, except per share data) | At and for the nine month period ended September 30, | At and for the year ended December 31, | |||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2012 | 2011 | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||||||||||||
(unaudited) | |||||||||||||||||||||||||||||||
Financial Ratios: | |||||||||||||||||||||||||||||||
Return on average assets | 0.43 | % | 0.20 | % | 0.23 | % | 0.17 | % | 0.19 | % | 0.03 | % | 0.87 | % | |||||||||||||||||
Return on average equity | 3.67 | % | 1.95 | % | 2.15 | % | 1.66 | % | 1.80 | % | 0.46 | % | 11.05 | % | |||||||||||||||||
Return on average common equity | 3.05 | % | —0.46 | % | 0.06 | % | 0.24 | % | 0.35 | % | 0.46 | % | 11.05 | % | |||||||||||||||||
Average equity to average assets | 11.58 | % | 10.46 | % | 10.79 | % | 10.22 | % | 10.32 | % | 6.55 | % | 7.83 | % | |||||||||||||||||
Net interest margin | 3.59 | % | 3.76 | % | 3.75 | % | 3.39 | % | 2.89 | % | 2.39 | % | 3.42 | % | |||||||||||||||||
Stockholders’ equity to assets | 11.24 | % | 12.28 | % | 11.21 | % | 9.73 | % | 9.60 | % | 9.43 | % | 6.98 | % | |||||||||||||||||
Net loan charge-offs to average loans | 0.72 | % | 2.01 | % | 1.85 | % | 1.22 | % | 1.11 | % | 0.85 | % | 0.18 | % | |||||||||||||||||
Nonperforming loans to total loans | 2.78 | % | 2.46 | % | 2.01 | % | 2.10 | % | 1.69 | % | 1.44 | % | 0.18 | % | |||||||||||||||||
Nonperforming assets to total assets | 2.31 | % | 2.06 | % | 1.49 | % | 1.81 | % | 1.42 | % | 0.99 | % | 0.16 | % |
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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
For the Years Ended December 31, 2011, 2010, and 2009
Critical Accounting Policies
The consolidated financial statements of Nicolet Bankshares, Inc. and its subsidiaries are prepared in conformity with GAAP and follow general practices within the industry in which we operate. This preparation requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates that are particularly susceptible to significant change include the determination of the allowance for loan losses and income taxes and, therefore, are critical accounting policies.
Allowance for Loan Losses
The allowance for loan losses (the “ALLL”) is a reserve for estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the loan portfolio. Actual credit losses, net of recoveries, are deducted from the ALLL. Loans are charged off when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the ALLL. A provision for loan losses, which is a charge against earnings, is recorded to bring the ALLL to a level that, in management’s judgment, is adequate to absorb probable losses in the loan portfolio. Management’s evaluation process used to determine the appropriateness of the ALLL is subject to the use of estimates, assumptions, and judgment. The evaluation process involves gathering and interpreting many qualitative and quantitative factors which could affect probable credit losses. Because interpretation and analysis involves judgment, current economic or business conditions can change, and future events are inherently difficult to predict, the anticipated amount of estimated loan losses and therefore the appropriateness of the ALLL could change significantly.
The allocation methodology applied by Nicolet is designed to assess the appropriateness of the ALLL and includes allocations for specifically identified impaired loans and loss factor allocations for all remaining loans, with a component primarily based on historical loss rates and a component primarily based on other qualitative factors. The methodology includes evaluation and consideration of several factors, such as but not limited to management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and nonaccrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or circumstances underlying collectability of loans. Because each of the criteria used is subject to change, the allocation of the ALLL is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular loan category. The total allowance is available to absorb losses from any segment of the loan portfolio. Management believes the ALLL is appropriate. The allowance analysis is reviewed by the board of directors on a quarterly basis in compliance with regulatory requirements. In addition, various regulatory agencies periodically review the ALLL. These agencies may require Nicolet National Bank to make additions to the ALLL based on their judgments of collectability based on information available to them at the time of their examination.
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Income taxes
The assessment of tax assets and liabilities involves the use of estimates, assumptions, interpretation, and judgment concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the consolidated results of operations and reported earnings.
Nicolet files a consolidated federal income tax return and a combined state income tax return (both of which include Nicolet and its wholly-owned subsidiaries). Accordingly, amounts equal to tax benefits of those companies having taxable federal losses or credits are reimbursed by the companies that incur federal tax liabilities. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax law rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through provision for income tax expense. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Nicolet may also recognize a liability for unrecognized tax benefits from uncertain tax positions. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the financial statements. Penalties related to unrecognized tax benefits are classified as income taxes.
Unless noted otherwise, all remaining information included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are shown in thousands, except per share data.
The following discussion is Nicolet management’s analysis of the understanding and evaluation of the consolidated financial condition and results of operations of Nicolet. It should be read in conjunction with Nicolet’s audited consolidated financial statements as of December 31, 2011 and 2010, and for the three years ended December 31, 2011.
Overview
Nicolet is a bank-holding company headquartered in Green Bay, Wisconsin, providing a diversified range of traditional banking and wealth management services to individuals and businesses in its market area through the 11 branch offices of its banking subsidiary, Nicolet National Bank, in Green Bay, De Pere, Appleton, Marinette and Crivitz, Wisconsin and Menominee, Michigan.
Nicolet’s primary revenue sources are net interest income from loans and other interest earning assets such as investments, less interest expense on deposits and other borrowings; and noninterest income, including, among others, trust fees, secondary mortgage income and other fees or revenue from financial services provided to customers or ancillary to loans and deposits. Business volumes and pricing drive revenue potential and tend to be influenced by overall economic factors, including market interest rates, business spending, consumer confidence, economic growth and competitive conditions within the marketplace.
During 2011, Nicolet continued to aggressively work through its credit quality issues, which resulted in a decrease in problem loans for the year. In line with its growth strategies, Nicolet experienced a full year of contribution from the four Brown County branches purchased in July 2010 and opened a new branch in Appleton, Wisconsin in December 2011. In September 2011, Nicolet redeemed its senior preferred stock under TARP, paying the Treasury $15,712 and accelerating the accretion of the remaining discount of $396, which unfavorably affected 2011 net income available to common shareholders. Such redemption was in connection with Nicolet’s September 2011 participation in the Small Business Lending Fund (“SBLF”), whereby Nicolet received $24,400 from Treasury for the issuance of new senior preferred stock. See “Business of Nicolet — General” on page 83 for additional information.
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Performance Summary
Nicolet reported $1,490 in net income for 2011, $380 greater than $1,110 for 2010. Net income available to common shareholders for 2011 was $29, or $0.01 per diluted common share, compared to net income available to common shareholders of $125, or $0.04 per diluted common share, for 2010. A $476 increase in preferred stock dividends and discount accretion reduced net income available to common shareholders in 2011. The $1,461 of preferred dividends and discount accretion for 2011 included $396 in accelerated discount accretion resulting from the repayment of the TARP senior preferred stock and higher dividends given the increase in its senior preferred stock from the SBLF.
• | Net interest income was $21,447 for 2011, an increase of $1,318 or 6.5% compared to 2010. On a tax-equivalent basis, the net interest margin for 2011 increased to 3.75% from 3.39% in 2010. The average yield on earning assets was 5.18% for 2011, down 7 basis points (“bps”) from 5.25% for 2010, while the cost of interest-bearing liabilities fell 48 bps to 1.67% for 2011 versus 2.15% for 2010. The improvement in net interest income and net interest margin was primarily due to lower interest expense and cost of funds, principally from the maturity of high-cost brokered deposits. |
• | Loans of $472,489 at December 31, 2011 decreased $41,272 from December 31, 2010. Lower utilization of commercial lines of credit accounted for 80% of the year-over-year decline, as commercial customers were cautious about debt levels. On average for the year, loans increased $4,169 to $503,362 for 2011. |
• | Net charge-offs were $9,336 for 2011 and $6,097 for 2010. The provision for loan losses was $6,600 for 2011, compared with $8,500 for 2010. The continued higher provision levels accommodated aggressive problem loan resolutions. The allowance to loans ratio at December 31, 2011 was 1.25% compared to 1.68% at December 31, 2010, and the decline is primarily attributable to the higher level of net charge-offs in 2011 and lower nonperforming loans. |
• | Total deposits were $551,536 at December 31, 2011, down $6,928 from December 31, 2010. Brokered deposits declined $48,454 since year end 2010, as maturing brokered CDs were not renewed given strong customer deposit growth during 2011. On average for the year, total deposits were $522,297, down $8,385, of which brokered deposits declined $63,724 and were almost fully replaced by customer deposit growth. |
• | Noninterest income for 2011 was $8,444, down $524, or 5.8%, compared to 2010. The decline was driven by lower mortgage banking income from the sales of residential real estate loans into the secondary market which fell $852 to $1,767 for 2011. Mortgage banking income increased in the second half of 2011 as compared to the first half due to declines in interest rates; however, the activity was not as high as 2010 levels. Offsetting the mortgage banking decline were increases in trust fees, service charges on deposits, and brokerage fees. |
• | Noninterest expense for 2011 was $21,443, an increase of $2,127, or 11.0%, over 2010, due primarily to carrying a full year of costs associated with the four branches purchased in July 2010 (mainly in employment and occupancy costs, as well as a $412 increase in core deposit intangible amortization). Nicolet benefited from the FDIC’s change in its assessment calculation, with FDIC assessments declining $297 to $630 for 2011. |
Net Interest Income
Net interest income in the consolidated statements of income (which excludes the taxable equivalent adjustment) was $21,447 in 2011 compared to $20,129 in 2010 and $16,364 in 2009. Taxable equivalent adjustments (adjustments to bring tax-exempt interest to a level that would yield the same after-tax income had that been subject to a 34% tax rate) were $660, $596 and $665 for 2011, 2010 and 2009, respectively, resulting in taxable equivalent net interest income of $22,107 for 2011, $20,725 for 2010 and $17,029 for 2009.
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Taxable equivalent net interest income is a non-GAAP measure, but is a preferred industry measurement of net interest income (and its use in calculating a net interest margin) as it enhances the comparability of net interest income arising from taxable and tax-exempt sources.
Net interest income is the primary source of Nicolet’s revenue, and is the difference between interest income on earning assets, such as loans and investment securities, and interest expense on interest-bearing liabilities, such as deposits and other borrowings. Net interest income is directly impacted by the sensitivity of the balance sheet to changes in interest rates and by the amount and composition of interest earning assets and interest-bearing liabilities, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities, and repricing frequencies.
Tables 1, 2, and 3 present information to facilitate the review and discussion of selected average balance sheet items, taxable equivalent net interest income, interest rate spread and net interest margin.
Table 1: Average Balance Sheet and Net Interest Income Analysis — Taxable-Equivalent Basis
For the Years Ended December 31,
(dollars in thousands)
For the Years Ended December 31,
(dollars in thousands)
Years Ended December 31 | |||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2011 | 2010 | 2009 | |||||||||||||||||||||||||||||||||||||
Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | |||||||||||||||||||||||||||||||
ASSETS | |||||||||||||||||||||||||||||||||||||||
Earning assets | |||||||||||||||||||||||||||||||||||||||
Loans | $ | 503,362 | $ | 28,190 | 5.54 | % | $ | 499,193 | $ | 29,466 | 5.84 | % | $ | 478,267 | $ | 28,956 | 5.99 | % | |||||||||||||||||||||
Investment securities | |||||||||||||||||||||||||||||||||||||||
Taxable | 20,866 | 689 | 3.30 | % | 22,295 | 865 | 3.88 | % | 17,534 | 767 | 4.37 | % | |||||||||||||||||||||||||||
Tax-exempt | 32,540 | 1,445 | 4.44 | % | 29,860 | 1,460 | 4.89 | % | 32,780 | 1,691 | 5.16 | % | |||||||||||||||||||||||||||
Other interest-earning assets | 25,718 | 166 | 0.64 | % | 51,834 | 225 | 0.53 | % | 51,222 | 833 | 1.73 | % | |||||||||||||||||||||||||||
Total interest-earning assets | 582,486 | $ | 30,490 | 5.18 | % | 603,182 | $ | 32,016 | 5.25 | % | 579,803 | $ | 32,247 | 5.51 | % | ||||||||||||||||||||||||
Cash and due from banks | 18,785 | 11,382 | 17,926 | ||||||||||||||||||||||||||||||||||||
Other assets | 41,082 | 39,146 | 35,555 | ||||||||||||||||||||||||||||||||||||
Total assets | $ | 642,353 | $ | 653,710 | $ | 633,284 | |||||||||||||||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities | |||||||||||||||||||||||||||||||||||||||
Savings | $ | 16,829 | $ | 45 | 0.27 | % | $ | 12,273 | $ | 31 | 0.25 | % | $ | 9,916 | $ | 34 | 0.34 | % | |||||||||||||||||||||
Interest-bearing demand | 63,346 | 404 | 0.64 | % | 76,489 | 360 | 0.47 | % | 41,258 | 232 | 0.56 | % | |||||||||||||||||||||||||||
MMA | 156,471 | 1,142 | 0.73 | % | 115,973 | 1,105 | 0.95 | % | 97,902 | 1,153 | 1.18 | % | |||||||||||||||||||||||||||
Core CD’s and IRA’s | 154,115 | 2,664 | 1.73 | % | 140,828 | 3,225 | 2.29 | % | 101,387 | 3,360 | 3.31 | % | |||||||||||||||||||||||||||
Brokered deposits | 63,749 | 2,255 | 3.54 | % | 127,473 | 4,633 | 3.63 | % | 204,139 | 7,909 | 3.87 | % | |||||||||||||||||||||||||||
Total interest-bearing deposits | 454,510 | 6,510 | 1.43 | % | 473,036 | 9,354 | 1.98 | % | 454,602 | 12,688 | 2.79 | % | |||||||||||||||||||||||||||
Other interest-bearing liabilities | 46,385 | 1,873 | 4.04 | % | 51,425 | 1,937 | 3.77 | % | 52,621 | 2,530 | 4.81 | % | |||||||||||||||||||||||||||
Total interest-bearing liabilities | 500,895 | 8,383 | 1.67 | % | 524,461 | 11,291 | 2.15 | % | 507,223 | 15,218 | 3.00 | % | |||||||||||||||||||||||||||
Noninterest-bearing demand | 67,787 | 57,647 | 56,139 | ||||||||||||||||||||||||||||||||||||
Other liabilities | 4,387 | 4,679 | 4,536 | ||||||||||||||||||||||||||||||||||||
Total equity | 69,284 | 66,923 | 65,387 | ||||||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 642,353 | $ | 653,710 | $ | 633,284 | |||||||||||||||||||||||||||||||||
Net interest income and rate spread | $ | 22,107 | 3.51 | % | $ | 20,725 | 3.11 | % | $ | 17,029 | 2.51 | % | |||||||||||||||||||||||||||
Net interest margin | 3.75 | % | 3.39 | % | 2.89 | % |
(1) | Nonaccrual loans are included in the daily average loan balances outstanding. |
(2) | The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 34% and adjusted for the disallowance of interest expense. |
(3) | Interest income includes loan fees of $396 in 2011, $492 in 2010 and $470 in 2009. |
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Table 2: Volume/Rate Variance — Taxable-Equivalent Basis
(dollars in thousands)
(dollars in thousands)
2011 Compared to 2010 Increase (decrease) Due to Changes in | 2010 Compared to 2009 Increase (decrease) Due to Changes in | ||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Volume | Rate* | Net | Volume | Rate* | Net | ||||||||||||||||||||||
Earning assets | |||||||||||||||||||||||||||
Loans (2) | $ | 236 | $ | (1,512 | ) | $ | (1,276 | ) | $ | 1,196 | $ | (686 | ) | $ | 510 | ||||||||||||
Investment securities | |||||||||||||||||||||||||||
Taxable | (21 | ) | (119 | ) | (140 | ) | 224 | (135 | ) | 89 | |||||||||||||||||
Tax-exempt (2) | (58 | ) | 6 | (51 | ) | (178 | ) | (44 | ) | (222 | ) | ||||||||||||||||
Other interest-earning assets | (66 | ) | 8 | (58 | ) | (332 | ) | (277 | ) | (609 | ) | ||||||||||||||||
Total interest-earning assets | $ | 91 | $ | (1,617 | ) | $ | (1,525 | ) | $ | 910 | $ | (1,142 | ) | $ | (232 | ) | |||||||||||
Interest-bearing liabilities | |||||||||||||||||||||||||||
Interest-bearing demand | $ | (12 | ) | $ | 2 | $ | 14 | $ | 7 | $ | (10 | ) | $ | (3 | ) | ||||||||||||
Savings deposits | (69 | ) | 113 | 44 | 171 | (43 | ) | 128 | |||||||||||||||||||
MMA | 332 | (295 | ) | 37 | 193 | (241 | ) | (48 | ) | ||||||||||||||||||
Core CD’s and IRA’s | 284 | (845 | ) | (561 | ) | 1,082 | (1,217 | ) | (135 | ) | |||||||||||||||||
Brokered deposits | (2,257 | ) | (121 | ) | (2,378 | ) | (2,813 | ) | (463 | ) | (3,276 | ) | |||||||||||||||
Total interest-bearing deposits | (1,698 | ) | (1,146 | ) | (2,844 | ) | (1,360 | ) | (1,974 | ) | (3,334 | ) | |||||||||||||||
Other interest-bearing liabilities | (74 | ) | 10 | (64 | ) | 12 | (605 | ) | (593 | ) | |||||||||||||||||
Total interest-bearing liabilities | (1,772 | (1,136 | ) | (2,908 | ) | (1,348 | ) | (2,579 | ) | (3,927 | ) | ||||||||||||||||
Net interest income | $ | 1,863 | $ | (481 | ) | $ | 1,383 | $ | 2,258 | $ | 1,437 | $ | 3,695 |
* | Nonaccrual loans are included in the daily average loan balances outstanding. |
(1) | The change in interest due to both rate and volume has been allocated in proportion to the relationship of dollar amounts of change in each. |
(2) | The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 34% adjusted for the disallowance of interest expense. |
Table 3: Interest Rate Spread, Margin and Average Balance Mix — Tax Equivalent Basis
(dollars in thousands)
(dollars in thousands)
Years Ended December 31, | |||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2011 | 2010 | 2009 | |||||||||||||||||||||||||||||||||||||
Average Balance | % of Earning Assets | Yield/Rate | Average Balance | % of Earning Assets | Yield/Rate | Average Balance | % of Earning Assets | Yield/Rate | |||||||||||||||||||||||||||||||
Total loans | $ | 503,362 | 86.4 | % | 5.54 | % | $ | 499,193 | 82.8 | % | 5.84 | % | $ | 478,267 | 82.5 | % | 5.99 | % | |||||||||||||||||||||
Securities and other earning assets | 79,124 | 13.6 | % | 2.91 | % | 103,989 | 17.2 | % | 2.45 | % | 101,536 | 17.5 | % | 3.23 | % | ||||||||||||||||||||||||
Total interest-earning assets | $ | 582,486 | 100.0 | % | 5.19 | % | $ | 603,182 | 100.0 | % | 5.26 | % | $ | 579,803 | 100.0 | % | 5.51 | % | |||||||||||||||||||||
Interest-bearing liabilities | $ | 500,895 | 88.1 | % | 1.67 | % | $ | 524,461 | 90.1 | % | 2.15 | % | $ | 507,223 | 90.0 | % | 3.00 | % | |||||||||||||||||||||
Noninterest-bearing demand | 67,787 | 11.9 | % | 57,647 | 9.9 | % | 56,139 | 10.0 | % | ||||||||||||||||||||||||||||||
Total funds sources | $ | 568,682 | 100.0 | % | 1.44 | % | $ | 582,107 | 100.0 | % | 1.87 | % | $ | 563,361 | 100.0 | % | 2.62 | % | |||||||||||||||||||||
Interest rate spread | 3.52 | % | 3.11 | % | 2.51 | % | |||||||||||||||||||||||||||||||||
Contribution from net free funds | 0.23 | % | 0.28 | % | 0.38 | % | |||||||||||||||||||||||||||||||||
Net interest margin | 3.75 | % | 3.39 | % | 2.89 | % |
Comparison of 2011 versus 2010
Taxable-equivalent net interest income was $22,107 for 2011, an increase of $1,382, or 6.7%, from 2010 predominantly attributable to lower volumes of high-rate brokered deposits (as brokered CDs matured without replacement) and lower rates on customer time deposits (given renewals in the lower rate environment), offset
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partly by lower rates on loans (given renewals in the lower rate environment and competitive pricing pressures on new loans).
The taxable-equivalent net interest margin was 3.75% for 2011, up from 3.39% for 2010. For 2011, the earning asset yield was 5.18%, 7 bps lower than last year, affected mainly by a decline in loan yields (down 30 bps to 5.54%), but aided by loans representing a higher percentage of earning assets (to 86.4% for 2011 versus 82.8 % in 2010) since loans yield more than other earning assets. All other earning assets combined yielded 2.91% for 2011, up 46 bps over last year, given a lower proportion of low-earning cash balances in 2011 versus 2010 from cash being utilized to support the average loan growth and payoff of maturing brokered deposits.
The cost of interest-bearing liabilities of 1.67% for 2011 was 48 bps lower than 2010, aided by a number of positive factors. The average cost of interest-bearing deposits for 2011 was 1.43%, down 55 bps versus 2010. This favorable decline was predominantly due to high-cost brokered deposits (3.54% for 2011 and 3.63% for 2010) representing a lower proportion of average interest-bearing deposits (14% for 2011 compared to 27% for 2010), and the cost of the remaining interest-bearing customer deposits combined (i.e. savings, interest-bearing demand, MMA and time deposits) falling 28 bps to 1.09% for 2011, led by time deposits. The cost of other interest-bearing liabilities (comprised of short- and long-term borrowings) increased 27 bps to 4.04% for 2011, mainly as a result of less lower-cost short-term borrowings in the mix of funds.
Average earning assets were $582,486 for 2011, $20,697 lower than 2010, primarily from lower interest-bearing cash balances (down nearly $26,000 from 2010), offset partly by higher average loans. Average loans increased $4,169 to $503,362, despite high 2011 charge off levels, with relatively steady growth through the first half but declining sharply in the second half of 2011, mainly from lower commercial line usage and business customers being more cautious about debt levels and economic conditions.
Average interest-bearing liabilities were $500,895 for 2011, down $23,566 from 2010. Average brokered deposits declined $63,724 as maturing CDs were not renewed, while the remaining interest-bearing customer deposits combined grew $45,199, impacted largely from a full year contribution of the deposits acquired in the July 2010 branch acquisition. Other interest-bearing liabilities declined $5,040 to $46,385, mainly in lower-cost short-term funds.
Comparison of 2010 versus 2009
Taxable equivalent net interest income for 2010 was $20,725, an increase of $3,696, or 21.7%, over 2009. The increase in taxable equivalent net interest income was a function of favorable volume and rate variances in interest-bearing liabilities (contributing $1,348 from lower funding balances, particularly brokered deposits, and $2,579 from lower funding costs, across all fund sources but mostly customer CDs and IRAs renewing in the lower rate environment), but an unfavorable net variance from earning assets (as lower yields on loans and other earning assets decreased net interest income by $1,141, offset partly by improved volumes contributing $910 to net interest income, especially from loans).
The net interest margin for 2010 was 3.39%, compared to 2.89% in 2009. The 50 bps improvement came largely from an 85 bps improvement in the cost of funds, offset by 25 bps decline in the yield on earning assets and 10 bps lower net free funds. For 2010, the yield on earning assets of 5.25% was 25 bps lower than 2009, with loan yields down 15 bps to 5.84%, impacted by renewals and competitive pricing pressures in a low interest rate environment and carrying more low-interest cash balances in the mix of 2011 other earning assets.
The cost of average interest-bearing liabilities of 2.15% in 2010 was 85 bps lower than 2009. The average cost of interest-bearing deposits in 2010 was 1.98%, 81 bps lower than 2009, reflecting heavy runoff of high-cost brokered deposits and growth in other lower-cost deposits, mainly from the part year contribution of deposits acquired in the July 2010 branch acquisition. The cost of other interest-bearing liabilities decreased 111 bps to 3.63% for 2010, as 2009 carried prepayment interest on certain long-term advances that were refinanced early given the low rate environment.
Average earning assets of $603,182 in 2010 were $23,379 higher than 2009, of which $20,926 was attributable to loan growth. Average interest-bearing liabilities of $524,461 in 2010 were up $17,238 versus
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2009, attributable largely to growth from the July 2010 branch acquisition, offset by a decline in brokered deposits from maturities.
Provision for Loan Losses
The provision for loan losses in 2011 was $6,600, compared to $8,500 and $6,000 for 2010 and 2009, respectively. The continued higher than historical level of provision was due primarily to aggressive work-outs of problem loans, the levels of loan charge-offs, nonperforming loan trends, depressed collateral values, and continuing economic conditions. Net charge-offs were $9,336 for 2011, compared to $6,097 for 2010 and $5,314 for 2009. The increase in net charge-offs during 2011 was primarily due to the resolution of issues relating to certain impaired loans identified in late 2010. At December 31, 2011, the ALLL was $5,899, compared to $8,635 at December 31, 2010, and $6,232 at December 31, 2009. The ratio of the allowance to total loans was 1.25%, 1.68%, and 1.28% at December 31, 2011, 2010, and 2009, respectively. Nonperforming loans at December 31, 2011, were $9,476, compared to $10,803 at December 31, 2010, and $8,212 at December 31, 2009, representing 2.0%, 2.1%, and 1.7% of total loans, respectively.
The provision for loan losses is predominantly a function of Nicolet’s methodology and judgment as to qualitative and quantitative factors used to determine the adequacy of the ALLL. The adequacy of the allowance is affected by changes in the size and character of the loan portfolio, changes in levels of impaired and other nonperforming loans, historical losses and delinquencies in each portfolio segment, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing and future economic conditions, the fair value of underlying collateral, and other factors which could affect potential credit losses. For additional information regarding asset quality and the ALLL, see “Balance Sheet Analysis — Loans,” and “Balance Sheet Analysis — Impaired Loans and Nonperforming Assets.”
Noninterest Income
Table 4: Noninterest Income
(dollars in thousands)
(dollars in thousands)
Years Ended December 31, | Change From Prior Year | ||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
$ Change | % Change | $ Change | % Change | ||||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011 | 2011 | 2010 | 2010 | |||||||||||||||||||||||||
Service charges on deposit accounts | $ | 1,180 | $ | 1,087 | $ | 932 | $ | 93 | 8.6 | % | $ | 155 | 16.6 | % | |||||||||||||||||
Trust services fee income | 2,899 | 2,811 | 2,858 | 88 | 3.1 | % | (47 | ) | (1.6%) | ||||||||||||||||||||||
Mortgage fee income | 1,767 | 2,619 | 1,547 | (852 | ) | (32.5%) | 1,072 | 69.3 | % | ||||||||||||||||||||||
Brokerage fee income | 334 | 291 | 208 | 43 | 14.8 | % | 83 | 39.9 | % | ||||||||||||||||||||||
Loss on sale, disposal and write down of assets, net | (55 | ) | (59 | ) | (150 | ) | 4 | 6.8 | % | 91 | 60.7 | % | |||||||||||||||||||
Bank owned life insurance | 572 | 574 | 558 | (2 | ) | (0.3%) | 16 | 2.9 | % | ||||||||||||||||||||||
Rent income | 955 | 970 | 1,003 | (15 | ) | (1.5%) | (33 | ) | (3.3%) | ||||||||||||||||||||||
Investment advisory fees | 330 | 308 | 357 | 22 | 7.1 | % | (49 | ) | (13.7%) | ||||||||||||||||||||||
Other | 462 | 367 | 218 | 95 | 25.9 | % | 149 | 68.3 | % | ||||||||||||||||||||||
Total other income | $ | 8,444 | $ | 8,968 | $ | 7,531 | $ | (524 | ) | (5.8%) | $ | 1,437 | 19.1 | % |
Comparison of 2011 versus 2010
Noninterest income was $8,444 for 2011, down $524, or 5.8%, from 2010, led by lower mortgage fee income.
Service fees on deposit accounts for 2011 were $1,180, up $93, or 8.6%, over 2010. The increase in service fees for 2011 was due mainly to higher non-sufficient funds (“NSF”) fees from the larger deposit base carried all year given the four Brown County branches acquired in July 2010.
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Trust service fees were $2,899 in 2011, up $88 compared to 2010, primarily from slight market improvements on assets under management, on which fees are based. Brokerage fees were up $43 over 2010, as a result of increased sales and the noted market improvement.
Mortgage fee income represents net gains received from the sale of residential real estate loans service-released into the secondary market and to a small degree, some related income. During the second half of 2010, mortgage rates fell to historically low levels, prompting a wave of residential refinancing activity generating $2,619 of mortgage banking income for the year. Mortgage banking income was $1,767 for 2011, reflecting a similar slow first half and stronger second half pattern, but not as dramatic as 2010.
Nicolet recognized a $55 net loss on sale, disposal and write down of assets in 2011 consisting of a $128 other-than-temporary impairment (“OTTI”) charge on a private equity security, and $73 net gains on other real estate owned (“OREO”) and other assets sold. Comparatively 2010 carried a $59 net loss, consisting of an OTTI charge of $428 on the same private equity security, $283 gains on investment sales and $86 net gain on OREO and other assets sold. Other income increased $95 to $462 in 2011 compared to 2010 largely from ancillary fees tied to deposit- related products.
Comparison of 2010 versus 2009
Noninterest income was $8,968 for 2010, an increase of $1,437, or 19.1%, from 2009.
For 2010, mortgage banking income was $2,619, up $1,072 from 2009. Sales of residential loan originations and refinancing activity reached a high in 2010 due to the historically low interest rate environment spurring refinancing activity.
The net loss on sale, disposal and write down of assets was $59 for 2010 compared to $150 in 2009, with 2009 carrying a $157 net loss on OREO sales offset by $7 gain on a small investment sale.
Noninterest Expense
Table 5: Noninterest Expense
(dollars in thousands)
(dollars in thousands)
Years Ended December 31, | Change From Prior Year | ||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
$ Change | % Change | $ Change | % Change | ||||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011 | 2011 | 2010 | 2010 | |||||||||||||||||||||||||
Salaries and employee benefits | $ | 11,334 | $ | 10,165 | $ | 8,282 | $ | 1,169 | 11.5 | % | $ | 1,883 | 22.7 | % | |||||||||||||||||
Occupancy, equipment and office | 4,409 | 3,748 | 3,254 | 661 | 17.6 | % | 494 | 15.2 | % | ||||||||||||||||||||||
Business development and marketing | 1,362 | 1,243 | 1,285 | 119 | 9.6 | % | (42 | ) | (3.3%) | ||||||||||||||||||||||
Data processing | 1,360 | 1,293 | 1,143 | 67 | 5.2 | % | 150 | 13.1 | % | ||||||||||||||||||||||
FDIC assessments | 630 | 927 | 1,144 | (297 | ) | (32.0%) | (217 | ) | (19.0%) | ||||||||||||||||||||||
Core deposit intangible amortization | 741 | 329 | — | 412 | 125.0 | % | 329 | 100 | % | ||||||||||||||||||||||
Other | 1,607 | 1,611 | 1,576 | (4 | ) | (0.2%) | 35 | 2.3 | % | ||||||||||||||||||||||
Total other expenses | $ | 21,443 | $ | 19,316 | $ | 16,684 | $ | 2,127 | 11.0 | % | $ | 2,632 | 15.8 | % |
Comparison of 2011 versus 2010
Total noninterest expense was $21,443 for 2011, an increase of $2,127, or 11.0%, over 2010 due primarily to increased salaries and employee benefits as well as occupancy costs. These expenses were largely impacted from carrying a full year of costs associated with the four branches purchased in July 2010, as well as normal merit increases between the years.
Salaries and employee benefits increased by $1,169, or 11.5%, over 2010. As noted above, this increase is largely due to the full year of salary and benefits paid as a result of the 2010 branch acquisition transaction.
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Occupancy, equipment and office increased $661, or 17.6%, over 2010. The increase was mainly the result of increasing rent and depreciation expense related to the larger branch network as well as continued investment in facilities consistent with plans for future growth.
FDIC assessments were $630 for 2011, $297 lower than 2010. Nicolet benefited from the FDIC’s change in assessment calculation effective in 2011.
The core deposit intangible amortization increased $412 from 2010 as a full year impact of the 2010 branch acquisition was realized.
Other operating expenses were $1,606 for 2011, a decrease of $6 over 2010. Nicolet continues to manage its costs commensurate with its operational requirements.
Comparison of 2010 versus 2009
Noninterest expense increased $2,632, or 15.8%, from 2009, primarily from increases in salaries and employee benefits, occupancy and data processing costs. Remaining noninterest expenses were stable or declining.
Salaries in 2010 increased mainly from personnel added with the July 2010 branch acquisition, as well as normal merit adjustments, and cash and equity incentive increases given better 2010 versus 2009 performance.
Occupancy expenses increased $494, or 15.2% from 2009 amounts. The majority of this increase was in rent expense which increased from $89 in 2009 to $355 in 2010, given the July 2010 branch acquisition.
Data processing increased $150, from general rate increases and the larger processing volumes added in 2010 with the branch acquisition.
Income Taxes
Income tax expense was $318 for 2011, $136 for 2010 and $45 for 2009. The effective tax rates were 17.2%, 10.6%, and 3.8% for 2011, 2010, and 2009, respectively, influenced largely by the amount of income before tax and the mix of tax-exempt income each year. The basic principles for accounting for income taxes require that deferred income taxes be analyzed to determine if a valuation allowance is required. A valuation allowance is required if it is more likely than not that some portion of the deferred tax asset will not be realized. At December 31, 2011 and 2010, no valuation allowance was determined to be necessary except for state NOL carry forwards.
At December 31, 2011, state tax net operating losses at Nicolet of approximately $3,700 existed to offset future taxable income resulting in a deferred tax asset of $200 for which a valuation allowance of $187 has been recognized as it is not expected to be realized under current regulations.
BALANCE SHEET ANALYSIS
Loans
Nicolet National Bank services a diverse customer base throughout Northeast Wisconsin and Michigan including the following industries: manufacturing, wholesaling, retail, service, and businesses supporting the general building industry. It continues to concentrate its efforts in originating loans in its local markets and assisting its current loan customers. It actively utilizes government loan programs such as those provided by the U.S. Small Business Administration to help these customers weather current economic conditions and position their businesses for the future.
Total loans were $472,489 at December 31, 2011, a decrease of $41,272, or 8.0%, from December 31, 2010. Lower utilization of commercial lines of credit accounted for 80% of this decline. During 2011, Nicolet actively pursued loan growth, but the decline in loan balances was primarily a result of reduced borrower demand, particularly during the second half of 2011, due to economic contraction.
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Table 6: Loan Composition
As of December 31,
(dollars in thousands)
As of December 31,
(dollars in thousands)
2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Amount | % of Total | Amount | % of Total | Amount | % of Total | Amount | % of Total | Amount | % of Total | ||||||||||||||||||||||||||||||||||
Commercial & industrial | $ | 154,011 | 32.6 | % | $ | 170,919 | 33.3 | % | $ | 146,121 | 30.0 | % | $ | 162,216 | 33.8 | % | $ | 132,570 | 30.0 | % | |||||||||||||||||||||||
CRE owner-occupied | 111,179 | 23.5 | 123,122 | 24.0 | 142,621 | 29.3 | 139,710 | 29.2 | 148,525 | 33.6 | |||||||||||||||||||||||||||||||||
CRE investment | 66,577 | 14.1 | 63,839 | 12.4 | 37,908 | 7.8 | 41,393 | 8.6 | 37,349 | 8.4 | |||||||||||||||||||||||||||||||||
Construction & land development | 24,774 | 5.2 | 31,464 | 6.1 | 40,619 | 8.3 | 29,729 | 6.2 | 39,946 | 9.0 | |||||||||||||||||||||||||||||||||
Residential construction | 9,363 | 2.0 | 8,893 | 1.7 | 12,940 | 2.7 | 14,279 | 3.0 | 4,595 | 1.0 | |||||||||||||||||||||||||||||||||
Residential-1st Mortgage | 56,393 | 11.9 | 56,533 | 11.0 | 47,352 | 9.7 | 38,881 | 8.1 | 29,360 | 6.7 | |||||||||||||||||||||||||||||||||
Residential-Junior mortgage | 42,699 | 9.1 | 46,621 | 9.1 | 47,020 | 9.7 | 46,945 | 9.8 | 41,328 | 9.3 | |||||||||||||||||||||||||||||||||
Retail & other | 7,493 | 1.6 | 12,370 | 2.4 | 11,990 | 2.5 | 6,026 | 1.3 | 8,684 | 2.0 | |||||||||||||||||||||||||||||||||
Total Loans | $ | 472,489 | 100.0 | % | $ | 513,761 | 100.0 | % | $ | 486,571 | 100.0 | % | $ | 479,179 | 100.0 | % | $ | 442,357 | 100.0 | % |
Commercial and industrial, real estate commercial, and construction and land development loans comprised 75.4% of the loan portfolio at December 31, 2011. Such loans are considered to have more inherent risk of default than residential mortgage or installment loans. The commercial balance per borrower is typically larger than that for residential and mortgage loans, implying higher potential losses on an individual customer basis. Commercial loan growth throughout 2010 and 2011 was hampered by soft loan demand (most predominantly during the second half of 2011) across all markets, Nicolet’s aggressive approach to recognizing risks associated with specific borrowers and the recognition of charge-offs on nonperforming loans in a timely manner.
Commercial and industrial loans were $154,011 at December 31, 2011, down $16,908, or 9.9%, since year end 2010, and comprised 32.6% of total loans. The commercial loan classification primarily consists of commercial loans to small businesses and loans to municipalities. Owner-occupied commercial real estate loans primarily consist of loans secured by business real estate that is occupied by borrowers that also have commercial and industrial loans. Owner-occupied commercial real estate loans were $111,179 at December 31, 2011, down $11,943, or 9.7%, since year end 2010, and comprised 23.5% of total loans. Both of these loan segments include a diverse range of industries. The credit risk related to commercial loans and owner-occupied commercial real estate loans is largely influenced by general economic conditions and the resulting impact on a borrower’s operations, or on the value of underlying collateral, if any. The decline in these commercial loan segments was primarily due to soft loan demand from business borrowers resulting from generally poor economic conditions.
Commercial investment real estate loans totaled $66,577 at December 31, 2011, up $2,738, or 4.3%, from December 31, 2010, and comprised 14.1% of total loans, up from 12.4% at the end of 2010. The investment real estate loan classification primarily includes commercial-based mortgage loans that are secured by non-owner occupied, nonfarm/nonresidential real estate properties, and multi-family residential properties.
Construction and land development loans totaled $24,774 at December 31, 2011, down $6,690, or 21.3%, from December 31, 2010, and comprised 5.2% of total loans, down from 6.1% at the end of 2010. Loans in this classification provide financing for the development of commercial income properties, multi-family residential development, and land designated for future development. Nicolet controls the credit risk on these types of loans by making loans in familiar markets, reviewing the merits of individual projects, controlling loan structure, and monitoring the progress of projects through the analysis of construction advances. The decrease in this segment was due to charge-offs, pay downs, and Nicolet National Bank decreasing its credit exposure by encouraging the refinancing of certain loan relationships with other financial institutions. Future lending in this segment will focus on loans that are secured by commercial income-producing properties as opposed to speculative real estate development. Credit risk is managed by employing sound underwriting guidelines, lending primarily to borrowers in local markets, periodically evaluating the underlying collateral, and formally reviewing the borrower’s financial soundness and relationships on an ongoing basis. Residential
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construction loans totaled $9,363 at the end of 2011, up $470, or 5.3%, from the prior year end, and comprised 2.0% and 1.7% of total loans outstanding at year end 2011 and 2010, respectively.
Residential first-mortgage real estate loans declined $140, or 0.2%, to $56,393 at December 31, 2011, representing 11.9% and 11.0% of the total loan portfolio at the end of 2011 and 2010, respectively. Residential first mortgage loans include conventional first-lien home mortgages, not including loans held for sale in the secondary market. Residential junior-lien real estate loans declined $3,922, or 8.4%, to $42,699, representing 9.0% and 9.1% of the total loan portfolio at the end of 2011 and 2010, respectively. Residential junior-lien real estate loans consist of home equity lines and term loans secured by junior mortgage liens. If the declines in market values that have occurred in the residential real estate markets worsen, particularly in Nicolet’s market area, the value of collateral securing its real estate loans could decline further, which could cause an increase in the provision for loan losses. In light of the uncertainty that exists in the economy and credit markets, there can be no guarantee that Nicolet will not experience additional deterioration resulting from a downturn in credit performance by its residential real estate loan customers. As part of its management of originating residential mortgage loans, nearly all of Nicolet’s long-term, fixed-rate residential real estate mortgage loans are sold in the secondary market without retaining the servicing rights. At December 31, 2011, $11,373 of residential mortgages were held for resale to the secondary market, compared to $5,334 at December 31, 2010.
Retail consumer loans totaled $7,493 at December 31, 2011, down $4,877, or 39.4%, compared to 2010, and represented 1.6% and 2.4% of the 2011 and 2010 yearend loan portfolio, respectively. The decline in aggregate consumer loan balances is largely a result of reduced consumer demand due to economic conditions. Loans in this classification include short-term and other personal installment loans not secured by real estate. Credit risk is primarily controlled by reviewing the creditworthiness of the borrowers, monitoring payment histories, and taking appropriate collateral and guaranty positions.
Factors that are important to managing overall credit quality are sound loan underwriting and administration, systematic monitoring of existing loans and commitments, effective loan review on an ongoing basis, early problem loan identification and remedial action to minimize losses, an adequate ALLL, and sound nonaccrual and charge-off policies. An active credit risk management process is used for commercial loans to further ensure that sound and consistent credit decisions are made. The credit management process is regularly reviewed and the process has been modified over the past several years to further strengthen the controls.
The loan portfolio is widely diversified by types of borrowers, industry groups, and market areas. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to multiple numbers of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At December 31, 2011, no significant industry concentrations existed in Nicolet’s portfolio in excess of 25% of total loans. Nicolet National Bank has also developed guidelines to manage its exposure to various types of concentration risks.
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The following table presents the maturity distribution of the loan portfolio at December 31, 2011:
Table 7: Loan Maturity Distribution
(dollars in thousands)
(dollars in thousands)
Loan Maturity | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
One Year or Less | Over One Year to Five Years | Over Five Years | Totals | ||||||||||||||||
Commercial & industrial | $ | 82,136 | $ | 64,931 | $ | 6,944 | $ | 154,011 | |||||||||||
CRE owner-occupied | 35,741 | 66,167 | 9,271 | 111,179 | |||||||||||||||
CRE investment | 26,120 | 33,784 | 6,673 | 66,577 | |||||||||||||||
Construction & land development | 19,410 | 5,316 | 48 | 24,774 | |||||||||||||||
Residential construction | 9,285 | — | 78 | 9,363 | |||||||||||||||
Residential 1st mortgage | 12,097 | 17,977 | 26,318 | 56,393 | |||||||||||||||
Residential junior mortgage | 7,672 | 14,708 | 20,319 | 42,699 | |||||||||||||||
Retail & other | 5,404 | 1,624 | 466 | 7,493 | |||||||||||||||
Total Loans | $ | 197,865 | $ | 204,507 | $ | 70,117 | $ | 472,489 | |||||||||||
Percent by maturity distribution | 41.9 | % | 43.3 | % | 14.8 | % | 100.0 | % |
Allowance for Loan and Lease Losses
Credit risks within the loan portfolio are inherently different for each loan type. Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and on-going review of loan payment performance. Active asset quality administration, including early problem loan identification and timely resolution of problems, aids in the management of credit risk and minimization of loan losses.
The ALLL is established through a provision for loan losses charged to expense to appropriately provide for potential credit losses in the existing loan portfolio. Loans are charged against the ALLL when management believes that the collection of principal is unlikely. The level of the ALLL represents management’s estimate of an amount of reserves that provides for estimated probable credit losses in the loan portfolio at the balance sheet date. To assess the ALLL, 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 and forecasted economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect potential credit losses. Nicolet’s methodology reflects guidance by regulatory agencies to all financial institutions.
At December 31, 2011, the ALLL was $5,899, compared to $8,635 at December 31, 2010 and $6,232 at December 31, 2009. The ALLL as a percentage of total loans was 1.3%, 1.7%, and 1.3% at December 31, 2011, 2010 and 2009, respectively. This trend has improved in 2011. The level of the provision for loan losses is directly correlated to the amount of net charge-offs, as it is Nicolet’s policy that the loan loss provisions, over time, exceed net charge-offs and provide coverage for potential credit losses in the existing loan portfolio.
Nicolet’s maagement allocates the ALLL by pools of risk within each loan portfolio segment. The allocation methodology consists of the following components. First, a specific reserve, for the estimated collateral shortfall, is established for all loans determined to be impaired. Loans measured for impairment include all loans risk-weighted as “substandard” and “doubtful” with balances greater than $25 and all troubled debt-restructurings (“restructured loans”), determined to be impaired by Nicolet. The specific reserve in the ALLL is equal to the aggregate collateral shortfall calculated from the impairment analysis. Second, Nicolet’s management allocates ALLL with historical loss rates by loan segment. The loss factors applied in the methodology are periodically re-evaluated and adjusted to reflect changes in historical loss levels on an
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annual basis. Lastly, management allocates ALLL to the remaining loan portfolio 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
The ALLL was 62.3%, 83.8% and 75.9% of nonperforming loans at December 31, 2011, 2010 and 2009, respectively. Gross charge-offs were $9,401 for 2011, $6,292 for 2010, and $5,427 for 2009, while recoveries for the corresponding periods were $65, $195, and $113, respectively. As a result, net charge-offs for 2011 were $9,336, or 1.9%, of average loans, compared to $6,097, or 1.2% of average loans, for 2010 and $5,314, or 1.1% of average loans, for 2009. The 2011 increase in net charge-offs of $3,239 was primarily due to a $1,429 increase in commercial & industrial loan net charge-offs, an $880 increase in construction & land development, a $299 increase in other commercial real estate, and a $673 increase in residential first- and junior-lien mortgage loans offset by a $42 decrease in retail and other. Issues impacting asset quality over the past few years have included historically depressed economic factors, such as depressed commercial and residential real estate markets, volatile energy prices, heightened unemployment, and depressed consumer confidence. Declining collateral values have significantly contributed to elevated levels of nonperforming loans, net charge-offs, and ALLL. Nicolet has been focused on reducing its exposure within these portfolio segments by pursuing rigorous workout and resolution plans on problem credits, and by implementing enhancements to the credit management process to address and enhance underwriting, and recognition and mitigation of risk on new extensions of credit. The level of the provision for loan losses is directly correlated to the amount of net charge-offs, as it is Nicolet’s policy that the loan loss provisions, over time, exceed net charge-offs and provide coverage for potential credit losses in the existing loan portfolio. Loans charged-off are subject to continuous review, and specific efforts are taken to achieve maximum recovery of principal, accrued interest, and related expenses.
The largest portion of the ALLL at year end 2011 was allocated to construction and land development loans and was $2,035, representing 34.5% of the ALLL at year end 2011 compared to 25.1% at year end 2010. The increase in the percentage amount allocated to construction and land development was mostly attributable to the decrease in the percentage of the total portfolio represented by construction and land development, to $24,774 or 5.2% of total loans at year end 2011, down from $31,464 or 6.1% at year end 2010. The ALLL allocated to commercial and industrial loans was $1,964 at year end 2011, a decrease of $2,608 from year end 2010, and represented 33.3% of the ALLL at year end 2011, compared to 53.0% at year end 2010. The decrease in the commercial and industrial allocation was due to a $1,970 decrease in impaired Commercial and Industrial loans, which represented 18.4% of impaired loans at year end 2011 compared to 34.3% at year end 2010. In comparison to the construction and land development and commercial and industrial loan segments, allocations to the ALLL for other loan segments are relatively small, and did not change appreciably from December 31, 2010 to December 31, 2011
Management performs ongoing intensive analyses of its loan portfolios to allow for early identification of customers experiencing financial difficulties, maintains prudent underwriting standards, understands the economy in its markets, and considers the trend of deterioration in loan quality in establishing the level of the ALLL.
Consolidated net income and stockholders’ equity could be affected if Nicolet’s management’s estimate of the ALLL necessary to cover expected losses is subsequently materially different, requiring a change in the level of provision for loan losses to be recorded. While management uses currently available information to recognize losses on loans, future adjustments to the ALLL may be necessary based on newly received appraisals, updated commercial customer financial statements, rapidly deteriorating customer cash flow, and changes in economic conditions that affect Nicolet’s customers. As an integral part of their examination process, federal regulatory agencies also review the ALLL. Such agencies may require additions to the ALLL or may require that certain loan balances be charged-off or downgraded into criticized loan categories when their credit evaluations differ from those of management based on their judgments about information available to them at the time of their examination.
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Table 8: Loan Loss Experience
For the Years Ended December 31,
(dollars in thousands)
For the Years Ended December 31,
(dollars in thousands)
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Allowance for loan losses (ALLL): | ||||||||||||||||||||||
Beginning balance | $ | 8,635 | $ | 6,232 | $ | 5,546 | $ | 5,383 | $ | 4,954 | ||||||||||||
Loans charged off: | ||||||||||||||||||||||
Commercial & industrial | 2,553 | 1,217 | 1,694 | 3,018 | 130 | |||||||||||||||||
CRE owner-occupied | 428 | 292 | 418 | 572 | — | |||||||||||||||||
CRE investment | 181 | 53 | 478 | — | 522 | |||||||||||||||||
Construction & land development | 5,243 | 4,335 | 300 | 108 | 131 | |||||||||||||||||
Residential construction | 42 | — | 500 | 68 | — | |||||||||||||||||
Residential 1st mortgage | 488 | 167 | 397 | 56 | 12 | |||||||||||||||||
Residential junior mortgage | 459 | 136 | 811 | 347 | 24 | |||||||||||||||||
Retail & other | 7 | 92 | 829 | 16 | 26 | |||||||||||||||||
Total loans charged off | 9,401 | 6,292 | 5,427 | 4,185 | 845 | |||||||||||||||||
Recoveries of loans previously charged off: | ||||||||||||||||||||||
Commercial & industrial | 23 | 116 | 7 | 67 | 95 | |||||||||||||||||
CRE — owner-occupied | 3 | 5 | 23 | 27 | — | |||||||||||||||||
CRE — investment | — | 33 | 76 | 211 | 6 | |||||||||||||||||
Construction & land development | 28 | — | — | 8 | — | |||||||||||||||||
Residential construction | — | — | — | 1 | — | |||||||||||||||||
Residential 1st mortgage | 9 | 40 | 7 | — | 10 | |||||||||||||||||
Residential junior mortgage | 2 | — | — | 2 | — | |||||||||||||||||
Retail & other | — | 1 | — | 4 | 3 | |||||||||||||||||
Total recoveries | 65 | 195 | 113 | 320 | 114 | |||||||||||||||||
Total net charge offs | 9,336 | 6,097 | 5,314 | 3,865 | 731 | |||||||||||||||||
Provision for loan losses | 6,600 | 8,500 | 6,000 | 4,028 | 1,160 | |||||||||||||||||
Ending balance of ALLL | $ | 5,899 | $ | 8,635 | $ | 6,232 | $ | 5,546 | $ | 5,383 | ||||||||||||
Ratios at the end of year: | ||||||||||||||||||||||
ALLL to total loans | 1.25 | % | 1.68 | % | 1.28 | % | 1.16 | % | 1.22 | % | ||||||||||||
ALLL to net charge offs | 63.2 | % | 141.6 | % | 117.3 | % | 143.5 | % | 736.4 | % | ||||||||||||
Net charge offs to average loans | 1.9 | % | 1.2 | % | 1.1 | % | .8 | % | .2 | % | ||||||||||||
Net loan charge-offs: | ||||||||||||||||||||||
Commercial & industrial | $ | 2,530 | $ | 1,101 | $ | 1,687 | $ | 2,951 | $ | 35 | ||||||||||||
CRE owner-occupied | 425 | 287 | 395 | 545 | — | |||||||||||||||||
CRE investment | 181 | 20 | 402 | (211 | ) | 516 | ||||||||||||||||
Construction & land development | 5,215 | 4,335 | 300 | 100 | 131 | |||||||||||||||||
Residential construction | 42 | — | 500 | 67 | — | |||||||||||||||||
Residential 1st mortgage | 479 | 127 | 390 | 56 | 2 | |||||||||||||||||
Residential junior mortgage | 457 | 136 | 811 | 345 | 24 | |||||||||||||||||
Retail & other | 7 | 91 | 829 | 12 | 23 | |||||||||||||||||
Total net charge offs | $ | 9,336 | $ | 6,097 | $ | 5,314 | $ | 3,865 | $ | 731 |
The allocation of the ALLL for each of the past five years is based on Nicolet’s estimate of loss exposure by category of loans is shown in Table 9.
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Table 9: Allocation of the Allowance for Loan Losses
As of December 31,
(dollars in thousands)
As of December 31,
(dollars in thousands)
2011 | % of Loan Type to Total Loans | 2010* | % of Loan Type to Total Loans | 2009* | % of Loan Type to Total Loans | 2008* | % of Loan Type to Total Loans | 2007* | % of Loan Type to Total Loans | |||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
ALLL allocation | ||||||||||||||||||||||||||||||||||||||||||
Commercial & industrial | $ | 1,964 | 32.6 | % | $ | 4,572 | 33.3 | % | $ | 2,849 | 30.0 | % | $ | 4,448 | 33.8 | % | $ | 4,442 | 30.0 | % | ||||||||||||||||||||||
CRE owner-occupied* | 347 | 23.5 | % | 556 | 24.0 | % | 799 | 29.3 | % | — | 29.2 | % | — | 33.6 | % | |||||||||||||||||||||||||||
CRE investment | 392 | 14.1 | % | 209 | 12.4 | % | 237 | 7.8 | % | 599 | 8.6 | % | 539 | 8.4 | % | |||||||||||||||||||||||||||
Construction & land development | 2,035 | 5.2 | % | 2,165 | 6.1 | % | 1,404 | 8.3 | % | 211 | 6.2 | % | 169 | 9.0 | % | |||||||||||||||||||||||||||
Residential construction* | 311 | 2.0 | % | 285 | 1.7 | % | 187 | 2.7 | % | — | 3.0 | % | — | 1.0 | % | |||||||||||||||||||||||||||
Residential 1st mortgage | 405 | 11.9 | % | 304 | 11.0 | % | 343 | 9.7 | % | 102 | 8.1 | % | 110 | 6.7 | % | |||||||||||||||||||||||||||
Residential junior mortgage* | 420 | 9.1 | % | 482 | 9.1 | % | 389 | 9.7 | % | — | 9.8 | % | — | 9.3 | % | |||||||||||||||||||||||||||
Retail & other | 25 | 1.6 | % | 62 | 2.4 | % | 24 | 2.5 | % | 186 | 1.3 | % | 123 | 2.0 | % | |||||||||||||||||||||||||||
Total ALLL | $ | 5,899 | 100.0 | % | $ | 8,635 | 100.0 | % | $ | 6,232 | 100.0 | % | $ | 5,546 | 100.0 | % | $ | 5,383 | 100.0 | % | ||||||||||||||||||||||
ALLL category as a percent of total ALLL: | ||||||||||||||||||||||||||||||||||||||||||
Commercial & industrial | 33.3 | % | 53.0 | % | 45.8 | % | 80.2 | % | 82.6 | % | ||||||||||||||||||||||||||||||||
CRE owner-occupied | 5.9 | % | 6.4 | % | 12.8 | % | — | — | ||||||||||||||||||||||||||||||||||
CRE investment | 6.6 | % | 2.4 | % | 3.8 | % | 10.8 | % | 10.0 | % | ||||||||||||||||||||||||||||||||
Construction &land development | 34.5 | % | 25.1 | % | 22.5 | % | 3.8 | % | 3.1 | % | ||||||||||||||||||||||||||||||||
Residential construction | 5.3 | % | 3.3 | % | 3.0 | % | — | — | ||||||||||||||||||||||||||||||||||
Residential 1st mortgage | 6.9 | % | 3.5 | % | 5.5 | % | 1.8 | % | 2.0 | % | ||||||||||||||||||||||||||||||||
Residential junior mortgage | 7.1 | % | 5.6 | % | 6.2 | % | — | — | ||||||||||||||||||||||||||||||||||
Retail & other | .4 | % | .7 | % | .4 | % | 3.4 | % | 2.3 | % | ||||||||||||||||||||||||||||||||
Total ALLL | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
* | The allocation of the ALLL is calculated using the categories indicated in Table 9 starting in 2011. The amounts for 2010 and 2009 were “recast” using these categories for purposes of comparability. Data was unavailable to calculate the categorical information for 2008 and 2007. Commercial RE- Owner Occupied balances were included in total Commercial RE — Investment, Residential Construction was included in total Construction & Development and Residential Junior Mortgage was included with total retail and other. |
Impaired Loans and Nonperforming Assets
As part of its overall credit risk management process, Nicolet’s management has been committed to an aggressive problem loan identification philosophy. This philosophy has been implemented through the ongoing monitoring and review of all pools of risk in the loan portfolio to ensure that problem loans are identified early and the risk of loss is minimized.
Nonperforming loans are considered one indicator of potential future loan losses. Nonperforming loans are defined as nonaccrual loans, including those defined as impaired under current accounting standards, and loans 90 days or more past due but still accruing interest. Loans are generally placed on nonaccrual status when contractually past due 90 days or more as to interest or principal payments. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on loans, it is management’s practice to place such loans on nonaccrual status immediately. Previously accrued and uncollected interest on such loans is reversed, amortization of related loan fees is suspended, and income is recorded only to the extent that interest payments are subsequently received in cash after a determination has been made that the principal balance of the loan is collectible. If collectability of the principal is in doubt, payments received are applied to loan principal.
Nonaccrual loans were $9,476, $10,303 and $8,212 at December 31, 2011, 2010, and 2009, respectively, reflecting the continued impact of the economy on Nicolet’s customers. Total nonaccrual loans at December 31, 2011 were down $827 since year end 2010, with commercial and industrial nonaccrual loans down $1,970. In contrast, commercial investment real estate nonaccruals were up $586, and residential first- and junior-lien
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nonaccruals were up $584, as these real-estate secured segments continue to exhibit signs of stress. Between year end 2010 and 2009, total nonaccrual loans increased $2,091, with commercial and industrial nonaccrual loans up $2,039 and construction and land development nonaccruals up $953. Nicolet’s ALLL methodology at December 31, 2011 included an impairment analysis on specifically identified loans defined by Nicolet as impaired, and incorporated the level of specific reserves for these credit relationships in determining the overall appropriate level of the ALLL.
The level of potential problem loans is another predominant factor in determining the relative level of risk in the loan portfolio and in determining the adequacy of the ALLL. Potential problem loans are generally defined by management to include loans rated as Substandard by management but that are in performing status; however, there are circumstances present which might adversely affect the ability of the borrower to comply with present repayment terms. The decision of management to include performing loans in potential problem loans does not necessarily mean that Nicolet expects losses to occur, but that management recognizes a higher degree of risk associated with these loans. The loans that have been reported as potential problem loans are predominantly commercial loans covering a diverse range of businesses and real estate property types. Potential problem loans totaled $23,232 at December 31, 2011 and $31,217 at December 31, 2010. Potential problem loans require a heightened management review of the pace at which a credit may deteriorate, the duration of asset quality stress, and uncertainty around the magnitude and scope of economic stress that may be felt by Nicolet’s customers and on underlying real estate values.
OREO decreased to $641 at December 31, 2011, compared to $1,443 at December 31, 2010 and $1,370 at December 31, 2009. The decrease in OREO during 2011 was primarily attributable to disposition and sale of development land that was recorded in OREO as of the previous year end. Nicolet’s management actively seeks to ensure properties held are monitored to minimize Nicolet’s risk of loss. Evaluations of the fair market value of the OREO properties are done quarterly and valuation adjustments, if necessary, are recorded in Nicolet’s consolidated financial statements.
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Table 10: Nonperforming Assets
As of December 31,
(dollars in thousands)
As of December 31,
(dollars in thousands)
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Nonaccrual loans considered impaired: | ||||||||||||||||||||||
Commercial & industrial | $ | 1,745 | $ | 3,715 | $ | 1,676 | $ | 422 | $ | 40 | ||||||||||||
CRE owner-occupied | 934 | 1,092 | 1,449 | — | — | |||||||||||||||||
CRE investment | 716 | 130 | 500 | 1,216 | 317 | |||||||||||||||||
Construction & land development | 3,367 | 3,331 | 2,378 | 4,729 | 451 | |||||||||||||||||
Residential construction | 1,480 | 1,380 | 1,748 | — | — | |||||||||||||||||
Residential 1st mortgage | 1,129 | 595 | 461 | 200 | — | |||||||||||||||||
Residential junior mortgage | 105 | 55 | — | 220 | — | |||||||||||||||||
Retail & other | — | 5 | — | 104 | — | |||||||||||||||||
Total nonaccrual loans considered impaired | 9,476 | 10,303 | 8,212 | 6,891 | 808 | |||||||||||||||||
Impaired loans still accruing interest | — | — | — | — | — | |||||||||||||||||
Accruing loans past due 90 days or more | — | 500 | — | — | — | |||||||||||||||||
Total nonperforming loans | 9,476 | 10,803 | 8,212 | 6,891 | 808 | |||||||||||||||||
OREO | 641 | 1,443 | 1,370 | 9 | 68 | |||||||||||||||||
Total nonperforming assets | $ | 10,117 | $ | 12,246 | $ | 9,582 | $ | 6,900 | $ | 876 | ||||||||||||
Total restructured loans accruing | — | — | — | — | — | |||||||||||||||||
Ratios | ||||||||||||||||||||||
Nonperforming loans to total loans | 2.0 | % | 2.1 | % | 1.7 | % | 1.4 | % | .2 | % | ||||||||||||
Nonperforming loans to total loans plus OREO | 2.0 | % | 2.1 | % | 1.7 | % | 1.4 | % | .2 | % | ||||||||||||
Nonperforming loans to total assets | 1.4 | % | 1.6 | % | 1.2 | % | 1.0 | % | .1 | % | ||||||||||||
ALLL to nonperforming loans | 62.3 | % | 79.9 | % | 75.9 | % | 80.0 | % | 666.2 | % | ||||||||||||
ALLL to total loans at end of year | 1.2 | % | 1.7 | % | 1.3 | % | 1.2 | % | 1.2 | % | ||||||||||||
Nonperforming assets by type: | ||||||||||||||||||||||
Commercial & industrial | $ | 1,745 | $ | 4,215 | $ | 1,676 | $ | 422 | $ | 40 | ||||||||||||
CRE owner-occupied | 934 | 1,092 | 1,449 | — | — | |||||||||||||||||
CRE investment | 716 | 130 | 500 | 1,216 | 317 | |||||||||||||||||
Construction & land development | 3,367 | 3,331 | 2,378 | 4,729 | 451 | |||||||||||||||||
Residential construction | 1,480 | 1,380 | 1,748 | — | — | |||||||||||||||||
Residential 1st mortgage | 1,129 | 595 | 461 | 200 | — | |||||||||||||||||
Residential junior mortgage | 105 | 55 | — | 220 | — | |||||||||||||||||
Retail & other | — | 5 | — | 104 | — | |||||||||||||||||
Total nonperforming loans | $ | 9,476 | $ | 10,803 | $ | 8,212 | $ | 6,891 | $ | 808 | ||||||||||||
Commercial real estate owned | $ | 566 | $ | 1,368 | $ | 1,255 | $ | 9 | $ | 68 | ||||||||||||
Residential real estate owned | 75 | 75 | 115 | — | — | |||||||||||||||||
Total other real estate owned | $ | 641 | $ | 1,443 | $ | 1,370 | $ | 9 | $ | 68 | ||||||||||||
Total nonperforming assets | $ | 10,117 | $ | 12,246 | $ | 9,582 | $ | 6,900 | $ | 876 |
The following tables shows the approximate gross interest that would have been recorded if the loans accounted for on nonaccrual basis and restructured loans for the years ended as indicated had performed in accordance with their original terms, in contrast to the amount of interest income that was included in interest income for the period.
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Table 11: Foregone Loan Interest
For the Years Ended December 31,
(dollars in thousands)
For the Years Ended December 31,
(dollars in thousands)
2011 | 2010 | 2009 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Interest income in accordance with original terms | $ | 1,390 | $ | 1,004 | $ | 638 | ||||||||
Interest income recognized | (220 | ) | (415 | ) | (239 | ) | ||||||||
Reduction in interest income | $ | 1,170 | $ | 589 | $ | 399 |
Investment Securities Portfolio
The investment securities portfolio is intended to provide Nicolet National Bank with adequate liquidity, flexible asset/liability management and a source of stable income. The portfolio is structured with minimal credit exposure to Nicolet. All securities are classified as available-for-sale and are carried at fair value. Unrealized gains and losses are excluded from earnings, but are reported as other comprehensive income in a separate component of shareholders’ equity, net of income tax. Premium amortization and discount accretion are recognized as adjustments to interest income using the interest method. Realized gains or losses on sales are based on the net proceeds and the adjusted carrying value amount of the securities sold using the specific identification method.
Table 12: Investment Securities Portfolio
As of December 31,
(dollars in thousands)
As of December 31,
(dollars in thousands)
2011 | 2010 | 2009 | |||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Amortized Cost | Fair Value | % of Total | Amortized Cost | Fair Value | % of Total | Amortized Cost | Fair Value | % of Total | |||||||||||||||||||||||||||||||
State, county and municipals | $ | 30,130 | $ | 31,848 | 56 | % | $ | 29,897 | $ | 31,109 | 59 | % | $ | 31,862 | $ | 33,424 | 61 | % | |||||||||||||||||||||
Mortgage-backed securities | 17,450 | 18,484 | 33 | % | 16,852 | 17,407 | 33 | % | 19,043 | 19,819 | 36 | % | |||||||||||||||||||||||||||
U.S. Government sponsored enterprises | 4,995 | 5,020 | 9 | % | 2,502 | 2,499 | 5 | % | — | — | — | ||||||||||||||||||||||||||||
Equity securities | 1,624 | 1,407 | 2 | % | 1,624 | 1,373 | 3 | % | 1,753 | 1,030 | 3 | % | |||||||||||||||||||||||||||
Total | $ | 54,199 | $ | 56,759 | 100 | % | $ | 50,875 | $ | 52,388 | 100 | % | $ | 52,658 | $ | 54,273 | 100 | % |
At December 31, 2011, the total carrying value of investment securities was $56,759, an increase of $4,371, or 8.3%, compared to December 31, 2010, and represented 8.4% and 7.8% of total assets at December 31, 2011 and 2010, respectively. Primarily due to weak investment returns and soft loan demand in 2011, much of Nicolet’s excess liquidity was held in low-rate cash accounts rather than committing funds to longer term investments in this low rate environment.
At December 31, 2011, the securities portfolio did not contain securities of any single issuer that were payable from and secured by the same source of revenue or taxing authority where the aggregate carrying value of such securities exceeded 10% of shareholders’ equity.
In addition to securities available-for-sale, Nicolet had other investments of $5,211 and $4,910 at December 31, 2011 and 2010, respectively, consisting of capital stock in the Federal Reserve and the FHLB (required as members of the Federal Reserve Bank System and the Federal Home Loan Bank System), as well as equity investments in other private companies. The FHLB and Federal Reserve investments are “restricted” in that they can only be sold back to the respective institutions or another member institution at par, and are thus, not liquid, have no ready market or quoted market value, and are carried at cost. The investments in private companies have no quoted market prices, and are carried at cost less OTTI charges, if any. Nicolet’s management evaluates all these other investments periodically for impairment, considering financial condition and other available relevant information. OTTI charges recorded in 2011 and 2010 were $128 (related to one private equity security classified in other investments) and $428 (related to the same security), respectively, and none for 2009.
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Table 13: Investment Securities Portfolio Maturity Distribution
As of December 31, 2011
(dollars in thousands)
As of December 31, 2011
(dollars in thousands)
Within One Year | After One but Within Five Years | After Five but Within Ten Years | After Ten Years | Mortgage- related and Equity Securities | Total Amortized Cost | Total Fair Value | |||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | |||||||||||||||||||||||||||||||||||||||||||
U.S. Government sponsored enterprises | 4,995 | 0.7 | % | $ | — | —% | $ | — | —% | $ | — | —% | $ | — | —% | $ | 4,995 | 0.7 | % | $ | 5,020 | ||||||||||||||||||||||||||||||||||
State and county municipals | 4,045 | 5.0 | 18,213 | 4.6 | 6,897 | 4.8 | 975 | 0.6 | — | — | 30,130 | 4.6 | 31,848 | ||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities | — | — | — | — | — | — | — | — | 17,450 | 3.7 | 17,450 | 3.7 | % | 18,484 | |||||||||||||||||||||||||||||||||||||||||
Equity securities | — | — | — | — | — | — | — | — | 1,624 | — | 1,624 | — | 1,407 | ||||||||||||||||||||||||||||||||||||||||||
Total amortized cost | $ | 9,040 | 2.6 | % | $ | 18,213 | 4.6 | % | $ | 6,897 | 4.8 | % | $ | 975 | 0.6 | % | $ | 19,074 | 3.4 | % | $ | 54,199 | 3.8 | % | $ | 56,759 | |||||||||||||||||||||||||||||
Total fair value and carrying value | $ | 9,134 | $ | 19,260 | $ | 7,499 | $ | 975 | $ | 19,891 | $ | 56,759 |
(1) | The yield on tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 34% adjusted for the disallowance of interest expense. |
Deposits
Deposits represent Nicolet’s largest source of funds. Nicolet competes with other bank and nonbank institutions for deposits, as well as with a growing number of non-deposit investment alternatives available to depositors, such as mutual funds, money market funds, annuities, and other brokerage investment products. Challenges to deposit growth include price changes on deposit products given movements in the rate environment and other competitive pricing pressures, and customer preferences regarding higher-costing deposit products or non-deposit investment alternatives.
At December 31, 2011, total deposits were $551,536, down $6,928 from year-end 2010. Consistent with Nicolet’s funding strategy, Nicolet continued to reduce brokered deposits during 2011. Total brokered deposits(included in time deposits in Table 14) declined from $86,063 at December 31, 2010 to $38,609 at December 31, 2011, or 56%, as Nicolet did not renew maturing brokered CDs. Excluding brokered deposits, deposits were $512,927, up $40,526 over year-end 2010, largely in response to deposit growth initiatives, new product offerings and deposit features.
Table 14: Deposits
At December 31,
(dollars in thousands)
At December 31,
(dollars in thousands)
2011 | 2010 | 2009 | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Amount | % of Total | Amount | % of Total | Amount | % of Total | ||||||||||||||||||||||
Demand | $ | 78,154 | 14.2 | % | $ | 68,202 | 12.2 | % | $ | 56,873 | 10.2 | % | |||||||||||||||
Money market and NOW accounts | 265,817 | 48.2 | % | 213,044 | 38.2 | % | 212,271 | 38.1 | % | ||||||||||||||||||
Savings | 21,284 | 3.9 | % | 13,600 | 2.4 | % | 10,184 | 1.8 | % | ||||||||||||||||||
Time | 186,281 | 33.7 | % | 263,618 | 47.2 | % | 277,656 | 49.9 | % | ||||||||||||||||||
Total | $ | 551,536 | 100.0 | % | $ | 558,464 | 100.0 | % | $ | 556,984 | 100.0 | % |
On average, deposits were $522,297 for 2011, down $8,385, or 1.6%, from the average for 2010. The mix of average deposits was also impacted by shift in customer preferences, predominantly away from time deposits.
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Table 15: Average Deposits
For the Years Ended December 31,
(dollars in thousands)
For the Years Ended December 31,
(dollars in thousands)
2011 | 2010 | 2009 | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Amount | % of Total | Amount | % of Total | Amount | % of Total | ||||||||||||||||||||||
Demand | $ | 67,787 | 13.0 | % | $ | 57,647 | 10.9 | % | $ | 56,139 | 11.0 | % | |||||||||||||||
Money market and NOW accounts | 219,817 | 42.1 | % | 192,462 | 36.3 | % | 139,160 | 27.3 | % | ||||||||||||||||||
Savings | 16,829 | 3.2 | % | 12,273 | 2.3 | % | 9,916 | 1.9 | % | ||||||||||||||||||
Time | 217,864 | 41.7 | % | 268,301 | 50.5 | % | 305,526 | 59.8 | % | ||||||||||||||||||
Total | $ | 522,297 | 100.0 | % | $ | 530,683 | 100.0 | % | $ | 510,741 | 100.0 | % |
Table 16: Maturity Distribution of Certificates of Deposit of $100,000 or More
As of the Years Ended December 31,
(dollars in thousands)
As of the Years Ended December 31,
(dollars in thousands)
2011 | 2010 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
3 months or less | $ | 36,871 | $ | 39,172 | ||||||
Over 3 months through 6 months | 8,361 | 16,437 | ||||||||
Over 6 months through 12 months | 25,645 | 35,804 | ||||||||
Over 12 months | 22,213 | 61,984 | ||||||||
Total | $ | 93,090 | $ | 153,397 |
Other Funding Sources
Other funding sources, which include short-term and long-term borrowings, were $45,691 and $46,157 at December 31, 2011 and 2010, respectively. Short-term borrowings, consisting mainly of customer repurchase agreements, totaled $4,132 at December 31, 2011 and $4,390 at December 31, 2010. Long-term borrowings include a joint venture note, and FHLB advances, totaling $35,374 at December 31, 2011, down $208 from December 31, 2010 attributable to scheduled principal payments on the joint venture note payable. Also included in long-term borrowings are the junior subordinated debentures of $6,186 issued in July 2004 in connection with the $6,000 of trust preferred securities issued by Nicolet Bankshares Statutory Trust I (the “Statutory Trust”), bearing an 8% fixed rate. Nicolet has the right to redeem the debentures purchased by the Statutory Trust, in whole or in part, on or after July 15, 2009. If the debentures are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest. The maturity date of the debenture, if not redeemed, is July 15, 2034. Further discussion on the junior subordinated debentures is included in Note 8, “Junior Subordinated Debentures” of the Notes to Consolidated Financial Statements for December 31, 2011, and further discussion of the terms of the joint venture note is included in Note 6, “Notes Payable” of the Notes to Consolidated Financial Statements for December 31, 2011.
Off-Balance Sheet Obligations
As of December 31, 2011 and 2010, Nicolet had the following commitments that did not appear on its balance sheet:
Table 17: Commitments
At December 31,
(dollars in thousands)
At December 31,
(dollars in thousands)
2011 | 2010 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Commitments to extend credit — Fixed and variable rate | $ | 158,261 | $ | 119,751 | ||||||
Standby and irrevocable letters of credit-fixed rate | 6,631 | 6,959 |
Further discussion of these commitments is included in Note 13, “Commitments and Contingencies” of the Notes to Consolidated Financial Statements.
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Contractual Obligations
Nicolet is party to various contractual obligations requiring the use of funds as part of its normal operations. The table below outlines principal amounts and timing of these obligations, excluding amounts due for interest, if applicable. Most of these obligations are routinely refinanced into similar replacement obligations. However, renewal of these obligations is dependent on its ability to offer competitive interest rates, liquidity needs, or availability of collateral for pledging purposes supporting the long-term advances.
Table 18: Contractual Obligations
As of December 31, 2011
(dollars in thousands)
As of December 31, 2011
(dollars in thousands)
Maturity by Years | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Total | 1 or less | 1-3 | 3-5 | Over 5 | |||||||||||||||||||
Junior Subordinated debentures | $ | 6,186 | $ | — | $ | — | $ | — | $ | 6,186 | |||||||||||||
Joint venture note | 10,374 | 218 | 481 | 9,675 | — | ||||||||||||||||||
FHLB borrowings | 25,000 | 5,000 | 20,000 | — | — | ||||||||||||||||||
Total long-term borrowing obligations | $ | 41,560 | $ | 5,218 | $ | 20,481 | $ | 9,675 | $ | 6,186 |
At the completion of the construction of Nicolet’s headquarters building in 2005 and as part of a joint venture investment related to the building, Nicolet and the other joint venture partners guaranteed a joint venture note to finance certain costs of the building. This note is secured by the building, bears a fixed rate of 5.81% and requires monthly principal and interest payments until its maturity on June 1, 2016. The balance of this joint venture note was $10,374 and $10,581 as of December 31, 2011 and 2010, respectively.
Liquidity and Interest Rate Sensitivity
Liquidity management refers to the ability to ensure that cash is available in a timely and cost-effective manner to meet cash flow requirements of depositors and borrowers and to meet other commitments as they fall due, including the ability to pay dividends to shareholders, service debt, invest in subsidiaries, repurchase common stock, and satisfy other operating requirements.
Funds are available from a number of basic banking activity sources including the core deposit base, the repayment and maturity of loans, investment securities sales, and sales of brokered deposits. All investment securities are classified as available-for-sale and are reported at fair value on the consolidated balance sheet. Approximately $7,487 of the $56,759 investment securities portfolio on hand at December 31, 2011 was pledged to secure public deposits, short-term borrowings, and repurchase agreements and for other purposes as required by law. Other funding sources available include short-term borrowings, federal funds purchased, and long-term borrowings.
Cash and cash equivalents at December 31, 2011 and 2010 were approximately $92,100 and $52,100, respectively. The rise in cash and cash equivalents was predominantly due to strong customer deposit growth and a decline in loans between December 31, 2011 and 2010. Nicolet’s liquidity resources were sufficient as of December 31, 2011 to fund loans and to meet other cash needs as necessary.
Interest Rate Sensitivity Gap Analysis
Table 19 represents a schedule of Nicolet National Bank’s assets and liabilities repricing over various time intervals. The primary market risk faced by Nicolet is interest rate risk. The static gap analysis starts with contractual repricing information for assets, liabilities, and off-balance sheet instruments. These items are then combined with repricing estimations for administered rate (interest-bearing demand deposits, savings, and money market accounts) and non-rate related products (demand deposit accounts, other assets, and other liabilities) to create a baseline repricing balance sheet. In addition to the contractual information, residential mortgage whole loan products and mortgage-backed securities are adjusted based on industry estimates of prepayment speeds that capture the expected prepayment of principal above the contractual amount based on how far away the contractual coupon is from market coupon rates. At the indicated time intervals the cumulative maturity gap was within Nicolet’s established guidelines of not greater than +25% or -25%.
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Table 19: Interest Rate Sensitivity Gap Analysis
(dollars in thousands)
(dollars in thousands)
December 31, 2011 | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
0-90 Days | 91-180 Days | 181-365 Days | 1-5 years | Beyond 5 Years | Total | ||||||||||||||||||||||
Earning Assets: | |||||||||||||||||||||||||||
Loans | $ | 247,479 | $ | 26,185 | $ | 36,760 | $ | 133,806 | $ | 28,259 | $ | 472,489 | |||||||||||||||
Securities at fair value | — | — | 5,000 | — | 51,759 | 56,759 | |||||||||||||||||||||
Other earnings assets | 92,444 | — | — | — | 1,852 | 94,296 | |||||||||||||||||||||
Total | $ | 339,923 | $ | 26,185 | $ | 41,760 | $ | 133,806 | $ | 81,870 | $ | 623,544 | |||||||||||||||
Cumulative rate sensitive assets | $ | 339,923 | $ | 366,108 | $ | 407,868 | $ | 541,674 | $ | 623,544 | |||||||||||||||||
Interest-bearing liabilities | |||||||||||||||||||||||||||
Interest bearing deposits | $ | 352,809 | $ | 16,150 | $ | 53,591 | $ | 50,825 | $ | 6 | $ | 473,381 | |||||||||||||||
Borrowings | 4,390 | 258 | 5,516 | 24,160 | 5,182 | 39,506 | |||||||||||||||||||||
Subordinated debentures | 774 | 774 | 1,548 | 3,090 | — | 6,186 | |||||||||||||||||||||
Total | $ | 357,973 | $ | 17,182 | $ | 60,655 | $ | 78,075 | $ | 5,188 | $ | 519,073 | |||||||||||||||
Cumulative interest sensitive liabilities | $ | 357,973 | $ | 375,155 | $ | 435,810 | $ | 513,860 | $ | 519,048 | |||||||||||||||||
Interest sensitivity gap | $ | (18,050 | ) | $ | 9,003 | $ | (18,895 | ) | $ | 55,731 | $ | 76,682 | |||||||||||||||
Cumulative interest sensitivity gap | $ | (18,050 | ) | $ | (9,047 | ) | $ | (27,942 | ) | $ | 27,789 | $ | 104,471 | ||||||||||||||
Cumulative ratio of rate sensitive assets to rate sensitive liabilities | 95 | % | 98 | % | 94 | % | 105 | % | 120 | % |
(1) | The interest rate sensitivity assumptions for savings accounts, money market accounts, and interest-bearing demand deposits accounts are based on current and historical experiences regarding portfolio retention and interest rate repricing behavior. Based on these experiences, a portion of these balances are considered to be long-term and fairly stable and are, therefore, included in the “1-5 Years” and “Beyond 5 Years” categories. |
In order to limit exposure to interest rate risk, management monitors the liquidity and gap analysis on a monthly basis and adjust pricing, term and product offerings when necessary to stay within applicable guidelines and maximize the effectiveness of asset/liability management.
Along with the static gap analysis, Nicolet’s management also estimates the effect a gradual change and a sudden change in interest rates could have on expected net interest income through income simulation. The simulation is run using the prime rate as the base with the assumption of rates increasing 100, 200, and 300 bps or decreasing 100, 200 and 300 bps. All rates are increased or decreased parallel to the change in prime rate. The simulation assumes a static mix of assets and liabilities. As a result of the simulation, over a 12-month time period ending December 31, 2011, net interest income was estimated to decrease 3.6% if rates increase 100 bps, while in a 100 bps rate environment assumption, net interest income was estimated to increase 2.76% during the same period. These results are in line with Nicolet’s relatively neutral interest rate sensitivity position, relatively short loan maturities and level of variable rate loans with interest floors. These results are based solely on the modeled changes in the market rates and do not reflect the earnings sensitivity that may arise from other factors such as changes in the shape of the yield curve, changes in spreads between key market rates, or changes in consumer or business behavior. These results also do not include any management action to mitigate potential income variances within the modeled process. The simulation results are one indicator of interest rate risk, and actual net interest income is largely impacted by the allocation of assets, liabilities and product mix. Nicolet’s management continually reviews its interest rate risk position through the Asset/Liability Committee process, and such Committee reports to the full board of directors on a monthly basis.
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Capital
Nicolet regularly reviews the adequacy of its capital to ensure that sufficient capital is available for current and future needs and is in compliance with regulatory guidelines. Nicolet’s management actively reviews capital strategies in light of perceived business risks associated with current and prospective earning levels, liquidity, asset quality, economic conditions in the markets served, and level of dividends available to shareholders. Nicolet’s management intends to maintain an optimal capital and leverage mix for growth and for shareholder return.
In December 2008, through a private placement of common stock, Nicolet raised $9,500 in capital. On December 23, 2008, under TARP, Nicolet received $14,964 from the Treasury for the issuance of 14,964 shares of senior preferred stock with $1,000 per share liquidation value (bearing a 5% dividend for the first five years and 9% thereafter) and an additional 748 shares of senior preferred stock with $1,000 per share liquidation value (bearing a 9% dividend) following the Treasury’s immediate exercise of preferred stock warrants. The initial $848 discount recorded on preferred stock that resulted from allocating a portion of the proceeds to the warrants is accreted directly to retained earnings over a five-year period on a straight-line basis.
While the TARP preferred stock was outstanding, Nicolet was subject to various restrictions governed by the executed documents with the Treasury, and by related governmental enactments. Such restrictions included: a) Treasury approval required for any increase in common dividends per share and for any repurchase of outstanding common stock; b) TARP dividends on Nicolet’s TARP preferred stock required to be paid in full before dividends could be paid to common shareholders; c) no tax deduction to Nicolet for any senior executive officer whose compensation was above $500; and d) additional restrictions and compliance requirements on executive compensation. In September of 2009, Nicolet received approval from the Treasury and its regulator to repurchase up to 100,000 shares of its common stock, under which 96,600 shares of common stock at a cost of $1,619 were repurchased and subsequently retired during 2009. Similar approvals were obtained for 2010 and 2011, allowing the repurchase of up to 100,000 shares of common stock pursuant to these authorizations each year. No shares were repurchased under these authorities during 2010 or 2011.
On September 1, 2011, after appropriate regulatory approvals, Nicolet effectively redeemed all the senior preferred stock under TARP, paying the Treasury $15,712 and accelerating the accretion of the remaining discount of $396 against retained earnings. Such redemption was in connection with Nicolet’s participation in the Treasury’s SBLF described below. The SBLF is a program separate and distinct from TARP, and thus, among other things, the restrictions noted above under TARP or related government enactments were no longer applicable to Nicolet.
The SBLF is a Treasury program made available to community banks, designed to boost lending to small businesses by providing participating banks with capital and liquidity. In particular, the SBLF program targets commercial, industrial, owner-occupied real-estate and agricultural-based lending to qualifying small businesses, which include businesses with less than $50 million in revenue, and promotes outreach to women-owned, veteran-owned and minority-owned businesses.
On September 1, 2011, under the SBLF, Nicolet received $24,400 from the Treasury for the issuance of 24,400 shares of Non-Cumulative Perpetual Preferred Stock, Series C, with $1,000 per share liquidation value. The annual dividend rate upon funding and for the following nine calendar quarters is 5%, unless there is growth in qualifying small business loans outstanding over a baseline which could reduce the rate to as low as 1% (as determined under the terms of the Securities Purchase Agreement (the “Agreement”)), adjusted quarterly. The dividend rate is fixed for the tenth quarter after funding through the end of the first four and one-half years at 7% (unless fixed at a lower rate given increased lending as similarly described above); and finally the dividend rate is fixed at 9% after four and one-half years if the preferred stock is not repaid. Nicolet’s weighted average dividend rate for 2011 (since funding) was 5%. Under the terms of the Agreement, Nicolet is required to provide various information, certifications, and reporting to the Treasury. At December 31, 2011, Nicolet believes it was in compliance with the requirements set by the Treasury in the Agreement. The preferred stock (under TARP or SBLF) qualifies as Tier 1 capital for regulatory purposes.
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A summary of Nicolet’s and Nicolet National Bank’s regulatory capital ratios as of December 31, 2011 and 2010 are as follows:
Table 20: Capital
(dollars in thousands)
(dollars in thousands)
Nicolet’s and Nicolet National Bank’s actual regulatory capital amounts and ratios as December 31, 2011 and 2010 are presented in the following table:
Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions (2) | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Amount | Ratio (1) | Amount | Ratio (1) | Amount | Ratio (1) | ||||||||||||||||||||||
As of December 31, 2011 | |||||||||||||||||||||||||||
Nicolet | |||||||||||||||||||||||||||
Total capital | $ | 82,638 | 16.7 | % | $ | 39,510 | 8.0 | % | N/A | N/A | |||||||||||||||||
Tier I capital | 76,739 | 15.5 | % | 19,755 | 4.0 | % | N/A | N/A | |||||||||||||||||||
Leverage | 76,739 | 12.1 | % | 25,468 | 4.0 | % | N/A | N/A | |||||||||||||||||||
Nicolet National Bank | |||||||||||||||||||||||||||
Total capital | $ | 74,586 | 15.6 | % | $ | 38,340 | 8.0 | % | $ | 47,925 | 10.0 | % | |||||||||||||||
Tier I capital | 68,687 | 14.3 | % | 19,170 | 4.0 | % | 28,755 | 6.0 | % | ||||||||||||||||||
Leverage | 68,687 | 11.1 | % | 24,831 | 4.0 | % | 31,039 | 5.0 | % | ||||||||||||||||||
As of December 31, 2010 | |||||||||||||||||||||||||||
Nicolet | |||||||||||||||||||||||||||
Total capital | $ | 72,635 | 13.8 | % | $ | 42,056 | 8.0 | % | N/A | N/A | |||||||||||||||||
Tier I capital | 66,259 | 12.6 | % | 21,028 | 4.0 | % | N/A | N/A | |||||||||||||||||||
Leverage | 66,259 | 9.9 | % | 26,798 | 4.0 | % | N/A | N/A | |||||||||||||||||||
Nicolet National Bank | |||||||||||||||||||||||||||
Total capital | $ | 65,796 | 13.0 | % | $ | 40,623 | 8.0 | % | $ | 50,779 | 10.0 | % | |||||||||||||||
Tier I capital | 59,420 | 11.7 | % | 20,312 | 4.0 | % | 30,768 | 6.0 | % | ||||||||||||||||||
Leverage | 59,420 | 9.2 | % | 25,958 | 4.0 | % | 32,447 | 5.0 | % |
(1) | The total capital ratio is defined as tier1 capital plus tier 2 capital divided by total risk-weighted assets. The tier 1 capital ratio is defined as tier1 capital divided by total risk-weighted assets. The leverage ratio is defined as tier1 capital divided by the most recent quarter’s average total assets. |
(2) | Prompt corrective action provisions are not applicable at the bank holding company level. |
A source of income and funds for Nicolet are dividends from Nicolet National Bank. Dividends declared by Nicolet National Bank that exceed the retained net income for the most current year plus retained net income for the preceding two years must be approved by federal regulatory agencies. At December 31, 2011, Nicolet National Bank could pay dividends of approximately $3,585 without seeking regulatory approval.
Effects of Inflation
The effect of inflation on a financial institution differs significantly from the effect on an industrial company. While a financial institution’s operating expenses, particularly salary and employee benefits, are affected by general inflation, the asset and liability structure of a financial institution consists largely of monetary items. Monetary items, such as cash, loans and deposits, are those assets and liabilities which are or will be converted into a fixed number of dollars regardless of changes in prices. As a result, changes in interest rates have a more significant impact on a financial institution’s performance than does general inflation. For additional information regarding interest rates and changes in net interest income see “Liquidity and Interest Rate Sensitivity.”
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Selected Quarterly Financial Data
The following is selected financial data summarizing the results of operations for each quarter in the years ended December 31, 2011, 2010 and 2009:
Table 21: Selected Quarterly Financial Data
(dollars in thousands, except per share data)
(dollars in thousands, except per share data)
2011 Quarter Ended | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31, | September 30, | June 30, | March 31, | ||||||||||||||||
Interest income | $ | 7,162 | $ | 7,310 | $ | 7,427 | $ | 7,931 | |||||||||||
Interest expense | 1,932 | 2,060 | 2,074 | 2,317 | |||||||||||||||
Net interest income | 5,230 | 5,250 | 5,353 | 5,614 | |||||||||||||||
Provision for loan losses | 1,800 | 1,500 | 1,800 | 1,500 | |||||||||||||||
Noninterest income | 2,428 | 2,137 | 1,914 | 1,965 | |||||||||||||||
Noninterest expense | 5,155 | 5,487 | 5,338 | 5,463 | |||||||||||||||
Net income | 508 | 343 | 210 | 429 | |||||||||||||||
Net income (loss) available to common equity | 203 | (321 | ) | (36 | ) | 182 | |||||||||||||
Basic and diluted earnings (loss) per common share | 0.06 | (0.09 | ) | (0.01 | ) | 0.05 |
2010 Quarter Ended | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31, | September 30, | June 30, | March 31, | ||||||||||||||||
Interest income | $ | 7,977 | $ | 8,212 | $ | 7,680 | $ | 7,550 | |||||||||||
Interest expense | 2,610 | 2,825 | 2,778 | 3,078 | |||||||||||||||
Net interest income | 5,367 | 5,387 | 4,902 | 4,472 | |||||||||||||||
Provision for loan losses | 4,000 | 1,500 | 1,500 | 1,500 | |||||||||||||||
Noninterest income | 2,925 | 2,333 | 1,872 | 1,838 | |||||||||||||||
Noninterest expense | 4,955 | 5,247 | 4,462 | 4,651 | |||||||||||||||
Net income | (318 | ) | 670 | 572 | 187 | ||||||||||||||
Net income (loss) available to common equity | (565 | ) | 423 | 326 | (60 | ) | |||||||||||||
Basic and diluted earnings (loss) per common share | (0.16 | ) | 0.12 | 0.09 | (0.01 | ) |
For the Nine Month Periods Ended September 30, 2012 and 2011
Basis of Accounting and Critical Accounting Policies
The consolidated financial statements of Nicolet Bankshares, Inc. and its subsidiaries are prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the industry in which Nicolet operates. The financial condition and results of operations presented in the consolidated financial statements, accompanying notes to the consolidated financial statements, selected financial data appearing elsewhere within this report, and management’s discussion and analysis are dependent upon Nicolet’s accounting policies. The selection and application of these accounting policies involve judgments about matters that affect the amounts reported in the financial statements and accompanying notes, and may require management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Nicolet made no significant changes in its critical accounting policies and significant estimates from those disclosed in its attached 2011 consolidated financial statements. The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes.
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Overview
During the first nine months of 2012, Nicolet benefited from contributions of its new Appleton branch opened in December 2011 (adding to both loan and deposit growth), from steady growth in customer deposits, particularly resulting from a new checking product introduced in mid-2011, very strong secondary mortgage fee income from higher refinances than the prior year, and quality loan growth and increased commercial line of credit usage. Additionally, Nicolet continued to aggressively work through its asset quality, with nonperforming loans declining, except for the addition in March 2012 to nonaccrual loans of a large credit relationship with strong collateral of approximately $8.5 million which remained in nonaccrual status at September 30, 2012. Given significantly lower net loan charge offs ($2.8 million for the first nine months of 2012 versus $7.7 million for the first nine months of 2011), Nicolet recognized lower provision for loan losses of $3.3 million for the nine months ended September 30, 2012, compared to $4.8 million for the comparable nine month period in 2011.
Unless otherwise noted, all remaining information included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations is shown in thousands, except per share data.
The following management’s discussion and analysis is presented to assist in the understanding and evaluation of Nicolet’s consolidated financial condition as of September 30, 2012 and December 31, 2011 and results of operations for the three-month and nine-month periods ended September 30, 2012 and 2011. It is intended to supplement the unaudited consolidated financial statements, condensed footnotes, and supplemental financial data appearing elsewhere in this document.
Performance Summary
For the first nine months of 2012, Nicolet reported $2,099 of net income, up $1,117 over the 2011 comparable period. Net income available to common shareholders for this same period, was $1,184, or $0.34 per diluted common share, compared to a net loss available to common shareholders of $174, or $0.05 per share, for the first nine months of 2011. The 2011 results included $396 in accelerated discount accretion resulting from the repayment of Nicolet’s TARP senior preferred stock on September 1, 2011.
For the three months ended September 30, 2012, Nicolet reported net income of $965 and net income available to common shareholders of $660, or $0.19 per common share, compared to net income of $343 but a net loss to common shareholders of $320 (after $664 of preferred stock dividends and discount accretion, inflated for the accelerated accretion noted above), or $0.09 per common share net loss, in the comparable 2011 period.
Key financial data includes:
• | For the first nine months of 2012 versus 2011, net income benefited from higher loan volumes though at lower yields than the prior year, growth in the mix of lower costing deposits, strong secondary market mortgage fee income due to increased refinance volume and a lower provision for loan losses, offset by growing expenses attributable to costs of its new branch that opened in December 2011, and higher personnel costs from a larger work force and higher incentives due to improved financial performance in 2012. |
• | For the three months ended September 30, 2012 versus 2011, net income benefited mainly from lower interest expense, lower provision for loan loss, and strong mortgage fee income, offset by higher noninterest expense, again concentrated in personnel costs. |
• | The provision for loan losses was $3,350 for the first nine months of 2012, exceeding net charge-offs of $2,759; comparatively, the provision for the first nine months of 2011 was $4,800, against $7,690 in net charge offs, primarily as issues contemplated by Nicolet’s management on certain impaired loans that were reserved for in late 2010 came to fruition in early 2011. The provision for loan losses was $975 for the third quarter of 2012, compared with $1,500 for the same period in 2011. The 2012 provision was positively impacted by reduced loan impairments between the years. The ALLL to total loans ratio at September 30, 2012 was 1.19% compared to 1.25% at December 31, 2011. |
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• | Net interest income of $16,053 for the nine months ended September 30, 2012 decreased by $164, or 1.0%, from the same period in 2011, as a favorable variance in interest expense (down $1,444) was slightly more than offset by the decline in interest income (down $1,608). Net interest income for the third quarter of 2012 was $5,650, down $400 from third quarter 2011, of which interest expense was favorable by $497 between the comparable third quarters. |
• | The net interest margin for the first nine months of 2012 was 3.59%, 17 bps lower than the comparable margin last year. The margin contraction comes largely from downward pressure on earning asset yields (down 54 bps to 4.68% for the first nine months of 2012, led by a 40 bps decline in loan yield to 5.15% and a higher mix of low-earning cash balances between the periods), while Nicolet’s cost of funds continued a favorable decline (down 38 bps to 1.32%, mainly from a dramatic decline in the volume and cost of brokered deposits between the nine month periods). For the third quarter of 2012, the net interest margin was 3.67%, with a 4.67% earning asset yield and a 1.19% cost of funds, compared to 3.71%, 5.14% and 1.68%, respectively, for third quarter 2011. |
• | Total assets were $682,802 at September 30, 2012, 1% higher than at December 31, 2011. However, the asset mix at September 30, 2012 reflected a greater percentage of loans than cash as compared to the asset mix at December 31, 2011. Loans were $545,708 at September 30, 2012, $73,219 higher than at December 31, 2011, funded mainly by cash and cash equivalents which declined $64,577. There was moderate and improving loan demand in the markets and higher commercial line of credit usage since December 31, 2011. |
• | Total deposits were $554,858 at September 30, 2012, up $3,322, or 1%, from December 31, 2011. Typically there is a pattern in Nicolet’s deposit base where deposits are at their lowest point in September and at their highest point in December. On average, total deposits for the first nine months of 2012 were $531,795, up $7,068 over average deposits for the first nine months of 2011. |
• | Noninterest income for the nine months ended September 30, 2012 was $7,986. This is an increase of $1,971, or 32.8%, compared to the nine months ended September 30, 2011. The most significant increase was in mortgage fee income (up $1,410) which continues to experience significant activity in the current low rate environment. |
• | For the nine months ended September 30, 2012, noninterest expense increased $1,435, or 8.8%, to $17,722 compared to $16,288 for the nine month period ended September 30, 2011. The most significant increase was in salaries and benefits and data processing expenses. These costs are consistent with Nicolet’s future strategic plans. |
Net Interest Income
Net interest income is the primary source of Nicolet’s revenue. Net interest income, which is the difference between interest earned on loans, investments and other earning assets and the interest paid on deposits and other interest-bearing liabilities, is directly impacted by the sensitivity of the balance sheet to changes in interest rates and by the amount and composition of interest earning assets and interest-bearing liabilities, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities, and repricing frequencies.
Comparison of nine months ended September 30, 2012 versus September 30, 2011
Net interest income in the consolidated statements of income (which excludes the taxable equivalent adjustment) was $16,053 and $16,217 for the nine months ending September 30, 2012 and 2011, respectively. Taxable equivalent adjustments (adjustments to bring tax-exempt interest to a level that would yield the same after-tax income had that been subject to a 34% tax rate) were $464 and $497 for the nine months ending September 30, 2012 and 2011, respectively, resulting in taxable equivalent net interest income of $16,517 and $16,714 for the nine months ending September 30, 2012 and 2011.
For the first nine months of 2012 versus 2011, net interest income benefited from higher loan volumes though at lower yields than the prior year and beneficial growth in the mix of lower costing deposits. The net interest margin for the first nine months of 2012 was 3.59%, 17 bps lower than the comparable margin last
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year. Taxable-equivalent net interest income was $16,517 for the first nine months of 2012, which is a decrease of $197 from the same period in 2011. The margin contraction comes largely from downward pressure on earning asset yields which were down 54 bps to 4.68% for the first nine months of 2012 compared to the same period in 2011. This decline was led by a 40 bps decline in loan yield to 5.15% and a higher mix of low-earning cash balances between the periods.
Nicolet’s cost of funds continued a favorable decline, decreasing 38 bps to 1.32%. This decrease was mainly attributable to a dramatic decline in the volume and cost of brokered deposits between the nine month periods providing a favorable variance to net interest expense of $1,493. The cost of the remaining interest-bearing customer deposits combined (i.e. savings, interest-bearing demand, MMA and time deposits) remained stable, showing a slight unfavorable variance in expense of $73 over the same nine month period in 2011.
Average earning assets were $606,227 for the nine months ending September 30, 2012, compared to $586,540 for the same period in 2011. The increase was primarily from increases in lower interest-bearing cash balances. Loans were declining during the first nine months of 2011 but increasing during the first nine months of 2012 reflecting a similar average balance but with opposite directional trends ending with strong loan growth in 2012. Average interest-bearing liabilities were $502,011 and $505,639 for the nine months ending September 30, 2012 and 2011, respectively.
Comparison of three months ended September 30, 2012 versus September 30, 2011
Net interest income in the consolidated statements of income (which excludes the taxable equivalent adjustment) was $5,650 and $5,250 for the three months ending September 30, 2012 and 2011, respectively. Taxable equivalent adjustments (adjustments to bring tax-exempt interest to a level that would yield the same after-tax income had that been subject to a 34% tax rate) were $147 and $166 for the three months ending September 30, 2012 and 2011, respectively, resulting in taxable equivalent net interest income of $5,797 and $5,416 for the three months ending September 30, 2012 and 2011.
For the third quarter of 2012, the net interest margin was 3.67%, with a 4.67% earning asset yield and a 1.19% cost of funds, compared to 3.71%, 5.14% and 1.68%, respectively, for third quarter 2011. Net interest income for the third quarter of 2012 was $5,797, down $381 from third quarter 2011. Significant favorable volume variances in loans were not enough to offset the continued unfavorable rate variances and total earning assets reflect a decline of $116 in interest income compared to the third quarter of 2011.
Interest expense was favorable by $497 between the comparable third quarters the majority of benefit being reflected in the reductions in brokered deposits. Favorable rate variances continue to be seen in the remaining interest-bearing customer deposits combined.
Average earning assets were $617,172 for the three months ending September 30, 2012, compared to $569,040 for the same quarter in 2011. The increase was primarily from increases in loans. Average interest-bearing liabilities were $469,680 and $440,268 for the quarters ending September 30, 2012 and 2011, respectively, largely from the bigger customer deposit base.
Tables 1 through 4 set forth information to facilitate the review and discussion of selected average balance sheet items, taxable equivalent net interest income, volume and rate differences, interest rate spread and net interest margin.
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Table 1: Year-To-Date Net Interest Income Analysis
(dollars in thousands)
(dollars in thousands)
For the Nine Months Ended September 30, | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2012 | 2011 | ||||||||||||||||||||||||||
Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | ||||||||||||||||||||||
ASSETS | |||||||||||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||||||||||
Loans, net of unearned income (1)(2) | $ | 509,536 | $ | 19,916 | 5.15 | % | $ | 510,852 | $ | 21,442 | 5.55 | % | |||||||||||||||
Taxable securities | 23,066 | 450 | 2.56 | % | 20,678 | 515 | 3.27 | % | |||||||||||||||||||
Tax-exempt securities | 32,400 | 1,001 | 4.06 | % | 32,600 | 1,094 | 4.41 | % | |||||||||||||||||||
Other interest-earning assets | 41,225 | 156 | 0.70 | % | 22,410 | 114 | 0.67 | % | |||||||||||||||||||
Total interest-earning assets | 606,227 | $ | 21,523 | 4.68 | % | 586,540 | $ | 23,165 | 5.22 | % | |||||||||||||||||
Cash and due from banks | 7,740 | 14,919 | |||||||||||||||||||||||||
Other assets | 45,432 | 40,839 | |||||||||||||||||||||||||
Total assets | $ | 659,400 | $ | 642,298 | |||||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||||||||||
Interest-bearing deposits | |||||||||||||||||||||||||||
Savings | $ | 29,767 | $ | 99 | 0.44 | % | $ | 15,693 | $ | 28 | 0.24 | % | |||||||||||||||
Interest-bearing demand | 86,602 | 617 | 0.95 | % | 60,712 | 262 | 0.57 | % | |||||||||||||||||||
Money Markets | 161,664 | 580 | 0.48 | % | 155,327 | 898 | 0.77 | % | |||||||||||||||||||
Core CD’s and IRA’s | 136,907 | 1,875 | 1.82 | % | 155,678 | 1,910 | 1.63 | % | |||||||||||||||||||
Brokered deposits | 40,395 | 458 | 1.51 | % | 72,063 | 1,950 | 3.61 | % | |||||||||||||||||||
Total interest-bearing deposits | 455,335 | 3,629 | 1.06 | % | 459,474 | 5,048 | 1.46 | % | |||||||||||||||||||
Other interest-bearing liabilities | 46,676 | 1,377 | 3.88 | % | 46,165 | 1,403 | 3.99 | % | |||||||||||||||||||
Total interest-bearing liabilities | $ | 502,011 | $ | 5,006 | 1.32 | % | $ | 505,639 | $ | 6,451 | 1.70 | % | |||||||||||||||
Non-interest-bearing deposits | 76,460 | 65,253 | |||||||||||||||||||||||||
Other liabilities | 4,602 | 4,221 | |||||||||||||||||||||||||
Stockholders’ equity | 76,328 | 67,185 | |||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 659,400 | $ | 642,298 | |||||||||||||||||||||||
Net interest income and interest-rate spread | $ | 16,517 | 3.36 | % | $ | 16,714 | 3.52 | % | |||||||||||||||||||
Net interest margin | 3.59 | % | 3.76 | % |
(1) | Nonaccrual loans are included in the daily average loan balances outstanding. |
(2) | Interest income includes loan fees of $100 in 2012 and $300 in 2011. |
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Table 2: Volume/Rate Variance
(dollars in thousands)
(dollars in thousands)
Comparison of nine months ended September 30, 2012 versus 2011
Volume | Rate (1) | Net | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Loans (1) | $ | (69 | ) | $ | (1,457 | ) | $ | (1,526 | ) | |||||
Investment securities | ||||||||||||||
Taxable | 73 | (138 | ) | (65 | ) | |||||||||
Tax-exempt | (9 | ) | (84 | ) | (93 | ) | ||||||||
Other interest-earning assets | 34 | 8 | 42 | |||||||||||
Total earning assets | $ | 30 | $ | (1,672 | ) | $ | (1,642 | ) | ||||||
Interest-bearing demand | $ | 141 | $ | (70 | ) | $ | 71 | |||||||
Savings deposits | 36 | 319 | 355 | |||||||||||
Money Markets | 35 | (353 | ) | (318 | ) | |||||||||
Core CD’s and IRA’s | (245 | ) | 210 | (35 | ) | |||||||||
Brokered deposits | (645 | ) | (848 | ) | (1,492 | ) | ||||||||
Total interest-bearing deposits | (677 | ) | (742 | ) | (1,419 | ) | ||||||||
Other interest-bearing liabilities | 9 | (35 | ) | (26 | ) | |||||||||
Total interest-bearing liabilities | (668 | ) | (777 | ) | (1,445 | ) | ||||||||
Net interest income | $ | 698 | $ | (895 | ) | $ | (197 | ) |
(1) | Nonaccrual loans are included in the daily average loan balances outstanding. |
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Table 3: Quarterly Net Interest Income Analysis
(dollars in thousands)
(dollars in thousands)
For the Three Months Ended September 30, | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2012 | 2011 | ||||||||||||||||||||||||||
Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | ||||||||||||||||||||||
ASSETS | |||||||||||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||||||||||
Loans, net of unearned income (1)(2) | $ | 538,989 | $ | 6,852 | 4.97 | % | $ | 491,361 | $ | 6,902 | 5.50 | % | |||||||||||||||
Taxable securities | 24,331 | 149 | 2.40 | % | 20,953 | 173 | 3.24 | % | |||||||||||||||||||
Tax-exempt securities | 32.412 | 318 | 3.84 | % | 32,961 | 362 | 4.30 | % | |||||||||||||||||||
Other interest-earning assets | 21,439 | 41 | 0.74 | % | 23,766 | 39 | 0.63 | % | |||||||||||||||||||
Total interest-earning assets | 617,172 | $ | 7,360 | 4.67 | % | 569,040 | 7,476 | 5.14 | % | ||||||||||||||||||
Cash and due from banks | 14,654 | 17,404 | |||||||||||||||||||||||||
Other assets | 46,406 | 42,477 | |||||||||||||||||||||||||
Total assets | $ | 678,232 | $ | 628,921 | |||||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||||||||||
Interest-bearing deposits | |||||||||||||||||||||||||||
Savings | $ | 35,358 | $ | 40 | 0.45 | % | $ | 16,765 | $ | 11 | 0.27 | % | |||||||||||||||
Interest-bearing demand | 91,455 | 228 | 0.99 | % | 63,322 | 108 | 0.67 | % | |||||||||||||||||||
Money Markets | 156,079 | 177 | 0.45 | % | 148,613 | 254 | 0.68 | % | |||||||||||||||||||
Core CD’s and IRA’s | 132,153 | 584 | 1.75 | % | 150,192 | 697 | 1.84 | % | |||||||||||||||||||
Brokered CD’s | 54,634 | 83 | 0.60 | % | 61,375 | 519 | 3.36 | % | |||||||||||||||||||
Total interest-bearing deposits | 469,680 | 1,113 | 0.94 | % | 440,268 | 1,588 | 1.43 | % | |||||||||||||||||||
Other interest-bearing liabilities | 47,275 | 450 | 3.72 | % | 45,512 | 471 | 4.05 | % | |||||||||||||||||||
Total interest-bearing liabilities | $ | 516,955 | $ | 1,563 | 1.19 | % | $ | 485,780 | $ | 2,060 | 1.68 | % | |||||||||||||||
Non-interest-bearing deposits | 79,905 | 69,111 | |||||||||||||||||||||||||
Other liabilities | 5,024 | 4,627 | |||||||||||||||||||||||||
Stockholders’ equity | 76,349 | 69,404 | |||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 678,232 | $ | 628,921 | |||||||||||||||||||||||
Net interest income and interest-rate spread | $ | 5,797 | 3.47 | % | $ | 5,416 | 3.46 | % | |||||||||||||||||||
Net interest margin | 3.67 | % | 3.71 | % |
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Table 4: Volume/Rate Variance
(dollars in thousands)
(dollars in thousands)
Comparison of three months ended September 30, 2012 versus 2011
Volume | Rate (1) | Net | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Loans (1) | $ | 626 | $ | (676 | ) | $ | (50 | ) | ||||||
Taxable securities | 58 | (82 | ) | (24 | ) | |||||||||
Tax-exempt securities | (23 | ) | (21 | ) | (44 | ) | ||||||||
Other interest-earning assets | — | 2 | 2 | |||||||||||
Total earning assets | $ | 662 | $ | (778 | ) | $ | (116 | ) | ||||||
Interest-bearing demand | $ | 59 | $ | (29 | ) | $ | 29 | |||||||
Savings deposits | 18 | 103 | 120 | |||||||||||
Money Markets | 12 | (89 | ) | (76 | ) | |||||||||
Core CD’s and IRA’s | (81 | ) | (32 | ) | (113 | ) | ||||||||
Brokered deposits | (52 | ) | (385 | ) | (436 | ) | ||||||||
Total interest-bearing deposits | (44 | ) | (432 | ) | (476 | ) | ||||||||
Other interest-bearing liabilities | 2 | (24 | ) | (21 | ) | |||||||||
Total interest-bearing liabilities | (41 | ) | (456 | ) | (497 | ) | ||||||||
Net interest income | $ | 703 | $ | (322 | ) | $ | 381 |
(1) | Nonaccrual loans are included in the daily average loan balances outstanding. |
Provision for Loan Losses
The provision for loan losses for the nine months ended September 30, 2012 and 2011 was $3,350 and $4,800 respectively. The provision for loan losses for the three months ended September 30, 2012 and 2011 was $975 and $1,500, respectively. While decreasing, the level of provision remains higher to accommodate continued loan-workout and loan growth. Net charge-offs were $529 and $1,656 for the third quarter ended September 30, 2012 and 2011, respectively. The decrease in net charge-offs in 2012 was primarily due to aggressive work-out of problem loans occurring in 2011 resulting in overall improved asset quality. At September 30, 2012, December 31, 2011 and September 30, 2011, the ALLL was $6,491, $5,899 and $5,746, respectively. The ratio of the ALLL to total loans for the same period ends was 1.19%, 1.25% and 1.19%, respectively. Nonperforming loans at September 30, 2012, were $15,152, compared to $11,826 at September 30, 2011 representing 2.8% and 2.5% of total loans, respectively, with nonperforming loans at September 30, 2012 including one large credit relationship with strong collateral of approximately $8,800.
The provision for loan losses is predominantly a function of Nicolet’s methodology and judgment as to qualitative and quantitative factors used to determine the adequacy of the ALLL. The adequacy of the allowance is affected by changes in the size and character of the loan portfolio, changes in levels of impaired and other nonperforming loans, historical losses and delinquencies in each portfolio segment, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing and future economic conditions, the fair value of underlying collateral, and other factors which could affect potential credit losses. For additional information regarding asset quality and the ALLL, see sections “Financial Condition —Loans,” “—Allowance For Loan Losses,” and “—Impaired Loans and Nonperforming Assets.”
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Noninterest Income
Table 5: Noninterest Income
(dollars in thousands)
(dollars in thousands)
Three months ended | Nine months ended | ||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
September 30, 2012 | September 30, 2011 | $ Change | % Change | September 30, 2012 | September 30, 2011 | $ Change | % Change | ||||||||||||||||||||||||||||
Service charges on deposit accounts | $ | 293 | $ | 281 | $ | 12 | 4.3 | % | $ | 859 | $ | 886 | $ | (27 | ) | (3.0 | )% | ||||||||||||||||||
Trust services fee income | 759 | 743 | 16 | 2.2 | % | 2,213 | 2,231 | (18 | ) | (0.8 | )% | ||||||||||||||||||||||||
Mortgage fee income | 846 | 410 | 436 | 106.3 | % | 2,254 | 844 | 1,410 | 167.1 | % | |||||||||||||||||||||||||
Brokerage fee income | 77 | 77 | — | — | 241 | 258 | (17 | ) | (6.6 | )% | |||||||||||||||||||||||||
Gain on sale, disposal and writedown of assets, net | 5 | 54 | (49 | ) | (90.7 | )% | 388 | 59 | 329 | 557.6 | % | ||||||||||||||||||||||||
Bank owned life insurance | 186 | 146 | 40 | 27.4 | % | 523 | 433 | 90 | 20.8 | % | |||||||||||||||||||||||||
Rent income | 264 | 237 | 27 | 11.4 | % | 744 | 717 | 27 | 3.8 | % | |||||||||||||||||||||||||
Investment advisory fees | 82 | 79 | 3 | 3.8 | % | 254 | 246 | 8 | 3.3 | % | |||||||||||||||||||||||||
Other | 173 | 110 | 63 | 57.3 | % | 509 | 341 | 168 | 49.3 | % | |||||||||||||||||||||||||
Total noninterest income | $ | 2,685 | $ | 2,137 | $ | 548 | 25.6 | % | $ | 7,985 | $ | 6,015 | $ | 1,970 | 32.8 | % |
Comparison of nine months ended September 30, 2012 versus the nine months ended September 30, 2011
Noninterest income for the first nine months of 2012 was $7,985, up $1,970, or 33%, from the same period in 2011, largely attributable to mortgage banking income which was $2,254, up $1,410 over the comparable period in 2011, which had a slower pace of refinance activity. Mortgage banking income represents net gains received from the sale of residential real estate loans sold (service-released) into the secondary market. Service fees on deposit accounts for the first nine months of 2012 were $859, down $27, or 3%, from the comparable 2011 period, primarily in NSF fees. For the first nine months of 2012, Nicolet recognized a $388 net gain on the sale of assets, as a result of securities sales to recognize accumulated increases, offset by OREO sale losses. Bank-owned life insurance (“BOLI”) income for the first nine months of 2012 was $523, up $90, or 21%, due to a new BOLI investment purchased in the first quarter of 2012. Other income was $509, up $168 over the first nine months of 2011, primarily from higher ancillary fees tied to deposits, such as debit card income and wire transfer fees.
Comparison of three months ended September 30, 2012 versus the three months ended September 30, 2011
Total noninterest income for the quarter ended September 30, 2012 was $2,685 compared to $2,137 during the September 30, 2011 quarter, an increase of $548, or 26%. Third quarter 2012 noninterest income increased primarily due to increased mortgage fee income and other income. The remaining noninterest income categories were relatively stable or slightly improved.
Noninterest Expense
Table 6: Noninterest Expense
(dollars in thousands)
(dollars in thousands)
Three months ended | Nine months ended | ||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
September 30, 2012 | September 30, 2011 | $ Change | % Change | September 30, 2012 | September 30, 2011 | $ Change | % Change | ||||||||||||||||||||||||||||
Salaries and employee benefits | $ | 3,325 | $ | 2,926 | $ | 399 | 13.6 | % | $ | 9,991 | $ | 8,681 | $ | 1,310 | 15.1 | % | |||||||||||||||||||
Occupancy, equipment and office | 1,093 | 1,108 | (15 | ) | (1.3 | ) | 3,334 | 3,287 | 47 | 1.4 | |||||||||||||||||||||||||
Business development and marketing | 438 | 326 | 112 | 34.4 | 1,134 | 962 | 172 | 17.9 | |||||||||||||||||||||||||||
Data processing | 444 | 348 | 96 | 27.6 | 1,255 | 1,026 | 229 | 22.3 | |||||||||||||||||||||||||||
FDIC assessments | 134 | 134 | — | — | 408 | 504 | (96 | ) | (19.0 | ) | |||||||||||||||||||||||||
Core deposit intangible amortization | 154 | 178 | (24 | ) | (13.5 | ) | 490 | 573 | (83 | ) | (14.5 | ) | |||||||||||||||||||||||
Other | 340 | 467 | (127 | ) | (27.2 | ) | 1,110 | 1,255 | (145 | ) | (11.6 | ) | |||||||||||||||||||||||
Total noninterest expense | $ | 5,928 | $ | 5,487 | $ | 441 | 8.0 | % | $ | 17,722 | $ | 16,288 | $ | 1,434 | 8.8 | % |
124
Comparison of nine months ended September 30, 2012 versus the nine months ended September 30, 2011
Total noninterest expense was $17,722 for the first nine months of 2012, an increase of $1,434, or 9%, compared to the first nine months of 2011, in part due to carrying costs related to the new branch opened in December 2011. The majority of the noninterest expense increase was due to increased salaries and employee benefits of $1,310, or 15%, higher than the first nine months of 2011, mainly from carrying a larger work force and higher incentives due to improved financial performance in 2012. Data processing increased mainly from the conversion of Nicolet trust system platform in mid-2012. Business development and marketing increased with more loan and deposit gathering initiatives and events in 2012.
Comparison of three months ended September 30, 2012 versus the nine months ended September 30, 2011
Noninterest expense for the third quarter of 2012 increased $441, or 8%, compared to the third quarter of 2011. Salaries and employee benefits increased in conjunction with the growth plans of Nicolet, and data processing costs, business development and marketing expenses increased as a result of asset and customer growth over the prior year. Costs related to occupancy, core deposit intangible amortization and other expenses were reduced.
Income Taxes and Deferred Tax Asset
Nicolet recorded income tax expense of $453 for the third quarter of 2012, compared to $54 for the third quarter of 2011. For the first nine months of 2012, income tax expense totaled $828 compared with expense of $133 for the same period of 2011. The increase in tax expense for the three months and nine months ended September 30, 2012 was due to increased taxable income compared to the 2011 periods.
Under GAAP, Nicolet must periodically analyze its deferred tax asset to determine if a valuation allowance is required. A valuation allowance is required to be recognized if it is “more likely than not” that such deferred tax assets will not be realized. In making that determination, management is required to evaluate both positive and negative evidence, including recent historical financial performance, forecasts of future income, tax planning strategies and assessments of the current and future economic and business conditions. Based upon consideration of the available evidence, including historical losses, which must be treated as substantial negative evidence, and the potential of future taxable income, no valuation allowance was determined to be necessary at September 30, 2012 or 2011, other than for state NOL carry forwards expected to expire unused.
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FINANCIAL CONDITION
Investment Securities Portfolio
The investment securities portfolio is intended to provide Nicolet National Bank with adequate liquidity, flexible asset/liability management and a source of stable income. The portfolio is structured with minimum credit exposure to Nicolet National Bank. All securities are classified as available-for-sale and are carried at fair market value. Unrealized gains and losses are excluded from earnings, but are reported as other comprehensive income in a separate component of stockholders’ equity, net of income tax. Premium amortization and discount accretion are recognized as adjustments to interest income using the interest method. Realized gains or losses on sales are based on the net proceeds and the adjusted carrying value amount of the securities sold using the specific identification method.
Table 7: Investments
(dollars in thousands)
(dollars in thousands)
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
September 30, 2012 | ||||||||||||||||||
State, county and municipals | $ | 32,315 | $ | 1,304 | $ | — | $ | 33,619 | ||||||||||
Mortgage-backed securities | 17,412 | 951 | — | 18,363 | ||||||||||||||
U.S. Government sponsored enterprises | 2,499 | 4 | — | 2,503 | ||||||||||||||
Equity securities | 1,624 | 966 | — | 2,590 | ||||||||||||||
$ | 53,850 | $ | 3,225 | $ | — | $ | 57,075 |
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Values | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31, 2011 | ||||||||||||||||||
State, county and municipals | $ | 30,130 | $ | 1,718 | $ | — | $ | 31,848 | ||||||||||
Mortgage-backed securities | 17,450 | 1,042 | 7 | 18,484 | ||||||||||||||
U.S. Government sponsored enterprises | 4,995 | 24 | — | 5,020 | ||||||||||||||
Equity securities | 1,624 | — | 217 | 1,407 | ||||||||||||||
$ | 54,199 | $ | 2,784 | $ | 224 | $ | 56,759 |
At September 30, 2012, the total carrying value of investment securities was $57,075, an increase of $316, or 0.6%, compared to December 31, 2011, and represented 8.4% of total assets. Primarily due to weak investment returns in 2012, much of Nicolet’s excess liquidity was held in low-rate cash accounts rather than committing funds to longer term investments in this low rate environment.
At September 30, 2012, the securities portfolio did not contain securities of any single issuer that were payable from and secured by the same source of revenue or taxing authority where the aggregate carrying value of such securities exceeded 10% of shareholders’ equity.
Loans
Total loans were $545,708 at September 30, 2012, an increase of $73,219, or 15.5%, from December 31, 2011. This increase was primarily the result of increased commercial lines and industrial loans, and residential first mortgage loans, which increased by $47,352 and $23,150, respectively, as a result of increased borrower demand, maintaining selected residential mortgages in the portfolio, and active marketing for new loans in Nicolet’s various markets.
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Table 8: Loan Composition
(dollars in thousands)
(dollars in thousands)
As of | |||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | September 30, 2011 | |||||||||||||||||||||||||||||||||||||||
Amount | % of Total | Amount | % of Total | Amount | % of Total | Amount | % of Total | Amount | % of Total | ||||||||||||||||||||||||||||||||||
Commercial & Industrial | $ | 201,363 | 36.9 | % | $ | 199,212 | 38.5 | % | $ | 168,808 | 34.9 | % | $ | 154,011 | 32.6 | % | $ | 157,989 | 33.0 | % | |||||||||||||||||||||||
CRE Owner-occupied | 112,040 | 20.5 | 116,451 | 22.5 | 114,037 | 23.6 | 111,179 | 23.5 | 110,451 | 23.1 | |||||||||||||||||||||||||||||||||
CRE Investment | 71,520 | 13.1 | 62,857 | 12.2 | 62,797 | 13.0 | 66,577 | 14.1 | 65,966 | 13.8 | |||||||||||||||||||||||||||||||||
Construction & Land Development | 26,964 | 5.0 | 24,612 | 4.8 | 27,934 | 5.8 | 24,774 | 5.2 | 27,360 | 5.7 | |||||||||||||||||||||||||||||||||
Residential Construction | 7,670 | 1.4 | 5,961 | 1.2 | 4,143 | 0.9 | 9,363 | 2.0 | 9,794 | 2.0 | |||||||||||||||||||||||||||||||||
Residential First Mortgage | 79,543 | 14.6 | 63,155 | 12.2 | 58,375 | 12.1 | 56,392 | 11.9 | 55,756 | 11.6 | |||||||||||||||||||||||||||||||||
Residential Junior Mortgage | 40,928 | 7.5 | 38,082 | 7.4 | 40,484 | 8.3 | 42,699 | 9.0 | 43,848 | 9.2 | |||||||||||||||||||||||||||||||||
Retail & Other | 5,680 | 1.0 | 6,662 | 1.2 | 7,284 | 1.4 | 7,494 | 1.7 | 7,888 | 1.6 | |||||||||||||||||||||||||||||||||
Total loans | $ | 545,708 | 100.0 | % | $ | 516,992 | 100.0 | % | $ | 483,862 | 100.0 | % | $ | 472,489 | 100.0 | % | $ | 479,052 | 100.0 | % |
Commercial and commercial real estate loans comprised 75.5% of the loan portfolio at September 30, 2012. Such loans are considered to have more inherent risk of default than residential mortgage or installment loans. The commercial balance per borrower is typically larger than for residential and mortgage loans, implying higher potential losses on an individual customer basis. Commercial loan growth throughout 2012 has been positively impacted by generally improving economic conditions and growth in borrower demand in each of Nicolet’s markets, including the development of new borrowing relationships in the market of its new branch opened in December 2011.
Commercial and industrial loans were $201,363 at September 30, 2012, an increase of $47,352, or 31%, since year-end 2011, and comprised 36.9% of total loans. The commercial business loan classification primarily consists of commercial loans to small businesses, multi-family residential income-producing real estate, and loans to municipalities. Loans of this type include a diverse range of industries. Owner-occupied commercial real estate loans primarily consist of loans secured by business real estate that is occupied by borrowers that also have commercial and industrial loans. Owner-occupied commercial real estate loans were $112,040 at September 30, 2012, up $861, or 0.8%, since year-end 2011, and comprised 20.5% of total loans. Both of these loan segments include a diverse range of industries. The credit risk related to commercial loans and owner-occupied commercial real estate loans is largely influenced by general economic conditions and the resulting impact on a borrower’s operations, or on the value of underlying collateral, if any. The increase in these commercial loan segments during 2012 was primarily due to increased loan demand from business borrowers, spurred by generally improving economic conditions, as well as development of new commercial business relationships in all of its markets.
Commercial investment real estate loans totaled $71,520 at September 30, 2012, up $4,943, or 7.4%, from December 31, 2011, and comprised 13.1% of total loans, down from 14.1% at the end of 2011. The investment real estate loan classification primarily includes commercial-based mortgage loans that are secured by non-owner occupied, nonfarm/nonresidential real estate properties, as well as multi-family residential properties. Credit risk is managed by employing sound underwriting guidelines, lending primarily to borrowers in local markets, periodically evaluating the underlying collateral, and formally reviewing the borrower’s financial soundness and overall relationship on an ongoing basis.
Construction and land development loans totaled $26,964 at September 30, 2012, up $2,190, or 8.8%, from December 31, 2011, and comprised 5.0% of total loans, down from 5.2% at the end of 2011. Loans in this classification provide financing for the development of commercial income properties, residential subdivisions and lots, multi-family residential development, and land designated for future development. Nicolet controls the credit risk on these types of loans by making loans in familiar markets, reviewing the merits of individual projects, controlling loan structure, and monitoring the progress of projects through the
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analysis of construction advances. Future lending in this segment will focus on loans that are secured by commercial income-producing properties as opposed to speculative real estate development. Residential construction loans totaled $7,670 at September 30, 2012, down $1,693, or 18.1%, from the prior year end, and comprised 1.4% and 2.0% of total loans outstanding at September 30, 2012 and year end 2011, respectively.
Residential first-mortgage real estate loans increased $23,151, or 41.1%, to $79,543, representing 14.6% and 11.9% of the total loan portfolio at September 30, 2012 and the end of 2011, respectively. Residential first mortgage loans include conventional first-lien home mortgages, not including loans held for sale in the secondary market. Residential junior-mortgage real estate loans declined $1,771, or 4.1%, to $40,928, representing 7.5% and 9.0% of the total loan portfolio as of September 30, 2012 and the end of 2011, respectively. Residential junior-mortgage real estate loans consist of home equity lines and term loans secured by junior mortgage liens. The increase in residential first-lien mortgage loans is due to increased borrower demand for new and refinance loans, driven by stabilizing market values and historically low interest rates. In addition, during 2012, Nicolet elected to expand the quantity and amount of first-lien mortgages held in its own portfolio. As part of its management of originating residential mortgage loans, Nicolet continues to sell the majority of its long-term, fixed-rate residential real estate mortgage loans in the secondary market without retaining the servicing rights. At September 30, 2012, $3,484 of residential mortgages were held for resale in the secondary market, compared to $11,373 at December 31, 2011.
Retail consumer loans totaled $5,680 at September 30, 2012, down $1,814, or 24.2%, compared to December 31, 2011, and represented 1.0% and 1.7% of the loan portfolio at September 30, 2012 and year end 2011, respectively. The decline in aggregate consumer loan balances is largely a result of reduced consumer demand and debt retirement. Loans in this classification include short-term and other personal installment loans not secured by real estate. Credit risk is primarily controlled by reviewing the creditworthiness of the borrowers, monitoring payment histories, and taking appropriate collateral and guaranty positions.
Factors that are important to managing overall credit quality are sound loan underwriting and administration, systematic monitoring of existing loans and commitments, effective loan review on an ongoing basis, early problem loan identification and remedial action to minimize losses, an adequate ALLL, and sound nonaccrual and charge-off policies. An active credit risk management process is used for commercial loans to further ensure that sound and consistent credit decisions are made. The credit management process is regularly reviewed and the process has been modified over the past several years to further strengthen its controls.
The loan portfolio is widely diversified by types of borrowers, industry groups, and market areas. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to multiple numbers of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At September 30, 2012, no significant industry concentrations existed in Nicolet’s portfolio in excess of 25% of total loans. Nicolet National Bank has also developed guidelines to manage its exposure to various types of concentration risks.
Allowance for Loan Losses
Credit risks within the loan portfolio are inherently different for each loan type. Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and on-going review of loan payment performance. Active asset quality administration, including early problem loan identification and timely resolution of problems, aids in the management of credit risk and minimization of loan losses.
At September 30, 2012, the ALLL was $6,491, compared to $5,899 at December 31, 2011. The ALLL as a percentage of total loans was 1.19% and 1.25% at September 30, 2012 and December 31, 2011, respectively. The provision for loan losses for the first nine months of 2012 was $3,350, compared to $4,800 for the first nine months of 2011. Net charge-offs were $2,758 for the nine months ended September 30, 2012, compared to $7,690 for the comparable period in 2011. The ALLL for individually evaluated impaired loans was $165 and $591 at September 30, 2012 and December 31, 2011, respectively, or 1.1% and 6.1% of the respective impaired loan balances.
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The ALLL is established through a provision for loan losses charged to expense to appropriately provide for potential credit losses in the existing loan portfolio. Loans are charged against the ALLL when management believes that the collection of principal is unlikely. The level of the ALLL represents management’s estimate of an amount of reserves that provides for estimated probable credit losses in the loan portfolio at the balance sheet date. To assess the ALLL, 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 and forecasted economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect potential credit losses. Nicolet’s methodology reflects guidance by regulatory agencies to all financial institutions.
The ALLL was 42.8% and 62.3% of nonperforming loans at September 30, 2012 and December 31, 2011, respectively. Gross charge-offs were $2,837 for the first nine months of 2012 compared to $7,743 for the first nine months of 2011, while recoveries for the corresponding periods were $79 and $53, respectively. As a result, net charge-offs at September 30, 2012 were 0.55% of average loans, compared to 1.52% of average loans at September 30, 2011. The decrease in net charge-offs of $4,932 was primarily due a $2,054 decrease in the commercial and industrial loan segment, a $4,023 decrease in the construction and land development loan segment, and net decreases of $85 and $251 in the residential first- and junior lien mortgage segments, respectively. These decreases were partially offset by an $892 increase in the owner-occupied commercial real estate segment, a $305 increase in the investment commercial real estate segment, a $396 increase in the residential construction segment, and a $37 increase in retail and other loans. Nicolet’s improved charge-off experience in 2012 is a result of aggressive recognition of charge-offs in 2011, together with improving asset quality in the current year due to strong efforts to resolve problem loans as well as generally improving economic conditions.
The largest portion of the ALLL at September 30, 2012 was allocated to commercial and industrial loans and was $2,676, an increase of $711 from year-end 2011, and represented 41.2% of the ALLL at September 30, 2012 compared to 33.3% at year-end 2011. The increase in the amount allocated to commercial and industrial loans was attributable to the increase in the balances in the commercial and industrial loan segment, which grew to 36.7% of total loans at September 30, 2012 from 32.6% at year-end 2011. The ALLL allocated to construction and land development loans was $1,904 at September 30, 2012, a decrease of $131 from year-end 2011, and represented 29.3% of the ALLL at September 30, 2012, compared to 34.5% at year-end 2011. The decrease in the construction and land development allocation was due to lower specific allocations for individual loans in this segment, as well as improvement in the risk profile of this segment. No other allocations to the ALLL for other loan segments represented more than 10% of the total ALLL as of September 30, 2012 or year-end 2011. Changes in the amount of ALLL allocation for these remaining loan segments were not significant, and reflect changes in the risk profile of the individual loan segments as well as the composition of the total loan portfolio. Nicolet’s management performs ongoing analyses of its loan portfolios to allow for early identification of customers experiencing financial difficulties, maintains prudent underwriting standards, understands the economy in its markets, and considers the trend of deterioration in loan quality in establishing the level of the ALLL. Nicolet believes that at September 30, 2012 the ALLL was appropriate to absorb probable incurred losses on existing loans that may become uncollectible.
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Table 9: Loan Loss Experience
(dollars in thousands)
(dollars in thousands)
For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
September 30, 2012 | September 30, 2011 | September 30, 2012 | September 30, 2011 | ||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||
Balance at beginning of period | $ | 6,045 | $ | 5,901 | $ | 5,899 | $ | 8,635 | |||||||||||
Loans charged-off: | |||||||||||||||||||
Commercial & Industrial | 52 | 65 | 129 | 2,166 | |||||||||||||||
CRE Owner-occupied | 301 | 177 | 1,327 | 428 | |||||||||||||||
CRE Investment | 150 | 100 | 305 | 100 | |||||||||||||||
Construction & Land Development | — | 1,135 | 307 | 4,334 | |||||||||||||||
Residential Construction | 1 | — | 396 | 43 | |||||||||||||||
Residential First Mortgage | 48 | 7 | 216 | 302 | |||||||||||||||
Residential Junior Mortgage | — | 198 | 118 | 364 | |||||||||||||||
Retail & Other | — | 5 | 38 | 5 | |||||||||||||||
Total loans charged-off | 552 | 1,687 | 2,836 | 7,742 | |||||||||||||||
Recoveries of loans previously charged-off: | |||||||||||||||||||
Commercial & Industrial | 4 | 3 | 34 | 17 | |||||||||||||||
CRE Owner-occupied | 1 | 1 | 9 | 2 | |||||||||||||||
CRE Investment | — | — | — | — | |||||||||||||||
Construction & Land Development | 17 | 26 | 22 | 26 | |||||||||||||||
Residential Construction | — | — | — | — | |||||||||||||||
Residential First Mortgage | — | 2 | 7 | 8 | |||||||||||||||
Residential Junior Mortgage | 1 | — | 5 | — | |||||||||||||||
Retail & Other | — | — | 1 | — | |||||||||||||||
Total recoveries | 23 | 32 | 78 | 53 | |||||||||||||||
Total net charge-offs | 529 | 1,655 | 2,758 | 7,689 | |||||||||||||||
Provision for loan losses | 975 | 1,500 | 3,350 | 4,800 | |||||||||||||||
Balance at end of period | $ | 6,491 | $ | 5,746 | $ | 6,491 | $ | 5,746 | |||||||||||
Ratios at end of period: | |||||||||||||||||||
Allowance for loan losses to total loans | 1.19 | % | 1.20 | % | 1.19 | % | 1.20 | % | |||||||||||
Allowance for loan losses to net charge-offs | 1227.0 | % | 347.2 | % | 235.4 | % | 74.7 | % | |||||||||||
Net charge-offs to average loans | .10 | % | .34 | % | .54 | % | 1.51 | % | |||||||||||
Net loan charge-offs (recoveries): | |||||||||||||||||||
Commercial & Industrial | $ | 48 | $ | 62 | $ | 95 | $ | 2,149 | |||||||||||
CRE Owner-occupied | 300 | 176 | 1,318 | 426 | |||||||||||||||
CRE Investment | 150 | 100 | 305 | 100 | |||||||||||||||
Construction & Land Development | (17 | ) | 1,109 | 285 | 4,308 | ||||||||||||||
Residential Construction | 1 | — | 396 | 43 | |||||||||||||||
Residential First Mortgage | 48 | 5 | 209 | 294 | |||||||||||||||
Residential Junior Mortgage | (1 | ) | 198 | 113 | 364 | ||||||||||||||
Retail & Other | — | 5 | 37 | 5 | |||||||||||||||
Total net charge-offs | $ | 529 | $ | 1,655 | $ | 2,758 | $ | 7,689 |
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The allocation of the ALLL is based on management’s estimate of loss exposure by category of loans shown in following table.
Table 10: Allocation of the ALLL
(dollars in thousands)
(dollars in thousands)
September 30, 2012 | % of Loan Type to Total Loans | June 30, 2012 | % of Loan Type to Total Loans | March 31, 2012 | % of Loan Type to Total Loans | December 31, 2011 | % of Loan Type to Total Loans | September 30, 2011 | % of Loan Type to Total Loans | ||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
ALLL allocation: | |||||||||||||||||||||||||||||||||||||||||||
Commercial & Industrial | $ | 2,676 | 36.67 | % | $ | 2,645 | 38.5 | % | $ | 2,192 | 34.9 | % | $ | 1,965 | 32.6 | % | $ | 2,733 | 33.0 | % | |||||||||||||||||||||||
CRE Owner-occupied | 536 | 20.40 | % | 552 | 22.5 | % | 746 | 23.6 | % | 347 | 23.5 | % | 486 | 23.1 | % | ||||||||||||||||||||||||||||
CRE Investment | 298 | 13.02 | % | 262 | 12.2 | % | 247 | 13.0 | % | 393 | 14.1 | % | 378 | 13.8 | % | ||||||||||||||||||||||||||||
Construction & Land Development | 1,904 | 4.91 | % | 1,666 | 4.8 | % | 1,887 | 5.8 | % | 2,035 | 5.2 | % | 1,099 | 5.7 | % | ||||||||||||||||||||||||||||
Residential Construction | 120 | 1.40 | % | 79 | 1.2 | % | 47 | 0.9 | % | 311 | 2.0 | % | 122 | 2.0 | % | ||||||||||||||||||||||||||||
Residential First Mortgage | 506 | 15.12 | % | 416 | 12.2 | % | 412 | 12.1 | % | 405 | 11.9 | % | 450 | 11.6 | % | ||||||||||||||||||||||||||||
Residential Junior Mortgage | 431 | 7.45 | % | 401 | 7.4 | % | 416 | 8.3 | % | 419 | 9.0 | % | 446 | 9.2 | % | ||||||||||||||||||||||||||||
Retail & Other | 20 | 1.03 | % | 24 | 1.2 | % | 26 | 1.4 | % | 24 | 1.7 | % | 32 | 1.6 | % | ||||||||||||||||||||||||||||
Total allowance for loan losses | $ | 6,491 | 100.0 | % | $ | 6,045 | 100.0 | % | $ | 5,973 | 100.0 | % | $ | 5,899 | 100.0 | % | $ | 5,746 | 100.0 | % | |||||||||||||||||||||||
ALLL category as a percent of total ALLL: | |||||||||||||||||||||||||||||||||||||||||||
Commercial & Industrial | 41.2 | % | 43.8 | % | 36.7 | % | 33.3 | % | 47.6 | % | |||||||||||||||||||||||||||||||||
CRE Owner-occupied | 8.3 | % | 9.1 | % | 12.5 | % | 5.9 | % | 8.5 | % | |||||||||||||||||||||||||||||||||
CRE Investment | 4.6 | % | 4.3 | % | 4.1 | % | 6.6 | % | 6.6 | % | |||||||||||||||||||||||||||||||||
Construction & Land Development | 29.3 | % | 27.6 | % | 31.6 | % | 34.5 | % | 19.1 | % | |||||||||||||||||||||||||||||||||
Residential Construction | 1.9 | % | 1.3 | % | 0.8 | % | 5.3 | % | 2.1 | % | |||||||||||||||||||||||||||||||||
Residential First Mortgage | 7.8 | % | 6.9 | % | 6.9 | % | 6.9 | % | 7.8 | % | |||||||||||||||||||||||||||||||||
Residential Junior Mortgage | 6.6 | % | 6.6 | % | 7.0 | % | 7.1 | % | 7.8 | % | |||||||||||||||||||||||||||||||||
Retail & Other | 0.3 | % | 0.4 | % | 0.4 | % | 0.4 | % | 0.5 | % | |||||||||||||||||||||||||||||||||
Total allowance for loan losses | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
Impaired Loans and Nonperforming Assets
As part of its overall credit risk management process, Nicolet’s management has been committed to an aggressive problem loan identification philosophy. This philosophy has been implemented through the ongoing monitoring and review of all pools of risk in the loan portfolio to ensure that problem loans are identified early and the risk of loss is minimized.
Nonperforming loans are considered one indicator of potential future loan losses. Nonperforming loans are defined as nonaccrual loans, including those defined as impaired under current accounting standards, loans 90 days or more past due but still accruing interest, and nonaccrual restructured loans. Loans are generally placed on nonaccrual status when contractually past due 90 days or more as to interest or principal payments. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on loans, it is management’s practice to place such loans on nonaccrual status immediately. Previously accrued and uncollected interest on such loans is reversed, amortization of related loan fees is suspended, and income is recorded only to the extent that interest payments are subsequently received in cash after a determination has been made that the principal balance of the loan is collectible. If collectability of the principal is in doubt, payments received are applied to loan
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principal. Management considers a loan to be impaired when it is probable Nicolet will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement.
Nonperforming loans were $15,152 at September 30, 2012, compared to $9,476 at year-end 2011. Total nonperforming loans have increased $5,676, or 59.9%, since year-end 2011. During the first quarter of 2012, one loan relationship totaling $5.6 million, which was previously classified as a Substandard accruing loan, was moved to nonaccrual status.
The level of potential problem loans is another predominant factor in determining the relative level of risk in the loan portfolio and in determining the adequacy of the ALLL. Potential problem loans are generally defined by management to include performing loans rated as Substandard by management, but having circumstances present which might adversely affect the ability of the borrower to comply with present repayment terms. The decision of management to include performing loans in potential problem loans does not necessarily mean that Nicolet expects losses to occur, but that management recognizes a higher degree of risk associated with these loans. Potential problem loans are predominantly commercial loans covering a diverse range of businesses and real estate property types. At September 30, 2012, potential problem loans totaled $11,542. Identifying potential problem loans requires a heightened management review of the pace at which a credit may deteriorate, the duration of asset quality stress, and uncertainty around the magnitude and scope of economic stress that may be felt by Nicolet’s customers and on underlying real estate values.
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Table 11: Nonperforming Loans and OREO
(dollars in thousands)
(dollars in thousands)
As of, | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | September 30, 2011 | |||||||||||||||||||
Nonaccrual loans: | |||||||||||||||||||||||
Commercial & Industrial | $ | 3,986 | $ | 4,088 | $ | 4,473 | $ | 1,744 | $ | 2,424 | |||||||||||||
CRE Owner-occupied | 354 | 389 | 1,235 | 934 | 745 | ||||||||||||||||||
CRE Investment | 380 | 544 | 555 | 716 | 858 | ||||||||||||||||||
Construction & Land Development | 8,558 | 8,531 | 8,820 | 3,367 | 4,740 | ||||||||||||||||||
Residential Construction | 397 | 1,200 | 1,231 | 1,480 | 1,843 | ||||||||||||||||||
Residential First Mortgage | 1,326 | 396 | 900 | 1,129 | 888 | ||||||||||||||||||
Residential Junior Mortgage | — | 36 | 105 | 106 | 328 | ||||||||||||||||||
Retail & Other | 151 | 151 | 151 | — | — | ||||||||||||||||||
Total nonaccrual loans | $ | 15,152 | $ | 15,335 | $ | 17,470 | $ | 9,476 | $ | 11,826 | |||||||||||||
Accruing loans past due 90 days or more | — | — | — | — | — | ||||||||||||||||||
Total nonperforming loans | $ | 15,152 | $ | 15,335 | $ | 17,470 | $ | 9,476 | $ | 11,826 | |||||||||||||
OREO | 617 | 890 | 260 | 641 | 858 | ||||||||||||||||||
Other repossessed assets | — | — | — | — | — | ||||||||||||||||||
Total nonperforming assets | $ | 15,769 | $ | 16,225 | $ | 17,730 | $ | 10,117 | $ | 12,684 | |||||||||||||
Total restructured loans accruing | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||
RATIOS | |||||||||||||||||||||||
Nonperforming loans to total loans | 2.78 | % | 2.97 | % | 3.61 | % | 2.01 | % | 2.47 | % | |||||||||||||
Nonperforming assets to total loans plus OREO | 2.89 | % | 3.13 | % �� | 3.66 | % | 2.14 | % | 2.64 | % | |||||||||||||
ALLL to nonperforming loans | 42.8 | % | 39.4 | % | 34.2 | % | 62.3 | % | 48.6 | % | |||||||||||||
ALLL to total loans at end of period | 1.19 | % | 1.17 | % | 1.23 | % | 1.25 | % | 1.20 | % | |||||||||||||
Nonperforming loans by type: | |||||||||||||||||||||||
Commercial & Industrial | $ | 3,986 | $ | 4,088 | $ | 4,473 | $ | 1,744 | $ | 2,424 | |||||||||||||
CRE Owner-occupied | 354 | 389 | 1,235 | 934 | 745 | ||||||||||||||||||
CRE Investment | 380 | 544 | 555 | 716 | 858 | ||||||||||||||||||
Construction & Land Development | 8,558 | 8,531 | 8,820 | 3,367 | 4,740 | ||||||||||||||||||
Residential Construction | 397 | 1,200 | 1,231 | 1,480 | 1,843 | ||||||||||||||||||
Residential First Mortgage | 1,326 | 396 | 900 | 1,129 | 888 | ||||||||||||||||||
Residential Junior Mortgage | — | 36 | 105 | 106 | 328 | ||||||||||||||||||
Retail & Other | 151 | 151 | 151 | — | — | ||||||||||||||||||
Total nonperforming loans | 15,152 | 15,335 | 17,470 | 9,476 | 11,826 | ||||||||||||||||||
Commercial real estate owned | 412 | 437 | 117 | 566 | 783 | ||||||||||||||||||
Residential real estate owned | 205 | 453 | 143 | 75 | 75 | ||||||||||||||||||
Total OREO | 617 | 890 | 260 | 641 | 858 | ||||||||||||||||||
Other repossessed assets | — | — | — | — | — | ||||||||||||||||||
Total nonperforming assets | $ | 15,769 | $ | 16,225 | $ | 17,730 | $ | 10,117 | $ | 12,684 |
Deposits
Deposits represent Nicolet’s largest source of funds. Nicolet competes with other bank and nonbank institutions for deposits, as well as with a growing number of non-deposit investment alternatives available to depositors, such as mutual funds, money market funds, annuities, and other brokerage investment products. Competition for deposits remains high. Challenges to deposit growth include price changes on deposit products given movements in the rate environment, and customer preferences regarding higher-costing deposit products or non-deposit investment alternatives.
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At September 30, 2012, total deposits were $554,858, up $3,323, or 0.6%, from year-end 2011, primarily due to seasonal fluctuations in noninterest-bearing demand deposits, decreased time deposits, and Nicolet’s strategy to continue to reduce noncore funding sources with continued rewards and other core deposit growth.
Time deposits were $176,246 at September 30, 2012, down $10,034 from December 31, 2011, as customers have moved time deposits into liquid, short-term, non-maturing deposits as time deposit rates have decreased to levels relative to certain non-maturity deposit accounts.
Brokered deposits were approximately $45,607 and $38,609 at September 31, 2012 and December 31, 2011, respectively.
Table 12: Deposit Distribution
(dollars in thousands)
(dollars in thousands)
September 30, 2012 | % of Total | December 31, 2011 | % of Total | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Noninterest-bearing demand deposits | $ | 91,578 | 16.5 | % | $ | 78,154 | 14.2 | % | ||||||||||
Interest-bearing demand deposits | 248,947 | 44.9 | % | 270,738 | 49.1 | % | ||||||||||||
Savings deposits | 38,087 | 6.9 | % | 21,781 | 3.9 | % | ||||||||||||
Time deposits | 176,246 | 31.7 | % | 180,862 | 32.8 | % | ||||||||||||
Total | $ | 554,858 | 100.0 | % | $ | 551,535 | 100.0 | % |
Contractual Obligations
Nicolet is a party to various contractual obligations requiring the use of funds as part of its normal operations. The table below outlines the principal amounts and timing of these obligations, excluding amounts due for interest, if applicable. Most of these obligations are routinely refinanced into similar replacement obligations. However, renewal of these obligations is dependent on Nicolet’s ability to offer competitive interest rates, liquidity needs, or availability of collateral for pledging purposes.
Table 13: Contractual Obligations
(dollars in thousands)
(dollars in thousands)
Payments due by period | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Total | < 1 year | 1-3 years | 3-5 years | > 5 years | |||||||||||||||||||
Subordinated debentures | $ | 6,186 | $ | — | $ | — | $ | — | $ | 6,186 | |||||||||||||
Other long-term borrowings | 10,212 | 230 | 503 | 9,480 | — | ||||||||||||||||||
FHLB borrowings | 25,000 | 10,000 | 10,000 | 5,000 | — | ||||||||||||||||||
Total long-term borrowing obligations | $ | 41,398 | $ | 10,230 | $ | 10,503 | $ | 14,480 | $ | 6,186 |
Liquidity
Liquidity management refers to the ability to ensure that cash is available in a timely and cost-effective manner to meet cash flow requirements of depositors and borrowers and to meet other commitments as they fall due, including the ability to pay dividends to shareholders, service debt, invest in subsidiaries, repurchase common stock, and satisfy other operating requirements.
Funds are available from a number of basic banking activity sources including the core deposit base, the repayment and maturity of loans, investment securities sales, and sales of brokered deposits. All investment securities are classified as available-for-sale and are reported at fair value on the consolidated balance sheet. Approximately $8,761 of the $57,075 investment securities portfolio on hand at September 30, 2012, was pledged to secure public deposits, short-term borrowings, and repurchase agreements and for other purposes as required by law. Other funding sources available include short-term borrowings, federal funds purchased, and long-term borrowings.
Cash and cash equivalents at September 30, 2012 and December 31, 2011, were $27,552 and $92,129, respectively. The decrease in cash and cash equivalents was due to strong loan growth between December 31, 2011 and September 30, 2012 which was accompanied by modest deposit growth during the same period.
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Nicolet’s liquidity resources were sufficient as of September 30, 2012 to fund its loans and to meet other cash needs when necessary.
Capital
Nicolet regularly reviews the adequacy of its capital to ensure that sufficient capital is available for current and future needs and is in compliance with regulatory guidelines. Management actively reviews capital strategies for Nicolet and Nicolet National Bank in light of perceived business risks associated with current and prospective earning levels, liquidity, asset quality, economic conditions in the markets served, and the level of dividends available to shareholders.
Nicolet (on a consolidated basis) and Nicolet National Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Nicolet and Nicolet National Bank’s financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Nicolet and Nicolet National Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require Nicolet and Nicolet National Bank to maintain minimum amounts and ratios of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2011 and 2010, that Nicolet and Nicolet National Bank met all capital adequacy requirements to which they are subject.
As of September 30, 2012 and December 31, 2011, the most recent notifications from the regulatory agencies categorized Nicolet National Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, an institution must maintain minimum Total risk-based, Tier 1 risk- based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since these notifications that management believes have changed Nicolet National Bank’s category.
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A summary of Nicolet’s and Nicolet National Bank’s regulatory capital ratios as of September 30, 2012 and December 31, 2011 are as follows:
Table 14: Capital Ratios
(dollars in thousands)
(dollars in thousands)
Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions (2) | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Amount | Ratio (1) | Amount | Ratio (1) | Amount | Ratio (1) | ||||||||||||||||||||||
As of September 30, 2012 | |||||||||||||||||||||||||||
Nicolet | |||||||||||||||||||||||||||
Total capital | $ | 84,090 | 15.1 | % | $ | 44,487 | 8.0 | % | N/A | N/A | |||||||||||||||||
Tier I capital | 77,599 | 14.0 | % | 22,243 | 4.0 | % | N/A | N/A | |||||||||||||||||||
Leverage | 77,599 | 11.5 | % | 26,897 | 4.0 | % | N/A | N/A | |||||||||||||||||||
Nicolet National Bank | |||||||||||||||||||||||||||
Total capital | $ | 78,458 | 14.5 | % | $ | 43,387 | 8.0 | % | $ | 54,234 | 10.0 | % | |||||||||||||||
Tier I capital | 71,967 | 13.3 | % | 21,694 | 4.0 | % | 32,541 | 6.0 | % | ||||||||||||||||||
Leverage | 71,967 | 10.9 | % | 26,328 | 4.0 | % | 32,910 | 5.0 | % | ||||||||||||||||||
As of December 31, 2011 | |||||||||||||||||||||||||||
Nicolet | |||||||||||||||||||||||||||
Total capital | $ | 82,638 | 16.7 | % | $ | 39,510 | 8.0 | % | N/A | NA/ | |||||||||||||||||
Tier I capital | 76,739 | 15.5 | % | 19,755 | 4.0 | % | N/A | N/A | |||||||||||||||||||
Leverage | 76,739 | 12.1 | % | 25,468 | �� | 4.0 | % | N/A | N/A | ||||||||||||||||||
Nicolet National Bank | |||||||||||||||||||||||||||
Total capital | $ | 74,586 | 15.6 | % | $ | 38,340 | 8.0 | % | $ | 47,925 | 10.0 | % | |||||||||||||||
Tier I capital | 68,687 | 14.3 | % | 19,170 | 4.0 | % | 28,755 | 6.0 | % | ||||||||||||||||||
Leverage | 68,687 | 11.1 | % | 24,831 | 4.0 | % | 31,039 | 5.0 | % |
(1) | The total capital ratio is defined as tier 1 capital plus tier 2 capital divided by total risk-weighted assets. The tier 1 capital ratio is defined as tier 1 capital divided by total risk-weighted assets. The leverage ratio is defined as tier 1 capital divided by the most recent quarter’s average total assets. |
(2) | Prompt corrective action provisions are not applicable at the bank holding company level. |
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MANAGEMENT OF NICOLET
Continuing Directors
The following table shows for each current director of Nicolet who will remain a director of the combined entity following the merger: (1) his or her name; (2) his or her age at December 31, 2012; (3) how long he or she has been a director of Nicolet; (4) his or her position(s) with Nicolet, other than as a director; and (5) his or her principal occupation and business experience for the past five years. Except as otherwise indicated, each director has been engaged in his or her present principal occupation for more than five years. All directors of Nicolet are also directors of Nicolet National Bank.
Name (Age) | Director Since | Positions and Business Experience | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Robert B. Atwell (55) | 2000 | Chairman and chief executive officer of Nicolet National Bank since 2000 and chairman, president, and chief executive officer of Nicolet since its formation in 2002. | ||||||||
Michael E. Daniels (48) | 2000 | President and chief operating officer of Nicolet National Bank since 2007, executive vice president and chief lending officer of Nicolet National Bank from 2000 to 2007 and secretary of Nicolet since 2002. | ||||||||
John N. Dykema (49) | 2006 | Owner, president and chief executive officer of Campbell Wrapper Corporation and Circle Packaging Machinery, Inc., manufacturers of custom packaging machinery. | ||||||||
Gary L. Fairchild (61) | 2008 | President, owner and chief executive officer of Fairchild Equipment, Inc. serving Wisconsin, Minnesota, and the Upper Peninsula of Michigan. A franchise dealer of forklift trucks, construction equipment, and various handling equipment. | ||||||||
Michael F. Felhofer (55) | 2000 | Owner and president of Candleworks of Door County, Inc., a candle manufacturer and retailer. | ||||||||
Andrew F. Hetzel, Jr. (56) | 2001 | President and chief executive officer of NPS Corp. and Blue Ridge Tissue Corp. These companies market and manufacture spill control products, towel and tissue products for the washroom and protective packaging materials. Managing member of Hetzel Enterprises LLC, a real estate holding company. | ||||||||
Donald J. Long, Jr. (55) | 2000 | Former owner and chief executive officer of Century Drill & Tool Co., Inc., an expediter of power tool accessories. | ||||||||
Benjamin P. Meeuwsen (44) | 2008 | President and owner of Fourinox, Inc., a custom equipment manufacturing company. | ||||||||
Susan L. Merkatoris (49) | 2003 | Certified Public Accountant; Owner of Larboard Enterprises, LLC, a packing and shipping franchise doing business as The UPS Stores; Co-owner and vice president of Midwest Stihl Inc., a distributor of Stihl Power Products. | ||||||||
Therese B. Pandl (59) | 2010 | President and chief executive officer of the Hospital Sisters Health System’s Division in Eastern Wisconsin, which includes St. Vincent Hospital and St. Mary’s Hospital Medical Center in Green Bay and St. Nicholas Hospital in Sheboygan; President and chief executive officer of St. Mary’s Hospital Medical Center and St. Vincent Hospital in Green Bay. |
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Name (Age) | Director Since | Positions and Business Experience | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Randy J. Rose (58) | 2012 | Retired president and chief executive officer of Schwabe North America. Currently serves as a member of the Executive Strategic Committee for Dr. Willmar Schwabe GmbH and Co. KG, parent of Schwabe North America, which encompasses Nature’s Way Holding Company, Enzymatic Therapy, and Integrative Therapeutics. | ||||||||
Robert J. Weyers (48) | 2000 | Co-owner of Weyers Group, a private equity investment firm; Commercial Horizons, Inc., a commercial property development company; and PBJ Holdings, LLC, a real estate holding company (see “Related Party Transactions”). |
New Directors of the Combined Entity
In addition to the above listed directors who will remain directors of Nicolet following the merger, Nicolet will appoint two current directors of Mid-Wisconsin, Kim A. Gowey and Christopher Ghidorzi, to its board of directors effective upon the consummation of the merger as a condition of the merger agreement. Dr. Gowey and Mr. Ghidorzi will serve until Nicolet’s next annual meeting of shareholders or their earlier resignation or removal under Nicolet’s bylaws and will be nominated for election at the first Nicolet annual meeting of shareholders following the expiration of their initial term. They will also serve as directors of Nicolet National Bank upon consummation of the bank merger.
Meetings and Committees of the Board of Directors
Nicolet’s board of directors conducts its business through meetings of the full board and through committees. Board committees include, among others, an Executive Committee, an Audit Committee and a Compensation Committee. During 2012, the board of directors held 12 meetings; the Executive Committee held three meetings; the Audit Committee held 6 meetings and the Compensation Committee held three meetings.
Executive Committee
The Executive Committee is authorized to exercise the board of directors’ authority between board meetings, subject to specific limitations. It functions as a nominating committee to select nominees for election to the board of directors and supports strategic discussions presented by management. The Executive Committee does not have a charter. The Executive Committee will consider nominees recommended by shareholders if submitted to Nicolet in accordance with the procedures set forth in Section 2.6 of Nicolet’s bylaws. See “Director Nominations and Shareholder Communications” below.
Current Executive Committee members are Robert B. Atwell, Michael E. Daniels, John Dykema, Donald J. Long, Jr., and Robert J. Weyers.
Audit Committee
The Audit Committee is responsible for reviewing, with Nicolet’s independent accountants, its audit plan, the scope and results of its audit engagement and the accompanying management letter, if any; reviewing the scope and results of Nicolet’s internal auditing procedures; consulting with the independent accountants and management with regard to Nicolet’s accounting methods and the adequacy of Nicolet’s internal accounting controls; pre-approving all audit and permissible non-audit services provided by the independent accountants; reviewing the independence of the independent accountants; and reviewing the range of the independent accountants’ audit and non-audit fees.
The current members of the Audit Committee are Susan L. Merkatoris, John N. Dykema, Michael F. Felhofer, and Ben Meeuwsen. Although Nicolet’s common stock is not listed on an exchange, each member of the Audit Committee meets the requirements for independence as defined by Nasdaq Stock Market listing
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standards. In addition, Ms. Merkatoris meets the criteria specified under applicable SEC regulations for an “audit committee financial expert.”
Compensation Committee
The Compensation Committee is responsible for, among other duties as may be directed by the board, determining compensation to be paid to Nicolet’s executive officers and directors and reviewing and administering Nicolet’s incentive plans, including making grants under those plans. The Compensation Committee also reviews Nicolet’s incentive compensation programs with senior risk officers to (i) ensure that the programs do not encourage officers to take unnecessary and excessive risks that threaten the value of Nicolet and (ii) identify and implement means of limiting such risks. The Compensation Committee is also responsible for discussing evaluating and reviewing employee compensation plans to ensure that such plans do not encourage the manipulation of Nicolet’s reported earnings. Finally, the Compensation Committee is responsible for submitting to various regulators such reports relating to Nicolet’s compensation practices as may be required.
The current members of the Compensation Committee are Donald J. Long, Jr., John Dykema, and Robert J. Weyers. Each member is an independent director under the standards promulgated by the NASDAQ Stock Market, with the exception of Mr. Weyers due to his ownership interest in PBJ Holdings, LLC. For further discussion, see “Related Party Transactions” at page 144.
Nominations
Nicolet’s board of directors has not created a standing nominating committee for director nominees and has not adopted a nominating committee charter. Rather, the full board of directors participates in the consideration of director nominees. Because of its current size, Nicolet believes a standing nominating committee for director nominees is not necessary.
Any shareholder of any class of outstanding capital stock of the corporation entitled to vote on the election of directors may also nominate individuals for election to the board of directors. Nominations, other than those made by the board of directors, must be in writing and must be delivered or mailed to the President of Nicolet not less than 14 days nor more than 50 days prior to any meeting of shareholders called for the election of directors, provided, however, that if less than 21 days’ notice of such meeting is given to shareholders, nominations by a shareholder must be delivered or mailed to the President of Nicolet no later than the close of business on the 7th day following the day on which notice of the meeting was given to shareholders. Written nominations by shareholders must contain, to the extent known to the nominating shareholder, the name and address of each proposed nominee, the principal occupation of each proposed nominee, the total number of shares of Nicolet that will be voted for each nominee, the name and address of the nominating shareholder, and the number of shares of capital stock owned by the nominating shareholder. Nominations not made in accordance with these requirements may be disregarded by the chairman of the meeting, and votes for such nominees disregarded.
Nicolet’s board of directors has not adopted a formal policy or process for identifying or evaluating nominees, but informally solicits and considers recommendations from a variety of sources, including other directors, members of the community, customers and shareholders of Nicolet, and professionals in the financial services and other industries. Similarly, the board does not prescribe any specific qualifications or skills that a nominee must possess, although it considers the potential nominee’s business experience; knowledge of Nicolet and the financial services industry; experience in serving as a director of Nicolet or another financial institution or public company generally; wisdom, integrity and analytical ability; familiarity with and participation in the communities served by Nicolet; commitment to and availability for service as a director; and any other factors the board deems relevant.
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Director Compensation
In 2012, directors received $500 for each board meeting and $250 for each committee meeting attended. The audit committee chair received $400 for each audit committee meeting. In 2011, directors received $400 for each board meeting and $200 for each committee meeting attended. Compensation for employee/directors of Nicolet is included in the table below.
The following table shows information concerning the compensation paid to the directors of Nicolet and its subsidiaries for their services as Directors during the fiscal year ended December 31, 2012. See “Executive Compensation” below for additional information regarding the compensation paid to Messrs. Atwell and Daniels in their capacities as executive officers of Nicolet.
Name | Fees earned or paid in cash* | |||||
---|---|---|---|---|---|---|
Robert B. Atwell | $ | 14,750 | ||||
Michael E. Daniels | 16,750 | |||||
John N. Dykema* | 10,000 | |||||
Gary L. Fairchild* | 9,250 | |||||
Michael F. Felhofer | 14,250 | |||||
Andrew F. Hetzel, Jr.* | 7,250 | |||||
Donald J. Long, Jr. | 11,000 | |||||
Benjamin P. Meeuwsen* | 9,250 | |||||
Susan L. Merkatoris | 13,150 | |||||
Therese B. Pandl* | 7,000 | |||||
Randy J. Rose* | 5,500 | |||||
Robert J. Weyers* | 11,000 |
* | Directors have the option of receiving their compensation in the form of Nicolet common stock through the Deferred Compensation Plan for Non-Employee Directors. For the seven directors noted, their 2012 cash director fees were remitted to the plan and used by the plan to purchase Nicolet common stock on behalf of the director. |
Executive Officers
Executive officers are appointed annually at the meetings of the board of directors of Nicolet, to serve until their successors are chosen and qualified. The following table sets forth for each executive officer of Nicolet: (1) the person’s name; (2) his or her age at December 31, 2012; (3) the year he or she was first elected as an officer of Nicolet; and (4) his or her positions with Nicolet, and his or her recent business experience for the past five years. The listed executive officers will continue to be Nicolet’s executive officers after the merger.
Name (Age) | Officer Since | Business Experience and Position with Nicolet | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Robert B. Atwell (55) | 2000 | Chairman and chief executive officer of Nicolet National Bank since 2000 and chairman, president and chief executive officer of Nicolet since its formation in 2002. | ||||||||
Michael E. Daniels (48) | 2000 | President and chief operating officer of Nicolet National Bank since 2007, executive vice president and chief lending officer of Nicolet National Bank from 2000 to 2007 and secretary of Nicolet since 2002. | ||||||||
Ann K. Lawson (52) | 2009 | Chief financial officer of Nicolet National Bank and of Nicolet since February 2, 2009. Ms. Lawson previously served as the director of corporate accounting and reporting with a large regional bank holding company headquartered in Green Bay, Wisconsin, from September 1998 to January 2009. |
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EXECUTIVE COMPENSATION
Summary Compensation Table
Nicolet has designated its chief executive officer and two other officers as “executive officers” in accordance with SEC reporting requirements. The following table provides certain summary information for the years ended December 31, 2012 and 2011 concerning the compensation paid or accrued by Nicolet and its subsidiaries to or on behalf of these officers.
Name | Year | Salary ($) | Bonus ($)(1) | Stock Awards ($) | Option Awards ($) | All Other Compensation ($)(5) | Total ($) | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Robert B. Atwell | 2012 | 350,000 | 140,000 | 322,575 | (6) | 314,115 | 82,923 | (2) | 1,209,613 | |||||||||||||||||||||
2011 | 350,000 | 30,000 | 0 | 0 | 22,536 | (2) | 402,536 | |||||||||||||||||||||||
Michael E. Daniels | 2012 | 295,000 | 118,000 | 322,575 | (6) | 314,115 | 71,654 | (3) | 1,121,344 | |||||||||||||||||||||
2011 | 295,000 | 25,000 | 0 | 0 | 21,309 | (3) | 341,309 | |||||||||||||||||||||||
Ann K. Lawson | 2012 | 150,026 | 30,000 | 27,225 | 24,350 | 10,502 | (4) | 242,103 | ||||||||||||||||||||||
2011 | 145,656 | 25,000 | 0 | 0 | 8,739 | (4) | 179,395 |
(1) | All bonuses are reported for the year in which they are earned. |
(2) | Includes $15,000 and $14,700 of 401(k) company matching contributions and discretionary profit sharing and $7,923 and $7,836 of life insurance premiums for 2012 and 2011, respectively. 2012 also includes $60,000 cash consideration paid to Mr. Atwell for signing a revised employment agreement in 2012. |
(3) | Includes $15,000 and $14,700 of 401(k) company matching contributions and discretionary profit sharing and $6,654 and $6,609 of life insurance premiums for 2012 and 2011, respectively. 2012 also includes $50,000 cash consideration paid to Mr. Daniels for signing a revised employment agreement in 2012. |
(4) | Includes $10,502 and $8,739 of 401(k) company matching contributions and discretionary profit sharing for 2012 and 2011, respectively. |
(5) | Nicolet have omitted information on perquisites and other personal benefits with an aggregate value below $10,000. |
(6) | Reflects the fair value of restricted stock on the date of grant. Does not include 5,303 shares of restricted stock issued to each of Messrs. Atwell and Daniels in January 2013 and described in “— 2013 Restricted Stock Awards” below. |
Employment Agreements.
Robert B. Atwell. Effective April 7, 2000, Nicolet National Bank entered into a rolling three-year employment agreement with Robert B. Atwell regarding Mr. Atwell’s employment. Under the terms of the agreement, Mr. Atwell received a fixed annual base salary during the initial three-year term, plus benefits, and annual bonus compensation pursuant to any incentive compensation program as may be adopted from time to time by the Board of Directors. Mr. Atwell’s compensation, including incentive compensation, is subject to annual review by the Board of Directors, and his 2011 and 2012 compensation is described in the Summary Compensation Table above.
Mr. Atwell’s agreement automatically renews for an additional day each day after April 7, 2000, so that it always has a three-year term, unless either of the parties to the agreement gives notice of his or its intent not to renew the agreement, which will cause the agreement to terminate on the third anniversary of the 30th day following the date of notice. The agreement also provides various other benefits and change in control provisions, and subjects Mr. Atwell to non-compete restrictions. Mr. Atwell’s employment agreement was amended and restated on April 17, 2012 to expand the geographic region subject to the non-compete
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restrictions. Additionally, under Mr. Atwell’s agreement, Nicolet is obligated to pay Mr. Atwell his base salary and health insurance reimbursement, as indicated, for the following terminating events:
Terminating Event | Payment Obligation of Base Salary | |||||
---|---|---|---|---|---|---|
Mr. Atwell becomes disabled, as defined | Maximum of six (6) months | |||||
Nicolet National Bank terminates Mr. Atwell’s employment without cause, as defined | Maximum of twelve (12) months salary and health insurance reimbursement | |||||
Mr. Atwell terminates his employment for cause, as defined | Maximum of twelve (12) months salary and health insurance reimbursement | |||||
Mr. Atwell terminates his employment for cause within six months after a change of control, as defined | One and one-half times base salary and bonus and twelve (12) months health insurance reimbursement |
Michael E. Daniels. Effective April 7, 2000, Nicolet National Bank entered into a rolling three-year employment agreement with Michael E. Daniels regarding Mr. Daniels’ employment. Under the terms of the agreement, Mr. Daniels received a fixed annual base salary during the initial three-year term, plus benefits and annual bonus compensation pursuant to any incentive compensation program as may be adopted from time to time by the Board of Directors. Mr. Daniels’ compensation is subject to annual review by the Board of Directors, and his 2011 and 2012 compensation is described in the Summary Compensation Table above.
Mr. Daniels’ agreement automatically renews for an additional day each day after April 7, 2000, so that it always has a three-year term, unless any of the parties to the agreement gives notice of his or its intent not to renew the agreement, which will cause the agreement to terminate on the third anniversary of the 30th day following the date of notice. The agreement also provides various other benefits and change in control provisions, and subjects Mr. Daniels to non-compete restrictions. Mr. Daniels’ employment agreement was amended and restated on April 17, 2012 to expand the geographic region subject to the non-compete restrictions. Additionally, under Mr. Daniels’ agreement, Nicolet is obligated to pay Mr. Daniels his base salary and health insurance reimbursement following the termination of his agreement under the same conditions and terms as described above for Mr. Atwell’s employment agreement.
2013 Restricted Stock Awards
Nicolet has, from time to time and as reflected in each of the Summary Compensation Table, above, and the Outstanding Equity Awards at 2012 Fiscal Year End Table, below, provided incentive equity awards to certain of its executive officers. In addition, in 2012, Nicolet’s Compensation Committee approved annual incentive targets for the performance of its Chief Executive Officer and Chief Operating Officer in 2012, which were met and resulted in the granting of equity awards to each officer in early 2013. In January 2013, Nicolet granted awards of restricted stock to Messrs. Atwell and Daniels in the amount of 5,303 shares each. The terms of this restricted stock provide for vesting in equal increments, with one-third of the granted shares vesting immediately, one-third of the granted shares vesting on the first anniversary of the grant date, and one-third of the granted shares vesting on the second anniversary of the grant date, with immediate, accelerated vesting in the event of a termination of employment based on death or disability or upon a change in control of Nicolet. The terms of the restricted stock also permit the surrender of shares to Nicolet on vesting in order to satisfy applicable tax withholding requirements, and each of Messrs. Atwell and Daniels surrendered 583 shares in connection with that portion of their respective awards that vested immediately in January 2013.
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Outstanding Equity Awards at 2012 Fiscal Year End Table
The following table sets forth information at December 31, 2012, concerning outstanding awards previously granted to the named executive officers.
Option Awards | Stock Awards | ||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name | Number of securities underlying unexercised options exercisable (#) | Number of securities underlying unexercised options Unexercisable (#) | Equity Incentive Plan Awards: Number of shares underlying unexercised unearned options (#) | Option exercise price ($) | Option expiration date | Number of shares of units of stock that have not vested (#) | Market value of shares or units of stock that have not vested ($) | Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested (#) | Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested ($) | ||||||||||||||||||||||||||||||
Robert B. Atwell | 79,570 | 0 | 0 | 18.00 | 12/13/2015 | ||||||||||||||||||||||||||||||||||
44,444 | 11,111 | (1) | 0 | 18.00 | 12/13/2015 | ||||||||||||||||||||||||||||||||||
0 | 64,500 | (2) | 0 | 16.50 | 4/10/2022 | ||||||||||||||||||||||||||||||||||
19,550 | (7) (8) | 322,575 | 0 | 0 | |||||||||||||||||||||||||||||||||||
Michael E. Daniels | 79,570 | 0 | 0 | 18.00 | 12/13/2015 | ||||||||||||||||||||||||||||||||||
44,444 | 11,111 | (1) | 0 | 18.00 | 12/13/2015 | ||||||||||||||||||||||||||||||||||
0 | 64,500 | (2) | 0 | 16.50 | 4/10/2022 | ||||||||||||||||||||||||||||||||||
19,550 | (7) (8) | 322,575 | 0 | 0 | |||||||||||||||||||||||||||||||||||
Ann K. Lawson | 12,000 | 8,000 | (3) | 0 | 16.00 | 2/2/2019 | |||||||||||||||||||||||||||||||||
6,000 | 4,000 | (4) | 0 | 16.80 | 12/15/2019 | ||||||||||||||||||||||||||||||||||
355 | 710 | (5) | 0 | 16.50 | 4/10/2012 | ||||||||||||||||||||||||||||||||||
145 | 3,790 | (6) | 0 | 16.50 | 4/10/2022 | ||||||||||||||||||||||||||||||||||
1,650 | (9) | 27,225 | 0 | 0 |
(1) | Represents the unvested remainder of a grant of 55,555 options made on December 13, 2005, which vest in 10 equal annual increments beginning on the date of grant. |
(2) | Granted on April 10, 2012, and vesting in 5 equal increments over a 5-year period on the anniversaries of the initial grant. |
(3) | Represents the unvested remainder of a grant of 20,000 options made on February 2, 2009, which vest in 5 equal increments over a 5-year period on the anniversaries of the initial grant. |
(4) | Represents the unvested remainder of a grant of 10,000 options made on December 15, 2009, which vest in 5 equal increments over a 5-year period on the anniversaries of the initial grant. |
(5) | Represents the unvested remainder of a grant of 1,065 options made on April 10, 2012, of which one-third vested immediately and one-third vest on each of the first and second anniversaries of the initial grant. |
(6) | Represents the unvested remainder of a grant of 3,935 options made on April 10, 2012, of which 145 vested immediately, 145 will vest on each of April 10, 2013 and April 10, 2014, and the remainder will vest in equal increments of 500 over the seven years subsequent to 2014 on the anniversaries of the initial grant. |
(7) | Represents the unvested remainder of a grant of 19,550 restricted shares made on April 10, 2012, which vest in 5 equal increments over a 5-year period on the anniversaries of the initial grant. |
(8) | Excludes restricted stock granted in January, 2013. |
(9) | Represents the unvested remainder of a grant of 1,650 restricted shares made on April 10, 2012, which vest in 10 equal increments over a 10-year period on the anniversaries of the initial grant. |
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RELATED PARTY TRANSACTIONS
Nicolet and its subsidiary Nicolet National Bank have banking and other business transactions in the ordinary course of business with directors and officers of Nicolet and Nicolet National Bank and their affiliates, including members of their families, corporations, partnerships or other organizations in which such directors and officers have a controlling interest. These transactions take place on substantially the same terms as those prevailing at the same time for comparable transactions with unrelated parties.
One of Nicolet’s directors, Robert J. Weyers, is a director of, and holds a one-third ownership interest in, PBJ Holdings, LLC, a real estate development and investment firm. In 2004, Nicolet entered into a joint venture with PBJ Holdings, LLC in connection with the development of the site of Nicolet’s headquarters facility. Mr. Weyers abstained from discussion or deliberations regarding the transaction in his capacity as a director of Nicolet and Nicolet National Bank. The joint venture involves a 50% investment by Nicolet on standard commercial terms reached through arms-length negotiation. During 2012, Nicolet National Bank paid approximately $978,000 in rent expense to the joint venture. For 2012, the joint venture’s net income was approximately $113,000, benefiting Nicolet and PBJ Holdings, LLC by approximately $56,500 each. Additionally, in 2011, Nicolet National Bank entered into a five-year facility lease through an arms-length negotiation with an LLC entity of which PBJ Holdings is the sole member. Nicolet National Bank pays approximately $ 64,000 per year in rent and CAM to the LLC under this lease. Management believes that the terms of the joint venture and lease described above are no less favorable to Nicolet National Bank or Nicolet than would have been achieved in a transaction with an unaffiliated third party.
From time to time, Nicolet National Bank will make loans to the directors and officers of Nicolet and Nicolet National Bank and their affiliates. None of these loans are currently nonaccrual, past due, restructured or potential problem loans. All such loans were: (i) made in the ordinary course of business; (ii) made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to Nicolet or Nicolet National Bank, and did not involve more than the normal risk of collectibility or present other unfavorable features.
Nicolet National Bank has employed certain employees who are related to Nicolet’s executive officers and/or directors. These individuals are compensated consistent with the policies of Nicolet National Bank that apply to all employees.
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INFORMATION ABOUT MID-WISCONSIN
General
Mid-Wisconsin was established as a Wisconsin corporation in 1986 to serve as a bank holding company for Mid-Wisconsin Bank, its current operating subsidiary. Both Mid-Wisconsin and Mid-Wisconsin Bank have their principal offices in Medford, Wisconsin. As the sole shareholder of Mid-Wisconsin Bank, Mid-Wisconsin is a bank holding company registered with, and subject to, regulation by the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended.
Mid-Wisconsin Bank
Mid-Wisconsin Bank was incorporated on September 1, 1890, as a state bank under the laws of Wisconsin. Mid-Wisconsin Bank operates 11 retail banking locations throughout North Central Wisconsin serving markets in Clark, Eau Claire, Lincoln, Marathon, Oneida, Price, Taylor and Vilas counties.
The day-to-day management of Mid-Wisconsin Bank rests with its officers with oversight provided by the board of directors. Mid-Wisconsin Bank is engaged in general commercial and retail banking services, including wealth management services. Mid-Wisconsin Bank serves individuals, businesses and governmental units and offers most forms of commercial and consumer lending, including lines of credit, term loans, real estate financing, mortgage lending and agricultural lending. In addition, Mid-Wisconsin Bank provides a full range of personal banking services, including checking accounts, savings and time products, installment and other personal loans, as well as mortgage loans. To expand services to its customers on a 24-hour basis, Mid-Wisconsin Bank offers ATM services, merchant capture, cash management, express phone, online and mobile banking. New services are frequently added.
Mid-Wisconsin Bank’s wealth management division (“Wealth Management”) consists of two delivery methods of providing financial products and services to assist customers in building, investing, or protecting their wealth. Through its state granted trust powers, Wealth Management provides fiduciary, administrative, and investment management services to personal trusts, estates, individuals, businesses, non-profits, and foundations for an asset based fee. Through a third-party broker/dealer, LPL Financial, which is a member of FINRA and SIPC and a registered broker/dealer, Wealth Management makes available a variety of retail investment and insurance products including equities, bonds, fixed and variable annuities, mutual funds, life insurance, long-term care insurance and brokered certificates of deposits, which are commission-based transactions.
All of Mid-Wisconsin Bank’s products and services are directly or indirectly related to the business of community banking and all activity is reported as one segment of operations. All revenue, profit and loss, and total assets are reported in one segment and represent Mid-Wisconsin Bank’s entire operations.
At September 30, 2012, Mid-Wisconsin had total consolidated assets of approximately $464 million, total consolidated deposits of approximately $364 million, total consolidated gross loans of approximately $308 million, and consolidated shareholders’ equity of approximately $37 million.
Available Information
Financial information, information relating to executive compensation, various benefit plans, voting securities and the principal holders of voting securities, relationships and related transactions and other related matters as to Mid-Wisconsin are set forth in Mid-Wisconsin’s Form 10-K Annual Report for the year ended December 31, 2011, a copy of which is included asAppendix E to this joint proxy statement-prospectus. Additional financial information as to Mid-Wisconsin for the nine months ended September 30, 2012 is set forth in Mid-Wisconsin’s Form 10-Q Quarterly Report, a copy of which is included asAppendix F to this joint proxy statement-prospectus.
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Market Prices of and Dividends Declared on Mid-Wisconsin Common Stock
The Mid-Wisconsin common stock is currently traded on the OTCQB market of the OTC Markets Group under the symbol “MWFS.” The last reported sale price of Mid-Wisconsin’s common stock prior to the mailing of this joint proxy statement-prospectus on , 2013 was $ on ��, 2013, and the last reported sale price prior to the announcement of the merger was $3.94 on November 28, 2012. Additional information available to management regarding the quarterly high and low bid prices for the Mid-Wisconsin common stock is provided below. For quarters where there were no sales of Mid-Wisconsin common stock, neither high nor low prices are given. As of , 201 , Mid-Wisconsin had shares of common stock issued and outstanding and approximately shareholders of record.
High | Low | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
2012 | ||||||||||
Fourth Quarter | $ | 4.75 | $ | 4.05 | ||||||
Third Quarter | $ | 6.50 | $ | 4.50 | ||||||
Second Quarter | $ | 6.00 | $ | 4.80 | ||||||
First Quarter | $ | 5.60 | $ | 3.94 | ||||||
2011 | ||||||||||
Fourth Quarter | $ | 5.00 | $ | 3.50 | ||||||
Third Quarter | $ | 8.70 | $ | 4.75 | ||||||
Second Quarter | $ | 8.00 | $ | 4.75 | ||||||
First Quarter | $ | 8.05 | $ | 7.90 |
The holders of Mid-Wisconsin common stock receive dividends if and when declared by the Mid-Wisconsin board of directors out of legally available funds. However, Mid-Wisconsin has paid no dividends on its common stock since August 2009 and is subject to a written agreement with the Federal Reserve Bank of Minneapolis that, among other things, prohibits Mid-Wisconsin’s payment of dividends absent the prior written consent of the Federal Reserve. In addition, Mid-Wisconsin’s ability to pay dividends on its common stock is restricted by the terms of certain of its other securities. For example, under the terms of the Debentures, Mid-Wisconsin may not pay dividends on its capital stock unless all accrued and unpaid interest payments on the Debentures have been fully paid. Additionally, the terms of the Preferred Stock provide that no dividends on any common or preferred stock that ranks equal to or junior to the Preferred Stock may be paid unless and until all accrued and unpaid dividends for all past dividend periods on the Preferred Stock have been fully paid. The principal source of Mid-Wisconsin cash flow, including cash flow to pay dividends to its shareholders, stems from dividends that Mid-Wisconsin Bank pays to Mid-Wisconsin as its sole shareholder. Statutory and regulatory limitations, as well as other factors that their board of directors deems relevant, apply to Mid-Wisconsin Bank’s payment of dividends to the Mid-Wisconsin, as well as to Mid-Wisconsin’s payment of dividends to its shareholders.
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SUPERVISION AND REGULATION
Both Nicolet and Nicolet National Bank are subject to extensive state and federal banking laws and regulations that impose restrictions on and provide for general regulatory oversight of their operations. These laws and regulations are generally intended to protect depositors and not stockholders. Legislation and regulations authorized by legislation influence, among other things:
• | how, when, and where Nicolet and Nicolet National Bank may expand geographically; |
• | into what product or service markets Nicolet and Nicolet National Bank may enter; |
• | how Nicolet and Nicolet National Bank must manage their assets; and |
• | under what circumstances money may or must flow between the parent bank holding company and the subsidiary bank. |
Set forth below is an explanation of the major pieces of legislation and regulation affecting the banking industry and how that legislation and regulation affects Nicolet’s actions. The following summary is qualified by reference to the statutory and regulatory provisions discussed. Changes in applicable laws or regulations may have a material effect on the business and prospects of Nicolet or Nicolet National Bank, and legislative changes and the policies of various regulatory authorities may significantly affect their operations. Nicolet cannot predict the effect that fiscal or monetary policies, or new federal or state legislation may have on the future business and earnings of Nicolet or Nicolet National Bank.
Regulation of Nicolet
Because Nicolet owns all of the capital stock of Nicolet National Bank, it is a bank holding company under the federal Bank Holding Company Act of 1956 (the “Bank Holding Company Act”). As a result, Nicolet is primarily subject to the supervision, examination, and reporting requirements of the Bank Holding Company Act and the regulations of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). As a bank holding company located in Wisconsin, the WDFI also regulates and monitors all significant aspects of its operations.
Acquisitions of Banks
The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before:
• | acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the bank’s voting shares; |
• | acquiring all or substantially all of the assets of any bank; or |
• | merging or consolidating with any other bank holding company. |
Additionally, The Bank Holding Company Act provides that the Federal Reserve may not approve any of these transactions if it would result in or tend to create a monopoly, substantially lessen competition, or otherwise function as a restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks involved in the transaction and the convenience and needs of the community to be served. The Federal Reserve’s consideration of financial resources generally focuses on capital adequacy, which is discussed below.
Under The Bank Holding Company Act, if adequately capitalized and adequately managed, Nicolet or any other bank holding company located in Wisconsin may purchase a bank located outside of Wisconsin. Conversely, an adequately capitalized and adequately managed bank holding company located outside of Wisconsin may purchase a bank located inside Wisconsin. In each case, however, restrictions may be placed
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on the acquisition of a bank that has only been in existence for a limited amount of time or will result in specified concentrations of deposits.
Change in Bank Control
Subject to various exceptions, The Bank Holding Company Act and the Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control is rebuttably presumed to exist if a person or company acquires 10% or more, but less than 25%, of any class of voting securities and either:
• | the bank holding company has registered securities under Section 12 of the Securities Act of 1934; or |
• | no other person owns a greater percentage of that class of voting securities immediately after the transaction. |
Following the completion of the merger, Nicolet’s common stock will not be registered under Section 12 of the Securities Exchange Act of 1934. The regulations provide a procedure for challenging rebuttable presumptions of control.
Permitted Activities
The Bank Holding Company Act has generally prohibited a bank holding company from engaging in activities other than banking or managing or controlling banks or other permissible subsidiaries and from acquiring or retaining direct or indirect control of any company engaged in any activities other than those determined by the Federal Reserve to be closely related to banking or managing or controlling banks as to be a proper incident thereto. Provisions of the Gramm-Leach-Bliley Act have expanded the permissible activities of a bank holding company that qualifies as a financial holding company. Under the regulations implementing the Gramm-Leach-Bliley Act, a financial holding company may engage in additional activities that are financial in nature or incidental or complementary to financial activities. Those activities include, among other activities, certain insurance and securities activities.
To qualify to become a financial holding company, Nicolet National Bank and any other depository institution subsidiary of Nicolet must be well capitalized and well managed and must have a Community Reinvestment Act rating of at least “satisfactory.” Additionally, Nicolet must file an election with the Federal Reserve to become a financial holding company and must provide the Federal Reserve with 30 days’ written notice prior to engaging in a permitted financial activity. While Nicolet meets the qualification standards applicable to financial holding companies, Nicolet has not elected to become a financial holding company at this time.
Support of Subsidiary Institutions
Under Federal Reserve policy, Nicolet is expected to act as a source of financial strength for Nicolet National Bank and to commit resources to support Nicolet National Bank. In addition, pursuant to the Dodd-Frank Act, the federal banking regulators are required to issue, within two years of enactment, rules that require a bank holding company to serve as a source of financial strength for any depository institution subsidiary. This support may be required at times when, without this Federal Reserve policy or the impending rules, Nicolet might not be inclined to provide it. In addition, any capital loans made by Nicolet to Nicolet National Bank will be repaid only after Nicolet National Bank’s deposits and various other obligations are repaid in full. In the unlikely event of its bankruptcy, any commitment that Nicolet gives to a bank regulatory agency to maintain the capital of Nicolet National Bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.
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Sarbanes-Oxley Act of 2002
On July 30, 2002, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) was signed into law and became some of the most sweeping federal legislation addressing accounting, corporate governance, and disclosure issues. The impact of the Sarbanes-Oxley Act is wide-ranging as it applies to all public companies and imposes significant new requirements for public company governance and disclosure requirements.
In general, the Sarbanes-Oxley Act mandated important new corporate governance and financial reporting requirements intended to enhance the accuracy and transparency of public companies’ reported financial results. It established new responsibilities for corporate chief executive officers, chief financial officers and audit committees in the financial reporting process and created a new regulatory body to oversee auditors of public companies. It backed these requirements with new SEC enforcement tools, increases criminal penalties for federal mail, wire and securities fraud, and created new criminal penalties for document and record destruction in connection with federal investigations. It also increased the opportunity for more private litigation by lengthening the statute of limitations for securities fraud claims and provided new federal corporate whistleblower protection.
The economic and operational effects of this legislation on public companies, including us, is significant in terms of the time, resources and costs associated with complying with this law. Because the Sarbanes-Oxley Act, for the most part, applies equally to larger and smaller public companies, Nicolet is presented with additional challenges as a smaller, community-oriented financial institution seeking to compete with larger financial institutions in its market.
On July 21, 2010, the Dodd-Frank Act was signed into law and included a permanent delay of the implementation of section 404(b) of the Sarbanes-Oxley Act for companies with non-affiliated public float under $75,000,000 (“non-accelerated filer”). Section 404(b) is the requirement to have an independent accounting firm audit and attest to the effectiveness of a company’s internal controls. As Nicolet does not exceed the public float threshold described above, there are no additional costs anticipated for complying with Section 404(b) in 2013.
Nicolet National Bank
Regulation of Nicolet National Bank
Because Nicolet National Bank is chartered as a national bank, it is primarily subject to the supervision, examination, and reporting requirements of the National Bank Act and the regulations of the OCC. The OCC regularly examines Nicolet National Bank’s operations and has the authority to approve or disapprove mergers, the establishment of branches and similar corporate actions. The OCC also has the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law. Because Nicolet National Bank’s deposits are insured by the FDIC to the maximum extent provided by law, it is also subject to certain FDIC regulations and the FDIC also has examination authority and back-up enforcement power over Nicolet National Bank. Nicolet National Bank is also subject to numerous state and federal statutes and regulations that affect Nicolet its business, activities, and operations.
Branching. National banks are required by the National Bank Act to adhere to branching laws applicable to state banks in the states in which they are located. Under Wisconsin law, Nicolet National Bank may open branch offices throughout the state with the prior approval of the OCC. In addition, with prior regulatory approval, Nicolet National Bank may acquire branches of existing banks located in Wisconsin or other states. Prior to the enactment of the Dodd-Frank Act, Nicolet National Bank and any other national- or state-chartered banks were generally permitted to branch across state lines by merging with banks in other states if allowed by the applicable states’ laws. However, interstate branching is now permitted for all national- and state-chartered banks as a result of the Dodd-Frank Act, provided that a state bank chartered by the state in which the branch is to be located would also be permitted to establish a branch.
Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically
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undercapitalized, in which all institutions are placed. The federal banking agencies have also specified by regulation the relevant capital levels for each category.
As a bank’s capital position deteriorates, federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized.
A “well-capitalized” bank is one that is not required to meet and maintain a specific capital level for any capital measure, pursuant to any written agreement, order, capital directive, or prompt corrective action directive, and has a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6%, and a Tier 1 leverage ratio of at least 5%. Generally, a classification as well capitalized will place a bank outside of the regulatory zone for purposes of prompt corrective action. However, a well-capitalized bank may be reclassified as “adequately capitalized” based on criteria other than capital, if the federal regulator determines that a bank is in an unsafe or unsound condition, or is engaged in unsafe or unsound practices, which requires certain remedial action.
An “adequately-capitalized” bank meets the required minimum level for each relevant capital measure, including a total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 4% and a Tier 1 leverage ratio of at least 4%. A bank that is adequately capitalized is prohibited from directly or indirectly accepting, renewing or rolling over any brokered deposits, absent applying for and receiving a waiver from the applicable regulatory authorities. Institutions that are not well capitalized are also prohibited, except in very limited circumstances where the FDIC permits use of a higher local market rate, from paying yields for deposits in excess of 75 basis points above a national average rate for deposits of comparable maturity, as calculated by the FDIC. In addition, all institutions are generally prohibited from making capital distributions and paying management fees to controlling persons if, subsequent to such distribution or payment, the institution would be undercapitalized. Finally, an adequately-capitalized bank may be forced to comply with operating restrictions similar to those placed on undercapitalized banks.
An “undercapitalized” bank fails to meet the required minimum level for any relevant capital measure. A bank that reaches the undercapitalized level is likely subject to a formal agreement, consent order or another formal supervisory sanction. An undercapitalized bank is not only subject to the requirements placed on adequately-capitalized banks, but also becomes subject to the following operating and managerial restrictions, which:
• | prohibit capital distributions; |
• | prohibit payment of management fees to a controlling person; |
• | require the bank to submit a capital restoration plan within 45 days of becoming undercapitalized; |
• | require close monitoring of compliance with capital restoration plans, requirements and restrictions by the primary federal regulator; |
• | restrict asset growth by requiring the bank to restrict its average total assets to the amount attained in the preceding calendar quarter; |
• | prohibit the acceptance of employee benefit plan deposits; and |
• | require prior approval by the primary federal regulator for acquisitions, branching and new lines of business. |
Finally, an undercapitalized institution may be required to comply with operating restrictions similar to those placed on significantly-undercapitalized institutions.
A “significantly-undercapitalized” bank has a total risk-based capital ratio less than 6%, a Tier 1 risk-based capital less than 3%, and a Tier 1 leverage ratio less than 3%. In addition to being subject to the restrictions applicable to undercapitalized institutions, significantly undercapitalized banks may, at the
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discretion of the bank’s primary federal regulator, also become subject to the following additional restrictions, which:
• | require the sale of enough capital stock so that the bank is adequately capitalized or, if grounds for conservatorship or receivership exist, the merger or acquisition of the bank; |
• | restrict affiliate transactions; |
• | restrict interest rates paid on deposits; |
• | further restrict growth, including a requirement that the bank reduce its total assets; |
• | restrict or prohibit all activities that are determined to pose an excessive risk to the bank; |
• | require the bank to elect new directors, dismiss directors or senior executive officers, or employ qualified senior executive officers to improve management; |
• | prohibit the acceptance of deposits from correspondent banks, including renewals and rollovers of prior deposits; |
• | require prior approval of capital distributions by holding companies; |
• | require holding company divestiture of the financial institution, bank divestiture of subsidiaries and/or holding company divestiture of other affiliates; and |
• | require the bank to take any other action the federal regulator determines will “better achieve” prompt corrective action objectives. |
Finally, without prior regulatory approval, a significantly undercapitalized institution must restrict the compensation paid to its senior executive officers, including the payment of bonuses and compensation that exceeds the officer’s average rate of compensation during the 12 calendar months preceding the calendar month in which the bank became undercapitalized.
A “critically-undercapitalized” bank has a ratio of tangible equity to total assets that is equal to or less than 2%. In addition to the appointment of a receiver in not more than 90 days, or such other action as determined by an institution’s primary federal regulator, an institution classified as critically undercapitalized is subject to the restrictions applicable to undercapitalized and significantly-undercapitalized institutions, and is further prohibited from doing the following without the prior written regulatory approval:
• | entering into material transactions other than in the ordinary course of business; |
• | extending credit for any highly leveraged transaction; |
• | amending the institution’s charter or bylaws, except to the extent necessary to carry out any other requirements of law, regulation or order; |
• | making any material change in accounting methods; |
• | engaging in certain types of transactions with affiliates; |
• | paying excessive compensation or bonuses, including golden parachutes; |
• | paying interest on new or renewed liabilities at a rate that would increase the institution’s weighted average cost of funds to a level significantly exceeding the prevailing rates of its competitors; and |
• | making principal or interest payment on subordinated debt 60 days or more after becoming critically undercapitalized. |
In addition, a bank’s primary federal regulator may impose additional restrictions on critically-undercapitalized institutions consistent with the intent of the prompt corrective action regulations. Once an institution has become critically undercapitalized, subject to certain narrow exceptions such as a material capital remediation, federal banking regulators will initiate the resolution of the institution.
FDIC Insurance Assessments.Nicolet National Bank’s deposits are insured by the Deposit Insurance Fund (the “DIF”) of the FDIC up to the maximum amount permitted by law, which was permanently
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increased to $250,000 by the Dodd-Frank Act. The FDIC uses the DIF to protect against the loss of insured deposits if an FDIC-insured bank or savings association fails. Pursuant to the Dodd-Frank Act, the FDIC must take steps, as necessary, for the DIF reserve ratio to reach 1.35% of estimated insured deposits by September 30, 2020. Nicolet National Bank is thus subject to FDIC deposit premium assessments.
Currently, the FDIC uses a risk-based assessment system that assigns insured depository institutions to one of four risk categories based on three primary sources of information — supervisory risk ratings for all institutions, financial ratios for most institutions, including Nicolet National Bank, and a “scorecard” calculation for large institutions. The FDIC adopted new rules, effective April 1, 2011, redefining the assessment base and adjusting the assessment rates. Under the old rules, the assessment base was domestic deposits; the new rule uses an assessment base of average consolidated total assets minus tangible equity, which is defined as Tier 1 Capital. Under the new rules, institutions assigned to the lowest risk category must pay an annual assessment rate now ranging between 2.5 and 9 cents per $100 of the assessment base. For institutions assigned to higher risk categories, assessment rates now range from 9 to 45 cents per $100 of the assessment base. These ranges reflect a possible downward adjustment for unsecured debt outstanding and, in the case of institutions outside the lowest risk category, possible upward adjustments for brokered deposits.
The new rules retain the FDIC Board’s flexibility to, without further notice-and-comment rulemaking, adopt rates that are higher or lower than the stated base assessment rates, provided that the FDIC cannot (1) increase or decrease the total rates from one quarter to the next by more than two basis points, or (2) deviate by more than two basis points from the stated base assessment rates. Although the Dodd-Frank Act requires that the FDIC eliminate its requirement to pay dividends to depository institutions when the reserve ratio exceeds a certain threshold, the FDIC’s new rule establishes a decreasing schedule of assessment rates that would take effect when the DIF reserve ratio first meets or exceeds 1.15%. If the DIF reserve ratio meets or exceeds 1.15% but is less than 2%, base assessment rates would range from 1.5 to 40 basis points; if the DIF reserve ratio meets or exceeds 2% but is less than 2.5%, base assessment rates would range from 1 to 38 basis points; and if the DIF reserve ratio meets or exceeds 2.5%, base assessment rates would range from 0.5 to 35 basis points.
On November 12, 2009, the FDIC adopted a rule requiring nearly all FDIC-insured depository institutions, including Nicolet National Bank, to prepay their DIF assessments for the fourth quarter of 2009 and for the following three years on December 30, 2009. At that time, the FDIC indicated that the prepayment of DIF assessments was in lieu of additional special assessments; however, there can be no guarantee that continued pressures on the DIF will not result in additional special assessments being collected by the FDIC in the future.
On October 19, 2010, the FDIC adopted a new DIF Restoration Plan that foregoes the uniform three basis point-increase previously scheduled to take effect on January 1, 2011. The FDIC indicated that this change was based on revised projections calling for lower than previously expected DIF losses for the period 2010 through 2014, continued stresses on the earnings of insured depository institutions, and the additional time afforded to reach the DIF reserve ratio required by the Dodd-Frank Act.
The FDIC also collects a deposit-based assessment from insured financial institutions on behalf of The Financing Corporation (“FICO”). The funds from these assessments are used to service debt issued by FICO in its capacity as a financial vehicle for the Federal Savings & Loan Insurance Corporation. The FICO assessment rate is set quarterly and in 2011 and 2012 ranged from 0.66 cents to 1.00 cents per $100 of assessable deposits. These assessments will continue until the debt matures between 2017 and 2019.
The FDIC may terminate its insurance of deposits if it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC.
Allowance for Loan Losses. The ALLL represents one of the most significant estimates in Nicolet National Bank’s financial statements and regulatory reports. Because of its significance, Nicolet National Bank has developed a system by which it develops, maintains, and documents a comprehensive, systematic, and consistently applied process for determining the amounts of the ALLL and the provision for loan losses. “The Interagency Policy Statement on the Allowance for Loan and Lease Losses,” issued on December 13, 2006,
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encourages all banks to ensure controls are in place to consistently determine the ALLL in accordance with GAAP, Nicolet National Bank’s stated policies and procedures, management’s best judgment, and relevant supervisory guidance. Consistent with supervisory guidance, Nicolet National Bank maintains a prudent and conservative, but not excessive, ALLL, that is at a level that is appropriate to cover estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the remainder of the loan and lease portfolio. Nicolet National Bank’s estimate of credit losses reflects consideration of all significant factors that affect the collectability of the portfolio as of the evaluation date. See “Management’s Discussion and Analysis — Critical Accounting Policies.”
Commercial Real Estate Lending. On December 6, 2006, the federal banking regulators issued final guidance to remind financial institutions of the risk posed by commercial real estate (“CRE”) lending concentrations. CRE loans generally include land development, construction loans, and loans secured by multifamily property, and nonfarm, nonresidential real property where the primary source of repayment is derived from rental income associated with the property. The guidance prescribes the following guidelines for its examiners to help identify institutions that are potentially exposed to significant CRE risk and may warrant greater supervisory scrutiny:
• | total reported loans for construction, land development and other land represent 100% or more of the institutions total capital, or |
• | total commercial real estate loans represent 300% or more of the institution’s total capital, and the outstanding balance of the institution’s commercial real estate loan portfolio has increased by 50% or more. |
Enforcement Powers. The Financial Institution Reform Recovery and Enforcement Act (“FIRREA”) expanded and increased civil and criminal penalties available for use by the federal regulatory agencies against depository institutions and certain “institution-affiliated parties.” Institution-affiliated parties primarily include management, employees, and agents of a financial institution, as well as independent contractors and consultants such as attorneys and accountants and others who participate in the conduct of the financial institution’s affairs. These practices can include the failure of an institution to timely file required reports or the filing of false or misleading information or the submission of inaccurate reports. Civil penalties may be as high as $1,100,000 per day for such violations. Criminal penalties for some financial institution crimes have been increased to 20 years. In addition, regulators are provided with greater flexibility to commence enforcement actions against institutions and institution-affiliated parties.
Possible enforcement actions include the termination of deposit insurance. Furthermore, banking agencies’ power to issue regulatory orders were expanded. Such orders may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined by the ordering agency to be appropriate. The Dodd-Frank Act increases regulatory oversight, supervision and examination of banks, bank holding companies and their respective subsidiaries by the appropriate regulatory agency.
Community Reinvestment Act. The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their respective jurisdictions, the federal banking agencies evaluate the record of each financial institution in meeting the credit needs of its local community, including low- and moderate-income neighborhoods. These facts are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on Nicolet National Bank. Additionally, Nicolet National Bank must publicly disclose the terms of various Community Reinvestment Act-related agreements.
Other Regulations. Interest and other charges collected or contracted for by Nicolet National Bank are subject to state usury laws and federal laws concerning interest rates. Nicolet National Bank’s loan operations are also subject to federal laws applicable to credit transactions, such as the:
• | Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; |
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• | Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; |
• | Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed, or other prohibited factors in extending credit; |
• | Fair Credit Reporting Act of 1978, as amended by the Fair and Accurate Credit Transactions Act, governing the use and provision of information to credit reporting agencies, certain identity theft protections, and certain credit and other disclosures; |
• | Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; |
• | National Flood Insurance Act and Flood Disaster Protection Act, requiring flood insurance to extend or renew certain loans in flood plains; |
• | Real Estate Settlement Procedures Act, requiring certain disclosures concerning loan closing costs and escrows, and governing transfers of loan servicing and the amounts of escrows in connection with loans secured by one-to-four family residential properties; |
• | Soldiers’ and Sailors’ Civil Relief Act of 1940, as amended, governing the repayment terms of, and property rights underlying, secured obligations of persons currently on active duty with the United States military; |
• | Talent Amendment in the 2007 Defense Authorization Act, establishing a 36% annual percentage rate ceiling, which includes a variety of charges including late fees, for certain types of consumer loans to military service members and their dependents; |
• | Bank Secrecy Act, as amended by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”), imposing requirements and limitations on specific financial transactions and account relationships, intended to guard against money laundering and terrorism financing; |
• | sections 22(g) and 22(h) of the Federal Reserve Act which set lending restrictions and limitations regarding loans and other extensions of credit made to executive officers, directors, principal shareholders and other insiders; and |
• | rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws. |
Nicolet National Bank’s deposit operations are subject to federal laws applicable to depository accounts, such as the following:
• | Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; |
• | Truth-In-Savings Act, requiring certain disclosures for consumer deposit accounts; |
• | Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and |
• | rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws. |
As part of the overall conduct of the business, Nicolet and Nicolet National Bank must comply with:
• | privacy and data security laws and regulations at both the federal and state level; and |
• | anti-money laundering laws, including the USA Patriot Act. |
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The Consumer Financial Protection Bureau. The Dodd-Frank Act creates the Consumer Financial Protection Bureau (the “Bureau”) within the Federal Reserve Board. The Bureau is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services. The Bureau has rulemaking authority over many of the statutes governing products and services offered to bank consumers. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are more stringent than those regulations promulgated by the Bureau and state attorneys general are permitted to enforce consumer protection rules adopted by the Bureau against state-chartered institutions.
Capital Adequacy
Nicolet and Nicolet National Bank are required to comply with the capital adequacy standards established by the Federal Reserve Board, in the case of Nicolet, and the OCC, in the case of Nicolet National Bank. The Federal Reserve Board has established a risk-based and a leverage measure of capital adequacy for bank holding companies. Nicolet National Bank is also subject to risk-based and leverage capital requirements adopted by its primary regulator, which are substantially similar to those adopted by the Federal Reserve Board for bank holding companies.
The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items, such as letters of credit and unfunded loan commitments, are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.
The minimum guideline for the ratio of total capital to risk-weighted assets, and classification as adequately capitalized, is 8%. A bank that fails to meet the required minimum guidelines is classified as undercapitalized and subject to operating and management restrictions. A bank, however, that exceeds its capital requirements and maintains a ratio of total capital to risk-weighted assets of 10% is classified as well capitalized.
Total capital consists of two components: Tier 1 capital and Tier 2 capital. Tier 1 capital generally consists of common stockholders’ equity, minority interests in the equity accounts of consolidated subsidiaries, qualifying noncumulative perpetual preferred stock, and a limited amount of qualifying cumulative perpetual preferred stock, less goodwill and other specified intangible assets. Tier 1 capital must equal at least 4% of risk-weighted assets. Tier 2 capital generally consists of subordinated debt, other preferred stock and hybrid capital, and a limited amount of loan loss reserves. The total amount of Tier 2 capital is limited to 100% of Tier 1 capital. As of September 30, 2012, Nicolet National Bank’s ratio of total capital to risk-weighted assets was 14.5% and Nicolet National Bank’s ratio of Tier 1 capital to risk-weighted assets was 13.3%.
In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies, which are intended to further address capital adequacy. The OCC has adopted substantially similar requirements for banks. These guidelines provide for a minimum ratio of Tier 1 capital to average assets, less goodwill and other specified intangible assets, of 3% for institutions that meet specified criteria, including having the highest regulatory rating and implementing the risk-based capital measure for market risk. All other institutions generally are required to maintain a leverage ratio of at least 4%. Nicolet National Bank has agreed with the OCC to maintain a leverage ratio of at least 8%. As of September 30, 2012, Nicolet National Bank’s leverage ratio was 10.9%. The guidelines also provide that institutions experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without reliance on intangible assets. The banking regulators consider the leverage ratio and other indicators of capital strength in evaluating proposals for expansion or new activities.
Through a provision known as “The Collins Amendment,” the Dodd-Frank Act establishes certain regulatory capital deductions with respect to hybrid capital instruments, such as trust preferred securities, that will effectively disallow the inclusion of such instruments in Tier 1 capital if such capital instrument is issued on or after May 19, 2010. However, preferred shares issued to the Treasury pursuant to the TARP Community
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Development Capital Initiative are exempt from the Collins Amendment and are permanently includable in Tier 1 capital. In addition, securities issued prior to May 19, 2010 by bank holding companies with less than $15 billion in total consolidated assets as of December 31, 2009 will not be subject to these required capital deductions. Finally, bank holding companies subject to the Federal Reserve Board’s Small Bank Holding Company Policy Statement as in effect on May 19, 2010 — generally, holding companies with less than $500 million in consolidated assets — are exempt from the trust preferred treatment changes required by the Dodd-Frank Act.
In June 2012, federal regulators issued proposed rules to implement the capital adequacy recommendations of the Basel Committee on Bank Supervision first proposed in December 2010. These proposals, which are known as “Basel III,” propose significant changes to the minimum capital levels and asset risk-weights for all banks, regardless of size, and bank holding companies with greater than $500 million in assets. Among the many changes in these proposed rules, banks would be required to hold higher levels of capital, a significantly higher portion of which would be required to be Tier 1 capital. Further, beginning in 2016, the ability of a bank or bank holding company to declare and pay dividends or pay discretionary bonuses to certain executive officers would become limited should the bank or bank holding company fail to maintain a “capital conservation buffer” composed of Tier 1 common equity that is 2.5% greater than applicable minimum capital requirements. The proposed Basel III rules would also impose significant changes on the risk-weighting of many assets, including home mortgages with high loan to value ratios, certain acquisition, development and construction loans, and certain past due assets. Finally, the proposed rules would also prevent trust preferred securities from counting as Tier 1 capital for the issuer following a ten-year phase out ending in 2022. The comment period for the proposed rules closed in late October 2012, and final rulemaking is pending.
Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and certain other restrictions on its business. As described above, significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements. See “Prompt Corrective Action” above.
The OCC, the Federal Reserve Board, and the FDIC have authority to compel or restrict certain actions if Nicolet National Bank’s capital should fall below adequate capital standards as a result of operating losses, or if its regulators otherwise determine that it has insufficient capital. Among other matters, the corrective actions may include, removing officers and directors; and assessing civil monetary penalties; and taking possession of and closing and liquidating Nicolet National Bank.
Generally, the regulatory capital framework under which Nicolet and Nicolet National Bank operate is in a period of change with likely legislation or regulation that will continue to revise the current standards and very likely increase capital requirements for the entire banking industry. Pursuant to the Dodd-Frank Act, bank regulators are required to establish new minimum leverage and risk-based capital requirements for certain bank holding companies and systematically important non-bank financial companies. The new minimum thresholds will not be lower than existing regulatory capital and leverage standards applicable to insured depository institutions and may, in fact, be higher once established.
Payment of Dividends
Nicolet is a legal entity separate and distinct from Nicolet National Bank. The principal source of Nicolet’s cash flow, including cash flow to pay dividends to its shareholders, are dividends that Nicolet National Bank pays to Nicolet as Nicolet National Bank’s sole shareholder. Statutory and regulatory limitations apply to Nicolet National Bank’s payment of dividends to Nicolet as well as to Nicolet’s payment of dividends to its shareholders. If, in the opinion of the OCC, Nicolet National Bank were engaged in or about to engage in an unsafe or unsound practice, the OCC could require that Nicolet National Bank stop or refrain from engaging in the practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level, would be an unsafe and unsound banking practice.
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Nicolet National Bank is required by federal law to obtain prior approval of the OCC for payments of dividends if the total of all dividends declared by Nicolet National Bank in any year will exceed (1) the total of Nicolet National Bank’s net profits for that year, plus (2) Nicolet National Bank’s retained net profits of the preceding two years, less any required transfers to surplus. The payment of dividends by Nicolet and Nicolet National Bank may also be affected by other factors, such as the requirement to maintain adequate capital above regulatory guidelines , any conditions or restrictions that may be imposed by regulatory authorities in connection with their approval of the merger, or the requirements of any written agreements that either Nicolet or Nicolet National Bank may enter into with their respective regulatory authorities.
When Nicolet received its capital investment from the Treasury under the SBLF on September 1, 2011, it became subject to certain contractual limitations on the payment of dividends. These limitations require, among other things, that (1) all dividends for the SBLF Preferred Stock paid before other dividends can be paid and (2) no dividends on or repurchases of Nicolet common stock will be permitted if the payment or dividends would result in a reduction of Nicolet’s Tier 1 capital from the level on the SBLF closing date by more than 10%.
Furthermore, the Federal Reserve Board clarified its guidance on dividend policies for bank holding companies through the publication of a Supervisory Letter, dated February 24, 2009. As part of the letter, the Federal Reserve Board encouraged bank holding companies to consult with the Federal Reserve Board prior to dividend declarations and redemption and repurchase decisions even when not explicitly required to do so by federal regulations. This guidance is largely consistent with prior regulatory statements encouraging bank holding companies to pay dividends out of net income and to avoid dividends that could adversely affect the capital needs or minimum regulatory capital ratios of the bank holding company and its subsidiary bank.
Any future determination relating to its dividend policy will be made at the discretion of the Board of Directors and will depend on many of the statutory and regulatory factors mentioned above.
Restrictions on Transactions with Affiliates
Nicolet and Nicolet National Bank are subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of:
• | a bank’s loans or extensions of credit to affiliates; |
• | a bank’s investment in affiliates; |
• | assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve Board; |
• | loans or extensions of credit to third parties collateralized by the securities or obligations of affiliates; and |
• | a bank’s guarantee, acceptance, or letter of credit issued on behalf of an affiliate. |
The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a bank’s capital and surplus and, as to all affiliates combined, to 20% of a bank’s capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements. Nicolet National Bank must also comply with other provisions designed to avoid taking low-quality assets.
Nicolet and Nicolet National Bank are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibit an institution from engaging in the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.
The Dodd-Frank Act enhances the requirements for certain transactions with affiliates under Section 23A and 23B, including an expansion of the definition of “covered transactions” and increasing the amount of time for which collateral requirements regarding covered transactions must be maintained.
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Nicolet National Bank is also subject to restrictions on extensions of credit to its executive officers, directors, principal shareholders, and their related interests. These extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties, and (2) must not involve more than the normal risk of repayment or present other unfavorable features. Effective July 21, 2011, an insured depository institution will be prohibited from engaging in asset purchases or sales transactions with its officers, directors, or principal shareholders unless (1) the transaction is on market terms and, (2) if the transaction represents greater than 10% of the capital and surplus of the bank, a majority of the disinterested directors has approved the transaction.
Limitations on Senior Executive Compensation
In June of 2010, federal banking regulators issued guidance designed to help ensure that incentive compensation policies at banking organizations do not encourage excessive risk-taking or undermine the safety and soundness of the organization. In connection with this guidance, the regulatory agencies announced that they will review incentive compensation arrangements as part of the regular, risk-focused supervisory process. Regulatory authorities may also take enforcement action against a banking organization if (1) its incentive compensation arrangement or related risk management, control, or governance processes pose a risk to the safety and soundness of the organization and (2) the organization is not taking prompt and effective measures to correct the deficiencies. To ensure that incentive compensation arrangements do not undermine safety and soundness at insured depository institutions, the incentive compensation guidance sets forth the following key principles:
• | incentive compensation arrangements should provide employees incentives that appropriately balance risk and financial results in a manner that does not encourage employees to expose the organization to imprudent risk; |
• | incentive compensation arrangements should be compatible with effective controls and risk management; and |
• | incentive compensation arrangements should be supported by strong corporate governance, including active and effective oversight by the board of directors. |
The Dodd-Frank Act
The Dodd-Frank Act has had a broad impact on the financial services industry, including significant regulatory and compliance changes previously discussed and including, among other things, (1) enhanced resolution authority of troubled and failing banks and their holding companies; (2) increased regulatory examination fees; and (3) numerous other provisions designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector. Additionally, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Federal Reserve Board, the OCC, and the FDIC.
Many of the requirements called for in the Dodd-Frank Act will be implemented over time, and most will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on financial institutions’ operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of its business activities; require changes to certain of its business practices; impose upon us more stringent capital, liquidity, and leverage ratio requirements; or otherwise adversely affect its business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.
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Proposed Legislation and Regulatory Action
New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations, and competitive relationships of financial institutions operating and doing business in the United States. Nicolet cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which its business may be affected by any new regulation or statute.
Effect of Governmental Monetary Policies
Nicolet National Bank’s earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Board’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve Board affect the levels of bank loans, investments, and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks, and its influence over reserve requirements to which member banks are subject. Neither Nicolet nor Nicolet National Bank can predict the nature or impact of future changes in monetary and fiscal policies.
OTHER MATTERS
Neither Nicolet’s nor Mid-Wisconsin’s respective management teams are aware of any other matters to be brought before their respective special shareholders’ meeting. However, if any other matters are properly brought before the applicable meeting, the persons named in the enclosed proxy card will have discretionary authority to vote all proxies with respect to such matters in accordance with their judgment.
EXPERTS
The consolidated financial statements and schedules as of December 31, 2011, and for each of the years in the three-year period ended December 31, 2011 included in Mid-Wisconsin’s Annual Report on Form 10-K for the year ended December 31, 2011, which is attached asAppendix E to this joint proxy statement-prospectus have been audited by Wipfli LLP. The consolidated financial statements as of December 31, 2011, and for each of the years in the three-year period ended December 31, 2011 for Nicolet, included beginning on page F-1 of this joint proxy statement-prospectus, and registration statement have been audited by Porter Keadle Moore LLC, Nicolet’s independent registered public accounting firm, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
Godfrey & Kahn LLP will provide an opinion to Nicolet and Mid-Wisconsin as to the validity of the shares of common stock that Nicolet will issue in the merger. The material U.S. federal income tax consequences of the merger will also be passed upon by Bryan Cave LLP. Certain additional legal matters relating to the merger will be passed upon for Nicolet by Bryan Cave LLP and Godfrey & Kahn LLP and for Mid-Wisconsin by Barack Ferrazzano Kirschbaum & Nagelberg LLP.
IMPORTANT NOTICE FOR MID-WISCONSIN’S SHAREHOLDERS
If you cannot locate your Mid-Wisconsin common stock certificate(s), please contact at Mid-Wisconsin, 132 West State Street, Medford, Wisconsin 54451, telephone number (715) 748-8300. If you have misplaced your stock certificates or if you hold certificates in names other than your own and wish to vote in person at the special meeting, we encourage you to resolve those matters before the meeting.
Please do not send your Mid-Wisconsin stock certificates at this time.
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WHERE YOU CAN FIND ADDITIONAL INFORMATION
Until December 20, 2012, Mid-Wisconsin was required to file certain reports, proxy statements and other information with the SEC. The SEC maintains a web site on the Internet that contains reports, proxy statements and other information about public companies, including Mid-Wisconsin’s filings through December 20, 2012. The address of that site is http://www.sec.gov. You may also read and copy any materials filed with the SEC by Mid-Wisconsin at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Nicolet has filed a registration statement on Form S-4 with the SEC that registers the Nicolet common stock to be issued in the merger. This joint proxy statement-prospectus is a part of that registration statement and constitutes a prospectus of Nicolet and a joint proxy statement of Mid-Wisconsin and Nicolet for their respective special meetings.
In addition, both Mid-Wisconsin Bank and Nicolet National Bank file quarterly Consolidated Reports of Condition and Income (“Call Reports”) with the FDIC. All Call Reports are publicly available, free of charge, on the FDIC’s website atwww.fdic.gov. Each Call Report consists of a Balance Sheet, Income Statement, Changes in Equity Capital and other supporting schedules as of the end of or for the period to which the Call Report relates. The Call Reports are prepared in accordance with regulatory instructions issued by the Federal Financial Institutions Examination Council. These instructions in most, but not all, cases follow GAAP, including the opinions and statements of the Accounting Principles Board and the Financial Accounting Standards Board. These reports are supervisory and regulatory documents, not primarily accounting documents, and do not provide a complete range of financial disclosure about the reporting bank. Nevertheless, the reports provide important information concerning the bank’s financial condition and results of operations.
This joint proxy statement-prospectus does not contain all of the information in the registration statement. Please refer to the registration statement for further information about Nicolet and the Nicolet common stock to be issued in the merger. Statements contained in this joint proxy statement-prospectus concerning the provisions of certain documents included in the registration statement are not necessarily complete. A complete copy of each document is filed as an exhibit to the registration statement. You may obtain copies of all or any part of the registration statement, including exhibits thereto, upon payment of the prescribed fees, at the offices of the SEC listed above.
Nicolet has supplied all of the information contained in this joint proxy statement-prospectus relating to Nicolet and its subsidiary bank. Mid-Wisconsin has supplied all of the information relating to Mid-Wisconsin and its subsidiary bank.
You should rely only on the information contained or incorporated by reference in this joint proxy statement-prospectus to vote on the proposals to Nicolet and Mid-Wisconsin shareholders in connection with the merger. We have not authorized anyone to provide you with information that is different from what is contained in this joint proxy statement-prospectus. This joint proxy statement-prospectus is dated [ ], 2013. You should not assume that the information contained in this joint proxy statement-prospectus is accurate as of any other date other than such date, and neither the mailing of this joint proxy statement-prospectus nor the issuance of Nicolet common stock as contemplated by the merger agreement will create any implication to the contrary.
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NICOLET BANKSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2011
December 31, 2011
F-1
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To the Board of Directors and Shareholders
Nicolet Bankshares, Inc.
Green Bay, Wisconsin
Nicolet Bankshares, Inc.
Green Bay, Wisconsin
We have audited the accompanying consolidated balance sheets of Nicolet Bankshares, Inc. and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nicolet Bankshares, Inc. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
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Atlanta, Georgia
February 29, 2012, except for Note 19, as to which the date is February 1, 2013
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February 29, 2012, except for Note 19, as to which the date is February 1, 2013
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F-2
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2011 and 2010
December 31, 2011 and 2010
2011 | 2010 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Assets | ||||||||||
Cash and due from banks | $ | 13,741,792 | $ | 14,737,396 | ||||||
Interest-earning deposits | 77,391,757 | 36,374,796 | ||||||||
Federal funds sold | 995,500 | 990,463 | ||||||||
Cash and cash equivalents | 92,129,049 | 52,102,655 | ||||||||
Certificates of deposit in other banks | 248,000 | 497,000 | ||||||||
Securities available for sale | 56,759,395 | 52,388,150 | ||||||||
Other investments | 5,211,150 | 4,910,450 | ||||||||
Loans held for sale | 11,373,260 | 5,333,900 | ||||||||
Loans | 472,488,814 | 513,760,783 | ||||||||
Allowance for loan losses | (5,899,488 | ) | (8,635,059 | ) | ||||||
Loans, net | 466,589,326 | 505,125,724 | ||||||||
Premises and equipment, net | 19,256,425 | 19,121,027 | ||||||||
Bank owned life insurance | 14,236,662 | 13,664,446 | ||||||||
Accrued interest receivable and other assets | 12,445,458 | 21,610,959 | ||||||||
Total assets | $ | 678,248,725 | $ | 674,754,311 | ||||||
Liabilities and Stockholders’ Equity | ||||||||||
Liabilities: | ||||||||||
Demand | $ | 78,154,193 | $ | 68,201,600 | ||||||
Money market and NOW accounts | 270,738,311 | 213,043,751 | ||||||||
Savings | 21,780,998 | 14,195,129 | ||||||||
Time | 180,862,028 | 263,023,433 | ||||||||
Total deposits | 551,535,530 | 558,463,913 | ||||||||
Short-term borrowings | 4,131,892 | 4,390,436 | ||||||||
Notes payable | 35,373,896 | 35,581,489 | ||||||||
Junior subordinated debentures | 6,185,568 | 6,185,568 | ||||||||
Accrued interest payable and other liabilities | 4,808,600 | 4,466,843 | ||||||||
Total liabilities | 602,035,486 | 609,088,249 | ||||||||
Stockholders’ Equity: | ||||||||||
Preferred equity | 24,400,000 | 15,203,280 | ||||||||
Common stock | 34,804 | 34,604 | ||||||||
Additional paid-in capital | 36,740,711 | 36,255,430 | ||||||||
Retained earnings | 13,156,974 | 13,128,021 | ||||||||
Accumulated other comprehensive income | 1,690,021 | 998,530 | ||||||||
Total Nicolet Bankshares Inc. stockholders’ equity | 76,022,510 | 65,619,865 | ||||||||
Noncontrolling interest | 190,729 | 46,197 | ||||||||
Total stockholders’ equity and noncontrolling interest | 76,213,239 | 65,666,062 | ||||||||
Total liabilities, noncontrolling interest and stockholders’ equity | $ | 678,248,725 | $ | 674,754,311 | ||||||
Preferred shares authorized (no par value) | 10,000,000 | 10,000,000 | ||||||||
Preferred shares issued | 24,400 | 15,712 | ||||||||
Common shares authorized (par value $0.01 per share) | 30,000,000 | 30,000,000 | ||||||||
Common shares issued | 3,480,355 | 3,460,437 |
See Notes to Consolidated Financial Statements
F-3
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31, 2011, 2010 and 2009
Years Ended December 31, 2011, 2010 and 2009
2011 | 2010 | 2009 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Interest income: | ||||||||||||||
Loans, including loan fees | $ | 28,033,620 | $ | 29,384,906 | $ | 28,878,744 | ||||||||
Investment securities: | ||||||||||||||
Taxable | 689,229 | 865,173 | 766,632 | |||||||||||
Non-taxable | 941,479 | 953,850 | 1,103,039 | |||||||||||
Federal funds sold | 2,492 | 9,937 | 21,429 | |||||||||||
Other interest income | 163,355 | 205,919 | 811,914 | |||||||||||
Total interest income | 29,830,175 | 31,419,785 | 31,581,758 | |||||||||||
Interest expense: | ||||||||||||||
Money market and NOW accounts | 1,546,429 | 1,465,504 | 1,384,693 | |||||||||||
Savings and time deposits | 4,963,800 | 7,888,960 | 11,303,884 | |||||||||||
Short term borrowings | 9,009 | 24,193 | 28,089 | |||||||||||
Junior subordinated debentures | 501,718 | 501,858 | 501,718 | |||||||||||
Notes payable | 1,362,045 | 1,410,080 | 1,999,116 | |||||||||||
Total interest expense | 8,383,001 | 11,290,595 | 15,217,500 | |||||||||||
Net interest income | 21,447,174 | 20,129,190 | 16,364,258 | |||||||||||
Provision for loan losses | 6,600,000 | 8,500,000 | 6,000,000 | |||||||||||
Net interest income after provision for loan losses | 14,847,174 | 11,629,190 | 10,364,258 | |||||||||||
Other income: | ||||||||||||||
Service charges on deposit accounts | 1,180,214 | 1,087,321 | 932,025 | |||||||||||
Trust services fee income | 2,898,673 | 2,811,173 | 2,857,632 | |||||||||||
Mortgage fee income | 1,766,778 | 2,618,909 | 1,546,565 | |||||||||||
Brokerage fee income | 334,209 | 290,582 | 207,679 | |||||||||||
Loss on sale, disposal and writedown of assets, net | (55,055 | ) | (58,668 | ) | (150,467 | ) | ||||||||
Bank owned life insurance | 572,216 | 573,940 | 557,627 | |||||||||||
Rent income | 954,888 | 969,809 | 1,003,402 | |||||||||||
Investment advisory fees | 329,518 | 307,608 | 357,456 | |||||||||||
Other | 462,360 | 367,263 | 218,742 | |||||||||||
Total other income | 8,443,801 | 8,967,937 | 7,530,661 | |||||||||||
Other expenses: | ||||||||||||||
Salaries and employee benefits | 11,333,831 | 10,165,339 | 8,281,869 | |||||||||||
Occupancy, equipment and office | 4,408,651 | 3,747,946 | 3,253,722 | |||||||||||
Business development and marketing | 1,362,572 | 1,242,421 | 1,284,734 | |||||||||||
Data processing | 1,360,463 | 1,292,704 | 1,143,296 | |||||||||||
FDIC assessments | 629,845 | 926,943 | 1,144,058 | |||||||||||
Core deposit intangible amortization | 740,621 | 329,165 | — | |||||||||||
Other | 1,606,744 | 1,611,429 | 1,576,063 | |||||||||||
Total other expenses | 21,442,727 | 19,315,947 | 16,683,742 | |||||||||||
Income before income tax expense | 1,848,248 | 1,281,180 | 1,211,177 | |||||||||||
Income tax expense | 318,431 | 136,326 | 45,551 | |||||||||||
Net income | 1,529,817 | 1,144,854 | 1,165,626 | |||||||||||
Less: Net income (loss) attributable to noncontrolling interest | 39,532 | 34,505 | (11,137 | ) | ||||||||||
Net income attributable to Nicolet Bankshares, Inc. | 1,490,285 | 1,110,349 | 1,176,763 | |||||||||||
Less: Preferred stock dividends and discount accretion | 1,461,332 | 985,160 | 1,001,017 | |||||||||||
Net income available to common shareholders | $ | 28,953 | $ | 125,189 | $ | 175,746 | ||||||||
Basic earnings per common share | $ | 0.01 | $ | 0.04 | $ | 0.05 | ||||||||
Diluted earnings per common share | $ | 0.01 | $ | 0.04 | $ | 0.05 | ||||||||
Weighted average common shares outstanding: | ||||||||||||||
Basic | 3,468,658 | 3,452,358 | 3,499,793 | |||||||||||
Diluted | 3,487,760 | 3,481,042 | 3,528,102 |
See Notes to Consolidated Financial Statements
F-4
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2011, 2010 and 2009
Years Ended December 31, 2011, 2010 and 2009
Nicolet Bankshares, Inc. Stockholders’ Equity | ||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Preferred Equity | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income | Noncontrolling Interest | Total | ||||||||||||||||||||||||
Balance, December 31, 2008 | $ | 14,864,000 | $ | 35,025 | $ | 36,706,079 | $ | 12,827,086 | $ | 999,373 | $ | 10,829 | $ | 65,442,392 | ||||||||||||||||
Net income (loss) | — | — | — | 1,176,763 | — | (11,137 | ) | 1,165,626 | ||||||||||||||||||||||
Change in net unrealized gains on securities available for sale, net of tax | — | — | — | — | 70,729 | — | 70,729 | |||||||||||||||||||||||
Reclassification adjustment for gains realized on securities available for sale, net of tax | — | — | — | — | (4,543 | ) | — | (4,543 | ) | |||||||||||||||||||||
Total comprehensive income | 1,231,812 | |||||||||||||||||||||||||||||
Stock compensation expense | — | — | 162,038 | — | — | — | 162,038 | |||||||||||||||||||||||
Exercise of stock options, including income tax benefit of $0 | — | 253 | 257,248 | — | — | — | 257,501 | |||||||||||||||||||||||
Issuance of common stock | — | 107 | 180,222 | — | — | — | 180,329 | |||||||||||||||||||||||
Preferred stock accretion | 169,640 | — | — | (169,640 | ) | — | — | — | ||||||||||||||||||||||
Preferred stock dividends | — | — | — | (831,377 | ) | — | — | (831,377 | ) | |||||||||||||||||||||
Common stock repurchase and cancellation (96,600 shares) | — | (966 | ) | (1,617,914 | ) | — | — | — | (1,618,880 | ) | ||||||||||||||||||||
Owner contribution to noncontrolling interest | — | — | — | — | — | 12,000 | 12,000 | |||||||||||||||||||||||
Balance, December 31, 2009 | $ | 15,033,640 | $ | 34,419 | $ | 35,687,673 | $ | 13,002,832 | $ | 1,065,559 | $ | 11,692 | $ | 64,835,815 | ||||||||||||||||
Net income | — | — | — | 1,110,349 | — | 34,505 | 1,144,854 | |||||||||||||||||||||||
Change in net unrealized gains on securities available for sale, net of tax | — | — | — | — | 119,851 | — | 119,851 | |||||||||||||||||||||||
Reclassification adjustment for gains realized on securities available for sale, net of tax | — | — | — | — | (186,880 | ) | — | (186,880 | ) | |||||||||||||||||||||
Total comprehensive income | 1,077,825 | |||||||||||||||||||||||||||||
Stock compensation expense | — | — | 295,740 | — | — | — | 295,740 | |||||||||||||||||||||||
Exercise of stock options, including income tax benefit of $0 | — | 64 | 64,436 | — | — | — | 64,500 | |||||||||||||||||||||||
Issuance of common stock | — | 121 | 207,581 | — | — | — | 207,702 | |||||||||||||||||||||||
Preferred stock accretion | 169,640 | — | — | (169,640 | ) | — | — | — | ||||||||||||||||||||||
Preferred stock dividends | — | — | — | (815,520 | ) | — | — | (815,520 | ) | |||||||||||||||||||||
Balance, December 31, 2010 | $ | 15,203,280 | $ | 34,604 | $ | 36,255,430 | $ | 13,128,021 | $ | 998,530 | $ | 46,197 | $ | 65,666,062 | ||||||||||||||||
Net income | — | — | — | 1,490,285 | — | 39,532 | 1,529,817 | |||||||||||||||||||||||
Change in net unrealized gains on securities available for sale, net of tax | — | — | — | — | 691,491 | — | 691,491 | |||||||||||||||||||||||
Total comprehensive income | 2,221,308 | |||||||||||||||||||||||||||||
Stock compensation expense | — | — | 294,458 | — | — | — | 294,458 | |||||||||||||||||||||||
Exercise of stock options, including income tax benefit of $3,205 | — | 178 | 196,073 | — | — | — | 196,251 | |||||||||||||||||||||||
Issuance of common stock | — | 22 | 35,750 | — | — | — | 35,772 | |||||||||||||||||||||||
Preferred stock accretion | 508,720 | — | — | (508,720 | ) | — | — | — | ||||||||||||||||||||||
Preferred stock dividends | — | — | — | (952,612 | ) | — | — | (952,612 | ) | |||||||||||||||||||||
Preferred stock redemption, CPP | (15,712,000 | ) | — | — | — | — | — | (15,712,000 | ) | |||||||||||||||||||||
Issuance of preferred stock, SBLF, net | 24,400,000 | — | (41,000 | ) | — | — | — | 24,359,000 | ||||||||||||||||||||||
Owner contribution to noncontrolling interest | — | — | — | — | — | 105,000 | 105,000 | |||||||||||||||||||||||
Balance, December 31, 2011 | $ | 24,400,000 | $ | 34,804 | $ | 36,740,711 | $ | 13,156,974 | $ | 1,690,021 | $ | 190,729 | $ | 76,213,239 |
See Notes to Consolidated Financial Statements
F-5
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 2011, 2010 and 2009
Years Ended December 31, 2011, 2010 and 2009
2011 | 2010 | 2009 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cash Flows From Operating Activities: | ||||||||||||||
Net income | $ | 1,529,817 | $ | 1,144,854 | $ | 1,165,626 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
Depreciation, amortization and accretion | 1,901,875 | 1,429,973 | 1,468,196 | |||||||||||
Provision for loan losses | 6,600,000 | 8,500,000 | 6,000,000 | |||||||||||
Provision for deferred taxes | 453,803 | (880,983 | ) | (339,774 | ) | |||||||||
Increase in cash surrender value of life insurance | (572,216 | ) | (573,940 | ) | (557,627 | ) | ||||||||
Stock compensation expense | 294,458 | 295,740 | 162,037 | |||||||||||
Loss on sale, disposal or writedown of assets, net | 55,055 | 58,668 | 150,467 | |||||||||||
Gain on sale of loans held for sale, net | (1,766,778 | ) | (2,618,909 | ) | (1,546,565 | ) | ||||||||
Proceeds from sale of loans held for sale | 108,858,230 | 161,346,099 | 120,834,339 | |||||||||||
Origination of loans held for sale | (113,130,812 | ) | (158,449,240 | ) | (121,481,124 | ) | ||||||||
Net change in: | ||||||||||||||
Accrued interest receivable and other assets | 7,151,062 | (6,045,475 | ) | (2,366,799 | ) | |||||||||
Accrued interest payable and other liabilities | (217,526 | ) | (358,753 | ) | 395,407 | |||||||||
Net cash provided by operating activities | 11,156,968 | 3,848,034 | 3,884,183 | |||||||||||
Cash Flows From Investing Activities: | ||||||||||||||
Net decrease in certificates of deposit in other banks | 249,000 | 2,479,000 | 30,280,000 | |||||||||||
Net decrease (increase) in loans | 30,963,273 | (8,965,918 | ) | (15,400,473 | ) | |||||||||
Purchases of securities available for sale | (9,704,315 | ) | (12,111,065 | ) | (10,771,514 | ) | ||||||||
Proceeds from sales of securities available for sale | — | 3,305,201 | 14,264 | |||||||||||
Proceeds from calls and maturities of securities available for sale | 6,263,087 | 10,794,659 | 7,095,617 | |||||||||||
Purchases of other investments | (428,450 | ) | (15,500 | ) | (323,100 | ) | ||||||||
Purchases of premises and equipment | (1,736,229 | ) | (1,612,717 | ) | (239,746 | ) | ||||||||
Proceeds from sale of other real estate and other assets | 1,839,775 | 765,893 | 1,176,415 | |||||||||||
Net cash received in business combination | — | 77,777,555 | — | |||||||||||
Net cash provided by investing activities | 27,446,141 | 72,417,108 | 11,831,463 | |||||||||||
Cash Flows From Financing Activities: | ||||||||||||||
Net decrease in deposits | (6,345,049 | ) | (104,205,084 | ) | (14,264,626 | ) | ||||||||
Net decrease in short term borrowings | (258,544 | ) | (3,208,398 | ) | (2,942,514 | ) | ||||||||
Repayments of notes payable | (207,593 | ) | (305,762 | ) | (647,480 | ) | ||||||||
Proceeds from Federal Home Loan Bank advances | — | — | 25,000,000 | |||||||||||
Repayments of Federal Home Loan Bank advances | — | — | (25,000,000 | ) | ||||||||||
Purchase of treasury stock | — | — | (1,618,880 | ) | ||||||||||
Proceeds from issuance of common stock, net | 35,772 | 207,702 | 180,329 | |||||||||||
Proceeds from exercise of common stock options | 196,251 | 64,500 | 257,501 | |||||||||||
Proceeds from issuance of preferred stock (SBLF), net | 24,359,000 | — | — | |||||||||||
Repayment of preferred stock (CPP) | (15,712,000 | ) | — | — | ||||||||||
Noncontrolling interest in joint venture | 105,000 | — | 12,000 | |||||||||||
Cash dividends paid on preferred stock | (749,552 | ) | (815,520 | ) | (729,437 | ) | ||||||||
Net cash provided (used) by financing activities | 1,423,285 | (108,262,562 | ) | (19,753,107 | ) | |||||||||
Net increase (decrease) in cash and cash equivalents | 40,026,394 | �� | (31,997,420 | ) | (4,037,461 | ) | ||||||||
Cash and cash equivalents: | ||||||||||||||
Beginning | $ | 52,102,655 | $ | 84,100,075 | $ | 88,137,536 | ||||||||
Ending | $ | 92,129,049 | $ | 52,102,655 | $ | 84,100,075 |
(continued)
See Notes to Consolidated Financial Statements
F-6
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows — continued
Years Ended December 31, 2011, 2010 and 2009
Years Ended December 31, 2011, 2010 and 2009
2011 | 2010 | 2009 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Supplemental Disclosures of Cash Flow Information: | ||||||||||||||
Cash paid during the year for: | ||||||||||||||
Interest | $ | 9,211,295 | $ | 11,754,089 | $ | 16,322,703 | ||||||||
Income taxes | 205,000 | 1,146,000 | 555,000 | |||||||||||
Supplemental Schedule of Noncash Investing Activities: | ||||||||||||||
Change in accumulated other comprehensive income relating to unrealized (gains) losses on securities available for sale, net of tax | $ | (691,491 | ) | $ | (119,851 | ) | $ | (70,729 | ) | |||||
Transfer of loans to other assets | 973,125 | 512,024 | 2,694,000 | |||||||||||
Supplemental Schedules of Noncash Financing Activities: | ||||||||||||||
Accretion of preferred stock discount | $ | 508,720 | $ | 169,640 | $ | 169,640 |
See Notes to Consolidated Financial Statements
F-7
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. | NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES |
Nature of Banking Activities: Nicolet Bankshares, Inc. was incorporated on April 5, 2000. Effective June 6, 2002, Nicolet Bankshares, Inc. received approval to become a one-bank holding company owning 100% of the common stock of Nicolet National Bank. Nicolet National Bank opened for business on October 29, 2000.
The consolidated income of Nicolet Bankshares, Inc. (the “Company”) is principally from the income of its wholly-owned subsidiary, Nicolet National Bank (the “Bank”). The Bank grants primarily commercial loans in its trade area of northeastern Wisconsin, but also grants residential and consumer loans, accepts deposits and provides trust and brokerage services to its customers. The Bank is subject to competition from other financial institutions providing financial products. The Company and the Bank are regulated by certain regulatory agencies, including the Office of the Comptroller of the Currency and the Federal Reserve Board and are subject to periodic examination by those agencies.
During 2004, the Company entered into a joint venture, Nicolet Joint Ventures, LLC (the “JV”), with a real estate development and investment firm in connection with the selection and development of a site for a new headquarters facility. The firm that is the joint venture party is considered a related party, as one of its principals is a Board member and shareholder of the Company. The JV involves a 50% ownership by the Company.
During 2008, the Company purchased 100% of Brookfield Investment Partners, LLC (“Brookfield Investments”), an investment advisory firm that provides investment strategy and transactional services to financial institutions.
In 2010, the Company purchased selected assets and assumed the deposits and leases of four Brown County, Wisconsin, branch offices from a Madison-based thrift (the “2010 Branch Acquisition”). See Note 2, “Business Combinations,” for additional disclosures.
A summary of the Company’s significant accounting policies follows.
Principles of Consolidation: The consolidated financial statements of the Company include the accounts of the Bank, Brookfield Investments and the JV. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. Results of operations of companies purchased, if any, are included from the date of acquisition.
Use of Estimates: In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, and the valuation of foreclosed real estate and deferred tax assets. The fair value disclosure of financial instruments is an estimate that can be computed within a range.
Cash and Cash Equivalents: For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and due from banks, federal funds sold, and interest-earning deposits in other banks with original maturities of 90 days or less, if any. The Bank maintains amounts in due from banks which, at times, may exceed federally insured limits. Management monitors these correspondent relationships. The Bank has not experienced any losses in such accounts. The Bank has restrictions on cash and due from banks as it is required to maintain certain vault cash and reserve balances with the Federal Reserve Bank to meet specific reserve requirements. The Bank’s reserve requirement was $175,000 at December 31, 2011, and there was no reserve requirement at December 31, 2010.
F-8
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities Available For Sale: Securities classified as available for sale 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 available for sale 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. Securities classified as available for sale are carried at fair value, with unrealized gains or losses, net of related deferred income taxes, reported as increases or decreases in accumulated other comprehensive income. Premiums and discounts are amortized or accreted into interest income over the life of the related securities using the effective interest method. Management evaluates investment securities for other-than-temporary impairment on at least an annual basis. A decline in the market value of any investment below amortized cost that is deemed other-than-temporary is charged to earnings for the decline in value deemed to be credit related and a new cost basis in the security is established. The decline in value attributed to non-credit related factors considered temporary in nature is recognized in other comprehensive income. In evaluating other-than-temporary impairment, management considers the length of time and extent to which the fair value has been less than cost, and the financial condition and near-term prospects of the issuer for a period sufficient to allow for any anticipated recovery in fair value in the near term. Realized gains or losses on securities sales (using the specific identification method) and declines in value judged to be other-than-temporary are included in the consolidated statements of income under loss on assets, net.
Other Investments: As a member of the Federal Reserve Bank System and the Federal Home Loan Bank (FHLB) System, the Bank is required to maintain an investment in the capital stock of these entities. These equity securities are “restricted” in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other tradable equity securities. As no ready market exists for these stocks, and they have no quoted market value, these investments are carried at cost. Also included are Company investments in other private companies that do not have quoted market prices, carried at cost less other-than-temporary impairment charges, if any. Management’s evaluation of these other investments for impairment includes consideration of the financial condition and other available relevant information of the issuer.
Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value as determined on an aggregate basis. The amount by which cost exceeds market value is accounted for as a valuation allowance. Changes, if any, in the valuation allowance are included in the determination of net income in the period in which the change occurs. As of December 31, 2011 and 2010, no valuation allowance was necessary. Loans held for sale are sold servicing released and without recourse. Mortgage fee income represents net gains from the sale of mortgage loans held for sale, as well as fees, if any, received from borrowers and loan investors related to these loans.
Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are carried at their principal amount outstanding. 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 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. 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 period of time.
F-9
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Management considers a loan to be impaired when it is probable the Bank will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement.
Allowance for Loan Losses: The allowance for loan losses is a reserve for estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the loan portfolio. Actual credit losses, net of recoveries, are deducted from the allowance for loan losses. Loans are charged off when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance for loan losses. A provision for loan losses, which is a charge against earnings, is recorded to bring the allowance for loan losses to a level that, in management’s judgment, is adequate to absorb probable losses in the loan portfolio.
The allocation methodology applied by the Company is designed to assess the appropriateness of the allowance for loan losses and includes allocations for specifically identified impaired loans and loss factor allocations for all remaining loans, with a component primarily based on historical loss rates and a component primarily based on other qualitative factors. The methodology includes evaluation and consideration of several factors, such as but not limited to management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and nonaccrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or circumstances underlying collectability of loans. Because each of the criteria used is subject to change, the allocation of the allowance for loan losses is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular loan category. The total allowance is available to absorb losses from any segment of the loan portfolio. Management believes the allowance for loan losses is appropriate. The allowance analysis is reviewed by the Board on a quarterly basis in compliance with regulatory requirements.
In addition, various regulatory agencies periodically review the allowance for loan losses. These agencies may require the Bank to make additions to the allowance for loan losses based on their judgments of collectability based on information available to them at the time of their examination.
Credit-Related Financial Instruments: In the ordinary course of business the Bank has entered into financial instruments consisting of commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded.
Transfers of Financial Assets: Transfers of financial assets, primarily in loan participation activities, are accounted for as sales only when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of the right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return assets.
Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed on straight-line and accelerated methods over the estimated useful lives of the related assets. Leasehold improvements are amortized on the straight-line method over the shorter of the estimated useful lives of the improvements or the terms of the related leases. Maintenance and repairs are expensed as incurred.
F-10
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Estimated useful lives of premises and equipment generally range as follows:
Building | 25 – 39 | years | ||||
Leasehold improvements | 5 – 15 | years | ||||
Furniture and equipment | 3 – 10 | years | ||||
Other Real Estate Owned: Other real estate owned, acquired through partial or total satisfaction of loans, is carried at the lower of cost or fair value less estimated costs to sell. Any write-down in the carrying value at the time of acquisition is charged to the allowance for loan losses. Any subsequent write-downs to reflect current fair market value, as well as gains or losses on disposition and revenues and expenses incurred to hold and maintain such properties, are treated as period costs. Other real estate owned, included in other assets in the consolidated balance sheets, was approximately $641,000 and $1,443,000 at December 31, 2011 and 2010, respectively.
Goodwill and Core Deposit Intangible: The excess of the cost of an acquisition over the fair value of the net assets acquired results primarily in goodwill or deposit base premiums which are included in other assets in the consolidated balance sheets. The core deposit intangible (related to the 2010 Branch Acquisition) has an estimated finite life, is amortized on an accelerated basis over a 10-year period, and is subject to periodic impairment evaluation. Goodwill is not amortized but is subject to impairment tests on at least an annual basis. Management periodically reviews the carrying value of its long-lived and intangible assets to determine if any impairment has occurred or whether changes in circumstances have occurred that would require a revision to the remaining useful life, in which case an impairment charge would be recorded as an expense in the period of impairment. In making such determination, management evaluates whether there are any adverse qualitative factors indicating that an impairment may exist, as well as the performance, on an undiscounted basis, of the underlying operations or assets which give rise to the intangible. The Company’s annual assessments indicated no impairment charge on goodwill or core deposit intangible was required for 2011 or 2010. Goodwill was approximately $762,000 at both December 31, 2011 and 2010. The net book value of core deposit intangible was approximately $2,880,000 and $3,621,000 at December 31, 2011 and 2010, respectively.
Short-term borrowings: Short-term borrowings consist primarily of overnight Federal funds purchased and securities sold under agreements to repurchase (“repos”), or other short-term borrowing arrangements. Repos are with commercial deposit customers, and are treated as financing activities carried at the amounts that will be subsequently repurchased as specified in the respective agreements. Repos generally mature within one to four days from the transaction date. The Company may be required to provide additional collateral based on the fair value of the underlying securities.
Stock-based Compensation Plans: Share-based payment to employees, including grants of employee stock options, are valued at fair value on the date of grant and expensed as compensation expense over the applicable vesting period.
For stock option grants with graded vesting schedules compensation expense is recognized on a straight-line basis over the requisite service period of the award. The fair value of each option is estimated on the date of grant using the Black-Scholes model. There were no stock option grants in 2011. The weighted average assumptions used for valuing option grants in 2010 and 2009 follow:
2010 | 2009 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Dividend yield | 0 | % | 0 | % | ||||||
Expected volatility | 25 | % | 22 | % | ||||||
Risk-free interest rate | 2.12 | % | 3.00 | % | ||||||
Expected average life | 7 years | 7 years | ||||||||
Weighted average per share fair value of options | $ | 5.41 | $ | 5.25 |
F-11
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income taxes: The Company files a consolidated federal income tax return and a combined state income tax return (both of which include the Company and its wholly-owned subsidiaries). Accordingly, amounts equal to tax benefits of those companies having taxable federal losses or credits are reimbursed by the companies that incur federal tax liabilities.
Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company may also recognize a liability for unrecognized tax benefits from uncertain tax positions. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the financial statements. At December 31, 2011, the Company had determined it had no significant uncertain tax positions. Interest and penalties related to unrecognized tax benefits are classified as income taxes.
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 common shares adjusted for the dilutive effect of outstanding stock options, and other potential common stock issuances, if any, from instruments such as convertible securities and warrants.
Earnings per share and related information are summarized as follows:
Years ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2011 | 2010 | 2009 | |||||||||||||
Net income, net of noncontrolling interest | $ | 1,490,285 | $ | 1,110,349 | $ | 1,176,763 | |||||||||
Less preferred stock dividends and discount accretion | 1,461,332 | 985,160 | 1,001,017 | ||||||||||||
Net income available to common shareholders | $ | 28,953 | $ | 125,189 | $ | 175,746 | |||||||||
Weighted average common shares outstanding | 3,468,658 | 3,452,358 | 3,499,793 | ||||||||||||
Effect of dilutive stock options | 19,102 | 28,684 | 28,309 | ||||||||||||
Diluted weighted average common shares outstanding | 3,487,760 | 3,481,042 | 3,528,102 | ||||||||||||
Basic earnings per common share | $ | 0.01 | $ | 0.04 | $ | 0.05 | |||||||||
Diluted earnings per common share | $ | 0.01 | $ | 0.04 | $ | 0.05 |
Treasury Stock: Treasury stock is accounted for at cost on a first-in-first-out basis. It is the Company’s general policy to cancel treasury stock shares in the same year as purchased.
Comprehensive income: Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, bypass the income statement and instead are reported in accumulated other comprehensive income, as a separate component of the equity section of the balance sheet. Realized gains or losses are reclassified to current period earnings. Changes in these items, along with net income, are components of comprehensive income.
Reclassifications: Certain amounts in the 2010 and 2009 consolidated financial statements have been reclassified to conform to the 2011 presentation.
F-12
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Developments: In July 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This ASU requires additional disclosure to facilitate financial statement users’ evaluation of: (1) the nature of credit risk inherent in the entity’s loan portfolio, (2) how that risk is analyzed and assessed in arriving at the allowance for loan losses, and (3) the changes and reasons for those changes in the allowance for loan losses. The increased disclosures as of the end of a reporting period are effective for periods ending on or after December 15, 2011. Increased disclosures about the activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 31, 2011. The Company adopted the accounting standard as of December 31, 2011, except for the activity-related disclosures which are required to be adopted in 2012, with no material impact on its results of operations, financial position and liquidity. See Note 4 for additional disclosures required under this accounting standard.
NOTE 2. | BUSINESS COMBINATION |
On July 23, 2010, the Company consummated its cash purchase of four Brown County, Wisconsin, branch offices from a Madison-based thrift (the “2010 Branch Acquisition”), to extend its deposit outreach in this market and to add greater retail diversity to its deposit base. At consummation, the Company acquired assets with a fair value of approximately $107 million, including $25 million of loans, $4 million of core deposit intangible and $78 million in cash, and assumed liabilities with a fair value of approximately $107 million, including $106 million of deposits. The acquired loans were performing loans, carefully and specifically selected, and judged by management to carry pricing appropriately commensurate with loan type, term and borrower creditworthiness; therefore, par was determined to be the initial fair value from both a market price and credit perspective. None of the acquired loans were considered impaired at the time of acquisition. A discounted cash flow method was used to mark the acquired time deposits to estimated fair value based on current comparable market rates for like-term deposits, resulting in a $1 million initial mark (amortized against interest expense over the weighted average remaining life of the acquired term deposits). The value of acquiring long-term relationships with depositors (i.e. the core deposit intangible) was estimated, including consideration of market and competitive information, comparable deposit premiums in other transactions, trend analysis, run-off risks, and other modeling, resulting in a $4 million initial core deposit intangible (amortized on an accelerated basis over its estimated useful life of 10 years). The Company incurred approximately $107,000 of non-recurring expenses in 2010 to consummate and integrate the 2010 Branch Acquisition, included primarily in other expenses in the consolidated statement of income.
NOTE 3. | SECURITIES AVAILABLE FOR SALE |
Amortized costs and fair values of securities available for sale are summarized as follows:
December 31, 2011 | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||
State, county and municipals | $ | 30,129,777 | $ | 1,718,153 | $ | — | $ | 31,847,930 | |||||||||||
Mortgage-backed securities | 17,449,742 | 1,041,824 | 6,851 | 18,484,715 | |||||||||||||||
U.S. Government sponsored enterprises | 4,995,463 | 24,287 | — | 5,019,750 | |||||||||||||||
Equity securities | 1,623,775 | — | 216,775 | 1,407,000 | |||||||||||||||
$ | 54,198,757 | $ | 2,784,264 | $ | 223,626 | $ | 56,759,395 |
F-13
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SECURITIES AVAILABLE FOR SALE (Continued)
December 31, 2010 | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||
State, county and municipals | $ | 29,896,878 | $ | 1,251,118 | $ | 39,271 | $ | 31,108,725 | |||||||||||
Mortgage-backed securities | 16,851,830 | 555,597 | — | 17,407,427 | |||||||||||||||
U.S. Government sponsored enterprises | 2,502,743 | — | 4,243 | 2,498,500 | |||||||||||||||
Equity securities | 1,623,775 | — | 250,277 | 1,373,498 | |||||||||||||||
$ | 50,875,226 | $ | 1,806,715 | $ | 293,791 | $ | 52,388,150 |
The current fair value and associated unrealized losses on investments in debt and equity securities with unrealized losses at December 31, 2011 and 2010 are summarized in the following table, with the length of time the individual securities have been in a continuous loss position.
December 31, 2011 | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||||
U.S. Government sponsored enterprises | $ | 1,015,445 | $ | 6,851 | $ | — | $ | — | $ | 1,015,445 | $ | 6,851 | |||||||||||||||
Equity securities | — | — | 1,407,000 | 216,775 | 1,407,000 | 216,775 | |||||||||||||||||||||
$ | 1,015,445 | $ | 6,851 | $ | 1,407,000 | $ | 216,775 | $ | 2,422,445 | $ | 223,626 |
December 31, 2010 | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||||
U.S. Government sponsored enterprises | $ | 2,498,500 | $ | 4,243 | $ | — | $ | — | $ | 2,498,500 | $ | 4,243 | |||||||||||||||
State, county and municipals | 4,961,962 | 39,271 | — | — | 4,961,962 | 39,271 | |||||||||||||||||||||
Equity securities | — | — | 1,373,498 | 250,277 | 1,373,498 | 250,277 | |||||||||||||||||||||
$ | 7,460,462 | $ | 43,514 | $ | 1,373,498 | $ | 250,277 | $ | 8,833,960 | $ | 293,791 |
At December 31, 2011, one U.S. government mortgage-backed security had unrealized losses less than 12 months. The category with unrealized losses greater than 12 months was comprised of one equity security. The unrealized losses in each category have occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase. The Company does not consider securities with unrealized losses at December 31, 2011 to be other-than-temporarily impaired. The Company has the ability and intent to hold its securities to maturity.
F-14
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SECURITIES AVAILABLE FOR SALE (Continued)
The amortized cost and fair value of securities available for sale by contractual maturity at December 31, 2011 are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or prepaid without any penalties; therefore, these securities are not included in the maturity categories in the following summary.
December 31, 2011 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Amortized Cost | Fair Value | ||||||||||
Due in less than one year | $ | 9,040,894 | $ | 9,134,246 | |||||||
Due in one year through five years | 18,212,866 | 19,259,643 | |||||||||
Due after five years through ten years | 6,896,480 | 7,498,791 | |||||||||
Due after ten years | 975,000 | 975,000 | |||||||||
35,125,240 | 36,867,680 | ||||||||||
Mortgage-backed securities | 17,449,742 | 18,484,715 | |||||||||
Equity securities | 1,623,775 | 1,407,000 | |||||||||
Securities available for sale | $ | 54,198,757 | $ | 56,759,395 |
Securities with a carrying value of approximately $7,487,000 and $10,013,000 as of December 31, 2011 and 2010, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.
There were no securities sales during 2011. Proceeds from sales of securities available for sale during 2010 and 2009 were $3,305,200 and $14,264, respectively. Gross gains of $283,152 and $6,883 were realized on sales in 2010 and 2009, respectively. Other-than-temporary impairment charges recorded in 2011 and 2010 were $127,750 (related to one private equity security classified in other investments) and $428,178 (related to the same security), respectively, and none for 2009.
NOTE 4. | LOANS |
Major classifications of loans as of December 31, were as follows:
2011 | Mix | 2010 | Mix | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Commercial | $ | 265,189,830 | 56 | % | $ | 294,040,544 | 57 | % | ||||||||||
Real Estate-Commercial | 66,576,760 | 14 | 63,839,435 | 13 | ||||||||||||||
Real Estate-Residential | 56,392,417 | 12 | 56,532,928 | 11 | ||||||||||||||
Construction | 34,136,929 | 7 | 40,357,249 | 8 | ||||||||||||||
Consumer | 50,192,878 | 11 | 58,990,627 | 11 | ||||||||||||||
Loans | 472,488,814 | 100 | % | 513,760,783 | 100 | % | ||||||||||||
Less allowance for loan losses | 5,899,488 | 8,635,059 | ||||||||||||||||
Loans, net | $ | 466,589,326 | $ | 505,125,724 |
Loan categories above include the following: Commercial includes business and industrial loans and lines, owner-occupied commercial real estate, and agriculture/farm-based loans. Commercial real estate includes multifamily and other non-owner occupied commercial real estate. Residential real estate includes one- to four-family first-lien loans. Construction loans include land, land development and residential or commercial construction loans. Consumer includes predominantly home equity lending plus retail and other loans.
Practically all of the Bank’s loans, commitments, and standby letters of credit have been granted to customers in the Bank’s market area. Although the Bank 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.
F-15
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LOANS (Continued)
Changes in the allowance for loan losses for the years ended December 31, are presented as follows:
2011 | 2010 | 2009 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at beginning of year | $ | 8,635,059 | $ | 6,231,609 | $ | 5,546,212 | ||||||||
Provision for loan losses | 6,600,000 | 8,500,000 | 6,000,000 | |||||||||||
Loans charged off | (9,400,479 | ) | (6,292,416 | ) | (5,426,858 | ) | ||||||||
Recoveries on loans previously charged off | 64,908 | 195,866 | 112,255 | |||||||||||
Balance at end of year | $ | 5,899,488 | $ | 8,635,059 | $ | 6,231,609 | ||||||||
Allowance for loan losses to loans | 1.25 | % | 1.68 | % | 1.28 | % |
In determining the appropriateness of the allowance for loan losses, management includes allocations for specifically identified impaired loans and loss factor allocations for all remaining loans, with a component primarily based on historical loss rates and another component primarily based on other qualitative actors. Impaired loans are individually assessed and are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.
Loans that are determined to be not impaired are 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 are also provided for certain current environmental and qualitative factors. An internal loan review function rates loans using a grading system based on nine different categories. Loans with grades of seven or higher (“classified loans”) represent loans with a greater risk of loss and may be assigned allocations for loss based on specific review of the weaknesses observed in the individual credits if classified as impaired. Classified loans are constantly monitored by the loan review function to ensure early identification of any deterioration.
A breakdown of the allowance for loan losses and recorded investments in loans at December 31, 2011 is as follows ($ in thousands):
Commercial | Real Estate- Commercial | Real Estate- Residential | Construction | Consumer | Total | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Allowance for Loan Losses (AFLL): | ||||||||||||||||||||||||||
Beginning balance | $ | 4,865 | $ | 162 | $ | 250 | $ | 2,836 | $ | 522 | $ | 8,635 | ||||||||||||||
Provision for loan losses charged to operations | 403 | 411 | 634 | 4,767 | 385 | 6,600 | ||||||||||||||||||||
Loans charged off | 2,981 | 181 | 488 | 5,285 | 466 | 9,401 | ||||||||||||||||||||
Recoveries chargeoffs | 26 | — | 9 | 28 | 2 | 65 | ||||||||||||||||||||
Ending balance | $ | 2,313 | $ | 392 | $ | 405 | $ | 2,346 | $ | 443 | $ | 5,899 | ||||||||||||||
As percent of AFLL | 39.2 | % | 6.6 | % | 6.9 | % | 39.8 | % | 7.5 | % | 100 | % | ||||||||||||||
AFLL attributed to individually evaluated loans | $ | 85 | $ | 163 | $ | 37 | $ | 264 | $ | — | $ | 549 | ||||||||||||||
AFLL attributed to collectively evaluated loans | 2,228 | 229 | 368 | 2,082 | 443 | 5,350 | ||||||||||||||||||||
Ending balance | $ | 2,313 | $ | 392 | $ | 405 | $ | 2,346 | $ | 443 | $ | 5,899 | ||||||||||||||
Loans: | ||||||||||||||||||||||||||
Individually evaluated | $ | 2,679 | $ | 716 | $ | 714 | $ | 5,262 | $ | 256 | $ | 9,627 | ||||||||||||||
Collectively evaluated | 262,511 | 65,861 | 55,678 | 28,875 | 49,937 | 462,862 | ||||||||||||||||||||
Total loans | $ | 265,190 | $ | 66,577 | $ | 56,392 | $ | 34,137 | $ | 50,193 | $ | 472,489 | ||||||||||||||
Total Loans | $ | 265,190 | $ | 66,577 | $ | 56,392 | $ | 34,137 | $ | 50,193 | $ | 472,489 | ||||||||||||||
Less allowance for loan losses | 2,313 | 392 | 405 | 2,346 | 443 | 5,899 | ||||||||||||||||||||
Net loans | $ | 262,877 | $ | 66,185 | $ | 55,987 | $ | 31,791 | $ | 49,750 | $ | 466,590 |
F-16
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LOANS (Continued)
The following is a summary of information pertaining to impaired loans as of December 31:
2011 | 2010 | 2009 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Impaired loans for which a specific allowance has been provided | $ | 3,353,000 | $ | 7,789,000 | $ | 12,709,000 | ||||||||
Impaired loans for which no specific allowance has been provided | 6,274,000 | 4,860,000 | 3,130,000 | |||||||||||
Total loans determined to be impaired | $ | 9,627,000 | $ | 12,649,000 | $ | 15,839,000 | ||||||||
Specific allowance provided for impaired loans, included in the allowance for loan losses | $ | 549,000 | $ | 3,423,000 | $ | 2,398,000 | ||||||||
Average investment in year-end impaired loans | $ | 19,096,000 | $ | 16,173,000 | $ | 29,932,000 | ||||||||
Cash basis interest income recognized on year-end impaired loans | $ | 373,000 | $ | 612,000 | $ | 1,264,000 |
A description of the loan grades are as follows:
1-4 Pass: Credits exhibit adequate cash flows, appropriate management and financial ratios within industry norms and/or are supported by sufficient collateral. Some credits in these rating categories may require a need for monitoring but elements of concern are not severe enough to warrant an elevated rating.
5 Watch: Credits with this rating are adequately secured and performing but are being monitored due to the presence of various short term weaknesses which may include unexpected, short term adverse financial performance, managerial problems, potential impact of a decline in the entire industry or local economy and delinquency issues. Loans to individuals or loans supported by guarantors with marginal net worth or collateral may be included in this rating category.
6 Special Mention: Credits with this rating have potential weaknesses that, without the Company’s attention and correction may result in deterioration of repayment prospects. These assets are considered Criticized Assets. Potential weaknesses may include adverse financial trends for the borrower or industry, repeated lack of compliance with Company requests, increasing debt to worth, serious management conditions and decreasing cash flow.
7 Substandard: Assets with this rating are characterized by the distinct possibility the Company will sustain some loss if deficiencies are not corrected. All foreclosures, liquidations, non-accrual loans are considered to be categorized in this rating, regardless of collateral sufficiency.
8 Doubtful: Assets with this rating exhibit all the weaknesses as one rated Substandard with the added characteristic that such weaknesses make collection or liquidation in full highly questionable.
9 Loss: Assets in this category are considered uncollectible. Pursuing any recovery or salvage value is impractical but does not preclude partial recovery in the future.
The following is a breakdown of loan types by risk grading as of December 31, 2011 ($ in thousands):
Grades 1 – 4 | Grade 5 | Grade 6 | Grade 7 | Grade 8 | Grade 9 | Total | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Commercial | $ | 233,201 | $ | 11,037 | $ | 3,779 | $ | 17,173 | $ | — | $ | — | $ | 265,190 | ||||||||||||||||
Real Estate-Commercial | 60,656 | 5,205 | — | 716 | — | — | 66,577 | |||||||||||||||||||||||
Real Estate-Residential | 51,950 | 1,245 | 213 | 2,984 | — | — | 56,392 | |||||||||||||||||||||||
Construction | 14,900 | 7,334 | 897 | 11,006 | — | — | 34,137 | |||||||||||||||||||||||
Consumer | 49,040 | 324 | — | 829 | — | — | 50,193 | |||||||||||||||||||||||
Total loans | $ | 409,747 | $ | 25,145 | $ | 4,889 | $ | 32,708 | $ | — | $ | — | $ | 472,489 |
F-17
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LOANS (Continued)
A breakdown of past due loans by type as of December 31, 2011 ($ in thousands):
2011 | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
30–89 Days Past Due (accruing) | 90 Days & Over or on non-accrual | Current | Total | ||||||||||||||||
Commercial | $ | 1,278 | $ | 2,530 | $ | 261,382 | $ | 265,190 | |||||||||||
Real Estate-Commercial | — | 716 | 65,861 | 66,577 | |||||||||||||||
Real Estate-Residential | 330 | 1,129 | 54,933 | 56,392 | |||||||||||||||
Construction | 1,139 | 4,847 | 28,151 | 34,137 | |||||||||||||||
Consumer | 123 | 254 | 49,816 | 50,193 | |||||||||||||||
Total loans | $ | 2,870 | $ | 9,476 | $ | 460,143 | $ | 472,489 | |||||||||||
As a percent of total loans | 0.6 | % | 2.0 | % | 97.4 | % | 100.0 | % |
The following is a summary of nonperforming assets as of December 31:
2011 | 2010 | 2009 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Nonaccrual loans | $ | 9,476,000 | $ | 10,303,000 | $ | 8,212,000 | ||||||||
Loans past due 90 days or more, still accruing | — | 500,000 | — | |||||||||||
Nonperforming loans | 9,476,000 | 10,803,000 | 8,212,000 | |||||||||||
Other real estate owned | 641,000 | 1,443,000 | 1,370,000 | |||||||||||
Nonperforming assets | $ | 10,117,000 | $ | 12,246,000 | $ | 9,582,000 | ||||||||
Nonperforming loans to loans | 2.01 | % | 2.10 | % | 1.69 | % | ||||||||
Nonperforming assets to assets | 1.49 | % | 1.81 | % | 1.42 | % |
Interest income of approximately $1,390,000, $1,004,000 and $638,000 would have been earned on the year-end nonaccrual loans had they been performing in accordance with their original terms during the years ended December 31, 2011, 2010 and 2009, respectively. Interest of approximately $220,000, $415,000 and $239,000 was earned on year-end nonaccrual loans and included in income for the years ended December 31, 2011, 2010 and 2009, respectively.
NOTE 5. | PREMISES AND EQUIPMENT |
Premises and equipment, less accumulated depreciation, are summarized as follows:
2011 | 2010 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Land | $ | 1,785,376 | $ | 1,285,376 | ||||||
Land improvements | 1,252,582 | 1,252,583 | ||||||||
Building and improvements | 15,611,933 | 15,126,933 | ||||||||
Leasehold improvements | 4,052,308 | 4,034,139 | ||||||||
Furniture and equipment | 6,894,582 | 6,227,490 | ||||||||
29,596,781 | 27,926,521 | |||||||||
Less accumulated depreciation | 10,340,356 | 8,805,494 | ||||||||
Premises and equipment, net | $ | 19,256,425 | $ | 19,121,027 |
Depreciation expense amounted to approximately $1,609,000, $1,440,000 and $1,447,000 in 2011, 2010 and 2009, respectively.
The Company and certain of its subsidiaries are obligated under noncancelable operating leases for facilities, certain of which provide for increased rentals based upon increases in cost of living adjustments and other indices.
F-18
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. PREMISES AND EQUIPMENT (Continued)
At December 31, 2011, the approximate minimum annual rentals under these noncancelable agreements with remaining terms in excess of one year are as follows ($ in thousands):
2012 | $ | 549 | ||||
2013 | 558 | |||||
2014 | 550 | |||||
2015 | 556 | |||||
2016 | 565 | |||||
Thereafter | 3,305 | |||||
Total | $ | 6,083 |
Total rent expense under leases totaled $662,800, $355,200 and $88,900 for 2011, 2010 and 2009 respectively.
NOTE 6. | DEPOSITS |
Brokered deposits were approximately $38,609,000 and $87,063,000 at December 31, 2011 and 2010, respectively. The weighted average rate of brokered deposits was 3.08% and 3.89% at December 31, 2011 and 2010, respectively.
At December 31, 2011, the scheduled maturities of time deposits were as follows:
Years Ending December 31, | ||||||
---|---|---|---|---|---|---|
2012 | $ | 130,031,969 | ||||
2013 | 29,588,013 | |||||
2014 | 9,249,953 | |||||
2015 | 4,559,565 | |||||
2016 | 7,427,265 | |||||
Thereafter | 5,263 | |||||
$ | 180,862,028 |
The aggregate amount of time deposits, each with a minimum denomination of $100,000, was approximately $93,090,000 and $153,397,000 at December 31, 2011 and 2010, respectively.
NOTE 7. | NOTES PAYABLE |
At December 31 the Company had the following notes payable:
2011 | 2010 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Joint Venture note | $ | 10,373,896 | $ | 10,581,489 | ||||||
FHLB advances | 25,000,000 | 25,000,000 | ||||||||
$ | 35,373,896 | $ | 35,581,489 |
At the completion of the construction of the Company’s headquarters building in 2005 and as part of a joint venture investment related to the building, the Company and the other joint venture partners guaranteed a JV note to finance certain costs of the building. This note is secured by the building, bears a fixed rate of 5.81% and requires monthly principal and interest payments until its maturity on June 1, 2016. The balance of this JV note was $10,373,896, and $10,581,489 as of December 31, 2011 and 2010, respectively.
At December 31, 2011 and 2010, the Company’s five fixed-rate FHLB advances total $25,000,000, have a weighted average rate of 2.87%, require interest-only monthly payments, and have maturities between July 2012 and July 2014. The FHLB advances are collateralized by a blanket lien on qualifying first mortgages, home equity loans, multi-family loans and certain farmland loans which totaled approximately $47,316,000
F-19
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. NOTES PAYABLE (Continued)
and $49,854,000 at December 31, 2011 and 2010, respectively. During 2009, the Company refinanced its FHLB advances into the five advances noted above, in anticipation of possible inflationary pressures at that time, and incurred a prepayment cost of approximately $324,000 charged to 2009 interest expense.
At December 31, 2010, the Company had a zero outstanding balance on its $10,000,000 line of credit with a third party bank, bearing interest of one-month LIBOR plus 2.50%, but not less than a floor rate of 4.50%, with quarterly payments of interest only. On October 17, 2011, the Company replaced this line with a $7,500,000 line of credit with a different third party bank bearing an interest rate of one-month LIBOR plus 2.25%, but not less than a floor rate of 4.25%, with quarterly payments of interest only. The outstanding balance was zero at December 31, 2011.
The following table shows the maturity schedule of the notes payable as of December 31, 2011.
Years Ending December 31, | ||||||
---|---|---|---|---|---|---|
2012 | $ | 5,218,413 | ||||
2013 | 10,233,377 | |||||
2014 | 10,247,502 | |||||
2015 | 262,481 | |||||
2016 | 9,412,123 | |||||
$ | 35,373,896 |
NOTE 8. | JUNIOR SUBORDINATED DEBENTURES |
In July 2004 the Company formed a wholly-owned Connecticut statutory trust, Nicolet Bankshares Statutory Trust I (the “Statutory Trust”), which issued $6.0 million of guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures that qualify as Tier 1 capital under Federal Reserve Board guidelines. All of the common securities of the Statutory Trust are owned by the Company. The proceeds from the issuance of the common securities and the trust preferred securities were used by the Statutory Trust to purchase $6,185,568 of junior subordinated debentures of the Company, which pay an 8% fixed rate. The proceeds received by the Company from the sale of the junior subordinated debentures were used for general purposes, primarily to provide capital to the Bank. The debentures represent the sole asset of the Statutory Trust. The Statutory Trust is not included in the consolidated financial statements. The net combined effect of all the documents entered into in connection with the trust preferred securities is that the Company is liable to make the distributions and other payments required on the trust preferred securities.
The Company has the right to redeem the debentures purchased by the Statutory Trust, in whole or in part, on or after July 15, 2009. If the debentures are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest. The maturity date of the debenture, if not redeemed, is July 15, 2034.
NOTE 9. | EMPLOYEE AND DIRECTOR BENEFIT PLANS |
The Company has purchased life insurance contracts on the lives of certain key officers. At December 31, 2011 and 2010, the cash surrender value of the bank owned life insurance was approximately $14,237,000 and $13,664,000, respectively, as included in the consolidated balance sheets.
The Company sponsors a deferred compensation plan for certain key management employees and directors. Under the management plan, employees designated by the Board of Directors may defer compensation and receive the deferred amounts plus earnings thereon upon termination of employment or at their election. The liability for the cumulative employee contributions and earnings thereon at December 31, 2011 and 2010 totaled approximately $391,000 and $356,000, respectively. Under the director plan, which
F-20
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
was approved in 2005, participating directors may defer up to 100% of their Board compensation towards the purchase of Company common stock at market prices on a quarterly basis that is held in a Rabbi Trust. During 2011 and 2010 the plan purchased 3,004 and 3,765 shares of Company common stock, respectively, valued at approximately $49,600 in 2011 and $64,200 in 2010. No distributions of shares under this director plan were made in 2011 or 2010. The common stock outstanding and the related director deferred compensation liability are offsetting components of the Company’s equity in the amount of $315,762 at year end 2011 and $266,196 at year end 2010 representing 16,889 shares and 13,885 shares, respectively.
The Company also sponsors a 401(k) savings plan under which eligible employees may choose to save up to 100% of salary compensation on either a pre-tax or after-tax basis, subject to certain IRS limits. Under the plan, the Company matches 100% of participating employee contributions up to 6% of the participant’s gross compensation. The Company contribution vests over five years. The Company can make additional annual discretionary profit sharing contributions, as determined by the Board of Directors.
For 2011, 2010 and 2009, the Company’s matching expense and discretionary contribution, if any for the year, totaled approximately $462,000, $415,000 and $415,000, respectively.
NOTE 10. | STOCK-BASED COMPENSATION |
In 2000, the Company adopted a Stock Incentive Plan covering up to 285,000 shares of the Company’s common stock. During 2002, the Company adopted a second Stock Incentive Plan covering an additional 125,000 shares of the Company’s common stock. During 2005 and 2008, the Company revised the second Stock Incentive Plan to allow for an additional 450,000 shares and 600,000 shares, respectively. A total of 1,460,000 shares have been reserved for potential stock options under these plans.
In 2011, the Company adopted a Long Term Incentive Plan covering up to 500,000 shares of the Company’s common stock. This plan provides for certain stock-based awards, such as but not limited to stock options, stock appreciation rights and restricted common stock, as well as cash performance awards. No awards have been made under this plan since its inception through December 31, 2011.
These plans are administered by a committee of the Board of Directors and provide for the granting of various equity awards per the plan documents to certain eligible officers, employees and directors of the Company.
In general, the exercise price of each option granted under these plans will not be less than the fair market value of the shares of common stock subject to the option on the date of grant as determined by the committee. Options will be exercisable in whole or in part upon such vesting terms as may be determined by the committee. Options expire ten years after the date of grant.
F-21
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. STOCK-BASED COMPENSATION (Continued)
As of December 31, 2011 approximately 944,000 shares were available for grant under these plans (collectively the “Stock Incentive Plans”).
Activity of the Stock Incentive Plans is summarized in the following table:
Weighted- Average Fair Value of Options Granted | Options Outstanding | Weighted- Average Exercise Price | Exercisable | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance — December 31, 2008 | 582,357 | $ | 17.52 | 444,807 | ||||||||||||||
Granted | $ | 5.25 | 222,500 | 16.70 | ||||||||||||||
Exercise of stock options | (25,250 | ) | 10.20 | |||||||||||||||
Cancelled | (24,000 | ) | 18.00 | |||||||||||||||
Balance — December 31, 2009 | 755,607 | 17.51 | 432,852 | |||||||||||||||
Granted | $ | 5.41 | 12,500 | 17.15 | ||||||||||||||
Exercise of stock options | (6,450 | ) | 10.00 | |||||||||||||||
Cancelled | (32,000 | ) | 17.03 | |||||||||||||||
Balance — December 31, 2010 | 729,657 | 17.59 | 491,780 | |||||||||||||||
Granted | — | — | — | |||||||||||||||
Exercise of stock options | (17,750 | ) | 11.06 | |||||||||||||||
Cancelled | (9,000 | ) | 15.76 | |||||||||||||||
Balance — December 31, 2011 | 702,907 | $ | 17.78 | 533,074 |
Options outstanding at December 31, 2011 are exercisable at option prices ranging from $10.00 to $26.00. There are 252,083 options outstanding in the range from $10.00–$17.00, 403,824 options outstanding in the range from $17.01–$22.00, and 47,000 options outstanding in the range from $22.01–$26.00. The exercisable options have a weighted average remaining contractual life of approximately 5 years as of December 31, 2011.
The Company recognized approximately $294,000, $296,000, and $162,000 of stock-based employee compensation expense during the years ended December 31, 2011, 2010 and 2009, respectively, associated with its stock option grants. As of December 31, 2011, there was approximately $667,500 of unrecognized compensation cost related to stock option grants. The cost is expected to be recognized over the remaining vesting period of approximately three years.
Intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the exercise price of the stock options. The total intrinsic value of options exercised in 2011, 2010 and 2009 was approximately $97,000, $45,000 and $156,000, respectively. The weighted average exercise price of stock options exercisable at December 31, 2011 was $17.84.
NOTE 11. | STOCKHOLDERS’ EQUITY |
On March 18, 2005, the stockholders of the Company approved a reorganization plan for the purpose of taking the Company private by reducing its number of stockholders of record below 300. The reorganization plan permitted the Company to discontinue reporting to the Securities and Exchange Commission based on the reduced number of stockholders. The reorganization was accomplished through a cash-out merger whereby stockholders owning 1,500 or fewer shares of common stock were paid cash for each share owned.
In December 2008, through a private placement, the Company raised $9,500,000 in capital, issuing 594,083 shares. The $100,000 of incurred costs related to the private placement issuance was charged against additional paid-in capital.
F-22
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. STOCKHOLDERS’ EQUITY (Continued)
On December 23, 2008, under the federal government’s Capital Purchase Program (“CPP”), the Company received $14,964,000 from the U.S. Treasury Department (“the UST”) for the issuance of 14,964 shares of senior preferred stock with $1,000 per share liquidation value (bearing a 5% dividend for the first five years and 9% thereafter) and an additional 748 shares of senior preferred stock with $1,000 per share liquidation value (bearing a 9% dividend) following the UST’s immediate exercise of preferred stock warrants. The $100,000 of incurred costs related to the preferred stock issuance was charged directly against preferred stock. The initial $848,200 discount recorded on preferred stock that resulted from allocating a portion of the proceeds to the warrants is accreted directly to retained earnings over a five-year period on a straight-line basis.
While the preferred stock under CPP was outstanding, the Company was subject to various restrictions governed by the executed documents with the UST, and by related governmental enactments. Such restrictions included: a) UST approval required for any increase in common dividends per share and for any repurchase of outstanding common stock; b) CPP period dividends required to be paid in full before dividends could be paid to common shareholders; c) no tax deduction to the Company for any senior executive officer whose compensation was above $500,000; and d) additional restrictions and compliance requirements on executive compensation. In September of 2009, the Company received approval from the UST and its regulator to repurchase up to 100,000 shares of its common stock, under which 96,600 shares of common stock at a cost of $1,618,880 were repurchased and subsequently retired during 2009. Similar approvals were obtained for 2010 and 2011, allowing repurchase of up to 100,000 shares of common stock each year. No shares were repurchased under these authorities during 2010 or 2011.
On September 1, 2011, after appropriate regulatory approvals, the Company effectively redeemed all the senior preferred stock under the CPP, paying the UST $15,712,000 and accelerating the accretion of the remaining discount. Such redemption was in connection with the Company’s participation in the UST’s Small Business Lending Fund (“SBLF”) described below. The SBLF is a program separate and distinct from the Troubled Asset Relief Program (“TARP”), and thus, among other things, the restrictions noted above under the CPP or related government enactments are no longer applicable to the Company.
The SBLF is a UST program made available to community banks, designed to boost lending to small businesses by providing participating banks with capital and liquidity. In particular, the SBLF program targets commercial, industrial, owner-occupied real-estate and agricultural-based lending to qualifying small businesses, which include businesses with less than $50 million in revenue, and promotes outreach to women-owned, veteran-owned and minority-owned businesses.
On September 1, 2011, under the SBLF, the Company received $24,400,000 from the UST for the issuance of 24,400 shares of Non-cumulative Perpetual Preferred Stock, Series C, with $1,000 per share liquidation value. The $41,000 of incurred issuance costs was charged against additional paid-in capital. The annual dividend rate upon funding and for the following nine calendar quarters is 5%, unless there is growth in qualifying small business loans outstanding over a baseline which could reduce the rate to as low as 1% (as determined under the terms of the Securities Purchase Agreement (the “Agreement”)), adjusted quarterly. The dividend rate is fixed for the tenth quarter after funding through the end of the first four and one-half years at 7% (unless fixed at a lower rate given increased lending as similarly described above); and finally the dividend rate is fixed at 9% after four and one-half years if the preferred stock is not repaid. The Company’s weighted average dividend rate for 2011 (since funding) was 5%. Under the terms of the Agreement, the Company will be required to provide various information, certifications, and reporting to the UST. At December 31, 2011, the Company believes it was in compliance with the requirements set by the UST in the Agreement. The preferred stock (under CPP or SBLF) qualifies as Tier 1 capital for regulatory purposes.
F-23
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. | INCOME TAXES |
The current and deferred amounts of income tax expense (benefit) were as follows:
2011 | 2010 | 2009 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Current | $ | (135,372 | ) | $ | 1,017,309 | $ | 385,325 | |||||||
Deferred | 461,598 | (880,983 | ) | (233,732 | ) | |||||||||
Change in valuation allowance | (7,795 | ) | — | (106,042 | ) | |||||||||
Income tax expense | $ | 318,431 | $ | 136,326 | $ | 45,551 |
The differences between the income tax expense recognized and the amount computed by applying the statutory federal income tax rate to the earnings before income taxes, less noncontrolling interest, for the years ended December 31, 2011, 2010 and 2009 are included in the following table.
2011 | 2010 | 2009 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Tax on pretax income, less noncontrolling interest, at statutory rates | $ | 614,963 | $ | 423,870 | $ | 415,586 | ||||||||
State income taxes, net of federal effect | 90,996 | 59,589 | 51,726 | |||||||||||
Tax-exempt interest income | (410,944 | ) | (374,066 | ) | (421,346 | ) | ||||||||
Non-deductible interest disallowance | 52,973 | 63,762 | 86,624 | |||||||||||
Increase in cash surrender value life insurance | (194,553 | ) | (195,140 | ) | (189,593 | ) | ||||||||
Non-deductible business entertainment | 84,077 | 75,023 | 70,415 | |||||||||||
Stock based employee compensation | 96,911 | 100,552 | 55,080 | |||||||||||
Other, net | (15,992 | ) | (17,264 | ) | (22,941 | ) | ||||||||
Income tax expense | $ | 318,431 | $ | 136,326 | $ | 45,551 |
The net deferred tax asset included with other assets into the accompanying consolidated balance sheets includes the following amounts of deferred tax assets and liabilities at December 31:
2011 | 2010 | 2009 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Deferred tax assets: | ||||||||||||||
Allowance for loan losses | $ | 2,322,653 | $ | 3,399,659 | $ | 2,247,654 | ||||||||
State net operating loss carryforwards | 199,887 | 194,490 | 194,490 | |||||||||||
Credit carryforwards | 450,226 | — | 117,091 | |||||||||||
Other real estate | 12,702 | 50,772 | 50,772 | |||||||||||
Investment securities | 218,871 | 168,575 | 147,466 | |||||||||||
Compensation | 278,436 | 244,987 | 206,792 | |||||||||||
Core deposit intangible | 299,537 | 217,594 | — | |||||||||||
Other | 200,600 | 53,303 | 249,379 | |||||||||||
Total deferred tax asset | 3,982,912 | 4,329,380 | 3,213,644 | |||||||||||
Less valuation allowance | (186,695 | ) | (194,490 | ) | (194,490 | ) | ||||||||
Deferred tax asset | 3,796,217 | 4,134,890 | 3,019,154 | |||||||||||
Deferred tax liabilities: | ||||||||||||||
Premises and equipment | (487,317 | ) | (347,898 | ) | (193,532 | ) | ||||||||
Prepaid expenses | (99,402 | ) | (32,558 | ) | (43,304 | ) | ||||||||
Other | — | (91,133 | ) | — | ||||||||||
Unrealized gain on securities available for sale | (870,620 | ) | (514,394 | ) | (548,924 | ) | ||||||||
Total deferred tax liability | (1,457,339 | ) | (985,983 | ) | (785,760 | ) | ||||||||
Net deferred tax asset | $ | 2,338,878 | $ | 3,148,907 | $ | 2,233,394 |
F-24
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. INCOME TAXES (Continued)
The Company has a state net operating loss carryforward of approximately $3,700,000 resulting in a deferred tax asset of approximately $200,000. A valuation allowance of $187,000 has been recognized on this asset relating to the parent company’s state loss carryforward which is not expected to be realized under current regulations. The remaining state net operating loss carryforward will not expire until 2026. At December 31, 2011, the Company has available alternative minimum tax credit carryforwards for federal tax purposes of approximately $450,000 which may be used indefinitely.
NOTE 13. | COMMITMENTS AND CONTINGENCIES |
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, financial guarantees, and standby letters of credit. They involve, to varying degrees, elements of credit risk in excess of amounts recognized on the consolidated balance sheets.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and issuing letters of credit as they do for on-balance-sheet instruments.
A summary of the contract or notional amount of the Company’s exposure to off-balance-sheet risk as of December 31 is as follows:
2011 | 2010 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Financial instruments whose contract amounts represent credit risk: | ||||||||||
Commitments to extend credit | $ | 158,261,000 | $ | 119,751,000 | ||||||
Standby letters of credit | 6,631,000 | 6,959,000 |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Credit card commitments are generally unsecured.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third-party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds collateral, which may include accounts receivable, inventory, property, equipment, and income-producing properties, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third-party, the Bank would be required to fund the commitment. The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount. If the commitment is funded, the Bank would be entitled to seek recovery from the customer. At December 31, 2011 and 2010, no amounts have been recorded as liabilities for the Bank’s potential obligations under these guarantees.
The Company has federal funds accommodations with other financial institutions where funds may be borrowed on a short-term basis at the market rate in effect at the time of the borrowing. The total federal funds accommodations as of December 31, 2011 and 2010 are $65,000,000 and $80,000,000, respectively. At December 31, 2011 and 2010, the Company had no outstanding balance on these lines.
In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the consolidated financial statements.
F-25
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. | RELATED PARTY TRANSACTIONS |
The Company conducts transactions, in the normal course of business, with its directors and officers, including companies in which they have a beneficial interest. It is the Company’s policy to comply with federal regulations that require that these transactions with directors and executive officers be made on substantially the same terms as those prevailing at the time made for comparable transactions to other persons. Related party loans totaled approximately $24,510,000 at December 31, 2011 and $25,120,000 at December 31, 2010.
During 2004, the Company entered into a joint venture (50% ownership by the Company) with a real estate development and investment firm (the “Firm”) in connection with the new headquarters facility. The Firm is considered a related party, as one of its principals is a Board member and shareholder of the Company. During 2009, the Company entered into an additional transaction with the Firm involving a 40% ownership of another entity resulting from an arm’s length workout of a loan originally held by the Bank. This 40% ownership was subsequently sold during 2010 at a gain to the Company of approximately $88,000. Finally, in August 2011, the Company opened a new branch location in a facility which is leased from an entity owned by the Firm on terms considered by management to be arms-length.
NOTE 15. | GAIN (LOSS) ON ASSETS |
Components of the gain (loss) on assets are as follows for the years ended December 31:
2011 | 2010 | 2009 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Gain on sale of securities, net | $ | — | $ | 283,152 | $ | 6,883 | ||||||||
Other than temporary impairment charge on securities | (127,750 | ) | (428,178 | ) | — | |||||||||
Gain (loss) on sale of other real estate owned, net | 64,472 | (10,307 | ) | (157,350 | ) | |||||||||
Gain on sale of other assets, net | 8,223 | 96,665 | — | |||||||||||
Loss on assets, net | $ | (55,055 | ) | $ | (58,668 | ) | $ | (150,467 | ) |
NOTE 16. | REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS OF DIVIDENDS |
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and Bank’s financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2011 and 2010, that the Company and the Bank met all capital adequacy requirements to which they are subject.
As of December 31, 2011 and 2010, the most recent notifications from the regulatory agencies categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, an institution must maintain minimum Total risk-based, Tier I risk-based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since these notifications that management believes have changed the Bank’s category.
F-26
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS OF DIVIDENDS
(Continued)
(Continued)
The Company’s and the Bank’s actual regulatory capital amounts and ratios as December 31, 2011 and 2010 are presented in the following table.
Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions (2) | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
($ in thousands) | Amount | Ratio (1) | Amount | Ratio (1) | Amount | Ratio (1) | |||||||||||||||||||||
As of December 31, 2011: | |||||||||||||||||||||||||||
Company | |||||||||||||||||||||||||||
Total capital | $ | 82,638 | 16.7 | % | $ | 39,510 | 8.0 | % | |||||||||||||||||||
Tier I capital | 76,739 | 15.5 | 19,755 | 4.0 | |||||||||||||||||||||||
Leverage | 76,739 | 12.1 | 25,468 | 4.0 | |||||||||||||||||||||||
Bank | |||||||||||||||||||||||||||
Total capital | $ | 74,586 | 15.6 | % | $ | 38,340 | 8.0 | % | $ | 47,925 | 10.0 | % | |||||||||||||||
Tier I capital | 68,687 | 14.3 | 19,170 | 4.0 | 28,755 | 6.0 | |||||||||||||||||||||
Leverage | 68,687 | 11.1 | 24,831 | 4.0 | 31,039 | 5.0 | |||||||||||||||||||||
As of December 31, 2010: | |||||||||||||||||||||||||||
Company | |||||||||||||||||||||||||||
Total capital | $ | 72,635 | 13.8 | % | $ | 42,056 | 8.0 | % | |||||||||||||||||||
Tier I capital | 66,259 | 12.6 | 21,028 | 4.0 | |||||||||||||||||||||||
Leverage | 66,259 | 9.9 | 26,798 | 4.0 | |||||||||||||||||||||||
Bank | |||||||||||||||||||||||||||
Total capital | $ | 65,796 | 13.0 | % | $ | 40,623 | 8.0 | % | $ | 50,779 | 10.0 | % | |||||||||||||||
Tier I capital | 59,420 | 11.7 | 20,312 | 4.0 | 30,468 | 6.0 | |||||||||||||||||||||
Leverage | 59,420 | 9.2 | 25,958 | 4.0 | 32,447 | 5.0 |
(1) | The Total capital ratio is defined as tier 1 capital plus tier 2 capital divided by total risk-weighted assets. The Tier 1 capital ratio is defined as tier 1 capital divided by total risk-weighted assets. The Leverage ratio is defined as tier 1 capital divided by the most recent quarter’s average total assets. |
(2) | Prompt corrective action provisions are not applicable at the bank holding company level. |
A source of income and funds for the Company are dividends from the Bank. Dividends declared by the Bank that exceed the retained net income for the most current year plus retained net income for the preceding two years must be approved by Federal regulatory agencies. At December 31, 2011, the Bank could pay dividends of approximately $3,585,000 without seeking regulatory approval.
NOTE 17. | FAIR VALUE OF FINANCIAL INFORMATION |
Disclosure of the fair value of financial instruments, whether recognized or not recognized in the balance sheet, is required for those instruments for which it is practicable to estimate that value, with the exception of certain financial instruments and all nonfinancial instruments as provided for by the accounting standards. For financial instruments recognized at fair value in the consolidated balance sheets, the fair value disclosure requirements also apply.
The relevant accounting standard (codified in ASC Topic 820, “Fair Value Measurements and Disclosures”) defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This standard applies under other accounting pronouncements that require or
F-27
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. FAIR VALUE OF FINANCIAL INFORMATION (Continued)
permit fair value measurements; accordingly, the standard amends numerous accounting pronouncements but does not require any new fair value measurements of reported balances. The standard emphasizes that fair value (i.e. the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date), among other things, is based on exit price versus entry price, should include assumptions about risk such as nonperformance risk in liability fair values, and is a market-based measurement versus an entity-specific measurement. The standard was effective for the Company as of January 1, 2008, with the exception of the application to nonfinancial assets and liabilities measured at fair value on a nonrecurring basis (such as other real estate owned and goodwill or other intangibles for impairment testing) to which the standard became effective on January 1, 2009.
The fair value hierarchy prioritizes inputs used to measure fair value into three broad levels. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the fair value measurement is based on inputs from different levels, the level within which the entire fair value measurement will be categorized is based on the lowest level input that is significant to the fair value measurement in its entirety; this assessment of the significance of an input requires management judgment.
The table following presents items measured at fair value on a recurring basis as of December 31, 2011 and 2010, aggregated by the level in the fair value hierarchy within which those measurements fall, as well as a roll forward of 2010 activity for Level 3 (significant unobservable inputs) fair value measurements.
Fair Value Measurements Using | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Measured at Fair Value on a Recurring Basis: | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||
($ in thousands) | |||||||||||||||||||
State, county and municipals | $ | 31,848 | $ | — | $ | 30,873 | $ | 975 | |||||||||||
Mortgage-backed securities | 18,484 | — | 18,484 | — | |||||||||||||||
US Government sponsored enterprises | 5,020 | — | 5,020 | — | |||||||||||||||
Equity securities | 1,407 | 1,407 | — | — | |||||||||||||||
Securities available for sale, December 31, 2011 | $ | 56,759 | $ | 1407 | $ | 54,377 | $ | 975 | |||||||||||
State, county and municipals | $ | 31,109 | $ | — | $ | 30,059 | $ | 1,050 | |||||||||||
Mortgage-backed securities | 17,407 | — | 17,407 | — | |||||||||||||||
US Government sponsored enterprises | 2,499 | — | 2,499 | — | |||||||||||||||
Equity securities | 1,373 | 1,373 | — | — | |||||||||||||||
Securities available for sale, December 31, 2010 | $ | 52,388 | $ | 1,373 | $ | 49,965 | $ | 1,050 |
Securities Available for Sale | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Level 3 Fair Value Measurements ($ in thousands): | 2011 | 2010 | |||||||||
Balance at beginning of year | $ | 1,050 | $ | 1,250 | |||||||
Purchases/(sales)/(settlements), net | (75 | ) | (200 | ) | |||||||
Net change in gain/(loss), realized and unrealized | — | — | |||||||||
Transfers in/(out) of Level 3 | — | — | |||||||||
Balance at end of year | $ | 975 | $ | 1,050 |
F-28
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. FAIR VALUE OF FINANCIAL INFORMATION (Continued)
The following is a description of the valuation methodologies used by the Company for the items noted in the table above, including the general classification of such instruments in the fair value hierarchy. Where quoted market prices on securities exchanges are available, the investment is classified in Level 1 of the fair value hierarchy. Level 1 investments primarily include exchange-traded equity securities available for sale. If quoted market prices are not available, fair value is generally determined using pricing models (such as matrix pricing which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities), quoted market prices of securities with similar characteristic (adjusted for differences between the quoted instruments and the instrument being valued), or discounted cash flows, and are classified in Level 2 of the fair value hierarchy. Examples of these investments include mortgage-related securities and obligations of state, county and municipals. Finally, in certain cases where there is limited activity or less transparency around inputs to the estimated fair value, investments are classified within Level 3 of the hierarchy. Examples of these include auction rate securities available for sale (for which there has been no liquid market since 2008). At December 31, 2011 and 2010, it was determined that carrying value was the best approximation of fair value for these Level 3 securities, based primarily on receipt of par from refinances for the auction rate securities.
The table following presents the Company’s collateral-dependent impaired loans and other real estate owned measured at fair value on a nonrecurring basis as of December 31, 2011 and 2010, aggregated by the level in the fair value hierarchy within which those measurements fall.
Fair Value Measurements Using | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Measured at Fair Value on a Nonrecurring Basis: | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||
($ in thousands) | |||||||||||||||||||
December 31, 2011: | |||||||||||||||||||
Collateral-dependent impaired loans | $ | 8,878 | $ | — | $ | 8,878 | $ | — | |||||||||||
Other real estate owned | 641 | — | 641 | — | |||||||||||||||
December 31, 2010: | |||||||||||||||||||
Collateral-dependent impaired loans | $ | 8,067 | $ | — | $ | 8,067 | $ | — | |||||||||||
Other real estate owned | 1,443 | — | 1,443 | — |
The following is a description of the valuation methodologies used by the Company for the items noted in the table above, including the general classification of such instruments in the fair value hierarchy. Per the applicable accounting standard, the use of observable market price or estimated fair value of collateral on collateral-dependent impaired loans and other real estate owned is considered a fair value measurement subject to the fair value hierarchy and provisions of the accounting standard. The primary inputs underlying estimated fair value of collateral- dependent impaired loans and other real estate owned classified within Level 2 are appraised values obtained from external parties for real estate collateral and current financial statements for non-real estate collateral (i.e. usually current assets in nature, such as accounts receivable or inventories). Appraised values of other real estate owned are adjusted for the expected costs to sell.
F-29
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. FAIR VALUE OF FINANCIAL INFORMATION (Continued)
Summarized below are the estimated fair values of the Company’s financial instruments at December 31, 2011 and 2010, along with the methods and assumptions used by the Company in estimating the fair value disclosures.
2011 | 2010 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
($ in thousands) | Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||||
Financial assets: | |||||||||||||||||||
Cash and cash equivalents | $ | 92,129 | $ | 92,129 | $ | 52,103 | $ | 52,103 | |||||||||||
Certificates of deposits in other banks | 248 | 248 | 497 | 497 | |||||||||||||||
Securities available for sale | 56,759 | 56,759 | 52,388 | 52,388 | |||||||||||||||
Other investments | 5,211 | 5,211 | 4,910 | 4,910 | |||||||||||||||
Loans held for sale | 11,373 | 11,373 | 5,334 | 5,334 | |||||||||||||||
Loans, net | 466,589 | 469,734 | 505,126 | 504,773 | |||||||||||||||
Bank owned life insurance | 14,237 | 14,237 | 13,664 | 13,664 | |||||||||||||||
Financial liabilities: | |||||||||||||||||||
Deposits | $ | 551,536 | $ | 553,761 | $ | 558,464 | $ | 561,458 | |||||||||||
Short-term borrowings | 4,132 | 4,132 | 4,390 | 4,390 | |||||||||||||||
Notes payable | 35,374 | 36,557 | 35,581 | 36,535 | |||||||||||||||
Junior subordinated debentures | 6,186 | 6,186 | 6,186 | 6,069 |
Cash and cash equivalents and certificates of deposits in other banks: For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
Securities available for sale and other investments: Fair values for securities are based on quoted market prices on securities exchanges, when available. If quoted market prices are not available, fair value is generally determined using pricing models, quoted market prices of securities with similar characteristics, or discounted cash flows. For other investments, the carrying amount of Federal Reserve Bank and FHLB stock is a reasonably accepted fair value estimate given their restricted nature, while the carrying amount of the remaining other investments (particularly common stocks of companies or other banks that are not publicly traded) approximates their fair value, determined primarily by analysis of company financial statements and recent capital issuances of the respective companies or banks, if any.
Loans held for sale: The carrying amount of loans held for sale approximates the fair value, given the short-term nature of the loans between origination and sale.
Loans, net: For variable-rate loans that reprice frequently and with no significant change in credit risk or other optionality, fair values are based on carrying values. Fair values for all other loans are estimated by discounting contractual cash flows using estimated market discount rates, which reflect the credit and interest rate risk inherent in the loan. Collateral-dependent impaired loans are included in loans, net.
Bank owned life insurance: The carrying value of these assets approximates fair value.
Deposits: The fair value of deposits with no stated maturity (such as demand deposits, savings, interest and non-interest checking, and money market accounts) is, by definition, equal to the amount payable on demand at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates within the market place.
Short-term borrowings: For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
F-30
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. FAIR VALUE OF FINANCIAL INFORMATION (Continued)
Notes payable and junior subordinated debentures: The fair values of notes payable and junior subordinated debentures are estimated using discounted cash flow analysis based on current interest rates being offered by instruments with similar terms and credit quality.
Off-balance-sheet instruments: The estimated fair value of letters of credit at December 31, 2011 and 2010 was insignificant. Loan commitments on which the committed interest rate is less than the current market rate are also insignificant at December 31, 2011 and 2010.
Limitations: Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Fair value estimates may not be realizable in an immediate settlement of the instrument. In some instances, there are no quoted market prices for the Company’s various financial instruments, in which case fair values may be based on estimates using present value or other valuation techniques, or based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of the financial instruments, or other factors. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. Subsequent changes in assumptions could significantly affect the estimates.
NOTE 18. | PARENT COMPANY ONLY FINANCIAL INFORMATION |
The following reflects the condensed financial statements (for the parent company) of Nicolet Bankshares, Inc.:
Balance Sheets
December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2011 | 2010 | ||||||||||
Assets | |||||||||||
Cash and due from subsidiary | $ | 4,604,894 | $ | 117,860 | |||||||
Investments | 3,384,750 | 3,479,000 | |||||||||
Investments in subsidiaries | 74,147,607 | 64,921,594 | |||||||||
Loans | — | 3,100,000 | |||||||||
Other assets | 498,779 | 545,552 | |||||||||
Total assets | $ | 82,636,030 | $ | 72,164,006 | |||||||
Liabilities and Stockholders’ Equity | |||||||||||
Junior subordinated debentures | $ | 6,185,568 | $ | 6,185,568 | |||||||
Other liabilities | 427,953 | 358,573 | |||||||||
Stockholders’ equity | 76,022,509 | 65,619,865 | |||||||||
Total liabilities and stockholders’ equity | $ | 82,636,030 | $ | 72,164,006 |
F-31
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. PARENT COMPANY ONLY FINANCIAL INFORMATION (Continued)
Statements of Income
For the years ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2011 | 2010 | 2009 | |||||||||||||
Interest income | $ | 55,935 | $ | 135,763 | $ | 17,292 | |||||||||
Interest expense | 502,562 | 538,073 | 517,538 | ||||||||||||
Net interest expense | (446,627 | ) | (402,310 | ) | (500,246 | ) | |||||||||
Dividend income | 1,500,000 | — | — | ||||||||||||
Operating expense | (75,938 | ) | (65,594 | ) | (133,975 | ) | |||||||||
Gain (loss) on assets, net | (127,750 | ) | (260,214 | ) | 6,883 | ||||||||||
Income tax benefit | 303,425 | 381,720 | 287,560 | ||||||||||||
Earnings (loss) before equity in undistributed earnings of subsidiaries | 1,153,110 | (346,398 | ) | (339,778 | ) | ||||||||||
Equity in undistributed earnings of subsidiaries, net of dividends received | 337,175 | 1,456,747 | 1,516,541 | ||||||||||||
Net income | $ | 1,490,285 | $ | 1,110,349 | $ | 1,176,763 |
Statements of Cash Flows
For the years ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2011 | 2010 | 2009 | |||||||||||||
Cash Flows From Operating Activities: | |||||||||||||||
Net Income attributable to Nicolet Bankshares, Inc. | $ | 1,490,285 | $ | 1,110,349 | $ | 1,176,763 | |||||||||
Adjustments to reconcile net income to net cash provided (used) by operating activities: | |||||||||||||||
Loss (gain) on assets, net | 127,750 | 260,214 | (6,883 | ) | |||||||||||
Change in other assets and liabilities, net | (98,297 | ) | 1,503,702 | (629,562 | ) | ||||||||||
Equity in undistributed earnings of subsidiaries, net of dividends received | (337,175 | ) | (1,456,747 | ) | (1,516,541 | ) | |||||||||
Net cash provided (used) by operating activities | 1,182,563 | 1,417,518 | (976,223 | ) | |||||||||||
Cash Flows from Investing Activities: | |||||||||||||||
Decrease (Increase) in loans | 3,100,000 | (3,100,000 | ) | — | |||||||||||
Purchase of investments and other assets, net | — | (38,000 | ) | (633,812 | ) | ||||||||||
Proceeds from sale of investments and other assets | — | 548,185 | — | ||||||||||||
Capital infusion to subsidiaries | (7,925,000 | ) | — | (712,000 | ) | ||||||||||
Net cash used in investing activities | (4,825,000 | ) | (2,589,815 | ) | (1,345,812 | ) | |||||||||
Cash Flows From Financing Activities: | |||||||||||||||
Purchase of treasury stock | — | — | (1,618,880 | ) | |||||||||||
Proceeds from issuance of common stock, net | 35,772 | 207,702 | 180,329 | ||||||||||||
Exercise of common stock options | 196,251 | 64,500 | 257,501 | ||||||||||||
Proceeds from issuance of preferred stock (SBLF), net | 24,359,000 | — | — | ||||||||||||
Redemption of preferred stock (CPP) | (15,712,000 | ) | — | — | |||||||||||
Cash dividends on preferred stock | (749,552 | ) | (815,520 | ) | (729,437 | ) | |||||||||
Net cash provided (used) by financing activities | 8,129,471 | (543,318 | ) | (1,910,487 | ) | ||||||||||
Net increase (decrease) in cash | 4,487,034 | (1,715,615 | ) | (4,232,523 | ) | ||||||||||
Beginning cash | 117,860 | 1,833,475 | 6,065,997 | ||||||||||||
Ending cash | $ | 4,604,894 | $ | 117,860 | $ | 1,833,475 |
F-32
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. | SUBSEQUENT EVENTS |
On November 28, 2012, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Mid-Wisconsin Financial Services, Inc. (“MWFS”), the holding company of Mid-Wisconsin Bank. Pursuant to the terms of the Merger Agreement, MWFS will be merged with and into Nicolet Bankshares, Inc. with Nicolet Bankshares, Inc. surviving the merger. After the merger, Mid-Wisconsin Bank will be merged with and into Nicolet National Bank with Nicolet National Bank surviving the merger. The transactions contemplated by the Merger Agreement are expected to be completed in the second quarter of 2013 and are contingent on customary conditions, including regulatory approval and the approval of the shareholders of both the Company and MWFS.
Under the terms of the Merger Agreement, MWFS shareholders will receive 0.3727 shares of Nicolet Bankshares, Inc. common stock, except in certain limited circumstances outlined in the Merger Agreement, which include, among other instances, cash in lieu of shares for fractional shares or for certain MWFS shareholders who own a small number of shares of MWFS common stock, all as defined or adjusted pursuant to the terms of the Merger Agreement. As a condition of the merger, MWFS shall have redeemed by the closing of the merger its preferred stock (issued to the UST by MWFS as part of its participation in the CPP with par value of $10.5 million) plus all accrued and unpaid dividends thereon; or if such redemption is not permitted by regulatory authorities for MWFS, the redemption of such stock by the Company for a maximum payment of $12.0 million.
F-33
NICOLET BANKSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Consolidated Financial Statements
Unaudited
Unaudited
September 30, 2012
F-34
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2012 (Unaudited) | December 31, 2011 (Audited) | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Assets | ||||||||||
Cash and due from banks | $ | 17,220,607 | $ | 13,741,792 | ||||||
Interest-earning deposits | 10,322,108 | 77,391,757 | ||||||||
Federal funds sold | 9,000 | 995,500 | ||||||||
Cash and cash equivalents | 27,551,715 | 92,129,049 | ||||||||
Certificates of deposit in other banks | — | 248,000 | ||||||||
Securities available for sale | 57,074,520 | 56,759,395 | ||||||||
Other investments | 5,220,550 | 5,211,150 | ||||||||
Loans held for sale | 3,483,625 | 11,373,260 | ||||||||
Loans | 545,707,995 | 472,488,814 | ||||||||
Allowance for loan losses | (6,490,649 | ) | (5,899,488 | ) | ||||||
Loans, net | 539,217,346 | 466,589,326 | ||||||||
Premises and equipment, net | 19,787,545 | 19,256,425 | ||||||||
Bank owned life insurance | 18,509,274 | 14,236,662 | ||||||||
Accrued interest receivable and other assets | 11,957,011 | 12,445,458 | ||||||||
Total assets | $ | 682,801,586 | $ | 678,248,725 | ||||||
Liabilities and Stockholders’ Equity | ||||||||||
Liabilities: | ||||||||||
Demand | $ | 91,577,676 | $ | 78,154,193 | ||||||
Money market and NOW accounts | 262,509,341 | 270,738,311 | ||||||||
Savings | 38,889,295 | 21,780,998 | ||||||||
Time | 161,881,207 | 180,862,028 | ||||||||
Total deposits | 554,857,519 | 551,535,530 | ||||||||
Short-term borrowings | 4,313,240 | 4,131,892 | ||||||||
Notes payable | 35,212,115 | 35,373,896 | ||||||||
Junior subordinated debentures | 6,185,568 | 6,185,568 | ||||||||
Accrued interest payable and other liabilities | 5,354,367 | 4,808,600 | ||||||||
Total liabilities | 605,922,809 | 602,035,486 | ||||||||
Stockholders’ Equity: | ||||||||||
Preferred equity | 24,400,000 | 24,400,000 | ||||||||
Common stock | 34,043 | 34,804 | ||||||||
Additional paid-in capital | 35,845,032 | 36,740,711 | ||||||||
Retained earnings | 14,341,038 | 13,156,974 | ||||||||
Accumulated other comprehensive income | 2,128,469 | 1,690,021 | ||||||||
Total Nicolet Bankshares Inc. stockholders’ equity | 76,748,582 | 76,022,510 | ||||||||
Noncontrolling interest | 130,195 | 190,729 | ||||||||
Total stockholders’ equity and noncontrolling interest | 76,878,777 | 76,213,239 | ||||||||
Total liabilities, noncontrolling interest and stockholders’ equity | $ | 682,801,586 | $ | 678,248,725 | ||||||
Preferred shares authorized (no par value) | 10,000,000 | 10,000,000 | ||||||||
Preferred shares issued | 24,400 | 24,400 | ||||||||
Common shares authorized (par value $0.01 per share) | 30,000,000 | 30,000,000 | ||||||||
Common shares issued | 3,404,312 | 3,480,355 |
See accompanying notes to consolidated financial statements.
F-35
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
(Unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||||||
Interest income: | |||||||||||||||||||
Loans, including loan fees | $ | 6,815,026 | $ | 6,862,388 | $ | 19,800,654 | $ | 21,324,399 | |||||||||||
Investment securities: | |||||||||||||||||||
Taxable | 149,309 | 172,813 | 449,758 | 514,997 | |||||||||||||||
Tax-exempt | 200,555 | 236,519 | 639,699 | 714,089 | |||||||||||||||
Federal funds sold | 516 | 688 | 2,018 | 1,861 | |||||||||||||||
Other interest income | 46,815 | 37,835 | 167,361 | 112,601 | |||||||||||||||
Total interest income | 7,212,221 | 7,310,243 | 21,059,490 | 22,667,947 | |||||||||||||||
Interest expense: | |||||||||||||||||||
Money market and NOW accounts | 418,325 | 361,292 | 1,222,126 | 1,159,089 | |||||||||||||||
Savings and time deposits | 694,250 | 1,227,201 | 2,406,966 | 3,888,530 | |||||||||||||||
Short term borrowings | 1,261 | 2,239 | 3,395 | 7,801 | |||||||||||||||
Junior subordinated debentures | 126,461 | 126,461 | 376,632 | 375,258 | |||||||||||||||
Notes payable | 322,308 | 342,698 | 997,342 | 1,020,161 | |||||||||||||||
Total interest expense | 1,562,605 | 2,059,891 | 5,006,461 | 6,450,839 | |||||||||||||||
Net interest income | 5,649,616 | 5,250,352 | 16,053,029 | 16,217,108 | |||||||||||||||
Provision for loan losses | 975,000 | 1,500,000 | 3,350,000 | 4,800,000 | |||||||||||||||
Net interest income after provision for loan losses | 4,674,616 | 3,750,352 | 12,703,029 | 11,417,108 | |||||||||||||||
Other income: | |||||||||||||||||||
Service charges on deposit accounts | 292,816 | 280,590 | 859,340 | 886,674 | |||||||||||||||
Trust services fee income | 758,991 | 742,768 | 2,213,482 | 2,230,542 | |||||||||||||||
Mortgage fee income | 845,797 | 410,188 | 2,254,232 | 844,012 | |||||||||||||||
Brokerage fee income | 76,719 | 77,113 | 241,282 | 257,503 | |||||||||||||||
Gain on sale, disposal and write-down of assets, net | 5,341 | 54,444 | 388,243 | 59,202 | |||||||||||||||
Bank owned life insurance | 186,339 | 146,235 | 522,612 | 432,956 | |||||||||||||||
Rent income | 263,878 | 237,314 | 743,899 | 716,845 | |||||||||||||||
Investment advisory fees | 82,431 | 78,815 | 253,732 | 246,268 | |||||||||||||||
Other | 172,251 | 109,089 | 508,750 | 341,386 | |||||||||||||||
Total other income | 2,684,563 | 2,136,556 | 7,985,572 | 6,015,388 | |||||||||||||||
Other expenses: | |||||||||||||||||||
Salaries and employee benefits | 3,325,001 | 2,925,690 | 9,991,271 | 8,680,789 | |||||||||||||||
Occupancy, equipment and office | 1,093,872 | 1,108,480 | 3,334,457 | 3,287,177 | |||||||||||||||
Business development and marketing | 437,506 | 326,081 | 1,134,115 | 961,592 | |||||||||||||||
Data processing | 443,723 | 347,715 | 1,255,252 | 1,026,112 | |||||||||||||||
FDIC assessments | 133,951 | 134,378 | 407,751 | 503,690 | |||||||||||||||
Core deposit intangible amortization | 154,708 | 177,749 | 490,456 | 572,747 | |||||||||||||||
Other | 339,586 | 466,642 | 1,109,150 | 1,255,619 | |||||||||||||||
Total other expenses | 5,928,347 | 5,486,735 | 17,722,452 | 16,287,726 | |||||||||||||||
Income before income tax expense | 1,430,832 | 400,173 | 2,966,149 | 1,144,770 | |||||||||||||||
Income tax expense | 452,852 | 54,356 | 827,619 | 133,002 | |||||||||||||||
Net income | 977,980 | 345,817 | 2,138,530 | 1,011,768 | |||||||||||||||
Less: Net income attributable to noncontrolling interest | 13,142 | 2,659 | 39,466 | 29,706 | |||||||||||||||
Net income attributable to Nicolet Bankshares, Inc. | 964,838 | 343,158 | 2,099,064 | 982,062 | |||||||||||||||
Less: Preferred stock dividends and discount accretion | 305,000 | 663,752 | 915,000 | 1,156,332 | |||||||||||||||
Net income (loss) available to common shareholders | $ | 659,838 | $ | (320,594 | ) | $ | 1,184,064 | $ | (174,270 | ) | |||||||||
Basic earnings (loss) per common share | $ | 0.19 | $ | (0.09 | ) | $ | 0.34 | $ | (0.05 | ) | |||||||||
Diluted earnings (loss) per common share | $ | 0.19 | $ | (0.09 | ) | $ | 0.34 | $ | (0.05 | ) | |||||||||
Weighted average common shares outstanding: | |||||||||||||||||||
Basic | 3,414,561 | 3,472,064 | 3,448,916 | 3,466,960 | |||||||||||||||
Diluted | 3,431,321 | 3,472,064 | 3,465,031 | 3,466,960 |
See accompanying notes to consolidated financial statements.
F-36
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
(Unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
September 30, | September 30, | ||||||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||||||
Net income | $ | 977,980 | $ | 345,817 | $ | 2,138,530 | $ | 1,011,768 | |||||||||||
Other comprehensive income, net of tax: | |||||||||||||||||||
Unrealized gains on securities available for sale: | |||||||||||||||||||
Net unrealized holding gains arising during the period | 470,530 | 185,760 | 1,104,583 | 928,252 | |||||||||||||||
Reclassification adjustment for net gains included earnings | — | — | (440,268 | ) | — | ||||||||||||||
Income tax expense | (159,980 | ) | (63,158 | ) | (225,867 | ) | (315,606 | ) | |||||||||||
Total other comprehensive income | 310,550 | 122,602 | 438,448 | 612,646 | |||||||||||||||
Comprehensive income | $ | 1,288,530 | $ | 468,419 | $ | 2,576,978 | $ | 1,624,414 |
See accompanying notes to consolidated financial statements.
F-37
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(Unaudited)
(Unaudited)
Preferred Equity | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (“AOCI”) | Noncontrolling Interest | Total | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance, December 31, 2010 | $ | 15,203,280 | $ | 34,604 | $ | 36,255,430 | $ | 13,128,021 | $ | 998,530 | $ | 46,197 | $ | 65,666,062 | ||||||||||||||||
Net income | — | — | — | 982,062 | — | 29,706 | 1,011,768 | |||||||||||||||||||||||
Other Comprehensive income | — | — | — | — | 612,646 | — | 612,646 | |||||||||||||||||||||||
Stock compensation expense | — | — | 223,559 | — | — | — | 223,559 | |||||||||||||||||||||||
Exercise of stock options, including income tax benefit of $2,000 | — | 105 | 123,645 | — | — | — | 123,750 | |||||||||||||||||||||||
Issuance of common stock | — | 15 | 25,428 | — | — | — | 25,443 | |||||||||||||||||||||||
Preferred stock accretion | 508,720 | — | — | (508,720 | ) | — | — | — | ||||||||||||||||||||||
Preferred stock dividends | — | — | — | (647,612 | ) | — | — | (647,612 | ) | |||||||||||||||||||||
Preferred stock redemption, CPP | (15,712,000 | ) | — | — | — | — | — | (15,712,000 | ) | |||||||||||||||||||||
Issuance of preferred stock, SBLF, net | 24,400,000 | — | (41,000 | ) | — | — | — | 24,359,000 | ||||||||||||||||||||||
Owner contribution to Noncontrolling interest | — | — | — | — | — | 105,000 | 105,000 | |||||||||||||||||||||||
Balance, September 30, 2011 | $ | 24,400,000 | $ | 34,724 | $ | 36,587,062 | $ | 12,953,751 | $ | 1,611,176 | $ | 180,903 | $ | 75,767,616 |
Preferred Equity | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (“AOCI”) | Noncontrolling Interest | Total | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance, December 31, 2011 | $ | 24,400,000 | $ | 34,804 | $ | 36,740,711 | $ | 13,156,974 | $ | 1,690,021 | $ | 190,729 | $ | 76,213,239 | ||||||||||||||||
Net income | — | — | — | 2,099,064 | — | 39,466 | 2,138,530 | |||||||||||||||||||||||
Other Comprehensive income | — | — | — | — | 438,448 | — | 438,448 | |||||||||||||||||||||||
Stock compensation expense | — | — | 376,270 | — | — | — | 376,270 | |||||||||||||||||||||||
Exercise of stock options, including income tax benefit of $2,720 | — | 45 | 56,205 | — | — | — | 56,250 | |||||||||||||||||||||||
Retirement of common stock | — | (806 | ) | (1,328,154 | ) | — | — | — | (1,328,960 | ) | ||||||||||||||||||||
Preferred stock dividends | — | — | — | (915,000 | ) | — | — | (915,000 | ) | |||||||||||||||||||||
Disbursement from noncontrolling interest | — | — | — | — | — | (100,000 | ) | (100,000 | ) | |||||||||||||||||||||
Balance, September 30, 2012 | $ | 24,400,000 | $ | 34,043 | $ | 35,845,032 | $ | 14,341,038 | $ | 2,128,469 | $ | 130,195 | $ | 76,878,777 |
See accompanying notes to consolidated financial statements.
F-38
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Unaudited)
(Unaudited)
Nine Months Ended September 30, 2012 | Nine Months Ended September 30, 2011 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Cash Flows From Operating Activities: | ||||||||||
Net income | $ | 2,138,530 | $ | 1,011,768 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||
Depreciation, amortization and accretion | 1,824,496 | 1,567,410 | ||||||||
Provision for loan losses | 3,350,000 | 4,800,000 | ||||||||
Increase in cash surrender value of life insurance | (522,612 | ) | (432,956 | ) | ||||||
Stock compensation expense | 376,270 | 223,559 | ||||||||
Gain on sale, disposal and write-down of assets, net | (388,243 | ) | (59,202 | ) | ||||||
Gain on sale of loans held for sale, net | (2,254,232 | ) | (844,012 | ) | ||||||
Proceeds from sale of loans held for sale | 144,716,375 | 49,799,969 | ||||||||
Origination of loans held for sale | (134,572,509 | ) | (57,540,689 | ) | ||||||
Net change in: | ||||||||||
Accrued interest receivable and other assets | (42,703 | ) | 7,114,696 | |||||||
Accrued interest payable and other liabilities | 319,900 | (470,912 | ) | |||||||
Net cash provided by operating activities | 14,945,272 | 5,169,631 | ||||||||
Cash Flows From Investing Activities: | ||||||||||
Net decrease in certificates of deposit in other banks | 248,000 | — | ||||||||
Net (increase) decrease in loans | (77,484,015 | ) | 24,264,444 | |||||||
Purchases of securities available for sale | (11,829,910 | ) | (7,294,616 | ) | ||||||
Proceeds from sales of securities available for sale | 5,415,008 | — | ||||||||
Proceeds from calls and maturities of securities available for sale | 7,075,315 | 3,462,899 | ||||||||
Purchase of other investments | (9,400 | ) | (187,150 | ) | ||||||
Purchase of BOLI | (3,750,000 | ) | — | |||||||
Purchase of premises and equipment | (1,720,051 | ) | (1,149,639 | ) | ||||||
Proceeds from sale of other real estate and other assets | 1,478,601 | 1,541,283 | ||||||||
Net cash provided by (used in) investing activities | (80,576,452 | ) | 20,637,221 | |||||||
Cash Flows From Financing Activities: | ||||||||||
Net increase (decrease) in deposits | 3,321,989 | (67,329,687 | ) | |||||||
Net increase (decrease) in short term borrowings | 181,348 | (1,125,009 | ) | |||||||
Repayments of notes payable | (161,781 | ) | (154,137 | ) | ||||||
Proceeds from Federal Home Loan Bank advances | 5,000,000 | — | ||||||||
Repayments of Federal Home Loan Bank advances | (5,000,000 | ) | — | |||||||
Purchase of treasury stock | (1,328,960 | ) | — | |||||||
Proceeds from issuance of common stock, net | — | 25,443 | ||||||||
Proceeds from exercise of common stock options | 56,250 | 123,750 | ||||||||
Proceeds from issuance of preferred stock (SBLF), net | — | 24,359,000 | ||||||||
Repayment of preferred stock (CPP), net | — | (15,712,000 | ) | |||||||
Noncontrolling interest in joint venture | (100,000 | ) | 105,000 | |||||||
Cash dividends paid on preferred stock | (915,000 | ) | (647,885 | ) | ||||||
Net cash provided by (used in) by financing activities | 1,053,846 | (60,355,525 | ) | |||||||
Net decrease in cash and cash equivalents | (64,577,334 | ) | (34,548,673 | ) | ||||||
Cash and cash equivalents: | ||||||||||
Beginning | 92,129,049 | 52,102,655 | ||||||||
Ending | $ | 27,551,715 | $ | 17,553,982 |
See accompanying notes to consolidated financial statements.
F-39
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows, Continued
(Unaudited)
(Unaudited)
Nine Months Ended September 30, 2012 | Nine Months Ended September 30, 2011 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Supplemental Disclosure of Cash Flow Information: | ||||||||||
Cash paid for interest | $ | 5,075,456 | $ | 7,423,265 | ||||||
Cash paid for taxes | 704,500 | 205,000 | ||||||||
Change in AOCI for unrealized gains on AFS, net of tax | (438,448 | ) | (612,646 | ) | ||||||
Transfer of loans to other real estate owned | 1,505,994 | 905,125 | ||||||||
Accretion of preferred stock discount | — | 508,720 |
See accompanying notes to consolidated financial statements.
F-40
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTE 1. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES |
General: In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly Nicolet Bankshares, Inc. (the “Company”) and its subsidiaries, consolidated balance sheets, statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the periods presented, and all such adjustments are of a normal recurring nature. All material intercompany transactions and balances are 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. The information contained in the audited consolidated financial statements and footnotes for the year ended December 31, 2011 should be referred to in connection with the reading of these unaudited interim financial statements.
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, and the valuation of deferred tax assets.
Reclassification: Certain amounts in the 2011 consolidated financial statements have been reclassified to conform to the 2012 presentation.
Recent Accounting Pronouncements: In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2012-02,Testing Indefinite-Lived Intangible Assets for Impairment (the revised standard). It allows companies to perform a “qualitative” assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar in approach to the goodwill impairment test. The revised standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, and entities can choose to early adopt the revised guidance. It is not expected to have a material impact on the Company’s financial position, results of operations or disclosures.
In April 2012, the FASB issued a proposed ASU to address the subsequent measurement of indemnification assets recognized as a result of a government assisted acquisition of a financial institution. The proposal requires an indemnification asset recognized as a result of a government assisted acquisition to be subsequently measured on the same basis as the indemnified item subject to the contractual limitations and amounts of the underlying contract. Comment letters on this proposed guidance were due by July 16, 2012. Because this standard is still in the proposal stage, the impact on the Company’s financial position, results of operations and disclosures has not been assessed.
In May 2011, the FASB issued an accounting standard that requires companies to disclose more of the processes for valuing items categorized as Level 3 in the fair value hierarchy, provide quantitative information about the significant unobservable inputs used in the measurement and, in certain cases, explain how sensitive the measurements are to changes in the inputs. Other than requiring additional disclosures, the adoption of this new guidance does not have a material impact on the Company’s financial condition, results of operations or liquidity.
In June 2011, the FASB issued an accounting standard that allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income,
F-41
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
and a total amount for comprehensive income. The statement(s) are required to be presented with equal prominence as the other primary financial statements. The accounting pronouncement eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity, but does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The Company adopted this standard effective with its 2012 reporting, electing to present a consolidated statement of comprehensive income separate from, but consecutive to, its consolidated income statement.
NOTE 2. | BUSINESS COMBINATION |
On July 23, 2010, the Company consummated its cash purchase of four Brown County, Wisconsin, branch offices from a Madison-based thrift (the “2010 Branch Acquisition”), to extend its deposit outreach in this market and to add greater retail diversity to its deposit base. At consummation, the Company acquired assets with a fair value of approximately $107 million, including $25 million of loans, $4 million of core deposit intangible and $78 million in cash, and assumed liabilities with a fair value of approximately $107 million, including $106 million of deposits. The acquired loans were performing loans, carefully and specifically selected, and judged by management to carry pricing appropriately commensurate with loan type, term and borrower creditworthiness; therefore, par was determined to be the initial fair value from both a market price and credit perspective. None of the acquired loans were considered impaired at the time of acquisition. A discounted cash flow method was used to mark the acquired time deposits to estimated fair value based on current comparable market rates for like-term deposits, resulting in a $1 million initial mark (amortized against interest expense over the weighted average remaining life of the acquired term deposits). The value of acquiring long-term relationships with depositors (i.e. the core deposit intangible) was estimated, including consideration of market and competitive information, comparable deposit premiums in other transactions, trend analysis, run-off risks, and other modeling, resulting in a $4 million initial core deposit intangible (amortized on an accelerated basis over its estimated useful life of 10 years).
NOTE 3. | EARNINGS (LOSS) PER COMMON SHARE |
Earnings (loss) per common share is calculated by dividing net income (loss) available to common equity by the weighted average number of common shares outstanding. Diluted earnings (loss) per share is calculated by dividing net income (loss) available to common equity by the weighted average number of shares adjusted for the dilutive effect of common stock awards, if any. Presented below are the calculations for basic and diluted earnings (loss) per common share.
Three Months Ended | Nine Months Ended | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
September 30, | September 30, | ||||||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||||||
(in thousands) | |||||||||||||||||||
Net income, net of noncontrolling interest | $ | 965 | $ | 343 | $ | 2,099 | $ | 982 | |||||||||||
Less preferred stock dividends and discount accretion | 305 | 664 | 915 | 1,156 | |||||||||||||||
Net income (loss) available to common shareholders’ | $ | 660 | $ | (321 | ) | $ | 1,184 | $ | (174 | ) | |||||||||
Weighted average common shares outstanding | 3,415 | 3,472 | 3,449 | 3,467 | |||||||||||||||
Effect of dilutive stock instruments | 16 | — | 16 | — | |||||||||||||||
Diluted weighted average common shares outstanding | 3,431 | 3,472 | 3,465 | 3,467 | |||||||||||||||
Basic earnings (loss) per common share | $ | 0.19 | $ | (0.09 | ) | $ | 0.34 | $ | (0.05 | ) | |||||||||
Diluted earnings (loss) per common share | $ | 0.19 | $ | (0.09 | ) | $ | 0.34 | $ | (0.05 | ) |
F-42
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTE 4. | SECURITIES |
Amortized costs and fair values of securities available for sale are summarized as follows:
(in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
September 30, 2012 | ||||||||||||||||||
State, county and municipals | $ | 32,315 | $ | 1,304 | $ | — | $ | 33,619 | ||||||||||
Mortgage-backed securities | 17,412 | 951 | — | 18,363 | ||||||||||||||
U.S. Government sponsored enterprises | 2,499 | 4 | — | 2,503 | ||||||||||||||
Equity securities | 1,624 | 966 | — | 2,590 | ||||||||||||||
$ | 53,850 | $ | 3,225 | $ | — | $ | 57,075 |
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Values | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31, 2011 | ||||||||||||||||||
State, county and municipals | $ | 30,130 | $ | 1,718 | $ | — | $ | 31,848 | ||||||||||
Mortgage-backed securities | 17,450 | 1,042 | 7 | 18,485 | ||||||||||||||
U.S. Government sponsored enterprises | 4,995 | 24 | — | 5,019 | ||||||||||||||
Equity securities | 1,624 | — | 217 | 1,407 | ||||||||||||||
$ | 54,199 | $ | 2,784 | $ | 224 | $ | 56,759 |
The following table represents gross unrealized losses and the related fair value of securities available for sale, aggregated by investment category and length of time individual securities have been in a continuous unrealized loss position, at December 31, 2011. The Company did not have any individual securities in an unrealized loss position at September 30,2012.
December 31, 2011 | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||
(in thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||||
U.S. Government sponsored enterprises | $ | 1,015 | $ | 7 | $ | — | $ | — | $ | 1,015 | $ | 7 | |||||||||||||||
Equity securities | — | — | 1,407 | 217 | 1,407 | 217 | |||||||||||||||||||||
$ | 1,015 | $ | 7 | $ | 1,407 | $ | 217 | $ | 2,422 | $ | 224 |
The amortized cost and fair values of securities available for sale at September 30, 2012, 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. Fair values of securities are estimated based on financial models or prices paid for similar securities. It is possible interest rates could change considerably, resulting in a material change in estimated fair value.
September 30, 2012 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | Amortized Cost | Fair Value | |||||||||
Due in less than one year | $ | 6,381 | $ | 6,410 | |||||||
Due in one year through five years | 20,978 | 21,973 | |||||||||
Due after five years through ten years | 7,080 | 7,364 | |||||||||
Due after ten years | 375 | 375 | |||||||||
34,814 | 36,122 | ||||||||||
Mortgage-backed securities | 17,412 | 18,363 | |||||||||
Equity securities | 1,624 | 2,590 | |||||||||
Securities available for sale | $ | 53,850 | $ | 57,075 |
F-43
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTE 4. SECURITIES (Continued)
There were no securities sales during 2011. Proceeds from sales of securities available for sale during the nine months ended September 30, 2012 were $5.4 million, recognizing gross gains of approximately $440,000. There were no other-than-temporary impairment (“OTTI”) charges recorded during the nine months ended September 30, 2012 or 2011.
NOTE 5. | LOANS, ALLOWANCE FOR LOAN LOSSES, AND CREDIT QUALITY |
The loan composition as of September 30, 2012 and December 31, 2011 is summarized as follows:
2012 | 2011 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | Amount | % of Total | Amount | % of Total | |||||||||||||||
Commercial & Industrial | $ | 201,363 | 36.9 | % | $ | 154,011 | 32.6 | % | |||||||||||
Commercial real estate (“CRE”) Owner-occupied | 112,040 | 20.5 | % | 111,179 | 23.5 | % | |||||||||||||
CRE Investment | 71,520 | 13.1 | % | 66,577 | 14.1 | % | |||||||||||||
Construction & Land Development | 26,964 | 5.0 | % | 24,774 | 5.2 | % | |||||||||||||
Residential Construction | 7,670 | 1.4 | % | 9,363 | 2.0 | % | |||||||||||||
Residential First Mortgage | 79,543 | 14.6 | % | 56,392 | 11.9 | % | |||||||||||||
Residential Junior Mortgage | 40,928 | 7.5 | % | 42,699 | 9.0 | % | |||||||||||||
Retail & Other | 5,680 | 1.0 | % | 7,494 | 1.7 | % | |||||||||||||
Loans | 545,708 | 100.0 | % | 472,489 | 100.0 | % | |||||||||||||
Less allowance for loan losses | 6,491 | 5,899 | |||||||||||||||||
Loans, net | $ | 539,217 | $ | 466,590 |
The allowance for loan losses (“ALLL”) represents management’s estimate of probable and inherent credit losses in the Bank’s loan portfolio at the balance sheet date. In general, estimating the amount of the ALLL 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 impaired loans, and the level of potential problem loans, all of which may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses could be required that could adversely affect our earnings or financial position in future periods. Allocations of the ALLL may be made for specific loans but the entire ALLL is available for any loan that, in management’s judgment, should be charged-off or for which an actual loss is realized.
F-44
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTE 5. LOANS, ALLOWANCE FOR LOAN LOSSES, AND CREDIT QUALITY (Continued)
A year-to-date summary of the changes in the ALLL by portfolio segment for the periods indicated is as follows (in thousands):
| |||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Allowance for Loan Losses (ALLL): | Commercial & Industrial | | Owner-occ. CRE | | Investment CRE | | Construction & Land Development | | Residential Construction | | Residential First Mortgage | | Residential Junior Mortgage | | Retail & Other | | Total | ||||||||||||||||||||||
Beginning balance December 31, 2011 | $ | 1,965 | $ | 347 | $ | 393 | $ | 2,035 | $ | 311 | $ | 405 | $ | 419 | $ | 24 | $ | 5,899 | |||||||||||||||||||||
Provision for loan losses charged to operations | 806 | 1,507 | 210 | 154 | 205 | 310 | 125 | 33 | 3,350 | ||||||||||||||||||||||||||||||
Loans charged off | 129 | 1,327 | 305 | 307 | 396 | 216 | 118 | 38 | 2,836 | ||||||||||||||||||||||||||||||
Recoveries | 34 | 9 | — | 22 | — | 7 | 5 | 1 | 78 | ||||||||||||||||||||||||||||||
Ending balance September 30, 2012 | $ | 2,676 | $ | 536 | $ | 298 | $ | 1,904 | $ | 120 | $ | 506 | $ | 431 | $ | 20 | $ | 6,491 | |||||||||||||||||||||
As percent of ALLL | |||||||||||||||||||||||||||||||||||||||
ALLL attributed to individually evaluated loans | $ | — | $ | 165 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 165 | |||||||||||||||||||||
ALLL attributed to collectively evaluated loans | 2,676 | 371 | 298 | 1,904 | 120 | 506 | 431 | 20 | 6,326 | ||||||||||||||||||||||||||||||
Ending balance | $ | 2,676 | $ | 536 | $ | 298 | $ | 1,904 | $ | 120 | $ | 506 | $ | 431 | $ | 20 | $ | 6,491 | |||||||||||||||||||||
Loans: | |||||||||||||||||||||||||||||||||||||||
Individually evaluated | $ | 3,986 | $ | 354 | $ | 380 | $ | 8,558 | $ | 397 | $ | 1,326 | $ | — | $ | 151 | $ | 15,152 | |||||||||||||||||||||
Collectively evaluated | 197,377 | 111,686 | 71,140 | 18,406 | 7,273 | 78,217 | 40,928 | 5,529 | 530,556 | ||||||||||||||||||||||||||||||
Total loans | $ | 201,363 | $ | 112,040 | $ | 71,520 | $ | 26,964 | $ | 7,670 | $ | 79,543 | $ | 40,928 | $ | 5,680 | $ | 545,708 | |||||||||||||||||||||
Less ALLL | $ | 2,676 | $ | 536 | $ | 298 | $ | 1,904 | $ | 120 | $ | 506 | $ | 431 | $ | 20 | $ | 6,491 | |||||||||||||||||||||
Net loans | $ | 198,687 | $ | 111,504 | $ | 71,222 | $ | 25,060 | $ | 7,550 | $ | 79,037 | $ | 40,497 | $ | 5,660 | $ | 539,217 |
The allocation methodology used by the Company includes specific allocations for impaired loans evaluated individually for impairment based on collateral values and for the remaining loan portfolio collectively evaluated for impairment primarily based on historical loss rates and other qualitative factors. Loan charge-offs and recoveries are based on actual amounts charged-off or recovered by loan category. Management allocates the ALLL by pools of risk within each loan portfolio.
The following table presents nonaccrual loans by portfolio segment as of September 30, 2012 and December 31, 2011:
(in thousands) | 2012 | % to Total | 2011 | % to Total | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Commercial & Industrial | $ | 3,986 | 26.3 | % | $ | 1,596 | 16.8 | % | ||||||||||
CRE Owner-occupied | 354 | 2.3 | % | 934 | 9.9 | % | ||||||||||||
CRE Investment | 380 | 2.5 | % | 716 | 7.6 | % | ||||||||||||
Construction & Land Development | 8,558 | 56.5 | % | 3,367 | 35.5 | % | ||||||||||||
Residential Construction | 397 | 2.6 | % | 1,480 | 15.6 | % | ||||||||||||
Residential First Mortgage | 1,326 | 8.8 | % | 1,129 | 11.9 | % | ||||||||||||
Residential Junior Mortgage | — | —% | 105 | 1.1 | % | |||||||||||||
Retail & Other | 151 | 1.0 | % | 149 | 1.6 | % | ||||||||||||
Loans | $ | 15,152 | 100.0 | % | $ | 9,476 | 100 | % |
F-45
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTE 5. LOANS, ALLOWANCE FOR LOAN LOSSES, AND CREDIT QUALITY (Continued)
Loans are generally placed on nonaccrual status when management has determined collection of the interest on a loan is doubtful or when a loan is contractually past due 90 days or more as to interest or principal payments. When loans are placed on nonaccrual status or charged-off, all current year unpaid accrued interest is reversed against interest income. The interest on these loans is subsequently accounted for on the cash basis until qualifying for return to accrual status. If collectability of the principal is in doubt, payments received are applied to loan principal. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Management considers a loan to be impaired when it is probable the Bank will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement.
A summary of loans by credit quality indicator based on internally assigned credit grade as of September 30, 2012 is as follows:
(in thousands) | Grades 1–4 | Grade 5 | Grade 6 | Grade 7 | Grade 8 | Grade 9 | Total | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Commercial & Industrial | $ | 193,018 | $ | 958 | $ | 1,381 | $ | 6,006 | $ | — | $ | — | $ | 201,363 | ||||||||||||||||
CRE Owner-occupied | 101,139 | 7,042 | 2,054 | 1,640 | 165 | — | 112,040 | |||||||||||||||||||||||
CRE Investment | 60,375 | 10,009 | — | 1,136 | — | — | 71,520 | |||||||||||||||||||||||
Construction & Land Development | 11,240 | 923 | 885 | 13,916 | — | — | 26,964 | |||||||||||||||||||||||
Residential Construction | 6,739 | — | — | 931 | — | — | 7,670 | |||||||||||||||||||||||
Residential First Mortgage | 76,066 | 1,102 | — | 2,375 | — | — | 79,543 | |||||||||||||||||||||||
Residential Junior Mortgage | 40,091 | 216 | 249 | 372 | — | — | 40,928 | |||||||||||||||||||||||
Retail & Other | 5,529 | — | — | 151 | — | — | 5,680 | |||||||||||||||||||||||
Total loans | $ | 494,197 | $ | 20,250 | $ | 4,569 | $ | 26,527 | $ | 165 | $ | — | $ | 545,708 |
Loans risk rated Acceptable (1–4) and Watch (5) are credits performing in accordance with the original terms, have adequate sources of repayment and little identifiable collectability risk. Special Mention (6) credits have potential weaknesses that deserve management’s attention. If left unremediated, these potential weaknesses may result in deterioration of the repayment of the credit. Substandard (7) loans typically have weaknesses in the paying capability of the obligor and/or guarantor or in collateral coverage. These loans have a well-defined weakness that jeopardizes the liquidation of the debt and are characterized by the possibility that the Company will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful (8) have all the weaknesses of substandard loans with the added characteristic that the collection of all amounts due according to the original contractual terms is highly unlikely and the amount of the loss is reasonably estimable. Loans classified as loss are considered uncollectible. All substandard and doubtful loans are evaluated individually for impairment based on collateral values.
The following table presents loans by past due status as of the dates indicated:
September 30, 2012 | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | 30–89 Days Past Due (accruing) | 90 Days & Over or non-accrual | Current | Total | |||||||||||||||
Commercial & Industrial | $ | 100 | $ | 3,986 | $ | 197,277 | $ | 201,363 | |||||||||||
CRE Owner-occupied | 1,857 | 354 | 109,829 | 112,040 | |||||||||||||||
CRE Investment | — | 380 | 71,140 | 71,520 | |||||||||||||||
Construction & Land Development | — | 8,558 | 18,406 | 26,964 | |||||||||||||||
Residential Construction | — | 397 | 7,273 | 7,670 | |||||||||||||||
Residential First Mortgage | — | 1,326 | 78,217 | 79,543 | |||||||||||||||
Residential Junior Mortgage | — | — | 40,928 | 40,928 | |||||||||||||||
Retail & Other | 14 | 151 | 5,515 | 5,680 | |||||||||||||||
Total loans | $ | 1,971 | $ | 15,152 | $ | 528,585 | $ | 545,708 | |||||||||||
As a percent of total loans | 0.4 | % | 2.8 | % | 96.8 | % | 100.0 | % |
F-46
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTE 5. LOANS, ALLOWANCE FOR LOAN LOSSES, AND CREDIT QUALITY (Continued)
December 31, 2011 | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
30–89 Days Past Due (accruing) | 90 Days & Over or on non-accrual | Current | Total | ||||||||||||||||
Commercial | $ | 1,278 | $ | 2,530 | $ | 261,382 | $ | 265,190 | |||||||||||
Real Estate-Commercial | — | 716 | 65,861 | 66,577 | |||||||||||||||
Real Estate-Residential | 330 | 1,129 | 54,933 | 56,392 | |||||||||||||||
Construction | 1,139 | 4,847 | 28,151 | 34,137 | |||||||||||||||
Consumer | 123 | 254 | 49,816 | 50,193 | |||||||||||||||
Total loans | $ | 2,870 | $ | 9,476 | $ | 460,143 | $ | 472,489 | |||||||||||
As a percent of total loans | 0.6 | % | 2.0 | % | 97.4 | % | 100.0 | % |
The following table presents impaired loans as of the dates indicated:
(in thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
September 30, 2012 | ||||||||||||||||||||||
With no related allowance: | ||||||||||||||||||||||
Commercial & Industrial | $ | 3,986 | $ | 4,432 | $ | — | $ | 2,330 | $ | 274 | ||||||||||||
CRE Owner-occupied | 60 | 60 | — | 298 | 12 | |||||||||||||||||
CRE Investment | 380 | 409 | — | 370 | 17 | |||||||||||||||||
Construction & Land Development | 8,558 | 8,692 | — | 7,289 | 374 | |||||||||||||||||
Residential Construction | 397 | 446 | — | 811 | 18 | |||||||||||||||||
Residential First Mortgage | 1,326 | 1,369 | — | 739 | 49 | |||||||||||||||||
Residential Junior Mortgage | — | — | — | 62 | — | |||||||||||||||||
Retail & Other | 151 | 151 | — | 151 | — | |||||||||||||||||
With a related allowance: | — | |||||||||||||||||||||
Commercial & Industrial | $ | — | $ | — | — | $ | 1,243 | $ | — | |||||||||||||
CRE Owner-occupied | 294 | 294 | 165 | 431 | — | |||||||||||||||||
CRE Investment | — | — | — | 179 | — | |||||||||||||||||
Construction & Land Development. | — | — | — | 30 | — | |||||||||||||||||
Residential Construction | — | — | — | 370 | — | |||||||||||||||||
Residential First Mortgage | — | — | — | 95 | — | |||||||||||||||||
Residential Junior Mortgage | — | — | — | — | — | |||||||||||||||||
Retail & Other | — | — | — | — | — | |||||||||||||||||
Total: | ||||||||||||||||||||||
Commercial & Industrial | $ | 3,986 | $ | 4,432 | — | $ | 3,573 | $ | 274 | |||||||||||||
CRE Owner-occupied | 354 | 354 | 165 | 728 | 12 | |||||||||||||||||
CRE Investment | 380 | 409 | — | 549 | 17 | |||||||||||||||||
Construction & Land Development | 8,558 | 8,692 | — | 7,319 | 374 | |||||||||||||||||
Residential Construction | 397 | 446 | — | 1,181 | 18 | |||||||||||||||||
Residential First Mortgage | 1,326 | 1,369 | — | 834 | 49 | |||||||||||||||||
Residential Junior Mortgage | — | — | — | 62 | — | |||||||||||||||||
Retail & Other | 151 | 151 | — | 151 | — | |||||||||||||||||
Total | $ | 15,152 | $ | 15,853 | $ | 165 | $ | 14,397 | $ | 744 |
F-47
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTE 5. LOANS, ALLOWANCE FOR LOAN LOSSES, AND CREDIT QUALITY (Continued)
The following is a summary of information pertaining to impaired loans as of December 31, 2011:
Impaired loans for which a specific allowance has been provided | $ | 3,353,000 | ||||
Impaired loans for which no specific allowance has been provided | 6,274,000 | |||||
Total loans determined to be impaired | $ | 9,627,000 | ||||
Specific allowance provided for impaired loans, included in the allowance for loan losses | $ | 549,000 | ||||
Average investment in year-end impaired loans | $ | 19,096,000 | ||||
Cash basis interest income recognized on year-end impaired loans | $ | 373,000 |
NOTE 6. | NOTES PAYABLE |
The Company had the following notes payable:
(in thousands) | September 30, 2012 | December 31, 2011 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Joint Venture note | $ | 10,212 | $ | 10,374 | ||||||
FHLB advances | 25,000 | 25,000 | ||||||||
$ | 35,212 | $ | 35,374 |
At the completion of the construction of the Company’s headquarters building in 2005 and as part of a joint venture investment related to the building, the Company and the other joint venture partners guaranteed a Joint Venture (“JV”) note to finance certain costs of the building. This note is secured by the building, bears a fixed rate of 5.81% and requires monthly principal and interest payments until its maturity on June 1, 2016. This note was current at September 30, 2012.
At September 30, 2012 and December 31, 2011, the Company’s five fixed-rate FHLB advances total $25,000,000, have a weighted average rate of 2.61% and 2.87%, respectively, and require interest-only monthly payments. At September 30, 2012, the FHLB advances have maturities between June 2013 and August 2016.The FHLB advances are collateralized by a blanket lien on qualifying first mortgages, home equity loans, multi-family loans and certain farmland loans which totaled approximately $43,997,000 and $47,316,000 at September 30, 2012 and December 31, 2011, respectively.
NOTE 7. | JUNIOR SUBORDINATED DEBENTURES |
In July 2004 the Company formed a wholly-owned Connecticut statutory trust, Nicolet Bankshares Statutory Trust I (the “Statutory Trust”), which issued $6.0 million of guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures that qualify as Tier I capital under Federal Reserve Board guidelines. All of the common securities of the Statutory Trust are owned by the Company. The proceeds from the issuance of the common securities and the trust preferred securities were used by the Statutory Trust to purchase $6,186 of junior subordinated debentures of the Company, which pay an 8% fixed rate. The proceeds received by the Company from the sale of the junior subordinated debentures were used for general purposes, primarily to provide capital to the Bank. The debentures represent the sole asset of the Statutory Trust. The Statutory Trust is not included in the consolidated financial statements. The net combined effect of all the documents entered into in connection with the trust preferred securities is that the Company is liable to make the distributions and other payments required on the trust preferred securities.
The Company has the right to redeem the debentures purchased by the Statutory Trust, in whole or in part, on or after July 15, 2009. If the debentures are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest. The maturity date of the debenture, if not redeemed, is July 15, 2034.
F-48
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTE 8. | STOCKHOLDERS’ EQUITY |
On December 23, 2008, under the federal government’s Capital Purchase Program (“CPP”), the Company received $14,964,000 from the U.S. Treasury Department (“the UST”) for the issuance of 14,964 shares of senior preferred stock with $1,000 per share liquidation value (bearing a 5% dividend for the first five years and 9% thereafter) and an additional 748 shares of senior preferred stock with $1,000 per share liquidation value (bearing a 9% dividend) following the UST’s immediate exercise of preferred stock warrants. The $100,000 of incurred costs related to the preferred stock issuance was charged directly against preferred stock. The initial $848,000 discount recorded on preferred stock that resulted from allocating a portion of the proceeds to the warrants is accreted directly to retained earnings over a five- year period on a straight-line basis.
While the preferred stock under CPP was outstanding, the Company was subject to various restrictions governed by the executed documents with the UST, and by related governmental enactments. Such restrictions included: a) UST approval required for any increase in common dividends per share and for any repurchase of outstanding common stock; b) CPP period dividends required to be paid in full before dividends could be paid to common shareholders; c) no tax deduction to the Company for any senior executive officer whose compensation was above $500,000; and d) additional restrictions and compliance requirements on executive compensation.
On September 1, 2011, after appropriate regulatory approvals, the Company effectively redeemed all the senior preferred stock under the CPP, paying the UST $15,712,000 and accelerating the accretion of the remaining discount. Such redemption was in connection with the Company’s participation in the UST’s Small Business Lending Fund (“SBLF”) described below. The SBLF is a program separate and distinct from the Troubled Asset Relief Program (“TARP”), and thus, among other things, the restrictions noted above under the CPP or related government enactments are no longer applicable to the Company.
The SBLF is a UST program made available to community banks, designed to boost lending to small businesses by providing participating banks with capital and liquidity. In particular, the SBLF program targets commercial, industrial, owner-occupied real-estate and agricultural-based lending to qualifying small businesses, which include businesses with less than $50 million in revenue, and promotes outreach to women-owned, veteran-owned and minority-owned businesses.
On September 1, 2011, under the SBLF, the Company received $24,400,000 from the UST for the issuance of 24,400 shares of Non-cumulative Perpetual Preferred Stock, Series C, with $1,000 per share liquidation value. The $41,000 of incurred issuance costs was charged against additional paid-in capital. The annual dividend rate upon funding and for the following nine calendar quarters is 5%, unless there is growth in qualifying small business loans outstanding over a baseline which could reduce the rate to as low as 1% (as determined under the terms of the Securities Purchase Agreement (the “Agreement”)), adjusted quarterly. The dividend rate is fixed for the tenth quarter after funding through the end of the first four and one-half years at 7% (unless fixed at a lower rate given increased lending as similarly described above); and finally the dividend rate is fixed at 9% after four and one-half years if the preferred stock is not repaid. The Company’s weighted average dividend rate for the nine month period ended September 30, 2012 and the period from funding through September 30, 2011 was 5%. Under the terms of the Agreement, the Company will be required to provide various information, certifications, and reporting to the UST. At September 30, 2012 and December 31, 2011, the Company believes it was in compliance with the requirements set by the UST in the Agreement. The preferred stock (under CPP or SBLF) qualifies as Tier 1 capital for regulatory purposes.
For the nine months ended September 30, 2012 the Company had repurchased 80,692 shares of its common stock for gross proceeds of approximately $1,331,000.
F-49
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTE 9. | FAIR VALUE MEASUREMENTS |
The relevant accounting standard (codified in ASC Topic 820, “Fair Value Measurements and Disclosures”) defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This standard applies under other accounting pronouncements that require or permit fair value measurements; accordingly, the standard amends numerous accounting pronouncements but does not require any new fair value measurements of reported balances. The standard emphasizes that fair value (i.e. the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date), among other things, is based on exit price versus entry price, should include assumptions about risk such as nonperformance risk in liability fair values, and is a market-based measurement versus an entity-specific measurement.
The fair value hierarchy prioritizes inputs used to measure fair value into three broad levels. Level 1inputs are quoted market prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liabilities, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the fair value measurement is based on inputs from different levels, the level within which the entire fair value measurement will be categorized is based on the lowest level input that is significant to the fair value measurement in its entirety; this assessment of the significance of an input requires management judgment.
The following table presents items measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011, aggregated by the level in the fair value hierarchy within which those measurements fall, as well as a roll forward of activity for Level 3 (significant unobservable inputs) fair value measurements.
September 30, 2012 | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Measured at Fair Value on a Recurring Basis | Fair Value Measurements Using | ||||||||||||||||||
(in thousands) | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||
State, county and municipals | $ | 33,619 | $ | — | $ | 32,644 | $ | 975 | |||||||||||
Mortgage-backed securities | 18,363 | — | 18,363 | — | |||||||||||||||
U.S. Government sponsored enterprises | 2,503 | — | 2,503 | — | |||||||||||||||
Equity securities | 2,590 | 2,590 | — | — | |||||||||||||||
Securities available-for-sale | $ | 57,075 | $ | 2,590 | $ | 53,510 | $ | 975 |
December 31, 2011 | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Fair Value Measurements Using | |||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||
State, county and municipals | $ | 31,848 | $ | — | $ | 30,873 | $ | 975 | |||||||||||
Mortgage-backed securities | 18,484 | — | 18,484 | — | |||||||||||||||
U.S. Government sponsored enterprises | 5,020 | — | 5,020 | — | |||||||||||||||
Equity securities | 1,407 | 1,407 | — | — | |||||||||||||||
Securities available-for-sale | $ | 56,759 | $ | 1,407 | $ | 54,377 | $ | 975 |
Securities Available for Sale | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Level 3 Fair Value Measurements: | Nine Months Ended September 30, 2012 | Year Ended December 31, 2012 | |||||||||
(in thousands) | |||||||||||
Balance at beginning of year | $ | 975 | $ | 1,050 | |||||||
Purchases/(sales)/(settlements), net | — | (75 | ) | ||||||||
Net change in gain/(loss), realized and unrealized | — | — | |||||||||
Transfers in/(out) of Level 3 | — | — | |||||||||
Balance at end of period | $ | 975 | $ | 975 |
F-50
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTE 9. FAIR VALUE MEASUREMENTS (Continued)
The following is a description of the valuation methodologies used by the Company for the items noted in the table above, including the general classification of such instruments in the fair value hierarchy. Where quoted market prices on securities exchanges are available, the investment is classified in Level 1 of the fair value hierarchy. Level1investments primarily include exchange-traded equity securities available for sale. If quoted market prices are not available, fair value is generally determined using pricing models (such as matrix pricing which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities), quoted market prices of securities with similar characteristic (adjusted for differences between the quoted instruments and the instrument being valued), or discounted cash flows, and are classified in Level 2 of the fair value hierarchy. Examples of these investments include mortgage-related securities and obligations of state, county and municipals. Finally, in certain cases where there is limited activity or less transparency around inputs to the estimated fair value, investments are classified within Level 3 of the hierarchy. Examples of these include auction rate securities available for sale (for which there has been no liquid market since 2008). At September 30, 2012 and December 31, 2011, it was determined that carrying value was the best approximation of fair value for these Level 3 securities, based primarily on receipt of par from refinances for the auction rate securities.
The following table presents the Company’s collateral-dependent impaired loans and other real estate owned measured at fair value on a nonrecurring basis as of September 30, 2012 and December 31, 2011, aggregated by the level in the fair value hierarchy within which those measurements fall.
Measured at Fair Value on a Nonrecurring Basis | Fair Value Measurements Using | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | September 30, 2012 | Level 1 | Level 2 | Level 3 | |||||||||||||||
Collateral-dependent impaired loans | $ | 15,152 | $ | — | $ | 15,152 | $ | — | |||||||||||
Other real estate owned | 617 | — | 617 | — |
Fair Value Measurements Using | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31, 2011 | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Collateral-dependent impaired loans | $ | 8,878 | $ | — | $ | 8,878 | $ | — | |||||||||||
Other real estate owned | 641 | — | 641 | — |
The following is a description of the valuation methodologies used by the Company for the items noted in the table above, including the general classification of such instruments in the fair value hierarchy. Per the applicable accounting standard, the use of observable market price or estimated fair value of collateral on collateral-dependent impaired loans and other real estate owned is considered a fair value measurement subject to the fair value hierarchy and provisions of the accounting standard. The primary inputs underlying estimated fair value of collateral dependent impaired loans and other real estate owned classified within Level 2 are appraised values obtained from external parties for real estate collateral and current financial statements for non-real estate collateral (i.e. usually current assets in nature, such as accounts receivable or inventories). Appraised values of other real estate owned are adjusted for the expected costs to sell.
F-51
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTE 9. FAIR VALUE MEASUREMENTS (Continued)
Summarized below are the estimated fair values of the Company’s financial instruments at September 30, 2012 and December 31, 2011, along with the methods and assumptions used by the Company in estimating the fair value disclosures.
September 30, 2012 | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Fair Value Measurements Using | |||||||||||||||||||||||
(in thousands) | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||
Financial assets: | |||||||||||||||||||||||
Cash and cash equivalents | $ | 27,552 | $ | 27,552 | $ | 27,552 | $ | — | $ | — | |||||||||||||
Securities available for sale | 57,075 | 57,075 | 2,590 | 53,510 | 975 | ||||||||||||||||||
Other investments | 5,221 | 5,221 | — | — | 5,221 | ||||||||||||||||||
Loans held for sale | 3,484 | 3,484 | — | — | 3,484 | ||||||||||||||||||
Loans, net | 539,217 | 543,263 | — | 15,152 | 528,111 | ||||||||||||||||||
Bank owned life insurance | 18,509 | 18,509 | — | 18,509 | — | ||||||||||||||||||
Financial liabilities: | |||||||||||||||||||||||
Deposits | $ | 554,858 | $ | 556,741 | $ | — | $ | — | $ | 556,741 | |||||||||||||
Short-term borrowings | 4,313 | 4,313 | — | 4,313 | — | ||||||||||||||||||
Notes payable | 35,212 | 35,994 | — | 35,994 | — | ||||||||||||||||||
Junior subordinated debentures | 6,186 | 6,186 | — | — | 6,186 |
December 31, 2011 | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Carrying Amount | Fair Value | |||||||||||||||||||||
Financial assets: | ||||||||||||||||||||||
Cash and cash equivalents | $ | 92,129 | $ | 92,129 | ||||||||||||||||||
Certificates of deposits in other banks | 248 | 248 | ||||||||||||||||||||
Securities available for sale | 56,759 | 56,759 | ||||||||||||||||||||
Other investments | 5,211 | 5,211 | ||||||||||||||||||||
Loans held for sale | 11,373 | 11,373 | ||||||||||||||||||||
Loans, net | 466,589 | 469,734 | ||||||||||||||||||||
Bank owned life insurance | 14,237 | 14,237 | ||||||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||
Deposits | $ | 551,536 | $ | 553,761 | ||||||||||||||||||
Short-term borrowings | 4,132 | 4,132 | �� | |||||||||||||||||||
Notes payable | 35,374 | 36,557 | ||||||||||||||||||||
Junior subordinated debentures | 6,186 | 6,186 |
The following is a description of the valuation methodologies used to estimate the fair value of financial instruments.
Cash and cash equivalents and certificates of deposits in other banks: For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
Securities available for sale and other investments: Fair values for securities are based on quoted market prices on securities exchanges, when available. If quoted market prices are not available, fair value is generally determined using pricing models, quoted market prices of securities with similar characteristics, or discounted cash flows. For other investments, the carrying amount of Federal Reserve Bank and FHLB stock is a reasonably accepted fair value estimate given the irrestricted nature, while the carrying amount of the remaining other investments (particularly common stocks of companies or other banks that are not publicly
F-52
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTE 9. FAIR VALUE MEASUREMENTS (Continued)
traded) approximates their fair value, determined primarily by analysis of company financial statements and recent capital issuances of the respective companies or banks, if any.
Loans held for sale: The carrying amount of loans held for sale approximates the fair value, given the short-term nature of the loans between origination and sale.
Loans, net: For variable-rate loans that reprice frequently and with no significant change in credit risk or other optionality, fair values are based on carrying values. Fair values for all other loans are estimated by discounting contractual cash flows using estimated market discount rates, which reflect the credit and interest rate risk inherent in the loan. Collateral-dependent impaired loans are included in loans, net.
Bank owned life insurance: The carrying value of these assets approximates fair value.
Deposits: The fair value of deposits with no stated maturity (such as demand deposits, savings, interest and non-interest checking, and money market accounts) is, by definition, equal to the amount payable on demand at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates within the marketplace.
Short-term borrowings: For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
Notes payable and junior subordinated debentures: The fair values of notes payable and junior subordinated debentures are estimated using discounted cash flow analysis based on current interest rates being offered by instruments with similar terms and credit quality.
Off-balance-sheet instruments: The estimated fair value of letters of credit at September 30, 2012 and December 31, 2011 was insignificant. Loan commitments on which the committed interest rate is less than the current market rate are also insignificant at September 30, 2012 and December 31,2011.
Limitations: Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Fair value estimates may not be realizable in an immediate settlement of the instrument. In some instances, there are no quoted market prices for the Company’s various financial instruments, in which case fair values may be based on estimates using present value or other valuation techniques, or based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of the financial instruments, or other factors. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. Subsequent changes in assumptions could significantly affect the estimates.
NOTE 10. | STOCK-BASED COMPENSATION |
The Company has stock incentive plans administered by a committee of the Board of Directors that provide for the granting of various equity awards per the plan documents to certain eligible officers, employees and directors of the Company.
F-53
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTE 10. STOCK-BASED COMPENSATION (Continued)
Activity of the stock incentive plans for options is summarized in the following table:
Weighted- Average Fair Value per share of Options Granted | Options Outstanding | Weighted- Average Exercise Price | Exercisable | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance — December 31, 2010 | 729,657 | $ | 17.59 | 491,780 | ||||||||||||||
Granted | — | — | — | |||||||||||||||
Exercise of stock options | (17,750 | ) | 11.06 | |||||||||||||||
Cancelled | (9,000 | ) | 15.76 | |||||||||||||||
Balance — December 31, 2011 | 702,907 | 17.78 | 533,074 | |||||||||||||||
Granted | $ | 4.87 | 184,625 | 16.50 | ||||||||||||||
Exercise of stock options | (4,500 | ) | 12.50 | |||||||||||||||
Cancelled | (22,175 | ) | 17.01 | |||||||||||||||
Balance — September 30, 2012 | 860,857 | $ | 17.55 | 540,937 |
Activity of the restricted stock awards is summarized in the following table:
Weighted- Average Fair Value per share of Restricted Stock | Restricted Stock Outstanding | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance — December 31, 2011 | — | |||||||||||||||||||||
Granted | $ | 16.50 | 54,725 | |||||||||||||||||||
Vested | — | |||||||||||||||||||||
Forfeited | 16.50 | (250 | ) | |||||||||||||||||||
Balance — September 30, 2012 | $ | 16.50 | 54,475 |
The Company recognized stock-based employee compensation expense of approximately $376,000 and $224,000 for nine months ended September 30, 2012 and 2011, respectively.
NOTE 11. | SUBSEQUENT EVENTS |
On November 28, 2012, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Mid-Wisconsin Financial Services, Inc. (“MWFS”), the holding company of Mid-Wisconsin Bank. Pursuant to the terms of the Merger Agreement, MWFS will be merged with and into Nicolet Bankshares, Inc. with Nicolet Bankshares, Inc. surviving the merger. After the merger, Mid-Wisconsin Bank will be merged with and into Nicolet National Bank with Nicolet National Bank surviving the merger. The transactions contemplated by the Merger Agreement are expected to be completed in the second quarter of 2013 and are contingent on customary conditions, including regulatory approval and the approval of the shareholders of both the Company and MWFS.
Under the terms of the Merger Agreement, MWFS shareholders will receive 0.3727 shares of Nicolet Bankshares, Inc. common stock, except in certain limited circumstances outlined in the Merger Agreement, which include, among other instances, cash in lieu of shares for fractional shares or for certain MWFS shareholders who own a small number of shares of MWFS common stock, all as defined or adjusted pursuant to the terms of the Merger Agreement. As a condition of the merger, MWFS shall have redeemed by the closing of the merger its preferred stock (issued to the UST by MWFS as part of its participation in the CPP with par value of $10.5 million) plus all accrued and unpaid dividends thereon; or if such redemption is not permitted by regulatory authorities for MWFS, the redemption of such stock by the Company for a maximum payment of $12.0 million.
F-54
APPENDIX A
AGREEMENT AND PLAN OF MERGER, AS AMENDED
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
NICOLET BANKSHARES, INC.
AND
MID-WISCONSIN FINANCIAL SERVICES, INC.
Dated as of November 28, 2012
TABLE OF CONTENTS
Page | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Parties | 1 | ||||||||||
Preamble | 1 | ||||||||||
ARTICLE 1 | TRANSACTIONS AND TERMS OF MERGER | 1 | |||||||||
1.1 | Merger | 1 | |||||||||
1.2 | Bank Merger | 1 | |||||||||
1.3 | Effective Time | 1 | |||||||||
1.4 | Time and Place of Closing | 1 | |||||||||
ARTICLE 2 | TERMS OF MERGER | 2 | |||||||||
2.1 | Articles of Incorporation | 2 | |||||||||
2.2 | Bylaws | 2 | |||||||||
2.3 | Directors | 2 | |||||||||
2.4 | Officers | 2 | |||||||||
ARTICLE 3 | MANNER OF CONVERTING SHARES | 2 | |||||||||
3.1 | Conversion of Target Shares | 2 | |||||||||
3.2 | Cancellation of Stock Options | 3 | |||||||||
ARTICLE 4 | EXCHANGE OF SHARES | 3 | |||||||||
4.1 | Exchange Procedures | 3 | �� | ||||||||
4.2 | Rights of Former Target Shareholders | 3 | |||||||||
ARTICLE 5 | REPRESENTATIONS AND WARRANTIES OF TARGET | 4 | |||||||||
5.1 | Organization, Standing, and Power | 4 | |||||||||
5.2 | Authority of Target; No Breach By Agreement | 4 | |||||||||
5.3 | Capital Stock | 5 | |||||||||
5.4 | Target Subsidiaries | 5 | |||||||||
5.5 | SEC Filings; Financial Statements | 6 | |||||||||
5.6 | Absence of Undisclosed Liabilities | 6 | |||||||||
5.7 | Loan Portfolio | 6 | |||||||||
5.8 | Absence of Certain Changes or Events | 6 | |||||||||
5.9 | Tax Matters | 7 | |||||||||
5.10 | Allowance for Possible Loan Losses | 8 | |||||||||
5.11 | Assets | 8 | |||||||||
5.12 | Intellectual Property | 9 | |||||||||
5.13 | Environmental Matters | 9 | |||||||||
5.14 | Compliance with Laws | 10 | |||||||||
5.15 | Labor Relations | 10 | |||||||||
5.16 | Employee Benefit Plans | 10 | |||||||||
5.17 | Material Contracts | 14 | |||||||||
5.18 | Legal Proceedings | 15 | |||||||||
5.19 | Regulatory Reports | 15 | |||||||||
5.20 | Internal Accounting and Disclosure Controls | 15 | |||||||||
5.21 | Community Reinvestment Act | 15 |
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Page | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
5.22 | Privacy of Customer Information | 15 | |||||||||
5.23 | Technology Systems | 16 | |||||||||
5.24 | Bank Secrecy Act Compliance | 16 | |||||||||
5.25 | Target Disclosure Memorandum | 16 | |||||||||
5.26 | Board Recommendation | 16 | |||||||||
5.27 | Brokers | 16 | |||||||||
ARTICLE 6 | REPRESENTATIONS AND WARRANTIES OF PURCHASER | 16 | |||||||||
6.1 | Organization, Standing and Power | 16 | |||||||||
6.2 | Authority of Purchaser; No Breach By Agreement | 17 | |||||||||
6.3 | Capital Stock | 17 | |||||||||
6.4 | Purchaser Subsidiaries | 18 | |||||||||
6.5 | Financial Statements | 18 | |||||||||
6.6 | Absence of Undisclosed Liabilities | 18 | |||||||||
6.7 | Absence of Certain Changes or Events | 19 | |||||||||
6.8 | Tax Matters | 19 | |||||||||
6.9 | Compliance with Laws | 20 | |||||||||
6.10 | Legal Proceedings | 20 | |||||||||
6.11 | Internal Accounting and Disclosure Controls | 21 | |||||||||
6.12 | Community Reinvestment Act | 21 | |||||||||
6.13 | Board Recommendation | 21 | |||||||||
6.14 | Brokers | 21 | |||||||||
6.15 | Loan and Investment Portfolios | 21 | |||||||||
6.16 | Allowance for Possible Loan Losses | 21 | |||||||||
6.17 | Regulatory Reports | 21 | |||||||||
6.18 | Bank Secrecy Act Compliance | 22 | |||||||||
ARTICLE 7 | CONDUCT OF BUSINESS PENDING CONSUMMATION | 22 | |||||||||
7.1 | Affirmative Covenants of Each Party | 22 | |||||||||
7.2 | Negative Covenants of Target | 22 | |||||||||
7.3 | Negative Covenants of Target | 23 | |||||||||
7.4 | Adverse Changes in Condition | 24 | |||||||||
7.5 | Reports | 24 | |||||||||
ARTICLE 8 | ADDITIONAL AGREEMENTS | 24 | |||||||||
8.1 | Registration Statement; Proxy Statement; Shareholder Approval | 24 | |||||||||
8.2 | Applications | 25 | |||||||||
8.3 | Filings of Articles of Merger | 25 | |||||||||
8.4 | Investigation and Confidentiality | 25 | |||||||||
8.5 | No Solicitations | 26 | |||||||||
8.6 | Press Releases | 26 | |||||||||
8.7 | Tax Treatment | 26 | |||||||||
8.8 | Agreement of Affiliates | 26 | |||||||||
8.9 | Indemnification | 27 | |||||||||
8.10 | Employee Benefits and Contracts | 28 | |||||||||
8.11 | Authorization and Approval of Purchaser Common Stock | 28 | |||||||||
8.12 | Supplemental Indenture | 28 | |||||||||
8.13 | Repurchase or Redemption of Target Preferred Stock | 28 | |||||||||
8.14 | Payment of Target Trust Preferred Interest Payments | 28 | |||||||||
8.15 | Prosecution of Regulatory Approvals | 29 |
ii
Page | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
8.16 | Meetings of Shareholders | 29 | |||||||||
ARTICLE 9 | CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE | 29 | |||||||||
9.1 | Conditions to Obligations of Each Party | 29 | |||||||||
9.2 | Conditions to Obligations of Purchaser | 30 | |||||||||
9.3 | Conditions to Obligations of Target | 31 | |||||||||
ARTICLE 10 | TERMINATION | 31 | |||||||||
10.1 | Termination | 31 | |||||||||
10.2 | Effect of Termination | 32 | |||||||||
10.3 | Non-Survival of Representations and Covenants | 33 | |||||||||
10.4 | Termination Payments | 33 | |||||||||
ARTICLE 11 | MISCELLANEOUS | 34 | |||||||||
11.1 | Definitions | 34 | |||||||||
11.2 | Expenses | 40 | |||||||||
11.3 | Entire Agreement | 40 | |||||||||
11.4 | Amendments | 40 | |||||||||
11.5 | Waivers | 40 | |||||||||
11.6 | Assignment | 41 | |||||||||
11.7 | Notices and Service of Process | 41 | |||||||||
11.8 | Governing Law | 41 | |||||||||
11.9 | Counterparts | 41 | |||||||||
11.10 | Captions; Articles and Sections | 41 | |||||||||
11.11 | Interpretations | 41 | |||||||||
11.12 | Severability | 42 | |||||||||
EXHIBITS | |||||||||||
Exhibit A | Bank Plan of Merger | ||||||||||
Exhibit B | Target Director Nominees | ||||||||||
Exhibit C-1 | Form of Target Affiliate Agreement | ||||||||||
Exhibit C-2 | Form of Purchaser Affiliate Agreement | ||||||||||
Exhibit D | Matters to be Opined Upon by Target Counsel | ||||||||||
Exhibit E | Matters to be Opined Upon by Purchaser Counsel |
iii
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this “Agreement”) is made and entered into as of November 28, 2012, by and between NICOLET BANKSHARES, INC. (“Purchaser”), a Wisconsin corporation, and MID-WISCONSIN FINANCIAL SERVICES, INC. (“Target”), a Wisconsin corporation.
Preamble
The respective Boards of Directors of Target and Purchaser are of the opinion that the transactions described herein are in the best interests of the parties to this Agreement and their respective shareholders. This Agreement provides for the merger of Target with and into Purchaser (the “Merger”), pursuant to which the outstanding shares of Target Common Stock shall be converted into the right to receive either cash or shares of Purchaser Common Stock and the shareholders of Target (other than those shareholders who exchange their shares solely for cash) shall become shareholders of Purchaser. Following the consummation of the Merger, Mid-Wisconsin Bank (“Target Bank”), a Wisconsin chartered bank, will merge with and into Nicolet National Bank (“Purchaser Bank”), a national bank chartered under the laws of the United States of America, in accordance with the terms of the Plan of Merger attached asExhibit A. The transactions described in this Agreement are subject to the approvals of the shareholders of Target and of Target Bank, the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Wisconsin Department of Financial Institutions (the “DFI”), the Office of the Comptroller of the Currency (the “OCC”), the Federal Deposit Insurance Corporation (the “FDIC”) and the satisfaction of certain other conditions described in this Agreement. It is the intention of the parties of this Agreement that the Merger for federal income tax purposes shall qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code.
Certain terms used in this Agreement but not otherwise defined herein are defined in Section 11.1 of this Agreement.
NOW, THEREFORE, in consideration of the above and the mutual warranties, representations, covenants, and agreements set forth herein, the parties agree as follows:
ARTICLE 1
TRANSACTIONS AND TERMS OF MERGER
TRANSACTIONS AND TERMS OF MERGER
1.1 Merger. Subject to the terms and conditions of this Agreement, Target shall be merged with and into Purchaser in accordance with the provisions of the Wisconsin Business Corporation Law (the “WBCL”). Purchaser shall be the Surviving Entity resulting from the Merger and shall continue to be governed by the Laws of the State of Wisconsin. The Merger shall be consummated pursuant to the terms of this Agreement, which has been approved and adopted by the respective Boards of Directors of Target and Purchaser.
1.2 Bank Merger. Following the consummation of the Merger, Target Bank shall be merged with and into Purchaser Bank in accordance with the provisions of Section 18(c) of the Federal Deposit Insurance Act and Subchapter VII of the Wisconsin Banking Law and pursuant to the terms and conditions of the Bank Plan of Merger attached hereto asExhibit A.
1.3 Effective Time. The Merger and other transactions contemplated by this Agreement shall become effective on the date and at the time Articles of Merger reflecting the Merger shall become effective with the DFI (the “Effective Time”). At the Effective Time, the separate corporate existence of Target shall cease, with Purchaser continuing as the Surviving Entity in the Merger.
1.4 Time and Place of Closing. The closing of the transactions contemplated hereby (the “Closing”) will take place at 9:00 A.M. Central Time on the date (the “Closing Date”) on which the Effective Time occurs (or the immediately preceding day if the Effective Time is earlier than 9:00 A.M.), or at such other time as the Parties, acting through their authorized officers, may mutually agree. The Closing shall be held at the office of Bryan Cave LLP, 1201 West Peachtree Street, Atlanta, GA 30309, or at such location as may be mutually agreed upon by the Parties.
1
ARTICLE 2
TERMS OF MERGER
TERMS OF MERGER
2.1 Articles of Incorporation. At the Effective Time, the Articles of Incorporation of Purchaser in effect immediately prior to the Effective Time shall be the Articles of Incorporation of the Surviving Entity of the Merger.
2.2 Bylaws. At the Effective Time, the Bylaws of Purchaser in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Entity of the Merger.
2.3 Directors. From and after the Effective Time, the directors of Purchaser in office immediately prior to the Effective Time, together with the two nominees set forth inExhibit B who are submitted by Target and approved by Purchaser’s Board of Directors (with such approval not to be unreasonably withheld) shall serve as the directors of the Surviving Entity of the Merger. The two nominees submitted by Target set forth onExhibit B shall serve until their terms expire or their earlier resignation or removal under the provisions of Purchaser’s Bylaws and shall thereafter be nominated for election at the first meeting of the Purchaser’s shareholders, as applicable, after the expiration of such nominees’ initial term.
2.4 Officers. At the Effective Time, the officers of Purchaser in office immediately prior to the Effective Time shall serve as the officers of the Surviving Entity of the Merger.
ARTICLE 3
MANNER OF CONVERTING SHARES
MANNER OF CONVERTING SHARES
3.1 Conversion of Target Shares. Subject to the provisions of this Article 3, at the Effective Time, by virtue of the Merger and without any action on the part of Purchaser, Target, or the shareholders of either of the foregoing, the shares of the constituent corporations shall be converted as follows:
(a) Each share of capital stock of Purchaser issued and outstanding immediately prior to the Effective Time shall remain issued and outstanding from and after the Effective Time.
(b) Each share of Target Common Stock outstanding immediately prior to the Effective Time, other than Dissenting Shares, shares held by Target, State-Restricted Shares or Cash-Out Shares, shall automatically be converted at the Effective Time into the right to receive 0.3727 shares of Purchaser Common Stock (the “Stock Merger Consideration”). Each share of Target Common Stock outstanding immediately prior to the Effective Time that is held by a holder of record of State-Restricted Shares or Cash-Out Shares shall automatically be converted at the Effective Time into the right to receive $6.15 in cash (the “Cash Merger Consideration”), payable by Purchaser. Such shares to be converted are sometimes referred to herein as the “Outstanding Target Shares,” and the shares of Purchaser Common Stock and any cash to be delivered pursuant to this Section 3.1(b) or Section 3.1(c) are referred to as the “Merger Consideration.” The Merger Consideration will be adjusted proportionately for any stock split, stock dividend, recapitalization, reclassification, or similar transaction that is effected by either Party, or for which a record date occurs, prior to the Effective Time, and the 200-share threshold for determining ownership of Cash-Out Shares may be adjusted by Purchaser if, after deducting payments for fractional shares, Dissenting Shares (assuming a $6.15 per share payment) and State-Restricted Shares from $500,000, the amount of cash payable for Cash-Out Shares at that threshold would not enable each holder of Cash-Out Shares to receive cash Merger Consideration for all of their shares. In such a case, Purchaser may either (i) change the 200-share threshold to the highest number of shares that would enable all holders of Target Common Stock with record ownership of Target Common Stock below such threshold to receive Cash Merger Consideration for all of their shares of Target Common Stock or (ii) deliver Stock Merger Consideration in lieu of Cash Merger Consideration to all holders of Cash-Out Shares.
(c) Notwithstanding any other provision of this Agreement, each holder of Outstanding Target Shares exchanged pursuant to the Merger who would otherwise have been entitled to receive a fraction of a share of Purchaser Common Stock (after taking into account all certificates delivered by such holder) shall receive, in lieu thereof, cash (without interest) in an amount equal to such fractional part of a share of Purchaser Common Stock multiplied by $6.15. No such holder will be entitled to dividends, voting rights, or any other rights as a shareholder in respect of any fractional shares.
2
(d) At the Effective Time, each share of Target Common Stock that is held by Target shall be cancelled without consideration therefor.
(e) No Dissenting Shares shall be converted in the Merger. All such shares shall be canceled, and the holders thereof shall thereafter have only such rights as are granted to dissenting shareholders under Subchapter XIII of the WBCL; provided, however, that if any such shareholder fails to perfect his, her or its rights as a dissenting shareholder with respect to his, her or its Dissenting Shares in accordance with Subchapter XIII of the WBCL or withdraws or loses such holder’s Dissenter’s Rights, such shares held by such shareholder shall be deemed to have been converted into, and become exchangeable for, as of the Effective Time, the right to receive the Merger Consideration to which the holder of such shares would have been entitled as of the Effective Time, without interest thereon.
3.2 Cancellation of Stock Options. Prior to the Effective Time, Target will take such action as may be necessary or appropriate to cancel, as of the Effective Time, all outstanding stock options granted by Target under the Target Plans (“Target Options”), without any payment made in exchange therefor.
ARTICLE 4
EXCHANGE OF SHARES
EXCHANGE OF SHARES
4.1 Exchange Procedures. Prior to the Effective Time, Purchaser shall select a transfer agent, bank or trust company to act as exchange agent (the “Exchange Agent”) to effect the delivery of the Merger Consideration to holders of Target Common Stock. At the Effective Time, Purchaser shall deliver the Merger Consideration to the Exchange Agent. Within five (5) days following the Effective Time, the Exchange Agent shall send to each holder of Outstanding Target Shares that owns shares of Target Common Stock as of the Effective Time a letter of transmittal (the “Letter of Transmittal”) for use in exchanging certificates previously evidencing shares of Target Common Stock (“Old Certificates”). The Letter of Transmittal will contain instructions with respect to the surrender of Old Certificates and the distribution of the Merger Consideration to holders of Target Common Stock. If any certificates for shares of Purchaser Common Stock are to be issued in a name other than that for which an Old Certificate surrendered or exchanged is issued, the Old Certificate so surrendered shall be properly endorsed and otherwise in proper form for transfer and the person requesting such exchange shall affix any requisite stock transfer tax stamps to the Old Certificate surrendered or provide funds for their purchase or establish to the satisfaction of the Exchange Agent that such taxes are not payable. Subject to applicable law and to the extent that the same has not yet been paid to a public official pursuant to applicable abandoned property laws, upon surrender of his, her or its Old Certificates, the holder thereof shall be paid the consideration to which he, she or it is entitled. All such property, if held by the Exchange Agent for payment or delivery to the holders of unsurrendered Old Certificates and unclaimed at the end of one (1) year from the Effective Time, shall at such time be paid or redelivered by the Exchange Agent to Purchaser, and after such time any holder of an Old Certificate who has not surrendered such certificate shall, subject to applicable laws and to the extent that the same has not yet been paid to a public official pursuant to applicable abandoned property laws, look as a general creditor only to Purchaser for payment or delivery of such property. In no event will any holder of Target Common Stock exchanged in the Merger be entitled to receive any interest on any amounts held by the Exchange Agent or Purchaser.
4.2 Rights of Former Target Shareholders.
(a) At the Effective Time, the stock transfer books of Target shall be closed as to holders of Target Common Stock immediately prior to the Effective Time and no transfer of Target Common Stock by any such holder shall thereafter be made or recognized. Until surrendered for exchange in accordance with the provisions of Section 4.1, each certificate theretofore representing Target Common Stock shall from and after the Effective Time represent for all purposes only the right to receive the consideration provided in Section 3.1 in exchange therefor. To the extent permitted by Law, former shareholders of record of Target shall be entitled to vote after the Effective Time at any meeting of Purchaser shareholders the number of whole shares of Purchaser Common Stock into which their respective shares of Target Common Stock are converted, regardless of whether such holders have exchanged their Old Certificates for certificates representing Purchaser Common Stock in accordance with the provisions of this Agreement.
3
(b) Whenever a dividend or other distribution is declared by Purchaser on the Purchaser Common Stock, the record date for which is at or after the Effective Time, the declaration shall include dividends or other distributions on all shares of Purchaser Common Stock issuable pursuant to this Agreement, but no dividend or other distribution payable to the holders of record of Purchaser Common Stock as of any time subsequent to the Effective Time shall be delivered to the holder of any Old Certificate until such holder surrenders such Old Certificate for exchange as provided in Section 4.1. However, upon surrender of such Old Certificate, both the Purchaser Common Stock certificate and any undelivered dividends and cash payments payable hereunder (without interest) shall be delivered and paid with respect to each share represented by such Old Certificate.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF TARGET
REPRESENTATIONS AND WARRANTIES OF TARGET
Target hereby represents and warrants to Purchaser as follows:
5.1 Organization, Standing, and Power.
(a) Target is a corporation duly organized, validly existing, and in good standing under the Laws of the State of Wisconsin, and has the corporate power and authority to carry on its business as now conducted and to own, lease and operate its Assets. Target is duly qualified or licensed to transact business as a foreign corporation in good standing in the jurisdictions where the character of the Assets or the nature or conduct of its business requires it to be so qualified or licensed, except for such jurisdictions in which the failure to be so qualified or licensed is not reasonably likely to have, individually or in the aggregate, a Target Material Adverse Effect. The minute book and other organizational documents for Target have been made available to Purchaser for its review and accurately reflect all amendments thereto and all proceedings of the Board of Directors and shareholders thereof.
(b) Target Bank is a bank duly organized, validly existing, and in good standing under the Laws of the State of Wisconsin, and has the corporate power and authority to carry on its business as now conducted and to own, lease and operate its Assets. Target Bank is duly qualified or licensed to transact business and in good standing in jurisdictions where the character of its Assets or the nature or conduct of its business requires it to be so qualified or licensed, except for such jurisdictions in which the failure to be so qualified or licensed is not reasonably likely to have, individually or in the aggregate, a Target Material Adverse Effect. The minute books and other organizational documents and corporate records for Target Bank have been made available to Purchaser for its review and are true and complete in all material respects as in effect as of the date of this Agreement and accurately reflect in all material respects all amendments thereto and all proceeding of the Board of Directors and shareholder thereof. Target Bank is an “insured institution” as defined in the Federal Deposit Insurance Act and applicable regulations thereunder.
5.2 Authority of Target; No Breach By Agreement.
(a) Target has the corporate power and authority necessary to execute and deliver this Agreement, and each of the Target Entities has the corporate power and authority necessary to perform its obligations under this Agreement and to consummate the transactions contemplated hereby. The execution, delivery, and performance of this Agreement and the consummation of the transactions contemplated herein, including the Merger, have been duly and validly authorized by all necessary corporate action in respect thereof on the part of Target. Subject to the requisite approval by Target’s shareholders and any applicable Consents of Regulatory Authorities, this Agreement represents a legal, valid, and binding obligation of Target, enforceable against Target in accordance with its terms (except in all cases as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, receivership, conservatorship, moratorium, or similar Laws affecting the enforcement of creditors’ rights generally and except that the availability of the equitable remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding may be brought).
(b) Neither the execution and delivery of this Agreement by Target, nor the consummation by Target of the transactions contemplated hereby, nor compliance by Target with any of the provisions hereof, will (i) conflict with or result in a breach of any provision of Target’s Articles of Incorporation or
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Bylaws or the certificate or articles of incorporation or bylaws of any Target Entity or any resolution adopted by the board of directors or the shareholders of any Target Entity that is currently in effect, (ii) except as disclosed inSection 5.2(b) of the Target Disclosure Memorandum or except to the extent it would not have a Target Material Adverse Effect, constitute or result in a Default under, or require any Consent pursuant to, or result in the creation of any Lien on any Asset of any Target Entity under, any Contract or Permit of any Target Entity, or, (iii) subject to receipt of the requisite Consents referred to in Section 9.1(b) or except to the extent it would not have a Target Material Adverse Effect, constitute or result in a Default under, or require any Consent pursuant to, any Law or Order applicable to any Target Entity or any of its Assets (including any Purchaser Entity or Target Entity becoming subject to or liable for the payment of any Tax or any of the Assets owned by any Purchaser Entity or Target Entity being reassessed or revalued by any Taxing authority, except where such Default would not have a Target Material Adverse Effect).
(c) Other than in connection or compliance with the provisions of the Securities Laws, applicable state corporate and securities Laws, and rules of the Over-the-Counter Bulletin Board, and other than Consents required from Regulatory Authorities, and other than notices to or filings with the Internal Revenue Service or the Pension Benefit Guaranty Corporation with respect to any employee benefit plans, no notice to, filing with, or Consent of, any public body or authority is necessary for the consummation by Target of the Merger or the other transactions contemplated in this Agreement.
5.3 Capital Stock.
(a) The authorized capital stock of Target consists of 6,000,000 shares of $0.10 par value per share Target Common Stock, of which 1,657,119 shares are issued and outstanding, and 50,000 shares of Target Preferred Stock, of which 10,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, are issued and outstanding and 500 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series B, are issued and outstanding. In addition, 30,510 shares of Target Common Stock are reserved for issuance pursuant to outstanding Target Options. All of the issued and outstanding shares of capital stock of Target are duly and validly issued and outstanding and are fully paid and nonassessable under the WBCL. To Target’s Knowledge, none of the outstanding shares of capital stock of Target has been issued in violation of any preemptive rights of the current or past shareholders of Target.
(b) The authorized capital stock of Target Bank consists of 668,500 shares of common stock, $5.00 par value per share. All of the issued and outstanding shares of capital stock of Target Bank are duly and validly issued and outstanding and are fully paid and nonassessable.
(c) Except as set forth in Section 5.3(a) or 5.3(b) of this Agreement, there are no (i) shares of capital stock, preferred stock or other equity securities of Target or Target Bank outstanding or (ii) outstanding Equity Rights relating to the capital stock of Target or Target Bank.
5.4 Target Subsidiaries. Except as set forth inSection 5.4 of the Target Disclosure Memorandum, Target or one of its wholly owned Subsidiaries owns all of the issued and outstanding shares of capital stock (or other equity interests) of each Target Subsidiary. No capital stock (or other equity interest) of any Target Subsidiary is or may become required to be issued (other than to another Target Entity) by reason of any Equity Rights, and there are no Contracts by which any Target Subsidiary is bound to issue (other than to another Target Entity) additional shares of its capital stock (or other equity interests) or Equity Rights or by which any Target Entity is or may be bound to transfer any shares of the capital stock (or other equity interests) of any Target Subsidiary (other than to another Target Entity). There are no Contracts relating to the rights of any Target Entity to vote or to dispose of any shares of the capital stock (or other equity interests) of any Target Subsidiary. All of the shares of capital stock (or other equity interests) of each Target Subsidiary held by a Target Entity are fully paid and nonassessable and are owned by the Target Entity free and clear of any Lien. Each Target Subsidiary is either a bank, corporation or statutory trust, and each such Target Subsidiary is duly organized, validly existing, and in good standing under the Laws of the jurisdiction in which it is incorporated or organized, and has the corporate power and authority necessary for it to own, lease and operate its Assets and to carry on its business as now conducted. Each Target Subsidiary is duly qualified or licensed to transact business as a foreign corporation in good standing in the jurisdictions where the character of its Assets or the nature or conduct of its business requires it to be so qualified or licensed, except
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for such jurisdictions in which the failure to be so qualified or licensed is not reasonably likely to have, individually or in the aggregate, a Target Material Adverse Effect.
5.5 SEC Filings; Financial Statements.
(a) Target has timely filed all SEC Documents required to be filed by Target since January 1, 2010 (the “Target SEC Reports”). The Target SEC Reports (i) at the time filed, complied in all material respects with the applicable requirements of the Securities Laws and other applicable Laws and (ii) did not, at the time they were filed (or, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated in such Target SEC Reports or necessary in order to make the statements in such Target SEC Reports, in light of the circumstances under which they were made, not misleading. No Target Subsidiary is required to file any SEC Documents.
(b) Each of the Target Financial Statements (including, in each case, any related notes) contained in the Target SEC Reports, including any Target SEC Reports filed after the date of this Agreement until the Effective Time, complied as to form in all material respects with the applicable published rules and regulations of the SEC with respect thereto, was prepared in accordance with GAAP applied on a consistent basis throughout the periods involved (except as may be indicated in the notes to such financial statements or, in the case of unaudited interim statements, as permitted by Form 10-Q of the SEC), and fairly presented in all material respects the consolidated financial position of Target and its Subsidiaries as at the respective dates and the consolidated results of operations and cash flows for the periods indicated, except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments which were not or are not expected to be material in amount or effect.
5.6 Absence of Undisclosed Liabilities. To Target’s Knowledge, the Target Entities have no Liabilities of a nature required to be reflected on the consolidated balance sheets prepared in accordance with GAAP, except Liabilities that are accrued or reserved against in the consolidated balance sheets of the Target Entities as of September 30, 2012, included in the Target Financial Statements or reflected in the notes thereto. The Target Entities have not incurred or paid any Liability since September 30, 2012, except for such Liabilities incurred or paid (i) in the ordinary course of business consistent with past business practice and that are not reasonably likely to have, individually or in the aggregate, a Target Material Adverse Effect; (ii) to legal, financial and other advisers in connection with the transactions contemplated by this Agreement; or (iii) set forth inSection 5.6 of the Target Disclosure Memorandum.
5.7 Loan Portfolio. As of the date of this Agreement, all loans, discounts and financing leases reflected on the Target Financial Statements were, and with respect to the Target Financial Statements delivered as of the dates subsequent to the execution of this Agreement, will be as of the dates thereof, (a) at the time and under the circumstances in which made, made for good, valuable and adequate consideration in the ordinary course of business, (b) evidenced by genuine notes, agreements or other evidences of indebtedness and (c) to the extent secured, have been secured by valid liens and security interests that have been perfected. Except as specifically set forth inSection 5.7 of the Target Disclosure Memorandum, no Target Entity is a party to any written or oral loan agreement, note or borrowing arrangement, including any loan guaranty, that was, as of the most recent month-end (i) delinquent by more than 30 days in the payment of principal or interest, (ii) known by the Target Entities to be otherwise in Default for more than 30 days, (iii) classified as “substandard,” “doubtful,” “loss,” “other assets especially mentioned” or any comparable classification by Target, the FDIC or the DFI, or (iv) an obligation of any director, executive officer or 10% shareholder of Target who is subject to Regulation O of the Federal Reserve Board (12 C.F.R. Part 215), or any person, corporation or enterprise controlling, controlled by or under common control with any of the foregoing.
5.8 Absence of Certain Changes or Events. Since September 30, 2012, except as disclosed in the Target Financial Statements or inSection 5.8 of the Target Disclosure Memorandum, (i) to Target’s Knowledge, there have been no events, changes, or occurrences which have had, or are reasonably likely to have, individually or in the aggregate, a Target Material Adverse Effect, (ii) Target has not declared, set aside for payment or paid any dividend to holders of, or declared or made any distribution on, any shares of Target Common Stock and (iii) no Target Entity has taken any action, or failed to take any action, prior to the date
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of this Agreement, which action or failure, if taken after the date of this Agreement, would represent or result in a material breach or violation of any of the covenants and agreements of Target provided in Article 7. Except as may result from the transactions contemplated by this Agreement, or as set forth inSection 5.8 of the Target Disclosure Memorandum, no Target Entity has since September 30, 2012:
(a) borrowed any money other than deposits or overnight fed funds or entered into any capital lease or leases; or, except in the ordinary course of business and consistent with past practices: (i) lent any money or pledged any of its credit in connection with any aspect of its business whether as a guarantor, surety, issuer of a letter of credit or otherwise, (ii) mortgaged or otherwise subjected to any Lien any of its assets, sold, assigned or transferred any of its assets in excess of $50,000 in the aggregate or (iii) incurred any other Liability or loss representing, individually or in the aggregate, over $50,000;
(b) suffered over $50,000 in damage, destruction or loss to immovable or movable property, whether or not covered by insurance;
(c) failed to operate its business in the ordinary course consistent with past practices, or failed to use reasonable efforts to preserve its business or to preserve the goodwill of its customers and others with whom it has business relations;
(d) forgiven any debt owed to it in excess of $50,000, or canceled any of its claims or paid any of its noncurrent obligations or Liabilities except in the ordinary course of business;
(e) made any capital expenditure or capital addition or betterment in excess of $50,000;
(f) entered into any agreement requiring the payment, conditionally or otherwise, of any salary, bonus, extra compensation (including payments for unused vacation or sick time), pension or severance payment to any of its present or former directors, officers or employees, except such agreements as are terminable at will without any penalty or other payment by it or increased (except for increases of not more than 5% consistent with past practices) the compensation (including salaries, fees, bonuses, profit sharing, incentive, pension, retirement or other similar payments) of any such person whose annual compensation would, following such increase, exceed $50,000;
(g) except as required in accordance with GAAP, changed any accounting practice followed or employed in preparing the Target Financial Statements;
(h) authorized or issued any additional shares of Target Common Stock, Target Preferred Stock, or Equity Rights; or
(i) entered into any agreement, contract or commitment to do any of the foregoing.
5.9 Tax Matters.
(a) All Tax Returns required to be filed by or on behalf of any Target Entity have been timely filed or requests for extensions have been timely filed, granted, and have not expired for all periods ended on or before the date of the most recent fiscal year end immediately preceding the Effective Time and all Tax Returns filed are complete and accurate in all material respects. All Taxes shown on filed Tax Returns have been paid. There is no audit examination, deficiency, or refund Litigation with respect to any Taxes, except as reserved against in the Target Financial Statements delivered prior to the date of this Agreement or as disclosed inSection 5.9 of the Target Disclosure Memorandum. Target’s federal income Tax Returns have not been audited by the IRS. All Taxes and other Liabilities due with respect to completed and settled examinations or concluded Litigation have been paid. There are no Liens with respect to Taxes upon any of the Assets of Target.
(b) No Target Entity has executed an extension or waiver of any statute of limitations on the assessment or collection of any Tax due that is currently in effect.
(c) The provision for any Taxes due or to become due for any Target Entity for the period or periods through and including the date of the respective Target Financial Statements that has been made and is reflected on such Target Financial Statements is sufficient to cover all such Taxes.
(d) Deferred Taxes of the Target Entities have been provided for in accordance with GAAP.
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(e) The Target Entities are in compliance with, and its records contain all information and documents (including properly completed IRS Forms W-9) necessary to comply with, all applicable information reporting and Tax withholding requirements under federal, state, and local Tax Laws, and such records identify with specificity all accounts subject to backup withholding under Section 3406 of the Internal Revenue Code, except where any such failure to comply would not reasonably be expected to have a Target Material Adverse Effect.
(f) No Target Entity has experienced a change in ownership with respect to its stock, within the meaning of Section 382 of the Internal Revenue Code, other than the ownership change that will occur as a result of the transactions contemplated by this Agreement.
(g) There is no pending claim by any taxing authority of a jurisdiction where either the Target or Target Bank has not filed Tax Returns that either Target or Target Bank is subject to taxation in that jurisdiction.
(h) Neither Target nor Target Bank has ever been a member of an “affiliated group” within the meaning of Code Section 1504(a) filing a consolidated federal income tax return, other than any “affiliated group” of which Target is the “common parent.” Except as set forth inSection 5.9 of the Target Disclosure Memorandum, neither Target nor Target Bank is a party to any Tax sharing or Tax allocation agreement that will remain in affect after consummation to the Mergers contemplated by this Agreement.
(i) Target has not taken or agreed to take any action, and has no Knowledge of any fact or circumstance that is reasonably likely, to prevent the Merger from qualifying as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code.
5.10 Allowance for Possible Loan Losses. The allowance for possible loan or credit losses (the “Allowance”) shown on the consolidated balance sheets of the Target Entities included in the Target Financial Statements and the allowance shown on the consolidated balance sheets of the Target Entities as of dates subsequent to the execution of this Agreement will be, as of the dates thereof, adequate in the judgment of Target’s management and consistent with GAAP and applicable regulatory requirements or guidelines to provide for all known or reasonably anticipated losses relating to or inherent in the loan and lease portfolios (including accrued interest receivables) of the Target Entities and other extensions of credit (including letters of credit and commitments to make loans or extend credit) by Target as of the dates thereof.
5.11 Assets.
(a) Except as disclosed inSection 5.11 of the Target Disclosure Memorandum or as disclosed or reserved against in the Target Financial Statements, the Target Entities have good and marketable title, free and clear of all Liens, to their respective Assets, except for (i) mortgages and encumbrances that secure indebtedness that is properly reflected in the Target Financial Statements or that secure deposits of public funds as required by law; (ii) Liens for taxes accrued but not yet payable; (iii) Liens arising as a matter of law in the ordinary course of business, provided that the obligations secured by such Liens are not delinquent or are being contested in good faith; (iv) such imperfections of title and encumbrances, if any, as do not materially detract from the value or materially interfere with the present use of any of such properties or Assets; and (v) capital leases and leases, if any, to third parties for fair and adequate consideration. All tangible properties used in the business of the Target Entities are in satisfactory working condition, reasonable wear and tear excepted, and are usable in the ordinary course of business consistent with Target’s past practices. All Assets which are material to the Target Entities’ businesses on a consolidated basis, held under leases or subleases by a Target Entity, are held under valid Contracts enforceable against such Target Entity in accordance with their respective terms (except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or other Laws affecting the enforcement of creditors’ rights generally and except that the availability of the equitable remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceedings may be brought), and each such Contract is in full force and effect.
(b) The Target Entities have paid all amounts due and payable under any insurance policies and guarantees applicable to the Target Entities and their respective Assets and operations; all such insurance policies and guarantees are in full force and effect, and all of the Target Entities’ material properties are
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insured in amounts, events and with deductibles, as set forth inSection 5.11(b) of the Target Disclosure Memorandum. Since January 1, 2010 no Target Entity has received written notice from any insurance carrier that (i) any policy of insurance will be canceled or that coverage thereunder will be reduced or eliminated, or (ii) premium costs with respect to such policies of insurance will be substantially increased. There are presently no claims for amounts exceeding in any individual case $50,000 pending under such policies of insurance, and no notices of claims in excess of such amounts have been given by a Target Entity under such policies. Except as set forth inSection 5.11(b) of the Target Disclosure Memorandum, the Target Entities are not aware of any circumstances that could give rise to any claim for an amount exceeding $50,000, nor has any notice of such circumstance been given under such policies.
(c) With respect to each lease of any real property or personal property to which any Target Entity is a party (whether as lessee or lessor) set forth onSection 5.11(c) of the Target Disclosure Memorandum, except for financing leases in which a Target Entity is lessor (i) such lease is in full force and effect in accordance with its terms against the Target Entity that is a party to the lease; (ii) all rents and other monetary amounts that have become due and payable thereunder have been paid by the Target Entity that is a party to the lease; (iii) there exists no Default under such lease by the Target Entity that is party to the lease; and (iv) upon receipt of the consents described inSection 5.11(c) of the Target Disclosure Memorandum, the Mergers will not constitute a default or a cause for termination or modification of such lease.
(d) No Target Entity has a legal obligation, absolute or contingent, to any other person to sell or otherwise dispose of any substantial part of its Assets except in the ordinary course of business consistent with past practices.
(e) The Target Entities’ Assets include all Assets reasonably required to operate the businesses of the Target Entities as presently conducted.
5.12 Intellectual Property. The Target Entities own or have a license to use the Intellectual Property used by the Target Entities in the course of their businesses. The Target Entities own or have a license to any Intellectual Property sold or licensed to a third party by a Target Entity in connection with the Target Entities’ business operations, and the Target Entities have the right to convey by sale or license any Intellectual Property so conveyed. No Target Entity has received notice of Default under any of their respective Intellectual Property licenses. No proceedings have been instituted, or are pending or overtly threatened, that challenge the rights of the Target Entities with respect to Intellectual Property used, sold or licensed by the Target Entities in the course of their businesses, nor, to Target’s Knowledge, has any Person claimed or alleged any rights to such Intellectual Property. To the Knowledge of the Target Entities, the conduct of the Target Entities’ businesses does not infringe any Intellectual Property of any other person. Except as disclosed inSection 5.12 of the Target Disclosure Memorandum, no Target Entity is obligated to pay any recurring royalties to any Person with respect to any such Intellectual Property.
5.13 Environmental Matters.
(a) The Target Entities and their Operating Properties are, and have been, in compliance with all Environmental Laws.
(b) There is no Litigation pending or threatened before any court, governmental agency, or authority or other forum in which the Target Entities or any of their Operating Properties (or the Target Entities in respect of such Operating Property) has been or, with respect to threatened Litigation, may be named as a defendant (i) for alleged noncompliance (including by any predecessor) with any Environmental Law or (ii) relating to the Release into the indoor or outdoor Environment of any Hazardous Material, whether or not occurring in, at, on, under, about, adjacent to, or affecting (or potentially affecting) an Asset currently or formerly owned, leased, or operated by the Target Entities or any of its Operating Properties or Participation Facilities, nor is there any reasonable basis for any Litigation of a type described in this sentence.
(c) During the period of (i) the Target Entities’ ownership or operation of any of their Assets, or (ii) the Target Entities’ holding of a security interest in an Operating Property, to the Knowledge of the Target Entities, there has been no Release of any Hazardous Material in, at, on, under, about, adjacent to, or affecting (or potentially affecting) such properties. Prior to the period of (i) the Target Entities’ ownership
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or operation of any of its Assets, or (ii) the Target Entities’ holding of a security interest in an Operating Property, to the Knowledge of the Target Entities, there was no Release of any Hazardous Material in, at, on, under, about, or affecting any such property or Operating Property.
(d) Target has delivered to Purchaser true and complete copies and results of any reports, studies, analyses, tests, or monitoring possessed or initiated by a Target Entity pertaining to Hazardous Materials in, at, on, under, about, or affecting (or potentially affecting) any Asset, or concerning compliance by the Target Entities or any other Person for whose conduct it is or may be held responsible, with Environmental Laws.
(e) To Target’s Knowledge, there are no aboveground or underground storage tanks, whether in use, out-of-service or closed, in, at, on, under, affecting or potentially affecting any of the Operating Properties. Any above-ground or underground storage tanks removed by or on behalf of the Target Entities at or from any Asset were removed in accordance with Environmental Laws and no soil or groundwater contamination or Release resulted from the operation or removal of such tanks.
5.14 Compliance with Laws. Target is a Wisconsin corporation and a registered bank holding company under the BHC Act, as amended, and has in effect all Permits necessary for it to own, lease, or operate its Assets and to carry on its business as now conducted, and there has occurred no Default under any such Permit, except where such Default would not have a Target Material Adverse Effect. No Target Entity is:
(a) in Default under any of the provisions of its respective Articles of Incorporation or Bylaws (or other governing instruments);
(b) in Default under any Laws, Orders, or Permits applicable to its business or employees conducting its business except where such Default would not have a Target Material Adverse Effect; or
(c) since January 1, 2010, in receipt of any written notification or communication from any agency or department of federal, state, or local government or any Regulatory Authority or the staff thereof (i) asserting that any Target Entity is not in compliance with any of the Laws or Orders which such governmental authority or Regulatory Authority enforces, (ii) threatening to revoke any Permits or (iii) except as set forth inSection 5.14(c) of the Target Disclosure Memorandum, requiring the Target Entity to enter into or consent to the issuance of a cease and desist order, formal agreement, directive, commitment, or memorandum of understanding, or to adopt any Board resolution or similar undertaking, which restricts materially the conduct of its business or in any manner relates to its capital adequacy, its credit or reserve policies or its management.
(d) Target Bank is a Wisconsin state bank whose deposits are, and will at the Effective Time be, insured by the FDIC to the extent such insurance is available.
5.15 Labor Relations. No Target Entity is a party to any Litigation asserting that it has committed an unfair labor practice (within the meaning of the National Labor Relations Act or comparable state law) or seeking to compel it to bargain with any labor organization or other employee representative to wages or conditions of employment, nor is any Target Entity party to any collective bargaining agreement, nor is there any pending or, to the Knowledge of the Target Entities, threatened strike, slowdown, picketing, work stoppage or other labor dispute involving Target. To the Knowledge of Target, there is no activity involving any employees of the Target Entities seeking to certify a collective bargaining unit or engaging in any other organization activity.
5.16 Employee Benefit Plans.
(a) Target and any other entities which now or in the past five years constitute a single employer within the meaning of Internal Revenue Code Section 414 are hereinafter collectively referred to as the “Target Group.”
(b) The following agreements, plans or arrangements, whether formal or informal and whether or not documented in writing, which are presently in effect and which cover current or former
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employees, directors and/or other service providers of any member of the Target Group (collectively “Participants”) are referred to as the “Target Plans”:
(i) Any employee benefit plan as defined in Section 3(3) of ERISA, and any trust or other funding agency created thereunder, or under which any member of the Target Group, with respect to employees, has any outstanding, present, or future obligation or liability, or under which any employee or former employee has any present or future right to benefits which are covered by ERISA; or
(ii) Any other pension, profit sharing, retirement, deferred compensation, stock purchase, stock option, incentive, bonus, vacation, severance, disability, hospitalization, medical, life insurance, split dollar or other employee benefit plan, program, policy, or arrangement, whether written or unwritten, formal or informal, which any member of the Target Group maintains or to which any member of the Target Group has any outstanding, present or future obligations to contribute or make payments under, whether voluntary, contingent or otherwise.
With respect to each Target Plan, Target has delivered to Purchaser true, complete and correct copies of the following (as applicable): (1) the written document evidencing such Target Plan or, with respect to any such plan that is not in writing, a written description thereof; (2) the summary plan description; (3) any related trust agreements, insurance contracts or documents of any other funding arrangements; (4) material third party service provider agreements; (5) all amendments, modifications or supplements to any such document; (6) the three most recent Internal Revenue Service Forms 5500 required to have been filed, including all schedules thereto; (7) the three most recent audit and/or actuarial reports; (8) the most recent determination letter from the Internal Revenue Service; and (9) any notices to or from the Internal Revenue Service, any office or representative of the Department of Labor or any other governmental entity relating to any compliance issues in respect of any Target Plan.
(c) Except as to those plans identified inSection 5.16 of the Target Disclosure Memorandum as Target Plans intended to be qualified under Section 401(a) of the Internal Revenue Code (the “Target Qualified Plans”), no member of the Target Group maintains a Target Plan which meets or was intended to meet the requirements of Section 401(a). As to each Target Qualified Plan, the Internal Revenue Service has issued favorable determination letter(s) to the effect that such Target Qualified Plan is a tax-qualified plan in form and that any related trust is exempt from taxation, and such determination letter(s) remain in effect and have not been revoked or, in the alternative, the Internal Revenue Service has issued favorable determination letter(s) to the effect that the prototype plan under which such Target Qualified Plan has been adopted is a tax-qualified plan in form and that any related trust is exempt from taxation, and that Target may rely upon such favorable determination letter(s) and, to the Knowledge of Target, such favorable determination letter(s) remain in effect and have not been revoked. Copies of the most recent favorable determination letters and any outstanding requests for a favorable determination letter with respect to each Target Qualified Plan, if any, have been delivered to the Purchaser. Except as to those plans identified inSection 5.16 of the Target Disclosure Memorandum, no Target Qualified Plan has been amended since the issuance of each respective most recent favorable determination letter. The Target Qualified Plans currently are intended to comply in form with the requirements under Internal Revenue Code Section 401(a), other than changes required by statutes, regulations and rulings for which amendments are not yet required. To the Knowledge of Target, no issue concerning qualification of the Target Qualified Plans is pending before or is threatened by the Internal Revenue Service. The Target Qualified Plans have been administered according to their terms (except for those terms which are inconsistent with the changes required by statutes, regulations, and rulings for which changes are not yet required to be made, in which case the Target Qualified Plans have been administered in accordance with the provisions of those statutes, regulations and rulings) and in accordance with the requirements of Internal Revenue Code Section 401(a). To the Knowledge of Target, no member of the Target Group or any fiduciary of any Target Qualified Plan has done anything that would adversely affect the qualified status of the Target Qualified Plans or the related trusts. Any Target Qualified Plan which is required to satisfy Internal Revenue Code Sections 401(k)(3) and 401(m)(2) has been, or will be, tested for compliance with, and has satisfied, or will satisfy, the requirements of, such Sections of the Internal Revenue Code for each plan year ending prior to the Closing Date in accordance with the requirements of the Internal Revenue Code.
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(d) Except as set forth inSection 5.16 of the Target Disclosure Memorandum, each member of the Target Group is in, or will be in prior to the Closing Date, material compliance with the requirements prescribed by any and all statutes, orders, governmental rules and regulations applicable to the Target Plans and all reports and disclosures relating to the Target Plans required to be filed with or furnished to any governmental entity, Participants or beneficiaries prior to the Closing Date have been or will be filed or furnished in a timely manner and in accordance with applicable Law. Each member of the Target Group has made full and timely payment through all due dates falling on or before the Closing Date of all contributions which are required under the terms of each of the Target Plans and in accordance with applicable Law and Contracts and, to the extent applicable, consistent with past practice and actuarial recommendations, to be paid as a contribution to each Target Plan. All insurance premiums have been paid in full, subject only to normal retrospective adjustments in the ordinary course, with regard to Target Plans providing insured benefits for policy years or other applicable policy periods ending on or before the Closing Date. Except as set forth inSection 5.16 of the Target Disclosure Memorandum, all other material obligations, whether arising by operation of applicable Law or by Contract, required to be performed with respect to each Target Plan on or before the Closing Date have been timely performed, and there have been no material defaults, omissions or violations by any party with respect to any Target Plan. No member of the Target Group has made or is obligated to make any nondeductible contributions to any Target Plan.
(e) Except as set forth inSection 5.16 of the Target Disclosure Memorandum, no member of the Target Group or any predecessors thereto maintains or has ever maintained, an “employee benefit pension plan” within the meaning of Section 3(2) of ERISA that is or was subject to Title IV of ERISA or Section 412 of the Internal Revenue Code. No member of the Target Group or any predecessors thereto has any obligation or liability to contribute or has ever contributed to any “multiemployer plan” as defined in Section 3(37) of ERISA. No member of the Target Group has incurred any current or projected liability in respect of post-retirement health, medical or life insurance benefits for Participants, except as required to avoid an excise tax under Section 4980B of the Internal Revenue Code or comparable State benefit continuation laws. Except as set forth inSection 5.16 of the Target Disclosure Memorandum, no Target Plan is or has been funded by, associated with, or related to a “voluntary employee’s beneficiary association” within the meaning of Section 501(c)(9) of the Internal Revenue Code, a “welfare benefit fund” within the meaning of Section 419 of the Internal Revenue Code, a “qualified asset account” within the meaning of Section 419A of the Internal Revenue Code or a “multiple employer welfare arrangement” within the meaning of Section 3(40) of ERISA.
(f) Except as set forth inSection 5.16 of the Target Disclosure Memorandum, no member of the Target Group is obligated, contingently or otherwise, under any agreement to pay any amount which would be treated as a “parachute payment,” as defined in Internal Revenue Code Section 280G(b) (determined without regard to Internal Revenue Code Section 280G(b)(2)(A)(ii)) or would be subject to tax under Section 4999 of the Internal Revenue Code.
(g) Except as contemplated by Section 8.10 of this Agreement, no termination or partial termination of any Target Qualified Plan has occurred, or will occur, prior to the Closing Date and no notice of intent to terminate any Target Qualified Plan has been, or will be, issued by a member of the Target Group prior to the Closing Date.
(h) No member of the Target Group has any remaining liability under any previously maintained Target Plan, whether maintained as a written or unwritten, formal or informal arrangement.
(i) To the Knowledge of the Target Group, no member of the Target Group nor any other “disqualified person” or “party in interest” (as defined in Internal Revenue Code Section 4975 and ERISA Section 3(14), respectively) with respect to the Target Plans, has engaged in any non-exempt “prohibited transaction” (as defined in Internal Revenue Code Section 4975 or ERISA Section 406). To the Knowledge of Target, all members of the Target Group and all fiduciaries with respect to the Target Plans, including any members of the Target Group which are fiduciaries as to a Target Plan, have complied in all respects with the requirements of ERISA Section 404, and to the Knowledge of Target, no member of the Target Group and no party in interest or disqualified person with respect to the Target Plans has taken or omitted any action which could lead to the imposition of an excise tax under the Internal Revenue Code or a fine under ERISA.
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(j) Other than routine claims for benefits, to the Knowledge of Target, there are no actions, audits, investigations, suits or claims pending, or threatened against any Target Plan, any trust or other funding agency created thereunder, or against any fiduciary of any Target Plan or against the assets of any Target Plan.
(k) All assets attributable to any Target Plan that is subject to ERISA have been held in trust, unless a statutory or administrative exemption to the trust requirements of Section 403(a) of ERISA applies. Except as disclosed in