As filed with the Securities and Exchange Commission on March 19 , 2013
Registration No. 333-186401
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2 TO
FORM S-4
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] |
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 March 19 , 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. Up to 617,608 shares of Nicolet common stock will be issued in connection with the merger. As of February 21, 2013, Mid-Wisconsin had approximately 350 shareholders of record holding fewer than 200 shares of Mid-Wisconsin common stock. These shareholders held a total of approximately 31,680 shares of Mid-Wisconsin common stock as of that date, which would result in a total cash payment of approximately $194,860. This amount is subject to change based on ownership changes that may occur within Mid-Wisconsin’s shareholder base prior to the closing of the merger. 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. No public market currently exists for the Nicolet common stock. The last known trading price for the Nicolet common stock was $16.50 per share on March 8, 2013, and the last known trading price for the Mid-Wisconsin common stock was $5.00 per share on February 20, 2013. When multiplied by the 0.3727 exchange ratio, the last known trading price of the Nicolet common stock results in a value of $6.15 per share.
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 16.
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. References to the “private placement” refer to the private placement of up to 200,000 shares of Nicolet common stock to members of its board of directors and to advisory directors who are also accredited investors at an offering price of $16.50 per share, as further described in “Summary — Nicolet Private Placement” on page 10.
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 in the manner described in the joint proxy statement — prospectus.
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 in the manner described in the joint proxy statement — prospectus.
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 | 3 | |||||
WHAT YOU WILL RECEIVE IN THE MERGER | 3 | |||||
EFFECT OF THE MERGER ON MID-WISCONSIN OPTIONS | 4 | |||||
YOUR EXPECTED TAX TREATMENT AS A RESULT OF THE MERGER | 4 | |||||
DISSENTERS’ RIGHTS | 5 | |||||
COMPARATIVE STOCK PRICES | 5 | |||||
REASONS FOR THE MERGER | 5 | |||||
NICOLET DIVIDENDS | 7 | |||||
OPINION OF MID-WISCONSIN’S FINANCIAL ADVISOR | 7 | |||||
OPINION OF NICOLET’S FINANCIAL ADVISOR | 7 | |||||
BOTH BOARDS OF DIRECTORS RECOMMEND SHAREHOLDER APPROVAL OF THE MERGER AGREEMENT | 7 | |||||
INFORMATION ABOUT THE SHAREHOLDERS’ MEETINGS | 7 | |||||
QUORUM AND VOTE REQUIRED AT THE MEETINGS | 8 | |||||
SHARE OWNERSHIP OF MANAGEMENT | 8 | |||||
STRUCTURE OF THE MERGER | 8 | |||||
WE MUST OBTAIN REGULATORY APPROVAL TO COMPLETE THE MERGER | 9 | |||||
WE MUST MEET SEVERAL CONDITIONS TO COMPLETE THE MERGER | 9 | |||||
TERMINATION AND TERMINATION FEE | 10 | |||||
MID-WISCONSIN’S DIRECTORS AND EXECUTIVE OFFICERS HAVE INTERESTS IN THE MERGER THAT DIFFER FROM ITS SHAREHOLDERS’ INTERESTS | 10 | |||||
NICOLET PRIVATE PLACEMENT | 11 | |||||
EMPLOYEE BENEFITS OF MID-WISCONSIN EMPLOYEES AFTER THE MERGER | 11 | |||||
DIFFERENCES IN RIGHTS OF MID-WISCONSIN’S SHAREHOLDERS AFTER THE MERGER | 11 | |||||
ACCOUNTING TREATMENT | 11 | |||||
UNAUDITED COMPARATIVE PER SHARE DATA | 12 | |||||
SELECTED UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION | 13 | |||||
RISK FACTORS | 16 | |||||
A WARNING ABOUT FORWARD-LOOKING STATEMENTS | 29 | |||||
THE MID-WISCONSIN SPECIAL SHAREHOLDERS’ MEETING | 30 | |||||
PURPOSE | 30 | |||||
RECORD DATE; QUORUM AND VOTE REQUIRED | 30 | |||||
SOLICITATION AND REVOCATION OF PROXIES | 31 | |||||
DISSENTERS’ RIGHTS | 32 | |||||
RECOMMENDATION OF THE BOARD OF DIRECTORS OF MID-WISCONSIN | 32 | |||||
THE NICOLET SPECIAL SHAREHOLDERS’ MEETING | 33 | |||||
PROPOSAL 1: THE MERGER AGREEMENT | 36 | |||||
BACKGROUND OF THE MERGER | 36 | |||||
REASONS FOR THE MERGER | 39 | |||||
OPINION OF MID-WISCONSIN’S FINANCIAL ADVISOR | 4 2 | |||||
OPINION OF NICOLET’S FINANCIAL ADVISOR | 50 | |||||
THE MERGER AGREEMENT | 5 9 | |||||
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER | 7 2 | |||||
CERTAIN DIFFERENCES IN RIGHTS OF SHAREHOLDERS | 7 7 | |||||
DISSENTERS’ RIGHTS | 8 2 |
Page | ||||||
---|---|---|---|---|---|---|
BUSINESS OF NICOLET | 8 9 | |||||
GENERAL | 8 9 | |||||
BUSINESS AND PROPERTIES | 90 | |||||
COMPETITION | 9 2 | |||||
EMPLOYEES | 9 2 | |||||
LEGAL PROCEEDINGS | 9 2 | |||||
MARKET PRICES OF AND DIVIDENDS DECLARED ON NICOLET COMMON STOCK | 9 2 | |||||
CERTAIN PROVISIONS OF NICOLET’S ARTICLES OF INCORPORATION AND BYLAWS REGARDING CHANGE OF CONTROL | 9 3 | |||||
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT | 9 4 | |||||
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF NICOLET | 9 7 | |||||
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OF NICOLET | 9 9 | |||||
MANAGEMENT OF NICOLET | 12 6 | |||||
CONTINUING DIRECTORS | 12 6 | |||||
NEW DIRECTORS OF THE COMBINED ENTITY | 12 7 | |||||
NOMINATIONS | 12 8 | |||||
DIRECTOR COMPENSATION | 12 9 | |||||
EXECUTIVE OFFICERS | 12 9 | |||||
EXECUTIVE COMPENSATION | 1 30 | |||||
RELATED PARTY TRANSACTIONS | 13 3 | |||||
INFORMATION ABOUT MID-WISCONSIN | 13 4 | |||||
GENERAL | 13 4 | |||||
MID-WISCONSIN BANK | 13 4 | |||||
MARKET PRICES OF AND DIVIDENDS DECLARED ON MID-WISCONSIN COMMON STOCK | 13 5 | |||||
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF MID-WISCONSIN | 13 6 | |||||
SUPERVISION AND REGULATION | 16 6 | |||||
OTHER MATTERS | 17 8 | |||||
EXPERTS | 17 8 | |||||
LEGAL MATTERS | 17 8 | |||||
IMPORTANT NOTICE FOR MID-WISCONSIN’S SHAREHOLDERS | 17 8 | |||||
WHERE YOU CAN FIND ADDITIONAL INFORMATION | 17 9 | |||||
CONSOLIDATED FINANCIAL STATEMENTS OF NICOLET BANKSHARES, INC. | F-1 | |||||
CONSOLIDATED FINANCIAL STATEMENTS OF MID-WISCONSIN FINANCIAL SERVICES, INC. | F-38 |
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. |
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. After giving effect to a concurrent private placement of up to 200,000 shares of Nicolet common stock, Mid-Wisconsin shareholders will own approximately 14.4% of the issued and outstanding shares of the combined company. See “The Merger Agreement — Regulatory and Other Required Approvals” page 68 for further explanation. |
Q: | How was the merger consideration determined? |
A: | The consideration to be paid to Mid-Wisconsin shareholders in the merger was the result of an arm’s-length negotiation between Nicolet and Mid-Wisconsin, subject to the direction of their respective boards of directors and advice provided by their respective legal counsel and independent financial advisors. See “Background of the Merger” on page __ for additional information regarding the process by which the merger consideration was determined. |
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 |
i
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 200 or fewer 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. |
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 16 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 67. |
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 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. |
ii
Q: | Are dissenters’ rights available to me in connection with this transaction? |
A: | Yes. You have dissenters’ rights in connection with the proposed merger under Subchapter XIII of the Wisconsin Business Corporation Law (the “WBCL”), Section 180.1301, et. seq. , which provides that a dissenting shareholder is entitled to receive cash in an amount equal to the “fair value” of his or her shares. The “fair value” of your shares may be more or less than the value of the consideration you would receive in the merger. |
To perfect dissenters’ rights, you must give either Nicolet or Mid-Wisconsin, respectively (depending upon whether you are a shareholder of Nicolet or Mid-Wisconsin), written notice of your intent to dissent from the merger prior to the vote of the shareholders at your company’s special meeting, must not vote your shares in favor of the merger, and must comply technically with proper procedure as set forth under Subsection XIII of the WBCL. You should read carefully the more detailed description of this procedure beginning on page __ as well as the full text of Subchapter XIII of the WBCL, which is attached to this document asAppendix B. |
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 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: Scot Thompson , Mid-Wisconsin Financial Services, Inc., 132 West State Street, Medford, Wisconsin, 54451, telephone: ( 715 ) 241-2585 . |
For Nicolet shareholders: Robert B. Atwell, Nicolet Bankshares, Inc., 111 North Washington Street, Green Bay, Wisconsin 54301, telephone: (920) 430-1400. |
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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 December 31, 2012, Nicolet had consolidated total assets of approximately $745 million, consolidated total gross loans of approximately $553 million, consolidated total deposits of approximately $616 million and consolidated shareholders’ equity of approximately $77 million. Nicolet reported $3.0 million in net income for 2012, representing over a 50% increase as compared to 2011. Net income available to common shareholders for 2012 was $1.8 million, or $0.53 per diluted common share, compared to net income available to common shareholders of $29, or $0.01 per diluted common share, for 2011.
During 2012, the quality of Nicolet’s balance sheet improved. Loan growth was strong, increasing by nearly 17% from year end 2011 to year end 2012, and deposit growth was also strong, increasing by nearly 12% over the same period. Asset quality measures stabilized in 2012, with nonperforming assets falling below 1% of assets, to 0.97% of assets at December 31, 2012, compared to 1.49% at December 31, 2011, and net charge offs to average loans of 0.60% for 2012 compared to 1.85% for 2011.
Nicolet’s management believes that the proposed merger will enable Nicolet to fulfill a variety of strategic objectives. Specifically, it will enable Nicolet to achieve critical scale, with over $1 billion in total assets as a result of the merger. Management believes it is necessary for Nicolet to grow to at least that asset threshold in order to offer the breadth of products and services necessary to compete effectively and to manage increasingly complex regulatory compliance, operational and risk management requirements efficiently. Management believes that Nicolet’s financial condition, results of operation and capital and asset quality ratios are of sufficient strength to enable it to acquire an institution facing challenges in the current
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regulatory and economic environment while maintaining strong capital ratios and providing a transaction that is accretive to earnings and book value. See “The Merger — Reasons for the Merger” on page __, “Opinion of Nicolet’s Financial Advisor” on page __ and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Nicolet” page __.
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 December 31, 2012, Mid-Wisconsin had consolidated total assets of approximately $454 million, consolidated total gross loans of approximately $296 million, consolidated total deposits of approximately $354 million and consolidated shareholders’ equity of approximately $36 million. Mid-Wisconsin reported a net loss available to common shareholders of $3.6 million, or $2.18 per common share, for the year ended December 31, 2012, compared to a net loss available to common shareholders of $4.6 million, or $2.78 per common share, for the year ended December 31, 2011. Loans were $295.6 million at December 31, 2012, which represented a decrease of $34.2 million from December 31, 2011. Total deposits were $354.5 million at December 31, 2012, down $27.1 million from December 31, 2011. The ratio of nonperforming assets to total assets was 3.54% at December 31, 2012 as compared to 3.21% at December 31, 2011. Net charge-offs for 2012 were 1.47% of average loans, compared to 1.30% of average loans for 2011.
On May 10, 2011, Mid-Wisconsin entered into a formal written agreement with the Federal Reserve to help ensure the financial soundness of Mid-Wisconsin and Mid-Wisconsin Bank. Pursuant to that agreement, Mid-Wisconsin agreed to, among other things: (i) ensure Mid-Wisconsin Bank complies with the Agreement; (ii) refrain from (x) declaring or paying any dividend on capital stock, (y) taking any dividend from Mid-Wisconsin Bank, or (z) making any distributions on its Debentures or the trust preferred securities, without the written consent of the Federal Reserve; and (iii) develop certain plans and projections with respect to its capital levels and cash flows.
On November 9, 2010, Mid-Wisconsin Bank entered into a formal written agreement with the Federal Deposit Insurance Corporation (the “FDIC”) and Wisconsin Department of Financial Institutions (“WDFI”). Pursuant to the agreement, Mid-Wisconsin Bank agreed to, among other things: (i) maintain ratios of Tier 1 capital to each of total assets and total risk-weighted assets of at least 8.5% and 12%; (ii) refrain from declaring or paying any dividend without the written consent of the FDIC and WDFI; and (iii) refrain from increasing its total assets by more than 5% during any three-month period without first submitting a growth plan to the FDIC and WDFI. As of December 31, 2012, Mid-Wisconsin Bank’s ratio of Tier 1 capital to each of total assets and total risk-weighted assets was 8.9% and 15.2%, which exceeded the ratios required under the Agreement. Additionally, in accordance with the Agreement, Mid-Wisconsin Bank has refrained from declaring dividends, taken measures to monitor and limit its growth, and provided various periodic progress reports to the FDIC and WDFI.
Pursuant to the Troubled Asset Relief Program (“TARP”) Capital Purchase Program, on February 20, 2009, Mid-Wisconsin entered into a Letter Agreement with the U.S. Treasury (“Treasury”), pursuant to which Mid-Wisconsin issued (i) 10,000 shares of Fixed Rate Cumulative Preferred Stock, Series A (the “Series A Preferred Stock”), and (ii) a warrant to purchase 500 shares of Fixed Rate Cumulative Preferred Stock, Series B (the “Series B Preferred Stock” and together with the Series A Preferred Stock, the “Preferred Stock”), which was immediately exercised, for an aggregate purchase price of $10.0 million in cash. On May 12, 2011, in consultation with the Federal Reserve Bank of Minneapolis, Mid-Wisconsin elected to begin deferring the interest payments due on its Floating/Fixed Rate Junior Subordinated Deferrable Interest Debentures, due 2035 (the “Debentures”), as well as the dividend payments due on the Preferred Stock, and therefore may not pay
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common stock dividends until such time as these deferred payments have been made in full. Mid-Wisconsin’s federal regulators, the Treasury and the Treasury’s Office of the Inspector General maintain significant oversight over Mid-Wisconsin as a TARP participating institution, to evaluate how it is using the capital provided and to ensure that it strengthens its efforts to help its borrowers avoid foreclosure, which is one of the core aspects of the Emergency Economic Stabilization Act of 2008.
On April 5, 2012, the President Obama signed into law the Jumpstart Our Business Startups Act (the “JOBS Act”). The JOBS Act amended various provisions of, and added new sections to, the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as provisions of the Sarbanes-Oxley Act of 2002. The JOBS Act increased the statutory threshold for deregistration under the Exchange Act for bank holding companies from 300 to 1,200 shareholders of record.
After significant deliberation and consultation with its legal and financial advisors, Mid-Wisconsin decided to suspend its reporting obligations under the Exchange Act. The financial burdens on Mid-Wisconsin to comply with the reporting obligations of the Exchange Act were significant. Mid-Wisconsin believed that the costs associated with preparing and filing such periodic reports were unnecessary and excessively burdensome, particularly in light of the limited benefits to Mid-Wisconsin’s’ stockholders. Mid-Wisconsin believed the money spent to prepare and file periodic reports with the SEC and to otherwise ensure compliance with the SEC’s rules and regulations could be used more effectively by investing in Mid-Wisconsin’s subsidiary bank to strengthen the financial condition of that entity. Consequently, Mid-Wisconsin filed a Form 15 on each of September 21, 2012 and January 2, 2013 with the SEC to take advantage of the higher deregistration thresholds provided by the JOBS Act.
The Merger Agreement
(See page 58)
(See page 58)
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 58)
(See page 58)
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, in which cash may be received. If the aggregate cash payment to Mid-Wisconsin shareholders would exceed $500,000, whether as a result of payment for fractional, state-restricted or cash-out shares as described below or in connection with the exercise of dissenters’ rights, then Nicolet may adjust the 200-share threshold for cash-out shares or elect to issue stock to shareholders regardless of the number of shares they own. See “The Merger Agreement — What Mid-Wisconsin’s Shareholders Will Receive in the Merger” on page __ for additional information.
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
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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. Nicolet presently does not anticipate that it will be required to pay cash to any shareholders based on their residence in a particular 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 58 for additional information.
The threshold for cash-out shares is based on record ownership of Mid-Wisconsin common stock, which is determined by the specific name(s) of the shareholder on the front of the stock certificate evidencing the shares. For example, if you hold separate certificates individually, as a joint tenant with someone else, as trustee, and in an IRA, those four certificates represent shares held by four different record holders, even if you control the voting or disposition of those shares. As a result, if you are a Mid-Wisconsin shareholder with 200 or more shares held among various accounts, you could still have these shares deemed “cash-out shares” and you could still receive cash in the merger for all of your shares if those accounts individually hold fewer than 200 shares.
To avoid this, you may either consolidate your ownership into a single form of record ownership representing more than 200 shares or acquire additional shares in the market sufficient to bring each of your accounts above the 200-share threshold prior to the effective date of the merger. Alternatively, if your are a Mid-Wisconsin shareholder who holds 200 or fewer shares, you may place your shares into “street name” with a broker that holds and will continue to hold in excess of 200 shares as of the effective time of the merger, and could thereby avoid having your shares be considered “cash-out shares” and being exchanged for cash (although you may still receive cash in lieu of fractional shares or in connection with any “state-restricted shares” that you hold as of the effective time of the merger). To ensure that the record ownership of the shares will be reflected appropriately on Mid-Wisconsin’s transfer agent’s records on the effective date of the merger, shareholders should initiate any transfers of their shares at least three business days prior to Mid-Wisconsin’s special shareholders’ meeting, as Nicolet and Mid-Wisconsin intend to effect the merger promptly thereafter and only those transfers that have settled by the effective date will be considered for purposes of determining the type of consideration to be received.
Effect of the Merger on Mid-Wisconsin Options
(See page 60)
(See page 60)
As of December 31, 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.
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
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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 39)
(See page 39)
Nicolet
In deciding to pursue an acquisition of Mid-Wisconsin, Nicolet’s management and board of directors noted, 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; |
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• | 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 Treasury under the TARP Capital Purchase Program; |
• | 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 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 & 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. |
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Nicolet Dividends
(See page __)
(See page __)
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. Future determinations regarding dividend policy will be made at the discretion of Nicolet’s board of directors based on factors they deem relevant at that time.
Opinion of Mid-Wisconsin’s Financial Advisor
(See page 41)
(See page 41)
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 49)
(See page 49)
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
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on the merger agreement described above and in the notice for the meeting. If Nicolet’s shareholders approve 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 36)
(See page 36)
• | 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 (or waiver of 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. Nicolet filed an application for approval of the bank merger with the OCC (which forwarded it to the WDFI) on January 17, 2013 and filed an application for approval of the merger with the WDFI on February 5, 2013. Based on discussions with the Federal Reserve, Nicolet withdrew the application for Federal Reserve approval that it initially filed on January 24, 2013 in order to submit a request for a statutory waiver of such approval at such time as it deems appropriate following further consultation with the Federal Reserve. 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 , or what, if any, conditions may be imposed in connection with 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; |
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• | 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 |
• | 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 65.
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Nicolet Private Placement
(see page 68)
(see page 68)
In order to provide additional capital to maintain Nicolet National Bank’s leverage capital ratio in accordance with regulatory requirements after the merger , Nicolet plans to effect a private placement of up to 200,000 shares of common stock to members of its board of directors and to advisory directors who are also “accredited investors,” as that term is defined in Rule 501 of the Securities Act. The shares will be offered and sold at a price of $16.50 per share, which is the value attributed to the Nicolet common stock for purposes of the merger and also reflects its current market price. Nicolet plans to consummate the private placement simultaneously with, and contingent upon, the closing of the merger. Nicolet currently anticipates that the $3.3 million in proceeds (if fully subscribed) will be contributed as capital to Nicolet National Bank for the reasons described in “The Merger Agreement—Regulatory and Other Required Approvals” on page 68. The private placement will result in additional dilution of Mid-Wisconsin shareholders’ percentage ownership of Nicolet following the merger, from a 15.1% interest without giving effect to the private placement to a 14.4% ownership interest after giving effect to the private placement, in each case on a fully diluted basis and assuming all of the offered shares are sold in the private placement and that no shares of Mid-Wisconsin common stock are converted to cash under the limited circumstances provided for in the merger agreement. See “Risk Factors — Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated” on page 17.
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.
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 70)
(See page 70)
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.
Neither Nicolet nor Mid-Wisconsin has a history of paying dividends to holders of their common stock. Nicolet does not intend to pay dividends on its common stock following the merger, and the pro forma financial information has been prepared on the assumption that no such dividends would be paid following 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 and the private placement, assuming no Mid-Wisconsin shares are converted to cash under the limited circumstances provided for in the merger agreement and that Nicolet issues 200,000 shares of common stock in the private placement. 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.
Year Ended December 31, 2012 | ||||||
---|---|---|---|---|---|---|
Net income per common share: | ||||||
Income (loss) per diluted common share: | ||||||
Nicolet | $ | 0.53 | ||||
Mid-Wisconsin | (2.18 | ) | ||||
Pro forma combined | 0.07 | |||||
Mid-Wisconsin merger equivalent(1) | 0.03 |
As of December 31, 2012 | ||||||
---|---|---|---|---|---|---|
Balance Sheet Data: | ||||||
Net book value per common share: | ||||||
Nicolet | $ | 15.45 | ||||
Mid-Wisconsin | 15.35 | |||||
Pro forma combined | 18.15 | |||||
Mid-Wisconsin merger equivalent(1) | 6.76 |
(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 statement of income as of and for the year ended December 31, 2012 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 pro forma adjustments also assume the issuance by Nicolet of 200,000 shares of common stock in a private placement and the contribution of the $3.3 million in gross offering proceeds to Nicolet National Bank as capital.
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 December 31, 2012. The pro forma condensed consolidated statement of income has been prepared assuming the transaction was consummated on January 1, 2012.
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 December 31, 2012 or at January 1, 2012, 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 the audited consolidated financial statements and related notes of Nicolet and Mid-Wisconsin 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 DECEMBER 31, 2012
(Dollars in Thousands)
COMBINED WITH MID-WISCONSIN FINANCIAL SERVICES, INC. AND SUBSIDIARY
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
AS OF DECEMBER 31, 2012
(Dollars in Thousands)
Historical | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Nicolet | Mid- Wisconsin | Pro Forma Adjustments | Pro Forma Combined | ||||||||||||||||
Assets | |||||||||||||||||||
Cash and cash equivalents | $ | 82,00 3 | $ | 27,209 | $ | (10,100 | )(1,2,6) | $ | 99,11 2 | ||||||||||
Investments securities, available for sale | 55,901 | 118,456 | ( 334 )(4 | ) | 174,023 | ||||||||||||||
Loans held for sale | 7,323 | 2,042 | — | 9,365 | |||||||||||||||
Loans, net | 545,481 | 286,044 | ( 13,747 )(4 | ) | 817, 778 | ||||||||||||||
Goodwill and intangible assets | 3,004 | — | 4,136(4 | ) | 7,140 | ||||||||||||||
Other real estate owned | 193 | 4,200 | (2,200 | )(4) | 2,193 | ||||||||||||||
Other assets | 51,35 0 | 15,912 | 6,496(4,5 | ) | 73,758 | ||||||||||||||
Total assets | $ | 745,255 | $ | 453,863 | $ | ( 15,749 ) | $ | 1,183,369 | |||||||||||
Liabilities, Noncontrolling Interest and Equity | |||||||||||||||||||
Deposits | $ | 616, 093 | $ | 354,497 | $ | 716 (4 | ) | $ | 971,306 | ||||||||||
Junior subordinated debentures | 6,186 | 10,310 | ( 4,936 )(4 | ) | 11,560 | ||||||||||||||
Other borrowings and debt | 39,190 | 49,500 | 1,604(4 | ) | 90,294 | ||||||||||||||
Other liabilities | 6,408 | 3,743 | (1,400 | )(2) | 8,751 | ||||||||||||||
Total liabilities | 667,877 | 418,050 | ( 4,016 ) | 1,081, 911 | |||||||||||||||
Preferred equity | 24,400 | 10,376 | (10,376 | )(1) | 24,400 | ||||||||||||||
Common equity | 52,933 | 25,437 | ( 1,357 )(1,3 ,6 ) | 77,013 | |||||||||||||||
Stockholders’ equity | 77,333 | 35,813 | ( 11,733 ) | 101,413 | |||||||||||||||
Noncontrolling interest | 45 | — | — | 45 | |||||||||||||||
Total stockholders’ equity and noncontrolling interest | 77,378 | 35,813 | ( 11,733 ) | 101,458 | |||||||||||||||
Total liabilities, noncontrolling interest and equity | $ | 745,255 | $ | 453,863 | $ | ( 15,749 ) | $ | 1,183,369 |
(1) | Mid-Wisconsin’s redemption immediately prior to consummation of its outstanding Preferred Stock for cash at $10,500 stated value (which includes $124 of unaccreted discount against common equity). Common equity and cash also reflect $1.5 million estimated one-time merger related expenses. |
(2) | Payment by Mid-Wisconsin by consummation of accrued and unpaid dividends and interest on Preferred Stock $1,060 and of accrued and unpaid interest on its Debentures $340. |
(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 $ 3,033 debit to common equity. Mid-Wisconsin common equity eliminated ($25,313). Excess of the fair value of net assets acquired over the purchase price, $ 13,224 , recorded directly to common equity. |
(4) | Adjustments to mark acquired assets and assumed liabilities to estimated fair values at December 31, 2012 (or all such estimates are subject to change as fair market value estimates are refined): a) Mid-Wisconsin’s investments ($ 334 ), fixed assets $ 1,786 , certificate of deposit interest premium $716, long-term debt $ 1,604 and junior subordinated debentures ($ 4,936 ); b) Core deposit intangible estimated at $ 4,136 ; c) Estimated fair market value adjustment to the loan portfolio of ($ 23,325 ) and other real estate owned of ($2,200) and reversal of Mid-Wisconsin’s allowances of $9,578 (net $ 15,947 pre-tax credit). |
(5) | A deferred tax asset of $4,710 debit, calculated on the pre-tax aggregate of the fair value marks. |
(6) | Reflects 200,000 shares at $16.50 per common share assuming full subscription in a private placement contingent upon consummation of the merger. |
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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)
Year Ended December 31, 2012 | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Historical | |||||||||||||||||||
Nicolet | Mid- Wisconsin | Pro Forma Adjustments | Pro Forma Combined | ||||||||||||||||
Interest income | $ | 28,795 | $ | 19,405 | $ | — | $ | 48,200 | |||||||||||
Interest expense | 6,529 | 4,637 | (355 )(2,4 ,5 ) | 10,811 | |||||||||||||||
Net interest income | 22,266 | 14,768 | — | 37,389 | |||||||||||||||
Provision for loan loss | 4,325 | 4,430 | — | ( 6 ) | 8,755 | ||||||||||||||
Net interest income after provision for loan losses | 17,941 | 10,338 | — | 28,634 | |||||||||||||||
Other income | 10,744 | 3,953 | — | 14,697 | |||||||||||||||
Other expense | 24,063 | 15,958 | 898(1,3 | ) | 40,919 | ||||||||||||||
Income from continuing operations before income taxes | 4,622 | (1,667 | ) | (543 | ) | 2,412 | |||||||||||||
Income taxes | 1,529 | 1,302 | 820 | * | |||||||||||||||
Income from continuing operations | 3,093 | (2,969 | ) | 1,592 | |||||||||||||||
Net income from noncontrolling interest | 57 | — | 57 | ||||||||||||||||
Preferred stock dividends and discount accretion | 1,220 | 650 | (650 | )( 7 ) | 1,220 | ||||||||||||||
Net income available to common shareholders | $ | 1,816 | $ | (3,619 | ) | $ | 315 | ||||||||||||
Basic earnings per common share | 0.53 | (2.18 | ) | 0.07 | |||||||||||||||
Diluted earnings per common share | 0.53 | (2.18 | ) | 0.07 | |||||||||||||||
Weighted average basic shares | 3,440 | 1,657 | (839 | )( 8,9 ) | 4,258 | ||||||||||||||
Weighted average diluted shares | 3,442 | 1,657 | (839 | )( 8,9 ) | 4,260 |
* | Reflects the tax impact of the pro forma combined income from continuing operations at a tax rate of 34%. |
(1) | D epreciation expense resulting from premises pro forma adjustment using straight-line over 25-year estimated useful life. |
(2) | F air value adjustment on FHLB advances assuming straight-line over 3-year weighted average life. |
(3) | A mortization of core deposit intangible resulting from the fair value pro forma adjustment amortized over 10 years using sum-of-years-digits. |
(4) | F air value adjustment on Trust Preferred Securities (TruPS) using straight line amortization over 10 years. |
(5) | Amortization of Certificate of Deposit (“COD”) Interest Premium over life of CDs. |
( 6 ) | 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. |
( 7 ) | 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. |
( 8 ) | 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. |
( 9 ) | Reflects issuance of 200,000 shares of common stock assuming full subscription in a private placement contingent upon consummation of the merger. |
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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 58.
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
16
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 OCC and the WDFI , and the Federal Reserve must either approve the merger or waive such approval in accordance with applicable law . 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.
In connection with the OCC’s review of Nicolet’s application for approval of the bank merger, Nicolet’s management has discussed, and continues to discuss, with representatives of the OCC various capital strategies for ensuring that Nicolet National Bank’s leverage ratio will continue to meet or exceed OCC requirements following the closing of the merger. In this regard, the OCC has verbally informed Nicolet that for a one-year period after the merger, Nicolet National Bank must calculate its leverage ratio without giving effect to bargain purchase gain in connection with the merger. Toward that end, Nicolet is raising up to $3.3 million of proceeds from a private placement of up to 200,000 shares of Nicolet common stock at $16.50 per share, with the private placement being effective and contingent upon the closing of the merger. Current discussions between Nicolet and the OCC also include, among other things, some combination of cash contributions from Nicolet into the bank and balance sheet management (i.e., reduction in assets and liabilities) to the extent necessary to meet or exceed applicable capital ratio requirements. If Nicolet is unable to raise the full $3.3 million in offering proceeds and is unable to contribute capital to Nicolet National Bank from other sources in an amount necessary to enable it to meet or exceed the OCC’s capital ratio requirements after the merger, then regulatory approval for the merger could be delayed or denied. Additionally, a failure to meet regulatory capital requirements could result in prompt corrective action by the OCC. See “The Merger Agreement — Regulatory and Other Required Approvals” on page 68 and “Supervision and Regulation — Nicolet National Bank — Prompt Corrective Action” on page 167.
The fairness opinions obtained by Nicolet and Mid-Wisconsin will not be updated before the closing of the merger.
The fairness opinions obtained by Nicolet and Mid-Wisconsin were dated November 28, 2012, which is the date the merger agreement was signed, and speak only as of that date. The financial, market and economic conditions and assumptions that supported the opinions may change prior to the closing of the merger, and neither Sandler O’Neill nor Raymond James is required to update its fairness opinion to take into account such potential changes. For example, the exchange ratio for the merger consideration is fixed, so changes in the market price of the Nicolet common stock or the Mid-Wisconsin common stock could result in the ultimate value of the merger consideration differing from the value assumed in the fairness opinions to an extent that an updated opinion could not be supported.
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 133, as well as, “Information About Nicolet,” at page __.
17
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.
Mid-Wisconsin is no longer required to file reports under the Exchange Act, and current public information about Mid-Wisconsin will not be available beyond the information required to be provided in the context of the merger.
In the fourth quarter of 2012, Mid-Wisconsin suspended its reporting obligations under the Exchange Act. As a result, Mid-Wisconsin is no longer required to file annual, quarterly or current reports regarding its business, financial condition and results of operations with the SEC. Although SEC regulations require disclosure of a significant amount of information regarding Mid-Wisconsin in this joint proxy statement-prospectus, the information required does not represent all of the information that would otherwise be required in Mid-Wisconsin’s Exchange Act reports. Furthermore, if the merger does not occur, Mid-Wisconsin will have no obligation to make information about its business, financial condition or results of operation available to the public or to its shareholders except to the extent prescribed by the WBCL and applicable bank regulatory reporting requirements.
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 65.
You will experience a substantial reduction in percentage ownership and voting power with respect to your shares as a result of the merger and private placement.
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 and private placement are 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 14.4% 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 December 31, 2012 and assuming no Mid-Wisconsin shares are converted to cash under the limited circumstances provided for in the merger agreement. Without giving effect to the private placement, Mid-Wisconsin shareholders would own approximately 15.1% of Nicolet’s issued and outstanding common stock on a fully diluted basis, based on the assumptions stated above. Accordingly, even if former Mid-Wisconsin 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, and Nicolet shareholders who are not participants in the private placement will experience further dilution as a result of the issuance of Nicolet common stock in the private placement. Consequently, while the current Nicolet shareholders will still own a majority of the Nicolet common stock after the merger, they will have less voting
18
power per share. See “The Merger Agreement — What Mid-Wisconsin Shareholders will Receive in the Merger,” at page 58.
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 December 31, 2012, approximately 39% 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 165.
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 December 31, 2012, Nicolet held $18.7 million of bank-owned life insurance on certain key and former employees and executives, with a cash surrender value of $18.7 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 $745 million in total consolidated assets at December 31, 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 ratios 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 financial strength. If current
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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 and the private placement, the directors and executive officers of the combined company, as a group, are expected to beneficially own approximately 19.6% of the fully diluted outstanding common stock of the combined company, assuming all of the shares offered in the private placement are sold to current Nicolet directors. 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 does not currently exist and may not develop after the merger. Trading in the Nicolet common stock is highly sporadic, and as a result, there is no typical number of trades per month. Based on information available to management, approximately 127,350 shares traded in 2012, representing 31 transactions, and approximately 69,700 shares traded in 2011, representing 25 transactions, with 58,700 of those shares being traded in the second quarter of 2011. There are currently approximately 260 shareholders of record of Nicolet’s common stock. Following the merger, Nicolet estimates that there will only be approximately 750 holders of record of its common stock,
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after giving effect to the estimated number of holders of cash-out shares. 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.
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 December 31, 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”).
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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 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.
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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 826 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 new properly executed proxy that is dated later than your initial proxy. |
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 81.
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 32, and “- Mid-Wisconsin’s Reasons for the Merger,” at page 39.
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 new properly executed proxy that is dated later than your initial proxy. |
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 32.
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 36, and “- Nicolet’s Reasons for the Merger,” at page 39.
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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. At that time, Mid-Wisconsin’s board and Raymond James evaluated the current banking environment, financial services industry trends, merger and acquisition activity within the industry and Mid-Wisconsin’s strategic alternatives, including, but not limited to, remaining an independent entity, raising additional capital and a possible merger or sale with a larger institution. Representatives of Raymond James discussed trends in bank pricing and financial performance along with an analysis of bank merger activity. Raymond James also discussed with Mid-Wisconsin’s board both the potential pricing Mid-Wisconsin might anticipate should it decide to consider a possible sale transaction and several financial institutions with possible interest in a possible business combination. The Mid-Wisconsin board engaged in a detailed discussion regarding the organization’s prospects in light of the risks and uncertainties related to anticipated increases in regulatory costs and capital requirements and the continuing low interest rate environment and the possible strategic alternatives discussed with Raymond James. The Mid-Wisconsin board of directors determined that a capital raising transaction would not be in the best interests of Mid-Wisconsin’s shareholders at that time due to Mid-Wisconsin’s depressed share price, the significant dilution such a capital raise could cause to shareholders and the overall uncertainty of whether such a capital raise could be successfully completed. Additionally, the board determined that it would be in the best interests of Mid-Wisconsin’s shareholders if Mid-Wisconsin investigated its strategic alternatives in order to determine whether to remain independent. Consequently, after a long discussion, the Mid-Wisconsin board
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authorized management to investigate a strategic transaction, including a possible sale transaction. 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.
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 non-binding letter of intent to Mid-Wisconsin. The letter of intent proposed a stock-for-stock transaction in which the exchange ratio would be calculated based on an assumed price range of $6.00 to $7.50 per share for the Mid-Wisconsin common stock and an assumed price of $16.50 for the Nicolet common stock. Based on these assumptions, the number of shares of Nicolet common stock to be issued in the merger would range from 602,589 to 753,236, and the implied transaction value would range from $9.9 million to $12.4 million. The letter of intent contemplated that Nicolet would purchase the outstanding Preferred Stock of Mid-Wisconsin from the Treasury for up to $6.0 million, representing a 43% discount to the $10.5 million stated value of the Preferred Stock, and that Nicolet would assume Mid-Wisconsin’s obligations under the Debentures, with Mid-Wisconsin paying all accrued and unpaid interest on the Debentures (totaling approximately $197,000 at March 31, 2012) prior to the closing of the merger.
On July 25, 2012, the Mid-Wisconsin board of directors met and approved continued negotiations with Nicolet. On July 30, 2012, Nicolet received Mid-Wisconsin’s proposed revisions to the terms of the letter of intent. The proposed revisions reflected an assumed price range of $7.00 to $8.25 per share for the Mid-Wisconsin common stock, representing the issuance of 703,020 to 828,560 shares of Nicolet common stock in the merger and an implied transaction value of $11.6 million to $13.7 million.
Messrs. Atwell and Daniels continued to discuss the proposed transaction terms with Dr. Gowey, and on August 1, 2012, Mid-Wisconsin received revised terms from Nicolet proposing a price range of $6.50 to $8.00 per share for the Mid-Wisconsin common stock, representing the issuance of 652,804 to 803,371 shares of Nicolet common stock and an implied transaction value of $10.8 million to $13.3 million.
On August 3, 2012, Nicolet and Mid-Wisconsin signed a letter of intent setting forth the terms described immediately above, together with a reduction of the maximum price at which Nicolet would purchase the Debentures from $6 million to $5 million. The letter of intent continued to contemplate Nicolet’s assumption of the Debentures and Mid-Wisconsin’s payment of all accrued and unpaid interest of the Debentures.
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
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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 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.
On February 27, 2013, in connection with the OCC’s review of Nicolet’s bank merger application, representatives of the OCC communicated verbally to management the OCC’s expectation that for one year after the merger, Nicolet National Bank must calculate its leverage ratio without giving effect to bargain purchase gain in connection with the merger. Nicolet’s management has discussed, and continues to discuss,
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with representatives of the OCC various capital strategies for ensuring that Nicolet National Bank’s leverage ratio will continue to meet or exceed OCC requirements following the closing of the merger. Toward that end, Nicolet is prepared to, among other things, generate up to $3.3 million of proceeds from a private placement of up to 200,000 shares of Nicolet common stock at $16.50 per share, with the private placement being effective and contingent upon the closing of the merger. The private placement will result in additional dilution of Mid-Wisconsin shareholders’ percentage ownership of Nicolet following the merger, from a 15.1% interest without giving effect to the private placement to a 14.4% ownership interest after giving effect to the private placement, in each case on a fully diluted basis and assuming all of the offered shares are sold in the private placement and that no shares of Mid-Wisconsin common stock are converted to cash under the limited circumstances provided for in the merger agreement. See “The Merger Agreement — Regulatory and Other Required Approvals” for additional information.
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; |
• | 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; |
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• | 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. |
Certain Non-Public, Unaudited, Forward-Looking Information Provided on Behalf of Mid-Wisconsin to Nicolet
In connection with Nicolet’s consideration of the proposed merger, Nicolet was provided copies of certain financial projections that were initially provided to Mid-Wisconsin’s board of directors in July 2012 by Raymond James. The projections were prepared by Raymond James for use in early discussions with potential acquirers of Mid-Wisconsin. Raymond James based the projections on Mid-Wisconsin’s internal budget and on assumptions that Raymond James made based on its internal financial analysis of Mid-Wisconsin up to that time. The financial projections were not intended to, and did not, reflect the financial projections of Mid-Wisconsin. The financial projections were preliminary in nature and, shortly after they were prepared, they were neither used nor relied on by Mid-Wisconsin or Raymond James. In view of the amount of time that passed between the preparation of these projections and the negotiation of the merger agreement and consideration of its terms by Nicolet’s board of directors, Nicolet’s board of directors did not consider this information as a basis for its approval of the merger. Because it was provided by Raymond James to Nicolet, however, it is being provided to shareholders as part of this joint proxy statement-prospectus.
A summary of Mid-Wisconsin’s projected year-end assets, net loans, deposits, shareholders’ equity, provision for loan losses, net income, earnings per share and capital ratios is provided below for the sole purpose of describing the material elements of the projections that Nicolet received. The inclusion of this
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information in this joint proxy statement-prospectus should not be interpreted as an indication that either Mid-Wisconsin or Nicolet considers this information to be a reliable prediction of its future results of operations, and this information should not be relied upon for that purpose or for any other purpose.
2012 | 2013 | 2014 | 2015 | 2016 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
($000s) | ||||||||||||||||||||||
Assets | $ | 457,465 | $ | 449,660 | $ | 458,137 | $ | 471,712 | $ | 490,368 | ||||||||||||
Loans, net | 305,469 | 301,935 | 308,241 | 318,052 | 331,447 | |||||||||||||||||
Deposits | 371,403 | 375,303 | 386,749 | 400,479 | 416,698 | |||||||||||||||||
Shareholders’ equity | 36,293 | 36,201 | 36,437 | 37,241 | 38,437 | |||||||||||||||||
Net interest income | 14,453 | 14,041 | 14,261 | 14,676 | 15,201 | |||||||||||||||||
Provision for loan losses | 4,300 | 2,365 | 1,719 | 1,290 | 1,290 | |||||||||||||||||
Net income before taxes | (1,293 | ) | 817 | 1,776 | 2,643 | 3,242 | ||||||||||||||||
Net income | �� | (2,498 | ) | 534 | 1,161 | 1,729 | 2,120 | |||||||||||||||
Earnings per share | (1.90 | ) | (0.06 | ) | 0.14 | 0.49 | 0.72 | |||||||||||||||
Tier 1 capital ratio | 14.45 | % | 14.26 | % | 13.74 | % | 13.29 | % | 12.85 | % | ||||||||||||
Total capital ratio | 15.70 | % | 15.84 | % | 15.64 | % | 15.49 | % | 15.33 | % | ||||||||||||
Tier 1 leverage ratio | 9.54 | % | 9.70 | % | 9.51 | % | 9.24 | % | 8.97 | % |
The projections summarized above were not prepared for the purpose, or with any expectation, of public disclosure, nor were they intended to comply with the guidelines for financial forecasts established by the American Institute of Certified Public Accountants or any other established guidelines regarding projections or forecasts. In addition, they were not reviewed or compiled by any accounting firm, either in connection with their preparation or for the purposes of providing any opinion with respect thereto. The reports of Mid-Wisconsin’s and Nicolet’s independent registered public accounting firms included in this joint proxy statement-prospectus relate solely to the historical financial information of the respective companies as referred to therein. Such report does not extend to the foregoing summary of the Mid-Wisconsin’s projections and should not be read as doing so.
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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. Mid-Wisconsin notes, however, that the trading price of its common stock continues to fluctuate, while the assumed value of the merger consideration remains fixed at $6.15 per share and the Raymond James fairness opinion speaks only as of the date of the merger agreement. During 2013 to date, trading prices for the Mid-Wisconsin common stock have ranged from $5.00 to $5.60 per share and could increase or decrease prior to the closing of the merger. 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 | % |
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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 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. Specifically, Raymond James received a $50,000 retainer in January 2012 and a $150,000 fairness opinion fee paid upon execution of the merger agreement, and will receive a $213,825 success fee payable upon consummation of the merger, representing total compensation of $413,825. Raymond James has received no other compensation from Mid-Wisconsin during the past two years. 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
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months ended September 30, 2012. The table below sets forth the data for Mid-Wisconsin, Nicolet and the 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
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. |
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(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-$50mm
Transaction Information | Seller Information | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Price/ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquiror | Target | State | Annc. Date | Deal Value ($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 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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. Of the transaction fee, Nicolet paid a $25,000 retainer to be credited at the closing of the transaction and $150,000 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. Except for $25,000 received in 2011, Sandler O’Neill has received no compensation from Nicolet during the past two years 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. Nicolet presently does not anticipate that it will be required to pay cash to any shareholders based on their residence in a particular 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.
Mid-Wisconsin shareholders with 200 or more shares held in various accounts may still have these shares deemed “cash-out shares” if each record account in which such shares were held contained 200 or fewer shares. Generally speaking, a shareholder “of record” is the shareholder whose name is listed on the front of the stock certificate, regardless of who ultimately has the power to vote or sell the shares. For example, if a shareholder holds separate certificates individually, as a joint tenant with someone else, as trustee, and in an IRA, those four certificates represent shares held by four different record holders, even if a single shareholder controls the voting or disposition of those shares. To avoid this, Mid-Wisconsin shareholders may either consolidate their ownership into a single holder of record of more than 200 shares or acquire additional shares in the market sufficient to bring each record account above the 200 share threshold prior to the effective date of the merger.
Alternatively, because shares held by a broker in “street name” on a shareholder’s behalf are held of record by the broker, Mid-Wisconsin shareholders who hold 200 or fewer shares but wish to avoid having these shares deemed “cash-out shares” may place these shares into “street name” with a broker that holds and will continue to hold in excess of 200 shares as of the effective time of the merger (although such a shareholder may still receive cash in lieu of fractional shares or in connection with any “state-restricted shares” held as of the effective time of the merger). Only those transfers that have settled by the effective date will be considered for purposes of determining the type of consideration to be received.
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.
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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 81 andAppendix B for additional information.
Effect of the Merger on Mid-Wisconsin Options
As of December 31, 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; |
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• | 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.
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; |
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• | 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.
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; |
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• | 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.
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
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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; |
• | 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.
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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.
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.
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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 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
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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.
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: Tammy Fieselman Telephone: ( 715 ) 748-8372 |
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.
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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 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
Nicolet filed an application for approval of the merger with the Federal Reserve on January 24, 2013, but withdrew it on February 8, 2013 following discussion with the Federal Reserve regarding the timing of the application process. Nicolet withdrew the application in order to provide an opportunity for the Federal Reserve Bank of Chicago to consider the results of the OCC’s review of the bank merger application described below within the 30-day time frame permitted under its delegated authority. Based on further discussions with the Federal Reserve, Nicolet has elected to submit a request for a statutory waiver of Federal Reserve approval pursuant Section 225.12(d)(2) of Federal Reserve Regulation Y. A waiver is permitted for a transaction that requires the prior approval of a federal bank supervisory agency, such as the OCC, under the Bank Merger Act if the acquiring bank holding company will meet the Federal Reserve’s capital adequacy guidelines before and after the transaction and if the transaction does not involve the acquisition of a non-bank company requiring separate approval. The Federal Reserve is required to act on a waiver request within 10 days after it is submitted. Nicolet plans to submit its waiver request prior at such time as its management deems appropriate upon consultation with the Federal Reserve. A waiver, if granted, would enable Nicolet to consummate the merger without resubmitting an application for approval of the merger.
If a waiver is not granted, then Nicolet would be required to resubmit its application for approval of the merger. In reviewing an 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 |
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• | 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.
Following approval of an application, the parties must wait at least 30 days after the date of approval (which may be shortened to 15 days) before they may complete the merger. During this waiting period, the U.S. Department of Justice may object to the merger on antitrust grounds.
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 forward ed the application to the WDFI) on January 17, 2013 and an Acquisition of Wisconsin Bank Holding Company Application with the WDFI on February 5, 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 |
• | 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 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 the OCC’s review of Nicolet’s application for approval of the bank merger, Nicolet’s management has discussed, and continues to discuss, with representatives of the OCC various capital strategies for ensuring that Nicolet National Bank’s leverage ratio will continue to meet or exceed OCC requirements following the closing of the merger. In this regard, the OCC has verbally informed Nicolet that for a one-year period after the merger, Nicolet National Bank must calculate its leverage ratio without giving effect to bargain purchase gain in connection with the merger. Toward that end, Nicolet is raising up to $3.3 million of proceeds from a private placement of up to 200,000 shares of Nicolet common stock at $16.50 per share, with the private placement being effective and contingent upon the closing of the merger. Current discussions between Nicolet and the OCC also include, among other things, some combination of cash contributions from Nicolet into the bank and balance sheet management (i.e., reduction in assets and liabilities) to the extent necessary to meet or exceed applicable capital ratio requirements. See “Risk Factors — Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated” on page 17 and “Supervision and Regulation — Capital Adequacy.”
Other Regulatory Authorities
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.
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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
Except as described in “— Federal Reserve” above, 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 conditioned upon their 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 is filed as Exhibit 8.1 to the registration statement of which this joint proxy statement- prospectus is a part. The opinion is 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 |
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at different prices, such U.S. Shareholder’s basis and holding period in its shares of Nicolet common 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 28 % 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. Following completion of the merger and private placement, assuming the issuance of 617,608 shares of Nicolet common stock in the merger and of 200,000 shares of Nicolet common stock in the private placement, Nicolet will have 4,297,496 shares of common stock issued and 4,243,021 shares of common stock outstanding.
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 71.
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 71.
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 $745 million in assets as of December 31, 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 December 31, 2012, Nicolet had consolidated total assets of $745 million, consolidated total gross loans of $553 million, consolidated total deposits of $616 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 December 31, 2012, Nicolet National Bank’s loan portfolio mix was as follows:
Loan Category | Ratio | |||||
---|---|---|---|---|---|---|
Commercial and industrial | 36 | % | ||||
Owner-occupied commercial real estate | 21 | % | ||||
Total commercial loans | 57 | % | ||||
CRE-investment | 14 | % | ||||
Construction and land development | 4 | % | ||||
Total CRE loans | 18 | % | ||||
Residential first mortgages | 16 | % | ||||
Residential junior mortgages | 7 | % | ||||
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
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(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 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 98.
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 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
2013 | ||||||||||
First Quarter (through March 19 , 2013) | $ | 16.50 | $ | 16.50 | ||||||
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 |
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High | Low | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
2011 | ||||||||||
Fourth Quarter | $ | 15.00 | $ | 15.00 | ||||||
Third Quarter | — | — | ||||||||
Second Quarter | 16.50 | 16.50 | ||||||||
First Quarter | 16.50 | 16.50 | ||||||||
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 174. 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 | — | — | *(15 | ) | |||||||||||
Christopher Ghidorzi | — | — | — | (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. Because the amount and allocation of individual subscriptions in the private placement is not yet known, this table does not give effect to the completion of the private placement. If all of the shares offered in the private placement were sold to current Nicolet directors, however, all current and prospective directors and executive officers as a group would beneficially own approximately 19.6% of the issued and outstanding shares of Nicolet common stock. |
(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. |
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(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, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010 is derived from Nicolet’s audited consolidated financial statements beginning on page F-1. The financial data as of December 31, 2010, 2009 and 2008 and for the years ended December 31, 2009 and 2008 is derived from Nicolet’s audited consolidated financial statements that are not included in this joint proxy statement-prospectus. You should not assume the results of operations for past periods indicate results for any future period.
(in thousands, except per share data) | At and for the year ended December 31, | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
Results of operations: | |||||||||||||||||||||||
Interest income | $ | 28,795 | $ | 29,830 | $ | 31,420 | $ | 31,582 | $ | 33,384 | |||||||||||||
Interest expense | 6,530 | 8,383 | 11,291 | 15,218 | 19,872 | ||||||||||||||||||
Net interest income | 22,265 | 21,447 | 20,129 | 16,364 | 13,512 | ||||||||||||||||||
Provision for loan losses | 4,325 | 6,600 | 8,500 | 6,000 | 4,029 | ||||||||||||||||||
Net interest income after provision for loan losses | 17,940 | 14,847 | 11,629 | 10,364 | 9,483 | ||||||||||||||||||
Other income | 10,744 | 8,444 | 8,968 | 7,531 | 6,124 | ||||||||||||||||||
Other expense | 24,062 | 21,443 | 19,316 | 16,684 | 16,440 | ||||||||||||||||||
Income (loss) before income taxes | 4,622 | 1,848 | 1,281 | 1,211 | (833 | ) | |||||||||||||||||
Income tax (benefit) expense | 1,529 | 318 | 136 | 45 | (996 | ) | |||||||||||||||||
Net income | 3,093 | 1,530 | 1,145 | 1,166 | 163 | ||||||||||||||||||
Net income (loss) attributable to noncontrolling interest | 57 | 40 | 35 | (11 | ) | (26 | ) | ||||||||||||||||
Net income attributable to Nicolet Bankshares, Inc. | 3,036 | 1,490 | 1,110 | 1,177 | 189 | ||||||||||||||||||
Preferred stock dividends and discount accretion | 1,220 | 1,461 | 985 | 1,001 | — | ||||||||||||||||||
Net income available to common equity | $ | 1,816 | $ | 29 | $ | 125 | $ | 176 | $ | 189 | |||||||||||||
Earnings per common share: | |||||||||||||||||||||||
Basic | $ | 0.53 | $ | 0.01 | $ | 0.04 | $ | 0.05 | $ | 0.07 | |||||||||||||
Diluted | 0.53 | 0.01 | 0.04 | 0.05 | 0.06 | ||||||||||||||||||
Weighted average common shares outstanding: | |||||||||||||||||||||||
Basic | 3,440 | 3,469 | 3,452 | 3,500 | 2,899 | ||||||||||||||||||
Weighted | 3,442 | 3,488 | 3,481 | 3,528 | 3,045 | ||||||||||||||||||
Year-End Balances: | |||||||||||||||||||||||
Loans | $ | 552,601 | $ | 472,489 | $ | 513,761 | $ | 486,571 | $ | 479,179 | |||||||||||||
Allowance for loan losses | 7,120 | 5,899 | 8,635 | 6,232 | 5,546 | ||||||||||||||||||
Investment securities available for sale | 55,901 | 56,759 | 52,388 | 54,273 | 50,525 | ||||||||||||||||||
Total assets | 745,255 | 678,249 | 674,754 | 675,403 | 694,019 | ||||||||||||||||||
Deposits | 616,093 | 551,536 | 558,464 | 556,984 | 571,248 | ||||||||||||||||||
Other debt | 39,190 | 39,506 | 39,972 | 43,486 | 47,076 | ||||||||||||||||||
Junior subordinated debentures | 6,186 | 6,186 | 6,186 | 6,186 | 6,186 | ||||||||||||||||||
Common equity | 52,933 | 51,623 | 50,417 | 49,790 | 50,557 | ||||||||||||||||||
Stockholders’ equity | 77,378 | 76,023 | 65,620 | 64,824 | 65,420 | ||||||||||||||||||
Book value per common share | 15.45 | 14.83 | 14.57 | 14.47 | 14.43 | ||||||||||||||||||
Average Balances: | |||||||||||||||||||||||
Loans | $ | 521,209 | $ | 503,362 | $ | 499,193 | $ | 478,267 | $ | 455,247 | |||||||||||||
Earning assets | 614,252 | 582,486 | 603,182 | 579,803 | 578,639 | ||||||||||||||||||
Total assets | 674,222 | 642,353 | 653,710 | 633,284 | 624,476 | ||||||||||||||||||
Deposits | 545,896 | 522,297 | 530,682 | 510,741 | 516,887 | ||||||||||||||||||
Interest-bearing liabilities | 511,572 | 500,895 | 524,461 | 507,223 | 532,278 | ||||||||||||||||||
Common equity | 52,134 | 50,968 | 51,661 | 50,441 | 40,931 | ||||||||||||||||||
Stockholders’ equity | 76,535 | 69,284 | 66,923 | 65,387 | 40,931 |
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(in thousands, except per share data) | At and for the year ended December 31, | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
Financial Ratios: | |||||||||||||||||||||||
Return on average assets | 0.45 | % | 0.23 | % | 0.17 | % | 0.19 | % | 0.03 | % | |||||||||||||
Return on average equity | 3.97 | % | 2.15 | % | 1.66 | % | 1.80 | % | 0.46 | % | |||||||||||||
Return on average common equity | 3.48 | % | 0.06 | % | 0.24 | % | 0.35 | % | 0.46 | % | |||||||||||||
Average equity to average assets | 11.35 | % | 10.79 | % | 10.22 | % | 10.32 | % | 6.55 | % | |||||||||||||
Net interest margin | 3.67 | % | 3.75 | % | 3.39 | % | 2.89 | % | 2.39 | % | |||||||||||||
Stockholders’ equity to assets | 10.38 | % | 11.21 | % | 9.73 | % | 9.60 | % | 9.43 | % | |||||||||||||
Net loan charge-offs to average loans | 0.60 | % | 1.85 | % | 1.22 | % | 1.11 | % | 0.85 | % | |||||||||||||
Nonperforming loans to total loans | 1.27 | % | 2.01 | % | 2.10 | % | 1.69 | % | 1.44 | % | |||||||||||||
Nonperforming assets to total assets | 0.97 | % | 1.49 | % | 1.81 | % | 1.42 | % | 0.99 | % |
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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF NICOLET
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF NICOLET
For the Years Ended December 31, 2012, 2011, and 2010
Critical Accounting Policies
The consolidated financial statements of Nicolet Bankshares, Inc. and its subsidiaries are prepared in conformity with U.S. GAAP and follow general practices within the industry in which it operates. 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 the 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 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 income 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 it is more likely than not that a portion of the full amount of the deferred tax asset will not be realized. In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. 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 tax expense.
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 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, 2012 and 2011, and for the three years ended December 31, 2012.
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, representing 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 2012, the quality of Nicolet’s balance sheet improved. Loan growth was strong (up nearly 17% between December 31, 2012 and 2011), a result of greater line of credit utilization by commercial customers, maintaining selected residential mortgages in the portfolio, and active marketing for new loans in Nicolet’s various markets. Deposit growth was also strong and more granular (up nearly 12% between December 31, 2012 and 2011), with benefits derived from the December 2011 opening of the new Appleton branch and also from growth in a relationship-based checking product introduced in mid-2011. Asset quality measures stabilized in 2012, with nonperforming assets falling below 1% of assets, to 0.97% of assets at December 31, 2012, compared to 1.49% at December 31, 2011, and net charge offs to average loans of 0.60% for 2012 compared to 1.85% for 2011. Finally, on November 28, 2012, Nicolet entered into the merger agreement with Mid-Wisconsin, as described further in this joint proxy statement-prospectus. The merger is expected to be
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completed in the second quarter of 2013, contingent upon conditions outlined in the merger agreement, including but not limited to regulatory and shareholder approvals of both Nicolet and MWFS. The two companies agreed to merge for strategic reasons beneficial to both, as further described in “Summary—Reasons for the Merger.”
During 2011, Nicolet worked aggressively through its credit quality issues, which resulted in a decrease in problem loans as compared to year end 2010. 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 SBLF, whereby Nicolet received $24,400 from Treasury for the issuance of new senior preferred stock.
See “Business of Nicolet — General” on page 88 for additional information.
Performance Summary
Nicolet reported $3,036 in net income for 2012, $1,546 greater than $1,490 for 2011. Net income available to common shareholders for 2012 was $1,816, or $0.53 per diluted common share, compared to net income available to common shareholders of $29, or $0.01 per diluted common share, for 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, while the entire $1,220 of preferred dividends for 2012 related to the senior preferred stock from the SBLF.
• | Net interest income was $22,265 for 2012, an increase of $818 or 3.8% compared to 2011. The improvement was primarily from lower interest expense due to a better funding mix of lower-costing deposits. On a tax-equivalent basis, the net interest margin for 2012 was 3.67%, down 8 basis points (“bps”) from 3.75% in 2011. The average yield on earning assets was 4.73%, 45 bps lower than 2011, largely impacted by downward pricing pressure on loans and investment securities and a higher proportion of low-earning cash in 2012 versus 2011. The cost of interest-bearing liabilities was 1.27% for 2012, favorably 40 bps lower than 2011, mainly due to the maturity of high-cost brokered deposits. |
• | Loans were $552,601 at December 31, 2012, an increase of $80,112, or 17.0%, from December 31, 2011. The increase was due to higher utilization of commercial lines of credit, maintaining selected residential mortgages in the portfolio, and active marketing for new loans in Nicolet’s various markets. Average loans were $521,209 for 2012, 3.5% higher than 2011. |
• | Asset quality was stabilizing in 2012. At December 31, 2012, nonperforming assets were $7,219 and represented 0.97% of total assets, compared to $10,117 and 1.49%, respectively, at December 31, 2011. The provision for loan losses was $4,325, exceeding net charge offs of $3,104 for 2012. Comparatively, the 2011 provision for loan losses was $6,600 against $9,336 in net charge offs, primarily due to resolution in early 2011 of issues contemplated on certain impaired loans that were reserved for in late 2010. The allowance as a percentage of loans at December 31, 2012 was 1.29% compared to 1.25% at December 31, 2011 and net charge offs to average loans decreased from 1.9% at December 31, 2011 to 0.6% at December 31, 2012. |
• | Total deposits were $616,093 at December 31, 2012, an increase of $64,557 or 11.7%, from December 31, 2011, including full year of growth in a relationship-based checking product introduced in mid-2011 and from the December 2011 opening of the new Appleton branch. Average total deposits for 2012 were $545,896, up 4.5% over 2011. |
• | Noninterest income for 2012 was $10,744, up $2,300, or 27.2%, over 2011, led by higher mortgage income (up $1,323 to $3,090 for 2012 as a result of residential refinancing activity that began to surge during the second half of 2011 in response to historically low interest rates remained significant throughout 2012, and aided further by some stabilization in home values in 2012), net |
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gains on sales of assets (at $448 for 2012, compared to a net loss of $55 for 2011), and higher bank owned life insurance (“BOLI”) income (up $138 to $710 for 2012 as a result of new investment during 2012). |
• | Noninterest expense for 2012 was $24,063, an increase of $2,620, or 12.2%, over 2011, due primarily to increased personnel-related costs, as well as business development and marketing, data processing and other costs. These expenses were largely impacted by a larger workforce due to the branch addition, 2012 equity award grants and higher incentive compensation given stronger 2012 performance, a trust system conversion, and merger-related costs. |
Comparison of 2011 versus 2010
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. Net income available to common shareholders decreased as a result of a $476 increase in preferred stock dividends to $1,461 due to the increase in senior preferred stock from the SBLF and $396 in accelerated discount accretion resulting from the repayment of the TARP senior preferred stock.
Net Interest Income
Net interest income in the consolidated statements of income (which excludes any taxable equivalent adjustment) was $22,265 in 2012, compared to $21,447 in 2011 and $20,129 in 2010. 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 $590, $660 and $596 for 2012, 2011 and 2010, respectively, resulting in taxable equivalent net interest income of $22,855 for 2012, $22,107 for 2011 and $20,725 for 2010.
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, mix 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.
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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 | |||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2012 | 2011 | 2010 | |||||||||||||||||||||||||||||||||||||
Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | |||||||||||||||||||||||||||||||
ASSETS | |||||||||||||||||||||||||||||||||||||||
Earning assets | |||||||||||||||||||||||||||||||||||||||
Loans | $ | 521,209 | $ | 27,280 | 5.17 | % | $ | 503,362 | $ | 28,190 | 5.54 | % | $ | 499,193 | $ | 29,466 | 5.84 | % | |||||||||||||||||||||
Investment securities | |||||||||||||||||||||||||||||||||||||||
Taxable | 21,963 | 625 | 2.85 | % | 19,242 | 725 | 3.77 | % | 20,548 | 875 | 4.26 | % | |||||||||||||||||||||||||||
Tax-exempt | 26,396 | 1,247 | 4.73 | % | �� | 26,889 | 1,408 | 5.24 | % | 27,993 | 1,459 | 5.21 | % | ||||||||||||||||||||||||||
Other interest-earning assets | 44,684 | 233 | 0.52 | % | 32,993 | 167 | 0.51 | % | 55,448 | 216 | 0.39 | % | |||||||||||||||||||||||||||
Total interest-earning assets | 614,252 | $ | 29,385 | 4.73 | % | 582,486 | $ | 30,490 | 5.18 | % | 603,182 | $ | 32,016 | 5.25 | % | ||||||||||||||||||||||||
Cash and due from banks | 15,628 | 18,785 | 11,382 | ||||||||||||||||||||||||||||||||||||
Other assets | 44,342 | 41,082 | 39,146 | ||||||||||||||||||||||||||||||||||||
Total assets | $ | 674,222 | $ | 642,353 | $ | 653,710 | |||||||||||||||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities | |||||||||||||||||||||||||||||||||||||||
Savings | $ | 33,046 | $ | 151 | 0.46 | % | $ | 16,829 | $ | 45 | 0.27 | % | $ | 12,273 | $ | 31 | 0.25 | % | |||||||||||||||||||||
Interest-bearing demand | 90,666 | 888 | 0.98 | % | 63,346 | 404 | 0.64 | % | 76,489 | 360 | 0.47 | % | |||||||||||||||||||||||||||
MMA | 167,196 | 780 | 0.47 | % | 156,471 | 1,142 | 0.73 | % | 115,973 | 1,105 | 0.95 | % | |||||||||||||||||||||||||||
Core CD’s and IRA’s | 133,814 | 2,373 | 1.77 | % | 154,115 | 2,664 | 1.73 | % | 140,828 | 3,225 | 2.29 | % | |||||||||||||||||||||||||||
Brokered deposits | 40,203 | 511 | 1.27 | % | 63,749 | 2,255 | 3.54 | % | 127,473 | 4,633 | 3.63 | % | |||||||||||||||||||||||||||
Total interest-bearing deposits | 464,925 | 4,703 | 1.01 | % | 454,510 | 6,510 | 1.43 | % | 473,036 | 9,354 | 1.98 | % | |||||||||||||||||||||||||||
Other interest-bearing liabilities | 46,647 | 1,827 | 3.85 | % | 46,385 | 1,873 | 3.98 | % | 51,425 | 1,937 | 3.71 | % | |||||||||||||||||||||||||||
Total interest-bearing liabilities | 511,572 | 6,530 | 1.27 | % | 500,895 | 8,383 | 1.67 | % | 524,461 | 11,291 | 2.15 | % | |||||||||||||||||||||||||||
Noninterest-bearing demand | 80,971 | 67,787 | 57,647 | ||||||||||||||||||||||||||||||||||||
Other liabilities | 5,145 | 4,387 | 4,679 | ||||||||||||||||||||||||||||||||||||
Total equity | 76,535 | 69,284 | 66,923 | ||||||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 674,222 | $ | 642,353 | $ | 653,710 | |||||||||||||||||||||||||||||||||
Net interest income and rate spread | $ | 22,855 | 3.46 | % | $ | 22,107 | 3.51 | % | $ | 20,725 | 3.11 | % | |||||||||||||||||||||||||||
Net interest margin | 3.67 | % | 3.75 | % | 3.39 | % |
(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 $128 in 2012, $396 in 2011 and $492 in 2010. |
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Table 2: Volume/Rate Variance — Taxable-Equivalent Basis
(dollars in thousands)
(dollars in thousands)
2012 Compared to 2011 Increase (decrease) Due to Changes in | 2011 Compared to 2010 Increase (decrease) Due to Changes in | ||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Volume | Rate* | Net(1) | Volume | Rate* | Net(1) | ||||||||||||||||||||||
Earning assets | |||||||||||||||||||||||||||
Loans (2) | $ | 974 | $ | (1,884 | ) | $ | (910 | ) | $ | 236 | $ | (1,512 | ) | $ | (1,276 | ) | |||||||||||
Investment securities | |||||||||||||||||||||||||||
Taxable | 66 | (166 | ) | (100 | ) | (27 | ) | (123 | ) | (150 | ) | ||||||||||||||||
Tax-exempt (2) | (25 | ) | (136 | ) | (161 | ) | (58 | ) | 7 | (51 | ) | ||||||||||||||||
Other interest-earning assets | 32 | 34 | 66 | (66 | ) | 17 | (49 | ) | |||||||||||||||||||
Total interest-earning assets | $ | 1,047 | $ | (2,152 | ) | $ | (1,105 | ) | $ | 85 | $ | (1,611 | ) | $ | (1,526 | ) | |||||||||||
Interest-bearing liabilities | |||||||||||||||||||||||||||
Interest-bearing demand | $ | 61 | $ | 45 | $ | 106 | $ | (12 | ) | $ | 2 | $ | 14 | ||||||||||||||
Savings deposits | 216 | 268 | 484 | (69 | ) | 113 | 44 | ||||||||||||||||||||
MMA | 74 | (436 | ) | (362 | ) | 332 | (295 | ) | 37 | ||||||||||||||||||
Core CD’s and IRA’s | (358 | ) | 67 | (291 | ) | 284 | (845 | ) | (561 | ) | |||||||||||||||||
Brokered deposits | (638 | ) | (1,106 | ) | (1,744 | ) | (2,257 | ) | (121 | ) | (2,378 | ) | |||||||||||||||
Total interest-bearing deposits | (645 | ) | (1,162 | ) | (1,807 | ) | (1,698 | ) | (1,146 | ) | (2,844 | ) | |||||||||||||||
Other interest-bearing liabilities | 5 | (51 | ) | (46 | ) | (73 | ) | 9 | (64 | ) | |||||||||||||||||
Total interest-bearing liabilities | (640 | ) | (1,213 | ) | (1,853 | ) | (1,771 | ) | (1,137 | ) | (2,908 | ) | |||||||||||||||
Net interest income | $ | 1,687 | $ | (939 | ) | $ | 748 | $ | 1,856 | $ | (474 | ) | $ | 1,382 |
* | 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 — Taxable-Equivalent Basis
(dollars in thousands)
(dollars in thousands)
Years Ended December 31, | |||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2012 | 2011 | 2010 | |||||||||||||||||||||||||||||||||||||
Average Balance | % of Earning Assets | Yield/Rate | Average Balance | % of Earning Assets | Yield/Rate | Average Balance | % of Earning Assets | Yield/Rate | |||||||||||||||||||||||||||||||
Total loans | $ | 521,209 | 84.9 | % | 5.17 | % | $ | 503,362 | 86.4 | % | 5.54 | % | $ | 499,193 | 82.8 | % | 5.84 | % | |||||||||||||||||||||
Securities and other earning assets | 93,043 | 15.1 | % | 2.26 | % | 79,124 | 13.6 | % | 2.91 | % | 103,989 | 17.2 | % | 2.45 | % | ||||||||||||||||||||||||
Total interest-earning assets | $ | 614,252 | 100.0 | % | 4.73 | % | $ | 582,486 | 100.0 | % | 5.18 | % | $ | 603,182 | 100.0 | % | 5.25 | % | |||||||||||||||||||||
Interest-bearing liabilities | $ | 511,572 | 83.3 | % | 1.27 | % | $ | 500,895 | 86.0 | % | 1.67 | % | $ | 524,461 | 86.9 | % | 2.15 | % | |||||||||||||||||||||
Noninterest-bearing funds, net | 102,680 | 16.7 | % | 81,591 | 14.0 | % | 78,721 | 13.1 | % | ||||||||||||||||||||||||||||||
Total funds sources | $ | 614,252 | 100.0 | % | 1.06 | % | $ | 582,486 | 100.0 | % | 1.44 | % | $ | 603,182 | 100.0 | % | 1.87 | % | |||||||||||||||||||||
Interest rate spread | 3.46 | % | 3.51 | % | 3.11 | % | |||||||||||||||||||||||||||||||||
Contribution from net free funds | 0.21 | % | 0.24 | % | 0.28 | % | |||||||||||||||||||||||||||||||||
Net interest margin | 3.67 | % | 3.75 | % | 3.39 | % |
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Comparison of 2012 versus 2011
Taxable-equivalent net interest income was $22,855 for 2012, an increase of $748, or 3.4%, from 2011, predominantly due to $1,853 lower interest expense due to beneficial growth in the mix of lower-costing deposits, offset partly by $1,105 lower interest income, as earning asset yields were down significantly from prior year mainly due to downward pricing pressure on loans and investments and a higher proportion of low-earning cash in 2012 versus 2011.
The taxable-equivalent net interest margin was 3.67% for 2012, down 8 bps from 3.75% in 2011, primarily from a lower interest rate spread as the earning asset yield declined 45 bps from 2011, offset only partly by a 40 bps reduction in the cost of funds.
For 2012 the earning asset yield was 4.73%, 45 bps lower than last year, mainly due to a decline in loan yields (down 37 bps to 5.17%), resulting from continued competitive pricing pressures in the low rate environment and Nicolet lowering or removing floor rates on selected variable rate loans. Since loan yields are generally higher than other interest-earning assets, the decline in the ratio of average loans to interest-earning assets (to 84.9% for 2012 as compared to 86.0% for 2011, despite average loans growing $17,847 or 3.5% over 2011) further depressed the earning asset yield for 2012. All other earning assets combined yielded 2.26% for 2012, down 65 bps from 2011, impacted by reinvestment in the low rate environment (with investment securities combined yielding 75 bps less in 2012 than in 2011) and by a higher proportion of low-earning cash, which comprised 5.2% of average interest-earning assets for 2012 versus 3.3% for 2011.
Nicolet’s cost of funds continued its favorable decline for the third consecutive year. The cost of interest-bearing liabilities was 1.27% for 2012, 40 bps lower than 2011, aided by a number of positive factors. The average cost of interest-bearing deposits for 2012 was 1.01%, down 42 bps versus 2011. This favorable decline was predominantly due to changes in high-cost brokered deposits, costing 1.27% on average for 2012 versus 3.54% for 2011 (from renewals in the lower rate environment), and representing a lower proportion of average interest-bearing deposits (8.6% for 2012 compared to 14.0% for 2011, given maturities exceeding renewals); and due to a lower cost of the remaining interest-bearing customer deposits combined (i.e. savings, interest-bearing demand, money market, and time deposits) falling 10 bps to 0.99% for 2012, led by a lower proportion held in time deposits. The cost of other interest-bearing liabilities (comprised of short- and long-term borrowings) decreased 13 bps to 3.85% for 2012, mainly from the renewal of a matured advance in the lower rate environment.
Average earning assets were $614,252 for 2012, $31,766 higher than 2011, primarily from $17,847 more in average loans and $12,621 more in average interest-bearing cash balances.
Average interest-bearing liabilities were $511,572 for 2012, up $10,677 over 2011. Average brokered deposits declined $23,546 as maturing CDs were not renewed or were renewed on a limited basis at lower rates, while the remaining interest-bearing customer deposits combined grew $33,961, mainly from a full year of growth in a relationship-based checking product introduced in mid-2011 and from the December 2011 opening of a new Appleton branch. Other interest-bearing liabilities were relatively unchanged, up only $262 to $46,647 at December 31, 2012.
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 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 2010, 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 2010, given a lower proportion of low-earning cash balances in
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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, money market, 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 3.98% for 2011, mainly as a result of lower-cost short-term borrowings declining in the mix of funds.
Average earning assets were $582,486 for 2011, $20,696 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 $45,198, 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.
Provision for Loan Losses
The provision for loan losses in 2012 was $4,325, compared to $6,600 for 2011 and $8,500 for 2010. The higher than historical level of provision over the past three years was due primarily to work-outs of problem loans, the levels of loan charge-offs, nonperforming loan trends, depressed collateral values, and uncertain economic conditions. However, with asset quality trends improving, the provision for loan losses has been trending down. Comparatively, the 2011 provision for loan losses was $6,600 against $9,339 in net charge offs, primarily due to the resolution in early 2011 of issues related to certain impaired loans that were reserved for in late 2010. At December 31, 2012, the ALLL was $7,120, compared to $5,899 at December 31, 2011 and $8,635 at December 31, 2010. The ratio of the ALLL to total loans was 1.29%, 1.25%, and 1.68%, at December 31, 2012, 2011, and 2010, respectively. Nonperforming loans at December 31, 2012 declined to $7,026, compared to $9,476 at December 31, 2011 and $10,803 at December 31, 2010, representing 1.3%, 2.0% and 2.1% 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 ALLL 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.”
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Noninterest Income
Table 4: Noninterest Income
(dollars in thousands)
(dollars in thousands)
Years Ended December 31, | Change From Prior Year | ||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
$ Change | % Change | $ Change | % Change | ||||||||||||||||||||||||||||
2012 | 2011 | 2010 | 2012 | 2012 | 2011 | 2011 | |||||||||||||||||||||||||
Service charges on deposit accounts | $ | 1,159 | $ | 1,180 | $ | 1,087 | $ | (21 | ) | (1.8%) | $ | 93 | 8.6 | % | |||||||||||||||||
Trust services fee income | 2,975 | 2,899 | 2,811 | 76 | 2.6 | 88 | 3.1 | ||||||||||||||||||||||||
Mortgage income | 3,090 | 1,767 | 2,619 | 1,323 | 74.9 | (852 | ) | (32.5 | ) | ||||||||||||||||||||||
Brokerage fee income | 323 | 334 | 291 | (11 | ) | (3.3 | ) | 43 | 14.8 | ||||||||||||||||||||||
Gain(loss) on sale, disposal and writedown of assets, net | 448 | (55 | ) | (59 | ) | 503 | 914.5 | 4 | 6.8 | ||||||||||||||||||||||
Bank owned life insurance (“BOLI”) | 710 | 572 | 574 | 138 | 24.1 | (2 | ) | (0.3 | ) | ||||||||||||||||||||||
Rent income | 1,003 | 955 | 970 | 48 | 5.0 | (15 | ) | (1.5 | ) | ||||||||||||||||||||||
Investment advisory fees | 343 | 330 | 308 | 13 | 3.9 | 22 | 7.1 | ||||||||||||||||||||||||
Other | 693 | 462 | 367 | 231 | 50.0 | 95 | 25.9 | ||||||||||||||||||||||||
Total noninterest income | $ | 10,744 | $ | 8,444 | $ | 8,968 | $ | 2,300 | 27.2 | % | $ | (524 | ) | (5.8%) |
Comparison of 2012 versus 2011
Noninterest income was $10,744 for 2012, up $2,300, or 27.2%, from 2011, led by higher mortgage income, net gains on sales of assets and higher BOLI income.
Service fees on deposit accounts for 2012 were $1,159, down $21, or 1.8%, from 2011. The slight decline in service charges on deposits for 2012 was due mainly to lower non-sufficient funds (“NSF”) fees, which were nearly offset by higher service charges on business and personal accounts.
Trust service fees were $2,975 in 2012, up $76 compared to 2011, primarily from slight market improvements on assets under management, on which fees are based, while brokerage fees were similar to the prior year, down only $11 from 2011.
Mortgage 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. Residential refinancing activity that began to surge during the second half of 2011 in response to historically low interest rates remained significant throughout 2012. As a result, and aided further by some stabilization in home values in 2012, mortgage banking income was $3,090 for 2012, nearly 75% higher than 2011.
Nicolet recognized a $448 net gain on sale, disposal and write down of assets in 2012, consisting mainly of $440 net gains on sales of securities available for sale and $8 net gain on disposal and write down of OREO and other assets. Comparably, the $55 net loss on sale, disposal and write down of assets in 2011 consisted of a $128 other-than-temporary impairment (“OTTI”) charge on a private equity security, and $73 net gains on OREO and other assets sold.
BOLI income increased $138 to $710 in 2012, commensurate with the $3,750 new investment in BOLI added in the first quarter of 2012. Other income increased $231 to $693 in 2012 compared to 2011 largely from ancillary fees tied to deposit-related products, most particularly debit card, check cashing and wire fee income.
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 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.
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 OTTI charge on a private equity security, and $73 net gains on 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.
Noninterest Expense
Table 5: Noninterest Expense
(dollars in thousands)
(dollars in thousands)
Years Ended December 31, | Change From Prior Year | ||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
$ Change | % Change | $ Change | % Change | ||||||||||||||||||||||||||||
2012 | 2011 | 2010 | 2012 | 2012 | 2011 | 2011 | |||||||||||||||||||||||||
Salaries and employee benefits | $ | 13,146 | $ | 11,334 | $ | 10,165 | $ | 1,812 | 16.0 | % | $ | 1,169 | 11.5 | % | |||||||||||||||||
Occupancy, equipment and office | 4,415 | 4,409 | 3,748 | 6 | 0.1 | % | 661 | 17.6 | % | ||||||||||||||||||||||
Business development and marketing | 1,649 | 1,362 | 1,243 | 287 | 21.1 | % | 119 | 9.6 | % | ||||||||||||||||||||||
Data processing | 1,689 | 1,360 | 1,293 | 329 | 24.2 | % | 67 | 5.2 | % | ||||||||||||||||||||||
FDIC assessments | 566 | 630 | 927 | (64 | ) | (10.2%) | (297 | ) | (32.0%) | ||||||||||||||||||||||
Core deposit intangible amortization | 639 | 741 | 329 | (102 | ) | (13.8%) | 412 | 125.0 | % | ||||||||||||||||||||||
Other | 1,959 | 1,607 | 1,611 | 352 | 21.9 | % | (4 | ) | (0.2%) | ||||||||||||||||||||||
Total noninterest expense | $ | 24,063 | $ | 21,443 | $ | 19,316 | $ | 2,620 | 12.2 | % | $ | 2,127 | 11.0 | % |
Comparison of 2012 versus 2011
Total noninterest expense was $24,063 for 2012, an increase of $2,620, or 12.2%, over 2011 due primarily to increased personnel-related costs, as well as business development and marketing, data processing and other costs. These expenses were largely impacted from a larger workforce and higher incentive compensation between the years, carrying a full year of costs associated with the new Appleton branch (opened in December 2011), a trust system conversion and costs tied to the pending merger with Mid-Wisconsin, which was announced in November 2012.
Salaries and employee benefits increased by $1,812, or 16.0%, over 2011. Base salaries grew $689 (8%) from merit increases between the years and from a larger workforce, with a 5% increase in average full-time equivalent employees to 158 for 2012. Incentive compensation increased $735 over 2011, including costs from equity awards granted in 2012 (as compared to none in 2011) and higher incentive payouts given Nicolet’s stronger 2012 performance. Commensurately, other personnel and fringe costs increased, mainly including higher payroll taxes, health insurance and employer 401k match.
Occupancy, equipment and office was essentially unchanged (up $6, or 0.1%) between 2012 and 2011, despite the full-year costs of the new Appleton branch and a larger workforce, as Nicolet managed these expenses carefully in 2012 following heavier new investment during 2011.
Business development and marketing expense was up $287 over 2011, given the greater focus on growth in loans and deposits, sales seminars and events, higher donations in 2012, and to a smaller degree, due to merger-related costs mainly related to due diligence work and initial communications.
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Data processing was up $329 over 2011, primarily due to one-time costs related to the trust system conversion in mid-2012 and slightly higher ongoing costs given greater functionality achieved.
FDIC assessments were $64 lower than 2011, as Nicolet benefited from the full year of the FDIC’s change in the assessment calculation that began in 2011. The core deposit intangible amortization decreased $102 as the amortization method is accelerated in earlier years, resulting in higher initial expense.
Other operating expenses were $1,959 for 2012, an increase of $352, almost exclusively the result of additional consulting and legal expenses related to the pending merger.
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 Brown county 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 and normal merit increases.
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 $1,607 for 2011, a decrease of $4 over 2010. Nicolet continued to manage its costs commensurate with its operational requirements.
Income Taxes
Income tax expense was $1,529 for 2012, $318 for 2011, and $136 for 2010. The effective tax rates were 33.1%, 17.2% and 10.6% for 2012, 2011 and 2010, respectively, influenced largely by the amount of income before tax and the mix of tax-exempt income each year, and to a smaller degree for 2012, impacted by the non-deductibility of certain merger-related costs. 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, no valuation allowance was determined to be necessary except for that related to state net operating loss (“NOL”) carry forwards. At December 31, 2011, state tax NOLs 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 was provided as it was not expected to be realized under existing regulations. However, due to a 2012 change in state law which allows for the utilization of parent company state NOLs in full, the prior valuation allowance was reversed in 2012.
BALANCE SHEET ANALYSIS
Loans
Nicolet services a diverse customer base throughout Northeast Wisconsin and in Menominee, 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 customers weather current economic conditions and position their businesses for the future.
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Nicolet’s primary lending function is to make commercial loans, consisting of commercial and industrial 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 loans, including residential first mortgages, residential junior mortgages (such as home equity loans and lines), and to a lesser degree residential construction loans; and retail and other loans.
Total loans were $552,601 at December 31, 2012, an increase of $80,112, or 17.0%, compared to $472,489 at December 31, 2011. The increase was due to higher borrower utilization of commercial lines of credit, maintaining selected residential mortgages in the portfolio, and active marketing for new loans in Nicolet’s various markets. Total loans between December 31, 2011 and 2010 were down $41,272, or 8.0%. During 2011, Nicolet actively pursued loan growth; however, loan balances were affected by reduced borrower demand and economic contraction, particularly during the second half of 2011, with lower utilization of commercial lines of credit accounting for 80% of the decline between year ends 2011 and 2010.
Table 6: Loan Composition
As of December 31,
(dollars in thousands)
As of December 31,
(dollars in thousands)
2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Amount | % of Total | Amount | % of Total | Amount | % of Total | Amount | % of Total | Amount | % of Total | ||||||||||||||||||||||||||||||||||
Commercial & industrial | $ | 197,516 | 35.7 | % | $ | 154,011 | 32.6 | % | $ | 170,919 | 33.3 | % | $ | 146,121 | 30.0 | % | $ | 162,216 | 33.8 | % | |||||||||||||||||||||||
Owner-occupied CRE | 118,242 | 21.4 | 111,179 | 23.5 | 123,122 | 24.0 | 142,621 | 29.3 | 139,710 | 29.2 | |||||||||||||||||||||||||||||||||
Total commercial loans | 315,758 | 57.1 | 265,190 | 56.1 | 294,041 | 57.3 | 288,742 | 59.3 | 301,926 | 63.0 | |||||||||||||||||||||||||||||||||
CRE investment | 76,618 | 13.9 | 66,577 | 14.1 | 63,839 | 12.4 | 37,908 | 7.8 | 41,393 | 8.6 | |||||||||||||||||||||||||||||||||
Construction & land development | 21,791 | 3.9 | 24,774 | 5.2 | 31,464 | 6.1 | 40,619 | 8.3 | 29,729 | 6.2 | |||||||||||||||||||||||||||||||||
Total CRE loans | 98,409 | 17.8 | 91,351 | 19.3 | 95,303 | 18.5 | 78,527 | 16.1 | 71,122 | 14.8 | |||||||||||||||||||||||||||||||||
Residential construction | 7,957 | 1.4 | 9,363 | 2.0 | 8,893 | 1.7 | 12,940 | 2.7 | 14,279 | 3.0 | |||||||||||||||||||||||||||||||||
Residential first mortgage | 85,588 | 15.5 | 56,392 | 11.9 | 56,533 | 11.0 | 47,352 | 9.7 | 38,881 | 8.1 | |||||||||||||||||||||||||||||||||
Residential junior mortgage | 39,352 | 7.1 | 42,699 | 9.0 | 46,621 | 9.1 | 47,020 | 9.7 | 46,945 | 9.8 | |||||||||||||||||||||||||||||||||
Total residential real estate loans | 132,897 | 24.0 | 108,455 | 22.9 | 112,047 | 21.8 | 107,312 | 22.1 | 100,105 | 20.9 | |||||||||||||||||||||||||||||||||
Retail & other | 5,537 | 1.1 | 7,494 | 1.7 | 12,370 | 2.4 | 11,990 | 2.5 | 6,026 | 1.3 | |||||||||||||||||||||||||||||||||
Total loans | $ | 552,601 | 100.0 | % | $ | 472,489 | 100.0 | % | $ | 513,761 | 100.0 | % | $ | 486,571 | 100.0 | % | $ | 479,179 | 100.0 | % |
Total commercial and CRE loans combined were 74.9% of the total loan portfolio at December 31, 2012, and 75.4% at December 31, 2011. Such loans are considered to have more inherent risk of default than residential mortgage or retail loans, in part because 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 and industrial loans, consisting primarily of commercial loans to small businesses and, to a lesser degree, to municipalities, were $197,516 at December 31, 2012, up $43,505, or 28.2%, since year end 2011, and comprised 35.7% of total loans. The increase in these commercial loan segments since 2011 was primarily due to renewed loan demand from business borrowers based on cautious optimism for improving economic conditions and higher line of credit utilization. Over the past three years, commercial and industrial loans have represented approximately one-third of the total loan portfolio. Owner-occupied CRE loans primarily consist of loans secured by business real estate that is occupied by borrowers that also have commercial and industrial loans. Owner-occupied CRE loans were $118,242 at December 31, 2012, up $7,063, or 6.4%, since year end 2011, and comprised 21.4% of total loans. Both of these loan segments include a diverse range of industries. The credit risk related to commercial and industrial loans and owner-occupied CRE 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.
CRE investment loans totaled $76,618 at December 31, 2012, up $10,041, or 15.1%, from December 31, 2011, and comprised 13.9% of total loans, similar to 14.1% at the end of 2011. The CRE investment loan
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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 $21,791 at December 31, 2012, down $2,983, or 12.0%, from December 31, 2011, and comprised 3.9% 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, 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 is primarily due to charge-offs and pay downs as Nicolet has limited new lending to reduce its credit exposure. Since 2010, lending in this segment has been focused 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 construction loans totaled $7,957 at the end of 2012, down $1,406, or 15.0%, from the prior year end, and comprised 1.4% and 2.0% of total loans at year end 2012 and 2011, respectively.
Residential first mortgage real estate loans grew $29,196, or 51.8% to $85,588 at December 31, 2012, representing 15.5% and 11.9% of the total loan portfolio at the end of 2012 and 2011, respectively. Residential first mortgage loans include conventional first-lien home mortgages and exclude loans held for sale in the secondary market. In 2012, Nicolet retained specific high quality residential mortgages, in part as an alternative to investing in greater volumes of mortgage-backed securities. Residential junior mortgage real estate loans declined $3,347, or 7.8%, to $39,352, representing 7.1% and 9.0% of the total loan portfolio at the end of 2012 and 2011, respectively. Residential junior mortgage real estate loans consist of home equity lines and term loans secured by junior mortgage liens. While Nicolet has not experienced significant losses in the residential real estate category, if 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, the vast majority 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, 2012, $7,323 of residential mortgages were held for resale to the secondary market, compared to $11,373 at December 31, 2011.
Retail and other loans totaled $5,537 at December 31, 2012, down $1,957, or 26.1%, compared to 2011, and represented 1.1% and 1.7% of the 2012 and 2011 year end loan portfolio, respectively. Loans in this classification include predominantly short-term and other personal installment loans not secured by real estate. The decline in retail and other loans is largely a result of consumers preferring home equity-based loans over consumer installment loans, as well as the uncertain and difficult economic conditions reducing consumer demand for leverage in general. 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, 2012, no significant industry concentrations
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existed in Nicolet’s portfolio in excess of 25% of total loans. Nicolet has also developed guidelines to manage its exposure to various types of concentration risks.
The following table presents the maturity distribution of the loan portfolio at December 31, 2012:
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 | $ | 96,862 | $ | 91,931 | $ | 8,723 | $ | 197,516 | |||||||||||
Owner-occupied CRE | 37,140 | 68,495 | 12,607 | 118,242 | |||||||||||||||
CRE investment | 14,545 | 49,710 | 12,363 | 76,618 | |||||||||||||||
Construction & land development | 15,099 | 6,644 | 48 | 21,791 | |||||||||||||||
Residential construction | 7,957 | — | — | 7,957 | |||||||||||||||
Residential first mortgage | 9,970 | 19,775 | 55,843 | 85,588 | |||||||||||||||
Residential junior mortgage | 3,072 | 21,302 | 14,978 | 39,352 | |||||||||||||||
Retail & other | 3,476 | 1,916 | 145 | 5,537 | |||||||||||||||
Total loans | $ | 188,121 | $ | 259,773 | $ | 104,707 | $ | 552,601 | |||||||||||
Percent by maturity distribution | 34.0 | % | 47.0 | % | 19.0 | % | 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, 2012, the ALLL was $7,120, compared to $5,899 at December 31, 2011 and $8,635 at December 31, 2010. The ALLL as a percentage of total loans was 1.29%, 1.25% and 1.68% at December 31, 2012, 2011 and 2010, respectively. The 2012 provision for loan losses was $4,325, compared to $6,600 for 2011and $8,500 for 2010. Gross charge-offs were $3,507 for 2012, $9,401 for 2011, and $6,292 for 2010, while recoveries for the corresponding periods were $403, $65, and $195, respectively. As a result, net charge-offs for 2012 were $3,104, or 0.6% of average loans, compared to $9,336, or 1.9% of average loans, for 2011 and $6,097, or 1.2% of average loans, for 2010. The $6,232 decline in net charge-offs between 2012 and 2011 was primarily due to $4,530 lower net charge offs in construction and land development (mainly tied to 3 large credit relationships) and $2,258 lower net charge offs in commercial & industrial loans (mainly tied to 2 large credit relationships), offset by a $900 increase in owner-occupied CRE net charge-offs. 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 level of the provision for loan losses is directly correlated to the
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assessment of the adequacy of the allowance, including, but not limited to, consideration of the amount of net charge-offs, loan growth, levels of nonperforming loans, and trends in the risk profile of the loan portfolio.
Nonperforming loans were $7,026, $9,476 and $10,803 for December 31, 2012, 2011 and 2010, respectively, exhibiting an improving trend. The ALLL was 101.3%, 62.3% and 79.9% of nonperforming loans at December 31, 2012, 2011 and 2010, respectively. Issues impacting asset quality over the past few years have included historically depressed economic factors, such as weakened commercial and residential real estate markets, volatile energy prices, heightened unemployment, and depressed consumer confidence, leading to long resolution periods at low returns. Declining collateral values significantly contributed to elevated levels of nonperforming loans, net charge-offs, and ALLL. Nicolet pursued rigorous workout and resolution plans on problem credits, and implemented enhanced underwriting and credit monitoring, particularly in 2010 and 2011. As a result, asset quality stabilized during 2012.
Nicolet’s management 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. The specific reserve in the ALLL is equal to the aggregate collateral shortfall calculated from the impairment analysis. Loans measured for impairment include nonaccrual loans, troubled debt-restructurings (“restructured loans”), or other loans determined to be impaired by management. 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 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 largest portion of the ALLL at year end 2012 was $2,580, allocated to construction and land development loans representing 36.2% of the ALLL at year end 2012 (compared to 34.5% at year end 2011), and commensurate with nonaccrual construction and land development loans representing 36.4% of total nonperforming loans (compared to 35.5% at year end 2011). The ALLL allocated to commercial and industrial loans was $1,969 at year end 2012 (an increase of $5 from year end 2011), and represented 27.7% of the ALLL, down from 33.3% at year end 2011, given the lower levels of net charge offs and nonaccruals in this loan category as compared to 2011. ALLL allocated to owner-occupied CRE increased $722, to $1,069 at December 31, 2012 (representing 15.0% of the ALLL), from $347 at December 31, 2011 (5.9% of the ALLL). The increased allocation is due to growing risks in this category, evidenced by higher net charge offs ($1,028 for 2012 versus $425 for 2011) and a rise in owner-occupied CRE nonaccruals (to $1,960 or 27.9% of total nonperforming loans, as compared to $934 or 9.9%, respectively, at December 31, 2011). The remaining allocations of the ALLL to other loan segments are relatively small and did not change appreciably between year end 2012 and 2011.
Management performs ongoing intensive analyses of its loan portfolio 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)
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Allowance for loan losses (ALLL): | ||||||||||||||||||||||
Beginning balance | $ | 5,899 | $ | 8,635 | $ | 6,232 | $ | 5,546 | $ | 5,383 | ||||||||||||
Loans charged off: | ||||||||||||||||||||||
Commercial & industrial | 295 | 2,553 | 1,217 | 1,694 | 3,018 | |||||||||||||||||
Owner-occupied CRE | 1,328 | 428 | 292 | 418 | 572 | |||||||||||||||||
CRE investment | 305 | 181 | 53 | 478 | — | |||||||||||||||||
Construction & land development | 713 | 5,243 | 4,335 | 300 | 108 | |||||||||||||||||
Residential construction | 396 | 42 | — | 500 | 68 | |||||||||||||||||
Residential first mortgage | 265 | 488 | 167 | 397 | 56 | |||||||||||||||||
Residential junior mortgage | 166 | 459 | 136 | 811 | 347 | |||||||||||||||||
Retail & other | 39 | 7 | 92 | 829 | 16 | |||||||||||||||||
Total loans charged off | 3,507 | 9,401 | 6,292 | 5,427 | 4,185 | |||||||||||||||||
Recoveries of loans previously charged off: | ||||||||||||||||||||||
Commercial & industrial | 36 | 23 | 116 | 7 | 67 | |||||||||||||||||
Owner-occupied CRE | 300 | 3 | 5 | 23 | 27 | |||||||||||||||||
CRE investment | 27 | — | 33 | 76 | 211 | |||||||||||||||||
Construction & land development | 22 | 28 | — | — | 8 | |||||||||||||||||
Residential construction | — | — | — | — | 1 | |||||||||||||||||
Residential first mortgage | 11 | 10 | 40 | 7 | — | |||||||||||||||||
Residential junior mortgage | 6 | 1 | — | — | 2 | |||||||||||||||||
Retail & other | 1 | — | 1 | — | 4 | |||||||||||||||||
Total recoveries | 403 | 65 | 195 | 113 | 320 | |||||||||||||||||
Total net charge offs | 3,104 | 9,336 | 6,097 | 5,314 | 3,865 | |||||||||||||||||
Provision for loan losses | 4,325 | 6,600 | 8,500 | 6,000 | 4,028 | |||||||||||||||||
Ending balance of ALLL | $ | 7,120 | $ | 5,899 | $ | 8,635 | $ | 6,232 | $ | 5,546 | ||||||||||||
Ratios at the end of year: | ||||||||||||||||||||||
ALLL to total loans | 1.29 | % | 1.25 | % | 1.68 | % | 1.28 | % | 1.16 | % | ||||||||||||
ALLL to net charge offs | 229.38 | % | 63.2 | % | 141.6 | % | 117.3 | % | 143.5 | % | ||||||||||||
Net charge offs to average loans | 0.60 | % | 1.9 | % | 1.2 | % | 1.1 | % | .8 | % | ||||||||||||
Net loan charge-offs: | ||||||||||||||||||||||
Commercial & industrial | $ | 259 | $ | 2,530 | $ | 1,101 | $ | 1,687 | $ | 2,951 | ||||||||||||
Owner-occupied CRE | 1,028 | 425 | 287 | 395 | 545 | |||||||||||||||||
CRE investment | 278 | 181 | 20 | 402 | (211 | ) | ||||||||||||||||
Construction & land development | 691 | 5,215 | 4,335 | 300 | 100 | |||||||||||||||||
Residential construction | 396 | 42 | — | 500 | 67 | |||||||||||||||||
Residential first mortgage | 254 | 478 | 127 | 390 | 56 | |||||||||||||||||
Residential junior mortgage | 160 | 458 | 136 | 811 | 345 | |||||||||||||||||
Retail & other | 38 | 7 | 91 | 829 | 12 | |||||||||||||||||
Total net charge offs | $ | 3,104 | $ | 9,336 | $ | 6,097 | $ | 5,314 | $ | 3,865 |
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)
2012 | % of Loan Type to Total Loans | 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 | |||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
ALLL allocation | ||||||||||||||||||||||||||||||||||||||||||
Commercial & industrial | $ | 1,969 | 35.7 | % | $ | 1,965 | 32.6 | % | $ | 4,572 | 33.3 | % | $ | 2,849 | 30.0 | % | $ | 4,448 | 33.8 | % | ||||||||||||||||||||||
Owner-occupied CRE* | 1,069 | 21.4 | % | 347 | 23.5 | % | 556 | 24.0 | % | 799 | 29.3 | % | — | 29.2 | % | |||||||||||||||||||||||||||
CRE investment | 337 | 13.9 | % | 393 | 14.1 | % | 209 | 12.4 | % | 237 | 7.8 | % | 599 | 8.6 | % | |||||||||||||||||||||||||||
Construction & land development | 2,580 | 3.9 | % | 2,035 | 5.2 | % | 2,165 | 6.1 | % | 1,404 | 8.3 | % | 211 | 6.2 | % | |||||||||||||||||||||||||||
Residential construction* | 137 | 1.4 | % | 311 | 2.0 | % | 285 | 1.7 | % | 187 | 2.7 | % | — | 3.0 | % | |||||||||||||||||||||||||||
Residential first mortgage | 685 | 15.5 | % | 405 | 11.9 | % | 304 | 11.0 | % | 343 | 9.7 | % | 102 | 8.1 | % | |||||||||||||||||||||||||||
Residential junior mortgage* | 312 | 7.1 | % | 419 | 9.1 | % | 482 | 9.1 | % | 389 | 9.7 | % | — | 9.8 | % | |||||||||||||||||||||||||||
Retail & other | 31 | 1.1 | % | 24 | 1.6 | % | 62 | 2.4 | % | 24 | 2.5 | % | 186 | 1.3 | % | |||||||||||||||||||||||||||
Total ALLL | $ | 7,120 | 100.0 | % | $ | 5,899 | 100.0 | % | $ | 8,635 | 100.0 | % | $ | 6,232 | 100.0 | % | $ | 5,546 | 100.0 | % | ||||||||||||||||||||||
ALLL category as a percent of total ALLL: | ||||||||||||||||||||||||||||||||||||||||||
Commercial & industrial | 27.7 | % | 33.3 | % | 53.0 | % | 45.8 | % | 80.2 | % | ||||||||||||||||||||||||||||||||
Owner-occupied CRE | 15.0 | % | 5.9 | % | 6.4 | % | 12.8 | % | — | |||||||||||||||||||||||||||||||||
CRE investment | 4.7 | % | 6.6 | % | 2.4 | % | 3.8 | % | 10.8 | % | ||||||||||||||||||||||||||||||||
Construction & land development | 36.2 | % | 34.5 | % | 25.1 | % | 22.5 | % | 3.8 | % | ||||||||||||||||||||||||||||||||
Residential construction | 1.9 | % | 5.3 | % | 3.3 | % | 3.0 | % | — | |||||||||||||||||||||||||||||||||
Residential first mortgage | 9.6 | % | 6.9 | % | 3.5 | % | 5.5 | % | 1.8 | % | ||||||||||||||||||||||||||||||||
Residential junior mortgage | 4.4 | % | 7.1 | % | 5.6 | % | 6.2 | % | — | |||||||||||||||||||||||||||||||||
Retail & other | 0.5 | % | 0.4 | % | 0.7 | % | 0.4 | % | 3.4 | % | ||||||||||||||||||||||||||||||||
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. Owner-occupied CRE balances were included in total CRE investment, residential construction was included in total construction & land 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 measured for impairment include nonaccrual loans, troubled debt-restructurings (“restructured loans”), or other loans determined to be impaired by management. 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.
Nonperforming loans were $7,026, $9,476, and $10,803 at December 31, 2012, 2011, and 2010, respectively, reflecting the impact of the difficult economy on Nicolet’s borrowers, but exhibiting an improving trend given Nicolet’s aggressive workout efforts over the past three years. Total nonperforming
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loans at December 31, 2012 were down $2,450 since year end 2011, with improvements in commercial and industrial, CRE investment, construction and land development, and residential construction, offset partly by increases in nonaccruals of owner-occupied CRE, residential first mortgage and retail and other loan categories. Between year-end 2011 and 2010, total nonperforming loans were down $1,327, with commercial and industrial down $1,866, but CRE investment up $586 and residential first and junior mortgage nonaccruals combined up $479 as these real estate segments continued to exhibit signs of stress.
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 $11,593, $23,232, and $31,217 at December 31, 2012, 2011 and 2010, respectively, exhibiting an improving trend. As a percent of total loans, potential problem loans represented 2.2%, 4.9% and 6.1%, at December 31, 2012, 2011 and 2010, respectively. 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 $193 at December 31, 2012, compared to $641 at December 31, 2011, and $1,443 at December 31, 2010. The decreases in OREO during 2012 and 2011 were primarily attributable to sales of properties held. 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)
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Nonaccrual loans considered impaired: | ||||||||||||||||||||||
Commercial & industrial | $ | 784 | $ | 1,849 | $ | 3,715 | $ | 1,676 | $ | 422 | ||||||||||||
Owner-occupied CRE | 1,960 | 934 | 1,092 | 1,449 | — | |||||||||||||||||
CRE investment | — | 716 | 130 | 500 | 1,216 | |||||||||||||||||
Construction & land development | 2,560 | 3,367 | 3,331 | 2,378 | 4,729 | |||||||||||||||||
Residential construction | — | 1,480 | 1,380 | 1,748 | — | |||||||||||||||||
Residential first mortgage | 1,580 | 1,129 | 595 | 461 | 200 | |||||||||||||||||
Residential junior mortgage | — | — | 55 | — | 220 | |||||||||||||||||
Retail & other | 142 | 1 | 5 | — | 104 | |||||||||||||||||
Total nonaccrual loans considered impaired | 7,026 | 9,476 | 10,303 | 8,212 | 6,891 | |||||||||||||||||
Impaired loans still accruing interest | — | — | — | — | — | |||||||||||||||||
Accruing loans past due 90 days or more | — | — | 500 | — | — | |||||||||||||||||
Total nonperforming loans | $ | 7,026 | $ | 9,476 | $ | 10,803 | $ | 8,212 | $ | 6,891 | ||||||||||||
OREO | 193 | 641 | 1,443 | 1,370 | 9 | |||||||||||||||||
Total nonperforming assets | $ | 7,219 | $ | 10,117 | $ | 12,246 | $ | 9,582 | $ | 6,900 | ||||||||||||
Total restructured loans accruing | — | — | — | — | — | |||||||||||||||||
Ratios | ||||||||||||||||||||||
Nonperforming loans to total loans | 1.3 | % | 2.0 | % | 2.1 | % | 1.7 | % | 1.4 | % | ||||||||||||
Nonperforming loans to total loans plus OREO | 1.3 | % | 2.0 | % | 2.1 | % | 1.7 | % | 1.4 | % | ||||||||||||
Nonperforming loans to total assets | 0.9 | % | 1.4 | % | 1.6 | % | 1.2 | % | 1.0 | % | ||||||||||||
ALLL to nonperforming loans | 101.3 | % | 62.3 | % | 79.9 | % | 75.9 | % | 80.5 | % | ||||||||||||
ALLL to total loans at end of year | 1.3 | % | 1.2 | % | 1.7 | % | 1.3 | % | 1.2 | % | ||||||||||||
Nonperforming assets by type: | ||||||||||||||||||||||
Commercial & industrial | $ | 784 | $ | 1,745 | $ | 4,215 | $ | 1,676 | $ | 422 | ||||||||||||
Owner-occupied CRE | 1,960 | 934 | 1,092 | 1,449 | — | |||||||||||||||||
CRE investment | — | 716 | 130 | 500 | 1,216 | |||||||||||||||||
Construction & land development | 2,560 | 3,367 | 3,331 | 2,378 | 4,729 | |||||||||||||||||
Residential construction | — | 1,480 | 1,380 | 1,748 | — | |||||||||||||||||
Residential first mortgage | 1,580 | 1,129 | 595 | 461 | 200 | |||||||||||||||||
Residential junior mortgage | — | 105 | 55 | — | 220 | |||||||||||||||||
Retail & other | 142 | — | 5 | — | 104 | |||||||||||||||||
Total nonperforming loans | $ | 7,026 | $ | 9,476 | $ | 10,803 | $ | 8,212 | $ | 6,891 | ||||||||||||
Commercial real estate owned | $ | 71 | $ | 566 | $ | 1,368 | $ | 1,255 | $ | 9 | ||||||||||||
Residential real estate owned | 122 | 75 | 75 | 115 | — | |||||||||||||||||
Total other real estate owned | $ | 193 | $ | 641 | $ | 1,443 | $ | 1,370 | $ | 9 | ||||||||||||
Total nonperforming assets | $ | 7,219 | $ | 10,117 | $ | 12,246 | $ | 9,582 | $ | 6,900 |
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)
2012 | 2011 | 2010 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Interest income in accordance with original terms | $ | 1,008 | $ | 1,390 | $ | 1,004 | ||||||||
Interest income recognized | (236 | ) | (220 | ) | (415 | ) | ||||||||
Reduction in interest income | $ | 772 | $ | 1,170 | $ | 589 |
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.
Table 12: Investment Securities Portfolio
As of December 31,
(dollars in thousands)
As of December 31,
(dollars in thousands)
2012 | 2011 | 2010 | |||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Amortized Cost | Fair Value | % of Total | Amortized Cost | Fair Value | % of Total | Amortized Cost | Fair Value | % of Total | |||||||||||||||||||||||||||||||
State, county and municipals | $ | 31,642 | $ | 32,687 | 58 | % | $ | 30,130 | $ | 31,848 | 56 | % | $ | 29,897 | $ | 31,109 | 59 | % | |||||||||||||||||||||
Mortgage-backed securities | 19,876 | 20,668 | 37 | % | 17,450 | 18,484 | 33 | % | 16,852 | 17,407 | 33 | % | |||||||||||||||||||||||||||
U.S. Government sponsored enterprises | — | — | —% | 4,995 | 5,020 | 9 | % | 2,502 | 2,499 | 5 | % | ||||||||||||||||||||||||||||
Equity securities | 1,624 | 2,546 | 5 | % | 1,624 | 1,407 | 2 | % | 1,624 | 1,373 | 3 | % | |||||||||||||||||||||||||||
Total | $ | 53,142 | $ | 55,901 | 100 | % | $ | 54,199 | $ | 56,759 | 100 | % | $ | 50,875 | $ | 52,388 | 100 | % |
At December 31, 2012, the total carrying value of investment securities was $55,901, down slightly from $56,759 at December 31, 2011 and represented 7.5% and 8.4% of total assets at December 31, 2012 and 2011, respectively. Primarily due to weak investment returns, in 2012, Nicolet retained specific high quality residential mortgages, and 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, 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.
In addition to securities available-for-sale, Nicolet had other investments of $5,221 and $5,211 at December 31, 2012 and 2011, 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. There were no OTTI charges recorded in 2012, however, OTTI charges recorded in 2011 and 2010 related to one private equity security classified in other investments and were $128 and $428, respectively.
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Table 13: Investment Securities Portfolio Maturity Distribution
As of December 31, 2012
(dollars in thousands)
As of December 31, 2012
(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 | |||||||||||||||||||||||||||||||||||||||||||
State and county municipals | $ | 4,330 | 5.7 | % | $ | 20,532 | 4.1 | % | $ | 6,405 | 2.8 | % | $ | 375 | 1.0 | % | $ | — | —% | $ | 31,642 | 4.0 | % | $ | 32,687 | ||||||||||||||||||||||||||||||
Mortgage-backed securities | — | — | — | — | — | — | — | — | 19,876 | 2.8 | 19,876 | 2.8 | % | 20,668 | |||||||||||||||||||||||||||||||||||||||||
Equity securities | — | — | — | — | — | — | — | — | 1,624 | — | 1,624 | — | 2,546 | ||||||||||||||||||||||||||||||||||||||||||
Total amortized cost | $ | 4,330 | 5.7 | % | $ | 20,532 | 4.1 | % | $ | 6,405 | 2.8 | % | $ | 375 | 1.0 | % | $ | 21,500 | 2.8 | % | $ | 53,142 | 3.5 | % | $ | 55,901 | |||||||||||||||||||||||||||||
Total fair value and carrying value | $ | 4,429 | $ | 21,404 | $ | 6,479 | $ | 375 | $ | 23,214 | $ | 55,901 |
(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.
Table 14: Deposits
At December 31,
(dollars in thousands)
At December 31,
(dollars in thousands)
2012 | 2011 | 2010 | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Amount | % of Total | Amount | % of Total | Amount | % of Total | ||||||||||||||||||||||
Demand | $ | 108,234 | 17.6 | % | $ | 78,154 | 14.2 | % | $ | 68,202 | 12.2 | % | |||||||||||||||
Money market and NOW accounts | 322,507 | 52.3 | % | 270,739 | 49.1 | % | 213,044 | 38.2 | % | ||||||||||||||||||
Savings | 46,907 | 7.6 | % | 21,781 | 3.9 | % | 13,600 | 2.4 | % | ||||||||||||||||||
Time | 138,445 | 22.5 | % | 180,862 | 32.8 | % | 263,618 | 47.2 | % | ||||||||||||||||||
Total | $ | 616,093 | 100.0 | % | $ | 551,536 | 100.0 | % | $ | 558,464 | 100.0 | % |
Total deposits were $616,093 at December 31, 2012, up $64,557 from December 31, 2011. Brokered deposits declined $5,969 since year end 2011, as maturing brokered CDs exceeded renewals due to strong customer deposit growth during 2012. On average for the year, total deposits were $545,896, an increase of $23,599 over 2011, with customer deposit growth more than exceeding the decline in average brokered deposits (down $23,546 on average between 2012 and 2011). The mix of average deposits was impacted by a continued shift in customer preferences, predominantly away from time deposits.
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 largely in response to deposit growth initiatives, new product offerings and deposit features. Excluding brokered deposits, deposits were $512,927, up $40,526 over year-end 2010. 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 the 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)
2012 | 2011 | 2010 | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Amount | % of Total | Amount | % of Total | Amount | % of Total | ||||||||||||||||||||||
Demand | $ | 80,971 | 14.8 | % | $ | 67,787 | 13.0 | % | $ | 57,647 | 10.9 | % | |||||||||||||||
Money market and NOW accounts | 257,862 | 47.2 | % | 219,817 | 42.1 | % | 192,462 | 36.3 | % | ||||||||||||||||||
Savings | 33,046 | 6.1 | % | 16,829 | 3.2 | % | 12,273 | 2.3 | % | ||||||||||||||||||
Time | 174,017 | 31.9 | % | 217,864 | 41.7 | % | 268,301 | 50.5 | % | ||||||||||||||||||
Total | $ | 545,896 | 100.0 | % | $ | 522,297 | 100.0 | % | $ | 530,683 | 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)
2012 | 2011 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
3 months or less | $ | 17,385 | $ | 36,871 | ||||||
Over 3 months through 6 months | 5,798 | 8,361 | ||||||||
Over 6 months through 12 months | 10,728 | 25,645 | ||||||||
Over 12 months | 34,552 | 22,213 | ||||||||
Total | $ | 68,463 | $ | 93,090 |
Other Funding Sources
Other funding sources, which include short-term and long-term borrowings, were $45,376 and $45,691 at December 31, 2012 and 2011, respectively. Short-term borrowings, consisting mainly of customer repurchase agreements, totaled $4,035 at December 31, 2012 and $4,132 at December 31, 2011. Long-term borrowings include a joint venture note and FHLB advances, totaling $35,155 at December 31, 2012, down $219 from December 31, 2011 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, 2012, and further discussion of the terms of the joint venture note is included in Note 7, “Notes Payable” of the Notes to Consolidated Financial Statements for December 31, 2012.
Off-Balance Sheet Obligations
As of December 31, 2012 and 2011, 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)
2012 | 2011 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Commitments to extend credit — Fixed and variable rate | $ | 178,676 | $ | 158,261 | ||||||
Standby and irrevocable letters of credit-fixed rate | 4,050 | 6,631 |
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, 2012
(dollars in thousands)
As of December 31, 2012
(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 | 10,155 | 233 | 9,922 | — | — | ||||||||||||||||||
FHLB borrowings | 25,000 | 10,000 | 15,000 | — | — | ||||||||||||||||||
Total long-term borrowing obligations | $ | 41,341 | $ | 10,233 | $ | 24,922 | $ | — | $ | 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 $10,155 and $10,374 as of December 31, 2012 and 2011, 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 $7,200 of the $55,901 investment securities portfolio on hand at December 31, 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 December 31, 2012 and 2011 were approximately $82,000 and $92,100, respectively. The increased cash and cash equivalents when compared to historical levels was predominantly due to strong customer deposit growth outpacing the loan demand. Nicolet’s liquidity resources were sufficient as of December 31, 2012 to fund loans and to meet other cash needs as necessary.
Interest Rate Sensitivity Gap Analysis
Table 19 represents a schedule of Nicolet’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, 2012 | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
0-90 Days | 91-180 Days | 181-365 Days | 1-5 years | Beyond 5 Years | Total | ||||||||||||||||||||||
Earning Assets: | |||||||||||||||||||||||||||
Loans | $ | 261,825 | $ | 37,106 | $ | 26,766 | $ | 173,057 | $ | 46,727 | $ | 545,481 | |||||||||||||||
Securities at fair value | 1,068 | 881 | 3,823 | 26,274 | 23,855 | 55,901 | |||||||||||||||||||||
Other earnings assets | 59,167 | — | — | — | 5,483 | 64,650 | |||||||||||||||||||||
Total | $ | 322,060 | $ | 37,987 | $ | 30,589 | $ | 199,331 | $ | 76,065 | $ | 666,032 | |||||||||||||||
Cumulative rate sensitive assets | $ | 322,060 | $ | 360,047 | $ | 390,636 | $ | 589,967 | $ | 666,032 | |||||||||||||||||
Interest-bearing liabilities | |||||||||||||||||||||||||||
Interest bearing deposits | $ | 394,453 | $ | 12,465 | $ | 26,601 | $ | 74,335 | $ | 5 | $ | 507,859 | |||||||||||||||
Borrowings | 4,267 | 5,255 | 5,510 | 4,080 | 20,078 | 39,190 | |||||||||||||||||||||
Subordinated debentures | 774 | 774 | 1,548 | 3,090 | — | 6,186 | |||||||||||||||||||||
Total | $ | 399,494 | $ | 18,494 | $ | 33,659 | $ | 81,505 | $ | 20,083 | $ | 553,235 | |||||||||||||||
Cumulative interest sensitive liabilities | $ | 399,494 | $ | 417,988 | $ | 451,647 | $ | 533,152 | $ | 553,235 | |||||||||||||||||
Interest sensitivity gap | $ | (77,434 | ) | $ | 19,493 | $ | (3,070 | ) | $ | 117,826 | $ | 55,982 | |||||||||||||||
Cumulative interest sensitivity gap | $ | (77,434 | ) | $ | (57,941 | ) | $ | (61,011 | ) | $ | 56,815 | $ | 112,797 | ||||||||||||||
Cumulative ratio of rate sensitive assets to rate sensitive liabilities | 81 | % | 86 | % | 86 | % | 111 | % | 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, 2012, net interest income was estimated to decrease 3.41% if rates increase 100 bps, and was estimated to decrease 1.43% in a 100 bps declining rate environment assumption. 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, however, as rates remain low and asset maturities extend while deposit maturities contract, this position is beginning to worsen. 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’s management 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.
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 2012 and 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, 2012, 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 amounts and ratios as of December 31, 2012 and 2011 are presented in the following table.
Table 20: Capital
(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 December 31, 2012 | |||||||||||||||||||||||||||
Nicolet | |||||||||||||||||||||||||||
Total capital | $ | 85,738 | 15.2 | % | $ | 45,098 | 8.0 | % | N/A | N/A | |||||||||||||||||
Tier I capital | 78,691 | 14.0 | % | 22,549 | 4.0 | % | N/A | N/A | |||||||||||||||||||
Leverage | 78,691 | 11.0 | % | 28,622 | 4.0 | % | N/A | N/A | |||||||||||||||||||
Nicolet National Bank | |||||||||||||||||||||||||||
Total capital | $ | 77,500 | 14.1 | % | $ | 43,984 | 8.0 | % | $ | 54,981 | 10.0 | % | |||||||||||||||
Tier I capital | 70,624 | 12.8 | % | 21,992 | 4.0 | % | 32,988 | 6.0 | % | ||||||||||||||||||
Leverage | 70,624 | 10.1 | % | 27,916 | 4.0 | % | 34,895 | 5.0 | % | ||||||||||||||||||
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 | % |
(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 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, 2012, Nicolet National Bank could pay dividends of approximately $2,850 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, 2012 and 2011.
Table 21: Selected Quarterly Financial Data
(dollars in thousands, except per share data)
(dollars in thousands, except per share data)
2012 Quarter Ended | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31, | September 30, | June 30, | March 31, | ||||||||||||||||
Interest income | $ | 7,735 | $ | 7,212 | $ | 6,943 | $ | 6,905 | |||||||||||
Interest expense | 1,523 | 1,563 | 1,608 | 1,836 | |||||||||||||||
Net interest income | 6,212 | 5,649 | 5,335 | 5,069 | |||||||||||||||
Provision for loan losses | 975 | 975 | 1,125 | 1,250 | |||||||||||||||
Noninterest income | 2,759 | 2,684 | 2,677 | 2,624 | |||||||||||||||
Noninterest expense | 6,340 | 5,928 | 6,009 | 5,785 | |||||||||||||||
Net income | 937 | 965 | 632 | 502 | |||||||||||||||
Net income available to common shareholders | 632 | 660 | 327 | 197 | |||||||||||||||
Basic and diluted earnings per common share | 0.18 | 0.19 | 0.09 | 0.07 |
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 shareholders | 203 | (321 | ) | (36 | ) | 182 | |||||||||||||
Basic and diluted earnings (loss) per common share | 0.06 | (0.09 | ) | (0.01 | ) | 0.05 |
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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 132.
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 stoc k 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 | — | — | 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 | — | — | 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 | — | — | 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 | — | — | 18.00 | 12/13/2015 | ||||||||||||||||||||||||||||||||||
44,444 | 11,111 | (1) | — | 18.00 | 12/13/2015 | ||||||||||||||||||||||||||||||||||
— | 64,500 | (2) | — | 16.50 | 4/10/2022 | ||||||||||||||||||||||||||||||||||
19,550 | (7) (8) | 322,575 | — | — | |||||||||||||||||||||||||||||||||||
Michael E. Daniels | 79,570 | — | — | 18.00 | 12/13/2015 | ||||||||||||||||||||||||||||||||||
44,444 | 11,111 | (1) | — | 18.00 | 12/13/2015 | ||||||||||||||||||||||||||||||||||
— | 64,500 | (2) | — | 16.50 | 4/10/2022 | ||||||||||||||||||||||||||||||||||
19,550 | (7) (8) | 322,575 | — | — | |||||||||||||||||||||||||||||||||||
Ann K. Lawson | 12,000 | 8,000 | (3) | — | 16.00 | 2/2/2019 | |||||||||||||||||||||||||||||||||
6,000 | 4,000 | (4) | — | 16.80 | 12/15/2019 | ||||||||||||||||||||||||||||||||||
355 | 710 | (5) | — | 16.50 | 4/10/2012 | ||||||||||||||||||||||||||||||||||
145 | 3,790 | (6) | — | 16.50 | 4/10/2022 | ||||||||||||||||||||||||||||||||||
1,650 | (9) | 27,225 | — | — |
(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.
Effective simultaneously with, and contingent upon, the closing of the merger, Nicolet plans to consummate a private placement of up to 200,000 shares of common stock to members of its board of directors and to advisory directors who are also “accredited investors,” as that term is defined in Rule 501 of the Securities Act. The shares will be offered and sold at a price of $16.50 per share, which is the value attributed to the Nicolet common stock for purposes of the merger and also reflects its current market price. Nicolet currently anticipates that the $3.3 million in anticipated proceeds will be contributed as capital to Nicolet National Bank. See “The Merger Agreement — Regulatory and Other Required Approvals” on page 68.
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 December 31, 2012, Mid-Wisconsin had total consolidated assets of approximately $454 million, total consolidated deposits of approximately $354 million, total consolidated gross loans of approximately $296 million, and consolidated shareholders’ equity of approximately $36 million.
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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 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
2013 | ||||||||||
First Quarter (through March 18 , 2013) | $ | 5.60 | $ | 5.00 | ||||||
2012 | ||||||||||
First Quarter | $ | 4.75 | $ | 4.05 | ||||||
Second Quarter | $ | 6.50 | $ | 4.50 | ||||||
Third Quarter | $ | 6.00 | $ | 5.20 | ||||||
Fourth Quarter | $ | 5.89 | $ | 3.85 | ||||||
2011 | ||||||||||
First Quarter | $ | 8.75 | $ | 7.85 | ||||||
Second Quarter | $ | 11.00 | $ | 7.77 | ||||||
Third Quarter | $ | 8.00 | $ | 4.75 | ||||||
Fourth Quarter | $ | 5.25 | $ | 4.00 |
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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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF MID-WISCONSIN
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF MID-WISCONSIN
The following management’s discussion and analysis reviews significant factors with respect to Mid-Wisconsin’s consolidated financial condition at December 31, 2012 and 2011, and results of operations for the three-year period ended December 31, 2012. This discussion should be read in conjunction with the consolidated financial statements, notes, and tables presented elsewhere in this joint proxy statement-prospectus.
Forward-Looking Statements
Statements made in this joint proxy statement-prospectus and in documents that are not purely forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, including any statements regarding descriptions of management’s plans, objectives, or goals for future operations, products or services, and forecasts of revenues, earnings, or other measures of performance. Forward-looking statements are based on current management expectations and, by their nature, are subject to risks and uncertainties. These statements generally may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “should,” “will,” “intend,” or similar expressions. Shareholders should note that many factors, some of which are discussed elsewhere in this document, could affect the future financial results of Mid-Wisconsin and could cause those results to differ materially from those expressed in forward-looking statements contained in this document. These factors, many of which are beyond Mid-Wisconsin’s control, include, but are not necessarily limited to the following:
• | operating, legal and regulatory risks, including the effects of the Dodd-Frank Act and regulations promulgated thereunder, as well as the rules proposed by the federal bank regulatory agencies to implement the Basel III capital accord; |
• | economic, political and competitive forces affecting Mid-Wisconsin’s banking and wealth management businesses; |
• | changes in monetary policy and general economic conditions, which may impact Mid-Wisconsin’s net interest income; and |
• | the risk that Mid-Wisconsin’s analyses of these risks, and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful |
These factors should be considered in evaluating the forward-looking statements, and you should not place undue reliance on such statements. Mid-Wisconsin specifically disclaims any obligation to update factors or to publicly announce the results of revisions to any of the forward-looking statements or comments included herein to reflect future events or developments.
Critical Accounting Policies
Mid-Wisconsin’s audited December 31, 2012 year-end financial statements are prepared in conformity with GAAP and follow general practices within the industry in which it operates. 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. Mid-Wisconsin believes the following policies are important to the portrayal of its financial condition and require subjective or complex judgments and, therefore, are critical accounting policies.
Investment Securities: The fair value of Mid-Wisconsin’s investment securities is important to the presentation of the consolidated financial statements since the investment securities are carried on the consolidated balance sheet at fair value. Mid-Wisconsin utilizes a third party vendor to assist in the
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determination of the fair value of its investment portfolio. Adjustments to the fair value of the investment portfolio impact Mid-Wisconsin’s consolidated financial condition by increasing or decreasing assets and shareholders’ equity, and possibly earnings. Declines in the fair value of investment securities below their cost that are deemed to be OTTI are reflected in earnings as realized losses and assigned a new cost basis. In estimating OTTI, Mid-Wisconsin’s management considers many factors, which include: (i) the length of time and the extent to which fair value has been less than cost; (ii) the financial condition and near-term prospects of the issuer; and (iii) Mid-Wisconsin’s intent and ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. To determine OTTI, management utilizes a discounted cash flow model to estimate the fair value of the security. The use of a discounted cash flow model involves judgment, particularly of interest rates, estimated default rates and prepayment speeds.
Allowance for Loan Losses (“ALLL”): Management’s evaluation process used to determine the adequacy of the ALLL is subject to the use of estimates, assumptions, and judgments. The allocation methodology focuses on evaluation of several factors, including but not limited to: (i) the establishment of specific reserve allocations on impaired credits where a high risk of loss is anticipated but not yet realized; (ii) consideration of historical loss rates and delinquency experience on each portfolio segment; (iii) management’s ongoing review and grading of the loan portfolio; (iv) trends in past due and nonperforming loans; (v) the risk characteristics of the various classifications of loans; (vii) 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. The total allowance is available to absorb losses from any segment of the portfolio.
Management believes that the level of the ALLL is appropriate at December 31, 2012. While management uses available information to recognize losses on loans, future changes to the ALLL may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review Mid-Wisconsin’s ALLL. Such agencies may require Mid-Wisconsin to make additions to the ALLL and to charge-off certain loan balances or to downgrade loans 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.
OREO: OREO is comprised of real estate acquired through or in lieu of a foreclosure proceeding. OREO is recorded at the lower of the recorded investment in the loan at the time of acquisition or the fair value of the underlying property value, less estimated selling costs. There are uncertainties as to the price Mid-Wisconsin may ultimately receive on the sale of the properties, potential property valuation allowances due to declines in the fair values, and the carrying costs of properties for expenses such as utilities, real estate taxes, and other ongoing expenses that may affect future earnings.
Income taxes: Mid-Wisconsin recognizes expense for federal and state income taxes currently payable as well as for deferred federal and state taxes for estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the consolidated balance sheets, as well as loss carryforwards and tax credit carryforwards. Realization of deferred tax assets is dependent upon Mid-Wisconsin generating sufficient taxable income in either the carryforward or carryback periods to cover net operating losses generated by the reversal of temporary differences. A valuation allowance is provided by way of a charge to income tax expense if it is determined that it is more likely than not that some portion or all of the deferred tax asset will not be realized. If different assumptions and conditions were to prevail, the valuation allowance may not be adequate to absorb unrealized deferred taxes and the amount of income taxes payable may need to be adjusted by way of a charge or credit to expense. Furthermore, income tax returns are subject to audit by the Internal Revenue Service and state taxing authorities. Income tax expense for current and prior periods is subject to adjustment based upon the outcome of such audits. Mid-Wisconsin believes it has adequately accrued for all probable income taxes payable and provided valuation allowances for deferred tax assets. Accrual of income taxes payable and valuation allowances against deferred tax assets are estimates subject to change based upon the outcome of future events.
All remaining information included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are shown in thousands of dollars, except per share data.
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RESULTS OF OPERATIONS
Overview
Mid-Wisconsin reported a net loss available to common shareholders of $3,619, or $2.18 per common share, for the year ended December 31, 2012, compared to a net loss available to common shareholders of $4,601, or $2.78 per common share, for the year ended December 31, 2011.
Key financial data includes:
• | Mid-Wisconsin’s results for 2012 were negatively impacted by the establishment of a full valuation allowance of $5,315 against its remaining net deferred tax asset. At December 31, 2011, management had determined that a valuation allowance relating to a portion of Mid-Wisconsin’s net deferred tax asset was necessary and accordingly, a partial valuation allowance of $3,081 was recognized. Continuing losses and general uncertainty surrounding future economic and business conditions contributed to management’s determination to establish the full valuation allowance in 2012. |
• | The provision for loan losses was $4,430 for 2012 compared to $4,750 for 2011. The provision was negatively impacted by changes to the historical loss rates and changes made in the values assigned to qualitative factors utilized by management in the calculation of the ALLL during 2012. |
• | Net charge-offs were $4,668 for 2012, compared to $4,405 for 2011. Mid-Wisconsin Bank’s ratio of the ALLL to total loans at December 31, 2012 was 3.24% compared to 2.98% at December 31, 2011. |
• | Net interest income was $14,768 at December 31, 2012, a decrease of 5% from 2011. The net interest margin percentage for 2012 was 3.31%, a decrease from 3.38% at December 31, 2011. The net interest margin remained stressed as assets matured, current reinvestment rates remained substantially lower than previous rates, and there was less opportunity to offset the future impact of the decline in income earned on assets as rates paid on liabilities approached 0%. The average yield on earning assets was 4.36% at December 31, 2012 compared to 4.76% at December 31, 2011. The cost of interest-bearing liabilities was 1.28% for 2012 compared to 1.68% for 2011. |
• | Loans were $295,622 at December 31, 2012, which represented a decrease of $34,241 from December 31, 2011. Much of this decrease was the result of a continued lack of demand for loans in Mid-Wisconsin’s market areas and levels of charge-offs coupled with the regular pay downs and pay-offs of existing loans. Increased competition for creditworthy borrowers continues to adversely impact profits and Mid-Wisconsin Bank’s ability to attract and retain creditworthy borrowers. |
• | Total deposits were $354,497 at December 31, 2012, down $27,123 from December 31, 2011, primarily due to the loss of one large deposit customer, decreased time deposits and Mid-Wisconsin’s continued efforts to reduce noncore funding sources. |
• | Noninterest income for 2012 was $3,953. Excluding a legal settlement of $500, noninterest income was $3,787 for 2011. The increase between periods was due to mortgage banking income from the sales of residential real estate loans into the secondary market and an increase in other income from the recovery of fees from charged-off loans. These increases were offset in part by a decline in service fees of $106 primarily due to a general decrease in the amount of non-sufficient funds (“NSF”)/overdraft fees resulting from regulatory changes under the Dodd-Frank Act. |
• | Noninterest expense for 2012, excluding foreclosure/OREO expense and legal and professional fees, decreased $1,991, or 13%, to $13,448, compared to 2011, primarily due to decreased salaries and employee benefits, occupancy expenses, data processing costs, FDIC expense and marketing expenses. Foreclosure/OREO expense was $1,284 for 2012 compared to $857 for 2011, primarily due to greater valuation adjustments on OREO properties and higher net losses on the sales of various foreclosed OREO properties. Legal and professional fees were $1,226 for 2012 compared to $891 for 2011 due to expenses related with the heightened levels of nonperforming assets and higher legal and consulting expenses related to the pending merger. |
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• | As of December 31, 2012, Mid-Wisconsin Bank’s tier one capital leverage ratio was 8.9% and total risk-based capital ratio was 15.2%, compared to 8.7% and 14.2%, respectively, at December 31, 2011. Mid-Wisconsin’s tier one capital leverage ratio was 9.6% and total risk-based capital ratio was 16.3%, compared to 9.6% and 15.6%, respectively, at December 31, 2011. All ratios are above the regulatory guidelines stipulated in Mid-Wisconsin Bank’s and Mid-Wisconsin’s agreements with their primary regulators. |
Net Interest Income
Earnings are substantially dependent on net interest income, which is the difference between interest earned on investments and loans and the interest paid on deposits and other interest-bearing liabilities. 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 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 2012 versus 2011
The following table sets forth information regarding average balances, interest income or interest expense, and the average rates earned or paid for each of Mid-Wisconsin’s major asset, liabilities and shareholders’ equity categories for the years ended December 31, 2012, 2011, and 2010. Effective for 2012, interest income on tax-exempt loans and tax-exempt securities has not been adjusted to reflect the tax equivalent basis, since Mid-Wisconsin does not expect to realize all of the tax benefits associated with these securities.
Table 1: Average Balance Sheet and Net Interest Income Analysis
Years Ended December 31, | |||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2012 | 2011 | 2010 | |||||||||||||||||||||||||||||||||||||
Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | |||||||||||||||||||||||||||||||
($ in thousands) | |||||||||||||||||||||||||||||||||||||||
ASSETS | �� | ||||||||||||||||||||||||||||||||||||||
Earnings assets | |||||||||||||||||||||||||||||||||||||||
Loans (1) (2) (3) | $ | 318,174 | $ | 16,965 | 5.33 | % | $ | 338,607 | $ | 18,980 | 5.61 | % | $ | 355,575 | $ | 21,391 | 6.02 | % | |||||||||||||||||||||
Investment securities: | |||||||||||||||||||||||||||||||||||||||
Taxable | 96,220 | 2,003 | 2.08 | % | 93,511 | 2,563 | 2.74 | % | 85,925 | 3,216 | 3.74 | % | |||||||||||||||||||||||||||
Tax-exempt (2) | 11,291 | 345 | 3.06 | % | 12,357 | 597 | 4.83 | % | 10,003 | 544 | 5.43 | % | |||||||||||||||||||||||||||
Federal funds sold | 1,516 | 2 | 0.13 | % | 12,296 | 16 | 0.13 | % | 17,182 | 26 | 0.15 | % | |||||||||||||||||||||||||||
Securities purchased under agreements to sell | — | — | 0.00 | % | 8,065 | 108 | 1.34 | % | 3,833 | 65 | 1.70 | % | |||||||||||||||||||||||||||
Other interest-earning assets | 18,343 | 90 | 0.49 | % | 3,512 | 39 | 1.11 | % | 6,160 | 64 | 1.04 | % | |||||||||||||||||||||||||||
Total earning assets | $ | 445,544 | $ | 19,405 | 4.36 | % | $ | 468,348 | $ | 22,303 | 4.76 | % | $ | 478,678 | $ | 25,306 | 5.29 | % | |||||||||||||||||||||
Cash and due from banks | 12,880 | 7,857 | 7,789 | ||||||||||||||||||||||||||||||||||||
Other assets | 22,887 | 26,737 | 27,797 | ||||||||||||||||||||||||||||||||||||
Allowance for loan losses | (10,242 | ) | (9,256 | ) | (8,667 | ) | |||||||||||||||||||||||||||||||||
Total assets | $ | 471,069 | $ | 493,686 | $ | 505,597 | |||||||||||||||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities | |||||||||||||||||||||||||||||||||||||||
Interest-bearing demand | $ | 38,715 | $ | 105 | 0.27 | % | $ | 35,785 | $ | 164 | 0.46 | % | $ | 35,100 | $ | 205 | 0.59 | % | |||||||||||||||||||||
Savings deposits | 121,610 | 591 | 0.49 | % | 116,802 | 902 | 0.77 | % | 107,622 | 1,074 | 1.00 | % | |||||||||||||||||||||||||||
Time deposits | 138,606 | 2,166 | 1.56 | % | 169,825 | 3,500 | 2.06 | % | 199,942 | 5,123 | 2.56 | % | |||||||||||||||||||||||||||
Short-term borrowings | 14,977 | 78 | 0.52 | % | 12,285 | 123 | 1.00 | % | 10,410 | 95 | 0.91 | % | |||||||||||||||||||||||||||
Long-term borrowings | 37,001 | 1,499 | 4.05 | % | 41,273 | 1,614 | 3.91 | % | 42,561 | 1,670 | 3.92 | % | |||||||||||||||||||||||||||
Subordinated debentures | 10,310 | 198 | 1.92 | % | 10,310 | 183 | 1.77 | % | 10,310 | 595 | 5.77 | % | |||||||||||||||||||||||||||
Total interest-bearing liabilities | $ | 361,219 | $ | 4,637 | 1.28 | % | $ | 386,280 | $ | 6,486 | 1.68 | % | $ | 405,945 | $ | 8,762 | 2.16 | % | |||||||||||||||||||||
Noninterest-bearing demand deposits | 68,464 | 61,798 | 52,208 | ||||||||||||||||||||||||||||||||||||
Other liabilities | 3,261 | 2,635 | 3,468 | ||||||||||||||||||||||||||||||||||||
Stockholders’ equity | 38,125 | 42,973 | 43,976 | ||||||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 471,069 | $ | 493,686 | $ | 505,597 | |||||||||||||||||||||||||||||||||
Net interest income and rate spread | $ | 14,768 | 3.08 | % | $ | 15,817 | 3.08 | % | $ | 16,544 | 3.13 | % | |||||||||||||||||||||||||||
Net interest margin | 3.31 | % | 3.38 | % | 3.46 | % |
(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 for the 2011 and 2010 periods. |
(3) | Interest income includes loan fees of $313 in 2012, $317 in 2011, and $387 in 2010. |
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Net interest income for 2012 was $14,768, down from taxable-equivalent net interest income of $15,817 for 2011. The decrease in net interest income was primarily attributable to unfavorable interest rate variances of $702 resulting from the impact of changes in the interest rate environment and product pricing and unfavorable volume variances of $347 due to changes in the balances and mix of interest earning assets and interest-bearing liabilities.
The net interest margin for 2012 was 3.31%, a decrease from the taxable-equivalent net interest margin of 3.38% in 2011. Yields on earning assets have declined year-over-year as elevated levels of liquidity have been reinvested in lower-yielding investment securities and interest-bearing deposits at other financial institutions and levels of nonaccrual loans remain above historical averages. The reduction in asset yields was offset by the decline in the cost of interest-bearing deposits due to a lower interest rate environment.
For 2012, the yield on earning assets of 4.36% was 40 basis points (“bps”) lower than 2011. Loan yields decreased 28 bps, to 5.33%, due to the impact of higher levels of nonaccrual loans, lower interest rates on the repricing of adjustable rate loans, soft loan demand, and competitive pricing pressures to retain and/or obtain creditworthy borrowers. The weighted-average yield on other earning assets decreased 64 bps to 1.92%, impacted by Mid-Wisconsin’s excess liquidity position as a result of soft loan demand being invested in lower-yielding assets.
The cost of interest-bearing liabilities of 1.28% for 2012 was 40 bps lower than 2011. The weighted-average cost of interest-bearing deposits was 0.96%, down 46 bps from 2011, while the weighted-average cost of wholesale funding (comprised of short-term borrowings and long-term borrowings) decreased 21 bps to 3.03% for 2012. Mid-Wisconsin’s subordinated debenture has $10,310 outstanding and a floating rate equal to the three-month LIBOR plus 1.43%, adjusted quarterly. The interest rate on the subordinated debentures at December 31, 2012 was 1.74%.
Average earning assets of $445,544 for 2012 were $22,804 lower than 2011. Average investment securities increased $1,643 to $107,511, reflecting Mid-Wisconsin’s excess liquidity position invested in lower-yielding assets rather than loans. Other interest-earning assets (comprised of federal funds sold, securities purchased under agreements to sell, and other interest-earning assets) decreased $4,014 to $19,859, due to the decrease in total average interest-bearing deposits and long-term borrowings. Due to the reduced liquidity needs, long-term borrowings have not been renewed as they mature. Interest income in 2012 of $19,405 decreased $2,898 from 2011 of which $1,080 of such decrease was due to unfavorable volume changes and $1,818 was due to unfavorable rate changes.
Average interest-bearing liabilities of $361,219 for 2012 were down $25,061 compared to 2011. Average interest-bearing deposits decreased $23,481 while noninterest-bearing deposits increased $6,666. Total average borrowings decreased $1,580 to $51,978.
For 2012, interest expense decreased $1,849 from the related 2011 amount of which $1,116 of such decrease was due to favorable rate changes and $733 was due to favorable volume changes. Management continues to manage the liability side of the net interest margin by adjusting short-term deposit rates to market.
Table 2: Volume/Rate Variance
2012 vs. 2011 | 2011 vs. 2010 | ||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Volume | Due to Rate (1) | Net | Volume | Due to Rate (1) | Net | ||||||||||||||||||||||
($ in thousands) | |||||||||||||||||||||||||||
Loans (2) | ($1,146 | ) | ($869 | ) | ($2,015 | ) | ($1,021 | ) | ($1,390 | ) | ($2,411 | ) | |||||||||||||||
Taxable investments | 74 | (634 | ) | (560 | ) | 284 | (937 | ) | (653 | ) | |||||||||||||||||
Tax-exempt investments (2) | (51 | ) | (201 | ) | (252 | ) | 128 | (75 | ) | 53 | |||||||||||||||||
Federal funds sold | (14 | ) | — | (14 | ) | (7 | ) | (2 | ) | (10 | ) | ||||||||||||||||
Securities purchased under agreements to sell | (108 | ) | — | (108 | ) | 72 | (29 | ) | 43 | ||||||||||||||||||
Other interest-earning assets | 165 | (114 | ) | 51 | (28 | ) | 2 | (25 | ) | ||||||||||||||||||
Total earning assets | ($1,080 | ) | ($1,818 | ) | ($2,898 | ) | ($572 | ) | ($2,431 | ) | ($3,003 | ) |
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2012 vs. 2011 | 2011 vs. 2010 | ||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Volume | Due to Rate (1) | Net | Volume | Due to Rate (1) | Net | ||||||||||||||||||||||
($ in thousands) | |||||||||||||||||||||||||||
Interest-bearing demand | $ | 13 | ($72 | ) | ($59 | ) | $ | 4 | ($45 | ) | ($41 | ) | |||||||||||||||
Savings deposits | 37 | (348 | ) | (311 | ) | 92 | (264 | ) | (172 | ) | |||||||||||||||||
Time deposits | (643 | ) | (691 | ) | (1,334 | ) | (771 | ) | (852 | ) | (1,623 | ) | |||||||||||||||
Short-term borrowings | 27 | (72 | ) | (45 | ) | 17 | 11 | 28 | |||||||||||||||||||
Long-term borrowings | (167 | ) | 52 | (115 | ) | (50 | ) | (6 | ) | (56 | ) | ||||||||||||||||
Subordinated debenture | — | 15 | 15 | — | (412 | ) | (412 | ) | |||||||||||||||||||
Total interest-bearing liabilities | ($733 | ) | ($1,116 | ) | ($1,849 | ) | ($708 | ) | ($1,568 | ) | ($2,276 | ) | |||||||||||||||
Net interest income | ($347 | ) | ($702 | ) | ($1,049 | ) | $ | 136 | ($863 | ) | ($727 | ) |
(1) | The change in interest due to both rate and volume has been allocated to rate. |
(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 for the 2011 and 2010 periods. |
Table 3: Net Yield on Earning Assets
December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Yield | Change | Yield | Change | Yield | Change | ||||||||||||||||||||||
Yield on earning assets (1) | 4.36 | % | (0.40 | )% | 4.76 | % | (0.53 | )% | 5.29 | % | (0.45 | )% | |||||||||||||||
Effective rate on all liabilities as a percentage of earning assets | 1.05 | % | (0.33 | )% | 1.38 | % | (0.45 | )% | 1.83 | % | (0.38 | )% | |||||||||||||||
Net yield on earning assets | 3.31 | % | (0.07 | )% | 3.38 | % | (0.08 | )% | 3.46 | % | (0.07 | )% |
(1) | 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 for the 2011 and 2010 periods. |
Comparison of 2011 versus 2010
Taxable-equivalent net interest income was $15,817 for 2011, a decrease of 4% from 2010 primarily attributable to unfavorable rate variances as the impact of interest rates received on loans and other investments decreased more than the interest rates paid on deposits and other borrowings. Taxable-equivalent net interest income decreased $863 due to changes in rate and increased $136 due to changes in volume in 2011 as compared to 2010.
The taxable-equivalent net interest margin was 3.38% for 2011, down from 3.46% for 2010. For 2011, the yield on earning assets of 4.76% was 53 bps lower than 2010. Loan yields decreased 41 bps, to 5.61%, impacted by levels of nonaccrual loans, lower loan yields given the repricing of adjustable rate loans, soft loan demand, and competitive pricing pressures to retain and/or obtain creditworthy borrowers. The yield on investment securities decreased 94 bps to 2.98%, impacted by Mid-Wisconsin’s excess liquidity position being invested in lower-yielding investment securities resulting from soft loan demand during 2011 and the sale of $33,184 of investment securities during the latter half of 2010.
The cost of interest-bearing liabilities of 1.68% for 2011 was 48 bps lower than 2010. The average cost of interest-bearing deposits was 1.42%, down 45 bps due to decreasing deposit offering rates, while the cost of wholesale funding (comprised of short-term borrowings and long-term borrowings) decreased 9 bps to 3.24% for 2011. Mid-Wisconsin’s outstanding $10,310 of subordinated debentures had a fixed rate of 5.98% through December 15, 2010, after which they have had a floating rate equal to the three-month LIBOR plus 1.43%, adjusted quarterly. The interest rate on the subordinated debentures and the dividend rate on the trust preferred securities at December 31, 2011 was 1.98%.
Average earning assets of $468,348 for 2011 were $10,330 lower than the comparable 2010 period. Average investment securities grew $9,940 to $105,868, reflecting Mid-Wisconsin’s increased liquidity
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position invested in lower-yielding assets. Average loans decreased $16,968 to $338,607 as a result of soft loan demand, pay-offs and charge-offs. Taxable-equivalent interest income in 2011 of $22,303 decreased $3,003 from the related 2010 amount due to $572 in unfavorable earning asset volume changes and $2,431 in unfavorable rate variances.
Average interest-bearing liabilities of $386,280 for 2011 were down $19,665 compared to the related 2010 period. Average interest-bearing deposits decreased $20,252 while noninterest-bearing deposits increased $9,590. For 2011, interest expense decreased $2,276, of which $1,568 was due to favorable rate changes and $708 was due to favorable volume changes.
Provision for Loan Losses
The provision for loan losses in 2012 was $4,430, compared to $4,750 and $4,755 for 2011 and 2010, respectively. In consultation with banking regulators, during the second quarter of 2012, management changed various factors in the ALLL allocation methodology including changes to the historical loss rates and values assigned to qualitative factors utilized in the calculation of the ALLL. These changes accounted for approximately $248 of the provision for loan losses taken in 2012.
Net charge-offs were $4,668 for 2012, compared to $4,405 for 2011 and $3,241 for 2010. The level of charge-offs in 2012 was primarily due to management’s decision, made in consultation with the banking regulators, to charge-off certain impaired loans that were covered by specific reserve allocations identified in the ALLL. At December 31, 2012, the ALLL was $9,578, a decrease of $238 from December 31, 2011 and an increase of $107 over December 31, 2010. The ratio of the allowance for loans losses to total loans was 3.24%, 2.98%, and 2.79% for the years ended December 31, 2012, 2011, and 2010, respectively. Nonperforming loans at December 31, 2012, were $11,857, compared to $11,215 at December 31, 2011, and $11,550 at December 31, 2010, representing 4.01%, 3.40%, and 3.41% of total loans, respectively.
The provision for loan losses is predominantly a function of Mid-Wisconsin’s methodology and judgment as to qualitative and quantitative factors used to determine the adequacy of the ALLL. The adequacy of the ALLL is affected by changes in the size and character of the loan portfolio, changes in levels of impaired and other nonperforming loans, historical losses and delinquencies in each portfolio category, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing and future economic conditions, the fair value of underlying collateral, and other factors which could affect potential credit losses. Mid-Wisconsin’s management believes the provision and the level of the ALLL conforms to Mid-Wisconsin’s policies and was adequate to cover anticipated and unexpected loan losses inherent in the loan portfolio as of December 31, 2012. However, Mid-Wisconsin may need to increase its provision for loan losses in the future should the quality of the loan portfolio decline or other factors used to determine the ALLL worsen. Please refer to the discussion under “Balance Sheet Analysis-Allowance for Loan Losses” and “Balance Sheet Analysis-Impaired Loans and Nonperforming Assets” for further information.
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Noninterest Income
Table 4: Noninterest Income
Years Ended December 31, | Change From Prior Year | |||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
($ in thousands) | 2012 | 2011 | 2010 | $ Change 2012 | % Change 2012 | $ Change 2011 | % Change 2011 | |||||||||||||||||||||||
Service fees | $ | 847 | $ | 953 | $ | 1,174 | ($106 | ) | (11%) | ($221 | ) | (19%) | ||||||||||||||||||
Trust service fees | 1,103 | 1,066 | 1,103 | 37 | 3 | % | (37 | ) | (3%) | |||||||||||||||||||||
Investment product commissions | 176 | 221 | 221 | (45 | ) | (20%) | — | —% | ||||||||||||||||||||||
Mortgage banking | 504 | 523 | 955 | (19 | ) | (4%) | (432 | ) | (45%) | |||||||||||||||||||||
Gain (loss) on sale of investments | 21 | (55 | ) | 1,054 | 76 | 138 | % | (1,109 | ) | (105%) | ||||||||||||||||||||
Other | 1,302 | 1,579 | 1,043 | (277 | ) | (18%) | 536 | 51% | ||||||||||||||||||||||
Total noninterest income | $ | 3,953 | $ | 4,287 | $ | 5,550 | ($334 | ) | (8%) | ($1,263 | ) | (23%) |
Comparison of 2012 versus 2011
Noninterest income for 2012 was $3,953, down $334, or 8%, from 2011. Excluding a legal settlement of $500, which is included in “Other” for 2011, noninterest income increased $166 between related periods.
Service fees on deposit accounts for 2012 were $847, down $106, or 11%, from 2011. The year over year decline in service fees was primarily due to a general decrease in the amount of NSF/overdraft fees resulting from regulatory changes under the Dodd-Frank Act. Core fee-based revenues for future periods are expected to be lower than historical amounts due to regulatory changes.
The Wealth Management Services Group generates trust service fees and investment product commissions. Wealth Management income was $1,279 for 2012, down 1%, from 2011, primarily due to a decrease in volume of investment product sales which was primarily offset by increases in the market valuations of assets under management, on which trust service fees are based.
Mortgage banking income represents income received from the sale of residential real estate loans into the secondary market. Mortgage banking income for 2012 was $504, down slightly from $523 in 2011. Secondary mortgage production remained relatively unchanged at $32,000 for 2012 and 2011, respectively.
In 2012, Mid-Wisconsin recognized a $21 gain on the sale of an investment. The security sale was executed due to the fact we were unable to obtain financial information from the issuer to complete ongoing due diligence requirements of Mid-Wisconsin’s investment portfolio. In 2011, Mid-Wisconsin recognized a $55 loss on the sale of investments. The 2011 security sales were executed in an effort to increase the credit quality of Mid-Wisconsin’s investment portfolio.
In the first quarter of 2011, Mid-Wisconsin received a $500 legal settlement, the details of which are subject to a confidentiality agreement. Excluding this legal settlement, other noninterest income increased $223, or 21%, to $1,302 for 2012 compared to $1,079 in 2011, primarily due to $88 of fees recovered from charged-off loans, $19 of loan prepayment penalties, and $42 of ATM transaction fees and debit card interchange income earned in 2012.
Comparison of 2011 versus 2010
Noninterest income was $4,287 for 2011, down $1,263, or 23%, from 2010. Excluding a legal settlement of $500 and a $55 loss on the sale of investments in 2011 and the $1,054 gain on the sale of investments recognized in 2010, noninterest income for the year ended December 31, 2011 totaled $3,842, down $654, or 15%, compared to 2010.
Service fees on deposit accounts for 2011 were $953, down $221, or 19%, from 2010. The decline in service fees was due to a general decrease in the amount of NSF/overdraft fees collected due to regulatory changes under the Dodd-Frank Act and changes in customer behavior.
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Trust service fees were $1,066 in 2011, down $37 from 2010, primarily due to a decrease in the valuations of assets under management, on which fees are based. Investment product commissions remained unchanged at $221 for 2011 and 2010.
During 2010, mortgage rates fell to historically low levels, prompting a wave of consumer refinancing activity generating $955 of mortgage banking income. Mortgage banking income increased in the third and fourth quarters of 2011 due to further declines in interest rates; however, even with the uptick in refinancing, the refinancing activity was not as high as 2010 levels.
Mid-Wisconsin recognized a $55 loss on the sale of investments in 2011. The security sales were executed in an effort to increase the credit quality of Mid-Wisconsin’s investment portfolio. Excluding the $500 legal settlement noted above, other operating income increased $36 to $1,079 in 2011 compared to $1,043 in 2010.
Noninterest Expense
Table 5: Noninterest Expense
Years Ended December 31, | Change From Prior Year | |||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
($ in thousands) | 2012 | 2011 | 2010 | $ Change 2012 | % Change 2012 | $ Change 2011 | % Change 2011 | |||||||||||||||||||||||
Salaries and employee benefits | $ | 7,522 | $ | 8,561 | $ | 8,537 | ($1,039 | ) | (12%) | $ | 24 | —% | ||||||||||||||||||
Occupancy | 1,665 | 1,769 | 1,830 | (104 | ) | (6%) | (61 | ) | (3%) | |||||||||||||||||||||
Data processing | 631 | 667 | 651 | (36 | ) | (5%) | 16 | 2% | ||||||||||||||||||||||
Foreclosure/OREO expense | 1,284 | 857 | 243 | 427 | 50 | % | 614 | 253% | ||||||||||||||||||||||
Legal and professional fees | 1,226 | 891 | 677 | 335 | 38 | % | 214 | 32% | ||||||||||||||||||||||
FDIC expense | 1,011 | 1,117 | 1,036 | (106 | ) | (9%) | 81 | 8% | ||||||||||||||||||||||
Other | 2,619 | 3,325 | 2,831 | (706 | ) | (21%) | 494 | 17% | ||||||||||||||||||||||
Total noninterest expense | $ | 15,958 | $ | 17,187 | $ | 15,805 | ($1,229 | ) | (7%) | $ | 1,382 | 9% |
Comparison of 2012 versus 2011
Total noninterest expense was $15,958 for 2012, a decrease of $1,229, or 7%, compared to 2011. Excluding foreclosure/OREO expense and legal and professional fees, total noninterest expense decreased $1,991, or 13%. The majority of the noninterest expense decrease was due to decreased salaries and employee benefits, marketing, loan servicing and other operating expenses. The decreases were offset by increases in foreclosure/OREO expense and legal and professional fees related to continued heightened levels of nonperforming assets and expenses relating to such nonperforming assets, and higher legal and consulting expenses related to the pending merger.
Salaries and employee benefits were $7,522 for 2012 a decrease of $1,039, or 12%, from 2011, primarily due to the decrease of full-time equivalent employees from 150 at December 31, 2011 to 132 at December 31, 2012. Occupancy expense decreased $104, or 6%, in 2012, due to decreased building maintenance, utility costs, depreciation and automobile expense, due in part to the 2011 closing of Mid-Wisconsin Bank’s branch located in Lake Tomahawk, Wisconsin as well as certain renegotiated contracts. During 2012, Mid-Wisconsin Bank’s branch located in Weston, Wisconsin, which was leased from a third party, was closed as well as the downtown Medford, Wisconsin branch. Data processing costs decreased $36, or 5%, due to decreased data processing maintenance costs.
Foreclosure/OREO expense consists of OREO carrying costs (maintenance, utilities, real estate taxes), valuation adjustments against the OREO carrying value, and gains or losses from the sale of OREO. Foreclosure/OREO expense increased $427 between the comparable years. Foreclosure/OREO expense for 2012 included $685 of valuation adjustments against the carrying costs of various foreclosed properties based on appraisals obtained during the period, compared to $628 in such valuation adjustments in 2011. Net losses on the sale of foreclosed properties were $141 for 2012 compared to net gains on the sale of foreclosed properties of $241 for 2011.
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Legal and professional fees were $1,226 in 2012 an increase of $335, or 38%, primarily due to costs associated with problem loans, and legal and consultant fees related to the pending merger. The decrease in FDIC expense of $106 was primarily due to the decrease in Mid-Wisconsin Bank’s average assets, which is the basis of the FDIC assessment calculation. Other operating expenses decreased $706 compared to 2011, primarily due to a $432 decrease in marketing costs, which had been elevated in the 2011 period due to the introduction of a new deposit program at that time, and the decrease of other discretionary spending by delaying non-critical projects, workflow changes, and renegotiating vendor contracts.
Comparison of 2011 versus 2010
Total noninterest expense was $17,187 for the full year of 2011, an increase of $1,382, or 9%, over 2010 due primarily to increased foreclosure/OREO expenses, collection expenses, FDIC costs, and marketing and product expenses associated with a new suite of deposit products.
Foreclosure/OREO expense was $857 for the full year 2011 and consisted of $1,098 of OREO carrying costs offset by a $241 gain on the sales of various OREO properties. Foreclosure/OREO expense also included $628 of valuation adjustments against the carrying cost of various foreclosed properties based on appraisals obtained during 2011, compared to $159 in 2010. The majority of the remaining increase in foreclosure/OREO expense was due to real estate taxes and maintenance costs.
Legal and professional fees were $891in 2011, an increase of $214, or 32%, primarily due to higher legal costs associated with loan collection activities in 2011. An increase in FDIC expense of $81 was primarily due to increased deposit insurance rates due to a change in Mid-Wisconsin’s risk rating.
Other operating expenses were $3,325 for the full year 2011, an increase of $494 over 2010, primarily due to increased marketing costs and reward payments based on debit card usage associated with the introduction of a new deposit program. The new deposit program enhanced brand awareness across Mid-Wisconsin’s markets and increased balances in noninterest-bearing demand and savings deposits.
Income Taxes
Income tax expense for 2012 was $1,302 compared to $1,861 for 2011. During 2012, management determined a full valuation reserve of $5,315 against the net deferred tax asset was warranted, thereby resulting in income tax expense of $1,302 for the year. Based on consideration of all available evidence, both positive and negative, including historical losses which must be treated as substantial negative evidence, management determined a full valuation allowance was warranted at December 31, 2012. A $3,081 partial valuation allowance was determined to be necessary at December 31, 2011 to adjust deferred tax assets to the amount of net operating losses that were expected to be realized in the future.
Both Mid-Wisconsin and Mid-Wisconsin Bank pay federal and state income taxes on their consolidated net earnings. At December 31, 2012, tax net operating losses at Mid-Wisconsin of approximately $5,682 federal and $11,578 state are available to offset future taxable income.
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BALANCE SHEET ANALYSIS
Securities
The investment securities portfolio is intended to provide Mid-Wisconsin Bank with adequate liquidity, flexible asset/liability management and a source of stable income. The portfolio is structured with minimum credit exposure to Mid-Wisconsin Bank. All securities are classified as available-for-sale and are carried at fair market value. Unrealized gains and losses are excluded from earnings but are reported as other comprehensive income in a separate component of shareholders’ equity, net of income tax. Premium amortization and discount accretion are recognized as adjustments to interest income using the interest method. Realized gains or losses on sales are based on the net proceeds and the adjusted carrying value amount of the securities sold using the specific identification method.
Table 6: Investment Securities Portfolio at Estimated Fair Value
As of December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2012 | 2011 | 2010 | |||||||||||||
($ in thousands) | |||||||||||||||
U.S. Treasury securities and obligations of U.S. government corporations and agencies | $ | 14,719 | $ | 18,808 | $ | 22,567 | |||||||||
Mortgage-backed securities | 77,835 | 67,653 | 56,916 | ||||||||||||
Obligations of states and political subdivisions | 24,913 | 22,932 | 20,715 | ||||||||||||
Corporate debt securities | 838 | 832 | 961 | ||||||||||||
Total debt securities | 118,305 | 110,225 | 101,159 | ||||||||||||
Equity securities | 151 | 151 | 151 | ||||||||||||
Total securities available-for-sale | $ | 118,456 | $ | 110,376 | $ | 101,310 |
At December 31, 2012, the total carrying value of investment securities was $118,456, which was an increase of $8,080 compared to December 31, 2011 and represented 26% and 23% of total assets at December 31, 2012 and 2011, respectively. Primarily due to continued soft loan demand and the general decrease in overall loans, Mid-Wisconsin’s excess liquidity has continued to be invested in securities.
At December 31, 2012, with the exception of securities of the U.S. government and U.S. government agencies, the securities portfolio did not contain securities of any single issuer that were payable from and secured by the same source of revenue or taxing authority where the aggregate carrying value of such securities exceeded 10% of shareholders’ equity.
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A summary of the investment portfolio is shown below:
Table 7: Investments
Investment Category | Rating | As of December 31, 2012 | As of December 31, 2011 | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Amount | % | Amount | % | ||||||||||||||||||||
($ in thousands) | |||||||||||||||||||||||
U.S. Treasury & Government Agencies Debt | AAA | $ | 14,719 | 100 | % | $ | 18,808 | 100 | % | ||||||||||||||
Total | $ | 14,719 | 100 | % | $ | 18,808 | 100 | % | |||||||||||||||
U.S. Treasury & Government Agencies Debt as % of Total Investment Portfolio | 12 | % | 17 | % | |||||||||||||||||||
Mortgage-Backed Securities | AAA | $ | 77,792 | 100 | % | $ | 67,588 | 100 | % | ||||||||||||||
AA3 | — | —% | 53 | —% | |||||||||||||||||||
A1 | 32 | —% | — | —% | |||||||||||||||||||
A+ | 11 | —% | 12 | —% | |||||||||||||||||||
Baa2 | — | —% | — | —% | |||||||||||||||||||
BA1 | — | —% | — | —% | |||||||||||||||||||
BA3 | — | —% | — | —% | |||||||||||||||||||
Total | $ | 77,835 | 100 | % | $ | 67,653 | 100 | % | |||||||||||||||
Mortgage-Backed Securities as % of Total Investment Portfolio | 66 | % | 61 | % | |||||||||||||||||||
Obligations of States and Political Subdivisions | AAA | $ | 503 | 2 | % | $ | — | —% | |||||||||||||||
Aa1 | 5,668 | 23 | % | 3,457 | 15 | % | |||||||||||||||||
Aa2 | 6,456 | 26 | % | 5,704 | 25 | % | |||||||||||||||||
AA3 | 2,421 | 10 | % | 3,363 | 15 | % | |||||||||||||||||
A1 | 1,098 | 4 | % | 990 | 4 | % | |||||||||||||||||
A2 | 134 | 1 | % | — | —% | ||||||||||||||||||
Baa2 | 327 | 1 | % | 337 | 1 | % | |||||||||||||||||
NR | 8,306 | 33 | % | 9,081 | 40 | % | |||||||||||||||||
Total | $ | 24,913 | 100 | % | $ | 22,932 | 100 | % | |||||||||||||||
Obligations of States and Political Subdivisions as % of Total Investment Portfolio | 21 | % | 21 | % | |||||||||||||||||||
Corporate Debt and Equity Securities | NR | $ | 989 | 100 | % | $ | 983 | 100 | % | ||||||||||||||
Total | $ | 989 | 100 | % | $ | 983 | 100 | % | |||||||||||||||
Corporate Debt and Equity Securities as % of Total Investment Portfolio | 1 | % | 1 | % | |||||||||||||||||||
Total Market Value of Securities Available-For-Sale | $ | 118,456 | 100 | % | $ | 110,376 | 100 | % |
Obligations of States and Political Subdivisions (“municipal securities”): At December 31, 2012 and 2011, municipal securities were $24,913 and $22,932, respectively, and represented 21% of total investment securities based on fair value. The majority of municipal securities held are general obligations or essential service bonds. Municipal bond insurance company downgrades have resulted in credit downgrades in certain municipal securities; however, it has been determined that due to the large number of small investments in these obligations, Mid-Wisconsin Bank’s loss exposure on any particular obligation is minimal. The municipal portfolio is evaluated periodically for credit risk by a third party. As of December 31, 2012, the total fair value of municipal securities reflected a net unrealized gain of $1,216.
Mortgage-Backed Securities: At December 31, 2012 and 2011, mortgage-related securities (which include predominantly mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae and Freddie Mac institutions that the government has
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affirmed its commitment to support) were $77,835 and $67,653, respectively, and represented 66% and 61%, respectively, of total investment securities based on fair value. The fair value of mortgage-related securities is subject to inherent risks based upon the future performance of the underlying collateral (mortgage loans) for these securities. Future performance may be impacted by prepayment risk and interest rate changes. The decline in fair value is attributable to changes in interest rates and not credit quality. Mid-Wisconsin does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery. As a result, Mid-Wisconsin does not consider these securities to be OTTI at December 31, 2012.
Corporate Debt and Equity Securities: At December 31, 2012 and 2011, corporate debt securities were $989 and $983, respectively, and represented 1% of total investment securities based on fair value. Corporate debt and equity securities include trust preferred debt securities, corporate bonds, and common equity securities. Corporate debt and equity securities included two trust preferred securities totaling $800, and other securities of $189 and $183 at December 31, 2012 and 2011, respectively. As of December 31, 2012, the interest payments on the two trust preferred securities were current.
FHLB Stock: Mid-Wisconsin had $1,303 and $2,306 of FHLB stock at December 31, 2012 and 2011, respectively. On April 18, 2012 the FHLB announced that the consensual cease and desist order with its regulator was terminated immediately. The FHLB can now declare quarterly dividends without the consent of its regulator, provided that: (i) the dividend payment is at or below the average three-month LIBOR for that quarter; and (ii) the dividend will not result in the FHLB’s retained earnings falling below their level at the previous year-end. The FHLB also has the option to seek regulatory approval to pay a higher dividend, if warranted. Mid-Wisconsin redeemed $1,003 of its excess FHLB capital stock in 2012 and has been informed that the FHLB will continue to repurchase excess stock on a quarterly basis.
Table 8: Investment Securities Portfolio Maturity Distribution as of December 31, 2012
Within One Year | After One But Within Five Years | After Five but Within Ten Years | After Ten Years | Total | ||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | |||||||||||||||||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||||||||||||||||||||
U.S. Treasury securities and obligations of U.S. government corporations and agencies | $ | — | 0.00 | % | $ | 10,246 | 2.06 | % | $ | 4,473 | 1.67 | % | $ | — | 0.00 | % | $ | 14,719 | 1.94% | |||||||||||||||||||||||
Mortgage-backed securities | 107 | 3.75 | % | 451 | 3.65 | % | 16,330 | 2.83 | % | 60,947 | 2.03 | % | 77,835 | 2.21% | ||||||||||||||||||||||||||||
Obligations of states and political subdivisions | 1,663 | 3.55 | % | 7,215 | 3.92 | % | 15,185 | 3.31 | % | 850 | 3.73 | % | 24,913 | 3.52% | ||||||||||||||||||||||||||||
Corporate debt securities | — | 0.00 | % | 25 | 4.98 | % | — | 0.00 | % | 964 | 3.08 | % | 989 | 3.13% | ||||||||||||||||||||||||||||
Total securities available-for-sale | $ | 1,770 | 3.56 | % | $ | 17,937 | 2.85 | % | $ | 35,988 | 2.89 | % | $ | 62,761 | 2.07 | % | $ | 118,456 | 2.46% |
Loans
Mid-Wisconsin Bank services a diverse customer base throughout North Central Wisconsin including the following industries: agriculture (primarily dairy), retail, manufacturing, service, resort properties, timber and businesses supporting the general building industry. It continues to concentrate its efforts on originating loans in its local markets and assisting current loan customers. It actively utilizes government loan programs such as those provided by the U.S. Small Business Administration, U.S. Department of Agriculture, and USDA Farm Service Agency to help customers through current economic conditions and position their businesses for the future.
Total loans were $295,622 at December 31, 2012, a decrease of $34,241, or 10%, from December 31, 2011. This decrease was primarily the result of a lack of new credit-worthy borrowers, loan pay-offs, higher charge-offs, increased competition in Mid-Wisconsin’s market areas for credit-worthy borrowers, and the regular pay downs of existing loans.
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Table 9: Loan Composition
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Amount | % of Total | Amount | % of Total | Amount | % of Total | Amount | % of Total | Amount | % of Total | |||||||||||||||||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||||||||||||||||||||
Commercial business | $ | 36,856 | 12 | % | $ | 41,347 | 12 | % | $ | 39,093 | 12 | % | $ | 35,673 | 10 | % | $ | 39,047 | 11% | |||||||||||||||||||||||
Commercial real estate | 115,924 | 39 | % | 123,868 | 37 | % | 132,079 | 39 | % | 138,891 | 39 | % | 127,209 | 34% | ||||||||||||||||||||||||||||
Real estate construction and land development | 19,819 | 7 | % | 28,708 | 9 | % | 30,206 | 9 | % | 35,417 | 10 | % | 45,665 | 13% | ||||||||||||||||||||||||||||
Agricultural | 43,418 | 15 | % | 45,351 | 14 | % | 39,671 | 12 | % | 42,280 | 12 | % | 43,345 | 12% | ||||||||||||||||||||||||||||
One-to-four family residential real estate | 76,033 | 26 | % | 85,614 | 26 | % | 91,974 | 26 | % | 99,116 | 27 | % | 100,311 | 28% | ||||||||||||||||||||||||||||
Installment | 3,572 | 1 | % | 4,975 | 2 | % | 6,147 | 2 | % | 7,239 | 2 | % | 8,804 | 2% | ||||||||||||||||||||||||||||
Total loans | $ | 295,622 | 100 | % | $ | 329,863 | 100 | % | $ | 339,170 | 100 | % | $ | 358,616 | 100 | % | $ | 364,381 | 100% | |||||||||||||||||||||||
Owner occupied | $ | 68,204 | 59 | % | $ | 70,412 | 57 | % | $ | 83,115 | 63 | % | $ | 88,002 | 63 | % | $ | 54,749 | 43% | |||||||||||||||||||||||
Non-owner occupied | 47,720 | 41 | % | 53,456 | 43 | % | 48,964 | 37 | % | 50,889 | 37 | % | 72,460 | 57% | ||||||||||||||||||||||||||||
Commercial real estate | $ | 115,924 | 100 | % | $ | 123,868 | 100 | % | $ | 132,079 | 100 | % | $ | 138,891 | 100 | % | $ | 127,209 | 100% | |||||||||||||||||||||||
1–4 family construction | $ | 785 | 4 | % | $ | 1,837 | 6 | % | $ | 967 | 3 | % | $ | 3,523 | 10 | % | $ | 4,757 | 10% | |||||||||||||||||||||||
All other construction | 19,034 | 96 | % | 26,871 | 94 | % | 29,239 | 97 | % | 31,894 | 90 | % | 40,908 | 90% | ||||||||||||||||||||||||||||
Real estate construction and land development | $ | 19,819 | 100 | % | $ | 28,708 | 100 | % | $ | 30,206 | 100 | % | $ | 35,417 | 100 | % | $ | 45,665 | 100% |
Commercial business loans, commercial real estate, real estate construction and land development loans and agricultural loans (hereby collectively referred to as the “Commercial” segment) comprised 73% of the loan portfolio at December 31, 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 that for residential mortgage loans, implying higher potential losses on an individual customer basis. Commercial loan growth throughout 2011 and 2012 has been negatively impacted by increased competition for credit-worthy borrowers, Mid-Wisconsin’s aggressive approach to recognizing risks associated with specific borrowers, and the acceleration of recognizing charge-offs of nonperforming loans in a timely manner.
Commercial business loans were $36,856 at December 31, 2012, a decrease of $4,491, or 11%, from December 31, 2011, and comprised 12% 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. The credit risk related to commercial business 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 commercial real estate loan classification primarily includes commercial-based mortgage loans that are secured by nonfarm/nonresidential real estate properties. Commercial real estate loans totaled $115,924 at December 31, 2012, a decrease of $7,944, or 6%, from December 31, 2011 primarily due to the amount of gross charge-offs taken in 2012 and participation loan pay-offs received. Credit risk for this segment 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.
Real estate construction and land development loans declined $8,889, or 31%, from December 31, 2011 to $19,819, representing 7% of the total loan portfolio at December 31, 2012, primarily due to loan pay-offs and pay downs received from borrowers. Loans in this segment provide financing for the acquisition or development of commercial income properties, multi-family residential development, and single-family consumer construction. Mid-Wisconsin controls the credit risk on these types of loans by making loans in familiar markets, underwriting the loans to meet the requirements of institutional investors in the secondary market, reviewing the merits of individual projects, controlling loan structure, and monitoring the progress of projects through the analysis of construction advances.
Agricultural loans totaled $43,418 at December 31, 2012, a decrease of 1,933, or 4%, from December 31, 2011. Loans in this segment include loans secured by farmland and financing for agricultural production.
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Credit risk is managed by employing sound underwriting guidelines, periodically evaluating the underlying collateral, and formally reviewing the borrower’s financial soundness and relationship on an ongoing basis.
One-to-four family residential real estate loans totaled $76,033 at December 31, 2012, down $9,581, or 11%, from December 31, 2011. Residential mortgage loans include conventional first lien home mortgages and home equity loans. Home equity loans consist of home equity lines, and term loans, some of which are first lien positions. If the declines in market values that have occurred in the residential real estate markets worsen, particularly in Mid-Wisconsin’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 Mid-Wisconsin 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 Mid-Wisconsin’s long-term, fixed-rate residential real estate mortgage loans are sold in the secondary market without retaining the servicing rights. At December 31, 2012, $2,042 of residential mortgages were being held for resale to the secondary market, compared to $2,163 at December 31, 2011.
Installment loans totaled $3,572 at December 31, 2012, down $1,403, or 28% compared to December 31, 2011, and represented 1% of the loan portfolio. The decline in aggregate installment loan balances is largely a result of the fact that Mid-Wisconsin experiences extensive competition from local credit unions offering low rates on installment loans and therefore has directed resources toward more profitable lending segments. 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 and enhance the direct participation by Mid-Wisconsin Bank’s Board of Directors’ Loan Committee (“BLC”) in the credit process.
The loan portfolio is 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. Mid-Wisconsin Bank has also developed guidelines to manage its exposure to various types of concentration risks. At December 31, 2012, the commercial real estate concentration exceeded 30% of total loans in Mid-Wisconsin’s portfolio.
The following table presents the maturity distribution of the loan portfolio at December 31, 2012:
Table 10: Loan Maturity Distribution
Loan Maturity | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
One Year or Less | Over One Year to Five Years | Over Five Years | |||||||||||||
($ in thousands) | |||||||||||||||
Commercial business | $ | 8,061 | $ | 26,472 | $ | 2,323 | |||||||||
Commercial real estate | 40,818 | 59,986 | 15,120 | ||||||||||||
Real estate construction and land development | 7,469 | 8,279 | 4,071 | ||||||||||||
Agricultural | 18,632 | 18,593 | 6,193 | ||||||||||||
One-to-four family residential real estate | 16,600 | 23,309 | 36,124 | ||||||||||||
Installment | 1,284 | 2,217 | 71 | ||||||||||||
Total | $ | 92,864 | $ | 138,856 | $ | 63,902 |
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Loan Maturity | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
One Year or Less | Over One Year to Five Years | Over Five Years | |||||||||||||
($ in thousands) | |||||||||||||||
Fixed rate | $ | 77,110 | $ | 118,296 | $ | 6,733 | |||||||||
Variable rate | 15,754 | 20,560 | 57,169 | ||||||||||||
Total | $ | 92,864 | $ | 138,856 | $ | 63,902 |
Credit Management Process Enhancements
Mid-Wisconsin’s Principal Executive Officer, Executive Vice President and Chief Credit Officer (collectively, “Executive Management”) have been focused on continued enhancements to credit management process to address credit quality and the effects of the economy. To enhance credit risk management, Mid-Wisconsin has taken several actions, including but not limited to: (i) the establishment of a credit administration function and hiring of a Chief Credit Officer; (ii) the expansion of its special assets and collection staff; (iii) the adoption of enhanced credit underwriting policies and procedures, including the requirement that exceptions to loan policies and procedures be approved by Executive Management; and (iv) requiring that loan officers prepare problem loan memos for all credits risk rated special mention and higher to identify risks and the remediation necessary to prevent continued credit quality declines in the loan portfolio. These changes have prompted a number of personnel changes among Mid-Wisconsin’s lending staff and in some instances the reassignment of duties and responsibilities among remaining staff members.
Additionally, while the board of directors has always provided oversight of the credit process, it has increased its involvement over the past several years. Three independent directors and the President comprise Mid-Wisconsin Bank’s BLC. The BLC meets at least twice each month (and other times as necessary) to review loan proposals for (i) secured loans risk rated acceptable or better and over $1,200; (ii) unsecured loans risk rated acceptable or better over $500; (iii) secured loans risk rated special mention or greater over $750; and (iv) unsecured loans risk rated special mention or greater over $100. All actions or proposed actions for all loans risk rated substandard or doubtful, or which have been adversely classified by regulatory agencies, must be approved by the BLC. Any secured loan over $7,000 or unsecured loan over $5,000 and all loan participations must be approved by the full board of directors. The BLC annually reviews all loan relationships risk rated acceptable or better and over $1,200, all loan relationships risk rated special mention and over $750, and all loan relationships risk rated substandard or doubtful. Delinquent loans are reviewed with the BLC on a regular basis.
Since 2009, the board’s Audit Committee has engaged the services of an independent third party to perform periodic reviews to evaluate the credit quality, internally assigned credit grades, loan administration and approval processes with respect to Mid-Wisconsin Bank’s loan portfolio. Three independent loan reviews were performed in 2012.
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 December 31, 2012, the ALLL was $9,578, compared to $9,816 at December 31, 2011. The ALLL as a percentage of total loans was 3.24% and 2.98% at December 31, 2012 and 2011, respectively. The provision for loan losses for 2012 was $4,430, compared to $4,750 for 2011. Net charge-offs were $4,668 for 2012, compared to $4,405 for 2011. The ALLL for individually evaluated impaired loans was $4,104 and $3,300 at December 31, 2012 and 2011, respectively, or 11.1% and 19.1% of the respective impaired loan balances. In consultation with banking regulators, during the second quarter of 2012, management revised various factors in the ALLL allocation methodology, including, but not limited to, the following: (i) utilizing a three year rolling historical loss rate; (ii) revising the values assigned to qualitative factors; and (iii) classifying all troubled debt-restructurings and loans risk-rated substandard and doubtful as impaired and evaluating each
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individual loan for impairment based on the fair value of collateral. This change in methodology was a large reason for the increase in the amount impaired loans reported in 2012, as previously only substandard and doubtful loans with collateral shortfalls were classified as impaired. The ALLL applicable to loans evaluated collectively was $5,474, or 2.1% of the loans, at December 31, 2012 compared to $6,516, or 2.0% of the loans, at December 31, 2011.
The allocation methodology used by Mid-Wisconsin includes specific allocations for impaired loans evaluated individually for impairment with the remaining loan portfolio collectively evaluated as portfolio segments of homogenous loans for impairment based on a three year rolling historical loss rate and other qualitative factors. A specific reserve for the estimated collateral shortfall is established for all impaired loans if necessary based on the underlying fair value of the collateral. Impaired loans now include all troubled debt-restructurings, and loans risk-rated substandard and doubtful. Management allocates the remaining loan portfolio into portfolio segments of similar risk profile and the risk of loss is based on Mid-Wisconsin Bank’s historical loss specific to each loan portfolio segment. The historical loss ratio is now calculated by dividing the portfolios segment’s 36-month average annual charge-offs for each portfolio segment by the 36-month average balance. Qualitative factors used to allocate each specific loan segment include, but are not limited to, the following: (i) changes in lending policy and procedures; (ii) changes in economic and business conditions; (iii) changes in nature and volume of the loan portfolio; (iv) loan management; (v) volume of past due loans; (vi) changes in the value of underlying collateral; and (vii) loan concentrations.
The ALLL was 81%, 88% and 82% of nonperforming loans at December 31, 2012, 2011, and 2010, respectively. Gross charge-offs were $5,176 for 2012, $4,988 for 2011, and $4,034 for 2010, while recoveries for the corresponding periods were $508, $583, and $793, respectively. As a result, net charge-offs for 2012 were 1.47% of average loans, compared to 1.30% of average loans for 2011, and 0.91% of average loans for 2010. The 2012 increase over 2011 in net charge-offs of $263 was comprised of a $1,495 increase in charge-offs in the commercial business, commercial real estate, and one-to-four family residential real estate segments which were partially offset by a $1,232 decrease in charge-offs in real estate construction and land development, agricultural, and installment loan segments. Issues impacting asset quality included historically depressed economic factors, such as heightened unemployment, depressed commercial and residential real estate markets, volatile energy prices, and decreased consumer confidence. Declining collateral values have significantly contributed to Mid-Wisconsin’s historically elevated levels of nonperforming loans, net charge-offs, and ALLL. Mid-Wisconsin has been focused on implementing enhancements to the credit management process to address and enhance underwriting and risk-based pricing guidelines for commercial real estate and real estate construction and land development lending, as well as on new home equity and residential mortgage loans, to reduce potential exposure within these portfolio segments.
The largest portion of the ALLL at December 31, 2012 was allocated to commercial real estate loan segments of $4,806 and represented 49% of the total ALLL at year-end 2012 compared to 38% at year-end 2011. The increase in the amount allocated to the commercial real estate segment was attributable to the increase in the level of nonaccrual and other impaired loans in this category, and the $622 increase in the related specific valuation allowance assigned to these loans. The ALLL allocated to commercial business loans was $810 at December 31, 2012, a decrease of $194 from year-end 2011, and represented 9% of the ALLL at December 31, 2012, compared to 10% at year-end 2011. The decrease in the commercial business ALLL reserve allocation was due to the $4,491 decrease in the balance of loans in this segment from December 31, 2011. At December 31, 2012, the ALLL allocated to real estate construction and land development was $1,206, compared to $1,320 at December 31, 2011, representing 13% of the ALLL at both December 31, 2012 and 2011. The allocation to real estate construction and land development decreased as the loan balances in the segment decreased $8,889 from December 31, 2011. The ALLL allocation to agricultural loans decreased to 5% at December 31, 2012 from 12% at December 31, 2011. Agricultural loans risk rated acceptable or better have improved since December 31, 2011. The ALLL allocation to one-to-four family residential real estate loans decreased to 23% of the ALLL at December 31, 2012, compared to 26% at December 31, 2011. One-to-four family residential real estate loans as a percent of the total loan portfolio were 26% at December 31, 2012, which was the same percentage as year-end 2011. The ALLL allocation to installment loans was 1.0% at December 31, 2012 and 2011, respectively. Management (i) performs ongoing intensive analyses of its loan portfolios to allow for early identification of customers experiencing financial
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difficulties, (ii) maintains prudent underwriting standards, (iii) understands the economy in its markets, and (iv) considers the trend of deterioration in loan quality in establishing the level of the ALLL.
Mid-Wisconsin believes that at December 31, 2012, the ALLL was appropriate to absorb probable incurred losses on existing loans that may become uncollectible; however, given the conditions in the real estate markets and economy in general, there can be no assurance that the allowance will prove sufficient to cover actual loan losses in the future. Consolidated net income and shareholders’ equity could be affected if 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 Mid-Wisconsin’s customers. Additionally, larger credit relationships do not necessarily create more allowance directly but can create wider fluctuations in net charge-offs and asset quality measures compared to Mid-Wisconsin’s longer historical trends. As an integral part of their examination process, various federal and state 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 11: Loan Loss Experience
Years Ended December 31, | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
($ in thousands) | |||||||||||||||||||||||
Allowance for loan losses: | �� | ||||||||||||||||||||||
Balance at beginning of year | $ | 9,816 | $ | 9,471 | $ | 7,957 | $ | 4,542 | $ | 4,174 | |||||||||||||
Loans charged-off: | |||||||||||||||||||||||
Commercial business | 339 | 173 | 435 | 608 | 299 | ||||||||||||||||||
Commercial real estate | 3,072 | 2,005 | 1,490 | 1,990 | 1,469 | ||||||||||||||||||
Real estate construction and land development | 312 | 1,295 | 537 | 1,556 | 186 | ||||||||||||||||||
Agricultural | 31 | 203 | 206 | 38 | 25 | ||||||||||||||||||
Total commercial | 3,754 | 3,676 | 2,668 | 4,192 | 1,979 | ||||||||||||||||||
One-to-four family residential real estate | 1,373 | 1,067 | 1,207 | 964 | 895 | ||||||||||||||||||
Installment | 49 | 245 | 159 | 127 | 195 | ||||||||||||||||||
Total loans charged-off | 5,176 | 4,988 | 4,034 | 5,283 | 3,069 | ||||||||||||||||||
Recoveries of loans previously charged-off: | |||||||||||||||||||||||
Commercial business | 61 | 37 | 167 | 4 | 122 | ||||||||||||||||||
Commercial real estate | 152 | 135 | 275 | 151 | 16 | ||||||||||||||||||
Real estate construction and land development | 60 | 134 | 149 | — | — | ||||||||||||||||||
Agricultural | 106 | 90 | 86 | 4 | 7 | ||||||||||||||||||
Total commercial | 379 | 396 | 677 | 159 | 145 | ||||||||||||||||||
One-to-four family residential real estate | 104 | 101 | 83 | 13 | 53 | ||||||||||||||||||
Installment | 25 | 86 | 33 | 20 | 39 | ||||||||||||||||||
Total recoveries | 508 | 583 | 793 | 192 | 237 | ||||||||||||||||||
Total net charge-offs | 4,668 | 4,405 | 3,241 | 5,091 | 2,832 | ||||||||||||||||||
Provision for loan losses | 4,430 | 4,750 | 4,755 | 8,506 | 3,200 | ||||||||||||||||||
Balance at end of year | $ | 9,578 | $ | 9,816 | $ | 9,471 | $ | 7,957 | $ | 4,542 | |||||||||||||
Ratios at end of year: | |||||||||||||||||||||||
Allowance for loan losses to total loans | 3.24 | % | 2.98 | % | 2.79 | % | 2.22 | % | 1.25 | % | |||||||||||||
Allowance for loan losses to net charge-offs | 2.1 | x | 2.2 | x | 2.9 | x | 1.6 | x | 1.6 | x | |||||||||||||
Net charge-offs to average loans | 1.47 | % | 1.30 | % | 0.91 | % | 1.40 | % | 0.78 | % | |||||||||||||
Net loan charge-offs (recoveries): | |||||||||||||||||||||||
Commercial business | $ | 278 | $ | 136 | $ | 268 | $ | 604 | $ | 177 | |||||||||||||
Commercial real estate | 2,920 | 1,870 | 1,215 | 1,839 | 1,453 | ||||||||||||||||||
Real estate construction and land development | 252 | 1,161 | 388 | 1,556 | 186 | ||||||||||||||||||
Agricultural | (75 | ) | 113 | 120 | 34 | 18 | |||||||||||||||||
Total commercial | 3,375 | 3,280 | 1,991 | 4,033 | 1,834 | ||||||||||||||||||
One-to-four family residential real estate | 1,269 | 966 | 1,124 | 951 | 842 | ||||||||||||||||||
Installment | 24 | 159 | 126 | 107 | 156 | ||||||||||||||||||
Total net charge-offs | $ | 4,668 | $ | 4,405 | $ | 3,241 | $ | 5,091 | $ | 2,832 | |||||||||||||
Commercial Real Estate and Construction net charge-off detail: | |||||||||||||||||||||||
Owner occupied | $ | 1,363 | $ | 1,431 | $ | 502 | $ | 757 | $ | 1,078 | |||||||||||||
Non-owner occupied | 1,557 | 439 | 713 | 1,082 | 375 | ||||||||||||||||||
Commercial real estate | $ | 2,920 | $ | 1,870 | $ | 1,215 | $ | 1,839 | $ | 1,453 | |||||||||||||
1–4 family construction | $ | — | $ | — | ($18 | ) | $ | 33 | $ | 186 | |||||||||||||
All other construction | 252 | 1,161 | 406 | 1,523 | — | ||||||||||||||||||
Real estate construction and land development | $ | 252 | $ | 1,161 | $ | 388 | $ | 1,556 | $ | 186 | |||||||||||||
Average loans | 318,174 | 338,607 | 355,575 | 363,966 | 361,883 |
The allocation of the ALLL for each of the past five years is based on Mid-Wisconsin’s estimate of loss exposure by category of loans as shown in Table 12.
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Table 12: Allocation of the Allowance for Loan Losses as of December 31:
($ in thousands) | 2012 | % of Loan Type to Total Loans | 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 | ||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
ALLL allocation: | ||||||||||||||||||||||||||||||||||||||||||
Commercial business | $ | 810 | 12 | % | $ | 1,004 | 12 | % | $ | 536 | 12 | % | $ | 497 | 10 | % | $ | 295 | 11% | |||||||||||||||||||||||
Commercial real estate | 4,806 | 39 | % | 3,685 | 37 | % | 4,320 | 39 | % | 3,954 | 39 | % | 1,836 | 34% | ||||||||||||||||||||||||||||
Real estate construction and land development | 1,206 | 7 | % | 1,320 | 9 | % | 1,278 | 9 | % | 685 | 10 | % | 836 | 13% | ||||||||||||||||||||||||||||
Agricultural | 452 | 15 | % | 1,139 | 14 | % | 1,146 | 12 | % | 981 | 12 | % | 450 | 12% | ||||||||||||||||||||||||||||
Total commercial | 7,274 | 73 | % | 7,148 | 72 | % | 7,280 | 72 | % | 6,117 | 71 | % | 3,417 | 70% | ||||||||||||||||||||||||||||
One-to-four family residential real estate | 2,215 | 26 | % | 2,530 | 26 | % | 2,060 | 26 | % | 1,753 | 27 | % | 1,010 | 28% | ||||||||||||||||||||||||||||
Installment | 89 | 1 | % | 138 | 2 | % | 131 | 2 | % | 87 | 2 | % | 115 | 2% | ||||||||||||||||||||||||||||
Total allowance for loan losses | $ | 9,578 | 100 | % | $ | 9,816 | 100 | % | $ | 9,471 | 100 | % | $ | 7,957 | 100 | % | $ | 4,542 | 100% | |||||||||||||||||||||||
ALLL category as a percent of total ALLL: | ||||||||||||||||||||||||||||||||||||||||||
Commercial business | 9 | % | 10 | % | 6 | % | 6 | % | 7 | % | ||||||||||||||||||||||||||||||||
Commercial real estate | 49 | % | 38 | % | 46 | % | 50 | % | 40 | % | ||||||||||||||||||||||||||||||||
Real estate construction and land development | 13 | % | 13 | % | 13 | % | 9 | % | 18 | % | ||||||||||||||||||||||||||||||||
Agricultural | 5 | % | 12 | % | 12 | % | 12 | % | 10 | % | ||||||||||||||||||||||||||||||||
Total commercial | 76 | % | 73 | % | 77 | % | 77 | % | 75 | % | ||||||||||||||||||||||||||||||||
One-to-four family residential real estate | 23 | % | 26 | % | 22 | % | 22 | % | 22 | % | ||||||||||||||||||||||||||||||||
Installment | 1 | % | 1 | % | 1 | % | 1 | % | 3 | % | ||||||||||||||||||||||||||||||||
Total allowance for loan losses | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
Impaired Loans and Nonperforming Assets
As part of its overall credit risk management process, 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 principal.
Nonperforming loans were $11,857 at December 31, 2012, compared to $11,215 at year-end 2011. Total nonperforming loans have increased $642, or 6%, since year-end 2011.
At December 31, 2012, Mid-Wisconsin had total restructured loans of $11,708, which consisted of $5,008 in accruing and performing loans in accordance with their modified terms and $6,700 classified as nonaccrual loans, compared to total restructured loans of $12,887 at December 31, 2011 which consisted of $7,541 performing in accordance with their modified terms and $5,346 classified as nonaccrual loans.
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
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repayment terms. The decision of management to include performing loans in potential problem loans does not necessarily mean that Mid-Wisconsin 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. Effective June 30, 2012, management classifies all potential problem loans as impaired loans in the ALLL calculation. At December 31, 2011, potential problem loans totaled $23,124. 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 Mid-Wisconsin’s customers and on underlying real estate values.
OREO was $4,200 at December 31, 2012, compared to $4,404 at December 31, 2011 and $4,230 at December 31, 2010. Net losses on sales of OREO were $141 for 2012 compared to net gains of $241 and $187 for 2011 and 2010, respectively. Write-downs on OREO were $685, $628, and $159 for 2012, 2011, and 2010, respectively. Management actively seeks to ensure properties held are monitored to minimize Mid-Wisconsin’s risk of loss. Evaluations of the fair market value of the OREO properties are done quarterly and valuation adjustments, if necessary, are recorded in Mid-Wisconsin’s consolidated financial statements.
Table 13: Nonperforming Loans and OREO
2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
($ in thousands) | |||||||||||||||||||||||
Nonaccrual loans: | |||||||||||||||||||||||
Commercial | $ | 7,810 | $ | 7,329 | $ | 8,369 | $ | 9,645 | $ | 5,668 | |||||||||||||
Agricultural | 440 | 134 | 440 | 939 | 737 | ||||||||||||||||||
One-to-four family residential real estate | 3,602 | 3,726 | 2,729 | 3,321 | 2,081 | ||||||||||||||||||
Installment | — | 5 | 2 | 19 | 463 | ||||||||||||||||||
Total nonaccrual loans | 11,852 | 11,194 | 11,540 | 13,924 | 8,949 | ||||||||||||||||||
Accruing loans past due 90 days or more | 5 | 21 | 10 | 18 | 36 | ||||||||||||||||||
Total nonperforming loans | 11,857 | 11,215 | 11,550 | 13,942 | 8,985 | ||||||||||||||||||
OREO | 4,200 | 4,404 | 4,230 | 1,808 | 2,556 | ||||||||||||||||||
Other repossessed assets | — | 60 | — | 450 | 5 | ||||||||||||||||||
Investment security (Trust Preferred) | — | — | 136 | 211 | — | ||||||||||||||||||
Total nonperforming assets (1) | $ | 16,057 | $ | 15,679 | $ | 15,916 | $ | 16,411 | $ | 11,546 | |||||||||||||
Restructured loans accruing | |||||||||||||||||||||||
Commercial | $ | 4,189 | $ | 5,908 | $ | 278 | $ | 151 | $ | 569 | |||||||||||||
Agricultural | 361 | 201 | — | — | — | ||||||||||||||||||
One-to-four family residential real estate | 442 | 1,411 | 987 | — | — | ||||||||||||||||||
Installment | 16 | 21 | — | — | — | ||||||||||||||||||
Total restructured loans accruing | $ | 5,008 | $ | 7,541 | $ | 1,265 | $ | 151 | $ | 569 | |||||||||||||
RATIOS | |||||||||||||||||||||||
Nonperforming loans to total loans | 4.01 | % | 3.40 | % | 3.41 | % | 3.89 | % | 2.47 | % | |||||||||||||
Nonperforming assets to total loans plus OREO | 5.36 | % | 4.69 | % | 4.63 | % | 4.55 | % | 3.15 | % | |||||||||||||
Nonperforming assets to total assets | 3.54 | % | 3.21 | % | 3.13 | % | 3.25 | % | 2.33 | % | |||||||||||||
ALL to nonperforming loans | 81 | % | 88 | % | 82 | % | 57 | % | 51 | % | |||||||||||||
ALL to total loans at end of year | 3.24 | % | 2.98 | % | 2.79 | % | 2.22 | % | 1.25 | % | |||||||||||||
Nonperforming assets by type: | |||||||||||||||||||||||
Commercial business | $ | 1,125 | $ | 734 | $ | 54 | $ | 40 | $ | 160 | |||||||||||||
Commercial real estate | 6,539 | 4,076 | 5,671 | 8,858 | 3,183 | ||||||||||||||||||
Real estate construction and land development | 146 | 2,519 | 2,644 | 747 | 2,325 | ||||||||||||||||||
Total commercial | 7,810 | 7,329 | 8,369 | 9,645 | 5,668 | ||||||||||||||||||
Agricultural | 440 | 134 | 440 | 939 | 737 | ||||||||||||||||||
One-to-four family residential real estate | 3,602 | 3,726 | 2,729 | 3,321 | 2,081 | ||||||||||||||||||
Installment | 5 | 26 | 12 | 37 | 499 | ||||||||||||||||||
Total nonperforming loans | 11,857 | 11,215 | 11,550 | 13,942 | 8,985 | ||||||||||||||||||
Commercial real estate owned | 3,536 | 4,116 | 3,683 | 1,523 | 1,827 | ||||||||||||||||||
Real estate residential owned | 664 | 288 | 547 | 285 | 729 |
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2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
($ in thousands) | |||||||||||||||||||||||
Total OREO | 4,200 | 4,404 | 4,230 | 1,808 | 2,556 | ||||||||||||||||||
Other repossessed assets | — | 60 | — | 450 | 5 | ||||||||||||||||||
Investment security (Trust Preferred) | — | — | 136 | 211 | — | ||||||||||||||||||
Total nonperforming assets | $ | 16,057 | $ | 15,679 | $ | 15,916 | $ | 16,411 | $ | 11,546 | |||||||||||||
CRE and Construction nonperforming loan detail: | |||||||||||||||||||||||
Owner occupied | $ | 2,361 | $ | 2,697 | $ | 4,228 | $ | 5,798 | $ | 2,255 | |||||||||||||
Non-owner occupied | 4,178 | 1,379 | 1,443 | 3,060 | 928 | ||||||||||||||||||
Commercial real estate | $ | 6,539 | $ | 4,076 | $ | 5,671 | $ | 8,858 | $ | 3,183 | |||||||||||||
1–4 family construction | $ | — | $ | — | $ | — | $ | — | $ | 296 | |||||||||||||
All other construction | 146 | 2,519 | 2,644 | 747 | 2,029 | ||||||||||||||||||
Real estate construction and land development | $ | 146 | $ | 2,519 | $ | 2,644 | $ | 747 | $ | 2,325 |
(1) | Beginning in 2012, the Company excluded restructured loans accruing interest from its definition of nonperforming loans. The definition of nonperforming assets now consists of nonaccrual loans, loans past due 90 days or more and still accruing interest, other real estate owned and other repossessed assets. As a result, certain prior period reclassification and disclosures have been made to the new definition. |
The following table 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.
Table 14: Foregone Loan Interest
Years Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2012 | 2011 | 2010 | |||||||||||||
($ in thousands) | |||||||||||||||
Interest income in accordance with original terms | $ | 719 | $ | 452 | $ | 819 | |||||||||
Interest income recognized | (333 | ) | (139 | ) | (197 | ) | |||||||||
Reduction in interest income | $ | 386 | $ | 313 | $ | 622 |
Deposits
Deposits represent Mid-Wisconsin’s largest source of funds. Mid-Wisconsin 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. A stipulation of Mid-Wisconsin Bank’s agreement (“Agreement”) with the FDIC and WDFI limits the rates of interest it may set on its deposit products. As a result, Mid-Wisconsin Bank’s ability to attract deposits based on rate competition is limited to a certain degree and its focus remains on expanding existing customer relationships.
At December 31, 2012, total deposits were $354,497, down $27,123, or 7%, from 2011, primarily due to the loss of one large depositor’s savings deposits, decreased time deposits, and Mid-Wisconsin’s strategy to continue to reduce noncore funding sources.
Time deposits were $118,366 at December 31, 2012, down $17,774 from December 31, 2011, as Mid-Wisconsin has not been as aggressive in bidding for municipal funds and customers have moved time deposits into liquid, short-term, non-maturing deposits as time deposit rates have decreased to levels relative to certain non-maturity deposit accounts.
Due to Mid-Wisconsin’s reduced liquidity needs, brokered certificate of deposits were not renewed in 2012 as they matured.
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Table 15: Deposit Distribution
2012 | 2011 | 2010 | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Amount | % of Total | Amount | % of Total | Amount | % of Total | ||||||||||||||||||||||
($ in thousands) | |||||||||||||||||||||||||||
Noninterest-bearing demand deposits | $ | 76,705 | 22 | % | $ | 70,790 | 19 | % | $ | 60,446 | 15 | % | |||||||||||||||
Interest-bearing demand deposits | 41,311 | 12 | % | 39,160 | 10 | % | 39,462 | 10 | % | ||||||||||||||||||
Savings deposits | 111,842 | 32 | % | 120,513 | 32 | % | 114,515 | 29 | % | ||||||||||||||||||
Time deposits | 118,366 | 32 | % | 136,140 | 35 | % | 159,201 | 39 | % | ||||||||||||||||||
Brokered certificates of deposit | 6,273 | 2 | % | 15,017 | 4 | % | 26,986 | 7 | % | ||||||||||||||||||
Total | $ | 354,497 | 100 | % | $ | 381,620 | 100 | % | $ | 400,610 | 100 | % |
Table 16: Maturity Distribution of Certificates of Deposit of $100,000 or More
Years Ended December 31, | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2012 | 2011 | |||||||||||||
($ in thousands) | ||||||||||||||
3 months or less | $ | 18,178 | $ | 13,693 | ||||||||||
Over 3 months through 6 months | 3,762 | 3,734 | ||||||||||||
Over 6 months through 12 months | 7,343 | 13,730 | ||||||||||||
Over 12 months | 7,980 | 15,538 | ||||||||||||
Total | $ | 37,263 | $ | 46,695 |
Other Funding Sources
Other funding sources, which include short-term and long-term borrowings, were $59,810 and $64,026 at December 31, 2012 and 2011, respectively. Short-term borrowings consist of corporate repurchase agreements which totaled $13,439 at December 31, 2012 and $13,655 at December 31, 2011. Long-term borrowings at December 31, 2012 were $36,061, a decrease of $4,000 from December 31, 2011 and attributable to the maturity of FHLB advances during the year that were not replaced. Also included in long-term borrowings are trust preferred securities. In 2005, Mid-Wisconsin Statutory Trust I (the “Trust”), a Delaware business trust subsidiary of Mid-Wisconsin, issued $10,000 in trust preferred securities. The trust preferred securities were sold in a private placement to institutional investors. The Trust used the proceeds from the offering along with Mid-Wisconsin’s common ownership investment to purchase $10,310 of Mid-Wisconsin’s junior subordinated debentures. The trust preferred securities and the junior subordinated debentures mature on December 15, 2035 and had a fixed rate of 5.98% until December 15, 2010. They now have a floating rate of the three-month LIBOR plus 1.43%, adjusted quarterly. The interest rates on the subordinated debentures and dividend rates on the trust preferred securities were 1.74% and 1.98% at December 31, 2012 and 2011, respectively.
The following information relates to securities sold under repurchase agreements at December 31:
Table 17: Short-Term Borrowings
Years Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2012 | 2011 | 2010 | |||||||||||||
($ in thousands) | |||||||||||||||
Balance end of year | $ | 13,439 | $ | 13,655 | $ | 9,512 | |||||||||
Average balance outstanding during year | $ | 14,977 | $ | 12,285 | $ | 10,411 | |||||||||
Maximum month-end balance outstanding | $ | 18,356 | $ | 15,817 | $ | 18,329 | |||||||||
Weighted average rate on amounts outstanding during year | 0.52 | % | 1.00 | % | 0.69 | % | |||||||||
Weighted average rate on amounts outstanding at end of year | 0.23 | % | 0.46 | % | 0.49 | % |
At December 31, 2012, Mid-Wisconsin Bank and Mid-Wisconsin had additional sources of liquidity available through pre-approved overnight federal funds lines of credit with corresponding banks, the Federal Reserve discount window and other long term borrowing agreements totaling $24,636.
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Off-Balance Sheet Obligations
As of December 31, 2012 and 2011, Mid-Wisconsin had the following commitments, which do not appear on its balance sheet:
Table 18: Commitments
2012 | 2011 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
($ in thousands) | ||||||||||||||
Commitments to extend credit: | ||||||||||||||
Fixed rate | $ | 17,117 | $ | 17,163 | ||||||||||
Adjustable rate | 25,255 | 23,515 | ||||||||||||
Standby and irrevocable letters of credit-fixed rate | 4,018 | 3,737 | ||||||||||||
Credit card commitments | 2,834 | 3,541 |
Contractual Obligations
Mid-Wisconsin 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 Mid-Wisconsin’s ability to offer competitive interest rates, liquidity needs, or availability of collateral for pledging purposes.
Table 19: Contractual Obligations as of December 31, 2012
Payments due by period | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Total | < 1 year | 1–3 years | 3–5 years | > 5 years | |||||||||||||||||||
($ in thousands) | |||||||||||||||||||||||
Subordinated debentures | $ | 10,310 | $ | — | $ | — | $ | — | $ | 10,310 | |||||||||||||
Other long-term borrowings | 10,000 | — | 10,000 | — | — | ||||||||||||||||||
FHLB borrowings | 26,061 | 2,000 | 24,061 | — | — | ||||||||||||||||||
Total long-term borrowing obligations | $ | 46,371 | $ | 2,000 | $ | 34,061 | $ | — | $ | 10,310 |
Also, Mid-Wisconsin has liabilities due to directors for services rendered with various payment terms depending on their anticipated retirement date or their election of payout terms following retirement. The total liability at December 31, 2012 for current and retired directors is $438.
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, primarily from the core deposit base and from the repayment and maturity of loans and investment securities. Additionally, liquidity is available from the sale of investment securities and brokered deposits. Volatility or disruptions in the capital markets may impact Mid-Wisconsin’s ability to access certain liquidity sources.
While dividends and service fees from Mid-Wisconsin Bank and proceeds from the issuance of capital have historically been the primary funding sources for Mid-Wisconsin, these sources could be limited or costly (such as by regulation increasing the capital needs of Mid-Wisconsin Bank, or by limited appetite for new sales of Mid-Wisconsin stock). No dividends have been received in cash from Mid-Wisconsin Bank since 2006. Also, as discussed in the “Capital” section below, Mid-Wisconsin’s agreement with the Federal Reserve Bank of Minneapolis (the “Federal Reserve Bank”) and Mid-Wisconsin Bank’s Agreement with the FDIC and WDFI placed restrictions on the payment of dividends from Mid-Wisconsin Bank to Mid-Wisconsin without prior regulatory approval. Mid-Wisconsin’s written agreement with the Federal Reserve Bank also requires the written consent of the Federal Reserve Bank to pay dividends to Mid-Wisconsin’s shareholders.
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Mid-Wisconsin is also prohibited from paying dividends on its common stock if it fails to make distributions or required payments on its junior subordinated debentures or on the Preferred Stock. In consultation with the Federal Reserve Bank, on May 12, 2011, Mid-Wisconsin exercised its rights to suspend dividends on the outstanding Preferred Stock and has also elected to defer interest on the junior subordinated debentures. On December 31, 2012, Mid-Wisconsin had $1,066 accrued and unpaid dividends on the Preferred Stock and $344 accrued and unpaid interest due on its junior subordinated debentures.
Investment securities are an important tool to Mid-Wisconsin’s liquidity objectives. All investment securities are classified as available-for-sale and are reported at fair value on the consolidated balance sheet. Approximately $69,965 of the $118,456 investment securities portfolio on hand at December 31, 2012, were pledged to secure public deposits, short-term borrowings, and for other purposes as required by law. The majority of the remaining securities could be sold to enhance liquidity, if necessary.
The scheduled maturity of loans could also provide a source of additional liquidity. Factors affecting liquidity relative to loans are loan renewals, origination volumes, prepayment rates, and maturity of the existing loan portfolio. Mid-Wisconsin Bank’s liquidity position is influenced by changes in interest rates, economic conditions, and competition. Conversely, loan demand may require other sources of funding that could be more costly than deposits.
Deposits are another source of liquidity for Mid-Wisconsin Bank. Deposit liquidity is affected by core deposit growth levels, certificates of deposit maturity structure, and retention and diversification of wholesale funding sources. Deposit outflows would require Mid-Wisconsin Bank to access alternative funding sources which may not be as liquid and may be more costly.
Other funding sources for Mid-Wisconsin Bank are in the form of short-term borrowings (corporate repurchase agreements, and federal funds purchased), and long-term borrowings. Short-term borrowings can be renewed and do not represent an immediate need to repay cash. Long-term borrowings are used for asset/liability matching purposes and to access more favorable interest rates than deposits. Mid-Wisconsin Bank’s liquidity resources were sufficient in 2012 to fund Mid-Wisconsin’s loans and to meet other cash needs when necessary.
At December 31, 2012 and 2011, Mid-Wisconsin held $2,295 and $2,743, respectively, in total cash and due from banks on an unconsolidated basis. The Bank Holding Company Act of 1956, as amended, requires that “a bank holding company shall serve as a source of financial and managerial strength to its subsidiary banks and shall not conduct its operations in an unsafe or unsound manner.” Pursuant to this mandate, Mid-Wisconsin has continued to monitor the capital strength and liquidity of Mid-Wisconsin Bank.
Interest Rate Sensitivity Gap Analysis
The primary market risk faced by Mid-Wisconsin is interest rate risk. The table reflects a cumulative positive interest sensitivity gap position, i.e. more rate sensitive assets maturing than rate sensitive liabilities. Mid-Wisconsin management extensively evaluates the cumulative gap position at the one and two-year time frames. At those time intervals the cumulative maturity gap was within management’s established guidelines of 60% to 120%.
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Table 20: Interest Rate Sensitivity Gap Analysis
December 31, 2012 | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
0–90 Days | 91–180 Days | 181–365 Days | 1–5 Years | Beyond 5 Years | Total | ||||||||||||||||||||||
($ in thousands) | |||||||||||||||||||||||||||
Earning Assets: | |||||||||||||||||||||||||||
Loans | $ | 53,200 | $ | 33,075 | $ | 48,254 | $ | 135,559 | $ | 25,534 | $ | 295,622 | |||||||||||||||
Securities | 6,761 | 7,868 | 12,676 | 56,365 | 34,786 | 118,456 | |||||||||||||||||||||
Other earning assets | 10,122 | — | — | — | — | 10,122 | |||||||||||||||||||||
Total | $ | 70,083 | $ | 40,943 | $ | 60,930 | $ | 191,924 | $ | 60,320 | $ | 424,200 | |||||||||||||||
Cumulative rate sensitive assets | $ | 70,083 | $ | 111,026 | $ | 171,956 | $ | 363,880 | $ | 424,200 | |||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||||||||||
Interest-bearing deposits (1) | $ | 50,296 | $ | 37,115 | $ | 66,499 | $ | 67,101 | $ | 56,781 | $ | 277,792 | |||||||||||||||
Borrowings | 13,439 | 2,000 | — | 34,061 | — | 49,500 | |||||||||||||||||||||
Subordinated debentures | — | — | — | — | 10,310 | 10,310 | |||||||||||||||||||||
Total | $ | 63,735 | $ | 39,115 | $ | 66,499 | $ | 101,162 | $ | 67,091 | $ | 337,602 | |||||||||||||||
Cumulative interest sensitive liabilities | $ | 63,735 | $ | 102,850 | $ | 169,349 | $ | 270,511 | $ | 337,602 | |||||||||||||||||
Interest sensitivity gap | $ | 6,348 | $ | 1,828 | ($5,569 | ) | $ | 90,762 | ($6,771 | ) | |||||||||||||||||
Cumulative interest sensitivity gap | $ | 6,348 | $ | 8,176 | $ | 2,607 | $ | 93,369 | $ | 86,598 | |||||||||||||||||
Cumulative ratio of rate sensitive assets to rate sensitive liabilities | 110.0 | % | 107.9 | % | 101.5 | % | 134.5 | % | 125.7 | % |
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 effectiveness of asset/liability management.
Mid-Wisconsin’s management also estimates the effect 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, 300 and 400 basis points or decreasing 100 or 200 basis points. All rates are increased or decreased parallel to the change in prime rate. The simulation assumes a static mix of assets and liabilities. 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. Actual net interest income is largely impacted by the allocation of assets, liabilities and product mix. The simulation results are one indicator of interest rate risk. Management also estimates the effect changes in the yield curve may have on net interest income through various non-parallel rate shifts. Several scenarios are run for extended projection time frames.
Management continually reviews Mid-Wisconsin’s interest rate risk position through Mid-Wisconsin’s Asset/Liability Committee process. This is also reported to the board of directors through the Board Investment Committee on a bi-monthly basis.
Proposed Merger
On November 28, 2012, Mid-Wisconsin entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Nicolet Bankshares, Inc. (“Nicolet”), the holding company of Nicolet National Bank. Pursuant to the terms of the Merger Agreement, Mid-Wisconsin will be merged with and into Nicolet in a stock for stock transaction creating one of the largest community banks in Wisconsin. 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 Mid-Wisconsin and Nicolet.
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Under the terms of the Merger Agreement, Mid-Wisconsin’s shareholders will generally receive 0.3727 shares of Nicolet common stock; however, in certain limited circumstances Mid-Wisconsin’s shareholders will receive cash in the amount of $6.15 per share of Mid-Wisconsin common stock in lieu of Nicolet stock. The specifics of such payments are described in the Merger Agreement. As a condition of the merger, Mid-Wisconsin shall have redeemed by the closing of the merger its Preferred Stock plus all accrued and unpaid dividends thereon and shall have brought current the junior subordinated debentures. If such repayments are not permitted by Mid-Wisconsin’s regulatory authorities, Nicolet shall purchase the Preferred Stock for a price, not to exceed $12,000 and shall pay all accrued but unpaid interest on the junior subordinated debentures.
Capital
Mid-Wisconsin’s management regularly reviews the adequacy of Mid-Wisconsin’s 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 Mid-Wisconsin and Mid-Wisconsin Bank 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.
As of December 31, 2012 and 2011, the tier 1 risk-based capital ratio, total risk-based capital (tier 1 and tier 2) ratio, and tier 1 leverage ratio for Mid-Wisconsin and Mid-Wisconsin Bank were in excess of regulatory minimum requirements, as well as the heightened requirements as set forth in Mid-Wisconsin Bank’s Agreement with the FDIC and WDFI. In the second quarter of 2012, the federal bank regulatory agencies issued joint proposed rules that would implement an international capital accord called “Basel III,” developed by the Basel Committee on Banking Supervision, a committee of central banks and bank supervisors. The proposed rules would apply to all depository organizations in the United States and most of their parent companies and would increase minimum capital ratios, add a new minimum common equity ratio, add a new capital conservation buffer, and would change the risk-weightings of certain assets for the purposes of calculating certain capital ratios. The proposed changes were intended to be phased in from 2013 through 2019. The comment period on the proposed rules expired on October 22, 2012. On November 9, 2012, the federal bank regulatory agencies announced that the implementation of Basel III in the United States was indefinitely delayed. Management continues to assess the effect of the proposed rules on Mid-Wisconsin and Mid-Wisconsin Bank’s capital position and will continue to monitor new developments with respect to the proposed rules.
On November 9, 2010, Mid-Wisconsin Bank entered into an Agreement with the FDIC and the WDFI. Under the terms of the Agreement, Mid-Wisconsin Bank is required to: (i) maintain ratios of tier 1 capital to each of total assets and total risk-weighted assets of at least 8.5% and 12%, respectively; (ii) refrain from declaring or paying any dividend without the written consent of the FDIC and WDFI; and (iii) refrain from increasing its total assets by more than 5% during any three-month period without first submitting a growth plan to the FDIC and WDFI. Additionally, on May 10, 2011, Mid-Wisconsin entered into a formal written agreement with the Federal Reserve Bank. Pursuant to Mid-Wisconsin’s agreement, Mid-Wisconsin needs the written consent of the Federal Reserve Bank to pay dividends to its shareholders. It is also prohibited from paying dividends on its common stock if it fails to make distributions or required payments on its junior subordinated debentures or on its Preferred Stock.
On October 14, 2008, the Treasury announced details of the TARP Capital Purchase Program, whereby the Treasury made direct equity investments into qualifying financial institutions in the form of preferred stock, providing an immediate influx of Tier 1 capital into the banking system. Participants also adopted the Treasury’s standards for executive compensation and corporate governance for the period during which the Treasury holds equity issued under this program.
On February 20, 2009, under the TARP Capital Purchase Program, Mid-Wisconsin issued 10,000 shares of Series A Preferred Stock and a warrant to purchase 500 shares of Series B Preferred Stock (together with the Series A Preferred stock, the “Preferred Stock”), which was immediately exercised, to the Treasury. Total proceeds received were $10,000. The proceeds received were allocated between the Series A Preferred Stock and the Series B Preferred Stock based upon their relative fair values, which resulted in the recording of a
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discount on the Series A Preferred Stock and a premium on the Series B Preferred Stock. The discount and premium is being amortized over five years from the date of issuance. The allocated carrying value of the Series A Preferred Stock and Series B Preferred Stock on the date of issuance (based on their relative fair values) was $9,442 and $558, respectively. Cumulative dividends on the Series A Preferred Stock accrue and are payable quarterly at a rate of 5% per annum for five years. The rate will increase to 9% per annum thereafter if the shares are not redeemed by Mid-Wisconsin. The Series B Preferred Stock dividends accrue and are payable quarterly at 9%. All $10,000 of the Preferred Stock qualify as tier 1 capital for regulatory purposes at Mid-Wisconsin.
A summary of Mid-Wisconsin’s and Mid-Wisconsin Bank’s regulatory capital ratios as of December 31, 2012 and 2011 are as follows:
Table 21: Capital Ratios
Actual | For Capital Adequacy Purposes (1) | To Be Well Capitalized Under Prompt Corrective Action Provisions (2) | ||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||||||||
December 31, 2012 | ||||||||||||||||||||||||||||||
Mid-Wisconsin Financial Services, Inc. | ||||||||||||||||||||||||||||||
Tier 1 to average assets | $ | 44,394 | 9.6 | % | $ | 18,448 | 4.0 | % | ||||||||||||||||||||||
Tier 1 risk-based capital ratio | 44,394 | 15.0 | % | 11,814 | 4.0 | % | ||||||||||||||||||||||||
Total risk-based capital ratios | 48,159 | 16.3 | % | 23,628 | 8.0 | % | ||||||||||||||||||||||||
Mid-Wisconsin Bank | ||||||||||||||||||||||||||||||
Tier 1 to average assets | $ | 40,695 | 8.9 | % | $ | 18,318 | 4.0 | % | $ | 38,925 | 8.5% | |||||||||||||||||||
Tier 1 risk-based capital ratio | 40,695 | 13.9 | % | 11,694 | 4.0 | % | 17,540 | 6.0% | ||||||||||||||||||||||
Total risk-based capital ratios | 44,422 | 15.2 | % | 23,387 | 8.0 | % | 35,081 | 12.0% | ||||||||||||||||||||||
December 31, 2011 | ||||||||||||||||||||||||||||||
Mid-Wisconsin Financial Services, Inc. | ||||||||||||||||||||||||||||||
Tier 1 to average assets | $ | 46,729 | 9.6 | % | $ | 19,396 | 4.0 | % | ||||||||||||||||||||||
Tier 1 risk-based capital ratio | 46,729 | 14.3 | % | 13,071 | 4.0 | % | ||||||||||||||||||||||||
Total risk-based capital ratios | 50,884 | 15.6 | % | 26,142 | 8.0 | % | ||||||||||||||||||||||||
Mid-Wisconsin Bank | ||||||||||||||||||||||||||||||
Tier 1 to average assets | $ | 41,736 | 8.7 | % | $ | 19,261 | 4.0 | % | $ | 40,929 | 8.5% | |||||||||||||||||||
Tier 1 risk-based capital ratio | 41,736 | 12.9 | % | 12,946 | 4.0 | % | 19,419 | 6.0% | ||||||||||||||||||||||
Total risk-based capital ratios | 45,853 | 14.2 | % | 25,891 | 8.0 | % | 38,837 | 12.0% |
(1) | The Bank has agreed with the FDIC and WDFI that, until its Agreement with such parties is no longer in effect, it will maintain minimum capital ratios at specified levels higher than those otherwise required by applicable regulations as follows: Tier 1 capital to total average assets — 8.5% and total capital to risk-weighted assets (total capital) — 12%. |
(2) | Prompt corrective action provisions are not applicable at the bank holding company level. |
Mid-Wisconsin’s ability to pay dividends depends in part upon the receipt of dividends from Mid-Wisconsin Bank and these dividends are subject to limitation under banking laws and regulations. Pursuant to the Agreement with the FDIC and WDFI, Mid-Wisconsin Bank needs the written consent of the regulators to pay dividends to Mid-Wisconsin. Mid-Wisconsin Bank has not paid dividends to Mid-Wisconsin since 2006. In consultation with the Federal Reserve Bank on May 12, 2011, Mid-Wisconsin exercised its rights to suspend dividends on the outstanding Preferred Stock and has also elected to defer interest on its junior subordinated debentures. Under the terms of the junior subordinated debentures, Mid-Wisconsin is allowed to defer payments of interest for 20 quarterly periods without default or penalty, but such amounts will continue to accrue. Also during the deferral period, Mid-Wisconsin generally may not pay cash dividends on or
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repurchase its common stock or preferred stock, including the Preferred Stock. Dividend payments on the Preferred Stock may be deferred without default, but the dividend is cumulative and therefore will continue to accrue and, if Mid-Wisconsin fails to pay dividends for an aggregate of six quarters, whether or not consecutive, the holder will have the right to appoint representatives to Mid-Wisconsin’s board of directors. As of September 30, 2012, Mid-Wisconsin had deferred dividends on its Preferred Stock for six quarters. Accordingly, the Treasury has appointed a representative who has observed the September and October 2012 monthly meetings of Mid-Wisconsin’s board of directors and may continue to observe Mid-Wisconsin’s future board of directors’ meetings.
The terms of the Preferred Stock also prevent Mid-Wisconsin from paying cash dividends on or repurchasing its common stock while dividends are in arrears. Therefore, Mid-Wisconsin will not be able to pay dividends on its common stock until it has fully paid all accrued and unpaid interest on the junior subordinated debentures and all accrued and unpaid dividends on the Preferred Stock. On December 31, 2012, Mid-Wisconsin had $1,066 accrued and unpaid dividends on the Preferred Stock and $344 accrued and unpaid interest due on its junior subordinated debentures.
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 ta 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 Gap Analysis.”
Selected Quarterly Financial Data
The following is selected financial data summarizing the results of operations for each quarter in the years ended December 31, 2012, 2011 and 2010:
Table 22: Selected Quarterly Financial Data
2012 Quarter Ended | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31, | September 30, | June 30, | March 31, | |||||||||||||||
(In thousands, except per share data) | ||||||||||||||||||
Interest income | $ | 4,569 | $ | 4,763 | $ | 4,960 | $5,113 | |||||||||||
Interest expense | 966 | 1,067 | 1,241 | 1,363 | ||||||||||||||
Net interest income | 3,603 | 3,696 | 3,719 | 3,750 | ||||||||||||||
Provision for loan losses | 750 | 750 | 2,180 | 750 | ||||||||||||||
Noninterest income | 1,042 | 977 | 949 | 985 | ||||||||||||||
Noninterest expense | 4,500 | 3,539 | 3,955 | 3,964 | ||||||||||||||
Income (loss) before income taxes | (605 | ) | 384 | (1,467 | ) | 21 | ||||||||||||
Income tax (benefit) expense | 150 | 3 | 1,149 | — | ||||||||||||||
Net income (loss) | (755 | ) | 381 | (2,616 | ) | 21 | ||||||||||||
Preferred stock dividends, discount and premium | (163 | ) | (163 | ) | (162 | ) | (162) | |||||||||||
Net income (loss) available to common equity | ($918 | ) | $ | 218 | ($2,778 | ) | ($141) | |||||||||||
Basic and diluted (loss) per common share | ($0.55 | ) | $ | 0.13 | ($1.67 | ) | ($0.09) |
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2011 Quarter Ended | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31, | September 30, | June 30, | March 31, | |||||||||||||||
(In thousands, except per share data) | ||||||||||||||||||
Interest income | $ | 5,507 | $ | 5,368 | $ | 5,519 | $5,645 | |||||||||||
Interest expense | 1,467 | 1,594 | 1,663 | 1,761 | ||||||||||||||
Net interest income | 4,040 | 3,774 | 3,856 | 3,884 | ||||||||||||||
Provision for loan losses | 900 | 900 | 1,900 | 1,050 | ||||||||||||||
Noninterest income | 1,018 | 915 | 932 | 1,422 | ||||||||||||||
Noninterest expense | 4,747 | 4,184 | 4,137 | 4,119 | ||||||||||||||
Income (loss) before income taxes | (589 | ) | (395 | ) | (1,249 | ) | 137 | |||||||||||
Income tax (benefit) expense | 2,622 | (209 | ) | (549 | ) | (3) | ||||||||||||
Net income (loss) | (3,211 | ) | (186 | ) | (700 | ) | 140 | |||||||||||
Preferred stock dividends, discount and premium | (162 | ) | (160 | ) | (162 | ) | (160) | |||||||||||
Net income (loss) available to common equity | ($3,373 | ) | ($346 | ) | ($862 | ) | ($20) | |||||||||||
Basic and diluted (loss) per common share | ($2.04 | ) | ($0.21 | ) | ($0.52 | ) | ($0.01) |
2010 Quarter Ended | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31, | September 30, | June 30, | March 31, | |||||||||||||||
(In thousands, except per share data) | ||||||||||||||||||
Interest income | $ | 6,018 | $ | 6,196 | $ | 6,391 | $6,457 | |||||||||||
Interest expense | 2,004 | 2,175 | 2,255 | 2,328 | ||||||||||||||
Net interest income | 4,014 | 4,021 | 4,136 | 4,129 | ||||||||||||||
Provision for loan losses | 1,500 | 900 | 955 | 1,400 | ||||||||||||||
Noninterest income | 1,876 | 1,467 | 1,220 | 987 | ||||||||||||||
OTTI losses, net | — | 412 | — | — | ||||||||||||||
Noninterest expense | 4,085 | 3,993 | 3,945 | 3,782 | ||||||||||||||
Income (loss) before income taxes | 305 | 183 | 456 | (66) | ||||||||||||||
Income tax (benefit) expense | 65 | 21 | 128 | (79) | ||||||||||||||
Net income (loss) | 240 | 162 | 328 | 13 | ||||||||||||||
Preferred stock dividends, discount and premium | (160 | ) | (160 | ) | (160 | ) | (161) | |||||||||||
Net income (loss) available to common equity | $ | 80 | $ | 2 | $ | 168 | ($148) | |||||||||||
Basic and diluted (loss) per common share | $ | 0.05 | $ | 0.00 | $ | 0.10 | ($0.09) |
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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 December 31, 2012, Nicolet National Bank’s ratio of total capital to risk-weighted assets was 14.1% and Nicolet National Bank’s ratio of Tier 1 capital to risk-weighted assets was 12.8%.
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 December 31, 2012, Nicolet National Bank’s leverage ratio was 10.1%. 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.
176
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.
177
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 as of December 31, 2012, and for each of the years in the three-year period ended December 31, 2012 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. The consolidated financial statements and schedules as of December 31, 2012, and for each of the years in the three-year period ended December 31, 2012 included beginning on page F-__ in this joint proxy statement-prospectus have been audited by Wipfli LLP.
LEGAL MATTERS
Godfrey & Kahn LLP has provided 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 have also been 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, 2012
December 31, 2012
F-1
![](https://capedge.com/proxy/S-4A/0001188112-13-000722/pkm-logo.jpg)
To the Board of Directors and Stockholders
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, 2012 and 2011, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012. 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, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.
![](https://capedge.com/proxy/S-4A/0001188112-13-000722/pkm-sig.jpg)
Atlanta, Georgia
February 22, 2013
![](https://capedge.com/proxy/S-4A/0001188112-13-000722/pkm-footer.jpg)
February 22, 2013
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F-2
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2012 and 2011
December 31, 2012 and 2011
2012 | 2011 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Assets | ||||||||||
Cash and due from banks | $ | 26,987,805 | $ | 13,741,792 | ||||||
Interest-earning deposits | 54,515,865 | 77,391,757 | ||||||||
Federal funds sold | 499,466 | 995,500 | ||||||||
Cash and cash equivalents | 82,003,136 | 92,129,049 | ||||||||
Certificates of deposit in other banks | — | 248,000 | ||||||||
Securities available for sale | 55,900,568 | 56,759,395 | ||||||||
Other investments | 5,220,550 | 5,211,150 | ||||||||
Loans held for sale | 7,323,000 | 11,373,260 | ||||||||
Loans | 552,600,840 | 472,488,814 | ||||||||
Allowance for loan losses | (7,119,964 | ) | (5,899,488 | ) | ||||||
Loans, net | 545,480,876 | 466,589,326 | ||||||||
Premises and equipment, net | 19,602,395 | 19,256,425 | ||||||||
Bank owned life insurance | 18,696,899 | 14,236,662 | ||||||||
Accrued interest receivable and other assets | 11,027,317 | 12,445,458 | ||||||||
Total assets | $ | 745,254,741 | $ | 678,248,725 | ||||||
Liabilities and Stockholders’ Equity | ||||||||||
Liabilities: | ||||||||||
Demand | $ | 108,233,581 | $ | 78,154,193 | ||||||
Money market and NOW accounts | 322,506,757 | 270,738,311 | ||||||||
Savings | 46,907,408 | 21,780,998 | ||||||||
Time | 138,444,853 | 180,862,028 | ||||||||
Total deposits | 616,092,599 | 551,535,530 | ||||||||
Short-term borrowings | 4,034,776 | 4,131,892 | ||||||||
Notes payable | 35,155,482 | 35,373,896 | ||||||||
Junior subordinated debentures | 6,185,568 | 6,185,568 | ||||||||
Accrued interest payable and other liabilities | 6,407,887 | 4,808,600 | ||||||||
Total liabilities | 667,876,312 | 602,035,486 | ||||||||
Stockholders’ Equity: | ||||||||||
Preferred equity | 24,400,000 | 24,400,000 | ||||||||
Common stock | 34,254 | 34,804 | ||||||||
Additional paid-in capital | 36,243,049 | 36,740,711 | ||||||||
Retained earnings | 14,972,855 | 13,156,974 | ||||||||
Accumulated other comprehensive income | 1,682,928 | 1,690,021 | ||||||||
Total Nicolet Bankshares Inc. stockholders’ equity | 77,333,086 | 76,022,510 | ||||||||
Noncontrolling interest | 45,343 | 190,729 | ||||||||
Total stockholders’ equity and noncontrolling interest | 77,378,429 | 76,213,239 | ||||||||
Total liabilities, noncontrolling interest and stockholders’ equity | $ | 745,254,741 | $ | 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 outstanding | 3,425,413 | 3,480,355 | ||||||||
Common shares issued | 3,479,888 | 3,480,355 |
See Notes to Consolidated Financial Statements
F-3
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31, 2012, 2011 and 2010
Years Ended December 31, 2012, 2011 and 2010
2012 | 2011 | 2010 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Interest income: | ||||||||||||||
Loans, including loan fees | $ | 27,145,244 | $ | 28,033,620 | $ | 29,384,906 | ||||||||
Investment securities: | ||||||||||||||
Taxable | 624,687 | 725,187 | 874,823 | |||||||||||
Non-taxable | 792,412 | 905,521 | 944,200 | |||||||||||
Federal funds sold | 2,602 | 2,492 | 9,937 | |||||||||||
Other interest income | 230,020 | 163,355 | 205,919 | |||||||||||
Total interest income | 28,794,965 | 29,830,175 | 31,419,785 | |||||||||||
Interest expense: | ||||||||||||||
Money market and NOW accounts | 1,704,304 | 1,546,429 | 1,465,504 | |||||||||||
Savings and time deposits | 2,998,693 | 4,963,800 | 7,888,960 | |||||||||||
Short term borrowings | 4,203 | 9,009 | 24,193 | |||||||||||
Junior subordinated debentures | 503,093 | 501,718 | 501,858 | |||||||||||
Notes payable | 1,319,260 | 1,362,045 | 1,410,080 | |||||||||||
Total interest expense | 6,529,553 | 8,383,001 | 11,290,595 | |||||||||||
Net interest income | 22,265,412 | 21,447,174 | 20,129,190 | |||||||||||
Provision for loan losses | 4,325,000 | 6,600,000 | 8,500,000 | |||||||||||
Net interest income after provision for loan losses | 17,940,412 | 14,847,174 | 11,629,190 | |||||||||||
Other income: | ||||||||||||||
Service charges on deposit accounts | 1,159,074 | 1,180,214 | 1,087,321 | |||||||||||
Trust services fee income | 2,974,658 | 2,898,673 | 2,811,173 | |||||||||||
Mortgage income | 3,090,125 | 1,766,778 | 2,618,909 | |||||||||||
Brokerage fee income | 323,097 | 334,209 | 290,582 | |||||||||||
Gain (loss) on sale, disposal and writedown of assets, net | 448,294 | (55,055 | ) | (58,668 | ) | |||||||||
Bank owned life insurance | 710,236 | 572,216 | 573,940 | |||||||||||
Rent income | 1,003,397 | 954,888 | 969,809 | |||||||||||
Investment advisory fees | 342,750 | 329,518 | 307,608 | |||||||||||
Other | 692,536 | 462,360 | 367,263 | |||||||||||
Total other income | 10,744,167 | 8,443,801 | 8,967,937 | |||||||||||
Other expenses: | ||||||||||||||
Salaries and employee benefits | 13,145,560 | 11,333,831 | 10,165,339 | |||||||||||
Occupancy, equipment and office | 4,415,144 | 4,408,651 | 3,747,946 | |||||||||||
Business development and marketing | 1,649,150 | 1,362,572 | 1,242,421 | |||||||||||
Data processing | 1,688,657 | 1,360,463 | 1,292,704 | |||||||||||
FDIC assessments | 566,283 | 629,845 | 926,943 | |||||||||||
Core deposit intangible amortization | 638,581 | 740,621 | 329,165 | |||||||||||
Other | 1,959,261 | 1,606,744 | 1,611,429 | |||||||||||
Total other expenses | 24,062,636 | 21,442,727 | 19,315,947 | |||||||||||
Income before income tax expense | 4,621,943 | 1,848,248 | 1,281,180 | |||||||||||
Income tax expense | 1,529,448 | 318,431 | 136,326 | |||||||||||
Net income | 3,092,495 | 1,529,817 | 1,144,854 | |||||||||||
Less: Net income attributable to noncontrolling interest | 56,614 | 39,532 | 34,505 | |||||||||||
Net income attributable to Nicolet Bankshares, Inc. | 3,035,881 | 1,490,285 | 1,110,349 | |||||||||||
Less: Preferred stock dividends and discount accretion | 1,220,000 | 1,461,332 | 985,160 | |||||||||||
Net income available to common shareholders | $ | 1,815,881 | $ | 28,953 | $ | 125,189 | ||||||||
Basic earnings per common share | $ | 0.53 | $ | 0.01 | $ | 0.04 | ||||||||
Diluted earnings per common share | $ | 0.53 | $ | 0.01 | $ | 0.04 | ||||||||
Weighted average common shares outstanding: | ||||||||||||||
Basic | 3,440,101 | 3,468,658 | 3,452,358 | |||||||||||
Diluted | 3,441,692 | 3,487,760 | 3,481,042 |
See Notes to Consolidated Financial Statements
F-4
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2012, 2011 and 2010
Years Ended December 31, 2012, 2011 and 2010
2012 | 2011 | 2010 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net income | $ | 3,092,495 | $ | 1,529,817 | $ | 1,144,854 | ||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||
Unrealized gains on securities available for sale: | ||||||||||||||
Net unrealized holding gains arising during the period | 638,528 | 1,047,714 | 250,653 | |||||||||||
Reclassification adjustment for net gains included in earnings | (440,268 | ) | — | (283,152 | ) | |||||||||
Income tax expense | (205,353 | ) | (356,223 | ) | (34,530 | ) | ||||||||
Total other comprehensive income (loss) | (7,093 | ) | 691,491 | (67,029 | ) | |||||||||
Comprehensive income | $ | 3,085,402 | $ | 2,221,308 | $ | 1,077,825 |
See Notes to Consolidated Financial Statements
F-5
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2012, 2011 and 2010
Years Ended December 31, 2012, 2011 and 2010
Nicolet Bankshares, Inc. Stockholders’ Equity | ||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Preferred Equity | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (“AOCI”) | Noncontrolling Interest | Total | ||||||||||||||||||||||||
Balance, December 31, 2009 | $ | 15,033,640 | $ | 34,419 | $ | 35,687,673 | $ | 13,002,832 | $ | 1,065,559 | $ | 11,692 | $ | 64,835,815 | ||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||
Net income | — | — | — | 1,110,349 | — | 34,505 | 1,144,854 | |||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (67,029 | ) | — | (67,029 | ) | |||||||||||||||||||||
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 | ||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||
Net income | — | — | — | 1,490,285 | — | 39,532 | 1,529,817 | |||||||||||||||||||||||
Other comprehensive income | — | — | — | — | 691,491 | — | 691,491 | |||||||||||||||||||||||
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 | ||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||
Net income | — | — | — | 3,035,881 | — | 56,614 | 3,092,495 | |||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (7,093 | ) | — | (7,093 | ) | |||||||||||||||||||||
Stock compensation expense | — | — | 511,332 | — | — | — | 511,332 | |||||||||||||||||||||||
Exercise of stock options, including income tax benefit of $2,720 | — | 257 | 321,618 | — | — | — | 321,875 | |||||||||||||||||||||||
Purchase and retirement of common stock | (807 | ) | (1,330,612 | ) | (1,331,419 | ) | ||||||||||||||||||||||||
Preferred stock dividends | — | — | — | (1,220,000 | ) | — | — | (1,220,000 | ) | |||||||||||||||||||||
Repayment from noncontrolling interest | — | — | — | — | — | (202,000 | ) | (202,000 | ) | |||||||||||||||||||||
Balance, December 31, 2012 | $ | 24,400,000 | $ | 34,254 | $ | 36,243,049 | $ | 14,972,855 | $ | 1,682,928 | $ | 45,343 | $ | 77,378,429 |
See Notes to Consolidated Financial Statements
F-6
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 2012, 2011 and 2010
Years Ended December 31, 2012, 2011 and 2010
2012 | 2011 | 2010 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cash Flows From Operating Activities: | ||||||||||||||
Net income | $ | 3,092,495 | $ | 1,529,817 | $ | 1,144,854 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
Depreciation, amortization and accretion | 2,417,291 | 1,901,875 | 1,429,973 | |||||||||||
Provision for loan losses | 4,325,000 | 6,600,000 | 8,500,000 | |||||||||||
Provision for deferred taxes | (272,999 | ) | 453,803 | (880,983 | ) | |||||||||
Increase in cash surrender value of life insurance | (710,237 | ) | (572,216 | ) | (573,940 | ) | ||||||||
Stock compensation expense | 511,332 | 294,458 | 295,740 | |||||||||||
Loss (gain) on sale, disposal or writedown of assets, net | (448,294 | ) | 55,055 | 58,668 | ||||||||||
Gain on sale of loans held for sale, net | (3,090,125 | ) | (1,766,778 | ) | (2,618,909 | ) | ||||||||
Proceeds from sale of loans held for sale | 196,417,797 | 108,858,230 | 161,346,099 | |||||||||||
Origination of loans held for sale | (189,277,412 | ) | (113,130,812 | ) | (158,449,240 | ) | ||||||||
Net change in: | ||||||||||||||
Accrued interest receivable and other assets | 582,683 | 7,151,062 | (6,045,475 | ) | ||||||||||
Accrued interest payable and other liabilities | 1,393,934 | (217,526 | ) | (358,753 | ) | |||||||||
Net cash provided by operating activities | 14,941,465 | 11,156,968 | 3,848,034 | |||||||||||
Cash Flows From Investing Activities: | ||||||||||||||
Net decrease in certificates of deposit in other banks | 248,000 | 249,000 | 2,479,000 | |||||||||||
Purchases of securities available for sale | (17,352,510 | ) | (9,704,315 | ) | (12,111,065 | ) | ||||||||
Proceeds from sales of securities available for sale | 5,415,008 | — | 3,305,201 | |||||||||||
Proceeds from calls and maturities of securities available for sale | 13,252,217 | 6,263,087 | 10,794,659 | |||||||||||
Net decrease (increase) in loans | (84,722,544 | ) | 30,963,273 | (8,965,918 | ) | |||||||||
Purchases of other investments | (9,400 | ) | (428,450 | ) | (15,500 | ) | ||||||||
Purchases of premises and equipment | (1,937,735 | ) | (1,736,229 | ) | (1,612,717 | ) | ||||||||
Proceeds from sales of premises and equipment | 18,264 | — | — | |||||||||||
Proceeds from sale of other real estate and other assets | 1,961,327 | 1,839,775 | 765,893 | |||||||||||
Purchase of bank owned life insurance | (3,750,000 | ) | — | — | ||||||||||
Net cash received in business combination | — | — | 77,777,555 | |||||||||||
Net cash (used) provided by investing activities | (86,877,373 | ) | 27,446,141 | 72,417,108 | ||||||||||
Cash Flows From Financing Activities: | ||||||||||||||
Net increase (decrease) in deposits | 64,557,069 | (6,345,049 | ) | (104,205,084 | ) | |||||||||
Net decrease in short term borrowings | (97,116 | ) | (258,544 | ) | (3,208,398 | ) | ||||||||
Repayments of notes payable | (218,414 | ) | (207,593 | ) | (305,762 | ) | ||||||||
Proceeds from Federal Home Loan Bank advances | 5,000,000 | — | — | |||||||||||
Repayments of Federal Home Loan Bank advances | (5,000,000 | ) | — | — | ||||||||||
Purchase of common stock | (1,331,419 | ) | — | — | ||||||||||
Proceeds from issuance of common stock, net | - | 35,772 | 207,702 | |||||||||||
Proceeds from exercise of common stock options | 321,875 | 196,251 | 64,500 | |||||||||||
Proceeds from issuance of preferred stock (SBLF), net | — | 24,359,000 | — | |||||||||||
Repayment of preferred stock (CPP) | — | (15,712,000 | ) | — | ||||||||||
Noncontrolling interest in joint venture | (202,000 | ) | 105,000 | — | ||||||||||
Cash dividends paid on preferred stock | (1,220,000 | ) | (749,552 | ) | (815,520 | ) | ||||||||
Net cash provided (used) by financing activities | 61,809,995 | 1,423,285 | (108,262,562 | ) | ||||||||||
Net increase (decrease) in cash and cash equivalents | (10,125,913 | ) | 40,026,394 | (31,997,420 | ) | |||||||||
Cash and cash equivalents: | ||||||||||||||
Beginning | $ | 92,129,049 | $ | 52,102,655 | $ | 84,100,075 | ||||||||
Ending | $ | 82,003,136 | $ | 92,129,049 | $ | 52,102,655 |
(Continued)
See Notes to Consolidated Financial Statements
F-7
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows — continued
Years Ended December 31, 2012, 2011 and 2010
Years Ended December 31, 2012, 2011 and 2010
2012 | 2011 | 2010 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Supplemental Disclosures of Cash Flow Information: | ||||||||||||||
Cash paid for interest | $ | 6,797,587 | $ | 9,211,295 | $ | 11,754,089 | ||||||||
Cash paid for taxes | 929,500 | 205,000 | 1,146,000 | |||||||||||
Transfer of loans to other real estate owned | 1,505,994 | 973,125 | 512,024 | |||||||||||
Accretion of preferred stock discount | — | 508,720 | 169,640 |
See Notes to Consolidated Financial Statements
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
Nature of Banking Activities: Nicolet Bankshares, Inc. (the “Company”) 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 (the “Bank”). Nicolet National Bank opened for business on October 29, 2000.
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.
The consolidated income of the Company is derived principally from the Bank, which conducts lending (primarily commercial-based loans, as well as residential and consumer loans) and deposit gathering (including other banking- and deposit-related products and services, such as ATMs, safe deposit boxes, check-cashing, wires, and debit cards) to businesses, consumers and governmental units principally in its trade area of northeastern Wisconsin, trust and brokerage services, and the support to deliver, fund and manage all such banking services to its customer base. The contribution of the JV and Brookfield Investments are not significant to the consolidated balance sheet or net income. While the Company’s chief decision-makers monitor the revenue streams of various products and services, the operations are managed and financial performance is evaluated on a company-wide basis; accordingly, management considers all the Company’s operations to be aggregated in one reportable operating segment.
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.
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 assessment of deferred tax assets and liabilities.
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
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)
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 $480,000 and $175,000 at December 31, 2012 and 2011, respectively.
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.
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 Gain (loss) on sale, disposal and writedown of assets, net.
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.
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 AFS 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, 2012 and 2011, no valuation allowance was necessary. Loans held for sale are sold servicing released and without recourse. Mortgage income represents net gains from the sale of mortgage loans held for sale, and to a much lesser degree, 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, net of deferred loan fees and costs. 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
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)
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. 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 losses 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.
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)
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.
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 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 $193,000 and $641,000 at December 31, 2012 and 2011, respectively.
Goodwill and Core Deposit Intangible: Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired or deposit base premiums which represents the value of the acquired customer core deposit base and 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 2012 or 2011. Goodwill was approximately $762,000 at both December 31, 2012 and 2011. The net book value of core deposit intangible was approximately $2,242,000 and $2,880,000 at December 31, 2012 and 2011, 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 payments to employees, including grants of restricted stock or stock options, are valued at fair value on the date of grant and expensed on a straight-line basis as compensation expense over the applicable vesting period.
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)
For stock option grants, 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 2012 and 2010 is as follows:
2012 | 2010 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dividend yield | 0% | 0% | ||||||||||||
Expected volatility | 25% | 25% | ||||||||||||
Risk-free interest rate | 1.37% | 2.12% | ||||||||||||
Expected average life | 7 years | 7 years | ||||||||||||
Weighted average per share fair value of options | $ | 4.87 | $5.41 |
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 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 it is more likely than not that a portion of the full amount of the deferred tax asset will not be realized. In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies.
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, 2012, the Company had determined it had no significant uncertain tax positions. Interest and penalties related to unrecognized tax benefits are classified as income tax expense.
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.
of outstanding stock options, and other potential common stock issuances, if any, from instruments such as convertible securities and warrants.
Earnings per common share and related information are summarized as follows:
Years ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2012 | 2011 | 2010 | |||||||||||||
Net income, net of noncontrolling interest | $ | 3,035,881 | $ | 1,490,285 | $ | 1,110,349 | |||||||||
Less preferred stock dividends and discount accretion | 1,220,000 | 1,461,332 | 985,160 | ||||||||||||
Net income available to common shareholders | $ | 1,815,881 | $ | 28,953 | $ | 125,189 | |||||||||
Weighted average common shares outstanding | 3,440,101 | 3,468,658 | 3,452,358 | ||||||||||||
Effect of dilutive stock options | 1,591 | 19,102 | 28,684 | ||||||||||||
Diluted weighted average common shares outstanding | 3,441,692 | 3,487,760 | 3,481,042 | ||||||||||||
Basic earnings per common share | $ | 0.53 | $ | 0.01 | $ | 0.04 | |||||||||
Diluted earnings per common share | $ | 0.53 | $ | 0.01 | $ | 0.04 |
F-13
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)
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. The Company presents comprehensive income in a separate consolidated statement of comprehensive income.
Reclassifications: Certain amounts in the 2011 and 2010 consolidated financial statements have been reclassified to conform to the 2012 presentation.
New Accounting Developments: In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2012-02,Testing Indefinite-Level 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 January 2013, the FASB issued Accounting Standards Update No. 2013-01,Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. This ASU limits the scope of the new balance sheet offsetting disclosures to derivatives, repurchase agreements, and securities lending transactions to the extent that they are (1) offset in the financial statements or (2) subject to an enforceable master netting agreement. The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. The Company is currently evaluating the impact this guidance will have on its financial position and disclosures. It is not expected to have an impact on the results of operations.
In February 2013, the FASB issued Accounting Standards Update No. 2013-02,Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments in this update require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component and by the respective line items of net income. This guidance is not expected to have a material impact on the Company’s financial position, results of operations, or disclosures.
Subsequent Events: Management has evaluated subsequent events for potential recognition or disclosure in the financial statements through February 22, 2013 the date on which financial statements were available to be issued.
NOTE 2. BUSINESS COMBINATIONS
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
F-14
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. BUSINESS COMBINATIONS (Continued)
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).
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. At December 31, 2012, MWFS had total assets of $454 million, loans of $296 million, deposits of $354 million and total equity of $36 million. Pursuant to the terms of the Merger Agreement, MWFS will be merged with and into the Company, and after the merger, Mid-Wisconsin Bank will be merged with and into the Bank. The transactions contemplated by the Merger Agreement are expected to be completed in the second quarter of 2013 and are contingent upon customary conditions, including regulatory approvals and the approval of shareholders of both the Company and MWFS.
Under the terms of the Merger Agreement, MWFS shareholders will receive 0.3727 shares of the Company’s common stock, except in certain limited circumstances outlined in the Merger Agreement, which include, among other instances, cash in lieu of 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 Department of U.S. Treasury (“UST”) as part of its participation in the federal government’s Capital Purchase Program (“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
NOTE 3. SECURITIES AVAILABLE FOR SALE
Amortized costs and fair values of securities available for sale are summarized as follows:
December 31, 2012 | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||
State, county and municipals | $ | 31,642,200 | $ | 1,079,360 | $ | 34,614 | $ | 32,686,946 | |||||||||||
Mortgage-backed securities | 19,875,695 | 802,650 | 10,723 | 20,667,622 | |||||||||||||||
Equity securities | 1,623,775 | 922,225 | — | 2,546,000 | |||||||||||||||
$ | 53,141,670 | $ | 2,804,235 | $ | 45,337 | $ | 55,900,568 |
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-15
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SECURITIES AVAILABLE FOR SALE (Continued)
The current fair value and associated unrealized losses on investments in debt and equity securities with unrealized losses at December 31, 2012 and 2011 are summarized in the following table, with the length of time the individual securities have been in a continuous loss position.
December 31, 2012 | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||||
State, county and municipals | $ | 4,249,443 | $ | 34,614 | $ | — | $ | — | $ | 4,249,443 | $ | 34,614 | |||||||||||||||
Mortgage-backed securities | 3,507,168 | 10,723 | — | — | 3,507,168 | 10,723 | |||||||||||||||||||||
$ | 7,756,611 | $ | 45,337 | $ | — | $ | — | $ | 7,756,611 | $ | 45,337 |
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 |
At December 31, 2012, two U.S. government sponsored enterprise mortgage-backed securities, and six municipal securities had unrealized losses less than 12 months. 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, 2012 to be other-than-temporarily impaired. The Company has the ability and intent to hold its securities to maturity.
The amortized cost and fair value of securities available for sale by contractual maturity at December 31, 2012 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, 2012 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Amortized Cost | Fair Value | ||||||||||
Due in less than one year | $ | 4,330,514 | $ | 4,429,369 | |||||||
Due in one year through five years | 20,531,873 | 21,403,885 | |||||||||
Due after five years through ten years | 6,404,813 | 6,478,692 | |||||||||
Due after ten years | 375,000 | 375,000 | |||||||||
31,642,200 | 32,686,946 | ||||||||||
Mortgage-backed securities | 19,875,695 | 20,667,622 | |||||||||
Equity securities | 1,623,775 | 2,546,000 | |||||||||
Securities available for sale | $ | 53,141,670 | $ | 55,900,568 |
Securities with a carrying value of approximately $7,241,000 and $7,487,000 as of December 31, 2012 and 2011, 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 2012 and 2010 were approximately$5,415,000 and $3,305,000, respectively. Gross gains of approximately $440,000 and $283,000 were realized on sales in 2012 and 2010, respectively. Other-than-temporary
F-16
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SECURITIES AVAILABLE FOR SALE (Continued)
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.
NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES
The loan composition as of December 31, is summarized as follows:
2012 | 2011 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | Amount | % of Total | Amount | % of Total | |||||||||||||||
Commercial & industrial | $ | 197,516 | 35.7 | % | $ | 154,011 | 32.6 | % | |||||||||||
Owner-occupied commercial real estate (“CRE”) | 118,242 | 21.4 | 111,179 | 23.5 | |||||||||||||||
CRE investment | 76,618 | 13.9 | 66,577 | 14.1 | |||||||||||||||
Construction & land development | 21,791 | 3.9 | 24,774 | 5.2 | |||||||||||||||
Residential construction | 7,957 | 1.4 | 9,363 | 2.0 | |||||||||||||||
Residential first mortgage | 85,588 | 15.5 | 56,392 | 11.9 | |||||||||||||||
Residential junior mortgage | 39,352 | 7.1 | 42,699 | 9.0 | |||||||||||||||
Retail & other | 5,537 | 1.1 | 7,494 | 1.7 | |||||||||||||||
Loans | 552,601 | 100.0 | % | 472,489 | 100.0 | % | |||||||||||||
Less allowance for loan losses | 7,120 | 5,899 | |||||||||||||||||
Loans, net | $ | 545,481 | $ | 466,590 | |||||||||||||||
Allowance for loan losses to loans | 1.29 | % | 1.25 | % |
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.
The allowance for loan and lease 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 to 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.
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.
F-17
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The following table presents the balance and activity in the ALLL by portfolio segment and the recorded investment in loans by portfolio segment based on the impairment method as of December 31, 2012 and 2011:
(in thousands): | Year ended December 31, 2012 | ||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Commercial & industrial | Owner- occupied CRE | CRE investment | Construction & land development | Residential construction | Residential first mortgage | Residential junior mortgage | Retail & other | Total | |||||||||||||||||||||||||||||||||||||||||||
ALLL: | |||||||||||||||||||||||||||||||||||||||||||||||||||
Beginning balance | $ | 1,965 | $ | 347 | $ | 393 | $ | 2,035 | $ | 311 | $ | 405 | $ | 419 | $ | 24 | $ | 5,899 | |||||||||||||||||||||||||||||||||
Provision | 263 | 1,750 | 222 | 1,236 | 222 | 534 | 53 | 45 | 4,325 | ||||||||||||||||||||||||||||||||||||||||||
Charge-offs | (295 | ) | (1,328 | ) | (305 | ) | (713 | ) | (396 | ) | (265 | ) | (166 | ) | (39 | ) | (3,507 | ) | |||||||||||||||||||||||||||||||||
Recoveries | 36 | 300 | 27 | 22 | — | 11 | 6 | 1 | 403 | ||||||||||||||||||||||||||||||||||||||||||
Ending balance | $ | 1,969 | $ | 1,069 | $ | 337 | $ | 2,580 | $ | 137 | $ | 685 | $ | 312 | $ | 31 | $ | 7,120 | |||||||||||||||||||||||||||||||||
As percent of ALLL | 27.7 | % | 15.0 | % | 4.7 | % | 36.2 | % | 1.9 | % | 9.6 | % | 4.4 | % | 0.5 | % | 100.0 | % | |||||||||||||||||||||||||||||||||
ALLL: | |||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||
Collectively evaluated | 1,969 | 1,069 | 337 | 2,580 | 137 | 685 | 312 | 31 | 7,120 | ||||||||||||||||||||||||||||||||||||||||||
Ending balance | $ | 1,969 | $ | 1,069 | $ | 337 | $ | 2,580 | $ | 137 | $ | 685 | $ | 312 | $ | 31 | $ | 7,120 | |||||||||||||||||||||||||||||||||
Loans: | |||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated | $ | 784 | $ | 1,960 | $ | — | $ | 2,560 | $ | — | $ | 1,580 | $ | — | $ | 142 | $ | 7,026 | |||||||||||||||||||||||||||||||||
Collectively evaluated | 196,732 | 116,282 | 76,618 | 19,231 | 7,957 | 84,008 | 39,352 | 5,395 | 545,575 | ||||||||||||||||||||||||||||||||||||||||||
Total loans | $ | 197,516 | $ | 118,242 | $ | 76,618 | $ | 21,791 | $ | 7,957 | $ | 85,588 | $ | 39,352 | $ | 5,537 | $ | 552,601 | |||||||||||||||||||||||||||||||||
Less ALLL | $ | 1,969 | $ | 1,069 | $ | 337 | $ | 2,580 | $ | 137 | $ | 685 | $ | 312 | $ | 31 | $ | 7,120 | |||||||||||||||||||||||||||||||||
Net loans | $ | 195,547 | $ | 117,173 | $ | 76,281 | $ | 19,211 | $ | 7,820 | $ | 84,903 | $ | 39,040 | $ | 5,506 | $ | 545,481 |
Year ended December 31, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Commercial & industrial | Owner- Occupied CRE | CRE investment | Construction & land development | Residential construction | Residential first mortgage | Residential junior mortgage | Retail & other | Total | |||||||||||||||||||||||||||||||||||||||||||
ALLL: | |||||||||||||||||||||||||||||||||||||||||||||||||||
Beginning balance | $ | 4,572 | $ | 556 | $ | 209 | $ | 2,165 | $ | 285 | $ | 304 | $ | 482 | $ | 62 | $ | 8,635 | |||||||||||||||||||||||||||||||||
Provision | (77 | ) | 216 | 365 | 5,085 | 68 | 579 | 395 | (31 | ) | 6,600 | ||||||||||||||||||||||||||||||||||||||||
Charge-offs | (2,553 | ) | (428 | ) | (181 | ) | (5,243 | ) | (42 | ) | (488 | ) | (459 | ) | (7 | ) | (9,401 | ) | |||||||||||||||||||||||||||||||||
Recoveries | 23 | 3 | — | 28 | — | 10 | 1 | — | 65 | ||||||||||||||||||||||||||||||||||||||||||
Ending balance | $ | 1,965 | $ | 347 | $ | 393 | $ | 2,035 | $ | 311 | $ | 405 | $ | 419 | $ | 24 | $ | 5,899 | |||||||||||||||||||||||||||||||||
As percent of ALLL | 33.3 | % | 5.9 | % | 6.7 | % | 34.5 | % | 5.3 | % | 6.9 | % | 7.1 | % | 0.3 | % | 100.0 | % | |||||||||||||||||||||||||||||||||
ALLL: | |||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated | $ | 8 | $ | 77 | $ | 163 | $ | 71 | $ | 193 | $ | 37 | $ | — | $ | — | $ | 549 | |||||||||||||||||||||||||||||||||
Collectively evaluated | 1,957 | 270 | 230 | 1,964 | 118 | 368 | 419 | 24 | 5,350 | ||||||||||||||||||||||||||||||||||||||||||
Ending balance | $ | 1,965 | $ | 347 | $ | 393 | $ | 2,035 | $ | 311 | $ | 405 | $ | 419 | $ | 24 | $ | 5,899 | |||||||||||||||||||||||||||||||||
Loans: | |||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated | $ | 1,744 | $ | 935 | $ | 716 | $ | 3,368 | $ | 1,894 | $ | 714 | $ | 105 | $ | 151 | $ | 9,627 | |||||||||||||||||||||||||||||||||
Collectively evaluated | 152,267 | 110,244 | 65,861 | 21,406 | 7,469 | 55,678 | 42,594 | 7,343 | 462,862 | ||||||||||||||||||||||||||||||||||||||||||
Total loans | $ | 154,011 | $ | 111,179 | $ | 66,577 | $ | 24,774 | $ | 9,363 | $ | 56,392 | $ | 42,699 | $ | 7,494 | $ | 472,489 | |||||||||||||||||||||||||||||||||
Less ALLL | $ | 1,965 | $ | 347 | $ | 393 | $ | 2,035 | $ | 311 | $ | 405 | $ | 419 | $ | 24 | $ | 5,899 | |||||||||||||||||||||||||||||||||
Net loans | $ | 152,046 | $ | 110,832 | $ | 66,184 | $ | 22,739 | $ | 9,052 | $ | 55,987 | $ | 42,280 | $ | 7,470 | $ | 466,590 |
F-18
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES (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.
The following table presents nonaccrual loans by portfolio segment as of December 31:
(in thousands) | 2012 | % to Total | 2011 | % to Total | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Commercial & industrial | $ | 784 | 11.2 | % | �� | $ | 1,849 | 19.5 | % | |||||||||
Owner-occupied CRE | 1,960 | 27.9 | 934 | 9.9 | ||||||||||||||
CRE investment | — | — | 716 | 7.6 | ||||||||||||||
Construction & land development | 2,560 | 36.4 | 3,367 | 35.5 | ||||||||||||||
Residential construction | — | — | 1,480 | 15.6 | ||||||||||||||
Residential first mortgage | 1,580 | 22.5 | 1,129 | 11.9 | ||||||||||||||
Residential junior mortgage | — | — | — | — | ||||||||||||||
Retail & other | 142 | 2.0 | 1 | 0.0 | ||||||||||||||
Nonaccrual loans | $ | 7,026 | 100.0 | % | $ | 9,476 | 100 | % |
The following tables present past due loans by portfolio segment as of December 31:
December 31, 2012 | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | 30–89 Days Past Due (accruing) | 90 Days & Over or non-accrual | Current | Total | |||||||||||||||
Commercial & industrial | $ | — | $ | 784 | $ | 196,732 | $ | 197,516 | |||||||||||
Owner-occupied CRE | — | 1,960 | 116,282 | 118,242 | |||||||||||||||
CRE investment | — | — | 76,618 | 76,618 | |||||||||||||||
Construction & land development | — | 2,560 | 19,231 | 21,791 | |||||||||||||||
Residential construction | — | — | 7,957 | 7,957 | |||||||||||||||
Residential first mortgage | — | 1,580 | 84,008 | 85,588 | |||||||||||||||
Residential junior mortgage | — | — | 39,352 | 39,352 | |||||||||||||||
Retail & other | 6 | 142 | 5,389 | 5,537 | |||||||||||||||
Total loans | $ | 6 | $ | 7,026 | $ | 545,569 | $ | 552,601 | |||||||||||
As a percent of total loans | 0.0 | % | 1.3 | % | 98.7 | % | 100.0 | % |
December 31, 2011 | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | 30–89 Days Past Due (accruing) | 90 Days & Over or non-accrual | Current | Total | |||||||||||||||
Commercial & industrial | $ | 898 | $ | 1,849 | $ | 151,264 | $ | 154,011 | |||||||||||
Owner-occupied CRE | 380 | 934 | 109,865 | 111,179 | |||||||||||||||
CRE investment | — | 716 | 65,861 | 66,577 | |||||||||||||||
Construction & land development | 1,139 | 3,367 | 20,268 | 24,774 | |||||||||||||||
Residential construction | — | 1,480 | 7,883 | 9,363 | |||||||||||||||
Residential first mortgage | 330 | 1,129 | 54,933 | 56,392 | |||||||||||||||
Residential junior mortgage | 123 | — | 42,576 | 42,699 | |||||||||||||||
Retail & other | — | 1 | 7,493 | 7,494 | |||||||||||||||
Total loans | $ | 2,870 | $ | 9,476 | $ | 460,143 | $ | 472,489 | |||||||||||
As a percent of total loans | 0.6 | % | 2.0 | % | 97.4 | % | 100.0 | % |
F-19
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
A description of the loan risk categories used by the Company 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, and 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 tables present loans by loan grade as of December 31:
2012 | |||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | Grades 1 – 4 | Grade 5 | Grade 6 | Grade 7 | Grade 8 | Grade 9 | Total | ||||||||||||||||||||||||
Commercial & industrial | $ | 192,426 | $ | 1,969 | $ | 604 | $ | 2,517 | $ | — | $ | — | $ | 197,516 | |||||||||||||||||
Owner-occupied CRE | 96,313 | 16,502 | 1,832 | 3,595 | — | — | 118,242 | ||||||||||||||||||||||||
CRE investment | 66,358 | 8,545 | — | 1,715 | — | — | 76,618 | ||||||||||||||||||||||||
Construction &land development | 12,351 | 855 | 877 | 7,708 | — | — | 21,791 | ||||||||||||||||||||||||
Residential construction | 6,775 | — | — | 1,182 | — | — | 7,957 | ||||||||||||||||||||||||
Residential first mortgage | 82,914 | 1,094 | — | 1,580 | — | — | 85,588 | ||||||||||||||||||||||||
Residential junior mortgage | 38,582 | 199 | 249 | 322 | — | — | 39,352 | ||||||||||||||||||||||||
Retail & other | 5,537 | — | — | — | — | — | 5,537 | ||||||||||||||||||||||||
Total loans | $ | 501,256 | $ | 29,164 | $ | 3,562 | $ | 18,619 | $ | — | $ | — | $ | 552,601 |
2011 | |||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | Grades 1 – 4 | Grade 5 | Grade 6 | Grade 7 | Grade 8 | Grade 9 | Total | ||||||||||||||||||||||||
Commercial & industrial | $ | 141,698 | $ | 4,321 | $ | 1,638 | $ | 6,354 | $ | — | $ | — | $ | 154,011 | |||||||||||||||||
Owner-occupied CRE | 91,503 | 6,716 | 2,141 | 10,819 | — | — | 111,179 | ||||||||||||||||||||||||
CRE investment | 60,656 | 5,205 | — | 716 | — | — | 66,577 | ||||||||||||||||||||||||
Construction & land development | 12,726 | 1,625 | 897 | 9,526 | — | — | 24,774 | ||||||||||||||||||||||||
Residential construction | 2,174 | 5,709 | — | 1,480 | — | — | 9,363 | ||||||||||||||||||||||||
Residential first mortgage | 51,950 | 1,245 | 213 | 2,984 | — | — | 56,392 | ||||||||||||||||||||||||
Residential junior mortgage | 41,697 | 324 | — | 678 | — | — | 42,699 | ||||||||||||||||||||||||
Retail & other | 7,343 | — | — | 151 | — | — | 7,494 | ||||||||||||||||||||||||
Total loans | $ | 409,747 | $ | 25,145 | $ | 4,889 | $ | 32,708 | $ | — | $ | — | $ | 472,489 |
F-20
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
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 not to be 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.
The following table presents impaired loans as of December 31, 2012:
(in thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31, 2012 | ||||||||||||||||||||||
With no related allowance: | ||||||||||||||||||||||
Commercial & industrial | $ | 784 | $ | 1,287 | $ | — | $ | 3,015 | $ | 265 | ||||||||||||
Owner-occupied CRE | 1,960 | 1,960 | — | 636 | 95 | |||||||||||||||||
CRE investment | — | — | — | 439 | — | |||||||||||||||||
Construction & land development | 2,560 | 2,560 | — | 6,333 | — | |||||||||||||||||
Residential construction | — | — | — | 620 | — | |||||||||||||||||
Residential first mortgage | 1,580 | 1,696 | — | 1,298 | 88 | |||||||||||||||||
Residential junior mortgage | — | — | — | 58 | — | |||||||||||||||||
Retail & Other | 142 | 150 | — | 120 | 7 | |||||||||||||||||
With a related allowance: | — | |||||||||||||||||||||
Commercial & industrial | $ | — | $ | — | $ | — | $ | 177 | $ | — | ||||||||||||
Owner-occupied CRE | — | — | — | 162 | — | |||||||||||||||||
CRE investment | — | — | — | — | — | |||||||||||||||||
Construction & land development. | — | — | — | — | — | |||||||||||||||||
Residential construction | — | — | — | — | — | |||||||||||||||||
Residential first mortgage | — | — | — | — | — | |||||||||||||||||
Residential junior mortgage | — | — | — | — | — | |||||||||||||||||
Retail & other | — | — | — | — | — | |||||||||||||||||
Total: | ||||||||||||||||||||||
Commercial & industrial | $ | 784 | $ | 1,287 | $ | — | $ | 3,192 | $ | 265 | ||||||||||||
Owner-occupied CRE | 1,960 | 1,960 | — | 798 | 95 | |||||||||||||||||
CRE investment | — | — | — | 439 | — | |||||||||||||||||
Construction & land development | 2,560 | 2,560 | — | 6,333 | — | |||||||||||||||||
Residential construction | — | — | — | 620 | — | |||||||||||||||||
Residential first mortgage | 1,580 | 1,696 | — | 1,298 | 88 | |||||||||||||||||
Residential junior mortgage | — | — | — | 58 | — | |||||||||||||||||
Retail & other | 142 | 150 | — | 120 | 7 | |||||||||||||||||
Total | $ | 7,026 | $ | 7,653 | $ | — | $ | 12,858 | $ | 455 |
F-21
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES (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 |
Interest income of approximately $1,008,000, $1,390,000, and $1,004,000 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, 2012, 2011 and 2010, respectively. Interest of approximately $236,000,$220,000, and $415,000 was earned on year-end nonaccrual loans and included in income for the years ended December 31, 2012, 2011 and 2010, respectively
NOTE 5. PREMISES AND EQUIPMENT
Premises and equipment, less accumulated depreciation, is summarized as follows as of December 31:
2012 | 2011 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Land | $ | 1,940,611 | $ | 1,785,376 | ||||||
Land improvements | 1,371,069 | 1,252,582 | ||||||||
Building and improvements | 16,851,690 | 15,611,933 | ||||||||
Leasehold improvements | 4,169,815 | 4,052,308 | ||||||||
Furniture and equipment | 7,140,081 | 6,894,582 | ||||||||
31,473,266 | 29,596,781 | |||||||||
Less accumulated depreciation | 11,870,871 | 10,340,356 | ||||||||
Premises and equipment, net | $ | 19,602,395 | $ | 19,256,425 |
Depreciation expense amounted to approximately $1,574,000, $1,609,000, and $1,440,000 in 2012, 2011, and 2010, respectively.
The Company and certain of its subsidiaries are obligated under noncancelable operating leases for facilities, certain of which provide for increased rentals based upon increases in cost of living adjustments and other indices.
At December 31, 2012, the approximate minimum annual rentals under these noncancelable agreements with remaining terms in excess of one year are as follows:
Years Ending December 31, | ($ in thousands) | |||||
---|---|---|---|---|---|---|
2013 | $ | 559 | ||||
2014 | 550 | |||||
2015 | 556 | |||||
2016 | 565 | |||||
2017 | 409 | |||||
Thereafter | 2,951 | |||||
Total | $ | 5,590 |
Total rent expense under leases totaled approximately $626,000, $662,800, and $355,200, for 2012, 2011 and 2010 respectively.
F-22
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. DEPOSITS
Brokered deposits were approximately $32,640,000 and $38,609,000 at December 31, 2012 and 2011, respectively. The weighted average rate of brokered deposits was 0.55% and 3.08% at December 31, 2012 and 2011, respectively.
At December 31, 2012, the scheduled maturities of time deposits were as follows:
Years Ending December 31, | ||||||
---|---|---|---|---|---|---|
2013 | $ | 64,104,642 | ||||
2014 | 50,305,594 | |||||
2015 | 9,325,964 | |||||
2016 | 10,260,338 | |||||
2017 | 4,442,887 | |||||
Thereafter | 5,428 | |||||
$ | 138,444,853 |
The aggregate amount of time deposits, each with a minimum denomination of $100,000, was approximately $68,463,000 and $93,090,000 at December 31, 2012 and 2011, respectively.
NOTE 7. NOTES PAYABLE
At December 31 the Company had the following notes payable:
2012 | 2011 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Joint Venture note | $ | 10,155,482 | $ | 10,373,896 | ||||||
FHLB advances | 25,000,000 | 25,000,000 | ||||||||
Notes Payable | $ | 35,155,482 | $ | 35,373,896 |
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 $10,155,482, and $10,373,896 as of December 31, 2012 and 2011, respectively.
At December 31, 2012 and 2011, the Company’s FHLB advances total $25,000,000, require interest-only monthly payments, and have maturities ranging from June 2013 to August 2016. The weighted average rate of FHLB advances was 2.61% and 2.87% at December 31, 2012 and 2011, respectively. 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 $54,161,000 and $47,316,000 at December 31, 2012 and 2011, respectively.
At December 31, 2012 the Company had a $7,500,000 line of credit with a third party bank, bearing a variable rate of interest based on one-month LIBOR plus a margin, but subject to a floor rate, with quarterly payments of interest only. The rate was one-month LIBOR plus 2.25% with 4.25% floor at year end 2012, and was one-month LIBOR plus 2.50% with 4.50% floor at year end 2011. The outstanding balance was zero at December 31, 2012 and 2011.
F-23
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. NOTES PAYABLE (Continued)
The following table shows the maturity schedule of the notes payable as of December 31,2012.
Maturing in: | ||||||
---|---|---|---|---|---|---|
2013 | $ | 10,233,377 | ||||
2014 | 10,247,502 | |||||
2015 | 262,481 | |||||
2016 | 14,412,122 | |||||
$ | 35,155,482 |
NOTE 8. JUNIOR SUBORDINATED DEBENTURES
In July 2004 the Company formed a wholly owned Connecticut statutory trust, Nicolet Bank shares 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, 2012 and 2011, the cash surrender value of the bank owned life insurance was approximately $18,697,000 and $14,237,000, 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 31,2012 and 2011 totaled approximately $439,000 and $391,000, respectively. Under the director plan, which 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 2012 and 2011 the plan purchased 3,350 and 3,004 shares of Company common stock, respectively, valued at approximately $55,300 in 2012 and $49,600 in 2011. In 2012, common stock valued at approximately $71,400 (and representing 3,667 shares) was distributed under this director plan; while no distributions were made in 2011. The common stock outstanding and the related director deferred compensation liability are offsetting components of the Company’s equity in the amount of $300,000 at year end 2012 and $315,762 at year end 2011 representing 16,572 shares and 16,889 shares, respectively.
The Company 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
F-24
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
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.
During 2012, 2011 and 2010, the Company’s 401(k) expense was approximately $498,000, $462,000, and $415,000, respectively.
NOTE 10. STOCK-BASED COMPENSATION
At December 31, 2012, the Company had two stock-based plans. These plans are administered by a committee of the Board of Directors and provide for the granting of various equity awards in accordance with the plan documents to certain officers, employees and directors of the Company.
The Company’s 2002 Stock Incentive Plan initially covered 125,000 shares of the Company’s common stock. The Company, with subsequent shareholder approval, revised this plan to allow for 450,000 additional shares in 2005 and 600,000 additional shares in 2008. A total of 1,175,000 shares have been reserved for potential stock options under the 2002 Plan.
The Company also adopted, with subsequent shareholder approval, the 2011 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.
In general, for stock options granted the exercise price will not be less than the fair market value of the Company’s common stock on the date of grant, the options will become exercisable based upon vesting terms determined by the committee, and the options will expire ten years after the date of grant. In general, for restricted stock granted the shares are issued at the fair market value of the Company’s common stock on the date of grant, are restricted as to transfer, but are not restricted as to dividend payments or voting rights, and the transfer restrictions lapse over time, depending upon vesting terms provided for in the grant and contingent upon continued employment.
As of December 31, 2012, approximately 729,000 shares were available for grant under these plans (collectively the “Stock Incentive Plans”).
Activity of the Stock Incentive Plans is summarized in the following tables:
Stock Options | Weighted- Average Fair Value of Options Granted | Option Shares Outstanding | Weighted- Average Exercise Price | Exercisable Shares | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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 | |||||||||||||||
Forfeited | (32,000 | ) | 17.03 | |||||||||||||||
Balance — December 31, 2010 | 729,657 | $ | 17.59 | 491,780 | ||||||||||||||
Granted | — | — | — | |||||||||||||||
Exercise of stock options | (17,750 | ) | 11.06 | |||||||||||||||
Forfeited | (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 | (25,750 | ) | 12.50 | |||||||||||||||
Forfeited | (36,250 | ) | 16.84 | |||||||||||||||
Balance — December 31, 2012 | 825,532 | $ | 17.70 | 548,623 |
Options outstanding at December 31, 2012 are exercisable at option prices ranging from $12.50 to $26.00. There are 382,208 options outstanding in the range from $12.50—$17.00, 396,824 options outstanding
F-25
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. STOCK-BASED COMPENSATION (Continued)
in the range from $17.01—$22.00, and 46,500 options outstanding in the range from $22.01—$26.00. The exercisable options have a weighted average remaining contractual life of approximately 4 years as of December 31, 2012.
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 2012, 2011 and 2010 was approximately $103,000, $97,000 and $45,000, respectively. The weighted average exercise price of stock options exercisable at December 31, 2012 was $18.16.
Restricted Stock | Weighted- Average Grant Date Fair Value | Restricted Shares Outstanding | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Balance — December 31, 2011 | $ | — | — | |||||||
Granted | 16.50 | 54,725 | ||||||||
Vested | — | — | ||||||||
Forfeited | 16.50 | (250 | ) | |||||||
Balance — December 31, 2012 | $ | 16.50 | 54,475 |
The Company recognized approximately $511,000, $294,000 and $296,000 of stock-based employee compensation expense during the years ended December 31, 2012, 2011 and 2010, respectively, associated with its stock equity awards. As of December 31, 2012, there was approximately $1,896,000 of unrecognized compensation cost related to equity award grants. The cost is expected to be recognized over the remaining vesting period of approximately five years.
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.
On December 23, 2008, under the federal government’s CPP, the Company received $14,964,000 from 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.
F-26
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. STOCKHOLDERS’ EQUITY (Continued)
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 of $396,000, which unfavorably affected 2011 net income available to common shareholders. 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 5% or 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 2012 and for 2011 (since funding) was 5%. Under the terms of the Agreement, the Company is required to provide various information, certifications, and reporting to the UST. At December 31, 2012, 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.
NOTE 12. INCOME TAXES
The current and deferred amounts of income tax expense were as follows:
2012 | 2011 | 2010 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Current | $ | 1,802,447 | $ | (135,372 | ) | $ | 1,017,309 | |||||||
Deferred | (86,304 | ) | 461,598 | (880,983 | ) | |||||||||
Change in valuation allowance | (186,695 | ) | (7,795 | ) | — | |||||||||
Income tax expense | $ | 1,529,448 | $ | 318,431 | $ | 136,326 |
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, 2012, 2011 and 2010 are included in the following table.
F-27
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. INCOME TAXES (Continued)
2012 | 2011 | 2010 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Tax on pretax income, less noncontrolling interest, at statutory rates | $ | 1,552,212 | $ | 614,963 | $ | 423,870 | ||||||||
State income taxes, net of federal effect | 252,523 | 90,996 | 59,589 | |||||||||||
Tax-exempt interest income | (358,097 | ) | (410,944 | ) | (374,066 | ) | ||||||||
Non-deductible interest disallowance | 35,477 | 52,973 | 63,762 | |||||||||||
Increase in cash surrender value life insurance | (241,481 | ) | (194,553 | ) | (195,140 | ) | ||||||||
Non-deductible business entertainment | 84,230 | 84,077 | 75,023 | |||||||||||
Non-deductible merger expenses | 127,349 | — | — | |||||||||||
Stock based employee compensation | 101,126 | 96,911 | 100,552 | |||||||||||
Other, net | (23,891 | ) | (15,992 | ) | (17,264 | ) | ||||||||
Income tax expense | $ | 1,529,448 | $ | 318,431 | $ | 136,326 |
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:
2012 | 2011 | 2010 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Deferred tax assets: | ||||||||||||||
Allowance for loan losses | $ | 2,803,159 | $ | 2,322,653 | $ | 3,399,659 | ||||||||
State net operating loss carryforwards | 170,203 | 199,887 | 194,490 | |||||||||||
Credit carryforwards | — | 450,226 | — | |||||||||||
Other real estate | 7,885 | 12,702 | 50,772 | |||||||||||
Investment securities | 218,871 | 218,871 | 168,575 | |||||||||||
Compensation | 374,896 | 278,436 | 244,987 | |||||||||||
Core deposit intangible | 342,751 | 299,537 | 217,594 | |||||||||||
Other | 96,895 | 200,600 | 53,303 | |||||||||||
Total deferred tax asset | 4,014,660 | 3,982,912 | 4,329,380 | |||||||||||
Less valuation allowance | — | (186,695 | ) | (194,490 | ) | |||||||||
Deferred tax asset | 4,014,660 | 3,796,217 | 4,134,890 | |||||||||||
Deferred tax liabilities: | ||||||||||||||
Premises and equipment | (434,466 | ) | (487,317 | ) | (347,898 | ) | ||||||||
Prepaid expenses | (97,697 | ) | (99,402 | ) | (32,558 | ) | ||||||||
Other | — | — | (91,133 | ) | ||||||||||
Unrealized gain on securities available for sale | (1,075,970 | ) | (870,620 | ) | (514,394 | ) | ||||||||
Total deferred tax liability | (1,608,133 | ) | (1,457,339 | ) | (985,983 | ) | ||||||||
Net deferred tax asset | $ | 2,406,527 | $ | 2,338,878 | $ | 3,148,907 |
The Company has a state net operating loss carryforward of approximately $3,200,000 for which the related tax benefit is $170,000. The prior year valuation allowance of $187,000 related to the state net operating loss carryover was reversed in 2012 due to a change in state law which allows for the use of the parent company’s state net operating loss against consolidated earnings. Management expects to utilize the full $3,200,000 prior to expiration.
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.
F-28
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. COMMITMENTS AND CONTINGENCIES (Continued)
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 contractor notional amount of the Company’s exposure to off-balance-sheet risk as of December 31 is as follows:
2012 | 2011 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Financial instruments whose contract amounts represent credit risk: | ||||||||||
Commitments to extend credit | $ | 178,676,000 | $ | 158,261,000 | ||||||
Standby letters of credit | 4,050,000 | 6,631,000 |
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, 2012 and 2011, 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 were $65,000,000 as of December 31, 2012 and 2011. At December 31, 2012 and 2011, 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.
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 $24,340,000 at December 31, 2012 and $24,510,000 at December 31, 2011.
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 building of the Company’s 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
F-29
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. RELATED PARTY TRANSACTIONS (Continued)
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 SALE, DISPOSAL AND WRITEDOWN OF ASSETS |
Components of the gain (loss) on sale, disposals and writedown of assets are as follows for the years ended December 31:
2012 | 2011 | 2010 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Gain on sale of securities, net | $ | 440,268 | $ | — | $ | 283,152 | ||||||||
Other than temporary impairment charge on securities | — | (127,750 | ) | (428,178 | ) | |||||||||
Gain (loss) on sale of other real estate owned, net | 27,242 | 64,472 | (10,307 | ) | ||||||||||
Writedown of other real estate owned | (20,026 | ) | — | — | ||||||||||
Gain on sale of other assets, net | 810 | 8,223 | 96,665 | |||||||||||
Gain (loss) on sale, disposal and writedown of assets, net | $ | 448,294 | $ | (55,055 | ) | $ | (58,668 | ) |
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, 2012 and 2011, that the Company and the Bank met all capital adequacy requirements to which they are subject.
As of December 31, 2012 and 2011, 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-30
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 of December 31, 2012 and 2011 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, 2012: | |||||||||||||||||||||||||||
Company | |||||||||||||||||||||||||||
Total capital | $ | 85,738 | 15.2 | % | $ | 45,098 | 8.0 | % | |||||||||||||||||||
Tier I capital | 78,691 | 14.0 | 22,549 | 4.0 | |||||||||||||||||||||||
Leverage | 78,691 | 11.0 | 28,622 | 4.0 | |||||||||||||||||||||||
Bank | |||||||||||||||||||||||||||
Total capital | $ | 77,500 | 14.1 | % | $ | 43,984 | 8.0 | % | $ | 54,981 | 10.0 | % | |||||||||||||||
Tier I capital | 70,624 | 12.8 | 21,992 | 4.0 | 32,988 | 6.0 | |||||||||||||||||||||
Leverage | 70,624 | 10.1 | 27,916 | 4.0 | 34,895 | 5.0 | |||||||||||||||||||||
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 |
(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, 2012, the Bank could pay dividends of approximately $2,850,000 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 FASB’s Accounting Standards Codification (“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-31
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 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, 2012 and 2011, aggregated by the level in the fair value hierarchy within which those measurements fall, as well as a roll forward of 2012 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 | $ | 32,687 | $ | — | $ | 32,312 | $ | 375 | |||||||||||
Mortgage-backed securities | 20,668 | — | 20,668 | — | |||||||||||||||
Equity securities | 2,546 | 2,546 | — | — | |||||||||||||||
Securities available for sale, December 31, 2012 | $ | 55,901 | $ | 2,546 | $ | 52,980 | $ | 375 | |||||||||||
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 | $ | 1,407 | $ | 54,377 | $ | 975 |
Securities Available for Sale | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Level 3 Fair Value Measurements ($ in thousands): | 2012 | 2011 | |||||||||
Balance at beginning of year | $ | 975 | $ | 1,050 | |||||||
Purchases/(sales)/(settlements), net | (600 | ) | (75 | ) | |||||||
Net change in gain/(loss), realized and unrealized | — | — | |||||||||
Transfers in/(out) of Level 3 | — | — | |||||||||
Balance at end of year | $ | 375 | $ | 975 |
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
F-32
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. FAIR VALUE OF FINANCIAL INFORMATION (Continued)
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, 2012 and 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 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, 2012 and 2011, 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, 2012: | |||||||||||||||||||
Collateral-dependent impaired loans | $ | 7,026 | $ | — | $ | — | $ | 7,026 | |||||||||||
Other real estate owned | 193 | — | — | 193 | |||||||||||||||
December 31, 2011: | |||||||||||||||||||
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. For individually evaluated impaired loans, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, the estimated fair value of the underlying collateral for collateral-dependent loans, or the estimated liquidity of the note. For other real estate owned, the fair value is based upon the estimated fair value of the underlying collateral adjusted for the expected costs to sell.
Summarized below are the estimated fair values of the Company’s financial instruments at December 31, 2012 and 2011, along with the methods and assumptions used by the Company in estimating the fair value disclosures.
December 31, 2012 | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
($ in thousands) | Carrying Amount | Estimated Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||||
Financial assets: | ||||||||||||||||||||||
Cash and cash equivalents | $ | 82,003 | $ | 82,003 | $ | 82,003 | $ | — | $— | |||||||||||||
Securities available for sale | 55,901 | 55,901 | 2,546 | 52,980 | 375 | |||||||||||||||||
Other investments | 5,221 | 5,221 | — | 3,243 | 1,978 | |||||||||||||||||
Loans held for sale | 7,323 | 7,323 | 7,323 | — | — | |||||||||||||||||
Loans, net | 545,481 | 540,887 | — | — | 540,887 | |||||||||||||||||
Bank owned life insurance | 18,697 | 18,697 | 18,697 | — | — | |||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||
Deposits | $ | 616,093 | $ | 617,677 | $ | — | $ | — | $617,677 | |||||||||||||
Short-term borrowings | 4,035 | 4,035 | 4,035 | — | — | |||||||||||||||||
Notes payable | 35,155 | 36,017 | — | 36,017 | — | |||||||||||||||||
Junior subordinated debentures | 6,186 | 6,186 | — | — | 6,186 |
F-33
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. FAIR VALUE OF FINANCIAL INFORMATION (Continued)
December 31, 2011 | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
($ in thousands) | Carrying Amount | Estimated 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 evaluation methodologies used for assets and liabilities which are either recorded or disclosed at fair value.
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, which is considered a Level 1 measurement. If quoted market prices are not available, fair value is generally determined using pricing models widely used in the industry, quoted market prices of securities with similar characteristics, or discounted cash flows, which is considered a Level 2 measurement, and Level 3 was deemed appropriate for auction rate securities (for which there has been no liquid market since 2008). For other investments, the carrying amount of Federal Reserve Bank and FHLB stock is a reasonably accepted fair value estimate given their restricted nature. Fair value is the redeemable (carrying) value based on the redemption provisions of the instruments which is considered a Level 2 measurement. 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 and represents a Level 3 measurement.
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, which is considered a Level 1 measurement.
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 interestrate risk inherent in the loan. Collateral-dependent impaired loans are included in loans, net. The fair value of loans is considered to be a Level 3 measurement due to internally developed discounted cash flow measurements.
Bank owned life insurance: The carrying value of these assets approximates fair value, which is considered a Level 1 measurement.
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. Use of internal discounted cash flows provides a Level 3 fair value measurement.
F-34
NICOLET BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. FAIR VALUE OF FINANCIAL INFORMATION (Continued)
Short-term borrowings: Due to the short-term nature of these instruments, the carrying amount is a reasonable estimate of fair value.
Notes payable: The fair values of notes payable are estimated using discounted cash flow analysis based on current interest rates being offered by instruments with similar terms and credit quality which represents a Level 2 measurement.
Junior subordinated debentures: The fair values of junior subordinated debentures are estimated based on an evaluation of current interest rates being offered by instruments with similar terms and credit quality. Since the market for these instruments is limited, the internal evaluation represents a Level 3 measurement.
Off-balance-sheet instruments: The estimated fair value of letters of credit at December 31, 2012 and 2011 was insignificant. Loan commitments on which the committed interest rate is less than the current market rate are also insignificant at December 31, 2012 and 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 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, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2012 | 2011 | ||||||||||
Assets | �� | ||||||||||
Cash and due from subsidiary | $ | 4,865,980 | $ | 4,604,894 | |||||||
Investments | 4,523,750 | 3,384,750 | |||||||||
Investments in subsidiaries | 74,398,466 | 74,147,607 | |||||||||
Other assets | 744,710 | 498,779 | |||||||||
Total assets | $ | 84,532,906 | $ | 82,636,030 | |||||||
Liabilities and Stockholders’ Equity | |||||||||||
Junior subordinated debentures | $ | 6,185,568 | $ | 6,185,568 | |||||||
Other liabilities | 1,014,252 | 427,953 | |||||||||
Stockholders’ equity | 77,333,086 | 76,022,509 | |||||||||
Total liabilities and stockholders’ equity | $ | 84,532,906 | $ | 82,636,030 |
F-35
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, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2012 | 2011 | 2010 | |||||||||||||
Interest income | $ | 41,893 | $ | 55,935 | $ | 135,763 | |||||||||
Interest expense | 503,093 | 502,562 | 538,073 | ||||||||||||
Net interest expense | (461,200 | ) | (446,627 | ) | (402,310 | ) | |||||||||
Dividend income | 3,000,000 | 1,500,000 | — | ||||||||||||
Operating expense | (437,357 | ) | (75,938 | ) | (65,594 | ) | |||||||||
Loss on assets, net | — | (127,750 | ) | (260,214 | ) | ||||||||||
Income tax benefit | 280,190 | 303,425 | 381,720 | ||||||||||||
Earnings (loss) before equity in undistributed earnings of subsidiaries | 2,381,633 | 1,153,110 | (346,398 | ) | |||||||||||
Equity in undistributed earnings of subsidiaries, net of dividends received | 654,248 | 337,175 | 1,456,747 | ||||||||||||
Net income | $ | 3,035,881 | $ | 1,490,285 | $ | 1,110,349 |
Statements of Cash Flows
For the years ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2012 | 2011 | 2010 | |||||||||||||
Cash Flows From Operating Activities: | |||||||||||||||
Net Income attributable to Nicolet Bankshares, Inc. | $ | 3,035,881 | $ | 1,490,285 | $ | 1,110,349 | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||
Loss (gain) on sale, disposal, or writedown of assets, net | — | 127,750 | 260,214 | ||||||||||||
Change in other assets and liabilities, net | (93,003 | ) | (98,297 | ) | 1,503,702 | ||||||||||
Equity in undistributed earnings of subsidiaries, net of dividends received | (250,248 | ) | (442,175 | ) | (1,456,747 | ) | |||||||||
Net cash provided by operating activities | 2,692,630 | 1,077,563 | 1,417,518 | ||||||||||||
Cash Flows from Investing Activities: | |||||||||||||||
Decrease (increase) in loans | — | 3,100,000 | (3,100,000 | ) | |||||||||||
Purchase of investments and other assets, net | — | — | (38,000 | ) | |||||||||||
Proceeds from sale of investments and other assets | — | — | 548,185 | ||||||||||||
Capital infusion to subsidiaries | — | (7,925,000 | ) | — | |||||||||||
Net cash used in investing activities | — | (4,825,000 | ) | (2,589,815 | ) | ||||||||||
Cash Flows From Financing Activities: | |||||||||||||||
Purchase of treasury stock | (1,331,419 | ) | — | — | |||||||||||
Proceeds from issuance of common stock, net | — | 35,772 | 207,702 | ||||||||||||
Proceeds from exercise of common stock options | 321,875 | 196,251 | 64,500 | ||||||||||||
Proceeds from issuance of preferred stock (SBLF), net | — | 24,359,000 | — | ||||||||||||
Repayment of preferred stock (CPP) | — | (15,712,000 | ) | — | |||||||||||
Noncontrolling interest in joint venture | (202,000 | ) | (105,000 | ) | — | ||||||||||
Cash dividends paid on preferred stock | (1,220,000 | ) | (749,552 | ) | (815,520 | ) | |||||||||
Net cash provided (used) by financing activities | (2,431,544 | ) | 8,234,471 | (543,318 | ) | ||||||||||
Net increase (decrease) in cash | 261,086 | 4,487,034 | (1,715,615 | ) | |||||||||||
Beginning cash | 4,604,894 | 117,860 | 1,833,475 | ||||||||||||
Ending cash | $ | 4,865,980 | $ | 4,604,894 | $ | 117,860 |
F-36
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Independent Auditor’s Report
Board of Directors
Mid-Wisconsin Financial Services, Inc.
Medford, Wisconsin
Mid-Wisconsin Financial Services, Inc.
Medford, Wisconsin
We have audited the accompanying consolidated financial statements of Mid-Wisconsin Financial Services, Inc. and Subsidiary, which comprise the consolidated balance sheets as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit of the December 31, 2012 financial statements in accordance with auditing standards generally accepted in the United States. Our audits for the years ended December 31, 2011 and 2010 were conducted in accordance with 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 from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mid-Wisconsin Financial Services, Inc. and Subsidiary as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2012, in accordance with accounting principles generally accepted in the United States.
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Wipfli LLP
February 27, 2013
Green Bay, Wisconsin
Green Bay, Wisconsin
F-37
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Consolidated Balance Sheets
December 31, 2012 and 2011
(In thousands, except per share data)
Consolidated Balance Sheets
December 31, 2012 and 2011
(In thousands, except per share data)
2012 | 2011 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Assets | ||||||||||
Cash and due from banks | $ | 17,087 | $ | 18,278 | ||||||
Interest-bearing deposits in other financial institutions | 9,644 | 10 | ||||||||
Federal funds sold and securities purchased under agreements to sell | 478 | 13,072 | ||||||||
Investment securities available-for-sale, at fair value | 118,456 | 110,376 | ||||||||
Loans held for sale | 2,042 | 2,163 | ||||||||
Loans | 295,622 | 329,863 | ||||||||
Less: Allowance for loan losses | (9,578 | ) | (9,816 | ) | ||||||
Loans, net | 286,044 | 320,047 | ||||||||
Accrued interest receivable | 1,411 | 1,640 | ||||||||
Premises and equipment, net | 7,519 | 7,943 | ||||||||
Other investments, at cost | 1,613 | 2,616 | ||||||||
Other real estate owned, net | 4,200 | 4,404 | ||||||||
Deferred tax asset | 0 | 1,179 | ||||||||
Other assets | 5,369 | 6,448 | ||||||||
Total assets | $ | 453,863 | $ | 488,176 | ||||||
Liabilities and Stockholders’ Equity | ||||||||||
Noninterest-bearing deposits | $ | 76,705 | $ | 70,790 | ||||||
Interest-bearing deposits | 277,792 | 310,830 | ||||||||
Total deposits | 354,497 | 381,620 | ||||||||
Short-term borrowings | 13,439 | 13,655 | ||||||||
Long-term borrowings | 36,061 | 40,061 | ||||||||
Subordinated debentures | 10,310 | 10,310 | ||||||||
Accrued interest payable | 817 | 878 | ||||||||
Accrued expenses and other liabilities | 2,926 | 2,139 | ||||||||
Total liabilities | 418,050 | 448,663 | ||||||||
Stockholders’ equity: | ||||||||||
Series A preferred stock — no par value | ||||||||||
Authorized — 10,000 shares | ||||||||||
Issued and outstanding Series A — 10,000 shares | 9,862 | 9,745 | ||||||||
Series B preferred stock — no par value | ||||||||||
Authorized — 500 shares | ||||||||||
Issued and outstanding Series B — 500 shares | 514 | 526 | ||||||||
Common stock — par value $0.10 per share | ||||||||||
Authorized—6,000,000 shares | ||||||||||
Issued and outstanding — 1,657,119 shares | 166 | 166 | ||||||||
Additional paid-in capital | 11,945 | 11,945 | ||||||||
Retained earnings | 11,907 | 15,526 | ||||||||
Accumulated other comprehensive income | 1,419 | 1,605 | ||||||||
Total stockholders’ equity | 35,813 | 39,513 | ||||||||
Total liabilities and stockholders’ equity | $ | 453,863 | $ | 488,176 |
The accompanying notes to the consolidated financial statements are an integral part of these statements.
F-38
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Consolidated Statements of Operations
Years Ended December 31, 2012, 2011, and 2010
(In thousands, except per share data)
Consolidated Statements of Operations
Years Ended December 31, 2012, 2011, and 2010
(In thousands, except per share data)
2012 | 2011 | 2010 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Interest Income | ||||||||||||||
Loans, including fees | $ | 16,965 | $ | 18,910 | $ | 21,325 | ||||||||
Securities: | ||||||||||||||
Taxable | 2,003 | 2,563 | 3,216 | |||||||||||
Tax-exempt | 345 | 403 | 366 | |||||||||||
Other | 92 | 163 | 155 | |||||||||||
Total interest income | 19,405 | 22,039 | 25,062 | |||||||||||
Interest Expense | ||||||||||||||
Deposits | 2,862 | 4,566 | 6,402 | |||||||||||
Short-term borrowings | 78 | 122 | 95 | |||||||||||
Long-term borrowings | 1,499 | 1,614 | 1,670 | |||||||||||
Subordinated debentures | 198 | 183 | 595 | |||||||||||
Total interest expense | 4,637 | 6,485 | 8,762 | |||||||||||
Net interest income | 14,768 | 15,554 | 16,300 | |||||||||||
Provision for loan losses | 4,430 | 4,750 | 4,755 | |||||||||||
Net interest income after provision for loan losses | 10,338 | 10,804 | 11,545 | |||||||||||
Noninterest Income | ||||||||||||||
Service fees | 847 | 953 | 1,174 | |||||||||||
Trust service fees | 1,103 | 1,066 | 1,103 | |||||||||||
Investment product commissions | 176 | 221 | 221 | |||||||||||
Mortgage banking | 504 | 523 | 955 | |||||||||||
Gain (loss) on sale of investments | 21 | (55 | ) | 1,054 | ||||||||||
Other | 1,302 | 1,579 | 1,043 | |||||||||||
Total noninterest income | 3,953 | 4,287 | 5,550 | |||||||||||
Other-than-temporary impairment losses, net | ||||||||||||||
Total other-than-temporary impairment losses | 0 | 0 | (426 | ) | ||||||||||
Amount in other comprehensive income, before taxes | 0 | 0 | 14 | |||||||||||
Total impairment | 0 | 0 | (412 | ) | ||||||||||
Noninterest Expense | ||||||||||||||
Salaries and employee benefits | 7,522 | 8,561 | 8,537 | |||||||||||
Occupancy | 1,665 | 1,769 | 1,830 | |||||||||||
Data processing | 631 | 667 | 651 | |||||||||||
Foreclosure/other real estate owned expense | 1,284 | 857 | 243 | |||||||||||
Legal and professional fees | 1,226 | 891 | 677 | |||||||||||
FDIC expense | 1,011 | 1,117 | 1,036 | |||||||||||
Other | 2,619 | 3,325 | 2,831 | |||||||||||
Total noninterest expense | 15,958 | 17,187 | 15,805 | |||||||||||
Income (loss) before income taxes | (1,667 | ) | (2,096 | ) | 878 | |||||||||
Income tax expense | 1,302 | 1,861 | 135 | |||||||||||
Net income (loss) | (2,969 | ) | (3,957 | ) | 743 | |||||||||
Preferred stock dividends, discount and premium | (650 | ) | (644 | ) | (641 | ) | ||||||||
Net income (loss) available to common equity | $ | (3,619 | ) | $ | (4,601 | ) | $ | 102 | ||||||
Earnings (loss) per common share: | ||||||||||||||
Basic and diluted | $ | (2.18 | ) | $ | (2.78 | ) | $ | 0.06 | ||||||
Cash dividends declared per common share | $ | 0.00 | $ | 0.00 | $ | 0.00 |
The accompanying notes to the consolidated financial statements are an integral part of these statements.
F-39
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income (Loss)
Years Ended December 31, 2012, 2011, and 2010
(In thousands, except per share data)
Consolidated Statements of Comprehensive Income (Loss)
Years Ended December 31, 2012, 2011, and 2010
(In thousands, except per share data)
2012 | 2011 | 2010 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net income (loss) | $ | (2,969 | ) | $ | (3,957 | ) | $ | 743 | ||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||
Investment securities available-for-sale: | ||||||||||||||
Reclassification for (gains) losses on sale of investments included in income | (21 | ) | 55 | (1,054 | ) | |||||||||
Net unrealized gains (losses) | (289 | ) | 1,697 | (58 | ) | |||||||||
Reclassification adjustment for impairment losses realized in earnings | 0 | 0 | 412 | |||||||||||
Income tax benefit (expense) | 124 | (737 | ) | 234 | ||||||||||
Total other comprehensive income (loss) net of tax | (186 | ) | 1,015 | (466 | ) | |||||||||
Comprehensive income (loss) | $ | (3,155 | ) | $ | (2,942 | ) | $ | 277 |
The accompanying notes to the consolidated financial statements are an integral part of these statements.
F-40
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2012, 2011, and 2010
(In thousands, except per share data)
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2012, 2011, and 2010
(In thousands, except per share data)
Preferred Stock | Common Stock | |||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Shares | Amount | Shares | Amount | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Totals | |||||||||||||||||||||||||||
Balance, January 1, 2010 | 10,500 | $ | 10,076 | 1,648 | $ | 165 | $ | 11,862 | $ | 20,025 | $ | 1,056 | $ | 43,184 | ||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||
Net income | 743 | 743 | ||||||||||||||||||||||||||||||||
Other comprehensive loss | (466 | ) | (466 | ) | ||||||||||||||||||||||||||||||
Accretion of preferred stock dividend | 107 | (107 | ) | 0 | ||||||||||||||||||||||||||||||
Amortization of preferred stock premium | (11 | ) | 11 | 0 | ||||||||||||||||||||||||||||||
Issuance of common stock: | ||||||||||||||||||||||||||||||||||
Proceeds from stock purchase plans | 4 | 0 | 32 | 32 | ||||||||||||||||||||||||||||||
Dividends — Preferred stock | (545 | ) | (545 | ) | ||||||||||||||||||||||||||||||
Stock-based compensation | 22 | 22 | ||||||||||||||||||||||||||||||||
Balance, December 31, 2010 | 10,500 | $ | 10,172 | 1,652 | $ | 165 | $ | 11,916 | $ | 20,127 | $ | 590 | $ | 42,970 | ||||||||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||||||||||||
Net loss | (3,957 | ) | (3,957 | ) | ||||||||||||||||||||||||||||||
Other comprehensive income | 1,015 | 1,015 | ||||||||||||||||||||||||||||||||
Accretion of preferred stock dividend | 111 | (111 | ) | 0 | ||||||||||||||||||||||||||||||
Amortization of preferred stock premium | (12 | ) | 12 | 0 | ||||||||||||||||||||||||||||||
Issuance of common stock: | ||||||||||||||||||||||||||||||||||
Proceeds from stock purchase plans | 5 | 1 | 29 | 30 | ||||||||||||||||||||||||||||||
Accrued and unpaid dividends — Preferred stock | (545 | ) | (545 | ) | ||||||||||||||||||||||||||||||
Balance, December 31, 2011 | 10,500 | $ | 10,271 | 1,657 | $ | 166 | $ | 11,945 | $ | 15,526 | $ | 1,605 | $ | 39,513 | ||||||||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||||||||||||
Net loss | (2,969 | ) | (2,969 | ) | ||||||||||||||||||||||||||||||
Other comprehensive loss | (186 | ) | (186 | ) | ||||||||||||||||||||||||||||||
Accretion of preferred stock dividend | 117 | (117 | ) | 0 | ||||||||||||||||||||||||||||||
Amortization of preferred stock premium | (12 | ) | 12 | 0 | ||||||||||||||||||||||||||||||
Accrued and unpaid dividends — Preferred stock | (545 | ) | (545 | ) | ||||||||||||||||||||||||||||||
Balance, December 31, 2012 | 10,500 | $ | 10,376 | 1,657 | $ | 166 | $ | 11,945 | $ | 11,907 | $ | 1,419 | $ | 35,813 |
The accompanying notes to the consolidated financial statements are an integral part of these statements.
F-41
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31, 2012, 2011, and 2010
(In thousands, except per share data)
Consolidated Statements of Cash Flows
Years Ended December 31, 2012, 2011, and 2010
(In thousands, except per share data)
2012 | 2011 | 2010 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cash flows from operating activities: | ||||||||||||||
Net income (loss) | $ | (2,969 | ) | $ | (3,957 | ) | $ | 743 | ||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||
Depreciation and amortization | 858 | 1,094 | 911 | |||||||||||
Provision for loan losses | 4,430 | 4,750 | 4,755 | |||||||||||
Provision for valuation allowance of other real estate owned | 685 | 628 | 159 | |||||||||||
Benefit for deferred income taxes | (912 | ) | (868 | ) | (90 | ) | ||||||||
(Gain) loss on sale of investment securities | (21 | ) | 55 | (1,054 | ) | |||||||||
Other-than-temporary impairment losses, net | 0 | 0 | 412 | |||||||||||
Gain on premises and equipment disposals | (1 | ) | (44 | ) | 0 | |||||||||
(Gain) loss on sale of foreclosed other real estate owned | 141 | (241 | ) | (187 | ) | |||||||||
Stock-based compensation | 0 | 0 | �� | 22 | ||||||||||
Valuation allowance — deferred taxes | 2,214 | 2,911 | 0 | |||||||||||
Changes in operating assets and liabilities: | ||||||||||||||
Loans held for sale | 121 | 5,281 | (1,992 | ) | ||||||||||
Other assets | 1,308 | 1,590 | 939 | |||||||||||
Other liabilities | 181 | (510 | ) | (503 | ) | |||||||||
Net cash provided by operating activities | 6,035 | 10,689 | 4,115 | |||||||||||
Cash flows from investing activities: | ||||||||||||||
Net (increase) decrease in interest-bearing deposits in other financial institutions | (9,634 | ) | (2 | ) | 5 | |||||||||
Net (increase) decrease in federal funds sold | 12,594 | 19,401 | (23,409 | ) | ||||||||||
Securities available for sale: | ||||||||||||||
Proceeds from sales | 521 | 641 | 38,146 | |||||||||||
Proceeds from maturities | 39,234 | 33,184 | 32,614 | |||||||||||
Payment for purchases | (48,294 | ) | (41,563 | ) | (68,747 | ) | ||||||||
FHLB stock redemption | 1,003 | 0 | 0 | |||||||||||
Net decrease in loans | 27,104 | 2,346 | 12,220 | |||||||||||
Capital expenditures | (282 | ) | (685 | ) | (682 | ) | ||||||||
Proceeds from sale of premises and equipment | 19 | 223 | 0 | |||||||||||
Proceeds from sale of other real estate owned | 1,848 | 1,995 | 1,590 | |||||||||||
Net cash provided by (used in) investing activities | 24,113 | 15,540 | (8,263 | ) | ||||||||||
Cash flows from financing activities: | ||||||||||||||
Net increase (decrease) in deposits | $ | (27,123 | ) | $ | (18,990 | ) | $ | 2,810 | ||||||
Net increase (decrease) in short-term borrowings | (216 | ) | 4,143 | 1,529 | ||||||||||
Proceeds from issuance of long-term borrowings | 0 | 0 | 22,061 | |||||||||||
Principal payments on long-term borrowings | (4,000 | ) | (2,500 | ) | (22,061 | ) | ||||||||
Proceeds from stock benefit plans | 0 | 30 | 32 | |||||||||||
Cash dividends paid on preferred stock | 0 | (136 | ) | (545 | ) | |||||||||
Net cash provided by (used in) financing activities | (31,339 | ) | (17,453 | ) | 3,826 | |||||||||
Net increase (decrease) in cash and due from banks | (1,191 | ) | 8,776 | (322 | ) | |||||||||
Cash and due from banks at beginning of year | 18,278 | 9,502 | 9,824 | |||||||||||
Cash and due from banks at end of year | $ | 17,087 | $ | 18,278 | $ | 9,502 | ||||||||
Supplemental disclosures of cash flow information: | ||||||||||||||
Cash paid (refunded) during the year for: | ||||||||||||||
Interest | $ | 4,698 | $ | 6,599 | $ | 9,057 | ||||||||
Income taxes | (74 | ) | 250 | 0 | ||||||||||
Noncash investing and financing activities: | ||||||||||||||
Loans transferred to other real estate owned | $ | 2,838 | $ | 2,631 | $ | 4,965 | ||||||||
Loans charged-off | 5,176 | 4,988 | 4,034 | |||||||||||
Dividends declared but not yet paid on preferred stock | 545 | 409 | 0 | |||||||||||
Loans made in connection with the sale of other real estate owned | 368 | 75 | 981 |
The accompanying notes to the consolidated financial statements are an integral part of these statements.
F-42
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2012, 2011, and 2010 (In thousands, except per share data)
Notes to Consolidated Financial Statements
December 31, 2012, 2011, and 2010 (In thousands, except per share data)
Note 1 — Summary of Significant Accounting Policies
Principal Business Activity
Mid-Wisconsin Financial Services, Inc. (together with all of its subsidiaries, collectively referred to herein as the “Company”) operates as a full-service financial institution with a primary market area including, but not limited to, Clark, Eau Claire, Lincoln, Marathon, Oneida, Price, Taylor and Vilas Counties, Wisconsin. The Company provides a variety of traditional banking product sales, insurance services, and wealth management services. The Company is regulated by federal and state agencies and is subject to periodic examinations by those agencies.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiary, Mid-Wisconsin Bank (the “Bank”), and the Bank’s wholly-owned subsidiary, Mid-Wisconsin Investment Corporation. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles and to general practice within the financial services industry.
The Company also owns Mid-Wisconsin Statutory Trust 1 (the “Trust”), a wholly owned subsidiary that is a variable interest entity because the Company is not the primary beneficiary and, as a result, is not consolidated. The Trust is a qualifying special-purpose entity established for the sole purpose of issuing trust preferred securities. The proceeds from the issuance were used by the Trust to purchase subordinated debentures of the Company, which is the sole asset of the Trust. Liabilities on the consolidated balance sheets include the subordinated debentures related to the Trust, as more fully described in Note 11.
Estimates
The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ significantly from those estimates. Estimates that are susceptible to significant change include the determination of the allowance for loan losses, the valuation of investments securities, the valuation of the deferred tax asset, and the valuation of the other real estate owned (“OREO”).
Cash Equivalents
For purposes of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption “Cash and due from banks.” Cash and due from banks include cash on hand and non-interest-bearing deposits at correspondent banks.
Investment Securities Available-for-Sale
Securities are classified as available-for-sale and are carried at fair value, with unrealized gains and losses, net of related deferred income taxes, included in stockholders’ equity as a separate component of other comprehensive income. Amortization of premiums and accretion of discounts are recognized into interest income using the interest method over the terms of the securities. Declines in fair value of securities that are deemed to be other-than-temporary are charged to earnings as a realized loss, and a new cost basis for the securities is established. In evaluating other-than-temporary impairment losses, management considers the length of time and extent to which the fair value has been in an unrealized loss position, changes in security ratings, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated
F-43
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010 (In thousands, except per share data)
December 31, 2012, 2011, and 2010 (In thousands, except per share data)
recovery in fair value. Gains and losses on the sale of securities are determined using the specific-identification method.
Loans Held for Sale
Loans held for sale consist of the current origination of certain fixed rate mortgage loans and are recorded at the lower of aggregate cost or fair value. A gain or loss is recognized at the time of the sale reflecting the present value of the difference between the contractual interest rate of the loans sold and the yield to the investor. All loans held for sale at December 31, 2012 and 2011 have a forward sale commitment from an investor. Mortgage servicing rights are not retained.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.
Interest on loans is accrued and credited to income based on the unpaid principal balance. 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, rather than delaying such action until the loans become 90 days past due. When a loan is placed on nonaccrual status or charged-off, previously accrued and uncollected interest is reversed, amortization of related deferred loan fees or costs is suspended, and income is recorded only to the extent that interest payments are subsequently received in cash and a determination has been made that the principal and interest of the loan is collectible. If collectability of the principal and interest is in doubt, payments received are applied to loan principal.
While an asset is in nonaccrual status, some or all of the cash interest payments received may be treated as interest income on a cash basis as long as the remaining recorded investment in the assets is deemed to be fully collectible. A nonaccrual loan is returned to accrual status when all delinquent principal and interest payments become current in accordance with the terms of the loan agreement, the borrower has demonstrated a period of sustained performance and the ultimate collectability of the total contractual principal and interest is no longer in doubt. A sustained period of repayment performance generally would be a minimum of nine months.
Loans are considered restructured loans if concessions have been granted to borrowers that are experiencing financial difficulty. The concessions granted generally involve the modification of terms of the loan, such as changes in payment schedule or interest rate, which generally would not otherwise be considered. Restructured loans can involve loans remaining on nonaccrual, moving to nonaccrual, or continuing on accrual status, depending on the individual facts and circumstances of the borrower. Nonaccrual restructured loans are included and treated with all other nonaccrual loans. In addition, all accruing restructured loans are reported as trouble debt restructurings which are considered and accounted for as impaired loans. Generally, restructured loans remain on nonaccrual until the customer has attained a sustained period of repayment performance under the modified terms, generally a minimum of nine months. Performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can meet the new terms and whether the loan should be returned to, or maintained on, accrual status. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan remains on nonaccrual.
F-44
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010 (In thousands, except per share data)
December 31, 2012, 2011, and 2010 (In thousands, except per share data)
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, and is based on quarterly evaluations of the collectability and historical loss experience of loans. Loans are charged against the allowance for loan losses when management believes the collectability of the principal in unlikely. 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 focuses on evaluation of several factors, including but not limited to: (i) the establishment of specific reserve allocations on impaired credits where a high risk of loss is anticipated but not yet realized; (ii) consideration of historical loss rates and delinquency experience on each portfolio segment; (iii) management’s ongoing review and grading of the loan portfolio; (iv) trends in past due and nonperforming loans; (v) the risk characteristics of the various classifications of loans; (vii) 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. The total allowance is available to absorb losses from any segment of the portfolio.
The allowance for loan losses includes specific allowances related to loans which have been judged to be impaired under current accounting standards. A loan is impaired when, based on current information, it is probable the Company will not collect all amounts due in accordance with the original contractual terms of the loan agreement, including both principal and interest. Management has determined that loans that have had their terms restructured in a trouble debt restructuring and loans risk-rated as substandard or doubtful meet this definition. Specific allowances on impaired loans are based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, and other sources of cash flows, as well as evaluation of legal options available to the Company. The amount of impairment is based upon the fair value of the underlying collateral values.
Management believes that the level of the allowance for loan losses is appropriate. While management uses available information to recognize losses on loans, future changes to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to make additions to the allowance for loan losses and 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.
Premises and Equipment
Premises and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed on a straight-line method and is based on the estimated useful lives of the assets. Maintenance and repair costs are charged to expense as incurred. Gains or losses on disposition of premises and equipment are reflected in income.
Other Real Estate Owned
OREO is comprised of real estate acquired through or in lieu of a foreclosure proceeding. OREO is recorded at the lower of the recorded investment in the loan at the time of acquisition or the fair value of the underlying property value, less estimated selling costs. Any write-down in the carrying value of a property 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 and losses on sale, and revenues and expenses incurred in maintaining such properties, are treated as period costs and are included as a component of foreclosure/other real estate owned expense.
F-45
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010 (In thousands, except per share data)
December 31, 2012, 2011, and 2010 (In thousands, except per share data)
Federal Home Loan Bank of Chicago (“FHLB”) Stock
As a member of the FHLB system, the Company is required to hold stock in the FHLB based on the outstanding amount of FHLB borrowings. This stock is recorded at cost, classified as a restricted security, and is included in the balance sheet caption “Other investments, at cost.” The stock is evaluated for impairment on an annual basis. The stock is viewed as a long-term investment and therefore, its value is determined based on the ultimate recovery of the par value rather than recognizing temporary declines in value.
Income Taxes
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 taxes, which arise from temporary differences between the amounts reported in the financial statements and the tax basis of assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the current enacted tax rates which will be in effect when these differences are expected to reverse. Provision (credit) for deferred taxes is the result of changes in the deferred tax assets and liabilities. A deferred tax valuation allowance is established if it is more likely than not that all or a portion of the deferred tax assets will not 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. Interest and penalties related to unrecognized tax benefits are classified as income taxes.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commitments under commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable.
Rate Lock Commitments
The Company enters into commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. The mortgage loans are sold to the secondary market shortly after the loan is closed. Rate lock commitments are recorded only to the extent of fees received since recording the estimated fair value of these commitments would not have a significant impact on the consolidated financial statements. The Company’s rate lock commitments were $13,346 and $13,655 at December 31, 2012 and 2011, respectively.
Segment Information
The Company, through a branch network of its banking subsidiary, provides a full range of consumer and commercial banking services to individuals, businesses, and farms in north central Wisconsin. These services include demand, time, and savings deposits; safe deposit services; credit cards; notary services; night depository; money orders, traveler’s checks; cashier’s checks; savings bonds; secured and unsecured consumer, commercial, and real estate loans; ATM processing; cash management; merchant capture; online banking; and trust and financial planning.
While the Company’s management monitors the revenue streams of various Company products and services, operations are managed and financial performance is evaluated on a companywide basis. Accordingly, all of the Company’s banking operations are considered by management to be aggregated in one reportable operating segment.
F-46
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010 (In thousands, except per share data)
December 31, 2012, 2011, and 2010 (In thousands, except per share data)
Advertising Costs
Advertising costs are generally expensed as incurred.
Stock-Based Compensation
The Company accounts for employee stock compensation plans using the fair value based method of accounting. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is also the vesting period.
Reclassifications
Certain amounts in the consolidated financial statements of prior periods have been reclassified to conform to the current period’s presentation.
Subsequent Events
Management has reviewed the Company’s operations for potential disclosure of information or financial statement impacts related to subsequent events through February 27, 2013 which is the date the financial statements were available to be issued.
Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (“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 did not have an 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, and a total amount for comprehensive income. The Company adopted this standard in 2012, electing to present a consolidated statement of comprehensive income (loss) separate from, but consecutive to, its consolidated statement of operations.
Deregistration
On September 21, 2012, the Company filed a Form 15 with the Securities and Exchange Commission (“SEC”) to deregister the Company’s common stock under Section 12(g) of the Securities Exchange Act of 1934 (“Exchange Act”), as amended by the Jumpstart Our Business Startups Act (“JOBS Act”), and suspend the Company’s periodic reporting obligations under Section 13(a) of the Exchange Act. Among other things, the JOBS Act, which was signed into law on April 5, 2012, increased the threshold number of stockholders of record under which banks and bank holding companies are permitted to deregister their securities under Section 12(g) of the Exchange Act from 300 to 1,200. The Company currently has less than 1,200 common stock stockholders of record and, therefore, may deregister its common stock under Section 12(g).
The Company’s deregistration of its common stock under Section 12(g) became effective December 20, 2012. Accordingly, the Company will not have any further reporting obligations under the Exchange Act.
F-47
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010 (In thousands, except per share data)
December 31, 2012, 2011, and 2010 (In thousands, except per share data)
Note 2 — Earnings (Loss) per Common Share
Earnings (loss) per common share are 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.
For the Years Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2012 | 2011 | 2010 | |||||||||||||
Net income (loss) | $ | (2,969 | ) | $ | (3,957 | ) | $ | 743 | |||||||
Preferred dividends, discount and premium | (650 | ) | (644 | ) | (641 | ) | |||||||||
Net income (loss) available to common equity | $ | (3,619 | ) | $ | (4,601 | ) | $ | 102 | |||||||
Weighted average common shares outstanding | 1,657 | 1,654 | 1,650 | ||||||||||||
Effect of dilutive stock options | 0 | 0 | 0 | ||||||||||||
Diluted weighted average common shares outstanding | 1,657 | 1,654 | 1,650 | ||||||||||||
Basic and diluted earnings (loss) per common share | $ | (2.18 | ) | $ | (2.78 | ) | $ | 0.06 |
Options to purchase 30,510, 37,406, and 57,905 shares of common stock for the years ended December 31, 2012, 2011 and 2010, respectively, were excluded from the calculation of diluted loss per share because the exercise price of the outstanding stock options was greater than the average market price of the common shares (anti-dilutive options).
Note 3 — Cash and Due From Banks
Cash and due from banks in the amount of $126 and $257 was restricted at December 31, 2012 and 2011, respectively, to meet the reserve requirements of the Federal Reserve System.
In the normal course of business, the Bank maintains cash and due from bank balances with correspondent banks. Accounts at each institution are temporarily guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) through December 31, 2012. Federal funds sold invested in other institutions are not guaranteed.
Note 4 — Securities
The amortized cost, gross unrealized gains and losses, and fair values of investment securities available-for-sale at December 31, 2012 and 2011 were as follows:
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Values | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31, 2012 | ||||||||||||||||||
U.S. Treasury securities and obligations of U.S. government corporations and agencies | $ | 14,444 | $ | 307 | $ | 32 | $ | 14,719 | ||||||||||
Mortgage-backed securities | 76,969 | 1,015 | 149 | 77,835 | ||||||||||||||
Obligations of states and political subdivisions | 23,697 | 1,237 | 21 | 24,913 | ||||||||||||||
Corporate debt securities | 831 | 7 | 0 | 838 | ||||||||||||||
Total debt securities | 115,941 | 2,566 | 202 | 118,305 | ||||||||||||||
Equity securities | 151 | 0 | 0 | 151 | ||||||||||||||
Total securities available-for-sale | $ | 116,092 | $ | 2,566 | $ | 202 | $ | 118,456 |
F-48
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010 (In thousands, except per share data)
December 31, 2012, 2011, and 2010 (In thousands, except per share data)
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Values | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31, 2011 |