Nicolet(US:NIC)2021-04-30 15:35markdown PART I – FINANCIAL INFORMATION [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements%3A) Presents Nicolet Bankshares' unaudited consolidated financial statements and notes for Q1 2021, detailing financial position and performance [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) (In thousands) | (In thousands) | March 31, 2021 (Unaudited) | December 31, 2020 (Audited) | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $735,854 | $802,859 | | Securities AFS, at fair value | $558,229 | $539,337 | | Loans, net | $2,813,725 | $2,756,928 | | Total assets | $4,543,804 | $4,551,789 | | **Liabilities** | | | | Total deposits | $3,900,594 | $3,910,399 | | Total liabilities | $3,993,758 | $4,012,600 | | **Stockholders' Equity** | | | | Total stockholders' equity | $550,046 | $539,189 | | Total liabilities and stockholders' equity | $4,543,804 | $4,551,789 | - Total assets remained largely unchanged at **$4.54 billion** as of March 31, 2021, compared to December 31, 2020, with a slight shift in composition[10](index=10&type=chunk) - Loans, net increased by **$56.797 million (2.06%)** from **$2.757 billion** at December 31, 2020, to **$2.814 billion** at March 31, 2021[10](index=10&type=chunk) [Consolidated Statements of Income](index=4&type=section&id=Consolidated%20Statements%20of%20Income) (In thousands) | (In thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Total interest income | $36,876 | $37,003 | | Total interest expense | $3,235 | $5,740 | | Net interest income | $33,641 | $31,263 | | Provision for credit losses | $500 | $3,000 | | Total noninterest income | $17,126 | $9,585 | | Total noninterest expense | $26,081 | $23,854 | | Net income attributable to Nicolet Bankshares, Inc. | $18,239 | $10,555 | | Basic Earnings per common share | $1.82 | $1.00 | | Diluted Earnings per common share | $1.75 | $0.98 | - Net income attributable to Nicolet Bankshares, Inc. increased by **$7.684 million (72.8%)** from **$10.555 million** in Q1 2020 to **$18.239 million** in Q1 2021[12](index=12&type=chunk) - Diluted EPS increased by **$0.77 (78.6%)** from **$0.98** in Q1 2020 to **$1.75** in Q1 2021[12](index=12&type=chunk) [Consolidated Statements of Comprehensive Income](index=5&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) (In thousands) | (In thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Net income | $18,239 | $10,673 | | Other comprehensive income (loss), net of tax | $(5,380) | $3,161 | | Comprehensive income | $12,859 | $13,834 | - Total other comprehensive income (loss) shifted from a gain of **$3.161 million** in Q1 2020 to a loss of **$(5.380) million** in Q1 2021, primarily due to unrealized losses on securities AFS[14](index=14&type=chunk) [Consolidated Statements of Stockholders' Equity](index=6&type=section&id=Consolidated%20Statements%20of%20Stockholders'%20Equity) (In thousands) | (In thousands) | Balances at December 31, 2020 | Balances at March 31, 2021 | | :--- | :--- | :--- | | Common Stock | $100 | $100 | | Additional Paid-In Capital | $273,390 | $271,388 | | Retained Earnings | $252,952 | $271,191 | | Accumulated Other Comprehensive Income (Loss) | $12,747 | $7,367 | | Total Stockholders' Equity | $539,189 | $550,046 | - Total stockholders' equity increased by **$10.857 million (2.01%)** from **$539.189 million** at December 31, 2020, to **$550.046 million** at March 31, 2021, driven by net income, partially offset by stock repurchases and other comprehensive loss[17](index=17&type=chunk) [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) (In thousands) | (In thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $38,213 | $12,165 | | Net cash provided by (used in) investing activities | $(82,165) | $(97,199) | | Net cash provided by (used in) financing activities | $(23,053) | $144,935 | | Net increase (decrease) in cash and cash equivalents | $(67,005) | $59,901 | | Cash and cash equivalents, Ending | $735,854 | $241,960 | - Net cash provided by operating activities significantly increased to **$38.213 million** in Q1 2021 from **$12.165 million** in Q1 2020[20](index=20&type=chunk) - Net cash used in financing activities shifted from a provision of **$144.935 million** in Q1 2020 to a usage of **$(23.053) million** in Q1 2021, primarily due to a decrease in deposits and long-term borrowings, and increased stock repurchases[20](index=20&type=chunk) [Notes to Unaudited Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Unaudited%20Consolidated%20Financial%20Statements) [Note 1 – Basis of Presentation](index=8&type=section&id=Note%201%20%E2%80%93%20Basis%20of%20Presentation) - The unaudited consolidated financial statements include all normal recurring adjustments necessary for fair presentation and should be read with the Company's **2020 Annual Report on Form 10-K**[23](index=23&type=chunk)[24](index=24&type=chunk) - Critical accounting policies and estimates, such as the allowance for credit losses and valuation of acquired loans, remain unchanged from the **2020 Annual Report on Form 10-K**[25](index=25&type=chunk)[26](index=26&type=chunk) [Note 2 – Acquisitions](index=8&type=section&id=Note%202%20%E2%80%93%20Acquisitions) - Nicolet completed its merger with **Advantage Community Bancshares, Inc.** on **August 21, 2020**, expanding its presence in Central Wisconsin[28](index=28&type=chunk) **Advantage Community Bancshares, Inc. Acquisition Impact (August 21, 2020):** | Item | Amount (approximate) | | :--- | :--- | | Total assets | $172 million | | Loans | $88 million | | Deposits | $141 million | | Core deposit intangible | $1 million | | Goodwill | $12 million | [Note 3 – Earnings per Common Share](index=9&type=section&id=Note%203%20%E2%80%93%20Earnings%20per%20Common%20Share) **Earnings Per Common Share (Three Months Ended March 31):** | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net income attributable to Nicolet Bankshares, Inc. (in thousands) | $18,239 | $10,555 | | Weighted average common shares outstanding (in thousands) | 9,998 | 10,516 | | Effect of dilutive common stock awards (in thousands) | 405 | 285 | | Diluted weighted average common shares outstanding (in thousands) | 10,403 | 10,801 | | Basic earnings per common share | $1.82 | $1.00 | | Diluted earnings per common share | $1.75 | $0.98 | - Options to purchase **less than 0.1 million shares** in 2021 and **approximately 0.1 million shares** in 2020 were excluded from diluted EPS calculations due to their anti-dilutive effect[32](index=32&type=chunk) [Note 4 – Stock-Based Compensation](index=9&type=section&id=Note%204%20%E2%80%93%20Stock-Based%20Compensation) - **Approximately 1.3 million shares** were available for grant under stock-based compensation plans as of March 31, 2021[33](index=33&type=chunk) **Stock Option Activity (Three Months Ended March 31, 2021):** | Metric | Amount | | :--- | :--- | | Outstanding - December 31, 2020 | 1,437,460 shares | | Exercise of stock options | (32,672) shares | | Outstanding - March 31, 2021 | 1,404,788 shares | | Weighted Average Exercise Price (Outstanding) | $50.82 | | Aggregate Intrinsic Value (Outstanding) | $45,872 thousand | | Intrinsic value of options exercised (Q1 2021) | $1.3 million | | Intrinsic value of options exercised (Q1 2020) | $1.8 million | - Stock-based compensation expense recognized was approximately **$1.200 million** in Q1 2021 and **$1.300 million** in Q1 2020. An additional **$100 thousand** director expense was recognized in Q1 2021 for immediately vested restricted stock[40](index=40&type=chunk) [Note 5 – Securities Available for Sale](index=10&type=section&id=Note%205%20%E2%80%93%20Securities%20Available%20for%20Sale) **Securities Available for Sale (AFS) - Fair Value (in thousands):** | Category | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | U.S. government agency securities | $79,115 | $63,451 | | State, county and municipals | $227,672 | $231,868 | | Mortgage-backed securities | $166,900 | $162,495 | | Corporate debt securities | $84,542 | $81,523 | | Total | $558,229 | $539,337 | **Gross Unrealized Losses on Securities AFS (in thousands):** | Category | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | U.S. government agency securities | $256 | $0 | | State, county and municipals | $1,935 | $11 | | Mortgage-backed securities | $1,040 | $78 | | Corporate debt securities | $84 | $0 | | Total | $3,315 | $89 | - **No allowance for credit losses** on securities AFS was recognized as unrealized losses are attributed to noncredit-related factors (e.g., interest rate changes), and the Company does not intend to sell these securities before recovery of cost[46](index=46&type=chunk) [Note 6 – Loans, Allowance for Credit Losses - Loans, and Credit Quality](index=12&type=section&id=Note%206%20%E2%80%93%20Loans%2C%20Allowance%20for%20Credit%20Losses%20-%20Loans%2C%20and%20Credit%20Quality) **Loan Composition (in thousands):** | Category | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Commercial & industrial | $728,498 | $750,718 | | Paycheck Protection Program ("PPP") loans | $229,403 | $186,016 | | Owner-occupied commercial real estate ("CRE") | $520,274 | $521,300 | | CRE investment | $490,053 | $460,721 | | Total Loans | $2,846,351 | $2,789,101 | | Allowance for credit losses - loans ("ACL-Loans") | $32,626 | $32,173 | | Loans, net | $2,813,725 | $2,756,928 | | ACL-Loans to loans | 1.15% | 1.15% | **Allowance for Credit Losses - Loans Roll Forward (in thousands):** | Item | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Beginning balance | $32,173 | $13,972 | | Provision for credit losses | $500 | $3,000 | | Net (charge-offs) recoveries | $(47) | $(55) | | Ending balance | $32,626 | $26,202 | **Past Due and Nonaccrual Loans (in thousands) - March 31, 2021:** | Category | 30-89 Days Past Due (accruing) | 90 Days & Over or nonaccrual | Current | Total | | :--- | :--- | :--- | :--- | :--- | | Commercial & industrial | $58 | $2,842 | $725,598 | $728,498 | | PPP loans | $0 | $0 | $229,403 | $229,403 | | Owner-occupied CRE | $76 | $1,563 | $518,635 | $520,274 | | Total loans | $2,227 | $8,965 | $2,835,159 | $2,846,351 | | Percent of total loans | 0.1% | 0.3% | 99.6% | 100.0% | - Nonaccrual loans decreased from **$9.455 million** at December 31, 2020, to **$8.965 million** at March 31, 2021[64](index=64&type=chunk) [Note 7 – Goodwill and Other Intangibles and Mortgage Servicing Rights](index=19&type=section&id=Note%207%20%E2%80%93%20Goodwill%20and%20Other%20Intangibles%20and%20Mortgage%20Servicing%20Rights) **Goodwill and Other Intangibles, Net (in thousands):** | Category | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Goodwill | $163,151 | $163,151 | | Core deposit intangibles | $8,112 | $8,837 | | Customer list intangibles | $3,238 | $3,365 | | Total | $174,501 | $175,353 | **Mortgage Servicing Rights (MSR) Asset (in thousands):** | Item | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | MSR asset at end of period | $10,851 | $10,230 | | Valuation allowance at end of period | $(1,500) | $(1,000) | | MSR asset, net | $9,351 | $9,230 | | Fair value of MSR asset at end of period | $10,550 | $9,276 | | Residential mortgage loans serviced for others | $1,293,845 | $1,250,206 | - Management determined **no impairment** was indicated for goodwill and other intangibles, considering the ongoing impacts of the COVID-19 pandemic[76](index=76&type=chunk) [Note 8 – Short and Long-Term Borrowings](index=20&type=section&id=Note%208%20%E2%80%93%20Short%20and%20Long-Term%20Borrowings) - The Company had **no outstanding short-term borrowings** at March 31, 2021, or December 31, 2020[84](index=84&type=chunk) **Long-Term Borrowings (in thousands):** | Category | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | FHLB advances | $19,000 | $29,000 | | Junior subordinated debentures | $24,988 | $24,869 | | Total long-term borrowings | $43,988 | $53,869 | - FHLB advances decreased by **$10.000 million**, with a weighted average rate of **0.78%** at March 31, 2021[86](index=86&type=chunk) [Note 9 – Fair Value Measurements](index=21&type=section&id=Note%209%20%E2%80%93%20Fair%20Value%20Measurements) - Financial instruments are measured at fair value using a **three-level hierarchy** based on input observability: **Level 1** (quoted prices in active markets), **Level 2** (observable inputs other than Level 1), and **Level 3** (significant unobservable inputs)[91](index=91&type=chunk)[92](index=92&type=chunk) **Assets Measured at Fair Value on a Recurring Basis (in thousands) - March 31, 2021:** | Category | Total | Level 1 | Level 2 | Level 3 | | :--- | :--- | :--- | :--- | :--- | | Securities AFS | $558,229 | $0 | $555,099 | $3,130 | | Other investments (equity securities) | $4,190 | $4,190 | $0 | $0 | **Assets Measured at Fair Value on a Nonrecurring Basis (in thousands) - March 31, 2021:** | Category | Total | Level 1 | Level 2 | Level 3 | | :--- | :--- | :--- | :--- | :--- | | Collateral dependent loans | $8,399 | $0 | $0 | $8,399 | | Other real estate owned ("OREO") | $3,797 | $0 | $0 | $3,797 | | MSR asset | $10,550 | $0 | $0 | $10,550 | [Note 10 – Subsequent Event](index=24&type=section&id=Note%2010%20%E2%80%93%20Subsequent%20Event) - On **April 12, 2021**, Nicolet entered a definitive merger agreement with **Mackinac Financial Corporation**, expanding into Northern Michigan and the Upper Peninsula[109](index=109&type=chunk) - Mackinac shareholders will receive **0.22 shares** of Nicolet common stock and **$4.64** in cash for each share of Mackinac common stock, approximating an **80% stock and 20% cash split**[109](index=109&type=chunk) **Mackinac Financial Corporation Financials (December 31, 2020):** | Item | Amount | | :--- | :--- | | Total assets | $1.5 billion | | Loans | $1.1 billion | | Deposits | $1.3 billion | | Equity | $168 million | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=25&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management analyzes Q1 2021 financial condition and operations, highlighting acquisition and pandemic impacts on key financial metrics [Overview](index=25&type=section&id=Overview) - Nicolet Bankshares, Inc. is a bank holding company providing banking and wealth management services in **Wisconsin and Menominee, Michigan**[111](index=111&type=chunk) - The **COVID-19 pandemic** significantly impacted the business environment in 2020, leading to increased liquidity, higher credit loss provisions, and a focus on customer support through loan modifications and the **Paycheck Protection Program (PPP)**[116](index=116&type=chunk)[117](index=117&type=chunk)[118](index=118&type=chunk) - Net income for Q1 2021 was **$18.200 million**, a **73% increase** over Q1 2020, driven by higher net interest income, lower credit provision, and strong noninterest income, particularly from mortgages[121](index=121&type=chunk) [Performance Summary](index=27&type=section&id=Performance%20Summary) **Earnings Summary and Selected Financial Data (in thousands, except per share data):** | Metric | 3/31/2021 | 3/31/2020 | | :--- | :--- | :--- | | Net interest income | $33,641 | $31,263 | | Provision for credit losses | $500 | $3,000 | | Noninterest income | $17,126 | $9,585 | | Noninterest expense | $26,081 | $23,854 | | Net income attributable to Nicolet Bankshares, Inc. | $18,239 | $10,555 | | Diluted EPS | $1.75 | $0.98 | | Return on average assets | 1.64% | 1.19% | | Net interest margin | 3.31% | 3.94% | | Nonperforming loans to total loans | 0.31% | 0.57% | - Total assets at March 31, 2021, were **$4.5 billion**, unchanged from December 31, 2020, but **$811.000 million (22%)** higher than March 31, 2020, primarily due to growth in core deposits from government stimulus[127](index=127&type=chunk) - Loans increased by **$57.000 million (2%)** over December 31, 2020, and **$239.000 million (9%)** over March 31, 2020, partly due to PPP loans and the Advantage acquisition[127](index=127&type=chunk) [Income Statement Analysis](index=29&type=section&id=INCOME%20STATEMENT%20ANALYSIS) [Net Interest Income](index=29&type=section&id=Net%20Interest%20Income) **Tax-Equivalent Net Interest Income and Margin:** | Metric | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Tax-equivalent net interest income (in thousands) | $33,893 | $31,494 | | Net interest margin | 3.31% | 3.94% | | Interest-earning asset yield | 3.63% | 4.66% | | Cost of funds | 0.47% | 1.04% | - Tax-equivalent net interest income increased by **$2.400 million (8%)** over Q1 2020, driven by favorable volumes (especially PPP loans and Advantage acquisition assets) despite unfavorable rates[135](index=135&type=chunk) - The net interest margin decreased by **63 bps** to **3.31%** in Q1 2021, primarily due to a **103 bps decline** in earning asset yield and a **17 bps decrease** in net free funds contribution, partially offset by a **57 bps favorable decline** in the cost of funds[137](index=137&type=chunk) [Provision for Credit Losses](index=32&type=section&id=Provision%20for%20Credit%20Losses) - The provision for credit losses decreased significantly to **$500 thousand** in Q1 2021 from **$3.000 million** in Q1 2020[142](index=142&type=chunk) - The reduction reflects **improved asset quality** and **better visibility on credit concerns** compared to the initial onset of the COVID-19 pandemic in Q1 2020[142](index=142&type=chunk) [Noninterest Income](index=33&type=section&id=Noninterest%20Income) **Noninterest Income (in thousands):** | Category | Q1 2021 | Q1 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Trust services fee income | $1,775 | $1,579 | $196 | 12% | | Brokerage fee income | $2,793 | $2,322 | $471 | 20% | | Mortgage income, net | $7,230 | $2,327 | $4,903 | 211% | | Card interchange income | $1,927 | $1,562 | $365 | 23% | | Other income | $1,072 | $521 | $551 | 106% | | Total noninterest income | $17,126 | $9,585 | $7,541 | 79% | - Net mortgage income saw a substantial increase of **$4.900 million (211%)**, primarily due to **higher sale gains** and **capitalized gains** from increased refinance activity and better pricing[147](index=147&type=chunk) - Other income increased by **$600 thousand**, largely due to a **favorable change in the fair value of nonqualified deferred compensation plan assets**, recovering from a significant market decline in March 2020[150](index=150&type=chunk) [Noninterest Expense](index=34&type=section&id=Noninterest%20Expense) **Noninterest Expense (in thousands):** | Category | Q1 2021 | Q1 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Personnel | $15,116 | $13,323 | $1,793 | 13% | | Occupancy, equipment and office | $4,137 | $4,204 | $(67) | (2)% | | Business development and marketing | $989 | $1,359 | $(370) | (27)% | | Data processing | $2,658 | $2,563 | $95 | 4% | | FDIC assessments | $595 | $0 | $595 | N/M | | Other expense | $1,734 | $1,412 | $322 | 23% | | Total noninterest expense | $26,081 | $23,854 | $2,227 | 9% | - Personnel expense increased by **$1.800 million (13%)**, partly due to the **change in fair value of nonqualified deferred compensation plan liabilities** and **higher health insurance, benefits, and incentives**[153](index=153&type=chunk) - FDIC assessments increased to **$600 thousand** in Q1 2021 as small bank assessment credits were **fully utilized in Q3 2020**[157](index=157&type=chunk) [Income Taxes](index=34&type=section&id=Income%20Taxes) **Income Tax Expense and Effective Tax Rate:** | Metric | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Income tax expense (in thousands) | $5,947 | $3,321 | | Effective tax rate | 24.59% | 23.73% | - The effective tax rate increased to **24.59%** in Q1 2021 from **23.73%** in Q1 2020, as the prior year benefited from favorable tax treatment of BOLI death benefits and higher stock-based compensation tax benefits[158](index=158&type=chunk) [Balance Sheet Analysis](index=35&type=section&id=BALANCE%20SHEET%20ANALYSIS) [Overall Balance Sheet Changes](index=35&type=section&id=Overall%20Balance%20Sheet%20Changes) - Total assets at March 31, 2021, were **$4.5 billion**, unchanged from December 31, 2020, but up **$800.000 million (22%)** from March 31, 2020, primarily due to increased liquidity[159](index=159&type=chunk)[160](index=160&type=chunk) - Cash and cash equivalents increased by **$494.000 million (204%)** to **$736.000 million** at March 31, 2021, representing **16%** of total assets[160](index=160&type=chunk) - Total deposits increased by **$900.000 million (29%)** over March 31, 2020, driven by customer core deposits and the Advantage acquisition, while borrowings decreased by **$114.000 million**[160](index=160&type=chunk) [Loans](index=35&type=section&id=Loans) **Period End Loan Composition (in thousands):** | Category | March 31, 2021 | % of Total | December 31, 2020 | % of Total | March 31, 2020 | % of Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Commercial-based loans | $2,212,907 | 78% | $2,159,667 | 78% | $1,971,766 | 75% | | Retail-based loans | $633,444 | 22% | $629,434 | 22% | $635,658 | 25% | | Total loans | $2,846,351 | 100% | $2,789,101 | 100% | $2,607,424 | 100% | | Total loans ex. PPP loans | $2,616,948 | 92% | $2,603,085 | 93% | $2,607,424 | 100% | - Commercial-based loans increased by **$53.000 million (2%)** since December 31, 2020, primarily due to a **$43.000 million increase** in net PPP loans and **$10.000 million growth** in other commercial loans[165](index=165&type=chunk) - Residential real estate loans grew by **$6.000 million (1%)** from year-end 2020, representing **21%** of total loans[166](index=166&type=chunk) [Allowance for Credit Losses - Loans](index=36&type=section&id=Allowance%20for%20Credit%20Losses%20-%20Loans) - The ACL-Loans was **$32.600 million** at March 31, 2021, representing **1.15%** of total loans and **1.25%** of loans excluding PPP loans[172](index=172&type=chunk) - The increase in ACL-Loans from year-end 2020 was due to a **$500 thousand provision for credit losses** and negligible net charge-offs (**0.01%** of average loans, annualized)[172](index=172&type=chunk) - The ACL-Loans methodology involves **specific reserves for credit-deteriorated loans**, historical loss rates by loan segment, qualitative factors, and reasonable and supportable forecasts[171](index=171&type=chunk) [Nonperforming Assets](index=38&type=section&id=Nonperforming%20Assets) **Nonperforming Assets (in thousands):** | Category | March 31, 2021 | December 31, 2020 | March 31, 2020 | | :--- | :--- | :--- | :--- | | Total nonaccrual loans | $8,965 | $9,455 | $14,769 | | Total OREO | $3,797 | $3,608 | $1,000 | | Total nonperforming assets | $12,762 | $13,063 | $15,769 | | Nonperforming assets to total assets | 0.28% | 0.29% | 0.42% | | ACL-Loans to nonperforming loans | 364% | 340% | 177% | - Nonperforming assets were **$13.000 million** at March 31, 2021, representing **0.28%** of total assets, a slight decrease from December 31, 2020[176](index=176&type=chunk) - Potential problem loans, defined as performing loans rated Substandard, decreased to **$13.000 million (0.4% of loans)** at March 31, 2021, from **$21.000 million (0.7% of loans)** at December 31, 2020[177](index=177&type=chunk) [Deposits](index=39&type=section&id=Deposits) **Period End Deposit Composition (in thousands):** | Category | March 31, 2021 | % of Total | December 31, 2020 | % of Total | March 31, 2020 | % of Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Noninterest-bearing demand | $1,216,477 | 31% | $1,212,787 | 31% | $791,563 | 26% | | Money market and interest-bearing demand | $1,576,041 | 40% | $1,551,325 | 40% | $1,208,024 | 40% | | Savings | $572,225 | 15% | $521,814 | 13% | $361,829 | 12% | | Time | $535,851 | 14% | $624,473 | 16% | $662,050 | 22% | | Total deposits | $3,900,594 | 100% | $3,910,399 | 100% | $3,023,466 | 100% | | Total customer deposits (core) | $3,639,577 | 93% | $3,585,538 | 92% | $2,741,883 | 91% | | Total brokered deposits | $261,017 | 7% | $324,861 | 8% | $281,583 | 9% | - Total deposits were **$3.900 billion** at March 31, 2021, minimally changed from December 31, 2020, with a **$54.000 million increase** in customer core deposits offsetting a **$64.000 million decrease** in brokered deposits[181](index=181&type=chunk) - Compared to March 31, 2020, total deposits increased by **$900.000 million (29%)**, largely due to increased customer core deposits from government stimulus and the Advantage acquisition[182](index=182&type=chunk) [Lending-Related Commitments](index=40&type=section&id=Lending-Related%20Commitments) **Off-Balance Sheet Lending-Related Commitments (in thousands):** | Category | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Commitments to extend credit | $960,788 | $950,287 | | Financial standby letters of credit | $7,868 | $8,241 | | Performance standby letters of credit | $7,757 | $8,366 | - Mortgage derivatives (interest rate lock commitments and forward commitments) represented **$82.000 million** and **$3.000 million**, respectively, at March 31, 2021, with a combined net fair value loss of **$211 thousand**[185](index=185&type=chunk) [Liquidity Management](index=40&type=section&id=Liquidity%20Management) - Nicolet's liquidity levels are **sufficient**, supported by a **stable core customer deposit base** and minimal use of non-core funding sources[187](index=187&type=chunk) - Available funding sources at March 31, 2021, included **$175.000 million** in unused Federal funds lines and **$185.000 million** in FHLB borrowing capacity[188](index=188&type=chunk) - Cash and cash equivalents decreased by **$67.000 million** from year-end 2020 to **$736.000 million** at March 31, 2021, due to investing and financing activities, partially offset by operating cash flows[191](index=191&type=chunk) [Interest Rate Sensitivity Management and Impact of Inflation](index=41&type=section&id=Interest%20Rate%20Sensitivity%20Management%20and%20Impact%20of%20Inflation) - Nicolet manages interest rate sensitivity through a **net interest income analysis**, simulating the impact of hypothetical interest rate changes on net interest income[194](index=194&type=chunk) **Projected Changes in Net Interest Income Over One-Year Horizon:** | Scenario | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | 200 bps decrease in interest rates | (0.4)% | (0.8)% | | 100 bps decrease in interest rates | (0.4)% | (0.8)% | | 100 bps increase in interest rates | 2.0% | 4.0% | | 200 bps increase in interest rates | 4.1% | 8.1% | - The Company's interest rate sensitivity results are within its guidelines of **not greater than -10% for +/- 100 bps** and **not greater than -15% for +/- 200 bps**[195](index=195&type=chunk) [Capital](index=42&type=section&id=Capital) - The Company's and the Bank's regulatory capital ratios remain above minimum regulatory requirements, qualifying the Bank as **well-capitalized**[199](index=199&type=chunk) **Company Risk-Based Capital Ratios (March 31, 2021):** | Ratio | Value | | :--- | :--- | | Total capital ratio | 13.4% | | Tier 1 capital ratio | 12.7% | | Common equity tier 1 capital ratio | 12.0% | | Tier 1 leverage ratio | 9.3% | - During Q1 2021, **$4.100 million** was used to repurchase and cancel **56,886 shares** of common stock, with **$16.300 million** remaining authorized under the repurchase program[200](index=200&type=chunk) [Critical Accounting Policies](index=43&type=section&id=Critical%20Accounting%20Policies) - **No changes** in critical accounting policies have occurred since December 31, 2020, as discussed in the **2020 Annual Report on Form 10-K**[202](index=202&type=chunk) [Future Accounting Pronouncements](index=43&type=section&id=Future%20Accounting%20Pronouncements) - The Company is evaluating the impact of **ASU 2020-04, Reference Rate Reform (Topic 848)**, which provides optional guidance to ease accounting burdens related to reference rate reform, effective through **December 31, 2022**[203](index=203&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=43&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Refers to Item 2 for quantitative and qualitative disclosures on market risk, specifically interest rate sensitivity - Quantitative and qualitative disclosures about market risk are addressed in the **'Interest Rate Sensitivity Management and Impact of Inflation' section of Item 2**[204](index=204&type=chunk) [Item 4. Controls and Procedures](index=43&type=section&id=Item%204.%20Controls%20and%20Procedures) Management confirmed effective disclosure controls and procedures with no material changes to internal controls in Q1 2021 - Management, under the supervision of the CEO and CFO, concluded that **disclosure controls and procedures were effective** as of March 31, 2021[205](index=205&type=chunk) - **No material changes** in internal controls over financial reporting occurred during the quarter[206](index=206&type=chunk) PART II – OTHER INFORMATION [Item 1. Legal Proceedings](index=44&type=section&id=Item%201.%20Legal%20Proceedings) No legal proceedings are expected to materially affect the Company's operations or financial position - **No legal proceedings** are currently underway that are expected to have a material adverse effect on the Company's results or financial position[209](index=209&type=chunk) [Item 1A. Risk Factors](index=44&type=section&id=Item%201A.%20Risk%20Factors) No material changes to risk factors since the 2020 Annual Report on Form 10-K - **No material changes** to risk factors have occurred since the Annual Report on Form 10-K for December 31, 2020[210](index=210&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=44&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) Nicolet repurchased 63,793 common shares for $4.1 million in Q1 2021, with $16.3 million remaining in the program **Common Stock Purchases (Q1 2021):** | Period | Total Number of Shares Purchased | Average Price Paid per Share ($) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | | :--- | :--- | :--- | :--- | :--- | | January 1 – January 31, 2021 | 9,688 | $68.41 | 9,688 | 542,500 | | February 1 – February 28, 2021 | 50,389 | $72.94 | 43,698 | 498,800 | | March 1 – March 31, 2021 | 3,716 | $76.80 | 3,500 | 495,300 | | Total | 63,793 | $72.48 | 56,886 | 495,300 | - During Q1 2021, **$4.100 million** was utilized to repurchase and cancel approximately **56,900 shares** of common stock under the repurchase program[212](index=212&type=chunk) - As of March 31, 2021, approximately **$16.300 million** remained available under the common stock repurchase program[212](index=212&type=chunk) [Item 3. Defaults Upon Senior Securities](index=44&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) No defaults on senior securities occurred during the reporting period - **No defaults** upon senior securities occurred[213](index=213&type=chunk) [Item 4. Mine Safety Disclosures](index=44&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the Company - Mine Safety Disclosures are **not applicable**[214](index=214&type=chunk) [Item 5. Other Information](index=44&type=section&id=Item%205.%20Other%20Information) No other information is reported under this item - **No other information** is reported[215](index=215&type=chunk) [Item 6. Exhibits](index=45&type=section&id=Item%206.%20Exhibits) Lists exhibits including merger agreement, CEO/CFO certifications, and XBRL documents - Exhibits include the **Agreement and Plan of Merger with Mackinac Financial Corporation**, CEO and CFO certifications under Sarbanes-Oxley Act, and various XBRL documents[216](index=216&type=chunk) [Signatures](index=46&type=section&id=Signatures) Report signed by President and CEO Michael E. Daniels and CFO Ann K. Lawson on April 30, 2021 - The report was signed by **Michael E. Daniels, President and CEO**, and **Ann K. Lawson, CFO**, on **April 30, 2021**[220](index=220&type=chunk)