NICOLET BANKSHARES, INC. Nicolet Bankshares, Inc. (the "Company" or "Nicolet") is a bank holding company headquartered inGreen Bay, Wisconsin . Nicolet provides a diversified range of traditional banking and wealth management services to individuals and businesses in its market area and through the branch offices of its banking subsidiary,Nicolet National Bank (the "Bank"), in northeastern and centralWisconsin and inMenominee, Michigan . Forward-Looking Statements Statements made in this document and in any documents that are incorporated by reference which are not purely historical are 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 its 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 Nicolet 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 Nicolet's control, include, but are not necessarily limited to the following: •the effects of the COVID-19 pandemic on the business, customers, employees and third-party service providers of Nicolet or any of its acquisition targets; •operating, legal and regulatory risks, including the effects of legislative or regulatory developments affecting the financial industry generally or Nicolet specifically; •economic, market, political and competitive forces affecting Nicolet's banking and wealth management businesses; •changes in interest rates, monetary policy and general economic conditions, which may impact Nicolet's net interest income; •diversion of management time on pandemic-related issues; •adoption of new accounting standards, including the effects from the adoption of the CECL model onJanuary 1, 2020 , or changes in existing standards; •changes to statutes, regulations, or regulatory policies or practices resulting from the COVID-19 pandemic; •compliance or operational risks related to new products, services, ventures, or lines of business, if any, that Nicolet may pursue or implement; and •the risk that Nicolet's analysis 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. Nicolet 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.
Overview
The following discussion is management's analysis of the consolidated financial condition as ofJune 30, 2020 andDecember 31, 2019 and results of operations for the three and six-month periods endedJune 30, 2020 and 2019. It should be read in conjunction with Nicolet's audited consolidated financial statements included in Nicolet's Annual Report on Form 10-K for the year endedDecember 31, 2019 . The timing of Nicolet's acquisition ofChoice Bancorp, Inc. ("Choice") onNovember 8, 2019 , at approximately 12% of pre-merger assets, impacts financial comparisons. Certain income statement results, average balances and related ratios for the three and six-month periods endedJune 30, 2020 include Choice, compared to no contribution from Choice for the three and six-month periods endedJune 30, 2019 , and a partial period of Choice in fourth quarter 2019. TheWorld Health Organization declared the coronavirus COVID-19 a pandemic inMarch 2020 . The impacts of the COVID-19 pandemic have resulted in, among other things, stock and global markets decline, disruption in business and leisure activities as nation-wide stay-at-home orders were mandated, significant strain on the health care industry as it addressed the severity of the health crisis, and shift in the general economy (such as high unemployment, negative GDP expectations, a 150 bps decline in Federal funds rates, and unprecedented government stimulus), triggering a 2020 recession. The dramatic events surrounding the pandemic and the uncertainty about the longevity of the pandemic's affects will continue to impact future expectations about credit costs and margins, as well as fee income and expenses. Amid the uncertainty, Nicolet took action to increase liquidity (largely through procurement of term brokered CDs in late March to early April), significantly increased the credit loss provision in the first half of 2020 for the dramatically changed 27 -------------------------------------------------------------------------------- circumstances that continue to evolve, and recorded market losses on equity investments held (in response to the market decline). Initial actions to keep customers and employees safe included reducing on-site staff, increasing remote staff, segregating leadership and key functional departments (and adding redundancy to ensure continuity of operations should there be a COVID-19 related incident), limiting branch access through appointment-only lobbies and temporarily closing 11 locations. We supplemented the pay of our front-line employees working on-site and eliminated senior management incentive accruals for the quarter. We aggressively procured masks and other protective supplies. Costs associated with on-site bonuses, testing, and protective supplies totaled$0.6 million for second quarter 2020. We sharpened our focus on configuring the Bank to more efficiently and effectively meet customers needs. We closely evaluated our branch network for redundancy and permanently closed seven (18%) of our 39 branches in second quarter, which also reduced headcount by 56 employees (nearly 10% of our workforce). As a result,$1.7 million of one-time costs were recorded during second quarter 2020 related to lease terminations, severance, accelerated depreciation and write-offs. At the start of the pandemic, Nicolet employed approximately 600 people and at peak points had 34% working remotely, 18% paid but not working due to risk concerns or location closure, and the remainder of employees working on-site. AtJune 30, 2020 , Nicolet employed 544 people, with the decline primarily due to the branch closures and efficiencies. Given the extent of uncertainty, we guided numerous customers through new loans, temporary loan modifications, or participation in the Paycheck Protection Program ("PPP"). Nicolet originated$340 million of PPP loans during second quarter 2020 for nearly 2,550 business customers, which supported approximately 40,000 employees in those underlying businesses. The PPP loans provided low 1% coupon and potentially forgivable funds to small businesses, and are fully guaranteed by the SBA warranting no credit loss provision. Nicolet earned on average a 3.53% fee or$12.2 million from the SBA to process and service the PPP loans. This aggregate fee was deferred and will be accreted ratably into interest income over the life of the PPP loan pool, which may accelerate if loans payoff sooner. Nicolet recognized$1.1 million of the aggregate fee into interest income for the second quarter of 2020. Using the PPP loans as collateral, Nicolet funded the PPP loans through theFederal Reserve's Paycheck Protection Program Liquidity Facility ("PPPLF"), which cost 0.35% and totaled$336 million atJune 30, 2020 . PPP loans funded by the PPPLF are given a zero risk-weight in regulatory risk-based capital ratios and are excluded from average assets in the regulatory leverage ratio. We created a micro-grant program, providing$1.25 million of funds directly to 325 customerswho otherwise qualified for a small PPP loan of less than$5,000 , no strings attached, as a more cost beneficial, timely and impactful result for the customer and the Company. The micro-grant program of the second quarter represented a direct give back of 10% of the PPP fees subsequently earned. Since the pandemic started, payment modifications were made on over 900 loans totaling$447 million , most of which were commercial. For retail customers purchasing new homes or refinancing, we processed a record of nearly 1,500 mortgage loans in second quarter 2020. 28 -------------------------------------------------------------------------------- Performance Summary Table 1: Earnings Summary and Selected Financial Data At or for the Three Months Ended At or for the Six Months Ended (In thousands, except per share data) 6/30/2020 3/31/2020 12/31/2019 9/30/2019 6/30/2019 6/30/2020 6/30/2019 Results of operations: Interest income$ 36,892 $ 37,003 $ 36,192 $ 34,667 $ 34,570 $ 73,895 $ 67,729 Interest expense 5,395 5,740 5,723 5,477 5,626 11,135 11,310 Net interest income 31,497 31,263 30,469 29,190 28,944 62,760 56,419 Provision for credit losses 3,000 3,000 300 400 300 6,000 500 Net interest income after provision for credit losses 28,497 28,263 30,169 28,790 28,644 56,760 55,919 Noninterest income 17,471 9,585 13,309 12,312 18,560 27,056 27,746 Noninterest expense 27,813 23,854 25,426 22,887 25,727 51,667 48,486 Income before income tax expense 18,155 13,994 18,052 18,215 21,477 32,149 35,179 Income tax expense 4,576 3,321 5,670 4,603 2,833 7,897 6,185 Net income 13,579 10,673 12,382 13,612 18,644 24,252 28,994 Net income attributable to noncontrolling interest 101 118 87 82 95 219 178 Net income attributable to Nicolet Bankshares, Inc.$ 13,478 $ 10,555 $ 12,295 $ 13,530 $ 18,549 $ 24,033 $ 28,816 Earnings per common share: Basic$ 1.29 $ 1.00 $ 1.22 $ 1.45 $ 1.98 $ 2.30 $ 3.06 Diluted$ 1.28 $ 0.98 $ 1.18 $ 1.40 $ 1.91 $ 2.25 $ 2.97 Common Shares: Basic weighted average 10,417 10,516 10,061 9,347 9,374 10,467 9,418 Diluted weighted average 10,520 10,801 10,452 9,697 9,692 10,659 9,711 Outstanding (period end) 10,424 10,408 10,588 9,363 9,327 10,424 9,327 Period-End Balances: Loans$ 2,821,501 $
2,607,424
$ 2,821,501 $ 2,203,273 Allowance for credit losses - loans 29,130 26,202 13,972 13,620 13,571 29,130 13,571 Securities available-for-sale, at fair value 510,809 511,860 449,302 419,300 403,989 510,809 403,989 Goodwill and other intangibles, net 164,094 164,974 165,967 121,371 122,285 164,094 122,285 Total assets 4,541,228 3,732,554 3,577,260 3,105,671 3,054,813 4,541,228 3,054,813 Deposits 3,537,805 3,023,466 2,954,453 2,584,447 2,536,639 3,537,805 2,536,639 Stockholders' equity 532,033 510,971 516,262 428,014 411,415 532,033 411,415 Book value per common share 51.04 49.09 48.76 45.71 44.11 51.04 44.11 Tangible book value per common share (2) 35.30 33.24 33.08 32.75 31.00 35.30 31.00 Average Balances: Loans$ 2,823,866 $ 2,584,584 $ 2,438,908 $ 2,218,307 $ 2,189,070 $ 2,704,225 $ 2,184,272 Interest-earning assets 3,917,499 3,167,505 2,974,974 2,763,997 2,702,357 3,542,502 2,718,557 Goodwill and other intangibles, net 164,564 165,532 147,636 121,895 122,841 165,048 123,363 Total assets 4,310,088 3,555,144 3,339,283 3,094,546 3,022,383 3,932,616 3,034,658 Deposits 3,403,188 2,920,071 2,756,295 2,563,821 2,514,226 3,161,630 2,535,459 Interest-bearing liabilities 2,741,199 2,218,592 2,023,448 1,895,754 1,892,775 2,479,896 1,919,345 Stockholders' equity 520,177 513,558 478,645 420,864 404,345 516,867 397,723 Financial Ratios: (1) Return on average assets 1.26 % 1.19 % 1.46 % 1.73 % 2.46 % 1.23 % 1.91 % Return on average common equity 10.42 8.27 10.19 12.75 18.40 9.35 14.61 Return on average tangible common equity (2) 15.24 12.20 14.74 17.95 26.43 13.74 21.18 Average equity to average assets 12.07 14.45 14.33 13.60 13.38 13.14 13.11 Stockholders' equity to assets 11.72 13.69 14.43 13.78 13.47 11.72 13.47 Tangible common equity to tangible assets (2) 8.41 9.70 10.27 10.28 9.86 8.41 9.86 Net interest margin 3.21 3.94 4.06 4.19 4.28 3.53 4.16 Net loan charge-offs to average loans 0.01 0.01 (0.01) 0.06 0.02 0.01 0.01 Nonperforming loans to total loans 0.43 0.57 0.55 0.41 0.35 0.43 0.35 Nonperforming assets to total assets 0.29 0.42 0.42 0.34 0.26 0.29 0.26 Efficiency ratio 55.69 57.16 57.57 55.19 64.01 56.36 63.00 Effective tax rate 25.21 23.73 31.41 25.27 13.19 24.56 17.58 Selected Items: Interest income from resolving PCI loans (rounded) N/A N/A$ 1,400 $ 1,800 $ 1,300 N/A$ 1,500 Tax-equivalent adjustment on net interest income 229 231 257 251 263 460 535 Tax benefit on stock-based compensation (24) (323) (1,275) (128) (739) (347) (883) (1) Income statement-related ratios for partial-year periods are annualized. (2) The ratios of tangible book value per common share, return on average tangible common equity, and tangible common equity to tangible assets exclude goodwill and other intangibles, net. These financial ratios have been included as they are considered to be critical metrics with which to analyze and evaluate financial condition and capital strength. 29 -------------------------------------------------------------------------------- Net income was$24.0 million for the six months endedJune 30, 2020 , a decrease of$4.8 million or 17% from$28.8 million for the six months endedJune 30, 2019 . Earnings per diluted common share was$2.25 for the first six months of 2020, compared to$2.97 for the first six months of 2019. •During second quarter 2019, net income favorably included$5.4 million (or$0.55 of diluted earnings per common share) related to two actions combined, the sale of 80% of Nicolet's equity investment inUFS, LLC , a data processing and e-banking entity ($7.4 million after-tax gain included in noninterest income under asset gains) and retirement-related compensation declared to benefit all employees after that sale ($2.75 million , or$2.0 million after-tax cost, included in noninterest expense under personnel), impacting the 2019 year-to-date and quarter comparisons. •Net interest income was$62.8 million for the first six months of 2020, up$6.3 million or 11% over the first six months of 2019. Interest income grew$6.2 million attributable to favorable volumes (mostly higher loan volumes reflecting the Choice acquisition inNovember 2019 and the PPP loans in second quarter 2020), partly offset by unfavorable rates due toFederal Reserve rate cuts in late 2019 and again inMarch 2020 . Interest expense decreased$0.2 million with the impact of the lower interest rate mostly offset by a higher volume of deposits. Net interest margin was 3.53% for the six months endedJune 30, 2020 , compared to 4.16% for the six months endedJune 30, 2019 . For additional information regarding net interest income, see "Income Statement Analysis - Net Interest Income." •Noninterest income was$27.1 million for the first six months of 2020, down$0.7 million or 2% from the comparable 2019 period, mostly due to the$7.4 million gain on the equity investment sale noted above. Excluding net asset gains (losses), noninterest income was$28.5 million for the first six months of 2020, up$8.5 million or 42% over 2019, predominantly on record net mortgage income spurred by strong refinance activity. For additional information regarding noninterest income, see "Income Statement Analysis - Noninterest Income." •Noninterest expense was$51.7 million ,$3.2 million or 7% higher than the first six months of 2019, largely due to the expanded operating base following the Choice acquisition, as well as one-time expenses in second quarter 2020 associated with the announced branch closures, safety efforts related to the pandemic, a micro-grant program and a merger termination charge (collectively$4.0 million ), while second quarter 2019 included$2.75 million of nonrecurring retirement-related compensation declared. Personnel costs decreased$0.1 million , while non-personnel expenses combined increased$3.3 million or 16% over the comparable 2019 period. For additional information regarding noninterest expense, see "Income Statement Analysis - Noninterest Expense." •Nonperforming assets were only$13 million , representing 0.29% of total assets atJune 30, 2020 , compared to 0.42% atDecember 31, 2019 and 0.26% atJune 30, 2019 . For additional information regarding nonperforming assets, see "Balance Sheet Analysis - Nonperforming Assets." •AtJune 30, 2020 , assets were$4.5 billion , up$964 million or 27% fromDecember 31, 2019 , largely due to higher cash and cash equivalents (commensurate with the increase in total deposits) and an increase in loans (driven by PPP loans originated in second quarter 2020). Compared toJune 30, 2019 , assets increased$1.5 billion or 49%, atttributable to the noted increases since year-end 2019 as well as the acquisition of Choice, which added$457 million in assets,$348 million in loans and$289 million in deposits at acquisition. For additional balance sheet discussion see "Balance Sheet Analysis." •AtJune 30, 2020 , loans were$2.8 billion , 10% higher thanDecember 31, 2019 and 28% higher thanJune 30, 2019 . On average, loans grew$520 million or 24% over the first six months of 2019. For additional information regarding loans, see "Balance Sheet Analysis - Loans." •Total deposits were$3.5 billion atJune 30, 2020 , an increase of 20% fromDecember 31, 2019 and 39% higher thanJune 30, 2019 . Year-to-date average deposits were$626 million or 25% higher than the first six months of 2019. For additional information regarding deposits, see "Balance Sheet Analysis - Deposits." INCOME STATEMENT ANALYSIS Net Interest Income Tax-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. The tax-equivalent adjustments bring tax-exempt interest to a level that would yield the same after-tax income by applying the effective Federal corporate tax rates to the underlying assets. Tables 2 and 3 present information to facilitate the review and discussion of selected average balance sheet items, tax-equivalent net interest income, interest rate spread and net interest margin. 30 --------------------------------------------------------------------------------
Table 2: Average Balance Sheet and Net Interest Income Analysis - Tax-Equivalent Basis
For the Six Months Ended
2020 2019
Average Average Average Average
(in thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate
ASSETS
Interest-earning assets
PPP Loans $ 132,353 $ 1,786 2.67 % $ - $ - - %
Commercial-based loans ex PPP 2,093,664 54,203 5.12 % 1,735,829 49,282 5.65 %
Retail-based loans 478,208 11,613 4.86 % 448,443 11,988 5.35 %
Total loans, including loan fees
(1)(2) 2,704,225 67,602 4.95 % 2,184,272 61,270 5.59 %
Investment securities:
Taxable 345,306 4,114 2.38 % 268,663 3,674 2.73 %
Tax-exempt (2) 126,402 1,402 2.22 % 137,576 1,513 2.20 %
Total investment securities 471,708 5,516 2.34 % 406,239 5,187 2.55 %
Other interest-earning assets 366,569 1,237 0.67 % 128,046 1,807 2.81 %
Total non-loan earning assets 838,277 6,753 1.61 % 534,285 6,994 2.62 %
Total interest-earning assets 3,542,502 $ 74,355 4.16 % 2,718,557 $ 68,264 5.00 %
Other assets, net 390,114 316,101
Total assets $ 3,932,616 $ 3,034,658
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Savings $ 372,122 $ 461 0.25 % $ 305,449 $ 752 0.50 %
Interest-bearing demand 533,574 2,248 0.85 % 495,878 2,549 1.04 %
Money market accounts ("MMA") 695,838 1,080 0.31 % 569,167 1,986 0.70 %
Core time deposits 413,326 3,564 1.73 % 401,849 4,059 2.04 %
Total interest-bearing core deposits 2,014,860 7,353 0.73 % 1,772,343 9,346 1.06 %
Brokered deposits 250,422 2,059 1.65 % 69,634 161 0.47 %
Total interest-bearing deposits 2,265,282 9,412 0.84 % 1,841,977 9,507 1.04 %
PPPLF 118,576 210 0.35 % - - - %
Other interest-bearing liabilities 96,038 1,513 3.12 % 77,368 1,803 4.64 %
Total wholesale funding 214,614 1,723 1.59 % 77,368 1,803 4.64 %
Total interest-bearing liabilities 2,479,896 11,135 0.90 % 1,919,345 11,310 1.19 %
Noninterest-bearing demand deposits 896,348 693,482
Other liabilities 39,505 24,108
Stockholders' equity 516,867 397,723
Total liabilities and
stockholders' equity $ 3,932,616 $ 3,034,658
Net interest income and rate spread $ 63,220 3.26 % $ 56,954 3.81 %
Tax-equivalent adjustment $ 460 $ 535
Net interest margin 3.53 % 4.16 %
Selected Additional Information:
Total loans ex. PPP $ 2,571,872 $ 65,816 5.07 % $ 2,184,272 $ 61,270 5.59 %
Total interest-earning assets ex PPP 3,410,149 72,569 4.22 % 2,718,557 68,264 5.00 %
Total interest-bearing liabilities
ex PPPLF 2,361,320 10,925 0.93 % 1,919,345 11,310 1.19 %
Net interest rate spread ex PPP &
PPPLF 3.29 % 3.81 %
(1)Nonaccrual loans and loans held for sale 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 21% and adjusted
for the disallowance of interest expense.
31
--------------------------------------------------------------------------------Table 2: Average Balance Sheet and Net Interest Income Analysis - Tax-Equivalent Basis (Continued)
For the Three Months Ended
2020 2019
Average Average Average Average
(in thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate
ASSETS
Interest-earning assets
PPP Loans $ 264,705 $ 1,786 2.67 % $ - $ - - %
Commercial-based loans ex PPP 2,078,927 26,311 5.01 % 1,742,209 25,215 5.73 %
Retail-based loans 480,234 5,697 4.75 % 446,861 6,042 5.41 %
Total loans, including loan fees
(1)(2) 2,823,866 33,794 4.74 % 2,189,070 31,257 5.66 %
Investment securities:
Taxable 362,703 2,042 2.25 % 269,072 2,041 3.03 %
Tax-exempt (2) 126,894 710 2.24 % 133,862 737 2.20 %
Total investment securities 489,597 2,752 2.25 % 402,934 2,778 2.76 %
Other interest-earning assets 604,036 575 0.38 % 110,353 798 2.87 %
Total non-loan earning assets 1,093,633 3,327 1.22 % 513,287 3,576 2.78 %
Total interest-earning assets 3,917,499 $ 37,121 3.76 % 2,702,357 $ 34,833 5.11 %
Other assets, net 392,589 320,026
Total assets $ 4,310,088 $ 3,022,383
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Savings $ 393,006 $ 155 0.16 % $ 311,029 $ 392 0.50 %
Interest-bearing demand 531,852 1,034 0.78 % 478,447 1,228 1.03 %
MMA 730,990 350 0.19 % 559,355 976 0.70 %
Core time deposits 398,726 1,631 1.65 % 406,427 2,100 2.07 %
Total interest-bearing core deposits 2,054,574 3,170 0.62 % 1,755,258 4,696 1.07 %
Brokered deposits 342,776 1,285 1.51 % 60,115 34 0.23 %
Total interest-bearing deposits 2,397,350 4,455 0.75 % 1,815,373 4,730 1.05 %
PPPLF 237,153 210 0.35 % - - - %
Other interest-bearing liabilities 106,696 730 2.71 % 77,402 896 4.59 %
Total wholesale funding 343,849 940 1.08 % 77,402 896 4.59 %
Total interest-bearing liabilities 2,741,199 5,395 0.79 % 1,892,775 5,626 1.19 %
Noninterest-bearing demand deposits 1,005,838 698,853
Other liabilities 42,874 26,410
Stockholders' equity 520,177 404,345
Total liabilities and
stockholders' equity $ 4,310,088 $ 3,022,383
Net interest income and rate spread $ 31,726 2.97 % $ 29,207 3.92 %
Tax-equivalent adjustment $ 229 $ 263
Net interest margin 3.21 % 4.28 %
Selected Additional Information:
Total loans ex. PPP $ 2,559,161 $ 32,008 4.96 % $ 2,189,070 $ 31,257 5.66 %
Total interest-earning assets ex PPP 3,652,794 35,335 3.84 % 2,702,357 34,833 5.11 %
Total interest-bearing liabilities
ex PPPLF 2,504,046 5,185 0.83 % 1,892,775 5,626 1.19 %
Net interest rate spread ex PPP &
PPPLF 3.01 % 3.92 %
(1)Nonaccrual loans and loans held for sale 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 21% and adjusted
for the disallowance of interest expense.
32
--------------------------------------------------------------------------------Table 3: Volume/Rate Variance - Tax-Equivalent Basis
For the Three Months Ended For the Six Months Ended
June 30, 2020 June 30, 2020
Compared to June 30, 2019: Compared to June 30, 2019:
Increase (Decrease) Due to
Increase (Decrease) Due to Changes in Changes in
(in thousands) Volume Rate Net (1) Volume Rate Net (1)
Interest-earning assets
PPP Loans $ 1,786 $ - $
1,786
(4,824) 1,096 11,228 (6,307) 4,921
Retail-based loans 431 (776) (345) 787 (1,162) (375)
Total loans (2) 8,137 (5,600) 2,537 13,801 (7,469) 6,332
Investment securities:
Taxable 442 (441) 1 640 (200) 440
Tax-exempt (2) (39) 12 (27) (124) 13 (111)
Total investment securities 403 (429) (26) 516 (187) 329
Other interest-earning assets 699 (922) (223) 1,319 (1,889) (570)
Total non-loan earning assets 1,102 (1,351) (249) 1,835 (2,076) (241)
Total interest-earning assets $ 9,239 $ (6,951) $
2,288
Interest-bearing liabilities Savings $ 83$ (320) $ (237) $ 140 $ (431) $ (291) Interest-bearing demand 125 (319) (194) 186 (487) (301) MMA 233 (859) (626) 374 (1,280) (906) Core time deposits (39) (430) (469) 116 (611) (495) Total interest-bearing core deposits 402 (1,928) (1,526) 816 (2,809) (1,993) Brokered deposits 568 683 1,251 958 940 1,898 Total interest-bearing deposits 970 (1,245) (275) 1,774 (1,869) (95) PPPLF 210 - 210 210 - 210 Other interest-bearing liabilities 63 (229) (166) 62 (352) (290) Total wholesale funding 273 (229) 44 272 (352) (80) Total interest-bearing liabilities 1,243 (1,474) (231) 2,046 (2,221) (175) Net interest income$ 7,996 $ (5,477) $
2,519
(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 21% and adjusted for the disallowance of interest expense.
The interest rate environment has experienced dramatic change. TheFederal Reserve steadily raised short-term interest rates during 2017 and 2018 in support of a growing economy (up 175 bps total to 2.50% at year end 2018), and then reduced rates by 75 bps in three moves during the second half of 2019 (to 1.75% at year end 2019) largely responding to global issues and slowing growth, which contributed to a flattened yield curve with periods of inversion. InMarch 2020 , theFederal Reserve dropped short-term rates by 150 bps (to 25 bps atMarch 31, 2020 ) in two emergency moves to respond to the unprecedented economic disruptions of the COVID-19 pandemic described in the "Overview" section, which brought slope back into the yield curve, though still fairly flat. Comparatively, short-term rates were 225 bps lower atJune 30, 2020 than atJune 30, 2019 . While the following paragraphs will discuss the comparison of the six months of 2020 and 2019, we expect that the COVID-19 pandemic impacts will continue to evolve and pressure future 2020 quarters even further, including continued margin pressure and potential unusual loan or deposit volume or pricing impacts. Tax-equivalent net interest income was$63.2 million for the first six months of 2020, comprised of net interest income of$62.8 million ($6.3 million or 11% higher than the first six months of 2019), and a$0.5 million tax-equivalent adjustment (down nearly$0.1 million between the periods). The$6.3 million increase in tax-equivalent net interest income was attributable to favorable volumes (which added$13.6 million , with$13.8 million from higher loan volumes, due to the inclusion of Choice interest-earning assets and PPP loans) and net unfavorable rates (which reduced net interest income by$7.3 million ). The net$7.3 million decrease from rates was from interest-earning asset rate changes in the lower rate environment (decreasing net interest income by$9.5 million , of which$7.5 million was from loans, and$1.9 million was from the dramatically reduced cash rate earned), offset partly by benefits of a lower cost of funds (improving net interest income by$2.2 million , predominantly led by$2.8 million savings from non-brokered interest-bearing core deposits,$0.4 million savings from wholesale funds, and offset by$0.9 million more interest cost from term brokered deposits which increased in both rate and volume). 33 -------------------------------------------------------------------------------- Between the comparable six-month periods, the interest rate spread decreased 55 bps, largely attributable to the lower interest rate environment between the first half periods and the significantly higher concentration of low-earning cash in the 2020 period. The 2020 interest earning asset yield declined 84 bps to 4.16%, largely from the 64 bps decline in loans (with approximately 12 bps related to inclusion of PPP loans at a 2.67% yield), and was also harmed by the decrease in the loans-to-earning asset mix (to 76% compared to 80% for first half 2019) given the significant increase in cash. The 2020 cost of funds declined favorably by 29 bps to 0.90%, largely from improved core deposit rates and lower variable wholesale funding rates, though offset partly by higher-costing brokered deposits (representing 10% of interest-bearing liabilities versus 4% for first half 2019) acquired with the Choice acquisition and procured in March-April 2020 under competitive conditions. The contribution from net free funds decreased 8 bps, due mostly to the reduced value in the lower rate environment, though offset partly by the 33% increase in average net free funds (largely from average noninterest-bearing demand deposits and stockholders equity) between the first half periods. As a result, the tax-equivalent net interest margin was 3.53% for first half 2020, down 63 bps compared to 4.16% for the comparable 2019 period. Average interest-earning assets increased to$3.5 billion , up$824 million or 30% over the 2019 comparable period, primarily due to the timing of the Choice acquisition inNovember 2019 , addition of PPP loans, and significantly higher cash in second quarter 2020. Between the comparable six-month periods, average loans increased$520 million or 24% (which includes modest organic growth,$348 million of Choice loans at acquisition and$329 million of net originated PPP loans in second quarter 2020), while all other interest-earning assets combined increased$304 million on average or 57%. The mix of average interest-earning assets shifted toward lower-yielding assets, at 76% loans, 13% investments and 11% other interest-earning assets (mostly cash) for first half 2020, compared to 80%, 15% and 5%, respectively for first half 2019. Tax-equivalent interest income was$74.4 million for first half 2020, up$6.1 million or 9% over first half 2019, while the related interest-earning asset yield was 4.16%, down 84 bps from the comparable period in 2019. Interest income on loans increased$6.3 million or 10% over first half 2019, aided by strong volumes, including Choice and PPP loans. The 2020 loan yield was 4.95%, down 64 bps from first half 2019, largely from the significantly lower rate environment impacting yields on new, renewed and variable rate loans, as well as from inclusion of PPP loans at a 2.67% yield. Between the comparable six-month periods, interest income on non-loan earning assets combined was down$0.2 million to$6.8 million , impacted by a 101 bps decline in the yield (to 1.61%) in the lower rate environment, partially offset by higher average volumes (up 57%) from the significantly higher cash. Average interest-bearing liabilities were$2.5 billion , an increase of$561 million or 29%, primarily due to the timing of the Choice acquisition inNovember 2019 , and the significant increase in deposits from government stimulus activities and deposited PPP loan proceeds. The mix of average interest-bearing liabilities was 81% core deposits, 10% brokered deposits and 9% other funding, compared to 92%, 4% and 4%, respectively, for first half 2019, with the mix changes (especially increased money markets and brokered deposits) influenced by the mix of the$289 million of Choice deposits acquired, and the procurement of brokered deposits in March-April 2020 as part of previously discussed liquidity actions. Interest expense decreased to$11.1 million (down$0.2 million ) for first half 2020 compared to first half 2019, on larger average interest-bearing liabilities volumes (up 29% to$2.5 billion ) but at a lower overall cost of funds (down 29 bps to 0.90%). Interest expense on deposits decreased$0.1 million or 1% from the first six months of 2019 given 23% higher average interest-bearing deposit balances but at a lower cost (down 20 bps to 0.84%). The 2020 cost of savings, interest-bearing demand, money market accounts and core time deposits decreased from the first six months of 2019, by 25 bps, 19 bps, 39 bps and 31 bps, respectively, as product rate changes were made in the lower rate environment, and brokered deposits cost 118 bps more than the prior first half period, largely from higher-costing term brokered funds acquired with the Choice acquisition inNovember 2019 and procured during March-April 2020 under competitive conditions as part of previously discussed liquidity actions. Interest expense on other interest-bearing liabilities decreased$0.1 million , on higher average balances (up$137 million ) but at a lower rate (down 305 bps to 1.59%), mostly impacted by the inclusion of the low-costing PPPLF (average balance of$119 million for first half 2020 at a 0.35% rate), and variable rate debt repricing and maturing advances replaced in the lower rate environment. Provision for Credit Losses The provision for credit losses increased to$6.0 million for the six months endedJune 30, 2020 , compared to$0.5 million for the six months endedJune 30, 2019 , largely due to the unprecedented economic disruptions and uncertainty surrounding the COVID-19 pandemic. The provision for credit losses was significantly increased to$3 million in first quarter 2020 with nearly no forward visibility in the wake of an emerging pandemic and recession. For second quarter 2020, an additional$3 million provision was recognized on still limited forward visibility and no material degradation of the current asset quality metrics. The provision for credit losses is predominantly a function of Nicolet's methodology and judgment as to qualitative and quantitative factors used to determine the appropriateness of the ACL-Loans. The appropriateness of the ACL-Loans 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 34 -------------------------------------------------------------------------------- factors which could affect expected credit losses. See also Note 1, "Basis of Presentation" and Note 6, "Loans, Allowance for Credit Losses - Loans, and Credit Quality" of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional policy and disclosures. For additional information regarding asset quality and the ACL-Loans, see "BALANCE SHEET ANALYSIS - Loans," "- Allowance for Credit Losses - Loans," and "- Nonperforming Assets." Noninterest Income Table 4: Noninterest Income Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2020 2019 $ Change % Change 2020 2019 $ Change % Change Trust services fee income$ 1,510 $ 1,569 $ (59) (4) %$ 3,089 $ 3,037 $ 52 2 % Brokerage fee income 2,269 2,002 267 13 4,591 3,812 779 20 Mortgage income, net 9,963 2,059 7,904 384 12,290 3,262 9,028 277 Service charges on deposit accounts 813 1,194 (381) (32) 2,038 2,364 (326) (14) Card interchange income 1,637 1,660 (23) (1) 3,199 3,080 119 4 BOLI income 540 880 (340) (39) 1,243 1,339 (96) (7) Other income 1,487 1,624 (137) (8) 2,008 3,108 (1,100) (35) Noninterest income without net gains 18,219 10,988 7,231 66 28,458 20,002 8,456 42 Asset gains (losses), net (748) 7,572 (8,320) N/M (1,402) 7,744 (9,146) N/M Total noninterest income$ 17,471 $ 18,560 $ (1,089) (6) %$ 27,056 $ 27,746 $ (690) (2) % Trust services fee income & Brokerage fee income combined$ 3,779 $ 3,571 $ 208 6 %$ 7,680 $ 6,849 $ 831 12 % N/M means not meaningful. Noninterest income was$27.1 million for first half 2020, decreasing$0.7 million or 2%, compared to$27.7 million for the comparable period of 2019, which included a$7.4 million gain on the equity investment sale noted previously. Noninterest income excluding net asset gains (losses) grew$8.5 million or 42% between the comparable first-half periods, predominantly on strong net mortgage income. Trust services fee income and brokerage fee income combined were$7.7 million , up$0.8 million or 12% over the first six months of 2019, consistent with the growth in accounts and assets under management, as well as the migration of some trust accounts into brokerage accounts. Mortgage income represents net gains received from the sale of residential real estate loans into the secondary market, capitalized mortgage servicing rights ("MSRs"), servicing fees net of MSR amortization, fair value marks on the mortgage interest rate lock commitments and forward commitments ("mortgage derivatives"), and MSR valuation changes, if any. Net mortgage income of$12.3 million , increased$9.0 million or 277% between the comparable first half periods, predominantly from higher sale gains and capitalized gains combined (up$9.1 million or 281%, commensurate with the increase in volumes sold into the secondary market aided by the current refinance boom), favorable changes in the fair value of the mortgage derivatives (up$0.2 million ), and higher net servicing fees (up$0.1 million or 32% on the larger portfolio serviced for others), partially offset by$0.4 million MSR asset impairment given higher refinance activity. See also "Lending-Related Commitments" and Note 7, "Goodwill and Other Intangibles and Mortgage Servicing Rights" of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures on the MSR asset. Service charges on deposit accounts were down$0.3 million to$2.0 million for the six months endedJune 30, 2020 , mainly as we waived certain fees during second quarter 2020 to provide economic relief to our customers. Card interchange income grew$0.1 million or 4% due to higher volume and activity, though tempered by cautionary spending of consumers amidst the stay-at-home orders and economic uncertainty. BOLI income was down$0.1 million between the comparable first half periods, attributable to the difference in BOLI death benefits received in each six-month period (down$0.2 million ), partly offset by income on higher average balances from$5 million additional BOLI purchased in mid-2019 and$6 million BOLI acquired with Choice. Other income of$2.0 million for the six months endedJune 30, 2020 was down$1.1 million from the comparable 2019 period, largely due to$0.5 million lower income from our smaller equity interest in a data processing entity after the partial sale in May 35 -------------------------------------------------------------------------------- 2019, as well as a$0.3 million negative change in the value of nonqualified deferred compensation plan assets from market declines in 2020 and$0.3 million attributable to the fee earned on a customer loan interest rate swap in second quarter 2019. Net asset losses of$1.4 million in first half 2020 were primarily attributable to unfavorable fair value marks on equity securities and the$0.1 million write-off of Commerce common stock in connection with the terms of the mutual termination of the Commerce merger agreement. Net asset gains of$7.7 million in first half 2019 were comprised primarily of the$7.4 million gain on the equity investment sale and$0.6 million of favorable fair value marks on equity securities, partially offset by losses of$0.3 million on fixed asset disposals and write-downs of OREO and other investments. Noninterest Expense Table 5: Noninterest Expense Three Months Ended June 30, Six Months Ended June 30, ($ in thousands) 2020 2019 Change % Change 2020 2019 Change % Change Personnel$ 14,482 $ 15,358 $ (876) (6) %$ 27,805 $ 27,895 $ (90) - % Occupancy, equipment and office 4,361 3,757 604 16 8,565 7,507 1,058
14
Business development and marketing 2,514 1,579 935 59 3,873 2,860 1,013 35 Data processing 2,399 2,350 49 2 4,962 4,705 257 5 Intangibles amortization 880 969 (89) (9) 1,873 2,022 (149) (7) Other expense 3,177 1,714 1,463 85 4,589 3,497 1,092 31
Total noninterest expense
8 %$ 51,667 $ 48,486 $ 3,181 7 %
Non-personnel expenses
29 %$ 23,862 $ 20,591 $ 3,271 16 % Average full-time equivalent ("FTE") employees 570 555 15 3 % 575 552 23 4 % Noninterest expense was$51.7 million , an increase of$3.2 million or 7% over first half 2019, largely due to the expanded operating base following the Choice acquisition, as well as one-time expenses in second quarter 2020 associated with the announced branch closures, safety efforts related to the pandemic, a micro-grant program and a merger termination charge (collectively$4.0 million ), while second quarter 2019 included$2.75 million of nonrecurring retirement-related compensation declared. Personnel costs decreased$0.1 million , while non-personnel expenses combined increased$3.3 million or 16% over first half 2019. Personnel expense was$27.8 million for the six months endedJune 30, 2020 , a decrease of$0.1 million from the comparable period in 2019. Excluding the$2.75 million nonrecurring compensation from the 2019 period, personnel expense increased$2.7 million or 11%. The increase is due mainly to the expanded workforce, with average FTE employees up 4% between the comparable first half periods, strong merit increases between the periods and higher health and other fringes. Personnel expense was also impacted by$0.2 million higher overtime to process mortgage and PPP volume,$0.2 million severance related to the branch closures, and$0.4 million of on-site bonus pay, offset by$0.3 million lower nonqualified deferred compensation expense mainly tied to the plan liability decline (similar to the related plan asset decline noted in the "Noninterest Income" section). Occupancy, equipment and office expense was$8.6 million for first half 2020, up$1.1 million or 14% compared to first half 2019, with 2020 including$0.5 million of accelerated depreciation and write-offs related to the branch closures, higher expense for software and technology to drive operational efficiency and enhance products or services, and for additional licensing and equipment to expand remote workers in response to the COVID-19 pandemic. First half 2019 also included approximately$0.2 million of accelerated depreciation for branch facility upgrades. Business development and marketing expense was$3.9 million , up$1.0 million or 35%, between the comparable six-month periods, largely due to$1.25 million for the micro-grant program. Data processing expense was$5.0 million , up$0.3 million or 5% between the comparable first half periods, with volume-based increases in core processing charges partially offset by savings in data communication. Intangibles amortization decreased$0.1 million between the comparable six-month periods mainly from declining amortization on the aging intangibles of previous acquisitions, with partially offsetting amortization from the new intangibles of theNovember 2019 Choice acquisition. Other expense was$4.6 million , up$1.1 million or 31% between the comparable first half periods. First half 2020 included$1.0 million of lease termination charges related to the branch closures and$0.5 million to terminate the Commerce merger agreement, while first half 2019 included$0.3 million higherFDIC insurance costs and a$0.3 million fraud loss contingency. 36 -------------------------------------------------------------------------------- Income Taxes Income tax expense was$7.9 million (effective tax rate of 24.56%) for first half 2020, compared to$6.2 million (effective tax rate of 17.58%) for the comparable period of 2019. The lower effective tax rate for 2019 was due to the favorable tax treatment of the equity investment sale, BOLI death benefit proceeds, and higher tax benefit on stock-based compensation. Income Statement Analysis - Three Months EndedJune 30, 2020 versus Three Months EndedJune 30, 2019 Net income was$13.5 million for the three months endedJune 30, 2020 , a decrease of$5.1 million or 27% from$18.5 million for the three months endedJune 30, 2019 . Earnings per diluted common share was$1.28 for second quarter 2020, compared to$1.91 for second quarter 2019. Net income for second quarter 2019 included$5.4 million from two nonrecurring items, a$7.4 million after-tax gain on the partial sale of its equity interest in a data processing entity, and$2.75 million ($2.0 million after-tax) in personnel expense for retirement-related compensation declared. Tax-equivalent net interest income was$31.7 million for second quarter 2020, comprised of net interest income of$31.5 million ($2.6 million or 9% over second quarter 2019), and a tax-equivalent adjustment of$0.2 million (down slightly from second quarter 2019). Tax-equivalent interest income increased$2.3 million between the second quarter periods, with$9.2 million from stronger volumes (led by average loans which grew$635 million or 29% over second quarter 2019, mostly from the PPP loans and the loans acquired with Choice, and significantly higher cash, up$494 million to represent 15% of interest-earning assets for second quarter 2020 compared to 4% for second quarter 2019), partly offset by$7.0 million from lower yields across most interest-earning assets given theFederal Reserve interest rate cuts in second half 2019 andMarch 2020 . Interest expense decreased$0.2 million from second quarter 2019, as the impact of the lower interest rate environment more than offset the higher average deposit and funding balances. For additional information regarding average balances, net interest income and net interest margin, see "Income Statement Analysis - Net Interest Income." The net interest margin for second quarter 2020 was 3.21%, down from 4.28% for second quarter 2019, heavily influenced by the changing balance sheet mix, especially to low-earning cash. The yield on interest-earning assets of 3.76% declined 135 bps from second quarter 2019 (mostly due to the dramatic increase in cash that generally earns 10 bps sinceMarch 2020 , as well as the low rate on the PPP loans). The yield on loans excluding PPP loans was 4.96%, 70 bps lower than second quarter 2019 mostly attributable to the impact of the lower interest rate environment on variable loans offset partly by floors and the mix of fixed rate loans. The cost of funds of 0.79% declined 40 bps during the comparable quarters as both deposit and other funding costs were adjusted down in the lower interest rate environment, as well as the inclusion of PPPLF funds costing 35 bps. Provision for credit losses in second quarter 2020 was$3.0 million , compared to provision for credit losses of$0.3 million for second quarter 2019 given the vastly different economic conditions between the second quarter periods and the evolving impact of current credit stress on our customers. Net charge-offs were negligible for the comparable second quarter periods at 0.01% and 0.02%, for second quarter 2020 and 2019, respectively. Noninterest income was$17.5 million for second quarter 2020, a decrease of$1.1 million (6%) from second quarter 2019, largely due to the 2019 gain from the equity investment sale noted above. Noninterest income excluding net asset gains (losses) was$18.2 million , an increase of$7.2 million (66%) over second quarter 2019, driven by strong secondary mortgage income. Net mortgage income of$10.0 million for second quarter 2020 was up$7.9 million (384%) over second quarter 2019 from higher sale gains and capitalized gains combined (up$7.1 million or 334%, commensurate with the increase in volumes sold into the secondary market, aided by the current refinance boom), a larger servicing portfolio, and a$0.9 million favorable change in the fair value of the mortgage derivatives, partially offset by$0.2 million MSR asset impairment given higher refinance activity. Trust services fee income and brokerage fee income combined was up$0.2 million or 6%, consistent with the growth in assets under management and including the migration of some trust accounts into brokerage accounts. BOLI income was down$0.3 million between the comparable second quarter periods, attributable to a death benefit received in second quarter 2019, partly offset by income on the higher average balances from additional BOLI purchased in mid-2019 and BOLI acquired with Choice. Other income decreased$0.1 million largely due to$0.3 million lower income from our smaller equity interest in a data processing entity after the partial sale in 2019 and$0.3 million attributable to the fee earned on a customer loan interest rate swap in second quarter 2019, partly offset by a$0.5 million positive change in the value of nonqualified deferred compensation plan assets from market recoveries in second quarter 2020. Net asset losses of$0.7 million for second quarter 2020 were primarily attributable to unfavorable fair value marks on equity securities, while net asset gains of$7.6 million for second quarter 2019 were largely attributable to the$7.4 million gain on the equity investment sale noted previously. For additional information regarding noninterest income, see "Income Statement Analysis - Noninterest Income." Noninterest expense was$27.8 million for second quarter 2020, an increase of$2.1 million (8%) from second quarter 2019, including a$0.9 million decrease in personnel expense and a$3.0 million increase in non-personnel expenses. Excluding the$2.75 million of nonrecurring compensation from second quarter 2019, personnel expense increased$1.9 million or 15%, due to higher average FTE employees (up 3%), strong merit increases between the years,$0.5 million higher expense for the rise in nonqualified deferred compensation liability from market changes, as well as$0.2 million higher overtime to process mortgage and PPP volume,$0.2 million severance related to the branch closures, and$0.4 million of on-site bonus pay, offset by reduced 37 -------------------------------------------------------------------------------- incentive compensation accruals in 2020. Occupancy, equipment, and office of$4.4 million was up$0.6 million (16%), attributable to$0.5 million of accelerated depreciation and impairment charges for the branch closures, as well as$0.2 million for protective supplies. Business development and marketing of$2.5 million increased$0.9 million (59%) over second quarter 2019 largely due to the$1.25 million micro-grant program expense, while business development costs were dramatically reduced during the stay-at-home orders in second quarter 2020. Other expense of$3.2 million was up$1.5 million (85%) as second quarter 2020 included$1.0 million of lease termination charges related to the branch closures and$0.5 million to terminate the Commerce merger agreement. For additional information regarding noninterest expense, see "Income Statement Analysis - Noninterest Expense." Income tax expense for second quarter 2020 was$4.6 million , with an effective tax rate of 25.21%, compared to income tax expense of$2.8 million and an effective tax rate of 13.19% for second quarter 2019. The lower income tax expense and effective tax rate for 2019 was due to the favorable tax treatment of the equity investment sale, BOLI death benefit proceeds, and the higher tax benefit on stock-based compensation. BALANCE SHEET ANALYSIS AtJune 30, 2020 , assets were$4.5 billion , an increase of$964 million (27%) fromDecember 31, 2019 . The increase from year-end 2019 was largely due to higher cash and cash equivalents (up$641 million to$823 million , commensurate with the increase in total deposits) and loans. Period end loans of$2.8 billion atJune 30, 2020 , increased$248 million fromDecember 31, 2019 , with the carrying value of PPP loans adding$329 million , net of an$81 million decline in the remaining loan portfolio (led by commercial lines of credit). Total deposits were$3.5 billion atJune 30, 2020 , an increase of a$583 million from year-end 2019, with customer deposits (core) up$397 million and brokered deposits up$186 million , influenced by liquidity objectives of customers and the Bank in the very uncertain times. Borrowings increased$350 million mostly due to participation in the PPPLF to fund the PPP loans. Total stockholders' equity was$532 million , an increase of$16 million fromDecember 31, 2019 , primarily from earnings and positive net fair value investment changes, exceeding stock repurchases and the adoption of CECL, which negatively impacted equity by$6 million . See also Notes 1, "Basis of Presentation" and 6, "Loans, Allowance for Credit Losses - Loans, and Credit Quality" of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional information on the adoption of CECL. Compared toJune 30, 2019 , assets were$4.5 billion , up$1.5 billion or 49%. Loans increased$618 million (28%) and deposits increased$1.0 billion (39%) overJune 30, 2019 , attributable to the increases from year-end 2019 noted above, as well as the acquisition of Choice inNovember 2019 , which added$457 million in assets,$348 million in loans and$289 million of deposits at acquisition. Stockholders' equity increased$121 million fromJune 30, 2019 , primarily due to common stock issued in theNovember 2019 Choice acquisition of$79.8 million , as well as net income and positive net fair value investment changes, partially offset by stock repurchases over the year.
Loans
In addition to the discussion that follows, see also Note 1, "Basis of Presentation" and Note 6, "Loans, Allowance for Credit Losses - Loans, and Credit Quality," in the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures and accounting policy on loans. For additional information regarding the allowance for credit losses and nonperforming assets see also "BALANCE SHEET ANALYSIS - Allowance for Credit Losses - Loans" and "BALANCE SHEET ANALYSIS - Nonperforming Assets." Nicolet services a diverse customer base throughout northeastern and centralWisconsin and inMenominee, Michigan . The Company concentrates on originating loans in its local markets and assisting its current loan customers. 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. AtJune 30, 2020 , no significant industry concentrations existed in Nicolet's portfolio in excess of 10% of total loans. With the emergence of the COVID-19 pandemic and the significance of stay-at-home orders inMarch 2020 particularly on restaurants, retail, arts, recreation, tourism and other hospitality businesses, Nicolet determined its collective concentration in these businesses at that time to be approximately 15% of its total loan portfolio, and began proactive discussions and/or temporary loan modifications (such as interest-only or payment deferrals) before the CARES Act passed in late March. Such modifications are further discussed under "BALANCE SHEET ANALYSIS - Nonperforming Assets." This collective concentration was part of the determination for a larger first half 2020 provision, and continues to be evaluated. It remains unknown yet how much the Paycheck Protection Program may alleviate potential loss concerns across business operators in Nicolet's loan portfoliowho participated in the PPP. Further, it is unknown how businesses (individual customers or industry groups) will react or survive should the pandemic be prolonged. 38 -------------------------------------------------------------------------------- An active credit risk management process is used to 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. 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 appropriate ACL-Loans, and sound nonaccrual and charge-off policies. Table 6: Period End Loan Composition June 30, 2020 December 31, 2019 June 30, 2019 (in thousands) Amount % of Total Amount % of Total Amount % of Total Commercial & industrial$ 729,264 26 %$ 806,189 31 %$ 737,928 34 % PPP loans 329,157 12 - - - - Owner-occupied CRE 495,722 17 496,372 19 447,554 20 Agricultural 99,020 3 95,450 4 89,250 4 Commercial 1,653,163 58 1,398,011 54 1,274,732 58 CRE investment 447,900 16 443,218 17 326,820 15 Construction & land development 107,277 4 92,970 4 73,108 3 Commercial real estate 555,177 20 536,188 21 399,928 18 Commercial-based loans 2,208,340 78 1,934,199 75 1,674,660 76 Residential construction 51,332 2 54,403 2 38,246 2 Residential first mortgage 417,694 15 432,167 17 345,061 16 Residential junior mortgage 114,323 4 122,771 5 116,433 5 Residential real estate 583,349 21 609,341 24 499,740 23 Retail & other 29,812 1 30,211 1 28,873 1 Retail-based loans 613,161 22 639,552 25 528,613 24 Total loans$ 2,821,501 100 %$ 2,573,751 100 %$ 2,203,273 100 % Total loans ex. PPP loans$ 2,492,344 88 %$ 2,573,751 100 %$ 2,203,273 100 % Broadly, the loan portfolio atJune 30, 2020 , was 78% commercial-based and 22% retail-based. Commercial-based loans are considered to have more inherent risk of default than retail-based loans, in part because of the broader list of factors that could impact a commercial borrower negatively. In addition, the commercial balance per borrower is typically larger than that for retail-based loans, implying higher potential losses on an individual customer basis. Credit risk on commercial-based 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. PPP loans, however, initially added during second quarter 2020, are fully guaranteed by the SBA, warranting no credit loss provisions. Commercial-based loans of$2.2 billion increased$274 million or 14% sinceDecember 31, 2019 , primarily due to the$329 million net carrying value added with the PPP loans, partly offset by declines in the remaining commercial-based loans (mostly commercial lines of credit), as many commercial customers funded their current needs through the PPP loans and exercised caution in this volatile and uncertain business climate. Commercial and industrial loans continue to be the largest segment of Nicolet's portfolio and represented 26% of the total portfolio atJune 30, 2020 . Residential real estate loans of$583 million were down$26 million or 4% from year-end 2019, to represent 21% of total loans atJune 30, 2020 . Residential first mortgage loans include conventional first-lien home mortgages, while residential junior mortgage real estate loans consist mainly of home equity lines and term loans secured by junior mortgage liens. 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 with servicing rights retained. Nicolet's mortgage loans are typically of high quality and have historically had low net charge-off rates. Retail and other loans were relatively unchanged from year-end 2019, and represented approximately 1% of the total loan portfolio, and include predominantly short-term and other personal installment loans not secured by real estate. Allowance for Credit Losses - Loans In addition to the discussion that follows, see also Note 1, "Basis of Presentation" and Note 6, "Loans, Allowance for Credit Losses - Loans, and Credit Quality," in the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures and accounting policy on the allowance for credit losses. Credit risks within the loan portfolio are inherently different for each loan type as summarized under "BALANCE SHEET ANALYSIS - Loans." A discussion of the loan portfolio credit risk can be found in the "Loans" section in Management's 39 -------------------------------------------------------------------------------- Discussion and Analysis of Financial Condition and Results of Operations included in the Company's 2019 Annual Report on Form 10-K. Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and ongoing 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. For additional information regarding nonperforming assets see also "BALANCE SHEET ANALYSIS - Nonperforming Assets." The ACL-Loans represents management's estimate of expected credit losses in the Company's loan portfolio at the balance sheet date. To assess the appropriateness of the ACL-Loans, an allocation methodology is applied by Nicolet which focuses on evaluation of qualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to specific loans; (ii) management's ongoing review and grading of the loan portfolio; (iii) consideration of historical loan loss and delinquency experience on each portfolio segment; (iv) trends in past due and nonperforming loans; (v) the risk characteristics of the various loan segments; (vi) changes in the size and character of the loan portfolio; (vii) concentrations of loans to specific borrowers or industries; (viii) existing economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect expected credit losses. Assessing these numerous factors involves significant judgment; therefore, management considers the ACL-Loans a critical accounting policy. Management allocates the ACL-Loans by pools of risk within each loan portfolio segment. The allocation methodology consists of the following components. First, a specific reserve is established for individually evaluated credit-deteriorated loans, which management defines as nonaccrual credit relationships over$250,000 , all loans determined to be troubled debt restructurings ("restructured loans"), plus other loans with evidence of credit deterioration. The specific reserve in the ACL-Loans for these credit deteriorated loans is equal to the aggregate collateral or discounted cash flow shortfall. Second, management allocates the ACL-Loans with historical loss rates by loan segment. The loss factors are measured on a quarterly basis and applied to each loan segment based on current loan balances and projected for their expected remaining life. Next, management allocates ACL-Loans using the qualitative factors mentioned above. Consideration is given to those current qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the historical loss experience of each loan segment. Lastly, management considers reasonable and supportable forecasts to assess the collectability of future cash flows. AtJune 30, 2020 , the ACL-Loans was$29.1 million (representing 1.03% of period end loans and 1.17% of loans excluding PPP loans) compared to$14.0 million atDecember 31, 2019 and$13.6 million atJune 30, 2019 . The increase in the ACL-Loans was largely due to the$9.3 million impact from the adoption of CECL (comprised of$8.5 million for the CECL impact on loan portfolio and$0.8 million for the PCD gross-up) and a much higher provision for credit losses in 2020 given the unprecedented economic disruptions and uncertainty surrounding the COVID-19 pandemic. The components of the ACL-Loans are detailed further in Table 7 below. 40 --------------------------------------------------------------------------------
Table 7: Allowance for Credit Losses - Loans
Six Months Ended Year Ended
(in thousands) June 30, 2020 June 30, 2019 December 31, 2019
ACL-Loans:
Balance at beginning of period $ 13,972 $ 13,153 $ 13,153
Adoption of CECL 8,488 - -
Initial PCD ACL 797 - -
Total impact for adoption of CECL 9,285 - -
Provision for credit losses 6,000 500 1,200
Charge-offs (216) (232) (927)
Recoveries 89 150 546
Net (charge-offs) recoveries (127) (82) (381)
Balance at end of period $ 29,130 $ 13,571 $ 13,972
Net loan (charge-offs) recoveries:
Commercial & industrial $ (37) $ 50 $ 261
Owner-occupied CRE - (11) (91)
Agricultural - - -
CRE investment (20) - -
Construction & land development - - -
Residential construction - - (226)
Residential first mortgage 4 35 14
Residential junior mortgage 15 (31) (41)
Retail & other (89) (125) (298)
Total net (charge-offs) recoveries $ (127) $ (82) $ (381)
Ratios:
ACL-Loans to total loans 1.03 % 0.62 % 0.54 % ACL-Loans to total loans ex. PPP loans 1.17 % 0.62 % 0.54 % Net charge-offs to average loans, annualized 0.01 % 0.01 % 0.02 % Net charge-offs to average loans ex. PPP loans, annualized 0.01 % 0.01 % 0.02 % Nonperforming Assets As part of its overall credit risk management process, management is 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. Management is actively working with customers and monitoring credit risk from the unprecedented economic disruptions surrounding the COVID-19 pandemic as described in further detail in the "Overview" section. Since the pandemic started, over 900 loans (88% commercial and 12% retail) were provided payment modifications on loans totaling$447 million (67% interest only and 33% full payment deferrals) generally for 90 to 120 days. As ofJuly 9, 2020 , 24% of these loans have returned to normal payment structures, 11% received a secondary extension to interest only for up to 90 more days (after bringing accrued interest current), and the remainder should end their initial modification periods by early September. See also Note 6, "Loans, Allowance for Credit Losses - Loans, and Credit Quality" of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures on credit quality. For additional information see also "BALANCE SHEET ANALYSIS - Loans" and "BALANCE SHEET ANALYSIS - Allowance for Credit Losses-Loans." Nonperforming loans are considered one indicator of potential future loan losses. Nonperforming loans are defined as nonaccrual loans and loans 90 days or more past due but still accruing interest. Loans are generally placed on nonaccrual status when contractually past due 90 days or more as to interest or principal payments. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on loans, it is management's practice to place such loans on nonaccrual status immediately. Nonaccrual loans decreased to$12 million atJune 30, 2020 , compared to$14 million atDecember 31, 2019 , largely due to pay downs on a few larger credits. Nonperforming assets (which include nonperforming loans and other real estate owned "OREO") were$13 million atJune 30, 2020 compared to$15 million atDecember 31, 2019 . OREO was$1 million at bothJune 30, 2020 andDecember 31, 2019 . 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 appropriate level of the ACL-Loans. 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 41 -------------------------------------------------------------------------------- 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-based loans covering a diverse range of businesses and real estate property types. Potential problem loans were$30 million (1.1% of loans) and$23 million (0.9% of loans) atJune 30, 2020 andDecember 31, 2019 , respectively. Potential problem loans require a heightened management review of the pace at which a credit may deteriorate, the duration of asset quality stress, and uncertainty around the magnitude and scope of economic stress that may be felt by Nicolet's customers and on underlying real estate values. Table 8: Nonperforming Assets (in thousands) June 30, 2020 December 31, 2019 June 30, 2019 Nonperforming loans: Commercial & industrial$ 4,142 $ 6,249$ 2,673 Owner-occupied CRE 3,005 3,311 2,462 Agricultural 1,711 1,898 828 Commercial 8,858 11,458 5,963 CRE investment 975 1,073 175 Construction & land development 533 20 - Commercial real estate 1,508 1,093 175 Commercial-based loans 10,366 12,551 6,138 Residential construction - - 451 Residential first mortgage 1,067 1,090 739 Residential junior mortgage 565 480 314 Residential real estate 1,632 1,570 1,504 Retail & other - 1 8 Retail-based loans 1,632 1,571 1,512 Total nonaccrual loans 11,998 14,122 7,650 Accruing loans past due 90 days or more - - - Total nonperforming loans$ 11,998 $ 14,122$ 7,650 OREO: Commercial real estate owned $ - $ - $ 300 Residential real estate owned - - - Bank property real estate owned 1,000 1,000 - Total OREO 1,000 1,000 300 Total nonperforming assets$ 12,998 $ 15,122$ 7,950 Performing troubled debt restructurings $ - $ 452 $ 466 Ratios: Nonperforming loans to total loans 0.43 % 0.55 % 0.35 % Nonperforming assets to total loans plus OREO 0.46 % 0.59 % 0.36 % Nonperforming assets to total assets 0.29 % 0.42 % 0.26 % ACL-Loans to nonperforming loans 242.8 % 98.9 % 177.4 % Deposits Deposits represent Nicolet's largest source of funds. The deposit composition is presented in Table 9 below. Total deposits of$3.5 billion atJune 30, 2020 , increased$583 million (20%) overDecember 31, 2019 , and was a large contributor to the heavy cash position at the end of the quarter. This unusually large increase in deposits was influenced by the very uncertain times, government stimulus payments and pandemic stay-at-home orders, which reduced spending and increased liquidity of consumers and businesses, and by PPP loan proceeds retained on deposit by corporate borrowers. Noninterest-bearing demand deposits accounted for the largest increase sinceDecember 31, 2019 , up$269 million (33%), primarily due to the deposited PPP loan proceeds. Transaction accounts combined (i.e., savings, money market, and interest-bearing demand) increased$189 million (12%) to$1.7 billion atJune 30, 2020 , and brokered deposits grew$186 million (116%) to$346 million , mainly due to our liquidity build executed in March-April offset partly by maturities of acquired brokered deposits, while core time deposits declined$61 million (14%) to$378 million , largely moving into transaction accounts. Compared toJune 30, 2019 , total deposits were up$1.0 billion or 39%. The increase in total deposits sinceJune 30, 2019 was largely due to the liquidity objectives of customers and the Bank in very uncertain times (as discussed above), as well as the acquisition of Choice, which added$289 million of deposits at acquisition. 42 --------------------------------------------------------------------------------
Table 9: Period End Deposit Composition
June 30, 2020 December 31, 2019 June 30, 2019
(in thousands) Amount % of Total Amount % of Total Amount % of Total
Noninterest-bearing demand $ 1,087,884 31 % $ 819,055 28 % $ 743,380 29 %
Money market and interest-bearing
demand 1,350,009 38 % 1,241,642 42 % 1,054,256 41 %
Savings 414,110 12 % 343,199 11 % 318,947 13 %
Time 685,802 19 % 550,557 19 % 420,056 17 %
Total deposits $ 3,537,805 100 % $ 2,954,453 100 % $ 2,536,639 100 %
Brokered transaction accounts $ 38,883 1 % $ 48,497 1 % $ 37,020 1 %
Brokered and listed time deposits 307,503 9 % 111,694 4 % 17,100 1 %
Total brokered deposits $ 346,386 10 % $ 160,191 5 % $ 54,120 2 %
Customer transaction accounts $ 2,813,120 79 % $ 2,355,399 80 % $ 2,079,563 82 %
Customer time deposits 378,299 11 % 438,863 15 % 402,956 16 %
Total customer deposits (core) $ 3,191,419 90 % $ 2,794,262 95 % $ 2,482,519 98 %
Lending-Related Commitments
As of June 30, 2020 and December 31, 2019 , Nicolet had the following off-balance
sheet lending-related commitments.
Table 10: Commitments
(in thousands) June 30, 2020 December 31, 2019
Commitments to extend credit $ 911,573 $ 773,555
Financial standby letters of credit 8,871 10,730
Performance standby letters of credit 8,690
8,469
Interest rate lock commitments to originate residential mortgage loans held for
sale (included above in commitments to extend credit) and forward commitments to
sell residential mortgage loans held for sale are considered derivative
instruments ("mortgage derivatives") and represented $155 million and $99
million , respectively, at June 30, 2020 . In comparison, interest rate lock
commitments to originate residential mortgage loans held for sale and forward
commitments to sell residential mortgage loans held for sale represented $43
million and $16 million , respectively, at December 31, 2019 . The net fair value
of these mortgage derivatives combined was a loss of $9,000 at June 30, 2020
compared to a gain of $79,000 at December 31, 2019 .
Liquidity Management
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 service debt, invest in subsidiaries, repurchase common stock, pay
dividends to shareholders (if any), and satisfy other operating requirements.
Given the stable core customer deposit base, fairly consistent patterns of
activity in the core deposit base (including extra growth in core deposits
during the pandemic as previously discussed), and the minimal use of capacity
available in numerous non-core funding sources, Nicolet's liquidity levels and
resources have been sufficient to fund loans, accommodate deposit trends and
cycles, and to meet other cash needs as necessary. In early March-April 2020 , in
response to the emerging crisis, management initiated preparatory actions to
further increase on-balance sheet liquidity, and brokered deposits of
approximately $200 million were procured, increasing liquid cash. These actions
were initiated prior to the passing of the CARES Act. In addition to the
on-balance sheet liquidity build, remaining liquidity facilities continue to
provide capacity and flexibility in an uncertain time. Funds are available from
a number of basic banking activity sources including, but not limited to, the
core deposit base; repayment and maturity of loans; investment securities calls,
maturities, and sales; and procurement of additional brokered deposits or other
wholesale funding. All securities AFS and equity securities (included in other
investments) are reported at fair value on the consolidated balance sheet. At
June 30, 2020 , approximately 31% of the $511 million securities AFS portfolio
was pledged to secure public deposits and short-term borrowings, as applicable,
and for other purposes as required by law. Additional funding sources at June
30, 2020 , consist of $175 million of available and unused Federal funds lines,
available borrowing capacity at the FHLB of $164 million , and borrowing capacity
in the brokered deposit market.
Cash and cash equivalents at June 30, 2020 and December 31, 2019 were $823
million and $182 million , respectively. The increase in cash and cash
equivalents since year-end 2019 was largely attributable to the significant
increase in deposits, influenced by government stimulus payments and pandemic
stay-at-home orders, which reduced spending and increased liquidity of consumers
and businesses in these uncertain times, and PPP loan proceeds retained on
deposit by corporate
43
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borrowers, as well as our own liquidity actions in March-April. Management
believes its liquidity resources were sufficient as of June 30, 2020 to fund
loans, accommodate deposit cycles and trends, and to meet other cash needs as
necessary in these unsettled times.
Management is committed to the parent Company being a source of strength to the
Bank and its other subsidiaries, and therefore, regularly evaluates capital and
liquidity positions of the parent Company in light of current and projected
needs, growth or strategies. The parent Company uses cash for normal expenses,
debt service requirements, and when opportune, for common stock repurchases or
investment in other strategic actions such as mergers or acquisitions. Dividends
from the Bank and, to a lesser extent, stock option exercises, represent
significant sources of cash flows for the parent Company. Among others,
additional cash sources available to the parent Company include access to the
public or private markets to issue new equity, subordinated debt or other debt.
At June 30, 2020 , the parent Company had $64 million in cash.
Interest Rate Sensitivity Management and Impact of Inflation
A reasonable balance between interest rate risk, credit risk, liquidity risk and
maintenance of yield, is highly important to Nicolet's business success and
profitability. As an ongoing part of its financial strategy and risk management,
Nicolet attempts to understand and manage the impact of fluctuations in market
interest rates on its net interest income. The consolidated balance sheet
consists mainly of interest-earning assets (loans, investments and cash) which
are primarily funded by interest-bearing liabilities (deposits and other
borrowings). Such financial instruments have varying levels of sensitivity to
changes in market rates of interest. Market rates are highly sensitive to many
factors beyond our control, including but not limited to general economic
conditions and policies of governmental and regulatory authorities. Our
operating income and net income depends, to a substantial extent, on "rate
spread" (i.e., the difference between the income earned on loans, investments
and other earning assets and the interest expense paid to obtain deposits and
other funding liabilities).
Asset-liability management policies establish guidelines for acceptable limits
on the sensitivity to changes in interest rates on earnings and market value of
assets and liabilities. Such policies are set and monitored by management and
the board of directors' Asset and Liability Committee .
To understand and manage the impact of fluctuations in market interest rates on
net interest income, Nicolet measures its overall interest rate sensitivity
through a net interest income analysis, which calculates the change in net
interest income in the event of hypothetical changes in interest rates under
different scenarios versus a baseline scenario. Such scenarios can involve
static balance sheets, balance sheets with projected growth, parallel (or
non-parallel) yield curve slope changes, immediate or gradual changes in market
interest rates, and one-year or longer time horizons. The simulation modeling
uses assumptions involving market spreads, prepayments of rate-sensitive
instruments, renewal rates on maturing or new loans, deposit retention rates,
and other assumptions.
Among other scenarios, Nicolet assessed the impact on net interest income in the
event of a gradual +/-100 bps and +/-200 bps change in market rates (parallel to
the change in prime rate) over a one-year time horizon to a static (flat)
balance sheet. The results provided include the liquidity measures mentioned
earlier and reflect the changed interest rate environment in response to the
current crisis. The interest rate scenarios are used for analytical purposes
only and do not necessarily represent management's view of future market
interest rate movements. Based on financial data at June 30, 2020 and December
31, 2019 , the projected changes in net interest income over a one-year time
horizon, versus the baseline, are presented in Table 11 below. The results are
within Nicolet's guidelines of not greater than -10% for +/- 100 bps and not
greater than -15% for +/- 200 bps and given the relatively short nature of the
Company's balance sheet, reflect a largely unchanged risk position as expected.
Table 11: Interest Rate Sensitivity
June 30, 2020 December 31 , 2019
200 bps decrease in interest rates 0.3 % (1.8) %
100 bps decrease in interest rates 0.2 % (1.0) %
100 bps increase in interest rates (0.4) % 0.8 %
200 bps increase in interest rates (0.8) % 1.7 %
Actual results may differ from these simulated results due to timing, magnitude
and frequency of interest rate changes, as well as changes in market conditions
and their impact on customer behavior and management strategies.
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, investments, loans,
deposits and other borrowings, 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.
44
--------------------------------------------------------------------------------Capital
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 and 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 returns available to shareholders. Management intends to maintain an optimal capital and leverage mix for growth and shareholder return. For details on the change in capital see "BALANCE SHEET ANALYSIS." The Company's and the Bank's regulatory capital ratios remain above minimum regulatory ratios, including the capital conservation buffer. AtJune 30, 2020 , the Bank's regulatory capital ratios qualify the Bank as well-capitalized under the prompt-corrective action framework. This strong base of capital has allowed Nicolet to be opportunistic in the current environment and in strategic growth. A summary of Nicolet's and the Bank's regulatory capital amounts and ratios, as well as selected capital metrics are presented in the following table. Table 12: Capital At or for the Six At or for the Months Ended Year Ended ($ in thousands) June 30, 2020 December 31, 2019 Company Stock Repurchases: * Common stock repurchased during the period (dollars) $ 13,903 $ 18,701 Common stock repurchased during the period (full shares) 206,833 310,781Company Risk-Based Capital : Total risk-based capital$ 424,132 $ 404,573 Tier 1 risk-based capital 395,557 378,608 Common equity Tier 1 capital 365,071 348,454 Total capital ratio 14.1 % 13.4 % Tier 1 capital ratio 13.1 % 12.6 % Common equity tier 1 capital ratio 12.1 % 11.6 % Tier 1 leverage ratio 10.1 % 11.9 %Bank Risk-Based Capital : Total risk-based capital$ 350,078 $ 323,432 Tier 1 risk-based capital 331,103 309,460 Common equity Tier 1 capital 331,103 309,460 Total capital ratio 11.6 % 10.8 % Tier 1 capital ratio 11.0 % 10.3 % Common equity tier 1 capital ratio 11.0 % 10.3 % Tier 1 leverage ratio 8.5 % 9.8 %
* Reflects common stock repurchased under board of director authorizations for the common stock repurchase program.
In managing capital for optimal return, we evaluate capital sources and uses, pricing and availability of our stock in the market, and alternative uses of capital (such as the level of organic growth or acquisition opportunities) in light of strategic plans. The Company's share repurchase program was temporarily suspended effectiveMarch 21, 2020 , in response to the uncertain future economic conditions due to the pandemic. Management intends to resume repurchases given current conditions, market opportunities and financial performance of the Company. AtJune 30, 2020 , there remained$7.1 million authorized under this repurchase program, as modified, to be utilized from time-to-time to repurchase shares in the open market, through block transactions or in private transactions. Critical Accounting Policies 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 for the period. Actual results could differ significantly from those estimates. Estimates that are particularly susceptible to significant change include the valuation of loan acquisition transactions, as well as the determination of the allowance for credit losses and income taxes. A discussion of these policies can be found in the "Critical Accounting Policies" section in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's 2019 Annual Report on Form 10-K. There have been no changes in the Company's determination of critical accounting policies sinceDecember 31, 2019 . See also Note 1, "Basis of Presentation" of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for changes to the Company's accounting policies on loans and the allowance for credit losses due to the adoption of CECL. 45
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Future Accounting Pronouncements Recent accounting pronouncements adopted are included in Note 1, "Basis of Presentation" of the Notes to Unaudited Consolidated Financial Statements within Part I, Item 1. InMarch 2020 , the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The updated guidance is effective for all entities as ofMarch 12, 2020 throughDecember 31, 2022 . The Company continues to evaluate the impact of reference rate reform on its consolidated financial statements.
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