See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements ~~Continued:~~

Continued:

NICOLET BANKSHARES, INC. ~~AND SUBSIDIARIES~~

Consolidated Statements of Cash Flows

~~(In thousands)~~ (Unaudited)

Nine Months Ended September 30,
2017 2016
Cash Flows From Operating Activities, net of effects of business combinations:
Net income $ 24,275 $ 12,551
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion 7,038 4,227
Provision for loan losses 1,875 1,350
Increase in cash surrender value of life insurance (1,314 ) (880 )
Stock compensation expense 1,871 1,123
Gain on sale or writedown of assets, net (2,071 ) (548 )
Gain on sale of loans held for sale, net (3,614 ) (3,713 )
Proceeds from sale of loans held for sale 164,726 179,967
Origination of loans held for sale (164,806 ) (179,581 )
Net change in:
Accrued interest receivable and other assets 239 1,182
Accrued interest payable and other liabilities 1,733 (3,888 )
Net cash provided by operating activities 29,952 11,790
Cash Flows From Investing Activities, net of effects of business combinations:
Net decrease in certificates of deposit in other banks 1,490 239
Net decrease (increase) in loans (126,499 ) 15,582
Purchases of securities AFS (49,119 ) (57,510 )
Proceeds from sales of securities AFS 10,798 30,319
Proceeds from calls and maturities of securities AFS 34,426 22,962
Purchase of other investments (3,256 ) (3,745 )
Proceeds from sales of other investments 6,519 -
Net increase in premises and equipment (2,958 ) (3,802 )
Proceeds from sales of other real estate and other assets 3,410 1,661
Purchase of BOLI (70 ) (20,000 )
Proceeds from redemption of BOLI - 21,549
Intangible from acquired customer relationships (870 ) -
Net cash received in business combination 9,119 66,517
Net cash provided (used) by investing activities (117,010 ) 73,772
Cash Flows From Financing Activities, net of effects of business combinations:
Net increase in deposits 22,054 55,332
Net increase (decrease) in short-term borrowings 12,900 (49,087 )
Proceeds from notes payable 30,000 -
Repayments of notes payable (4,487 ) (56,519 )
Redemption of preferred stock - (12,200 )
Purchase and retirement of common stock (7,462 ) (3,046 )
Capitalized issuance costs, net (186 ) (260 )
Proceeds from issuance of common stock 175 101
Proceeds from exercise of common stock options, net 1,064 1,502
Cash dividends paid on preferred stock - (633 )
Net cash provided (used) by financing activities 54,058 (64,810 )
Net increase (decrease) in cash and cash equivalents (33,000 ) 20,752
Cash and cash equivalents:
Beginning $ 129,103 $ 83,619
Ending $ 96,103 $ 104,371
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 7,117 $ 5,787
Cash paid for taxes 8,805 7,150
Transfer of loans and bank premises to other real estate owned 828 33
Capitalized mortgage servicing rights 679 492
Transfer of loans from held for sale to held for investment 3,236 -
Acquisitions
Fair value of assets acquired 439,000 1,035,000
Fair value of liabilities assumed 398,000 937,000
Net assets acquired 41,000 98,000



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

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

See accompanying notes to unaudited consolidated financial statements.

NICOLET BANKSHARES, INC. ~~AND SUBSIDIARIES~~

Notes to Unaudited Consolidated Financial Statements

Note 1 – Basis of Presentation

General

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

These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been omitted or abbreviated. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~

2019.

Critical Accounting Policies and Estimates

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

There have been no material changes or developments with respect to the assumptions or methodologies that the Company uses when applying what management believes are critical accounting policies and developing critical accounting estimates as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~

2019, except as disclosed in Updates to Significant Accounting Policies and Recent Accounting Developments Adopted

below.

Updates to Significant Accounting Policies

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

The Company evaluates securities AFS in unrealized loss positions on a quarterly basis to determine whether the decline in fair value below the amortized costs basis (impairment) is due to credit-related factors or noncredit-related factors. In ~~December 2016,~~making this evaluation, management considers the ~~Financial~~extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. Any impairment that is not credit-related is recognized in other comprehensive income, net of related deferred income taxes. Credit-related impairment is recognized as an allowance for credit losses (“ACL”) on the balance sheet based on the amount by which the amortized cost basis exceeds the fair value, with a corresponding charge to net income. Both the ACL and the charge to net income may be reversed if conditions change. However, if the Company intends to sell an impaired AFS security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount must be recognized in net income with a corresponding adjustment to the security's amortized cost basis rather than through the establishment of an ACL. See Note 5 for additional disclosures on AFS securities.

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

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

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

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

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

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

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

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

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

Recent Accounting ~~Standards Board (“FASB”)~~Developments Adopted

In August 2018, the FASB issued ~~updated guidance to~~ Accounting Standards Update (“ASU”) ~~2016-19,~~~~Technical Corrections and Improvements~~~~intended~~2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to ~~make changes to clarify~~ the ~~Accounting Standards Codification~~Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements by removing, modifying or ~~correct unintended application of~~adding certain disclosures. The updated guidance ~~that is not expected to have a significant effect on current accounting practice. The ASU is~~was effective for annual reporting periods, including interim periods within those ~~annual periods,~~fiscal years, beginning after December 15, ~~2016.~~2019. The ~~impact of~~Company adopted the ~~new~~updated guidance ~~did not have a~~effective January 1, 2020, with no material impact on ~~the Company’s~~its consolidated financial ~~statements.~~

statements as the new ASU only revises disclosure requirements. See Note 9 for fair value disclosures.

In ~~March~~June 2016, the FASB issued ~~updated guidance to~~ ASU ~~2016-09,~~~~Stock Compensation Improvements to Employee Share-Based Payment Activity~~2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments intended to ~~simplify~~improve the financial reporting by requiring earlier recognition of credit losses on loans and ~~improve several aspects~~certain other financial assets. Topic 326 replaces the incurred loss impairment model (which recognizes losses when a probable threshold is met) with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. The measurement of ~~the accounting for share-based payment transactions, including the income tax consequences, classification of such awards as either equity or liabilities~~lifetime expected credit losses is based on historical experience, current conditions, and ~~classification on the statement of cash flows.~~reasonable and supportable forecasts. The ~~updated guidance is~~ASU was effective for SEC filers for fiscal years, and interim ~~and annual reporting~~ periods within those fiscal years, beginning after December 15, ~~2016. The consolidated financial statements include the impact of the new guidance.~~2019. The Company adopted the ~~pronouncement as required~~new accounting standard on January 1, ~~2017, prospectively, which included~~2020, as required, and recorded a ~~reduction~~cumulative-effect adjustment of $6 million to ~~income tax expense of $14,000~~retained earnings. See Updates to Significant Accounting Policies above for changes to accounting policies and ~~$176,000~~see Note 6 for ~~the three months and nine months ended September 30, 2017, respectively, for deductions attributable to exercised stock options and vesting of restricted stock.~~

additional disclosures on this new accounting pronouncement.

Reclassifications

~~Note 1 – Basis of Presentation, continued~~

~~Operating Segment~~

While the chief decision makers monitor the revenue streams of the various products and services, and evaluate costs, balance sheet positions and quality, all such products, services and activities are directly or indirectly related to the business of community banking, with no regular, formal or material segment delineations. Operations are managed and financial performance is evaluated on a company-wide basis, and accordingly, all the financial service operations are considered by management to be aggregated in one reportable operating segment.

~~Reclassifications~~

Certain amounts in the ~~2016~~2019 consolidated financial statements have been reclassified to conform to the ~~2017~~2020 presentation.

Note 2 – Acquisitions

~~First Menasha Bancshares,~~

Choice Bancorp, Inc. (“~~First Menasha”~~Choice”):

On ~~April 28, 2017,~~November 8, 2019, the Company consummated its merger with ~~First Menasha~~Choice, pursuant to the terms of the Agreement and Plan of Merger ~~by and between the Company and First Menasha~~ dated ~~November 3, 2016,~~June 26, 2019, (the ~~“Merger~~“Choice Merger Agreement”), whereby ~~First Menasha~~Choice (at 12% of Nicolet’s then pre-merger asset size) was merged with and into Nicolet, and Choice Bank, the wholly owned bank subsidiary of Choice, was merged with and into the Company, and The First National Bank-Fox Valley, the wholly owned commercial bank subsidiary of First Menasha serving the Fox Valley area of Wisconsin, was merged with and into Nicolet National Bank (the “Bank”).Bank. The system integration was completed, and ~~five~~the two branches of ~~First Menasha~~Choice opened on ~~May 1, 2017,~~November 12, 2019, as Nicolet National Bank branches, expanding its presence ~~into Calumet and Winnebago Counties, Wisconsin. Concurrently, Nicolet~~in the Oshkosh marketplace. The Company closed ~~one~~its legacy Oshkosh location concurrently with the consummation of ~~its Calumet County locations, bringing~~ the ~~Bank’s footprint to 38 branches as of September 30, 2017.~~

Choice merger.

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

Oshkosh marketplace.

Pursuant to the Choice Merger Agreement, the final purchase price consisted of issuing ~~1,309,885~~1,184,102 shares of the ~~Company’s~~Company's common stock (given the final stock-for-stock exchange ratio of ~~3.126 except for First Menasha~~0.497, and not exchanging the Choice shares owned by the Company immediately prior to the time of the merger), for common stock consideration of ~~$62.2~~$79.8 million (based on ~~$47.52~~$67.39 per share, the volume weighted average closing price of the ~~Company’s~~Company's common stock over the preceding 2030 trading day period) plus cash consideration of ~~$19.3~~$1.7 million. Approximately $0.2 million in direct stock issuance costs for the merger were incurred and charged against additional ~~paid in~~paid-in capital.

Upon consummation, the Company added ~~$480~~$457 million in assets, ~~$351~~including $348 million in loans, ~~$375~~$289 million in deposits, $4$1.7 million in core deposit intangible, and ~~$41~~$45 million of goodwill. The Company accounted for the transaction under the acquisition method of accounting, and thus, the financial position and results of operations of ~~First Menasha~~Choice prior to the consummation date were not included in the accompanying consolidated financial statements. The accounting required assets purchased and liabilities assumed to be recorded at their respective estimated fair values at the date of acquisition.

Pending Acquisitions:

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

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

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

Advantage Community Bancshares, Inc. (“Advantage”): On March 2, 2020, Nicolet entered into a definitive merger agreement with Advantage pursuant to which Advantage will merge with and into Nicolet. Due to the ~~closing date fair values becomes available through~~relative small size of the ~~measurement period~~transaction, terms of ~~approximately one year from consummation. During~~the all-cash deal were not disclosed. At March 31, 2020, Advantage had total assets of $149 million, loans of $94 million, deposits of $126 million, and equity of $20 million. The merger is expected to close in the third quarter of ~~2017, adjustments were made based on additional information. Goodwill was increased~~2020 and remains subject to customary closing conditions, including approval by ~~$1.0 million to account for the gain in the Company’s pre-acquisition equity interest holding in First Menasha, resulting in a $1.2 million gain in pre-tax earnings.~~

~~Financial advisor business acquired:~~

~~During the first quarter of 2016, Nicolet agreed in a private transaction to hire a select group of financial advisors~~Advantage shareholders and purchase their respective books of business, as well as their operating platform, to enhance the leadership and future growth of the Company’s wealth management business. The transaction was effected in phases and completed April 1, 2016. The Company paid $4.9 million total initial consideration, including $0.8 million cash, $2.6 million of Nicolet common stock, and recorded a $1.5 million earn-out liability payable to one principal in the future. The Company initially recorded $0.4 million of goodwill, $0.2 million of fixed assets, and $4.3 million of customer relationship intangibles (a portion amortizing straight-line over 10 years and a portion over 15 years). During the third quarter of 2017, the previously variable earn-out liability was agreed to be modified to a fixed amount. Therefore, the earn-out liability was adjusted to $2.4 million, with a corresponding $0.9 million increase in the customer relationship intangible, being amortized over the original term. The transaction impacts the income statement primarily within brokerage income, personnel expense, and intangibles amortization.

regulatory approvals.

~~Note 2 – Acquisitions, continued~~

~~Baylake Corp. (“Baylake”):~~

On April 29, 2016, the Company consummated its merger with Baylake. The system integration was completed, and 21 branches of Baylake opened, on May 2, 2016, as branches of the Bank, expanding its presence into Door, Kewaunee, and Manitowoc Counties, Wisconsin. The Company closed one of its Brown County locations concurrently with the Baylake merger, and closed an additional six branches in the fourth quarter of 2016.

The purpose of the Baylake merger was for strategic reasons beneficial to the Company. The acquisition was consistent with its plan to drive growth and efficiency through increased scale, leverage the strengths of each bank across the combined customer base, enhance profitability, and add liquidity and shareholder value.

Baylake shareholders received 0.4517 shares of the Company’s common stock for each outstanding share of Baylake common stock (except for Baylake shares pre-owned by the Company at the time of the merger), and cash in lieu of any fractional share. Pre-existing Baylake equity awards (restricted stock units and stock options) immediately vested upon consummation of the merger. The Company issued 0.4517 shares of its common stock for each vesting Baylake restricted stock unit, and Nicolet assumed, after appropriate adjustment by the 0.4517 exchange ratio, all pre-existing Baylake stock options. As a result, the Company issued 4,344,243 shares of the Company’s common stock, for common stock consideration of $163.3 million (based on $37.58 per share, the volume weighted average closing price of the Company’s common stock over the preceding 20 trading day period) and recorded an additional $1.2 million consideration for the assumed stock options. Approximately $0.3 million in direct stock issuance costs for the merger were incurred and charged against additional paid in capital.

The Company accounted for the transaction under the acquisition method of accounting, and thus, the financial position and results of operations of Baylake prior to the consummation date were not included in the accompanying consolidated financial statements.

~~The fair value of the assets acquired and liabilities assumed on April 29, 2016 was as follows:~~

(in millions) As recorded by
Baylake Corp Fair Value
Adjustments As Recorded
by Nicolet
Cash, cash equivalents and securities available for sale $ 262 $ 1 $ 263
Loans 710 (19 ) 691
Other real estate owned 3 (2 ) 1
Core deposit intangible 1 16 17
Fixed assets and other assets 71 (8 ) 63
Total assets acquired $ 1,047 $ (12 ) $ 1,035

Deposits $ 822 $ - $ 822
Junior subordinated debentures, borrowings and other liabilities 116 (1 ) 115
Total liabilities acquired $ 938 $ (1 ) $ 937

Excess of assets acquired over liabilities acquired $ 109 $ (11 ) $ 98
Less: purchase price 164
Goodwill $ 66

The following unaudited pro forma information presents the results of operations for the three and nine months ended September 30, 2016, as if the Baylake acquisition had occurred January 1 of that year. These unaudited pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined company that would have been achieved had the acquisition occurred at the beginning of each period presented, nor are they intended to represent or be indicative of future results of operations.

(in thousands, except per share data) Three Months Ended
September 30, 2016 Nine Months Ended
September 30, 2016
Total revenues, net of interest expense $ 29,436 $ 82,870
Net income 6,827 17,042
Diluted earnings per share 0.74 1.85

Note 3 – Earnings per Common Share

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

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
(In thousands except per share data)
Net income, net of noncontrolling interest $ 9,512 $ 6,464 $ 24,047 $ 12,375
Less: preferred stock dividends - 247 - 633
Net income available to common shareholders $ 9,512 $ 6,217 $ 24,047 $ 11,742
Weighted average common shares outstanding 9,837 8,608 9,317 6,689
Effect of dilutive stock instruments 572 362 504 335
Diluted weighted average common shares outstanding 10,409 8,970 9,821 7,024
Basic earnings per common share* $ 0.97 $ 0.72 $ 2.58 $ 1.76
Diluted earnings per common share* $ 0.91 $ 0.69 $ 2.45 $ 1.67



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

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

~~There were no~~

For the three months ended March 31, 2020 and 2019, options ~~outstanding at September 30, 2017 or September 30, 2016 that were~~to purchase approximately 0.1 million shares are excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive.

Note 4 – ~~Stock-based~~Stock-Based Compensation

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

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

Nine Months Ended
September 30, 2017 Year Ended
December 31, 2016
Dividend yield 0 % 0 %
Expected volatility 25 % 25 %
Risk-free interest rate 2.13 % 1.52 %
Expected average life 7 years 7 years
Weighted average per share fair value of options $ 15.44 $ 11.04

follows.

~~Note 4 – Stock-based Compensation, continued~~

~~Activity in~~



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

A summary of the Company’s ~~Stock Incentive Plans~~stock option activity is summarized ~~in the following tables:~~

Option Shares
Stock Options
Outstanding Weighted-
Average
Exercise Price Exercisable
Shares Weighted-
Average
Exercise
Price
Balance – December 31, 2015 746,004 $ 21.56 325,979 $ 19.09
Granted⁽¹⁾ 170,500 36.86
Options assumed in acquisition 91,701 21.03
Exercise of stock options* (84,723 ) 20.98
Forfeited (1,456 ) 21.71
Balance – December 31, 2016 922,026 24.39 439,639 $ 19.97
Granted⁽²⁾ 814,500 48.86
Exercise of stock options* (65,833 ) 19.52
Forfeited (400 ) 16.50
Balance – September 30, 2017 1,670,293 $ 36.51 471,043 $ 21.49

below.



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

*The terms of the stock option agreements permit having a number of shares of stock withheld, the fair market value of which as of the date of exercise is sufficient to satisfy the exercise price and/or tax withholding ~~requirements, and accordingly 4,443~~requirements. For the three months ended March 31, 2020, 16,671 such shares were surrendered ~~during~~to the nine months ended September 30, 2017 and 10,244 shares were surrendered during the year ended December 31, 2016. These stock options were considered exercised and then surrendered and are included in the Exercise of stock option line.

⁽¹⁾ ~~The weighted average per share fair value of options granted was $11.04 for the period.~~

⁽²⁾ ~~The weighted average per share fair value of options granted was $15.44 for the period.~~

~~The following options were outstanding at September 30, 2017:~~

Number of Shares Weighted-Average Exercise
Price Weighted-Average
Remaining Life (Years)
Outstanding Exercisable Outstanding Exercisable Outstanding Exercisable
$9.19 – $20.00 257,750 238,000 $ 16.30 $ 16.28 3.78 3.71
$20.01 – $25.00 241,455 110,055 23.68 23.54 6.54 5.89
$25.01 – $30.00 153,724 71,524 26.00 26.11 6.91 6.44
$30.01 – $40.00 202,864 51,464 35.88 34.76 8.64 8.27
$40.01 – $49.30 814,500 - 48.86 - 9.63 -
1,670,293 471,043 $ 36.51 $ 21.49 7.91 5.14

Company.

Intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the exercise price of the stock options. The ~~total~~ intrinsic value of options exercised infor the ~~first nine~~three months ~~of 2017,~~ended March 31, 2020 and ~~full year of 2016~~2019 was approximately $1.8 million and ~~$1.3~~$1.1 million, respectively.

Restricted Stock Weighted-
Average Grant
Date Fair Value Restricted
Shares
Outstanding
Balance – December 31, 2015 $ 18.70 36,690
Granted 33.68 31,466
Vested* 23.58 (25,207 )
Forfeited - -
Balance – December 31, 2016 26.80 42,949
Granted - -
Vested * 22.47 (15,346 )
Forfeited 16.50 (130 )
Balance – September 30, 2017 $ 29.27 27,473

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



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

*The terms of the restricted stock agreements permit the surrender of shares to the Company upon vesting in order to satisfy applicable tax withholding requirements at the minimum statutory withholding rate, and accordingly, ~~4,553~~1,341 shares were surrendered during the ~~nine~~three months ended ~~September 30, 2017 and 7,851 shares were surrendered during the twelve months ended December~~March 31, ~~2016.~~

2020.

~~Note 4 – Stock-based Compensation, continued~~

The Company recognized approximately ~~$1.9~~$1.3 million and $1.1 million of stock-based ~~employee~~ compensation expense ~~during~~(included in personnel on the ~~nine~~consolidated statements of income) for the three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016,~~2019, respectively, associated with its common stock ~~equity awards.~~awards granted to officers and employees. As of ~~September 30, 2017,~~March 31, 2020, there was approximately ~~$15.2~~$12.8 million of unrecognized compensation cost related to equity award grants. The cost is expected to be recognized over the ~~weighted average~~ remaining vesting period of approximately ~~four~~3.2 years.

The Company recognized a tax benefit of approximately $0.3 million for the three months ended March 31, 2020 for the tax impact of stock option exercises and vesting of restricted stock.

Note 5 – Securities Available for Sale

Amortized ~~costs~~cost and fair ~~values~~value of securities available for sale are summarized as ~~follows:~~

September 30, 2017
(in thousands) Amortized Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair Value
U.S. government sponsored enterprises $ 26,394 $ - $ 122 $ 26,272
State, county and municipals 189,226 521 1,031 188,716
Mortgage-backed securities 159,113 261 1,438 157,936
Corporate debt securities 32,203 541 - 32,744
Equity securities 1,288 1,261 - 2,549
$ 408,224 $ 2,584 $ 2,591 $ 408,217

December 31, 2016
(in thousands) Amortized Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair Value
U.S. government sponsored enterprises $ 1,981 $ - $ 18 $ 1,963
State, county and municipals 191,721 160 4,638 187,243
Mortgage-backed securities 161,309 242 2,422 159,129
Corporate debt securities 12,117 52 - 12,169
Equity securities 2,631 2,152 - 4,783
$ 369,759 $ 2,606 $ 7,078 $ 365,287

follows.



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



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

The following table ~~represents~~presents gross unrealized losses and the related estimated fair value of ~~investment~~ securities ~~available~~AFS for ~~sale,~~which an allowance for credit losses has not been recorded, aggregated by investment category and length of time individual securities have been in a continuous unrealized loss ~~position, at September 30, 2017~~position.



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



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

The Company evaluates securities AFS in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. In making this evaluation, management considers the extent to which the fair value has been less than cost, the financial condition and ~~December 31, 2016.~~

September 30, 2017
Less than 12 months 12 months or more Total
(in thousands) Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses
U.S. government sponsored enterprises $ 26,272 $ 122 $ - $ - $ 26,272 $ 122
State, county and municipals 63,924 352 46,677 679 110,601 1,031
Mortgage-backed securities 94,850 747 35,475 691 130,325 1,438
$ 185,046 $ 1,221 $ 82,152 $ 1,370 $ 267,198 $ 2,591

December 31, 2016
Less than 12 months 12 months or more Total
(in thousands) Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses
U.S. government sponsored enterprises $ 1,963 $ 18 $ - $ - $ 1,963 $ 18
State, county and municipals 167,457 4,629 1,300 9 168,757 4,638
Mortgage-backed securities 134,770 2,311 3,653 111 138,423 2,422
$ 304,190 $ 6,958 $ 4,953 $ 120 $ 309,143 $ 7,078

~~Note 5 – Securities Available for Sale, continued~~

~~At September 30, 2017~~near-term prospects of the issuer, and the intent and ability of the Company ~~had $2.6 million~~to hold the security for a period of ~~gross unrealized losses related~~time sufficient to ~~507 securities.~~ allow for any anticipated recovery in fair value.

As of ~~September 30, 2017,~~March 31, 2020, the Company does not consider its securities AFS with unrealized losses to be ~~other-than-temporarily impaired~~attributable to credit-related factors, as the unrealized losses in each category have occurred as a result of changes in noncredit-related factors such as changes in interest rates, market spreads and ~~current~~ market conditions subsequent to purchase, not credit ~~deterioration.~~deterioration; thus, no allowance for credit losses on securities AFS was recorded. The Company has the ability and intent to hold its securities to maturity. There were no other-than-temporary impairments charged to earnings during the ~~nine-month periods ending September 30, 2017 or September 30, 2016.~~

full year 2019.

The amortized cost and fair ~~values~~value of securities ~~available for sale at September 30, 2017~~AFS by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment ~~penalties. Fair values~~penalties; as this is particularly inherent in mortgage-backed securities, these securities are not included in the maturity categories below.



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

Proceeds and realized gains / losses from the sale of securities are estimated based on financial models or prices paid for the same or similar securities. It is possible interest rates could change considerably, resulting in a material change in estimated fair value.

September 30, 2017
(in thousands) Amortized Cost Fair Value
Due in less than one year $ 13,262 $ 13,261
Due in one year through five years 96,098 96,410
Due after five years through ten years 130,477 129,769
Due after ten years 7,986 8,292
247,823 247,732
Mortgage-backed securities 159,113 157,936
Equity securities 1,288 2,549
Securities available for sale $ 408,224 $ 408,217

~~Proceeds from sales of securities available for sale during the first nine months of 2017 and 2016~~AFS were approximately $10.8 million and $30.3 million, respectively. During the first nine months of 2017, gross gains and losses realized were $1.2 million and $7,000, respectively, while gross gains and gross losses were $90,000 and $13,000, respectively, for the comparable nine months of 2016.

as follows.



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

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

The loan composition ~~as of September 30, 2017 and December 31, 2016~~ is summarized as follows.

Total
September 30, 2017 December 31, 2016
(in thousands) Amount
% of
Total
Amount % of
Total
Commercial & industrial $ 625,729 30.5 % $ 428,270 27.3 %
Owner-occupied commercial real estate (“CRE”) 428,054 20.9 360,227 23.0
Agricultural (“AG”) production 36,352 1.8 34,767 2.2
AG real estate 48,443 2.4 45,234 2.9
CRE investment 303,448 14.8 195,879 12.5
Construction & land development 87,649 4.3 74,988 4.8
Residential construction 33,163 1.6 23,392 1.5
Residential first mortgage 363,116 17.7 300,304 19.1
Residential junior mortgage 102,654 5.0 91,331 5.8
Retail & other 22,514 1.0 14,515 0.9
Loans 2,051,122 100.0 % 1,568,907 100.0 %
Less allowance for loan losses 12,610 11,820
Loans, net $ 2,038,512 $ 1,557,087
Allowance for loan losses to loans 0.61 % 0.75 %

Originated
September 30, 2017 December 31, 2016
(in thousands) Amount
% of
Total
Amount % of
Total
Commercial & industrial $ 470,700 40.4 % $ 330,073 36.6 %
Owner-occupied CRE 221,556 19.0 182,776 20.3
AG production 11,605 1.0 9,192 1.0
AG real estate 23,876 2.0 18,858 2.1
CRE investment 98,328 8.4 72,930 8.1
Construction & land development 55,387 4.7 44,147 4.9
Residential construction 27,129 2.3 20,768 2.3
Residential first mortgage 180,509 15.5 164,949 18.3
Residential junior mortgage 60,207 5.2 48,199 5.3
Retail & other 17,092 1.5 10,095 1.1
Loans 1,166,389 100.0 % 901,987 100.0 %
Less allowance for loan losses 10,406 9,449
Loans, net $ 1,155,983 $ 892,538
Allowance for loan losses to loans 0.89 % 1.05 %

Acquired
September 30, 2017 December 31, 2016
(in thousands) Amount
% of
Total
Amount % of
Total
Commercial & industrial $ 155,029 17.5 % $ 98,197 14.7 %
Owner-occupied CRE 206,498 23.3 177,451 26.6
AG production 24,747 2.8 25,575 3.8
AG real estate 24,567 2.8 26,376 4.0
CRE investment 205,120 23.2 122,949 18.4
Construction & land development 32,262 3.7 30,841 4.6
Residential construction 6,034 0.7 2,624 0.4
Residential first mortgage 182,607 20.6 135,355 20.3
Residential junior mortgage 42,447 4.8 43,132 6.5
Retail & other 5,422 0.6 4,420 0.7
Loans 884,733 100.0 % 666,920 100.0 %
Less allowance for loan losses 2,204 2,371
Loans, net $ 882,529 $ 664,549
Allowance for loan losses to loans 0.25 % 0.36 %



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

Accrued interest on loans of $7 million at both March 31, 2020 and December 31, 2019 is included in accrued interest receivable and other assets on the consolidated balance sheets. See Note ~~6 – Loans,~~ 1 for for the Company's accounting policy on accrued interest with respect to loans and the allowance for credit losses.

Allowance for ~~Loan Losses, and~~ Credit ~~Quality, continued~~

~~Practically all~~Losses-Loans:

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

~~The~~

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



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

The following table presents the balance and ~~lease losses (“ALLL”)~~activity in the ACL-Loans by portfolio segment.



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

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



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

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

The ACL-Loans represents management’s estimate of ~~probable and inherent~~expected credit losses in the Company’s loan portfolio at the balance sheet date. ~~In general, estimating~~To assess the ~~amount~~appropriateness of the ~~ALLL~~ACL-Loans, an allocation methodology is ~~a function~~applied by Nicolet which focuses on evaluation of ~~a number of~~qualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to ~~changes in~~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 ~~net charge-offs,~~segment; (iv) trends in past due and ~~impaired~~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 the level of potential problem loans, all of which may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses could be required that could adversely affect our earnings or financial position in future periods. Allocations to the ALLL may be made for specific loans but the entire ALLL is available for any loan that, in management’s judgment, should be charged-off or for which an actual loss is realized.

The allocation methodology used by the Company includes specific allocations for impaired loans evaluated individually for impairment based on collateral values and for the remaining loan portfolio collectively evaluated for impairment primarily based on historical loss rates and(x) other qualitative ~~factors. Loan charge-offs~~ and ~~recoveries are based on actual amounts charged-off or recovered by loan category.~~ quantitative factors which could affect expected credit losses. Assessing these numerous factors involves significant judgment.

Management allocates the ~~ALLL~~ACL-Loans by pools of risk within each loan ~~portfolio.~~

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

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



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

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



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

Past Due and Nonaccrual Loans:

The following tables present ~~the balance and activity in the ALLL by portfolio segment and the recorded investment in~~past due loans by portfolio ~~at or for the nine months ended September 30, 2017:~~

TOTAL – Nine Months Ended September 30, 2017
(in thousands)
ALLL: Commercial
& industrial Owner-
occupied
CRE AG
production AG real
estate CRE
investment Construction
& land
development Residential
construction Residential
first
mortgage Residential
junior
mortgage Retail
& other Total
Beginning balance $ 3,919 $ 2,867 $ 150 $ 285 $ 1,124 $ 774 $ 304 $ 1,784 $ 461 $ 152 $ 11,820
Provision 2,183 (253 ) 16 (17 ) 132 (19 ) (137 ) (124 ) 4 90 1,875
Charge-offs (1,097 ) - - - - (13 ) - (8 ) - (38 ) (1,156 )
Recoveries 20 29 - - 1 - - 6 2 13 71
Net charge-offs (1,077 ) 29 - - 1 (13 ) - (2 ) 2 (25 ) (1,085 )
Ending balance $ 5,025 $ 2,643 $ 166 $ 268 $ 1,257 $ 742 $ 167 $ 1,658 $ 467 $ 217 $ 12,610
As percent of ALLL 39.9 % 21.0 % 1.3 % 2.1 % 10.0 % 5.9 % 1.3 % 13.1 % 3.7 % 1.7 % 100.0 %

ALLL:
Individually evaluated $ 226 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ 226
Collectively evaluated 4,799 2,643 166 268 1,257 742 167 1,658 467 217 12,384
Ending balance $ 5,025 $ 2,643 $ 166 $ 268 $ 1,257 $ 742 $ 167 $ 1,658 $ 467 $ 217 $ 12,610

Loans:
Individually evaluated $ 5,071 $ 1,116 $ - $ 218 $ 4,845 $ 723 $ 80 $ 1,619 $ 60 $ - $ 13,732
Collectively evaluated 620,658 426,938 36,352 48,225 298,603 86,926 33,083 361,497 102,594 22,514 2,037,390
Total loans $ 625,729 $ 428,054 $ 36,352 $ 48,443 $ 303,448 $ 87,649 $ 33,163 $ 363,116 $ 102,654 $ 22,514 $ 2,051,122

Less ALLL $ 5,025 $ 2,643 $ 166 $ 268 $ 1,257 $ 742 $ 167 $ 1,658 $ 467 $ 217 $ 12,610
Net loans $ 620,704 $ 425,411 $ 36,186 $ 48,175 $ 302,191 $ 86,907 $ 32,996 $ 361,458 $ 102,187 $ 22,297 $ 2,038,512

segment.

~~Note 6 – Loans, Allowance for Loan Losses, and Credit Quality, continued~~

Originated – Nine Months Ended September 30, 2017
(in thousands)
ALLL: Commercial
& industrial Owner-
occupied
CRE AG
production AG real
estate CRE
investment Construction
& land
development Residential
construction Residential
first
mortgage Residential
junior
mortgage Retail
& other Total
Beginning balance $ 3,150 $ 2,263 $ 122 $ 222 $ 893 $ 656 $ 266 $ 1,372 $ 373 $ 132 $ 9,449
Provision 2,128 (167 ) 19 (11 ) 140 (20 ) (135 ) (44 ) 13 82 2,005
Charge-offs (1,043 ) - - - - - - (8 ) - (38 ) (1,089 )
Recoveries 1 24 - - - - - 1 2 13 41
Net charge-offs (1,042 ) 24 - - - - - (7 ) 2 (25 ) (1,048 )
Ending balance $ 4,236 $ 2,120 $ 141 $ 211 $ 1,033 $ 636 $ 131 $ 1,321 $ 388 $ 189 $ 10,406
As percent of ALLL 40.7 % 20.4. % 1.4 % 2.0 % 9.9 % 6.1 % 1.3 % 12.7 % 3.7 % 1.8 % 100.0 %

ALLL:
Individually evaluated $ 226 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ 226
Collectively evaluated 4,010 2,120 141 211 1,033 636 131 1,321 388 189 10,180
Ending balance $ 4,236 $ 2,120 $ 141 $ 211 $ 1,033 $ 636 $ 131 $ 1,321 $ 388 $ 189 $ 10,406

Loans:
Individually evaluated $ 615 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ 615
Collectively evaluated 470,085 221,556 11,605 23,876 98,328 55,387 27,129 180,509 60,207 17,092 1,165,774
Total loans $ 470,700 $ 221,556 $ 11,605 $ 23,876 $ 98,328 $ 55,387 $ 27,129 $ 180,509 $ 60,207 $ 17,092 $ 1,166,389

Less ALLL $ 4,236 $ 2,120 $ 141 $ 211 $ 1,033 $ 636 $ 131 $ 1,321 $ 388 $ 189 $ 10,406
Net loans $ 466,464 $ 219,436 $ 11,464 $ 23,665 $ 97,295 $ 54,751 $ 26,998 $ 179,188 $ 59,819 $ 16,903 $ 1,155,983

Acquired – Nine Months Ended September 30, 2017
(in thousands)
ALLL: Commercial
& industrial Owner-
occupied
CRE AG
production AG real
estate CRE
investment Construction
& land
development Residential
construction Residential
first
mortgage Residential
junior
mortgage Retail
& other Total
Beginning balance $ 769 $ 604 $ 28 $ 63 $ 231 $ 118 $ 38 $ 412 $ 88 $ 20 $ 2,371
Provision 55 (86 ) (3 ) (6 ) (8 ) 1 (2 ) (80 ) (9 ) 8 (130 )
Charge-offs (54 ) - - - - (13 ) - - - - (67 )
Recoveries 19 5 - - 1 - - 5 - - 30
Net charge-offs (35 ) 5 - - 1 (13 ) - 5 - - (37 )
Ending balance $ 789 $ 523 $ 25 $ 57 $ 224 $ 106 $ 36 $ 337 $ 79 $ 28 $ 2,204
As percent of ALLL 35.8 % 23.7 % 1.1 % 2.6 % 10.2 % 4.8 % 1.6 % 15.3 % 3.6 % 1.3 % 100.0 %

Loans:
Individually evaluated $ 4,456 $ 1,116 $ - $ 218 $ 4,845 $ 723 $ 80 $ 1,619 $ 60 $ - $ 13,117
Collectively evaluated 150,573 205,382 24,747 24,349 200,275 31,539 5,954 180,988 42,387 5,422 871,616
Total loans $ 155,029 $ 206,498 $ 24,747 $ 24,567 $ 205,120 $ 32,262 $ 6,034 $ 182,607 $ 42,447 $ 5,422 $ 884,733

Less ALLL $ 789 $ 523 $ 25 $ 57 $ 224 $ 106 $ 36 $ 337 $ 79 $ 28 $ 2,204
Net loans $ 154,240 $ 205,975 $ 24,722 $ 24,510 $ 204,896 $ 32,156 $ 5,998 $ 182,270 $ 42,368 $ 5,394 $ 882,529

~~Note 6 – Loans, Allowance for Loan Losses, and Credit Quality, continued~~

~~The following table presents the balance and activity in the ALLL by portfolio segment and the recorded investment in loans by portfolio at or for the nine months ended September 30, 2016.~~

TOTAL – Nine Months Ended September 30, 2016
(in thousands)
ALLL: Commercial
& industrial Owner-
occupied
CRE AG
production AG real
estate CRE
investment Construction
& land
development Residential
construction Residential
first
mortgage Residential
junior
mortgage Retail
& other Total
Beginning balance $ 3,721 $ 1,933 $ 85 $ 380 $ 785 $ 1,446 $ 147 $ 1,240 $ 496 $ 74 $ 10,307
Provision 745 710 40 (77 ) 23 (586 ) 176 188 42 89 1,350
Charge-offs (279 ) (61 ) - - - - - - (53 ) (39 ) (432 )
Recoveries 17 3 - - 221 - - 5 7 3 256
Net charge-offs (262 ) (58 ) - - 221 - - 5 (46 ) (36 ) (176 )
Ending balance $ 4,204 $ 2,585 $ 125 $ 303 $ 1,029 $ 860 $ 323 $ 1,433 $ 492 $ 127 $ 11,481
As percent of ALLL 36.6 % 22.5 % 1.1 % 2.6 % 9.0 % 7.5 % 2.8 % 12.5 % 4.3 % 1.1 % 100.0 %

ALLL:
Individually evaluated $ 96 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ 96
Collectively evaluated 4,108 2,585 125 303 1,029 860 323 1,433 492 127 11,385
Ending balance $ 4,204 $ 2,585 $ 125 $ 303 $ 1,029 $ 860 $ 323 $ 1,433 $ 492 $ 127 $ 11,481

Loans:
Individually evaluated $ 662 $ 2,666 $ 53 $ 240 $ 13,466 $ 722 $ 287 $ 2,303 $ 181 $ - $ 20,580
Collectively evaluated 423,128 359,888 34,024 45,431 184,418 67,439 27,044 282,350 95,720 14,102 1,533,544
Total loans $ 423,790 $ 362,554 $ 34,077 $ 45,671 $ 197,884 $ 68,161 $ 27,331 $ 284,653 $ 95,901 $ 14,102 $ 1,554,124

Less ALLL $ 4,204 $ 2,585 $ 125 $ 303 $ 1,029 $ 860 $ 323 $ 1,433 $ 492 $ 127 $ 11,481
Net loans $ 419,586 $ 359,969 $ 33,952 $ 45,368 $ 196,855 $ 67,301 $ 27,008 $ 283,220 $ 95,409 $ 13,975 $ 1,542,643

Originated – Nine Months Ended September 30, 2016
(in thousands)
ALLL: Commercial
& industrial Owner-
occupied
CRE AG
production AG real
estate CRE
investment Construction
& land
development Residential
construction Residential
first
mortgage Residential
junior
mortgage Retail
& other Total
Beginning balance $ 3,135 $ 1,567 $ 71 $ 299 $ 646 $ 1,381 $ 147 $ 987 $ 418 $ 63 $ 8,714
Provision 426 408 29 (73 ) (70 ) (633 ) 130 85 16 80 398
Charge-offs (262 ) (3 ) - - - - - - (53 ) (38 ) (356 )
Recoveries - 3 - - 221 - - - 6 2 232
Net charge-offs (262 ) - - - 221 - - - (47 ) (36 ) (124 )
Ending balance $ 3,299 $ 1,975 $ 100 $ 226 $ 797 $ 748 $ 277 $ 1,072 $ 387 $ 107 $ 8,988
As percent of ALLL 36.7 % 22.0 % 1.1 % 2.5 % 8.9 % 8.3 % 3.1 % 11.9 % 4.3 % 1.2 % 100.0 %

ALLL:
Individually evaluated $ 96 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ 96
Collectively evaluated 3,203 1,975 100 226 797 748 277 1,072 387 107 8,892
Ending balance $ 3,299 $ 1,975 $ 100 $ 226 $ 797 $ 748 $ 277 $ 1,072 $ 387 $ 107 $ 8,988

Loans:
Individually evaluated $ 319 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ 319
Collectively evaluated 321,203 181,107 8,857 18,222 72,182 34,916 20,964 138,103 47,346 9,179 852,079
Total loans $ 321,522 $ 181,107 $ 8,857 $ 18,222 $ 72,182 $ 34,916 $ 20,964 $ 138,103 $ 47,346 $ 9,179 $ 852,398

Less ALLL $ 3,299 $ 1,975 $ 100 $ 226 $ 797 $ 748 $ 277 $ 1,072 $ 387 $ 107 $ 8,988
Net loans $ 318,223 $ 179,132 $ 8,757 $ 17,996 $ 71,385 $ 34,168 $ 20,687 $ 137,031 $ 46,959 $ 9,072 $ 843,410



	March 31, 2020
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or nonaccrual			Current			Total
Commercial & industrial	$	1,060		$	6,050		$	824,147		$	831,257
Owner-occupied CRE	1,961			3,837			493,907			499,705
Agricultural	1			1,801			94,189			95,991
CRE investment	484			1,029			447,245			448,758
Construction & land development	210			533			95,312			96,055
Residential construction	100			—			52,845			52,945
Residential first mortgage	1,985			953			429,188			432,126
Residential junior mortgage	249			566			120,290			121,105
Retail & other	80			—			29,402			29,482
Total loans	$	6,130		$	14,769		$	2,586,525		$	2,607,424
Percent of total loans	0.2		%	0.6		%	99.2		%	100.0		%

~~Note 6 – Loans, Allowance for Loan Losses, and Credit Quality, continued~~

Acquired – Nine Months Ended September 30, 2016
(in thousands)
ALLL: Commercial
& industrial Owner-
occupied
CRE AG
production AG real
estate CRE
investment Construction
& land
development Residential
construction Residential
first
mortgage Residential
junior
mortgage Retail
& other Total
Beginning balance $ 586 $ 366 $ 14 $ 81 $ 139 $ 65 $ - $ 253 $ 78 $ 11 $ 1,593
Provision 319 302 11 (4 ) 93 47 46 103 26 9 952
Charge-offs (17 ) (58 ) - - - - - - - (1 ) (76 )
Recoveries 17 - - - - - - 5 1 1 24
Net charge-offs - (58 ) - - - - - 5 1 - (52 )
Ending balance $ 905 $ 610 $ 25 $ 77 $ 232 $ 112 $ 46 $ 361 $ 105 $ 20 $ 2,493
As percent of ALLL 36.3 % 24.5 % 1.0 % 3.1 % 9.3 % 4.5 % 1.8 % 14.5 % 4.2 % 0.8 % 100.0 %

Loans:
Individually evaluated $ 343 $ 2,666 $ 53 $ 240 $ 13,466 $ 722 $ 287 $ 2,303 $ 181 $ - $ 20,261
Collectively evaluated 101,925 178,781 25,167 27,209 112,236 32,523 6,080 144,247 48,374 4,923 681,465
Total loans $ 102,268 $ 181,447 $ 25,220 $ 27,449 $ 125,702 $ 33,245 $ 6,367 $ 146,550 $ 48,555 $ 4,923 $ 701,726

Less ALLL $ 905 $ 610 $ 25 $ 77 $ 232 $ 112 $ 46 $ 361 $ 105 $ 20 $ 2,493
Net loans $ 101,363 $ 180,837 $ 25,195 $ 27,372 $ 125,470 $ 33,133 $ 6,321 $ 146,189 $ 48,450 $ 4,903 $ 699,233



	December 31, 2019
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or nonaccrual			Current			Total
Commercial & industrial	$	1,729		$	6,249		$	798,211		$	806,189
Owner-occupied CRE	112			3,311			492,949			496,372
Agricultural	—			1,898			93,552			95,450
CRE investment	—			1,073			442,145			443,218
Construction & land development	2,063			20			90,887			92,970
Residential construction	302			—			54,101			54,403
Residential first mortgage	2,736			1,090			428,341			432,167
Residential junior mortgage	217			480			122,074			122,771
Retail & other	110			1			30,100			30,211
Total loans	$	7,269		$	14,122		$	2,552,360		$	2,573,751
Percent of total loans	0.3		%	0.5		%	99.2		%	100.0		%

~~Note 6 – Loans, Allowance for Loan Losses, and Credit Quality, continued~~

The following table presents nonaccrual loans by portfolio ~~segment~~segment. The nonaccrual loans without a related allowance for credit losses have been reflected in ~~total and then as a further breakdown by originated or acquired as of September 30, 2017 and December 31, 2016.~~

Total Nonaccrual Loans
(in thousands) September 30,
2017 % to Total December 31,
2016 % to Total
Commercial & industrial $ 5,078 35.2 % $ 358 1.8 %
Owner-occupied CRE 1,276 8.8 2,894 14.3
AG production 2 - 9 0.1
AG real estate 186 1.3 208 1.0
CRE investment 4,537 31.4 12,317 60.6
Construction & land development 723 5.0 1,193 5.9
Residential construction 80 0.6 260 1.3
Residential first mortgage 2,301 16.0 2,990 14.7
Residential junior mortgage 239 1.7 56 0.3
Retail & other - - - -
Nonaccrual loans - Total $ 14,422 100.0 % $ 20,285 100.0 %

Originated
(in thousands) September 30,
2017 % to Total December 31,
2016 % to Total
Commercial & industrial $ 615 62.3 % $ 4 1.6 %
Owner-occupied CRE 38 3.8 42 16.3
AG production 2 0.2 7 2.7
AG real estate - - - -
CRE investment - - - -
Construction & land development - - - -
Residential construction - - - -
Residential first mortgage 333 33.7 204 79.4
Residential junior mortgage - - - -
Retail & other - - - -
Nonaccrual loans - Originated $ 988 100.0 % $ 257 100.0 %

Acquired
(in thousands) September 30,
2017 % to Total December 31,
2016 % to Total
Commercial & industrial $ 4,463 33.2 % $ 354 1.8 %
Owner-occupied CRE 1,238 9.2 2,852 14.2
AG production - - 2 0.1
AG real estate 186 1.4 208 1.0
CRE investment 4,537 33.8 12,317 61.4
Construction & land development 723 5.4 1,193 6.0
Residential construction 80 0.6 260 1.3
Residential first mortgage 1,968 14.6 2,786 13.9
Residential junior mortgage 239 1.8 56 0.3
Retail & other - - - -
Nonaccrual loans – Acquired $ 13,434 100.0 % $ 20,028 100.0 %

the collateral dependent loans table above.



	March 31, 2020					December 31, 2019
(in thousands)	Nonaccrual Loans			% of Total		Nonaccrual Loans			% of Total
Commercial & industrial	$	6,050		41	%	$	6,249		44	%
Owner-occupied CRE	3,837			26		3,311			23
Agricultural	1,801			12		1,898			14
CRE investment	1,029			7		1,073			8
Construction & land development	533			4		20			—
Residential construction	—			—		—			—
Residential first mortgage	953			6		1,090			8
Residential junior mortgage	566			4		480			3
Retail & other	—			—		1			—
Nonaccrual loans	$	14,769		100	%	$	14,122		100	%
Percent of total loans	0.6		%			0.5		%

~~Note 6 – Loans, Allowance for Loan Losses, and~~

Credit Quality ~~continued~~

Information:

The following table presents total loans by risk categories and year of origination.



March 31, 2020	Amortized Cost Basis by Origination Year
(in thousands)	2020		2019		2018		2017		2016		Prior		Revolving		Revolving to Term		TOTAL
Commercial & industrial
Grades 1-4	$	45,598	$	151,079	$	118,171	$	77,690	$	31,727	$	64,618	$	291,990	$	—	$	780,873
Grade 5	39		3,470		7,446		576		1,479		2,830		7,845		—		23,685
Grade 6	—		23		823		4		1		37		4,946		—		5,834
Grade 7	113		2,078		1,115		1,404		1,372		7,393		7,390		—		20,865
Total	$	45,750	$	156,650	$	127,555	$	79,674	$	34,579	$	74,878	$	312,171	$	—	$	831,257

Owner-occupied CRE
Grades 1-4	$	21,337	$	68,525	$	84,981	$	64,514	$	50,402	$	175,204	$	2,340	$	—	$	467,303
Grade 5	—		576		1,706		7,882		396		6,676		488		—		17,724
Grade 6	—		—		—		1,749		—		56		—		—		1,805
Grade 7	—		168		285		2,197		1,797		8,426		—		—		12,873
Total	$	21,337	$	69,269	$	86,972	$	76,342	$	52,595	$	190,362	$	2,828	$	—	$	499,705

Agricultural
Grades 1-4	$	4,321	$	7,982	$	7,604	$	10,793	$	3,998	$	26,721	$	20,468	$	—	$	81,887
Grade 5	—		—		38		179		710		4,064		89		—		5,080
Grade 6	—		—		—		329		392		—		49		—		770
Grade 7	—		—		58		117		1,375		5,893		811		—		8,254
Total	$	4,321	$	7,982	$	7,700	$	11,418	$	6,475	$	36,678	$	21,417	$	—	$	95,991

CRE investment
Grades 1-4	$	29,442	$	72,601	$	45,017	$	71,370	$	44,213	$	168,170	$	6,238	$	—	$	437,051
Grade 5	—		—		55		—		394		6,629		—		—		7,078
Grade 6	—		105		—		915		656		—		—		—		1,676
Grade 7	—		—		—		—		146		2,807		—		—		2,953
Total	$	29,442	$	72,706	$	45,072	$	72,285	$	45,409	$	177,606	$	6,238	$	—	$	448,758

Construction & land development
Grades 1-4	$	7,276	$	46,643	$	20,176	$	3,719	$	2,683	$	9,827	$	1,678	$	—	$	92,002
Grade 5	—		219		2,699		45		—		26		—		—		2,989
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		149		—		—		—		915		—		—		1,064
Total	$	7,276	$	47,011	$	22,875	$	3,764	$	2,683	$	10,768	$	1,678	$	—	$	96,055

Residential construction
Grades 1-4	$	3,495	$	44,300	$	3,922	$	466	$	29	$	135	$	—	$	—	$	52,347
Grade 5	—		542		—		56		—		—		—		—		598
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		—		—		—		—		—		—		—		—
Total	$	3,495	$	44,842	$	3,922	$	522	$	29	$	135	$	—	$	—	$	52,945

Residential first mortgage
Grades 1-4	$	24,900	$	79,077	$	59,651	$	56,748	$	60,809	$	142,975	$	1,538	$	1	$	425,699
Grade 5	—		1,215		296		309		697		1,153		—		—		3,670
Grade 6	—		—		—		—		—		2		—		—		2
Grade 7	—		778		198		20		66		1,693		—		—		2,755
Total	$	24,900	$	81,070	$	60,145	$	57,077	$	61,572	$	145,823	$	1,538	$	1	$	432,126

Residential junior mortgage
Grades 1-4	$	927	$	7,017	$	5,941	$	1,856	$	2,021	$	3,844	$	95,033	$	3,861	$	120,500
Grade 5	—		—		—		—		—		34		—		—		34
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		—		—		30		—		355		75		111		571
Total	$	927	$	7,017	$	5,941	$	1,886	$	2,021	$	4,233	$	95,108	$	3,972	$	121,105

Retail & other
Grades 1-4	$	2,438	$	5,605	$	2,658	$	1,161	$	827	$	1,156	$	15,637	$	—	$	29,482
Grade 5	—		—		—		—		—		—		—		—		—
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		—		—		—		—		—		—		—		—
Total	$	2,438	$	5,605	$	2,658	$	1,161	$	827	$	1,156	$	15,637	$	—	$	29,482

Total loans	$	139,886	$	492,152	$	362,840	$	304,129	$	206,190	$	641,639	$	456,615	$	3,973	$	2,607,424

The following tables present total ~~past due~~ loans by ~~portfolio segment as~~risk categories.



	March 31, 2020
(in thousands)	Grades 1- 4			Grade 5			Grade 6			Grade 7			Total
Commercial & industrial	$	780,873		$	23,685		$	5,834		$	20,865		$	831,257
Owner-occupied CRE	467,303			17,724			1,805			12,873			499,705
Agricultural	81,887			5,080			770			8,254			95,991
CRE investment	437,051			7,078			1,676			2,953			448,758
Construction & land development	92,002			2,989			—			1,064			96,055
Residential construction	52,347			598			—			—			52,945
Residential first mortgage	425,699			3,670			2			2,755			432,126
Residential junior mortgage	120,500			34			—			571			121,105
Retail & other	29,482			—			—			—			29,482
Total loans	$	2,487,144		$	60,858		$	10,087		$	49,335		$	2,607,424
Percent of total	95.4		%	2.3		%	0.4		%	1.9		%	100.0		%



	December 31, 2019
(in thousands)	Grades 1- 4			Grade 5			Grade 6			Grade 7			Total
Commercial & industrial	$	765,073		$	20,199		$	7,663		$	13,254		$	806,189
Owner-occupied CRE	464,661			20,855			953			9,903			496,372
Agricultural	77,082			6,785			3,275			8,308			95,450
CRE investment	430,794			8,085			2,578			1,761			443,218
Construction & land development	90,523			2,213			15			219			92,970
Residential construction	53,286			1,117			—			—			54,403
Residential first mortgage	424,044			4,677			668			2,778			432,167
Residential junior mortgage	122,249			35			—			487			122,771
Retail & other	30,210			—			—			1			30,211
Total loans	$	2,457,922		$	63,966		$	15,152		$	36,711		$	2,573,751
Percent of total	95.5		%	2.5		%	0.6		%	1.4		%	100.0		%

An internal loan review function rates loans using a grading system based on different risk categories. Loans with a Substandard grade are considered to have a greater risk of ~~September 30, 2017~~loss and ~~December 31, 2016:~~

September 30, 2017
(in thousands) 30-89 Days
Past Due
(accruing) 90 Days &
Over or
nonaccrual Current Total
Commercial & industrial $ 303 $ 5,078 $ 620,348 $ 625,729
Owner-occupied CRE 229 1,276 426,549 428,054
AG production - 2 36,350 36,352
AG real estate - 186 48,257 48,443
CRE investment - 4,537 298,911 303,448
Construction & land development 38 723 86,888 87,649
Residential construction 1,085 80 31,998 33,163
Residential first mortgage 537 2,301 360,278 363,116
Residential junior mortgage 23 239 102,392 102,654
Retail & other 4 - 22,510 22,514
Total loans $ 2,219 $ 14,422 $ 2,034,481 $ 2,051,122
As a percent of total loans 0.1 % 0.7 % 99.2 % 100.0 %

December 31, 2016
(in thousands) 30-89 Days
Past Due
(accruing) 90 Days &
Over or
nonaccrual Current Total
Commercial & industrial $ 22 $ 358 $ 427,890 $ 428,270
Owner-occupied CRE 268 2,894 357,065 360,227
AG production - 9 34,758 34,767
AG real estate - 208 45,026 45,234
CRE investment - 12,317 183,562 195,879
Construction & land development - 1,193 73,795 74,988
Residential construction - 260 23,132 23,392
Residential first mortgage 486 2,990 296,828 300,304
Residential junior mortgage 200 56 91,075 91,331
Retail & other 15 - 14,500 14,515
Total loans $ 991 $ 20,285 $ 1,547,631 $ 1,568,907
As a percent of total loans 0.1 % 1.3 % 98.6 % 100.0 %

may be assigned allocations for loss based on specific review of the weaknesses observed in the individual credits. Such loans are constantly monitored by the loan review function to ensure early identification of any deterioration. A description of the loan risk categories used by the Company ~~follows:~~

follows.

Grades 1-4, Pass: Credits exhibit adequate cash flows, appropriate management and financial ratios within industry norms and/or are supported by sufficient collateral. Some credits in these rating categories may require a need for monitoring but elements of concern are not severe enough to warrant an elevated rating.

Grade 5, Watch: Credits with this rating are adequately secured and performing but are being monitored due to the presence of various short-term weaknesses which may include unexpected, short-term adverse financial performance, managerial problems, potential impact of a decline in the entire industry or local economy and delinquency issues. Loans to individuals or loans supported by guarantors with marginal net worth or collateral may be included in this rating category.

Grade 6, Special Mention: Credits with this rating have potential weaknesses that, without the Company’s attention and correction may result in deterioration of repayment prospects. These assets are considered Criticized Assets. Potential weaknesses may include adverse financial trends for the borrower or industry, repeated lack of compliance with Company requests, increasing debt to net worth, serious management conditions and decreasing cash flow.

Grade 7, Substandard: Assets with this rating are characterized by the distinct possibility the Company will sustain some loss if deficiencies are not corrected. All foreclosures, liquidations, and ~~non-accrual~~nonaccrual loans are considered to be categorized in this rating, regardless of collateral sufficiency.

~~8 Doubtful: Assets with this rating exhibit all the weaknesses as one rated Substandard with the added characteristic that such weaknesses make collection or liquidation in full highly questionable.~~

~~Note 6 – Loans, Allowance for Loan Losses, and~~

Nonaccretable Discount on Purchased Credit ~~Quality, continued~~

~~9 Loss: Assets in this category are considered uncollectible. Pursuing any recovery or salvage value is impractical but does not preclude partial recovery in the future.~~

Impaired Loans:

The following ~~tables present total loans by loan grade as of September 30, 2017 and December 31, 2016:~~

September 30, 2017
(in thousands) Grades 1- 4 Grade 5 Grade 6 Grade 7 Grade 8 Grade 9 Total
Commercial & industrial $ 594,129 $ 15,356 $ 4,585 $ 11,659 $ - $ - $ 625,729
Owner-occupied CRE 402,021 22,058 1,348 2,627 - - 428,054
AG production 31,245 4,067 - 1,040 - - 36,352
AG real estate 40,982 4,845 - 2,616 - - 48,443
CRE investment 288,346 9,191 - 5,911 - - 303,448
Construction & land development 85,932 627 17 1,073 - - 87,649
Residential construction 33,083 - - 80 - - 33,163
Residential first mortgage 356,985 2,207 779 3,145 - - 363,116
Residential junior mortgage 102,281 17 - 356 - - 102,654
Retail & other 22,514 - - - - - 22,514
Total loans $ 1,957,518 $ 58,368 $ 6,729 $ 28,507 $ - $ - $ 2,051,122
Percent of total 95.4 % 2.9 % 0.3 % 1.4 % - - 100.0 %

December 31, 2016
(in thousands) Grades 1- 4 Grade 5 Grade 6 Grade 7 Grade 8 Grade 9 Total
Commercial & industrial $ 401,954 $ 16,633 $ 2,133 $ 7,550 $ - $ - $ 428,270
Owner-occupied CRE 340,846 14,758 193 4,430 - - 360,227
AG production 31,026 3,191 70 480 - - 34,767
AG real estate 41,747 2,727 - 760 - - 45,234
CRE investment 173,652 8,137 - 14,090 - - 195,879
Construction & land development 69,097 4,318 - 1,573 - - 74,988
Residential construction 22,030 1,102 - 260 - - 23,392
Residential first mortgage 295,109 1,348 192 3,655 - - 300,304
Residential junior mortgage 91,123 - 114 94 - - 91,331
Retail & other 14,515 - - - - - 14,515
Total loans $ 1,481,099 $ 52,214 $ 2,702 $ 32,892 $ - $ - $ 1,568,907
Percent of total 94.4 % 3.3 % 0.2 % 2.1 % - - 100.0 %

~~Management considers a loan to be impaired when it is probable~~table summarizes the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. For determining the adequacy of the ALLL, management defines impaired loans as nonaccrual credit relationships over $250,000, all loans determined to be troubled debt restructurings, plus additional loans with impairment risk characteristics. At the time an individual loan goes into nonaccrual status, however, management evaluates the loan for impairment and possible charge-off regardless of loan size.

In determining the appropriateness of the ALLL, management includes allocations for specifically identified impaired loans and loss factor allocations for all remaining loans, with a component primarily basednonaccretable discount on historical loss rates and another component primarily based on other qualitative factors. Impaired loans are individually assessed and are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.

Loans that are determined not to be impaired are collectively evaluated for impairment, stratified by type and allocated loss ranges based on the Company’s actual historical loss ratios for each strata, and adjustments are also provided for certain current environmental and qualitative factors. An internal loan review function rates loans using a grading system based on nine different categories. Loans with grades of seven or higher (“classified loans”) represent loans with a greater risk of loss and may be assigned allocations for loss based on specific review of the weaknesses observed in the individual credits if classified as impaired. Classified loans are constantly monitored by the loan review function to ensure early identification of any deterioration.

~~Note 6 – Loans, Allowance for Loan Losses, and Credit Quality, continued~~

~~The following tables present impaired loans and then as a further breakdown by originated or acquired as of September 30, 2017 and December 31, 2016.~~

Total Impaired Loans – September 30, 2017
(in thousands) Recorded
Investment Unpaid
Principal
Balance Related
Allowance Average
Recorded
Investment Interest
Income
Recognized
Commercial & industrial $ 5,071 $ 12,275 $ 226 $ 5,057 $ 469
Owner-occupied CRE 1,116 2,793 - 1,185 96
AG production - 15 - - -
AG real estate 218 308 - 229 25
CRE investment 4,845 8,863 - 5,099 353
Construction & land development 723 1,189 - 743 44
Residential construction 80 983 - 94 27
Residential first mortgage 1,619 2,971 - 1,699 121
Residential junior mortgage 60 500 - 64 6
Retail & Other - 14 - - -
Total $ 13,732 $ 29,911 $ 226 $ 14,170 $ 1,141

Originated Impaired Loans – September 30, 2017
(in thousands) Recorded
Investment Unpaid
Principal
Balance Related
Allowance Average
Recorded
Investment Interest
Income
Recognized
Commercial & industrial $ 615 $ 615 $ 226 $ 615 $ 91
Owner-occupied CRE - - - - -
AG production - - - - -
AG real estate - - - - -
CRE investment - - - - -
Construction & land development - - - - -
Residential construction - - - - -
Residential first mortgage - - - - -
Residential junior mortgage - - - - -
Retail & Other - - - - -
Total $ 615 $ 615 $ 226 $ 615 $ 91

Acquired Impaired Loans – September 30, 2017
(in thousands) Recorded
Investment Unpaid
Principal
Balance Related
Allowance Average
Recorded
Investment Interest
Income
Recognized
Commercial & industrial $ 4,456 $ 11,660 $ - $ 4,442 $ 378
Owner-occupied CRE 1,116 2,793 - 1,185 96
AG production - 15 - - -
AG real estate 218 308 - 229 25
CRE investment 4,845 8,863 - 5,099 353
Construction & land development 723 1,189 - 743 44
Residential construction 80 983 - 94 27
Residential first mortgage 1,619 2,971 - 1,699 121
Residential junior mortgage 60 500 - 64 6
Retail & Other - 14 - - -
Total $ 13,117 $ 29,296 $ - $ 13,555 $ 1,050

~~Note 6 – Loans, Allowance for Loan Losses, and Credit Quality, continued~~

Total Impaired Loans – December 31, 2016
(in thousands) Recorded
Investment Unpaid
Principal
Balance Related
Allowance Average
Recorded
Investment Interest
Income
Recognized
Commercial & industrial $ 338 $ 720 $ - $ 348 $ 34
Owner-occupied CRE 2,588 4,661 - 2,700 271
AG production 41 163 - 48 6
AG real estate 240 332 - 245 26
CRE investment 12,552 19,695 - 12,982 1,051
Construction & land development 694 2,122 - 752 112
Residential construction 261 1,348 - 287 82
Residential first mortgage 2,204 3,706 - 2,312 190
Residential junior mortgage 299 639 - 209 17
Retail & Other - 36 - - -
Total $ 19,217 $ 33,422 $ - $ 19,883 $ 1,789

~~There were no originated impaired loans as of December 31, 2016. All loans in the table above were acquired loans.~~

~~In April 2017, the First Menasha merger added~~ purchased credit impaired loans ~~at a fair value~~prior to the adoption of $5.4 million, net of an initial $5.9 million non-accretable mark. Also, during the third quarter a loan of $3.1 million was acquired, net of an initial $2.4 million non-accretable mark. Including these credit impaired loans acquired in the First Menasha merger and third quarter acquisition, total purchased credit impaired loans acquired in aggregate were initially recorded at a fair value of $43.6 million on their respective acquisition dates, net of an initial $34.4 million non-accretable mark and a zero accretable mark. At September 30, 2017, $12.3 million of the $43.6 million remain in impaired loans and $0.8 million of acquired loans have subsequently become impaired, bringing acquired impaired loans to $13.1 million.

Non-accretable discount on purchase credit impaired (“PCI”) loans: Nine Months Ended Year ended
(in thousands) September 30, 2017 December 31, 2016
Balance at beginning of period $ 14,327 $ 4,229
Acquired balance, net 8,352 13,923
Accretion to loan interest income (5,925 ) (3,458 )
Disposals of loans (1,121 ) (367 )
Balance at end of period $ 15,633 $ 14,327

ASU 2016-13.



	Three Months Ended			Year Ended
(in thousands)	March 31, 2019			December 31, 2019
Balance at beginning of period	$	6,408		$	6,408
Acquired balance, net	—			911
Accretion to loan interest income	(221		)	(4,713		)
Disposals of loans	—			(679		)
Balance at end of period	$	6,187		$	1,927

Troubled Debt Restructurings

~~During the quarter ended September 30, 2017,~~:

At March 31, 2020, there were two additional loans that were restructured. One loan was an existing PCI loan which was restructured as part of a new agreement with a loan amount of $3.5 million. The other loan was an acquired loan for $0.7 million in which terms were extended subsequent to acquisition. At September 30, 2017, there were sevenfour loans classified as troubled debt restructurings ~~totaling $5.2 million. These seven loans had~~with a ~~combined premodification~~current outstanding balance of ~~$5.2~~$1.1 million and pre-modification balance of $1.4 million. ~~There~~In comparison, at December 31, 2019, there were ~~no other~~five loans ~~which were modified and~~ classified as troubled debt restructurings ~~at September 30, 2017.~~with an outstanding balance of $1.1 million and pre-modification balance of $1.4 million. There were no loans classified as troubled debt restructurings during the previous twelve months that subsequently defaulted asduring the three months ended March 31, 2020. As of ~~September 30, 2017. Loans which~~March 31, 2020, there were ~~considered~~no commitments to lend additional funds to debtors whose terms have been modified in troubled debt restructurings by First Menasha and Baylake prior to acquisition are not required to be classified as troubled debt restructurings in the Company’s consolidated financial statements unless and until such loans subsequently meet criteria to be classified as such, since acquired loans were recorded at their estimated fair values at the time of the acquisition.

restructurings.

Note 7 – Goodwill ~~Intangible Assets~~and Other Intangibles and Mortgage Servicing Rights

Management periodically reviews the carrying value of its ~~long-lived and~~ intangible assets to determine if any impairment has occurred, in which case an impairment charge would be recorded as an expense in the period of impairment, or whether changes in circumstances have occurred that would require a revision to the remaining useful life which would impact expense prospectively. In making such determination, management evaluates whether there are any adverse qualitative factors indicating that an impairment may exist, as well as the performance, on an undiscounted basis, of the underlying operations or assets which give rise to the intangible. In the first quarter, management considered the potential impacts of the COVID-19 pandemic on the valuation of our franchise value, stability of deposits, and of the wealth client base, underlying our goodwill, core deposit intangible, and customer list intangibles, and determined no impairments were indicated. However, the impacts of the COVID-19 pandemic, which began in March 2020, are still evolving. The Company’s ~~annual assessments indicated no~~assessment in 2019 resulted in an $0.8 million full impairment charge on non-bank goodwill. A summary of goodwill orand other intangibles was ~~required for 2016 or the first nine months of 2017.~~

as follows.

~~Note 7 –~~



	Three Months Ended		Year Ended
(in thousands)	March 31, 2020		December 31, 2019
Goodwill	$	151,198	$	151,198
Core deposit intangibles	10,031		10,897
Customer list intangibles	3,745		3,872
Other intangibles	13,776		14,769
Goodwill and other intangibles, net	$	164,974	$	165,967

Goodwill ~~Intangible Assets and Mortgage Servicing Rights, continued~~

~~Goodwill~~: ~~Goodwill was $107.4 million at September 30, 2017 and $66.7 million at December 31, 2016. There was an addition to the carrying amount~~A summary of goodwill ~~in the second quarter of 2017 of $39.7 million related to the First Menasha merger. In accordance with business combination accounting standards, an additional increase to~~was as follows. During 2019, goodwill ~~of $1.0 million occurred in the third quarter of 2017~~increased due to the ~~Company recording its previously held equity interest in First Menasha at its then acquisition date fair value, resulting in a $1.2 million gain in pre-tax earnings.~~Choice acquisition. See Note 2 for additional information on the Company's acquisitions.

Three Months Ended Year Ended
(in thousands) March 31, 2020 December 31, 2019
Goodwill:
Goodwill at beginning of year $ 151,198
$ 107,366
Acquisition —
44,594
Impairment —
(762 )
Goodwill at end of period $ 151,198
$ 151,198

Other intangible assets: Other intangible assets, consisting of core deposit intangibles ~~(related to branch or bank acquisitions)~~ and customer list intangibles, ~~(related to the customer relationships acquired in the 2016 financial advisor business acquisition),~~ are amortized over their estimated finite lives. ~~There was an addition of $3.7 million to the~~During 2019, core deposit intangibles ~~related~~increased due to the First Menasha merger in the second quarter of 2017. The customer relationship intangible was increased $0.9 million in the third quarter of 2017 due to a modification to the contingent earn-out payment, fixing the previously variable earn-out payment on a portion of the purchase price.Choice acquisition. See Note 2 for additional information on the Company's acquisitions.

(in thousands) September 30, 2017 December 31, 2016
Core deposit intangibles:
Gross carrying amount $ 29,015 $ 25,345
Accumulated amortization (11,469 ) (8,244 )
Net book value $ 17,546 $ 17,101
Additions during the period $ 3,670 $ 17,259
Amortization during the period $ 3,225 $ 3,189

Customer list intangibles:
Gross carrying amount $ 5,233 $ 4,363
Accumulated amortization (558 ) (269 )
Net book value $ 4,675 $ 4,094
Additions during the period $ 870 $ 4,363
Amortization during the period $ 289 $ 269

Three Months Ended Year Ended
(in thousands) March 31, 2020 December 31, 2019
Core deposit intangibles:
Gross carrying amount $ 30,715
$ 30,715
Accumulated amortization (20,684 ) (19,818 )
Net book value $ 10,031
$ 10,897
Additions during the period $ —
$ 1,700
Amortization during the period $ 866
$ 3,365
Customer list intangibles:
Gross carrying amount $ 5,523
$ 5,523
Accumulated amortization (1,778 ) (1,651 )
Net book value $ 3,745
$ 3,872
Additions during the period $ —
$ —
Amortization during the period $ 127
$ 507

Mortgage servicing rights: ~~A summary~~Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income, and assessed for impairment at each reporting date, with the amortization recorded in mortgage income, net, in the consolidated statements of income. Mortgage servicing rights are carried at the lower of the ~~mortgage servicing rights (“MSR”) asset, which is~~initial capitalized amount, net of accumulated amortization, or estimated fair value, and are included in other assets in the consolidated balance ~~sheets, for~~sheets. A summary of the ~~nine months ended September 30, 2017 and year ended December 31, 2016~~changes in the mortgage servicing rights asset was as ~~follows:~~

(in thousands) September 30, 2017 December 31, 2016
Mortgage servicing rights (MSR) asset:
MSR asset at beginning of year $ 1,922 $ 193
Capitalized MSR 679 1,023
MSR asset acquired 874 885
Amortization during the period (339 ) (179 )
Valuation allowance at end of period - -
Net book value at end of period $ 3,136 $ 1,922

Fair value of MSR asset at end of period $ 4,116 $ 2,013
Residential mortgage loans serviced for others 509,897 $ 295,353
Net book value of MSR asset to loans serviced for others 0.62 % 0.65 %

follows.



	Three Months Ended			Year Ended
(in thousands)	March 31, 2020			December 31, 2019
Mortgage servicing rights ("MSR") asset:
MSR asset at beginning of year	$	5,919		$	3,749
Capitalized MSR	559			2,876
MSR asset acquired	—			160
Amortization during the period	(284		)	(866		)
MSR asset at end of period	$	6,194		$	5,919
Valuation allowance at beginning of year	$	—		$	—
Additions	(175		)	—
Valuation allowance at end of period	$	(175	)	$	—
MSR asset, net	$	6,019		$	5,919
Fair value of MSR asset at end of period	$	8,807		$	8,420
Residential mortgage loans serviced for others	$	890,162		$	847,756
Net book value of MSR asset to loans serviced for others	0.68		%	0.70		%

The Company periodically evaluates its mortgage servicing rights asset for impairment. At each reporting date, impairment is assessed based on an estimated fair value using estimated prepayment speeds of the underlying mortgage loans serviced and stratifications based on the risk characteristics of the underlying loans ~~serviced~~ (predominantly loan type and note interest rate). NoA valuation ~~or impairment charge~~allowance of $0.2 million was recorded for ~~2016 or~~the three months ended March 31, 2020, while no valuation allowance was recorded for the year ~~to date 2017.~~

ended December 31, 2019. See Note 9 for additional information on the fair value of the MSR asset.

~~Note 7 – Goodwill, Intangible Assets and Mortgage Servicing Rights, continued~~

The following table shows the estimated future amortization expense for amortizing intangible ~~assets.~~assets and the MSR asset. The projections are based on existing asset balances, the current interest rate environment and prepayment speeds as of ~~the September 30, 2017.~~March 31, 2020. The actual amortization expense the Company recognizes in any given period may be significantly different depending upon acquisition or sale activities, changes in interest rates, prepayment speeds, market conditions, regulatory requirements and events or circumstances that indicate the carrying amount of an asset may not be recoverable.

(in thousands) Core deposit
intangibles Customer list
intangibles MSR asset
Year ending December 31,
2017 (remaining three months) $ 1,070 $ 112 $ 136
2018 3,915 449 544
2019 3,337 449 544
2020 2,657 449 677
2021 2,167 449 301
Thereafter 4,400 2,767 934
Total $ 17,546 $ 4,675 $ 3,136



(in thousands)	Core deposit intangibles		Customer list intangibles		MSR asset
Year ending December 31,
2020 (remaining nine months)	$	2,127	$	380	$	829
2021	2,453		507		937
2022	1,987		507		930
2023	1,490		483		962
2024	1,010		449		541
2025	573		449		541
Thereafter	391		970		1,454
Total	$	10,031	$	3,745	$	6,194

Note 8 – ~~Notes Payable~~

Short and Long-Term Borrowings

Short-Term Borrowings:

Short-term borrowings include any borrowing with an original maturity of one year or less. The Company had a $75 million short-term FHLB advance, with a fixed rate of 0.61%, outstanding at March 31, 2020. At December 31, 2019, the ~~following~~Company did not have any outstanding short-term borrowings.

Long-Term Borrowings:

The components of long-term ~~notes payable (notes~~borrowings (borrowing with an original ~~maturities of~~maturity greater than one year) were as follows.



(in thousands)	March 31, 2020			December 31, 2019
FHLB advances	$	40,046		$	25,061
Junior subordinated debentures	30,695			30,575
Subordinated notes	12,000			11,993
Total long-term borrowings	$	82,741		$	67,629
Percent of fixed rate long-term borrowings	70		%	64		%
Percent of floating rate long-term borrowings	30		%	36		%

FHLB Advances:

(in thousands) September 30, 2017 December 31, 2016
Federal Home Loan Bank (“FHLB”) advances $ 41,571 $ 1,000
Notes payable $ 41,571 $ 1,000

The ~~Company’s~~ FHLB advances bear fixed rates, require interest-only monthly payments, and have ~~maturities ranging from December 2017 to November 2022.~~maturity dates through 2027. The weighted average ~~rates~~rate of the FHLB advances ~~were 1.65%~~was 1.11% at ~~September 30, 2017~~March 31, 2020 and ~~1.17%~~1.57% at December 31, 2016. FHLB advances are collateralized by a blanket lien on qualifying first mortgages, home equity loans, multi-family loans and certain farmland loans which totaled $330.7 million and $283.8 million at September 30, 2017 and December 31, 2016, respectively.

~~The following table shows the maturity schedule of the notes payable as of September 30, 2017:~~

Maturing in (in thousands)
2017 (remaining three months) $ 5,018
2018 1,000
2019 -
2020 10,000
2021 -
2022 25,553
$ 41,571

The Company has a $10 million line of credit with a third party bank, bearing a variable rate of interest based on one-month LIBOR plus a margin, but subject to a floor rate, with quarterly payments of interest only. At September 30, 2017, the available line was $10 million, the rate was one-month LIBOR plus 2.25% with a 3.25% floor. The outstanding balance was zero at September 30, 2017 and December 31, 2016, and the line was not used during 2017 or 2016.

~~Note 9 –~~ 2019.

Junior Subordinated Debentures

At September 30, 2017 and December 31, 2016, the Company’s carrying value of junior subordinated debentures was $29.5 million and $24.7 million, respectively. At September 30, 2017 and December 31, 2016, $28.3 million and $23.6 million, respectively, of guaranteed preferred beneficial interests (“trust preferred securities”) qualify as Tier 1 capital under the Federal Reserve Bank guidelines.

:The following table shows the breakdown of junior subordinated ~~debentures as of September 30, 2017 and December 31, 2016.~~debentures. Interest on all debentures is current. Any applicable discounts (initially recorded to carry an acquired debenture at its then estimated fair market value) are being accreted to interest expense over the remaining life of the debentures. All the debentures below are currently callable and may be redeemed in part or in full at par plus any accrued but unpaid interest.

At March 31, 2020 and December 31, 2019, $29.5 million and $29.4 million, respectively, qualify as Tier 1 capital.

~~Note 9 – Junior Subordinated Debentures, continued~~

Junior Subordinated Debentures
(in thousands) Maturity
Date Par 9/30/2017
Unamortized
Discount 9/30/2017
Carrying
Value 12/31/2016
Carrying
Value
2004 Nicolet Bankshares Statutory Trust⁽¹⁾ 7/15/2034 $ 6,186 $ - $ 6,186 $ 6,186
2005 Mid-Wisconsin Financial Services, Inc.⁽²⁾ 12/15/2035 10,310 (3,620 ) 6,690 6,540
2006 Baylake Corp.⁽³⁾ 9/30/2036 16,598 (4,415 ) 12,183 12,006
2004 First Menasha Bancshares, Inc.⁽⁴⁾ 3/17/2034 5,155 (717 ) 4,438 -
Total $ 38,249 $ (8,752 ) $ 29,497 $ 24,732



		Junior Subordinated Debentures
				3/31/2020			3/31/2020		12/31/19
(in thousands)	Maturity Date	Par		Unamortized Discount			Carrying Value		Carrying Value
2004 Nicolet Bankshares Statutory Trust ⁽¹⁾	7/15/2034	$	6,186	$	—		$	6,186	$	6,186
2005 Mid-Wisconsin Financial Services, Inc. ⁽²⁾	12/15/2035	10,310		(3,122		)	7,188		7,138
2006 Baylake Corp. ⁽³⁾	9/30/2036	16,598		(3,824		)	12,774		12,715
2004 First Menasha Bancshares, Inc. ⁽⁴⁾	3/17/2034	5,155		(608		)	4,547		4,536
Total		$	38,249	$	(7,554	)	$	30,695	$	30,575


(1)	The interest rate is 8.00% fixed.


(2)	The debentures, assumed in April 2013 as the result of an acquisition, have a floating rate of the three-month LIBOR plus 1.43%, adjusted quarterly. The interest rates were ~~2.75%~~2.17% and ~~2.39%~~3.32% as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, respectively.


(3)	The debentures, assumed in April 2016 as a result of an acquisition, have a floating rate of the three-month LIBOR plus 1.35%, adjusted quarterly. The interest rates were ~~2.69%~~2.72% and ~~2.35%~~3.31% as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, respectively.


(4)	The debentures, assumed in April 2017 as the result of an acquisition, have a floating rate of the three-month LIBOR plus 2.79%, adjusted quarterly. The interest ~~rate was 4.11%~~rates were 3.63% and 4.69% as of ~~September 30, 2017.~~March 31, 2020 and December 31, 2019, respectively.

Underlying respective statutory trusts (the “statutory trusts”) issued trust preferred securities and common securities. The proceeds from the issuance of the common and the trust preferred securities were used by each trust to purchase junior subordinated debentures of the Company. The debentures represent the sole asset of the statutory trusts. All of the common securities of the statutory trusts are owned by the Company. The statutory trusts are not included in the consolidated financial statements. The net effect of all the documents entered into with respect to the trust preferred securities is that the Company, through payments on its debentures, is liable for the distributions and other payments required on the trust preferred securities.

~~Note 10 –~~

Subordinated Notes

:In 2015, the Company placed an aggregate of $12 million in subordinated Notes in private placements with certain accredited investors. All Notes were issued with 10-year maturities, have a fixed annual interest rate of 5% payable quarterly, are callable on or after the fifth anniversary of their respective issuances dates, and qualify for Tier 2 capital for regulatory purposes. ~~At September 30, 2017, the carrying value of these subordinated notes was $11.9 million.~~

The $180,000 debt issuance costs associated with the $12 million Notes are being amortized on a straight line basis over the first five years, representing the no-call periods, as additional interest expense. As of September 30, 2017 and December 31, 2016, respectively, $88,000 and $115,000, of unamortized debt issuance costs remain and are reflected as a reduction to the carrying value of the outstanding debt.

Note 119 – Fair Value Measurements

Fair value represents the estimated price at which an orderly transaction to sell an asset or transfer a liability would take place between market participants at the measurement date under current market conditions (i.e., an exit price concept), and is a market-based measurement versus an entity-specific measurement.

~~As provided for by accounting standards, the~~

The Company records and/or discloses financial instruments on a fair value basis. These financial assets and financial liabilities are measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the assumptions used to determine fair value. These levels are:

Level 1 -– quoted market prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement ~~date;~~ date

Level 2 -– inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or ~~indirectly;~~ indirectly

Level 3 – significant unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market ~~activity.~~ activity

In instances where the fair value measurement is based on inputs from different levels, the level within which the entire fair value measurement will be categorized is based on the lowest level input that is significant to the fair value measurement in its ~~entirety; this~~entirety. This assessment of the significance of an input requires management judgment.

Disclosure of the fair value of financial instruments, whether recognized or not recognized in the balance sheet, is required for those instruments for which it is practicable to estimate that value, with the exception of certain financial instruments and all nonfinancial instruments as provided for by the accounting standards. For financial instruments recognized at fair value in the consolidated balance sheets, the fair value disclosure requirements also apply.

Recurring basis fair value measurements:

The following table presents the balances of assets and liabilities measured at fair value on a recurring basis for the periods presented. During the second quarter of 2017, three securities classified as Level 3 were acquired with the First Menasha acquisition with a fair value of $0.2 million. The remaining changes in Level 3 were due to pay downs.

Fair Value Measurements Using
Measured at Fair Value on a Recurring Basis: Total Level 1 Level 2 Level 3
(in thousands)
U.S. government sponsored enterprises $ 26,272 $ - $ 26,272 $ -
State, county and municipals 188,716 - 188,057 659
Mortgage-backed securities 157,936 - 157,929 7
Corporate debt securities 32,744 - 24,254 8,490
Equity securities 2,549 2,549 - -
Securities AFS, September 30, 2017 $ 408,217 $ 2,549 $ 396,512 $ 9,156

(in thousands)
U.S. government sponsored enterprises $ 1,963 $ - $ 1,963 $ -
State, county and municipals 187,243 - 186,717 526
Mortgage-backed securities 159,129 - 159,076 53
Corporate debt securities 12,169 - 3,640 8,529
Equity securities 4,783 4,783 - -
Securities AFS, December 31, 2016 $ 365,287 $ 4,783 $ 351,396 $ 9,108



(in thousands)			Fair Value Measurements Using
Measured at Fair Value on a Recurring Basis:	Total		Level 1		Level 2		Level 3
March 31, 2020
U.S. government agency securities	$	64,252	$	—	$	64,252	$	—
State, county and municipals	157,336		—		157,336		—
Mortgage-backed securities	209,953		—		209,953		—
Corporate debt securities	80,319		—		77,189		3,130
Securities AFS	$	511,860	$	—	$	508,730	$	3,130
Other investments (equity securities)	$	3,978	$	3,978	$	—	$	—
December 31, 2019
U.S. government agency securities	$	16,460	$	—	$	16,460	$	—
State, county and municipals	156,393		—		156,393		—
Mortgage-backed securities	195,018		—		195,018		—
Corporate debt securities	81,431		—		78,301		3,130
Securities AFS	$	449,302	$	—	$	446,172	$	3,130
Other investments (equity securities)	$	3,375	$	3,375	$	—	$	—

The following is a description of the valuation methodologies used by the Company for the ~~Securities~~securities AFS and equity securities measured at fair value on a recurring basis, noted in the tables ~~of this footnote.~~above. Where quoted market prices on securities exchanges are available, the ~~investment is~~investments are classified as Level 1. Level 1 investments primarily include exchange-traded equity ~~securities available for sale.~~securities. If quoted market prices are not available, fair value is generally determined using prices obtained from independent pricing vendors who use pricing models (with typical inputs including benchmark yields, reported trades for similar securities, issuer spreads or relationship to other benchmark quoted securities), or discounted cash flows, and are classified as Level 2. Examples of these investments include ~~mortgage-related~~U.S. government agency securities, ~~and~~mortgage-backed securities, obligations of state, county and ~~municipals.~~municipals, and certain corporate debt securities. Finally, in certain cases where there is limited activity or less transparency around inputs to the estimated fair value, investments are classified within Level 3 of the hierarchy. Examples of these include private municipal bonds and corporate debt securities, which include trust preferred security investments. At ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, it was determined that carrying value was the best approximation of fair value for ~~all of the~~these Level 3 securities, based primarily on the internal analysis on these securities.

~~Note 11 – Fair Value Measurements, continued~~

The following table presents the changes in the Level 3 securities AFS measured at fair value on a recurring basis.



(in thousands)	Three Months Ended		Year Ended
Level 3 Fair Value Measurements:	March 31, 2020		December 31, 2019
Balance at beginning of year	$	3,130	$	8,490
Acquired balance	—		300
Paydowns/Sales/Settlements	—		(5,660		)
Balance at end of period	$	3,130	$	3,130

Nonrecurring basis fair value measurements:

The following table presents the Company’s ~~impaired loans and other real estate owned (“OREO”)~~assets measured at fair value on a nonrecurring basis, ~~for~~aggregated by level in the ~~periods presented.~~

~~Measured at Fair Value on a Nonrecurring Basis~~

Fair Value Measurements Using
(in thousands) Total Level 1 Level 2 Level 3
September 30, 2017:
Impaired loans $ 13,506 $ - $ - $ 13,506
OREO 1,314 - - 1,314
December 31, 2016:
Impaired loans $ 19,217 $ - $ - $ 19,217
OREO 2,059 - - 2,059

fair value hierarchy within which those measurements fall.



(in thousands)			Fair Value Measurements Using
Measured at Fair Value on a Nonrecurring Basis:	Total		Level 1		Level 2		Level 3
March 31, 2020
Collateral dependent loans	$	10,062	$	—	$	—	$	10,062
Other real estate owned (“OREO”)	1,000		—		—		1,000
MSR asset	8,807		—		—		8,807
December 31, 2019
Impaired loans	$	16,150	$	—	$	—	$	16,150
OREO	1,000		—		—		1,000
MSR asset	8,420		—		—		8,420

The following is a description of the valuation methodologies used by the Company for the items noted in the table ~~above, including the general classification of such instruments in the fair value hierarchy.~~above. For individually evaluated impaired loans, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, the estimated fair value of the underlying collateral for collateral-dependent loans, or the estimated liquidity of the note. For OREO, the fair value is based upon the estimated fair value of the underlying collateral adjusted for the expected costs to sell.

To estimate the fair value of the MSR asset, the underlying serviced loan pools are stratified by interest rate tranche and term of the loan, and a valuation model is used to calculate the present value of the expected future cash flows for each stratum. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as costs to service, a discount rate, ancillary income, default rates and losses, and prepayment speeds. Although some of these assumptions are based on observable market data, other assumptions are based on unobservable estimates of what market participants would use to measure fair value.

~~Note 11 – Fair Value Measurements, continued~~

Financial instruments:

The carrying amounts and estimated fair values of the Company’s financial instruments ~~at September 30, 2017 and December 31, 2016~~ are shown below.

September 30, 2017
(in thousands) Carrying
Amount Estimated
Fair Value Level 1 Level 2 Level 3
Financial assets:
Cash and cash equivalents $ 96,103 $ 96,103 $ 96,103 $ - $ -
Certificates of deposit in other banks 2,494 2,495 - 2,495 -
Securities AFS 408,217 408,217 2,549 396,512 9,156
Other investments 14,931 14,931 - 13,236 1,695
Loans held for sale 6,963 7,089 - 7,089 -
Loans, net 2,038,512 2,030,248 - - 2,030,248
BOLI 63,989 63,989 63,989 - -
MSR asset 3,136 4,116 - - 4,116

Financial liabilities:
Deposits $ 2,366,951 $ 2,366,199 $ - $ - $ 2,366,199
Short-term borrowings 12,900 12,900 12,900 - -
Notes payable 41,571 41,708 - 41,708 -
Junior subordinated debentures 29,497 28,907 - - 28,907
Subordinated notes 11,912 11,417 - - 11,417

December 31, 2016
(in thousands) Carrying
Amount Estimated
Fair Value Level 1 Level 2 Level 3
Financial assets:
Cash and cash equivalents $ 129,103 $ 129,103 $ 129,103 $ - $ -
Certificates of deposit in other banks 3,984 3,992 - 3,992 -
Securities AFS 365,287 365,287 4,783 351,396 9,108
Other investments 17,499 17,499 - 15,779 1,720
Loans held for sale 6,913 6,968 - 6,968 -
Loans, net 1,557,087 1,568,676 - - 1,568,676
BOLI 54,134 54,134 54,134 - -
MSR asset 1,922 2,013 - - 2,013

Financial liabilities:
Deposits $ 1,969,986 $ 1,969,973 $ - $ - $ 1,969,973
Notes payable 1,000 1,002 - 1,002 -
Junior subordinated debentures 24,732 24,095 - - 24,095
Subordinated notes 11,885 11,459 - - 11,459

~~Not all the financial instruments listed in the table above are subject to the disclosure provisions~~



March 31, 2020
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	241,960	$	241,960	$	241,960	$	—	$	—
Certificates of deposit in other banks	18,804		19,905		—		19,905		—
Securities AFS	511,860		511,860		—		508,730		3,130
Other investments, including equity securities	27,176		27,176		3,978		19,260		3,938
Loans held for sale	3,929		4,006		—		4,006		—
Loans, net	2,581,222		2,659,556		—		—		2,659,556
BOLI	78,665		78,665		78,665		—		—
MSR asset	6,019		8,807		—		—		8,807
Financial liabilities:
Deposits	$	3,023,466	$	3,029,747	$	—	$	—	$	3,029,747
Short-term borrowings	75,000		75,000		—		75,000		—
Long-term borrowings	82,741		82,958		—		40,877		42,081



December 31, 2019
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	182,059	$	182,059	$	182,059	$	—	$	—
Certificates of deposit in other banks	19,305		19,310		—		19,310		—
Securities AFS	449,302		449,302		—		446,172		3,130
Other investments, including equity securities	24,072		24,072		3,375		16,759		3,938
Loans held for sale	2,706		2,753		—		2,753		—
Loans, net	2,559,779		2,593,110		—		—		2,593,110
BOLI	78,140		78,140		78,140		—		—
MSR asset	5,919		8,420		—		—		8,420
Financial liabilities:
Deposits	$	2,954,453	$	2,956,229	$	—	$	—	$	2,956,229
Long-term borrowings	67,629		66,816		—		25,075		41,741

The carrying value of ~~Accounting Standards Codification (“ASC”) 820,~~~~Fair Value Measurements and Disclosures,~~as certain assets and liabilities ~~result in their carrying value approximating fair value. These include~~such as cash and cash equivalents, BOLI, nonmaturing deposits, and short-term borrowings, ~~and nonmaturing deposits.~~approximate their estimated fair value. For those financial instruments not previously disclosed, the following is a description of the ~~evaluation~~valuation methodologies used.

Certificates of deposits in other banks: Fair values are estimated using discounted cash flow analysis based on current interest rates being offered by instruments with similar terms and represents a Level 2 measurement.

~~Note 11 – Fair Value Measurements, continued~~

Other investments: The valuation methodologies utilized for exchange-traded equity securities are discussed under “Recurring basis fair value measurements” above. The carrying amount of Federal Reserve Bank ~~Bankers Bank, Farmer Mac,~~ and FHLB stock is a reasonably accepted fair value estimate given their restricted nature. Fair value is the redeemable (carrying) value based on the redemption provisions of the instruments which is considered a Level 2 measurement. The carrying amount of the remaining other investments (particularly common stocks of companies or other banks that are not publicly traded) approximates their fair value, determined primarily by analysis of company financial statements and recent capital issuances of the respective companies or banks, if any, and represents a Level 3 measurement.

Loans held for sale:The fair value estimation process for the loans held for sale portfolio is segregated by loan type. The estimated fair value was based on what secondary markets are currently offering for portfolios with similar characteristics and represents a Level 2 measurement.

Loans, net: For variable-rate loans that reprice frequently and with no significant change in credit risk or other optionality, fair values are based on carrying values. Fair values for all other loans are estimated by discounting contractual cash flows using estimated market discount rates, which reflect the credit and interest rate risk inherent in the loan. Collateral-dependent impaired loans are included in loans, net. The fair value of loans is considered to be a Level 3 measurement due to internally developed discounted cash flow measurements.

~~Mortgage servicing rights asset:~~ To estimate the fair value of the MSR asset, the underlying serviced loan pools are stratified by interest rate tranche and term of the loan, and a valuation model is used to calculate the present value of expected future cash flows for each stratum. When the carrying value of the MSR asset related to a stratum exceeds its fair value, the stratum is recorded at fair value. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as costs to service, a discount rate, ancillary income, default rates and losses, and prepayment speeds. Although some of these assumptions are based on observable market data, other assumptions are based on unobservable estimates of what market participants would use to measure fair value. As a result, the fair value measurement of mortgage servicing rights is considered a Level 3 measurement and represents an income approach to fair value.

Deposits: The fair value of deposits with no stated maturity (such as demand deposits, savings, interest and ~~non-interest~~noninterest checking, and money market accounts) is, by definition, equal to the amount payable on demand at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market place on certificates of similar remaining maturities. Use of internal discounted cash flows provides a Level 3 fair value measurement.

~~Notes payable~~

Long-term borrowings: The fair value of the ~~Federal Home Loan Bank~~FHLB advances is obtained from the ~~Federal Home Loan Bank~~FHLB which uses a discounted cash flow analysis based on current market rates of similar maturity debt securities and represents a Level 2 measurement. The fair values of any remaining notes payable are estimated using discounted cash flow analysis based on current interest rates being offered by instruments with similar terms and credit quality which represents a Level 3 measurement.

~~Junior~~the junior subordinated debentures and subordinated notes~~: The fair values of these debt instruments~~ utilize a discounted cash flow analysis based on an estimate of current interest rates being offered by instruments with similar terms and credit quality. Since the market for these instruments is limited, the internal evaluation represents a Level 3 measurement.

~~Off-balance-sheet~~

Lending-related commitments and derivative financial instruments: At ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, the estimated fair value of letters of credit, ~~loan~~interest rate lock commitments on ~~which the committed interest rate is less than the current market rate, and of~~residential mortgage loans, outstanding mandatory commitments to sell ~~mortgages~~residential mortgage loans into the secondary market, and mirror interest rate swap agreements were not significant.

Limitations: Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Fair value estimates may not be realizable in an immediate settlement of the instrument. In some instances, there are no quoted market prices for the Company’s various financial instruments, in which case fair values may be based on estimates using present value or other valuation techniques, or based on judgments

regarding future expected loss experience, current economic conditions, risk characteristics of the financial instruments, or other factors. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. Subsequent changes in assumptions could significantly affect the estimates.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Nicolet Bankshares, Inc. (the “Company” or “Nicolet”) is a bank holding company headquartered in Green Bay, ~~Wisconsin, providing~~Wisconsin. Nicolet provides a diversified range of traditional banking and wealth management services to individuals and businesses in its market area and through the 38 branch offices of its banking subsidiary, Nicolet National Bank (the “Bank”), in northeastern and central Wisconsin and in Menominee, Michigan.

~~Overview~~

At September 30, 2017, Nicolet Bankshares, Inc. and its subsidiaries (“Nicolet” or the “Company”) had total assets of $2.8 billion, loans of $2.0 billion, deposits of $2.4 billion and total stockholders’ equity of $360 million, representing increases over December 31, 2016 of 24%, 31%, 20% and 31% in assets, loans, deposits and total equity, respectively. This balance sheet growth was predominately attributable to the April 28, 2017 acquisition of First Menasha Bancshares, Inc. (“First Menasha”), which added assets of $480 million (about 20% of Nicolet’s pre-merger asset size), loans of $351 million, deposits of $375 million, core deposit intangible of $4 million and goodwill of $41 million (as of the consummation date and based on estimated fair values), for a total purchase price that included the issuance of $62 million of common equity (or 1.3 million shares) and $19 million of cash, and which is further described in Note 2, “Acquisitions” of the notes to unaudited consolidated financial statements. In particular, organic loan growth has been strong since year end 2016, with loans, excluding $351 million of loans at acquisition of First Menasha, up $131 million or 8%.

For the nine months ended September 30, 2017, net income was $24.0 million (94% above the comparable period of 2016), and net income available to common shareholders was $24.0 million or $2.45 per diluted common share. Evaluation of financial performance between 2017 and 2016 periods was impacted in general from the timing of the 2017 acquisition and the 2016 acquisitions, and inclusion of non-recurring merger-based expenses and integration costs, as described more fully under the section “Management’s Discussion and Analysis.”

Nicolet’s profitability is significantly dependent upon net interest income (interest income earned on loans and other interest-earning assets such as investments, net of interest expense on deposits and other borrowed funds), and noninterest income sources (including but not limited to service charges on deposits, trust and brokerage fees, mortgage income from sales of residential mortgages into the secondary market and related servicing fees, and other fees or revenue from financial services provided to customers or ancillary to loans and deposits), offset by the level of the provision for loan losses, noninterest expenses (largely employee compensation and overhead expenses tied to processing and operating the Bank’s business), and income taxes. Business volumes and pricing drive revenue potential and tend to be influenced by overall economic factors, including market interest rates, business spending, consumer confidence, economic growth and competitive conditions within the marketplace.

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:

operating, legal and regulatory risks, including the effects of the Dodd-Frank Wall Street Reform and Consumer Protection Act and regulations promulgated thereunder, as well as the rules by the Federal bank regulatory agencies to implement the Basel III capital accord;

~~economic, 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;~~

~~potential difficulties in integrating the operations of Nicolet with those of acquired entities, if any;~~

~~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 analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.~~

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 on January 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.

~~Branch Closures~~

In April 2017, Nicolet closed one branch in conjunction with the 2017 acquisition due to overlapping geography. In March 2017, Nicolet closed two branches, one in close proximity to another Nicolet branch and one that was an outlier branch. Nicolet closed seven branches in 2016 that were in close proximity to other Nicolet branches, one concurrent with the Baylake merger, one in October and five in December 2016. As a result, Nicolet operates 38 branches as of September 30, 2017. Nicolet started its effort to eliminate costs associated with branches in overlapping or outlier geographies in 2015 from its acquisition activity, and will continue to evaluate opportunities for efficiencies.

~~Critical Accounting Policies~~

The consolidated financial statements of Nicolet are prepared in conformity with U.S. GAAP and follow general practices within the industry in which it operates. This preparation requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the consolidated financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the consolidated financial statements. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates that are particularly susceptible to significant change include the valuation of loans acquired in business combinations, as well as the determination of the allowance for loan losses and income taxes and, therefore, are critical accounting policies.

~~Valuation of Loans Acquired in Business Combinations~~

~~Acquisitions accounted for under ASC Topic 805,~~~~Business Combinations~~, require the use of the acquisition method of accounting. Assets acquired and liabilities assumed in a business combination are recorded at estimated fair value on their purchase date. In particular, the valuation of acquired loans involves significant estimates, assumptions and judgment based on information available as of the acquisition date. Substantially all loans acquired in the transaction are evaluated either individually or in pools of loans with similar characteristics; and since the estimated fair value of acquired loans includes a credit consideration, no carryover of any previously recorded allowance for loan losses is recorded at acquisition. A number of factors are considered in determining the estimated fair value of purchased loans including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, contractual interest rates compared to market interest rates, and net present value of cash flows expected to be received.

In determining the Day 1 Fair Values of acquired loans, management calculates a non-accretable difference (the credit mark component of the acquired loans) and an accretable difference (the market rate or yield component of the acquired loans). The non-accretable difference is the difference between the undiscounted contractually required payments and the undiscounted cash flows expected to be collected in accordance with management’s determination of the Day 1 Fair Values. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows will result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to the accretable and non-accretable differences, which would have a positive impact on interest income.

The accretable yield on acquired loans is the difference between the expected cash flows and the initial investment in the acquired loans. The accretable yield is recognized into earnings through interest income using the effective yield method over the term of the loans. Management separately monitors the acquired loan portfolio and periodically reviews loans contained within this portfolio against the factors and assumptions used in determining the Day 1 Fair Values.

~~Allowance for Loan Losses (“ALLL”)~~

The ALLL is a reserve for estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the loan portfolio. Actual credit losses, net of recoveries, are deducted from the ALLL. Loans are charged off when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the ALLL. A provision for loan losses, which is a charge against earnings, is recorded to bring the ALLL to a level that, in management’s judgment, is adequate to absorb probable losses in the loan portfolio. Management’s evaluation process used to determine the appropriateness of the ALLL is subject to the use of estimates, assumptions, and judgment. The evaluation process involves gathering and interpreting many qualitative and quantitative factors which could affect probable credit losses. Because interpretation and analysis involves judgment, current economic or business conditions can change, and future events are inherently difficult to predict, the anticipated amount of estimated loan losses and therefore the appropriateness of the ALLL could change significantly.

The allocation methodology applied by Nicolet is designed to assess the appropriateness of the ALLL and includes allocations for specifically identified impaired loans and loss factor allocations for all remaining loans, with a component primarily based on historical loss rates and a component primarily based on other qualitative factors. The methodology includes evaluation and consideration of several factors, such as, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and nonaccrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or circumstances underlying the collectability of loans. Because each of the criteria used is subject to change, the allocation of the ALLL is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular loan category. The total allowance is available to absorb losses from any segment of the loan portfolio. Management believes the ALLL is appropriate at September 30, 2017. The allowance analysis is reviewed by the board of directors on a quarterly basis in compliance with regulatory requirements. In addition, various regulatory agencies periodically review the ALLL. These agencies may require Nicolet to make additions to the ALLL based on their judgments of collectability based on information available to them at the time of their examination. Acquired loans were purchased at fair value without any ALLL, and subsequent to acquisition such acquired loans will be evaluated and ALLL will be recorded on them to the extent necessary.

~~Income Taxes~~

The assessment of income tax assets and liabilities involves the use of estimates, assumptions, interpretation, and judgment concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the consolidated results of operations and reported earnings.

Nicolet files a consolidated federal income tax return and a combined state income tax return (both of which include Nicolet and its wholly owned subsidiaries). Accordingly, amounts equal to tax benefits of those companies having taxable federal losses or credits are reimbursed by the companies that incur federal tax liabilities. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax law rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through provision for income tax expense. Valuation allowances are established when it is more likely than not that a portion of the full amount of the deferred tax asset will not be realized. In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. Nicolet may also recognize a liability for unrecognized tax benefits from uncertain tax positions. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the financial statements. Penalties related to unrecognized tax benefits are classified as income tax expense.

Overview

~~Management’s Discussion and Analysis~~

The following discussion is ~~Nicolet~~ management’s analysis of the consolidated financial condition as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016~~2019 and results of operations for the ~~three and nine-month~~three-month periods ended ~~September 30, 2017~~March 31, 2020 and ~~2016.~~2019. It should be read in conjunction with Nicolet’s audited consolidated financial statements ~~as of December 31, 2016 and 2015, and for the three years ended December 31, 2016,~~ included in Nicolet’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~

~~Evaluation~~2019.

The timing of Nicolet’s acquisition of Choice Bancorp, Inc. (“Choice”) on November 8, 2019, at approximately 12% of pre-merger assets, impacts financial performance and average balances between 2017 and 2016 was impacted in general from the timing and sizes of the 2017 and 2016 acquisitions. Since the balances and results of operations of the acquired entities are appropriately not included in the accompanying consolidated financial statements until their consummation dates,comparisons. Certain income statement results, and average balances for 2017 included full contributions from the 2016 acquisitions and no or partial contributions from the 2017 acquisition. Similarly for 2016 income statement and average balance results, the 2016 acquisitions provided no to partial contributions and the 2017 acquisition provided no contribution.

The inclusion of the Baylake balance sheet (at about 83% of Nicolet’s then pre-merger asset size) and operational results for approximately eight months in 2016 (and approximately five months in the nine month period ended September 30, 2016) analytically explains most of the increase in certain average balances and ~~income statement line items between 2017~~related ratios for first quarter 2020 include three months of Choice, compared to no contribution from Choice in first quarter 2019 and ~~2016 periods. To~~ a ~~lesser extent,~~partial period of Choice in fourth quarter 2019.

Of importance, the ~~inclusion~~World Health Organization declared the coronavirus COVID-19 a pandemic in March 2020. The impacts of the ~~First Menasha balance sheet (at about 20% of Nicolet’s then pre-merger asset size)~~COVID-19 pandemic have resulted in, among other things, a significant stock and ~~operational results for approximately five of nine months~~global markets decline, disruption in ~~2017 analytically explains a portion~~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 ~~increase in certain average balances~~health crisis, and income statement line items between 2017 and 2016 periods. The 2016 financial advisory business acquisition primarily impacts the brokerage fee income, personnel expense and certain other expense line items. Last, the 2016 and 2017 acquisitions impacted pre-tax net income by inclusion of non-recurring direct merger expenses of approximately $1.3 million in 2016 ($0.4 million, $0.4 million, $0.1 million and $0.4 million in first through fourth quarters, respectively) and $0.5 million in 2017 ($0.2 million and $0.3 millionshift in the ~~first~~general economy (such as high unemployment, negative GDP expectations, a 150 bps decline in Federal funds rates, and ~~second quarters, respectively)~~the start of unprecedented government stimulus), ~~along with~~triggering a ~~$1.7 million lease termination charge~~2020 recession.

Amid the uncertainty, in ~~second quarter 2016~~March 2020, Nicolet took action to increase liquidity (largely through term brokered CDs), significantly increased the credit loss provision for the dramatically changed circumstances that continue to evolve, and recorded market losses on equity investments held (in response to the market decline) and valuation charges related to secondary mortgage activities on otherwise strong secondary mortgage activity. Actions to keep customers and employees safe including reducing staff on site, increasing remote staff, segregating leadership and key functional departments (and adding redundancy to ensure continuity of operations should there be a ~~Nicolet~~COVID-19 related incident), and limiting branch lobby access through appointment-only or temporarily

closed ~~concurrent with~~locations. While we continue to pay all employees, we also supplemented the ~~Baylake merger.~~

~~Nicolet remains focused on gaining efficiencies from its increased scale from~~pay of our front-line employees working on-site and eliminated senior management incentive accruals for the ~~acquisitions,~~quarter. Given the extent of uncertainty, we have guided numerous customers through new loans, temporary loan modifications, or participation in the Paycheck Protection Program (the “PPP”, which provided low rate and potentially forgivable loans to small businesses that meet criteria of the program, initially funding in April). The dramatic events surrounding the pandemic will clearly impact future expectations about credit costs and margins, as well as ~~on organic growth in our expanded markets~~fee income and ~~in brokerage services.~~

expenses.

Performance Summary

Table 1: Earnings Summary and Selected Financial Data



	At or for the Three Months Ended
(In thousands, except per share data)	3/31/2020			12/31/2019			9/30/2019			6/30/2019			3/31/2019
Results of operations:
Interest income	$	37,003		$	36,192		$	34,667		$	34,570		$	33,159
Interest expense	5,740			5,723			5,477			5,626			5,684
Net interest income	31,263			30,469			29,190			28,944			27,475
Provision for credit losses	3,000			300			400			300			200
Net interest income after provision for credit losses	28,263			30,169			28,790			28,644			27,275
Noninterest income	9,585			13,309			12,312			18,560			9,186
Noninterest expense	23,854			25,426			22,887			25,727			22,759
Income before income tax expense	13,994			18,052			18,215			21,477			13,702
Income tax expense	3,321			5,670			4,603			2,833			3,352
Net income	10,673			12,382			13,612			18,644			10,350
Net income attributable to noncontrolling interest	118			87			82			95			83
Net income attributable to Nicolet Bankshares, Inc.	$	10,555		$	12,295		$	13,530		$	18,549		$	10,267
Earnings per common share:
Basic	$	1.00		$	1.22		$	1.45		$	1.98		$	1.09
Diluted	$	0.98		$	1.18		$	1.40		$	1.91		$	1.05
Common Shares:
Basic weighted average	10,516			10,061			9,347			9,374			9,461
Diluted weighted average	10,801			10,452			9,697			9,692			9,758
Outstanding (period end)	10,408			10,588			9,363			9,327			9,431
Period-End Balances:
Loans	$	2,607,424		$	2,573,751		$	2,242,931		$	2,203,273		$	2,189,688
Allowance for credit losses	26,202			13,972			13,620			13,571			13,370
Securities available-for-sale, at fair value	511,860			449,302			419,300			403,989			407,693
Goodwill and other intangibles, net	164,974			165,967			121,371			122,285			123,254
Total assets	3,732,554			3,577,260			3,105,671			3,054,813			3,041,091
Deposits	3,023,466			2,954,453			2,584,447			2,536,639			2,538,486
Stockholders’ equity	510,971			516,262			428,014			411,415			398,767
Book value per common share	49.09			48.76			45.71			44.11			42.28
Tangible book value per common share ⁽²⁾	33.24			33.08			32.75			31.00			29.21
Average Balances:
Loans	$	2,584,584		$	2,438,908		$	2,218,307		$	2,189,070		$	2,179,420
Interest-earning assets	3,167,505			2,974,974			2,763,997			2,702,357			2,734,936
Goodwill and other intangibles, net	165,532			147,636			121,895			122,841			123,892
Total assets	3,555,144			3,339,283			3,094,546			3,022,383			3,047,068
Deposits	2,920,071			2,756,295			2,563,821			2,514,226			2,556,927
Interest-bearing liabilities	2,218,592			2,023,448			1,895,754			1,892,775			1,946,210
Stockholders’ equity	513,558			478,645			420,864			404,345			391,027
Financial Ratios:⁽¹⁾
Return on average assets	1.19		%	1.46		%	1.73		%	2.46		%	1.37		%
Return on average common equity	8.27			10.19			12.75			18.40			10.65
Return on average tangible common equity ⁽²⁾	12.20			14.74			17.95			26.43			15.59
Average equity to average assets	14.45			14.33			13.60			13.38			12.83
Stockholders' equity to assets	13.69			14.43			13.78			13.47			13.11
Tangible common equity to tangible assets ⁽²⁾	9.70			10.27			10.28			9.86			9.44
Net interest margin	3.94			4.06			4.19			4.28			4.05
Net loan charge-offs to average loans	0.01			(0.01		)	0.06			0.02			—
Nonperforming loans to total loans	0.57			0.55			0.41			0.35			0.40
Nonperforming assets to total assets	0.42			0.42			0.34			0.26			0.30
Effective tax rate	23.73			31.41			25.27			13.19			24.46
Selected Items:
Interest income from resolving PCI loans (rounded)	$	—		$	1,400		$	1,800		$	1,300		$	200
Tax-equivalent adjustment on net interest income	231			257			251			263			272

(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 important metrics with which to analyze and evaluate financial condition and capital strength, especially when comparing Nicolet ~~reported net~~to non-acquisitive financial institutions.

Net income ~~of $24.0~~was $10.6 million for the ~~nine~~three months ended ~~September 30, 2017, a 94%~~March 31, 2020, an increase of $0.3 million or 3% over ~~$12.4~~$10.3 million for the ~~first nine~~three months ~~of 2016. Net income available to common shareholders was $24.0 million, or $2.45~~ended March 31, 2019. Earnings per diluted common share was $0.98 for first quarter 2020, compared to $1.05 for first quarter 2019, with earnings up 3% and diluted weighted average shares up 11%. Annualized return on average assets for the comparable first ~~nine months~~quarters of ~~2017. Comparatively, after $633,000 of preferred stock dividends, net income available to common shareholders~~2020 and 2019 was ~~$11.7 million, or $1.67 per diluted common share~~1.19% and 1.37%, respectively. Recognizing the pandemic headwinds (largely impacting the provision for ~~the first nine months of 2016. Beginning March 1, 2016, the annual dividend rate~~credit losses recorded, market value losses on preferred stock moved from 1% to 9% in accordance with the contractual terms. Nicolet redeemed its outstanding preferred stock in full in September 2016, explaining the difference in preferred stock dividends between the nine-month periods.

~~The results for the first nine months of 2017 include full contributions from the 2016 acquisitions~~equity securities held, and ~~five months from First Menasha, while the comparative 2016 period includes approximately five months from the 2016 acquisitions and nothing from First Menasha.~~

Net interest income was $72.2 million for the first nine months of 2017, an increase of $24.1 million or 50% over the comparable period of 2016, including $4.5 million higher aggregate discount accretion income between the periods. The improvement was primarily the result of favorable volume and mix variances (driven by the addition of acquired net interest-earning assets albeit at lower yields, as well as organic growth), and net favorable rate variances, largely from higher earning asset yields partially offset by a higher cost of funds. On a tax-equivalent basis, the earning asset yield was 4.69% for the first nine months of 2017, 25 basis points (“bps”) higher than the comparable period in 2016, influenced by more earning assets in loans and investments than in low-earning cash and higher aggregate discount accretion income. The cost of funds was 0.56% for the first nine months of 2017, 2 bps lower than 2016, driven by a lower cost of deposits (largely due to the addition of Baylake deposits at lower rates) between the comparable periods. As a result, the interest rate spread was 4.13% for the first nine months of 2017, 27 bps higher than the comparable period in 2016. The net interest margin was 4.27%, 28 bps over the comparable period of 2016.

Noninterest income was $26.0 million for the first nine months of 2017, an increase of $7.2 million or 39% over the first nine months of 2016, aided largely by the 2016 acquisitions and, to a lesser extent, the 2017 acquisition. Excluding net gains on sale or write-down of assets from both periods, noninterest income increased $5.7 million or 31%. Brokerage fee income led the increase, growing $2.1 million or 101%, attributable to the 2016 financial advisor business acquisition and subsequent new growth. Between the nine-month periods, increases due primarily to higher volumes and activity were also experienced in service charges on deposits (up $0.9 million or 34%), net mortgage income (up $0.3 million or 8%), trust fee income (up $0.4 million or 11%), card interchange fees were up $1.2 million or 54% on higher volume and activity, and other income (up $0.4 million or 21%).

Noninterest expense for the first nine months of 2017 was $59.5 million (including $0.5 million attributable to non-recurring merger-based expenses) compared to $46.6 million for the comparable period in 2016 (including $2.6 million merger-related expenses). Excluding the noted merger-based expenses from both periods, noninterest expense increased approximately $15 million or 34%. The increase between the nine-month periods was primarily due to a larger operating base, attributable to the acquisitions. Personnel expense accounted for the majority of the increase in total expense, up $7.7 million or 31% over the first nine months of 2016, commensurate with the 32% increase in average full time equivalent employees for the comparable periods.

Loans were $2.05 billion at September 30, 2017, up $482 million or 31% from $1.57 billion at December 31, 2016, and up $497 million or 32% over September 30, 2016, largely driven by $351 million of loans acquired with First Menasha at acquisition. Excluding the impact of First Menasha, loans increased $131 million or 8% organically since year end 2016. Between the comparative nine-month periods, average loans were $1.84 billion yielding 5.26% in 2017, compared to $1.27 billion yielding 5.13% in 2016, a 45% increase in average balances. The 13 bps increase in loan yield was largely due to $4.5 million of higher aggregate discount accretion income on acquired loans between the nine-month periods (inclusive of $3.2 million higher discount income related to favorably resolved purchased credit impaired loans), partially offset by pressure on rates of new and renewing loans in the competitive rate environment.

Total deposits were $2.37 billion at September 30, 2017, up $397 million or 20% from $1.97 billion at December 31, 2016, and up $433 million or 22% over September 30, 2016, primarily due to $375 million of deposits acquired with First Menasha at acquisition). Excluding the impact of First Menasha, deposits increased $22 million or 1% since year end 2016. Between the comparative nine-month periods, average total deposits were up $631 million or 41%, attributable to the acquisitions, with noninterest-bearing demand deposits representing 24% and 23% of total deposits for the nine-month periods ended September 30, 2017 and 2016, respectively. Interest-bearing deposits cost 0.42% for the first nine months of 2017, down 1 bp from 0.43% for the same period in 2016, benefiting mostly from the lower-costing Baylake deposits acquired, offset partly by the higher-costing First Menasha deposits acquired, an increase in selected deposit rates that began in July 2017, and general rate pressures influenced by a 75 bps increase in the federal funds rate since January 1, 2016.

Asset quality measures remained strong with continued improvement. Nonperforming assets declined to $15.7 million at September 30, 2017, from $22.3 million at year end 2016 and $23.7 million a year ago. As a percentage of total assets, nonperforming assets were 0.55% at September 30, 2017, 0.97% at December 31, 2016, and 1.04% at September 30, 2016. The allowance for loan losses was $12.6 million at September 30, 2017 (representing 0.61% of loans), compared to $11.8 million at December 31, 2016 (representing 0.75% of loans), and $11.5 million at September 30, 2016 (representing 0.74% of loans). The decline in the ratio of the ALLL to loans primarily resulted from recording the acquired loan portfolios at fair value with no carryover of allowance at the time of each merger. The provision for loan losses was $1.9 million with net charge-offs of $1.1 million for the first nine months of 2017, versus provision of $1.4 million and $0.2 million of net charge-offs for the comparable 2016 period.

~~Net Interest Income~~

~~Nicolet’s earnings are substantially dependent~~valuation marks on net interest income. Net interest income is the primary source of Nicolet’s revenue and is the difference between interest income earned on interest earning assets, such as loans and investments, and interest expense on interest-bearing liabilities, such as deposits and other borrowings. Net interest income is directly impacted by the sensitivity of the balance sheet to changes in interest rates and by the amount and composition of earningmortgage servicing-related assets and ~~interest-bearing liabilities, including characteristics such as~~commitments), the ~~fixed or variable nature~~underlying financial results were sound for first quarter 2020.

At March 31, 2020, assets were $3.7 billion, an increase of $155 million (4%) from December 31, 2019 and an increase of $691 million (23%) from March 31, 2019. The increase since year-end 2019 is largely due to the ~~financial instruments, contractual maturities,~~March 2020 liquidity actions.

At March 31, 2020, loans were $2.6 billion, an increase of $34 million (1%) over December 31, 2019 (representing organic growth) and ~~repricing frequencies.~~

~~Net interest income in the consolidated statements of income (which excludes any taxable equivalent adjustment) was $72.2~~$418 million ~~in the first nine months of 2017, $24.1 million or 50%~~(19%) higher than ~~$48.1~~March 31, 2019 (largely due to the $348 million ~~in the~~of Choice loans acquired). Quarterly average loans grew $146 million (24% annualized) over fourth quarter 2019 and grew $405 million (19%) over first ~~nine months of 2016, including $4.5 million higher aggregate discount accretion between the periods and~~quarter 2019, with both comparisons impacted by the timing of the ~~acquisitions~~Choice acquisition. For additional information regarding loans, see “BALANCE SHEET ANALYSIS — Loans.”

Total deposits were $3.0 billion at March 31, 2020, a $69 million (2%) increase from December 31, 2019 (with ~~2017 including five months~~brokered deposits up $121 million from the liquidity actions in March, and core deposits down $52 million, consistent with customary seasonal trends) and $485 million (19%) higher than March 31, 2019 (largely due to the $289 million of ~~First Menasha~~Choice deposits acquired and ~~full contribution~~the March 2020 liquidity actions noted above). Quarterly average deposits grew $164 million (24% annualized) over fourth quarter 2019 and grew $363 million (14%) over first quarter 2019, with both comparisons impacted by the timing of the Choice acquisition. For additional information regarding deposits, see “BALANCE SHEET ANALYSIS – Deposits.”

Comparatively, short-term interest rates were 225 bps lower in first quarter 2020 than first quarter 2019, given the 75 bps change in second half 2019 and 150 bps change in March 2020 by the Federal Reserve. The net interest margin was 3.94% for first quarter 2020, 11 bps lower than the comparable 2019 period, with the earning asset yield down 23 bps, the cost of funds favorably lower by 14 bps, and the net free funds unfavorably lower by 2 bps. Net interest income increased $3.8 million or 14% over first quarter 2019, benefiting predominantly from ~~Baylake, while~~stronger volumes (largely attributable to the ~~2016 period included only five months~~inclusion of Choice assets acquired), offset partly by unfavorable net rate changes (largely due to the lower rate environment). For additional information regarding net interest income, see “INCOME STATEMENT ANALYSIS — Net Interest Income.”

Noninterest income excluding net asset gains grew $1.2 million or 14% over first quarter 2019, with all categories except other income up year-over-year, in part from ~~Baylake). Taxable equivalent adjustments (adjustments~~the timing of the Choice acquisition in November 2019. For additional information regarding noninterest income, see “INCOME STATEMENT ANALYSIS — Noninterest Income.”

Noninterest expense increased $1.1 million or 5% over first quarter 2019, in part from the timing of the Choice acquisition in November 2019. For additional information regarding noninterest expense, see “INCOME STATEMENT ANALYSIS — Noninterest Expense.”

Provision for credit losses increased to ~~bring tax-exempt interest to a level that would yield the same after-tax income had that been subject to a 35% tax rate) were $1.8 million and $1.3~~$3.0 million for the ~~first nine~~three months ~~of 2017~~ended March 31, 2020, compared to $0.2 million for the three months ended March 31, 2019, largely due to the unprecedented economic disruptions and ~~2016, respectively, resulting~~uncertainty surrounding the COVID-19 pandemic as described in ~~taxable equivalent net interest income of $74.0 million and $49.4 million, respectively.~~

~~Taxable equivalent~~further detail in the “Overview” section. For additional information regarding the allowance for credit losses see “BALANCE SHEET ANALYSIS – Allowance for Credit Losses - Loans.”

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.

Table ~~1: Year-To-Date~~2: Average Balance Sheet and Net Interest Income Analysis

For the Nine Months Ended September 30,
2017 2016
(in thousands) Average
Balance Interest Average
Rate Average
Balance Interest Average
Rate
ASSETS
Earning assets
Loans, including loan fees (1)(2) $ 1,842,695 $ 73,377 5.26 % $ 1,274,405 $ 49,634 5.13 %
Investment securities
Taxable 236,275 3,422 1.93 % 147,720 2,068 1.87 %
Tax-exempt (2) 160,815 3,267 2.71 % 122,850 2,265 2.46 %
Other interest-earning assets 51,803 1,136 2.92 % 87,840 906 1.38 %
Total interest-earning assets 2,291,588 $ 81,202 4.69 % 1,632,815 $ 54,873 4.44 %
Cash and due from banks 76,992 43,001
Other assets 211,546 147,070
Total assets $ 2,580,126 $ 1,822,886
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings $ 249,099 $ 271 0.15 % $ 184,156 $ 166 0.12 %
Interest-bearing demand 419,266 1,590 0.51 % 310,801 1,310 0.56 %
MMA 581,277 1,165 0.27 % 421,920 415 0.13 %
Core CDs and IRAs 288,524 1,568 0.73 % 249,788 1,657 0.89 %
Brokered deposits 120,782 622 0.69 % 28,897 280 1.29 %
Total interest-bearing deposits 1,658,948 5,216 0.42 % 1,195,562 3,828 0.43 %
Other interest-bearing liabilities 62,414 1,966 4.17 % 52,470 1,638 4.11 %
Total interest-bearing liabilities 1,721,362 7,182 0.56 % 1,248,032 5,466 0.58 %
Noninterest-bearing demand 516,412 348,765
Other liabilities 19,079 16,779
Total equity 323,273 209,310
Total liabilities and stockholders’ equity $ 2,580,126 $ 1,822,886

Net interest income and rate spread $ 74,020 4.13 % $ 49,407 3.86 %
Net interest margin 4.27 % 3.99 %

- Tax-Equivalent Basis



	For the Three Months Ended March 31,
	2020						2019
(in thousands)	Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate
ASSETS
Interest-earning assets
Loans, including loan fees ⁽¹⁾⁽²⁾	$	2,584,584	$	33,808	5.19	%	$	2,179,420	$	30,013	5.51	%
Investment securities:
Taxable	327,910		2,072		2.53	%	268,249		1,633		2.43	%
Tax-exempt ⁽²⁾	125,910		692		2.20	%	141,331		776		2.20	%
Other interest-earning assets	129,101		662		2.04	%	145,936		1,009		2.76	%
Total non-loan earning assets	582,921		3,426		2.35	%	555,516		3,418		2.46	%
Total interest-earning assets	3,167,505		$	37,234	4.66	%	2,734,936		$	33,431	4.89	%
Other assets, net	387,639						312,132
Total assets	$	3,555,144					$	3,047,068
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings	$	351,238	$	305	0.35	%	$	299,806	$	360	0.49	%
Interest-bearing demand	535,296		1,214		0.91	%	513,503		1,321		1.04	%
Money market accounts ("MMA")	660,686		730		0.44	%	579,089		1,010		0.71	%
Core time deposits	427,925		1,933		1.82	%	397,220		1,959		2.00	%
Brokered deposits	158,068		775		1.97	%	79,258		127		0.65	%
Total interest-bearing deposits	2,133,213		4,957		0.93	%	1,868,876		4,777		1.04	%
Other interest-bearing liabilities	85,379		783		3.64	%	77,334		907		4.69	%
Total interest-bearing liabilities	2,218,592		5,740		1.04	%	1,946,210		5,684		1.18	%
Noninterest-bearing demand	786,858						688,051
Other liabilities	36,136						21,780
Stockholders’ equity	513,558						391,027
Total liabilities and stockholders’ equity	$	3,555,144					$	3,047,068
Net interest income and rate spread			$	31,494	3.62	%			$	27,747	3.71	%
Tax-equivalent adjustment			$	231					$	272
Net interest income and net interest margin			$	31,263	3.94	%			$	27,475	4.05	%


(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 ~~35%~~21% and adjusted for the disallowance of interest expense.

Table ~~2: Year-To-Date~~3: Volume/Rate Variance

~~Comparison of the nine months ended September 30, 2017 versus the nine months ended September 30, 2016 follows:~~

Increase (decrease)
Due to Changes in
(in thousands) Volume Rate Net
Earning assets

Loans⁽¹⁾⁽²⁾ $ 22,613 $ 1,130 $ 23,743
Investment securities
Taxable 1,382 (28 ) 1,354
Tax-exempt⁽²⁾ 752 250 1,002
Other interest-earning assets (234 ) 464 230

Total interest-earning assets $ 24,513 $ 1,816 $ 26,329

Interest-bearing liabilities
Savings deposits $ 66 $ 39 $ 105
Interest-bearing demand 421 (141 ) 280
MMA 200 550 750
Core CDs and IRAs 234 (323 ) (89 )
Brokered deposits 525 (183 ) 342

Total interest-bearing deposits 1,446 (58 ) 1,388
Other interest-bearing liabilities 412 (84 ) 328

Total interest-bearing liabilities 1,858 (142 ) 1,716
Net interest income $ 22,655 $ 1,958 $ 24,613

- Tax-Equivalent Basis



	For the Three Months Ended March 31, 2020 Compared to March 31, 2019:
	Increase (Decrease) Due to Changes in
(in thousands)	Volume			Rate			Net ⁽¹⁾
Interest-earning assets
Loans ⁽²⁾	$	5,649		$	(1,854	)	$	3,795
Investment securities:
Taxable	354			85			439
Tax-exempt⁽²⁾	(85		)	1			(84		)
Other interest-earning assets	(23		)	(324		)	(347		)
Total non-loan earning assets	246			(238		)	8
Total interest-earning assets	$	5,895		$	(2,092	)	$	3,803
Interest-bearing liabilities
Savings	$	57		$	(112	)	$	(55	)
Interest-bearing demand	57			(164		)	(107		)
MMA	131			(411		)	(280		)
Core time deposits	154			(180		)	(26		)
Brokered deposits	213			435			648
Total interest-bearing deposits	612			(432		)	180
Other interest-bearing liabilities	3			(127		)	(124		)
Total interest-bearing liabilities	615			(559		)	56
Net interest income	$	5,280		$	(1,533	)	$	3,747


(1)	~~Nonaccrual loans are included~~The change in interest due to both rate and volume has been allocated in proportion to the ~~daily average loan balances outstanding.~~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 ~~35%~~21% and adjusted for the disallowance of interest expense.

~~Table 3: Quarterly Net Interest Income Analysis~~

For the Three Months Ended September 30,
2017 2016
(in thousands) Average
Balance Interest Average
Rate Average
Balance Interest Average
Rate
ASSETS
Earning assets
Loans, including loan fees⁽¹⁾⁽²⁾ $ 2,035,277 $ 27,420 5.29 % $ 1,562,151 $ 21,138 5.32 %
Investment securities
Taxable 248,579 1,114 1.79 % 199,843 902 1.80 %
Tax-exempt⁽²⁾ 160,965 1,107 2.75 % 152,959 969 2.53 %
Other interest-earning assets 60,252 407 2.69 % 84,782 351 1.66 %
Total interest-earning assets 2,505,073 $ 30,048 4.72 % 1,999,735 $ 23,360 4.57 %
Cash and due from banks 54,925 59,573
Other assets 265,544 206,774
Total assets $ 2,825,542 $ 2,266,082
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings $ 268,552 $ 129 0.19 % $ 216,055 $ 60 0.11 %
Interest-bearing demand 441,409 758 0.68 % 367,854 451 0.49 %
MMA 606,737 622 0.41 % 539,160 180 0.13 %
Core CDs and IRAs 297,318 595 0.79 % 300,827 583 0.77 %
Brokered deposits 172,200 260 0.60 % 29,639 76 1.02 %
Total interest-bearing deposits 1,786,216 2,364 0.53 % 1,453.535 1,350 0.37 %
Other interest-bearing liabilities 68,123 699 4.04 % 39,898 541 5.35 %
Total interest-bearing liabilities 1,854,339 3,063 0.65 % 1,493,433 1,891 0.50 %
Noninterest-bearing demand 591,013 464,131
Other liabilities 21,962 22,616
Total equity 358,228 285,902
Total liabilities and stockholders’ equity $ 2,825,542 $ 2,266,082
Net interest income and rate spread $ 26,985 4.07 % $ 21,469 4.07 %
Net interest margin 4.24 % 4.19 %

~~(1)~~

~~Nonaccrual loans are included in the daily average loan balances outstanding.~~

~~(2)~~

~~The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 35% and adjusted for the disallowance of interest expense.~~

~~Table 4: Quarterly Volume/Rate Variance~~

~~Comparison~~The interest rate environment has experienced dramatic change. The Federal 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. In March 2020, the Federal Reserve dropped short-term rates by 150 bps (to 25 bps at March 31, 2020) in two emergency moves to respond to the unprecedented economic disruptions of the ~~three months ended September 30, 2017 versus~~COVID-19 pandemic described in the ~~three months ended September 30, 2016 follows:~~

Increase (decrease)
Due to Changes in
(in thousands) Volume Rate Net
Earning assets

Loans (1) (2) $ 6,462 $ (180 ) $ 6,282
Investment securities
Taxable 182 30 212
Tax-exempt(2) 52 86 138
Other interest-earning assets (144 ) 200 56

Total interest-earning assets $ 6,552 $ 136 $ 6,688

Interest-bearing liabilities
Savings deposits $ 17 $ 52 $ 69
Interest-bearing demand 103 204 307
MMA 25 417 442
Core CDs and IRAs (7 ) 19 12
Brokered deposits 228 (44 ) 184

Total interest-bearing deposits 366 648 1,014
Other interest-bearing liabilities 143 15 158

Total interest-bearing liabilities 509 663 1,172
Net interest income $ 6,043 $ (527 ) $ 5,516

~~(1)~~

~~Nonaccrual loans are included in the daily average loan balances outstanding.~~

~~(2)~~

~~The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 35% and adjusted for the disallowance of interest expense.~~

~~Table 5: Interest Rate Spread, Margin~~“Overview” section, which brought slope back into the yield curve, albeit still fairly flat. Comparatively, short-term rates were 225 bps lower in first quarter 2020 than in first quarter 2019. While the following paragraphs will discuss the comparison of the first quarter of 2020 and ~~Average Balance Mix — Taxable Equivalent Basis~~

Nine Months Ended September 30,
2017 2016
(in thousands) Average
Balance % of
Earning
Assets Yield/Rate Average
Balance % of
Earning
Assets Yield/Rate
Total loans $ 1,842,695 80.4 % 5.26 % $ 1,274,405 78.0 % 5.13 %
Securities and other earning assets 448,893 19.6 % 2.32 % 358,410 22.0 % 1.95 %
Total interest-earning assets $ 2,291,588 100.0 % 4.69 % $ 1,632,815 100.0 % 4.44 %

Interest-bearing liabilities $ 1,721,362 75.1 % 0.56 % $ 1,248,032 76.4 % 0.58 %
Noninterest-bearing funds, net 570,226 24.9 % 384,783 23.6 %
Total funds sources $ 2,291,588 100.0 % 0.56 % $ 1,632,815 100.0 % 0.43 %
Interest rate spread 4.13 % 3.86 %
Contribution from net free funds 0.14 % 0.13 %
Net interest margin 4.27 % 3.99 %

~~Taxable-equivalent~~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 ~~$74.0 million and $49.4~~$31.5 million for the ~~nine~~first three months of ~~2017 and 2016, respectively, up $24.6~~2020, comprised of net interest income of $31.3 million ($3.8 million or ~~50%~~14% higher than the first three months of 2019), and a $0.2 million tax-equivalent adjustment (down nearly $0.1 million between the periods). The $3.7 million increase in tax-equivalent net interest income was due to favorable volumes (which added nearly $5.3 million, with ~~$22.7~~$5.6 million from ~~net favorable volume and mix variances (due~~higher loan volumes, largely due to the ~~addition~~inclusion of ~~acquired~~Choice interest-earning assets) and net unfavorable rates (which reduced net interest income by $1.5 million). The net $1.5 million decrease from rates was from interest-earning ~~assets, as well as organic growth), and~~asset rate changes in the lower rate environment (decreasing net interest income by $2.1 million, of which $1.9 million was from ~~net favorable rate variances (from both~~loans, inclusive of $0.7 million lower aggregate discount accretion), offset partly by benefits of a lower cost of funds ~~and higher earning asset yield) between the periods. Taxable equivalent~~(improving net interest income ~~on earning assets increased $26.3~~by $0.6 million, ~~or 48% between the nine-month periods, with $23.7~~predominantly led by $0.9 million savings from non-brokered interest-bearing deposits, $0.1 million savings from wholesale funds, and offset by $0.4 million more interest cost from term brokered deposits which increased in both rate and volume).

Between the comparable three-month periods, the interest rate spread decreased 9 bps. Given the lower rate environment between the first quarter periods, the interest earning asset yield declined 23 bps to 4.66%, largely from the 32 bps decline in loans ~~($22.6 million~~though benefiting from ~~greater volume and $1.1 million from rates (with $4.5 million~~the increase in ~~higher aggregate discount accretion income, including $3.2 million higher discount income related~~the loans-to-earning asset mix (to 82% compared to ~~favorably resolved purchased credit impaired~~80% for first quarter 2019) since loans earn more than ~~offsetting~~investments and cash; and the cost of funds declined favorably by 14 bps to 1.04%, largely from improved core deposit rates and lower underlying loan yields mainly from the acquired portfolios)), $2.4 million more interest from total investments (mostly volume-based), and $0.2 million more interest from other earning assets. Interest expense increased $1.7 million, led by $1.9 million higher interest on interest-bearing liabilities due to volume and mix variances (mostly acquired deposits and a higher proportion of brokered deposits), partially offset by $0.2 million of net favorable rate variances due to lower costvariable wholesale funding ~~(largely from lower-costing Baylake deposits acquired,~~rates, though offset partly by higher-costing ~~First Menasha~~brokered deposits ~~acquired, an increase in select deposit rates that began in July 2017, and general rate pressures influenced by a 75 bps increase in the federal funds rate since January 1, 2016).~~

~~The taxable-equivalent net interest margin was 4.27% for the first nine months~~(representing 7% of ~~2017, up 28 bps~~interest-bearing liabilities versus ~~the first nine months of 2016. The interest rate spread increased 27 bps between the periods, with a favorable increase in the earning asset yield (up 25 bps to 4.69%~~4% for first ~~nine months of 2017),~~quarter 2019) acquired with the Choice acquisition and ~~an improvement~~procured in ~~the cost of funds (down 2 bps to 0.56% for the first nine months of 2017).~~March 2020 under competitive conditions. The contribution from net free funds decreased 2 bps, due mostly to the reduced value in the lower rate environment, though offset partly by the 20% increase in average net free funds (largely from average noninterest-bearing

demand deposits and stockholders equity) between the first quarter periods. As a result, the tax-equivalent net interest margin was 3.94% for first quarter 2020, down 11 bps compared to 4.05% for the comparable 2019 period.

Average interest-earning assets increased ~~by 1 bp, mostly~~to $3.2 billion, up $433 million or 16% over the 2019 comparable period, primarily due to ~~lower costs on~~Choice acquired assets in first quarter 2020 versus none in first quarter 2019. Between the ~~funding side~~three-month periods, average loans increased $405 million or 19% (which includes organic growth and $348 million of Choice loans at acquisition), while all other interest-earning assets combined increased nearly $28 million or 5%. The mix of average interest-earning assets was improved toward higher-yielding assets, at 82% loans, 14% investments and 4% other interest-earning assets (mostly cash) for first quarter 2020, compared to 80%, 15% and 5%, respectively for first quarter 2019.

Tax-equivalent interest income was $37.2 million for first quarter 2020, up $3.8 million or 11% over first quarter 2019, while the balance sheet. Since January 1, 2016, the Federal Reserve raised short-term interest rates by 75 bps to 125 bps as of September 30, 2017 (up 25 bps in each of December 2016, March 2017 and June 2017). These increases have impacted the rate earned on cash and the cost of shorter-term deposits and borrowings, but have not significantly influenced rates further out on the yield curve; and thus, have only minimally impacted new investment yields or new loan pricing. Additionally, while both 2017 and 2016 periods are experiencing favorable income from discount accretion on acquired loans, particularly where such loans pay or resolve at better than their carrying values, such favorable interest flow can be sporadic and will diminish over time.

~~The earning~~related interest-earning asset yield was 4.66%, down 23 bps from the comparable period in 2019. Interest income on loans increased $3.8 million or 13% over first quarter 2019, aided by strong volumes. The 2020 loan yield was 5.19%, down 32 bps from first quarter 2019, largely from the significantly lower rate environment impacting yields on new, renewed and variable rate loans and partly from $0.7 million lower aggregate discount income accretion between the periods. Between the comparable three-month periods, interest income on non-loan earning assets combined was essentially unchanged at $3.4 million, with average volumes up 5%, offsetting impacts from a 11 bps decline in the related yield (to 2.35%) in the lower rate environment.

Average interest-bearing liabilities were $2.2 billion, an increase of $272 million or 14%, primarily due to the timing of the Choice acquisition in November 2019. The mix of average interest-bearing liabilities was 89% core deposits, 7% brokered deposits and 4% other funding, compared to 92%, 4% and 4%, respectively, for first quarter 2019, with the mix changes (especially increased money markets and brokered deposits) mostly influenced ~~largely~~ by the mix of ~~underlying earning assets, particularly carrying~~Choice deposits acquired, and to a lesser extent the procurement of brokered deposits in March 2020 as part of previously discussed liquidity actions.

Interest expense was minimally changed at $5.7 million (up nearly $0.1 million) for first quarter 2020 compared to first quarter 2019, on larger average interest-bearing liabilities volumes (up 14% to $2.2 billion) but at a lower overall cost of funds (down 14 bps to 1.04%). Interest expense on deposits increased $0.2 million or 4% over the first three months of 2019 given 14% higher ~~proportion~~average interest-bearing deposit balances but at a lower cost (down 11 bps to 0.93%). The 2020 cost of ~~loans~~savings, interest-bearing demand, money market accounts and ~~investments (each at higher yields~~core time deposits decreased from the first three months of 2019, by 14 bps, 13 bps, 27 bps and 18 bps, respectively, as product rate changes were made in the ~~2017 period~~lower rate environment, and brokered deposits cost 132 bps more than the ~~2016 period)~~prior first quarter period largely due to higher-costing term brokered funds acquired with the Choice acquisition and procured in March 2020 under competitive conditions as part of previously discussed liquidity actions. Interest expense on other interest-bearing liabilities decreased $0.1 million, on slightly higher average balances (up $8 million) but at a lower ~~proportion of low-earning cash. Loans, investments~~rate (down 105 bps to 3.64%), mostly as variable rate debt repriced and ~~other interest earning assets (mostly low-earning cash) represented 80%, 18% and 2% of average earning assets, respectively,~~maturing advances were replaced in the lower rate environment.

Provision for Credit Losses

The provision for credit losses increased to $3.0 million for the ~~first nine~~three months ~~of 2017, and 78%, 17%, and 5%, respectively,~~ended March 31, 2020, compared to $0.2 million for the ~~comparable 2016 period. Loans yielded 5.26%~~three months ended March 31, 2019, largely due to the unprecedented economic disruptions and ~~5.13%, respectively, for~~uncertainty surrounding the ~~first nine months~~COVID-19 pandemic as described in further detail in the “Overview” section. The ACL-Loans was $26.2 million (1.00% of ~~2017~~loans) at March 31, 2020, compared to $14.0 million (0.54% of loans) at December 31, 2019 and ~~2016, while non-loan earning assets combined yielded 2.32% and 1.95%, respectively, for the periods.~~$13.4 million (0.61% of loans) at March 31, 2019. The ~~13 bps~~ increase in ~~loan yield between~~ the ~~nine-month periods~~ACL-Loans since December 31, 2019 was largely due to the ~~higher aggregate discount accretion on acquired loans between periods, more than offsetting lower underlying loan yields mainly from the acquired loan portfolios and competitive pricing.~~

Average interest-earning assets were $2.29 billion for the first nine months of 2017, $659 million, or 40% higher than the first nine months of 2016, largely attributable to acquired balances as well as strong organic loan growth. The change consisted of a $568$9.3 million increase in average loans (up 45% to $1.8 billion), a $127 million increase in investment securities (up 47% to $397 million) and a $36 million decrease in other interest-earning assets, predominantly low earning cash.

Nicolet’s cost of funds decreased 2 bps to 0.56% for the first nine months of 2017 compared to a year ago. The average cost of interest-bearing deposits (which represented 96% of average interest-bearing liabilities for the nine months ended September 30, 2017 and 2016), was 0.42% for the first nine months of 2017, down 1 bp from the first nine months of 2016, largely benefiting from the lower-costing Baylake deposits acquired, offset partly by the higher-costing First Menasha deposits acquired, an increase in select deposit rates that began in July 2017, and general rate pressures influenced by a 75 bps increase in the federal funds rate since January 1, 2016.

Average interest-bearing liabilities were $1.72 billion for the first nine months of 2017, up $473 million or 38% from the comparable period in 2016, predominantly attributable to acquired balances. Interest-bearing deposits represented 96% of average interest-bearing liabilities for the first nine months of 2017 and 2016, while the mix of average interest-bearing deposits moved from higher costing core CDs to lower costing transaction accounts, improving the overall deposit cost slightly between the nine-month periods. Average brokered deposits were $121 million for the first nine months of 2017, up $92 million or 318% from the comparable period in 2016, with average yields declining from 1.29% to 0.69%. The increase in brokered deposits was partly due to ~~brokered deposits assumed~~the adoption of the current expected credit losses (“CECL”) model and the provision for credit losses in first quarter 2020. See Notes 1 and 6 for additional information on the ~~2017 acquisition. The Company has reduced yields on these brokered deposits by repricing to market rates.~~

~~Provision for Loan Losses~~

new CECL accounting standard.

The provision for loan losses for the nine months ended September 30, 2017 and 2016 was $1.9 million and $1.4 million, respectively, exceeding net charge offs of $1.1 million and $0.2 million, respectively. Asset quality measures have been strong and improving with continued resolutions of problem loans. The ALLL was $12.6 million (0.61% of loans) at September 30, 2017, compared to $11.8 million (0.75% of loans) at December 31, 2016 and $11.5 million (0.74% of loans) at September 30, 2016. The decline in the ratio was a result of recording the acquired loan portfolios at fair value with no carryover of allowance at the time of each merger.

~~The provision for loan~~credit losses is predominantly a function of Nicolet’s methodology and judgment as to qualitative and quantitative factors used to determine the ~~adequacy~~appropriateness of the ~~ALLL.~~ACL-Loans. The ~~adequacy~~appropriateness of the ~~ALLL~~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 factors which could affect ~~potential~~expected credit losses. For additional information regarding asset quality and the ~~ALLL,~~ACL-Loans, see ~~“Balance Sheet Analysis~~“BALANCE SHEET ANALYSIS — Loans,” “— Allowance for ~~Loan and Lease~~Credit Losses - Loans,” and “— ~~Impaired Loans and~~ Nonperforming Assets.”

Noninterest Income

Table 6:4: Noninterest Income

For the three months ended September 30, For the nine months ended September 30,
2017 2016 $ Change % Change 2017 2016 $ Change % Change
(in thousands)
Service charges on deposit accounts $ 1,238 $ 1,051 $ 187 17.8 % $ 3,367 $ 2,514 $ 853 33.9 %
Mortgage income, net 1,774 2,010 (236 ) (11.7 ) 4,022 3,713 309 8.3
Trust services fee income 1,479 1,373 106 7.7 4,431 4,000 431 10.8
Brokerage fee income 1,500 992 508 51.2 4,192 2,090 2,102 100.6
BOLI income 459 318 141 44.3 1,314 880 434 49.3
Rent income 285 285 - - 852 820 32 3.9
Investment advisory fees 92 146 (54 ) (37.0 ) 357 341 16 4.7
Gain on sale or write-down of assets, net 1,305 453 852 188.1 2,071 548 1,523 277.9
Card interchange income 1,224 922 302 32.8 3,378 2,199 1,179 53.6
Other income 808 982 (174 ) (17.7 ) 2,034 1,675 359 21.4
Total noninterest income $ 10,164 $ 8,532 $ 1,632 19.1 % $ 26,018 $ 18,780 $ 7,238 38.5 %
Noninterest income without net gains $ 8,859 $ 8,079 $ 780 9.7 % $ 23,947 $ 18,232 $ 5,715 31.3 %
Components of the gain on sale or write-down of assets, net:
Gain on sale of AFS securities, net $ 1,221 $ 37 $ 1,184 3200.0 % $ 1,220 $ 77 $ 1,143 1,484.4 %
Gain on sale of OREO, net 84 439 (355 ) (80.9 ) 253 582 (329 ) (56.5 )
Write-down of OREO - - - - (126 ) - (126 ) N/M
Gain/(loss) on sale or disposition of assets, net - (23 ) 23 N/M 724 (111 ) 835 752.3
Gain on sale or write-down of assets, net $ 1,305 $ 453 $ 852 188.1 % $ 2,071 $ 548 $ 1,523 277.9 %

~~N/M means not meaningful~~

~~Comparison of the nine months ending September 30, 2017 versus 2016~~



	Three Months Ended March 31,
(in thousands)	2020			2019		$ Change			% Change
Trust services fee income	$	1,579		$	1,468	$	111		8	%
Brokerage fee income	2,322			1,810		512			28
Mortgage income, net	2,327			1,203		1,124			93
Service charges on deposit accounts	1,225			1,170		55			5
Card interchange income	1,562			1,420		142			10
BOLI income	703			459		244			53
Other income	521			1,484		(963		)	(65	)
Noninterest income without net gains	10,239			9,014		1,225			14
Asset gains (losses), net	(654		)	172		(826		)	N/M
Total noninterest income	$	9,585		$	9,186	$	399		4	%

Trust services fee income & Brokerage fee income combined	$	3,901		$	3,278	$	623		19	%

Noninterest income was ~~$26.0~~$9.6 million for first quarter 2020, compared to $9.2 million for the ~~first nine months~~comparable period of ~~2017, compared to $18.8 million for the first nine months~~2019, an increase of 2016, aided largely by the 2016 acquisitions and, to a lesser extent, the 2017 acquisition. Excluding net gains on sale or write-down of assets from both nine-month periods, noninterest income increased $5.7$0.4 million or ~~31.3%~~4%.

~~The 2017 activity in~~ Noninterest income excluding net ~~gain on sale or write-down of assets consisted of a~~asset gains grew $1.2 million ~~gain to record~~or 14% between the ~~fair value of Nicolet’s pre-acquisition interest in First Menasha, a $0.3~~comparable first-quarter periods, predominantly on strong net mortgage income.

Trust services fee income and brokerage fee income combined were $3.9 million, net gain on the sale of OREO, a $0.1 million write-down of OREO properties, and a $0.7 million gain on the sale or disposition of assets (consisting of $0.9 million of gain from the sale two vacated bank branches, a $0.4 million loss from the transfer of bank branches to OREO, and a $0.2 million gain from the sale of an other investment). The 2016 activity included gains ofup $0.6 million ~~from~~or 19% over first quarter 2019, consistent with the ~~sale of OREO properties.~~

~~Service charges on deposit~~growth in accounts were $3.4 million for the first nine months of 2017, up $0.9 million or 33.9% over the first nine months of 2016, resulting from an increased number of accounts mostly attributable to the bank acquisitions and ~~an increase to the fee charged on overdrafts implemented in May 2017.~~

assets under management.

Mortgage income represents net gains received from the sale of residential real estate loans ~~service-released and service-retained~~ into the secondary market, capitalized mortgage servicing rights (“MSRs”), servicing fees ~~offsetting~~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, and to a smaller degree some related income.~~any. Net mortgage income of $2.3 million, increased $1.1 million or 93% between the comparable first quarter periods, predominantly from higher sale gains and capitalized gains combined (up $1.9 million or 178%, commensurate with a 178% increase in volumes sold into the secondary market aided by the current refinance boom) and higher net servicing fees (up $0.1 million or 30% on the larger portfolio serviced for others), partially offset by $0.9 million combined losses related to unfavorable changes in the fair value of the mortgage derivatives under volatile rates and 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 minimally changed at $1.2 million for both first quarter periods, as the majority of deposit growth between first quarter periods was in time deposits which do not incur service charges.

Card interchange income grew $0.1 million or 10% due to higher volume and activity.

BOLI income was up $0.2 million between the comparable first quarter periods, mainly due to BOLI death benefits recorded in first quarter 2020, as well as income on higher average balances from $5 million additional BOLI purchased in mid-2019 and $6 million BOLI acquired with Choice.

Other income of $0.5 million for the three months ended March 31, 2020 was down $1.0 million from the comparable 2019 period, largely due to an $0.8 million negative change in the value of nonqualified deferred compensation plan assets from the significant market decline in March 2020, as well as $0.2 million lower income from our smaller equity interest in a data processing entity after the partial sale in May 2019.

Net asset losses of $0.7 million in first quarter 2020 and net asset gains of $0.2 million in first quarter 2019 were primarily attributable to the impact of market movements on equity securities.

Noninterest Expense

Table 5: Noninterest Expense



	Three Months Ended March 31,
($ in thousands)	2020		2019		Change			% Change
Personnel	$	13,323	$	12,537	$	786		6	%
Occupancy, equipment and office	4,204		3,750		454			12
Business development and marketing	1,359		1,281		78			6
Data processing	2,563		2,355		208			9
Intangibles amortization	993		1,053		(60		)	(6	)
Other expense	1,412		1,783		(371		)	(21	)
Total noninterest expense	$	23,854	$	22,759	$	1,095		5	%
Non-personnel expenses	$	10,531	$	10,222	$	309		3	%
Average full-time equivalent employees	580		549		31			6	%

Noninterest expense was $23.9 million, an increase of $1.1 million or 5% over first quarter 2019. Personnel costs increased $0.8 million, and non-personnel expenses combined increased $0.3 million or ~~8.3% between the comparable nine-month periods due to greater secondary mortgage production and sales aided by a broader geographic footprint and increased net servicing fees on the growing portfolio~~3% over first quarter 2019.

Personnel expense was $13.3 million for first quarter 2020, an increase of ~~mortgage loans serviced for others.~~

~~Trust service fees were up $0.4~~$0.8 million or 10.8% between the nine-month periods due to higher assets under management. Between the nine-month periods, brokerage fees were up significantly, up $2.1 million or 100.6%, attributable to the 2016 financial advisor business acquisition as well as subsequent new growth and pricing.

BOLI income was up $0.4 million or 49.3% between the nine-month periods, commensurate with the growth in average BOLI investments, including additional insurance purchases in 2016. Card interchange fees were up $1.2 million or 53.6% on higher volume and activity. Other noninterest income was $2.0 million, up $0.4 million or 21.4%6% over the comparable period ~~of 2016 with income from equity~~ in ~~UFS, a data processing company acquired in the Baylake merger, up $0.3 million.~~

~~Noninterest Expense~~

~~Table 7: Noninterest Expense~~

For the three months ended September 30, For the nine months ended September 30,
2017 2016 $ Change % Change 2017 2016 $ Change % Change
(in thousands)
Personnel $ 11,488 $ 10,516 $ 972 9.2 % $ 32,404 $ 24,748 $ 7,656 30.9 %
Occupancy, equipment and office 3,559 3,018 541 17.9 9,613 7,324 2,289 31.3
Business development and marketing 1,113 985 128 13.0 3,359 2,353 1,006 42.8
Data processing 2,238 1,831 407 22.2 6,428 4,408 2,020 45.8
FDIC assessments 205 247 (42 ) (17.0 ) 582 629 (47 ) (7.5 )
Intangibles amortization 1,173 1,172 1 0.1 3,514 2,295 1,219 53.1
Other expense 1,086 1,250 (164 ) (13.1 ) 3,598 4,799 (1,201 ) (25.0 )
Total noninterest expense $ 20,862 $ 19,019 $ 1,843 9.7 % $ 59,498 $ 46,556 $ 12,942 27.8 %
Non-personnel expenses $ 9,374 $ 8,503 $ 871 10.2 % $ 27,094 $ 21,808 $ 5,286 24.2 %

~~Comparison of the nine months ending September 30, 2017 versus 2016~~

Total noninterest expense was $59.5 million for the first nine months of 2017 (including $0.5 million attributable to non-recurring, merger-based expenses such as legal and conversion processing costs), compared to $46.6 million for the comparable period in 2016 (including $2.6 million merger-related expenses, of which $1.7 million was a lease termination charge). Excluding the noted merger-based expenses from both periods, noninterest expense increased approximately $15.0 million or 34.2%, primarily attributable to the larger operating base as a result of the 2016 and 2017 acquisitions.

~~Personnel expense was $32.4 million for the first nine months of 2017, up $7.7 million or 30.9% compared to the first nine months of 2016, largely~~2019, partly due to the expanded workforce, with average ~~full time~~full-time equivalent employees up ~~32% (from 393 to 519 for~~6% between the comparable first ~~nine months of 2016 and 2017, respectively). Also contributing to the increase were~~quarter periods. Personnel expense was also impacted by merit increases between the periods, ~~incentives timing,~~higher equity ~~grants in the second quarter of 2017,~~incentives, and higher health and other ~~benefits costs.~~

benefit costs, partially offset by $0.8 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 ~~$9.6~~$4.2 million for ~~the~~ first ~~nine months of 2017,~~quarter 2020, up ~~$2.3~~$0.5 million or ~~31.3%~~12% compared to ~~2016, primarily~~first quarter 2019, with 2020 including higher expense for software and technology to drive operational efficiency and enhance products or services, support the ~~result of~~expanded branch facilities and personnel, and for additional licensing and equipment to expand remote workers in response to the ~~larger operating base and software needs, offset partly by branch closure savings.~~

COVID-19 pandemic.

Business development and marketing expense ~~increased $1.0~~was $1.4 million, up $0.1 million or ~~42.8%~~6%, between the comparable ~~nine-month~~three-month periods, largely due to the ~~expanded operating base~~timing and ~~branding efforts influencing additional~~extent of donations, marketing campaigns, promotions, and media.

Data processing ~~expenses, which are primarily volume-based, rose $2.0~~expense was $2.6 million, up $0.2 million or ~~45.8%~~9% between the ~~nine-month~~comparable first quarter periods, ~~predominantly attributable to~~with volume-based increases in core processing charges partially offset by savings in data communication.

Intangibles amortization decreased $0.1 million between the comparable three-month periods mainly from declining amortization on the aging intangibles of previous acquisitions, ~~higher card processing, and expanded functionalities. Intangible~~with partially offsetting amortization ~~increased $1.2 million, due exclusively to timing of and~~from the ~~addition of~~new intangibles ~~recorded as part~~ of the ~~acquisitions.~~

November 2019 Choice acquisition.

Other ~~noninterest~~ expense ~~decreased $1.2~~was $1.4 million, down $0.4 million or ~~25.0%~~21% between the ~~nine-month~~comparable first quarter periods, due primarily to ~~$2.1~~$0.2 million lower ~~merger-related expenses, partially offset by a $0.9 million increase in all other~~FDIC insurance costs ~~which were largely a function of higher other operating costs associated with size (such as OREO expenses, legal, audit and bank insurance costs)~~ and a ~~$0.4~~$0.3 million ~~increase~~fraud loss contingency recognized in ~~2017 associated with implementing the customer relationship system that began in the fourth~~first quarter ~~of 2016.~~

2019.

Income Taxes

~~For the nine-month periods ending September 30, 2017 and 2016, income~~

Income tax expense was ~~$12.6~~$3.3 million ~~and $6.4~~(effective tax rate of 23.7%) for first quarter 2020, compared to $3.4 million ~~respectively. The increase was primarily attributable to higher pre-tax income between the two periods. Included in 2017 is a~~(effective tax ~~benefit~~rate of $0.2 million related to the exercise of stock options and restricted stock vesting in accordance with ASU 2016-09. U.S. GAAP requires that deferred income taxes be analyzed to determine if a valuation allowance is required. A valuation allowance is required if it is more likely than not that some portion of the deferred tax asset will not be realized. No valuation allowance was determined to be necessary as of September 30, 2017 or December 31, 2016.

~~Comparison of the three months ending September 30, 2017 versus 2016~~

~~Nicolet reported net income of $9.5 million for the three months ended September 30, 2017, up $3.0 million or 47% over $6.5 million~~24.5%) for the comparable period of ~~2016. Net income available to common shareholders~~2019. The lower effective tax rate for ~~the third quarter of 2017~~2020 was ~~$9.5 million, or $0.91 per diluted common share, compared to net income available to common shareholders of $6.2 million, or $0.69 per diluted common share, for the third quarter of 2016.~~

~~Pre-tax earnings of the third quarter of 2016 was negatively impacted by $0.1 million merger-based expenses compared to no merger-based expense in the third quarter of 2017.~~

Net interest income in the consolidated statements of income (which excludes any taxable equivalent adjustment) was $26.4 million in the third quarter of 2017 versus $20.9 million in the third quarter of 2016, including $0.4 million higher aggregate discount income between the periods. Taxable equivalent adjustments (adjustments to bring tax-exempt interest to a level that would yield the same after-tax income had that been subject to a 35% tax rate) were $0.6 million in each of the three months ended September 30, 2017 and 2016, resulting in taxable equivalent net interest income of $27.0 million and $21.5 million, respectively. Taxable equivalent net interest income for third quarter 2017 was up $5.5 million or 26% versus third quarter 2016, with $6.0 million of the increase due to net favorable volume variances (predominately due to the ~~First Menasha~~favorable tax treatment of the BOLI death benefit proceeds and higher tax benefit on stock-based compensation.

BALANCE SHEET ANALYSIS

At March 31, 2020, assets ~~included~~were $3.7 billion, an increase of $155 million (4%) from December 31, 2019. The increase from year-end 2019 was largely due to liquidity actions in ~~2017 but not in 2016),~~March, with cash and ~~$0.5~~cash equivalents increasing $60 million and securities AFS up $63 million. Period end loans of $2.6 billion at March 31, 2020, increased $34 million (5% annualized) from December 31, 2019. Total deposits were $3.0 billion at March 31, 2020, an increase of a $69 million from year-end 2019, with brokered deposits up $121 million, while customer deposits (core) were lower by $52 million consistent with customary seasonal trends. Borrowings increased $90 million with a combination of short-term and long-term FHLB advances. Total stockholders’ equity was $511 million, a decrease of $5 million from December 31, 2019, mostly due to the adoption of CECL, which negatively impacted equity by $6 million, with earnings and net ~~interest income from net unfavorable rate variances (especially from higher costing deposits).~~

~~The earning asset yield was 4.72%~~fair value investment changes partially offset by stock repurchases. See also Notes 1, “Basis of Presentation” and 6, “Loans, Allowance for ~~third quarter 2017, 15 bps higher than third quarter 2016,~~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 to March 31, 2019, assets were $3.7 billion, up $691 million or 23%. Loans increased $418 million (19%) and deposits increased $485 million (19%) over March 31, 2019, both mainly due to ~~a higher mix~~the acquisition of Choice in November 2019, which added $348 million in loans and $289 million of deposits at acquisition. Hence, organic growth year-over-year was 3% for loans (reasonable to the growth of our markets) and 7% for deposits (which included the March 2020 liquidity actions through brokered deposits). Stockholders’ equity increased $112 million from March 31, 2019, primarily due to common stock issued in the November 2019 Choice acquisition of $79.8 million, as ~~a percent of earning assets. Loans earned 5.29%~~well as net income and represented 81% of average earning assets for third quarter 2017, compared to 5.32% and 78%, respectively, for third quarter 2016. The 3 bps decrease in loan yield between the three-month periods was negatively impacted by the underlying rate pressure on loan yields from competition and the flatter yield curve environment,net fair value investment changes, partially offset by ~~higher aggregate discount accretion~~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. ~~Non-loan earning~~For additional information regarding the allowance for credit losses and nonperforming assets ~~which earn less than loan assets represented 19% of average earning assets~~see also “BALANCE SHEET ANALYSIS – Allowance for ~~third quarter 2017 (including higher low-earning cash)~~Credit Losses - Loans” and ~~earned 2.24%, versus 22% of earning assets yielding 2.03% for third quarter 2016.~~

The cost of funds was 0.65% for third quarter 2017, 15 bps higher than third quarter 2016, driven by an increase in the cost of deposits (up 16 bps to 0.53% for third quarter 2017), mostly from higher-costing First Menasha deposits acquired and an increase in select deposit rates that began in July 2017. The cost of other interest-bearing liabilities decreased 131 bps to 4.04% between the third quarter periods, mostly due to a higher proportion of lower-cost, shorter term funding in the mix.

Noninterest income was $10.2 million for third quarter 2017, up $1.6 million over the third quarter 2016. Noninterest income without net gains was up $0.8 million or 10%, with service charges on deposits up $0.2 million (given the larger deposit base), and trust and brokerage fees up $0.6 million combined (mostly attributable to the 2016 financial advisor business acquisition and market improvements). Card interchange income was up $0.3 million on greater activity. Other income decreased $0.2 million between the third quarter periods, although there was an increase in UFS, Inc. income of $0.1 million. Net gain on sale or write-down of assets increased by $0.9 million between the third quarter periods, mostly due to a $1.2 million gain to record the fair value of Nicolet’s pre-acquisition interest in First Menasha in the third quarter of 2017.

Noninterest expense was $20.9 million for the third quarter of 2017, up $1.8 million or 9.7% from third quarter 2016. There were no non-recurring merger-based expenses in the third quarter 2017 compared to $0.1 million in the third quarter of 2016. Excluding the noted merger-based expenses, noninterest expense increased approximately $1.9 million or 10.2%. Salaries and employee benefits for the third quarter of 2017 were $11.5 million, $1.0 million or 9.2% higher than the third quarter of 2016, due to merit increases, higher equity award costs, and an increase in average full time equivalent employees attributable to the 2017 acquisition. Occupancy, equipment and office expense was $0.6 million higher due to the larger operating base and software needs. Data processing was $0.4 million higher than third quarter 2016 from increased accounts, higher card processing costs and expanded functionalities.

The provision for loan losses was $1.0 million and $0.5 million for third quarter 2017 and 2016, respectively. Net charge-offs for the quarter ending September 30, 2017 were $1.1 million (due to the charge off of a large commercial loan) compared to a net recovery of $0.1 million for the third quarter of 2016. At September 30, 2017, the ALLL was $12.6 million (or 0.61% of total loans) compared to $11.5 million (or 0.74% of total loans) at September 30, 2016. The decline in the ratio was a result of recording the First Menasha loan portfolio at fair value with no carryover of their allowance at the time of the merger.

~~Income tax expense was $5.1 million and $3.4 million for the third quarters of 2017 and 2016, respectively. The effective tax rates were 34.9% for third quarter 2017 and 34.5% for third quarter 2016.~~

~~BALANCE~~“BALANCE SHEET ANALYSIS

~~Loans~~

– Nonperforming Assets.”

Nicolet services a diverse customer base throughout ~~Northeast~~northeastern and ~~Central~~central Wisconsin and in Menominee, Michigan including the following industries: manufacturing, agriculture, wholesaling, retail, service, and businesses supporting, among others, the general building and paper industries. It continues to concentrate its efforts inMichigan. The Company concentrates on originating loans in its local markets and assisting its current loan customers. It actively utilizes government loan programs such as those provided by the U.S. Small Business Administration to help customers weather current economic conditions and position their businesses for the future.

Nicolet’s primary lending function is to make 1) commercial loans, consisting of commercial and industrial business loans, agricultural (“AG”) production, and owner-occupied commercial real estate (“CRE”) loans; 2) CRE loans, consisting of commercial investment real estate loans, AG real estate, and construction and land development loans; 3) residential real estate loans, including residential first mortgages, residential junior mortgages (such as home equity loans and lines), and residential construction loans; and 4) retail and other loans. Using these four broad groups the mix of loans at September 30, 2017 was 53% commercial, 22% CRE loans, 24% residential real estate, and 1% retail and other loans; and grouped further the loan mix was 75% commercial-based and 25% retail-based.

Total loans were $2.1 billion at September 30, 2017 compared to $1.6 billion at December 31, 2016. Compared to September 30, 2016, loans grew $497 million or 32%, primarily as a result of the $351 million loans added from First Menasha at acquisition in April 2017 and also through strong organic growth. On average, loans were $1.8 billion and $1.3 billion for the first nine months of 2017 and 2016, respectively, up 45%, largely attributable to the timing of inclusion of acquired loans. At the time of the merger, the acquired First Menasha loan portfolio was somewhat similar to Nicolet’s pre-merger loan mix, with the most notable differences being a higher mix in CRE investment and a lower mix in commercial and industrial loans. The majority of organic growth experienced in the first nine months of 2017 has been in commercial and industrial loans.

~~Table 8: Period End Loan Composition~~

September 30, 2017 December 31, 2016 September 30, 2016
Amount % of
Total Amount % of
Total Amount % of
Total
Commercial & industrial $ 625,729 30.5 % $ 428,270 27.3 % $ 423,790 27.3 %
Owner-occupied CRE 428,054 20.9 360,227 23.0 362,554 23.3
AG production 36,352 1.8 34,767 2.2 34,077 2.2
AG real estate 48,443 2.4 45,234 2.9 45,671 2.9
CRE investment 303,448 14.8 195,879 12.5 197,884 12.7
Construction & land development 87,649 4.3 74,988 4.8 68,161 4.4
Residential construction 33,163 1.6 23,392 1.5 27,331 1.8
Residential first mortgage 363,116 17.7 300,304 19.1 284,653 18.3
Residential junior mortgage 102,654 5.0 91,331 5.8 95,901 6.2
Retail & other 22,514 1.0 14,515 0.9 14,102 0.9
Total loans $ 2,051,122 100.0 $ 1,568,907 100.0 % $ 1,554,124 100.0 %

Broadly, loans were 75% commercial-based and 25% retail-based at September 30, 2017 compared to 73% commercial-based and 27% retail-based at December 31, 2016. 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 as well as the commercial balance per borrower is typically larger than that for retail-based loans, implying higher potential losses on an individual customer basis.

Commercial and industrial loans consist primarily of commercial loans to small businesses within a diverse range of industries and, to a lesser degree, to municipalities. The credit risk related to commercial and industrial 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. Commercial and industrial loans increased $197 million to $626 million since year end 2016, largely attributable to acquired First Menasha loans and strong organic growth. Commercial and industrial loans continue to be the largest segment of Nicolet’s portfolio and increased to 30.5% of the total portfolio at September 30, 2017, up from 27.3% at December 31, 2016.

Owner-occupied CRE loans decreased to 20.9% of loans at September 30, 2017 from 23.0% at December 31, 2016. Owner-occupied CRE loans primarily consist of loans within a diverse range of industries secured by business real estate that is occupied by borrowers (i.e. who operate their businesses out of the underlying collateral) and who may also have commercial and industrial loans. The credit risk related to owner-occupied CRE loans is largely influenced by general economic conditions and the resulting impact on a borrower’s operations, or on the value of underlying collateral.

AG production and AG real estate loans combined consist of loans secured by farmland and related farming operations. The credit risk related to agricultural loans is largely influenced by the prices farmers can get for their production and/or the underlying value of the farmland. In total, agricultural loans increased $5 million since year end 2016, representing 4.2% of total loans at September 30, 2017, versus 5.1% at December 31, 2016.

The CRE investment loan classification primarily includes commercial-based mortgage loans that are secured by non-owner occupied, nonfarm/nonresidential real estate properties, and multi-family residential properties. Lending in this segment has been focused on loans that are secured by commercial income-producing properties as opposed to speculative real estate development. The balance of these loans increased $108 million since year end 2016, largely attributable to the acquired First Menasha loan mix, representing 14.8% of total loans at September 30, 2017 compared to 12.5% of total loans at December 31, 2016.

Loans in the construction and land development portfolio provide financing for the development of commercial income properties, multi-family residential development, and land designated for future development. Nicolet controls the credit risk on these types of loans by making loans in familiar markets, reviewing the merits of individual projects, controlling loan structure, and monitoring the progress of projects through the analysis of construction advances. Credit risk is managed by employing sound underwriting guidelines, lending primarily to borrowers in local markets, periodically evaluating the underlying collateral, and formally reviewing the borrower’s financial soundness and relationships on an ongoing basis. Lending on originated loans in this category has remained relatively steady as a percent of loans. Since December 31, 2016, balances have increased $13 million, and this category represented 4.3% and 4.8% of total loans at September 30, 2017 and year-end 2016, respectively.

On a combined basis, Nicolet’s residential real estate loans represent 24.3% of total loans at September 30, 2017, down from 26.4% at December 31, 2016. Residential first mortgage loans include conventional first-lien home mortgages. Residential junior mortgage real estate loans consist mainly of home equity lines and term loans secured by junior mortgage liens. Across the industry, home equities generally involve loans that are in second or junior lien positions, but Nicolet has secured many such loans in a first lien position, further mitigating the portfolio risks. Nicolet has not experienced significant losses in its residential real estate loans; however, if market values in the residential real estate markets decline, particularly in Nicolet’s market area, rising loan-to-value ratios could cause an increase in the provision for loan losses. As part of its management of originating residential mortgage loans, the vast majority of Nicolet’s long-term, fixed-rate residential real estate mortgage loans are sold in the secondary market without retaining the servicing rights. Mortgage loans retained in the portfolio are typically of high quality and have historically had low net charge off rates.

Loans in the retail and other classification represent less than 1% of the total loan portfolio, and include predominantly short-term and other personal installment loans not secured by real estate. Credit risk is primarily controlled by reviewing the creditworthiness of the borrowers, monitoring payment histories, and taking appropriate collateral and/or guaranty positions. The loan balances in this portfolio increased $8 million from December 31, 2016 to September 30, 2017.

Factors that are important to managing overall credit quality are sound loan underwriting and administration, systematic monitoring of existing loans and commitments, effective loan review on an ongoing basis, early problem loan identification and remedial action to minimize losses, an adequate ALLL, and sound nonaccrual and charge-off policies. An active credit risk management process is used for commercial loans to further ensure that sound and consistent credit decisions are made. The credit management process is regularly reviewed and the process has been modified over the past several years to further strengthen the controls.

The loan portfolio is widely diversified by types of borrowers, industry groups, and market areas. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to multiple numbers of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At ~~September 30, 2017,~~March 31, 2020, no significant industry concentrations existed in Nicolet’s portfolio in excess of ~~25%~~10% of total loans.

With the emergence of the COVID-19 pandemic and the significance of stay-at-home orders in March 2020 particularly on restaurants, retail, arts, recreation, tourism and other hospitality businesses, Nicolet determined its collective concentration in these businesses 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 Coronavirus Aid, Relief, and Economic Security (“CARES”) Act passed in late March. This collective concentration was part of the determination for a larger first quarter 2020 provision. It is unknown yet how much of the Paycheck Protection Program may alleviate potential loss concerns across business operators in Nicolet’s loan portfolio who participate in the PPP.

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 ~~also developed guidelines~~been modified over the past several years to ~~manage~~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



	March 31, 2020				December 31, 2019				March 31, 2019
(in thousands)	Amount		% of Total		Amount		% of Total		Amount		% of Total
Commercial & industrial	$	831,257	32	%	$	806,189	31	%	$	711,505	32	%
Owner-occupied CRE	499,705		19		496,372		19		439,440		20
Agricultural	95,991		3		95,450		4		89,078		4
Commercial	1,426,953		54		1,398,011		54		1,240,023		56
CRE investment	448,758		17		443,218		17		342,343		16
Construction & land development	96,055		4		92,970		4		82,308		4
Commercial real estate	544,813		21		536,188		21		424,651		20
Commercial-based loans	1,971,766		75		1,934,199		75		1,664,674		76
Residential construction	52,945		2		54,403		2		34,425		2
Residential first mortgage	432,126		17		432,167		17		350,661		16
Residential junior mortgage	121,105		5		122,771		5		113,628		5
Residential real estate	606,176		24		609,341		24		498,714		23
Retail & other	29,482		1		30,211		1		26,300		1
Retail-based loans	635,658		25		639,552		25		525,014		24
Total loans	$	2,607,424	100	%	$	2,573,751	100	%	$	2,189,688	100	%

Broadly, the loan portfolio at March 31, 2020, was 75% commercial-based and 25% 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.

Commercial-based loans of $2.0 billion increased $38 million or 2% since December 31, 2019, primarily due to growth in commercial and industrial loans. Commercial and industrial loans continue to be the largest segment of Nicolet’s portfolio and represented 32% of the total portfolio at March 31, 2020.

Residential real estate loans were relatively unchanged from year-end 2019, and represented 24% of total loans at March 31, 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 ~~exposure to various types~~management of ~~concentration risks.~~

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 ~~Loan and Lease~~Credit Losses

- Loans

In addition to the discussion that follows, see also Note 1, “Basis of ~~Presentation,”~~Presentation” and Note 6, “Loans, Allowance for ~~Loan~~Credit Losses - Loans, and Credit Quality,” in the ~~notes~~Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures and accounting policy on the ~~unaudited consolidated financial statements and the “Critical Accounting Policies” within management’s discussion and analysis.~~

allowance for credit losses.

Credit risks within the loan portfolio are inherently different for each loan type as ~~described~~summarized under ~~“Balance Sheet Analysis-Loans.~~“BALANCE SHEET ANALYSIS — Loans.” A discussion of the loan portfolio credit risk can be found in the “Loans” 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. Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and ~~on-going~~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 ~~ALLL is established through a provision for loan losses charged to expense to appropriately provide for potential~~ACL-Loans represents management’s estimate of expected credit losses in the existing loan portfolio. Loans are charged off against the ALLL when management believes that the collection of principal is unlikely. The level of the ALLL represents management’s estimate of an amount of reserves that provides for estimated probable credit losses in theCompany’s loan portfolio at the balance sheet date. To assess the ~~ALLL,~~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 ~~and forecasted~~ economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect ~~potential~~expected credit losses. ~~Nicolet’s methodology reflects guidance by regulatory agencies to all financial institutions.~~

Assessing these numerous factors involves significant judgment; therefore, management considers the ACL-Loans a critical accounting policy.

Management allocates the ~~ALLL~~ACL-Loans by pools of risk within each loan portfolio segment. The allocation methodology consists of the following components. First, a specific reserve ~~for the estimated shortfall~~ is established for individually evaluated credit-deteriorated loans, which management defines as nonaccrual credit relationships over $250,000, all loans determined to be ~~impaired.~~troubled debt restructurings (“restructured loans”), plus other loans with evidence of credit deterioration. The specific reserve in the ~~ALLL~~ACL-Loans for these credit deteriorated loans is equal to the aggregate collateral or discounted cash flow shortfall calculated from the impairment analyses. Loans measured for impairment include nonaccrual loans, non-performing troubled debt-restructurings (“restructured loans”), or other loans determined to be impaired by management.shortfall. Second, ~~Nicolet’s~~ management allocates ~~ALLL~~the ACL-Loans with historical loss rates by loan segment. The loss factors are measured on a quarterly basis and applied ~~in the methodology are periodically re-evaluated~~to each loan segment based on current loan balances and adjusted to reflect changes in historical loss levels on an annual basis. The look-back period on which the average historical loss rates are determined is a rolling 20-quarter (5 year) average. Lastly,projected for their expected remaining life. Next, management allocates ~~ALLL to the remaining loan portfolio~~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. ~~Management conducts~~Lastly, management considers reasonable and supportable forecasts to assess the collectability of future cash flows. As reflected in Note 6, changes to the March 31, 2020 allocation of the ACL-Loans since year-end 2019, were primarily increases to commercial and industrial loans (to 40% from 39%) and CRE investment (to 16% from 11%), and a decrease to owner-occupied CRE (to 17% from 22%), reflective of the higher general risk changes on a life-of-loan perspective.

With the emergence of the COVID-19 pandemic and the significance of stay-at-home orders in March 2020 particularly on restaurants, retail, arts, recreation, tourism and other hospitality businesses, Nicolet determined its ~~allocation methodology on both the originated loans and on the acquired loans separately~~collective concentration in these businesses to ~~account for differences, such as different loss histories and qualitative factors, between the two segments.~~

~~Management performs ongoing intensive analyses~~be approximately 15% of its total loan portfolio, ~~to allow for early identification~~and began proactive discussions and/or temporary loan modifications (such as interest-only or payment deferrals) with many of ~~customers experiencing financial difficulties, maintains prudent underwriting standards, understands~~these even before the ~~economy~~CARES Act passed in ~~its markets, and considers the trend of deterioration in loan quality in establishing the level~~late March. This collective concentration was part of the ~~ALLL.~~

~~Consolidated net income and stockholders’ equity could be affected if management’s estimate of~~determination for a larger first quarter 2020 provision. It is unknown yet how much the ~~ALLL necessary to cover expected losses is~~ subsequently ~~materially different, requiring a change~~passed Paycheck Protection Program may alleviate potential loss concerns across business operators in Nicolet's loan portfolio who participate in the ~~level~~PPP.

At March 31, 2020, the ACL-Loans was $26.2 million (representing 1.00% of provision for loan losses to be recorded. While management uses currently available information to recognize losses on loans, future adjustments to the ALLL may be necessary based on newly received appraisals, updated commercial customer financial statements, rapidly deteriorating customer cash flow, and changes in economic conditions that affect Nicolet’s customers. As an integral part of their examination process, federal regulatory agencies also review the ALLL. Such agencies may require additions to the ALLL or may require that certain loan balances be charged-off or downgraded into criticized loan categories when their credit evaluations differ from those of management based on their judgments about information available to them at the time of their examination.

~~At September 30, 2017, the ALLL was $12.6 million~~period end loans) compared to ~~$11.8~~$14.0 million at December 31, 2016. The nine-month increase was a result of a 2017 provision of $1.9 million exceeding 2017 net charge offs of $1.1 million. Comparatively, the provision for loan losses in the first nine months of 2016 was $1.4 million2019 and net charge offs were $0.2 million. Annualized net charge offs as a percent of average loans were 0.08% in the first nine months of 2017 compared to 0.02% for the first nine months of 2016 and 0.02% for the entire 2016 year. Loans charged off are subject to continuous review, and specific efforts are taken to achieve maximum recovery of principal, accrued interest, and related expenses. The level of the provision for loan losses is directly correlated to the assessment of the adequacy of the allowance, including, but not limited to, consideration of the amount of net charge-offs, loan growth, levels of nonperforming loans, and trends in the risk profile of the loan portfolio.

The ratio of the ALLL as a percentage of period-end loans was 0.61% at September 30, 2017 (with a 0.89% ratio on originated loans and a 0.25% ratio on acquired loans) compared to 0.75% at December 31, 2016 (with a 1.05% ratio on originated loans and a 0.36% ratio on acquired loans). The ALLL to loans ratio is impacted by the accounting treatment of Nicolet’s 2013, 2016 and 2017 bank acquisitions, which combined at their acquisition dates added no ALLL to the numerator and $1.3 billion of loans into the denominator. Acquired loans were $885 million and $667$13.4 million at ~~September 30, 2017 and December~~March 31, ~~2016, respectively, representing 43% of total loans at both September 30, 2017 and December 31, 2016.~~2019. The ~~change in the ALLL to loans ratio was driven by the~~ increase in the ~~denominator~~ACL-Loans was largely due to the $9.3 million impact from ~~acquired loans~~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 higher provision for credit losses given the unprecedented economic disruptions and uncertainty surrounding the COVID-19 pandemic that emerged in ~~2016 and 2017.~~

March 2020 as described in further detail in the “Overview” section. The ~~largest portions~~components of the ALLL were allocated to commercial & industrial (“C&I”) loans and owner-occupied CRE loans combined, representing 60.9% and 57.5% of the ALLL at September 30, 2017 and December 31, 2016, respectively. Most notably since December 31, 2016, the increased allocations to C&I (from 33.2% to 39.9%), and the decreased allocation in owner-occupied CRE investment (from 24.3% to 21.0%) was largely the result of changes to allowance allocations in conjunction with changes in past due and loss histories and balance mix changes. The large $1.0 million charge-off in the third quarter of 2017 was an originated C&I loan.

~~Table 9: Loan Loss Experience~~

For the nine months ended Year ended
(in thousands) September 30,
2017 September 30,
2016 December 31,
2016
Allowance for loan losses (ALLL):
Balance at beginning of period $ 11,820 $ 10,307 $ 10,307
Provision for loan losses 1,875 1,350 1,800
Charge-offs (1,156 ) 432 (584 )
Recoveries 71 (256 ) 297
Net charge-offs (1,085 ) 176 (287 )
Balance at end of period $ 12,610 $ 11,481 $ 11,820

Net loan charge-offs (recoveries):
Commercial & industrial $ 1,077 $ 262 $ 253
Owner-occupied CRE (29 ) 58 103
Agricultural production - - -
Agricultural real estate - - -
CRE investment (1 ) (221 ) (221 )
Construction & land development 13 - -
Residential construction - - -
Residential first mortgage 2 (5 ) 49
Residential junior mortgage (2 ) 46 49
Retail & other 25 36 54
Total net loans charged-off $ 1,085 $ 176 $ 287

ALLL to total loans 0.61 % 0.74 % 0.75 %
ALLL to net charge-offs 1,162.2 % 6,523.3 % 4,118.5 %
Net charge-offs to average loans, annualized 0.08 % 0.02 % 0.02 %

~~The allocation of the ALLL is based on Nicolet’s estimate of loss exposure by category of loans and is shown~~ACL-Loans are detailed further in Table ~~10 for September 30, 2017 and December 31, 2016.~~

7 below.

Table ~~10: Allocation of the~~7: Allowance for ~~Loan~~Credit Losses

(in thousands) September 30, 2017 % of Loan
Type to
Total
Loans December 31, 2016 % of Loan
Type to
Total
Loans
ALLL allocation
Commercial & industrial $ 5,025 30.5 % $ 3,919 27.3 %
Owner-occupied CRE 2,643 20.9 2,867 23.0
Agricultural production 166 1.8 150 2.2
Agricultural real estate 268 2.4 285 2.9
CRE investment 1,257 14.8 1,124 12.5
Construction & land development 742 4.3 774 4.8
Residential construction 167 1.6 304 1.5
Residential first mortgage 1,658 17.7 1,784 19.1
Residential junior mortgage 467 5.0 461 5.8
Retail & other 217 1.0 152 0.9
Total ALLL $ 12,610 100.0 % $ 11,820 100.0 %

ALLL category as a percent of total ALLL:
Commercial & industrial 39.9 % 33.2 %
Owner-occupied CRE 21.0 24.3
Agricultural production 1.3 1.3
Agricultural real estate 2.1 2.4
CRE investment 10.0 9.5
Construction & land development 5.9 6.5
Residential construction 1.3 2.6
Residential first mortgage 13.1 15.1
Residential junior mortgage 3.7 3.9
Retail & other 1.7 1.2
Total ALLL 100.0 % 100.0 %

~~Impaired~~ - Loans ~~and~~



	Three Months Ended						Year Ended
(in thousands)	March 31, 2020			March 31, 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	3,000			200			1,200
Charge-offs	(93		)	(10		)	(927		)
Recoveries	38			27			546
Net (charge-offs) recoveries	(55		)	17			(381		)
Balance at end of period	$	26,202		$	13,370		$	13,972
Net loan (charge-offs) recoveries:
Commercial & industrial	$	30		$	16		$	261
Owner-occupied CRE	—			1			(91		)
Agricultural	—			—			—
CRE investment	(20		)	—			—
Construction & land development	—			—			—
Residential construction	—			—			(226		)
Residential first mortgage	1			—			14
Residential junior mortgage	3			2			(41		)
Retail & other	(69		)	(2		)	(298		)
Total net (charge-offs) recoveries	$	(55	)	$	17		$	(381	)
Ratios:
ACL-Loans to total loans	1.00		%	0.61		%	0.54		%
Net charge-offs to average loans, annualized	0.01		%	—		%	0.02		%

Nonperforming Assets

As part of its overall credit risk management process, ~~Nicolet’s~~ management ~~has been~~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. 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 regarding the loans and nonperforming assets see also “BALANCE SHEET ANALYSIS – Loans” and “BALANCE SHEET ANALYSIS – Nonperforming Assets.”

Nonperforming loans are considered one indicator of potential future loan losses. Nonperforming loans are defined as nonaccrual loans ~~including those defined as impaired under current accounting standards,~~ and loans 90 days or more past due but still accruing interest. Loans are generally placed on nonaccrual status when contractually past due 90 days or more as to interest or principal payments. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on loans, it is management’s practice to place such loans on nonaccrual status immediately. Nonaccrual loans were ~~$14.4~~$14.8 million ~~(consisting of $1.0 million originated loans and $13.4 million acquired loans)~~ at ~~September 30, 2017~~March 31, 2020 compared to ~~$20.3~~$14.1 million at December 31, ~~2016 (consisting of $0.3 million originated loans and $20.0 million acquired loans).~~2019. Nonperforming assets (which include nonperforming loans and other real estate owned “OREO”) were ~~$15.7~~$15.8 million at ~~September 30, 2017~~March 31, 2020 compared to ~~$22.3~~$15.1 million at December 31, ~~2016.~~2019. OREO was ~~$1.3~~$1.0 million at ~~September 30, 2017, down from $2.1 million at year end 2016, the majority of which is closed bank branch property.~~both March 31, 2020 and December 31, 2019. Nonperforming assets as a percent of total assets ~~were 0.55%~~was unchanged at ~~September 30, 2017 compared to 0.97% at~~0.42% for both March 31, 2020 and December 31, ~~2016.~~

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 ~~adequacy~~appropriate level of the ~~ALLL.~~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 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 ~~$14.1~~$34.6 million ~~(0.7%~~(1.3% of loans) and ~~$12.6~~$22.6 million ~~(0.8%~~(0.9% of loans) at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~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 ~~11:~~8: Nonperforming Assets

(in thousands) September 30,
2017 December 31,
2016 September 30,
2016
Nonaccrual loans:
Commercial & industrial $ 5,078 $ 358 $ 680
Owner-occupied CRE 1,276 2,894 2,986
AG production 2 9 23
AG real estate 186 208 208
CRE investment 4,537 12,317 13,216
Construction & land development 723 1,193 1,220
Residential construction 80 260 287
Residential first mortgage 2,301 2,990 2,656
Residential junior mortgage 239 56 212
Retail & other — — —
Total nonaccrual loans 14,422 20,285 21,488
Accruing loans past due 90 days or more — — —
Total nonperforming loans $ 14,422 $ 20,285 $ 21,488
OREO:
Commercial & industrial $ — $ 64 $ 64
Owner-occupied CRE 25 304 278
CRE investment 160 — —
Construction & land development 90 623 651
Residential real estate owned — 29 109
Bank property real estate owned 1,039 1,039 1,087
Total OREO 1,314 2,059 2,189
Total nonperforming assets $ 15,736 $ 22,344 $ 23,677
Total restructured loans accruing $ — $ — $ —
Ratios
Nonperforming loans to total loans 0.70 % 1.29 % 1.38 %
Nonperforming assets to total loans plus OREO 0.77 % 1.42 % 1.52 %
Nonperforming assets to total assets 0.55 % 0.97 % 1.04 %
ALLL to nonperforming loans 87.4 % 58.3 % 53.4 %
ALLL to total loans 0.61 % 0.75 % 0.74 %

~~Table 12: Investment Securities Portfolio~~

September 30, 2017 December 31, 2016
(in thousands) Amortized
Cost Fair
Value %of
Fair
Value Amortized
Cost Fair
Value %of
Fair
Value
U.S. government sponsored enterprises $ 26,394 $ 26,272 6 % $ 1,981 $ 1,963 1 %
State, county and municipals 189,226 188,716 46 191,721 187,243 51
Mortgage-backed securities 159,113 157,936 39 161,309 159,129 44
Corporate debt securities 32,203 32,744 8 12,117 12,169 3
Equity securities 1,288 2,549 1 2,631 4,783 1
Total $ 408,224 $ 408,217 100 % $ 369,759 $ 365,287 100 %

At September 30, 2017 the total carrying value of investment securities was $408.2 million, up from $365.3 million at December 31, 2016, and represented 14.3% and 15.9% of total assets at September 30, 2017 and December 31, 2016, respectively. The increase since year end 2016 was largely attributable to investment securities added from First Menasha at acquisition in April 2017 as well as purchase activity. At September 30, 2017, the securities portfolio did not contain securities of any single issuer that were payable from and secured by the same source of revenue or taxing authority where the aggregate carrying value of such securities exceeded 10% of stockholders’ equity.

In addition to securities available for sale, Nicolet has other investments, consisting of capital stock in the Federal Reserve and the FHLB (required as members of the Federal Reserve Bank System and the Federal Home Loan Bank System), and the Federal Agricultural Mortgage Corporation, as well as equity investments in other privately-traded companies. The FHLB and Federal Reserve investments are “restricted” in that they can only be sold back to the respective institutions or another member institution at par, and are thus not liquid, have no ready market or quoted market value, and are carried at cost. The remaining investments have no quoted market prices, and are carried at cost less other than temporary impairment (“OTTI”) charges, if any. Nicolet’s management evaluates all these other investments periodically for impairment, considering financial condition and other available relevant information. Other investments totaled $14.9 million at September 30, 2017 and $17.5 million at December 31, 2016, with the decline primarily attributable to redeemed FHLB stock. One equity investment had an OTTI charge of $0.5 million recorded in the fourth quarter of 2016. There were no OTTI charges recorded in 2017.

~~Table 13: Investment Securities Portfolio Maturity Distribution~~

As of September 30, 2017
Within
One Year After One
but Within
Five Years After Five
but Within
Ten Years After
Ten Years Mortgage-
related
and Equity
Securities Total
Amortized
Cost Total
Fair
Value
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount
(in thousands)
U.S. government sponsored enterprises $ — — % $ 10,406 0.1 % $ 15,988 0.1 % $ — — % $ — — % $ 26,394 0.3 % $ 26,272
State and county municipals (1) 13,262 2.5 74,612 2.8 100,339 2.5 1,013 2.9 — — 189,226 2.6 188,716
Mortgage-backed securities — — — — — — — — 159,113 2.9 159,113 3.0 157,936
Corporate debt securities — — 11,080 4.2 14,150 2.9 6,973 5.8 — — 32,203 3.9 32,744
Equity securities — — — — — — — — 1,288 2.4 1,288 2.4 2,549

Total amortized cost $ 13,262 2.5 % $ 96,098 2.7 % $ 130,477 2.2 % $ 7,986 5.4 % $ 160,401 2.9 % $ 408,224 2.7 % $ 408,217
Total fair value and carrying value $ 13,261 $ 96,410 $ 129,769 $ 8,292 $ 160,485 $ 408,217

As a percent of total fair value 3 % 24 % 32 % 2 % 39 % 100 %

~~(1)~~

~~The yield on tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 35% adjusted for the disallowance of interest expense.~~



(in thousands)	March 31, 2020			December 31, 2019			March 31, 2019
Nonperforming loans:
Commercial & industrial	$	6,050		$	6,249		$	3,871
Owner-occupied CRE	3,837			3,311			2,784
Agricultural	1,801			1,898			174
Commercial	11,688			11,458			6,829
CRE investment	1,029			1,073			333
Construction & land development	533			20			80
Commercial real estate	1,562			1,093			413
Commercial-based loans	13,250			12,551			7,242
Residential construction	—			—			333
Residential first mortgage	953			1,090			899
Residential junior mortgage	566			480			250
Residential real estate	1,519			1,570			1,482
Retail & other	—			1			8
Retail-based loans	1,519			1,571			1,490
Total nonaccrual loans	14,769			14,122			8,732
Accruing loans past due 90 days or more	—			—			—
Total nonperforming loans	$	14,769		$	14,122		$	8,732
OREO:
Commercial real estate owned	$	—		$	—		$	420
Bank property real estate owned	1,000			1,000			—
Total OREO	1,000			1,000			420
Total nonperforming assets	$	15,769		$	15,122		$	9,152
Performing troubled debt restructurings	$	—		$	452		$	466
Ratios:
Nonperforming loans to total loans	0.57		%	0.55		%	0.40		%
Nonperforming assets to total loans plus OREO	0.60		%	0.59		%	0.42		%
Nonperforming assets to total assets	0.42		%	0.42		%	0.30		%
ACL-Loans to nonperforming loans	177.4		%	98.9		%	153.1		%

Deposits

Deposits represent Nicolet’s largest source of funds. ~~Nicolet competes~~The deposit composition is presented in Table 9 below.

Total deposits were $3.0 billion at March 31, 2020, $69 million or 2% higher than December 31, 2019. Notably, the increase in total deposits since year-end 2019 was largely to support liquidity actions in March and was funded partly by a net $121 million increase in brokered deposits. Core customer deposits declined $52 million, consistent with ~~other bank and nonbank institutions for~~customary seasonal trends.

Compared to March 31, 2019, total deposits were up $485 million or 19%. The increase in total deposits since March 31, 2019 was largely due to the acquisition of Choice, which added $289 million of deposits at acquisition, as well as with a growing number of non-deposit investment alternatives available to depositors, such as mutual funds, money market funds, annuities, and other brokerage investment products. Challenges to deposit growth include price changes on deposit products given movements in the rate environment and other competitive pricing pressures, and customer preferences regarding higher-costing deposit products or non-deposit investment alternatives. Included in total deposits in Table 14 are brokered deposits of $126 million at September 30, 2017 and $21 million at December 31, 2016.

~~Table 14: Deposits~~

September 30, 2017 December 31, 2016
(in thousands) Amount % of
Total Amount % of
Total
Demand $ 638,447 27.0 % $ 482,300 24.5 %
Money market and NOW accounts 1,107,360 46.8 964,509 49.0
Savings 274,828 11.6 221,282 11.2
Time 346,316 14.6 301,895 15.3
Total deposits $ 2,366,951 100.0 % $ 1,969,986 100.0 %

Total deposits were $2.4 billion at September 30, 2017, up $397 million or 20% since December 31, 2016, largely attributable to the $375 million deposits added from First Menasha at acquisition in April 2017. On average for the first nine months of 2017, total deposits were $2.2 billion, up $631 million, or 41%, from the comparable 2016 period, largely attributable to the inclusion of acquired Baylake deposits for all of 2017 versus five of nine months in 2016 and acquired First Menasha deposits for five months of 2017 versus no months in 2016. On average, the mix of deposits changed between the comparable nine-month periods, with 2017 carrying morean increase in brokered deposits ~~demand (i.e. noninterest bearing) deposits and money market and NOW accounts, and less in savings and time deposits.~~

to support the liquidity actions noted above.

Table ~~15: Average Deposits~~

For the nine months ended
September 30, 2017 September 30, 2016
(in thousands) Amount % of
Total Amount % of
Total
Demand $ 516,412 23.7 % $ 348,765 22.6 %
Money market and NOW accounts 1,064,585 48.9 732,721 47.4
Savings 249,099 11.5 184,156 11.9
Time 345,264 15.9 278,685 18.1
Total $ 2,175,360 100.0 % $ 1,544,327 100.0 %

~~Table 16: Maturity Distribution of Certificates of~~9: Period End Deposit ~~of $100,000 or More~~

(in thousands) September 30,
2017
3 months or less $ 19,226
Over 3 months through 6 months 25,973
Over 6 months through 12 months 44,218
Over 12 months 71,655
Total $ 161,072

~~Other Funding Sources~~

Other funding sources included short-term borrowings ($12.9 million at September 30, 2017 and zero at December 31, 2016) and long-term borrowings (totaling $83.0 million at September 30, 2017 and $37.6 million at December 31, 2016). Short-term borrowings, when used, consist mainly of federal funds purchased, overnight borrowings with correspondent financial institutions, FHLB advances with original maturities of one year or less, and customer repurchase agreements maturing in less than six months. Long-term borrowings include notes payable (consisting of FHLB advances with original maturities greater than one year), junior subordinated debentures (largely qualifying as Tier 1 capital for regulatory purposes, given their long maturity dates, even though they are redeemable in whole or in part at par), and subordinated debt (issued in 2015 with 10-year maturities, callable on or after the fifth anniversary date of their respective issuance dates, and qualifying as Tier 2 capital for regulatory purposes). Further information regarding these long-term borrowings is included in Note 8 – Notes Payable, Note 9 – Junior Subordinated Debentures, and Note 10 – Subordinated Notes in the notes to the unaudited consolidated financial statements. Given the high level of deposits to assets, other funding sources are currently utilized modestly, mainly for their capital equivalent characteristics and term funding.

At September 30, 2017, additional funding sources consist of a $10 million available and unused line of credit at the holding company, $158 million of available and unused federal funds purchased lines, and remaining available total borrowing capacity at the FHLB of $115 million.

~~Off-Balance Sheet Obligations~~

Composition



	March 31, 2020				December 31, 2019				March 31, 2019
(in thousands)	Amount		% of Total		Amount		% of Total		Amount		% of Total
Noninterest-bearing demand	$	791,563	26	%	$	819,055	28	%	$	696,111	27	%
Money market and interest-bearing demand	1,208,024		40	%	1,241,642		42	%	1,112,572		44	%
Savings	361,829		12	%	343,199		11	%	306,342		12	%
Time	662,050		22	%	550,557		19	%	423,461		17	%
Total deposits	$	3,023,466	100	%	$	2,954,453	100	%	$	2,538,486	100	%
Brokered transaction accounts	$	36,331	1	%	$	48,497	1	%	$	47,544	2	%
Brokered and listed time deposits	245,252		8	%	111,694		4	%	19,399		1	%
Total brokered deposits	$	281,583	9	%	$	160,191	5	%	$	66,943	3	%
Customer transaction accounts	$	2,325,085	77	%	$	2,355,399	80	%	$	2,067,481	81	%
Customer time deposits	416,798		14	%	438,863		15	%	404,062		16	%
Total customer deposits (core)	$	2,741,883	91	%	$	2,794,262	95	%	$	2,471,543	97	%

Lending-Related Commitments

As of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, Nicolet had the following off-balance sheet lending-related commitments.

Table 10: Commitments



(in thousands)	March 31, 2020		December 31, 2019
Commitments to extend credit	$	755,822	$	773,555
Financial standby letters of credit	10,717		10,730
Performance standby letters of credit	8,270		8,469

Interest rate lock commitments ~~that did not appear on its balance sheet:~~

~~Table 17: Commitments~~

September 30, December 31,
2017 2016
(in thousands)
Commitments to extend credit — fixed and variable rate $ 660,578 $ 554,980
Financial letters of credit 9,381 12,444
Standby letters of credit 8,006 4,898

~~Interest~~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 $186.7 million and $108.6 million, respectively, at March 31, 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 ~~are considered derivative instruments and~~ represented ~~$32.2~~$43.4 million and ~~$5.9~~$16.3 million, respectively, at ~~September 30, 2017. Fair~~December 31, 2019. The net fair value ~~approximates the notional amounts.~~

of these mortgage derivatives combined was a loss of $682,000 at March 31, 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 ~~pay dividends to shareholders,~~ 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, 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 2020, in response to the emerging crisis, management initiated preparatory actions to further increase on-balance sheet liquidity, and wholesale funds of approximately $210 million were procured, increasing liquid cash and investments. These actions were initiated prior to the passing of the CARES Act. In addition to these on-balance sheet measures, 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, the~~base; repayment and maturity of ~~loans,~~loans; investment securities calls, maturities, and ~~sales,~~sales; and ~~funds obtained through~~procurement of additional brokered ~~deposits.~~deposits or other wholesale funding. All ~~investment~~ securities ~~are classified as available for sale~~AFS and equity securities (included in other investments) are reported at fair value on the consolidated balance sheet. ~~Approximately $77 million~~At March 31, 2020, approximately 30% of the ~~$408~~$512 million ~~investment~~ securities AFS portfolio ~~at September 30, 2017~~ was pledged to secure public deposits ~~short term~~and short-term borrowings, ~~repurchase agreements, or~~as applicable, and for other purposes as required by law. ~~Other~~Additional funding sources at March 31, 2020, consist of a $10 million available ~~include short-term borrowings, federal~~and unused line of credit at the holding company, $175 million of available and unused Federal funds ~~purchased,~~lines, available borrowing capacity at the FHLB of $86 million, and ~~long-term borrowings.~~

borrowing capacity in the brokered deposit market.

Cash and cash equivalents at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016~~2019 were ~~$96~~$242 million and ~~$129~~$182 million, respectively. ~~These levels have decreased through the first nine months of 2017 with $117 million net cash used by investing activities (mostly due to a net~~The increase in ~~loans~~cash and ~~securities), partially offset~~cash equivalents since year-end 2019 was mostly attributable to liquidity actions in March, which were largely funded by ~~$30 million net cash provided by operating activities~~brokered deposits and ~~$54 million net cash provided by financing activities (mostly due to a net increase in deposits). Nicolet’s~~FHLB advances. Management believes its liquidity resources were sufficient as of ~~September 30, 2017~~March 31, 2020 to fund loans, accommodate deposit ~~trends~~cycles and ~~cycles,~~trends, and to meet other cash needs as ~~necessary.~~

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 its $10 million available and unused line of credit, and access to the public or private markets to issue new equity, subordinated debt or other debt. At March 31, 2020, the parent Company had $54 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.

Nicolet assessed the impact on net interest income in the event of a gradual +/-100 bps and +/-200 bps ~~decrease~~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 ~~this analysis on~~ financial data at ~~September 30, 2017,~~March 31, 2020 and December 31, 2019, the projected changes in net interest income over a one-year time horizon, versus the baseline, ~~was -0.5%, -0.2%, 0.3% and 0.6% for the -200, -100, +100 and +200 bps scenarios, respectively; such~~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.~~

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



	March 31, 2020		December 31, 2019
200 bps decrease in interest rates	(0.3	)%	(1.8	)%
100 bps decrease in interest rates	(0.5	)%	(1.0	)%
100 bps increase in interest rates	0.7	%	0.8	%
200 bps increase in interest rates	1.4	%	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.

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 ~~for~~ shareholder return.

For details on the change in capital see “BALANCE SHEET ANALYSIS.”

~~At September 30, 2017,~~ Nicolet’s intent is to maintain capital ~~structure consisted of $360.4 million of common stock equity compared to $275.9 million of common equity~~levels for the Company and the Bank at December 31, 2016. Nicolet’s common equity, representing 12.7% of total assets at September 30, 2017 and 12.0% at December 31, 2016, continues to reflect capacity to capitalize on opportunities. Nicolet’s common stock was accepted by shareholders as the primary considerationamounts in ~~the recent 2017 and 2016 acquisitions, as described in Note 2 – “Acquisitions,” in the notes to the unaudited consolidated financial statements.~~

~~On April 28, 2017 as part~~excess of the ~~First Menasha merger, Nicolet issued 1.3 million shares of common stock for common stock consideration of $62.2 million. On April 29, 2016 as part of~~regulatory well-capitalized thresholds, including the Baylake merger, Nicolet issued 4.3 million shares of common stock for common stock consideration of $163.3 million, and recorded $1.2 million consideration for assumed stock options. In connection with the financial advisor business acquisition that completed on April 1, 2016, Nicolet issued $2.6 million in common stock consideration. Book value per common share increased 14% to $36.78 at September 30, 2017 from $32.26 at year end 2016 aided mostly by the common equity issued in the 2017 acquisition and retained earnings exceeding stock purchases.

~~As shown in Table 18, Nicolet’s regulatory~~ capital ~~ratios remain well above minimum regulatory ratios. Also, at September 30, 2017,~~conservation buffer. At March 31, 2020, the Bank’s regulatory capital ratios qualify the Bank as well-capitalized under the prompt-corrective action ~~framework with hurdles of 10.0%, 8.0%, 6.5% and 5.0%, respectively.~~framework. This strong base of capital has allowed Nicolet to be opportunistic in the current environment and in strategic growth.

The primary source of income and funds for the parent company is dividends from the Bank. Dividends declared by the Bank that exceed the retained net income for the most current year plus retained net income for the preceding two years must be approved by federal regulatory agencies. At September 30, 2017, the Bank could pay dividends of approximately $13.9 million without seeking regulatory approval. During 2016, the Bank paid $35.5 million of dividends (which included a special dividend of $15 million out of Bank surplus) to the parent company, and paid $10 million of dividends during the first nine months of 2017. On October 17, 2017, the Bank declared and paid a $12 million dividend to the Company.

A summary of Nicolet’s and ~~Nicolet National~~the Bank’s regulatory capital amounts and ratios, as ~~of September 30, 2017 and December 31, 2016~~well as selected capital metrics are presented in the following table.

Table ~~18:~~12: Capital

Actual For Capital
Adequacy Purposes To Be Well
Capitalized
Under Prompt
Corrective Action
Provisions (2)
(in thousands) Amount Ratio (1) Amount Ratio (1) Amount Ratio (1)
As of September 30, 2017:
Company
Total capital $ 293,800 12.8 % $ 183,929 8.0 %
Tier 1 capital 269,277 11.7 137,947 6.0
CET 1 capital 240,351 10.5 103,460 4.5
Leverage 269,277 10.0 108,169 4.0

Bank
Total capital $ 279,665 12.2 % $ 183,696 8.0 % $ 229,620 10.0 %
Tier 1 capital 267,055 11.6 137,772 6.0 183,696 8.0
CET 1 capital 267,055 11.6 103,329 4.5 149,253 6.5
Leverage 267,055 9.9 108,053 4.0 135,067 5.0

As of December 31, 2016:
Company
Total capital $ 249,723 13.9 % $ 144,195 8.0 %
Tier 1 capital 226,018 12.5 108,146 6.0
CET 1 capital 202,313 11.2 81,110 4.5
Leverage 226,018 10.3 87,566 4.0

Bank
Total capital $ 217,682 12.1 % $ 144,322 8.0 % $ 180,403 10.0 %
Tier 1 capital 205,862 11.4 108,242 6.0 144,322 8.0
CET 1 capital 205,862 11.4 81,181 4.5 117,262 6.5
Leverage 205,862 9.4 87,329 4.0 109,161 5.0

~~(1)~~

The total capital ratio is defined as Tier1 capital plus Tier 2 capital divided by total risk-weighted assets. The Tier 1 capital ratio is defined as Tier1 capital divided by total risk-weighted assets. CET 1 capital ratio is defined as Tier 1 capital, with deductions for goodwill and other intangible assets (other than mortgage servicing assets), net of associated deferred tax liabilities, and limitations on the inclusion of deferred tax assets, mortgage servicing assets and investments in other financial institutions, in each case as provided further in the rules, divided by total risk-weighted assets. The leverage ratio is defined as Tier 1 capital divided by the most recent quarter’s average total assets, adjusted in accordance with regulatory guidelines.

~~(2)~~

~~Prompt corrective action provisions are not applicable at the bank holding company level.~~



	At or for the Three Months Ended			At or for the Year Ended
($ in thousands)	March 31, 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			310,781
Company Risk-Based Capital:
Total risk-based capital	$	405,600		$	404,573
Tier 1 risk-based capital	378,421			378,608
Common equity Tier 1 capital	348,106			348,454
Total capital ratio	13.3		%	13.4		%
Tier 1 capital ratio	12.4		%	12.6		%
Common equity tier 1 capital ratio	11.4		%	11.6		%
Tier 1 leverage ratio	11.2		%	11.9		%
Bank Risk-Based Capital:
Total risk-based capital	$	340,279		$	323,432
Tier 1 risk-based capital	323,500			309,460
Common equity Tier 1 capital	323,500			309,460
Total capital ratio	11.2		%	10.8		%
Tier 1 capital ratio	10.6		%	10.3		%
Common equity tier 1 capital ratio	10.6		%	10.3		%
Tier 1 leverage ratio	9.5		%	9.8		%
* Reflects common stock repurchased under board of director authorizations for the common stock repurchase program.

In ~~July 2013,~~managing capital for optimal return, we evaluate capital sources and uses, pricing and availability of our stock in the ~~Federal Reserve Board~~market, and alternative uses of capital (such as the level of organic growth or acquisition opportunities) in light of strategic plans. During first quarter 2020, $13.9 million was utilized to repurchase and cancel 206,833 shares of common stock pursuant to our common stock repurchase program, which is utilized from time-to-time to repurchase shares in the open market, through block transactions or in private transactions. As a result of the uncertainty regarding future economic conditions due to the COVID-19 pandemic, Nicolet temporarily suspended its share repurchase program on March 21, 2020. At March 31, 2020, there remained $7.1 million authorized under this repurchase program.

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 since December 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 ~~OCC issued final rules implementing~~allowance for credit losses due to the ~~Basel III regulatory capital framework and related Dodd-Frank Act changes. The final rules took effect for the Company and Bank on January~~adoption of CECL.

Future Accounting Pronouncements

Recent accounting pronouncements adopted are included in Note 1, ~~2015, subject to a transition period for certain parts~~“Basis of Presentation” of the ~~rules. The rules permitted certain banking organizations~~Notes to retain, through a one-time election, the existing treatment for accumulated other comprehensive income. Nicolet and the Bank made the election in 2015 to retain the existing treatment for accumulated other comprehensive income.

The tables above calculate and present regulatory capital based upon the new regulatory capital ratio requirements under Basel III that became effective on January 1, 2015. Beginning in 2016, an additional capital conservation buffer was added to the minimum requirements for capital adequacy purposes, subject to a three year phase-in period. The capital conservation buffer will be fully phased-in on January 1, 2019 at 2.5 percent. A banking organization with a conservation buffer of less than 2.5 percent (or the required phase-in amount in years prior to 2019) will be subject to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. At the present time, the ratios for the Company and Bank are sufficient to meet the fully phased-in conservation buffer.

~~Future Accounting Pronouncements~~

Unaudited Consolidated Financial Statements within Part I, Item 1.

In ~~May 2014,~~March 2020, the FASB issued ASU ~~2014-09,~~~~Revenue from Contracts with Customers~~2020-04, Reference Rate Reform (Topic ~~606).~~~~The core principle~~848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional guidance ~~is that an entity should recognize revenue~~for a limited period of time to ~~depict~~ease the ~~transfer of promised goods~~potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and ~~services~~exceptions for applying GAAP to ~~customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods~~contracts, hedging relationships, and ~~services. In August 2015, the FASB issued an amendment to defer the effective date for all entities~~other transactions affected by ~~one year.~~reference rate reform if certain criteria are met. The updated guidance is effective for ~~annual reporting periods beginning after~~all entities as of March 12, 2020 through December 15, 2017, including interim periods within that reporting period. Since a significant number of business transactions are not subject to the guidance, it is not expected to have a material impact on the Company’s financial statements when it goes into effect the first quarter of 2018.

~~In August 2017, the FASB issued updated guidance to ASU 2017-12,~~~~Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.~~ASU 2017-12 expands the activities that qualify for hedge accounting and simplifies the rules for reporting hedging transactions. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted.31, 2022. The Company ~~is currently assessing~~continues to evaluate the impact of ~~the new guidance~~reference rate reform on its consolidated financial statements, and it is not expected to have a significant impact on its consolidated financial statements because the Company does not have any significant derivatives and does not currently apply hedge accounting to derivatives.

~~In May 2017, the FASB issued updated guidance to ASU 2017-09,~~~~Compensation - Stock Compensation (Topic 718).~~ASU 2017-09 applies to entities that change the terms or conditions of a share-based payment award to provide clarity and reduce diversity in practice as well as cost and complexity when applying the guidance in Topic 718 to the modification to the terms and conditions of a share-based payment award. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company is currently assessing the impact of the new guidance on its consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See section “Interest Rate Sensitivity Management” and Impact of Inflation” within Management’s Discussion and Analysis of Financial Condition and Results of Operations under Part I, Item 2.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, management, under the supervision, and with the participation, of our Chairman, President and Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act pursuant to Exchange Act Rule ~~13a-15.~~13a-15). Based upon, and as of the date of such evaluation, the Chairman, President and Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective.

There have been no changes in the Company’s internal controls or, to the Company’s knowledge, in other factors during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We and our subsidiaries may be involved from time to time in various routine legal proceedings incidental to our respective businesses. Neither we nor any of our subsidiaries are currently engaged in any legal proceedings that are expected to have a material adverse effect on our results of operations or financial position.

ITEM 1A. RISK FACTORS

There have been no material changes in the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~

2019, except as disclosed below.

The recent global coronavirus outbreak could harm business and results of operations for Nicolet.

In December 2019, a coronavirus (COVID-19) was reported in China, and has since spread to additional countries including the United States. In March 2020, the World Health Organization declared the coronavirus to be a pandemic. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the coronavirus pandemic on the businesses of Nicolet, and there is no guarantee that efforts by Nicolet to address the adverse impacts of the coronavirus will be effective. The impact to date has included periods of significant volatility in financial, commodities and other markets. This volatility, if it continues, could have an adverse impact on Nicolet’s customers and on Nicolet’s business, financial condition and results of operations. Nicolet may also incur additional costs to remedy damages caused by business disruptions.

In addition, recent actions by US federal, state and foreign governments to address the pandemic, including travel bans and school, business and entertainment venue closures, may also have a significant adverse effect on the markets in which Nicolet conducts its businesses. The extent of impacts resulting from the coronavirus pandemic and other events beyond the control of Nicolet will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus pandemic and actions taken to contain the coronavirus or its impact, among others.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Following are Nicolet’s monthly common stock purchases during the ~~third~~first quarter of ~~2017.~~

Total Number of
Shares Purchased (a) 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(a)
(#) ($) (#) (#)
Period

July 1 – July 31, 2017 338 $ 54.82 — 458,000
August 1– August 31, 2017 49,699 $ 53.45 49,699 408,000
September 1 – September 30, 2017 17,316 $ 54.14 16,846 391,000
Total 67,353 $ 53.63 66,545 391,000

2020.



	Total Number of Shares Purchased ^(a)	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 ^(b)
	(#)	($)		(#)	(#)
Period
January 1 – January 31, 2020	47,699	$	71.28	32,402	516,600
February 1 – February 29, 2020	89,724	$	71.65	87,225	429,400
March 1 – March 31, 2020	87,422	$	61.30	87,206	342,200
Total	224,845	$	67.55	206,833	342,200

(a)

During ~~the third~~first quarter ~~of 2017,~~2020, the Company repurchased ~~0 and 808~~1,341 common shares for minimum tax withholding settlements on restricted stock and ~~net settlements~~repurchased 16,671 common shares to satisfy the exercise price and / or tax withholding requirements of stock options, respectively. These purchases do not count against the maximum number of shares that may yet be purchased under the board of ~~directors’~~directors' authorization.

(b)

During ~~early 2014, a common stock repurchase program was approved which authorized, with subsequent modifications the use of up to $30~~first quarter 2020, Nicolet utilized $13.9 million to repurchase ~~up to 1,050,000 shares of outstanding common stock. At September 30, 2017,~~and cancel approximately ~~$8.6 million remained available to repurchase up to 391,000 common shares. Using the closing stock price on September 30, 2017 of $57.53, a total of approximately 149,000~~207,000 shares of common stock ~~could be repurchased~~pursuant to our common stock repurchase program. At March 31, 2020, approximately $7.1 million remained available under this ~~plan. Nicolet resumed repurchases of its shares under this program during the second quarter of 2017.~~common stock repurchase program.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

~~None.~~

None.

ITEM 6. EXHIBITS

The following exhibits are filed herewith:

~~Exhibit~~

Exhibit Number		Description
~~31.1~~2.1		Agreement and Plan of Merger Between Nicolet Bankshares, Inc. and Commerce Financial Holdings, Inc. dated February 17, 2020⁽¹⁾
3.1		Amended and Restated Bylaws of Nicolet Bankshares, Inc.⁽²⁾
31.1		Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002
31.2		Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002
32.1		Certification of CEO Pursuant to 18 ~~U.S.C~~U.S.C. Section 1350 as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
32.2		Certification of CFO Pursuant to 18 ~~U.S.C~~U.S.C. Section 1350 as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
101*101		~~Interactive data files pursuant to Rule 405 of Regulation S-T:~~The following material from Nicolet’s Form 10-Q Report for the three months ended March 31, 2020, formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated ~~Statement~~Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial ~~Statements tagged as blocks of text.~~Statements.

*Indicates information that is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12

(1) Incorporated by reference to the exhibit of the ~~Securities Act of 1933, is deemed not~~same number in the Registrant's Current Report on Form 8-K filed ~~for purposes of section~~on February 18, 2020.

(2) Incorporated by reference to the exhibit of the ~~Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.~~

same number in the Registrant's Current Report on Form 8-K, filed on March 25, 2020.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	NICOLET BANKSHARES, INC.

~~November 3, 2017~~April 30, 2020	/s/ Robert B. Atwell
	Robert B. Atwell
	Chairman, President and Chief Executive Officer

~~November 3, 2017~~April 30, 2020	/s/ Ann K. Lawson
	Ann K. Lawson
	Chief Financial Officer



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

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

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

N/A (Former Name, Former Address ~~including zip code,~~ and ~~telephone number, including area code, of~~ ~~Registrant’s principal executive offices)~~ Former Fiscal Year, if Changed Since Last Report)



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

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



Large accelerated filer¨	Accelerated filerx	~~Non-accelerated filer~~¨	~~Smaller reporting company~~¨

~~(Do not check if a smaller~~ Non-accelerated filer ¨	Smaller reporting ~~company)~~company ¨

Emerging Growth Company ¨


			PAGE
PART I	FINANCIAL INFORMATION

	Item 1.	Financial Statements:

		Consolidated Balance Sheets ~~September 30, 2017 (unaudited) and December 31, 2016~~	3

		Consolidated Statements of Income ~~Three Months and Nine Months ended September 30, 2017 and 2016 (unaudited)~~	4

		Consolidated Statements of Comprehensive Income ~~Three Months and Nine Months ended September 30, 2017 and 2016 (unaudited)~~	5

		Consolidated ~~Statement~~Statements of ~~Changes in~~ Stockholders’ Equity ~~Nine Months Ended September 30, 2017 (unaudited)~~	6

		Consolidated Statements of Cash Flows ~~Nine Months Ended September 30, 2017 and 2016 (unaudited)~~	7

		Notes to Unaudited Consolidated Financial Statements	~~8-31~~8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~32-55~~27

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5543

	Item 4.	Controls and Procedures	~~55-56~~43

PART II	OTHER INFORMATION

	~~Item 1.~~	~~Legal Proceedings~~	56

	Item ~~1A.~~1.	~~Risk Factors~~Legal Proceedings	5643

	Item 2.1A.	~~Unregistered Sales of Equity Securities and Use of Proceeds~~Risk Factors	5643

	Item 3.2.	~~Defaults Upon Senior~~Unregistered Sales of Equity Securities and Use of Proceeds	5644

	Item 4.3.	~~Mine Safety Disclosures~~Defaults Upon Senior Securities	5644

	Item 5.4.	~~Other Information~~Mine Safety Disclosures	5644

	Item 5.	Other Information	44

	Item 6.	Exhibits	5744

		Signatures	5745

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Net income	$	9,586		$	6,529		$	24,275		$	12,551
Other comprehensive income, net of tax:
Unrealized gains on securities AFS:
Net unrealized holding gains (losses) arising during the period		834			(984	)		5,685			2,257
Reclassification adjustment for net gains included in net income		(1,221	)		(37	)		(1,220	)		(77	)
Income tax benefit (expense)		125			397			(1,741	)		(851	)
Total other comprehensive income (loss)		(262	)		(624	)		2,724			1,329
Comprehensive income	$	9,324		$	5,905		$	26,999		$	13,880

	September 30, 2017 (Unaudited)			December 31, 2016 (Audited)
Assets
Cash and due from banks	$	64,075		$	68,056
Interest-earning deposits		31,297			60,320
Federal funds sold		731			727
Cash and cash equivalents		96,103			129,103
Certificates of deposit in other banks		2,494			3,984
Securities available for sale (“AFS”)		408,217			365,287
Other investments		14,931			17,499
Loans held for sale		6,963			6,913
Loans		2,051,122			1,568,907
Allowance for loan losses		(12,610	)		(11,820	)
Loans, net		2,038,512			1,557,087
Premises and equipment, net		47,432			45,862
Bank owned life insurance (“BOLI”)		63,989			54,134
Goodwill and other intangibles		129,588			87,938
Accrued interest receivable and other assets		37,501			33,072
Total assets	$	2,845,730		$	2,300,879

Liabilities and Stockholders’ Equity
Liabilities:
Demand	$	638,447		$	482,300
Money market and NOW accounts		1,107,360			964,509
Savings		274,828			221,282
Time		346,316			301,895
Total deposits		2,366,951			1,969,986
Short-term borrowings		12,900			-
Notes payable		41,571			1,000
Junior subordinated debentures		29,497			24,732
Subordinated notes		11,912			11,885
Accrued interest payable and other liabilities		21,827			16,911
Total liabilities		2,484,658			2,024,514

Stockholders’ Equity:
Common stock		98			86
Additional paid-in capital		267,396			209,700
Retained earnings		92,935			68,888
Accumulated other comprehensive loss (“AOCI”)		(3	)		(2,727	)
Total Nicolet Bankshares, Inc. stockholders’ equity		360,426			275,947
Noncontrolling interest		646			418
Total stockholders’ equity and noncontrolling interest		361,072			276,365
Total liabilities, noncontrolling interest and stockholders’ equity	$	2,845,730		$	2,300,879
Preferred shares authorized (no par value)		10,000,000			10,000,000
Preferred shares issued and outstanding		-			-
Common shares authorized (par value $0.01 per share)		30,000,000			30,000,000
Common shares outstanding		9,798,724			8,553,292
Common shares issued		9,826,197			8,596,241



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

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

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

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



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

	Nicolet Bankshares, Inc. Stockholders’ Equity
	Common Stock			Additional Paid-In Capital			Retained Earnings		Accumulated Other Comprehensive Income (loss)			Noncontrolling Interest		Total
Balance December 31, 2016	$	86		$	209,700		$	68,888	$	(2,727	)	$	418	$	276,365
Comprehensive income:
Net income		-			-			24,047		-			228		24,275
Other comprehensive income		-			-			-		2,724			-		2,724
Stock compensation expense		-			1,871			-		-			-		1,871
Exercise of stock options, net		1			1,285			-		-			-		1,286
Issuance of common stock		-			175			-		-			-		175
Issuance of common stock in acquisitions, net of capitalized issuance costs of $186		13			62,047			-		-			-		62,060
Purchase and retirement of common stock		(2	)		(7,682	)		-		-			-		(7,684	)
Balance, September 30, 2017	$	98		$	267,396		$	92,935	$	(3	)	$	646	$	361,072

	Nine Months Ended September 30,
	2017			2016
Cash Flows From Operating Activities, net of effects of business combinations:
Net income	$	24,275		$	12,551
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion		7,038			4,227
Provision for loan losses		1,875			1,350
Increase in cash surrender value of life insurance		(1,314	)		(880	)
Stock compensation expense		1,871			1,123
Gain on sale or writedown of assets, net		(2,071	)		(548	)
Gain on sale of loans held for sale, net		(3,614	)		(3,713	)
Proceeds from sale of loans held for sale		164,726			179,967
Origination of loans held for sale		(164,806	)		(179,581	)
Net change in:
Accrued interest receivable and other assets		239			1,182
Accrued interest payable and other liabilities		1,733			(3,888	)
Net cash provided by operating activities		29,952			11,790
Cash Flows From Investing Activities, net of effects of business combinations:
Net decrease in certificates of deposit in other banks		1,490			239
Net decrease (increase) in loans		(126,499	)		15,582
Purchases of securities AFS		(49,119	)		(57,510	)
Proceeds from sales of securities AFS		10,798			30,319
Proceeds from calls and maturities of securities AFS		34,426			22,962
Purchase of other investments		(3,256	)		(3,745	)
Proceeds from sales of other investments		6,519			-
Net increase in premises and equipment		(2,958	)		(3,802	)
Proceeds from sales of other real estate and other assets		3,410			1,661
Purchase of BOLI		(70	)		(20,000	)
Proceeds from redemption of BOLI		-			21,549
Intangible from acquired customer relationships		(870	)		-
Net cash received in business combination		9,119			66,517
Net cash provided (used) by investing activities		(117,010	)		73,772
Cash Flows From Financing Activities, net of effects of business combinations:
Net increase in deposits		22,054			55,332
Net increase (decrease) in short-term borrowings		12,900			(49,087	)
Proceeds from notes payable		30,000			-
Repayments of notes payable		(4,487	)		(56,519	)
Redemption of preferred stock		-			(12,200	)
Purchase and retirement of common stock		(7,462	)		(3,046	)
Capitalized issuance costs, net		(186	)		(260	)
Proceeds from issuance of common stock		175			101
Proceeds from exercise of common stock options, net		1,064			1,502
Cash dividends paid on preferred stock		-			(633	)
Net cash provided (used) by financing activities		54,058			(64,810	)
Net increase (decrease) in cash and cash equivalents		(33,000	)		20,752
Cash and cash equivalents:
Beginning	$	129,103		$	83,619
Ending	$	96,103		$	104,371
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	7,117		$	5,787
Cash paid for taxes		8,805			7,150
Transfer of loans and bank premises to other real estate owned		828			33
Capitalized mortgage servicing rights		679			492
Transfer of loans from held for sale to held for investment		3,236			-
Acquisitions
Fair value of assets acquired		439,000			1,035,000
Fair value of liabilities assumed		398,000			937,000
Net assets acquired		41,000			98,000

(in millions)	As recorded by Baylake Corp		Fair Value Adjustments			As Recorded by Nicolet
Cash, cash equivalents and securities available for sale	$	262	$	1		$	263
Loans		710		(19	)		691
Other real estate owned		3		(2	)		1
Core deposit intangible		1		16			17
Fixed assets and other assets		71		(8	)		63
Total assets acquired	$	1,047	$	(12	)	$	1,035

Deposits	$	822	$	-		$	822
Junior subordinated debentures, borrowings and other liabilities		116		(1	)		115
Total liabilities acquired	$	938	$	(1	)	$	937

Excess of assets acquired over liabilities acquired	$	109	$	(11	)	$	98
Less: purchase price							164
Goodwill						$	66

(in thousands, except per share data)	Three Months Ended September 30, 2016		Nine Months Ended September 30, 2016
Total revenues, net of interest expense	$	29,436	$	82,870
Net income		6,827		17,042
Diluted earnings per share		0.74		1.85

	Nine Months Ended September 30, 2017			Year Ended December 31, 2016
Dividend yield		0	%		0	%
Expected volatility		25	%		25	%
Risk-free interest rate		2.13	%		1.52	%
Expected average life		7 years			7 years
Weighted average per share fair value of options	$	15.44		$	11.04

	Option Shares Stock Options Outstanding			Weighted- Average Exercise Price		Exercisable Shares		Weighted- Average Exercise Price
Balance – December 31, 2015		746,004		$	21.56		325,979	$	19.09
Granted⁽¹⁾		170,500			36.86
Options assumed in acquisition		91,701			21.03
Exercise of stock options*		(84,723	)		20.98
Forfeited		(1,456	)		21.71
Balance – December 31, 2016		922,026			24.39		439,639	$	19.97
Granted⁽²⁾		814,500			48.86
Exercise of stock options*		(65,833	)		19.52
Forfeited		(400	)		16.50
Balance – September 30, 2017		1,670,293		$	36.51		471,043	$	21.49

	Number of Shares				Weighted-Average Exercise Price				Weighted-Average Remaining Life (Years)
	Outstanding		Exercisable		Outstanding		Exercisable		Outstanding		Exercisable
$9.19 – $20.00		257,750		238,000	$	16.30	$	16.28		3.78		3.71
$20.01 – $25.00		241,455		110,055		23.68		23.54		6.54		5.89
$25.01 – $30.00		153,724		71,524		26.00		26.11		6.91		6.44
$30.01 – $40.00		202,864		51,464		35.88		34.76		8.64		8.27
$40.01 – $49.30		814,500		-		48.86		-		9.63		-
		1,670,293		471,043	$	36.51	$	21.49		7.91		5.14

Restricted Stock	Weighted- Average Grant Date Fair Value		Restricted Shares Outstanding
Balance – December 31, 2015	$	18.70		36,690
Granted		33.68		31,466
Vested*		23.58		(25,207	)
Forfeited		-		-
Balance – December 31, 2016		26.80		42,949
Granted		-		-
Vested *		22.47		(15,346	)
Forfeited		16.50		(130	)
Balance – September 30, 2017	$	29.27		27,473

	September 30, 2017
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. government sponsored enterprises	$	26,394	$	-	$	122	$	26,272
State, county and municipals		189,226		521		1,031		188,716
Mortgage-backed securities		159,113		261		1,438		157,936
Corporate debt securities		32,203		541		-		32,744
Equity securities		1,288		1,261		-		2,549
	$	408,224	$	2,584	$	2,591	$	408,217

	December 31, 2016
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. government sponsored enterprises	$	1,981	$	-	$	18	$	1,963
State, county and municipals		191,721		160		4,638		187,243
Mortgage-backed securities		161,309		242		2,422		159,129
Corporate debt securities		12,117		52		-		12,169
Equity securities		2,631		2,152		-		4,783
	$	369,759	$	2,606	$	7,078	$	365,287

	TOTAL – Nine Months Ended September 30, 2017
(in thousands) ALLL:	Commercial & industrial			Owner- occupied CRE			AG production			AG real estate			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total
Beginning balance	$	3,919		$	2,867		$	150		$	285		$	1,124		$	774		$	304		$	1,784		$	461		$	152		$	11,820
Provision		2,183			(253	)		16			(17	)		132			(19	)		(137	)		(124	)		4			90			1,875
Charge-offs		(1,097	)		-			-			-			-			(13	)		-			(8	)		-			(38	)		(1,156	)
Recoveries		20			29			-			-			1			-			-			6			2			13			71
Net charge-offs		(1,077	)		29			-			-			1			(13	)		-			(2	)		2			(25	)		(1,085	)
Ending balance	$	5,025		$	2,643		$	166		$	268		$	1,257		$	742		$	167		$	1,658		$	467		$	217		$	12,610
As percent of ALLL		39.9	%		21.0	%		1.3	%		2.1	%		10.0	%		5.9	%		1.3	%		13.1	%		3.7	%		1.7	%		100.0	%

ALLL:
Individually evaluated	$	226		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	226
Collectively evaluated		4,799			2,643			166			268			1,257			742			167			1,658			467			217			12,384
Ending balance	$	5,025		$	2,643		$	166		$	268		$	1,257		$	742		$	167		$	1,658		$	467		$	217		$	12,610

Loans:
Individually evaluated	$	5,071		$	1,116		$	-		$	218		$	4,845		$	723		$	80		$	1,619		$	60		$	-		$	13,732
Collectively evaluated		620,658			426,938			36,352			48,225			298,603			86,926			33,083			361,497			102,594			22,514			2,037,390
Total loans	$	625,729		$	428,054		$	36,352		$	48,443		$	303,448		$	87,649		$	33,163		$	363,116		$	102,654		$	22,514		$	2,051,122

Less ALLL	$	5,025		$	2,643		$	166		$	268		$	1,257		$	742		$	167		$	1,658		$	467		$	217		$	12,610
Net loans	$	620,704		$	425,411		$	36,186		$	48,175		$	302,191		$	86,907		$	32,996		$	361,458		$	102,187		$	22,297		$	2,038,512

	Total Nonaccrual Loans
(in thousands)	September 30, 2017		% to Total			December 31, 2016		% to Total
Commercial & industrial	$	5,078		35.2	%	$	358		1.8	%
Owner-occupied CRE		1,276		8.8			2,894		14.3
AG production		2		-			9		0.1
AG real estate		186		1.3			208		1.0
CRE investment		4,537		31.4			12,317		60.6
Construction & land development		723		5.0			1,193		5.9
Residential construction		80		0.6			260		1.3
Residential first mortgage		2,301		16.0			2,990		14.7
Residential junior mortgage		239		1.7			56		0.3
Retail & other		-		-			-		-
Nonaccrual loans - Total	$	14,422		100.0	%	$	20,285		100.0	%

	Originated
(in thousands)	September 30, 2017		% to Total			December 31, 2016		% to Total
Commercial & industrial	$	615		62.3	%	$	4		1.6	%
Owner-occupied CRE		38		3.8			42		16.3
AG production		2		0.2			7		2.7
AG real estate		-		-			-		-
CRE investment		-		-			-		-
Construction & land development		-		-			-		-
Residential construction		-		-			-		-
Residential first mortgage		333		33.7			204		79.4
Residential junior mortgage		-		-			-		-
Retail & other		-		-			-		-
Nonaccrual loans - Originated	$	988		100.0	%	$	257		100.0	%

	Acquired
(in thousands)	September 30, 2017		% to Total			December 31, 2016		% to Total
Commercial & industrial	$	4,463		33.2	%	$	354		1.8	%
Owner-occupied CRE		1,238		9.2			2,852		14.2
AG production		-		-			2		0.1
AG real estate		186		1.4			208		1.0
CRE investment		4,537		33.8			12,317		61.4
Construction & land development		723		5.4			1,193		6.0
Residential construction		80		0.6			260		1.3
Residential first mortgage		1,968		14.6			2,786		13.9
Residential junior mortgage		239		1.8			56		0.3
Retail & other		-		-			-		-
Nonaccrual loans – Acquired	$	13,434		100.0	%	$	20,028		100.0	%

	September 30, 2017
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or nonaccrual			Current			Total
Commercial & industrial	$	303		$	5,078		$	620,348		$	625,729
Owner-occupied CRE		229			1,276			426,549			428,054
AG production		-			2			36,350			36,352
AG real estate		-			186			48,257			48,443
CRE investment		-			4,537			298,911			303,448
Construction & land development		38			723			86,888			87,649
Residential construction		1,085			80			31,998			33,163
Residential first mortgage		537			2,301			360,278			363,116
Residential junior mortgage		23			239			102,392			102,654
Retail & other		4			-			22,510			22,514
Total loans	$	2,219		$	14,422		$	2,034,481		$	2,051,122
As a percent of total loans		0.1	%		0.7	%		99.2	%		100.0	%

	December 31, 2016
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or nonaccrual			Current			Total
Commercial & industrial	$	22		$	358		$	427,890		$	428,270
Owner-occupied CRE		268			2,894			357,065			360,227
AG production		-			9			34,758			34,767
AG real estate		-			208			45,026			45,234
CRE investment		-			12,317			183,562			195,879
Construction & land development		-			1,193			73,795			74,988
Residential construction		-			260			23,132			23,392
Residential first mortgage		486			2,990			296,828			300,304
Residential junior mortgage		200			56			91,075			91,331
Retail & other		15			-			14,500			14,515
Total loans	$	991		$	20,285		$	1,547,631		$	1,568,907
As a percent of total loans		0.1	%		1.3	%		98.6	%		100.0	%

Non-accretable discount on purchase credit impaired (“PCI”) loans:	Nine Months Ended			Year ended
(in thousands)	September 30, 2017			December 31, 2016
Balance at beginning of period	$	14,327		$	4,229
Acquired balance, net		8,352			13,923
Accretion to loan interest income		(5,925	)		(3,458	)
Disposals of loans		(1,121	)		(367	)
Balance at end of period	$	15,633		$	14,327

Maturing in	(in thousands)
2017 (remaining three months)	$	5,018
2018		1,000
2019		-
2020		10,000
2021		-
2022		25,553
	$	41,571

	For the Nine Months Ended September 30,
	2017							2016
(in thousands)	Average Balance		Interest		Average Rate			Average Balance		Interest		Average Rate
ASSETS
Earning assets
Loans, including loan fees (1)(2)	$	1,842,695	$	73,377		5.26	%	$	1,274,405	$	49,634		5.13	%
Investment securities
Taxable		236,275		3,422		1.93	%		147,720		2,068		1.87	%
Tax-exempt (2)		160,815		3,267		2.71	%		122,850		2,265		2.46	%
Other interest-earning assets		51,803		1,136		2.92	%		87,840		906		1.38	%
Total interest-earning assets		2,291,588	$	81,202		4.69	%		1,632,815	$	54,873		4.44	%
Cash and due from banks		76,992							43,001
Other assets		211,546							147,070
Total assets	$	2,580,126						$	1,822,886
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings	$	249,099	$	271		0.15	%	$	184,156	$	166		0.12	%
Interest-bearing demand		419,266		1,590		0.51	%		310,801		1,310		0.56	%
MMA		581,277		1,165		0.27	%		421,920		415		0.13	%
Core CDs and IRAs		288,524		1,568		0.73	%		249,788		1,657		0.89	%
Brokered deposits		120,782		622		0.69	%		28,897		280		1.29	%
Total interest-bearing deposits		1,658,948		5,216		0.42	%		1,195,562		3,828		0.43	%
Other interest-bearing liabilities		62,414		1,966		4.17	%		52,470		1,638		4.11	%
Total interest-bearing liabilities		1,721,362		7,182		0.56	%		1,248,032		5,466		0.58	%
Noninterest-bearing demand		516,412							348,765
Other liabilities		19,079							16,779
Total equity		323,273							209,310
Total liabilities and stockholders’ equity	$	2,580,126						$	1,822,886

Net interest income and rate spread			$	74,020		4.13	%			$	49,407		3.86	%
Net interest margin						4.27	%						3.99	%

	Increase (decrease) Due to Changes in
(in thousands)	Volume			Rate			Net
Earning assets

Loans⁽¹⁾⁽²⁾	$	22,613		$	1,130		$	23,743
Investment securities
Taxable		1,382			(28	)		1,354
Tax-exempt⁽²⁾		752			250			1,002
Other interest-earning assets		(234	)		464			230

Total interest-earning assets	$	24,513		$	1,816		$	26,329

Interest-bearing liabilities
Savings deposits	$	66		$	39		$	105
Interest-bearing demand		421			(141	)		280
MMA		200			550			750
Core CDs and IRAs		234			(323	)		(89	)
Brokered deposits		525			(183	)		342

Total interest-bearing deposits		1,446			(58	)		1,388
Other interest-bearing liabilities		412			(84	)		328

Total interest-bearing liabilities		1,858			(142	)		1,716
Net interest income	$	22,655		$	1,958		$	24,613

	September 30, 2017					December 31, 2016					September 30, 2016
	Amount		% of Total			Amount		% of Total			Amount		% of Total
Commercial & industrial	$	625,729		30.5	%	$	428,270		27.3	%	$	423,790		27.3	%
Owner-occupied CRE		428,054		20.9			360,227		23.0			362,554		23.3
AG production		36,352		1.8			34,767		2.2			34,077		2.2
AG real estate		48,443		2.4			45,234		2.9			45,671		2.9
CRE investment		303,448		14.8			195,879		12.5			197,884		12.7
Construction & land development		87,649		4.3			74,988		4.8			68,161		4.4
Residential construction		33,163		1.6			23,392		1.5			27,331		1.8
Residential first mortgage		363,116		17.7			300,304		19.1			284,653		18.3
Residential junior mortgage		102,654		5.0			91,331		5.8			95,901		6.2
Retail & other		22,514		1.0			14,515		0.9			14,102		0.9
Total loans	$	2,051,122		100.0		$	1,568,907		100.0	%	$	1,554,124		100.0	%

	For the nine months ended						Year ended
(in thousands)	September 30, 2017			September 30, 2016			December 31, 2016
Allowance for loan losses (ALLL):
Balance at beginning of period	$	11,820		$	10,307		$	10,307
Provision for loan losses		1,875			1,350			1,800
Charge-offs		(1,156	)		432			(584	)
Recoveries		71			(256	)		297
Net charge-offs		(1,085	)		176			(287	)
Balance at end of period	$	12,610		$	11,481		$	11,820

Net loan charge-offs (recoveries):
Commercial & industrial	$	1,077		$	262		$	253
Owner-occupied CRE		(29	)		58			103
Agricultural production		-			-			-
Agricultural real estate		-			-			-
CRE investment		(1	)		(221	)		(221	)
Construction & land development		13			-			-
Residential construction		-			-			-
Residential first mortgage		2			(5	)		49
Residential junior mortgage		(2	)		46			49
Retail & other		25			36			54
Total net loans charged-off	$	1,085		$	176		$	287

ALLL to total loans		0.61	%		0.74	%		0.75	%
ALLL to net charge-offs		1,162.2	%		6,523.3	%		4,118.5	%
Net charge-offs to average loans, annualized		0.08	%		0.02	%		0.02	%

(in thousands)	September 30, 2017			% of Loan Type to Total Loans			December 31, 2016			% of Loan Type to Total Loans
ALLL allocation
Commercial & industrial	$	5,025			30.5	%	$	3,919			27.3	%
Owner-occupied CRE		2,643			20.9			2,867			23.0
Agricultural production		166			1.8			150			2.2
Agricultural real estate		268			2.4			285			2.9
CRE investment		1,257			14.8			1,124			12.5
Construction & land development		742			4.3			774			4.8
Residential construction		167			1.6			304			1.5
Residential first mortgage		1,658			17.7			1,784			19.1
Residential junior mortgage		467			5.0			461			5.8
Retail & other		217			1.0			152			0.9
Total ALLL	$	12,610			100.0	%	$	11,820			100.0	%

ALLL category as a percent of total ALLL:
Commercial & industrial		39.9	%					33.2	%
Owner-occupied CRE		21.0						24.3
Agricultural production		1.3						1.3
Agricultural real estate		2.1						2.4
CRE investment		10.0						9.5
Construction & land development		5.9						6.5
Residential construction		1.3						2.6
Residential first mortgage		13.1						15.1
Residential junior mortgage		3.7						3.9
Retail & other		1.7						1.2
Total ALLL		100.0	%					100.0	%

	As of September 30, 2017
	Within One Year						After One but Within Five Years						After Five but Within Ten Years						After Ten Years						Mortgage- related and Equity Securities						Total Amortized Cost					Total Fair Value
	Amount			Yield			Amount			Yield			Amount			Yield			Amount			Yield			Amount			Yield			Amount		Yield			Amount
(in thousands)
U.S. government sponsored enterprises	$	—			—	%	$	10,406			0.1	%	$	15,988			0.1	%	$	—			—	%	$	—			—	%	$	26,394		0.3	%	$	26,272
State and county municipals (1)		13,262			2.5			74,612			2.8			100,339			2.5			1,013			2.9			—			—			189,226		2.6			188,716
Mortgage-backed securities		—			—			—			—			—			—			—			—			159,113			2.9			159,113		3.0			157,936
Corporate debt securities		—			—			11,080			4.2			14,150			2.9			6,973			5.8			—			—			32,203		3.9			32,744
Equity securities		—			—			—			—			—			—			—			—			1,288			2.4			1,288		2.4			2,549

Total amortized cost	$	13,262			2.5	%	$	96,098			2.7	%	$	130,477			2.2	%	$	7,986			5.4	%	$	160,401			2.9	%	$	408,224		2.7	%	$	408,217
Total fair value and carrying value	$	13,261					$	96,410					$	129,769					$	8,292					$	160,485										$	408,217

As a percent of total fair value		3	%					24	%					32	%					2	%					39	%										100	%

(in thousands)	September 30, 2017
3 months or less	$	19,226
Over 3 months through 6 months		25,973
Over 6 months through 12 months		44,218
Over 12 months		71,655
Total	$	161,072

	September 30,		December 31,
	2017		2016
(in thousands)
Commitments to extend credit — fixed and variable rate	$	660,578	$	554,980
Financial letters of credit		9,381		12,444
Standby letters of credit		8,006		4,898

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions (2)
(in thousands)	Amount		Ratio (1)			Amount		Ratio (1)			Amount		Ratio (1)
As of September 30, 2017:
Company
Total capital	$	293,800		12.8	%	$	183,929		8.0	%
Tier 1 capital		269,277		11.7			137,947		6.0
CET 1 capital		240,351		10.5			103,460		4.5
Leverage		269,277		10.0			108,169		4.0

Bank
Total capital	$	279,665		12.2	%	$	183,696		8.0	%	$	229,620		10.0	%
Tier 1 capital		267,055		11.6			137,772		6.0			183,696		8.0
CET 1 capital		267,055		11.6			103,329		4.5			149,253		6.5
Leverage		267,055		9.9			108,053		4.0			135,067		5.0

As of December 31, 2016:
Company
Total capital	$	249,723		13.9	%	$	144,195		8.0	%
Tier 1 capital		226,018		12.5			108,146		6.0
CET 1 capital		202,313		11.2			81,110		4.5
Leverage		226,018		10.3			87,566		4.0

Bank
Total capital	$	217,682		12.1	%	$	144,322		8.0	%	$	180,403		10.0	%
Tier 1 capital		205,862		11.4			108,242		6.0			144,322		8.0
CET 1 capital		205,862		11.4			81,181		4.5			117,262		6.5
Leverage		205,862		9.4			87,329		4.0			109,161		5.0

	Total Number of Shares Purchased (a)		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(a)
	(#)		($)		(#)		(#)
Period

July 1 – July 31, 2017		338	$	54.82		—		458,000
August 1– August 31, 2017		49,699	$	53.45		49,699		408,000
September 1 – September 30, 2017		17,316	$	54.14		16,846		391,000
Total		67,353	$	53.63		66,545		391,000