See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC. ~~AND SUBSIDIARIES~~

Consolidated Statements of Income

(In thousands, except share and per share data) (Unaudited)

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
Interest income:
Loans, including loan fees $ 27,329 $ 21,049 $ 73,098 $ 49,455
Investment securities:
Taxable 1,114 902 3,422 2,068
Non-taxable 604 493 1,761 1,146
Other interest income 407 351 1,136 906
Total interest income 29,454 22,795 79,417 53,575
Interest expense:
Money market and NOW accounts 1,380 631 2,755 1,726
Savings and time deposits 984 719 2,461 2,102
Short-term borrowings - - 72 5
Notes payable 81 6 133 230
Junior subordinated debentures 459 376 1,284 926
Subordinated notes 159 159 477 477
Total interest expense 3,063 1,891 7,182 5,466
Net interest income 26,391 20,904 72,235 48,109
Provision for loan losses 975 450 1,875 1,350
Net interest income after provision for loan losses 25,416 20,454 70,360 46,759
Noninterest income:
Service charges on deposit accounts 1,238 1,051 3,367 2,514
Mortgage income, net 1,774 2,010 4,022 3,713
Trust services fee income 1,479 1,373 4,431 4,000
Brokerage fee income 1,500 992 4,192 2,090
Bank owned life insurance 459 318 1,314 880
Rent income 285 285 852 820
Investment advisory fees 92 146 357 341
Gain on sale or writedown of assets, net 1,305 453 2,071 548
Other income 2,032 1,904 5,412 3,874
Total noninterest income 10,164 8,532 26,018 18,780
Noninterest expense:
Personnel 11,488 10,516 32,404 24,748
Occupancy, equipment and office 3,559 3,018 9,613 7,324
Business development and marketing 1,113 985 3,359 2,353
Data processing 2,238 1,831 6,428 4,408
FDIC assessments 205 247 582 629
Intangibles amortization 1,173 1,172 3,514 2,295
Other expense 1,086 1,250 3,598 4,799
Total noninterest expense 20,862 19,019 59,498 46,556

Income before income tax expense 14,718 9,967 36,880 18,983
Income tax expense 5,132 3,438 12,605 6,432
Net income 9,586 6,529 24,275 12,551
Less: net income attributable to noncontrolling interest 74 65 228 176
Net income attributable to Nicolet Bankshares, Inc. 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

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
Weighted average common shares outstanding:
Basic 9,836,646 8,607,719 9,316,814 6,689,367
Diluted 10,408,683 8,969,735 9,820,724 7,024,169


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Interest income:
Loans, including loan fees	$	34,047	$	31,334	$	101,591	$	92,511
Investment securities:
Taxable	2,001		1,904		6,115		5,578
Tax-exempt	542		503		1,542		1,574
Other interest income	680		926		1,917		2,733
Total interest income	37,270		34,667		111,165		102,396
Interest expense:
Deposits	3,784		4,596		13,196		14,103
Short-term borrowings	0		0		65		0
Long-term borrowings	926		881		2,584		2,684
Total interest expense	4,710		5,477		15,845		16,787
Net interest income	32,560		29,190		95,320		85,609
Provision for credit losses	3,000		400		9,000		900
Net interest income after provision for credit losses	29,560		28,790		86,320		84,709
Noninterest income:
Trust services fee income	1,628		1,594		4,717		4,631
Brokerage fee income	2,489		2,113		7,080		5,925
Mortgage income, net	9,675		3,700		21,965		6,962
Service charges on deposit accounts	1,037		1,223		3,075		3,587
Card interchange income	1,877		1,735		5,076		4,815
BOLI income	531		495		1,774		1,834
Asset gains (losses), net	217		286		(1,185)		8,030
Other income	1,237		1,166		3,245		4,274
Total noninterest income	18,691		12,312		45,747		40,058
Noninterest expense:
Personnel	14,072		12,914		41,877		40,809
Occupancy, equipment and office	4,051		3,454		12,616		10,961
Business development and marketing	810		1,428		4,683		4,288
Data processing	2,658		2,515		7,620		7,220
Intangibles amortization	834		914		2,707		2,936
Other expense	1,260		1,662		5,849		5,159
Total noninterest expense	23,685		22,887		75,352		71,373
Income before income tax expense	24,566		18,215		56,715		53,394
Income tax expense	6,434		4,603		14,331		10,788
Net income	18,132		13,612		42,384		42,606
Less: Net income attributable to noncontrolling interest	30		82		249		260
Net income attributable to Nicolet Bankshares, Inc.	$	18,102	$	13,530	$	42,135	$	42,346
Earnings per common share:
Basic	$	1.75	$	1.45	$	4.04	$	4.51
Diluted	$	1.72	$	1.40	$	3.97	$	4.36
Weighted average common shares outstanding:
Basic	10,348,862		9,346,814		10,426,228		9,393,795
Diluted	10,498,552		9,696,850		10,604,732		9,706,795

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC. ~~AND SUBSIDIARIES~~

Consolidated Statements of Comprehensive Income

(In thousands) (Unaudited)

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net income	$	18,132	$	13,612	$	42,384	$	42,606
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities AFS:
Net unrealized holding gains (losses)	394		2,053		12,708		14,165
Net realized (gains) losses included in income	(151)		0		(315)		(32)
Income tax (expense) benefit	(66)		(555)		(3,346)		(3,817)
Total other comprehensive income (loss)	177		1,498		9,047		10,316
Comprehensive income	$	18,309	$	15,110	$	51,431	$	52,922

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements ~~Continued:~~

Continued:

NICOLET BANKSHARES, INC. ~~AND SUBSIDIARIES~~

Consolidated ~~Statement~~Statements of Stockholders’ Equity

(In thousands) (Unaudited)

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


	Nicolet Bankshares, Inc. Stockholders’ Equity
	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Non- controlling Interest		Total
Balances at June 30, 2020	$	104	$	301,778	$	216,863	$	13,288	$	820	$	532,853
Comprehensive income:
Net income, three months ended September 30, 2020	—		—		18,102		—		30		18,132
Other comprehensive income (loss)	—		—		—		177		—		177
Stock-based compensation expense	—		1,260		—		—		—		1,260
Exercise of stock options, net	—		94		—		—		—		94
Issuance of common stock	—		148		—		—		—		148
Purchase and retirement of common stock	(2)		(13,744)		—		—		—		(13,746)
Distribution to noncontrolling interest	—		—		—		—		(49)		(49)

Balances at September 30, 2020	$	102	$	289,536	$	234,965	$	13,465	$	801	$	538,869
Balances at June 30, 2019	$	94	$	234,963	$	173,180	$	3,178	$	733	$	412,148
Comprehensive income:
Net income, three months ended September 30, 2019	—		—		13,530		—		82		13,612
Other comprehensive income (loss)	—		—		—		1,498		—		1,498
Stock-based compensation expense	—		1,144		—		—		—		1,144
Exercise of stock options, net	—		1,200		—		—		—		1,200
Issuance of common stock	—		166		—		—		—		166
Purchase and retirement of common stock	—		(939)		—		—		—		(939)
Distribution to noncontrolling interest	—		—		—		—		(87)		(87)
Balances at September 30, 2019	$	94	$	236,534	$	186,710	$	4,676	$	728	$	428,742
Balances at December 31, 2019	$	106	$	312,733	$	199,005	$	4,418	$	728	$	516,990
Comprehensive income:
Net income, nine months ended September 30, 2020	—		—		42,135		—		249		42,384
Other comprehensive income (loss)	—		—		—		9,047		—		9,047
Stock-based compensation expense	—		4,216		—		—		—		4,216
Exercise of stock options, net	—		1,048		—		—		—		1,048
Issuance of common stock	—		482		—		—		—		482
Purchase and retirement of common stock	(4)		(28,943)		—		—		—		(28,947)
Distribution to noncontrolling interest	—		—		—		—		(176)		(176)
Adoption of new accounting pronouncement (see Note 1)	—		—		(6,175)		—		—		(6,175)
Balances at September 30, 2020	$	102	$	289,536	$	234,965	$	13,465	$	801	$	538,869
Balances at December 31, 2018	$	95	$	247,790	$	144,364	$	(5,640)	$	743	$	387,352
Comprehensive income:
Net income, nine months ended September 30, 2019	—		—		42,346		—		260		42,606
Other comprehensive income (loss)	—		—		—		10,316		—		10,316
Stock-based compensation expense	—		3,643		—		—		—		3,643
Exercise of stock options, net	2		4,380		—		—		—		4,382
Issuance of common stock	—		449		—		—		—		449
Purchase and retirement of common stock	(3)		(19,728)		—		—		—		(19,731)
Distribution to noncontrolling interest	—		—		—		—		(275)		(275)

Balances at September 30, 2019	$	94	$	236,534	$	186,710	$	4,676	$	728	$	428,742

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)	Nine Months Ended September 30,
	2020		2019
Cash Flows From Operating Activities:
Net income	$	42,384	$	42,606
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion	7,564		5,260
Provision for credit losses	9,000		900
Increase in cash surrender value of life insurance	(1,647)		(1,432)
Stock-based compensation expense	4,216		3,643
Asset (gains) losses, net	1,185		(8,030)
Gain on sale of loans held for sale, net	(22,217)		(7,042)
Proceeds from sale of loans held for sale	663,466		255,775
Origination of loans held for sale	(650,660)		(259,465)
Net change in:
Accrued interest receivable and other assets	4,781		(5,020)
Accrued interest payable and other liabilities	6,200		9,310
Net cash provided by (used in) operating activities	64,272		36,505
Cash Flows From Investing Activities:
Net (increase) decrease in loans	(244,751)		(74,131)
Net (increase) decrease in certificates of deposit in other banks	5,719		(4,402)
Purchases of securities AFS	(128,661)		(57,875)
Proceeds from sales of securities AFS	14,864		13,240
Proceeds from calls and maturities of securities AFS	69,568		38,128
Purchases of other investments	(3,815)		(1,941)
Proceeds from sales of other investments	0		17,144
Purchases of BOLI	0		(5,000)
Proceeds from redemption of BOLI	245		1,348
Net (increase) decrease in premises and equipment	(9,708)		(3,529)
Net (increase) decrease in other real estate and other assets	0		15
Net cash (paid) received in business combination	(21,820)		0
Net cash provided by (used in) investing activities	(318,359)		(77,003)
Cash Flows From Financing Activities:
Net increase (decrease) in deposits	617,373		(29,691)

Proceeds from long-term borrowings	367,841		0
Repayments of long-term borrowings	(32,029)		(20,193)
Purchase and retirement of common stock	(28,947)		(19,731)

Proceeds from issuance of common stock	482		449
Proceeds from exercise of stock options	1,048		4,382
Distribution to noncontrolling interest	(176)		(275)
Net cash provided by (used in) financing activities	925,592		(65,059)
Net increase (decrease) in cash and cash equivalents	671,505		(105,557)
Cash and cash equivalents:
Beginning	182,059		249,526
Ending *	$	853,564	$	143,969
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	18,130	$	16,682
Cash paid for taxes	16,353		11,690
Transfer of loans and bank premises to other real estate owned	0		1,025
Capitalized mortgage servicing rights	4,038		1,807

* Cash and cash equivalents at September 30, 2020 include restricted cash of $1.9 millionpledged as collateral on interest rate swaps and 0 reserve balance was required with the Federal Reserve Bank. At September 30, 2019, cash and cash equivalents include restricted cash of $1.3 millionpledged as collateral on interest rate swaps and $6.3 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, 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 for which 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 cost 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 credit 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 CECL

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 Notes 5 and 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.~~

~~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 indirectlyadditional disclosures 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.

this new accounting pronouncement.

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,~~

Completed Acquisitions:

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~~Company's banking subsidiary, ~~of First Menasha serving the Fox Valley area of Wisconsin, was merged with and into~~ Nicolet National Bank (the “Bank”). The system integration was completed, and ~~five~~the 2 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. The estimated fair values may be subject to refinement as additional information relative to the closing date fair values becomes available through the measurement period of approximately one year from consummation. During the third quarter of 2017, adjustments were made based on additional information. Goodwill was increased 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,~~

Advantage Community Bancshares, Inc. (“Advantage”): On August 21, 2020, Nicolet agreed in a private transaction to hire a select group of financial advisors 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.

~~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~~Advantage, pursuant to the terms of the definitive merger agreement dated March 2, 2020, whereby Advantage merged with and into Nicolet, and Advantage Community Bank, ~~expanding its presence~~the wholly owned bank subsidiary of Advantage, was merged with and 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~~Bank. Advantage's 4 branches in Dorchester, Edgar, Mosinee, and Wausau opened as Nicolet National Bank branches on August 24, 2020, expanding our presence in Central Wisconsin and the ~~fourth quarter of 2016.~~

~~The purpose~~Wausau area. Due to the small size 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~~transaction, terms 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~~all-cash deal were not ~~included in the accompanying consolidated financial statements.~~

~~The fair value~~disclosed.

Upon consummation, Advantage added total assets of ~~the assets acquired~~approximately $172 million (representing approximately 4% of Nicolet's then pre-merger asset size), loans of $88 million, deposits of $141 million, core deposit intangible of $1 million, 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~~goodwill of ~~operations for the three~~$12 million.

Terminated Acquisition:

Commerce Financial Holdings, Inc. (“Commerce”): On February 17, 2020, Nicolet entered into a definitive merger agreement (“Merger Agreement”) with Commerce Financial Holdings, Inc. (“Commerce”) pursuant to which Nicolet would acquire Commerce and ~~nine months ended September 30, 2016, as if the Baylake acquisition had occurred January 1~~its wholly-owned banking subsidiary, Commerce State Bank. On May 18, 2020, Nicolet and Commerce announced a mutual agreement to terminate their Merger Agreement. Nicolet paid Commerce $0.5 million and surrendered its $0.1 million 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

Commerce common stock.

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 September 30,				Nine Months Ended September 30,
(In thousands, except per share data)	2020		2019		2020		2019
Net income attributable to Nicolet Bankshares, Inc.	$	18,102	$	13,530	$	42,135	$	42,346
Weighted average common shares outstanding	10,349		9,347		10,426		9,394
Effect of dilutive common stock awards	150		350		179		313
Diluted weighted average common shares outstanding	10,499		9,697		10,605		9,707
Basic earnings per common share*	$	1.75	$	1.45	$	4.04	$	4.51
Diluted earnings per common share*	$	1.72	$	1.40	$	3.97	$	4.36

*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 options outstanding at~~

For the three and nine months ended September 30, ~~2017 or September 30, 2016 that were~~2020, options to purchase approximately 0.2 million and 0.1 million shares, respectively, are excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive.

For both the three and nine months ended September 30, 2019, options to purchase less than 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, and at September 30, 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.


	Nine Months Ended September 30,
	2020			2019
Dividend yield	0		%	0		%
Expected volatility	25		%	25		%
Risk-free interest rate	1.72		%	2.37		%
Expected average life	7 years			7 years
Weighted average per share fair value of options	$	23.74		$	19.23

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

~~Activity in~~

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	44,500	70.09
Exercise of stock options *	(47,237)	(23.26)
Forfeited	0	0
Outstanding - September 30, 2020	1,440,996	$	50.24	6.8	$	10,300
Exercisable - September 30, 2020	747,746	$	44.44	6.2	$	7,727

*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 shares were surrendered during~~requirements. For the nine months ended September 30, ~~2017 and 10,244~~2020, 17,699 such shares were surrendered ~~during~~to 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 months ~~of 2017,~~ended September 30, 2020 and ~~full year of 2016~~2019 was approximately ~~$1.8~~$2.0 million and ~~$1.3~~$6.9 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	55.52		10,450
Vested *	43.87		(13,865)
Forfeited	0		0
Outstanding - September 30, 2020	$	51.50	19,106

*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~~1,482 shares were surrendered during the nine months ended September 30, ~~2017 and 7,851 shares were surrendered during the twelve months ended December 31, 2016.~~

2020.

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

The Company recognized approximately ~~$1.9~~$3.8 million and ~~$1.1~~$3.4 million of stock-based ~~employee~~ compensation expense ~~during~~(included in personnel on the consolidated statements of income) for the nine months ended September 30, ~~2017~~2020 and ~~2016,~~2019, respectively, associated with its common stock ~~equity awards.~~awards granted to officers and employees. In addition, during first nine months of 2020, the Company recognized approximately $0.4 million of director expense (included in other expense on the consolidated statements of income) for a total restricted stock grant of 7,950 shares with immediate vesting to directors, while during first nine months of 2019, the Company recognized approximately $0.3 million of director expense for a total restricted stock grant of 4,257 shares with immediate vesting to directors, representing the annual stock retainer fee paid to external board members. As of September 30, ~~2017,~~2020, there was approximately ~~$15.2~~$10.4 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~~three years.

The Company recognized a tax benefit of approximately $0.4 million and $1.0 million for the nine months ended September 30, 2020 and 2019, respectively, 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.


	September 30, 2020
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Fair Value as % of Total
U.S. government agency securities	$	64,006	$	328	$	0	$	64,334	12	%
State, county and municipals	210,567		4,934		22		215,479		40	%
Mortgage-backed securities	164,282		7,521		48		171,755		32	%
Corporate debt securities	78,050		5,733		0		83,783		16	%
Total	$	516,905	$	18,516	$	70	$	535,351	100	%


	December 31, 2019
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Fair Value as % of Total
U.S. government agency securities	$	16,516	$	4	$	60	$	16,460	4	%
State, county and municipals	155,501		1,049		157		156,393		35	%
Mortgage-backed securities	193,223		2,492		697		195,018		43	%
Corporate debt securities	78,009		3,422		0		81,431		18	%
Total	$	443,249	$	6,967	$	914	$	449,302	100	%

All mortgage-backed securities included in the table above were issued by U.S. government agencies and corporations. Securities AFS with a fair value of $147 million and $166 million as of September 30, 2020 and December 31, 2019, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law. Accrued interest on securities AFS totaled $2.6 million and $2.2 million at September 30, 2020 and December 31, 2019, respectively, and is included in accrued interest receivable and other assets on the consolidated balance sheets.

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.


	September 30, 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

State, county and municipals	$	8,867	$	22	$	0	$	0	$	8,867	$	22	18
Mortgage-backed securities	5,440		42		481		6		5,921		48		20

Total	$	14,307	$	64	$	481	$	6	$	14,788	$	70	38


	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

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, the~~2020, 0 allowance for credit losses on securities AFS was recognized. 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. ~~The~~Furthermore, the Company ~~has~~does not have the ~~ability and~~ intent to ~~hold its~~sell any of these securities AFS and believes that it is more likely than not that we will not have to ~~maturity. There~~sell any such securities before a recovery of cost. During 2019, there were no0 other-than-temporary impairments charged to ~~earnings during the nine-month periods ending September 30, 2017 or September 30, 2016.~~

earnings.

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.


	September 30, 2020
(in thousands)	Amortized Cost		Fair Value
Due in less than one year	$	35,899	$	36,133
Due in one year through five years	224,042		231,540
Due after five years through ten years	72,838		74,829
Due after ten years	19,844		21,094
	352,623		363,596
Mortgage-backed securities	164,282		171,755
Securities AFS	$	516,905	$	535,351

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.


	Nine Months Ended September 30,
(in thousands)	2020		2019
Gross gains	$	315	$	152
Gross losses	0		(120)
Gains (losses) on sales of securities AFS, net	$	315	$	32
Proceeds from sales of securities AFS	$	14,864	$	13,240

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 %


	September 30, 2020					December 31, 2019
(in thousands)	Amount			% of Total		Amount			% of Total
Commercial & industrial	$	735,531		25	%	$	806,189		31	%
Paycheck Protection Program (“PPP”) loans	335,236			12		0			0
Owner-occupied commercial real estate (“CRE”)	499,605			17		496,372			19
Agricultural	111,022			4		95,450			4
CRE investment	475,050			16		443,218			17
Construction & land development	121,647			4		92,970			4
Residential construction	57,496			2		54,403			2
Residential first mortgage	428,017			15		432,167			17
Residential junior mortgage	112,173			4		122,771			5
Retail & other	33,016			1		30,211			1
Loans	2,908,793			100	%	2,573,751			100	%
Less allowance for credit losses - Loans (“ACL-Loans”)	31,388					13,972
Loans, net	$	2,877,405				$	2,559,779
Allowance for credit losses - Loans to loans	1.08		%			0.54		%

Accrued interest on loans totaled $8 million and $7 million at September 30, 2020 and December 31, 2019, respectively, and is included in accrued interest receivable and other assets on the consolidated balance sheets. See Note ~~6 – Loans,~~ 1 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 - loans is summarized as follows.


	Nine Months Ended				Year Ended
(in thousands)	September 30, 2020		September 30, 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	9,000		900		1,200
Charge-offs	(1,002)		(629)		(927)
Recoveries	133		196		546
Net (charge-offs) recoveries	(869)		(433)		(381)
Ending balance	$	31,388	$	13,620	$	13,972

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


	Nine Months Ended September 30, 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			0			0			0			0			0			0			0			0			797
Provision	2,061			1,616			636			2,205			462			93			1,561			182			184			9,000
Charge-offs	(602)			(257)			0			(20)			0			0			0			0			(123)			(1,002)
Recoveries	90			0			0			0			0			0			7			18			18			133
Net (charge-offs) recoveries	(512)			(257)			0			(20)			0			0			7			18			(105)			(869)
Ending balance	$	10,779		$	5,618		$	1,576		$	5,755		$	927		$	585		$	4,523		$	1,068		$	557		$	31,388
As % of ACL-Loans	34		%	18		%	5		%	18		%	3		%	2		%	14		%	4		%	2		%	100		%

*The PPP loans are fully guaranteed by the SBA; thus, no ACL-Loans has been allocated to these loans.

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


	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)			0			0			0			(226)			(22)			(80)			(347)			(927)
Recoveries	420			2			0			0			0			0			36			39			49			546
Net (charge-offs) recoveries	261			(91)			0			0			0			(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 September 30, 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, collateral dependent loans, and 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. 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 the 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 to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. For collateral dependent loans, expected credit losses are based on the fair value of the collateral at the balance sheet date, with consideration for estimated selling costs if satisfaction of the loan depends on the 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 September 30, 2020.


September 30, 2020	Collateral Type
(in thousands)	Real Estate		Other Business Assets		Total		Without an Allowance		With an Allowance		Allowance Allocation
Commercial & industrial	$	0	$	2,579	$	2,579	$	0	$	2,579	$	848
PPP loans	0		0		0		0		0		—
Owner-occupied CRE	1,986		0		1,986		1,986		0		0
Agricultural	625		1,455		2,080		727		1,353		164
CRE investment	897		0		897		897		0		0
Construction & land development	533		0		533		533		0		0
Residential construction	0		0		0		0		0		0
Residential first mortgage	0		0		0		0		0		0
Residential junior mortgage	0		0		0		0		0		0
Retail & other	0		0		0		0		0		0
Total loans	$	4,041	$	4,034	$	8,075	$	4,143	$	3,932	$	1,012

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		0		3,677		256
Agricultural	2,134		2,172		116		2,311		37
CRE investment	2,426		2,790		0		2,497		364
Construction & land development	382		382		0		460		0
Residential construction	0		0		0		0		0
Residential first mortgage	2,357		2,629		0		2,412		178
Residential junior mortgage	218		349		0		224		58
Retail & other	12		12		0		12		0
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


	September 30, 2020
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or nonaccrual			Current			Total
Commercial & industrial	$	40		$	3,011		$	732,480		$	735,531
PPP loans	0			0			335,236			335,236
Owner-occupied CRE	1,380			2,471			495,754			499,605
Agricultural	127			2,297			108,598			111,022
CRE investment	0			911			474,139			475,050
Construction & land development	68			533			121,046			121,647
Residential construction	0			0			57,496			57,496
Residential first mortgage	543			1,312			426,162			428,017
Residential junior mortgage	75			411			111,687			112,173
Retail & other	401			51			32,564			33,016
Total loans	$	2,634		$	10,997		$	2,895,162		$	2,908,793
Percent of total loans	0.1		%	0.4		%	99.5		%	100.0		%

~~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


	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	0			1,898			93,552			95,450
CRE investment	0			1,073			442,145			443,218
Construction & land development	2,063			20			90,887			92,970
Residential construction	302			0			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~~

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

~~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.


	September 30, 2020					December 31, 2019
(in thousands)	Nonaccrual Loans			% of Total		Nonaccrual Loans			% of Total
Commercial & industrial	$	3,011		27	%	$	6,249		44	%
PPP loans	0			0		0			0
Owner-occupied CRE	2,471			23		3,311			23
Agricultural	2,297			21		1,898			14
CRE investment	911			8		1,073			8
Construction & land development	533��			5		20			0
Residential construction	0			0		0			0
Residential first mortgage	1,312			12		1,090			8
Residential junior mortgage	411			4		480			3
Retail & other	51			0		1			0
Nonaccrual loans	$	10,997		100	%	$	14,122		100	%
Percent of total loans	0.4		%			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.


September 30, 2020	Amortized Cost Basis by Origination Year
(in thousands)	2020		2019		2018		2017		2016		Prior		Revolving		Revolving to Term		TOTAL
Commercial & industrial (a)
Grades 1-4	$	429,518	$	135,539	$	107,712	$	78,205	$	26,209	$	55,141	$	188,738	$	0	$	1,021,062
Grade 5	649		3,300		3,584		588		1,427		2,483		15,098		0		27,129
Grade 6	73		21		765		5,604		176		33		2,405		0		9,077
Grade 7	1,959		1,153		1,562		714		460		4,941		2,710		0		13,499
Total	$	432,199	$	140,013	$	113,623	$	85,111	$	28,272	$	62,598	$	208,951	$	0	$	1,070,767
Owner-occupied CRE
Grades 1-4	$	52,625	$	67,705	$	82,734	$	56,258	$	47,267	$	160,406	$	1,796	$	0	$	468,791
Grade 5	42		842		1,060		7,416		361		6,883		489		0		17,093
Grade 6	0		0		0		1,723		0		729		0		0		2,452
Grade 7	0		334		279		2,170		1,747		6,739		0		0		11,269
Total	$	52,667	$	68,881	$	84,073	$	67,567	$	49,375	$	174,757	$	2,285	$	0	$	499,605
Agricultural
Grades 1-4	$	11,683	$	6,138	$	8,095	$	9,328	$	3,046	$	33,620	$	22,828	$	0	$	94,738
Grade 5	304		375		717		570		667		5,374		683		0		8,690
Grade 6	0		0		0		328		392		0		0		0		720
Grade 7	0		0		33		111		1,139		5,543		48		0		6,874
Total	$	11,987	$	6,513	$	8,845	$	10,337	$	5,244	$	44,537	$	23,559	$	0	$	111,022
CRE investment
Grades 1-4	$	67,988	$	81,809	$	44,047	$	69,685	$	35,332	$	156,073	$	6,742	$	0	$	461,676
Grade 5	0		0		101		1,295		840		5,636		0		0		7,872
Grade 6	0		104		0		804		652		1,122		0		0		2,682
Grade 7	0		0		0		0		142		2,678		0		0		2,820
Total	$	67,988	$	81,913	$	44,148	$	71,784	$	36,966	$	165,509	$	6,742	$	0	$	475,050
Construction & land development
Grades 1-4	$	46,088	$	36,507	$	15,573	$	3,067	$	2,192	$	8,930	$	4,211	$	0	$	116,568
Grade 5	0		470		2,683		545		0		24		457		0		4,179
Grade 6	0		0		0		0		0		0		0		0		0
Grade 7	0		0		0		0		0		900		0		0		900
Total	$	46,088	$	36,977	$	18,256	$	3,612	$	2,192	$	9,854	$	4,668	$	0	$	121,647
Residential construction
Grades 1-4	$	29,372	$	26,039	$	1,216	$	449	$	0	$	50	$	0	$	0	$	57,126
Grade 5	0		315		0		55		0		0		0		0		370
Grade 6	0		0		0		0		0		0		0		0		0
Grade 7	0		0		0		0		0		0		0		0		0
Total	$	29,372	$	26,354	$	1,216	$	504	$	0	$	50	$	0	$	0	$	57,496
Residential first mortgage
Grades 1-4	$	94,370	$	69,301	$	45,425	$	45,798	$	47,449	$	118,317	$	364	$	0	$	421,024
Grade 5	0		821		908		197		324		2,232		0		0		4,482
Grade 6	0		0		261		0		0		0		0		0		261
Grade 7	0		653		198		17		0		1,382		0		0		2,250
Total	$	94,370	$	70,775	$	46,792	$	46,012	$	47,773	$	121,931	$	364	$	0	$	428,017
Residential junior mortgage
Grades 1-4	$	3,650	$	4,613	$	4,390	$	1,475	$	1,730	$	3,794	$	90,596	$	1,478	$	111,726
Grade 5	0		0		0		0		0		33		0		0		33
Grade 6	0		0		0		0		0		0		0		0		0
Grade 7	0		0		0		28		0		258		128		0		414
Total	$	3,650	$	4,613	$	4,390	$	1,503	$	1,730	$	4,085	$	90,724	$	1,478	$	112,173
Retail & other
Grades 1-4	$	7,693	$	6,027	$	2,208	$	1,808	$	876	$	1,514	$	12,839	$	0	$	32,965
Grade 5	0		0		0		0		0		0		0		0		0
Grade 6	0		0		0		0		0		0		0		0		0
Grade 7	0		0		0		0		0		51		0		0		51
Total	$	7,693	$	6,027	$	2,208	$	1,808	$	876	$	1,565	$	12,839	$	0	$	33,016

Total loans	$	746,014	$	442,066	$	323,551	$	288,238	$	172,428	$	584,886	$	350,132	$	1,478	$	2,908,793

(a) For purposes of this table, the $335 million net carrying value of PPP loans were originated in 2020, have a Pass risk grade (Grades 1-4) and have been included with the Commercial & industrial loan category.

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


	September 30, 2020
(in thousands)	Grades 1- 4			Grade 5			Grade 6			Grade 7			Total
Commercial & industrial	$	685,826		$	27,129		$	9,077		$	13,499		$	735,531
PPP loans	335,236			0			0			0			335,236
Owner-occupied CRE	468,791			17,093			2,452			11,269			499,605
Agricultural	94,738			8,690			720			6,874			111,022
CRE investment	461,676			7,872			2,682			2,820			475,050
Construction & land development	116,568			4,179			0			900			121,647
Residential construction	57,126			370			0			0			57,496
Residential first mortgage	421,024			4,482			261			2,250			428,017
Residential junior mortgage	111,726			33			0			414			112,173
Retail & other	32,965			0			0			51			33,016
Total loans	$	2,785,676		$	69,848		$	15,192		$	38,077		$	2,908,793
Percent of total	95.8		%	2.4		%	0.5		%	1.3		%	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			0			0			54,403
Residential first mortgage	424,044			4,677			668			2,778			432,167
Residential junior mortgage	122,249			35			0			487			122,771
Retail & other	30,210			0			0			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 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.~~

~~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 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 based 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 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. Troubled Debt Restructurings: 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

~~Troubled Debt Restructurings~~

~~During the quarter ended September 30, 2017,~~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 seven6 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 $1.9 million. ~~There~~In comparison, at December 31, 2019, there were ~~no other~~5 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 no0 loans classified as troubled debt restructurings during the previous twelve months that

subsequently defaulted asduring the nine months ended September 30, 2020. As of September 30, ~~2017. Loans which~~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. ~~The Company’s annual assessments indicated no impairment charge on goodwill or other intangibles was required for 2016 or~~In the first nine months of ~~2017.~~

~~Note 7 – Goodwill, Intangible Assets~~2020, management considered the potential impacts of the COVID-19 pandemic on the valuation of our franchise value, stability of deposits, and ~~Mortgage Servicing Rights, continued~~

~~Goodwill~~~~: Goodwill was $107.4~~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, continue to evolve. The Company’s assessment in 2019 resulted in an $0.8 million ~~at September 30, 2017 and $66.7 million at December 31, 2016. There was an addition~~full impairment charge on non-bank goodwill related to ~~the carrying amount~~a change in business strategy. A summary of goodwill ~~in the second quarter~~and other intangibles was as follows.


	Nine Months Ended		Year Ended
(in thousands)	September 30, 2020		December 31, 2019
Goodwill	$	163,151	$	151,198
Core deposit intangibles	9,570		10,897
Customer list intangibles	3,492		3,872
Other intangibles	13,062		14,769
Goodwill and other intangibles, net	$	176,213	$	165,967

Goodwill: A summary of ~~2017 of $39.7 million related to the First Menasha merger. In accordance with business combination accounting standards, an additional increase to~~ goodwill ~~of $1.0 million occurred in the third quarter of 2017~~was as follows. During 2020, goodwill increased due to the ~~Company recording its previously held equity interest in First Menasha at its then~~Advantage acquisition ~~date fair value, resulting in a $1.2 million gain in pre-tax earnings.~~and during 2019, goodwill increased due to the Choice acquisition. See Note 2 for additional information on the Company's acquisitions.

Nine Months Ended Year Ended
(in thousands) September 30, 2020 December 31, 2019
Goodwill:
Goodwill at beginning of year $ 151,198 $ 107,366
Acquisition 11,953 44,594
Impairment 0 (762)
Goodwill at end of period $ 163,151 $ 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 2020, core deposit intangibles ~~related~~increased due to the ~~First Menasha merger in the second quarter of 2017. The customer relationship intangible was~~Advantage acquisition and during 2019, core deposit intangibles 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

Nine Months Ended Year Ended
(in thousands) September 30, 2020 December 31, 2019
Core deposit intangibles:
Gross carrying amount $ 31,715 $ 30,715
Accumulated amortization (22,145) (19,818)
Net book value $ 9,570 $ 10,897
Additions during the period $ 1,000 $ 1,700
Amortization during the period $ 2,327 $ 3,365
Customer list intangibles:
Gross carrying amount $ 5,523 $ 5,523
Accumulated amortization (2,031) (1,651)
Net book value $ 3,492 $ 3,872
Additions during the period $ 0 $ 0
Amortization during the period $ 380 $ 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.


	Nine Months Ended			Year Ended
(in thousands)	September 30, 2020			December 31, 2019
Mortgage servicing rights ("MSR") asset:
MSR asset at beginning of year	$	5,919		$	3,749
Capitalized MSR	4,038			2,876
MSR asset acquired	529			160
Amortization during the period	(1,001)			(866)
MSR asset at end of period	$	9,485		$	5,919
Valuation allowance at beginning of year	$	0		$	0
Additions	(800)			0
Valuation allowance at end of period	$	(800)		$	0
MSR asset, net	$	8,685		$	5,919
Fair value of MSR asset at end of period	$	10,332		$	8,420
Residential mortgage loans serviced for others	$	1,204,856		$	847,756
Net book value of MSR asset to loans serviced for others	0.72		%	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 $0.8 million was recorded for ~~2016 or~~the nine months ended September 30, 2020, while 0 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.~~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 three months)	$	733	$	127	$	434
2021	2,643		507		1,568
2022	2,150		507		1,535
2023	1,633		483		1,419
2024	1,130		449		1,202
2025	670		449		784
Thereafter	611		970		2,543
Total	$	9,570	$	3,492	$	9,485

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. At both September 30, 2020 and December 31, 2019, the Company did 0t have any outstanding short-term borrowings.

Long-Term Borrowings:

The ~~Company had the following~~components of long-term ~~notes payable (notes~~borrowings (borrowing with an original ~~maturities of~~maturity greater than one year):

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

were as follows.


(in thousands)	September 30, 2020		December 31, 2019
PPP Liquidity Facility (“PPPLF”)	$	333,876	$	0
FHLB advances	29,015		25,061
Junior subordinated debentures	30,935		30,575
Subordinated notes	12,000		11,993
Total long-term borrowings	$	405,826	$	67,629

PPPLF: To support the effectiveness of the PPP loans, the Federal Reserve introduced the PPPLF to extend credit to financial institutions that made PPP loans, with the related PPP loans used as collateral on the borrowings. The ~~Company’s~~PPPLF borrowings have a fixed interest rate of 0.35% and a maturity date equal to the maturity date of the related PPP loans, with the PPP loans maturing either two or five years from the origination date of the PPP loan. The Company's PPP loans and related PPPLF funding have a weighted average life of approximately two years. Given the level of all other funding combined, the Company intends to repay the PPPLF during fourth quarter 2020.

FHLB Advances: The 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 0.73% at September 30, ~~2017~~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.

~~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

⁽¹⁾

~~The interest rate is 8.00% fixed.~~

⁽²⁾

The debentures, assumed in April 2013 as the result of acquisition, have a floating rate of the three-month LIBOR plus 1.43%, adjusted quarterly. The interest rates were 2.75% and 2.39% as of September 30, 2017 and December 31, 2016, respectively.

⁽³⁾

The debentures, assumed in April 2016 as a result of acquisition, have a floating rate of the three-month LIBOR plus 1.35%, adjusted quarterly. The interest rates were 2.69% and 2.35% as of September 30, 2017 and December 31, 2016, respectively.

⁽⁴⁾

~~The debentures, assumed in April 2017 as the result of acquisition, have a floating rate of the three-month LIBOR plus 2.79%, adjusted quarterly. The interest rate was 4.11% as of September 30, 2017.~~

~~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~~Company intends to ~~purchase~~redeem in full its 2004 Nicolet Bankshares Statutory Trust junior subordinated debentures ($6 million at 8%) on the next interest payment date of December 31, 2020, and has received all necessary regulatory approvals for such redemption. At September 30, 2020 and December 31, 2019, $29.8 million and $29.4 million, respectively, qualify as Tier 1 capital.


		Junior Subordinated Debentures
		September 30, 2020						December 31, 2019
(in thousands)	Maturity Date	Par		Unamortized Discount		Carrying Value		Carrying Value
2004 Nicolet Bankshares Statutory Trust (1)	7/15/2034	$	6,186	$	0	$	6,186	$	6,186
2005 Mid-Wisconsin Financial Services, Inc. (2)	12/15/2035	10,310		(3,022)		7,288		7,138
2006 Baylake Corp. (3)	9/30/2036	16,598		(3,706)		12,892		12,715
2004 First Menasha Bancshares, Inc. (4)	3/17/2034	5,155		(586)		4,569		4,536
Total		$	38,249	$	(7,314)	$	30,935	$	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 ~~Company.~~ three-month LIBOR plus 1.43%, adjusted quarterly. The interest rates were 1.68% and 3.32% as of September 30, 2020 and December 31, 2019, respectively.

(3)The debentures, ~~represent the sole asset~~assumed in April 2016 as a result of an acquisition, have a floating rate of the ~~statutory trusts. All~~three-month LIBOR plus 1.35%, adjusted quarterly. The interest rates were 1.57% and 3.31% as of September 30, 2020 and December 31, 2019, respectively.

(4)The debentures, assumed in April 2017 as the result of an acquisition, have a floating rate of the ~~common securities~~three-month LIBOR plus 2.79%, adjusted quarterly. The interest rates were 3.04% and 4.69% as 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 distributionsSeptember 30, 2020 and ~~other payments required on the trust preferred securities.~~

~~Note 10 –~~ December 31, 2019, respectively.

Subordinated Notes

:In first half 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~~and may be called on or after the fifth anniversary of their respective issuances ~~dates,~~dates. The Company has received regulatory approval to call the Notes and has provided notice of its election to call all Notes effective November 16, 2020. The subordinated Notes qualify for Tier 2 capital for regulatory ~~purposes. At September 30, 2017,~~purposes, and are discounted in accordance with regulations when 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~~has 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 reductionor less remaining to ~~the carrying value of the outstanding debt.~~

maturity.

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
September 30, 2020
U.S. government agency securities	$	64,334	$	0	$	64,334	$	0
State, county and municipals	215,479		0		215,479		0
Mortgage-backed securities	171,755		0		171,755		0
Corporate debt securities	83,783		0		80,653		3,130
Securities AFS	$	535,351	$	0	$	532,221	$	3,130
Other investments (equity securities)	$	3,124	$	3,124	$	0	$	0
December 31, 2019
U.S. government agency securities	$	16,460	$	0	$	16,460	$	0
State, county and municipals	156,393		0		156,393		0
Mortgage-backed securities	195,018		0		195,018		0
Corporate debt securities	81,431		0		78,301		3,130
Securities AFS	$	449,302	$	0	$	446,172	$	3,130
Other investments (equity securities)	$	3,375	$	3,375	$	0	$	0

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~~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.

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

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


(in thousands)	Nine Months Ended		Year Ended
Level 3 Fair Value Measurements:	September 30, 2020		December 31, 2019
Balance at beginning of year	$	3,130	$	8,490
Acquired balance	0		300
Paydowns/Sales/Settlements	0		(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
September 30, 2020
Collateral dependent loans	$	7,063	$	0	$	0	$	7,063
Other real estate owned (“OREO”)	1,000		0		0		1,000
MSR asset	10,332		0		0		10,332
December 31, 2019
Impaired loans	$	16,150	$	0	$	0	$	16,150
OREO	1,000		0		0		1,000
MSR asset	8,420		0		0		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 collateral dependent loans and 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~~


September 30, 2020
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	853,564	$	853,564	$	853,564	$	0	$	0
Certificates of deposit in other banks	32,969		35,112		0		35,112		0
Securities AFS	535,351		535,351		0		532,221		3,130
Other investments, including equity securities	26,636		26,636		3,124		19,472		4,040
Loans held for sale	8,384		8,712		0		8,712		0
Loans, net	2,877,405		2,962,975		0		0		2,962,975
BOLI	82,905		82,905		82,905		0		0
MSR asset	8,685		10,332		0		0		10,332
Financial liabilities:
Deposits	$	3,712,808	$	3,720,344	$	0	$	0	$	3,720,344

Long-term borrowings	405,826		405,787		0		363,471		42,316


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	$	0	$	0
Certificates of deposit in other banks	19,305		19,310		0		19,310		0
Securities AFS	449,302		449,302		0		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		0		2,753		0
Loans, net	2,559,779		2,593,110		0		0		2,593,110
BOLI	78,140		78,140		78,140		0		0
MSR asset	5,919		8,420		0		0		8,420
Financial liabilities:
Deposits	$	2,954,453	$	2,956,229	$	0	$	0	$	2,956,229
Long-term borrowings	67,629		66,816		0		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 PPPLF funding has a fixed rate of 0.35% for all participants; thus, carrying value approximates the estimated fair value 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~~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.

~~Management’s Discussion and Analysis~~

Overview

The following discussion is ~~Nicolet~~ management’s analysis of the consolidated financial condition as of September 30, ~~2017~~2020 and December 31, ~~2016~~2019 and results of operations for the three and nine-month periods ended September 30, ~~2017~~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 acquisitions of Choice Bancorp, Inc. (“Choice”) on November 8, 2019, at 12% of pre-merger assets, and Advantage Community Bancshares, Inc. (“Advantage”) on August 21, 2020, at 4% 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 and related ratios for ~~2017 included full contributions from~~ the ~~2016 acquisitions~~three 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 periodnine-month periods ended September 30, ~~2016) analytically explains most~~2020 include full contribution from Choice and a partial period of Advantage in third quarter 2020, while the same periods in 2019 include no contribution from Choice or Advantage.

The World Health Organization declared the coronavirus COVID-19 a pandemic in March 2020. The initial impacts of the ~~increase~~COVID-19 pandemic resulted in, ~~certain average balances~~among other things, stock and ~~income statement line items between 2017~~global markets decline, disruption in business and ~~2016 periods. To a lesser extent,~~leisure activities as nation-wide stay-at-home orders were mandated, significant strain on the ~~inclusion~~health care industry as it addressed the severity of the ~~First Menasha balance sheet (at about 20% of Nicolet’s then pre-merger asset size)~~health crisis, and ~~operational results for approximately five of nine months~~shift in ~~2017 analytically explains~~the general economy (such as high unemployment, negative GDP expectations, a ~~portion~~150 bps decline in Federal funds rates, and unprecedented government stimulus), triggering a 2020 recession. The dramatic events surrounding the pandemic, fluctuating social and economic changes since the onset of the ~~increase in certain average balances~~pandemic, and ~~income statement line items between 2017~~the uncertainty about the longevity of the pandemic's affects will continue to impact future expectations about credit costs and ~~2016 periods. The 2016 financial advisory business acquisition primarily impacts the brokerage~~margins, as well as fee income ~~personnel expense~~ and ~~certain other expense line items. Last,~~expenses.

Amid the ~~2016 and 2017 acquisitions impacted pre-tax net income by inclusion~~uncertainty, Nicolet took action to increase liquidity (largely through procurement of ~~non-recurring direct merger expenses of approximately $1.3 million~~term brokered CDs 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 million~~late March to early April), significantly increased the credit loss provision in the first nine months of 2020 for the dramatically changed circumstances that continue to evolve, and recorded market losses on equity investments held (in response to the market decline). Initial actions to keep customers and employees safe included reducing on-site staff, increasing remote staff, segregating leadership and key functional departments (and adding redundancy to ensure continuity of operations should there be a COVID-19 related incident), limiting branch access through appointment-only lobbies and temporarily closing 11 locations. In second ~~quarters, respectively), along~~quarter 2020 we supplemented the pay of our front-line employees working on-site, eliminated senior management incentive accruals, and aggressively procured masks and other protective supplies. Costs associated with ~~a $1.7~~on-site bonuses, testing, and protective supplies totaled $0.6 million ~~lease termination charge~~for second quarter 2020.

We sharpened our focus on configuring the Bank to more efficiently and effectively meet customers needs. We closely evaluated our branch network for redundancy and permanently closed seven (18%) of our 39 branches in second quarter, ~~2016~~which also reduced headcount by 56 employees (nearly 10% of our workforce). As a result, $1.7 million of one-time costs were recorded during second quarter 2020 related to lease terminations, severance, accelerated depreciation and write-offs. At September 30, 2020, Nicolet operates 36 branches, which includes the four branches acquired with Advantage. During fourth quarter 2020, Nicolet plans to close its Rib Mountain location (near Wausau) and open an additional Appleton location that is currently under construction.

Given the extent of uncertainty, we guided numerous customers through new loans, temporary loan modifications, or participation in the Paycheck Protection Program (“PPP”). Through September 30, 2020, Nicolet originated $351 million of PPP loans for 2,725 business customers, which supported over 40,000 employees in those underlying businesses. The PPP loans provided low 1% coupon and potentially forgivable funds to small businesses, and are fully guaranteed by the SBA warranting no credit loss provision. Nicolet earned on average a 3.5% fee or $12.3 million gross from the SBA to process and service the PPP loans. This aggregate fee was deferred and will be accreted ratably into interest income over the life of the PPP loan pool, which may accelerate if loans payoff sooner. Nicolet ~~branch~~recognized $2.7 million of the aggregate fee into interest income for year-to-date 2020. At September 30, 2020, the net carrying value of the PPP loans was $335 million. Using the PPP loans as collateral, Nicolet funded the PPP loans through the Federal Reserve's Paycheck Protection Program Liquidity Facility (“PPPLF”), which cost 0.35% and totaled $334 million at September 30, 2020. PPP loans are given a zero risk-weight in regulatory risk-based capital ratios and are also excluded from average assets in the regulatory leverage ratio if pledged as collateral on the related PPPLF funding. We created a micro-grant program, providing $1.25 million of funds in second quarter 2020 directly to 325 customers who otherwise qualified for a small PPP loan of less than $5,000, no strings attached, as a more cost beneficial, timely and impactful result for the customer and the Company. Since the pandemic started, payment modifications were made on approximately 980 loans totaling $462 million, most of which were commercial. As of September 30, only $60 million or 2% of loans excluding PPP loans, remained on modified terms. For retail customers purchasing new homes or refinancing, we closed ~~concurrent with~~over 1,200 mortgage loans in third quarter and nearly 3,300 for year-to-date 2020.

In summary, net income has been very strong at $42.1 million for the ~~Baylake merger.~~

~~Nicolet remains~~2020 year-to-date period, despite the magnitude of unforeseen changes in the economy from the pandemic and other events. Most notably, exceptionally strong secondary mortgage income, steadily rising net interest income (despite tighter margins), and expense control (except for one-time costs of the second quarter) have supported earnings against elevated credit loss provisions for potential credit challenges which remain largely unseen and difficult to yet quantify. The 2020 balance sheet has continued to grow since year end 2019 to $4.7 billion in assets at September 30, 2020, in part from our recent acquisition, but more so from extraordinarily high cash attributable to strong deposit growth as customers remain focused on ~~gaining efficiencies from its increased scale from the acquisitions,~~liquidity and safety.


Performance Summary
Table 1: Earnings Summary and Selected Financial Data
	At or for the Three Months Ended															At or for the Nine Months Ended
(In thousands, except per share data)	9/30/2020			6/30/2020			3/31/2020			12/31/2019			9/30/2019			9/30/2020			9/30/2019
Results of operations:
Interest income	$	37,270		$	36,892		$	37,003		$	36,192		$	34,667		$	111,165		$	102,396
Interest expense	4,710			5,395			5,740			5,723			5,477			15,845			16,787
Net interest income	32,560			31,497			31,263			30,469			29,190			95,320			85,609
Provision for credit losses	3,000			3,000			3,000			300			400			9,000			900
Net interest income after provision for credit losses	29,560			28,497			28,263			30,169			28,790			86,320			84,709
Noninterest income	18,691			17,471			9,585			13,309			12,312			45,747			40,058
Noninterest expense	23,685			27,813			23,854			25,426			22,887			75,352			71,373
Income before income tax expense	24,566			18,155			13,994			18,052			18,215			56,715			53,394
Income tax expense	6,434			4,576			3,321			5,670			4,603			14,331			10,788
Net income	18,132			13,579			10,673			12,382			13,612			42,384			42,606
Net income attributable to noncontrolling interest	30			101			118			87			82			249			260
Net income attributable to Nicolet Bankshares, Inc.	$	18,102		$	13,478		$	10,555		$	12,295		$	13,530		$	42,135		$	42,346
Earnings per common share:
Basic	$	1.75		$	1.29		$	1.00		$	1.22		$	1.45		$	4.04		$	4.51
Diluted	$	1.72		$	1.28		$	0.98		$	1.18		$	1.40		$	3.97		$	4.36
Common Shares:
Basic weighted average	10,349			10,417			10,516			10,061			9,347			10,426			9,394
Diluted weighted average	10,499			10,520			10,801			10,452			9,697			10,605			9,707
Outstanding (period end)	10,196			10,424			10,408			10,588			9,363			10,196			9,363
Period-End Balances:
Loans	$	2,908,793		$	2,821,501		$	2,607,424		$	2,573,751		$	2,242,931		$	2,908,793		$	2,242,931
Allowance for credit losses - loans	31,388			29,130			26,202			13,972			13,620			31,388			13,620
Securities available-for-sale, at fair value	535,351			510,809			511,860			449,302			419,300			535,351			419,300
Goodwill and other intangibles, net	176,213			164,094			164,974			165,967			121,371			176,213			121,371
Total assets	4,706,375			4,541,228			3,732,554			3,577,260			3,105,671			4,706,375			3,105,671
Deposits	3,712,808			3,537,805			3,023,466			2,954,453			2,584,447			3,712,808			2,584,447
Stockholders’ equity	538,068			532,033			510,971			516,262			428,014			538,068			428,014
Book value per common share	52.77			51.04			49.09			48.76			45.71			52.77			45.71
Tangible book value per common share (2)	35.49			35.30			33.24			33.08			32.75			35.49			32.75
Average Balances:
Loans	$	2,871,256		$	2,823,866		$	2,584,584		$	2,438,908		$	2,218,307		$	2,760,309		$	2,195,742
Interest-earning assets	4,216,106			3,917,499			3,167,505			2,974,974			2,763,997			3,768,676			2,733,870
Goodwill and other intangibles, net	169,353			164,564			165,532			147,636			121,895			166,493			122,869
Total assets	4,633,359			4,310,088			3,555,144			3,339,283			3,094,546			4,167,902			3,054,840
Deposits	3,636,260			3,403,188			2,920,071			2,756,295			2,563,821			3,320,994			2,545,017
Interest-bearing liabilities	2,933,737			2,741,199			2,218,592			2,023,448			1,895,754			2,632,280			1,911,395
Stockholders’ equity	537,826			520,177			513,558			478,645			420,864			523,904			405,521
Financial Ratios: (1)
Return on average assets	1.55		%	1.26		%	1.19		%	1.46		%	1.73		%	1.35		%	1.85		%
Return on average common equity	13.39			10.42			8.27			10.19			12.75			10.74			13.96
Return on average tangible common equity (2)	19.54			15.24			12.20			14.74			17.95			15.75			20.03
Average equity to average assets	11.61			12.07			14.45			14.33			13.60			12.57			13.27
Stockholders' equity to assets	11.43			11.72			13.69			14.43			13.78			11.43			13.78
Tangible common equity to tangible assets (2)	7.99			8.41			9.70			10.27			10.28			7.99			10.28
Net interest margin	3.06			3.21			3.94			4.06			4.19			3.35			4.17
Net loan charge-offs to average loans	0.10			0.01			0.01			(0.01)			0.06			0.04			0.03
Nonperforming loans to total loans	0.38			0.43			0.57			0.55			0.41			0.38			0.41
Nonperforming assets to total assets	0.25			0.29			0.42			0.42			0.34			0.25			0.34
Efficiency ratio	46.18			55.69			57.16			57.57			55.19			52.71			60.27
Effective tax rate	26.19			25.21			23.73			31.41			25.27			25.27			20.20
Selected Items:
Interest income from resolving PCI loans (rounded)	N/A			N/A			N/A			$	1,400		$	1,800		N/A			$	3,300
Tax-equivalent adjustment on net interest income	$	249		$	229		$	231		257			251			$	709		786
Tax benefit on stock-based compensation	(14)			(24)			(323)			(1,275)			(128)			(361)			(1,011)

(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 ~~well as on organic growth in our expanded markets~~they are considered to be critical metrics with which to analyze and ~~in brokerage services.~~

~~Performance Summary~~

~~Nicolet reported net~~evaluate financial condition and capital strength.

Net income ~~of $24.0~~was $42.1 million for the nine months ended September 30, ~~2017,~~2020, compared to $42.3 million for the nine months ended September 30, 2019. Earnings per diluted common share was $3.97 for the first nine months of 2020, compared to $4.36 for the first nine months of 2019.

•During second quarter 2019, net income favorably included $5.4 million (or $0.55 of diluted earnings per common share) related to two actions combined, the sale of 80% of Nicolet's equity investment in UFS, LLC, a ~~94% increase over $12.4~~data processing and e-banking entity ($7.4 million after-tax gain included in noninterest income under asset gains) and retirement-related compensation declared to benefit all employees after that sale ($2.75 million, or $2.0 million after-tax cost, included in noninterest expense under personnel), impacting the 2019 year-to-date and quarter comparisons.

•Net interest income was $95.3 million for the first nine months of ~~2016. Net income available to common shareholders was $24.0~~2020, up $9.7 million or ~~$2.45 per diluted common share for~~11% over the first nine months of ~~2017. Comparatively, after $633,000 of preferred stock dividends,~~2019. Interest income grew $8.8 million attributable to favorable volumes (mostly higher loan volumes from the Choice acquisition in November 2019, PPP loans in second quarter 2020, the Advantage acquisition in August 2020, and higher cash), partly offset by net ~~income available to common shareholders was $11.7~~unfavorable rates, influenced by Federal Reserve rate cuts in late 2019 and again in March 2020. Interest expense favorably decreased $0.9 million or $1.67 per diluted common share for the first nine months of 2016. Beginning March 1, 2016, the annual dividend rate 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~~periods with the impact of lower interest rates mostly offset by a higher volume of deposits. Net interest margin was 3.35% for the ~~first~~ nine months ~~of 2017 include full contributions from~~ended September 30, 2020, compared to 4.17% for the ~~2016 acquisitions and five~~nine months ~~from First Menasha, while~~ended September 30, 2019, heavily influenced by the ~~comparative 2016 period includes approximately five months from~~changing balance sheet mix in 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.

lower rate environment. For additional information regarding net interest income, see “Income Statement Analysis — Net Interest ~~Income~~

~~Nicolet’s earnings are substantially dependent on net interest income. Net interest~~Income.”

•Noninterest 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 earning assets and interest-bearing liabilities, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities, and repricing frequencies.

~~Net interest income in the consolidated statements of income (which excludes any taxable equivalent adjustment)~~ was $72.2 million in the first nine months of 2017, $24.1 million or 50% higher than $48.1 million in the first nine months of 2016, including $4.5 million higher aggregate discount accretion between the periods and impacted by the timing of the acquisitions (with 2017 including five months of First Menasha and full contribution from Baylake, while the 2016 period included only five months from Baylake). 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 $1.8 million and $1.3$45.7 million for the first nine months of ~~2017~~2020, up $5.7 million or 14% from the comparable 2019 period. Excluding net asset gains (losses), noninterest income was $46.9 million for the first nine months of 2020, up $14.9 million or 47% over 2019, predominantly on record net mortgage income spurred by strong refinance activity. For additional information regarding noninterest income, see “Income Statement Analysis — Noninterest Income.”

•Noninterest expense was $75.4 million, $4.0 million or 6% higher than the first nine months of 2019, largely due to the expanded operating base following the Choice and ~~2016, respectively, resulting~~Advantage acquisitions, as well as one-time expenses in ~~taxable equivalent net interest income~~second quarter 2020 associated with the announced branch closures, safety efforts related to the pandemic, a micro-grant program and a merger termination charge (collectively $4.0 million), while second quarter 2019 included $2.75 million of ~~$74.0~~nonrecurring retirement-related compensation declared. Personnel costs increased $1.1 million, and ~~$49.4~~non-personnel expenses combined increased $2.9 million ~~respectively.~~

~~Taxable equivalent~~or 10% over the comparable 2019 period. For additional information regarding noninterest expense, see “Income Statement Analysis — Noninterest Expense.”

•Nonperforming assets were only $12 million, representing 0.25% of total assets at September 30, 2020, compared to 0.42% at December 31, 2019 and 0.34% at September 30, 2019. For additional information regarding nonperforming assets, see “Balance Sheet Analysis – Nonperforming Assets.”

•At September 30, 2020, assets were $4.7 billion, up $1.1 billion or 32% from December 31, 2019, largely due to higher cash and cash equivalents (commensurate with the increase in total deposits) and an increase in loans (driven by PPP loans originated in second quarter 2020), as well as the acquisition of Advantage, which added $172 million in assets, $88 million in loans and $141 million in deposits at acquisition. Compared to September 30, 2019, assets increased $1.6 billion or 52%, attributable to the noted increases since year-end 2019 as well as the acquisition of Choice, which added $457 million in assets, $348 million in loans and $289 million in deposits at acquisition. For additional balance sheet discussion see “Balance Sheet Analysis.”

•At September 30, 2020, loans were $2.9 billion, 13% higher than December 31, 2019 and 30% higher than September 30, 2019. On average, loans grew $565 million or 26% over the first nine months of 2019. For additional information regarding loans, see “Balance Sheet Analysis — Loans.”

•Total deposits were $3.7 billion at September 30, 2020, an increase of 26% from December 31, 2019 and 44% higher than September 30, 2019. Year-to-date average deposits were $776 million or 30% higher than the first nine months of 2019. For additional information regarding deposits, see “Balance Sheet Analysis – Deposits.”

INCOME STATEMENT ANALYSIS

Net Interest Income

Tax-equivalent net interest income is a non-GAAP measure, but is a preferred industry measurement of net interest income (and its use in calculating a net interest margin) as it enhances the comparability of net interest income arising from taxable and tax-exempt sources.

The tax-equivalent adjustments bring tax-exempt interest to a level that would yield the same after-tax income by applying the effective Federal corporate tax rates to the underlying assets. Tables 2 and 3 present information to facilitate the review and discussion of selected average balance sheet items, tax-equivalent net interest income, interest rate spread and net interest margin.

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 %

~~(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.~~

- Tax-Equivalent Basis


	For the Nine Months Ended September 30,
	2020						2019
(in thousands)	Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate
ASSETS
Interest-earning assets
PPP Loans	$	199,662	$	4,263	2.80	%	$	—	$	—	—	%
Commercial-based loans ex PPP	2,083,768		80,224		5.06	%	1,745,835		74,558		5.63	%
Retail-based loans	476,879		17,190		4.81	%	449,907		18,092		5.36	%
Total loans, including loan fees (1)(2)	2,760,309		101,677		4.85	%	2,195,742		92,650		5.58	%
Investment securities:
Taxable	349,202		6,115		2.34	%	269,663		5,578		2.76	%
Tax-exempt (2)	130,714		2,165		2.21	%	134,166		2,221		2.21	%
Total investment securities	479,916		8,280		2.30	%	403,829		7,799		2.57	%
Other interest-earning assets	528,451		1,917		0.48	%	134,299		2,733		2.69	%
Total non-loan earning assets	1,008,367		10,197		1.35	%	538,128		10,532		2.60	%
Total interest-earning assets	3,768,676		$	111,874	3.91	%	2,733,870		$	103,182	4.99	%
Other assets, net	399,226						320,970
Total assets	$	4,167,902					$	3,054,840
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings	$	395,961	$	588	0.20	%	$	311,438	$	1,136	0.49	%
Interest-bearing demand	551,018		3,092		0.75	%	490,661		3,748		1.02	%
Money market accounts (“MMA”)	723,323		1,313		0.24	%	569,850		2,858		0.67	%
Core time deposits	400,198		4,901		1.64	%	397,530		6,070		2.04	%
Total interest-bearing core deposits	2,070,500		9,894		0.64	%	1,769,479		13,812		1.04	%
Brokered deposits	279,165		3,302		1.58	%	64,588		291		0.60	%
Total interest-bearing deposits	2,349,665		13,196		0.75	%	1,834,067		14,103		1.03	%
PPPLF	191,535		507		0.35	%	—		—		—	%
Other interest-bearing liabilities	91,080		2,142		3.10	%	77,328		2,684		4.59	%
Total wholesale funding	282,615		2,649		1.23	%	77,328		2,684		4.59	%
Total interest-bearing liabilities	2,632,280		15,845		0.80	%	1,911,395		16,787		1.17	%
Noninterest-bearing demand deposits	971,329						710,950
Other liabilities	40,389						26,974
Stockholders’ equity	523,904						405,521
Total liabilities and stockholders’ equity	$	4,167,902					$	3,054,840
Net interest income and rate spread			$	96,029	3.11	%			$	86,395	3.82	%
Tax-equivalent adjustment			$	709					$	786
Net interest margin					3.35	%					4.17	%
Selected Additional Information:
Total loans ex. PPP	$	2,560,647	$	97,414	5.01	%	$	2,195,742	$	92,650	5.58	%
Total interest-earning assets ex PPP	3,569,014		107,611		3.98	%	2,733,870		103,182		4.99	%
Total interest-bearing liabilities ex PPPLF	2,440,745		15,338		0.84	%	1,911,395		16,787		1.17	%
Net interest rate spread ex PPP & PPPLF					3.14	%					3.82	%

(1)Nonaccrual loans and loans held for sale are included in the daily average loan balances outstanding.

(2)The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 21% and adjusted for the disallowance of interest expense.

Table 2: ~~Year-To-Date~~Average Balance Sheet and Net Interest Income Analysis - Tax-Equivalent Basis (Continued)


	For the Three Months Ended September 30,
	2020						2019
(in thousands)	Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate
ASSETS
Interest-earning assets
PPP Loans	$	332,816	$	2,477	2.91	%	$	—	$	—	—	%
Commercial-based loans ex PPP	2,064,191		26,021		4.93	%	1,765,520		25,277		5.60	%
Retail-based loans	474,249		5,577		4.70	%	452,787		6,103		5.39	%
Total loans, including loan fees (1)(2)	2,871,256		34,075		4.66	%	2,218,307		31,380		5.56	%
Investment securities:
Taxable	356,908		2,001		2.24	%	271,632		1,904		2.80	%
Tax-exempt (2)	139,245		763		2.19	%	127,458		708		2.22	%
Total investment securities	496,153		2,764		2.23	%	399,090		2,612		2.62	%
Other interest-earning assets	848,697		680		0.32	%	146,600		926		2.49	%
Total non-loan earning assets	1,344,850		3,444		1.02	%	545,690		3,538		2.58	%
Total interest-earning assets	4,216,106		$	37,519	3.50	%	2,763,997		$	34,918	4.97	%
Other assets, net	417,253						330,549
Total assets	$	4,633,359					$	3,094,546
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings	$	443,121	$	127	0.11	%	$	323,222	$	384	0.47	%
Interest-bearing demand	585,528		844		0.57	%	480,395		1,199		0.99	%
MMA	777,696		233		0.12	%	571,194		873		0.61	%
Core time deposits	374,230		1,337		1.42	%	389,033		2,010		2.05	%
Total interest-bearing core deposits	2,180,575		2,541		0.46	%	1,763,844		4,466		1.00	%
Brokered deposits	336,026		1,243		1.47	%	54,661		130		0.94	%
Total interest-bearing deposits	2,516,601		3,784		0.60	%	1,818,505		4,596		1.00	%
PPPLF	335,865		297		0.35	%	—		—		—	%
Other interest-bearing liabilities	81,271		629		3.05	%	77,249		881		4.48	%
Total wholesale funding	417,136		926		0.87	%	77,249		881		4.48	%
Total interest-bearing liabilities	2,933,737		4,710		0.64	%	1,895,754		5,477		1.14	%
Noninterest-bearing demand deposits	1,119,659						745,316
Other liabilities	42,137						32,612
Stockholders’ equity	537,826						420,864
Total liabilities and stockholders’ equity	$	4,633,359					$	3,094,546
Net interest income and rate spread			$	32,809	2.86	%			$	29,441	3.83	%
Tax-equivalent adjustment			$	249					$	251
Net interest margin					3.06	%					4.19	%
Selected Additional Information:
Total loans ex. PPP	$	2,538,440	$	31,598	4.89	%	$	2,218,307	$	31,380	5.56	%
Total interest-earning assets ex PPP	3,883,290		35,042		3.55	%	2,763,997		34,918		4.97	%
Total interest-bearing liabilities ex PPPLF	2,597,872		4,413		0.67	%	1,895,754		5,477		1.14	%
Net interest rate spread ex PPP & PPPLF					2.88	%					3.83	%

(1)Nonaccrual loans and loans held for sale are included in the daily average loan balances outstanding.

(2)The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 21% and adjusted for the disallowance of interest expense.

Table 3: Volume/Rate Variance

~~Comparison~~ - Tax-Equivalent Basis


	For the Three Months Ended September 30, 2020 Compared to September 30, 2019:						For the Nine Months Ended September 30, 2020 Compared to September 30, 2019:
	Increase (Decrease) Due to Changes in						Increase (Decrease) Due to Changes in
(in thousands)	Volume		Rate		Net (1)		Volume		Rate		Net (1)
Interest-earning assets
PPP Loans	$	2,477	$	—	$	2,477	$	4,263	$	—	$	4,263
Commercial-based loans ex. PPP	5,524		(4,780)		744		16,787		(11,121)		5,666
Retail-based loans	288		(814)		(526)		1,072		(1,974)		(902)
Total loans (2)	8,289		(5,594)		2,695		22,122		(13,095)		9,027
Investment securities:
Taxable	345		(248)		97		944		(407)		537
Tax-exempt (2)	65		(10)		55		(57)		1		(56)
Total investment securities	410		(258)		152		887		(406)		481
Other interest-earning assets	861		(1,107)		(246)		2,285		(3,101)		(816)
Total non-loan earning assets	1,271		(1,365)		(94)		3,172		(3,507)		(335)
Total interest-earning assets	$	9,560	$	(6,959)	$	2,601	$	25,294	$	(16,602)	$	8,692

Interest-bearing liabilities
Savings	$	106	$	(363)	$	(257)	$	252	$	(800)	$	(548)
Interest-bearing demand	223		(578)		(355)		424		(1,080)		(656)
MMA	235		(875)		(640)		625		(2,170)		(1,545)
Core time deposits	(74)		(599)		(673)		40		(1,209)		(1,169)
Total interest-bearing core deposits	490		(2,415)		(1,925)		1,341		(5,259)		(3,918)
Brokered deposits	1,004		109		1,113		2,023		988		3,011
Total interest-bearing deposits	1,494		(2,306)		(812)		3,364		(4,271)		(907)
PPPLF	297		—		297		507		—		507
Other interest-bearing liabilities	23		(275)		(252)		84		(626)		(542)
Total wholesale funding	320		(275)		45		591		(626)		(35)
Total interest-bearing liabilities	1,814		(2,581)		(767)		3,955		(4,897)		(942)
Net interest income	$	7,746	$	(4,378)	$	3,368	$	21,339	$	(11,705)	$	9,634

(1)The change in interest due to both rate and volume has been allocated in proportion to the relationship of dollar amounts of change in each.

(2)The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 21% and adjusted for the disallowance of interest expense.

The interest rate environment has experienced dramatic change. 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 COVID-19 pandemic described in the “Overview” section, which brought slope back into the yield curve, though still fairly flat. Comparatively, short-term rates were 175 bps lower at September 30, 2020 than at September 30, 2019. While the following paragraphs will discuss the comparison of the nine months ~~ended September 30, 2017 versus~~of 2020 and 2019, we expect that 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

~~(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.~~

COVID-19 pandemic impacts will continue to evolve and pressure future quarters even further, including continued margin pressure and potential unusual loan or deposit volume or pricing impacts.

~~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 of the three months ended September 30, 2017 versus 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 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~~Tax-equivalent net interest income was ~~$74.0~~$96.0 million and $49.4 million for the nine months of 2017 and 2016, respectively, up $24.6 million or 50%, with $22.7 million from net favorable volume and mix variances (due to the addition of acquired net interest-earning assets, as well as organic growth), and $1.9 million from net favorable rate variances (from both a lower cost of funds and higher earning asset yield) between the periods. Taxable equivalent interest income on earning assets increased $26.3 million or 48% between the nine-month periods, with $23.7 million more interest from loans ($22.6 million from greater volume and $1.1 million from rates (with $4.5 million in higher aggregate discount accretion income, including $3.2 million higher discount income related to favorably resolved purchased credit impaired loans, more than offsetting 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 cost funding (largely from lower-costing Baylake deposits acquired, offset partly by 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).

~~The taxable-equivalent net interest margin was 4.27%~~ for the first nine months of ~~2017, up 28 bps versus~~2020, comprised of net interest income of $95.3 million ($9.7 million or 11% higher than the first nine months of ~~2016.~~2019), and a $0.7 million tax-equivalent adjustment (down nearly $0.1 million between the periods). The $9.6 million increase in tax-equivalent net interest income was attributable to net favorable volumes (which added $21.3 million, with $22.1 million from higher loan volumes, due to the inclusion of Choice and Advantage interest-earning assets, as well as PPP loans) and net unfavorable rates (which reduced net interest income by $11.7 million). The net $11.7 million decrease from rates was from interest-earning asset rate changes in the lower rate environment (decreasing net interest income by $16.6 million, of which $13.1 million was from loans, and $3.0 million was from the dramatically reduced cash rate earned), offset partly by benefits of a lower cost of funds (improving net interest income by $4.9 million, predominantly led by $5.3 million savings from non-brokered interest-bearing core deposits and $0.6 million savings from wholesale funds, partly offset by $1.0 million more interest cost from term brokered deposits which increased in both rate and volume).

Between the comparable nine-month periods, the interest rate spread ~~increased 27~~decreased 71 bps, largely attributable to the lower interest rate environment between the periods ~~with a favorable increase~~and the significantly higher concentration of low-earning cash in the 2020 period. The 2020 interest earning asset yield ~~(up 25~~declined 108 bps to ~~4.69% for first nine months~~3.91%, largely from the 73 bps decline in loans (with approximately 16 bps related to inclusion of ~~2017)~~PPP loans at a 2.80% yield), and ~~an improvement~~was also harmed by the decrease in the ~~cost of funds (down 2 bps~~loans-to-earning asset mix (to 73% compared to ~~0.56%~~80% for the first nine months of ~~2017).~~2019) given the significant increase in cash. The 2020 cost of funds declined favorably by 37 bps to 0.80%, largely from improved core deposit rates and lower variable wholesale funding rates, though offset partly by higher-costing brokered deposits (representing 10% of interest-bearing liabilities versus 3% for the first nine months of 2019) acquired with the Choice acquisition and procured in March-April 2020 under competitive conditions. The contribution from net free funds ~~increased~~decreased 11 bps, due mostly to the reduced value in the lower rate environment, though offset partly by ~~1 bp, mostly due to lower costs on~~ the ~~funding side of 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~~38% increase 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~~average net free funds (largely from average noninterest-bearing demand deposits and ~~borrowings, but have not significantly influenced rates further out on~~stockholders equity) between 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 favorablenine-month periods. As a result, the tax-equivalent net interest ~~flow can be sporadic and will diminish over time.~~

~~The earning asset yield~~margin was influenced largely by the mix of underlying earning assets, particularly carrying a higher proportion of loans and investments (each at higher yields in the 2017 period than the 2016 period) and a lower proportion of low-earning cash. Loans, investments and other interest earning assets (mostly low-earning cash) represented 80%, 18% and 2% of average earning assets, respectively,3.35% for the first nine months of ~~2017, and 78%, 17%, and 5%, respectively,~~2020, down 82 bps compared to 4.17% for the comparable ~~2016~~2019 period. ~~Loans yielded 5.26%~~

Average interest-earning assets increased to $3.8 billion, up $1.0 billion (38%) over the 2019 comparable period, primarily due to the timing of the acquisitions (Choice in November 2019 and ~~5.13%~~Advantage in August 2020), addition of PPP loans (beginning second quarter 2020), and significantly higher cash starting in second quarter 2020. Between the comparable nine-month periods, average loans increased $565 million or 26% (which includes modest organic growth, $348 million of Choice loans at acquisition, $88 million of Advantage loans at acquisition, and $335 million of net PPP loans at September 30, 2020), while all other interest-earning assets combined increased $470 million (87%) on average. The mix of average interest-earning assets shifted toward lower-yielding assets, at 73% loans, 13% investments and 14% other interest-earning assets (mostly cash) for the first nine months of 2020, compared to 80%, 15% and 5%, respectively for the first nine months of ~~2017 and 2016, while non-loan earning assets combined yielded 2.32% and 1.95%, respectively, for the periods. The 13 bps increase in loan yield between the nine-month periods~~2019.

Tax-equivalent interest income 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~~$111.9 million for the first nine months of ~~2017, $659~~2020, up $8.7 million ~~or 40% higher than~~(8%) over the first nine months of ~~2016,~~2019, while the related interest-earning asset yield was 3.91%, down 108 bps from the comparable period in 2019. Interest income on loans increased $9.0 million (10%) over the first nine months of 2019, aided by strong volumes, including Choice, Advantage, and PPP loans. The 2020 loan yield was 4.85%, down 73 bps from the first nine months of 2019, largely ~~attributable to acquired balances~~from the significantly lower rate environment impacting yields on new, renewed and variable rate loans, as well as ~~strong organic loan growth. The change consisted~~from inclusion of PPP loans at a ~~$568~~2.80% yield. Between the comparable nine-month periods, interest income on non-loan earning assets combined was down $0.3 million to $10.2 million, impacted by a 125 bps decline in the yield (to 1.35%) in the lower rate environment, partially offset by higher average volumes (up 87%) from the significantly higher cash.

Average interest-bearing liabilities were $2.6 billion, an increase of $721 million (38%), primarily due to the timing of the Choice acquisition in November 2019 and the Advantage acquisition in August 2020, as well as the significant increase in deposits from government stimulus activities and deposited PPP loan proceeds. The mix of average ~~loans (up 45%~~interest-bearing liabilities was 79% core deposits, 10% brokered deposits and 11% other funding, compared to ~~$1.8 billion)~~93%, ~~a $127 million increase in investment securities (up 47% to $397 million)~~3% 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%~~4%, respectively, for the first nine months of ~~2017~~2019, with the mix changes (especially increased money markets and brokered deposits) influenced by the mix of the $289 million of Choice deposits acquired, and the procurement of brokered deposits in March-April 2020 as part of previously discussed liquidity actions.

Interest expense decreased to $15.8 million (down $0.9 million) for the first nine months of 2020 compared to the first nine months of 2019, on larger average interest-bearing liabilities volumes (up 38% to $2.6 billion) but at a ~~year ago. The average~~lower overall cost of ~~interest-bearing~~funds (down 37 bps to 0.80%). Interest expense on deposits ~~(which represented 96%~~decreased $0.9 million (6%) from the first nine months of 2019 given 28% higher average interest-bearing deposit balances but at a lower cost (down 28 bps to 0.75%). The 2020 cost of savings, interest-bearing demand, money market accounts and core time deposits decreased from the first nine months of 2019, by 29 bps, 27 bps, 43 bps and 40 bps, respectively, as product rate changes were made in the lower rate environment, and brokered deposits cost 98 bps more than the comparable nine-month period of 2019, largely from higher-costing term brokered funds acquired with the Choice acquisition in November 2019 and procured during March-April 2020 under competitive conditions as part of previously discussed liquidity actions. Interest expense on other interest-bearing liabilities was minimally changed between the comparable nine-month periods, as additional interest expense on higher average balances (up $205 million) was substantially offset by lower rates (down 336 bps to 1.23%), mostly impacted by the inclusion of the low-costing PPPLF (average balance of $192 million for the first nine months of 2020 at a 0.35% rate), and variable rate debt repricing and maturing advances replaced in the lower rate environment.

Provision for Credit Losses

The provision for credit losses increased to $9.0 million 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~~2020, compared to $0.9 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 in the 2017 acquisition. The Company has reduced yields on these brokered deposits by repricing to market rates.

~~Provision for Loan Losses~~

~~The provision for loan losses~~ for the nine months ended September 30, ~~2017~~2019, largely due to the unprecedented economic disruptions and ~~2016 was $1.9 million~~uncertainty surrounding the COVID-19 pandemic, and ~~$1.4 million, respectively, exceeding net charge offs~~to a lesser extent, to the acquisition 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 declineAdvantage 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.~~

third quarter 2020. The provision for ~~loan~~credit losses was significantly increased to $3 million in first quarter 2020 with nearly no forward visibility in the wake of an emerging pandemic and recession. For second and third quarter 2020, the expectations about the extent and duration of current credit stress on our customers remains extremely difficult to estimate; thus, an additional provision of $3 million per quarter was provided despite no material degradation of the current asset quality metrics. In addition, the third quarter provision for credit losses included approximately $0.6 million to establish the initial allowance for credit losses - loans related to the Advantage acquisition.

The provision for credit losses is predominantly a function of Nicolet’s methodology and judgment as to qualitative and quantitative factors used to determine the ~~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. See also Note 1, “Basis of Presentation” and Note 6, “Loans, Allowance for Credit Losses - Loans, and Credit Quality” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional policy and disclosures. For additional information regarding asset quality and the ~~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 %


	Three Months Ended September 30,								Nine Months Ended September 30,
(in thousands)	2020		2019		$ Change		% Change		2020		2019		$ Change		% Change
Trust services fee income	$	1,628	$	1,594	$	34	2	%	$	4,717	$	4,631	$	86	2	%
Brokerage fee income	2,489		2,113		376		18		7,080		5,925		1,155		19
Mortgage income, net	9,675		3,700		5,975		161		21,965		6,962		15,003		215
Service charges on deposit accounts	1,037		1,223		(186)		(15)		3,075		3,587		(512)		(14)
Card interchange income	1,877		1,735		142		8		5,076		4,815		261		5
BOLI income	531		495		36		7		1,774		1,834		(60)		(3)
Other income	1,237		1,166		71		6		3,245		4,274		(1,029)		(24)
Noninterest income without net gains	18,474		12,026		6,448		54		46,932		32,028		14,904		47
Asset gains (losses), net	217		286		(69)		N/M		(1,185)		8,030		(9,215)		N/M
Total noninterest income	$	18,691	$	12,312	$	6,379	52	%	$	45,747	$	40,058	$	5,689	14	%
Trust services fee income & Brokerage fee income combined	$	4,117	$	3,707	$	410	11	%	$	11,797	$	10,556	$	1,241	12	%

N/M means not ~~meaningful~~

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

meaningful.

Noninterest income was ~~$26.0~~$45.7 million for the first nine months of ~~2017,~~2020, an increase of $5.7 million (14%) compared to ~~$18.8~~$40.1 million for the ~~first nine months~~comparable period of ~~2016, aided largely by the 2016 acquisitions and, to~~2019, which included 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 million or 31.3%.~~

The 2017 activity in net gain on sale or write-down of assets consisted of a $1.2 million gain to record the fair value of Nicolet’s pre-acquisition interest in First Menasha, a $0.3 million net gain on the sale of OREO, a $0.1 million write-down of OREO properties, and a $0.7$7.4 million gain on the equity investment sale ~~or disposition of assets (consisting of $0.9~~noted previously. Noninterest income excluding net asset gains (losses) grew $14.9 million ~~of gain from~~(47%) between the ~~sale two vacated bank branches, a $0.4~~comparable nine-month periods, predominantly on strong net mortgage income.

Trust services fee income and brokerage fee income combined were $11.8 million, ~~loss from the transfer of bank branches to OREO, and a $0.2~~up $1.2 million ~~gain from the sale of an other investment). The 2016 activity included gains of $0.6 million from the sale of OREO properties.~~

~~Service charges on deposit accounts were $3.4 million for the first nine months of 2017, up $0.9 million or 33.9%~~(12%) over the first nine months of ~~2016, resulting from an increased number of~~2019, consistent with the growth in 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 $22.0 million, increased ~~$0.3~~$15.0 million ~~or 8.3%~~(215%) between the comparable nine-month periods, ~~due to greater~~predominantly from higher sale gains and capitalized gains combined (up $15.3 million or 217%, commensurate with the increase in volumes sold into the secondary ~~mortgage production and sales~~market aided by ~~a broader geographic footprint~~the current refinance boom and ~~increased~~better pricing between the years), favorable changes in the fair value of the mortgage derivatives (up $0.3 million), and higher net servicing fees (up $0.2 million or 34% on the ~~growing~~ larger

portfolio ~~of mortgage loans~~ serviced for ~~others.~~

~~Trust service~~others), partially offset by $0.8 million MSR asset impairment given faster paydown activity. See also “Lending-Related Commitments” and Note 7, “Goodwill and Other Intangibles and Mortgage Servicing Rights” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures on the MSR asset.

Service charges on deposit accounts were down $0.5 million to $3.1 million for the nine months ended September 30, 2020, mainly as we waived certain fees ~~were up $0.4~~during second quarter 2020 to provide economic relief to our customers.

Card interchange income grew $0.3 million ~~or 10.8% between the nine-month periods~~(5%) due to higher ~~assets under management. Between~~volume and activity, especially seen in third quarter 2020, as the first half activity was tempered by cautionary spending of consumers given the economic uncertainty.

BOLI income was down $0.1 million between the comparable nine-month periods, ~~brokerage fees were up significantly, up $2.1 million or 100.6%,~~ attributable to the ~~2016 financial advisor business acquisition~~difference in BOLI death benefits received in each nine-month period (down $0.2 million), partly offset by income on higher average balances from $5 million additional BOLI purchased in mid-2019, $6 million BOLI acquired with Choice, and $3 million BOLI acquired with Advantage.

Other income of $3.2 million for the nine months ended September 30, 2020 was down $1.0 million from the comparable 2019 period, largely due to $0.5 million lower income from our smaller equity interest in a data processing entity after the partial sale in May 2019 and $0.3 million attributable to the fee earned on a customer loan interest rate swap in second quarter 2019.

Net asset losses of $1.2 million in the first nine months of 2020 were primarily attributable to unfavorable fair value marks on equity securities and the $0.1 million write-off of Commerce common stock in connection with the terms of the mutual termination of the Commerce merger agreement, partly offset by gains of $0.3 million on the sale of securities AFS. Net asset gains of $8.0 million in the first nine months of 2019 were comprised primarily of the $7.4 million gain on the equity investment sale and $0.9 million of favorable fair value marks on equity securities, partially offset by losses of $0.3 million on fixed asset disposals and write-downs of OREO and other investments.

Noninterest Expense

Table 5: Noninterest Expense


	Three Months Ended September 30,								Nine Months Ended September 30,
($ in thousands)	2020		2019		Change		% Change		2020		2019		Change		% Change
Personnel	$	14,072	$	12,914	$	1,158	9	%	$	41,877	$	40,809	$	1,068	3	%
Occupancy, equipment and office	4,051		3,454		597		17		12,616		10,961		1,655		15
Business development and marketing	810		1,428		(618)		(43)		4,683		4,288		395		9
Data processing	2,658		2,515		143		6		7,620		7,220		400		6
Intangibles amortization	834		914		(80)		(9)		2,707		2,936		(229)		(8)
Other expense	1,260		1,662		(402)		(24)		5,849		5,159		690		13
Total noninterest expense	$	23,685	$	22,887	$	798	3	%	$	75,352	$	71,373	$	3,979	6	%
Non-personnel expenses	$	9,613	$	9,973	$	(360)	(4)	%	$	33,475	$	30,564	$	2,911	10	%
Average full-time equivalent (“FTE”) employees	523		568		(45)		(8)	%	553		557		(4)		(1)	%

Noninterest expense was $75.4 million, an increase of $4.0 million (6%) over the first nine months of 2019, largely due to the expanded operating base following the Choice and Advantage acquisitions, as well as ~~subsequent new growth and pricing.~~

~~BOLI income was up $0.4 million or 49.3% between the nine-month periods, commensurate~~one-time expenses in second quarter 2020 associated with the ~~growth in average BOLI investments, including additional insurance purchases in 2016. Card interchange fees were up $1.2~~announced branch closures, safety efforts related to the pandemic, a micro-grant program and a merger termination charge (collectively $4.0 million), while second quarter 2019 included $2.75 million ~~or 53.6% on higher volume and activity. Other noninterest income~~of nonrecurring retirement-related compensation declared. Personnel costs increased $1.1 million (3%), while non-personnel expenses combined increased $2.9 million (10%) over the first nine months of 2019.

Personnel expense was ~~$2.0~~$41.9 million ~~up $0.4~~for the nine months ended September 30, 2020, an increase of $1.1 million ~~or 21.4% over~~from the comparable period ~~of 2016~~in 2019. Excluding the $2.75 million nonrecurring compensation from the 2019 period, personnel expense increased $3.8 million (10%). The increase is mainly due to strong merit increases between the periods (increasing salary expense and 401k expense), higher stock-based compensation, as well as higher health and other fringes. While average FTEs were minimally changed between the year-to-date periods, the three-quarter trend was increasing for 2019 and decreasing for 2020 with ~~income~~the additional headcount 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~~Choice and Advantage acquisitions, largely offset by reductions from the ~~nine months ending September 30, 2017 versus 2016~~

~~Total noninterest~~branch closures. Personnel expense was ~~$59.5~~also impacted by $0.4 million higher overtime to process mortgage and PPP volume, $0.2 million severance related to the branch closures, and $0.4 million of on-site bonus pay.

Occupancy, equipment and office expense was $12.6 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 which2020, up $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%~~(15%) compared to the first nine months of ~~2016, largely due~~2019, with 2020 including $0.5 million of accelerated depreciation and write-offs related to the ~~expanded workforce, with average full time equivalent employees up 32% (from 393~~

branch closures, higher expense for software and technology to ~~519~~drive operational efficiency and enhance products or services, and for ~~the first nine months of 2016~~additional licensing and ~~2017, respectively). Also contributing~~equipment to expand remote workers in response to the ~~increase were merit increases between the periods, incentives timing, equity grants in the second quarter~~COVID-19 pandemic. The comparable nine-month period of ~~2017, and higher health and other benefits costs.~~

~~Occupancy, equipment and office expense was $9.6~~2019 also included approximately $0.2 million of accelerated depreciation for ~~the first nine months of 2017, up $2.3 million or 31.3% compared to 2016, primarily the result of the larger operating base and software needs, offset partly by~~ branch ~~closure savings.~~

facility upgrades.

Business development and marketing expense ~~increased $1.0~~was $4.7 million, up $0.4 million or ~~42.8%~~9%, between the comparable nine-month periods, largely due to $1.25 million for the ~~expanded operating base~~micro-grant program, partly offset by lower business development costs from less travel and ~~branding efforts influencing additional marketing, promotions and media.~~

entertainment during the pandemic.

Data processing ~~expenses, which are primarily volume-based, rose $2.0~~expense was $7.6 million, up $0.4 million or ~~45.8%~~6% between the comparable nine-month periods, ~~predominantly attributable~~mostly due to volume-based increases in core processing charges.

Intangibles amortization decreased $0.2 million between the comparable nine-month periods mainly from declining amortization on the aging intangibles of previous acquisitions, partly offset by amortization from the new intangibles of the August 2020 Advantage and November 2019 Choice acquisitions.

Other expense was $5.8 million, up $0.7 million (13%) between the comparable nine-month periods. The first nine months of 2020 included $1.0 million of lease termination charges related to the ~~acquisitions, higher card processing, and expanded functionalities. Intangible amortization increased $1.2~~branch closures, $0.5 million ~~due exclusively~~ to ~~timing of and~~terminate the ~~addition of intangibles recorded as part of the acquisitions.~~

Other noninterest expense decreased $1.2 million or 25.0% between the nine-month periods, due primarily to $2.1 million lower merger-related expenses, partially offset by a $0.9 million increase in all other costs, which were largely a function of higher other operating costs associated with size (such as OREO expenses, legal, audit and bank insurance costs)Commerce merger agreement and a ~~$0.4~~$0.3 million ~~increase in 2017 associated with implementing~~charge on the ~~customer relationship system that began in~~early repayment of FHLB advances, while the ~~fourth quarter~~first nine months of ~~2016.~~

2019 included $0.2 million higher FDIC insurance costs and a $0.6 million fraud loss contingency.

Income Taxes

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

Income tax expense was ~~$12.6~~$14.3 million (effective tax rate of 25.27%) for the first nine months of 2020, compared to $10.8 million (effective tax rate of 20.20%) for the comparable period of 2019. The lower effective tax rate for 2019 was due to the favorable tax treatment of the equity investment sale, BOLI death benefit proceeds, and ~~$6.4 million, respectively. The increase was primarily attributable to~~ higher ~~pre-tax income between the two periods. Included in 2017 is a~~ tax benefit 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 ofon stock-based compensation.

Income Statement Analysis – Three Months Ended September 30, ~~2017 or December 31, 2016.~~

~~Comparison of the three months ending~~2020 versus Three Months Ended September 30, ~~2017 versus 2016~~

~~Nicolet reported net~~2019

Net income ~~of $9.5~~was $18.1 million for the three months ended September 30, ~~2017, up $3.0~~2020, an increase of $4.6 million ~~or 47% over $6.5~~(34%) from $13.5 million for the comparable period of 2016. Net income available to common shareholders for the third quarter of 2017 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~~2019. Earnings per diluted common share was $1.72 for third quarter 2020, compared to $1.40 for third quarter 2019.

Tax-equivalent net interest income was $32.8 million for third quarter 2020, comprised of net interest income of ~~$27.0~~$32.6 million ($3.4 million or 12% over third quarter 2019), and ~~$21.5~~a tax-equivalent adjustment of $0.2 million ~~respectively. Taxable equivalent net~~(down minimally from third quarter 2019). Tax-equivalent 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 assets included in 2017 but not in 2016), and $0.5 million lower net interest income from net unfavorable rate variances (especially from higher costing deposits).

The earning asset yield was 4.72% for third quarter 2017, 15 bps higher than third quarter 2016, mainly due to a higher mix of loans as a percent of earning assets. Loans earned 5.29% 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, partially offset by higher aggregate discount accretion on loans. Non-loan earning assets which earn less than loan assets represented 19% of average earning assets for third quarter 2017 (including higher low-earning cash) 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 $0.2increased $2.6 million between the third quarter periods, ~~although there~~with $9.6 million from stronger volumes (led by average loans which grew $653 million or 29% over third quarter 2019, mostly from the PPP loans and the loans acquired with Choice and Advantage, as well as significantly higher cash included in other interest earning assets, up $702 million to represent 20% of interest-earning assets for third quarter 2020 compared to 5% for third quarter 2019), partly offset by $7.0 million from lower yields across most interest-earning assets given the Federal Reserve interest rate cuts in second half 2019 and March 2020. Interest expense decreased $0.8 million from third quarter 2019, as the impact of the lower interest rate environment more than offset the higher average deposit and funding balances. For additional information regarding average balances, net interest income and net interest margin, see “Income Statement Analysis — Net Interest Income.”

The net interest margin for third quarter 2020 was an3.06%, down from 4.19% for third quarter 2019, heavily influenced by the changing balance sheet mix, especially to low-earning cash. The yield on interest-earning assets of 3.50% declined 147 bps from third quarter 2019 (mostly due to the dramatic increase in ~~UFS, Inc. income~~cash that generally earns 10 bps since March 2020, as well as the low rate on the PPP loans). The yield on loans excluding PPP loans was 4.89%, 67 bps lower than third quarter 2019 mostly attributable to the impact of ~~$0.1 million. Net gain~~the lower interest rate environment on ~~sale or write-down~~variable loans offset partly by floors and the mix of ~~assets increased by $0.9~~fixed rate loans. The cost of funds of 0.64% declined 50 bps between the comparable quarters as both deposit and other funding costs were adjusted down in the lower interest rate environment, as well as the inclusion of PPPLF funds costing 35 bps.

Provision for credit losses in third quarter 2020 was $3.0 million, compared to provision for credit losses of $0.4 million for third quarter 2019 given the vastly different economic conditions between the third quarter periods ~~mostly due to~~and the unknown magnitude of the evolving impact of current credit stress on our customers arising from pandemic-based business disruptions and other recessionary conditions. Net charge-offs were 0.10% and 0.06%, for third quarter 2020 and 2019, respectively.

Noninterest income was $18.7 million for third quarter 2020, an increase of $6.4 million (52%) from third quarter 2019, driven by strong secondary mortgage income. Net mortgage income of $9.7 million for third quarter 2020 was up $6.0 million (161%) over third quarter 2019 from higher sale gains and capitalized gains combined (up $6.2 million or 163%, commensurate with the increase in volumes sold into the secondary market, aided by the current refinance boom, and better pricing between the years), a ~~$1.2~~larger servicing portfolio, and a $0.1 million ~~gain to record~~favorable change in the fair value of ~~Nicolet’s pre-acquisition interest~~the mortgage derivatives, partially offset by $0.4 million MSR asset impairment given higher refinance activity. Trust services fee income and brokerage fee

income combined was up $0.4 million (11%), consistent with the growth in ~~First Menasha in the~~assets under management. Service charges on deposit accounts were down $0.2 million to $1.0 million for third quarter ~~of 2017.~~

2020, mainly on lower NSF charges. Card interchange income grew $0.1 million (8%) due to higher volume and activity. For additional information regarding noninterest income, see “Income Statement Analysis — Noninterest Income.”

Noninterest expense was ~~$20.9~~$23.7 million for ~~the~~ third quarter 2020, an increase of ~~2017, up $1.8~~$0.8 million ~~or 9.7%~~(3%) from third quarter ~~2016. There were no non-recurring merger-based expenses~~2019, including a $1.2 million increase in ~~the third quarter 2017 compared to $0.1~~personnel expense partly offset by a $0.4 million decrease in ~~the third quarter of 2016. Excluding the noted merger-based expenses, noninterest~~non-personnel expenses. Personnel expense increased ~~approximately $1.9~~$1.2 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,~~(9%), mainly due to strong merit increases between the periods (increasing salary expense and stock-based compensation), as well as higher ~~equity award costs,~~health and ~~an increase in average full time equivalent employees attributable to~~other fringes. Average FTEs were down 8% between the ~~2017 acquisition.~~comparable quarters as the timing of the additional headcount from the Choice and Advantage acquisitions, was more than offset by reductions from the branch closures. Occupancy, equipment, and office ~~expense~~of $4.1 million was up $0.6 million ~~higher due~~(17%), attributable to the larger operating base and higher expense for software ~~needs. Data processing was $0.4~~and technology to drive operational efficiency, enhance products or services, and support the expanded remote worker capabilities. Business development and marketing of $0.8 million ~~higher than~~decreased $0.6 million (43%) versus third quarter ~~2016 from increased accounts, higher card processing~~2019 as travel, educational and entertainment costs ~~and expanded functionalities.~~

~~The provision~~were dramatically reduced during the pandemic. All remaining noninterest expense categories on a combined basis were down $0.3 million (7%) as third quarter 2019 included $0.2 million for ~~loan losses was $1.0 million and $0.5 million~~a fraud loss contingency matter. For additional information regarding noninterest expense, see “Income Statement Analysis — Noninterest Expense.”

Income tax expense for third quarter ~~2017 and 2016, respectively. Net charge-offs for the quarter ending September 30, 2017 were $1.1~~2020 was $6.4 million, ~~(due to the charge off~~with an effective tax rate of ~~a large commercial loan)~~26.19%, compared to ~~a net recovery~~income tax expense of ~~$0.1~~$4.6 million and an effective tax rate of 25.27% for ~~the~~ third quarter ~~of 2016.~~ 2019.

BALANCE SHEET ANALYSIS

At September 30, ~~2017,~~2020, assets were $4.7 billion, an increase of $1.1 billion (32%) from December 31, 2019. The increase from year-end 2019 was largely due to higher cash and cash equivalents (up $672 million to $854 million, commensurate with the ~~ALLL was $12.6 million (or 0.61%~~increase in total deposits) and loans. Period end loans of ~~total loans) compared to $11.5 million (or 0.74% of total loans)~~$2.9 billion at September 30, ~~2016. The~~2020, increased $335 million from December 31, 2019, with the net carrying value of PPP loans adding $335 million and Advantage adding $88 million at acquisition, net of a decline in the ~~ratio was a result of recording the First Menasha~~remaining loan portfolio (led by commercial lines of credit). Total deposits were $3.7 billion at September 30, 2020, an increase of a $758 million from year-end 2019, with customer deposits (core) up $592 million and brokered deposits up $167 million, influenced by liquidity objectives of customers and the Bank in the very uncertain times. Borrowings increased $338 million mostly due to participation in the PPPLF to fund the PPP loans. Total stockholders’ equity was $538 million, an increase of $22 million from December 31, 2019, primarily from earnings and positive net fair value ~~with no carryover~~investment changes, exceeding stock repurchases and the adoption of ~~their allowance at the time~~CECL, which negatively impacted equity by $6 million. See also Notes 1, “Basis of Presentation” and 6, “Loans, Allowance for Credit Losses - Loans, and Credit Quality” of the ~~merger.~~

~~Income tax expense was $5.1~~Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional information on the adoption of CECL.

Compared to September 30, 2019, assets were $4.7 billion, up $1.6 billion or 52%. Loans increased $666 million (30%) and ~~$3.4~~deposits increased $1.1 billion (44%) over September 30, 2019, attributable to the increases from year-end 2019 noted above, as well as the acquisition of Choice in November 2019, which added $457 million in assets, $348 million in loans and $289 million of deposits at acquisition. Stockholders’ equity increased $110 million from September 30, 2019, primarily due to common stock issued in the November 2019 Choice acquisition of $80 million, as well as net income and positive net fair value investment changes, partially offset by stock repurchases over the year.

Loans

In addition to the discussion that follows, see also Note 1, “Basis of Presentation” and Note 6, “Loans, Allowance for Credit Losses - Loans, and Credit Quality,” in the ~~third quarters of 2017~~Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures and ~~2016, respectively. The effective tax rates were 34.9%~~accounting policy on loans. For additional information regarding the allowance for ~~third quarter 2017~~credit losses and ~~34.5% for third quarter 2016.~~

~~BALANCE~~nonperforming assets see also “BALANCE SHEET ANALYSIS

~~Loans~~

– Allowance for Credit Losses - Loans” and “BALANCE SHEET ANALYSIS – 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,~~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, Nicolet began proactive discussions and/or temporary loan modifications (such as interest-only or payment deferrals) before the CARES Act passed in late March. Such modifications are further discussed under “BALANCE SHEET ANALYSIS – Nonperforming Assets.” In addition, Nicolet evaluated its collective concentration in restaurants, retail, arts, recreation, tourism and other hospitality businesses, which represented approximately 15% of its loan portfolio at the start of the pandemic in March 2020, and has ~~also developed guidelines~~declined modestly since that time. It remains unknown yet how much the Paycheck Protection Program may alleviate potential loss concerns across business operators in Nicolet’s loan portfolio who participated in the PPP. Further, it is unknown how businesses (individual customers or industry groups) will react or survive given the prolonged and evolving impact of the pandemic. These factors were part of the determination for a larger 2020 provision, and continue to ~~manage~~be evaluated.

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

Table 6: Period End Loan Composition


	September 30, 2020				December 31, 2019				September 30, 2019
(in thousands)	Amount		% of Total		Amount		% of Total		Amount		% of Total
Commercial & industrial	$	735,531	25	%	$	806,189	31	%	$	763,742	34	%
PPP loans	335,236		12		—		—		—		—
Owner-occupied CRE	499,605		17		496,372		19		456,508		20
Agricultural	111,022		4		95,450		4		94,641		5
Commercial	1,681,394		58		1,398,011		54		1,314,891		59
CRE investment	475,050		16		443,218		17		336,442		15
Construction & land development	121,647		4		92,970		4		61,810		3
Commercial real estate	596,697		20		536,188		21		398,252		18
Commercial-based loans	2,278,091		78		1,934,199		75		1,713,143		77
Residential construction	57,496		2		54,403		2		41,496		2
Residential first mortgage	428,017		15		432,167		17		343,400		15
Residential junior mortgage	112,173		4		122,771		5		116,179		5
Residential real estate	597,686		21		609,341		24		501,075		22
Retail & other	33,016		1		30,211		1		28,713		1
Retail-based loans	630,702		22		639,552		25		529,788		23
Total loans	$	2,908,793	100	%	$	2,573,751	100	%	$	2,242,931	100	%
Total loans ex. PPP loans	$	2,573,557	88	%	$	2,573,751	100	%	$	2,242,931	100	%

Broadly, the loan portfolio at September 30, 2020, was 78% commercial-based and 22% retail-based. Commercial-based loans are considered to have more inherent risk of default than retail-based loans, in part because of the broader list of factors that could impact a commercial borrower negatively. In addition, the commercial balance per borrower is typically larger than that for retail-based loans, implying higher potential losses on an individual customer basis. Credit risk on commercial-based loans is largely influenced by general economic conditions and the resulting impact on a borrower’s operations or on the value of underlying collateral, if any. PPP loans, however, initially added during second quarter 2020, are fully guaranteed by the SBA, warranting no credit loss provisions.

Commercial-based loans of $2.3 billion increased $344 million (18%) since December 31, 2019, primarily due to the $335 million net carrying value added with the PPP loans and the $88 million of loans added with Advantage at acquisition, partly offset by declines in the remaining commercial-based loans (mostly commercial lines of credit), as many commercial customers funded their current needs through the PPP loans and exercised caution in this volatile and uncertain business climate. Commercial and industrial loans continue to be the largest segment of Nicolet’s portfolio and represented 25% of the total portfolio at September 30, 2020.

Residential real estate loans of $598 million were down $12 million (2%) from year-end 2019, to represent 21% of total loans at September 30, 2020. Residential first mortgage loans include conventional first-lien home mortgages, while residential junior mortgage real estate loans consist mainly of home equity lines and term loans secured by junior mortgage liens. As part of its ~~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 ~~all~~individually evaluated credit-deteriorated loans, ~~determined to be impaired.~~which management defines as nonaccrual credit relationships over $250,000, collateral dependent loans, and 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~~shortfall. Management allocates 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. Second, Nicolet’s management allocates ALLLACL-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 its allocation methodology on both~~Lastly, management considers reasonable and supportable forecasts to assess the ~~originated loans and on the acquired loans separately to account for differences, such as different loss histories and qualitative factors, between the two segments.~~

~~Management performs ongoing intensive analyses~~collectability of its loan portfolio to allow for early identification of customers experiencing financial difficulties, maintains prudent underwriting standards, understands the economy in its markets, and considers the trend of deterioration in loan quality in establishing the level of the ALLL.

Consolidated net income and stockholders’ equity could be affected if management’s estimate of the ALLL necessary to cover expected losses is subsequently materially different, requiring a change in the level of provision for loan losses to be recorded. While management uses currently available information to recognize losses on loans, future ~~adjustments to the ALLL may be necessary based on newly received appraisals, updated commercial customer financial statements, rapidly deteriorating customer~~ cash flow, and changes in economic conditions that affect Nicolet’s customers. As an integral part of their examination process, federal regulatory agencies also review the ALLL. Such agencies may require additions to the ALLL or may require that certain loan balances be charged-off or downgraded into criticized loan categories when their credit evaluations differ from those of management based on their judgments about information available to them at the time of their examination.

flows.

At September 30, ~~2017,~~2020, the ~~ALLL~~ACL-Loans was ~~$12.6~~$31.4 million (representing 1.08% of period end loans and 1.22% of period end loans excluding PPP 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$13.6 million at September 30, ~~2017 and December 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 the loan portfolio and $0.8 million for the PCD gross-up) and a much higher provision for credit losses in ~~2016~~2020 given the unprecedented economic disruptions and ~~2017.~~

uncertainty surrounding the COVID-19 pandemic. 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~~


	Nine Months Ended						Year Ended
(in thousands)	September 30, 2020			September 30, 2019			December 31, 2019
ACL-Loans:
Balance at beginning of period	$	13,972		$	13,153		$	13,153
Adoption of CECL	8,488			—			—
Initial PCD ACL	797			—			—
Total impact for adoption of CECL	9,285			—			—
Provision for credit losses	9,000			900			1,200
Charge-offs	(1,002)			(629)			(927)
Recoveries	133			196			546
Net (charge-offs) recoveries	(869)			(433)			(381)
Balance at end of period	$	31,388		$	13,620		$	13,972
Net loan (charge-offs) recoveries:
Commercial & industrial	$	(512)		$	31		$	261
Owner-occupied CRE	(257)			(11)			(91)
Agricultural	—			—			—
CRE investment	(20)			—			—
Construction & land development	—			—			—
Residential construction	—			(226)			(226)
Residential first mortgage	7			36			14
Residential junior mortgage	18			(48)			(41)
Retail & other	(105)			(215)			(298)
Total net (charge-offs) recoveries	$	(869)		$	(433)		$	(381)
Ratios:
ACL-Loans to total loans	1.08		%	0.61		%	0.54		%
ACL-Loans to total loans ex. PPP loans	1.22		%	0.61		%	0.54		%
Net charge-offs to average loans, annualized	0.04		%	0.03		%	0.02		%
Net charge-offs to average loans ex. PPP loans, annualized	0.05		%	0.03		%	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. Since the pandemic started, approximately 980 loans (88% commercial and 12% retail) were provided payment modifications, consistent with the guidelines of the CARES Act, on loans totaling $462 million (65% interest only and 35% full payment deferrals). As of September 30, 2020, $384 million (83%) had returned to normal payment structures and $19 million (4%) were paid off or removed (of which one was a September charge-off for $0.5 million). The remaining $60 million (in 66 commercial and 6 retail loans) remained under modification structure, representing only 2% of September period end loans excluding PPP loans, and we expect approximately $45 million of these to end their modification periods by November. See also Note 6, “Loans, Allowance for Credit Losses - Loans, and Credit Quality” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures on credit quality. For additional information see also “BALANCE SHEET ANALYSIS – Loans” and “BALANCE SHEET ANALYSIS – Allowance for Credit Losses-Loans.”

Nonperforming loans are considered one indicator of potential future loan losses. Nonperforming loans are defined as nonaccrual loans ~~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~~decreased to $11 million ~~(consisting of $1.0 million originated loans and $13.4 million acquired loans)~~ at September 30, ~~2017~~2020, compared to ~~$20.3~~$14 million at December 31, ~~2016 (consisting of $0.3~~2019, largely due to pay downs on a few larger commercial credits and an $0.8 million ~~originated loans and $20.0 million acquired loans).~~charge-off on one commercial credit relationship. Nonperforming assets (which include nonperforming loans and other real estate owned “OREO”) were ~~$15.7~~$12 million at September 30, ~~2017~~2020 compared to ~~$22.3~~$15 million at December 31, ~~2016.~~2019. OREO was ~~$1.3~~$1 million at both September 30, 2017, down from $2.1 million at year end 2016, the majority of which is closed bank branch property. Nonperforming assets as a percent of total assets were 0.55% at September 30, 2017 compared to 0.97% at2020 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~~$27 million ~~(0.7%~~(0.9% of loans) and ~~$12.6~~$23 million ~~(0.8%~~(0.9% of loans) at September 30, ~~2017~~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 thousands)	September 30, 2020			December 31, 2019			September 30, 2019
Nonperforming loans:
Commercial & industrial	$	3,011		$	6,249		$	2,279
Owner-occupied CRE	2,471			3,311			2,302
Agricultural	2,297			1,898			2,097
Commercial	7,779			11,458			6,678
CRE investment	911			1,073			1,111
Construction & land development	533			20			—
Commercial real estate	1,444			1,093			1,111
Commercial-based loans	9,223			12,551			7,789
Residential construction	—			—			—
Residential first mortgage	1,312			1,090			865
Residential junior mortgage	411			480			576
Residential real estate	1,723			1,570			1,441
Retail & other	51			1			8
Retail-based loans	1,774			1,571			1,449
Total nonaccrual loans	10,997			14,122			9,238
Accruing loans past due 90 days or more	—			—			—
Total nonperforming loans	$	10,997		$	14,122		$	9,238
OREO:
Commercial real estate owned	$	—		$	—		$	525
Residential real estate owned	—			—			—
Bank property real estate owned	1,000			1,000			800
Total OREO	1,000			1,000			1,325
Total nonperforming assets	$	11,997		$	15,122		$	10,563
Performing troubled debt restructurings	$	—		$	452		$	459
Ratios:
Nonperforming loans to total loans	0.38		%	0.55		%	0.41		%
Nonperforming assets to total loans plus OREO	0.41		%	0.59		%	0.47		%
Nonperforming assets to total assets	0.25		%	0.42		%	0.34		%
ACL-Loans to nonperforming loans	285.4		%	98.9		%	147.4		%

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 %

Deposits

~~(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.~~

~~Deposits~~

Deposits represent Nicolet’s largest source of funds. Nicolet competes with other bank and nonbank institutions for deposits, as well as with a growing number of non-deposit investment alternatives available to depositors, such as mutual funds, money market funds, annuities, and other brokerage investment products. Challenges toThe 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 depositscomposition is presented in Table ~~14 are brokered~~9 below.

Total 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~~$3.7 billion at September 30, ~~2017, up $397~~2020, increased $758 million ~~or 20%~~(26%) over December 31, 2019, and was a large contributor to the current heavy cash position. This unusually large increase in deposits was influenced by the very uncertain times, government stimulus payments and pandemic stay-at-home orders, which reduced spending and increased liquidity of consumers and businesses, and by PPP loan proceeds retained on deposit by corporate borrowers. Also contributing to the increase in deposits from December 31, 2019, was the acquisition of Advantage, which added $141 million of deposits at acquisition. Noninterest-bearing demand deposits accounted for the largest increase since December 31, ~~2016, largely attributable~~2019, up $316 million (39%), primarily due to the ~~$375~~deposited PPP loan proceeds. Transaction accounts combined (i.e., savings, money market, and interest-bearing demand) increased $341 million (22%) to $1.9 billion at September 30, 2020, and brokered deposits ~~added from First Menasha at acquisition~~grew $167 million (104%) to $327 million, mainly due to our liquidity build executed in ~~April 2017. On average for the first nine months~~March-April offset partly by maturities of ~~2017,~~

acquired brokered deposits, while core time deposits declined $66 million (15%) to $373 million, largely moving into transaction accounts.

Compared to September 30, 2019, total deposits were ~~$2.2~~up $1.1 billion ~~up $631 million, or 41%, from the comparable 2016 period,~~(44%). The increase in total deposits since September 30, 2019 was largely ~~attributable~~due to the ~~inclusion~~liquidity objectives of ~~acquired Baylake deposits for all~~customers and the Bank in very uncertain times, and the acquisition of ~~2017 versus five~~Advantage (as discussed above), as well as the acquisition of ~~nine months in 2016 and acquired First Menasha deposits for five months of 2017 versus no months in 2016. On average, the mix~~Choice, which added $289 million of deposits changed between the comparable nine-month periods, with 2017 carrying more in brokered deposits, demand (i.e. noninterest bearing) deposits and money market and NOW accounts, and less in savings and time deposits.

at acquisition.

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


	September 30, 2020				December 31, 2019				September 30, 2019
(in thousands)	Amount		% of Total		Amount		% of Total		Amount		% of Total
Noninterest-bearing demand	$	1,135,384	30	%	$	819,055	28	%	$	782,968	30	%
Money market and interest-bearing demand	1,432,667		39	%	1,241,642		42	%	1,079,233		42	%
Savings	480,745		13	%	343,199		11	%	329,122		13	%
Time	664,012		18	%	550,557		19	%	393,124		15	%
Total deposits	$	3,712,808	100	%	$	2,954,453	100	%	$	2,584,447	100	%
Brokered transaction accounts	$	35,975	1	%	$	48,497	1	%	$	38,078	1	%
Brokered and listed time deposits	290,827		8	%	111,694		4	%	15,450		1	%
Total brokered deposits	$	326,802	9	%	$	160,191	5	%	$	53,528	2	%
Customer transaction accounts	$	3,012,821	81	%	$	2,355,399	80	%	$	2,153,245	83	%
Customer time deposits	373,185		10	%	438,863		15	%	377,674		15	%
Total customer deposits (core)	$	3,386,006	91	%	$	2,794,262	95	%	$	2,530,919	98	%

Lending-Related Commitments

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

Table 10: Commitments


(in thousands)	September 30, 2020		December 31, 2019
Commitments to extend credit	$	976,506	$	773,555
Financial standby letters of credit	7,871		10,730
Performance standby letters of credit	9,672		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 $132 million and $78 million, respectively, at September 30, 2020. In comparison, interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans held for sale ~~are considered derivative instruments and~~ represented ~~$32.2~~$43 million and ~~$5.9~~$16 million, respectively, at December 31, 2019. The net fair value of these mortgage derivatives combined was a loss of $186,000 at September 30, ~~2017. Fair value approximates the notional amounts.~~

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 (including extra growth in core deposits during the pandemic as previously discussed), and the minimal use of capacity available in numerous non-core funding sources, Nicolet's liquidity levels and resources have been sufficient to fund loans, accommodate deposit trends and cycles, and to meet other cash needs as necessary. In early March-April 2020, in response to the emerging crisis, management initiated preparatory actions to further increase on-balance sheet liquidity, and brokered deposits of approximately $200 million were procured, increasing liquid cash. These actions were initiated prior to the passing of the CARES Act. In addition to the on-balance sheet liquidity build, remaining liquidity facilities continue to provide capacity and flexibility in an uncertain time.

Funds are available from a number of basic banking activity sources including, but not limited to, the core deposit ~~base, 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 September 30, 2020, approximately 27% of the ~~$408~~$535 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 September 30, 2020, consist of $175 million of available and unused Federal funds lines, available borrowing capacity at the FHLB of $160 million, and borrowing capacity in the brokered deposit market.

In consideration of the funds availability for the Bank and the current high levels of cash in a very low interest rate environment, management has taken prudent pricing actions on deposits and loans, as well as actions to reduce non-deposit funding. Brokered deposits have matured without renewal and selected FHLB advances were paid early. In addition, management intends to fully repay the PPPLF funding before the end of 2020, given ample levels of all other funding combined.

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. 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 ~~short-term borrowings, federal funds purchased,~~access to the public or private markets to issue new equity, subordinated debt or other debt. The parent Company uses cash for normal expenses, debt service requirements, and ~~long-term borrowings.~~

when opportune, for common stock repurchases, repayment of debt, or investment in other strategic actions such as mergers or acquisitions. Based on this evaluation, the Company is in the process of the early redemption of its higher-costing fixed rate subordinated Notes ($12 million at 5%) and one issuance of fixed rate junior subordinated debentures ($6 million at 8%), expected to be completed before the end of 2020. At September 30, 2020, the parent Company had $49 million in cash.

Cash and cash equivalents at September 30, ~~2017~~2020 and December 31, ~~2016~~2019 were ~~$96~~$854 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 by $30 million net~~ cash ~~provided by operating activities and $54 million net cash provided by financing activities (mostly due~~equivalents since year-end 2019 was largely attributable to ~~a net~~the significant increase in ~~deposits). Nicolet’s~~deposits, influenced by government stimulus payments and the evolving pandemic crisis, which reduced spending and increased liquidity of consumers and businesses in these uncertain times, and PPP loan proceeds retained on deposit by corporate borrowers, as well as our own liquidity actions in March-April. Management believes its liquidity resources were sufficient as of September 30, ~~2017~~2020 to fund loans, accommodate deposit ~~trends~~cycles and ~~cycles,~~trends, and to meet other cash needs as ~~necessary.~~

necessary in these unsettled times.

Interest Rate Sensitivity Management

and Impact of Inflation

A reasonable balance between interest rate risk, credit risk, liquidity risk and maintenance of yield, is highly important to Nicolet’s business success and profitability. As an ongoing part of its financial strategy and risk management, Nicolet attempts to understand and manage the impact of fluctuations in market interest rates on its net interest income. The consolidated balance sheet consists mainly of interest-earning assets (loans, investments and cash) which are primarily funded by interest-bearing liabilities (deposits and other borrowings). Such financial instruments have varying levels of sensitivity to changes in market rates of interest. Market rates are highly sensitive to many factors beyond our control, including but not limited to general economic conditions and policies of governmental and regulatory authorities. Our operating income and net income depends, to a substantial extent, on “rate spread” (i.e., the difference between the income earned on loans, investments and other earning assets and the interest expense paid to obtain deposits and other funding liabilities).

Asset-liability management policies establish guidelines for acceptable limits on the sensitivity to changes in interest rates on earnings and market value of assets and liabilities. Such policies are set and monitored by management and the board of directors’ Asset and Liability Committee.

To understand and manage the impact of fluctuations in market interest rates on net interest income, Nicolet measures its overall interest rate sensitivity through a net interest income analysis, which calculates the change in net interest income in the event of hypothetical changes in interest rates under different scenarios versus a baseline scenario. Such scenarios can involve static balance sheets, balance sheets with projected growth, parallel (or non-parallel) yield curve slope changes, immediate or gradual changes in market interest rates, and one-year or longer time horizons. The simulation modeling uses assumptions involving market spreads, prepayments of rate-sensitive instruments, renewal rates on maturing or new loans, deposit retention rates, and other assumptions.

Among other scenarios, Nicolet assessed the impact on net interest income in the event of a gradual +/-100 bps and +/-200 bps ~~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,~~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


	September 30, 2020		December 31, 2019
200 bps decrease in interest rates	—	%	(1.8)	%
100 bps decrease in interest rates	(0.2)	%	(1.0)	%
100 bps increase in interest rates	2.1	%	0.8	%
200 bps increase in interest rates	4.1	%	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 capital structure consisted of $360.4 million of common stock equity compared to $275.9 million of common equity at December 31, 2016. Nicolet’s common equity, representing 12.7% of total assets at September 30, 2017The Company’s 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 consideration 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 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 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~~Bank’s regulatory capital ratios remain ~~well~~ above minimum regulatory ~~ratios. Also, at~~ratios, including the capital conservation buffer. At September 30, ~~2017,~~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


	At or for the Nine Months Ended			At or for the Year Ended
($ in thousands)	September 30, 2020			December 31, 2019
Company Stock Repurchases: *
Common stock repurchased during the period (dollars)	$	27,635		$	18,701
Common stock repurchased during the period (full shares)	441,747			310,781
Company Risk-Based Capital:
Total risk-based capital	$	419,248		$	404,573
Tier 1 risk-based capital	388,980			378,608
Common equity Tier 1 capital	358,393			348,454
Total capital ratio	13.4		%	13.4		%
Tier 1 capital ratio	12.4		%	12.6		%
Common equity tier 1 capital ratio	11.5		%	11.6		%
Tier 1 leverage ratio	9.5		%	11.9		%
Bank Risk-Based Capital:
Total risk-based capital	$	360,074		$	323,432
Tier 1 risk-based capital	339,406			309,460
Common equity Tier 1 capital	339,406			309,460
Total capital ratio	11.5		%	10.8		%
Tier 1 capital ratio	10.9		%	10.3		%
Common equity tier 1 capital ratio	10.9		%	10.3		%
Tier 1 leverage ratio	8.3		%	9.8		%
* Reflects common stock repurchased under board of director authorizations for the common stock repurchase program.

In managing capital for optimal return, we evaluate capital sources and uses, pricing and availability of our stock in the market, and alternative uses of capital (such as the level of organic growth or acquisition opportunities) in light of strategic plans. Based on this evaluation, the Company is in the process of the early redemption of certain capital-equivalent debt, including its

~~(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.~~

higher-costing fixed rate subordinated Notes ($12 million at 5%) and its fixed rate junior subordinated debentures ($6 million at 8%), expected to be completed before the end of 2020. These early redemptions are expected to reduce the Company's Tier 1 risk-based capital by $6 million and Total risk-based capital by $16 million. The redemptions will have no impact on the Bank's risk-based capital.

The Company resumed its share repurchase program in late July given current conditions, market opportunities and financial performance of the Company. On August 18, 2020, Nicolet's board authorized an increase to the program of $20 million or up to 325,000 shares of common stock. As a result, at September 30, 2020, there remained $13.4 million authorized under this repurchase program, as modified, to be utilized from time-to-time to repurchase shares in the open market, through block transactions or in private transactions.

Critical Accounting Policies

In ~~July 2013,~~preparing the ~~Federal Reserve Board~~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 on its customers, 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 U.S. 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 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

~~(a)~~

During the third quarter of 2017, the Company repurchased 0 and 808 shares for minimum tax withholding settlements on restricted stock and net settlements 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’ authorization.

~~(b)~~

During early 2014, a common stock repurchase program was approved which authorized, with subsequent modifications the use of up to $30 million to repurchase up to 1,050,000 shares of outstanding common stock. At September 30, 2017, 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 shares of common stock could be repurchased under this plan. Nicolet resumed repurchases of its shares under this program during the second quarter of 2017.

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
July 1 – July 31, 2020	27,571	$	56.67	27,571	314,600
August 1 – August 31, 2020	78,752	$	59.16	78,752	560,900
September 1 – September 30, 2020	128,666	$	58.41	128,591	432,200
Total	234,989	$	58.45	234,914	432,200

(a)During third quarter 2020, the Company repurchased 75 common shares for minimum tax withholding settlements on restricted stock and no common shares were repurchased to satisfy the exercise price and / or tax withholding requirements of stock options. These purchases do not count against the maximum number of shares that may yet be purchased under the board of directors' authorization.

(b)During third quarter 2020, Nicolet utilized $13.7 million to repurchase and cancel approximately 235,000 shares of common stock pursuant to our common stock repurchase program. On August 18, 2020, Nicolet's board authorized an increase to the program of $20 million or up to 325,000 shares of common stock. As a result, at September 30, 2020, approximately $13.4 million remained available under this 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						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.INS						The XBRL Instance Document does not appear in the Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statement of Cash Flows,Date File because its XBRL tags are embedded within the Inline XBRL document (1)
101.SCH						Inline XBRL Taxonomy Extension Schema Document
101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document
104						Cover Page Interactive Data File (formatted as Inline XBRL and ~~(vi) Notes to Consolidated Financial Statements tagged as blocks of text.~~contained in Exhibit 101)

*Indicates

(1) Includes the following financial information ~~that is furnished~~included in the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Stockholders' Equity, (v) the Consolidated Statements of Cash Flows, and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject(vi) Notes to ~~liability under these sections.~~

Unaudited Consolidated Financial Statements.

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~~October 30, 2020			/s/ Robert B. Atwell
			Robert B. Atwell
			Chairman, President and Chief Executive Officer

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


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 reporting company)~~
Emerging Growth Company	☐

		~~PAGE~~
~~PART I~~	~~FINANCIAL INFORMATION~~
					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	5546

			Item 4.	Controls and Procedures	~~55-56~~46

PART II			OTHER INFORMATION

			Item 1.	Legal Proceedings	5647

			Item 1A.	Risk Factors	5647

			Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5647

			Item 3.	Defaults Upon Senior Securities	5647

			Item 4.	Mine Safety Disclosures	5647

			Item 5.	Other Information	5648

			Item 6.	Exhibits	5748

				Signatures	5749

	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


	September 30, 2020		December 31, 2019
	(Unaudited)		(Audited)
Assets
Cash and due from banks	$	67,922	$	75,433
Interest-earning deposits	785,642		106,626

Cash and cash equivalents	853,564		182,059
Certificates of deposit in other banks	32,969		19,305
Securities available for sale (“AFS”), at fair value	535,351		449,302
Other investments	26,636		24,072
Loans held for sale	8,384		2,706
Loans	2,908,793		2,573,751
Allowance for credit losses - loans (“ACL-Loans”)	(31,388)		(13,972)
Loans, net	2,877,405		2,559,779
Premises and equipment, net	64,184		56,469
Bank owned life insurance (“BOLI”)	82,905		78,140
Goodwill and other intangibles, net	176,213		165,967
Accrued interest receivable and other assets	48,764		39,461
Total assets	$	4,706,375	$	3,577,260

Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing demand deposits	$	1,135,384	$	819,055
Interest-bearing deposits	2,577,424		2,135,398
Total deposits	3,712,808		2,954,453
Short-term borrowings	0		0
Long-term borrowings	405,826		67,629
Accrued interest payable and other liabilities	48,872		38,188
Total liabilities	4,167,506		3,060,270

Stockholders’ Equity:
Common stock	102		106
Additional paid-in capital	289,536		312,733
Retained earnings	234,965		199,005
Accumulated other comprehensive income (loss)	13,465		4,418
Total Nicolet Bankshares, Inc. stockholders’ equity	538,068		516,262
Noncontrolling interest	801		728
Total stockholders’ equity and noncontrolling interest	538,869		516,990
Total liabilities, noncontrolling interest and stockholders’ equity	$	4,706,375	$	3,577,260

Preferred shares authorized (no par value)	10,000,000		10,000,000
Preferred shares issued and outstanding	0		0
Common shares authorized (par value $0.01 per share)	30,000,000		30,000,000
Common shares outstanding	10,196,228		10,587,738
Common shares issued	10,215,334		10,610,259

(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	%

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

	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