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,
	2021		2020		2021		2020
Interest income:
Loans, including loan fees	$	35,294	$	34,047	$	104,267	$	101,591
Investment securities:
Taxable	2,061		2,001		5,935		6,115
Tax-exempt	517		542		1,582		1,542
Other interest income	869		680		2,140		1,917
Total interest income	38,741		37,270		113,924		111,165
Interest expense:
Deposits	2,444		3,784		7,799		13,196
Short-term borrowings	—		—		—		65
Long-term borrowings	1,113		926		1,729		2,584
Total interest expense	3,557		4,710		9,528		15,845
Net interest income	35,184		32,560		104,396		95,320
Provision for credit losses	6,000		3,000		6,500		9,000
Net interest income after provision for credit losses	29,184		29,560		97,896		86,320
Noninterest income:
Trust services fee income	2,043		1,628		5,724		4,717
Brokerage fee income	3,154		2,489		8,938		7,080
Mortgage income, net	4,808		9,675		17,637		21,965
Service charges on deposit accounts	1,314		1,037		3,541		3,075
Card interchange income	2,299		1,877		6,492		5,076
BOLI income	572		531		1,658		1,774
Asset gains (losses), net	(1,187)		217		3,716		(1,185)
Other income	993		1,237		3,594		3,245
Total noninterest income	13,996		18,691		51,300		45,747
Noninterest expense:
Personnel	16,927		14,072		49,127		41,877
Occupancy, equipment and office	5,749		4,051		13,939		12,616
Business development and marketing	1,654		810		3,853		4,683
Data processing	2,939		2,612		8,408		7,574
Intangibles amortization	758		834		2,400		2,707
FDIC assessments	480		347		1,555		347
Merger-related expense	2,793		151		3,449		853
Other expense	1,761		808		7,158		4,695
Total noninterest expense	33,061		23,685		89,889		75,352
Income before income tax expense	10,119		24,566		59,307		56,715
Income tax expense	2,295		6,434		14,960		14,331
Net income	7,824		18,132		44,347		42,384
Less: Net income attributable to noncontrolling interest	—		30		—		249
Net income attributable to Nicolet Bankshares, Inc.	$	7,824	$	18,102	$	44,347	$	42,135
Earnings per common share:
Basic	$	0.75	$	1.75	$	4.39	$	4.04
Diluted	$	0.73	$	1.72	$	4.22	$	3.97
Weighted average common shares outstanding:
Basic	10,391,896		10,348,862		10,098,492		10,426,228
Diluted	10,775,591		10,498,552		10,503,163		10,604,732

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,
	2021		2020		2021		2020
Net income	$	7,824	$	18,132	$	44,347	$	42,384
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities AFS:
Net unrealized holding gains (losses)	(3,074)		394		(8,581)		12,708
Net realized (gains) losses included in income	13		(151)		13		(315)
Income tax (expense) benefit	827		(66)		2,313		(3,346)
Total other comprehensive income (loss)	(2,234)		177		(6,255)		9,047
Comprehensive income	$	5,590	$	18,309	$	38,092	$	51,431

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, 2021	$	98	$	261,096	$	289,475	$	8,726	$	—	$	559,395
Comprehensive income:
Net income, three months ended September 30, 2021	—		—		7,824		—		—		7,824
Other comprehensive income (loss)	—		—		—		(2,234)		—		(2,234)
Issuance of common stock in acquisition	23		179,411		—		—		—		179,434
Stock-based compensation expense	—		1,826		—		—		—		1,826
Exercise of stock options, net	1		160		—		—		—		161
Issuance of common stock	—		163		—		—		—		163
Purchase and retirement of common stock	(2)		(17,289)		—		—		—		(17,291)

Balances at September 30, 2021	$	120	$	425,367	$	297,299	$	6,492	$	—	$	729,278
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 December 31, 2020	$	100	$	273,390	$	252,952	$	12,747	$	—	$	539,189
Comprehensive income:
Net income, nine months ended September 30, 2021	—		—		44,347		—		—		44,347
Other comprehensive income (loss)	—		—		—		(6,255)		—		(6,255)
Issuance of common stock in acquisition	23		179,411		—		—		—		179,434
Stock-based compensation expense	—		5,222		—		—		—		5,222
Exercise of stock options, net	1		1,385		—		—		—		1,386
Issuance of common stock	—		395		—		—		—		395
Purchase and retirement of common stock	(4)		(34,436)		—		—		—		(34,440)

Balances at September 30, 2021	$	120	$	425,367	$	297,299	$	6,492	$	—	$	729,278
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	—		—		(6,175)		—		—		(6,175)
Balances at September 30, 2020	$	102	$	289,536	$	234,965	$	13,465	$	801	$	538,869

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,
	2021		2020
Cash Flows From Operating Activities:
Net income	$	44,347	$	42,384
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion	9,301		7,564
Provision for credit losses	6,500		9,000
Increase in cash surrender value of life insurance	(1,658)		(1,647)
Stock-based compensation expense	5,222		4,216
Asset (gains) losses, net	(3,716)		1,185
Gain on sale of loans held for sale, net	(16,289)		(22,217)
Net change due to:
Proceeds from sale of loans held for sale	503,405		663,466
Origination of loans held for sale	(485,641)		(650,660)
Accrued interest receivable and other assets	(6,721)		4,781
Accrued interest payable and other liabilities	(2,488)		6,200
Net cash provided by (used in) operating activities	52,262		64,272
Cash Flows From Investing Activities:
Net (increase) decrease in loans	10,406		(244,751)
Net (increase) decrease in certificates of deposit in other banks	8,561		5,719
Purchases of securities AFS	(214,343)		(128,661)
Purchases of securities HTM	(20,996)		—
Proceeds from sales of securities AFS	15,975		14,864
Proceeds from calls and maturities of securities AFS	81,681		69,568
Purchases of other investments	(4,787)		(3,815)
Proceeds from sales of other investments	1,534		—

Proceeds from redemption of BOLI	—		245
Net (increase) decrease in premises and equipment	(6,894)		(9,708)
Net (increase) decrease in other real estate and other assets	1,046		—
Net cash (paid) received in business combination	394,868		(21,820)
Net cash provided by (used in) investing activities	267,051		(318,359)
Cash Flows From Financing Activities:
Net increase (decrease) in deposits	199,698		617,373

Proceeds from long-term borrowings	103,953		367,841
Repayments of long-term borrowings	(42,559)		(32,029)
Purchase and retirement of common stock	(34,440)		(28,947)

Proceeds from issuance of common stock	395		482
Proceeds from exercise of stock options	1,386		1,048
Distribution to noncontrolling interest	—		(176)
Net cash provided by (used in) financing activities	228,433		925,592
Net increase (decrease) in cash and cash equivalents	547,746		671,505
Cash and cash equivalents:
Beginning	802,859		182,059
Ending *	$	1,350,605	$	853,564
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	9,320	$	18,130
Cash paid for taxes	24,116		16,353
Transfer of loans and bank premises to other real estate owned	302		—
Capitalized mortgage servicing rights	3,191		4,038

Acquisitions:
Fair value of assets acquired	$	1,544,518	$	—
Fair value of liabilities assumed	1,407,605		—
Net assets acquired	136,913		—

* Cash and cash equivalents at both September 30, 2021 and September 30, 2020, include restricted cash of $1.9 millionpledged as collateral on interest rate swaps and no reserve balance was required with the Federal Reserve Bank.

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, as of and 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.~~

2020.

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.~~

~~Recent Accounting Developments Adopted~~

~~In December 2016, the Financial Accounting Standards Board (“FASB”) issued updated guidance to Accounting Standards Update (“ASU”) 2016-19,~~~~Technical Corrections and Improvements~~intended to make changes to clarify the Accounting Standards Codification or correct unintended application of guidance that is not expected to have a significant effect on current accounting practice. The ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016. The impact of the new guidance did not have a material impact on the Company’s consolidated financial statements.

~~In March 2016, the FASB issued updated guidance to ASU 2016-09,~~~~Stock Compensation Improvements to Employee Share-Based Payment Activity~~ intended to simplify and improve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of such awards as either equity or liabilities and classification on the statement of cash flows. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2016. The consolidated financial statements include the impact of the new guidance. The Company adopted the pronouncement as required on January 1, 2017, prospectively, which included a reduction to income tax expense of $14,000 and $176,000 for the three months and nine months ended September 30, 2017, respectively, for deductions attributable to exercised stock options and vesting of restricted stock.

2020.

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

~~Operating Segment~~

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

Reclassifications

Certain amounts in the ~~2016~~2020 consolidated financial statements have been reclassified to conform to the ~~2017~~2021 presentation.

These reclassifications were not material and did not impact previously reported net income or comprehensive income.

Note 2 – Acquisitions

~~First Menasha~~

Completed Acquisitions:

Advantage Community Bancshares, Inc. (“~~First Menasha”~~Advantage”):

On ~~April 28, 2017, the Company consummated~~August 21, 2020, Nicolet completed its merger with ~~First Menasha~~Advantage, pursuant to the ~~Agreement and Plan~~terms of ~~Merger by and between~~ the ~~Company and First Menasha~~definitive merger agreement dated ~~November 3, 2016, (the “Merger Agreement”),~~March 2, 2020, whereby ~~First Menasha was~~Advantage merged with and into ~~the Company,~~Nicolet, and ~~The First National Bank-Fox Valley,~~Advantage Community Bank, the wholly owned ~~commercial~~ bank subsidiary of ~~First Menasha serving the Fox Valley area of Wisconsin,~~Advantage, was merged with and into Nicolet National Bank (the “Bank”). ~~The system integration was completed,~~Advantage’s 4 branches in Dorchester, Edgar, Mosinee, and ~~five branches of First Menasha~~Wausau opened ~~on May 1, 2017,~~ as Nicolet National Bank branches on August 24, 2020, expanding our presence in Central Wisconsin and the Wausau area. Due to the small size of the transaction, terms of the all-cash deal were not disclosed.

Upon consummation, Advantage added total assets of 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 goodwill of $12 million.

Mackinac Financial Corporation (“Mackinac”): On September 3, 2021, Nicolet completed its merger with Mackinac, pursuant to the terms of the Agreement and Plan of Merger dated April 12, 2021 (the “Mackinac Merger Agreement”), at which time Mackinac merged with and into Nicolet, and mBank, the wholly owned bank subsidiary of Mackinac, was merged with and into the Bank.

Pursuant to the Mackinac Merger Agreement, Mackinac shareholders received fixed consideration of 0.22 shares of Nicolet common stock and $4.64 in cash for each share of Mackinac common stock owned (approximating a 20% cash and 80% stock split), resulting in the issuance of 2.3 million shares of Nicolet common stock for stock consideration of $180 million and cash consideration of $49 million, or a total purchase price of $229 million. The Mackinac merger expands Nicolet prominently into Northern Michigan and the Upper Peninsula of Michigan, and adds to Nicolet’s presence ~~into Calumet~~in upper northeastern Wisconsin.

A summary of the assets acquired and ~~Winnebago Counties, Wisconsin. Concurrently, Nicolet closed one of its Calumet County locations, bringing~~liabilities assumed in the ~~Bank’s footprint to 38 branches~~Mackinac transaction, as of ~~September 30, 2017.~~

the acquisition date, including the preliminary purchase price allocation was as follows.


(In thousands, except share data)	Acquired from Mackinac		Fair Value Adjustments		Estimated Fair Value
Assets Acquired:
Cash and cash equivalents	$	448,378	$	—	$	448,378
Investment securities	103,992		(2,148)		101,844
Loans	930,420		(178)		930,242
ACL-Loans	(5,579)		3,683		(1,896)
Premises and equipment	23,619		(2,723)		20,896
BOLI	15,715		—		15,715
Goodwill	19,574		(19,574)		—
Other intangibles	3,918		803		4,721
Other assets	24,752		(134)		24,618
Total assets	$	1,564,789	$	(20,271)	$	1,544,518
Liabilities Assumed:
Deposits	$	1,365,068	$	1,153	$	1,366,221
Short-term borrowings	—		—		—
Long-term borrowings	28,104		525		28,629
Other liabilities	12,755		—		12,755
Total liabilities	$	1,405,927	$	1,678	$	1,407,605
Net assets acquired					$	136,913
Purchase Price:
Nicolet common stock issued (in shares)					2,337,230
Value of Nicolet common stock consideration					$	179,826
Cash consideration paid					49,367
Total purchase price					$	229,193
Preliminary goodwill					$	92,280

The ~~purpose~~Company purchased loans through the acquisition of Mackinac for which there was, at the date of acquisition, more than insignificant deterioration of credit quality since origination (purchased credit deteriorated loans or “PCD” loans). The carrying amount of these loans at acquisition was as follows.


(In thousands)	September 3, 2021
Purchase price of PCD loans at acquisition	$	10,605
Allowance for credit losses on PCD loans at acquisition	1,896
Par value of PCD acquired loans at acquisition	$	12,501

The following unaudited pro forma information is presented for illustrative purposes only. The pro forma information should not be relied upon as being indicative of the historical results of operations the companies would have had if the merger had occurred before such periods or the future results of operations that the companies will experience as a result of the merger. The pro forma information, although helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect the benefits of expected cost savings, opportunities to earn additional revenue, the impact of restructuring and merger-related expenses, or other factors that may result as a consequence of the merger ~~was~~and, accordingly, does not attempt to ~~continue Nicolet’s interest in strategic growth, consistent with its plan~~predict or suggest future results. The unaudited pro forma information set forth below gives effect 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~~as if it had occurred on January 1, 2020, the ~~leading community bank to serve the Fox Valley area of Wisconsin.~~

~~Pursuant to the Merger Agreement, the final purchase price consisted of issuing 1,309,885 shares~~beginning of the Company’s common stock (given the final stock-for-stock exchange ratio of 3.126 except for First Menasha shares owned by the Company immediately prior to the time of the merger), for common stock consideration of $62.2 million (based on $47.52 per share, the volume weighted average closing price of the Company’s common stock over the preceding 20 trading day period) plus cash consideration of $19.3 million. Approximately $0.2 million in direct stock issuance costs for the merger were incurred and charged against additional paid in capital.

~~Upon consummation, the Company added $480 million in assets, $351 million in loans, $375 million in deposits, $4 million in core deposit intangible, and $41 million of goodwill.~~ earliest period presented.


	Nine Months Ended		Year Ended
(In thousands, except per share data)	September 30, 2021		December 31, 2020
Total revenue, net of interest expense	$	198,137	$	255,665
Net income	$	53,223	$	69,094
Diluted earnings per common share	$	4.21	$	5.37

The Company accounted for the ~~transaction~~Mackinac acquisition under the acquisition method of accounting, and thus, the financial position and results of operations of ~~First Menasha~~Mackinac 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 value was determined with the assistance of third party valuations, appraisals, and third party advisors. Due to the timing of the merger, the purchase price allocation and estimated fair value measurements remain preliminary. Goodwill arising as a result of the Mackinac acquisition is not deductible for tax purposes. Management will continue to review the estimated fair values and expects to finalize its analysis of the acquired assets and assumed liabilities in the transaction over the next few months, within one year of the merger. Therefore, adjustments to the purchase price allocation and estimated fair value may beoccur.

Pending Acquisition:

County Bancorp, Inc. (“County”): On June 22, 2021, Nicolet entered into a definitive merger agreement with County pursuant to which County will merge with and into Nicolet, to become the premier agriculture lender throughout Wisconsin. Pursuant to the terms and 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 gainconditions set forth in the ~~Company’s pre-acquisition equity interest holding~~Merger Agreement, County shareholders will have the right to receive for each share of County common stock, at the election of each holder and subject to proration, either $37.18 in ~~First Menasha, resulting in a $1.2 million gain in pre-tax earnings.~~

~~Financial advisor business acquired:~~

During the first quarter of 2016, Nicolet agreed in a private transaction to hire a select group of financial advisors 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~~or 0.48 shares of Nicolet common ~~stock,~~stock. County shareholder elections will be prorated to ensure the total consideration will consist of approximately 20% cash and ~~recorded a~~approximately 80% common stock. At June 30, 2021, County had total assets of $1.5 ~~million earn-out liability payable to one principal in~~billion, loans of $1.0 billion, deposits of $1.1 billion, and equity of $175 million. As of September 7, 2021, Nicolet had received all regulatory approvals for the ~~future. The Company initially recorded $0.4 million~~County merger. On October 5, 2021, the shareholders 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 of the Bank, expanding its presence into Door, Kewaunee, and Manitowoc Counties, Wisconsin. The Company closed one of its Brownboth County ~~locations concurrently with the Baylake merger, and closed an additional six branches in the fourth quarter of 2016.~~

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

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

~~The Company accounted for~~at special meetings of their respective shareholders held on that date. Nicolet expects to close the ~~transaction under the acquisition method of accounting, and thus, the financial position and results of operations of Baylake prior~~merger on December 3, 2021, subject to ~~the consummation date were not included in the accompanying consolidated financial statements.~~

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

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

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

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

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

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

customary closing conditions.

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)	2021		2020		2021		2020
Net income attributable to Nicolet Bankshares, Inc.	$	7,824	$	18,102	$	44,347	$	42,135

Weighted average common shares outstanding	10,392		10,349		10,098		10,426
Effect of dilutive common stock awards	384		150		405		179
Diluted weighted average common shares outstanding	10,776		10,499		10,503		10,605

Basic earnings per common share*	$	0.75	$	1.75	$	4.39	$	4.04
Diluted earnings per common share*	$	0.73	$	1.72	$	4.22	$	3.97

*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 months ended September 30, ~~2017 or September 30, 2016 that were~~2021 and 2020, respectively, options to purchase approximately 0.2 million shares are excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive.

For the nine months ended September 30, 2021 and 2020, respectively, options to purchase approximately 0.1 million shares are excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive.

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

The Company may grant stock options and restricted stock under its stock-based compensation plans to certain officers, employees and directors. These plans are administered by a committee of the Board of Directors, and at September 30, 2021, approximately 0.9 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 for the nine months ended September 30, 2021 and 2020 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,
	2021			2020
Dividend yield	—		%	—		%
Expected volatility	30		%	25		%
Risk-free interest rate	1.16		%	1.72		%
Expected average life	7 years			7 years
Weighted average per share fair value of options	$	26.55		$	23.74

~~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, 2020	1,437,460	$	50.47
Granted	380,000	78.77
Exercise of stock options *	(40,482)	34.23
Forfeited	(1,000)	48.85
Outstanding - September 30, 2021	1,775,978	$	56.90	6.7	$	32,446
Exercisable - September 30, 2021	970,878	$	47.00	5.5	$	26,400

*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~~2021, 7,514 such shares were ~~surrendered during~~withheld by 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, 2021 and ~~full year of 2016~~2020 was approximately ~~$1.8~~$1.7 million and ~~$1.3~~$2.0 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, 2020	$	53.57	18,925
Granted	77.64		19,595
Vested *	60.66		(15,510)
Forfeited	41.44		(446)
Outstanding - September 30, 2021	$	69.83	22,564

*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~~1,581 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.~~

2021.

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

The Company recognized approximately ~~$1.9~~$4.5 million and ~~$1.1~~$3.8 million of stock-based ~~employee~~ compensation expense (included in personnel on the consolidated statements of income) for the nine months ended September 30, 2021 and 2020, respectively, associated with its common stock awards granted to officers and employees. In addition, during the nine months ended September 30, ~~2017 and 2016, respectively, associated~~2021, the Company recognized approximately $0.7 million of director expense (included in other expense on the consolidated statements of income) for a total restricted stock grant of 9,595 shares with ~~its~~immediate vesting to directors, while during the nine months ended September 30, 2020, the Company recognized approximately $0.4 million of director expense for a total restricted stock ~~equity awards.~~grant of 7,950 shares with immediate vesting to directors, representing the annual stock retainer fee paid to external board members. As of September 30, ~~2017,~~2021, there was approximately ~~$15.2~~$16.1 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 years.

The Company recognized a tax benefit of approximately $0.3 million and $0.4 million for the nine months ended September 30, 2021 and 2020, respectively, for the tax impact of stock option exercises and vesting of restricted stock.

Note 5 – Investment Securities ~~Available~~

Investment securities are classified as AFS or HTM on the consolidated balance sheets at the time of purchase. AFS securities include those securities that the Company intends to hold for ~~Sale~~

~~Amortized costs~~an indefinite period of time, but not necessarily to maturity, and are carried at fair value on the consolidated balance sheets. HTM securities include those securities which the Company has both the positive intent and ability to hold to maturity, and are carried at amortized cost on the consolidated balance sheets. Premiums and discounts on investment securities are amortized or accreted into interest income over the estimated life of the related securities using the effective interest method.

The amortized cost and fair ~~values~~value of securities ~~available for sale~~AFS and HTM 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, 2021
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Fair Value as % of Total
Securities AFS:
U.S. government agency securities	$	174,946	$	76	$	196	$	174,826	24	%
State, county and municipals	236,905		3,261		1,502		238,664		33	%
Mortgage-backed securities	193,931		4,439		1,080		197,290		28	%
Corporate debt securities	101,267		4,041		146		105,162		15	%
Total securities AFS	$	707,049	$	11,817	$	2,924	$	715,942	100	%
Securities HTM:
U.S. government agency securities	$	—	$	—	$	—	$	—	—	%
State, county and municipals	30,842		8		51		30,799		63	%
Mortgage-backed securities	18,221		42		116		18,147		37	%
Corporate debt securities	—		—		—		—		—	%
Total securities HTM	$	49,063	$	50	$	167	$	48,946	100	%


	December 31, 2020
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Fair Value as % of Total
Securities AFS:
U.S. government agency securities	$	63,162	$	289	$	—	$	63,451	12	%
State, county and municipals	226,493		5,386		11		231,868		43	%
Mortgage-backed securities	156,148		6,425		78		162,495		30	%
Corporate debt securities	76,073		5,450		—		81,523		15	%
Total securities AFS	$	521,876	$	17,550	$	89	$	539,337	100	%

All mortgage-backed securities included in the tables above were issued by U.S. government agencies and corporations. Investment securities with a carrying value of $149 million and $146 million, as of September 30, 2021 and December 31, 2020, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law. Accrued interest on investment securities totaled $3.5 million and $2.3 million at September 30, 2021 and December 31, 2020, 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~~ 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 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

position.


	September 30, 2021
	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
Securities AFS:
U.S. government agency securities	$	120,726	$	196	$	—	$	—	$	120,726	$	196	7
State, county and municipals	86,749		1,465		974		37		87,723		1,502		113
Mortgage-backed securities	71,934		1,073		864		7		72,798		1,080		127
Corporate debt securities	19,017		146		—		—		19,017		146		11
Total	$	298,426	$	2,880	$	1,838	$	44	$	300,264	$	2,924	258
Securities HTM:

State, county and municipals	$	23,502	$	51	$	—	$	—	$	23,502	$	51	35
Mortgage-backed securities	6,656		116		—		—		6,656		116		5

Total	$	30,158	$	167	$	—	$	—	$	30,158	$	167	40

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

~~At September 30, 2017~~


	December 31, 2020
	Less than 12 months				12 months or more				Total
($ in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Number of Securities

State, county and municipals	$	5,181	$	11	$	—	$	—	$	5,181	$	11	9
Mortgage-backed securities	10,612		71		492		7		11,104		78		22

Total	$	15,793	$	82	$	492	$	7	$	16,285	$	89	31

Quarterly, the Company ~~had $2.6 million~~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 near-term prospects of ~~gross unrealized losses related~~the issuer, and the intent and ability of the Company to ~~507 securities.~~hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. As of September 30, ~~2017, the~~2021 and December 31, 2020, no 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.

Quarterly, the Company evaluates securities HTM to determine whether an allowance for credit losses is necessary. In making this determination, management considers the facts and circumstances of the underlying investment securities. For the state, county and municipal securities, management considers issuer bond ratings, historical loss rates by bond ratings, whether issuers continue to make timely principal and interest payments per the contractual terms of the investment securities, internal forecasts, and whether or not such investment securities provide insurance, other credit enhancement, or are pre-refunded by the issuers. Based on this evaluation, no allowance for credit losses has been recorded for the HTM state, county, and municipal securities. For the mortgage-backed securities, all such securities were issued by U.S. government agencies and corporations, which are currently explicitly or implicitly guaranteed by the U.S. government and have a long history of no ~~other-than-temporary impairments charged to earnings during~~credit losses. Therefore, management determined no allowance for credit losses was necessary for the ~~nine-month periods ending September 30, 2017 or September 30, 2016.~~

HTM mortgage-backed securities.

The amortized cost and fair ~~values~~value of investment securities ~~available for sale at September 30, 2017~~ 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 of~~penalties; as this is particularly inherent in mortgage-backed securities, these securities are ~~estimated based on financial models~~not included in the maturity categories below.


As of September 30, 2021	Securities AFS				Securities HTM
(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in less than one year	$	86,520	$	86,835	$	8,086	$	8,085
Due in one year through five years	260,903		265,298		5,010		5,004
Due after five years through ten years	154,595		154,277		8,483		8,463
Due after ten years	11,100		12,242		9,263		9,247
	513,118		518,652		30,842		30,799
Mortgage-backed securities	193,931		197,290		18,221		18,147
Total investment securities	$	707,049	$	715,942	$	49,063	$	48,946

Proceeds and realized gains or ~~prices paid for~~losses from 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~~sale of AFS securities ~~available for sale during the first nine months of 2017 and 2016~~ 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)	2021		2020
Gross gains	$	4	$	315
Gross losses	(17)		—
Gains (losses) on sales of securities AFS, net	$	(13)	$	315
Proceeds from sales of securities AFS	$	15,975	$	14,864

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, 2021					December 31, 2020
(in thousands)	Amount			% of Total		Amount			% of Total
Commercial & industrial	$	887,910		25	%	$	750,718		27	%
Paycheck Protection Program (“PPP”) loans	68,347			2		186,016			7
Owner-occupied commercial real estate (“CRE”)	697,816			20		521,300			19
Agricultural	112,409			3		109,629			4
CRE investment	662,871			19		460,721			16
Construction & land development	173,971			5		131,283			5
Residential construction	59,611			2		41,707			1
Residential first mortgage	688,491			19		444,155			16
Residential junior mortgage	130,279			4		111,877			4
Retail & other	51,493			1		31,695			1
Loans	3,533,198			100	%	2,789,101			100	%
Less allowance for credit losses - Loans (“ACL-Loans”)	38,399					32,173
Loans, net	$	3,494,799				$	2,756,928
Allowance for credit losses - Loans to loans	1.09		%			1.15		%

~~Note 6 – Loans,~~

Accrued interest on loans totaled $9 million at September 30, 2021 and $7 million at December 31, 2020, and is included in accrued interest receivable and other assets on the consolidated balance sheets.

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

~~Practically all~~- 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.


	Three Months Ended				Nine Months Ended				Year Ended
(in thousands)	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020		December 31, 2020
Beginning balance	$	32,561	$	29,130	$	32,173	$	13,972	$	13,972
Adoption of CECL	—		—		—		8,488		8,488
Initial PCD ACL	—		—		—		797		797
Total impact - adoption CECL	—		—		—		9,285		9,285
ACL on PCD loans acquired	1,896		—		1,896		—		—
Provision for credit losses	4,000		3,000		4,500		9,000		10,300
Charge-offs	(107)		(786)		(436)		(1,002)		(1,689)
Recoveries	49		44		266		133		305
Net (charge-offs) recoveries	(58)		(742)		(170)		(869)		(1,384)
Ending balance	$	38,399	$	31,388	$	38,399	$	31,388	$	32,173

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


	Nine Months Ended September 30, 2021
(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	$	11,644		$	5,872		$	1,395		$	5,441		$	984		$	421		$	4,773		$	1,086		$	557		$	32,173
ACL on PCD loans	584			530			—			392			103			—			272			12			3			1,896
Provision	(1,121)			443			(195)			1,904			507			259			1,962			262			479			4,500
Charge-offs	(242)			—			(48)			(4)			—			—			(53)			—			(89)			(436)
Recoveries	211			—			—			2			—			—			19			4			30			266
Net (charge-offs) recoveries	(31)			—			(48)			(2)			—			—			(34)			4			(59)			(170)
Ending balance	$	11,076		$	6,845		$	1,152		$	7,735		$	1,594		$	680		$	6,973		$	1,364		$	980		$	38,399
As % of ACL-Loans	29		%	18		%	3		%	20		%	4		%	2		%	18		%	4		%	2		%	100		%

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


	Year Ended December 31, 2020
(in thousands)	Commercial & industrial			Owner- occupied CRE			Agricultural			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total
ACL-Loans *
Beginning balance	$	5,471		$	3,010		$	579		$	1,600		$	414		$	368		$	1,669		$	517		$	344		$	13,972
Adoption of CECL	2,962			1,249			361			1,970			51			124			1,286			351			134			8,488
Initial PCD ACL	797			—			—			—			—			—			—			—			—			797
Provision	3,106			2,062			455			2,061			519			(71)			1,809			151			208			10,300
Charge-offs	(812)			(530)			—			(190)			—			—			(2)			—			(155)			(1,689)
Recoveries	120			81			—			—			—			—			11			67			26			305
Net (charge-offs) recoveries	(692)			(449)			—			(190)			—			—			9			67			(129)			(1,384)
Ending balance	$	11,644		$	5,872		$	1,395		$	5,441		$	984		$	421		$	4,773		$	1,086		$	557		$	32,173
As % of ACL-Loans	36		%	18		%	4		%	17		%	3		%	1		%	15		%	4		%	2		%	100		%

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 ~~tables present the balance~~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 ~~activity~~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. Management allocates the ACL-Loans with historical loss rates by ~~portfolio~~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 ~~recorded investment~~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.

Allowance for Credit Losses-Unfunded Commitments:

In addition to the ACL-Loans, the Company has established an ACL-Unfunded commitments, classified in ~~loans by portfolio~~accrued interest payable and other liabilities on the consolidated balance sheets. This reserve is maintained at ora level that management believes is sufficient to absorb losses arising from unfunded loan commitments, and is determined quarterly based on methodology similar to the methodology for determining the ~~nine months ended~~ACL-Loans. The reserve for unfunded commitments at 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

2021 was $2 million.

Provision for Credit Losses:

The provision for credit losses is determined by the Company as the amount to be added to the ACL loss accounts for various types of financial instruments including loans, investment securities, and off-balance sheet credit exposures after net charge-offs have been deducted to bring the ACL to a level that, in management's judgment, is necessary to absorb expected credit losses over the lives of the respective financial instruments. See Note ~~6 – Loans, Allowance~~5 for ~~Loan Losses, and Credit Quality, continued~~

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

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

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

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

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

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

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

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

additional information regarding the ACL related to investment securities. The following table presents the components of the provision for credit losses.


	Three Months Ended				Nine Months Ended				Year Ended
(in thousands)	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020		December 31, 2020
Provision for credit losses on:
Loans	$	4,000	$	3,000	$	4,500	$	9,000	$	10,300
Unfunded Commitments	2,000		—		2,000		—		—
Investment securities	—		—		—		—		—
Total	$	6,000	$	3,000	$	6,500	$	9,000	$	10,300

Collateral Dependent Loans:

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 estimated fair value of the collateral at the balance ~~and activity in~~sheet date, with consideration for estimated selling costs if satisfaction of the ~~ALLL~~loan depends on the sale of the collateral. The following tables present collateral dependent loans by portfolio segment and ~~the recorded investment in~~collateral type, including those loans with and without a related allowance allocation.


September 30, 2021	Collateral Type
(in thousands)	Real Estate		Other Business Assets		Total		Without an Allowance		With an Allowance		Allowance Allocation
Commercial & industrial	$	—	$	2,071	$	2,071	$	1,504	$	567	$	226
PPP loans	—		—		—		—		—		—
Owner-occupied CRE	2,264		—		2,264		1,854		410		141
Agricultural	956		625		1,581		345		1,236		55
CRE investment	4,019		—		4,019		2,659		1,360		469
Construction & land development	1,138		—		1,138		745		393		276
Residential construction	—		—		—		—		—		—
Residential first mortgage	1,387		—		1,387		1,387		—		—
Residential junior mortgage	166		—		166		166		—		—
Retail & other	—		—		—		—		—		—
Total loans	$	9,930	$	2,696	$	12,626	$	8,660	$	3,966	$	1,167


December 31, 2020	Collateral Type
(in thousands)	Real Estate		Other Business Assets		Total		Without an Allowance		With an Allowance		Allowance Allocation
Commercial & industrial	$	—	$	2,195	$	2,195	$	501	$	1,694	$	1,241
PPP loans	—		—		—		—		—		—
Owner-occupied CRE	3,519		—		3,519		3,519		—		—
Agricultural	584		797		1,381		1,378		3		3
CRE investment	1,474		—		1,474		1,474		—		—
Construction & land development	308		—		308		308		—		—
Residential construction	—		—		—		—		—		—
Residential first mortgage	—		—		—		—		—		—
Residential junior mortgage	—		—		—		—		—		—
Retail & other	—		—		—		—		—		—
Total loans	$	5,885	$	2,992	$	8,877	$	7,180	$	1,697	$	1,244

Past Due and Nonaccrual Loans:

The following tables present past due 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

segment.


	September 30, 2021
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or nonaccrual			Current			Total
Commercial & industrial	$	610		$	1,778		$	885,522		$	887,910
PPP loans	—			—			68,347			68,347
Owner-occupied CRE	314			2,990			694,512			697,816
Agricultural	—			1,782			110,627			112,409
CRE investment	—			4,249			658,622			662,871
Construction & land development	221			1,093			172,657			173,971
Residential construction	412			—			59,199			59,611
Residential first mortgage	4,894			4,495			679,102			688,491
Residential junior mortgage	19			232			130,028			130,279
Retail & other	74			96			51,323			51,493
Total loans	$	6,544		$	16,715		$	3,509,939		$	3,533,198
Percent of total loans	0.2		%	0.5		%	99.3		%	100.0		%

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

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

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

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


	December 31, 2020
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or nonaccrual			Current			Total
Commercial & industrial	$	—		$	2,646		$	748,072		$	750,718
PPP loans	—			—			186,016			186,016
Owner-occupied CRE	—			1,869			519,431			521,300
Agricultural	7			1,830			107,792			109,629
CRE investment	—			1,488			459,233			460,721
Construction & land development	—			327			130,956			131,283
Residential construction	—			—			41,707			41,707
Residential first mortgage	613			823			442,719			444,155
Residential junior mortgage	43			384			111,450			111,877
Retail & other	102			88			31,505			31,695
Total loans	$	765		$	9,455		$	2,778,881		$	2,789,101
Percent of total loans	—		%	0.4		%	99.6		%	100.0		%

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

The following table presents nonaccrual loans by portfolio ~~segment 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 %

segment.


	September 30, 2021					December 31, 2020
(in thousands)	Nonaccrual Loans			% of Total		Nonaccrual Loans			% of Total
Commercial & industrial	$	1,778		11	%	$	2,646		28	%
PPP loans	—			—		—			—
Owner-occupied CRE	2,990			18		1,869			20
Agricultural	1,782			11		1,830			19
CRE investment	4,249			25		1,488			16
Construction & land development	1,093			6		327			3
Residential construction	—			—		—			—
Residential first mortgage	4,495			27		823			9
Residential junior mortgage	232			1		384			4
Retail & other	96			1		88			1
Nonaccrual loans	$	16,715		100	%	$	9,455		100	%
Percent of total loans	0.5		%			0.4		%

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

Credit Quality ~~continued~~

Information:

The following tables present total ~~past due~~ loans by ~~portfolio segment as~~risk categories and year of origination. Loans acquired from Mackinac have been included in the September 30, ~~2017~~2021 table based upon the actual origination date.


September 30, 2021	Amortized Cost Basis by Origination Year
(in thousands)	2021		2020		2019		2018		2017		Prior		Revolving		Revolving to Term		TOTAL
Commercial & industrial (a)
Grades 1-4	$	185,906	$	150,260	$	129,503	$	72,053	$	52,402	$	72,579	$	261,381	$	—	$	924,084
Grade 5	1,046		2,051		4,389		5,411		5,858		1,874		7,237		—		27,866
Grade 6	622		358		33		4		—		50		563		—		1,630
Grade 7	—		6		740		50		799		825		257		—		2,677
Total	$	187,574	$	152,675	$	134,665	$	77,518	$	59,059	$	75,328	$	269,438	$	—	$	956,257
Owner-occupied CRE
Grades 1-4	$	97,166	$	88,970	$	111,153	$	82,216	$	63,024	$	195,027	$	14,008	$	—	$	651,564
Grade 5	3,035		1,795		6,618		2,287		3,520		14,231		1,208		—		32,694
Grade 6	—		—		1,655		—		428		47		—		—		2,130
Grade 7	—		3,018		1,930		—		1,003		5,477		—		—		11,428
Total	$	100,201	$	93,783	$	121,356	$	84,503	$	67,975	$	214,782	$	15,216	$	—	$	697,816
Agricultural
Grades 1-4	$	9,615	$	12,784	$	6,665	$	7,753	$	7,872	$	31,732	$	23,640	$	—	$	100,061
Grade 5	372		—		—		30		216		7,474		460		—		8,552
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		—		—		24		324		3,350		98		—		3,796
Total	$	9,987	$	12,784	$	6,665	$	7,807	$	8,412	$	42,556	$	24,198	$	—	$	112,409
CRE investment
Grades 1-4	$	135,607	$	114,013	$	129,087	$	39,758	$	38,760	$	143,652	$	10,213	$	—	$	611,090
Grade 5	6,622		4,306		6,795		3,011		184		25,035		—		—		45,953
Grade 6	—		—		—		142		—		57		—		—		199
Grade 7	—		—		462		—		918		4,011		238		—		5,629
Total	$	142,229	$	118,319	$	136,344	$	42,911	$	39,862	$	172,755	$	10,451	$	—	$	662,871
Construction & land development
Grades 1-4	$	36,034	$	74,504	$	19,522	$	19,655	$	1,611	$	12,295	$	6,509	$	—	$	170,130
Grade 5	132		—		1,581		931		—		24		—		—		2,668
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		—		—		—		17		1,075		81		—		1,173
Total	$	36,166	$	74,504	$	21,103	$	20,586	$	1,628	$	13,394	$	6,590	$	—	$	173,971
Residential construction
Grades 1-4	$	40,200	$	16,428	$	1,040	$	916	$	975	$	—	$	—	$	—	$	59,559
Grade 5	—		—		52		—		—		—		—		—		52
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		—		—		—		—		—		—		—		—
Total	$	40,200	$	16,428	$	1,092	$	916	$	975	$	—	$	—	$	—	$	59,611
Residential first mortgage
Grades 1-4	$	181,931	$	165,383	$	202,727	$	21,473	$	21,487	$	82,894	$	3,472	$	5	$	679,372
Grade 5	86		534		2,431		—		—		1,359		—		—		4,410
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		—		2,062		—		146		2,501		—		—		4,709
Total	$	182,017	$	165,917	$	207,220	$	21,473	$	21,633	$	86,754	$	3,472	$	5	$	688,491
Residential junior mortgage
Grades 1-4	$	2,244	$	3,225	$	3,341	$	1,628	$	557	$	2,142	$	115,016	$	1,250	$	129,403
Grade 5	—		—		30		—		—		—		448		—		478
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		—		166		—		24		46		162		—		398
Total	$	2,244	$	3,225	$	3,537	$	1,628	$	581	$	2,188	$	115,626	$	1,250	$	130,279
Retail & other
Grades 1-4	$	11,896	$	8,202	$	6,615	$	2,478	$	2,087	$	4,202	$	15,889	$	—	$	51,369
Grade 5	29		—		—		—		—		—		—		—		29
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		10		—		23		—		62		—		—		95
Total	$	11,925	$	8,212	$	6,615	$	2,501	$	2,087	$	4,264	$	15,889	$	—	$	51,493

Total loans	$	712,543	$	645,847	$	638,597	$	259,843	$	202,212	$	612,021	$	460,880	$	1,255	$	3,533,198

(a) For purposes of this table at September 30, 2021, the $68 million net carrying value of PPP loans include $65 million originated in 2021 and the remainder originated in 2020, have a Pass risk grade (Grades 1-4) and have been included with the Commercial & industrial loan category.


December 31, 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	$	348,274	$	121,989	$	98,920	$	72,027	$	21,613	$	39,454	$	183,858	$	—	$	886,135
Grade 5	1,416		2,239		4,486		527		1,638		4,151		18,994		—		33,451
Grade 6	69		19		735		5,315		29		32		1,923		—		8,122
Grade 7	334		1,126		1,389		663		122		3,103		2,289		—		9,026
Total	$	350,093	$	125,373	$	105,530	$	78,532	$	23,402	$	46,740	$	207,064	$	—	$	936,734
Owner-occupied CRE
Grades 1-4	$	90,702	$	74,029	$	78,013	$	52,911	$	45,042	$	150,624	$	870	$	—	$	492,191
Grade 5	42		623		1,349		7,541		1,102		5,842		—		—		16,499
Grade 6	—		—		—		1,710		—		706		—		—		2,416
Grade 7	2,987		675		176		835		—		5,521		—		—		10,194
Total	$	93,731	$	75,327	$	79,538	$	62,997	$	46,144	$	162,693	$	870	$	—	$	521,300
Agricultural
Grades 1-4	$	13,719	$	5,652	$	7,580	$	9,745	$	2,613	$	32,702	$	21,513	$	—	$	93,524
Grade 5	1,034		—		701		169		644		6,131		356		—		9,035
Grade 6	—		—		—		329		390		—		—		—		719
Grade 7	—		—		26		110		1,111		5,042		62		—		6,351
Total	$	14,753	$	5,652	$	8,307	$	10,353	$	4,758	$	43,875	$	21,931	$	—	$	109,629
CRE investment
Grades 1-4	$	82,518	$	78,841	$	40,881	$	69,643	$	31,541	$	137,048	$	5,255	$	—	$	445,727
Grade 5	—		—		47		1,284		1,828		9,073		—		—		12,232
Grade 6	—		—		—		796		—		—		—		—		796
Grade 7	—		—		—		—		—		1,966		—		—		1,966
Total	$	82,518	$	78,841	$	40,928	$	71,723	$	33,369	$	148,087	$	5,255	$	—	$	460,721
Construction & land development
Grades 1-4	$	67,578	$	30,733	$	15,209	$	2,204	$	2,083	$	7,266	$	3,675	$	—	$	128,748
Grade 5	—		373		660		545		—		23		455		—		2,056
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		—		—		—		—		479		—		—		479
Total	$	67,578	$	31,106	$	15,869	$	2,749	$	2,083	$	7,768	$	4,130	$	—	$	131,283
Residential construction
Grades 1-4	$	31,687	$	9,185	$	395	$	121	$	—	$	264	$	—	$	—	$	41,652
Grade 5	—		—		—		55		—		—		—		—		55
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		—		—		—		—		—		—		—		—
Total	$	31,687	$	9,185	$	395	$	176	$	—	$	264	$	—	$	—	$	41,707
Residential first mortgage
Grades 1-4	$	146,744	$	64,013	$	40,388	$	41,245	$	41,274	$	103,094	$	287	$	5	$	437,050
Grade 5	—		925		2,245		256		364		1,714		—		—		5,504
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		437		197		16		9		942		—		—		1,601
Total	$	146,744	$	65,375	$	42,830	$	41,517	$	41,647	$	105,750	$	287	$	5	$	444,155
Residential junior mortgage
Grades 1-4	$	4,936	$	4,338	$	3,663	$	1,060	$	869	$	3,131	$	91,816	$	1,648	$	111,461
Grade 5	—		—		—		—		—		32		—		—		32
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		—		—		27		—		232		125		—		384
Total	$	4,936	$	4,338	$	3,663	$	1,087	$	869	$	3,395	$	91,941	$	1,648	$	111,877
Retail & other
Grades 1-4	$	8,083	$	5,213	$	1,942	$	1,676	$	752	$	1,339	$	12,602	$	—	$	31,607
Grade 5	—		—		—		—		—		—		—		—		—
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	16		—		22		—		—		50		—		—		88
Total	$	8,099	$	5,213	$	1,964	$	1,676	$	752	$	1,389	$	12,602	$	—	$	31,695

Total loans	$	800,139	$	400,410	$	299,024	$	270,810	$	153,024	$	519,961	$	344,080	$	1,653	$	2,789,101

(a) For purposes of this table, the $186 million net carrying value of PPP loans at 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 %

2020 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 loans by risk categories.


	September 30, 2021
(in thousands)	Grades 1- 4			Grade 5			Grade 6			Grade 7			Total
Commercial & industrial	$	855,737		$	27,866		$	1,630		$	2,677		$	887,910
PPP loans	68,347			—			—			—			68,347
Owner-occupied CRE	651,564			32,694			2,130			11,428			697,816
Agricultural	100,061			8,552			—			3,796			112,409
CRE investment	611,090			45,953			199			5,629			662,871
Construction & land development	170,130			2,668			—			1,173			173,971
Residential construction	59,559			52			—			—			59,611
Residential first mortgage	679,372			4,410			—			4,709			688,491
Residential junior mortgage	129,403			478			—			398			130,279
Retail & other	51,369			29			—			95			51,493
Total loans	$	3,376,632		$	122,702		$	3,959		$	29,905		$	3,533,198
Percent of total	95.6		%	3.5		%	0.1		%	0.8		%	100.0		%


	December 31, 2020
(in thousands)	Grades 1- 4			Grade 5			Grade 6			Grade 7			Total
Commercial & industrial	$	700,119		$	33,451		$	8,122		$	9,026		$	750,718
PPP loans	186,016			—			—			—			186,016
Owner-occupied CRE	492,191			16,499			2,416			10,194			521,300
Agricultural	93,524			9,035			719			6,351			109,629
CRE investment	445,727			12,232			796			1,966			460,721
Construction & land development	128,748			2,056			—			479			131,283
Residential construction	41,652			55			—			—			41,707
Residential first mortgage	437,050			5,504			—			1,601			444,155
Residential junior mortgage	111,461			32			—			384			111,877
Retail & other	31,607			—			—			88			31,695
Total loans	$	2,668,095		$	78,864		$	12,053		$	30,089		$	2,789,101
Percent of total	95.7		%	2.8		%	0.4		%	1.1		%	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 loss and 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,~~2021, 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 seven14 loans classified as troubled debt restructurings ~~totaling $5.2 million. These seven loans had~~with a ~~combined premodification~~current outstanding balance of ~~$5.2~~$5.4 million (including $3.3 million on nonaccrual and $2.1 million performing) and pre-modification balance of $5.9 million. ~~There~~In comparison, at December 31, 2020, there were ~~no other~~11 loans ~~which were modified and~~ classified as troubled debt

restructurings ~~at September 30, 2017.~~with an outstanding balance of $5.5 million (including $3.4 million on nonaccrual and $2.1 million performing) and pre-modification balance of $6.5 million. There were no loans classified as troubled debt restructurings during the previous twelve months that subsequently defaulted asduring the nine months ended September 30, 2021. As of September 30, ~~2017. Loans which~~2021, 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~~Management continues to consider the ongoing impacts of the COVID-19 pandemic and related economic uncertainty on the valuation of our franchise, stability of deposits, and of the wealth client base, underlying our goodwill, core deposit intangible, and customer list intangibles, and determined no ~~impairment charge on~~impairments were indicated. A summary of goodwill orand other intangibles was ~~required for 2016 or the first nine months of 2017.~~

as follows.


	Nine Months Ended		Year Ended
(in thousands)	September 30, 2021		December 31, 2020
Goodwill	$	255,431	$	163,151
Core deposit intangibles	11,539		8,837
Customer list intangibles	2,984		3,365
Other intangibles	14,523		12,202
Goodwill and other intangibles, net	$	269,954	$	175,353

~~Note 7 –~~

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

~~Goodwill~~: ~~Goodwill was $107.4 million at September 30, 2017 and $66.7 million at December 31, 2016. There was an addition to the carrying amount~~A summary of goodwill ~~in the second quarter of 2017 of $39.7 million related to the First Menasha merger. In accordance with business combination accounting standards, an additional increase to~~was as follows. During 2021, goodwill ~~of $1.0 million occurred in the third quarter of 2017~~increased due to the ~~Company recording its previously held equity interest in First Menasha at its then~~Mackinac acquisition, ~~date fair value, resulting in a $1.2 million gain in pre-tax earnings.~~while during 2020, goodwill increased due to the Advantage acquisition. See Note 2 for additional information on the Company’s acquisitions.

Nine Months Ended Year Ended
(in thousands) September 30, 2021 December 31, 2020
Goodwill:
Goodwill at beginning of year $ 163,151 $ 151,198
Acquisition 92,280 11,953
Goodwill at end of period $ 255,431 $ 163,151

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~~A summary of other intangible assets was ~~an addition of $3.7 million to the~~as follows. During 2021, core deposit intangibles ~~related~~increased due to the ~~First Menasha merger in the second quarter of 2017. The customer relationship intangible was~~Mackinac acquisition, while during 2020, 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.~~Advantage 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, 2021 December 31, 2020
Core deposit intangibles:
Gross carrying amount $ 36,436 $ 31,715
Accumulated amortization (24,897) (22,878)
Net book value $ 11,539 $ 8,837
Additions during the period $ 4,721 $ 1,000
Amortization during the period $ 2,019 $ 3,060
Customer list intangibles:
Gross carrying amount $ 5,523 $ 5,523
Accumulated amortization (2,539) (2,158)
Net book value $ 2,984 $ 3,365
Amortization during the period $ 381 $ 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, 2021			December 31, 2020
Mortgage servicing rights ("MSR") asset:
MSR asset at beginning of year	$	10,230		$	5,919
Capitalized MSR	3,191			5,256
MSR asset acquired	1,322			529
Amortization during the period	(1,580)			(1,474)
MSR asset at end of period	$	13,163		$	10,230
Valuation allowance at beginning of year	$	(1,000)		$	—
Additions	(500)			(1,000)
Reversals	300			—
Valuation allowance at end of period	$	(1,200)		$	(1,000)
MSR asset, net	$	11,963		$	9,230
Fair value of MSR asset at end of period	$	14,482		$	9,276
Residential mortgage loans serviced for others	$	1,532,585		$	1,250,206
Net book value of MSR asset to loans serviced for others	0.78		%	0.74		%

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~~stratification based on the risk characteristics of the underlying loans ~~serviced~~ (predominantly loan type and note interest rate). ~~No valuation or impairment charge was recorded~~See Note 9 for ~~2016 or year to date 2017.~~

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.~~2021. 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,
2021 (remaining three months)	$	859	$	126	$	486
2022	3,059		507		2,421
2023	2,412		483		2,363
2024	1,815		449		2,250
2025	1,248		449		1,361
2026	777		249		1,118
Thereafter	1,369		721		3,164
Total	$	11,539	$	2,984	$	13,163

Note 8 – ~~Notes Payable~~

~~The~~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, 2021 and December 31, 2020, the Company ~~had the following long-term notes payable (notes~~did not have any outstanding short-term borrowings.

Long-Term Borrowings:

Long-term borrowings include any 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

year. The ~~Company’s~~ components of long-term borrowings were as follows.


(in thousands)	September 30, 2021		December 31, 2020
FHLB advances	$	20,000	$	29,000
Junior subordinated debentures	25,228		24,869
Subordinated notes	99,005		—
Total long-term borrowings	$	144,233	$	53,869

FHLB Advances: The Federal Home Loan Bank (“FHLB”) advances bear fixed rates, require interest-only monthly payments, and have ~~maturities ranging from December 2017 to November 2022.~~maturity dates through March 2027. The weighted average ~~rates~~rate of the FHLB advances ~~were 1.65%~~was 0.74% at September 30, ~~2017~~2021 and ~~1.17%~~0.73% 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 –~~ 2020.

Junior Subordinated Debentures

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

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

At September 30, 2021 and December 31, 2020, $24.3 million and $23.9 million, respectively, qualify as Tier 1 capital.


		Junior Subordinated Debentures
		September 30, 2021						December 31, 2020
(in thousands)	Maturity Date	Par		Unamortized Discount		Carrying Value		Carrying Value
2005 Mid-Wisconsin Financial Services, Inc. (1)	12/15/2035	$	10,310	$	(2,823)	$	7,487	$	7,338
2006 Baylake Corp. (2)	9/30/2036	16,598		(3,470)		13,128		12,951
2004 First Menasha Bancshares, Inc. (3)	3/17/2034	5,155		(542)		4,613		4,580
Total		$	32,063	$	(6,835)	$	25,228	$	24,869

~~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⁾

(1)The debentures, assumed in April 2013 as the result of an acquisition, have a floating rate ~~of the three-month LIBOR plus 1.43%, adjusted quarterly. The interest rates were 2.75% 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~~three-month LIBOR plus 1.43%, adjusted quarterly. The interest rates were 1.55% and ~~the trust preferred securities were used by each trust to purchase junior subordinated~~1.65% as of September 30, 2021 and December 31, 2020, respectively.

(2)The debentures, assumed in April 2016 as a result of an acquisition, have a floating rate of the ~~Company.~~ three-month LIBOR plus 1.35%, adjusted quarterly. The interest rates were 1.48% and 1.59% as of September 30, 2021 and December 31, 2020, respectively.

(3)The debentures, ~~represent~~assumed in April 2017 as the ~~sole asset~~result of an acquisition, have a floating rate of the ~~statutory trusts. All~~three-month LIBOR plus 2.79%, adjusted quarterly. The interest rates were 2.91% and 3.02% as of the common securities of the statutory trusts are owned by the Company. The statutory trusts are not included in the consolidated financial statements. The net effect of all the documents entered into with respect to the trust preferred securities is that the Company, through payments on its debentures, is liable for the distributionsSeptember 30, 2021 and ~~other payments required on the trust preferred securities.~~

~~Note 10 –~~ December 31, 2020, respectively.

Subordinated Notes

~~In 2015~~: On July 7, 2021, Nicolet completed the ~~Company placed an aggregate~~private placement of ~~$12~~$100 million in fixed-to-floating rate subordinated notes (the “Notes”) due in 2031. The Notes ~~in private placements with certain accredited investors. All Notes were issued with 10-year maturities, have a fixed annual interest rate of 5% payable quarterly,~~ are ~~callable on or after the fifth anniversary of their respective issuances dates, and~~intended to qualify ~~for~~as Tier 2 capital for regulatory ~~purposes. At September 30, 2017, the carrying value~~purposes, and are redeemable beginning July 15, 2026 and quarterly thereafter on any interest payment date. The Notes will bear interest at a fixed annual rate 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~~3.125% for the first five years ~~representing the no-call periods, as additional interest expense. As of September 30, 2017~~ and ~~December 31, 2016, respectively, $88,000 and $115,000, of unamortized debt issuance costs remain and are reflected as a reduction~~will reset quarterly thereafter to the ~~carrying value of the outstanding debt.~~

then current three-month Secured Overnight Financing Rate (“SOFR”) plus 0.2375%.

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, 2021
U.S. government agency securities	$	174,826	$	—	$	174,826	$	—
State, county and municipals	238,664		—		238,498		166
Mortgage-backed securities	197,290		—		197,290		—
Corporate debt securities	105,162		—		101,532		3,630
Securities AFS	$	715,942	$	—	$	712,146	$	3,796
Other investments (equity securities)	$	8,077	$	8,077	$	—	$	—
December 31, 2020
U.S. government agency securities	$	63,451	$	—	$	63,451	$	—
State, county and municipals	231,868		—		231,868		—
Mortgage-backed securities	162,495		—		162,495		—
Corporate debt securities	81,523		—		78,393		3,130
Securities AFS	$	539,337	$	—	$	536,207	$	3,130
Other investments (equity securities)	$	3,567	$	3,567	$	—	$	—

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~~2021 and December 31, ~~2016,~~2020, 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.

For the nine months ended September 30, 2021 and the year ended December 31, 2020, there have been no changes in the Level 3 securities AFS measured at fair value on a recurring basis.

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


	Nine Months Ended		Year Ended
Level 3 Fair Value Measurements:	September 30, 2021		December 31, 2020
Balance at beginning of year	$	3,130	$	3,130
Acquired balance	666		—

Balance at end of period	$	3,796	$	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, 2021
Collateral dependent loans	$	11,459	$	—	$	—	$	11,459
Other real estate owned (“OREO”)	4,469		—		—		4,469
MSR asset	11,963		—		—		11,963
December 31, 2020
Collateral dependent loans	$	7,633	$	—	$	—	$	7,633
OREO	3,608		—		—		3,608
MSR asset	9,230		—		—		9,230

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

~~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 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 cash and cash equivalents, BOLI, short-term borrowings, and nonmaturing deposits. For those financial instruments not previously disclosed the following is a description of the evaluation 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 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 the 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~~

Financial instruments:

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

~~Junior 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 instruments~~: At September 30, 2017 and December 31, 2016, the estimated fair value of letters of credit, loan commitments on which the committed interest rate is less than the current market rate, and of outstanding mandatory commitments to sell mortgages into the secondary market 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~~are shown below.


September 30, 2021
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	1,350,605	$	1,350,605	$	1,350,605	$	—	$	—
Certificates of deposit in other banks	24,079		26,653		—		26,653		—
Securities AFS	715,942		715,942		—		712,146		3,796
Securities HTM	49,063		48,946		—		48,946		—
Other investments, including equity securities	38,602		38,602		8,078		24,634		5,890
Loans held for sale	16,784		17,153		—		17,153		—
Loans, net	3,494,799		3,539,968		—		—		3,539,968

MSR asset	11,963		14,482		—		—		14,482
Financial liabilities:
Deposits	$	5,428,774	$	5,459,453	$	—	$	—	$	5,459,453

Long-term borrowings	144,233		144,566		—		20,199		124,367


December 31, 2020
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	802,859	$	802,859	$	802,859	$	—	$	—
Certificates of deposit in other banks	29,521		31,053		—		31,053		—
Securities AFS	539,337		539,337		—		536,207		3,130
Other investments, including equity securities	27,619		27,619		3,567		20,155		3,897
Loans held for sale	21,450		22,329		—		22,329		—
Loans, net	2,756,928		2,834,452		—		—		2,834,452

MSR asset	9,230		9,276		—		—		9,276
Financial liabilities:
Deposits	$	3,910,399	$	3,917,121	$	—	$	—	$	3,917,121
Long-term borrowings	53,869		53,859		—		29,488		24,371

The valuation ~~techniques, or based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of~~methodologies for the financial instruments ordisclosed in the above table are described in the Fair Value Measurements note in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Note 10 – Other Assets and Other Liabilities Held for Sale

On September 7, 2021, Nicolet entered into a Purchase and Assumption Agreement (the “Birmingham Agreement”) with Bank of Ann Arbor to sell Nicolet’s Birmingham, Michigan branch, including legacy mBank’s asset-based lending team (the “Birmingham Sale”). Pursuant to the terms of the Birmingham Agreement, Bank of Ann Arbor has agreed to assume certain deposit liabilities and to acquire certain loans, as well as cash, personal property and other ~~factors. Those techniques are significantly affected~~fixed assets associated with the Birmingham branch. The combined loan and deposit balances of the Birmingham branch (excluding certain loans and deposits not subject to the Birmingham Agreement) were approximately $177 million and $47 million, respectively, as of September 30, 2021. The completion of the Birmingham Sale is subject to customary closing conditions and the approval of the purchase by the ~~assumptions used, including~~appropriate state and federal regulatory agencies. Subject to the ~~discount rate~~satisfaction of such conditions and ~~estimate~~approvals, Nicolet and Bank of ~~future cash flows. Subsequent changes~~Ann Arbor expect to the close the Birmingham Sale in ~~assumptions could significantly affect~~ the ~~estimates.~~

first quarter of 2022.

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 ~~in northeastern and central Wisconsin and 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”(the “Bank”), ~~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~~in Northeast 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 acquisitionCentral Wisconsin, Northern Michigan and the ~~2016 acquisitions, and inclusion~~upper peninsula 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.

Michigan.

Forward-Looking Statements

Statements made in this document and in any documents that are incorporated by reference which are not purely historical are forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, including any statements regarding descriptions of management’s plans, objectives, or goals for future operations, products or services, and forecasts of its revenues, earnings, or other measures of performance. Forward-looking statements are based on current management expectations and, by their nature, are subject to risks and uncertainties. These statements generally may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “should,” “will,” “intend,” or similar expressions. Shareholders should note that many factors, some of which are discussed elsewhere in this document, could affect the future financial results of Nicolet and could cause those results to differ materially from those expressed in forward-looking statements contained in this document. These factors, many of which are beyond Nicolet’s control, include, but are not necessarily limited to the following:

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 magnitude and duration of the COVID-19 pandemic and 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, including County;

•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;

•the risk that the proposed acquisition of County will not be consummated or will not meet Nicolet’s expectations regarding the timing of the proposed acquisition;

•the possibility that the anticipated benefits of the Mackinac acquisition are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy and competitive factors in the areas where Nicolet does business;

•the possibility that the proposed Birmingham Sale will not close when expected or at all because required regulatory approvals are not received or other conditions to the closing are not satisfied on a timely basis or at all;

•diversion of management time on pandemic-related or acquisition-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;

•changes in consumer demand for financial services; 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~~2021 and December 31, ~~2016~~2020 and results of operations for the three and nine-month periods ended September 30, ~~2017~~2021 and ~~2016.~~2020. 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.~~

2020.

Evaluation of financial performance and ~~average balances~~certain balance sheet line items between ~~2017~~2021 and ~~2016 was~~2020 were impacted ~~in general from~~by the timing and ~~sizes~~size of ~~the 2017 and 2016 acquisitions. Since the balances and results~~Nicolet’s acquisition of operations of the acquired entities are appropriately not included in the accompanying consolidated financial statements until their consummation dates, income statement results and average balances for 2017 included full contributions from the 2016 acquisitions and no or partial contributions from the 2017 acquisition. Similarly for 2016 income statement and average balance results, the 2016 acquisitions provided no to partial contributions and the 2017 acquisition provided no contribution.

Mackinac Financial Corporation (“Mackinac”) on September 3, 2021. The inclusion of the ~~Baylake~~Mackinac balance sheet (at ~~about 83%~~approximately 30% of Nicolet’s then pre-merger asset size) and operational results for approximately eight months in 2016 (and approximately five months in the nine month period ended September 30, 2016) analytically explains most of the increase in certain average balances and income statement line items between 2017 and 2016 periods. To a lesser extent, the inclusion of the First Menasha balance sheet (at about 20% of Nicolet’s then pre-merger asset size) and operational results for approximately five of nine months in 2017 analytically explains a substantial portion of the increase in certain ~~average~~period end balances, ~~and~~while the income statement ~~line items between 2017~~results reflect only one month of contribution from Mackinac in 2021. At acquisition, Mackinac added $1.5 billion in assets, $0.9 billion of loans, $1.4 billion of deposits, and ~~2016 periods.~~ goodwill of $92 million, for a total purchase price that included $180 million of common equity (or 2.3 million shares) and $49 million of cash.

The ~~2016 financial advisory~~initial impacts of the COVID-19 pandemic (declared in March 2020) resulted in, among other things, stock and global markets decline, disruption in business ~~acquisition primarily impacts~~and leisure activities as nation-wide stay-at-home orders were mandated, significant strain on the ~~brokerage fee~~health care industry as it addressed the severity of the health crisis, and shifts in the general economy (such as high unemployment, negative GDP expectations, an immediate 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 pandemic, and uncertainty about the longevity of the pandemic’s effects were significant and unfolding throughout most of 2020, but have abated somewhat for 2021 as people and businesses were supported by government stimulus and are adjusting to a vaccination rollout and a new normal in a still evolving environment, including a second wave of the pandemic from a new strain of the virus.

Amid the uncertainty, in 2020 Nicolet increased liquidity, increased the credit loss provision, took significant safety measures for customers and employees, improved efficiencies (including seven net branch closures) and automation, and returned fully on site by June 2020, operating safely to serve and meet the needs of customers in the challenging environment, including advising clients about their finances and wealth in a volatile climate, closing significant volumes of mortgages for retail customers purchasing new homes or refinancing, and guiding commercial customers through temporary loan modifications and/or participation in the Paycheck Protection Program (“PPP”). The main themes from late 2020 continued to drive results into 2021 - strong mortgage income, ~~personnel~~strong asset quality leading to lower credit provision, continued PPP loan activity (including a new round of funding), high levels of cash, and expense control, while serving our customers and ~~certain other expense line items. Last,~~communities safely on site.

During 2020, we originated 2,725 PPP loans totaling $351 million, bearing a 1% contractual rate, and earned a $12.3 million fee. During 2021, under the ~~2016 and 2017 acquisitions impacted pre-tax net income by inclusion~~latest round of ~~non-recurring direct merger expenses of approximately $1.3 million in 2016 ($0.4 million, $0.4 million, $0.1~~the SBA’s program, Nicolet originated 2,205 PPP loans totaling $160 million and ~~$0.4~~earned a $9.3 million fee. Of the total fees, $5.7 million was accreted into interest in ~~first through fourth quarters, respectively)~~2020 and ~~$0.5~~$9.8 million ~~in 2017 ($0.2 million and $0.3 million~~was accreted in the first nine months of 2021. At September 30, 2021, the net carrying value of all PPP loans held for investment was $68 million, or 2% of total loans, for a net $118 million decrease from year-end 2020, as loan forgiveness has outpaced the latest round of new PPP loans. SBA loan forgiveness that started in November 2020 has boosted overall borrower equity in their businesses and ~~second quarters, respectively), along~~meaningfully improves the credit quality of many commercial relationships.


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)	9/30/2021			6/30/2021			3/31/2021			12/31/2020			9/30/2020			9/30/2021			9/30/2020
Results of operations:
Interest income	$	38,741		$	38,307		$	36,876		$	38,037		$	37,270		$	113,924		$	111,165
Interest expense	3,557			2,736			3,235			4,019			4,710			9,528			15,845
Net interest income	35,184			35,571			33,641			34,018			32,560			104,396			95,320
Provision for credit losses	6,000			—			500			1,300			3,000			6,500			9,000
Net interest income after provision for credit losses	29,184			35,571			33,141			32,718			29,560			97,896			86,320
Noninterest income	13,996			20,178			17,126			16,879			18,691			51,300			45,747
Noninterest expense	33,061			30,747			26,081			25,367			23,685			89,889			75,352
Income before income tax expense	10,119			25,002			24,186			24,230			24,566			59,307			56,715
Income tax expense	2,295			6,718			5,947			6,145			6,434			14,960			14,331
Net income	7,824			18,284			18,239			18,085			18,132			44,347			42,384
Net income attributable to noncontrolling interest	—			—			—			98			30			—			249
Net income attributable to Nicolet Bankshares, Inc.	$	7,824		$	18,284		$	18,239		$	17,987		$	18,102		$	44,347		$	42,135
Earnings per common share:
Basic	$	0.75		$	1.85		$	1.82		$	1.79		$	1.75		$	4.39		$	4.04
Diluted	$	0.73		$	1.77		$	1.75		$	1.74		$	1.72		$	4.22		$	3.97
Common Shares:
Basic weighted average	10,392			9,902			9,998			10,074			10,349			10,098			10,426
Diluted weighted average	10,776			10,326			10,403			10,350			10,499			10,503			10,605
Outstanding (period end)	11,952			9,843			9,988			10,011			10,196			11,952			10,196
Period-End Balances:
Loans	$	3,533,198		$	2,820,331		$	2,846,351		$	2,789,101		$	2,908,793		$	3,533,198		$	2,908,793
Allowance for credit losses - loans	38,399			32,561			32,626			32,173			31,388			38,399			31,388
Securities available-for-sale, at fair value	715,942			562,028			558,229			539,337			535,351			715,942			535,351
Goodwill and other intangibles, net	269,954			173,711			174,501			175,353			176,213			269,954			176,213
Total assets	6,407,820			4,587,347			4,543,804			4,551,789			4,706,375			6,407,820			4,706,375
Deposits	5,428,774			3,939,022			3,900,594			3,910,399			3,712,808			5,428,774			3,712,808
Stockholders’ equity (common)	729,278			559,395			550,046			539,189			538,068			729,278			538,068
Book value per common share	61.01			56.83			55.07			53.86			52.77			61.01			52.77
Tangible book value per common share (2)	38.43			39.18			37.60			36.34			35.49			38.43			35.49
Average Balances:
Loans	$	3,076,422		$	2,869,105		$	2,825,664		$	2,868,827		$	2,871,256		$	2,924,648		$	2,760,309
Interest-earning assets	4,734,768			4,109,394			4,089,603			4,091,460			4,216,106			4,313,618			3,768,676
Goodwill and other intangibles, net	201,748			174,026			174,825			175,678			169,353			183,632			166,493
Total assets	5,246,193			4,527,839			4,514,927			4,515,226			4,633,359			4,765,665			4,167,902
Deposits	4,448,468			3,897,797			3,875,205			3,793,430			3,636,260			4,075,923			3,320,994
Interest-bearing liabilities	3,093,031			2,684,871			2,764,232			2,744,578			2,933,737			2,848,583			2,632,280
Stockholders’ equity (common)	608,946			550,974			544,541			537,920			537,826			568,390			523,904
Financial Ratios: (1)
Return on average assets	0.59		%	1.62		%	1.64		%	1.58		%	1.55		%	1.24		%	1.35		%
Return on average common equity	5.10			13.31			13.58			13.30			13.39			10.43			10.74
Return on average tangible common equity (2)	7.62			19.46			20.01			19.75			19.54			15.41			15.75
Average equity to average assets	11.61			12.17			12.06			11.91			11.61			11.93			12.57
Stockholders' equity to assets	11.38			12.19			12.11			11.85			11.43			11.38			11.43
Tangible common equity to tangible assets (2)	7.48			8.74			8.60			8.31			7.99			7.48			7.99
Net interest margin	2.94			3.45			3.31			3.29			3.06			3.22			3.35
Net loan charge-offs to average loans	0.01			0.01			0.01			0.07			0.10			0.01			0.04
Nonperforming loans to total loans	0.47			0.25			0.31			0.34			0.38			0.47			0.38
Nonperforming assets to total assets	0.33			0.21			0.28			0.29			0.25			0.33			0.25
Efficiency ratio	65.32			59.37			51.84			48.99			46.18			58.86			52.71
Effective tax rate	22.68			26.87			24.59			25.36			26.19			25.22			25.27

(1) Income statement-related ratios for partial-year periods are annualized.

(2) The ratios of tangible book value per common share, return on average tangible common equity, and tangible common equity to tangible assets exclude goodwill and other intangibles, net. These financial ratios have been included as they are considered to be critical metrics with which to analyze and evaluate financial condition and capital strength. See Table 1A: Non-GAAP Financial Measures for a ~~$1.7 million lease termination charge in second quarter 2016 related to a Nicolet branch closed concurrent with the Baylake merger.~~

~~Nicolet remains focused on gaining efficiencies from its increased scale from the acquisitions, as well as on organic growth in our expanded markets and in brokerage services.~~

~~Performance Summary~~

~~Nicolet reported net~~reconciliation of these financial measures.


Table 1A: Non-GAAP Financial Measures
	At or for the Three Months Ended										At or for the Nine Months Ended
(In thousands, except per share data)	9/30/2021		6/30/2021		3/31/2021		12/31/2020		9/30/2020		9/30/2021		9/30/2020
Tangible Assets:
Total assets	$	6,407,820	$	4,587,347	$	4,543,804	$	4,551,789	$	4,706,375
Goodwill and other intangibles, net	269,954		173,711		174,501		175,353		176,213
Tangible assets	$	6,137,866	$	4,413,636	$	4,369,303	$	4,376,436	$	4,530,162
Tangible Common Equity:
Stockholders’ equity (common)	$	729,278	$	559,395	$	550,046	$	539,189	$	538,068
Goodwill and other intangibles, net	269,954		173,711		174,501		175,353		176,213
Tangible common equity	$	459,324	$	385,684	$	375,545	$	363,836	$	361,855
Average Tangible Common Equity:
Stockholders’ equity (common)	$	608,946	$	550,974	$	544,541	$	537,920	$	537,826	$	568,390	$	523,904
Goodwill and other intangibles, net	201,748		174,026		174,825		175,678		169,353		183,632		166,493
Average tangible common equity	$	407,198	$	376,948	$	369,716	$	362,242	$	368,473	$	384,758	$	357,411

Net income ~~of $24.0~~was $44.3 million for the nine months ended September 30, ~~2017, a 94% increase over $12.4~~2021, compared to $42.1 million for the nine months ended September 30, 2020. Earnings per diluted common share was $4.22 for the first nine months of 2021, compared to $3.97 for the first nine months of 2020.

•Net interest income was $104.4 million for the first nine months of ~~2016. Net income available to common shareholders was $24.0~~2021, up $9.1 million ~~or $2.45 per diluted common share for~~(10%) over the first nine months of ~~2017. Comparatively, after $633,000 of preferred stock dividends,~~2020. Interest income grew $2.8 million attributable to favorable volumes (mostly higher loan volumes), partly offset by net ~~income available to common shareholders was $11.7~~unfavorable rates (influenced by Federal Reserve rate cuts in March 2020). Interest expense favorably decreased $6.3 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 reflecting disciplined deposit pricing. Net interest margin was 3.22% for the ~~first~~ nine months ~~of 2017 include full contributions from~~ended September 30, 2021, compared to 3.35% for the ~~2016 acquisitions and five~~nine months ~~from First Menasha, while~~ended September 30, 2020, influenced by the ~~comparative 2016 period includes approximately five months from~~changing balance sheet mix, including elevated cash levels, 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$51.3 million for the first nine months of ~~2017~~2021, up $5.6 million (12%) from the comparable 2020 period. Excluding net asset gains (losses), noninterest income was $47.6 million for the first nine months of 2021, up $0.7 million (1%) over 2020, predominantly on higher wealth revenue (trust services and ~~2016, respectively, resulting in taxable equivalent~~brokerage fee income combined) and card interchange income, partly offset by lower net ~~interest~~mortgage income. For additional information regarding noninterest income, see “Income Statement Analysis — Noninterest Income.”

•Noninterest expense was $89.9 million, $14.5 million (19%) higher than the first nine months of ~~$74.0~~2020. Personnel costs increased $7.3 million, and ~~$49.4~~non-personnel expenses combined increased $7.3 million ~~respectively.~~

~~Taxable equivalent~~(22%) over the comparable 2020 period. For additional information regarding noninterest expense, see “Income Statement Analysis — Noninterest Expense.”

•Nonperforming assets were $21 million, representing 0.33% of total assets at September 30, 2021, compared to 0.29% at December 31, 2020 and 0.25% at September 30, 2020. For additional information regarding nonperforming assets, see “Balance Sheet Analysis – Nonperforming Assets.”

•At September 30, 2021, assets were $6.4 billion, up $1.9 billion (41%) from December 31, 2020 and up $1.7 billion (36%) from September 30, 2020, mainly due to the acquisition of Mackinac. For additional balance sheet discussion see “Balance Sheet Analysis.”

•At September 30, 2021, loans were $3.5 billion, $744 million (27%) higher than December 31, 2020 and $624 million (21%) higher than September 30, 2020, largely due to the acquisition of Mackinac. On average, loans grew $164 million (6%) over the first nine months of 2020. For additional information regarding loans, see “Balance Sheet Analysis — Loans.”

•Total deposits were $5.4 billion at September 30, 2021, an increase of $1.5 billion (39%) from December 31, 2020 and $1.7 billion (46%) higher than September 30, 2020, substantially attributable to the Mackinac acquisition. Year-to-date average deposits were $755 million (23%) higher than the first nine months of 2020. 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,
	2021						2020
(in thousands)	Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate
ASSETS
Interest-earning assets
PPP Loans	$	173,463	$	11,123	8.46	%	$	199,662	$	4,263	2.80	%
Commercial-based loans ex PPP	2,222,290		75,845		4.50	%	2,083,768		80,224		5.06	%
Retail-based loans	528,895		17,357		4.38	%	476,879		17,190		4.81	%
Total loans, including loan fees (1)(2)	2,924,648		104,325		4.71	%	2,760,309		101,677		4.85	%
Investment securities:
Taxable	418,897		5,935		1.89	%	349,202		6,115		2.34	%
Tax-exempt (2)	140,691		2,252		2.13	%	130,714		2,165		2.21	%
Total investment securities	559,588		8,187		1.95	%	479,916		8,280		2.30	%
Other interest-earning assets	829,382		2,140		0.34	%	528,451		1,917		0.48	%
Total non-loan earning assets	1,388,970		10,327		0.99	%	1,008,367		10,197		1.35	%
Total interest-earning assets	4,313,618		$	114,652	3.51	%	3,768,676		$	111,874	3.91	%
Other assets, net	452,047						399,226
Total assets	$	4,765,665					$	4,167,902
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings	$	595,385	$	272	0.06	%	$	395,961	$	588	0.20	%
Interest-bearing demand	681,079		2,114		0.41	%	551,018		3,092		0.75	%
Money market accounts (“MMA”)	889,022		363		0.05	%	723,323		1,313		0.24	%
Core time deposits	318,477		2,165		0.91	%	400,198		4,901		1.64	%
Total interest-bearing core deposits	2,483,963		4,914		0.26	%	2,070,500		9,894		0.64	%
Brokered deposits	284,738		2,885		1.35	%	279,165		3,302		1.58	%
Total interest-bearing deposits	2,768,701		7,799		0.38	%	2,349,665		13,196		0.75	%
PPPLF	—		—		—	%	191,535		507		0.35	%
Other interest-bearing liabilities	79,882		1,729		2.87	%	91,080		2,142		3.10	%
Total wholesale funding	79,882		1,729		2.87	%	282,615		2,649		1.23	%
Total interest-bearing liabilities	2,848,583		9,528		0.45	%	2,632,280		15,845		0.80	%
Noninterest-bearing demand deposits	1,307,222						971,329
Other liabilities	41,470						40,389
Stockholders’ equity	568,390						523,904
Total liabilities and stockholders’ equity	$	4,765,665					$	4,167,902
Net interest income and rate spread			$	105,124	3.06	%			$	96,029	3.11	%
Tax-equivalent adjustment			$	728					$	709
Net interest income and net interest margin			$	104,396	3.22	%			$	95,320	3.35	%
Selected Additional Information:
Total loans ex. PPP	$	2,751,185	$	93,202	4.48	%	$	2,560,647	$	97,414	5.01	%
Total interest-earning assets ex PPP	4,140,155		103,529		3.31	%	3,569,014		107,611		3.98	%
Total interest-bearing liabilities ex PPPLF	2,848,583		9,528		0.45	%	2,440,745		15,338		0.84	%
Net interest rate spread ex PPP & PPPLF					2.86	%					3.14	%

(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 Volume/Rate Variance~~

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

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

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

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

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

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

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

~~(1)~~

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

~~(2)~~

~~The yield on tax-exempt loans~~Average Balance Sheet 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 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.~~

- Tax-Equivalent Basis (Continued)


	For the Three Months Ended September 30,
	2021						2020
(in thousands)	Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate
ASSETS
Interest-earning assets
PPP Loans	$	109,318	$	2,310	8.27	%	$	332,816	$	2,477	2.91	%
Commercial-based loans ex PPP	2,378,480		26,759		4.40	%	2,064,191		26,021		4.93	%
Retail-based loans	588,624		6,242		4.24	%	474,249		5,577		4.70	%
Total loans, including loan fees (1)(2)	3,076,422		35,311		4.51	%	2,871,256		34,075		4.66	%
Investment securities:
Taxable	472,598		2,061		1.74	%	356,908		2,001		2.24	%
Tax-exempt (2)	139,272		744		2.14	%	139,245		763		2.19	%
Total investment securities	611,870		2,805		1.83	%	496,153		2,764		2.23	%
Other interest-earning assets	1,046,476		869		0.33	%	848,697		680		0.32	%
Total non-loan earning assets	1,658,346		3,674		0.55	%	1,344,850		3,444		1.02	%
Total interest-earning assets	4,734,768		$	38,985	3.24	%	4,216,106		$	37,519	3.50	%
Other assets, net	511,425						417,253
Total assets	$	5,246,193					$	4,633,359
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings	$	662,260	$	100	0.06	%	$	443,121	$	127	0.11	%
Interest-bearing demand	711,442		685		0.38	%	585,528		844		0.57	%
MMA	962,538		135		0.06	%	777,696		233		0.12	%
Core time deposits	329,012		630		0.76	%	374,230		1,337		1.42	%
Total interest-bearing core deposits	2,665,252		1,550		0.23	%	2,180,575		2,541		0.46	%
Brokered deposits	284,164		894		1.25	%	336,026		1,243		1.47	%
Total interest-bearing deposits	2,949,416		2,444		0.33	%	2,516,601		3,784		0.60	%
PPPLF	—		—		—	%	335,865		297		0.35	%
Other interest-bearing liabilities	143,615		1,113		3.08	%	81,271		629		3.05	%
Total wholesale funding	143,615		1,113		3.08	%	417,136		926		0.87	%
Total interest-bearing liabilities	3,093,031		3,557		0.46	%	2,933,737		4,710		0.64	%
Noninterest-bearing demand deposits	1,499,052						1,119,659
Other liabilities	45,164						42,137
Stockholders’ equity	608,946						537,826
Total liabilities and stockholders’ equity	$	5,246,193					$	4,633,359
Net interest income and rate spread			$	35,428	2.78	%			$	32,809	2.86	%
Tax-equivalent adjustment			$	244					$	249
Net interest income and net interest margin			$	35,184	2.94	%			$	32,560	3.06	%
Selected Additional Information:
Total loans ex. PPP	$	2,967,104	$	33,001	4.37	%	$	2,538,440	$	31,598	4.89	%
Total interest-earning assets ex PPP	4,625,450		36,675		3.12	%	3,883,290		35,042		3.55	%
Total interest-bearing liabilities ex PPPLF	3,093,031		3,557		0.46	%	2,597,872		4,413		0.67	%
Net interest rate spread ex PPP & PPPLF					2.66	%					2.88	%

(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 ~~4: Quarterly~~3: Volume/Rate Variance

~~Comparison~~ - Tax-Equivalent Basis


	For the Three Months Ended September 30, 2021 Compared to September 30, 2020:						For the Nine Months Ended September 30, 2021 Compared to September 30, 2020:
	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	$	(2,481)	$	2,314	$	(167)	$	(627)	$	7,487	$	6,860
Commercial-based loans ex. PPP	3,547		(2,809)		738		4,484		(8,863)		(4,379)
Retail-based loans	1,249		(584)		665		1,786		(1,619)		167
Total loans (2)	2,315		(1,079)		1,236		5,643		(2,995)		2,648
Investment securities:
Taxable	438		(378)		60		643		(823)		(180)
Tax-exempt (2)	—		(19)		(19)		161		(74)		87
Total investment securities	438		(397)		41		804		(897)		(93)
Other interest-earning assets	107		82		189		456		(233)		223
Total non-loan earning assets	545		(315)		230		1,260		(1,130)		130
Total interest-earning assets	$	2,860	$	(1,394)	$	1,466	$	6,903	$	(4,125)	$	2,778

Interest-bearing liabilities
Savings	$	48	$	(75)	$	(27)	$	209	$	(525)	$	(316)
Interest-bearing demand	159		(318)		(159)		616		(1,594)		(978)
MMA	47		(145)		(98)		247		(1,197)		(950)
Core time deposits	(146)		(561)		(707)		(861)		(1,875)		(2,736)
Total interest-bearing core deposits	108		(1,099)		(991)		211		(5,191)		(4,980)
Brokered deposits	(176)		(173)		(349)		64		(481)		(417)
Total interest-bearing deposits	(68)		(1,272)		(1,340)		275		(5,672)		(5,397)
PPPLF	(148)		(149)		(297)		(253)		(254)		(507)
Other interest-bearing liabilities	600		(116)		484		186		(599)		(413)
Total wholesale funding	452		(265)		187		(67)		(853)		(920)
Total interest-bearing liabilities	384		(1,537)		(1,153)		208		(6,525)		(6,317)
Net interest income	$	2,476	$	143	$	2,619	$	6,695	$	2,400	$	9,095

(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.

Short-term interest rates have remained steady since March 2020, while the yield curve has begun to steepen mainly since year end 2020. The succeeding quarters felt the pressure of a low interest rate environment and bloated cash balances from government stimulus, both in the form of stimulus checks to individuals and PPP loans for businesses. The continued elevation of low interest-earning asset balances have further decreased margins along with the normal pressures of a near-zero rate environment. Though margins remain depressed, interest income dollars continue to rise on favorable asset volumes and proactive expense reduction measures. The following paragraphs will discuss the comparison of the ~~three~~first nine months ~~ended September 30, 2017 versus~~of 2021 and 2020, with COVID-19 pandemic impacts appearing in second quarter 2020 and 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~~economy beginning to rebound in the first part of 2021. Though improving, we see continued margin pressure 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~~pricing impacts on loans and deposits.

Tax-equivalent net interest income was ~~$74.0~~$105.1 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~~2021, comprised of net interest income of $104.4 million ($9.1 million or 10% higher than the first nine months of ~~2016.~~2020), and a $0.7 million tax-equivalent adjustment. The $9.1 million increase in tax-equivalent net interest income was attributable to net favorable volumes (which added $6.7 million, mostly from higher loan volumes and organic loan growth, as well as interest-earning assets from the Mackinac and Advantage acquisitions) and net favorable rates (which increased net interest income $2.4 million due to a lower cost of funds largely as a result of prudent deposit pricing actions).

Between the comparable nine-month periods, the interest rate spread ~~increased 27~~decreased 5 bps, largely attributable to the lower interest rate environment between the periods ~~with a favorable increase in~~and the ~~earning asset yield (up 25 bps~~higher concentration of low-earning cash compared to ~~4.69% for~~the first nine months of ~~2017)~~2020. The 2021 interest-earning asset yield declined 40 bps to 3.51%, ~~and an improvement~~partly from the 14 bps decline in loans but was more significantly impacted by the decrease in the ~~cost of funds (down 2 bps~~loans-to-earning asset mix (to 68% compared to ~~0.56%~~73% for the first nine months of ~~2017).~~2020) given the dramatic increase in cash. Other interest-earning assets (which are predominantly cash) declined 14 bps, while

total non-loan earning assets declined 36 bps. The 2021 cost of funds declined favorably 35 bps to 0.45%, largely from improved interest-bearing core deposit rates, as well as lower brokered and other interest-bearing liabilities rates. The contribution from net free funds ~~increased~~decreased 8 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~~29% 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 higher 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,3.22% for the first nine months of ~~2017, and 78%, 17%, and 5%, respectively,~~2021, down 13 bps compared to 3.35% for the comparable ~~2016~~2020 period. ~~Loans yielded 5.26%~~

Average interest-earning assets increased to $4.3 billion, up $0.5 billion (14%) over the 2020 comparable period, primarily due to significantly higher cash starting in second quarter 2020, the addition of PPP loans (beginning second quarter 2020), and ~~5.13%~~the timing of the Mackinac and Advantage acquisitions (in September 2021 and August 2020, respectively). Between the comparable nine-month periods, average loans increased $164 million (6%), mostly due to organic loan growth and the timing of the Mackinac and Advantage acquisitions, which added loans of $930 million and $88 million, respectively, at acquisition. In addition, PPP loan activity remains strong, with a net average balance of $173 million at September 30, 2021, as loan forgiveness has outpaced the latest round of funding. Total non-loan interest-earning assets increased $381 million (38%) on average, largely due to higher cash. The mix of average interest-earning assets shifted to lower-yielding assets, at 68% loans, 13% investments and 19% other interest-earning assets (mostly cash) for the first nine months of 2021, compared to 73%, 13% and 14%, 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~~2020.

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~~$114.7 million for the first nine months of ~~2017, $659~~2021, up $2.8 million ~~or 40% higher than~~from the first nine months of ~~2016,~~2020, and the related interest-earning asset yield was 3.51%, down 40 bps from the comparable period in 2020. Interest income on loans increased $2.6 million over the first nine months of 2020, with net decreases in interest rates more than offset by favorable volumes. The 2021 loan yield was 4.71%, down 14 bps from the first nine months of 2020, largely ~~attributable~~from the significantly lower rate environment impacting yields on new, renewed and variable rate loans. Between the comparable nine-month periods, interest income on non-loan earning assets combined grew $0.1 million to ~~acquired balances as well as strong organic loan growth. The change consisted~~$10.3 million on higher average volumes (up 38%, mostly cash), though the yield declined 36 bps (to 0.99%) in the lower rate environment, mostly from the significantly higher cash.

Average interest-bearing liabilities were $2.8 billion, an increase of ~~a $568~~$216 million (8%), primarily due to the significant increase in deposits from government stimulus activities and deposited PPP loan proceeds, though also partly due to the timing of the Mackinac and Advantage acquisitions (in September 2021 and August 2020, respectively). The mix of average ~~loans (up 45% to $1.8 billion), a $127 million increase in investment securities (up 47% to $397 million)~~interest-bearing liabilities was 87% core deposits, 10% brokered deposits and ~~a $36 million decrease in~~3% other ~~interest-earning assets, predominantly low earning cash.~~

~~Nicolet’s cost of funds decreased 2 bps to 0.56%~~funding for the first nine months of ~~2017~~2021, compared to ~~a year ago. The average cost~~79%, 10% and 11%, respectively, for the first nine months of ~~interest-bearing deposits (which represented 96%~~2020.

Interest expense decreased to $9.5 million for the first nine months of 2021, down $6.3 million compared to the first nine months of 2020, on slightly higher volumes of average interest-bearing liabilities (up 8% to $2.8 billion) but at a lower overall cost of funds (down 35 bps to 0.45%). Interest expense on deposits decreased $5.4 million (41%) from the first nine months of 2020 given higher average interest-bearing deposit balances at a lower cost (down 37 bps to 0.38%) as product rate changes were made in the lower rate environment, and brokered deposits cost 23 bps less, largely from maturities of higher-costing term brokered funds procured during March-April 2020 under competitive conditions as part of previously discussed liquidity actions. Interest expense on other interest-bearing liabilities was down between the comparable nine-month periods, as interest expense on lower average balances (down $203 million) more than offset the higher rates related to the subordinated notes issued in July 2021 (up 164 bps to 2.87%).

Provision for Credit Losses

The provision for credit losses was $6.5 million for the nine months ended September 30, ~~2017~~2021 (comprised of $4.5 million related to the ACL-Loans, and 2016), was 0.42% for the first nine months of 2017, down 1 bp from the first nine months of 2016, largely benefiting from the lower-costing Baylake deposits acquired, offset partly by the higher-costing First Menasha deposits acquired, an increase in select deposit rates that began in July 2017, and general rate pressures influenced by a 75 bps increase in the federal funds rate since January 1, 2016.

Average interest-bearing liabilities were $1.72 billion for the first nine months of 2017, up $473 million or 38% from the comparable period in 2016, predominantly attributable to acquired balances. Interest-bearing deposits represented 96% of average interest-bearing liabilities for the first nine months of 2017 and 2016, while the mix of average interest-bearing deposits moved from higher costing core CDs to lower costing transaction accounts, improving the overall deposit cost slightly between the nine-month periods. Average brokered deposits were $121$2.0 million for the ~~first nine months of 2017, up $92~~ACL on unfunded commitments), compared to $9.0 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~~2020 (all related to the ACL-Loans). The 2021 provision for credit losses was mostly due to the Day 2 ACL increase from the Mackinac acquisition. In comparison, the provision for credit losses was significantly increased for most of 2020 given unprecedented economic disruptions and ~~2016 was $1.9 million~~uncertainty surrounding the COVID-19 pandemic, and ~~$1.4 million, respectively, exceeding net charge offs~~the related credit stress on our customers, though tempered starting in late 2020 and continuing into 2021 as potential deterioration of ~~$1.1 million and $0.2 million, respectively. Asset~~loan quality measures have been strong and improving with continued resolutions of problem loans. The ALLL was $12.6 million (0.61% of loans) at September 30, 2017, compared to $11.8 million (0.75% of loans) at December 31, 2016 and $11.5 million (0.74% of loans) at September 30, 2016. The decline in the ratio was a result of recording the acquired loan portfolios at fair value with no carryover of allowance at the time of each merger.

metrics initially anticipated did not materialize.

The provision for ~~loan~~credit losses is predominantly a function of Nicolet’s methodology and judgment as to qualitative and quantitative factors used to determine the ~~adequacy~~appropriateness of the ~~ALLL.~~ACL-Loans and unfunded commitments. 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~~collateral dependent 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. The ACL for unfunded commitments is affected by many of the same factors as the ACL-Loans, as well as funding assumptions relative to lines of credit. 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. 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)	2021		2020		$ Change		% Change		2021		2020		$ Change		% Change
Trust services fee income	$	2,043	$	1,628	$	415	25	%	$	5,724	$	4,717	$	1,007	21	%
Brokerage fee income	3,154		2,489		665		27		8,938		7,080		1,858		26
Mortgage income, net	4,808		9,675		(4,867)		(50)		17,637		21,965		(4,328)		(20)
Service charges on deposit accounts	1,314		1,037		277		27		3,541		3,075		466		15
Card interchange income	2,299		1,877		422		22		6,492		5,076		1,416		28
BOLI income	572		531		41		8		1,658		1,774		(116)		(7)
Other income	993		1,237		(244)		(20)		3,594		3,245		349		11
Noninterest income without net gains	15,183		18,474		(3,291)		(18)		47,584		46,932		652		1
Asset gains (losses), net	(1,187)		217		(1,404)		N/M		3,716		(1,185)		4,901		N/M
Total noninterest income	$	13,996	$	18,691	$	(4,695)	(25)	%	$	51,300	$	45,747	$	5,553	12	%
Trust services fee income & Brokerage fee income combined	$	5,197	$	4,117	$	1,080	26	%	$	14,662	$	11,797	$	2,865	24	%

N/M means not ~~meaningful~~

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

meaningful.

Noninterest income was ~~$26.0~~$51.3 million for the first nine months of ~~2017,~~2021, an increase of $5.6 million (12%) compared to ~~$18.8~~$45.7 million for the ~~first nine months~~comparable period of ~~2016, aided largely by~~2020. Noninterest income excluding net asset gains (losses) grew $0.7 million (1%) between the ~~2016 acquisitions and, to a lesser extent, the 2017 acquisition. Excluding net gains on sale or write-down of assets from both~~comparable nine-month periods, ~~noninterest~~predominantly on higher wealth revenue (trust services and brokerage fee income ~~increased $5.7~~combined) and card interchange income, partly offset by lower net mortgage income.

Trust services fee income and brokerage fee income combined were $14.7 million, ~~or 31.3%.~~

~~The 2017 activity in net gain on sale or write-down of assets consisted of a $1.2~~up $2.9 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 million gain on the sale or disposition of assets (consisting of $0.9 million of gain from the sale two vacated bank branches, a $0.4 million loss from the transfer of bank branches to OREO, and a $0.2 million gain from the sale of an other investment). The 2016 activity included gains 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%~~(24%) over the first nine months of ~~2016, resulting from an increased number of~~2020, 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 $17.6 million, decreased $4.3 million (20%) between the comparable nine-month periods, predominantly on slowing mortgage activity from the record levels experienced in 2020. Gains on sales and capitalized gains combined decreased $5.7 million, while net servicing fees increased ~~$0.3~~$0.1 million ~~or 8.3%~~(with higher income on the larger portfolio serviced for others, partially offset by an increase in MSR amortization), the mortgage derivatives were $0.6 million favorable, and MSR impairment was down $0.6 million on slower 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 up $0.5 million to $3.5 million for the nine months ended September 30, 2021, mainly as we waived certain fees during 2020 to provide economic relief to our customers at the inception of the pandemic.

Card interchange income grew $1.4 million (28%) between the comparable nine-month periods due to ~~greater secondary mortgage production~~higher volume and ~~sales aided by a broader geographic footprint and increased net servicing fees on~~activity, as activity was tempered starting late in first quarter 2020 with the ~~growing portfolio~~onset of ~~mortgage loans serviced for others.~~

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

cautionary spending of consumers given the economic uncertainty.

BOLI income was ~~up $0.4~~down $0.1 million ~~or 49.3%~~ between the comparable nine-month periods, ~~commensurate with the growth~~attributable to BOLI death benefits received in ~~average BOLI investments, including additional insurance purchases in 2016. Card interchange fees were up $1.2 million or 53.6%~~2020, partly offset by income on higher ~~volume and activity.~~ average balances from $3 million BOLI acquired with Advantage in August 2020.

Other ~~noninterest~~ income ~~was $2.0~~of $3.6 million ~~up $0.4 million or 21.4% over the comparable period of 2016 with income from equity in UFS, a data processing company acquired in the Baylake merger, up $0.3 million.~~

~~Noninterest Expense~~

~~Table 7: Noninterest Expense~~

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

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

~~Total noninterest expense~~2021 was ~~$59.5~~up $0.3 million from the comparable 2020 period, largely due to the change in fair value of nonqualified deferred compensation plan assets from the significant market decline at the onset of the pandemic. See also “Noninterest Expense” for discussion on the offsetting fair value change to the nonqualified deferred compensation plan liabilities.

Net asset gains of $3.7 million for the first nine months of 2017 (including $0.5 million attributable to non-recurring, merger-based expenses such as legal and conversion processing costs), compared to $46.6 million for the comparable period in 2016 (including $2.6 million merger-related expenses, of which $1.7 million was a lease termination charge). Excluding the noted merger-based expenses from both periods, noninterest expense increased approximately $15.0 million or 34.2%,2021 were primarily attributable to favorable fair value marks on equity securities (including $3.5 million from the ~~larger operating base as a result~~second quarter 2021 initial public offering of ~~the 2016 and 2017 acquisitions.~~

~~Personnel expense was $32.4~~an equity investment), while net

asset losses of $1.2 million for the first nine months of ~~2017, up $7.7~~2020 were primarily attributable to unfavorable fair value marks on equity securities (reflecting the significant market declines at the onset of the pandemic).

Noninterest Expense

Table 5: Noninterest Expense


	Three Months Ended September 30,								Nine Months Ended September 30,
($ in thousands)	2021		2020		Change		% Change		2021		2020		Change		% Change
Personnel	$	16,927	$	14,072	$	2,855	20	%	$	49,127	$	41,877	$	7,250	17	%
Occupancy, equipment and office	5,749		4,051		1,698		42		13,939		12,616		1,323		10
Business development and marketing	1,654		810		844		104		3,853		4,683		(830)		(18)
Data processing	2,939		2,612		327		13		8,408		7,574		834		11
Intangibles amortization	758		834		(76)		(9)		2,400		2,707		(307)		(11)
FDIC assessments	480		347		133		38		1,555		347		1,208		N/M
Merger-related expense	2,793		151		2,642		N/M		3,449		853		2,596		N/M
Other expense	1,761		808		953		118		7,158		4,695		2,463		52
Total noninterest expense	$	33,061	$	23,685	$	9,376	40	%	$	89,889	$	75,352	$	14,537	19	%
Non-personnel expenses	$	16,134	$	9,613	$	6,521	68	%	$	40,762	$	33,475	$	7,287	22	%
Average full-time equivalent (“FTE”) employees	646		523		123		24	%	591		553		38		7	%

N/M means not meaningful.

Noninterest expense was $89.9 million, ~~or 30.9%~~an increase of $14.5 million (19%) over the first nine months of 2020. Personnel costs increased $7.3 million (17%), while non-personnel expenses combined increased $7.3 million (22%) compared to the first nine months of ~~2016,~~2020.

Personnel expense was $49.1 million for the nine months ended September 30, 2021, an increase of $7.3 million from the comparable period in 2020. The increase in personnel was largely due to higher equity and other incentives commensurate with the ~~expanded workforce, with average full time equivalent employees up 32% (from 393 to 519~~strong earnings for the first ~~nine months~~part of ~~2016 and 2017, respectively). Also contributing to the~~2021, as well as an increase ~~were~~in salaries from merit increases between the periods ~~incentives timing, equity grants~~and higher average FTEs (mostly from the acquisition of Mackinac). Personnel expense was also impacted by the change in the ~~second quarter~~fair value of ~~2017, and higher health and other benefits costs.~~

nonqualified deferred compensation plan liabilities from the significant market decline at the onset of the pandemic. See also “Noninterest Income” for discussion on the offsetting fair value change to the nonqualified deferred compensation plan assets.

Occupancy, equipment and office expense was ~~$9.6~~$13.9 million for the first nine months of ~~2017,~~2021, up ~~$2.3~~$1.3 million ~~or 31.3%~~(10%) compared to ~~2016, primarily~~ the ~~result~~first nine months of 2020, as 2021 included $0.9 million of accelerated depreciation and write-offs related to branch closures, as well as higher expense for the ~~larger operating base~~expanded branch network with the Mackinac acquisition and additional expense for software ~~needs, offset partly by~~and technology solutions to drive operational efficiency, and enhance products or services. In addition, second quarter 2020 included $0.5 million of accelerated depreciation and write-offs related to branch ~~closure savings.~~

closures.

Business development and marketing expense ~~increased $1.0~~was $3.9 million, ~~or 42.8%~~down $0.8 million (18%), between the comparable nine-month periods, largely due to the ~~expanded~~$1.25 million micro-grant program in second quarter 2020 (which provided funds directly to customers who otherwise qualified for small PPP loans of less than $5,000, as a more cost beneficial result for the customer), as well as lower marketing costs from differences in the timing and extent of donations, marketing campaigns, promotions, and media.

Data processing expense was $8.4 million, up $0.8 million (11%) between the comparable nine-month periods, mostly due to volume-based increases in core processing charges, as well as the larger operating base ~~and branding efforts influencing additional marketing, promotions and media.~~

~~Data processing expenses, which are primarily volume-based, rose $2.0~~with the Mackinac acquisition.

Intangibles amortization decreased $0.3 million ~~or 45.8%~~ between the comparable nine-month periods ~~predominantly attributable~~mainly from declining amortization on the aging intangibles of previous acquisitions, partly offset by amortization from the new intangibles of recent acquisitions.

FDIC assessments increased to $1.6 million for the ~~acquisitions,~~first nine months of 2021 as the small bank assessment credits were fully utilized during third quarter 2020 and also reflecting the higher ~~card processing, and expanded functionalities. Intangible amortization increased $1.2~~assessment base.

Other expense was $7.2 million, up $2.5 million (52%) between the comparable nine-month periods, mostly due ~~exclusively~~ to ~~timing~~an increase in director fees (reflective of ~~and~~the additional complexity of a larger company, including the addition of ~~intangibles recorded as part of~~two new directors), higher professional fees, costs to carry closed bank branches, and overall higher expenses related to the ~~acquisitions.~~

~~Other noninterest expense decreased $1.2 million or 25.0% between the nine-month periods, due primarily to~~larger operating base. In

addition, 2021 included a $2.1 million ~~lower merger-related expenses, partially offset by a $0.9~~contract termination charge, while 2020 included $1.0 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~~lease termination charges related to branch closures and ~~bank insurance costs) and a $0.4~~$0.5 million ~~increase in 2017 associated with implementing~~to terminate the ~~customer relationship system that began in the fourth quarter of 2016.~~

Commerce merger agreement.

Income Taxes

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

Income tax expense was ~~$12.6~~$15.0 million ~~and $6.4~~(effective tax rate of 25.22%) for the first nine months of 2021, compared to $14.3 million ~~respectively. The increase was primarily attributable to higher pre-tax income between~~(effective tax rate of 25.27%) for the ~~two periods. Included in 2017 is a tax benefit~~comparable period 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 of2020.

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

~~Comparison of the three months ending~~2021 versus Three Months Ended September 30, ~~2017 versus 2016~~

~~Nicolet reported net~~2020

Net income ~~of $9.5~~was $7.8 million for the three months ended September 30, 2017, up $3.0 million or 47% over $6.5 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,2021, compared to ~~net income available to common shareholders of $6.2~~$18.1 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~~2020. Earnings per diluted common share was $0.73 for third quarter 2021, compared to $1.72 for third quarter 2020.

Tax-equivalent net interest income was $35.4 million for third quarter 2021, comprised of net interest income of ~~$27.0~~$35.2 million ($2.6 million or 8% over third quarter 2020), and ~~$21.5~~a tax-equivalent adjustment of $0.2 million ~~respectively. Taxable equivalent net~~(essentially unchanged from third quarter 2020). Tax-equivalent interest income ~~for~~increased $1.5 million between the third quarter ~~2017 was up $5.5~~periods, with $2.9 million from stronger volumes (led by average loans which grew $205 million or ~~26% versus~~7% over third quarter ~~2016, with $6.0 million~~2020, including both organic loan growth and one month of the ~~increase due to~~loans acquired with Mackinac, net ~~favorable volume variances (predominately due~~of PPP loan forgiveness), partly offset by $1.4 million from lower yields. In addition, growth in other interest-earning assets (mostly cash) also contributed 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~~stronger volumes between the comparable third quarter ~~2017, 15 bps higher than third quarter 2016, mainly due~~periods, increasing $198 million (23%) to ~~a higher mix~~represent 22% of ~~loans as a percent of earning assets. Loans earned 5.29% and represented 81% of average earning~~interest-earning assets for third quarter ~~2017,~~2021, compared to ~~5.32% and 78%, respectively,~~20% for third quarter ~~2016.~~ 2020. Interest expense decreased $1.2 million from third quarter 2020, as the impact of the lower interest rate environment more than offset the higher average deposit balances. For additional information regarding average balances, net interest income and net interest margin, see “INCOME STATEMENT ANALYSIS — Net Interest Income.”

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 assetsnet interest margin for third quarter ~~2017 (including higher low-earning cash) and earned 2.24%~~2021 was 2.94%, ~~versus 22% of earning assets yielding 2.03%~~down from 3.06% for third quarter ~~2016.~~

2020, influenced by the changing balance sheet mix with higher levels of low-earning cash. The yield on interest-earning assets of 3.24% declined 26 bps from third quarter 2020. The yield on loans excluding PPP loans was 4.37%, 52 bps lower than third quarter 2020 mostly attributable to the impact of the lower interest rate environment on variable loans offset partly by floors and the mix of fixed rate loans. The cost of funds of 0.46% declined 18 bps between the comparable quarters as deposit costs were adjusted down in the lower interest rate environment, and third quarter 2020 was ~~0.65%~~also influenced by the the inclusion of PPPLF funds costing 35 bps.

Provision for credit losses was $6.0 million for third quarter ~~2017, 15 bps higher than~~2021 (comprised of $4.0 million related to the ACL-Loans, and $2.0 million for the ACL on unfunded commitments), compared to provision for credit losses of $3.0 million for third quarter ~~2016, driven~~2020. The 2021 provision for credit losses was mostly due to the Day 2 ACL increase from the Mackinac acquisition as net charge-offs were negligible (at 0.01% for year-to-date 2021) and asset quality metrics remain strong, while the 2020 provision reflected the unknown magnitude of the evolving impact of credit stress on our customers arising from pandemic-based business disruptions and other recessionary conditions. For additional information regarding the allowance for credit losses-loans and asset quality, see “BALANCE SHEET ANALYSIS — Allowance for Credit Losses - Loans” and “BALANCE SHEET ANALYSIS — Nonperforming Assets.”

Noninterest income was $14.0 million for third quarter 2021, a decrease of $4.7 million (25%) from third quarter 2020. Noninterest income excluding net asset gains (losses) was down $3.3 million (18%) between the comparable third quarter periods, predominantly on lower net mortgage income. Net mortgage income of $4.8 million for third quarter 2021 was down $4.9 million (50%) from third quarter 2020, predominantly on slowing mortgage activity from the record levels experienced in 2020, including lower sale gains and capitalized gains combined (down $5.8 million, commensurate with the lower volumes sold into the secondary market), partly offset by a $0.2 million favorable change in the fair value of the mortgage derivatives, and $0.7 million lower MSR asset impairment given slower refinance activity. Trust services fee income and brokerage fee income combined was up $1.1 million (26%), consistent with the growth in assets under management. Service charges on deposit accounts grew $0.3 million to $1.3 million for third quarter 2021, mainly as we waived certain fees during third quarter 2020 to provide economic relief to our customers at the inception of the pandemic. Card interchange income grew $0.4 million (22%) due to higher volume and activity. Net asset losses of $1.2 million in third quarter 2021 were primarily attributable to fair value marks on equity securities, compared to net asset gains of $0.2 million in third quarter 2020. For additional information regarding noninterest income, see “INCOME STATEMENT ANALYSIS — Noninterest Income.”

Noninterest expense was $33.1 million for third quarter 2021, an increase of $9.4 million (40%) from third quarter 2020, including a $2.9 million increase in personnel expense and a $6.5 million increase in non-personnel expenses. The increase in personnel was largely due to higher equity and other incentives commensurate with the strong earnings for the first part of 2021, as well as an increase in salaries from merit increases between the ~~cost~~periods and higher average FTEs (mostly from the acquisition of ~~deposits (up 16 bps~~Mackinac). Occupancy, equipment, and office of $5.7 million was up $1.7 million (42%), as 2021 included $0.9 million of accelerated depreciation and write-offs related to ~~0.53%~~branch closures, as well as higher expense for the expanded branch

network with the Mackinac acquisition and additional expense for software and technology solutions to drive operational efficiency, and enhance products or services. Business development and marketing of $1.7 million increased $0.8 million versus third quarter ~~2017), mostly~~2020 due to higher marketing costs from ~~higher-costing First Menasha deposits acquired~~differences in the timing and ~~an increase in select deposit rates that began in July 2017. The cost~~extent of ~~other interest-bearing liabilities decreased 131 bps to 4.04%~~donations, marketing campaigns, promotions, and media. Data processing expense was $2.9 million, up $0.3 million (13%) between the comparable third quarter periods, mostly due to ~~a higher proportion of lower-cost, shorter term funding~~volume-based increases in core processing charges, as well as the ~~mix.~~

~~Noninterest income was $10.2~~larger operating base with the Mackinac acquisition. FDIC assessments increased to $0.5 million for third quarter ~~2017, up $1.6 million over~~2021 as the small bank assessment credits were fully utilized during third quarter ~~2016. Noninterest income without net gains~~2020 and also reflecting the higher assessment base. Other expense was $1.8 million, up $0.8 million or 10%, with service charges on deposits up $0.2 million (given the larger deposit base), and trust and brokerage fees up $0.6 million combined (mostly attributable to the 2016 financial advisor business acquisition and market improvements). Card interchange income was up $0.3 million on greater activity. Other income decreased $0.2$1.0 million between the ~~third quarter periods, although there was an increase in UFS, Inc. income of $0.1 million. Net gain on sale or write-down of assets increased by $0.9 million between the~~comparable third quarter periods, mostly due to ~~a $1.2 million gain to record the fair value of Nicolet’s pre-acquisition interest in First Menasha in the third quarter of 2017.~~

Noninterest expense was $20.9 million for the third quarter of 2017, up $1.8 million or 9.7% from third quarter 2016. There were no non-recurring merger-based expenses in the third quarter 2017 compared to $0.1 million in the third quarter of 2016. Excluding the noted merger-based expenses, noninterest expense increased approximately $1.9 million or 10.2%. Salaries and employee benefits for the third quarter of 2017 were $11.5 million, $1.0 million or 9.2% higher than the third quarter of 2016, due to merit increases, higher equity award costs, and an increase in ~~average full time equivalent employees attributable~~director fees (reflective of the additional complexity of a larger company, including the addition of two new directors in third quarter 2021), higher professional fees, costs to ~~the 2017 acquisition. Occupancy, equipment~~carry closed bank branches, and ~~office expense was $0.6 million~~overall higher ~~due~~expenses related to the larger operating ~~base and software needs. Data processing was $0.4 million higher than third quarter 2016 from increased accounts, higher card processing costs and expanded functionalities.~~

~~The provision for loan losses was $1.0 million and $0.5 million~~base. 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~~2021 was $2.3 million, ~~(due to the charge off~~with an effective tax rate of ~~a large commercial loan)~~22.68%, compared to ~~a net recovery~~income tax expense of ~~$0.1~~$6.4 million and an effective tax rate of 26.19% for ~~the~~ third quarter ~~of 2016.~~ 2020.

BALANCE SHEET ANALYSIS

At September 30, ~~2017,~~2021, period end assets were $6.4 billion, up $1.9 billion (41%) from December 31, 2020, mostly due to the ~~ALLL was $12.6~~Mackinac acquisition which added total assets of $1.5 billion at acquisition. The increase in assets from year-end 2020 included a $744 million ~~(or 0.61%~~increase in loans, a $548 million increase in cash and cash equivalents, and a $226 million increase in investment securities. Total deposits of ~~total loans) compared to $11.5 million (or 0.74% of total loans)~~$5.4 billion at September 30, ~~2016. The decline~~2021, were up $1.5 billion from December 31, 2020, also mostly attributable to the Mackinac acquisition. Total stockholders’ equity was $729 million, an increase of $190 million from December 31, 2020, primarily from the common stock issued in the ~~ratio was a result of recording the First Menasha loan portfolio at~~Mackinac acquisition and retained earnings, partly offset by stock repurchases and negative net fair value ~~with no carryover~~investment changes.

Compared to September 30, 2020, assets were $6.4 billion, up $1.7 billion (36%) from September 30, 2020, also mainly due to the Mackinac acquisition. The increase in assets from September 30, 2020 included a $624 million increase in loans, a $497 million increase in cash and cash equivalents, and a $230 million increase in investment securities. On the funding side, deposits increased $1.7 billion (46%) over September 30, 2020, while total borrowings decreased $262 million due to the early repayment of ~~their~~PPPLF funding given the strong core deposit base. Stockholders’ equity increased $191 million from September 30, 2020, primarily due to common stock issued in the Mackinac acquisition and net income, partially offset by stock repurchases over the year and negative net fair value investment changes.

Loans

In addition to the discussion that follows, see also Note 6, “Loans, Allowance for Credit Losses - Loans, and Credit Quality,” in the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures on loans. For additional information regarding the allowance atfor credit losses and nonperforming assets see also “BALANCE SHEET ANALYSIS – Allowance for Credit Losses - Loans” and “BALANCE SHEET ANALYSIS – Nonperforming Assets.”

Prior to the ~~time~~acquisition of ~~the merger.~~

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

~~BALANCE SHEET ANALYSIS~~

~~Loans~~

Mackinac, Nicolet ~~services~~serviced a diverse customer base throughout ~~Northeast~~northeastern and ~~Central~~central Wisconsin and in Menominee, Michigan. With the acquisition of Mackinac on September 3, 2021, the Company has expanded into Northern Michigan ~~including~~and the ~~following industries: manufacturing, agriculture, wholesaling, retail, service, and businesses supporting, among others, the general building and paper industries. It continues~~Upper Peninsula of Michigan, as well as adding to ~~concentrate~~ its ~~efforts~~presence in upper northeastern Wisconsin. 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,~~2021, no significant industry concentrations existed in Nicolet’s portfolio in excess of 10% of total loans.

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, 2021				December 31, 2020				September 30, 2020
(in thousands)	Amount		% of Total		Amount		% of Total		Amount		% of Total
Commercial & industrial	$	887,910	25	%	$	750,718	27	%	$	735,531	25	%
PPP loans	68,347		2		186,016		7		335,236		12
Owner-occupied CRE	697,816		20		521,300		19		499,605		17
Agricultural	112,409		3		109,629		4		111,022		4
Commercial	1,766,482		50		1,567,663		57		1,681,394		58
CRE investment	662,871		19		460,721		16		475,050		16
Construction & land development	173,971		5		131,283		5		121,647		4
Commercial real estate	836,842		24		592,004		21		596,697		20
Commercial-based loans	2,603,324		74		2,159,667		78		2,278,091		78
Residential construction	59,611		2		41,707		1		57,496		2
Residential first mortgage	688,491		19		444,155		16		428,017		15
Residential junior mortgage	130,279		4		111,877		4		112,173		4
Residential real estate	878,381		25		597,739		21		597,686		21
Retail & other	51,493		1		31,695		1		33,016		1
Retail-based loans	929,874		26		629,434		22		630,702		22
Total loans	$	3,533,198	100	%	$	2,789,101	100	%	$	2,908,793	100	%
Total loans ex. PPP loans	$	3,464,851	98	%	$	2,603,085	93	%	$	2,573,557	88	%

As noted in Table 6 above, the loan portfolio at September 30, 2021, was 74% commercial-based and 26% 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.

At September 30, 2021, loans were $3.5 billion, $744 million (27%) higher than December 31, 2020, largely due to the acquisition of Mackinac, which added loans of $930 million at acquisition, partly offset by the transfer of $177 million of loans to other assets held for sale in anticipation of the previously announced sale of the Birmingham, Michigan branch. Commercial-based loans of $2.6 billion increased $444 million since December 31, 2020, including a $118 million decrease in the net carrying value of PPP loans (with the additional $160 million from the latest round of PPP loans, more than offset by continued PPP loan forgiveness). Commercial and industrial loans continue to be the largest segment of Nicolet’s portfolio and represented 25% of the total portfolio at September 30, 2021.

Residential real estate loans of $878 million grew $281 million (47%) from year-end 2020, to represent 25% of total ~~loans. Nicolet has also developed guidelines to manage~~loans at September 30, 2021. 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 up $20 million from year-end 2020, 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,” 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 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 2020 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, purchased credit-deteriorated 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 the impairment analyses. Loans measured for impairment include nonaccrual loans, non-performing troubled debt-restructurings (“restructured loans”), or other loans determined to be impaired by management.shortfall. Second, ~~Nicolet’s~~ management allocates ~~ALLL~~the ACL-Loans with historical loss rates by loan segment. The loss factors are measured on a quarterly basis and applied ~~in the methodology are periodically re-evaluated~~to each loan segment based on current loan balances and adjusted to reflect changes in historical loss levels on an annual basis. The look-back period on which the average historical loss rates are determined is a rolling 20-quarter (5 year) average. Lastly,projected for their expected remaining life. Next, management allocates ~~ALLL to the remaining loan portfolio~~ACL-Loans using the qualitative factors mentioned above. Consideration is given to those current qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the historical loss experience of each loan segment. ~~Management conducts 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,~~2021, the ~~ALLL~~ACL-Loans was ~~$12.6~~$38.4 million (representing 1.09% of period end loans and 1.11% of period end loans excluding PPP loans) compared to ~~$11.8~~$32.2 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 million2020 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$31.4 million at September 30, ~~2017 and December 31, 2016, respectively, representing 43% of total loans at both September 30, 2017 and December 31, 2016.~~2020. The change in the ~~ALLL~~ACL-Loans from year-end 2020 was mostly due to ~~loans ratio was driven by~~ the Mackinac acquisition, including $4.0 million of provision added for the Day 2 allowance and $1.9 million related to purchased credit deteriorated loans. The increase in the ~~denominator~~ACL-Loans from ~~acquired~~September 30, 2020 was also largely due to the Mackinac acquisition. Net charge-offs (0.01% of average loans, ~~in 2016 and 2017.~~

annualized) remain negligible. 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, 2021			September 30, 2020			December 31, 2020
ACL-Loans:
Balance at beginning of period	$	32,173		$	13,972		$	13,972
Adoption of CECL	—			8,488			8,488
Initial PCD ACL	—			797			797
Total impact for adoption of CECL	—			9,285			9,285
ACL on PCD loans acquired	1,896			—			—
Provision for credit losses	4,500			9,000			10,300
Charge-offs	(436)			(1,002)			(1,689)
Recoveries	266			133			305
Net (charge-offs) recoveries	(170)			(869)			(1,384)
Balance at end of period	$	38,399		$	31,388		$	32,173
Net loan (charge-offs) recoveries:
Commercial & industrial	$	(31)		$	(512)		$	(692)
Owner-occupied CRE	—			(257)			(449)
Agricultural	(48)			—			—
CRE investment	(2)			(20)			(190)
Construction & land development	—			—			—
Residential construction	—			—			—
Residential first mortgage	(34)			7			9
Residential junior mortgage	4			18			67
Retail & other	(59)			(105)			(129)
Total net (charge-offs) recoveries	$	(170)		$	(869)		$	(1,384)
Ratios:
ACL-Loans to total loans	1.09		%	1.08		%	1.15		%
ACL-Loans to total loans ex. PPP loans	1.11		%	1.22		%	1.24		%
Net charge-offs to average loans, annualized	0.01		%	0.04		%	0.05		%
Net charge-offs to average loans ex. PPP loans, annualized	0.01		%	0.05		%	0.05		%

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 continues to actively work with customers and monitor credit risk from the ongoing economic disruptions surrounding the COVID-19 pandemic. Since the pandemic started, approximately 1,000 loans were provided temporary payment modifications, and as of September 30, 2021, only 2 loans remain under temporary payment modification structure. In addition, at September 30, 2021, 14 loans with a current balance of $5 million have been classified as troubled debt restructurings (included in Table 8 below), with $2 million reflected as performing troubled debt restructurings and the remainder in nonaccrual). 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 further 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 million (consisting of $1.0 million originated loans and $13.4 million acquired loans) at September 30, 2017 compared to $20.3 million at December 31, 2016 (consisting of $0.3 million originated loans and $20.0 million acquired loans). Nonperforming assets ~~(which~~ include nonperforming loans and other real estate owned ~~“OREO”~~(“OREO”) ~~were $15.7 million at~~. At September 30, ~~2017~~2021, nonperforming assets were $21 million, comprised of $17 million of nonaccrual loans and $4 million of OREO, and represented 0.33% of total assets, compared to ~~$22.3~~$13 million or 0.29% of total assets at December 31, ~~2016. OREO~~2020. The increase in nonperforming assets was ~~$1.3 million at September 30, 2017, down from $2.1 million at year end 2016,~~largely due to the ~~majority~~acquisition 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% at December 31, 2016.~~

Mackinac.

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~~$13 million ~~(0.7%~~(0.4% of loans) and ~~$12.6~~$21 million ~~(0.8%~~(0.7% of loans) at September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, 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, 2021			December 31, 2020			September 30, 2020
Nonperforming loans:
Commercial & industrial	$	1,778		$	2,646		$	3,011
Owner-occupied CRE	2,990			1,869			2,471
Agricultural	1,782			1,830			2,297
Commercial	6,550			6,345			7,779
CRE investment	4,249			1,488			911
Construction & land development	1,093			327			533
Commercial real estate	5,342			1,815			1,444
Commercial-based loans	11,892			8,160			9,223
Residential construction	—			—			—
Residential first mortgage	4,495			823			1,312
Residential junior mortgage	232			384			411
Residential real estate	4,727			1,207			1,723
Retail & other	96			88			51
Retail-based loans	4,823			1,295			1,774
Total nonaccrual loans	16,715			9,455			10,997
Accruing loans past due 90 days or more	—			—			—
Total nonperforming loans	$	16,715		$	9,455		$	10,997
Nonaccrual loans (included above) covered by SBA guarantee	$	1,729		$	1,265		$	(1,172)
OREO:
Commercial real estate owned	$	1,219		$	—		$	—
Residential real estate owned	355			—			—
Bank property real estate owned	2,895			3,608			1,000
Total OREO	4,469			3,608			1,000
Total nonperforming assets	$	21,184		$	13,063		$	11,997
Performing troubled debt restructurings	$	2,103		$	2,120		$	—
Ratios:
Nonperforming loans to total loans	0.47		%	0.34		%	0.38		%
Nonperforming assets to total loans plus OREO	0.60		%	0.47		%	0.41		%
Nonperforming assets to total assets	0.33		%	0.29		%	0.25		%
ACL-Loans to nonperforming loans	230		%	340		%	285		%

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~~The deposit levels have been heavily influenced by the ongoing economic uncertainty, government stimulus payments and other ~~bank~~directives related to the pandemic, which reduced spending and ~~nonbank institutions for deposits,~~increased liquidity of consumers and businesses, as well as with a growing number of non-deposit investment alternatives available to depositors, such as mutual funds, money market funds, annuities, and other brokerage investment products. Challenges to deposit growth include price changesby PPP loan proceeds retained on deposit ~~products given movements in the rate environment and other competitive pricing pressures, and customer preferences regarding higher-costing~~by corporate borrowers. In addition, Mackinac added deposits of $1.4 billion at acquisition. The deposit ~~products or non-deposit investment alternatives. Included in total deposits~~composition 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~~$5.4 billion at September 30, ~~2017, up $397 million or 20% since~~2021, increased $1.5 billion (39%) from December 31, ~~2016,~~2020, largely ~~attributable~~due to the ~~$375 million~~Mackinac acquisition. Core customer deposits ~~added from First Menasha at acquisition~~increased $1.5 billion, while brokered deposits increased $32 million. The growth in ~~April 2017. On average for the first nine months of 2017,~~deposits was also aided by additional government stimulus payments and new PPP funds on deposit.

Compared to September 30, 2020, total deposits ~~were $2.2~~increased $1.7 billion ~~up $631 million, or 41%~~(46%), ~~from the comparable 2016 period,~~also largely ~~attributable~~due to the ~~inclusion of acquired Baylake~~Mackinac acquisition. Customer core deposits for all of 2017 versus five of nine months in 2016 and acquired First Menasha deposits for five months of 2017 versus no months in 2016. On average, the mix of deposits changed between the comparable nine-month periods, with 2017 carrying more inincreased $1.7 billion, while brokered deposits ~~demand (i.e. noninterest bearing)~~grew $30 million. The increase in total deposits ~~and money market and NOW accounts, and less in savings and time deposits.~~

~~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 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~~since September 30, ~~2017~~2020 was also influenced by the liquidity objectives of consumers 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 maturingbusinesses 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~~

very uncertain times noted above.

Table 9: Period End Deposit Composition


	September 30, 2021				December 31, 2020				September 30, 2020
(in thousands)	Amount		% of Total		Amount		% of Total		Amount		% of Total
Noninterest-bearing demand	$	1,852,119	34	%	$	1,212,787	31	%	$	1,135,384	30	%
Money market and interest-bearing demand	2,154,557		40	%	1,551,325		40	%	1,432,667		39	%
Savings	775,281		14	%	521,814		13	%	480,745		13	%
Time	646,817		12	%	624,473		16	%	664,012		18	%
Total deposits	$	5,428,774	100	%	$	3,910,399	100	%	$	3,712,808	100	%
Brokered transaction accounts	$	152,858	3	%	$	46,340	1	%	$	35,975	1	%
Brokered and listed time deposits	204,202		4	%	278,521		7	%	290,827		8	%
Total brokered deposits	$	357,060	7	%	$	324,861	8	%	$	326,802	9	%
Customer transaction accounts	$	4,629,099	85	%	$	3,239,586	83	%	$	3,012,821	81	%
Customer time deposits	442,615		8	%	345,952		9	%	373,185		10	%
Total customer deposits (core)	$	5,071,714	93	%	$	3,585,538	92	%	$	3,386,006	91	%

Lending-Related Commitments

As of September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, Nicolet had the following off-balance sheet lending-related commitments.

Table 10: Commitments


(in thousands)	September 30, 2021		December 31, 2020
Commitments to extend credit	$	1,111,156	$	950,287
Financial standby letters of credit	13,947		8,241
Performance standby letters of credit	8,821		8,366

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 the notional amounts represented $78 million and $320,000, respectively, at September 30, 2021. 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~~$113 million and ~~$5.9~~$20 million, respectively, at December 31, 2020. The net fair value of these mortgage derivatives combined was a gain of $104,000 at September 30, ~~2017. Fair value approximates the notional amounts.~~

2021 compared to a loss of $244,000 at December 31, 2020.

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. At the onset of the pandemic, but prior to the announcement of government stimulus, management initiated preparatory actions to increase on-balance sheet liquidity to ensure we could meet customer needs. These actions proved later to not be necessary, leading us to reduce non-deposit funding. In addition to this 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. All investment securities are classified as available for sale and are reported at fair value on the consolidated balance sheet. Approximately $77 million~~deposits or other wholesale funding. At September 30, 2021, approximately 20% of the ~~$408~~$765 million investment securities portfolio ~~at September 30, 2017~~ was pledged to secure public deposits, ~~short term borrowings, repurchase agreements, or~~as applicable, and for other purposes as required by law. ~~Other~~Additional funding sources at September 30, 2021, consist of $175 million of available and unused Federal funds lines, available borrowing capacity at the FHLB of $219 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 repaid early.

Management is committed to the Parent Company being a source of strength to the Bank and its other subsidiaries, and therefore, regularly evaluates capital and liquidity positions of the Parent Company in light of current and projected needs, growth or strategies. The Parent Company uses cash for normal expenses, debt service requirements, and when opportune, for common stock repurchases, repayment of debt, or investment in other strategic actions such as mergers or acquisitions. At September 30, 2021, the Parent Company had $85 million in cash. Additional cash sources, among others, available to the Parent Company include ~~short-term borrowings, federal funds purchased,~~its $10 million available and ~~long-term borrowings.~~

unused line of credit, and access to the public or private markets to issue new equity, subordinated notes or other debt. On July 7, 2021, Nicolet completed the private placement of $100 million in fixed-to-floating rate subordinated notes (the “Notes”) due in 2031. (See Note 8, “Short and Long-Term Borrowings” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional information on the new Notes). Dividends from the Bank and, to a lesser extent, stock option exercises, also represent significant sources of cash flows for the Parent Company.

Cash and cash equivalents at September 30, ~~2017~~2021 and December 31, ~~2016~~2020 were ~~$96 million~~$1.4 billion and ~~$129~~$803 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~~cash equivalents since year-end 2020 included $52 million net cash provided by operating activities (mostly earnings), $267 million net cash provided by investing activities (with net cash received in the Mackinac acquisition exceeding cash payments to fund loan growth and ~~$54~~net investment purchases), and $228 million net cash provided by financing activities (mostly ~~due to a net increase in deposits)~~deposit growth and proceeds received from the subordinated notes issuance). ~~Nicolet’s~~Management believes its liquidity resources were sufficient as of September 30, ~~2017~~2021 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, partly in response to the pandemic. 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,~~2021 and December 31, 2020, 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, 2021		December 31, 2020
200 bps decrease in interest rates	(0.3)	%	(0.8)	%
100 bps decrease in interest rates	(0.3)	%	(0.8)	%
100 bps increase in interest rates	1.3	%	4.0	%
200 bps increase in interest rates	2.8	%	8.1	%

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~~guidelines. The capital position and strategies are actively ~~reviews capital strategies~~reviewed 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,~~2021, 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, 2021			December 31, 2020
Company Stock Repurchases: *
Common stock repurchased during the period (dollars)	$	33,680		$	40,544
Common stock repurchased during the period (full shares)	447,898			646,748
Company Risk-Based Capital:
Total risk-based capital	$	615,052		$	406,325
Tier 1 risk-based capital	488,620			385,068
Common equity Tier 1 capital	464,355			361,162
Total capital ratio	14.6		%	12.9		%
Tier 1 capital ratio	11.6		%	12.2		%
Common equity tier 1 capital ratio	11.0		%	11.4		%
Tier 1 leverage ratio	9.6		%	9.0		%
Bank Risk-Based Capital:
Total risk-based capital	$	515,152		$	351,081
Tier 1 risk-based capital	487,622			329,824
Common equity Tier 1 capital	487,622			329,824
Total capital ratio	12.3		%	11.2		%
Tier 1 capital ratio	11.6		%	10.5		%
Common equity tier 1 capital ratio	11.6		%	10.5		%
Tier 1 leverage ratio	9.8		%	7.8		%
* 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. During the first nine months of 2021, $34 million was utilized to repurchase and cancel 447,898 shares of common stock, at an average per share cost of $75.20, pursuant to our common stock repurchase program. On August 17, 2021, Nicolet’s board authorized an increase to the program of $40 million. As a result, at September 30, 2021, there remained $47 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.

~~(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.~~

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 ~~OCC issued final rules implementing~~reported amounts of assets and liabilities as of the ~~Basel III regulatory capital framework~~date of the balance sheet and ~~related Dodd-Frank Act changes. The final rules took effect~~revenues and expenses for the ~~Company and Bank on January 1, 2015, subject~~period. Actual results could differ significantly from those estimates. Estimates that are particularly susceptible to ~~a transition period for certain parts~~significant change include the valuation of loan acquisition transactions, as well as the determination of the ~~rules. The rules permitted certain banking organizations to retain, through a one-time election,~~allowance for credit losses and income taxes. A discussion of these policies can be found in the ~~existing treatment for accumulated other comprehensive income. Nicolet~~“Critical Accounting Policies” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the ~~Bank made~~Company’s 2020 Annual Report on Form 10-K. There have been no changes in 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 bufferCompany’s determination 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.

critical accounting policies since December 31, 2020.

Future Accounting Pronouncements

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 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 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.~~

2020.

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.

2021.


	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, 2021	83,585	$	70.95	83,585
August 1 – August 31, 2021	151,916	$	74.68	150,009
September 1 – September 30, 2021	75	$	—	—
Total	235,576	$	73.35	233,594	630,500

(a)During third quarter 2021, the Company repurchased 75 common shares for minimum tax withholding settlements on restricted stock and 1,907 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 2021, Nicolet utilized $17.1 million to repurchase and cancel 233,594 shares of common stock pursuant to our common stock repurchase program. On August 17, 2021, Nicolet’s board authorized an increase to the program of $40 million. As a result, at September 30, 2021, approximately $47 million remained available under this common stock repurchase program, or approximately 630,500 shares of common stock (based upon the closing stock price of $74.18 on September 30, 2021).

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

~~None.~~

None.

ITEM 6. EXHIBITS

The following exhibits are filed herewith:

~~Exhibit~~
Exhibit Number						Description
~~31.1~~2.1						Agreement and Plan of Merger Between Nicolet Bankshares, Inc. and Mackinac Financial Corporation, dated April 12, 2021(1)
2.2						Agreement and Plan of Merger Between Nicolet Bankshares, Inc. and County Bancorp, Inc., dated June 22, 2021(2)
4.1						Indenture, dated as of July 7, 2021, by and between Nicolet Bankshares, Inc. and U.S. Bank National Association, as trustee(3)
4.2						Form of 3.125% Fixed-to-Floating Rate Subordinated Note due 2031 of Nicolet Bankshares, Inc.(3)
10.1						Form of Subordinated Note Purchase Agreement, dated as of July 7, 2021, by and between Nicolet Bankshares, Inc. and the several Purchasers(3)
10.2						Form of Registration Rights Agreement, dated as of July 7, 2021, by and between Nicolet Bankshares, Inc. and the several Purchasers(3)
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 (4)
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 information that is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12

(1) Incorporated by reference to the exhibit of the ~~Securities Act of 1933, is deemed not~~same number in the Registrant’s Current Report on Form 8-K filed ~~for purposes of section 18~~on April 12, 2021.

(2) Incorporated by reference to Exhibit 2.1 in the Registrant’s Current Report on Form 8-K filed on June 22, 2021.

(3) Incorporated by reference to the exhibit of the ~~Securities Exchange Act~~same number in the Registrant’s Current Report on Form 8-K filed on July 7, 2021.

(4) Includes the following financial information included in the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of ~~1934,~~Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, 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 29, 2021			/s/ ~~Robert B. Atwell~~Michael E. Daniels
			~~Robert B. Atwell~~Michael E. Daniels
			~~Chairman,~~ President and Chief Executive Officer

~~November 3, 2017~~October 29, 2021			/s/ ~~Ann K. Lawson~~H. Phillip Moore, Jr.
			~~Ann K. Lawson~~H. Phillip Moore, Jr.
			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	5547

			Item 4.	Controls and Procedures	~~55-56~~47

PART II			OTHER INFORMATION

			Item 1.	Legal Proceedings	5648

			Item 1A.	Risk Factors	5648

			Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5648

			Item 3.	Defaults Upon Senior Securities	5648

			Item 4.	Mine Safety Disclosures	5648

			Item 5.	Other Information	5648

			Item 6.	Exhibits	5749

				Signatures	5750

	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, 2021		December 31, 2020
	(Unaudited)		(Audited)
Assets
Cash and due from banks	$	217,608	$	88,460
Interest-earning deposits	1,132,997		714,399

Cash and cash equivalents	1,350,605		802,859
Certificates of deposit in other banks	24,079		29,521
Securities available for sale (“AFS”), at fair value	715,942		539,337
Securities held to maturity (“HTM”), at amortized cost	49,063		—
Other investments	38,602		27,619
Loans held for sale	16,784		21,450
Other assets held for sale	177,627		—
Loans	3,533,198		2,789,101
Allowance for credit losses - loans (“ACL-Loans”)	(38,399)		(32,173)
Loans, net	3,494,799		2,756,928
Premises and equipment, net	83,513		59,944
Bank owned life insurance (“BOLI”)	100,690		83,262
Goodwill and other intangibles, net	269,954		175,353
Accrued interest receivable and other assets	86,162		55,516
Total assets	$	6,407,820	$	4,551,789

Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing demand deposits	$	1,852,119	$	1,212,787
Interest-bearing deposits	3,576,655		2,697,612
Total deposits	5,428,774		3,910,399

Long-term borrowings	144,233		53,869
Other liabilities held for sale	47,496		—
Accrued interest payable and other liabilities	58,039		48,332
Total liabilities	5,678,542		4,012,600

Stockholders’ Equity:
Common stock	120		100
Additional paid-in capital	425,367		273,390
Retained earnings	297,299		252,952
Accumulated other comprehensive income (loss)	6,492		12,747
Total stockholders’ equity	729,278		539,189
Total liabilities and stockholders’ equity	$	6,407,820	$	4,551,789

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	11,952,438		10,011,342
Common shares issued	11,975,002		10,030,267

(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	%

	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

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