UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________

FORM 10-Q

x

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

1934

For the quarterly period ended September 30, 2017

2021

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file numbernumber: 001-37700

NICOLET BANKSHARES, INC.

(Exact nameName of registrantRegistrant as specifiedSpecified in its charter)

Charter)

WISCONSIN

Wisconsin47-0871001
(State or other jurisdictionOther Jurisdiction of incorporationIncorporation or organization)

Organization)

47-0871001

(I.R.S. Employer Identification No.)

111 North Washington Street

Green Bay,Wisconsin54301

(920) 430-1400

(Address including zip code,of Principal Executive Offices)
(Zip Code)
(920)430-1400
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and telephone number, including area code, of
Registrant’s principal executive offices)

Former Fiscal Year, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareNCBSThe NASDAQ Stock Market LLC
Indicate by check mark whether the registrant:registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive DateData File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx No¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer¨Accelerated filerx
Non-accelerated filer¨Smaller reporting company¨
(Do not check if a smaller reporting company)
Emerging Growth Company

Emerging Growth Companyx

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨ Nox

As of October 27, 20172021 there were 9,801,61311,953,925 shares of $0.01 par value common stock outstanding.




Nicolet Bankshares, Inc.
Quarterly Report on Form 10-Q
September 30, 2021
TABLE OF CONTENTS

Nicolet Bankshares, Inc.

TABLE OF CONTENTS

PAGE
PART IFINANCIAL INFORMATION
PAGE
PART I
FINANCIAL INFORMATION
Item 1.
Financial Statements:
Consolidated Balance Sheets
September 30, 2017 (unaudited) and December 31, 2016
Consolidated Statements of Income
Three Months and Nine Months ended September 30, 2017 and 2016 (unaudited)
Consolidated Statements of Comprehensive Income
Three Months and Nine Months ended September 30, 2017 and 2016 (unaudited)
Consolidated StatementStatements of Changes in Stockholders’ Equity
Nine Months Ended September 30, 2017 (unaudited)
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2017 and 2016 (unaudited)
Notes to Unaudited Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
PART II
OTHER INFORMATION
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of  Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
Signatures

2

2



PART I – FINANCIAL INFORMATION


Item 1. FINANCIAL STATEMENTS:

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets
(In thousands, except share and per share data)

  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, 2021December 31, 2020
(Unaudited)(Audited)
Assets
Cash and due from banks$217,608 $88,460 
Interest-earning deposits1,132,997 714,399 
Cash and cash equivalents1,350,605 802,859 
Certificates of deposit in other banks24,079 29,521 
Securities available for sale (“AFS”), at fair value715,942 539,337 
Securities held to maturity (“HTM”), at amortized cost49,063 — 
Other investments38,602 27,619 
Loans held for sale16,784 21,450 
Other assets held for sale177,627 — 
Loans3,533,198 2,789,101 
Allowance for credit losses - loans (“ACL-Loans”)(38,399)(32,173)
Loans, net3,494,799 2,756,928 
Premises and equipment, net83,513 59,944 
Bank owned life insurance (“BOLI”)100,690 83,262 
Goodwill and other intangibles, net269,954 175,353 
Accrued interest receivable and other assets86,162 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 deposits3,576,655 2,697,612 
Total deposits5,428,774 3,910,399 
Long-term borrowings144,233 53,869 
Other liabilities held for sale47,496 — 
Accrued interest payable and other liabilities58,039 48,332 
Total liabilities5,678,542 4,012,600 
Stockholders’ Equity:
Common stock120 100 
Additional paid-in capital425,367 273,390 
Retained earnings297,299 252,952 
Accumulated other comprehensive income (loss)6,492 12,747 
Total stockholders’ equity729,278 539,189 
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 outstanding11,952,438 10,011,342 
Common shares issued11,975,002 10,030,267 
See accompanying notes to unaudited consolidated financial statements.

3

3


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,
2021202020212020
Interest income:
Loans, including loan fees$35,294 $34,047 $104,267 $101,591 
Investment securities:
Taxable2,061 2,001 5,935 6,115 
Tax-exempt517 542 1,582 1,542 
Other interest income869 680 2,140 1,917 
Total interest income38,741 37,270 113,924 111,165 
Interest expense:
Deposits2,444 3,784 7,799 13,196 
Short-term borrowings —  65 
Long-term borrowings1,113 926 1,729 2,584 
Total interest expense3,557 4,710 9,528 15,845 
Net interest income35,184 32,560 104,396 95,320 
Provision for credit losses6,000 3,000 6,500 9,000 
Net interest income after provision for credit losses29,184 29,560 97,896 86,320 
Noninterest income:
Trust services fee income2,043 1,628 5,724 4,717 
Brokerage fee income3,154 2,489 8,938 7,080 
Mortgage income, net4,808 9,675 17,637 21,965 
Service charges on deposit accounts1,314 1,037 3,541 3,075 
Card interchange income2,299 1,877 6,492 5,076 
BOLI income572 531 1,658 1,774 
Asset gains (losses), net(1,187)217 3,716 (1,185)
Other income993 1,237 3,594 3,245 
Total noninterest income13,996 18,691 51,300 45,747 
Noninterest expense:
Personnel16,927 14,072 49,127 41,877 
Occupancy, equipment and office5,749 4,051 13,939 12,616 
Business development and marketing1,654 810 3,853 4,683 
Data processing2,939 2,612 8,408 7,574 
Intangibles amortization758 834 2,400 2,707 
FDIC assessments480 347 1,555 347 
Merger-related expense2,793 151 3,449 853 
Other expense1,761 808 7,158 4,695 
Total noninterest expense33,061 23,685 89,889 75,352 
Income before income tax expense10,119 24,566 59,307 56,715 
Income tax expense2,295 6,434 14,960 14,331 
Net income7,824 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:
Basic10,391,896 10,348,862 10,098,492 10,426,228 
Diluted10,775,591 10,498,552 10,503,163 10,604,732 
See accompanying notes to unaudited consolidated financial statements.

4

4


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,
2021202020212020
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 income13 (151)13 (315)
Income tax (expense) benefit827 (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.

5

5


ITEM 1. Financial Statements Continued:

Continued:


NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated StatementStatements 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 acquisition23 179,411    179,434 
Stock-based compensation expense 1,826    1,826 
Exercise of stock options, net1 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 acquisition23 179,411    179,434 
Stock-based compensation expense 5,222    5,222 
Exercise of stock options, net1 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.

6

6


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,
20212020
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 accretion9,301 7,564 
Provision for credit losses6,500 9,000 
Increase in cash surrender value of life insurance(1,658)(1,647)
Stock-based compensation expense5,222 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 sale503,405 663,466 
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 activities52,262 64,272 
Cash Flows From Investing Activities:
Net (increase) decrease in loans10,406 (244,751)
Net (increase) decrease in certificates of deposit in other banks8,561 5,719 
Purchases of securities AFS(214,343)(128,661)
Purchases of securities HTM(20,996)— 
Proceeds from sales of securities AFS15,975 14,864 
Proceeds from calls and maturities of securities AFS81,681 69,568 
Purchases of other investments(4,787)(3,815)
Proceeds from sales of other investments1,534 — 
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 assets1,046 — 
Net cash (paid) received in business combination394,868 (21,820)
Net cash provided by (used in) investing activities267,051 (318,359)
Cash Flows From Financing Activities:
Net increase (decrease) in deposits199,698 617,373 
Proceeds from long-term borrowings103,953 367,841 
Repayments of long-term borrowings(42,559)(32,029)
Purchase and retirement of common stock(34,440)(28,947)
Proceeds from issuance of common stock395 482 
Proceeds from exercise of stock options1,386 1,048 
Distribution to noncontrolling interest (176)
Net cash provided by (used in) financing activities228,433 925,592 
Net increase (decrease) in cash and cash equivalents547,746 671,505 
Cash and cash equivalents:
Beginning802,859 182,059 
Ending *$1,350,605 $853,564 
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest$9,320 $18,130 
Cash paid for taxes24,116 16,353 
Transfer of loans and bank premises to other real estate owned302 — 
Capitalized mortgage servicing rights3,191 4,038 
Acquisitions:
Fair value of assets acquired$1,544,518 $— 
Fair value of liabilities assumed1,407,605 — 
Net assets acquired136,913 — 
* 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.

7

7



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 arehave 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 loancredit 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 loancredit 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 Improvementsintended 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.

8
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 20162020 consolidated financial statements have been reclassified to conform to the 20172021 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 consummatedAugust 21, 2020, Nicolet completed its merger with First MenashaAdvantage, pursuant to the Agreement and Planterms of Merger by and between the Company and First Menashadefinitive merger agreement dated November 3, 2016, (the “Merger Agreement”),March 2, 2020, whereby First Menasha wasAdvantage 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 MenashaWausau 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.

8


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 Calumetin upper northeastern Wisconsin.

A summary of the assets acquired and Winnebago Counties, Wisconsin. Concurrently, Nicolet closed one of its Calumet County locations, bringingliabilities assumed in the Bank’s footprint to 38 branchesMackinac 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 MackinacFair Value AdjustmentsEstimated Fair Value
Assets Acquired:
Cash and cash equivalents$448,378 $— $448,378 
Investment securities103,992 (2,148)101,844 
Loans930,420 (178)930,242 
ACL-Loans(5,579)3,683 (1,896)
Premises and equipment23,619 (2,723)20,896 
BOLI15,715 — 15,715 
Goodwill19,574 (19,574)— 
Other intangibles3,918 803 4,721 
Other assets24,752 (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 borrowings28,104 525 28,629 
Other liabilities12,755 — 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 paid49,367 
    Total purchase price$229,193 
Preliminary goodwill$92,280 

The purposeCompany 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 acquisition1,896 
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 wasand, accordingly, does not attempt to continue Nicolet’s interest in strategic growth, consistent with its planpredict 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 becameas 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 sharesbeginning 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.


9


Nine Months EndedYear Ended
(In thousands, except per share data)September 30, 2021December 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 transactionMackinac acquisition under the acquisition method of accounting, and thus, the financial position and results of operations of First MenashaMackinac 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 holdingMerger 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 millionor 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 aapproximately 80% common stock. At June 30, 2021, County had total assets of $1.5 million earn-out liability payable to one principal inbillion, 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 millionCounty 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.

9

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 forat 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 priormerger 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 

10
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)2021202020212020
Net income attributable to Nicolet Bankshares, Inc.$7,824 $18,102 $44,347 $42,135 
Weighted average common shares outstanding10,392 10,349 10,098 10,426 
Effect of dilutive common stock awards384 150 405 179 
Diluted weighted average common shares outstanding10,776 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-averageweighted average shares outstanding during the interim period, and not on an annualized weighted-averageweighted 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 were2021 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.

10


Note 4 – Stock-basedStock-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 andoption 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 

11
follows.

Nine Months Ended September 30,
20212020
Dividend yield— %— %
Expected volatility30 %25 %
Risk-free interest rate1.16 %1.72 %
Expected average life7 years7 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 Plansstock 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 OptionsOption Shares
Outstanding
Weighted
Average
Exercise Price
Weighted Average
Remaining
Life (Years)
Aggregate
Intrinsic Value
(in thousands)
Outstanding - December 31, 20201,437,460 $50.47 
Granted380,000 78.77 
Exercise of stock options *(40,482)34.23 
Forfeited(1,000)48.85 
Outstanding - September 30, 20211,775,978 $56.90 6.7$32,446 
Exercisable - September 30, 2021970,878 $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 duringrequirements. For the nine months ended September 30, 2017 and 10,2442021, 7,514 such shares were surrendered duringwithheld 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 20162020 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 StockWeighted Average Grant
Date Fair Value
Restricted Shares
Outstanding
Outstanding - December 31, 2020$53.57 18,925 
Granted77.64 19,595 
Vested *60.66 (15,510)
Forfeited41.44 (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, 4,5531,581 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.

12
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, associated2021, 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 itsimmediate 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

11


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 costsan 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 valuesvalue of securities available for saleAFS 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 CostGross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated Fair ValueFair Value as % of Total
Securities AFS:
U.S. government agency securities$174,946 $76 $196 $174,826 24 %
State, county and municipals236,905 3,261 1,502 238,664 33 %
Mortgage-backed securities193,931 4,439 1,080 197,290 28 %
Corporate debt securities101,267 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 municipals30,842 51 30,799 63 %
Mortgage-backed securities18,221 42 116 18,147 37 %
Corporate debt securities— — — — — %
Total securities HTM$49,063 $50 $167 $48,946 100 %
December 31, 2020
(in thousands)Amortized CostGross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated Fair ValueFair Value as % of Total
Securities AFS:
U.S. government agency securities$63,162 $289 $— $63,451 12 %
State, county and municipals226,493 5,386 11 231,868 43 %
Mortgage-backed securities156,148 6,425 78 162,495 30 %
Corporate debt securities76,073 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.

12



The following table representspresents 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 

13
position.

September 30, 2021
Less than 12 months12 months or moreTotal
($ 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 
State, county and municipals86,749 1,465 974 37 87,723 1,502 113 
Mortgage-backed securities71,934 1,073 864 72,798 1,080 127 
Corporate debt securities19,017 146 — — 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 securities6,656 116 — — 6,656 116 
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 months12 months or moreTotal
($ 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 
Mortgage-backed securities10,612 71 492 11,104 78 22 
Total$15,793 $82 $492 $$16,285 $89 31 
Quarterly, the Company had $2.6 millionevaluates 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 relatedthe 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, the2021 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 impairedattributable 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. TheFurthermore, the Company hasdoes not have the ability and intent to hold itssell any of these securities AFS and believes that it is more likely than not that we will not have to maturity. Theresell 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 duringcredit 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.


13


The amortized cost and fair valuesvalue 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 ofpenalties; as this is particularly inherent in mortgage-backed securities, these securities are estimated based on financial modelsnot included in the maturity categories below.
As of September 30, 2021Securities AFSSecurities HTM
(in thousands)Amortized CostFair ValueAmortized CostFair Value
Due in less than one year$86,520 $86,835 $8,086 $8,085 
Due in one year through five years260,903 265,298 5,010 5,004 
Due after five years through ten years154,595 154,277 8,483 8,463 
Due after ten years11,100 12,242 9,263 9,247 
513,118 518,652 30,842 30,799 
Mortgage-backed securities193,931 197,290 18,221 18,147 
Total investment securities$707,049 $715,942 $49,063 $48,946 
Proceeds and realized gains or prices paid forlosses 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 salessale 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.

14
as follows.

Nine Months Ended September 30,
(in thousands)20212020
Gross gains$$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 LoanCredit 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%    

15

September 30, 2021December 31, 2020
(in thousands)Amount% of
Total
Amount% of
Total
Commercial & industrial$887,910 25 %$750,718 27 %
Paycheck Protection Program (“PPP”) loans68,347 186,016 
Owner-occupied commercial real estate (“CRE”)697,816 20 521,300 19 
Agricultural112,409 109,629 
CRE investment662,871 19 460,721 16 
Construction & land development173,971 131,283 
Residential construction59,611 41,707 
Residential first mortgage688,491 19 444,155 16 
Residential junior mortgage130,279 111,877 
Retail & other51,493 31,695 
Loans3,533,198 100 %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 loans1.09 %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 LoanCredit 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

14


A roll forward of the allowance for loancredit losses - loans is summarized as follows.
Three Months EndedNine Months EndedYear Ended
(in thousands)September 30, 2021September 30, 2020September 30, 2021September 30, 2020December 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 acquired1,896 — 1,896 — — 
Provision for credit losses4,000 3,000 4,500 9,000 10,300 
Charge-offs(107)(786)(436)(1,002)(1,689)
Recoveries49 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
AgriculturalCRE
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 loans584 530 — 392 103 — 272 12 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)
Recoveries211 — — — — 19 30 266 
Net (charge-offs) recoveries(31)— (48)(2)— — (34)(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-Loans29 %18 %%20 %%%18 %%%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
AgriculturalCRE
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 CECL2,962 1,249 361 1,970 51 124 1,286 351 134 8,488 
Initial PCD ACL797 — — — — — — — — 797 
Provision3,106 2,062 455 2,061 519 (71)1,809 151 208 10,300 
Charge-offs(812)(530)— (190)— — (2)— (155)(1,689)
Recoveries120 81 — — — — 11 67 26 305 
Net (charge-offs) recoveries(692)(449)— (190)— — 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-Loans36 %18 %%17 %%%15 %%%100 %
The ACL-Loans represents management’s estimate of probable and inherentexpected credit losses in the Company’s loan portfolio at the balance sheet date. In general, estimatingTo assess the amountappropriateness of the ALLLACL-Loans, an allocation methodology is a functionapplied by Nicolet which focuses on evaluation of a number ofqualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to changes inspecific 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 impairednonperforming 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 ALLLACL-Loans by pools of risk within each loan portfolio.

portfolio segment. The allocation methodology consists of the following tables present the balancecomponents. 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 activityother loans with evidence of credit deterioration. The specific reserve in the ALLLACL-Loans for these credit deteriorated loans is equal to the

15


aggregate collateral or discounted cash flow shortfall. Management allocates the ACL-Loans with historical loss rates by portfolioloan 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 investmentACL-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 portfolioaccrued 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 endedACL-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 

16
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, Allowance5 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 

17

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 EndedNine Months EndedYear Ended
(in thousands)September 30, 2021September 30, 2020September 30, 2021September 30, 2020December 31, 2020
Provision for credit losses on:
Loans$4,000 $3,000 $4,500 $9,000 $10,300 
Unfunded Commitments2,000 — 2,000 — — 
Investment securities— — — — — 
Total$6,000 $3,000 $6,500 $9,000 $10,300 
Collateral Dependent Loans:
A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. For collateral dependent loans, expected credit losses are based on the estimated fair value of the collateral at the balance and activity insheet date, with consideration for estimated selling costs if satisfaction of the ALLLloan depends on the sale of the collateral. The following tables present collateral dependent loans by portfolio segment and the recorded investment incollateral type, including those loans with and without a related allowance allocation.
September 30, 2021Collateral Type
(in thousands)Real EstateOther Business AssetsTotalWithout an AllowanceWith an AllowanceAllowance Allocation
Commercial & industrial$— $2,071 $2,071 $1,504 $567 $226 
PPP loans— — — — — — 
Owner-occupied CRE2,264 — 2,264 1,854 410 141 
Agricultural956 625 1,581 345 1,236 55 
CRE investment4,019 — 4,019 2,659 1,360 469 
Construction & land development1,138 — 1,138 745 393 276 
Residential construction— — — — — — 
Residential first mortgage1,387 — 1,387 1,387 — — 
Residential junior mortgage166 — 166 166 — — 
Retail & other— — — — — — 
Total loans$9,930 $2,696 $12,626 $8,660 $3,966 $1,167 

16


December 31, 2020Collateral Type
(in thousands)Real EstateOther Business AssetsTotalWithout an AllowanceWith an AllowanceAllowance Allocation
Commercial & industrial$— $2,195 $2,195 $501 $1,694 $1,241 
PPP loans— — — — — — 
Owner-occupied CRE3,519 — 3,519 3,519 — — 
Agricultural584 797 1,381 1,378 
CRE investment1,474 — 1,474 1,474 — — 
Construction & land development308 — 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 

18
segment.
September 30, 2021
(in thousands)30-89 Days Past
Due (accruing)
90 Days & Over or nonaccrualCurrentTotal
Commercial & industrial$610 $1,778 $885,522 $887,910 
PPP loans— — 68,347 68,347 
Owner-occupied CRE314 2,990 694,512 697,816 
Agricultural— 1,782 110,627 112,409 
CRE investment— 4,249 658,622 662,871 
Construction & land development221 1,093 172,657 173,971 
Residential construction412 — 59,199 59,611 
Residential first mortgage4,894 4,495 679,102 688,491 
Residential junior mortgage19 232 130,028 130,279 
Retail & other74 96 51,323 51,493 
Total loans$6,544 $16,715 $3,509,939 $3,533,198 
Percent of total loans0.2 %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 

19
December 31, 2020
(in thousands)30-89 Days Past
Due (accruing)
90 Days & Over or nonaccrualCurrentTotal
Commercial & industrial$— $2,646 $748,072 $750,718 
PPP loans— — 186,016 186,016 
Owner-occupied CRE— 1,869 519,431 521,300 
Agricultural1,830 107,792 109,629 
CRE investment— 1,488 459,233 460,721 
Construction & land development— 327 130,956 131,283 
Residential construction— — 41,707 41,707 
Residential first mortgage613 823 442,719 444,155 
Residential junior mortgage43 384 111,450 111,877 
Retail & other102 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

17


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%

20
segment.

September 30, 2021December 31, 2020
(in thousands)Nonaccrual Loans% of TotalNonaccrual Loans% of Total
Commercial & industrial$1,778 11 %$2,646 28 %
PPP loans— — — — 
Owner-occupied CRE2,990 18 1,869 20 
Agricultural1,782 11 1,830 19 
CRE investment4,249 25 1,488 16 
Construction & land development1,093 327 
Residential construction— — — — 
Residential first mortgage4,495 27 823 
Residential junior mortgage232 384 
Retail & other96 88 
Nonaccrual loans$16,715 100 %$9,455 100 %
Percent of total loans0.5 %0.4 %

Note 6 – Loans, Allowance for Loan Losses, and


18


Credit Quality continued

Information:

The following tables present total past due loans by portfolio segment asrisk categories and year of origination. Loans acquired from Mackinac have been included in the September 30, 20172021 table based upon the actual origination date.
September 30, 2021Amortized Cost Basis by Origination Year
(in thousands)20212020201920182017PriorRevolvingRevolving to TermTOTAL
Commercial & industrial (a)
Grades 1-4$185,906 $150,260 $129,503 $72,053 $52,402 $72,579 $261,381 $— $924,084 
Grade 51,046 2,051 4,389 5,411 5,858 1,874 7,237 — 27,866 
Grade 6622 358 33 — 50 563 — 1,630 
Grade 7— 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 53,035 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 5372 — — 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 56,622 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 5132 — 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 $$679,372 
Grade 586 534 2,431 — — 1,359 — — 4,410 
Grade 6— — — — — — — — — 
Grade 7— — 2,062 — 146 2,501 — — 4,709 
Total$182,017 $165,917 $207,220 $21,473 $21,633 $86,754 $3,472 $$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 529 — — — — — — — 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.
19


December 31, 2020Amortized Cost Basis by Origination Year
(in thousands)20202019201820172016PriorRevolvingRevolving to TermTOTAL
Commercial & industrial (a)
Grades 1-4$348,274 $121,989 $98,920 $72,027 $21,613 $39,454 $183,858 $— $886,135 
Grade 51,416 2,239 4,486 527 1,638 4,151 18,994 — 33,451 
Grade 669 19 735 5,315 29 32 1,923 — 8,122 
Grade 7334 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 542 623 1,349 7,541 1,102 5,842 — — 16,499 
Grade 6— — — 1,710 — 706 — — 2,416 
Grade 72,987 675 176 835 — 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 51,034 — 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 $$437,050 
Grade 5— 925 2,245 256 364 1,714 — — 5,504 
Grade 6— — — — — — — — — 
Grade 7— 437 197 16 942 — — 1,601 
Total$146,744 $65,375 $42,830 $41,517 $41,647 $105,750 $287 $$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 716 — 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.

20


The following tables present total loans by risk categories.
September 30, 2021
(in thousands)Grades 1- 4Grade 5Grade 6Grade 7Total
Commercial & industrial$855,737 $27,866 $1,630 $2,677 $887,910 
PPP loans68,347 — — — 68,347 
Owner-occupied CRE651,564 32,694 2,130 11,428 697,816 
Agricultural100,061 8,552 — 3,796 112,409 
CRE investment611,090 45,953 199 5,629 662,871 
Construction & land development170,130 2,668 — 1,173 173,971 
Residential construction59,559 52 — — 59,611 
Residential first mortgage679,372 4,410 — 4,709 688,491 
Residential junior mortgage129,403 478 — 398 130,279 
Retail & other51,369 29 — 95 51,493 
Total loans$3,376,632 $122,702 $3,959 $29,905 $3,533,198 
Percent of total95.6 %3.5 %0.1 %0.8 %100.0 %
December 31, 2020
(in thousands)Grades 1- 4Grade 5Grade 6Grade 7Total
Commercial & industrial$700,119 $33,451 $8,122 $9,026 $750,718 
PPP loans186,016 — — — 186,016 
Owner-occupied CRE492,191 16,499 2,416 10,194 521,300 
Agricultural93,524 9,035 719 6,351 109,629 
CRE investment445,727 12,232 796 1,966 460,721 
Construction & land development128,748 2,056 — 479 131,283 
Residential construction41,652 55 — — 41,707 
Residential first mortgage437,050 5,504 — 1,601 444,155 
Residential junior mortgage111,461 32 — 384 111,877 
Retail & other31,607 — — 88 31,695 
Total loans$2,668,095 $78,864 $12,053 $30,089 $2,789,101 
Percent of total95.7 %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-accrualnonaccrual 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.

21

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.

22

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 

23

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 hadwith a combined premodificationcurrent 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. ThereIn comparison, at December 31, 2020, there were no other11 loans which were modified and classified as troubled debt

21


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 which2021, there were consideredno 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 Assetsand 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 indicatedManagement 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 onimpairments were indicated. A summary of goodwill orand other intangibles was required for 2016 or the first nine months of 2017.

24
as follows.

Nine Months EndedYear Ended
(in thousands)September 30, 2021December 31, 2020
Goodwill$255,431 $163,151 
Core deposit intangibles11,539 8,837 
Customer list intangibles2,984 3,365 
    Other intangibles14,523 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 amountA 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 towas as follows. During 2021, goodwill of $1.0 million occurred in the third quarter of 2017increased due to the Company recording its previously held equity interest in First Menasha at its thenMackinac 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 EndedYear Ended
(in thousands)September 30, 2021December 31, 2020
Goodwill:
Goodwill at beginning of year$163,151 $151,198 
Acquisition92,280 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. ThereA summary of other intangible assets was an addition of $3.7 million to theas follows. During 2021, core deposit intangibles relatedincreased due to the First Menasha merger in the second quarter of 2017. The customer relationship intangible wasMackinac 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 EndedYear Ended
(in thousands)September 30, 2021December 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 summaryMortgage 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 isinitial capitalized amount, net
22


of accumulated amortization, or estimated fair value, and are included in other assets in the consolidated balance sheets, forsheets. A summary of the nine months ended September 30, 2017 and year ended December 31, 2016changes 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 EndedYear Ended
(in thousands)September 30, 2021December 31, 2020
Mortgage servicing rights ("MSR") asset:
MSR asset at beginning of year$10,230 $5,919 
Capitalized MSR3,191 5,256 
MSR asset acquired1,322 529 
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)$— 
Additions(500)(1,000)
Reversals300 — 
Valuation allowance at end of period$(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 others0.78 %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 stratificationsstratification based on the risk characteristics of the underlying loans serviced (predominantly loan type and note interest rate). No valuation or impairment charge was recordedSee Note 9 for 2016 or year to date 2017.

25
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 
20223,059 507 2,421 
20232,412 483 2,363 
20241,815 449 2,250 
20251,248 449 1,361 
2026777 249 1,118 
Thereafter1,369 721 3,164 
Total$11,539 $2,984 $13,163 

Note 8 – Notes Payable

TheShort 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 (notesdid not have any outstanding short-term borrowings.
Long-Term Borrowings:
Long-term borrowings include any borrowing with an original maturities ofmaturity 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, 2021December 31, 2020
FHLB advances$20,000 $29,000 
Junior subordinated debentures25,228 24,869 
Subordinated notes99,005 — 
Total long-term borrowings$144,233 $53,869 
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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 ratesrate of the FHLB advances were 1.65%was 0.74% at September 30, 20172021 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.

26
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, 2021December 31, 2020
(in thousands)Maturity
Date
ParUnamortized
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)
9/30/203616,598 (3,470)13,128 12,951 
2004 First Menasha Bancshares, Inc. (3)
3/17/20345,155 (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 commonthree-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 subordinated1.65% 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, representassumed in April 2017 as the sole assetresult of an acquisition, have a floating rate of the statutory trusts. Allthree-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 aggregateprivate 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, andintended to qualify foras Tier 2 capital for regulatory purposes. At September 30, 2017, the carrying valuepurposes, 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 over3.125% 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 reductionwill reset quarterly thereafter to the carrying value of the outstanding debt.

27
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; thisentirety. 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.

24


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:TotalLevel 1Level 2Level 3
September 30, 2021
U.S. government agency securities$174,826 $— $174,826 $— 
State, county and municipals238,664 — 238,498 166 
Mortgage-backed securities197,290 — 197,290 — 
Corporate debt securities105,162 — 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 municipals231,868 — 231,868 — 
Mortgage-backed securities162,495 — 162,495 — 
Corporate debt securities81,523 — 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 Securitiessecurities 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 isinvestments 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-relatedU.S. government agency securities, andmortgage-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, 20172021 and December 31, 2016,2020, it was determined that carrying value was the best approximation of fair value for all of thethese Level 3 securities, based primarily on the internal analysis on these securities.

28

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 EndedYear Ended
Level 3 Fair Value Measurements:September 30, 2021December 31, 2020
Balance at beginning of year$3,130 $3,130 
Acquired balance666 — 
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, foraggregated 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:TotalLevel 1Level 2Level 3
September 30, 2021
Collateral dependent loans$11,459 $— $— $11,459 
Other real estate owned (“OREO”)4,469 — — 4,469 
MSR asset11,963 — — 11,963 
December 31, 2020
Collateral dependent loans$7,633 $— $— $7,633 
OREO3,608 — — 3,608 
MSR asset9,230 — — 9,230 
25


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 impairedcollateral dependent loans, the amount of impairment isexpected 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 liquidityselling 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.

29

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.

30

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 otherare shown below.

September 30, 2021
(in thousands)Carrying
Amount
Estimated
Fair Value
Level 1Level 2Level 3
Financial assets:
Cash and cash equivalents$1,350,605 $1,350,605 $1,350,605 $— $— 
Certificates of deposit in other banks24,079 26,653 — 26,653 — 
Securities AFS715,942 715,942 — 712,146 3,796 
Securities HTM49,063 48,946 — 48,946 — 
Other investments, including equity securities38,602 38,602 8,078 24,634 5,890 
Loans held for sale16,784 17,153 — 17,153 — 
Loans, net3,494,799 3,539,968 — — 3,539,968 
MSR asset11,963 14,482 — — 14,482 
Financial liabilities:
Deposits$5,428,774 $5,459,453 $— $— $5,459,453 
Long-term borrowings144,233 144,566 — 20,199 124,367 
December 31, 2020
(in thousands)Carrying
Amount
Estimated
Fair Value
Level 1Level 2Level 3
Financial assets:
Cash and cash equivalents$802,859 $802,859 $802,859 $— $— 
Certificates of deposit in other banks29,521 31,053 — 31,053 — 
Securities AFS539,337 539,337 — 536,207 3,130 
Other investments, including equity securities27,619 27,619 3,567 20,155 3,897 
Loans held for sale21,450 22,329 — 22,329 — 
Loans, net2,756,928 2,834,452 — — 2,834,452 
MSR asset9,230 9,276 — — 9,276 
Financial liabilities:
Deposits$3,910,399 $3,917,121 $— $— $3,917,121 
Long-term borrowings53,869 53,859 — 29,488 24,371 
The valuation techniques, or based on judgments regarding future expected loss experience, current economic conditions, risk characteristics ofmethodologies 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 affectedfixed 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, includingappropriate state and federal regulatory agencies. Subject to the discount ratesatisfaction of such conditions and estimateapprovals, Nicolet and Bank of future cash flows. Subsequent changesAnn Arbor expect to the close the Birmingham Sale in assumptions could significantly affect the estimates.

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first quarter of 2022.

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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, providingWisconsin. 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 millionin 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 inclusionupper 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.

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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.

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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.

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Management’s Discussion and Analysis

Overview
The following discussion is Nicolet management’s analysis of the consolidated financial condition as of September 30, 20172021 and December 31, 20162020 and results of operations for the three and nine-month periods ended September 30, 20172021 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 balancescertain balance sheet line items between 20172021 and 2016 was2020 were impacted in general fromby the timing and sizessize of the 2017 and 2016 acquisitions. Since the balances and resultsNicolet’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 BaylakeMackinac 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 averageperiod end balances, andwhile the income statement line items between 2017results 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.

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The 2016 financial advisoryinitial 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 impactsand leisure activities as nation-wide stay-at-home orders were mandated, significant strain on the brokerage feehealth 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, personnelstrong 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 inclusionlatest round of non-recurring direct merger expenses of approximately $1.3 million in 2016 ($0.4 million, $0.4 million, $0.1the SBA’s program, Nicolet originated 2,205 PPP loans totaling $160 million and $0.4earned 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 millionwas 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), alongmeaningfully improves the credit quality of many commercial relationships.


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Performance Summary
Table 1: Earnings Summary and Selected Financial Data
At or for the Three Months EndedAt or for the Nine Months Ended
(In thousands, except per share data)9/30/20216/30/20213/31/202112/31/20209/30/20209/30/20219/30/2020
Results of operations:
Interest income$38,741 $38,307 $36,876 $38,037 $37,270 $113,924 $111,165 
Interest expense3,557 2,736 3,235 4,019 4,710 9,528 15,845 
Net interest income35,184 35,571 33,641 34,018 32,560 104,396 95,320 
Provision for credit losses6,000 — 500 1,300 3,000 6,500 9,000 
Net interest income after provision for credit losses29,184 35,571 33,141 32,718 29,560 97,896 86,320 
Noninterest income13,996 20,178 17,126 16,879 18,691 51,300 45,747 
Noninterest expense33,061 30,747 26,081 25,367 23,685 89,889 75,352 
Income before income tax expense10,119 25,002 24,186 24,230 24,566 59,307 56,715 
Income tax expense2,295 6,718 5,947 6,145 6,434 14,960 14,331 
Net income7,824 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 average10,392 9,902 9,998 10,074 10,349 10,098 10,426 
Diluted weighted average10,776 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 - loans38,399 32,561 32,626 32,173 31,388 38,399 31,388 
Securities available-for-sale, at fair value715,942 562,028 558,229 539,337 535,351 715,942 535,351 
Goodwill and other intangibles, net269,954 173,711 174,501 175,353 176,213 269,954 176,213 
Total assets6,407,820 4,587,347 4,543,804 4,551,789 4,706,375 6,407,820 4,706,375 
Deposits5,428,774 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 share61.01 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 assets4,734,768 4,109,394 4,089,603 4,091,460 4,216,106 4,313,618 3,768,676 
Goodwill and other intangibles, net201,748 174,026 174,825 175,678 169,353 183,632 166,493 
Total assets5,246,193 4,527,839 4,514,927 4,515,226 4,633,359 4,765,665 4,167,902 
Deposits4,448,468 3,897,797 3,875,205 3,793,430 3,636,260 4,075,923 3,320,994 
Interest-bearing liabilities3,093,031 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 assets0.59 %1.62 %1.64 %1.58 %1.55 %1.24 %1.35 %
Return on average common equity5.10 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 assets11.61 12.17 12.06 11.91 11.61 11.93 12.57 
Stockholders' equity to assets11.38 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 margin2.94 3.45 3.31 3.29 3.06 3.22 3.35 
Net loan charge-offs to average loans0.01 0.01 0.01 0.07 0.10 0.01 0.04 
Nonperforming loans to total loans0.47 0.25 0.31 0.34 0.38 0.47 0.38 
Nonperforming assets to total assets0.33 0.21 0.28 0.29 0.25 0.33 0.25 
Efficiency ratio65.32 59.37 51.84 48.99 46.18 58.86 52.71 
Effective tax rate22.68 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 netreconciliation of these financial measures.

29


Table 1A: Non-GAAP Financial Measures
At or for the Three Months EndedAt or for the Nine Months Ended
(In thousands, except per share data)9/30/20216/30/20213/31/202112/31/20209/30/20209/30/20219/30/2020
Tangible Assets:       
Total assets$6,407,820 $4,587,347 $4,543,804 $4,551,789 $4,706,375 
Goodwill and other intangibles, net269,954 173,711 174,501 175,353 176,213 
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, net269,954 173,711 174,501 175,353 176,213 
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, net201,748 174,026 174,825 175,678 169,353 183,632 166,493 
Average tangible common equity$407,198 $376,948 $369,716 $362,242 $368,473 $384,758 $357,411 
Net income of $24.0was $44.3 million for the nine months ended September 30, 2017, a 94% increase over $12.42021, 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 $24.02021, 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 $11.7unfavorable 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 resultsperiods reflecting disciplined deposit pricing. Net interest margin was 3.22% for the first nine months of 2017 include full contributions fromended September 30, 2021, compared to 3.35% for the 2016 acquisitions and fivenine months from First Menasha, whileended September 30, 2020, influenced by the comparative 2016 period includes approximately five months fromchanging 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.

35

·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 interestIncome.”

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.

36

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 20172021, 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 equivalentbrokerage fee income combined) and card interchange income, partly offset by lower net interestmortgage 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 $74.02020. Personnel costs increased $7.3 million, and $49.4non-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.”
30



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.


31


Table 1: Year-To-Date2: 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.

37
- Tax-Equivalent Basis

For the Nine Months Ended September 30,
20212020
(in thousands)Average
Balance
InterestAverage
Yield/Rate
Average
Balance
InterestAverage
Yield/Rate
ASSETS
Interest-earning assets
PPP Loans$173,463 $11,123 8.46 %$199,662 $4,263 2.80 %
Commercial-based loans ex PPP2,222,290 75,845 4.50 %2,083,768 80,224 5.06 %
Retail-based loans528,895 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:
Taxable418,897 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 securities559,588 8,187 1.95 %479,916 8,280 2.30 %
Other interest-earning assets829,382 2,140 0.34 %528,451 1,917 0.48 %
Total non-loan earning assets1,388,970 10,327 0.99 %1,008,367 10,197 1.35 %
Total interest-earning assets4,313,618 $114,652 3.51 %3,768,676 $111,874 3.91 %
Other assets, net452,047 399,226 
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 demand681,079 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 deposits318,477 2,165 0.91 %400,198 4,901 1.64 %
Total interest-bearing core deposits2,483,963 4,914 0.26 %2,070,500 9,894 0.64 %
Brokered deposits284,738 2,885 1.35 %279,165 3,302 1.58 %
Total interest-bearing deposits2,768,701 7,799 0.38 %2,349,665 13,196 0.75 %
PPPLF— — — %191,535 507 0.35 %
Other interest-bearing liabilities79,882 1,729 2.87 %91,080 2,142 3.10 %
Total wholesale funding79,882 1,729 2.87 %282,615 2,649 1.23 %
Total interest-bearing liabilities2,848,583 9,528 0.45 %2,632,280 15,845 0.80 %
Noninterest-bearing demand deposits1,307,222 971,329 
Other liabilities41,470 40,389 
Stockholders’ equity568,390 523,904 
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 PPP4,140,155 103,529 3.31 %3,569,014 107,611 3.98 %
Total interest-bearing liabilities ex PPPLF2,848,583 9,528 0.45 %2,440,745 15,338 0.84 %
Net interest rate spread ex PPP & PPPLF2.86 %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.

32


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 loansAverage 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.

38

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.

39
- Tax-Equivalent Basis (Continued)

For the Three Months Ended September 30,
20212020
(in thousands)Average
Balance
InterestAverage
Yield/Rate
Average
Balance
InterestAverage
Yield/Rate
ASSETS
Interest-earning assets
PPP Loans$109,318 $2,310 8.27 %$332,816 $2,477 2.91 %
Commercial-based loans ex PPP2,378,480 26,759 4.40 %2,064,191 26,021 4.93 %
Retail-based loans588,624 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:
Taxable472,598 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 securities611,870 2,805 1.83 %496,153 2,764 2.23 %
Other interest-earning assets1,046,476 869 0.33 %848,697 680 0.32 %
Total non-loan earning assets1,658,346 3,674 0.55 %1,344,850 3,444 1.02 %
Total interest-earning assets4,734,768 $38,985 3.24 %4,216,106 $37,519 3.50 %
Other assets, net511,425 417,253 
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 demand711,442 685 0.38 %585,528 844 0.57 %
MMA962,538 135 0.06 %777,696 233 0.12 %
Core time deposits329,012 630 0.76 %374,230 1,337 1.42 %
Total interest-bearing core deposits2,665,252 1,550 0.23 %2,180,575 2,541 0.46 %
Brokered deposits284,164 894 1.25 %336,026 1,243 1.47 %
Total interest-bearing deposits2,949,416 2,444 0.33 %2,516,601 3,784 0.60 %
PPPLF— — — %335,865 297 0.35 %
Other interest-bearing liabilities143,615 1,113 3.08 %81,271 629 3.05 %
Total wholesale funding143,615 1,113 3.08 %417,136 926 0.87 %
Total interest-bearing liabilities3,093,031 3,557 0.46 %2,933,737 4,710 0.64 %
Noninterest-bearing demand deposits1,499,052 1,119,659 
Other liabilities45,164 42,137 
Stockholders’ equity608,946 537,826 
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 PPP4,625,450 36,675 3.12 %3,883,290 35,042 3.55 %
Total interest-bearing liabilities ex PPPLF3,093,031 3,557 0.46 %2,597,872 4,413 0.67 %
Net interest rate spread ex PPP & PPPLF2.66 %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.

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Table 4: Quarterly3: 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 inIncrease (Decrease) Due to Changes in
(in thousands)VolumeRate
Net (1)
VolumeRate
Net (1)
Interest-earning assets
PPP Loans$(2,481)$2,314 $(167)$(627)$7,487 $6,860 
Commercial-based loans ex. PPP3,547 (2,809)738 4,484 (8,863)(4,379)
Retail-based loans1,249 (584)665 1,786 (1,619)167 
Total loans (2)
2,315 (1,079)1,236 5,643 (2,995)2,648 
Investment securities:
Taxable438 (378)60 643 (823)(180)
Tax-exempt (2)
— (19)(19)161 (74)87 
Total investment securities438 (397)41 804 (897)(93)
Other interest-earning assets107 82 189 456 (233)223 
 Total non-loan earning assets545 (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 demand159 (318)(159)616 (1,594)(978)
MMA47 (145)(98)247 (1,197)(950)
Core time deposits(146)(561)(707)(861)(1,875)(2,736)
Total interest-bearing core deposits108 (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 liabilities600 (116)484 186 (599)(413)
Total wholesale funding452 (265)187 (67)(853)(920)
Total interest-bearing liabilities384 (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 threefirst nine months ended September 30, 2017 versusof 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, Margineconomy 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-equivalentpricing 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).

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The taxable-equivalent net interest margin was 4.27% for the first nine months of 2017, up 28 bps versus2021, 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 27decreased 5 bps, largely attributable to the lower interest rate environment between the periods with a favorable increase inand the earning asset yield (up 25 bpshigher concentration of low-earning cash compared to 4.69% forthe first nine months of 2017)2020. The 2021 interest-earning asset yield declined 40 bps to 3.51%, and an improvementpartly from the 14 bps decline in loans but was more significantly impacted by the decrease in the cost of funds (down 2 bpsloans-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
34


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 increaseddecreased 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 bps29% 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-termaverage net free funds (largely from higher average noninterest-bearing demand deposits and borrowings, but have not significantly influenced rates further out onstockholders’ 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 yieldmargin 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 20162020 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 periods2020.
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, $6592021, up $2.8 million or 40% higher thanfrom 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 attributablefrom 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 in3% 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 20172021, compared to a year ago. The average cost79%, 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, 20172021 (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 $92ACL 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, 20172020 (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 millionuncertainty surrounding the COVID-19 pandemic, and $1.4 million, respectively, exceeding net charge offsthe 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. Assetloan 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 loancredit losses is predominantly a function of Nicolet’s methodology and judgment as to qualitative and quantitative factors used to determine the adequacyappropriateness of the ALLL.ACL-Loans and unfunded commitments. The adequacyappropriateness of the ALLLACL-Loans is affected by changes in the size and character of the loan portfolio, changes in levels of impairedcollateral 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 potentialexpected 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
35


quality and the ALLL,ACL-Loans, see “Balance Sheet Analysis“BALANCE SHEET ANALYSIS — Loans,” “— Allowance for Loan and LeaseCredit Losses - Loans,” and “— Impaired Loans and Nonperforming Assets.”

41


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)20212020$ Change% Change20212020$ Change% Change
Trust services fee income$2,043 $1,628 $415 25 %$5,724 $4,717 $1,007 21 %
Brokerage fee income3,154 2,489 665 27 8,938 7,080 1,858 26 
Mortgage income, net4,808 9,675 (4,867)(50)17,637 21,965 (4,328)(20)
Service charges on deposit accounts1,314 1,037 277 27 3,541 3,075 466 15 
Card interchange income2,299 1,877 422 22 6,492 5,076 1,416 28 
BOLI income572 531 41 1,658 1,774 (116)(7)
Other income993 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 
Asset gains (losses), net(1,187)217 (1,404)N/M3,716 (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 monthscomparable period of 2016, aided largely by2020. 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 bothcomparable nine-month periods, noninterestpredominantly on higher wealth revenue (trust services and brokerage fee income increased $5.7combined) 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 $1.2up $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 of2020, 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 offsettingnet 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 productionhigher volume and sales aided by a broader geographic footprint and increased net servicing fees onactivity, as activity was tempered starting late in first quarter 2020 with the growing portfolioonset 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 $0.4down $0.1 million or 49.3% between the comparable nine-month periods, commensurate with the growthattributable 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 $2.0of $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.

42

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 offor the nine months endingended September 30, 2017 versus 2016

Total noninterest expense2021 was $59.5up $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 resultsecond quarter 2021 initial public offering of the 2016 and 2017 acquisitions.

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

36


asset losses of $1.2 million for the first nine months of 2017, up $7.72020 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)20212020Change% Change20212020Change% Change
Personnel$16,927 $14,072 $2,855 20 %$49,127 $41,877 $7,250 17 %
Occupancy, equipment and office5,749 4,051 1,698 42 13,939 12,616 1,323 10 
Business development and marketing1,654 810 844 104 3,853 4,683 (830)(18)
Data processing2,939 2,612 327 13 8,408 7,574 834 11 
Intangibles amortization758 834 (76)(9)2,400 2,707 (307)(11)
FDIC assessments480 347 133 381,555 347 1,208 N/M
Merger-related expense2,793 151 2,642 N/M3,449 853 2,596 N/M
Other expense1,761 808 953 118 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”) employees646 523 123 24 %591 553 38 %
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 519strong earnings for the first nine monthspart of 2016 and 2017, respectively). Also contributing to the2021, as well as an increase werein salaries from merit increases between the periods incentives timing, equity grantsand higher average FTEs (mostly from the acquisition of Mackinac). Personnel expense was also impacted by the change in the second quarterfair 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 resultfirst 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 baseexpanded branch network with the Mackinac acquisition and additional expense for software needs, offset partly byand 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 $1.0was $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 $2.0with the Mackinac acquisition.

Intangibles amortization decreased $0.3 million or 45.8% between the comparable nine-month periods predominantly attributablemainly 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 $1.2assessment base.
Other expense was $7.2 million, up $2.5 million (52%) between the comparable nine-month periods, mostly due exclusively to timingan increase in director fees (reflective of andthe additional complexity of a larger company, including the addition of intangibles recorded as part oftwo 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 tolarger operating base. In

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addition, 2021 included a $2.1 million lower merger-related expenses, partially offset by a $0.9contract 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, auditlease termination charges related to branch closures and bank insurance costs) and a $0.4$0.5 million increase in 2017 associated with implementingto 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 benefitcomparable 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 ending2021 versus Three Months Ended September 30, 2017 versus 2016

Nicolet reported net2020

Net income of $9.5was $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.

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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 equivalent2020. 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 $21.5a tax-equivalent adjustment of $0.2 million respectively. Taxable equivalent net(essentially unchanged from third quarter 2020). Tax-equivalent interest income forincreased $1.5 million between the third quarter 2017 was up $5.5periods, with $2.9 million from stronger volumes (led by average loans which grew $205 million or 26% versus7% over third quarter 2016, with $6.0 million2020, including both organic loan growth and one month of the increase due toloans acquired with Mackinac, net favorable volume variances (predominately dueof 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% forstronger volumes between the comparable third quarter 2017, 15 bps higher than third quarter 2016, mainly dueperiods, increasing $198 million (23%) to a higher mixrepresent 22% of loans as a percent of earning assets. Loans earned 5.29% and represented 81% of average earninginterest-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 than2021 (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, driven2020. 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 costperiods and higher average FTEs (mostly from the acquisition of deposits (up 16 bpsMackinac). 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
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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), mostly2020 due to higher marketing costs from higher-costing First Menasha deposits acquireddifferences in the timing and an increase in select deposit rates that began in July 2017. The costextent 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 fundingvolume-based increases in core processing charges, as well as the mix.

Noninterest income was $10.2larger operating base with the Mackinac acquisition. FDIC assessments increased to $0.5 million for third quarter 2017, up $1.6 million over2021 as the small bank assessment credits were fully utilized during third quarter 2016. Noninterest income without net gains2020 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 thecomparable 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 attributabledirector 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, equipmentcarry closed bank branches, and office expense was $0.6 millionoverall higher dueexpenses 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 millionbase. 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 $1.12021 was $2.3 million, (due to the charge offwith an effective tax rate of a large commercial loan)22.68%, compared to a net recoveryincome 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 $12.6Mackinac 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 decline2021, 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 atMackinac acquisition and retained earnings, partly offset by stock repurchases and negative net fair value with no carryoverinvestment 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 theirPPPLF 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 timeacquisition 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 servicesserviced a diverse customer base throughout Northeastnortheastern and Centralcentral Wisconsin and in Menominee, Michigan. With the acquisition of Mackinac on September 3, 2021, the Company has expanded into Northern Michigan includingand the following industries: manufacturing, agriculture, wholesaling, retail, service, and businesses supporting, among others, the general building and paper industries. It continuesUpper Peninsula of Michigan, as well as adding to concentrate its effortspresence 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.

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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.

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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.
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Table 6: Period End Loan Composition
September 30, 2021December 31, 2020September 30, 2020
(in thousands)Amount% of TotalAmount% of TotalAmount% of Total
Commercial & industrial$887,910 25 %$750,718 27 %$735,531 25 %
PPP loans68,347 186,016 335,236 12 
Owner-occupied CRE697,816 20 521,300 19 499,605 17 
Agricultural112,409 109,629 111,022 
Commercial1,766,482 50 1,567,663 57 1,681,394 58 
CRE investment662,871 19 460,721 16 475,050 16 
Construction & land development173,971 131,283 121,647 
Commercial real estate836,842 24 592,004 21 596,697 20 
Commercial-based loans2,603,324 74 2,159,667 78 2,278,091 78 
Residential construction59,611 41,707 57,496 
Residential first mortgage688,491 19 444,155 16 428,017 15 
Residential junior mortgage130,279 111,877 112,173 
Residential real estate878,381 25 597,739 21 597,686 21 
Retail & other51,493 31,695 33,016 
Retail-based loans929,874 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 manageloans 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 typesmanagement 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 LeaseCredit Losses

- Loans

In addition to the discussion that follows, see also Note 1, “Basis of Presentation,” and Note 6, “Loans, Allowance for LoanCredit Losses - Loans, and Credit Quality,” in the notesNotes 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 describedsummarized 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-goingongoing 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.

46
For additional information regarding nonperforming assets see also “BALANCE SHEET ANALYSIS – Nonperforming Assets.”

40



The ALLL is established through a provision for loan losses charged to expense to appropriately provide for potentialACL-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 potentialexpected 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 ALLLACL-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 allindividually 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 ALLLACL-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 ALLLthe 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-evaluatedto 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 portfolioACL-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 bothLastly, 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 analysescollectability 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 ALLLACL-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 ALLLACL-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 denominatorACL-Loans from acquiredSeptember 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 portionscomponents 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.

47

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 shownACL-Loans are detailed further in Table 10 for September 30, 2017 and December 31, 2016.

48
7 below.

41



Table 10: Allocation of the7: Allowance for LoanCredit 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 EndedYear Ended
(in thousands)September 30, 2021September 30, 2020December 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 acquired1,896 — — 
Provision for credit losses4,500 9,000 10,300 
Charge-offs(436)(1,002)(1,689)
Recoveries266 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)
Residential junior mortgage18 67 
Retail & other(59)(105)(129)
Total net (charge-offs) recoveries$(170)$(869)$(1,384)
Ratios:
ACL-Loans to total loans1.09 %1.08 %1.15 %
ACL-Loans to total loans ex. PPP loans1.11 %1.22 %1.24 %
Net charge-offs to average loans, annualized0.01 %0.04 %0.05 %
Net charge-offs to average loans ex. PPP loans, annualized0.01 %0.05 %0.05 %

Nonperforming Assets

As part of its overall credit risk management process, Nicolet’s management has beenis 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, 20172021, 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. OREO2020. 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 majorityacquisition 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 adequacyappropriate 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
42


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, 20172021 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.

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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.

50

(in thousands)September 30, 2021December 31, 2020September 30, 2020
Nonperforming loans:
Commercial & industrial$1,778 $2,646 $3,011 
Owner-occupied CRE2,990 1,869 2,471 
Agricultural1,782 1,830 2,297 
Commercial6,550 6,345 7,779 
CRE investment4,249 1,488 911 
Construction & land development1,093 327 533 
Commercial real estate5,342 1,815 1,444 
Commercial-based loans11,892 8,160 9,223 
Residential construction— — — 
Residential first mortgage4,495 823 1,312 
Residential junior mortgage232 384 411 
Residential real estate4,727 1,207 1,723 
Retail & other96 88 51 
Retail-based loans4,823 1,295 1,774 
Total nonaccrual loans16,715 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 owned355 — — 
Bank property real estate owned2,895 3,608 1,000 
Total OREO4,469 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 loans0.47 %0.34 %0.38 %
Nonperforming assets to total loans plus OREO0.60 %0.47 %0.41 %
Nonperforming assets to total assets0.33 %0.29 %0.25 %
ACL-Loans to nonperforming loans230 %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 withThe deposit levels have been heavily influenced by the ongoing economic uncertainty, government stimulus payments and other bankdirectives 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-costingby corporate borrowers. In addition, Mackinac added deposits of $1.4 billion at acquisition. The deposit products or non-deposit investment alternatives. Included in total depositscomposition is presented in Table 14 are brokered9 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% since2021, increased $1.5 billion (39%) from December 31, 2016,2020, largely attributabledue to the $375 millionMackinac acquisition. Core customer deposits added from First Menasha at acquisitionincreased $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 $2.2increased $1.7 billion up $631 million, or 41%(46%), from the comparable 2016 period,also largely attributabledue to the inclusion of acquired BaylakeMackinac 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.

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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 atsince September 30, 20172020 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.

43


Table 9: Period End Deposit Composition
September 30, 2021December 31, 2020September 30, 2020
(in thousands)Amount% of TotalAmount% of TotalAmount% of Total
Noninterest-bearing demand$1,852,119 34 %$1,212,787 31 %$1,135,384 30 %
Money market and interest-bearing demand2,154,557 40 %1,551,325 40 %1,432,667 39 %
Savings775,281 14 %521,814 13 %480,745 13 %
Time646,817 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 %$46,340 %$35,975 %
Brokered and listed time deposits204,202 %278,521 %290,827 %
Total brokered deposits$357,060 %$324,861 %$326,802 %
Customer transaction accounts$4,629,099 85 %$3,239,586 83 %$3,012,821 81 %
Customer time deposits442,615 %345,952 %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, 20172021 and December 31, 2016,2020, Nicolet had the following off-balance sheet lending-related commitments.
Table 10: Commitments
(in thousands)September 30, 2021December 31, 2020
Commitments to extend credit$1,111,156 $950,287 
Financial standby letters of credit13,947 8,241 
Performance standby letters of credit8,821 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 

Interestto 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.

52
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, thebase; repayment and maturity of loans,loans; investment securities calls, maturities, and sales,sales; and funds obtained throughprocurement 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 milliondeposits 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, oras applicable, and for other purposes as required by law. OtherAdditional 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.
44


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, 20172021 and December 31, 20162020 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 netThe increase in loanscash and securities), partially offset by $30cash 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 $54net 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’sManagement believes its liquidity resources were sufficient as of September 30, 20172021 to fund loans, accommodate deposit trendscycles 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 decreasechange 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; suchare 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, 2021December 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 rates1.3 %4.0 %
200 bps increase in interest rates2.8 %8.1 %
45


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 guidelinesguidelines. The capital position and strategies are actively reviews capital strategiesreviewed 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.

53
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’sBank’s regulatory capital ratios remain well above minimum regulatory ratios. Also, atratios, 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 Nationalthe Bank’s regulatory capital amounts and ratios, as of September 30, 2017 and December 31, 2016well 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 

54

At or for the Nine Months EndedAt or for the
Year Ended
($ in thousands)September 30, 2021December 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 capital488,620 385,068 
Common equity Tier 1 capital464,355 361,162 
Total capital ratio14.6 %12.9 %
Tier 1 capital ratio11.6 %12.2 %
Common equity tier 1 capital ratio11.0 %11.4 %
Tier 1 leverage ratio9.6 %9.0 %
Bank Risk-Based Capital:
Total risk-based capital$515,152 $351,081 
Tier 1 risk-based capital487,622 329,824 
Common equity Tier 1 capital487,622 329,824 
Total capital ratio12.3 %11.2 %
Tier 1 capital ratio11.6 %10.5 %
Common equity tier 1 capital ratio11.6 %10.5 %
Tier 1 leverage ratio9.8 %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.

46

(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 Boardconsolidated financial statements, management is required to make estimates and assumptions that affect the OCC issued final rules implementingreported amounts of assets and liabilities as of the Basel III regulatory capital frameworkdate of the balance sheet and related Dodd-Frank Act changes. The final rules took effectrevenues and expenses for the Company and Bank on January 1, 2015, subjectperiod. Actual results could differ significantly from those estimates. Estimates that are particularly susceptible to a transition period for certain partssignificant 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 madeCompany’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 Customers2020-04, Reference Rate Reform (Topic 606).The core principle848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional guidance is that an entity should recognize revenuefor a limited period of time to depictease the transfer of promised goodspotential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and servicesexceptions for applying GAAP to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goodscontracts, hedging relationships, and services. In August 2015, the FASB issued an amendment to defer the effective date for all entitiesother transactions affected by one year.reference rate reform if certain criteria are met. The updated guidance is effective for annual reporting periods beginning afterall 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 assessingcontinues to evaluate the impact of the new guidancereference 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.

55

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.



47


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, 202183,585 $70.95 83,585 
August 1 – August 31, 2021151,916 $74.68 150,009 
September 1 – September 30, 202175 $— — 
Total235,576 $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.

56

None.
48



ITEM 6. EXHIBITS

The following exhibits are filed herewith:

Exhibit
Exhibit
Number
Description
31.12.1
2.2
4.1
4.2
10.1
10.2
31.1
31.2
32.1
32.2
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.SCHInline XBRL Taxonomy Extension Schema Document
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document
101.LABInline XBRL Taxonomy Extension Label Linkbase Document
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document
104Cover 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 notsame number in the Registrant’s Current Report on Form 8-K filed for purposes of section 18on 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 Actsame 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.

49


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, 2017October 29, 2021/s/ Robert B. AtwellMichael E. Daniels
Robert B. AtwellMichael E. Daniels
Chairman, President and Chief Executive Officer
November 3, 2017October 29, 2021/s/ Ann K. LawsonH. Phillip Moore, Jr.
Ann K. LawsonH. Phillip Moore, Jr.
Chief Financial Officer

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