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

March 31, 2023

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 shareNICNew York Stock Exchange
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, 2017April 30, 2023 there were 9,801,61314,716,616 shares of $0.01 par value common stock outstanding.




Nicolet Bankshares, Inc.
Quarterly Report on Form 10-Q
March 31, 2023
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) (Loss)
Consolidated Statements of Comprehensive Income
Three Months and Nine Months ended September 30, 2017 and 2016 (unaudited) (Loss)
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 

March 31, 2023December 31, 2022
(Unaudited)(Audited)
Assets
Cash and due from banks$93,462 $121,211 
Interest-earning deposits20,718 33,512 
Cash and cash equivalents114,180 154,723 
Certificates of deposit in other banks11,293 12,518 
Securities available for sale (“AFS”), at fair value1,023,176 917,618 
Securities held to maturity (“HTM”), at amortized cost 679,128 
Other investments57,482 65,286 
Loans held for sale4,962 1,482 
Loans6,223,732 6,180,499 
Allowance for credit losses - loans (“ACL-Loans”)(62,412)(61,829)
Loans, net6,161,320 6,118,670 
Premises and equipment, net112,569 108,956 
Bank owned life insurance (“BOLI”)166,107 165,137 
Goodwill and other intangibles, net400,277 402,438 
Accrued interest receivable and other assets140,988 138,013 
Total assets$8,192,354 $8,763,969 
Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing demand deposits$2,094,623 $2,361,816 
Interest-bearing deposits4,833,956 4,817,105 
Total deposits6,928,579 7,178,921 
Short-term borrowings50,000 317,000 
Long-term borrowings197,448 225,342 
Accrued interest payable and other liabilities54,535 70,177 
Total liabilities7,230,562 7,791,440 
Stockholders’ Equity:
Common stock147 147 
Additional paid-in capital623,746 621,988 
Retained earnings398,966 407,864 
Accumulated other comprehensive income (loss)(61,067)(57,470)
Total stockholders’ equity961,792 972,529 
Total liabilities and stockholders’ equity$8,192,354 $8,763,969 
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 outstanding14,698,265 14,690,614 
Common shares issued14,771,255 14,764,104 
See accompanying notes to unaudited consolidated financial statements.

3

3


ITEM 1. Financial Statements Continued:


NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Loss)

(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
March 31,
20232022
Interest income:
Loans, including loan fees$79,142 $51,299 
Investment securities:
Taxable4,961 5,127 
Tax-exempt1,737 675 
Other interest income1,536 817 
Total interest income87,376 57,918 
Interest expense:
Deposits24,937 2,192 
Short-term borrowings3,212 — 
Long-term borrowings2,506 1,931 
Total interest expense30,655 4,123 
Net interest income56,721 53,795 
Provision for credit losses3,090 300 
Net interest income after provision for credit losses53,631 53,495 
Noninterest income:
Wealth management fee income5,512 5,699 
Mortgage income, net1,466 3,253 
Service charges on deposit accounts1,480 1,477 
Card interchange income3,033 2,581 
BOLI income1,200 933 
Deferred compensation plan asset market valuations946 (467)
LSR income, net1,155 (382)
Asset gains (losses), net(38,468)1,313 
Other income1,832 1,536 
Total noninterest income(21,844)15,943 
Noninterest expense:
Personnel24,328 21,191 
Occupancy, equipment and office8,783 6,944 
Business development and marketing2,121 1,831 
Data processing3,988 3,387 
Intangibles amortization2,161 1,424 
FDIC assessments540 480 
Merger-related expense163 98 
Other expense2,791 2,195 
Total noninterest expense44,875 37,550 
Income (loss) before income tax expense(13,088)31,888 
Income tax expense (benefit)(4,190)7,724 
Net income (loss)$(8,898)$24,164 
Earnings (loss) per common share:
Basic$(0.61)$1.77 
Diluted$(0.61)$1.70 
Weighted average common shares outstanding:
Basic14,694,451 13,648,745 
Diluted14,694,451 14,214,752 
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

(Loss)

(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
March 31,
20232022
Net income (loss)$(8,898)$24,164 
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities AFS:
Net unrealized holding gains (losses)15,294 (39,948)
Net realized (gains) losses included in income213 (15)
Reclassification adjustment for securities transferred from
   held to maturity to available for sale
(20,434)— 
Income tax (expense) benefit1,330 10,790 
Total other comprehensive income (loss)(3,597)(29,173)
Comprehensive income (loss)$(12,495)$(5,009)
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 

Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Balances at December 31, 2022$147 $621,988 $407,864 $(57,470)$972,529 
Comprehensive income:
Net income (loss), three months ended March 31, 2023  (8,898) (8,898)
Other comprehensive income (loss)   (3,597)(3,597)
Stock-based compensation expense 1,424   1,424 
Exercise of stock options, net 148   148 
Issuance of common stock 186   186 
Balances at March 31, 2023$147 $623,746 $398,966 $(61,067)$961,792 
Balances at December 31, 2021$140 $575,045 $313,604 $3,102 $891,891 
Comprehensive income:
Net income, three months ended March 31, 2022— — 24,164 — 24,164 
Other comprehensive income (loss)— — — (29,173)(29,173)
Stock-based compensation expense— 1,799 — — 1,799 
Exercise of stock options, net1,886 — — 1,887 
Issuance of common stock— 175 — — 175 
Purchase and retirement of common stock(6)(54,427)— — (54,433)
Balances at March 31, 2022$135 $524,478 $337,768 $(26,071)$836,310 
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)Three Months Ended March 31,
20232022
Cash Flows From Operating Activities:
Net income (loss)$(8,898)$24,164 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation, amortization, and accretion4,197 6,769 
Provision for credit losses3,090 300 
Increase in cash surrender value of life insurance(1,087)(933)
Stock-based compensation expense1,424 1,799 
Asset (gains) losses, net38,468 (1,313)
Gain on sale of loans held for sale, net(612)(2,377)
Net change due to:
Proceeds from sale of loans held for sale17,789 86,478 
Origination of loans held for sale(20,861)(88,304)
Accrued interest receivable and other assets(2,326)6,786 
Accrued interest payable and other liabilities(15,642)(11,426)
Net cash provided by (used in) operating activities15,542 21,943 
Cash Flows From Investing Activities:
Net (increase) decrease in loans(41,764)(64,669)
Net (increase) decrease in certificates of deposit in other banks1,225 2,228 
Purchases of securities AFS (5,017)
Purchases of securities HTM (38,856)
Proceeds from sales of securities AFS22,565 3,400 
Proceeds from sales of securities HTM460,051 — 
Proceeds from calls and maturities of securities AFS42,028 29,511 
Proceeds from calls and maturities of securities HTM2,916 5,430 
Purchases of other investments(3,801)(10,953)
Proceeds from sales of other investments11,108 775 
Proceeds from redemption of BOLI117 117 
Net (increase) decrease in premises and equipment(5,646)(1,953)
Net (increase) decrease in other real estate and other assets 3,075 
Net cash (paid) received in branch sale 147,833 
Net cash provided by (used in) investing activities488,799 70,921 
Cash Flows From Financing Activities:
Net increase (decrease) in deposits(250,218)(229,862)
Net increase (decrease) in short-term borrowings(267,000)— 
Repayments of long-term borrowings(28,000)(10,000)
Purchase and retirement of common stock (54,433)
Proceeds from issuance of common stock186 175 
Proceeds from exercise of stock options148 1,887 
Net cash provided by (used in) financing activities(544,884)(292,233)
Net increase (decrease) in cash and cash equivalents(40,543)(199,369)
Cash and cash equivalents:
Beginning154,723 595,292 
Ending *$114,180 $395,923 
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest$30,825 $5,170 
Cash paid for taxes — 
Transfer of securities from HTM to AFS177,727 — 
Transfer of loans and bank premises to other real estate owned 432 
Capitalized mortgage servicing rights204 886 
* There was no restricted cash in cash and cash equivalents at March 31, 2023, while cash and cash equivalents at March 31, 2022, included restricted cash of $1.9 million pledged as collateral on interest rate swaps. No reserve balance was required with the Federal Reserve Bank at either March 31, 2023 or March 31, 2022.
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 (loss), comprehensive income (loss), 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.

2022.

Critical Accounting Policies and Estimates

Preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions, and assumptionsjudgments 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 thatThese estimates are particularly susceptiblebased on management’s knowledge of historical experience, current information, and other factors deemed to significant change for the Company include the determination of the allowance for loan losses, the assessment of deferred tax assets and liabilities, and the valuation of loans acquired in acquisitions; therefore, these are critical accounting policies.be relevant; accordingly, as this information changes, actual results could differ from those estimates. 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. ActualNicolet considers accounting estimates to be critical to reported financial results may ultimately differif the accounting estimate requires management to make assumptions about matters that are highly uncertain and different estimates that are reasonably likely to occur from period to period, could have a material impact on the financial statements. The accounting estimates although management does not generally believe such differences would materially affectwe consider to be critical include business combinations and the consolidated financial statements in any individual reporting period presented.

valuation of loans acquired, the determination of the allowance for credit losses, and income taxes.

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.

2022.


Recent Accounting DevelopmentsPronouncements Adopted

In December 2016,March 2022, the FASB issued ASU 2022-02, Financial Accounting Standards BoardInstruments - Credit Losses (Topic 326): Troubled Debt Restructurings (“FASB”TDRs”) issuedand Vintage Disclosures. This ASU eliminated the accounting guidance for TDRs by creditors and enhanced the disclosure requirements for loan modifications to borrowers experiencing financial difficulty. The ASU also requires public business entities to expand the vintage disclosures to include gross charge-offs by year of origination. The 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,fiscal years beginning after December 15, 2016. The impact2022. Adoption of the new guidancethis ASU did not have a material impact on the Company’s consolidated financial statements.

statements; however, it resulted in new disclosures. See Note 6 for the new disclosures.

Future Accounting Pronouncements
In March 2016,2023, the FASB issued updated guidanceASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. This ASU permits reporting entities to ASU 2016-09,Stock Compensation Improvementselect to Employee Share-Based Payment Activity intended to simplify and improve several aspectsaccount for tax equity investments, regardless of the accountingtax credit program for share-based payment transactions, includingwhich the income tax consequences, classificationcredits are received, using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of such awardsthe investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the income statement as either equitya component of income tax expense. A reporting entity makes an accounting policy election to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis rather than electing to apply the proportional amortization method at the reporting entity level or liabilitiesto individual investments. This ASU also requires specific disclosures of investments that generate income tax credits and classification onother income tax benefits from a tax credit program for which the statement of cash flows.entity has elected to apply the proportional amortization method. The updated guidance is effective for interim and annual reporting periodsfiscal years beginning after December 15, 2016.2023.

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In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which defers the sunset date of the original guidance from December 31, 2022 to December 31, 2024. The Company continues to work through the cessation of LIBOR, including the modification of its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR. The Company expects to utilize the reference rate reform transition guidance, as applicable, and does not expect such adoption to have a material impact on its consolidated financial statements includeor financial disclosures. The Company will continue to assess the impact ofas 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 Septemberreference rate transition approaches June 30, 2017, respectively, for deductions attributable to exercised stock options and vesting of restricted stock.

8
2023.


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 20162022 consolidated financial statements have been reclassified to conform to the 20172023 presentation.

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


Note 2 – Acquisitions

First Menasha Bancshares,Acquisition

Charter Bankshares, Inc. (“First Menasha”Charter”):

On April 28, 2017, the Company consummatedAugust 26, 2022, Nicolet completed its merger with First MenashaCharter, pursuant to the Agreement and Plan of Merger by and between the Company and First Menasha dated November 3, 2016, (the “Merger Agreement”), whereby First Menasha wasMarch 29, 2022, at which time Charter merged with and into the Company,Nicolet, and The First National Bank-Fox Valley,Charter Bank, the wholly owned commercial bank subsidiary of First Menasha serving the Fox Valley area of Wisconsin,Charter, was merged with and into Nicolet National Bank (the “Bank”). The system integration was completed, and five branches, the wholly owned bank subsidiary of First Menasha opened on May 1, 2017, as Nicolet National Bank branches, expanding its presence into Calumet and Winnebago Counties, Wisconsin. Concurrently, Nicolet closed one of its Calumet County locations, bringing the Bank’s footprint to 38 branches as of September 30, 2017.

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

Pursuant to the Merger Agreement, the final purchase price consisted of issuing 1,309,885Charter stockholders received 15.458 shares of the Company’sNicolet common stock (given the final stock-for-stock exchange ratioand $475 in cash for each share of 3.126 exceptCharter owned. As a result, Nicolet issued approximately 1.26 million shares of Nicolet common stock for First Menasha shares owned by the Company immediately prior to the time of the merger), for common stock consideration of $62.2$98 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) plusand cash consideration of $19.3$39 million, for a total purchase price of $137 million. Approximately $0.2 millionWith the Charter merger, Nicolet expanded to Western Wisconsin and Minnesota.


A summary of the assets acquired and liabilities assumed in direct stock issuance coststhe Charter transaction, as of the acquisition date, including the purchase price allocation was as follows.

(In millions, except share data)Acquired from CharterFair Value AdjustmentsEstimated Fair Value
Assets Acquired:
Cash and cash equivalents$10 $— $10 
Investment securities218 — 218 
Loans848 (21)827 
ACL-Loans(9)(2)
Premises and equipment10 
BOLI29 — 29 
Core deposit intangible— 19 19 
Other assets10 
     Total assets$1,110 $11 $1,121 
Liabilities Assumed:
Deposits$869 $$870 
Borrowings161 — 161 
Other liabilities— 
     Total liabilities$1,033 $$1,034 
Net assets acquired$87 
Purchase Price:
Nicolet common stock issued (in shares)1,262,360 
Value of Nicolet common stock consideration$98 
Cash consideration paid39 
    Total purchase price$137 
Preliminary goodwill$50 

The Company purchased loans through the acquisition of Charter for which there was, at the merger were incurred and charged against additional paid in capital.

Upon consummation, the Company added $480 million in assets, $351 million indate of acquisition, more than insignificant deterioration of credit quality since origination (purchased credit deteriorated loans $375 million in deposits, $4 million in core deposit intangible, and $41 millionor “PCD” loans). The carrying amount of goodwill. these loans at acquisition was as follows.


9


(In thousands)August 26, 2022
Purchase price of PCD loans at acquisition$24,031 
Allowance for credit losses on PCD loans at acquisition1,709 
Par value of PCD acquired loans at acquisition$25,740 

The Company accounted for the transactionCharter acquisition under the acquisition method of accounting, and thus, the financial position and results of operations of First MenashaCharter prior to the consummation date were not included in the accompanying consolidated financial statements. The accounting required assets purchased and liabilities assumed to be recorded at their respective estimated fair values at the date of acquisition. The estimated fair values may be subject to refinementvalue was determined with the assistance of third party valuations, appraisals, and third party advisors. Goodwill arising as additional information relativea result of the Charter acquisition is not deductible for tax purposes. Due to the closing datetiming of the merger, the purchase price allocation and estimated fair value measurements remain preliminary. Management will continue to review the estimated fair values becomes available throughand expects to finalize its analysis of 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 gainacquired assets and assumed liabilities in the Company’s pre-acquisition equity interest holding in First Menasha, resulting in a $1.2 million gain in pre-tax earnings.

Financial advisor business acquired:

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

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

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

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

Thepurchase price allocation and estimated 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
may occur.


Note 3 – Earnings per Common Share

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

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

Three Months Ended March 31,
(In thousands, except per share data)20232022
Net income (loss)$(8,898)$24,164 
Weighted average common shares outstanding14,694 13,649 
Effect of dilutive common stock awards— 566 
Diluted weighted average common shares outstanding14,694 14,215 
Basic earnings (loss) per common share*$(0.61)$1.77 
Diluted earnings (loss) per common share*$(0.61)$1.70 
*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

As a result of the Company’s reported net loss for the three months ended March 31, 2023, all of the common stock awards outstanding were noexcluded from the computation of diluted earnings (loss) per common shares. For the three months ended March 31, 2022, options outstanding at September 30, 2017 or September 30, 2016 thatto purchase approximately 0.1 million shares were excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive.


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 March 31, 2023, approximately 0.7 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 three months ended March 31, 2022 were as follows:

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

follows. There were no stock options granted for the three months ended March 31, 2023.
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Three Months Ended March 31, 2022
Dividend yield— %
Expected volatility30 %
Risk-free interest rate1.77 %
Expected average life7 years
Weighted average per share fair value of options$32.99 

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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, 20221,853,064 $59.79 
Granted— — 
Exercise of stock options *(5,329)34.82 
Outstanding - March 31, 20231,847,735 $59.86 5.7$16,359 
Exercisable - March 31, 20231,278,592 $52.22 4.6$16,302 
*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 4,443requirements. For the three months ended March 31, 2023, 492 such shares were surrendered duringwithheld by the nine months ended September 30, 2017 and 10,244 shares were surrendered during the year ended December 31, 2016. These stock options were considered exercised and then surrendered and are included in the Exercise of stock option line.

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

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

The following options were outstanding at September 30, 2017:

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

Company.

Intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the exercise price of the stock options. The total intrinsic value of options exercised infor the first ninethree months of 2017,ended March 31, 2023 and full year of 20162022 was approximately $1.8$0.2 million and $1.3$3.0 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 

*The terms

A summary of the Company’s restricted stock agreements permit the surrender of shares to the Company upon vesting in order to satisfy applicable tax withholding requirements at the minimum statutory withholding rate, and accordingly 4,553 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.

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activity is summarized below.

Restricted StockWeighted Average Grant
Date Fair Value
Restricted Shares
Outstanding
Outstanding - December 31, 2022$76.49 73,490 
Granted— — 
Vested72.00 (500)
Outstanding - March 31, 2023$76.52 72,990 

Note 4 – Stock-based Compensation, continued

The Company recognized approximately $1.9$1.4 million and $1.1$1.8 million of stock-based employee compensation expense during(included in personnel on the nineconsolidated statements of income) for the three months ended September 30, 2017March 31, 2023 and 2016,2022, respectively, associated with its common stock equity awards.awards granted to officers and employees. As of September 30, 2017,March 31, 2023, there was approximately $15.2$17.2 million of unrecognized compensation cost related to equity award grants. The costgrants, which is expected to be recognized over the weighted average remaining vesting period of approximately fourthree years.

The Company recognized a tax benefit of less than $0.1 million and approximately $0.4 million for the three months ended March 31, 2023 and 2022, respectively, for the tax impact of stock option exercises and vesting of restricted stock.


Note 5 – Securities Availableand Other Investments
Securities
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 AFS and HTM are summarized as follows.
March 31, 2023
(in thousands)Amortized CostGross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated Fair Value
Securities AFS:
U.S. Treasury securities$192,166 $— $6,058 $186,108 
U.S. government agency securities9,959 36 25 9,970 
State, county and municipals428,643 692 31,887 397,448 
Mortgage-backed securities350,712 — 39,091 311,621 
Corporate debt securities125,349 — 7,320 118,029 
Total securities AFS$1,106,829 $728 $84,381 $1,023,176 
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December 31, 2022
(in thousands)Amortized CostGross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated Fair Value
Securities AFS:
U.S. Treasury securities$192,116 $— $8,286 $183,830 
U.S. government agency securities2,133 — 33 2,100 
State, county and municipals433,733 123 35,668 398,188 
Mortgage-backed securities227,650 10 26,728 200,932 
Corporate debt securities140,712 8,147 132,568 
Total securities AFS$996,344 $136 $78,862 $917,618 
Securities HTM:
U.S. Treasury securities$497,648 $— $35,722 $461,926 
U.S. government agency securities8,744 46 — 8,790 
State, county and municipals34,874 — 3,349 31,525 
Mortgage-backed securities137,862 — 16,751 121,111 
Total securities HTM$679,128 $46 $55,822 $623,352 
On March 7, 2023, Nicolet executed the sale of $500 million (par value) U.S. Treasury held to maturity securities for a pre-tax loss of $38 million or an after-tax loss of $28 million. Proceeds from the sale were used to reduce existing FHLB borrowings with the remainder held in investable cash. As a result of the sale of securities previously classified as held to maturity, the remaining unsold portfolio of held to maturity securities, with a book value of $177 million, was reclassified to available for sale are summarizedwith a carrying value of approximately $157 million. The unrealized loss on this portfolio of $20 million increased the balance of accumulated other comprehensive loss $15 million, net of the deferred tax effect, and is subject to future market changes.

Proceeds and realized gains or losses from the sale of AFS and HTM securities were 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.

Three Months Ended March 31,
(in thousands)20232022
Securities AFS:
Gross gains$126 $20 
Gross losses(339)(5)
Gains (losses) on sales of securities AFS, net$(213)$15 
Proceeds from sales of securities AFS$22,565 $3,400 
Securities HTM:
Gross gains$— $— 
Gross losses(37,723)— 
Gains (losses) on sales of securities HTM, net$(37,723)$— 
Proceeds from sales of securities HTM$460,051 $— 
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 $414 million and $883 million, as of March 31, 2023 and December 31, 2022, respectively, were pledged as collateral to secure public deposits and borrowings, as applicable, and for liquidity or other purposes as required by regulation. Accrued interest on investment securities totaled $6 million at both March 31, 2023 and December 31, 2022, 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.

March 31, 2023
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. Treasury securities$456 $$185,640 $6,050 $186,096 $6,058 
U.S. government agency securities2,718 20 107 2,825 25 
State, county and municipals79,617 1,826 247,397 30,061 327,014 31,887 608 
Mortgage-backed securities35,724 2,158 275,897 36,933 311,621 39,091 464 
Corporate debt securities68,654 2,583 44,995 4,737 113,649 7,320 75 
Total$187,169 $6,595 $754,036 $77,786 $941,205 $84,381 1,165 

Note 5 – Securities Available for Sale, continued

At September 30, 2017

December 31, 2022
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. Treasury securities$448 $14 $183,382 $8,272 $183,830 $8,286 
U.S. government agency securities2,083 32 17 2,100 33 
State, county and municipals277,546 18,041 86,569 17,627 364,115 35,668 812 
Mortgage-backed securities102,108 11,320 95,614 15,408 197,722 26,728 376 
Corporate debt securities114,887 6,186 12,938 1,961 127,825 8,147 90 
Total$497,072 $35,593 $378,520 $43,269 $875,592 $78,862 1,296 
Securities HTM:
U.S. Treasury securities$— $— $461,926 $35,722 $461,926 $35,722 
State, county and municipals17,591 1,594 11,654 1,755 29,245 3,349 58 
Mortgage-backed securities68,108 8,029 53,003 8,722 121,111 16,751 106 
Total$85,699 $9,623 $526,583 $46,199 $612,282 $55,822 170 
During first quarter 2023, the Company had $2.6recognized provision expense of $2.3 million of gross unrealized losses related to 507 securities. As of September 30, 2017, the expected credit loss on its Signature Bank sub debt investment (acquired in an acquisition), and immediately charged-off the full investment. The Company does not consider its remaining 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. Furthermore, the Company does not have the intent to sell any of these AFS securities and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost. As of March 31, 2023 and December 31, 2022, no allowance for credit losses on AFS securities was recognized.
The Company hasevaluated the abilityHTM securities and intentdetermined no allowance for credit losses was necessary at December 31, 2022. The U.S. Treasury and U.S. government agency securities are guaranteed by the U.S. government. For the state, county and municipal securities, management considered issuer bond ratings, historical loss rates by bond ratings, whether issuers continue to hold itsmake timely principal and interest payments per the contractual terms of the investment securities, to maturity. Thereinternal forecasts, and whether or not such investment securities provide insurance, other credit enhancement, or are pre-refunded by the issuers. For the mortgage-backed securities, all such securities were issued by U.S. government agencies and corporations, which are currently explicitly or implicitly guaranteed by the U.S. government and have a long history of no other-than-temporary impairments charged to earnings during the nine-month periods ending September 30, 2017 or September 30, 2016.

credit losses.

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 March 31, 2023Securities AFS
(in thousands)Amortized CostFair Value
Due in less than one year$225,921 $223,243 
Due in one year through five years173,794 163,788 
Due after five years through ten years223,776 201,296 
Due after ten years132,626 123,228 
756,117 711,555 
Mortgage-backed securities350,712 311,621 
Total investment securities$1,106,829 $1,023,176 
Other Investments
Other investments include “restricted” equity securities, equity securities with readily determinable fair values, and private company securities. As a member of the Federal Reserve Bank System and the Federal Home Loan Bank (“FHLB”) System, Nicolet is required to maintain an investment in the capital stock of these entities. These equity securities are “restricted” in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other exchange traded equity securities. As no ready market exists for these stocks, and they have no quoted market value, these investments are carried at cost. Also included are investments in other private companies that do not have quoted market prices, paid for the same or similar securities. It is possible interest rates could change considerably, resulting in a material change in estimated fairwhich are carried at cost less impairment charges, if any. The carrying value.

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

Proceeds from sales of securities available for sale during the first nine months of 2017 and 2016 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
other investments are summarized as follows.

March 31, 2023December 31, 2022
(in thousands)AmountAmount
Federal Reserve Bank stock$32,708 $32,219 
Federal Home Loan Bank (“FHLB”) stock10,174 18,625 
Equity securities with readily determinable fair values3,912 4,376 
Other investments10,688 10,066 
Total other investments$57,482 $65,286 


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

March 31, 2023December 31, 2022
(in thousands)Amount% of
Total
Amount% of
Total
Commercial & industrial$1,330,052 21 %$1,304,819 21 %
Owner-occupied commercial real estate (“CRE”)969,064 16 954,599 15 
Agricultural1,065,909 17 1,088,607 18 
CRE investment1,146,388 19 1,149,949 19 
Construction & land development333,370 318,600 
Residential construction134,782 114,392 
Residential first mortgage1,014,166 16 1,016,935 16 
Residential junior mortgage177,026 177,332 
Retail & other52,975 55,266 
Loans6,223,732 100 %6,180,499 100 %
Less allowance for credit losses - Loans (“ACL-Loans”)62,412 61,829 
Loans, net$6,161,320 $6,118,670 
Allowance for credit losses - Loans to loans1.00 %1.00 %

Note 6 – Loans,

Accrued interest on loans totaled $16 million and $15 million at March 31, 2023 and December 31, 2022, respectively, and is included in accrued interest receivable and other assets on the consolidated balance sheets.
14


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

A roll forward of the allowance for loancredit losses - loans is summarized as follows.
Three Months EndedYear Ended
(in thousands)March 31, 2023March 31, 2022December 31, 2022
Beginning balance$61,829 $49,672 $49,672 
ACL on PCD loans acquired— — 1,937 
Provision for credit losses750 300 10,950 
Charge-offs(184)(100)(1,033)
Recoveries17 34 303 
Net (charge-offs) recoveries(167)(66)(730)
Ending balance$62,412 $49,906 $61,829 
The following tables present the balance and lease losses (“ALLL”)activity in the ACL-Loans by portfolio segment.
Three Months Ended March 31, 2023
(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$16,350 $9,138 $9,762 $12,744 $2,572 $1,412 $6,976 $1,846 $1,029 $61,829 
Provision457 172 (328)210 106 262 (206)(31)108 750 
Charge-offs(118)— — — — — — — (66)(184)
Recoveries10 — — — — — 17 
Net (charge-offs) recoveries(108)— — — — — (62)(167)
Ending balance$16,699 $9,310 $9,436 $12,954 $2,678 $1,674 $6,771 $1,815 $1,075 $62,412 
As % of ACL-Loans27 %15 %15 %21 %%%11 %%%100 %

Year Ended December 31, 2022
(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$12,613 $7,222 $9,547 $8,462 $1,812 $900 $6,844 $1,340 $932 $49,672 
ACL on PCD loans1,408 384 — 38 — 93 12 — 1,937 
Provision2,415 2,087 215 4,075 758 512 96 493 299 10,950 
Charge-offs(190)(555)— — — — (65)— (223)(1,033)
Recoveries104 — — 169 — — 21 303 
Net (charge-offs) recoveries(86)(555)— 169 — — (57)(202)(730)
Ending balance$16,350 $9,138 $9,762 $12,744 $2,572 $1,412 $6,976 $1,846 $1,029 $61,829 
As % of ACL-Loans26 %15 %16 %21 %%%11 %%%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 ALLL is a functionACL-Loans, management applies an allocation methodology 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, purchased credit deteriorated loans, and activityother loans with evidence of credit deterioration. The specific reserve in the ALLLACL-Loans for these credit

15


deteriorated loans is equal to the 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 investment in loans by portfolio atACL-Loans using the qualitative factors mentioned above. Consideration is given to those current qualitative or forenvironmental factors that are likely to cause estimated credit losses as of the nine months ended September 30, 2017:

  TOTAL – Nine Months Ended September 30, 2017 
(in thousands)
ALLL:
 Commercial
& industrial
  Owner-
occupied
CRE
  AG
production
  AG real
estate
  CRE
investment
  Construction
& land
development
  Residential
construction
  Residential
first
mortgage
  Residential
junior
mortgage
  Retail
& other
  Total 
Beginning balance $3,919  $2,867  $150  $285  $1,124  $774  $304  $1,784  $461  $152  $11,820 
Provision  2,183   (253)  16   (17)  132   (19)  (137)  (124)  4   90   1,875 
Charge-offs  (1,097)  -   -   -   -   (13)  -   (8)  -   (38)  (1,156)
Recoveries  20   29   -   -   1   -   -   6   2   13   71 
Net charge-offs  (1,077)  29   -   -   1   (13)  -   (2)  2   (25)  (1,085)
Ending balance $5,025  $2,643  $166  $268  $1,257  $742  $167  $1,658  $467  $217  $12,610 
As percent of ALLL  39.9%  21.0%  1.3%  2.1%  10.0%  5.9%  1.3%  13.1%  3.7%  1.7%  100.0%
                                             
ALLL:                                            
Individually evaluated $226  $-  $-  $-  $-  $-  $-  $-  $-  $-  $226 
Collectively evaluated  4,799   2,643   166   268   1,257   742   167   1,658   467   217   12,384 
Ending balance $5,025  $2,643  $166  $268  $1,257  $742  $167  $1,658  $467  $217  $12,610 
                                             
Loans:                                            
Individually evaluated $5,071  $1,116  $-  $218  $4,845  $723  $80  $1,619  $60  $-  $13,732 
Collectively evaluated  620,658   426,938   36,352   48,225   298,603   86,926   33,083   361,497   102,594   22,514   2,037,390 
Total loans $625,729  $428,054  $36,352  $48,443  $303,448  $87,649  $33,163  $363,116  $102,654  $22,514  $2,051,122 
                                             
Less ALLL $5,025  $2,643  $166  $268  $1,257  $742  $167  $1,658  $467  $217  $12,610 
Net loans $620,704  $425,411  $36,186  $48,175  $302,191  $86,907  $32,996  $361,458  $102,187  $22,297  $2,038,512 

16
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.

Note 6 – Loans, Allowance for LoanCredit Losses-Unfunded Commitments:

In addition to the ACL-Loans, the Company has established an ACL-Unfunded commitments, classified in accrued interest payable and other liabilities on the consolidated balance sheets. This reserve is maintained at a 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 ACL-Loans. The reserve for unfunded commitments was $3.0 million at both March 31, 2023 and December 31, 2022.
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 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

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

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

Three Months EndedYear Ended
(in thousands)March 31, 2023March 31, 2022December 31, 2022
Provision for credit losses on:
Loans$750 $300 $10,950 
Unfunded commitments— — 550 
Investment securities2,340 — — 
Total$3,090 $300 $11,500 
16


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.
March 31, 2023Collateral Type
(in thousands)Real EstateOther Business AssetsTotalWithout an AllowanceWith an AllowanceAllowance Allocation
Commercial & industrial$— $2,419 $2,419 $1,084 $1,335 $506 
Owner-occupied CRE5,905 — 5,905 5,697 208 54 
Agricultural12,656 5,800 18,456 12,751 5,705 166 
CRE investment3,158 — 3,158 2,635 523 
Construction & land development650 — 650 650 — — 
Residential first mortgage1,357 — 1,357 1,357 — — 
Residential junior mortgage— — — 
Total loans$23,734 $8,219 $31,953 $24,182 $7,771 $733 

December 31, 2022Collateral Type
(in thousands)Real EstateOther Business AssetsTotalWithout an AllowanceWith an AllowanceAllowance Allocation
Commercial & industrial$— $3,475 $3,475 $1,927 $1,548 $595 
Owner-occupied CRE4,907 — 4,907 4,699 208 53 
Agricultural13,758 6,458 20,216 14,358 5,858 261 
CRE investment2,713 — 2,713 979 1,734 212 
Construction & land development670 — 670 670 — — 
Residential first mortgage91 — 91 91 — — 
Total loans$22,139 $9,933 $32,072 $22,724 $9,348 $1,121 


17


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.
March 31, 2023
(in thousands)30-89 Days Past
Due (accruing)
90 Days & Over or nonaccrualCurrentTotal
Commercial & industrial$256 $2,874 $1,326,922 $1,330,052 
Owner-occupied CRE388 7,128 961,548 969,064 
Agricultural178 18,782 1,046,949 1,065,909 
CRE investment— 4,126 1,142,262 1,146,388 
Construction & land development— 748 332,622 333,370 
Residential construction1,144 — 133,638 134,782 
Residential first mortgage3,852 4,986 1,005,328 1,014,166 
Residential junior mortgage219 196 176,611 177,026 
Retail & other222 55 52,698 52,975 
Total loans$6,259 $38,895 $6,178,578 $6,223,732 
Percent of total loans0.1 %0.6 %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, 2022
(in thousands)30-89 Days Past
Due (accruing)
90 Days & Over or nonaccrualCurrentTotal
Commercial & industrial$210 $3,328 $1,301,281 $1,304,819 
Owner-occupied CRE833 5,647 948,119 954,599 
Agricultural20 20,416 1,068,171 1,088,607 
CRE investment— 3,832 1,146,117 1,149,949 
Construction & land development— 771 317,829 318,600 
Residential construction— — 114,392 114,392 
Residential first mortgage3,628 3,780 1,009,527 1,016,935 
Residential junior mortgage236 224 176,872 177,332 
Retail & other261 82 54,923 55,266 
Total loans$5,188 $38,080 $6,137,231 $6,180,499 
Percent of total loans0.1 %0.6 %99.3 %100.0 %


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

The following table presents nonaccrual loans by portfolio segment in total and then as a further breakdown by originated or acquired as of September 30, 2017 and December 31, 2016.

  Total Nonaccrual Loans 
(in thousands) September 30,
2017
  % to Total  December 31,
2016
  % to Total 
Commercial & industrial $5,078   35.2% $358   1.8%
Owner-occupied CRE  1,276   8.8   2,894   14.3 
AG production  2   -   9   0.1 
AG real estate  186   1.3   208   1.0 
CRE investment  4,537   31.4   12,317   60.6 
Construction & land development  723   5.0   1,193   5.9 
Residential construction  80   0.6   260   1.3 
Residential first mortgage  2,301   16.0   2,990   14.7 
Residential junior mortgage  239   1.7   56   0.3 
Retail & other  -   -   -   - 
Nonaccrual loans - Total $14,422   100.0% $20,285   100.0%
                 
  Originated 
(in thousands) September 30,
2017
  % to Total  December 31,
2016
  % to Total 
Commercial & industrial $615   62.3% $4   1.6%
Owner-occupied CRE  38   3.8   42   16.3 
AG production  2   0.2   7   2.7 
AG real estate  -   -   -   - 
CRE investment  -   -   -   - 
Construction & land development  -   -   -   - 
Residential construction  -   -   -   - 
Residential first mortgage  333   33.7   204   79.4 
Residential junior mortgage  -   -   -   - 
Retail & other  -   -   -   - 
Nonaccrual loans - Originated $988   100.0% $257   100.0%
                 
  Acquired 
(in thousands) September 30,
2017
  % to Total  December 31,
2016
  % to Total 
Commercial & industrial $4,463   33.2% $354   1.8%
Owner-occupied CRE  1,238   9.2   2,852   14.2 
AG production  -   -   2   0.1 
AG real estate  186   1.4   208   1.0 
CRE investment  4,537   33.8   12,317   61.4 
Construction & land development  723   5.4   1,193   6.0 
Residential construction  80   0.6   260   1.3 
Residential first mortgage  1,968   14.6   2,786   13.9 
Residential junior mortgage  239   1.8   56   0.3 
Retail & other  -   -   -   - 
Nonaccrual loans – Acquired $13,434   100.0% $20,028   100.0%

20
segment.

March 31, 2023December 31, 2022
(in thousands)Nonaccrual Loans% of TotalNonaccrual Loans% of Total
Commercial & industrial$2,874 %$3,328 %
Owner-occupied CRE7,128 18 5,647 15 
Agricultural18,782 48 20,416 53 
CRE investment4,126 11 3,832 10 
Construction & land development748 771 
Residential construction— — — — 
Residential first mortgage4,986 13 3,780 10 
Residential junior mortgage196 224 
Retail & other55 — 82 — 
Nonaccrual loans$38,895 100 %$38,080 100 %
Percent of total loans0.6 %0.6 %

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 gross charge-offs by year of September 30, 2017origination. Acquired loans have been included based upon the actual origination date.
March 31, 2023Amortized Cost Basis by Origination Year
(in thousands)20232022202120202019PriorRevolvingRevolving to TermTOTAL
Commercial & industrial
Grades 1-4$47,409 $312,964 $215,435 $96,534 $65,723 $111,114 $376,926 $— $1,226,105 
Grade 595 4,204 4,640 6,548 1,195 11,392 27,894 — 55,968 
Grade 6— 1,358 618 66 — 11,881 6,543 — 20,466 
Grade 7291 3,613 1,894 2,165 2,371 2,411 14,768 — 27,513 
Total$47,795 $322,139 $222,587 $105,313 $69,289 $136,798 $426,131 $— $1,330,052 
Current period gross charge-offs$— $(77)$(26)$— $— $— $(15)$— $(118)
Owner-occupied CRE
Grades 1-4$28,513 $155,362 $196,641 $103,973 $97,039 $322,852 $4,773 $— $909,153 
Grade 51,381 3,134 6,310 4,485 908 17,497 490 — 34,205 
Grade 6— 1,000 355 41 1,575 2,070 250 — 5,291 
Grade 7— 224 684 7,244 1,358 10,905 — — 20,415 
Total$29,894 $159,720 $203,990 $115,743 $100,880 $353,324 $5,513 $— $969,064 
Current period gross charge-offs$— $— $— $— $— $— $— $— $— 
Agricultural
Grades 1-4$11,930 $280,631 $138,443 $83,733 $25,089 $152,730 $227,727 $— $920,283 
Grade 51,239 13,311 11,668 1,762 879 39,707 20,436 — 89,002 
Grade 650 62 1,244 — 52 2,332 195 — 3,935 
Grade 7695 7,199 7,271 786 1,942 23,812 10,984 — 52,689 
Total$13,914 $301,203 $158,626 $86,281 $27,962 $218,581 $259,342 $— $1,065,909 
Current period gross charge-offs$— $— $— $— $— $— $— $— $— 
CRE investment
Grades 1-4$8,011 $205,798 $228,060 $189,172 $132,082 $326,737 $11,704 $— $1,101,564 
Grade 52,825 563 1,633 3,552 3,312 21,095 — — 32,980 
Grade 6— — — — 1,159 3,778 183 — 5,120 
Grade 7— — 21 523 2,316 3,663 201 — 6,724 
Total$10,836 $206,361 $229,714 $193,247 $138,869 $355,273 $12,088 $— $1,146,388 
Current period gross charge-offs$— $— $— $— $— $— $— $— $— 
Construction & land development
Grades 1-4$6,947 $119,087 $144,313 $11,980 $8,802 $36,033 $5,290 $— $332,452 
Grade 5— 34 — — 12 92 — — 138 
Grade 6— — — — — — — — — 
Grade 7— 32 — — — 748 — — 780 
Total$6,947 $119,153 $144,313 $11,980 $8,814 $36,873 $5,290 $— $333,370 
Current period gross charge-offs$— $— $— $— $— $— $— $— $— 
Residential construction
Grades 1-4$5,036 $114,512 $12,948 $1,045 $121 $549 $— $— $134,211 
Grade 5— — 571 — — — — — 571 
Grade 6— — — — — — — — — 
Grade 7— — — — — — — — — 
Total$5,036 $114,512 $13,519 $1,045 $121 $549 $— $— $134,782 
Current period gross charge-offs$— $— $— $— $— $— $— $— $— 
Residential first mortgage
Grades 1-4$35,309 $309,434 $270,665 $142,741 $66,489 $173,612 $1,426 $$999,679 
Grade 5— 1,364 776 987 1,776 2,759 — — 7,662 
Grade 6— — — — 703 — — — 703 
Grade 7— 152 477 178 359 4,956 — — 6,122 
Total$35,309 $310,950 $271,918 $143,906 $69,327 $181,327 $1,426 $$1,014,166 
Current period gross charge-offs$— $— $— $— $— $— $— $— $— 
Residential junior mortgage
Grades 1-4$2,784 $9,905 $4,291 $5,055 $3,071 $4,780 $140,169 $6,570 $176,625 
Grade 5— — — — — — — — — 
Grade 6— — — — — — — — — 
Grade 7— 35 205 — — 23 138 — 401 
Total$2,784 $9,940 $4,496 $5,055 $3,071 $4,803 $140,307 $6,570 $177,026 
Current period gross charge-offs$— $— $— $— $— $— $— $— $— 
Retail & other
Grades 1-4$1,646 $10,603 $8,010 $3,659 $2,622 $4,451 $21,885 $— $52,876 
Grade 5— — 21 — — — — — 21 
Grade 6— — — — — — — — — 
Grade 7— — 46 29 — — 78 
Total$1,646 $10,603 $8,077 $3,661 $2,623 $4,480 $21,885 $— $52,975 
Current period gross charge-offs$— $— $— $— $— $— $(66)$— $(66)
Total loans$154,161 $1,554,581 $1,257,240 $666,231 $420,956 $1,292,008 $871,982 $6,573 $6,223,732 

19


December 31, 2022Amortized Cost Basis by Origination Year
(in thousands)20222021202020192018PriorRevolvingRevolving to TermTOTAL
Commercial & industrial
Grades 1-4$317,394 $226,065 $101,374 $68,884 $50,189 $77,589 $360,978 $— $1,202,473 
Grade 59,938 5,902 10,811 1,530 3,986 4,562 20,617 — 57,346 
Grade 61,459 2,283 629 511 402 11,653 14,047 — 30,984 
Grade 7556 293 3,211 2,990 775 1,070 5,121 — 14,016 
Total$329,347 $234,543 $116,025 $73,915 $55,352 $94,874 $400,763 $— $1,304,819 
Current period gross charge-offs$(38)$(41)$(2)$— $(109)$— $— $— $(190)
Owner-occupied CRE
Grades 1-4$151,391 $190,313 $105,156 $100,606 $91,479 $252,574 $6,734 $— $898,253 
Grade 55,241 3,192 4,287 2,163 4,791 14,632 348 — 34,654 
Grade 6— — 763 2,361 — 877 — — 4,001 
Grade 7227 706 6,344 616 — 9,798 — — 17,691 
Total$156,859 $194,211 $116,550 $105,746 $96,270 $277,881 $7,082 $— $954,599 
Current period gross charge-offs$— $— $— $— $— $(555)$— $— $(555)
Agricultural
Grades 1-4$275,208 $145,272 $85,413 $25,463 $19,687 $130,849 $249,033 $— $930,925 
Grade 513,295 18,178 2,694 1,992 517 43,927 21,199 — 101,802 
Grade 6115 1,457 28 33 — 5,258 429 — 7,320 
Grade 77,165 2,632 720 1,977 4,611 19,948 11,507 — 48,560 
Total$295,783 $167,539 $88,855 $29,465 $24,815 $199,982 $282,168 $— $1,088,607 
Current period gross charge-offs$— $— $— $— $— $— $— $— $— 
CRE investment
Grades 1-4$205,930 $229,252 $192,527 $134,301 $79,649 $248,595 $11,383 $— $1,101,637 
Grade 5567 1,649 3,578 4,266 3,086 24,897 — — 38,043 
Grade 6— — — 1,170 2,396 2,483 206 — 6,255 
Grade 7— — 121 299 245 3,140 209 — 4,014 
Total$206,497 $230,901 $196,226 $140,036 $85,376 $279,115 $11,798 $— $1,149,949 
Current period gross charge-offs$— $— $— $— $— $— $— $— $— 
Construction & land development
Grades 1-4$104,804 $140,727 $12,188 $9,747 $23,811 $13,138 $13,235 $— $317,650 
Grade 537 — — 14 — 95 — — 146 
Grade 6— — — — — — — — — 
Grade 733 — — — — 771 — — 804 
Total$104,874 $140,727 $12,188 $9,761 $23,811 $14,004 $13,235 $— $318,600 
Current period gross charge-offs$— $— $— $— $— $— $— $— $— 
Residential construction
Grades 1-4$92,417 $16,774 $966 $123 $336 $229 $3,547 $— $114,392 
Grade 5— — — — — — — — — 
Grade 6— — — — — — — — — 
Grade 7— — — — — — — — — 
Total$92,417 $16,774 $966 $123 $336 $229 $3,547 $— $114,392 
Current period gross charge-offs$— $— $— $— $— $— $— $— $— 
Residential first mortgage
Grades 1-4$318,628 $272,011 $147,857 $68,975 $31,208 $162,153 $2,080 $$1,002,915 
Grade 51,494 758 997 1,803 2,272 465 — — 7,789 
Grade 6— — — 711 — — — — 711 
Grade 7154 329 188 349 197 4,303 — — 5,520 
Total$320,276 $273,098 $149,042 $71,838 $33,677 $166,921 $2,080 $$1,016,935 
Current period gross charge-offs$— $— $— $— $— $(65)$— $— $(65)
Residential junior mortgage
Grades 1-4$10,119 $4,580 $5,207 $3,151 $1,573 $3,409 $142,784 $5,762 $176,585 
Grade 5— — — — — 143 165 — 308 
Grade 6— — — — — — — — — 
Grade 7— 206 — — — 24 209 — 439 
Total$10,119 $4,786 $5,207 $3,151 $1,573 $3,576 $143,158 $5,762 $177,332 
Current period gross charge-offs$— $— $— $— $— $— $— $— $— 
Retail & other
Grades 1-4$12,318 $8,957 $4,221 $3,188 $1,035 $24,950 $492 $— $55,161 
Grade 5— 23 — — — — — — 23 
Grade 6— — — — — — — — — 
Grade 7— 23 22 30 — — 82 
Total$12,318 $9,003 $4,243 $3,190 $1,065 $24,955 $492 $— $55,266 
Current period gross charge-offs$— $(1)$(6)$(1)$— $— $(215)$— $(223)
Total loans$1,528,490 $1,271,582 $689,302 $437,225 $322,275 $1,061,537 $864,323 $5,765 $6,180,499 

20


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 December 31, 2016:

  September 30, 2017 
(in thousands) 30-89 Days
Past Due
(accruing)
  90 Days &
Over or
nonaccrual
  Current  Total 
Commercial & industrial $303  $5,078  $620,348  $625,729 
Owner-occupied CRE  229   1,276   426,549   428,054 
AG production  -   2   36,350   36,352 
AG real estate  -   186   48,257   48,443 
CRE investment  -   4,537   298,911   303,448 
Construction & land development  38   723   86,888   87,649 
Residential construction  1,085   80   31,998   33,163 
Residential first mortgage  537   2,301   360,278   363,116 
Residential junior mortgage  23   239   102,392   102,654 
Retail & other  4   -   22,510   22,514 
Total loans $2,219  $14,422  $2,034,481  $2,051,122 
As a percent of total loans  0.1%  0.7%  99.2%  100.0%
                 
  December 31, 2016 
(in thousands) 30-89 Days
Past Due
(accruing)
  90 Days &
Over or
nonaccrual
  Current  Total 
Commercial & industrial $22  $358  $427,890  $428,270 
Owner-occupied CRE  268   2,894   357,065   360,227 
AG production  -   9   34,758   34,767 
AG real estate  -   208   45,026   45,234 
CRE investment  -   12,317   183,562   195,879 
Construction & land development  -   1,193   73,795   74,988 
Residential construction  -   260   23,132   23,392 
Residential first mortgage  486   2,990   296,828   300,304 
Residential junior mortgage  200   56   91,075   91,331 
Retail & other  15   -   14,500   14,515 
Total loans $991  $20,285  $1,547,631  $1,568,907 
As a percent of total loans  0.1%  1.3%  98.6%  100.0%

may be assigned allocations for loss based on specific review of the weaknesses observed in the individual credits. Such loans are monitored by the loan review function to help 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

Modifications to Borrowers Experiencing Financial Difficulty:
On January 1, 2023, the weaknesses as one rated Substandard withCompany adopted ASU 2022-02, which eliminated the added characteristicaccounting guidance for TDRs by creditors and enhanced the disclosure requirements for certain loan modifications to borrowers experiencing financial difficulty. The following table presents the amortized cost of loans that such weaknesses make collection or liquidation in full highly questionable.

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were both experiencing financial difficulty and were modified during the three months ended March 31, 2023, aggregated by portfolio segment and type of modification.

(in thousands)Payment DelayTerm ExtensionInterest Rate ReductionTerm Extension & Interest Rate ReductionTotal% of Total Loans
Commercial & industrial$— $— $— $— $— — %
Owner-occupied CRE— — — — — — %
Agricultural110 — — — 110 0.01 %
CRE investment— — — — — — %
Construction & land development— — — — — — %
Residential first mortgage— — — — — — %
Total$110 $— $— $— $110 — %

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

The loans presented 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 probabletable above have had more than insignificant payment delays (which the Company will be unablehas defined as payment delays in excess of six months). These modified loans are closely monitored by the Company to collect all contractual principalunderstand the effectiveness of its modification efforts, and interest payments duesuch loans generally remain in nonaccrual status pending a sustained period of performance in accordance with the termsmodified terms.

As of March 31, 2023, there were no loans made to borrowers experiencing financial difficulty that were modified during the loan agreement. For determiningcurrent period and subsequently defaulted, and there were no commitments to lend additional funds to such debtors.
Troubled Debt Restructuring Disclosures Prior to Adoption of ASU 2022-02:
As of December 31, 2022, the adequacyCompany had restructured loans totaling $18 million, with a pre-modification balance of the ALLL, management defines impaired loans$24 million, all of which were also reflected 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 

loans. There were no originated impairedrestructured 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,modified during the third quarter a loan of $3.1 million was acquired, net of an initial $2.4 million non-accretable mark. Including these credit impaired loans acquired in the First Menasha merger and third quarter acquisition, total purchased credit impaired loans acquired in aggregate were initially recorded at a fair value of $43.6 million on their respective acquisition dates, net of an initial $34.4 million non-accretable mark and a zero accretable mark. At September 30, 2017, $12.3 million of the $43.6 million remain in impaired loans and $0.8 million of acquired loans have subsequently become impaired, bringing acquired impaired loans to $13.1 million.

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

Troubled Debt Restructurings

During the quarter ended September 30, 2017, 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 seven loans classified as troubled debt restructurings totaling $5.2 million. These seven loans had a combined premodification balance of $5.2 million. There were no other loans which were modified and classified as troubled debt restructurings at September 30, 2017. There were no loans classified as troubled debt restructurings during the previous twelve months2022 that subsequently defaulted, as of September 30, 2017. Loans whichand there were considered troubled debt restructurings by First Menasha and Baylake priorno commitments to acquisition are not requiredlend additional funds 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.

debtors.


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Note 7 – Goodwill Intangible Assets and MortgageOther Intangibles and 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 whichthat would impactaffect 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 also regularly monitors economic factors for potential impairment indications on the value of our franchise, stability of deposits, and the wealth client base, underlying our goodwill and other intangibles. Management concluded no impairment charge onwas indicated for the three months ended March 31, 2023 and the year ended December 31, 2022. A summary of goodwill orand other intangibles was required for 2016 or the first nine months of 2017.

24
as follows.

(in thousands)March 31, 2023December 31, 2022
Goodwill$367,387 $367,387 
Core deposit intangibles30,667 32,701 
Customer list intangibles2,223 2,350 
    Other intangibles32,890 35,051 
Goodwill and other intangibles, net$400,277 $402,438 

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 2022, 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 then acquisition date fair value, resulting in a $1.2 million gain in pre-tax earnings. See Note 2 for additional information on the acquisitions.

Charter acquisition.

Three Months EndedYear Ended
(in thousands)March 31, 2023December 31, 2022
Goodwill:
Goodwill at beginning of year$367,387 $317,189 
Acquisitions— 49,970 
Purchase accounting adjustment— 228 
Goodwill at end of period$367,387 $367,387 
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 2022, core deposit intangibles relatedincreased due to the First Menasha merger in the second quarter of 2017. The customer relationship intangible was increased $0.9 million in the third quarter of 2017 due to a modification to the contingent earn-out payment, fixing the previously variable earn-out payment on a portion of the purchase price. See Note 2 for additional information on the 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 

Charter acquisition.

Three Months EndedYear Ended
(in thousands)March 31, 2023December 31, 2022
Core deposit intangibles:
Gross carrying amount$60,724 $60,724 
Accumulated amortization(30,057)(28,023)
Net book value$30,667 $32,701 
Additions during the period$— $19,364 
Amortization during the period$2,034 $6,108 
Customer list intangibles:
Gross carrying amount$5,523 $5,523 
Accumulated amortization(3,300)(3,173)
Net book value$2,223 $2,350 
Amortization during the period$127 $508 
22


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

sheets. 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 chargeA summary of the changes in the mortgage servicing rights asset was recorded for 2016 or yearas follows.

Three Months EndedYear Ended
(in thousands)March 31, 2023December 31, 2022
Mortgage servicing rights asset:
MSR asset at beginning of year$13,080 $13,636 
Capitalized MSR204 2,327 
Amortization during the period(740)(2,883)
MSR asset at end of period$12,544 $13,080 
Valuation allowance at beginning of year$(500)$(1,200)
Reversals500 700 
Valuation allowance at end of period$— $(500)
MSR asset, net$12,544 $12,580 
Fair value of MSR asset at end of period$17,708 $17,215 
Residential mortgage loans serviced for others$1,620,150 $1,637,109 
Net book value of MSR asset to loans serviced for others0.77 %0.77 %
Loan servicing rights (“LSR”): The Company acquired an LSR asset in December 2021 which will be amortized over the estimated remaining loan service period. The Company does not expect to date 2017.

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add new loans to this servicing portfolio. A summary of the changes in the LSR asset were as follows.

Three Months EndedYear Ended
(in thousands)March 31, 2023December 31, 2022
Loan servicing rights asset:
LSR asset at beginning of year$11,039 $20,055 
Amortization during the period(552)(9,016)
LSR asset at end of period$10,487 $11,039 
Agricultural loans serviced for others$528,891 $538,392 

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

The following table shows the estimated future amortization expense for amortizing intangible assets and the servicing assets. The projections are based on existing asset balances, the current interest rate environment and prepayment speeds as of the September 30, 2017.March 31, 2023. 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 assetLSR asset
Year ending December 31,
2023 (remaining nine months)$5,555 $356 $1,672 $1,656 
20246,298 449 2,680 1,962 
20255,161 449 1,942 1,717 
20263,983 249 1,434 1,472 
20273,218 166 1,434 1,227 
20282,622 166 1,432 981 
Thereafter3,830 388 1,950 1,472 
Total$30,667 $2,223 $12,544 $10,487 


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Note 8 – Notes Payable

The Company had the following long-term notes payable (notesShort and Long-Term Borrowings

Short-Term Borrowings:
Short-term borrowings include any borrowing with an original maturitiesmaturity of one year or less. At March 31, 2023, short-term borrowings included $50 million of short-term FHLB advances due in September 2023 with a weighted average rate of 4.26%. At December 31, 2022, short-term borrowings included $317 million of short-term FHLB advances, comprised of $117 million due in January 2023 at a weighted average rate of 4.29% and $200 million due in September 2023 at a weighted average rate of 4.30%.
Long-Term Borrowings:
Long-term borrowings include any borrowing with an original maturity greater than one year):

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

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

(in thousands)March 31, 2023December 31, 2022
FHLB advances$5,000 $33,000 
Junior subordinated debentures39,928 39,720 
Subordinated notes152,520 152,622 
Total long-term borrowings$197,448 $225,342 
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 2025. The weighted average ratesrate of the FHLB advances were 1.65%was 1.55% at September 30, 2017March 31, 2023 and 1.17%1.09% 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 – 2022.

Junior Subordinated Debentures

At September 30, 2017 and December 31, 2016,: Each of 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. Interest on all debentures is current. Any applicable discounts (initially recordedissued 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 plus any accrued but unpaid interest.

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Note 9 – Junior Subordinated Debentures, continued

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

(1)The interest rate is 8.00% fixed.
(2)The debentures, assumed in April 2013 as the result of acquisition, have a floating rate of the three-month LIBOR plus 1.43%, adjusted quarterly. The interest rates were 2.75% and 2.39% as of September 30, 2017 and December 31, 2016, respectively.
(3)The debentures, assumed in April 2016 as a result of acquisition, have a floating rate of the three-month LIBOR plus 1.35%, adjusted quarterly. The interest rates were 2.69% and 2.35% as of September 30, 2017 and December 31, 2016, respectively.
(4)The debentures, assumed in April 2017 as the result of acquisition, have a floating rate of the three-month LIBOR plus 2.79%, adjusted quarterly. The interest rate was 4.11% as of September 30, 2017.

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

Note 10 – Interest on all debentures is current. Any applicable discounts (initially recorded to carry an acquired debenture at its then estimated fair value) are being accreted to interest expense over the remaining life of the debenture. All the junior subordinated debentures are currently callable and may be redeemed in part or in full, at par, plus any accrued but unpaid interest. At both March 31, 2023 and December 31, 2022, approximately $38 million of trust preferred securities qualify as Tier 1 capital.


Subordinated Notes

(the “Notes”): In 2015July 2021, the Company placed an aggregatecompleted the private placement of $12$100 million in fixed-to-floating rate subordinated notes due in 2031, with a fixed annual rate of 3.125% for the first five years, and will reset quarterly thereafter to the then current three-month Secured Overnight Financing Rate (“SOFR”) plus 237.5 basis points. The Notes due in private placements2031 are redeemable beginning July 15, 2026 and quarterly thereafter on any interest payment date.

In December 2021, Nicolet assumed two subordinated note issuances at a premium as the result of an acquisition. One issuance was $30 million in fixed-to-floating rate subordinated notes due in 2028, with certain accredited investors. All Notes were issued with 10-year maturities, have a fixed annual interest rate of 5% payable5.875% for the first five years, and will reset quarterly thereafter to the then current three-month LIBOR plus 2.88% The second issuance was $22 million in fixed-to-floating rate subordinated notes due in 2030, with a fixed annual interest rate of 7.00% for the first five years, and will reset quarterly thereafter to the then current SOFR plus 687.5 basis points. The Notes due in 2028 are callableredeemable beginning June 1, 2023, and quarterly thereafter on or afterany interest payment date, while the fifth anniversary of their respective issuances dates,Notes due in 2030 are redeemable beginning June 30, 2025, and quarterly thereafter on any interest payment date. All Notes qualify foras Tier 2 capital for regulatory purposes. At September 30,
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The following table shows the breakdown of junior subordinated debentures and subordinated notes.
As of March 31, 2023As of December 31, 2022
(in thousands)Maturity
Date
Interest
 Rate
Par
Unamortized Premium /(Discount) / Debt Issue Costs (1)

Carrying
Value
Interest
 Rate

Carrying
Value
Junior Subordinated Debentures:
Mid-Wisconsin Statutory Trust I (2)
12/15/20356.30 %$10,310 $(2,527)$7,783 6.20 %$7,734 
Baylake Capital Trust II (3)
9/30/20366.51 %16,598 (3,115)13,483 6.08 %13,424 
First Menasha Statutory Trust (4)
3/17/20347.70 %5,155 (476)4,679 7.53 %4,668 
County Bancorp Statutory Trust II (5)
9/15/20356.40 %6,186 (870)5,316 6.30 %5,277 
County Bancorp Statutory Trust III (6)
6/15/20366.56 %6,186 (928)5,258 6.46 %5,219 
Fox River Valley Capital Trust (7)
5/30/20336.40 %3,610 (201)3,409 6.40 %3,398 
Total$48,045 $(8,117)$39,928 $39,720 
Subordinated Notes:
Subordinated Notes due 20317/15/20313.13 %$100,000 $(681)$99,319 3.13 %$99,267 
County Subordinated Notes due 20286/1/20285.88 %30,000 49 30,049 5.88 %30,119 
County Subordinated Notes due 20306/30/20307.00 %22,400 752 23,152 7.00 %23,236 
Total$152,400 $120 $152,520 $152,622 
(1) Represents the remaining unamortized premium or discount on debt issuances assumed in acquisitions, and represents the unamortized debt issue costs for the debt issued directly by Nicolet.
(2) The debentures, assumed in April 2013 as the result of an acquisition, have a floating rate of three-month LIBOR plus 1.43%, adjusted quarterly.
(3) The debentures, assumed in April 2016 as a result of an acquisition, have a floating rate of three-month LIBOR plus 1.35%, adjusted quarterly.
(4) The debentures, assumed in April 2017 as the carryingresult of an acquisition, have a floating rate of three-month LIBOR plus 2.79%, adjusted quarterly.
(5) The debentures, assumed in December 2021 as the result of an acquisition, have a floating rate of three-month LIBOR plus 1.53%, adjusted quarterly.
(6) The debentures, assumed in December 2021 as the result of an acquisition, have a floating rate of three-month LIBOR plus 1.69%, adjusted quarterly.
(7) The debentures, assumed in December 2021 as the result of an acquisition, have a floating rate of 5-year swap rate plus 3.40%, which resets every five years.

Note 9 – Commitments and Contingencies
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, financial guarantees, and standby letters of credit. Such commitments may involve, to varying degrees, elements of credit risk in excess of amounts recognized on the consolidated balance sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and issuing letters of credit as they do for on-balance sheet financial instruments. See Note 6 for information on the allowance for credit losses-unfunded commitments.
A summary of the contract or notional amount of the Company’s exposure to off-balance sheet risk was as follows.
(in thousands)March 31, 2023December 31, 2022
Commitments to extend credit$1,850,215 $1,850,601 
Financial standby letters of credit23,246 26,530 
Performance standby letters of credit9,952 9,375 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract, and predominantly included commercial lines of credit with a term of one year or less. The commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Financial and performance standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Financial standby letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party, while performance standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party. Both of these guarantees are primarily issued to support public and private
25


borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds collateral, which may include accounts receivable, inventory, property, equipment, and income-producing properties, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third-party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount. If the commitment is funded, the Company would be entitled to seek recovery from the customer.
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 (“mortgage derivatives”) and the contractual amounts were $18 million and $17 million, respectively, at March 31, 2023. 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 totaled $9 million and $9 million, respectively, at December 31, 2022. The net fair value of these subordinated notesmortgage derivatives combined was $11.9 million.

The $180,000 debt issuance costs associated with the $12a net gain of $0.1 million Notes are being amortized on a straight line basis over the first five years, representing the no-call periods, as additional interest expense. As of September 30, 2017at both March 31, 2023 and December 31, 2016, respectively, $88,0002022.

Nicolet is party to various pending and $115,000,threatened claims and legal proceedings arising in the normal course of unamortized debt issuance costs remainbusiness activities, some of which may involve claims for substantial amounts. Although Nicolet has developed policies and are reflected asprocedures to minimize legal noncompliance and the impact of claims and other proceedings and endeavored to procure reasonable amounts of insurance coverage, litigation and regulatory actions present an ongoing risk. With respect to all such claims, Nicolet continuously assesses its potential liability based on the allegations and evidence available. If the facts indicate that it is probable that Nicolet will incur a reduction toloss and the carrying valueamount of such loss can be reasonably estimated, Nicolet will establish an accrual for the probable loss. For matters where a loss is not probable, or the amount of the outstanding debt.

27
loss cannot be reasonably estimated, Nicolet does not establish an accrual.

Future developments could result in an unfavorable outcome for or resolution of any one or more of the legal proceedings in which Nicolet is a defendant, which may be material to Nicolet’s business or consolidated results of operations or financial condition for a particular fiscal period or periods. Although it is not possible to predict the outcomes of any of these legal proceedings or the range of possible loss, if any, based on the most recent information available, advice of counsel and available insurance coverage, if applicable, management believes that any liability resulting from such proceedings would not have a material adverse effect on our financial position or results of operations.

Note 1110 – 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 certain 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. TheseObservable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect assumptions of the reporting entity about how market participants would price the asset or liability based on the best information available under the circumstances. The three fair value 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.

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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
March 31, 2023
U.S. Treasury securities$186,108 $— $186,108 $— 
U.S. government agency securities9,970 — 9,970 — 
State, county and municipals397,448 — 395,579 1,869 
Mortgage-backed securities311,621 — 310,638 983 
Corporate debt securities118,029 — 112,726 5,303 
Securities AFS$1,023,176 $— $1,015,021 $8,155 
Other investments (equity securities)$3,912 $3,912 $— $— 
December 31, 2022
U.S. Treasury securities$183,830 $— $183,830 $— 
U.S. government agency securities2,100 — 2,100 — 
State, county and municipals398,188 — 396,315 1,873 
Mortgage-backed securities200,932 — 199,951 981 
Corporate debt securities132,568 — 127,269 5,299 
Securities AFS$917,618 $— $909,465 $8,153 
Other investments (equity securities)$4,376 $4,376 $— $— 
The following is a description of the valuation methodologies used by the Company for the Securities AFSassets and liabilities 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. Treasury securities, andU.S. government agency securities, mortgage-backed securities, obligations of state, county and municipals.municipals, and certain corporate debt securities. Finally, in certain cases where there is limited activity or less transparency around inputs to the estimated fair value, investments are classified within Level 3 of the hierarchy. Examples of these include private municipal bonds and corporate debt securities, which includeare primarily trust preferred security investments.investments, as well as certain municipal bonds and mortgage-backed securities. At September 30, 2017March 31, 2023 and December 31, 2016,2022, 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

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

Note 11 – Fair Value Measurements, continued

Three Months EndedYear Ended
Level 3 Fair Value Measurements:March 31, 2023December 31, 2022
Balance at beginning of year$8,153 $8,065 
Acquired balance— 750 
Maturities / Paydowns— (451)
Unrealized gain / (loss)(211)
Balance at end of period$8,155 $8,153 
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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
March 31, 2023
Collateral dependent loans$31,220 $— $— $31,220 
Other real estate owned (“OREO”)1,975 — — 1,975 
MSR asset12,544 — — 12,544 
December 31, 2022
Collateral dependent loans$30,951 $— $— $30,951 
OREO1,975 — — 1,975 
MSR asset12,580 — — 12,580 
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 impairmentestimated fair value is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, the estimated fair value of the underlying collateral with consideration for collateral-dependent loans,estimated selling costs if satisfaction of the loan depends on the sale of the collateral, or the estimated liquidity of the note. For OREO, the fair value is based upon the estimated fair value of the underlying collateral adjusted for the expected costs to sell.

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.

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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 servicing 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.

March 31, 2023
(in thousands)Carrying
Amount
Estimated
Fair Value
Level 1Level 2Level 3
Financial assets:
Cash and cash equivalents$114,180 $114,180 $114,180 $— $— 
Certificates of deposit in other banks11,293 11,181 — 11,181 — 
Securities AFS1,023,176 1,023,176 — 1,015,021 8,155 
Other investments, including equity securities57,482 57,482 3,912 42,982 10,588 
Loans held for sale4,962 5,057 — 5,057 — 
Loans, net6,161,320 5,962,242 — — 5,962,242 
MSR asset12,544 17,708 — — 17,708 
Accrued interest receivable21,796 21,796 21,796 — — 
Financial liabilities:
Deposits$6,928,579 $6,918,140 $— $— $6,918,140 
Short-term borrowings50,000 50,000 — 50,000 — 
Long-term borrowings197,448 188,203 — 4,855 183,348 
Accrued interest payable4,219 4,219 4,219 — — 
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December 31, 2022
(in thousands)Carrying
Amount
Estimated
Fair Value
Level 1Level 2Level 3
Financial assets:
Cash and cash equivalents$154,723 $154,723 $154,723 $— $— 
Certificates of deposit in other banks12,518 12,407 — 12,407 — 
Securities AFS917,618 917,618 — 909,465 8,153 
Securities HTM679,128 623,352 — 623,352 — 
Other investments, including equity securities65,286 65,286 4,376 52,093 8,817 
Loans held for sale1,482 1,529 — 1,529 — 
Loans, net6,118,670 5,863,570 — — 5,863,570 
MSR asset12,580 17,215 — — 17,215 
Accrued interest receivable21,275 21,275 21,275 — — 
Financial liabilities:
Deposits$7,178,921 $7,172,779 $— $— $7,172,779 
Short-term borrowings317,000 317,000 317,000 — — 
Long-term borrowings225,342 220,513 — 33,001 187,512 
Accrued interest payable4,265 4,265 4,265 — — 
The valuation techniques, or based on judgments regarding future expected loss experience, current economic conditions, risk characteristics ofmethodologies for the financial instruments or other factors. Those techniquesdisclosed in the above table are significantly affected bydescribed in Note 18, Fair Value Measurements, in the assumptions used, includingCompany’s Annual Report on Form 10-K for the discount rate and estimate of future cash flows. Subsequent changes in assumptions could significantly affect the estimates.

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year ended December 31, 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 (the “Bank”), in northeasternWisconsin, Michigan, and central WisconsinMinnesota. In this Quarterly Report on Form 10-Q, unless the context indicates otherwise, all references to “we,” “us” 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“our” refer to the April 28, 2017 acquisition of First Menasha Bancshares, Inc. (“First Menasha”), which added assets of $480 million (about 20% of Nicolet’s pre-merger asset size), loans of $351 million, deposits of $375 million, core deposit intangible of $4 million and goodwill of $41 million (as of the consummation date and based on estimated fair values), for a total purchase price that included the issuance of $62 million of common equity (or 1.3 million shares) and $19 million of cash, and which is further described in Note 2, “Acquisitions” of the notes to unaudited consolidated financial statements. In particular, organic loan growth has been strong since year end 2016, with loans, excluding $351 million of loans at acquisition of First Menasha, up $131 million or 8%.

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

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

Company.

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 are neither statements of historical fact nor assurance of future performance and generally may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “should,” “will,” “intend,” or similar expressions. Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of various transactions or events, and statements about our future performance, operations, products and services, and should be viewed with caution. 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 inimplied or anticipated by the statements. Except as required by law, we expressly disclaim any obligations to publicly update any forward-looking statements contained in this document. Thesewhether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise. Important factors, many of which are beyond Nicolet’s control, that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements, in addition to those described in detail under Item 1A, “Risk Factors” of Nicolet’s 2022 Annual Report on Form 10-K 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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operating, legal and regulatory risks, including the effects of legislative or regulatory developments affecting the financial industry generally or Nicolet specifically;

our ability to maintain liquidity, primarily through deposits, in light of recent events in the banking industry;
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;
potential difficulties in identifying and integrating the operations of future acquisition targets with those of Nicolet;
the impact of purchase accounting with respect to our merger activities, or any change in the assumptions used regarding the assets purchased and liabilities assumed to determine their fair value;
cybersecurity risks and the vulnerability of our network and online banking portals, and the systems or parties with whom we contract, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches that could adversely affect our business and financial performance or reputation;
changes in accounting standards, rules and interpretations and the related impact on Nicolet’s financial statements;
compliance or operational risks related to new products, services, ventures, or lines of business, if any, that Nicolet may pursue or implement;
changes in monetary and tax policies;
changes occurring in business conditions and inflation and the possibility of a recession;
our ability to attract and retain key personnel;
examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for credit losses, write-down assets, or take other actions;
risks associated with actual or potential information gatherings, investigations or legal proceedings by customers, regulatory agencies or others;
the potential effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as weather events, natural disasters, epidemics and pandemics (including COVID-19), war or terrorist activities, disruptions in our customers’ supply chains, disruptions in transportation, essential utility outages or trade disputes and related tariffs;
each of the factors and risks under Item 1A, “Risk Factors” of Nicolet’s 2022 Annual Report on Form 10-K and in subsequent filings we make with the SEC; 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, 2017March 31, 2023 and December 31, 20162022 and results of operations for the three and nine-monththree-month periods ended September 30, 2017March 31, 2023 and 2016.2022. 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 2022 Annual Report on Form 10-K for the year ended December 31, 2016.

Evaluation of10-K.


Our financial performance and average balances between 2017 and 2016 wascertain balance sheet line items were impacted in general fromby the timing and sizessize of the 2017 and 2016 acquisitions. Since the balances and resultsour acquisition of operations of the acquired entities are appropriately not included in the accompanying consolidated financial statements until their consummation dates,Charter Bankshares, Inc. (“Charter”) on August 26, 2022. Certain income statement results, and average balances for 2017 included full contributions from the 2016 acquisitions and no orrelated ratios include partial contributions from Charter from the 2017 acquisition. Similarlyacquisition date. Additional information on our acquisition activity is included in Note 2, “Acquisition” in the Notes to Unaudited Consolidated Financial Statements, under Part I, Item 1.

Economic Outlook and Recent Industry Developments
The current economic outlook is highly uncertain. A strong labor market is contributing to continuing positive economic activity and demand for 2016goods and services; however, certain sectors are beginning to show signs of weakening. Real estate and manufacturing are slowing. Unemployment rates have not increased despite the significant increase in interest rates by the Federal Reserve to combat inflation (from a target range of 0.00%-0.25% in early March 2022 to 4.75%-5.00% at the end of March 2023). Many economists are anticipating a mild recession over the next year, but the long-term outlook is still positive as entrepreneurial activity remains strong.

During first quarter 2023, the banking industry experienced significant volatility with high-profile bank failures and industry wide concerns related to liquidity, deposit outflows, unrealized securities losses, and eroding consumer confidence in the banking system. Despite these negative industry developments, Nicolet strengthened its balance sheet and maintained a solid liquidity position. During first quarter 2023, the Company sold $500 million in held to maturity securities and used the net proceeds to reduce wholesale funding, which repositioned the balance sheet for future growth. This reduction in wholesale funding also enhanced the Company’s already strong liquidity position.


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Table 1: Earnings Summary and Selected Financial Data
At or for the Three Months Ended
(In thousands, except per share data)3/31/202312/31/20229/30/20226/30/20223/31/2022
Results of operations:
Net interest income$56,721 $68,092 $62,990 $55,084 $53,795 
Provision for credit losses3,090 1,850 8,600 750 300 
Noninterest income(21,844)14,846 13,000 14,131 15,943 
Noninterest expense44,875 43,989 42,567 36,538 37,550 
Income (loss) before income tax expense(13,088)37,099 24,823 31,927 31,888 
Income tax expense (benefit)(4,190)9,498 6,313 7,942 7,724 
Net income (loss)$(8,898)$27,601 $18,510 $23,985 $24,164 
Earnings (loss) per common share:     
Basic$(0.61)$1.88 $1.33 $1.79 $1.77 
Diluted$(0.61)$1.83 $1.29 $1.73 $1.70 
Common Shares:     
Basic weighted average14,694 14,685 13,890 13,402 13,649 
Diluted weighted average14,694 15,110 14,310 13,852 14,215 
Outstanding (period end)14,698 14,691 14,673 13,407 13,457 
Period-End Balances:     
Loans$6,223,732 $6,180,499 $5,984,437 $4,978,654 $4,683,315 
Allowance for credit losses - loans62,412 61,829 60,348 50,655 49,906 
Total assets8,192,354 8,763,969 8,895,916 7,370,252 7,320,212 
Deposits6,928,579 7,178,921 7,395,902 6,286,266 6,231,120 
Stockholders’ equity (common)961,792 972,529 938,463 839,387 836,310 
Book value per common share65.44 66.20 63.96 62.61 62.15 
Tangible book value per common share (2)
38.20 38.81 36.21 37.49 37.03 
Financial Ratios: (1)
     
Return on average assets(0.42)%1.26 %0.93 %1.32 %1.30 %
Return on average common equity(3.72)11.47 8.25 11.48 11.38 
Return on average tangible common equity (2)
(6.34)19.85 13.93 19.21 18.75 
Stockholders’ equity to assets11.74 11.10 10.55 11.39 11.42 
Tangible common equity to tangible assets (2)
7.21 6.82 6.26 7.15 7.14 
Reconciliation of Non-GAAP Financial Measures:
Adjusted net income (loss) reconciliation: (3)
Net income (loss) (GAAP)$(8,898)$27,601 $18,510 $23,985 $24,164 
Adjustments:
Provision expense (4)
2,340 — 8,000 — — 
Assets (gains) losses, net38,468 (260)46 (1,603)(1,313)
Merger-related expense163 492 519 555 98 
Adjustments subtotal40,971 232 8,565 (1,048)(1,215)
Tax on Adjustments (25% effective tax rate)10,243 58 2,141 (262)(304)
Adjustments, net of tax30,728 174 6,424 (786)(911)
Core banking operations / Adjusted net income (Non-GAAP)$21,830 $27,775 $24,934 $23,199 $23,253 
Adjusted diluted earnings per common share (Non-GAAP)$1.45 $1.84 $1.74 $1.67 $1.64 
Tangible assets: (2)
Total assets$8,192,354 $8,763,969 $8,895,916 $7,370,252 $7,320,212 
Goodwill and other intangibles, net400,277 402,438 407,117 336,721 338,068 
Tangible assets$7,792,077 $8,361,531 $8,488,799 $7,033,531 $6,982,144 
Tangible common equity: (2)
Stockholders’ equity (common)$961,792 $972,529 $938,463 $839,387 $836,310 
Goodwill and other intangibles, net400,277 402,438 407,117 336,721 338,068 
Tangible common equity$561,515 $570,091 $531,346 $502,666 $498,242 
Tangible average common equity: (2)
Average stockholders’ equity (common)$970,108 $954,970 $890,205 $837,975 $861,319 
Average goodwill and other intangibles, net401,212 403,243 363,211 337,289 338,694 
Average tangible common equity$568,896 $551,727 $526,994 $500,686 $522,625 
(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 are non-GAAP financial measures that exclude goodwill and other intangibles, net. These financial ratios have been included as management considers them to be useful metrics with which to analyze and evaluate our financial condition and capital strength. See section “Non-GAAP Financial Measures” below.
(3) The adjusted net income statement/ core banking operations measure is a non-GAAP financial measure that provides information that management believes is useful to investors in understanding our operating performance and average balance results,trends and also aids investors in the 2016 acquisitions provided nocomparison of our financial performance to partial contributionsthe financial performance of peer banks. See section “Non-GAAP Financial Measures” below.
(4) Provision expense for 2023 is attributable to the expected loss on our investment in Signature Bank sub debt, and the 2017provision expense for 2022 is attributable to the Day 2 allowance from the acquisition provided no contribution.

The inclusion of Charter.

32



Non-GAAP Financial Measures
We identify “tangible book value per common share,” “return on average tangible common equity,” “tangible common equity to tangible assets” “adjusted net income / core banking operations,” and “adjusted diluted earnings per common share” as “non-GAAP financial measures.” In accordance with the Baylake balance sheet (at about 83% of Nicolet’s then pre-merger asset size) and operational results for approximately eight months in 2016 (and approximately five monthsSEC’s rules, we identify certain financial measures as non-GAAP financial measures if such financial measures exclude or include amounts in the nine month period ended September 30, 2016) analytically explains most of the increasedirectly comparable measures calculated and presented 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 monthsaccordance with generally accepted accounting principles (“GAAP”) in 2017 analytically explains a portion of the increase in certain average balances and income statement line items between 2017 and 2016 periods. The 2016 financial advisory business acquisition primarily impacts the brokerage fee income, personnel expense and certain other expense line items. Last, the 2016 and 2017 acquisitions impacted pre-tax net income by inclusion of non-recurring direct merger expenses of approximately $1.3 million in 2016 ($0.4 million, $0.4 million, $0.1 million and $0.4 million in first through fourth quarters, respectively) and $0.5 million in 2017 ($0.2 million and $0.3 millioneffect in the firstUnited States in our statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and second quarters, respectively), alongother statistical measures, ratios or statistical measures calculated using exclusively financial measures calculated in accordance with a $1.7 million lease termination charge in second quarter 2016 relatedGAAP.
Management believes that the presentation of these non-GAAP financial measures (a) are important metrics used to analyze and evaluate our financial condition and capital strength and provide important supplemental information that contributes to a Nicolet branch closed concurrent withproper understanding of our operating performance and trends, (b) enables a more complete understanding of factors and trends affecting our business, and (c) allows investors to compare our financial performance to the Baylake merger.

Nicolet remains focused on gaining efficiencies from its increased scale fromfinancial performance of our peers and to evaluate our performance in a manner similar to management, the acquisitions,financial services industry, bank stock analysts, and bank regulators. Management uses non-GAAP measures as well as on organic growthfollows: in the preparation of our operating budgets, monthly financial performance reporting, and in our expanded marketspresentation to investors of our performance. However, we acknowledge that these non-GAAP financial measures have a number of limitations. Limitations associated with non-GAAP financial measures include the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently. These disclosures should not be considered an alternative to our GAAP results. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is presented in brokerage services.

the table above.

Performance Summary

Nicolet reportedrecognized a net incomeloss of $24.0$9 million for the nine months ended September 30, 2017, a 94% increase over $12.4 million for the first nine months of 2016. Net income available to common shareholders was $24.0 million, or $2.45(or loss per diluted common share of $0.61) for the first nine months of 2017. Comparatively, after $633,000 of preferred stock dividends,quarter 2023, compared to net income available to common shareholders was $11.7of $28 million or $1.67(or earnings per diluted common share of $1.83) for fourth quarter 2022, and net income of $24 million (or earnings per diluted common share of $1.70) for first quarter 2022.
Core banking operations (or adjusted net income (Non-GAAP)) earned $22 million on growth in loans and wealth management fee revenue. Asset quality continued to be very good as nonperforming assets were 0.50% of total assets. Net income reflected non-core items and the related tax effect of each, including U.S. Treasury securities sale loss, expected loss (provision expense) on the Signature Bank sub debt investment (acquired in an acquisition), merger-related expenses, Day 2 credit provision expense required under the CECL model, as well as gains / (losses) on other assets and investments. These non-core items negatively impacted earnings per diluted common share $2.06 for first nine monthsquarter 2023 and $0.01 for fourth quarter 2022, and positively impacted earnings per diluted common share $0.06 for first quarter 2022.
On March 7, 2023, Nicolet executed the sale of 2016. Beginning March 1, 2016,$500 million (par value) U.S. Treasury held to maturity securities for a pre-tax loss of $38 million or an after-tax loss of $28 million to reposition the annual dividend rate on preferred stock movedbalance sheet for future growth. The $500 million portfolio yielded approximately 88 bps with scheduled maturities in 2024 and 2025 (or average duration of 2 years). Proceeds from 1%the sale were used to 9% in accordancereduce existing FHLB borrowings with the contractual terms. Nicolet redeemed its outstanding preferred stockremainder held in full in September 2016, explaininginvestable cash. The following table summarizes the difference in preferred stock dividends between the nine-month periods.

The results for the first nine monthsestimated annual impact of 2017 include full contributions from the 2016 acquisitions and five months from First Menasha, while the comparative 2016 period includes approximately five months from the 2016 acquisitions and nothing from First Menasha.

this balance sheet repositioning.
·Net
Sale Metrics$ in MillionsAssumptions
Loss on sale of U.S.Treasury securities$(37,723)Sale of $500 million U.S. Treasury securities yielding 88 bps
Lost interest from U.S. Treasury securities$(4,380)Assumes $500 million at 88 bps
Lower interest expense on FHLB borrowings17,128 Assumes $377 million at 456 bps (at time of sale)
Interest income was $72.2from investable cash3,905 Assumes $83 million for the first nine monthsat 465 bps (at time 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 acquiredsale)
Projected net interest-earning assets albeit at lower yields, as well as organic growth), and net favorable rate variances, largelyimpact 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.repositioning$16,653 

Estimated earn back (in years)352.26

As a result of the sale of securities previously classified as held to maturity, the remaining unsold portfolio of held to maturity securities, with a book value of $177 million, was reclassified to available for sale with a carrying value of approximately $157 million. The unrealized loss on this portfolio of $20 million increased the balance of accumulated other comprehensive loss (AOCI) $15 million, net of the deferred tax effect, and is subject to future market changes.

·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%.
At March 31, 2023, assets were $8.2 billion, a decrease of $572 million (7%) from December 31, 2022, mostly in investment securities due to the balance sheet repositioning. Compared to March 31, 2022, assets increased $872 million (12%) due to the acquisition of Charter as well as strong organic loan growth.
33


At March 31, 2023, loans were $6.2 billion, an increase of $43 million (3% annualized) from December 31, 2022. Compared to March 31, 2022, loans increased $1.5 billion (33%), largely due to the Charter acquisition and strong organic loan growth. For additional information regarding loans, see “BALANCE SHEET ANALYSIS — Loans.”
Total deposits were $6.9 billion at March 31, 2023, down $250 million from December 31, 2022, mostly in noninterest-bearing demand deposits. Compared to March 31, 2022, deposits increased $697 million (11%), largely due to the Charter acquisition. For additional information regarding deposits, see “BALANCE SHEET ANALYSIS – Deposits.”
The increase between the nine-month periods was primarily due to a larger operating base, attributable to the acquisitions. Personnel expense accounted for the majority of the increase in total expense, up $7.7 million or 31% over the first nine months of 2016, commensurate with the 32% increase in average full time equivalent employees for the comparable periods.

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

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

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

Net Interest Income

Nicolet’s earnings are substantially dependent on net interest income.margin was 2.91% for first quarter 2023, 32 bps lower than the comparable 2022 period. The favorable increase in the earning asset yield of 101 bps, was more than offset by a 195 bps increase in the cost of funds, and the net free funds improved 62 bps. Net interest income is the primary source of Nicolet’s revenue and is the difference betweenincreased $2.9 million (5%) over first quarter 2022, including a $29.5 million increase in 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 impactedoffset by the sensitivity of the balance sheet to changesa $26.5 million increase 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 million for the first nine months of 2017 and 2016, respectively, resulting in taxable equivalentexpense. For additional information regarding net interest income, see “INCOME STATEMENT ANALYSIS — Net Interest Income.”

Noninterest income was a negative $21.8 million for first quarter 2023, a $37.8 million unfavorable change compared to first quarter 2022. Excluding net asset gains (losses), noninterest income for first quarter 2023 was $16.6 million, a $2.0 million increase over first quarter 2022. For additional information regarding noninterest income, see “INCOME STATEMENT ANALYSIS — Noninterest Income.”
Noninterest expense was $44.9 million for first quarter 2023, an increase of $74.0$7.3 million and $49.4(20%) over first quarter 2022. Personnel costs increased $3.1 million respectively.

Taxable equivalent(15%), while non-personnel expenses combined increased $4.2 million (26%) compared to first quarter 2022. For additional information regarding noninterest expense, see “INCOME STATEMENT ANALYSIS — Noninterest Expense.”


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.


34


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 Three Months Ended March 31,
20232022
(in thousands)Average
Balance
InterestAverage
Yield/Rate
Average
Balance
InterestAverage
Yield/Rate
ASSETS
Interest-earning assets
Commercial-based loans$5,145,341 $65,512 5.09 %$3,920,744 $43,197 4.41 %
Retail-based loans1,056,439 13,674 5.18 %768,040 8,137 4.24 %
    Total loans, including loan fees (1)(2)
6,201,780 79,186 5.11 %4,688,784 51,334 4.38 %
Investment securities:
Taxable1,224,395 4,961 1.63 %1,386,593 5,127 1.48 %
Tax-exempt (2)
284,140 2,285 3.22 %189,031 1,031 2.18 %
        Total investment securities1,508,535 7,246 1.93 %1,575,624 6,158 1.57 %
Other interest-earning assets120,275 1,536 5.11 %446,783 817 0.73 %
Total non-loan earning assets1,628,810 8,782 2.16 %2,022,407 6,975 1.38 %
Total interest-earning assets7,830,590 $87,968 4.49 %6,711,191 $58,309 3.48 %
Other assets, net740,033 808,445 
Total assets$8,570,623 $7,519,636 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings$888,979 $2,365 1.08 %$821,452 $105 0.05 %
Interest-bearing demand985,778 3,339 1.37 %1,052,076 701 0.27 %
Money market accounts (“MMA”)1,847,701 11,190 2.46 %1,540,506 323 0.09 %
Core time deposits602,882 2,693 1.81 %595,864 508 0.35 %
Total interest-bearing core deposits4,325,340 19,587 1.84 %4,009,898 1,637 0.17 %
Brokered deposits566,282 5,350 3.83 %459,460 555 0.49 %
Total interest-bearing deposits4,891,622 24,937 2.07 %4,469,358 2,192 0.20 %
Other interest-bearing liabilities499,485 5,718 4.58 %214,557 1,931 3.60 %
Total interest-bearing liabilities5,391,107 30,655 2.30 %4,683,915 4,123 0.35 %
Noninterest-bearing demand2,168,640 1,923,186 
Other liabilities40,768 51,216 
Stockholders’ equity970,108 861,319 
Total liabilities and stockholders’ equity$8,570,623 $7,519,636 
Net interest income and rate spread$57,313 2.19 %$54,186 3.13 %
Tax-equivalent adjustment & net free funds592 0.72 %391 0.10 %
Net interest income and net interest margin$56,721 2.91 %$53,795 3.23 %

(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.

35


Table 2: Year-To-Date3: Volume/Rate Variance

Comparison - Tax-Equivalent Basis

For the Three Months Ended March 31, 2023
Compared to March 31, 2022:
Increase (Decrease) Due to Changes in
(in thousands)VolumeRate
Net (1)
Interest-earning assets
Commercial-based loans$14,894 $7,421 $22,315 
Retail-based loans3,481 2,056 5,537 
    Total loans, including loan fees (2) (3)
18,375 9,477 27,852 
Investment securities:
Taxable(1,243)1,077 (166)
Tax-exempt (3)
646 608 1,254 
    Total investment securities(597)1,685 1,088 
Other interest-earning assets(100)819 719 
 Total non-loan earning assets(697)2,504 1,807 
Total interest-earning assets$17,678 $11,981 $29,659 
Interest-bearing liabilities
Savings$$2,251 $2,260 
Interest-bearing demand(41)2,679 2,638 
MMA78 10,789 10,867 
Core time deposits2,179 2,185 
    Total interest-bearing core deposits52 17,898 17,950 
Brokered deposits158 4,637 4,795 
Total interest-bearing deposits210 22,535 22,745 
Other interest-bearing liabilities3,143 644 3,787 
Total interest-bearing liabilities3,353 23,179 26,532 
Net interest income$14,325 $(11,198)$3,127 
(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)Nonaccrual loans and loans held for sale are included in the nine months ended September 30, 2017 versusdaily average loan balances outstanding.
(3)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 nine months ended September 30, 2016 follows:

  Increase (decrease)
Due to Changes in
 
(in thousands) Volume  Rate  Net 
Earning assets            
             
Loans(1)(2) $22,613  $1,130  $23,743 
Investment securities            
Taxable  1,382   (28)  1,354 
Tax-exempt(2)  752   250   1,002 
Other interest-earning assets  (234)  464   230 
             
Total interest-earning assets $24,513  $1,816  $26,329 
             
Interest-bearing liabilities            
Savings deposits $66  $39  $105 
Interest-bearing demand  421   (141)  280 
MMA  200   550   750 
Core CDs and IRAs  234   (323)  (89)
Brokered deposits  525   (183)  342 
             
Total interest-bearing deposits  1,446   (58)  1,388 
Other interest-bearing liabilities  412   (84)  328 
             
Total interest-bearing liabilities  1,858   (142)  1,716 
Net interest income $22,655  $1,958  $24,613 

(1)Nonaccrual loans are included in the daily average loan balances outstanding.
(2)The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 35% and adjusted for the disallowance of interest expense.

38
disallowance of interest expense.

Table 3: Quarterly Net Interest Income Analysis

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

(1)Nonaccrual loans are included in the daily average loan balances outstanding.
(2)The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 35% and adjusted for the disallowance of interest expense.

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Table 4: Quarterly Volume/Rate Variance

Comparison

The Federal Reserve raised short-term interest rates a total of 425 bps during 2022, increasing the three months ended September 30, 2017 versus the three months ended September 30, 2016 follows:

  Increase (decrease)
Due to Changes in
 
(in thousands) Volume  Rate  Net 
Earning assets            
             
Loans (1) (2) $6,462  $(180) $6,282 
Investment securities            
Taxable  182   30   212 
Tax-exempt(2)  52   86   138 
Other interest-earning assets  (144)  200   56 
             
Total interest-earning assets $6,552  $136  $6,688 
             
Interest-bearing liabilities            
Savings deposits $17  $52  $69 
Interest-bearing demand  103   204   307 
MMA  25   417   442 
Core CDs and IRAs  (7)  19   12 
Brokered deposits  228   (44)  184 
             
Total interest-bearing deposits  366   648   1,014 
Other interest-bearing liabilities  143   15   158 
             
Total interest-bearing liabilities  509   663   1,172 
Net interest income $6,043  $(527) $5,516 

(1)Nonaccrual loans are included in the daily average loan balances outstanding.
(2)The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 35% and adjusted for the disallowance of interest expense.

Table 5: Interest Rate Spread, Margin and Average Balance Mix — Taxable Equivalent Basis

  Nine Months Ended September 30, 
  2017  2016 
(in thousands) Average
Balance
  % of
Earning
Assets
  Yield/Rate  Average
Balance
  % of
Earning
Assets
  Yield/Rate 
Total loans $1,842,695   80.4%  5.26% $1,274,405   78.0%  5.13%
Securities and other earning assets  448,893   19.6%  2.32%  358,410   22.0%  1.95%
Total interest-earning assets $2,291,588   100.0%  4.69% $1,632,815   100.0%  4.44%
                         
Interest-bearing liabilities $1,721,362   75.1%  0.56% $1,248,032   76.4%  0.58%
Noninterest-bearing funds, net  570,226   24.9%      384,783   23.6%    
Total funds sources $2,291,588   100.0%  0.56% $1,632,815   100.0%  0.43%
Interest rate spread          4.13%          3.86%
Contribution from net free funds          0.14%          0.13%
Net interest margin          4.27%          3.99%

Taxable-equivalentFederal Funds rate to a range of 4.25% to 4.50% as of December 31, 2022. Additional increases totaling 50 bps were made in first quarter 2023, resulting in a Federal Funds range of 4.75% to 5.00% as of March 31, 2023.

Tax-equivalent net interest income was $74.0 million and $49.4$57 million for first quarter 2023, an increase of $3 million (6%) over first quarter 2022). The $3 million increase in tax-equivalent net interest income was attributable to net favorable volumes (which added $14 million to net interest income, mostly from the nine months of 2017Charter acquisition and 2016, respectively, up $24.6 million or 50%, with $22.7solid loan growth) and net unfavorable rates (which decreased net interest income $11 million from net favorable volumehigher deposit costs and mix variances (duethe lag in repricing the loan portfolio to current market interest rates).
Average interest-earning assets increased to $7.8 billion, up $1.1 billion (17%) over the comparable 2022 period, primarily due to the additiontiming of acquired netthe acquisition of Charter. Between the comparable three-month periods, average loans increased $1.5 billion (32%), mostly due to timing of the Charter acquisition (which added loans of $827 million at acquisition) and strong organic loan growth throughout 2022. Average investment securities decreased $67 million between the comparable three-month periods, while other interest-earning assets as well as organic growth), and $1.9declined $327 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 variancesmostly due to lower cost funding (largely from lower-costing Baylake deposits acquired, offset partly by higher-costing First Menasha deposits acquired,cash. As a result, the mix of average interest-earning assets shifted to 79% loans, 19% investments and 2% other interest-earning assets (mostly cash) for first quarter 2023, compared to 70%, 23% and 7%, respectively, for first quarter 2022.
Average interest-bearing liabilities were $5.4 billion for first quarter 2023, an increase in select deposit rates that began in July 2017,of $707 million (15%) over first quarter 2022, primarily due to the timing of the acquisition of Charter. Average interest-bearing core deposits increased $315 million and general rate pressures influenced by a 75 bps increase inaverage brokered deposits increased $107 million between the federal funds rate since January 1, 2016).

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comparable three-month periods, reflecting the impact of the Charter acquisition and brokered funding to support the strong loan growth. Other interest-bearing liabilities increased $285 million between the comparable first quarter periods, partly due to wholesale funding acquired with Charter and partly due to FHLB borrowings to support the strong loan growth. The taxable-equivalent net interest marginmix of average interest-bearing liabilities was 4.27%80% core deposits, 11% brokered deposits and 9% wholesale funding for the first nine months of 2017, up 28 bps versusquarter 2023, compared to 86%, 10%, and 4%, respectively, for the first nine months of 2016. quarter 2022.

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The interest rate spread increased 27decreased 94 bps between the comparable first quarter periods, with a favorable increaseas our liabilities have repriced faster than our assets in the earningrapidly rising interest rate environment. The interest-earning asset yield (up 25increased 101 bps to 4.69%4.49% for the first ninethree months of 2017),2023, primarily due to the changing mix of interest-earning assets (mostly the reduction in cash noted above). The loan yield improved 73 bps to 5.11% between the comparable three-month periods, largely due to the repricing of new and an improvementrenewed loans in a rising interest rate environment, while the yield on investment securities increased 36 bps to 1.93%. The cost of funds (down 2increased 195 bps to 0.56%2.30% for first quarter 2023, also reflecting the first nine monthsrising interest rate environment, a migration of 2017)customer deposits into higher rate deposit products, and a shift in the mix of interest-bearing liabilities (mostly the increase in wholesale funding noted above). The contribution from net free funds increased by 1 bp,62 bps, mostly due to lower costs on the funding side of the balance sheet. Since January 1, 2016, the Federal Reserve raised short-term interest rates by 75 bps to 125 bps as of September 30, 2017 (up 25 bps in each of December 2016, March 2017 and June 2017). These increases have impacted the rate earned on cash and the cost of shorter-term deposits and borrowings, but have not significantly influenced rates further out on the yield curve; and thus, have only minimally impacted new investment yields or new loan pricing. Additionally, while both 2017 and 2016 periods are experiencing favorable income from discount accretion on acquired loans, particularly where such loans pay or resolve at better than their carrying values, such favorable interest flow can be sporadic and will diminish over time.

The earning asset yield 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, for the first nine months of 2017, and 78%, 17%, and 5%, respectively, for the comparable 2016 period. Loans yielded 5.26% and 5.13%, respectively, for the first nine months of 2017 and 2016, while non-loan earning assets combined yielded 2.32% and 1.95%, respectively, for the periods. The 13 bps increase in loan yield between the nine-month periods was largely due to the higher aggregate discount accretionvalue in the rising interest rate environment. As a result, the tax-equivalent net interest margin was 2.91% for first quarter 2023, down 32 bps compared to 3.23% for first quarter 2022.

Tax-equivalent interest income was $88 million for first quarter 2023, up $30 million from first quarter 2022, comprised of $18 million higher volumes and $12 million higher average rates. Interest income on acquired loans between periods, more than offsetting lower underlying loan yields mainlyincreased $28 million over first quarter 2022, mostly due to higher average balances from the acquired loan portfoliosCharter acquisition and competitive pricing.

Average interest-earning assets were $2.29 billion for the first nine months of 2017, $659 million, or 40% higher than the first nine months of 2016, largely attributable to acquired balances as well as strong organic loan growth. The change consistedInterest expense increased to $31 million for first quarter 2023, up $27 million compared to first quarter 2022, comprised of a $568$23 million increase in average loans (up 45% to $1.8 billion), a $127 million increase in investment securities (up 47% to $397 million) and a $36 million decrease in other interest-earning assets, predominantly low earning cash.

Nicolet’shigher overall cost of funds decreased 2 bps to 0.56% for theand $3 million higher volumes. Interest expense on deposits increased $23 million from first nine months of 2017 comparedquarter 2022 mostly due to a year ago. The average cost of interest-bearing deposits (which represented 96% of average interest-bearing liabilities for the nine months ended September 30, 2017 and 2016), was 0.42% for the first nine months of 2017, down 1 bp from the first nine months of 2016, largely benefiting from the lower-costing Baylake deposits acquired, offset partly by the higher-costing First Menasha deposits acquired, an increase in select deposit rates that began in July 2017, and generalmuch higher interest 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% fromenvironment. Interest expense on wholesale funding increased between the comparable period in 2016, predominantly attributablethree-month periods, mostly due to acquiredhigher average balances. Interest-bearing deposits represented 96% of average interest-bearing liabilities

Provision 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 $121Credit Losses
The provision for credit losses was $3.1 million for the first ninethree months ended March 31, 2023 (comprised of 2017, up $92$0.8 million or 318% fromrelated to the comparable period in 2016, with average yields declining from 1.29%ACL-Loans and $2.3 million for the ACL on securities AFS), compared to 0.69%$0.3 million for the three months ended March 31, 2022 (all related to the ACL-Loans). 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 loancredit losses for the nine months ended September 30, 2017on loans was attributable to growth and 2016 was $1.9 million and $1.4 million, respectively, exceeding net charge offs of $1.1 million and $0.2 million, respectively. Asset quality measures have been strong and improving with continued resolutions of problem loans. The ALLL was $12.6 million (0.61% of loans) at September 30, 2017, compared to $11.8 million (0.75% of loans) at December 31, 2016 and $11.5 million (0.74% of loans) at September 30, 2016. The declinechanges in the ratiounderlying loan portfolio, while the provision for credit losses on securities AFS was a result of recordingdue to the acquired loan portfolios at fair value with no carryover of allowance at the time of each merger.

expected loss on our Signature Bank sub debt investment which was fully charged-off during first quarter 2023.

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. 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 securities is affected by risk of the underlying issuer, while the ACL for unfunded commitments is affected by many of the same factors as the ACL-Loans, as well as funding assumptions relative to lines of credit. See also Note 6, “Loans, Allowance for Credit Losses - Loans, and Credit Quality” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures. For additional information regarding asset quality and the ALLL,ACL-Loans, see “Balance Sheet Analysis“BALANCE SHEET ANALYSIS — Loans,” “— Allowance for Loan and LeaseCredit Losses - Loans,” and “— Impaired Loans and Nonperforming Assets.”

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Noninterest Income

Table 6:4: Noninterest Income

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

N/M means not meaningful

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

Three Months Ended March 31,
(in thousands)20232022$ Change% Change
Trust services fee income$2,033 $2,011 $22 %
Brokerage fee income3,479 3,688 (209)(6)
Wealth management fee income5,512 5,699 (187)(3)
Mortgage income, net1,466 3,253 (1,787)(55)
Service charges on deposit accounts1,480 1,477 — 
Card interchange income3,033 2,581 452 18 
BOLI income1,200 933 267 29 
Deferred compensation plan asset market valuations946 (467)1,413 (303)
LSR income, net1,155 (382)1,537 N/M
Other income1,832 1,536 296 19 
Subtotal16,624 14,630 1,994 14 
Asset gains (losses), net(38,468)1,313 (39,781)N/M
Total noninterest income$(21,844)$15,943 $(37,787)(237)%
N/M means not meaningful.
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Noninterest income was $26.0a negative $21.8 million for the first ninethree months of 2017,2023, an unfavorable change of $37.8 million compared to $18.8 million for the first ninethree months of 2016, aided largely by2022, primarily due to the 2016 acquisitions and, to a lesser extent, the 2017 acquisition.balance sheet repositioning. Excluding net asset gains on sale or write-down of assets from both nine-month periods,(losses), noninterest income increased $5.7for first quarter 2023 was $16.6 million, or 31.3%.

The 2017 activity in net gain on sale or write-down of assets consisted of a $1.2$2.0 million gain to record the fair value of Nicolet’s pre-acquisition interest in First Menasha, a $0.3(14%) increase over first quarter 2022.

Wealth management fee income was $5.5 million, net gain on the sale of OREO, a $0.1down $0.2 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(3%) 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 ninethree months of 2017, up $0.9 million or 33.9% over the first nine months of 2016, resulting from an increased number of2022, as unfavorable market-related declines outpaced 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”MSR”), 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 increased $0.3of $1.5 million, or 8.3%decreased $1.8 million (55%) between the comparable nine-monthfirst quarter periods, mostly due to greaterthe rising interest rate environment reducing secondary mortgage productionmarket volumes and sales aided by a broader geographic footprintthe related gains on sales. See also “Lending-Related Commitments” and increased net servicing feesNote 7, “Goodwill and Other Intangibles and Servicing Rights” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures on the growing portfolio of mortgage loans serviced for others.

Trust service fees were up $0.4MSR asset.

Card interchange income grew $0.5 million or 10.8%(18%) between the nine-monthcomparable three-month periods due to higher assets under management. Between the nine-month periods, brokerage fees were up significantly, up $2.1 million or 100.6%, attributable to the 2016 financial advisor business acquisition as well as subsequent new growthvolume and pricing.

activity.

BOLI income was up $0.4$0.3 million or 49.3% between the nine-monthcomparable three-month periods, commensurateattributable to higher average balances from BOLI acquired with the growth in average BOLI investments, including additional insurance purchases in 2016. Card interchange fees were up $1.2Charter acquisition.
Loan servicing rights (“LSR”) income increased $1.5 million or 53.6% on higher volume and activity. Other noninterest income was $2.0 million, up $0.4 million or 21.4% overbetween the comparable period of 2016 with incomefirst quarter periods mostly due to lower LSR amortization from equity in UFS, a data processing company acquiredthe much slower prepayments speeds in the Baylake merger,higher interest rate environment. See also Note 7, “Goodwill and Other Intangibles and Servicing Rights” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional information on the LSR asset.
Other income of $1.8 million for the three months ended March 31, 2023 was up $0.3 million.

42
million from the comparable 2022 period, largely due to broker fees.

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%

ComparisonNet asset losses of the nine months ending September 30, 2017 versus 2016

Total noninterest expense was $59.5$38.5 million for the first ninethree months of 2017 (including $0.5 million2023 were primarily attributable to non-recurring, merger-basedlosses on the sale of approximately $500 million (par value) U.S. Treasury held to maturity securities executed in early March as part of a balance sheet repositioning, while net asset gains of $1.3 million for the first three months of 2022 were primarily attributable to gains on sales of other real estate owned (mostly closed bank branch locations).


Noninterest Expense
Table 5: Noninterest Expense
Three Months Ended March 31,
($ in thousands)20232022Change% Change
Personnel$24,328 $21,191 $3,137 15 %
Occupancy, equipment and office8,783 6,944 1,839 26 
Business development and marketing2,121 1,831 290 16 
Data processing3,988 3,387 601 18 
Intangibles amortization2,161 1,424 737 52 
FDIC assessments540 480 60 13 
Merger-related expense163 98 65 66 
Other expense2,791 2,195 596 27 
Total noninterest expense$44,875 $37,550 $7,325 20 %
Non-personnel expenses$20,547 $16,359 $4,188 26 %
Average full-time equivalent (“FTE”) employees943 833 110 13 %

Noninterest expense was $44.9 million, an increase of $7.3 million (20%) over the first three months of 2022. Personnel costs increased $3.1 million (15%), while non-personnel expenses such as legal and conversion processing costs),combined increased $4.2 million (26%) compared to $46.6the first three months of 2022.
Personnel expense was $24.3 million for the three months ended March 31, 2023, an increase of $3.1 million from 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, noninterest2022. Salary expense increased approximately $15.0$3.0 million or 34.2%, primarily attributable to(17%) over the first three months of 2022, reflecting higher salaries from the larger operatingemployee base as a result of the 2016 and 2017 acquisitions.

Personnel expense was $32.4 million for the first nine months of 2017,(with average full-time equivalent employees up $7.7 million or 30.9% compared to the first nine months of 2016, largely13%, mostly due to the expanded workforce, with average full time equivalent employees up 32% (from 393 to 519 for the first nine months of 2016Charter acquisition), investments in our wealth team, and 2017, respectively). Also contributing to the increase were merit increases between the periods, incentives timing, equity grantsyears, partly offset by lower incentive

38


compensation given the current period net loss. Fringe benefits increased $0.1 million (3%) over the first three months of 2022, commensurate with the larger employee base. Salary 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 recent market declines. See also “Noninterest Income” for the offsetting fair value change to the nonqualified deferred compensation plan assets.

Occupancy, equipment and office expense was $9.6$8.8 million for the first ninethree months of 2017,2023, up $2.3$1.8 million or 31.3%(26%) compared to 2016, primarily the resultfirst three months of 2022, largely due to the larger operating baseexpanded branch network with the Charter acquisition, as well as additional expense for software and software needs, offset partly by branch closure savings.

technology solutions.

Business development and marketing expense increased $1.0was $2.1 million, or 42.8%,up $0.3 million (16%) between the comparable nine-monthfirst quarter periods, largely due to the expanded operating base and branding efforts influencing additional marketing, promotions and media.

Data processing expenses, which are primarily volume-based, rose $2.0 million or 45.8% between the nine-month periods predominantly attributable to the acquisitions, highertiming and extent of marketing donations, promotions, and media to support our expanded branch network and community base.

Data processing expense was $4.0 million, up $0.6 million (18%) between the comparable three-month periods, mostly due to volume-based increases in core and card processing and expanded functionalities. Intangiblecharges, partly from the Charter acquisition.
Intangibles amortization increased $1.2$0.7 million due exclusively to timing of and the addition of intangibles recorded as part of the acquisitions.

Other noninterest expense decreased $1.2 million or 25.0% between the nine-monthcomparable first quarter periods due primarily to $2.1 million lower merger-related expenses, partially offset by a $0.9 million increase in all other costs, which were largely a function of higher other operating costs associatedamortization from the intangibles added with size (such as OREO expenses, legal, audit and bank insurance costs) and a $0.4 million increase in 2017 associated with implementing the customer relationship system that began in the fourth quarter of 2016.

Income Taxes

For the nine-month periods ending September 30, 2017 and 2016, income taxrecent acquisitions.

Other expense was $12.6$2.8 million, and $6.4up $0.6 million respectively. The increase was primarily attributable(27%) between the comparable three-month periods, mostly due to higher pre-tax income between the two periods. Included in 2017 isprofessional fees.

Income Taxes
Income tax was a tax benefit of $0.2$4.2 million related to(effective tax rate of 32.0%) for the exercise of stock options and restricted stock vesting in accordance with ASU 2016-09. U.S. GAAP requires that deferred income taxes be analyzed to determine if a valuation allowance is required. A valuation allowance is required if it is more likely than not that some portion of the deferred tax asset will not be realized. No valuation allowance was determined to be necessary as of September 30, 2017 or December 31, 2016.

Comparison of thefirst three months ending September 30, 2017 versus 2016

Nicolet reported net income of $9.52023, compared to expense of $7.7 million for the three months ended September 30, 2017, up $3.0 million or 47% over $6.5 million(effective tax rate of 24.2%) for the comparable period of 2016. Net income available to common shareholders for the third quarter of 2017 was $9.5 million, or $0.91 per diluted common share, compared to net income available to common shareholders of $6.2 million, or $0.69 per diluted common share, for the third quarter of 2016.

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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 expense2022. The change in the third quarter of 2017.

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


BALANCE SHEET ANALYSIS
At March 31, 2023, period end assets included in 2017 but not in 2016), and $0.5were $8.2 billion, a decrease of $572 million lower net interest income(7%) from net unfavorable rate variances (especially from higher costing deposits).

The earning asset yield was 4.72% for third quarter 2017, 15 bps higher than third quarter 2016, mainlyDecember 31, 2022, mostly due to the sale of investment securities as part of our balance sheet repositioning. Total loans increased $43 million from December 31, 2022. Total deposits of $6.9 billion at March 31, 2023, decreased $250 million from December 31, 2022, while total borrowings decreased $295 million from December 31, 2022 in FHLB advances. Total stockholders’ equity was $962 million at March 31, 2023, a higher mixdecrease of $11 million since December 31, 2022, also mostly from the balance sheet repositioning.

Compared to March 31, 2022, assets increased $872 million (12%), largely due to the acquisition of Charter and strong loan growth, partly offset by lower investment securities related to the balance sheet repositioning. Total loans as a percentincreased $1.5 billion and total deposits increased $697 million from March 31, 2022, also largely due to the acquisition of earning assets. Loans earned 5.29%Charter. Stockholders’ equity increased $125 million from March 31, 2022, primarily due to common stock issued in the Charter acquisition and represented 81% of average earning assets for third quarter 2017, compared to 5.32% and 78%, respectively, for third quarter 2016. The 3 bps decrease in loan yield between the three-month periods was negatively impacted by the underlying rate pressure on loan yields from competition and the flatter yield curve environment,net income, partially offset by higher aggregate discount accretion on loans. Non-loan earning assets which earn less than loan assets represented 19% of average earning assets for third quarter 2017 (including higher low-earning cash) and earned 2.24%, versus 22% of earning assets yielding 2.03% for third quarter 2016.

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

Noninterest income was $10.2 million for third quarter 2017, up $1.6 million over the third quarter 2016. Noninterest income withoutnegative net gains was up $0.8 million or 10%, with service charges on deposits up $0.2 million (given the larger deposit base), and trust and brokerage fees up $0.6 million combined (mostly attributable to the 2016 financial advisor business acquisition and market improvements). Card interchange income was up $0.3 million on greater activity. Other income decreased $0.2 million between the third quarter periods, although there was an increase in UFS, Inc. income of $0.1 million. Net gain on sale or write-down of assets increased by $0.9 million between the third quarter periods, mostly due to a $1.2 million gain to record the fair value of Nicolet’s pre-acquisition interest in First Menasha in the third quarter of 2017.

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

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

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

BALANCE SHEET ANALYSIS

investment changes.


Loans

Nicolet services a diverse customer base throughout NortheastWisconsin, Michigan and Central Wisconsin and in Menominee, Michigan including the following industries: manufacturing, agriculture, wholesaling, retail, service, and businesses supporting, among others, the general building and paper industries. It continues toMinnesota. We concentrate its efforts inon originating loans in itsour local markets and assisting its current loan customers. ItNicolet actively utilizes government loan programs such as those provided by the U.S. Small Business Administration (“SBA”) and the U.S. Department of Agriculture’s Farm Service Agency (“FSA”).
An active credit risk management process is used to help customers weather current economic conditionsensure that sound and position their businesses for the future.

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Nicolet’s primary lending functionconsistent credit decisions are made. The credit management process is to make 1) commercial loans, consisting of commercialregularly reviewed 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 comparedmodified over the past several years 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 offurther strengthen 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.

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 adequate ALLL,appropriate ACL-Loans, and sound nonaccrual and charge-off policies. An active

For additional disclosures on loans, 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 information regarding the allowance for credit losses and nonperforming assets see “BALANCE SHEET ANALYSIS – Allowance for Credit Losses - Loans” and “BALANCE SHEET ANALYSIS – Nonperforming Assets.” A detailed discussion of the loan portfolio accounting policies, general loan portfolio characteristics, and credit risk management processare described in Note 1, “Nature of Business and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements, included in Part II, Item 8 of the Company’s 2022 Annual Report on Form 10-K.
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Table 6: Period End Loan Composition
March 31, 2023December 31, 2022March 31, 2022
(in thousands)Amount% of TotalAmount% of TotalAmount% of Total
Commercial & industrial$1,330,052 21 %$1,304,819 21 %$1,063,300 23 %
Owner-occupied CRE969,064 16 954,599 15 794,946 17 
Agricultural1,065,909 17 1,088,607 18 826,364 18 
Commercial3,365,025 54 3,348,025 54 2,684,610 58 
CRE investment1,146,388 19 1,149,949 19 807,602 17 
Construction & land development333,370 318,600 211,640 
Commercial real estate1,479,758 24 1,468,549 24 1,019,242 21 
Commercial-based loans4,844,783 78 4,816,574 78 3,703,852 79 
Residential construction134,782 114,392 72,660 
Residential first mortgage1,014,166 16 1,016,935 16 721,107 15 
Residential junior mortgage177,026 177,332 133,817 
Residential real estate1,325,974 21 1,308,659 21 927,584 20 
Retail & other52,975 55,266 51,879 
Retail-based loans1,378,949 22 1,363,925 22 979,463 21 
Total loans$6,223,732 100 %$6,180,499 100 %$4,683,315 100 %
As noted in Table 6 above, the loan portfolio at March 31, 2023, was 78% commercial-based and 22% retail-based. Commercial-based loans are considered to have more inherent risk of default than retail-based loans, in part because of the broader list of factors that could impact a commercial borrower negatively. In addition, the commercial balance per borrower is usedtypically larger than that for commercialretail-based loans, to further ensure that sound and consistent credit decisions are made. The credit management processimplying higher potential losses on an individual customer basis. Credit risk on commercial-based loans is regularly reviewedlargely influenced by general economic conditions and the process has been modified overresulting impact on a borrower’s operations or on the past several years to further strengthenvalue of underlying collateral, if any.
Total loans of $6.2 billion at March 31, 2023, increased $43 million (3% annualized) from December 31, 2022. At March 31, 2023, commercial and industrial loans represented the controls.

largest segment of Nicolet’s loan portfolio at 21% of the total portfolio, followed by CRE investment at 19% of the total portfolio. The loan portfolio is widely diversified by typesand included the following industries: manufacturing, wholesaling, paper, packaging, food production and processing, agriculture, forest products, hospitality, retail, service, and businesses supporting the general building industry. The following chart provides the industry distribution of borrowers, industry groups, and market areas. Significantour commercial loan concentrations are consideredportfolio at March 31, 2023.

Commercial Loan Portfolio by Industry Type (based on NAICS codes)
Commercial Loan Portfolio by Industry_03.31.2023.jpg
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The following table presents the maturity distribution of the loan portfolio.
Table 7: Loan Maturity Distribution
As of March 31, 2023Loan Maturity
(in thousands)One Year
or Less
After One Year
to Five Years
After Five Years to Fifteen YearsAfter Fifteen YearsTotal
Commercial & industrial$461,831 $658,961 $196,521 $12,739 $1,330,052 
Owner-occupied CRE75,722 658,076 207,699 27,567 969,064 
Agricultural322,511 333,575 368,658 41,165 1,065,909 
CRE investment137,888 734,765 243,544 30,191 1,146,388 
Construction & land development47,607 147,750 107,855 30,158 333,370 
Residential construction *39,145 8,368 3,232 84,037 134,782 
Residential first mortgage21,559 261,782 197,860 532,965 1,014,166 
Residential junior mortgage8,956 19,200 34,158 114,712 177,026 
Retail & other26,525 14,449 7,615 4,386 52,975 
   Total loans$1,141,744 $2,836,926 $1,367,142 $877,920 $6,223,732 
Percent by maturity distribution18 %46 %22 %14 %100 %
Total fixed rate loans$496,022 $2,659,905 $986,196 $306,850 $4,448,973 
Total floating rate loans$645,722 $177,021 $380,946 $571,070 $1,774,759 
As of December 31, 2022Loan Maturity
(in thousands)One Year
or Less
After One Year
to Five Years
After Five Years to Fifteen YearsAfter Fifteen YearsTotal
Commercial & industrial$433,319 $660,560 $197,352 $13,588 $1,304,819 
Owner-occupied CRE78,759 639,093 208,719 28,028 954,599 
Agricultural350,752 328,495 367,913 41,447 1,088,607 
CRE investment129,770 737,869 250,256 32,054 1,149,949 
Construction & land development64,169 131,889 92,379 30,163 318,600 
Residential construction *41,049 6,922 2,091 64,330 114,392 
Residential first mortgage22,985 263,810 202,514 527,626 1,016,935 
Residential junior mortgage6,814 19,941 33,201 117,376 177,332 
Retail & other27,814 15,002 8,021 4,429 55,266 
   Total loans$1,155,431 $2,803,581 $1,362,446 $859,041 $6,180,499 
Percent by maturity distribution19 %45 %22 %14 %100 %
Total fixed rate loans$520,535 $2,631,295 $987,225 $315,982 $4,455,037 
Total floating rate loans$634,896 $172,286 $375,221 $543,059 $1,725,462 
* The residential construction loans with a loan maturity after five years represent a construction 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, no significant industry concentrations existed in Nicolet’s portfolio in excess of 25% of total loans. Nicolet has also developed guidelines to manage its exposure to various types of concentration risks.

permanent loan product.


Allowance for Loan and LeaseCredit Losses

In addition to - Loans

For additional disclosures on the discussion that follows,allowance for credit losses, 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. A detailed discussion of the unaudited consolidated financial statementsloan portfolio accounting policies, general loan portfolio characteristics, and credit risk are described in Note 1, “Nature of Business and Significant Accounting Policies,” of the “Critical Accounting Policies” within management’s discussion and analysis.

Notes to Consolidated Financial Statements, included in Part II, Item 8 of the Company’s 2022 Annual Report on Form 10-K.

Credit risks within the loan portfolio are inherently different for each loan type as described under “Balance Sheet Analysis-Loans.”type. 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.

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Loans charged off are subject to continuous review, and specific efforts are taken to achieve maximum recovery of principal, interest, and related expenses. For additional information regarding nonperforming assets see also “BALANCE SHEET ANALYSIS – Nonperforming Assets.”

The ALLL is established through a provision for loan losses charged to expense to appropriately provide for 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,overall appropriateness of the ACL-Loans, management applies 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 nonperformingnonaccrual 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 estimate.

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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 and environmental factors mentioned above. Consideration is given to those current qualitative or environmental factors that are likely to cause estimated credit losses as ofat 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 loanscollectability of future cash flows.
At March 31, 2023, the ACL-Loans was $62 million (representing 1.00% of period end loans), unchanged from $62 million (or 1.00% of period end loans) at December 31, 2022 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 analysesup from $50 million (or 1.07% 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 changeperiod end loans) at March 31, 2022. The increase in the levelACL-Loans from March 31, 2022 was mostly due to the Charter acquisition, which added $8 million of provision for loan lossesthe Day 2 allowance and $2 million related 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 theirpurchased credit evaluations differ from those of management based on their judgments about information available to them at the time of their examination.

At September 30, 2017, the ALLL was $12.6 million compared to $11.8 million at December 31, 2016.deteriorated loans. 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 million 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 levelcomponents 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 million at September 30, 2017 and December 31, 2016, respectively, representing 43% of total loans at both September 30, 2017 and December 31, 2016. The change in the ALLL to loans ratio was driven by the increase in the denominator from acquired loans in 2016 and 2017.

The largest portions 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.

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8 below.

Table 10: Allocation of the8: 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

Three Months EndedYear Ended
(in thousands)March 31, 2023March 31, 2022December 31, 2022
ACL-Loans:
Balance at beginning of period$61,829 $49,672 $49,672 
ACL on PCD loans acquired— — 1,937 
Provision for credit losses750 300 10,950 
Charge-offs(184)(100)(1,033)
Recoveries17 34 303 
Net (charge-offs) recoveries(167)(66)(730)
Balance at end of period$62,412 $49,906 $61,829 
Net loan (charge-offs) recoveries:
Commercial & industrial$(108)$20 $(86)
Owner-occupied CRE— (36)(555)
Agricultural— — 
CRE investment— — 169 
Construction & land development— — — 
Residential construction— — — 
Residential first mortgage(57)
Residential junior mortgage— — 
Retail & other(62)(54)(202)
Total net (charge-offs) recoveries$(167)$(66)$(730)
Ratios:
ACL-Loans to total loans1.00 %1.07 %1.00 %
Net charge-offs to average loans, annualized0.01 %0.01 %0.01 %

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 thatidentify problem loans are identified early and minimize the risk of loss is minimized.

loss. Management continues to actively work with customers and monitor credit risk from the ongoing economic uncertainty. For additional disclosures on credit quality, see 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 information on loans see “BALANCE SHEET ANALYSIS – Loans” and for additional information on the ACL-Loans see “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
42


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”). At March 31, 2023, nonperforming assets were $15.7$41 million at September 30, 2017and represented 0.50% of total assets, compared to $22.3$40 million or 0.46% of total assets at December 31, 2016. OREO was $1.3 million at September 30, 2017, down from $2.1 million at year end 2016, the majority of which is closed bank branch property. Nonperforming assets as a percent of total assets were 0.55% at September 30, 2017 compared to 0.97% at December 31, 2016.

2022.

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 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$76 million (0.7%(1% of loans) and $12.6$53 million (0.8%(1% of loans) at September 30, 2017March 31, 2023 and December 31, 2016, respectively.2022, respectively, with the increase primarily due to the downgrade of one commercial credit relationship. Potential problem loans require a heightened management review ofgiven the pace at which a credit may deteriorate, the potential 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 11:9: 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.

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(in thousands)March 31, 2023December 31, 2022March 31, 2022
Nonperforming loans:
Commercial & industrial$2,874 $3,328 $1,849 
Owner-occupied CRE7,128 5,647 5,007 
Agricultural18,782 20,416 23,570 
Commercial28,784 29,391 30,426 
CRE investment4,126 3,832 3,914 
Construction & land development748 771 1,054 
Commercial real estate4,874 4,603 4,968 
Commercial-based loans33,658 33,994 35,394 
Residential construction— — — 
Residential first mortgage4,986 3,780 3,919 
Residential junior mortgage196 224 242 
Residential real estate5,182 4,004 4,161 
Retail & other55 82 115 
Retail-based loans5,237 4,086 4,276 
Total nonaccrual loans38,895 38,080 39,670 
Accruing loans past due 90 days or more— — — 
Total nonperforming loans$38,895 $38,080 $39,670 
Nonaccrual loans (included above) covered by guarantees$5,372 $5,459 $4,675 
OREO:
Commercial real estate owned$628 $628 $797 
Bank property real estate owned1,347 1,347 9,019 
Total OREO1,975 1,975 9,816 
Total nonperforming assets$40,870 $40,055 $49,486 
Ratios:
Nonperforming loans to total loans0.62 %0.62 %0.85 %
Nonperforming assets to total loans plus OREO0.66 %0.65 %1.05 %
Nonperforming assets to total assets0.50 %0.46 %0.68 %
ACL-Loans to nonperforming loans160 %162 %126 %

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%

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(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.funds, and the strong core deposit base provides a stable funding source. As of March 31, 2023, approximately 83% of core deposit balances have been with Nicolet competes with other bank and nonbank institutions formore than five years.
Core deposit balances of $6.4 billion at March 31, 2023 declined $181 million (3%) from December 31, 2022, partly due to the seasonal run-off of municipal deposits. Compared to March 31, 2022, core deposits as well as with a growing number of non-deposit investment alternatives availableincreased $584 million (10%), largely due to depositors, such as mutual funds, money market funds, annuities, and other brokerage investment products. Challenges tothe Charter acquisition. The deposit growth include price changes on deposit products given movements in the rate environment and other competitive pricing pressures, and customer preferences regarding higher-costing deposit products or non-deposit investment alternatives. Included in total depositscomposition is presented in Table 14 are brokered10 below.
Table 10: Period End Deposit Composition
March 31, 2023December 31, 2022March 31, 2022
(in thousands)Amount% of TotalAmount% of TotalAmount% of Total
Noninterest-bearing demand$2,094,623 30 %$2,361,816 33 %$1,912,995 31 %
Interest-bearing demand1,138,415 17 %1,279,850 18 %1,239,582 20 %
Money market1,886,879 27 %1,707,619 24 %1,500,442 24 %
Savings865,824 12 %931,417 13 %841,369 13 %
Time942,838 14 %898,219 12 %736,732 12 %
Total deposits$6,928,579 100 %$7,178,921 100 %$6,231,120 100 %
Brokered transaction accounts$233,393 %$252,829 %$228,079 %
Brokered and listed time deposits289,181 %339,066 %180,823 %
Total brokered deposits$522,574 %$591,895 %$408,902 %
Customer transaction accounts$5,752,348 83 %$6,027,873 84 %$5,266,309 84 %
Customer time deposits653,657 %559,153 %555,909 %
Total customer deposits (core)$6,406,005 92 %$6,587,026 92 %$5,822,218 93 %
Total uninsured deposits were $1.9 billion (representing 27% of $126 milliontotal deposits) at September 30, 2017 and $21 millionMarch 31, 2023, compared to $2.1 billion (representing 29% of total deposits) at December 31, 2016.

Table 14: Deposits

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

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

51
2022.

Table 15: Average Deposits

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

Table 16: Maturity Distribution of Certificates of Deposit of $100,000 or More

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

Other Funding Sources

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

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

Off-Balance Sheet Obligations


Lending-Related Commitments
As of September 30, 2017March 31, 2023 and December 31, 2016,2022, Nicolet had the following off-balance sheet lending-related commitments.
Table 11: Commitments
(in thousands)March 31, 2023December 31, 2022
Commitments to extend credit$1,850,215 $1,850,601 
Financial standby letters of credit23,246 26,530 
Performance standby letters of credit9,952 9,375 
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 $18 million and $17 million, respectively, at March 31, 2023. 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 andboth represented $32.2$9 million and $5.9 million, respectively, at September 30, 2017. FairDecember 31, 2022. The net fair value approximates the notional amounts.

52
of these mortgage derivatives combined was a gain of $72,000 at March 31, 2023 compared to a gain of $50,000 at December 31, 2022.


Liquidity Management

Liquidity management refers to the ability to ensure that cash isadequate liquid funds are available in a timely and cost-effective manner to meet the current and future cash flow requirementsobligations arising in the daily operations of depositors and borrowers and to meet other commitments as they fall due, includingthe Company. These cash flow obligations include the ability to meet the commitments to borrowers for extensions of credit, accommodate deposit cycles and trends, fund capital expenditures, pay dividends to shareholders, service debt, invest in subsidiaries, repurchase common stock,stockholders (if any), and satisfy other operating requirements.

Fundsexpenses. The Company’s most liquid assets are availablecash and due from banks and interest-earning deposits, which totaled $114 million and $155 million at March 31, 2023 and December 31, 2022, respectively. Balances of these liquid assets are dependent on our operating, investing, and financing activities during any given period.

The $41 million decrease in cash and cash equivalents since year-end 2022 included $16 million net cash provided by operating activities and $489 million net cash provided by investing activities (mostly investment sales from the balance sheet repositioning), more than offset by $545 million net cash used in financing activities (repayment of FHLB borrowings from the
44


balance sheet repositioning and a numbernet decrease in deposits). As of basic banking activityMarch 31, 2023, management believed that adequate liquidity existed to meet all projected cash flow obligations.
Nicolet’s primary sources including but not limited toof funds include the core deposit base, the repayment and maturity of loans, investment securities calls, maturities, and sales, and funds obtained throughprocurement of 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 March 31, 2023, approximately 40% of the $408 million investment securities portfolio at September 30, 2017 was pledged as collateral to secure public deposits short termand borrowings, repurchase agreements,as applicable, and for liquidity or for other purposes as required by law. Other fundingregulation. Liquidity sources available to the Company at March 31, 2023, are presented in Table 12 below.
Table 12: Liquidity Sources
(in millions)March 31, 2023
FHLB Borrowing Availability (1)
$547 
Fed Funds Lines155
Fed Discount Window11
Immediate Funding Availability$713 
Unencumbered AFS Securities$609 
Less: AFS Securities retained per policy (2)
(403)
Brokered Capacity1,210 
Guaranteed portion of SBA loans89 
Other funding sources28 
Short-Term Funding Availability (3)
$1,533 
Total Contingent Funding Availability$2,246 
(1) Excludes outstanding FHLB borrowings of $55 million at March 31, 2023.
(2) Excludes $403 million of AFS securities retained in accordance with internal treasury liquidity policy.
(3) Short-term funding availability defined as funding that could be secured between 2 and 30 days.
Management is committed to the Parent Company being a source of strength to the Bank and its other subsidiaries, and therefore, regularly evaluates capital and liquidity positions of the Parent Company in light of current and projected needs, growth or strategies. The Parent Company uses cash for normal expenses, debt service requirements and, when opportune, for common stock repurchases or investment in other strategic actions such as mergers or acquisitions. At March 31, 2023, the Parent Company had $62 million in cash. Additional cash sources available to the Parent Company include short-term borrowings, federal funds purchased,access to the public or private markets to issue new equity, subordinated notes or other debt. Dividends from the Bank and, long-term borrowings.

Cash and cash equivalents at September 30, 2017 and December 31, 2016 were $96 million and $129 million, respectively. These levels have decreased through the first nine months of 2017 with $117 million net cash used by investing activities (mostly due to a net increaselesser extent, stock option exercises, represent significant sources of cash flows for the Parent Company. The Bank is required by federal law to obtain prior approval of the OCC for payments of dividends if the total of all dividends declared by the Bank in loans and securities), partially offset by $30 million net cash provided by operating activities and $54 million net cash provided by financing activities (mostly due to a net increase in deposits). Nicolet’s liquidity resources were sufficient as of September 30, 2017 to fund loans, accommodate deposit trends and cycles, andany year will exceed certain thresholds. Management does not believe that regulatory restrictions on dividends from the Bank will adversely affect its ability to meet otherits cash needs as necessary.

obligations.


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 itsour financial strategy and risk management, Nicolet attemptswe attempt to understand and manage the impact of fluctuations in market interest rates on itsour 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 boardBoard of directors’Directors’ Asset and Liability Committee.

To understand and manage the impact of fluctuations in market interest rates on net interest income, Nicolet measures itswe measure our 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
45


market spreads, prepayments of rate-sensitive instruments, renewal rates on maturing or new loans, deposit retention rates, and other assumptions.

Nicolet

Among other scenarios, we 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 above and reflect the changed interest rate environment. The interest rate scenarios are used for analytical purposes only and do not necessarily represent management’s view of future market interest rate movements. Based on this analysis on financial data at September 30, 2017,March 31, 2023 and December 31, 2022, 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 13 below. The results are within Nicolet’s guidelines of not greater than -10% for +/- 100 bps and not greater than -15% for +/- 200 bps.

Table 13: Interest Rate Sensitivity
March 31, 2023December 31, 2022
200 bps decrease in interest rates(0.1)%(0.7)%
100 bps decrease in interest rates(0.1)%(0.4)%
100 bps increase in interest rates(0.2)%— %
200 bps increase in interest rates(0.3)%0.1 %
Actual results may differ from these simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and their impact on customer behavior and management strategies.

The effect of inflation on a financial institution differs significantly from the effect on an industrial company. While a financial institution’s operating expenses, particularly salary and employee benefits, are affected by general inflation, the asset and liability structure of a financial institution consists largely of monetary items. Monetary items, such as cash, investments, loans, deposits and other borrowings, are those assets and liabilities which are or will be converted into a fixed number of dollars regardless of changes in prices. As a result, changes in interest rates have a more significant impact on a financial institution’s performance than does general inflation. Inflation may also have impacts on the Bank’s customers, on businesses and consumers and their ability or willingness to invest, save or spend, and perhaps on their ability to repay loans. As such, there would likely be impacts on the general appetite for banking products and the credit health of the Bank’s customer base.

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.

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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, at September 30, 2017,ratios, including the capital conservation buffer. At March 31, 2023, 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’sthe Company’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.

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Table 18:14: 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 

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

(2)Prompt corrective action provisions are not applicable at the bank holding company level.

At or for the Three Months EndedAt or for the
Year Ended
($ in thousands)March 31, 2023December 31, 2022
Company Stock Repurchases: *
Common stock repurchased during the period (dollars)$— $61,483 
Common stock repurchased during the period (full shares)— 671,662 
Company Risk-Based Capital:
Total risk-based capital$886,051 $889,763 
Tier 1 risk-based capital676,114 684,280 
Common equity Tier 1 capital637,967 646,341 
Total capital ratio12.3 %12.3 %
Tier 1 capital ratio9.4 %9.5 %
Common equity tier 1 capital ratio8.9 %9.0 %
Tier 1 leverage ratio8.2 %8.2 %
Bank Risk-Based Capital:
Total risk-based capital$813,992 $816,951 
Tier 1 risk-based capital756,575 764,090 
Common equity Tier 1 capital756,575 764,090 
Total capital ratio11.3 %11.3 %
Tier 1 capital ratio10.5 %10.6 %
Common equity tier 1 capital ratio10.5 %10.6 %
Tier 1 leverage ratio9.2 %9.1 %
* Reflects common stock repurchased under board of director authorizations for the common stock repurchase program.
In July 2013,managing capital for optimal return, we evaluate capital sources and uses, pricing and availability of our stock in the Federal Reserve Boardmarket, and alternative uses of capital (such as the OCC issued final rules implementinglevel of organic growth or acquisition opportunities) in light of strategic plans. At March 31, 2023, there remains $47 million authorized under this repurchase program, as modified, to be utilized from time-to-time to repurchase shares in the Basel III regulatory capital frameworkopen market, through block transactions or in private transactions.


Critical Accounting Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions or judgments that affect the amounts reported in the financial statements and related Dodd-Frank Act changes. The final rules took effectaccompanying notes. These estimates and assumptions are based on historical experience, current information, and other factors deemed to be relevant; accordingly, as this information changes, actual results could differ from those estimates. Nicolet considers accounting estimates to be critical to reported financial results if the accounting estimate requires management to make assumptions about matters that are highly uncertain and different estimates that management reasonably could have used for the Company and Bank on January 1, 2015, subjectaccounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to a transitionoccur from period for certain parts of the rules. The rules permitted certain banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income. Nicolet and the Bank made the election in 2015 to retain the existing treatment for accumulated other comprehensive income.

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

Future Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09,Revenue from Contracts with Customers (Topic 606).The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. In August 2015, the FASB issued an amendment to defer the effective date for all entities by one year. The updated guidance is effective for annual reporting periods beginning after 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 toperiod, could have a material impact on the Company’s financial statements when it goes into effectstatements. The accounting estimates we consider to be critical include business combinations and the first quartervaluation of 2018.

In August 2017,loans acquired, 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. The Company is currently assessing the impactdetermination of the new guidanceallowance for credit losses, and income taxes. A discussion of these estimates can be found in the “Critical Accounting Estimates” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2022 Annual Report on its consolidated financial statements,Form 10-K. There have been no changes in the Company’s determination of critical accounting policies 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 afterestimates since December 15, 2017, with early adoption permitted. The Company is currently assessing the impact of the new guidance on its consolidated financial statements.

31, 2022.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our market risk at March 31, 2023, from that presented in our 2022 Annual Report on Form 10-K. 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.

2, for our interest rate sensitivity position at March 31, 2023.

ITEM 4. CONTROLS AND PROCEDURES

As

(a) Disclosure Controls and Procedures. Management, under the supervision, and with the participation, of our principal executive officer and principal financial officer, evaluated our disclosure controls and procedures (as such term is defined in Exchange Act Rule 13a-15(e)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective 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 Chiefreport.
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(b) Changes in Internal Control Over Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term in Rule 13a-15(e) and 15d-15(e) under the Exchange Act pursuant to Exchange Act Rule 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 proceduresReporting. There were effective.

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There have been no changes in the Company’s internal controls or, to the Company’s knowledge,control over financial reporting (as such term is defined in other factorsExchange Act Rule 13a-15(f)) during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controlscontrol 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.



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PART II – OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

We

The Company and ourits subsidiaries may be involved from time to time in various routine legal proceedings incidental to our respective businesses. Neither wethe Company nor any of ourits 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.

2022.

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

Following are

Issuer Purchases of Equity Securities
The following table contains information regarding purchases of Nicolet’s monthly common stock purchasesmade during first quarter 2023 by or on behalf of the thirdCompany or any “affiliated purchaser,” as defined by Rule 10b-18(a)(3) of the Exchange Act.
Total Number of
Shares Purchased (a)
Average Price
Paid per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans
or Programs (b)
(#)($)(#)(#)
Period
January 1 – January 31, 2023— $— — 
February 1 – February 28, 2023— $— — 
March 1 – March 31, 2023492 $75.26 — 
Total492 $75.26 — 753,000 
a.During first quarter 2023, the Company withheld no common shares for minimum tax withholding settlements on restricted stock, and withheld 492 common shares to satisfy the exercise price and tax withholding requirements on stock option exercises. These are not considered “repurchases” and, therefore, do not count against the maximum number 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.
shares that may yet be purchased under the Board of Directors’ authorization.
b.The Board of Directors approved a common stock repurchase program which authorized, with subsequent modifications, the use of up to $276 million to repurchase outstanding shares of common stock. This common stock repurchase program was last modified on April 19, 2022, and has no expiration date. At March 31, 2023, approximately $47 million remained available under this common stock repurchase program, or approximately 753,000 shares of common stock (based upon the closing stock price of $63.05 on March 31, 2023).

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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None.
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ITEM 6. EXHIBITS

The following exhibits are filed herewith:

Exhibit
Exhibit
Number
Description
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 (1)
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

(1) Includes the following financial information that is furnishedincluded in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income (Loss), (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject(vi) Notes to liability under these sections.

Unaudited Consolidated Financial Statements.

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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, 2017May 2, 2023/s/ Robert B. AtwellMichael E. Daniels
Robert B. AtwellMichael E. Daniels
Chairman, President and Chief Executive Officer
November 3, 2017May 2, 2023/s/ Ann K. LawsonH. Phillip Moore, Jr.
Ann K. LawsonH. Phillip Moore, Jr.
Chief Financial Officer

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51