UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________

FORM 10-Q

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

For the quarterly period ended ~~June 30, 2019~~March 31, 2020

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

For the transition period from to

Commission file number: 001-37700

NICOLET BANKSHARES, INC.

(Exact Name of Registrant as Specified in its Charter)



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

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

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

N/A (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)



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

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

Indicate by check mark whether the 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. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ý 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 filer x

Non-accelerated filer ¨	Smaller reporting company ¨

Emerging Growth Company ¨

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 ¨ No ý

As of ~~July 31, 2019~~April 27, 2020 there were ~~9,345,621~~10,412,885 shares of $0.01 par value common stock outstanding.

Nicolet Bankshares, Inc.

Quarterly Report on Form 10-Q

~~June 30, 2019~~March 31, 2020

TABLE OF CONTENTS



			PAGE
PART I	FINANCIAL INFORMATION

	Item 1.	Financial Statements:

		Consolidated Balance Sheets	3

		Consolidated Statements of Income	4

		Consolidated Statements of Comprehensive Income	5

		Consolidated Statements of Stockholders’ Equity	6

		Consolidated Statements of Cash Flows	7

		Notes to Unaudited Consolidated Financial Statements	8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4443

	Item 4.	Controls and Procedures	4443

PART II	OTHER INFORMATION

	Item 1.	Legal Proceedings	4443

	Item 1A.	Risk Factors	4443

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44

	Item 3.	Defaults Upon Senior Securities	4544

	Item 4.	Mine Safety Disclosures	4544

	Item 5.	Other Information	4544

	Item 6.	Exhibits	4544

		Signatures	4645

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS:

NICOLET BANKSHARES, INC.

Consolidated Balance Sheets

(In thousands, except share and per share data)


	June 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
	(Unaudited)			(Audited)			(Unaudited)			(Audited)
Assets
Cash and due from banks	$	75,074		$	85,896		$	53,741		$	75,433
Interest-earning deposits	79,846			163,630			188,219			106,626
Cash and cash equivalents	154,920			249,526			241,960			182,059
Certificates of deposit in other banks	5,396			993			18,804			19,305
Securities available for sale (“AFS”), at fair value	403,989			400,144			511,860			449,302
Other investments	19,841			17,997			27,176			24,072
Loans held for sale	4,699			1,639			3,929			2,706
Loans	2,203,273			2,166,181			2,607,424			2,573,751
Allowance for loan losses ("ALLL")	(13,571		)	(13,153		)
Allowance for credit losses - loans (“ACL-Loans”)							(26,202		)	(13,972		)
Loans, net	2,189,702			2,153,028			2,581,222			2,559,779
Premises and equipment, net	49,109			48,173			60,276			56,469
Bank owned life insurance (“BOLI”)	69,222			66,310			78,665			78,140
Goodwill and other intangibles, net	122,285			124,307			164,974			165,967
Accrued interest receivable and other assets	35,650			34,418			43,688			39,461
Total assets	$	3,054,813		$	3,096,535		$	3,732,554		$	3,577,260

Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing demand deposits	$	743,380		$	753,065		$	791,563		$	819,055
Interest-bearing deposits	1,793,259			1,861,073			2,231,903			2,135,398
Total deposits	2,536,639			2,614,138			3,023,466			2,954,453
Short-term borrowings							75,000			—
Long-term borrowings	77,432			77,305			82,741			67,629
Accrued interest payable and other liabilities	28,594			17,740			39,607			38,188
Total liabilities	2,642,665			2,709,183			3,220,814			3,060,270

Stockholders’ Equity:
Common stock	94			95			104			106
Additional paid-in capital	234,963			247,790			299,903			312,733
Retained earnings	173,180			144,364			203,385			199,005
Accumulated other comprehensive income (loss)	3,178			(5,640		)	7,579			4,418
Total Nicolet Bankshares, Inc. stockholders’ equity	411,415			386,609			510,971			516,262
Noncontrolling interest	733			743			769			728
Total stockholders’ equity and noncontrolling interest	412,148			387,352			511,740			516,990
Total liabilities, noncontrolling interest and stockholders’ equity	$	3,054,813		$	3,096,535		$	3,732,554		$	3,577,260

Preferred shares authorized (no par value)	10,000,000			10,000,000			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			30,000,000			30,000,000
Common shares outstanding	9,327,420			9,495,265			10,408,375			10,587,738
Common shares issued	9,351,359			9,524,777			10,428,896			10,610,259

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.

Consolidated Statements of Income

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


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended March 31,
	2019		2018		2019		2018		2020			2019
Interest income:
Loans, including loan fees	$	31,209	$	27,193	$	61,177	$	55,647	$	33,778		$	29,968
Investment securities:
Taxable	2,041		1,597		3,674		2,939		2,072			1,633
Tax-exempt	522		577		1,071		1,165		491			549
Other interest income	798		1,178		1,807		1,579		662			1,009
Total interest income	34,570		30,545		67,729		61,330		37,003			33,159
Interest expense:
Deposits	4,730		3,868		9,507		6,957		4,957			4,777
Short-term borrowings	—		5		—		8		27			—
Long-term borrowings	896		869		1,803		1,688		756			907
Total interest expense	5,626		4,742		11,310		8,653		5,740			5,684
Net interest income	28,944		25,803		56,419		52,677		31,263			27,475
Provision for loan losses	300		510		500		1,020
Net interest income after provision for loan losses	28,644		25,293		55,919		51,657
Provision for credit losses									3,000			200
Net interest income after provision for credit losses									28,263			27,275
Noninterest income:
Trust services fee income	1,569		1,671		3,037		3,277		1,579			1,468
Brokerage fee income	2,002		1,738		3,812		3,342		2,322			1,810
Mortgage income, net	2,059		1,528		3,262		2,608		2,327			1,203
Service charges on deposit accounts	1,194		1,200		2,364		2,390		1,225			1,170
Card interchange income	1,660		1,358		3,080		2,601		1,562			1,420
BOLI income	880		468		1,339		910		703			459
Asset gains (losses), net	7,572		972		7,744		1,176		(654		)	172
Other income	1,624		1,304		3,108		2,759		521			1,484
Total noninterest income	18,560		10,239		27,746		19,063		9,585			9,186
Noninterest expense:
Personnel	15,358		12,674		27,895		25,166		13,323			12,537
Occupancy, equipment and office	3,757		3,454		7,507		7,241		4,204			3,750
Business development and marketing	1,579		1,463		2,860		2,805		1,359			1,281
Data processing	2,350		2,399		4,705		4,719		2,563			2,355
Intangibles amortization	969		1,100		2,022		2,282		993			1,053
Other expense	1,714		1,361		3,497		2,880		1,412			1,783
Total noninterest expense	25,727		22,451		48,486		45,093		23,854			22,759
Income before income tax expense	21,477		13,081		35,179		25,627		13,994			13,702
Income tax expense	2,833		3,255		6,185		6,163		3,321			3,352
Net income	18,644		9,826		28,994		19,464		10,673			10,350
Less: Net income attributable to noncontrolling interest	95		89		178		150		118			83
Net income attributable to Nicolet Bankshares, Inc.	$	18,549	$	9,737	$	28,816	$	19,314	$	10,555		$	10,267
Earnings per common share:
Basic	$	1.98	$	1.01	$	3.06	$	1.99	$	1.00		$	1.09
Diluted	$	1.91	$	0.98	$	2.97	$	1.93	$	0.98		$	1.05
Weighted average common shares outstanding:
Basic	9,374,348		9,639,098		9,417,676		9,701,888		10,515,778			9,461,485
Diluted	9,692,378		9,969,854		9,710,827		10,032,304		10,800,636			9,758,351

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.

Consolidated Statements of Comprehensive Income

(In thousands) (Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2019			2018			2019			2018			2020			2019
Net income	$	18,644		$	9,826		$	28,994		$	19,464		$	10,673		$	10,350
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities AFS:
Net unrealized holding gains (losses)	4,401			(320		)	12,112			(4,978		)	4,329			7,711
Net realized (gains) losses included in income	(19		)	—			(32		)	—			—			(13		)
Income tax (expense) benefit	(1,183		)	86			(3,262		)	1,343			(1,168		)	(2,079		)
Total other comprehensive income (loss)	3,199			(234		)	8,818			(3,635		)	3,161			5,619
Comprehensive income	$	21,843		$	9,592		$	37,812		$	15,829		$	13,834		$	15,969

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.

Consolidated Statements of Stockholders’ Equity

(In thousands) (Unaudited)


	Nicolet Bankshares, Inc. Stockholders’ Equity																	Nicolet Bankshares, Inc. Stockholders’ Equity
	Common Stock			Additional Paid-In Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Non- controlling Interest			Total			Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Non- controlling Interest			Total
Balance, December 31, 2017	$	98		$	263,835		$	102,391	$	(2,146	)	$	701		$	364,879
Balances at December 31, 2019																		$	106		$	312,733		$	199,005		$	4,418		$	728		$	516,990
Comprehensive income:
Net income	—			—			9,577		—			61			9,638
Net income, three months ended March 31, 2020																		—			—			10,555			—			118			10,673
Other comprehensive income (loss)	—			—			—		(3,401		)	—			(3,401		)	—			—			—			3,161			—			3,161
Stock-based compensation expense	—			1,220			—		—			—			1,220			—			1,299			—			—			—			1,299
Exercise of stock options, net	—			427			—		—			—			427			—			851			—			—			—			851
Issuance of common stock	—			51			—		—			—			51			—			215			—			—			—			215
Purchase and retirement of common stock	(1		)	(8,063		)	—		—			—			(8,064		)	(2		)	(15,195		)	—			—			—			(15,197		)
Distribution to noncontrolling interest	—			—			—		—			(99		)	(99		)	—			—			—			—			(77		)	(77		)
Adoption of new accounting pronouncement	—			—			937		(937		)	—			—
Balance, March 31, 2018	$	97		$	257,470		$	112,905	$	(6,484	)	$	663		$	364,651
Adoption of new accounting pronouncement (see Note 1)																		—			—			(6,175		)	—			—			(6,175		)
Balances at March 31, 2020																		$	104		$	299,903		$	203,385		$	7,579		$	769		$	511,740

Balances at December 31, 2018																		$	95		$	247,790		$	144,364		$	(5,640	)	$	743		$	387,352
Comprehensive income:
Net income	—			—			9,737		—			89			9,826
Net income, three months ended March 31, 2019																		—			—			10,267			—			83			10,350
Other comprehensive income (loss)	—			—			—		(234		)	—			(234		)	—			—			—			5,619			—			5,619
Stock-based compensation expense	—			1,094			—		—			—			1,094			—			1,108			—			—			—			1,108
Exercise of stock options, net	—			535			—		—			—			535			—			698			—			—			—			698
Issuance of common stock	—			57			—		—			—			57			—			148			—			—			—			148
Purchase and retirement of common stock	(1		)	(4,592		)	—		—			—			(4,593		)	(1		)	(5,681		)	—			—			—			(5,682		)
Distribution to noncontrolling interest	—			—			—		—			(51		)	(51		)
Balance, June 30, 2018	$	96		$	254,564		$	122,642	$	(6,718	)	$	701		$	371,285

Balance, December 31, 2018	$	95		$	247,790		$	144,364	$	(5,640	)	$	743		$	387,352
Comprehensive income:
Net income	—			—			10,267		—			83			10,350
Other comprehensive income (loss)	—			—			—		5,619			—			5,619
Stock-based compensation expense	—			1,108			—		—			—			1,108
Exercise of stock options, net	—			698			—		—			—			698
Issuance of common stock	—			148			—		—			—			148
Purchase and retirement of common stock	(1		)	(5,681		)	—		—			—			(5,682		)
Balance, March 31, 2019	$	94		$	244,063		$	154,631	$	(21	)	$	826		$	399,593
Comprehensive income:
Net income	—			—			18,549		—			95			18,644
Other comprehensive income (loss)	—			—			—		3,199			—			3,199
Stock-based compensation expense	—			1,391			—		—			—			1,391
Exercise of stock options, net	2			2,482			—		—			—			2,484
Issuance of common stock	—			135			—		—			—			135
Purchase and retirement of common stock	(2		)	(13,108		)	—		—			—			(13,110		)
Distribution to noncontrolling interest	—			—			—		—			(188		)	(188		)
Balance, June 30, 2019	$	94		$	234,963		$	173,180	$	3,178		$	733		$	412,148
Balances at March 31, 2019																		$	94		$	244,063		$	154,631		$	(21	)	$	826		$	399,593

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.

Consolidated Statements of Cash Flows (Unaudited)


(In thousands)	Six Months Ended June 30,						Three Months Ended March 31,
	2019			2018			2020			2019
Cash Flows From Operating Activities:
Net income	$	28,994		$	19,464		$	10,673		$	10,350
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion	3,194			3,121			2,156			1,108
Provision for loan losses	500			1,020
Provision for credit losses							3,000			200
Increase in cash surrender value of life insurance	(938		)	(910		)	(525		)	(459		)
Stock-based compensation expense	2,499			2,314			1,299			1,108
Asset (gains) losses, net	(7,744		)	(1,176		)	654			(172		)
Gain on sale of loans held for sale, net	(3,246		)	(2,235		)	(3,017		)	(1,102		)
Proceeds from sale of loans held for sale	120,753			115,515			103,950			37,338
Origination of loans held for sale	(121,438		)	(114,926		)	(102,715		)	(36,747		)
Net change in:
Accrued interest receivable and other assets	(6,595		)	(3,223		)	(5,567		)	(1,748		)
Accrued interest payable and other liabilities	3,135			1,054			2,257			421
Net cash provided by operating activities	19,114			20,018
Net cash provided by (used in) operating activities							12,165			10,297
Cash Flows From Investing Activities:
Net increase in loans	(34,459		)	(37,458		)
Net (increase) decrease in loans							(32,238		)	(21,728		)
Net (increase) decrease in certificates of deposit in other banks	(4,403		)	499			501			1
Purchases of securities AFS	(29,087		)	(33,697		)	(74,759		)	(19,064		)
Proceeds from sales of securities AFS	13,240			—			—			8,076
Proceeds from calls and maturities of securities AFS	23,055			27,657			17,931			10,636
Purchases of other investments	(1,373		)	(629		)	(3,673		)	(63		)
Proceeds from sales of other investments	17,144			386
Purchases of BOLI	(2,000		)	—
Proceeds from redemption of BOLI	428			—
Net (increase) decrease in premises and equipment	(3,137		)	(814		)	(4,961		)	(2,368		)
Net (increase) decrease in other real estate and other assets	15			1,486
Net cash provided by (used in) investing activities	(20,577		)	(42,570		)	(97,199		)	(24,510		)
Cash Flows From Financing Activities:
Net increase (decrease) in deposits	(77,499		)	(15,449		)	69,143			(75,652		)
Net increase in short-term borrowings							75,000			—
Proceeds from long-term borrowings							20,000			—
Repayments of long-term borrowings	(129		)	(1,126		)	(5,000		)	(64		)
Purchase and retirement of common stock	(18,792		)	(12,657		)	(15,197		)	(5,682		)
Proceeds from issuance of common stock	283			108			215			148
Proceeds from exercise of stock options	3,182			962			851			698
Distribution to noncontrolling interest	(188		)	(150		)	(77		)	—
Net cash provided by (used in) financing activities	(93,143		)	(28,312		)	144,935			(80,552		)
Net increase (decrease) in cash and cash equivalents	(94,606		)	(50,864		)	59,901			(94,765		)
Cash and cash equivalents:
Beginning	249,526			154,933			182,059			249,526
Ending *	$	154,920		$	104,069		$	241,960		$	154,761
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	11,091		$	8,574		$	6,077		$	5,466
Cash paid for taxes	6,340			5,325			—			—
Transfer of loans and bank premises to other real estate owned	—			537
Capitalized mortgage servicing rights	871			275			559			319
Initial recognition of operating lease right of use asset	5,403			—
Initial recognition of operating lease liability	5,403			—

* Cash and cash equivalents at March 31, 2020 include restricted cash of ~~$5.8~~$1.9 millionpledged as collateral on interest rate swaps and ~~$6.8~~no reserve balance was required with the Federal Reserve Bank. At March 31, 2019, cash and cash equivalents include $9.0 million ~~at June 30, 2019 and 2018, respectively,~~ for the reserve balance required with the Federal Reserve Bank. ~~At June 30, 2019, cash and cash equivalents also includes restricted cash of $950,000 pledged as collateral on interest rate swaps.~~

See accompanying notes to unaudited consolidated financial statements.

NICOLET BANKSHARES, INC.

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

These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been omitted or abbreviated. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

Critical Accounting Policies and Estimates

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

There have been no material changes or developments with respect to the assumptions or methodologies that the Company uses when applying what management believes are critical accounting policies and developing critical accounting estimates as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019, except as disclosed in Updates to Significant Accounting Policies and Recent Accounting Developments Adopted below.

Updates to Significant Accounting Policies

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

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

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

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

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

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

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

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

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

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

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

Recent Accounting Developments Adopted

In August ~~2017,~~2018, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued Accounting Standards Update (“ASU”) ~~2017-12,~~2018-13, ~~Derivatives and Hedging~~Fair Value Measurement (Topic ~~815)~~820): ~~Targeted Improvements~~Disclosure Framework - Changes to ~~Accounting~~the Disclosure Requirements for ~~Hedging Activities~~Fair Value Measurement. This ASU ~~2017-12 expands~~modifies the ~~activities that qualify~~disclosure requirements for ~~hedge accounting and simplifies the rules for reporting hedging transactions.~~fair value measurements by removing, modifying or adding certain disclosures. The updated guidance iswas effective for ~~interim and~~ annual reporting periods, including interim periods within those fiscal years, beginning after December 15, ~~2018, with early adoption permitted.~~2019. The Company adopted the updated guidance effective January 1, ~~2019~~2020, with no material impact on its consolidated financial statements ~~because~~as the ~~Company does not have any significant derivatives and does not currently apply hedge accounting to derivatives.~~new ASU only revises disclosure requirements. See Note 9 for fair value disclosures.

In ~~February~~June 2016, the FASB issued ASU ~~2016-02,~~2016-13, ~~Leases~~Financial Instruments – Credit Losses (Topic ~~842)~~326): Measurement of Credit Losses on Financial Instruments, intended to improve the financial reporting by requiring earlier recognition of credit losses on loans and certain other financial assets. Topic 326 replaces the incurred loss impairment model (which recognizes losses when a probable threshold is met) with ~~several subsequent updates. Topic 842 introduced~~ a ~~new accounting model for lessors~~requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. The measurement of lifetime expected credit losses is based on historical experience, current conditions, and ~~lessees. For lessees, almost all leases are now recognized on the balance sheet as a right-of-use ("ROU") asset~~reasonable and ~~lease liability, unlike previous GAAP which required only capital leases to be recognized on the balance sheet.~~supportable forecasts. The accounting applied by lessors is largely unchanged from existing guidance. Topic 842 also requires additional disclosures concerning the amount, timing and uncertainty of cash flows arising from leases. The updated guidance isASU was effective for ~~annual reporting~~SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and provides a modified retrospective transition approach that allows lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption (the "effective date" method), with the option to elect certain practical expedients. Nicolet2019. The Company adopted the new ~~guidance prospectively as of~~accounting standard on January 1, ~~2019, using the effective date method; thus, prior comparative periods have not been restated.~~

~~Upon adoption, Nicolet recognized an ROU asset~~2020, as required, and ~~lease liability~~recorded a cumulative-effect adjustment of ~~approximately $5 million. There was no impact~~$6 million to ~~its consolidated statements of income or cash flows compared~~retained earnings. See Updates to ~~the prior lease~~Significant Accounting Policies above for changes to accounting ~~model. The ROU asset~~policies and lease liability are recorded in other assets and other liabilities, respectively, in the consolidated balance sheets. As part of the adoption, Nicolet elected the package of practical expedients permitted under the transition guidance of thesee Note 6 for additional disclosures on this new standard which allowed the carry forward of the historical lease classification. Nicolet also elected the practical expedient to group lease and non-lease components as a single lease component; thus, the Company's leases include both lease (e.g., fixed payments including rent, taxes, and insurance

~~costs) and non-lease components (e.g., common area or other maintenance costs). See Note 10 for the new disclosures required by Topic 842.~~accounting pronouncement.

Reclassifications

Certain amounts in the ~~2018~~2019 consolidated financial statements have been reclassified to conform to the ~~2019~~2020 presentation.

Note 2 – ~~Pending Acquisition~~Acquisitions

Choice Bancorp, Inc. (“Choice”):

On November 8, 2019, the Company consummated its merger with Choice, pursuant to the terms of the Agreement and Plan of Merger dated June 26, 2019, (the “Choice Merger Agreement”), whereby Choice (at 12% of Nicolet’s then pre-merger asset size) was merged with and into Nicolet, and Choice Bank, the wholly owned bank subsidiary of Choice, was merged with and into the Bank. The system integration was completed, and the two branches of Choice opened on November 12, 2019, as Nicolet National Bank branches, expanding its presence in the Oshkosh marketplace. The Company closed its legacy Oshkosh location concurrently with the consummation of the Choice merger.

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

Pursuant to the Choice Merger Agreement, the final purchase price consisted of issuing 1,184,102 shares of the Company's common stock (given the final stock-for-stock exchange ratio of 0.497, and not exchanging the Choice shares owned by the Company immediately prior to the time of the merger), for common stock consideration of $79.8 million (based on $67.39 per share, the volume weighted average closing price of the Company's common stock over the preceding 30 trading day period) plus cash consideration of $1.7 million. Approximately $0.2 million in direct stock issuance costs for the merger were incurred and charged against additional paid-in capital.

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

Pending Acquisitions:

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

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

Commerce would represent approximately 16% of the combined company's assets at March 31, 2020. At ~~June 30, 2019, Choice~~March 31, 2020, Commerce had total assets of ~~$444~~$729 million, loans of ~~$349~~$618 million, deposits of ~~$312~~$620 million, and equity of ~~$39~~$71 million.

Advantage Community Bancshares, Inc. (“Advantage”): On March 2, 2020, Nicolet entered into a definitive merger agreement with Advantage pursuant to which Advantage will merge with and into Nicolet. Due to the relative small size of the transaction, terms of the all-cash deal were not disclosed. At March 31, 2020, Advantage had total assets of $149 million, loans of $94 million, deposits of $126 million, and equity of $20 million. The merger is expected to close in the ~~fourth~~third quarter of ~~2019~~2020 and remains subject to customary closing conditions, including approval by ~~Choice~~Advantage shareholders and regulatory approvals.

Note 3 – Earnings per Common Share

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


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended March 31,
(In thousands, except per share data)	2019		2018		2019		2018		2020		2019
Net income attributable to Nicolet Bankshares, Inc.	$	18,549	$	9,737	$	28,816	$	19,314	$	10,555	$	10,267
Weighted average common shares outstanding	9,374		9,639		9,418		9,702		10,516		9,461
Effect of dilutive common stock awards	318		331		293		330		285		297
Diluted weighted average common shares outstanding	9,692		9,970		9,711		10,032		10,801		9,758
Basic earnings per common share*	$	1.98	$	1.01	$	3.06	$	1.99	$	1.00	$	1.09
Diluted earnings per common share*	$	1.91	$	0.98	$	2.97	$	1.93	$	0.98	$	1.05

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

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019, options to purchase less than 0.1 million shares are excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive. For the three and six months ended June 30, 2018, options to purchase approximately 0.1 million shares are excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive.

Note 4 – Stock-Based Compensation

The Company may grant stock options and restricted stock under its stock-based compensation plans to certain officers, employees and directors. These plans are administered by a committee of the Board of Directors. In February 2019, with subsequent shareholder approval, the 2011 Long-Term Incentive Plan was amended to increase the shares reserved for potential stock-based awards from 1,500,000 shares to 3,000,000 shares. At ~~June 30, 2019,~~March 31, 2020, approximately ~~1.6~~1.4 million shares were available for grant under these stock-based compensation plans.

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


	Six Months Ended June 30,						Three Months Ended March 31,
	2019			2018			2020			2019
Dividend yield	—		%	—		%	—		%	—		%
Expected volatility	25		%	25		%	25		%	—		%
Risk-free interest rate	2.37		%	2.48		%	1.67		%	—		%
Expected average life	7 years			7 years			7 years			0 years
Weighted average per share fair value of options	$	19.23		$	17.60		$	21.83		$	—

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


Stock Options	Option Shares Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Life (Years)	Aggregate Intrinsic Value (in thousands)		Option Shares Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Life (Years)	Aggregate Intrinsic Value (in thousands)
Outstanding - December 31, 2018	1,581,699		$	40.77
Outstanding - December 31, 2019								1,443,733		$	48.75
Granted	15,000		59.55					39,500		71.89
Exercise of stock options *	(137,443	)	23.15					(38,702	)	23.83
Forfeited	(3,538	)	27.43					—		—
Outstanding - June 30, 2019	1,455,718		$	42.65	7.1	$	28,249
Exercisable - June 30, 2019	667,418		$	38.34	6.5	$	15,833
Outstanding - March 31, 2020								1,444,531		$	50.06	7.3	$	10,543
Exercisable - March 31, 2020								554,331		$	43.43	6.5	$	6,293

* The terms of the stock option agreements permit having a number of shares of stock withheld, the fair market value of which as of the date of exercise is sufficient to satisfy the exercise price and/or tax withholding requirements. For the ~~six~~three months ended ~~June 30, 2019, 64,681~~March 31, 2020, 16,671 such shares were surrendered to the 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 intrinsic value of options exercised for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ was approximately ~~$5.0~~$1.8 million and ~~$1.4~~$1.1 million, respectively.

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


Restricted Stock	Weighted Average Grant Date Fair Value		Restricted Shares Outstanding		Weighted Average Grant Date Fair Value		Restricted Shares Outstanding
Outstanding - December 31, 2018	$	39.37	29,512
Outstanding - December 31, 2019					$	44.94	22,521
Granted	61.96		4,257		72.00		2,500
Vested *	44.79		(9,422	)	38.89		(4,500	)
Forfeited	16.50		(408	)	—		—
Outstanding - June 30, 2019	$	41.64	23,939
Outstanding - March 31, 2020					$	49.56	20,521

* The terms of the restricted stock agreements permit the surrender of shares to the Company upon vesting in order to satisfy applicable tax withholding requirements at the minimum statutory withholding rate, and accordingly, ~~1,553~~1,341 shares were surrendered during the ~~six~~three months ended ~~June 30, 2019.~~March 31, 2020.

The Company recognized approximately ~~$2.2~~$1.3 million and ~~$2.3~~$1.1 million of stock-based compensation expense (included in personnel on the consolidated statements of income) ~~during~~for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively, associated with its common stock awards granted to officers and employees. In addition, during the first half of 2019, the Company recognized approximately $0.3 million of director expense (included in other expense on the consolidated statements of income) for a total restricted stock grant of 4,257 shares with immediate vesting to directors. As of ~~June 30, 2019,~~March 31, 2020, there was approximately ~~$11.0~~$12.8 million of unrecognized compensation cost related to equity award grants. The cost is expected to be recognized over the remaining vesting period of approximately ~~three~~3.2 years. The Company recognized a tax benefit of approximately ~~$0.9 million and $0.2~~$0.3 million for the ~~six~~three months ended ~~June 30, 2019 and 2018, respectively,~~March 31, 2020 for the tax impact of stock option exercises and vesting of restricted stock.

Note 5 – Securities Available for Sale

Amortized cost and fair value of securities available for sale are summarized as follows.


	June 30, 2019								March 31, 2020
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. government agency securities	$	16,834	$	—	$	205	$	16,629	$	64,180	$	288	$	216	$	64,252
State, county and municipals	147,959		597		386		148,170		155,700		1,661		25		157,336
Mortgage-backed securities	150,094		2,507		772		151,829		203,575		6,499		121		209,953
Corporate debt securities	84,749		2,629		17		87,361		78,023		2,516		220		80,319
Total	$	399,636	$	5,733	$	1,380	$	403,989	$	501,478	$	10,964	$	582	$	511,860


	December 31, 2018								December 31, 2019
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. government agency securities	$	22,467	$	—	$	818	$	21,649	$	16,516	$	4	$	60	$	16,460
State, county and municipals	163,702		76		3,252		160,526		155,501		1,049		157		156,393
Mortgage-backed securities	134,350		328		3,034		131,644		193,223		2,492		697		195,018
Corporate debt securities	87,352		66		1,093		86,325		78,009		3,422		—		81,431
Total	$	407,871	$	470	$	8,197	$	400,144	$	443,249	$	6,967	$	914	$	449,302

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


	June 30, 2019													March 31, 2020
	Less than 12 months				12 months or more				Total					Less than 12 months				12 months or more				Total
($ in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Number of Securities
U.S. government agency securities	$	—	$	—	$	16,629	$	205	$	16,629	$	205	3	$	—	$	—	$	10,854	$	216	$	10,854	$	216	2
State, county and municipals	1,917		2		64,560		384		66,477		386		181	12,286		25		—		—		12,286		25		30
Mortgage-backed securities	13,180		25		64,028		747		77,208		772		166	9,261		32		17,829		89		27,090		121		50
Corporate debt securities	—		—		2,041		17		2,041		17		1	16,777		220		—		—		16,777		220		9
Total	$	15,097	$	27	$	147,258	$	1,353	$	162,355	$	1,380	351	$	38,324	$	277	$	28,683	$	305	$	67,007	$	582	91


	December 31, 2018														December 31, 2019
	Less than 12 months				12 months or more					Total					Less than 12 months				12 months or more				Total
($ in thousands)	Fair Value		Unrealized Losses		Fair Value		��	Unrealized Losses		Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Number of Securities
U.S. government agency securities	$	—	$	—	$	21,649		$	818	$	21,649	$	818	3	$	1,035	$	2	$	11,091	$	58	$	12,126	$	60	6
State, county and municipals	16,136		98		130,975			3,154		147,111		3,252		440	22,451		132		7,605		25		30,056		157		56
Mortgage-backed securities	20,568		132		89,189			2,902		109,757		3,034		204	49,626		245		47,271		452		96,897		697		150
Corporate debt securities	51,592		677		9,757			416		61,349		1,093		33	—		—		—		—		—		—		—
Total	$	88,296	$	907	$	251,570		$	7,290	$	339,866	$	8,197	680	$	73,112	$	379	$	65,967	$	535	$	139,079	$	914	212

The Company evaluates securities AFS in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. In making this evaluation, management considers the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.

As of ~~June 30, 2019,~~March 31, 2020, the Company does not consider its securities AFS with unrealized losses to be ~~other-than-temporarily impaired,~~attributable to credit-related factors, as the unrealized losses in each category have occurred as a result of changes in noncredit-related factors such as changes in interest rates, market spreads and market conditions subsequent to purchase, not credit ~~deterioration.~~deterioration; thus, no allowance for credit losses on securities AFS was recorded. The Company has the ability and intent to hold its securities to maturity. There were no other-than-temporary impairments charged to earnings during the ~~six months ended June 30, 2019 or 2018.~~full year 2019.

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


	June 30, 2019				March 31, 2020
(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in less than one year	$	21,526	$	21,528	$	16,942	$	16,982
Due in one year through five years	187,172		189,049		235,471		237,604
Due after five years through ten years	34,437		34,702		35,066		35,929
Due after ten years	6,407		6,881		10,424		11,392
	249,542		252,160		297,903		301,907
Mortgage-backed securities	150,094		151,829		203,575		209,953
Securities AFS	$	399,636	$	403,989	$	501,478	$	511,860

Proceeds and realized gains / losses from the sale of securities AFS were as follows.


	Six Months Ended June 30,					Three Months Ended March 31,
(in thousands)	2019			2018		2020		2019
Gross gains	$	152		$	—	$	—	$	133
Gross losses	(120		)	—		—		(120		)
Gains (losses) on sales of securities AFS, net	$	32		$	—	$	—	$	13
Proceeds from sales of securities AFS	$	13,240		$	—	$	—	$	8,076

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

The loan composition is summarized as follows.


	June 30, 2019					December 31, 2018					March 31, 2020					December 31, 2019
(in thousands)	Amount			% of Total		Amount			% of Total		Amount			% of Total		Amount			% of Total
Commercial & industrial	$	737,928		34	%	$	684,920		32	%	$	831,257		32	%	$	806,189		31	%
Owner-occupied commercial real estate (“CRE”)	447,554			20		441,353			20
Agricultural (“AG”) production	35,765			2		35,625			2
AG real estate	53,485			2		53,444			2
Owner-occupied CRE											499,705			19		496,372			19
Agricultural											95,991			3		95,450			4
CRE investment	326,820			15		343,652			16		448,758			17		443,218			17
Construction & land development	73,108			3		80,599			4		96,055			4		92,970			4
Residential construction	38,246			2		30,926			1		52,945			2		54,403			2
Residential first mortgage	345,061			16		357,841			17		432,126			17		432,167			17
Residential junior mortgage	116,433			5		111,328			5		121,105			5		122,771			5
Retail & other	28,873			1		26,493			1		29,482			1		30,211			1
Loans	2,203,273			100	%	2,166,181			100	%	2,607,424			100	%	2,573,751			100	%
Less allowance for loan losses (“ALLL”)	13,571					13,153
Less allowance for credit losses - Loans (“ACL-Loans”)											26,202					13,972
Loans, net	$	2,189,702				$	2,153,028				$	2,581,222				$	2,559,779
Allowance for loan losses to loans	0.62		%			0.61		%
Allowance for credit losses - Loans to loans											1.00		%			0.54		%

~~As a further breakdown,~~Accrued interest on loans ~~are summarized by originated~~of $7 million at both March 31, 2020 and ~~acquired as follows.~~December 31, 2019 is included in accrued interest receivable and other assets on the consolidated balance sheets. See Note 1 for for the Company's accounting policy on accrued interest with respect to loans and the allowance for credit losses.

Allowance for Credit Losses-Loans:

June 30, 2019 December 31, 2018
(in thousands)
Originated
Amount

% of
Total

Acquired
Amount

% of
Total

Originated
Amount

% of
Total

Acquired
Amount

% of
Total
Commercial & industrial $ 625,450
40 % $ 112,478
18 % $ 568,100
38 % $ 116,820
17 %
Owner-occupied CRE 306,634
19
140,920
22
283,531
19
157,822
23
AG production 11,383
1
24,382
4
11,113
1
24,512
4
AG real estate 33,907
2
19,578
3
31,374
2
22,070
3
CRE investment 165,687
10
161,133
26
171,087
12
172,565
25
Construction & land development 60,297
4
12,811
2
66,478
4
14,121
2
Residential construction 37,996
2
250
—
30,926
2
—
—
Residential first mortgage 221,613
14
123,448
20
220,368
15
137,473
20
Residential junior mortgage 88,053
6
28,380
5
78,379
5
32,949
5
Retail & other 27,115
2
1,758
—
23,809
2
2,684
1
Loans 1,578,135
100 % 625,138
100 % 1,485,165
100 % 681,016
100 %
Less ALLL 11,934
1,637
11,448
1,705

Loans, net $ 1,566,201
$ 623,501
$ 1,473,717
$ 679,311

ALLL to loans 0.76 % 0.26 % 0.77 % 0.25 %
As a percent of total loans 72 % 28 % 69 % 31 %

~~Practically all~~The majority of the Company’s loans, commitments, and 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.

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


	Six Months Ended						Year Ended			Three Months Ended						Year Ended
(in thousands)	June 30, 2019			June 30, 2018			December 31, 2018			March 31, 2020			March 31, 2019			December 31, 2019
Beginning balance	$	13,153		$	12,653		$	12,653		$	13,972		$	13,153		$	13,153
Provision for loan losses	500			1,020			1,600
Adoption of CECL										8,488			—			—
Initial PCD ACL										797			—			—
Total impact for adoption of CECL										9,285			—			—
Provision for credit losses										3,000			200			1,200
Charge-offs	(232		)	(877		)	(1,213		)	(93		)	(10		)	(927		)
Recoveries	150			79			113			38			27			546
Net (charge-offs) recoveries	(82		)	(798		)	(1,100		)	(55		)	17			(381		)
Ending balance	$	13,571		$	12,875		$	13,153		$	26,202		$	13,370		$	13,972

The following ~~tables present~~table presents the balance and activity in the ~~ALLL by portfolio segment and the recorded investment in loans~~ACL-Loans by portfolio segment.

TOTAL – Six Months Ended June 30, 2019
(in thousands)
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
ALLL:
Beginning balance $ 5,271
$ 2,847
$ 121
$ 301
$ 1,470
$ 510
$ 211
$ 1,646
$ 472
$ 304
$ 13,153
Provision 371
17
15
23
(19 ) (65 ) 35
(79 ) 66
136
500
Charge-offs —
(13 ) —
—
—
—
—
—
(60 ) (159 ) (232 )
Recoveries 50
2
—
—
—
—
—
35
29
34
150
Net (charge-offs) recoveries 50
(11 ) —
—
—
—
—
35
(31 ) (125 ) (82 )
Ending balance $ 5,692
$ 2,853
$ 136
$ 324
$ 1,451
$ 445
$ 246
$ 1,602
$ 507
$ 315
$ 13,571
As % of ALLL 42 % 21 % 1 % 2 % 11 % 3 % 2 % 12 % 4 % 2 % 100 %
ALLL:
Individually evaluated $ 382
$ —
$ 38
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ 420
Collectively evaluated 5,310
2,853
98
324
1,451
445
246
1,602
507
315
13,151
Ending balance $ 5,692
$ 2,853
$ 136
$ 324
$ 1,451
$ 445
$ 246
$ 1,602
$ 507
$ 315
$ 13,571
Loans:
Individually evaluated $ 2,476
$ 2,734
$ 401
$ 734
$ 1,520
$ 472
$ 451
$ 2,632
$ 224
$ 12
$ 11,656
Collectively evaluated 735,452
444,820
35,364
52,751
325,300
72,636
37,795
342,429
116,209
28,861
2,191,617
Total loans $ 737,928
$ 447,554
$ 35,765
$ 53,485
$ 326,820
$ 73,108
$ 38,246
$ 345,061
$ 116,433
$ 28,873
$ 2,203,273
Less ALLL 5,692
2,853
136
324
1,451
445
246
1,602
507
315
13,571
Net loans $ 732,236
$ 444,701
$ 35,629
$ 53,161
$ 325,369
$ 72,663
$ 38,000
$ 343,459
$ 115,926
$ 28,558
$ 2,189,702

~~As a further breakdown, the ALLL is summarized by originated and acquired as follows.~~

Originated – Six Months Ended June 30, 2019
(in thousands)
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
ALLL:
Beginning balance $ 4,683
$ 2,439
$ 110
$ 255
$ 1,230
$ 431
$ 211
$ 1,400
$ 408
$ 281
$ 11,448
Provision 385
36
12
23
14
(49 ) 1
(56 ) 8
136
510
Charge-offs —
(13 ) —
—
—
—
—
—
—
(159 ) (172 )
Recoveries 50
2
—
—
—
—
—
35
27
34
148
Net (charge-offs) recoveries 50
(11 ) —
—
—
—
—
35
27
(125 ) (24 )
Ending balance $ 5,118
$ 2,464
$ 122
$ 278
$ 1,244
$ 382
$ 212
$ 1,379
$ 443
$ 292
$ 11,934
As % of ALLL 43 % 21 % 1 % 2 % 10 % 3 % 2 % 12 % 4 % 2 % 100 %
ALLL:
Individually evaluated $ 382
$ —
$ 38
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ 420
Collectively evaluated 4,736
2,464
84
278
1,244
382
212
1,379
443
292
11,514
Ending balance $ 5,118
$ 2,464
$ 122
$ 278
$ 1,244
$ 382
$ 212
$ 1,379
$ 443
$ 292
$ 11,934
Loans:
Individually evaluated $ 777
$ 1,841
$ 224
$ 466
$ —
$ —
$ 451
$ —
$ —
$ —
$ 3,759
Collectively evaluated 624,673
304,793
11,159
33,441
165,687
60,297
37,545
221,613
88,053
27,115
1,574,376
Total loans $ 625,450
$ 306,634
$ 11,383
$ 33,907
$ 165,687
$ 60,297
$ 37,996
$ 221,613
$ 88,053
$ 27,115
$ 1,578,135
Less ALLL 5,118
2,464
122
278
1,244
382
212
1,379
443
292
11,934
Net loans $ 620,332
$ 304,170
$ 11,261
$ 33,629
$ 164,443
$ 59,915
$ 37,784
$ 220,234
$ 87,610
$ 26,823
$ 1,566,201

Acquired – Six Months Ended June 30, 2019
(in thousands)
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
ALLL:
Beginning balance $ 588
$ 408
$ 11
$ 46
$ 240
$ 79
$ —
$ 246
$ 64
$ 23
$ 1,705
Provision (14 ) (19 ) 3
—
(33 ) (16 ) 34
(23 ) 58
—
(10 )
Charge-offs —
—
—
—
—
—
—
—
(60 ) —
(60 )
Recoveries —
—
—
—
—
—
—
—
2
—
2
Net (charge-offs) recoveries —
—
—
—
—
—
—
—
(58 ) —
(58 )
Ending balance $ 574
$ 389
$ 14
$ 46
$ 207
$ 63
$ 34
$ 223
$ 64
$ 23
$ 1,637
As % of ALLL 35 % 24 % 1 % 3 % 13 % 4 % 2 % 13 % 4 % 1 % 100 %
ALLL:
Individually evaluated $ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
Collectively evaluated 574
389
14
46
207
63
34
223
64
23
1,637
Ending balance $ 574
$ 389
$ 14
$ 46
$ 207
$ 63
$ 34
$ 223
$ 64
$ 23
$ 1,637
Loans:
Individually evaluated $ 1,699
$ 893
$ 177
$ 268
$ 1,520
$ 472
$ —
$ 2,632
$ 224
$ 12
$ 7,897
Collectively evaluated 110,779
140,027
24,205
19,310
159,613
12,339
250
120,816
28,156
1,746
617,241
Total loans $ 112,478
$ 140,920
$ 24,382
$ 19,578
$ 161,133
$ 12,811
$ 250
$ 123,448
$ 28,380
$ 1,758
$ 625,138
Less ALLL 574
389
14
46
207
63
34
223
64
23
1,637
Net loans $ 111,904
$ 140,531
$ 24,368
$ 19,532
$ 160,926
$ 12,748
$ 216
$ 123,225
$ 28,316
$ 1,735
$ 623,501



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

For comparison purposes, the following ~~tables present~~table presents the balance and activity in the ~~ALLL by portfolio segment and the recorded investment in loans~~ACL-Loans by portfolio segment for the prior year-end period.

TOTAL – Year Ended December 31, 2018
(in thousands)
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
ALLL:
Beginning balance $ 4,934
$ 2,607
$ 129
$ 296
$ 1,388
$ 726
$ 251
$ 1,609
$ 488
$ 225
$ 12,653
Provision 1,107
300
(8 ) 5
119
(216 ) (40 ) 117
(51 ) 267
1,600
Charge-offs (813 ) (74 ) —
—
(37 ) —
—
(85 ) —
(204 ) (1,213 )
Recoveries 43
14
—
—
—
—
—
5
35
16
113
Net (charge-offs) recoveries (770 ) (60 ) —
—
(37 ) —
—
(80 ) 35
(188 ) (1,100 )
Ending balance $ 5,271
$ 2,847
$ 121
$ 301
$ 1,470
$ 510
$ 211
$ 1,646
$ 472
$ 304
$ 13,153
As % of ALLL 40 % 22 % 1 % 2 % 11 % 4 % 2 % 12 % 4 % 2 % 100 %
ALLL:
Individually evaluated $ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
Collectively evaluated 5,271
2,847
121
301
1,470
510
211
1,646
472
304
13,153
Ending balance $ 5,271
$ 2,847
$ 121
$ 301
$ 1,470
$ 510
$ 211
$ 1,646
$ 472
$ 304
$ 13,153
Loans:
Individually evaluated $ 2,927
$ 1,506
$ —
$ 222
$ 1,686
$ 603
$ —
$ 2,750
$ 233
$ 12
$ 9,939
Collectively evaluated 681,993
439,847
35,625
53,222
341,966
79,996
30,926
355,091
111,095
26,481
2,156,242
Total loans $ 684,920
$ 441,353
$ 35,625
$ 53,444
$ 343,652
$ 80,599
$ 30,926
$ 357,841
$ 111,328
$ 26,493
$ 2,166,181
Less ALLL 5,271
2,847
121
301
1,470
510
211
1,646
472
304
13,153
Net loans $ 679,649
$ 438,506
$ 35,504
$ 53,143
$ 342,182
$ 80,089
$ 30,715
$ 356,195
$ 110,856
$ 26,189
$ 2,153,028



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

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

The ACL-Loans represents management’s estimate of expected credit losses in the Company’s loan portfolio at the balance sheet date. To assess the appropriateness of the ACL-Loans, an allocation methodology is ~~summarized~~applied by ~~originated~~Nicolet which focuses on evaluation of qualitative and ~~acquired as follows.~~

Originated – Year Ended December 31, 2018
(in thousands)
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
ALLL:
Beginning balance $ 4,192
$ 2,115
$ 112
$ 235
$ 1,154
$ 628
$ 200
$ 1,297
$ 409
$ 200
$ 10,542
Provision 1,262
385
(2 ) 20
113
(197 ) 11
187
(31 ) 266
2,014
Charge-offs (813 ) (64 ) —
—
(37 ) —
—
(85 ) —
(201 ) (1,200 )
Recoveries 42
3
—
—
—
—
—
1
30
16
92
Net (charge-offs) recoveries (771 ) (61 ) —
—
(37 ) —
—
(84 ) 30
(185 ) (1,108 )
Ending balance $ 4,683
$ 2,439
$ 110
$ 255
$ 1,230
$ 431
$ 211
$ 1,400
$ 408
$ 281
$ 11,448
As % of ALLL 41 % 21 % 1 % 2 % 11 % 4 % 2 % 12 % 4 % 2 % 100 %
ALLL:
Individually evaluated $ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
Collectively evaluated 4,683
2,439
110
255
1,230
431
211
1,400
408
281
11,448
Ending balance $ 4,683
$ 2,439
$ 110
$ 255
$ 1,230
$ 431
$ 211
$ 1,400
$ 408
$ 281
$ 11,448
Loans:
Individually evaluated $ 227
$ 321
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ 548
Collectively evaluated 567,873
283,210
11,113
31,374
171,087
66,478
30,926
220,368
78,379
23,809
1,484,617
Total loans $ 568,100
$ 283,531
$ 11,113
$ 31,374
$ 171,087
$ 66,478
$ 30,926
$ 220,368
$ 78,379
$ 23,809
$ 1,485,165
Less ALLL 4,683
2,439
110
255
1,230
431
211
1,400
408
281
11,448
Net loans $ 563,417
$ 281,092
$ 11,003
$ 31,119
$ 169,857
$ 66,047
$ 30,715
$ 218,968
$ 77,971
$ 23,528
$ 1,473,717
environmental factors, including but not limited to: (i) evaluation of facts and issues related to specific loans; (ii) management’s ongoing review and grading of the loan portfolio; (iii) consideration of historical loan loss and delinquency experience on each portfolio segment; (iv) trends in past due and nonperforming loans; (v) the risk characteristics of the various loan segments; (vi) changes in the size and character of the loan portfolio; (vii) concentrations of loans to specific borrowers or industries; (viii) existing economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect expected credit losses. Assessing these numerous factors involves significant judgment.

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

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

Acquired – Year Ended December 31, 2018
(in thousands)
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
ALLL:
Beginning balance $ 742
$ 492
$ 17
$ 61
$ 234
$ 98
$ 51
$ 312
$ 79
$ 25
$ 2,111
Provision (155 ) (85 ) (6 ) (15 ) 6
(19 ) (51 ) (70 ) (20 ) 1
(414 )
Charge-offs —
(10 ) —
—
—
—
—
—
—
(3 ) (13 )
Recoveries 1
11
—
—
—
—
—
4
5
—
21
Net (charge-offs) recoveries 1
1
—
—
—
—
—
4
5
(3 ) 8
Ending balance $ 588
$ 408
$ 11
$ 46
$ 240
$ 79
$ —
$ 246
$ 64
$ 23
$ 1,705
As % of ALLL 34 % 24 % 1 % 3 % 14 % 5 % — % 14 % 4 % 1 % 100 %
ALLL:
Individually evaluated $ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
Collectively evaluated 588
408
11
46
240
79
—
246
64
23
1,705
Ending balance $ 588
$ 408
$ 11
$ 46
$ 240
$ 79
$ —
$ 246
$ 64
$ 23
$ 1,705
Loans:
Individually evaluated $ 2,700
$ 1,185
$ —
$ 222
$ 1,686
$ 603
$ —
$ 2,750
$ 233
$ 12
$ 9,391
Collectively evaluated 114,120
156,637
24,512
21,848
170,879
13,518
—
134,723
32,716
2,672
671,625
Total loans $ 116,820
$ 157,822
$ 24,512
$ 22,070
$ 172,565
$ 14,121
$ —
$ 137,473
$ 32,949
$ 2,684
$ 681,016
Less ALLL 588
408
11
46
240
79
—
246
64
23
1,705
Net loans $ 116,232
$ 157,414
$ 24,501
$ 22,024
$ 172,325
$ 14,042
$ —
$ 137,227
$ 32,885
$ 2,661
$ 679,311



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

The following table presents ~~nonaccrual~~impaired loans ~~by portfolio segment~~and their respective allowance for credit loss allocations at December 31, 2019, as determined in ~~total and then as a further breakdown by originated or acquired.~~accordance with historical accounting guidance.


	Total Nonaccrual Loans										Total Impaired Loans – December 31, 2019
(in thousands)	June 30, 2019			% of Total		December 31, 2018			% of Total		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial & industrial	$	2,673		35	%	$	2,816		52	%	$	5,932	$	7,950	$	625	$	5,405	$	1,170
Owner-occupied CRE	2,462			32		673			12		3,430		4,016		—		3,677		256
AG production	401			5		—			—
AG real estate	427			6		164			3
Agricultural											2,134		2,172		116		2,311		37
CRE investment	175			2		210			4		2,426		2,790		—		2,497		364
Construction & land development	—			—		80			1		382		382		—		460		—
Residential construction	451			6		1			—		—		—		—		—		—
Residential first mortgage	739			10		1,265			23		2,357		2,629		—		2,412		178
Residential junior mortgage	314			4		262			5		218		349		—		224		58
Retail & other	8			—		—			—		12		12		—		12		—
Nonaccrual loans	$	7,650		100	%	$	5,471		100	%
Percent of total loans	0.3		%			0.2		%
Total											$	16,891	$	20,300	$	741	$	16,998	$	2,063

June 30, 2019 December 31, 2018
(in thousands)
Originated
Amount

% of
Total

Acquired
Amount

% of
Total

Originated
Amount

% of
Total

Acquired
Amount

% of
Total
Commercial & industrial $ 953
23 % $ 1,720
51 % $ 352
25 % $ 2,464
61 %
Owner-occupied CRE 1,841
43
621
18
362
26
311
8
AG production 224
5
177
5
—
—
—
—
AG real estate 216
5
211
6
—
—
164
4
CRE investment —
—
175
5
—
—
210
5
Construction & land development —
—
—
—
—
—
80
2
Residential construction 451
11
—
—
1
—
—
—
Residential first mortgage 472
11
267
8
629
45
636
15
Residential junior mortgage 98
2
216
7
65
4
197
5
Retail & other —
—
8
—
—
—
—
—
Nonaccrual loans $ 4,255
100 % $ 3,395
100 % $ 1,409
100 % $ 4,062
100 %
Percent of nonaccrual loans 56 % 44 % 26 % 74 %
Past Due and Nonaccrual Loans:

The following tables present past due loans by portfolio segment.


	June 30, 2019												March 31, 2020
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or nonaccrual			Current			Total			30-89 Days Past Due (accruing)			90 Days & Over or nonaccrual			Current			Total
Commercial & industrial	$	344		$	2,673		$	734,911		$	737,928		$	1,060		$	6,050		$	824,147		$	831,257
Owner-occupied CRE	—			2,462			445,092			447,554			1,961			3,837			493,907			499,705
AG production	—			401			35,364			35,765
AG real estate	—			427			53,058			53,485
Agricultural													1			1,801			94,189			95,991
CRE investment	—			175			326,645			326,820			484			1,029			447,245			448,758
Construction & land development	71			—			73,037			73,108			210			533			95,312			96,055
Residential construction	841			451			36,954			38,246			100			—			52,845			52,945
Residential first mortgage	383			739			343,939			345,061			1,985			953			429,188			432,126
Residential junior mortgage	536			314			115,583			116,433			249			566			120,290			121,105
Retail & other	122			8			28,743			28,873			80			—			29,402			29,482
Total loans	$	2,297		$	7,650		$	2,193,326		$	2,203,273		$	6,130		$	14,769		$	2,586,525		$	2,607,424
Percent of total loans	0.1		%	0.3		%	99.6		%	100.0		%	0.2		%	0.6		%	99.2		%	100.0		%


	December 31, 2018												December 31, 2019
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or nonaccrual			Current			Total			30-89 Days Past Due (accruing)			90 Days & Over or nonaccrual			Current			Total
Commercial & industrial	$	—		$	2,816		$	682,104		$	684,920		$	1,729		$	6,249		$	798,211		$	806,189
Owner-occupied CRE	557			673			440,123			441,353			112			3,311			492,949			496,372
AG production	19			—			35,606			35,625
AG real estate	35			164			53,245			53,444
Agricultural													—			1,898			93,552			95,450
CRE investment	180			210			343,262			343,652			—			1,073			442,145			443,218
Construction & land development	—			80			80,519			80,599			2,063			20			90,887			92,970
Residential construction	—			1			30,925			30,926			302			—			54,101			54,403
Residential first mortgage	758			1,265			355,818			357,841			2,736			1,090			428,341			432,167
Residential junior mortgage	12			262			111,054			111,328			217			480			122,074			122,771
Retail & other	10			—			26,483			26,493			110			1			30,100			30,211
Total loans	$	1,571		$	5,471		$	2,159,139		$	2,166,181		$	7,269		$	14,122		$	2,552,360		$	2,573,751
Percent of total loans	0.1		%	0.2		%	99.7		%	100.0		%	0.3		%	0.5		%	99.2		%	100.0		%

The following table presents nonaccrual loans by portfolio segment. The nonaccrual loans without a related allowance for credit losses have been reflected in the collateral dependent loans table above.



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

Credit Quality Information:

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



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

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

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

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

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

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

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

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

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

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

The following tables present total loans by risk categories.



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



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

An internal loan review function rates loans using a grading system based on different risk categories. Loans with a Substandard grade are considered to have a greater risk of loss and may be assigned allocations for loss based on specific review of the weaknesses observed in the individual credits. Such loans are constantly monitored by the loan review function to ensure early identification of any deterioration. A description of the loan risk categories used by the Company follows.

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 nonaccrual loans are considered to be categorized in this rating, regardless of collateral sufficiency.

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

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

~~The following tables present total loans by risk categories.~~

June 30, 2019
(in thousands) Grades 1- 4 Grade 5 Grade 6 Grade 7 Grade 8 Grade 9 Total
Commercial & industrial $ 702,261
$ 20,234
$ 2,413
$ 13,020
$ —
$ —
$ 737,928
Owner-occupied CRE 418,203
16,027
2,464
10,860
—
—
447,554
AG production 26,000
5,096
1,622
3,047
—
—
35,765
AG real estate 40,983
6,645
2,367
3,490
—
—
53,485
CRE investment 322,209
2,569
890
1,152
—
—
326,820
Construction & land development 73,040
52
16
—
—
—
73,108
Residential construction 37,795
—
—
451
—
—
38,246
Residential first mortgage 340,609
1,360
1,264
1,828
—
—
345,061
Residential junior mortgage 116,092
17
—
324
—
—
116,433
Retail & other 28,865
—
—
8
—
—
28,873
Total loans $ 2,106,057
$ 52,000
$ 11,036
$ 34,180
$ —
$ —
$ 2,203,273
Percent of total 95.6 % 2.4 % 0.5 % 1.5 % —
—
100.0 %

December 31, 2018
(in thousands) Grades 1- 4 Grade 5 Grade 6 Grade 7 Grade 8 Grade 9 Total
Commercial & industrial $ 649,475
$ 16,145
$ 6,178
$ 13,122
$ —
$ —
$ 684,920
Owner-occupied CRE 405,198
22,776
6,569
6,810
—
—
441,353
AG production 29,363
3,302
2,351
609
—
—
35,625
AG real estate 46,248
3,246
2,983
967
—
—
53,444
CRE investment 334,080
6,792
—
2,780
—
—
343,652
Construction & land development 75,365
5,138
16
80
—
—
80,599
Residential construction 30,926
—
—
—
—
—
30,926
Residential first mortgage 353,239
1,406
510
2,686
—
—
357,841
Residential junior mortgage 111,037
17
—
274
—
—
111,328
Retail & other 26,493
—
—
—
—
—
26,493
Total loans $ 2,061,424
$ 58,822
$ 18,607
$ 27,328
$ —
$ —
$ 2,166,181
Percent of total 95.1 % 2.7 % 0.9 % 1.3 % —
—
100.0 %

Nonaccretable Discount on Purchased Credit Impaired Loans:

The following ~~tables present impaired loans.~~

Total Impaired Loans – June 30, 2019
(in thousands)
Recorded
Investment

Unpaid Principal
Balance

Related
Allowance

Average Recorded
Investment

Interest Income
Recognized
Commercial & industrial $ 2,476
$ 7,253
$ 382
$ 3,196
$ 969
Owner-occupied CRE 2,734
3,069
—
2,812
127
AG production 401
404
38
402
4
AG real estate 734
734
—
735
—
CRE investment 1,520
1,525
—
1,523
5
Construction & land development 472
472
—
497
—
Residential construction 451
451
—
451
—
Residential first mortgage 2,632
2,798
—
2,672
73
Residential junior mortgage 224
224
—
227
—
Retail & other 12
15
—
12
3
Total $ 11,656
$ 16,945
$ 420
$ 12,527
$ 1,181
Originated impaired loans $ 3,759
$ 3,855
$ 420
$ 3,829
$ 97
Acquired impaired loans 7,897
13,090
—
8,698
1,084
Total $ 11,656
$ 16,945
$ 420
$ 12,527
$ 1,181

Total Impaired Loans – December 31, 2018
(in thousands)
Recorded
Investment

Unpaid Principal
Balance

Related
Allowance

Average Recorded
Investment

Interest Income
Recognized
Commercial & industrial $ 2,927
$ 6,736
$ —
$ 4,041
$ 660
Owner-occupied CRE 1,506
1,833
—
1,659
137
AG production —
—
—
—
—
AG real estate 222
281
—
238
26
CRE investment 1,686
2,484
—
1,606
163
Construction & land development 603
1,506
—
603
21
Residential construction —
—
—
—
—
Residential first mortgage 2,750
2,907
—
2,478
176
Residential junior mortgage 233
262
—
62
15
Retail & other 12
12
—
12
1
Total $ 9,939
$ 16,021
$ —
$ 10,699
$ 1,199
Originated impaired loans $ 548
$ 548
$ —
$ 899
$ 154
Acquired impaired loans 9,391
15,473
—
9,800
1,045
Total $ 9,939
$ 16,021
$ —
$ 10,699
$ 1,199

~~Total~~table summarizes the nonaccretable discount on purchased credit impaired loans ~~(in aggregate since~~prior to the ~~Company’s 2013 acquisitions) were initially recorded at a fair value~~adoption of $43.6 million on their respective acquisition dates, net of an initial $34.4 million nonaccretable mark and a zero accretable mark. At June 30, 2019, $7.9 million of the $43.6 million remain in impaired loans.ASU 2016-13.


Nonaccretable discount on purchased credit impaired loans:	Six Months Ended						Year Ended
										Three Months Ended			Year Ended
(in thousands)	June 30, 2019			June 30, 2018			December 31, 2018			March 31, 2019			December 31, 2019
Balance at beginning of period	$	6,408		$	9,471		$	9,471		$	6,408		$	6,408
Acquired balance, net										—			911
Accretion to loan interest income	(1,524		)	(1,580		)	(1,976		)	(221		)	(4,713		)
Transferred to accretable	—			(56		)	(990		)
Disposals of loans	—			—			(97		)	—			(679		)
Balance at end of period	$	4,884		$	7,835		$	6,408		$	6,187		$	1,927

Troubled Debt Restructurings:

At ~~June 30, 2019,~~March 31, 2020, there were ~~six~~four loans classified as troubled debt restructurings with a current outstanding balance of ~~$1.4~~$1.1 million ~~(including performing TDRs of $0.5 million and the remainder on nonaccrual)~~ and pre-modification balance of ~~$2.1~~$1.4 million. In comparison, at December 31, ~~2018,~~2019, there were ~~four~~five loans classified as troubled debt restructurings with an outstanding balance of ~~$0.6~~$1.1 million and pre-modification balance of ~~$2.7~~$1.4 million. There were no loans classified as troubled debt restructurings during the previous twelve months that subsequently defaulted during the ~~six~~three months ended ~~June 30, 2019.~~March 31, 2020. As of ~~June 30, 2019,~~March 31, 2020, there were no commitments to lend additional funds to debtors whose terms have been modified in troubled debt restructurings.

Note 7 – Goodwill and Other Intangibles and Mortgage Servicing Rights

Management periodically reviews the carrying value of its intangible assets to determine if any impairment has occurred, in which case an impairment charge would be recorded as an expense in the period of impairment, or whether changes in circumstances have occurred that would require a revision to the remaining useful life which would impact expense prospectively. In making such determination, management evaluates whether there are any adverse qualitative factors indicating that an impairment may exist, as well as the performance, on an undiscounted basis, of the underlying operations or assets which give rise to the intangible. In the first quarter, management considered the potential impacts of the COVID-19 pandemic on the valuation of our franchise value, stability of deposits, and of the wealth client base, underlying our goodwill, core deposit intangible, and customer list intangibles, and determined no impairments were indicated. However, the impacts of the COVID-19 pandemic, which began in March 2020, are still evolving. The Company’s ~~quarterly~~ assessment ~~indicated no~~in 2019 resulted in an $0.8 million full impairment charge on ~~goodwill, core deposit intangibles or customer list intangibles was required for the year ended December 31, 2018 or the six months ended June 30, 2019.~~non-bank goodwill. A summary of goodwill and other intangibles was as follows.


	Six Months Ended		Year Ended		Three Months Ended		Year Ended
(in thousands)	June 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Goodwill	$	107,366	$	107,366	$	151,198	$	151,198
Core deposit intangibles	10,794		12,562		10,031		10,897
Customer list intangibles	4,125		4,379		3,745		3,872
Other intangibles	14,919		16,941		13,776		14,769
Goodwill and other intangibles, net	$	122,285	$	124,307	$	164,974	$	165,967

Goodwill: ~~Goodwill~~A summary of goodwill was ~~$107.4 million at both June 30,~~as follows. During 2019, ~~and December 31, 2018.~~goodwill increased due to the Choice acquisition. See Note 2 for additional information on the Company's acquisitions.



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

Other intangible assets: Other intangible assets, consisting of core deposit intangibles and customer list intangibles, are amortized over their estimated finite lives. During 2019, core deposit intangibles increased due to the Choice acquisition. See Note 2 for additional information on the Company's acquisitions.


	Six Months Ended			Year Ended			Three Months Ended			Year Ended
(in thousands)	June 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
Core deposit intangibles:
Gross carrying amount	$	29,015		$	29,015		$	30,715		$	30,715
Accumulated amortization	(18,221		)	(16,453		)	(20,684		)	(19,818		)
Net book value	$	10,794		$	12,562		$	10,031		$	10,897
Additions during the period	$	—		$	—		$	—		$	1,700
Amortization during the period	$	1,768		$	3,915		$	866		$	3,365
Customer list intangibles:
Gross carrying amount	$	5,523		$	5,523		$	5,523		$	5,523
Accumulated amortization	(1,398		)	(1,144		)	(1,778		)	(1,651		)
Net book value	$	4,125		$	4,379		$	3,745		$	3,872
Additions during the period	$	—		$	290		$	—		$	—
Amortization during the period	$	254		$	474		$	127		$	507

Mortgage servicing rights: 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. A summary of the changes in the mortgage servicing rights asset was as follows.


	Six Months Ended			Year Ended			Three Months Ended			Year Ended
(in thousands)	June 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
Mortgage servicing rights ("MSR") asset:
MSR asset at beginning of year	$	3,749		$	3,187		$	5,919		$	3,749
Capitalized MSR	871			1,203			559			2,876
MSR asset acquired							—			160
Amortization during the period	(387		)	(641		)	(284		)	(866		)
MSR asset at end of period	$	4,233		$	3,749		$	6,194		$	5,919
Valuation allowance at beginning of year							$	—		$	—
Additions							(175		)	—
Valuation allowance at end of period							$	(175	)	$	—
MSR asset, net							$	6,019		$	5,919
Fair value of MSR asset at end of period	$	6,506		$	6,347		$	8,807		$	8,420
Residential mortgage loans serviced for others	$	663,360		$	603,446		$	890,162		$	847,756
Net book value of MSR asset to loans serviced for others	0.64		%	0.62		%	0.68		%	0.70		%

The Company periodically evaluates its mortgage servicing rights asset for impairment. At each reporting date, impairment is assessed based on estimated fair value using estimated prepayment speeds of the underlying mortgage loans serviced and stratifications based on the risk characteristics of the underlying loans (predominantly loan type and note interest rate). NoA valuation allowance ~~or impairment charge~~of $0.2 million was recorded for the three months ended March 31, 2020, while no valuation allowance was recorded for the year ended December 31, ~~2018 or the six months ended June 30,~~ 2019. See Note 9 for additional information on the fair value of the MSR asset.

The following table shows the estimated future amortization expense for amortizing intangible assets and the MSR asset. The projections are based on existing asset balances, the current interest rate environment and prepayment speeds as of ~~June 30, 2019.~~March 31, 2020. The actual amortization expense the Company recognizes in any given period may be significantly different depending upon acquisition or sale activities, changes in interest rates, prepayment speeds, market conditions, regulatory requirements and events or circumstances that indicate the carrying amount of an asset may not be recoverable.


(in thousands)	Core deposit intangibles		Customer list intangibles		MSR asset		Core deposit intangibles		Customer list intangibles		MSR asset
Year ending December 31,
2019 (remaining six months)	$	1,569	$	253	$	395
2020	2,657		507		773
2020 (remaining nine months)							$	2,127	$	380	$	829
2021	2,167		507		623		2,453		507		937
2022	1,735		507		623		1,987		507		930
2023	1,273		483		520		1,490		483		962
2024	841		449		324		1,010		449		541
2025							573		449		541
Thereafter	552		1,419		975		391		970		1,454
Total	$	10,794	$	4,125	$	4,233	$	10,031	$	3,745	$	6,194

Note 8 – Short and Long-Term Borrowings

Short-Term Borrowings:

~~The Company did not have~~Short-term borrowings include any ~~short-term borrowings (borrowing~~borrowing with an original maturity of one year or ~~less)~~less. The Company had a $75 million short-term FHLB advance, with a fixed rate of 0.61%, outstanding at ~~June 30, 2019 or~~March 31, 2020. At December 31, ~~2018.~~2019, the Company did not have any outstanding short-term borrowings.

Long-Term Borrowings:

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


(in thousands)	June 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
FHLB advances	$	35,122		$	35,252		$	40,046		$	25,061
Junior subordinated debentures	30,335			30,096			30,695			30,575
Subordinated notes	11,975			11,957			12,000			11,993
Total long-term borrowings	$	77,432		$	77,305		$	82,741		$	67,629
Percent of fixed rate long-term borrowings	69		%	69		%	70		%	64		%
Percent of floating rate long-term borrowings	31		%	31		%	30		%	36		%

FHLB Advances: The FHLB advances bear fixed rates, require interest-only monthly payments, and have maturity dates through ~~2022.~~2027. The weighted average rate of the FHLB advances was ~~1.72%~~1.11% at ~~both June 30, 2019~~March 31, 2020 and 1.57% at December 31, ~~2018.~~2019.

Junior Subordinated Debentures: The following table shows the breakdown of junior subordinated debentures. Interest on all debentures is current. Any applicable discounts (initially recorded to carry an acquired debenture at its then estimated fair market value) are being accreted to interest expense over the remaining life of the debentures. All the debentures below are currently callable and may be redeemed in part or in full at par plus any accrued but unpaid interest. At ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018, $29.2~~2019, $29.5 million and ~~$28.9~~$29.4 million, respectively, qualify as Tier 1 capital.


												Junior Subordinated Debentures
		Junior Subordinated Debentures												3/31/2020			3/31/2020		12/31/19
(in thousands)	Maturity Date	Par		6/30/2019 Unamortized Discount			6/30/2019 Carrying Value		12/31/2018 Carrying Value		Maturity Date	Par		Unamortized Discount			Carrying Value		Carrying Value
2004 Nicolet Bankshares Statutory Trust ⁽¹⁾	7/15/2034	$	6,186	$	—		$	6,186	$	6,186	7/15/2034	$	6,186	$	—		$	6,186	$	6,186
2005 Mid-Wisconsin Financial Services, Inc. ⁽²⁾	12/15/2035	10,310		(3,272		)	7,038		6,939		12/15/2035	10,310		(3,122		)	7,188		7,138
2006 Baylake Corp. ⁽³⁾	9/30/2036	16,598		(4,002		)	12,596		12,478		9/30/2036	16,598		(3,824		)	12,774		12,715
2004 First Menasha Bancshares, Inc. ⁽⁴⁾	3/17/2034	5,155		(640		)	4,515		4,493		3/17/2034	5,155		(608		)	4,547		4,536
Total		$	38,249	$	(7,914	)	$	30,335	$	30,096		$	38,249	$	(7,554	)	$	30,695	$	30,575


(1)	The interest rate is 8.00% fixed.


(2)	The debentures, assumed in April 2013 as the result of an acquisition, have a floating rate of the three-month LIBOR plus 1.43%, adjusted quarterly. The interest rates were ~~3.84%~~2.17% and ~~4.22%~~3.32% as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.


(3)	The debentures, assumed in April 2016 as a result of an acquisition, have a floating rate of the three-month LIBOR plus 1.35%, adjusted quarterly. The interest rates were ~~3.67%~~2.72% and ~~4.15%~~3.31% as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.


(4)	The debentures, assumed in April 2017 as the result of an acquisition, have a floating rate of the three-month LIBOR plus 2.79%, adjusted quarterly. The interest rates were ~~5.20%~~3.63% and ~~5.58%~~4.69% as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.

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

Note 9 – 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.

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

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

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

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

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.


(in thousands)			Fair Value Measurements Using								Fair Value Measurements Using
Measured at Fair Value on a Recurring Basis:	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
June 30, 2019
March 31, 2020
U.S. government agency securities	$	16,629	$	—	$	16,629	$	—	$	64,252	$	—	$	64,252	$	—
State, county and municipals	148,170		—		148,105		65		157,336		—		157,336		—
Mortgage-backed securities	151,829		—		151,829		—		209,953		—		209,953		—
Corporate debt securities	87,361		—		79,523		7,838		80,319		—		77,189		3,130
Securities AFS	$	403,989	$	—	$	396,086	$	7,903	$	511,860	$	—	$	508,730	$	3,130
Other investments (equity securities)	$	3,258	$	3,258	$	—	$	—	$	3,978	$	3,978	$	—	$	—
December 31, 2018
December 31, 2019
U.S. government agency securities	$	21,649	$	—	$	21,649	$	—	$	16,460	$	—	$	16,460	$	—
State, county and municipals	160,526		—		160,460		66		156,393		—		156,393		—
Mortgage-backed securities	131,644		—		131,644		—		195,018		—		195,018		—
Corporate debt securities	86,325		—		77,901		8,424		81,431		—		78,301		3,130
Securities AFS	$	400,144	$	—	$	391,654	$	8,490	$	449,302	$	—	$	446,172	$	3,130
Other investments (equity securities)	$	2,650	$	2,650	$	—	$	—	$	3,375	$	3,375	$	—	$	—

The following is a description of the valuation methodologies used by the Company for the securities AFS and equity securities measured at fair value on a recurring basis, noted in the tables above. Where quoted market prices on securities exchanges are available, the investments are classified as Level 1. Level 1 investments primarily include exchange-traded equity 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 U.S. government agency securities, mortgage-backed securities, obligations of state, county and municipals, and certain corporate debt securities. Finally, in certain cases where there is limited activity or less transparency around inputs to the estimated fair value, investments are classified within Level 3 of the hierarchy. Examples of these include private municipal bonds and corporate debt securities, which include trust preferred security investments. At ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, it was determined that carrying value was the best approximation of fair value for these Level 3 securities, based primarily on the internal analysis on these securities.

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


(in thousands)	Six Months Ended			Year Ended			Three Months Ended		Year Ended
Level 3 Fair Value Measurements:	June 30, 2019			December 31, 2018			March 31, 2020		December 31, 2019
Balance at beginning of year	$	8,490		$	9,151		$	3,130	$	8,490
Acquired balance							—		300
Paydowns/Sales/Settlements	(587		)	(661		)	—		(5,660		)
Balance at end of period	$	7,903		$	8,490		$	3,130	$	3,130

Nonrecurring basis fair value measurements:

The following table presents the Company’s assets measured at fair value on a nonrecurring basis, aggregated by level in the fair value hierarchy within which those measurements fall.


(in thousands)			Fair Value Measurements Using								Fair Value Measurements Using
Measured at Fair Value on a Nonrecurring Basis:	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
June 30, 2019
Impaired loans	$	11,236	$	—	$	—	$	11,236
March 31, 2020
Collateral dependent loans									$	10,062	$	—	$	—	$	10,062
Other real estate owned (“OREO”)	300		—		—		300		1,000		—		—		1,000
MSR asset	6,506		—		—		6,506		8,807		—		—		8,807
December 31, 2018
December 31, 2019
Impaired loans	$	9,939	$	—	$	—	$	9,939	$	16,150	$	—	$	—	$	16,150
OREO	420		—		—		420		1,000		—		—		1,000
MSR asset	6,347		—		—		6,347		8,420		—		—		8,420

The following is a description of the valuation methodologies used by the Company for the items noted in the table above. For individually evaluated impaired loans, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, the estimated fair value of the underlying collateral for collateral-dependent loans, or the estimated liquidity of the note. For OREO, the fair value is based upon the estimated fair value of the underlying collateral adjusted for the expected costs to sell. To estimate the fair value of the MSR asset, the underlying serviced loan pools are stratified by interest rate tranche and term of the loan, and a valuation model is used to calculate the present value of the expected future cash flows for each stratum. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as costs to service, a discount rate, ancillary income, default rates and losses, and prepayment speeds. Although some of these assumptions are based on observable market data, other assumptions are based on unobservable estimates of what market participants would use to measure fair value.

Financial instruments:

The carrying amounts and estimated fair values of the Company’s financial instruments are shown below.


June 30, 2019
March 31, 2020											March 31, 2020
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3			Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	154,920	$	154,920	$	154,920	$	—	$	—		$	241,960	$	241,960	$	241,960	$	—	$	—
Certificates of deposit in other banks	5,396		5,378		—		5,378		—			18,804		19,905		—		19,905		—
Securities AFS	403,989		403,989		—		396,086		7,903			511,860		511,860		—		508,730		3,130
Other investments, including equity securities	19,841		19,841		3,258		13,224		3,359			27,176		27,176		3,978		19,260		3,938
Loans held for sale	4,699		4,783		—		4,783		—			3,929		4,006		—		4,006		—
Loans, net	2,189,702		2,200,767		—		—		2,200,767			2,581,222		2,659,556		—		—		2,659,556
BOLI	69,222		69,222		69,222		—		—			78,665		78,665		78,665		—		—
MSR asset	4,233		6,506		—		—		6,506			6,019		8,807		—		—		8,807
Financial liabilities:
Deposits	$	2,536,639	$	2,537,128	$	—	$	—	$	2,537,128		$	3,023,466	$	3,029,747	$	—	$	—	$	3,029,747
Short-term borrowings												75,000		75,000		—		75,000		—
Long-term borrowings	77,432		76,671		—		35,254		41,417			82,741		82,958		—		40,877		42,081


December 31, 2018
December 31, 2019											December 31, 2019
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3			Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	249,526	$	249,526	$	249,526	$	—	$	—		$	182,059	$	182,059	$	182,059	$	—	$	—
Certificates of deposit in other banks	993		993		—		993		—			19,305		19,310		—		19,310		—
Securities AFS	400,144		400,144		—		391,654		8,490			449,302		449,302		—		446,172		3,130
Other investments, including equity securities	17,997		17,997		2,650		13,189		2,158			24,072		24,072		3,375		16,759		3,938
Loans held for sale	1,639		1,662		—		1,662		—			2,706		2,753		—		2,753		—
Loans, net	2,153,028		2,139,322		—		—		2,139,322			2,559,779		2,593,110		—		—		2,593,110
BOLI	66,310		66,310		66,310		—		—			78,140		78,140		78,140		—		—
MSR asset	3,749		6,347		—		—		6,347			5,919		8,420		—		—		8,420
Financial liabilities:
Deposits	$	2,614,138	$	2,614,995	$	—	$	—	$	2,614,995		$	2,954,453	$	2,956,229	$	—	$	—	$	2,956,229
Long-term borrowings	77,305		75,923		—		34,907		41,016			67,629		66,816		—		25,075		41,741

The carrying value of certain assets and liabilities such as cash and cash equivalents, BOLI, ~~and~~ nonmaturing deposits, and short-term borrowings, approximate their estimated fair value. For those financial instruments not previously disclosed, the following is a description of the valuation methodologies used.

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

Other investments: The valuation methodologies utilized for exchange-traded equity securities are discussed under “Recurring basis fair value measurements” above. The carrying amount of Federal Reserve Bank 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.

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

Long-term borrowings: The fair value of the FHLB advances is obtained from the FHLB which uses a discounted cash flow analysis based on current market rates of similar maturity debt securities and represents a Level 2 measurement. The fair values of the junior subordinated debentures and subordinated notes 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.

Lending-related commitments and derivative financial instruments: At ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the estimated fair value of letters of credit, interest rate lock commitments on residential mortgage loans, outstanding mandatory commitments to sell residential mortgage loans into the secondary market, and mirror interest rate swap agreements were not significant.

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

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

~~Note 10 – Operating Leases~~

As of January 1, 2019, the Company adopted ASU 2016-02 (Topic 842) on a prospective basis using the effective date method. The adoption of the new standard did not have a material impact on Nicolet's financial statements; however, additional disclosures have been added in accordance with the ASU. See Note 1 for additional information on this new accounting standard.

The operating lease ROU asset represents the right to use an underlying asset during the lease term, while the operating lease liability represents the obligation to make lease payments arising from the lease. The ROU asset and lease liability are recognized at lease commencement based on the present value of the remaining lease payments, considering a discount rate that represents Nicolet's incremental borrowing rate. Operating lease expense is recognized on a straight-line basis over the lease term and is recognized in occupancy, equipment, and office on the consolidated statements of income.

Nicolet leases space under non-cancelable operating lease agreements for certain bank and nonbank branch facilities with remaining lease terms of 2 to 7 years. Certain lease arrangements contain extension options which typically range from 5 to 10 years at the then fair market rental rates. The lease asset and liability considers renewal options when they are reasonably certain of being exercised.

~~A summary of net lease cost and selected other information related to operating leases was as follows.~~

Six Months Ended
($ in thousands) June 30, 2019
Net lease cost:
Operating lease cost $ 501
Variable lease cost 113
Net lease cost $ 614
Selected other operating lease information:
Weighted average remaining lease term (years) 5
Weighted average discount rate 2.5 %

~~The following table summarizes the maturity of remaining lease liabilities.~~

(in thousands)
Year ending December 31,
2019 (remaining six months) $ 566
2020 1,129
2021 1,017
2022 961
2023 718
2024 613
Thereafter 151
Total future minimum lease payments 5,155
Less: amount representing interest (129 )
Present value of net future minimum lease payments $ 5,026

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. Nicolet provides a diversified range of traditional banking and wealth management services to individuals and businesses in its market area and through the branch offices of its banking subsidiary, Nicolet National Bank (the “Bank”), in northeastern and central Wisconsin and in Menominee, Michigan.

Forward-Looking Statements

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

the effects of the COVID-19 pandemic on the business, customers, employees and third-party service providers of Nicolet or any of its acquisition targets;

operating, legal and regulatory risks, including the effects of legislative or regulatory developments affecting the financial industry generally or Nicolet specifically;

economic, market, political and competitive forces affecting Nicolet’s banking and wealth management businesses;

changes in interest rates, monetary policy and general economic conditions, which may impact Nicolet’s net interest income;

~~potential difficulties~~diversion of management time on pandemic-related issues;

adoption of new accounting standards, including the effects from the adoption of the CECL model on January 1, 2020, or changes in ~~integrating~~existing standards;

changes to statutes, regulations, or regulatory policies or practices resulting from the ~~operations of Nicolet with those of Choice following the merger;~~COVID-19 pandemic;

compliance or operational risks related to new products, services, ventures, or lines of business, if any, that Nicolet may pursue or implement; and

the risk that Nicolet’s ~~analyses~~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.

Overview

The following discussion is management’s analysis of the consolidated financial condition as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 and results of operations for the ~~three and six-month~~three-month periods ended ~~June 30, 2019~~March 31, 2020 and ~~2018.~~2019. It should be read in conjunction with Nicolet’s audited consolidated financial statements included in Nicolet’s Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

The timing of Nicolet’s acquisition of Choice Bancorp, Inc. (“Choice”) on November 8, 2019, at approximately 12% of pre-merger assets, impacts financial comparisons. Certain income statement results, average balances and related ratios for first quarter 2020 include three months of Choice, compared to no contribution from Choice in first quarter 2019 and a partial period of Choice in fourth quarter 2019.

Of importance, the World Health Organization declared the coronavirus COVID-19 a pandemic in March 2020. The impacts of the COVID-19 pandemic have resulted in, among other things, a significant stock and global markets decline, disruption in business and leisure activities as nation-wide stay-at-home orders were mandated, significant strain on the health care industry as it addressed the severity of the health crisis, and shift in the general economy (such as high unemployment, negative GDP expectations, a 150 bps decline in Federal funds rates, and the start of unprecedented government stimulus), triggering a 2020 recession.

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

closed locations. While we continue to pay all employees, we also supplemented the pay of our front-line employees working on-site and eliminated senior management incentive accruals for the quarter. Given the extent of uncertainty, we have guided numerous customers through new loans, temporary loan modifications, or participation in the Paycheck Protection Program (the “PPP”, which provided low rate and potentially forgivable loans to small businesses that meet criteria of the program, initially funding in April). The dramatic events surrounding the pandemic will clearly impact future expectations about credit costs and margins, as well as fee income and expenses.

Performance Summary

Table 1: Earnings Summary and Selected Financial Data


	At or for the Three Months Ended															At or for the Six Months Ended						At or for the Three Months Ended
(In thousands, except per share data)	6/30/2019			3/31/2019			12/31/2018			9/30/2018			6/30/2018			6/30/2019			6/30/2018			3/31/2020			12/31/2019			9/30/2019			6/30/2019			3/31/2019
Results of operations:
Interest income	$	34,570		$	33,159		$	32,327		$	31,880		$	30,545		$	67,729		$	61,330		$	37,003		$	36,192		$	34,667		$	34,570		$	33,159
Interest expense	5,626			5,684			5,298			4,938			4,742			11,310			8,653			5,740			5,723			5,477			5,626			5,684
Net interest income	28,944			27,475			27,029			26,942			25,803			56,419			52,677			31,263			30,469			29,190			28,944			27,475
Provision for loan losses	300			200			240			340			510			500			1,020
Net interest income after provision for loan losses	28,644			27,275			26,789			26,602			25,293			55,919			51,657
Provision for credit losses																						3,000			300			400			300			200
Net interest income after provision for credit losses																						28,263			30,169			28,790			28,644			27,275
Noninterest income	18,560			9,186			9,797			10,649			10,239			27,746			19,063			9,585			13,309			12,312			18,560			9,186
Noninterest expense	25,727			22,759			21,621			23,044			22,451			48,486			45,093			23,854			25,426			22,887			25,727			22,759
Income before income tax expense	21,477			13,702			14,965			14,207			13,081			35,179			25,627			13,994			18,052			18,215			21,477			13,702
Income tax expense	2,833			3,352			4,015			3,268			3,255			6,185			6,163			3,321			5,670			4,603			2,833			3,352
Net income	18,644			10,350			10,950			10,939			9,826			28,994			19,464			10,673			12,382			13,612			18,644			10,350
Net income attributable to noncontrolling interest	95			83			87			80			89			178			150			118			87			82			95			83
Net income attributable to Nicolet Bankshares, Inc.	$	18,549		$	10,267		$	10,863		$	10,859		$	9,737		$	28,816		$	19,314		$	10,555		$	12,295		$	13,530		$	18,549		$	10,267
Earnings per common share:
Basic	$	1.98		$	1.09		$	1.14		$	1.13		$	1.01		$	3.06		$	1.99		$	1.00		$	1.22		$	1.45		$	1.98		$	1.09
Diluted	$	1.91		$	1.05		$	1.11		$	1.09		$	0.98		$	2.97		$	1.93		$	0.98		$	1.18		$	1.40		$	1.91		$	1.05
Common Shares:
Basic weighted average	9,374			9,461			9,526			9,633			9,639			9,418			9,702			10,516			10,061			9,347			9,374			9,461
Diluted weighted average	9,692			9,758			9,814			9,949			9,970			9,711			10,032			10,801			10,452			9,697			9,692			9,758
Outstanding (period end)	9,327			9,431			9,495			9,577			9,643			9,327			9,643			10,408			10,588			9,363			9,327			9,431
Period-End Balances:
Loans	$	2,203,273		$	2,189,688		$	2,166,181		$	2,143,457		$	2,128,624		$	2,203,273		$	2,128,624		$	2,607,424		$	2,573,751		$	2,242,931		$	2,203,273		$	2,189,688
Allowance for loan losses	13,571			13,370			13,153			12,992			12,875			13,571			12,875
Allowance for credit losses																						26,202			13,972			13,620			13,571			13,370
Securities available-for-sale, at fair value	403,989			407,693			400,144			410,911			401,975			403,989			401,975			511,860			449,302			419,300			403,989			407,693
Goodwill and other intangibles, net	122,285			123,254			124,307			125,360			126,124			122,285			126,124			164,974			165,967			121,371			122,285			123,254
Total assets	3,054,813			3,041,091			3,096,535			3,000,902			2,922,151			3,054,813			2,922,151			3,732,554			3,577,260			3,105,671			3,054,813			3,041,091
Deposits	2,536,639			2,538,486			2,614,138			2,522,156			2,455,536			2,536,639			2,455,536			3,023,466			2,954,453			2,584,447			2,536,639			2,538,486
Stockholders’ equity	411,415			398,767			386,609			377,171			370,584			411,415			370,584			510,971			516,262			428,014			411,415			398,767
Book value per common share	44.11			42.28			40.72			39.38			38.43			44.11			38.43			49.09			48.76			45.71			44.11			42.28
Tangible book value per common share ⁽²⁾	31.00			29.21			27.62			26.29			25.35			31.00			25.35			33.24			33.08			32.75			31.00			29.21
Average Balances:
Loans	$	2,189,070		$	2,179,420		$	2,142,870		$	2,134,448		$	2,117,828		$	2,184,272		$	2,116,096		$	2,584,584		$	2,438,908		$	2,218,307		$	2,189,070		$	2,179,420
Interest-earning assets	2,702,357			2,734,936			2,693,752			2,664,316			2,742,976			2,718,557			2,663,962			3,167,505			2,974,974			2,763,997			2,702,357			2,734,936
Goodwill and other intangibles, net	122,841			123,892			124,930			125,798			126,646			123,363			127,220			165,532			147,636			121,895			122,841			123,892
Total assets	3,022,383			3,047,068			2,996,553			2,971,247			3,044,466			3,034,658			2,970,908			3,555,144			3,339,283			3,094,546			3,022,383			3,047,068
Deposits	2,514,226			2,556,927			2,518,378			2,497,439			2,583,112			2,535,459			2,510,013			2,920,071			2,756,295			2,563,821			2,514,226			2,556,927
Interest-bearing liabilities	1,892,775			1,946,210			1,867,327			1,931,119			2,084,361			1,919,345			2,005,341			2,218,592			2,023,448			1,895,754			1,892,775			1,946,210
Stockholders’ equity	404,345			391,027			379,846			375,507			364,988			397,723			365,492			513,558			478,645			420,864			404,345			391,027
Financial Ratios:⁽¹⁾
Return on average assets	2.46		%	1.37		%	1.44		%	1.45		%	1.28		%	1.91		%	1.31		%	1.19		%	1.46		%	1.73		%	2.46		%	1.37		%
Return on average common equity	18.40			10.65			11.35			11.47			10.70			14.61			10.66			8.27			10.19			12.75			18.40			10.65
Return on average tangible common equity ⁽²⁾	26.43			15.59			16.91			17.25			16.39			21.18			16.35			12.20			14.74			17.95			26.43			15.59
Average equity to average assets	13.38			12.83			12.68			12.64			11.99			13.11			12.30			14.45			14.33			13.60			13.38			12.83
Stockholders' equity to assets	13.47			13.11			12.49			12.57			12.68			13.47			12.68			13.69			14.43			13.78			13.47			13.11
Tangible common equity to tangible assets ⁽²⁾	9.86			9.44			8.83			8.76			8.74			9.86			8.74			9.70			10.27			10.28			9.86			9.44
Net interest margin	4.28			4.05			3.98			4.02			3.77			4.16			3.98			3.94			4.06			4.19			4.28			4.05
Net loan charge-offs to average loans	0.02			(0.00		)	0.01			0.04			0.08			0.01			0.08			0.01			(0.01		)	0.06			0.02			—
Nonperforming loans to total loans	0.35			0.40			0.25			0.48			0.51			0.35			0.51			0.57			0.55			0.41			0.35			0.40
Nonperforming assets to total assets	0.26			0.30			0.19			0.38			0.41			0.26			0.41			0.42			0.42			0.34			0.26			0.30
Efficiency ratio	64.01			61.91			58.03			61.08			63.49			63.00			63.38
Effective tax rate	13.19			24.46			26.83			23.00			24.88			17.58			24.05			23.73			31.41			25.27			13.19			24.46
Selected Items:
Interest income from resolving PCI loans (rounded)	$	1,300		$	200		$	100		$	300		$	100		$	1,500		$	1,600		$	—		$	1,400		$	1,800		$	1,300		$	200
Tax-equivalent adjustment on net interest income	263			272			278			285			289			535			587			231			257			251			263			272
Tax benefit on stock-based compensation	(739		)	(144		)	(23		)	—			—			(883		)	(159		)

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

(2) The ratios of tangible book value per common share, return on average tangible common equity, and tangible common equity to tangible assets exclude goodwill and other intangibles, net. These financial ratios have been included as they are considered to be ~~critical~~important metrics with which to analyze and evaluate financial condition and capital ~~strength.~~strength, especially when comparing Nicolet to non-acquisitive financial institutions.

Net income was ~~$28.8~~$10.6 million for the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, an increase of ~~$9.5~~$0.3 million or ~~49%~~3% over ~~$19.3~~$10.3 million for the ~~six~~three months ended ~~June 30, 2018.~~March 31, 2019. Earnings per diluted common share was ~~$2.97~~$0.98 for ~~the~~ first ~~six months of~~quarter 2020, compared to $1.05 for first quarter 2019, ~~54% higher than $1.93~~with earnings up 3% and diluted weighted average shares up 11%. Annualized return on average assets for the comparable ~~2018 period.~~first quarters of 2020 and 2019 was 1.19% and 1.37%, respectively. Recognizing the pandemic headwinds (largely impacting the provision for credit losses recorded, market value losses on equity securities held, and valuation marks on mortgage servicing-related assets and commitments), the underlying financial results were sound for first quarter 2020.

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

At March 31, 2020, loans were $2.6 billion, an increase of $34 million (1%) over December 31, 2019 (representing organic growth) and $418 million (19%) higher than March 31, 2019 (largely due to the $348 million of Choice loans acquired). Quarterly average loans grew $146 million (24% annualized) over fourth quarter 2019 ~~Nicolet sold approximately 80% of its equity investment in UFS, LLC, a data processing~~ and ~~e-banking entity, and recognized a $7.4~~grew $405 million ~~after-tax gain (included in noninterest income under asset gains) and recorded $2.75 million ($2.0 million after-tax) in personnel expense for retirement-related compensation declared. Consistent~~(19%) over first quarter 2019, with ~~our philosophy of aligning outcomes to customers, shareholders, and employees,~~both comparisons impacted by the ~~board approved these retirement-related compensation actions to benefit all employees following the recognition~~timing of the ~~gain on~~Choice acquisition. For additional information regarding loans, see “BALANCE SHEET ANALYSIS — Loans.”

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

Comparatively, short-term interest rates were 225 bps lower in first quarter 2020 than first quarter 2019, given the 75 bps change in second half 2019 and 150 bps change in March 2020 by the Federal Reserve. The net interest margin was 3.94% for first quarter 2020, 11 bps lower than the comparable 2019 period, with the earning asset yield down 23 bps, the cost of ~~taxes, these actions impacted~~funds favorably lower by 14 bps, and the net ~~income favorably~~free funds unfavorably lower by ~~$5.4 million and diluted earnings per common share by $0.55.~~

2 bps. Net interest income ~~was $56.4 million for the first six months of 2019, up $3.7~~increased $3.8 million or 7%14% over first ~~half 2018. Interest income grew $6.4 million (despite $1.0 million lower aggregate discount income on purchased loans)~~quarter 2019, benefiting predominantly from stronger volumes (largely attributable to the inclusion of Choice assets acquired), ~~aided~~offset partly by ~~a higher mix of average interest-earning assets in loans and the elevated~~unfavorable net rate ~~environment on new, renewed and variable rate loans. Interest expense increased $2.7 million primarily~~changes (largely due to ~~rising rates. Net interest margin was 4.16% for~~ the ~~six months ended June 30, 2019, compared to 3.98% for the six months ended June 30, 2018.~~lower rate environment). For additional information regarding net interest income, see ~~“Income Statement Analysis~~“INCOME STATEMENT ANALYSIS — Net Interest Income.”

Noninterest income ~~was $27.7 million for first half 2019, up $8.7~~excluding net asset gains grew $1.2 million or ~~46%~~14% over first quarter 2019, with all categories except other income up year-over-year, in part from the ~~comparable 2018 period, mostly due to~~timing of the ~~$7.4 million gain on the equity investment sale noted above.~~Choice acquisition in November 2019. For additional information regarding noninterest income, see ~~“Income Statement Analysis~~“INCOME STATEMENT ANALYSIS — Noninterest Income.”

Noninterest expense ~~was $48.5 million, $3.4~~increased $1.1 million or ~~8% higher than~~5% over first ~~half 2018, mostly due to the retirement-related compensation actions in second~~ quarter 2019, ~~noted above. Personnel costs increased $2.7 million, and non-personnel expenses combined increased $0.7 million or 3% over first half 2018.~~in part from the timing of the Choice acquisition in November 2019. For additional information regarding noninterest expense, see ~~“Income Statement Analysis~~“INCOME STATEMENT ANALYSIS — Noninterest Expense.”

~~Asset quality remains sound. Nonperforming assets were $8.0~~Provision for credit losses increased to $3.0 million ~~representing 0.26% of total assets at June 30,~~for the three months ended March 31, 2020, compared to $0.2 million for the three months ended March 31, 2019, ~~up modestly from 0.19% at December 31, 2018~~largely due to the unprecedented economic disruptions and ~~down favorably from 0.41% at June 30, 2018.~~uncertainty surrounding the COVID-19 pandemic as described in further detail in the “Overview” section. For additional information regarding ~~nonperforming assets,~~the allowance for credit losses see ~~“Balance Sheet Analysis~~“BALANCE SHEET ANALYSIS – ~~Nonperforming Assets.”~~

At June 30, 2019, assets were $3.1 billion, a decrease of $42 million (1%) from December 31, 2018 (largely due to a $95 million decrease in cash and cash equivalents exceeding a $37 million increase in loans) and an increase of $133 million (5%) from June 30, 2018 (mostly due to a $51 million increase in cash and cash equivalents and $75 million increase in loans).

At June 30, 2019, loans were $2.2 billion, 2% higher than December 31, 2018 and 4% higher than June 30, 2018. On average, loans grew $68 million or 3% over first half 2018. For additional information regarding loans, see “Balance Sheet Analysis —Allowance for Credit Losses - Loans.”

Total deposits were $2.5 billion at June 30, 2019, a decrease of 3% from December 31, 2018 and 3% higher than June 30, 2018. Average deposits were $25 million or 1% higher than first half 2018 (which included a $0.1 billion impact of carrying a $0.3 billion short-term transaction deposit of a large commercial customer from late March to mid-June 2018). For additional information regarding deposits, see “Balance Sheet Analysis – Deposits.”

INCOME STATEMENT ANALYSIS

Net Interest Income

Tax-equivalent net interest income is a non-GAAP measure, but is a preferred industry measurement of net interest income (and its use in calculating a net interest margin) as it enhances the comparability of net interest income arising from taxable and tax-exempt sources. The tax-equivalent adjustments bring tax-exempt interest to a level that would yield the same after-tax income by applying the effective Federal corporate tax rates to the underlying assets. Tables 2 and 3 present information to facilitate the review and discussion of selected average balance sheet items, tax-equivalent net interest income, interest rate spread and net interest margin.

Table 2: Average Balance Sheet and Net Interest Income Analysis - Tax-Equivalent Basis

For the Six Months Ended June 30,
2019 2018
(in thousands)
Average
Balance
Interest
Average
Yield/Rate

Average
Balance
Interest
Average
Yield/Rate
ASSETS
Interest-earning assets
Loans, including loan fees ⁽¹⁾⁽²⁾
$ 2,184,272
$ 61,270
5.59 % $ 2,116,096
$ 55,741
5.25 %
Investment securities:
Taxable 268,663
3,674
2.73 % 251,204
2,939
2.34 %
Tax-exempt⁽²⁾
137,576
1,513
2.20 % 153,724
1,658
2.16 %
Other interest-earning assets 128,046
1,807
2.81 % 142,938
1,579
2.20 %
Total non-loan earning assets 534,285
6,994
2.62 % 547,866
6,176
2.25 %
Total interest-earning assets 2,718,557
$ 68,264
5.00 % 2,663,962
$ 61,917
4.63 %
Other assets, net 316,101
306,946

Total assets $ 3,034,658
$ 2,970,908

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings $ 305,449
$ 752
0.50 % $ 277,927
$ 504
0.37 %
Interest-bearing demand 495,878
2,549
1.04 % 550,631
2,171
0.79 %
Money market accounts (“MMA”) 569,167
1,986
0.70 % 678,719
1,918
0.57 %
Core time deposits 401,849
4,059
2.04 % 310,696
2,009
1.30 %
Brokered deposits 69,634
161
0.47 % 109,158
355
0.66 %
Total interest-bearing deposits 1,841,977
9,507
1.04 % 1,927,131
6,957
0.73 %
Other interest-bearing liabilities 77,368
1,803
4.64 % 78,210
1,696
4.32 %
Total interest-bearing liabilities 1,919,345
11,310
1.19 % 2,005,341
8,653
0.87 %
Noninterest-bearing demand 693,482
582,882

Other liabilities 24,108
17,193

Stockholders’ equity 397,723
365,492

Total liabilities and
stockholders’ equity
$ 3,034,658
$ 2,970,908

Net interest income and rate spread $ 56,954
3.81 % $ 53,264
3.76 %
Tax-equivalent adjustment $ 535
$ 587

Net interest margin 4.16 % 3.98 %


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


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

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


	For the Three Months Ended June 30,												For the Three Months Ended March 31,
	2019						2018						2020						2019
(in thousands)	Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate
ASSETS
Interest-earning assets
Loans, including loan fees ⁽¹⁾⁽²⁾	$	2,189,070	$	31,257	5.66	%	$	2,117,828	$	27,241	5.10	%	$	2,584,584	$	33,808	5.19	%	$	2,179,420	$	30,013	5.51	%
Investment securities:
Taxable	269,072		2,041		3.03	%	257,537		1,597		2.48	%	327,910		2,072		2.53	%	268,249		1,633		2.43	%
Tax-exempt ⁽²⁾	133,862		737		2.20	%	151,163		818		2.16	%	125,910		692		2.20	%	141,331		776		2.20	%
Other interest-earning assets	110,353		798		2.87	%	216,448		1,178		2.16	%	129,101		662		2.04	%	145,936		1,009		2.76	%
Total non-loan earning assets	513,287		3,576		2.78	%	625,148		3,593		2.29	%	582,921		3,426		2.35	%	555,516		3,418		2.46	%
Total interest-earning assets	2,702,357		$	34,833	5.11	%	2,742,976		$	30,834	4.46	%	3,167,505		$	37,234	4.66	%	2,734,936		$	33,431	4.89	%
Other assets, net	320,026						301,490						387,639						312,132
Total assets	$	3,022,383					$	3,044,466					$	3,555,144					$	3,047,068
LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY												LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings	$	311,029	$	392	0.50	%	$	282,656	$	286	0.41	%	$	351,238	$	305	0.35	%	$	299,806	$	360	0.49	%
Interest-bearing demand	478,447		1,228		1.03	%	539,744		1,098		0.82	%	535,296		1,214		0.91	%	513,503		1,321		1.04	%
MMA	559,355		976		0.70	%	765,741		1,195		0.63	%
Money market accounts ("MMA")													660,686		730		0.44	%	579,089		1,010		0.71	%
Core time deposits	406,427		2,100		2.07	%	317,594		1,143		1.44	%	427,925		1,933		1.82	%	397,220		1,959		2.00	%
Brokered deposits	60,115		34		0.23	%	100,426		146		0.59	%	158,068		775		1.97	%	79,258		127		0.65	%
Total interest-bearing deposits	1,815,373		4,730		1.05	%	2,006,161		3,868		0.77	%	2,133,213		4,957		0.93	%	1,868,876		4,777		1.04	%
Other interest-bearing liabilities	77,402		896		4.59	%	78,200		874		4.43	%	85,379		783		3.64	%	77,334		907		4.69	%
Total interest-bearing liabilities	1,892,775		5,626		1.19	%	2,084,361		4,742		0.91	%	2,218,592		5,740		1.04	%	1,946,210		5,684		1.18	%
Noninterest-bearing demand	698,853						576,951						786,858						688,051
Other liabilities	26,410						18,166						36,136						21,780
Stockholders’ equity	404,345						364,988						513,558						391,027
Total liabilities and stockholders’ equity	$	3,022,383					$	3,044,466					$	3,555,144					$	3,047,068
Net interest income and rate spread			$	29,207	3.92	%			$	26,092	3.55	%			$	31,494	3.62	%			$	27,747	3.71	%
Tax-equivalent adjustment			$	263					$	289					$	231					$	272
Net interest margin					4.28	%					3.77	%
Net interest income and net interest margin															$	31,263	3.94	%			$	27,475	4.05	%


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


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

Table 3: Volume/Rate Variance - Tax-Equivalent Basis


	For the Three Months Ended June 30, 2019 Compared to June 30, 2018:									For the Six Months Ended June 30, 2019 Compared to June 30, 2018:									For the Three Months Ended March 31, 2020 Compared to March 31, 2019:
	Increase (Decrease) Due to Changes in									Increase (Decrease) Due to Changes in									Increase (Decrease) Due to Changes in
(in thousands)	Volume			Rate			Net ⁽¹⁾			Volume			Rate			Net ⁽¹⁾			Volume			Rate			Net ⁽¹⁾
Interest-earning assets
Loans ⁽²⁾	$	996		$	3,020		$	4,016		$	1,968		$	3,561		$	5,529		$	5,649		$	(1,854	)	$	3,795
Investment securities:
Taxable	101			343			444			484			251			735			354			85			439
Tax-exempt⁽²⁾	(94		)	13			(81		)	(177		)	32			(145		)	(85		)	1			(84		)
Other interest-earning assets	(583		)	203			(380		)	(130		)	358			228			(23		)	(324		)	(347		)
Total non-loan earning assets	(576		)	559			(17		)	177			641			818			246			(238		)	8
Total interest-earning assets	$	420		$	3,579		$	3,999		$	2,145		$	4,202		$	6,347		$	5,895		$	(2,092	)	$	3,803

Interest-bearing liabilities
Savings	$	31		$	75		$	106		$	54		$	194		$	248		$	57		$	(112	)	$	(55	)
Interest-bearing demand	(135		)	265			130			(232		)	610			378			57			(164		)	(107		)
MMA	(348		)	129			(219		)	(339		)	407			68			131			(411		)	(280		)
Core time deposits	374			583			957			703			1,347			2,050			154			(180		)	(26		)
Brokered deposits	(44		)	(68		)	(112		)	(108		)	(86		)	(194		)	213			435			648
Total interest-bearing deposits	(122		)	984			862			78			2,472			2,550			612			(432		)	180
Other interest-bearing liabilities	6			16			22			(1		)	108			107			3			(127		)	(124		)
Total interest-bearing liabilities	(116		)	1,000			884			77			2,580			2,657			615			(559		)	56
Net interest income	$	536		$	2,579		$	3,115		$	2,068		$	1,622		$	3,690		$	5,280		$	(1,533	)	$	3,747


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


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

The interest rate environment has experienced dramatic change. The Federal Reserve steadily raised short-term interest rates ~~by 25~~during 2017 and 2018 in support of a growing economy (up 175 bps ~~in eight moves from fourth quarter 2016 through fourth quarter 2018 (up 200 bps total)~~total to 2.50% at ~~December 31, 2018, with no short-term~~year end 2018), and then reduced rates by 75 bps in three moves induring the second half of 2019 ~~through June 30. The noted increases impacted the rate earned on short-term assets~~(to 1.75% at year end 2019) largely responding to global issues and ~~pressured the cost of shorter-term borrowings, but did not consistently cause~~slowing growth, which contributed to a ~~corresponding increase on rates further out on the curve. Hence, 2018 was characterized by a flattening~~flattened yield curve ~~while~~with periods of inversion. In March 2020, the Federal Reserve dropped short-term rates by 150 bps (to 25 bps at March 31, 2020) in two emergency moves to respond to the unprecedented economic disruptions of the COVID-19 pandemic described in the “Overview” section, which brought slope back into the yield curve, albeit still fairly flat. Comparatively, short-term rates were 225 bps lower in first quarter 2020 than in first quarter 2019. While the following paragraphs will discuss the comparison of the first ~~six months~~quarter of 2020 and 2019, ~~has had periods of an inverted yield curve.~~we expect that the COVID-19 pandemic impacts will continue to evolve and pressure future 2020 quarters even further, including continued margin pressure and potential unusual loan or deposit volume or pricing impacts.

Tax-equivalent net interest income was ~~$57.0~~$31.5 million for the first ~~six~~three months of ~~2019,~~2020, comprised of net interest income of ~~$56.4~~$31.3 million ($~~3.7~~3.8 million or 7%14% higher than the first ~~half 2018, overcoming $1.0 million lower aggregate discount accretion on purchased loans)~~three months of 2019), and a ~~$0.5~~$0.2 million tax-equivalent adjustment ~~(relatively unchanged~~(down nearly $0.1 million between the periods). The $3.7 million increase in tax-equivalent net interest income was due to favorable volumes (which added ~~$2.1~~nearly $5.3 million, with ~~$2.0~~$5.6 million from higher loan ~~volumes)~~volumes, largely due to the inclusion of Choice interest-earning assets) and ~~favorable~~net unfavorable rates (which ~~added $1.6~~reduced net interest income by $1.5 million). The net ~~$1.6~~$1.5 million ~~increase~~decrease from rates was from interest-earning asset rate changes in the ~~higher interest~~lower rate environment ~~(improving~~(decreasing net interest income by ~~$4.2~~$2.1 million, of which ~~$3.6~~$1.9 million was from loans, inclusive of ~~the~~$0.7 million lower aggregate discount accretion), ~~exceeding the rising~~offset partly by benefits of a lower cost of funds ~~(which cost $2.6~~(improving net interest income by $0.6 million, predominantly led by $0.9 million savings from non-brokered interest-bearing deposits, $0.1 million savings from wholesale funds, and offset by $0.4 million more ~~led by interest-bearing~~interest cost from term brokered deposits which increased in both rate and ~~most notably time deposits)~~volume).

Between the comparable ~~six-month~~three-month periods, the interest rate spread ~~increased 5~~decreased 9 bps. Given the lower rate environment between the first quarter periods, the interest earning asset yield declined 23 bps ~~due~~ to an4.66%, largely from the 32 bps decline in loans though benefiting from the increase in the ~~interest-earning~~loans-to-earning asset ~~yield (up 37 bps~~mix (to 82% compared to ~~5.00%, aided by an improved mix of assets in higher-yielding loans), exceeding a rise in~~80% for first quarter 2019) since loans earn more than investments and cash; and the cost of funds ~~(up 32~~declined favorably by 14 bps to ~~1.19%).~~1.04%, largely from improved core deposit rates and lower variable wholesale funding rates, though offset partly by higher-costing brokered deposits (representing 7% of interest-bearing liabilities versus 4% for first quarter 2019) acquired with the Choice acquisition and procured in March 2020 under competitive conditions. The contribution from net free funds ~~increased 13~~decreased 2 bps, due mostly to the reduced value in the lower rate environment, though offset partly by the 20% increase in average net free funds (largely from average noninterest-bearing

demand deposits ~~(up 19%)~~ and ~~their increased value in~~stockholders equity) between the ~~higher rate environment.~~first quarter periods. As a result, the tax-equivalent net interest margin was ~~4.16%~~3.94% for first ~~half 2019, up 18~~quarter 2020, down 11 bps compared to ~~3.98%~~4.05% for the comparable ~~2018~~2019 period.

Average interest-earning assets ~~were $2.7~~increased to $3.2 billion, ~~for the first six months of 2019, $55~~up $433 million or ~~2% higher than~~16% over the 2019 comparable ~~2018 period.~~period, primarily due to Choice acquired assets in first quarter 2020 versus none in first quarter 2019. Between the ~~six-month~~three-month periods, average loans increased ~~$68~~$405 million or 3%19% (which includes organic growth and $348 million of Choice loans at acquisition), while all other interest-earning assets ~~declined $13~~combined increased nearly $28 million ~~(mainly in lower earning cash, as total investment securities were relatively unchanged)~~or 5%. The ~~2019~~ mix of average interest-earning assets was ~~80%~~improved toward higher-yielding assets, at 82% loans, ~~15%~~14% investments and 5%4% other interest-earning assets (mostly cash), for first quarter 2020, compared to ~~79%~~80%, 15% and 6%5%, respectively for first ~~half 2018.~~

quarter 2019.

Tax-equivalent interest income was ~~$68.3~~$37.2 million for first ~~half 2019,~~quarter 2020, up ~~$6.3~~$3.8 million or ~~10%~~11% over first ~~half 2018,~~quarter 2019, while the related interest-earning asset yield was ~~5.00%~~4.66%, ~~up 37~~down 23 bps ~~over first half 2018.~~from the comparable period in 2019. Interest income on loans increased ~~$5.5~~$3.8 million or ~~10%~~13% over first ~~half 2018, despite $1.0 million lower aggregate discount accretion income between the periods (predominantly attributable to aging discounts on purchased loans).~~quarter 2019, aided by strong volumes. The ~~2019~~2020 loan yield was ~~5.59%~~5.19%, ~~up 34~~down 32 bps ~~over~~from first ~~half 2018 (which, if excluding~~quarter 2019, largely from the ~~aggregate discount accretion income from both six-month periods, would have increased 44 bps), as improved~~significantly lower rate environment impacting yields on new, renewed and variable rate loans ~~in the higher rate environment more than offset the~~and partly from $0.7 million lower aggregate discount ~~income.~~income accretion between the periods. Between the comparable ~~six-month~~three-month periods, interest income on non-loan earning assets combined ~~increased $0.8~~was essentially unchanged at $3.4 million, ~~or 13%~~with average volumes up 5%, ~~while~~offsetting impacts from a 11 bps decline in the related yield ~~increased 37 bps to 2.62%, due mostly to the higher rate on cash levels, as well as higher yields on new investments added~~(to 2.35%) in the ~~higher~~lower rate environment.

Average interest-bearing liabilities were ~~$1.9~~$2.2 billion, ~~a decrease~~an increase of ~~$86.0~~$272 million or ~~4% compared to first half 2018,~~14%, primarily due to ~~an $85.2 million or 4% decrease~~the timing of the Choice acquisition in interest-bearing deposits (with organic growth partially offsetting the $0.1 billion impact on first half 2018 of carrying a $0.3 billion short-term transaction deposit of a large commercial customer from late March to mid-June 2018). With core deposit growth (especially in core time deposits, responding to more favorable rate offerings between the years), brokered deposits have continued to decline.November 2019. The mix of average interest-bearing liabilities was ~~92%~~89% core deposits, 4%7% brokered deposits and 4% other funding, compared to ~~90%~~92%, 6%4% and 4%, respectively, for first ~~half 2018.~~quarter 2019, with the mix changes (especially increased money markets and brokered deposits) mostly influenced by the mix of Choice deposits acquired, and to a lesser extent the procurement of brokered deposits in March 2020 as part of previously discussed liquidity actions.

Interest expense was ~~$11.3~~minimally changed at $5.7 million (up nearly $0.1 million) for first ~~half~~quarter 2020 compared to first quarter 2019, ~~up $2.7 million over first half 2018, and the related~~on larger average interest-bearing liabilities volumes (up 14% to $2.2 billion) but at a lower overall cost of funds ~~increased 32~~(down 14 bps to ~~1.19%, driven predominantly by the cost, mix and volume of deposits.~~1.04%). Interest expense on deposits increased ~~$2.6~~$0.2 million ~~from~~or 4% over the first ~~half 2018 and the~~three months of 2019 given 14% higher average interest-bearing deposit balances but at a lower cost ~~of interest-bearing deposits increased 31~~(down 11 bps to ~~1.04%, influenced by increases in select deposit rates from general rate pressures of the higher rate environment and the larger proportion of core time deposits.~~0.93%). The ~~2019~~2020 cost of savings, interest-bearing demand, ~~and~~ money market accounts ~~increased over~~and core time deposits decreased from the first ~~half 2018~~three months of 2019, by 14 bps, 13 bps, 2527 bps and 1318 bps, respectively, as product rate changes ~~lagged~~were made in the ~~incremental rise in the~~lower rate environment, and ~~time~~brokered deposits cost 74132 bps more ~~between~~than the ~~six-month periods commensurate~~prior first quarter period largely due to higher-costing term brokered funds acquired with ~~paying more for~~the Choice acquisition and procured in March 2020 under competitive conditions as part of previously discussed liquidity actions. Interest expense on other interest-bearing liabilities decreased $0.1 million, on slightly higher average balances (up $8 million) but at a ~~customer's commitment of term~~lower rate (down 105 bps to 3.64%), mostly as variable rate debt repriced and maturing advances were replaced in the ~~higher~~lower rate environment.

Provision for ~~Loan~~Credit Losses

~~Asset quality trends remained strong.~~ The provision for ~~loan~~credit losses ~~was $0.5~~increased to $3.0 million for the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, compared to ~~$1.0~~$0.2 million for the ~~six~~three months ended ~~June 30, 2018.~~March 31, 2019, largely due to the unprecedented economic disruptions and uncertainty surrounding the COVID-19 pandemic as described in further detail in the “Overview” section. The ~~ALLL~~ACL-Loans was ~~$13.6~~$26.2 million ~~(0.62%~~(1.00% of loans) at ~~June 30, 2019,~~March 31, 2020, compared to ~~$13.2~~$14.0 million (0.54% of loans) at December 31, 2019 and $13.4 million (0.61% of loans) at March 31, 2019. The increase in the ACL-Loans since December 31, ~~2018~~2019 was largely due to the $9.3 million increase due to the adoption of the current expected credit losses (“CECL”) model and ~~$12.9 million (0.60% of loans) at June 30, 2018.~~the provision for credit losses in first quarter 2020. See Notes 1 and 6 for additional information on the new CECL accounting standard.

The provision for ~~loan~~credit losses is predominantly a function of Nicolet’s methodology and judgment as to qualitative and quantitative factors used to determine the appropriateness of the ~~ALLL.~~ACL-Loans. The appropriateness of the ~~ALLL~~ACL-Loans is affected by changes in the size and character of the loan portfolio, changes in levels of impaired and other nonperforming loans, historical losses and delinquencies in each portfolio segment, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing and future economic conditions, the fair value of underlying collateral, and other factors which could affect ~~potential~~expected credit losses. For additional information regarding asset quality and the ~~ALLL,~~ACL-Loans, see “BALANCE SHEET ANALYSIS — Loans,” “— Allowance for ~~Loan~~Credit Losses - Loans,” and “— Nonperforming Assets.”

Noninterest Income

Table 4: Noninterest Income


	Three Months Ended June 30,									Six Months Ended June 30,									Three Months Ended March 31,
(in thousands)	2019		2018		$ Change			% Change		2019		2018		$ Change			% Change		2020			2019		$ Change			% Change
Trust services fee income	$	1,569	$	1,671	$	(102	)	(6	)%	$	3,037	$	3,277	$	(240	)	(7	)%	$	1,579		$	1,468	$	111		8	%
Brokerage fee income	2,002		1,738		264			15		3,812		3,342		470			14		2,322			1,810		512			28
Mortgage income, net	2,059		1,528		531			35		3,262		2,608		654			25		2,327			1,203		1,124			93
Service charges on deposit accounts	1,194		1,200		(6		)	(1	)	2,364		2,390		(26		)	(1	)	1,225			1,170		55			5
Card interchange income	1,660		1,358		302			22		3,080		2,601		479			18		1,562			1,420		142			10
BOLI income	880		468		412			88		1,339		910		429			47		703			459		244			53
Other income	1,624		1,304		320			25		3,108		2,759		349			13		521			1,484		(963		)	(65	)
Noninterest income without net gains	10,988		9,267		1,721			19		20,002		17,887		2,115			12		10,239			9,014		1,225			14
Asset gains (losses), net	7,572		972		6,600			N/M		7,744		1,176		6,568			N/M		(654		)	172		(826		)	N/M
Total noninterest income	$	18,560	$	10,239	$	8,321		81	%	$	27,746	$	19,063	$	8,683		46	%	$	9,585		$	9,186	$	399		4	%

Trust services fee income & Brokerage fee income combined	$	3,571	$	3,409	$	162		5	%	$	6,849	$	6,619	$	230		3	%	$	3,901		$	3,278	$	623		19	%

~~N/M means not meaningful.~~

Noninterest income was ~~$27.7~~$9.6 million for first ~~half 2019,~~quarter 2020, compared to ~~$19.1~~$9.2 million for ~~first half 2018,~~the comparable period of 2019, an increase of ~~$8.7~~$0.4 million or ~~46%, mostly due to the $7.4 million gain on the equity investment sale noted previously.~~4%. Noninterest income excluding net asset gains grew ~~$2.1~~$1.2 million or ~~12%~~14% between the comparable ~~six-month~~first-quarter periods, ~~with most categories up year over year.~~predominantly on strong net mortgage income.

Trust services fee income and brokerage fee income combined were $3.9 million, up ~~$0.2~~$0.6 million or 3%19% over first quarter 2019, consistent with ~~some Trust~~the growth in accounts ~~being transferred into the Brokerage accounts.~~and assets under management.

Mortgage income represents net gains received from the sale of residential real estate loans into the secondary market, capitalized mortgage servicing rights (“MSRs”), servicing fees net of MSR amortization, fair value marks on the mortgage interest rate lock commitments and forward commitments ~~offsetting MSR amortization,~~(“mortgage derivatives”), and MSR valuation changes, if ~~any, and to a smaller degree some related income.~~any. Net mortgage income of $2.3 million, increased ~~$0.7~~$1.1 million or ~~25%~~93% between the comparable ~~six-month~~first quarter periods, predominantly from higher ~~MSR~~sale gains ~~(reflective of changes~~and capitalized gains combined (up $1.9 million or 178%, commensurate with a 178% increase in ~~MSR capitalization assumptions in mid-2018),~~volumes sold into the secondary market aided by the current refinance boom) and higher ~~gains on sale, and increased~~ net servicing fees (up $0.1 million or 30% on the ~~growing~~larger portfolio ~~of mortgage loans~~ serviced for ~~others,~~others), partially offset by $0.9 million combined losses related to unfavorable changes in the fair value of the mortgage ~~interest rate lock~~derivatives under volatile rates and ~~forward commitments.~~MSR asset impairment given higher refinance activity. See also “Lending-Related Commitments” and Note 7, “Goodwill and Other Intangibles and Mortgage Servicing Rights” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures on the MSR asset.

Service charges on ~~deposits~~deposit accounts were minimally changed at ~~$2.4~~$1.2 million for both ~~six-month periods. The change in~~first quarter periods, as the ~~2019 deposit base had minimal impact on service charges since most~~majority of ~~the~~ deposit growth ~~in 2019 occurred~~between first quarter periods was in time deposits ~~and the increase to the earnings credit rate in mid-2018 mostly offset the growth in transaction deposits.~~which do not incur service charges.

Card interchange income grew ~~$0.5~~$0.1 million or ~~18%~~10% due to higher volume and activity.

BOLI income ~~increased $0.4~~was up $0.2 million ~~fully attributable~~between the comparable first quarter periods, mainly due to a BOLI death ~~benefit received~~benefits recorded in ~~second~~first quarter ~~2019.~~2020, as well as income on higher average balances from $5 million additional BOLI purchased in mid-2019 and $6 million BOLI acquired with Choice.

Other income ~~increased $0.3~~of $0.5 million ~~mostly attributable~~for the three months ended March 31, 2020 was down $1.0 million from the comparable 2019 period, largely due to an $0.8 million negative change in the ~~fee earned on~~value of nonqualified deferred compensation plan assets from the significant market decline in March 2020, as well as $0.2 million lower income from our smaller equity interest in a ~~customer loan interest rate swap~~data processing entity after the partial sale in ~~second quarter~~May 2019.

~~The $7.7~~Net asset losses of $0.7 million in first quarter 2020 and net asset gains of $0.2 million in first ~~half~~quarter 2019 were comprised primarily of the $7.4 million gain on the equity investment sale and $0.6 million of favorable fair value marks on equity securities, partially offset by losses of $0.1 million on the disposal of fixed assets, a $0.1 million write-down on an OREO property, and a $0.1 million write-down on an other investment. The $7.4 million equity investment gain was related to Nicolet's sale of approximately 80% of its equity interest in UFS, LLC, a data processing and e-banking entity. The $1.2 million net asset gains in first half 2018 were primarily attributable to ~~$0.6 million~~the impact of ~~net gains~~market movements on ~~the sale of fixed assets, a $0.3 million fair value mark on equity securities, and a $0.2 million gain on the sale of~~ equity securities.

Noninterest Expense

Table 5: Noninterest Expense


	Three Months Ended June 30,									Six Months Ended June 30,									Three Months Ended March 31,
($ in thousands)	2019		2018		Change			% Change		2019		2018		Change			% Change		2020		2019		Change			% Change
Personnel	$	15,358	$	12,674	$	2,684		21	%	$	27,895	$	25,166	$	2,729		11	%	$	13,323	$	12,537	$	786		6	%
Occupancy, equipment and office	3,757		3,454		303			9		7,507		7,241		266			4		4,204		3,750		454			12
Business development and marketing	1,579		1,463		116			8		2,860		2,805		55			2		1,359		1,281		78			6
Data processing	2,350		2,399		(49		)	(2	)	4,705		4,719		(14		)	—		2,563		2,355		208			9
Intangibles amortization	969		1,100		(131		)	(12	)	2,022		2,282		(260		)	(11	)	993		1,053		(60		)	(6	)
Other expense	1,714		1,361		353			26		3,497		2,880		617			21		1,412		1,783		(371		)	(21	)
Total noninterest expense	$	25,727	$	22,451	$	3,276		15	%	$	48,486	$	45,093	$	3,393		8	%	$	23,854	$	22,759	$	1,095		5	%
Non-personnel expenses	$	10,369	$	9,777	$	592		6	%	$	20,591	$	19,927	$	664		3	%	$	10,531	$	10,222	$	309		3	%
Average full-time equivalent employees	555		552		3			1	%	552		548		4			1	%	580		549		31			6	%

Noninterest expense was ~~$48.5~~$23.9 million, an increase of ~~$3.4~~$1.1 million or 8%5% over first ~~half 2018.~~quarter 2019. Personnel costs increased ~~$2.7~~$0.8 million, and non-personnel expenses combined increased ~~$0.7~~$0.3 million or 3% over ~~the~~ first ~~half of 2018.~~quarter 2019.

Personnel expense was ~~$27.9~~$13.3 million for ~~the~~ first ~~six months of 2019,~~quarter 2020, an increase of ~~$2.7~~$0.8 million or ~~11%~~6% over the comparable period in ~~2018. As previously noted, the increase in personnel expense was largely driven by $2.75 million of retirement-related compensation actions in second quarter~~ 2019, ~~including a discretionary profit sharing contribution of $1.05 million~~partly due to the ~~401k plan and a $1.7 million contribution to~~expanded workforce, with average full-time equivalent employees up 6% between the nonqualified deferred compensation plan. Consistent with our philosophy of aligning outcomes to customers, shareholders, and employees, the board approved these retirement-related compensation actions to benefit

~~all employees following the recognition of the gain on the equity investment sale.~~comparable first quarter periods. Personnel expense was also impacted by merit increases between the periods, ~~(though on a minimally changed workforce, with average full-time equivalents up less than 1%), lower~~higher equity incentives, and ~~cash incentives (mostly timing in nature), and lower~~higher health and other benefit ~~costs.~~costs, partially offset by $0.8 million lower nonqualified deferred compensation expense mainly tied to the plan liability decline (similar to the related plan asset decline noted in the “Noninterest Income” section).

Occupancy, equipment and office expense was ~~$7.5~~$4.2 million for first ~~half 2019,~~quarter 2020, up ~~$0.3~~$0.5 million or 4%12% compared to first ~~half 2018,~~quarter 2019, with ~~2019~~2020 including higher expense for software and technology ~~solutions~~ to drive operational efficiency and ~~product~~enhance products or ~~service enhancements,~~services, support the expanded branch facilities and ~~both periods including approximately $0.2 million of accelerated depreciation~~personnel, and for ~~branch facility upgrades.~~additional licensing and equipment to expand remote workers in response to the COVID-19 pandemic.

Business development and marketing expense was ~~$2.9~~$1.4 million, up $0.1 million or 2%6%, between the comparable ~~six-month~~three-month periods, largely due to the timing and extent of donations, marketing campaigns, promotions, and media.

Data processing expense was $2.6 million, up $0.2 million or 9% between the comparable first quarter periods, with volume-based increases in core processing charges partially offset by savings in data communication.

Intangibles amortization decreased ~~$0.3~~$0.1 million between the ~~first half~~comparable three-month periods mainly from declining amortization on the aging intangibles of previous ~~acquisitions.~~ acquisitions, with partially offsetting amortization from the new intangibles of the November 2019 Choice acquisition.

Other expense was ~~$3.5~~$1.4 million, ~~up $0.6~~down $0.4 million or 21% between the comparable ~~six-month~~first quarter periods, due primarily to $0.2 million lower FDIC insurance costs and a $0.3 million fraud loss contingency ~~loss~~ recognized in first quarter ~~2019 and $0.3 million for the annual equity retainer granted to directors in second quarter 2019 (versus granted in third quarter last year).~~2019.

Income Taxes

Income tax expense was ~~$6.2~~$3.3 million (effective tax rate of ~~17.6%~~23.7%) for first ~~half 2019,~~quarter 2020, compared to ~~$6.2~~$3.4 million (effective tax rate of ~~24.0%~~24.5%) for the comparable period of ~~2018.~~2019. The lower effective tax rate for 2020 was due to the favorable tax treatment of the ~~equity investment sale,~~ BOLI death benefit proceeds and ~~the~~higher tax benefit on stock-based compensation.

~~Income Statement Analysis – Three Months Ended June 30, 2019 versus Three Months Ended June 30, 2018~~

Net income was $18.5 million for the three months ended June 30, 2019, an increase of $8.8 million or 91% over $9.7 million for the three months ended June 30, 2018. Earnings per diluted common share was $1.91 for second quarter 2019, 95% higher than $0.98 for second quarter 2018. Net income in second quarter 2019 included $5.4 million from two nonrecurring items, a $7.4 million after-tax gain from the equity investment sale previously noted (recorded in net asset gains) and $2.75 million ($2.0 million after tax) in personnel expense for retirement-related compensation actions.

Tax-equivalent net interest income was $29.2 million for second quarter 2019, comprised of net interest income of $28.9 million ($3.1 million or 12% over second quarter 2018, driven mostly by net positive rate variances, including $0.6 million higher aggregate discount accretion on purchased loans), and a tax-equivalent adjustment of $0.3 million (unchanged from second quarter 2018). Tax-equivalent interest income increased $4.0 million between the second quarter periods, with $3.6 million from improved yields across all interest-earning assets though led by loans (with a 65 bps increase in the interest-earning asset yield) and $0.4 million from stronger volumes (led by average loans which grew to represent 81% of interest-earning assets versus 77% for second quarter 2018). Interest expense increased $0.9 million over second quarter 2018, with $1.0 million from rising rates (with a 28 bps increase in the cost of funds) and the remainder from higher volumes, both led by deposits and deposit mix. For additional information regarding average balances and net interest income, see “Income Statement Analysis — Net Interest Income.”

Second quarter 2019 earning asset yield, cost of funds, and net interest margin were 5.11%, 1.19% and 4.28%, respectively, compared to 4.46%, 0.91% and 3.77%, respectively, for second quarter 2018. Of note, a $0.3 billion short-term transaction deposit of a long-standing customer was carried from late March to mid-June 2018, increasing second quarter 2018 average deposits and interest-bearing cash each by approximately $0.2 billion. The inclusion of the large deposit was a positive contributor to second quarter 2018 net interest income, though at a very low net spread, which lowered that quarter's reported earning asset yield and net interest margin by approximately 20 bps each and lowered the reported cost of funds by approximately 2 bps. For additional information regarding net interest income, see “Income Statement Analysis — Net Interest Income.”

Asset quality remained exceptional. For second quarter 2019, provision for loan losses was $0.3 million (covering $0.1 million of net charge-offs), compared to provision for loan losses of $0.5 million (covering $0.4 million of net charge-offs) for second quarter 2018.

Noninterest income was $18.6 million for second quarter 2019, an increase of $8.3 million or 81% over second quarter 2018. Excluding net asset gains, noninterest income increased $1.7 million or 19%, largely due to mortgage income (up $0.5 million or 35% on higher sales volume and a larger servicing portfolio), trust services fee income and brokerage fee income combined (up $0.2 million or 5%, with some Trust accounts being transferred into Brokerage), card interchange income (up $0.3 million or 22% on higher volume and activity), and BOLI income (up $0.4 million from a death benefit). Net asset gains of $7.6 million for second quarter 2019 were largely attributable to the $7.4 million gain on the equity investment sale noted previously. Net asset gains of $1.0 million for second quarter 2018 were primarily attributable to $0.4 million of net gains on the sale of fixed assets, a $0.4 million fair value mark on equity securities, and a $0.2 million gain on the sale of equity securities. For additional information regarding noninterest income, see “Income Statement Analysis — Noninterest Income.”

Noninterest expense was $25.7 million for second quarter 2019, an increase of $3.3 million or 15% over second quarter 2018. Personnel expense increased $2.7 million or 21% from second quarter 2018, fully attributable to the large retirement-related compensation noted previously. Personnel expense was also impacted by merit increases between the periods (though on a

minimally changed workforce, with average full-time equivalents up less than 1%), lower equity and cash incentives (mostly timing in nature), and minimally changed health and other benefit costs. Non-personnel expenses combined increased $0.6 million or 6%, largely due to occupancy, equipment, and office (up $0.3 million or 9%, attributable to accelerated depreciation for branch facility upgrades) and other expense (up $0.4 million or 26%, mainly from the $0.3 million annual equity retainer granted to directors in second quarter versus third quarter last year). For additional information regarding noninterest expense, see “Income Statement Analysis — Noninterest Expense.”

Income tax expense for second quarter 2019 was $2.8 million, with an effective tax rate of 13.2%, compared to income tax expense of $3.3 million and an effective tax rate of 24.9% for second quarter 2018. The lower income tax expense and effective tax rate was due to the favorable tax treatment of the equity investment sale, BOLI death benefit, and the tax benefit on stock-based compensation.

BALANCE SHEET ANALYSIS

At ~~June 30, 2019,~~March 31, 2020, assets were ~~$3.1~~$3.7 billion, ~~a decrease~~an increase of ~~$42~~$155 million ~~or 1%~~(4%) from December 31, ~~2018, while~~2019. The increase from year-end 2019 was largely due to liquidity actions in March, with cash and cash equivalents increasing $60 million and securities AFS up $63 million. Period end loans of $2.6 billion at March 31, 2020, increased $34 million (5% annualized) from December 31, 2019. Total deposits were ~~$2.5 billion, a decrease of $78 million or 3% over the same period, with both reflecting the usual cyclical decline. Loans grew $37 million or 2% to $2.2~~$3.0 billion at ~~June 30, 2019.~~March 31, 2020, an increase of a $69 million from year-end 2019, with brokered deposits up $121 million, while customer deposits (core) were lower by $52 million consistent with customary seasonal trends. Borrowings increased $90 million with a combination of short-term and long-term FHLB advances. Total stockholders’ equity was ~~$411~~$511 million, ~~an increase~~a decrease of ~~$25~~$5 million from December 31, ~~2018,~~2019, mostly due to the adoption of CECL, which negatively impacted equity by $6 million, with earnings and net fair value investment changes partially offset by stock repurchases. See also Notes 1, “Basis of Presentation” and 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 the adoption of CECL.

Compared to ~~June 30, 2018,~~March 31, 2019, assets were ~~$3.1~~$3.7 billion, up ~~$133~~$691 million or ~~5%,~~23%. Loans increased $418 million (19%) and deposits ~~were $2.5 billion, an increase of $81~~increased $485 million ~~or 3%, largely~~(19%) over March 31, 2019, both mainly due to the acquisition of Choice in November 2019, which added $348 million in loans and $289 million of deposits at acquisition. Hence, organic growth ~~in time deposits. Loans increased $75 million or 4% from June 30, 2018. Compared~~year-over-year was 3% for loans (reasonable to ~~June 30, 2018, stockholders’~~the growth of our markets) and 7% for deposits (which included the March 2020 liquidity actions through brokered deposits). Stockholders’ equity increased ~~$41~~$112 million from March 31, 2019, primarily due to common stock issued in the November 2019 Choice acquisition of $79.8 million, as well as net income ~~stock issuances,~~ and net fair value investment changes, partially offset by stock repurchases over the year.

Loans

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

Nicolet services a diverse customer base throughout northeastern and central Wisconsin and in Menominee, Michigan. The Company concentrates on originating loans in its local markets and assisting its current loan customers. The loan portfolio is widely diversified by types of borrowers, industry groups, and market areas. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to multiple numbers of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At ~~June 30, 2019,~~March 31, 2020, no significant industry concentrations existed in Nicolet’s portfolio in excess of 10% of total loans. ~~Nicolet has also developed guidelines to manage its exposure to various types of concentration risks. See also Note 6, “Loans, Allowance for Loan Losses, and Credit Quality”~~

With the emergence of the ~~Notes~~COVID-19 pandemic and the significance of stay-at-home orders in March 2020 particularly on restaurants, retail, arts, recreation, tourism and other hospitality businesses, Nicolet determined its collective concentration in these businesses to ~~Unaudited Consolidated Financial Statements under Part I, Item 1,~~be approximately 15% of its total loan portfolio, and began proactive discussions and/or temporary loan modifications (such as interest-only or payment deferrals) before the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act passed in late March. This collective concentration was part of the determination for ~~additional disclosures on loans.~~a larger first quarter 2020 provision. It is unknown yet how much of the Paycheck Protection Program may alleviate potential loss concerns across business operators in Nicolet’s loan portfolio who participate in the PPP.

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

Table 6: Period End Loan Composition


	June 30, 2019				December 31, 2018				June 30, 2018				March 31, 2020				December 31, 2019				March 31, 2019
(in thousands)	Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total
Commercial & industrial	$	737,928	34	%	$	684,920	32	%	$	666,249	31	%	$	831,257	32	%	$	806,189	31	%	$	711,505	32	%
Owner-occupied CRE	447,554		20		441,353		20		448,367		21		499,705		19		496,372		19		439,440		20
AG production	35,765		2		35,625		2		34,016		2
Agricultural													95,991		3		95,450		4		89,078		4
Commercial	1,221,247		56		1,161,898		54		1,148,632		54		1,426,953		54		1,398,011		54		1,240,023		56
AG real estate	53,485		2		53,444		2		53,019		2
CRE investment	326,820		15		343,652		16		333,893		16		448,758		17		443,218		17		342,343		16
Construction & land development	73,108		3		80,599		4		75,053		4		96,055		4		92,970		4		82,308		4
Commercial real estate	453,413		20		477,695		22		461,965		22		544,813		21		536,188		21		424,651		20
Commercial-based loans	1,674,660		76		1,639,593		76		1,610,597		76		1,971,766		75		1,934,199		75		1,664,674		76
Residential construction	38,246		2		30,926		1		28,701		1		52,945		2		54,403		2		34,425		2
Residential first mortgage	345,061		16		357,841		17		358,537		17		432,126		17		432,167		17		350,661		16
Residential junior mortgage	116,433		5		111,328		5		106,592		5		121,105		5		122,771		5		113,628		5
Residential real estate	499,740		23		500,095		23		493,830		23		606,176		24		609,341		24		498,714		23
Retail & other	28,873		1		26,493		1		24,197		1		29,482		1		30,211		1		26,300		1
Retail-based loans	528,613		24		526,588		24		518,027		24		635,658		25		639,552		25		525,014		24
Total loans	$	2,203,273	100	%	$	2,166,181	100	%	$	2,128,624	100	%	$	2,607,424	100	%	$	2,573,751	100	%	$	2,189,688	100	%

Broadly, the loan portfolio at ~~June 30, 2019,~~March 31, 2020, was ~~76%~~75% commercial-based and ~~24%~~25% retail-based. Commercial-based loans are considered to have more inherent risk of default than retail-based loans, in part because of the broader list of factors that could impact a commercial borrower negatively. In addition, the commercial balance per borrower is typically larger than that for retail-based loans, implying higher potential losses on an individual customer basis. Credit risk on commercial-based loans is largely

influenced by general economic conditions and the resulting impact on a borrower’s operations or on the value of underlying collateral, if any.

Commercial-based loans of ~~$1.7~~$2.0 billion increased ~~$35~~$38 million or 2% since December 31, ~~2018,~~2019, primarily due to growth in commercial and industrial loans. Commercial and industrial loans continue to be the largest segment of Nicolet’s portfolio and represented ~~34%~~32% of the total portfolio at ~~June 30, 2019.~~March 31, 2020.

Residential real estate loans were relatively unchanged from year-end ~~2018,~~2019, and represented ~~23%~~24% of total loans at ~~June 30, 2019.~~March 31, 2020. Residential first mortgage loans include conventional first-lien home mortgages, while residential junior mortgage real estate loans consist mainly of home equity lines and term loans secured by junior mortgage liens. As part of its 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 with ~~or without retaining the~~ servicing ~~rights. Nicolet's~~rights retained. Nicolet’s mortgage loans are typically of high quality and have historically had low net charge-off rates.

Retail and other loans ~~(up $2 million~~were relatively unchanged from year-end ~~2018)~~2019 and represented approximately 1% of the total loan portfolio, and include predominantly short-term and other personal installment loans not secured by real estate.

Allowance for ~~Loan~~Credit Losses - Loans

In addition to the discussion that follows, see also Note 1, “Basis of Presentation” and Note 6, “Loans, Allowance for ~~Loan~~Credit Losses - Loans, and Credit Quality,” in the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures and accounting policy on the allowance for ~~loan~~credit losses.

Credit risks within the loan portfolio are inherently different for each loan type as summarized under “BALANCE SHEET ANALYSIS — Loans.” A ~~detailed~~ discussion of the loan portfolio credit risk can be found in the ~~"Loans"~~“Loans” section in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's ~~2018~~2019 Annual Report on Form 10-K. ~~There have been no material changes in the credit risk of the Company's loan portfolio since December 31, 2018.~~ Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and ongoing review of loan payment performance. Active asset quality administration, including early problem loan identification and timely resolution of problems, aids in the management of credit risk and minimization of loan losses. For additional information regarding nonperforming assets see also “BALANCE SHEET ANALYSIS – Nonperforming Assets.”

The ~~level of the ALLL~~ACL-Loans represents management’s estimate of ~~an amount of reserves that provides for estimated probable~~expected credit losses in the Company’s loan portfolio at the balance sheet date. To assess the appropriateness of the ~~ALLL,~~ACL-Loans, an allocation methodology is applied by Nicolet which focuses on evaluation of qualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to specific loans; (ii) management’s ongoing review and grading of the loan portfolio; (iii) consideration of historical loan loss and delinquency experience on each portfolio segment; (iv) trends in past due and nonperforming loans; (v)

the risk characteristics of the various loan segments; (vi) changes in the size and character of the loan portfolio; (vii) concentrations of loans to specific borrowers or industries; (viii) existing economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect ~~potential~~expected credit losses. Assessing these numerous factors involves significant judgment; therefore, management considers the ~~ALLL~~ACL-Loans a critical accounting policy.

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

With the emergence of the COVID-19 pandemic and the significance of stay-at-home orders in March 2020 particularly on restaurants, retail, arts, recreation, tourism and other hospitality businesses, Nicolet determined its ~~allocation methodology on both~~collective concentration in these businesses to be approximately 15% of its total loan portfolio, and began proactive discussions and/or temporary loan modifications (such as interest-only or payment deferrals) with many of these even before the ~~originated loans and on~~CARES Act passed in late March. This collective concentration was part of the ~~acquired loans separately to account~~determination for ~~differences, such as different~~a larger first quarter 2020 provision. It is unknown yet how much the subsequently passed Paycheck Protection Program may alleviate potential loss ~~histories and qualitative factors, between~~concerns across business operators in Nicolet's loan portfolio who participate in the ~~two loan portfolios.~~PPP.

At ~~June 30, 2019,~~March 31, 2020, the ~~ALLL~~ACL-Loans was ~~$13.6~~$26.2 million (representing 1.00% of period end loans) compared to ~~$13.2~~$14.0 million at December 31, ~~2018.~~2019 and $13.4 million at March 31, 2019. The increase in the ACL-Loans was largely due to the $9.3 million impact from the adoption of CECL (comprised of $8.5 million for the CECL impact on loan portfolio and $0.8 million for the PCD gross-up) and a higher provision for credit losses given the unprecedented economic disruptions and uncertainty surrounding the COVID-19 pandemic that emerged in March 2020 as described in further detail in the “Overview” section. The components of the ~~ALLL~~ACL-Loans are detailed further in Table 7 below. ~~Annualized net charge-offs as a percent of average loans were 0.01% for first half 2019, compared to 0.08% for first half 2018 and 0.05% for the entire 2018 year.~~

The ratio of the ALLL as a percentage of period-end loans was 0.62% at June 30, 2019, compared to 0.61% and 0.60% for December 31, 2018 and June 30, 2018, respectively. The ALLL to loans ratio is impacted by the accounting treatment of Nicolet’s bank acquisitions, which combined at their acquisition dates (from 2013 to 2017) added no ALLL to the numerator and $1.3 billion of loans into the denominator. Remaining outstanding acquired loans were $625 million (28% of total loans) and $681 million (31% of total loans) at June 30, 2019 and December 31, 2018, respectively. At June 30, 2019, the $13.6 million ALLL was comprised of $1.6 million for acquired loans (0.26% of acquired loans) and $11.9 million for originated loans (0.76% of originated loans). In comparison, at December 31, 2018, the $13.2 million ALLL was comprised of $1.7 million for acquired loans (0.25% of acquired loans) and $11.4 million for originated loans (0.77% of originated loans).

Table 7: Allowance for ~~Loan~~Credit Losses - Loans


	Six Months Ended						Year Ended			Three Months Ended						Year Ended
(in thousands)	June 30, 2019			June 30, 2018			December 31, 2018			March 31, 2020			March 31, 2019			December 31, 2019
Allowance for loan losses:
ACL-Loans:
Balance at beginning of period	$	13,153		$	12,653		$	12,653		$	13,972		$	13,153		$	13,153
Provision for loan losses	500			1,020			1,600
Adoption of CECL										8,488			—			—
Initial PCD ACL										797			—			—
Total impact for adoption of CECL										9,285			—			—
Provision for credit losses										3,000			200			1,200
Charge-offs	(232		)	(877		)	(1,213		)	(93		)	(10		)	(927		)
Recoveries	150			79			113			38			27			546
Net (charge-offs) recoveries	(82		)	(798		)	(1,100		)	(55		)	17			(381		)
Balance at end of period	$	13,571		$	12,875		$	13,153		$	26,202		$	13,370		$	13,972
Net loan (charge-offs) recoveries:
Commercial & industrial	$	50		$	(564	)	$	(770	)	$	30		$	16		$	261
Owner-occupied CRE	(11		)	(54		)	(60		)	—			1			(91		)
AG production	—			—			—
AG real estate	—			—			—
Agricultural										—			—			—
CRE investment	—			(37		)	(37		)	(20		)	—			—
Construction & land development	—			—			—			—			—			—
Residential construction	—			—			—			—			—			(226		)
Residential first mortgage	35			(47		)	(80		)	1			—			14
Residential junior mortgage	(31		)	29			35			3			2			(41		)
Retail & other	(125		)	(125		)	(188		)	(69		)	(2		)	(298		)
Total net (charge-offs) recoveries	$	(82	)	$	(798	)	$	(1,100	)	$	(55	)	$	17		$	(381	)
Ratios:
ALLL to total loans	0.62		%	0.60		%	0.61		%
ACL-Loans to total loans										1.00		%	0.61		%	0.54		%
Net charge-offs to average loans, annualized	0.01		%	0.08		%	0.05		%	0.01		%	—		%	0.02		%

Nonperforming Assets

As part of its overall credit risk management process, management is committed to an aggressive problem loan identification philosophy. This philosophy has been implemented through the ongoing monitoring and review of all pools of risk in the loan portfolio to ensure that problem loans are identified early and the risk of loss is minimized. Management is actively working with customers and monitoring credit risk from the unprecedented economic disruptions surrounding the COVID-19 pandemic as described in further detail in the “Overview” section. See also Note 6, “Loans, Allowance for ~~Loan~~Credit Losses - Loans, and Credit Quality” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures on credit quality. For additional information regarding the loans and nonperforming assets see also “BALANCE SHEET ANALYSIS – Loans” and “BALANCE SHEET ANALYSIS – Nonperforming Assets.”

Nonperforming loans are considered one indicator of potential future loan losses. Nonperforming loans are defined as nonaccrual loans ~~including those defined as impaired under current accounting standards,~~ and loans 90 days or more past due but still accruing interest. Loans are generally placed on nonaccrual status when contractually past due 90 days or more as to interest or principal payments. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on loans, it is management’s practice to place such loans on nonaccrual status immediately. Nonaccrual loans were ~~$7.7~~$14.8 million ~~(consisting of $4.3 million originated loans and $3.4 million acquired loans)~~ at ~~June 30, 2019~~March 31, 2020 compared to ~~$5.5~~$14.1 million at December 31, ~~2018 (consisting of $1.4 million originated loans and $4.1 million acquired loans).~~2019. Nonperforming assets (which include nonperforming loans and other real estate owned “OREO”) were ~~$8.0~~$15.8 million at ~~June 30, 2019~~March 31, 2020 compared to ~~$5.9~~$15.1 million at December 31, ~~2018.~~2019. OREO was ~~$0.3~~$1.0 million at ~~June 30, 2019~~both March 31, 2020 and ~~$0.4 million at~~ December 31, ~~2018.~~2019. Nonperforming assets as a percent of total assets ~~were 0.26%~~was unchanged at ~~June 30, 2019 compared to 0.19% at~~0.42% for both March 31, 2020 and December 31, ~~2018.~~2019.

The level of potential problem loans is another predominant factor in determining the relative level of risk in the loan portfolio and in determining the appropriate level of the ~~ALLL.~~ACL-Loans. Potential problem loans are generally defined by management to include loans rated as Substandard by management but that are in performing status; however, there are circumstances present which might adversely affect the ability of the borrower to comply with present repayment terms. The decision of management to include performing loans in potential problem loans does not necessarily mean that Nicolet expects losses to occur, but that management recognizes a higher degree of risk associated with these loans. The loans that have been reported as potential problem loans are predominantly commercial-based loans covering a diverse range of businesses and real estate property types. Potential problem loans were ~~$26.5~~$34.6 million ~~(1.2%~~(1.3% of loans) and ~~$21.9~~$22.6 million ~~(1.0%~~(0.9% of loans) at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. Potential problem loans require a heightened management review of the pace at which a credit may deteriorate, the duration of asset quality stress, and uncertainty around the magnitude and scope of economic stress that may be felt by Nicolet’s customers and on underlying real estate values.

Table 8: Nonperforming Assets


(in thousands)	June 30, 2019			December 31, 2018			June 30, 2018			March 31, 2020			December 31, 2019			March 31, 2019
Nonperforming loans:
Commercial & industrial	$	2,673		$	2,816		$	6,119		$	6,050		$	6,249		$	3,871
Owner-occupied CRE	2,462			673			588			3,837			3,311			2,784
AG production	401			—			66
AG real estate	427			164			175
Agricultural										1,801			1,898			174
Commercial										11,688			11,458			6,829
CRE investment	175			210			1,487			1,029			1,073			333
Construction & land development	—			80			—			533			20			80
Commercial real estate										1,562			1,093			413
Commercial-based loans										13,250			12,551			7,242
Residential construction	451			1			108			—			—			333
Residential first mortgage	739			1,265			2,063			953			1,090			899
Residential junior mortgage	314			262			276			566			480			250
Residential real estate										1,519			1,570			1,482
Retail & other	8			—			—			—			1			8
Retail-based loans										1,519			1,571			1,490
Total nonaccrual loans	7,650			5,471			10,882			14,769			14,122			8,732
Accruing loans past due 90 days or more	—			—			—			—			—			—
Total nonperforming loans	$	7,650		$	5,471		$	10,882		$	14,769		$	14,122		$	8,732
OREO:
Commercial real estate owned	$	300		$	420		$	505		$	—		$	—		$	420
Bank property real estate owned	—			—			725			1,000			1,000			—
Total OREO	300			420			1,230			1,000			1,000			420
Total nonperforming assets	$	7,950		$	5,891		$	12,112		$	15,769		$	15,122		$	9,152
Performing troubled debt restructurings	$	466		$	—		$	—		$	—		$	452		$	466
Ratios:
Nonperforming loans to total loans	0.35		%	0.25		%	0.51		%	0.57		%	0.55		%	0.40		%
Nonperforming assets to total loans plus OREO	0.36		%	0.27		%	0.57		%	0.60		%	0.59		%	0.42		%
Nonperforming assets to total assets	0.26		%	0.19		%	0.41		%	0.42		%	0.42		%	0.30		%
ALLL to nonperforming loans	177.4		%	240.4		%	118.3		%
ACL-Loans to nonperforming loans										177.4		%	98.9		%	153.1		%

Deposits

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

Total deposits were ~~$2.5~~$3.0 billion at ~~June 30, 2019, $77~~March 31, 2020, $69 million or ~~3% lower~~2% higher than December 31, 2018, reflecting the usual cyclical decline. Notably, the decrease in total deposits since year-end 2018 was largely due to money market and interest-bearing demand (down $109 million or 9%), partially offset by growth in savings and time accounts.

~~Compared to June 30, 2018, total deposits were up $81 million or 3%.~~2019. Notably, the increase in total deposits since ~~June 30, 2018~~year-end 2019 was largely to support liquidity actions in March and was funded partly by a net $121 million increase in brokered deposits. Core customer deposits declined $52 million, consistent with customary seasonal trends.

Compared to March 31, 2019, total deposits were up $485 million or 19%. The increase in total deposits since March 31, 2019 was largely due to ~~noninterest-bearing demand accounts (up $122~~the acquisition of Choice, which added $289 million ~~or 20%)~~of deposits at acquisition, as well as ~~growth~~an increase in ~~savings and time accounts, partially offset by reductions in money market and interest-bearing demand (down $115 million or 10%).~~brokered deposits to support the liquidity actions noted above.

Table 9: Period End Deposit Composition


	June 30, 2019				December 31, 2018				June 30, 2018				March 31, 2020				December 31, 2019				March 31, 2019
(in thousands)	Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total
Noninterest-bearing demand	$	743,380	29	%	$	753,065	29	%	$	621,576	25	%	$	791,563	26	%	$	819,055	28	%	$	696,111	27	%
Money market and interest-bearing demand	1,054,256		41	%	1,163,369		45	%	1,169,163		48	%	1,208,024		40	%	1,241,642		42	%	1,112,572		44	%
Savings	318,947		13	%	294,068		11	%	289,156		12	%	361,829		12	%	343,199		11	%	306,342		12	%
Time	420,056		17	%	403,636		15	%	375,641		15	%	662,050		22	%	550,557		19	%	423,461		17	%
Total deposits	$	2,536,639	100	%	$	2,614,138	100	%	$	2,455,536	100	%	$	3,023,466	100	%	$	2,954,453	100	%	$	2,538,486	100	%
Brokered transaction accounts	$	37,020	1	%	$	62,021	2	%	$	63,741	3	%	$	36,331	1	%	$	48,497	1	%	$	47,544	2	%
Brokered time deposits	17,100		1	%	19,130		1	%	37,713		1	%
Brokered and listed time deposits													245,252		8	%	111,694		4	%	19,399		1	%
Total brokered deposits	$	54,120	2	%	$	81,151	3	%	$	101,454	4	%	$	281,583	9	%	$	160,191	5	%	$	66,943	3	%
Customer transaction accounts	$	2,079,563	82	%	$	2,148,481	82	%	$	2,016,154	82	%	$	2,325,085	77	%	$	2,355,399	80	%	$	2,067,481	81	%
Customer time deposits	402,956		16	%	384,506		15	%	337,928		14	%	416,798		14	%	438,863		15	%	404,062		16	%
Total customer deposits (core)	$	2,482,519	98	%	$	2,532,987	97	%	$	2,354,082	96	%	$	2,741,883	91	%	$	2,794,262	95	%	$	2,471,543	97	%

Lending-Related Commitments

As of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, Nicolet had the following off-balance sheet lending-related commitments.

Table 10: Commitments


(in thousands)	June 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Commitments to extend credit	$	720,685	$	721,098	$	755,822	$	773,555
Financial standby letters of credit	11,399		8,571		10,717		10,730
Performance standby letters of credit	9,164		7,094		8,270		8,469

Interest rate lock commitments to originate residential mortgage loans held for sale (included above in commitments to extend credit) and forward commitments to sell residential mortgage loans held for sale are considered derivative instruments (“mortgage derivatives”) and represented ~~$80.3~~$186.7 million and ~~$15.2~~$108.6 million, respectively, at ~~June 30, 2019.~~March 31, 2020. In comparison, interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans held for sale represented ~~$18.2~~$43.4 million and ~~$6.0~~$16.3 million, respectively, at December 31, ~~2018.~~2019. The net fair value of these ~~interest rate lock commitments and forward commitments~~mortgage derivatives combined was a loss of ~~$154,000~~$682,000 at ~~June 30, 2019~~March 31, 2020 compared to a gain of ~~$162,000~~$79,000 at December 31, ~~2018.~~2019.

Liquidity Management

Liquidity management refers to the ability to ensure that cash is available in a timely and cost-effective manner to meet cash flow requirements of depositors and borrowers and to meet other commitments as they fall due, including the ability to service debt, invest in subsidiaries, repurchase common stock, pay dividends to shareholders (if any), and satisfy other operating requirements.

Given the stable core customer deposit base, fairly consistent patterns of activity in the core deposit base, and the minimal use of capacity available in numerous non-core funding sources, Nicolet's liquidity levels and resources have been sufficient to fund loans, accommodate deposit trends and cycles, and to meet other cash needs as necessary. In early March 2020, in response to the emerging crisis, management initiated preparatory actions to further increase on-balance sheet liquidity, and wholesale funds of approximately $210 million were procured, increasing liquid cash and investments. These actions were initiated prior to the passing of the CARES Act. In addition to these on-balance sheet measures, remaining liquidity facilities continue to provide capacity and flexibility in an uncertain time. Funds are available from a number of basic banking activity sources including, but not limited to, the core deposit base; repayment and maturity of loans; investment securities calls, maturities, and sales; and procurement of additional brokered deposits or other wholesale funding. All securities AFS and equity securities (included in other investments) are reported at fair value on the consolidated balance sheet. At ~~June 30, 2019,~~March 31, 2020, approximately ~~33%~~30% of the ~~$404~~$512 million securities AFS portfolio was pledged to secure public deposits and short-term borrowings, as applicable, and for other purposes as required by law. Additional funding sources at ~~June 30, 2019,~~March 31, 2020, consist of a $10 million available and unused line of credit at the holding company, $175 million of available and unused Federal funds lines, available borrowing capacity at the FHLB of ~~$170~~$86 million, and borrowing capacity in the brokered deposit market.

Cash and cash equivalents at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 were ~~$155~~$242 million and ~~$250~~$182 million, respectively. The ~~decrease~~increase in cash and cash equivalents since year-end ~~2018~~2019 was ~~largely~~mostly attributable to ~~loan growth, a reduction~~liquidity actions in March, which were largely funded by brokered deposits and ~~common stock purchases, partially offset by earnings. Nicolet’s~~FHLB advances. Management believes its liquidity resources were sufficient as of ~~June 30, 2019~~March 31, 2020 to fund loans, accommodate deposit cycles and trends, and to meet other cash needs as ~~necessary.~~necessary in these unsettled times.

Management is committed to the parent Company being a source of strength to the Bank and its other subsidiaries, and therefore, regularly evaluates capital and liquidity positions of the parent Company in light of current and projected needs, growth or strategies. The parent Company uses cash for normal expenses, debt service requirements, and when opportune, for common stock repurchases or investment in other strategic actions such as mergers or acquisitions. Dividends from the Bank and, to a lesser extent, stock

option exercises, represent significant sources of cash flows for the parent Company. Among others, additional cash sources available to the parent Company include its $10 million available and unused line of credit, and access to the public or private markets to issue new equity, subordinated debt or other debt. At ~~June 30, 2019,~~March 31, 2020, the parent Company had ~~$42~~$54 million in cash.

Interest Rate Sensitivity Management and Impact of Inflation

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

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

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

Nicolet assessed the impact on net interest income in the event of a gradual +/-100 bps and +/-200 bps change in market rates (parallel to the change in prime rate) over a one-year time horizon to a static (flat) balance sheet. The results provided include the liquidity measures mentioned earlier and reflect the changed interest rate environment in response to the current crisis. The interest rate scenarios are used for analytical purposes only and do not necessarily represent management’s view of future market interest rate movements. Based on financial data at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the projected changes in net interest income over a one-year time horizon, versus the baseline, are presented in Table 11 below. The results are within Nicolet’s guidelines of not greater than -10% for +/- 100 bps and not greater than -15% for +/- 200 ~~bps.~~bps and given the relatively short nature of the Company's balance sheet, reflect a largely unchanged risk position as expected.

Table 11: Interest Rate Sensitivity


	June 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
200 bps decrease in interest rates	(2.4	)%	(0.6	)%	(0.3	)%	(1.8	)%
100 bps decrease in interest rates	(1.1	)%	—	%	(0.5	)%	(1.0	)%
100 bps increase in interest rates	1.1	%	(0.1	)%	0.7	%	0.8	%
200 bps increase in interest rates	2.2	%	—	%	1.4	%	1.7	%

Actual results may differ from these simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and their impact on customer behavior and management strategies.

The effect of inflation on a financial institution differs significantly from the effect on an industrial company. While a financial institution’s operating expenses, particularly salary and employee benefits, are affected by general inflation, the asset and liability structure of a financial institution consists largely of monetary items. Monetary items, such as cash, investments, loans, deposits and other borrowings, are those assets and liabilities which are or will be converted into a fixed number of dollars regardless of changes in prices. As a result, changes in interest rates have a more significant impact on a financial institution’s performance than does general inflation.

Capital

Management regularly reviews the adequacy of its capital to ensure that sufficient capital is available for current and future needs and is in compliance with regulatory guidelines and actively reviews capital strategies in light of perceived business risks associated with current and prospective earning levels, liquidity, asset quality, economic conditions in the markets served, and level of returns available to shareholders. Management intends to maintain an optimal capital and leverage mix for growth and shareholder return. For details on the change in capital see “BALANCE SHEET ANALYSIS.”

Nicolet’s intent is to maintain capital levels for the Company and the Bank at amounts in excess of the regulatory well-capitalized ~~thresholds.~~thresholds, including the capital conservation buffer. At ~~June 30, 2019,~~March 31, 2020, the Bank’s regulatory capital ratios qualify the Bank as well-capitalized under the prompt-corrective action framework. This strong base of capital has allowed Nicolet to be opportunistic in the current environment and in strategic growth. A summary of Nicolet’s and the Bank’s regulatory capital amounts and ratios, as well as selected capital metrics are presented in the following table.

Table 12: Capital


	At or for the Six Months Ended			At or for the Year Ended			At or for the Three Months Ended			At or for the Year Ended
($ in thousands)	June 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
Company Stock Repurchases: *
Common stock repurchased during the period (dollars)	$	14,742		$	22,178		$	13,903		$	18,701
Common stock repurchased during the period (full shares)	253,753			408,071			206,833			310,781
Company Risk-Based Capital:
Total risk-based capital	$	344,596		$	326,235		$	405,600		$	404,573
Tier 1 risk-based capital	319,050			301,125			378,421			378,608
Common equity Tier 1 capital	289,130			271,435			348,106			348,454
Total capital ratio	13.2		%	12.9		%	13.3		%	13.4		%
Tier 1 capital ratio	12.2		%	11.9		%	12.4		%	12.6		%
Common equity tier 1 capital ratio	11.1		%	10.7		%	11.4		%	11.6		%
Tier 1 leverage ratio	11.0		%	10.4		%	11.2		%	11.9		%
Bank Risk-Based Capital:
Total risk-based capital	$	292,810		$	274,492		$	340,279		$	323,432
Tier 1 risk-based capital	279,239			261,339			323,500			309,460
Common equity Tier 1 capital	279,239			261,339			323,500			309,460
Total capital ratio	11.2		%	10.8		%	11.2		%	10.8		%
Tier 1 capital ratio	10.7		%	10.3		%	10.6		%	10.3		%
Common equity tier 1 capital ratio	10.7		%	10.3		%	10.6		%	10.3		%
Tier 1 leverage ratio	9.6		%	9.1		%	9.5		%	9.8		%
* Reflects common stock repurchased under board of director authorizations for the common stock repurchase program.

In managing capital for optimal return, we evaluate capital sources and uses, pricing and availability of our stock in the market, and alternative uses of capital (such as the level of organic growth or acquisition opportunities) in light of strategic plans. During first ~~half 2019, $14.7~~quarter 2020, $13.9 million was utilized to repurchase and cancel ~~253,753~~206,833 shares of common stock pursuant to our common stock repurchase ~~program. On June 18, 2019, Nicolet's board authorized an increase to the~~ program, ~~of $20 million or up to 325,000 shares of common stock. As a result, at June 30, 2019, there remains $25.0 million authorized under the repurchase program to be~~which is utilized from time-to-time to repurchase shares in the open market, through block transactions or in private transactions. As a result of the uncertainty regarding future economic conditions due to the COVID-19 pandemic, Nicolet temporarily suspended its share repurchase program on March 21, 2020. At March 31, 2020, there remained $7.1 million authorized under this repurchase program.

Critical Accounting Policies

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Estimates that are particularly susceptible to significant change include the valuation of loan acquisition transactions, as well as the determination of the allowance for ~~loan~~credit losses and income taxes. A discussion of these policies can be found in the “Critical Accounting Policies” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s ~~2018~~2019 Annual Report on Form 10-K. There have been no changes in the Company’s ~~application~~determination of critical accounting policies since December 31, ~~2018.~~2019. See also Note 1, “Basis of Presentation” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for changes to the Company's accounting policies on loans and the allowance for credit losses due to the adoption of CECL.

Future Accounting Pronouncements

Recent accounting pronouncements adopted are included in Note 1, “Basis of Presentation” of the Notes to Unaudited Consolidated Financial Statements within Part I, Item 1.

In ~~August 2018,~~March 2020, the FASB issued ASU ~~2018-13,~~2020-04, ~~Fair Value Measurement~~Reference Rate Reform (Topic ~~820)~~848): ~~Disclosure Framework - Changes to~~Facilitation of the ~~Disclosure Requirements for Fair Value Measurement~~Effects of Reference Rate Reform on Financial Reporting. This ASU ~~modifies~~provides optional guidance for a limited period of time to ease the ~~disclosure requirements~~potential burden in accounting for ~~fair value measurements~~(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 ~~removing, modifying or adding~~reference rate reform if certain ~~disclosures.~~criteria are met. The updated guidance is effective for ~~annual reporting periods, including interim periods within those fiscal years, beginning after~~all entities as of March 12, 2020 through December ~~15, 2019, with early adoption permitted. As~~31, 2022. The Company continues to evaluate the ~~new ASU only revises disclosure requirements, it is not expected to have a material~~ impact of reference rate reform on ~~the Company's~~its consolidated financial statements.

~~In June 2016, the FASB issued ASU 2016-13,~~ ~~Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments~~ intended to improve the financial reporting by requiring earlier recognition of credit losses on loans and certain other financial assets. Topic 326 replaces the current incurred loss impairment model (which recognizes losses when a probable threshold is met) with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. The measurement of lifetime expected credit losses will be based on historical experience, current

conditions, and reasonable and supportable forecasts. The ASU is effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Entities should apply the amendment by means of a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Early application is permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company expects to adopt the new accounting standard in 2020, as required. Nicolet established a cross-functional team to assess the impact of the new guidance on its consolidated financial statements and implement the new standard. This team continues to make progress on developing credit models, model validation and testing, as well as accounting, reporting, and governance processes to comply with the new credit loss requirements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

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

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

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

There have been no material changes in the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019, except as disclosed below.

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

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

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

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

Following are Nicolet’s monthly common stock purchases during the ~~second~~first quarter of ~~2019.~~2020.

Total Number of
Shares Purchased ^(a)

Average Price
Paid per Share

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs

Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans
or Programs ^(b)
(#) ($) (#) (#)
Period
April 1 – April 30, 2019 39,755
$ 59.72
39,409
393,000
May 1 – May 31, 2019 140,245
$ 60.88
75,730
317,000
June 1 – June 30, 2019 35,959
$ 60.96
35,959
606,000
Total 215,959
$ 60.68
151,098
606,000



	Total Number of Shares Purchased ^(a)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs ^(b)
	(#)	($)		(#)	(#)
Period
January 1 – January 31, 2020	47,699	$	71.28	32,402	516,600
February 1 – February 29, 2020	89,724	$	71.65	87,225	429,400
March 1 – March 31, 2020	87,422	$	61.30	87,206	342,200
Total	224,845	$	67.55	206,833	342,200

(a)

During ~~second~~first quarter ~~2019,~~2020, the Company repurchased ~~180~~1,341 common shares for minimum tax withholding settlements on restricted stock and repurchased ~~64,681~~16,671 common shares to satisfy the exercise price and / or tax withholding requirements of stock options, respectively. These purchases do not count against the maximum number of shares that may yet be purchased under the board of directors' authorization.


(b)	During ~~second~~first quarter ~~2019,~~2020, Nicolet utilized ~~$9.1~~$13.9 million to repurchase and cancel approximately ~~151,000~~207,000 shares of common stock pursuant to our common stock repurchase program. ~~On June 18, 2019, Nicolet's board authorized an increase to the~~At March 31, 2020, approximately $7.1 million remained available under this common stock repurchase program.

~~program of $20 million or up to 325,000 shares of common stock. As a result, at June 30, 2019, approximately $25.0 million remained available to repurchase up to 606,000 common shares.~~

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The following exhibits are filed herewith:



Exhibit Number		Description
2.1		Agreement and Plan of Merger Between Nicolet Bankshares, Inc. and ~~Choice Bancorp,~~Commerce Financial Holdings, Inc. dated ~~June 26, 2019~~February 17, 2020 ⁽¹⁾
3.1		Amended and Restated Bylaws of Nicolet Bankshares, Inc.⁽²⁾
31.1		Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002
31.2		Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002
32.1		Certification of CEO Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
32.2		Certification of CFO Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
101		The following material from Nicolet’s Form 10-Q Report for the three ~~and six~~ months ended ~~June 30, 2019,~~March 31, 2020, formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial Statements.

(1) Incorporated by reference to ~~Exhibit 2.1~~the exhibit of the same number in the Registrant's Current Report on Form 8-K filed on ~~June 27, 2019.~~February 18, 2020.

(2) Incorporated by reference to the exhibit of the same number in the Registrant's Current Report on Form 8-K, filed on March 25, 2020.

SIGNATURES

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



	NICOLET BANKSHARES, INC.

~~August 2, 2019~~April 30, 2020	/s/ Robert B. Atwell
	Robert B. Atwell
	Chairman, President and Chief Executive Officer

~~August 2, 2019~~April 30, 2020	/s/ Ann K. Lawson
	Ann K. Lawson
	Chief Financial Officer

4645



	TOTAL – Six Months Ended June 30, 2019
(in thousands)	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
ALLL:
Beginning balance	$	5,271		$	2,847		$	121		$	301		$	1,470		$	510		$	211		$	1,646		$	472		$	304		$	13,153
Provision	371			17			15			23			(19		)	(65		)	35			(79		)	66			136			500
Charge-offs	—			(13		)	—			—			—			—			—			—			(60		)	(159		)	(232		)
Recoveries	50			2			—			—			—			—			—			35			29			34			150
Net (charge-offs) recoveries	50			(11		)	—			—			—			—			—			35			(31		)	(125		)	(82		)
Ending balance	$	5,692		$	2,853		$	136		$	324		$	1,451		$	445		$	246		$	1,602		$	507		$	315		$	13,571
As % of ALLL	42		%	21		%	1		%	2		%	11		%	3		%	2		%	12		%	4		%	2		%	100		%
ALLL:
Individually evaluated	$	382		$	—		$	38		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	420
Collectively evaluated	5,310			2,853			98			324			1,451			445			246			1,602			507			315			13,151
Ending balance	$	5,692		$	2,853		$	136		$	324		$	1,451		$	445		$	246		$	1,602		$	507		$	315		$	13,571
Loans:
Individually evaluated	$	2,476		$	2,734		$	401		$	734		$	1,520		$	472		$	451		$	2,632		$	224		$	12		$	11,656
Collectively evaluated	735,452			444,820			35,364			52,751			325,300			72,636			37,795			342,429			116,209			28,861			2,191,617
Total loans	$	737,928		$	447,554		$	35,765		$	53,485		$	326,820		$	73,108		$	38,246		$	345,061		$	116,433		$	28,873		$	2,203,273
Less ALLL	5,692			2,853			136			324			1,451			445			246			1,602			507			315			13,571
Net loans	$	732,236		$	444,701		$	35,629		$	53,161		$	325,369		$	72,663		$	38,000		$	343,459		$	115,926		$	28,558		$	2,189,702



	TOTAL – Year Ended December 31, 2018
(in thousands)	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
ALLL:
Beginning balance	$	4,934		$	2,607		$	129		$	296		$	1,388		$	726		$	251		$	1,609		$	488		$	225		$	12,653
Provision	1,107			300			(8		)	5			119			(216		)	(40		)	117			(51		)	267			1,600
Charge-offs	(813		)	(74		)	—			—			(37		)	—			—			(85		)	—			(204		)	(1,213		)
Recoveries	43			14			—			—			—			—			—			5			35			16			113
Net (charge-offs) recoveries	(770		)	(60		)	—			—			(37		)	—			—			(80		)	35			(188		)	(1,100		)
Ending balance	$	5,271		$	2,847		$	121		$	301		$	1,470		$	510		$	211		$	1,646		$	472		$	304		$	13,153
As % of ALLL	40		%	22		%	1		%	2		%	11		%	4		%	2		%	12		%	4		%	2		%	100		%
ALLL:
Individually evaluated	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—
Collectively evaluated	5,271			2,847			121			301			1,470			510			211			1,646			472			304			13,153
Ending balance	$	5,271		$	2,847		$	121		$	301		$	1,470		$	510		$	211		$	1,646		$	472		$	304		$	13,153
Loans:
Individually evaluated	$	2,927		$	1,506		$	—		$	222		$	1,686		$	603		$	—		$	2,750		$	233		$	12		$	9,939
Collectively evaluated	681,993			439,847			35,625			53,222			341,966			79,996			30,926			355,091			111,095			26,481			2,156,242
Total loans	$	684,920		$	441,353		$	35,625		$	53,444		$	343,652		$	80,599		$	30,926		$	357,841		$	111,328		$	26,493		$	2,166,181
Less ALLL	5,271			2,847			121			301			1,470			510			211			1,646			472			304			13,153
Net loans	$	679,649		$	438,506		$	35,504		$	53,143		$	342,182		$	80,089		$	30,715		$	356,195		$	110,856		$	26,189		$	2,153,028



	Acquired – Year Ended December 31, 2018
(in thousands)	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
ALLL:
Beginning balance	$	742		$	492		$	17		$	61		$	234		$	98		$	51		$	312		$	79		$	25		$	2,111
Provision	(155		)	(85		)	(6		)	(15		)	6			(19		)	(51		)	(70		)	(20		)	1			(414		)
Charge-offs	—			(10		)	—			—			—			—			—			—			—			(3		)	(13		)
Recoveries	1			11			—			—			—			—			—			4			5			—			21
Net (charge-offs) recoveries	1			1			—			—			—			—			—			4			5			(3		)	8
Ending balance	$	588		$	408		$	11		$	46		$	240		$	79		$	—		$	246		$	64		$	23		$	1,705
As % of ALLL	34		%	24		%	1		%	3		%	14		%	5		%	—		%	14		%	4		%	1		%	100		%
ALLL:
Individually evaluated	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—
Collectively evaluated	588			408			11			46			240			79			—			246			64			23			1,705
Ending balance	$	588		$	408		$	11		$	46		$	240		$	79		$	—		$	246		$	64		$	23		$	1,705
Loans:
Individually evaluated	$	2,700		$	1,185		$	—		$	222		$	1,686		$	603		$	—		$	2,750		$	233		$	12		$	9,391
Collectively evaluated	114,120			156,637			24,512			21,848			170,879			13,518			—			134,723			32,716			2,672			671,625
Total loans	$	116,820		$	157,822		$	24,512		$	22,070		$	172,565		$	14,121		$	—		$	137,473		$	32,949		$	2,684		$	681,016
Less ALLL	588			408			11			46			240			79			—			246			64			23			1,705
Net loans	$	116,232		$	157,414		$	24,501		$	22,024		$	172,325		$	14,042		$	—		$	137,227		$	32,885		$	2,661		$	679,311



	Total Impaired Loans – June 30, 2019
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial & industrial	$	2,476	$	7,253	$	382	$	3,196	$	969
Owner-occupied CRE	2,734		3,069		—		2,812		127
AG production	401		404		38		402		4
AG real estate	734		734		—		735		—
CRE investment	1,520		1,525		—		1,523		5
Construction & land development	472		472		—		497		—
Residential construction	451		451		—		451		—
Residential first mortgage	2,632		2,798		—		2,672		73
Residential junior mortgage	224		224		—		227		—
Retail & other	12		15		—		12		3
Total	$	11,656	$	16,945	$	420	$	12,527	$	1,181
Originated impaired loans	$	3,759	$	3,855	$	420	$	3,829	$	97
Acquired impaired loans	7,897		13,090		—		8,698		1,084
Total	$	11,656	$	16,945	$	420	$	12,527	$	1,181



	For the Six Months Ended June 30,
	2019						2018
(in thousands)	Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate
ASSETS
Interest-earning assets
Loans, including loan fees ⁽¹⁾⁽²⁾	$	2,184,272	$	61,270	5.59	%	$	2,116,096	$	55,741	5.25	%
Investment securities:
Taxable	268,663		3,674		2.73	%	251,204		2,939		2.34	%
Tax-exempt⁽²⁾	137,576		1,513		2.20	%	153,724		1,658		2.16	%
Other interest-earning assets	128,046		1,807		2.81	%	142,938		1,579		2.20	%
Total non-loan earning assets	534,285		6,994		2.62	%	547,866		6,176		2.25	%
Total interest-earning assets	2,718,557		$	68,264	5.00	%	2,663,962		$	61,917	4.63	%
Other assets, net	316,101						306,946
Total assets	$	3,034,658					$	2,970,908
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings	$	305,449	$	752	0.50	%	$	277,927	$	504	0.37	%
Interest-bearing demand	495,878		2,549		1.04	%	550,631		2,171		0.79	%
Money market accounts (“MMA”)	569,167		1,986		0.70	%	678,719		1,918		0.57	%
Core time deposits	401,849		4,059		2.04	%	310,696		2,009		1.30	%
Brokered deposits	69,634		161		0.47	%	109,158		355		0.66	%
Total interest-bearing deposits	1,841,977		9,507		1.04	%	1,927,131		6,957		0.73	%
Other interest-bearing liabilities	77,368		1,803		4.64	%	78,210		1,696		4.32	%
Total interest-bearing liabilities	1,919,345		11,310		1.19	%	2,005,341		8,653		0.87	%
Noninterest-bearing demand	693,482						582,882
Other liabilities	24,108						17,193
Stockholders’ equity	397,723						365,492
Total liabilities and stockholders’ equity	$	3,034,658					$	2,970,908
Net interest income and rate spread			$	56,954	3.81	%			$	53,264	3.76	%
Tax-equivalent adjustment			$	535					$	587
Net interest margin					4.16	%					3.98	%