UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________

FORM 10-Q

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

For the quarterly period ended September 30, ~~2021~~2022

☐ 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

47-0871001

(State or Other Jurisdiction of Incorporation or Organization)

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

111 North Washington Street

Green Bay,

Wisconsin

54301

(Address of Principal Executive Offices)

(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~~NIC	~~The NASDAQ~~New York Stock ~~Market LLC~~Exchange

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 ☒ 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 ☒ 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	☒

Non-accelerated filer	☐	Smaller reporting company	☐

Emerging ~~Growth Company~~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 ☒

As of October ~~27, 2021~~31, 2022 there were ~~11,953,925~~14,676,910 shares of $0.01 par value common stock outstanding.

Nicolet Bankshares, Inc.

Quarterly Report on Form 10-Q

September 30, ~~2021~~2022

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS:

NICOLET BANKSHARES, INC.

Consolidated Balance Sheets

(In thousands, except share and per share data)


		September 30, 2021		December 31, 2020			September 30, 2022		December 31, 2021
		(Unaudited)		(Audited)			(Unaudited)		(Audited)
Assets	Assets					Assets
Cash and due from banks	Cash and due from banks	$	217,608	$	88,460	Cash and due from banks	$	118,537	$	209,349
Interest-earning deposits	Interest-earning deposits	1,132,997		714,399		Interest-earning deposits	319,745		385,943

Cash and cash equivalents	Cash and cash equivalents	1,350,605		802,859		Cash and cash equivalents	438,282		595,292
Certificates of deposit in other banks	Certificates of deposit in other banks	24,079		29,521		Certificates of deposit in other banks	13,510		21,920
Securities available for sale (“AFS”), at fair value	Securities available for sale (“AFS”), at fair value	715,942		539,337		Securities available for sale (“AFS”), at fair value	949,597		921,661
Securities held to maturity (“HTM”), at amortized cost	Securities held to maturity (“HTM”), at amortized cost	49,063		—		Securities held to maturity (“HTM”), at amortized cost	686,424		651,803
Other investments	Other investments	38,602		27,619		Other investments	79,279		44,008
Loans held for sale	Loans held for sale	16,784		21,450		Loans held for sale	3,709		6,447
Other assets held for sale	Other assets held for sale	177,627		—		Other assets held for sale	—		199,833
Loans	Loans	3,533,198		2,789,101		Loans	5,984,437		4,621,836
Allowance for credit losses - loans (“ACL-Loans”)	Allowance for credit losses - loans (“ACL-Loans”)	(38,399)		(32,173)		Allowance for credit losses - loans (“ACL-Loans”)	(60,348)		(49,672)
Loans, net	Loans, net	3,494,799		2,756,928		Loans, net	5,924,089		4,572,164
Premises and equipment, net	Premises and equipment, net	83,513		59,944		Premises and equipment, net	106,648		94,566
Bank owned life insurance (“BOLI”)	Bank owned life insurance (“BOLI”)	100,690		83,262		Bank owned life insurance (“BOLI”)	165,166		134,476
Goodwill and other intangibles, net	Goodwill and other intangibles, net	269,954		175,353		Goodwill and other intangibles, net	407,117		339,492
Accrued interest receivable and other assets	Accrued interest receivable and other assets	86,162		55,516		Accrued interest receivable and other assets	122,095		113,375
Total assets	Total assets	$	6,407,820	$	4,551,789	Total assets	$	8,895,916	$	7,695,037

Liabilities and Stockholders’ Equity	Liabilities and Stockholders’ Equity					Liabilities and Stockholders’ Equity
Liabilities:	Liabilities:					Liabilities:
Noninterest-bearing demand deposits	Noninterest-bearing demand deposits	$	1,852,119	$	1,212,787	Noninterest-bearing demand deposits	$	2,477,507	$	1,975,705
Interest-bearing deposits	Interest-bearing deposits	3,576,655		2,697,612		Interest-bearing deposits	4,918,395		4,490,211
Total deposits	Total deposits	5,428,774		3,910,399		Total deposits	7,395,902		6,465,916

Short-term borrowings						Short-term borrowings	280,000		—
Long-term borrowings	Long-term borrowings	144,233		53,869		Long-term borrowings	225,236		216,915
Other liabilities held for sale	Other liabilities held for sale	47,496		—		Other liabilities held for sale	—		51,586
Accrued interest payable and other liabilities	Accrued interest payable and other liabilities	58,039		48,332		Accrued interest payable and other liabilities	56,315		68,729
Total liabilities	Total liabilities	5,678,542		4,012,600		Total liabilities	7,957,453		6,803,146

Stockholders’ Equity:	Stockholders’ Equity:					Stockholders’ Equity:
Common stock	Common stock	120		100		Common stock	147		140
Additional paid-in capital	Additional paid-in capital	425,367		273,390		Additional paid-in capital	620,392		575,045
Retained earnings	Retained earnings	297,299		252,952		Retained earnings	380,263		313,604
Accumulated other comprehensive income (loss)	Accumulated other comprehensive income (loss)	6,492		12,747		Accumulated other comprehensive income (loss)	(62,339)		3,102
Total stockholders’ equity	Total stockholders’ equity	729,278		539,189		Total stockholders’ equity	938,463		891,891
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	6,407,820	$	4,551,789	Total liabilities and stockholders’ equity	$	8,895,916	$	7,695,037

Preferred shares authorized (no par value)	Preferred shares authorized (no par value)	10,000,000		10,000,000		Preferred shares authorized (no par value)	10,000,000		10,000,000
Preferred shares issued and outstanding	Preferred shares issued and outstanding	—		—		Preferred shares issued and outstanding	—		—
Common shares authorized (par value $0.01 per share)	Common shares authorized (par value $0.01 per share)	30,000,000		30,000,000		Common shares authorized (par value $0.01 per share)	30,000,000		30,000,000
Common shares outstanding	Common shares outstanding	11,952,438		10,011,342		Common shares outstanding	14,673,197		13,994,079
Common shares issued	Common shares issued	11,975,002		10,030,267		Common shares issued	14,746,123		14,019,880

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 September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Interest income:	Interest income:									Interest income:
Loans, including loan fees	Loans, including loan fees	$	35,294	$	34,047	$	104,267	$	101,591	Loans, including loan fees	$	63,060	$	35,294	$	167,313	$	104,267
Investment securities:	Investment securities:									Investment securities:
Taxable	Taxable	2,061		2,001		5,935		6,115		Taxable	5,350		2,061		15,612		5,935
Tax-exempt	Tax-exempt	517		542		1,582		1,542		Tax-exempt	1,181		517		2,503		1,582
Other interest income	Other interest income	869		680		2,140		1,917		Other interest income	1,127		869		2,734		2,140
Total interest income	Total interest income	38,741		37,270		113,924		111,165		Total interest income	70,718		38,741		188,162		113,924
Interest expense:	Interest expense:									Interest expense:
Deposits	Deposits	2,444		3,784		7,799		13,196		Deposits	4,638		2,444		9,240		7,799
Short-term borrowings	Short-term borrowings	—		—		—		65		Short-term borrowings	594		—		622		—
Long-term borrowings	Long-term borrowings	1,113		926		1,729		2,584		Long-term borrowings	2,496		1,113		6,431		1,729
Total interest expense	Total interest expense	3,557		4,710		9,528		15,845		Total interest expense	7,728		3,557		16,293		9,528
Net interest income	Net interest income	35,184		32,560		104,396		95,320		Net interest income	62,990		35,184		171,869		104,396
Provision for credit losses	Provision for credit losses	6,000		3,000		6,500		9,000		Provision for credit losses	8,600		6,000		9,650		6,500
Net interest income after provision for credit losses	Net interest income after provision for credit losses	29,184		29,560		97,896		86,320		Net interest income after provision for credit losses	54,390		29,184		162,219		97,896
Noninterest income:	Noninterest income:									Noninterest income:
Trust services fee income	Trust services fee income	2,043		1,628		5,724		4,717		Trust services fee income	1,969		2,043		5,984		5,724
Brokerage fee income	Brokerage fee income	3,154		2,489		8,938		7,080		Brokerage fee income	3,040		3,154		9,716		8,938
Mortgage income, net	Mortgage income, net	4,808		9,675		17,637		21,965		Mortgage income, net	1,728		4,808		7,186		17,637
Service charges on deposit accounts	Service charges on deposit accounts	1,314		1,037		3,541		3,075		Service charges on deposit accounts	1,589		1,314		4,602		3,541
Card interchange income	Card interchange income	2,299		1,877		6,492		5,076		Card interchange income	3,012		2,299		8,543		6,492
BOLI income	BOLI income	572		531		1,658		1,774		BOLI income	966		572		2,667		1,658
Asset gains (losses), net	Asset gains (losses), net	(1,187)		217		3,716		(1,185)		Asset gains (losses), net	(46)		(1,187)		2,870		3,716
Other income	Other income	993		1,237		3,594		3,245		Other income	742		993		1,506		3,594
Total noninterest income	Total noninterest income	13,996		18,691		51,300		45,747		Total noninterest income	13,000		13,996		43,074		51,300
Noninterest expense:	Noninterest expense:									Noninterest expense:
Personnel	Personnel	16,927		14,072		49,127		41,877		Personnel	24,136		16,927		65,008		49,127
Occupancy, equipment and office	Occupancy, equipment and office	5,749		4,051		13,939		12,616		Occupancy, equipment and office	7,641		5,749		21,476		13,939
Business development and marketing	Business development and marketing	1,654		810		3,853		4,683		Business development and marketing	2,281		1,654		6,169		3,853
Data processing	Data processing	2,939		2,612		8,408		7,574		Data processing	3,664		2,939		10,647		8,408
Intangibles amortization	Intangibles amortization	758		834		2,400		2,707		Intangibles amortization	1,628		758		4,399		2,400
FDIC assessments	FDIC assessments	480		347		1,555		347		FDIC assessments	480		480		1,440		1,555
Merger-related expense	Merger-related expense	2,793		151		3,449		853		Merger-related expense	519		2,793		1,172		3,449
Other expense	Other expense	1,761		808		7,158		4,695		Other expense	2,218		1,761		6,344		7,158
Total noninterest expense	Total noninterest expense	33,061		23,685		89,889		75,352		Total noninterest expense	42,567		33,061		116,655		89,889
Income before income tax expense	Income before income tax expense	10,119		24,566		59,307		56,715		Income before income tax expense	24,823		10,119		88,638		59,307
Income tax expense	Income tax expense	2,295		6,434		14,960		14,331		Income tax expense	6,313		2,295		21,979		14,960
Net income	Net income	7,824		18,132		44,347		42,384		Net income	$	18,510	$	7,824	$	66,659	$	44,347
Less: Net income attributable to noncontrolling interest		—		30		—		249
Net income attributable to Nicolet Bankshares, Inc.		$	7,824	$	18,102	$	44,347	$	42,135
Earnings per common share:	Earnings per common share:									Earnings per common share:
Basic	Basic	$	0.75	$	1.75	$	4.39	$	4.04	Basic	$	1.33	$	0.75	$	4.88	$	4.39
Diluted	Diluted	$	0.73	$	1.72	$	4.22	$	3.97	Diluted	$	1.29	$	0.73	$	4.72	$	4.22
Weighted average common shares outstanding:	Weighted average common shares outstanding:									Weighted average common shares outstanding:
Basic	Basic	10,391,896		10,348,862		10,098,492		10,426,228		Basic	13,890,066		10,391,896		13,647,973		10,098,492
Diluted	Diluted	10,775,591		10,498,552		10,503,163		10,604,732		Diluted	14,310,275		10,775,591		14,126,772		10,503,163

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.

Consolidated Statements of Comprehensive Income (Loss)

(In thousands) (Unaudited)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Net income	Net income	$	7,824	$	18,132	$	44,347	$	42,384	Net income	$	18,510	$	7,824	$	66,659	$	44,347
Other comprehensive income (loss), net of tax:	Other comprehensive income (loss), net of tax:									Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities AFS:	Unrealized gains (losses) on securities AFS:									Unrealized gains (losses) on securities AFS:
Net unrealized holding gains (losses)	Net unrealized holding gains (losses)	(3,074)		394		(8,581)		12,708		Net unrealized holding gains (losses)	(26,162)		(3,074)		(89,630)		(8,581)
Net realized (gains) losses included in income	Net realized (gains) losses included in income	13		(151)		13		(315)		Net realized (gains) losses included in income	—		13		(15)		13
Income tax (expense) benefit	Income tax (expense) benefit	827		(66)		2,313		(3,346)		Income tax (expense) benefit	7,064		827		24,204		2,313
Total other comprehensive income (loss)	Total other comprehensive income (loss)	(2,234)		177		(6,255)		9,047		Total other comprehensive income (loss)	(19,098)		(2,234)		(65,441)		(6,255)
Comprehensive income		$	5,590	$	18,309	$	38,092	$	51,431
Comprehensive income (loss)										Comprehensive income (loss)	$	(588)	$	5,590	$	1,218	$	38,092

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
		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)		Total
Balances at June 30, 2022														Balances at June 30, 2022	$	134	$	520,741	$	361,753	$	(43,241)	$	839,387
Comprehensive income:														Comprehensive income:
Net income, three months ended September 30, 2022														Net income, three months ended September 30, 2022	—		—		18,510		—		18,510
Other comprehensive income (loss)														Other comprehensive income (loss)	—		—		—		(19,098)		(19,098)
Issuance of common stock in acquisition														Issuance of common stock in acquisition	13		98,136		—		—		98,149
Stock-based compensation expense														Stock-based compensation expense	—		1,329		—		—		1,329
Exercise of stock options, net														Exercise of stock options, net	—		1		—		—		1
Issuance of common stock														Issuance of common stock	—		185		—		—		185

Balances at September 30, 2022														Balances at September 30, 2022	$	147	$	620,392	$	380,263	$	(62,339)	$	938,463
Balances at June 30, 2021	Balances at June 30, 2021	$	98	$	261,096	$	289,475	$	8,726	$	—	$	559,395	Balances at June 30, 2021	$	98	$	261,096	$	289,475	$	8,726	$	559,395
Comprehensive income:	Comprehensive income:													Comprehensive income:
Net income, three months ended September 30, 2021	Net income, three months ended September 30, 2021	—		—		7,824		—		—		7,824		Net income, three months ended September 30, 2021	—		—		7,824		—		7,824
Other comprehensive income (loss)	Other comprehensive income (loss)	—		—		—		(2,234)		—		(2,234)		Other comprehensive income (loss)	—		—		—		(2,234)		(2,234)
Issuance of common stock in acquisition	Issuance of common stock in acquisition	23		179,411		—		—		—		179,434		Issuance of common stock in acquisition	23		179,411		—		—		179,434
Stock-based compensation expense	Stock-based compensation expense	—		1,826		—		—		—		1,826		Stock-based compensation expense	—		1,826		—		—		1,826
Exercise of stock options, net	Exercise of stock options, net	1		160		—		—		—		161		Exercise of stock options, net	1		160		—		—		161
Issuance of common stock	Issuance of common stock	—		163		—		—		—		163		Issuance of common stock	—		163		—		—		163
Purchase and retirement of common stock	Purchase and retirement of common stock	(2)		(17,289)		—		—		—		(17,291)		Purchase and retirement of common stock	(2)		(17,289)		—		—		(17,291)

Balances at September 30, 2021	Balances at September 30, 2021	$	120	$	425,367	$	297,299	$	6,492	$	—	$	729,278	Balances at September 30, 2021	$	120	$	425,367	$	297,299	$	6,492	$	729,278
Balances at June 30, 2020		$	104	$	301,778	$	216,863	$	13,288	$	820	$	532,853
Balances at December 31, 2021														Balances at December 31, 2021	$	140	$	575,045	$	313,604	$	3,102	$	891,891
Comprehensive income:	Comprehensive income:													Comprehensive income:
Net income, three months ended September 30, 2020		—		—		18,102		—		30		18,132
Net income, nine months ended September 30, 2022														Net income, nine months ended September 30, 2022	—		—		66,659		—		66,659
Other comprehensive income (loss)	Other comprehensive income (loss)	—		—		—		177		—		177		Other comprehensive income (loss)	—		—		—		(65,441)		(65,441)
Issuance of common stock in acquisition														Issuance of common stock in acquisition	13		98,136		—		—		98,149
Stock-based compensation expense	Stock-based compensation expense	—		1,260		—		—		—		1,260		Stock-based compensation expense	—		5,282		—		—		5,282
Exercise of stock options, net	Exercise of stock options, net	—		94		—		—		—		94		Exercise of stock options, net	1		2,077		—		—		2,078
Issuance of common stock	Issuance of common stock	—		148		—		—		—		148		Issuance of common stock	—		557		—		—		557
Purchase and retirement of common stock	Purchase and retirement of common stock	(2)		(13,744)		—		—		—		(13,746)		Purchase and retirement of common stock	(7)		(60,705)		—		—		(60,712)
Distribution to noncontrolling interest		—		—		—		—		(49)		(49)
Balances at September 30, 2020		$	102	$	289,536	$	234,965	$	13,465	$	801	$	538,869

Balances at September 30, 2022														Balances at September 30, 2022	$	147	$	620,392	$	380,263	$	(62,339)	$	938,463
Balances at December 31, 2020	Balances at December 31, 2020	$	100	$	273,390	$	252,952	$	12,747	$	—	$	539,189	Balances at December 31, 2020	$	100	$	273,390	$	252,952	$	12,747	$	539,189
Comprehensive income:	Comprehensive income:													Comprehensive income:
Net income, nine months ended September 30, 2021	Net income, nine months ended September 30, 2021	—		—		44,347		—		—		44,347		Net income, nine months ended September 30, 2021	—		—		44,347		—		44,347
Other comprehensive income (loss)	Other comprehensive income (loss)	—		—		—		(6,255)		—		(6,255)		Other comprehensive income (loss)	—		—		—		(6,255)		(6,255)
Issuance of common stock in acquisition	Issuance of common stock in acquisition	23		179,411		—		—		—		179,434		Issuance of common stock in acquisition	23		179,411		—		—		179,434
Stock-based compensation expense	Stock-based compensation expense	—		5,222		—		—		—		5,222		Stock-based compensation expense	—		5,222		—		—		5,222
Exercise of stock options, net	Exercise of stock options, net	1		1,385		—		—		—		1,386		Exercise of stock options, net	1		1,385		—		—		1,386
Issuance of common stock	Issuance of common stock	—		395		—		—		—		395		Issuance of common stock	—		395		—		—		395
Purchase and retirement of common stock	Purchase and retirement of common stock	(4)		(34,436)		—		—		—		(34,440)		Purchase and retirement of common stock	(4)		(34,436)		—		—		(34,440)

Balances at September 30, 2021	Balances at September 30, 2021	$	120	$	425,367	$	297,299	$	6,492	$	—	$	729,278	Balances at September 30, 2021	$	120	$	425,367	$	297,299	$	6,492	$	729,278
Balances at December 31, 2019		$	106	$	312,733	$	199,005	$	4,418	$	728	$	516,990
Comprehensive income:
Net income, nine months ended September 30, 2020		—		—		42,135		—		249		42,384
Other comprehensive income (loss)		—		—		—		9,047		—		9,047
Stock-based compensation expense		—		4,216		—		—		—		4,216
Exercise of stock options, net		—		1,048		—		—		—		1,048
Issuance of common stock		—		482		—		—		—		482
Purchase and retirement of common stock		(4)		(28,943)		—		—		—		(28,947)
Distribution to noncontrolling interest		—		—		—		—		(176)		(176)
Adoption of new accounting pronouncement		—		—		(6,175)		—		—		(6,175)
Balances at September 30, 2020		$	102	$	289,536	$	234,965	$	13,465	$	801	$	538,869

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.

Consolidated Statements of Cash Flows (Unaudited)


(In thousands)	(In thousands)	Nine Months Ended September 30,				(In thousands)	Nine Months Ended September 30,
		2021		2020			2022		2021
Cash Flows From Operating Activities:	Cash Flows From Operating Activities:					Cash Flows From Operating Activities:
Net income	Net income	$	44,347	$	42,384	Net income	$	66,659	$	44,347
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion	Depreciation, amortization, and accretion	9,301		7,564		Depreciation, amortization, and accretion	16,994		9,301
Provision for credit losses	Provision for credit losses	6,500		9,000		Provision for credit losses	9,650		6,500
Increase in cash surrender value of life insurance	Increase in cash surrender value of life insurance	(1,658)		(1,647)		Increase in cash surrender value of life insurance	(2,551)		(1,658)
Stock-based compensation expense	Stock-based compensation expense	5,222		4,216		Stock-based compensation expense	5,282		5,222
Asset (gains) losses, net	Asset (gains) losses, net	(3,716)		1,185		Asset (gains) losses, net	(2,870)		(3,716)
Gain on sale of loans held for sale, net	Gain on sale of loans held for sale, net	(16,289)		(22,217)		Gain on sale of loans held for sale, net	(4,520)		(16,289)
Net change due to:	Net change due to:					Net change due to:
Proceeds from sale of loans held for sale	Proceeds from sale of loans held for sale	503,405		663,466		Proceeds from sale of loans held for sale	188,093		503,405
Origination of loans held for sale	Origination of loans held for sale	(485,641)		(650,660)		Origination of loans held for sale	(182,962)		(485,641)
Accrued interest receivable and other assets	Accrued interest receivable and other assets	(6,721)		4,781		Accrued interest receivable and other assets	7,719		(6,721)
Accrued interest payable and other liabilities	Accrued interest payable and other liabilities	(2,488)		6,200		Accrued interest payable and other liabilities	(14,145)		(2,488)
Net cash provided by (used in) operating activities	Net cash provided by (used in) operating activities	52,262		64,272		Net cash provided by (used in) operating activities	87,349		52,262
Cash Flows From Investing Activities:	Cash Flows From Investing Activities:					Cash Flows From Investing Activities:
Net (increase) decrease in loans	Net (increase) decrease in loans	10,406		(244,751)		Net (increase) decrease in loans	(537,001)		10,406
Net (increase) decrease in certificates of deposit in other banks	Net (increase) decrease in certificates of deposit in other banks	8,561		5,719		Net (increase) decrease in certificates of deposit in other banks	8,419		8,561
Purchases of securities AFS	Purchases of securities AFS	(214,343)		(128,661)		Purchases of securities AFS	(8,623)		(214,343)
Purchases of securities HTM	Purchases of securities HTM	(20,996)		—		Purchases of securities HTM	(56,479)		(20,996)
Proceeds from sales of securities AFS	Proceeds from sales of securities AFS	15,975		14,864		Proceeds from sales of securities AFS	23,984		15,975
Proceeds from calls and maturities of securities AFS	Proceeds from calls and maturities of securities AFS	81,681		69,568		Proceeds from calls and maturities of securities AFS	70,781		81,681
Proceeds from calls and maturities of securities HTM						Proceeds from calls and maturities of securities HTM	21,378		—
Purchases of other investments	Purchases of other investments	(4,787)		(3,815)		Purchases of other investments	(30,327)		(4,787)
Proceeds from sales of other investments	Proceeds from sales of other investments	1,534		—		Proceeds from sales of other investments	4,014		1,534

Proceeds from redemption of BOLI	Proceeds from redemption of BOLI	—		245		Proceeds from redemption of BOLI	578		—
Net (increase) decrease in premises and equipment	Net (increase) decrease in premises and equipment	(6,894)		(9,708)		Net (increase) decrease in premises and equipment	(7,965)		(6,894)
Net (increase) decrease in other real estate and other assets	Net (increase) decrease in other real estate and other assets	1,046		—		Net (increase) decrease in other real estate and other assets	9,785		1,046
Net cash (paid) received in branch sale						Net cash (paid) received in branch sale	147,833		—
Net cash (paid) received in business combination	Net cash (paid) received in business combination	394,868		(21,820)		Net cash (paid) received in business combination	(28,221)		394,868
Net cash provided by (used in) investing activities	Net cash provided by (used in) investing activities	267,051		(318,359)		Net cash provided by (used in) investing activities	(381,844)		267,051
Cash Flows From Financing Activities:	Cash Flows From Financing Activities:					Cash Flows From Financing Activities:
Net increase (decrease) in deposits	Net increase (decrease) in deposits	199,698		617,373		Net increase (decrease) in deposits	68,428		199,698

Net increase (decrease) in short-term borrowings						Net increase (decrease) in short-term borrowings	147,134		—
Proceeds from long-term borrowings	Proceeds from long-term borrowings	103,953		367,841		Proceeds from long-term borrowings	—		103,953
Repayments of long-term borrowings	Repayments of long-term borrowings	(42,559)		(32,029)		Repayments of long-term borrowings	(20,000)		(42,559)
Purchase and retirement of common stock	Purchase and retirement of common stock	(34,440)		(28,947)		Purchase and retirement of common stock	(60,712)		(34,440)

Proceeds from issuance of common stock	Proceeds from issuance of common stock	395		482		Proceeds from issuance of common stock	557		395
Proceeds from exercise of stock options	Proceeds from exercise of stock options	1,386		1,048		Proceeds from exercise of stock options	2,078		1,386
Distribution to noncontrolling interest		—		(176)

Net cash provided by (used in) financing activities	Net cash provided by (used in) financing activities	228,433		925,592		Net cash provided by (used in) financing activities	137,485		228,433
Net increase (decrease) in cash and cash equivalents	Net increase (decrease) in cash and cash equivalents	547,746		671,505		Net increase (decrease) in cash and cash equivalents	(157,010)		547,746
Cash and cash equivalents:	Cash and cash equivalents:					Cash and cash equivalents:
Beginning	Beginning	802,859		182,059		Beginning	595,292		802,859
Ending *	Ending *	$	1,350,605	$	853,564	Ending *	$	438,282	$	1,350,605
Supplemental Disclosures of Cash Flow Information:	Supplemental Disclosures of Cash Flow Information:					Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	Cash paid for interest	$	9,320	$	18,130	Cash paid for interest	$	19,785	$	9,320
Cash paid for taxes	Cash paid for taxes	24,116		16,353		Cash paid for taxes	25,660		24,116
Transfer of loans and bank premises to other real estate owned	Transfer of loans and bank premises to other real estate owned	302		—		Transfer of loans and bank premises to other real estate owned	432		302
Capitalized mortgage servicing rights	Capitalized mortgage servicing rights	3,191		4,038		Capitalized mortgage servicing rights	2,127		3,191

Acquisitions:	Acquisitions:					Acquisitions:
Fair value of assets acquired	Fair value of assets acquired	$	1,544,518	$	—	Fair value of assets acquired	$	1,118,000	$	1,556,000
Fair value of liabilities assumed	Fair value of liabilities assumed	1,407,605		—		Fair value of liabilities assumed	1,034,000		1,409,000
Net assets acquired	Net assets acquired	136,913		—		Net assets acquired	84,000		147,000

* ~~Cash~~There was no restricted cash in cash and cash equivalents at ~~both~~September 30, 2022, while cash and cash equivalents at September 30, 2021, ~~and September 30, 2020, include~~included restricted cash of $1.9 millionpledged as collateral on interest rate ~~swaps and no~~swaps. No reserve balance was required with the Federal Reserve ~~Bank.~~Bank at either September 30, 2022 or September 30, 2021.

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 (loss), changes in stockholders’ equity and cash flows of Nicolet Bankshares, Inc. (the “Company” or “Nicolet”) and its subsidiaries, as of and for the periods presented, and all such adjustments are of a normal recurring nature. All material intercompany transactions and balances 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, ~~2020.~~2021.

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 credit losses, valuation of loans in acquisition transactions, useful lives for depreciation and amortization, fair value of financial instruments, impairment calculations, valuation of deferred tax assets, uncertain income tax positions and contingencies. Estimates that are particularly susceptible to significant change for the Company include the determination of the allowance for 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, ~~2020.~~2021.

Future Accounting Pronouncements

In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures. This ASU eliminates the accounting guidance for TDRs by creditors, while enhancing the disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The ASU also requires public business entities to expand the vintage disclosures to include gross charge-offs by year of origination. The updated guidance is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. Adoption of this amendment is not expected to have a material impact on the Company’s consolidated financial statements; though, it will result in new disclosures of gross charge-offs by year of origination and on the types of loan modifications to borrowers experiencing financial difficulties. Current TDR disclosures will be also removed.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The updated guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company continues to work through the cessation of LIBOR, including the modification of its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR. The Company expects to utilize the reference rate reform transition guidance, as applicable, and does not expect such adoption to have a material impact on its consolidated financial statements or financial disclosures. The Company will continue to assess the impact as the reference rate transition approaches June 30, 2023.

Reclassifications

Certain amounts in the ~~2020~~2021 consolidated financial statements have been reclassified to conform to the ~~2021~~2022 presentation. These reclassifications were not material and did not impact previously reported net income or comprehensive income.

Note 2 – Acquisitions

Completed Acquisitions:

~~Advantage Community Bancshares,~~Charter Bankshares, Inc. (“~~Advantage”~~Charter”): On August ~~21, 2020,~~26, 2022, Nicolet completed its merger with ~~Advantage,~~Charter, pursuant to the ~~terms~~Agreement and Plan of ~~the definitive merger agreement~~Merger dated March ~~2, 2020, whereby Advantage~~29, 2022 (the “Charter Merger Agreement”), at which time Charter merged with and into Nicolet, and ~~Advantage Community~~Charter Bank, the wholly owned bank subsidiary of ~~Advantage,~~Charter, was merged with and into Nicolet National Bank (the “Bank”)~~. Advantage’s 4 branches in Dorchester, Edgar, Mosinee, and Wausau opened as Nicolet National Bank branches on August 24, 2020, expanding our presence in Central Wisconsin and~~, the ~~Wausau area. Due to the small size~~wholly owned bank subsidiary of ~~the transaction, terms of the all-cash deal were not disclosed.~~Nicolet.

~~Upon consummation, Advantage added total assets~~Pursuant to the Charter Merger Agreement, each share of Charter common stock issued and outstanding immediately prior to the effective time of the merger was converted into the right to receive 15.458 shares of Nicolet common stock and $475 in cash. As a result, Nicolet issued approximately ~~$172~~1.26 million ~~(representing approximately 4%~~shares of ~~Nicolet’s then pre-merger asset size), loans~~Nicolet common stock for stock consideration of ~~$88 million, deposits of $141 million, core deposit intangible of $1~~$98 million and ~~goodwill~~cash consideration of ~~$12~~$39 million, for a total purchase price of $137 million. With the Charter merger, Nicolet expanded to Western Wisconsin and Minnesota.

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


(In millions, except share data)	Acquired from Charter		Fair Value Adjustments		Estimated Fair Value
Assets Acquired:
Cash and cash equivalents	$	10	$	—	$	10
Investment securities	218		—		218
Loans	848		(21)		827
ACL-Loans	(9)		7		(2)
Premises and equipment	9		1		10
BOLI	29		—		29
Core deposit intangible	—		19		19
Other assets	5		2		7
Total assets	$	1,110	$	8	$	1,118
Liabilities Assumed:
Deposits	$	869	$	1	$	870
Borrowings	161		—		161
Other liabilities	3		—		3
Total liabilities	$	1,033	$	1	$	1,034
Net assets acquired					$	84
Purchase Price:
Nicolet common stock issued (in shares)					1,262,360
Value of Nicolet common stock consideration					$	98
Cash consideration paid					39
Total purchase price					$	137
Preliminary goodwill					$	53

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


(In thousands)	August 26, 2022
Purchase price of PCD loans at acquisition	$	24,031
Allowance for credit losses on PCD loans at acquisition	1,709
Par value of PCD acquired loans at acquisition	$	25,740

The Company accounted for the Charter acquisition under the acquisition method of accounting, and thus, the financial position and results of operations of Charter prior to the consummation date were not included in the accompanying consolidated financial statements. The accounting required assets purchased and liabilities assumed to be recorded at their respective estimated fair values at the date of acquisition. The estimated fair value was determined with the assistance of third party

valuations, appraisals, and third party advisors. Goodwill arising as a result of the Charter acquisition is not deductible for tax purposes.

County Bancorp, Inc. (“County”): On December 3, 2021, Nicolet completed its merger with County, pursuant to the Agreement and Plan of Merger dated June 22, 2021 (the “County Merger Agreement”), at which time County merged with and into Nicolet, and Investors Community Bank, the wholly owned bank subsidiary of County, was merged with and into the Bank.

Pursuant to the County Merger Agreement, each share of County common stock issued and outstanding immediately prior to the effective time of the merger was converted into the right to receive, at the election of the shareholder, either cash of $37.18 or 0.48 shares of Nicolet common stock, subject to proration procedures such that 1,237,000 shares of County common stock were exchanged for cash, and the remaining shares were exchanged for Nicolet common stock. As a result, Nicolet issued approximately 2.4 million shares of Nicolet common stock for stock consideration of $176 million and cash consideration of $48 million, or a total purchases price of $224 million. With the County merger, Nicolet became the premier agriculture lender throughout Wisconsin.

A summary of the assets acquired and liabilities assumed in the County transaction, as of the acquisition date, including the purchase price allocation was as follows.


(In millions, except share data)	Acquired from County		Fair Value Adjustments		Estimated Fair Value
Assets Acquired:
Cash and cash equivalents	$	20	$	—	$	20
Investment securities	301		(1)		300
Loans	1,015		(1)		1,014
ACL-Loans	(11)		8		(3)
Premises and equipment	21		(4)		17
BOLI	33		—		33
Core deposit intangible	—		7		7
Loan servicing rights	20		—		20
Other assets	6		(2)		4
Total assets	$	1,405	$	7	$	1,412
Liabilities Assumed:
Deposits	$	1,027	$	3	$	1,030
Borrowings	218		1		219
Other liabilities	8		—		8
Total liabilities	$	1,253	$	4	$	1,257
Net assets acquired					$	155
Purchase Price:
Nicolet common stock issued (in shares)					2,366,243
Value of Nicolet common stock consideration					$	176
Cash consideration paid					48
Total purchase price					$	224
Write-off prior investment in County					(1)
Goodwill					$	70

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


(In thousands)	December 3, 2021
Purchase price of PCD loans at acquisition	$	64,948
Allowance for credit losses on PCD loans at acquisition	3,262
Par value of PCD acquired loans at acquisition	$	68,210

The Company accounted for the County acquisition under the acquisition method of accounting, and thus, the financial position and results of operations of County prior to the consummation date were not included in the accompanying consolidated

financial statements. The accounting required assets purchased and liabilities assumed to be recorded at their respective estimated fair values at the date of acquisition. The estimated fair value was determined with the assistance of third party valuations, appraisals, and third party advisors. Goodwill arising as a result of the County acquisition is not deductible for tax purposes.

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

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

A summary of the assets acquired and liabilities assumed in the Mackinac transaction, as of the acquisition date, including the ~~preliminary~~ purchase price allocation was as follows.


(In thousands, except share data)		Acquired from Mackinac		Fair Value Adjustments		Estimated Fair Value
(In millions, except share data)								(In millions, except share data)	Acquired from Mackinac		Fair Value Adjustments		Estimated Fair Value
Assets Acquired:	Assets Acquired:							Assets Acquired:
Cash and cash equivalents	Cash and cash equivalents	$	448,378	$	—	$	448,378	Cash and cash equivalents	$	448	$	—	$	448
Investment securities	Investment securities	103,992		(2,148)		101,844		Investment securities	104		—		104
Loans	Loans	930,420		(178)		930,242		Loans	930		10		940
ACL-Loans	ACL-Loans	(5,579)		3,683		(1,896)		ACL-Loans	(6)		4		(2)
Premises and equipment	Premises and equipment	23,619		(2,723)		20,896		Premises and equipment	24		(3)		21
BOLI	BOLI	15,715		—		15,715		BOLI	16		—		16
Goodwill	Goodwill	19,574		(19,574)		—		Goodwill	20		(20)		—
Other intangibles	Other intangibles	3,918		803		4,721		Other intangibles	4		3		7
Other assets	Other assets	24,752		(134)		24,618		Other assets	25		(3)		22
Total assets	Total assets	$	1,564,789	$	(20,271)	$	1,544,518	Total assets	$	1,565	$	(9)	$	1,556
Liabilities Assumed:	Liabilities Assumed:							Liabilities Assumed:
Deposits	Deposits	$	1,365,068	$	1,153	$	1,366,221	Deposits	$	1,365	$	1	$	1,366
Short-term borrowings		—		—		—
Long-term borrowings		28,104		525		28,629
Borrowings								Borrowings	28		1		29
Other liabilities	Other liabilities	12,755		—		12,755		Other liabilities	13		1		14
Total liabilities	Total liabilities	$	1,405,927	$	1,678	$	1,407,605	Total liabilities	$	1,406	$	3	$	1,409
Net assets acquired	Net assets acquired					$	136,913	Net assets acquired					$	147
Purchase Price:	Purchase Price:							Purchase Price:
Nicolet common stock issued (in shares)	Nicolet common stock issued (in shares)					2,337,230		Nicolet common stock issued (in shares)					2,337,230
Value of Nicolet common stock consideration	Value of Nicolet common stock consideration					$	179,826	Value of Nicolet common stock consideration					$	180
Cash consideration paid	Cash consideration paid					49,367		Cash consideration paid					49
Total purchase price	Total purchase price					$	229,193	Total purchase price					$	229
Preliminary goodwill						$	92,280
Write-off prior investment in Mackinac								Write-off prior investment in Mackinac					(2)
Goodwill								Goodwill					$	84

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


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

consolidated financial statements. The accounting required assets purchased and liabilities assumed to be recorded at their respective estimated fair values at the date of acquisition. The estimated fair value was determined with the assistance of third party valuations, appraisals, and third party advisors. Goodwill arising as a result of the Mackinac acquisition is not deductible for tax purposes.

Summary Unaudited Pro Forma Information: The following unaudited pro forma information is presented for illustrative purposes ~~only.~~only, and gives effect to the acquisitions of County and Mackinac as if the acquisitions had occurred on January 1, 2021, the beginning of the earliest period presented. The pro forma information should not be relied upon as being indicative of the historical results of operations the companies would have had if the ~~merger~~acquisitions had occurred before such periods or the future results of operations that the companies will experience as a result of the ~~merger.~~mergers. The pro forma information, although helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect the benefits of expected cost savings, opportunities to earn additional revenue, the impact of restructuring and merger-related expenses, or other factors that may result as a consequence of the ~~merger~~mergers and, accordingly, does not attempt to predict or suggest future results. ~~The unaudited pro forma information set forth below gives effect to the merger as if it had occurred on January 1, 2020, the beginning of the earliest period presented.~~

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

The Company accounted for the Mackinac acquisition under the acquisition method of accounting, and thus, the financial position and results of operations of Mackinac prior to the consummation date were not included in the accompanying consolidated financial statements. The accounting required assets purchased and liabilities assumed to be recorded at their respective estimated fair values at the date of acquisition. The estimated fair value was determined with the assistance of third party valuations, appraisals, and third party advisors. Due to the timing of the merger, the purchase price allocation and estimated fair value measurements remain preliminary. Goodwill arising as a result of the Mackinac acquisition is not deductible for tax purposes. Management will continue to review the estimated fair values and expects to finalize its analysis of the acquired assets and assumed liabilities in the transaction over the next few months, within one year of the merger. Therefore, adjustments to the purchase price allocation and estimated fair value may occur.

~~Pending Acquisition:~~

~~County Bancorp, Inc. (“County”):~~ On June 22, 2021, Nicolet entered into a definitive merger agreement with County pursuant to which County will merge with and into Nicolet, to become the premier agriculture lender throughout Wisconsin. Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, County shareholders will have the right to receive for each share of County common stock, at the election of each holder and subject to proration, either $37.18 in cash or 0.48 shares of Nicolet common stock. County shareholder elections will be prorated to ensure the total consideration will consist of approximately 20% cash and approximately 80% common stock. At June 30, 2021, County had total assets of $1.5 billion, loans of $1.0 billion, deposits of $1.1 billion, and equity of $175 million. As of September 7, 2021, Nicolet had received all regulatory approvals for the County merger. On October 5, 2021, the shareholders of both County and Nicolet approved the merger at special meetings of their respective shareholders held on that date. Nicolet expects to close the merger on December 3, 2021, subject to customary closing conditions.


	Three Months Ended		Nine Months Ended
(In thousands, except per share data)	September 30, 2021		September 30, 2021
Total revenue, net of interest expense	$	84,802	$	241,287
Net income	$	16,470	$	62,243
Diluted earnings per common share	$	1.06	$	4.09

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 September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands, except per share data)	(In thousands, except per share data)	2021		2020		2021		2020		(In thousands, except per share data)	2022		2021		2022		2021
Net income attributable to Nicolet Bankshares, Inc.		$	7,824	$	18,102	$	44,347	$	42,135

Net income										Net income	$	18,510	$	7,824	$	66,659	$	44,347
Weighted average common shares outstanding	Weighted average common shares outstanding	10,392		10,349		10,098		10,426		Weighted average common shares outstanding	13,890		10,392		13,648		10,098
Effect of dilutive common stock awards	Effect of dilutive common stock awards	384		150		405		179		Effect of dilutive common stock awards	420		384		479		405
Diluted weighted average common shares outstanding	Diluted weighted average common shares outstanding	10,776		10,499		10,503		10,605		Diluted weighted average common shares outstanding	14,310		10,776		14,127		10,503

Basic earnings per common share*	Basic earnings per common share*	$	0.75	$	1.75	$	4.39	$	4.04	Basic earnings per common share*	$	1.33	$	0.75	$	4.88	$	4.39
Diluted earnings per common share*	Diluted earnings per common share*	$	0.73	$	1.72	$	4.22	$	3.97	Diluted earnings per common share*	$	1.29	$	0.73	$	4.72	$	4.22

*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 months ended September 30, ~~2021~~2022 and ~~2020,~~2021, respectively, options to purchase approximately 0.2 million shares are excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive. For the nine months ended September 30, ~~2021~~2022 and ~~2020,~~2021, respectively, options to purchase approximately 0.1 million shares are excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive.

Note 4 – Stock-Based Compensation

The Company may grant stock options and restricted stock under its stock-based compensation plans to certain officers, employees and directors. These plans are administered by a committee of the Board of Directors, and at September 30, ~~2021,~~2022, approximately ~~0.9~~0.7 million shares were available for grant under these stock-based compensation plans.

A Black-Scholes model is utilized to estimate the fair value of stock option grants, while the market price of the Company’s stock at the date of grant is used to estimate the fair value of restricted stock awards. The weighted average assumptions used in the Black-Scholes model for valuing stock option grants for the nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 were as follows.


		Nine Months Ended September 30,							Nine Months Ended September 30,
		2021			2020				2022			2021
Dividend yield	Dividend yield	—		%	—		%	Dividend yield	—		%	—		%
Expected volatility	Expected volatility	30		%	25		%	Expected volatility	30		%	30		%
Risk-free interest rate	Risk-free interest rate	1.16		%	1.72		%	Risk-free interest rate	3.03		%	1.16		%
Expected average life	Expected average life	7 years			7 years			Expected average life	7 years			7 years
Weighted average per share fair value of options	Weighted average per share fair value of options	$	26.55		$	23.74		Weighted average per share fair value of options	$	30.99		$	26.55

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


Stock Options	Stock Options	Option Shares Outstanding	Weighted Average Exercise Price		Weighted Average Remaining Life (Years)	Aggregate Intrinsic Value (in thousands)		Stock Options	Option Shares Outstanding	Weighted Average Exercise Price		Weighted Average Remaining Life (Years)	Aggregate Intrinsic Value (in thousands)
Outstanding - December 31, 2020		1,437,460	$	50.47
Outstanding - December 31, 2021								Outstanding - December 31, 2021	1,833,246	$	57.69
Granted	Granted	380,000	78.77					Granted	132,929	81.04
Exercise of stock options *	Exercise of stock options *	(40,482)	34.23					Exercise of stock options *	(65,661)	41.26
Forfeited	Forfeited	(1,000)	48.85					Forfeited	(8,500)	77.62
Outstanding - September 30, 2021		1,775,978	$	56.90	6.7	$	32,446
Exercisable - September 30, 2021		970,878	$	47.00	5.5	$	26,400
Outstanding - September 30, 2022								Outstanding - September 30, 2022	1,892,014	$	59.81	6.2	$	24,920
Exercisable - September 30, 2022								Exercisable - September 30, 2022	1,207,585	$	50.84	4.9	$	24,324

* 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 nine months ended September 30, ~~2021, 7,514~~2022, 6,073 such shares were withheld by 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 nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 was approximately ~~$1.7~~$3.3 million and ~~$2.0~~$1.7 million, respectively.

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


Restricted Stock	Restricted Stock	Weighted Average Grant Date Fair Value		Restricted Shares Outstanding	Restricted Stock	Weighted Average Grant Date Fair Value		Restricted Shares Outstanding
Outstanding - December 31, 2020		$	53.57	18,925
Outstanding - December 31, 2021					Outstanding - December 31, 2021	$	71.42	25,801
Granted	Granted	77.64		19,595	Granted	75.99		60,852
Vested *	Vested *	60.66		(15,510)	Vested *	71.51		(13,127)
Forfeited	Forfeited	41.44		(446)	Forfeited	56.01		(600)
Outstanding - September 30, 2021		$	69.83	22,564
Outstanding - September 30, 2022					Outstanding - September 30, 2022	$	75.34	72,926

* 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, ~~1,581~~465 shares were surrendered during the nine months ended September 30, ~~2021.~~2022.

The Company recognized approximately ~~$4.5~~$4.6 million and ~~$3.8~~$4.5 million of stock-based compensation expense (included in personnel on the consolidated statements of income) for the nine months ended September 30, ~~2021~~2022 and ~~2020,~~2021, respectively, associated with its common stock awards granted to officers and employees. In addition, during the nine months ended September 30, ~~2021,~~2022, the Company recognized approximately $0.7 million of director expense (included in other expense on the consolidated statements of income) for ~~a total~~ restricted stock ~~grant of 9,595~~grants totaling 8,852 shares with immediate vesting to directors, while during the first nine months ~~ended September 30, 2020,~~of 2021, the Company recognized approximately ~~$0.4~~$0.7 million of director expense for ~~a total~~ restricted stock ~~grant of 7,950~~grants totaling 9,595 shares with immediate vesting to directors, in each case representing the annual stock retainer fee paid to external board ~~members.~~members for that year. As of September 30, ~~2021,~~2022, there was approximately ~~$16.1~~$19.9 million of unrecognized compensation

cost related to equity award ~~grants. The cost~~grants, which is expected to be recognized over the remaining vesting period of approximately four years. The Company recognized a tax benefit of approximately ~~$0.3~~$0.4 million and ~~$0.4~~$0.3 million for the nine months ended September 30, ~~2021~~2022 and ~~2020,~~2021, respectively, for the tax impact of stock option exercises and vesting of restricted stock.

Note 5 – ~~Investment~~ Securities and Other Investments

Securities

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

The amortized cost and fair value of securities AFS and HTM are summarized as follows.


		September 30, 2021											September 30, 2022
(in thousands)	(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Fair Value as % of Total		(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Fair Value as % of Total
Securities AFS:	Securities AFS:											Securities AFS:
U.S. government agency securities	U.S. government agency securities	$	174,946	$	76	$	196	$	174,826	24	%	U.S. government agency securities	$	194,295	$	—	$	9,532	$	184,763	19	%
State, county and municipals	State, county and municipals	236,905		3,261		1,502		238,664		33	%	State, county and municipals	454,740		32		42,908		411,864		43	%
Mortgage-backed securities	Mortgage-backed securities	193,931		4,439		1,080		197,290		28	%	Mortgage-backed securities	239,430		1		25,996		213,435		23	%
Corporate debt securities	Corporate debt securities	101,267		4,041		146		105,162		15	%	Corporate debt securities	146,528		—		6,993		139,535		15	%
Total securities AFS	Total securities AFS	$	707,049	$	11,817	$	2,924	$	715,942	100	%	Total securities AFS	$	1,034,993	$	33	$	85,429	$	949,597	100	%
Securities HTM:	Securities HTM:											Securities HTM:
U.S. government agency securities	U.S. government agency securities	$	—	$	—	$	—	$	—	—	%	U.S. government agency securities	$	506,952	$	65	$	38,590	$	468,427	74	%
State, county and municipals	State, county and municipals	30,842		8		51		30,799		63	%	State, county and municipals	39,121		1		3,363		35,759		6	%
Mortgage-backed securities	Mortgage-backed securities	18,221		42		116		18,147		37	%	Mortgage-backed securities	140,351		—		16,898		123,453		20	%
Corporate debt securities		—		—		—		—		—	%

Total securities HTM	Total securities HTM	$	49,063	$	50	$	167	$	48,946	100	%	Total securities HTM	$	686,424	$	66	$	58,851	$	627,639	100	%


		December 31, 2020											December 31, 2021
(in thousands)	(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Fair Value as % of Total		(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Fair Value as % of Total
Securities AFS:	Securities AFS:											Securities AFS:
U.S. government agency securities	U.S. government agency securities	$	63,162	$	289	$	—	$	63,451	12	%	U.S. government agency securities	$	192,506	$	6	$	1,235	$	191,277	21	%
State, county and municipals	State, county and municipals	226,493		5,386		11		231,868		43	%	State, county and municipals	311,717		3,222		2,202		312,737		34	%
Mortgage-backed securities	Mortgage-backed securities	156,148		6,425		78		162,495		30	%	Mortgage-backed securities	270,017		3,090		1,845		271,262		29	%
Corporate debt securities	Corporate debt securities	76,073		5,450		—		81,523		15	%	Corporate debt securities	143,172		3,459		246		146,385		16	%
Total securities AFS	Total securities AFS	$	521,876	$	17,550	$	89	$	539,337	100	%	Total securities AFS	$	917,412	$	9,777	$	5,528	$	921,661	100	%
Securities HTM:												Securities HTM:
U.S. government agency securities												U.S. government agency securities	$	508,810	$	—	$	2,740	$	506,070	78	%
State, county and municipals												State, county and municipals	42,876		10		173		42,713		7	%
Mortgage-backed securities												Mortgage-backed securities	100,117		89		595		99,611		15	%
Total securities HTM												Total securities HTM	$	651,803	$	99	$	3,508	$	648,394	100	%

All mortgage-backed securities included in the tables above were issued by U.S. government agencies and corporations. Investment securities with a carrying value of ~~$149~~$786 million and ~~$146~~$277 million, as of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, were pledged as collateral onto secure public deposits, as applicable, and for liquidity or other purposes as required ~~or permitted~~ by ~~law.~~regulation. Accrued interest on investment securities totaled ~~$3.5 million and $2.3~~$7 million at September 30, ~~2021~~2022 and $5 million at December 31, ~~2020, respectively,~~2021, and is included in accrued interest receivable and other assets on the consolidated balance sheets.

1214

The following table presents gross unrealized losses and the related estimated fair value of investment securities for 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.


		September 30, 2021														September 30, 2022
		Less than 12 months				12 months or more				Total						Less than 12 months				12 months or more				Total
($ in thousands)	($ in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Number of Securities	($ in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Number of Securities
Securities AFS:	Securities AFS:														Securities AFS:
U.S. government agency securities	U.S. government agency securities	$	120,726	$	196	$	—	$	—	$	120,726	$	196	7	U.S. government agency securities	$	73,427	$	3,649	$	111,307	$	5,883	$	184,734	$	9,532	18
State, county and municipals	State, county and municipals	86,749		1,465		974		37		87,723		1,502		113	State, county and municipals	325,212		29,803		66,031		13,105		391,243		42,908		906
Mortgage-backed securities	Mortgage-backed securities	71,934		1,073		864		7		72,798		1,080		127	Mortgage-backed securities	163,160		17,180		49,315		8,816		212,475		25,996		384
Corporate debt securities	Corporate debt securities	19,017		146		—		—		19,017		146		11	Corporate debt securities	123,488		5,218		11,668		1,775		135,156		6,993		94
Total	Total	$	298,426	$	2,880	$	1,838	$	44	$	300,264	$	2,924	258	Total	$	685,287	$	55,850	$	238,321	$	29,579	$	923,608	$	85,429	1,402
Securities HTM:	Securities HTM:														Securities HTM:

U.S. government agency securities															U.S. government agency securities	$	459,059	$	38,590	$	—	$	—	$	459,059	$	38,590	6
State, county and municipals	State, county and municipals	$	23,502	$	51	$	—	$	—	$	23,502	$	51	35	State, county and municipals	25,308		2,663		4,495		700		29,803		3,363		58
Mortgage-backed securities	Mortgage-backed securities	6,656		116		—		—		6,656		116		5	Mortgage-backed securities	117,168		15,696		6,285		1,202		123,453		16,898		106

Total	Total	$	30,158	$	167	$	—	$	—	$	30,158	$	167	40	Total	$	601,535	$	56,949	$	10,780	$	1,902	$	612,315	$	58,851	170


		December 31, 2020														December 31, 2021
		Less than 12 months				12 months or more				Total						Less than 12 months				12 months or more				Total
($ in thousands)	($ in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Number of Securities	($ in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Number of Securities

Securities AFS:															Securities AFS:
U.S. government agency securities															U.S. government agency securities	$	190,432	$	1,235	$	—	$	—	$	190,432	$	1,235	11
State, county and municipals	State, county and municipals	$	5,181	$	11	$	—	$	—	$	5,181	$	11	9	State, county and municipals	103,950		2,119		1,777		83		105,727		2,202		132
Mortgage-backed securities	Mortgage-backed securities	10,612		71		492		7		11,104		78		22	Mortgage-backed securities	137,561		1,616		6,068		229		143,629		1,845		159

Corporate debt securities															Corporate debt securities	23,267		246		—		—		23,267		246		13
Total	Total	$	15,793	$	82	$	492	$	7	$	16,285	$	89	31	Total	$	455,210	$	5,216	$	7,845	$	312	$	463,055	$	5,528	315
Securities HTM:															Securities HTM:
U.S. government agency securities															U.S. government agency securities	$	505,938	$	2,740	$	—	$	—	$	505,938	$	2,740	9
State, county and municipals															State, county and municipals	30,898		173		—		—		30,898		173		46
Mortgage-backed securities															Mortgage-backed securities	69,333		595		—		—		69,333		595		72
Total															Total	$	606,169	$	3,508	$	—	$	—	$	606,169	$	3,508	127

Quarterly, 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 September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, no allowance for credit losses on securities AFS was recognized. The Company does not consider its securities AFS with unrealized losses to be 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. Furthermore, the Company does not have the intent to sell any of these securities AFS and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost.

~~Quarterly, the~~The Company also evaluates securities HTM quarterly to determine whether an allowance for credit losses is necessary. In making this determination, management considers the facts and circumstances of the underlying investment securities. The U.S. government agency securities include U.S. Treasury Notes which are guaranteed by the U.S. government. For the state, county and municipal securities, management considers issuer bond ratings, historical loss rates by bond ratings, whether issuers continue to make timely principal and interest payments per the contractual terms of the investment securities, internal forecasts, and whether or not such investment securities provide insurance, other credit enhancement, or are pre-refunded by the issuers. ~~Based on this evaluation, no allowance for credit losses has been recorded for the HTM state, county, and municipal securities.~~ For the mortgage-backed securities, all such securities were issued by U.S. government agencies and corporations,

which are currently explicitly or implicitly guaranteed by the U.S. government and have a long history of no credit losses. Therefore, management determined no allowance for credit losses was necessary for the ~~HTM mortgage-backed securities.~~

securities HTM.

The amortized cost and fair value of investment securities 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.


As of September 30, 2021		Securities AFS				Securities HTM
As of September 30, 2022										As of September 30, 2022	Securities AFS				Securities HTM
(in thousands)	(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in less than one year	Due in less than one year	$	86,520	$	86,835	$	8,086	$	8,085	Due in less than one year	$	220,008	$	214,856	$	5,032	$	5,022
Due in one year through five years	Due in one year through five years	260,903		265,298		5,010		5,004		Due in one year through five years	189,795		180,208		510,548		471,106
Due after five years through ten years	Due after five years through ten years	154,595		154,277		8,483		8,463		Due after five years through ten years	233,100		206,362		26,740		24,404
Due after ten years	Due after ten years	11,100		12,242		9,263		9,247		Due after ten years	152,660		134,736		3,753		3,654
		513,118		518,652		30,842		30,799			795,563		736,162		546,073		504,186
Mortgage-backed securities	Mortgage-backed securities	193,931		197,290		18,221		18,147		Mortgage-backed securities	239,430		213,435		140,351		123,453
Total investment securities	Total investment securities	$	707,049	$	715,942	$	49,063	$	48,946	Total investment securities	$	1,034,993	$	949,597	$	686,424	$	627,639

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


		Nine Months Ended September 30,					Nine Months Ended September 30,
(in thousands)	(in thousands)	2021		2020		(in thousands)	2022		2021
Gross gains	Gross gains	$	4	$	315	Gross gains	$	20	$	4
Gross losses	Gross losses	(17)		—		Gross losses	(5)		(17)
Gains (losses) on sales of securities AFS, net	Gains (losses) on sales of securities AFS, net	$	(13)	$	315	Gains (losses) on sales of securities AFS, net	$	15	$	(13)
Proceeds from sales of securities AFS		$	15,975	$	14,864
Proceeds from sales of securities AFS *						Proceeds from sales of securities AFS *	$	23,984	$	15,975

* Includes proceeds of $21 million recognized on the sale of securities AFS upon acquisition of Charter for which no gain or loss was recognized in the income statement as the securities were marked to fair value through purchase accounting.

Other Investments

Other investments include “restricted” equity securities, equity securities with readily determinable fair values, and private company securities. As a member of the Federal Reserve Bank System and the Federal Home Loan Bank (“FHLB”) System, Nicolet is required to maintain an investment in the capital stock of these entities. These equity securities are “restricted” in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other exchange traded equity securities. As no ready market exists for these stocks, and they have no quoted market value, these investments are carried at cost. Also included are investments in other private companies that do not have quoted market prices, which are carried at cost less impairment charges, if any. The carrying value of other investments are summarized as follows.


	September 30, 2022		December 31, 2021
(in thousands)	Amount		Amount
Federal Reserve Bank stock	$	34,722	$	20,973
Federal Home Loan Bank (“FHLB”) stock	22,939		10,545
Equity securities with readily determinable fair values	4,482		5,660
Other investments	17,136		6,830
Total other investments	$	79,279	$	44,008

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

The loan composition is summarized as follows.


		September 30, 2021					December 31, 2020						September 30, 2022					December 31, 2021
(in thousands)	(in thousands)	Amount			% of Total		Amount			% of Total		(in thousands)	Amount			% of Total		Amount			% of Total
Commercial & industrial	Commercial & industrial	$	887,910		25	%	$	750,718		27	%	Commercial & industrial	$	1,268,252		21	%	$	1,042,256		23	%
Paycheck Protection Program (“PPP”) loans		68,347			2		186,016			7
Owner-occupied commercial real estate (“CRE”)	Owner-occupied commercial real estate (“CRE”)	697,816			20		521,300			19		Owner-occupied commercial real estate (“CRE”)	954,933			16		787,189			17
Agricultural	Agricultural	112,409			3		109,629			4		Agricultural	1,017,498			17		794,728			17
CRE investment	CRE investment	662,871			19		460,721			16		CRE investment	1,132,951			19		818,061			18
Construction & land development	Construction & land development	173,971			5		131,283			5		Construction & land development	306,446			5		213,035			5
Residential construction	Residential construction	59,611			2		41,707			1		Residential construction	101,286			2		70,353			1
Residential first mortgage	Residential first mortgage	688,491			19		444,155			16		Residential first mortgage	970,384			16		713,983			15
Residential junior mortgage	Residential junior mortgage	130,279			4		111,877			4		Residential junior mortgage	176,428			3		131,424			3
Retail & other	Retail & other	51,493			1		31,695			1		Retail & other	56,259			1		50,807			1
Loans	Loans	3,533,198			100	%	2,789,101			100	%	Loans	5,984,437			100	%	4,621,836			100	%
Less allowance for credit losses - Loans (“ACL-Loans”)	Less allowance for credit losses - Loans (“ACL-Loans”)	38,399					32,173					Less allowance for credit losses - Loans (“ACL-Loans”)	60,348					49,672
Loans, net	Loans, net	$	3,494,799				$	2,756,928				Loans, net	$	5,924,089				$	4,572,164
Allowance for credit losses - Loans to loans	Allowance for credit losses - Loans to loans	1.09		%			1.15		%			Allowance for credit losses - Loans to loans	1.01		%			1.07		%

Commercial and industrial loans included less than $1 million and $25 million of PPP loans at September 30, 2022 and December 31, 2021, respectively. Accrued interest on loans totaled $9$14 million and $11 million at September 30, ~~2021~~2022 and ~~$7 million at~~ December 31, ~~2020,~~2021, respectively, and is included in accrued interest receivable and other assets on the consolidated balance sheets.

Allowance for Credit Losses - Loans:

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 credit losses - loans is summarized as follows.


		Three Months Ended				Nine Months Ended				Year Ended			Three Months Ended				Nine Months Ended				Year Ended
(in thousands)	(in thousands)	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020		December 31, 2020		(in thousands)	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021		December 31, 2021
Beginning balance	Beginning balance	$	32,561	$	29,130	$	32,173	$	13,972	$	13,972	Beginning balance	$	50,655	$	32,561	$	49,672	$	32,173	$	32,173
Adoption of CECL		—		—		—		8,488		8,488
Initial PCD ACL		—		—		—		797		797
Total impact - adoption CECL		—		—		—		9,285		9,285
ACL on PCD loans acquired	ACL on PCD loans acquired	1,896		—		1,896		—		—		ACL on PCD loans acquired	1,709		1,896		1,709		1,896		5,159
Provision for credit losses	Provision for credit losses	4,000		3,000		4,500		9,000		10,300		Provision for credit losses	8,200		4,000		9,100		4,500		12,500
Charge-offs	Charge-offs	(107)		(786)		(436)		(1,002)		(1,689)		Charge-offs	(300)		(107)		(442)		(436)		(513)
Recoveries	Recoveries	49		44		266		133		305		Recoveries	84		49		309		266		353
Net (charge-offs) recoveries	Net (charge-offs) recoveries	(58)		(742)		(170)		(869)		(1,384)		Net (charge-offs) recoveries	(216)		(58)		(133)		(170)		(160)
Ending balance	Ending balance	$	38,399	$	31,388	$	38,399	$	31,388	$	32,173	Ending balance	$	60,348	$	38,399	$	60,348	$	38,399	$	49,672

The following tables present the balance and activity in the ACL-Loans by portfolio segment.


		Nine Months Ended September 30, 2021																															Nine Months Ended September 30, 2022
(in thousands)	(in thousands)	Commercial & industrial			Owner- occupied CRE			Agricultural			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total			(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 *	ACL-Loans *																															ACL-Loans *
Beginning balance	Beginning balance	$	11,644		$	5,872		$	1,395		$	5,441		$	984		$	421		$	4,773		$	1,086		$	557		$	32,173		Beginning balance	$	12,613		$	7,222		$	9,547		$	8,462		$	1,812		$	900		$	6,844		$	1,340		$	932		$	49,672
ACL on PCD loans	ACL on PCD loans	584			530			—			392			103			—			272			12			3			1,896			ACL on PCD loans	1,408			156			—			38			2			—			93			12			—			1,709
Provision	Provision	(1,121)			443			(195)			1,904			507			259			1,962			262			479			4,500			Provision	621			1,356			847			3,004			603			446			1,415			517			291			9,100
Charge-offs	Charge-offs	(242)			—			(48)			(4)			—			—			(53)			—			(89)			(436)			Charge-offs	(152)			(36)			—			—			—			—			(65)			—			(189)			(442)
Recoveries	Recoveries	211			—			—			2			—			—			19			4			30			266			Recoveries	103			—			—			169			—			—			7			9			21			309
Net (charge-offs) recoveries	Net (charge-offs) recoveries	(31)			—			(48)			(2)			—			—			(34)			4			(59)			(170)			Net (charge-offs) recoveries	(49)			(36)			—			169			—			—			(58)			9			(168)			(133)
Ending balance	Ending balance	$	11,076		$	6,845		$	1,152		$	7,735		$	1,594		$	680		$	6,973		$	1,364		$	980		$	38,399		Ending balance	$	14,593		$	8,698		$	10,394		$	11,673		$	2,417		$	1,346		$	8,294		$	1,878		$	1,055		$	60,348
As % of ACL-Loans	As % of ACL-Loans	29		%	18		%	3		%	20		%	4		%	2		%	18		%	4		%	2		%	100		%	As % of ACL-Loans	24		%	15		%	17		%	19		%	4		%	2		%	14		%	3		%	2		%	100		%

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


		Year Ended December 31, 2020																															Year Ended December 31, 2021
(in thousands)	(in thousands)	Commercial & industrial			Owner- occupied CRE			Agricultural			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total			(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 *	ACL-Loans *																															ACL-Loans *
Beginning balance	Beginning balance	$	5,471		$	3,010		$	579		$	1,600		$	414		$	368		$	1,669		$	517		$	344		$	13,972		Beginning balance	$	11,644		$	5,872		$	1,395		$	5,441		$	984		$	421		$	4,773		$	1,086		$	557		$	32,173
Adoption of CECL		2,962			1,249			361			1,970			51			124			1,286			351			134			8,488
Initial PCD ACL		797			—			—			—			—			—			—			—			—			797
ACL on PCD loans																																ACL on PCD loans	723			1,045			2,585			415			103			—			272			13			3			5,159
Provision	Provision	3,106			2,062			455			2,061			519			(71)			1,809			151			208			10,300			Provision	196			305			5,615			2,608			725			479			1,892			237			443			12,500
Charge-offs	Charge-offs	(812)			(530)			—			(190)			—			—			(2)			—			(155)			(1,689)			Charge-offs	(242)			—			(48)			(4)			—			—			(113)			—			(106)			(513)
Recoveries	Recoveries	120			81			—			—			—			—			11			67			26			305			Recoveries	292			—			—			2			—			—			20			4			35			353
Net (charge-offs) recoveries	Net (charge-offs) recoveries	(692)			(449)			—			(190)			—			—			9			67			(129)			(1,384)			Net (charge-offs) recoveries	50			—			(48)			(2)			—			—			(93)			4			(71)			(160)
Ending balance	Ending balance	$	11,644		$	5,872		$	1,395		$	5,441		$	984		$	421		$	4,773		$	1,086		$	557		$	32,173		Ending balance	$	12,613		$	7,222		$	9,547		$	8,462		$	1,812		$	900		$	6,844		$	1,340		$	932		$	49,672
As % of ACL-Loans	As % of ACL-Loans	36		%	18		%	4		%	17		%	3		%	1		%	15		%	4		%	2		%	100		%	As % of ACL-Loans	25		%	14		%	19		%	17		%	4		%	2		%	14		%	3		%	2		%	100		%

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, management applies an allocation methodology ~~is applied by Nicolet~~ which focuses on evaluation of qualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to specific loans; (ii) management’s ongoing review and grading of the loan portfolio; (iii) consideration of historical loan loss and delinquency experience on each portfolio segment; (iv) trends in past due and 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.

aggregate collateral or discounted cash flow shortfall. Management allocates the ACL-Loans with historical loss rates by loan segment. The loss factors are measured on a quarterly basis and applied to each loan segment based on current loan balances and projected for their expected remaining life. Next, management allocates the ACL-Loans using the qualitative factors mentioned above. Consideration is given to those current qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the historical loss experience of each loan segment. Lastly, management considers reasonable and supportable forecasts to assess the collectability of future cash flows.

Allowance for Credit Losses-Unfunded Commitments:

In addition to the ACL-Loans, the Company has established an ACL-Unfunded commitments, classified in accrued interest payable and other liabilities on the consolidated balance sheets. This reserve is maintained at a level that management believes is sufficient to absorb losses arising from unfunded loan commitments, and is determined quarterly based on methodology similar to the methodology for determining the ACL-Loans. The reserve for unfunded commitments was $3.0 million at September 30, ~~2021 was $2 million.~~2022 and $2.4 million at December 31, 2021.

Provision for Credit Losses:

The provision for credit losses is determined by the Company as the amount to be added to the ACL loss accounts for various types of financial instruments including loans, investment securities, and off-balance sheet credit exposures after net charge-offs have been deducted to bring the ACL to a level that, in ~~management's~~management’s judgment, is necessary to absorb expected credit losses over the lives of the respective financial instruments. See Note 5 for additional information regarding the ACL related to investment securities. The following table presents the components of the provision for credit losses.


		Three Months Ended				Nine Months Ended				Year Ended			Three Months Ended				Nine Months Ended				Year Ended
(in thousands)	(in thousands)	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020		December 31, 2020		(in thousands)	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021		December 31, 2021
Provision for credit losses on:	Provision for credit losses on:											Provision for credit losses on:
Loans	Loans	$	4,000	$	3,000	$	4,500	$	9,000	$	10,300	Loans	$	8,200	$	4,000	$	9,100	$	4,500	$	12,500
Unfunded Commitments	Unfunded Commitments	2,000		—		2,000		—		—		Unfunded Commitments	400		2,000		550		2,000		2,400
Investment securities	Investment securities	—		—		—		—		—		Investment securities	—		—		—		—		—
Total	Total	$	6,000	$	3,000	$	6,500	$	9,000	$	10,300	Total	$	8,600	$	6,000	$	9,650	$	6,500	$	14,900

Collateral Dependent Loans:

A loan is considered to be collateral dependent when, based upon ~~management's~~management’s assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. For collateral dependent loans, expected credit losses are based on the estimated fair value of the collateral at the balance sheet date, with consideration for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. The following tables present collateral dependent loans by portfolio segment and collateral type, including those loans with and without a related allowance allocation.


September 30, 2021		Collateral Type
September 30, 2022														September 30, 2022	Collateral Type
(in thousands)	(in thousands)	Real Estate		Other Business Assets		Total		Without an Allowance		With an Allowance		Allowance Allocation		(in thousands)	Real Estate		Other Business Assets		Total		Without an Allowance		With an Allowance		Allowance Allocation
Commercial & industrial	Commercial & industrial	$	—	$	2,071	$	2,071	$	1,504	$	567	$	226	Commercial & industrial	$	—	$	3,032	$	3,032	$	1,443	$	1,589	$	661
PPP loans		—		—		—		—		—		—
Owner-occupied CRE	Owner-occupied CRE	2,264		—		2,264		1,854		410		141		Owner-occupied CRE	5,205		—		5,205		3,526		1,679		297
Agricultural	Agricultural	956		625		1,581		345		1,236		55		Agricultural	13,974		6,439		20,413		16,900		3,513		205
CRE investment	CRE investment	4,019		—		4,019		2,659		1,360		469		CRE investment	2,196		—		2,196		404		1,792		242
Construction & land development	Construction & land development	1,138		—		1,138		745		393		276		Construction & land development	685		—		685		685		—		—
Residential construction	Residential construction	—		—		—		—		—		—		Residential construction	—		—		—		—		—		—
Residential first mortgage	Residential first mortgage	1,387		—		1,387		1,387		—		—		Residential first mortgage	91		—		91		91		—		—
Residential junior mortgage	Residential junior mortgage	166		—		166		166		—		—		Residential junior mortgage	—		—		—		—		—		—
Retail & other	Retail & other	—		—		—		—		—		—		Retail & other	—		—		—		—		—		—
Total loans	Total loans	$	9,930	$	2,696	$	12,626	$	8,660	$	3,966	$	1,167	Total loans	$	22,151	$	9,471	$	31,622	$	23,049	$	8,573	$	1,405


December 31, 2021	Collateral Type
(in thousands)	Real Estate		Other Business Assets		Total		Without an Allowance		With an Allowance		Allowance Allocation
Commercial & industrial	$	—	$	2,296	$	2,296	$	1,842	$	454	$	258
Owner-occupied CRE	3,537		—		3,537		1,315		2,222		552
Agricultural	19,637		8,518		28,155		25,310		2,845		841
CRE investment	3,000		—		3,000		1,684		1,316		407
Construction & land development	1,038		—		1,038		655		383		211
Residential construction	—		—		—		—		—		—
Residential first mortgage	473		—		473		473		—		—
Residential junior mortgage	—		—		—		—		—		—
Retail & other	—		—		—		—		—		—
Total loans	$	27,685	$	10,814	$	38,499	$	31,279	$	7,220	$	2,269

1619

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

Past Due and Nonaccrual Loans:

The following tables present past due loans by portfolio segment.


		September 30, 2021													September 30, 2022
(in thousands)	(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or nonaccrual			Current			Total			(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or nonaccrual			Current			Total
Commercial & industrial	Commercial & industrial	$	610		$	1,778		$	885,522		$	887,910		Commercial & industrial	$	954		$	3,052		$	1,264,246		$	1,268,252
PPP loans		—			—			68,347			68,347
Owner-occupied CRE	Owner-occupied CRE	314			2,990			694,512			697,816			Owner-occupied CRE	513			5,806			948,614			954,933
Agricultural	Agricultural	—			1,782			110,627			112,409			Agricultural	—			20,646			996,852			1,017,498
CRE investment	CRE investment	—			4,249			658,622			662,871			CRE investment	27			3,343			1,129,581			1,132,951
Construction & land development	Construction & land development	221			1,093			172,657			173,971			Construction & land development	—			794			305,652			306,446
Residential construction	Residential construction	412			—			59,199			59,611			Residential construction	557			—			100,729			101,286
Residential first mortgage	Residential first mortgage	4,894			4,495			679,102			688,491			Residential first mortgage	1,621			4,309			964,454			970,384
Residential junior mortgage	Residential junior mortgage	19			232			130,028			130,279			Residential junior mortgage	249			277			175,902			176,428
Retail & other	Retail & other	74			96			51,323			51,493			Retail & other	138			99			56,022			56,259
Total loans	Total loans	$	6,544		$	16,715		$	3,509,939		$	3,533,198		Total loans	$	4,059		$	38,326		$	5,942,052		$	5,984,437
Percent of total loans	Percent of total loans	0.2		%	0.5		%	99.3		%	100.0		%	Percent of total loans	0.1		%	0.6		%	99.3		%	100.0		%


		December 31, 2020													December 31, 2021
(in thousands)	(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or nonaccrual			Current			Total			(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or nonaccrual			Current			Total
Commercial & industrial	Commercial & industrial	$	—		$	2,646		$	748,072		$	750,718		Commercial & industrial	$	94		$	1,908		$	1,040,254		$	1,042,256
PPP loans		—			—			186,016			186,016
Owner-occupied CRE	Owner-occupied CRE	—			1,869			519,431			521,300			Owner-occupied CRE	—			4,220			782,969			787,189
Agricultural	Agricultural	7			1,830			107,792			109,629			Agricultural	108			28,367			766,253			794,728
CRE investment	CRE investment	—			1,488			459,233			460,721			CRE investment	114			4,119			813,828			818,061
Construction & land development	Construction & land development	—			327			130,956			131,283			Construction & land development	—			1,071			211,964			213,035
Residential construction	Residential construction	—			—			41,707			41,707			Residential construction	246			—			70,107			70,353
Residential first mortgage	Residential first mortgage	613			823			442,719			444,155			Residential first mortgage	2,592			4,132			707,259			713,983
Residential junior mortgage	Residential junior mortgage	43			384			111,450			111,877			Residential junior mortgage	23			243			131,158			131,424
Retail & other	Retail & other	102			88			31,505			31,695			Retail & other	115			94			50,598			50,807
Total loans	Total loans	$	765		$	9,455		$	2,778,881		$	2,789,101		Total loans	$	3,292		$	44,154		$	4,574,390		$	4,621,836
Percent of total loans	Percent of total loans	—		%	0.4		%	99.6		%	100.0		%	Percent of total loans	0.1		%	0.9		%	99.0		%	100.0		%

The following table presents nonaccrual loans by portfolio segment.


		September 30, 2021					December 31, 2020						September 30, 2022					December 31, 2021
(in thousands)	(in thousands)	Nonaccrual Loans			% of Total		Nonaccrual Loans			% of Total		(in thousands)	Nonaccrual Loans			% of Total		Nonaccrual Loans			% of Total
Commercial & industrial	Commercial & industrial	$	1,778		11	%	$	2,646		28	%	Commercial & industrial	$	3,052		8	%	$	1,908		4	%
PPP loans		—			—		—			—
Owner-occupied CRE	Owner-occupied CRE	2,990			18		1,869			20		Owner-occupied CRE	5,806			15		4,220			10
Agricultural	Agricultural	1,782			11		1,830			19		Agricultural	20,646			54		28,367			64
CRE investment	CRE investment	4,249			25		1,488			16		CRE investment	3,343			9		4,119			9
Construction & land development	Construction & land development	1,093			6		327			3		Construction & land development	794			2		1,071			3
Residential construction	Residential construction	—			—		—			—		Residential construction	—			—		—			—
Residential first mortgage	Residential first mortgage	4,495			27		823			9		Residential first mortgage	4,309			11		4,132			9
Residential junior mortgage	Residential junior mortgage	232			1		384			4		Residential junior mortgage	277			1		243			1
Retail & other	Retail & other	96			1		88			1		Retail & other	99			—		94			—
Nonaccrual loans	Nonaccrual loans	$	16,715		100	%	$	9,455		100	%	Nonaccrual loans	$	38,326		100	%	$	44,154		100	%
Percent of total loans	Percent of total loans	0.5		%			0.4		%			Percent of total loans	0.6		%			0.9		%

1820

Credit Quality Information:

The following tables present total loans by risk categories and year of origination. Loans acquired from Charter, Mackinac and County have been included in the September 30, 2022 and December 31, 2021 ~~table~~tables based upon the actual origination date.


September 30, 2021		Amortized Cost Basis by Origination Year
September 30, 2022																				September 30, 2022	Amortized Cost Basis by Origination Year
(in thousands)	(in thousands)	2021		2020		2019		2018		2017		Prior		Revolving		Revolving to Term		TOTAL		(in thousands)	2022		2021		2020		2019		2018		Prior		Revolving		Revolving to Term		TOTAL
Commercial & industrial ~~(a)~~	Commercial & industrial ~~(a)~~																			Commercial & industrial ~~(a)~~
Grades 1-4	Grades 1-4	$	185,906	$	150,260	$	129,503	$	72,053	$	52,402	$	72,579	$	261,381	$	—	$	924,084	Grades 1-4	$	254,713	$	246,195	$	108,418	$	76,355	$	52,099	$	83,341	$	349,324	$	—	$	1,170,445
Grade 5	Grade 5	1,046		2,051		4,389		5,411		5,858		1,874		7,237		—		27,866		Grade 5	7,187		7,423		11,052		2,084		2,734		4,344		18,807		—		53,631
Grade 6	Grade 6	622		358		33		4		—		50		563		—		1,630		Grade 6	158		1,649		675		638		453		11,972		14,718		—		30,263
Grade 7	Grade 7	—		6		740		50		799		825		257		—		2,677		Grade 7	552		352		3,384		2,666		802		1,149		5,008		—		13,913
Total	Total	$	187,574	$	152,675	$	134,665	$	77,518	$	59,059	$	75,328	$	269,438	$	—	$	956,257	Total	$	262,610	$	255,619	$	123,529	$	81,743	$	56,088	$	100,806	$	387,857	$	—	$	1,268,252
Owner-occupied CRE	Owner-occupied CRE																			Owner-occupied CRE
Grades 1-4	Grades 1-4	$	97,166	$	88,970	$	111,153	$	82,216	$	63,024	$	195,027	$	14,008	$	—	$	651,564	Grades 1-4	$	128,054	$	189,922	$	111,622	$	104,840	$	93,619	$	269,617	$	7,952	$	—	$	905,626
Grade 5	Grade 5	3,035		1,795		6,618		2,287		3,520		14,231		1,208		—		32,694		Grade 5	2,868		4,750		2,824		2,826		3,875		14,325		172		—		31,640
Grade 6	Grade 6	—		—		1,655		—		428		47		—		—		2,130		Grade 6	—		—		—		2,388		—		887		—		—		3,275
Grade 7	Grade 7	—		3,018		1,930		—		1,003		5,477		—		—		11,428		Grade 7	440		414		6,244		377		85		6,832		—		—		14,392
Total	Total	$	100,201	$	93,783	$	121,356	$	84,503	$	67,975	$	214,782	$	15,216	$	—	$	697,816	Total	$	131,362	$	195,086	$	120,690	$	110,431	$	97,579	$	291,661	$	8,124	$	—	$	954,933
Agricultural	Agricultural																			Agricultural
Grades 1-4	Grades 1-4	$	9,615	$	12,784	$	6,665	$	7,753	$	7,872	$	31,732	$	23,640	$	—	$	100,061	Grades 1-4	$	238,387	$	154,364	$	93,529	$	26,185	$	20,967	$	135,426	$	195,784	$	—	$	864,642
Grade 5	Grade 5	372		—		—		30		216		7,474		460		—		8,552		Grade 5	12,109		15,525		2,823		2,028		1,504		42,561		23,090		—		99,640
Grade 6	Grade 6	—		—		—		—		—		—		—		—		—		Grade 6	49		1,491		31		33		—		5,322		425		—		7,351
Grade 7	Grade 7	—		—		—		24		324		3,350		98		—		3,796		Grade 7	7,072		2,651		863		2,024		3,655		20,388		9,212		—		45,865
Total	Total	$	9,987	$	12,784	$	6,665	$	7,807	$	8,412	$	42,556	$	24,198	$	—	$	112,409	Total	$	257,617	$	174,031	$	97,246	$	30,270	$	26,126	$	203,697	$	228,511	$	—	$	1,017,498
CRE investment	CRE investment																			CRE investment
Grades 1-4	Grades 1-4	$	135,607	$	114,013	$	129,087	$	39,758	$	38,760	$	143,652	$	10,213	$	—	$	611,090	Grades 1-4	$	167,931	$	228,709	$	195,020	$	141,749	$	79,790	$	261,027	$	13,890	$	—	$	1,088,116
Grade 5	Grade 5	6,622		4,306		6,795		3,011		184		25,035		—		—		45,953		Grade 5	784		1,664		5,252		3,131		983		24,997		—		—		36,811
Grade 6	Grade 6	—		—		—		142		—		57		—		—		199		Grade 6	—		—		—		1,183		2,029		1,078		206		—		4,496
Grade 7	Grade 7	—		—		462		—		918		4,011		238		—		5,629		Grade 7	—		—		—		73		249		2,991		215		—		3,528
Total	Total	$	142,229	$	118,319	$	136,344	$	42,911	$	39,862	$	172,755	$	10,451	$	—	$	662,871	Total	$	168,715	$	230,373	$	200,272	$	146,136	$	83,051	$	290,093	$	14,311	$	—	$	1,132,951
Construction & land development	Construction & land development																			Construction & land development
Grades 1-4	Grades 1-4	$	36,034	$	74,504	$	19,522	$	19,655	$	1,611	$	12,295	$	6,509	$	—	$	170,130	Grades 1-4	$	82,695	$	139,561	$	15,958	$	9,979	$	27,553	$	14,936	$	14,361	$	—	$	305,043
Grade 5	Grade 5	132		—		1,581		931		—		24		—		—		2,668		Grade 5	40		—		—		513		—		22		—		—		575
Grade 6	Grade 6	—		—		—		—		—		—		—		—		—		Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	Grade 7	—		—		—		—		17		1,075		81		—		1,173		Grade 7	34		—		—		—		—		794		—		—		828
Total	Total	$	36,166	$	74,504	$	21,103	$	20,586	$	1,628	$	13,394	$	6,590	$	—	$	173,971	Total	$	82,769	$	139,561	$	15,958	$	10,492	$	27,553	$	15,752	$	14,361	$	—	$	306,446
Residential construction	Residential construction																			Residential construction
Grades 1-4	Grades 1-4	$	40,200	$	16,428	$	1,040	$	916	$	975	$	—	$	—	$	—	$	59,559	Grades 1-4	$	61,266	$	32,309	$	1,490	$	125	$	338	$	664	$	5,094	$	—	$	101,286
Grade 5	Grade 5	—		—		52		—		—		—		—		—		52		Grade 5	—		—		—		—		—		—		—		—		—
Grade 6	Grade 6	—		—		—		—		—		—		—		—		—		Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	Grade 7	—		—		—		—		—		—		—		—		—		Grade 7	—		—		—		—		—		—		—		—		—
Total	Total	$	40,200	$	16,428	$	1,092	$	916	$	975	$	—	$	—	$	—	$	59,611	Total	$	61,266	$	32,309	$	1,490	$	125	$	338	$	664	$	5,094	$	—	$	101,286
Residential first mortgage	Residential first mortgage																			Residential first mortgage
Grades 1-4	Grades 1-4	$	181,931	$	165,383	$	202,727	$	21,473	$	21,487	$	82,894	$	3,472	$	5	$	679,372	Grades 1-4	$	261,535	$	266,465	$	151,436	$	73,915	$	32,871	$	167,038	$	2,595	$	3	$	955,858
Grade 5	Grade 5	86		534		2,431		—		—		1,359		—		—		4,410		Grade 5	928		1,349		1,006		2,147		2,295		418		—		—		8,143
Grade 6	Grade 6	—		—		—		—		—		—		—		—		—		Grade 6	—		—		—		717		—		—		—		—		717
Grade 7	Grade 7	—		—		2,062		—		146		2,501		—		—		4,709		Grade 7	—		332		211		410		225		4,488		—		—		5,666
Total	Total	$	182,017	$	165,917	$	207,220	$	21,473	$	21,633	$	86,754	$	3,472	$	5	$	688,491	Total	$	262,463	$	268,146	$	152,653	$	77,189	$	35,391	$	171,944	$	2,595	$	3	$	970,384
Residential junior mortgage	Residential junior mortgage																			Residential junior mortgage
Grades 1-4	Grades 1-4	$	2,244	$	3,225	$	3,341	$	1,628	$	557	$	2,142	$	115,016	$	1,250	$	129,403	Grades 1-4	$	7,864	$	4,875	$	5,314	$	3,227	$	1,745	$	3,439	$	144,053	$	5,293	$	175,810
Grade 5	Grade 5	—		—		30		—		—		—		448		—		478		Grade 5	—		—		—		—		—		144		—		—		144
Grade 6	Grade 6	—		—		—		—		—		—		—		—		—		Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	Grade 7	—		—		166		—		24		46		162		—		398		Grade 7	—		209		—		27		—		86		152		—		474
Total	Total	$	2,244	$	3,225	$	3,537	$	1,628	$	581	$	2,188	$	115,626	$	1,250	$	130,279	Total	$	7,864	$	5,084	$	5,314	$	3,254	$	1,745	$	3,669	$	144,205	$	5,293	$	176,428
Retail & other	Retail & other																			Retail & other
Grades 1-4	Grades 1-4	$	11,896	$	8,202	$	6,615	$	2,478	$	2,087	$	4,202	$	15,889	$	—	$	51,369	Grades 1-4	$	11,363	$	9,873	$	4,751	$	3,677	$	1,220	$	24,608	$	667	$	—	$	56,159
Grade 5	Grade 5	29		—		—		—		—		—		—		—		29		Grade 5	—		—		—		—		—		—		—		—		—
Grade 6	Grade 6	—		—		—		—		—		—		—		—		—		Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	Grade 7	—		10		—		23		—		62		—		—		95		Grade 7	—		—		16		2		30		52		—		—		100
Total	Total	$	11,925	$	8,212	$	6,615	$	2,501	$	2,087	$	4,264	$	15,889	$	—	$	51,493	Total	$	11,363	$	9,873	$	4,767	$	3,679	$	1,250	$	24,660	$	667	$	—	$	56,259

Total loans	Total loans	$	712,543	$	645,847	$	638,597	$	259,843	$	202,212	$	612,021	$	460,880	$	1,255	$	3,533,198	Total loans	$	1,246,029	$	1,310,082	$	721,919	$	463,319	$	329,121	$	1,102,946	$	805,725	$	5,296	$	5,984,437

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

1921


December 31, 2020		Amortized Cost Basis by Origination Year
December 31, 2021																				December 31, 2021	Amortized Cost Basis by Origination Year
(in thousands)	(in thousands)	2020		2019		2018		2017		2016		Prior		Revolving		Revolving to Term		TOTAL		(in thousands)	2021		2020		2019		2018		2017		Prior		Revolving		Revolving to Term		TOTAL
Commercial & industrial ~~(a)~~	Commercial & industrial ~~(a)~~																			Commercial & industrial ~~(a)~~
Grades 1-4	Grades 1-4	$	348,274	$	121,989	$	98,920	$	72,027	$	21,613	$	39,454	$	183,858	$	—	$	886,135	Grades 1-4	$	282,369	$	146,131	$	99,702	$	69,478	$	50,557	$	71,247	$	288,115	$	—	$	1,007,599
Grade 5	Grade 5	1,416		2,239		4,486		527		1,638		4,151		18,994		—		33,451		Grade 5	1,685		1,905		4,369		5,809		4,860		2,097		8,408		—		29,133
Grade 6	Grade 6	69		19		735		5,315		29		32		1,923		—		8,122		Grade 6	598		54		16		687		67		91		391		—		1,904
Grade 7	Grade 7	334		1,126		1,389		663		122		3,103		2,289		—		9,026		Grade 7	—		440		692		337		976		743		432		—		3,620
Total	Total	$	350,093	$	125,373	$	105,530	$	78,532	$	23,402	$	46,740	$	207,064	$	—	$	936,734	Total	$	284,652	$	148,530	$	104,779	$	76,311	$	56,460	$	74,178	$	297,346	$	—	$	1,042,256
Owner-occupied CRE	Owner-occupied CRE																			Owner-occupied CRE
Grades 1-4	Grades 1-4	$	90,702	$	74,029	$	78,013	$	52,911	$	45,042	$	150,624	$	870	$	—	$	492,191	Grades 1-4	$	154,578	$	94,300	$	105,226	$	92,128	$	75,583	$	202,816	$	6,945	$	—	$	731,576
Grade 5	Grade 5	42		623		1,349		7,541		1,102		5,842		—		—		16,499		Grade 5	7,753		3,019		6,529		2,543		2,515		13,905		656		—		36,920
Grade 6	Grade 6	—		—		—		1,710		—		706		—		—		2,416		Grade 6	—		—		1,642		—		20		805		—		—		2,467
Grade 7	Grade 7	2,987		675		176		835		—		5,521		—		—		10,194		Grade 7	—		3,124		1,914		—		3,526		6,672		990		—		16,226
Total	Total	$	93,731	$	75,327	$	79,538	$	62,997	$	46,144	$	162,693	$	870	$	—	$	521,300	Total	$	162,331	$	100,443	$	115,311	$	94,671	$	81,644	$	224,198	$	8,591	$	—	$	787,189
Agricultural	Agricultural																			Agricultural
Grades 1-4	Grades 1-4	$	13,719	$	5,652	$	7,580	$	9,745	$	2,613	$	32,702	$	21,513	$	—	$	93,524	Grades 1-4	$	128,404	$	87,844	$	28,416	$	22,887	$	36,298	$	86,104	$	235,743	$	—	$	625,696
Grade 5	Grade 5	1,034		—		701		169		644		6,131		356		—		9,035		Grade 5	14,796		4,183		2,391		915		3,912		48,373		26,778		—		101,348
Grade 6	Grade 6	—		—		—		329		390		—		—		—		719		Grade 6	38		38		36		—		86		1,049		85		—		1,332
Grade 7	Grade 7	—		—		26		110		1,111		5,042		62		—		6,351		Grade 7	3,284		3,971		3,490		4,201		7,215		31,672		12,519		—		66,352
Total	Total	$	14,753	$	5,652	$	8,307	$	10,353	$	4,758	$	43,875	$	21,931	$	—	$	109,629	Total	$	146,522	$	96,036	$	34,333	$	28,003	$	47,511	$	167,198	$	275,125	$	—	$	794,728
CRE investment	CRE investment																			CRE investment
Grades 1-4	Grades 1-4	$	82,518	$	78,841	$	40,881	$	69,643	$	31,541	$	137,048	$	5,255	$	—	$	445,727	Grades 1-4	$	192,274	$	139,127	$	136,306	$	56,148	$	65,026	$	162,991	$	11,289	$	—	$	763,161
Grade 5	Grade 5	—		—		47		1,284		1,828		9,073		—		—		12,232		Grade 5	11,081		3,001		6,497		3,945		6,726		17,527		—		—		48,777
Grade 6	Grade 6	—		—		—		796		—		—		—		—		796		Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	Grade 7	—		—		—		—		—		1,966		—		—		1,966		Grade 7	—		—		456		141		1,352		3,943		231		—		6,123
Total	Total	$	82,518	$	78,841	$	40,928	$	71,723	$	33,369	$	148,087	$	5,255	$	—	$	460,721	Total	$	203,355	$	142,128	$	143,259	$	60,234	$	73,104	$	184,461	$	11,520	$	—	$	818,061
Construction & land development	Construction & land development																			Construction & land development
Grades 1-4	Grades 1-4	$	67,578	$	30,733	$	15,209	$	2,204	$	2,083	$	7,266	$	3,675	$	—	$	128,748	Grades 1-4	$	81,891	$	72,415	$	12,547	$	19,511	$	1,184	$	11,274	$	10,943	$	—	$	209,765
Grade 5	Grade 5	—		373		660		545		—		23		455		—		2,056		Grade 5	640		—		521		919		—		119		—		—		2,199
Grade 6	Grade 6	—		—		—		—		—		—		—		—		—		Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	Grade 7	—		—		—		—		—		479		—		—		479		Grade 7	—		—		—		—		17		1,054		—		—		1,071
Total	Total	$	67,578	$	31,106	$	15,869	$	2,749	$	2,083	$	7,768	$	4,130	$	—	$	131,283	Total	$	82,531	$	72,415	$	13,068	$	20,430	$	1,201	$	12,447	$	10,943	$	—	$	213,035
Residential construction	Residential construction																			Residential construction
Grades 1-4	Grades 1-4	$	31,687	$	9,185	$	395	$	121	$	—	$	264	$	—	$	—	$	41,652	Grades 1-4	$	58,352	$	9,998	$	155	$	344	$	1,072	$	380	$	—	$	—	$	70,301
Grade 5	Grade 5	—		—		—		55		—		—		—		—		55		Grade 5	—		—		52		—		—		—		—		—		52
Grade 6	Grade 6	—		—		—		—		—		—		—		—		—		Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	Grade 7	—		—		—		—		—		—		—		—		—		Grade 7	—		—		—		—		—		—		—		—		—
Total	Total	$	31,687	$	9,185	$	395	$	176	$	—	$	264	$	—	$	—	$	41,707	Total	$	58,352	$	9,998	$	207	$	344	$	1,072	$	380	$	—	$	—	$	70,353
Residential first mortgage	Residential first mortgage																			Residential first mortgage
Grades 1-4	Grades 1-4	$	146,744	$	64,013	$	40,388	$	41,245	$	41,274	$	103,094	$	287	$	5	$	437,050	Grades 1-4	$	256,082	$	152,932	$	168,705	$	22,568	$	20,147	$	82,479	$	1,840	$	4	$	704,757
Grade 5	Grade 5	—		925		2,245		256		364		1,714		—		—		5,504		Grade 5	713		529		3,094		—		—		1,508		—		—		5,844
Grade 6	Grade 6	—		—		—		—		—		—		—		—		—		Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	Grade 7	—		437		197		16		9		942		—		—		1,601		Grade 7	—		—		560		225		73		2,524		—		—		3,382
Total	Total	$	146,744	$	65,375	$	42,830	$	41,517	$	41,647	$	105,750	$	287	$	5	$	444,155	Total	$	256,795	$	153,461	$	172,359	$	22,793	$	20,220	$	86,511	$	1,840	$	4	$	713,983
Residential junior mortgage	Residential junior mortgage																			Residential junior mortgage
Grades 1-4	Grades 1-4	$	4,936	$	4,338	$	3,663	$	1,060	$	869	$	3,131	$	91,816	$	1,648	$	111,461	Grades 1-4	$	3,194	$	3,139	$	3,021	$	1,501	$	512	$	1,969	$	115,817	$	1,426	$	130,579
Grade 5	Grade 5	—		—		—		—		—		32		—		—		32		Grade 5	—		—		29		—		—		—		439		—		468
Grade 6	Grade 6	—		—		—		—		—		—		—		—		—		Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	Grade 7	—		—		—		27		—		232		125		—		384		Grade 7	—		—		172		—		23		44		138		—		377
Total	Total	$	4,936	$	4,338	$	3,663	$	1,087	$	869	$	3,395	$	91,941	$	1,648	$	111,877	Total	$	3,194	$	3,139	$	3,222	$	1,501	$	535	$	2,013	$	116,394	$	1,426	$	131,424
Retail & other	Retail & other																			Retail & other
Grades 1-4	Grades 1-4	$	8,083	$	5,213	$	1,942	$	1,676	$	752	$	1,339	$	12,602	$	—	$	31,607	Grades 1-4	$	13,676	$	6,886	$	5,826	$	2,053	$	1,882	$	20,102	$	275	$	—	$	50,700
Grade 5	Grade 5	—		—		—		—		—		—		—		—		—		Grade 5	—		—		—		—		—		—		—		—		—
Grade 6	Grade 6	—		—		—		—		—		—		—		—		—		Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	Grade 7	16		—		22		—		—		50		—		—		88		Grade 7	—		24		2		19		—		62		—		—		107
Total	Total	$	8,099	$	5,213	$	1,964	$	1,676	$	752	$	1,389	$	12,602	$	—	$	31,695	Total	$	13,676	$	6,910	$	5,828	$	2,072	$	1,882	$	20,164	$	275	$	—	$	50,807

Total loans	Total loans	$	800,139	$	400,410	$	299,024	$	270,810	$	153,024	$	519,961	$	344,080	$	1,653	$	2,789,101	Total loans	$	1,211,408	$	733,060	$	592,366	$	306,359	$	283,629	$	771,550	$	722,034	$	1,430	$	4,621,836

(a) For purposes of this table, the $186 million net carrying value of PPP loans at December 31, 2020 were originated in 2020, have a Pass risk grade (Grades 1-4) and have been included with the Commercial & industrial loan category.

2022

The following tables present total loans by risk categories.


		September 30, 2021																September 30, 2022
(in thousands)	(in thousands)	Grades 1- 4			Grade 5			Grade 6			Grade 7			Total			(in thousands)	Grades 1- 4			Grade 5			Grade 6			Grade 7			Total
Commercial & industrial	Commercial & industrial	$	855,737		$	27,866		$	1,630		$	2,677		$	887,910		Commercial & industrial	$	1,170,445		$	53,631		$	30,263		$	13,913		$	1,268,252
PPP loans		68,347			—			—			—			68,347
Owner-occupied CRE	Owner-occupied CRE	651,564			32,694			2,130			11,428			697,816			Owner-occupied CRE	905,626			31,640			3,275			14,392			954,933
Agricultural	Agricultural	100,061			8,552			—			3,796			112,409			Agricultural	864,642			99,640			7,351			45,865			1,017,498
CRE investment	CRE investment	611,090			45,953			199			5,629			662,871			CRE investment	1,088,116			36,811			4,496			3,528			1,132,951
Construction & land development	Construction & land development	170,130			2,668			—			1,173			173,971			Construction & land development	305,043			575			—			828			306,446
Residential construction	Residential construction	59,559			52			—			—			59,611			Residential construction	101,286			—			—			—			101,286
Residential first mortgage	Residential first mortgage	679,372			4,410			—			4,709			688,491			Residential first mortgage	955,858			8,143			717			5,666			970,384
Residential junior mortgage	Residential junior mortgage	129,403			478			—			398			130,279			Residential junior mortgage	175,810			144			—			474			176,428
Retail & other	Retail & other	51,369			29			—			95			51,493			Retail & other	56,159			—			—			100			56,259
Total loans	Total loans	$	3,376,632		$	122,702		$	3,959		$	29,905		$	3,533,198		Total loans	$	5,622,985		$	230,584		$	46,102		$	84,766		$	5,984,437
Percent of total	Percent of total	95.6		%	3.5		%	0.1		%	0.8		%	100.0		%	Percent of total	93.9		%	3.9		%	0.8		%	1.4		%	100.0		%


		December 31, 2020																December 31, 2021
(in thousands)	(in thousands)	Grades 1- 4			Grade 5			Grade 6			Grade 7			Total			(in thousands)	Grades 1- 4			Grade 5			Grade 6			Grade 7			Total
Commercial & industrial	Commercial & industrial	$	700,119		$	33,451		$	8,122		$	9,026		$	750,718		Commercial & industrial	$	1,007,599		$	29,133		$	1,904		$	3,620		$	1,042,256
PPP loans		186,016			—			—			—			186,016
Owner-occupied CRE	Owner-occupied CRE	492,191			16,499			2,416			10,194			521,300			Owner-occupied CRE	731,576			36,920			2,467			16,226			787,189
Agricultural	Agricultural	93,524			9,035			719			6,351			109,629			Agricultural	625,696			101,348			1,332			66,352			794,728
CRE investment	CRE investment	445,727			12,232			796			1,966			460,721			CRE investment	763,161			48,777			—			6,123			818,061
Construction & land development	Construction & land development	128,748			2,056			—			479			131,283			Construction & land development	209,765			2,199			—			1,071			213,035
Residential construction	Residential construction	41,652			55			—			—			41,707			Residential construction	70,301			52			—			—			70,353
Residential first mortgage	Residential first mortgage	437,050			5,504			—			1,601			444,155			Residential first mortgage	704,757			5,844			—			3,382			713,983
Residential junior mortgage	Residential junior mortgage	111,461			32			—			384			111,877			Residential junior mortgage	130,579			468			—			377			131,424
Retail & other	Retail & other	31,607			—			—			88			31,695			Retail & other	50,700			—			—			107			50,807
Total loans	Total loans	$	2,668,095		$	78,864		$	12,053		$	30,089		$	2,789,101		Total loans	$	4,294,134		$	224,741		$	5,703		$	97,258		$	4,621,836
Percent of total	Percent of total	95.7		%	2.8		%	0.4		%	1.1		%	100.0		%	Percent of total	92.9		%	4.9		%	0.1		%	2.1		%	100.0		%

An internal loan review function rates loans using a grading system based on different risk categories. Loans with a Substandard grade are considered to have a greater risk of loss and may be assigned allocations for loss based on specific review of the weaknesses observed in the individual credits. Such loans are ~~constantly~~ monitored by the loan review function to help 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.

~~Troubled Debt Restructurings~~: At September 30, 2021, there were 14 loans classified as troubled debt restructurings with a current outstanding balance of $5.4 million (including $3.3 million on nonaccrual and $2.1 million performing) and pre-modification balance of $5.9 million. In comparison, at December 31, 2020, there were 11 loans classified as troubled debt

2123

Troubled Debt Restructurings:

Loans are considered troubled debt restructurings ~~with an outstanding balance~~if concessions have been granted to borrowers who are experiencing financial difficulties. The following table presents the loan composition of ~~$5.5 million (including $3.4 million on~~ nonaccrual and ~~$2.1 million performing)~~performing TDRs.


	September 30, 2022						December 31, 2021
(in thousands)	Performing		Nonaccrual		Total		Performing		Nonaccrual		Total
Commercial & industrial	$	—	$	223	$	223	$	—	$	197	$	197
Owner-occupied CRE	—		2,639		2,639		3,466		2,888		6,354
Agricultural	—		14,181		14,181		—		16,835		16,835
CRE investment	—		299		299		918		—		918
Construction & land development	—		75		75		—		308		308
Residential first mortgage	—		13		13		913		15		928
Residential junior mortgage	—		—		—		146		—		146
Total	$	—	$	17,430	$	17,430	$	5,443	$	20,243	$	25,686

The following table presents the number of loans modified in a TDR, pre-modification loan balance, and ~~pre-modification~~post-modification loan balance by loan composition.


	September 30, 2022					December 31, 2021
($ in thousands)	Number of Loans	Pre-Modification Balance		Current Balance		Number of Loans	Pre-Modification Balance		Current Balance
Commercial & industrial	4	$	240	$	223	2	$	200	$	197
Owner-occupied CRE	3	5,138		2,639		6	6,913		6,354
Agricultural	26	16,237		14,181		31	17,228		16,835
CRE investment	1	301		299		1	919		918
Construction & land development	1	533		75		1	533		308
Residential first mortgage	1	17		13		2	931		928
Residential junior mortgage	—	—		—		1	166		146
Total	36	$	22,466	$	17,430	44	$	26,890	$	25,686

TDR concessions may include payment schedule modifications, interest rate concessions, maturity date extensions, bankruptcies, or some combination of ~~$6.5 million.~~these concessions. There were no loans which were classified as troubled debt restructurings during the previous twelve months that subsequently defaulted during ~~the nine months ended~~2021 or through September 30, ~~2021.~~2022. As of September 30, ~~2021,~~2022, 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~~that would ~~impact~~affect 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. Management ~~continues to consider the ongoing impacts of the COVID-19 pandemic and related~~regularly monitors economic ~~uncertainty~~factors for potential impairment indications on the ~~valuation~~value of our franchise, stability of deposits, and of the wealth client base, underlying our goodwill, core deposit intangible, and customer list intangibles, and determined no impairments were indicated. A summary of goodwill and other intangibles was as follows.


		Nine Months Ended		Year Ended
(in thousands)	(in thousands)	September 30, 2021		December 31, 2020		(in thousands)	September 30, 2022		December 31, 2021
Goodwill	Goodwill	$	255,431	$	163,151	Goodwill	$	369,849	$	317,189
Core deposit intangibles	Core deposit intangibles	11,539		8,837		Core deposit intangibles	34,791		19,445
Customer list intangibles	Customer list intangibles	2,984		3,365		Customer list intangibles	2,477		2,858
Other intangibles	Other intangibles	14,523		12,202		Other intangibles	37,268		22,303
Goodwill and other intangibles, net	Goodwill and other intangibles, net	$	269,954	$	175,353	Goodwill and other intangibles, net	$	407,117	$	339,492

Goodwill: A summary of goodwill was as follows. During 2022, goodwill increased due to the Charter acquisition, while during 2021, goodwill increased due to the acquisitions of Mackinac ~~acquisition, while during 2020, goodwill increased due to the Advantage acquisition.~~and County. See Note 2 for additional information on the Company’s acquisitions.

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


	Nine Months Ended		Year Ended
(in thousands)	September 30, 2022		December 31, 2021
Goodwill:
Goodwill at beginning of year	$	317,189	$	163,151
Acquisitions	52,660		154,038

Goodwill at end of period	$	369,849	$	317,189

Other intangible assets: Other intangible assets, consisting of core deposit intangibles and customer list intangibles, are amortized over their estimated finite lives. A summary of other intangible assets was as follows. During 2022, core deposit intangibles increased due to the Charter acquisition, while during 2021, core deposit intangibles increased due to the acquisitions of Mackinac ~~acquisition, while during 2020, core deposit intangibles increased due to the Advantage acquisition.~~and County. See Note 2 for additional information on the Company’s acquisitions.


		Nine Months Ended		Year Ended			Nine Months Ended		Year Ended
(in thousands)	(in thousands)	September 30, 2021		December 31, 2020		(in thousands)	September 30, 2022		December 31, 2021
Core deposit intangibles:	Core deposit intangibles:					Core deposit intangibles:
Gross carrying amount	Gross carrying amount	$	36,436	$	31,715	Gross carrying amount	$	60,724	$	41,360
Accumulated amortization	Accumulated amortization	(24,897)		(22,878)		Accumulated amortization	(25,933)		(21,915)
Net book value	Net book value	$	11,539	$	8,837	Net book value	$	34,791	$	19,445
Additions during the period	Additions during the period	$	4,721	$	1,000	Additions during the period	$	19,364	$	13,595
Amortization during the period	Amortization during the period	$	2,019	$	3,060	Amortization during the period	$	4,018	$	2,987
Customer list intangibles:	Customer list intangibles:					Customer list intangibles:
Gross carrying amount	Gross carrying amount	$	5,523	$	5,523	Gross carrying amount	$	5,523	$	5,523
Accumulated amortization	Accumulated amortization	(2,539)		(2,158)		Accumulated amortization	(3,046)		(2,665)
Net book value	Net book value	$	2,984	$	3,365	Net book value	$	2,477	$	2,858

Amortization during the period	Amortization during the period	$	381	$	507	Amortization during the period	$	381	$	507

Mortgage servicing rights (“MSR”): 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.


		Nine Months Ended			Year Ended				Nine Months Ended			Year Ended
(in thousands)	(in thousands)	September 30, 2021			December 31, 2020			(in thousands)	September 30, 2022			December 31, 2021
Mortgage servicing rights ("MSR") asset:
Mortgage servicing rights asset:								Mortgage servicing rights asset:
MSR asset at beginning of year	MSR asset at beginning of year	$	10,230		$	5,919		MSR asset at beginning of year	$	13,636		$	10,230
Capitalized MSR	Capitalized MSR	3,191			5,256			Capitalized MSR	2,127			4,329
MSR asset acquired	MSR asset acquired	1,322			529			MSR asset acquired	—			1,322
Amortization during the period	Amortization during the period	(1,580)			(1,474)			Amortization during the period	(2,145)			(2,245)
MSR asset at end of period	MSR asset at end of period	$	13,163		$	10,230		MSR asset at end of period	$	13,618		$	13,636
Valuation allowance at beginning of year	Valuation allowance at beginning of year	$	(1,000)		$	—		Valuation allowance at beginning of year	$	(1,200)		$	(1,000)
Additions	Additions	(500)			(1,000)			Additions	—			(500)
Reversals	Reversals	300			—			Reversals	700			300
Valuation allowance at end of period	Valuation allowance at end of period	$	(1,200)		$	(1,000)		Valuation allowance at end of period	$	(500)		$	(1,200)
MSR asset, net	MSR asset, net	$	11,963		$	9,230		MSR asset, net	$	13,118		$	12,436
Fair value of MSR asset at end of period	Fair value of MSR asset at end of period	$	14,482		$	9,276		Fair value of MSR asset at end of period	$	16,740		$	15,599
Residential mortgage loans serviced for others	Residential mortgage loans serviced for others	$	1,532,585		$	1,250,206		Residential mortgage loans serviced for others	$	1,649,187		$	1,583,577
Net book value of MSR asset to loans serviced for others	Net book value of MSR asset to loans serviced for others	0.78		%	0.74		%	Net book value of MSR asset to loans serviced for others	0.80		%	0.79		%

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 stratification based on the risk characteristics of the underlying loans (predominantly loan type and note interest rate). See Note 9 for additional information on the fair value of the MSR asset.

Loan servicing rights (“LSR”): The Company acquired an LSR asset in connection with its acquisition of County on December 3, 2021 (see Note 2 for additional information on the County acquisition). The LSR asset was $13 million at September 30, 2022, and related to approximately $553 million of unpaid principal balances of loans serviced for others. The LSR asset will

be amortized on an accelerated basis over the estimated remaining loan service period as the Company does not expect to add new loans to this servicing portfolio. See Note 9 for additional information on the fair value of the LSR asset.

The following table shows the estimated future amortization expense for amortizing intangible assets and the ~~MSR asset.~~servicing assets. The projections are based on existing asset balances, the current interest rate environment and prepayment speeds as of September 30, ~~2021.~~2022. 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)	(in thousands)	Core deposit intangibles		Customer list intangibles		MSR asset		(in thousands)	Core deposit intangibles		Customer list intangibles		MSR asset		LSR asset
Year ending December 31,	Year ending December 31,							Year ending December 31,
2021 (remaining three months)		$	859	$	126	$	486
2022		3,059		507		2,421
2022 (remaining three months)								2022 (remaining three months)	$	2,091	$	126	$	386	$	2,004
2023	2023	2,412		483		2,363		2023	7,589		483		2,735		6,345
2024	2024	1,815		449		2,250		2024	6,298		449		2,635		3,673
2025	2025	1,248		449		1,361		2025	5,161		449		1,884		1,020
2026	2026	777		249		1,118		2026	3,983		249		1,394		—
2027								2027	3,218		166		1,394		—
Thereafter	Thereafter	1,369		721		3,164		Thereafter	6,451		555		3,190		—
Total	Total	$	11,539	$	2,984	$	13,163	Total	$	34,791	$	2,477	$	13,618	$	13,042

Note 8 – Short and Long-Term Borrowings

Short-Term Borrowings:

Short-term borrowings include any borrowing with an original maturity of one year or less. At ~~both~~ September 30, ~~2021~~2022, short-term borrowings included $280 million of short-term FHLB advances, comprised of $80 million due in October 2022 at a weighted average rate of 2.70% and ~~December 31, 2020, the~~$200 million due in September 2023 at a weighted average rate of 4.30%. The Company did not have any outstanding short-term ~~borrowings.~~borrowings at December 31, 2021.

Long-Term Borrowings:

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

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


(in thousands)	September 30, 2022		December 31, 2021
FHLB advances	$	33,000	$	25,000
Junior subordinated debentures	39,512		38,885
Subordinated notes	152,724		153,030
Total long-term borrowings	$	225,236	$	216,915

FHLB Advances: The Federal Home Loan Bank (“FHLB”) advances bear fixed rates, require interest-only monthly payments, and have maturity dates through ~~March 2027.~~February 2030. The weighted average rate of the FHLB advances was ~~0.74%~~1.09% at September 30, ~~2021~~2022 and ~~0.73%~~0.59% at December 31, ~~2020.~~2021.

Junior Subordinated Debentures: ~~The following table shows~~ Each of the ~~breakdown of~~ junior subordinated ~~debentures.~~debentures was issued to an underlying statutory trust (the “statutory trusts”), which issued trust preferred securities and common securities and used the proceeds from the issuance of the common and the trust preferred securities to purchase the junior subordinated debentures of the Company. The debentures represent the sole asset of the statutory trusts. All of the common securities of the statutory trusts are owned by the Company. The statutory trusts are not included in the consolidated financial statements. The net effect of all the documents entered into with respect to the trust preferred securities is that the Company, through payments on its debentures, is liable for the distributions and other payments required on the trust preferred securities. Interest on all debentures is current. Any applicable discounts (initially recorded to carry an acquired debenture at its then estimated fair value) are being accreted to interest expense over the remaining life of the ~~debentures.~~debenture. All the junior subordinated debentures ~~below~~ are currently callable and may be redeemed in part or in full, at par, plus any accrued but unpaid interest. At September 30, ~~2021~~2022 and December 31, ~~2020, $24.3~~2021, approximately $38 million and ~~$23.9~~$37 million, respectively, of trust preferred securities qualify as Tier 1 capital.

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

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

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

~~(3)~~The debentures, 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 2.91% and 3.02% as of September 30, 2021 and December 31, 2020, respectively.

Subordinated Notes (the “Notes”): On In July 7, 2021, ~~Nicolet~~the Company completed the private placement of $100 million in fixed-to-floating rate subordinated notes ~~(the “Notes”)~~ due in 2031. The Notes are intended to qualify as Tier 2 capital for regulatory purposes, and are redeemable beginning July 15, 2026 and quarterly thereafter on any interest payment date. The Notes will bear interest at2031, with a fixed annual rate of 3.125% for the first five years, and will reset quarterly thereafter to the then current three-month Secured Overnight Financing Rate (“SOFR”) plus ~~0.2375%.~~237.5 basis points. The Notes due in 2031 are redeemable beginning July 15, 2026 and quarterly thereafter on any interest payment date.

In December 2021, Nicolet assumed two subordinated note issuances at a premium as the result of the County acquisition. One issuance was $30 million in fixed-to-floating rate subordinated notes due in 2028, with a fixed annual interest rate of 5.875% for the first five years, and will reset quarterly thereafter to the then current three-month LIBOR plus 2.88% The second issuance was $22 million in fixed-to-floating rate subordinated notes due in 2030, with a fixed annual interest rate of 7.00% for the first five years, and will reset quarterly thereafter to the then current SOFR plus 687.5 basis points. The Notes due in 2028 are redeemable beginning June 1, 2023, and quarterly thereafter on any interest payment date, while the Notes due in 2030 are redeemable beginning June 30, 2025, and quarterly thereafter on any interest payment date. All Notes qualify as Tier 2 capital for regulatory purposes.

The following table shows the breakdown of junior subordinated debentures and subordinated notes.


		As of September 30, 2022								As of December 31, 2021
(in thousands)	Maturity Date	Interest Rate		Par		Unamortized Premium /(Discount) / Debt Issue Costs (1)		Carrying Value		Interest Rate		Carrying Value
Junior Subordinated Debentures:
Mid-Wisconsin Statutory Trust I (2)	12/15/2035	4.72	%	$	10,310	$	(2,625)	$	7,685	1.63	%	$	7,537
Baylake Capital Trust II (3)	9/30/2036	5.02	%	16,598		(3,233)		13,365		1.57	%	13,187
First Menasha Statutory Trust (4)	3/17/2034	6.32	%	5,155		(498)		4,657		3.01	%	4,624
County Bancorp Statutory Trust II (5)	9/15/2035	4.82	%	6,186		(948)		5,238		1.73	%	5,061
County Bancorp Statutory Trust III (6)	6/15/2036	4.98	%	6,186		(1,006)		5,180		1.89	%	5,121
Fox River Valley Capital Trust (7)	5/30/2033	6.40	%	3,610		(223)		3,387		6.40	%	3,355
Total				$	48,045	$	(8,533)	$	39,512			$	38,885
Subordinated Notes:
Subordinated Notes due 2031	7/15/2031	3.13	%	$	100,000	$	(785)	$	99,215	3.13	%	$	99,057
County Subordinated Notes due 2028	6/1/2028	5.88	%	30,000		189		30,189		5.88	%	30,402
County Subordinated Notes due 2030	6/30/2030	7.00	%	22,400		920		23,320		7.00	%	23,571
Total				$	152,400	$	324	$	152,724			$	153,030

(1) Represents the remaining unamortized premium or discount on debt issuances assumed in acquisitions, and represents the unamortized debt issue costs for the debt issued directly by Nicolet.

(2) The debentures, assumed in April 2013 as the result of an acquisition, have a floating rate of three-month LIBOR plus 1.43%, adjusted quarterly.

(3) The debentures, assumed in April 2016 as a result of an acquisition, have a floating rate of three-month LIBOR plus 1.35%, adjusted quarterly.

(4) The debentures, assumed in April 2017 as the result of an acquisition, have a floating rate of three-month LIBOR plus 2.79%, adjusted quarterly.

(5) The debentures, assumed in December 2021 as the result of an acquisition, have a floating rate of three-month LIBOR plus 1.53%, adjusted quarterly.

(6) The debentures, assumed in December 2021 as the result of an acquisition, have a floating rate of three-month LIBOR plus 1.69%, adjusted quarterly.

(7) The debentures, assumed in December 2021 as the result of an acquisition, have a floating rate of 5-year LIBOR plus 3.40%, which resets every five years.

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 certain financial instruments on a fair value basis. These financial assets and financial liabilities are measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the assumptions used to determine fair value. ~~These~~Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect assumptions of the reporting entity about how market participants would price the asset or liability based on the best information available under the circumstances. The three fair value levels are:

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

•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)	(in thousands)			Fair Value Measurements Using						(in thousands)			Fair Value Measurements Using
Measured at Fair Value on a Recurring Basis:	Measured at Fair Value on a Recurring Basis:	Total		Level 1		Level 2		Level 3		Measured at Fair Value on a Recurring Basis:	Total		Level 1		Level 2		Level 3
September 30, 2021
September 30, 2022										September 30, 2022
U.S. government agency securities	U.S. government agency securities	$	174,826	$	—	$	174,826	$	—	U.S. government agency securities	$	184,763	$	—	$	184,763	$	—
State, county and municipals	State, county and municipals	238,664		—		238,498		166		State, county and municipals	411,864		—		410,021		1,843
Mortgage-backed securities	Mortgage-backed securities	197,290		—		197,290		—		Mortgage-backed securities	213,435		—		212,453		982
Corporate debt securities	Corporate debt securities	105,162		—		101,532		3,630		Corporate debt securities	139,535		—		134,214		5,321
Securities AFS	Securities AFS	$	715,942	$	—	$	712,146	$	3,796	Securities AFS	$	949,597	$	—	$	941,451	$	8,146
Other investments (equity securities)	Other investments (equity securities)	$	8,077	$	8,077	$	—	$	—	Other investments (equity securities)	$	4,482	$	4,482	$	—	$	—
December 31, 2020
Derivative assets										Derivative assets	—		—		—		—
Derivative liabilities										Derivative liabilities	—		—		—		—
December 31, 2021										December 31, 2021
U.S. government agency securities	U.S. government agency securities	$	63,451	$	—	$	63,451	$	—	U.S. government agency securities	$	191,277	$	—	$	191,277	$	—
State, county and municipals	State, county and municipals	231,868		—		231,868		—		State, county and municipals	312,737		—		310,316		2,421
Mortgage-backed securities	Mortgage-backed securities	162,495		—		162,495		—		Mortgage-backed securities	271,262		—		270,260		1,002
Corporate debt securities	Corporate debt securities	81,523		—		78,393		3,130		Corporate debt securities	146,385		—		141,743		4,642
Securities AFS	Securities AFS	$	539,337	$	—	$	536,207	$	3,130	Securities AFS	$	921,661	$	—	$	913,596	$	8,065
Other investments (equity securities)	Other investments (equity securities)	$	3,567	$	3,567	$	—	$	—	Other investments (equity securities)	$	5,660	$	5,660	$	—	$	—
Derivative assets										Derivative assets	1,064		—		1,064		—
Derivative liabilities										Derivative liabilities	1,064		—		1,064		—

The following is a description of the valuation methodologies used by the Company for the ~~securities AFS~~assets and ~~equity securities~~liabilities 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 corporate debt securities, which ~~include~~are primarily trust preferred security ~~investments.~~investments, as well as certain municipal bonds and mortgage-backed securities. At September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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 fair value of the derivative assets and liabilities is determined using a discounted cash flow analysis of the expected cash flows of each derivative, which considers the contractual terms of the underlying derivative financial instrument and observable market-based inputs, such as interest rate curves.

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


		Nine Months Ended		Year Ended			Nine Months Ended		Year Ended
Level 3 Fair Value Measurements:	Level 3 Fair Value Measurements:	September 30, 2021		December 31, 2020		Level 3 Fair Value Measurements:	September 30, 2022		December 31, 2021
Balance at beginning of year	Balance at beginning of year	$	3,130	$	3,130	Balance at beginning of year	$	8,065	$	3,130
Acquired balance	Acquired balance	666		—		Acquired balance	750		4,935

Maturities / Paydowns						Maturities / Paydowns	(442)		—
Unrealized gain / (loss)						Unrealized gain / (loss)	(227)		—
Balance at end of period	Balance at end of period	$	3,796	$	3,130	Balance at end of period	$	8,146	$	8,065

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
Measured at Fair Value on a Nonrecurring Basis: Total Level 1 Level 2 Level 3
September 30, 2021
Collateral dependent loans $ 11,459 $ — $ — $ 11,459
Other real estate owned (“OREO”) 4,469 — — 4,469
MSR asset 11,963 — — 11,963
December 31, 2020
Collateral dependent loans $ 7,633 $ — $ — $ 7,633
OREO 3,608 — — 3,608
MSR asset 9,230 — — 9,230


(in thousands)			Fair Value Measurements Using
Measured at Fair Value on a Nonrecurring Basis:	Total		Level 1		Level 2		Level 3
September 30, 2022
Collateral dependent loans	$	30,217	$	—	$	—	$	30,217
Other real estate owned (“OREO”)	2,134		—		—		2,134
MSR asset	13,118		—		—		13,118
LSR asset	13,042		—		—		13,042
December 31, 2021
Collateral dependent loans	$	36,230	$	—	$	—	$	36,230
OREO	11,955		—		—		11,955
MSR asset	12,436		—		—		12,436
LSR asset	20,055		—		—		20,055

The following is a description of the valuation methodologies used by the Company for the items noted in the table above. For collateral dependent loans, the estimated fair value is based upon the present value of expected ~~credit losses are based on~~future cash flows discounted at the loan’s effective interest rate, the estimated fair value of the underlying collateral ~~at the balance sheet date,~~ with consideration for estimated selling costs if satisfaction of the loan depends on the sale of the ~~collateral.~~collateral, or the estimated liquidity of the note. For OREO, the fair value is based upon the estimated fair value of the underlying collateral adjusted for the expected costs to sell. 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 servicing valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as costs to service, a discount rate, ancillary income, default rates and losses, and prepayment speeds. Although some of these assumptions are based on observable market data, other assumptions are based on unobservable estimates of what market participants would use to measure fair value.

Financial instruments:

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


September 30, 2021
September 30, 2022												September 30, 2022
(in thousands)	(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3		(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:	Financial assets:											Financial assets:
Cash and cash equivalents	Cash and cash equivalents	$	1,350,605	$	1,350,605	$	1,350,605	$	—	$	—	Cash and cash equivalents	$	438,282	$	438,282	$	438,282	$	—	$	—
Certificates of deposit in other banks	Certificates of deposit in other banks	24,079		26,653		—		26,653		—		Certificates of deposit in other banks	13,510		13,409		—		13,409		—
Securities AFS	Securities AFS	715,942		715,942		—		712,146		3,796		Securities AFS	949,597		949,597		—		941,451		8,146
Securities HTM	Securities HTM	49,063		48,946		—		48,946		—		Securities HTM	686,424		627,639		—		627,639		—
Other investments, including equity securities	Other investments, including equity securities	38,602		38,602		8,078		24,634		5,890		Other investments, including equity securities	79,279		79,279		4,482		58,910		15,887
Loans held for sale	Loans held for sale	16,784		17,153		—		17,153		—		Loans held for sale	3,709		3,770		—		3,770		—
Loans, net	Loans, net	3,494,799		3,539,968		—		—		3,539,968		Loans, net	5,924,089		5,638,877		—		—		5,638,877

MSR asset	MSR asset	11,963		14,482		—		—		14,482		MSR asset	13,118		16,740		—		—		16,740
LSR asset												LSR asset	13,042		13,042		—		—		13,042
Accrued interest receivable												Accrued interest receivable	21,542		21,542		21,542		—		—
Financial liabilities:	Financial liabilities:											Financial liabilities:
Deposits	Deposits	$	5,428,774	$	5,459,453	$	—	$	—	$	5,459,453	Deposits	$	7,395,902	$	7,390,443	$	—	$	—	$	7,390,443

Short-term borrowings												Short-term borrowings	280,000		280,000		—		280,000		—
Long-term borrowings	Long-term borrowings	144,233		144,566		—		20,199		124,367		Long-term borrowings	225,236		220,616		—		33,104		187,512
Accrued interest payable												Accrued interest payable	3,533		3,533		3,533		—		—

December 31, 2020
(in thousands) Carrying
Amount Estimated
Fair Value Level 1 Level 2 Level 3
Financial assets:
Cash and cash equivalents $ 802,859 $ 802,859 $ 802,859 $ — $ —
Certificates of deposit in other banks 29,521 31,053 — 31,053 —
Securities AFS 539,337 539,337 — 536,207 3,130
Other investments, including equity securities 27,619 27,619 3,567 20,155 3,897
Loans held for sale 21,450 22,329 — 22,329 —
Loans, net 2,756,928 2,834,452 — — 2,834,452
MSR asset 9,230 9,276 — — 9,276
Financial liabilities:
Deposits $ 3,910,399 $ 3,917,121 $ — $ — $ 3,917,121
Long-term borrowings 53,869 53,859 — 29,488 24,371


December 31, 2021
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	595,292	$	595,292	$	595,292	$	—	$	—
Certificates of deposit in other banks	21,920		22,236		—		22,236		—
Securities AFS	921,661		921,661		—		913,596		8,065
Securities HTM	651,803		648,394		—		648,394		—
Other investments, including equity securities	44,008		44,008		5,660		32,110		6,238
Loans held for sale	6,447		6,616		—		6,616		—
Loans, net	4,572,164		4,606,851		—		—		4,606,851
MSR asset	12,436		15,599		—		—		15,599
LSR asset	20,055		20,055		—		—		20,055
Accrued interest receivable	15,277		15,277		15,277		—		—
Financial liabilities:
Deposits	$	6,465,916	$	6,463,064	$	—	$	—	$	6,463,064

Long-term borrowings	216,915		216,092		—		25,097		190,995
Accrued interest payable	3,078		3,078		3,078		—		—

The valuation methodologies for the financial instruments disclosed in the above table are described in ~~the~~Note 18, Fair Value Measurements, ~~note~~ in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

Note 10 – Other Assets and Other Liabilities Held for Sale

On September 7, 2021, Nicolet entered into a Purchase and Assumption Agreement (the “Birmingham Agreement”) with Bank of Ann Arbor to sell Nicolet’s Birmingham, Michigan branch, including legacy mBank’s asset-based lending team (the “Birmingham Sale”). Pursuant to the terms of the Birmingham Agreement, Bank of Ann Arbor ~~has~~ agreed to assume certain deposit liabilities and to acquire certain loans, as well as cash, personal property and other fixed assets associated with the Birmingham branch. The combined loan and deposit balances of the Birmingham branch (excluding certain loans and deposits not subject to the Birmingham Agreement) were approximately ~~$177~~$199 million and ~~$47~~$51 million, respectively, as of ~~September 30,~~December 31, 2021. The ~~completion of the~~ Birmingham Sale is subject to customary closing conditions and the approval of the purchase by the appropriate state and federal regulatory agencies. Subject to the satisfaction of such conditions and approvals, Nicolet and Bank of Ann Arbor expect to the close the Birmingham Sale in the first quarter ofclosed on January 21, 2022.

2630

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 ~~Northeast and Central~~ Wisconsin, ~~Northern~~ Michigan, and Minnesota. In this Quarterly Report on Form 10-Q, unless the ~~upper peninsula of Michigan.~~context indicates otherwise, all references to “we,” “us” and “our” refer to the Company.

Forward-Looking Statements

Statements made in this document and in any documents that are incorporated by reference which are not purely historical are forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, including any statements regarding descriptions of management’s plans, objectives, or goals for future operations, products or services, and forecasts of its revenues, earnings, or other measures of performance. Forward-looking statements are based on current management expectations and, by their nature, are subject to risks and uncertainties. These statements are neither statements of historical fact nor assurance of future performance and generally may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “should,” “will,” “intend,” or similar expressions. Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of various transactions or events, and statements about our future performance, operations, products and services, and should be viewed with caution. Shareholders should note that many factors, some of which are discussed elsewhere in this document, could affect the future financial results of Nicolet and could cause those results to differ materially from those ~~expressed in~~implied or anticipated by the statements. Except as required by law, we expressly disclaim any obligations to publicly update any forward-looking statements ~~contained in this document. These~~whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise. Important factors, many of which are beyond Nicolet’s control, that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements, in addition to those described in detail under Item 1A, “Risk Factors” of Nicolet’s 2021 Annual Report on Form 10-K include, but are not necessarily limited to the following:

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

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

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

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

•potential difficulties in identifying and integrating the ~~risk that the proposed~~operations of future acquisition targets with those of ~~County will not be consummated or will not meet Nicolet’s expectations regarding the timing of the proposed acquisition;~~Nicolet;

•the ~~possibility that the anticipated benefits of the Mackinac acquisition are not realized when expected or at all, including as a result of the~~ impact of purchase accounting with respect to our merger activities, or ~~problems arising from, the integration of the two companies or as a result of the strength of the economy and competitive factors~~any change in the ~~areas where Nicolet does business;~~assumptions used regarding the assets purchased and liabilities assumed to determine their fair value;

•cybersecurity risks and the ~~possibility~~vulnerability of our network and online banking portals, and the systems or parties with whom we contract, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches that ~~the proposed Birmingham Sale will not close when expected~~could adversely affect our business and financial performance or ~~at all because required regulatory approvals are not received or other conditions to the closing are not satisfied on a timely basis or at all;~~

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

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

•changes ~~to statutes, regulations, or regulatory policies or practices resulting from~~in accounting standards, rules and interpretations and the ~~COVID-19 pandemic;~~related impact on Nicolet’s financial statements;

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

•changes in ~~consumer demand~~monetary and tax policies;

•changes occurring in business conditions and inflation;

•our ability to attract and retain key personnel;

•examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for credit losses, write-down assets, or take other actions;

•risks associated with actual or potential information gatherings, investigations or legal proceedings by customers, regulatory agencies or others;

•the potential effects of events beyond our control that may have a destabilizing effect on financial ~~services;~~markets and the economy, such as weather events, natural disasters, epidemics and pandemics (including COVID-19), war or terrorist activities, disruptions in our customers’ supply chains, disruptions in transportation, essential utility outages or trade disputes and related tariffs;

•each of the factors and risks under Item 1A, “Risk Factors” of Nicolet’s 2021 Annual Report on Form 10-K and in subsequent filings we make with the SEC; and

•risks related to our merger with Charter, including:

◦possible negative impact on our stock price and future business and financial results;

◦unexpected costs associated with the merger;

◦diversion of management’s attention from ongoing business operations and opportunities;

◦possible inability to achieve expected synergies and operating efficiencies in the merger within the expected timeframes or at all;

◦the impact of, or problems arising from the integration of the two companies;

◦the outcome of litigation or of matters before regulatory agencies, whether currently existing or commencing in the future, including litigation related to the merger;

◦potential adverse reactions or changes to business or employee relationships, including those resulting from the completion of the merger; and

◦current or future adverse legislation or regulation.

•the risk that Nicolet’s analysis of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.

These factors should be considered in evaluating the forward-looking statements, and you should not place undue reliance on such statements. Nicolet specifically disclaims any obligation to update factors or to publicly announce the results of revisions to any of the forward-looking statements or comments included herein to reflect future events or developments.

Overview

The following discussion is management’s analysis of the consolidated financial condition as of September 30, ~~2021~~2022 and December 31, ~~2020~~2021 and results of operations for the three and nine-month periods ended September 30, ~~2021~~2022 and ~~2020.~~2021. It should be read in conjunction with Nicolet’s audited consolidated financial statements included in Nicolet’s 2021 Annual Report on Form ~~10-K for the year ended December 31, 2020.~~10-K.

~~Evaluation of~~Our financial performance and certain balance sheet line items ~~between 2021 and 2020~~ were impacted by the timing and size of ~~Nicolet’s acquisition~~our 2021 acquisitions of Mackinac Financial Corporation (“Mackinac”) on September 3, ~~2021. The inclusion~~2021 and County Bancorp, Inc. (“County”) on December 3, 2021, as well as our 2022 acquisition of ~~the Mackinac balance sheet (at approximately 30% of Nicolet’s then pre-merger asset size) explains a substantial portion of the increase in certain period end balances, while the~~Charter Bankshares, Inc. (“Charter”) on August 26, 2022. Certain income statement results, ~~reflect only one month of contribution~~average balances and related ratios include partial contributions from Mackinac, County, and Charter, each from the respective acquisition date. Additional information on our acquisition activity is included in ~~2021. At acquisition, Mackinac added $1.5 billion~~Note 2, “Acquisitions” in assets, $0.9 billion of loans, $1.4 billion of deposits, and goodwill of $92 million, for a total purchase price that included $180 million of common equity (or 2.3 million shares) and $49 million of cash.

the Notes to Unaudited Consolidated Financial Statements, under Part I, Item 1.

Economic Outlook

Growth in economic activity and demand for goods and services, combined with labor shortages, supply chain complications and geopolitical matters, have contributed to rising inflation. In response, the Federal Reserve has raised interest rates from a target range of 0.00%-0.25% in early March 2022 to 3.00%-3.25% at the end of September 2022. In addition, the Federal Reserve has signaled that it anticipates additional increases in the target range are likely to mitigate the hardships caused by the ongoing Russia-Ukraine conflict, continued supply chain disruptions, and increased inflationary pressure. The ~~initial impacts~~tightening of the ~~COVID-19 pandemic (declared~~Federal Reserve’s monetary policies, including these increases in ~~March 2020) resulted~~the target range and the tapering of the Federal Reserve’s balance sheet, combined with ongoing economic and political instability, increases the risk of an economic recession. While forecasts vary, many economists are projecting that U.S. economic growth will slow and inflation will remain elevated in ~~among other things, stock~~the coming quarters, potentially resulting in a contraction of the U.S. gross domestic output by 2023, if not earlier. The timing and ~~global markets decline, disruption in~~impact of inflation and rising interest rates on our business and ~~leisure activities as nation-wide stay-at-home orders were mandated, significant strain~~related financial results will depend on ~~the health care industry as it addressed the severity of the health crisis,~~future developments, which are highly uncertain and shifts in the general economy (such as high unemployment, negative GDP expectations, an immediate 150 bps decline in Federal funds rates, and unprecedented government stimulus), triggering a 2020 recession. The dramatic events surrounding the pandemic, fluctuating social and economic changes since the onset of the pandemic, and uncertainty about the longevity of the pandemic’s effects were significant and unfolding throughout most of 2020, but have abated somewhat for 2021 as people and businesses were supported by government stimulus and are adjustingdifficult to ~~a vaccination rollout and a new normal in a still evolving environment, including a second wave of the pandemic from a new strain of the virus.~~

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

During 2020, we originated 2,725 PPP loans totaling $351 million, bearing a 1% contractual rate, and earned a $12.3 million fee. During 2021, under the latest round of the SBA’s program, Nicolet originated 2,205 PPP loans totaling $160 million and earned a $9.3 million fee. Of the total fees, $5.7 million was accreted into interest in 2020 and $9.8 million was accreted in the first nine months of 2021. At September 30, 2021, the net carrying value of all PPP loans held for investment was $68 million, or 2% of total loans, for a net $118 million decrease from year-end 2020, as loan forgiveness has outpaced the latest round of new PPP loans. SBA loan forgiveness that started in November 2020 has boosted overall borrower equity in their businesses and meaningfully improves the credit quality of many commercial relationships.predict.

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Performance Summary
Table 1: Earnings Summary and Selected Financial Data	Table 1: Earnings Summary and Selected Financial Data																						Table 1: Earnings Summary and Selected Financial Data
		At or for the Three Months Ended															At or for the Nine Months Ended							At or for the Three Months Ended															At or for the Nine Months Ended
(In thousands, except per share data)	(In thousands, except per share data)	9/30/2021			6/30/2021			3/31/2021			12/31/2020			9/30/2020			9/30/2021			9/30/2020			(In thousands, except per share data)	9/30/2022			6/30/2022			3/31/2022			12/31/2021			9/30/2021			9/30/2022			9/30/2021
Results of operations:	Results of operations:																						Results of operations:
Interest income		$	38,741		$	38,307		$	36,876		$	38,037		$	37,270		$	113,924		$	111,165
Interest expense		3,557			2,736			3,235			4,019			4,710			9,528			15,845
Net interest income	Net interest income	35,184			35,571			33,641			34,018			32,560			104,396			95,320			Net interest income	$	62,990		$	55,084		$	53,795		$	53,559		$	35,184		$	171,869		$	104,396
Provision for credit losses	Provision for credit losses	6,000			—			500			1,300			3,000			6,500			9,000			Provision for credit losses	8,600			750			300			8,400			6,000			9,650			6,500
Net interest income after provision for credit losses		29,184			35,571			33,141			32,718			29,560			97,896			86,320
Noninterest income	Noninterest income	13,996			20,178			17,126			16,879			18,691			51,300			45,747			Noninterest income	13,000			14,131			15,943			16,064			13,996			43,074			51,300
Noninterest expense	Noninterest expense	33,061			30,747			26,081			25,367			23,685			89,889			75,352			Noninterest expense	42,567			36,538			37,550			39,408			33,061			116,655			89,889
Income before income tax expense	Income before income tax expense	10,119			25,002			24,186			24,230			24,566			59,307			56,715			Income before income tax expense	24,823			31,927			31,888			21,815			10,119			88,638			59,307
Income tax expense	Income tax expense	2,295			6,718			5,947			6,145			6,434			14,960			14,331			Income tax expense	6,313			7,942			7,724			5,510			2,295			21,979			14,960
Net income	Net income	7,824			18,284			18,239			18,085			18,132			44,347			42,384			Net income	$	18,510		$	23,985		$	24,164		$	16,305		$	7,824		$	66,659		$	44,347
Net income attributable to noncontrolling interest		—			—			—			98			30			—			249
Net income attributable to Nicolet Bankshares, Inc.		$	7,824		$	18,284		$	18,239		$	17,987		$	18,102		$	44,347		$	42,135
Earnings per common share:
Earnings per common share ("EPS"):																							Earnings per common share ("EPS"):
Basic	Basic	$	0.75		$	1.85		$	1.82		$	1.79		$	1.75		$	4.39		$	4.04		Basic	$	1.33		$	1.79		$	1.77		$	1.29		$	0.75		$	4.88		$	4.39
Diluted	Diluted	$	0.73		$	1.77		$	1.75		$	1.74		$	1.72		$	4.22		$	3.97		Diluted	$	1.29		$	1.73		$	1.70		$	1.25		$	0.73		$	4.72		$	4.22
Common Shares:	Common Shares:																						Common Shares:
Basic weighted average	Basic weighted average	10,392			9,902			9,998			10,074			10,349			10,098			10,426			Basic weighted average	13,890			13,402			13,649			12,626			10,392			13,648			10,098
Diluted weighted average	Diluted weighted average	10,776			10,326			10,403			10,350			10,499			10,503			10,605			Diluted weighted average	14,310			13,852			14,215			13,049			10,776			14,127			10,503
Outstanding (period end)	Outstanding (period end)	11,952			9,843			9,988			10,011			10,196			11,952			10,196			Outstanding (period end)	14,673			13,407			13,457			13,994			11,952			14,673			11,952
Period-End Balances:	Period-End Balances:																						Period-End Balances:
Loans	Loans	$	3,533,198		$	2,820,331		$	2,846,351		$	2,789,101		$	2,908,793		$	3,533,198		$	2,908,793		Loans	$	5,984,437		$	4,978,654		$	4,683,315		$	4,621,836		$	3,533,198		$	5,984,437		$	3,533,198
Allowance for credit losses - loans	Allowance for credit losses - loans	38,399			32,561			32,626			32,173			31,388			38,399			31,388			Allowance for credit losses - loans	60,348			50,655			49,906			49,672			38,399			60,348			38,399
Securities available-for-sale, at fair value		715,942			562,028			558,229			539,337			535,351			715,942			535,351
Goodwill and other intangibles, net		269,954			173,711			174,501			175,353			176,213			269,954			176,213
Total assets	Total assets	6,407,820			4,587,347			4,543,804			4,551,789			4,706,375			6,407,820			4,706,375			Total assets	8,895,916			7,370,252			7,320,212			7,695,037			6,407,820			8,895,916			6,407,820
Deposits	Deposits	5,428,774			3,939,022			3,900,594			3,910,399			3,712,808			5,428,774			3,712,808			Deposits	7,395,902			6,286,266			6,231,120			6,465,916			5,428,774			7,395,902			5,428,774
Stockholders’ equity (common)	Stockholders’ equity (common)	729,278			559,395			550,046			539,189			538,068			729,278			538,068			Stockholders’ equity (common)	938,463			839,387			836,310			891,891			729,278			938,463			729,278
Book value per common share	Book value per common share	61.01			56.83			55.07			53.86			52.77			61.01			52.77			Book value per common share	63.96			62.61			62.15			63.73			61.01			63.96			61.01
Tangible book value per common share (2)	Tangible book value per common share (2)	38.43			39.18			37.60			36.34			35.49			38.43			35.49			Tangible book value per common share (2)	36.21			37.49			37.03			39.47			38.43			36.21			38.43
Average Balances:
Loans		$	3,076,422		$	2,869,105		$	2,825,664		$	2,868,827		$	2,871,256		$	2,924,648		$	2,760,309
Interest-earning assets		4,734,768			4,109,394			4,089,603			4,091,460			4,216,106			4,313,618			3,768,676
Goodwill and other intangibles, net		201,748			174,026			174,825			175,678			169,353			183,632			166,493
Total assets		5,246,193			4,527,839			4,514,927			4,515,226			4,633,359			4,765,665			4,167,902
Deposits		4,448,468			3,897,797			3,875,205			3,793,430			3,636,260			4,075,923			3,320,994
Interest-bearing liabilities		3,093,031			2,684,871			2,764,232			2,744,578			2,933,737			2,848,583			2,632,280
Stockholders’ equity (common)		608,946			550,974			544,541			537,920			537,826			568,390			523,904
Financial Ratios: (1)	Financial Ratios: (1)																						Financial Ratios: (1)
Return on average assets	Return on average assets	0.59		%	1.62		%	1.64		%	1.58		%	1.55		%	1.24		%	1.35		%	Return on average assets	0.93		%	1.32		%	1.30		%	0.96		%	0.59		%	1.18		%	1.24		%
Return on average common equity	Return on average common equity	5.10			13.31			13.58			13.30			13.39			10.43			10.74			Return on average common equity	8.25			11.48			11.38			8.24			5.10			10.32			10.43
Return on average tangible common equity (2)	Return on average tangible common equity (2)	7.62			19.46			20.01			19.75			19.54			15.41			15.75			Return on average tangible common equity (2)	13.93			19.21			18.75			13.19			7.62			17.25			15.41
Average equity to average assets		11.61			12.17			12.06			11.91			11.61			11.93			12.57
Stockholders' equity to assets	Stockholders' equity to assets	11.38			12.19			12.11			11.85			11.43			11.38			11.43			Stockholders' equity to assets	10.55			11.39			11.42			11.59			11.38			10.55			11.38
Tangible common equity to tangible assets (2)	Tangible common equity to tangible assets (2)	7.48			8.74			8.60			8.31			7.99			7.48			7.99			Tangible common equity to tangible assets (2)	6.26			7.15			7.14			7.51			7.48			6.26			7.48
Net interest margin		2.94			3.45			3.31			3.29			3.06			3.22			3.35
Net loan charge-offs to average loans		0.01			0.01			0.01			0.07			0.10			0.01			0.04
Nonperforming loans to total loans		0.47			0.25			0.31			0.34			0.38			0.47			0.38
Nonperforming assets to total assets		0.33			0.21			0.28			0.29			0.25			0.33			0.25
Efficiency ratio		65.32			59.37			51.84			48.99			46.18			58.86			52.71
Effective tax rate		22.68			26.87			24.59			25.36			26.19			25.22			25.27
Reconciliation of Non-GAAP Financial Measures:																							Reconciliation of Non-GAAP Financial Measures:
Adjusted net income reconciliation (3)																							Adjusted net income reconciliation (3)
Net income (GAAP)																							Net income (GAAP)	$	18,510		$	23,985		$	24,164		$	16,305		$	7,824		$	66,659		$	44,347
Adjustments:																							Adjustments:
Provision expense related to merger																							Provision expense related to merger	8,000			—			—			8,400			6,000			8,000			6,000
Assets (gains) losses, net																							Assets (gains) losses, net	46			(1,603)			(1,313)			(465)			1,187			(2,870)			(3,716)
Merger-related expense																							Merger-related expense	519			555			98			2,202			2,793			1,172			3,449
Branch closure expense																							Branch closure expense	—			—			—			—			944			—			944
Adjustments subtotal																							Adjustments subtotal	8,565			(1,048)			(1,215)			10,137			10,924			6,302			6,677
Tax on Adjustments (25% effective tax rate)																							Tax on Adjustments (25% effective tax rate)	2,141			(262)			(304)			2,534			2,731			1,576			1,669
Adjustments, net of tax																							Adjustments, net of tax	6,424			(786)			(911)			7,603			8,193			4,727			5,008
Adjusted net income (Non-GAAP)																							Adjusted net income (Non-GAAP)	$	24,934		$	23,199		$	23,253		$	23,908		$	16,017		$	71,386		$	49,355
Adjusted diluted EPS (Non-GAAP)																							Adjusted diluted EPS (Non-GAAP)	$	1.74		$	1.67		$	1.64		$	1.83		$	1.49		$	5.05		$	4.70
Tangible Assets:																							Tangible Assets:
Total assets																							Total assets	$	8,895,916		$	7,370,252		$	7,320,212		$	7,695,037		$	6,407,820
Goodwill and other intangibles, net																							Goodwill and other intangibles, net	407,117			336,721			338,068			339,492			269,954
Tangible assets																							Tangible assets	$	8,488,799		$	7,033,531		$	6,982,144		$	7,355,545		$	6,137,866
Tangible Common Equity:																							Tangible Common Equity:
Stockholders’ equity (common)																							Stockholders’ equity (common)	$	938,463		$	839,387		$	836,310		$	891,891		$	729,278
Goodwill and other intangibles, net																							Goodwill and other intangibles, net	407,117			336,721			338,068			339,492			269,954
Tangible common equity																							Tangible common equity	$	531,346		$	502,666		$	498,242		$	552,399		$	459,324
Average Tangible Common Equity:																							Average Tangible Common Equity:
Stockholders’ equity (common)																							Stockholders’ equity (common)	$	890,205		$	837,975		$	861,319		$	784,666		$	608,946		$	863,272		$	568,390
Goodwill and other intangibles, net																							Goodwill and other intangibles, net	363,211			337,289			338,694			294,051			201,748			346,488			183,632
Average tangible common equity																							Average tangible common equity	$	526,994		$	500,686		$	522,625		$	490,615		$	407,198		$	516,784		$	384,758

Note: Numbers may not sum due to rounding.

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

(2) The ratios of tangible book value per common share, return on average tangible common equity, and tangible common equity to tangible assets are non-GAAP financial measures that exclude goodwill and other intangibles, net. These financial ratios have been included as ~~they are considered~~management considers them to be ~~critical~~useful metrics with which to analyze and evaluate financial condition and capital strength. See ~~Table 1A: Non-GAAP~~section “Non-GAAP Financial ~~Measures for~~Measures” below.

(3) The adjusted net income measure is a ~~reconciliation~~non-GAAP financial measure that provides information that management believes is useful to investors in understanding our operating performance and trends and also aids investors in the comparison of ~~these~~our financial ~~measures.~~performance to the financial performance of peer banks. See section “Non-GAAP Financial Measures” below.

2933

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

Non-GAAP Financial Measures

We identify “tangible book value per common share,” “return on average tangible common equity,” “tangible common equity to tangible assets” “adjusted net income,” and “adjusted diluted earnings per common share” as “non-GAAP financial measures.” In accordance with the SEC’s rules, we identify certain financial measures as non-GAAP financial measures if such financial measures exclude or include amounts in the most directly comparable measures calculated and presented in accordance with generally accepted accounting principles (“GAAP”) in effect in the United States in our statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures, ratios or statistical measures calculated using exclusively financial measures calculated in accordance with GAAP.

Management believes that the presentation of these non-GAAP financial measures (a) are important metrics used to analyze and evaluate our financial condition and capital strength and provide important supplemental information that contributes to a proper understanding of our operating performance and trends, (b) enables a more complete understanding of factors and trends affecting our business, and (c) allows investors to compare our financial performance to the financial performance of our peers and to evaluate our performance in a manner similar to management, the financial services industry, bank stock analysts, and bank regulators. Management uses non-GAAP measures as follows: in the preparation of our operating budgets, monthly financial performance reporting, and in our presentation to investors of our performance. However, we acknowledge that these non-GAAP financial measures have a number of limitations. Limitations associated with non-GAAP financial measures include the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently. These disclosures should not be considered an alternative to our GAAP results. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is presented in the table above.

Performance Summary

Net income was $66.7 million for the nine months ended September 30, 2022, compared to $44.3 million for the nine months ended September 30, ~~2021, compared to $42.1 million for the nine months ended September 30, 2020.~~2021. Earnings per diluted common share was $4.72 for the first nine months of 2022, compared to $4.22 for the first nine months of ~~2021, compared to $3.97 for the first nine months of 2020.~~2021.

•Net interest income was ~~$104.4~~$171.9 million for the first nine months of ~~2021,~~2022, up ~~$9.1~~$67.5 million ~~(10%~~(65%) over the first nine months of ~~2020.~~2021. Interest income grew ~~$2.8~~$74.2 million attributable to favorable volumes (mostly higher loan volumes), partly offset by net unfavorable rates ~~(influenced by~~(as loans reprice at varying intervals to reflect the recent Federal Reserve interest rate ~~cuts in March 2020)~~increases). Interest expense ~~favorably decreased $6.3~~increased $6.8 million between the nine-month periods ~~reflecting disciplined deposit pricing.~~mostly from the larger funding base. Net interest margin was 3.36% for the nine months ended September 30, 2022, compared to 3.22% for the nine months ended September 30, ~~2021, compared to 3.35% for the nine months ended September 30, 2020, influenced by the changing balance sheet mix, including elevated cash levels, in the lower rate environment.~~2021. For additional information regarding net interest income, see “Income Statement Analysis — Net Interest Income.”

•Noninterest income was ~~$51.3~~$43.1 million for the first nine months of ~~2021, up $5.6~~2022, down $8.2 million ~~(12%~~(16%) from the comparable ~~2020 period. Excluding net asset gains (losses), noninterest income was $47.6 million for the first nine months of~~ 2021 ~~up $0.7 million (1%) over 2020, predominantly on higher wealth revenue (trust services and brokerage fee income combined) and card interchange income, partly offset by~~period, primarily due to lower net mortgage income. For additional information regarding noninterest income, see “Income Statement Analysis — Noninterest Income.”

•Noninterest expense was ~~$89.9~~$116.7 million, ~~$14.5~~$26.8 million ~~(19%~~(30%) higher than the first nine months of ~~2020.~~2021. Personnel costs increased ~~$7.3~~$15.9 million, and non-personnel expenses combined increased ~~$7.3~~$10.9 million ~~(22%~~(27%) over the comparable ~~2020~~2021 period. For additional information regarding noninterest expense, see “Income Statement Analysis — Noninterest Expense.”

•Nonperforming assets were ~~$21~~$40 million, representing ~~0.33%~~0.45% of total assets at September 30, ~~2021,~~2022, compared to ~~0.29%~~0.73% at December 31, ~~2020~~2021 and ~~0.25%~~0.33% at September 30, ~~2020.~~2021. For additional information regarding nonperforming assets, see “Balance Sheet Analysis – Nonperforming Assets.”

•At September 30, ~~2021,~~2022, assets were ~~$6.4~~$8.9 billion, up ~~$1.9~~$1.2 billion ~~(41%~~(16%) from December 31, ~~2020 and up $1.7~~2021, largely due to the Charter acquisition, which added total assets of $1.1 billion ~~(36%~~at acquisition. Total assets increased $2.5 billion (39%) from September 30, ~~2020,~~2021, mainly due to the ~~acquisition~~acquisitions of ~~Mackinac.~~Charter and County. For additional balance sheet discussion see “Balance Sheet Analysis.”

•At September 30, ~~2021,~~2022, loans were ~~$3.5~~$6.0 billion, ~~$744 million (27%~~an increase of $1.4 billion (29%) ~~higher than~~from December 31, ~~2020~~2021, including the Charter acquisition (which added loans of $827 million at acquisition) and ~~$624 million (21%~~solid organic loan growth. Total loans were $2.5 billion (69%) higher than September 30, ~~2020,~~2021, largely due to the ~~acquisition~~acquisitions of ~~Mackinac.~~Charter and County. On average, loans grew ~~$164 million (6%~~$2.1 billion (70%) over the first nine months of ~~2020.~~2021. For additional information regarding loans, see “Balance Sheet Analysis — Loans.”

•Total deposits were ~~$5.4~~$7.4 billion at September 30, ~~2021,~~2022, an increase of ~~$1.5 billion (39%~~$930 million (14%) from December 31, ~~2020~~2021, including the Charter acquisition (which added deposits of $870 million at acquisition) and ~~$1.7~~higher brokered deposits. Total deposits were $2.0 billion ~~(46%~~(36%) higher than September 30, ~~2020, substantially attributable~~2021, largely due to the ~~Mackinac acquisition.~~Charter and County

acquisitions. Year-to-date average deposits were ~~$755 million (23%~~$2.3 billion (57%) higher than the first nine months of ~~2020.~~2021. 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 Nine Months Ended September 30,													For the Nine Months Ended September 30,
		2021						2020							2022						2021
(in thousands)	(in thousands)	Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate		(in thousands)	Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate
ASSETS	ASSETS													ASSETS
Interest-earning assets	Interest-earning assets													Interest-earning assets
PPP Loans		$	173,463	$	11,123	8.46	%	$	199,662	$	4,263	2.80	%
Commercial-based loans ex PPP		2,222,290		75,845		4.50	%	2,083,768		80,224		5.06	%
Commercial PPP Loans														Commercial PPP Loans	$	6,433	$	1,391	28.51	%	$	173,463	$	11,123	8.46	%
All other commercial-based loans														All other commercial-based loans	4,143,934		138,881		4.42	%	2,222,290		75,845		4.50	%
Retail-based loans	Retail-based loans	528,895		17,357		4.38	%	476,879		17,190		4.81	%	Retail-based loans	825,065		27,141		4.39	%	528,895		17,357		4.38	%
Total loans, including loan fees (1)(2)	Total loans, including loan fees (1)(2)	2,924,648		104,325		4.71	%	2,760,309		101,677		4.85	%	Total loans, including loan fees (1)(2)	4,975,432		167,413		4.45	%	2,924,648		104,325		4.71	%
Investment securities:	Investment securities:													Investment securities:
Taxable	Taxable	418,897		5,935		1.89	%	349,202		6,115		2.34	%	Taxable	1,389,540		15,612		1.50	%	418,897		5,935		1.89	%
Tax-exempt (2)	Tax-exempt (2)	140,691		2,252		2.13	%	130,714		2,165		2.21	%	Tax-exempt (2)	202,011		3,661		2.42	%	140,691		2,252		2.13	%
Total investment securities	Total investment securities	559,588		8,187		1.95	%	479,916		8,280		2.30	%	Total investment securities	1,591,551		19,273		1.62	%	559,588		8,187		1.95	%
Other interest-earning assets	Other interest-earning assets	829,382		2,140		0.34	%	528,451		1,917		0.48	%	Other interest-earning assets	251,983		2,734		1.44	%	829,382		2,140		0.34	%
Total non-loan earning assets	Total non-loan earning assets	1,388,970		10,327		0.99	%	1,008,367		10,197		1.35	%	Total non-loan earning assets	1,843,534		22,007		1.59	%	1,388,970		10,327		0.99	%
Total interest-earning assets	Total interest-earning assets	4,313,618		$	114,652	3.51	%	3,768,676		$	111,874	3.91	%	Total interest-earning assets	6,818,966		$	189,420	3.67	%	4,313,618		$	114,652	3.51	%
Other assets, net	Other assets, net	452,047						399,226						Other assets, net	731,928						452,047
Total assets	Total assets	$	4,765,665					$	4,167,902					Total assets	$	7,550,894					$	4,765,665
LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY													LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities	Interest-bearing liabilities													Interest-bearing liabilities
Savings	Savings	$	595,385	$	272	0.06	%	$	395,961	$	588	0.20	%	Savings	$	854,307	$	827	0.13	%	$	595,385	$	272	0.06	%
Interest-bearing demand	Interest-bearing demand	681,079		2,114		0.41	%	551,018		3,092		0.75	%	Interest-bearing demand	1,010,372		2,647		0.35	%	681,079		2,114		0.41	%
Money market accounts (“MMA”)	Money market accounts (“MMA”)	889,022		363		0.05	%	723,323		1,313		0.24	%	Money market accounts (“MMA”)	1,502,038		2,132		0.19	%	889,022		363		0.05	%
Core time deposits	Core time deposits	318,477		2,165		0.91	%	400,198		4,901		1.64	%	Core time deposits	556,970		1,240		0.30	%	318,477		2,165		0.91	%
Total interest-bearing core deposits	Total interest-bearing core deposits	2,483,963		4,914		0.26	%	2,070,500		9,894		0.64	%	Total interest-bearing core deposits	3,923,687		6,846		0.23	%	2,483,963		4,914		0.26	%
Brokered deposits	Brokered deposits	284,738		2,885		1.35	%	279,165		3,302		1.58	%	Brokered deposits	450,311		2,394		0.71	%	284,738		2,885		1.35	%
Total interest-bearing deposits	Total interest-bearing deposits	2,768,701		7,799		0.38	%	2,349,665		13,196		0.75	%	Total interest-bearing deposits	4,373,998		9,240		0.28	%	2,768,701		7,799		0.38	%
PPPLF		—		—		—	%	191,535		507		0.35	%
Other interest-bearing liabilities		79,882		1,729		2.87	%	91,080		2,142		3.10	%
Total wholesale funding		79,882		1,729		2.87	%	282,615		2,649		1.23	%
Wholesale funding														Wholesale funding	239,362		7,053		3.91	%	79,882		1,729		2.87	%
Total interest-bearing liabilities	Total interest-bearing liabilities	2,848,583		9,528		0.45	%	2,632,280		15,845		0.80	%	Total interest-bearing liabilities	4,613,360		16,293		0.47	%	2,848,583		9,528		0.45	%
Noninterest-bearing demand deposits	Noninterest-bearing demand deposits	1,307,222						971,329						Noninterest-bearing demand deposits	2,034,865						1,307,222
Other liabilities	Other liabilities	41,470						40,389						Other liabilities	39,397						41,470
Stockholders’ equity	Stockholders’ equity	568,390						523,904						Stockholders’ equity	863,272						568,390
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	4,765,665					$	4,167,902					Total liabilities and stockholders’ equity	$	7,550,894					$	4,765,665
Net interest income and rate spread				$	105,124	3.06	%			$	96,029	3.11	%
Interest rate spread														Interest rate spread					3.20	%					3.06	%
Net free funds														Net free funds					0.16	%					0.16	%
Tax-equivalent net interest income and net interest margin														Tax-equivalent net interest income and net interest margin			$	173,127	3.36	%			$	105,124	3.22	%
Tax-equivalent adjustment	Tax-equivalent adjustment			$	728					$	709			Tax-equivalent adjustment			$	1,258					$	728
Net interest income and net interest margin				$	104,396	3.22	%			$	95,320	3.35	%
Selected Additional Information:
Total loans ex. PPP		$	2,751,185	$	93,202	4.48	%	$	2,560,647	$	97,414	5.01	%
Total interest-earning assets ex PPP		4,140,155		103,529		3.31	%	3,569,014		107,611		3.98	%
Total interest-bearing liabilities ex PPPLF		2,848,583		9,528		0.45	%	2,440,745		15,338		0.84	%
Net interest rate spread ex PPP & PPPLF						2.86	%					3.14	%
Net interest income														Net interest income			$	171,869					$	104,396

(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 September 30,
	2022						2021
(in thousands)	Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate
ASSETS
Interest-earning assets
Commercial PPP Loans	$	605	$	1	0.93	%	$	109,318	$	2,310	8.27	%
All other commercial-based loans	4,484,746		52,673		4.60	%	2,378,480		26,759		4.40	%
Retail-based loans	905,907		10,421		4.60	%	588,624		6,242		4.24	%
Total loans, including loan fees (1)(2)	5,391,258		63,095		4.60	%	3,076,422		35,311		4.51	%
Investment securities:
Taxable	1,391,330		5,350		1.54	%	472,598		2,061		1.74	%
Tax-exempt (2)	234,123		1,639		2.80	%	139,272		744		2.14	%
Total investment securities	1,625,453		6,989		1.72	%	611,870		2,805		1.83	%
Other interest-earning assets	144,409		1,127		3.09	%	1,046,476		869		0.33	%
Total non-loan earning assets	1,769,862		8,116		1.83	%	1,658,346		3,674		0.88	%
Total interest-earning assets	7,161,120		$	71,211	3.91	%	4,734,768		$	38,985	3.24	%
Other assets, net	695,011						511,425
Total assets	$	7,856,131					$	5,246,193
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings	$	899,503	$	488	0.22	%	$	662,260	$	100	0.06	%
Interest-bearing demand	990,891		1,148		0.46	%	711,442		685		0.38	%
MMA	1,540,610		1,309		0.34	%	962,538		135		0.06	%
Core time deposits	543,444		408		0.30	%	329,012		630		0.76	%
Total interest-bearing core deposits	3,974,448		3,353		0.33	%	2,665,252		1,550		0.23	%
Brokered deposits	468,010		1,285		1.09	%	284,164		894		1.25	%
Total interest-bearing deposits	4,442,458		4,638		0.41	%	2,949,416		2,444		0.33	%
Wholesale funding	287,751		3,090		4.25	%	143,615		1,113		3.08	%
Total interest-bearing liabilities	4,730,209		7,728		0.65	%	3,093,031		3,557		0.46	%
Noninterest-bearing demand deposits	2,200,789						1,499,052
Other liabilities	34,928						45,164
Stockholders’ equity	890,205						608,946
Total liabilities and stockholders’ equity	$	7,856,131					$	5,246,193
Interest rate spread					3.26	%					2.78	%
Net free funds					0.22	%					0.16	%
Tax-equivalent net interest income and net interest margin			$	63,483	3.48	%			$	35,428	2.94	%
Tax-equivalent adjustment			$	493					$	244
Net interest income			$	62,990					$	35,184

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

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

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

3336

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


		For the Three Months Ended September 30, 2021 Compared to September 30, 2020:						For the Nine Months Ended September 30, 2021 Compared to September 30, 2020:							For the Three Months Ended September 30, 2022 Compared to September 30, 2021:						For the Nine Months Ended September 30, 2022 Compared to September 30, 2021:
		Increase (Decrease) Due to Changes in						Increase (Decrease) Due to Changes in							Increase (Decrease) Due to Changes in						Increase (Decrease) Due to Changes in
(in thousands)	(in thousands)	Volume		Rate		Net (1)		Volume		Rate		Net (1)		(in thousands)	Volume		Rate		Net (1)		Volume		Rate		Net (1)
Interest-earning assets	Interest-earning assets													Interest-earning assets
PPP Loans		$	(2,481)	$	2,314	$	(167)	$	(627)	$	7,487	$	6,860
Commercial-based loans ex. PPP		3,547		(2,809)		738		4,484		(8,863)		(4,379)
Commercial PPP Loans														Commercial PPP Loans	$	(1,220)	$	(1,089)	$	(2,309)	$	(18,046)	$	8,314	$	(9,732)
All other commercial-based loans														All other commercial-based loans	24,677		1,237		25,914		77,726		(14,690)		63,036
Retail-based loans	Retail-based loans	1,249		(584)		665		1,786		(1,619)		167		Retail-based loans	3,562		617		4,179		9,667		117		9,784
Total loans (2)	Total loans (2)	2,315		(1,079)		1,236		5,643		(2,995)		2,648		Total loans (2)	27,019		765		27,784		69,347		(6,259)		63,088
Investment securities:	Investment securities:													Investment securities:
Taxable	Taxable	438		(378)		60		643		(823)		(180)		Taxable	2,871		418		3,289		9,228		449		9,677
Tax-exempt (2)	Tax-exempt (2)	—		(19)		(19)		161		(74)		87		Tax-exempt (2)	615		280		895		1,081		328		1,409
Total investment securities	Total investment securities	438		(397)		41		804		(897)		(93)		Total investment securities	3,486		698		4,184		10,309		777		11,086
Other interest-earning assets	Other interest-earning assets	107		82		189		456		(233)		223		Other interest-earning assets	(454)		712		258		(343)		937		594
Total non-loan earning assets	Total non-loan earning assets	545		(315)		230		1,260		(1,130)		130		Total non-loan earning assets	3,032		1,410		4,442		9,966		1,714		11,680
Total interest-earning assets	Total interest-earning assets	$	2,860	$	(1,394)	$	1,466	$	6,903	$	(4,125)	$	2,778	Total interest-earning assets	$	30,051	$	2,175	$	32,226	$	79,313	$	(4,545)	$	74,768

Interest-bearing liabilities	Interest-bearing liabilities													Interest-bearing liabilities
Savings	Savings	$	48	$	(75)	$	(27)	$	209	$	(525)	$	(316)	Savings	$	47	$	341	$	388	$	155	$	400	$	555
Interest-bearing demand	Interest-bearing demand	159		(318)		(159)		616		(1,594)		(978)		Interest-bearing demand	305		158		463		901		(368)		533
MMA	MMA	47		(145)		(98)		247		(1,197)		(950)		MMA	125		1,049		1,174		385		1,384		1,769
Core time deposits	Core time deposits	(146)		(561)		(707)		(861)		(1,875)		(2,736)		Core time deposits	278		(500)		(222)		1,047		(1,972)		(925)
Total interest-bearing core deposits	Total interest-bearing core deposits	108		(1,099)		(991)		211		(5,191)		(4,980)		Total interest-bearing core deposits	755		1,048		1,803		2,488		(556)		1,932
Brokered deposits	Brokered deposits	(176)		(173)		(349)		64		(481)		(417)		Brokered deposits	516		(125)		391		1,239		(1,730)		(491)
Total interest-bearing deposits	Total interest-bearing deposits	(68)		(1,272)		(1,340)		275		(5,672)		(5,397)		Total interest-bearing deposits	1,271		923		2,194		3,727		(2,286)		1,441
PPPLF		(148)		(149)		(297)		(253)		(254)		(507)
Other interest-bearing liabilities		600		(116)		484		186		(599)		(413)
Total wholesale funding		452		(265)		187		(67)		(853)		(920)
Wholesale funding														Wholesale funding	1,395		582		1,977		4,735		589		5,324
Total interest-bearing liabilities	Total interest-bearing liabilities	384		(1,537)		(1,153)		208		(6,525)		(6,317)		Total interest-bearing liabilities	2,666		1,505		4,171		8,462		(1,697)		6,765
Net interest income	Net interest income	$	2,476	$	143	$	2,619	$	6,695	$	2,400	$	9,095	Net interest income	$	27,385	$	670	$	28,055	$	70,851	$	(2,848)	$	68,003

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

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

~~Short-term~~The Federal Reserve raised short-term interest rates ~~have~~a total of 300 bps since mid-March 2022, increasing the Federal Funds rate to a range of 3.00% to 3.25% as of September 30, 2022. Prior to this, short-term interest rates remained steady since March 2020, ~~while the yield curve has begun~~with a Federal Funds range of 0.00% to steepen mainly since year end 2020. The succeeding quarters felt the pressure of a low interest rate environment and bloated cash balances from government stimulus, both in the form of stimulus checks to individuals and PPP loans for businesses. The continued elevation of low interest-earning asset balances have further decreased margins along with the normal pressures of a near-zero rate environment. Though margins remain depressed, interest income dollars continue to rise on favorable asset volumes and proactive expense reduction measures. The following paragraphs will discuss the comparison of the first nine months of 2021 and 2020, with COVID-19 pandemic impacts appearing in second quarter 2020 and the economy beginning to rebound in the first part of 2021. Though improving, we see continued margin pressure and pricing impacts on loans and deposits.0.25%.

Tax-equivalent net interest income was ~~$105.1~~$173.1 million for the first nine months of ~~2021,~~2022, comprised of net interest income of ~~$104.4~~$171.9 million ($~~9.1~~67.5 million or ~~10%~~65% higher than the first nine months of ~~2020)~~2021), and a ~~$0.7~~$1.3 million tax-equivalent adjustment. The ~~$9.1~~$68.0 million increase in tax-equivalent net interest income was attributable to net favorable volumes (which added ~~$6.7~~$70.9 million, mostly from ~~higher loan~~interest-earning asset volumes ~~and organic loan growth,~~added with the recent acquisitions, as well as ~~interest-earning assets from the Mackinac~~solid loan growth and ~~Advantage acquisitions)~~strategic investment purchases) and net ~~favorable~~unfavorable rates (which ~~increased~~decreased net interest income ~~$2.4~~$2.8 million ~~due to a lower cost of funds largely as a result of prudent deposit~~from competitive pricing ~~actions).~~

~~Between the comparable nine-month periods, the interest rate spread decreased 5 bps, largely attributable to the lower interest rate environment between the periods~~pressure and the ~~higher concentration of low-earning cash compared~~lag in repricing to the first nine months of 2020. The 2021 interest-earning asset yield declined 40 bps to 3.51%, partly from the 14 bps decline in loans but was more significantly impacted by the decrease in the loans-to-earning asset mix (to 68% compared to 73% for the first nine months of 2020) given the dramatic increase in cash. Other interest-earning assets (which are predominantly cash) declined 14 bps, while

total non-loan earning assets declined 36 bps. The 2021 cost of funds declined favorably 35 bps to 0.45%, largely from improved interest-bearing core deposit rates, as well as lower brokered and other interest-bearing liabilities rates. The contribution from net free funds decreased 8 bps, due mostly to the reduced value in the lower rate environment, though offset partly by the 29% increase in average net free funds (largely from higher average noninterest-bearing demand deposits and stockholders’ equity) between the nine-month periods. As a result, the tax-equivalent netcurrent market interest ~~margin was 3.22% for the first nine months of 2021, down 13 bps compared to 3.35% for the comparable 2020 period.~~rates).

Average interest-earning assets increased to ~~$4.3~~$6.8 billion, up ~~$0.5~~$2.5 billion ~~(14%~~(58%) over the ~~2020~~2021 comparable period, primarily due to ~~significantly higher cash starting in second quarter 2020,~~ the ~~addition~~acquisitions of ~~PPP loans (beginning second quarter 2020),~~Mackinac, County, and ~~the timing of the Mackinac and Advantage acquisitions~~Charter (in September 2021, December 2021, and August ~~2020,~~2022, respectively). Between the comparable nine-month periods, average loans increased ~~$164 million (6%~~$2.1 billion (70%), mostly due to the Mackinac, County, and Charter acquisitions, which added loans of $0.9 billion, $1.0 billion, and $0.8 billion respectively, at acquisition. In addition, average loans reflected strong organic loan growth and the ~~timing~~repurchase of previously participated agricultural loans, which more than offset the ~~Mackinac~~reduction in PPP loans from continued loan forgiveness. Average investment securities increased $1.0 billion between the comparable nine-month periods, partly due to the acquisitions, and ~~Advantage acquisitions, which added loans~~partly due to the strategic re-investment of ~~$930 million~~approximately $0.5 billion excess cash liquidity into U.S. Treasury securities of varying yields and $88 million, respectively, at acquisition. In addition, PPP loan activity remains strong, with a net average balance of $173 million at September 30, 2021, as loan forgiveness has outpaced the latest round of funding. Total non-loandurations during fourth quarter 2021. Other interest-earning assets ~~increased $381 million (38%) on average, largely due to higher cash. The~~declined $0.6 billion with the additional assets added with the acquisitions, more than offset by lower cash mostly from the re-investment of excess cash liquidity noted above. As a result, the mix of average interest-earning assets shifted to ~~lower-yielding assets, at 68%~~73% loans, ~~13%~~23% investments and ~~19%~~4% other interest-earning assets (mostly cash) for the first nine months of ~~2021,~~2022, compared to ~~73%~~68%, 13% and ~~14%~~19%, respectively, for the first nine months of ~~2020.~~2021.

Average interest-bearing liabilities were $4.6 billion for the first nine months of 2022, an increase of $1.8 billion (62%) over the first nine months of 2021, primarily due to the acquisitions of Mackinac, County, and Charter. Average interest-bearing core deposits increased $1.4 billion and average brokered deposits increased $166 million between the comparable nine-month periods largely due to the acquisitions. Other interest-bearing liabilities grew $159 million between the comparable nine-month periods, partly due to the private placement of $100 million in fixed-to-floating rate subordinated notes in July 2021, and partly due to wholesale funding acquired with the acquisitions. The mix of average interest-bearing liabilities was 85% core deposits, 10% brokered deposits and 5% wholesale funding for the first nine months of 2022, compared to 87%, 10% and 3%, respectively, for the first nine months of 2021.

Between the comparable nine-month periods, the interest rate spread increased 14 bps. The interest-earning asset yield increased 16 bps to 3.67% for the first nine months of 2022, primarily due to the changing mix of interest-earning assets (mostly the reduction in cash due to the re-investment of excess cash liquidity noted above). The loan yield declined 26 bps to 4.45% between the comparable nine-month periods, largely due to the impact of the low interest rate environment through early 2022 and competitive pricing pressures on new, renewed, and variable rate loans, while the yield on investment securities declined 33 bps to 1.62%, also attributable to the low interest rate environment through early 2022, as well as the strategic re-investment of cash into U.S. Treasury securities. The cost of funds increased 2 bps to 0.47% for the first nine months of 2022, as lower rates on core interest-bearing deposits and brokered deposits, were more than offset by higher wholesale funding rates and a shift in the mix of interest-bearing liabilities (mostly the increase in wholesale funding noted above). As a result, the tax-equivalent net interest margin was 3.36% for the first nine months of 2022, up 14 bps compared to 3.22% for the first nine months of 2021.

Tax-equivalent interest income was ~~$114.7~~$189.4 million for the first nine months of ~~2021,~~2022, up ~~$2.8~~$74.8 million from the first nine months of ~~2020, and the related interest-earning asset yield was 3.51%, down 40 bps from the comparable period in 2020.~~2021, comprised of $79.3 million higher volumes, partly offset by lower average rates. Interest income on loans increased ~~$2.6~~$63.1 million over the first nine months of ~~2020, with net decreases in interest rates more than offset by favorable volumes. The~~ 2021, ~~loan yield was 4.71%, down 14 bps~~mostly due to higher average balances from the ~~first nine months of 2020, largely from the significantly lower rate environment impacting yields on new, renewed and variable rate loans.~~acquisitions, as well as solid loan growth. Between the comparable nine-month periods, interest income on ~~non-loan earning assets combined~~investment securities grew ~~$0.1~~$11.1 million, ~~to $10.3 million on higher average volumes (up 38%, mostly cash), though the yield declined 36 bps (to 0.99%) in the lower rate environment, mostly from the significantly higher cash.~~

~~Average interest-bearing liabilities were $2.8 billion, an increase of $216 million (8%), primarily due~~also attributable to the ~~significant increase in deposits from government stimulus activities and deposited PPP loan proceeds, though also partly due to~~acquisitions, as well as the ~~timing~~re-investment of ~~the Mackinac and Advantage acquisitions (in September 2021 and August 2020, respectively)~~excess cash liquidity (noted above). The mix of average interest-bearing liabilities was 87% core deposits, 10% brokered deposits and 3% other funding for the first nine months of 2021, compared to 79%, 10% and 11%, respectively, for the first nine months of 2020.

Interest expense ~~decreased~~increased to ~~$9.5~~$16.3 million for the first nine months of ~~2021, down $6.3~~2022, up $6.8 million compared to the first nine months of ~~2020, on slightly~~2021, comprised of $8.5 million higher volumes, ~~of average interest-bearing liabilities (up 8% to $2.8 billion) but at a~~partly offset by $1.7 million from lower overall cost of ~~funds (down 35 bps to 0.45%).~~funds. Interest expense on deposits ~~decreased $5.4~~increased $1.4 million ~~(41%~~(18%) from the first nine months of ~~2020~~2021 given higher average interest-bearing deposit balances at a lower cost ~~(down 37 bps to 0.38%)~~ as product and rate changes were made during 2021 in the ~~lower~~low rate environment, ~~and~~while brokered deposits cost ~~23 bps~~ less largely from maturities of higher-costing term brokered funds procured ~~during March-April 2020~~ under competitive conditions ~~as part of previously discussed liquidity actions.~~in mid-2020 during the pandemic. Interest expense on ~~other interest-bearing liabilities was down~~wholesale funding increased between the comparable nine-month periods, ~~as interest expense on lower~~mostly due to higher average balances ~~(down $203 million) more than offset~~from the ~~higher rates related to the~~July 2021 subordinated notes ~~issued in July 2021 (up 164 bps to 2.87%).~~issuance, as well as wholesale funding acquired with the acquisitions.

Provision for Credit Losses

The provision for credit losses was $9.7 million for the nine months ended September 30, 2022 (comprised of $9.1 million related to the ACL-Loans and $0.6 million for the ACL on unfunded commitments), compared to $6.5 million for the nine months ended September 30, 2021 (comprised of $4.5 million related to the ACL-Loans and $2.0 million for the ACL on unfunded commitments)~~, compared to $9.0 million for the nine months ended September 30, 2020 (all related to the ACL-Loans)~~. The ~~2021~~2022 provision for credit losses was mostly due to the Day 2 ACL increase from the ~~Mackinac acquisition. In comparison,~~Charter acquisition, while the 2021 provision for credit losses was ~~significantly increased~~mostly due to the Day 2 ACL increase for ~~most of 2020 given unprecedented economic disruptions and uncertainty surrounding~~ the COVID-19 pandemic, and the related credit stress on our customers, though tempered starting in late 2020 and continuing into 2021 as potential deterioration of loan quality metrics initially anticipated did not materialize.Mackinac acquisition.

The provision for credit losses is predominantly a function of Nicolet’s methodology and judgment as to qualitative and quantitative factors used to determine the appropriateness of the ACL-Loans and unfunded commitments. The appropriateness of the ACL-Loans is affected by changes in the size and character of the loan portfolio, changes in levels of collateral dependent and other nonperforming loans, historical losses and delinquencies in each portfolio segment, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing and future economic conditions, the fair value of underlying collateral, and other factors which could affect expected credit losses. The ACL for unfunded commitments is affected by many of the same factors as the ACL-Loans, as well as funding assumptions relative to lines of credit. See also Note 6, “Loans, Allowance for Credit Losses - Loans, and Credit Quality” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures. For additional information regarding asset

quality and the ACL-Loans, see “BALANCE SHEET ANALYSIS — Loans,” “— Allowance for Credit Losses - Loans,” and “— Nonperforming Assets.”

Noninterest Income

Table 4: Noninterest Income


		Three Months Ended September 30,								Nine Months Ended September 30,									Three Months Ended September 30,								Nine Months Ended September 30,
(in thousands)	(in thousands)	2021		2020		$ Change		% Change		2021		2020		$ Change		% Change		(in thousands)	2022		2021		$ Change		% Change		2022		2021		$ Change		% Change
Trust services fee income	Trust services fee income	$	2,043	$	1,628	$	415	25	%	$	5,724	$	4,717	$	1,007	21	%	Trust services fee income	$	1,969	$	2,043	$	(74)	(4)	%	$	5,984	$	5,724	$	260	5	%
Brokerage fee income	Brokerage fee income	3,154		2,489		665		27		8,938		7,080		1,858		26		Brokerage fee income	3,040		3,154		(114)		(4)		9,716		8,938		778		9
Mortgage income, net	Mortgage income, net	4,808		9,675		(4,867)		(50)		17,637		21,965		(4,328)		(20)		Mortgage income, net	1,728		4,808		(3,080)		(64)		7,186		17,637		(10,451)		(59)
Service charges on deposit accounts	Service charges on deposit accounts	1,314		1,037		277		27		3,541		3,075		466		15		Service charges on deposit accounts	1,589		1,314		275		21		4,602		3,541		1,061		30
Card interchange income	Card interchange income	2,299		1,877		422		22		6,492		5,076		1,416		28		Card interchange income	3,012		2,299		713		31		8,543		6,492		2,051		32
BOLI income	BOLI income	572		531		41		8		1,658		1,774		(116)		(7)		BOLI income	966		572		394		69		2,667		1,658		1,009		61
LSR income, net																		LSR income, net	(517)		—		(517)		N/M		(1,042)		—		(1,042)		N/M
Other income	Other income	993		1,237		(244)		(20)		3,594		3,245		349		11		Other income	1,259		993		266		27		2,548		3,594		(1,046)		(29)
Noninterest income without net gains	Noninterest income without net gains	15,183		18,474		(3,291)		(18)		47,584		46,932		652		1		Noninterest income without net gains	13,046		15,183		(2,137)		(14)		40,204		47,584		(7,380)		(16)
Asset gains (losses), net	Asset gains (losses), net	(1,187)		217		(1,404)		N/M		3,716		(1,185)		4,901		N/M		Asset gains (losses), net	(46)		(1,187)		1,141		N/M		2,870		3,716		(846)		(23)
Total noninterest income	Total noninterest income	$	13,996	$	18,691	$	(4,695)	(25)	%	$	51,300	$	45,747	$	5,553	12	%	Total noninterest income	$	13,000	$	13,996	$	(996)	(7)	%	$	43,074	$	51,300	$	(8,226)	(16)	%
Trust services fee income & Brokerage fee income combined	Trust services fee income & Brokerage fee income combined	$	5,197	$	4,117	$	1,080	26	%	$	14,662	$	11,797	$	2,865	24	%	Trust services fee income & Brokerage fee income combined	$	5,009	$	5,197	$	(188)	(4)	%	$	15,700	$	14,662	$	1,038	7	%

N/M means not meaningful.

Noninterest income was $43.1 million for the first nine months of 2022, a decrease of $8.2 million (16%) compared to $51.3 million for the first nine months of 2021, ~~an increase of $5.6 million (12%) compared~~primarily due to $45.7 million for the comparable period of 2020. Noninterest income excluding net asset gains (losses) grew $0.7 million (1%) between the comparable nine-month periods, predominantly on higher wealth revenue (trust services and brokerage fee income combined) and card interchange income, partly offset by lower net mortgage income.

Trust services fee income and brokerage fee income combined were ~~$14.7~~$15.7 million, up ~~$2.9~~$1.0 million ~~(24%~~(7%) over the first nine months of ~~2020,~~2021, consistent with the growth in accounts and assets under ~~management.~~management, though tempered by unfavorable market-related declines.

Mortgage income represents net gains received from the sale of residential real estate loans into the secondary market, capitalized mortgage servicing rights (“~~MSRs”~~MSR”), servicing fees net of MSR amortization, fair value marks on the mortgage interest rate lock commitments and forward commitments (“mortgage derivatives”), and MSR valuation changes, if any. Net mortgage income of ~~$17.6~~$7.2 million, decreased ~~$4.3~~$10.5 million ~~(20%~~(59%) between the comparable nine-month periods, ~~predominantly~~mostly due to the rising interest rate environment reducing secondary market volumes and the related gains on ~~slowing mortgage activity from the record levels experienced in 2020.~~sales. Gains on sales and capitalized gains combined decreased ~~$5.7~~$10.9 million ~~while net servicing fees increased $0.1 million (with higher income on~~and the ~~larger portfolio serviced for others, partially offset by an increase in MSR amortization),~~fair value of the mortgage derivatives ~~were $0.6~~decreased $0.4 million, ~~favorable, and~~while MSR impairment was ~~down $0.6~~$0.9 million favorable on slower paydown activity. See also “Lending-Related Commitments” and Note 7, “Goodwill and Other Intangibles and ~~Mortgage~~ Servicing Rights” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures on the MSR asset.

Service charges on deposit accounts were up ~~$0.5~~$1.1 million to ~~$3.5~~$4.6 million for the nine months ended September 30, ~~2021, mainly as we waived certain fees during 2020~~2022, mostly due to ~~provide economic relief to our customers at~~ the ~~inception of~~larger deposit base from the ~~pandemic.~~acquisitions.

Card interchange income grew ~~$1.4~~$2.1 million ~~(28%~~(32%) between the comparable nine-month periods due to higher volume and ~~activity, as activity was tempered starting late in first quarter 2020 with the onset of the pandemic, as well as cautionary spending of consumers given the economic uncertainty.~~activity.

BOLI income was ~~down $0.1~~up $1.0 million between the comparable nine-month periods, attributable to ~~BOLI death benefits received in 2020, partly offset by income on~~ higher average balances from ~~$3 million~~ BOLI acquired with ~~Advantage in August 2020.~~the acquisitions and also benefiting from the rising interest rate environment.

Loan servicing rights (“LSR”) income includes agricultural loan servicing fees net of the related LSR amortization. Nicolet is not adding new loans to this servicing portfolio and repurchased approximately $100 million of these previously participated loans during second quarter 2022; thus, the LSR amortization is currently outpacing the loan servicing fees. See also Note 7, “Goodwill and Other Intangibles and Servicing Rights” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional information on the LSR asset.

Other income of ~~$3.6~~$2.5 million for the nine months ended September 30, ~~2021~~2022 was ~~up $0.3~~down $1.0 million from the comparable ~~2020~~2021 period, largely due to unfavorable changes in the ~~change in~~ fair value of nonqualified deferred compensation plan assets from the ~~significant~~recent market ~~decline at~~declines, partly offset by new revenue from crop insurance sales (related to the ~~onset of the pandemic.~~County acquisition). See also “Noninterest Expense” for discussion on the offsetting fair value change to the nonqualified deferred compensation plan liabilities.

Net asset gains of $2.9 million for the first nine months of 2022 were primarily attributable to gains on sales of other real estate owned (mostly closed bank branch locations), while net asset gains of $3.7 million for the first nine months of 2021 were primarily attributable to favorable fair value marks on equity ~~securities (including $3.5 million from the second quarter 2021 initial public offering of an equity investment), while net~~

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

Noninterest Expense

Table 5: Noninterest Expense

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

~~N/M means not meaningful.~~


	Three Months Ended September 30,								Nine Months Ended September 30,
($ in thousands)	2022		2021		Change		% Change		2022		2021		Change		% Change
Personnel	$	24,136	$	16,927	$	7,209	43	%	$	65,008	$	49,127	$	15,881	32	%
Occupancy, equipment and office	7,641		5,749		1,892		33		21,476		13,939		7,537		54
Business development and marketing	2,281		1,654		627		38		6,169		3,853		2,316		60
Data processing	3,664		2,939		725		25		10,647		8,408		2,239		27
Intangibles amortization	1,628		758		870		115		4,399		2,400		1,999		83
FDIC assessments	480		480		—		—		1,440		1,555		(115)		(7)
Merger-related expense	519		2,793		(2,274)		(81)		1,172		3,449		(2,277)		(66)
Other expense	2,218		1,761		457		26		6,344		7,158		(814)		(11)
Total noninterest expense	$	42,567	$	33,061	$	9,506	29	%	$	116,655	$	89,889	$	26,766	30	%
Non-personnel expenses	$	18,431	$	16,134	$	2,297	14	%	$	51,647	$	40,762	$	10,885	27	%
Average full-time equivalent (“FTE”) employees	907		646		261		40	%	863		591		272		46	%

Noninterest expense was ~~$89.9~~$116.7 million, an increase of ~~$14.5~~$26.8 million ~~(19%~~(30%) over the first nine months of ~~2020.~~2021. Personnel costs increased ~~$7.3~~$15.9 million ~~(17%~~(32%), while non-personnel expenses combined increased ~~$7.3~~$10.9 million ~~(22%~~(27%) compared to the first nine months of ~~2020.~~2021.

Personnel expense was ~~$49.1~~$65.0 million for the nine months ended September 30, ~~2021,~~2022, an increase of ~~$7.3~~$15.9 million from the comparable period in ~~2020. The increase in personnel was largely~~2021. Salary expense increased $16.4 million (58%) over the first nine months of 2021, reflecting higher salaries from the larger employee base (with average full-time equivalent employees up 46%, mostly due to ~~higher equity~~the timing of the 2022 and ~~other incentives commensurate with the strong earnings for the first part of~~ 2021 ~~as well as an increase~~acquisitions), investments in ~~salaries from~~our wealth team, and merit increases between the ~~periods~~years. Salary expense also reflected increases in hourly pay and ~~higher average FTEs (mostly from~~base salaries effective at the ~~acquisition~~end of ~~Mackinac).~~March 2022, which benefited 67% of our employee base. Fringe benefits increased $3.4 million (50%) over the first nine months of 2021, commensurate with the larger employee base. Personnel expense was also impacted by the change in the fair value of nonqualified deferred compensation plan liabilities from the ~~significant~~recent market ~~decline at the onset of the pandemic.~~declines. See also “Noninterest Income” for discussion on the offsetting fair value change to the nonqualified deferred compensation plan assets.

Occupancy, equipment and office expense was ~~$13.9~~$21.5 million for the first nine months of ~~2021,~~2022, up ~~$1.3~~$7.5 million ~~(10%~~(54%) compared to the first nine months of ~~2020, as~~ 2021, ~~included $0.9 million of accelerated depreciation and write-offs related~~largely due to ~~branch closures, as well as higher expense for~~ the expanded branch network with the ~~Mackinac acquisition and~~recent acquisitions, as well as additional expense for software and technology solutions to drive operational efficiency, and enhance products or services. In addition, second quarter 2020 included $0.5 million of accelerated depreciation and write-offs related to branch closures.solutions.

Business development and marketing expense was ~~$3.9~~$6.2 million, ~~down $0.8~~up $2.3 million ~~(18%~~(60%), between the comparable nine-month periods, largely due to the $1.25 million micro-grant program in second quarter 2020 (which provided funds directly to customers who otherwise qualified for small PPP loans of less than $5,000, as a more cost beneficial result for the customer),higher travel and entertainment expenses, as well as ~~lower~~additional marketing ~~costs from differences in the timing and extent of~~ donations, ~~marketing campaigns,~~ promotions, and ~~media.~~media to support our expanded branch network and community base.

Data processing expense was ~~$8.4~~$10.6 million, up ~~$0.8~~$2.2 million ~~(11%~~(27%) between the comparable nine-month periods, mostly due to volume-based increases in core processing charges, ~~as well as~~including the larger operating base ~~with~~following the Mackinac, ~~acquisition.~~County, and Charter acquisitions.

Intangibles amortization ~~decreased $0.3~~increased $2.0 million between the comparable nine-month periods ~~mainly from declining amortization on the aging intangibles of previous acquisitions, partly offset by~~due to higher amortization from the ~~new~~ intangibles ofadded with the recent acquisitions.

FDIC assessments increased to $1.6 million for the first nine months of 2021 as the small bank assessment credits were fully utilized during third quarter 2020 and also reflecting the higher assessment base.

Other expense was ~~$7.2~~$6.3 million, ~~up $2.5~~down $0.8 million ~~(52%~~(11%) between the comparable nine-month periods, mostly due to ~~an increase~~a $2.1 million contract termination charge incurred in ~~director fees (reflective of the additional complexity of a larger company, including the addition of two new directors),~~2021, partly offset by higher professional fees, costs to carry closed bank branches, and overall higher expenses related to ~~the~~our larger operating base. In

addition, 2021 included a $2.1 million contract termination charge, while 2020 included $1.0 million of lease termination charges related to branch closures and $0.5 million to terminate the Commerce merger agreement.

Income Taxes

Income tax expense was ~~$15.0~~$22.0 million (effective tax rate of ~~25.22%~~24.8%) for the first nine months of ~~2021,~~2022, compared to ~~$14.3~~$15.0 million (effective tax rate of ~~25.27%~~25.2%) for the comparable period of ~~2020.~~2021.

Income Statement Analysis – Three Months Ended September 30, ~~2021~~2022 versus Three Months Ended September 30, ~~2020~~2021

Net income was $18.5 million for the three months ended September 30, 2022, compared to $7.8 million for the three months ended September 30, ~~2021, compared to $18.1 million for the three months ended September 30, 2020.~~2021. Earnings per diluted common share was $1.29 for third quarter 2022, compared to $0.73 for third quarter ~~2021, compared to $1.72 for third quarter 2020.~~2021.

Tax-equivalent net interest income was ~~$35.4~~$63.5 million for third quarter ~~2021,~~2022, comprised of net interest income of ~~$35.2~~$63.0 million ($~~2.6~~27.8 million or 8%79% over third quarter ~~2020)~~2021), and a tax-equivalent adjustment of ~~$0.2 million (essentially unchanged from third quarter 2020).~~$0.5 million. Tax-equivalent interest income increased ~~$1.5~~$32.2 million between the third quarter periods, with ~~$2.9~~$30.1 million from stronger volumes (led by average loans which grew ~~$205 million~~$2.3 billion or 7%75% over third quarter ~~2020, including both organic loan growth~~2021, mostly due to the acquisitions) and ~~one month of the loans acquired with Mackinac, net of PPP loan forgiveness), partly offset by $1.4~~$2.2 million from ~~lower~~higher yields. ~~In addition, growth in other interest-earning assets (mostly cash) also contributed to the stronger volumes~~Average investment securities increased $1.0 billion between the comparable third quarter periods, ~~increasing $198 million (23%)~~partly due to ~~represent 22%~~the acquisitions, and partly due to the strategic re-investment of ~~interest-earning assets for third~~approximately $0.5 billion excess cash liquidity into U.S. Treasury securities of varying yields and durations during fourth quarter ~~2021, compared to 20% for third quarter 2020.~~2021. Interest expense ~~decreased $1.2~~increased $4.2 million from third quarter ~~2020, as the impact of the lower interest rate environment more than offset the~~2021, including $2.7 million from higher volumes (mostly from higher average deposit ~~balances.~~balances from the acquisitions) and $1.5 million due to higher overall funding costs. For additional information regarding average balances, net interest income and net interest margin, see “INCOME STATEMENT ANALYSIS — Net Interest Income.”

The net interest margin for third quarter ~~2021~~2022 was ~~2.94%~~3.48%, ~~down from 3.06%~~compared to 2.94% for third quarter ~~2020,~~2021, influenced by interest rate increases and the changing balance sheet mix. The mix ~~with higher levels~~ of ~~low-earning cash. The~~average interest-earning assets shifted from 65% loans, 13% investments and 22% other interest-earning assets (mostly cash) for third quarter 2021, to 75%, 23% and 2%, respectively, for third quarter 2022. As a result, the yield on interest-earning assets of ~~3.24% declined 26~~3.91% increased 67 bps from third quarter ~~2020.~~2021. The yield on loans ~~excluding PPP loans~~ was ~~4.37%~~4.60%, 529 bps ~~lower~~higher than third quarter ~~2020 mostly attributable~~2021, largely due to the impact of the ~~lower~~rising interest rate ~~environment on variable loans offset partly by floors and the mix of fixed rate loans.~~environment. The cost of funds of ~~0.46% declined 18~~0.65% increased 19 bps between the comparable quarters, ~~as deposit costs were adjusted down in~~also due to the ~~lower~~rising interest ~~rate environment, and third quarter 2020 was also influenced by the the inclusion of PPPLF funds costing 35 bps.~~rates.

Provision for credit losses was ~~$6.0~~$8.6 million for third quarter ~~2021~~2022 (comprised of ~~$4.0~~$8.2 million related to the ACL-Loans, and ~~$2.0~~$0.4 million for the ACL on unfunded commitments), compared to $6.0 million provision for credit losses ~~of $3.0 million~~ for third quarter ~~2020.~~2021. The ~~2021~~2022 provision for credit losses was mostly due to the Day 2 ACL increase from the ~~Mackinac~~Charter acquisition, ~~as net charge-offs were negligible (at 0.01% for year-to-date 2021) and asset quality metrics remain strong,~~ while the ~~2020~~2021 provision ~~reflected~~for credit losses was mostly due to the ~~unknown magnitude of~~Day 2 ACL increase for the ~~evolving impact of credit stress on our customers arising from pandemic-based business disruptions and other recessionary conditions.~~Mackinac acquisition. For additional information regarding the allowance for credit losses-loans and asset quality, see “BALANCE SHEET ANALYSIS — Allowance for Credit Losses - Loans” and “BALANCE SHEET ANALYSIS — Nonperforming Assets.”

Noninterest income was ~~$14.0~~$13.0 million for third quarter ~~2021,~~2022, a decrease of ~~$4.7~~$1.0 million ~~(25%~~(7%) from third quarter ~~2020. Noninterest income excluding net asset gains (losses) was down $3.3 million (18%) between the comparable third quarter periods, predominantly on lower net mortgage income.~~2021. Net mortgage income of ~~$4.8~~$1.7 million for third quarter ~~2021~~2022 was down ~~$4.9~~$3.1 million ~~(50%~~(64%) from third quarter ~~2020, predominantly~~2021, primarily due to the rising interest rate environment reducing secondary market volumes and the related gains on slowing mortgage activity from the record levels experienced in 2020, including lower sale gains and capitalized gains combined (down $5.8 million, commensurate with the lower volumes sold into the secondary market), partly offset by a $0.2 million favorable change in the fair value of the mortgage derivatives, and $0.7 million lower MSR asset impairment given slower refinance activity.sales. Trust services fee income and brokerage fee income combined was ~~up $1.1~~down $0.2 million ~~(26%~~(4%), ~~consistent with~~as unfavorable market-related declines outpaced the growth in accounts and assets under management. Service charges on deposit accounts grew $0.3 million to ~~$1.3~~$1.6 million for third quarter ~~2021, mainly as we waived certain fees during third quarter 2020~~2022, mostly due to ~~provide economic relief to our customers at~~ the ~~inception of~~larger deposit base from the ~~pandemic.~~acquisitions. Card interchange income grew ~~$0.4~~$0.7 million ~~(22%~~(31%) due to higher volume and activity. Net asset losses were minimal in third quarter 2022, while net asset losses of $1.2 million in third quarter 2021 were primarily attributable to fair value marks on equity ~~securities, compared to net asset gains of $0.2 million in third quarter 2020.~~securities. For additional information regarding noninterest income, see “INCOME STATEMENT ANALYSIS — Noninterest Income.”

Noninterest expense was ~~$33.1~~$42.6 million for third quarter ~~2021,~~2022, an increase of ~~$9.4~~$9.5 million ~~(40%~~(29%) from third quarter ~~2020,~~2021, including a ~~$2.9~~$7.2 million increase in personnel expense and a ~~$6.5~~$2.3 million increase in non-personnel expenses. The increase in personnel was ~~largely~~ due to higher ~~equity~~salaries and ~~other incentives commensurate with~~fringe benefits from the ~~strong earnings for the first part of 2021, as well as an increase~~larger employee base (with average full-time equivalent employees up 40%), investments in ~~salaries from~~our wealth team, and merit increases between the ~~periods and higher average FTEs (mostly from the acquisition of Mackinac).~~years. Occupancy, equipment, and office of ~~$5.7~~$7.6 million was up ~~$1.7~~$1.9 million ~~(42%~~(33%), ~~as 2021 included $0.9 million of accelerated depreciation and write-offs related~~largely due to the expanded branch ~~closures,~~network with the recent acquisitions, as well as ~~higher expense for the expanded branch~~

~~network with the Mackinac acquisition and~~ additional expense for software and technology ~~solutions to drive operational efficiency, and enhance products or services.~~solutions. Business development and marketing of ~~$1.7~~$2.3 million increased ~~$0.8~~$0.6 million ~~versus~~over third quarter ~~2020~~2021, largely due to higher travel and entertainment expenses, as well as additional marketing ~~costs from differences in the timing and extent of~~ donations, ~~marketing campaigns,~~ promotions, and ~~media.~~media to support our expanded branch network and community base. Data processing expense was ~~$2.9~~$3.7 million, up ~~$0.3~~$0.7 million ~~(13%~~(25%) between the comparable third quarter periods, mostly due to volume-based increases in core processing charges, ~~as well as~~including the larger operating base ~~with~~following the Mackinac, ~~acquisition. FDIC assessments increased to $0.5 million for third quarter 2021 as the small bank assessment credits were fully utilized during third quarter 2020~~County, and ~~also reflecting the higher assessment base.~~Charter acquisitions. Other expense was ~~$1.8~~$2.2 million, up ~~$1.0~~$0.5 million between the comparable third quarter periods, ~~mostly~~primarily due to ~~an increase in director fees (reflective of the additional complexity of a larger company, including the addition of two new directors in third quarter 2021),~~ higher professional fees ~~costs to carry closed bank branches,~~ and overall higher expenses related to ~~the~~our larger operating base. For additional information regarding noninterest expense, see “INCOME STATEMENT ANALYSIS — Noninterest Expense.”

Income tax expense for third quarter ~~2021~~2022 was ~~$2.3~~$6.3 million, with an effective tax rate of ~~22.68%~~25.4%, compared to income tax expense of ~~$6.4~~$2.3 million and an effective tax rate of ~~26.19%~~22.7% for third quarter ~~2020.~~2021.

BALANCE SHEET ANALYSIS

At September 30, ~~2021,~~2022, period end assets were ~~$6.4~~$8.9 billion, ~~up $1.9~~an increase of $1.2 billion ~~(41%~~(16%) from December 31, ~~2020, mostly~~2021, largely due to the ~~Mackinac~~Charter acquisition, which added total assets of ~~$1.5~~$1.1 billion at acquisition. ~~The increase in assets~~Total loans increased $1.4 billion from ~~year-end 2020 included a $744~~December 31, 2021, largely due to the Charter acquisition (which added loans of $827 million ~~increase in loans, a $548 million increase in cash~~at acquisition) and ~~cash equivalents, and a $226 million increase in investment securities.~~solid organic loan growth. Total deposits of ~~$5.4~~$7.4 billion at September 30, ~~2021, were up $1.5 billion~~2022, increased $930 million from December 31, ~~2020, also mostly attributable~~2021, including the Charter acquisition (which added deposits of $870 million at acquisition) and higher brokered deposits. Total borrowings increased $288 million from December 31, 2021, with approximately half acquired with Charter and the remainder related to ~~the Mackinac acquisition.~~new FHLB advances. Total stockholders’ equity was ~~$729~~$938 million at September 30, 2022, an increase of ~~$190~~$47 million ~~from~~since December 31, ~~2020, primarily from the common stock issued in the Mackinac acquisition and retained earnings, partly offset by stock repurchases and negative net fair value investment changes.~~

Compared to September 30, 2020, assets were $6.4 billion, up $1.7 billion (36%) from September 30, 2020, also mainly due to the Mackinac acquisition. The increase in assets from September 30, 2020 included a $624 million increase in loans, a $497 million increase in cash and cash equivalents, and a $230 million increase in investment securities. On the funding side, deposits increased $1.7 billion (46%) over September 30, 2020, while total borrowings decreased $262 million due to the early repayment of PPPLF funding given the strong core deposit base. Stockholders’ equity increased $191 million from September 30, 2020,2021, primarily due to common stock issued in the ~~Mackinac~~Charter acquisition and current year earnings, partly offset by stock repurchase activity and unfavorable changes in the fair value of securities AFS.

Compared to September 30, 2021, assets were up $2.5 billion (39%) from September 30, 2021, largely due to the acquisitions of Charter and County. Total loans increased $2.5 billion and total deposits increased $2.0 billion from September 30, 2021, also largely due to the acquisitions of Charter and County. Stockholders’ equity increased $209 million from September 30, 2021, primarily due to common stock issued in the Charter and County acquisitions and net income, partially offset by stock repurchases over the year and negative net fair value investment changes.

Loans

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

~~Prior to the acquisition of Mackinac,~~ Nicolet ~~serviced~~services a diverse customer base ~~throughout northeastern and central~~in Wisconsin, ~~and in Menominee, Michigan. With the acquisition of Mackinac on September 3, 2021, the Company has expanded into Northern~~ Michigan and ~~the Upper Peninsula of Michigan, as well as adding to its presence in upper northeastern Wisconsin. The Company concentrates~~Minnesota. We concentrate on originating loans in ~~its~~our 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 September 30, 2021, no significant industry concentrations existed in Nicolet’s portfolio in excess of 10% of total loans.

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

Table 6: Period End Loan Composition


		September 30, 2021				December 31, 2020				September 30, 2020					September 30, 2022				December 31, 2021				September 30, 2021
(in thousands)	(in thousands)	Amount		% of Total		Amount		% of Total		Amount		% of Total		(in thousands)	Amount		% of Total		Amount		% of Total		Amount		% of Total
Commercial & industrial	Commercial & industrial	$	887,910	25	%	$	750,718	27	%	$	735,531	25	%	Commercial & industrial	$	1,268,252	21	%	$	1,042,256	23	%	$	956,257	27	%
PPP loans		68,347		2		186,016		7		335,236		12
Owner-occupied CRE	Owner-occupied CRE	697,816		20		521,300		19		499,605		17		Owner-occupied CRE	954,933		16		787,189		17		697,816		20
Agricultural	Agricultural	112,409		3		109,629		4		111,022		4		Agricultural	1,017,498		17		794,728		17		112,409		3
Commercial	Commercial	1,766,482		50		1,567,663		57		1,681,394		58		Commercial	3,240,683		54		2,624,173		57		1,766,482		50
CRE investment	CRE investment	662,871		19		460,721		16		475,050		16		CRE investment	1,132,951		19		818,061		18		662,871		19
Construction & land development	Construction & land development	173,971		5		131,283		5		121,647		4		Construction & land development	306,446		5		213,035		5		173,971		5
Commercial real estate	Commercial real estate	836,842		24		592,004		21		596,697		20		Commercial real estate	1,439,397		24		1,031,096		23		836,842		24
Commercial-based loans	Commercial-based loans	2,603,324		74		2,159,667		78		2,278,091		78		Commercial-based loans	4,680,080		78		3,655,269		80		2,603,324		74
Residential construction	Residential construction	59,611		2		41,707		1		57,496		2		Residential construction	101,286		2		70,353		1		59,611		2
Residential first mortgage	Residential first mortgage	688,491		19		444,155		16		428,017		15		Residential first mortgage	970,384		16		713,983		15		688,491		19
Residential junior mortgage	Residential junior mortgage	130,279		4		111,877		4		112,173		4		Residential junior mortgage	176,428		3		131,424		3		130,279		4
Residential real estate	Residential real estate	878,381		25		597,739		21		597,686		21		Residential real estate	1,248,098		21		915,760		19		878,381		25
Retail & other	Retail & other	51,493		1		31,695		1		33,016		1		Retail & other	56,259		1		50,807		1		51,493		1
Retail-based loans	Retail-based loans	929,874		26		629,434		22		630,702		22		Retail-based loans	1,304,357		22		966,567		20		929,874		26
Total loans	Total loans	$	3,533,198	100	%	$	2,789,101	100	%	$	2,908,793	100	%	Total loans	$	5,984,437	100	%	$	4,621,836	100	%	$	3,533,198	100	%
Total loans ex. PPP loans		$	3,464,851	98	%	$	2,603,085	93	%	$	2,573,557	88	%

As noted in Table 6 above, the loan portfolio at September 30, ~~2021,~~2022, was ~~74%~~78% commercial-based and ~~26%~~22% retail-based. Commercial-based loans are considered to have more inherent risk of default than retail-based loans, in part because of the broader list of factors that could impact a commercial borrower negatively. In addition, the commercial balance per borrower is typically larger than that for retail-based loans, implying higher potential losses on an individual customer basis. Credit risk on commercial-based loans is largely influenced by general economic conditions and the resulting impact on a borrower’s operations or on the value of underlying collateral, if any. ~~PPP loans, however, initially added during second quarter 2020, are fully guaranteed by the SBA, warranting no credit loss provisions.~~

At September 30, ~~2021,~~2022, loans were ~~$3.5~~$6.0 billion, ~~$744 million (27%)~~$1.4 billion higher than December 31, ~~2020,~~2021, largely due to the Charter acquisition ~~of Mackinac, which~~(which added loans of ~~$930~~$827 million at ~~acquisition, partly offset by~~acquisition) and solid organic loan growth. Excluding the ~~transfer of $177~~$827 million of loans ~~to other assets held for sale in anticipation~~Charter added at acquisition, loans increased $536 million (16% annualized) from year-end 2021 on solid organic growth, as well as the repurchase of ~~the~~approximately $100 million previously announced sale of the Birmingham, Michigan branch. Commercial-based loans of $2.6 billion increased $444 million since December 31, 2020, including a $118 million decrease in the net carrying value of PPP loans (with the additional $160 million from the latest round of PPP loans, more than offset by continued PPP loan forgiveness).participated agricultural loans. Commercial and industrial loans continue to be the largest segment of Nicolet’s portfolio and represented ~~25%~~21% of the total portfolio at September 30, ~~2021.~~2022.

Residential real estate loans of ~~$878~~$1.2 billion grew $332 million ~~grew $281 million (47%)~~ from year-end ~~2020,~~2021, including the Charter acquisition and organic growth, to represent ~~25%~~21% of total loans at September 30, ~~2021.~~2022. 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~~our management of ~~originating~~ residential mortgage loans, the ~~vast~~ majority of Nicolet’s long-term, fixed-rate residential ~~real estate~~first mortgage loans are sold in the secondary market with servicing rights retained. Nicolet’s mortgage loans are typically of high quality and have historically had low net charge-off rates.

Retail and other loans were up ~~$20 million~~slightly ($5 million) from year-end ~~2020, and represented~~2021, representing approximately 1% of the total loan portfolio, and include predominantly short-term and other personal installment loans not secured by real estate.

Allowance for Credit Losses - Loans

Credit risks within the loan portfolio are inherently different for each loan type as summarized under “BALANCE SHEET ANALYSIS — Loans.” A discussion of the loan portfolio credit risk can be found in the “Loans” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s ~~2020~~2021 Annual Report on Form 10-K. Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and 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 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, management applies an allocation methodology ~~is applied by Nicolet~~ which focuses on evaluation of qualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to specific loans; (ii) management’s ongoing review and grading of the loan portfolio; (iii) consideration of historical loan loss and delinquency experience on each portfolio segment; (iv) trends in past due and ~~nonperforming~~nonaccrual 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; therefore, management considers the ACL-Loans a critical accounting ~~policy.~~estimate.

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~~credit deteriorated loans, which management defines as nonaccrual credit relationships over $250,000, collateral dependent loans, purchased ~~credit-deteriorated~~credit deteriorated loans, and other loans with evidence of credit deterioration. The specific reserve in the ACL-Loans for these credit deteriorated loans is equal to the aggregate collateral or discounted cash flow shortfall. ~~Second, management~~Management allocates the ACL-Loans with historical loss rates by loan segment. The loss factors are measured on a quarterly basis and applied to each loan segment based on current loan balances and projected for their expected remaining life. Next, management allocates the ACL-Loans using the qualitative factors mentioned above. Consideration is given to those current qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the historical loss experience of each loan segment. Lastly, management considers reasonable and supportable forecasts to assess the collectability of future cash flows.

At September 30, ~~2021,~~2022, the ACL-Loans was ~~$38.4~~$60 million (representing ~~1.09%~~1.01% of period end ~~loans and 1.11% of period end loans excluding PPP~~ loans) compared to ~~$32.2~~$50 million at December 31, ~~2020~~2021 and ~~$31.4~~$38 million at September 30, ~~2020.~~2021. The ~~change~~increase in the ACL-Loans from year-end ~~2020~~2021 was mostly due to the ~~Mackinac~~Charter acquisition, ~~including $4.0~~which added $8 million of provision ~~added~~ for the Day 2 allowance and ~~$1.9~~$2 million related to purchased credit deteriorated loans. The increase in the ACL-Loans from September 30, ~~2020~~2021 was ~~also~~ largely due to the ~~Mackinac acquisition. Net charge-offs (0.01%~~acquisitions of ~~average loans, annualized) remain negligible.~~Charter and County, which combined added $16 million of provision for the Day 2 allowance and $5 million related to purchased credit deteriorated loans. The components of the ACL-Loans are detailed further in Table 7 below.

4143

Table 7: Allowance for Credit Losses - Loans


		Nine Months Ended						Year Ended				Nine Months Ended						Year Ended
(in thousands)	(in thousands)	September 30, 2021			September 30, 2020			December 31, 2020			(in thousands)	September 30, 2022			September 30, 2021			December 31, 2021
ACL-Loans:	ACL-Loans:										ACL-Loans:
Balance at beginning of period	Balance at beginning of period	$	32,173		$	13,972		$	13,972		Balance at beginning of period	$	49,672		$	32,173		$	32,173
Adoption of CECL		—			8,488			8,488
Initial PCD ACL		—			797			797
Total impact for adoption of CECL		—			9,285			9,285
ACL on PCD loans acquired	ACL on PCD loans acquired	1,896			—			—			ACL on PCD loans acquired	1,709			1,896			5,159
Provision for credit losses	Provision for credit losses	4,500			9,000			10,300			Provision for credit losses	9,100			4,500			12,500
Charge-offs	Charge-offs	(436)			(1,002)			(1,689)			Charge-offs	(442)			(436)			(513)
Recoveries	Recoveries	266			133			305			Recoveries	309			266			353
Net (charge-offs) recoveries	Net (charge-offs) recoveries	(170)			(869)			(1,384)			Net (charge-offs) recoveries	(133)			(170)			(160)
Balance at end of period	Balance at end of period	$	38,399		$	31,388		$	32,173		Balance at end of period	$	60,348		$	38,399		$	49,672
Net loan (charge-offs) recoveries:	Net loan (charge-offs) recoveries:										Net loan (charge-offs) recoveries:
Commercial & industrial	Commercial & industrial	$	(31)		$	(512)		$	(692)		Commercial & industrial	$	(49)		$	(31)		$	50
Owner-occupied CRE	Owner-occupied CRE	—			(257)			(449)			Owner-occupied CRE	(36)			—			—
Agricultural	Agricultural	(48)			—			—			Agricultural	—			(48)			(48)
CRE investment	CRE investment	(2)			(20)			(190)			CRE investment	169			(2)			(2)
Construction & land development	Construction & land development	—			—			—			Construction & land development	—			—			—
Residential construction	Residential construction	—			—			—			Residential construction	—			—			—
Residential first mortgage	Residential first mortgage	(34)			7			9			Residential first mortgage	(58)			(34)			(93)
Residential junior mortgage	Residential junior mortgage	4			18			67			Residential junior mortgage	9			4			4
Retail & other	Retail & other	(59)			(105)			(129)			Retail & other	(168)			(59)			(71)
Total net (charge-offs) recoveries	Total net (charge-offs) recoveries	$	(170)		$	(869)		$	(1,384)		Total net (charge-offs) recoveries	$	(133)		$	(170)		$	(160)
Ratios:	Ratios:										Ratios:
ACL-Loans to total loans	ACL-Loans to total loans	1.09		%	1.08		%	1.15		%	ACL-Loans to total loans	1.01		%	1.09		%	1.07		%
ACL-Loans to total loans ex. PPP loans		1.11		%	1.22		%	1.24		%
Net charge-offs to average loans, annualized	Net charge-offs to average loans, annualized	0.01		%	0.04		%	0.05		%	Net charge-offs to average loans, annualized	0.00		%	0.01		%	0.01		%
Net charge-offs to average loans ex. PPP loans, annualized		0.01		%	0.05		%	0.05		%

Nonperforming Assets

As part of its overall credit risk management process, 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~~identify problem loans ~~are identified~~ early and minimize the risk of ~~loss is minimized.~~loss. Management continues to actively work with customers and monitor credit risk from the ongoing ~~economic~~ disruptions ~~surrounding the COVID-19 pandemic. Since~~related to the pandemic, ~~started, approximately 1,000 loans were provided temporary payment modifications,~~as well as economic, political, and as of September 30, 2021, only 2 loans remain under temporary payment modification structure. In addition, at September 30, 2021, 14 loans with a current balance of $5 million have been classified as troubled debt restructurings (included in Table 8 below), with $2 million reflected as performing troubled debt restructurings and the remainder in nonaccrual).social turmoil. See also Note 6, “Loans, Allowance for Credit Losses - Loans, and Credit Quality” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for further disclosures on credit quality. For additional information see also “BALANCE SHEET ANALYSIS – Loans” and “BALANCE SHEET ANALYSIS – Allowance for Credit Losses-Loans.”

Nonperforming loans are considered one indicator of potential future loan losses. Nonperforming loans are defined as nonaccrual loans 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. Nonperforming assets include nonperforming loans and other real estate owned (“OREO”). At September 30, ~~2021,~~2022, nonperforming assets were ~~$21~~$40 million ~~comprised of $17 million of nonaccrual loans and $4 million of OREO,~~ and represented ~~0.33%~~0.45% of total assets, compared to ~~$13~~$56 million or ~~0.29%~~0.73% of total assets at December 31, ~~2020. The increase in nonperforming assets was largely due to the acquisition of Mackinac.~~2021.

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 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 ~~$13~~$46 million ~~(0.4%~~(0.8% of loans) and ~~$21~~$53 million ~~(0.7%~~(1.1% of loans) at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Potential problem loans require a heightened management review ofgiven the pace at which a credit may deteriorate, the potential duration of asset quality stress, and uncertainty around the magnitude and scope of economic stress that may be felt by Nicolet’s customers and on underlying real estate values.

Table 8: Nonperforming Assets


(in thousands)	(in thousands)	September 30, 2021			December 31, 2020			September 30, 2020			(in thousands)	September 30, 2022			December 31, 2021			September 30, 2021
Nonperforming loans:	Nonperforming loans:										Nonperforming loans:
Commercial & industrial	Commercial & industrial	$	1,778		$	2,646		$	3,011		Commercial & industrial	$	3,052		$	1,908		$	1,778
Owner-occupied CRE	Owner-occupied CRE	2,990			1,869			2,471			Owner-occupied CRE	5,806			4,220			2,990
Agricultural	Agricultural	1,782			1,830			2,297			Agricultural	20,646			28,367			1,782
Commercial	Commercial	6,550			6,345			7,779			Commercial	29,504			34,495			6,550
CRE investment	CRE investment	4,249			1,488			911			CRE investment	3,343			4,119			4,249
Construction & land development	Construction & land development	1,093			327			533			Construction & land development	794			1,071			1,093
Commercial real estate	Commercial real estate	5,342			1,815			1,444			Commercial real estate	4,137			5,190			5,342
Commercial-based loans	Commercial-based loans	11,892			8,160			9,223			Commercial-based loans	33,641			39,685			11,892
Residential construction	Residential construction	—			—			—			Residential construction	—			—			—
Residential first mortgage	Residential first mortgage	4,495			823			1,312			Residential first mortgage	4,309			4,132			4,495
Residential junior mortgage	Residential junior mortgage	232			384			411			Residential junior mortgage	277			243			232
Residential real estate	Residential real estate	4,727			1,207			1,723			Residential real estate	4,586			4,375			4,727
Retail & other	Retail & other	96			88			51			Retail & other	99			94			96
Retail-based loans	Retail-based loans	4,823			1,295			1,774			Retail-based loans	4,685			4,469			4,823
Total nonaccrual loans	Total nonaccrual loans	16,715			9,455			10,997			Total nonaccrual loans	38,326			44,154			16,715
Accruing loans past due 90 days or more	Accruing loans past due 90 days or more	—			—			—			Accruing loans past due 90 days or more	—			—			—
Total nonperforming loans	Total nonperforming loans	$	16,715		$	9,455		$	10,997		Total nonperforming loans	$	38,326		$	44,154		$	16,715
Nonaccrual loans (included above) covered by SBA guarantee		$	1,729		$	1,265		$	(1,172)
Nonaccrual loans (included above) covered by guarantees											Nonaccrual loans (included above) covered by guarantees	$	5,493		$	6,776		$	1,729
OREO:	OREO:										OREO:
Commercial real estate owned	Commercial real estate owned	$	1,219		$	—		$	—		Commercial real estate owned	$	628		$	1,549		$	1,219
Residential real estate owned	Residential real estate owned	355			—			—			Residential real estate owned	—			99			355
Bank property real estate owned	Bank property real estate owned	2,895			3,608			1,000			Bank property real estate owned	1,506			10,307			2,895
Total OREO	Total OREO	4,469			3,608			1,000			Total OREO	2,134			11,955			4,469
Total nonperforming assets	Total nonperforming assets	$	21,184		$	13,063		$	11,997		Total nonperforming assets	$	40,460		$	56,109		$	21,184
Performing troubled debt restructurings	Performing troubled debt restructurings	$	2,103		$	2,120		$	—		Performing troubled debt restructurings	$	—		$	5,443		$	2,103
Ratios:	Ratios:										Ratios:
Nonperforming loans to total loans	Nonperforming loans to total loans	0.47		%	0.34		%	0.38		%	Nonperforming loans to total loans	0.64		%	0.96		%	0.47		%
Nonperforming assets to total loans plus OREO	Nonperforming assets to total loans plus OREO	0.60		%	0.47		%	0.41		%	Nonperforming assets to total loans plus OREO	0.68		%	1.21		%	0.60		%
Nonperforming assets to total assets	Nonperforming assets to total assets	0.33		%	0.29		%	0.25		%	Nonperforming assets to total assets	0.45		%	0.73		%	0.33		%
ACL-Loans to nonperforming loans	ACL-Loans to nonperforming loans	230		%	340		%	285		%	ACL-Loans to nonperforming loans	157		%	112		%	230		%

Deposits

Deposits represent Nicolet’s largest source of funds. ~~The deposit levels have been heavily influenced by the ongoing economic uncertainty, government stimulus payments and other directives related~~Total deposits of $7.4 billion at September 30, 2022, increased $930 million from December 31, 2021, primarily due to the ~~pandemic, which reduced spending~~Charter acquisition, and included a $735 million increase in core customer deposits and a $195 million increase in brokered deposits. Compared to September 30, 2021, total deposits increased ~~liquidity of consumers~~$2.0 billion (36%), largely due to the Charter and ~~businesses, as well as by PPP loan proceeds retained on deposit by corporate borrowers. In addition, Mackinac added deposits of $1.4 billion at acquisition.~~County acquisitions. The deposit composition is presented in Table 9 below.

Total deposits of $5.4 billion at September 30, 2021, increased $1.5 billion (39%) from December 31, 2020, largely due to the Mackinac acquisition. Core customer deposits increased $1.5 billion, while brokered deposits increased $32 million. The growth in deposits was also aided by additional government stimulus payments and new PPP funds on deposit.

Compared to September 30, 2020, total deposits increased $1.7 billion (46%), also largely due to the Mackinac acquisition. Customer core deposits increased $1.7 billion, while brokered deposits grew $30 million. The increase in total deposits since September 30, 2020 was also influenced by the liquidity objectives of consumers and businesses in very uncertain times noted above.

Table 9: Period End Deposit Composition


		September 30, 2021				December 31, 2020				September 30, 2020					September 30, 2022				December 31, 2021				September 30, 2021
(in thousands)	(in thousands)	Amount		% of Total		Amount		% of Total		Amount		% of Total		(in thousands)	Amount		% of Total		Amount		% of Total		Amount		% of Total
Noninterest-bearing demand	Noninterest-bearing demand	$	1,852,119	34	%	$	1,212,787	31	%	$	1,135,384	30	%	Noninterest-bearing demand	$	2,477,507	33	%	$	1,975,705	31	%	$	1,852,119	34	%
Money market and interest-bearing demand	Money market and interest-bearing demand	2,154,557		40	%	1,551,325		40	%	1,432,667		39	%	Money market and interest-bearing demand	3,012,405		41	%	2,834,824		44	%	2,154,557		40	%
Savings	Savings	775,281		14	%	521,814		13	%	480,745		13	%	Savings	939,832		13	%	803,197		12	%	775,281		14	%
Time	Time	646,817		12	%	624,473		16	%	664,012		18	%	Time	966,158		13	%	852,190		13	%	646,817		12	%
Total deposits	Total deposits	$	5,428,774	100	%	$	3,910,399	100	%	$	3,712,808	100	%	Total deposits	$	7,395,902	100	%	$	6,465,916	100	%	$	5,428,774	100	%
Brokered transaction accounts	Brokered transaction accounts	$	152,858	3	%	$	46,340	1	%	$	35,975	1	%	Brokered transaction accounts	$	252,891	3	%	$	234,306	4	%	$	152,858	3	%
Brokered and listed time deposits	Brokered and listed time deposits	204,202		4	%	278,521		7	%	290,827		8	%	Brokered and listed time deposits	386,101		5	%	209,857		3	%	204,202		4	%
Total brokered deposits	Total brokered deposits	$	357,060	7	%	$	324,861	8	%	$	326,802	9	%	Total brokered deposits	$	638,992	8	%	$	444,163	7	%	$	357,060	7	%
Customer transaction accounts	Customer transaction accounts	$	4,629,099	85	%	$	3,239,586	83	%	$	3,012,821	81	%	Customer transaction accounts	$	6,176,853	84	%	$	5,379,420	83	%	$	4,629,099	85	%
Customer time deposits	Customer time deposits	442,615		8	%	345,952		9	%	373,185		10	%	Customer time deposits	580,057		8	%	642,333		10	%	442,615		8	%
Total customer deposits (core)	Total customer deposits (core)	$	5,071,714	93	%	$	3,585,538	92	%	$	3,386,006	91	%	Total customer deposits (core)	$	6,756,910	92	%	$	6,021,753	93	%	$	5,071,714	93	%

Lending-Related Commitments

As of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, Nicolet had the following off-balance sheet lending-related commitments.

Table 10: Commitments


(in thousands)	(in thousands)	September 30, 2021		December 31, 2020		(in thousands)	September 30, 2022		December 31, 2021
Commitments to extend credit	Commitments to extend credit	$	1,111,156	$	950,287	Commitments to extend credit	$	1,854,064	$	1,433,881
Financial standby letters of credit	Financial standby letters of credit	13,947		8,241		Financial standby letters of credit	26,250		13,562
Performance standby letters of credit	Performance standby letters of credit	8,821		8,366		Performance standby letters of credit	9,059		7,336

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 the notional amounts represented ~~$78~~$12 million and ~~$320,000,~~$10 million, respectively, at September 30, ~~2021.~~2022. 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 ~~$113~~$50 million and ~~$20~~$1 million, respectively, at December 31, ~~2020.~~2021. The net fair value of these mortgage derivatives combined was a gain of ~~$104,000~~$121,000 at September 30, ~~2021~~2022 compared to a ~~loss~~gain of ~~$244,000~~$149,000 at December 31, ~~2020.~~2021.

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 (including extra growth in core deposits during the pandemic as previously discussed), and the minimal use of capacity available in numerous non-core funding sources, Nicolet’s liquidity levels and resources have been sufficient to fund loans, accommodate deposit trends and cycles, and to meet other cash needs as necessary. At the onset of the pandemic, but prior to the announcement of government stimulus, management initiated preparatory actions to increase on-balance sheet liquidity to ensure we could meet customer needs. These actions proved later to not be necessary, leading us to reduce non-deposit funding. In addition to this on-balance sheet liquidity build, remaining liquidity facilities continue to provide capacity and flexibility in an uncertain time.

Funds are available from a number of basic banking activity sources including, but not limited to, the core deposit base; repayment and maturity of loans; investment securities calls, maturities, and sales; and procurement of additional brokered deposits or other wholesale funding. At September 30, ~~2021,~~2022, approximately ~~20%~~48% of the ~~$765 million~~$1.6 billion investment securities portfolio was pledged as collateral to secure public deposits, as applicable, and for liquidity or other purposes as required by ~~law.~~regulation. Additional funding sources at September 30, ~~2021,~~2022, consist ~~of $175 million~~ of available and unused Federal funds lines, ~~available~~ borrowing capacity at the FHLB of ~~$219~~$554 million, and borrowing capacity in the brokered deposit market.

In consideration of the funds availability for the Bank and the current high levels of cash in a very low interest rate environment, management has taken prudent pricing actions on deposits and loans, as well as actions to reduce non-deposit funding. Brokered deposits have matured without renewal and selected FHLB advances were repaid early.

Management is committed to the Parent Company being a source of strength to the Bank and its other subsidiaries, and therefore, regularly evaluates capital and liquidity positions of the Parent Company in light of current and projected needs, growth or strategies. The Parent Company uses cash for normal expenses, debt service requirements, and when opportune, for common stock repurchases, repayment of debt, or investment in other strategic actions such as mergers or acquisitions. At September 30, ~~2021,~~2022, the Parent Company had ~~$85~~$38 million in cash. Additional cash sources ~~among others,~~ 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 notes or other debt. ~~On July 7,~~During 2021, Nicolet completed the private placement of $100 million in fixed-to-floating rate subordinated notes (the “Notes”) due in 2031. (See Note 8, “Short and Long-Term Borrowings” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional information on the ~~new~~ Notes). Dividends from the Bank and, to a lesser extent, stock option exercises, also represent significant sources of cash flows for the Parent Company.

Cash and cash equivalents at September 30, ~~2021~~2022 and December 31, ~~2020~~2021 were ~~$1.4 billion~~$438 million and ~~$803~~$595 million, respectively. The ~~increase~~decrease in cash and cash equivalents since year-end ~~2020~~2021 included ~~$52~~$87 million net cash provided by operating activities (mostly earnings), ~~$267~~$382 million net cash ~~provided by~~used in investing activities (with strong loan growth and cash paid for the Charter acquisition partly offset by net cash received infrom the ~~Mackinac acquisition exceeding cash payments to fund loan growth and net investment purchases)~~Birmingham branch sale), and ~~$228~~$137 million net cash provided by financing activities (mostly deposit ~~growth~~ and ~~proceeds received from the subordinated notes issuance)~~short-term borrowings partly offset by cash outflows for common stock repurchases). Management believes its liquidity resources were sufficient as of September 30, ~~2021~~2022 to fund loans, accommodate deposit cycles and trends, and to meet other cash needs as ~~necessary in these unsettled times.~~necessary.

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

Among other scenarios, ~~Nicolet~~we 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, partly in response to the pandemic.~~environment. The interest rate scenarios are used for analytical purposes only and do not necessarily represent management’s view of future market interest rate movements. Based on financial data at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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 and given the relatively short nature of the Company’s balance sheet, reflect a largely unchanged risk position as expected.~~bps.

Table 11: Interest Rate Sensitivity

September 30, 2021 December 31, 2020
200 bps decrease in interest rates (0.3) % (0.8) %
100 bps decrease in interest rates (0.3) % (0.8) %
100 bps increase in interest rates 1.3 % 4.0 %
200 bps increase in interest rates 2.8 % 8.1 %


	September 30, 2022		December 31, 2021
200 bps decrease in interest rates	(1.7)	%	(0.3)	%
100 bps decrease in interest rates	(0.7)	%	(0.3)	%
100 bps increase in interest rates	0.5	%	(0.1)	%
200 bps increase in interest rates	1.1	%	(0.3)	%

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

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

Capital

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

The Company’s and the Bank’s regulatory capital ratios remain above minimum regulatory ratios, including the capital conservation buffer. At September 30, ~~2021,~~2022, 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~~the Company’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 Nine Months Ended			At or for the Year Ended				At or for the Nine Months Ended			At or for the Year Ended
($ in thousands)	($ in thousands)	September 30, 2021			December 31, 2020			($ in thousands)	September 30, 2022			December 31, 2021
Company Stock Repurchases: *	Company Stock Repurchases: *							Company Stock Repurchases: *
Common stock repurchased during the period (dollars)	Common stock repurchased during the period (dollars)	$	33,680		$	40,544		Common stock repurchased during the period (dollars)	$	60,697		$	61,464
Common stock repurchased during the period (full shares)	Common stock repurchased during the period (full shares)	447,898			646,748			Common stock repurchased during the period (full shares)	661,662			793,064
Company Risk-Based Capital:	Company Risk-Based Capital:							Company Risk-Based Capital:
Total risk-based capital	Total risk-based capital	$	615,052		$	406,325		Total risk-based capital	$	855,119		$	793,410
Tier 1 risk-based capital	Tier 1 risk-based capital	488,620			385,068			Tier 1 risk-based capital	651,016			604,199
Common equity Tier 1 capital	Common equity Tier 1 capital	464,355			361,162			Common equity Tier 1 capital	613,284			567,095
Total capital ratio	Total capital ratio	14.6		%	12.9		%	Total capital ratio	12.0		%	13.8		%
Tier 1 capital ratio	Tier 1 capital ratio	11.6		%	12.2		%	Tier 1 capital ratio	9.2		%	10.5		%
Common equity tier 1 capital ratio	Common equity tier 1 capital ratio	11.0		%	11.4		%	Common equity tier 1 capital ratio	8.6		%	9.9		%
Tier 1 leverage ratio	Tier 1 leverage ratio	9.6		%	9.0		%	Tier 1 leverage ratio	8.6		%	9.4		%
Bank Risk-Based Capital:	Bank Risk-Based Capital:							Bank Risk-Based Capital:
Total risk-based capital	Total risk-based capital	$	515,152		$	351,081		Total risk-based capital	$	801,952		$	700,869
Tier 1 risk-based capital	Tier 1 risk-based capital	487,622			329,824			Tier 1 risk-based capital	750,572			664,688
Common equity Tier 1 capital	Common equity Tier 1 capital	487,622			329,824			Common equity Tier 1 capital	750,572			664,688
Total capital ratio	Total capital ratio	12.3		%	11.2		%	Total capital ratio	11.3		%	12.2		%
Tier 1 capital ratio	Tier 1 capital ratio	11.6		%	10.5		%	Tier 1 capital ratio	10.6		%	11.6		%
Common equity tier 1 capital ratio	Common equity tier 1 capital ratio	11.6		%	10.5		%	Common equity tier 1 capital ratio	10.6		%	11.6		%
Tier 1 leverage ratio	Tier 1 leverage ratio	9.8		%	7.8		%	Tier 1 leverage ratio	10.0		%	10.3		%
* Reflects common stock repurchased under board of director authorizations for the common stock repurchase program.	* Reflects common stock repurchased under board of director authorizations for the common stock repurchase program.							* Reflects common stock repurchased under board of director authorizations for the common stock repurchase program.

In managing capital for optimal return, we evaluate capital sources and uses, pricing and availability of our stock in the market, and alternative uses of capital (such as the level of organic growth or acquisition opportunities) in light of strategic plans. During the first nine months of ~~2021, $34~~2022, $61 million was utilized to repurchase and cancel ~~447,898~~661,662 shares of common stock, ~~at an average per share cost of $75.20,~~ pursuant to our common stock repurchase program. ~~On August 17, 2021, Nicolet’s board authorized an increase to the program of $40 million. As a result, at~~At September 30, ~~2021,~~2022, there ~~remained $47~~remains $48 million authorized under this repurchase program, as modified, to be utilized from time-to-time to repurchase shares in the open market, through block transactions or in private transactions.

Critical Accounting ~~Policies~~Estimates

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 credit losses, the determination and ~~income taxes.~~assessment of deferred tax assets and liabilities, and the valuation of loans acquired in acquisition transactions. A discussion of these ~~policies~~estimates can be found in the “Critical Accounting ~~Policies”~~Estimates” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s ~~2020~~2021 Annual Report on Form 10-K. There have been no changes in the Company’s determination of critical accounting policies and estimates since December 31, ~~2020.~~2021.

~~Future Accounting Pronouncements~~

~~In March 2020, the FASB issued ASU 2020-04,~~ ~~Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting~~. This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The updated guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company continues to evaluate the impact of reference rate reform on its consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our market risk at September 30, 2022, from that presented in our 2021 Annual Report on Form 10-K. See section “Interest Rate Sensitivity Management and Impact of Inflation” within Management’s Discussion and Analysis of Financial Condition and Results of Operations under Part I, Item 2.2, for our interest rate sensitivity position at September 30, 2022.

ITEM 4. CONTROLS AND PROCEDURES

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

(b) Changes in Internal Control Over Financial Reporting. There ~~have been~~were no changes in the Company’s internal ~~controls or, to the Company’s knowledge,~~control over financial reporting (as such term is defined in ~~other factors~~Exchange Act Rule 13a-15(f)) during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal 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.

4749

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, ~~2020.~~2021.

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

~~Following are~~Issuer Purchases of Equity Securities

The following table contains information regarding purchases of Nicolet’s ~~monthly~~ common stock ~~purchases~~made during ~~the~~ third quarter 2022 by or on behalf of ~~2021.~~the Company or any “affiliated purchaser,” as defined by Rule 10b-18(a)(3) of the Exchange Act.

Total Number of
Shares Purchased (a)
Average Price
Paid per Share Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans
or Programs (b)
(#) ($) (#) (#)
Period
July 1 – July 31, 2021 83,585 $ 70.95 83,585
August 1 – August 31, 2021 151,916 $ 74.68 150,009
September 1 – September 30, 2021 75 $ — —
Total 235,576 $ 73.35 233,594 630,500


	Total Number of Shares Purchased (a)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (b)
	(#)	($)		(#)	(#)
Period
July 1 – July 31, 2022	—	$	—	—
August 1 – August 31, 2022	—	$	—	—
September 1 – September 30, 2022	72	$	76.66	—
Total	72	$	76.66	—	686,000

~~(a)~~a.During third quarter ~~2021,~~2022, the Company ~~repurchased 75~~withheld 72 common shares for minimum tax withholding settlements on restricted ~~stock~~stock. These are not considered “repurchases” and, ~~1,907 common shares were repurchased to satisfy the exercise price and / or tax withholding requirements of stock options. These purchases~~therefore, do not count against the maximum number of shares that may yet be purchased under the board of ~~directors'~~directors’ authorization.

~~(b)~~b.~~During third quarter 2021, Nicolet utilized $17.1~~The board of directors approved a common stock repurchase program which authorized, with subsequent modifications, the use of up to $276 million to repurchase ~~and cancel 233,594~~outstanding shares of common ~~stock pursuant to our~~stock. This common stock repurchase ~~program. On August 17, 2021, Nicolet’s board authorized an increase to the~~ program ~~of $40 million. As a result, at~~was last modified on April 19, 2022, and has no expiration date. At September 30, ~~2021,~~2022, approximately ~~$47~~$48 million remained available under this common stock repurchase program, or approximately ~~630,500~~686,000 shares of common stock (based upon the closing stock price of ~~$74.18~~$70.44 on September 30, ~~2021)~~2022).

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

4850

ITEM 6. EXHIBITS

The following exhibits are filed herewith:


Exhibit Number						Description
2.1						Agreement and Plan of Merger By and Between Nicolet Bankshares, Inc. and ~~Mackinac Financial Corporation,~~Charter Bankshares, Inc., dated ~~April 12, 2021~~March 29, 2022 (1)
~~2.2~~						~~Agreement and Plan of Merger Between Nicolet Bankshares, Inc. and County Bancorp, Inc., dated June 22, 2021(2)~~
~~4.1~~						~~Indenture, dated as of July 7, 2021, by and between Nicolet Bankshares, Inc. and U.S. Bank National Association, as trustee(3)~~
~~4.2~~						~~Form of 3.125% Fixed-to-Floating Rate Subordinated Note due 2031 of Nicolet Bankshares, Inc.(3)~~
~~10.1~~						~~Form of Subordinated Note Purchase Agreement, dated as of July 7, 2021, by and between Nicolet Bankshares, Inc. and the several Purchasers(3)~~
~~10.2~~						~~Form of Registration Rights Agreement, dated as of July 7, 2021, by and between Nicolet Bankshares, Inc. and the several Purchasers(3)~~
31.1						Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002
31.2						Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002
32.1						Certification of CEO Pursuant to 18 U.S.C. 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.INS						The XBRL Instance Document does not appear in the Interactive Date File because its XBRL tags are embedded within the Inline XBRL document ~~(4)~~(2)
101.SCH						Inline XBRL Taxonomy Extension Schema Document
101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document
104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

(1) Incorporated by reference to the exhibit of the same number in the Registrant’s Current Report on Form 8-K filed on ~~April 12, 2021.~~March 30, 2022.

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

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

~~(4)~~ Includes the following financial information included in the ~~Company's~~Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2021,~~2022, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial Statements.

4951

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.

~~October 29, 2021~~November 1, 2022			/s/ Michael E. Daniels
			Michael E. Daniels
			President and Chief Executive Officer

~~October 29, 2021~~November 1, 2022			/s/ H. Phillip Moore, Jr.
			H. Phillip Moore, Jr.
			Chief Financial Officer

5052


			PAGE
PART I	FINANCIAL INFORMATION

	Item 1.	Financial Statements:

		Consolidated Balance Sheets	3

		Consolidated Statements of Income	4

		Consolidated Statements of Comprehensive Income (Loss)	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	2731

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4748

	Item 4.	Controls and Procedures	4748

PART II	OTHER INFORMATION

	Item 1.	Legal Proceedings	4850

	Item 1A.	Risk Factors	4850

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4850

	Item 3.	Defaults Upon Senior Securities	4850

	Item 4.	Mine Safety Disclosures	4850

	Item 5.	Other Information	4850

	Item 6.	Exhibits	4951

		Signatures	5052


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