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 June 30, ~~2022~~2023

☐ 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	NIC	New York Stock 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	☐

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 July 31, ~~2022~~2023 there were ~~13,409,981~~14,740,465 shares of $0.01 par value common stock outstanding.

Nicolet Bankshares, Inc.

Quarterly Report on Form 10-Q

June 30, ~~2022~~2023

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)


		June 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022
		(Unaudited)		(Audited)			(Unaudited)		(Audited)
Assets	Assets					Assets
Cash and due from banks	Cash and due from banks	$	96,189	$	209,349	Cash and due from banks	$	122,021	$	121,211
Interest-earning deposits	Interest-earning deposits	84,828		385,943		Interest-earning deposits	383,185		33,512

Cash and cash equivalents	Cash and cash equivalents	181,017		595,292		Cash and cash equivalents	505,206		154,723
Certificates of deposit in other banks	Certificates of deposit in other banks	15,502		21,920		Certificates of deposit in other banks	9,808		12,518
Securities available for sale (“AFS”), at fair value	Securities available for sale (“AFS”), at fair value	813,248		921,661		Securities available for sale (“AFS”), at fair value	921,108		917,618
Securities held to maturity (“HTM”), at amortized cost	Securities held to maturity (“HTM”), at amortized cost	695,812		651,803		Securities held to maturity (“HTM”), at amortized cost	—		679,128
Other investments	Other investments	53,269		44,008		Other investments	57,578		65,286
Loans held for sale	Loans held for sale	5,084		6,447		Loans held for sale	3,849		1,482
Other assets held for sale		—		199,833

Loans	Loans	4,978,654		4,621,836		Loans	6,222,776		6,180,499
Allowance for credit losses - loans (“ACL-Loans”)	Allowance for credit losses - loans (“ACL-Loans”)	(50,655)		(49,672)		Allowance for credit losses - loans (“ACL-Loans”)	(62,811)		(61,829)
Loans, net	Loans, net	4,927,999		4,572,164		Loans, net	6,159,965		6,118,670
Premises and equipment, net	Premises and equipment, net	96,656		94,566		Premises and equipment, net	117,278		108,956
Bank owned life insurance (“BOLI”)	Bank owned life insurance (“BOLI”)	136,060		134,476		Bank owned life insurance (“BOLI”)	167,192		165,137
Goodwill and other intangibles, net	Goodwill and other intangibles, net	336,721		339,492		Goodwill and other intangibles, net	398,194		402,438
Accrued interest receivable and other assets	Accrued interest receivable and other assets	108,884		113,375		Accrued interest receivable and other assets	142,450		138,013
Total assets	Total assets	$	7,370,252	$	7,695,037	Total assets	$	8,482,628	$	8,763,969

Liabilities and Stockholders’ Equity	Liabilities and Stockholders’ Equity					Liabilities and Stockholders’ Equity
Liabilities:	Liabilities:					Liabilities:
Noninterest-bearing demand deposits	Noninterest-bearing demand deposits	$	2,045,732	$	1,975,705	Noninterest-bearing demand deposits	$	2,059,939	$	2,361,816
Interest-bearing deposits	Interest-bearing deposits	4,240,534		4,490,211		Interest-bearing deposits	5,138,665		4,817,105
Total deposits	Total deposits	6,286,266		6,465,916		Total deposits	7,198,604		7,178,921
Short-term borrowings						Short-term borrowings	50,000		317,000
Long-term borrowings						Long-term borrowings	197,577		225,342

Long-term borrowings		196,963		216,915
Other liabilities held for sale		—		51,586
Accrued interest payable and other liabilities	Accrued interest payable and other liabilities	47,636		68,729		Accrued interest payable and other liabilities	58,809		70,177
Total liabilities	Total liabilities	6,530,865		6,803,146		Total liabilities	7,504,990		7,791,440

Stockholders’ Equity:	Stockholders’ Equity:					Stockholders’ Equity:
Common stock	Common stock	134		140		Common stock	147		147
Additional paid-in capital	Additional paid-in capital	520,741		575,045		Additional paid-in capital	624,897		621,988
Retained earnings	Retained earnings	361,753		313,604		Retained earnings	417,863		407,864
Accumulated other comprehensive income (loss)	Accumulated other comprehensive income (loss)	(43,241)		3,102		Accumulated other comprehensive income (loss)	(65,269)		(57,470)
Total stockholders’ equity	Total stockholders’ equity	839,387		891,891		Total stockholders’ equity	977,638		972,529
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	7,370,252	$	7,695,037	Total liabilities and stockholders’ equity	$	8,482,628	$	8,763,969

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	13,407,375		13,994,079		Common shares outstanding	14,717,938		14,690,614
Common shares issued	Common shares issued	13,428,551		14,019,880		Common shares issued	14,788,928		14,764,104

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.

Consolidated Statements of Income

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


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2022		2021		2022		2021			2023		2022		2023		2022
Interest income:	Interest income:									Interest income:
Loans, including loan fees	Loans, including loan fees	$	52,954	$	35,111	$	104,253	$	68,973	Loans, including loan fees	$	84,091	$	52,954	$	163,233	$	104,253
Investment securities:	Investment securities:									Investment securities:
Taxable	Taxable	5,135		2,060		10,262		3,874		Taxable	4,133		5,135		9,094		10,262
Tax-exempt	Tax-exempt	647		520		1,322		1,065		Tax-exempt	1,476		647		3,213		1,322
Other interest income	Other interest income	790		616		1,607		1,271		Other interest income	2,357		790		3,893		1,607
Total interest income	Total interest income	59,526		38,307		117,444		75,183		Total interest income	92,057		59,526		179,433		117,444
Interest expense:	Interest expense:									Interest expense:
Deposits	Deposits	2,410		2,433		4,602		5,355		Deposits	29,340		2,410		54,277		4,602
Short-term borrowings	Short-term borrowings	28		—		28		—		Short-term borrowings	1,108		28		4,320		28
Long-term borrowings	Long-term borrowings	2,004		303		3,935		616		Long-term borrowings	2,570		2,004		5,076		3,935
Total interest expense	Total interest expense	4,442		2,736		8,565		5,971		Total interest expense	33,018		4,442		63,673		8,565
Net interest income	Net interest income	55,084		35,571		108,879		69,212		Net interest income	59,039		55,084		115,760		108,879
Provision for credit losses	Provision for credit losses	750		—		1,050		500		Provision for credit losses	450		750		3,540		1,050
Net interest income after provision for credit losses	Net interest income after provision for credit losses	54,334		35,571		107,829		68,712		Net interest income after provision for credit losses	58,589		54,334		112,220		107,829
Noninterest income:	Noninterest income:									Noninterest income:
Trust services fee income		2,004		1,906		4,015		3,681
Brokerage fee income		2,988		2,991		6,676		5,784
Wealth management fee income										Wealth management fee income	5,870		4,992		11,382		10,691
Mortgage income, net	Mortgage income, net	2,205		5,599		5,458		12,829		Mortgage income, net	1,822		2,205		3,288		5,458
Service charges on deposit accounts	Service charges on deposit accounts	1,536		1,136		3,013		2,227		Service charges on deposit accounts	1,529		1,536		3,009		3,013
Card interchange income	Card interchange income	2,950		2,266		5,531		4,193		Card interchange income	3,331		2,950		6,364		5,531
BOLI income	BOLI income	768		559		1,701		1,086		BOLI income	1,073		768		2,273		1,701
Deferred compensation plan asset market valuations										Deferred compensation plan asset market valuations	499		(1,316)		1,445		(1,783)
LSR income, net										LSR income, net	1,135		(143)		2,290		(525)
Asset gains (losses), net	Asset gains (losses), net	1,603		4,192		2,916		4,903		Asset gains (losses), net	(318)		1,603		(38,786)		2,916
Other income	Other income	77		1,529		764		2,601		Other income	1,900		1,536		3,732		3,072
Total noninterest income	Total noninterest income	14,131		20,178		30,074		37,304		Total noninterest income	16,841		14,131		(5,003)		30,074
Noninterest expense:	Noninterest expense:									Noninterest expense:
Personnel	Personnel	19,681		17,084		40,872		32,200		Personnel	23,900		19,681		48,228		40,872
Occupancy, equipment and office	Occupancy, equipment and office	6,891		4,053		13,835		8,190		Occupancy, equipment and office	8,845		6,891		17,628		13,835
Business development and marketing	Business development and marketing	2,057		1,210		3,888		2,199		Business development and marketing	1,946		2,057		4,067		3,888
Data processing	Data processing	3,596		2,811		6,983		5,469		Data processing	4,218		3,596		8,206		6,983
Intangibles amortization	Intangibles amortization	1,347		790		2,771		1,642		Intangibles amortization	2,083		1,347		4,244		2,771
FDIC assessments	FDIC assessments	480		480		960		1,075		FDIC assessments	1,009		480		1,549		960
Merger-related expense	Merger-related expense	555		656		653		656		Merger-related expense	26		555		189		653
Other expense	Other expense	1,931		3,663		4,126		5,397		Other expense	2,930		1,931		5,721		4,126
Total noninterest expense	Total noninterest expense	36,538		30,747		74,088		56,828		Total noninterest expense	44,957		36,538		89,832		74,088
Income before income tax expense	Income before income tax expense	31,927		25,002		63,815		49,188		Income before income tax expense	30,473		31,927		17,385		63,815
Income tax expense	Income tax expense	7,942		6,718		15,666		12,665		Income tax expense	7,878		7,942		3,688		15,666
Net income	Net income	$	23,985	$	18,284	$	48,149	$	36,523	Net income	$	22,595	$	23,985	$	13,697	$	48,149
Earnings per common share:	Earnings per common share:									Earnings per common share:
Basic	Basic	$	1.79	$	1.85	$	3.56	$	3.67	Basic	$	1.54	$	1.79	$	0.93	$	3.56
Diluted	Diluted	$	1.73	$	1.77	$	3.43	$	3.52	Diluted	$	1.51	$	1.73	$	0.91	$	3.43
Weighted average common shares outstanding:	Weighted average common shares outstanding:									Weighted average common shares outstanding:
Basic	Basic	13,402,455		9,901,614		13,524,919		9,949,359		Basic	14,711,490		13,402,455		14,703,018		13,524,919
Diluted	Diluted	13,852,179		10,325,699		14,035,086		10,364,629		Diluted	14,959,778		13,852,179		15,011,418		14,035,086

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 June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2022		2021		2022		2021			2023		2022		2023		2022
Net income	Net income	$	23,985	$	18,284	$	48,149	$	36,523	Net income	$	22,595	$	23,985	$	13,697	$	48,149
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)	(23,520)		1,862		(63,468)		(5,507)		Net unrealized holding gains (losses)	(5,893)		(23,520)		9,401		(63,468)
Net realized (gains) losses included in income	Net realized (gains) losses included in income	—		—		(15)		—		Net realized (gains) losses included in income	135		—		348		(15)
Reclassification adjustment for securities transferred from held to maturity to available for sale										Reclassification adjustment for securities transferred from held to maturity to available for sale	—		—		(20,434)		—
Income tax (expense) benefit	Income tax (expense) benefit	6,350		(503)		17,140		1,486		Income tax (expense) benefit	1,556		6,350		2,886		17,140
Total other comprehensive income (loss)	Total other comprehensive income (loss)	(17,170)		1,359		(46,343)		(4,021)		Total other comprehensive income (loss)	(4,202)		(17,170)		(7,799)		(46,343)
Comprehensive income (loss)	Comprehensive income (loss)	$	6,815	$	19,643	$	1,806	$	32,502	Comprehensive income (loss)	$	18,393	$	6,815	$	5,898	$	1,806

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.

Consolidated Statements of Stockholders’ Equity

(In thousands) (Unaudited)


		Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total			Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
Balances at March 31, 2023												Balances at March 31, 2023	$	147	$	623,746	$	398,966	$	(61,067)	$	961,792
Comprehensive income:												Comprehensive income:
Net income, three months ended June 30, 2023												Net income, three months ended June 30, 2023	—		—		22,595		—		22,595
Other comprehensive income (loss)												Other comprehensive income (loss)	—		—		—		(4,202)		(4,202)

Stock-based compensation expense												Stock-based compensation expense	—		2,006		—		—		2,006
Cash dividends on common stock, $0.25 per share												Cash dividends on common stock, $0.25 per share	—		—		(3,698)		—		(3,698)
Exercise of stock options, net												Exercise of stock options, net	1		451		—		—		452
Issuance of common stock												Issuance of common stock	—		214		—		—		214
Purchase and retirement of common stock												Purchase and retirement of common stock	(1)		(1,520)		—		—		(1,521)

Balances at June 30, 2023												Balances at June 30, 2023	$	147	$	624,897	$	417,863	$	(65,269)	$	977,638
Balances at March 31, 2022	Balances at March 31, 2022	$	135	$	524,478	$	337,768	$	(26,071)	$	836,310	Balances at March 31, 2022	$	135	$	524,478	$	337,768	$	(26,071)	$	836,310
Comprehensive income:	Comprehensive income:											Comprehensive income:
Net income, three months ended June 30, 2022	Net income, three months ended June 30, 2022	—		—		23,985		—		23,985		Net income, three months ended June 30, 2022	—		—		23,985		—		23,985
Other comprehensive income (loss)	Other comprehensive income (loss)	—		—		—		(17,170)		(17,170)		Other comprehensive income (loss)	—		—		—		(17,170)		(17,170)

Stock-based compensation expense	Stock-based compensation expense	—		2,154		—		—		2,154		Stock-based compensation expense	—		2,154		—		—		2,154
Exercise of stock options, net	Exercise of stock options, net	—		190		—		—		190		Exercise of stock options, net	—		190		—		—		190
Issuance of common stock	Issuance of common stock	—		197		—		—		197		Issuance of common stock	—		197		—		—		197
Purchase and retirement of common stock	Purchase and retirement of common stock	(1)		(6,278)		—		—		(6,279)		Purchase and retirement of common stock	(1)		(6,278)		—		—		(6,279)

Balances at June 30, 2022	Balances at June 30, 2022	$	134	$	520,741	$	361,753	$	(43,241)	$	839,387	Balances at June 30, 2022	$	134	$	520,741	$	361,753	$	(43,241)	$	839,387
Balances at March 31, 2021		$	100	$	271,388	$	271,191	$	7,367	$	550,046
Balances at December 31, 2022												Balances at December 31, 2022	$	147	$	621,988	$	407,864	$	(57,470)	$	972,529
Comprehensive income:	Comprehensive income:											Comprehensive income:
Net income, three months ended June 30, 2021		—		—		18,284		—		18,284
Net income, six months ended June 30, 2023												Net income, six months ended June 30, 2023	—		—		13,697		—		13,697
Other comprehensive income (loss)	Other comprehensive income (loss)	—		—		—		1,359		1,359		Other comprehensive income (loss)	—		—		—		(7,799)		(7,799)

Stock-based compensation expense	Stock-based compensation expense	—		2,055		—		—		2,055		Stock-based compensation expense	—		3,430		—		—		3,430
Cash dividends on common stock, $0.25 per share												Cash dividends on common stock, $0.25 per share	—		—		(3,698)		—		(3,698)
Exercise of stock options, net	Exercise of stock options, net	—		64		—		—		64		Exercise of stock options, net	1		599		—		—		600
Issuance of common stock	Issuance of common stock	—		111		—		—		111		Issuance of common stock	—		400		—		—		400
Purchase and retirement of common stock	Purchase and retirement of common stock	(2)		(12,522)		—		—		(12,524)		Purchase and retirement of common stock	(1)		(1,520)		—		—		(1,521)

Balances at June 30, 2021		$	98	$	261,096	$	289,475	$	8,726	$	559,395
Balances at June 30, 2023												Balances at June 30, 2023	$	147	$	624,897	$	417,863	$	(65,269)	$	977,638
Balances at December 31, 2021	Balances at December 31, 2021	$	140	$	575,045	$	313,604	$	3,102	$	891,891	Balances at December 31, 2021	$	140	$	575,045	$	313,604	$	3,102	$	891,891
Comprehensive income:	Comprehensive income:											Comprehensive income:
Net income, six months ended June 30, 2022	Net income, six months ended June 30, 2022	—		—		48,149		—		48,149		Net income, six months ended June 30, 2022	—		—		48,149		—		48,149
Other comprehensive income (loss)	Other comprehensive income (loss)	—		—		—		(46,343)		(46,343)		Other comprehensive income (loss)	—		—		—		(46,343)		(46,343)

Stock-based compensation expense	Stock-based compensation expense	—		3,953		—		—		3,953		Stock-based compensation expense	—		3,953		—		—		3,953
Exercise of stock options, net	Exercise of stock options, net	1		2,076		—		—		2,077		Exercise of stock options, net	1		2,076		—		—		2,077
Issuance of common stock	Issuance of common stock	—		372		—		—		372		Issuance of common stock	—		372		—		—		372
Purchase and retirement of common stock	Purchase and retirement of common stock	(7)		(60,705)		—		—		(60,712)		Purchase and retirement of common stock	(7)		(60,705)		—		—		(60,712)

Balances at June 30, 2022	Balances at June 30, 2022	$	134	$	520,741	$	361,753	$	(43,241)	$	839,387	Balances at June 30, 2022	$	134	$	520,741	$	361,753	$	(43,241)	$	839,387
Balances at December 31, 2020		$	100	$	273,390	$	252,952	$	12,747	$	539,189
Comprehensive income:
Net income, six months ended June 30, 2021		—		—		36,523		—		36,523
Other comprehensive income (loss)		—		—		—		(4,021)		(4,021)
Stock-based compensation expense		—		3,396		—		—		3,396
Exercise of stock options, net		—		1,225		—		—		1,225
Issuance of common stock		—		232		—		—		232
Purchase and retirement of common stock		(2)		(17,147)		—		—		(17,149)

Balances at June 30, 2021		$	98	$	261,096	$	289,475	$	8,726	$	559,395

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)	Six Months Ended June 30,				(In thousands)	Six Months Ended June 30,
		2022		2021			2023		2022
Cash Flows From Operating Activities:	Cash Flows From Operating Activities:					Cash Flows From Operating Activities:
Net income	Net income	$	48,149	$	36,523	Net income	$	13,697	$	48,149
Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:						Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation, amortization, and accretion	Depreciation, amortization, and accretion	11,804		5,204		Depreciation, amortization, and accretion	9,274		11,804
Provision for credit losses	Provision for credit losses	1,050		500		Provision for credit losses	3,540		1,050
Increase in cash surrender value of life insurance	Increase in cash surrender value of life insurance	(1,701)		(1,086)		Increase in cash surrender value of life insurance	(2,159)		(1,701)
Stock-based compensation expense	Stock-based compensation expense	3,953		3,396		Stock-based compensation expense	3,430		3,953
Asset (gains) losses, net	Asset (gains) losses, net	(2,916)		(4,903)		Asset (gains) losses, net	38,786		(2,916)
Gain on sale of loans held for sale, net	Gain on sale of loans held for sale, net	(3,468)		(12,133)		Gain on sale of loans held for sale, net	(1,860)		(3,468)
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	150,037		367,215		Proceeds from sale of loans held for sale	64,117		150,037
Origination of loans held for sale	Origination of loans held for sale	(146,891)		(347,161)		Origination of loans held for sale	(65,244)		(146,891)
Accrued interest receivable and other assets	Accrued interest receivable and other assets	8,112		(2,001)		Accrued interest receivable and other assets	(3,846)		8,112
Accrued interest payable and other liabilities	Accrued interest payable and other liabilities	(18,787)		(2,539)		Accrued interest payable and other liabilities	(11,368)		(18,787)
Net cash provided by (used in) operating activities	Net cash provided by (used in) operating activities	49,342		43,015		Net cash provided by (used in) operating activities	48,367		49,342
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	(359,145)		(30,451)		Net (increase) decrease in loans	(39,223)		(359,145)
Net (increase) decrease in certificates of deposit in other banks	Net (increase) decrease in certificates of deposit in other banks	6,427		6,134		Net (increase) decrease in certificates of deposit in other banks	2,710		6,427
Purchases of securities AFS	Purchases of securities AFS	(8,017)		(88,204)		Purchases of securities AFS	—		(8,017)
Purchases of securities HTM	Purchases of securities HTM	(56,479)		—		Purchases of securities HTM	—		(56,479)
Proceeds from sales of securities AFS	Proceeds from sales of securities AFS	3,400		—		Proceeds from sales of securities AFS	26,798		3,400
Proceeds from sales of securities HTM						Proceeds from sales of securities HTM	460,051		—
Proceeds from calls and maturities of securities AFS	Proceeds from calls and maturities of securities AFS	47,052		58,349		Proceeds from calls and maturities of securities AFS	133,027		47,052
Proceed from calls and maturities of securities HTM		12,509		—
Proceeds from calls and maturities of securities HTM						Proceeds from calls and maturities of securities HTM	2,916		12,509
Purchases of other investments	Purchases of other investments	(11,303)		(1,710)		Purchases of other investments	(12,022)		(11,303)
Proceeds from sales of other investments	Proceeds from sales of other investments	1,734		822		Proceeds from sales of other investments	18,883		1,734

Proceeds from redemption of BOLI	Proceeds from redemption of BOLI	117		—		Proceeds from redemption of BOLI	117		117
Net (increase) decrease in premises and equipment	Net (increase) decrease in premises and equipment	(6,173)		(3,694)		Net (increase) decrease in premises and equipment	(12,565)		(6,173)
Net (increase) decrease in other real estate and other assets	Net (increase) decrease in other real estate and other assets	9,836		1,165		Net (increase) decrease in other real estate and other assets	794		9,836
Net cash (paid) received in branch sale	Net cash (paid) received in branch sale	147,833		—		Net cash (paid) received in branch sale	—		147,833

Net cash provided by (used in) investing activities	Net cash provided by (used in) investing activities	(212,209)		(57,589)		Net cash provided by (used in) investing activities	581,486		(212,209)
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	(173,145)		28,813		Net increase (decrease) in deposits	19,849		(173,145)
Net increase (decrease) in short-term borrowings						Net increase (decrease) in short-term borrowings	(267,000)		—

Proceeds from long-term borrowings		—		5,000
Repayments of long-term borrowings	Repayments of long-term borrowings	(20,000)		(14,000)		Repayments of long-term borrowings	(28,000)		(20,000)
Purchase and retirement of common stock	Purchase and retirement of common stock	(60,712)		(17,149)		Purchase and retirement of common stock	(1,521)		(60,712)
Cash dividends paid on common stock						Cash dividends paid on common stock	(3,698)		—

Proceeds from issuance of common stock	Proceeds from issuance of common stock	372		232		Proceeds from issuance of common stock	400		372
Proceeds from exercise of stock options	Proceeds from exercise of stock options	2,077		1,225		Proceeds from exercise of stock options	600		2,077

Net cash provided by (used in) financing activities	Net cash provided by (used in) financing activities	(251,408)		4,121		Net cash provided by (used in) financing activities	(279,370)		(251,408)
Net increase (decrease) in cash and cash equivalents	Net increase (decrease) in cash and cash equivalents	(414,275)		(10,453)		Net increase (decrease) in cash and cash equivalents	350,483		(414,275)
Cash and cash equivalents:	Cash and cash equivalents:					Cash and cash equivalents:
Beginning	Beginning	595,292		802,859		Beginning	154,723		595,292
Ending *	Ending *	$	181,017	$	792,406	Ending *	$	505,206	$	181,017
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	$	11,367	$	6,436	Cash paid for interest	$	61,769	$	11,367
Cash paid for taxes	Cash paid for taxes	19,610		19,416		Cash paid for taxes	12,400		19,610
Transfer of securities from HTM to AFS						Transfer of securities from HTM to AFS	177,727		—
Transfer of loans and bank premises to other real estate owned	Transfer of loans and bank premises to other real estate owned	432		302		Transfer of loans and bank premises to other real estate owned	—		432
Capitalized mortgage servicing rights	Capitalized mortgage servicing rights	1,685		2,294		Capitalized mortgage servicing rights	620		1,685

* There was no restricted cash in cash and cash equivalents at ~~June 30, 2022, while cash and cash equivalents at June 30, 2021, included restricted cash of $1.9 millionpledged as collateral on interest rate swaps. No reserve balance was required with the Federal Reserve Bank at~~ either June 30, ~~2022~~2023 or June 30, ~~2021.~~2022.

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, ~~2021.~~2022.

Critical Accounting Policies and Estimates

Preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions, and ~~assumptions~~judgments 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~~These estimates are ~~particularly susceptible~~based on management’s knowledge of historical experience, current information, and other factors deemed to significant change for the Company include the determination of the allowance for 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.be relevant; accordingly, as this information changes, actual results could differ from those estimates. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: external market factors such as market interest rates and employment rates, changes to operating policies and procedures, changes in applicable banking or tax regulations, and changes to deferred tax estimates. ~~Actual~~Nicolet considers accounting estimates to be critical to reported financial results ~~may ultimately differ~~if the accounting estimate requires management to make assumptions about matters that are highly uncertain and different estimates that are reasonably likely to occur from period to period, could have a material impact on the financial statements. The accounting estimates ~~although management does not generally believe such differences would materially affect~~we consider to be critical include business combinations and the ~~consolidated financial statements in any individual reporting period presented.~~valuation of loans acquired, the determination of the allowance for credit losses, and income taxes.

There have been no material changes or developments with respect to the assumptions or methodologies that the Company uses when applying ~~what management believes are~~ critical accounting policies and developing critical accounting estimates as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

~~Future~~Recent Accounting Pronouncements Adopted

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~~eliminated the accounting guidance for TDRs by creditors ~~while enhancing~~and enhanced the disclosure requirements for ~~certain~~ loan ~~refinancings and restructurings by creditors when a borrower is~~modifications to borrowers experiencing financial difficulty. The ASU also requires public business entities to expand the vintage disclosures to include gross charge-offs by year of origination. The updated guidance is effective for fiscal years beginning after December 15, ~~2022, with early adoption permitted.~~2022. Adoption of this ~~amendment is~~ASU did not ~~expected to~~ have a material impact on the Company’s consolidated financial statements; ~~though,~~however, it ~~will result~~resulted in new disclosures. See Note 6 for the new disclosures.

Future Accounting Pronouncements

In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. This ASU permits reporting entities to elect to account for tax equity investments, regardless of the tax credit program for which the income tax credits are received, using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the income statement as a component of income tax expense. A reporting entity makes an accounting policy election to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis rather than electing to apply the proportional amortization method at the reporting entity level or to individual investments. This ASU also requires specific disclosures of ~~gross charge-offs by year of origination~~investments that generate income tax credits and onother income tax benefits from a tax credit program for which the ~~types of loan modifications~~entity has elected to ~~borrowers experiencing financial difficulties. Current TDR disclosures will be also removed.~~apply the proportional amortization method. The updated guidance is effective for fiscal years beginning after December 15, 2023.

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~~In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which defers the sunset date of the original guidance ~~is effective for all entities as of March 12, 2020 through~~from December 31, ~~2022.~~2022 to December 31, 2024. The Company continues to work through the cessation of LIBOR, including the modification of its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR. The Company expects to utilize the reference rate reform transition guidance, as applicable, and does not expect such adoption to have a material impact on its consolidated financial statements 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 ~~2021~~2022 consolidated financial statements have been reclassified to conform to the ~~2022~~2023 presentation. These reclassifications were not material and did not impact previously reported net income or comprehensive income.

Note 2 – ~~Acquisitions~~

~~Completed Acquisitions:~~Acquisition

~~County Bancorp,~~Charter Bankshares, Inc. (“~~County”~~Charter”): On ~~December 3, 2021,~~August 26, 2022, Nicolet completed its merger with ~~County,~~Charter, pursuant to the Agreement and Plan of Merger dated ~~June 22, 2021 (the “County Merger Agreement”),~~March 29, 2022, at which time ~~County~~Charter merged with and into Nicolet, and ~~Investors Community~~Charter Bank, the wholly owned bank subsidiary of ~~County,~~Charter, was merged with and into Nicolet National Bank (the “Bank”), the wholly owned bank subsidiary of Nicolet.

~~Pursuant to the County Merger Agreement, each share of County common stock issued and outstanding immediately prior to the effective time of~~ In the merger, ~~was converted into the right to receive, at the election of the shareholder, either cash of $37.18 or 0.48~~Charter stockholders received 15.458 shares of Nicolet common stock ~~subject to proration procedures such that 1,237,000 shares~~and $475 in cash for each share of ~~County common stock were exchanged for cash, and the remaining shares were exchanged for Nicolet common stock.~~Charter owned. As a result, Nicolet issued approximately ~~2.4~~1.26 million shares of Nicolet common stock for stock consideration of ~~$176~~$98 million and cash consideration of ~~$48~~$39 million, orfor a total ~~purchases~~purchase price of ~~$224~~$137 million. With the ~~County~~Charter merger, Nicolet ~~became the premier agriculture lender throughout Wisconsin.~~expanded to Western Wisconsin and Minnesota.

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


(In millions, except share data)	(In millions, except share data)	Acquired from County		Fair Value Adjustments		Estimated Fair Value		(In millions, except share data)	Acquired from Charter		Fair Value Adjustments		Estimated Fair Value
Assets Acquired:	Assets Acquired:							Assets Acquired:
Cash and cash equivalents	Cash and cash equivalents	$	20	$	—	$	20	Cash and cash equivalents	$	10	$	—	$	10
Investment securities	Investment securities	301		(1)		300		Investment securities	218		—		218
Loans	Loans	1,015		(1)		1,014		Loans	848		(21)		827
ACL-Loans	ACL-Loans	(11)		8		(3)		ACL-Loans	(9)		7		(2)
Premises and equipment	Premises and equipment	21		(4)		17		Premises and equipment	9		1		10
BOLI	BOLI	33		—		33		BOLI	29		—		29
Core deposit intangible	Core deposit intangible	—		7		7		Core deposit intangible	—		19		19
Loan servicing rights		20		—		20
Other assets	Other assets	6		(2)		4		Other assets	5		5		10
Total assets	Total assets	$	1,405	$	7	$	1,412	Total assets	$	1,110	$	11	$	1,121
Liabilities Assumed:	Liabilities Assumed:							Liabilities Assumed:
Deposits	Deposits	$	1,027	$	3	$	1,030	Deposits	$	869	$	1	$	870
Borrowings	Borrowings	218		1		219		Borrowings	161		—		161
Other liabilities	Other liabilities	8		—		8		Other liabilities	3		—		3
Total liabilities	Total liabilities	$	1,253	$	4	$	1,257	Total liabilities	$	1,033	$	1	$	1,034
Net assets acquired	Net assets acquired					$	155	Net assets acquired					$	87
Purchase Price:	Purchase Price:							Purchase Price:
Nicolet common stock issued (in shares)	Nicolet common stock issued (in shares)					2,366,243		Nicolet common stock issued (in shares)					1,262,360
Value of Nicolet common stock consideration	Value of Nicolet common stock consideration					$	176	Value of Nicolet common stock consideration					$	98
Cash consideration paid	Cash consideration paid					48		Cash consideration paid					39
Total purchase price	Total purchase price					$	224	Total purchase price					$	137
Write-off prior investment in County						(1)
Goodwill	Goodwill					$	70	Goodwill					$	50

The Company purchased loans through the acquisition of ~~County~~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)	~~December 3, 2021~~August 26, 2022
Purchase price of PCD loans at acquisition	$	~~64,948~~24,031
Allowance for credit losses on PCD loans at acquisition	~~3,262~~1,709
Par value of PCD acquired loans at acquisition	$	~~68,210~~25,740

The Company accounted for the ~~County~~Charter acquisition under the acquisition method of accounting, and thus, the financial position and results of operations of ~~County~~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 ~~County~~Charter 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, 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 expanded Nicolet prominently into Northern Michigan and the Upper Peninsula of Michigan, and 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 purchase price allocation was as follows.~~

(In millions, except share data) Acquired from Mackinac Fair Value Adjustments Estimated Fair Value
Assets Acquired:
Cash and cash equivalents $ 448 $ — $ 448
Investment securities 104 — 104
Loans 930 10 940
ACL-Loans (6) 4 (2)
Premises and equipment 24 (3) 21
BOLI 16 — 16
Goodwill 20 (20) —
Other intangibles 4 3 7
Other assets 25 (3) 22
     Total assets $ 1,565 $ (9) $ 1,556
Liabilities Assumed:
Deposits $ 1,365 $ 1 $ 1,366
Borrowings 28 1 29
Other liabilities 13 1 14
     Total liabilities $ 1,406 $ 3 $ 1,409
Net assets acquired $ 147
Purchase Price:
Nicolet common stock issued (in shares) 2,337,230
Value of Nicolet common stock consideration $ 180
Cash consideration paid 49
    Total purchase price $ 229
Write-off prior investment in Mackinac (2)
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” loans). The carrying amount of these loans at acquisition was as follows.


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

The 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. 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, 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 acquisitions had occurred before such periods or the future results of operations that the companies will experience as a result of the 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 mergers and, accordingly, does not attempt to predict or suggest future results.

Three Months Ended Six Months Ended
(In thousands, except per share data) June 30, 2021 June 30, 2021
Total revenue, net of interest expense $ 85,562 $ 166,870
Net income $ 27,960 $ 44,621
Diluted earnings per common share $ 1.86 $ 2.96

~~Pending Acquisition:~~

~~Charter Bankshares, Inc. (“Charter”)~~: On March 29, 2022, Nicolet entered into an Agreement and Plan of Merger with Charter (the “Charter Merger Agreement”) pursuant to which Charter will merge with and into Nicolet. Pursuant to the terms and subject to the conditions set forth in the Charter Merger Agreement, at the effective time of the merger, Charter shareholders will have the right to receive 15.458 shares of Nicolet common stock and $475 in cash for each share of Charter common stock. As a result, Nicolet expects to issue approximately 1.26 million shares of Nicolet common stock and $38.8 million in cash for the acquisition of Charter. At March 31, 2022, Charter had total assets of $1.1 billion. As of July 12, 2022, Nicolet received all regulatory approvals for the Charter merger. The merger is expected to close in the third quarter of 2022, subject to customary closing conditions.

Note 3 – Earnings per Common Share

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


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
(In thousands, except per share data)	(In thousands, except per share data)	2022		2021		2022		2021		(In thousands, except per share data)	2023		2022		2023		2022
Net income	Net income	$	23,985	$	18,284	$	48,149	$	36,523	Net income	$	22,595	$	23,985	$	13,697	$	48,149
Weighted average common shares outstanding	Weighted average common shares outstanding	13,402		9,902		13,525		9,949		Weighted average common shares outstanding	14,711		13,402		14,703		13,525
Effect of dilutive common stock awards	Effect of dilutive common stock awards	450		424		510		416		Effect of dilutive common stock awards	249		450		308		510
Diluted weighted average common shares outstanding	Diluted weighted average common shares outstanding	13,852		10,326		14,035		10,365		Diluted weighted average common shares outstanding	14,960		13,852		15,011		14,035
Basic earnings per common share*	Basic earnings per common share*	$	1.79	$	1.85	$	3.56	$	3.67	Basic earnings per common share*	$	1.54	$	1.79	$	0.93	$	3.56
Diluted earnings per common share*	Diluted earnings per common share*	$	1.73	$	1.77	$	3.43	$	3.52	Diluted earnings per common share*	$	1.51	$	1.73	$	0.91	$	3.43

*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 both the three and six months ended June 30, ~~2022~~2023, options to purchase approximately 0.3 million shares were excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive. For both the three and six months ended June 30, ~~2021,~~2022, options to purchase approximately 0.1 million shares ~~are~~were excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive.

Note 4 – Stock-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 June 30, ~~2022,~~2023, approximately ~~0.8~~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 six months ended June 30, 2022 and 2021~~ were as follows.


		Six Months Ended June 30,							Six Months Ended June 30,
		2022			2021				2023			2022
Dividend yield	Dividend yield	—		%	—		%	Dividend yield	1.6		%	—		%
Expected volatility	Expected volatility	30		%	30		%	Expected volatility	30		%	30		%
Risk-free interest rate	Risk-free interest rate	1.77		%	1.16		%	Risk-free interest rate	3.74		%	1.77		%
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	$	32.99		$	26.55		Weighted average per share fair value of options	$	20.94		$	32.99

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, 2021		1,833,246	$	57.69
Outstanding - December 31, 2022								Outstanding - December 31, 2022	1,853,064	$	59.79
Granted	Granted	30,429	93.68					Granted	7,000	64.36
Exercise of stock options *	Exercise of stock options *	(65,411)	41.32					Exercise of stock options *	(48,979)	31.67
Forfeited	Forfeited	(8,100)	77.56					Forfeited	(13,000)	78.32
Outstanding - June 30, 2022		1,790,164	$	58.81	6.2	$	27,369
Exercisable - June 30, 2022		1,207,235	$	50.84	5.1	$	26,444
Outstanding - June 30, 2023								Outstanding - June 30, 2023	1,798,085	$	60.44	5.5	$	19,976
Exercisable - June 30, 2023								Exercisable - June 30, 2023	1,310,642	$	54.41	4.6	$	19,862

* The terms of the stock option agreements permit having a number of shares of stock withheld, the fair market value of which as of the date of exercise is sufficient to satisfy the exercise price and/or tax withholding requirements. For the six months ended June 30, ~~2022, 6,073~~2023, 14,772 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 six months ended June 30, ~~2022~~2023 and ~~2021~~2022 was approximately ~~$3.3~~$1.4 million and ~~$1.5~~$3.3 million, respectively.

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

Restricted Stock Weighted Average Grant
Date Fair Value Restricted Shares
Outstanding
Outstanding - December 31, 2021 $ 71.42 25,801
Granted 77.06 8,424
Vested * 71.63 (12,449)
Forfeited 56.01 (600)
Outstanding - June 30, 2022 $ 73.98 21,176

* 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, 393 shares were surrendered during the six months ended June 30, 2022.


Restricted Stock	Weighted Average Grant Date Fair Value		Restricted Shares Outstanding
Outstanding - December 31, 2022	$	76.49	73,490
Granted	55.65		11,674
Vested	59.50		(14,174)

Outstanding - June 30, 2023	$	76.45	70,990

The Company recognized approximately ~~$3.3~~$2.8 million and ~~$2.7~~$3.3 million of stock-based compensation expense (included in personnel on the consolidated statements of income) for the six months ended June 30, ~~2022~~2023 and ~~2021,~~2022, respectively, associated with its common stock awards granted to officers and employees. In addition, ~~during~~for the six months ended June 30, ~~2022,~~2023, the Company recognized approximately $0.6 million of director expense (included in other expense on the consolidated statements of income) for restricted stock grants totaling ~~8,424~~11,674 shares with immediate vesting to directors, while ~~during first half 2021,~~for the six months ended June 30, 2022, the Company recognized approximately ~~$0.7~~$0.6 million of director expense for restricted stock grants totaling ~~8,562~~8,424 shares with immediate vesting to directors, in each case representing the annual stock retainer fee paid to external board members for that year. As of June 30, ~~2022,~~2023, there was approximately ~~$14.2~~$15.6 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~~three years. The Company

recognized a tax benefit of approximately ~~$0.4~~$0.2 million and ~~$0.3~~$0.4 million for the six months ended June 30, ~~2022~~2023 and ~~2021,~~2022, respectively, for the tax impact of stock option exercises and vesting of restricted stock.

Note 5 – Securities and Other Investments

Securities

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


		June 30, 2022											June 30, 2023
(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
Securities AFS:	Securities AFS:											Securities AFS:
U.S. Treasury securities												U.S. Treasury securities	$	142,197	$	—	$	4,999	$	137,198
U.S. government agency securities	U.S. government agency securities	$	191,976	$	—	$	8,127	$	183,849	23	%	U.S. government agency securities	8,807		29		44		8,792
State, county and municipals	State, county and municipals	298,822		38		27,358		271,502		33	%	State, county and municipals	401,293		263		32,718		368,838
Mortgage-backed securities	Mortgage-backed securities	246,198		2		19,952		226,248		28	%	Mortgage-backed securities	342,945		—		41,161		301,784
Corporate debt securities	Corporate debt securities	135,486		65		3,902		131,649		16	%	Corporate debt securities	115,277		—		10,781		104,496
Total securities AFS	Total securities AFS	$	872,482	$	105	$	59,339	$	813,248	100	%	Total securities AFS	$	1,010,519	$	292	$	89,703	$	921,108
Securities HTM:
U.S. government agency securities		$	507,766	$	25	$	30,348	$	477,443	74	%
State, county and municipals		44,230		4		2,541		41,693		6	%
Mortgage-backed securities		143,816		—		12,719		131,097		20	%

Total securities HTM		$	695,812	$	29	$	45,608	$	650,233	100	%


		December 31, 2021											December 31, 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
Securities AFS:	Securities AFS:											Securities AFS:
U.S. Treasury securities												U.S. Treasury securities	$	192,116	$	—	$	8,286	$	183,830
U.S. government agency securities	U.S. government agency securities	$	192,506	$	6	$	1,235	$	191,277	21	%	U.S. government agency securities	2,133		—		33		2,100
State, county and municipals	State, county and municipals	311,717		3,222		2,202		312,737		34	%	State, county and municipals	433,733		123		35,668		398,188
Mortgage-backed securities	Mortgage-backed securities	270,017		3,090		1,845		271,262		29	%	Mortgage-backed securities	227,650		10		26,728		200,932
Corporate debt securities	Corporate debt securities	143,172		3,459		246		146,385		16	%	Corporate debt securities	140,712		3		8,147		132,568
Total securities AFS	Total securities AFS	$	917,412	$	9,777	$	5,528	$	921,661	100	%	Total securities AFS	$	996,344	$	136	$	78,862	$	917,618
Securities HTM:	Securities HTM:											Securities HTM:
U.S. Treasury securities												U.S. Treasury securities	$	497,648	$	—	$	35,722	$	461,926
U.S. government agency securities	U.S. government agency securities	$	508,810	$	—	$	2,740	$	506,070	78	%	U.S. government agency securities	8,744		46		—		8,790
State, county and municipals	State, county and municipals	42,876		10		173		42,713		7	%	State, county and municipals	34,874		—		3,349		31,525
Mortgage-backed securities	Mortgage-backed securities	100,117		89		595		99,611		15	%	Mortgage-backed securities	137,862		—		16,751		121,111
Total securities HTM	Total securities HTM	$	651,803	$	99	$	3,508	$	648,394	100	%	Total securities HTM	$	679,128	$	46	$	55,822	$	623,352

On March 7, 2023, Nicolet executed the sale of $500 million (par value) U.S. Treasury held to maturity securities for a pre-tax loss of $38 million or an after-tax loss of $28 million. Proceeds from the sale were used to reduce existing FHLB borrowings with the remainder held in investable cash. As a result of the sale of securities previously classified as held to maturity, the remaining unsold portfolio of held to maturity securities, with a book value of $177 million, was reclassified to available for sale with a carrying value of approximately $157 million. The unrealized loss on this portfolio of $20 million (at the time of reclassification) increased the balance of accumulated other comprehensive loss $15 million, net of the deferred tax effect, and is subject to future market changes.

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


	Six Months Ended June 30,
(in thousands)	2023		2022
Securities AFS:
Gross gains	$	148	$	20
Gross losses	(496)		(5)
Gains (losses) on sales of securities AFS, net	$	(348)	$	15
Proceeds from sales of securities AFS	$	26,798	$	3,400
Securities HTM:
Gross gains	$	—	$	—
Gross losses	(37,723)		—
Gains (losses) on sales of securities HTM, net	$	(37,723)	$	—
Proceeds from sales of securities HTM	$	460,051	$	—

All mortgage-backed securities included in the ~~tables above~~securities portfolio were issued by U.S. government agencies and corporations. Investment securities with a carrying value of ~~$781~~$396 million and ~~$277~~$883 million, as of June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively, were pledged as collateral to secure public deposits and borrowings, as applicable, and for liquidity or other purposes as required by regulation. Accrued interest on investment securities totaled $5 million and $6 million at ~~both~~ June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively, and is included in accrued interest receivable and other assets on the consolidated balance sheets.

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.


		June 30, 2022														June 30, 2023
		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. Treasury securities															U.S. Treasury securities	$	453	$	14	$	136,733	$	4,985	$	137,186	$	4,999	7
U.S. government agency securities	U.S. government agency securities	$	183,739	$	8,127	$	—	$	—	$	183,739	$	8,127	12	U.S. government agency securities	1,771		38		106		6		1,877		44		8
State, county and municipals	State, county and municipals	231,716		22,805		25,953		4,553		257,669		27,358		403	State, county and municipals	89,871		2,286		244,861		30,432		334,732		32,718		661
Mortgage-backed securities	Mortgage-backed securities	204,256		16,398		21,567		3,554		225,823		19,952		370	Mortgage-backed securities	10,915		616		290,862		40,545		301,777		41,161		445
Corporate debt securities	Corporate debt securities	101,597		3,902		—		—		101,597		3,902		63	Corporate debt securities	33,133		1,231		66,984		9,550		100,117		10,781		70
Total	Total	$	721,308	$	51,232	$	47,520	$	8,107	$	768,828	$	59,339	848	Total	$	136,143	$	4,185	$	739,546	$	85,518	$	875,689	$	89,703	1,191
Securities HTM:
U.S. government agency securities		$	466,941	$	30,348	$	—	$	—	$	466,941	$	30,348	6
State, county and municipals		34,537		2,541		—		—		34,537		2,541		60
Mortgage-backed securities		131,053		12,719		—		—		131,053		12,719		110

Total		$	632,531	$	45,608	$	—	$	—	$	632,531	$	45,608	176

December 31, 2021
Less than 12 months 12 months or more Total
($ in thousands) Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses Number of
Securities
Securities AFS:
U.S. government agency securities $ 190,432 $ 1,235 $ — $ — $ 190,432 $ 1,235 11
State, county and municipals 103,950 2,119 1,777 83 105,727 2,202 132
Mortgage-backed securities 137,561 1,616 6,068 229 143,629 1,845 159
Corporate debt securities 23,267 246 — — 23,267 246 13
Total $ 455,210 $ 5,216 $ 7,845 $ 312 $ 463,055 $ 5,528 315
Securities HTM:
U.S. government agency securities $ 505,938 $ 2,740 $ — $ — $ 505,938 $ 2,740 9
State, county and municipals 30,898 173 — — 30,898 173 46
Mortgage-backed securities 69,333 595 — — 69,333 595 72
Total $ 606,169 $ 3,508 $ — $ — $ 606,169 $ 3,508 127

~~Quarterly,~~


	December 31, 2022
	Less than 12 months				12 months or more				Total
($ in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Number of Securities
Securities AFS:
U.S. Treasury securities	$	448	$	14	$	183,382	$	8,272	$	183,830	$	8,286	9
U.S. government agency securities	2,083		32		17		1		2,100		33		9
State, county and municipals	277,546		18,041		86,569		17,627		364,115		35,668		812
Mortgage-backed securities	102,108		11,320		95,614		15,408		197,722		26,728		376
Corporate debt securities	114,887		6,186		12,938		1,961		127,825		8,147		90
Total	$	497,072	$	35,593	$	378,520	$	43,269	$	875,592	$	78,862	1,296
Securities HTM:
U.S. Treasury securities	$	—	$	—	$	461,926	$	35,722	$	461,926	$	35,722	6

State, county and municipals	17,591		1,594		11,654		1,755		29,245		3,349		58
Mortgage-backed securities	68,108		8,029		53,003		8,722		121,111		16,751		106
Total	$	85,699	$	9,623	$	526,583	$	46,199	$	612,282	$	55,822	170

During first quarter 2023, the Company ~~evaluates securities AFS~~recognized provision expense of $2.3 million related to the expected credit loss on its Signature Bank sub debt investment (acquired in ~~unrealized loss positions to determine whether~~an acquisition), and immediately charged-off the impairment is due to credit-related factors or noncredit-related factors. In making this evaluation, management considers the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. As of June 30, 2022 and December 31, 2021, no allowance for credit losses on securities AFS was recognized.full investment. The Company does not consider its remaining 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 AFS 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.

~~The Company also evaluates securities HTM quarterly to determine whether an~~ As of June 30, 2023 and December 31, 2022, no allowance for credit losses ~~is necessary. In making this determination, management considers~~on AFS securities was recognized.

The Company evaluated the ~~facts~~HTM securities and ~~circumstances of the underlying investment securities.~~determined no allowance for credit losses was necessary at December 31, 2022. The U.S. Treasury and 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~~considered 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. 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 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 June 30, 2022		Securities AFS				Securities HTM
As of June 30, 2023										As of June 30, 2023	Securities AFS
(in thousands)	(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		(in thousands)	Amortized Cost		Fair Value
Due in less than one year	Due in less than one year	$	106,281	$	105,073	$	6,626	$	6,616	Due in less than one year	$	172,412	$	170,901
Due in one year through five years	Due in one year through five years	251,475		242,694		507,447		476,632		Due in one year through five years	163,610		151,145
Due after five years through ten years	Due after five years through ten years	192,260		173,265		32,711		30,751		Due after five years through ten years	209,473		185,108
Due after ten years	Due after ten years	76,268		65,968		5,212		5,137		Due after ten years	122,079		112,170
		626,284		587,000		551,996		519,136			667,574		619,324
Mortgage-backed securities	Mortgage-backed securities	246,198		226,248		143,816		131,097		Mortgage-backed securities	342,945		301,784
Total investment securities	Total investment securities	$	872,482	$	813,248	$	695,812	$	650,233	Total investment securities	$	1,010,519	$	921,108

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

Six Months Ended June 30,
(in thousands) 2022 2021
Gross gains $ 20 $ —
Gross losses (5) —
Gains (losses) on sales of securities AFS, net $ 15 $ —
Proceeds from sales of securities AFS $ 3,400 $ —

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.


		June 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022
(in thousands)	(in thousands)	Amount		Amount		(in thousands)	Amount		Amount
Federal Reserve Bank stock	Federal Reserve Bank stock	$	29,024	$	20,973	Federal Reserve Bank stock	$	32,411	$	32,219
Federal Home Loan Bank (“FHLB”) stock	Federal Home Loan Bank (“FHLB”) stock	9,771		10,545		Federal Home Loan Bank (“FHLB”) stock	9,674		18,625
Equity securities with readily determinable fair values	Equity securities with readily determinable fair values	4,793		5,660		Equity securities with readily determinable fair values	3,748		4,376
Other investments	Other investments	9,681		6,830		Other investments	11,745		10,066
Total other investments	Total other investments	$	53,269	$	44,008	Total other investments	$	57,578	$	65,286

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

The loan composition is summarized as follows.


		June 30, 2022					December 31, 2021						June 30, 2023					December 31, 2022
(in thousands)	(in thousands)	Amount			% of Total		Amount			% of Total		(in thousands)	Amount			% of Total		Amount			% of Total
Commercial & industrial	Commercial & industrial	$	1,118,360		23	%	$	1,042,256		23	%	Commercial & industrial	$	1,318,567		21	%	$	1,304,819		21	%
Owner-occupied commercial real estate (“CRE”)	Owner-occupied commercial real estate (“CRE”)	790,680			16		787,189			17		Owner-occupied commercial real estate (“CRE”)	969,202			16		954,599			15
Agricultural	Agricultural	967,192			19		794,728			17		Agricultural	1,068,999			17		1,088,607			18
CRE investment	CRE investment	818,562			16		818,061			18		CRE investment	1,108,692			18		1,149,949			19
Construction & land development	Construction & land development	228,575			5		213,035			5		Construction & land development	337,389			5		318,600			5
Residential construction	Residential construction	69,423			1		70,353			1		Residential construction	108,095			2		114,392			2
Residential first mortgage	Residential first mortgage	785,591			16		713,983			15		Residential first mortgage	1,072,609			17		1,016,935			16
Residential junior mortgage	Residential junior mortgage	148,732			3		131,424			3		Residential junior mortgage	184,873			3		177,332			3
Retail & other	Retail & other	51,539			1		50,807			1		Retail & other	54,350			1		55,266			1
Loans	Loans	4,978,654			100	%	4,621,836			100	%	Loans	6,222,776			100	%	6,180,499			100	%
Less allowance for credit losses - Loans (“ACL-Loans”)	Less allowance for credit losses - Loans (“ACL-Loans”)	50,655					49,672					Less allowance for credit losses - Loans (“ACL-Loans”)	62,811					61,829
Loans, net	Loans, net	$	4,927,999				$	4,572,164				Loans, net	$	6,159,965				$	6,118,670
Allowance for credit losses - Loans to loans	Allowance for credit losses - Loans to loans	1.02		%			1.07		%			Allowance for credit losses - Loans to loans	1.01		%			1.00		%

~~Commercial and industrial loans included $1 million and $25 million of PPP loans at June 30, 2022 and December 31, 2021, respectively.~~ Accrued interest on loans totaled ~~$11~~$16 million and $15 million at ~~both~~ June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, 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 Six Months Ended Year Ended
(in thousands) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 December 31, 2021
Beginning balance $ 49,906 $ 32,626 $ 49,672 $ 32,173 $ 32,173
ACL on PCD loans acquired — — — — 5,159
Provision for credit losses 600 — 900 500 12,500
Charge-offs (42) (235) (142) (329) (513)
Recoveries 191 170 225 217 353
Net (charge-offs) recoveries 149 (65) 83 (112) (160)
Ending balance $ 50,655 $ 32,561 $ 50,655 $ 32,561 $ 49,672


	Three Months Ended				Six Months Ended				Year Ended
(in thousands)	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022		December 31, 2022
Beginning balance	$	62,412	$	49,906	$	61,829	$	49,672	$	49,672
ACL on PCD loans acquired	—		—		—		—		1,937
Provision for credit losses	450		600		1,200		900		10,950
Charge-offs	(561)		(42)		(745)		(142)		(1,033)
Recoveries	510		191		527		225		303
Net (charge-offs) recoveries	(51)		149		(218)		83		(730)
Ending balance	$	62,811	$	50,655	$	62,811	$	50,655	$	61,829

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


		Six Months Ended June 30, 2022																															Six Months Ended June 30, 2023
(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	$	12,613		$	7,222		$	9,547		$	8,462		$	1,812		$	900		$	6,844		$	1,340		$	932		$	49,672		Beginning balance	$	16,350		$	9,138		$	9,762		$	12,744		$	2,572		$	1,412		$	6,976		$	1,846		$	1,029		$	61,829
ACL on PCD loans		—			—			—			—			—			—			—			—			—			—

Provision	Provision	1,048			(261)			505			(416)			(59)			6			(291)			186			182			900			Provision	(387)			(307)			1,865			(301)			127			(69)			(46)			136			182			1,200
Charge-offs	Charge-offs	—			(36)			—			—			—			—			—			—			(106)			(142)			Charge-offs	(403)			—			(66)			—			—			—			—			(96)			(180)			(745)
Recoveries	Recoveries	30			—			—			169			—			—			5			1			20			225			Recoveries	518			—			3			—			—			—			2			—			4			527
Net (charge-offs) recoveries	Net (charge-offs) recoveries	30			(36)			—			169			—			—			5			1			(86)			83			Net (charge-offs) recoveries	115			—			(63)			—			—			—			2			(96)			(176)			(218)
Ending balance	Ending balance	$	13,691		$	6,925		$	10,052		$	8,215		$	1,753		$	906		$	6,558		$	1,527		$	1,028		$	50,655		Ending balance	$	16,078		$	8,831		$	11,564		$	12,443		$	2,699		$	1,343		$	6,932		$	1,886		$	1,035		$	62,811
As % of ACL-Loans	As % of ACL-Loans	27		%	14		%	20		%	16		%	3		%	2		%	13		%	3		%	2		%	100		%	As % of ACL-Loans	26		%	14		%	18		%	20		%	4		%	2		%	11		%	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, 2021																															Year Ended December 31, 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	723			1,045			2,585			415			103			—			272			13			3			5,159			ACL on PCD loans	1,408			384			—			38			2			—			93			12			—			1,937
Provision	Provision	196			305			5,615			2,608			725			479			1,892			237			443			12,500			Provision	2,415			2,087			215			4,075			758			512			96			493			299			10,950
Charge-offs	Charge-offs	(242)			—			(48)			(4)			—			—			(113)			—			(106)			(513)			Charge-offs	(190)			(555)			—			—			—			—			(65)			—			(223)			(1,033)
Recoveries	Recoveries	292			—			—			2			—			—			20			4			35			353			Recoveries	104			—			—			169			—			—			8			1			21			303
Net (charge-offs) recoveries	Net (charge-offs) recoveries	50			—			(48)			(2)			—			—			(93)			4			(71)			(160)			Net (charge-offs) recoveries	(86)			(555)			—			169			—			—			(57)			1			(202)			(730)
Ending balance	Ending balance	$	12,613		$	7,222		$	9,547		$	8,462		$	1,812		$	900		$	6,844		$	1,340		$	932		$	49,672		Ending balance	$	16,350		$	9,138		$	9,762		$	12,744		$	2,572		$	1,412		$	6,976		$	1,846		$	1,029		$	61,829
As % of ACL-Loans	As % of ACL-Loans	25		%	14		%	19		%	17		%	4		%	2		%	14		%	3		%	2		%	100		%	As % of ACL-Loans	26		%	15		%	16		%	21		%	4		%	2		%	11		%	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 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.

Management allocates the ACL-Loans by pools of risk within each loan portfolio segment. The allocation methodology consists of the following components. First, a specific reserve is established for individually evaluated credit-deteriorated loans, which management defines as nonaccrual credit relationships over $250,000, collateral dependent loans, purchased 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. 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 ~~$2.6~~$3.0 million at both June 30, ~~2022~~2023 and ~~$2.4 million at~~ December 31, ~~2021.~~

2022.

Provision for Credit Losses:

The provision for credit losses is determined by the Company as the amount to be added to the ACL loss accounts for various types of financial instruments including loans, investment securities, and off-balance sheet credit exposures after net charge-offs have been deducted to bring the ACL to a level that, in management’s judgment, is necessary to absorb expected credit losses over the lives of the respective financial instruments. See Note 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				Six Months Ended				Year Ended			Three Months Ended				Six Months Ended				Year Ended
(in thousands)	(in thousands)	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021		December 31, 2021		(in thousands)	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022		December 31, 2022
Provision for credit losses on:	Provision for credit losses on:											Provision for credit losses on:
Loans	Loans	$	600	$	—	$	900	$	500	$	12,500	Loans	$	450	$	600	$	1,200	$	900	$	10,950
Unfunded Commitments		150		—		150		—		2,400
Unfunded commitments												Unfunded commitments	—		150		—		150		550
Investment securities	Investment securities	—		—		—		—		—		Investment securities	—		—		2,340		—		—
Total	Total	$	750	$	—	$	1,050	$	500	$	14,900	Total	$	450	$	750	$	3,540	$	1,050	$	11,500

Collateral Dependent Loans:

A loan is considered to be collateral dependent when, based upon management’s assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. For collateral dependent loans, expected credit losses are based on the estimated fair value of the collateral at the balance 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.


June 30, 2022		Collateral Type
June 30, 2023														June 30, 2023	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	$	—	$	2,196	$	2,196	$	1,425	$	771	$	197	Commercial & industrial	$	—	$	1,989	$	1,989	$	561	$	1,428	$	461
Owner-occupied CRE	Owner-occupied CRE	6,562		—		6,562		4,489		2,073		403		Owner-occupied CRE	5,236		—		5,236		5,236		—		—
Agricultural	Agricultural	14,236		6,522		20,758		14,604		6,154		309		Agricultural	5,805		3,069		8,874		3,871		5,003		91
CRE investment	CRE investment	2,265		—		2,265		419		1,846		289		CRE investment	2,434		—		2,434		1,911		523		7
Construction & land development	Construction & land development	1,009		—		1,009		1,009		—		—		Construction & land development	—		—		—		—		—		—
Residential construction		—		—		—		—		—		—

Residential first mortgage	Residential first mortgage	—		—		—		—		—		—		Residential first mortgage	693		—		693		693		—		—
Residential junior mortgage	Residential junior mortgage	—		—		—		—		—		—		Residential junior mortgage	—		—		—		—		—		—
Retail & other		—		—		—		—		—		—

Total loans	Total loans	$	24,072	$	8,718	$	32,790	$	21,946	$	10,844	$	1,198	Total loans	$	14,168	$	5,058	$	19,226	$	12,272	$	6,954	$	559


December 31, 2021		Collateral Type
December 31, 2022														December 31, 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	$	—	$	2,296	$	2,296	$	1,842	$	454	$	258	Commercial & industrial	$	—	$	3,475	$	3,475	$	1,927	$	1,548	$	595
Owner-occupied CRE	Owner-occupied CRE	3,537		—		3,537		1,315		2,222		552		Owner-occupied CRE	4,907		—		4,907		4,699		208		53
Agricultural	Agricultural	19,637		8,518		28,155		25,310		2,845		841		Agricultural	13,758		6,458		20,216		14,358		5,858		261
CRE investment	CRE investment	3,000		—		3,000		1,684		1,316		407		CRE investment	2,713		—		2,713		979		1,734		212
Construction & land development	Construction & land development	1,038		—		1,038		655		383		211		Construction & land development	670		—		670		670		—		—
Residential construction		—		—		—		—		—		—

Residential first mortgage	Residential first mortgage	473		—		473		473		—		—		Residential first mortgage	91		—		91		91		—		—
Residential junior mortgage		—		—		—		—		—		—
Retail & other		—		—		—		—		—		—

Total loans	Total loans	$	27,685	$	10,814	$	38,499	$	31,279	$	7,220	$	2,269	Total loans	$	22,139	$	9,933	$	32,072	$	22,724	$	9,348	$	1,121

1817

Past Due and Nonaccrual Loans:

The following tables present past due loans by portfolio segment.


		June 30, 2022													June 30, 2023
(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	$	2,114		$	1,784		$	1,114,462		$	1,118,360		Commercial & industrial	$	260		$	3,157		$	1,315,150		$	1,318,567
Owner-occupied CRE	Owner-occupied CRE	165			5,183			785,332			790,680			Owner-occupied CRE	28			6,573			962,601			969,202
Agricultural	Agricultural	129			21,054			946,009			967,192			Agricultural	151			9,092			1,059,756			1,068,999
CRE investment	CRE investment	287			3,617			814,658			818,562			CRE investment	56			2,535			1,106,101			1,108,692
Construction & land development	Construction & land development	—			1,044			227,531			228,575			Construction & land development	121			95			337,173			337,389
Residential construction	Residential construction	994			—			68,429			69,423			Residential construction	—			—			108,095			108,095
Residential first mortgage	Residential first mortgage	1,427			3,580			780,584			785,591			Residential first mortgage	868			3,638			1,068,103			1,072,609
Residential junior mortgage	Residential junior mortgage	126			221			148,385			148,732			Residential junior mortgage	118			87			184,668			184,873
Retail & other	Retail & other	146			97			51,296			51,539			Retail & other	215			101			54,034			54,350
Total loans	Total loans	$	5,388		$	36,580		$	4,936,686		$	4,978,654		Total loans	$	1,817		$	25,278		$	6,195,681		$	6,222,776
Percent of total loans	Percent of total loans	0.1		%	0.7		%	99.2		%	100.0		%	Percent of total loans	—		%	0.4		%	99.6		%	100.0		%


		December 31, 2021													December 31, 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	$	94		$	1,908		$	1,040,254		$	1,042,256		Commercial & industrial	$	210		$	3,328		$	1,301,281		$	1,304,819
Owner-occupied CRE	Owner-occupied CRE	—			4,220			782,969			787,189			Owner-occupied CRE	833			5,647			948,119			954,599
Agricultural	Agricultural	108			28,367			766,253			794,728			Agricultural	20			20,416			1,068,171			1,088,607
CRE investment	CRE investment	114			4,119			813,828			818,061			CRE investment	—			3,832			1,146,117			1,149,949
Construction & land development	Construction & land development	—			1,071			211,964			213,035			Construction & land development	—			771			317,829			318,600
Residential construction	Residential construction	246			—			70,107			70,353			Residential construction	—			—			114,392			114,392
Residential first mortgage	Residential first mortgage	2,592			4,132			707,259			713,983			Residential first mortgage	3,628			3,780			1,009,527			1,016,935
Residential junior mortgage	Residential junior mortgage	23			243			131,158			131,424			Residential junior mortgage	236			224			176,872			177,332
Retail & other	Retail & other	115			94			50,598			50,807			Retail & other	261			82			54,923			55,266
Total loans	Total loans	$	3,292		$	44,154		$	4,574,390		$	4,621,836		Total loans	$	5,188		$	38,080		$	6,137,231		$	6,180,499
Percent of total loans	Percent of total loans	0.1		%	0.9		%	99.0		%	100.0		%	Percent of total loans	0.1		%	0.6		%	99.3		%	100.0		%

The following table presents nonaccrual loans by portfolio segment.


		June 30, 2022					December 31, 2021						June 30, 2023					December 31, 2022
(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	$	1,784		5	%	$	1,908		4	%	Commercial & industrial	$	3,157		12	%	$	3,328		9	%
Owner-occupied CRE	Owner-occupied CRE	5,183			14		4,220			10		Owner-occupied CRE	6,573			26		5,647			15
Agricultural	Agricultural	21,054			58		28,367			64		Agricultural	9,092			36		20,416			53
CRE investment	CRE investment	3,617			10		4,119			9		CRE investment	2,535			10		3,832			10
Construction & land development	Construction & land development	1,044			2		1,071			3		Construction & land development	95			1		771			2
Residential construction	Residential construction	—			—		—			—		Residential construction	—			—		—			—
Residential first mortgage	Residential first mortgage	3,580			10		4,132			9		Residential first mortgage	3,638			14		3,780			10
Residential junior mortgage	Residential junior mortgage	221			1		243			1		Residential junior mortgage	87			—		224			1
Retail & other	Retail & other	97			—		94			—		Retail & other	101			1		82			—
Nonaccrual loans	Nonaccrual loans	$	36,580		100	%	$	44,154		100	%	Nonaccrual loans	$	25,278		100	%	$	38,080		100	%
Percent of total loans	Percent of total loans	0.7		%			0.9		%			Percent of total loans	0.4		%			0.6		%

1918

Credit Quality Information:

The following tables present total loans by risk categories and gross charge-offs by year of origination. ~~Loans acquired from Mackinac and County~~Acquired loans have been included ~~in the June 30, 2022 and December 31, 2021 tables~~ based upon the actual origination date.


June 30, 2022		Amortized Cost Basis by Origination Year
June 30, 2023																				June 30, 2023	Amortized Cost Basis by Origination Year
(in thousands)	(in thousands)	2022		2021		2020		2019		2018		Prior		Revolving		Revolving to Term		TOTAL		(in thousands)	2023		2022		2021		2020		2019		Prior		Revolving		Revolving to Term		TOTAL
Commercial & industrial	Commercial & industrial																			Commercial & industrial
Grades 1-4	Grades 1-4	$	150,560	$	235,065	$	115,457	$	85,568	$	55,138	$	86,868	$	331,520	$	—	$	1,060,176	Grades 1-4	$	97,859	$	292,993	$	198,515	$	85,707	$	59,568	$	102,696	$	383,527	$	—	$	1,220,865
Grade 5	Grade 5	5,978		4,207		10,982		2,421		711		4,507		19,006		—		47,812		Grade 5	5,318		6,973		6,397		1,929		1,156		7,678		27,520		—		56,971
Grade 6	Grade 6	167		1,095		121		577		466		399		514		—		3,339		Grade 6	—		1,688		1,361		837		5		1,127		4,907		—		9,925
Grade 7	Grade 7	48		28		3,409		625		658		1,214		1,051		—		7,033		Grade 7	605		3,578		2,590		2,319		2,189		13,912		5,613		—		30,806
Total	Total	$	156,753	$	240,395	$	129,969	$	89,191	$	56,973	$	92,988	$	352,091	$	—	$	1,118,360	Total	$	103,782	$	305,232	$	208,863	$	90,792	$	62,918	$	125,413	$	421,567	$	—	$	1,318,567
Current period gross charge-offs																				Current period gross charge-offs	$	—	$	(77)	$	(114)	$	—	$	—	$	(197)	$	(15)	$	—	$	(403)
Owner-occupied CRE	Owner-occupied CRE																			Owner-occupied CRE
Grades 1-4	Grades 1-4	$	78,180	$	154,736	$	90,071	$	92,236	$	82,271	$	240,560	$	7,573	$	—	$	745,627	Grades 1-4	$	60,120	$	160,217	$	189,378	$	100,814	$	92,047	$	302,445	$	3,210	$	—	$	908,231
Grade 5	Grade 5	822		4,977		2,225		5,709		2,962		11,048		14		—		27,757		Grade 5	1,398		4,237		9,020		5,009		1,139		16,269		509		—		37,581
Grade 6	Grade 6	—		—		—		1,832		683		283		—		—		2,798		Grade 6	—		261		352		546		1,561		954		150		—		3,824
Grade 7	Grade 7	—		—		6,299		161		—		8,038		—		—		14,498		Grade 7	—		221		2,069		6,806		577		9,893		—		—		19,566
Total	Total	$	79,002	$	159,713	$	98,595	$	99,938	$	85,916	$	259,929	$	7,587	$	—	$	790,680	Total	$	61,518	$	164,936	$	200,819	$	113,175	$	95,324	$	329,561	$	3,869	$	—	$	969,202
Current period gross charge-offs																				Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Agricultural	Agricultural																			Agricultural
Grades 1-4	Grades 1-4	$	166,648	$	154,216	$	96,285	$	28,045	$	20,248	$	148,562	$	198,551	$	—	$	812,555	Grades 1-4	$	34,882	$	281,777	$	139,350	$	82,481	$	24,247	$	152,130	$	230,863	$	—	$	945,730
Grade 5	Grade 5	2,268		15,504		3,951		2,115		775		52,536		20,284		—		97,433		Grade 5	2,335		12,391		6,359		741		373		39,105		14,380		—		75,684
Grade 6	Grade 6	—		329		33		34		—		3,291		337		—		4,024		Grade 6	—		109		1,144		—		52		2,320		129		—		3,754
Grade 7	Grade 7	6,935		4,364		1,634		2,350		3,794		23,126		10,977		—		53,180		Grade 7	2,570		7,057		6,827		589		1,890		15,082		9,816		—		43,831
Total	Total	$	175,851	$	174,413	$	101,903	$	32,544	$	24,817	$	227,515	$	230,149	$	—	$	967,192	Total	$	39,787	$	301,334	$	153,680	$	83,811	$	26,562	$	208,637	$	255,188	$	—	$	1,068,999
Current period gross charge-offs																				Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	(66)	$	—	$	—	$	(66)
CRE investment	CRE investment																			CRE investment
Grades 1-4	Grades 1-4	$	88,371	$	172,181	$	133,305	$	113,059	$	50,947	$	215,573	$	10,035	$	—	$	783,471	Grades 1-4	$	17,613	$	196,825	$	217,555	$	181,239	$	123,758	$	305,218	$	13,699	$	—	$	1,055,907
Grade 5	Grade 5	276		4,359		2,554		2,144		449		17,477		—		—		27,259		Grade 5	2,814		559		13,092		3,908		3,812		19,960		49		—		44,194
Grade 6	Grade 6	—		—		—		1,203		1,097		1,445		206		—		3,951		Grade 6	—		—		—		—		497		3,693		73		—		4,263
Grade 7	Grade 7	—		—		—		75		138		3,447		221		—		3,881		Grade 7	—		—		21		523		2,403		1,381		—		—		4,328
Total	Total	$	88,647	$	176,540	$	135,859	$	116,481	$	52,631	$	237,942	$	10,462	$	—	$	818,562	Total	$	20,427	$	197,384	$	230,668	$	185,670	$	130,470	$	330,252	$	13,821	$	—	$	1,108,692
Current period gross charge-offs																				Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Construction & land development	Construction & land development																			Construction & land development
Grades 1-4	Grades 1-4	$	42,613	$	91,176	$	43,458	$	9,649	$	11,607	$	12,645	$	13,434	$	—	$	224,582	Grades 1-4	$	19,928	$	132,395	$	129,347	$	9,924	$	8,498	$	31,872	$	3,237	$	—	$	335,201
Grade 5	Grade 5	—		1,566		—		516		843		24		—		—		2,949		Grade 5	—		30		128		1,285		511		91		—		—		2,045
Grade 6	Grade 6	—		—		—		—		—		—		—		—		—		Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	Grade 7	—		—		—		—		—		1,044		—		—		1,044		Grade 7	48		—		—		—		—		95		—		—		143
Total	Total	$	42,613	$	92,742	$	43,458	$	10,165	$	12,450	$	13,713	$	13,434	$	—	$	228,575	Total	$	19,976	$	132,425	$	129,475	$	11,209	$	9,009	$	32,058	$	3,237	$	—	$	337,389
Current period gross charge-offs																				Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential construction	Residential construction																			Residential construction
Grades 1-4	Grades 1-4	$	24,350	$	41,888	$	1,252	$	150	$	340	$	1,043	$	400	$	—	$	69,423	Grades 1-4	$	15,583	$	80,786	$	8,244	$	1,064	$	127	$	1,513	$	—	$	—	$	107,317
Grade 5	Grade 5	—		—		—		—		—		—		—		—		—		Grade 5	162		—		616		—		—		—		—		—		778
Grade 6	Grade 6	—		—		—		—		—		—		—		—		—		Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	Grade 7	—		—		—		—		—		—		—		—		—		Grade 7	—		—		—		—		—		—		—		—		—
Total	Total	$	24,350	$	41,888	$	1,252	$	150	$	340	$	1,043	$	400	$	—	$	69,423	Total	$	15,745	$	80,786	$	8,860	$	1,064	$	127	$	1,513	$	—	$	—	$	108,095
Current period gross charge-offs																				Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential first mortgage	Residential first mortgage																			Residential first mortgage
Grades 1-4	Grades 1-4	$	152,844	$	236,331	$	135,176	$	70,033	$	25,878	$	155,087	$	1,378	$	4	$	776,731	Grades 1-4	$	76,867	$	338,815	$	264,697	$	137,536	$	62,134	$	176,793	$	805	$	3	$	1,057,650
Grade 5	Grade 5	—		706		519		1,950		—		776		—		—		3,951		Grade 5	—		1,305		1,055		1,272		2,874		2,858		—		—		9,364
Grade 6	Grade 6	—		—		—		729		—		—		—		—		729		Grade 6	—		—		—		—		562		—		—		—		562
Grade 7	Grade 7	—		—		290		353		218		3,319		—		—		4,180		Grade 7	—		151		471		276		424		3,711		—		—		5,033
Total	Total	$	152,844	$	237,037	$	135,985	$	73,065	$	26,096	$	159,182	$	1,378	$	4	$	785,591	Total	$	76,867	$	340,271	$	266,223	$	139,084	$	65,994	$	183,362	$	805	$	3	$	1,072,609
Current period gross charge-offs																				Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential junior mortgage	Residential junior mortgage																			Residential junior mortgage
Grades 1-4	Grades 1-4	$	3,720	$	3,861	$	4,980	$	2,057	$	1,769	$	2,874	$	125,271	$	3,951	$	148,483	Grades 1-4	$	7,841	$	9,094	$	4,026	$	4,821	$	2,955	$	4,387	$	144,869	$	6,590	$	184,583
Grade 5	Grade 5	—		—		—		—		—		—		—		—		—		Grade 5	—		—		—		—		—		—		—		—		—
Grade 6	Grade 6	—		—		—		—		—		—		—		—		—		Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	Grade 7	—		—		—		28		—		79		142		—		249		Grade 7	—		32		204		—		—		15		39		—		290
Total	Total	$	3,720	$	3,861	$	4,980	$	2,085	$	1,769	$	2,953	$	125,413	$	3,951	$	148,732	Total	$	7,841	$	9,126	$	4,230	$	4,821	$	2,955	$	4,402	$	144,908	$	6,590	$	184,873
Current period gross charge-offs																				Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	(96)	$	—	$	—	$	(96)
Retail & other	Retail & other																			Retail & other
Grades 1-4	Grades 1-4	$	6,572	$	9,676	$	5,085	$	3,855	$	1,265	$	24,174	$	804	$	—	$	51,431	Grades 1-4	$	4,078	$	9,654	$	7,001	$	3,212	$	2,378	$	4,282	$	23,638	$	—	$	54,243
Grade 5	Grade 5	—		—		—		—		—		—		—		—		—		Grade 5	—		—		19		—		—		—		—		—		19
Grade 6	Grade 6	—		—		—		—		—		—		—		—		—		Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	Grade 7	—		—		11		2		37		58		—		—		108		Grade 7	30		—		21		11		1		25		—		—		88
Total	Total	$	6,572	$	9,676	$	5,096	$	3,857	$	1,302	$	24,232	$	804	$	—	$	51,539	Total	$	4,108	$	9,654	$	7,041	$	3,223	$	2,379	$	4,307	$	23,638	$	—	$	54,350

Current period gross charge-offs																				Current period gross charge-offs	$	(6)	$	(1)	$	—	$	(1)	$	—	$	(52)	$	(120)	$	—	$	(180)
Total loans	Total loans	$	730,352	$	1,136,265	$	657,097	$	427,476	$	262,294	$	1,019,497	$	741,718	$	3,955	$	4,978,654	Total loans	$	350,051	$	1,541,148	$	1,209,859	$	632,849	$	395,738	$	1,219,505	$	867,033	$	6,593	$	6,222,776


December 31, 2022	Amortized Cost Basis by Origination Year
(in thousands)	2022		2021		2020		2019		2018		Prior		Revolving		Revolving to Term		TOTAL
Commercial & industrial
Grades 1-4	$	317,394	$	226,065	$	101,374	$	68,884	$	50,189	$	77,589	$	360,978	$	—	$	1,202,473
Grade 5	9,938		5,902		10,811		1,530		3,986		4,562		20,617		—		57,346
Grade 6	1,459		2,283		629		511		402		11,653		14,047		—		30,984
Grade 7	556		293		3,211		2,990		775		1,070		5,121		—		14,016
Total	$	329,347	$	234,543	$	116,025	$	73,915	$	55,352	$	94,874	$	400,763	$	—	$	1,304,819
Current period gross charge-offs	$	(38)	$	(41)	$	(2)	$	—	$	(109)	$	—	$	—	$	—	$	(190)
Owner-occupied CRE
Grades 1-4	$	151,391	$	190,313	$	105,156	$	100,606	$	91,479	$	252,574	$	6,734	$	—	$	898,253
Grade 5	5,241		3,192		4,287		2,163		4,791		14,632		348		—		34,654
Grade 6	—		—		763		2,361		—		877		—		—		4,001
Grade 7	227		706		6,344		616		—		9,798		—		—		17,691
Total	$	156,859	$	194,211	$	116,550	$	105,746	$	96,270	$	277,881	$	7,082	$	—	$	954,599
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	(555)	$	—	$	—	$	(555)
Agricultural
Grades 1-4	$	275,208	$	145,272	$	85,413	$	25,463	$	19,687	$	130,849	$	249,033	$	—	$	930,925
Grade 5	13,295		18,178		2,694		1,992		517		43,927		21,199		—		101,802
Grade 6	115		1,457		28		33		—		5,258		429		—		7,320
Grade 7	7,165		2,632		720		1,977		4,611		19,948		11,507		—		48,560
Total	$	295,783	$	167,539	$	88,855	$	29,465	$	24,815	$	199,982	$	282,168	$	—	$	1,088,607
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
CRE investment
Grades 1-4	$	205,930	$	229,252	$	192,527	$	134,301	$	79,649	$	248,595	$	11,383	$	—	$	1,101,637
Grade 5	567		1,649		3,578		4,266		3,086		24,897		—		—		38,043
Grade 6	—		—		—		1,170		2,396		2,483		206		—		6,255
Grade 7	—		—		121		299		245		3,140		209		—		4,014
Total	$	206,497	$	230,901	$	196,226	$	140,036	$	85,376	$	279,115	$	11,798	$	—	$	1,149,949
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Construction & land development
Grades 1-4	$	104,804	$	140,727	$	12,188	$	9,747	$	23,811	$	13,138	$	13,235	$	—	$	317,650
Grade 5	37		—		—		14		—		95		—		—		146
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	33		—		—		—		—		771		—		—		804
Total	$	104,874	$	140,727	$	12,188	$	9,761	$	23,811	$	14,004	$	13,235	$	—	$	318,600
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential construction
Grades 1-4	$	92,417	$	16,774	$	966	$	123	$	336	$	229	$	3,547	$	—	$	114,392
Grade 5	—		—		—		—		—		—		—		—		—
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		—		—		—		—		—		—		—		—
Total	$	92,417	$	16,774	$	966	$	123	$	336	$	229	$	3,547	$	—	$	114,392
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential first mortgage
Grades 1-4	$	318,628	$	272,011	$	147,857	$	68,975	$	31,208	$	162,153	$	2,080	$	3	$	1,002,915
Grade 5	1,494		758		997		1,803		2,272		465		—		—		7,789
Grade 6	—		—		—		711		—		—		—		—		711
Grade 7	154		329		188		349		197		4,303		—		—		5,520
Total	$	320,276	$	273,098	$	149,042	$	71,838	$	33,677	$	166,921	$	2,080	$	3	$	1,016,935
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	(65)	$	—	$	—	$	(65)
Residential junior mortgage
Grades 1-4	$	10,119	$	4,580	$	5,207	$	3,151	$	1,573	$	3,409	$	142,784	$	5,762	$	176,585
Grade 5	—		—		—		—		—		143		165		—		308
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		206		—		—		—		24		209		—		439
Total	$	10,119	$	4,786	$	5,207	$	3,151	$	1,573	$	3,576	$	143,158	$	5,762	$	177,332
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Retail & other
Grades 1-4	$	12,318	$	8,957	$	4,221	$	3,188	$	1,035	$	24,950	$	492	$	—	$	55,161
Grade 5	—		23		—		—		—		—		—		—		23
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		23		22		2		30		5		—		—		82
Total	$	12,318	$	9,003	$	4,243	$	3,190	$	1,065	$	24,955	$	492	$	—	$	55,266
Current period gross charge-offs	$	—	$	(1)	$	(6)	$	(1)	$	—	$	—	$	(215)	$	—	$	(223)
Total loans	$	1,528,490	$	1,271,582	$	689,302	$	437,225	$	322,275	$	1,061,537	$	864,323	$	5,765	$	6,180,499

December 31, 2021 Amortized Cost Basis by Origination Year
(in thousands) 2021 2020 2019 2018 2017 Prior Revolving Revolving to Term TOTAL
Commercial & industrial
Grades 1-4 $ 282,369 $ 146,131 $ 99,702 $ 69,478 $ 50,557 $ 71,247 $ 288,115 $ — $ 1,007,599
Grade 5 1,685 1,905 4,369 5,809 4,860 2,097 8,408 — 29,133
Grade 6 598 54 16 687 67 91 391 — 1,904
Grade 7 — 440 692 337 976 743 432 — 3,620
Total $ 284,652 $ 148,530 $ 104,779 $ 76,311 $ 56,460 $ 74,178 $ 297,346 $ — $ 1,042,256
Owner-occupied CRE
Grades 1-4 $ 154,578 $ 94,300 $ 105,226 $ 92,128 $ 75,583 $ 202,816 $ 6,945 $ — $ 731,576
Grade 5 7,753 3,019 6,529 2,543 2,515 13,905 656 — 36,920
Grade 6 — — 1,642 — 20 805 — — 2,467
Grade 7 — 3,124 1,914 — 3,526 6,672 990 — 16,226
Total $ 162,331 $ 100,443 $ 115,311 $ 94,671 $ 81,644 $ 224,198 $ 8,591 $ — $ 787,189
Agricultural
Grades 1-4 $ 128,404 $ 87,844 $ 28,416 $ 22,887 $ 36,298 $ 86,104 $ 235,743 $ — $ 625,696
Grade 5 14,796 4,183 2,391 915 3,912 48,373 26,778 — 101,348
Grade 6 38 38 36 — 86 1,049 85 — 1,332
Grade 7 3,284 3,971 3,490 4,201 7,215 31,672 12,519 — 66,352
Total $ 146,522 $ 96,036 $ 34,333 $ 28,003 $ 47,511 $ 167,198 $ 275,125 $ — $ 794,728
CRE investment
Grades 1-4 $ 192,274 $ 139,127 $ 136,306 $ 56,148 $ 65,026 $ 162,991 $ 11,289 $ — $ 763,161
Grade 5 11,081 3,001 6,497 3,945 6,726 17,527 — — 48,777
Grade 6 — — — — — — — — —
Grade 7 — — 456 141 1,352 3,943 231 — 6,123
Total $ 203,355 $ 142,128 $ 143,259 $ 60,234 $ 73,104 $ 184,461 $ 11,520 $ — $ 818,061
Construction & land development
Grades 1-4 $ 81,891 $ 72,415 $ 12,547 $ 19,511 $ 1,184 $ 11,274 $ 10,943 $ — $ 209,765
Grade 5 640 — 521 919 — 119 — — 2,199
Grade 6 — — — — — — — — —
Grade 7 — — — — 17 1,054 — — 1,071
Total $ 82,531 $ 72,415 $ 13,068 $ 20,430 $ 1,201 $ 12,447 $ 10,943 $ — $ 213,035
Residential construction
Grades 1-4 $ 58,352 $ 9,998 $ 155 $ 344 $ 1,072 $ 380 $ — $ — $ 70,301
Grade 5 — — 52 — — — — — 52
Grade 6 — — — — — — — — —
Grade 7 — — — — — — — — —
Total $ 58,352 $ 9,998 $ 207 $ 344 $ 1,072 $ 380 $ — $ — $ 70,353
Residential first mortgage
Grades 1-4 $ 256,082 $ 152,932 $ 168,705 $ 22,568 $ 20,147 $ 82,479 $ 1,840 $ 4 $ 704,757
Grade 5 713 529 3,094 — — 1,508 — — 5,844
Grade 6 — — — — — — — — —
Grade 7 — — 560 225 73 2,524 — — 3,382
Total $ 256,795 $ 153,461 $ 172,359 $ 22,793 $ 20,220 $ 86,511 $ 1,840 $ 4 $ 713,983
Residential junior mortgage
Grades 1-4 $ 3,194 $ 3,139 $ 3,021 $ 1,501 $ 512 $ 1,969 $ 115,817 $ 1,426 $ 130,579
Grade 5 — — 29 — — — 439 — 468
Grade 6 — — — — — — — — —
Grade 7 — — 172 — 23 44 138 — 377
Total $ 3,194 $ 3,139 $ 3,222 $ 1,501 $ 535 $ 2,013 $ 116,394 $ 1,426 $ 131,424
Retail & other
Grades 1-4 $ 13,676 $ 6,886 $ 5,826 $ 2,053 $ 1,882 $ 20,102 $ 275 $ — $ 50,700
Grade 5 — — — — — — — — —
Grade 6 — — — — — — — — —
Grade 7 — 24 2 19 — 62 — — 107
Total $ 13,676 $ 6,910 $ 5,828 $ 2,072 $ 1,882 $ 20,164 $ 275 $ — $ 50,807
Total loans $ 1,211,408 $ 733,060 $ 592,366 $ 306,359 $ 283,629 $ 771,550 $ 722,034 $ 1,430 $ 4,621,836

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

June 30, 2022
(in thousands) Grades 1- 4 Grade 5 Grade 6 Grade 7 Total
Commercial & industrial $ 1,060,176 $ 47,812 $ 3,339 $ 7,033 $ 1,118,360
Owner-occupied CRE 745,627 27,757 2,798 14,498 790,680
Agricultural 812,555 97,433 4,024 53,180 967,192
CRE investment 783,471 27,259 3,951 3,881 818,562
Construction & land development 224,582 2,949 — 1,044 228,575
Residential construction 69,423 — — — 69,423
Residential first mortgage 776,731 3,951 729 4,180 785,591
Residential junior mortgage 148,483 — — 249 148,732
Retail & other 51,431 — — 108 51,539
Total loans $ 4,672,479 $ 207,161 $ 14,841 $ 84,173 $ 4,978,654
Percent of total 93.8 % 4.2 % 0.3 % 1.7 % 100.0 %

December 31, 2021
(in thousands) Grades 1- 4 Grade 5 Grade 6 Grade 7 Total
Commercial & industrial $ 1,007,599 $ 29,133 $ 1,904 $ 3,620 $ 1,042,256
Owner-occupied CRE 731,576 36,920 2,467 16,226 787,189
Agricultural 625,696 101,348 1,332 66,352 794,728
CRE investment 763,161 48,777 — 6,123 818,061
Construction & land development 209,765 2,199 — 1,071 213,035
Residential construction 70,301 52 — — 70,353
Residential first mortgage 704,757 5,844 — 3,382 713,983
Residential junior mortgage 130,579 468 — 377 131,424
Retail & other 50,700 — — 107 50,807
Total loans $ 4,294,134 $ 224,741 $ 5,703 $ 97,258 $ 4,621,836
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 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~~Modifications to Borrowers Experiencing Financial Difficulty:

~~Loans are considered troubled debt restructurings if concessions have been granted~~On January 1, 2023, the Company adopted ASU 2022-02, which eliminated the accounting guidance for TDRs by creditors and enhanced the disclosure requirements for certain loan modifications to borrowers ~~who are~~ experiencing financial ~~difficulties.~~difficulty. The following table presents the ~~loan composition~~amortized cost of ~~nonaccrual~~loans that were both experiencing financial difficulty and ~~performing TDRs.~~were modified during the six months ended June 30, 2023, aggregated by portfolio segment and type of modification.


		June 30, 2022						December 31, 2021
(in thousands)	(in thousands)	Performing		Nonaccrual		Total		Performing		Nonaccrual		Total		(in thousands)	Payment Delay		Term Extension		Interest Rate Reduction		Term Extension & Interest Rate Reduction		Total		% of Total Loans
Commercial & industrial	Commercial & industrial	$	—	$	194	$	194	$	—	$	197	$	197	Commercial & industrial	$	454	$	—	$	88	$	—	$	542	0.04	%
Owner-occupied CRE	Owner-occupied CRE	1,710		2,770		4,480		3,466		2,888		6,354		Owner-occupied CRE	—		—		—		—		—		—	%
Agricultural	Agricultural	—		14,525		14,525		—		16,835		16,835		Agricultural	109		—		—		—		109		0.01	%
CRE investment	CRE investment	—		—		—		918		—		918		CRE investment	—		—		—		—		—		—	%
Construction & land development	Construction & land development	—		308		308		—		308		308		Construction & land development	—		—		—		—		—		—	%

Residential first mortgage	Residential first mortgage	—		14		14		913		15		928		Residential first mortgage	—		—		—		—		—		—	%
Residential junior mortgage		—		—		—		146		—		146

Total	Total	$	1,710	$	17,811	$	19,521	$	5,443	$	20,243	$	25,686	Total	$	563	$	—	$	88	$	—	$	651	0.01	%

The ~~following~~loans presented in the table ~~presents~~above have had more than insignificant payment delays (which the ~~number~~Company has defined as payment delays in excess of six months). These modified loans are closely monitored by the Company to understand the effectiveness of its modification efforts, and such loans generally remain in nonaccrual status pending a sustained period of performance in accordance with the modified ~~in a TDR, pre-modification loan balance, and post-modification loan balance by loan composition.~~terms.

June 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 2 $ 200 $ 194 2 $ 200 $ 197
Owner-occupied CRE 5 5,138 4,480 6 6,913 6,354
Agricultural 26 16,237 14,525 31 17,228 16,835
CRE investment — — — 1 919 918
Construction & land development 1 533 308 1 533 308
Residential first mortgage 1 17 14 2 931 928
Residential junior mortgage — — — 1 166 146
Total 35 $ 22,125 $ 19,521 44 $ 26,890 $ 25,686

TDR concessions may include payment schedule modifications, interest rate concessions, maturity date extensions, bankruptcies, or some combination of these concessions. There were no loans which were classified as troubled debt restructurings during the previous twelve months that subsequently defaulted during 2021 or through June 30, 2022. As of June 30, ~~2022,~~2023, there were no loans made to borrowers experiencing financial difficulty that were modified during the current period and subsequently defaulted, and there were no commitments to lend additional funds to ~~debtors whose terms have been~~such debtors.

Troubled Debt Restructuring Disclosures Prior to Adoption of ASU 2022-02:

As of December 31, 2022, the Company had restructured loans totaling $18 million, with a pre-modification balance of $24 million, all of which were also reflected as nonaccrual loans. There were no restructured loans modified ~~in troubled debt restructurings.~~

during 2022 that subsequently defaulted, and there were no commitments to lend additional funds to such debtors.

Note 7 – Goodwill and Other Intangibles and 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 that would 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 also regularly monitors economic factors for potential impairment indications on the value of our franchise, stability of deposits, and the wealth client base, underlying our goodwill ~~core deposit intangible,~~ and ~~customer list intangibles,~~other intangibles. Management concluded no impairment was indicated for the six months ended June 30, 2023 and ~~determined no impairments were indicated.~~the year ended December 31, 2022. A summary of goodwill and other intangibles was as follows.

(in thousands) June 30, 2022 December 31, 2021
Goodwill $ 317,189 $ 317,189
Core deposit intangibles 16,928 19,445
Customer list intangibles 2,604 2,858
Other intangibles 19,532 22,303
Goodwill and other intangibles, net $ 336,721 $ 339,492



(in thousands)	June 30, 2023		December 31, 2022
Goodwill	$	367,387	$	367,387
Core deposit intangibles	28,710		32,701
Customer list intangibles	2,097		2,350
Other intangibles	30,807		35,051
Goodwill and other intangibles, net	$	398,194	$	402,438

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


		Six Months Ended		Year Ended			Six Months Ended		Year Ended
(in thousands)	(in thousands)	June 30, 2022		December 31, 2021		(in thousands)	June 30, 2023		December 31, 2022
Goodwill:	Goodwill:					Goodwill:
Goodwill at beginning of year	Goodwill at beginning of year	$	317,189	$	163,151	Goodwill at beginning of year	$	367,387	$	317,189
Acquisitions	Acquisitions	—		154,038		Acquisitions	—		49,970

Purchase accounting adjustment						Purchase accounting adjustment	—		228
Goodwill at end of period	Goodwill at end of period	$	317,189	$	317,189	Goodwill at end of period	$	367,387	$	367,387

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 ~~2021,~~2022, core deposit intangibles increased due to the ~~acquisitions of Mackinac and County. See Note 2 for additional information on the Company’s acquisitions.~~Charter acquisition.


		Six Months Ended		Year Ended			Six Months Ended		Year Ended
(in thousands)	(in thousands)	June 30, 2022		December 31, 2021		(in thousands)	June 30, 2023		December 31, 2022
Core deposit intangibles:	Core deposit intangibles:					Core deposit intangibles:
Gross carrying amount	Gross carrying amount	$	41,360	$	41,360	Gross carrying amount	$	60,724	$	60,724
Accumulated amortization	Accumulated amortization	(24,432)		(21,915)		Accumulated amortization	(32,014)		(28,023)
Net book value	Net book value	$	16,928	$	19,445	Net book value	$	28,710	$	32,701
Additions during the period	Additions during the period	$	—	$	13,595	Additions during the period	$	—	$	19,364
Amortization during the period	Amortization during the period	$	2,517	$	2,987	Amortization during the period	$	3,991	$	6,108
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	(2,919)		(2,665)		Accumulated amortization	(3,426)		(3,173)
Net book value	Net book value	$	2,604	$	2,858	Net book value	$	2,097	$	2,350

Amortization during the period	Amortization during the period	$	254	$	507	Amortization during the period	$	253	$	508

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.~~

Six Months Ended Year Ended
(in thousands) June 30, 2022 December 31, 2021
Mortgage servicing rights asset:
MSR asset at beginning of year $ 13,636 $ 10,230
Capitalized MSR 1,685 4,329
MSR asset acquired — 1,322
Amortization during the period (1,413) (2,245)
MSR asset at end of period $ 13,908 $ 13,636
Valuation allowance at beginning of year $ (1,200) $ (1,000)
Additions — (500)
Reversals 700 300
Valuation allowance at end of period $ (500) $ (1,200)
MSR asset, net $ 13,408 $ 12,436
Fair value of MSR asset at end of period $ 15,699 $ 15,599
Residential mortgage loans serviced for others $ 1,611,794 $ 1,583,577
Net book value of MSR asset to loans serviced for others 0.83 % 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~~A summary of the ~~MSR asset.~~changes in the mortgage servicing rights asset was as follows.


	Six Months Ended			Year Ended
(in thousands)	June 30, 2023			December 31, 2022
Mortgage servicing rights asset:
MSR asset at beginning of year	$	13,080		$	13,636
Capitalized MSR	620			2,327

Amortization during the period	(1,489)			(2,883)
MSR asset at end of period	$	12,211		$	13,080
Valuation allowance at beginning of year	$	(500)		$	(1,200)

Reversals	500			700
Valuation allowance at end of period	$	—		$	(500)
MSR asset, net	$	12,211		$	12,580
Fair value of MSR asset at end of period	$	16,200		$	17,215
Residential mortgage loans serviced for others	$	1,615,985		$	1,637,109
Net book value of MSR asset to loans serviced for others	0.76		%	0.77		%

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 $15 million at June 30, 2022, and related to approximately $604 million of unpaid principal balances of loans serviced for others. The LSR assetwhich will be

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


	Six Months Ended		Year Ended
(in thousands)	June 30, 2023		December 31, 2022
Loan servicing rights asset:
LSR asset at beginning of year	$	11,039	$	20,055
Amortization during the period	(1,104)		(9,016)
LSR asset at end of period	$	9,935	$	11,039
Agricultural loans serviced for others	$	512,766	$	538,392

The following table shows the estimated future amortization expense for amortizing intangible assets and the servicing assets. The projections are based on existing asset balances, the current interest rate environment and estimated prepayment speeds as of June 30, ~~2022.~~2023. The actual amortization expense the Company recognizes in any given period may be significantly different depending upon acquisition or sale activities, changes in interest rates, prepayment speeds, market conditions, regulatory requirements and events or circumstances that indicate the carrying amount of an asset may not be recoverable.


(in thousands)	(in thousands)	Core deposit intangibles		Customer list intangibles		MSR asset		LSR 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,
2022 (remaining six months)		$	2,300	$	253	$	1,107	$	4,175
2023		3,910		483		2,691		6,345
2023 (remaining six months)										2023 (remaining six months)	$	3,598	$	230	$	945	$	1,104
2024	2024	3,135		449		2,587		3,673		2024	6,298		449		2,725		1,962
2025	2025	2,385		449		1,828		1,020		2025	5,161		449		1,998		1,717
2026	2026	1,659		249		1,351		—		2026	3,983		249		1,474		1,472
2027	2027	1,346		166		1,351		—		2027	3,218		166		1,473		1,227
2028										2028	2,622		166		1,472		981
Thereafter	Thereafter	2,193		555		2,993		—		Thereafter	3,830		388		2,124		1,472
Total	Total	$	16,928	$	2,604	$	13,908	$	15,213	Total	$	28,710	$	2,097	$	12,211	$	9,935

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~~ June 30, ~~2022 and~~2023, short-term borrowings included $50 million of short-term FHLB advances due in September 2023 with a weighted average rate of 4.26%. At December 31, ~~2021, the Company did not have any outstanding~~2022, short-term ~~borrowings.~~borrowings included $317 million of short-term FHLB advances, comprised of $117 million due in January 2023 at a weighted average rate of 4.29% and $200 million due in September 2023 at a weighted average rate of 4.30%.

Long-Term Borrowings:

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


(in thousands)	(in thousands)	June 30, 2022		December 31, 2021		(in thousands)	June 30, 2023		December 31, 2022
FHLB advances	FHLB advances	$	5,000	$	25,000	FHLB advances	$	5,000	$	33,000
Junior subordinated debentures	Junior subordinated debentures	39,305		38,885		Junior subordinated debentures	40,136		39,720
Subordinated notes	Subordinated notes	152,658		153,030		Subordinated notes	152,441		152,622
Total long-term borrowings	Total long-term borrowings	$	196,963	$	216,915	Total long-term borrowings	$	197,577	$	225,342

FHLB Advances: The Federal Home Loan Bank (“FHLB”) advances bear fixed rates, require interest-only monthly payments, and have maturity dates through March 2025. The weighted average rate of the FHLB advances was 1.55% at June 30, ~~2022~~2023 and ~~0.59%~~1.09% at December 31, ~~2021.~~2022.

Junior Subordinated Debentures: Each of the junior subordinated 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 debenture. All the junior subordinated debentures are currently callable and may be redeemed in part or in full, at par, plus any accrued but unpaid interest. At both June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, approximately $38 million ~~and $37 million, respectively,~~ of trust preferred securities qualify as Tier 1 capital.

Subordinated Notes (the “Notes”): In July 2021, the Company completed the private placement of $100 million in fixed-to-floating rate subordinated notes due in 2031, with a fixed annual rate of 3.125% for the first five years, and will reset quarterly thereafter to the then current three-month Secured Overnight Financing Rate (“SOFR”) plus 237.5 basis points. The Notes due in 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~~an 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.~~purposes, and are discounted in accordance with regulations when the debt has five years or less remaining to maturity.

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


			As of June 30, 2022								As of December 31, 2021						As of June 30, 2023								As of December 31, 2022
(in thousands)	(in thousands)	Maturity Date	Interest Rate		Par		Unamortized Premium /(Discount) / Debt Issue Costs (1)		Carrying Value		Interest Rate		Carrying Value		(in thousands)	Maturity Date	Interest Rate		Par		Unamortized Premium /(Discount) / Debt Issue Costs (1)		Carrying Value		Interest Rate		Carrying Value
Junior Subordinated Debentures:	Junior Subordinated Debentures:														Junior Subordinated Debentures:
Mid-Wisconsin Statutory Trust I (2)	Mid-Wisconsin Statutory Trust I (2)	12/15/2035	3.26	%	$	10,310	$	(2,674)	$	7,636	1.63	%	$	7,537	Mid-Wisconsin Statutory Trust I (2)	12/15/2035	6.98	%	$	10,310	$	(2,478)	$	7,832	6.20	%	$	7,734
Baylake Capital Trust II (3)	Baylake Capital Trust II (3)	9/30/2036	3.60	%	16,598		(3,292)		13,306		1.57	%	13,187		Baylake Capital Trust II (3)	9/30/2036	6.89	%	16,598		(3,056)		13,542		6.08	%	13,424
First Menasha Statutory Trust (4)	First Menasha Statutory Trust (4)	3/17/2034	4.82	%	5,155		(509)		4,646		3.01	%	4,624		First Menasha Statutory Trust (4)	3/17/2034	8.30	%	5,155		(465)		4,690		7.53	%	4,668
County Bancorp Statutory Trust II (5)	County Bancorp Statutory Trust II (5)	9/15/2035	3.36	%	6,186		(1,044)		5,142		1.73	%	5,061		County Bancorp Statutory Trust II (5)	9/15/2035	7.08	%	6,186		(831)		5,355		6.30	%	5,277
County Bancorp Statutory Trust III (6)	County Bancorp Statutory Trust III (6)	6/15/2036	3.52	%	6,186		(987)		5,199		1.89	%	5,121		County Bancorp Statutory Trust III (6)	6/15/2036	7.24	%	6,186		(889)		5,297		6.46	%	5,219
Fox River Valley Capital Trust (7)	Fox River Valley Capital Trust (7)	5/30/2033	6.40	%	3,610		(234)		3,376		6.40	%	3,355		Fox River Valley Capital Trust (7)	5/30/2033	6.40	%	3,610		(190)		3,420		6.40	%	3,398
Total	Total				$	48,045	$	(8,740)	$	39,305			$	38,885	Total				$	48,045	$	(7,909)	$	40,136			$	39,720
Subordinated Notes:	Subordinated Notes:														Subordinated Notes:
Subordinated Notes due 2031	Subordinated Notes due 2031	7/15/2031	3.13	%	$	100,000	$	(838)	$	99,162	3.13	%	$	99,057	Subordinated Notes due 2031	7/15/2031	3.13	%	$	100,000	$	(628)	$	99,372	3.13	%	$	99,267
County Subordinated Notes due 2028	County Subordinated Notes due 2028	6/1/2028	5.88	%	30,000		280		30,280		5.88	%	30,402		County Subordinated Notes due 2028	6/1/2028	8.38	%	30,000		—		30,000		5.88	%	30,119
County Subordinated Notes due 2030	County Subordinated Notes due 2030	6/30/2030	7.00	%	22,400		816		23,216		7.00	%	23,571		County Subordinated Notes due 2030	6/30/2030	7.00	%	22,400		669		23,069		7.00	%	23,236
Total	Total				$	152,400	$	258	$	152,658			$	153,030	Total				$	152,400	$	41	$	152,441			$	152,622

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

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

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

(4) The debentures, assumed in April 2017 as the 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~~swap rate plus 3.40%, which resets every five years.

Note 9 – Commitments and Contingencies

The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, financial guarantees, and standby letters of credit. Such commitments may involve, to varying degrees, elements of credit risk in excess of amounts recognized on the consolidated balance sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and issuing letters of credit as they do for on-balance sheet financial instruments. See Note 6 for information on the allowance for credit losses-unfunded commitments.

A summary of the contract or notional amount of the Company’s exposure to off-balance sheet risk was as follows.


(in thousands)	June 30, 2023		December 31, 2022
Commitments to extend credit	$	1,826,995	$	1,850,601
Financial standby letters of credit	22,777		26,530
Performance standby letters of credit	12,824		9,375

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract, and predominantly included commercial lines of credit with a term of one year or less. The commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Financial and performance standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Financial standby letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party, while performance standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party. Both of these guarantees are primarily issued to support public and private

borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds collateral, which may include accounts receivable, inventory, property, equipment, and income-producing properties, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third-party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount. If the commitment is funded, the Company would be entitled to seek recovery from the customer.

Interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans held for sale are considered derivative instruments (“mortgage derivatives”) and the contractual amounts were $24 million and $18 million, respectively, at June 30, 2023. In comparison, interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans held for sale totaled $9 million and $9 million, respectively, at December 31, 2022. The net fair value of these mortgage derivatives combined was a net gain of $0.2 million and $0.1 million at June 30, 2023 and December 31, 2022, respectively.

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

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

Note 910 – 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. 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
June 30, 2022
June 30, 2023										June 30, 2023
U.S. Treasury securities										U.S. Treasury securities	$	137,198	$	—	$	137,198	$	—
U.S. government agency securities	U.S. government agency securities	$	183,849	$	—	$	183,849	$	—	U.S. government agency securities	8,792		—		8,792		—
State, county and municipals	State, county and municipals	271,502		—		269,621		1,881		State, county and municipals	368,838		—		367,417		1,421
Mortgage-backed securities	Mortgage-backed securities	226,248		—		225,268		980		Mortgage-backed securities	301,784		—		300,805		979
Corporate debt securities	Corporate debt securities	131,649		—		127,056		4,593		Corporate debt securities	104,496		—		99,241		5,255
Securities AFS	Securities AFS	$	813,248	$	—	$	805,794	$	7,454	Securities AFS	$	921,108	$	—	$	913,453	$	7,655
Other investments (equity securities)	Other investments (equity securities)	$	4,793	$	4,793	$	—	$	—	Other investments (equity securities)	$	3,748	$	3,748	$	—	$	—
Derivative assets		—		—		—		—
Derivative liabilities		—		—		—		—
December 31, 2021

December 31, 2022										December 31, 2022
U.S. Treasury securities										U.S. Treasury securities	$	183,830	$	—	$	183,830	$	—
U.S. government agency securities	U.S. government agency securities	$	191,277	$	—	$	191,277	$	—	U.S. government agency securities	2,100		—		2,100		—
State, county and municipals	State, county and municipals	312,737		—		310,316		2,421		State, county and municipals	398,188		—		396,315		1,873
Mortgage-backed securities	Mortgage-backed securities	271,262		—		270,260		1,002		Mortgage-backed securities	200,932		—		199,951		981
Corporate debt securities	Corporate debt securities	146,385		—		141,743		4,642		Corporate debt securities	132,568		—		127,269		5,299
Securities AFS	Securities AFS	$	921,661	$	—	$	913,596	$	8,065	Securities AFS	$	917,618	$	—	$	909,465	$	8,153
Other investments (equity securities)	Other investments (equity securities)	$	5,660	$	5,660	$	—	$	—	Other investments (equity securities)	$	4,376	$	4,376	$	—	$	—
Derivative assets		1,064		—		1,064		—
Derivative liabilities		1,064		—		1,064		—

The following is a description of the valuation methodologies used by the Company for the assets and 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. Treasury securities, 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 are primarily trust preferred security investments, as well as certain municipal bonds and mortgage-backed securities. At June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, 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.

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


		Six Months Ended		Year Ended
(in thousands)						(in thousands)	Six Months Ended		Year Ended
Level 3 Fair Value Measurements:	Level 3 Fair Value Measurements:	June 30, 2022		December 31, 2021		Level 3 Fair Value Measurements:	June 30, 2023		December 31, 2022
Balance at beginning of year	Balance at beginning of year	$	8,065	$	3,130	Balance at beginning of year	$	8,153	$	8,065
Acquired balance	Acquired balance	—		4,935		Acquired balance	—		750
Maturities / Paydowns	Maturities / Paydowns	(442)		—		Maturities / Paydowns	(451)		(451)
Unrealized gain / (loss)	Unrealized gain / (loss)	(169)		—		Unrealized gain / (loss)	(47)		(211)
Balance at end of period	Balance at end of period	$	7,454	$	8,065	Balance at end of period	$	7,655	$	8,153

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)	(in thousands)			Fair Value Measurements Using						(in thousands)			Fair Value Measurements Using
Measured at Fair Value on a Nonrecurring Basis:	Measured at Fair Value on a Nonrecurring Basis:	Total		Level 1		Level 2		Level 3		Measured at Fair Value on a Nonrecurring Basis:	Total		Level 1		Level 2		Level 3
June 30, 2022
June 30, 2023										June 30, 2023
Collateral dependent loans	Collateral dependent loans	$	31,592	$	—	$	—	$	31,592	Collateral dependent loans	$	18,667	$	—	$	—	$	18,667
Other real estate owned (“OREO”)	Other real estate owned (“OREO”)	5,006		—		—		5,006		Other real estate owned (“OREO”)	1,478		—		—		1,478
MSR asset	MSR asset	13,408		—		—		13,408		MSR asset	12,211		—		—		12,211
LSR asset		15,213		—		—		15,213
December 31, 2021
December 31, 2022										December 31, 2022
Collateral dependent loans	Collateral dependent loans	$	36,230	$	—	$	—	$	36,230	Collateral dependent loans	$	30,951	$	—	$	—	$	30,951
OREO	OREO	11,955		—		—		11,955		OREO	1,975		—		—		1,975
MSR asset	MSR asset	12,436		—		—		12,436		MSR asset	12,580		—		—		12,580
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 future cash flows discounted at the loan’s effective interest rate, the estimated fair value of the underlying collateral with consideration for estimated selling costs if satisfaction of the loan depends on the sale of the collateral, or the estimated liquidity of the note. For OREO, the fair value is based upon the estimated fair value of the underlying collateral adjusted for the expected costs to sell. 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 ~~fair value of the LSR asset is determined by stratifying the rights into tranches based on the predominant characteristics, such as interest rate, loan type, and investor type, and a~~servicing valuation model ~~is used to calculate the present value of the expected future cash flows for each tranche. The servicing valuation models incorporate~~incorporates assumptions that market participants would use in estimating future net servicing income, such as costs to service, a discount rate, ancillary income, default rates and losses, and prepayment speeds. Although some of these assumptions are based on observable market data, other assumptions are based on unobservable estimates of what market participants would use to measure fair value.

Financial instruments:

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


June 30, 2022
June 30, 2023												June 30, 2023
(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	$	181,017	$	181,017	$	181,017	$	—	$	—	Cash and cash equivalents	$	505,206	$	505,206	$	505,206	$	—	$	—
Certificates of deposit in other banks	Certificates of deposit in other banks	15,502		15,462		—		15,462		—		Certificates of deposit in other banks	9,808		9,710		—		9,710		—
Securities AFS	Securities AFS	813,248		813,248		—		805,794		7,454		Securities AFS	921,108		921,108		—		913,453		7,655
Securities HTM		695,812		650,233		—		650,233		—

Other investments, including equity securities	Other investments, including equity securities	53,269		53,269		4,793		39,387		9,089		Other investments, including equity securities	57,578		57,578		3,748		43,334		10,496
Loans held for sale	Loans held for sale	5,084		5,190		—		5,190		—		Loans held for sale	3,849		3,944		—		3,944		—
Loans, net	Loans, net	4,927,999		4,818,422		—		—		4,818,422		Loans, net	6,159,965		5,854,647		—		—		5,854,647
MSR asset	MSR asset	13,408		15,699		—		—		15,699		MSR asset	12,211		16,200		—		—		16,200
LSR asset		15,213		15,213		—		—		15,213
Accrued interest receivable	Accrued interest receivable	16,008		16,008		16,008		—		—		Accrued interest receivable	21,511		21,511		21,511		—		—
Financial liabilities:	Financial liabilities:											Financial liabilities:
Deposits	Deposits	$	6,286,266	$	6,281,308	$	—	$	—	$	6,281,308	Deposits	$	7,198,604	$	7,167,820	$	—	$	—	$	7,167,820

Short-term borrowings												Short-term borrowings	50,000		50,000		—		50,000		—
Long-term borrowings	Long-term borrowings	196,963		192,447		—		5,001		187,446		Long-term borrowings	197,577		188,603		—		4,701		183,902
Accrued interest payable	Accrued interest payable	2,668		2,668		2,668		—		—		Accrued interest payable	6,335		6,335		6,335		—		—


December 31, 2021
December 31, 2022												December 31, 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	$	595,292	$	595,292	$	595,292	$	—	$	—	Cash and cash equivalents	$	154,723	$	154,723	$	154,723	$	—	$	—
Certificates of deposit in other banks	Certificates of deposit in other banks	21,920		22,236		—		22,236		—		Certificates of deposit in other banks	12,518		12,407		—		12,407		—
Securities AFS	Securities AFS	921,661		921,661		—		913,596		8,065		Securities AFS	917,618		917,618		—		909,465		8,153
Securities HTM	Securities HTM	651,803		648,394		—		648,394		—		Securities HTM	679,128		623,352		—		623,352		—
Other investments, including equity securities	Other investments, including equity securities	44,008		44,008		5,660		32,110		6,238		Other investments, including equity securities	65,286		65,286		4,376		52,093		8,817
Loans held for sale	Loans held for sale	6,447		6,616		—		6,616		—		Loans held for sale	1,482		1,529		—		1,529		—
Loans, net	Loans, net	4,572,164		4,606,851		—		—		4,606,851		Loans, net	6,118,670		5,863,570		—		—		5,863,570
MSR asset	MSR asset	12,436		15,599		—		—		15,599		MSR asset	12,580		17,215		—		—		17,215
LSR asset		20,055		20,055		—		—		20,055
Accrued interest receivable	Accrued interest receivable	15,277		15,277		15,277		—		—		Accrued interest receivable	21,275		21,275		21,275		—		—
Financial liabilities:	Financial liabilities:											Financial liabilities:
Deposits	Deposits	$	6,465,916	$	6,463,064	$	—	$	—	$	6,463,064	Deposits	$	7,178,921	$	7,172,779	$	—	$	—	$	7,172,779

Short-term borrowings												Short-term borrowings	317,000		317,000		317,000		—		—
Long-term borrowings	Long-term borrowings	216,915		216,092		—		25,097		190,995		Long-term borrowings	225,342		220,513		—		33,001		187,512
Accrued interest payable	Accrued interest payable	3,078		3,078		3,078		—		—		Accrued interest payable	4,265		4,265		4,265		—		—

The valuation methodologies for the financial instruments disclosed in the above table are described in Note 18, Fair Value Measurements, in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~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 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 $199 million and $51 million, respectively, as of December 31, 2021. The Birmingham Sale closed on January 21, 2022.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Nicolet Bankshares, Inc. (the “Company” or “Nicolet”) is a bank holding company headquartered in Green Bay, Wisconsin. 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 ~~the upper peninsula of Michigan.~~Minnesota. In this Quarterly Report on Form 10-Q, unless the 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, ~~(including the expected closing date of the merger with Charter Bankshares, Inc. (“Charter”) and number of shares to be issued in connection with that merger),~~ 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 implied or anticipated by the statements. Except as required by law, we expressly disclaim any obligations to publicly update any forward-looking statements 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~~2022 Annual Report on Form 10-K include, but are not necessarily limited to the following:

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

•our ability to maintain liquidity, primarily through deposits, in light of recent events in the banking industry;

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

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

•potential difficulties in identifying and integrating the operations of future acquisition targets with those of Nicolet;

•the impact of purchase accounting with respect to our merger activities, or any change in the assumptions used regarding the assets purchased and liabilities assumed to determine their fair value;

•cybersecurity risks and the vulnerability of our network and online banking portals, and the systems or parties with whom we contract, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches that could adversely affect our business and financial performance or reputation;

•changes in accounting standards, rules and interpretations and the related impact on Nicolet’s financial statements;

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

•changes in monetary and tax policies;

•changes occurring in business conditions and ~~inflation;~~inflation and the possibility of a recession;

•our ability to attract and retain key personnel;

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

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

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

•each of the factors and risks under Item 1A, “Risk Factors” of Nicolet’s ~~2021~~2022 Annual Report on Form 10-K and in subsequent filings we make with the SEC; and

•~~risks related to our proposed merger with Charter, including:~~

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

◦~~uncertainties while the merger is pending which could have a negative effect;~~

◦~~the occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the Charter Merger Agreement;~~

◦~~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;~~

◦~~failure to receive or satisfy required shareholder or other approvals, consents, waivers and/or non-objections or other conditions to the closing;~~

◦~~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 announcement or 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.

Overview

The following discussion is management’s analysis of the consolidated financial condition as of June 30, ~~2022~~2023 and December 31, ~~2021~~2022 and results of operations for the three and six-month periods ended June 30, ~~2022~~2023 and ~~2021.~~2022. It should be read in conjunction with Nicolet’s audited consolidated financial statements included in Nicolet’s ~~2021~~2022 Annual Report on Form 10-K.

Our financial performance and certain balance sheet line items were impacted by the timing and size of our ~~2021 acquisitions~~acquisition of ~~Mackinac Financial Corporation~~Charter Bankshares, Inc. (“~~Mackinac”~~Charter”) on ~~September 3, 2021 and County Bancorp, Inc. (“County”) on December 3, 2021.~~August 26, 2022. Certain income statement results, average balances and related ratios ~~for 2021~~ include partial contributions from ~~Mackinac and County, each~~Charter from the ~~respective~~ acquisition date. Additional information on our ~~2021~~ acquisition activity is included in Note 2, ~~“Acquisitions”~~“Acquisition” in the Notes to Unaudited Consolidated Financial Statements, under Part I, Item 1.

Economic Outlook and Recent Industry Developments

~~Growth in~~For year-to-date 2023, economic ~~activity and~~growth remains stronger than expected, driven by spending within the consumer sector. The labor market remains tighter than expected, which is fueling additional consumer spending through continued demand for goods and ~~services, combined with labor shortages, supply chain complications and geopolitical matters, have contributed~~services. Inflation has started to ~~rising inflation.~~come down; however, the progress has been slower than anticipated despite the significant increase in interest rates by the Federal Reserve. In ~~response,~~an effort to combat inflation, the Federal Reserve has ~~raised~~tightened monetary policy by raising interest rates from a target range of 0.00%-0.25% in early March 2022 to ~~2.25%-2.50%~~5.00%-5.25% at the end of June 2023, followed by another 0.25% increase (to a target rate of 5.25%-5.50%) at the end of July ~~2022.~~2023. All these factors are indicating a slowing in economic activity is the most likely scenario for the U.S. economy in late 2023.

These macroeconomic challenges are fueling additional concerns within the banking sector. During first quarter 2023, the banking industry experienced significant volatility with high-profile bank failures and industry wide concerns related to liquidity, deposit outflows, unrealized securities losses, and eroding consumer confidence in the banking system. This banking crisis has the potential for tighter lending standards and higher capital requirements, which further complicates the current economic outlook. In addition, the ~~Federal Reserve has signaled that it anticipates additional increases in~~ongoing geopolitical issues also have 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 tightening of the Federal Reserve’s monetary policies, including these increases in the target range and the tapering of the Federal Reserve’s balance sheet, combined with ongoingpotential for further 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 the coming quarters, potentially resulting in a contraction of the U.S. gross domestic output by 2023, if not earlier. The timing and impact of inflation and rising interest rates on our business and related financial results will depend on future developments, which are highly uncertain and difficult to predict.

~~Proposed Merger with Charter~~

On March 29, 2022, Nicolet entered into an Agreement and Plan of Merger with Charter (the “Charter Merger Agreement”), a bank holding company headquartered in Eau Claire, Wisconsin, with total assets of $1.1 billion at March 31, 2022. The merger is expected to close in the third quarter of 2022, subject to customary closing conditions. Under the terms of the Charter Merger Agreement, each outstanding share of Charter common stock will be converted into the right to receive 15.458 shares of Nicolet common stock and $475 in cash. As a result, we expect to issue approximately 1.26 million shares of Nicolet common stock and $38.8 million in cash for the acquisition of Charter.disruptions.


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 Six Months Ended							At or for the Three Months Ended															At or for the Six Months Ended
(In thousands, except per share data)	(In thousands, except per share data)	6/30/2022			3/31/2022			12/31/2021			9/30/2021			6/30/2021			6/30/2022			6/30/2021			(In thousands, except per share data)	6/30/2023			3/31/2023			12/31/2022			9/30/2022			6/30/2022			6/30/2023			6/30/2022
Results of operations:	Results of operations:																						Results of operations:
Net interest income	Net interest income	$	55,084		$	53,795		$	53,559		$	35,184		$	35,571		$	108,879		$	69,212		Net interest income	$	59,039		$	56,721		$	68,092		$	62,990		$	55,084		$	115,760		$	108,879
Provision for credit losses	Provision for credit losses	750			300			8,400			6,000			—			1,050			500			Provision for credit losses	450			3,090			1,850			8,600			750			3,540			1,050
Noninterest income	Noninterest income	14,131			15,943			16,064			13,996			20,178			30,074			37,304			Noninterest income	16,841			(21,844)			14,846			13,000			14,131			(5,003)			30,074
Noninterest expense	Noninterest expense	36,538			37,550			39,408			33,061			30,747			74,088			56,828			Noninterest expense	44,957			44,875			43,989			42,567			36,538			89,832			74,088
Income before income tax expense		31,927			31,888			21,815			10,119			25,002			63,815			49,188
Income tax expense		7,942			7,724			5,510			2,295			6,718			15,666			12,665
Net income		$	23,985		$	24,164		$	16,305		$	7,824		$	18,284		$	48,149		$	36,523
Earnings per common share:
Income (loss) before income tax expense																							Income (loss) before income tax expense	30,473			(13,088)			37,099			24,823			31,927			17,385			63,815
Income tax expense (benefit)																							Income tax expense (benefit)	7,878			(4,190)			9,498			6,313			7,942			3,688			15,666
Net income (loss)																							Net income (loss)	$	22,595		$	(8,898)		$	27,601		$	18,510		$	23,985		$	13,697		$	48,149
Earnings (loss) per common share ("EPS"):																							Earnings (loss) per common share ("EPS"):
Basic	Basic	$	1.79		$	1.77		$	1.29		$	0.75		$	1.85		$	3.56		$	3.67		Basic	$	1.54		$	(0.61)		$	1.88		$	1.33		$	1.79		$	0.93		$	3.56
Diluted	Diluted	$	1.73		$	1.70		$	1.25		$	0.73		$	1.77		$	3.43		$	3.52		Diluted	$	1.51		$	(0.61)		$	1.83		$	1.29		$	1.73		$	0.91		$	3.43
Common Shares:	Common Shares:																						Common Shares:
Basic weighted average	Basic weighted average	13,402			13,649			12,626			10,392			9,902			13,525			9,949			Basic weighted average	14,711			14,694			14,685			13,890			13,402			14,703			13,525
Diluted weighted average	Diluted weighted average	13,852			14,215			13,049			10,776			10,326			14,035			10,365			Diluted weighted average	14,960			14,694			15,110			14,310			13,852			15,011			14,035
Outstanding (period end)	Outstanding (period end)	13,407			13,457			13,994			11,952			9,843			13,407			9,843			Outstanding (period end)	14,718			14,698			14,691			14,673			13,407			14,718			13,407
Period-End Balances:	Period-End Balances:																						Period-End Balances:
Loans	Loans	$	4,978,654		$	4,683,315		$	4,621,836		$	3,533,198		$	2,820,331		$	4,978,654		$	2,820,331		Loans	$	6,222,776		$	6,223,732		$	6,180,499		$	5,984,437		$	4,978,654		$	6,222,776		$	4,978,654
Allowance for credit losses - loans	Allowance for credit losses - loans	50,655			49,906			49,672			38,399			32,561			50,655			32,561			Allowance for credit losses - loans	62,811			62,412			61,829			60,348			50,655			62,811			50,655
Total assets	Total assets	7,370,252			7,320,212			7,695,037			6,407,820			4,587,347			7,370,252			4,587,347			Total assets	8,482,628			8,192,354			8,763,969			8,895,916			7,370,252			8,482,628			7,370,252
Deposits	Deposits	6,286,266			6,231,120			6,465,916			5,428,774			3,939,022			6,286,266			3,939,022			Deposits	7,198,604			6,928,579			7,178,921			7,395,902			6,286,266			7,198,604			6,286,266
Stockholders’ equity (common)	Stockholders’ equity (common)	839,387			836,310			891,891			729,278			559,395			839,387			559,395			Stockholders’ equity (common)	977,638			961,792			972,529			938,463			839,387			977,638			839,387
Book value per common share	Book value per common share	62.61			62.15			63.73			61.01			56.83			62.61			56.83			Book value per common share	66.42			65.44			66.20			63.96			62.61			66.42			62.61
Tangible book value per common share (2)	Tangible book value per common share (2)	37.49			37.03			39.47			38.43			39.18			37.49			39.18			Tangible book value per common share (2)	39.37			38.20			38.81			36.21			37.49			39.37			37.49
Financial Ratios: (1)	Financial Ratios: (1)																						Financial Ratios: (1)
Return on average assets	Return on average assets	1.32		%	1.30		%	0.96		%	0.59		%	1.62		%	1.31		%	1.63		%	Return on average assets	1.10		%	(0.42)		%	1.26		%	0.93		%	1.32		%	0.33		%	1.31		%
Return on average common equity	Return on average common equity	11.48			11.38			8.24			5.10			13.31			11.43			13.45			Return on average common equity	9.37			(3.72)			11.47			8.25			11.48			2.85			11.43
Return on average tangible common equity (2)	Return on average tangible common equity (2)	19.21			18.75			13.19			7.62			19.46			18.98			19.73			Return on average tangible common equity (2)	15.95			(6.34)			19.85			13.93			19.21			4.86			18.98
Stockholders' equity to assets	Stockholders' equity to assets	11.39			11.42			11.59			11.38			12.19			11.39			12.19			Stockholders' equity to assets	11.53			11.74			11.10			10.55			11.39			11.53			11.39
Tangible common equity to tangible assets (2)	Tangible common equity to tangible assets (2)	7.15			7.14			7.51			7.48			8.74			7.15			8.74			Tangible common equity to tangible assets (2)	7.17			7.21			6.82			6.26			7.15			7.17			7.15
Reconciliation of Non-GAAP Financial Measures:	Reconciliation of Non-GAAP Financial Measures:																						Reconciliation of Non-GAAP Financial Measures:
Adjusted net income reconciliation (3)
Net income (GAAP)		$	23,985		$	24,164		$	16,305		$	7,824		$	18,284		$	48,149		$	36,523
Adjusted net income (loss) reconciliation (3)																							Adjusted net income (loss) reconciliation (3)
Net income (loss) (GAAP)																							Net income (loss) (GAAP)	$	22,595		$	(8,898)		$	27,601		$	18,510		$	23,985		$	13,697		$	48,149
Adjustments:	Adjustments:																						Adjustments:
Provision expense related to merger		—			—			8,400			6,000			—			—			—
Provision expense (4)																							Provision expense (4)	—			2,340			—			8,000			—			2,340			—
Assets (gains) losses, net	Assets (gains) losses, net	(1,603)			(1,313)			(465)			1,187			(4,192)			(2,916)			(4,903)			Assets (gains) losses, net	318			38,468			(260)			46			(1,603)			38,786			(2,916)
Merger-related expense	Merger-related expense	555			98			2,202			2,793			656			653			656			Merger-related expense	26			163			492			519			555			189			653
Branch closure expense		—			—			—			944			—			—			—

Adjustments subtotal	Adjustments subtotal	(1,048)			(1,215)			10,137			10,924			(3,536)			(2,263)			(4,247)			Adjustments subtotal	344			40,971			232			8,565			(1,048)			41,315			(2,263)
Tax on Adjustments (25% effective tax rate)	Tax on Adjustments (25% effective tax rate)	(262)			(304)			2,534			2,731			(884)			(566)			(1,062)			Tax on Adjustments (25% effective tax rate)	86			10,243			58			2,141			(262)			10,329			(566)
Adjustments, net of tax	Adjustments, net of tax	(786)			(911)			7,603			8,193			(2,652)			(1,697)			(3,185)			Adjustments, net of tax	258			30,728			174			6,424			(786)			30,986			(1,697)
Adjusted net income (Non-GAAP)	Adjusted net income (Non-GAAP)	$	23,199		$	23,253		$	23,908		$	16,017		$	15,632		$	46,452		$	33,338		Adjusted net income (Non-GAAP)	$	22,853		$	21,830		$	27,775		$	24,934		$	23,199		$	44,683		$	46,452
Adjusted diluted EPS (Non-GAAP)	Adjusted diluted EPS (Non-GAAP)	$	1.67		$	1.64		$	1.83		$	1.49		$	1.51		$	3.31		$	3.22		Adjusted diluted EPS (Non-GAAP)	$	1.53		$	1.45		$	1.84		$	1.74		$	1.67		$	2.98		$	3.31
Tangible Assets:	Tangible Assets:																						Tangible Assets:
Total assets	Total assets	$	7,370,252		$	7,320,212		$	7,695,037		$	6,407,820		$	4,587,347								Total assets	$	8,482,628		$	8,192,354		$	8,763,969		$	8,895,916		$	7,370,252
Goodwill and other intangibles, net	Goodwill and other intangibles, net	336,721			338,068			339,492			269,954			173,711									Goodwill and other intangibles, net	398,194			400,277			402,438			407,117			336,721
Tangible assets	Tangible assets	$	7,033,531		$	6,982,144		$	7,355,545		$	6,137,866		$	4,413,636								Tangible assets	$	8,084,434		$	7,792,077		$	8,361,531		$	8,488,799		$	7,033,531
Tangible Common Equity:	Tangible Common Equity:																						Tangible Common Equity:
Stockholders’ equity (common)	Stockholders’ equity (common)	$	839,387		$	836,310		$	891,891		$	729,278		$	559,395								Stockholders’ equity (common)	$	977,638		$	961,792		$	972,529		$	938,463		$	839,387
Goodwill and other intangibles, net	Goodwill and other intangibles, net	336,721			338,068			339,492			269,954			173,711									Goodwill and other intangibles, net	398,194			400,277			402,438			407,117			336,721
Tangible common equity	Tangible common equity	$	502,666		$	498,242		$	552,399		$	459,324		$	385,684								Tangible common equity	$	579,444		$	561,515		$	570,091		$	531,346		$	502,666
Average Tangible Common Equity:	Average Tangible Common Equity:																						Average Tangible Common Equity:
Stockholders’ equity (common)	Stockholders’ equity (common)	$	837,975		$	861,319		$	784,666		$	608,946		$	550,974		$	849,582		$	547,775		Stockholders’ equity (common)	$	967,142		$	970,108		$	954,970		$	890,205		$	837,975		$	968,617		$	849,582
Goodwill and other intangibles, net	Goodwill and other intangibles, net	337,289			338,694			294,051			201,748			174,026			337,988			174,424			Goodwill and other intangibles, net	399,080			401,212			403,243			363,211			337,289			400,140			337,988
Average tangible common equity	Average tangible common equity	$	500,686		$	522,625		$	490,615		$	407,198		$	376,948		$	511,594		$	373,351		Average tangible common equity	$	568,062		$	568,896		$	551,727		$	526,994		$	500,686		$	568,477		$	511,594

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 management considers them to be useful metrics with which to analyze and evaluate financial condition and capital strength. See section “Non-GAAP Financial Measures” below.

(3) The adjusted net income measure is a 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 our financial performance to the financial performance of peer banks. See section “Non-GAAP Financial Measures” below.

(4) Provision expense for 2023 is attributable to the expected loss on our investment in Signature Bank sub debt, and the provision expense for 2022 is attributable to the Day 2 allowance from the acquisition of Charter.

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 ~~$48.1~~$14 million (or earnings per diluted common share of $0.91) for the six months ended June 30, 2023, compared to net income of $48 million (or earnings per diluted common share of $3.43) for the six months ended June 30, 2022, ~~compared to $36.5 million~~with 2023 significantly impacted by the first quarter balance sheet repositioning actions (detailed below).

Net income reflected non-core items and the related tax effect of each, including U.S. Treasury securities sale loss, expected loss (provision expense) on the Signature Bank sub debt investment (acquired in an acquisition), merger-related expenses, Day 2 credit provision expense required under the CECL model, as well as gains / (losses) on other assets and investments. These non-core items negatively impacted earnings per diluted common share $2.07 for the six months ended June 30, ~~2021. Earnings~~2023 and positively impacted earnings per diluted common share ~~was $3.43~~$0.12 for the ~~first~~ six months ended June 30, 2022.

On March 7, 2023, Nicolet executed the sale of ~~2022, compared~~$500 million (par value) U.S. Treasury held to ~~$3.52~~maturity securities for a pre-tax loss of $38 million or an after-tax loss of $28 million to reposition the ~~first six months~~balance sheet for future growth. The $500 million portfolio yielded approximately 88 bps with scheduled maturities in 2024 and 2025 (or average duration of ~~2021.~~2 years). Proceeds from the sale were used to reduce existing FHLB borrowings with the remainder held in investable cash. The following table summarizes the estimated annual impact of this balance sheet repositioning.


Sale Metrics	$ in Thousands		Assumptions
Loss on sale of U.S.Treasury securities	$	(37,723)	Sale of $500 million U.S. Treasury securities yielding 88 bps

Lost interest from U.S. Treasury securities	$	(4,380)	Assumes $500 million at 88 bps
Lower interest expense on FHLB borrowings	17,128		Assumes $377 million at 456 bps (at time of sale)
Interest income from investable cash	3,905		Assumes $83 million at 465 bps (at time of sale)
Projected net impact from repositioning	$	16,653
Estimated earn back (in years)	2.26

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

•Net interest income was ~~$108.9~~$116 million for the first six months of ~~2022,~~2023, up ~~$39.7~~$7 million ~~(57%~~(6%) over the first six months of ~~2021.~~2022. Interest income grew ~~$42.3~~$62 million attributable to favorable ~~volumes (mostly higher loan volumes), partly offset by net unfavorable~~ rates ~~(as~~from new and renewed loans ~~reprice at varying intervals to reflect the recent Federal Reserve~~in a rising interest rate ~~increases)~~environment, as well as favorable loan volumes (partly from the Charter acquisition). Interest expense increased ~~$2.6~~$55 million between the comparable six-month periods mostly from ~~the larger~~higher average funding ~~base.~~costs. Net interest margin was 3.02% for the six months ended June 30, 2023, compared to 3.29% for the six months ended June 30, ~~2022, compared to 3.38% for the six months ended June 30, 2021.~~2022. For additional information regarding net interest income, see “Income Statement Analysis — Net Interest Income.”

•Noninterest income was ~~$30.1~~a negative $5 million for the first six months of ~~2022, down $7.2~~2023, a $35 million ~~(19%)~~unfavorable change from the comparable ~~2021~~2022 period, ~~with lower~~primarily due to the balance sheet repositioning (noted above). Excluding net ~~mortgage income and other income partly offset by growth in most other~~asset gains (losses), noninterest income ~~categories.~~for the first six months of 2023 was $34 million, a $7 million increase over the first six months of 2022. For additional information regarding noninterest income, see “Income Statement Analysis — Noninterest Income.”

•Noninterest expense was ~~$74.1~~$90 million, ~~$17.3~~$16 million ~~(30%~~(21%) higher than the first six months of ~~2021.~~2022. Personnel costs increased ~~$8.7~~$7 million, and non-personnel expenses combined increased ~~$8.6~~$8 million ~~(35%~~(25%) over the comparable ~~2021~~2022 period. For additional information regarding noninterest expense, see “Income Statement Analysis — Noninterest Expense.”

•Nonperforming assets were ~~$42~~$27 million, representing ~~0.56%~~0.32% of total assets at June 30, ~~2022,~~2023, compared to ~~0.73%~~$40 million or 0.46% of total assets at December 31, ~~2021 and 0.21% at June 30, 2021.~~2022. The reduction in nonperforming assets was due to the sale of select nonaccrual loans (net book value of approximately $13 million). For additional information regarding nonperforming assets, see “Balance Sheet Analysis – Nonperforming Assets.”

•At June 30, ~~2022,~~2023, assets were ~~$7.4~~$8.5 billion, down ~~$0.3 billion (4%~~$281 million (3%) from December 31, ~~2021,~~2022, mostly ~~cash and cash equivalents. Total assets increased $2.8 billion (61%) from June 30, 2021, mainly~~ due to the ~~acquisitions~~sale of ~~Mackinac and County.~~investment securities as part of our balance sheet repositioning, partly offset by higher cash balances. For additional balance sheet discussion see “Balance Sheet Analysis.”

•At June 30, ~~2022,~~2023, loans were ~~$5.0~~$6.2 billion, ~~$357~~up $42 million ~~(8%) higher than~~from December 31, ~~2021 on solid~~2022, with growth in residential mortgage loans partly offset by lower commercial-based loans from the sale of specific nonaccrual loans (noted above) as well as the payoff of two larger loan ~~growth. Total loans were $2.2 billion (77%) higher than June 30, 2021, largely due to the acquisitions of Mackinac and County.~~relationships. On average, loans grew ~~$1.9~~$1.5 billion ~~(67%~~(31%) over the first six months of ~~2021.~~2022. For additional information regarding loans, see “Balance Sheet Analysis — Loans.”

•Total deposits ~~were $6.3~~of $7.2 billion at June 30, ~~2022, a decrease of $180 million (3%)~~2023, were minimally changed from December 31, ~~2021 on~~2022, with growth in customer and brokered time deposits partly offset by lower ~~core customer deposits. Total deposits were $2.3 billion (60%) higher than June 30, 2021, largely due to the Mackinac and County acquisitions.~~transaction account balances. Year-to-date average deposits were ~~$2.4 billion (62%~~$711 million (11%) higher than the first six months of ~~2021.~~2022. For additional information regarding deposits, see “Balance Sheet Analysis – Deposits.”

INCOME STATEMENT ANALYSIS

Net Interest Income

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

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

For the Six Months Ended June 30,
2022 2021
(in thousands) Average
Balance Interest Average
Yield/Rate Average
Balance Interest Average
Yield/Rate
ASSETS
Interest-earning assets
Commercial PPP Loans $ 9,395 $ 1,390 29.41 % $ 206,066 $ 8,813 8.51 %
All other commercial-based loans 3,970,704 86,208 4.32 % 2,142,902 49,086 4.56 %
Retail-based loans 783,974 16,720 4.27 % 498,536 11,114 4.46 %
Total loans, including loan fees (1)(2)
4,764,073 104,318 4.36 % 2,847,504 69,013 4.83 %
Investment securities:
Taxable 1,388,630 10,262 1.48 % 391,601 3,874 1.98 %
Tax-exempt (2)
185,689 2,022 2.18 % 141,412 1,509 2.13 %
Total investment securities 1,574,319 12,284 1.56 % 533,013 5,383 2.02 %
Other interest-earning assets 306,662 1,607 1.05 % 719,036 1,271 0.35 %
Total non-loan earning assets 1,880,981 13,891 1.48 % 1,252,049 6,654 1.06 %
Total interest-earning assets 6,645,054 $ 118,209 3.54 % 4,099,553 $ 75,667 3.68 %
Other assets, net 750,693 421,866
Total assets $ 7,395,747 $ 4,521,419
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings $ 831,335 $ 339 0.08 % $ 561,392 $ 172 0.06 %
Interest-bearing demand 1,020,273 1,499 0.30 % 665,646 1,429 0.43 %
Money market accounts (“MMA”) 1,482,431 823 0.11 % 851,655 227 0.05 %
Core time deposits 563,846 833 0.30 % 313,123 1,536 0.99 %
Total interest-bearing core deposits 3,897,885 3,494 0.18 % 2,391,816 3,364 0.28 %
Brokered deposits 441,316 1,108 0.51 % 285,029 1,991 1.41 %
Total interest-bearing deposits 4,339,201 4,602 0.21 % 2,676,845 5,355 0.40 %
Wholesale funding 214,767 3,963 3.69 % 47,487 616 2.58 %
Total interest-bearing liabilities 4,553,968 8,565 0.38 % 2,724,332 5,971 0.44 %
Noninterest-bearing demand deposits 1,950,528 1,209,718
Other liabilities 41,669 39,594
Stockholders’ equity 849,582 547,775
Total liabilities and
stockholders’ equity
$ 7,395,747 $ 4,521,419
Interest rate spread 3.16 % 3.24 %
Net free funds 0.13 % 0.14 %
Tax-equivalent net interest income and net interest margin $ 109,644 3.29 % $ 69,696 3.38 %
Tax-equivalent adjustment $ 765 $ 484
Net interest income $ 108,879 $ 69,212

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

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

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


		For the Three Months Ended June 30,													For the Six Months Ended June 30,
		2022						2021							2023						2022
(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
Commercial PPP Loans		$	5,333	$	13	0.93	%	$	205,639	$	4,862	9.35	%
All other commercial-based loans		4,033,469		44,388		4.35	%	2,159,774		24,645		4.51	%
Retail-based loans		799,733		8,583		4.29	%	503,692		5,622		4.47	%

Total loans, including loan fees (1)(2)	Total loans, including loan fees (1)(2)	4,838,535		52,984		4.34	%	2,869,105		35,129		4.85	%	Total loans, including loan fees (1)(2)	$	6,219,868	$	163,318	5.23	%	$	4,764,073	$	104,318	4.36	%
Investment securities:	Investment securities:													Investment securities:
Taxable	Taxable	1,390,642		5,135		1.48	%	400,646		2,060		2.06	%	Taxable	1,022,188		9,094		1.78	%	1,388,630		10,262		1.48	%
Tax-exempt (2)	Tax-exempt (2)	182,385		991		2.17	%	136,986		734		2.15	%	Tax-exempt (2)	264,935		4,246		3.21	%	185,689		2,022		2.18	%
Total investment securities	Total investment securities	1,573,027		6,126		1.56	%	537,632		2,794		2.08	%	Total investment securities	1,287,123		13,340		2.07	%	1,574,319		12,284		1.56	%
Other interest-earning assets	Other interest-earning assets	168,082		790		1.87	%	702,657		616		0.35	%	Other interest-earning assets	156,353		3,893		4.96	%	306,662		1,607		1.05	%
Total non-loan earning assets	Total non-loan earning assets	1,741,109		6,916		1.59	%	1,240,289		3,410		1.10	%	Total non-loan earning assets	1,443,476		17,233		2.39	%	1,880,981		13,891		1.48	%
Total interest-earning assets	Total interest-earning assets	6,579,644		$	59,900	3.61	%	4,109,394		$	38,539	3.72	%	Total interest-earning assets	7,663,344		$	180,551	4.69	%	6,645,054		$	118,209	3.54	%
Other assets, net	Other assets, net	693,575						418,445						Other assets, net	735,323						750,693
Total assets	Total assets	$	7,273,219					$	4,527,839					Total assets	$	8,398,667					$	7,395,747
LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY													LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities	Interest-bearing liabilities													Interest-bearing liabilities
Savings	Savings	$	841,109	$	234	0.11	%	$	586,590	$	92	0.06	%	Savings	$	865,588	$	4,867	1.13	%	$	831,335	$	339	0.08	%
Interest-bearing demand	Interest-bearing demand	988,820		798		0.32	%	657,979		670		0.41	%	Interest-bearing demand	929,728		6,449		1.40	%	1,020,273		1,499		0.30	%
MMA		1,424,995		500		0.14	%	846,114		104		0.05	%
Money market accounts (“MMA”)														Money market accounts (“MMA”)	1,836,405		23,191		2.55	%	1,482,431		823		0.11	%
Core time deposits	Core time deposits	532,179		325		0.24	%	297,047		657		0.89	%	Core time deposits	670,071		7,808		2.35	%	563,846		833		0.30	%
Total interest-bearing core deposits	Total interest-bearing core deposits	3,787,103		1,857		0.20	%	2,387,730		1,523		0.26	%	Total interest-bearing core deposits	4,301,792		42,315		1.98	%	3,897,885		3,494		0.18	%
Brokered deposits	Brokered deposits	423,372		553		0.52	%	253,816		910		1.44	%	Brokered deposits	603,668		11,962		4.00	%	441,316		1,108		0.51	%
Total interest-bearing deposits	Total interest-bearing deposits	4,210,475		2,410		0.23	%	2,641,546		2,433		0.37	%	Total interest-bearing deposits	4,905,460		54,277		2.23	%	4,339,201		4,602		0.21	%
Wholesale funding	Wholesale funding	214,975		2,032		3.77	%	43,325		303		2.76	%	Wholesale funding	395,742		9,396		4.72	%	214,767		3,963		3.69	%
Total interest-bearing liabilities	Total interest-bearing liabilities	4,425,450		4,442		0.40	%	2,684,871		2,736		0.41	%	Total interest-bearing liabilities	5,301,202		63,673		2.42	%	4,553,968		8,565		0.38	%
Noninterest-bearing demand deposits	Noninterest-bearing demand deposits	1,977,569						1,256,251						Noninterest-bearing demand deposits	2,094,860						1,950,528
Other liabilities	Other liabilities	32,225						35,743						Other liabilities	33,988						41,669
Stockholders’ equity	Stockholders’ equity	837,975						550,974						Stockholders’ equity	968,617						849,582
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	7,273,219					$	4,527,839					Total liabilities and stockholders’ equity	$	8,398,667					$	7,395,747
Interest rate spread	Interest rate spread					3.21	%					3.31	%	Interest rate spread					2.27	%					3.16	%
Net free funds	Net free funds					0.13	%					0.14	%	Net free funds					0.75	%					0.13	%
Tax-equivalent net interest income and net interest margin	Tax-equivalent net interest income and net interest margin			$	55,458	3.34	%			$	35,803	3.45	%	Tax-equivalent net interest income and net interest margin			$	116,878	3.02	%			$	109,644	3.29	%
Tax-equivalent adjustment	Tax-equivalent adjustment			$	374					$	232			Tax-equivalent adjustment			$	1,118					$	765
Net interest income	Net interest income			$	55,084					$	35,571			Net interest income			$	115,760					$	108,879

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

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

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


	For the Three Months Ended June 30,
	2023						2022
(in thousands)	Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate
ASSETS
Interest-earning assets



Total loans, including loan fees (1)(2)	$	6,237,757	$	84,132	5.35	%	$	4,838,535	$	52,984	4.34	%
Investment securities:
Taxable	822,204		4,133		2.01	%	1,390,642		5,135		1.48	%
Tax-exempt (2)	245,940		1,961		3.19	%	182,385		991		2.17	%
Total investment securities	1,068,144		6,094		2.28	%	1,573,027		6,126		1.56	%
Other interest-earning assets	192,034		2,357		4.87	%	168,082		790		1.87	%
Total non-loan earning assets	1,260,178		8,451		2.68	%	1,741,109		6,916		1.59	%
Total interest-earning assets	7,497,935		$	92,583	4.90	%	6,579,644		$	59,900	3.61	%
Other assets, net	730,665						693,575
Total assets	$	8,228,600					$	7,273,219
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings	$	842,454	$	2,502	1.19	%	$	841,109	$	234	0.11	%
Interest-bearing demand	874,294		3,110		1.43	%	988,820		798		0.32	%
MMA	1,825,233		12,001		2.64	%	1,424,995		500		0.14	%
Core time deposits	736,521		5,115		2.79	%	532,179		325		0.24	%
Total interest-bearing core deposits	4,278,502		22,728		2.13	%	3,787,103		1,857		0.20	%
Brokered deposits	640,643		6,612		4.14	%	423,372		553		0.52	%
Total interest-bearing deposits	4,919,145		29,340		2.39	%	4,210,475		2,410		0.23	%
Wholesale funding	293,140		3,678		4.96	%	214,975		2,032		3.77	%
Total interest-bearing liabilities	5,212,285		33,018		2.54	%	4,425,450		4,442		0.40	%
Noninterest-bearing demand deposits	2,021,892						1,977,569
Other liabilities	27,281						32,225
Stockholders’ equity	967,142						837,975
Total liabilities and stockholders’ equity	$	8,228,600					$	7,273,219
Interest rate spread					2.36	%					3.21	%
Net free funds					0.78	%					0.13	%
Tax-equivalent net interest income and net interest margin			$	59,565	3.14	%			$	55,458	3.34	%
Tax-equivalent adjustment			$	526					$	374
Net interest income			$	59,039					$	55,084

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

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

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


		For the Three Months Ended June 30, 2022 Compared to June 30, 2021:						For the Six Months Ended June 30, 2022 Compared to June 30, 2021:							For the Three Months Ended June 30, 2023 Compared to June 30, 2022:						For the Six Months Ended June 30, 2023 Compared to June 30, 2022:
		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
Commercial PPP Loans		$	(2,519)	$	(2,330)	$	(4,849)	$	(14,193)	$	6,770	$	(7,423)
All other commercial-based loans		21,272		(1,529)		19,743		50,668		(13,546)		37,122
Retail-based loans		3,161		(200)		2,961		6,071		(465)		5,606

Total loans (2)	Total loans (2)	21,914		(4,059)		17,855		42,546		(7,241)		35,305		Total loans (2)	$	24,153	$	6,995	$	31,148	$	35,730	$	23,270	$	59,000
Investment securities:	Investment securities:													Investment securities:
Taxable	Taxable	3,104		(29)		3,075		6,303		85		6,388		Taxable	(1,054)		52		(1,002)		(1,598)		430		(1,168)
Tax-exempt (2)	Tax-exempt (2)	247		10		257		481		32		513		Tax-exempt (2)	414		556		970		1,056		1,168		2,224
Total investment securities	Total investment securities	3,351		(19)		3,332		6,784		117		6,901		Total investment securities	(640)		608		(32)		(542)		1,598		1,056
Other interest-earning assets	Other interest-earning assets	(71)		245		174		25		311		336		Other interest-earning assets	(57)		1,624		1,567		171		2,115		2,286
Total non-loan earning assets	Total non-loan earning assets	3,280		226		3,506		6,809		428		7,237		Total non-loan earning assets	(697)		2,232		1,535		(371)		3,713		3,342
Total interest-earning assets	Total interest-earning assets	$	25,194	$	(3,833)	$	21,361	$	49,355	$	(6,813)	$	42,542	Total interest-earning assets	$	23,456	$	9,227	$	32,683	$	35,359	$	26,983	$	62,342
Interest-bearing liabilities	Interest-bearing liabilities													Interest-bearing liabilities
Savings	Savings	$	51	$	91	$	142	$	99	$	68	$	167	Savings	$	2	$	2,266	$	2,268	$	14	$	4,514	$	4,528
Interest-bearing demand	Interest-bearing demand	288		(160)		128		611		(541)		70		Interest-bearing demand	(103)		2,415		2,312		(145)		5,095		4,950
MMA	MMA	107		289		396		242		354		596		MMA	179		11,322		11,501		241		22,127		22,368
Core time deposits	Core time deposits	323		(655)		(332)		770		(1,473)		(703)		Core time deposits	171		4,619		4,790		184		6,791		6,975
Total interest-bearing core deposits	Total interest-bearing core deposits	769		(435)		334		1,722		(1,592)		130		Total interest-bearing core deposits	249		20,622		20,871		294		38,527		38,821
Brokered deposits	Brokered deposits	409		(766)		(357)		769		(1,652)		(883)		Brokered deposits	420		5,639		6,059		546		10,308		10,854
Total interest-bearing deposits	Total interest-bearing deposits	1,178		(1,201)		(23)		2,491		(3,244)		(753)		Total interest-bearing deposits	669		26,261		26,930		840		48,835		49,675
Wholesale funding	Wholesale funding	1,628		101		1,729		3,202		145		3,347		Wholesale funding	674		972		1,646		3,790		1,643		5,433
Total interest-bearing liabilities	Total interest-bearing liabilities	2,806		(1,100)		1,706		5,693		(3,099)		2,594		Total interest-bearing liabilities	1,343		27,233		28,576		4,630		50,478		55,108
Net interest income	Net interest income	$	22,388	$	(2,733)	$	19,655	$	43,662	$	(3,714)	$	39,948	Net interest income	$	22,113	$	(18,006)	$	4,107	$	30,729	$	(23,495)	$	7,234

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

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

The Federal Reserve raised short-term interest rates 25a total of 425 bps ~~in March~~during 2022, ~~followed by~~increasing the Federal Funds rate to a ~~50 bps increase in May 2022 and a~~range of 4.25% to 4.50% as of December 31, 2022. Additional increases totaling 75 bps ~~increase~~were made in the first half of 2023, resulting in a Federal Funds range of 5.00% to 5.25% as of June ~~2022, for a total increase in short-term interest rates of 150 bps since year-end 2021. Prior to this, short-term interest rates remained steady since March 2020.~~30, 2023.

Tax-equivalent net interest income was ~~$109.6~~$117 million for the ~~first~~ six months June 30, 2023, an increase of ~~2022, comprised of net interest income of $108.9~~$7 million ~~($39.7 million or 57% higher than~~(7%) over the ~~first~~ six months ~~of 2021), and a $0.8 million tax-equivalent adjustment.~~ended June 30, 2022. The ~~$39.9~~$7 million increase in tax-equivalent net interest income was attributable to net favorable volumes (which added ~~$43.7~~$31 million to net interest income, mostly from ~~interest-earning asset volumes added with~~ the ~~Mackinac~~Charter acquisition and ~~County acquisitions, as well as~~ solid loan ~~growth and strategic investment purchases)~~growth) and net unfavorable rates (which decreased net interest income ~~$3.7~~$23 million from ~~competitive pricing pressure~~higher deposit costs and the lag in repricing the loan portfolio to current market interest rates).

Average interest-earning assets increased to ~~$6.6~~$7.7 billion, up ~~$2.5~~$1.0 billion ~~(62%~~(15%) over the ~~2021~~ comparable 2022 period, primarily due to the ~~acquisitions~~timing of ~~Mackinac and County (in September 2021 and December 2021, respectively).~~the acquisition of Charter. Between the comparable ~~first half~~six-month periods, average loans increased ~~$1.9~~$1.5 billion ~~(67%~~(31%), mostly due to timing of the ~~Mackinac and County acquisitions, which~~Charter acquisition (which added loans of ~~$0.9 billion~~$827 million at acquisition) and ~~$1.0 billion, respectively, at acquisition. In addition, average loans reflected~~ strong organic loan growth ~~and the repurchase of previously participated agricultural loans, which more than offset the reduction in PPP loans from continued loan forgiveness.~~throughout 2022. Average investment securities ~~increased $1.0 billion~~decreased $287 million between the comparable ~~first half~~six-month periods, partly due to the acquisitions of Mackinac and County, and partly due to the strategic re-investment of approximately $0.5 billion excess cash liquidity into U.S. Treasury securities of varying yields and durations during fourth quarter 2021. Otherwhile other interest-earning assets declined ~~$0.4 billion with the additional assets added with the 2021 acquisitions, more than offset by~~$150 million, mostly due to lower ~~cash mostly from the re-investment of excess cash liquidity noted above.~~cash. As a result, the mix of average interest-earning assets shifted to ~~72%~~81% loans, ~~24%~~17% investments and 4%2% other interest-earning assets (mostly cash) for the first half ~~2022,~~of 2023, compared to ~~69%~~72%, ~~13%~~24% and ~~18%~~4%, respectively, for the first half ~~2021.~~

of 2022.

Average interest-bearing liabilities were ~~$4.6~~$5.3 billion for the first half ~~2022,~~of 2023, an increase of ~~$1.8 billion (67%~~$747 million (16%) over the first half ~~2021,~~of 2022, primarily due to the ~~acquisitions~~timing of ~~Mackinac and County.~~the acquisition of Charter. Average interest-bearing core deposits increased ~~$1.5 billion~~$404 million and average brokered deposits increased ~~$156~~$162 million between the comparable ~~first half~~six-month periods, ~~largely due~~reflecting the impact of the Charter acquisition and brokered funding to support the ~~Mackinac and County acquisitions.~~strong loan growth in 2022. Other interest-bearing liabilities ~~grew $167~~increased $181 million between the comparable ~~first half~~six-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 Charter and partly due to FHLB borrowings to support the ~~Mackinac and County acquisitions.~~strong loan growth in 2022. The mix of average interest-bearing liabilities was ~~86%~~81% core deposits, ~~10%~~11% brokered deposits and ~~4% other~~8% wholesale funding for the first half ~~2022,~~of 2023, compared to ~~88%~~86%, 10%, and 2%4%, respectively, for the first half ~~2021.~~of 2022.

~~Between the comparable first half periods, the~~

The interest rate spread decreased ~~8 bps.~~89 bps between the comparable six-month periods, as our liabilities have repriced faster than our assets in the rapidly rising interest rate environment. The ~~first half 2022~~ interest-earning asset yield ~~declined 14~~increased 115 bps to ~~3.54%, reflecting~~4.69% for the ~~decline in the average yield~~first six months of ~~loans and investment securities, as well as~~2023, due to the changing mix of interest-earning assets (mostly the reduction in cash ~~due to~~noted above), as well as the ~~re-investment of excess cash liquidity noted above).~~higher interest rate environment. The loan yield ~~declined 47~~improved 87 bps to ~~4.36%~~5.23% between the comparable ~~first half~~six-month periods, largely due to the ~~impact~~repricing of ~~the low~~new and renewed loans in a rising interest rate environment, ~~through early 2022 and competitive pricing pressures on new, renewed, and variable rate loans,~~ while the yield on investment securities ~~declined 46~~increased 51 bps to ~~1.56%,~~2.07%. The cost of funds increased 204 bps to 2.42% for the first half of 2023, also ~~attributable to~~reflecting the ~~low~~rising interest rate environment, ~~through early 2022, as well as~~a migration of customer deposits into higher rate deposit products, and a shift in the ~~strategic re-investment~~mix of ~~cash into lower yielding U.S. Treasury securities. The 2022 cost of funds declined 6 bps to 0.38%, largely from lower rates on core~~ interest-bearing ~~deposits and brokered deposits.~~liabilities (mostly the increase in wholesale funding noted above). The contribution from net free funds ~~decreased 1~~increased 62 bps, mostly due ~~mostly~~ to the ~~reduced~~higher value in the ~~low~~rising interest rate environment, though offset partly by the 52% increase in average net free funds (largely from higher average noninterest-bearing demand deposits and stockholders’ equity) between the first half periods.environment. As a result, the tax-equivalent net interest margin was ~~3.29%~~3.02% for the first half ~~2022,~~of 2023, down 927 bps compared to ~~3.38%~~3.29% for the first half ~~2021.~~of 2022.

Tax-equivalent interest income was ~~$118.2~~$181 million for the first half ~~2022,~~of 2023, up ~~$42.5~~$62 million from ~~first half 2021,~~comparable period of 2022, comprised of ~~$49.4~~$35 million higher volumes ~~partly offset by lower~~and $27 million higher average ~~rates.~~rates (mostly in the loan portfolio). Interest income on loans increased ~~$35.3~~$59 million over the first half ~~2021,~~of 2022, mostly due to higher average balances from the ~~Mackinac~~Charter acquisition and ~~County acquisitions, as well as solid~~strong organic loan growth. Between the comparable first half periods, interest income on investment securities grew $6.9 million, also attributable to the Mackinac and County acquisitions, as well as the re-investment of excess cash liquidity (noted above). Interest expense increased to ~~$8.6~~$64 million for the first half ~~2022,~~of 2023, up ~~$2.6~~$55 million compared to the first half ~~2021, comprised~~ of ~~$5.7 million~~2022, mostly due to a much higher ~~volumes, partly offset by $3.1 million from lower overall~~ cost of funds. Interest expense on deposits ~~decreased $0.8~~increased $50 million (14%) from first half 2021 given higher average interest-bearing deposit balances at a lower cost as product rate changes were made during 2021 in the low rate environment, and brokered deposits cost less largely from maturities of higher-costing term brokered funds procured under competitive conditions in mid-2020 during the pandemic. Interest expense on other interest-bearing liabilities increased between the comparable ~~first half~~six-month periods mostly due to ~~higher average balances from~~ the ~~July 2021 subordinated notes issuance, as well as wholesale funding acquired with the 2021 acquisitions.~~rapidly rising interest rate environment.

Provision for Credit Losses

The provision for credit losses was $3.5 million for the six months ended June 30, 2023 (comprised of $1.2 million related to the ACL-Loans and $2.3 million for the ACL on securities AFS), compared to $1.1 million for the six months ended June 30, 2022 (comprised of $0.9 million related to the ACL-Loans and ~~$0.2 million~~the remainder for the ACL on unfunded commitments)~~, compared~~. The 2023 provision for credit losses on loans was attributable to ~~$0.5 million~~growth and changes in the underlying loan portfolio, while the provision for ~~the six months ended June 30, 2021 (all related~~credit losses on securities AFS was due to the ~~ACL-Loans).~~expected loss on our Signature Bank subordinated debt investment which was fully charged-off during first quarter 2023.

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

Noninterest Income

Table 4: Noninterest Income


		Three Months Ended June 30,								Six Months Ended June 30,									Three Months Ended June 30,								Six Months Ended June 30,
(in thousands)	(in thousands)	2022		2021		$ Change		% Change		2022		2021		$ Change		% Change		(in thousands)	2023		2022		$ Change		% Change		2023		2022		$ Change		% Change
Trust services fee income	Trust services fee income	$	2,004	$	1,906	$	98	5	%	$	4,015	$	3,681	$	334	9	%	Trust services fee income	$	2,148	$	2,004	$	144	7	%	$	4,181	$	4,015	$	166	4	%
Brokerage fee income	Brokerage fee income	2,988		2,991		(3)		—		6,676		5,784		892		15		Brokerage fee income	3,722		2,988		734		25		7,201		6,676		525		8
Wealth management fee income																		Wealth management fee income	5,870		4,992		878		18		11,382		10,691		691		6
Mortgage income, net	Mortgage income, net	2,205		5,599		(3,394)		(61)		5,458		12,829		(7,371)		(57)		Mortgage income, net	1,822		2,205		(383)		(17)		3,288		5,458		(2,170)		(40)
Service charges on deposit accounts	Service charges on deposit accounts	1,536		1,136		400		35		3,013		2,227		786		35		Service charges on deposit accounts	1,529		1,536		(7)		—		3,009		3,013		(4)		—
Card interchange income	Card interchange income	2,950		2,266		684		30		5,531		4,193		1,338		32		Card interchange income	3,331		2,950		381		13		6,364		5,531		833		15
BOLI income	BOLI income	768		559		209		37		1,701		1,086		615		57		BOLI income	1,073		768		305		40		2,273		1,701		572		34
Deferred compensation plan asset market valuations																		Deferred compensation plan asset market valuations	499		(1,316)		1,815		N/M		1,445		(1,783)		3,228		N/M
LSR income, net	LSR income, net	(143)		—		(143)		N/M		(525)		—		(525)		N/M		LSR income, net	1,135		(143)		1,278		N/M		2,290		(525)		2,815		N/M
Other income	Other income	220		1,529		(1,309)		(86)		1,289		2,601		(1,312)		(50)		Other income	1,900		1,536		364		24		3,732		3,072		660		21
Noninterest income without net gains		12,528		15,986		(3,458)		(22)		27,158		32,401		(5,243)		(16)
Noninterest income without net gains (losses)																		Noninterest income without net gains (losses)	17,159		12,528		4,631		37		33,783		27,158		6,625		24
Asset gains (losses), net	Asset gains (losses), net	1,603		4,192		(2,589)		(62)		2,916		4,903		(1,987)		(41)		Asset gains (losses), net	(318)		1,603		(1,921)		N/M		(38,786)		2,916		(41,702)		N/M
Total noninterest income	Total noninterest income	$	14,131	$	20,178	$	(6,047)	(30)	%	$	30,074	$	37,304	$	(7,230)	(19)	%	Total noninterest income	$	16,841	$	14,131	$	2,710	19	%	$	(5,003)	$	30,074	$	(35,077)	(117)	%
Trust services fee income & Brokerage fee income combined		$	4,992	$	4,897	$	95	2	%	$	10,691	$	9,465	$	1,226	13	%

N/M means not meaningful.

Noninterest income was ~~$30.1~~a negative $5.0 million for the first six months of 2023, an unfavorable change of $35.1 million compared to the first six months of 2022, primarily due to the balance sheet repositioning. Excluding net asset gains (losses), noninterest income for first half ~~2022,~~2023 was $33.8 million, a ~~decrease of $7.2~~$6.6 million ~~(19%~~(24%) ~~compared to $37.3 million for first half 2021, with lower net mortgage income and other income partly offset by growth in most other noninterest income categories.~~

~~Trust services fee income and brokerage fee income combined were $10.7 million, up $1.2 million (13%)~~increase over first half ~~2021, consistent with~~2022.

Wealth management fee income was $11.4 million, up $0.7 million (6%) from the first six months of 2022, including favorable market-related changes, as well as growth in accounts and assets under ~~management, though tempered by unfavorable market-related declines.~~management.

Mortgage income represents net gains received from the sale of residential real estate loans into the secondary market, capitalized mortgage servicing rights (“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 ~~$5.5~~$3.3 million, decreased ~~$7.4~~$2.2 million ~~(57%~~(40%) between the comparable six-month periods, mostly due to the rising interest rate environment reducing secondary market volumes and the related gains on sales. Gains on sales and capitalized gains combined decreased $8.1 million and the fair value of the mortgage derivatives decreased $0.4 million, while MSR impairment was $1.2 million favorable on slower paydown activity. See also ~~“Lending-Related Commitments” and~~ Note 7, “Goodwill and Other Intangibles and Servicing Rights” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures on the MSR asset.

~~Service charges on deposit accounts were up $0.8 million to $3.0 million for the six months ended June 30, 2022, mostly due to the larger deposit base from the 2021 acquisitions.~~

Card interchange income grew ~~$1.3~~$0.8 million ~~(32%~~(15%) between the comparable six-month periods due to higher volume and activity.

BOLI income was up $0.6 million between the comparable six-month periods, attributable to higher average balances from BOLI acquired with the ~~2021 acquisitions.~~Charter acquisition.

Loan servicing rights (“LSR”) income ~~includes agricultural loan servicing fees net of~~increased $2.8 million between the ~~related LSR amortization. Nicolet is not adding new loans~~comparable first half periods mostly due to ~~this servicing portfolio and repurchased approximately $100 million of these previously participated loans during second quarter 2022; thus, the~~lower LSR amortization ~~is currently outpacing~~from the ~~loan servicing fees.~~much slower prepayments speeds in the higher interest rate environment. See also Note 7, “Goodwill and Other Intangibles and Servicing Rights” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional information on the LSR asset.

Other income of ~~$1.3~~$3.7 million for the six months ended June 30, ~~2022~~2023 was ~~down $1.3~~up $0.7 million from the comparable ~~2021~~2022 period, largely due to ~~unfavorable changes in~~broker fees and card incentive income.

Net asset losses of $38.8 million for the ~~fair value~~first six months of ~~nonqualified deferred compensation plan assets from the recent market declines, partly offset by new revenue from crop insurance sales (related~~2023 were primarily attributable to ~~the County acquisition). See also “Noninterest Expense” for discussion~~losses on the ~~offsetting fair value change~~sale of approximately $500 million (par value) U.S. Treasury held to ~~the nonqualified deferred compensation plan liabilities.~~

~~Net~~maturity securities executed in early March as part of a balance sheet repositioning, while net asset gains of $2.9 million for the first ~~half~~six 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 $4.9 million for first half 2021 were primarily attributable to favorable fair value marks on equity securities.~~.

Noninterest Expense

Table 5: Noninterest Expense


		Three Months Ended June 30,								Six Months Ended June 30,									Three Months Ended June 30,								Six Months Ended June 30,
($ in thousands)	($ in thousands)	2022		2021		Change		% Change		2022		2021		Change		% Change		($ in thousands)	2023		2022		Change		% Change		2023		2022		Change		% Change
Personnel	Personnel	$	19,681	$	17,084	$	2,597	15	%	$	40,872	$	32,200	$	8,672	27	%	Personnel	$	23,900	$	19,681	$	4,219	21	%	$	48,228	$	40,872	$	7,356	18	%
Occupancy, equipment and office	Occupancy, equipment and office	6,891		4,053		2,838		70		13,835		8,190		5,645		69		Occupancy, equipment and office	8,845		6,891		1,954		28		17,628		13,835		3,793		27
Business development and marketing	Business development and marketing	2,057		1,210		847		70		3,888		2,199		1,689		77		Business development and marketing	1,946		2,057		(111)		(5)		4,067		3,888		179		5
Data processing	Data processing	3,596		2,811		785		28		6,983		5,469		1,514		28		Data processing	4,218		3,596		622		17		8,206		6,983		1,223		18
Intangibles amortization	Intangibles amortization	1,347		790		557		71		2,771		1,642		1,129		69		Intangibles amortization	2,083		1,347		736		55		4,244		2,771		1,473		53
FDIC assessments	FDIC assessments	480		480		—		—		960		1,075		(115)		(11)		FDIC assessments	1,009		480		529		110		1,549		960		589		61
Merger-related expense	Merger-related expense	555		656		(101)		(15)		653		656		(3)		—		Merger-related expense	26		555		(529)		(95)		189		653		(464)		(71)
Other expense	Other expense	1,931		3,663		(1,732)		(47)		4,126		5,397		(1,271)		(24)		Other expense	2,930		1,931		999		52		5,721		4,126		1,595		39
Total noninterest expense	Total noninterest expense	$	36,538	$	30,747	$	5,791	19	%	$	74,088	$	56,828	$	17,260	30	%	Total noninterest expense	$	44,957	$	36,538	$	8,419	23	%	$	89,832	$	74,088	$	15,744	21	%
Non-personnel expenses	Non-personnel expenses	$	16,857	$	13,663	$	3,194	23	%	$	33,216	$	24,628	$	8,588	35	%	Non-personnel expenses	$	21,057	$	16,857	$	4,200	25	%	$	41,604	$	33,216	$	8,388	25	%
Average full-time equivalent (“FTE”) employees	Average full-time equivalent (“FTE”) employees	850		570		280		49	%	842		564		278		49	%	Average full-time equivalent (“FTE”) employees	943		850		93		11	%	943		842		101		12	%

Noninterest expense was ~~$74.1~~$89.8 million, an increase of ~~$17.3~~$15.7 million ~~(30%~~(21%) over the first ~~half 2021.~~six months of 2022. Personnel costs increased ~~$8.7~~$7.4 million ~~(27%~~(18%), while non-personnel expenses combined increased ~~$8.6~~$8.4 million ~~(35%~~(25%) compared to the first ~~half 2021.~~six months of 2022.

Personnel expense was ~~$40.9~~$48.2 million for the six months ended June 30, ~~2022,~~2023, an increase of ~~$8.7~~$7.4 million from the comparable period in ~~2021.~~2022. Salary expense increased ~~$11.0~~$6.1 million ~~(60%~~(18%) over the first ~~half 2021,~~six months of 2022, reflecting higher salaries from the larger employee base (with average full-time equivalent employees up ~~49%~~12%, mostly due to the ~~2021 acquisitions) as well as~~Charter acquisition), investments in our wealth team, and merit increases between the ~~years. Salary expense also reflected increases in hourly pay and base salaries effective at~~years, partly offset by lower incentive compensation commensurate with the ~~end of March 2022, which benefited 67% of our employee base.~~lower current period earnings. Fringe benefits increased ~~$1.6~~$1.3 million ~~(35%~~(20%) over the first ~~half 2021, mostly due to~~six months of 2022, reflecting higher overall health care expenses as well as the larger employee base. ~~Personnel~~Salary expense was also impacted by the change in the fair value of nonqualified deferred compensation plan liabilities from the recent market ~~declines.~~improvements. 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 ~~$13.8~~$17.6 million for the first ~~half 2022,~~six months of 2023, up ~~$5.6~~$3.8 million ~~(69%~~(27%) compared to the first ~~half 2021,~~six months of 2022, largely due to the expanded branch network with the ~~Mackinac and County acquisitions,~~Charter acquisition, as well as additional expense for software and technology solutions.

Business development and marketing expense was ~~$3.9~~$4.1 million, up ~~$1.7~~$0.2 million ~~(77%~~(5%), between the comparable ~~six-month~~first half periods, largely ~~due~~attributable to the ~~higher travel~~timing and ~~entertainment expenses, as well as additional~~extent of marketing donations, promotions, and media to support our expanded branch network and community base.

Data processing expense was ~~$7.0~~$8.2 million, up ~~$1.5~~$1.2 million ~~(28%~~(18%) between the comparable six-month periods, mostly due to volume-based increases in core and card processing charges, ~~including~~partly from the ~~larger operating base following the Mackinac and County acquisitions.~~Charter acquisition.

Intangibles amortization increased ~~$1.1~~$1.5 million between the comparable first half periods due to higher amortization from the intangibles added with the ~~2021~~recent acquisitions.

Other expense was ~~$4.1~~$5.7 million, ~~down $1.3~~up $1.6 million ~~(24%~~(39%) between the comparable six-month periods, mostly due to ~~a $2.1 million contract termination charge incurred in 2021 and lower~~higher professional ~~fees (related to the 2021 subordinated notes issuance), partly offset by costs to carry closed bank branches and overall higher expenses related to our larger operating base.~~fees.

Income Taxes

Income tax expense was $3.7 million (effective tax rate of 21.2%) for the first six months of 2023, compared to expense of $15.7 million (effective tax rate of 24.5%) for ~~first half 2022, compared to $12.7 million (effective tax rate of 25.7%) for~~ the comparable period of ~~2021.~~2022. The change in income tax expense was largely due to the lower pretax earnings between the years.

3940

Income Statement Analysis – Three Months Ended June 30, ~~2022~~2023 versus Three Months Ended June 30, ~~2021~~2022

Net income was $22.6 million for the three months ended June 30, 2023, compared to $24.0 million for the three months ended June 30, ~~2022, compared to $18.3 million for the three months ended June 30, 2021.~~2022. Earnings per diluted common share was $1.51 for second quarter 2023, compared to $1.73 for second quarter ~~2022, compared to $1.77 for second quarter 2021.~~2022.

Tax-equivalent net interest income was ~~$55.5~~$59.6 million for second quarter ~~2022, comprised~~2023, an increase of ~~net interest income of $55.1~~$4.1 million ~~($19.5 million or 55%~~ over second quarter ~~2021), and a tax-equivalent adjustment of $0.4 million. Tax-equivalent interest~~2022. Interest income increased ~~$21.4~~$32.7 million ~~between the~~over second quarter ~~periods,~~2022, with ~~$25.2~~$23.5 million from stronger volumes (led by average loans which grew ~~$2.0~~$1.4 billion or ~~69%~~29% over second quarter ~~2021,~~2022, mostly due to the ~~acquisitions of Mackinac~~Charter acquisition) and ~~County), partly offset by $3.8~~$9.2 million from ~~lower~~higher yields. Average investment securities ~~increased $1.0 billion~~decreased $505 million between the comparable second quarter periods, ~~partly~~mostly due to the acquisitions of Mackinac and County, and partly due to the strategic re-investment of approximately $0.5 billion excess cash liquidity into U.S. Treasury securities of varying yields and durations during fourthbalance sheet repositioning actions in first quarter ~~2021.~~2023. Interest expense increased ~~$1.7~~$28.6 million from second quarter ~~2021, with the impact of the~~2022, mostly due to $27.2 million higher ~~average deposit balances partly offset a lower~~ overall ~~cost on deposits.~~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 second quarter ~~2022~~2023 was ~~3.34%~~3.14%, ~~down from 3.45%~~compared to 3.34% for second quarter ~~2021,~~2022, influenced by ~~timing of recent~~the rising interest rate ~~increases~~environment and the changing balance sheet mix. The mix of average interest-earning assets shifted from 74% loans, 24% investments and 2% other interest-earning assets (mostly cash) for second quarter 2022, to 83%, 14% and 3%, respectively, for second quarter 2023. The yield on interest-earning assets of ~~3.61% declined 11~~4.90% increased 129 bps from second quarter ~~2021.~~2022. The yield on loans was ~~4.34%~~5.35%, 51101 bps ~~lower~~higher than second quarter ~~2021,~~2022, largely due to the impact of the ~~low~~rising interest rate ~~environment throughout 2021 and competitive pricing pressures on new, renewed, and variable loans, as well as the continued reduction in PPP loans due to loan forgiveness.~~environment. The cost of funds of ~~0.40% declined 1~~2.54% increased 214 bps between the comparable quarters, ~~mostly~~also due to ~~lower rates on core interest-bearing deposits and brokered deposits.~~the rising interest rates.

Provision for credit losses was $0.5 million for second quarter 2023 (all related to the ACL-Loans), compared to $0.8 million provision for credit losses for second quarter 2022 (comprised of $0.6 million related to the ACL-Loans, and $0.2 million for the ACL on unfunded commitments), compared to no provision for credit losses for second quarter 2021. The 2022 provision for credit losses was attributable to strong loan growth, solid asset quality trends, and negligible net charge-offs, while the 2021 provision for credit losses was due to improving asset quality trends and minimal net charge-offs.. 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 ~~$14.1~~$16.8 million for second quarter ~~2022, a decrease~~2023, an increase of ~~$6.0~~$2.7 million ~~(30%~~(19%) from second quarter 2021. Net mortgage income of $2.2 million for second quarter 2022 was down $3.4 million (61%) from second quarter 2021, primarily due to the rising interest rate environment reducing secondary market volumes and the related gains on sales. Trust services2022. Wealth management fee income ~~and brokerage fee income combined was up $0.1~~grew $0.9 million ~~(2%~~(18%), ~~consistent with the~~including favorable market-related changes, as well as growth in accounts and assets under ~~management, though tempered by unfavorable market-related declines. Service charges on deposit accounts grew $0.4~~management. Market valuations improved $1.8 million ~~to $1.5 million for~~between the comparable second quarter ~~2022,~~periods from favorable fair value changes on the deferred compensation plan assets. LSR income increased $1.3 million between the comparable second quarter periods mostly due to ~~the larger deposit base~~lower LSR amortization from the ~~2021 acquisitions. Card interchange income grew $0.7~~much slower prepayments speeds in the higher interest rate environment. Net asset losses of $0.3 million ~~(30%) due to higher volume and activity. Other income declined $1.3 million from~~in second quarter ~~2021, largely due~~2023 were primarily attributable to unfavorable ~~changes in the~~ fair value ~~of nonqualified deferred compensation plan assets from the recent market declines. Net~~marks on equity securities, while net asset gains of $1.6 million in second quarter 2022 ~~were~~ were primarily attributable to gains on sales of other real estate owned (mostly closed bank branch locations)~~, while net asset gains of $4.2 million in second quarter 2021 were primarily attributable to favorable fair value marks on equity securities.~~. For additional information regarding noninterest income, see “INCOME STATEMENT ANALYSIS — Noninterest Income.”

Noninterest expense was ~~$36.5~~$45.0 million for second quarter ~~2022,~~2023, an increase of ~~$5.8~~$8.4 million ~~(19%~~(23%) from second quarter ~~2021,~~2022, including a ~~$2.6~~$4.2 million increase in personnel expense and a ~~$3.2~~$4.2 million increase in non-personnel expenses. The increase in personnel was due to higher salaries and fringe benefits from the larger employee base ~~partly offset by~~(with average full-time equivalent employees up 11%), investments in our wealth team, and merit increases between the ~~change in fair value of nonqualified deferred compensation plan liabilities from recent market declines.~~years. Occupancy, equipment, and office of ~~$6.9~~$8.8 million was up ~~$2.8~~$2.0 million ~~(70%~~(28%), largely due to the expanded branch network with the ~~Mackinac and County~~Charter acquisitions as well as additional expense for software and technology solutions. Business development and marketing of $2.1 million increased $0.8 million over second quarter 2021, largely due to higher travel and entertainment expenses, as well as additional marketing donations, promotions, and media to support our expanded branch network and community base. Data processing expense was ~~$3.6~~$4.2 million, up ~~$0.8~~$0.6 million ~~(28%~~(17%) between the comparable second quarter periods, mostly due to volume-based increases in core and card processing charges, including the larger operating base following the ~~Mackinac and County acquisitions.~~Charter acquisition. Other expense was ~~$1.9~~$2.9 million, ~~down $1.7~~an increase of $1.0 million between the comparable second quarter periods, ~~mostly~~primarily due to ~~a $2.1 million contract termination charge incurred in second quarter 2021 and lower~~higher professional fees ~~(related to the 2021 subordinated notes issuance), partly offset by costs to carry closed bank branches~~ and overall higher expenses related to our larger operating base. For additional information regarding noninterest expense, see “INCOME STATEMENT ANALYSIS — Noninterest Expense.”

Income tax expense for second quarter 2022 was $7.9 million, with an effective tax rate of 24.9%, compared to income tax expense of $6.7 million and an effective tax rate of 26.9% for second quarter 2021.

4041

BALANCE SHEET ANALYSIS

At June 30, ~~2022,~~2023, period end assets were ~~$7.4~~$8.5 billion, a decrease of ~~$0.3 billion (4%~~$281 million (3%) from December 31, ~~2021, on lower cash and cash equivalents from the decline in deposits and stock repurchase activity, as well as $200 million of assets related~~2022, mostly due to the sale of ~~the Birmingham branch in January 2022.~~investment securities as part of our balance sheet repositioning, partly offset by higher cash balances. Total loans increased ~~$357~~$42 million from December 31, ~~2021,~~2022, with ~~solid organic loan~~ growth in ~~agricultural, commercial and industrial, and~~ residential ~~first~~ mortgage loans partly offset by lower commercial-based loans from the sale of specific nonaccrual loans as well as the ~~repurchase~~payoff of ~~approximately $100 million previously participated agricultural loans.~~two larger loan relationships. Total deposits of ~~$6.3~~$7.2 billion at June 30, 2023, were minimally changed from December 31, 2022, with growth in customer and brokered time deposits partly offset by lower transaction account balances. Total borrowings decreased ~~$180~~$295 million from December 31, ~~2021, due to~~2022 in FHLB advances (as part of the ~~repricing of acquired deposits to current market rates and a reduction in retail deposits.~~balance sheet repositioning). Total stockholders’ equity was ~~$839~~$978 million at June 30, ~~2022, a decrease~~2023, an increase of ~~$53~~$5 million since December 31, ~~2021, mostly due to stock repurchase activity and unfavorable changes in the fair value of securities AFS, partly offset by current year earnings.~~2022.

Compared to June 30, ~~2021,~~2022, assets ~~were $7.4~~increased $1.1 billion ~~up $2.8 billion (61%~~(15%) ~~from June 30, 2021,~~, largely due to the ~~acquisitions~~acquisition of ~~Mackinac~~Charter and ~~County in second half 2021.~~strong loan growth, partly offset by lower investment securities related to the balance sheet repositioning. Total loans increased ~~$2.2~~$1.2 billion and total deposits increased ~~$2.3 billion~~$912 million from June 30, ~~2021,~~2022, also largely due to the ~~acquisitions~~acquisition of ~~Mackinac and County.~~Charter. Stockholders’ equity increased ~~$280~~$138 million from June 30, ~~2021,~~2022, primarily due to common stock issued in the ~~Mackinac and County acquisitions~~Charter acquisition and net income, partially offset by ~~stock repurchases over the year and~~ negative net fair value investment changes.

Loans

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

Nicolet services a diverse customer base throughout ~~Northeast and Central~~ Wisconsin, ~~Northern~~ Michigan and ~~the Upper Peninsula of Michigan.~~Minnesota. We concentrate on originating loans in our local markets and assisting current loan customers. ~~The~~Nicolet actively utilizes government loan ~~portfolio is widely diversified~~programs such as those provided by ~~types~~the U.S. Small Business Administration (“SBA”) and the U.S. Department of ~~borrowers, industry groups, and market areas.~~Agriculture’s Farm Service Agency (“FSA”).

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 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.

For additional disclosures on loans, see also Note 6, “Loans, Allowance for Credit Losses - Loans, and Credit Quality,” in the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1. For information regarding the allowance for credit losses and nonperforming assets see “BALANCE SHEET ANALYSIS – Allowance for Credit Losses - Loans” and “BALANCE SHEET ANALYSIS – Nonperforming Assets.” A detailed discussion of the loan portfolio accounting policies, general loan portfolio characteristics, and credit risk are described in Note 1, “Nature of Business and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements, included in Part II, Item 8 of the Company’s 2022 Annual Report on Form 10-K.

Table 6: Period End Loan Composition


		June 30, 2022				December 31, 2021				June 30, 2021					June 30, 2023				December 31, 2022				June 30, 2022
(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	$	1,118,360	23	%	$	1,042,256	23	%	$	886,456	31	%	Commercial & industrial	$	1,318,567	21	%	$	1,304,819	21	%	$	1,118,360	23	%
Owner-occupied CRE	Owner-occupied CRE	790,680		16		787,189		17		520,299		18		Owner-occupied CRE	969,202		16		954,599		15		790,680		16
Agricultural	Agricultural	967,192		19		794,728		17		110,664		4		Agricultural	1,068,999		17		1,088,607		18		967,192		19
Commercial	Commercial	2,876,232		58		2,624,173		57		1,517,419		53		Commercial	3,356,768		54		3,348,025		54		2,876,232		58
CRE investment	CRE investment	818,562		16		818,061		18		505,588		18		CRE investment	1,108,692		18		1,149,949		19		818,562		16
Construction & land development	Construction & land development	228,575		5		213,035		5		140,588		5		Construction & land development	337,389		5		318,600		5		228,575		5
Commercial real estate	Commercial real estate	1,047,137		21		1,031,096		23		646,176		23		Commercial real estate	1,446,081		23		1,468,549		24		1,047,137		21
Commercial-based loans	Commercial-based loans	3,923,369		79		3,655,269		80		2,163,595		76		Commercial-based loans	4,802,849		77		4,816,574		78		3,923,369		79
Residential construction	Residential construction	69,423		1		70,353		1		46,646		2		Residential construction	108,095		2		114,392		2		69,423		1
Residential first mortgage	Residential first mortgage	785,591		16		713,983		15		471,354		17		Residential first mortgage	1,072,609		17		1,016,935		16		785,591		16
Residential junior mortgage	Residential junior mortgage	148,732		3		131,424		3		104,218		4		Residential junior mortgage	184,873		3		177,332		3		148,732		3
Residential real estate	Residential real estate	1,003,746		20		915,760		19		622,218		23		Residential real estate	1,365,577		22		1,308,659		21		1,003,746		20
Retail & other	Retail & other	51,539		1		50,807		1		34,518		1		Retail & other	54,350		1		55,266		1		51,539		1
Retail-based loans	Retail-based loans	1,055,285		21		966,567		20		656,736		24		Retail-based loans	1,419,927		23		1,363,925		22		1,055,285		21
Total loans	Total loans	$	4,978,654	100	%	$	4,621,836	100	%	$	2,820,331	100	%	Total loans	$	6,222,776	100	%	$	6,180,499	100	%	$	4,978,654	100	%

As noted in Table 6 above, the loan portfolio at June 30, ~~2022,~~2023, was ~~79%~~77% commercial-based and ~~21%~~23% 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.

Total loans of $6.2 billion at June 30, 2023, increased $42 million from December 31, 2022, with growth in residential mortgage loans partly offset by lower commercial-based loans from the sale of specific nonaccrual loans (net book value of approximately $13 million) as well as the payoff of two larger loan relationships. At June 30, 2023, commercial and industrial loans represented the largest segment of Nicolet’s loan portfolio at 21% of the total portfolio, followed by CRE investment at 18% of the total portfolio. The loan portfolio is widely diversified and included the following industries: manufacturing, wholesaling, paper, packaging, food production and processing, agriculture, forest products, hospitality, retail, service, and businesses supporting the general building industry. The following chart provides the industry distribution of our commercial loan portfolio at June 30, 2023.


Commercial Loan Portfolio by Industry Type (based on NAICS codes)

The following table presents the maturity distribution of the loan portfolio.

Table 7: Loan Maturity Distribution


As of June 30, 2023	Loan Maturity
(in thousands)	One Year or Less			After One Year to Five Years			After Five Years to Fifteen Years			After Fifteen Years			Total
Commercial & industrial	$	464,614		$	652,126		$	190,494		$	11,333		$	1,318,567
Owner-occupied CRE	74,675			657,889			203,445			33,193			969,202
Agricultural	330,163			336,515			361,578			40,743			1,068,999
CRE investment	131,458			724,139			226,416			26,679			1,108,692
Construction & land development	32,270			187,928			91,499			25,692			337,389
Residential construction *	28,627			8,088			4,014			67,366			108,095
Residential first mortgage	20,151			260,733			193,751			597,974			1,072,609
Residential junior mortgage	9,681			20,068			33,646			121,478			184,873
Retail & other	28,946			13,454			7,699			4,251			54,350
Total loans	$	1,120,585		$	2,860,940		$	1,312,542		$	928,709		$	6,222,776
Percent by maturity distribution	18		%	46		%	21		%	15		%	100		%










Total fixed rate loans	$	452,373		$	2,692,047		$	929,155		$	322,487		$	4,396,062










Total floating rate loans	$	668,212		$	168,893		$	383,387		$	606,222		$	1,826,714

~~At June 30, 2022,~~


As of December 31, 2022	Loan Maturity
(in thousands)	One Year or Less			After One Year to Five Years			After Five Years to Fifteen Years			After Fifteen Years			Total
Commercial & industrial	$	433,319		$	660,560		$	197,352		$	13,588		$	1,304,819
Owner-occupied CRE	78,759			639,093			208,719			28,028			954,599
Agricultural	350,752			328,495			367,913			41,447			1,088,607
CRE investment	129,770			737,869			250,256			32,054			1,149,949
Construction & land development	64,169			131,889			92,379			30,163			318,600
Residential construction *	41,049			6,922			2,091			64,330			114,392
Residential first mortgage	22,985			263,810			202,514			527,626			1,016,935
Residential junior mortgage	6,814			19,941			33,201			117,376			177,332
Retail & other	27,814			15,002			8,021			4,429			55,266
Total loans	$	1,155,431		$	2,803,581		$	1,362,446		$	859,041		$	6,180,499
Percent by maturity distribution	19		%	45		%	22		%	14		%	100		%










Total fixed rate loans	$	520,535		$	2,631,295		$	987,225		$	315,982		$	4,455,037










Total floating rate loans	$	634,896		$	172,286		$	375,221		$	543,059		$	1,725,462

* The residential construction loans ~~were $5.0 billion, $357 million higher than December 31, 2021. The increase in loans was due~~with a loan maturity after five years represent a construction to ~~strong growth in most~~permanent loan categories, including commercial loans up $276 million (11%), primarily agricultural and commercial and industrial loans, partly offset by continued reductions in PPP loans from loan forgiveness (down $24 million). The growth in commercial loans also included the repurchase of approximately $100 million previously participated agricultural loans. Excluding the repurchased agricultural loans, the organic commercial loan growth was $176 million (7%) from December 31, 2021. Commercial and industrial loans continue to be the largest segment of Nicolet’s portfolio and represented 23% of the total portfolio at June 30, 2022.

Residential real estate loans of $1.0 billion grew $88 million from year-end 2021, primarily in ARM products, to represent 20% of total loans at June 30, 2022. Residential first mortgage loans include conventional first-lien home mortgages, while residential junior mortgage loans consist mainly of home equity lines and term loans secured by junior mortgage liens. As part of our management of residential mortgage loans, the majority of Nicolet’s long-term, fixed-rate residential 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 slightly ($1 million) from year-end 2021, representing approximately 1% of the total loan portfolio, and include predominantly short-term and other personal installment loans not secured by real estate.product.

Allowance for Credit Losses - Loans

~~In addition to~~For additional disclosures on the ~~discussion that follows,~~allowance for credit losses, 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. A detailed discussion of the loan portfolio accounting policies, general loan portfolio characteristics, and credit risk are described in Note 1, ~~for additional disclosures~~“Nature of Business and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements, included in Part II, Item 8 of the Company’s 2022 Annual Report on ~~the allowance for credit losses.~~Form 10-K.

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 2021 Annual Report on Form 10-K.type. 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. Loans charged off are subject to continuous review, and specific efforts are taken to achieve maximum recovery of principal, interest, and related expenses. For additional information regarding nonperforming assets see also “BALANCE SHEET ANALYSIS – Nonperforming Assets.”

The ACL-Loans represents management’s estimate of expected credit losses in the Company’s loan portfolio at the balance sheet date. To assess the overall appropriateness of the ACL-Loans, management applies an allocation methodology 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 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 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 loans, which management defines as nonaccrual credit relationships over $250,000, collateral dependent loans, purchased credit deteriorated loans, and other loans with evidence of credit deterioration. The specific reserve in the ACL-Loans for these credit deteriorated loans is equal to the aggregate collateral or discounted cash flow shortfall. ~~Management~~Second, management allocates the ACL-Loans with historical loss rates by loan segment. The loss factors are measured on a quarterly basis and applied to each loan segment based on current loan balances and projected for their expected remaining life. Next, management allocates the ACL-Loans using the qualitative and environmental factors mentioned above. Consideration is given to those current qualitative or environmental factors that are likely to cause estimated credit losses ~~as of~~at 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 June 30, ~~2022,~~2023, the ACL-Loans was $63 million (representing 1.01% of period end loans), minimally changed from $62 million (or 1.00% of period end loans) at December 31, 2022 and up from $51 million ~~(representing~~(or 1.02% of period end loans) ~~compared to $50 million at December 31, 2021 and $33 million~~ at June 30, ~~2021. The increase in the ACL-Loans from year-end 2021 is reflective of strong loan growth, solid asset quality trends, and negligible net charge-offs.~~2022. The increase in the ACL-Loans from June 30, ~~2021~~2022 was ~~largely~~mostly due to the ~~acquisitions of Mackinac and County,~~Charter acquisition, which ~~combined~~ added ~~$12~~$8 million of provision for the Day 2 allowance and $5$2 million related to purchased credit deteriorated loans. The components of the ACL-Loans are detailed further in Table 78 below.

4244

Table 7:8: Allowance for Credit Losses - Loans


		Six Months Ended						Year Ended				Six Months Ended						Year Ended
(in thousands)	(in thousands)	June 30, 2022			June 30, 2021			December 31, 2021			(in thousands)	June 30, 2023			June 30, 2022			December 31, 2022
ACL-Loans:	ACL-Loans:										ACL-Loans:
Balance at beginning of period	Balance at beginning of period	$	49,672		$	32,173		$	32,173		Balance at beginning of period	$	61,829		$	49,672		$	49,672
ACL on PCD loans acquired	ACL on PCD loans acquired	—			—			5,159			ACL on PCD loans acquired	—			—			1,937
Provision for credit losses	Provision for credit losses	900			500			12,500			Provision for credit losses	1,200			900			10,950
Charge-offs	Charge-offs	(142)			(329)			(513)			Charge-offs	(745)			(142)			(1,033)
Recoveries	Recoveries	225			217			353			Recoveries	527			225			303
Net (charge-offs) recoveries	Net (charge-offs) recoveries	83			(112)			(160)			Net (charge-offs) recoveries	(218)			83			(730)
Balance at end of period	Balance at end of period	$	50,655		$	32,561		$	49,672		Balance at end of period	$	62,811		$	50,655		$	61,829
Net loan (charge-offs) recoveries:	Net loan (charge-offs) recoveries:										Net loan (charge-offs) recoveries:
Commercial & industrial	Commercial & industrial	$	30		$	(36)		$	50		Commercial & industrial	$	115		$	30		$	(86)
Owner-occupied CRE	Owner-occupied CRE	(36)			—			—			Owner-occupied CRE	—			(36)			(555)
Agricultural	Agricultural	—			(48)			(48)			Agricultural	(63)			—			—
CRE investment	CRE investment	169			(2)			(2)			CRE investment	—			169			169
Construction & land development	Construction & land development	—			—			—			Construction & land development	—			—			—
Residential construction	Residential construction	—			—			—			Residential construction	—			—			—
Residential first mortgage	Residential first mortgage	5			12			(93)			Residential first mortgage	2			5			(57)
Residential junior mortgage	Residential junior mortgage	1			3			4			Residential junior mortgage	(96)			1			1
Retail & other	Retail & other	(86)			(41)			(71)			Retail & other	(176)			(86)			(202)
Total net (charge-offs) recoveries	Total net (charge-offs) recoveries	$	83		$	(112)		$	(160)		Total net (charge-offs) recoveries	$	(218)		$	83		$	(730)
Ratios:	Ratios:										Ratios:
ACL-Loans to total loans	ACL-Loans to total loans	1.02		%	1.15		%	1.07		%	ACL-Loans to total loans	1.01		%	1.02		%	1.00		%
Net charge-offs to average loans, annualized	Net charge-offs to average loans, annualized	(0.00)		%	0.01		%	0.01		%	Net charge-offs to average loans, annualized	0.01		%	—		%	0.01		%

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 identify problem loans early and minimize the risk of loss. Management continues to actively work with customers and monitor credit risk from the ongoing ~~disruptions related to the pandemic, as well as economic, political, and social turmoil. See also~~macroeconomic challenges. For additional disclosures on credit quality, see Note 6, “Loans, Allowance for Credit Losses - Loans, and Credit Quality” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item ~~1, for further disclosures on credit quality.~~1. For additional information on loans see ~~also~~ “BALANCE SHEET ANALYSIS – Loans” and for additional information on the ACL-Loans see “BALANCE SHEET ANALYSIS – Allowance for Credit Losses-Loans.”

Nonperforming loans are considered one indicator of potential future loan losses. Nonperforming loans are defined as nonaccrual loans 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 June 30, ~~2022,~~2023, nonperforming assets were ~~$42~~$27 million and represented ~~0.56%~~0.32% of total assets, compared to ~~$56~~$40 million or ~~0.73%~~0.46% of total assets at December 31, ~~2021.~~2022. The reduction in nonperforming assets was mostly due to the nonaccrual loan sale (as noted under “BALANCE SHEET ANALYSIS – Loans” above).

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 ~~$48~~$79 million ~~(1.0%~~(1% of loans) and $53 million ~~(1.1%~~(1% of loans) at June 30, ~~2022~~2023 and December 31, ~~2021, respectively.~~2022, respectively, with the increase primarily due to the downgrade of one commercial credit relationship. Potential problem loans require a heightened management review ofgiven the pace at which a credit may deteriorate, the potential duration of asset quality stress, and uncertainty around the magnitude and scope of economic stress that may be felt by Nicolet’s customers and on underlying real estate values.

4345

Table 8:9: Nonperforming Assets


(in thousands)	(in thousands)	June 30, 2022			December 31, 2021			June 30, 2021			(in thousands)	June 30, 2023			December 31, 2022			June 30, 2022
Nonperforming loans:	Nonperforming loans:										Nonperforming loans:
Commercial & industrial	Commercial & industrial	$	1,784		$	1,908		$	1,110		Commercial & industrial	$	3,157		$	3,328		$	1,784
Owner-occupied CRE	Owner-occupied CRE	5,183			4,220			1,625			Owner-occupied CRE	6,573			5,647			5,183
Agricultural	Agricultural	21,054			28,367			1,820			Agricultural	9,092			20,416			21,054
Commercial	Commercial	28,021			34,495			4,555			Commercial	18,822			29,391			28,021
CRE investment	CRE investment	3,617			4,119			743			CRE investment	2,535			3,832			3,617
Construction & land development	Construction & land development	1,044			1,071			326			Construction & land development	95			771			1,044
Commercial real estate	Commercial real estate	4,661			5,190			1,069			Commercial real estate	2,630			4,603			4,661
Commercial-based loans	Commercial-based loans	32,682			39,685			5,624			Commercial-based loans	21,452			33,994			32,682
Residential construction	Residential construction	—			—			—			Residential construction	—			—			—
Residential first mortgage	Residential first mortgage	3,580			4,132			1,135			Residential first mortgage	3,638			3,780			3,580
Residential junior mortgage	Residential junior mortgage	221			243			113			Residential junior mortgage	87			224			221
Residential real estate	Residential real estate	3,801			4,375			1,248			Residential real estate	3,725			4,004			3,801
Retail & other	Retail & other	97			94			60			Retail & other	101			82			97
Retail-based loans	Retail-based loans	3,898			4,469			1,308			Retail-based loans	3,826			4,086			3,898
Total nonaccrual loans	Total nonaccrual loans	36,580			44,154			6,932			Total nonaccrual loans	25,278			38,080			36,580
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	$	36,580		$	44,154		$	6,932		Total nonperforming loans	$	25,278		$	38,080		$	36,580
Nonaccrual loans (included above) covered by guarantees	Nonaccrual loans (included above) covered by guarantees	$	4,883		$	6,776		$	1,201		Nonaccrual loans (included above) covered by guarantees	$	3,110		$	5,459		$	4,883
OREO:	OREO:										OREO:
Commercial real estate owned	Commercial real estate owned	$	628		$	1,549		$	—		Commercial real estate owned	$	520		$	628		$	628
Residential real estate owned		—			99			—

Bank property real estate owned	Bank property real estate owned	4,378			10,307			2,895			Bank property real estate owned	958			1,347			4,378
Total OREO	Total OREO	5,006			11,955			2,895			Total OREO	1,478			1,975			5,006
Total nonperforming assets	Total nonperforming assets	$	41,586		$	56,109		$	9,827		Total nonperforming assets	$	26,756		$	40,055		$	41,586
Performing troubled debt restructurings		$	1,710		$	5,443		$	3,879

Ratios:	Ratios:										Ratios:
Nonperforming loans to total loans	Nonperforming loans to total loans	0.73		%	0.96		%	0.25		%	Nonperforming loans to total loans	0.41		%	0.62		%	0.73		%
Nonperforming assets to total loans plus OREO	Nonperforming assets to total loans plus OREO	0.83		%	1.21		%	0.35		%	Nonperforming assets to total loans plus OREO	0.43		%	0.65		%	0.83		%
Nonperforming assets to total assets	Nonperforming assets to total assets	0.56		%	0.73		%	0.21		%	Nonperforming assets to total assets	0.32		%	0.46		%	0.56		%
ACL-Loans to nonperforming loans	ACL-Loans to nonperforming loans	138		%	112		%	470		%	ACL-Loans to nonperforming loans	248		%	162		%	138		%

Deposits

Deposits represent Nicolet’s largest source of ~~funds. Total deposits~~funds, and the strong core deposit base provides a stable funding source. Core deposit balances of ~~$6.3~~$6.5 billion at June 30, ~~2022, decreased $180~~2023 declined $128 million (2%) from December 31, ~~2021,~~2022, including ~~a $219 million reduction in core customer deposits and a $39 million increase in brokered deposits. The net decrease in deposits from year-end 2021 was due to~~lower commercial balances, as well as the ~~repricing~~seasonal run-off of ~~acquired deposits to current market rates and a reduction in retail~~municipal deposits. Compared to June 30, ~~2021, total~~2022, core deposits increased ~~$2.3 billion (60%~~$656 million (11%), largely due to the ~~Mackinac and County acquisitions.~~Charter acquisition. The deposit composition is presented in Table 910 below.

Table 9:10: Period End Deposit Composition


		June 30, 2022				December 31, 2021				June 30, 2021					June 30, 2023				December 31, 2022				June 30, 2022
(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	$	2,045,732	33	%	$	1,975,705	31	%	$	1,324,994	34	%	Noninterest-bearing demand	$	2,059,939	29	%	$	2,361,816	33	%	$	2,045,732	33	%
Money market and interest-bearing demand		2,642,510		42	%	2,834,824		44	%	1,512,753		38	%
Interest-bearing demand														Interest-bearing demand	1,030,919		14	%	1,279,850		18	%	1,230,822		20	%
Money market														Money market	1,835,523		26	%	1,707,619		24	%	1,411,688		22	%
Savings	Savings	858,160		13	%	803,197		12	%	599,461		15	%	Savings	821,803		11	%	931,417		13	%	858,160		13	%
Time	Time	739,864		12	%	852,190		13	%	501,814		13	%	Time	1,450,420		20	%	898,219		12	%	739,864		12	%
Total deposits	Total deposits	$	6,286,266	100	%	$	6,465,916	100	%	$	3,939,022	100	%	Total deposits	$	7,198,604	100	%	$	7,178,921	100	%	$	6,286,266	100	%
Brokered transaction accounts	Brokered transaction accounts	$	265,240	4	%	$	234,306	4	%	$	34,067	1	%	Brokered transaction accounts	$	173,107	2	%	$	252,829	3	%	$	265,240	4	%
Brokered and listed time deposits	Brokered and listed time deposits	218,198		4	%	209,857		3	%	216,273		5	%	Brokered and listed time deposits	566,405		8	%	339,066		5	%	218,198		4	%
Total brokered deposits	Total brokered deposits	$	483,438	8	%	$	444,163	7	%	$	250,340	6	%	Total brokered deposits	$	739,512	10	%	$	591,895	8	%	$	483,438	8	%
Customer transaction accounts	Customer transaction accounts	$	5,281,162	84	%	$	5,379,420	83	%	$	3,403,141	87	%	Customer transaction accounts	$	5,575,077	78	%	$	6,027,873	84	%	$	5,281,162	84	%
Customer time deposits	Customer time deposits	521,666		8	%	642,333		10	%	285,541		7	%	Customer time deposits	884,015		12	%	559,153		8	%	521,666		8	%
Total customer deposits (core)	Total customer deposits (core)	$	5,802,828	92	%	$	6,021,753	93	%	$	3,688,682	94	%	Total customer deposits (core)	$	6,459,092	90	%	$	6,587,026	92	%	$	5,802,828	92	%

Total estimated uninsured deposits were $2.0 billion (representing 28% of total deposits) at June 30, 2023, compared to $2.3 billion (representing 32% of total deposits) at December 31, 2022.

4446

Lending-Related Commitments

As of June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, Nicolet had the following off-balance sheet lending-related commitments.

Table ~~10:~~11: Commitments


(in thousands)	(in thousands)	June 30, 2022		December 31, 2021		(in thousands)	June 30, 2023		December 31, 2022
Commitments to extend credit	Commitments to extend credit	$	1,564,644	$	1,433,881	Commitments to extend credit	$	1,826,995	$	1,850,601
Financial standby letters of credit	Financial standby letters of credit	19,100		13,562		Financial standby letters of credit	22,777		26,530
Performance standby letters of credit	Performance standby letters of credit	8,049		7,336		Performance standby letters of credit	12,824		9,375

~~Interest rate lock~~For additional disclosures on lending-related commitments, see Note 9, “Commitments and Contingencies” of the Notes 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 $16 million and $15 million, respectively, at June 30, 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 $50 million and $1 million, respectively, at December 31, 2021. The net fair value of these mortgage derivatives combined was a gain of $103,000 at June 30, 2022 compared to a gain of $149,000 at December 31, 2021.Unaudited Consolidated Financial Statements under Part I, Item 1.

Liquidity Management

Liquidity management refers to the ability to ensure that ~~cash is~~adequate liquid funds are available ~~in a timely and cost-effective manner~~ to meet the current and future cash flow ~~requirements~~obligations arising in the daily operations of ~~depositors and borrowers and to meet other commitments as they fall due, including~~the Company. These cash flow obligations include the ability to ~~service debt, invest in subsidiaries, repurchase common stock,~~meet the commitments to borrowers for extensions of credit, accommodate deposit cycles and trends, fund capital expenditures, pay dividends to stockholders (if any), and satisfy other operating ~~requirements.~~expenses. The Company’s most liquid assets are cash and due from banks and interest-earning deposits, which totaled $505 million and $155 million at June 30, 2023 and December 31, 2022, respectively. Balances of these liquid assets are dependent on our operating, investing, and financing activities during any given period.

~~Funds are available~~The $350 million increase in cash and cash equivalents since year-end 2022 included $48 million net cash provided by operating activities and $581 million net cash provided by investing activities (mostly investment sales from ~~a number~~the balance sheet repositioning), partly offset by $279 million net cash used in financing activities (mostly repayment of ~~basic banking activity~~FHLB borrowings from the balance sheet repositioning). As of June 30, 2023, management believed that adequate liquidity existed to meet all projected cash flow obligations.

Nicolet’s primary sources ~~including, but not limited to,~~of funds include the core deposit ~~base;~~base, repayment and maturity of ~~loans;~~loans, investment securities calls, maturities, and ~~sales;~~sales, and procurement of ~~additional~~ brokered deposits or other wholesale funding. At June 30, ~~2022,~~2023, approximately ~~52%~~43% of the ~~$1.5 billion~~ investment securities portfolio was pledged as collateral to secure public deposits and borrowings, as applicable, and for liquidity or other purposes as required by regulation. ~~Additional funding~~Liquidity sources available to the Company at June 30, ~~2022, consist of available and unused Federal funds lines, borrowing capacity at the FHLB of $840 million, and borrowing capacity~~2023, are presented in ~~the brokered deposit market.~~Table 12 below.

Table 12: Liquidity Sources


(in millions)	June 30, 2023
FHLB Borrowing Availability (1)	$	581
Fed Funds Lines	155
Fed Discount Window	11
Immediate Funding Availability	$	747

Unencumbered AFS Securities	$	525
Less: AFS Securities retained per policy (2)	(443)
Brokered Capacity	1,060
Guaranteed portion of SBA loans	88
Other funding sources	75
Short-Term Funding Availability (3)	$	1,305

Total Contingent Funding Availability	$	2,052

(1) Excludes outstanding FHLB borrowings of $55 million at June 30, 2023.
(2) Excludes $443 million of AFS securities retained in accordance with internal treasury liquidity policy.
(3) Short-term funding availability defined as funding that could be secured between 2 and 30 days.

Management is committed to the Parent Company being a source of strength to the Bank and its other subsidiaries, and therefore, regularly evaluates capital and liquidity positions of the Parent Company in light of current and projected needs, growth or strategies. The Parent Company uses cash for normal expenses, debt service requirements and, when opportune, for common stock repurchases, repayment of debt, or investment in other strategic actions such as mergers or acquisitions. At June 30, ~~2022,~~2023, the Parent Company had ~~$47~~$56 million in cash. Additional cash sources available to the Parent Company include access to the public or private markets to issue new equity, subordinated notes or other debt. 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 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 June 30, 2022 and December 31, 2021 were $181 million and $595 million, respectively.~~ The ~~decrease~~Bank is required by federal law to obtain prior approval of the OCC for payments of dividends if the total of all dividends declared by the Bank in cash and cash equivalents since year-end 2021 included $49 million net cash provided by operating activities (mostly earnings), $212 million net cash used in investing activities (with strong loan growth partly offset by net cash receivedany year will exceed certain thresholds. Management does not believe that regulatory restrictions on dividends from the ~~Birmingham branch sale), and $251 million net cash used in financing activities (mostly to fund deposit outflows and common stock repurchases). Management believes~~Bank will adversely affect its ~~liquidity resources were sufficient as of June 30, 2022 to fund loans, accommodate deposit cycles and trends, and~~ability to meet ~~other~~its cash ~~needs as necessary.~~obligations.

Interest Rate Sensitivity Management and Impact of Inflation

A reasonable balance between interest rate risk, credit risk, liquidity risk and maintenance of yield, is highly important to Nicolet’s business success and profitability. As an ongoing part of our financial strategy and risk management, we attempt to understand and manage the impact of fluctuations in market interest rates on 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~~Board of ~~directors’~~Directors’ Asset and Liability Committee.

To understand and manage the impact of fluctuations in market interest rates on net interest income, 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, 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~~above and reflect the ~~changed~~higher interest rate environment. The interest rate scenarios are used for analytical purposes only and do not necessarily represent management’s view of future market interest rate movements. Based on financial data at June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the projected changes in net interest income over a one-year time horizon, versus the baseline, are presented in Table 1113 below. The results are within Nicolet’s guidelines of not greater than -10% for +/- 100 bps and not greater than -15% for +/- 200 bps.

Table ~~11:~~13: Interest Rate Sensitivity


		June 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022
200 bps decrease in interest rates	200 bps decrease in interest rates	(1.3)	%	(0.3)	%	200 bps decrease in interest rates	(2.1)	%	(0.7)	%
100 bps decrease in interest rates	100 bps decrease in interest rates	(0.4)	%	(0.3)	%	100 bps decrease in interest rates	(1.1)	%	(0.4)	%
100 bps increase in interest rates	100 bps increase in interest rates	—	%	(0.1)	%	100 bps increase in interest rates	1.1	%	—	%
200 bps increase in interest rates	200 bps increase in interest rates	(0.1)	%	(0.3)	%	200 bps increase in interest rates	2.3	%	0.1	%

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

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

Capital

Management regularly reviews the adequacy of its capital to ensure that sufficient capital is available for current and future needs and is in compliance with regulatory guidelines. The capital position and 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 June 30, ~~2022,~~2023, 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 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:~~14: Capital


		At or for the Six Months Ended			At or for the Year Ended				At or for the Six Months Ended			At or for the Year Ended
($ in thousands)	($ in thousands)	June 30, 2022			December 31, 2021			($ in thousands)	June 30, 2023			December 31, 2022
Company Stock Repurchases: *	Company Stock Repurchases: *							Company Stock Repurchases: *
Common stock repurchased during the period (dollars)	Common stock repurchased during the period (dollars)	$	60,697		$	61,464		Common stock repurchased during the period (dollars)	$	1,519		$	61,483
Common stock repurchased during the period (full shares)	Common stock repurchased during the period (full shares)	661,662			793,064			Common stock repurchased during the period (full shares)	26,853			671,662
Company Risk-Based Capital:	Company Risk-Based Capital:							Company Risk-Based Capital:
Total risk-based capital	Total risk-based capital	$	791,903		$	793,410		Total risk-based capital	$	902,726		$	889,763
Tier 1 risk-based capital	Tier 1 risk-based capital	597,957			604,199			Tier 1 risk-based capital	698,469			684,280
Common equity Tier 1 capital	Common equity Tier 1 capital	560,433			567,095			Common equity Tier 1 capital	660,114			646,341
Total capital ratio	Total capital ratio	13.4		%	13.8		%	Total capital ratio	12.7		%	12.3		%
Tier 1 capital ratio	Tier 1 capital ratio	10.1		%	10.5		%	Tier 1 capital ratio	9.8		%	9.5		%
Common equity tier 1 capital ratio	Common equity tier 1 capital ratio	9.5		%	9.9		%	Common equity tier 1 capital ratio	9.3		%	9.0		%
Tier 1 leverage ratio	Tier 1 leverage ratio	8.5		%	9.4		%	Tier 1 leverage ratio	8.8		%	8.2		%
Bank Risk-Based Capital:	Bank Risk-Based Capital:							Bank Risk-Based Capital:
Total risk-based capital	Total risk-based capital	$	731,419		$	700,869		Total risk-based capital	$	841,973		$	816,951
Tier 1 risk-based capital	Tier 1 risk-based capital	690,132			664,688			Tier 1 risk-based capital	784,157			764,090
Common equity Tier 1 capital	Common equity Tier 1 capital	690,132			664,688			Common equity Tier 1 capital	784,157			764,090
Total capital ratio	Total capital ratio	12.4		%	12.2		%	Total capital ratio	11.8		%	11.3		%
Tier 1 capital ratio	Tier 1 capital ratio	11.7		%	11.6		%	Tier 1 capital ratio	11.0		%	10.6		%
Common equity tier 1 capital ratio	Common equity tier 1 capital ratio	11.7		%	11.6		%	Common equity tier 1 capital ratio	11.0		%	10.6		%
Tier 1 leverage ratio	Tier 1 leverage ratio	9.9		%	10.3		%	Tier 1 leverage ratio	9.9		%	9.1		%
* 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)~~opportunities, dividends, or repayment of equity-equivalent debt) in light of strategic plans. ~~During first half 2022, $61 million was utilized to repurchase and cancel 661,662 shares of common stock, pursuant to our common stock repurchase program.~~ At June 30, ~~2022,~~2023, there remains ~~$48~~$46 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 Estimates

~~In preparing the consolidated~~The preparation of financial statements in conformity with U.S. GAAP requires management ~~is required~~ to make estimates, ~~and~~ assumptions or judgments that affect the amounts reported ~~amounts of assets~~in the financial statements and ~~liabilities~~accompanying notes. These estimates and assumptions are based on historical experience, current information, and other factors deemed to be relevant; accordingly, as ~~of the date of the balance sheet and revenues and expenses for the period. Actual~~this information changes, actual results could differ ~~significantly~~ from those estimates. ~~Estimates~~Nicolet considers accounting estimates to be critical to reported financial results if the accounting estimate requires management to make assumptions about matters that are ~~particularly susceptible~~highly uncertain and different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to ~~significant change~~occur from period to period, could have a material impact on the financial statements. The accounting estimates we consider to be critical include business combinations and the valuation of loans acquired, 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.~~income taxes. A discussion of these estimates can be found in the “Critical Accounting Estimates” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s ~~2021~~2022 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, ~~2021.~~2022.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our market risk at June 30, ~~2022,~~2023, from that presented in our ~~2021~~2022 Annual Report on Form 10-K. See section “Interest Rate Sensitivity Management and Impact of Inflation” within Management’s Discussion and Analysis of Financial Condition and Results of Operations under Part I, Item 2, for our interest rate sensitivity position at June 30, ~~2022.~~2023.

ITEM 4. CONTROLS AND PROCEDURES

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

(b) Changes in Internal Control Over Financial Reporting. There were no changes in the Company’s internal control over financial reporting (as such term is defined in 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~~control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

WeThe Company and ~~our~~its subsidiaries may be involved from time to time in various routine legal proceedings incidental to our respective businesses. Neither wethe Company nor any of ~~our~~its 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, ~~2021.~~2022.

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

Issuer Purchases of Equity Securities

The following table contains information regarding purchases of Nicolet’s common stock made during ~~the~~ second quarter ~~of 2022~~2023 by or on behalf of 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
April 1 – April 30, 2022 68,132 $ 92.38 67,949
May 1 – May 31, 2022 — $ — —
June 1 – June 30, 2022 — $ — —
Total 68,132 $ 92.38 67,949 667,000


	Total Number of Shares Purchased (a)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (b)
	(#)	($)		(#)	(#)
Period
April 1 – April 30, 2023	21,031	$	59.63	12,116
May 1 – May 31, 2023	18,430	$	57.48	14,737
June 1 – June 30, 2023	1,672	$	72.36	—
Total	41,133	$	59.18	26,853	677,000

a.During second quarter ~~2022,~~2023, the Company withheld ~~183~~no common shares for minimum tax withholding settlements on restricted ~~stock.~~stock, and withheld 14,280 common shares to satisfy the exercise price and tax withholding requirements on stock option exercises. These are not considered “repurchases” and, therefore, do not count against the maximum number of shares that may yet be purchased under the ~~board~~Board of ~~directors’~~Directors’ authorization.

b.The ~~board~~Board of ~~directors~~Directors approved a common stock repurchase program which authorized, with subsequent modifications, the use of up to $276 million to repurchase outstanding shares of common stock. This common stock repurchase program was last modified on April 19, 2022, and has no expiration date. At June 30, ~~2022,~~2023, approximately ~~$48~~$46 million remained available under this common stock repurchase program, or approximately ~~667,000~~677,000 shares of common stock (based upon the closing stock price of ~~$72.34~~$67.91 on June 30, ~~2022)~~2023).

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

4950

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 Charter Bankshares, Inc., dated March 29, 2022(1)~~
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 ~~(2)~~(1)
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 March 30, 2022.~~

~~(2)~~ Includes the following financial information included in the ~~Company's~~Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, ~~2022,~~2023, 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.

5051

SIGNATURES

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


			NICOLET BANKSHARES, INC.

August ~~8, 2022~~4, 2023			/s/ Michael E. Daniels
			Michael E. Daniels
			President and Chief Executive Officer

August ~~8, 2022~~4, 2023			/s/ H. Phillip Moore, Jr.
			H. Phillip Moore, Jr.
			Chief Financial Officer

5152


			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	30

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4749

	Item 4.	Controls and Procedures	4750

PART II	OTHER INFORMATION

	Item 1.	Legal Proceedings	4950

	Item 1A.	Risk Factors	4950

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4950

	Item 3.	Defaults Upon Senior Securities	4950

	Item 4.	Mine Safety Disclosures	4950

	Item 5.	Other Information	4950

	Item 6.	Exhibits	5051

		Signatures	5152


(In millions, except share data)	Acquired from Mackinac		Fair Value Adjustments		Estimated Fair Value
Assets Acquired:
Cash and cash equivalents	$	448	$	—	$	448
Investment securities	104		—		104
Loans	930		10		940
ACL-Loans	(6)		4		(2)
Premises and equipment	24		(3)		21
BOLI	16		—		16
Goodwill	20		(20)		—
Other intangibles	4		3		7
Other assets	25		(3)		22
Total assets	$	1,565	$	(9)	$	1,556
Liabilities Assumed:
Deposits	$	1,365	$	1	$	1,366
Borrowings	28		1		29
Other liabilities	13		1		14
Total liabilities	$	1,406	$	3	$	1,409
Net assets acquired					$	147
Purchase Price:
Nicolet common stock issued (in shares)					2,337,230
Value of Nicolet common stock consideration					$	180
Cash consideration paid					49
Total purchase price					$	229
Write-off prior investment in Mackinac					(2)
Goodwill					$	84


	June 30, 2022
(in thousands)	Grades 1- 4			Grade 5			Grade 6			Grade 7			Total
Commercial & industrial	$	1,060,176		$	47,812		$	3,339		$	7,033		$	1,118,360
Owner-occupied CRE	745,627			27,757			2,798			14,498			790,680
Agricultural	812,555			97,433			4,024			53,180			967,192
CRE investment	783,471			27,259			3,951			3,881			818,562
Construction & land development	224,582			2,949			—			1,044			228,575
Residential construction	69,423			—			—			—			69,423
Residential first mortgage	776,731			3,951			729			4,180			785,591
Residential junior mortgage	148,483			—			—			249			148,732
Retail & other	51,431			—			—			108			51,539
Total loans	$	4,672,479		$	207,161		$	14,841		$	84,173		$	4,978,654
Percent of total	93.8		%	4.2		%	0.3		%	1.7		%	100.0		%