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NICOLET BANKSHARES INC - Quarter Report: 2021 September (Form 10-Q)


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
☐ 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)
Wisconsin47-0871001
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
111 North Washington Street
Green Bay,Wisconsin54301
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareNCBSThe NASDAQ Stock Market LLC
Indicate by check mark whether the registrant (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 October 27, 2021 there were 11,953,925 shares of $0.01 par value common stock outstanding.


Nicolet Bankshares, Inc.
Quarterly Report on Form 10-Q
September 30, 2021
TABLE OF CONTENTS
PAGE
2

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS:
NICOLET BANKSHARES, INC.
Consolidated Balance Sheets
(In thousands, except share and per share data)
September 30, 2021December 31, 2020
(Unaudited)(Audited)
Assets
Cash and due from banks$217,608 $88,460 
Interest-earning deposits1,132,997 714,399 
Cash and cash equivalents
1,350,605 802,859 
Certificates of deposit in other banks24,079 29,521 
Securities available for sale (“AFS”), at fair value715,942 539,337 
Securities held to maturity (“HTM”), at amortized cost49,063 — 
Other investments38,602 27,619 
Loans held for sale16,784 21,450 
Other assets held for sale177,627 — 
Loans3,533,198 2,789,101 
Allowance for credit losses - loans (“ACL-Loans”)(38,399)(32,173)
Loans, net
3,494,799 2,756,928 
Premises and equipment, net83,513 59,944 
Bank owned life insurance (“BOLI”)100,690 83,262 
Goodwill and other intangibles, net269,954 175,353 
Accrued interest receivable and other assets86,162 55,516 
Total assets
$6,407,820 $4,551,789 
Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing demand deposits$1,852,119 $1,212,787 
Interest-bearing deposits3,576,655 2,697,612 
Total deposits
5,428,774 3,910,399 
Long-term borrowings144,233 53,869 
Other liabilities held for sale47,496 — 
Accrued interest payable and other liabilities58,039 48,332 
Total liabilities
5,678,542 4,012,600 
Stockholders’ Equity:
Common stock120 100 
Additional paid-in capital425,367 273,390 
Retained earnings297,299 252,952 
Accumulated other comprehensive income (loss)6,492 12,747 
Total stockholders’ equity729,278 539,189 
Total liabilities and stockholders’ equity$6,407,820 $4,551,789 
Preferred shares authorized (no par value)
10,000,000 10,000,000 
Preferred shares issued and outstanding— — 
Common shares authorized (par value $0.01 per share)
30,000,000 30,000,000 
Common shares outstanding11,952,438 10,011,342 
Common shares issued11,975,002 10,030,267 
See accompanying notes to unaudited consolidated financial statements.
3
ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.
Consolidated Statements of Income
(In thousands, except share and per share data) (Unaudited)
Three Months Ended
September 30,		Nine Months Ended
September 30,
2021202020212020
Interest income:
Loans, including loan fees$35,294 $34,047 $104,267 $101,591 
Investment securities:
Taxable
2,061 2,001 5,935 6,115 
Tax-exempt
517 542 1,582 1,542 
Other interest income869 680 2,140 1,917 
Total interest income
38,741 37,270 113,924 111,165 
Interest expense:
Deposits2,444 3,784 7,799 13,196 
Short-term borrowings— — — 65 
Long-term borrowings1,113 926 1,729 2,584 
Total interest expense
3,557 4,710 9,528 15,845 
Net interest income
35,184 32,560 104,396 95,320 
Provision for credit losses6,000 3,000 6,500 9,000 
Net interest income after provision for credit losses29,184 29,560 97,896 86,320 
Noninterest income:
Trust services fee income2,043 1,628 5,724 4,717 
Brokerage fee income3,154 2,489 8,938 7,080 
Mortgage income, net4,808 9,675 17,637 21,965 
Service charges on deposit accounts1,314 1,037 3,541 3,075 
Card interchange income2,299 1,877 6,492 5,076 
BOLI income572 531 1,658 1,774 
Asset gains (losses), net(1,187)217 3,716 (1,185)
Other income993 1,237 3,594 3,245 
Total noninterest income
13,996 18,691 51,300 45,747 
Noninterest expense:
Personnel16,927 14,072 49,127 41,877 
Occupancy, equipment and office5,749 4,051 13,939 12,616 
Business development and marketing1,654 810 3,853 4,683 
Data processing2,939 2,612 8,408 7,574 
Intangibles amortization758 834 2,400 2,707 
FDIC assessments480 347 1,555 347 
Merger-related expense2,793 151 3,449 853 
Other expense1,761 808 7,158 4,695 
Total noninterest expense
33,061 23,685 89,889 75,352 
Income before income tax expense
10,119 24,566 59,307 56,715 
Income tax expense2,295 6,434 14,960 14,331 
Net income
7,824 18,132 44,347 42,384 
Less: Net income attributable to noncontrolling interest— 30 — 249 
Net income attributable to Nicolet Bankshares, Inc.$7,824 $18,102 $44,347 $42,135 
Earnings per common share:
Basic$0.75 $1.75 $4.39 $4.04 
Diluted$0.73 $1.72 $4.22 $3.97 
Weighted average common shares outstanding:
Basic10,391,896 10,348,862 10,098,492 10,426,228 
Diluted10,775,591 10,498,552 10,503,163 10,604,732 
See accompanying notes to unaudited consolidated financial statements.
4
ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.
Consolidated Statements of Comprehensive Income
(In thousands) (Unaudited)
Three Months Ended
September 30,		Nine Months Ended
September 30,
2021202020212020
Net income$7,824 $18,132 $44,347 $42,384 
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities AFS:
Net unrealized holding gains (losses)
(3,074)394 (8,581)12,708 
Net realized (gains) losses included in income
13 (151)13 (315)
Income tax (expense) benefit827 (66)2,313 (3,346)
Total other comprehensive income (loss)(2,234)177 (6,255)9,047 
Comprehensive income$5,590 $18,309 $38,092 $51,431 
See accompanying notes to unaudited consolidated financial statements.
5
ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.
Consolidated Statements of Stockholders’ Equity
(In thousands) (Unaudited)
Nicolet Bankshares, Inc. Stockholders’ Equity
Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss)		Non-
controlling
Interest		Total
Balances at June 30, 2021$98 $261,096 $289,475 $8,726 $— $559,395 
Comprehensive income:
Net income, three months ended
 September 30, 2021
— — 7,824 — — 7,824 
Other comprehensive income (loss)
— — — (2,234)— (2,234)
Issuance of common stock in acquisition23 179,411 — — — 179,434 
Stock-based compensation expense— 1,826 — — — 1,826 
Exercise of stock options, net1 160 — — — 161 
Issuance of common stock— 163 — — — 163 
Purchase and retirement of common stock(2)(17,289)— — — (17,291)
Balances at September 30, 2021$120 $425,367 $297,299 $6,492 $— $729,278 
Balances at June 30, 2020$104 $301,778 $216,863 $13,288 $820 $532,853 
Comprehensive income:
Net income, three months ended
 September 30, 2020
— — 18,102 — 30 18,132 
Other comprehensive income (loss)
— — — 177 — 177 
Stock-based compensation expense— 1,260 — — — 1,260 
Exercise of stock options, net— 94 — — — 94 
Issuance of common stock— 148 — — — 148 
Purchase and retirement of common stock(2)(13,744)— — — (13,746)
Distribution to noncontrolling interest— — — — (49)(49)
Balances at September 30, 2020$102 $289,536 $234,965 $13,465 $801 $538,869 
Balances at December 31, 2020$100 $273,390 $252,952 $12,747 $— $539,189 
Comprehensive income:
Net income, nine months ended
 September 30, 2021
— — 44,347 — — 44,347 
Other comprehensive income (loss)
— — — (6,255)— (6,255)
Issuance of common stock in acquisition23 179,411 — — — 179,434 
Stock-based compensation expense— 5,222 — — — 5,222 
Exercise of stock options, net1 1,385 — — — 1,386 
Issuance of common stock— 395 — — — 395 
Purchase and retirement of common stock(4)(34,436)— — — (34,440)
Balances at September 30, 2021$120 $425,367 $297,299 $6,492 $— $729,278 
Balances at December 31, 2019$106 $312,733 $199,005 $4,418 $728 $516,990 
Comprehensive income:
Net income, nine months ended
 September 30, 2020
— — 42,135 — 249 42,384 
Other comprehensive income (loss)
— — — 9,047 — 9,047 
Stock-based compensation expense— 4,216 — — — 4,216 
Exercise of stock options, net— 1,048 — — — 1,048 
Issuance of common stock— 482 — — — 482 
Purchase and retirement of common stock(4)(28,943)— — — (28,947)
Distribution to noncontrolling interest— — — — (176)(176)
Adoption of new accounting pronouncement— — (6,175)— — (6,175)
Balances at September 30, 2020$102 $289,536 $234,965 $13,465 $801 $538,869 
See accompanying notes to unaudited consolidated financial statements.
6
ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended September 30,
20212020
Cash Flows From Operating Activities:
Net income$44,347 $42,384 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion9,301 7,564 
Provision for credit losses6,500 9,000 
Increase in cash surrender value of life insurance(1,658)(1,647)
Stock-based compensation expense5,222 4,216 
Asset (gains) losses, net(3,716)1,185 
Gain on sale of loans held for sale, net(16,289)(22,217)
Net change due to:
Proceeds from sale of loans held for sale503,405 663,466 
Origination of loans held for sale(485,641)(650,660)
Accrued interest receivable and other assets
(6,721)4,781 
Accrued interest payable and other liabilities
(2,488)6,200 
Net cash provided by (used in) operating activities
52,262 64,272 
Cash Flows From Investing Activities:
Net (increase) decrease in loans10,406 (244,751)
Net (increase) decrease in certificates of deposit in other banks8,561 5,719 
Purchases of securities AFS(214,343)(128,661)
Purchases of securities HTM(20,996)— 
Proceeds from sales of securities AFS15,975 14,864 
Proceeds from calls and maturities of securities AFS81,681 69,568 
Purchases of other investments(4,787)(3,815)
Proceeds from sales of other investments1,534 — 
Proceeds from redemption of BOLI— 245 
Net (increase) decrease in premises and equipment(6,894)(9,708)
Net (increase) decrease in other real estate and other assets1,046 — 
Net cash (paid) received in business combination394,868 (21,820)
Net cash provided by (used in) investing activities
267,051 (318,359)
Cash Flows From Financing Activities:
Net increase (decrease) in deposits199,698 617,373 
Proceeds from long-term borrowings103,953 367,841 
Repayments of long-term borrowings(42,559)(32,029)
Purchase and retirement of common stock(34,440)(28,947)
Proceeds from issuance of common stock395 482 
Proceeds from exercise of stock options1,386 1,048 
Distribution to noncontrolling interest— (176)
Net cash provided by (used in) financing activities
228,433 925,592 
Net increase (decrease) in cash and cash equivalents
547,746 671,505 
Cash and cash equivalents:
Beginning
802,859 182,059 
Ending *
$1,350,605 $853,564 
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest$9,320 $18,130 
Cash paid for taxes24,116 16,353 
Transfer of loans and bank premises to other real estate owned302 — 
Capitalized mortgage servicing rights3,191 4,038 
Acquisitions:
Fair value of assets acquired
$1,544,518 $— 
Fair value of liabilities assumed
1,407,605 — 
Net assets acquired
136,913 — 
* Cash and cash equivalents at both September 30, 2021 and September 30, 2020, include restricted cash of $1.9 million pledged as collateral on interest rate swaps and no reserve balance was required with the Federal Reserve Bank.
See accompanying notes to unaudited consolidated financial statements.
7

NICOLET BANKSHARES, INC.
Notes to Unaudited Consolidated Financial Statements

Note 1 – Basis of Presentation
General
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated balance sheets, statements of income, comprehensive income, changes in stockholders’ equity and cash flows of Nicolet Bankshares, Inc. (the “Company” or “Nicolet”) and its subsidiaries, as of and for the periods presented, and all such adjustments are of a normal recurring nature. All material intercompany transactions and balances have been eliminated. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the entire year.
These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been omitted or abbreviated. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Critical Accounting Policies and Estimates
Preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, the allowance for credit losses, valuation of loans in acquisition transactions, useful lives for depreciation and amortization, fair value of financial instruments, impairment calculations, valuation of deferred tax assets, uncertain income tax positions and contingencies. Estimates that are particularly susceptible to significant change for the Company include the determination of the allowance for credit losses, the determination and assessment of deferred tax assets and liabilities, and the valuation of loans acquired in acquisition transactions; therefore, these are critical accounting policies. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: external market factors such as market interest rates and employment rates, changes to operating policies and procedures, changes in applicable banking or tax regulations, and changes to deferred tax estimates. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period presented.
There have been no material changes or developments with respect to the assumptions or methodologies that the Company uses when applying what management believes are critical accounting policies and developing critical accounting estimates as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

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

Note 2 – Acquisitions
Completed Acquisitions:
Advantage Community Bancshares, Inc. (“Advantage”): On August 21, 2020, Nicolet completed its merger with Advantage, pursuant to the terms of the definitive merger agreement dated March 2, 2020, whereby Advantage merged with and into Nicolet, and Advantage Community Bank, the wholly owned bank subsidiary of Advantage, was merged with and into Nicolet National Bank (the “Bank”). Advantage’s four branches in Dorchester, Edgar, Mosinee, and Wausau opened as Nicolet National Bank branches on August 24, 2020, expanding our presence in Central Wisconsin and the Wausau area. Due to the small size of the transaction, terms of the all-cash deal were not disclosed.

Upon consummation, Advantage added total assets of approximately $172 million (representing approximately 4% of Nicolet’s then pre-merger asset size), loans of $88 million, deposits of $141 million, core deposit intangible of $1 million, and goodwill of $12 million.

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

8

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

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

(In thousands, except share data)Acquired from MackinacFair Value AdjustmentsEstimated Fair Value
Assets Acquired:
Cash and cash equivalents$448,378 $— $448,378 
Investment securities103,992 (2,148)101,844 
Loans930,420 (178)930,242 
ACL-Loans(5,579)3,683 (1,896)
Premises and equipment23,619 (2,723)20,896 
BOLI15,715 — 15,715 
Goodwill19,574 (19,574)— 
Other intangibles3,918 803 4,721 
Other assets24,752 (134)24,618 
     Total assets$1,564,789 $(20,271)$1,544,518 
Liabilities Assumed:
Deposits$1,365,068 $1,153 $1,366,221 
Short-term borrowings— — — 
Long-term borrowings28,104 525 28,629 
Other liabilities12,755 — 12,755 
     Total liabilities$1,405,927 $1,678 $1,407,605 
Net assets acquired$136,913 
Purchase Price:
Nicolet common stock issued (in shares)2,337,230 
Value of Nicolet common stock consideration$179,826 
Cash consideration paid49,367 
    Total purchase price$229,193 
Preliminary goodwill$92,280 

The 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 acquisition1,896 
Par value of PCD acquired loans at acquisition$12,501 

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

9

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

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

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

Note 3 – Earnings per Common Share
Basic earnings per common share are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share are calculated by dividing net income available to common shareholders by the weighted average number of shares adjusted for the dilutive effect of common stock awards (outstanding stock options and unvested restricted stock), if any. Presented below are the calculations for basic and diluted earnings per common share.
Three Months Ended September 30,Nine Months Ended September 30,
(In thousands, except per share data)2021202020212020
Net income attributable to Nicolet Bankshares, Inc.$7,824 $18,102 $44,347 $42,135 
Weighted average common shares outstanding10,392 10,349 10,098 10,426 
Effect of dilutive common stock awards384 150 405 179 
Diluted weighted average common shares outstanding10,776 10,499 10,503 10,605 
Basic earnings per common share*$0.75 $1.75 $4.39 $4.04 
Diluted earnings per common share*$0.73 $1.72 $4.22 $3.97 
*Cumulative quarterly per share performance may not equal annual per share totals due to the effects of the amount and timing of capital increases. When computing earnings per share for an interim period, the denominator is based on the weighted average shares outstanding during the interim period, and not on an annualized weighted average basis. Accordingly, the sum of the earnings per share data for the quarters will not necessarily equal the year to date earnings per share data.
For the three months ended September 30, 2021 and 2020, respectively, options to purchase approximately 0.2 million shares are excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive. For the nine months ended September 30, 2021 and 2020, respectively, options to purchase approximately 0.1 million shares are excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive.

10

Note 4 – Stock-Based Compensation
The Company may grant stock options and restricted stock under its stock-based compensation plans to certain officers, employees and directors. These plans are administered by a committee of the Board of Directors, and at September 30, 2021, approximately 0.9 million shares were available for grant under these stock-based compensation plans.
A Black-Scholes model is utilized to estimate the fair value of stock option grants, while the market price of the Company’s stock at the date of grant is used to estimate the fair value of restricted stock awards. The weighted average assumptions used in the Black-Scholes model for valuing stock option grants for the nine months ended September 30, 2021 and 2020 were as follows.
Nine Months Ended September 30,
20212020
Dividend yield— %— %
Expected volatility30 %25 %
Risk-free interest rate1.16 %1.72 %
Expected average life7 years7 years
Weighted average per share fair value of options$26.55 $23.74 
A summary of the Company’s stock option activity is summarized below.
Stock OptionsOption Shares
Outstanding		Weighted
Average
Exercise Price		Weighted Average
Remaining
Life (Years)		Aggregate
Intrinsic Value
(in thousands)
Outstanding - December 31, 20201,437,460 $50.47 
Granted380,000 78.77 
Exercise of stock options *(40,482)34.23 
Forfeited(1,000)48.85 
Outstanding - September 30, 20211,775,978 $56.90 6.7$32,446 
Exercisable - September 30, 2021970,878 $47.00 5.5$26,400 
* The terms of the stock option agreements permit having a number of shares of stock withheld, the fair market value of which as of the date of exercise is sufficient to satisfy the exercise price and/or tax withholding requirements. For the nine months ended September 30, 2021, 7,514 such shares were withheld by the Company.
Intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the exercise price of the stock options. The intrinsic value of options exercised for the nine months ended September 30, 2021 and 2020 was approximately $1.7 million and $2.0 million, respectively.
A summary of the Company’s restricted stock activity is summarized below.
Restricted StockWeighted Average Grant
Date Fair Value		Restricted Shares
Outstanding
Outstanding - December 31, 2020$53.57 18,925 
Granted77.64 19,595 
Vested *60.66 (15,510)
Forfeited41.44 (446)
Outstanding - September 30, 2021$69.83 22,564 
* The terms of the restricted stock agreements permit the surrender of shares to the Company upon vesting in order to satisfy applicable tax withholding requirements at the minimum statutory withholding rate, and accordingly, 1,581 shares were surrendered during the nine months ended September 30, 2021.
The Company recognized approximately $4.5 million and $3.8 million of stock-based compensation expense (included in personnel on the consolidated statements of income) for the nine months ended September 30, 2021 and 2020, respectively, associated with its common stock awards granted to officers and employees. In addition, during the nine months ended September 30, 2021, the Company recognized approximately $0.7 million of director expense (included in other expense on the consolidated statements of income) for a total restricted stock grant of 9,595 shares with immediate vesting to directors, while during the nine months ended September 30, 2020, the Company recognized approximately $0.4 million of director expense for a total restricted stock grant of 7,950 shares with immediate vesting to directors, representing the annual stock retainer fee paid to external board members. As of September 30, 2021, there was approximately $16.1 million of unrecognized compensation
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cost related to equity award grants. The cost is expected to be recognized over the remaining vesting period of approximately four years. The Company recognized a tax benefit of approximately $0.3 million and $0.4 million for the nine months ended September 30, 2021 and 2020, respectively, for the tax impact of stock option exercises and vesting of restricted stock.

Note 5 – Investment Securities
Investment securities are classified as AFS or HTM on the consolidated balance sheets at the time of purchase. AFS securities include those securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity, and are carried at fair value on the consolidated balance sheets. HTM securities include those securities which the Company has both the positive intent and ability to hold to maturity, and are carried at amortized cost on the consolidated balance sheets. Premiums and discounts on investment securities are amortized or accreted into interest income over the estimated life of the related securities using the effective interest method.

The amortized cost and fair value of securities AFS and HTM are summarized as follows.
September 30, 2021
(in thousands)Amortized CostGross
Unrealized
Gains		Gross
Unrealized
Losses		Estimated Fair ValueFair Value as % of Total
Securities AFS:
U.S. government agency securities$174,946 $76 $196 $174,826 24 %
State, county and municipals236,905 3,261 1,502 238,664 33 %
Mortgage-backed securities193,931 4,439 1,080 197,290 28 %
Corporate debt securities101,267 4,041 146 105,162 15 %
Total securities AFS$707,049 $11,817 $2,924 $715,942 100 %
Securities HTM:
U.S. government agency securities$— $— $— $— — %
State, county and municipals30,842 8 51 30,799 63 %
Mortgage-backed securities18,221 42 116 18,147 37 %
Corporate debt securities— — — — — %
Total securities HTM$49,063 $50 $167 $48,946 100 %
December 31, 2020
(in thousands)Amortized CostGross
Unrealized
Gains		Gross
Unrealized
Losses		Estimated Fair ValueFair Value as % of Total
Securities AFS:
U.S. government agency securities$63,162 $289 $— $63,451 12 %
State, county and municipals226,493 5,386 11 231,868 43 %
Mortgage-backed securities156,148 6,425 78 162,495 30 %
Corporate debt securities76,073 5,450 — 81,523 15 %
Total securities AFS$521,876 $17,550 $89 $539,337 100 %
All mortgage-backed securities included in the tables above were issued by U.S. government agencies and corporations. Investment securities with a carrying value of $149 million and $146 million, as of September 30, 2021 and December 31, 2020, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law. Accrued interest on investment securities totaled $3.5 million and $2.3 million at September 30, 2021 and December 31, 2020, respectively, and is included in accrued interest receivable and other assets on the consolidated balance sheets.

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The following table presents gross unrealized losses and the related estimated fair value of investment securities for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time individual securities have been in a continuous unrealized loss position.
September 30, 2021
Less than 12 months12 months or moreTotal
($ in thousands)Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Number of
Securities
Securities AFS:
U.S. government agency securities$120,726 $196 $— $— $120,726 $196 7 
State, county and municipals86,749 1,465 974 37 87,723 1,502 113 
Mortgage-backed securities71,934 1,073 864 7 72,798 1,080 127 
Corporate debt securities19,017 146 — — 19,017 146 11 
Total
$298,426 $2,880 $1,838 $44 $300,264 $2,924 258 
Securities HTM:
State, county and municipals$23,502 $51 $— $— $23,502 $51 35 
Mortgage-backed securities6,656 116 — — 6,656 116 5 
Total
$30,158 $167 $— $— $30,158 $167 40 
December 31, 2020
Less than 12 months12 months or moreTotal
($ in thousands)Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Number of
Securities
State, county and municipals$5,181 $11 $— $— $5,181 $11 9 
Mortgage-backed securities10,612 71 492 7 11,104 78 22 
Total
$15,793 $82 $492 $7 $16,285 $89 31 
Quarterly, the Company evaluates securities AFS in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. In making this evaluation, management considers the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. As of September 30, 2021 and December 31, 2020, no allowance for credit losses on securities AFS was recognized. The Company does not consider its securities AFS with unrealized losses to be attributable to credit-related factors, as the unrealized losses in each category have occurred as a result of changes in noncredit-related factors such as changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration. Furthermore, the Company does not have the intent to sell any of these securities AFS and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost.
Quarterly, the Company evaluates securities HTM to determine whether an allowance for credit losses is necessary. In making this determination, management considers the facts and circumstances of the underlying investment securities. For the state, county and municipal securities, management considers issuer bond ratings, historical loss rates by bond ratings, whether issuers continue to make timely principal and interest payments per the contractual terms of the investment securities, internal forecasts, and whether or not such investment securities provide insurance, other credit enhancement, or are pre-refunded by the issuers. Based on this evaluation, no allowance for credit losses has been recorded for the HTM state, county, and municipal securities. For the mortgage-backed securities, all such securities were issued by U.S. government agencies and corporations, which are currently explicitly or implicitly guaranteed by the U.S. government and have a long history of no credit losses. Therefore, management determined no allowance for credit losses was necessary for the HTM mortgage-backed securities.

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The amortized cost and fair value of investment securities by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties; as this is particularly inherent in mortgage-backed securities, these securities are not included in the maturity categories below.
As of September 30, 2021
Securities AFSSecurities HTM
(in thousands)Amortized CostFair ValueAmortized CostFair Value
Due in less than one year$86,520 $86,835 $8,086 $8,085 
Due in one year through five years260,903 265,298 5,010 5,004 
Due after five years through ten years154,595 154,277 8,483 8,463 
Due after ten years11,100 12,242 9,263 9,247 
513,118 518,652 30,842 30,799 
Mortgage-backed securities193,931 197,290 18,221 18,147 
Total investment securities$707,049 $715,942 $49,063 $48,946 
Proceeds and realized gains or losses from the sale of AFS securities were as follows.
Nine Months Ended September 30,
(in thousands)20212020
Gross gains$4 $315 
Gross losses(17)— 
Gains (losses) on sales of securities AFS, net
$(13)$315 
Proceeds from sales of securities AFS$15,975 $14,864 

Note 6 – Loans, Allowance for Credit Losses - Loans, and Credit Quality
The loan composition is summarized as follows.
September 30, 2021December 31, 2020
(in thousands)Amount% of
Total		Amount% of
Total
Commercial & industrial$887,910 25 %$750,718 27 %
Paycheck Protection Program (“PPP”) loans68,347 2 186,016 7 
Owner-occupied commercial real estate (“CRE”)697,816 20 521,300 19 
Agricultural112,409 3 109,629 4 
CRE investment662,871 19 460,721 16 
Construction & land development173,971 5 131,283 5 
Residential construction59,611 2 41,707 1 
Residential first mortgage688,491 19 444,155 16 
Residential junior mortgage130,279 4 111,877 4 
Retail & other51,493 1 31,695 1 
Loans
3,533,198 100 %2,789,101 100 %
Less allowance for credit losses - Loans (“ACL-Loans”)38,399 32,173 
Loans, net
$3,494,799 $2,756,928 
Allowance for credit losses - Loans to loans1.09 %1.15 %
Accrued interest on loans totaled $9 million at September 30, 2021 and $7 million at December 31, 2020, and is included in accrued interest receivable and other assets on the consolidated balance sheets.
Allowance for 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.
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A roll forward of the allowance for credit losses - loans is summarized as follows.
Three Months Ended Nine Months EndedYear Ended
(in thousands)September 30, 2021September 30, 2020September 30, 2021September 30, 2020December 31, 2020
Beginning balance$32,561 $29,130 $32,173 $13,972 $13,972 
Adoption of CECL— — — 8,488 8,488 
Initial PCD ACL— — — 797 797 
Total impact - adoption CECL— — — 9,285 9,285 
ACL on PCD loans acquired1,896 — 1,896 — — 
Provision for credit losses4,000 3,000 4,500 9,000 10,300 
Charge-offs(107)(786)(436)(1,002)(1,689)
Recoveries49 44 266 133 305 
Net (charge-offs) recoveries(58)(742)(170)(869)(1,384)
Ending balance$38,399 $31,388 $38,399 $31,388 $32,173 
The following tables present the balance and activity in the ACL-Loans by portfolio segment.
Nine Months Ended September 30, 2021
(in thousands)Commercial
& industrial		Owner-
occupied
CRE		AgriculturalCRE
investment		Construction & land
development		Residential
construction		Residential
first mortgage		Residential
junior
mortgage		Retail
& other		Total
ACL-Loans *
Beginning balance$11,644 $5,872 $1,395 $5,441 $984 $421 $4,773 $1,086 $557 $32,173 
ACL on PCD loans584 530 — 392 103 — 272 12 3 1,896 
Provision(1,121)443 (195)1,904 507 259 1,962 262 479 4,500 
Charge-offs(242)— (48)(4)— — (53)— (89)(436)
Recoveries211 — — 2 — — 19 4 30 266 
Net (charge-offs) recoveries(31)— (48)(2)— — (34)4 (59)(170)
Ending balance$11,076 $6,845 $1,152 $7,735 $1,594 $680 $6,973 $1,364 $980 $38,399 
As % of ACL-Loans29 %18 %3 %20 %4 %2 %18 %4 %2 %100 %
*The PPP loans are fully guaranteed by the SBA; thus, no ACL-Loans has been allocated to these loans.
Year Ended December 31, 2020
(in thousands)Commercial
& industrial		Owner-
occupied
CRE		AgriculturalCRE
investment		Construction
& land
development		Residential
construction		Residential
first
mortgage		Residential
junior
mortgage		Retail &
other		 
Total
ACL-Loans *
Beginning balance$5,471 $3,010 $579 $1,600 $414 $368 $1,669 $517 $344 $13,972 
Adoption of CECL2,962 1,249 361 1,970 51 124 1,286 351 134 8,488 
Initial PCD ACL797 — — — — — — — — 797 
Provision3,106 2,062 455 2,061 519 (71)1,809 151 208 10,300 
Charge-offs(812)(530)— (190)— — (2)— (155)(1,689)
Recoveries120 81 — — — — 11 67 26 305 
Net (charge-offs) recoveries(692)(449)— (190)— — 9 67 (129)(1,384)
Ending balance$11,644 $5,872 $1,395 $5,441 $984 $421 $4,773 $1,086 $557 $32,173 
As % of ACL-Loans36 %18 %4 %17 %3 %1 %15 %4 %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, an allocation methodology is applied by Nicolet which focuses on evaluation of qualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to specific loans; (ii) management’s ongoing review and grading of the loan portfolio; (iii) consideration of historical loan loss and delinquency experience on each portfolio segment; (iv) trends in past due and nonperforming loans; (v) the risk characteristics of the various loan segments; (vi) changes in the size and character of the loan portfolio; (vii) concentrations of loans to specific borrowers or industries; (viii) existing economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect expected credit losses. Assessing these numerous factors involves significant judgment.
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, and other loans with evidence of credit deterioration. The specific reserve in the ACL-Loans for these credit deteriorated loans is equal to the
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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 at September 30, 2021 was $2 million.
Provision for Credit Losses:
The provision for credit losses is determined by the Company as the amount to be added to the ACL loss accounts for various types of financial instruments including loans, investment securities, and off-balance sheet credit exposures after net charge-offs have been deducted to bring the ACL to a level that, in management's judgment, is necessary to absorb expected credit losses over the lives of the respective financial instruments. See Note 5 for additional information regarding the ACL related to investment securities. The following table presents the components of the provision for credit losses.
Three Months Ended Nine Months EndedYear Ended
(in thousands)September 30, 2021September 30, 2020September 30, 2021September 30, 2020December 31, 2020
Provision for credit losses on:
Loans$4,000 $3,000 $4,500 $9,000 $10,300 
Unfunded Commitments2,000 — 2,000 — — 
Investment securities— — — — — 
Total$6,000 $3,000 $6,500 $9,000 $10,300 
Collateral Dependent Loans:
A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. For collateral dependent loans, expected credit losses are based on the estimated fair value of the collateral at the balance sheet date, with consideration for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. The following tables present collateral dependent loans by portfolio segment and collateral type, including those loans with and without a related allowance allocation.
September 30, 2021Collateral Type
(in thousands)Real EstateOther Business AssetsTotalWithout an AllowanceWith an AllowanceAllowance Allocation
Commercial & industrial$— $2,071 $2,071 $1,504 $567 $226 
PPP loans— — — — — — 
Owner-occupied CRE2,264 — 2,264 1,854 410 141 
Agricultural956 625 1,581 345 1,236 55 
CRE investment4,019 — 4,019 2,659 1,360 469 
Construction & land development1,138 — 1,138 745 393 276 
Residential construction— — — — — — 
Residential first mortgage1,387 — 1,387 1,387 — — 
Residential junior mortgage166 — 166 166 — — 
Retail & other— — — — — — 
Total loans$9,930 $2,696 $12,626 $8,660 $3,966 $1,167 

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December 31, 2020Collateral Type
(in thousands)Real EstateOther Business AssetsTotalWithout an AllowanceWith an AllowanceAllowance Allocation
Commercial & industrial$— $2,195 $2,195 $501 $1,694 $1,241 
PPP loans— — — — — — 
Owner-occupied CRE3,519 — 3,519 3,519 — — 
Agricultural584 797 1,381 1,378 3 3 
CRE investment1,474 — 1,474 1,474 — — 
Construction & land development308 — 308 308 — — 
Residential construction— — — — — — 
Residential first mortgage— — — — — — 
Residential junior mortgage— — — — — — 
Retail & other— — — — — — 
Total loans$5,885 $2,992 $8,877 $7,180 $1,697 $1,244 

Past Due and Nonaccrual Loans:
The following tables present past due loans by portfolio segment.
September 30, 2021
(in thousands)30-89 Days Past
Due (accruing)		90 Days & Over or nonaccrualCurrentTotal
Commercial & industrial$610 $1,778 $885,522 $887,910 
PPP loans— — 68,347 68,347 
Owner-occupied CRE314 2,990 694,512 697,816 
Agricultural— 1,782 110,627 112,409 
CRE investment— 4,249 658,622 662,871 
Construction & land development221 1,093 172,657 173,971 
Residential construction412 — 59,199 59,611 
Residential first mortgage4,894 4,495 679,102 688,491 
Residential junior mortgage19 232 130,028 130,279 
Retail & other74 96 51,323 51,493 
Total loans$6,544 $16,715 $3,509,939 $3,533,198 
Percent of total loans0.2 %0.5 %99.3 %100.0 %
December 31, 2020
(in thousands)30-89 Days Past
Due (accruing)		90 Days & Over or nonaccrualCurrentTotal
Commercial & industrial$— $2,646 $748,072 $750,718 
PPP loans— — 186,016 186,016 
Owner-occupied CRE— 1,869 519,431 521,300 
Agricultural7 1,830 107,792 109,629 
CRE investment— 1,488 459,233 460,721 
Construction & land development— 327 130,956 131,283 
Residential construction— — 41,707 41,707 
Residential first mortgage613 823 442,719 444,155 
Residential junior mortgage43 384 111,450 111,877 
Retail & other102 88 31,505 31,695 
Total loans$765 $9,455 $2,778,881 $2,789,101 
Percent of total loans— %0.4 %99.6 %100.0 %

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The following table presents nonaccrual loans by portfolio segment.
September 30, 2021December 31, 2020
(in thousands)Nonaccrual Loans% of TotalNonaccrual Loans% of Total
Commercial & industrial$1,778 11 %$2,646 28 %
PPP loans— — — — 
Owner-occupied CRE2,990 18 1,869 20 
Agricultural1,782 11 1,830 19 
CRE investment4,249 25 1,488 16 
Construction & land development1,093 6 327 3 
Residential construction— — — — 
Residential first mortgage4,495 27 823 9 
Residential junior mortgage232 1 384 4 
Retail & other96 1 88 1 
Nonaccrual loans
$16,715 100 %$9,455 100 %
Percent of total loans0.5 %0.4 %

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Credit Quality Information:
The following tables present total loans by risk categories and year of origination. Loans acquired from Mackinac have been included in the September 30, 2021 table based upon the actual origination date.
September 30, 2021Amortized Cost Basis by Origination Year
(in thousands)20212020201920182017PriorRevolvingRevolving to TermTOTAL
Commercial & industrial (a)
Grades 1-4$185,906 $150,260 $129,503 $72,053 $52,402 $72,579 $261,381 $— $924,084 
Grade 51,046 2,051 4,389 5,411 5,858 1,874 7,237 — 27,866 
Grade 6622 358 33 4 — 50 563 — 1,630 
Grade 7— 6 740 50 799 825 257 — 2,677 
Total$187,574 $152,675 $134,665 $77,518 $59,059 $75,328 $269,438 $— $956,257 
Owner-occupied CRE
Grades 1-4$97,166 $88,970 $111,153 $82,216 $63,024 $195,027 $14,008 $— $651,564 
Grade 53,035 1,795 6,618 2,287 3,520 14,231 1,208 — 32,694 
Grade 6— — 1,655 — 428 47 — — 2,130 
Grade 7— 3,018 1,930 — 1,003 5,477 — — 11,428 
Total$100,201 $93,783 $121,356 $84,503 $67,975 $214,782 $15,216 $— $697,816 
Agricultural
Grades 1-4$9,615 $12,784 $6,665 $7,753 $7,872 $31,732 $23,640 $— $100,061 
Grade 5372 — — 30 216 7,474 460 — 8,552 
Grade 6— — — — — — — — — 
Grade 7— — — 24 324 3,350 98 — 3,796 
Total$9,987 $12,784 $6,665 $7,807 $8,412 $42,556 $24,198 $— $112,409 
CRE investment
Grades 1-4$135,607 $114,013 $129,087 $39,758 $38,760 $143,652 $10,213 $— $611,090 
Grade 56,622 4,306 6,795 3,011 184 25,035 — — 45,953 
Grade 6— — — 142 — 57 — — 199 
Grade 7— — 462 — 918 4,011 238 — 5,629 
Total$142,229 $118,319 $136,344 $42,911 $39,862 $172,755 $10,451 $— $662,871 
Construction & land development
Grades 1-4$36,034 $74,504 $19,522 $19,655 $1,611 $12,295 $6,509 $— $170,130 
Grade 5132 — 1,581 931 — 24 — — 2,668 
Grade 6— — — — — — — — — 
Grade 7— — — — 17 1,075 81 — 1,173 
Total$36,166 $74,504 $21,103 $20,586 $1,628 $13,394 $6,590 $— $173,971 
Residential construction
Grades 1-4$40,200 $16,428 $1,040 $916 $975 $— $— $— $59,559 
Grade 5— — 52 — — — — — 52 
Grade 6— — — — — — — — — 
Grade 7— — — — — — — — — 
Total$40,200 $16,428 $1,092 $916 $975 $— $— $— $59,611 
Residential first mortgage
Grades 1-4$181,931 $165,383 $202,727 $21,473 $21,487 $82,894 $3,472 $5 $679,372 
Grade 586 534 2,431 — — 1,359 — — 4,410 
Grade 6— — — — — — — — — 
Grade 7— — 2,062 — 146 2,501 — — 4,709 
Total$182,017 $165,917 $207,220 $21,473 $21,633 $86,754 $3,472 $5 $688,491 
Residential junior mortgage
Grades 1-4$2,244 $3,225 $3,341 $1,628 $557 $2,142 $115,016 $1,250 $129,403 
Grade 5— — 30 — — — 448 — 478 
Grade 6— — — — — — — — — 
Grade 7— — 166 — 24 46 162 — 398 
Total$2,244 $3,225 $3,537 $1,628 $581 $2,188 $115,626 $1,250 $130,279 
Retail & other
Grades 1-4$11,896 $8,202 $6,615 $2,478 $2,087 $4,202 $15,889 $— $51,369 
Grade 529 — — — — — — — 29 
Grade 6— — — — — — — — — 
Grade 7— 10 — 23 — 62 — — 95 
Total$11,925 $8,212 $6,615 $2,501 $2,087 $4,264 $15,889 $— $51,493 
Total loans$712,543 $645,847 $638,597 $259,843 $202,212 $612,021 $460,880 $1,255 $3,533,198 
(a) For purposes of this table at September 30, 2021, the $68 million net carrying value of PPP loans include $65 million originated in 2021 and the remainder originated in 2020, have a Pass risk grade (Grades 1-4) and have been included with the Commercial & industrial loan category.
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December 31, 2020Amortized Cost Basis by Origination Year
(in thousands)20202019201820172016PriorRevolvingRevolving to TermTOTAL
Commercial & industrial (a)
Grades 1-4$348,274 $121,989 $98,920 $72,027 $21,613 $39,454 $183,858 $— $886,135 
Grade 51,416 2,239 4,486 527 1,638 4,151 18,994 — 33,451 
Grade 669 19 735 5,315 29 32 1,923 — 8,122 
Grade 7334 1,126 1,389 663 122 3,103 2,289 — 9,026 
Total$350,093 $125,373 $105,530 $78,532 $23,402 $46,740 $207,064 $— $936,734 
Owner-occupied CRE
Grades 1-4$90,702 $74,029 $78,013 $52,911 $45,042 $150,624 $870 $— $492,191 
Grade 542 623 1,349 7,541 1,102 5,842 — — 16,499 
Grade 6— — — 1,710 — 706 — — 2,416 
Grade 72,987 675 176 835 — 5,521 — — 10,194 
Total$93,731 $75,327 $79,538 $62,997 $46,144 $162,693 $870 $— $521,300 
Agricultural
Grades 1-4$13,719 $5,652 $7,580 $9,745 $2,613 $32,702 $21,513 $— $93,524 
Grade 51,034 — 701 169 644 6,131 356 — 9,035 
Grade 6— — — 329 390 — — — 719 
Grade 7— — 26 110 1,111 5,042 62 — 6,351 
Total$14,753 $5,652 $8,307 $10,353 $4,758 $43,875 $21,931 $— $109,629 
CRE investment
Grades 1-4$82,518 $78,841 $40,881 $69,643 $31,541 $137,048 $5,255 $— $445,727 
Grade 5— — 47 1,284 1,828 9,073 — — 12,232 
Grade 6— — — 796 — — — — 796 
Grade 7— — — — — 1,966 — — 1,966 
Total$82,518 $78,841 $40,928 $71,723 $33,369 $148,087 $5,255 $— $460,721 
Construction & land development
Grades 1-4$67,578 $30,733 $15,209 $2,204 $2,083 $7,266 $3,675 $— $128,748 
Grade 5— 373 660 545 — 23 455 — 2,056 
Grade 6— — — — — — — — — 
Grade 7— — — — — 479 — — 479 
Total$67,578 $31,106 $15,869 $2,749 $2,083 $7,768 $4,130 $— $131,283 
Residential construction
Grades 1-4$31,687 $9,185 $395 $121 $— $264 $— $— $41,652 
Grade 5— — — 55 — — — — 55 
Grade 6— — — — — — — — — 
Grade 7— — — — — — — — — 
Total$31,687 $9,185 $395 $176 $— $264 $— $— $41,707 
Residential first mortgage
Grades 1-4$146,744 $64,013 $40,388 $41,245 $41,274 $103,094 $287 $5 $437,050 
Grade 5— 925 2,245 256 364 1,714 — — 5,504 
Grade 6— — — — — — — — — 
Grade 7— 437 197 16 9 942 — — 1,601 
Total$146,744 $65,375 $42,830 $41,517 $41,647 $105,750 $287 $5 $444,155 
Residential junior mortgage
Grades 1-4$4,936 $4,338 $3,663 $1,060 $869 $3,131 $91,816 $1,648 $111,461 
Grade 5— — — — — 32 — — 32 
Grade 6— — — — — — — — — 
Grade 7— — — 27 — 232 125 — 384 
Total$4,936 $4,338 $3,663 $1,087 $869 $3,395 $91,941 $1,648 $111,877 
Retail & other
Grades 1-4$8,083 $5,213 $1,942 $1,676 $752 $1,339 $12,602 $— $31,607 
Grade 5— — — — — — — — — 
Grade 6— — — — — — — — — 
Grade 716 — 22 — — 50 — — 88 
Total$8,099 $5,213 $1,964 $1,676 $752 $1,389 $12,602 $— $31,695 
Total loans$800,139 $400,410 $299,024 $270,810 $153,024 $519,961 $344,080 $1,653 $2,789,101 
(a) For purposes of this table, the $186 million net carrying value of PPP loans at December 31, 2020 were originated in 2020, have a Pass risk grade (Grades 1-4) and have been included with the Commercial & industrial loan category.
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The following tables present total loans by risk categories.
September 30, 2021
(in thousands)Grades 1- 4Grade 5Grade 6Grade 7Total
Commercial & industrial$855,737 $27,866 $1,630 $2,677 $887,910 
PPP loans68,347 — — — 68,347 
Owner-occupied CRE651,564 32,694 2,130 11,428 697,816 
Agricultural100,061 8,552 — 3,796 112,409 
CRE investment611,090 45,953 199 5,629 662,871 
Construction & land development170,130 2,668 — 1,173 173,971 
Residential construction59,559 52 — — 59,611 
Residential first mortgage679,372 4,410 — 4,709 688,491 
Residential junior mortgage129,403 478 — 398 130,279 
Retail & other51,369 29 — 95 51,493 
Total loans$3,376,632 $122,702 $3,959 $29,905 $3,533,198 
Percent of total95.6 %3.5 %0.1 %0.8 %100.0 %
December 31, 2020
(in thousands)Grades 1- 4Grade 5Grade 6Grade 7Total
Commercial & industrial$700,119 $33,451 $8,122 $9,026 $750,718 
PPP loans186,016 — — — 186,016 
Owner-occupied CRE492,191 16,499 2,416 10,194 521,300 
Agricultural93,524 9,035 719 6,351 109,629 
CRE investment445,727 12,232 796 1,966 460,721 
Construction & land development128,748 2,056 — 479 131,283 
Residential construction41,652 55 — — 41,707 
Residential first mortgage437,050 5,504 — 1,601 444,155 
Residential junior mortgage111,461 32 — 384 111,877 
Retail & other31,607 — — 88 31,695 
Total loans$2,668,095 $78,864 $12,053 $30,089 $2,789,101 
Percent of total95.7 %2.8 %0.4 %1.1 %100.0 %

An internal loan review function rates loans using a grading system based on different risk categories. Loans with a Substandard grade are considered to have a greater risk of loss and may be assigned allocations for loss based on specific review of the weaknesses observed in the individual credits. Such loans are constantly monitored by the loan review function to ensure early identification of any deterioration. A description of the loan risk categories used by the Company follows.
Grades 1-4, Pass: Credits exhibit adequate cash flows, appropriate management and financial ratios within industry norms and/or are supported by sufficient collateral. Some credits in these rating categories may require a need for monitoring but elements of concern are not severe enough to warrant an elevated rating.
Grade 5, Watch: Credits with this rating are adequately secured and performing but are being monitored due to the presence of various short-term weaknesses which may include unexpected, short-term adverse financial performance, managerial problems, potential impact of a decline in the entire industry or local economy and delinquency issues. Loans to individuals or loans supported by guarantors with marginal net worth or collateral may be included in this rating category.
Grade 6, Special Mention: Credits with this rating have potential weaknesses that, without the Company’s attention and correction may result in deterioration of repayment prospects. These assets are considered Criticized Assets. Potential weaknesses may include adverse financial trends for the borrower or industry, repeated lack of compliance with Company requests, increasing debt to net worth, serious management conditions and decreasing cash flow.
Grade 7, Substandard: Assets with this rating are characterized by the distinct possibility the Company will sustain some loss if deficiencies are not corrected. All foreclosures, liquidations, and nonaccrual loans are considered to be categorized in this rating, regardless of collateral sufficiency.
Troubled Debt Restructurings: At September 30, 2021, there were fourteen loans classified as troubled debt restructurings with a current outstanding balance of $5.4 million (including $3.3 million on nonaccrual and $2.1 million performing) and pre-modification balance of $5.9 million. In comparison, at December 31, 2020, there were eleven loans classified as troubled debt
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restructurings with an outstanding balance of $5.5 million (including $3.4 million on nonaccrual and $2.1 million performing) and pre-modification balance of $6.5 million. There were no loans classified as troubled debt restructurings during the previous twelve months that subsequently defaulted during the nine months ended September 30, 2021. As of September 30, 2021, there were no commitments to lend additional funds to debtors whose terms have been modified in troubled debt restructurings.

Note 7 – Goodwill and Other Intangibles and Mortgage Servicing Rights
Management periodically reviews the carrying value of its intangible assets to determine if any impairment has occurred, in which case an impairment charge would be recorded as an expense in the period of impairment, or whether changes in circumstances have occurred that would require a revision to the remaining useful life which would impact expense prospectively. In making such determination, management evaluates whether there are any adverse qualitative factors indicating that an impairment may exist, as well as the performance, on an undiscounted basis, of the underlying operations or assets which give rise to the intangible. Management continues to consider the ongoing impacts of the COVID-19 pandemic and related economic uncertainty on the valuation of our franchise, stability of deposits, and of the wealth client base, underlying our goodwill, core deposit intangible, and customer list intangibles, and determined no impairments were indicated. A summary of goodwill and other intangibles was as follows.
Nine Months EndedYear Ended
(in thousands)September 30, 2021December 31, 2020
Goodwill$255,431 $163,151 
Core deposit intangibles11,539 8,837 
Customer list intangibles2,984 3,365 
    Other intangibles14,523 12,202 
Goodwill and other intangibles, net$269,954 $175,353 
Goodwill: A summary of goodwill was as follows. During 2021, goodwill increased due to the Mackinac acquisition, while during 2020, goodwill increased due to the Advantage acquisition. See Note 2 for additional information on the Company’s acquisitions.
Nine Months EndedYear Ended
(in thousands)September 30, 2021December 31, 2020
Goodwill:
Goodwill at beginning of year$163,151 $151,198 
Acquisition92,280 11,953 
Goodwill at end of period$255,431 $163,151 
Other intangible assets: Other intangible assets, consisting of core deposit intangibles and customer list intangibles, are amortized over their estimated finite lives. A summary of other intangible assets was as follows. During 2021, core deposit intangibles increased due to the Mackinac acquisition, while during 2020, core deposit intangibles increased due to the Advantage acquisition. See Note 2 for additional information on the Company’s acquisitions.
Nine Months EndedYear Ended
(in thousands)September 30, 2021December 31, 2020
Core deposit intangibles:
Gross carrying amount$36,436 $31,715 
Accumulated amortization(24,897)(22,878)
Net book value$11,539 $8,837 
Additions during the period$4,721 $1,000 
Amortization during the period$2,019 $3,060 
Customer list intangibles:
Gross carrying amount$5,523 $5,523 
Accumulated amortization(2,539)(2,158)
Net book value$2,984 $3,365 
Amortization during the period$381 $507 
Mortgage servicing rights: 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
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of accumulated amortization, or estimated fair value, and are included in other assets in the consolidated balance sheets. A summary of the changes in the mortgage servicing rights asset was as follows.
Nine Months EndedYear Ended
(in thousands)September 30, 2021December 31, 2020
Mortgage servicing rights ("MSR") asset:
MSR asset at beginning of year$10,230 $5,919 
Capitalized MSR3,191 5,256 
MSR asset acquired1,322 529 
Amortization during the period(1,580)(1,474)
MSR asset at end of period$13,163 $10,230 
Valuation allowance at beginning of year$(1,000)$— 
Additions(500)(1,000)
Reversals300 — 
Valuation allowance at end of period$(1,200)$(1,000)
MSR asset, net$11,963 $9,230 
Fair value of MSR asset at end of period$14,482 $9,276 
Residential mortgage loans serviced for others$1,532,585 $1,250,206 
Net book value of MSR asset to loans serviced for others0.78 %0.74 %
The Company periodically evaluates its mortgage servicing rights asset for impairment. At each reporting date, impairment is assessed based on estimated fair value using estimated prepayment speeds of the underlying mortgage loans serviced and stratification based on the risk characteristics of the underlying loans (predominantly loan type and note interest rate). See Note 9 for additional information on the fair value of the MSR asset.
The following table shows the estimated future amortization expense for amortizing intangible assets and the MSR asset. The projections are based on existing asset balances, the current interest rate environment and prepayment speeds as of September 30, 2021. The actual amortization expense the Company recognizes in any given period may be significantly different depending upon acquisition or sale activities, changes in interest rates, prepayment speeds, market conditions, regulatory requirements and events or circumstances that indicate the carrying amount of an asset may not be recoverable.
(in thousands)Core deposit
intangibles		Customer list
intangibles		MSR asset
Year ending December 31,
2021 (remaining three months)
$859 $126 $486 
20223,059 507 2,421 
20232,412 483 2,363 
20241,815 449 2,250 
20251,248 449 1,361 
2026777 249 1,118 
Thereafter1,369 721 3,164 
Total$11,539 $2,984 $13,163 

Note 8 – Short and Long-Term Borrowings
Short-Term Borrowings:
Short-term borrowings include any borrowing with an original maturity of one year or less. At both September 30, 2021 and December 31, 2020, the Company did not have any outstanding short-term borrowings.
Long-Term Borrowings:
Long-term borrowings include any borrowing with an original maturity greater than one year. The components of long-term borrowings were as follows.
(in thousands)September 30, 2021December 31, 2020
FHLB advances$20,000 $29,000 
Junior subordinated debentures25,228 24,869 
Subordinated notes99,005 — 
Total long-term borrowings
$144,233 $53,869 
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FHLB Advances: The Federal Home Loan Bank (“FHLB”) advances bear fixed rates, require interest-only monthly payments, and have maturity dates through March 2027. The weighted average rate of the FHLB advances was 0.74% at September 30, 2021 and 0.73% at December 31, 2020.
Junior Subordinated Debentures: The following table shows the breakdown of junior subordinated debentures. Interest on all debentures is current. Any applicable discounts (initially recorded to carry an acquired debenture at its then estimated fair value) are being accreted to interest expense over the remaining life of the debentures. All the debentures below are currently callable and may be redeemed in part or in full at par plus any accrued but unpaid interest. At September 30, 2021 and December 31, 2020, $24.3 million and $23.9 million, respectively, qualify as Tier 1 capital.
Junior Subordinated Debentures
September 30, 2021December 31, 2020
(in thousands)Maturity
Date		ParUnamortized
Discount		Carrying
Value		Carrying
Value
2005 Mid-Wisconsin Financial Services, Inc. (1)
12/15/2035$10,310 $(2,823)$7,487 $7,338 
2006 Baylake Corp. (2)
9/30/203616,598 (3,470)13,128 12,951 
2004 First Menasha Bancshares, Inc. (3)
3/17/20345,155 (542)4,613 4,580 
Total $32,063 $(6,835)$25,228 $24,869 
(1)The debentures, assumed in April 2013 as the result of an acquisition, have a floating rate of the three-month LIBOR plus 1.43%, adjusted quarterly. The interest rates were 1.55% and 1.65% as of September 30, 2021 and December 31, 2020, respectively.
(2)The debentures, assumed in April 2016 as a result of an acquisition, have a floating rate of the three-month LIBOR plus 1.35%, adjusted quarterly. The interest rates were 1.48% and 1.59% as of September 30, 2021 and December 31, 2020, respectively.
(3)The debentures, assumed in April 2017 as the result of an acquisition, have a floating rate of the three-month LIBOR plus 2.79%, adjusted quarterly. The interest rates were 2.91% and 3.02% as of September 30, 2021 and December 31, 2020, respectively.

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

Note 9 – Fair Value Measurements
Fair value represents the estimated price at which an orderly transaction to sell an asset or transfer a liability would take place between market participants at the measurement date under current market conditions (i.e., an exit price concept), and is a market-based measurement versus an entity-specific measurement.
The Company records and/or discloses financial instruments on a fair value basis. These financial assets and financial liabilities are measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the assumptions used to determine fair value. These levels are:
•Level 1 – quoted market prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date
•Level 2 – inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly
•Level 3 – significant unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity
In instances where the fair value measurement is based on inputs from different levels, the level within which the entire fair value measurement will be categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. This assessment of the significance of an input requires management judgment.
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Recurring basis fair value measurements:
The following table presents the balances of assets and liabilities measured at fair value on a recurring basis for the periods presented.
(in thousands)Fair Value Measurements Using
Measured at Fair Value on a Recurring Basis:TotalLevel 1Level 2Level 3
September 30, 2021
U.S. government agency securities$174,826 $— $174,826 $— 
State, county and municipals238,664 — 238,498 166 
Mortgage-backed securities197,290 — 197,290 — 
Corporate debt securities105,162 — 101,532 3,630 
Securities AFS
$715,942 $— $712,146 $3,796 
Other investments (equity securities)$8,077 $8,077 $— $— 
December 31, 2020
U.S. government agency securities$63,451 $— $63,451 $— 
State, county and municipals231,868 — 231,868 — 
Mortgage-backed securities162,495 — 162,495 — 
Corporate debt securities81,523 — 78,393 3,130 
Securities AFS
$539,337 $— $536,207 $3,130 
Other investments (equity securities)$3,567 $3,567 $— $— 
The following is a description of the valuation methodologies used by the Company for the securities AFS and equity securities measured at fair value on a recurring basis, noted in the tables above. Where quoted market prices on securities exchanges are available, the investments are classified as Level 1. Level 1 investments primarily include exchange-traded equity securities. If quoted market prices are not available, fair value is generally determined using prices obtained from independent pricing vendors who use pricing models (with typical inputs including benchmark yields, reported trades for similar securities, issuer spreads or relationship to other benchmark quoted securities), or discounted cash flows, and are classified as Level 2. Examples of these investments include U.S. government agency securities, mortgage-backed securities, obligations of state, county and municipals, and certain corporate debt securities. Finally, in certain cases where there is limited activity or less transparency around inputs to the estimated fair value, investments are classified within Level 3 of the hierarchy. Examples of these include private corporate debt securities, which include trust preferred security investments. At September 30, 2021 and December 31, 2020, 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.
For the nine months ended September 30, 2021 and the year ended December 31, 2020, there have been no changes in the Level 3 securities AFS measured at fair value on a recurring basis.
Nine Months EndedYear Ended
Level 3 Fair Value Measurements:September 30, 2021December 31, 2020
Balance at beginning of year$3,130 $3,130 
Acquired balance666 — 
Balance at end of period$3,796 $3,130 
Nonrecurring basis fair value measurements:
The following table presents the Company’s assets measured at fair value on a nonrecurring basis, aggregated by level in the fair value hierarchy within which those measurements fall.
(in thousands)Fair Value Measurements Using
Measured at Fair Value on a Nonrecurring Basis:TotalLevel 1Level 2Level 3
September 30, 2021
Collateral dependent loans$11,459 $— $— $11,459 
Other real estate owned (“OREO”)4,469 — — 4,469 
MSR asset11,963 — — 11,963 
December 31, 2020
Collateral dependent loans$7,633 $— $— $7,633 
OREO3,608 — — 3,608 
MSR asset9,230 — — 9,230 
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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, 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. For OREO, the fair value is based upon the estimated fair value of the underlying collateral adjusted for the expected costs to sell. To estimate the fair value of the MSR asset, the underlying serviced loan pools are stratified by interest rate tranche and term of the loan, and a valuation model is used to calculate the present value of the expected future cash flows for each stratum. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as costs to service, a discount rate, ancillary income, default rates and losses, and prepayment speeds. Although some of these assumptions are based on observable market data, other assumptions are based on unobservable estimates of what market participants would use to measure fair value.
Financial instruments:
The carrying amounts and estimated fair values of the Company’s financial instruments are shown below.
September 30, 2021
(in thousands)Carrying
Amount		Estimated
Fair Value		Level 1Level 2Level 3
Financial assets:
Cash and cash equivalents$1,350,605 $1,350,605 $1,350,605 $— $— 
Certificates of deposit in other banks24,079 26,653 — 26,653 — 
Securities AFS715,942 715,942 — 712,146 3,796 
Securities HTM49,063 48,946 — 48,946 — 
Other investments, including equity securities38,602 38,602 8,078 24,634 5,890 
Loans held for sale16,784 17,153 — 17,153 — 
Loans, net3,494,799 3,539,968 — — 3,539,968 
MSR asset11,963 14,482 — — 14,482 
Financial liabilities:
Deposits$5,428,774 $5,459,453 $— $— $5,459,453 
Long-term borrowings144,233 144,566 — 20,199 124,367 
December 31, 2020
(in thousands)Carrying
Amount		Estimated
Fair Value		Level 1Level 2Level 3
Financial assets:
Cash and cash equivalents$802,859 $802,859 $802,859 $— $— 
Certificates of deposit in other banks29,521 31,053 — 31,053 — 
Securities AFS539,337 539,337 — 536,207 3,130 
Other investments, including equity securities27,619 27,619 3,567 20,155 3,897 
Loans held for sale21,450 22,329 — 22,329 — 
Loans, net2,756,928 2,834,452 — — 2,834,452 
MSR asset9,230 9,276 — — 9,276 
Financial liabilities:
Deposits$3,910,399 $3,917,121 $— $— $3,917,121 
Long-term borrowings53,869 53,859 — 29,488 24,371 
The valuation methodologies for the financial instruments disclosed in the above table are described in the Fair Value Measurements note in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Note 10 – Other Assets and Other Liabilities Held for Sale
On September 7, 2021, Nicolet entered into a Purchase and Assumption Agreement (the “Birmingham Agreement”) with Bank of Ann Arbor to sell Nicolet’s Birmingham, Michigan branch, including legacy mBank’s asset-based lending team (the “Birmingham Sale”). Pursuant to the terms of the Birmingham Agreement, Bank of Ann Arbor has agreed to assume certain deposit liabilities and to acquire certain loans, as well as cash, personal property and other fixed assets associated with the Birmingham branch. The combined loan and deposit balances of the Birmingham branch (excluding certain loans and deposits not subject to the Birmingham Agreement) were approximately $177 million and $47 million, respectively, as of September 30, 2021. The completion of the Birmingham Sale is subject to customary closing conditions and the approval of the purchase by the appropriate state and federal regulatory agencies. Subject to the satisfaction of such conditions and approvals, Nicolet and Bank of Ann Arbor expect to the close the Birmingham Sale in the first quarter of 2022.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nicolet Bankshares, Inc. (the “Company” or “Nicolet”) is a bank holding company headquartered in Green Bay, Wisconsin. 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.
Forward-Looking Statements
Statements made in this document and in any documents that are incorporated by reference which are not purely historical are forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, including any statements regarding descriptions of management’s plans, objectives, or goals for future operations, products or services, and forecasts of its revenues, earnings, or other measures of performance. Forward-looking statements are based on current management expectations and, by their nature, are subject to risks and uncertainties. These statements generally may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “should,” “will,” “intend,” or similar expressions. Shareholders should note that many factors, some of which are discussed elsewhere in this document, could affect the future financial results of Nicolet and could cause those results to differ materially from those expressed in forward-looking statements contained in this document. These factors, many of which are beyond Nicolet’s control, include, but are not necessarily limited to the following:
•the magnitude and duration of the COVID-19 pandemic and the effects of the COVID-19 pandemic on the business, customers, employees and third-party service providers of Nicolet or any of its acquisition targets, including County;
•operating, legal and regulatory risks, including the effects of legislative or regulatory developments affecting the financial industry generally or Nicolet specifically;
•economic, market, political and competitive forces affecting Nicolet’s banking and wealth management businesses;
•changes in interest rates, monetary policy and general economic conditions, which may impact Nicolet’s net interest income;
•the risk that the proposed acquisition of County will not be consummated or will not meet Nicolet’s expectations regarding the timing of the proposed acquisition;
•the possibility that the anticipated benefits of the Mackinac acquisition are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy and competitive factors in the areas where Nicolet does business;
•the possibility that the proposed Birmingham Sale will not close when expected or at all because required regulatory approvals are not received or other conditions to the closing are not satisfied on a timely basis or at all;
•diversion of management time on pandemic-related or acquisition-related issues;
•adoption of new accounting standards, including the effects from the adoption of the CECL model on January 1, 2020, or changes in existing standards;
•changes to statutes, regulations, or regulatory policies or practices resulting from the COVID-19 pandemic;
•compliance or operational risks related to new products, services, ventures, or lines of business, if any, that Nicolet may pursue or implement;
•changes in consumer demand for financial services; and
•the risk that Nicolet’s analysis of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.
These factors should be considered in evaluating the forward-looking statements, and you should not place undue reliance on such statements. Nicolet specifically disclaims any obligation to update factors or to publicly announce the results of revisions to any of the forward-looking statements or comments included herein to reflect future events or developments.

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

Evaluation of financial performance and certain balance sheet line items between 2021 and 2020 were impacted by the timing and size of Nicolet’s acquisition of Mackinac Financial Corporation (“Mackinac”) on September 3, 2021. The inclusion of the Mackinac balance sheet (at approximately 30% of Nicolet’s then pre-merger asset size) explains a substantial portion of the increase in certain period end balances, while the income statement results reflect only one month of contribution from Mackinac in 2021. At acquisition, Mackinac added $1.5 billion in assets, $0.9 billion of loans, $1.4 billion of deposits, and goodwill of $92 million, for a total purchase price that included $180 million of common equity (or 2.3 million shares) and $49 million of cash.
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The initial impacts of the COVID-19 pandemic (declared in March 2020) resulted in, among other things, stock and global markets decline, disruption in business and leisure activities as nation-wide stay-at-home orders were mandated, significant strain on the health care industry as it addressed the severity of the health crisis, and shifts in the general economy (such as high unemployment, negative GDP expectations, an immediate 150 bps decline in Federal funds rates, and unprecedented government stimulus), triggering a 2020 recession. The dramatic events surrounding the pandemic, fluctuating social and economic changes since the onset of the pandemic, and uncertainty about the longevity of the pandemic’s effects were significant and unfolding throughout most of 2020, but have abated somewhat for 2021 as people and businesses were supported by government stimulus and are adjusting to a vaccination rollout and a new normal in a still evolving environment, including a second wave of the pandemic from a new strain of the virus.

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

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


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Performance Summary
Table 1: Earnings Summary and Selected Financial Data
At or for the Three Months EndedAt or for the Nine Months Ended
(In thousands, except per share data)9/30/20216/30/20213/31/202112/31/20209/30/20209/30/20219/30/2020
Results of operations:
Interest income$38,741 $38,307 $36,876 $38,037 $37,270 $113,924 $111,165 
Interest expense3,557 2,736 3,235 4,019 4,710 9,528 15,845 
Net interest income35,184 35,571 33,641 34,018 32,560 104,396 95,320 
Provision for credit losses6,000 — 500 1,300 3,000 6,500 9,000 
Net interest income after provision for credit losses29,184 35,571 33,141 32,718 29,560 97,896 86,320 
Noninterest income13,996 20,178 17,126 16,879 18,691 51,300 45,747 
Noninterest expense33,061 30,747 26,081 25,367 23,685 89,889 75,352 
Income before income tax expense10,119 25,002 24,186 24,230 24,566 59,307 56,715 
Income tax expense2,295 6,718 5,947 6,145 6,434 14,960 14,331 
Net income7,824 18,284 18,239 18,085 18,132 44,347 42,384 
Net income attributable to noncontrolling interest— — — 98 30 — 249 
Net income attributable to Nicolet Bankshares, Inc.$7,824 $18,284 $18,239 $17,987 $18,102 $44,347 $42,135 
Earnings per common share:       
Basic$0.75 $1.85 $1.82 $1.79 $1.75 $4.39 $4.04 
Diluted$0.73 $1.77 $1.75 $1.74 $1.72 $4.22 $3.97 
Common Shares:       
Basic weighted average10,392 9,902 9,998 10,074 10,349 10,098 10,426 
Diluted weighted average10,776 10,326 10,403 10,350 10,499 10,503 10,605 
Outstanding (period end)11,952 9,843 9,988 10,011 10,196 11,952 10,196 
Period-End Balances:       
Loans$3,533,198 $2,820,331 $2,846,351 $2,789,101 $2,908,793 $3,533,198 $2,908,793 
Allowance for credit losses - loans38,399 32,561 32,626 32,173 31,388 38,399 31,388 
Securities available-for-sale, at fair value715,942 562,028 558,229 539,337 535,351 715,942 535,351 
Goodwill and other intangibles, net269,954 173,711 174,501 175,353 176,213 269,954 176,213 
Total assets6,407,820 4,587,347 4,543,804 4,551,789 4,706,375 6,407,820 4,706,375 
Deposits5,428,774 3,939,022 3,900,594 3,910,399 3,712,808 5,428,774 3,712,808 
Stockholders’ equity (common)729,278 559,395 550,046 539,189 538,068 729,278 538,068 
Book value per common share61.01 56.83 55.07 53.86 52.77 61.01 52.77 
Tangible book value per common share (2)
38.43 39.18 37.60 36.34 35.49 38.43 35.49 
Average Balances:       
Loans$3,076,422 $2,869,105 $2,825,664 $2,868,827 $2,871,256 $2,924,648 $2,760,309 
Interest-earning assets4,734,768 4,109,394 4,089,603 4,091,460 4,216,106 4,313,618 3,768,676 
Goodwill and other intangibles, net201,748 174,026 174,825 175,678 169,353 183,632 166,493 
Total assets5,246,193 4,527,839 4,514,927 4,515,226 4,633,359 4,765,665 4,167,902 
Deposits4,448,468 3,897,797 3,875,205 3,793,430 3,636,260 4,075,923 3,320,994 
Interest-bearing liabilities3,093,031 2,684,871 2,764,232 2,744,578 2,933,737 2,848,583 2,632,280 
Stockholders’ equity (common)608,946 550,974 544,541 537,920 537,826 568,390 523,904 
Financial Ratios: (1)
       
Return on average assets0.59 %1.62 %1.64 %1.58 %1.55 %1.24 %1.35 %
Return on average common equity5.10 13.31 13.58 13.30 13.39 10.43 10.74 
Return on average tangible common equity (2)
7.62 19.46 20.01 19.75 19.54 15.41 15.75 
Average equity to average assets11.61 12.17 12.06 11.91 11.61 11.93 12.57 
Stockholders' equity to assets11.38 12.19 12.11 11.85 11.43 11.38 11.43 
Tangible common equity to tangible assets (2)
7.48 8.74 8.60 8.31 7.99 7.48 7.99 
Net interest margin2.94 3.45 3.31 3.29 3.06 3.22 3.35 
Net loan charge-offs to average loans0.01 0.01 0.01 0.07 0.10 0.01 0.04 
Nonperforming loans to total loans0.47 0.25 0.31 0.34 0.38 0.47 0.38 
Nonperforming assets to total assets0.33 0.21 0.28 0.29 0.25 0.33 0.25 
Efficiency ratio65.32 59.37 51.84 48.99 46.18 58.86 52.71 
Effective tax rate22.68 26.87 24.59 25.36 26.19 25.22 25.27 

(1) Income statement-related ratios for partial-year periods are annualized.
(2) The ratios of tangible book value per common share, return on average tangible common equity, and tangible common equity to tangible assets exclude goodwill and other intangibles, net. These financial ratios have been included as they are considered to be critical metrics with which to analyze and evaluate financial condition and capital strength. See Table 1A: Non-GAAP Financial Measures for a reconciliation of these financial measures.
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Table 1A: Non-GAAP Financial Measures
At or for the Three Months EndedAt or for the Nine Months Ended
(In thousands, except per share data)9/30/20216/30/20213/31/202112/31/20209/30/20209/30/20219/30/2020
Tangible Assets:       
Total assets$6,407,820 $4,587,347 $4,543,804 $4,551,789 $4,706,375 
Goodwill and other intangibles, net269,954 173,711 174,501 175,353 176,213 
Tangible assets$6,137,866 $4,413,636 $4,369,303 $4,376,436 $4,530,162 
Tangible Common Equity:
Stockholders’ equity (common)$729,278 $559,395 $550,046 $539,189 $538,068 
Goodwill and other intangibles, net269,954 173,711 174,501 175,353 176,213 
Tangible common equity$459,324 $385,684 $375,545 $363,836 $361,855 
Average Tangible Common Equity:       
Stockholders’ equity (common)$608,946 $550,974 $544,541 $537,920 $537,826 $568,390 $523,904 
Goodwill and other intangibles, net201,748 174,026 174,825 175,678 169,353 183,632 166,493 
Average tangible common equity$407,198 $376,948 $369,716 $362,242 $368,473 $384,758 $357,411 
Net income was $44.3 million for the nine months ended September 30, 2021, compared to $42.1 million for the nine months ended September 30, 2020. Earnings per diluted common share was $4.22 for the first nine months of 2021, compared to $3.97 for the first nine months of 2020.
•Net interest income was $104.4 million for the first nine months of 2021, up $9.1 million (10%) over the first nine months of 2020. Interest income grew $2.8 million attributable to favorable volumes (mostly higher loan volumes), partly offset by net unfavorable rates (influenced by Federal Reserve rate cuts in March 2020). Interest expense favorably decreased $6.3 million between the nine-month periods reflecting disciplined deposit pricing. Net interest margin was 3.22% for the nine months ended September 30, 2021, compared to 3.35% for the nine months ended September 30, 2020, influenced by the changing balance sheet mix, including elevated cash levels, in the lower rate environment. For additional information regarding net interest income, see “Income Statement Analysis — Net Interest Income.”
•Noninterest income was $51.3 million for the first nine months of 2021, up $5.6 million (12%) from the comparable 2020 period. Excluding net asset gains (losses), noninterest income was $47.6 million for the first nine months of 2021, up $0.7 million (1%) over 2020, predominantly on higher wealth revenue (trust services and brokerage fee income combined) and card interchange income, partly offset by lower net mortgage income. For additional information regarding noninterest income, see “Income Statement Analysis — Noninterest Income.”
•Noninterest expense was $89.9 million, $14.5 million (19%) higher than the first nine months of 2020. Personnel costs increased $7.3 million, and non-personnel expenses combined increased $7.3 million (22%) over the comparable 2020 period. For additional information regarding noninterest expense, see “Income Statement Analysis — Noninterest Expense.”
•Nonperforming assets were $21 million, representing 0.33% of total assets at September 30, 2021, compared to 0.29% at December 31, 2020 and 0.25% at September 30, 2020. For additional information regarding nonperforming assets, see “Balance Sheet Analysis – Nonperforming Assets.”
•At September 30, 2021, assets were $6.4 billion, up $1.9 billion (41%) from December 31, 2020 and up $1.7 billion (36%) from September 30, 2020, mainly due to the acquisition of Mackinac. For additional balance sheet discussion see “Balance Sheet Analysis.”
•At September 30, 2021, loans were $3.5 billion, $744 million (27%) higher than December 31, 2020 and $624 million (21%) higher than September 30, 2020, largely due to the acquisition of Mackinac. On average, loans grew $164 million (6%) over the first nine months of 2020. For additional information regarding loans, see “Balance Sheet Analysis — Loans.”
•Total deposits were $5.4 billion at September 30, 2021, an increase of $1.5 billion (39%) from December 31, 2020 and $1.7 billion (46%) higher than September 30, 2020, substantially attributable to the Mackinac acquisition. Year-to-date average deposits were $755 million (23%) higher than the first nine months of 2020. For additional information regarding deposits, see “Balance Sheet Analysis – Deposits.”
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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.

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Table 2: Average Balance Sheet and Net Interest Income Analysis - Tax-Equivalent Basis
For the Nine Months Ended September 30,
20212020
(in thousands)Average
Balance		InterestAverage
Yield/Rate		Average
Balance		InterestAverage
Yield/Rate
ASSETS
Interest-earning assets
PPP Loans$173,463 $11,123 8.46 %$199,662 $4,263 2.80 %
Commercial-based loans ex PPP2,222,290 75,845 4.50 %2,083,768 80,224 5.06 %
Retail-based loans528,895 17,357 4.38 %476,879 17,190 4.81 %
Total loans, including loan fees (1)(2)
2,924,648 104,325 4.71 %2,760,309 101,677 4.85 %
Investment securities:
Taxable
418,897 5,935 1.89 %349,202 6,115 2.34 %
Tax-exempt (2)
140,691 2,252 2.13 %130,714 2,165 2.21 %
Total investment securities559,588 8,187 1.95 %479,916 8,280 2.30 %
Other interest-earning assets829,382 2,140 0.34 %528,451 1,917 0.48 %
Total non-loan earning assets
1,388,970 10,327 0.99 %1,008,367 10,197 1.35 %
Total interest-earning assets
4,313,618 $114,652 3.51 %3,768,676 $111,874 3.91 %
Other assets, net452,047 399,226 
Total assets
$4,765,665 $4,167,902 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings$595,385 $272 0.06 %$395,961 $588 0.20 %
Interest-bearing demand681,079 2,114 0.41 %551,018 3,092 0.75 %
Money market accounts (“MMA”)889,022 363 0.05 %723,323 1,313 0.24 %
Core time deposits318,477 2,165 0.91 %400,198 4,901 1.64 %
Total interest-bearing core deposits
2,483,963 4,914 0.26 %2,070,500 9,894 0.64 %
Brokered deposits284,738 2,885 1.35 %279,165 3,302 1.58 %
Total interest-bearing deposits
2,768,701 7,799 0.38 %2,349,665 13,196 0.75 %
PPPLF— — — %191,535 507 0.35 %
Other interest-bearing liabilities79,882 1,729 2.87 %91,080 2,142 3.10 %
Total wholesale funding
79,882 1,729 2.87 %282,615 2,649 1.23 %
Total interest-bearing liabilities
2,848,583 9,528 0.45 %2,632,280 15,845 0.80 %
Noninterest-bearing demand deposits1,307,222 971,329 
Other liabilities41,470 40,389 
Stockholders’ equity568,390 523,904 
Total liabilities and
 stockholders’ equity
$4,765,665 $4,167,902 
Net interest income and rate spread$105,124 3.06 %$96,029 3.11 %
Tax-equivalent adjustment$728 $709 
Net interest income and net interest margin$104,396 3.22 %$95,320 3.35 %
Selected Additional Information:
Total loans ex. PPP$2,751,185 $93,202 4.48 %$2,560,647 $97,414 5.01 %
Total interest-earning assets ex PPP4,140,155 103,529 3.31 %3,569,014 107,611 3.98 %
Total interest-bearing liabilities ex PPPLF2,848,583 9,528 0.45 %2,440,745 15,338 0.84 %
Net interest rate spread ex PPP & PPPLF2.86 %3.14 %
(1)Nonaccrual loans and loans held for sale are included in the daily average loan balances outstanding.
(2)The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 21% and adjusted for the disallowance of interest expense.

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Table 2: Average Balance Sheet and Net Interest Income Analysis - Tax-Equivalent Basis (Continued)
For the Three Months Ended September 30,
20212020
(in thousands)Average
Balance		InterestAverage
Yield/Rate		Average
Balance		InterestAverage
Yield/Rate
ASSETS
Interest-earning assets
PPP Loans$109,318 $2,310 8.27 %$332,816 $2,477 2.91 %
Commercial-based loans ex PPP2,378,480 26,759 4.40 %2,064,191 26,021 4.93 %
Retail-based loans588,624 6,242 4.24 %474,249 5,577 4.70 %
Total loans, including loan fees (1)(2)
3,076,422 35,311 4.51 %2,871,256 34,075 4.66 %
Investment securities:
Taxable
472,598 2,061 1.74 %356,908 2,001 2.24 %
Tax-exempt (2)
139,272 744 2.14 %139,245 763 2.19 %
Total investment securities611,870 2,805 1.83 %496,153 2,764 2.23 %
Other interest-earning assets1,046,476 869 0.33 %848,697 680 0.32 %
Total non-loan earning assets
1,658,346 3,674 0.55 %1,344,850 3,444 1.02 %
Total interest-earning assets
4,734,768 $38,985 3.24 %4,216,106 $37,519 3.50 %
Other assets, net511,425 417,253 
Total assets
$5,246,193 $4,633,359 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings$662,260 $100 0.06 %$443,121 $127 0.11 %
Interest-bearing demand711,442 685 0.38 %585,528 844 0.57 %
MMA962,538 135 0.06 %777,696 233 0.12 %
Core time deposits329,012 630 0.76 %374,230 1,337 1.42 %
Total interest-bearing core deposits
2,665,252 1,550 0.23 %2,180,575 2,541 0.46 %
Brokered deposits284,164 894 1.25 %336,026 1,243 1.47 %
Total interest-bearing deposits
2,949,416 2,444 0.33 %2,516,601 3,784 0.60 %
PPPLF— — — %335,865 297 0.35 %
Other interest-bearing liabilities143,615 1,113 3.08 %81,271 629 3.05 %
Total wholesale funding143,615 1,113 3.08 %417,136 926 0.87 %
Total interest-bearing liabilities
3,093,031 3,557 0.46 %2,933,737 4,710 0.64 %
Noninterest-bearing demand deposits1,499,052 1,119,659 
Other liabilities45,164 42,137 
Stockholders’ equity608,946 537,826 
Total liabilities and
 stockholders’ equity
$5,246,193 $4,633,359 
Net interest income and rate spread$35,428 2.78 %$32,809 2.86 %
Tax-equivalent adjustment$244 $249 
Net interest income and net interest margin$35,184 2.94 %$32,560 3.06 %
Selected Additional Information:
Total loans ex. PPP$2,967,104 $33,001 4.37 %$2,538,440 $31,598 4.89 %
Total interest-earning assets ex PPP4,625,450 36,675 3.12 %3,883,290 35,042 3.55 %
Total interest-bearing liabilities ex PPPLF3,093,031 3,557 0.46 %2,597,872 4,413 0.67 %
Net interest rate spread ex PPP & PPPLF2.66 %2.88 %
(1)Nonaccrual loans and loans held for sale are included in the daily average loan balances outstanding.
(2)The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 21% and adjusted for the disallowance of interest expense.

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Table 3: Volume/Rate Variance - Tax-Equivalent Basis
For the Three Months Ended
September 30, 2021
Compared to September 30, 2020:
For the Nine Months Ended
 September 30, 2021
Compared to September 30, 2020:
Increase (Decrease) Due to Changes inIncrease (Decrease) Due to Changes in
(in thousands)VolumeRate
Net (1)
VolumeRate
Net (1)
Interest-earning assets
PPP Loans$(2,481)$2,314 $(167)$(627)$7,487 $6,860 
Commercial-based loans ex. PPP3,547 (2,809)738 4,484 (8,863)(4,379)
Retail-based loans1,249 (584)665 1,786 (1,619)167 
Total loans (2)
2,315 (1,079)1,236 5,643 (2,995)2,648 
Investment securities:
Taxable
438 (378)60 643 (823)(180)
Tax-exempt (2)
— (19)(19)161 (74)87 
Total investment securities438 (397)41 804 (897)(93)
Other interest-earning assets107 82 189 456 (233)223 
 Total non-loan earning assets
545 (315)230 1,260 (1,130)130 
Total interest-earning assets
$2,860 $(1,394)$1,466 $6,903 $(4,125)$2,778 
Interest-bearing liabilities
Savings$48 $(75)$(27)$209 $(525)$(316)
Interest-bearing demand159 (318)(159)616 (1,594)(978)
MMA47 (145)(98)247 (1,197)(950)
Core time deposits(146)(561)(707)(861)(1,875)(2,736)
Total interest-bearing core deposits
108 (1,099)(991)211 (5,191)(4,980)
Brokered deposits(176)(173)(349)64 (481)(417)
Total interest-bearing deposits
(68)(1,272)(1,340)275 (5,672)(5,397)
PPPLF(148)(149)(297)(253)(254)(507)
Other interest-bearing liabilities600 (116)484 186 (599)(413)
Total wholesale funding452 (265)187 (67)(853)(920)
Total interest-bearing liabilities
384 (1,537)(1,153)208 (6,525)(6,317)
Net interest income$2,476 $143 $2,619 $6,695 $2,400 $9,095 
(1)The change in interest due to both rate and volume has been allocated in proportion to the relationship of dollar amounts of change in each.
(2)The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 21% and adjusted for the disallowance of interest expense.


Short-term interest rates have remained steady since March 2020, while the yield curve has begun to steepen mainly since year end 2020. The succeeding quarters felt the pressure of a low interest rate environment and bloated cash balances from government stimulus, both in the form of stimulus checks to individuals and PPP loans for businesses. The continued elevation of low interest-earning asset balances have further decreased margins along with the normal pressures of a near-zero rate environment. Though margins remain depressed, interest income dollars continue to rise on favorable asset volumes and proactive expense reduction measures. The following paragraphs will discuss the comparison of the first nine months of 2021 and 2020, with COVID-19 pandemic impacts appearing in second quarter 2020 and the economy beginning to rebound in the first part of 2021. Though improving, we see continued margin pressure and pricing impacts on loans and deposits.
Tax-equivalent net interest income was $105.1 million for the first nine months of 2021, comprised of net interest income of $104.4 million ($9.1 million or 10% higher than the first nine months of 2020), and a $0.7 million tax-equivalent adjustment. The $9.1 million increase in tax-equivalent net interest income was attributable to net favorable volumes (which added $6.7 million, mostly from higher loan volumes and organic loan growth, as well as interest-earning assets from the Mackinac and Advantage acquisitions) and net favorable rates (which increased net interest income $2.4 million due to a lower cost of funds largely as a result of prudent deposit pricing actions).
Between the comparable nine-month periods, the interest rate spread decreased 5 bps, largely attributable to the lower interest rate environment between the periods and the higher concentration of low-earning cash compared to the first nine months of 2020. The 2021 interest-earning asset yield declined 40 bps to 3.51%, partly from the 14 bps decline in loans but was more significantly impacted by the decrease in the loans-to-earning asset mix (to 68% compared to 73% for the first nine months of 2020) given the dramatic increase in cash. Other interest-earning assets (which are predominantly cash) declined 14 bps, while
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total non-loan earning assets declined 36 bps. The 2021 cost of funds declined favorably 35 bps to 0.45%, largely from improved interest-bearing core deposit rates, as well as lower brokered and other interest-bearing liabilities rates. The contribution from net free funds decreased 8 bps, due mostly to the reduced value in the lower rate environment, though offset partly by the 29% increase in average net free funds (largely from higher average noninterest-bearing demand deposits and stockholders’ equity) between the nine-month periods. As a result, the tax-equivalent net interest margin was 3.22% for the first nine months of 2021, down 13 bps compared to 3.35% for the comparable 2020 period.
Average interest-earning assets increased to $4.3 billion, up $0.5 billion (14%) over the 2020 comparable period, primarily due to significantly higher cash starting in second quarter 2020, the addition of PPP loans (beginning second quarter 2020), and the timing of the Mackinac and Advantage acquisitions (in September 2021 and August 2020, respectively). Between the comparable nine-month periods, average loans increased $164 million (6%), mostly due to organic loan growth and the timing of the Mackinac and Advantage acquisitions, which added loans of $930 million and $88 million, respectively, at acquisition. In addition, PPP loan activity remains strong, with a net average balance of $173 million at September 30, 2021, as loan forgiveness has outpaced the latest round of funding. Total non-loan interest-earning assets increased $381 million (38%) on average, largely due to higher cash. The mix of average interest-earning assets shifted to lower-yielding assets, at 68% loans, 13% investments and 19% other interest-earning assets (mostly cash) for the first nine months of 2021, compared to 73%, 13% and 14%, respectively, for the first nine months of 2020.
Tax-equivalent interest income was $114.7 million for the first nine months of 2021, up $2.8 million from the first nine months of 2020, and the related interest-earning asset yield was 3.51%, down 40 bps from the comparable period in 2020. Interest income on loans increased $2.6 million over the first nine months of 2020, with net decreases in interest rates more than offset by favorable volumes. The 2021 loan yield was 4.71%, down 14 bps from the first nine months of 2020, largely from the significantly lower rate environment impacting yields on new, renewed and variable rate loans. Between the comparable nine-month periods, interest income on non-loan earning assets combined grew $0.1 million to $10.3 million on higher average volumes (up 38%, mostly cash), though the yield declined 36 bps (to 0.99%) in the lower rate environment, mostly from the significantly higher cash.
Average interest-bearing liabilities were $2.8 billion, an increase of $216 million (8%), primarily due to the significant increase in deposits from government stimulus activities and deposited PPP loan proceeds, though also partly due to the timing of the Mackinac and Advantage acquisitions (in September 2021 and August 2020, respectively). The mix of average interest-bearing liabilities was 87% core deposits, 10% brokered deposits and 3% other funding for the first nine months of 2021, compared to 79%, 10% and 11%, respectively, for the first nine months of 2020.
Interest expense decreased to $9.5 million for the first nine months of 2021, down $6.3 million compared to the first nine months of 2020, on slightly higher volumes of average interest-bearing liabilities (up 8% to $2.8 billion) but at a lower overall cost of funds (down 35 bps to 0.45%). Interest expense on deposits decreased $5.4 million (41%) from the first nine months of 2020 given higher average interest-bearing deposit balances at a lower cost (down 37 bps to 0.38%) as product rate changes were made in the lower rate environment, and brokered deposits cost 23 bps less, largely from maturities of higher-costing term brokered funds procured during March-April 2020 under competitive conditions as part of previously discussed liquidity actions. Interest expense on other interest-bearing liabilities was down between the comparable nine-month periods, as interest expense on lower average balances (down $203 million) more than offset the higher rates related to the subordinated notes issued in July 2021 (up 164 bps to 2.87%).
Provision for Credit Losses
The provision for credit losses was $6.5 million for the nine months ended September 30, 2021 (comprised of $4.5 million related to the ACL-Loans, and $2.0 million for the ACL on unfunded commitments), compared to $9.0 million for the nine months ended September 30, 2020 (all related to the ACL-Loans). The 2021 provision for credit losses was mostly due to the Day 2 ACL increase from the Mackinac acquisition. In comparison, the provision for credit losses was significantly increased for most of 2020 given unprecedented economic disruptions and uncertainty surrounding the COVID-19 pandemic, and the related credit stress on our customers, though tempered starting in late 2020 and continuing into 2021 as potential deterioration of loan quality metrics initially anticipated did not materialize.
The provision for credit losses is predominantly a function of Nicolet’s methodology and judgment as to qualitative and quantitative factors used to determine the appropriateness of the ACL-Loans and unfunded commitments. The appropriateness of the ACL-Loans is affected by changes in the size and character of the loan portfolio, changes in levels of collateral dependent and other nonperforming loans, historical losses and delinquencies in each portfolio segment, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing and future economic conditions, the fair value of underlying collateral, and other factors which could affect expected credit losses. The ACL for unfunded commitments is affected by many of the same factors as the ACL-Loans, as well as funding assumptions relative to lines of credit. See also Note 6, “Loans, Allowance for Credit Losses - Loans, and Credit Quality” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures. For additional information regarding asset
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quality and the ACL-Loans, see “BALANCE SHEET ANALYSIS — Loans,” “— Allowance for Credit Losses - Loans,” and “— Nonperforming Assets.”

Noninterest Income
Table 4: Noninterest Income
Three Months Ended September 30,Nine Months Ended September 30,
(in thousands)20212020$ Change% Change20212020$ Change% Change
Trust services fee income$2,043 $1,628 $415 25 %$5,724 $4,717 $1,007 21 %
Brokerage fee income3,154 2,489 665 27 8,938 7,080 1,858 26 
Mortgage income, net4,808 9,675 (4,867)(50)17,637 21,965 (4,328)(20)
Service charges on deposit accounts1,314 1,037 277 27 3,541 3,075 466 15 
Card interchange income2,299 1,877 422 22 6,492 5,076 1,416 28 
BOLI income572 531 41 8 1,658 1,774 (116)(7)
Other income993 1,237 (244)(20)3,594 3,245 349 11 
Noninterest income without
 net gains
15,183 18,474 (3,291)(18)47,584 46,932 652 1 
Asset gains (losses), net(1,187)217 (1,404)N/M3,716 (1,185)4,901 N/M
Total noninterest income
$13,996 $18,691 $(4,695)(25)%$51,300 $45,747 $5,553 12 %
Trust services fee income & Brokerage fee income combined$5,197 $4,117 $1,080 26 %$14,662 $11,797 $2,865 24 %
N/M means not meaningful.
Noninterest income was $51.3 million for the first nine months of 2021, an increase of $5.6 million (12%) compared to $45.7 million for the comparable period of 2020. Noninterest income excluding net asset gains (losses) grew $0.7 million (1%) between the comparable nine-month periods, predominantly on higher wealth revenue (trust services and brokerage fee income combined) and card interchange income, partly offset by lower net mortgage income.
Trust services fee income and brokerage fee income combined were $14.7 million, up $2.9 million (24%) over the first nine months of 2020, consistent with the growth in accounts and assets under management.
Mortgage income represents net gains received from the sale of residential real estate loans into the secondary market, capitalized mortgage servicing rights (“MSRs”), servicing fees net of MSR amortization, fair value marks on the mortgage interest rate lock commitments and forward commitments (“mortgage derivatives”), and MSR valuation changes, if any. Net mortgage income of $17.6 million, decreased $4.3 million (20%) between the comparable nine-month periods, predominantly on slowing mortgage activity from the record levels experienced in 2020. Gains on sales and capitalized gains combined decreased $5.7 million, while net servicing fees increased $0.1 million (with higher income on the larger portfolio serviced for others, partially offset by an increase in MSR amortization), the mortgage derivatives were $0.6 million favorable, and MSR impairment was down $0.6 million on slower paydown activity. See also “Lending-Related Commitments” and Note 7, “Goodwill and Other Intangibles and Mortgage Servicing Rights” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures on the MSR asset.
Service charges on deposit accounts were up $0.5 million to $3.5 million for the nine months ended September 30, 2021, mainly as we waived certain fees during 2020 to provide economic relief to our customers at the inception of the pandemic.
Card interchange income grew $1.4 million (28%) between the comparable nine-month periods due to higher volume and activity, as activity was tempered starting late in first quarter 2020 with the onset of the pandemic, as well as cautionary spending of consumers given the economic uncertainty.
BOLI income was down $0.1 million between the comparable nine-month periods, attributable to BOLI death benefits received in 2020, partly offset by income on higher average balances from $3 million BOLI acquired with Advantage in August 2020.
Other income of $3.6 million for the nine months ended September 30, 2021 was up $0.3 million from the comparable 2020 period, largely due to the change in fair value of nonqualified deferred compensation plan assets from the significant market decline at the onset of the pandemic. See also “Noninterest Expense” for discussion on the offsetting fair value change to the nonqualified deferred compensation plan liabilities.
Net asset gains of $3.7 million for the first nine months of 2021 were primarily attributable to favorable fair value marks on equity securities (including $3.5 million from the second quarter 2021 initial public offering of an equity investment), while net
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asset losses of $1.2 million for the first nine months of 2020 were primarily attributable to unfavorable fair value marks on equity securities (reflecting the significant market declines at the onset of the pandemic).

Noninterest Expense
Table 5: Noninterest Expense
Three Months Ended September 30,Nine Months Ended September 30,
($ in thousands)20212020Change% Change20212020Change% Change
Personnel$16,927 $14,072 $2,855 20 %$49,127 $41,877 $7,250 17 %
Occupancy, equipment and office5,749 4,051 1,698 42 13,939 12,616 1,323 10 
Business development and marketing1,654 810 844 104 3,853 4,683 (830)(18)
Data processing2,939 2,612 327 13 8,408 7,574 834 11 
Intangibles amortization758 834 (76)(9)2,400 2,707 (307)(11)
FDIC assessments480 347 133 381,555 347 1,208 N/M
Merger-related expense2,793 151 2,642 N/M3,449 853 2,596 N/M
Other expense1,761 808 953 118 7,158 4,695 2,463 52 
Total noninterest expense
$33,061 $23,685 $9,376 40 %$89,889 $75,352 $14,537 19 %
Non-personnel expenses$16,134 $9,613 $6,521 68 %$40,762 $33,475 $7,287 22 %
Average full-time equivalent (“FTE”) employees646 523 123 24 %591 553 38 7 %
N/M means not meaningful.

Noninterest expense was $89.9 million, an increase of $14.5 million (19%) over the first nine months of 2020. Personnel costs increased $7.3 million (17%), while non-personnel expenses combined increased $7.3 million (22%) compared to the first nine months of 2020.
Personnel expense was $49.1 million for the nine months ended September 30, 2021, an increase of $7.3 million from the comparable period in 2020. The increase in personnel was largely due to higher equity and other incentives commensurate with the strong earnings for the first part of 2021, as well as an increase in salaries from merit increases between the periods and higher average FTEs (mostly from the acquisition of Mackinac). Personnel expense was also impacted by the change in the fair value of nonqualified deferred compensation plan liabilities from the significant market decline at the onset of the pandemic. See also “Noninterest Income” for discussion on the offsetting fair value change to the nonqualified deferred compensation plan assets.
Occupancy, equipment and office expense was $13.9 million for the first nine months of 2021, up $1.3 million (10%) compared to the first nine months of 2020, as 2021 included $0.9 million of accelerated depreciation and write-offs related to branch closures, as well as higher expense for the expanded branch network with the Mackinac acquisition and additional expense for software and technology solutions to drive operational efficiency, and enhance products or services. In addition, second quarter 2020 included $0.5 million of accelerated depreciation and write-offs related to branch closures.
Business development and marketing expense was $3.9 million, down $0.8 million (18%), between the comparable nine-month periods, largely due to the $1.25 million micro-grant program in second quarter 2020 (which provided funds directly to customers who otherwise qualified for small PPP loans of less than $5,000, as a more cost beneficial result for the customer), as well as lower marketing costs from differences in the timing and extent of donations, marketing campaigns, promotions, and media.
Data processing expense was $8.4 million, up $0.8 million (11%) between the comparable nine-month periods, mostly due to volume-based increases in core processing charges, as well as the larger operating base with the Mackinac acquisition.
Intangibles amortization decreased $0.3 million between the comparable nine-month periods mainly from declining amortization on the aging intangibles of previous acquisitions, partly offset by amortization from the new intangibles of recent acquisitions.
FDIC assessments increased to $1.6 million for the first nine months of 2021 as the small bank assessment credits were fully utilized during third quarter 2020 and also reflecting the higher assessment base.
Other expense was $7.2 million, up $2.5 million (52%) between the comparable nine-month periods, mostly due to an increase in director fees (reflective of the additional complexity of a larger company, including the addition of two new directors), higher professional fees, costs to carry closed bank branches, and overall higher expenses related to the larger operating base. In
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addition, 2021 included a $2.1 million contract termination charge, while 2020 included $1.0 million of lease termination charges related to branch closures and $0.5 million to terminate the Commerce merger agreement.
Income Taxes
Income tax expense was $15.0 million (effective tax rate of 25.22%) for the first nine months of 2021, compared to $14.3 million (effective tax rate of 25.27%) for the comparable period of 2020.

Income Statement Analysis – Three Months Ended September 30, 2021 versus Three Months Ended September 30, 2020
Net income was $7.8 million for the three months ended September 30, 2021, compared to $18.1 million for the three months ended September 30, 2020. Earnings per diluted common share was $0.73 for third quarter 2021, compared to $1.72 for third quarter 2020.
Tax-equivalent net interest income was $35.4 million for third quarter 2021, comprised of net interest income of $35.2 million ($2.6 million or 8% over third quarter 2020), and a tax-equivalent adjustment of $0.2 million (essentially unchanged from third quarter 2020). Tax-equivalent interest income increased $1.5 million between the third quarter periods, with $2.9 million from stronger volumes (led by average loans which grew $205 million or 7% over third quarter 2020, including both organic loan growth and one month of the loans acquired with Mackinac, net of PPP loan forgiveness), partly offset by $1.4 million from lower yields. In addition, growth in other interest-earning assets (mostly cash) also contributed to the stronger volumes between the comparable third quarter periods, increasing $198 million (23%) to represent 22% of interest-earning assets for third quarter 2021, compared to 20% for third quarter 2020. Interest expense decreased $1.2 million from third quarter 2020, as the impact of the lower interest rate environment more than offset the higher average deposit balances. For additional information regarding average balances, net interest income and net interest margin, see “INCOME STATEMENT ANALYSIS — Net Interest Income.”
The net interest margin for third quarter 2021 was 2.94%, down from 3.06% for third quarter 2020, influenced by the changing balance sheet mix with higher levels of low-earning cash. The yield on interest-earning assets of 3.24% declined 26 bps from third quarter 2020. The yield on loans excluding PPP loans was 4.37%, 52 bps lower than third quarter 2020 mostly attributable to the impact of the lower interest rate environment on variable loans offset partly by floors and the mix of fixed rate loans. The cost of funds of 0.46% declined 18 bps between the comparable quarters as deposit costs were adjusted down in the lower interest rate environment, and third quarter 2020 was also influenced by the the inclusion of PPPLF funds costing 35 bps.
Provision for credit losses was $6.0 million for third quarter 2021 (comprised of $4.0 million related to the ACL-Loans, and $2.0 million for the ACL on unfunded commitments), compared to provision for credit losses of $3.0 million for third quarter 2020. The 2021 provision for credit losses was mostly due to the Day 2 ACL increase from the Mackinac acquisition as net charge-offs were negligible (at 0.01% for year-to-date 2021) and asset quality metrics remain strong, while the 2020 provision reflected the unknown magnitude of the evolving impact of credit stress on our customers arising from pandemic-based business disruptions and other recessionary conditions. For additional information regarding the allowance for credit losses-loans and asset quality, see “BALANCE SHEET ANALYSIS — Allowance for Credit Losses - Loans” and “BALANCE SHEET ANALYSIS — Nonperforming Assets.”
Noninterest income was $14.0 million for third quarter 2021, a decrease of $4.7 million (25%) from third quarter 2020. Noninterest income excluding net asset gains (losses) was down $3.3 million (18%) between the comparable third quarter periods, predominantly on lower net mortgage income. Net mortgage income of $4.8 million for third quarter 2021 was down $4.9 million (50%) from third quarter 2020, predominantly on slowing mortgage activity from the record levels experienced in 2020, including lower sale gains and capitalized gains combined (down $5.8 million, commensurate with the lower volumes sold into the secondary market), partly offset by a $0.2 million favorable change in the fair value of the mortgage derivatives, and $0.7 million lower MSR asset impairment given slower refinance activity. Trust services fee income and brokerage fee income combined was up $1.1 million (26%), consistent with the growth in assets under management. Service charges on deposit accounts grew $0.3 million to $1.3 million for third quarter 2021, mainly as we waived certain fees during third quarter 2020 to provide economic relief to our customers at the inception of the pandemic. Card interchange income grew $0.4 million (22%) due to higher volume and activity. Net asset losses of $1.2 million in third quarter 2021 were primarily attributable to fair value marks on equity securities, compared to net asset gains of $0.2 million in third quarter 2020. For additional information regarding noninterest income, see “INCOME STATEMENT ANALYSIS — Noninterest Income.”
Noninterest expense was $33.1 million for third quarter 2021, an increase of $9.4 million (40%) from third quarter 2020, including a $2.9 million increase in personnel expense and a $6.5 million increase in non-personnel expenses. The increase in personnel was largely due to higher equity and other incentives commensurate with the strong earnings for the first part of 2021, as well as an increase in salaries from merit increases between the periods and higher average FTEs (mostly from the acquisition of Mackinac). Occupancy, equipment, and office of $5.7 million was up $1.7 million (42%), as 2021 included $0.9 million of accelerated depreciation and write-offs related to branch closures, as well as higher expense for the expanded branch
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network with the Mackinac acquisition and additional expense for software and technology solutions to drive operational efficiency, and enhance products or services. Business development and marketing of $1.7 million increased $0.8 million versus third quarter 2020 due to higher marketing costs from differences in the timing and extent of donations, marketing campaigns, promotions, and media. Data processing expense was $2.9 million, up $0.3 million (13%) between the comparable third quarter periods, mostly due to volume-based increases in core processing charges, as well as the larger operating base with the Mackinac acquisition. FDIC assessments increased to $0.5 million for third quarter 2021 as the small bank assessment credits were fully utilized during third quarter 2020 and also reflecting the higher assessment base. Other expense was $1.8 million, up $1.0 million between the comparable third quarter periods, mostly due to an increase in director fees (reflective of the additional complexity of a larger company, including the addition of two new directors in third quarter 2021), higher professional fees, costs to carry closed bank branches, and overall higher expenses related to the larger operating base. For additional information regarding noninterest expense, see “INCOME STATEMENT ANALYSIS — Noninterest Expense.”
Income tax expense for third quarter 2021 was $2.3 million, with an effective tax rate of 22.68%, compared to income tax expense of $6.4 million and an effective tax rate of 26.19% for third quarter 2020.

BALANCE SHEET ANALYSIS
At September 30, 2021, period end assets were $6.4 billion, up $1.9 billion (41%) from December 31, 2020, mostly due to the Mackinac acquisition which added total assets of $1.5 billion at acquisition. The increase in assets from year-end 2020 included a $744 million increase in loans, a $548 million increase in cash and cash equivalents, and a $226 million increase in investment securities. Total deposits of $5.4 billion at September 30, 2021, were up $1.5 billion from December 31, 2020, also mostly attributable to the Mackinac acquisition. Total stockholders’ equity was $729 million, an increase of $190 million from December 31, 2020, primarily from the common stock issued in the Mackinac acquisition and retained earnings, partly offset by stock repurchases and negative net fair value investment changes.
Compared to September 30, 2020, assets were $6.4 billion, up $1.7 billion (36%) from September 30, 2020, also mainly due to the Mackinac acquisition. The increase in assets from September 30, 2020 included a $624 million increase in loans, a $497 million increase in cash and cash equivalents, and a $230 million increase in investment securities. On the funding side, deposits increased $1.7 billion (46%) over September 30, 2020, while total borrowings decreased $262 million due to the early repayment of PPPLF funding given the strong core deposit base. Stockholders’ equity increased $191 million from September 30, 2020, primarily due to common stock issued in the Mackinac acquisition and net income, partially offset by stock repurchases over the year and negative net fair value investment changes.

Loans
In addition to the discussion that follows, see also Note 6, “Loans, Allowance for Credit Losses - Loans, and Credit Quality,” in the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures on loans. For additional information regarding the allowance for credit losses and nonperforming assets see also “BALANCE SHEET ANALYSIS – Allowance for Credit Losses - Loans” and “BALANCE SHEET ANALYSIS – Nonperforming Assets.”
Prior to the acquisition of Mackinac, Nicolet serviced a diverse customer base throughout northeastern and central Wisconsin and in Menominee, Michigan. With the acquisition of Mackinac on September 3, 2021, the Company has expanded into Northern Michigan and the Upper Peninsula of Michigan, as well as adding to its presence in upper northeastern Wisconsin. The Company concentrates on originating loans in its local markets and assisting its current loan customers. The loan portfolio is widely diversified by types of borrowers, industry groups, and market areas. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to multiple numbers of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At September 30, 2021, no significant industry concentrations existed in Nicolet’s portfolio in excess of 10% of total loans.
An active credit risk management process is used to ensure that sound and consistent credit decisions are made. The credit management process is regularly reviewed and the process has been modified over the past several years to further strengthen the controls. Factors that are important to managing overall credit quality are sound loan underwriting and administration, systematic monitoring of existing loans and commitments, effective loan review on an ongoing basis, early problem loan identification and remedial action to minimize losses, an appropriate ACL-Loans, and sound nonaccrual and charge-off policies.
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Table 6: Period End Loan Composition
September 30, 2021December 31, 2020September 30, 2020
(in thousands)Amount% of TotalAmount% of TotalAmount% of Total
Commercial & industrial$887,910 25 %$750,718 27 %$735,531 25 %
PPP loans68,347 2 186,016 7 335,236 12 
Owner-occupied CRE697,816 20 521,300 19 499,605 17 
Agricultural112,409 3 109,629 4 111,022 4 
Commercial
1,766,482 50 1,567,663 57 1,681,394 58 
CRE investment662,871 19 460,721 16 475,050 16 
Construction & land development173,971 5 131,283 5 121,647 4 
Commercial real estate
836,842 24 592,004 21 596,697 20 
Commercial-based loans
2,603,324 74 2,159,667 78 2,278,091 78 
Residential construction59,611 2 41,707 1 57,496 2 
Residential first mortgage688,491 19 444,155 16 428,017 15 
Residential junior mortgage130,279 4 111,877 4 112,173 4 
Residential real estate
878,381 25 597,739 21 597,686 21 
Retail & other51,493 1 31,695 1 33,016 1 
Retail-based loans
929,874 26 629,434 22 630,702 22 
Total loans$3,533,198 100 %$2,789,101 100 %$2,908,793 100 %
Total loans ex. PPP loans$3,464,851 98 %$2,603,085 93 %$2,573,557 88 %
As noted in Table 6 above, the loan portfolio at September 30, 2021, was 74% commercial-based and 26% retail-based. Commercial-based loans are considered to have more inherent risk of default than retail-based loans, in part because of the broader list of factors that could impact a commercial borrower negatively. In addition, the commercial balance per borrower is typically larger than that for retail-based loans, implying higher potential losses on an individual customer basis. Credit risk on commercial-based loans is largely influenced by general economic conditions and the resulting impact on a borrower’s operations or on the value of underlying collateral, if any. PPP loans, however, initially added during second quarter 2020, are fully guaranteed by the SBA, warranting no credit loss provisions.
At September 30, 2021, loans were $3.5 billion, $744 million (27%) higher than December 31, 2020, largely due to the acquisition of Mackinac, which added loans of $930 million at acquisition, partly offset by the transfer of $177 million of loans to other assets held for sale in anticipation of the previously announced sale of the Birmingham, Michigan branch. Commercial-based loans of $2.6 billion increased $444 million since December 31, 2020, including a $118 million decrease in the net carrying value of PPP loans (with the additional $160 million from the latest round of PPP loans, more than offset by continued PPP loan forgiveness). Commercial and industrial loans continue to be the largest segment of Nicolet’s portfolio and represented 25% of the total portfolio at September 30, 2021.
Residential real estate loans of $878 million grew $281 million (47%) from year-end 2020, to represent 25% of total loans at September 30, 2021. Residential first mortgage loans include conventional first-lien home mortgages, while residential junior mortgage real estate loans consist mainly of home equity lines and term loans secured by junior mortgage liens. As part of its management of originating residential mortgage loans, the vast majority of Nicolet’s long-term, fixed-rate residential real estate mortgage loans are sold in the secondary market with servicing rights retained. Nicolet’s mortgage loans are typically of high quality and have historically had low net charge-off rates.
Retail and other loans were up $20 million from year-end 2020, and represented approximately 1% of the total loan portfolio, and include predominantly short-term and other personal installment loans not secured by real estate.

Allowance for Credit Losses - 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 the allowance for credit losses.
Credit risks within the loan portfolio are inherently different for each loan type as summarized under “BALANCE SHEET ANALYSIS — Loans.” A discussion of the loan portfolio credit risk can be found in the “Loans” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2020 Annual Report on Form 10-K. Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and ongoing review of loan payment performance. Active asset quality administration, including early problem loan identification and timely resolution of problems, aids in the management of credit risk and minimization of loan losses. For additional information regarding nonperforming assets see also “BALANCE SHEET ANALYSIS – Nonperforming Assets.”
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The ACL-Loans represents management’s estimate of expected credit losses in the Company’s loan portfolio at the balance sheet date. To assess the appropriateness of the ACL-Loans, an allocation methodology is applied by Nicolet which focuses on evaluation of qualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to specific loans; (ii) management’s ongoing review and grading of the loan portfolio; (iii) consideration of historical loan loss and delinquency experience on each portfolio segment; (iv) trends in past due and nonperforming loans; (v) the risk characteristics of the various loan segments; (vi) changes in the size and character of the loan portfolio; (vii) concentrations of loans to specific borrowers or industries; (viii) existing economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect expected credit losses. Assessing these numerous factors involves significant judgment; therefore, management considers the ACL-Loans a critical accounting policy.
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. Second, management allocates the ACL-Loans with historical loss rates by loan segment. The loss factors are measured on a quarterly basis and applied to each loan segment based on current loan balances and projected for their expected remaining life. Next, management allocates ACL-Loans using the qualitative factors mentioned above. Consideration is given to those current qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the historical loss experience of each loan segment. Lastly, management considers reasonable and supportable forecasts to assess the collectability of future cash flows.
At September 30, 2021, the ACL-Loans was $38.4 million (representing 1.09% of period end loans and 1.11% of period end loans excluding PPP loans) compared to $32.2 million at December 31, 2020 and $31.4 million at September 30, 2020. The change in the ACL-Loans from year-end 2020 was mostly due to the Mackinac acquisition, including $4.0 million of provision added for the Day 2 allowance and $1.9 million related to purchased credit deteriorated loans. The increase in the ACL-Loans from September 30, 2020 was also largely due to the Mackinac acquisition. Net charge-offs (0.01% of average loans, annualized) remain negligible. The components of the ACL-Loans are detailed further in Table 7 below.
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Table 7: Allowance for Credit Losses - Loans
Nine Months EndedYear Ended
(in thousands)September 30, 2021September 30, 2020December 31, 2020
ACL-Loans:
Balance at beginning of period$32,173 $13,972 $13,972 
Adoption of CECL— 8,488 8,488 
Initial PCD ACL— 797 797 
Total impact for adoption of CECL— 9,285 9,285 
ACL on PCD loans acquired1,896 — — 
Provision for credit losses4,500 9,000 10,300 
Charge-offs(436)(1,002)(1,689)
Recoveries266 133 305 
Net (charge-offs) recoveries(170)(869)(1,384)
Balance at end of period$38,399 $31,388 $32,173 
Net loan (charge-offs) recoveries:
Commercial & industrial$(31)$(512)$(692)
Owner-occupied CRE— (257)(449)
Agricultural(48)— — 
CRE investment(2)(20)(190)
Construction & land development— — — 
Residential construction— — — 
Residential first mortgage(34)7 9 
Residential junior mortgage4 18 67 
Retail & other(59)(105)(129)
Total net (charge-offs) recoveries$(170)$(869)$(1,384)
Ratios:
ACL-Loans to total loans1.09 %1.08 %1.15 %
ACL-Loans to total loans ex. PPP loans1.11 %1.22 %1.24 %
Net charge-offs to average loans, annualized0.01 %0.04 %0.05 %
Net charge-offs to average loans ex. PPP loans, annualized0.01 %0.05 %0.05 %

Nonperforming Assets
As part of its overall credit risk management process, management is committed to an aggressive problem loan identification philosophy. This philosophy has been implemented through the ongoing monitoring and review of all pools of risk in the loan portfolio to ensure that problem loans are identified early and the risk of loss is minimized. Management continues to actively work with customers and monitor credit risk from the ongoing economic disruptions surrounding the COVID-19 pandemic. Since the pandemic started, approximately 1,000 loans were provided temporary payment modifications, and as of September 30, 2021, only 2 loans remain under temporary payment modification structure. In addition, at September 30, 2021, 14 loans with a current balance of $5 million have been classified as troubled debt restructurings (included in Table 8 below), with $2 million reflected as performing troubled debt restructurings and the remainder in nonaccrual). See also Note 6, “Loans, Allowance for Credit Losses - Loans, and Credit Quality” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for further disclosures on credit quality. For additional information see also “BALANCE SHEET ANALYSIS – Loans” and “BALANCE SHEET ANALYSIS – Allowance for Credit Losses-Loans.”
Nonperforming loans are considered one indicator of potential future loan losses. Nonperforming loans are defined as nonaccrual loans and loans 90 days or more past due but still accruing interest. Loans are generally placed on nonaccrual status when contractually past due 90 days or more as to interest or principal payments. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on loans, it is management’s practice to place such loans on nonaccrual status immediately. Nonperforming assets include nonperforming loans and other real estate owned (“OREO”). At September 30, 2021, nonperforming assets were $21 million, comprised of $17 million of nonaccrual loans and $4 million of OREO, and represented 0.33% of total assets, compared to $13 million or 0.29% of total assets at December 31, 2020. The increase in nonperforming assets was largely due to the acquisition of Mackinac.
The level of potential problem loans is another predominant factor in determining the relative level of risk in the loan portfolio and in determining the 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
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which might adversely affect the ability of the borrower to comply with present repayment terms. The decision of management to include performing loans in potential problem loans does not necessarily mean that Nicolet expects losses to occur, but that management recognizes a higher degree of risk associated with these loans. The loans that have been reported as potential problem loans are predominantly commercial-based loans covering a diverse range of businesses and real estate property types. Potential problem loans were $13 million (0.4% of loans) and $21 million (0.7% of loans) at September 30, 2021 and December 31, 2020, respectively. Potential problem loans require a heightened management review of the pace at which a credit may deteriorate, the duration of asset quality stress, and uncertainty around the magnitude and scope of economic stress that may be felt by Nicolet’s customers and on underlying real estate values.
Table 8: Nonperforming Assets
(in thousands)September 30, 2021December 31, 2020September 30, 2020
Nonperforming loans:
Commercial & industrial$1,778 $2,646 $3,011 
Owner-occupied CRE2,990 1,869 2,471 
Agricultural1,782 1,830 2,297 
Commercial6,550 6,345 7,779 
CRE investment4,249 1,488 911 
Construction & land development1,093 327 533 
Commercial real estate5,342 1,815 1,444 
Commercial-based loans11,892 8,160 9,223 
Residential construction— — — 
Residential first mortgage4,495 823 1,312 
Residential junior mortgage232 384 411 
Residential real estate4,727 1,207 1,723 
Retail & other96 88 51 
Retail-based loans
4,823 1,295 1,774 
Total nonaccrual loans
16,715 9,455 10,997 
Accruing loans past due 90 days or more— — — 
Total nonperforming loans
$16,715 $9,455 $10,997 
Nonaccrual loans (included above) covered by SBA guarantee$1,729 $1,265 $(1,172)
OREO:
Commercial real estate owned$1,219 $— $— 
Residential real estate owned355 — — 
Bank property real estate owned2,895 3,608 1,000 
Total OREO
4,469 3,608 1,000 
Total nonperforming assets
$21,184 $13,063 $11,997 
Performing troubled debt restructurings$2,103 $2,120 $— 
Ratios:
Nonperforming loans to total loans0.47 %0.34 %0.38 %
Nonperforming assets to total loans plus OREO0.60 %0.47 %0.41 %
Nonperforming assets to total assets0.33 %0.29 %0.25 %
ACL-Loans to nonperforming loans230 %340 %285 %

Deposits
Deposits represent Nicolet’s largest source of funds. The deposit levels have been heavily influenced by the ongoing economic uncertainty, government stimulus payments and other directives related to the pandemic, which reduced spending and increased liquidity of consumers and businesses, as well as by PPP loan proceeds retained on deposit by corporate borrowers. In addition, Mackinac added deposits of $1.4 billion at acquisition. The deposit composition is presented in Table 9 below.
Total deposits of $5.4 billion at September 30, 2021, increased $1.5 billion (39%) from December 31, 2020, largely due to the Mackinac acquisition. Core customer deposits increased $1.5 billion, while brokered deposits increased $32 million. The growth in deposits was also aided by additional government stimulus payments and new PPP funds on deposit.
Compared to September 30, 2020, total deposits increased $1.7 billion (46%), also largely due to the Mackinac acquisition. Customer core deposits increased $1.7 billion, while brokered deposits grew $30 million. The increase in total deposits since September 30, 2020 was also influenced by the liquidity objectives of consumers and businesses in very uncertain times noted above.
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Table 9: Period End Deposit Composition
September 30, 2021December 31, 2020September 30, 2020
(in thousands)Amount% of TotalAmount% of TotalAmount% of Total
Noninterest-bearing demand$1,852,119 34 %$1,212,787 31 %$1,135,384 30 %
Money market and interest-bearing demand2,154,557 40 %1,551,325 40 %1,432,667 39 %
Savings775,281 14 %521,814 13 %480,745 13 %
Time646,817 12 %624,473 16 %664,012 18 %
Total deposits
$5,428,774 100 %$3,910,399 100 %$3,712,808 100 %
Brokered transaction accounts$152,858 3 %$46,340 1 %$35,975 1 %
Brokered and listed time deposits204,202 4 %278,521 7 %290,827 8 %
Total brokered deposits
$357,060 7 %$324,861 8 %$326,802 9 %
Customer transaction accounts$4,629,099 85 %$3,239,586 83 %$3,012,821 81 %
Customer time deposits442,615 8 %345,952 9 %373,185 10 %
Total customer deposits (core)
$5,071,714 93 %$3,585,538 92 %$3,386,006 91 %

Lending-Related Commitments
As of September 30, 2021 and December 31, 2020, Nicolet had the following off-balance sheet lending-related commitments.
Table 10: Commitments
(in thousands)September 30, 2021December 31, 2020
Commitments to extend credit$1,111,156 $950,287 
Financial standby letters of credit13,947 8,241 
Performance standby letters of credit8,821 8,366 
Interest rate lock commitments to originate residential mortgage loans held for sale (included above in commitments to extend credit) and forward commitments to sell residential mortgage loans held for sale are considered derivative instruments (“mortgage derivatives”) and the notional amounts represented $78 million and $320,000, respectively, at September 30, 2021. In comparison, interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans held for sale represented $113 million and $20 million, respectively, at December 31, 2020. The net fair value of these mortgage derivatives combined was a gain of $104,000 at September 30, 2021 compared to a loss of $244,000 at December 31, 2020.

Liquidity Management
Liquidity management refers to the ability to ensure that cash is available in a timely and cost-effective manner to meet cash flow requirements of depositors and borrowers and to meet other commitments as they fall due, including the ability to service debt, invest in subsidiaries, repurchase common stock, pay dividends to shareholders (if any), and satisfy other operating requirements.
Given the stable core customer deposit base, fairly consistent patterns of activity in the core deposit base (including extra growth in core deposits during the pandemic as previously discussed), and the minimal use of capacity available in numerous non-core funding sources, Nicolet’s liquidity levels and resources have been sufficient to fund loans, accommodate deposit trends and cycles, and to meet other cash needs as necessary. At the onset of the pandemic, but prior to the announcement of government stimulus, management initiated preparatory actions to increase on-balance sheet liquidity to ensure we could meet customer needs. These actions proved later to not be necessary, leading us to reduce non-deposit funding. In addition to this on-balance sheet liquidity build, remaining liquidity facilities continue to provide capacity and flexibility in an uncertain time.
Funds are available from a number of basic banking activity sources including, but not limited to, the core deposit base; repayment and maturity of loans; investment securities calls, maturities, and sales; and procurement of additional brokered deposits or other wholesale funding. At September 30, 2021, approximately 20% of the $765 million investment securities portfolio was pledged to secure public deposits, as applicable, and for other purposes as required by law. Additional funding sources at September 30, 2021, consist of $175 million of available and unused Federal funds lines, available borrowing capacity at the FHLB of $219 million, and borrowing capacity in the brokered deposit market.
In consideration of the funds availability for the Bank and the current high levels of cash in a very low interest rate environment, management has taken prudent pricing actions on deposits and loans, as well as actions to reduce non-deposit funding. Brokered deposits have matured without renewal and selected FHLB advances were repaid early.
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Management is committed to the Parent Company being a source of strength to the Bank and its other subsidiaries, and therefore, regularly evaluates capital and liquidity positions of the Parent Company in light of current and projected needs, growth or strategies. The Parent Company uses cash for normal expenses, debt service requirements, and when opportune, for common stock repurchases, repayment of debt, or investment in other strategic actions such as mergers or acquisitions. At September 30, 2021, the Parent Company had $85 million in cash. Additional cash sources, among others, available to the Parent Company include its $10 million available and unused line of credit, and access to the public or private markets to issue new equity, subordinated notes or other debt. On July 7, 2021, Nicolet completed the private placement of $100 million in fixed-to-floating rate subordinated notes (the “Notes”) due in 2031. (See Note 8, “Short and Long-Term Borrowings” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional information on the new Notes). Dividends from the Bank and, to a lesser extent, stock option exercises, also represent significant sources of cash flows for the Parent Company.
Cash and cash equivalents at September 30, 2021 and December 31, 2020 were $1.4 billion and $803 million, respectively. The increase in cash and cash equivalents since year-end 2020 included $52 million net cash provided by operating activities (mostly earnings), $267 million net cash provided by investing activities (with net cash received in the Mackinac acquisition exceeding cash payments to fund loan growth and net investment purchases), and $228 million net cash provided by financing activities (mostly deposit growth and proceeds received from the subordinated notes issuance). Management believes its liquidity resources were sufficient as of September 30, 2021 to fund loans, accommodate deposit cycles and trends, and to meet other cash needs as necessary in these unsettled times.

Interest Rate Sensitivity Management and Impact of Inflation
A reasonable balance between interest rate risk, credit risk, liquidity risk and maintenance of yield, is highly important to Nicolet’s business success and profitability. As an ongoing part of its financial strategy and risk management, Nicolet attempts to understand and manage the impact of fluctuations in market interest rates on its net interest income. The consolidated balance sheet consists mainly of interest-earning assets (loans, investments and cash) which are primarily funded by interest-bearing liabilities (deposits and other borrowings). Such financial instruments have varying levels of sensitivity to changes in market rates of interest. Market rates are highly sensitive to many factors beyond our control, including but not limited to general economic conditions and policies of governmental and regulatory authorities. Our operating income and net income depends, to a substantial extent, on “rate spread” (i.e., the difference between the income earned on loans, investments and other earning assets and the interest expense paid to obtain deposits and other funding liabilities).
Asset-liability management policies establish guidelines for acceptable limits on the sensitivity to changes in interest rates on earnings and market value of assets and liabilities. Such policies are set and monitored by management and the board of directors’ Asset and Liability Committee.
To understand and manage the impact of fluctuations in market interest rates on net interest income, Nicolet measures its overall interest rate sensitivity through a net interest income analysis, which calculates the change in net interest income in the event of hypothetical changes in interest rates under different scenarios versus a baseline scenario. Such scenarios can involve static balance sheets, balance sheets with projected growth, parallel (or non-parallel) yield curve slope changes, immediate or gradual changes in market interest rates, and one-year or longer time horizons. The simulation modeling uses assumptions involving market spreads, prepayments of rate-sensitive instruments, renewal rates on maturing or new loans, deposit retention rates, and other assumptions.
Among other scenarios, Nicolet assessed the impact on net interest income in the event of a gradual +/-100 bps and +/-200 bps change in market rates (parallel to the change in prime rate) over a one-year time horizon to a static (flat) balance sheet. The results provided include the liquidity measures mentioned earlier and reflect the changed interest rate environment, partly in response to the pandemic. The interest rate scenarios are used for analytical purposes only and do not necessarily represent management’s view of future market interest rate movements. Based on financial data at September 30, 2021 and December 31, 2020, the projected changes in net interest income over a one-year time horizon, versus the baseline, are presented in Table 11 below. The results are within Nicolet’s guidelines of not greater than -10% for +/- 100 bps and not greater than -15% for +/- 200 bps and given the relatively short nature of the Company’s balance sheet, reflect a largely unchanged risk position as expected.
Table 11: Interest Rate Sensitivity
September 30, 2021December 31, 2020
200 bps decrease in interest rates(0.3)%(0.8)%
100 bps decrease in interest rates(0.3)%(0.8)%
100 bps increase in interest rates1.3 %4.0 %
200 bps increase in interest rates2.8 %8.1 %
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Actual results may differ from these simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and their impact on customer behavior and management strategies.
The effect of inflation on a financial institution differs significantly from the effect on an industrial company. While a financial institution’s operating expenses, particularly salary and employee benefits, are affected by general inflation, the asset and liability structure of a financial institution consists largely of monetary items. Monetary items, such as cash, investments, loans, deposits and other borrowings, are those assets and liabilities which are or will be converted into a fixed number of dollars regardless of changes in prices. As a result, changes in interest rates have a more significant impact on a financial institution’s performance than does general inflation.

Capital
Management regularly reviews the adequacy of its capital to ensure that sufficient capital is available for current and future needs and is in compliance with regulatory guidelines. 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 September 30, 2021, the Bank’s regulatory capital ratios qualify the Bank as well-capitalized under the prompt-corrective action framework. This strong base of capital has allowed Nicolet to be opportunistic in the current environment and in strategic growth. A summary of Nicolet’s and the Bank’s regulatory capital amounts and ratios, as well as selected capital metrics are presented in the following table.
Table 12: Capital
At or for the Nine Months Ended
At or for the
Year Ended
($ in thousands)September 30, 2021December 31, 2020
Company Stock Repurchases: *
Common stock repurchased during the period (dollars)$33,680 $40,544 
Common stock repurchased during the period (full shares)447,898 646,748 
Company Risk-Based Capital:
Total risk-based capital$615,052 $406,325 
Tier 1 risk-based capital488,620 385,068 
Common equity Tier 1 capital464,355 361,162 
Total capital ratio14.6 %12.9 %
Tier 1 capital ratio11.6 %12.2 %
Common equity tier 1 capital ratio11.0 %11.4 %
Tier 1 leverage ratio9.6 %9.0 %
Bank Risk-Based Capital:
Total risk-based capital$515,152 $351,081 
Tier 1 risk-based capital487,622 329,824 
Common equity Tier 1 capital487,622 329,824 
Total capital ratio12.3 %11.2 %
Tier 1 capital ratio11.6 %10.5 %
Common equity tier 1 capital ratio11.6 %10.5 %
Tier 1 leverage ratio9.8 %7.8 %
* Reflects common stock repurchased under board of director authorizations for the common stock repurchase program.
In managing capital for optimal return, we evaluate capital sources and uses, pricing and availability of our stock in the market, and alternative uses of capital (such as the level of organic growth or acquisition opportunities) in light of strategic plans. During the first nine months of 2021, $34 million was utilized to repurchase and cancel 447,898 shares of common stock, at an average per share cost of $75.20, pursuant to our common stock repurchase program. On August 17, 2021, Nicolet’s board authorized an increase to the program of $40 million. As a result, at September 30, 2021, there remained $47 million authorized under this repurchase program, as modified, to be utilized from time-to-time to repurchase shares in the open market, through block transactions or in private transactions.
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Critical Accounting Policies
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Estimates that are particularly susceptible to significant change include the valuation of loan acquisition transactions, as well as the determination of the allowance for credit losses and income taxes. A discussion of these policies can be found in the “Critical Accounting Policies” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2020 Annual Report on Form 10-K. There have been no changes in the Company’s determination of critical accounting policies since December 31, 2020.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See section “Interest Rate Sensitivity Management and Impact of Inflation” within Management’s Discussion and Analysis of Financial Condition and Results of Operations under Part I, Item 2.

ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management, under the supervision, and with the participation, of our President and Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act pursuant to Exchange Act Rule 13a-15). Based upon, and as of the date of such evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective.
There have been no changes in the Company’s internal controls or, to the Company’s knowledge, in other factors during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
We and our subsidiaries may be involved from time to time in various routine legal proceedings incidental to our respective businesses. Neither we nor any of our subsidiaries are currently engaged in any legal proceedings that are expected to have a material adverse effect on our results of operations or financial position.

ITEM 1A. RISK FACTORS
There have been no material changes in the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Following are Nicolet’s monthly common stock purchases during the third quarter of 2021.
Total Number of
Shares Purchased (a)
Average Price
Paid per Share		Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans
or Programs (b)
(#)($)(#)(#)
Period
July 1 – July 31, 202183,585 $70.95 83,585 
August 1 – August 31, 2021151,916 $74.68 150,009 
September 1 – September 30, 202175 $— — 
Total235,576 $73.35 233,594 630,500 
(a)During third quarter 2021, the Company repurchased 75 common shares for minimum tax withholding settlements on restricted stock and 1,907 common shares were repurchased to satisfy the exercise price and / or tax withholding requirements of stock options. These purchases do not count against the maximum number of shares that may yet be purchased under the board of directors' authorization.
(b)During third quarter 2021, Nicolet utilized $17.1 million to repurchase and cancel 233,594 shares of common stock pursuant to our common stock repurchase program. On August 17, 2021, Nicolet’s board authorized an increase to the program of $40 million. As a result, at September 30, 2021, approximately $47 million remained available under this common stock repurchase program, or approximately 630,500 shares of common stock (based upon the closing stock price of $74.18 on September 30, 2021).
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
The following exhibits are filed herewith:
Exhibit
Number		Description
2.1
2.2
4.1
4.2
10.1
10.2
31.1
31.2
32.1
32.2
101.INS
The XBRL Instance Document does not appear in the Interactive Date File because its XBRL tags are embedded within the Inline XBRL document (4)
101.SCHInline XBRL Taxonomy Extension Schema Document
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document
101.LABInline XBRL Taxonomy Extension Label Linkbase Document
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
(1) Incorporated by reference to the exhibit of the same number in the Registrant’s Current Report on Form 8-K filed on April 12, 2021.
(2) Incorporated by reference to Exhibit 2.1 in the Registrant’s Current Report on Form 8-K filed on June 22, 2021.
(3) Incorporated by reference to the exhibit of the same number in the Registrant’s Current Report on Form 8-K filed on July 7, 2021.
(4) Includes the following financial information included in the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial Statements.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NICOLET BANKSHARES, INC.
October 29, 2021/s/ Michael E. Daniels
Michael E. Daniels
President and Chief Executive Officer
October 29, 2021/s/ H. Phillip Moore, Jr.
H. Phillip Moore, Jr.
Chief Financial Officer

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