NICOLET BANKSHARES INC - Quarter Report: 2023 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, 2023

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

For the transition period from to

Commission file number: 001-37700

NICOLET BANKSHARES, INC.

(Exact Name of Registrant as Specified in its Charter)

Wisconsin

47-0871001

(State or Other Jurisdiction of Incorporation or Organization)

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

111 North Washington Street

Green Bay,

Wisconsin

54301

(Address of Principal Executive Offices)

(Zip Code)

(920)

430-1400

(Registrant’s Telephone Number, Including Area Code)

N/A

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


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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	NIC	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 31, 2023 there were 14,761,128 shares of $0.01 par value common stock outstanding.

Nicolet Bankshares, Inc.

Quarterly Report on Form 10-Q

September 30, 2023

TABLE OF CONTENTS


			PAGE
PART I	FINANCIAL INFORMATION

	Item 1.	Financial Statements:

		Consolidated Balance Sheets	3

		Consolidated Statements of Income	4

		Consolidated Statements of Comprehensive Income (Loss)	5

		Consolidated Statements of Stockholders’ Equity	6

		Consolidated Statements of Cash Flows	7

		Notes to Unaudited Consolidated Financial Statements	8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50

	Item 4.	Controls and Procedures	50

PART II	OTHER INFORMATION

	Item 1.	Legal Proceedings	51

	Item 1A.	Risk Factors	51

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51

	Item 3.	Defaults Upon Senior Securities	51

	Item 4.	Mine Safety Disclosures	51

	Item 5.	Other Information	52

	Item 6.	Exhibits	52

		Signatures	53

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS:

NICOLET BANKSHARES, INC.

Consolidated Balance Sheets

(In thousands, except share and per share data)


	September 30, 2023		December 31, 2022
	(Unaudited)		(Audited)
Assets
Cash and due from banks	$	109,414	$	121,211
Interest-earning deposits	436,466		33,512

Cash and cash equivalents	545,880		154,723
Certificates of deposit in other banks	7,598		12,518
Securities available for sale (“AFS”), at fair value	793,826		917,618
Securities held to maturity (“HTM”), at amortized cost	—		679,128
Other investments	58,367		65,286
Loans held for sale	6,500		1,482

Loans	6,239,257		6,180,499
Allowance for credit losses - loans (“ACL-Loans”)	(63,160)		(61,829)
Loans, net	6,176,097		6,118,670
Premises and equipment, net	117,744		108,956
Bank owned life insurance (“BOLI”)	168,223		165,137
Goodwill and other intangibles, net	396,208		402,438
Accrued interest receivable and other assets	145,719		138,013
Total assets	$	8,416,162	$	8,763,969

Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing demand deposits	$	2,020,074	$	2,361,816
Interest-bearing deposits	5,162,314		4,817,105
Total deposits	7,182,388		7,178,921
Short-term borrowings	—		317,000
Long-term borrowings	197,754		225,342

Accrued interest payable and other liabilities	61,559		70,177
Total liabilities	7,441,701		7,791,440

Stockholders’ Equity:
Common stock	147		147
Additional paid-in capital	626,348		621,988
Retained earnings	431,317		407,864
Accumulated other comprehensive income (loss)	(83,351)		(57,470)
Total stockholders’ equity	974,461		972,529
Total liabilities and stockholders’ equity	$	8,416,162	$	8,763,969

Preferred shares authorized (no par value)	10,000,000		10,000,000
Preferred shares issued and outstanding	—		—
Common shares authorized (par value $0.01 per share)	30,000,000		30,000,000
Common shares outstanding	14,757,565		14,690,614
Common shares issued	14,818,155		14,764,104

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.

Consolidated Statements of Income

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Interest income:
Loans, including loan fees	$	87,657	$	63,060	$	250,890	$	167,313
Investment securities:
Taxable	4,351		5,350		13,445		15,612
Tax-exempt	1,424		1,181		4,637		2,503
Other interest income	6,452		1,127		10,345		2,734
Total interest income	99,884		70,718		279,317		188,162
Interest expense:
Deposits	34,964		4,638		89,241		9,240
Short-term borrowings	474		594		4,794		622
Long-term borrowings	2,972		2,496		8,048		6,431
Total interest expense	38,410		7,728		102,083		16,293
Net interest income	61,474		62,990		177,234		171,869
Provision for credit losses	450		8,600		3,990		9,650
Net interest income after provision for credit losses	61,024		54,390		173,244		162,219
Noninterest income:
Wealth management fee income	6,057		5,009		17,439		15,700
Mortgage income, net	2,020		1,728		5,308		7,186
Service charges on deposit accounts	1,492		1,589		4,501		4,602
Card interchange income	3,321		3,012		9,685		8,543
BOLI income	1,090		966		3,363		2,667
Deferred compensation plan asset market valuations	(457)		(571)		988		(2,354)
LSR income, net	1,108		(517)		3,398		(1,042)
Asset gains (losses), net	31		(46)		(38,755)		2,870
Other income	1,879		1,830		5,611		4,902
Total noninterest income	16,541		13,000		11,538		43,074
Noninterest expense:
Personnel	23,944		24,136		72,172		65,008
Occupancy, equipment and office	9,027		7,641		26,655		21,476
Business development and marketing	1,869		2,281		5,936		6,169
Data processing	4,643		3,664		12,849		10,647
Intangibles amortization	1,986		1,628		6,230		4,399
FDIC assessments	1,500		480		3,049		1,440
Merger-related expense	—		519		189		1,172
Other expense	2,769		2,218		8,490		6,344
Total noninterest expense	45,738		42,567		135,570		116,655
Income before income tax expense	31,827		24,823		49,212		88,638
Income tax expense	14,669		6,313		18,357		21,979
Net income	$	17,158	$	18,510	$	30,855	$	66,659
Earnings per common share:
Basic	$	1.16	$	1.33	$	2.10	$	4.88
Diluted	$	1.14	$	1.29	$	2.05	$	4.72
Weighted average common shares outstanding:
Basic	14,740,319		13,890,066		14,715,588		13,647,973
Diluted	15,099,622		14,310,275		15,044,259		14,126,772

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.

Consolidated Statements of Comprehensive Income (Loss)

(In thousands) (Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net income	$	17,158	$	18,510	$	30,855	$	66,659
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities AFS:
Net unrealized holding gains (losses)	(21,645)		(26,162)		(12,244)		(89,630)
Net realized (gains) losses included in income	(11)		—		337		(15)
Reclassification adjustment for securities transferred from held to maturity to available for sale	—		—		(20,434)		—
Income tax (expense) benefit	3,574		7,064		6,460		24,204
Total other comprehensive income (loss)	(18,082)		(19,098)		(25,881)		(65,441)
Comprehensive income (loss)	$	(924)	$	(588)	$	4,974	$	1,218

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.

Consolidated Statements of Stockholders’ Equity

(In thousands) (Unaudited)



	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
Balances at June 30, 2023	$	147	$	624,897	$	417,863	$	(65,269)	$	977,638
Comprehensive income:
Net income, three months ended September 30, 2023	—		—		17,158		—		17,158
Other comprehensive income (loss)	—		—		—		(18,082)		(18,082)

Stock-based compensation expense	—		1,399		—		—		1,399
Cash dividends on common stock, $0.25 per share	—		—		(3,704)		—		(3,704)
Exercise of stock options, net	—		(146)		—		—		(146)
Issuance of common stock	—		198		—		—		198


Balances at September 30, 2023	$	147	$	626,348	$	431,317	$	(83,351)	$	974,461
Balances at June 30, 2022	$	134	$	520,741	$	361,753	$	(43,241)	$	839,387
Comprehensive income:
Net income, three months ended September 30, 2022	—		—		18,510		—		18,510
Other comprehensive income (loss)	—		—		—		(19,098)		(19,098)
Issuance of common stock in acquisition	13		98,136		—		—		98,149
Stock-based compensation expense	—		1,329		—		—		1,329
Exercise of stock options, net	—		1		—		—		1
Issuance of common stock	—		185		—		—		185


Balances at September 30, 2022	$	147	$	620,392	$	380,263	$	(62,339)	$	938,463
Balances at December 31, 2022	$	147	$	621,988	$	407,864	$	(57,470)	$	972,529
Comprehensive income:
Net income, nine months ended September 30, 2023	—		—		30,855		—		30,855
Other comprehensive income (loss)	—		—		—		(25,881)		(25,881)

Stock-based compensation expense	—		4,829		—		—		4,829
Cash dividends on common stock, $0.50 per share	—		—		(7,402)		—		(7,402)
Exercise of stock options, net	1		453		—		—		454
Issuance of common stock	—		598		—		—		598
Purchase and retirement of common stock	(1)		(1,520)		—		—		(1,521)

Balances at September 30, 2023	$	147	$	626,348	$	431,317	$	(83,351)	$	974,461
Balances at December 31, 2021	$	140	$	575,045	$	313,604	$	3,102	$	891,891
Comprehensive income:
Net income, nine months ended September 30, 2022	—		—		66,659		—		66,659
Other comprehensive income (loss)	—		—		—		(65,441)		(65,441)
Issuance of common stock in acquisition	13		98,136		—		—		98,149
Stock-based compensation expense	—		5,282		—		—		5,282
Exercise of stock options, net	1		2,077		—		—		2,078
Issuance of common stock	—		557		—		—		557
Purchase and retirement of common stock	(7)		(60,705)		—		—		(60,712)


Balances at September 30, 2022	$	147	$	620,392	$	380,263	$	(62,339)	$	938,463

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.

Consolidated Statements of Cash Flows (Unaudited)


(In thousands)	Nine Months Ended September 30,
	2023		2022
Cash Flows From Operating Activities:
Net income	$	30,855	$	66,659
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation, amortization, and accretion	13,163		16,994
Provision for credit losses	3,990		9,650
Increase in cash surrender value of life insurance	(3,386)		(2,551)
Stock-based compensation expense	4,829		5,282
Asset (gains) losses, net	38,755		(2,870)
Gain on sale of loans held for sale, net	(3,230)		(4,520)
Net change due to:
Proceeds from sale of loans held for sale	108,991		188,093
Origination of loans held for sale	(111,883)		(182,962)
Accrued interest receivable and other assets	(3,263)		7,719
Accrued interest payable and other liabilities	(8,618)		(14,145)
Net cash provided by (used in) operating activities	70,203		87,349
Cash Flows From Investing Activities:
Net (increase) decrease in loans	(55,042)		(537,001)
Net (increase) decrease in certificates of deposit in other banks	4,920		8,419
Purchases of securities AFS	(20,220)		(8,623)
Purchases of securities HTM	—		(56,479)
Proceeds from sales of securities AFS	28,992		23,984
Proceeds from sales of securities HTM	460,051		—
Proceeds from calls and maturities of securities AFS	256,151		70,781
Proceeds from calls and maturities of securities HTM	2,916		21,378
Purchases of other investments	(12,934)		(30,327)
Proceeds from sales of other investments	18,939		4,014

Proceeds from redemption of BOLI	312		578
Net (increase) decrease in premises and equipment	(15,104)		(7,965)
Net (increase) decrease in other real estate and other assets	1,211		9,785
Net cash (paid) received in branch sale	—		147,833
Net cash (paid) received in business combination	—		(28,221)
Net cash provided by (used in) investing activities	670,192		(381,844)
Cash Flows From Financing Activities:
Net increase (decrease) in deposits	3,633		68,428
Net increase (decrease) in short-term borrowings	(317,000)		147,134

Repayments of long-term borrowings	(28,000)		(20,000)
Purchase and retirement of common stock	(1,521)		(60,712)
Cash dividends paid on common stock	(7,402)		—

Proceeds from issuance of common stock	598		557
Proceeds from exercise of stock options	454		2,078

Net cash provided by (used in) financing activities	(349,238)		137,485
Net increase (decrease) in cash and cash equivalents	391,157		(157,010)
Cash and cash equivalents:
Beginning	154,723		595,292
Ending *	$	545,880	$	438,282
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	99,486	$	19,785
Cash paid for taxes	22,920		25,660
Transfer of securities from HTM to AFS	177,727		—
Transfer of loans and bank premises to other real estate owned	873		432
Capitalized mortgage servicing rights	1,104		2,127
Acquisitions:
Fair value of assets acquired	$	—	$	1,121,000
Fair value of liabilities assumed	—		1,034,000
Net assets acquired	—		87,000

* There was no restricted cash in cash and cash equivalents at either September 30, 2023 or September 30, 2022.

See accompanying notes to unaudited consolidated financial statements.

NICOLET BANKSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

Note 1 – Basis of Presentation

General

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

These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been omitted or abbreviated. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Critical Accounting Policies and Estimates

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

There have been no material changes or developments with respect to the assumptions or methodologies that the Company uses when applying 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, 2022.

Recent Accounting Pronouncements Adopted

In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures. This ASU eliminated the accounting guidance for TDRs by creditors and enhanced the disclosure requirements for loan modifications to borrowers experiencing financial difficulty. The ASU also requires public business entities to expand the vintage disclosures to include gross charge-offs by year of origination. The updated guidance is effective for fiscal years beginning after December 15, 2022. Adoption of this ASU did not have a material impact on the Company’s consolidated financial statements; however, it resulted in new disclosures. See Note 6 for the new disclosures.

Future Accounting Pronouncements

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

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

Reclassifications

Certain amounts in the 2022 consolidated financial statements have been reclassified to conform to the 2023 presentation. These reclassifications were not material and did not impact previously reported net income or comprehensive income.

Note 2 – Acquisition

Charter Bankshares, Inc. (“Charter”): On August 26, 2022, Nicolet completed its merger with Charter, pursuant to the Agreement and Plan of Merger dated March 29, 2022, at which time Charter merged with and into Nicolet, and Charter Bank, the wholly owned bank subsidiary of Charter, was merged with and into Nicolet National Bank (the “Bank”), the wholly owned bank subsidiary of Nicolet. In the merger, Charter stockholders received 15.458 shares of Nicolet common stock and $475 in cash for each share of Charter owned. As a result, Nicolet issued approximately 1.26 million shares of Nicolet common stock for stock consideration of $98 million and cash consideration of $39 million, for a total purchase price of $137 million. With the Charter merger, Nicolet expanded to Western Wisconsin and Minnesota.

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


(In millions, except share data)	Acquired from Charter		Fair Value Adjustments		Estimated Fair Value
Assets Acquired:
Cash and cash equivalents	$	10	$	—	$	10
Investment securities	218		—		218
Loans	848		(21)		827
ACL-Loans	(9)		7		(2)
Premises and equipment	9		1		10
BOLI	29		—		29
Core deposit intangible	—		19		19
Other assets	5		5		10
Total assets	$	1,110	$	11	$	1,121
Liabilities Assumed:
Deposits	$	869	$	1	$	870
Borrowings	161		—		161
Other liabilities	3		—		3
Total liabilities	$	1,033	$	1	$	1,034
Net assets acquired					$	87
Purchase Price:
Nicolet common stock issued (in shares)					1,262,360
Value of Nicolet common stock consideration					$	98
Cash consideration paid					39
Total purchase price					$	137
Goodwill					$	50

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


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

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

Note 3 – Earnings per Common Share

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands, except per share data)	2023		2022		2023		2022
Net income	$	17,158	$	18,510	$	30,855	$	66,659
Weighted average common shares outstanding	14,740		13,890		14,716		13,648
Effect of dilutive common stock awards	360		420		328		479
Diluted weighted average common shares outstanding	15,100		14,310		15,044		14,127
Basic earnings per common share*	$	1.16	$	1.33	$	2.10	$	4.88
Diluted earnings per common share*	$	1.14	$	1.29	$	2.05	$	4.72

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

For the three and nine months ended September 30, 2023, options to purchase approximately 0.1 million and 0.2 million shares, respectively, were excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive. For the three and nine months ended September 30, 2022, options to purchase approximately 0.2 million and 0.1 million shares, respectively, were excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive.

Note 4 – Stock-Based Compensation

The Company may grant stock options and restricted stock under its stock-based compensation plans to certain officers, employees and directors. These plans are administered by a committee of the Board of Directors, and at September 30, 2023, approximately 0.7 million shares were available for grant under these stock-based compensation plans.

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


	Nine Months Ended September 30,
	2023			2022
Dividend yield	1.6		%	—		%
Expected volatility	30		%	30		%
Risk-free interest rate	3.74		%	3.03		%
Expected average life	7 years			7 years
Weighted average per share fair value of options	$	20.94		$	30.99

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


Stock Options	Option Shares Outstanding	Weighted Average Exercise Price		Weighted Average Remaining Life (Years)	Aggregate Intrinsic Value (in thousands)
Outstanding - December 31, 2022	1,853,064	$	59.79
Granted	7,000	64.36
Exercise of stock options *	(115,179)	40.02
Forfeited	(25,000)	84.98
Outstanding - September 30, 2023	1,719,885	$	60.76	5.3	$	20,354
Exercisable - September 30, 2023	1,260,942	$	55.09	4.5	$	20,217

* 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, 2023, 54,517 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, 2023 and 2022 was approximately $3.7 million and $3.3 million, respectively.

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


Restricted Stock	Weighted Average Grant Date Fair Value		Restricted Shares Outstanding
Outstanding - December 31, 2022	$	76.49	73,490
Granted	55.65		11,674
Vested	66.40		(24,574)

Outstanding - September 30, 2023	$	76.57	60,590

The Company recognized approximately $4.2 million and $4.6 million of stock-based compensation expense (included in personnel on the consolidated statements of income) for the nine months ended September 30, 2023 and 2022, respectively, associated with its common stock awards granted to officers and employees. In addition, for the nine months ended September 30, 2023, the Company recognized approximately $0.6 million of director expense (included in other expense on the consolidated statements of income) for restricted stock grants totaling 11,674 shares with immediate vesting to directors, while for the nine months ended September 30, 2022, the Company recognized approximately $0.7 million of director expense for restricted stock grants totaling 8,852 shares with immediate vesting to directors, in each case representing the annual stock retainer fee paid to external board members for that year. As of September 30, 2023, there was approximately $14.0 million of unrecognized compensation cost related to equity award grants, which is expected to be recognized over the remaining vesting period of approximately three years. The Company recognized a tax benefit of approximately $0.5 million and $0.4 million for the nine months ended September 30, 2023 and 2022, respectively, for the tax impact of stock option exercises and vesting of restricted stock.

Note 5 – Securities and Other Investments

Securities

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

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


	September 30, 2023
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities AFS:
U.S. Treasury securities	$	42,190	$	—	$	4,686	$	37,504
U.S. government agency securities	8,293		2		74		8,221
State, county and municipals	387,259		69		45,998		341,330
Mortgage-backed securities	355,906		—		49,497		306,409
Corporate debt securities	111,245		—		10,883		100,362
Total securities AFS	$	904,893	$	71	$	111,138	$	793,826


	December 31, 2022
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities AFS:
U.S. Treasury securities	$	192,116	$	—	$	8,286	$	183,830
U.S. government agency securities	2,133		—		33		2,100
State, county and municipals	433,733		123		35,668		398,188
Mortgage-backed securities	227,650		10		26,728		200,932
Corporate debt securities	140,712		3		8,147		132,568
Total securities AFS	$	996,344	$	136	$	78,862	$	917,618
Securities HTM:
U.S. Treasury securities	$	497,648	$	—	$	35,722	$	461,926
U.S. government agency securities	8,744		46		—		8,790
State, county and municipals	34,874		—		3,349		31,525
Mortgage-backed securities	137,862		—		16,751		121,111
Total securities HTM	$	679,128	$	46	$	55,822	$	623,352

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

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


	Nine Months Ended September 30,
(in thousands)	2023		2022
Securities AFS:
Gross gains	$	268	$	20
Gross losses	(605)		(5)
Gains (losses) on sales of securities AFS, net	$	(337)	$	15
Proceeds from sales of securities AFS	$	28,992	$	23,984
Securities HTM:
Gross gains	$	—	$	—
Gross losses	(37,723)		—
Gains (losses) on sales of securities HTM, net	$	(37,723)	$	—
Proceeds from sales of securities HTM	$	460,051	$	—

All mortgage-backed securities included in the securities portfolio were issued by U.S. government agencies and corporations. Investment securities with a carrying value of $345 million and $883 million, as of September 30, 2023 and December 31, 2022, respectively, were pledged as collateral to secure public deposits and borrowings, as applicable, and for liquidity or other purposes as required by regulation. Accrued interest on investment securities totaled $5 million at both September 30, 2023 and December 31, 2022, and is included in accrued interest receivable and other assets on the consolidated balance sheets.

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


	September 30, 2023
	Less than 12 months				12 months or more				Total
($ in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Number of Securities
Securities AFS:
U.S. Treasury securities	$	—	$	—	$	37,504	$	4,686	$	37,504	$	4,686	4
U.S. government agency securities	5,396		32		1,798		42		7,194		74		10
State, county and municipals	66,415		5,460		263,740		40,538		330,155		45,998		710
Mortgage-backed securities	19,959		268		286,450		49,229		306,409		49,497		451
Corporate debt securities	3,336		223		92,607		10,660		95,943		10,883		67
Total	$	95,106	$	5,983	$	682,099	$	105,155	$	777,205	$	111,138	1,242


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

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

During first quarter 2023, the Company recognized provision expense of $2.3 million related to the expected credit loss on its Signature Bank sub debt investment (acquired in an acquisition), and immediately charged-off the full investment. The Company does not consider its remaining securities AFS with unrealized losses to be attributable to credit-related factors, as the unrealized losses in each category have occurred as a result of changes in noncredit-related factors such as changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration. Furthermore, the Company does not have the intent to sell any of these AFS securities and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost. As of September 30, 2023 and December 31, 2022, no allowance for credit losses on AFS securities was recognized.

The Company evaluated the HTM securities and determined no allowance for credit losses was necessary at December 31, 2022. The U.S. Treasury and U.S. government agency securities are guaranteed by the U.S. government. For the state, county and municipal securities, management considered issuer bond ratings, historical loss rates by bond ratings, whether issuers continue to make timely principal and interest payments per the contractual terms of the investment securities, internal forecasts, and whether or not such investment securities provide insurance, other credit enhancement, or are pre-refunded by the issuers. For the mortgage-backed securities, all such securities were issued by U.S. government agencies and corporations, which are currently explicitly or implicitly guaranteed by the U.S. government and have a long history of no credit losses.

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, 2023	Securities AFS
(in thousands)	Amortized Cost		Fair Value
Due in less than one year	$	65,155	$	64,470
Due in one year through five years	162,719		147,803
Due after five years through ten years	207,337		177,658
Due after ten years	113,776		97,486
	548,987		487,417
Mortgage-backed securities	355,906		306,409
Total investment securities	$	904,893	$	793,826

Other Investments

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


	September 30, 2023		December 31, 2022
(in thousands)	Amount		Amount
Federal Reserve Bank stock	$	33,050	$	32,219
Federal Home Loan Bank (“FHLB”) stock	9,674		18,625
Equity securities with readily determinable fair values	3,893		4,376
Other investments	11,750		10,066
Total other investments	$	58,367	$	65,286

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

The loan composition is summarized as follows.


	September 30, 2023					December 31, 2022
(in thousands)	Amount			% of Total		Amount			% of Total
Commercial & industrial	$	1,237,789		20	%	$	1,304,819		21	%
Owner-occupied commercial real estate (“CRE”)	971,397			16		954,599			15
Agricultural	1,108,261			18		1,088,607			18
CRE investment	1,130,938			18		1,149,949			19
Construction & land development	326,747			5		318,600			5
Residential construction	76,289			1		114,392			2
Residential first mortgage	1,136,748			18		1,016,935			16
Residential junior mortgage	195,432			3		177,332			3
Retail & other	55,656			1		55,266			1
Loans	6,239,257			100	%	6,180,499			100	%
Less allowance for credit losses - Loans (“ACL-Loans”)	63,160					61,829
Loans, net	$	6,176,097				$	6,118,670
Allowance for credit losses - Loans to loans	1.01		%			1.00		%

Accrued interest on loans totaled $19 million and $15 million at September 30, 2023 and December 31, 2022, respectively, and is included in accrued interest receivable and other assets on the consolidated balance sheets.

Allowance for Credit Losses - Loans:

The majority of the Company’s loans, commitments, and letters of credit have been granted to customers in the Company’s market area. Although the Company has a diversified loan portfolio, the credit risk in the loan portfolio is largely influenced by general economic conditions and trends of the counties and markets in which the debtors operate, and the resulting impact on the operations of borrowers or on the value of underlying collateral, if any.

A roll forward of the allowance for credit losses - loans is summarized as follows.


	Three Months Ended				Nine Months Ended				Year Ended
(in thousands)	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022		December 31, 2022
Beginning balance	$	62,811	$	50,655	$	61,829	$	49,672	$	49,672
ACL on PCD loans acquired	—		1,709		—		1,709		1,937
Provision for credit losses	450		8,200		1,650		9,100		10,950
Charge-offs	(346)		(300)		(1,091)		(442)		(1,033)
Recoveries	245		84		772		309		303
Net (charge-offs) recoveries	(101)		(216)		(319)		(133)		(730)
Ending balance	$	63,160	$	60,348	$	63,160	$	60,348	$	61,829

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


	Nine Months Ended September 30, 2023
(in thousands)	Commercial & industrial			Owner- occupied CRE			Agricultural			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total
ACL-Loans
Beginning balance	$	16,350		$	9,138		$	9,762		$	12,744		$	2,572		$	1,412		$	6,976		$	1,846		$	1,029		$	61,829

Provision	(1,518)			48			2,467			46			96			(484)			336			295			364			1,650
Charge-offs	(403)			(301)			(66)			—			—			—			—			(96)			(225)			(1,091)
Recoveries	518			241			3			—			—			—			3			—			7			772
Net (charge-offs) recoveries	115			(60)			(63)			—			—			—			3			(96)			(218)			(319)
Ending balance	$	14,947		$	9,126		$	12,166		$	12,790		$	2,668		$	928		$	7,315		$	2,045		$	1,175		$	63,160
As % of ACL-Loans	24		%	14		%	19		%	20		%	4		%	2		%	12		%	3		%	2		%	100		%


	Year Ended December 31, 2022
(in thousands)	Commercial & industrial			Owner- occupied CRE			Agricultural			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total
ACL-Loans
Beginning balance	$	12,613		$	7,222		$	9,547		$	8,462		$	1,812		$	900		$	6,844		$	1,340		$	932		$	49,672
ACL on PCD loans	1,408			384			—			38			2			—			93			12			—			1,937
Provision	2,415			2,087			215			4,075			758			512			96			493			299			10,950
Charge-offs	(190)			(555)			—			—			—			—			(65)			—			(223)			(1,033)
Recoveries	104			—			—			169			—			—			8			1			21			303
Net (charge-offs) recoveries	(86)			(555)			—			169			—			—			(57)			1			(202)			(730)
Ending balance	$	16,350		$	9,138		$	9,762		$	12,744		$	2,572		$	1,412		$	6,976		$	1,846		$	1,029		$	61,829
As % of ACL-Loans	26		%	15		%	16		%	21		%	4		%	2		%	11		%	3		%	2		%	100		%

The ACL-Loans represents management’s estimate of expected credit losses in the Company’s loan portfolio at the balance sheet date. To assess the appropriateness of the ACL-Loans, management applies an allocation methodology which focuses on evaluation of qualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to specific loans; (ii) management’s ongoing review and grading of the loan portfolio; (iii) consideration of historical loan loss and delinquency experience on each portfolio segment; (iv) trends in past due and nonperforming loans; (v) the risk characteristics of the various loan segments; (vi) changes in the size and character of the loan portfolio; (vii) concentrations of loans to specific borrowers or industries; (viii) existing economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect expected credit losses. Assessing these numerous factors involves significant judgment.

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

Allowance for Credit Losses-Unfunded Commitments:

In addition to the ACL-Loans, the Company has established an ACL-Unfunded commitments, classified in accrued interest payable and other liabilities on the consolidated balance sheets. This reserve is maintained at a level that management believes is sufficient to absorb losses arising from unfunded loan commitments, and is determined quarterly based on methodology similar to the methodology for determining the ACL-Loans. The reserve for unfunded commitments was $3.0 million at both September 30, 2023 and December 31, 2022.

Provision for Credit Losses:

The provision for credit losses is determined by the Company as the amount to be added to the ACL loss accounts for various types of financial instruments including loans, investment securities, and 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 Ended				Year Ended
(in thousands)	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022		December 31, 2022
Provision for credit losses on:
Loans	$	450	$	8,200	$	1,650	$	9,100	$	10,950
Unfunded commitments	—		400		—		550		550
Investment securities	—		—		2,340		—		—
Total	$	450	$	8,600	$	3,990	$	9,650	$	11,500

Collateral Dependent Loans:

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


September 30, 2023	Collateral Type
(in thousands)	Real Estate		Other Business Assets		Total		Without an Allowance		With an Allowance		Allowance Allocation
Commercial & industrial	$	—	$	3,402	$	3,402	$	2,351	$	1,051	$	230
Owner-occupied CRE	4,827		—		4,827		4,827		—		—
Agricultural	7,629		5,811		13,440		8,530		4,910		123
CRE investment	942		—		942		552		390		19
Construction & land development	—		—		—		—		—		—

Residential first mortgage	686		—		686		686		—		—
Residential junior mortgage	—		—		—		—		—		—

Total loans	$	14,084	$	9,213	$	23,297	$	16,946	$	6,351	$	372


December 31, 2022	Collateral Type
(in thousands)	Real Estate		Other Business Assets		Total		Without an Allowance		With an Allowance		Allowance Allocation
Commercial & industrial	$	—	$	3,475	$	3,475	$	1,927	$	1,548	$	595
Owner-occupied CRE	4,907		—		4,907		4,699		208		53
Agricultural	13,758		6,458		20,216		14,358		5,858		261
CRE investment	2,713		—		2,713		979		1,734		212
Construction & land development	670		—		670		670		—		—

Residential first mortgage	91		—		91		91		—		—


Total loans	$	22,139	$	9,933	$	32,072	$	22,724	$	9,348	$	1,121

Past Due and Nonaccrual Loans:

The following tables present past due loans by portfolio segment.


	September 30, 2023
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or nonaccrual			Current			Total
Commercial & industrial	$	281		$	5,192		$	1,232,316		$	1,237,789
Owner-occupied CRE	76			5,602			965,719			971,397
Agricultural	151			13,458			1,094,652			1,108,261
CRE investment	240			1,100			1,129,598			1,130,938
Construction & land development	23			177			326,547			326,747
Residential construction	—			—			76,289			76,289
Residential first mortgage	1,710			3,812			1,131,226			1,136,748
Residential junior mortgage	67			92			195,273			195,432
Retail & other	729			74			54,853			55,656
Total loans	$	3,277		$	29,507		$	6,206,473		$	6,239,257
Percent of total loans	0.1		%	0.5		%	99.4		%	100.0		%


	December 31, 2022
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or nonaccrual			Current			Total
Commercial & industrial	$	210		$	3,328		$	1,301,281		$	1,304,819
Owner-occupied CRE	833			5,647			948,119			954,599
Agricultural	20			20,416			1,068,171			1,088,607
CRE investment	—			3,832			1,146,117			1,149,949
Construction & land development	—			771			317,829			318,600
Residential construction	—			—			114,392			114,392
Residential first mortgage	3,628			3,780			1,009,527			1,016,935
Residential junior mortgage	236			224			176,872			177,332
Retail & other	261			82			54,923			55,266
Total loans	$	5,188		$	38,080		$	6,137,231		$	6,180,499
Percent of total loans	0.1		%	0.6		%	99.3		%	100.0		%

The following table presents nonaccrual loans by portfolio segment.


	September 30, 2023					December 31, 2022
(in thousands)	Nonaccrual Loans			% of Total		Nonaccrual Loans			% of Total
Commercial & industrial	$	5,192		17	%	$	3,328		9	%
Owner-occupied CRE	5,602			19		5,647			15
Agricultural	13,458			46		20,416			53
CRE investment	1,100			4		3,832			10
Construction & land development	177			1		771			2
Residential construction	—			—		—			—
Residential first mortgage	3,812			13		3,780			10
Residential junior mortgage	92			—		224			1
Retail & other	74			—		82			—
Nonaccrual loans	$	29,507		100	%	$	38,080		100	%
Percent of total loans	0.5		%			0.6		%

Credit Quality Information:

The following tables present total loans by risk categories and gross charge-offs by year of origination. Acquired loans have been included based upon the actual origination date.


September 30, 2023	Amortized Cost Basis by Origination Year
(in thousands)	2023		2022		2021		2020		2019		Prior		Revolving		Revolving to Term		TOTAL
Commercial & industrial
Grades 1-4	$	152,385	$	254,446	$	184,778	$	73,488	$	53,351	$	96,269	$	334,059	$	—	$	1,148,776
Grade 5	5,350		10,296		6,779		2,908		1,246		7,364		24,477		—		58,420
Grade 6	—		591		612		194		4		1,028		1,850		—		4,279
Grade 7	4,444		4,600		2,653		2,372		1,952		7,205		3,088		—		26,314
Total	$	162,179	$	269,933	$	194,822	$	78,962	$	56,553	$	111,866	$	363,474	$	—	$	1,237,789
Current period gross charge-offs	$	—	$	(77)	$	(114)	$	—	$	—	$	(197)	$	(15)	$	—	$	(403)
Owner-occupied CRE
Grades 1-4	$	101,687	$	157,461	$	186,745	$	98,057	$	90,223	$	277,024	$	3,114	$	—	$	914,311
Grade 5	949		3,754		9,854		5,362		1,481		15,158		212		—		36,770
Grade 6	—		—		348		1,545		605		150		—		—		2,648
Grade 7	—		218		1,024		6,916		354		8,861		295		—		17,668
Total	$	102,636	$	161,433	$	197,971	$	111,880	$	92,663	$	301,193	$	3,621	$	—	$	971,397
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	(301)	$	—	$	—	$	(301)
Agricultural
Grades 1-4	$	72,777	$	282,254	$	136,796	$	80,960	$	23,694	$	144,223	$	252,202	$	—	$	992,906
Grade 5	2,809		11,201		6,003		725		384		33,751		14,316		—		69,189
Grade 6	—		134		1,114		—		51		2,293		207		—		3,799
Grade 7	3,851		6,898		6,455		492		1,865		14,764		8,042		—		42,367
Total	$	79,437	$	300,487	$	150,368	$	82,177	$	25,994	$	195,031	$	274,767	$	—	$	1,108,261
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	(66)	$	—	$	—	$	(66)
CRE investment
Grades 1-4	$	27,123	$	183,799	$	247,563	$	172,237	$	117,114	$	294,916	$	11,445	$	—	$	1,054,197
Grade 5	2,802		7,859		14,857		8,634		10,066		21,927		49		—		66,194
Grade 6	—		—		—		—		—		1,357		65		—		1,422
Grade 7	—		55		21		—		1,043		8,006		—		—		9,125
Total	$	29,925	$	191,713	$	262,441	$	180,871	$	128,223	$	326,206	$	11,559	$	—	$	1,130,938
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Construction & land development
Grades 1-4	$	37,180	$	153,809	$	88,212	$	9,610	$	5,288	$	28,329	$	2,070	$	—	$	324,498
Grade 5	—		26		127		1,275		508		89		—		—		2,025
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	47		—		—		—		—		92		85		—		224
Total	$	37,227	$	153,835	$	88,339	$	10,885	$	5,796	$	28,510	$	2,155	$	—	$	326,747
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential construction
Grades 1-4	$	35,996	$	32,539	$	5,279	$	1,101	$	125	$	1,209	$	40	$	—	$	76,289
Grade 5	—		—		—		—		—		—		—		—		—
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		—		—		—		—		—		—		—		—
Total	$	35,996	$	32,539	$	5,279	$	1,101	$	125	$	1,209	$	40	$	—	$	76,289
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential first mortgage
Grades 1-4	$	125,176	$	377,475	$	256,628	$	134,035	$	59,281	$	168,739	$	614	$	3	$	1,121,951
Grade 5	—		1,296		1,259		1,262		2,538		2,684		—		—		9,039
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		150		467		485		1,074		3,582		—		—		5,758
Total	$	125,176	$	378,921	$	258,354	$	135,782	$	62,893	$	175,005	$	614	$	3	$	1,136,748
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential junior mortgage
Grades 1-4	$	12,538	$	7,607	$	3,915	$	4,360	$	2,848	$	4,110	$	153,322	$	6,446	$	195,146
Grade 5	—		—		—		—		—		—		—		—		—
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		32		202		—		—		14		38		—		286
Total	$	12,538	$	7,639	$	4,117	$	4,360	$	2,848	$	4,124	$	153,360	$	6,446	$	195,432
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	(96)	$	—	$	—	$	(96)
Retail & other
Grades 1-4	$	7,281	$	8,932	$	6,202	$	2,925	$	2,045	$	4,042	$	24,107	$	—	$	55,534
Grade 5	—		—		18		—		—		—		—		—		18
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		—		26		10		1		67		—		—		104
Total	$	7,281	$	8,932	$	6,246	$	2,935	$	2,046	$	4,109	$	24,107	$	—	$	55,656
Current period gross charge-offs	$	(6)	$	(1)	$	—	$	(1)	$	—	$	(52)	$	(165)	$	—	$	(225)
Total loans	$	592,395	$	1,505,432	$	1,167,937	$	608,953	$	377,141	$	1,147,253	$	833,697	$	6,449	$	6,239,257


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

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

Grades 1-4, Pass: Credits exhibit adequate cash flows, appropriate management and financial ratios within industry norms and/or are supported by sufficient collateral. Some credits in these rating categories may require a need for monitoring but elements of concern are not severe enough to warrant an elevated rating.

Grade 5, Watch: Credits with this rating are adequately secured and performing but are being monitored due to the presence of various short-term weaknesses which may include unexpected, short-term adverse financial performance, managerial problems, potential impact of a decline in the entire industry or local economy and delinquency issues. Loans to individuals or loans supported by guarantors with marginal net worth or collateral may be included in this rating category.

Grade 6, Special Mention: Credits with this rating have potential weaknesses that, without the Company’s attention and correction may result in deterioration of repayment prospects. These assets are considered Criticized Assets. Potential weaknesses may include adverse financial trends for the borrower or industry, repeated lack of compliance with Company requests, increasing debt to net worth, serious management conditions and decreasing cash flow.

Grade 7, Substandard: Assets with this rating are characterized by the distinct possibility the Company will sustain some loss if deficiencies are not corrected. All foreclosures, liquidations, and nonaccrual loans are considered to be categorized in this rating, regardless of collateral sufficiency.

Modifications to Borrowers Experiencing Financial Difficulty:

On January 1, 2023, the Company adopted ASU 2022-02, which eliminated the accounting guidance for TDRs by creditors and enhanced the disclosure requirements for certain loan modifications to borrowers experiencing financial difficulty. The following table presents the amortized cost of loans that were both experiencing financial difficulty and were modified during the nine months ended September 30, 2023, aggregated by portfolio segment and type of modification.


(in thousands)	Payment Delay		Term Extension		Interest Rate Reduction		Term Extension & Interest Rate Reduction		Total		% of Total Loans
Commercial & industrial	$	433	$	—	$	87	$	—	$	520	0.04	%
Owner-occupied CRE	—		—		—		—		—		—	%
Agricultural	107		—		—		—		107		0.01	%
CRE investment	—		—		—		—		—		—	%
Construction & land development	—		—		—		—		—		—	%

Residential first mortgage	—		—		—		—		—		—	%


Total	$	540	$	—	$	87	$	—	$	627	0.01	%

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

As of September 30, 2023, there were no loans made to borrowers experiencing financial difficulty that were modified during the current period and subsequently defaulted, and there were no commitments to lend additional funds to such debtors.

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

As of December 31, 2022, the Company had restructured loans totaling $18 million, with a pre-modification balance of $24 million, all of which were also reflected as nonaccrual loans. There were no restructured loans modified during 2022 that subsequently defaulted, and there were no commitments to lend additional funds to such debtors.

Note 7 – Goodwill and Other Intangibles and Servicing Rights

Management periodically reviews the carrying value of its intangible assets to determine if any impairment has occurred, in which case an impairment charge would be recorded as an expense in the period of impairment, or whether changes in circumstances have occurred that would require a revision to the remaining useful life that would affect expense prospectively. In making such determination, management evaluates whether there are any adverse qualitative factors indicating that an impairment may exist, as well as the performance of the underlying operations or assets which give rise to the intangible. Management also regularly monitors economic factors for potential impairment indications on the value of our franchise, stability of deposits, and the wealth client base, underlying our goodwill and other intangibles. Management concluded no impairment was indicated for the nine months ended September 30, 2023 and the year ended December 31, 2022. A summary of goodwill and other intangibles was as follows.



(in thousands)	September 30, 2023		December 31, 2022
Goodwill	$	367,387	$	367,387
Core deposit intangibles	26,842		32,701
Customer list intangibles	1,979		2,350
Other intangibles	28,821		35,051
Goodwill and other intangibles, net	$	396,208	$	402,438

Goodwill: A summary of goodwill was as follows. During 2022, goodwill increased due to the Charter acquisition.


	Nine Months Ended		Year Ended
(in thousands)	September 30, 2023		December 31, 2022
Goodwill:
Goodwill at beginning of year	$	367,387	$	317,189
Acquisitions	—		49,970
Purchase accounting adjustment	—		228
Goodwill at end of period	$	367,387	$	367,387

Other intangible assets: Other intangible assets, consisting of core deposit intangibles and customer list intangibles, are amortized over their estimated finite lives. A summary of other intangible assets was as follows. During 2022, core deposit intangibles increased due to the Charter acquisition.


	Nine Months Ended		Year Ended
(in thousands)	September 30, 2023		December 31, 2022
Core deposit intangibles:
Gross carrying amount	$	60,724	$	60,724
Accumulated amortization	(33,882)		(28,023)
Net book value	$	26,842	$	32,701
Additions during the period	$	—	$	19,364
Amortization during the period	$	5,859	$	6,108
Customer list intangibles:
Gross carrying amount	$	5,523	$	5,523
Accumulated amortization	(3,544)		(3,173)
Net book value	$	1,979	$	2,350

Amortization during the period	$	371	$	508

Mortgage servicing rights (“MSR”): Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income, and assessed for impairment at each reporting date, with the amortization recorded in mortgage income, net, in the consolidated statements of income. Mortgage servicing rights are carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value, and are included in other assets in the consolidated balance sheets. 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). A summary of the changes in the mortgage servicing rights asset was as follows.


	Nine Months Ended			Year Ended
(in thousands)	September 30, 2023			December 31, 2022
Mortgage servicing rights asset:
MSR asset at beginning of year	$	13,080		$	13,636
Capitalized MSR	1,104			2,327

Amortization during the period	(2,248)			(2,883)
MSR asset at end of period	$	11,936		$	13,080
Valuation allowance at beginning of year	$	(500)		$	(1,200)

Reversals	500			700
Valuation allowance at end of period	$	—		$	(500)
MSR asset, net	$	11,936		$	12,580
Fair value of MSR asset at end of period	$	15,847		$	17,215
Residential mortgage loans serviced for others	$	1,610,318		$	1,637,109
Net book value of MSR asset to loans serviced for others	0.74		%	0.77		%

Loan servicing rights (“LSR”): The Company acquired an LSR asset in December 2021 which will be amortized over the estimated remaining loan service period. The Company does not expect to add new loans to this servicing portfolio. A summary of the changes in the LSR asset were as follows.


	Nine Months Ended		Year Ended
(in thousands)	September 30, 2023		December 31, 2022
Loan servicing rights asset:
LSR asset at beginning of year	$	11,039	$	20,055
Amortization during the period	(1,656)		(9,016)
LSR asset at end of period	$	9,383	$	11,039
Agricultural loans serviced for others	$	502,901	$	538,392

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


(in thousands)	Core deposit intangibles		Customer list intangibles		MSR asset		LSR asset
Year ending December 31,
2023 (remaining three months)	$	1,730	$	112	$	687	$	552
2024	6,298		449		2,661		1,962
2025	5,161		449		1,978		1,717
2026	3,983		249		1,457		1,472
2027	3,218		166		1,457		1,227
2028	2,622		166		1,456		981
Thereafter	3,830		388		2,240		1,472
Total	$	26,842	$	1,979	$	11,936	$	9,383

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

Long-Term Borrowings:

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


(in thousands)	September 30, 2023		December 31, 2022
FHLB advances	$	5,000	$	33,000
Junior subordinated debentures	40,344		39,720
Subordinated notes	152,410		152,622
Total long-term borrowings	$	197,754	$	225,342

FHLB Advances: The Federal Home Loan Bank (“FHLB”) advance bears a fixed rate, requires interest-only monthly payments, and has a maturity date of March 2025. The weighted average rate of the FHLB advances was 1.55% at September 30, 2023 and 1.09% at December 31, 2022.

Junior Subordinated Debentures: Each of the junior subordinated debentures was issued to an underlying statutory trust (the “statutory trusts”), which issued trust preferred securities and common securities and used the proceeds from the issuance of the common and the trust preferred securities to purchase the junior subordinated debentures of the Company. The debentures represent the sole asset of the statutory trusts. All of the common securities of the statutory trusts are owned by the Company. The statutory trusts are not included in the consolidated financial statements. The net effect of all the documents entered into with respect to the trust preferred securities is that the Company, through payments on its debentures, is liable for the distributions and other payments required on the trust preferred securities. Interest on all debentures is current. Any applicable discounts (initially recorded to carry an acquired debenture at its then estimated fair value) are being accreted to interest expense over the remaining life of the debenture. All the junior subordinated debentures are currently callable and may be redeemed in part or in full, at par, plus any accrued but unpaid interest. At September 30, 2023 and December 31, 2022, approximately $39 million and $38 million, respectively, of trust preferred securities qualify as Tier 1 capital.

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

In December 2021, Nicolet assumed two subordinated note issuances at a premium as the result of an acquisition. One issuance was $30 million in fixed-to-floating rate subordinated notes due in 2028, with a fixed annual interest rate of 5.875% for the first five years, and will reset quarterly thereafter to the then current three-month SOFR, as adjusted for the LIBOR to SOFR spread adjustment, plus 2.88%. The Company intends to redeem these notes on the next interest payment date in fourth quarter 2023. The second issuance was $22 million in fixed-to-floating rate subordinated notes due in 2030, with a fixed annual interest rate of 7.00% for the first five years, and will reset quarterly thereafter to the then current SOFR plus 687.5 basis points. The Notes due in 2028 are redeemable beginning June 1, 2023, and quarterly thereafter on any interest payment date, while the Notes due in 2030 are redeemable beginning June 30, 2025, and quarterly thereafter on any interest payment date. All Notes qualify as Tier 2 capital for regulatory purposes, and are discounted in accordance with regulations when the debt has five years or less remaining to maturity.

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


		As of September 30, 2023								As of December 31, 2022
(in thousands)	Maturity Date	Interest Rate		Par		Unamortized Premium /(Discount) / Debt Issue Costs (1)		Carrying Value		Interest Rate		Carrying Value
Junior Subordinated Debentures:
Mid-Wisconsin Statutory Trust I (2)	12/15/2035	7.10	%	$	10,310	$	(2,429)	$	7,881	6.20	%	$	7,734
Baylake Capital Trust II (3)	9/30/2036	7.01	%	16,598		(2,997)		13,601		6.08	%	13,424
First Menasha Statutory Trust (4)	3/17/2034	8.46	%	5,155		(454)		4,701		7.53	%	4,668
County Bancorp Statutory Trust II (5)	9/15/2035	7.20	%	6,186		(792)		5,394		6.30	%	5,277
County Bancorp Statutory Trust III (6)	6/15/2036	7.36	%	6,186		(850)		5,336		6.46	%	5,219
Fox River Valley Capital Trust (7)	5/30/2033	6.40	%	3,610		(179)		3,431		6.40	%	3,398
Total				$	48,045	$	(7,701)	$	40,344			$	39,720
Subordinated Notes:
Subordinated Notes due 2031	7/15/2031	3.13	%	$	100,000	$	(576)	$	99,424	3.13	%	$	99,267
County Subordinated Notes due 2028	6/1/2028	8.56	%	30,000		—		30,000		5.88	%	30,119
County Subordinated Notes due 2030	6/30/2030	7.00	%	22,400		586		22,986		7.00	%	23,236
Total				$	152,400	$	10	$	152,410			$	152,622

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

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

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

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

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

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

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

* The floating rate on this debenture was originally based on three-month LIBOR. Effective with the cessation of LIBOR, the floating rate on this debenture is now based on three-month CME Term SOFR, plus the spread adjustment of 0.26161%.

Note 9 – Commitments and Contingencies

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

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


(in thousands)	September 30, 2023		December 31, 2022
Commitments to extend credit	$	1,810,068	$	1,850,601
Financial standby letters of credit	18,235		26,530
Performance standby letters of credit	15,814		9,375

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

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

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

Interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans held for sale are considered derivative instruments (“mortgage derivatives”) and the contractual amounts were $16 million and $17 million, respectively, at September 30, 2023. In comparison, interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans held for sale totaled $9 million and $9 million, respectively, at December 31, 2022. The net fair value of these mortgage derivatives combined was a net gain of $0.2 million and $0.1 million at September 30, 2023 and December 31, 2022, respectively.

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

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

Note 10 – Fair Value Measurements

Fair value represents the estimated price at which an orderly transaction to sell an asset or transfer a liability would take place between market participants at the measurement date under current market conditions (i.e., an exit price concept), and is a market-based measurement versus an entity-specific measurement. The Company records and/or discloses certain financial instruments on a fair value basis. These financial assets and financial liabilities are measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the assumptions used to determine fair value. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect assumptions of the reporting entity about how market participants would price the asset or liability based on the best information available under the circumstances. The three fair value levels are:

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

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

•Level 3 – significant unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity

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

Recurring basis fair value measurements:

The following table presents the balances of assets and liabilities measured at fair value on a recurring basis for the periods presented.


(in thousands)			Fair Value Measurements Using
Measured at Fair Value on a Recurring Basis:	Total		Level 1		Level 2		Level 3
September 30, 2023
U.S. Treasury securities	$	37,504	$	—	$	37,504	$	—
U.S. government agency securities	8,221		—		8,221		—
State, county and municipals	341,330		—		339,949		1,381
Mortgage-backed securities	306,409		—		305,438		971
Corporate debt securities	100,362		—		97,064		3,298
Securities AFS	$	793,826	$	—	$	788,176	$	5,650
Other investments (equity securities)	$	3,893	$	3,893	$	—	$	—
Derivative assets	$	186	$	—	$	—	$	186
Derivative liabilities	$	—	$	—	$	—	$	—
December 31, 2022
U.S. Treasury securities	$	183,830	$	—	$	183,830	$	—
U.S. government agency securities	2,100		—		2,100		—
State, county and municipals	398,188		—		396,315		1,873
Mortgage-backed securities	200,932		—		199,951		981
Corporate debt securities	132,568		—		127,269		5,299
Securities AFS	$	917,618	$	—	$	909,465	$	8,153
Other investments (equity securities)	$	4,376	$	4,376	$	—	$	—
Derivative assets	$	60	$	—	$	—	$	60
Derivative liabilities	$	10	$	—	$	—	$	10

The following is a description of the valuation methodologies used by the Company for the assets and liabilities measured at fair value on a recurring basis, noted in the tables above.

Securities AFS: Where quoted market prices on securities exchanges are available, the investments are classified as Level 1. Level 1 investments primarily include exchange-traded equity securities. If quoted market prices are not available, fair value is generally determined using prices obtained from independent pricing vendors who use pricing models (with typical inputs including benchmark yields, reported trades for similar securities, issuer spreads or relationship to other benchmark quoted securities), or discounted cash flows, and are classified as Level 2. Examples of these investments include U.S. Treasury securities, U.S. government agency securities, mortgage-backed securities, obligations of state, county and municipals, and certain corporate debt securities. Finally, in certain cases where there is limited activity or less transparency around inputs to the estimated fair value, investments are classified within Level 3 of the hierarchy. Examples of these include private corporate debt securities, which are primarily trust preferred security investments, as well as certain municipal bonds and mortgage-backed securities. At September 30, 2023 and December 31, 2022, it was determined that carrying value was the best approximation of fair value for these Level 3 securities, based primarily on the internal analysis on these securities.

Derivatives: The derivative assets and liabilities include interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans held for sale, which are considered derivative instruments (“mortgage derivatives”). The fair value of interest rate lock commitments are determined using the projected sale price of individual loans based on changes in the market interest rates, projected pull-through rates (the probability that an interest rate lock commitment will ultimately result in an originated loan), the reduction in the value of the applicant’s option due to the passage of time, and the remaining origination costs to be incurred based on management’s estimate of market costs. The fair value of forward commitments are determined using quoted prices of to-be-announced securities in active markets, or benchmarked to such securities. The derivative assets and liabilities are classified with Level 3 of the hierarchy.

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


(in thousands)	Nine Months Ended		Year Ended
Level 3 Fair Value Measurements:	September 30, 2023		December 31, 2022
Balance at beginning of year	$	8,153	$	8,065
Acquired balance	—		750
Maturities / Paydowns	(2,469)		(451)
Unrealized gain / (loss)	(34)		(211)
Balance at end of period	$	5,650	$	8,153

Nonrecurring basis fair value measurements:

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


(in thousands)			Fair Value Measurements Using
Measured at Fair Value on a Nonrecurring Basis:	Total		Level 1		Level 2		Level 3
September 30, 2023
Collateral dependent loans	$	22,925	$	—	$	—	$	22,925
Other real estate owned (“OREO”)	2,031		—		—		2,031
MSR asset	11,936		—		—		11,936
December 31, 2022
Collateral dependent loans	$	30,951	$	—	$	—	$	30,951
OREO	1,975		—		—		1,975
MSR asset	12,580		—		—		12,580

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

Financial instruments:

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


September 30, 2023
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	545,880	$	545,880	$	545,880	$	—	$	—
Certificates of deposit in other banks	7,598		7,519		—		7,519		—
Securities AFS	793,826		793,826		—		788,176		5,650

Other investments, including equity securities	58,367		58,367		3,893		43,973		10,501
Loans held for sale	6,500		6,641		—		6,641		—
Loans, net	6,176,097		5,908,160		—		—		5,908,160
MSR asset	11,936		15,847		—		—		15,847
LSR asset	9,383		9,383		—		—		9,383
Accrued interest receivable	24,166		24,166		24,166		—		—
Financial liabilities:
Deposits	$	7,182,388	$	7,164,174	$	—	$	—	$	7,164,174
Short-term borrowings	—		—		—		—		—
Long-term borrowings	197,754		190,738		—		4,736		186,002
Accrued interest payable	7,028		7,028		7,028		—		—


December 31, 2022
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	154,723	$	154,723	$	154,723	$	—	$	—
Certificates of deposit in other banks	12,518		12,407		—		12,407		—
Securities AFS	917,618		917,618		—		909,465		8,153
Securities HTM	679,128		623,352		—		623,352		—
Other investments, including equity securities	65,286		65,286		4,376		52,093		8,817
Loans held for sale	1,482		1,529		—		1,529		—
Loans, net	6,118,670		5,863,570		—		—		5,863,570
MSR asset	12,580		17,215		—		—		17,215
LSR asset	11,039		11,039		—		—		11,039
Accrued interest receivable	21,275		21,275		21,275		—		—
Financial liabilities:
Deposits	$	7,178,921	$	7,172,779	$	—	$	—	$	7,172,779
Short-term borrowings	317,000		317,000		317,000		—		—
Long-term borrowings	225,342		220,513		—		33,001		187,512
Accrued interest payable	4,265		4,265		4,265		—		—

The valuation methodologies for the financial instruments disclosed in the above table are described in Note 18, Fair Value Measurements, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Note 11 – Subsequent Event

On October 2, 2023, Nicolet sold its member interest in UFS, LLC, for proceeds of $10 million and a pre-tax gain of approximately $9 million. This gain on sale will be realized during fourth quarter 2023.

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

Forward-Looking Statements

Statements made in this document and in any documents that are incorporated by reference which are not purely historical are forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, including any statements regarding descriptions of management’s plans, objectives, or goals for future operations, products or services, and forecasts of its revenues, earnings, or other measures of performance. Forward-looking statements are based on current management expectations and, by their nature, are subject to risks and uncertainties. These statements are neither statements of historical fact nor assurance of future performance and generally may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “should,” “will,” “intend,” or similar expressions. Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of various transactions or events, and statements about our future performance, operations, products and services, and should be viewed with caution. Shareholders should note that many factors, some of which are discussed elsewhere in this document, could affect the future financial results of Nicolet and could cause those results to differ materially from those implied or anticipated by the statements. Except as required by law, we expressly disclaim any obligations to publicly update any forward-looking statements whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise. Important factors, many of which are beyond Nicolet’s control, that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements, in addition to those described in detail under Item 1A, “Risk Factors” of Nicolet’s 2022 Annual Report on Form 10-K include, but are not necessarily limited to the following:

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

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

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

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

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

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

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

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

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

•changes in monetary and tax policies;

•our ability to attract and retain key personnel;

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

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

•the potential effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as inflation and recessions, weather events, natural disasters, epidemics and pandemics, terrorist activities, wars or other foreign conflicts, disruptions in our customers’ supply chains, disruptions in transportation, essential utility outages or trade disputes and related tariffs;

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

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

These factors should be considered in evaluating the forward-looking statements, and you should not place undue reliance on such statements.

Overview

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

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

Economic Outlook and Recent Industry Developments

For year-to-date 2023, economic growth remains stronger than expected, driven by spending within the consumer sector. The labor market remains strong with competitive compensation and low unemployment. Consumer spending has been stronger than expected the past few quarters with continued demand for goods and services; however, consumer sentiment is beginning to wane from mounting pressures of higher interest rates, declining savings, rising cost of food and energy, and increasing credit card debt.

The Federal Reserve tightened monetary policy to combat inflation by aggressively raising interest rates from a target range of 0.00%-0.25% in early March 2022 to 5.25%-5.50% at the end of September 2023, and inflation has slowed from the start of the year, but remains higher than the Fed’s target of 2%. Inflation could remain in the 2.5% - 3.0% range, or just above the Fed target, for a period time due to the tight labor markets and de-globalization of supply chains. All these factors are indicating a slowing in economic activity is the most likely scenario for the U.S. economy leading into 2024.

These macroeconomic challenges are fueling additional concerns within the banking sector. During first quarter 2023, the banking industry experienced significant volatility with high-profile bank failures and industry wide concerns related to liquidity, deposit outflows, unrealized securities losses, and eroding consumer confidence in the banking system. The banking world remains challenging amidst tightening credit conditions, indications of declining asset quality, slowing economic demand, interest rate risk management, and potential for higher capital requirements, which further complicates the current economic outlook. In addition, the ongoing geopolitical issues have the potential for further economic disruptions.


Table 1: Earnings Summary and Selected Financial Data
	At or for the Three Months Ended															At or for the Nine Months Ended
(In thousands, except per share data)	9/30/2023			6/30/2023			3/31/2023			12/31/2022			9/30/2022			9/30/2023			9/30/2022
Results of operations:
Net interest income	$	61,474		$	59,039		$	56,721		$	68,092		$	62,990		$	177,234		$	171,869
Provision for credit losses	450			450			3,090			1,850			8,600			3,990			9,650
Noninterest income	16,541			16,841			(21,844)			14,846			13,000			11,538			43,074
Noninterest expense	45,738			44,957			44,875			43,989			42,567			135,570			116,655
Income (loss) before income tax expense	31,827			30,473			(13,088)			37,099			24,823			49,212			88,638
Income tax expense (benefit)	14,669			7,878			(4,190)			9,498			6,313			18,357			21,979
Net income (loss)	$	17,158		$	22,595		$	(8,898)		$	27,601		$	18,510		$	30,855		$	66,659
Earnings (loss) per common share ("EPS"):
Basic	$	1.16		$	1.54		$	(0.61)		$	1.88		$	1.33		$	2.10		$	4.88
Diluted	$	1.14		$	1.51		$	(0.61)		$	1.83		$	1.29		$	2.05		$	4.72
Common Shares:
Basic weighted average	14,740			14,711			14,694			14,685			13,890			14,716			13,648
Diluted weighted average	15,100			14,960			14,694			15,110			14,310			15,044			14,127
Outstanding (period end)	14,758			14,718			14,698			14,691			14,673			14,758			14,673
Period-End Balances:
Loans	$	6,239,257		$	6,222,776		$	6,223,732		$	6,180,499		$	5,984,437		$	6,239,257		$	5,984,437
Allowance for credit losses - loans	63,160			62,811			62,412			61,829			60,348			63,160			60,348
Total assets	8,416,162			8,482,628			8,192,354			8,763,969			8,895,916			8,416,162			8,895,916
Deposits	7,182,388			7,198,604			6,928,579			7,178,921			7,395,902			7,182,388			7,395,902
Stockholders’ equity (common)	974,461			977,638			961,792			972,529			938,463			974,461			938,463
Book value per common share	66.03			66.42			65.44			66.20			63.96			66.03			63.96
Tangible book value per common share (2)	39.18			39.37			38.20			38.81			36.21			39.18			36.21
Financial Ratios: (1)
Return on average assets	0.81		%	1.10		%	(0.42)		%	1.26		%	0.93		%	0.49		%	1.18		%
Return on average common equity	6.92			9.37			(3.72)			11.47			8.25			4.24			10.32
Return on average tangible common equity (2)	11.62			15.95			(6.34)			19.85			13.93			7.18			17.25
Stockholders' equity to assets	11.58			11.53			11.74			11.10			10.55			11.58			10.55
Tangible common equity to tangible assets (2)	7.21			7.17			7.21			6.82			6.26			7.21			6.26
Reconciliation of Non-GAAP Financial Measures:
Adjusted net income (loss) reconciliation (3)
Net income (loss) (GAAP)	$	17,158		$	22,595		$	(8,898)		$	27,601		$	18,510		$	30,855		$	66,659
Adjustments:
Provision expense (4)	—			—			2,340			—			8,000			2,340			8,000
Assets (gains) losses, net	(31)			318			38,468			(260)			46			38,755			(2,870)
Merger-related expense	—			26			163			492			519			189			1,172

Adjustments subtotal	(31)			344			40,971			232			8,565			41,284			6,302
Tax on Adjustments (5)	(6)			86			10,243			58			2,141			8,050			1,576
Tax - Wisconsin tax law change (5)	6,151			—			—			—			—			9,118			—
Adjusted net income (Non-GAAP)	$	23,284		$	22,853		$	21,830		$	27,775		$	24,934		$	73,207		$	71,386
Adjusted diluted EPS (Non-GAAP)	$	1.54		$	1.53		$	1.45		$	1.84		$	1.74		$	4.87		$	5.05
Tangible Assets:
Total assets	$	8,416,162		$	8,482,628		$	8,192,354		$	8,763,969		$	8,895,916
Goodwill and other intangibles, net	396,208			398,194			400,277			402,438			407,117
Tangible assets	$	8,019,954		$	8,084,434		$	7,792,077		$	8,361,531		$	8,488,799
Tangible Common Equity:
Stockholders’ equity (common)	$	974,461		$	977,638		$	961,792		$	972,529		$	938,463
Goodwill and other intangibles, net	396,208			398,194			400,277			402,438			407,117
Tangible common equity	$	578,253		$	579,444		$	561,515		$	570,091		$	531,346
Average Tangible Common Equity:
Stockholders’ equity (common)	$	983,133		$	967,142		$	970,108		$	954,970		$	890,205		$	973,509		$	863,272
Goodwill and other intangibles, net	397,052			399,080			401,212			403,243			363,211			399,100			346,488
Average tangible common equity	$	586,081		$	568,062		$	568,896		$	551,727		$	526,994		$	574,409		$	516,784

Note: Numbers may not sum due to rounding.

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

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

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

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

(5) The effective tax rate for periods prior to July 1, 2023, effective date of the Wisconsin tax law change (as detailed below in Performance Summary), assumed an effective tax rate of 25%, and periods subsequent to the effective date assumed an effective tax rate of 19.5%.

Non-GAAP Financial Measures

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

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

Performance Summary

Net income was $31 million (or earnings per diluted common share of $2.05) for the nine months ended September 30, 2023, compared to net income of $67 million (or earnings per diluted common share of $4.72) for the nine months ended September 30, 2022, with 2023 significantly impacted by the first quarter balance sheet repositioning (detailed below).

In July 2023, Wisconsin’s Governor signed the Wisconsin state budget, retroactive to January 1, 2023, which included language that provides financial institutions with an exemption from state taxable income for interest, fees, and penalties earned on loans to existing Wisconsin-based business or agriculture purpose loans that are $5 million or less in balance on January 1, 2023, and to new loans that meet the criteria. The impact to Nicolet moving forward will be a reduction / elimination of State income taxes being expensed, resulting in an estimated effective tax rate of 19.5% (compared to a 25% effective tax rate previously). However, the elimination of Wisconsin state income tax expense will also cause a valuation allowance to be established for the state-related deferred tax assets as of the effective date of the legislation, requiring a one-time $9.1 million charge to state income tax expense in the third quarter.

Net income reflected non-core items and the related tax effect of each, including the first quarter U.S. Treasury securities sale loss (balance sheet repositioning), change in Wisconsin tax law, expected loss (provision expense) on the Signature Bank sub debt investment (acquired in an acquisition), merger-related expenses, Day 2 credit provision expense required under the CECL model, as well as gains / (losses) on other assets and investments. These non-core items negatively impacted earnings per diluted common share $2.82 for the nine months ended September 30, 2023 and negatively impacted earnings per diluted common share $0.33 for the nine months ended September 30, 2022.

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


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

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

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

•Net interest income was $177 million for the first nine months of 2023, up $5 million (3%) over the first nine months of 2022. Interest income grew $91 million attributable to favorable loan volumes (partly from the Charter acquisition), as well as favorable rates from new and renewed loans in a rising interest rate environment and higher rates on investment securities and investable cash. Interest expense increased $86 million between the comparable nine-month periods mostly from higher average funding costs. Net interest margin was 3.07% for the nine months ended September 30, 2023, compared to 3.36% for the nine months ended September 30, 2022. For additional information regarding net interest income, see “Income Statement Analysis — Net Interest Income.”

•Noninterest income was $12 million for the first nine months of 2023, a $32 million unfavorable change from the comparable 2022 period, primarily due to the balance sheet repositioning (noted above). Excluding net asset gains (losses), noninterest income for the first nine months of 2023 was $50 million, a $10 million increase over the first nine months of 2022. For additional information regarding noninterest income, see “Income Statement Analysis — Noninterest Income.”

•Noninterest expense was $136 million, $19 million (16%) higher than the first nine months of 2022. Personnel costs increased $7 million, and non-personnel expenses combined increased $12 million (23%) over the comparable 2022 period. For additional information regarding noninterest expense, see “Income Statement Analysis — Noninterest Expense.”

•Nonperforming assets were $32 million, representing 0.37% of total assets at September 30, 2023, compared to $40 million or 0.46% of total assets at December 31, 2022. The reduction in nonperforming assets was due to the sale of select nonaccrual loans. For additional information regarding nonperforming assets, see “Balance Sheet Analysis – Nonperforming Assets.”

•At September 30, 2023, assets were $8.4 billion, down $348 million (4%) from December 31, 2022, mostly due to the sale of investment securities as part of our balance sheet repositioning, partly offset by higher investable cash balances. For additional balance sheet discussion see “Balance Sheet Analysis.”

•At September 30, 2023, loans were $6.2 billion, up $59 million from December 31, 2022, with growth in residential mortgage loans partly offset by slowing commercial loan demand. On average, loans grew $1.2 billion (25%) over the first nine months of 2022. For additional information regarding loans, see “Balance Sheet Analysis — Loans.”

•Total deposits of $7.2 billion at September 30, 2023, were minimally changed from December 31, 2022, with growth in time deposits and money market accounts partly offset by lower demand and savings account balances. Year-to-date average deposits were $644 million (10%) higher than the first nine months of 2022. For additional information regarding deposits, see “Balance Sheet Analysis – Deposits.”

INCOME STATEMENT ANALYSIS

Net Interest Income

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

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


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



Total loans, including loan fees (1)(2)	$	6,223,396	$	251,019	5.33	%	$	4,975,432	$	167,413	4.45	%
Investment securities:
Taxable	924,829		13,445		1.94	%	1,389,540		15,612		1.50	%
Tax-exempt (2)	252,933		6,130		3.23	%	202,011		3,661		2.42	%
Total investment securities	1,177,762		19,575		2.22	%	1,591,551		19,273		1.62	%
Other interest-earning assets	266,753		10,345		5.13	%	251,983		2,734		1.44	%
Total non-loan earning assets	1,444,515		29,920		2.75	%	1,843,534		22,007		1.59	%
Total interest-earning assets	7,667,911		$	280,939	4.85	%	6,818,966		$	189,420	3.67	%
Other assets, net	737,088						731,928
Total assets	$	8,404,999					$	7,550,894
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings	$	845,079	$	7,387	1.17	%	$	854,307	$	827	0.13	%
Interest-bearing demand	900,802		9,677		1.44	%	1,010,372		2,647		0.35	%
Money market accounts (“MMA”)	1,848,921		36,223		2.62	%	1,502,038		2,132		0.19	%
Core time deposits	771,041		16,656		2.89	%	556,970		1,240		0.30	%
Total interest-bearing core deposits	4,365,843		69,943		2.14	%	3,923,687		6,846		0.23	%
Brokered deposits	619,870		19,298		4.16	%	450,311		2,394		0.71	%
Total interest-bearing deposits	4,985,713		89,241		2.39	%	4,373,998		9,240		0.28	%
Wholesale funding	343,827		12,842		4.93	%	239,362		7,053		3.91	%
Total interest-bearing liabilities	5,329,540		102,083		2.56	%	4,613,360		16,293		0.47	%
Noninterest-bearing demand deposits	2,067,265						2,034,865
Other liabilities	34,685						39,397
Stockholders’ equity	973,509						863,272
Total liabilities and stockholders’ equity	$	8,404,999					$	7,550,894
Interest rate spread					2.29	%					3.20	%
Net free funds					0.78	%					0.16	%
Tax-equivalent net interest income and net interest margin			$	178,856	3.07	%			$	173,127	3.36	%
Tax-equivalent adjustment			$	1,622					$	1,258
Net interest income			$	177,234					$	171,869

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

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

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


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



Total loans, including loan fees (1)(2)	$	6,230,336	$	87,701	5.54	%	$	5,391,258	$	63,095	4.60	%
Investment securities:
Taxable	733,286		4,351		2.37	%	1,391,330		5,350		1.54	%
Tax-exempt (2)	229,321		1,884		3.29	%	234,123		1,639		2.80	%
Total investment securities	962,607		6,235		2.59	%	1,625,453		6,989		1.72	%
Other interest-earning assets	483,952		6,452		5.23	%	144,409		1,127		3.09	%
Total non-loan earning assets	1,446,559		12,687		3.47	%	1,769,862		8,116		1.83	%
Total interest-earning assets	7,676,895		$	100,388	5.15	%	7,161,120		$	71,211	3.91	%
Other assets, net	740,561						695,011
Total assets	$	8,417,456					$	7,856,131
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings	$	804,730	$	2,520	1.24	%	$	899,503	$	488	0.22	%
Interest-bearing demand	843,893		3,228		1.52	%	990,891		1,148		0.46	%
MMA	1,873,545		13,032		2.76	%	1,540,610		1,309		0.34	%
Core time deposits	969,690		8,848		3.62	%	543,444		408		0.30	%
Total interest-bearing core deposits	4,491,858		27,628		2.44	%	3,974,448		3,353		0.33	%
Brokered deposits	651,745		7,336		4.47	%	468,010		1,285		1.09	%
Total interest-bearing deposits	5,143,603		34,964		2.70	%	4,442,458		4,638		0.41	%
Wholesale funding	241,689		3,446		5.58	%	287,751		3,090		4.25	%
Total interest-bearing liabilities	5,385,292		38,410		2.83	%	4,730,209		7,728		0.65	%
Noninterest-bearing demand deposits	2,012,974						2,200,789
Other liabilities	36,057						34,928
Stockholders’ equity	983,133						890,205
Total liabilities and stockholders’ equity	$	8,417,456					$	7,856,131
Interest rate spread					2.32	%					3.26	%
Net free funds					0.84	%					0.22	%
Tax-equivalent net interest income and net interest margin			$	61,978	3.16	%			$	63,483	3.48	%
Tax-equivalent adjustment			$	504					$	493
Net interest income			$	61,474					$	62,990

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

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

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


	For the Three Months Ended September 30, 2023 Compared to September 30, 2022:						For the Nine Months Ended September 30, 2023 Compared to September 30, 2022:
	Increase (Decrease) Due to Changes in						Increase (Decrease) Due to Changes in
(in thousands)	Volume		Rate		Net (1)		Volume		Rate		Net (1)
Interest-earning assets



Total loans (2)	$	10,704	$	13,902	$	24,606	$	46,562	$	37,044	$	83,606
Investment securities:
Taxable	(1,442)		443		(999)		(3,073)		906		(2,167)
Tax-exempt (2)	(34)		279		245		1,056		1,413		2,469
Total investment securities	(1,476)		722		(754)		(2,017)		2,319		302
Other interest-earning assets	4,100		1,225		5,325		160		7,451		7,611
Total non-loan earning assets	2,624		1,947		4,571		(1,857)		9,770		7,913
Total interest-earning assets	$	13,328	$	15,849	$	29,177	$	44,705	$	46,814	$	91,519
Interest-bearing liabilities
Savings	$	(57)	$	2,089	$	2,032	$	(9)	$	6,569	$	6,560
Interest-bearing demand	(194)		2,274		2,080		(318)		7,348		7,030
MMA	342		11,381		11,723		602		33,489		34,091
Core time deposits	554		7,886		8,440		651		14,765		15,416
Total interest-bearing core deposits	645		23,630		24,275		926		62,171		63,097
Brokered deposits	680		5,371		6,051		1,213		15,691		16,904
Total interest-bearing deposits	1,325		29,001		30,326		2,139		77,862		80,001
Wholesale funding	(360)		716		356		3,472		2,317		5,789
Total interest-bearing liabilities	965		29,717		30,682		5,611		80,179		85,790
Net interest income	$	12,363	$	(13,868)	$	(1,505)	$	39,094	$	(33,365)	$	5,729

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

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

The Federal Reserve raised short-term interest rates a total of 425 bps during 2022, increasing the Federal Funds rate to a range of 4.25% to 4.50% as of December 31, 2022. Additional increases totaling 100 bps were made in the first nine months of 2023, resulting in a Federal Funds range of 5.25% to 5.50% as of September 30, 2023.

Tax-equivalent net interest income was $179 million for the nine months ended September 30, 2023, an increase of $6 million (3%) over the nine months ended September 30, 2022. The $6 million increase in tax-equivalent net interest income was attributable to net favorable volumes (which added $39 million to net interest income, mostly from the Charter acquisition and loan growth) and net unfavorable rates (which decreased net interest income $33 million from higher deposit costs and the lag in repricing the loan portfolio to current market interest rates).

Average interest-earning assets increased to $7.7 billion, up $849 million (12%) over the comparable 2022 period, primarily due to the timing of the acquisition of Charter. Between the comparable nine-month periods, average loans increased $1.2 billion (25%), mostly due to timing of the Charter acquisition (which added loans of $827 million at acquisition) and strong organic loan growth throughout 2022. Average investment securities decreased $414 million between the comparable nine-month periods, while other interest-earning assets increased $15 million, mostly due to investable cash. As a result, the mix of average interest-earning assets shifted to 81% loans, 15% investments and 4% other interest-earning assets (mostly cash) for the first nine months of 2023, compared to 73%, 23% and 4%, respectively, for the first nine months of 2022.

Average interest-bearing liabilities were $5.3 billion for the first nine months of 2023, an increase of $716 million (16%) over the first nine months of 2022, primarily due to the timing of the acquisition of Charter. Average interest-bearing core deposits increased $442 million and average brokered deposits increased $170 million between the comparable nine-month periods, reflecting the impact of the Charter acquisition and brokered funding to support the strong loan growth in 2022. Other interest-bearing liabilities increased $104 million between the comparable nine-month periods, partly due to wholesale funding acquired with Charter and partly due to FHLB borrowings to support the strong loan growth in 2022. The mix of average interest-bearing liabilities was 82% core deposits, 12% brokered deposits and 6% wholesale funding for the first nine months of 2023, compared to 85%, 10%, and 5%, respectively, for the first nine months of 2022.

The interest rate spread decreased 91 bps between the comparable nine-month periods, as our liabilities have repriced faster than our assets in the rapidly rising interest rate environment. The interest-earning asset yield increased 118 bps to 4.85% for the first nine months of 2023, due to the changing mix of interest-earning assets (noted above), as well as the higher interest rate environment. The loan yield improved 88 bps to 5.33% between the comparable nine-month periods, largely due to the repricing of new and renewed loans in a rising interest rate environment, while the yield on investment securities increased 60 bps to 2.22%. The cost of funds increased 209 bps to 2.56% for the first nine months of 2023, also reflecting the rising interest rate environment and a migration of customer deposits into higher rate deposit products. The contribution from net free funds increased 62 bps, mostly due to the higher value in the rising interest rate environment. As a result, the tax-equivalent net interest margin was 3.07% for the first nine months of 2023, down 29 bps compared to 3.36% for the first nine months of 2022.

Tax-equivalent interest income was $281 million for the first nine months of 2023, up $92 million from comparable period of 2022, comprised of $45 million higher volumes and $47 million higher average rates (mostly in the loan portfolio). Interest income on loans increased $84 million over the first nine months of 2022, due to higher average balances from the Charter acquisition and strong organic loan growth in 2022, as well as higher rates from the rising interest rate environment. Interest expense increased to $102 million for the first nine months of 2023, up $86 million compared to the first nine months of 2022, mostly due to a much higher cost of funds. Interest expense on deposits increased $80 million between the comparable nine-month periods mostly due to the rapidly rising interest rate environment.

Provision for Credit Losses

The provision for credit losses was $4.0 million for the nine months ended September 30, 2023 (comprised of $1.7 million related to the ACL-Loans and $2.3 million for the ACL on securities AFS), compared to $9.7 million for the nine months ended September 30, 2022 (comprised of $9.1 million related to the ACL-Loans and the remainder for the ACL on unfunded commitments). The 2023 provision for credit losses on loans was attributable to growth and changes in the underlying loan portfolio, while the provision for credit losses on securities AFS was due to the expected loss on our Signature Bank subordinated debt investment which was fully charged-off during first quarter 2023. The 2022 provision for credit losses was mostly due to the Day 2 increase from the Charter acquisition.

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

Noninterest Income

Table 4: Noninterest Income


	Three Months Ended September 30,								Nine Months Ended September 30,
(in thousands)	2023		2022		$ Change		% Change		2023		2022		$ Change		% Change
Trust services fee income	$	2,107	$	1,969	$	138	7	%	$	6,288	$	5,984	$	304	5	%
Brokerage fee income	3,950		3,040		910		30		11,151		9,716		1,435		15
Wealth management fee income	6,057		5,009		1,048		21		17,439		15,700		1,739		11
Mortgage income, net	2,020		1,728		292		17		5,308		7,186		(1,878)		(26)
Service charges on deposit accounts	1,492		1,589		(97)		(6)		4,501		4,602		(101)		(2)
Card interchange income	3,321		3,012		309		10		9,685		8,543		1,142		13
BOLI income	1,090		966		124		13		3,363		2,667		696		26
Deferred compensation plan asset market valuations	(457)		(571)		114		N/M		988		(2,354)		3,342		N/M
LSR income, net	1,108		(517)		1,625		N/M		3,398		(1,042)		4,440		N/M
Other income	1,879		1,830		49		3		5,611		4,902		709		14
Noninterest income without net gains (losses)	16,510		13,046		3,464		27		50,293		40,204		10,089		25
Asset gains (losses), net	31		(46)		77		N/M		(38,755)		2,870		(41,625)		N/M
Total noninterest income	$	16,541	$	13,000	$	3,541	27	%	$	11,538	$	43,074	$	(31,536)	(73)	%

N/M means not meaningful.

Noninterest income was $11.5 million for the first nine months of 2023, an unfavorable change of $31.5 million compared to the first nine months of 2022, primarily due to the balance sheet repositioning. Excluding net asset gains (losses), noninterest income for the first nine months of 2023 was $50.3 million, a $10.1 million (25%) increase over the comparable period in 2022.

Wealth management fee income was $17.4 million, up $1.7 million (11%) from the first nine months of 2022, on growth in accounts and assets under management (up 24% from year-end 2022), though tempered by unfavorable market-related changes.

Mortgage income includes net gains received from the sale of residential real estate loans into the secondary market, capitalized mortgage servicing rights (“MSR”), servicing fees net of MSR amortization, fair value marks on the mortgage interest rate lock commitments and forward commitments (“mortgage derivatives”), and MSR valuation changes, if any. Net mortgage income of $5.3 million, decreased $1.9 million (26%) between the comparable nine-month periods, mostly due to the rising interest rate environment reducing secondary market volumes and the related gains on sales. See also Note 7, “Goodwill and Other Intangibles and Servicing Rights” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures on the MSR asset.

Card interchange income grew $1.1 million (13%) between the comparable nine-month periods due to higher volume and activity.

BOLI income was up $0.7 million between the comparable nine-month periods, attributable to higher average balances from BOLI acquired with the Charter acquisition.

Loan servicing rights (“LSR”) income increased $4.4 million between the comparable nine-month periods mostly due to lower LSR amortization from the much slower prepayment speeds in the higher interest rate environment. See also Note 7, “Goodwill and Other Intangibles and Servicing Rights” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional information on the LSR asset.

Other income of $5.6 million for the nine months ended September 30, 2023 was up $0.7 million from the comparable 2022 period, largely due to broker fees and card incentive income.

Net asset losses of $38.8 million for the first nine months of 2023 were primarily attributable to losses on the sale of approximately $500 million (par value) U.S. Treasury held to maturity securities executed in early March as part of a balance sheet repositioning, while net asset gains of $2.9 million for the first nine months of 2022 were primarily attributable to gains on sales of other real estate owned (mostly closed bank branch locations).

Noninterest Expense

Table 5: Noninterest Expense


	Three Months Ended September 30,								Nine Months Ended September 30,
($ in thousands)	2023		2022		Change		% Change		2023		2022		Change		% Change
Personnel	$	23,944	$	24,136	$	(192)	(1)	%	$	72,172	$	65,008	$	7,164	11	%
Occupancy, equipment and office	9,027		7,641		1,386		18		26,655		21,476		5,179		24
Business development and marketing	1,869		2,281		(412)		(18)		5,936		6,169		(233)		(4)
Data processing	4,643		3,664		979		27		12,849		10,647		2,202		21
Intangibles amortization	1,986		1,628		358		22		6,230		4,399		1,831		42
FDIC assessments	1,500		480		1,020		213		3,049		1,440		1,609		112
Merger-related expense	—		519		(519)		(100)		189		1,172		(983)		(84)
Other expense	2,769		2,218		551		25		8,490		6,344		2,146		34
Total noninterest expense	$	45,738	$	42,567	$	3,171	7	%	$	135,570	$	116,655	$	18,915	16	%
Non-personnel expenses	$	21,794	$	18,431	$	3,363	18	%	$	63,398	$	51,647	$	11,751	23	%
Average full-time equivalent (“FTE”) employees	977		907		70		8	%	955		863		92		11	%

Noninterest expense was $135.6 million, an increase of $18.9 million (16%) over the first nine months of 2022. Personnel costs increased $7.2 million (11%), while non-personnel expenses combined increased $11.8 million (23%) compared to the first nine months of 2022.

Personnel expense was $72.2 million for the nine months ended September 30, 2023, an increase of $7.2 million from the comparable period in 2022. Salary expense increased $6.0 million (11%) over the first nine months of 2022, reflecting higher salaries from the larger employee base (with average full-time equivalent employees up 11%, mostly due to the Charter acquisition), investments in our wealth team, and merit increases between the years, partly offset by lower incentive compensation commensurate with the lower current period earnings. Fringe benefits increased $1.2 million (12%) over the first nine months of 2022, reflecting higher overall health care expenses as well as the larger employee base. Salary expense was also impacted by the change in the fair value of nonqualified deferred compensation plan liabilities from the recent market improvements. See also “Noninterest Income” for the offsetting fair value change to the nonqualified deferred compensation plan assets.

Occupancy, equipment and office expense was $26.7 million for the first nine months of 2023, up $5.2 million (24%) compared to the first nine months of 2022, largely due to the expanded branch network with the Charter acquisition, as well as additional expense for software and technology solutions.

Business development and marketing expense was $5.9 million, down $0.2 million (4%) between the comparable nine-month periods, largely attributable to the timing and extent of marketing donations, promotions, and media.

Data processing expense was $12.8 million, up $2.2 million (21%) between the comparable nine-month periods, mostly due to volume-based increases in core and card processing charges, partly from the Charter acquisition.

Intangibles amortization increased $1.8 million between the comparable nine-month periods due to higher amortization from the intangibles added with the Charter acquisition.

Other expense was $8.5 million, up $2.1 million (34%) between the comparable nine-month periods, mostly due to higher professional fees.

Income Taxes

Income tax expense was $18.4 million (effective tax rate of 37.3%) for the first nine months of 2023, compared to expense of $22.0 million (effective tax rate of 24.8%) for the comparable period of 2022. The change in income tax expense was due to lower pretax earnings, and also included a $9.1 million charge to income tax expense to establish a tax valuation allowance related to the Wisconsin tax law change noted above in the “Performance Summary” section.

Income Statement Analysis – Three Months Ended September 30, 2023 versus Three Months Ended September 30, 2022

Net income was $17.2 million, or adjusted net income (non-GAAP) of $23.3 million, for the three months ended September 30, 2023, compared to net income of $18.5 million, or adjusted net income (non-GAAP) of $24.9 million for the three months ended September 30, 2022. Earnings per diluted common share was $1.14 for third quarter 2023, compared to $1.29 for third quarter 2022.

Tax-equivalent net interest income was $62.0 million for third quarter 2023, a decrease of $1.5 million from third quarter 2022. Interest income increased $29.2 million over third quarter 2022, while interest expense increased $30.7 million from third quarter 2022. The increase in interest income included $15.8 million from higher yields (reflecting the rising interest rate environment) and $13.3 million from stronger volumes (led by average loans which grew $839 million or 16% over third quarter 2022, mostly due to timing of the Charter acquisition). Average investment securities decreased $663 million, while other interest-earning assets grew $340 million (primarily investable cash) between the comparable third quarter periods, mostly due to the balance sheet repositioning actions in first quarter 2023 as well as investment securities maturities and paydowns. Interest expense increased $30.7 million from third quarter 2022, mostly due to $29.7 million higher overall funding costs. For additional information regarding average balances, net interest income and net interest margin, see “INCOME STATEMENT ANALYSIS — Net Interest Income.”

The net interest margin for third quarter 2023 was 3.16%, compared to 3.48% for third quarter 2022, impacted by the rising interest rate environment and the changing balance sheet mix. The mix of average interest-earning assets shifted from 75% loans, 23% investments and 2% other interest-earning assets (mostly investable cash) for third quarter 2022, to 81%, 13% and 6%, respectively, for third quarter 2023. The mix of average interest-bearing liabilities shifted from 84% core deposits, 10% brokered deposits, and 6% wholesale funding for third quarter 2022, to 83%, 12%, and 5%, respectively, for third quarter 2023, including a notable shift to higher rate deposit products. The yield on interest-earning assets of 5.15% increased 124 bps from third quarter 2022, while the cost of funds of 2.83% increased 218 bps between the comparable quarters.

Provision for credit losses was $0.5 million for third quarter 2023 (all related to the ACL-Loans), compared to $8.6 million provision for credit losses for third quarter 2022 (comprised of $8.2 million related to the ACL-Loans, and $0.4 million for the ACL on unfunded commitments). The third quarter 2022 provision for credit losses was mostly due to the Day 2 ACL increase from the Charter acquisition. For additional information regarding the allowance for credit losses-loans and asset quality, see “BALANCE SHEET ANALYSIS — Allowance for Credit Losses - Loans” and “BALANCE SHEET ANALYSIS — Nonperforming Assets.”

Noninterest income was $16.5 million for third quarter 2023, an increase of $3.5 million (27%) from third quarter 2022. Wealth management fee income grew $1.0 million (21%), including favorable market-related changes, as well as growth in accounts and assets under management. Card interchange income grew $0.3 million (10%) between the comparable third quarter periods due to higher volume and activity. LSR income increased $1.6 million between the comparable third quarter periods mostly due to lower LSR amortization from the much slower prepayments speeds in the higher interest rate environment. For additional information regarding noninterest income, see “INCOME STATEMENT ANALYSIS — Noninterest Income.”

Noninterest expense was $45.7 million for third quarter 2023, an increase of $3.2 million (7%) from third quarter 2022, including a $0.2 million decrease in personnel expense and a $3.4 million increase in non-personnel expenses. The decrease in personnel included higher salaries and fringe benefits more than offset by lower incentive compensation. Occupancy, equipment, and office of $9.0 million was up $1.4 million (18%), largely due to the expanded branch network with the Charter acquisition as well as additional expense for software and technology solutions. Data processing expense was $4.6 million, up $1.0 million (27%) between the comparable third quarter periods, mostly due to volume-based increases in core and card processing charges, including the larger operating base following the Charter acquisition. Other expense was $2.8 million, an increase of $0.6 million between the comparable third quarter periods, primarily due to higher professional fees and overall higher expenses related to our larger operating base. For additional information regarding noninterest expense, see “INCOME STATEMENT ANALYSIS — Noninterest Expense.”

Income tax expense was $14.7 million (effective tax rate of 46.1%) for third quarter 2023, compared to $6.3 million (effective tax rate of 25.4%) for third quarter 2022. The change in income tax expense included a $9.1 million charge to income tax expense to establish a tax valuation allowance, partly offset by a $3.0 million reduction to income tax expense to reverse amounts recorded in the first half of 2023, both related to the Wisconsin tax law change noted above in the “Performance Summary” section.

BALANCE SHEET ANALYSIS

At September 30, 2023, period end assets were $8.4 billion, a decrease of $348 million (4%) from December 31, 2022, mostly lower investment securities from the first quarter balance sheet repositioning, as well as subsequent investment securities maturities and paydowns, partly offset by higher cash balances. Total loans increased $59 million from December 31, 2022, with growth in residential mortgage loans partly offset by slower commercial loan demand, the sale of specific nonaccrual loans, and the payoff of two larger loan relationships. Total deposits of $7.2 billion at September 30, 2023, were minimally changed from December 31, 2022, with growth in customer and brokered time deposits partly offset by lower transaction account balances. Total borrowings decreased $345 million from December 31, 2022 in FHLB advances, mostly from the first quarter balance sheet repositioning. Total stockholders’ equity was $974 million at September 30, 2023, an increase of $2 million since December 31, 2022, with increases from earnings substantially offset by negative fair value investment changes and dividend payments.

Compared to September 30, 2022, assets decreased $480 million (5%), including lower investment securities from the first quarter balance sheet repositioning, as well as subsequent investment securities maturities and paydowns, partly offset by solid loan growth. Total loans increased $255 million, primarily in residential mortgage and agricultural loans. Total deposits decreased $214 million from September 30, 2022. Stockholders’ equity increased $36 million from September 30, 2022, with solid net income, partially offset by negative net fair value investment changes and dividend payments.

Loans

Nicolet services a diverse customer base throughout Wisconsin, Michigan and Minnesota. We concentrate on originating loans in our local markets and assisting current loan customers. Nicolet actively utilizes government loan programs such as those provided by the U.S. Small Business Administration (“SBA”) and the U.S. Department of Agriculture’s Farm Service Agency (“FSA”).

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

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

Table 6: Period End Loan Composition


	September 30, 2023				December 31, 2022				September 30, 2022
(in thousands)	Amount		% of Total		Amount		% of Total		Amount		% of Total
Commercial & industrial	$	1,237,789	20	%	$	1,304,819	21	%	$	1,268,252	21	%
Owner-occupied CRE	971,397		16		954,599		15		954,933		16
Agricultural	1,108,261		18		1,088,607		18		1,017,498		17
Commercial	3,317,447		54		3,348,025		54		3,240,683		54
CRE investment	1,130,938		18		1,149,949		19		1,132,951		19
Construction & land development	326,747		5		318,600		5		306,446		5
Commercial real estate	1,457,685		23		1,468,549		24		1,439,397		24
Commercial-based loans	4,775,132		77		4,816,574		78		4,680,080		78
Residential construction	76,289		1		114,392		2		101,286		2
Residential first mortgage	1,136,748		18		1,016,935		16		970,384		16
Residential junior mortgage	195,432		3		177,332		3		176,428		3
Residential real estate	1,408,469		22		1,308,659		21		1,248,098		21
Retail & other	55,656		1		55,266		1		56,259		1
Retail-based loans	1,464,125		23		1,363,925		22		1,304,357		22
Total loans	$	6,239,257	100	%	$	6,180,499	100	%	$	5,984,437	100	%

As noted in Table 6 above, the loan portfolio at September 30, 2023, was 77% commercial-based and 23% retail-based. Commercial-based loans are considered to have more inherent risk of default than retail-based loans, in part because of the broader list of factors that could impact a commercial borrower negatively. In addition, the commercial balance per borrower is typically larger than that for retail-based loans, implying higher potential losses on an individual customer basis. Credit risk on commercial-based loans is largely influenced by general economic conditions and the resulting impact on a borrower’s operations or on the value of underlying collateral, if any.

Total loans of $6.2 billion at September 30, 2023, increased $59 million from December 31, 2022, with growth in residential mortgage loans partly offset by slower commercial loan demand, the sale of specific nonaccrual loans, and the payoff of two larger loan relationships. At September 30, 2023, commercial and industrial loans represented the largest segment of Nicolet’s loan portfolio at 20% of the total portfolio, followed by agricultural and CRE investment each at 18% of the total portfolio. The loan portfolio is widely diversified and included the following industries: manufacturing, wholesaling, paper, packaging, food production and processing, agriculture, forest products, hospitality, retail, service, and businesses supporting the general building industry. The following chart provides the industry distribution of our commercial loan portfolio at September 30, 2023.


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

Commercial Loan Portfolio by Industry_09.30.2023.jpg

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

Table 7: Loan Maturity Distribution


As of September 30, 2023	Loan Maturity
(in thousands)	One Year or Less			After One Year to Five Years			After Five Years to Fifteen Years			After Fifteen Years			Total
Commercial & industrial	$	421,162		$	648,557		$	157,771		$	10,299		$	1,237,789
Owner-occupied CRE	77,437			674,765			190,312			28,883			971,397
Agricultural	395,017			322,060			350,574			40,610			1,108,261
CRE investment	127,690			748,772			228,546			25,930			1,130,938
Construction & land development	30,254			184,992			85,995			25,506			326,747
Residential construction *	28,245			8,189			1,248			38,607			76,289
Residential first mortgage	24,177			265,884			186,542			660,145			1,136,748
Residential junior mortgage	15,247			18,580			34,558			127,047			195,432
Retail & other	29,656			13,012			8,861			4,127			55,656
Total loans	$	1,148,885		$	2,884,811		$	1,244,407		$	961,154		$	6,239,257
Percent by maturity distribution	19		%	46		%	20		%	15		%	100		%










Total fixed rate loans	$	505,680		$	2,681,310		$	863,139		$	323,819		$	4,373,948










Total floating rate loans	$	643,205		$	203,501		$	381,268		$	637,335		$	1,865,309


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










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










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

* The residential construction loans with a loan maturity after five years represent a construction to permanent loan product.

Allowance for Credit Losses - Loans

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

Credit risks within the loan portfolio are inherently different for each loan type. Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and ongoing review of loan payment performance. Active asset quality administration, including early problem loan identification and timely resolution of problems, aids in the management of credit risk and minimization of loan losses. Loans charged off are subject to continuous review, and specific efforts are taken to achieve maximum recovery of principal, interest, and related expenses. For additional information regarding nonperforming assets see also “BALANCE SHEET ANALYSIS – Nonperforming Assets.”

The ACL-Loans represents management’s estimate of expected credit losses in the Company’s loan portfolio at the balance sheet date. To assess the overall appropriateness of the ACL-Loans, management applies an allocation methodology which focuses on evaluation of qualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to specific loans; (ii) management’s ongoing review and grading of the loan portfolio; (iii) consideration of historical loan loss and delinquency experience on each portfolio segment; (iv) trends in past due and nonaccrual loans; (v) the risk characteristics of the various loan segments; (vi) changes in the size and character of the loan portfolio; (vii) concentrations of loans to specific borrowers or industries; (viii) existing economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect expected credit losses. Assessing these numerous factors involves significant judgment; therefore, management considers the ACL-Loans a critical accounting estimate.

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

At September 30, 2023, the ACL-Loans was $63 million (representing 1.01% of period end loans), minimally changed from $62 million (or 1.00% of period end loans) at December 31, 2022 and up from $60 million (or 1.01% of period end loans) at September 30, 2022. The components of the ACL-Loans are detailed further in Table 8 below.

Table 8: Allowance for Credit Losses - Loans


	Nine Months Ended						Year Ended
(in thousands)	September 30, 2023			September 30, 2022			December 31, 2022
ACL-Loans:
Balance at beginning of period	$	61,829		$	49,672		$	49,672
ACL on PCD loans acquired	—			1,709			1,937
Provision for credit losses	1,650			9,100			10,950
Charge-offs	(1,091)			(442)			(1,033)
Recoveries	772			309			303
Net (charge-offs) recoveries	(319)			(133)			(730)
Balance at end of period	$	63,160		$	60,348		$	61,829
Net loan (charge-offs) recoveries:
Commercial & industrial	$	115		$	(49)		$	(86)
Owner-occupied CRE	(60)			(36)			(555)
Agricultural	(63)			—			—
CRE investment	—			169			169
Construction & land development	—			—			—
Residential construction	—			—			—
Residential first mortgage	3			(58)			(57)
Residential junior mortgage	(96)			9			1
Retail & other	(218)			(168)			(202)
Total net (charge-offs) recoveries	$	(319)		$	(133)		$	(730)
Ratios:
ACL-Loans to total loans	1.01		%	1.01		%	1.00		%
Net charge-offs to average loans, annualized	0.01		%	—		%	0.01		%

Nonperforming Assets

As part of its overall credit risk management process, management is committed to an aggressive problem loan identification philosophy. This philosophy has been implemented through the ongoing monitoring and review of all pools of risk in the loan portfolio to identify problem loans early and minimize the risk of loss. Management continues to actively work with customers and monitor credit risk from the ongoing macroeconomic challenges. For additional disclosures on credit quality, see Note 6, “Loans, Allowance for Credit Losses - Loans, and Credit Quality” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1. For additional information on loans see “BALANCE SHEET ANALYSIS – Loans” and for additional information on the ACL-Loans see “BALANCE SHEET ANALYSIS – Allowance for Credit Losses-Loans.”

Nonperforming loans are considered one indicator of potential future loan losses. Nonperforming loans are defined as nonaccrual loans 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, 2023, nonperforming assets were $32 million and represented 0.37% of total assets, compared to $40 million or 0.46% of total assets at December 31, 2022. The reduction in nonperforming assets was mostly due to the nonaccrual loan sale (as noted under “BALANCE SHEET ANALYSIS – Loans” above).

The level of potential problem loans is another predominant factor in determining the relative level of risk in the loan portfolio and in determining the appropriate level of the ACL-Loans. Potential problem loans are generally defined by management to include loans rated as Substandard by management but that are in performing status; however, there are circumstances present which might adversely affect the ability of the borrower to comply with present repayment terms. The decision of management to include performing loans in potential problem loans does not necessarily mean that Nicolet expects losses to occur, but that management recognizes a higher degree of risk associated with these loans. The loans that have been reported as potential problem loans are predominantly commercial-based loans covering a diverse range of businesses and real estate property types. Potential problem loans were $72 million (1% of loans) and $53 million (1% of loans) at September 30, 2023 and December 31, 2022, respectively, with the increase primarily due to the downgrade of one commercial credit relationship. Potential problem loans require heightened management review given the pace at which a credit may deteriorate, the potential duration of asset quality stress, and uncertainty around the magnitude and scope of economic stress that may be felt by Nicolet’s customers and on underlying real estate values.

Table 9: Nonperforming Assets


(in thousands)	September 30, 2023			December 31, 2022			September 30, 2022
Nonperforming loans:
Commercial & industrial	$	5,192		$	3,328		$	3,052
Owner-occupied CRE	5,602			5,647			5,806
Agricultural	13,458			20,416			20,646
Commercial	24,252			29,391			29,504
CRE investment	1,100			3,832			3,343
Construction & land development	177			771			794
Commercial real estate	1,277			4,603			4,137
Commercial-based loans	25,529			33,994			33,641
Residential construction	—			—			—
Residential first mortgage	3,812			3,780			4,309
Residential junior mortgage	92			224			277
Residential real estate	3,904			4,004			4,586
Retail & other	74			82			99
Retail-based loans	3,978			4,086			4,685
Total nonaccrual loans	29,507			38,080			38,326
Accruing loans past due 90 days or more	—			—			—
Total nonperforming loans	$	29,507		$	38,080		$	38,326
Nonaccrual loans (included above) covered by guarantees	$	5,919		$	5,459		$	5,493
OREO:
Commercial real estate owned	$	1,147		$	628		$	628

Bank property real estate owned	884			1,347			1,506
Total OREO	2,031			1,975			2,134
Total nonperforming assets	$	31,538		$	40,055		$	40,460

Ratios:
Nonperforming loans to total loans	0.47		%	0.62		%	0.64		%
Nonperforming assets to total loans plus OREO	0.51		%	0.65		%	0.68		%
Nonperforming assets to total assets	0.37		%	0.46		%	0.45		%
ACL-Loans to nonperforming loans	214		%	162		%	157		%

Deposits

Deposits represent Nicolet’s largest source of funds, and the strong core deposit base provides a stable funding source. Core deposit balances of $6.6 billion at September 30, 2023 were minimally changed from December 31, 2022, and included a shift to higher rate deposit products (mostly money market accounts and time deposits). Compared to September 30, 2022, core deposits decreased $178 million (3%) and brokered deposits decreased $35 million (5%). The deposit composition is presented in Table 10 below.

Table 10: Period End Deposit Composition


	September 30, 2023				December 31, 2022				September 30, 2022
(in thousands)	Amount		% of Total		Amount		% of Total		Amount		% of Total
Noninterest-bearing demand	$	2,020,074	28	%	$	2,361,816	33	%	$	2,477,507	33	%
Interest-bearing demand	955,746		13	%	1,279,850		18	%	1,242,961		17	%
Money market	1,933,227		27	%	1,707,619		24	%	1,769,444		24	%
Savings	789,045		11	%	931,417		13	%	939,832		13	%
Time	1,484,296		21	%	898,219		12	%	966,158		13	%
Total deposits	$	7,182,388	100	%	$	7,178,921	100	%	$	7,395,902	100	%
Brokered transaction accounts	$	146,517	2	%	$	252,829	3	%	$	252,891	3	%
Brokered and listed time deposits	457,433		6	%	339,066		5	%	386,101		5	%
Total brokered deposits	$	603,950	8	%	$	591,895	8	%	$	638,992	8	%
Customer transaction accounts	$	5,551,575	77	%	$	6,027,873	84	%	$	6,176,853	84	%
Customer time deposits	1,026,863		15	%	559,153		8	%	580,057		8	%
Total customer deposits (core)	$	6,578,438	92	%	$	6,587,026	92	%	$	6,756,910	92	%

Total estimated uninsured deposits were $2.0 billion (representing 29% of total deposits) at September 30, 2023, compared to $2.3 billion (representing 32% of total deposits) at December 31, 2022.

Lending-Related Commitments

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

Table 11: Commitments


(in thousands)	September 30, 2023		December 31, 2022
Commitments to extend credit	$	1,810,068	$	1,850,601
Financial standby letters of credit	18,235		26,530
Performance standby letters of credit	15,814		9,375

For additional disclosures on lending-related commitments, see Note 9, “Commitments and Contingencies” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1.

Liquidity Management

Liquidity management refers to the ability to ensure that adequate liquid funds are available to meet the current and future cash flow obligations arising in the daily operations of the Company. These cash flow obligations include the ability to meet the commitments to borrowers for extensions of credit, accommodate deposit cycles and trends, fund capital expenditures, pay dividends to stockholders (if any), and satisfy other operating expenses. The Company’s most liquid assets are cash and due from banks and interest-earning deposits, which totaled $546 million and $155 million at September 30, 2023 and December 31, 2022, respectively. Balances of these liquid assets are dependent on our operating, investing, and financing activities during any given period.

The $391 million increase in cash and cash equivalents since year-end 2022 included $70 million net cash provided by operating activities and $670 million net cash provided by investing activities (mostly investment sales from the balance sheet repositioning), partly offset by $349 million net cash used in financing activities (mostly repayment of FHLB borrowings from the balance sheet repositioning). As of September 30, 2023, management believed that adequate liquidity existed to meet all projected cash flow obligations.

Nicolet’s primary sources of funds include the core deposit base, repayment and maturity of loans, investment securities calls, maturities, and sales, and procurement of brokered deposits or other wholesale funding. At September 30, 2023, approximately 43% of the investment securities portfolio was pledged as collateral to secure public deposits and borrowings, as applicable, and

for liquidity or other purposes as required by regulation. Liquidity sources available to the Company at September 30, 2023, are presented in Table 12 below.

Table 12: Liquidity Sources


(in millions)	September 30, 2023
FHLB Borrowing Availability (1)	$	560
Fed Funds Lines	195
Fed Discount Window	11
Immediate Funding Availability	$	766

Brokered Capacity	1,192
Guaranteed portion of SBA loans	87
Other funding sources	96
Short-Term Funding Availability (2)	$	1,375

Total Contingent Funding Availability	$	2,141

(1) Excludes outstanding FHLB borrowings of $5 million at September 30, 2023.
(2) Short-term funding availability defined as funding that could be secured between 2 and 30 days.

Management is committed to the Parent Company being a source of strength to the Bank and its other subsidiaries, and therefore, regularly evaluates capital and liquidity positions of the Parent Company in light of current and projected needs, growth or strategies. The Parent Company uses cash for normal expenses, debt service requirements and, when opportune, for common stock repurchases, repayment of debt, or investment in other strategic actions such as mergers or acquisitions. At September 30, 2023, the Parent Company had $49 million in cash. Additional cash sources available to the Parent Company include access to the public or private markets to issue new equity, subordinated notes or other debt. Dividends from the Bank and, to a lesser extent, stock option exercises, represent significant sources of cash flows for the Parent Company. The Bank is required by federal law to obtain prior approval of the OCC for payments of dividends if the total of all dividends declared by the Bank in any year will exceed certain thresholds. Management does not believe that regulatory restrictions on dividends from the Bank will adversely affect its ability to meet its cash obligations.

Interest Rate Sensitivity Management and Impact of Inflation

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

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

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

Among other scenarios, we assessed the impact on net interest income in the event of a gradual +/-100 bps and +/-200 bps change in market rates (parallel to the change in prime rate) over a one-year time horizon to a static (flat) balance sheet. The results provided include the liquidity measures mentioned above and reflect the higher interest rate environment. The interest rate scenarios are used for analytical purposes only and do not necessarily represent management’s view of future market interest rate movements. Based on financial data at September 30, 2023 and December 31, 2022, the projected changes in net interest income over a one-year time horizon, versus the baseline, are presented in Table 13 below. The results are within Nicolet’s guidelines of not greater than -10% for +/- 100 bps and not greater than -15% for +/- 200 bps.

Table 13: Interest Rate Sensitivity


	September 30, 2023		December 31, 2022
200 bps decrease in interest rates	(1.8)	%	(0.7)	%
100 bps decrease in interest rates	(0.9)	%	(0.4)	%
100 bps increase in interest rates	1.1	%	—	%
200 bps increase in interest rates	2.3	%	0.1	%

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

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

Capital

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

The Company’s and the Bank’s regulatory capital ratios remain above minimum regulatory ratios, including the capital conservation buffer. At September 30, 2023, the Bank’s regulatory capital ratios qualify the Bank as well-capitalized under the prompt-corrective action framework. This strong base of capital has allowed Nicolet to be opportunistic in strategic growth. A summary of the Company’s and the Bank’s regulatory capital amounts and ratios, as well as selected capital metrics are presented in the following table.

Table 14: Capital


	At or for the Nine Months Ended			At or for the Year Ended
($ in thousands)	September 30, 2023			December 31, 2022
Company Stock Repurchases: *
Common stock repurchased during the period (dollars)	$	1,519		$	61,483
Common stock repurchased during the period (full shares)	26,853			671,662
Company Risk-Based Capital:
Total risk-based capital	$	920,142		$	889,763
Tier 1 risk-based capital	715,567			684,280
Common equity Tier 1 capital	677,004			646,341
Total capital ratio	13.0		%	12.3		%
Tier 1 capital ratio	10.1		%	9.5		%
Common equity tier 1 capital ratio	9.6		%	9.0		%
Tier 1 leverage ratio	8.8		%	8.2		%
Bank Risk-Based Capital:
Total risk-based capital	$	863,617		$	816,951
Tier 1 risk-based capital	805,452			764,090
Common equity Tier 1 capital	805,452			764,090
Total capital ratio	12.2		%	11.3		%
Tier 1 capital ratio	11.4		%	10.6		%
Common equity tier 1 capital ratio	11.4		%	10.6		%
Tier 1 leverage ratio	9.9		%	9.1		%
* 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, dividends, or repayment of equity-equivalent debt) in light of strategic plans. At September 30, 2023, there remains $46 million authorized under this repurchase program, as modified, to be utilized from time-to-time to repurchase shares in the open market, through block transactions or in private transactions.

Critical Accounting Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions or judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates and assumptions are based on historical experience, current information, and other factors deemed to be relevant; accordingly, as this information changes, actual results could differ from those estimates. Nicolet considers accounting estimates to be critical to reported financial results if the accounting estimate requires management to make assumptions about matters that are highly uncertain and different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the financial statements. The accounting estimates we consider to be critical include business combinations and the valuation of loans acquired, the determination of the allowance for credit losses, and income taxes. A discussion of these estimates can be found in the “Critical Accounting Estimates” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2022 Annual Report on Form 10-K. There have been no changes in the Company’s determination of critical accounting policies and estimates since December 31, 2022.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

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

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

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

There have been no material changes in the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

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

Issuer Purchases of Equity Securities

The following table contains information regarding purchases of Nicolet’s common stock made during third quarter 2023 by or on behalf of the Company or any “affiliated purchaser,” as defined by Rule 10b-18(a)(3) of the Exchange Act.


	Total Number of Shares Purchased (a)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (b)
	(#)	($)		(#)	(#)
Period
July 1 – July 31, 2023	39,745	$	80.60	—
August 1 – August 31, 2023	—	$	—	—
September 1 – September 30, 2023	—	$	—	—
Total	39,745	$	80.60	—	659,000

a.During third quarter 2023, the Company withheld no common shares for minimum tax withholding settlements on restricted stock, and withheld 39,745 common shares to satisfy the exercise price and tax withholding requirements on stock option exercises. These are not considered “repurchases” and, therefore, do not count against the maximum number of shares that may yet be purchased under the Board of Directors’ authorization.

b.The Board of Directors approved a common stock repurchase program which authorized, with subsequent modifications, the use of up to $276 million to repurchase outstanding shares of common stock. This common stock repurchase program was last modified on April 19, 2022, and has no expiration date. There were no common stock repurchases under this program during third quarter 2023. At September 30, 2023, approximately $46 million remained available under this common stock repurchase program, or approximately 659,000 shares of common stock (based upon the closing stock price of $69.78 on September 30, 2023).

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Atwell Agreement: In connection with the Company’s succession and transition plan, on November 6, 2023, Robert B. Atwell, our Executive Chairman and one of Nicolet’s founders, and the Company entered into a letter agreement (the “Atwell Agreement”) setting forth the terms applicable to his transition from active employment as the Executive Chairman through December 31, 2023 (the “Transition Date”), to thereafter as an advisor for a period of three years following the Transition Date (the “Term”). In consideration of the services provided and compliance with the restrictive covenants (described below) during the Term, Mr. Atwell will receive an annual fee of $680,000, health insurance coverage for Mr. Atwell and his qualified dependents, Nicolet will continue to pay the premiums for specified life insurance policies, and Nicolet will transfer ownership of his current company-owned car to Mr. Atwell. Pursuant to the Atwell Agreement, Mr. Atwell agreed to be bound by a noncompetition restriction and employee and customer non-solicitation covenants while he is providing services to the Company and for three years thereafter. Mt. Atwell will remain a member of the Company’s Board of Directors.

The foregoing summary of the material terms of the Atwell Agreement is qualified in its entirety by reference to the full text of the agreement, which is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q.

Rule 10b5-1 and Non-Rule 10b5-1 Trading Arrangements: None.

ITEM 6. EXHIBITS

The following exhibits are filed herewith:


Exhibit Number						Description
10.1						Succession Plan and Executive Advisory Services Letter Agreement between Nicolet Bankshares, Inc. and Robert Atwell dated November 6, 2023
31.1						Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002
31.2						Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002
32.1						Certification of CEO Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
32.2						Certification of CFO Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
101						Interactive data files for Nicolet Bankshares, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL: (i) the Consolidated Balance Sheets (unaudited), (ii) the Consolidated Statements of Income (unaudited), (iii) the Consolidated Statements of Comprehensive Income (Loss) (unaudited), (iv) the Consolidated Statements of Stockholders’ Equity (unaudited), (v) the Consolidated Statements of Cash Flows (unaudited), and (vi) Notes to Unaudited Consolidated Financial Statements.
104						Cover Page from Nicolet Bankshares, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 (formatted in Inline XBRL and contained in Exhibit 101)

SIGNATURES

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


			NICOLET BANKSHARES, INC.

November 7, 2023			/s/ Michael E. Daniels
			Michael E. Daniels
			President and Chief Executive Officer

November 7, 2023			/s/ H. Phillip Moore, Jr.
			H. Phillip Moore, Jr.
			Chief Financial Officer