Nicolet Bankshares - 10-Q quarterly report FY2021 Q2

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________

FORM 10-Q

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

For the quarterly period ended June 30, 2021

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

For the transition period from to

Commission file number: 001-37700

NICOLET BANKSHARES, INC.

(Exact Name of Registrant as Specified in its Charter)

Wisconsin

47-0871001

(State or Other Jurisdiction of Incorporation or Organization)

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

111 North Washington Street

Green Bay,

Wisconsin

54301

(Address of Principal Executive Offices)

(Zip Code)

(920)

430-1400

(Registrant’s Telephone Number, Including Area Code)

N/A

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


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

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

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

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

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


Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐	Smaller reporting company	☐

Emerging Growth Company	☐

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

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

As of July 28, 2021 there were 9,779,662 shares of $0.01 par value common stock outstanding.

Nicolet Bankshares, Inc.

Quarterly Report on Form 10-Q

June 30, 2021

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS:

NICOLET BANKSHARES, INC.

Consolidated Balance Sheets

(In thousands, except share and per share data)


	June 30, 2021		December 31, 2020
	(Unaudited)		(Audited)
Assets
Cash and due from banks	$	77,634	$	88,460
Interest-earning deposits	714,772		714,399

Cash and cash equivalents	792,406		802,859
Certificates of deposit in other banks	23,387		29,521
Securities available for sale (“AFS”), at fair value	562,028		539,337
Other investments	33,440		27,619
Loans held for sale	11,235		21,450
Loans	2,820,331		2,789,101
Allowance for credit losses - loans (“ACL-Loans”)	(32,561)		(32,173)
Loans, net	2,787,770		2,756,928
Premises and equipment, net	61,618		59,944
Bank owned life insurance (“BOLI”)	84,347		83,262
Goodwill and other intangibles, net	173,711		175,353
Accrued interest receivable and other assets	57,405		55,516
Total assets	$	4,587,347	$	4,551,789

Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing demand deposits	$	1,324,994	$	1,212,787
Interest-bearing deposits	2,614,028		2,697,612
Total deposits	3,939,022		3,910,399

Long-term borrowings	45,108		53,869
Accrued interest payable and other liabilities	43,822		48,332
Total liabilities	4,027,952		4,012,600

Stockholders’ Equity:
Common stock	98		100
Additional paid-in capital	261,096		273,390
Retained earnings	289,475		252,952
Accumulated other comprehensive income (loss)	8,726		12,747
Total stockholders’ equity	559,395		539,189
Total liabilities and stockholders’ equity	$	4,587,347	$	4,551,789

Preferred shares authorized (no par value)	10,000,000		10,000,000
Preferred shares issued and outstanding	—		—
Common shares authorized (par value $0.01 per share)	30,000,000		30,000,000
Common shares outstanding	9,843,141		10,011,342
Common shares issued	9,865,955		10,030,267

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.

Consolidated Statements of Income

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Interest income:
Loans, including loan fees	$	35,111	$	33,766	$	68,973	$	67,544
Investment securities:
Taxable	2,060		2,042		3,874		4,114
Tax-exempt	520		509		1,065		1,000
Other interest income	616		575		1,271		1,237
Total interest income	38,307		36,892		75,183		73,895
Interest expense:
Deposits	2,433		4,455		5,355		9,412
Short-term borrowings	—		38		—		65
Long-term borrowings	303		902		616		1,658
Total interest expense	2,736		5,395		5,971		11,135
Net interest income	35,571		31,497		69,212		62,760
Provision for credit losses	—		3,000		500		6,000
Net interest income after provision for credit losses	35,571		28,497		68,712		56,760
Noninterest income:
Trust services fee income	1,906		1,510		3,681		3,089
Brokerage fee income	2,991		2,269		5,784		4,591
Mortgage income, net	5,599		9,963		12,829		12,290
Service charges on deposit accounts	1,136		813		2,227		2,038
Card interchange income	2,266		1,637		4,193		3,199
BOLI income	559		540		1,086		1,243
Asset gains (losses), net	4,192		(748)		4,903		(1,402)
Other income	1,529		1,487		2,601		2,008
Total noninterest income	20,178		17,471		37,304		27,056
Noninterest expense:
Personnel	17,084		14,482		32,200		27,805
Occupancy, equipment and office	4,053		4,361		8,190		8,565
Business development and marketing	1,210		2,514		2,199		3,873
Data processing	2,811		2,399		5,469		4,962
Intangibles amortization	790		880		1,642		1,873
FDIC assessments	480		—		1,075		—
Other expense	4,319		3,177		6,053		4,589
Total noninterest expense	30,747		27,813		56,828		51,667
Income before income tax expense	25,002		18,155		49,188		32,149
Income tax expense	6,718		4,576		12,665		7,897
Net income	18,284		13,579		36,523		24,252
Less: Net income attributable to noncontrolling interest	—		101		—		219
Net income attributable to Nicolet Bankshares, Inc.	$	18,284	$	13,478	$	36,523	$	24,033
Earnings per common share:
Basic	$	1.85	$	1.29	$	3.67	$	2.30
Diluted	$	1.77	$	1.28	$	3.52	$	2.25
Weighted average common shares outstanding:
Basic	9,901,614		10,417,226		9,949,359		10,466,590
Diluted	10,325,699		10,519,739		10,364,629		10,659,318

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.

Consolidated Statements of Comprehensive Income

(In thousands) (Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Net income	$	18,284	$	13,579	$	36,523	$	24,252
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities AFS:
Net unrealized holding gains (losses)	1,862		7,985		(5,507)		12,314
Net realized (gains) losses included in income	—		(164)		—		(164)
Income tax (expense) benefit	(503)		(2,112)		1,486		(3,280)
Total other comprehensive income (loss)	1,359		5,709		(4,021)		8,870
Comprehensive income	$	19,643	$	19,288	$	32,502	$	33,122

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.

Consolidated Statements of Stockholders’ Equity

(In thousands) (Unaudited)


	Nicolet Bankshares, Inc. Stockholders’ Equity
	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Non- controlling Interest		Total
Balances at March 31, 2021	$	100	$	271,388	$	271,191	$	7,367	$	—	$	550,046
Comprehensive income:
Net income, three months ended June 30, 2021	—		—		18,284		—		—		18,284
Other comprehensive income (loss)	—		—		—		1,359		—		1,359
Stock-based compensation expense	—		2,055		—		—		—		2,055
Exercise of stock options, net	—		64		—		—		—		64
Issuance of common stock	—		111		—		—		—		111
Purchase and retirement of common stock	(2)		(12,522)		—		—		—		(12,524)

Balances at June 30, 2021	$	98	$	261,096	$	289,475	$	8,726	$	—	$	559,395
Balances at March 31, 2020	$	104	$	299,903	$	203,385	$	7,579	$	769	$	511,740
Comprehensive income:
Net income, three months ended June 30, 2020	—		—		13,478		—		101		13,579
Other comprehensive income (loss)	—		—		—		5,709		—		5,709
Stock-based compensation expense	—		1,657		—		—		—		1,657
Exercise of stock options, net	—		103		—		—		—		103
Issuance of common stock	—		119		—		—		—		119
Purchase and retirement of common stock	—		(4)		—		—		—		(4)
Distribution to noncontrolling interest	—		—		—		—		(50)		(50)
Balances at June 30, 2020	$	104	$	301,778	$	216,863	$	13,288	$	820	$	532,853
Balances at December 31, 2020	$	100	$	273,390	$	252,952	$	12,747	$	—	$	539,189
Comprehensive income:
Net income, six months ended June 30, 2021	—		—		36,523		—		—		36,523
Other comprehensive income (loss)	—		—		—		(4,021)		—		(4,021)
Stock-based compensation expense	—		3,396		—		—		—		3,396
Exercise of stock options, net	—		1,225		—		—		—		1,225
Issuance of common stock	—		232		—		—		—		232
Purchase and retirement of common stock	(2)		(17,147)		—		—		—		(17,149)

Balances at June 30, 2021	$	98	$	261,096	$	289,475	$	8,726	$	—	$	559,395
Balances at December 31, 2019	$	106	$	312,733	$	199,005	$	4,418	$	728	$	516,990
Comprehensive income:
Net income, six months ended June 30, 2020	—		—		24,033		—		219		24,252
Other comprehensive income (loss)	—		—		—		8,870		—		8,870
Stock-based compensation expense	—		2,956		—		—		—		2,956
Exercise of stock options, net	—		954		—		—		—		954
Issuance of common stock	—		334		—		—		—		334
Purchase and retirement of common stock	(2)		(15,199)		—		—		—		(15,201)
Distribution to noncontrolling interest	—		—		—		—		(127)		(127)
Adoption of new accounting pronouncement	—		—		(6,175)		—		—		(6,175)
Balances at June 30, 2020	$	104	$	301,778	$	216,863	$	13,288	$	820	$	532,853

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.

Consolidated Statements of Cash Flows (Unaudited)


(In thousands)	Six Months Ended June 30,
	2021		2020
Cash Flows From Operating Activities:
Net income	$	36,523	$	24,252
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion	5,204		4,954
Provision for credit losses	500		6,000
Increase in cash surrender value of life insurance	(1,086)		(1,058)
Stock-based compensation expense	3,396		2,956
Asset (gains) losses, net	(4,903)		1,402
Gain on sale of loans held for sale, net	(12,133)		(12,217)
Net change due to:
Proceeds from sale of loans held for sale	367,215		395,187
Origination of loans held for sale	(347,161)		(404,346)
Accrued interest receivable and other assets	(2,001)		(9,328)
Accrued interest payable and other liabilities	(2,539)		12,388
Net cash provided by (used in) operating activities	43,015		20,190
Cash Flows From Investing Activities:
Net (increase) decrease in loans	(30,451)		(245,750)
Net (increase) decrease in certificates of deposit in other banks	6,134		1,496
Purchases of securities AFS	(88,204)		(94,380)
Proceeds from sales of securities AFS	—		9,232
Proceeds from calls and maturities of securities AFS	58,349		40,017
Purchases of other investments	(1,710)		(3,738)
Proceeds from sales of other investments	822		—

Proceeds from redemption of BOLI	—		245
Net (increase) decrease in premises and equipment	(3,694)		(6,240)
Net (increase) decrease in other real estate and other assets	1,165		—

Net cash provided by (used in) investing activities	(57,589)		(299,118)
Cash Flows From Financing Activities:
Net increase (decrease) in deposits	28,813		583,612

Proceeds from long-term borrowings	5,000		367,841
Repayments of long-term borrowings	(14,000)		(17,860)
Purchase and retirement of common stock	(17,149)		(15,201)

Proceeds from issuance of common stock	232		334
Proceeds from exercise of stock options	1,225		954
Distribution to noncontrolling interest	—		(127)
Net cash provided by (used in) financing activities	4,121		919,553
Net increase (decrease) in cash and cash equivalents	(10,453)		640,625
Cash and cash equivalents:
Beginning	802,859		182,059
Ending *	$	792,406	$	822,684
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	6,436	$	12,874
Cash paid for taxes	19,416		—
Transfer of loans and bank premises to other real estate owned	302		—
Capitalized mortgage servicing rights	2,294		2,250

* Cash and cash equivalents at both June 30, 2021 and June 30, 2020, include restricted cash of $1.9 million pledged as collateral on interest rate swaps and no reserve balance was required with the Federal Reserve Bank.

See accompanying notes to unaudited consolidated financial statements.

NICOLET BANKSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

Note 1 – Basis of Presentation

General

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

These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been omitted or abbreviated. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Critical Accounting Policies and Estimates

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

There have been no material changes or developments with respect to the assumptions or methodologies that the Company uses when applying what management believes are critical accounting policies and developing critical accounting estimates as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Reclassifications

Certain amounts in the 2020 consolidated financial statements have been reclassified to conform to the 2021 presentation.

Note 2 – Acquisitions

Completed Acquisition:

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

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

Pending Acquisitions:

Mackinac Financial Corporation (“Mackinac”): On April 12, 2021, Nicolet entered into a definitive merger agreement with Mackinac pursuant to which Mackinac will merge with and into Nicolet, expanding Nicolet prominently into Northern Michigan and the Upper Peninsula of Michigan. Mackinac shareholders will receive fixed consideration of 0.22 shares of Nicolet common stock and $4.64 in cash for each share of Mackinac common stock owned (approximating a 20% cash and

80% stock split), subject to provisions provided for in the merger agreement. At March 31, 2021, Mackinac had total assets of $1.5 billion, loans of $1.1 billion, deposits of $1.3 billion, and equity of $170 million. On July 15, 2021, the shareholders of both Mackinac and Nicolet approved the merger at special meetings of their respective shareholders held on that date. As of July 19, 2021, Nicolet received all regulatory approvals for the Mackinac merger. The merger is expected to close in the third quarter of 2021, subject to customary closing conditions.

County Bancorp, Inc. (“County”): On June 22, 2021, Nicolet entered into a definitive merger agreement with County pursuant to which County will merge with and into Nicolet, to become the premiere agriculture lender throughout Wisconsin. Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, County shareholders will have the right to receive for each share of County common stock, at the election of each holder and subject to proration, either $37.18 in cash or 0.48 shares of Nicolet common stock. County shareholder elections will be prorated to ensure the total consideration will consist of approximately 20% cash and approximately 80% common stock. At March 31, 2021, County had total assets of $1.5 billion, loans of $1.0 billion, deposits of $1.1 billion, and equity of $166 million. The merger is expected to close in the fourth quarter of 2021, subject to customary closing conditions, including approval by regulators and shareholders of both County and Nicolet.

Note 3 – Earnings per Common Share

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


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands, except per share data)	2021		2020		2021		2020
Net income attributable to Nicolet Bankshares, Inc.	$	18,284	$	13,478	$	36,523	$	24,033

Weighted average common shares outstanding	9,902		10,417		9,949		10,467
Effect of dilutive common stock awards	424		103		416		192
Diluted weighted average common shares outstanding	10,326		10,520		10,365		10,659

Basic earnings per common share*	$	1.85	$	1.29	$	3.67	$	2.30
Diluted earnings per common share*	$	1.77	$	1.28	$	3.52	$	2.25

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

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

Note 4 – Stock-Based Compensation

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

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


	Six Months Ended June 30,
	2021			2020
Dividend yield	—		%	—		%
Expected volatility	30		%	25		%
Risk-free interest rate	1.16		%	1.67		%
Expected average life	7 years			7 years
Weighted average per share fair value of options	$	26.55		$	21.83

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


Stock Options	Option Shares Outstanding	Weighted Average Exercise Price		Weighted Average Remaining Life (Years)	Aggregate Intrinsic Value (in thousands)
Outstanding - December 31, 2020	1,437,460	$	50.47
Granted	380,000	78.77
Exercise of stock options *	(36,482)	33.58
Forfeited	(1,000)	48.85
Outstanding - June 30, 2021	1,779,978	$	56.86	7.0	$	27,295
Exercisable - June 30, 2021	950,778	$	47.20	5.7	$	22,028

* The terms of the stock option agreements permit having a number of shares of stock withheld, the fair market value of which as of the date of exercise is sufficient to satisfy the exercise price and/or tax withholding requirements. For the six months ended June 30, 2021, 5,607 such shares were withheld by the Company.

Intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the exercise price of the stock options. The intrinsic value of options exercised for the six months ended June 30, 2021 and 2020 was approximately $1.5 million and $1.9 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, 2020	$	53.57	18,925
Granted	77.92		18,562
Vested *	59.90		(14,227)
Forfeited	41.44		(446)
Outstanding - June 30, 2021	$	69.67	22,814

* The terms of the restricted stock agreements permit the surrender of shares to the Company upon vesting in order to satisfy applicable tax withholding requirements at the minimum statutory withholding rate, and accordingly, 1,506 shares were surrendered during the six months ended June 30, 2021.

The Company recognized approximately $2.7 million and $2.6 million of stock-based compensation expense (included in personnel on the consolidated statements of income) for the six months ended June 30, 2021 and 2020, respectively, associated with its common stock awards granted to officers and employees. In addition, during first half 2021, the Company recognized approximately $0.7 million of director expense (included in other expense on the consolidated statements of income) for a total restricted stock grant of 8,562 shares with immediate vesting to directors, while during first half 2020, the Company recognized approximately $0.4 million of director expense for a total restricted stock grant of 7,950 shares with immediate vesting to directors, representing the annual stock retainer fee paid to external board members. As of June 30, 2021, there was approximately $17.8 million of unrecognized compensation cost related to equity award grants. The cost is expected to be recognized over the remaining vesting period of approximately four years. The Company recognized a tax benefit of approximately $0.3 million for both the six months ended June 30, 2021 and 2020, respectively, for the tax impact of stock option exercises and vesting of restricted stock.

Note 5 – Securities Available for Sale

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


	June 30, 2021
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Fair Value as % of Total
U.S. government agency securities	$	67,914	$	136	$	43	$	68,007	12	%
State, county and municipals	228,633		3,651		1,080		231,204		41	%
Mortgage-backed securities	175,768		5,271		502		180,537		32	%
Corporate debt securities	77,759		4,521		—		82,280		15	%
Total	$	550,074	$	13,579	$	1,625	$	562,028	100	%


	December 31, 2020
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Fair Value as % of Total
U.S. government agency securities	$	63,162	$	289	$	—	$	63,451	12	%
State, county and municipals	226,493		5,386		11		231,868		43	%
Mortgage-backed securities	156,148		6,425		78		162,495		30	%
Corporate debt securities	76,073		5,450		—		81,523		15	%
Total	$	521,876	$	17,550	$	89	$	539,337	100	%

All mortgage-backed securities included in the table above were issued by U.S. government agencies and corporations. Securities AFS with a fair value of $131 million and $146 million as of June 30, 2021 and December 31, 2020, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law. Accrued interest on securities AFS totaled $2.6 million and $2.3 million at June 30, 2021 and December 31, 2020, respectively, and is included in accrued interest receivable and other assets on the consolidated balance sheets.

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


	June 30, 2021
	Less than 12 months				12 months or more				Total
($ in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Number of Securities
U.S. government agency securities	$	16,427	$	43	$	—	$	—	$	16,427	$	43	1
State, county and municipals	61,025		1,080		—		—		61,025		1,080		80
Mortgage-backed securities	42,092		491		854		11		42,946		502		43

Total	$	119,544	$	1,614	$	854	$	11	$	120,398	$	1,625	124


	December 31, 2020
	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

State, county and municipals	$	5,181	$	11	$	—	$	—	$	5,181	$	11	9
Mortgage-backed securities	10,612		71		492		7		11,104		78		22

Total	$	15,793	$	82	$	492	$	7	$	16,285	$	89	31

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

As of June 30, 2021 and December 31, 2020, no allowance for credit losses on securities AFS was recognized. The Company does not consider its securities AFS with unrealized losses to be attributable to credit-related factors, as the unrealized losses in each category have occurred as a result of changes in noncredit-related factors such as changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration. Furthermore, the Company does not have the intent to sell any of these securities AFS and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost.

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


	June 30, 2021
(in thousands)	Amortized Cost		Fair Value
Due in less than one year	$	75,485	$	75,771
Due in one year through five years	157,313		162,657
Due after five years through ten years	134,810		135,132
Due after ten years	6,698		7,931
	374,306		381,491
Mortgage-backed securities	175,768		180,537
Securities AFS	$	550,074	$	562,028

There were no sales of securities AFS for the six months ended June 30, 2021. Gross gains of $164,000 and proceeds of $9.2 million were recognized for the six months ended June 30, 2020.

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

The loan composition is summarized as follows.


	June 30, 2021					December 31, 2020
(in thousands)	Amount			% of Total		Amount			% of Total
Commercial & industrial	$	736,169		26	%	$	750,718		27	%
Paycheck Protection Program (“PPP”) loans	150,287			5		186,016			7
Owner-occupied commercial real estate (“CRE”)	520,299			18		521,300			19
Agricultural	110,664			4		109,629			4
CRE investment	505,588			18		460,721			16
Construction & land development	140,588			5		131,283			5
Residential construction	46,646			2		41,707			1
Residential first mortgage	471,354			17		444,155			16
Residential junior mortgage	104,218			4		111,877			4
Retail & other	34,518			1		31,695			1
Loans	2,820,331			100	%	2,789,101			100	%
Less allowance for credit losses - Loans (“ACL-Loans”)	32,561					32,173
Loans, net	$	2,787,770				$	2,756,928
Allowance for credit losses - Loans to loans	1.15		%			1.15		%

Accrued interest on loans totaled $6 million at June 30, 2021 and $7 million at December 31, 2020, and is included in accrued interest receivable and other assets on the consolidated balance sheets.

Allowance for Credit Losses-Loans:

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

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


	Three Months Ended				Six Months Ended				Year Ended
(in thousands)	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020		December 31, 2020
Beginning balance	$	32,626	$	26,202	$	32,173	$	13,972	$	13,972
Adoption of CECL	—		—		—		8,488		8,488
Initial PCD ACL	—		—		—		797		797
Total impact - adoption CECL	—		—		—		9,285		9,285
Provision for credit losses	—		3,000		500		6,000		10,300
Charge-offs	(235)		(123)		(329)		(216)		(1,689)
Recoveries	170		51		217		89		305
Net (charge-offs) recoveries	(65)		(72)		(112)		(127)		(1,384)
Ending balance	$	32,561	$	29,130	$	32,561	$	29,130	$	32,173

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


	Six Months Ended June 30, 2021
(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	$	11,644		$	5,872		$	1,395		$	5,441		$	984		$	421		$	4,773		$	1,086		$	557		$	32,173
Provision	(1,537)			(367)			68			940			267			183			535			164			247			500
Charge-offs	(209)			—			(48)			(4)			—			—			—			—			(68)			(329)
Recoveries	173			—			—			2			—			—			12			3			27			217
Net (charge-offs) recoveries	(36)			—			(48)			(2)			—			—			12			3			(41)			(112)
Ending balance	$	10,071		$	5,505		$	1,415		$	6,379		$	1,251		$	604		$	5,320		$	1,253		$	763		$	32,561
As % of ACL-Loans	31		%	17		%	4		%	20		%	4		%	2		%	16		%	4		%	2		%	100		%

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


	Year Ended December 31, 2020
(in thousands)	Commercial & industrial			Owner- occupied CRE			Agricultural			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total
ACL-Loans *
Beginning balance	$	5,471		$	3,010		$	579		$	1,600		$	414		$	368		$	1,669		$	517		$	344		$	13,972
Adoption of CECL	2,962			1,249			361			1,970			51			124			1,286			351			134			8,488
Initial PCD ACL	797			—			—			—			—			—			—			—			—			797
Provision	3,106			2,062			455			2,061			519			(71)			1,809			151			208			10,300
Charge-offs	(812)			(530)			—			(190)			—			—			(2)			—			(155)			(1,689)
Recoveries	120			81			—			—			—			—			11			67			26			305
Net (charge-offs) recoveries	(692)			(449)			—			(190)			—			—			9			67			(129)			(1,384)
Ending balance	$	11,644		$	5,872		$	1,395		$	5,441		$	984		$	421		$	4,773		$	1,086		$	557		$	32,173
As % of ACL-Loans	36		%	18		%	4		%	17		%	3		%	1		%	15		%	4		%	2		%	100		%

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

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.

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


June 30, 2021	Collateral Type
(in thousands)	Real Estate		Other Business Assets		Total		Without an Allowance		With an Allowance		Allowance Allocation
Commercial & industrial	$	—	$	475	$	475	$	450	$	25	$	1
PPP loans	—		—		—		—		—		—
Owner-occupied CRE	3,164		—		3,164		3,164		—		—
Agricultural	967		648		1,615		—		1,615		56
CRE investment	1,567		—		1,567		1,567		—		—
Construction & land development	389		—		389		389		—		—
Residential construction	—		—		—		—		—		—
Residential first mortgage	1,639		—		1,639		1,639		—		—
Residential junior mortgage	166		—		166		166		—		—
Retail & other	—		—		—		—		—		—
Total loans	$	7,892	$	1,123	$	9,015	$	7,375	$	1,640	$	57


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

Past Due and Nonaccrual Loans:

The following tables present past due loans by portfolio segment.


	June 30, 2021
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or nonaccrual			Current			Total
Commercial & industrial	$	231		$	1,110		$	734,828		$	736,169
PPP loans	—			—			150,287			150,287
Owner-occupied CRE	—			1,625			518,674			520,299
Agricultural	—			1,820			108,844			110,664
CRE investment	—			743			504,845			505,588
Construction & land development	32			326			140,230			140,588
Residential construction	—			—			46,646			46,646
Residential first mortgage	370			1,135			469,849			471,354
Residential junior mortgage	31			113			104,074			104,218
Retail & other	66			60			34,392			34,518
Total loans	$	730		$	6,932		$	2,812,669		$	2,820,331
Percent of total loans	—		%	0.3		%	99.7		%	100.0		%


	December 31, 2020
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or nonaccrual			Current			Total
Commercial & industrial	$	—		$	2,646		$	748,072		$	750,718
PPP loans	—			—			186,016			186,016
Owner-occupied CRE	—			1,869			519,431			521,300
Agricultural	7			1,830			107,792			109,629
CRE investment	—			1,488			459,233			460,721
Construction & land development	—			327			130,956			131,283
Residential construction	—			—			41,707			41,707
Residential first mortgage	613			823			442,719			444,155
Residential junior mortgage	43			384			111,450			111,877
Retail & other	102			88			31,505			31,695
Total loans	$	765		$	9,455		$	2,778,881		$	2,789,101
Percent of total loans	—		%	0.4		%	99.6		%	100.0		%

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


	June 30, 2021					December 31, 2020
(in thousands)	Nonaccrual Loans			% of Total		Nonaccrual Loans			% of Total
Commercial & industrial	$	1,110		16	%	$	2,646		28	%
PPP loans	—			—		—			—
Owner-occupied CRE	1,625			23		1,869			20
Agricultural	1,820			26		1,830			19
CRE investment	743			11		1,488			16
Construction & land development	326			5		327			3
Residential construction	—			—		—			—
Residential first mortgage	1,135			16		823			9
Residential junior mortgage	113			2		384			4
Retail & other	60			1		88			1
Nonaccrual loans	$	6,932		100	%	$	9,455		100	%
Percent of total loans	0.3		%			0.4		%

Credit Quality Information:

The following tables present total loans by risk categories and year of origination.


June 30, 2021	Amortized Cost Basis by Origination Year
(in thousands)	2021		2020		2019		2018		2017		Prior		Revolving		Revolving to Term		TOTAL
Commercial & industrial (a)
Grades 1-4	$	202,033	$	152,425	$	102,212	$	83,827	$	61,276	$	52,122	$	205,187	$	—	$	859,082
Grade 5	332		2,104		2,938		4,103		4,983		1,244		8,664		—		24,368
Grade 6	646		62		14		34		—		54		453		—		1,263
Grade 7	—		20		559		247		656		261		—		—		1,743
Total	$	203,011	$	154,611	$	105,723	$	88,211	$	66,915	$	53,681	$	214,304	$	—	$	886,456
Owner-occupied CRE
Grades 1-4	$	52,332	$	80,254	$	70,356	$	71,906	$	54,680	$	163,041	$	1,020	$	—	$	493,589
Grade 5	—		1,391		1,303		958		2,450		10,812		—		—		16,914
Grade 6	—		—		—		—		1,682		241		—		—		1,923
Grade 7	—		2,949		166		—		942		3,816		—		—		7,873
Total	$	52,332	$	84,594	$	71,825	$	72,864	$	59,754	$	177,910	$	1,020	$	—	$	520,299
Agricultural
Grades 1-4	$	6,430	$	13,218	$	5,132	$	7,300	$	8,933	$	33,511	$	22,697	$	—	$	97,221
Grade 5	382		295		—		669		221		7,457		456		—		9,480
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		—		—		25		324		3,516		98		—		3,963
Total	$	6,812	$	13,513	$	5,132	$	7,994	$	9,478	$	44,484	$	23,251	$	—	$	110,664
CRE investment
Grades 1-4	$	106,420	$	80,996	$	63,133	$	26,878	$	47,690	$	137,969	$	5,331	$	—	$	468,417
Grade 5	2,276		2,592		1,318		3,089		189		24,740		—		—		34,204
Grade 6	—		—		—		—		779		59		—		—		838
Grade 7	—		—		—		—		919		1,210		—		—		2,129
Total	$	108,696	$	83,588	$	64,451	$	29,967	$	49,577	$	163,978	$	5,331	$	—	$	505,588
Construction & land development
Grades 1-4	$	13,738	$	79,069	$	19,516	$	12,081	$	1,601	$	8,456	$	4,877	$	—	$	139,338
Grade 5	—		—		—		—		504		36		303		—		843
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		—		—		—		18		308		81		—		407
Total	$	13,738	$	79,069	$	19,516	$	12,081	$	2,123	$	8,800	$	5,261	$	—	$	140,588
Residential construction
Grades 1-4	$	21,871	$	21,354	$	2,298	$	460	$	396	$	214	$	—	$	—	$	46,593
Grade 5	—		—		—		—		53		—		—		—		53
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		—		—		—		—		—		—		—		—
Total	$	21,871	$	21,354	$	2,298	$	460	$	449	$	214	$	—	$	—	$	46,646
Residential first mortgage
Grades 1-4	$	101,859	$	133,749	$	52,563	$	31,994	$	31,315	$	112,478	$	242	$	5	$	464,205
Grade 5	—		—		502		586		457		2,544		—		—		4,089
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		—		1,808		—		113		1,139		—		—		3,060
Total	$	101,859	$	133,749	$	54,873	$	32,580	$	31,885	$	116,161	$	242	$	5	$	471,354
Residential junior mortgage
Grades 1-4	$	1,599	$	3,293	$	2,387	$	2,298	$	679	$	3,055	$	89,335	$	1,262	$	103,908
Grade 5	—		—		—		—		—		31		—		—		31
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		—		166		—		25		47		41		—		279
Total	$	1,599	$	3,293	$	2,553	$	2,298	$	704	$	3,133	$	89,376	$	1,262	$	104,218
Retail & other
Grades 1-4	$	6,923	$	4,687	$	4,241	$	1,332	$	1,434	$	1,752	$	14,089	$	—	$	34,458
Grade 5	—		—		—		—		—		—		—		—		—
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		11		—		—		—		49		—		—		60
Total	$	6,923	$	4,698	$	4,241	$	1,332	$	1,434	$	1,801	$	14,089	$	—	$	34,518

Total loans	$	516,841	$	578,469	$	330,612	$	247,787	$	222,319	$	570,162	$	352,874	$	1,267	$	2,820,331

(a) For purposes of this table at June 30, 2021, the $150 million net carrying value of PPP loans include $139 million originated in 2021 and $11 million originated in 2020, have a Pass risk grade (Grades 1-4) and have been included with the Commercial & industrial loan category.


December 31, 2020	Amortized Cost Basis by Origination Year
(in thousands)	2020		2019		2018		2017		2016		Prior		Revolving		Revolving to Term		TOTAL
Commercial & industrial (a)
Grades 1-4	$	348,274	$	121,989	$	98,920	$	72,027	$	21,613	$	39,454	$	183,858	$	—	$	886,135
Grade 5	1,416		2,239		4,486		527		1,638		4,151		18,994		—		33,451
Grade 6	69		19		735		5,315		29		32		1,923		—		8,122
Grade 7	334		1,126		1,389		663		122		3,103		2,289		—		9,026
Total	$	350,093	$	125,373	$	105,530	$	78,532	$	23,402	$	46,740	$	207,064	$	—	$	936,734
Owner-occupied CRE
Grades 1-4	$	90,702	$	74,029	$	78,013	$	52,911	$	45,042	$	150,624	$	870	$	—	$	492,191
Grade 5	42		623		1,349		7,541		1,102		5,842		—		—		16,499
Grade 6	—		—		—		1,710		—		706		—		—		2,416
Grade 7	2,987		675		176		835		—		5,521		—		—		10,194
Total	$	93,731	$	75,327	$	79,538	$	62,997	$	46,144	$	162,693	$	870	$	—	$	521,300
Agricultural
Grades 1-4	$	13,719	$	5,652	$	7,580	$	9,745	$	2,613	$	32,702	$	21,513	$	—	$	93,524
Grade 5	1,034		—		701		169		644		6,131		356		—		9,035
Grade 6	—		—		—		329		390		—		—		—		719
Grade 7	—		—		26		110		1,111		5,042		62		—		6,351
Total	$	14,753	$	5,652	$	8,307	$	10,353	$	4,758	$	43,875	$	21,931	$	—	$	109,629
CRE investment
Grades 1-4	$	82,518	$	78,841	$	40,881	$	69,643	$	31,541	$	137,048	$	5,255	$	—	$	445,727
Grade 5	—		—		47		1,284		1,828		9,073		—		—		12,232
Grade 6	—		—		—		796		—		—		—		—		796
Grade 7	—		—		—		—		—		1,966		—		—		1,966
Total	$	82,518	$	78,841	$	40,928	$	71,723	$	33,369	$	148,087	$	5,255	$	—	$	460,721
Construction & land development
Grades 1-4	$	67,578	$	30,733	$	15,209	$	2,204	$	2,083	$	7,266	$	3,675	$	—	$	128,748
Grade 5	—		373		660		545		—		23		455		—		2,056
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		—		—		—		—		479		—		—		479
Total	$	67,578	$	31,106	$	15,869	$	2,749	$	2,083	$	7,768	$	4,130	$	—	$	131,283
Residential construction
Grades 1-4	$	31,687	$	9,185	$	395	$	121	$	—	$	264	$	—	$	—	$	41,652
Grade 5	—		—		—		55		—		—		—		—		55
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		—		—		—		—		—		—		—		—
Total	$	31,687	$	9,185	$	395	$	176	$	—	$	264	$	—	$	—	$	41,707
Residential first mortgage
Grades 1-4	$	146,744	$	64,013	$	40,388	$	41,245	$	41,274	$	103,094	$	287	$	5	$	437,050
Grade 5	—		925		2,245		256		364		1,714		—		—		5,504
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		437		197		16		9		942		—		—		1,601
Total	$	146,744	$	65,375	$	42,830	$	41,517	$	41,647	$	105,750	$	287	$	5	$	444,155
Residential junior mortgage
Grades 1-4	$	4,936	$	4,338	$	3,663	$	1,060	$	869	$	3,131	$	91,816	$	1,648	$	111,461
Grade 5	—		—		—		—		—		32		—		—		32
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	—		—		—		27		—		232		125		—		384
Total	$	4,936	$	4,338	$	3,663	$	1,087	$	869	$	3,395	$	91,941	$	1,648	$	111,877
Retail & other
Grades 1-4	$	8,083	$	5,213	$	1,942	$	1,676	$	752	$	1,339	$	12,602	$	—	$	31,607
Grade 5	—		—		—		—		—		—		—		—		—
Grade 6	—		—		—		—		—		—		—		—		—
Grade 7	16		—		22		—		—		50		—		—		88
Total	$	8,099	$	5,213	$	1,964	$	1,676	$	752	$	1,389	$	12,602	$	—	$	31,695

Total loans	$	800,139	$	400,410	$	299,024	$	270,810	$	153,024	$	519,961	$	344,080	$	1,653	$	2,789,101

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

The following tables present total loans by risk categories.


	June 30, 2021
(in thousands)	Grades 1- 4			Grade 5			Grade 6			Grade 7			Total
Commercial & industrial	$	708,795		$	24,368		$	1,263		$	1,743		$	736,169
PPP loans	150,287			—			—			—			150,287
Owner-occupied CRE	493,589			16,914			1,923			7,873			520,299
Agricultural	97,221			9,480			—			3,963			110,664
CRE investment	468,417			34,204			838			2,129			505,588
Construction & land development	139,338			843			—			407			140,588
Residential construction	46,593			53			—			—			46,646
Residential first mortgage	464,205			4,089			—			3,060			471,354
Residential junior mortgage	103,908			31			—			279			104,218
Retail & other	34,458			—			—			60			34,518
Total loans	$	2,706,811		$	89,982		$	4,024		$	19,514		$	2,820,331
Percent of total	96.0		%	3.2		%	0.1		%	0.7		%	100.0		%


	December 31, 2020
(in thousands)	Grades 1- 4			Grade 5			Grade 6			Grade 7			Total
Commercial & industrial	$	700,119		$	33,451		$	8,122		$	9,026		$	750,718
PPP loans	186,016			—			—			—			186,016
Owner-occupied CRE	492,191			16,499			2,416			10,194			521,300
Agricultural	93,524			9,035			719			6,351			109,629
CRE investment	445,727			12,232			796			1,966			460,721
Construction & land development	128,748			2,056			—			479			131,283
Residential construction	41,652			55			—			—			41,707
Residential first mortgage	437,050			5,504			—			1,601			444,155
Residential junior mortgage	111,461			32			—			384			111,877
Retail & other	31,607			—			—			88			31,695
Total loans	$	2,668,095		$	78,864		$	12,053		$	30,089		$	2,789,101
Percent of total	95.7		%	2.8		%	0.4		%	1.1		%	100.0		%

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

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

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

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

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

Troubled Debt Restructurings: At June 30, 2021, there were twelve loans classified as troubled debt restructurings with a current outstanding balance of $6.8 million (including $2.9 million on nonaccrual and $3.9 million performing) and pre-modification balance of $7.3 million. In comparison, at December 31, 2020, there were eleven loans classified as troubled debt

restructurings with an outstanding balance of $5.5 million (including $3.4 million on nonaccrual and $2.1 million performing) and pre-modification balance of $6.5 million. There were no loans classified as troubled debt restructurings during the previous twelve months that subsequently defaulted during the six months ended June 30, 2021. As of June 30, 2021, there were no commitments to lend additional funds to debtors whose terms have been modified in troubled debt restructurings.

Note 7 – Goodwill and Other Intangibles and Mortgage Servicing Rights

Management periodically reviews the carrying value of its intangible assets to determine if any impairment has occurred, in which case an impairment charge would be recorded as an expense in the period of impairment, or whether changes in circumstances have occurred that would require a revision to the remaining useful life which would impact expense prospectively. In making such determination, management evaluates whether there are any adverse qualitative factors indicating that an impairment may exist, as well as the performance, on an undiscounted basis, of the underlying operations or assets which give rise to the intangible. Management continues to consider the ongoing impacts of the COVID-19 pandemic and related economic uncertainty on the valuation of our franchise, stability of deposits, and of the wealth client base, underlying our goodwill, core deposit intangible, and customer list intangibles, and determined no impairments were indicated. A summary of goodwill and other intangibles was as follows.


	Six Months Ended		Year Ended
(in thousands)	June 30, 2021		December 31, 2020
Goodwill	$	163,151	$	163,151
Core deposit intangibles	7,449		8,837
Customer list intangibles	3,111		3,365
Other intangibles	10,560		12,202
Goodwill and other intangibles, net	$	173,711	$	175,353

Goodwill: A summary of goodwill was as follows. During 2020, goodwill increased due to the Advantage acquisition. See Note 2 for additional information on the Company’s acquisitions.


	Six Months Ended		Year Ended
(in thousands)	June 30, 2021		December 31, 2020
Goodwill:
Goodwill at beginning of year	$	163,151	$	151,198
Acquisition	—		11,953

Goodwill at end of period	$	163,151	$	163,151

Other intangible assets: Other intangible assets, consisting of core deposit intangibles and customer list intangibles, are amortized over their estimated finite lives. During 2020, core deposit intangibles increased due to the Advantage acquisition. See Note 2 for additional information on the Company’s acquisitions.


	Six Months Ended		Year Ended
(in thousands)	June 30, 2021		December 31, 2020
Core deposit intangibles:
Gross carrying amount	$	31,715	$	31,715
Accumulated amortization	(24,266)		(22,878)
Net book value	$	7,449	$	8,837
Additions during the period	$	—	$	1,000
Amortization during the period	$	1,388	$	3,060
Customer list intangibles:
Gross carrying amount	$	5,523	$	5,523
Accumulated amortization	(2,412)		(2,158)
Net book value	$	3,111	$	3,365

Amortization during the period	$	254	$	507

Mortgage servicing rights: Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income, and assessed for impairment at each reporting date, with the amortization recorded in mortgage income, net, in the consolidated statements of income. Mortgage servicing rights are carried at the lower of the initial capitalized amount, net

of accumulated amortization, or estimated fair value, and are included in other assets in the consolidated balance sheets. A summary of the changes in the mortgage servicing rights asset was as follows.


	Six Months Ended			Year Ended
(in thousands)	June 30, 2021			December 31, 2020
Mortgage servicing rights ("MSR") asset:
MSR asset at beginning of year	$	10,230		$	5,919
Capitalized MSR	2,294			5,256
MSR asset acquired	—			529
Amortization during the period	(1,029)			(1,474)
MSR asset at end of period	$	11,495		$	10,230
Valuation allowance at beginning of year	$	(1,000)		$	—
Additions	(500)			(1,000)
Valuation allowance at end of period	$	(1,500)		$	(1,000)
MSR asset, net	$	9,995		$	9,230
Fair value of MSR asset at end of period	$	12,214		$	9,276
Residential mortgage loans serviced for others	$	1,335,522		$	1,250,206
Net book value of MSR asset to loans serviced for others	0.75		%	0.74		%

The Company periodically evaluates its mortgage servicing rights asset for impairment. At each reporting date, impairment is assessed based on estimated fair value using estimated prepayment speeds of the underlying mortgage loans serviced and stratification based on the risk characteristics of the underlying loans (predominantly loan type and note interest rate). See Note 9 for additional information on the fair value of the MSR asset.

The following table shows the estimated future amortization expense for amortizing intangible assets and the MSR asset. The projections are based on existing asset balances, the current interest rate environment and prepayment speeds as of June 30, 2021. The actual amortization expense the Company recognizes in any given period may be significantly different depending upon acquisition or sale activities, changes in interest rates, prepayment speeds, market conditions, regulatory requirements and events or circumstances that indicate the carrying amount of an asset may not be recoverable.


(in thousands)	Core deposit intangibles		Customer list intangibles		MSR asset
Year ending December 31,
2021 (remaining six months)	$	1,255	$	253	$	901
2022	2,150		507		1,942
2023	1,633		483		1,855
2024	1,130		449		1,796
2025	670		449		1,134
2026	317		249		1,044
Thereafter	294		721		2,823
Total	$	7,449	$	3,111	$	11,495

Note 8 – Short and Long-Term Borrowings

Short-Term Borrowings:

Short-term borrowings include any borrowing with an original maturity of one year or less. At both June 30, 2021 and December 31, 2020, the Company did not have any outstanding short-term borrowings.

Long-Term Borrowings:

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


(in thousands)	June 30, 2021		December 31, 2020
FHLB advances	$	20,000	$	29,000
Junior subordinated debentures	25,108		24,869

Total long-term borrowings	$	45,108	$	53,869

FHLB Advances: The FHLB advances bear fixed rates, require interest-only monthly payments, and have maturity dates through March 2027. The weighted average rate of the FHLB advances was 0.74% at June 30, 2021 and 0.73% at December 31, 2020.

Junior Subordinated Debentures: The following table shows the breakdown of junior subordinated debentures. Interest on all debentures is current. Any applicable discounts (initially recorded to carry an acquired debenture at its then estimated fair value) are being accreted to interest expense over the remaining life of the debentures. All the debentures below are currently callable and may be redeemed in part or in full at par plus any accrued but unpaid interest. At June 30, 2021 and December 31, 2020, $24.1 million and $23.9 million, respectively, qualify as Tier 1 capital.


		Junior Subordinated Debentures
		June 30, 2021						December 31, 2020
(in thousands)	Maturity Date	Par		Unamortized Discount		Carrying Value		Carrying Value
2005 Mid-Wisconsin Financial Services, Inc. (1)	12/15/2035	$	10,310	$	(2,873)	$	7,437	$	7,338
2006 Baylake Corp. (2)	9/30/2036	16,598		(3,529)		13,069		12,951
2004 First Menasha Bancshares, Inc. (3)	3/17/2034	5,155		(553)		4,602		4,580
Total		$	32,063	$	(6,955)	$	25,108	$	24,869

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

(2)The debentures, assumed in April 2016 as a result of an acquisition, have a floating rate of the three-month LIBOR plus 1.35%, adjusted quarterly. The interest rates were 1.50% and 1.59% as of June 30, 2021 and December 31, 2020, respectively.

(3)The debentures, assumed in April 2017 as the result of an acquisition, have a floating rate of the three-month LIBOR plus 2.79%, adjusted quarterly. The interest rates were 2.91% and 3.02% as of June 30, 2021 and December 31, 2020, respectively.

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

Note 9 – Fair Value Measurements

Fair value represents the estimated price at which an orderly transaction to sell an asset or transfer a liability would take place between market participants at the measurement date under current market conditions (i.e., an exit price concept), and is a market-based measurement versus an entity-specific measurement.

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

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

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

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

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

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
June 30, 2021
U.S. government agency securities	$	68,007	$	—	$	68,007	$	—
State, county and municipals	231,204		—		231,204		—
Mortgage-backed securities	180,537		—		180,537		—
Corporate debt securities	82,280		—		79,150		3,130
Securities AFS	$	562,028	$	—	$	558,898	$	3,130
Other investments (equity securities)	$	9,116	$	9,116	$	—	$	—
December 31, 2020
U.S. government agency securities	$	63,451	$	—	$	63,451	$	—
State, county and municipals	231,868		—		231,868		—
Mortgage-backed securities	162,495		—		162,495		—
Corporate debt securities	81,523		—		78,393		3,130
Securities AFS	$	539,337	$	—	$	536,207	$	3,130
Other investments (equity securities)	$	3,567	$	3,567	$	—	$	—

The following is a description of the valuation methodologies used by the Company for the securities AFS and equity securities measured at fair value on a recurring basis, noted in the tables above. Where quoted market prices on securities exchanges are available, the investments are classified as Level 1. Level 1 investments primarily include exchange-traded equity securities. If quoted market prices are not available, fair value is generally determined using prices obtained from independent pricing vendors who use pricing models (with typical inputs including benchmark yields, reported trades for similar securities, issuer spreads or relationship to other benchmark quoted securities), or discounted cash flows, and are classified as Level 2. Examples of these investments include U.S. government agency securities, mortgage-backed securities, obligations of state, county and municipals, and certain corporate debt securities. Finally, in certain cases where there is limited activity or less transparency around inputs to the estimated fair value, investments are classified within Level 3 of the hierarchy. Examples of these include private corporate debt securities, which include trust preferred security investments. At June 30, 2021 and December 31, 2020, it was determined that carrying value was the best approximation of fair value for these Level 3 securities, based primarily on the internal analysis on these securities.

For the six months ended June 30, 2021 and the year ended December 31, 2020, there have been no changes in the Level 3 securities AFS measured at fair value on a recurring basis.

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
June 30, 2021
Collateral dependent loans	$	8,958	$	—	$	—	$	8,958
Other real estate owned (“OREO”)	2,895		—		—		2,895
MSR asset	9,995		—		—		9,995
December 31, 2020
Collateral dependent loans	$	7,633	$	—	$	—	$	7,633
OREO	3,608		—		—		3,608
MSR asset	9,230		—		—		9,230

The following is a description of the valuation methodologies used by the Company for the items noted in the table above. For collateral dependent loans, expected credit losses are based on the estimated fair value of the collateral at the balance sheet date, with consideration for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. For OREO, the fair value is based upon the estimated fair value of the underlying collateral adjusted for the expected costs to sell. To estimate the

fair value of the MSR asset, the underlying serviced loan pools are stratified by interest rate tranche and term of the loan, and a valuation model is used to calculate the present value of the expected future cash flows for each stratum. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as costs to service, a discount rate, ancillary income, default rates and losses, and prepayment speeds. Although some of these assumptions are based on observable market data, other assumptions are based on unobservable estimates of what market participants would use to measure fair value.

Financial instruments:

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


June 30, 2021
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	792,406	$	792,406	$	792,406	$	—	$	—
Certificates of deposit in other banks	23,387		24,948		—		24,948		—
Securities AFS	562,028		562,028		—		558,898		3,130
Other investments, including equity securities	33,440		33,440		9,116		20,115		4,209
Loans held for sale	11,235		11,537		—		11,537		—
Loans, net	2,787,770		2,843,744		—		—		2,843,744

MSR asset	9,995		12,214		—		—		12,214
Financial liabilities:
Deposits	$	3,939,022	$	3,945,358	$	—	$	—	$	3,945,358

Long-term borrowings	45,108		45,350		—		20,242		25,108


December 31, 2020
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	802,859	$	802,859	$	802,859	$	—	$	—
Certificates of deposit in other banks	29,521		31,053		—		31,053		—
Securities AFS	539,337		539,337		—		536,207		3,130
Other investments, including equity securities	27,619		27,619		3,567		20,155		3,897
Loans held for sale	21,450		22,329		—		22,329		—
Loans, net	2,756,928		2,834,452		—		—		2,834,452

MSR asset	9,230		9,276		—		—		9,276
Financial liabilities:
Deposits	$	3,910,399	$	3,917,121	$	—	$	—	$	3,917,121
Long-term borrowings	53,869		53,859		—		29,488		24,371

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

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

Nicolet Bankshares, Inc. (the “Company” or “Nicolet”) is a bank holding company headquartered in Green Bay, Wisconsin. Nicolet provides a diversified range of traditional banking and wealth management services to individuals and businesses in its market area and through the branch offices of its banking subsidiary, Nicolet National Bank (the “Bank”), in northeastern and central Wisconsin and in Menominee, Michigan.

Forward-Looking Statements

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

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

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

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

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

•the risk that the proposed acquisitions of Mackinac and/or County will not be consummated or will not meet Nicolet’s expectations regarding the timing of the proposed acquisition;

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

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

•changes to statutes, regulations, or regulatory policies or practices resulting from the COVID-19 pandemic;

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

•changes in consumer demand for financial services; and

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

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

Overview

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

The timing of Nicolet’s acquisition of Advantage Community Bancshares, Inc. (“Advantage”) on August 21, 2020, at 4% of then pre-merger assets, impacts financial comparisons. Certain income statement results, average balances and related ratios for the three and six-month period ended June 30, 2021 include full contribution from Advantage, while the same period in 2020 includes no contribution from Advantage.

The initial impacts of the COVID-19 pandemic (declared in March 2020) resulted in, among other things, stock and global markets decline, disruption in business and leisure activities as nation-wide stay-at-home orders were mandated, significant strain on the health care industry as it addressed the severity of the health crisis, and shifts in the general economy (such as high unemployment, negative GDP expectations, an immediate 150 bps decline in Federal funds rates, and unprecedented government stimulus), triggering a 2020 recession. The dramatic events surrounding the pandemic, fluctuating social and

economic changes since the onset of the pandemic, and uncertainty about the longevity of the pandemic’s affects were significant and unfolding throughout most of 2020, but have abated somewhat for 2021 as people and businesses were supported by government stimulus and are adjusting to a vaccination rollout and a new normal in a still evolving environment, as concerns of a second wave of a new strain of the virus have surfaced.

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

During 2020, we originated 2,725 PPP loans totaling $351 million, bearing a 1% contractual rate, and earned a $12.3 million fee. During first half 2021, under the latest round of the SBA’s program, Nicolet originated 2,205 PPP loans totaling $160 million and earned a $9.3 million fee. Of the total fees, $5.7 million was accreted into interest in 2020 and $7.7 million was accreted in first half 2021. At June 30, 2021, the net carrying value of all PPP loans was $150 million, or 5% of total loans, for a net $36 million decrease from year-end 2020, as loan forgiveness has outpaced the latest round of new PPP loans. SBA loan forgiveness that started in November 2020 has boosted overall borrower equity in their businesses and meaningfully improves the credit quality of many commercial relationships.


Performance Summary
Table 1: Earnings Summary and Selected Financial Data
	At or for the Three Months Ended															At or for the Six Months Ended
(In thousands, except per share data)	6/30/2021			3/31/2021			12/31/2020			9/30/2020			6/30/2020			6/30/2021			6/30/2020
Results of operations:
Interest income	$	38,307		$	36,876		$	38,037		$	37,270		$	36,892		$	75,183		$	73,895
Interest expense	2,736			3,235			4,019			4,710			5,395			5,971			11,135
Net interest income	35,571			33,641			34,018			32,560			31,497			69,212			62,760
Provision for credit losses	—			500			1,300			3,000			3,000			500			6,000
Net interest income after provision for credit losses	35,571			33,141			32,718			29,560			28,497			68,712			56,760
Noninterest income	20,178			17,126			16,879			18,691			17,471			37,304			27,056
Noninterest expense	30,747			26,081			25,367			23,685			27,813			56,828			51,667
Income before income tax expense	25,002			24,186			24,230			24,566			18,155			49,188			32,149
Income tax expense	6,718			5,947			6,145			6,434			4,576			12,665			7,897
Net income	18,284			18,239			18,085			18,132			13,579			36,523			24,252
Net income attributable to noncontrolling interest	—			—			98			30			101			—			219
Net income attributable to Nicolet Bankshares, Inc.	$	18,284		$	18,239		$	17,987		$	18,102		$	13,478		$	36,523		$	24,033
Earnings per common share:
Basic	$	1.85		$	1.82		$	1.79		$	1.75		$	1.29		$	3.67		$	2.30
Diluted	$	1.77		$	1.75		$	1.74		$	1.72		$	1.28		$	3.52		$	2.25
Common Shares:
Basic weighted average	9,902			9,998			10,074			10,349			10,417			9,949			10,467
Diluted weighted average	10,326			10,403			10,350			10,499			10,520			10,365			10,659
Outstanding (period end)	9,843			9,988			10,011			10,196			10,424			9,843			10,424
Period-End Balances:
Loans	$	2,820,331		$	2,846,351		$	2,789,101		$	2,908,793		$	2,821,501		$	2,820,331		$	2,821,501
Allowance for credit losses - loans	32,561			32,626			32,173			31,388			29,130			32,561			29,130
Securities available-for-sale, at fair value	562,028			558,229			539,337			535,351			510,809			562,028			510,809
Goodwill and other intangibles, net	173,711			174,501			175,353			176,213			164,094			173,711			164,094
Total assets	4,587,347			4,543,804			4,551,789			4,706,375			4,541,228			4,587,347			4,541,228
Deposits	3,939,022			3,900,594			3,910,399			3,712,808			3,537,805			3,939,022			3,537,805
Stockholders’ equity (common)	559,395			550,046			539,189			538,068			532,033			559,395			532,033
Book value per common share	56.83			55.07			53.86			52.77			51.04			56.83			51.04
Tangible book value per common share (2)	39.18			37.60			36.34			35.49			35.30			39.18			35.30
Average Balances:
Loans	$	2,869,105		$	2,825,664		$	2,868,827		$	2,871,256		$	2,823,866		$	2,847,504		$	2,704,225
Interest-earning assets	4,109,394			4,089,603			4,091,460			4,216,106			3,917,499			4,099,553			3,542,502
Goodwill and other intangibles, net	174,026			174,825			175,678			169,353			164,564			174,424			165,048
Total assets	4,527,839			4,514,927			4,515,226			4,633,359			4,310,088			4,521,419			3,932,616
Deposits	3,897,797			3,875,205			3,793,430			3,636,260			3,403,188			3,886,563			3,161,630
Interest-bearing liabilities	2,684,871			2,764,232			2,744,578			2,933,737			2,741,199			2,724,332			2,479,896
Stockholders’ equity (common)	550,974			544,541			537,920			537,826			520,177			547,775			516,867
Financial Ratios: (1)
Return on average assets	1.62		%	1.64		%	1.58		%	1.55		%	1.26		%	1.63		%	1.23		%
Return on average common equity	13.31			13.58			13.30			13.39			10.42			13.45			9.35
Return on average tangible common equity (2)	19.46			20.01			19.75			19.54			15.24			19.73			13.74
Average equity to average assets	12.17			12.06			11.91			11.61			12.07			12.12			13.14
Stockholders' equity to assets	12.19			12.11			11.85			11.43			11.72			12.19			11.72
Tangible common equity to tangible assets (2)	8.74			8.60			8.31			7.99			8.41			8.74			8.41
Net interest margin	3.45			3.31			3.29			3.06			3.21			3.38			3.53
Net loan charge-offs to average loans	0.01			0.01			0.07			0.10			0.01			0.01			0.01
Nonperforming loans to total loans	0.25			0.31			0.34			0.38			0.43			0.25			0.43
Nonperforming assets to total assets	0.21			0.28			0.29			0.25			0.29			0.21			0.29
Efficiency ratio	59.37			51.84			48.99			46.18			55.69			55.66			56.36
Effective tax rate	26.87			24.59			25.36			26.19			25.21			25.75			24.56
Selected Items:
Tax-equivalent adjustment on net interest income	$	232		$	252		$	260		249			229			$	484		460
Tax benefit on stock-based compensation	(20)			(234)			(77)			(14)			(24)			(254)			(347)

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

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


Table 1A: Non-GAAP Financial Measures
	At or for the Three Months Ended										At or for the Six Months Ended
(In thousands, except per share data)	6/30/2021		3/31/2021		12/31/2020		9/30/2020		6/30/2020		6/30/2021		6/30/2020
Tangible Assets:
Total assets	$	4,587,347	$	4,543,804	$	4,551,789	$	4,706,375	$	4,541,228	$	4,587,347	$	4,541,228
Goodwill and other intangibles, net	173,711		174,501		175,353		176,213		164,094		173,711		164,094
Tangible assets	$	4,413,636	$	4,369,303	$	4,376,436	$	4,530,162	$	4,377,134	$	4,413,636	$	4,377,134
Tangible Common Equity:
Stockholders’ equity (common)	$	559,395	$	550,046	$	539,189	$	538,068	$	532,033	$	559,395	$	532,033
Goodwill and other intangibles, net	173,711		174,501		175,353		176,213		164,094		173,711		164,094
Tangible common equity	$	385,684	$	375,545	$	363,836	$	361,855	$	367,939	$	385,684	$	367,939
Average Tangible Common Equity:
Stockholders’ equity (common)	$	550,974	$	544,541	$	537,920	$	537,826	$	520,177	$	547,775	$	516,867
Goodwill and other intangibles, net	174,026		174,825		175,678		169,353		164,564		174,424		165,048
Average tangible common equity	$	376,948	$	369,716	$	362,242	$	368,473	$	355,613	$	373,351	$	351,819

Net income was $36.5 million for the six months ended June 30, 2021, compared to $24.0 million for the six months ended June 30, 2020. Earnings per diluted common share was $3.52 for the first six months of 2021, compared to $2.25 for the first six months of 2020.

•Net interest income was $69.2 million for the first six months of 2021, up $6.5 million (10%) over the first six months of 2020. Interest income grew $1.3 million attributable to favorable volumes (mostly higher loan volumes), partly offset by net unfavorable rates (influenced by Federal Reserve rate cuts in March 2020). Interest expense favorably decreased $5.2 million between the six-month periods reflecting disciplined deposit pricing. Net interest margin was 3.38% for the six months ended June 30, 2021, compared to 3.53% for the six months ended June 30, 2020, influenced by the changing balance sheet mix, including elevated cash levels, in the lower rate environment. For additional information regarding net interest income, see “Income Statement Analysis — Net Interest Income.”

•Noninterest income was $37.3 million for the first six months of 2021, up $10.2 million (38%) from the comparable 2020 period. Excluding net asset gains (losses), noninterest income was $32.4 million for the first six months of 2021, up $3.9 million (14%) over 2020, predominantly on higher wealth revenue (trust services and brokerage fee income combined) and card interchange income. For additional information regarding noninterest income, see “Income Statement Analysis — Noninterest Income.”

•Noninterest expense was $56.8 million, $5.2 million (10%) higher than the first six months of 2020. Personnel costs increased $4.4 million, and non-personnel expenses combined increased $0.8 million (3%) over the comparable 2020 period. For additional information regarding noninterest expense, see “Income Statement Analysis — Noninterest Expense.”

•Nonperforming assets were only $10 million, representing 0.21% of total assets at June 30, 2021, compared to 0.29% at December 31, 2020 and 0.29% at June 30, 2020. For additional information regarding nonperforming assets, see “Balance Sheet Analysis – Nonperforming Assets.”

•At June 30, 2021, assets were $4.6 billion, up $36 million (1%) from December 31, 2020 and up $46 million (1%) from June 30, 2020. For additional balance sheet discussion see “Balance Sheet Analysis.”

•At June 30, 2021, loans were $2.8 billion, $31 million (1%) higher than December 31, 2020 and were minimally changed from June 30, 2020. On average, loans grew $143 million (5%) over the first six months of 2020. For additional information regarding loans, see “Balance Sheet Analysis — Loans.”

•Total deposits were $3.9 billion at June 30, 2021, an increase of $29 million (1%) from December 31, 2020 and $401 million (11%) higher than June 30, 2020. Year-to-date average deposits were $725 million (23%) higher than the first six months of 2020. For additional information regarding deposits, see “Balance Sheet Analysis – Deposits.”

INCOME STATEMENT ANALYSIS

Net Interest Income

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

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


	For the Six Months Ended June 30,
	2021						2020
(in thousands)	Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate
ASSETS
Interest-earning assets
PPP Loans	$	206,066	$	8,813	8.51	%	$	132,353	$	1,786	2.67	%
Commercial-based loans ex PPP	2,142,902		49,086		4.56	%	2,093,664		54,203		5.12	%
Retail-based loans	498,536		11,114		4.46	%	478,208		11,613		4.86	%
Total loans, including loan fees (1)(2)	2,847,504		69,013		4.83	%	2,704,225		67,602		4.95	%
Investment securities:
Taxable	391,601		3,874		1.98	%	345,306		4,114		2.38	%
Tax-exempt (2)	141,412		1,509		2.13	%	126,402		1,402		2.22	%
Total investment securities	533,013		5,383		2.02	%	471,708		5,516		2.34	%
Other interest-earning assets	719,036		1,271		0.35	%	366,569		1,237		0.67	%
Total non-loan earning assets	1,252,049		6,654		1.06	%	838,277		6,753		1.61	%
Total interest-earning assets	4,099,553		$	75,667	3.68	%	3,542,502		$	74,355	4.16	%
Other assets, net	421,866						390,114
Total assets	$	4,521,419					$	3,932,616
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings	$	561,392	$	172	0.06	%	$	372,122	$	461	0.25	%
Interest-bearing demand	665,646		1,429		0.43	%	533,574		2,248		0.85	%
Money market accounts (“MMA”)	851,655		227		0.05	%	695,838		1,080		0.31	%
Core time deposits	313,123		1,536		0.99	%	413,326		3,564		1.73	%
Total interest-bearing core deposits	2,391,816		3,364		0.28	%	2,014,860		7,353		0.73	%
Brokered deposits	285,029		1,991		1.41	%	250,422		2,059		1.65	%
Total interest-bearing deposits	2,676,845		5,355		0.40	%	2,265,282		9,412		0.84	%
PPPLF	—		—		—	%	118,576		210		0.35	%
Other interest-bearing liabilities	47,487		616		2.58	%	96,038		1,513		3.12	%
Total wholesale funding	47,487		616		2.58	%	214,614		1,723		1.59	%
Total interest-bearing liabilities	2,724,332		5,971		0.44	%	2,479,896		11,135		0.90	%
Noninterest-bearing demand deposits	1,209,718						896,348
Other liabilities	39,594						39,505
Stockholders’ equity	547,775						516,867
Total liabilities and stockholders’ equity	$	4,521,419					$	3,932,616
Net interest income and rate spread			$	69,696	3.24	%			$	63,220	3.26	%
Tax-equivalent adjustment			$	484					$	460
Net interest income and net interest margin			$	69,212	3.38	%			$	62,760	3.53	%
Selected Additional Information:
Total loans ex. PPP	$	2,641,438	$	60,200	4.54	%	$	2,571,872	$	65,816	5.07	%
Total interest-earning assets ex PPP	3,893,487		66,854		3.42	%	3,410,149		72,569		4.22	%
Total interest-bearing liabilities ex PPPLF	2,724,332		5,971		0.44	%	2,361,320		10,925		0.93	%
Net interest rate spread ex PPP & PPPLF					2.98	%					3.29	%

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

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

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


	For the Three Months Ended June 30,
	2021						2020
(in thousands)	Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate
ASSETS
Interest-earning assets
PPP Loans	$	205,639	$	4,862	9.35	%	$	264,705	$	1,786	2.67	%
Commercial-based loans ex PPP	2,159,774		24,645		4.51	%	2,078,927		26,311		5.01	%
Retail-based loans	503,692		5,622		4.47	%	480,234		5,697		4.75	%
Total loans, including loan fees (1)(2)	2,869,105		35,129		4.85	%	2,823,866		33,794		4.74	%
Investment securities:
Taxable	400,646		2,060		2.06	%	362,703		2,042		2.25	%
Tax-exempt (2)	136,986		734		2.15	%	126,894		710		2.24	%
Total investment securities	537,632		2,794		2.08	%	489,597		2,752		2.25	%
Other interest-earning assets	702,657		616		0.35	%	604,036		575		0.38	%
Total non-loan earning assets	1,240,289		3,410		1.10	%	1,093,633		3,327		1.22	%
Total interest-earning assets	4,109,394		$	38,539	3.72	%	3,917,499		$	37,121	3.76	%
Other assets, net	418,445						392,589
Total assets	$	4,527,839					$	4,310,088
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings	$	586,590	$	92	0.06	%	$	393,006	$	155	0.16	%
Interest-bearing demand	657,979		670		0.41	%	531,852		1,034		0.78	%
MMA	846,114		104		0.05	%	730,990		350		0.19	%
Core time deposits	297,047		657		0.89	%	398,726		1,631		1.65	%
Total interest-bearing core deposits	2,387,730		1,523		0.26	%	2,054,574		3,170		0.62	%
Brokered deposits	253,816		910		1.44	%	342,776		1,285		1.51	%
Total interest-bearing deposits	2,641,546		2,433		0.37	%	2,397,350		4,455		0.75	%
PPPLF	—		—		—	%	237,153		210		0.35	%
Other interest-bearing liabilities	43,325		303		2.76	%	106,696		730		2.71	%
Total wholesale funding	43,325		303		2.76	%	343,849		940		1.08	%
Total interest-bearing liabilities	2,684,871		2,736		0.41	%	2,741,199		5,395		0.79	%
Noninterest-bearing demand deposits	1,256,251						1,005,838
Other liabilities	35,743						42,874
Stockholders’ equity	550,974						520,177
Total liabilities and stockholders’ equity	$	4,527,839					$	4,310,088
Net interest income and rate spread			$	35,803	3.31	%			$	31,726	2.97	%
Tax-equivalent adjustment			$	232					$	229
Net interest income and net interest margin			$	35,571	3.45	%			$	31,497	3.21	%
Selected Additional Information:
Total loans ex. PPP	$	2,663,466	$	30,267	4.50	%	$	2,559,161	$	32,008	4.96	%
Total interest-earning assets ex PPP	3,903,755		33,677		3.42	%	3,652,794		35,335		3.84	%
Total interest-bearing liabilities ex PPPLF	2,684,871		2,736		0.41	%	2,504,046		5,185		0.83	%
Net interest rate spread ex PPP & PPPLF					3.01	%					3.01	%

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

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

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


	For the Three Months Ended June 30, 2021 Compared to June 30, 2020:						For the Six Months Ended June 30, 2021 Compared to June 30, 2020:
	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
PPP Loans	$	(480)	$	3,556	$	3,076	$	1,426	$	5,601	$	7,027
Commercial-based loans ex. PPP	743		(2,409)		(1,666)		1,371		(6,488)		(5,117)
Retail-based loans	280		(355)		(75)		486		(985)		(499)
Total loans (2)	543		792		1,335		3,283		(1,872)		1,411
Investment securities:
Taxable	119		(101)		18		149		(389)		(240)
Tax-exempt (2)	55		(31)		24		162		(55)		107
Total investment securities	174		(132)		42		311		(444)		(133)
Other interest-earning assets	68		(27)		41		363		(329)		34
Total non-loan earning assets	242		(159)		83		674		(773)		(99)
Total interest-earning assets	$	785	$	633	$	1,418	$	3,957	$	(2,645)	$	1,312

Interest-bearing liabilities
Savings	$	56	$	(119)	$	(63)	$	162	$	(451)	$	(289)
Interest-bearing demand	208		(572)		(364)		461		(1,280)		(819)
MMA	48		(294)		(246)		198		(1,051)		(853)
Core time deposits	(347)		(627)		(974)		(731)		(1,297)		(2,028)
Total interest-bearing core deposits	(35)		(1,612)		(1,647)		90		(4,079)		(3,989)
Brokered deposits	(318)		(57)		(375)		261		(329)		(68)
Total interest-bearing deposits	(353)		(1,669)		(2,022)		351		(4,408)		(4,057)
PPPLF	(105)		(105)		(210)		(105)		(105)		(210)
Other interest-bearing liabilities	(212)		(215)		(427)		(391)		(506)		(897)
Total wholesale funding	(317)		(320)		(637)		(496)		(611)		(1,107)
Total interest-bearing liabilities	(670)		(1,989)		(2,659)		(145)		(5,019)		(5,164)
Net interest income	$	1,455	$	2,622	$	4,077	$	4,102	$	2,374	$	6,476

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

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

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

Tax-equivalent net interest income was $69.7 million for the first six months of 2021, comprised of net interest income of $69.2 million ($6.5 million or 10% higher than the first six months of 2020), and a $0.5 million tax-equivalent adjustment. The $6.5 million increase in tax-equivalent net interest income was attributable to net favorable volumes (which added $4.1 million, mostly from higher loan volumes due to the inclusion of PPP loans and organic loan growth, as well as interest-earning assets from the Advantage acquisition) and net favorable rates (which increased net interest income $2.4 million due to a lower cost of funds largely as a result of prudent deposit pricing actions).

Between the comparable six-month periods, the interest rate spread decreased 2 bps, largely attributable to the lower interest rate environment between the periods and the higher concentration of low-earning cash compared to first half 2020. The 2021 interest-earning asset yield declined 48 bps to 3.68%, partly from the 12 bps decline in loans but was more significantly impacted by the decrease in the loans-to-earning asset mix (to 69% compared to 77% for first half 2020) given the dramatic increase in cash. Other interest-earning assets (which are predominantly cash) declined 32 bps, while total non-loan earning

assets declined 55 bps. The 2021 cost of funds declined favorably 46 bps to 0.44%, largely from improved interest-bearing core deposit rates, as well as lower brokered and wholesale funding rates. The contribution from net free funds decreased 13 bps, due mostly to the reduced value in the lower rate environment, though offset partly by the 29% increase in average net free funds (largely from higher average noninterest-bearing demand deposits and stockholders’ equity) between the six-month periods. As a result, the tax-equivalent net interest margin was 3.38% for first half 2021, down 15 bps compared to 3.53% for the comparable 2020 period.

Average interest-earning assets increased to $4.1 billion, up $0.6 billion (16%) over the 2020 comparable period, primarily due to significantly higher cash starting in second quarter 2020, the addition of PPP loans (beginning second quarter 2020), and the timing of the Advantage acquisition (August 2020). Between the comparable first half periods, average loans increased $143 million (5%), mostly due to PPP loan activity (net average balance of $206 million at June 30, 2021), as well as organic loan growth and $88 million of Advantage loans at acquisition. Total non-loan interest-earning assets increased $414 million (49%) on average, largely due to higher cash. The mix of average interest-earning assets shifted to lower-yielding assets, at 69% loans, 13% investments and 18% other interest-earning assets (mostly cash) for first half 2021, compared to 77%, 13% and 10%, respectively, for first half 2020.

Tax-equivalent interest income was $75.7 million for first half 2021, up $1.3 million from first half 2020, and the related interest-earning asset yield was 3.68%, down 48 bps from the comparable period in 2020. Interest income on loans increased $1.4 million over first half 2020, with net decreases in interest rates more than offset by favorable PPP and other loan volumes. The 2021 loan yield was 4.83%, down 12 bps from first half 2020, largely from the significantly lower rate environment impacting yields on new, renewed and variable rate loans. Between the comparable six-month periods, interest income on non-loan earning assets combined was down $0.1 million to $6.7 million, impacted by a 55 bps decline in the yield (to 1.06%) in the lower rate environment, partially offset by higher average volumes (up 49%) from the significantly higher cash.

Average interest-bearing liabilities were $2.7 billion, an increase of $244 million (10%), primarily due to the significant increase in deposits from government stimulus activities and deposited PPP loan proceeds, though also partly due to the timing of the Advantage acquisition in August 2020. The mix of average interest-bearing liabilities was 88% core deposits, 10% brokered deposits and 2% other funding for first half 2021, compared to 81%, 10% and 9%, respectively, for first half 2020.

Interest expense decreased to $6.0 million for first half 2021, down $5.2 million compared to first half 2020, on higher volumes of average interest-bearing liabilities (up 10% to $2.7 billion) but at a lower overall cost of funds (down 46 bps to 0.44%). Interest expense on deposits decreased $4.1 million (43%) from first half 2020 given higher average interest-bearing deposit balances at a lower cost (down 44 bps to 0.40%) as product rate changes were made in the lower rate environment, and brokered deposits cost 24 bps less, largely from maturities of higher-costing term brokered funds procured during March-April 2020 under competitive conditions as part of previously discussed liquidity actions. Interest expense on other interest-bearing liabilities was down between the comparable first half periods, as interest expense on lower average balances (down $167 million) more than offset the higher rates (up 99 bps to 2.58%).

Provision for Credit Losses

The provision for credit losses decreased to $0.5 million for the six months ended June 30, 2021, compared to $6.0 million for the six months ended June 30, 2020. The provision for credit losses was significantly increased for most of 2020 given unprecedented economic disruptions and uncertainty surrounding the COVID-19 pandemic, and the related credit stress on our customers, though tempered starting in late 2020 and continuing into first half 2021 as potential deterioration of loan quality metrics initially anticipated did not materialize.

The provision for credit losses is predominantly a function of Nicolet’s methodology and judgment as to qualitative and quantitative factors used to determine the appropriateness of the ACL-Loans. 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. See also Note 6, “Loans, Allowance for Credit Losses - Loans, and Credit Quality” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures. For additional information regarding asset quality and the ACL-Loans, see “BALANCE SHEET ANALYSIS — Loans,” “— Allowance for Credit Losses - Loans,” and “— Nonperforming Assets.”

Noninterest Income

Table 4: Noninterest Income


	Three Months Ended June 30,								Six Months Ended June 30,
(in thousands)	2021		2020		$ Change		% Change		2021		2020		$ Change		% Change
Trust services fee income	$	1,906	$	1,510	$	396	26	%	$	3,681	$	3,089	$	592	19	%
Brokerage fee income	2,991		2,269		722		32		5,784		4,591		1,193		26
Mortgage income, net	5,599		9,963		(4,364)		(44)		12,829		12,290		539		4
Service charges on deposit accounts	1,136		813		323		40		2,227		2,038		189		9
Card interchange income	2,266		1,637		629		38		4,193		3,199		994		31
BOLI income	559		540		19		4		1,086		1,243		(157)		(13)
Other income	1,529		1,487		42		3		2,601		2,008		593		30
Noninterest income without net gains	15,986		18,219		(2,233)		(12)		32,401		28,458		3,943		14
Asset gains (losses), net	4,192		(748)		4,940		N/M		4,903		(1,402)		6,305		N/M
Total noninterest income	$	20,178	$	17,471	$	2,707	15	%	$	37,304	$	27,056	$	10,248	38	%
Trust services fee income & Brokerage fee income combined	$	4,897	$	3,779	$	1,118	30	%	$	9,465	$	7,680	$	1,785	23	%

N/M means not meaningful.

Noninterest income was $37.3 million for first half 2021, an increase of $10.2 million (38%) compared to $27.1 million for the comparable period of 2020. Noninterest income excluding net asset gains (losses) grew $3.9 million (14%) between the comparable six-month periods, predominantly on higher wealth revenue (trust services and brokerage fee income combined) and card interchange income.

Trust services fee income and brokerage fee income combined were $9.5 million, up $1.8 million (23%) over first half 2020, consistent with the growth in accounts and assets under management.

Mortgage income represents net gains received from the sale of residential real estate loans into the secondary market, capitalized mortgage servicing rights (“MSRs”), servicing fees net of MSR amortization, fair value marks on the mortgage interest rate lock commitments and forward commitments (“mortgage derivatives”), and MSR valuation changes, if any. Net mortgage income of $12.8 million, increased $0.5 million (4%) between the comparable six-month periods, predominantly from favorable changes in the fair value of the mortgage derivatives (up $0.5 million), higher sale gains and capitalized gains combined (up $0.1 million), and higher net servicing fees (up $0.5 million on the larger portfolio serviced for others), partially offset by an increase in MSR amortization (up $0.5 million ) and higher MSR asset impairment given faster paydown activity (up $0.1 million, with impairment of $0.5 million in first half 2021 compared to impairment of $0.4 million in first half 2020). See also “Lending-Related Commitments” and Note 7, “Goodwill and Other Intangibles and Mortgage Servicing Rights” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures on the MSR asset.

Service charges on deposit accounts were up $0.2 million to $2.2 million for the six months ended June 30, 2021, mainly as we waived certain fees during 2020 to provide economic relief to our customers at the inception of the pandemic.

Card interchange income grew $1.0 million (31%) between the comparable first half periods due to higher volume and activity, as activity was tempered starting late in first quarter 2020 with the onset of the pandemic, as well as cautionary spending of consumers given the economic uncertainty.

BOLI income was down $0.2 million between the comparable six-month periods, attributable to BOLI death benefits received in first half 2020, partly offset by income on higher average balances from $3 million BOLI acquired with Advantage in August 2020.

Other income of $2.6 million for the six months ended June 30, 2021 was up $0.6 million from the comparable 2020 period, largely due to the change in fair value of nonqualified deferred compensation plan assets from the significant market decline at the onset of the pandemic (from a negative position at June 30, 2020 to a positive position at June 30, 2021). See also “Noninterest Expense” for discussion on the offsetting fair value change to the nonqualified deferred compensation plan liabilities.

Net asset gains of $4.9 million in first half 2021 were primarily attributable to favorable fair value marks on equity securities (including $3.5 million from the second quarter 2021 initial public offering of an equity investment), compared to net asset losses of $1.4 million in first half 2020.

Noninterest Expense

Table 5: Noninterest Expense


	Three Months Ended June 30,								Six Months Ended June 30,
($ in thousands)	2021		2020		Change		% Change		2021		2020		Change		% Change
Personnel	$	17,084	$	14,482	$	2,602	18	%	$	32,200	$	27,805	$	4,395	16	%
Occupancy, equipment and office	4,053		4,361		(308)		(7)		8,190		8,565		(375)		(4)
Business development and marketing	1,210		2,514		(1,304)		(52)		2,199		3,873		(1,674)		(43)
Data processing	2,811		2,399		412		17		5,469		4,962		507		10
Intangibles amortization	790		880		(90)		(10)		1,642		1,873		(231)		(12)
FDIC assessments	480		—		480		N/M		1,075		—		1,075		N/M
Other expense	4,319		3,177		1,142		36		6,053		4,589		1,464		32
Total noninterest expense	$	30,747	$	27,813	$	2,934	11	%	$	56,828	$	51,667	$	5,161	10	%
Non-personnel expenses	$	13,663	$	13,331	$	332	2	%	$	24,628	$	23,862	$	766	3	%
Average full-time equivalent (“FTE”) employees	570		570		—		—	%	564		575		(11)		(2)	%

N/M means not meaningful.

Noninterest expense was $56.8 million, an increase of $5.2 million (10%) over first half 2020. Personnel costs increased $4.4 million (16%), while non-personnel expenses combined increased $0.8 million (3%) compared to first half 2020.

Personnel expense was $32.2 million for the six months ended June 30, 2021, an increase of $4.4 million from the comparable period in 2020. The increase in personnel was largely due to higher equity and other incentives commensurate with the strong earnings for first half 2021, as well as a 5% increase in salaries from merit increases between the periods. Personnel expense was also impacted by the change in the fair value of nonqualified deferred compensation plan liabilities from the significant market decline at the onset of the pandemic (from a negative position at June 30, 2020 to a positive position at June 30, 2021). See also “Noninterest Income” for discussion on the offsetting fair value change to the nonqualified deferred compensation plan assets.

Occupancy, equipment and office expense was $8.2 million for first half 2021, down $0.4 million (4%) compared to first half 2020, as second quarter 2020 included $0.5 million of accelerated depreciation and write-offs related to branch closures, while 2021 included higher expense for software and technology to drive operational efficiency, enhance products or services.

Business development and marketing expense was $2.2 million, down $1.7 million (43%), between the comparable six-month periods, largely due to the $1.25 million micro-grant program in second quarter 2020 (which provided funds directly to customers who otherwise qualified for small PPP loans of less than $5,000, as a more cost beneficial result for the customer), as well as lower marketing costs from differences in the timing and extent of donations, marketing campaigns, promotions, and media.

Data processing expense was $5.5 million, up $0.5 million (10%) between the comparable six-month periods, mostly due to volume-based increases in core processing charges.

Intangibles amortization decreased $0.2 million between the comparable first half periods mainly from declining amortization on the aging intangibles of previous acquisitions, partly offset by amortization from the new intangibles of the August 2020 Advantage acquisition.

FDIC assessments increased to $1.1 million for first half 2021 as the small bank assessment credits were fully utilized during third quarter 2020 and also reflecting the higher assessment base.

Other expense was $6.1 million, up $1.5 million (32%) between the comparable first half periods, mostly due to higher professional costs related to the recently announced acquisitions of Mackinac and County, as well as the new subordinated notes issuance. In addition, 2021 included a $2.1 million contract termination charge, while 2020 included $1.0 million of lease termination charges related to branch closures and $0.5 million to terminate the Commerce merger agreement.

Income Taxes

Income tax expense was $12.7 million (effective tax rate of 25.75%) for first half 2021, compared to $7.9 million (effective tax rate of 24.56%) for the comparable period of 2020. The lower effective tax rate for 2020 was due to the favorable tax treatment of the BOLI death benefit proceeds and higher tax benefit on stock-based compensation.

Income Statement Analysis – Three Months Ended June 30, 2021 versus Three Months Ended June 30, 2020

Net income was $18.3 million for the three months ended June 30, 2021, an increase of $4.8 million (36%) from $13.5 million for the three months ended June 30, 2020. Earnings per diluted common share was $1.77 for second quarter 2021, compared to $1.28 for second quarter 2020.

Tax-equivalent net interest income was $35.8 million for second quarter 2021, comprised of net interest income of $35.6 million ($4.1 million or 13% over second quarter 2020), and a tax-equivalent adjustment of $0.2 million (essentially unchanged from second quarter 2020). Tax-equivalent interest income increased $1.4 million between the second quarter periods, with $0.8 million from stronger volumes (led by average loans which grew $45 million or 2% over second quarter 2020, mostly from organic loan growth and the loans acquired with Advantage, net of PPP loan forgiveness, as well as the continued increase in cash, up $99 million to represent 17% of interest-earning assets for second quarter 2021 compared to 15% for second quarter 2020) and $0.6 million from higher yields. Interest expense decreased $2.7 million from second quarter 2020, as the impact of the lower interest rate environment more than offset the higher average deposit balances. For additional information regarding average balances, net interest income and net interest margin, see “INCOME STATEMENT ANALYSIS — Net Interest Income.”

The net interest margin for second quarter 2021 was 3.45%, up from 3.21% for second quarter 2020, influenced by the changing balance sheet mix with higher levels of low-earning cash. The yield on interest-earning assets of 3.72% declined 4 bps from second quarter 2020. The yield on loans excluding PPP loans was 4.50%, 46 bps lower than second quarter 2020 mostly attributable to the impact of the lower interest rate environment on variable loans offset partly by floors and the mix of fixed rate loans. The cost of funds of 0.41% declined 38 bps between the comparable quarters as deposit costs were adjusted down in the lower interest rate environment, and second quarter 2020 was also influenced by the the inclusion of PPPLF funds costing 35 bps.

Provision for credit losses declined to zero for second quarter 2021, compared to provision for credit losses of $3.0 million for second quarter 2020 given the vastly different economic conditions between the second quarter periods. The 2020 provision reflected the unknown magnitude of the evolving impact of credit stress on our customers arising from pandemic-based business disruptions and other recessionary conditions, while the 2021 provision evidences that this anticipated credit stress did not materialize as net charge-offs remain negligible (at 0.01% for both second quarter 2021 and 2020) and asset quality metrics continue to improve. 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 $20.2 million for second quarter 2021, an increase of $2.7 million (15%) from second quarter 2020. Noninterest income excluding net asset gains (losses) was down $2.2 million (12%) between the comparable second quarter periods, predominantly on lower net mortgage income. Net mortgage income of $5.6 million for second quarter 2021 was down $4.4 million (44%) from second quarter 2020 mostly due to lower sale gains and capitalized gains combined (down 4.3 million or 46%, commensurate with the lower volumes sold into the secondary market), a larger servicing portfolio (including $0.2 million higher servicing income, offset by $0.2 million higher amortization), a $0.3 million unfavorable change in the fair value of the mortgage derivatives, and $0.2 million lower MSR asset impairment given slower refinance activity. Trust services fee income and brokerage fee income combined was up $1.1 million (30%), consistent with the growth in assets under management. Service charges on deposit accounts grew $0.3 million to $1.1 million for second quarter 2021, mainly as we waived certain fees during second quarter 2020 to provide economic relief to our customers at the inception of the pandemic. Card interchange income grew $0.6 million (38%) due to higher volume and activity. Net asset gains of $4.2 million in second quarter 2021 were primarily attributable to favorable fair value marks on equity securities (including $3.5 million from the second quarter 2021 initial public offering of an equity investment), compared to net asset losses of $0.7 million in second quarter 2020. For additional information regarding noninterest income, see “INCOME STATEMENT ANALYSIS — Noninterest Income.”

Noninterest expense was $30.7 million for second quarter 2021, an increase of $2.9 million (11%) from second quarter 2020, including a $2.6 million increase in personnel expense and a $0.3 million increase in non-personnel expenses. Personnel expense increased $2.6 million (18%), largely due to higher equity and other incentives commensurate with the strong earnings, as well as higher salaries from merit increases between the periods. Occupancy, equipment, and office of $4.1 million was down $0.3 million (7%), as second quarter 2020 included $0.5 million of accelerated depreciation and write-offs related to branch closures, while 2021 included higher expense for software and technology to drive operational efficiency, enhance products or services. Business development and marketing of $1.2 million decreased $1.3 million (52%) versus second quarter 2020 largely due to $1.25 million for the micro-grant program in second quarter 2020. Data processing expense was $2.8 million, up $0.4 million (17%) between the comparable second quarter periods, mostly due to volume-based increases in core processing charges. FDIC assessments increased to $0.5 million for second quarter 2021 as the small bank assessment credits were fully utilized during third quarter 2020 and also reflecting the higher assessment base. Other expense was $4.3 million, up

$1.1 million (36%) between the comparable second quarter periods, mostly due to higher professional costs related to the recently announced acquisitions of Mackinac and County, as well as the new subordinated notes issuance. In addition, second quarter 2021 included a $2.1 million contract termination charge, while second quarter 2020 included $1.0 million of lease termination charges related to branch closures and $0.5 million to terminate the Commerce merger agreement. For additional information regarding noninterest expense, see “INCOME STATEMENT ANALYSIS — Noninterest Expense.”

Income tax expense for second quarter 2021 was $6.7 million, with an effective tax rate of 26.87%, compared to income tax expense of $4.6 million and an effective tax rate of 25.21% for second quarter 2020.

BALANCE SHEET ANALYSIS

At June 30, 2021, period end assets were $4.6 billion, up $36 million (1%) from December 31, 2020, with a slight shift in composition. The shift in assets from year-end 2020 included a $31 million increase in loans (comprised of a $36 million net reduction in PPP loans, and a $67 million increase in all other loans, mostly commercial), and a $23 million increase in securities AFS, offset by a reduction in cash and cash equivalents (down $10 million to $792 million). Total deposits of $3.9 billion at June 30, 2021, were up $29 million from December 31, 2020, including an increase of $103 million in customer core deposits, partly offset by a decrease of $75 million in brokered deposits. Total stockholders’ equity was $559 million, an increase of $20 million from December 31, 2020, primarily from earnings, exceeding stock repurchases and negative net fair value investment changes.

Compared to June 30, 2020, assets were $4.6 billion, up $46 million (1%) from June 30, 2020. Cash and cash equivalents decreased $30 million (4%) to $792 million at June 30, 2021, and represented 17% of total assets (compared to 18% of total assets at June 30, 2020). Total loans were minimally changed at $2.8 billion (as the net reduction in PPP loans of $179 million, mirrored growth of $178 million in the rest of the loan portfolio) and securities AFS increased $51 million (10%). On the funding side, deposits increased $0.4 billion (11%) over June 30, 2020, while total borrowings decreased $373 million due to the early repayment of PPPLF funding given the strong core deposit base. Also contributing to the increase since June 30, 2020 was the acquisition of Advantage in August 2020, which added $172 million in assets, $88 million in loans and $141 million of deposits at acquisition. Stockholders’ equity increased $27 million from June 30, 2020, primarily due to net income, partially offset by stock repurchases over the year and negative net fair value investment changes.

Loans

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

Nicolet services a diverse customer base throughout northeastern and central Wisconsin and in Menominee, Michigan. The Company concentrates on originating loans in its local markets and assisting its current loan customers. The loan portfolio is widely diversified by types of borrowers, industry groups, and market areas. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to multiple numbers of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At June 30, 2021, no significant industry concentrations existed in Nicolet’s portfolio in excess of 10% of total loans.

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

Table 6: Period End Loan Composition


	June 30, 2021				December 31, 2020				June 30, 2020
(in thousands)	Amount		% of Total		Amount		% of Total		Amount		% of Total
Commercial & industrial	$	736,169	26	%	$	750,718	27	%	$	729,264	26	%
PPP loans	150,287		5		186,016		7		329,157		12
Owner-occupied CRE	520,299		18		521,300		19		495,722		17
Agricultural	110,664		4		109,629		4		99,020		3
Commercial	1,517,419		53		1,567,663		57		1,653,163		58
CRE investment	505,588		18		460,721		16		447,900		16
Construction & land development	140,588		5		131,283		5		107,277		4
Commercial real estate	646,176		23		592,004		21		555,177		20
Commercial-based loans	2,163,595		76		2,159,667		78		2,208,340		78
Residential construction	46,646		2		41,707		1		51,332		2
Residential first mortgage	471,354		17		444,155		16		417,694		15
Residential junior mortgage	104,218		4		111,877		4		114,323		4
Residential real estate	622,218		23		597,739		21		583,349		21
Retail & other	34,518		1		31,695		1		29,812		1
Retail-based loans	656,736		24		629,434		22		613,161		22
Total loans	$	2,820,331	100	%	$	2,789,101	100	%	$	2,821,501	100	%
Total loans ex. PPP loans	$	2,670,044	95	%	$	2,603,085	93	%	$	2,492,344	88	%

Broadly, the loan portfolio at June 30, 2021, was 76% commercial-based and 24% retail-based. Commercial-based loans are considered to have more inherent risk of default than retail-based loans, in part because of the broader list of factors that could impact a commercial borrower negatively. In addition, the commercial balance per borrower is typically larger than that for retail-based loans, implying higher potential losses on an individual customer basis. Credit risk on commercial-based loans is largely influenced by general economic conditions and the resulting impact on a borrower’s operations or on the value of underlying collateral, if any. PPP loans, however, initially added during second quarter 2020, are fully guaranteed by the SBA, warranting no credit loss provisions.

Commercial-based loans of $2.2 billion increased $4 million since December 31, 2020, including a $36 million decrease in the net carrying value of PPP loans (including an additional $160 million from the latest round of PPP loans, more than offset by approximately $195 million of PPP loan forgiveness) and growth of $40 million in the remainder of the commercial-based loan portfolio. Commercial and industrial loans continue to be the largest segment of Nicolet’s portfolio and represented 26% of the total portfolio at June 30, 2021.

Residential real estate loans of $622 million grew $24 million (4%) from year-end 2020, to represent 23% of total loans at June 30, 2021. Residential first mortgage loans include conventional first-lien home mortgages, while residential junior mortgage real estate loans consist mainly of home equity lines and term loans secured by junior mortgage liens. As part of its management of originating residential mortgage loans, the vast majority of Nicolet’s long-term, fixed-rate residential real estate mortgage loans are sold in the secondary market with servicing rights retained. Nicolet’s mortgage loans are typically of high quality and have historically had low net charge-off rates.

Retail and other loans were minimally changed from year-end 2020, and represented approximately 1% of the total loan portfolio, and include predominantly short-term and other personal installment loans not secured by real estate.

Allowance for Credit Losses - Loans

Credit risks within the loan portfolio are inherently different for each loan type as summarized under “BALANCE SHEET ANALYSIS — Loans.” A discussion of the loan portfolio credit risk can be found in the “Loans” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2020 Annual Report on Form 10-K. Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and ongoing review of loan payment performance. Active asset quality administration, including early problem loan identification and timely resolution of problems, aids in the management of credit risk and minimization of loan losses. For additional information regarding nonperforming assets see also “BALANCE SHEET ANALYSIS – Nonperforming Assets.”

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

At June 30, 2021, the ACL-Loans was $32.6 million (representing 1.15% of period end loans and 1.22% of period end loans excluding PPP loans) compared to $32.2 million at December 31, 2020 and $29.1 million at June 30, 2020. The change in the ACL-Loans from year-end 2020 was due to the $0.5 million provision for credit losses recognized and negligible net charge-offs (0.01% of average loans, annualized), while the increase from June 30, 2020 was largely due to the higher provision for credit losses in 2020 given the unprecedented economic disruptions and uncertainty surrounding the COVID-19 pandemic. The components of the ACL-Loans are detailed further in Table 7 below.

Table 7: Allowance for Credit Losses - Loans


	Six Months Ended						Year Ended
(in thousands)	June 30, 2021			June 30, 2020			December 31, 2020
ACL-Loans:
Balance at beginning of period	$	32,173		$	13,972		$	13,972
Adoption of CECL	—			8,488			8,488
Initial PCD ACL	—			797			797
Total impact for adoption of CECL	—			9,285			9,285
Provision for credit losses	500			6,000			10,300
Charge-offs	(329)			(216)			(1,689)
Recoveries	217			89			305
Net (charge-offs) recoveries	(112)			(127)			(1,384)
Balance at end of period	$	32,561		$	29,130		$	32,173
Net loan (charge-offs) recoveries:
Commercial & industrial	$	(36)		$	(37)		$	(692)
Owner-occupied CRE	—			—			(449)
Agricultural	(48)			—			—
CRE investment	(2)			(20)			(190)
Construction & land development	—			—			—
Residential construction	—			—			—
Residential first mortgage	12			4			9
Residential junior mortgage	3			15			67
Retail & other	(41)			(89)			(129)
Total net (charge-offs) recoveries	$	(112)		$	(127)		$	(1,384)
Ratios:
ACL-Loans to total loans	1.15		%	1.03		%	1.15		%
ACL-Loans to total loans ex. PPP loans	1.22		%	1.17		%	1.24		%
Net charge-offs to average loans, annualized	0.01		%	0.01		%	0.05		%
Net charge-offs to average loans ex. PPP loans, annualized	0.01		%	0.01		%	0.05		%

Nonperforming Assets

As part of its overall credit risk management process, management is committed to an aggressive problem loan identification philosophy. This philosophy has been implemented through the ongoing monitoring and review of all pools of risk in the loan portfolio to ensure that problem loans are identified early and the risk of loss is minimized. Management continues to actively work with customers and monitor credit risk from the ongoing economic disruptions surrounding the COVID-19 pandemic. Since the pandemic started, approximately 1,000 loans were provided temporary payment modifications, and as of June 30, 2021, only 1 loan remains under temporary payment modification structure. In addition, at June 30, 2021, 12 loans with a current balance of $7 million have been classified as troubled debt restructurings (included in Table 8 below), with $4 million reflected as performing troubled debt restructurings and the remainder in nonaccrual). See also Note 6, “Loans, Allowance for Credit Losses - Loans, and Credit Quality” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for further disclosures on credit quality. For additional information see also “BALANCE SHEET ANALYSIS – Loans” and “BALANCE SHEET ANALYSIS – Allowance for Credit Losses-Loans.”

Nonperforming loans are considered one indicator of potential future loan losses. Nonperforming loans are defined as nonaccrual loans and loans 90 days or more past due but still accruing interest. Loans are generally placed on nonaccrual status when contractually past due 90 days or more as to interest or principal payments. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on loans, it is management’s practice to place such loans on nonaccrual status immediately. Nonperforming assets include nonperforming loans and other real estate owned (“OREO”). At June 30, 2021, nonperforming assets were $10 million, comprised of $7 million of nonaccrual loans and $3 million of OREO, and represented 0.21% of total assets, compared to $13 million or 0.29% of total assets at December 31, 2020.

The level of potential problem loans is another predominant factor in determining the relative level of risk in the loan portfolio and in determining the appropriate level of the ACL-Loans. Potential problem loans are generally defined by management to include loans rated as Substandard by management but that are in performing status; however, there are circumstances present which might adversely affect the ability of the borrower to comply with present repayment terms. The decision of management to include performing loans in potential problem loans does not necessarily mean that Nicolet expects losses to occur, but that management recognizes a higher degree of risk associated with these loans. The loans that have been reported as potential problem loans are predominantly commercial-based loans covering a diverse range of businesses and real estate property types. Potential problem loans were $13 million (0.4% of loans) and $21 million (0.7% of loans) at June 30, 2021 and December 31, 2020, respectively. Potential problem loans require a heightened management review of the pace at which a credit may deteriorate, the duration of asset quality stress, and uncertainty around the magnitude and scope of economic stress that may be felt by Nicolet’s customers and on underlying real estate values.

Table 8: Nonperforming Assets


(in thousands)	June 30, 2021			December 31, 2020			June 30, 2020
Nonperforming loans:
Commercial & industrial	$	1,110		$	2,646		$	4,142
Owner-occupied CRE	1,625			1,869			3,005
Agricultural	1,820			1,830			1,711
Commercial	4,555			6,345			8,858
CRE investment	743			1,488			975
Construction & land development	326			327			533
Commercial real estate	1,069			1,815			1,508
Commercial-based loans	5,624			8,160			10,366
Residential construction	—			—			—
Residential first mortgage	1,135			823			1,067
Residential junior mortgage	113			384			565
Residential real estate	1,248			1,207			1,632
Retail & other	60			88			—
Retail-based loans	1,308			1,295			1,632
Total nonaccrual loans	6,932			9,455			11,998
Accruing loans past due 90 days or more	—			—			—
Total nonperforming loans	$	6,932		$	9,455		$	11,998
Nonaccrual loans (included above) covered by SBA guarantee	$	1,201		$	1,265		$	735
OREO:
Commercial real estate owned	$	—		$	—		$	—
Residential real estate owned	—			—			—
Bank property real estate owned	2,895			3,608			1,000
Total OREO	2,895			3,608			1,000
Total nonperforming assets	$	9,827		$	13,063		$	12,998
Performing troubled debt restructurings	$	3,879		$	2,120		$	—
Ratios:
Nonperforming loans to total loans	0.25		%	0.34		%	0.43		%
Nonperforming assets to total loans plus OREO	0.35		%	0.47		%	0.46		%
Nonperforming assets to total assets	0.21		%	0.29		%	0.29		%
ACL-Loans to nonperforming loans	470		%	340		%	243		%

Deposits

Deposits represent Nicolet’s largest source of funds. The deposit levels have been heavily influenced by the ongoing economic uncertainty, government stimulus payments and other directives related to the pandemic, which reduced spending and increased liquidity of consumers and businesses, as well as by PPP loan proceeds retained on deposit by corporate borrowers. The deposit composition is presented in Table 9 below.

Total deposits of $3.9 billion at June 30, 2021, increased $29 million (1%) from December 31, 2020. Core customer deposits increased $103 million, aided in part by additional government stimulus payments and new PPP funds on deposit, while brokered deposits decreased $75 million, as brokered deposits matured without renewal given our liquid position.

Compared to June 30, 2020, total deposits increased $0.4 billion (11%), largely due to an increase in customer core deposits, partly offset by a $96 million reduction in brokered deposits. The increase in total deposits since June 30, 2020 was largely due to the liquidity objectives of consumers and businesses in very uncertain times noted above. Also contributing to the increase in deposits from June 30, 2020, was the acquisition of Advantage in August 2020, which added $141 million of deposits at acquisition.

Table 9: Period End Deposit Composition


	June 30, 2021				December 31, 2020				June 30, 2020
(in thousands)	Amount		% of Total		Amount		% of Total		Amount		% of Total
Noninterest-bearing demand	$	1,324,994	34	%	$	1,212,787	31	%	$	1,087,884	31	%
Money market and interest-bearing demand	1,512,753		38	%	1,551,325		40	%	1,350,009		38	%
Savings	599,461		15	%	521,814		13	%	414,110		12	%
Time	501,814		13	%	624,473		16	%	685,802		19	%
Total deposits	$	3,939,022	100	%	$	3,910,399	100	%	$	3,537,805	100	%
Brokered transaction accounts	$	34,067	1	%	$	46,340	1	%	$	38,883	1	%
Brokered and listed time deposits	216,273		5	%	278,521		7	%	307,503		9	%
Total brokered deposits	$	250,340	6	%	$	324,861	8	%	$	346,386	10	%
Customer transaction accounts	$	3,403,141	87	%	$	3,239,586	83	%	$	2,813,120	79	%
Customer time deposits	285,541		7	%	345,952		9	%	378,299		11	%
Total customer deposits (core)	$	3,688,682	94	%	$	3,585,538	92	%	$	3,191,419	90	%

Lending-Related Commitments

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

Table 10: Commitments


(in thousands)	June 30, 2021		December 31, 2020
Commitments to extend credit	$	985,380	$	950,287
Financial standby letters of credit	8,330		8,241
Performance standby letters of credit	7,441		8,366

Interest rate lock commitments to originate residential mortgage loans held for sale (included above in commitments to extend credit) and forward commitments to sell residential mortgage loans held for sale are considered derivative instruments (“mortgage derivatives”) and represented $63 million and $1 million, respectively, at June 30, 2021. In comparison, interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans held for sale represented $113 million and $20 million, respectively, at December 31, 2020. The net fair value of these mortgage derivatives combined was a gain of $157,000 at June 30, 2021 compared to a loss of $244,000 at December 31, 2020.

Liquidity Management

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

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

Funds are available from a number of basic banking activity sources including, but not limited to, the core deposit base; repayment and maturity of loans; investment securities calls, maturities, and sales; and procurement of additional brokered deposits or other wholesale funding. All securities AFS and equity securities (included in other investments) are reported at fair value on the consolidated balance sheet. At June 30, 2021, approximately 23% of the $562 million securities AFS portfolio was pledged to secure public deposits, as applicable, and for other purposes as required by law. Additional funding sources at June 30, 2021, consist of $175 million of available and unused Federal funds lines, available borrowing capacity at the FHLB of $206 million, and borrowing capacity in the brokered deposit market.

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

Management is committed to the Parent Company being a source of strength to the Bank and its other subsidiaries, and therefore, regularly evaluates capital and liquidity positions of the Parent Company in light of current and projected needs, growth or strategies. The Parent Company uses cash for normal expenses, debt service requirements, and when opportune, for common stock repurchases, repayment of debt, or investment in other strategic actions such as mergers or acquisitions. At June 30, 2021, the Parent Company had $53 million in cash. Additional cash sources, among others, available to the Parent Company include its $10 million available and unused line of credit, and access to the public or private markets to issue new equity, subordinated notes or other debt. Subsequent to quarter end, on July 7, 2021, Nicolet completed the private placement of $100 million in fixed-to-floating rate subordinated notes (the “Notes”) due in 2031. (See Note 8, “Short and Long-Term Borrowings” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional information on the new Notes). Dividends from the Bank and, to a lesser extent, stock option exercises, represent significant sources of cash flows for the Parent Company.

Cash and cash equivalents at June 30, 2021 and December 31, 2020 were $792 million and $803 million, respectively. The decrease in cash and cash equivalents since year-end 2020 included $43 million net cash provided by operating activities (mostly earnings), $58 million net cash used by investing activities (primarily to fund loan growth, mostly PPP loans, and net investment purchases), and $4 million net cash provided by financing activities (with brokered deposit maturities, more than offset by core deposit growth, including additional government stimulus). Management believes its liquidity resources were sufficient as of June 30, 2021 to fund loans, accommodate deposit cycles and trends, and to meet other cash needs as necessary in these unsettled times.

Interest Rate Sensitivity Management and Impact of Inflation

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

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

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

Among other scenarios, Nicolet assessed the impact on net interest income in the event of a gradual +/-100 bps and +/-200 bps change in market rates (parallel to the change in prime rate) over a one-year time horizon to a static (flat) balance sheet. The results provided include the liquidity measures mentioned earlier and reflect the changed interest rate environment, partly in response to the pandemic. The interest rate scenarios are used for analytical purposes only and do not necessarily represent management’s view of future market interest rate movements. Based on financial data at June 30, 2021 and December 31, 2020, the projected changes in net interest income over a one-year time horizon, versus the baseline, are presented in Table 11 below. The results are within Nicolet’s guidelines of not greater than -10% for +/- 100 bps and not greater than -15% for +/- 200 bps and given the relatively short nature of the Company’s balance sheet, reflect a largely unchanged risk position as expected.

Table 11: Interest Rate Sensitivity


	June 30, 2021		December 31, 2020
200 bps decrease in interest rates	(0.4)	%	(0.8)	%
100 bps decrease in interest rates	(0.4)	%	(0.8)	%
100 bps increase in interest rates	2.3	%	4.0	%
200 bps increase in interest rates	4.6	%	8.1	%

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.

Capital

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

The Company’s and the Bank’s regulatory capital ratios remain above minimum regulatory ratios, including the capital conservation buffer. At June 30, 2021, the Bank’s regulatory capital ratios qualify the Bank as well-capitalized under the prompt-corrective action framework. This strong base of capital has allowed Nicolet to be opportunistic in the current environment and in strategic growth. A summary of Nicolet’s and the Bank’s regulatory capital amounts and ratios, as well as selected capital metrics are presented in the following table.

Table 12: Capital


	At or for the Six Months Ended			At or for the Year Ended
($ in thousands)	June 30, 2021			December 31, 2020
Company Stock Repurchases: *
Common stock repurchased during the period (dollars)	$	16,555		$	40,544
Common stock repurchased during the period (full shares)	214,304			646,748
Company Risk-Based Capital:
Total risk-based capital	$	432,231		$	406,325
Tier 1 risk-based capital	410,683			385,068
Common equity Tier 1 capital	386,538			361,162
Total capital ratio	13.4		%	12.9		%
Tier 1 capital ratio	12.7		%	12.2		%
Common equity tier 1 capital ratio	12.0		%	11.4		%
Tier 1 leverage ratio	9.4		%	9.0		%
Bank Risk-Based Capital:
Total risk-based capital	$	367,804		$	351,081
Tier 1 risk-based capital	346,256			329,824
Common equity Tier 1 capital	346,256			329,824
Total capital ratio	11.4		%	11.2		%
Tier 1 capital ratio	10.8		%	10.5		%
Common equity tier 1 capital ratio	10.8		%	10.5		%
Tier 1 leverage ratio	8.0		%	7.8		%
* Reflects common stock repurchased under board of director authorizations for the common stock repurchase program.

In managing capital for optimal return, we evaluate capital sources and uses, pricing and availability of our stock in the market, and alternative uses of capital (such as the level of organic growth or acquisition opportunities) in light of strategic plans. During first half 2021, $16.6 million was utilized to repurchase and cancel 214,304 shares of common stock, at an average per share cost of $77.25, pursuant to our common stock repurchase program. On May 18, 2021, Nicolet’s board authorized an increase to the program of $20 million or up to 250,000 shares of common stock. As a result, at June 30, 2021, there remained $23.9 million authorized under this repurchase program, as modified, to be utilized from time-to-time to repurchase shares in the open market, through block transactions or in private transactions.

Critical Accounting Policies

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Estimates that are particularly susceptible to significant change include the valuation of loan acquisition transactions, as well as the determination of the allowance for credit losses and income taxes. A discussion of these policies can be found in the “Critical Accounting Policies” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2020 Annual Report on Form 10-K. There have been no changes in the Company’s determination of critical accounting policies since December 31, 2020.

Future Accounting Pronouncements

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

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

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

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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

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

Following are Nicolet’s monthly common stock purchases during the second quarter of 2021.


	Total Number of Shares Purchased (a)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (b)
	(#)	($)		(#)	(#)
Period
April 1 – April 30, 2021	48,918	$	78.90	48,712	446,600
May 1 – May 31, 2021	108,706	$	79.21	108,706	587,900
June 1 – June 30, 2021	—	$	—	—	587,900
Total	157,624	$	79.12	157,418	587,900

(a)During second quarter 2021, the Company repurchased 206 common shares for minimum tax withholding settlements on restricted stock and no common shares were repurchased to satisfy the exercise price and / or tax withholding requirements of stock options. These purchases do not count against the maximum number of shares that may yet be purchased under the board of directors' authorization.

(b)During second quarter 2021, Nicolet utilized $12.5 million to repurchase and cancel approximately 157,400 shares of common stock pursuant to our common stock repurchase program. On May 18, 2021, Nicolet’s board authorized an increase to the program of $20 million or up to 250,000 shares of common stock. As a result, at June 30, 2021, approximately $23.9 million remained available under this common stock repurchase program.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The following exhibits are filed herewith:


Exhibit Number						Description
2.1						Agreement and Plan of Merger Between Nicolet Bankshares, Inc. and Mackinac Financial Corporation, dated April 12, 2021 (1)
2.2						Agreement and Plan of Merger Between Nicolet Bankshares, Inc. and County Bancorp, Inc., dated June 22, 2021 (2)
10.1						Employment Agreement, date d June 7, 2021, by and among the Registrant, Nicolet National Bank and H. Phillip Moore, Jr. (3)
31.1						Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002
31.2						Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002
32.1						Certification of CEO Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
32.2						Certification of CFO Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
101.INS						The XBRL Instance Document does not appear in the Interactive Date File because its XBRL tags are embedded within the Inline XBRL document (4)
101.SCH						Inline XBRL Taxonomy Extension Schema Document
101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document
104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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

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

(3) Incorporated by reference to the exhibit of the same number in the Registrant’s Current Report on Form 8-K filed on June 9, 2021.

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

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.

July 30, 2021			/s/ Michael E. Daniels
			Michael E. Daniels
			President and Chief Executive Officer

July 30, 2021			/s/ H. Phillip Moore, Jr.
			H. Phillip Moore, Jr.
			Chief Financial Officer

Nicolet Bankshares - 10-Q quarterly report FY2021 Q2

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			PAGE
PART I	FINANCIAL INFORMATION

	Item 1.	Financial Statements:

		Consolidated Balance Sheets	3

		Consolidated Statements of Income	4

		Consolidated Statements of Comprehensive Income	5

		Consolidated Statements of Stockholders’ Equity	6

		Consolidated Statements of Cash Flows	7

		Notes to Unaudited Consolidated Financial Statements	8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43

	Item 4.	Controls and Procedures	43

PART II	OTHER INFORMATION

	Item 1.	Legal Proceedings	44

	Item 1A.	Risk Factors	44

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

	Item 3.	Defaults Upon Senior Securities	44

	Item 4.	Mine Safety Disclosures	44

	Item 5.	Other Information	44

	Item 6.	Exhibits	45

		Signatures	46