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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 September 30, 2022
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                           to                          
Commission file number: 001-37700
NICOLET BANKSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
Wisconsin47-0871001
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
111 North Washington Street
Green Bay,Wisconsin54301
(Address of Principal Executive Offices) 
(Zip Code)
(920)430-1400
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareNICNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer☐Accelerated filer☒
Non-accelerated filer☐Smaller reporting company☐
Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 31, 2022 there were 14,676,910 shares of $0.01 par value common stock outstanding.


Nicolet Bankshares, Inc.
Quarterly Report on Form 10-Q
September 30, 2022
TABLE OF CONTENTS
2

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS:
NICOLET BANKSHARES, INC.
Consolidated Balance Sheets
(In thousands, except share and per share data)
September 30, 2022December 31, 2021
(Unaudited)(Audited)
Assets
Cash and due from banks$118,537 $209,349 
Interest-earning deposits319,745 385,943 
Cash and cash equivalents
438,282 595,292 
Certificates of deposit in other banks13,510 21,920 
Securities available for sale (“AFS”), at fair value949,597 921,661 
Securities held to maturity (“HTM”), at amortized cost686,424 651,803 
Other investments79,279 44,008 
Loans held for sale3,709 6,447 
Other assets held for sale— 199,833 
Loans5,984,437 4,621,836 
Allowance for credit losses - loans (“ACL-Loans”)(60,348)(49,672)
Loans, net
5,924,089 4,572,164 
Premises and equipment, net106,648 94,566 
Bank owned life insurance (“BOLI”)165,166 134,476 
Goodwill and other intangibles, net407,117 339,492 
Accrued interest receivable and other assets122,095 113,375 
Total assets
$8,895,916 $7,695,037 
Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing demand deposits$2,477,507 $1,975,705 
Interest-bearing deposits4,918,395 4,490,211 
Total deposits
7,395,902 6,465,916 
Short-term borrowings280,000 — 
Long-term borrowings225,236 216,915 
Other liabilities held for sale— 51,586 
Accrued interest payable and other liabilities56,315 68,729 
Total liabilities
7,957,453 6,803,146 
Stockholders’ Equity:
Common stock147 140 
Additional paid-in capital620,392 575,045 
Retained earnings380,263 313,604 
Accumulated other comprehensive income (loss)(62,339)3,102 
Total stockholders’ equity938,463 891,891 
Total liabilities and stockholders’ equity$8,895,916 $7,695,037 
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 outstanding14,673,197 13,994,079 
Common shares issued14,746,123 14,019,880 
See accompanying notes to unaudited consolidated financial statements.
3
ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.
Consolidated Statements of Income
(In thousands, except share and per share data) (Unaudited)
Three Months Ended
September 30,		Nine Months Ended
September 30,
2022202120222021
Interest income:
Loans, including loan fees$63,060 $35,294 $167,313 $104,267 
Investment securities:
Taxable
5,350 2,061 15,612 5,935 
Tax-exempt
1,181 517 2,503 1,582 
Other interest income1,127 869 2,734 2,140 
Total interest income
70,718 38,741 188,162 113,924 
Interest expense:
Deposits4,638 2,444 9,240 7,799 
Short-term borrowings594 — 622 — 
Long-term borrowings2,496 1,113 6,431 1,729 
Total interest expense
7,728 3,557 16,293 9,528 
Net interest income
62,990 35,184 171,869 104,396 
Provision for credit losses8,600 6,000 9,650 6,500 
Net interest income after provision for credit losses54,390 29,184 162,219 97,896 
Noninterest income:
Trust services fee income1,969 2,043 5,984 5,724 
Brokerage fee income3,040 3,154 9,716 8,938 
Mortgage income, net1,728 4,808 7,186 17,637 
Service charges on deposit accounts1,589 1,314 4,602 3,541 
Card interchange income3,012 2,299 8,543 6,492 
BOLI income966 572 2,667 1,658 
Asset gains (losses), net(46)(1,187)2,870 3,716 
Other income742 993 1,506 3,594 
Total noninterest income
13,000 13,996 43,074 51,300 
Noninterest expense:
Personnel24,136 16,927 65,008 49,127 
Occupancy, equipment and office7,641 5,749 21,476 13,939 
Business development and marketing2,281 1,654 6,169 3,853 
Data processing3,664 2,939 10,647 8,408 
Intangibles amortization1,628 758 4,399 2,400 
FDIC assessments480 480 1,440 1,555 
Merger-related expense519 2,793 1,172 3,449 
Other expense2,218 1,761 6,344 7,158 
Total noninterest expense
42,567 33,061 116,655 89,889 
Income before income tax expense
24,823 10,119 88,638 59,307 
Income tax expense6,313 2,295 21,979 14,960 
Net income
$18,510 $7,824 $66,659 $44,347 
Earnings per common share:
Basic$1.33 $0.75 $4.88 $4.39 
Diluted$1.29 $0.73 $4.72 $4.22 
Weighted average common shares outstanding:
Basic13,890,066 10,391,896 13,647,973 10,098,492 
Diluted14,310,275 10,775,591 14,126,772 10,503,163 
See accompanying notes to unaudited consolidated financial statements.
4
ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands) (Unaudited)
Three Months Ended
September 30,		Nine Months Ended
September 30,
2022202120222021
Net income$18,510 $7,824 $66,659 $44,347 
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities AFS:
Net unrealized holding gains (losses)
(26,162)(3,074)(89,630)(8,581)
Net realized (gains) losses included in income
— 13 (15)13 
Income tax (expense) benefit7,064 827 24,204 2,313 
Total other comprehensive income (loss)(19,098)(2,234)(65,441)(6,255)
Comprehensive income (loss)$(588)$5,590 $1,218 $38,092 
See accompanying notes to unaudited consolidated financial statements.
5
ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.
Consolidated Statements of Stockholders’ Equity
(In thousands) (Unaudited)
Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss)		Total
Balances at June 30, 2022$134 $520,741 $361,753 $(43,241)$839,387 
Comprehensive income:
Net income, three months ended September 30, 2022
— — 18,510 — 18,510 
Other comprehensive income (loss)
— — — (19,098)(19,098)
Issuance of common stock in acquisition13 98,136 — — 98,149 
Stock-based compensation expense— 1,329 — — 1,329 
Exercise of stock options, net— 1 — — 1 
Issuance of common stock— 185 — — 185 
Balances at September 30, 2022$147 $620,392 $380,263 $(62,339)$938,463 
Balances at June 30, 2021$98 $261,096 $289,475 $8,726 $559,395 
Comprehensive income:
Net income, three months ended September 30, 2021
— — 7,824 — 7,824 
Other comprehensive income (loss)
— — — (2,234)(2,234)
Issuance of common stock in acquisition23 179,411 — — 179,434 
Stock-based compensation expense— 1,826 — — 1,826 
Exercise of stock options, net1 160 — — 161 
Issuance of common stock— 163 — — 163 
Purchase and retirement of common stock(2)(17,289)— — (17,291)
Balances at September 30, 2021$120 $425,367 $297,299 $6,492 $729,278 
Balances at December 31, 2021$140 $575,045 $313,604 $3,102 $891,891 
Comprehensive income:
Net income, nine months ended September 30, 2022
— — 66,659 — 66,659 
Other comprehensive income (loss)
— — — (65,441)(65,441)
Issuance of common stock in acquisition13 98,136 — — 98,149 
Stock-based compensation expense— 5,282 — — 5,282 
Exercise of stock options, net1 2,077 — — 2,078 
Issuance of common stock— 557 — — 557 
Purchase and retirement of common stock(7)(60,705)— — (60,712)
Balances at September 30, 2022$147 $620,392 $380,263 $(62,339)$938,463 
Balances at December 31, 2020$100 $273,390 $252,952 $12,747 $539,189 
Comprehensive income:
Net income, nine months ended September 30, 2021
— — 44,347 — 44,347 
Other comprehensive income (loss)
— — — (6,255)(6,255)
Issuance of common stock in acquisition23 179,411 — — 179,434 
Stock-based compensation expense— 5,222 — — 5,222 
Exercise of stock options, net1 1,385 — — 1,386 
Issuance of common stock— 395 — — 395 
Purchase and retirement of common stock(4)(34,436)— — (34,440)
Balances at September 30, 2021$120 $425,367 $297,299 $6,492 $729,278 
See accompanying notes to unaudited consolidated financial statements.
6
ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended September 30,
20222021
Cash Flows From Operating Activities:
Net income$66,659 $44,347 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion16,994 9,301 
Provision for credit losses9,650 6,500 
Increase in cash surrender value of life insurance(2,551)(1,658)
Stock-based compensation expense5,282 5,222 
Asset (gains) losses, net(2,870)(3,716)
Gain on sale of loans held for sale, net(4,520)(16,289)
Net change due to:
Proceeds from sale of loans held for sale188,093 503,405 
Origination of loans held for sale(182,962)(485,641)
Accrued interest receivable and other assets
7,719 (6,721)
Accrued interest payable and other liabilities
(14,145)(2,488)
Net cash provided by (used in) operating activities
87,349 52,262 
Cash Flows From Investing Activities:
Net (increase) decrease in loans(537,001)10,406 
Net (increase) decrease in certificates of deposit in other banks8,419 8,561 
Purchases of securities AFS(8,623)(214,343)
Purchases of securities HTM(56,479)(20,996)
Proceeds from sales of securities AFS23,984 15,975 
Proceeds from calls and maturities of securities AFS70,781 81,681 
Proceeds from calls and maturities of securities HTM21,378 — 
Purchases of other investments(30,327)(4,787)
Proceeds from sales of other investments4,014 1,534 
Proceeds from redemption of BOLI578 — 
Net (increase) decrease in premises and equipment(7,965)(6,894)
Net (increase) decrease in other real estate and other assets9,785 1,046 
Net cash (paid) received in branch sale147,833 — 
Net cash (paid) received in business combination(28,221)394,868 
Net cash provided by (used in) investing activities
(381,844)267,051 
Cash Flows From Financing Activities:
Net increase (decrease) in deposits68,428 199,698 
Net increase (decrease) in short-term borrowings147,134 — 
Proceeds from long-term borrowings— 103,953 
Repayments of long-term borrowings(20,000)(42,559)
Purchase and retirement of common stock(60,712)(34,440)
Proceeds from issuance of common stock557 395 
Proceeds from exercise of stock options2,078 1,386 
Net cash provided by (used in) financing activities
137,485 228,433 
Net increase (decrease) in cash and cash equivalents
(157,010)547,746 
Cash and cash equivalents:
Beginning
595,292 802,859 
Ending *
$438,282 $1,350,605 
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest$19,785 $9,320 
Cash paid for taxes25,660 24,116 
Transfer of loans and bank premises to other real estate owned432 302 
Capitalized mortgage servicing rights2,127 3,191 
Acquisitions:
Fair value of assets acquired
$1,118,000 $1,556,000 
Fair value of liabilities assumed
1,034,000 1,409,000 
Net assets acquired
84,000 147,000 
* There was no restricted cash in cash and cash equivalents at September 30, 2022, while cash and cash equivalents at September 30, 2021, included restricted cash of $1.9 million pledged as collateral on interest rate swaps. No reserve balance was required with the Federal Reserve Bank at either September 30, 2022 or September 30, 2021.
See accompanying notes to unaudited consolidated financial statements.
7

NICOLET BANKSHARES, INC.
Notes to Unaudited Consolidated Financial Statements

Note 1 – Basis of Presentation
General
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated balance sheets, statements of income, comprehensive income (loss), changes in stockholders’ equity and cash flows of Nicolet Bankshares, Inc. (the “Company” or “Nicolet”) and its subsidiaries, as of and for the periods presented, and all such adjustments are of a normal recurring nature. All material intercompany transactions and balances have been eliminated. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the entire year.
These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been omitted or abbreviated. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
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, 2021.

Future Accounting Pronouncements
In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures. This ASU eliminates the accounting guidance for TDRs by creditors, while enhancing the disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The ASU also requires public business entities to expand the vintage disclosures to include gross charge-offs by year of origination. The updated guidance is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. Adoption of this amendment is not expected to have a material impact on the Company’s consolidated financial statements; though, it will result in new disclosures of gross charge-offs by year of origination and on the types of loan modifications to borrowers experiencing financial difficulties. Current TDR disclosures will be also removed.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The updated guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company continues to work through the cessation of LIBOR, including the modification of its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR. The Company expects to utilize the reference rate reform transition guidance, as applicable, and does not expect such adoption to have a material impact on its consolidated financial statements or financial disclosures. The Company will continue to assess the impact as the reference rate transition approaches June 30, 2023.

Reclassifications
Certain amounts in the 2021 consolidated financial statements have been reclassified to conform to the 2022 presentation. These reclassifications were not material and did not impact previously reported net income or comprehensive income.
8


Note 2 – Acquisitions
Completed Acquisitions:
Charter Bankshares, Inc. (“Charter”): On August 26, 2022, Nicolet completed its merger with Charter, pursuant to the Agreement and Plan of Merger dated March 29, 2022 (the “Charter Merger Agreement”), at which time Charter merged with and into Nicolet, and Charter Bank, the wholly owned bank subsidiary of Charter, was merged with and into Nicolet National Bank (the “Bank”), the wholly owned bank subsidiary of Nicolet.

Pursuant to the Charter Merger Agreement, each share of Charter common stock issued and outstanding immediately prior to the effective time of the merger was converted into the right to receive 15.458 shares of Nicolet common stock and $475 in cash. As a result, Nicolet issued approximately 1.26 million shares of Nicolet common stock for stock consideration of $98 million and cash consideration of $39 million, for a total purchase price of $137 million. With the Charter merger, Nicolet expanded to Western Wisconsin and Minnesota.

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

(In millions, except share data)Acquired from CharterFair Value AdjustmentsEstimated Fair Value
Assets Acquired:
Cash and cash equivalents$10 $— $10 
Investment securities218 — 218 
Loans848 (21)827 
ACL-Loans(9)7 (2)
Premises and equipment9 1 10 
BOLI29 — 29 
Core deposit intangible— 19 19 
Other assets5 2 7 
     Total assets$1,110 $8 $1,118 
Liabilities Assumed:
Deposits$869 $1 $870 
Borrowings161 — 161 
Other liabilities3 — 3 
     Total liabilities$1,033 $1 $1,034 
Net assets acquired$84 
Purchase Price:
Nicolet common stock issued (in shares)1,262,360 
Value of Nicolet common stock consideration$98 
Cash consideration paid39 
    Total purchase price$137 
Preliminary goodwill$53 

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

(In thousands)August 26, 2022
Purchase price of PCD loans at acquisition$24,031 
Allowance for credit losses on PCD loans at acquisition1,709 
Par value of PCD acquired loans at acquisition$25,740 

The Company accounted for the Charter acquisition under the acquisition method of accounting, and thus, the financial position and results of operations of Charter prior to the consummation date were not included in the accompanying consolidated financial statements. The accounting required assets purchased and liabilities assumed to be recorded at their respective estimated fair values at the date of acquisition. The estimated fair value was determined with the assistance of third party
9

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

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

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

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

(In millions, except share data)Acquired from CountyFair Value AdjustmentsEstimated Fair Value
Assets Acquired:
Cash and cash equivalents$20 $— $20 
Investment securities301 (1)300 
Loans1,015 (1)1,014 
ACL-Loans(11)8 (3)
Premises and equipment21 (4)17 
BOLI33 — 33 
Core deposit intangible— 7 7 
Loan servicing rights20 — 20 
Other assets6 (2)4 
     Total assets$1,405 $7 $1,412 
Liabilities Assumed:
Deposits$1,027 $3 $1,030 
Borrowings218 1 219 
Other liabilities8 — 8 
     Total liabilities$1,253 $4 $1,257 
Net assets acquired$155 
Purchase Price:
Nicolet common stock issued (in shares)2,366,243 
Value of Nicolet common stock consideration$176 
Cash consideration paid48 
    Total purchase price$224 
Write-off prior investment in County(1)
Goodwill$70 

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

(In thousands)December 3, 2021
Purchase price of PCD loans at acquisition$64,948 
Allowance for credit losses on PCD loans at acquisition3,262 
Par value of PCD acquired loans at acquisition$68,210 

The Company accounted for the County acquisition under the acquisition method of accounting, and thus, the financial position and results of operations of County prior to the consummation date were not included in the accompanying consolidated
10

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

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

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

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

(In millions, except share data)Acquired from MackinacFair Value AdjustmentsEstimated Fair Value
Assets Acquired:
Cash and cash equivalents$448 $— $448 
Investment securities104 — 104 
Loans930 10 940 
ACL-Loans(6)4 (2)
Premises and equipment24 (3)21 
BOLI16 — 16 
Goodwill20 (20)— 
Other intangibles4 3 7 
Other assets25 (3)22 
     Total assets$1,565 $(9)$1,556 
Liabilities Assumed:
Deposits$1,365 $1 $1,366 
Borrowings28 1 29 
Other liabilities13 1 14 
     Total liabilities$1,406 $3 $1,409 
Net assets acquired$147 
Purchase Price:
Nicolet common stock issued (in shares)2,337,230 
Value of Nicolet common stock consideration$180 
Cash consideration paid49 
    Total purchase price$229 
Write-off prior investment in Mackinac(2)
Goodwill$84 

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

(In thousands)September 3, 2021
Purchase price of PCD loans at acquisition$10,605 
Allowance for credit losses on PCD loans at acquisition1,896 
Par value of PCD acquired loans at acquisition$12,501 

The Company accounted for the Mackinac acquisition under the acquisition method of accounting, and thus, the financial position and results of operations of Mackinac prior to the consummation date were not included in the accompanying
11

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

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

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

Note 3 – Earnings per Common Share
Basic earnings per common share are calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share are calculated by dividing net income by the weighted average number of shares adjusted for the dilutive effect of common stock awards (outstanding stock options and unvested restricted stock), if any. Presented below are the calculations for basic and diluted earnings per common share.
Three Months Ended September 30,Nine Months Ended September 30,
(In thousands, except per share data)2022202120222021
Net income$18,510 $7,824 $66,659 $44,347 
Weighted average common shares outstanding13,890 10,392 13,648 10,098 
Effect of dilutive common stock awards420 384 479 405 
Diluted weighted average common shares outstanding14,310 10,776 14,127 10,503 
Basic earnings per common share*$1.33 $0.75 $4.88 $4.39 
Diluted earnings per common share*$1.29 $0.73 $4.72 $4.22 
*Cumulative quarterly per share performance may not equal annual per share totals due to the effects of the amount and timing of capital increases. When computing earnings per share for an interim period, the denominator is based on the weighted average shares outstanding during the interim period, and not on an annualized weighted average basis. Accordingly, the sum of the earnings per share data for the quarters will not necessarily equal the year to date earnings per share data.
For the three months ended September 30, 2022 and 2021, respectively, options to purchase approximately 0.2 million shares are excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive. For the nine months ended September 30, 2022 and 2021, respectively, options to purchase approximately 0.1 million shares are excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive.

Note 4 – Stock-Based Compensation
The Company may grant stock options and restricted stock under its stock-based compensation plans to certain officers, employees and directors. These plans are administered by a committee of the Board of Directors, and at September 30, 2022, approximately 0.7 million shares were available for grant under these stock-based compensation plans.
12

A Black-Scholes model is utilized to estimate the fair value of stock option grants, while the market price of the Company’s stock at the date of grant is used to estimate the fair value of restricted stock awards. The weighted average assumptions used in the Black-Scholes model for valuing stock option grants for the nine months ended September 30, 2022 and 2021 were as follows.
Nine Months Ended September 30,
20222021
Dividend yield— %— %
Expected volatility30 %30 %
Risk-free interest rate3.03 %1.16 %
Expected average life7 years7 years
Weighted average per share fair value of options$30.99 $26.55 
A summary of the Company’s stock option activity is summarized below.
Stock OptionsOption Shares
Outstanding		Weighted
Average
Exercise Price		Weighted Average
Remaining
Life (Years)		Aggregate
Intrinsic Value
(in thousands)
Outstanding - December 31, 20211,833,246 $57.69 
Granted132,929 81.04 
Exercise of stock options *(65,661)41.26 
Forfeited(8,500)77.62 
Outstanding - September 30, 20221,892,014 $59.81 6.2$24,920 
Exercisable - September 30, 20221,207,585 $50.84 4.9$24,324 
* The terms of the stock option agreements permit having a number of shares of stock withheld, the fair market value of which as of the date of exercise is sufficient to satisfy the exercise price and/or tax withholding requirements. For the nine months ended September 30, 2022, 6,073 such shares were withheld by the Company.
Intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the exercise price of the stock options. The intrinsic value of options exercised for the nine months ended September 30, 2022 and 2021 was approximately $3.3 million and $1.7 million, respectively.
A summary of the Company’s restricted stock activity is summarized below.
Restricted StockWeighted Average Grant
Date Fair Value		Restricted Shares
Outstanding
Outstanding - December 31, 2021$71.42 25,801 
Granted75.99 60,852 
Vested *71.51 (13,127)
Forfeited56.01 (600)
Outstanding - September 30, 2022$75.34 72,926 
* The terms of the restricted stock agreements permit the surrender of shares to the Company upon vesting in order to satisfy applicable tax withholding requirements at the minimum statutory withholding rate, and accordingly, 465 shares were surrendered during the nine months ended September 30, 2022.
The Company recognized approximately $4.6 million and $4.5 million of stock-based compensation expense (included in personnel on the consolidated statements of income) for the nine months ended September 30, 2022 and 2021, respectively, associated with its common stock awards granted to officers and employees. In addition, during the nine months ended September 30, 2022, the Company recognized approximately $0.7 million of director expense (included in other expense on the consolidated statements of income) for restricted stock grants totaling 8,852 shares with immediate vesting to directors, while during the first nine months of 2021, the Company recognized approximately $0.7 million of director expense for restricted stock grants totaling 9,595 shares with immediate vesting to directors, in each case representing the annual stock retainer fee paid to external board members for that year. As of September 30, 2022, there was approximately $19.9 million of unrecognized compensation cost related to equity award grants, which is expected to be recognized over the remaining vesting period of approximately four years. The Company recognized a tax benefit of approximately $0.4 million and $0.3 million for the nine months ended September 30, 2022 and 2021, respectively, for the tax impact of stock option exercises and vesting of restricted stock.
13


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

The amortized cost and fair value of securities AFS and HTM are summarized as follows.
September 30, 2022
(in thousands)Amortized CostGross
Unrealized
Gains		Gross
Unrealized
Losses		Estimated Fair ValueFair Value as % of Total
Securities AFS:
U.S. government agency securities$194,295 $— $9,532 $184,763 19 %
State, county and municipals454,740 32 42,908 411,864 43 %
Mortgage-backed securities239,430 1 25,996 213,435 23 %
Corporate debt securities146,528 — 6,993 139,535 15 %
Total securities AFS$1,034,993 $33 $85,429 $949,597 100 %
Securities HTM:
U.S. government agency securities$506,952 $65 $38,590 $468,427 74 %
State, county and municipals39,121 1 3,363 35,759 6 %
Mortgage-backed securities140,351 — 16,898 123,453 20 %
Total securities HTM$686,424 $66 $58,851 $627,639 100 %
December 31, 2021
(in thousands)Amortized CostGross
Unrealized
Gains		Gross
Unrealized
Losses		Estimated Fair ValueFair Value as % of Total
Securities AFS:
U.S. government agency securities$192,506 $6 $1,235 $191,277 21 %
State, county and municipals311,717 3,222 2,202 312,737 34 %
Mortgage-backed securities270,017 3,090 1,845 271,262 29 %
Corporate debt securities143,172 3,459 246 146,385 16 %
Total securities AFS$917,412 $9,777 $5,528 $921,661 100 %
Securities HTM:
U.S. government agency securities$508,810 $— $2,740 $506,070 78 %
State, county and municipals42,876 10 173 42,713 7 %
Mortgage-backed securities100,117 89 595 99,611 15 %
Total securities HTM$651,803 $99 $3,508 $648,394 100 %
All mortgage-backed securities included in the tables above were issued by U.S. government agencies and corporations. Investment securities with a carrying value of $786 million and $277 million, as of September 30, 2022 and December 31, 2021, respectively, were pledged as collateral to secure public deposits, as applicable, and for liquidity or other purposes as required by regulation. Accrued interest on investment securities totaled $7 million at September 30, 2022 and $5 million at December 31, 2021, and is included in accrued interest receivable and other assets on the consolidated balance sheets.

14


The following table presents gross unrealized losses and the related estimated fair value of investment securities for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time individual securities have been in a continuous unrealized loss position.
September 30, 2022
Less than 12 months12 months or moreTotal
($ in thousands)Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Number of
Securities
Securities AFS:
U.S. government agency securities$73,427 $3,649 $111,307 $5,883 $184,734 $9,532 18 
State, county and municipals325,212 29,803 66,031 13,105 391,243 42,908 906 
Mortgage-backed securities163,160 17,180 49,315 8,816 212,475 25,996 384 
Corporate debt securities123,488 5,218 11,668 1,775 135,156 6,993 94 
Total
$685,287 $55,850 $238,321 $29,579 $923,608 $85,429 1,402 
Securities HTM:
U.S. government agency securities$459,059 $38,590 $— $— $459,059 $38,590 6 
State, county and municipals25,308 2,663 4,495 700 29,803 3,363 58 
Mortgage-backed securities117,168 15,696 6,285 1,202 123,453 16,898 106 
Total
$601,535 $56,949 $10,780 $1,902 $612,315 $58,851 170 
December 31, 2021
Less than 12 months12 months or moreTotal
($ in thousands)Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Number of
Securities
Securities AFS:
U.S. government agency securities$190,432 $1,235 $— $— $190,432 $1,235 11 
State, county and municipals103,950 2,119 1,777 83 105,727 2,202 132 
Mortgage-backed securities137,561 1,616 6,068 229 143,629 1,845 159 
Corporate debt securities23,267 246 — — 23,267 246 13 
Total
$455,210 $5,216 $7,845 $312 $463,055 $5,528 315 
Securities HTM:
U.S. government agency securities$505,938 $2,740 $— $— $505,938 $2,740 9 
State, county and municipals30,898 173 — — 30,898 173 46 
Mortgage-backed securities69,333 595 — — 69,333 595 72 
Total
$606,169 $3,508 $— $— $606,169 $3,508 127 
Quarterly, the Company evaluates securities AFS in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. In making this evaluation, management considers the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. As of September 30, 2022 and December 31, 2021, no allowance for credit losses on securities AFS was recognized. The Company does not consider its securities AFS with unrealized losses to be attributable to credit-related factors, as the unrealized losses in each category have occurred as a result of changes in noncredit-related factors such as changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration. Furthermore, the Company does not have the intent to sell any of these securities AFS and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost.
The Company also evaluates securities HTM quarterly to determine whether an allowance for credit losses is necessary. In making this determination, management considers the facts and circumstances of the underlying investment securities. The U.S. government agency securities include U.S. Treasury Notes which are guaranteed by the U.S. government. For the state, county and municipal securities, management considers issuer bond ratings, historical loss rates by bond ratings, whether issuers continue to make timely principal and interest payments per the contractual terms of the investment securities, internal forecasts, and whether or not such investment securities provide insurance, other credit enhancement, or are pre-refunded by the issuers. For the mortgage-backed securities, all such securities were issued by U.S. government agencies and corporations,
15

which are currently explicitly or implicitly guaranteed by the U.S. government and have a long history of no credit losses. Therefore, management determined no allowance for credit losses was necessary for the securities HTM.
The amortized cost and fair value of investment securities by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties; as this is particularly inherent in mortgage-backed securities, these securities are not included in the maturity categories below.
As of September 30, 2022
Securities AFSSecurities HTM
(in thousands)Amortized CostFair ValueAmortized CostFair Value
Due in less than one year$220,008 $214,856 $5,032 $5,022 
Due in one year through five years189,795 180,208 510,548 471,106 
Due after five years through ten years233,100 206,362 26,740 24,404 
Due after ten years152,660 134,736 3,753 3,654 
795,563 736,162 546,073 504,186 
Mortgage-backed securities239,430 213,435 140,351 123,453 
Total investment securities$1,034,993 $949,597 $686,424 $627,639 
Proceeds and realized gains or losses from the sale of AFS securities were as follows.
Nine Months Ended September 30,
(in thousands)20222021
Gross gains$20 $4 
Gross losses(5)(17)
Gains (losses) on sales of securities AFS, net
$15 $(13)
Proceeds from sales of securities AFS *$23,984 $15,975 
* Includes proceeds of $21 million recognized on the sale of securities AFS upon acquisition of Charter for which no gain or loss was recognized in the income statement as the securities were marked to fair value through purchase accounting.

Other Investments
Other investments include “restricted” equity securities, equity securities with readily determinable fair values, and private company securities. As a member of the Federal Reserve Bank System and the Federal Home Loan Bank (“FHLB”) System, Nicolet is required to maintain an investment in the capital stock of these entities. These equity securities are “restricted” in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other exchange traded equity securities. As no ready market exists for these stocks, and they have no quoted market value, these investments are carried at cost. Also included are investments in other private companies that do not have quoted market prices, which are carried at cost less impairment charges, if any. The carrying value of other investments are summarized as follows.
September 30, 2022December 31, 2021
(in thousands)AmountAmount
Federal Reserve Bank stock
$34,722 $20,973 
Federal Home Loan Bank (“FHLB”) stock
22,939 10,545 
Equity securities with readily determinable fair values4,482 5,660 
Other investments17,136 6,830 
Total other investments$79,279 $44,008 

16


Note 6 – Loans, Allowance for Credit Losses - Loans, and Credit Quality
The loan composition is summarized as follows.
September 30, 2022December 31, 2021
(in thousands)Amount% of
Total		Amount% of
Total
Commercial & industrial$1,268,252 21 %$1,042,256 23 %
Owner-occupied commercial real estate (“CRE”)954,933 16 787,189 17 
Agricultural1,017,498 17 794,728 17 
CRE investment1,132,951 19 818,061 18 
Construction & land development306,446 5 213,035 5 
Residential construction101,286 2 70,353 1 
Residential first mortgage970,384 16 713,983 15 
Residential junior mortgage176,428 3 131,424 3 
Retail & other56,259 1 50,807 1 
Loans
5,984,437 100 %4,621,836 100 %
Less allowance for credit losses - Loans (“ACL-Loans”)60,348 49,672 
Loans, net
$5,924,089 $4,572,164 
Allowance for credit losses - Loans to loans1.01 %1.07 %
Commercial and industrial loans included less than $1 million and $25 million of PPP loans at September 30, 2022 and December 31, 2021, respectively. Accrued interest on loans totaled $14 million and $11 million at September 30, 2022 and December 31, 2021, respectively, and is included in accrued interest receivable and other assets on the consolidated balance sheets.
Allowance for Credit Losses - Loans:
The majority of the Company’s loans, commitments, and letters of credit have been granted to customers in the Company’s market area. Although the Company has a diversified loan portfolio, the credit risk in the loan portfolio is largely influenced by general economic conditions and trends of the counties and markets in which the debtors operate, and the resulting impact on the operations of borrowers or on the value of underlying collateral, if any.
A roll forward of the allowance for credit losses - loans is summarized as follows.
Three Months Ended Nine Months EndedYear Ended
(in thousands)September 30, 2022September 30, 2021September 30, 2022September 30, 2021December 31, 2021
Beginning balance$50,655 $32,561 $49,672 $32,173 $32,173 
ACL on PCD loans acquired1,709 1,896 1,709 1,896 5,159 
Provision for credit losses8,200 4,000 9,100 4,500 12,500 
Charge-offs(300)(107)(442)(436)(513)
Recoveries84 49 309 266 353 
Net (charge-offs) recoveries(216)(58)(133)(170)(160)
Ending balance$60,348 $38,399 $60,348 $38,399 $49,672 
17

The following tables present the balance and activity in the ACL-Loans by portfolio segment.
Nine Months Ended September 30, 2022
(in thousands)Commercial
& industrial		Owner-
occupied
CRE		AgriculturalCRE
investment		Construction & land
development		Residential
construction		Residential
first mortgage		Residential
junior
mortgage		Retail
& other		Total
ACL-Loans *
Beginning balance$12,613 $7,222 $9,547 $8,462 $1,812 $900 $6,844 $1,340 $932 $49,672 
ACL on PCD loans1,408 156 — 38 2 — 93 12 — 1,709 
Provision621 1,356 847 3,004 603 446 1,415 517 291 9,100 
Charge-offs(152)(36)— — — — (65)— (189)(442)
Recoveries103 — — 169 — — 7 9 21 309 
Net (charge-offs) recoveries(49)(36)— 169 — — (58)9 (168)(133)
Ending balance$14,593 $8,698 $10,394 $11,673 $2,417 $1,346 $8,294 $1,878 $1,055 $60,348 
As % of ACL-Loans24 %15 %17 %19 %4 %2 %14 %3 %2 %100 %
*The PPP loans are fully guaranteed by the SBA; thus, no ACL-Loans has been allocated to these loans.
Year Ended December 31, 2021
(in thousands)Commercial
& industrial		Owner-
occupied
CRE		AgriculturalCRE
investment		Construction
& land
development		Residential
construction		Residential
first
mortgage		Residential
junior
mortgage		Retail &
other		 
Total
ACL-Loans *
Beginning balance$11,644 $5,872 $1,395 $5,441 $984 $421 $4,773 $1,086 $557 $32,173 
ACL on PCD loans723 1,045 2,585 415 103 — 272 13 3 5,159 
Provision196 305 5,615 2,608 725 479 1,892 237 443 12,500 
Charge-offs(242)— (48)(4)— — (113)— (106)(513)
Recoveries292 — — 2 — — 20 4 35 353 
Net (charge-offs) recoveries50 — (48)(2)— — (93)4 (71)(160)
Ending balance$12,613 $7,222 $9,547 $8,462 $1,812 $900 $6,844 $1,340 $932 $49,672 
As % of ACL-Loans25 %14 %19 %17 %4 %2 %14 %3 %2 %100 %
The ACL-Loans represents management’s estimate of expected credit losses in the Company’s loan portfolio at the balance sheet date. To assess the appropriateness of the ACL-Loans, management applies an allocation methodology which focuses on evaluation of qualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to specific loans; (ii) management’s ongoing review and grading of the loan portfolio; (iii) consideration of historical loan loss and delinquency experience on each portfolio segment; (iv) trends in past due and nonperforming loans; (v) the risk characteristics of the various loan segments; (vi) changes in the size and character of the loan portfolio; (vii) concentrations of loans to specific borrowers or industries; (viii) existing economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect expected credit losses. Assessing these numerous factors involves significant judgment.
Management allocates the ACL-Loans by pools of risk within each loan portfolio segment. The allocation methodology consists of the following components. First, a specific reserve is established for individually evaluated credit-deteriorated loans, which management defines as nonaccrual credit relationships over $250,000, collateral dependent loans, purchased credit deteriorated loans, and other loans with evidence of credit deterioration. The specific reserve in the ACL-Loans for these credit deteriorated loans is equal to the aggregate collateral or discounted cash flow shortfall. Management allocates the ACL-Loans with historical loss rates by loan segment. The loss factors are measured on a quarterly basis and applied to each loan segment based on current loan balances and projected for their expected remaining life. Next, management allocates the ACL-Loans using the qualitative factors mentioned above. Consideration is given to those current qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the historical loss experience of each loan segment. Lastly, management considers reasonable and supportable forecasts to assess the collectability of future cash flows.
Allowance for Credit Losses-Unfunded Commitments:
In addition to the ACL-Loans, the Company has established an ACL-Unfunded commitments, classified in accrued interest payable and other liabilities on the consolidated balance sheets. This reserve is maintained at a level that management believes is sufficient to absorb losses arising from unfunded loan commitments, and is determined quarterly based on methodology similar to the methodology for determining the ACL-Loans. The reserve for unfunded commitments was $3.0 million at September 30, 2022 and $2.4 million at December 31, 2021.

18

Provision for Credit Losses:
The provision for credit losses is determined by the Company as the amount to be added to the ACL loss accounts for various types of financial instruments including loans, investment securities, and off-balance sheet credit exposures after net charge-offs have been deducted to bring the ACL to a level that, in management’s judgment, is necessary to absorb expected credit losses over the lives of the respective financial instruments. See Note 5 for additional information regarding the ACL related to investment securities. The following table presents the components of the provision for credit losses.
Three Months Ended Nine Months EndedYear Ended
(in thousands)September 30, 2022September 30, 2021September 30, 2022September 30, 2021December 31, 2021
Provision for credit losses on:
Loans$8,200 $4,000 $9,100 $4,500 $12,500 
Unfunded Commitments400 2,000 550 2,000 2,400 
Investment securities— — — — — 
Total$8,600 $6,000 $9,650 $6,500 $14,900 
Collateral Dependent Loans:
A loan is considered to be collateral dependent when, based upon management’s assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. For collateral dependent loans, expected credit losses are based on the estimated fair value of the collateral at the balance sheet date, with consideration for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. The following tables present collateral dependent loans by portfolio segment and collateral type, including those loans with and without a related allowance allocation.
September 30, 2022Collateral Type
(in thousands)Real EstateOther Business AssetsTotalWithout an AllowanceWith an AllowanceAllowance Allocation
Commercial & industrial$— $3,032 $3,032 $1,443 $1,589 $661 
Owner-occupied CRE5,205 — 5,205 3,526 1,679 297 
Agricultural13,974 6,439 20,413 16,900 3,513 205 
CRE investment2,196 — 2,196 404 1,792 242 
Construction & land development685 — 685 685 — — 
Residential construction— — — — — — 
Residential first mortgage91 — 91 91 — — 
Residential junior mortgage— — — — — — 
Retail & other— — — — — — 
Total loans$22,151 $9,471 $31,622 $23,049 $8,573 $1,405 

December 31, 2021Collateral Type
(in thousands)Real EstateOther Business AssetsTotalWithout an AllowanceWith an AllowanceAllowance Allocation
Commercial & industrial$— $2,296 $2,296 $1,842 $454 $258 
Owner-occupied CRE3,537 — 3,537 1,315 2,222 552 
Agricultural19,637 8,518 28,155 25,310 2,845 841 
CRE investment3,000 — 3,000 1,684 1,316 407 
Construction & land development1,038 — 1,038 655 383 211 
Residential construction— — — — — — 
Residential first mortgage473 — 473 473 — — 
Residential junior mortgage— — — — — — 
Retail & other— — — — — — 
Total loans$27,685 $10,814 $38,499 $31,279 $7,220 $2,269 


19

Past Due and Nonaccrual Loans:
The following tables present past due loans by portfolio segment.
September 30, 2022
(in thousands)30-89 Days Past
Due (accruing)		90 Days & Over or nonaccrualCurrentTotal
Commercial & industrial$954 $3,052 $1,264,246 $1,268,252 
Owner-occupied CRE513 5,806 948,614 954,933 
Agricultural— 20,646 996,852 1,017,498 
CRE investment27 3,343 1,129,581 1,132,951 
Construction & land development— 794 305,652 306,446 
Residential construction557 — 100,729 101,286 
Residential first mortgage1,621 4,309 964,454 970,384 
Residential junior mortgage249 277 175,902 176,428 
Retail & other138 99 56,022 56,259 
Total loans$4,059 $38,326 $5,942,052 $5,984,437 
Percent of total loans0.1 %0.6 %99.3 %100.0 %
December 31, 2021
(in thousands)30-89 Days Past
Due (accruing)		90 Days & Over or nonaccrualCurrentTotal
Commercial & industrial$94 $1,908 $1,040,254 $1,042,256 
Owner-occupied CRE— 4,220 782,969 787,189 
Agricultural108 28,367 766,253 794,728 
CRE investment114 4,119 813,828 818,061 
Construction & land development— 1,071 211,964 213,035 
Residential construction246 — 70,107 70,353 
Residential first mortgage2,592 4,132 707,259 713,983 
Residential junior mortgage23 243 131,158 131,424 
Retail & other115 94 50,598 50,807 
Total loans$3,292 $44,154 $4,574,390 $4,621,836 
Percent of total loans0.1 %0.9 %99.0 %100.0 %

The following table presents nonaccrual loans by portfolio segment.
September 30, 2022December 31, 2021
(in thousands)Nonaccrual Loans% of TotalNonaccrual Loans% of Total
Commercial & industrial$3,052 8 %$1,908 4 %
Owner-occupied CRE5,806 15 4,220 10 
Agricultural20,646 54 28,367 64 
CRE investment3,343 9 4,119 9 
Construction & land development794 2 1,071 3 
Residential construction— — — — 
Residential first mortgage4,309 11 4,132 9 
Residential junior mortgage277 1 243 1 
Retail & other99 — 94 — 
Nonaccrual loans
$38,326 100 %$44,154 100 %
Percent of total loans0.6 %0.9 %

20

Credit Quality Information:
The following tables present total loans by risk categories and year of origination. Loans acquired from Charter, Mackinac and County have been included in the September 30, 2022 and December 31, 2021 tables based upon the actual origination date.
September 30, 2022Amortized Cost Basis by Origination Year
(in thousands)20222021202020192018PriorRevolvingRevolving to TermTOTAL
Commercial & industrial
Grades 1-4$254,713 $246,195 $108,418 $76,355 $52,099 $83,341 $349,324 $— $1,170,445 
Grade 57,187 7,423 11,052 2,084 2,734 4,344 18,807 — 53,631 
Grade 6158 1,649 675 638 453 11,972 14,718 — 30,263 
Grade 7552 352 3,384 2,666 802 1,149 5,008 — 13,913 
Total$262,610 $255,619 $123,529 $81,743 $56,088 $100,806 $387,857 $— $1,268,252 
Owner-occupied CRE
Grades 1-4$128,054 $189,922 $111,622 $104,840 $93,619 $269,617 $7,952 $— $905,626 
Grade 52,868 4,750 2,824 2,826 3,875 14,325 172 — 31,640 
Grade 6— — — 2,388 — 887 — — 3,275 
Grade 7440 414 6,244 377 85 6,832 — — 14,392 
Total$131,362 $195,086 $120,690 $110,431 $97,579 $291,661 $8,124 $— $954,933 
Agricultural
Grades 1-4$238,387 $154,364 $93,529 $26,185 $20,967 $135,426 $195,784 $— $864,642 
Grade 512,109 15,525 2,823 2,028 1,504 42,561 23,090 — 99,640 
Grade 649 1,491 31 33 — 5,322 425 — 7,351 
Grade 77,072 2,651 863 2,024 3,655 20,388 9,212 — 45,865 
Total$257,617 $174,031 $97,246 $30,270 $26,126 $203,697 $228,511 $— $1,017,498 
CRE investment
Grades 1-4$167,931 $228,709 $195,020 $141,749 $79,790 $261,027 $13,890 $— $1,088,116 
Grade 5784 1,664 5,252 3,131 983 24,997 — — 36,811 
Grade 6— — — 1,183 2,029 1,078 206 — 4,496 
Grade 7— — — 73 249 2,991 215 — 3,528 
Total$168,715 $230,373 $200,272 $146,136 $83,051 $290,093 $14,311 $— $1,132,951 
Construction & land development
Grades 1-4$82,695 $139,561 $15,958 $9,979 $27,553 $14,936 $14,361 $— $305,043 
Grade 540 — — 513 — 22 — — 575 
Grade 6— — — — — — — — — 
Grade 734 — — — — 794 — — 828 
Total$82,769 $139,561 $15,958 $10,492 $27,553 $15,752 $14,361 $— $306,446 
Residential construction
Grades 1-4$61,266 $32,309 $1,490 $125 $338 $664 $5,094 $— $101,286 
Grade 5— — — — — — — — — 
Grade 6— — — — — — — — — 
Grade 7— — — — — — — — — 
Total$61,266 $32,309 $1,490 $125 $338 $664 $5,094 $— $101,286 
Residential first mortgage
Grades 1-4$261,535 $266,465 $151,436 $73,915 $32,871 $167,038 $2,595 $3 $955,858 
Grade 5928 1,349 1,006 2,147 2,295 418 — — 8,143 
Grade 6— — — 717 — — — — 717 
Grade 7— 332 211 410 225 4,488 — — 5,666 
Total$262,463 $268,146 $152,653 $77,189 $35,391 $171,944 $2,595 $3 $970,384 
Residential junior mortgage
Grades 1-4$7,864 $4,875 $5,314 $3,227 $1,745 $3,439 $144,053 $5,293 $175,810 
Grade 5— — — — — 144 — — 144 
Grade 6— — — — — — — — — 
Grade 7— 209 — 27 — 86 152 — 474 
Total$7,864 $5,084 $5,314 $3,254 $1,745 $3,669 $144,205 $5,293 $176,428 
Retail & other
Grades 1-4$11,363 $9,873 $4,751 $3,677 $1,220 $24,608 $667 $— $56,159 
Grade 5— — — — — — — — — 
Grade 6— — — — — — — — — 
Grade 7— — 16 2 30 52 — — 100 
Total$11,363 $9,873 $4,767 $3,679 $1,250 $24,660 $667 $— $56,259 
Total loans$1,246,029 $1,310,082 $721,919 $463,319 $329,121 $1,102,946 $805,725 $5,296 $5,984,437 

21

December 31, 2021Amortized Cost Basis by Origination Year
(in thousands)20212020201920182017PriorRevolvingRevolving to TermTOTAL
Commercial & industrial
Grades 1-4$282,369 $146,131 $99,702 $69,478 $50,557 $71,247 $288,115 $— $1,007,599 
Grade 51,685 1,905 4,369 5,809 4,860 2,097 8,408 — 29,133 
Grade 6598 54 16 687 67 91 391 — 1,904 
Grade 7— 440 692 337 976 743 432 — 3,620 
Total$284,652 $148,530 $104,779 $76,311 $56,460 $74,178 $297,346 $— $1,042,256 
Owner-occupied CRE
Grades 1-4$154,578 $94,300 $105,226 $92,128 $75,583 $202,816 $6,945 $— $731,576 
Grade 57,753 3,019 6,529 2,543 2,515 13,905 656 — 36,920 
Grade 6— — 1,642 — 20 805 — — 2,467 
Grade 7— 3,124 1,914 — 3,526 6,672 990 — 16,226 
Total$162,331 $100,443 $115,311 $94,671 $81,644 $224,198 $8,591 $— $787,189 
Agricultural
Grades 1-4$128,404 $87,844 $28,416 $22,887 $36,298 $86,104 $235,743 $— $625,696 
Grade 514,796 4,183 2,391 915 3,912 48,373 26,778 — 101,348 
Grade 638 38 36 — 86 1,049 85 — 1,332 
Grade 73,284 3,971 3,490 4,201 7,215 31,672 12,519 — 66,352 
Total$146,522 $96,036 $34,333 $28,003 $47,511 $167,198 $275,125 $— $794,728 
CRE investment
Grades 1-4$192,274 $139,127 $136,306 $56,148 $65,026 $162,991 $11,289 $— $763,161 
Grade 511,081 3,001 6,497 3,945 6,726 17,527 — — 48,777 
Grade 6— — — — — — — — — 
Grade 7— — 456 141 1,352 3,943 231 — 6,123 
Total$203,355 $142,128 $143,259 $60,234 $73,104 $184,461 $11,520 $— $818,061 
Construction & land development
Grades 1-4$81,891 $72,415 $12,547 $19,511 $1,184 $11,274 $10,943 $— $209,765 
Grade 5640 — 521 919 — 119 — — 2,199 
Grade 6— — — — — — — — — 
Grade 7— — — — 17 1,054 — — 1,071 
Total$82,531 $72,415 $13,068 $20,430 $1,201 $12,447 $10,943 $— $213,035 
Residential construction
Grades 1-4$58,352 $9,998 $155 $344 $1,072 $380 $— $— $70,301 
Grade 5— — 52 — — — — — 52 
Grade 6— — — — — — — — — 
Grade 7— — — — — — — — — 
Total$58,352 $9,998 $207 $344 $1,072 $380 $— $— $70,353 
Residential first mortgage
Grades 1-4$256,082 $152,932 $168,705 $22,568 $20,147 $82,479 $1,840 $4 $704,757 
Grade 5713 529 3,094 — — 1,508 — — 5,844 
Grade 6— — — — — — — — — 
Grade 7— — 560 225 73 2,524 — — 3,382 
Total$256,795 $153,461 $172,359 $22,793 $20,220 $86,511 $1,840 $4 $713,983 
Residential junior mortgage
Grades 1-4$3,194 $3,139 $3,021 $1,501 $512 $1,969 $115,817 $1,426 $130,579 
Grade 5— — 29 — — — 439 — 468 
Grade 6— — — — — — — — — 
Grade 7— — 172 — 23 44 138 — 377 
Total$3,194 $3,139 $3,222 $1,501 $535 $2,013 $116,394 $1,426 $131,424 
Retail & other
Grades 1-4$13,676 $6,886 $5,826 $2,053 $1,882 $20,102 $275 $— $50,700 
Grade 5— — — — — — — — — 
Grade 6— — — — — — — — — 
Grade 7— 24 2 19 — 62 — — 107 
Total$13,676 $6,910 $5,828 $2,072 $1,882 $20,164 $275 $— $50,807 
Total loans$1,211,408 $733,060 $592,366 $306,359 $283,629 $771,550 $722,034 $1,430 $4,621,836 

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The following tables present total loans by risk categories.
September 30, 2022
(in thousands)Grades 1- 4Grade 5Grade 6Grade 7Total
Commercial & industrial$1,170,445 $53,631 $30,263 $13,913 $1,268,252 
Owner-occupied CRE905,626 31,640 3,275 14,392 954,933 
Agricultural864,642 99,640 7,351 45,865 1,017,498 
CRE investment1,088,116 36,811 4,496 3,528 1,132,951 
Construction & land development305,043 575 — 828 306,446 
Residential construction101,286 — — — 101,286 
Residential first mortgage955,858 8,143 717 5,666 970,384 
Residential junior mortgage175,810 144 — 474 176,428 
Retail & other56,159 — — 100 56,259 
Total loans$5,622,985 $230,584 $46,102 $84,766 $5,984,437 
Percent of total93.9 %3.9 %0.8 %1.4 %100.0 %
December 31, 2021
(in thousands)Grades 1- 4Grade 5Grade 6Grade 7Total
Commercial & industrial$1,007,599 $29,133 $1,904 $3,620 $1,042,256 
Owner-occupied CRE731,576 36,920 2,467 16,226 787,189 
Agricultural625,696 101,348 1,332 66,352 794,728 
CRE investment763,161 48,777 — 6,123 818,061 
Construction & land development209,765 2,199 — 1,071 213,035 
Residential construction70,301 52 — — 70,353 
Residential first mortgage704,757 5,844 — 3,382 713,983 
Residential junior mortgage130,579 468 — 377 131,424 
Retail & other50,700 — — 107 50,807 
Total loans$4,294,134 $224,741 $5,703 $97,258 $4,621,836 
Percent of total92.9 %4.9 %0.1 %2.1 %100.0 %

An internal loan review function rates loans using a grading system based on different risk categories. Loans with a Substandard grade are considered to have a greater risk of loss and may be assigned allocations for loss based on specific review of the weaknesses observed in the individual credits. Such loans are monitored by the loan review function to help ensure early identification of any deterioration. A description of the loan risk categories used by the Company follows.
Grades 1-4, Pass: Credits exhibit adequate cash flows, appropriate management and financial ratios within industry norms and/or are supported by sufficient collateral. Some credits in these rating categories may require a need for monitoring but elements of concern are not severe enough to warrant an elevated rating.
Grade 5, Watch: Credits with this rating are adequately secured and performing but are being monitored due to the presence of various short-term weaknesses which may include unexpected, short-term adverse financial performance, managerial problems, potential impact of a decline in the entire industry or local economy and delinquency issues. Loans to individuals or loans supported by guarantors with marginal net worth or collateral may be included in this rating category.
Grade 6, Special Mention: Credits with this rating have potential weaknesses that, without the Company’s attention and correction may result in deterioration of repayment prospects. These assets are considered Criticized Assets. Potential weaknesses may include adverse financial trends for the borrower or industry, repeated lack of compliance with Company requests, increasing debt to net worth, serious management conditions and decreasing cash flow.
Grade 7, Substandard: Assets with this rating are characterized by the distinct possibility the Company will sustain some loss if deficiencies are not corrected. All foreclosures, liquidations, and nonaccrual loans are considered to be categorized in this rating, regardless of collateral sufficiency.

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Troubled Debt Restructurings:
Loans are considered troubled debt restructurings if concessions have been granted to borrowers who are experiencing financial difficulties. The following table presents the loan composition of nonaccrual and performing TDRs.
 
September 30, 2022
December 31, 2021
(in thousands)PerformingNonaccrualTotalPerformingNonaccrualTotal
Commercial & industrial$— $223 $223 $— $197 $197 
Owner-occupied CRE— 2,639 2,639 3,466 2,888 6,354 
Agricultural— 14,181 14,181 — 16,835 16,835 
CRE investment— 299 299 918 — 918 
Construction & land development— 75 75 — 308 308 
Residential first mortgage— 13 13 913 15 928 
Residential junior mortgage— — — 146 — 146 
Total$— $17,430 $17,430 $5,443 $20,243 $25,686 
The following table presents the number of loans modified in a TDR, pre-modification loan balance, and post-modification loan balance by loan composition.
 
September 30, 2022
December 31, 2021
($ in thousands)Number of LoansPre-Modification BalanceCurrent BalanceNumber of LoansPre-Modification BalanceCurrent Balance
Commercial & industrial4 $240 $223 2 $200 $197 
Owner-occupied CRE3 5,138 2,639 6 6,913 6,354 
Agricultural26 16,237 14,181 31 17,228 16,835 
CRE investment1 301 299 1 919 918 
Construction & land development1 533 75 1 533 308 
Residential first mortgage1 17 13 2 931 928 
Residential junior mortgage— — — 1 166 146 
Total36 $22,466 $17,430 44 $26,890 $25,686 
TDR concessions may include payment schedule modifications, interest rate concessions, maturity date extensions, bankruptcies, or some combination of these concessions. There were no loans which were classified as troubled debt restructurings during the previous twelve months that subsequently defaulted during 2021 or through September 30, 2022. As of September 30, 2022, there were no commitments to lend additional funds to debtors whose terms have been modified in troubled debt restructurings.

Note 7 – Goodwill and Other Intangibles and Servicing Rights
Management periodically reviews the carrying value of its intangible assets to determine if any impairment has occurred, in which case an impairment charge would be recorded as an expense in the period of impairment, or whether changes in circumstances have occurred that would require a revision to the remaining useful life that would affect expense prospectively. In making such determination, management evaluates whether there are any adverse qualitative factors indicating that an impairment may exist, as well as the performance, on an undiscounted basis, of the underlying operations or assets which give rise to the intangible. Management regularly monitors economic factors for potential impairment indications on the value of our franchise, stability of deposits, and the wealth client base, underlying our goodwill, core deposit intangible, and customer list intangibles, and determined no impairments were indicated. A summary of goodwill and other intangibles was as follows.
(in thousands)September 30, 2022December 31, 2021
Goodwill$369,849 $317,189 
Core deposit intangibles34,791 19,445 
Customer list intangibles2,477 2,858 
    Other intangibles37,268 22,303 
Goodwill and other intangibles, net$407,117 $339,492 
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Goodwill: A summary of goodwill was as follows. During 2022, goodwill increased due to the Charter acquisition, while during 2021, goodwill increased due to the acquisitions of Mackinac and County. See Note 2 for additional information on the Company’s acquisitions.
Nine Months EndedYear Ended
(in thousands)September 30, 2022December 31, 2021
Goodwill:
Goodwill at beginning of year$317,189 $163,151 
Acquisitions52,660 154,038 
Goodwill at end of period$369,849 $317,189 
Other intangible assets: Other intangible assets, consisting of core deposit intangibles and customer list intangibles, are amortized over their estimated finite lives. A summary of other intangible assets was as follows. During 2022, core deposit intangibles increased due to the Charter acquisition, while during 2021, core deposit intangibles increased due to the acquisitions of Mackinac and County. See Note 2 for additional information on the Company’s acquisitions.
Nine Months EndedYear Ended
(in thousands)September 30, 2022December 31, 2021
Core deposit intangibles:
Gross carrying amount$60,724 $41,360 
Accumulated amortization(25,933)(21,915)
Net book value$34,791 $19,445 
Additions during the period$19,364 $13,595 
Amortization during the period$4,018 $2,987 
Customer list intangibles:
Gross carrying amount$5,523 $5,523 
Accumulated amortization(3,046)(2,665)
Net book value$2,477 $2,858 
Amortization during the period$381 $507 
Mortgage servicing rights (“MSR”): Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income, and assessed for impairment at each reporting date, with the amortization recorded in mortgage income, net, in the consolidated statements of income. Mortgage servicing rights are carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value, and are included in other assets in the consolidated balance sheets. A summary of the changes in the mortgage servicing rights asset was as follows.
Nine Months EndedYear Ended
(in thousands)September 30, 2022December 31, 2021
Mortgage servicing rights asset:
MSR asset at beginning of year$13,636 $10,230 
Capitalized MSR2,127 4,329 
MSR asset acquired— 1,322 
Amortization during the period(2,145)(2,245)
MSR asset at end of period$13,618 $13,636 
Valuation allowance at beginning of year$(1,200)$(1,000)
Additions— (500)
Reversals700 300 
Valuation allowance at end of period$(500)$(1,200)
MSR asset, net$13,118 $12,436 
Fair value of MSR asset at end of period$16,740 $15,599 
Residential mortgage loans serviced for others$1,649,187 $1,583,577 
Net book value of MSR asset to loans serviced for others0.80 %0.79 %
The Company periodically evaluates its mortgage servicing rights asset for impairment. At each reporting date, impairment is assessed based on estimated fair value using estimated prepayment speeds of the underlying mortgage loans serviced and stratification based on the risk characteristics of the underlying loans (predominantly loan type and note interest rate). See Note 9 for additional information on the fair value of the MSR asset.
Loan servicing rights (“LSR”): The Company acquired an LSR asset in connection with its acquisition of County on December 3, 2021 (see Note 2 for additional information on the County acquisition). The LSR asset was $13 million at September 30, 2022, and related to approximately $553 million of unpaid principal balances of loans serviced for others. The LSR asset will
25

be amortized on an accelerated basis over the estimated remaining loan service period as the Company does not expect to add new loans to this servicing portfolio. See Note 9 for additional information on the fair value of the LSR asset.
The following table shows the estimated future amortization expense for amortizing intangible assets and the servicing assets. The projections are based on existing asset balances, the current interest rate environment and prepayment speeds as of September 30, 2022. The actual amortization expense the Company recognizes in any given period may be significantly different depending upon acquisition or sale activities, changes in interest rates, prepayment speeds, market conditions, regulatory requirements and events or circumstances that indicate the carrying amount of an asset may not be recoverable.
(in thousands)Core deposit
intangibles		Customer list
intangibles		MSR assetLSR asset
Year ending December 31,
2022 (remaining three months)
$2,091 $126 $386 $2,004 
20237,589 483 2,735 6,345 
20246,298 449 2,635 3,673 
20255,161 449 1,884 1,020 
20263,983 249 1,394 — 
20273,218 166 1,394 — 
Thereafter6,451 555 3,190 — 
Total$34,791 $2,477 $13,618 $13,042 

Note 8 – Short and Long-Term Borrowings
Short-Term Borrowings:
Short-term borrowings include any borrowing with an original maturity of one year or less. At September 30, 2022, short-term borrowings included $280 million of short-term FHLB advances, comprised of $80 million due in October 2022 at a weighted average rate of 2.70% and $200 million due in September 2023 at a weighted average rate of 4.30%. The Company did not have any outstanding short-term borrowings at December 31, 2021.
Long-Term Borrowings:
Long-term borrowings include any borrowing with an original maturity greater than one year. The components of long-term borrowings were as follows.
(in thousands)September 30, 2022December 31, 2021
FHLB advances$33,000 $25,000 
Junior subordinated debentures39,512 38,885 
Subordinated notes152,724 153,030 
Total long-term borrowings
$225,236 $216,915 
FHLB Advances: The Federal Home Loan Bank (“FHLB”) advances bear fixed rates, require interest-only monthly payments, and have maturity dates through February 2030. The weighted average rate of the FHLB advances was 1.09% at September 30, 2022 and 0.59% at December 31, 2021.
Junior Subordinated Debentures: Each of the junior subordinated debentures was issued to an underlying statutory trust (the “statutory trusts”), which issued trust preferred securities and common securities and used the proceeds from the issuance of the common and the trust preferred securities to purchase the junior subordinated debentures of the Company. The debentures represent the sole asset of the statutory trusts. All of the common securities of the statutory trusts are owned by the Company. The statutory trusts are not included in the consolidated financial statements. The net effect of all the documents entered into with respect to the trust preferred securities is that the Company, through payments on its debentures, is liable for the distributions and other payments required on the trust preferred securities. Interest on all debentures is current. Any applicable discounts (initially recorded to carry an acquired debenture at its then estimated fair value) are being accreted to interest expense over the remaining life of the debenture. All the junior subordinated debentures are currently callable and may be redeemed in part or in full, at par, plus any accrued but unpaid interest. At September 30, 2022 and December 31, 2021, approximately $38 million and $37 million, respectively, of trust preferred securities qualify as Tier 1 capital.

Subordinated Notes (the “Notes”): In July 2021, the Company completed the private placement of $100 million in fixed-to-floating rate subordinated notes due in 2031, with a fixed annual rate of 3.125% for the first five years, and will reset quarterly thereafter to the then current three-month Secured Overnight Financing Rate (“SOFR”) plus 237.5 basis points. The Notes due in 2031 are redeemable beginning July 15, 2026 and quarterly thereafter on any interest payment date.
26

In December 2021, Nicolet assumed two subordinated note issuances at a premium as the result of the County acquisition. One issuance was $30 million in fixed-to-floating rate subordinated notes due in 2028, with a fixed annual interest rate of 5.875% for the first five years, and will reset quarterly thereafter to the then current three-month LIBOR plus 2.88% The second issuance was $22 million in fixed-to-floating rate subordinated notes due in 2030, with a fixed annual interest rate of 7.00% for the first five years, and will reset quarterly thereafter to the then current SOFR plus 687.5 basis points. The Notes due in 2028 are redeemable beginning June 1, 2023, and quarterly thereafter on any interest payment date, while the Notes due in 2030 are redeemable beginning June 30, 2025, and quarterly thereafter on any interest payment date. All Notes qualify as Tier 2 capital for regulatory purposes.
The following table shows the breakdown of junior subordinated debentures and subordinated notes.
As of September 30, 2022
As of December 31, 2021
(in thousands)Maturity
Date		Interest
 Rate		Par
Unamortized Premium /(Discount) / Debt Issue Costs (1)

Carrying
Value		Interest
 Rate
Carrying
Value
Junior Subordinated Debentures:
Mid-Wisconsin Statutory Trust I (2)
12/15/20354.72 %$10,310 $(2,625)$7,685 1.63 %$7,537 
Baylake Capital Trust II (3)
9/30/20365.02 %16,598 (3,233)13,365 1.57 %13,187 
First Menasha Statutory Trust (4)
3/17/20346.32 %5,155 (498)4,657 3.01 %4,624 
County Bancorp Statutory Trust II (5)
9/15/20354.82 %6,186 (948)5,238 1.73 %5,061 
County Bancorp Statutory Trust III (6)
6/15/20364.98 %6,186 (1,006)5,180 1.89 %5,121 
Fox River Valley Capital Trust (7)
5/30/20336.40 %3,610 (223)3,387 6.40 %3,355 
Total$48,045 $(8,533)$39,512 $38,885 
Subordinated Notes:
Subordinated Notes due 20317/15/20313.13 %$100,000 $(785)$99,215 3.13 %$99,057 
County Subordinated Notes due 20286/1/20285.88 %30,000 189 30,189 5.88 %30,402 
County Subordinated Notes due 20306/30/20307.00 %22,400 920 23,320 7.00 %23,571 
Total$152,400 $324 $152,724 $153,030 
(1) Represents the remaining unamortized premium or discount on debt issuances assumed in acquisitions, and represents the unamortized debt issue costs for the debt issued directly by Nicolet.
(2) The debentures, assumed in April 2013 as the result of an acquisition, have a floating rate of three-month LIBOR plus 1.43%, adjusted quarterly.
(3) The debentures, assumed in April 2016 as a result of an acquisition, have a floating rate of three-month LIBOR plus 1.35%, adjusted quarterly.
(4) The debentures, assumed in April 2017 as the result of an acquisition, have a floating rate of three-month LIBOR plus 2.79%, adjusted quarterly.
(5) The debentures, assumed in December 2021 as the result of an acquisition, have a floating rate of three-month LIBOR plus 1.53%, adjusted quarterly.
(6) The debentures, assumed in December 2021 as the result of an acquisition, have a floating rate of three-month LIBOR plus 1.69%, adjusted quarterly.
(7) The debentures, assumed in December 2021 as the result of an acquisition, have a floating rate of 5-year LIBOR plus 3.40%, which resets every five years.

Note 9 – Fair Value Measurements
Fair value represents the estimated price at which an orderly transaction to sell an asset or transfer a liability would take place between market participants at the measurement date under current market conditions (i.e., an exit price concept), and is a market-based measurement versus an entity-specific measurement. The Company records and/or discloses certain financial instruments on a fair value basis. These financial assets and financial liabilities are measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the assumptions used to determine fair value. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect assumptions of the reporting entity about how market participants would price the asset or liability based on the best information available under the circumstances. The three fair value levels are:
•Level 1 – quoted market prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date
•Level 2 – inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly
•Level 3 – significant unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity
27

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:TotalLevel 1Level 2Level 3
September 30, 2022
U.S. government agency securities$184,763 $— $184,763 $— 
State, county and municipals411,864 — 410,021 1,843 
Mortgage-backed securities213,435 — 212,453 982 
Corporate debt securities139,535 — 134,214 5,321 
Securities AFS
$949,597 $— $941,451 $8,146 
Other investments (equity securities)$4,482 $4,482 $— $— 
Derivative assets— — — — 
Derivative liabilities— — — — 
December 31, 2021
U.S. government agency securities$191,277 $— $191,277 $— 
State, county and municipals312,737 — 310,316 2,421 
Mortgage-backed securities271,262 — 270,260 1,002 
Corporate debt securities146,385 — 141,743 4,642 
Securities AFS
$921,661 $— $913,596 $8,065 
Other investments (equity securities)$5,660 $5,660 $— $— 
Derivative assets1,064 — 1,064 — 
Derivative liabilities1,064 — 1,064 — 
The following is a description of the valuation methodologies used by the Company for the assets and liabilities measured at fair value on a recurring basis, noted in the tables above. Where quoted market prices on securities exchanges are available, the investments are classified as Level 1. Level 1 investments primarily include exchange-traded equity securities. If quoted market prices are not available, fair value is generally determined using prices obtained from independent pricing vendors who use pricing models (with typical inputs including benchmark yields, reported trades for similar securities, issuer spreads or relationship to other benchmark quoted securities), or discounted cash flows, and are classified as Level 2. Examples of these investments include U.S. government agency securities, mortgage-backed securities, obligations of state, county and municipals, and certain corporate debt securities. Finally, in certain cases where there is limited activity or less transparency around inputs to the estimated fair value, investments are classified within Level 3 of the hierarchy. Examples of these include private corporate debt securities, which are primarily trust preferred security investments, as well as certain municipal bonds and mortgage-backed securities. At September 30, 2022 and December 31, 2021, it was determined that carrying value was the best approximation of fair value for these Level 3 securities, based primarily on the internal analysis on these securities. The fair value of the derivative assets and liabilities is determined using a discounted cash flow analysis of the expected cash flows of each derivative, which considers the contractual terms of the underlying derivative financial instrument and observable market-based inputs, such as interest rate curves.
The following table presents the changes in Level 3 securities AFS measured at fair value on a recurring basis.
Nine Months EndedYear Ended
Level 3 Fair Value Measurements:September 30, 2022December 31, 2021
Balance at beginning of year$8,065 $3,130 
Acquired balance750 4,935 
Maturities / Paydowns(442)— 
Unrealized gain / (loss)(227)— 
Balance at end of period$8,146 $8,065 
28

Nonrecurring basis fair value measurements:
The following table presents the Company’s assets measured at fair value on a nonrecurring basis, aggregated by level in the fair value hierarchy within which those measurements fall.
(in thousands)Fair Value Measurements Using
Measured at Fair Value on a Nonrecurring Basis:TotalLevel 1Level 2Level 3
September 30, 2022
Collateral dependent loans$30,217 $— $— $30,217 
Other real estate owned (“OREO”)2,134 — — 2,134 
MSR asset13,118 — — 13,118 
LSR asset13,042 — — 13,042 
December 31, 2021
Collateral dependent loans$36,230 $— $— $36,230 
OREO11,955 — — 11,955 
MSR asset12,436 — — 12,436 
LSR asset20,055 — — 20,055 
The following is a description of the valuation methodologies used by the Company for the items noted in the table above. For collateral dependent loans, the estimated fair value is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, the estimated fair value of the underlying collateral with consideration for estimated selling costs if satisfaction of the loan depends on the sale of the collateral, or the estimated liquidity of the note. For OREO, the fair value is based upon the estimated fair value of the underlying collateral adjusted for the expected costs to sell. To estimate the fair value of the MSR asset, the underlying serviced loan pools are stratified by interest rate tranche and term of the loan, and a valuation model is used to calculate the present value of the expected future cash flows for each stratum. The servicing valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as costs to service, a discount rate, ancillary income, default rates and losses, and prepayment speeds. Although some of these assumptions are based on observable market data, other assumptions are based on unobservable estimates of what market participants would use to measure fair value.
Financial instruments:
The carrying amounts and estimated fair values of the Company’s financial instruments are shown below.
September 30, 2022
(in thousands)Carrying
Amount		Estimated
Fair Value		Level 1Level 2Level 3
Financial assets:
Cash and cash equivalents$438,282 $438,282 $438,282 $— $— 
Certificates of deposit in other banks13,510 13,409 — 13,409 — 
Securities AFS949,597 949,597 — 941,451 8,146 
Securities HTM686,424 627,639 — 627,639 — 
Other investments, including equity securities79,279 79,279 4,482 58,910 15,887 
Loans held for sale3,709 3,770 — 3,770 — 
Loans, net5,924,089 5,638,877 — — 5,638,877 
MSR asset13,118 16,740 — — 16,740 
LSR asset13,042 13,042 — — 13,042 
Accrued interest receivable21,542 21,542 21,542 — — 
Financial liabilities:
Deposits$7,395,902 $7,390,443 $— $— $7,390,443 
Short-term borrowings280,000 280,000 — 280,000 — 
Long-term borrowings225,236 220,616 — 33,104 187,512 
Accrued interest payable3,533 3,533 3,533 — — 
29

December 31, 2021
(in thousands)Carrying
Amount		Estimated
Fair Value		Level 1Level 2Level 3
Financial assets:
Cash and cash equivalents$595,292 $595,292 $595,292 $— $— 
Certificates of deposit in other banks21,920 22,236 — 22,236 — 
Securities AFS921,661 921,661 — 913,596 8,065 
Securities HTM651,803 648,394 — 648,394 — 
Other investments, including equity securities44,008 44,008 5,660 32,110 6,238 
Loans held for sale6,447 6,616 — 6,616 — 
Loans, net4,572,164 4,606,851 — — 4,606,851 
MSR asset12,436 15,599 — — 15,599 
LSR asset20,055 20,055 — — 20,055 
Accrued interest receivable15,277 15,277 15,277 — — 
Financial liabilities:
Deposits$6,465,916 $6,463,064 $— $— $6,463,064 
Long-term borrowings216,915 216,092 — 25,097 190,995 
Accrued interest payable3,078 3,078 3,078 — — 
The valuation methodologies for the financial instruments disclosed in the above table are described in Note 18, Fair Value Measurements, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

Note 10 – Other Assets and Other Liabilities Held for Sale
On September 7, 2021, Nicolet entered into a Purchase and Assumption Agreement (the “Birmingham Agreement”) with Bank of Ann Arbor to sell Nicolet’s Birmingham, Michigan branch, including legacy mBank’s asset-based lending team (the “Birmingham Sale”). Pursuant to the terms of the Birmingham Agreement, Bank of Ann Arbor agreed to assume certain deposit liabilities and to acquire certain loans, as well as cash, personal property and other fixed assets associated with the Birmingham branch. The combined loan and deposit balances of the Birmingham branch (excluding certain loans and deposits not subject to the Birmingham Agreement) were approximately $199 million and $51 million, respectively, as of December 31, 2021. The Birmingham Sale closed on January 21, 2022.
30

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nicolet Bankshares, Inc. (the “Company” or “Nicolet”) is a bank holding company headquartered in Green Bay, Wisconsin. Nicolet provides a diversified range of traditional banking and wealth management services to individuals and businesses in its market area and through the branch offices of its banking subsidiary, Nicolet National Bank (the “Bank”), in Wisconsin, Michigan, and Minnesota. In this Quarterly Report on Form 10-Q, unless the context indicates otherwise, all references to “we,” “us” and “our” refer to the Company.
Forward-Looking Statements
Statements made in this document and in any documents that are incorporated by reference which are not purely historical are forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, including any statements regarding descriptions of management’s plans, objectives, or goals for future operations, products or services, and forecasts of its revenues, earnings, or other measures of performance. Forward-looking statements are based on current management expectations and, by their nature, are subject to risks and uncertainties. These statements are neither statements of historical fact nor assurance of future performance and generally may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “should,” “will,” “intend,” or similar expressions. Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of various transactions or events, and statements about our future performance, operations, products and services, and should be viewed with caution. Shareholders should note that many factors, some of which are discussed elsewhere in this document, could affect the future financial results of Nicolet and could cause those results to differ materially from those implied or anticipated by the statements. Except as required by law, we expressly disclaim any obligations to publicly update any forward-looking statements whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise. Important factors, many of which are beyond Nicolet’s control, that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements, in addition to those described in detail under Item 1A, “Risk Factors” of Nicolet’s 2021 Annual Report on Form 10-K include, but are not necessarily limited to the following:
•operating, legal and regulatory risks, including the effects of legislative or regulatory developments affecting the financial industry generally or Nicolet specifically;
•economic, market, political and competitive forces affecting Nicolet’s banking and wealth management businesses;
•changes in interest rates, monetary policy and general economic conditions, which may impact Nicolet’s net interest income;
•potential difficulties in identifying and integrating the operations of future acquisition targets with those of Nicolet;
•the impact of purchase accounting with respect to our merger activities, or any change in the assumptions used regarding the assets purchased and liabilities assumed to determine their fair value;
•cybersecurity risks and the vulnerability of our network and online banking portals, and the systems or parties with whom we contract, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches that could adversely affect our business and financial performance or reputation;
•changes in accounting standards, rules and interpretations and the related impact on Nicolet’s financial statements;
•compliance or operational risks related to new products, services, ventures, or lines of business, if any, that Nicolet may pursue or implement;
•changes in monetary and tax policies;
•changes occurring in business conditions and inflation;
•our ability to attract and retain key personnel;
•examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for credit losses, write-down assets, or take other actions;
•risks associated with actual or potential information gatherings, investigations or legal proceedings by customers, regulatory agencies or others;
•the potential effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as weather events, natural disasters, epidemics and pandemics (including COVID-19), war or terrorist activities, disruptions in our customers’ supply chains, disruptions in transportation, essential utility outages or trade disputes and related tariffs;
•each of the factors and risks under Item 1A, “Risk Factors” of Nicolet’s 2021 Annual Report on Form 10-K and in subsequent filings we make with the SEC; and
•risks related to our merger with Charter, including:
◦possible negative impact on our stock price and future business and financial results;
◦unexpected costs associated with the merger;
◦diversion of management’s attention from ongoing business operations and opportunities;
31

◦possible inability to achieve expected synergies and operating efficiencies in the merger within the expected timeframes or at all;
◦the impact of, or problems arising from the integration of the two companies;
◦the outcome of litigation or of matters before regulatory agencies, whether currently existing or commencing in the future, including litigation related to the merger;
◦potential adverse reactions or changes to business or employee relationships, including those resulting from the completion of the merger; and
◦current or future adverse legislation or regulation.
•the risk that Nicolet’s analysis of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.
These factors should be considered in evaluating the forward-looking statements, and you should not place undue reliance on such statements.

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

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

Economic Outlook
Growth in economic activity and demand for goods and services, combined with labor shortages, supply chain complications and geopolitical matters, have contributed to rising inflation. In response, the Federal Reserve has raised interest rates from a target range of 0.00%-0.25% in early March 2022 to 3.00%-3.25% at the end of September 2022. In addition, the Federal Reserve has signaled that it anticipates additional increases in the target range are likely to mitigate the hardships caused by the ongoing Russia-Ukraine conflict, continued supply chain disruptions, and increased inflationary pressure. The tightening of the Federal Reserve’s monetary policies, including these increases in the target range and the tapering of the Federal Reserve’s balance sheet, combined with ongoing economic and political instability, increases the risk of an economic recession. While forecasts vary, many economists are projecting that U.S. economic growth will slow and inflation will remain elevated in the coming quarters, potentially resulting in a contraction of the U.S. gross domestic output by 2023, if not earlier. The timing and impact of inflation and rising interest rates on our business and related financial results will depend on future developments, which are highly uncertain and difficult to predict.


32

Table 1: Earnings Summary and Selected Financial Data
At or for the Three Months EndedAt or for the Nine Months Ended
(In thousands, except per share data)9/30/20226/30/20223/31/202212/31/20219/30/20219/30/20229/30/2021
Results of operations:
Net interest income$62,990 $55,084 $53,795 $53,559 $35,184 $171,869 $104,396 
Provision for credit losses8,600 750 300 8,400 6,000 9,650 6,500 
Noninterest income13,000 14,131 15,943 16,064 13,996 43,074 51,300 
Noninterest expense42,567 36,538 37,550 39,408 33,061 116,655 89,889 
Income before income tax expense24,823 31,927 31,888 21,815 10,119 88,638 59,307 
Income tax expense6,313 7,942 7,724 5,510 2,295 21,979 14,960 
Net income$18,510 $23,985 $24,164 $16,305 $7,824 $66,659 $44,347 
Earnings per common share ("EPS"):       
Basic$1.33 $1.79 $1.77 $1.29 $0.75 $4.88 $4.39 
Diluted$1.29 $1.73 $1.70 $1.25 $0.73 $4.72 $4.22 
Common Shares:       
Basic weighted average13,890 13,402 13,649 12,626 10,392 13,648 10,098 
Diluted weighted average14,310 13,852 14,215 13,049 10,776 14,127 10,503 
Outstanding (period end)14,673 13,407 13,457 13,994 11,952 14,673 11,952 
Period-End Balances:       
Loans$5,984,437 $4,978,654 $4,683,315 $4,621,836 $3,533,198 $5,984,437 $3,533,198 
Allowance for credit losses - loans60,348 50,655 49,906 49,672 38,399 60,348 38,399 
Total assets8,895,916 7,370,252 7,320,212 7,695,037 6,407,820 8,895,916 6,407,820 
Deposits7,395,902 6,286,266 6,231,120 6,465,916 5,428,774 7,395,902 5,428,774 
Stockholders’ equity (common)938,463 839,387 836,310 891,891 729,278 938,463 729,278 
Book value per common share63.96 62.61 62.15 63.73 61.01 63.96 61.01 
Tangible book value per common share (2)
36.21 37.49 37.03 39.47 38.43 36.21 38.43 
Financial Ratios: (1)
       
Return on average assets0.93 %1.32 %1.30 %0.96 %0.59 %1.18 %1.24 %
Return on average common equity8.25 11.48 11.38 8.24 5.10 10.32 10.43 
Return on average tangible common equity (2)
13.93 19.21 18.75 13.19 7.62 17.25 15.41 
Stockholders' equity to assets10.55 11.39 11.42 11.59 11.38 10.55 11.38 
Tangible common equity to tangible assets (2)
6.26 7.15 7.14 7.51 7.48 6.26 7.48 
Reconciliation of Non-GAAP Financial Measures:
Adjusted net income reconciliation (3)
Net income (GAAP)$18,510 $23,985 $24,164 $16,305 $7,824 $66,659 $44,347 
Adjustments:
Provision expense related to merger8,000 — — 8,400 6,000 8,000 6,000 
Assets (gains) losses, net46 (1,603)(1,313)(465)1,187 (2,870)(3,716)
Merger-related expense519 555 98 2,202 2,793 1,172 3,449 
Branch closure expense— — — — 944 — 944 
Adjustments subtotal8,565 (1,048)(1,215)10,137 10,924 6,302 6,677 
Tax on Adjustments (25% effective tax rate)2,141 (262)(304)2,534 2,731 1,576 1,669 
Adjustments, net of tax6,424 (786)(911)7,603 8,193 4,727 5,008 
Adjusted net income (Non-GAAP)$24,934 $23,199 $23,253 $23,908 $16,017 $71,386 $49,355 
Adjusted diluted EPS (Non-GAAP)$1.74 $1.67 $1.64 $1.83 $1.49 $5.05 $4.70 
Tangible Assets:
Total assets$8,895,916 $7,370,252 $7,320,212 $7,695,037 $6,407,820 
Goodwill and other intangibles, net407,117 336,721 338,068 339,492 269,954 
Tangible assets$8,488,799 $7,033,531 $6,982,144 $7,355,545 $6,137,866 
Tangible Common Equity:
Stockholders’ equity (common)$938,463 $839,387 $836,310 $891,891 $729,278 
Goodwill and other intangibles, net407,117 336,721 338,068 339,492 269,954 
Tangible common equity$531,346 $502,666 $498,242 $552,399 $459,324 
Average Tangible Common Equity:       
Stockholders’ equity (common)$890,205 $837,975 $861,319 $784,666 $608,946 $863,272 $568,390 
Goodwill and other intangibles, net363,211 337,289 338,694 294,051 201,748 346,488 183,632 
Average tangible common equity$526,994 $500,686 $522,625 $490,615 $407,198 $516,784 $384,758 
Note: Numbers may not sum due to rounding.
(1) Income statement-related ratios for partial-year periods are annualized.
(2) The ratios of tangible book value per common share, return on average tangible common equity, and tangible common equity to tangible assets are non-GAAP financial measures that exclude goodwill and other intangibles, net. These financial ratios have been included as management considers them to be useful metrics with which to analyze and evaluate financial condition and capital strength. See section “Non-GAAP Financial Measures” below.
(3) The adjusted net income measure is a non-GAAP financial measure that provides information that management believes is useful to investors in understanding our operating performance and trends and also aids investors in the comparison of our financial performance to the financial performance of peer banks. See section “Non-GAAP Financial Measures” below.
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Non-GAAP Financial Measures
We identify “tangible book value per common share,” “return on average tangible common equity,” “tangible common equity to tangible assets” “adjusted net income,” and “adjusted diluted earnings per common share” as “non-GAAP financial measures.” In accordance with the SEC’s rules, we identify certain financial measures as non-GAAP financial measures if such financial measures exclude or include amounts in the most directly comparable measures calculated and presented in accordance with generally accepted accounting principles (“GAAP”) in effect in the United States in our statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures, ratios or statistical measures calculated using exclusively financial measures calculated in accordance with GAAP.
Management believes that the presentation of these non-GAAP financial measures (a) are important metrics used to analyze and evaluate our financial condition and capital strength and provide important supplemental information that contributes to a proper understanding of our operating performance and trends, (b) enables a more complete understanding of factors and trends affecting our business, and (c) allows investors to compare our financial performance to the financial performance of our peers and to evaluate our performance in a manner similar to management, the financial services industry, bank stock analysts, and bank regulators. Management uses non-GAAP measures as follows: in the preparation of our operating budgets, monthly financial performance reporting, and in our presentation to investors of our performance. However, we acknowledge that these non-GAAP financial measures have a number of limitations. Limitations associated with non-GAAP financial measures include the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently. These disclosures should not be considered an alternative to our GAAP results. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is presented in the table above.
Performance Summary
Net income was $66.7 million for the nine months ended September 30, 2022, compared to $44.3 million for the nine months ended September 30, 2021. Earnings per diluted common share was $4.72 for the first nine months of 2022, compared to $4.22 for the first nine months of 2021.
•Net interest income was $171.9 million for the first nine months of 2022, up $67.5 million (65%) over the first nine months of 2021. Interest income grew $74.2 million attributable to favorable volumes (mostly higher loan volumes), partly offset by net unfavorable rates (as loans reprice at varying intervals to reflect the recent Federal Reserve interest rate increases). Interest expense increased $6.8 million between the nine-month periods mostly from the larger funding base. Net interest margin was 3.36% for the nine months ended September 30, 2022, compared to 3.22% for the nine months ended September 30, 2021. For additional information regarding net interest income, see “Income Statement Analysis — Net Interest Income.”
•Noninterest income was $43.1 million for the first nine months of 2022, down $8.2 million (16%) from the comparable 2021 period, primarily due to lower net mortgage income. For additional information regarding noninterest income, see “Income Statement Analysis — Noninterest Income.”
•Noninterest expense was $116.7 million, $26.8 million (30%) higher than the first nine months of 2021. Personnel costs increased $15.9 million, and non-personnel expenses combined increased $10.9 million (27%) over the comparable 2021 period. For additional information regarding noninterest expense, see “Income Statement Analysis — Noninterest Expense.”
•Nonperforming assets were $40 million, representing 0.45% of total assets at September 30, 2022, compared to 0.73% at December 31, 2021 and 0.33% at September 30, 2021. For additional information regarding nonperforming assets, see “Balance Sheet Analysis – Nonperforming Assets.”
•At September 30, 2022, assets were $8.9 billion, up $1.2 billion (16%) from December 31, 2021, largely due to the Charter acquisition, which added total assets of $1.1 billion at acquisition. Total assets increased $2.5 billion (39%) from September 30, 2021, mainly due to the acquisitions of Charter and County. For additional balance sheet discussion see “Balance Sheet Analysis.”
•At September 30, 2022, loans were $6.0 billion, an increase of $1.4 billion (29%) from December 31, 2021, including the Charter acquisition (which added loans of $827 million at acquisition) and solid organic loan growth. Total loans were $2.5 billion (69%) higher than September 30, 2021, largely due to the acquisitions of Charter and County. On average, loans grew $2.1 billion (70%) over the first nine months of 2021. For additional information regarding loans, see “Balance Sheet Analysis — Loans.”
•Total deposits were $7.4 billion at September 30, 2022, an increase of $930 million (14%) from December 31, 2021, including the Charter acquisition (which added deposits of $870 million at acquisition) and higher brokered deposits. Total deposits were $2.0 billion (36%) higher than September 30, 2021, largely due to the Charter and County
34

acquisitions. Year-to-date average deposits were $2.3 billion (57%) higher than the first nine months of 2021. For additional information regarding deposits, see “Balance Sheet Analysis – Deposits.”

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

Table 2: Average Balance Sheet and Net Interest Income Analysis - Tax-Equivalent Basis
For the Nine Months Ended September 30,
20222021
(in thousands)Average
Balance		InterestAverage
Yield/Rate		Average
Balance		InterestAverage
Yield/Rate
ASSETS
Interest-earning assets
Commercial PPP Loans$6,433 $1,391 28.51 %$173,463 $11,123 8.46 %
All other commercial-based loans4,143,934 138,881 4.42 %2,222,290 75,845 4.50 %
Retail-based loans825,065 27,141 4.39 %528,895 17,357 4.38 %
Total loans, including loan fees (1)(2)
4,975,432 167,413 4.45 %2,924,648 104,325 4.71 %
Investment securities:
Taxable
1,389,540 15,612 1.50 %418,897 5,935 1.89 %
Tax-exempt (2)
202,011 3,661 2.42 %140,691 2,252 2.13 %
Total investment securities1,591,551 19,273 1.62 %559,588 8,187 1.95 %
Other interest-earning assets251,983 2,734 1.44 %829,382 2,140 0.34 %
Total non-loan earning assets
1,843,534 22,007 1.59 %1,388,970 10,327 0.99 %
Total interest-earning assets
6,818,966 $189,420 3.67 %4,313,618 $114,652 3.51 %
Other assets, net731,928 452,047 
Total assets
$7,550,894 $4,765,665 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings$854,307 $827 0.13 %$595,385 $272 0.06 %
Interest-bearing demand1,010,372 2,647 0.35 %681,079 2,114 0.41 %
Money market accounts (“MMA”)1,502,038 2,132 0.19 %889,022 363 0.05 %
Core time deposits556,970 1,240 0.30 %318,477 2,165 0.91 %
Total interest-bearing core deposits
3,923,687 6,846 0.23 %2,483,963 4,914 0.26 %
Brokered deposits450,311 2,394 0.71 %284,738 2,885 1.35 %
Total interest-bearing deposits
4,373,998 9,240 0.28 %2,768,701 7,799 0.38 %
Wholesale funding239,362 7,053 3.91 %79,882 1,729 2.87 %
Total interest-bearing liabilities
4,613,360 16,293 0.47 %2,848,583 9,528 0.45 %
Noninterest-bearing demand deposits2,034,865 1,307,222 
Other liabilities39,397 41,470 
Stockholders’ equity863,272 568,390 
Total liabilities and stockholders’ equity$7,550,894 $4,765,665 
Interest rate spread3.20 %3.06 %
Net free funds0.16 %0.16 %
Tax-equivalent net interest income and net interest margin$173,127 3.36 %$105,124 3.22 %
Tax-equivalent adjustment$1,258 $728 
Net interest income$171,869 $104,396 
(1)Nonaccrual loans and loans held for sale are included in the daily average loan balances outstanding.
(2)The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 21% and adjusted for the disallowance of interest expense.
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Table 2: Average Balance Sheet and Net Interest Income Analysis - Tax-Equivalent Basis (Continued)
For the Three Months Ended September 30,
20222021
(in thousands)Average
Balance		InterestAverage
Yield/Rate		Average
Balance		InterestAverage
Yield/Rate
ASSETS
Interest-earning assets
Commercial PPP Loans$605 $1 0.93 %$109,318 $2,310 8.27 %
All other commercial-based loans4,484,746 52,673 4.60 %2,378,480 26,759 4.40 %
Retail-based loans905,907 10,421 4.60 %588,624 6,242 4.24 %
Total loans, including loan fees (1)(2)
5,391,258 63,095 4.60 %3,076,422 35,311 4.51 %
Investment securities:
Taxable
1,391,330 5,350 1.54 %472,598 2,061 1.74 %
Tax-exempt (2)
234,123 1,639 2.80 %139,272 744 2.14 %
Total investment securities1,625,453 6,989 1.72 %611,870 2,805 1.83 %
Other interest-earning assets144,409 1,127 3.09 %1,046,476 869 0.33 %
Total non-loan earning assets
1,769,862 8,116 1.83 %1,658,346 3,674 0.88 %
Total interest-earning assets
7,161,120 $71,211 3.91 %4,734,768 $38,985 3.24 %
Other assets, net695,011 511,425 
Total assets
$7,856,131 $5,246,193 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings$899,503 $488 0.22 %$662,260 $100 0.06 %
Interest-bearing demand990,891 1,148 0.46 %711,442 685 0.38 %
MMA1,540,610 1,309 0.34 %962,538 135 0.06 %
Core time deposits543,444 408 0.30 %329,012 630 0.76 %
Total interest-bearing core deposits
3,974,448 3,353 0.33 %2,665,252 1,550 0.23 %
Brokered deposits468,010 1,285 1.09 %284,164 894 1.25 %
Total interest-bearing deposits
4,442,458 4,638 0.41 %2,949,416 2,444 0.33 %
Wholesale funding287,751 3,090 4.25 %143,615 1,113 3.08 %
Total interest-bearing liabilities
4,730,209 7,728 0.65 %3,093,031 3,557 0.46 %
Noninterest-bearing demand deposits2,200,789 1,499,052 
Other liabilities34,928 45,164 
Stockholders’ equity890,205 608,946 
Total liabilities and stockholders’ equity$7,856,131 $5,246,193 
Interest rate spread3.26 %2.78 %
Net free funds0.22 %0.16 %
Tax-equivalent net interest income and net interest margin$63,483 3.48 %$35,428 2.94 %
Tax-equivalent adjustment$493 $244 
Net interest income$62,990 $35,184 
(1)Nonaccrual loans and loans held for sale are included in the daily average loan balances outstanding.
(2)The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 21% and adjusted for the disallowance of interest expense.

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Table 3: Volume/Rate Variance - Tax-Equivalent Basis
For the Three Months Ended
September 30, 2022
Compared to September 30, 2021:
For the Nine Months Ended
 September 30, 2022
Compared to September 30, 2021:
Increase (Decrease) Due to Changes inIncrease (Decrease) Due to Changes in
(in thousands)VolumeRate
Net (1)
VolumeRate
Net (1)
Interest-earning assets
Commercial PPP Loans$(1,220)$(1,089)$(2,309)$(18,046)$8,314 $(9,732)
All other commercial-based loans24,677 1,237 25,914 77,726 (14,690)63,036 
Retail-based loans3,562 617 4,179 9,667 117 9,784 
Total loans (2)
27,019 765 27,784 69,347 (6,259)63,088 
Investment securities:
Taxable
2,871 418 3,289 9,228 449 9,677 
Tax-exempt (2)
615 280 895 1,081 328 1,409 
Total investment securities3,486 698 4,184 10,309 777 11,086 
Other interest-earning assets(454)712 258 (343)937 594 
 Total non-loan earning assets
3,032 1,410 4,442 9,966 1,714 11,680 
Total interest-earning assets
$30,051 $2,175 $32,226 $79,313 $(4,545)$74,768 
Interest-bearing liabilities
Savings$47 $341 $388 $155 $400 $555 
Interest-bearing demand305 158 463 901 (368)533 
MMA125 1,049 1,174 385 1,384 1,769 
Core time deposits278 (500)(222)1,047 (1,972)(925)
Total interest-bearing core deposits
755 1,048 1,803 2,488 (556)1,932 
Brokered deposits516 (125)391 1,239 (1,730)(491)
Total interest-bearing deposits
1,271 923 2,194 3,727 (2,286)1,441 
Wholesale funding1,395 582 1,977 4,735 589 5,324 
Total interest-bearing liabilities
2,666 1,505 4,171 8,462 (1,697)6,765 
Net interest income$27,385 $670 $28,055 $70,851 $(2,848)$68,003 
(1)The change in interest due to both rate and volume has been allocated in proportion to the relationship of dollar amounts of change in each.
(2)The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 21% and adjusted for the disallowance of interest expense.


The Federal Reserve raised short-term interest rates a total of 300 bps since mid-March 2022, increasing the Federal Funds rate to a range of 3.00% to 3.25% as of September 30, 2022. Prior to this, short-term interest rates remained steady since March 2020, with a Federal Funds range of 0.00% to 0.25%.
Tax-equivalent net interest income was $173.1 million for the first nine months of 2022, comprised of net interest income of $171.9 million ($67.5 million or 65% higher than the first nine months of 2021), and a $1.3 million tax-equivalent adjustment. The $68.0 million increase in tax-equivalent net interest income was attributable to net favorable volumes (which added $70.9 million, mostly from interest-earning asset volumes added with the recent acquisitions, as well as solid loan growth and strategic investment purchases) and net unfavorable rates (which decreased net interest income $2.8 million from competitive pricing pressure and the lag in repricing to current market interest rates).
Average interest-earning assets increased to $6.8 billion, up $2.5 billion (58%) over the 2021 comparable period, primarily due to the acquisitions of Mackinac, County, and Charter (in September 2021, December 2021, and August 2022, respectively). Between the comparable nine-month periods, average loans increased $2.1 billion (70%), mostly due to the Mackinac, County, and Charter acquisitions, which added loans of $0.9 billion, $1.0 billion, and $0.8 billion respectively, at acquisition. In addition, average loans reflected strong organic loan growth and the repurchase of previously participated agricultural loans, which more than offset the reduction in PPP loans from continued loan forgiveness. Average investment securities increased $1.0 billion between the comparable nine-month periods, partly due to the acquisitions, and partly due to the strategic re-investment of approximately $0.5 billion excess cash liquidity into U.S. Treasury securities of varying yields and durations during fourth quarter 2021. Other interest-earning assets declined $0.6 billion with the additional assets added with the acquisitions, more than offset by lower cash mostly from the re-investment of excess cash liquidity noted above. As a result, the mix of average interest-earning assets shifted to 73% loans, 23% investments and 4% other interest-earning assets (mostly cash) for the first nine months of 2022, compared to 68%, 13% and 19%, respectively, for the first nine months of 2021.
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Average interest-bearing liabilities were $4.6 billion for the first nine months of 2022, an increase of $1.8 billion (62%) over the first nine months of 2021, primarily due to the acquisitions of Mackinac, County, and Charter. Average interest-bearing core deposits increased $1.4 billion and average brokered deposits increased $166 million between the comparable nine-month periods largely due to the acquisitions. Other interest-bearing liabilities grew $159 million between the comparable nine-month periods, partly due to the private placement of $100 million in fixed-to-floating rate subordinated notes in July 2021, and partly due to wholesale funding acquired with the acquisitions. The mix of average interest-bearing liabilities was 85% core deposits, 10% brokered deposits and 5% wholesale funding for the first nine months of 2022, compared to 87%, 10% and 3%, respectively, for the first nine months of 2021.
Between the comparable nine-month periods, the interest rate spread increased 14 bps. The interest-earning asset yield increased 16 bps to 3.67% for the first nine months of 2022, primarily due to the changing mix of interest-earning assets (mostly the reduction in cash due to the re-investment of excess cash liquidity noted above). The loan yield declined 26 bps to 4.45% between the comparable nine-month periods, largely due to the impact of the low interest rate environment through early 2022 and competitive pricing pressures on new, renewed, and variable rate loans, while the yield on investment securities declined 33 bps to 1.62%, also attributable to the low interest rate environment through early 2022, as well as the strategic re-investment of cash into U.S. Treasury securities. The cost of funds increased 2 bps to 0.47% for the first nine months of 2022, as lower rates on core interest-bearing deposits and brokered deposits, were more than offset by higher wholesale funding rates and a shift in the mix of interest-bearing liabilities (mostly the increase in wholesale funding noted above). As a result, the tax-equivalent net interest margin was 3.36% for the first nine months of 2022, up 14 bps compared to 3.22% for the first nine months of 2021.
Tax-equivalent interest income was $189.4 million for the first nine months of 2022, up $74.8 million from the first nine months of 2021, comprised of $79.3 million higher volumes, partly offset by lower average rates. Interest income on loans increased $63.1 million over the first nine months of 2021, mostly due to higher average balances from the acquisitions, as well as solid loan growth. Between the comparable nine-month periods, interest income on investment securities grew $11.1 million, also attributable to the acquisitions, as well as the re-investment of excess cash liquidity (noted above). Interest expense increased to $16.3 million for the first nine months of 2022, up $6.8 million compared to the first nine months of 2021, comprised of $8.5 million higher volumes, partly offset by $1.7 million from lower overall cost of funds. Interest expense on deposits increased $1.4 million (18%) from the first nine months of 2021 given higher average interest-bearing deposit balances at a lower cost as product and rate changes were made during 2021 in the low rate environment, while brokered deposits cost less largely from maturities of higher-costing term brokered funds procured under competitive conditions in mid-2020 during the pandemic. Interest expense on wholesale funding increased between the comparable nine-month periods, mostly due to higher average balances from the July 2021 subordinated notes issuance, as well as wholesale funding acquired with the acquisitions.
Provision for Credit Losses
The provision for credit losses was $9.7 million for the nine months ended September 30, 2022 (comprised of $9.1 million related to the ACL-Loans and $0.6 million for the ACL on unfunded commitments), compared to $6.5 million for the nine months ended September 30, 2021 (comprised of $4.5 million related to the ACL-Loans and $2.0 million for the ACL on unfunded commitments). The 2022 provision for credit losses was mostly due to the Day 2 ACL increase from the Charter acquisition, while the 2021 provision for credit losses was mostly due to the Day 2 ACL increase for the Mackinac acquisition.
The provision for credit losses is predominantly a function of Nicolet’s methodology and judgment as to qualitative and quantitative factors used to determine the appropriateness of the ACL-Loans and unfunded commitments. The appropriateness of the ACL-Loans is affected by changes in the size and character of the loan portfolio, changes in levels of collateral dependent and other nonperforming loans, historical losses and delinquencies in each portfolio segment, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing and future economic conditions, the fair value of underlying collateral, and other factors which could affect expected credit losses. The ACL for unfunded commitments is affected by many of the same factors as the ACL-Loans, as well as funding assumptions relative to lines of credit. See also Note 6, “Loans, Allowance for Credit Losses - Loans, and Credit Quality” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures. For additional information regarding asset quality and the ACL-Loans, see “BALANCE SHEET ANALYSIS — Loans,” “— Allowance for Credit Losses - Loans,” and “— Nonperforming Assets.”
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Noninterest Income
Table 4: Noninterest Income
Three Months Ended September 30,Nine Months Ended September 30,
(in thousands)20222021$ Change% Change20222021$ Change% Change
Trust services fee income$1,969 $2,043 $(74)(4)%$5,984 $5,724 $260 5 %
Brokerage fee income3,040 3,154 (114)(4)9,716 8,938 778 9 
Mortgage income, net1,728 4,808 (3,080)(64)7,186 17,637 (10,451)(59)
Service charges on deposit accounts1,589 1,314 275 21 4,602 3,541 1,061 30 
Card interchange income3,012 2,299 713 31 8,543 6,492 2,051 32 
BOLI income966 572 394 69 2,667 1,658 1,009 61 
LSR income, net(517)— (517)N/M(1,042)— (1,042)N/M
Other income1,259 993 266 27 2,548 3,594 (1,046)(29)
Noninterest income without
 net gains
13,046 15,183 (2,137)(14)40,204 47,584 (7,380)(16)
Asset gains (losses), net(46)(1,187)1,141 N/M2,870 3,716 (846)(23)
Total noninterest income
$13,000 $13,996 $(996)(7)%$43,074 $51,300 $(8,226)(16)%
Trust services fee income & Brokerage fee income combined$5,009 $5,197 $(188)(4)%$15,700 $14,662 $1,038 7 %
N/M means not meaningful.
Noninterest income was $43.1 million for the first nine months of 2022, a decrease of $8.2 million (16%) compared to $51.3 million for the first nine months of 2021, primarily due to lower net mortgage income.
Trust services fee income and brokerage fee income combined were $15.7 million, up $1.0 million (7%) over the first nine months of 2021, consistent with the growth in accounts and assets under management, though tempered by unfavorable market-related declines.
Mortgage income represents net gains received from the sale of residential real estate loans into the secondary market, capitalized mortgage servicing rights (“MSR”), servicing fees net of MSR amortization, fair value marks on the mortgage interest rate lock commitments and forward commitments (“mortgage derivatives”), and MSR valuation changes, if any. Net mortgage income of $7.2 million, decreased $10.5 million (59%) between the comparable nine-month periods, mostly due to the rising interest rate environment reducing secondary market volumes and the related gains on sales. Gains on sales and capitalized gains combined decreased $10.9 million and the fair value of the mortgage derivatives decreased $0.4 million, while MSR impairment was $0.9 million favorable on slower paydown activity. See also “Lending-Related Commitments” and Note 7, “Goodwill and Other Intangibles and Servicing Rights” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures on the MSR asset.
Service charges on deposit accounts were up $1.1 million to $4.6 million for the nine months ended September 30, 2022, mostly due to the larger deposit base from the acquisitions.
Card interchange income grew $2.1 million (32%) between the comparable nine-month periods due to higher volume and activity.
BOLI income was up $1.0 million between the comparable nine-month periods, attributable to higher average balances from BOLI acquired with the acquisitions and also benefiting from the rising interest rate environment.
Loan servicing rights (“LSR”) income includes agricultural loan servicing fees net of the related LSR amortization. Nicolet is not adding new loans to this servicing portfolio and repurchased approximately $100 million of these previously participated loans during second quarter 2022; thus, the LSR amortization is currently outpacing the loan servicing fees. See also Note 7, “Goodwill and Other Intangibles and Servicing Rights” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional information on the LSR asset.
Other income of $2.5 million for the nine months ended September 30, 2022 was down $1.0 million from the comparable 2021 period, largely due to unfavorable changes in the fair value of nonqualified deferred compensation plan assets from the recent market declines, partly offset by new revenue from crop insurance sales (related to the County acquisition). See also “Noninterest Expense” for discussion on the offsetting fair value change to the nonqualified deferred compensation plan liabilities.
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Net asset gains of $2.9 million for the first nine months of 2022 were primarily attributable to gains on sales of other real estate owned (mostly closed bank branch locations), while net asset gains of $3.7 million for the first nine months of 2021 were primarily attributable to favorable fair value marks on equity securities.

Noninterest Expense
Table 5: Noninterest Expense
Three Months Ended September 30,Nine Months Ended September 30,
($ in thousands)20222021Change% Change20222021Change% Change
Personnel$24,136 $16,927 $7,209 43 %$65,008 $49,127 $15,881 32 %
Occupancy, equipment and office7,641 5,749 1,892 33 21,476 13,939 7,537 54 
Business development and marketing2,281 1,654 627 38 6,169 3,853 2,316 60 
Data processing3,664 2,939 725 25 10,647 8,408 2,239 27 
Intangibles amortization1,628 758 870 115 4,399 2,400 1,999 83 
FDIC assessments480 480 — — 1,440 1,555 (115)(7)
Merger-related expense519 2,793 (2,274)(81)1,172 3,449 (2,277)(66)
Other expense2,218 1,761 457 26 6,344 7,158 (814)(11)
Total noninterest expense
$42,567 $33,061 $9,506 29 %$116,655 $89,889 $26,766 30 %
Non-personnel expenses$18,431 $16,134 $2,297 14 %$51,647 $40,762 $10,885 27 %
Average full-time equivalent (“FTE”) employees907 646 261 40 %863 591 272 46 %

Noninterest expense was $116.7 million, an increase of $26.8 million (30%) over the first nine months of 2021. Personnel costs increased $15.9 million (32%), while non-personnel expenses combined increased $10.9 million (27%) compared to the first nine months of 2021.
Personnel expense was $65.0 million for the nine months ended September 30, 2022, an increase of $15.9 million from the comparable period in 2021. Salary expense increased $16.4 million (58%) over the first nine months of 2021, reflecting higher salaries from the larger employee base (with average full-time equivalent employees up 46%, mostly due to the timing of the 2022 and 2021 acquisitions), investments in our wealth team, and merit increases between the years. Salary expense also reflected increases in hourly pay and base salaries effective at the end of March 2022, which benefited 67% of our employee base. Fringe benefits increased $3.4 million (50%) over the first nine months of 2021, commensurate with the larger employee base. Personnel expense was also impacted by the change in the fair value of nonqualified deferred compensation plan liabilities from the recent market declines. See also “Noninterest Income” for discussion on the offsetting fair value change to the nonqualified deferred compensation plan assets.
Occupancy, equipment and office expense was $21.5 million for the first nine months of 2022, up $7.5 million (54%) compared to the first nine months of 2021, largely due to the expanded branch network with the recent acquisitions, as well as additional expense for software and technology solutions.
Business development and marketing expense was $6.2 million, up $2.3 million (60%), between the comparable nine-month periods, largely due to higher travel and entertainment expenses, as well as additional marketing donations, promotions, and media to support our expanded branch network and community base.
Data processing expense was $10.6 million, up $2.2 million (27%) between the comparable nine-month periods, mostly due to volume-based increases in core processing charges, including the larger operating base following the Mackinac, County, and Charter acquisitions.
Intangibles amortization increased $2.0 million between the comparable nine-month periods due to higher amortization from the intangibles added with the recent acquisitions.
Other expense was $6.3 million, down $0.8 million (11%) between the comparable nine-month periods, mostly due to a $2.1 million contract termination charge incurred in 2021, partly offset by higher professional fees, costs to carry closed bank branches, and overall higher expenses related to our larger operating base.

Income Taxes
Income tax expense was $22.0 million (effective tax rate of 24.8%) for the first nine months of 2022, compared to $15.0 million (effective tax rate of 25.2%) for the comparable period of 2021.
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Income Statement Analysis – Three Months Ended September 30, 2022 versus Three Months Ended September 30, 2021
Net income was $18.5 million for the three months ended September 30, 2022, compared to $7.8 million for the three months ended September 30, 2021. Earnings per diluted common share was $1.29 for third quarter 2022, compared to $0.73 for third quarter 2021.
Tax-equivalent net interest income was $63.5 million for third quarter 2022, comprised of net interest income of $63.0 million ($27.8 million or 79% over third quarter 2021), and a tax-equivalent adjustment of $0.5 million. Tax-equivalent interest income increased $32.2 million between the third quarter periods, with $30.1 million from stronger volumes (led by average loans which grew $2.3 billion or 75% over third quarter 2021, mostly due to the acquisitions) and $2.2 million from higher yields. Average investment securities increased $1.0 billion between the comparable third quarter periods, partly due to the acquisitions, and partly due to the strategic re-investment of approximately $0.5 billion excess cash liquidity into U.S. Treasury securities of varying yields and durations during fourth quarter 2021. Interest expense increased $4.2 million from third quarter 2021, including $2.7 million from higher volumes (mostly from higher average deposit balances from the acquisitions) and $1.5 million due to higher overall funding costs. For additional information regarding average balances, net interest income and net interest margin, see “INCOME STATEMENT ANALYSIS — Net Interest Income.”
The net interest margin for third quarter 2022 was 3.48%, compared to 2.94% for third quarter 2021, influenced by interest rate increases and the changing balance sheet mix. The mix of average interest-earning assets shifted from 65% loans, 13% investments and 22% other interest-earning assets (mostly cash) for third quarter 2021, to 75%, 23% and 2%, respectively, for third quarter 2022. As a result, the yield on interest-earning assets of 3.91% increased 67 bps from third quarter 2021. The yield on loans was 4.60%, 9 bps higher than third quarter 2021, largely due to the impact of the rising interest rate environment. The cost of funds of 0.65% increased 19 bps between the comparable quarters, also due to the rising interest rates.
Provision for credit losses was $8.6 million for third quarter 2022 (comprised of $8.2 million related to the ACL-Loans, and $0.4 million for the ACL on unfunded commitments), compared to $6.0 million provision for credit losses for third quarter 2021. The 2022 provision for credit losses was mostly due to the Day 2 ACL increase from the Charter acquisition, while the 2021 provision for credit losses was mostly due to the Day 2 ACL increase for the Mackinac acquisition. For additional information regarding the allowance for credit losses-loans and asset quality, see “BALANCE SHEET ANALYSIS — Allowance for Credit Losses - Loans” and “BALANCE SHEET ANALYSIS — Nonperforming Assets.”
Noninterest income was $13.0 million for third quarter 2022, a decrease of $1.0 million (7%) from third quarter 2021. Net mortgage income of $1.7 million for third quarter 2022 was down $3.1 million (64%) from third quarter 2021, primarily due to the rising interest rate environment reducing secondary market volumes and the related gains on sales. Trust services fee income and brokerage fee income combined was down $0.2 million (4%), as unfavorable market-related declines outpaced the growth in accounts and assets under management. Service charges on deposit accounts grew $0.3 million to $1.6 million for third quarter 2022, mostly due to the larger deposit base from the acquisitions. Card interchange income grew $0.7 million (31%) due to higher volume and activity. Net asset losses were minimal in third quarter 2022, while net asset losses of $1.2 million in third quarter 2021 were primarily attributable to fair value marks on equity securities. For additional information regarding noninterest income, see “INCOME STATEMENT ANALYSIS — Noninterest Income.”
Noninterest expense was $42.6 million for third quarter 2022, an increase of $9.5 million (29%) from third quarter 2021, including a $7.2 million increase in personnel expense and a $2.3 million increase in non-personnel expenses. The increase in personnel was due to higher salaries and fringe benefits from the larger employee base (with average full-time equivalent employees up 40%), investments in our wealth team, and merit increases between the years. Occupancy, equipment, and office of $7.6 million was up $1.9 million (33%), largely due to the expanded branch network with the recent acquisitions, as well as additional expense for software and technology solutions. Business development and marketing of $2.3 million increased $0.6 million over third quarter 2021, largely due to higher travel and entertainment expenses, as well as additional marketing donations, promotions, and media to support our expanded branch network and community base. Data processing expense was $3.7 million, up $0.7 million (25%) between the comparable third quarter periods, mostly due to volume-based increases in core processing charges, including the larger operating base following the Mackinac, County, and Charter acquisitions. Other expense was $2.2 million, up $0.5 million between the comparable third quarter periods, primarily due to higher professional fees and overall higher expenses related to our larger operating base. For additional information regarding noninterest expense, see “INCOME STATEMENT ANALYSIS — Noninterest Expense.”
Income tax expense for third quarter 2022 was $6.3 million, with an effective tax rate of 25.4%, compared to income tax expense of $2.3 million and an effective tax rate of 22.7% for third quarter 2021.
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BALANCE SHEET ANALYSIS
At September 30, 2022, period end assets were $8.9 billion, an increase of $1.2 billion (16%) from December 31, 2021, largely due to the Charter acquisition, which added total assets of $1.1 billion at acquisition. Total loans increased $1.4 billion from December 31, 2021, largely due to the Charter acquisition (which added loans of $827 million at acquisition) and solid organic loan growth. Total deposits of $7.4 billion at September 30, 2022, increased $930 million from December 31, 2021, including the Charter acquisition (which added deposits of $870 million at acquisition) and higher brokered deposits. Total borrowings increased $288 million from December 31, 2021, with approximately half acquired with Charter and the remainder related to new FHLB advances. Total stockholders’ equity was $938 million at September 30, 2022, an increase of $47 million since December 31, 2021, primarily due to common stock issued in the Charter acquisition and current year earnings, partly offset by stock repurchase activity and unfavorable changes in the fair value of securities AFS.
Compared to September 30, 2021, assets were up $2.5 billion (39%) from September 30, 2021, largely due to the acquisitions of Charter and County. Total loans increased $2.5 billion and total deposits increased $2.0 billion from September 30, 2021, also largely due to the acquisitions of Charter and County. Stockholders’ equity increased $209 million from September 30, 2021, primarily due to common stock issued in the Charter and County acquisitions and net income, partially offset by stock repurchases over the year and negative net fair value investment changes.

Loans
In addition to the discussion that follows, see also Note 6, “Loans, Allowance for Credit Losses - Loans, and Credit Quality,” in the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures on loans. For additional information regarding the allowance for credit losses and nonperforming assets see also “BALANCE SHEET ANALYSIS – Allowance for Credit Losses - Loans” and “BALANCE SHEET ANALYSIS – Nonperforming Assets.”
Nicolet services a diverse customer base in Wisconsin, Michigan and Minnesota. We concentrate on originating loans in our local markets and assisting current loan customers. The loan portfolio is widely diversified by types of borrowers, industry groups, and market areas.
An active credit risk management process is used to ensure that sound and consistent credit decisions are made. The credit management process is regularly reviewed and has been modified over the past several years to further strengthen the controls. Factors that are important to managing overall credit quality are sound loan underwriting and administration, systematic monitoring of existing loans and commitments, effective loan review on an ongoing basis, early problem loan identification and remedial action to minimize losses, an appropriate ACL-Loans, and sound nonaccrual and charge-off policies.
Table 6: Period End Loan Composition
September 30, 2022December 31, 2021September 30, 2021
(in thousands)Amount% of TotalAmount% of TotalAmount% of Total
Commercial & industrial$1,268,252 21 %$1,042,256 23 %$956,257 27 %
Owner-occupied CRE954,933 16 787,189 17 697,816 20 
Agricultural1,017,498 17 794,728 17 112,409 3 
Commercial
3,240,683 54 2,624,173 57 1,766,482 50 
CRE investment1,132,951 19 818,061 18 662,871 19 
Construction & land development306,446 5 213,035 5 173,971 5 
Commercial real estate
1,439,397 24 1,031,096 23 836,842 24 
Commercial-based loans
4,680,080 78 3,655,269 80 2,603,324 74 
Residential construction101,286 2 70,353 1 59,611 2 
Residential first mortgage970,384 16 713,983 15 688,491 19 
Residential junior mortgage176,428 3 131,424 3 130,279 4 
Residential real estate
1,248,098 21 915,760 19 878,381 25 
Retail & other56,259 1 50,807 1 51,493 1 
Retail-based loans
1,304,357 22 966,567 20 929,874 26 
Total loans$5,984,437 100 %$4,621,836 100 %$3,533,198 100 %
As noted in Table 6 above, the loan portfolio at September 30, 2022, was 78% commercial-based and 22% retail-based. Commercial-based loans are considered to have more inherent risk of default than retail-based loans, in part because of the broader list of factors that could impact a commercial borrower negatively. In addition, the commercial balance per borrower is typically larger than that for retail-based loans, implying higher potential losses on an individual customer basis. Credit risk on commercial-based loans is largely influenced by general economic conditions and the resulting impact on a borrower’s operations or on the value of underlying collateral, if any.
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At September 30, 2022, loans were $6.0 billion, $1.4 billion higher than December 31, 2021, largely due to the Charter acquisition (which added loans of $827 million at acquisition) and solid organic loan growth. Excluding the $827 million of loans Charter added at acquisition, loans increased $536 million (16% annualized) from year-end 2021 on solid organic growth, as well as the repurchase of approximately $100 million previously participated agricultural loans. Commercial and industrial loans continue to be the largest segment of Nicolet’s portfolio and represented 21% of the total portfolio at September 30, 2022.
Residential real estate loans of $1.2 billion grew $332 million from year-end 2021, including the Charter acquisition and organic growth, to represent 21% of total loans at September 30, 2022. Residential first mortgage loans include conventional first-lien home mortgages, while residential junior mortgage loans consist mainly of home equity lines and term loans secured by junior mortgage liens. As part of our management of residential mortgage loans, the majority of Nicolet’s long-term, fixed-rate residential first mortgage loans are sold in the secondary market with servicing rights retained. Nicolet’s mortgage loans are typically of high quality and have historically had low net charge-off rates.
Retail and other loans were up slightly ($5 million) from year-end 2021, representing approximately 1% of the total loan portfolio, and include predominantly short-term and other personal installment loans not secured by real estate.

Allowance for Credit Losses - Loans
In addition to the discussion that follows, see also Note 6, “Loans, Allowance for Credit Losses - Loans, and Credit Quality,” in the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures on the allowance for credit losses.
Credit risks within the loan portfolio are inherently different for each loan type as summarized under “BALANCE SHEET ANALYSIS — Loans.” A discussion of the loan portfolio credit risk can be found in the “Loans” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2021 Annual Report on Form 10-K. Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and ongoing review of loan payment performance. Active asset quality administration, including early problem loan identification and timely resolution of problems, aids in the management of credit risk and minimization of loan losses. For additional information regarding nonperforming assets see also “BALANCE SHEET ANALYSIS – Nonperforming Assets.”
The ACL-Loans represents management’s estimate of expected credit losses in the Company’s loan portfolio at the balance sheet date. To assess the appropriateness of the ACL-Loans, management applies an allocation methodology which focuses on evaluation of qualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to specific loans; (ii) management’s ongoing review and grading of the loan portfolio; (iii) consideration of historical loan loss and delinquency experience on each portfolio segment; (iv) trends in past due and nonaccrual loans; (v) the risk characteristics of the various loan segments; (vi) changes in the size and character of the loan portfolio; (vii) concentrations of loans to specific borrowers or industries; (viii) existing economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect expected credit losses. Assessing these numerous factors involves significant judgment; therefore, management considers the ACL-Loans a critical accounting estimate.
Management allocates the ACL-Loans by pools of risk within each loan portfolio segment. The allocation methodology consists of the following components. First, a specific reserve is established for individually evaluated credit deteriorated loans, which management defines as nonaccrual credit relationships over $250,000, collateral dependent loans, purchased credit deteriorated loans, and other loans with evidence of credit deterioration. The specific reserve in the ACL-Loans for these credit deteriorated loans is equal to the aggregate collateral or discounted cash flow shortfall. Management allocates the ACL-Loans with historical loss rates by loan segment. The loss factors are measured on a quarterly basis and applied to each loan segment based on current loan balances and projected for their expected remaining life. Next, management allocates the ACL-Loans using the qualitative factors mentioned above. Consideration is given to those current qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the historical loss experience of each loan segment. Lastly, management considers reasonable and supportable forecasts to assess the collectability of future cash flows.
At September 30, 2022, the ACL-Loans was $60 million (representing 1.01% of period end loans) compared to $50 million at December 31, 2021 and $38 million at September 30, 2021. The increase in the ACL-Loans from year-end 2021 was mostly due to the Charter acquisition, which added $8 million of provision for the Day 2 allowance and $2 million related to purchased credit deteriorated loans. The increase in the ACL-Loans from September 30, 2021 was largely due to the acquisitions of Charter and County, which combined added $16 million of provision for the Day 2 allowance and $5 million related to purchased credit deteriorated loans. The components of the ACL-Loans are detailed further in Table 7 below.
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Table 7: Allowance for Credit Losses - Loans
Nine Months EndedYear Ended
(in thousands)September 30, 2022September 30, 2021December 31, 2021
ACL-Loans:
Balance at beginning of period$49,672 $32,173 $32,173 
ACL on PCD loans acquired1,709 1,896 5,159 
Provision for credit losses9,100 4,500 12,500 
Charge-offs(442)(436)(513)
Recoveries309 266 353 
Net (charge-offs) recoveries(133)(170)(160)
Balance at end of period$60,348 $38,399 $49,672 
Net loan (charge-offs) recoveries:
Commercial & industrial$(49)$(31)$50 
Owner-occupied CRE(36)— — 
Agricultural— (48)(48)
CRE investment169 (2)(2)
Construction & land development— — — 
Residential construction— — — 
Residential first mortgage(58)(34)(93)
Residential junior mortgage9 4 4 
Retail & other(168)(59)(71)
Total net (charge-offs) recoveries$(133)$(170)$(160)
Ratios:
ACL-Loans to total loans1.01 %1.09 %1.07 %
Net charge-offs to average loans, annualized0.00 %0.01 %0.01 %

Nonperforming Assets
As part of its overall credit risk management process, management is committed to an aggressive problem loan identification philosophy. This philosophy has been implemented through the ongoing monitoring and review of all pools of risk in the loan portfolio to identify problem loans early and minimize the risk of loss. Management continues to actively work with customers and monitor credit risk from the ongoing disruptions related to the pandemic, as well as economic, political, and social turmoil. See also Note 6, “Loans, Allowance for Credit Losses - Loans, and Credit Quality” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for further disclosures on credit quality. For additional information see also “BALANCE SHEET ANALYSIS – Loans” and “BALANCE SHEET ANALYSIS – Allowance for Credit Losses-Loans.”
Nonperforming loans are considered one indicator of potential future loan losses. Nonperforming loans are defined as nonaccrual loans and loans 90 days or more past due but still accruing interest. Loans are generally placed on nonaccrual status when contractually past due 90 days or more as to interest or principal payments. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on loans, it is management’s practice to place such loans on nonaccrual status immediately. Nonperforming assets include nonperforming loans and other real estate owned (“OREO”). At September 30, 2022, nonperforming assets were $40 million and represented 0.45% of total assets, compared to $56 million or 0.73% of total assets at December 31, 2021.
The level of potential problem loans is another predominant factor in determining the relative level of risk in the loan portfolio and in determining the appropriate level of the ACL-Loans. Potential problem loans are generally defined by management to include loans rated as Substandard by management but that are in performing status; however, there are circumstances present which might adversely affect the ability of the borrower to comply with present repayment terms. The decision of management to include performing loans in potential problem loans does not necessarily mean that Nicolet expects losses to occur, but that management recognizes a higher degree of risk associated with these loans. The loans that have been reported as potential problem loans are predominantly commercial-based loans covering a diverse range of businesses and real estate property types. Potential problem loans were $46 million (0.8% of loans) and $53 million (1.1% of loans) at September 30, 2022 and December 31, 2021, respectively. Potential problem loans require heightened management review given the pace at which a credit may deteriorate, the potential duration of asset quality stress, and uncertainty around the magnitude and scope of economic stress that may be felt by Nicolet’s customers and on underlying real estate values.
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Table 8: Nonperforming Assets
(in thousands)September 30, 2022December 31, 2021September 30, 2021
Nonperforming loans:
Commercial & industrial$3,052 $1,908 $1,778 
Owner-occupied CRE5,806 4,220 2,990 
Agricultural20,646 28,367 1,782 
Commercial29,504 34,495 6,550 
CRE investment3,343 4,119 4,249 
Construction & land development794 1,071 1,093 
Commercial real estate4,137 5,190 5,342 
Commercial-based loans33,641 39,685 11,892 
Residential construction— — — 
Residential first mortgage4,309 4,132 4,495 
Residential junior mortgage277 243 232 
Residential real estate4,586 4,375 4,727 
Retail & other99 94 96 
Retail-based loans
4,685 4,469 4,823 
Total nonaccrual loans
38,326 44,154 16,715 
Accruing loans past due 90 days or more— — — 
Total nonperforming loans
$38,326 $44,154 $16,715 
Nonaccrual loans (included above) covered by guarantees$5,493 $6,776 $1,729 
OREO:
Commercial real estate owned$628 $1,549 $1,219 
Residential real estate owned— 99 355 
Bank property real estate owned1,506 10,307 2,895 
Total OREO
2,134 11,955 4,469 
Total nonperforming assets
$40,460 $56,109 $21,184 
Performing troubled debt restructurings$— $5,443 $2,103 
Ratios:
Nonperforming loans to total loans0.64 %0.96 %0.47 %
Nonperforming assets to total loans plus OREO0.68 %1.21 %0.60 %
Nonperforming assets to total assets0.45 %0.73 %0.33 %
ACL-Loans to nonperforming loans157 %112 %230 %

Deposits
Deposits represent Nicolet’s largest source of funds. Total deposits of $7.4 billion at September 30, 2022, increased $930 million from December 31, 2021, primarily due to the Charter acquisition, and included a $735 million increase in core customer deposits and a $195 million increase in brokered deposits. Compared to September 30, 2021, total deposits increased $2.0 billion (36%), largely due to the Charter and County acquisitions. The deposit composition is presented in Table 9 below.
Table 9: Period End Deposit Composition
September 30, 2022December 31, 2021September 30, 2021
(in thousands)Amount% of TotalAmount% of TotalAmount% of Total
Noninterest-bearing demand$2,477,507 33 %$1,975,705 31 %$1,852,119 34 %
Money market and interest-bearing demand3,012,405 41 %2,834,824 44 %2,154,557 40 %
Savings939,832 13 %803,197 12 %775,281 14 %
Time966,158 13 %852,190 13 %646,817 12 %
Total deposits
$7,395,902 100 %$6,465,916 100 %$5,428,774 100 %
Brokered transaction accounts$252,891 3 %$234,306 4 %$152,858 3 %
Brokered and listed time deposits386,101 5 %209,857 3 %204,202 4 %
Total brokered deposits
$638,992 8 %$444,163 7 %$357,060 7 %
Customer transaction accounts$6,176,853 84 %$5,379,420 83 %$4,629,099 85 %
Customer time deposits580,057 8 %642,333 10 %442,615 8 %
Total customer deposits (core)
$6,756,910 92 %$6,021,753 93 %$5,071,714 93 %
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Lending-Related Commitments
As of September 30, 2022 and December 31, 2021, Nicolet had the following off-balance sheet lending-related commitments.
Table 10: Commitments
(in thousands)September 30, 2022December 31, 2021
Commitments to extend credit$1,854,064 $1,433,881 
Financial standby letters of credit26,250 13,562 
Performance standby letters of credit9,059 7,336 
Interest rate lock commitments to originate residential mortgage loans held for sale (included above in commitments to extend credit) and forward commitments to sell residential mortgage loans held for sale are considered derivative instruments (“mortgage derivatives”) and the notional amounts represented $12 million and $10 million, respectively, at September 30, 2022. In comparison, interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans held for sale represented $50 million and $1 million, respectively, at December 31, 2021. The net fair value of these mortgage derivatives combined was a gain of $121,000 at September 30, 2022 compared to a gain of $149,000 at December 31, 2021.

Liquidity Management
Liquidity management refers to the ability to ensure that cash is available in a timely and cost-effective manner to meet cash flow requirements of depositors and borrowers and to meet other commitments as they fall due, including the ability to service debt, invest in subsidiaries, repurchase common stock, and satisfy other operating requirements.
Funds are available from a number of basic banking activity sources including, but not limited to, the core deposit base; repayment and maturity of loans; investment securities calls, maturities, and sales; and procurement of additional brokered deposits or other wholesale funding. At September 30, 2022, approximately 48% of the $1.6 billion investment securities portfolio was pledged as collateral to secure public deposits, as applicable, and for liquidity or other purposes as required by regulation. Additional funding sources at September 30, 2022, consist of available and unused Federal funds lines, borrowing capacity at the FHLB of $554 million, and borrowing capacity in the brokered deposit market.
Management is committed to the Parent Company being a source of strength to the Bank and its other subsidiaries, and therefore, regularly evaluates capital and liquidity positions of the Parent Company in light of current and projected needs, growth or strategies. The Parent Company uses cash for normal expenses, debt service requirements, and when opportune, for common stock repurchases, repayment of debt, or investment in other strategic actions such as mergers or acquisitions. At September 30, 2022, the Parent Company had $38 million in cash. Additional cash sources available to the Parent Company include access to the public or private markets to issue new equity, subordinated notes or other debt. During 2021, Nicolet completed the private placement of $100 million in fixed-to-floating rate subordinated notes (the “Notes”) due in 2031. (See Note 8, “Short and Long-Term Borrowings” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional information on the Notes). Dividends from the Bank and, to a lesser extent, stock option exercises, also represent significant sources of cash flows for the Parent Company.
Cash and cash equivalents at September 30, 2022 and December 31, 2021 were $438 million and $595 million, respectively. The decrease in cash and cash equivalents since year-end 2021 included $87 million net cash provided by operating activities (mostly earnings), $382 million net cash used in investing activities (with strong loan growth and cash paid for the Charter acquisition partly offset by net cash received from the Birmingham branch sale), and $137 million net cash provided by financing activities (mostly deposit and short-term borrowings partly offset by cash outflows for common stock repurchases). Management believes its liquidity resources were sufficient as of September 30, 2022 to fund loans, accommodate deposit cycles and trends, and to meet other cash needs as necessary.

Interest Rate Sensitivity Management and Impact of Inflation
A reasonable balance between interest rate risk, credit risk, liquidity risk and maintenance of yield, is highly important to Nicolet’s business success and profitability. As an ongoing part of our financial strategy and risk management, we attempt to understand and manage the impact of fluctuations in market interest rates on our net interest income. The consolidated balance sheet consists mainly of interest-earning assets (loans, investments and cash) which are primarily funded by interest-bearing liabilities (deposits and other borrowings). Such financial instruments have varying levels of sensitivity to changes in market rates of interest. Market rates are highly sensitive to many factors beyond our control, including but not limited to general economic conditions and policies of governmental and regulatory authorities. Our operating income and net income depends, to a substantial extent, on “rate spread” (i.e., the difference between the income earned on loans, investments and other earning assets and the interest expense paid to obtain deposits and other funding liabilities).
46

Asset-liability management policies establish guidelines for acceptable limits on the sensitivity to changes in interest rates on earnings and market value of assets and liabilities. Such policies are set and monitored by management and the board of directors’ Asset and Liability Committee.
To understand and manage the impact of fluctuations in market interest rates on net interest income, we measure our overall interest rate sensitivity through a net interest income analysis, which calculates the change in net interest income in the event of hypothetical changes in interest rates under different scenarios versus a baseline scenario. Such scenarios can involve static balance sheets, balance sheets with projected growth, parallel (or non-parallel) yield curve slope changes, immediate or gradual changes in market interest rates, and one-year or longer time horizons. The simulation modeling uses assumptions involving market spreads, prepayments of rate-sensitive instruments, renewal rates on maturing or new loans, deposit retention rates, and other assumptions.
Among other scenarios, we assessed the impact on net interest income in the event of a gradual +/-100 bps and +/-200 bps change in market rates (parallel to the change in prime rate) over a one-year time horizon to a static (flat) balance sheet. The results provided include the liquidity measures mentioned earlier and reflect the changed interest rate environment. The interest rate scenarios are used for analytical purposes only and do not necessarily represent management’s view of future market interest rate movements. Based on financial data at September 30, 2022 and December 31, 2021, the projected changes in net interest income over a one-year time horizon, versus the baseline, are presented in Table 11 below. The results are within Nicolet’s guidelines of not greater than -10% for +/- 100 bps and not greater than -15% for +/- 200 bps.
Table 11: Interest Rate Sensitivity
September 30, 2022December 31, 2021
200 bps decrease in interest rates(1.7)%(0.3)%
100 bps decrease in interest rates(0.7)%(0.3)%
100 bps increase in interest rates0.5 %(0.1)%
200 bps increase in interest rates1.1 %(0.3)%
Actual results may differ from these simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and their impact on customer behavior and management strategies.
The effect of inflation on a financial institution differs significantly from the effect on an industrial company. While a financial institution’s operating expenses, particularly salary and employee benefits, are affected by general inflation, the asset and liability structure of a financial institution consists largely of monetary items. Monetary items, such as cash, investments, loans, deposits and other borrowings, are those assets and liabilities which are or will be converted into a fixed number of dollars regardless of changes in prices. As a result, changes in interest rates have a more significant impact on a financial institution’s performance than does general inflation. Inflation may also impact the Bank’s customers, businesses and consumers and their ability or willingness to invest, save or spend, and perhaps on their ability to repay loans. As such, there would likely be impacts on the general appetite for banking products and the credit health of the Bank’s customer base.

Capital
Management regularly reviews the adequacy of its capital to ensure that sufficient capital is available for current and future needs and is in compliance with regulatory guidelines. The capital position and capital strategies are actively reviewed in light of perceived business risks associated with current and prospective earning levels, liquidity, asset quality, economic conditions in the markets served, and level of returns available to shareholders. Management intends to maintain an optimal capital and leverage mix for growth and shareholder return. For details on the change in capital see “BALANCE SHEET ANALYSIS.”
The Company’s and the Bank’s regulatory capital ratios remain above minimum regulatory ratios, including the capital conservation buffer. At September 30, 2022, the Bank’s regulatory capital ratios qualify the Bank as well-capitalized under the prompt-corrective action framework. This strong base of capital has allowed Nicolet to be opportunistic in the current environment and in strategic growth. A summary of the Company’s and the Bank’s regulatory capital amounts and ratios, as well as selected capital metrics are presented in the following table.
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Table 12: Capital
At or for the Nine Months Ended
At or for the
Year Ended
($ in thousands)September 30, 2022December 31, 2021
Company Stock Repurchases: *
Common stock repurchased during the period (dollars)$60,697 $61,464 
Common stock repurchased during the period (full shares)661,662 793,064 
Company Risk-Based Capital:
Total risk-based capital$855,119 $793,410 
Tier 1 risk-based capital651,016 604,199 
Common equity Tier 1 capital613,284 567,095 
Total capital ratio12.0 %13.8 %
Tier 1 capital ratio9.2 %10.5 %
Common equity tier 1 capital ratio8.6 %9.9 %
Tier 1 leverage ratio8.6 %9.4 %
Bank Risk-Based Capital:
Total risk-based capital$801,952 $700,869 
Tier 1 risk-based capital750,572 664,688 
Common equity Tier 1 capital750,572 664,688 
Total capital ratio11.3 %12.2 %
Tier 1 capital ratio10.6 %11.6 %
Common equity tier 1 capital ratio10.6 %11.6 %
Tier 1 leverage ratio10.0 %10.3 %
* Reflects common stock repurchased under board of director authorizations for the common stock repurchase program.
In managing capital for optimal return, we evaluate capital sources and uses, pricing and availability of our stock in the market, and alternative uses of capital (such as the level of organic growth or acquisition opportunities) in light of strategic plans. During the first nine months of 2022, $61 million was utilized to repurchase and cancel 661,662 shares of common stock, pursuant to our common stock repurchase program. At September 30, 2022, there remains $48 million authorized under this repurchase program, as modified, to be utilized from time-to-time to repurchase shares in the open market, through block transactions or in private transactions.

Critical Accounting Estimates
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Estimates that are particularly susceptible to significant change include the 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. A discussion of these estimates can be found in the “Critical Accounting Estimates” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2021 Annual Report on Form 10-K. There have been no changes in the Company’s determination of critical accounting policies and estimates since December 31, 2021.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risk at September 30, 2022, from that presented in our 2021 Annual Report on Form 10-K. See section “Interest Rate Sensitivity Management and Impact of Inflation” within Management’s Discussion and Analysis of Financial Condition and Results of Operations under Part I, Item 2, for our interest rate sensitivity position at September 30, 2022.

ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. Management, under the supervision, and with the participation, of our principal executive officer and principal financial officer, evaluated our disclosure controls and procedures (as such term is defined in Exchange Act Rule 13a-15(e) and 15d-15(e)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
48

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


49

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, 2021.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table contains information regarding purchases of Nicolet’s common stock made during third quarter 2022 by or on behalf of the Company or any “affiliated purchaser,” as defined by Rule 10b-18(a)(3) of the Exchange Act.
Total Number of
Shares Purchased (a)
Average Price
Paid per Share		Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans
or Programs (b)
(#)($)(#)(#)
Period
July 1 – July 31, 2022— $— — 
August 1 – August 31, 2022— $— — 
September 1 – September 30, 202272 $76.66 — 
Total72 $76.66 — 686,000 
a.During third quarter 2022, the Company withheld 72 common shares for minimum tax withholding settlements on restricted stock. These are not considered “repurchases” and, therefore, do not count against the maximum number of shares that may yet be purchased under the board of directors’ authorization.
b.The board of directors approved a common stock repurchase program which authorized, with subsequent modifications, the use of up to $276 million to repurchase outstanding shares of common stock. This common stock repurchase program was last modified on April 19, 2022, and has no expiration date. At September 30, 2022, approximately $48 million remained available under this common stock repurchase program, or approximately 686,000 shares of common stock (based upon the closing stock price of $70.44 on September 30, 2022).
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
50


ITEM 6. EXHIBITS
The following exhibits are filed herewith:
Exhibit
Number		Description
2.1
31.1
31.2
32.1
32.2
101.INS
The XBRL Instance Document does not appear in the Interactive Date File because its XBRL tags are embedded within the Inline XBRL document (2)
101.SCHInline XBRL Taxonomy Extension Schema Document
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document
101.LABInline XBRL Taxonomy Extension Label Linkbase Document
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
(1) Incorporated by reference to the exhibit of the same number in the Registrant’s Current Report on Form 8-K filed on March 30, 2022.
(2) Includes the following financial information included in the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial Statements.
51

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NICOLET BANKSHARES, INC.
November 1, 2022/s/ Michael E. Daniels
Michael E. Daniels
President and Chief Executive Officer
November 1, 2022/s/ H. Phillip Moore, Jr.
H. Phillip Moore, Jr.
Chief Financial Officer

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