NICOLET BANKSHARES INC (NIC) FY 2021 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is management’s analysis to assist in the understanding and evaluation of the consolidated financial condition and results of operations of Nicolet. It should be read in conjunction with the consolidated financial statements and footnotes and the selected financial data presented elsewhere in this report.

Evaluation of financial performance and certain balance sheet line items was impacted by the timing and size of Nicolet’s 2021 acquisitions, County Bancorp, Inc. (“County”) and Mackinac Financial Corporation (“Mackinac”). Certain income statement results, average balances and related ratios for 2021 include partial contributions from County and Mackinac, each from the respective acquisition date. Additional information on Nicolet’s recent acquisition activity is included in Note 2, “Acquisitions” in the Notes to Consolidated Financial Statements, under Part II, Item 8.

The detailed financial discussion that follows focuses on 2021 results compared to 2020. For a discussion of 2020 results compared to 2019, see the information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 26, 2021, which information under that caption is incorporated herein by reference. Historical results of operations are not necessarily predictive of future results.

Overview

2021 Highlights

In 2021, Nicolet delivered on growth, profitability, capital positioning, and sound asset quality management.  On December 3, 2021, Nicolet completed its acquisition of County for a total purchase price of $224 million, including the issuance of 2.4 million shares of common stock valued at $176 million and the remainder in cash consideration. County added total assets of $1.4 billion, loans of $1.0 billion, and deposits of $1.0 billion, at acquisition. On September 3, 2021, Nicolet completed its acquisition of Mackinac for a total purchase price of $229 million, comprised of stock consideration of $180 million, or 2.3 million shares of common stock, and cash consideration of $49 million. At acquisition, Mackinac added total assets of $1.6 billion, loans of $0.9 billion, and deposits of $1.4 billion.

Net income for the year ended December 31, 2021 was $61 million and earnings per diluted common share was $5.44, compared to net income of $60 million and earnings per diluted common share of $5.70 for 2020. Non-core items, and the related tax effect of each, in net income included merger and integration related expenses, Day 2 credit provision expense required under the CECL model, branch optimization costs, and gains on other investments. For the full year, non-core items negatively impacted diluted earnings per common share $1.13 for 2021 and $0.24 for 2020.

At December 31, 2021, Nicolet had total assets of $7.7 billion, an increase of $3.1 billion (69%) over December 31, 2020, largely due to the acquisitions of Mackinac and County. Total loans increased $1.8 billion (66%) and total deposits increased $2.6 billion (65%) from December 31, 2020, also largely due to the acquisitions of Mackinac and County. Total stockholders’ equity was $892 million at December 31, 2021, an increase of $353 million since December 31, 2020, mostly due to the common stock issued in the Mackinac and County acquisitions. For the year ended December 31, 2021, Nicolet repurchased approximately 793,000 shares of common stock for a total cost of $61.5 million, or an average cost of $77.50 per share.

Nonperforming assets were $56 million at December 31, 2021, consisting of $44 million of nonaccrual loans (largely due to nonaccrual agricultural loans acquired with County) and $12 million of other real estate owned (primarily closed bank branch properties yet to be sold), and representing 0.73% of total assets, compared to $13 million or 0.29% at year-end 2020. The allowance for credit losses-loans increased to $50 million (1.07% of loans), mostly due to the Day 2 allowance increase from acquisitions.

Nicolet’s board and management team has several objectives in 2022, with the primary being to ensure the successful cultural integration of the Mackinac and County acquisitions from the prior year. The respective branch and system conversions of both acquisitions were completed with very little disruption to our customers during 2021. However, as with any sizable acquisition, the melding of cultures does not happen immediately, and takes a tremendous amount of effort by our entire employee base. We have worked hard to retain the right people and hire new talent in many of the markets we’ve entered in the past year. As with past acquisitions, we plan to show how our words matter, and will be investing in the new communities we now serve. While new acquisitions take time and resources to fully integrate, we don’t plan to lose sight of our core franchise. We expect to achieve solid organic growth in loans, deposits, wealth management service revenue, and other revenue lines across our footprint. As the U.S. economy continues to emerge from the pandemic of the past two years, there will be several economic policy changes that will impact the banking industry in the coming year and beyond. Nicolet is an asset sensitive bank, and therefore an increase in interest rates is expected to increase our net interest income over time. As interest rates are currently forecasted to increase several times during 2022, we expect our revenues to be positively impacted, although the degree to which remains unknown given several factors

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at play. We believe 2022 will be another year of opportunity, and have positioned the Company to take advantage by maintaining a solid balance sheet funded almost entirely by core deposits, ample liquidity, and prudent capital management. Nicolet enters 2022 as a “well capitalized” financial institution with more than $80 million in cash at its holding company. We expect this cash to be deployed through continued use of our share repurchase program, potential acquisitions, and other strategic long-term investments that will position Nicolet for years to come.

Pandemic Effects, Actions and Updates

The 2020 year was marked by significant events (health pandemic, large sudden rate drop by the Federal Reserve, unprecedented government stimulus, political changes and social issues, and other market and economic disruptions), volatility, and uncertainty, that turned 2020 into a very tactical year for Nicolet management. Management took several actions to respond: added $0.2 billion of liquidity (which later proved to not be necessary, leading to a reduction in non-deposit leverage in the second half of the year), temporarily (and later permanently) closed 8 branches, provided temporary relief to customers through loan payment modifications on nearly 1,000 loans (with only a fraction remaining on modified terms at year end 2020), dramatically elevated the credit loss provision given pervading uncertainty (though slowed the provision in fourth quarter as potential deterioration of loan quality metrics initially anticipated had not materialized), channeled significant resources to originate Paycheck Protection Program (“PPP”) loans (peaking at 2,725 loans totaling $351 million during 2020) and residential mortgages (over $1 billion originated to consumers under atypical conditions), granted $1.25 million of aid to expedite funds to smaller businesses who would have otherwise waited for small PPP loans, kept people safe (with $0.6 million of expense in second quarter for onsite-bonuses, testing and protective supplies), and prioritized full return to on-site work by June to allow us to move forward on goals and improvements. During 2020, we still executed on our acquisition strategy, completing the all-cash acquisition of Advantage.

The dramatic events surrounding the pandemic, fluctuating social and economic changes since the onset of the pandemic, and uncertainty about the longevity of the pandemic’s effects have abated somewhat during 2021 as consumers and businesses were supported by government stimulus and the vaccination rollout. Despite these challenges, Nicolet continues to focus on serving the needs of its communities, including originating 2,205 PPP loans totaling $160 million during 2021, as well as serving our communities through charitable donations, volunteerism, and community events. However, much uncertainty remains from new strains of the virus, ongoing supply chain issues and competitive labor markets, which could result in continued volatility.

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Table 1: Earnings Summary and Selected Financial Data

(1) The ratios of tangible book value per common share, return on average tangible common equity, and tangible common equity to tangible assets exclude goodwill and other intangibles, net. These financial ratios have been included as they are considered to be critical metrics with which to analyze and evaluate financial condition and capital strength.

(2) The adjusted net income measure and related reconciliation provide information useful to investors in understanding the operating performance and trends of Nicolet and also to aid investors in the comparison of Nicolet’s financial performance to the financial performance of peer banks.

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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 sheet 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 factor 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.

INCOME STATEMENT ANALYSIS

Net Interest Income

Net interest income is the primary source of Nicolet’s revenue, and is the difference between interest income on earning assets, such as loans and investment securities, and interest expense on interest-bearing liabilities, such as deposits and other borrowings. Net interest income is directly impacted by the sensitivity of the balance sheet to changes in interest rates and by the amount, mix and composition of interest-earning assets and interest-bearing liabilities, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities, and repricing frequencies. Tax-equivalent net interest income is a non-GAAP measure, but is a preferred industry measurement of net interest income (and is used in calculating a net interest margin) as it enhances the comparability of net interest income arising from taxable and tax-exempt sources. Tables 2 and 3 present information to facilitate the review and discussion of selected average balance sheet items, tax-equivalent net interest income, interest rate spread, and net interest margin.

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

(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

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

(3)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.

Comparison of 2021 versus 2020

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

Tax-equivalent net interest income was $159 million for 2021, comprised of net interest income of $158 million ($29 million or 22% higher than 2020) and a $1 million tax-equivalent adjustment. The increase in tax-equivalent net interest income was comprised of $22 million higher interest income and $6 million lower interest expense. Higher volumes added $24 million to interest income (mostly from higher loan volumes related to the Mackinac and County acquisitions and organic loan growth, as well as growth in other interest-earning assets), offset partly by a $2 million increase to interest expense on higher interest-bearing liabilities (also mostly from volumes due to the Mackinac and County acquisitions, as well as $100 million of subordinated notes issued in July 2021). Rate changes added $7 million to net interest income, mostly due to $9 million lower interest expense (including $7 million from prudent deposit pricing actions on interest-bearing core deposits).

Average interest-earning assets were $4.7 billion for 2021, $0.9 billion (23%) higher than 2020. Average loans increased $396 million (14%) to $3.2 billion, largely due to the timing of the acquisitions (with Mackinac adding $0.9 billion at acquisition in September 2021 and County adding $1.0 billion at acquisition in December 2021). Investment securities increased $248 million, including growth related to the acquisitions, as well as 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 were up $225

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million, mostly cash, reflecting the continued liquidity of businesses and consumers. As a result, the mix of average interest-earning assets shifted. Other interest-earning assets increased to 17% of total interest-earning assets for 2021 (compared to 15% for 2020) and investment securities increased to represent 16% of total interest-earning assets for 2021 (compared to 13% in 2020), while the percentage of loans decreased to represent 67% of total interest-earning assets for 2021 (compared to 72% in the prior year).

Average interest-bearing liabilities were $3.1 billion for 2021, an increase of $480 million (18%) from 2020, primarily due to the significant increase in deposits from government stimulus activities and deposited PPP loan proceeds, as well as the timing of the acquisitions (Mackinac in September 2021 and County in December 2021). Average core interest-bearing deposits increased $605 million and brokered deposits grew $19 million, while funding decreased $143 million (mostly PPPLF funding). The mix of average interest-bearing liabilities was 87% core deposits, 10% brokered deposits, and 3% other funding for 2021, compared to 80% core deposits, 11% brokered deposits, and 9% other funding in 2020.

The interest rate spread increased 8 bps between the periods, attributable to the low interest rate environment and the changing balance sheet mix. The 2021 interest-earning asset yield decreased 24 bps to 3.66% for 2021, largely due to the lower loans-to-earning asset mix given the higher mix of cash assets (as noted above) combined with continued decline in yield (to 0.36% versus 0.46% in 2020). Loans yielded 4.92% for 2021, up slightly (2 bps) from 2020, mostly from the yield on PPP loans (at 11.78% for 2021), as the yield on all other loans decreased 40 bps (to 4.60%) largely from the lower interest rate environment continuing to impact yields on new, renewed and variable rate loans. Investments yielded 1.77%, 49 bps lower than 2020, attributable to the lower rate environment along with the strategic re-investment of excess cash put into lower yielding U.S. Treasuries, compared to the mix of the balance of the portfolio. The cost of funds declined 32 bps to 0.43% for 2021, mainly due to lower rates on core interest-bearing deposits (down 33 bps to 0.24%), as well as the changing mix of interest-bearing liabilities (as noted above). The contribution from net free funds decreased 9 bps, due mostly to the reduced value in the lower interest rate environment, though offset partly by the increase in average net free funds (largely from higher average noninterest-bearing demand deposits and stockholders’ equity) between the years. As a result, the net interest margin was 3.37% for 2021, down 1 bps compared to 3.38% for 2020.

Tax-equivalent interest income was $173 million, up $22 million (15%) over 2020. Interest income on loans increased $20 million (15%) over 2020, mostly due to strong volumes from the 2021 acquisitions and organic loan growth. Between the years, interest income on investment securities increased $2 million to $13 million, with $3 million from higher average volumes due to the 2021 acquisitions and strategic re-investment of cash (as noted above), partially offset by $1 million lower rate from declining yields in the low interest rate environment. Interest expense was $14 million for 2021, down $6 million (32%) from 2020. Interest expense on deposits decreased $6 million from 2020 given higher average deposit balances at a lower cost (down 35 bps to 0.34%) as product rate changes were made in the lower interest rate environment, and brokered deposits cost 32 bps 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 was minimally changed (down 2%), as interest expense on lower average balances (down $143 million, mostly PPPLF) was offset by higher rates (up 175 bps to 3.06%), reflecting the July 2021 subordinated notes issuance ($100 million at 3.125%), debt acquired with County, and the inclusion of the low-costing PPPLF during 2020.

Provision for Credit Losses

The provision for credit losses in 2021 was $14.9 million (comprised of $12.5 million related to the ACL-Loans, and $2.4 million for the ACL on unfunded commitments). The 2021 provision for credit losses was mostly due to the required Day 2 ACL increase from the acquisitions of County and Mackinac. Comparatively, 2020 provision for credit losses was $10.3 million largely due to the unprecedented economic disruptions and uncertainty surrounding the COVID pandemic. Net charge-offs were negligible for both years.

The provision for credit losses is predominantly a function of Nicolet’s methodology and judgment as to qualitative and quantitative factors used to determine the appropriateness of the ACL-Loans. The appropriateness of the ACL-Loans is affected by changes in the size and character of the loan portfolio, changes in levels of collateral-dependent and other nonperforming loans, historical losses and delinquencies in each portfolio segment, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing and future economic conditions, the fair value of underlying collateral, and other factors which could affect potential credit losses. For additional information regarding asset quality and the ACL-Loans, see “BALANCE SHEET ANALYSIS — Loans,” and “— Allowance for Credit Losses - Loans” and “—Nonperforming Assets.”

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Noninterest Income

Table 4: Noninterest Income

Comparison of 2021 versus 2020

Noninterest income was $67 million for 2021, an increase of $5 million (8%) over 2020. Excluding net asset gains (losses), noninterest income for 2021 was down $1 million (2%) compared to 2020. Notable contributions to the change in noninterest income were:

•Trust services fee income and brokerage fee income combined were $20 million for 2021, up $4 million (23%) from 2020, consistent with the growth in accounts and assets under management.

•Mortgage income represents net gains received from the sale of residential real estate loans into the secondary market, capitalized mortgage servicing rights (“MSRs”), servicing fees net of MSR amortization, fair value marks on the mortgage interest rate lock commitments and forward commitments (“mortgage derivatives”), and MSR valuation changes, if any. Net mortgage income was $22 million for 2021, down $8 million (26%) between the years, predominantly on slowing mortgage activity from the record levels experienced in 2020. Gains on sales and capitalized gains combined decreased $9 million, commensurate with the lower volume of loans sold into the secondary market, while MSR impairment was down $1 million on slower paydown activity. See also “Off-Balance Sheet Arrangements, Lending-Related Commitments and Contractual Obligations” and Note 6, “Goodwill and Other Intangibles and Servicing Rights” in the Notes to Consolidated Financial Statements, under Part II, Item 8

•Service charges on deposit accounts were up $1 million (19%) to $5 million for 2021, partly due to the waiver of certain fees during 2020 to provide economic relief to our customers at the inception of the pandemic and partly due to the larger deposit base from the 2021 acquisitions.

•Card interchange income grew $2 million (31%) to $9 million in 2021 largely due to higher volume and activity, though 2020 activity was also tempered by cautionary spending of consumers given the economic uncertainty of the pandemic.

•BOLI income decreased $0.3 million (12%) to $2 million for 2021, attributable to BOLI death benefits received in 2020, partly offset by income on higher average balances from the BOLI acquired in recent acquisitions.

•The $4 million net asset gains in 2021 were primarily attributable to favorable fair value marks on equity securities (including $3.5 million related to the initial public offering of an equity investment). Net asset losses in 2020 of $2 million were comprised primarily of $1 million market losses on equity securities held in the lower, more volatile market and $1 million of net losses on branch other real estate owned write-downs. Additional information on the net gains is also included in Note 16, “Asset Gains (Losses), Net,” in the Notes to Consolidated Financial Statements, under Part II, Item 8.

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Noninterest Expense

Table 5: Noninterest Expense

Comparison of 2021 versus 2020

Noninterest expense was $129 million, an increase of $29 million (28%) over 2020. Personnel costs increased $13 million, while non-personnel expenses combined increased $15 million over 2020. Notable contributions to the change in noninterest expense were:

•Personnel expense (including salaries, overtime, cash and equity incentives, and employee benefit and payroll-related expenses) was $71 million for 2021, an increase of $13 million (24%) over 2020. Salary expense increased $5 million (16%) over 2020, reflecting higher salaries from the larger employee base (with average full-time equivalent employees up 13%) as well as merit increases between the years. Cash, equity and other incentives increased $6 million, reflective of the strong earnings for the year, the successful integration of two acquisitions, and large option grants during the year (intended to align incentives with future strategic goals). Fringe benefits increased $2 million over 2020, mainly on higher health costs between the years.

•Occupancy, equipment and office expense was $21 million for 2021, up $4 million (26%) from 2020, with 2021 including $0.9 million of accelerated depreciation and write-offs related to the branch closures, as well as higher expense for the expanded branch network with the Mackinac and County acquisitions, and additional expense for software and technology to drive operational efficiencies, and enhance products or services. 2020 also included $0.5 million of accelerated depreciation and write-offs related to branch closures.

•Business development and marketing expense was $5 million for 2021, minimally changed from 2020. During 2021, business development costs have increased as travel and entertainment is returning to more normal levels (though still down from pre-pandemic levels), as well as lower marketing costs from differences in the timing and extent of donations, marketing campaigns, promotions, and media. In comparison, business development costs during 2020 were low from less travel and entertainment during the pandemic. In addition, 2020 also included $1.25 million for the micro-grant program (which provided funds directly to customers who otherwise qualified for small PPP loans of less than $5,000, as a more cost beneficial result for the customer).

•Data processing expense was $12 million for 2021, up $1.5 million (14%) over 2020, mostly due to volume-based increases in core processing charges, as well as the larger operating base following the Mackinac and County acquisitions.

•Intangible amortization was down slightly (2%) between the years, with the declining amortization on the aging intangibles of previous acquisitions, substantially offset by amortization from the new intangibles of recent acquisitions.

•FDIC assessments increased to $2 million for 2021 as the small bank assessment credits were fully utilized during third quarter 2020, and also reflecting the higher assessment base.

•Other expense was $9 million for 2021, up $3 million (59%) from 2020, mostly due to an increase in director fees (reflective of the additional complexity of a larger company, including the addition of four new directors), higher professional fees, costs to carry closed bank branches, and overall higher expenses related to the larger operating base. In addition, 2021 included a $2 million contract termination charge, while 2020 included $1 million of lease termination charges related to the branch closures.

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Income Taxes

Income tax expense was $20 million (effective tax rate of 25.2%) for 2021, unchanged from 2020 income tax expense (effective tax rate of 25.3%). The accounting for income taxes requires deferred income taxes to be analyzed to determine if a valuation allowance is required. A valuation allowance is required if it is more likely than not that some portion of the deferred tax asset will not be realized. This analysis involves the use of estimates, assumptions, interpretation, and judgment concerning accounting pronouncements and federal and state tax codes; therefore, income taxes are considered a critical accounting policy. At December 31, 2021 and 2020, no valuation allowance was determined to be necessary. Additional information on the subjectivity of income taxes is discussed further under “Critical Accounting Policies-Income Taxes.” The Company’s income taxes accounting policy is described in Note 1, “Nature of Business and Significant Accounting Policies,” and additional disclosures relative to income taxes are included in Note 13, “Income Taxes” in the Notes to Consolidated Financial Statements, under Part II, Item 8.

BALANCE SHEET ANALYSIS

Loans

Nicolet services a diverse customer base throughout Northeast and Central Wisconsin, Northern Michigan and the upper peninsula of Michigan, including the following industries: manufacturing, wholesaling, paper, packaging, food production and processing, agriculture, forest products, retail, service, and businesses supporting the general building industry. The Company concentrates on originating loans in its local markets and assisting current loan customers. Nicolet actively utilizes government loan programs such as those provided by the U.S. Small Business Administration (“SBA”), including the Paycheck Protection Program, and the U.S. Department of Agriculture’s Farm Service Agency (“FSA”) to help customers with current economic conditions and positioning their businesses for the future. In addition to the discussion that follows, accounting policies for loans are described in Note 1, “Nature of Business and Significant Accounting Policies,” and additional disclosures are included in Note 4, “Loans, Allowance for Credit Losses - Loans, and Credit Quality,” in the Notes to Consolidated Financial Statements, under Part II, Item 8.

Table 6: Period End Loan Composition

Total loans were $4.6 billion at December 31, 2021, an increase of $1.8 billion (66%), compared to total loans of $2.8 billion at December 31, 2020. The increase in loans during 2021 was largely due to the acquisitions of Mackinac and County, which added total loans of $0.9 billion and $1.0 billion, respectively, at acquisition, and also shifted the composition of the loan portfolio. In addition, during 2021, under the latest round of the SBA’s program, we originated 2,205 PPP loans totaling $160 million, bearing a 1% contractual rate, and earned a $9 million fee. In comparison, during 2020 we originated 2,725 PPP loans totaling $351 million and earned a $12 million fee. Of the total fees, $15 million was accreted into interest income during 2021 and $6 million was accreted during 2020. At December 31, 2021, the net carrying value of PPP loans was $25 million, or 1% of loans, with the decline in balance due to SBA loan forgiveness.

As noted in Table 6 above, year-end 2021 loans were broadly 80% commercial-based and 20% retail-based compared to 78% commercial-based and 22% retail-based at year-end 2020. Commercial-based loans are considered to have more inherent risk of

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default than retail-based loans, in part because the commercial balance per borrower is typically larger than that for retail-based loans, implying higher potential losses on an individual customer basis.

Commercial and industrial loans consist primarily of commercial loans to small businesses, PPP loans, and, to a lesser degree, to municipalities within a diverse range of industries. The credit risk related to commercial and industrial 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. Commercial and industrial loans, including the PPP loans, continue to be the largest segment of Nicolet’s portfolio, representing 23% of the portfolio at year-end 2021.

Owner-occupied CRE loans represented 17% of loans at year-end 2021, down from 19% at year-end 2020. This category primarily consists of loans within a diverse range of industries secured by business real estate that is occupied by borrowers who operate their businesses out of the underlying collateral and who may also have commercial and industrial loans. The credit risk related to owner-occupied CRE loans is largely influenced by general economic conditions and the resulting impact on a borrower’s operations, or on the value of underlying collateral.

Agricultural loans consist of loans secured by farmland and the related farming operations. The credit risk related to agricultural loans is largely influenced by the agricultural economy, including market prices for the cost of feed and the price of milk, and/or the underlying value of the farmland. These loans represented 17% of loans at year-end 2021, compared to 4% a year ago, with the increase attributable to the acquisition of County.

The CRE investment loan classification primarily includes commercial-based mortgage loans that are secured by non-owner occupied, nonfarm/nonresidential real estate properties, and multi-family residential properties. Lending in this segment has been focused on loans that are secured by commercial income-producing properties as opposed to speculative real estate development. These loans represented 18% of loans at December 31, 2021, compared to 16% of loans at year-end 2020.

Loans in the construction and land development portfolio represented 5% of total loans at year-end 2021, unchanged from a year ago. Construction and land development loans provide financing for the development of commercial income properties, multi-family residential development, and land designated for future development. Nicolet controls the credit risk on these types of loans by making loans in familiar markets, reviewing the merits of individual projects, controlling loan structure, and monitoring the progress of projects through the analysis of construction advances. Credit risk is managed by employing sound underwriting guidelines, lending primarily to borrowers in local markets, periodically evaluating the underlying collateral, and formally reviewing the borrower’s financial soundness and relationships on an ongoing basis.

On a combined basis, Nicolet’s residential real estate loans represented 19% of total loans at year-end 2021 compared to 21% of total loans at year-end 2020. Residential first mortgage loans include conventional first-lien home mortgages. Residential junior mortgage loans consist of home equity lines and term loans secured by junior mortgage liens. As part of its management of originating residential mortgage loans, the vast majority of Nicolet’s long-term, fixed-rate residential first mortgage loans are sold in the secondary market with the servicing rights retained. Nicolet’s mortgage loans are typically of high quality and have historically had low net charge-off rates.

Loans in the retail and other classification represented approximately 1% of the total loan portfolio, and include predominantly short-term and other personal installment loans not secured by real estate. Credit risk is primarily controlled by reviewing the creditworthiness of the borrowers, monitoring payment histories, and taking appropriate collateral and/or guaranty positions.

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. An active credit risk management process is used for commercial loans to further ensure that sound and consistent credit decisions are made. The credit management process is regularly reviewed and the process has been enhanced over the past several years to further strengthen the controls.

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Table 7: Loan Maturity Distribution

The following table presents the maturity distribution of the loan portfolio at December 31, 2021.

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

Allowance for Credit Losses - Loans

In addition to the discussion that follows, accounting policies for the allowance for credit losses - loans are described in Note 1, “Nature of Business and Significant Accounting Policies,” and additional ACL-Loans disclosures are included in Note 4, “Loans, Allowance for Credit Losses - Loans, and Credit Quality,” in the Notes to Consolidated Financial Statements, under Part II, Item 8.

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

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

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

Management performs ongoing intensive analysis of its loan portfolio to allow for early identification of customers experiencing financial difficulties, maintains prudent underwriting standards, understands the economy in its markets, and considers the trend of deterioration in loan quality in establishing the level of the ACL-Loans. In addition, various regulatory agencies periodically review the ACL-Loans. These agencies may require the Company to make additions to the ACL-Loans or may require that certain loan balances be charged off or downgraded into classified loan categories when their credit evaluations differ from those of management based on their judgments of collectability from information available to them at the time of their examination.

At December 31, 2021, the ACL-Loans was $50 million (representing 1.07% of period end loans) compared to $32 million at December 31, 2020. The increase in the ACL-Loans was largely due to the acquisitions of Mackinac and County, which combined added $12 million of provision for the Day 2 allowance and $5 million related to purchased credit deteriorated loans. Net charge-offs (0.01% of average loans) remain negligible. The components of the ACL-Loans are detailed further in Tables 8 and 9 below.

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Table 8: Allowance for Credit Losses - Loans

The allocation of the ACL-Loans by loan category for each of the past three years is shown in Table 9. The largest portions of the ACL-Loans were allocated to commercial & industrial loans and agricultural loans, representing 25% and 19%, respectively, of the ACL-Loans at December 31, 2021. In comparison, the largest portions of the ACL-Loans were allocated to commercial & industrial loans and owner-occupied CRE, representing 36% and 18%, respectively, of the ACL-Loans at December 31, 2020. This change in allocated ACL-Loans was attributable to the change in loan portfolio composition, mostly related to the agricultural loans acquired with County, as well as changes in outstanding loan balances between the years and risk trends within loan categories.

Table 9: Allocation of the Allowance for Credit Losses - Loans

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Nonperforming Assets

As part of its overall credit risk management process, management is committed to an aggressive problem loan identification philosophy. This philosophy has been implemented through the ongoing monitoring and review of all pools of risk in the loan portfolio to ensure that problem loans are identified early and the risk of loss is minimized. Management continues to actively work with customers to monitor credit risk from the ongoing economic disruptions surrounding the pandemic. Since the pandemic started, nearly 1,000 loans were provided temporary payment modifications, and as of December 31, 2021, no loans remain under temporary payment modification structure. In addition to the discussion that follows, accounting policies for loans and the ACL-Loans are described in Note 1, “Nature of Business and Significant Accounting Policies,” and additional credit quality disclosures are included in Note 4, “Loans, Allowance for Credit Losses - Loans, and Credit Quality,” in the Notes to Consolidated Financial Statements, under Part II, Item 8.

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 (which include nonperforming loans and other real estate owned “OREO”) were $56 million at December 31, 2021, compared to $13 million at December 31, 2020. Nonaccrual loans were $44 million at December 31, 2021, compared to $9 million at December 31, 2020, with the increase largely due to the nonaccrual agricultural loans acquired with County. OREO was $12 million at December 31, 2021, up from $4 million at year-end 2020, with the increase primarily due to the addition of closed bank branch properties. Nonperforming assets as a percent of total assets was 0.73% at December 31, 2021, compared to 0.29% at December 31, 2020.

The level of potential problem loans is another predominant factor in determining the relative level of risk in the loan portfolio and in determining the appropriate level of the ACL-Loans. Potential problem loans are generally defined by management to include loans rated as Substandard by management but that are in performing status; however, there are circumstances present which might adversely affect the ability of the borrower to comply with present repayment terms. The decision of management to include performing loans in potential problem loans does not necessarily mean that Nicolet expects losses to occur, but that management recognizes a higher degree of risk associated with these loans. The loans that have been reported as potential problem loans are predominantly commercial-based loans covering a diverse range of businesses and real estate property types. Potential problem loans were $53 million (1% of total loans) and $21 million (1% of total loans) at December 31, 2021 and 2020, respectively, with the increase largely due to the agricultural loans acquired with County. Potential problem loans require a heightened management review of the pace at which a credit may deteriorate, the duration of asset quality stress, and uncertainty around the magnitude and scope of economic stress that may be felt by Nicolet’s customers and on underlying real estate values.

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Table 10: Nonperforming Assets

Investment Securities Portfolio

The investment securities portfolio is intended to provide Nicolet with adequate liquidity, flexible asset/liability management and a source of stable income. The portfolio is structured with minimal credit exposure to Nicolet. All investment securities are classified at the time of purchase as available for sale (“AFS”) or held to maturity (“HTM”). In addition to the discussion that follows, the investment securities portfolio accounting policies are described in Note 1, “Nature of Business and Significant Accounting Policies,” and additional disclosures are included in Note 3, “Investment Securities,” in the Notes to Consolidated Financial Statements, under Part II, Item 8.

At December 31, 2021, the investment securities portfolio totaled $1.6 billion, comprised of $922 million securities AFS and $652 million securities HTM (representing 20% of total assets), compared to $539 million, all securities AFS, (representing 12% of total assets) at December 31, 2020. During 2021, the Company purchased approximately $500 million of U.S. Treasury securities (included in U.S. government agency securities) of varying yields and durations, which were classified as HTM, to re-invest a portion of excess cash liquidity. In addition, the acquisitions of Mackinac and County added investment securities totaling $104 million and $300 million, respectively, at acquisition, with a portion of these investment securities designated as HTM at acquisition.

Nicolet also had other investments of $44 million and $28 million at December 31, 2021 and 2020, respectively, consisting of capital stock in the Federal Reserve and the Federal Home Loan Bank (“FHLB”) (required as members of the Federal Reserve Bank System and the FHLB System), equity securities with readily determinable fair values, and to a lesser degree equity investments in other private companies. The FHLB and Federal Reserve investments are “restricted” in that they can only be sold back to the respective institutions or another member institution at par, and are thus not liquid, have no ready market or quoted market value, and are carried at cost. The private company equity investments have no quoted market prices, and are carried at cost less impairment charges, if any. The other investments are evaluated periodically for impairment, considering financial condition and other available relevant information.

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Table 11: Investment Securities Portfolio Maturity Distribution (1)

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

Deposits

Deposits represent Nicolet’s largest source of funds. The deposit levels in 2021 and 2020 have been heavily influenced by the ongoing economic uncertainty, government stimulus payments and other directives related to the pandemic, which reduced spending and increased liquidity of consumers and businesses, as well as by PPP loan proceeds retained on deposit by commercial borrowers. In addition, Mackinac and County added deposits of $1.4 billion and $1.0 billion, respectively, at acquisition.

Deposits levels may also be impacted by competition with other bank and nonbank institutions, as well as with a number of non-deposit investment alternatives available to depositors, such as mutual funds, money market funds, annuities, and other brokerage investment products. Deposit challenges include competitive deposit product features, price changes on deposit products given movements in the interest rate environment and other competitive pricing pressures, and customer preferences regarding higher-costing deposit products or non-deposit investment alternatives. Additional disclosures on deposits are included in Note 8, “Deposits,” in the Notes to Consolidated Financial Statements, under Part II, Item 8. See Table 2 for information on average deposit balances and deposit rates.

Table 12: Period End Deposit Composition

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Total deposits were $6.5 billion at December 31, 2021, an increase of $2.6 billion (65%) over year-end 2020, largely due to the acquisitions of Mackinac and County, as well as additional government stimulus and new PPP funds on deposit. Since December 31, 2020, customer deposits (core) increased $2.4 billion to represent 93% of total deposits, and brokered deposits increased $0.1 billion to represent 7% of total deposits.

On average, deposits grew $1.1 billion (31%) between 2021 and 2020 (as detailed in Table 2), primarily due to the timing of the acquisitions (Mackinac in September 2021 and County in December 2021) and the liquidity objectives of our customers in uncertain economic times. Average customer deposits (core) increased $1.0 billion (33%), while average brokered deposits were up slightly (6%) over the prior year.

At December 31, 2021, Nicolet had $113 million of time deposits that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limit of $250,000. The following table provides information on the maturity distribution of those time deposits, including the portion of those time deposits in excess of the FDIC insurance limits (over $250,000) as of December 31, 2021.

Table 13: Maturity Distribution of Uninsured Time Deposits

Total uninsured deposits were $2.1 billion and $1.2 billion as of December 31, 2021 and 2020, respectively.

Other Funding Sources

Other funding sources include short-term borrowings (zero at both December 31, 2021 and 2020) and long-term borrowings (totaling $217 million and $54 million at December 31, 2021 and 2020, respectively). Short-term borrowings (with an original contractual maturity of one year or less) consist mainly of short-term FHLB advances, customer repurchase agreements or federal funds purchased. Long-term borrowings (with an original contractual maturity of over one year) include FHLB advances, junior subordinated debentures, and subordinated notes. The interest on all long-term borrowings is current.

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. In addition, the Company acquired $16 million of junior subordinated debentures and $52 million of subordinated notes as part of the County acquisition. All FHLB advances acquired with the Mackinac and County acquisitions were repaid in full shortly after the respective acquisition dates given our strong core deposit base. See Note 9, “Short and Long-Term Borrowings,” of the Notes to Consolidated Financial Statements under Part II, Item 8 for additional details. See section “Liquidity Management,” for information on available funding sources at December 31, 2021.

RISK MANAGEMENT AND CAPITAL

Liquidity Management

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

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

Funds are available from a number of basic banking activity sources including, but not limited to, the core deposit base; repayment and maturity of loans; investment securities calls, maturities, and sales; and procurement of additional brokered deposits or other wholesale funding. At December 31, 2021, approximately 18% of the investment securities portfolio was pledged to secure public deposits, as applicable, and for other purposes as required by law. Additional funding sources at December 31, 2021, consist of

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$195 million of available and unused Federal funds lines, available borrowing capacity at the FHLB of $355 million, and borrowing capacity in the brokered deposit market.

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

Management is committed to the Parent Company being a source of strength to the Bank and its other subsidiaries, and therefore, regularly evaluates capital and liquidity positions of the Parent Company in light of current and projected needs, growth or strategies. The Parent Company uses cash for normal expenses, debt service requirements and, when opportune, for common stock repurchases or investment in other strategic actions such as mergers or acquisitions. At December 31, 2021, the Parent Company had $85 million in cash. Additional cash sources available to the Parent Company include access to the public or private markets to issue new equity, subordinated notes or other debt. Dividends from the Bank and, to a lesser extent, stock option exercises, represent significant sources of cash flows for the Parent Company. The Bank is required by federal law to obtain prior approval of the OCC for payments of dividends if the total of all dividends declared by the Bank in any year will exceed certain thresholds, as more fully described in “Business—Regulation of the Bank – Payment of Dividends” and in Note 17, “Regulatory Capital Requirements,” in the Notes to the Consolidated Financial Statements under Part II, Item 8. Management does not believe that regulatory restrictions on dividends from the Bank will adversely affect its ability to meet its cash obligations.

Cash and cash equivalents at December 31, 2021 and 2020 were approximately $595 million and $803 million, respectively. The $208 million decrease in cash and cash equivalents since year-end 2020 included $98 million net cash provided by operating activities (mostly earnings), more than offset by $371 million net cash used in investing activities (primarily to purchase investment securities and to fund loan growth) and $65 million net cash provided by financing activities (with funds from increased deposits and the subordinated notes issuance partly offset by the early redemption of selected debt and common stock repurchases). Nicolet’s liquidity resources were sufficient as of December 31, 2021 to fund loans, accommodate deposit trends and cycles, 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 its financial strategy and risk management, Nicolet attempts to understand and manage the impact of fluctuations in market interest rates on its net interest income. The consolidated balance sheet consists mainly of interest-earning assets (loans, investments and cash) which are primarily funded by interest-bearing liabilities (deposits and other borrowings). Such financial instruments have varying levels of sensitivity to changes in market rates of interest. Market rates are highly sensitive to many factors beyond our control, including but not limited to general economic conditions and policies of governmental and regulatory authorities. Our operating income and net income depends, to a substantial extent, on “rate spread” (i.e., the difference between the income earned on loans, investments and other earning assets and the interest expense paid to obtain deposits and other funding liabilities).

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

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

Among other scenarios, Nicolet assessed the impact on net interest income in the event of a gradual +/-100 bps and +/-200 bps change in market rates (parallel to the change in prime rate) over a one-year time horizon to a static (flat) balance sheet. The results provided include the liquidity measures mentioned above and reflect the changed interest rate environment, partly in response to the pandemic. The interest rate scenarios are used for analytical purposes only and do not necessarily represent management’s view of future market interest rate movements. Based on financial data at December 31, 2021 and 2020, the projected changes in net interest income over a one-year time horizon, versus the baseline, are presented in Table 14 below. The results were within Nicolet’s guidelines of not greater than -10% for +/- 100 bps and not greater than -15% for +/- 200 bps, and given the relatively short nature of the Company’s balance sheet, reflect a largely unchanged risk position as expected.

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Table 14: Interest Rate Sensitivity

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

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

Capital

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

Capital balances and changes in capital are presented in the Consolidated Statements of Changes in Stockholders’ Equity in Part II, Item 8. Further discussion of capital components is included in Note 12, “Stockholders’ Equity,” and a summary of dividend restrictions, as well as regulatory capital amounts and ratios for Nicolet and the Bank is presented in Note 17, “Regulatory Capital Requirements,” of the Notes to Consolidated Financial Statements under Part II, Item 8.

The Company’s and the Bank’s regulatory capital ratios remain well above minimum regulatory ratios, including the capital conservation buffer. At December 31, 2021, the Bank’s regulatory capital ratios qualify the Bank as well-capitalized under the prompt-corrective action framework. This strong base of capital has allowed Nicolet to be opportunistic in the current environment and in strategic growth. For a discussion of the regulatory restrictions applicable to the Company and the Bank, see section “Business-Regulation of Nicolet” and “Business-Regulation of the Bank,” included within Part I, Item 1. A summary of Nicolet’s and the Bank’s regulatory capital amounts and ratios, as well as selected capital metrics are presented in Table 15.

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Table 15: Capital

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. Through an ongoing repurchase program, the Board has authorized the repurchase of Nicolet’s common stock as an alternative use of capital. During 2021, $61 million was used to repurchase and cancel approximately 793,000 shares at a weighted average price per share of $77.50. At December 31, 2021, there remained $69 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.

Off-Balance Sheet Arrangements, Lending-Related Commitments and Contractual Obligations

Nicolet is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. At December 31, 2021, interest rate lock commitments to originate residential mortgage loans held for sale of $50 million (included in the commitments to extend credit) and forward commitments to sell residential mortgage loans held for sale of $1 million are considered derivative instruments. Further information and discussion of these commitments is included in Note 14, “Commitments and Contingencies” of the Notes to Consolidated Financial Statements, under Part II, Item 8.

The table below outlines the principal amounts and timing of Nicolet’s contractual obligations. The amounts presented below exclude amounts due for interest, if applicable, and include any unamortized premiums / discounts or other similar carrying value adjustments. As of December 31, 2021, Nicolet had the following contractual obligations. Further discussion of the nature of each obligation is included in the referenced note of the Notes to Consolidated Financial Statements, under Part II, Item 8.

Table 16: Contractual Obligations

Critical Accounting Estimates

The consolidated financial statements of Nicolet are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and follow general practices within the industry in which it operates. This preparation requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the consolidated financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the consolidated financial statements. Certain policies inherently have a greater reliance on the use of estimates,

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assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates that are particularly susceptible to significant change include the valuation of loan acquisition transactions, as well as the determination of the allowance for credit losses and income taxes and, therefore, are critical accounting policies. In addition to the discussion that follows, the accounting policies related to these estimates are further described in Note 1, “Nature of Business and Significant Accounting Policies,” in the Notes to Consolidated Financial Statements, under Part II, Item 8.

Business Combinations and Valuation of Loans Acquired in Business Combinations

We account for acquisitions under Financial Accounting Standards Board (“FASB”) ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. Assets acquired and liabilities assumed in a business combination are recorded at the estimated fair value on their purchase date. As provided for under GAAP, management has up to 12 months following the date of the acquisition to finalize the fair values of acquired assets and assumed liabilities, where it was not possible to estimate the acquisition date fair value upon consummation. Management finalized the fair values of acquired assets and assumed liabilities within this 12-month period and management currently considers such values to be the Day 1 Fair Values for the acquisition transactions.

In particular, the valuation of acquired loans involves significant estimates, assumptions and judgment based on information available as of the acquisition date. Loans acquired in a business combination transaction are evaluated either individually or in pools of loans with similar characteristics; including consideration of a credit component. A number of factors are considered in determining the estimated fair value of purchased loans including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, contractual interest rates compared to market interest rates, and net present value of cash flows expected to be received.

Allowance for Credit Losses - Loans

Management’s evaluation process used to determine the appropriateness of the ACL-Loans is subject to the use of estimates, assumptions, and judgment. The evaluation process involves gathering and interpreting many qualitative and quantitative factors which could affect probable credit losses. Because interpretation and analysis involves judgment, current economic or business conditions can change, and future events are inherently difficult to predict, the anticipated amount of estimated credit losses and therefore the appropriateness of the ACL-Loans could change significantly. Effective January 1, 2020, the Company changed its methodology for accounting for the allowance for credit losses-loans due to the adoption of a new accounting standard, which requires use of a lifetime expected credit losses model versus the historical incurred credit losses model. See Note 1, “Nature of Business and Significant Accounting Policies,” in the Notes to Consolidated Financial Statements, under Part II, Item 8 for the impact of this change on accounting policies.

The allocation methodology applied by Nicolet is designed to assess the appropriateness of the ACL-Loans and includes allocations for individually evaluated credit-deteriorated loans and loss factor allocations for all remaining loans, with a component primarily based on historical loss rates and a component primarily based on other qualitative and environmental factors. The methodology includes evaluation and consideration of several factors, including but not limited to: management’s ongoing review and grading of the loan portfolio, evaluation of facts and issues related to specific loans, consideration of historical loan loss and delinquency experience on each portfolio segment, trends in past due and nonaccrual loans, the risk characteristics of specific loans or various loan segments, changes in the size and character of the loan portfolio, concentrations of loans to specific borrowers or industries, the fair value of underlying collateral, existing economic conditions, and other qualitative and quantitative factors which could affect expected credit losses. In addition, with adoption of CECL in 2020, the model also now considers reasonable and supportable forecasts to assess the collectability of future cash flows. While management uses the best information available to make its evaluation, future adjustments to the ACL-Loans may be necessary if there are significant changes in economic conditions (both existing and forecast) or circumstances underlying the collectability of loans. Because each of the criteria used is subject to change, the allocation of the ACL-Loans is made for analytical purposes and is not necessarily indicative of the trend of future credit losses in any particular loan category. The ACL-Loans is available to absorb losses from any segment of the loan portfolio. Management believes the ACL-Loans is appropriate at December 31, 2021. The allowance analysis is reviewed by the board of directors on a quarterly basis in compliance with regulatory requirements.

Consolidated net income and stockholders’ equity could be affected if management’s estimate of the ACL-Loans necessary to cover expected credit losses is subsequently materially different, requiring a change in the level of provision for credit losses to be recorded. While management uses currently available information to recognize expected credit losses on loans, future adjustments to the ACL-Loans may be necessary based on newly received appraisals, updated commercial customer financial statements, rapidly deteriorating customer cash flow, and changes in economic conditions or forecasts that affect Nicolet’s customers. As an integral part of their examination process, federal regulatory agencies also review the ACL-Loans. Such agencies may require additions to the ACL-Loans or may require that certain loan balances be charged-off or downgraded into classified loan categories when their credit evaluations differ from those of management based on their judgments about information available to them at the time of their examination.

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Income Taxes

The assessment of income tax assets and liabilities involves the use of estimates, assumptions, interpretation, and judgment concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the consolidated results of operations and reported earnings.

Nicolet files a consolidated federal income tax return and a combined state income tax return (both of which include Nicolet and its wholly owned subsidiaries). Accordingly, amounts equal to tax benefits of those companies having taxable federal losses or credits are reimbursed by the companies that incur federal tax liabilities. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed quarterly for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax law rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through provision for income tax expense. Valuation allowances are established when it is more likely than not that a portion of the full amount of the deferred tax asset will not be realized. In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. Nicolet may also recognize a liability for unrecognized tax benefits from uncertainty in income taxes. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the financial statements. Penalties related to unrecognized tax benefits are classified as income tax expense.