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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 March 31, 2023
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                           to                          
Commission file number: 001-37700
NICOLET BANKSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
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 April 30, 2023 there were 14,716,616 shares of $0.01 par value common stock outstanding.


Nicolet Bankshares, Inc.
Quarterly Report on Form 10-Q
March 31, 2023
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)
March 31, 2023December 31, 2022
(Unaudited)(Audited)
Assets
Cash and due from banks$93,462 $121,211 
Interest-earning deposits20,718 33,512 
Cash and cash equivalents
114,180 154,723 
Certificates of deposit in other banks11,293 12,518 
Securities available for sale (“AFS”), at fair value1,023,176 917,618 
Securities held to maturity (“HTM”), at amortized cost— 679,128 
Other investments57,482 65,286 
Loans held for sale4,962 1,482 
Loans6,223,732 6,180,499 
Allowance for credit losses - loans (“ACL-Loans”)(62,412)(61,829)
Loans, net
6,161,320 6,118,670 
Premises and equipment, net112,569 108,956 
Bank owned life insurance (“BOLI”)166,107 165,137 
Goodwill and other intangibles, net400,277 402,438 
Accrued interest receivable and other assets140,988 138,013 
Total assets
$8,192,354 $8,763,969 
Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing demand deposits$2,094,623 $2,361,816 
Interest-bearing deposits4,833,956 4,817,105 
Total deposits
6,928,579 7,178,921 
Short-term borrowings50,000 317,000 
Long-term borrowings197,448 225,342 
Accrued interest payable and other liabilities54,535 70,177 
Total liabilities
7,230,562 7,791,440 
Stockholders’ Equity:
Common stock147 147 
Additional paid-in capital623,746 621,988 
Retained earnings398,966 407,864 
Accumulated other comprehensive income (loss)(61,067)(57,470)
Total stockholders’ equity961,792 972,529 
Total liabilities and stockholders’ equity$8,192,354 $8,763,969 
Preferred shares authorized (no par value)
10,000,000 10,000,000 
Preferred shares issued and outstanding— — 
Common shares authorized (par value $0.01 per share)
30,000,000 30,000,000 
Common shares outstanding14,698,265 14,690,614 
Common shares issued14,771,255 14,764,104 
See accompanying notes to unaudited consolidated financial statements.
3
ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.
Consolidated Statements of Income (Loss)
(In thousands, except share and per share data) (Unaudited)
Three Months Ended
March 31,
20232022
Interest income:
Loans, including loan fees$79,142 $51,299 
Investment securities:
Taxable
4,961 5,127 
Tax-exempt
1,737 675 
Other interest income1,536 817 
Total interest income
87,376 57,918 
Interest expense:
Deposits24,937 2,192 
Short-term borrowings3,212 — 
Long-term borrowings2,506 1,931 
Total interest expense
30,655 4,123 
Net interest income
56,721 53,795 
Provision for credit losses3,090 300 
Net interest income after provision for credit losses53,631 53,495 
Noninterest income:
Wealth management fee income5,512 5,699 
Mortgage income, net1,466 3,253 
Service charges on deposit accounts1,480 1,477 
Card interchange income3,033 2,581 
BOLI income1,200 933 
Deferred compensation plan asset market valuations946 (467)
LSR income, net1,155 (382)
Asset gains (losses), net(38,468)1,313 
Other income1,832 1,536 
Total noninterest income
(21,844)15,943 
Noninterest expense:
Personnel24,328 21,191 
Occupancy, equipment and office8,783 6,944 
Business development and marketing2,121 1,831 
Data processing3,988 3,387 
Intangibles amortization2,161 1,424 
FDIC assessments540 480 
Merger-related expense163 98 
Other expense2,791 2,195 
Total noninterest expense
44,875 37,550 
Income (loss) before income tax expense(13,088)31,888 
Income tax expense (benefit)(4,190)7,724 
Net income (loss)$(8,898)$24,164 
Earnings (loss) per common share:
Basic$(0.61)$1.77 
Diluted$(0.61)$1.70 
Weighted average common shares outstanding:
Basic14,694,451 13,648,745 
Diluted14,694,451 14,214,752 
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
March 31,
20232022
Net income (loss)$(8,898)$24,164 
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities AFS:
Net unrealized holding gains (losses)
15,294 (39,948)
Net realized (gains) losses included in income
213 (15)
Reclassification adjustment for securities transferred from
   held to maturity to available for sale
(20,434)— 
Income tax (expense) benefit1,330 10,790 
Total other comprehensive income (loss)(3,597)(29,173)
Comprehensive income (loss)$(12,495)$(5,009)
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 December 31, 2022$147 $621,988 $407,864 $(57,470)$972,529 
Comprehensive income:
Net income (loss), three months ended March 31, 2023
— — (8,898)— (8,898)
Other comprehensive income (loss)— — — (3,597)(3,597)
Stock-based compensation expense— 1,424 — — 1,424 
Exercise of stock options, net— 148 — — 148 
Issuance of common stock— 186 — — 186 
Balances at March 31, 2023$147 $623,746 $398,966 $(61,067)$961,792 
Balances at December 31, 2021$140 $575,045 $313,604 $3,102 $891,891 
Comprehensive income:
Net income, three months ended March 31, 2022
— — 24,164 — 24,164 
Other comprehensive income (loss)— — — (29,173)(29,173)
Stock-based compensation expense— 1,799 — — 1,799 
Exercise of stock options, net1 1,886 — — 1,887 
Issuance of common stock— 175 — — 175 
Purchase and retirement of common stock(6)(54,427)— — (54,433)
Balances at March 31, 2022$135 $524,478 $337,768 $(26,071)$836,310 
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)
Three Months Ended March 31,
20232022
Cash Flows From Operating Activities:
Net income (loss)$(8,898)$24,164 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation, amortization, and accretion4,197 6,769 
Provision for credit losses3,090 300 
Increase in cash surrender value of life insurance(1,087)(933)
Stock-based compensation expense1,424 1,799 
Asset (gains) losses, net38,468 (1,313)
Gain on sale of loans held for sale, net(612)(2,377)
Net change due to:
Proceeds from sale of loans held for sale17,789 86,478 
Origination of loans held for sale(20,861)(88,304)
Accrued interest receivable and other assets
(2,326)6,786 
Accrued interest payable and other liabilities
(15,642)(11,426)
Net cash provided by (used in) operating activities
15,542 21,943 
Cash Flows From Investing Activities:
Net (increase) decrease in loans(41,764)(64,669)
Net (increase) decrease in certificates of deposit in other banks1,225 2,228 
Purchases of securities AFS— (5,017)
Purchases of securities HTM— (38,856)
Proceeds from sales of securities AFS22,565 3,400 
Proceeds from sales of securities HTM460,051 — 
Proceeds from calls and maturities of securities AFS42,028 29,511 
Proceeds from calls and maturities of securities HTM2,916 5,430 
Purchases of other investments(3,801)(10,953)
Proceeds from sales of other investments11,108 775 
Proceeds from redemption of BOLI117 117 
Net (increase) decrease in premises and equipment(5,646)(1,953)
Net (increase) decrease in other real estate and other assets— 3,075 
Net cash (paid) received in branch sale— 147,833 
Net cash provided by (used in) investing activities
488,799 70,921 
Cash Flows From Financing Activities:
Net increase (decrease) in deposits(250,218)(229,862)
Net increase (decrease) in short-term borrowings(267,000)— 
Repayments of long-term borrowings(28,000)(10,000)
Purchase and retirement of common stock— (54,433)
Proceeds from issuance of common stock186 175 
Proceeds from exercise of stock options148 1,887 
Net cash provided by (used in) financing activities
(544,884)(292,233)
Net increase (decrease) in cash and cash equivalents
(40,543)(199,369)
Cash and cash equivalents:
Beginning
154,723 595,292 
Ending *
$114,180 $395,923 
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest$30,825 $5,170 
Cash paid for taxes— — 
Transfer of securities from HTM to AFS177,727 — 
Transfer of loans and bank premises to other real estate owned— 432 
Capitalized mortgage servicing rights204 886 
* There was no restricted cash in cash and cash equivalents at March 31, 2023, while cash and cash equivalents at March 31, 2022, 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 March 31, 2023 or March 31, 2022.
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 (loss), comprehensive income (loss), changes in stockholders’ equity, and cash flows of Nicolet Bankshares, Inc. (the “Company” or “Nicolet”) and its subsidiaries, as of and for the periods presented, and all such adjustments are of a normal recurring nature. All material intercompany transactions and balances have been eliminated. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the entire year.
These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been omitted or abbreviated. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
Critical Accounting Policies and Estimates
Preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements and accompanying disclosures. Estimates are used in accounting for, among other items, the allowance for credit losses, valuation of loans in acquisition transactions, useful lives for depreciation and amortization, fair value of financial instruments, impairment calculations, valuation of deferred tax assets, uncertain income tax positions and contingencies. These estimates are based on management’s knowledge of historical experience, current information, and other factors deemed to be relevant; accordingly, as this information changes, actual results could differ from those estimates. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: external market factors such as market interest rates and employment rates, changes to operating policies and procedures, changes in applicable banking or tax regulations, and changes to deferred tax estimates. Nicolet considers accounting estimates to be critical to reported financial results if the accounting estimate requires management to make assumptions about matters that are highly uncertain and different estimates that are reasonably likely to occur from period to period, could have a material impact on the financial statements. The accounting estimates we consider to be critical include business combinations and the valuation of loans acquired, the determination of the allowance for credit losses, and income taxes.
There have been no material changes or developments with respect to the assumptions or methodologies that the Company uses when applying critical accounting policies and developing critical accounting estimates as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Recent Accounting Pronouncements Adopted
In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures. This ASU eliminated the accounting guidance for TDRs by creditors and enhanced the disclosure requirements for loan modifications to borrowers experiencing financial difficulty. The ASU also requires public business entities to expand the vintage disclosures to include gross charge-offs by year of origination. The updated guidance is effective for fiscal years beginning after December 15, 2022. Adoption of this ASU did not have a material impact on the Company’s consolidated financial statements; however, it resulted in new disclosures. See Note 6 for the new disclosures.
Future Accounting Pronouncements
In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. This ASU permits reporting entities to elect to account for tax equity investments, regardless of the tax credit program for which the income tax credits are received, using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the income statement as a component of income tax expense. A reporting entity makes an accounting policy election to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis rather than electing to apply the proportional amortization method at the reporting entity level or to individual investments. This ASU also requires specific disclosures of investments that generate income tax credits and other income tax benefits from a tax credit program for which the entity has elected to apply the proportional amortization method. The updated guidance is effective for fiscal years beginning after December 15, 2023.

8

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which defers the sunset date of the original guidance from December 31, 2022 to December 31, 2024. The Company continues to work through the cessation of LIBOR, including the modification of its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR. The Company expects to utilize the reference rate reform transition guidance, as applicable, and does not expect such adoption to have a material impact on its consolidated financial statements or financial disclosures. The Company will continue to assess the impact as the reference rate transition approaches June 30, 2023.

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

Note 2 – Acquisition
Charter Bankshares, Inc. (“Charter”): On August 26, 2022, Nicolet completed its merger with Charter, pursuant to the Agreement and Plan of Merger dated March 29, 2022, at which time Charter merged with and into Nicolet, and Charter Bank, the wholly owned bank subsidiary of Charter, was merged with and into Nicolet National Bank (the “Bank”), the wholly owned bank subsidiary of Nicolet. In the merger, Charter stockholders received 15.458 shares of Nicolet common stock and $475 in cash for each share of Charter owned. As a result, Nicolet issued approximately 1.26 million shares of Nicolet common stock for stock consideration of $98 million and cash consideration of $39 million, for a total purchase price of $137 million. With the Charter merger, Nicolet expanded to Western Wisconsin and Minnesota.

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

(In millions, except share data)Acquired from 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 5 10 
     Total assets$1,110 $11 $1,121 
Liabilities Assumed:
Deposits$869 $1 $870 
Borrowings161 — 161 
Other liabilities3 — 3 
     Total liabilities$1,033 $1 $1,034 
Net assets acquired$87 
Purchase Price:
Nicolet common stock issued (in shares)1,262,360 
Value of Nicolet common stock consideration$98 
Cash consideration paid39 
    Total purchase price$137 
Preliminary goodwill$50 

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

9

(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 valuations, appraisals, and third party advisors. Goodwill arising as a result of the Charter acquisition is not deductible for tax purposes. Due to the timing of the merger, the purchase price allocation and estimated fair value measurements remain preliminary. Management will continue to review the estimated fair values and expects to finalize its analysis of the acquired assets and assumed liabilities in the transaction over the next few months, within one year of the merger. Therefore, adjustments to the purchase price allocation and estimated fair value may occur.

Note 3 – Earnings per Common Share
Basic earnings per common share are calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per common share are calculated by dividing net income (loss) 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 March 31,
(In thousands, except per share data)20232022
Net income (loss)$(8,898)$24,164 
Weighted average common shares outstanding14,694 13,649 
Effect of dilutive common stock awards— 566 
Diluted weighted average common shares outstanding14,694 14,215 
Basic earnings (loss) per common share*$(0.61)$1.77 
Diluted earnings (loss) per common share*$(0.61)$1.70 
*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.
As a result of the Company’s reported net loss for the three months ended March 31, 2023, all of the common stock awards outstanding were excluded from the computation of diluted earnings (loss) per common shares. For the three months ended March 31, 2022, options to purchase approximately 0.1 million shares were excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive.

Note 4 – Stock-Based Compensation
The Company may grant stock options and restricted stock under its stock-based compensation plans to certain officers, employees and directors. These plans are administered by a committee of the Board of Directors, and at March 31, 2023, approximately 0.7 million shares were available for grant under these stock-based compensation plans.
A Black-Scholes model is utilized to estimate the fair value of stock option grants, while the market price of the Company’s stock at the date of grant is used to estimate the fair value of restricted stock awards. The weighted average assumptions used in the Black-Scholes model for valuing stock option grants for the three months ended March 31, 2022 were as follows. There were no stock options granted for the three months ended March 31, 2023.
Three Months Ended March 31, 2022
Dividend yield— %
Expected volatility30 %
Risk-free interest rate1.77 %
Expected average life7 years
Weighted average per share fair value of options$32.99 
10

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, 20221,853,064 $59.79 
Granted— — 
Exercise of stock options *(5,329)34.82 
Outstanding - March 31, 20231,847,735 $59.86 5.7$16,359 
Exercisable - March 31, 20231,278,592 $52.22 4.6$16,302 
* 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 three months ended March 31, 2023, 492 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 three months ended March 31, 2023 and 2022 was approximately $0.2 million and $3.0 million, respectively.
A summary of the Company’s restricted stock activity is summarized below.
Restricted StockWeighted Average Grant
Date Fair Value		Restricted Shares
Outstanding
Outstanding - December 31, 2022$76.49 73,490 
Granted— — 
Vested72.00 (500)
Outstanding - March 31, 2023$76.52 72,990 
The Company recognized approximately $1.4 million and $1.8 million of stock-based compensation expense (included in personnel on the consolidated statements of income) for the three months ended March 31, 2023 and 2022, respectively, associated with its common stock awards granted to officers and employees. As of March 31, 2023, there was approximately $17.2 million of unrecognized compensation cost related to equity award grants, which is expected to be recognized over the remaining vesting period of approximately three years. The Company recognized a tax benefit of less than $0.1 million and approximately $0.4 million for the three months ended March 31, 2023 and 2022, respectively, for the tax impact of stock option exercises and vesting of restricted stock.

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

The amortized cost and fair value of securities AFS and HTM are summarized as follows.
March 31, 2023
(in thousands)Amortized CostGross
Unrealized
Gains		Gross
Unrealized
Losses		Estimated Fair Value
Securities AFS:
U.S. Treasury securities$192,166 $— $6,058 $186,108 
U.S. government agency securities9,959 36 25 9,970 
State, county and municipals428,643 692 31,887 397,448 
Mortgage-backed securities350,712 — 39,091 311,621 
Corporate debt securities125,349 — 7,320 118,029 
Total securities AFS$1,106,829 $728 $84,381 $1,023,176 
11

December 31, 2022
(in thousands)Amortized CostGross
Unrealized
Gains		Gross
Unrealized
Losses		Estimated Fair Value
Securities AFS:
U.S. Treasury securities$192,116 $— $8,286 $183,830 
U.S. government agency securities2,133 — 33 2,100 
State, county and municipals433,733 123 35,668 398,188 
Mortgage-backed securities227,650 10 26,728 200,932 
Corporate debt securities140,712 3 8,147 132,568 
Total securities AFS$996,344 $136 $78,862 $917,618 
Securities HTM:
U.S. Treasury securities$497,648 $— $35,722 $461,926 
U.S. government agency securities8,744 46 — 8,790 
State, county and municipals34,874 — 3,349 31,525 
Mortgage-backed securities137,862 — 16,751 121,111 
Total securities HTM$679,128 $46 $55,822 $623,352 
On March 7, 2023, Nicolet executed the sale of $500 million (par value) U.S. Treasury held to maturity securities for a pre-tax loss of $38 million or an after-tax loss of $28 million. Proceeds from the sale were used to reduce existing FHLB borrowings with the remainder held in investable cash. As a result of the sale of securities previously classified as held to maturity, the remaining unsold portfolio of held to maturity securities, with a book value of $177 million, was reclassified to available for sale with a carrying value of approximately $157 million. The unrealized loss on this portfolio of $20 million increased the balance of accumulated other comprehensive loss $15 million, net of the deferred tax effect, and is subject to future market changes.

Proceeds and realized gains or losses from the sale of AFS and HTM securities were as follows.
Three Months Ended March 31,
(in thousands)20232022
Securities AFS:
Gross gains$126 $20 
Gross losses(339)(5)
Gains (losses) on sales of securities AFS, net
$(213)$15 
Proceeds from sales of securities AFS$22,565 $3,400 
Securities HTM:
Gross gains$— $— 
Gross losses(37,723)— 
Gains (losses) on sales of securities HTM, net$(37,723)$— 
Proceeds from sales of securities HTM$460,051 $— 
All mortgage-backed securities included in the tables above were issued by U.S. government agencies and corporations. Investment securities with a carrying value of $414 million and $883 million, as of March 31, 2023 and December 31, 2022, respectively, were pledged as collateral to secure public deposits and borrowings, as applicable, and for liquidity or other purposes as required by regulation. Accrued interest on investment securities totaled $6 million at both March 31, 2023 and December 31, 2022, and is included in accrued interest receivable and other assets on the consolidated balance sheets.
12


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.
March 31, 2023
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. Treasury securities$456 $8 $185,640 $6,050 $186,096 $6,058 9 
U.S. government agency securities2,718 20 107 5 2,825 25 9 
State, county and municipals79,617 1,826 247,397 30,061 327,014 31,887 608 
Mortgage-backed securities35,724 2,158 275,897 36,933 311,621 39,091 464 
Corporate debt securities68,654 2,583 44,995 4,737 113,649 7,320 75 
Total
$187,169 $6,595 $754,036 $77,786 $941,205 $84,381 1,165 
December 31, 2022
Less than 12 months12 months or moreTotal
($ in thousands)Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Number of
Securities
Securities AFS:
U.S. Treasury securities$448 $14 $183,382 $8,272 $183,830 $8,286 9 
U.S. government agency securities2,083 32 17 1 2,100 33 9 
State, county and municipals277,546 18,041 86,569 17,627 364,115 35,668 812 
Mortgage-backed securities102,108 11,320 95,614 15,408 197,722 26,728 376 
Corporate debt securities114,887 6,186 12,938 1,961 127,825 8,147 90 
Total
$497,072 $35,593 $378,520 $43,269 $875,592 $78,862 1,296 
Securities HTM:
U.S. Treasury securities$— $— $461,926 $35,722 $461,926 $35,722 6 
State, county and municipals17,591 1,594 11,654 1,755 29,245 3,349 58 
Mortgage-backed securities68,108 8,029 53,003 8,722 121,111 16,751 106 
Total
$85,699 $9,623 $526,583 $46,199 $612,282 $55,822 170 
During first quarter 2023, the Company recognized provision expense of $2.3 million related to the expected credit loss on its Signature Bank sub debt investment (acquired in an acquisition), and immediately charged-off the full investment. The Company does not consider its remaining securities AFS with unrealized losses to be attributable to credit-related factors, as the unrealized losses in each category have occurred as a result of changes in noncredit-related factors such as changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration. Furthermore, the Company does not have the intent to sell any of these AFS securities and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost. As of March 31, 2023 and December 31, 2022, no allowance for credit losses on AFS securities was recognized.
The Company evaluated the HTM securities and determined no allowance for credit losses was necessary at December 31, 2022. The U.S. Treasury and U.S. government agency securities are guaranteed by the U.S. government. For the state, county and municipal securities, management considered issuer bond ratings, historical loss rates by bond ratings, whether issuers continue to make timely principal and interest payments per the contractual terms of the investment securities, internal forecasts, and whether or not such investment securities provide insurance, other credit enhancement, or are pre-refunded by the issuers. For the mortgage-backed securities, all such securities were issued by U.S. government agencies and corporations, which are currently explicitly or implicitly guaranteed by the U.S. government and have a long history of no credit losses.
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The amortized cost and fair value of investment securities by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties; as this is particularly inherent in mortgage-backed securities, these securities are not included in the maturity categories below.
As of March 31, 2023
Securities AFS
(in thousands)Amortized CostFair Value
Due in less than one year$225,921 $223,243 
Due in one year through five years173,794 163,788 
Due after five years through ten years223,776 201,296 
Due after ten years132,626 123,228 
756,117 711,555 
Mortgage-backed securities350,712 311,621 
Total investment securities$1,106,829 $1,023,176 
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.
March 31, 2023December 31, 2022
(in thousands)AmountAmount
Federal Reserve Bank stock
$32,708 $32,219 
Federal Home Loan Bank (“FHLB”) stock
10,174 18,625 
Equity securities with readily determinable fair values3,912 4,376 
Other investments10,688 10,066 
Total other investments$57,482 $65,286 

Note 6 – Loans, Allowance for Credit Losses - Loans, and Credit Quality
The loan composition is summarized as follows.
March 31, 2023December 31, 2022
(in thousands)Amount% of
Total		Amount% of
Total
Commercial & industrial$1,330,052 21 %$1,304,819 21 %
Owner-occupied commercial real estate (“CRE”)969,064 16 954,599 15 
Agricultural1,065,909 17 1,088,607 18 
CRE investment1,146,388 19 1,149,949 19 
Construction & land development333,370 5 318,600 5 
Residential construction134,782 2 114,392 2 
Residential first mortgage1,014,166 16 1,016,935 16 
Residential junior mortgage177,026 3 177,332 3 
Retail & other52,975 1 55,266 1 
Loans
6,223,732 100 %6,180,499 100 %
Less allowance for credit losses - Loans (“ACL-Loans”)62,412 61,829 
Loans, net
$6,161,320 $6,118,670 
Allowance for credit losses - Loans to loans1.00 %1.00 %
Accrued interest on loans totaled $16 million and $15 million at March 31, 2023 and December 31, 2022, respectively, and is included in accrued interest receivable and other assets on the consolidated balance sheets.
14

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 Year Ended
(in thousands)March 31, 2023March 31, 2022December 31, 2022
Beginning balance$61,829 $49,672 $49,672 
ACL on PCD loans acquired— — 1,937 
Provision for credit losses750 300 10,950 
Charge-offs(184)(100)(1,033)
Recoveries17 34 303 
Net (charge-offs) recoveries(167)(66)(730)
Ending balance$62,412 $49,906 $61,829 
The following tables present the balance and activity in the ACL-Loans by portfolio segment.
Three Months Ended March 31, 2023
(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$16,350 $9,138 $9,762 $12,744 $2,572 $1,412 $6,976 $1,846 $1,029 $61,829 
Provision457 172 (328)210 106 262 (206)(31)108 750 
Charge-offs(118)— — — — — — — (66)(184)
Recoveries10 — 2 — — — 1 — 4 17 
Net (charge-offs) recoveries(108)— 2 — — — 1 — (62)(167)
Ending balance$16,699 $9,310 $9,436 $12,954 $2,678 $1,674 $6,771 $1,815 $1,075 $62,412 
As % of ACL-Loans27 %15 %15 %21 %4 %2 %11 %3 %2 %100 %

Year Ended December 31, 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 loans1,408 384 — 38 2 — 93 12 — 1,937 
Provision2,415 2,087 215 4,075 758 512 96 493 299 10,950 
Charge-offs(190)(555)— — — — (65)— (223)(1,033)
Recoveries104 — — 169 — — 8 1 21 303 
Net (charge-offs) recoveries(86)(555)— 169 — — (57)1 (202)(730)
Ending balance$16,350 $9,138 $9,762 $12,744 $2,572 $1,412 $6,976 $1,846 $1,029 $61,829 
As % of ACL-Loans26 %15 %16 %21 %4 %2 %11 %3 %2 %100 %
The ACL-Loans represents management’s estimate of expected credit losses in the Company’s loan portfolio at the balance sheet date. To assess the appropriateness of the ACL-Loans, management applies an allocation methodology which focuses on evaluation of qualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to specific loans; (ii) management’s ongoing review and grading of the loan portfolio; (iii) consideration of historical loan loss and delinquency experience on each portfolio segment; (iv) trends in past due and nonperforming loans; (v) the risk characteristics of the various loan segments; (vi) changes in the size and character of the loan portfolio; (vii) concentrations of loans to specific borrowers or industries; (viii) existing economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect expected credit losses. Assessing these numerous factors involves significant judgment.
Management allocates the ACL-Loans by pools of risk within each loan portfolio segment. The allocation methodology consists of the following components. First, a specific reserve is established for individually evaluated credit-deteriorated loans, which management defines as nonaccrual credit relationships over $250,000, collateral dependent loans, purchased credit deteriorated loans, and other loans with evidence of credit deterioration. The specific reserve in the ACL-Loans for these credit
15

deteriorated loans is equal to the aggregate collateral or discounted cash flow shortfall. Management allocates the ACL-Loans with historical loss rates by loan segment. The loss factors are measured on a quarterly basis and applied to each loan segment based on current loan balances and projected for their expected remaining life. Next, management allocates the ACL-Loans using the qualitative factors mentioned above. Consideration is given to those current qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the historical loss experience of each loan segment. Lastly, management considers reasonable and supportable forecasts to assess the collectability of future cash flows.
Allowance for Credit Losses-Unfunded Commitments:
In addition to the ACL-Loans, the Company has established an ACL-Unfunded commitments, classified in accrued interest payable and other liabilities on the consolidated balance sheets. This reserve is maintained at a level that management believes is sufficient to absorb losses arising from unfunded loan commitments, and is determined quarterly based on methodology similar to the methodology for determining the ACL-Loans. The reserve for unfunded commitments was $3.0 million at both March 31, 2023 and December 31, 2022.
Provision for Credit Losses:
The provision for credit losses is determined by the Company as the amount to be added to the ACL loss accounts for various types of financial instruments including loans, investment securities, and off-balance sheet credit exposures after net charge-offs have been deducted to bring the ACL to a level that, in management’s judgment, is necessary to absorb expected credit losses over the lives of the respective financial instruments. See Note 5 for additional information regarding the ACL related to investment securities. The following table presents the components of the provision for credit losses.
Three Months Ended Year Ended
(in thousands)March 31, 2023March 31, 2022December 31, 2022
Provision for credit losses on:
Loans$750 $300 $10,950 
Unfunded commitments— — 550 
Investment securities2,340 — — 
Total$3,090 $300 $11,500 
16

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.
March 31, 2023Collateral Type
(in thousands)Real EstateOther Business AssetsTotalWithout an AllowanceWith an AllowanceAllowance Allocation
Commercial & industrial$— $2,419 $2,419 $1,084 $1,335 $506 
Owner-occupied CRE5,905 — 5,905 5,697 208 54 
Agricultural12,656 5,800 18,456 12,751 5,705 166 
CRE investment3,158 — 3,158 2,635 523 7 
Construction & land development650 — 650 650 — — 
Residential first mortgage1,357 — 1,357 1,357 — — 
Residential junior mortgage8 — 8 8 — — 
Total loans$23,734 $8,219 $31,953 $24,182 $7,771 $733 

December 31, 2022Collateral Type
(in thousands)Real EstateOther Business AssetsTotalWithout an AllowanceWith an AllowanceAllowance Allocation
Commercial & industrial$— $3,475 $3,475 $1,927 $1,548 $595 
Owner-occupied CRE4,907 — 4,907 4,699 208 53 
Agricultural13,758 6,458 20,216 14,358 5,858 261 
CRE investment2,713 — 2,713 979 1,734 212 
Construction & land development670 — 670 670 — — 
Residential first mortgage91 — 91 91 — — 
Total loans$22,139 $9,933 $32,072 $22,724 $9,348 $1,121 


17

Past Due and Nonaccrual Loans:
The following tables present past due loans by portfolio segment.
March 31, 2023
(in thousands)30-89 Days Past
Due (accruing)		90 Days & Over or nonaccrualCurrentTotal
Commercial & industrial$256 $2,874 $1,326,922 $1,330,052 
Owner-occupied CRE388 7,128 961,548 969,064 
Agricultural178 18,782 1,046,949 1,065,909 
CRE investment— 4,126 1,142,262 1,146,388 
Construction & land development— 748 332,622 333,370 
Residential construction1,144 — 133,638 134,782 
Residential first mortgage3,852 4,986 1,005,328 1,014,166 
Residential junior mortgage219 196 176,611 177,026 
Retail & other222 55 52,698 52,975 
Total loans$6,259 $38,895 $6,178,578 $6,223,732 
Percent of total loans0.1 %0.6 %99.3 %100.0 %
December 31, 2022
(in thousands)30-89 Days Past
Due (accruing)		90 Days & Over or nonaccrualCurrentTotal
Commercial & industrial$210 $3,328 $1,301,281 $1,304,819 
Owner-occupied CRE833 5,647 948,119 954,599 
Agricultural20 20,416 1,068,171 1,088,607 
CRE investment— 3,832 1,146,117 1,149,949 
Construction & land development— 771 317,829 318,600 
Residential construction— — 114,392 114,392 
Residential first mortgage3,628 3,780 1,009,527 1,016,935 
Residential junior mortgage236 224 176,872 177,332 
Retail & other261 82 54,923 55,266 
Total loans$5,188 $38,080 $6,137,231 $6,180,499 
Percent of total loans0.1 %0.6 %99.3 %100.0 %

The following table presents nonaccrual loans by portfolio segment.
March 31, 2023December 31, 2022
(in thousands)Nonaccrual Loans% of TotalNonaccrual Loans% of Total
Commercial & industrial$2,874 7 %$3,328 9 %
Owner-occupied CRE7,128 18 5,647 15 
Agricultural18,782 48 20,416 53 
CRE investment4,126 11 3,832 10 
Construction & land development748 2 771 2 
Residential construction— — — — 
Residential first mortgage4,986 13 3,780 10 
Residential junior mortgage196 1 224 1 
Retail & other55 — 82 — 
Nonaccrual loans
$38,895 100 %$38,080 100 %
Percent of total loans0.6 %0.6 %

18

Credit Quality Information:
The following tables present total loans by risk categories and gross charge-offs by year of origination. Acquired loans have been included based upon the actual origination date.
March 31, 2023Amortized Cost Basis by Origination Year
(in thousands)20232022202120202019PriorRevolvingRevolving to TermTOTAL
Commercial & industrial
Grades 1-4$47,409 $312,964 $215,435 $96,534 $65,723 $111,114 $376,926 $— $1,226,105 
Grade 595 4,204 4,640 6,548 1,195 11,392 27,894 — 55,968 
Grade 6— 1,358 618 66 — 11,881 6,543 — 20,466 
Grade 7291 3,613 1,894 2,165 2,371 2,411 14,768 — 27,513 
Total$47,795 $322,139 $222,587 $105,313 $69,289 $136,798 $426,131 $— $1,330,052 
Current period gross charge-offs$— $(77)$(26)$— $— $— $(15)$— $(118)
Owner-occupied CRE
Grades 1-4$28,513 $155,362 $196,641 $103,973 $97,039 $322,852 $4,773 $— $909,153 
Grade 51,381 3,134 6,310 4,485 908 17,497 490 — 34,205 
Grade 6— 1,000 355 41 1,575 2,070 250 — 5,291 
Grade 7— 224 684 7,244 1,358 10,905 — — 20,415 
Total$29,894 $159,720 $203,990 $115,743 $100,880 $353,324 $5,513 $— $969,064 
Current period gross charge-offs$— $— $— $— $— $— $— $— $— 
Agricultural
Grades 1-4$11,930 $280,631 $138,443 $83,733 $25,089 $152,730 $227,727 $— $920,283 
Grade 51,239 13,311 11,668 1,762 879 39,707 20,436 — 89,002 
Grade 650 62 1,244 — 52 2,332 195 — 3,935 
Grade 7695 7,199 7,271 786 1,942 23,812 10,984 — 52,689 
Total$13,914 $301,203 $158,626 $86,281 $27,962 $218,581 $259,342 $— $1,065,909 
Current period gross charge-offs$— $— $— $— $— $— $— $— $— 
CRE investment
Grades 1-4$8,011 $205,798 $228,060 $189,172 $132,082 $326,737 $11,704 $— $1,101,564 
Grade 52,825 563 1,633 3,552 3,312 21,095 — — 32,980 
Grade 6— — — — 1,159 3,778 183 — 5,120 
Grade 7— — 21 523 2,316 3,663 201 — 6,724 
Total$10,836 $206,361 $229,714 $193,247 $138,869 $355,273 $12,088 $— $1,146,388 
Current period gross charge-offs$— $— $— $— $— $— $— $— $— 
Construction & land development
Grades 1-4$6,947 $119,087 $144,313 $11,980 $8,802 $36,033 $5,290 $— $332,452 
Grade 5— 34 — — 12 92 — — 138 
Grade 6— — — — — — — — — 
Grade 7— 32 — — — 748 — — 780 
Total$6,947 $119,153 $144,313 $11,980 $8,814 $36,873 $5,290 $— $333,370 
Current period gross charge-offs$— $— $— $— $— $— $— $— $— 
Residential construction
Grades 1-4$5,036 $114,512 $12,948 $1,045 $121 $549 $— $— $134,211 
Grade 5— — 571 — — — — — 571 
Grade 6— — — — — — — — — 
Grade 7— — — — — — — — — 
Total$5,036 $114,512 $13,519 $1,045 $121 $549 $— $— $134,782 
Current period gross charge-offs$— $— $— $— $— $— $— $— $— 
Residential first mortgage
Grades 1-4$35,309 $309,434 $270,665 $142,741 $66,489 $173,612 $1,426 $3 $999,679 
Grade 5— 1,364 776 987 1,776 2,759 — — 7,662 
Grade 6— — — — 703 — — — 703 
Grade 7— 152 477 178 359 4,956 — — 6,122 
Total$35,309 $310,950 $271,918 $143,906 $69,327 $181,327 $1,426 $3 $1,014,166 
Current period gross charge-offs$— $— $— $— $— $— $— $— $— 
Residential junior mortgage
Grades 1-4$2,784 $9,905 $4,291 $5,055 $3,071 $4,780 $140,169 $6,570 $176,625 
Grade 5— — — — — — — — — 
Grade 6— — — — — — — — — 
Grade 7— 35 205 — — 23 138 — 401 
Total$2,784 $9,940 $4,496 $5,055 $3,071 $4,803 $140,307 $6,570 $177,026 
Current period gross charge-offs$— $— $— $— $— $— $— $— $— 
Retail & other
Grades 1-4$1,646 $10,603 $8,010 $3,659 $2,622 $4,451 $21,885 $— $52,876 
Grade 5— — 21 — — — — — 21 
Grade 6— — — — — — — — — 
Grade 7— — 46 2 1 29 — — 78 
Total$1,646 $10,603 $8,077 $3,661 $2,623 $4,480 $21,885 $— $52,975 
Current period gross charge-offs$— $— $— $— $— $— $(66)$— $(66)
Total loans$154,161 $1,554,581 $1,257,240 $666,231 $420,956 $1,292,008 $871,982 $6,573 $6,223,732 

19

December 31, 2022Amortized Cost Basis by Origination Year
(in thousands)20222021202020192018PriorRevolvingRevolving to TermTOTAL
Commercial & industrial
Grades 1-4$317,394 $226,065 $101,374 $68,884 $50,189 $77,589 $360,978 $— $1,202,473 
Grade 59,938 5,902 10,811 1,530 3,986 4,562 20,617 — 57,346 
Grade 61,459 2,283 629 511 402 11,653 14,047 — 30,984 
Grade 7556 293 3,211 2,990 775 1,070 5,121 — 14,016 
Total$329,347 $234,543 $116,025 $73,915 $55,352 $94,874 $400,763 $— $1,304,819 
Current period gross charge-offs$(38)$(41)$(2)$— $(109)$— $— $— $(190)
Owner-occupied CRE
Grades 1-4$151,391 $190,313 $105,156 $100,606 $91,479 $252,574 $6,734 $— $898,253 
Grade 55,241 3,192 4,287 2,163 4,791 14,632 348 — 34,654 
Grade 6— — 763 2,361 — 877 — — 4,001 
Grade 7227 706 6,344 616 — 9,798 — — 17,691 
Total$156,859 $194,211 $116,550 $105,746 $96,270 $277,881 $7,082 $— $954,599 
Current period gross charge-offs$— $— $— $— $— $(555)$— $— $(555)
Agricultural
Grades 1-4$275,208 $145,272 $85,413 $25,463 $19,687 $130,849 $249,033 $— $930,925 
Grade 513,295 18,178 2,694 1,992 517 43,927 21,199 — 101,802 
Grade 6115 1,457 28 33 — 5,258 429 — 7,320 
Grade 77,165 2,632 720 1,977 4,611 19,948 11,507 — 48,560 
Total$295,783 $167,539 $88,855 $29,465 $24,815 $199,982 $282,168 $— $1,088,607 
Current period gross charge-offs$— $— $— $— $— $— $— $— $— 
CRE investment
Grades 1-4$205,930 $229,252 $192,527 $134,301 $79,649 $248,595 $11,383 $— $1,101,637 
Grade 5567 1,649 3,578 4,266 3,086 24,897 — — 38,043 
Grade 6— — — 1,170 2,396 2,483 206 — 6,255 
Grade 7— — 121 299 245 3,140 209 — 4,014 
Total$206,497 $230,901 $196,226 $140,036 $85,376 $279,115 $11,798 $— $1,149,949 
Current period gross charge-offs$— $— $— $— $— $— $— $— $— 
Construction & land development
Grades 1-4$104,804 $140,727 $12,188 $9,747 $23,811 $13,138 $13,235 $— $317,650 
Grade 537 — — 14 — 95 — — 146 
Grade 6— — — — — — — — — 
Grade 733 — — — — 771 — — 804 
Total$104,874 $140,727 $12,188 $9,761 $23,811 $14,004 $13,235 $— $318,600 
Current period gross charge-offs$— $— $— $— $— $— $— $— $— 
Residential construction
Grades 1-4$92,417 $16,774 $966 $123 $336 $229 $3,547 $— $114,392 
Grade 5— — — — — — — — — 
Grade 6— — — — — — — — — 
Grade 7— — — — — — — — — 
Total$92,417 $16,774 $966 $123 $336 $229 $3,547 $— $114,392 
Current period gross charge-offs$— $— $— $— $— $— $— $— $— 
Residential first mortgage
Grades 1-4$318,628 $272,011 $147,857 $68,975 $31,208 $162,153 $2,080 $3 $1,002,915 
Grade 51,494 758 997 1,803 2,272 465 — — 7,789 
Grade 6— — — 711 — — — — 711 
Grade 7154 329 188 349 197 4,303 — — 5,520 
Total$320,276 $273,098 $149,042 $71,838 $33,677 $166,921 $2,080 $3 $1,016,935 
Current period gross charge-offs$— $— $— $— $— $(65)$— $— $(65)
Residential junior mortgage
Grades 1-4$10,119 $4,580 $5,207 $3,151 $1,573 $3,409 $142,784 $5,762 $176,585 
Grade 5— — — — — 143 165 — 308 
Grade 6— — — — — — — — — 
Grade 7— 206 — — — 24 209 — 439 
Total$10,119 $4,786 $5,207 $3,151 $1,573 $3,576 $143,158 $5,762 $177,332 
Current period gross charge-offs$— $— $— $— $— $— $— $— $— 
Retail & other
Grades 1-4$12,318 $8,957 $4,221 $3,188 $1,035 $24,950 $492 $— $55,161 
Grade 5— 23 — — — — — — 23 
Grade 6— — — — — — — — — 
Grade 7— 23 22 2 30 5 — — 82 
Total$12,318 $9,003 $4,243 $3,190 $1,065 $24,955 $492 $— $55,266 
Current period gross charge-offs$— $(1)$(6)$(1)$— $— $(215)$— $(223)
Total loans$1,528,490 $1,271,582 $689,302 $437,225 $322,275 $1,061,537 $864,323 $5,765 $6,180,499 

20

An internal loan review function rates loans using a grading system based on different risk categories. Loans with a Substandard grade are considered to have a greater risk of loss and may be assigned allocations for loss based on specific review of the weaknesses observed in the individual credits. Such loans are monitored by the loan review function to help ensure early identification of any deterioration. A description of the loan risk categories used by the Company follows.
Grades 1-4, Pass: Credits exhibit adequate cash flows, appropriate management and financial ratios within industry norms and/or are supported by sufficient collateral. Some credits in these rating categories may require a need for monitoring but elements of concern are not severe enough to warrant an elevated rating.
Grade 5, Watch: Credits with this rating are adequately secured and performing but are being monitored due to the presence of various short-term weaknesses which may include unexpected, short-term adverse financial performance, managerial problems, potential impact of a decline in the entire industry or local economy and delinquency issues. Loans to individuals or loans supported by guarantors with marginal net worth or collateral may be included in this rating category.
Grade 6, Special Mention: Credits with this rating have potential weaknesses that, without the Company’s attention and correction may result in deterioration of repayment prospects. These assets are considered Criticized Assets. Potential weaknesses may include adverse financial trends for the borrower or industry, repeated lack of compliance with Company requests, increasing debt to net worth, serious management conditions and decreasing cash flow.
Grade 7, Substandard: Assets with this rating are characterized by the distinct possibility the Company will sustain some loss if deficiencies are not corrected. All foreclosures, liquidations, and nonaccrual loans are considered to be categorized in this rating, regardless of collateral sufficiency.
Modifications to Borrowers Experiencing Financial Difficulty:
On January 1, 2023, the Company adopted ASU 2022-02, which eliminated the accounting guidance for TDRs by creditors and enhanced the disclosure requirements for certain loan modifications to borrowers experiencing financial difficulty. The following table presents the amortized cost of loans that were both experiencing financial difficulty and were modified during the three months ended March 31, 2023, aggregated by portfolio segment and type of modification.
(in thousands)Payment DelayTerm ExtensionInterest Rate ReductionTerm Extension & Interest Rate ReductionTotal% of Total Loans
Commercial & industrial$— $— $— $— $— — %
Owner-occupied CRE— — — — — — %
Agricultural110 — — — 110 0.01 %
CRE investment— — — — — — %
Construction & land development— — — — — — %
Residential first mortgage— — — — — — %
Total$110 $— $— $— $110 — %
The loans presented in the table above have had more than insignificant payment delays (which the Company has defined as payment delays in excess of six months). These modified loans are closely monitored by the Company to understand the effectiveness of its modification efforts, and such loans generally remain in nonaccrual status pending a sustained period of performance in accordance with the modified terms.
As of March 31, 2023, there were no loans made to borrowers experiencing financial difficulty that were modified during the current period and subsequently defaulted, and there were no commitments to lend additional funds to such debtors.
Troubled Debt Restructuring Disclosures Prior to Adoption of ASU 2022-02:
As of December 31, 2022, the Company had restructured loans totaling $18 million, with a pre-modification balance of $24 million, all of which were also reflected as nonaccrual loans. There were no restructured loans modified during 2022 that subsequently defaulted, and there were no commitments to lend additional funds to such debtors.

21


Note 7 – Goodwill and Other Intangibles and Servicing Rights
Management periodically reviews the carrying value of its intangible assets to determine if any impairment has occurred, in which case an impairment charge would be recorded as an expense in the period of impairment, or whether changes in circumstances have occurred that would require a revision to the remaining useful life that would affect expense prospectively. In making such determination, management evaluates whether there are any adverse qualitative factors indicating that an impairment may exist, as well as the performance of the underlying operations or assets which give rise to the intangible. Management also regularly monitors economic factors for potential impairment indications on the value of our franchise, stability of deposits, and the wealth client base, underlying our goodwill and other intangibles. Management concluded no impairment was indicated for the three months ended March 31, 2023 and the year ended December 31, 2022. A summary of goodwill and other intangibles was as follows.
(in thousands)March 31, 2023December 31, 2022
Goodwill$367,387 $367,387 
Core deposit intangibles30,667 32,701 
Customer list intangibles2,223 2,350 
    Other intangibles32,890 35,051 
Goodwill and other intangibles, net$400,277 $402,438 
Goodwill: A summary of goodwill was as follows. During 2022, goodwill increased due to the Charter acquisition.
Three Months EndedYear Ended
(in thousands)March 31, 2023December 31, 2022
Goodwill:
Goodwill at beginning of year$367,387 $317,189 
Acquisitions— 49,970 
Purchase accounting adjustment— 228 
Goodwill at end of period$367,387 $367,387 
Other intangible assets: Other intangible assets, consisting of core deposit intangibles and customer list intangibles, are amortized over their estimated finite lives. A summary of other intangible assets was as follows. During 2022, core deposit intangibles increased due to the Charter acquisition.
Three Months EndedYear Ended
(in thousands)March 31, 2023December 31, 2022
Core deposit intangibles:
Gross carrying amount$60,724 $60,724 
Accumulated amortization(30,057)(28,023)
Net book value$30,667 $32,701 
Additions during the period$— $19,364 
Amortization during the period$2,034 $6,108 
Customer list intangibles:
Gross carrying amount$5,523 $5,523 
Accumulated amortization(3,300)(3,173)
Net book value$2,223 $2,350 
Amortization during the period$127 $508 
22

Mortgage servicing rights (“MSR”): Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income, and assessed for impairment at each reporting date, with the amortization recorded in mortgage income, net, in the consolidated statements of income. Mortgage servicing rights are carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value, and are included in other assets in the consolidated balance sheets. The Company periodically evaluates its mortgage servicing rights asset for impairment. At each reporting date, impairment is assessed based on estimated fair value using estimated prepayment speeds of the underlying mortgage loans serviced and stratification based on the risk characteristics of the underlying loans (predominantly loan type and note interest rate). A summary of the changes in the mortgage servicing rights asset was as follows.
Three Months EndedYear Ended
(in thousands)March 31, 2023December 31, 2022
Mortgage servicing rights asset:
MSR asset at beginning of year$13,080 $13,636 
Capitalized MSR204 2,327 
Amortization during the period(740)(2,883)
MSR asset at end of period$12,544 $13,080 
Valuation allowance at beginning of year$(500)$(1,200)
Reversals500 700 
Valuation allowance at end of period$— $(500)
MSR asset, net$12,544 $12,580 
Fair value of MSR asset at end of period$17,708 $17,215 
Residential mortgage loans serviced for others$1,620,150 $1,637,109 
Net book value of MSR asset to loans serviced for others0.77 %0.77 %
Loan servicing rights (“LSR”): The Company acquired an LSR asset in December 2021 which will be amortized over the estimated remaining loan service period. The Company does not expect to add new loans to this servicing portfolio. A summary of the changes in the LSR asset were as follows.
Three Months EndedYear Ended
(in thousands)March 31, 2023December 31, 2022
Loan servicing rights asset:
LSR asset at beginning of year$11,039 $20,055 
Amortization during the period(552)(9,016)
LSR asset at end of period$10,487 $11,039 
Agricultural loans serviced for others$528,891 $538,392 
The following table shows the estimated future amortization expense for amortizing intangible assets and the servicing assets. The projections are based on existing asset balances, the current interest rate environment and prepayment speeds as of March 31, 2023. The actual amortization expense the Company recognizes in any given period may be significantly different depending upon acquisition or sale activities, changes in interest rates, prepayment speeds, market conditions, regulatory requirements and events or circumstances that indicate the carrying amount of an asset may not be recoverable.
(in thousands)Core deposit
intangibles		Customer list
intangibles		MSR assetLSR asset
Year ending December 31,
2023 (remaining nine months)
$5,555 $356 $1,672 $1,656 
20246,298 449 2,680 1,962 
20255,161 449 1,942 1,717 
20263,983 249 1,434 1,472 
20273,218 166 1,434 1,227 
20282,622 166 1,432 981 
Thereafter3,830 388 1,950 1,472 
Total$30,667 $2,223 $12,544 $10,487 


23

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 March 31, 2023, short-term borrowings included $50 million of short-term FHLB advances due in September 2023 with a weighted average rate of 4.26%. At December 31, 2022, short-term borrowings included $317 million of short-term FHLB advances, comprised of $117 million due in January 2023 at a weighted average rate of 4.29% and $200 million due in September 2023 at a weighted average rate of 4.30%.
Long-Term Borrowings:
Long-term borrowings include any borrowing with an original maturity greater than one year. The components of long-term borrowings were as follows.
(in thousands)March 31, 2023December 31, 2022
FHLB advances$5,000 $33,000 
Junior subordinated debentures39,928 39,720 
Subordinated notes152,520 152,622 
Total long-term borrowings
$197,448 $225,342 
FHLB Advances: The Federal Home Loan Bank (“FHLB”) advances bear fixed rates, require interest-only monthly payments, and have maturity dates through March 2025. The weighted average rate of the FHLB advances was 1.55% at March 31, 2023 and 1.09% at December 31, 2022.
Junior Subordinated Debentures: Each of the junior subordinated debentures was issued to an underlying statutory trust (the “statutory trusts”), which issued trust preferred securities and common securities and used the proceeds from the issuance of the common and the trust preferred securities to purchase the junior subordinated debentures of the Company. The debentures represent the sole asset of the statutory trusts. All of the common securities of the statutory trusts are owned by the Company. The statutory trusts are not included in the consolidated financial statements. The net effect of all the documents entered into with respect to the trust preferred securities is that the Company, through payments on its debentures, is liable for the distributions and other payments required on the trust preferred securities. Interest on all debentures is current. Any applicable discounts (initially recorded to carry an acquired debenture at its then estimated fair value) are being accreted to interest expense over the remaining life of the debenture. All the junior subordinated debentures are currently callable and may be redeemed in part or in full, at par, plus any accrued but unpaid interest. At both March 31, 2023 and December 31, 2022, approximately $38 million of trust preferred securities qualify as Tier 1 capital.

Subordinated Notes (the “Notes”): In July 2021, the Company completed the private placement of $100 million in fixed-to-floating rate subordinated notes due in 2031, with a fixed annual rate of 3.125% for the first five years, and will reset quarterly thereafter to the then current three-month Secured Overnight Financing Rate (“SOFR”) plus 237.5 basis points. The Notes due in 2031 are redeemable beginning July 15, 2026 and quarterly thereafter on any interest payment date.
In December 2021, Nicolet assumed two subordinated note issuances at a premium as the result of an acquisition. One issuance was $30 million in fixed-to-floating rate subordinated notes due in 2028, with a fixed annual interest rate of 5.875% for the first five years, and will reset quarterly thereafter to the then current three-month 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.
24

The following table shows the breakdown of junior subordinated debentures and subordinated notes.
As of March 31, 2023
As of December 31, 2022
(in thousands)Maturity
Date		Interest
 Rate		Par
Unamortized Premium /(Discount) / Debt Issue Costs (1)

Carrying
Value		Interest
 Rate
Carrying
Value
Junior Subordinated Debentures:
Mid-Wisconsin Statutory Trust I (2)
12/15/20356.30 %$10,310 $(2,527)$7,783 6.20 %$7,734 
Baylake Capital Trust II (3)
9/30/20366.51 %16,598 (3,115)13,483 6.08 %13,424 
First Menasha Statutory Trust (4)
3/17/20347.70 %5,155 (476)4,679 7.53 %4,668 
County Bancorp Statutory Trust II (5)
9/15/20356.40 %6,186 (870)5,316 6.30 %5,277 
County Bancorp Statutory Trust III (6)
6/15/20366.56 %6,186 (928)5,258 6.46 %5,219 
Fox River Valley Capital Trust (7)
5/30/20336.40 %3,610 (201)3,409 6.40 %3,398 
Total$48,045 $(8,117)$39,928 $39,720 
Subordinated Notes:
Subordinated Notes due 20317/15/20313.13 %$100,000 $(681)$99,319 3.13 %$99,267 
County Subordinated Notes due 20286/1/20285.88 %30,000 49 30,049 5.88 %30,119 
County Subordinated Notes due 20306/30/20307.00 %22,400 752 23,152 7.00 %23,236 
Total$152,400 $120 $152,520 $152,622 
(1) Represents the remaining unamortized premium or discount on debt issuances assumed in acquisitions, and represents the unamortized debt issue costs for the debt issued directly by Nicolet.
(2) The debentures, assumed in April 2013 as the result of an acquisition, have a floating rate of three-month 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 swap rate plus 3.40%, which resets every five years.

Note 9 – Commitments and Contingencies
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, financial guarantees, and standby letters of credit. Such commitments may involve, to varying degrees, elements of credit risk in excess of amounts recognized on the consolidated balance sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and issuing letters of credit as they do for on-balance sheet financial instruments. See Note 6 for information on the allowance for credit losses-unfunded commitments.
A summary of the contract or notional amount of the Company’s exposure to off-balance sheet risk was as follows.
(in thousands)March 31, 2023December 31, 2022
Commitments to extend credit$1,850,215 $1,850,601 
Financial standby letters of credit23,246 26,530 
Performance standby letters of credit9,952 9,375 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract, and predominantly included commercial lines of credit with a term of one year or less. The commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Financial and performance standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Financial standby letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party, while performance standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party. Both of these guarantees are primarily issued to support public and private
25

borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds collateral, which may include accounts receivable, inventory, property, equipment, and income-producing properties, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third-party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount. If the commitment is funded, the Company would be entitled to seek recovery from the customer.
Interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans held for sale are considered derivative instruments (“mortgage derivatives”) and the contractual amounts were $18 million and $17 million, respectively, at March 31, 2023. In comparison, interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans held for sale totaled $9 million and $9 million, respectively, at December 31, 2022. The net fair value of these mortgage derivatives combined was a net gain of $0.1 million at both March 31, 2023 and December 31, 2022.
Nicolet is party to various pending and threatened claims and legal proceedings arising in the normal course of business activities, some of which may involve claims for substantial amounts. Although Nicolet has developed policies and procedures to minimize legal noncompliance and the impact of claims and other proceedings and endeavored to procure reasonable amounts of insurance coverage, litigation and regulatory actions present an ongoing risk. With respect to all such claims, Nicolet continuously assesses its potential liability based on the allegations and evidence available. If the facts indicate that it is probable that Nicolet will incur a loss and the amount of such loss can be reasonably estimated, Nicolet will establish an accrual for the probable loss. For matters where a loss is not probable, or the amount of the loss cannot be reasonably estimated, Nicolet does not establish an accrual.
Future developments could result in an unfavorable outcome for or resolution of any one or more of the legal proceedings in which Nicolet is a defendant, which may be material to Nicolet’s business or consolidated results of operations or financial condition for a particular fiscal period or periods. Although it is not possible to predict the outcomes of any of these legal proceedings or the range of possible loss, if any, based on the most recent information available, advice of counsel and available insurance coverage, if applicable, management believes that any liability resulting from such proceedings would not have a material adverse effect on our financial position or results of operations.

Note 10 – Fair Value Measurements
Fair value represents the estimated price at which an orderly transaction to sell an asset or transfer a liability would take place between market participants at the measurement date under current market conditions (i.e., an exit price concept), and is a market-based measurement versus an entity-specific measurement. The Company records and/or discloses certain financial instruments on a fair value basis. These financial assets and financial liabilities are measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the assumptions used to determine fair value. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect assumptions of the reporting entity about how market participants would price the asset or liability based on the best information available under the circumstances. The three fair value levels are:
•Level 1 – quoted market prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date
•Level 2 – inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly
•Level 3 – significant unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity
In instances where the fair value measurement is based on inputs from different levels, the level within which the entire fair value measurement will be categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. This assessment of the significance of an input requires management judgment.
26

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
March 31, 2023
U.S. Treasury securities$186,108 $— $186,108 $— 
U.S. government agency securities9,970 — 9,970 — 
State, county and municipals397,448 — 395,579 1,869 
Mortgage-backed securities311,621 — 310,638 983 
Corporate debt securities118,029 — 112,726 5,303 
Securities AFS
$1,023,176 $— $1,015,021 $8,155 
Other investments (equity securities)$3,912 $3,912 $— $— 
December 31, 2022
U.S. Treasury securities$183,830 $— $183,830 $— 
U.S. government agency securities2,100 — 2,100 — 
State, county and municipals398,188 — 396,315 1,873 
Mortgage-backed securities200,932 — 199,951 981 
Corporate debt securities132,568 — 127,269 5,299 
Securities AFS
$917,618 $— $909,465 $8,153 
Other investments (equity securities)$4,376 $4,376 $— $— 
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. Treasury securities, U.S. government agency securities, mortgage-backed securities, obligations of state, county and municipals, and certain corporate debt securities. Finally, in certain cases where there is limited activity or less transparency around inputs to the estimated fair value, investments are classified within Level 3 of the hierarchy. Examples of these include private corporate debt securities, which are primarily trust preferred security investments, as well as certain municipal bonds and mortgage-backed securities. At March 31, 2023 and December 31, 2022, it was determined that carrying value was the best approximation of fair value for these Level 3 securities, based primarily on the internal analysis on these securities.
The following table presents the changes in Level 3 securities AFS measured at fair value on a recurring basis.
Three Months EndedYear Ended
Level 3 Fair Value Measurements:March 31, 2023December 31, 2022
Balance at beginning of year$8,153 $8,065 
Acquired balance— 750 
Maturities / Paydowns— (451)
Unrealized gain / (loss)2 (211)
Balance at end of period$8,155 $8,153 
27

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
March 31, 2023
Collateral dependent loans$31,220 $— $— $31,220 
Other real estate owned (“OREO”)1,975 — — 1,975 
MSR asset12,544 — — 12,544 
December 31, 2022
Collateral dependent loans$30,951 $— $— $30,951 
OREO1,975 — — 1,975 
MSR asset12,580 — — 12,580 
The following is a description of the valuation methodologies used by the Company for the items noted in the table above. For collateral dependent loans, the estimated fair value is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, the estimated fair value of the underlying collateral with consideration for estimated selling costs if satisfaction of the loan depends on the sale of the collateral, or the estimated liquidity of the note. For OREO, the fair value is based upon the estimated fair value of the underlying collateral adjusted for the expected costs to sell. To estimate the fair value of the MSR asset, the underlying serviced loan pools are stratified by interest rate tranche and term of the loan, and a valuation model is used to calculate the present value of the expected future cash flows for each stratum. The servicing valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as costs to service, a discount rate, ancillary income, default rates and losses, and prepayment speeds. Although some of these assumptions are based on observable market data, other assumptions are based on unobservable estimates of what market participants would use to measure fair value.
Financial instruments:
The carrying amounts and estimated fair values of the Company’s financial instruments are shown below.
March 31, 2023
(in thousands)Carrying
Amount		Estimated
Fair Value		Level 1Level 2Level 3
Financial assets:
Cash and cash equivalents$114,180 $114,180 $114,180 $— $— 
Certificates of deposit in other banks11,293 11,181 — 11,181 — 
Securities AFS1,023,176 1,023,176 — 1,015,021 8,155 
Other investments, including equity securities57,482 57,482 3,912 42,982 10,588 
Loans held for sale4,962 5,057 — 5,057 — 
Loans, net6,161,320 5,962,242 — — 5,962,242 
MSR asset12,544 17,708 — — 17,708 
Accrued interest receivable21,796 21,796 21,796 — — 
Financial liabilities:
Deposits$6,928,579 $6,918,140 $— $— $6,918,140 
Short-term borrowings50,000 50,000 — 50,000 — 
Long-term borrowings197,448 188,203 — 4,855 183,348 
Accrued interest payable4,219 4,219 4,219 — — 
28

December 31, 2022
(in thousands)Carrying
Amount		Estimated
Fair Value		Level 1Level 2Level 3
Financial assets:
Cash and cash equivalents$154,723 $154,723 $154,723 $— $— 
Certificates of deposit in other banks12,518 12,407 — 12,407 — 
Securities AFS917,618 917,618 — 909,465 8,153 
Securities HTM679,128 623,352 — 623,352 — 
Other investments, including equity securities65,286 65,286 4,376 52,093 8,817 
Loans held for sale1,482 1,529 — 1,529 — 
Loans, net6,118,670 5,863,570 — — 5,863,570 
MSR asset12,580 17,215 — — 17,215 
Accrued interest receivable21,275 21,275 21,275 — — 
Financial liabilities:
Deposits$7,178,921 $7,172,779 $— $— $7,172,779 
Short-term borrowings317,000 317,000 317,000 — — 
Long-term borrowings225,342 220,513 — 33,001 187,512 
Accrued interest payable4,265 4,265 4,265 — — 
The valuation methodologies for the financial instruments disclosed in the above table are described in Note 18, Fair Value Measurements, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nicolet Bankshares, Inc. (the “Company” or “Nicolet”) is a bank holding company headquartered in Green Bay, Wisconsin. Nicolet provides a diversified range of traditional banking and wealth management services to individuals and businesses in its market area and through the branch offices of its banking subsidiary, Nicolet National Bank (the “Bank”), in Wisconsin, Michigan, and Minnesota. In this Quarterly Report on Form 10-Q, unless the context indicates otherwise, all references to “we,” “us” and “our” refer to the Company.
Forward-Looking Statements
Statements made in this document and in any documents that are incorporated by reference which are not purely historical are forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, including any statements regarding descriptions of management’s plans, objectives, or goals for future operations, products or services, and forecasts of its revenues, earnings, or other measures of performance. Forward-looking statements are based on current management expectations and, by their nature, are subject to risks and uncertainties. These statements are neither statements of historical fact nor assurance of future performance and generally may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “should,” “will,” “intend,” or similar expressions. Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of various transactions or events, and statements about our future performance, operations, products and services, and should be viewed with caution. Shareholders should note that many factors, some of which are discussed elsewhere in this document, could affect the future financial results of Nicolet and could cause those results to differ materially from those implied or anticipated by the statements. Except as required by law, we expressly disclaim any obligations to publicly update any forward-looking statements whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise. Important factors, many of which are beyond Nicolet’s control, that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements, in addition to those described in detail under Item 1A, “Risk Factors” of Nicolet’s 2022 Annual Report on Form 10-K include, but are not necessarily limited to the following:
•operating, legal and regulatory risks, including the effects of legislative or regulatory developments affecting the financial industry generally or Nicolet specifically;
•our ability to maintain liquidity, primarily through deposits, in light of recent events in the banking industry;
•economic, market, political and competitive forces affecting Nicolet’s banking and wealth management businesses;
•changes in interest rates, monetary policy and general economic conditions, which may impact Nicolet’s net interest income;
•potential difficulties in identifying and integrating the operations of future acquisition targets with those of Nicolet;
•the impact of purchase accounting with respect to our merger activities, or any change in the assumptions used regarding the assets purchased and liabilities assumed to determine their fair value;
•cybersecurity risks and the vulnerability of our network and online banking portals, and the systems or parties with whom we contract, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches that could adversely affect our business and financial performance or reputation;
•changes in accounting standards, rules and interpretations and the related impact on Nicolet’s financial statements;
•compliance or operational risks related to new products, services, ventures, or lines of business, if any, that Nicolet may pursue or implement;
•changes in monetary and tax policies;
•changes occurring in business conditions and inflation and the possibility of a recession;
•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 2022 Annual Report on Form 10-K and in subsequent filings we make with the SEC; and
•the risk that Nicolet’s analysis of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.
These factors should be considered in evaluating the forward-looking statements, and you should not place undue reliance on such statements.
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Overview
The following discussion is management’s analysis of the consolidated financial condition as of March 31, 2023 and December 31, 2022 and results of operations for the three-month periods ended March 31, 2023 and 2022. It should be read in conjunction with Nicolet’s audited consolidated financial statements included in Nicolet’s 2022 Annual Report on Form 10-K.

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

Economic Outlook and Recent Industry Developments
The current economic outlook is highly uncertain. A strong labor market is contributing to continuing positive economic activity and demand for goods and services; however, certain sectors are beginning to show signs of weakening. Real estate and manufacturing are slowing. Unemployment rates have not increased despite the significant increase in interest rates by the Federal Reserve to combat inflation (from a target range of 0.00%-0.25% in early March 2022 to 4.75%-5.00% at the end of March 2023). Many economists are anticipating a mild recession over the next year, but the long-term outlook is still positive as entrepreneurial activity remains strong.

During first quarter 2023, the banking industry experienced significant volatility with high-profile bank failures and industry wide concerns related to liquidity, deposit outflows, unrealized securities losses, and eroding consumer confidence in the banking system. Despite these negative industry developments, Nicolet strengthened its balance sheet and maintained a solid liquidity position. During first quarter 2023, the Company sold $500 million in held to maturity securities and used the net proceeds to reduce wholesale funding, which repositioned the balance sheet for future growth. This reduction in wholesale funding also enhanced the Company’s already strong liquidity position.


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Table 1: Earnings Summary and Selected Financial Data
At or for the Three Months Ended
(In thousands, except per share data)3/31/202312/31/20229/30/20226/30/20223/31/2022
Results of operations:
Net interest income$56,721 $68,092 $62,990 $55,084 $53,795 
Provision for credit losses3,090 1,850 8,600 750 300 
Noninterest income(21,844)14,846 13,000 14,131 15,943 
Noninterest expense44,875 43,989 42,567 36,538 37,550 
Income (loss) before income tax expense(13,088)37,099 24,823 31,927 31,888 
Income tax expense (benefit)(4,190)9,498 6,313 7,942 7,724 
Net income (loss)$(8,898)$27,601 $18,510 $23,985 $24,164 
Earnings (loss) per common share:     
Basic$(0.61)$1.88 $1.33 $1.79 $1.77 
Diluted$(0.61)$1.83 $1.29 $1.73 $1.70 
Common Shares:     
Basic weighted average14,694 14,685 13,890 13,402 13,649 
Diluted weighted average14,694 15,110 14,310 13,852 14,215 
Outstanding (period end)14,698 14,691 14,673 13,407 13,457 
Period-End Balances:     
Loans$6,223,732 $6,180,499 $5,984,437 $4,978,654 $4,683,315 
Allowance for credit losses - loans62,412 61,829 60,348 50,655 49,906 
Total assets8,192,354 8,763,969 8,895,916 7,370,252 7,320,212 
Deposits6,928,579 7,178,921 7,395,902 6,286,266 6,231,120 
Stockholders’ equity (common)961,792 972,529 938,463 839,387 836,310 
Book value per common share65.44 66.20 63.96 62.61 62.15 
Tangible book value per common share (2)
38.20 38.81 36.21 37.49 37.03 
Financial Ratios: (1)
     
Return on average assets(0.42)%1.26 %0.93 %1.32 %1.30 %
Return on average common equity(3.72)11.47 8.25 11.48 11.38 
Return on average tangible common equity (2)
(6.34)19.85 13.93 19.21 18.75 
Stockholders’ equity to assets11.74 11.10 10.55 11.39 11.42 
Tangible common equity to tangible assets (2)
7.21 6.82 6.26 7.15 7.14 
Reconciliation of Non-GAAP Financial Measures:
Adjusted net income (loss) reconciliation: (3)
Net income (loss) (GAAP)$(8,898)$27,601 $18,510 $23,985 $24,164 
Adjustments:
Provision expense (4)
2,340 — 8,000 — — 
Assets (gains) losses, net38,468 (260)46 (1,603)(1,313)
Merger-related expense163 492 519 555 98 
Adjustments subtotal40,971 232 8,565 (1,048)(1,215)
Tax on Adjustments (25% effective tax rate)10,243 58 2,141 (262)(304)
Adjustments, net of tax30,728 174 6,424 (786)(911)
Core banking operations / Adjusted net income (Non-GAAP)$21,830 $27,775 $24,934 $23,199 $23,253 
Adjusted diluted earnings per common share (Non-GAAP)$1.45 $1.84 $1.74 $1.67 $1.64 
Tangible assets: (2)
Total assets$8,192,354 $8,763,969 $8,895,916 $7,370,252 $7,320,212 
Goodwill and other intangibles, net400,277 402,438 407,117 336,721 338,068 
Tangible assets$7,792,077 $8,361,531 $8,488,799 $7,033,531 $6,982,144 
Tangible common equity: (2)
Stockholders’ equity (common)$961,792 $972,529 $938,463 $839,387 $836,310 
Goodwill and other intangibles, net400,277 402,438 407,117 336,721 338,068 
Tangible common equity$561,515 $570,091 $531,346 $502,666 $498,242 
Tangible average common equity: (2)
Average stockholders’ equity (common)$970,108 $954,970 $890,205 $837,975 $861,319 
Average goodwill and other intangibles, net401,212 403,243 363,211 337,289 338,694 
Average tangible common equity$568,896 $551,727 $526,994 $500,686 $522,625 
(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 our financial condition and capital strength. See section “Non-GAAP Financial Measures” below.
(3) The adjusted net income / core banking operations measure is a non-GAAP financial measure that provides information that management believes is useful to investors in understanding our operating performance and trends and also aids investors in the comparison of our financial performance to the financial performance of peer banks. See section “Non-GAAP Financial Measures” below.
(4) Provision expense for 2023 is attributable to the expected loss on our investment in Signature Bank sub debt, and the provision expense for 2022 is attributable to the Day 2 allowance from the acquisition of Charter.
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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 / core banking operations,” 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
Nicolet recognized a net loss of $9 million (or loss per diluted common share of $0.61) for first quarter 2023, compared to net income of $28 million (or earnings per diluted common share of $1.83) for fourth quarter 2022, and net income of $24 million (or earnings per diluted common share of $1.70) for first quarter 2022.
Core banking operations (or adjusted net income (Non-GAAP)) earned $22 million on growth in loans and wealth management fee revenue. Asset quality continued to be very good as nonperforming assets were 0.50% of total assets. Net income reflected non-core items and the related tax effect of each, including U.S. Treasury securities sale loss, expected loss (provision expense) on the Signature Bank sub debt investment (acquired in an acquisition), merger-related expenses, Day 2 credit provision expense required under the CECL model, as well as gains / (losses) on other assets and investments. These non-core items negatively impacted earnings per diluted common share $2.06 for first quarter 2023 and $0.01 for fourth quarter 2022, and positively impacted earnings per diluted common share $0.06 for first quarter 2022.
On March 7, 2023, Nicolet executed the sale of $500 million (par value) U.S. Treasury held to maturity securities for a pre-tax loss of $38 million or an after-tax loss of $28 million to reposition the balance sheet for future growth. The $500 million portfolio yielded approximately 88 bps with scheduled maturities in 2024 and 2025 (or average duration of 2 years). Proceeds from the sale were used to reduce existing FHLB borrowings with the remainder held in investable cash. The following table summarizes the estimated annual impact of this balance sheet repositioning.
Sale Metrics$ in MillionsAssumptions
Loss on sale of U.S.Treasury securities$(37,723)Sale of $500 million U.S. Treasury securities yielding 88 bps
Lost interest from U.S. Treasury securities$(4,380)Assumes $500 million at 88 bps
Lower interest expense on FHLB borrowings17,128 Assumes $377 million at 456 bps (at time of sale)
Interest income from investable cash3,905 Assumes $83 million at 465 bps (at time of sale)
Projected net impact from repositioning$16,653 
Estimated earn back (in years)2.26
As a result of the sale of securities previously classified as held to maturity, the remaining unsold portfolio of held to maturity securities, with a book value of $177 million, was reclassified to available for sale with a carrying value of approximately $157 million. The unrealized loss on this portfolio of $20 million increased the balance of accumulated other comprehensive loss (AOCI) $15 million, net of the deferred tax effect, and is subject to future market changes.
•At March 31, 2023, assets were $8.2 billion, a decrease of $572 million (7%) from December 31, 2022, mostly in investment securities due to the balance sheet repositioning. Compared to March 31, 2022, assets increased $872 million (12%) due to the acquisition of Charter as well as strong organic loan growth.
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•At March 31, 2023, loans were $6.2 billion, an increase of $43 million (3% annualized) from December 31, 2022. Compared to March 31, 2022, loans increased $1.5 billion (33%), largely due to the Charter acquisition and strong organic loan growth. For additional information regarding loans, see “BALANCE SHEET ANALYSIS — Loans.”
•Total deposits were $6.9 billion at March 31, 2023, down $250 million from December 31, 2022, mostly in noninterest-bearing demand deposits. Compared to March 31, 2022, deposits increased $697 million (11%), largely due to the Charter acquisition. For additional information regarding deposits, see “BALANCE SHEET ANALYSIS – Deposits.”
•The net interest margin was 2.91% for first quarter 2023, 32 bps lower than the comparable 2022 period. The favorable increase in the earning asset yield of 101 bps, was more than offset by a 195 bps increase in the cost of funds, and the net free funds improved 62 bps. Net interest income increased $2.9 million (5%) over first quarter 2022, including a $29.5 million increase in interest income offset by a $26.5 million increase in interest expense. For additional information regarding net interest income, see “INCOME STATEMENT ANALYSIS — Net Interest Income.”
•Noninterest income was a negative $21.8 million for first quarter 2023, a $37.8 million unfavorable change compared to first quarter 2022. Excluding net asset gains (losses), noninterest income for first quarter 2023 was $16.6 million, a $2.0 million increase over first quarter 2022. For additional information regarding noninterest income, see “INCOME STATEMENT ANALYSIS — Noninterest Income.”
•Noninterest expense was $44.9 million for first quarter 2023, an increase of $7.3 million (20%) over first quarter 2022. Personnel costs increased $3.1 million (15%), while non-personnel expenses combined increased $4.2 million (26%) compared to first quarter 2022. For additional information regarding noninterest expense, see “INCOME STATEMENT ANALYSIS — Noninterest Expense.”

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

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Table 2: Average Balance Sheet and Net Interest Income Analysis - Tax-Equivalent Basis
For the Three Months Ended March 31,
2023
2022
(in thousands)Average
Balance		InterestAverage
Yield/Rate		Average
Balance		InterestAverage
Yield/Rate
ASSETS
Interest-earning assets
Commercial-based loans$5,145,341 $65,512 5.09 %$3,920,744 $43,197 4.41 %
Retail-based loans1,056,439 13,674 5.18 %768,040 8,137 4.24 %
    Total loans, including loan fees (1)(2)
6,201,780 79,186 5.11 %4,688,784 51,334 4.38 %
Investment securities:
Taxable
1,224,395 4,961 1.63 %1,386,593 5,127 1.48 %
Tax-exempt (2)
284,140 2,285 3.22 %189,031 1,031 2.18 %
        Total investment securities1,508,535 7,246 1.93 %1,575,624 6,158 1.57 %
Other interest-earning assets120,275 1,536 5.11 %446,783 817 0.73 %
Total non-loan earning assets
1,628,810 8,782 2.16 %2,022,407 6,975 1.38 %
Total interest-earning assets
7,830,590 $87,968 4.49 %6,711,191 $58,309 3.48 %
Other assets, net740,033 808,445 
Total assets
$8,570,623 $7,519,636 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings$888,979 $2,365 1.08 %$821,452 $105 0.05 %
Interest-bearing demand985,778 3,339 1.37 %1,052,076 701 0.27 %
Money market accounts (“MMA”)1,847,701 11,190 2.46 %1,540,506 323 0.09 %
Core time deposits602,882 2,693 1.81 %595,864 508 0.35 %
Total interest-bearing core deposits4,325,340 19,587 1.84 %4,009,898 1,637 0.17 %
Brokered deposits566,282 5,350 3.83 %459,460 555 0.49 %
Total interest-bearing deposits
4,891,622 24,937 2.07 %4,469,358 2,192 0.20 %
Other interest-bearing liabilities499,485 5,718 4.58 %214,557 1,931 3.60 %
Total interest-bearing liabilities
5,391,107 30,655 2.30 %4,683,915 4,123 0.35 %
Noninterest-bearing demand2,168,640 1,923,186 
Other liabilities40,768 51,216 
Stockholders’ equity970,108 861,319 
Total liabilities and stockholders’ equity$8,570,623 $7,519,636 
Net interest income and rate spread$57,313 2.19 %$54,186 3.13 %
Tax-equivalent adjustment & net free funds592 0.72 %391 0.10 %
Net interest income and net interest margin$56,721 2.91 %$53,795 3.23 %
(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 March 31, 2023
Compared to March 31, 2022:
Increase (Decrease) Due to Changes in
(in thousands)VolumeRate
Net (1)
Interest-earning assets
Commercial-based loans$14,894 $7,421 $22,315 
Retail-based loans3,481 2,056 5,537 
    Total loans, including loan fees (2) (3)
18,375 9,477 27,852 
Investment securities:
Taxable(1,243)1,077 (166)
Tax-exempt (3)
646 608 1,254 
    Total investment securities(597)1,685 1,088 
Other interest-earning assets(100)819 719 
 Total non-loan earning assets
(697)2,504 1,807 
Total interest-earning assets
$17,678 $11,981 $29,659 
Interest-bearing liabilities
Savings$9 $2,251 $2,260 
Interest-bearing demand(41)2,679 2,638 
MMA78 10,789 10,867 
Core time deposits6 2,179 2,185 
    Total interest-bearing core deposits52 17,898 17,950 
Brokered deposits158 4,637 4,795 
Total interest-bearing deposits
210 22,535 22,745 
Other interest-bearing liabilities3,143 644 3,787 
Total interest-bearing liabilities
3,353 23,179 26,532 
Net interest income$14,325 $(11,198)$3,127 
(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.

The Federal Reserve raised short-term interest rates a total of 425 bps during 2022, increasing the Federal Funds rate to a range of 4.25% to 4.50% as of December 31, 2022. Additional increases totaling 50 bps were made in first quarter 2023, resulting in a Federal Funds range of 4.75% to 5.00% as of March 31, 2023.
Tax-equivalent net interest income was $57 million for first quarter 2023, an increase of $3 million (6%) over first quarter 2022). The $3 million increase in tax-equivalent net interest income was attributable to net favorable volumes (which added $14 million to net interest income, mostly from the Charter acquisition and solid loan growth) and net unfavorable rates (which decreased net interest income $11 million from higher deposit costs and the lag in repricing the loan portfolio to current market interest rates).
Average interest-earning assets increased to $7.8 billion, up $1.1 billion (17%) over the comparable 2022 period, primarily due to the timing of the acquisition of Charter. Between the comparable three-month periods, average loans increased $1.5 billion (32%), mostly due to timing of the Charter acquisition (which added loans of $827 million at acquisition) and strong organic loan growth throughout 2022. Average investment securities decreased $67 million between the comparable three-month periods, while other interest-earning assets declined $327 million, mostly due to lower cash. As a result, the mix of average interest-earning assets shifted to 79% loans, 19% investments and 2% other interest-earning assets (mostly cash) for first quarter 2023, compared to 70%, 23% and 7%, respectively, for first quarter 2022.
Average interest-bearing liabilities were $5.4 billion for first quarter 2023, an increase of $707 million (15%) over first quarter 2022, primarily due to the timing of the acquisition of Charter. Average interest-bearing core deposits increased $315 million and average brokered deposits increased $107 million between the comparable three-month periods, reflecting the impact of the Charter acquisition and brokered funding to support the strong loan growth. Other interest-bearing liabilities increased $285 million between the comparable first quarter periods, partly due to wholesale funding acquired with Charter and partly due to FHLB borrowings to support the strong loan growth. The mix of average interest-bearing liabilities was 80% core deposits, 11% brokered deposits and 9% wholesale funding for the first quarter 2023, compared to 86%, 10%, and 4%, respectively, for the first quarter 2022.
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The interest rate spread decreased 94 bps between the comparable first quarter periods, as our liabilities have repriced faster than our assets in the rapidly rising interest rate environment. The interest-earning asset yield increased 101 bps to 4.49% for the first three months of 2023, primarily due to the changing mix of interest-earning assets (mostly the reduction in cash noted above). The loan yield improved 73 bps to 5.11% between the comparable three-month periods, largely due to the repricing of new and renewed loans in a rising interest rate environment, while the yield on investment securities increased 36 bps to 1.93%. The cost of funds increased 195 bps to 2.30% for first quarter 2023, also reflecting the rising interest rate environment, a migration of customer deposits into higher rate deposit products, and a shift in the mix of interest-bearing liabilities (mostly the increase in wholesale funding noted above). The contribution from net free funds increased 62 bps, mostly due to the higher value in the rising interest rate environment. As a result, the tax-equivalent net interest margin was 2.91% for first quarter 2023, down 32 bps compared to 3.23% for first quarter 2022.
Tax-equivalent interest income was $88 million for first quarter 2023, up $30 million from first quarter 2022, comprised of $18 million higher volumes and $12 million higher average rates. Interest income on loans increased $28 million over first quarter 2022, mostly due to higher average balances from the Charter acquisition and strong organic loan growth. Interest expense increased to $31 million for first quarter 2023, up $27 million compared to first quarter 2022, comprised of $23 million higher overall cost of funds and $3 million higher volumes. Interest expense on deposits increased $23 million from first quarter 2022 mostly due to a much higher interest rate environment. Interest expense on wholesale funding increased between the comparable three-month periods, mostly due to higher average balances.
Provision for Credit Losses
The provision for credit losses was $3.1 million for the three months ended March 31, 2023 (comprised of $0.8 million related to the ACL-Loans and $2.3 million for the ACL on securities AFS), compared to $0.3 million for the three months ended March 31, 2022 (all related to the ACL-Loans). The provision for credit losses on loans was attributable to growth and changes in the underlying loan portfolio, while the provision for credit losses on securities AFS was due to the expected loss on our Signature Bank sub debt investment which was fully charged-off during first quarter 2023.
The provision for credit losses is predominantly a function of Nicolet’s methodology and judgment as to qualitative and quantitative factors used to determine the appropriateness of the ACL. The appropriateness of the ACL-Loans is affected by changes in the size and character of the loan portfolio, changes in levels of collateral dependent and other nonperforming loans, historical losses and delinquencies in each portfolio segment, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing and future economic conditions, the fair value of underlying collateral, and other factors which could affect expected credit losses. The ACL for securities is affected by risk of the underlying issuer, while the ACL for unfunded commitments is affected by many of the same factors as the ACL-Loans, as well as funding assumptions relative to lines of credit. See also Note 6, “Loans, Allowance for Credit Losses - Loans, and Credit Quality” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures. For additional information regarding asset quality and the ACL-Loans, see “BALANCE SHEET ANALYSIS — Loans,” “— Allowance for Credit Losses - Loans,” and “— Nonperforming Assets.”

Noninterest Income
Table 4: Noninterest Income
Three Months Ended March 31,
(in thousands)20232022$ Change% Change
Trust services fee income$2,033 $2,011 $22 1 %
Brokerage fee income3,479 3,688 (209)(6)
Wealth management fee income5,512 5,699 (187)(3)
Mortgage income, net1,466 3,253 (1,787)(55)
Service charges on deposit accounts1,480 1,477 3 — 
Card interchange income3,033 2,581 452 18 
BOLI income1,200 933 267 29 
Deferred compensation plan asset market valuations946 (467)1,413 (303)
LSR income, net1,155 (382)1,537 N/M
Other income1,832 1,536 296 19 
Subtotal16,624 14,630 1,994 14 
Asset gains (losses), net(38,468)1,313 (39,781)N/M
Total noninterest income
$(21,844)$15,943 $(37,787)(237)%
N/M means not meaningful.
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Noninterest income was a negative $21.8 million for the first three months of 2023, an unfavorable change of $37.8 million compared to the first three months of 2022, primarily due to the balance sheet repositioning. Excluding net asset gains (losses), noninterest income for first quarter 2023 was $16.6 million, a $2.0 million (14%) increase over first quarter 2022.
Wealth management fee income was $5.5 million, down $0.2 million (3%) from the first three months of 2022, as unfavorable market-related declines outpaced 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 (“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 $1.5 million, decreased $1.8 million (55%) between the comparable first quarter periods, mostly due to the rising interest rate environment reducing secondary market volumes and the related gains on sales. 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.
Card interchange income grew $0.5 million (18%) between the comparable three-month periods due to higher volume and activity.
BOLI income was up $0.3 million between the comparable three-month periods, attributable to higher average balances from BOLI acquired with the Charter acquisition.
Loan servicing rights (“LSR”) income increased $1.5 million between the comparable first quarter periods mostly due to lower LSR amortization from the much slower prepayments speeds in the higher interest rate environment. See also Note 7, “Goodwill and Other Intangibles and Servicing Rights” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional information on the LSR asset.
Other income of $1.8 million for the three months ended March 31, 2023 was up $0.3 million from the comparable 2022 period, largely due to broker fees.
Net asset losses of $38.5 million for the first three months of 2023 were primarily attributable to losses on the sale of approximately $500 million (par value) U.S. Treasury held to maturity securities executed in early March as part of a balance sheet repositioning, while net asset gains of $1.3 million for the first three months of 2022 were primarily attributable to gains on sales of other real estate owned (mostly closed bank branch locations).

Noninterest Expense
Table 5: Noninterest Expense
Three Months Ended March 31,
($ in thousands)20232022Change% Change
Personnel$24,328 $21,191 $3,137 15 %
Occupancy, equipment and office8,783 6,944 1,839 26 
Business development and marketing2,121 1,831 290 16 
Data processing3,988 3,387 601 18 
Intangibles amortization2,161 1,424 737 52 
FDIC assessments540 480 60 13 
Merger-related expense163 98 65 66 
Other expense2,791 2,195 596 27 
Total noninterest expense
$44,875 $37,550 $7,325 20 %
Non-personnel expenses$20,547 $16,359 $4,188 26 %
Average full-time equivalent (“FTE”) employees943 833 110 13 %

Noninterest expense was $44.9 million, an increase of $7.3 million (20%) over the first three months of 2022. Personnel costs increased $3.1 million (15%), while non-personnel expenses combined increased $4.2 million (26%) compared to the first three months of 2022.
Personnel expense was $24.3 million for the three months ended March 31, 2023, an increase of $3.1 million from the comparable period in 2022. Salary expense increased $3.0 million (17%) over the first three months of 2022, reflecting higher salaries from the larger employee base (with average full-time equivalent employees up 13%, mostly due to the Charter acquisition), investments in our wealth team, and merit increases between the years, partly offset by lower incentive
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compensation given the current period net loss. Fringe benefits increased $0.1 million (3%) over the first three months of 2022, commensurate with the larger employee base. Salary expense was also impacted by the change in the fair value of nonqualified deferred compensation plan liabilities from the recent market declines. See also “Noninterest Income” for the offsetting fair value change to the nonqualified deferred compensation plan assets.
Occupancy, equipment and office expense was $8.8 million for the first three months of 2023, up $1.8 million (26%) compared to the first three months of 2022, largely due to the expanded branch network with the Charter acquisition, as well as additional expense for software and technology solutions.
Business development and marketing expense was $2.1 million, up $0.3 million (16%) between the comparable first quarter periods, largely attributable to the timing and extent of marketing donations, promotions, and media to support our expanded branch network and community base.
Data processing expense was $4.0 million, up $0.6 million (18%) between the comparable three-month periods, mostly due to volume-based increases in core and card processing charges, partly from the Charter acquisition.
Intangibles amortization increased $0.7 million between the comparable first quarter periods due to higher amortization from the intangibles added with the recent acquisitions.
Other expense was $2.8 million, up $0.6 million (27%) between the comparable three-month periods, mostly due to higher professional fees.

Income Taxes
Income tax was a benefit of $4.2 million (effective tax rate of 32.0%) for the first three months of 2023, compared to expense of $7.7 million (effective tax rate of 24.2%) for the comparable period of 2022. The change in the effective tax rate was largely due to the increase in tax benefits with a pre-tax loss.

BALANCE SHEET ANALYSIS
At March 31, 2023, period end assets were $8.2 billion, a decrease of $572 million (7%) from December 31, 2022, mostly due to the sale of investment securities as part of our balance sheet repositioning. Total loans increased $43 million from December 31, 2022. Total deposits of $6.9 billion at March 31, 2023, decreased $250 million from December 31, 2022, while total borrowings decreased $295 million from December 31, 2022 in FHLB advances. Total stockholders’ equity was $962 million at March 31, 2023, a decrease of $11 million since December 31, 2022, also mostly from the balance sheet repositioning.
Compared to March 31, 2022, assets increased $872 million (12%), largely due to the acquisition of Charter and strong loan growth, partly offset by lower investment securities related to the balance sheet repositioning. Total loans increased $1.5 billion and total deposits increased $697 million from March 31, 2022, also largely due to the acquisition of Charter. Stockholders’ equity increased $125 million from March 31, 2022, primarily due to common stock issued in the Charter acquisition and net income, partially offset by negative net fair value investment changes.

Loans
Nicolet services a diverse customer base throughout Wisconsin, Michigan and Minnesota. We concentrate on originating loans in our local markets and assisting current loan customers. Nicolet actively utilizes government loan programs such as those provided by the U.S. Small Business Administration (“SBA”) and the U.S. Department of Agriculture’s Farm Service Agency (“FSA”).
An active credit risk management process is used to ensure that sound and consistent credit decisions are made. The credit management process is regularly reviewed and has been modified over the past several years to further strengthen the controls. Factors that are important to managing overall credit quality are sound loan underwriting and administration, systematic monitoring of existing loans and commitments, effective loan review on an ongoing basis, early problem loan identification and remedial action to minimize losses, an appropriate ACL-Loans, and sound nonaccrual and charge-off policies.
For additional disclosures on loans, see also Note 6, “Loans, Allowance for Credit Losses - Loans, and Credit Quality,” in the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1. For information regarding the allowance for credit losses and nonperforming assets see “BALANCE SHEET ANALYSIS – Allowance for Credit Losses - Loans” and “BALANCE SHEET ANALYSIS – Nonperforming Assets.” A detailed discussion of the loan portfolio accounting policies, general loan portfolio characteristics, and credit risk are described in Note 1, “Nature of Business and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements, included in Part II, Item 8 of the Company’s 2022 Annual Report on Form 10-K.
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Table 6: Period End Loan Composition
March 31, 2023December 31, 2022March 31, 2022
(in thousands)Amount% of TotalAmount% of TotalAmount% of Total
Commercial & industrial$1,330,052 21 %$1,304,819 21 %$1,063,300 23 %
Owner-occupied CRE969,064 16 954,599 15 794,946 17 
Agricultural1,065,909 17 1,088,607 18 826,364 18 
Commercial
3,365,025 54 3,348,025 54 2,684,610 58 
CRE investment1,146,388 19 1,149,949 19 807,602 17 
Construction & land development333,370 5 318,600 5 211,640 4 
Commercial real estate
1,479,758 24 1,468,549 24 1,019,242 21 
Commercial-based loans
4,844,783 78 4,816,574 78 3,703,852 79 
Residential construction134,782 2 114,392 2 72,660 2 
Residential first mortgage1,014,166 16 1,016,935 16 721,107 15 
Residential junior mortgage177,026 3 177,332 3 133,817 3 
Residential real estate
1,325,974 21 1,308,659 21 927,584 20 
Retail & other52,975 1 55,266 1 51,879 1 
Retail-based loans
1,378,949 22 1,363,925 22 979,463 21 
Total loans$6,223,732 100 %$6,180,499 100 %$4,683,315 100 %
As noted in Table 6 above, the loan portfolio at March 31, 2023, 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.
Total loans of $6.2 billion at March 31, 2023, increased $43 million (3% annualized) from December 31, 2022. At March 31, 2023, commercial and industrial loans represented the largest segment of Nicolet’s loan portfolio at 21% of the total portfolio, followed by CRE investment at 19% of the total portfolio. The loan portfolio is widely diversified and included the following industries: manufacturing, wholesaling, paper, packaging, food production and processing, agriculture, forest products, hospitality, retail, service, and businesses supporting the general building industry. The following chart provides the industry distribution of our commercial loan portfolio at March 31, 2023.
Commercial Loan Portfolio by Industry Type (based on NAICS codes)
Commercial Loan Portfolio by Industry_03.31.2023.jpg
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The following table presents the maturity distribution of the loan portfolio.
Table 7: Loan Maturity Distribution
As of March 31, 2023
Loan Maturity
(in thousands)One Year
or Less		After One Year
to Five Years		After Five Years to Fifteen YearsAfter Fifteen YearsTotal
Commercial & industrial$461,831 $658,961 $196,521 $12,739 $1,330,052 
Owner-occupied CRE75,722 658,076 207,699 27,567 969,064 
Agricultural322,511 333,575 368,658 41,165 1,065,909 
CRE investment137,888 734,765 243,544 30,191 1,146,388 
Construction & land development47,607 147,750 107,855 30,158 333,370 
Residential construction *39,145 8,368 3,232 84,037 134,782 
Residential first mortgage21,559 261,782 197,860 532,965 1,014,166 
Residential junior mortgage8,956 19,200 34,158 114,712 177,026 
Retail & other26,525 14,449 7,615 4,386 52,975 
   Total loans$1,141,744 $2,836,926 $1,367,142 $877,920 $6,223,732 
Percent by maturity distribution18 %46 %22 %14 %100 %
Total fixed rate loans$496,022 $2,659,905 $986,196 $306,850 $4,448,973 
Total floating rate loans$645,722 $177,021 $380,946 $571,070 $1,774,759 
As of December 31, 2022
Loan Maturity
(in thousands)One Year
or Less		After One Year
to Five Years		After Five Years to Fifteen YearsAfter Fifteen YearsTotal
Commercial & industrial$433,319 $660,560 $197,352 $13,588 $1,304,819 
Owner-occupied CRE78,759 639,093 208,719 28,028 954,599 
Agricultural350,752 328,495 367,913 41,447 1,088,607 
CRE investment129,770 737,869 250,256 32,054 1,149,949 
Construction & land development64,169 131,889 92,379 30,163 318,600 
Residential construction *41,049 6,922 2,091 64,330 114,392 
Residential first mortgage22,985 263,810 202,514 527,626 1,016,935 
Residential junior mortgage6,814 19,941 33,201 117,376 177,332 
Retail & other27,814 15,002 8,021 4,429 55,266 
   Total loans$1,155,431 $2,803,581 $1,362,446 $859,041 $6,180,499 
Percent by maturity distribution19 %45 %22 %14 %100 %
Total fixed rate loans$520,535 $2,631,295 $987,225 $315,982 $4,455,037 
Total floating rate loans$634,896 $172,286 $375,221 $543,059 $1,725,462 
* The residential construction loans with a loan maturity after five years represent a construction to permanent loan product.

Allowance for Credit Losses - Loans
For additional disclosures on the allowance for credit losses, see Note 6, “Loans, Allowance for Credit Losses - Loans, and Credit Quality,” in the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1. A detailed discussion of the loan portfolio accounting policies, general loan portfolio characteristics, and credit risk are described in Note 1, “Nature of Business and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements, included in Part II, Item 8 of the Company’s 2022 Annual Report on Form 10-K.
Credit risks within the loan portfolio are inherently different for each loan type. Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and ongoing review of loan payment performance. Active asset quality administration, including early problem loan identification and timely resolution of problems, aids in the management of credit risk and minimization of loan losses. Loans charged off are subject to continuous review, and specific efforts are taken to achieve maximum recovery of principal, interest, and related expenses. For additional information regarding nonperforming assets see also “BALANCE SHEET ANALYSIS – Nonperforming Assets.”
The ACL-Loans represents management’s estimate of expected credit losses in the Company’s loan portfolio at the balance sheet date. To assess the overall appropriateness of the ACL-Loans, management applies an allocation methodology which focuses on evaluation of qualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to specific loans; (ii) management’s ongoing review and grading of the loan portfolio; (iii) consideration of historical loan loss and delinquency experience on each portfolio segment; (iv) trends in past due and nonaccrual loans; (v) the risk characteristics of the various loan segments; (vi) changes in the size and character of the loan portfolio; (vii) concentrations of loans to specific borrowers or industries; (viii) existing economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect expected credit losses. Assessing these numerous factors involves significant judgment; therefore, management considers the ACL-Loans a critical accounting estimate.
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Management allocates the ACL-Loans by pools of risk within each loan portfolio segment. The allocation methodology consists of the following components. First, a specific reserve is established for individually evaluated credit deteriorated loans, which management defines as nonaccrual credit relationships over $250,000, collateral dependent loans, purchased credit deteriorated loans, and other loans with evidence of credit deterioration. The specific reserve in the ACL-Loans for these credit deteriorated loans is equal to the aggregate collateral or discounted cash flow shortfall. Second, management allocates the ACL-Loans with historical loss rates by loan segment. The loss factors are measured on a quarterly basis and applied to each loan segment based on current loan balances and projected for their expected remaining life. Next, management allocates the ACL-Loans using the qualitative and environmental factors mentioned above. Consideration is given to those current qualitative or environmental factors that are likely to cause estimated credit losses at the evaluation date to differ from the historical loss experience of each loan segment. Lastly, management considers reasonable and supportable forecasts to assess the collectability of future cash flows.
At March 31, 2023, the ACL-Loans was $62 million (representing 1.00% of period end loans), unchanged from $62 million (or 1.00% of period end loans) at December 31, 2022 and up from $50 million (or 1.07% of period end loans) at March 31, 2022. The increase in the ACL-Loans from March 31, 2022 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 components of the ACL-Loans are detailed further in Table 8 below.
Table 8: Allowance for Credit Losses - Loans
Three Months EndedYear Ended
(in thousands)March 31, 2023March 31, 2022December 31, 2022
ACL-Loans:
Balance at beginning of period$61,829 $49,672 $49,672 
ACL on PCD loans acquired— — 1,937 
Provision for credit losses750 300 10,950 
Charge-offs(184)(100)(1,033)
Recoveries17 34 303 
Net (charge-offs) recoveries(167)(66)(730)
Balance at end of period$62,412 $49,906 $61,829 
Net loan (charge-offs) recoveries:
Commercial & industrial$(108)$20 $(86)
Owner-occupied CRE— (36)(555)
Agricultural2 — — 
CRE investment— — 169 
Construction & land development— — — 
Residential construction— — — 
Residential first mortgage1 4 (57)
Residential junior mortgage— — 1 
Retail & other(62)(54)(202)
Total net (charge-offs) recoveries$(167)$(66)$(730)
Ratios:
ACL-Loans to total loans1.00 %1.07 %1.00 %
Net charge-offs to average loans, annualized0.01 %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 economic uncertainty. For additional disclosures on credit quality, see Note 6, “Loans, Allowance for Credit Losses - Loans, and Credit Quality” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1. For additional information on loans see “BALANCE SHEET ANALYSIS – Loans” and for additional information on the ACL-Loans see “BALANCE SHEET ANALYSIS – Allowance for Credit Losses-Loans.”
Nonperforming loans are considered one indicator of potential future loan losses. Nonperforming loans are defined as nonaccrual loans and loans 90 days or more past due but still accruing interest. Loans are generally placed on nonaccrual status when contractually past due 90 days or more as to interest or principal payments. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on loans, it is management’s
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practice to place such loans on nonaccrual status immediately. Nonperforming assets include nonperforming loans and other real estate owned (“OREO”). At March 31, 2023, nonperforming assets were $41 million and represented 0.50% of total assets, compared to $40 million or 0.46% of total assets at December 31, 2022.
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 $76 million (1% of loans) and $53 million (1% of loans) at March 31, 2023 and December 31, 2022, respectively, with the increase primarily due to the downgrade of one commercial credit relationship. Potential problem loans require heightened management review given the pace at which a credit may deteriorate, the potential duration of asset quality stress, and uncertainty around the magnitude and scope of economic stress that may be felt by Nicolet’s customers and on underlying real estate values.
Table 9: Nonperforming Assets
(in thousands)March 31, 2023December 31, 2022March 31, 2022
Nonperforming loans:
Commercial & industrial$2,874 $3,328 $1,849 
Owner-occupied CRE7,128 5,647 5,007 
Agricultural18,782 20,416 23,570 
Commercial28,784 29,391 30,426 
CRE investment4,126 3,832 3,914 
Construction & land development748 771 1,054 
Commercial real estate4,874 4,603 4,968 
Commercial-based loans33,658 33,994 35,394 
Residential construction— — — 
Residential first mortgage4,986 3,780 3,919 
Residential junior mortgage196 224 242 
Residential real estate5,182 4,004 4,161 
Retail & other55 82 115 
Retail-based loans
5,237 4,086 4,276 
Total nonaccrual loans
38,895 38,080 39,670 
Accruing loans past due 90 days or more— — — 
Total nonperforming loans
$38,895 $38,080 $39,670 
Nonaccrual loans (included above) covered by guarantees$5,372 $5,459 $4,675 
OREO:
Commercial real estate owned$628 $628 $797 
Bank property real estate owned1,347 1,347 9,019 
Total OREO
1,975 1,975 9,816 
Total nonperforming assets
$40,870 $40,055 $49,486 
Ratios:
Nonperforming loans to total loans0.62 %0.62 %0.85 %
Nonperforming assets to total loans plus OREO0.66 %0.65 %1.05 %
Nonperforming assets to total assets0.50 %0.46 %0.68 %
ACL-Loans to nonperforming loans160 %162 %126 %
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Deposits
Deposits represent Nicolet’s largest source of funds, and the strong core deposit base provides a stable funding source. As of March 31, 2023, approximately 83% of core deposit balances have been with Nicolet more than five years.
Core deposit balances of $6.4 billion at March 31, 2023 declined $181 million (3%) from December 31, 2022, partly due to the seasonal run-off of municipal deposits. Compared to March 31, 2022, core deposits increased $584 million (10%), largely due to the Charter acquisition. The deposit composition is presented in Table 10 below.
Table 10: Period End Deposit Composition
March 31, 2023December 31, 2022March 31, 2022
(in thousands)Amount% of TotalAmount% of TotalAmount% of Total
Noninterest-bearing demand$2,094,623 30 %$2,361,816 33 %$1,912,995 31 %
Interest-bearing demand1,138,415 17 %1,279,850 18 %1,239,582 20 %
Money market1,886,879 27 %1,707,619 24 %1,500,442 24 %
Savings865,824 12 %931,417 13 %841,369 13 %
Time942,838 14 %898,219 12 %736,732 12 %
Total deposits
$6,928,579 100 %$7,178,921 100 %$6,231,120 100 %
Brokered transaction accounts$233,393 4 %$252,829 3 %$228,079 4 %
Brokered and listed time deposits289,181 4 %339,066 5 %180,823 3 %
Total brokered deposits
$522,574 8 %$591,895 8 %$408,902 7 %
Customer transaction accounts$5,752,348 83 %$6,027,873 84 %$5,266,309 84 %
Customer time deposits653,657 9 %559,153 8 %555,909 9 %
Total customer deposits (core)
$6,406,005 92 %$6,587,026 92 %$5,822,218 93 %
Total uninsured deposits were $1.9 billion (representing 27% of total deposits) at March 31, 2023, compared to $2.1 billion (representing 29% of total deposits) at December 31, 2022.

Lending-Related Commitments
As of March 31, 2023 and December 31, 2022, Nicolet had the following off-balance sheet lending-related commitments.
Table 11: Commitments
(in thousands)March 31, 2023December 31, 2022
Commitments to extend credit$1,850,215 $1,850,601 
Financial standby letters of credit23,246 26,530 
Performance standby letters of credit9,952 9,375 
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 $18 million and $17 million, respectively, at March 31, 2023. In comparison, interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans held for sale both represented $9 million at December 31, 2022. The net fair value of these mortgage derivatives combined was a gain of $72,000 at March 31, 2023 compared to a gain of $50,000 at December 31, 2022.

Liquidity Management
Liquidity management refers to the ability to ensure that adequate liquid funds are available to meet the current and future cash flow obligations arising in the daily operations of the Company. These cash flow obligations include the ability to meet the commitments to borrowers for extensions of credit, accommodate deposit cycles and trends, fund capital expenditures, pay dividends to stockholders (if any), and satisfy other operating expenses. The Company’s most liquid assets are cash and due from banks and interest-earning deposits, which totaled $114 million and $155 million at March 31, 2023 and December 31, 2022, respectively. Balances of these liquid assets are dependent on our operating, investing, and financing activities during any given period.
The $41 million decrease in cash and cash equivalents since year-end 2022 included $16 million net cash provided by operating activities and $489 million net cash provided by investing activities (mostly investment sales from the balance sheet repositioning), more than offset by $545 million net cash used in financing activities (repayment of FHLB borrowings from the
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balance sheet repositioning and a net decrease in deposits). As of March 31, 2023, management believed that adequate liquidity existed to meet all projected cash flow obligations.
Nicolet’s primary sources of funds include the core deposit base, repayment and maturity of loans, investment securities calls, maturities, and sales, and procurement of brokered deposits or other wholesale funding. At March 31, 2023, approximately 40% of the investment securities portfolio was pledged as collateral to secure public deposits and borrowings, as applicable, and for liquidity or other purposes as required by regulation. Liquidity sources available to the Company at March 31, 2023, are presented in Table 12 below.
Table 12: Liquidity Sources
(in millions)March 31, 2023
FHLB Borrowing Availability (1)
$547 
Fed Funds Lines155
Fed Discount Window11
Immediate Funding Availability$713 
Unencumbered AFS Securities$609 
Less: AFS Securities retained per policy (2)
(403)
Brokered Capacity1,210 
Guaranteed portion of SBA loans89 
Other funding sources28 
Short-Term Funding Availability (3)
$1,533 
Total Contingent Funding Availability$2,246 
(1) Excludes outstanding FHLB borrowings of $55 million at March 31, 2023.
(2) Excludes $403 million of AFS securities retained in accordance with internal treasury liquidity policy.
(3) Short-term funding availability defined as funding that could be secured between 2 and 30 days.
Management is committed to the Parent Company being a source of strength to the Bank and its other subsidiaries, and therefore, regularly evaluates capital and liquidity positions of the Parent Company in light of current and projected needs, growth or strategies. The Parent Company uses cash for normal expenses, debt service requirements and, when opportune, for common stock repurchases or investment in other strategic actions such as mergers or acquisitions. At March 31, 2023, the Parent Company had $62 million in cash. Additional cash sources available to the Parent Company include access to the public or private markets to issue new equity, subordinated notes or other debt. Dividends from the Bank and, to a lesser extent, stock option exercises, represent significant sources of cash flows for the Parent Company. The Bank is required by federal law to obtain prior approval of the OCC for payments of dividends if the total of all dividends declared by the Bank in any year will exceed certain thresholds. Management does not believe that regulatory restrictions on dividends from the Bank will adversely affect its ability to meet its cash obligations.

Interest Rate Sensitivity Management and Impact of Inflation
A reasonable balance between interest rate risk, credit risk, liquidity risk and maintenance of yield, is highly important to Nicolet’s business success and profitability. As an ongoing part of our financial strategy and risk management, we attempt to understand and manage the impact of fluctuations in market interest rates on our net interest income. The consolidated balance sheet consists mainly of interest-earning assets (loans, investments and cash) which are primarily funded by interest-bearing liabilities (deposits and other borrowings). Such financial instruments have varying levels of sensitivity to changes in market rates of interest. Market rates are highly sensitive to many factors beyond our control, including but not limited to general economic conditions and policies of governmental and regulatory authorities. Our operating income and net income depends, to a substantial extent, on “rate spread” (i.e., the difference between the income earned on loans, investments and other earning assets and the interest expense paid to obtain deposits and other funding liabilities).
Asset-liability management policies establish guidelines for acceptable limits on the sensitivity to changes in interest rates on earnings and market value of assets and liabilities. Such policies are set and monitored by management and the Board of Directors’ Asset and Liability Committee.
To understand and manage the impact of fluctuations in market interest rates on net interest income, we measure our overall interest rate sensitivity through a net interest income analysis, which calculates the change in net interest income in the event of hypothetical changes in interest rates under different scenarios versus a baseline scenario. Such scenarios can involve static balance sheets, balance sheets with projected growth, parallel (or non-parallel) yield curve slope changes, immediate or gradual changes in market interest rates, and one-year or longer time horizons. The simulation modeling uses assumptions involving
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market spreads, prepayments of rate-sensitive instruments, renewal rates on maturing or new loans, deposit retention rates, and other assumptions.
Among other scenarios, we assessed the impact on net interest income in the event of a gradual +/-100 bps and +/-200 bps change in market rates (parallel to the change in prime rate) over a one-year time horizon to a static (flat) balance sheet. The results provided include the liquidity measures mentioned above and reflect the 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 March 31, 2023 and December 31, 2022, the projected changes in net interest income over a one-year time horizon, versus the baseline, are presented in Table 13 below. The results are within Nicolet’s guidelines of not greater than -10% for +/- 100 bps and not greater than -15% for +/- 200 bps.
Table 13: Interest Rate Sensitivity
March 31, 2023December 31, 2022
200 bps decrease in interest rates(0.1)%(0.7)%
100 bps decrease in interest rates(0.1)%(0.4)%
100 bps increase in interest rates(0.2)%— %
200 bps increase in interest rates(0.3)%0.1 %
Actual results may differ from these simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and their impact on customer behavior and management strategies.
The effect of inflation on a financial institution differs significantly from the effect on an industrial company. While a financial institution’s operating expenses, particularly salary and employee benefits, are affected by general inflation, the asset and liability structure of a financial institution consists largely of monetary items. Monetary items, such as cash, investments, loans, deposits and other borrowings, are those assets and liabilities which are or will be converted into a fixed number of dollars regardless of changes in prices. As a result, changes in interest rates have a more significant impact on a financial institution’s performance than does general inflation. Inflation may also have impacts on the Bank’s customers, on businesses and consumers and their ability or willingness to invest, save or spend, and perhaps on their ability to repay loans. As such, there would likely be impacts on the general appetite for banking products and the credit health of the Bank’s customer base.

Capital
Management regularly reviews the adequacy of its capital to ensure that sufficient capital is available for current and future needs and is in compliance with regulatory guidelines. The capital position and strategies are actively reviewed in light of perceived business risks associated with current and prospective earning levels, liquidity, asset quality, economic conditions in the markets served, and level of returns available to shareholders. Management intends to maintain an optimal capital and leverage mix for growth and shareholder return. For details on the change in capital see “BALANCE SHEET ANALYSIS.”
The Company’s and the Bank’s regulatory capital ratios remain above minimum regulatory ratios, including the capital conservation buffer. At March 31, 2023, the Bank’s regulatory capital ratios qualify the Bank as well-capitalized under the prompt-corrective action framework. This strong base of capital has allowed Nicolet to be opportunistic in strategic growth. A summary of the Company’s and the Bank’s regulatory capital amounts and ratios, as well as selected capital metrics are presented in the following table.
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Table 14: Capital
At or for the Three Months Ended
At or for the
Year Ended
($ in thousands)March 31, 2023December 31, 2022
Company Stock Repurchases: *
Common stock repurchased during the period (dollars)$— $61,483 
Common stock repurchased during the period (full shares)— 671,662 
Company Risk-Based Capital:
Total risk-based capital$886,051 $889,763 
Tier 1 risk-based capital676,114 684,280 
Common equity Tier 1 capital637,967 646,341 
Total capital ratio12.3 %12.3 %
Tier 1 capital ratio9.4 %9.5 %
Common equity tier 1 capital ratio8.9 %9.0 %
Tier 1 leverage ratio8.2 %8.2 %
Bank Risk-Based Capital:
Total risk-based capital$813,992 $816,951 
Tier 1 risk-based capital756,575 764,090 
Common equity Tier 1 capital756,575 764,090 
Total capital ratio11.3 %11.3 %
Tier 1 capital ratio10.5 %10.6 %
Common equity tier 1 capital ratio10.5 %10.6 %
Tier 1 leverage ratio9.2 %9.1 %
* Reflects common stock repurchased under board of director authorizations for the common stock repurchase program.
In managing capital for optimal return, we evaluate capital sources and uses, pricing and availability of our stock in the market, and alternative uses of capital (such as the level of organic growth or acquisition opportunities) in light of strategic plans. At March 31, 2023, there remains $47 million authorized under this repurchase program, as modified, to be utilized from time-to-time to repurchase shares in the open market, through block transactions or in private transactions.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risk at March 31, 2023, from that presented in our 2022 Annual Report on Form 10-K. See section “Interest Rate Sensitivity Management and Impact of Inflation” within Management’s Discussion and Analysis of Financial Condition and Results of Operations under Part I, Item 2, for our interest rate sensitivity position at March 31, 2023.

ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. Management, under the supervision, and with the participation, of our principal executive officer and principal financial officer, evaluated our disclosure controls and procedures (as such term is defined in Exchange Act Rule 13a-15(e)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
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(b) Changes in Internal Control Over Financial Reporting. There were no changes in the Company’s internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


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PART II – OTHER INFORMATION

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

ITEM 1A. RISK FACTORS
There have been no material changes in the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table contains information regarding purchases of Nicolet’s common stock made during first quarter 2023 by or on behalf of the Company or any “affiliated purchaser,” as defined by Rule 10b-18(a)(3) of the Exchange Act.
Total Number of
Shares Purchased (a)
Average Price
Paid per Share		Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans
or Programs (b)
(#)($)(#)(#)
Period
January 1 – January 31, 2023— $— — 
February 1 – February 28, 2023— $— — 
March 1 – March 31, 2023492 $75.26 — 
Total492 $75.26 — 753,000 
a.During first quarter 2023, the Company withheld no common shares for minimum tax withholding settlements on restricted stock, and withheld 492 common shares to satisfy the exercise price and tax withholding requirements on stock option exercises. These are not considered “repurchases” and, therefore, do not count against the maximum number of shares that may yet be purchased under the Board of Directors’ authorization.
b.The Board of Directors approved a common stock repurchase program which authorized, with subsequent modifications, the use of up to $276 million to repurchase outstanding shares of common stock. This common stock repurchase program was last modified on April 19, 2022, and has no expiration date. At March 31, 2023, approximately $47 million remained available under this common stock repurchase program, or approximately 753,000 shares of common stock (based upon the closing stock price of $63.05 on March 31, 2023).
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
The following exhibits are filed herewith:
Exhibit
Number		Description
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 (1)
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) Includes the following financial information included in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income (Loss), (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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NICOLET BANKSHARES, INC.
May 2, 2023/s/ Michael E. Daniels
Michael E. Daniels
President and Chief Executive Officer
May 2, 2023/s/ H. Phillip Moore, Jr.
H. Phillip Moore, Jr.
Chief Financial Officer

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