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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, 2021
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                           to                          
Commission file number: 001-37700
NICOLET BANKSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
Wisconsin 47-0871001
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
111 North Washington Street
Green Bay, Wisconsin 54301
(Address of Principal Executive Offices) 
(Zip Code)
(920) 430-1400
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.01 per share NCBS The NASDAQ Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☒
Non-accelerated filer ☐ Smaller reporting company ☐
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 28, 2021 there were 9,956,521 shares of $0.01 par value common stock outstanding.


Nicolet Bankshares, Inc.
Quarterly Report on Form 10-Q
March 31, 2021
TABLE OF CONTENTS
PAGE
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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, 2021 December 31, 2020
(Unaudited) (Audited)
Assets
Cash and due from banks $ 61,295  $ 88,460 
Interest-earning deposits 674,559  714,399 
Cash and cash equivalents
735,854  802,859 
Certificates of deposit in other banks 27,296  29,521 
Securities available for sale (“AFS”), at fair value 558,229  539,337 
Other investments 28,248  27,619 
Loans held for sale 16,883  21,450 
Loans 2,846,351  2,789,101 
Allowance for credit losses - loans (“ACL-Loans”) (32,626) (32,173)
Loans, net
2,813,725  2,756,928 
Premises and equipment, net 59,413  59,944 
Bank owned life insurance (“BOLI”) 83,788  83,262 
Goodwill and other intangibles, net 174,501  175,353 
Accrued interest receivable and other assets 45,867  55,516 
Total assets
$ 4,543,804  $ 4,551,789 
Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing demand deposits $ 1,216,477  $ 1,212,787 
Interest-bearing deposits 2,684,117  2,697,612 
Total deposits
3,900,594  3,910,399 
Short-term borrowings —  — 
Long-term borrowings 43,988  53,869 
Accrued interest payable and other liabilities 49,176  48,332 
Total liabilities
3,993,758  4,012,600 
Stockholders’ Equity:
Common stock 100  100 
Additional paid-in capital 271,388  273,390 
Retained earnings 271,191  252,952 
Accumulated other comprehensive income (loss) 7,367  12,747 
Total stockholders’ equity 550,046  539,189 
Total liabilities and stockholders’ equity $ 4,543,804  $ 4,551,789 
Preferred shares authorized (no par value)
10,000,000  10,000,000 
Preferred shares issued and outstanding —  — 
Common shares authorized (par value $0.01 per share)
30,000,000  30,000,000 
Common shares outstanding 9,987,897  10,011,342 
Common shares issued 10,002,322  10,030,267 
See accompanying notes to unaudited consolidated financial statements.
3
ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.
Consolidated Statements of Income
(In thousands, except share and per share data) (Unaudited)
Three Months Ended
March 31,
2021 2020
Interest income:
Loans, including loan fees $ 33,862  $ 33,778 
Investment securities:
Taxable
1,814  2,072 
Tax-exempt
545  491 
Other interest income 655  662 
Total interest income
36,876  37,003 
Interest expense:
Deposits 2,922  4,957 
Short-term borrowings —  27 
Long-term borrowings 313  756 
Total interest expense
3,235  5,740 
Net interest income
33,641  31,263 
Provision for credit losses 500  3,000 
Net interest income after provision for credit losses
33,141  28,263 
Noninterest income:
Trust services fee income 1,775  1,579 
Brokerage fee income 2,793  2,322 
Mortgage income, net 7,230  2,327 
Service charges on deposit accounts 1,091  1,225 
Card interchange income 1,927  1,562 
BOLI income 527  703 
Asset gains (losses), net 711  (654)
Other income 1,072  521 
Total noninterest income
17,126  9,585 
Noninterest expense:
Personnel 15,116  13,323 
Occupancy, equipment and office 4,137  4,204 
Business development and marketing 989  1,359 
Data processing 2,658  2,563 
Intangibles amortization 852  993 
FDIC assessments 595  — 
Other expense 1,734  1,412 
Total noninterest expense
26,081  23,854 
Income before income tax expense
24,186  13,994 
Income tax expense 5,947  3,321 
Net income
18,239  10,673 
Less: Net income attributable to noncontrolling interest —  118 
Net income attributable to Nicolet Bankshares, Inc. $ 18,239  $ 10,555 
Earnings per common share:
Basic $ 1.82  $ 1.00 
Diluted $ 1.75  $ 0.98 
Weighted average common shares outstanding:
Basic 9,997,634  10,515,778 
Diluted 10,403,309  10,800,636 
See accompanying notes to unaudited consolidated financial statements.
4
ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.
Consolidated Statements of Comprehensive Income
(In thousands) (Unaudited)
Three Months Ended
March 31,
2021 2020
Net income $ 18,239  $ 10,673 
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities AFS:
Net unrealized holding gains (losses)
(7,369) 4,329 
Net realized (gains) losses included in income
—  — 
Income tax (expense) benefit 1,989  (1,168)
Total other comprehensive income (loss) (5,380) 3,161 
Comprehensive income $ 12,859  $ 13,834 
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)
Nicolet Bankshares, Inc. Stockholders’ Equity
Common
Stock 		Additional
Paid-In
Capital 		Retained
Earnings 		Accumulated
Other
Comprehensive
Income (Loss) 		Non-
controlling
Interest 		Total
Balances at December 31, 2020 $ 100  $ 273,390  $ 252,952  $ 12,747  $ —  $ 539,189 
Comprehensive income:
Net income, three months ended
 March 31, 2021
—  —  18,239  —  —  18,239 
Other comprehensive income (loss)
—  —  —  (5,380) —  (5,380)
Stock-based compensation expense —  1,341  —  —  —  1,341 
Exercise of stock options, net —  1,161  —  —  —  1,161 
Issuance of common stock —  121  —  —  —  121 
Purchase and retirement of common stock —  (4,625) —  —  —  (4,625)
Balances at March 31, 2021 $ 100  $ 271,388  $ 271,191  $ 7,367  $ —  $ 550,046 
Balances at December 31, 2019 $ 106  $ 312,733  $ 199,005  $ 4,418  $ 728  $ 516,990 
Comprehensive income:
Net income, three months ended
 March 31, 2020
—  —  10,555  —  118  10,673 
Other comprehensive income (loss)
—  —  —  3,161  —  3,161 
Stock-based compensation expense —  1,299  —  —  —  1,299 
Exercise of stock options, net —  851  —  —  —  851 
Issuance of common stock —  215  —  —  —  215 
Purchase and retirement of common stock (2) (15,195) —  —  —  (15,197)
Distribution to noncontrolling interest —  —  —  —  (77) (77)
Adoption of new accounting pronouncement —  —  (6,175) —  —  (6,175)
Balances at March 31, 2020 $ 104  $ 299,903  $ 203,385  $ 7,579  $ 769  $ 511,740 
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,
2021 2020
Cash Flows From Operating Activities:
Net income $ 18,239  $ 10,673 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion 2,719  2,156 
Provision for credit losses 500  3,000 
Increase in cash surrender value of life insurance (527) (525)
Stock-based compensation expense 1,341  1,299 
Asset (gains) losses, net (711) 654 
Gain on sale of loans held for sale, net (7,255) (3,017)
Proceeds from sale of loans held for sale 222,406  103,950 
Origination of loans held for sale (211,701) (102,715)
Net change in:
Accrued interest receivable and other assets
9,719  (5,567)
Accrued interest payable and other liabilities
3,483  2,257 
Net cash provided by (used in) operating activities
38,213  12,165 
Cash Flows From Investing Activities:
Net (increase) decrease in loans (57,003) (32,238)
Net (increase) decrease in certificates of deposit in other banks 2,225  501 
Purchases of securities AFS (48,402) (74,759)
Proceeds from calls and maturities of securities AFS 21,215  17,931 
Purchases of other investments (89) (3,673)
Proceeds from sales of other investments 81  — 
Net (increase) decrease in premises and equipment (485) (4,961)
Net (increase) decrease in other real estate and other assets 293  — 
Net cash provided by (used in) investing activities
(82,165) (97,199)
Cash Flows From Financing Activities:
Net increase (decrease) in deposits (9,710) 69,143 
Net increase in short-term borrowings —  75,000 
Proceeds from long-term borrowings —  20,000 
Repayments of long-term borrowings (10,000) (5,000)
Purchase and retirement of common stock (4,625) (15,197)
Proceeds from issuance of common stock 121  215 
Proceeds from exercise of stock options 1,161  851 
Distribution to noncontrolling interest —  (77)
Net cash provided by (used in) financing activities
(23,053) 144,935 
Net increase (decrease) in cash and cash equivalents
(67,005) 59,901 
Cash and cash equivalents:
Beginning
802,859  182,059 
Ending *
$ 735,854  $ 241,960 
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 3,492  $ 6,077 
Cash paid for taxes —  — 
Transfer of loans and bank premises to other real estate owned 302  — 
Capitalized mortgage servicing rights 1,117  559 
* Cash and cash equivalents at both March 31, 2021 and March 31, 2020, include restricted cash of $1.9 million pledged as collateral on interest rate swaps and no reserve balance was required with the Federal Reserve Bank.
See accompanying notes to unaudited consolidated financial statements.
7

NICOLET BANKSHARES, INC.
Notes to Unaudited Consolidated Financial Statements

Note 1 – Basis of Presentation
General
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated balance sheets, statements of income, comprehensive income, changes in stockholders’ equity and cash flows of Nicolet Bankshares, Inc. (the “Company” or “Nicolet”) and its subsidiaries, as of and for the periods presented, and all such adjustments are of a normal recurring nature. All material intercompany transactions and balances have been eliminated. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the entire year.
These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been omitted or abbreviated. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Critical Accounting Policies and Estimates
Preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, the allowance for credit losses, valuation of loans in acquisition transactions, useful lives for depreciation and amortization, fair value of financial instruments, impairment calculations, valuation of deferred tax assets, uncertain income tax positions and contingencies. Estimates that are particularly susceptible to significant change for the Company include the determination of the allowance for credit losses, the determination and assessment of deferred tax assets and liabilities, and the valuation of loans acquired in acquisition transactions; therefore, these are critical accounting policies. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: external market factors such as market interest rates and employment rates, changes to operating policies and procedures, changes in applicable banking or tax regulations, and changes to deferred tax estimates. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period presented.
There have been no material changes or developments with respect to the assumptions or methodologies that the Company uses when applying what management believes are critical accounting policies and developing critical accounting estimates as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

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

Note 2 – Acquisitions
Completed Acquisition:

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

Upon consummation, Advantage added total assets of approximately $172 million (representing approximately 4% of Nicolet’s then pre-merger asset size), loans of $88 million, deposits of $141 million, core deposit intangible of $1 million, and goodwill of $12 million.
8


Note 3 – Earnings per Common Share
Basic earnings per common share are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share are calculated by dividing net income available to common shareholders by the weighted average number of shares adjusted for the dilutive effect of common stock awards (outstanding stock options and unvested restricted stock), if any. Presented below are the calculations for basic and diluted earnings per common share.
Three Months Ended March 31,
(In thousands, except per share data) 2021 2020
Net income attributable to Nicolet Bankshares, Inc. $ 18,239  $ 10,555 
Weighted average common shares outstanding 9,998  10,516 
Effect of dilutive common stock awards 405  285 
Diluted weighted average common shares outstanding 10,403  10,801 
Basic earnings per common share* $ 1.82  $ 1.00 
Diluted earnings per common share* $ 1.75  $ 0.98 
*Cumulative quarterly per share performance may not equal annual per share totals due to the effects of the amount and timing of capital increases. When computing earnings per share for an interim period, the denominator is based on the weighted average shares outstanding during the interim period, and not on an annualized weighted average basis. Accordingly, the sum of the earnings per share data for the quarters will not necessarily equal the year to date earnings per share data.
For the three months ended March 31, 2021, options to purchase less than 0.1 million shares are excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive. For the three months ended March 31, 2020, options to purchase approximately 0.1 million shares are excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive.

Note 4 – Stock-Based Compensation
The Company may grant stock options and restricted stock under its stock-based compensation plans to certain officers, employees and directors. These plans are administered by a committee of the Board of Directors, and at March 31, 2021, approximately 1.3 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, 2020 were as follows. There were no stock option grants for the three months ended March 31, 2021.
Three Months Ended March 31,
2021 2020
Dividend yield —  % —  %
Expected volatility —  % 25  %
Risk-free interest rate —  % 1.67  %
Expected average life 0 years 7 years
Weighted average per share fair value of options $ —  $ 21.83 
9

A summary of the Company’s stock option activity is summarized below.
Stock Options Option Shares
Outstanding 		Weighted
Average
Exercise Price 		Weighted Average
Remaining
Life (Years) 		Aggregate
Intrinsic Value
(in thousands)
Outstanding - December 31, 2020 1,437,460  $ 50.47 
Granted —  — 
Exercise of stock options * (32,672) 35.55 
Forfeited —  — 
Outstanding - March 31, 2021 1,404,788  $ 50.82  6.4 $ 45,872 
Exercisable - March 31, 2021 779,538  $ 46.87  5.9 $ 28,538 
* 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, 2021, 5,607 such shares were withheld by the Company.
Intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the exercise price of the stock options. The intrinsic value of options exercised for the three months ended March 31, 2021 and 2020 was approximately $1.3 million and $1.8 million, respectively.
A summary of the Company’s restricted stock activity is summarized below.
Restricted Stock Weighted Average Grant
Date Fair Value 		Restricted Shares
Outstanding
Outstanding - December 31, 2020 $ 53.57  18,925 
Granted 72.24  1,500 
Vested * 47.23  (6,000)
Forfeited —  — 
Outstanding - March 31, 2021 $ 58.15  14,425 
* The terms of the restricted stock agreements permit the surrender of shares to the Company upon vesting in order to satisfy applicable tax withholding requirements at the minimum statutory withholding rate, and accordingly, 1,300 shares were surrendered during the three months ended March 31, 2021.
The Company recognized approximately $1.2 million and $1.3 million of stock-based compensation expense (included in personnel on the consolidated statements of income) for the three months ended March 31, 2021 and 2020, respectively, associated with its common stock awards granted to officers and employees. In addition, during first quarter 2021, the Company recognized approximately $0.1 million of director expense (included in other expense on the consolidated statements of income) for a total restricted stock grant of 1,500 shares with immediate vesting to directors. As of March 31, 2021, there was approximately $8.5 million of unrecognized compensation cost related to equity award grants. The cost is expected to be recognized over the remaining vesting period of approximately 2.5 years. The Company recognized a tax benefit of approximately $0.2 million and $0.3 million for the three months ended March 31, 2021 and 2020, respectively, for the tax impact of stock option exercises and vesting of restricted stock.

Note 5 – Securities Available for Sale
Amortized cost and fair value of securities available for sale are summarized as follows.
March 31, 2021
(in thousands) Amortized Cost Gross
Unrealized
Gains 		Gross
Unrealized
Losses 		Fair Value Fair Value as % of Total
U.S. government agency securities $ 79,139  $ 232  $ 256  $ 79,115  14  %
State, county and municipals 226,192  3,415  1,935  227,672  41  %
Mortgage-backed securities 163,048  4,892  1,040  166,900  30  %
Corporate debt securities 79,758  4,868  84  84,542  15  %
Total
$ 548,137  $ 13,407  $ 3,315  $ 558,229  100  %
10

December 31, 2020
(in thousands) Amortized Cost Gross
Unrealized
Gains 		Gross
Unrealized
Losses 		Fair Value Fair Value as % of Total
U.S. government agency securities $ 63,162  $ 289  $ —  $ 63,451  12  %
State, county and municipals 226,493  5,386  11  231,868  43  %
Mortgage-backed securities 156,148  6,425  78  162,495  30  %
Corporate debt securities 76,073  5,450  —  81,523  15  %
Total
$ 521,876  $ 17,550  $ 89  $ 539,337  100  %
All mortgage-backed securities included in the table above were issued by U.S. government agencies and corporations. Securities AFS with a fair value of $145 million and $146 million as of March 31, 2021 and December 31, 2020, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law. Accrued interest on securities AFS totaled $2.8 million and $2.3 million at March 31, 2021 and December 31, 2020, respectively, and is included in accrued interest receivable and other assets on the consolidated balance sheets.

The following table presents gross unrealized losses and the related estimated fair value of securities AFS for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time individual securities have been in a continuous unrealized loss position.
March 31, 2021
Less than 12 months 12 months or more Total
($ in thousands) Fair
Value 		Unrealized
Losses 		Fair
Value 		Unrealized
Losses 		Fair
Value 		Unrealized
Losses 		Number of
Securities
U.S. government agency securities $ 16,263  $ 256  $ —  $ —  $ 16,263  $ 256  1 
State, county and municipals 74,338  1,935  —  —  74,338  1,935  110 
Mortgage-backed securities 39,362  1,036  331  4  39,693  1,040  40 
Corporate debt securities 2,087  84  —  —  2,087  84  1 
Total
$ 132,050  $ 3,311  $ 331  $ 4  $ 132,381  $ 3,315  152 
December 31, 2020
Less than 12 months 12 months or more Total
($ in thousands) Fair
Value 		Unrealized
Losses 		Fair
Value 		Unrealized
Losses 		Fair
Value 		Unrealized
Losses 		Number of
Securities
State, county and municipals $ 5,181  $ 11  $ —  $ —  $ 5,181  $ 11  9 
Mortgage-backed securities 10,612  71  492  7  11,104  78  22 
Total
$ 15,793  $ 82  $ 492  $ 7  $ 16,285  $ 89  31 
The Company evaluates securities AFS in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. In making this evaluation, management considers the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.
As of March 31, 2021 and December 31, 2020, no allowance for credit losses on securities AFS was recognized. The Company does not consider its securities AFS with unrealized losses to be attributable to credit-related factors, as the unrealized losses in each category have occurred as a result of changes in noncredit-related factors such as changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration. Furthermore, the Company does not have the intent to sell any of these securities AFS and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost.
11

The amortized cost and fair value of securities AFS by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties; as this is particularly inherent in mortgage-backed securities, these securities are not included in the maturity categories below.
March 31, 2021
(in thousands) Amortized Cost Fair Value
Due in less than one year $ 91,706  $ 92,221 
Due in one year through five years 160,270  165,873 
Due after five years through ten years 121,235  120,172 
Due after ten years 11,878  13,063 
385,089  391,329 
Mortgage-backed securities 163,048  166,900 
Securities AFS $ 548,137  $ 558,229 
There were no sales of securities AFS for the three months ended March 31, 2021 and March 31, 2020.
Note 6 – Loans, Allowance for Credit Losses - Loans, and Credit Quality
The loan composition is summarized as follows.
March 31, 2021 December 31, 2020
(in thousands) Amount % of
Total 		Amount % of
Total
Commercial & industrial $ 728,498  26  % $ 750,718  27  %
Paycheck Protection Program (“PPP”) loans 229,403  8  186,016  7 
Owner-occupied commercial real estate (“CRE”) 520,274  18  521,300  19 
Agricultural 107,009  4  109,629  4 
CRE investment 490,053  17  460,721  16 
Construction & land development 137,670  5  131,283  5 
Residential construction 39,586  1  41,707  1 
Residential first mortgage 456,197  16  444,155  16 
Residential junior mortgage 107,641  4  111,877  4 
Retail & other 30,020  1  31,695  1 
Loans
2,846,351  100  % 2,789,101  100  %
Less allowance for credit losses - Loans (“ACL-Loans”) 32,626  32,173 
Loans, net
$ 2,813,725  $ 2,756,928 
Allowance for credit losses - Loans to loans 1.15  % 1.15  %
Accrued interest on loans totaled $7 million at both March 31, 2021 and December 31, 2020, and is included in accrued interest receivable and other assets on the consolidated balance sheets.
Allowance for Credit Losses-Loans:
The majority of the Company’s loans, commitments, and letters of credit have been granted to customers in the Company’s market area. Although the Company has a diversified loan portfolio, the credit risk in the loan portfolio is largely influenced by general economic conditions and trends of the counties and markets in which the debtors operate, and the resulting impact on the operations of borrowers or on the value of underlying collateral, if any.
12

A roll forward of the allowance for credit losses - loans is summarized as follows.
Three Months Ended Year Ended
(in thousands) March 31, 2021 March 31, 2020 December 31, 2020
Beginning balance $ 32,173  $ 13,972  $ 13,972 
Adoption of CECL —  8,488  8,488 
Initial PCD ACL —  797  797 
Total impact for adoption of CECL —  9,285  9,285 
Provision for credit losses 500  3,000  10,300 
Charge-offs (94) (93) (1,689)
Recoveries 47  38  305 
Net (charge-offs) recoveries
(47) (55) (1,384)
Ending balance $ 32,626  $ 26,202  $ 32,173 
The following tables present the balance and activity in the ACL-Loans by portfolio segment.
Three Months Ended March 31, 2021
(in thousands) Commercial
& industrial 		Owner-
occupied
CRE 		Agricultural CRE
investment 		Construction & land
development 		Residential
construction 		Residential
first mortgage 		Residential
junior
mortgage 		Retail
& other 		Total
ACL-Loans *
Beginning balance $ 11,644  $ 5,872  $ 1,395  $ 5,441  $ 984  $ 421  $ 4,773  $ 1,086  $ 557  $ 32,173 
Provision (1,043) (338) (100) 723  248  83  539  224  164  500 
Charge-offs (44) —  —  (4) —  —  —  —  (46) (94)
Recoveries 31  —  —  —  —  —  10  2  4  47 
Net (charge-offs) recoveries (13) —  —  (4) —  —  10  2  (42) (47)
Ending balance $ 10,588  $ 5,534  $ 1,295  $ 6,160  $ 1,232  $ 504  $ 5,322  $ 1,312  $ 679  $ 32,626 
As % of ACL-Loans 32  % 17  % 4  % 19  % 4  % 2  % 16  % 4  % 2  % 100  %
*The PPP loans are fully guaranteed by the SBA; thus, no ACL-Loans has been allocated to these loans.
Year Ended December 31, 2020
(in thousands) Commercial
& industrial 		Owner-
occupied
CRE 		Agricultural CRE
investment 		Construction
& land
development 		Residential
construction 		Residential
first
mortgage 		Residential
junior
mortgage 		Retail &
other 		 
Total
ACL-Loans *
Beginning balance $ 5,471  $ 3,010  $ 579  $ 1,600  $ 414  $ 368  $ 1,669  $ 517  $ 344  $ 13,972 
Adoption of CECL 2,962  1,249  361  1,970  51  124  1,286  351  134  8,488 
Initial PCD ACL 797  —  —  —  —  —  —  —  —  797 
Provision 3,106  2,062  455  2,061  519  (71) 1,809  151  208  10,300 
Charge-offs (812) (530) —  (190) —  —  (2) —  (155) (1,689)
Recoveries 120  81  —  —  —  —  11  67  26  305 
Net (charge-offs) recoveries (692) (449) —  (190) —  —  9  67  (129) (1,384)
Ending balance $ 11,644  $ 5,872  $ 1,395  $ 5,441  $ 984  $ 421  $ 4,773  $ 1,086  $ 557  $ 32,173 
As % of ACL-Loans 36  % 18  % 4  % 17  % 3  % 1  % 15  % 4  % 2  % 100  %
The ACL-Loans represents management’s estimate of expected credit losses in the Company’s loan portfolio at the balance sheet date. To assess the appropriateness of the ACL-Loans, an allocation methodology is applied by Nicolet which focuses on evaluation of qualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to specific loans; (ii) management’s ongoing review and grading of the loan portfolio; (iii) consideration of historical loan loss and delinquency experience on each portfolio segment; (iv) trends in past due and nonperforming loans; (v) the risk characteristics of the various loan segments; (vi) changes in the size and character of the loan portfolio; (vii) concentrations of loans to specific borrowers or industries; (viii) existing economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect expected credit losses. Assessing these numerous factors involves significant judgment.
Management allocates the ACL-Loans by pools of risk within each loan portfolio segment. The allocation methodology consists of the following components. First, a specific reserve is established for individually evaluated credit-deteriorated loans, which management defines as nonaccrual credit relationships over $250,000, collateral dependent loans, and other loans with evidence of credit deterioration. The specific reserve in the ACL-Loans for these credit deteriorated loans is equal to the aggregate collateral or discounted cash flow shortfall. Management allocates the ACL-Loans with historical loss rates by loan
13

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.
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, 2021 Collateral Type
(in thousands) Real Estate Other Business Assets Total Without an Allowance With an Allowance Allowance Allocation
Commercial & industrial $ —  $ 2,437  $ 2,437  $ 401  $ 2,036  $ 955 
PPP loans —  —  —  —  —  — 
Owner-occupied CRE 3,514  —  3,514  3,514  —  — 
Agricultural 986  675  1,661  986  675  2 
CRE investment 1,436  —  1,436  1,436  —  — 
Construction & land development 308  —  308  308  —  — 
Residential construction —  —  —  —  —  — 
Residential first mortgage —  —  —  —  —  — 
Residential junior mortgage —  —  —  —  —  — 
Retail & other —  —  —  —  —  — 
Total loans $ 6,244  $ 3,112  $ 9,356  $ 6,645  $ 2,711  $ 957 

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


14

Past Due and Nonaccrual Loans:
The following tables present past due loans by portfolio segment.
March 31, 2021
(in thousands) 30-89 Days Past
Due (accruing) 		90 Days & Over or nonaccrual Current Total
Commercial & industrial $ 58  $ 2,842  $ 725,598  $ 728,498 
PPP loans —  —  229,403  229,403 
Owner-occupied CRE 76  1,563  518,635  520,274 
Agricultural —  2,087  104,922  107,009 
CRE investment —  1,436  488,617  490,053 
Construction & land development 73  327  137,270  137,670 
Residential construction —  —  39,586  39,586 
Residential first mortgage 1,932  527  453,738  456,197 
Residential junior mortgage 32  116  107,493  107,641 
Retail & other 56  67  29,897  30,020 
Total loans $ 2,227  $ 8,965  $ 2,835,159  $ 2,846,351 
Percent of total loans 0.1  % 0.3  % 99.6  % 100.0  %
December 31, 2020
(in thousands) 30-89 Days Past
Due (accruing) 		90 Days & Over or nonaccrual Current Total
Commercial & industrial $ —  $ 2,646  $ 748,072  $ 750,718 
PPP loans —  —  186,016  186,016 
Owner-occupied CRE —  1,869  519,431  521,300 
Agricultural 7  1,830  107,792  109,629 
CRE investment —  1,488  459,233  460,721 
Construction & land development —  327  130,956  131,283 
Residential construction —  —  41,707  41,707 
Residential first mortgage 613  823  442,719  444,155 
Residential junior mortgage 43  384  111,450  111,877 
Retail & other 102  88  31,505  31,695 
Total loans $ 765  $ 9,455  $ 2,778,881  $ 2,789,101 
Percent of total loans —  % 0.4  % 99.6  % 100.0  %
The following table presents nonaccrual loans by portfolio segment. The nonaccrual loans without a related allowance for credit losses have been reflected in the collateral dependent loans table above.
March 31, 2021 December 31, 2020
(in thousands) Nonaccrual Loans % of Total Nonaccrual Loans % of Total
Commercial & industrial $ 2,842  32  % $ 2,646  28  %
PPP loans —  —  —  — 
Owner-occupied CRE 1,563  17  1,869  20 
Agricultural 2,087  23  1,830  19 
CRE investment 1,436  16  1,488  16 
Construction & land development 327  4  327  3 
Residential construction —  —  —  — 
Residential first mortgage 527  6  823  9 
Residential junior mortgage 116  1  384  4 
Retail & other 67  1  88  1 
Nonaccrual loans
$ 8,965  100  % $ 9,455  100  %
Percent of total loans 0.3  % 0.4  %

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Credit Quality Information:
The following tables present total loans by risk categories and year of origination.
March 31, 2021 Amortized Cost Basis by Origination Year
(in thousands) 2021 2020 2019 2018 2017 Prior Revolving Revolving to Term TOTAL
Commercial & industrial (a)
Grades 1-4 $ 163,454  $ 247,363  $ 115,018  $ 86,898  $ 66,632  $ 56,175  $ 192,156  $ —  $ 927,696 
Grade 5 115  2,012  3,339  4,560  5,299  3,821  6,216  —  25,362 
Grade 6 670  65  16  42  —  57  219  —  1,069 
Grade 7 —  20  928  469  655  336  1,366  —  3,774 
Total $ 164,239  $ 249,460  $ 119,301  $ 91,969  $ 72,586  $ 60,389  $ 199,957  $ —  $ 957,901 
Owner-occupied CRE
Grades 1-4 $ 13,070  $ 88,302  $ 74,839  $ 76,925  $ 50,831  $ 182,221  $ 1,084  $ —  $ 487,272 
Grade 5 —  41  1,933  1,032  7,828  11,266  —  —  22,100 
Grade 6 —  —  —  21  2,564  51  —  —  2,636 
Grade 7 —  2,968  512  —  952  3,834  —  —  8,266 
Total $ 13,070  $ 91,311  $ 77,284  $ 77,978  $ 62,175  $ 197,372  $ 1,084  $ —  $ 520,274 
Agricultural
Grades 1-4 $ 1,179  $ 13,801  $ 5,232  $ 7,353  $ 9,551  $ 34,345  $ 21,259  $ —  $ 92,720 
Grade 5 284  295  —  685  439  6,301  277  —  8,281 
Grade 6 —  —  —  —  —  —  —  —  — 
Grade 7 —  —  —  26  90  5,795  97  —  6,008 
Total $ 1,463  $ 14,096  $ 5,232  $ 8,064  $ 10,080  $ 46,441  $ 21,633  $ —  $ 107,009 
CRE investment
Grades 1-4 $ 49,394  $ 80,566  $ 73,984  $ 34,734  $ 60,858  $ 143,032  $ 6,028  $ —  $ 448,596 
Grade 5 1,555  2,592  1,106  3,077  3,777  26,654  —  —  38,761 
Grade 6 —  —  —  —  787  —  —  —  787 
Grade 7 —  —  —  —  —  1,909  —  —  1,909 
Total $ 50,949  $ 83,158  $ 75,090  $ 37,811  $ 65,422  $ 171,595  $ 6,028  $ —  $ 490,053 
Construction & land development
Grades 1-4 $ 4,931  $ 77,235  $ 23,800  $ 14,532  $ 2,068  $ 8,450  $ 4,279  $ —  $ 135,295 
Grade 5 —  —  373  651  534  22  453  —  2,033 
Grade 6 —  —  —  —  —  —  —  —  — 
Grade 7 —  —  —  —  19  323  —  —  342 
Total $ 4,931  $ 77,235  $ 24,173  $ 15,183  $ 2,621  $ 8,795  $ 4,732  $ —  $ 137,670 
Residential construction
Grades 1-4 $ 6,212  $ 27,277  $ 5,129  $ 392  $ 307  $ 215  $ —  $ —  $ 39,532 
Grade 5 —  —  —  —  54  —  —  —  54 
Grade 6 —  —  —  —  —  —  —  —  — 
Grade 7 —  —  —  —  —  —  —  —  — 
Total $ 6,212  $ 27,277  $ 5,129  $ 392  $ 361  $ 215  $ —  $ —  $ 39,586 
Residential first mortgage
Grades 1-4 $ 48,620  $ 144,134  $ 58,206  $ 34,880  $ 35,738  $ 126,739  $ 342  $ 5  $ 448,664 
Grade 5 —  —  921  2,149  462  2,771  —  —  6,303 
Grade 6 —  —  —  —  —  —  —  —  — 
Grade 7 —  —  435  194  15  586  —  —  1,230 
Total $ 48,620  $ 144,134  $ 59,562  $ 37,223  $ 36,215  $ 130,096  $ 342  $ 5  $ 456,197 
Residential junior mortgage
Grades 1-4 $ 964  $ 4,406  $ 3,997  $ 3,228  $ 838  $ 3,553  $ 89,255  $ 1,252  $ 107,493 
Grade 5 —  —  —  —  —  32  —  —  32 
Grade 6 —  —  —  —  —  —  —  —  — 
Grade 7 —  —  —  —  26  48  42  —  116 
Total $ 964  $ 4,406  $ 3,997  $ 3,228  $ 864  $ 3,633  $ 89,297  $ 1,252  $ 107,641 
Retail & other
Grades 1-4 $ 2,428  $ 5,381  $ 4,774  $ 1,541  $ 1,567  $ 1,961  $ 12,301  $ —  $ 29,953 
Grade 5 —  —  —  —  —  —  —  —  — 
Grade 6 —  —  —  —  —  —  —  —  — 
Grade 7 —  17  —  —  —  50  —  —  67 
Total $ 2,428  $ 5,398  $ 4,774  $ 1,541  $ 1,567  $ 2,011  $ 12,301  $ —  $ 30,020 
Total loans $ 292,876  $ 696,475  $ 374,542  $ 273,389  $ 251,891  $ 620,547  $ 335,374  $ 1,257  $ 2,846,351 
(a) For purposes of this table at March 31, 2021, the $229 million net carrying value of PPP loans include $138 million originated in 2021 and $91 million originated in 2020, have a Pass risk grade (Grades 1-4) and have been included with the Commercial & industrial loan category.
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December 31, 2020 Amortized Cost Basis by Origination Year
(in thousands) 2020 2019 2018 2017 2016 Prior Revolving Revolving to Term TOTAL
Commercial & industrial (a)
Grades 1-4 $ 348,274  $ 121,989  $ 98,920  $ 72,027  $ 21,613  $ 39,454  $ 183,858  $ —  $ 886,135 
Grade 5 1,416  2,239  4,486  527  1,638  4,151  18,994  —  33,451 
Grade 6 69  19  735  5,315  29  32  1,923  —  8,122 
Grade 7 334  1,126  1,389  663  122  3,103  2,289  —  9,026 
Total $ 350,093  $ 125,373  $ 105,530  $ 78,532  $ 23,402  $ 46,740  $ 207,064  $ —  $ 936,734 
Owner-occupied CRE
Grades 1-4 $ 90,702  $ 74,029  $ 78,013  $ 52,911  $ 45,042  $ 150,624  $ 870  $ —  $ 492,191 
Grade 5 42  623  1,349  7,541  1,102  5,842  —  —  16,499 
Grade 6 —  —  —  1,710  —  706  —  —  2,416 
Grade 7 2,987  675  176  835  —  5,521  —  —  10,194 
Total $ 93,731  $ 75,327  $ 79,538  $ 62,997  $ 46,144  $ 162,693  $ 870  $ —  $ 521,300 
Agricultural
Grades 1-4 $ 13,719  $ 5,652  $ 7,580  $ 9,745  $ 2,613  $ 32,702  $ 21,513  $ —  $ 93,524 
Grade 5 1,034  —  701  169  644  6,131  356  —  9,035 
Grade 6 —  —  —  329  390  —  —  —  719 
Grade 7 —  —  26  110  1,111  5,042  62  —  6,351 
Total $ 14,753  $ 5,652  $ 8,307  $ 10,353  $ 4,758  $ 43,875  $ 21,931  $ —  $ 109,629 
CRE investment
Grades 1-4 $ 82,518  $ 78,841  $ 40,881  $ 69,643  $ 31,541  $ 137,048  $ 5,255  $ —  $ 445,727 
Grade 5 —  —  47  1,284  1,828  9,073  —  —  12,232 
Grade 6 —  —  —  796  —  —  —  —  796 
Grade 7 —  —  —  —  —  1,966  —  —  1,966 
Total $ 82,518  $ 78,841  $ 40,928  $ 71,723  $ 33,369  $ 148,087  $ 5,255  $ —  $ 460,721 
Construction & land development
Grades 1-4 $ 67,578  $ 30,733  $ 15,209  $ 2,204  $ 2,083  $ 7,266  $ 3,675  $ —  $ 128,748 
Grade 5 —  373  660  545  —  23  455  —  2,056 
Grade 6 —  —  —  —  —  —  —  —  — 
Grade 7 —  —  —  —  —  479  —  —  479 
Total $ 67,578  $ 31,106  $ 15,869  $ 2,749  $ 2,083  $ 7,768  $ 4,130  $ —  $ 131,283 
Residential construction
Grades 1-4 $ 31,687  $ 9,185  $ 395  $ 121  $ —  $ 264  $ —  $ —  $ 41,652 
Grade 5 —  —  —  55  —  —  —  —  55 
Grade 6 —  —  —  —  —  —  —  —  — 
Grade 7 —  —  —  —  —  —  —  —  — 
Total $ 31,687  $ 9,185  $ 395  $ 176  $ —  $ 264  $ —  $ —  $ 41,707 
Residential first mortgage
Grades 1-4 $ 146,744  $ 64,013  $ 40,388  $ 41,245  $ 41,274  $ 103,094  $ 287  $ 5  $ 437,050 
Grade 5 —  925  2,245  256  364  1,714  —  —  5,504 
Grade 6 —  —  —  —  —  —  —  —  — 
Grade 7 —  437  197  16  9  942  —  —  1,601 
Total $ 146,744  $ 65,375  $ 42,830  $ 41,517  $ 41,647  $ 105,750  $ 287  $ 5  $ 444,155 
Residential junior mortgage
Grades 1-4 $ 4,936  $ 4,338  $ 3,663  $ 1,060  $ 869  $ 3,131  $ 91,816  $ 1,648  $ 111,461 
Grade 5 —  —  —  —  —  32  —  —  32 
Grade 6 —  —  —  —  —  —  —  —  — 
Grade 7 —  —  —  27  —  232  125  —  384 
Total $ 4,936  $ 4,338  $ 3,663  $ 1,087  $ 869  $ 3,395  $ 91,941  $ 1,648  $ 111,877 
Retail & other
Grades 1-4 $ 8,083  $ 5,213  $ 1,942  $ 1,676  $ 752  $ 1,339  $ 12,602  $ —  $ 31,607 
Grade 5 —  —  —  —  —  —  —  —  — 
Grade 6 —  —  —  —  —  —  —  —  — 
Grade 7 16  —  22  —  —  50  —  —  88 
Total $ 8,099  $ 5,213  $ 1,964  $ 1,676  $ 752  $ 1,389  $ 12,602  $ —  $ 31,695 
Total loans $ 800,139  $ 400,410  $ 299,024  $ 270,810  $ 153,024  $ 519,961  $ 344,080  $ 1,653  $ 2,789,101 
(a) For purposes of this table, the $186 million net carrying value of PPP loans at December 31, 2020 were originated in 2020, have a Pass risk grade (Grades 1-4) and have been included with the Commercial & industrial loan category.
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The following tables present total loans by risk categories.
March 31, 2021
(in thousands) Grades 1- 4 Grade 5 Grade 6 Grade 7 Total
Commercial & industrial $ 698,293  $ 25,362  $ 1,069  $ 3,774  $ 728,498 
PPP loans 229,403  —  —  —  229,403 
Owner-occupied CRE 487,272  22,100  2,636  8,266  520,274 
Agricultural 92,720  8,281  —  6,008  107,009 
CRE investment 448,596  38,761  787  1,909  490,053 
Construction & land development 135,295  2,033  —  342  137,670 
Residential construction 39,532  54  —  —  39,586 
Residential first mortgage 448,664  6,303  —  1,230  456,197 
Residential junior mortgage 107,493  32  —  116  107,641 
Retail & other 29,953  —  —  67  30,020 
Total loans $ 2,717,221  $ 102,926  $ 4,492  $ 21,712  $ 2,846,351 
Percent of total 95.4  % 3.6  % 0.2  % 0.8  % 100.0  %
December 31, 2020
(in thousands) Grades 1- 4 Grade 5 Grade 6 Grade 7 Total
Commercial & industrial $ 700,119  $ 33,451  $ 8,122  $ 9,026  $ 750,718 
PPP loans 186,016  —  —  —  186,016 
Owner-occupied CRE 492,191  16,499  2,416  10,194  521,300 
Agricultural 93,524  9,035  719  6,351  109,629 
CRE investment 445,727  12,232  796  1,966  460,721 
Construction & land development 128,748  2,056  —  479  131,283 
Residential construction 41,652  55  —  —  41,707 
Residential first mortgage 437,050  5,504  —  1,601  444,155 
Residential junior mortgage 111,461  32  —  384  111,877 
Retail & other 31,607  —  —  88  31,695 
Total loans $ 2,668,095  $ 78,864  $ 12,053  $ 30,089  $ 2,789,101 
Percent of total 95.7  % 2.8  % 0.4  % 1.1  % 100.0  %
An internal loan review function rates loans using a grading system based on different risk categories. Loans with a Substandard grade are considered to have a greater risk of loss and may be assigned allocations for loss based on specific review of the weaknesses observed in the individual credits. Such loans are constantly monitored by the loan review function to ensure early identification of any deterioration. A description of the loan risk categories used by the Company follows.
Grades 1-4, Pass: Credits exhibit adequate cash flows, appropriate management and financial ratios within industry norms and/or are supported by sufficient collateral. Some credits in these rating categories may require a need for monitoring but elements of concern are not severe enough to warrant an elevated rating.
Grade 5, Watch: Credits with this rating are adequately secured and performing but are being monitored due to the presence of various short-term weaknesses which may include unexpected, short-term adverse financial performance, managerial problems, potential impact of a decline in the entire industry or local economy and delinquency issues. Loans to individuals or loans supported by guarantors with marginal net worth or collateral may be included in this rating category.
Grade 6, Special Mention: Credits with this rating have potential weaknesses that, without the Company’s attention and correction may result in deterioration of repayment prospects. These assets are considered Criticized Assets. Potential weaknesses may include adverse financial trends for the borrower or industry, repeated lack of compliance with Company requests, increasing debt to net worth, serious management conditions and decreasing cash flow.
Grade 7, Substandard: Assets with this rating are characterized by the distinct possibility the Company will sustain some loss if deficiencies are not corrected. All foreclosures, liquidations, and nonaccrual loans are considered to be categorized in this rating, regardless of collateral sufficiency.
Troubled Debt Restructurings: At March 31, 2021, there were eight loans classified as troubled debt restructurings with a current outstanding balance of $5.1 million (including $3.0 million on nonaccrual and $2.1 million performing) and pre-modification balance of $5.5 million. In comparison, at December 31, 2020, there were eleven loans classified as troubled debt
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restructurings with an outstanding balance of $5.5 million (including $3.4 million on nonaccrual and $2.1 million performing) and pre-modification balance of $6.5 million. There were no loans classified as troubled debt restructurings during the previous twelve months that subsequently defaulted during the three months ended March 31, 2021. As of March 31, 2021, there were no commitments to lend additional funds to debtors whose terms have been modified in troubled debt restructurings.

Note 7 – Goodwill and Other Intangibles and Mortgage Servicing Rights
Management periodically reviews the carrying value of its intangible assets to determine if any impairment has occurred, in which case an impairment charge would be recorded as an expense in the period of impairment, or whether changes in circumstances have occurred that would require a revision to the remaining useful life which would impact expense prospectively. In making such determination, management evaluates whether there are any adverse qualitative factors indicating that an impairment may exist, as well as the performance, on an undiscounted basis, of the underlying operations or assets which give rise to the intangible. Management continues to consider the ongoing impacts of the COVID-19 pandemic and related economic uncertainty on the valuation of our franchise, stability of deposits, and of the wealth client base, underlying our goodwill, core deposit intangible, and customer list intangibles, and determined no impairments were indicated. A summary of goodwill and other intangibles was as follows.
Three Months Ended Year Ended
(in thousands) March 31, 2021 December 31, 2020
Goodwill $ 163,151  $ 163,151 
Core deposit intangibles 8,112  8,837 
Customer list intangibles 3,238  3,365 
    Other intangibles 11,350  12,202 
Goodwill and other intangibles, net $ 174,501  $ 175,353 
Goodwill: A summary of goodwill was as follows. During 2020, goodwill increased due to the Advantage acquisition. See Note 2 for additional information on the Company’s acquisitions.
Three Months Ended Year Ended
(in thousands) March 31, 2021 December 31, 2020
Goodwill:
Goodwill at beginning of year $ 163,151  $ 151,198 
Acquisition —  11,953 
Goodwill at end of period $ 163,151  $ 163,151 
Other intangible assets: Other intangible assets, consisting of core deposit intangibles and customer list intangibles, are amortized over their estimated finite lives. During 2020, core deposit intangibles increased due to the Advantage acquisition. See Note 2 for additional information on the Company’s acquisitions.
Three Months Ended Year Ended
(in thousands) March 31, 2021 December 31, 2020
Core deposit intangibles:
Gross carrying amount $ 31,715  $ 31,715 
Accumulated amortization (23,603) (22,878)
Net book value $ 8,112  $ 8,837 
Additions during the period $ —  $ 1,000 
Amortization during the period $ 725  $ 3,060 
Customer list intangibles:
Gross carrying amount $ 5,523  $ 5,523 
Accumulated amortization (2,285) (2,158)
Net book value $ 3,238  $ 3,365 
Amortization during the period $ 127  $ 507 
Mortgage servicing rights: Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income, and assessed for impairment at each reporting date, with the amortization recorded in mortgage income, net, in the consolidated statements of income. Mortgage servicing rights are carried at the lower of the initial capitalized amount, net
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of accumulated amortization, or estimated fair value, and are included in other assets in the consolidated balance sheets. A summary of the changes in the mortgage servicing rights asset was as follows.
Three Months Ended Year Ended
(in thousands) March 31, 2021 December 31, 2020
Mortgage servicing rights ("MSR") asset:
MSR asset at beginning of year $ 10,230  $ 5,919 
Capitalized MSR 1,117  5,256 
MSR asset acquired —  529 
Amortization during the period (496) (1,474)
MSR asset at end of period $ 10,851  $ 10,230 
Valuation allowance at beginning of year $ (1,000) $ — 
Additions (500) (1,000)
Valuation allowance at end of period $ (1,500) $ (1,000)
MSR asset, net $ 9,351  $ 9,230 
Fair value of MSR asset at end of period $ 10,550  $ 9,276 
Residential mortgage loans serviced for others $ 1,293,845  $ 1,250,206 
Net book value of MSR asset to loans serviced for others 0.72  % 0.74  %
The Company periodically evaluates its mortgage servicing rights asset for impairment. At each reporting date, impairment is assessed based on estimated fair value using estimated prepayment speeds of the underlying mortgage loans serviced and stratification based on the risk characteristics of the underlying loans (predominantly loan type and note interest rate). See Note 9 for additional information on the fair value of the MSR asset.
The following table shows the estimated future amortization expense for amortizing intangible assets and the MSR asset. The projections are based on existing asset balances, the current interest rate environment and prepayment speeds as of March 31, 2021. The actual amortization expense the Company recognizes in any given period may be significantly different depending upon acquisition or sale activities, changes in interest rates, prepayment speeds, market conditions, regulatory requirements and events or circumstances that indicate the carrying amount of an asset may not be recoverable.
(in thousands) Core deposit
intangibles 		Customer list
intangibles 		MSR asset
Year ending December 31,
2021 (remaining nine months)
$ 1,918  $ 380  $ 1,381 
2022 2,150  507  1,869 
2023 1,633  483  1,773 
2024 1,130  449  1,448 
2025 670  449  961 
2026 317  249  960 
Thereafter 294  721  2,459 
Total $ 8,112  $ 3,238  $ 10,851 

Note 8 – Short and Long-Term Borrowings
Short-Term Borrowings:
Short-term borrowings include any borrowing with an original maturity of one year or less. At both March 31, 2021 and December 31, 2020, the Company did not have any outstanding short-term borrowings.
Long-Term Borrowings:
Long-term borrowings include any borrowing with an original maturity greater than one year. The components of long-term borrowings were as follows.
(in thousands) March 31, 2021 December 31, 2020
FHLB advances $ 19,000  $ 29,000 
Junior subordinated debentures 24,988  24,869 
Total long-term borrowings
$ 43,988  $ 53,869 
FHLB Advances: The FHLB advances bear fixed rates, require interest-only monthly payments, and have maturity dates through March 2027. The weighted average rate of the FHLB advances was 0.78% at March 31, 2021 and 0.73% at December 31, 2020.
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Junior Subordinated Debentures: The following table shows the breakdown of junior subordinated debentures. Interest on all debentures is current. Any applicable discounts (initially recorded to carry an acquired debenture at its then estimated fair value) are being accreted to interest expense over the remaining life of the debentures. All the debentures below are currently callable and may be redeemed in part or in full at par plus any accrued but unpaid interest. At March 31, 2021 and December 31, 2020, $24.0 million and $23.9 million, respectively, qualify as Tier 1 capital.
Junior Subordinated Debentures
March 31, 2021 December 31, 2020
(in thousands) Maturity
Date 		Par Unamortized
Discount 		Carrying
Value 		Carrying
Value
2005 Mid-Wisconsin Financial Services, Inc. (1)
12/15/2035 $ 10,310  $ (2,923) $ 7,387  $ 7,338 
2006 Baylake Corp. (2)
9/30/2036 16,598  (3,588) 13,010  12,951 
2004 First Menasha Bancshares, Inc. (3)
3/17/2034 5,155  (564) 4,591  4,580 
Total   $ 32,063  $ (7,075) $ 24,988  $ 24,869 
(1)The debentures, assumed in April 2013 as the result of an acquisition, have a floating rate of the three-month LIBOR plus 1.43%, adjusted quarterly. The interest rates were 1.61% and 1.65% as of March 31, 2021 and December 31, 2020, respectively.
(2)The debentures, assumed in April 2016 as a result of an acquisition, have a floating rate of the three-month LIBOR plus 1.35%, adjusted quarterly. The interest rates were 1.55% and 1.59% as of March 31, 2021 and December 31, 2020, respectively.
(3)The debentures, assumed in April 2017 as the result of an acquisition, have a floating rate of the three-month LIBOR plus 2.79%, adjusted quarterly. The interest rates were 2.97% and 3.02% as of March 31, 2021 and December 31, 2020, respectively.

Note 9 – Fair Value Measurements
Fair value represents the estimated price at which an orderly transaction to sell an asset or transfer a liability would take place between market participants at the measurement date under current market conditions (i.e., an exit price concept), and is a market-based measurement versus an entity-specific measurement.
The Company records and/or discloses financial instruments on a fair value basis. These financial assets and financial liabilities are measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the assumptions used to determine fair value. These levels are:
•Level 1 – quoted market prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date
•Level 2 – inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly
•Level 3 – significant unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity
In instances where the fair value measurement is based on inputs from different levels, the level within which the entire fair value measurement will be categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. This assessment of the significance of an input requires management judgment.
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Recurring basis fair value measurements:
The following table presents the balances of assets and liabilities measured at fair value on a recurring basis for the periods presented.
(in thousands) Fair Value Measurements Using
Measured at Fair Value on a Recurring Basis: Total Level 1 Level 2 Level 3
March 31, 2021
U.S. government agency securities $ 79,115  $ —  $ 79,115  $ — 
State, county and municipals 227,672  —  227,672  — 
Mortgage-backed securities 166,900  —  166,900  — 
Corporate debt securities 84,542  —  81,412  3,130 
Securities AFS
$ 558,229  $ —  $ 555,099  $ 3,130 
Other investments (equity securities) $ 4,190  $ 4,190  $ —  $ — 
December 31, 2020
U.S. government agency securities $ 63,451  $ —  $ 63,451  $ — 
State, county and municipals 231,868  —  231,868  — 
Mortgage-backed securities 162,495  —  162,495  — 
Corporate debt securities 81,523  —  78,393  3,130 
Securities AFS
$ 539,337  $ —  $ 536,207  $ 3,130 
Other investments (equity securities) $ 3,567  $ 3,567  $ —  $ — 
The following is a description of the valuation methodologies used by the Company for the securities AFS and equity securities measured at fair value on a recurring basis, noted in the tables above. Where quoted market prices on securities exchanges are available, the investments are classified as Level 1. Level 1 investments primarily include exchange-traded equity securities. If quoted market prices are not available, fair value is generally determined using prices obtained from independent pricing vendors who use pricing models (with typical inputs including benchmark yields, reported trades for similar securities, issuer spreads or relationship to other benchmark quoted securities), or discounted cash flows, and are classified as Level 2. Examples of these investments include U.S. government agency securities, mortgage-backed securities, obligations of state, county and municipals, and certain corporate debt securities. Finally, in certain cases where there is limited activity or less transparency around inputs to the estimated fair value, investments are classified within Level 3 of the hierarchy. Examples of these include private corporate debt securities, which include trust preferred security investments. At March 31, 2021 and December 31, 2020, it was determined that carrying value was the best approximation of fair value for these Level 3 securities, based primarily on the internal analysis on these securities.
For the three months ended March 31, 2021 and the year ended December 31, 2020, there have been no changes in the Level 3 securities AFS measured at fair value on a recurring basis.
Nonrecurring basis fair value measurements:
The following table presents the Company’s assets measured at fair value on a nonrecurring basis, aggregated by level in the fair value hierarchy within which those measurements fall.
(in thousands) Fair Value Measurements Using
Measured at Fair Value on a Nonrecurring Basis: Total Level 1 Level 2 Level 3
March 31, 2021
Collateral dependent loans $ 8,399  $ —  $ —  $ 8,399 
Other real estate owned (“OREO”) 3,797  —  —  3,797 
MSR asset 10,550  —  —  10,550 
December 31, 2020
Collateral dependent loans $ 7,633  $ —  $ —  $ 7,633 
OREO 3,608  —  —  3,608 
MSR asset 9,276  —  —  9,276 
The following is a description of the valuation methodologies used by the Company for the items noted in the table above. For collateral dependent loans, expected credit losses are based on the estimated fair value of the collateral at the balance sheet date, with consideration for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. For OREO, the fair value is based upon the estimated fair value of the underlying collateral adjusted for the expected costs to sell. To estimate the fair value of the MSR asset, the underlying serviced loan pools are stratified by interest rate tranche and term of the loan, and a
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valuation model is used to calculate the present value of the expected future cash flows for each stratum. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as costs to service, a discount rate, ancillary income, default rates and losses, and prepayment speeds. Although some of these assumptions are based on observable market data, other assumptions are based on unobservable estimates of what market participants would use to measure fair value.
Financial instruments:
The carrying amounts and estimated fair values of the Company’s financial instruments are shown below.
March 31, 2021
(in thousands) Carrying
Amount 		Estimated
Fair Value 		Level 1 Level 2 Level 3
Financial assets:
Cash and cash equivalents $ 735,854  $ 735,854  $ 735,854  $ —  $ — 
Certificates of deposit in other banks 27,296  28,320  —  28,320  — 
Securities AFS 558,229  558,229  —  555,099  3,130 
Other investments, including equity securities 28,248  28,248  4,190  20,074  3,984 
Loans held for sale 16,883  17,383  —  17,383  — 
Loans, net 2,813,725  2,861,528  —  —  2,861,528 
BOLI 83,788  83,788  83,788  —  — 
MSR asset 9,351  10,550  —  —  10,550 
Financial liabilities:
Deposits $ 3,900,594  $ 3,906,058  $ —  $ —  $ 3,906,058 
Long-term borrowings 43,988  43,750  —  19,261  24,489 
December 31, 2020
(in thousands) Carrying
Amount 		Estimated
Fair Value 		Level 1 Level 2 Level 3
Financial assets:
Cash and cash equivalents $ 802,859  $ 802,859  $ 802,859  $ —  $ — 
Certificates of deposit in other banks 29,521  31,053  —  31,053  — 
Securities AFS 539,337  539,337  —  536,207  3,130 
Other investments, including equity securities 27,619  27,619  3,567  20,155  3,897 
Loans held for sale 21,450  22,329  —  22,329  — 
Loans, net 2,756,928  2,834,452  —  —  2,834,452 
BOLI 83,262  83,262  83,262  —  — 
MSR asset 9,230  9,276  —  —  9,276 
Financial liabilities:
Deposits $ 3,910,399  $ 3,917,121  $ —  $ —  $ 3,917,121 
Long-term borrowings 53,869  53,859  —  29,488  24,371 
The carrying value of certain assets and liabilities such as cash and cash equivalents, BOLI, nonmaturing deposits, and short-term borrowings, approximate their estimated fair value. For those financial instruments not previously disclosed, the following is a description of the valuation methodologies used.
Certificates of deposits in other banks: Fair values are estimated using discounted cash flow analysis based on current interest rates being offered by instruments with similar terms and represents a Level 2 measurement.
Other investments: The valuation methodologies utilized for exchange-traded equity securities are discussed under “Recurring basis fair value measurements” above. The carrying amount of Federal Reserve Bank and FHLB stock is a reasonably accepted fair value estimate given their restricted nature. Fair value is the redeemable (carrying) value based on the redemption provisions of the instruments which is considered a Level 2 measurement. The carrying amount of the remaining other investments (particularly common stocks of companies or other banks that are not publicly traded) approximates their fair value, determined primarily by analysis of company financial statements and recent capital issuances of the respective companies or banks, if any, and represents a Level 3 measurement.
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Loans held for sale: The fair value estimation process for the loans held for sale portfolio is segregated by loan type. The estimated fair value was based on what secondary markets are currently offering for portfolios with similar characteristics and represents a Level 2 measurement.
Loans, net: For variable-rate loans that reprice frequently and with no significant change in credit risk or other optionality, fair values are based on carrying values. Fair values for all other loans are estimated by discounting contractual cash flows using estimated market discount rates, which reflect the credit and interest rate risk inherent in the loan. Collateral-dependent impaired loans are included in loans, net. The fair value of loans is considered to be a Level 3 measurement due to internally developed discounted cash flow measurements.
Deposits: The fair value of deposits with no stated maturity (such as demand deposits, savings, interest and noninterest checking, and money market accounts) is, by definition, equal to the amount payable on demand at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market place on certificates of similar remaining maturities. Use of internal discounted cash flows provides a Level 3 fair value measurement.
Long-term borrowings: The fair value of the FHLB advances is obtained from the FHLB which uses a discounted cash flow analysis based on current market rates of similar maturity debt securities and represents a Level 2 measurement. The fair value of the junior subordinated debentures utilizes a discounted cash flow analysis based on an estimate of current interest rates being offered by instruments with similar terms and credit quality. Since the market for these instruments is limited, the internal evaluation represents a Level 3 measurement.
Lending-related commitments and derivative financial instruments: At March 31, 2021 and December 31, 2020, the estimated fair value of letters of credit, interest rate lock commitments on residential mortgage loans, outstanding mandatory commitments to sell residential mortgage loans into the secondary market, and mirror interest rate swap agreements were not significant.
Limitations: Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Fair value estimates may not be realizable in an immediate settlement of the instrument. In some instances, there are no quoted market prices for the Company’s various financial instruments, in which case fair values may be based on estimates using present value or other valuation techniques, or based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of the financial instruments, or other factors. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. Subsequent changes in assumptions could significantly affect the estimates.

Note 10 – Subsequent Event
On April 12, 2021, Nicolet entered into a definitive merger agreement with Mackinac Financial Corporation (“Mackinac”) pursuant to which Mackinac will merge with and into Nicolet, expanding Nicolet prominently into Northern Michigan and the Upper Peninsula of Michigan. Mackinac shareholders will receive fixed consideration of 0.22 shares of Nicolet common stock and $4.64 in cash for each share of Mackinac common stock owned (approximating a 20% cash and 80% stock split), subject to provisions provided for in the merger agreement. At December 31, 2020, Mackinac had total assets of $1.5 billion, loans of $1.1 billion, deposits of $1.3 billion, and equity of $168 million. The merger is expected to close in the third quarter of 2021, subject to customary closing conditions, including approval by regulators and shareholders of both Mackinac and Nicolet.
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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 northeastern and central Wisconsin and in Menominee, Michigan.
Forward-Looking Statements
Statements made in this document and in any documents that are incorporated by reference which are not purely historical are forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, including any statements regarding descriptions of management’s plans, objectives, or goals for future operations, products or services, and forecasts of its revenues, earnings, or other measures of performance. Forward-looking statements are based on current management expectations and, by their nature, are subject to risks and uncertainties. These statements generally may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “should,” “will,” “intend,” or similar expressions. Shareholders should note that many factors, some of which are discussed elsewhere in this document, could affect the future financial results of Nicolet and could cause those results to differ materially from those expressed in forward-looking statements contained in this document. These factors, many of which are beyond Nicolet’s control, include, but are not necessarily limited to the following:
•the magnitude and duration of the COVID-19 pandemic and the effects of the COVID-19 pandemic on the business, customers, employees and third-party service providers of Nicolet or any of its acquisition targets, including Mackinac;
•operating, legal and regulatory risks, including the effects of legislative or regulatory developments affecting the financial industry generally or Nicolet specifically;
•economic, market, political and competitive forces affecting Nicolet’s banking and wealth management businesses;
•changes in interest rates, monetary policy and general economic conditions, which may impact Nicolet’s net interest income;
•the risk that the proposed acquisition of Mackinac will not be consummated or will not meet Nicolet’s expectations regarding the timing of the proposed acquisition;
•diversion of management time on pandemic-related or acquisition-related issues;
•adoption of new accounting standards, including the effects from the adoption of the CECL model on January 1, 2020, or changes in existing standards;
•changes to statutes, regulations, or regulatory policies or practices resulting from the COVID-19 pandemic;
•compliance or operational risks related to new products, services, ventures, or lines of business, if any, that Nicolet may pursue or implement;
•changes in consumer demand for financial services; and
•the risk that Nicolet’s analysis of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.
These factors should be considered in evaluating the forward-looking statements, and you should not place undue reliance on such statements. Nicolet specifically disclaims any obligation to update factors or to publicly announce the results of revisions to any of the forward-looking statements or comments included herein to reflect future events or developments.

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

The timing of Nicolet’s acquisition of Advantage Community Bancshares, Inc. (“Advantage”) on August 21, 2020, at 4% of then pre-merger assets, impacts financial comparisons. Certain income statement results, average balances and related ratios for the three-month period ended March 31, 2021 include full contribution from Advantage, while the same period in 2020 includes no contribution from Advantage.

The initial impacts of the COVID-19 pandemic (declared in March 2020) resulted in, among other things, stock and global markets decline, disruption in business and leisure activities as nation-wide stay-at-home orders were mandated, significant strain on the health care industry as it addressed the severity of the health crisis, and shifts in the general economy (such as high unemployment, negative GDP expectations, an immediate 150 bps decline in Federal funds rates, and unprecedented government stimulus), triggering a 2020 recession. The dramatic events surrounding the pandemic, fluctuating social and
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economic changes since the onset of the pandemic, and uncertainty about the longevity of the pandemic’s affects were significant and unfolding throughout most of 2020, but have abated somewhat for 2021 as people and businesses were supported by government stimulus and are adjusting to a vaccination rollout and a new normal in a still evolving environment.

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

At March 31, 2021, period end assets were $4.5 billion, unchanged from December 31, 2020, with a slight shift in composition. The shift in assets included a $57 million increase in loans (including $43 million from net activity in PPP loans, and $14 million increase in all other loans, mainly commercial) and a $19 million increase in securities AFS, offset by a reduction in cash and cash equivalents (down $67 million to $736 million). Total deposits of $3.9 billion at March 31, 2021, were also minimally changed from year end, with a decrease of $64 million in brokered deposits (as brokered deposits mature without renewal given our liquid position) substantially offset by a $54 million increase in customer core deposits (aided in part by additional stimulus checks and new PPP funds on deposit). Total capital was $550 million at March 31, 2021, an increase of $11 million since year end, mostly due to solid earnings, partly offset by share repurchase activity and unfavorable net fair value investment changes.

During 2020, we originated 2,725 PPP loans totaling $351 million, bearing a 1% contractual rate, and earned a $12.3 million fee. During first quarter 2021, under the latest round of the SBA’s program, Nicolet originated 1,928 PPP loans totaling $145 million and earned a $7.2 million fee. Of the total fees, $5.7 million was accreted into interest in 2020 and $3.4 million was accreted in first quarter 2021. At March 31, 2021, the net carrying value of all PPP loans was $229 million, or 8% of total loans, for a net $43 million increase over year-end 2020. SBA loan forgiveness that started in November 2020 has boosted overall borrower equity in their businesses, meaningfully improving the credit quality of many commercial relationships.

Net income for first quarter 2021 was $18.2 million, consistent with net income of $18.0 million for fourth quarter 2020 and 73% stronger than net income of $10.6 million for first quarter 2020, due to the vastly different business environment between the first quarter periods (essentially pre-pandemic for 2020 and emerging-out-of-pandemic for 2021). Between the first quarter periods, 2021 benefited from higher net interest income (largely the inclusion of PPP loans and despite tighter margins), lower credit provision (on improved asset quality levels and better visibility on credit concerns than a year ago), strong noninterest income (led by exceptionally higher net mortgage income), offset partly by higher noninterest expense (with merit increases and expense timing in personnel and modest increase in all other expenses combined) and tax expense (given the higher pretax income level).
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Performance Summary
Table 1: Earnings Summary and Selected Financial Data
At or for the Three Months Ended
(In thousands, except per share data) 3/31/2021 12/31/2020 9/30/2020 6/30/2020 3/31/2020
Results of operations:
Interest income $ 36,876  $ 38,037  $ 37,270  $ 36,892  $ 37,003 
Interest expense 3,235  4,019  4,710  5,395  5,740 
Net interest income 33,641  34,018  32,560  31,497  31,263 
Provision for credit losses 500  1,300  3,000  3,000  3,000 
Net interest income after provision for credit losses 33,141  32,718  29,560  28,497  28,263 
Noninterest income 17,126  16,879  18,691  17,471  9,585 
Noninterest expense 26,081  25,367  23,685  27,813  23,854 
Income before income tax expense 24,186  24,230  24,566  18,155  13,994 
Income tax expense 5,947  6,145  6,434  4,576  3,321 
Net income 18,239  18,085  18,132  13,579  10,673 
Net income attributable to noncontrolling interest —  98  30  101  118 
Net income attributable to Nicolet Bankshares, Inc. $ 18,239  $ 17,987  $ 18,102  $ 13,478  $ 10,555 
Earnings per common share:          
Basic $ 1.82  $ 1.79  $ 1.75  $ 1.29  $ 1.00 
Diluted $ 1.75  $ 1.74  $ 1.72  $ 1.28  $ 0.98 
Common Shares:          
Basic weighted average 9,998  10,074  10,349  10,417  10,516 
Diluted weighted average 10,403  10,350  10,499  10,520  10,801 
Outstanding (period end) 9,988  10,011  10,196  10,424  10,408 
Period-End Balances:          
Loans $ 2,846,351  $ 2,789,101  $ 2,908,793  $ 2,821,501  $ 2,607,424 
Allowance for credit losses - loans 32,626  32,173  31,388  29,130  26,202 
Securities available-for-sale, at fair value 558,229  539,337  535,351  510,809  511,860 
Goodwill and other intangibles, net 174,501  175,353  176,213  164,094  164,974 
Total assets 4,543,804  4,551,789  4,706,375  4,541,228  3,732,554 
Deposits 3,900,594  3,910,399  3,712,808  3,537,805  3,023,466 
Stockholders’ equity 550,046  539,189  538,068  532,033  510,971 
Book value per common share 55.07  53.86  52.77  51.04  49.09 
Tangible book value per common share (2)
37.60  36.34  35.49  35.30  33.24 
Average Balances:          
Loans $ 2,825,664  $ 2,868,827  $ 2,871,256  $ 2,823,866  $ 2,584,584 
Interest-earning assets 4,089,603  4,091,460  4,216,106  3,917,499  3,167,505 
Goodwill and other intangibles, net 174,825  175,678  169,353  164,564  165,532 
Total assets 4,514,927  4,515,226  4,633,359  4,310,088  3,555,144 
Deposits 3,875,205  3,793,430  3,636,260  3,403,188  2,920,071 
Interest-bearing liabilities 2,764,232  2,744,578  2,933,737  2,741,199  2,218,592 
Stockholders’ equity 544,541  537,920  537,826  520,177  513,558 
Financial Ratios: (1)
         
Return on average assets 1.64  % 1.58  % 1.55  % 1.26  % 1.19  %
Return on average common equity 13.58  13.30  13.39  10.42  8.27 
Return on average tangible common equity (2)
20.01  19.75  19.54  15.24  12.20 
Average equity to average assets 12.06  11.91  11.61  12.07  14.45 
Stockholders' equity to assets 12.11  11.85  11.43  11.72  13.69 
Tangible common equity to tangible assets (2)
8.60  8.31  7.99  8.41  9.70 
Net interest margin 3.31  3.29  3.06  3.21  3.94 
Net loan charge-offs to average loans 0.01  0.07  0.10  0.01  0.01 
Nonperforming loans to total loans 0.31  0.34  0.38  0.43  0.57 
Nonperforming assets to total assets 0.28  0.29  0.25  0.29  0.42 
Effective tax rate 24.59  25.36  26.19  25.21  23.73 
(1) Income statement-related ratios for partial-year periods are annualized.
(2) The ratios of tangible book value per common share, return on average tangible common equity, and tangible common equity to tangible assets exclude goodwill and other intangibles, net. These financial ratios have been included as they are considered to be important metrics with which to analyze and evaluate financial condition and capital strength, especially when comparing Nicolet to non-acquisitive financial institutions.

Net income was $18.2 million for the three months ended March 31, 2021, an increase of $7.6 million (73%) over $10.6 million for the three months ended March 31, 2020. Earnings per diluted common share was $1.75 for first quarter 2021, compared to
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$0.98 for first quarter 2020, with earnings up 73% and diluted weighted average shares down 4%. Annualized return on average assets for the comparable first quarters of 2021 and 2020 was 1.64% and 1.19%, respectively. The underlying financial results were sound for first quarter 2021, reflecting disciplined deposit pricing and a steepening yield curve, though largely offset by continued lower earning asset yields in this low rate environment. Mortgage has been strong, with the low rate environment boosting refinancing activity, while the provision for credit losses has been reflective of our continued pristine asset quality.
•At March 31, 2021, assets were $4.5 billion, unchanged from December 31, 2020 and $811 million (22%) higher than March 31, 2020. The increase since March 2020 is largely due to the steady growth in core deposits coming from customers holding funds from government stimulus (both payments to individuals and PPP loan proceeds held by businesses).
•At March 31, 2021, loans were $2.8 billion, an increase of $57 million (2%) over December 31, 2020 and $239 million (9%) higher than March 31, 2020 (partly due to the $88 million of loans acquired with Advantage in August 2020). Quarterly average loans contracted $43 million (2%) from fourth quarter 2020, but grew $241 million (9%) over first quarter 2020. For additional information regarding loans, see “BALANCE SHEET ANALYSIS — Loans.”
•Total deposits were $3.9 billion at March 31, 2021, down slightly ($10 million) from December 31, 2020 (with brokered deposits down $64 million, as brokered deposits procured during our liquidity actions in March 2020 mature without renewal, and customer core deposits up $54 million, from individual stimulus and new PPP funds on deposit) and $877 million (29%) higher than March 31, 2020 (largely due to steady increases in customer balances from government stimulus, the $141 million of deposits acquired with Advantage in August 2020, and the March 2020 liquidity actions noted above). Quarterly average deposits grew $82 million (2%) over fourth quarter 2020 and grew $955 million (33%) over first quarter 2020. For additional information regarding deposits, see “BALANCE SHEET ANALYSIS – Deposits.”
•Comparatively, short-term interest rates have remained unchanged since March 2020, while the yield curve has begun to steepen mainly since year end 2020. The net interest margin was 3.31% for first quarter 2021, 63 bps lower than the comparable 2020 period, with the earning asset yield down 103 bps, the cost of funds favorably lower 57 bps, and the net free funds unfavorably lower 17 bps. Net interest income increased $2.4 million (8%) over first quarter 2020, benefiting predominantly from favorable deposit rate changes (largely due to the lower rate environment) with the impact of lower earning asset yields offset largely by PPP income. For additional information regarding net interest income, see “INCOME STATEMENT ANALYSIS — Net Interest Income.”
•Noninterest income excluding net asset gains grew $6.2 million (60%) over first quarter 2020, with net mortgage income, trust services fee income, brokerage fee income and other income up year-over-year on a recovering economy. For additional information regarding noninterest income, see “INCOME STATEMENT ANALYSIS — Noninterest Income.”
•Noninterest expense increased $2.2 million (9%) over first quarter 2020, in part from elevated personnel costs, increased data processing and heightened professional fees related to the proposed acquisition of Mackinac. For additional information regarding noninterest expense, see “INCOME STATEMENT ANALYSIS — Noninterest Expense.”
•Provision for credit losses decreased to $0.5 million for the three months ended March 31, 2021, compared to $3.0 million for the three months ended March 31, 2020, with the prior year largely impacted by uncertainty surrounding the initial onset of the COVID-19 pandemic. Asset quality has improved over the prior year and we continue to maintain historically favorable ratios in all categories. For additional information regarding the allowance for credit losses see “BALANCE SHEET ANALYSIS – Allowance for Credit Losses - Loans.”
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INCOME STATEMENT ANALYSIS
Net Interest Income
Tax-equivalent net interest income is a non-GAAP measure, but is a preferred industry measurement of net interest income (and its use in calculating a net interest margin) as it enhances the comparability of net interest income arising from taxable and tax-exempt sources. The tax-equivalent adjustments bring tax-exempt interest to a level that would yield the same after-tax income by applying the effective Federal corporate tax rates to the underlying assets. Tables 2 and 3 present information to facilitate the review and discussion of selected average balance sheet items, tax-equivalent net interest income, interest rate spread and net interest margin.

Table 2: Average Balance Sheet and Net Interest Income Analysis - Tax-Equivalent Basis
For the Three Months Ended March 31,
2021
2020
(in thousands) Average
Balance 		Interest Average
Yield/Rate 		Average
Balance 		Interest Average
Yield/Rate
ASSETS
Interest-earning assets
PPP Loans $ 206,498  $ 3,951  7.65  % $ —  $ —  —  %
Commercial-based loans ex PPP 2,125,844  24,441  4.60  % 2,108,402  27,892  5.23  %
Retail-based loans 493,322  5,493  4.46  % 476,182  5,916  4.97  %
    Total loans, including loan fees (1)(2)
2,825,664  33,885  4.80  % 2,584,584  33,808  5.19  %
Investment securities:
Taxable
382,455  1,814  1.90  % 327,910  2,072  2.53  %
Tax-exempt (2)
145,887  774  2.12  % 125,910  692  2.20  %
        Total investment securities 528,342  2,588  1.96  % 453,820  2,764  2.44  %
Other interest-earning assets 735,597  655  0.36  % 129,101  662  2.04  %
Total non-loan earning assets
1,263,939  3,243  1.03  % 582,921  3,426  2.35  %
Total interest-earning assets
4,089,603  $ 37,128  3.63  % 3,167,505  $ 37,234  4.66  %
Other assets, net 425,324  387,639 
Total assets
$ 4,514,927  $ 3,555,144 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings $ 535,914  $ 80  0.06  % $ 351,238  $ 305  0.35  %
Interest-bearing demand 673,398  759  0.46  % 535,296  1,214  0.91  %
Money market accounts ("MMA") 857,258  124  0.06  % 660,686  730  0.44  %
Core time deposits 329,378  878  1.08  % 427,925  1,933  1.82  %
Total interest-bearing core deposits 2,395,948  1,841  0.31  % 1,975,145  4,182  0.85  %
Brokered deposits 316,589  1,081  1.38  % 158,068  775  1.97  %
Total interest-bearing deposits
2,712,537  2,922  0.44  % 2,133,213  4,957  0.93  %
Other interest-bearing liabilities 51,695  313  2.42  % 85,379  783  3.64  %
Total interest-bearing liabilities
2,764,232  3,235  0.47  % 2,218,592  5,740  1.04  %
Noninterest-bearing demand 1,162,668  786,858 
Other liabilities 43,486  36,136 
Stockholders’ equity 544,541  513,558 
Total liabilities and stockholders’ equity $ 4,514,927  $ 3,555,144 
Net interest income and rate spread $ 33,893  3.16  % $ 31,494  3.62  %
Tax-equivalent adjustment & net free funds 252  0.15  % 231  0.32  %
Net interest income and net interest margin $ 33,641  3.31  % $ 31,263  3.94  %
Selected Additional Information:
Total loans ex PPP $ 2,619,166  $ 29,934  4.57  % $ 2,584,584  $ 33,808  5.19  %
Total interest-earning assets ex PPP 3,883,105  33,177  3.42  % 3,167,505  37,234  4.66  %
Net interest rate spread ex PPP 2.95  % 3.62  %
(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, 2021
Compared to March 31, 2020:
Increase (Decrease) Due to Changes in
(in thousands) Volume Rate
Net (1)
Interest-earning assets
PPP Loans $ 3,951  $ —  $ 3,951 
Commercial-based loans ex PPP (1,329) (2,122) (3,451)
Retail-based loans 205  (628) (423)
    Total loans, including loan fees (2) (3)
2,827  (2,750) 77 
Investment securities:
Taxable 18  (276) (258)
Tax-exempt (3)
107  (25) 82 
    Total investment securities 125  (301) (176)
Other interest-earning assets 393  (400) (7)
 Total non-loan earning assets
518  (701) (183)
Total interest-earning assets
$ 3,345  $ (3,451) $ (106)
Interest-bearing liabilities
Savings $ 107  $ (332) $ (225)
Interest-bearing demand 255  (710) (455)
MMA 166  (772) (606)
Core time deposits (383) (672) (1,055)
    Total interest-bearing core deposits 145  (2,486) (2,341)
Brokered deposits 589  (283) 306 
Total interest-bearing deposits
734  (2,769) (2,035)
Other interest-bearing liabilities (176) (294) (470)
Total interest-bearing liabilities
558  (3,063) (2,505)
Net interest income $ 2,787  $ (388) $ 2,399 
(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.

Short-term interest rates have remained steady since March 31, 2020, while the yield curve has begun to steepen mainly since year end 2020. The succeeding four quarters felt the pressure of a low interest rate environment and bloated cash balances from government stimulus, both in the form of stimulus checks to individuals and PPP loans for businesses. These elevated low interest-earning asset balances have further decreased margins along with the normal pressures of a near-zero rate environment. Though margins remain depressed, interest income dollars continue to rise on favorable asset volumes and proactive expense reduction measures. The following paragraphs will discuss the comparison of the first three months of 2021 and 2020, with minimal COVID-19 pandemic impacts appearing in first quarter 2020 and the economy beginning to rebound in first quarter 2021. Though improving, we see continued margin pressure and pricing impacts on loans and deposits.
Tax-equivalent net interest income was $33.9 million for the first three months of 2021, comprised of net interest income of $33.6 million ($2.4 million or 8% higher than the first three months of 2020), and a $0.3 million tax-equivalent adjustment. The $2.4 million increase in tax-equivalent net interest income was attributable to net favorable volumes (which added $2.8 million, mostly from higher loan volumes due to the inclusion PPP loans as well as interest-earning assets from the Advantage acquisition) and net unfavorable rates (which reduced net interest income $0.4 million). The net $0.4 million decrease from rates was from interest-earning asset rate changes in the lower rate environment (decreasing net interest income $3.5 million, of which $2.8 million was from loans), offset partly by benefits of a lower cost of funds (improving net interest income $3.1 million, predominantly led by $2.5 million savings from interest-bearing core deposits, $0.3 million savings from wholesale funds, and $0.3 million savings from brokered deposits).
Between the comparable three-month periods, the interest rate spread decreased 46 bps, largely attributable to the lower interest rate environment between the periods and the significantly higher concentration of low-earning cash compared to first quarter 2020. The 2021 interest-earning asset yield declined 103 bps to 3.63%, partly from the 39 bps decline in loans but was more significantly impacted by the decrease in the loans-to-earning asset mix (to 69% compared to 82% for first quarter 2020) given the significant increase in cash. Other interest-earning assets (which are predominantly cash) declined 168 bps, while total non-
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loan earning assets declined 132 bps. The 2021 cost of funds declined favorably 57 bps to 0.47%, largely from improved interest-bearing core deposit rates, as well as lower brokered and wholesale funding rates. The contribution from net free funds decreased 17 bps, due mostly to the reduced value in the lower rate environment, though offset partly by the 40% increase in average net free funds (largely from average noninterest-bearing demand deposits and stockholders equity) between the three-month periods. As a result, the tax-equivalent net interest margin was 3.31% for first quarter 2021, down 63 bps compared to 3.94% for the comparable 2020 period.
Average interest-earning assets increased to $4.1 billion, up $0.9 billion (29%) over the 2020 comparable period, primarily due to significantly higher cash starting in second quarter 2020, the addition of PPP loans (beginning second quarter 2020), and the timing of the Advantage acquisition (August 2020). Between the comparable first quarter periods, average loans increased $241 million (9%), mostly due to PPP loan activity (net average balance of $206 million at March 31, 2021) and $88 million of Advantage loans at acquisition, while all other interest-earning assets combined increased $681 million (117%) on average. The mix of average interest-earning assets shifted toward lower-yielding assets, at 69% loans, 13% investments and 18% other interest-earning assets (mostly cash) for first quarter 2021, compared to 82%, 14% and 4%, respectively, for first quarter 2020.
Tax-equivalent interest income was $37.1 million for first quarter 2021, down $0.1 million from first quarter 2020, and the related interest-earning asset yield was 3.63%, down 103 bps from the comparable period in 2020. Interest income on loans increased $0.1 million over first quarter 2020, with decreases in interest rates more than offset by PPP loan volumes. The 2021 loan yield was 4.80%, down 39 bps from first quarter 2020, largely from the significantly lower rate environment impacting yields on new, renewed and variable rate loans, as well as from inclusion of PPP loans at a 7.65% yield (comprised of a 1% coupon rate and accreted fees associated with the program). Between the comparable three-month periods, interest income on non-loan earning assets combined was down $0.2 million to $3.2 million, impacted by a 132 bps decline in the yield (to 1.03%) in the lower rate environment, partially offset by higher average volumes (up 117%) from the significantly higher cash.
Average interest-bearing liabilities were $2.8 billion, an increase of $546 million (25%), primarily due to the significant increase in deposits from government stimulus activities and deposited PPP loan proceeds, though also partly due to the timing of the Advantage acquisition in August 2020. The mix of average interest-bearing liabilities was 87% core deposits, 11% brokered deposits and 2% other funding for first quarter 2021, compared to 89%, 7% and 4%, respectively, for first quarter 2020, with the mix changes influenced by the procurement of brokered deposits in March-April 2020 as part of previously discussed liquidity actions.
Interest expense decreased to $3.2 million for first quarter 2021, down $2.5 million compared to first quarter 2020, on higher volumes of average interest-bearing liabilities (up 25% to $2.8 billion) but at a lower overall cost of funds (down 57 bps to 0.47%). Interest expense on deposits decreased $2.0 million (41%) from first quarter 2020 given 27% higher average interest-bearing deposit balances but at a lower cost (down 49 bps to 0.44%). The 2021 cost of savings, interest-bearing demand, money market accounts and core time deposits decreased from first quarter 2020, by 29 bps, 45 bps, 38 bps and 74 bps, respectively, as product rate changes were made in the lower rate environment, and brokered deposits cost 59 bps less than the comparable first quarter period of 2020, largely from maturities of higher-costing term brokered funds procured during March-April 2020 under competitive conditions as part of previously discussed liquidity actions. Interest expense on other interest-bearing liabilities was down between the comparable first quarter periods, as interest expense on lower average balances (down $34 million) combined with lower rates (down 122 bps to 2.42%) decreased expense by more than half.
Provision for Credit Losses
The provision for credit losses decreased to $0.5 million for the three months ended March 31, 2021, compared to $3.0 million for the three months ended March 31, 2020. The provision for credit losses was significantly increased for the first three quarters of 2020 given unprecedented economic disruptions and uncertainty surrounding the COVID-19 pandemic, and the related credit stress on our customers, though tempered in late 2020 into first quarter 2021 as potential deterioration of loan quality metrics initially anticipated did not materialize.
The provision for credit losses is predominantly a function of Nicolet’s methodology and judgment as to qualitative and quantitative factors used to determine the appropriateness of the ACL-Loans. The appropriateness of the ACL-Loans is affected by changes in the size and character of the loan portfolio, changes in levels of collateral dependent and other nonperforming loans, historical losses and delinquencies in each portfolio segment, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing and future economic conditions, the fair value of underlying collateral, and other factors which could affect expected credit losses. See also Note 6, “Loans, Allowance for Credit Losses - Loans, and Credit Quality” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures. For additional information regarding asset quality and the ACL-Loans, see “BALANCE SHEET ANALYSIS — Loans,” “— Allowance for Credit Losses - Loans,” and “— Nonperforming Assets.”
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Noninterest Income
Table 4: Noninterest Income
Three Months Ended March 31,
(in thousands) 2021 2020 $ Change % Change
Trust services fee income $ 1,775  $ 1,579  $ 196  12  %
Brokerage fee income 2,793  2,322  471  20 
Mortgage income, net 7,230  2,327  4,903  211 
Service charges on deposit accounts 1,091  1,225  (134) (11)
Card interchange income 1,927  1,562  365  23 
BOLI income 527  703  (176) (25)
Other income 1,072  521  551  106 
Noninterest income without net gains
16,415  10,239  6,176  60 
Asset gains (losses), net 711  (654) 1,365  N/M
Total noninterest income
$ 17,126  $ 9,585  $ 7,541  79  %
Trust services fee income & Brokerage fee income combined $ 4,568  $ 3,901  $ 667  17  %
N/M means not meaningful.

Noninterest income was $17.1 million for first quarter 2021, an increase of $7.5 million (79%) compared to $9.6 million for the comparable period of 2020. Noninterest income excluding net asset gains (losses) grew $6.2 million (60%) between the comparable three-month periods, predominantly on strong net mortgage income.
Trust services fee income and brokerage fee income combined were $4.6 million, up $0.7 million (17%) over first quarter 2020, consistent with the growth in accounts and assets under management.
Mortgage income represents net gains received from the sale of residential real estate loans into the secondary market, capitalized mortgage servicing rights (“MSRs”), servicing fees net of MSR amortization, fair value marks on the mortgage interest rate lock commitments and forward commitments (“mortgage derivatives”), and MSR valuation changes, if any. Net mortgage income of $7.2 million, increased $4.9 million (211%) between the comparable three-month periods, predominantly from higher sale gains and capitalized gains combined (up $4.4 million or 144%, commensurate with the increase in volumes sold into the secondary market aided by higher refinance activity and better pricing between the years), favorable changes in the fair value of the mortgage derivatives (up $0.8 million), and higher net servicing fees (up $0.3 million on the larger portfolio serviced for others), partially offset by a $0.2 million increase in MSR amortization and $0.3 million higher MSR asset impairment given faster paydown activity (with impairment of $0.5 million in first quarter 2021 compared to impairment of $0.2 million in first quarter 2020). See also “Lending-Related Commitments” and Note 7, “Goodwill and Other Intangibles and Mortgage Servicing Rights” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures on the MSR asset.
Service charges on deposit accounts were down $0.1 million to $1.1 million for the three months ended March 31, 2021, mainly as a result of a decrease in NSF fees due to the increased liquidity of consumers and businesses.
Card interchange income grew $0.4 million (23%) between the comparable first quarter periods due to higher volume and activity, as activity was tempered late in first quarter 2020 with the onset of the pandemic, as well as cautionary spending of consumers given the economic uncertainty.
BOLI income was down $0.2 million between the comparable three-month periods, attributable to BOLI death benefits received in first quarter 2020, partly offset by income on higher average balances from $3 million BOLI acquired with Advantage in August 2020.
Other income of $1.1 million for the three months ended March 31, 2021 was up $0.6 million from the comparable 2020 period, largely due to the change in fair value of nonqualified deferred compensation plan assets from the significant market decline in March 2020 at the onset of the pandemic (from a negative position at March 31, 2020 to a positive position at March 31, 2021). See also “Noninterest Expense” for discussion on the offsetting fair value change to the nonqualified deferred compensation plan liabilities.
Net asset gains of $0.7 million in first quarter 2021 were primarily attributable to favorable fair value marks on equity securities, which was largely a recapture of net asset losses of $0.7 million in first quarter 2020.
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Noninterest Expense
Table 5: Noninterest Expense
Three Months Ended March 31,
($ in thousands) 2021 2020 Change % Change
Personnel $ 15,116  $ 13,323  $ 1,793  13  %
Occupancy, equipment and office 4,137  4,204  (67) (2)
Business development and marketing 989  1,359  (370) (27)
Data processing 2,658  2,563  95  4 
Intangibles amortization 852  993  (141) (14)
FDIC assessments 595  —  595  N/M
Other expense 1,734  1,412  322  23 
Total noninterest expense
$ 26,081  $ 23,854  $ 2,227  9  %
Non-personnel expenses $ 10,965  $ 10,531  $ 434  4  %
Average full-time equivalent (“FTE”) employees 558  580  (22) (4) %
N/M means not meaningful.

Noninterest expense was $26.1 million, an increase of $2.2 million (9%) over first quarter 2020. Personnel costs increased $1.8 million (13%), while non-personnel expenses combined increased $0.4 million (4%) compared to first quarter 2020.
Personnel expense was $15.1 million for the three months ended March 31, 2021, an increase of $1.8 million from the comparable period in 2020. A significant portion of the increase is due to the change in the fair value of nonqualified deferred compensation plan liabilities from the significant market decline at the onset of the pandemic (from a negative position at March 31, 2020 to a positive position at March 31, 2021). See also “Noninterest Income” for discussion on the offsetting fair value change to the nonqualified deferred compensation plan assets. Excluding this fair value change, personnel increased 7% compared to first quarter 2020. Salaries increased 2%, with the lower average FTE employees from a smaller branch network offset by merit increases between the periods. Personnel expense was also impacted by higher health insurance and other fringe benefit costs, as well as higher incentives in conjunction with the strong earnings for first quarter 2021.
Occupancy, equipment and office expense was $4.1 million for first quarter 2021, down $0.1 million (2%) compared to first quarter 2020, due to the smaller branch network and ongoing efforts to improve operational efficiency.
Business development and marketing expense was $1.0 million, down $0.4 million (27%), between the comparable three-month periods, largely due to lower business development costs from less travel and entertainment during the pandemic, as well as lower marketing costs from differences in the timing and extent of donations, marketing campaigns, promotions, and media.
Data processing expense was $2.7 million, up $0.1 million (4%) between the comparable three-month periods, mostly due to volume-based increases in core processing charges.
Intangibles amortization decreased $0.1 million between the comparable first quarter periods mainly from declining amortization on the aging intangibles of previous acquisitions, partly offset by amortization from the new intangibles of the August 2020 Advantage acquisition.
FDIC assessments increased to $0.6 million for first quarter 2021 as the small bank assessment credits were fully utilized during third quarter 2020 and also reflecting the higher assessment base.
Other expense was $1.7 million, up $0.3 million (23%) between the comparable first quarter periods, mostly due to higher professional costs related to the recently announced proposed acquisition of Mackinac.
Income Taxes
Income tax expense was $5.9 million (effective tax rate of 24.59%) for first quarter 2021, compared to $3.3 million (effective tax rate of 23.73%) for the comparable period of 2020. The lower effective tax rate for 2020 was due to the favorable tax treatment of the BOLI death benefit proceeds and higher tax benefit on stock-based compensation.
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BALANCE SHEET ANALYSIS
At March 31, 2021, period end assets were $4.5 billion, unchanged from December 31, 2020, with a slight shift in composition. The shift in assets from year-end 2020 included a $57 million increase in loans (comprised of $43 million from net activity in PPP loans, and a $14 million increase in all other loans, mostly commercial), and a $19 million increase in securities AFS, offset by a reduction in cash and cash equivalents (down $67 million to $736 million). Total deposits of $3.9 billion at March 31, 2021, were also minimally changed from December 31, 2020, with a decrease of $64 million in brokered deposits substantially offset by an increase of $54 million in customer core deposits. Borrowings decreased $10 million mostly due to the early repayment of an FHLB advance. Total stockholders’ equity was $550 million, an increase of $11 million from December 31, 2020, primarily from earnings, exceeding stock repurchases and negative net fair value investment changes.
Compared to March 31, 2020, assets were $4.5 billion, up $0.8 billion (22%), largely due to the increase in liquidity. Cash and cash equivalents increased significantly, up $494 million (204%) to $736 million at March 31, 2021, and represented 16% of total assets (compared to 6% of total assets at March 31, 2020), while loans increased $239 million (9%) and securities AFS increased $46 million (9%). On the funding side, deposits increased $0.9 billion (29%) over March 31, 2020, while total borrowings decreased $114 million. Also contributing to the increase was the acquisition of Advantage in August 2020, which added $172 million in assets, $88 million in loans and $141 million of deposits at acquisition. Stockholders’ equity increased $39 million from March 31, 2020, primarily due to net income, partially offset by stock repurchases over the year.

Loans
In addition to the discussion that follows, see also Note 6, “Loans, Allowance for Credit Losses - Loans, and Credit Quality,” in the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures on loans. For additional information regarding the allowance for credit losses and nonperforming assets see also “BALANCE SHEET ANALYSIS – Allowance for Credit Losses - Loans” and “BALANCE SHEET ANALYSIS – Nonperforming Assets.”
Nicolet services a diverse customer base throughout northeastern and central Wisconsin and in Menominee, Michigan. The Company concentrates on originating loans in its local markets and assisting its current loan customers. The loan portfolio is widely diversified by types of borrowers, industry groups, and market areas. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to multiple numbers of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At March 31, 2021, no significant industry concentrations existed in Nicolet’s portfolio in excess of 10% of total loans.
An active credit risk management process is used to ensure that sound and consistent credit decisions are made. The credit management process is regularly reviewed and the process has been modified over the past several years to further strengthen the controls. Factors that are important to managing overall credit quality are sound loan underwriting and administration, systematic monitoring of existing loans and commitments, effective loan review on an ongoing basis, early problem loan identification and remedial action to minimize losses, an appropriate ACL-Loans, and sound nonaccrual and charge-off policies.
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Table 6: Period End Loan Composition
March 31, 2021 December 31, 2020 March 31, 2020
(in thousands) Amount % of Total Amount % of Total Amount % of Total
Commercial & industrial $ 728,498  26  % $ 750,718  27  % $ 831,257  32  %
PPP loans 229,403  8  186,016  7  —  — 
Owner-occupied CRE 520,274  18  521,300  19  499,705  19 
Agricultural 107,009  4  109,629  4  95,991  3 
Commercial
1,585,184  56  1,567,663  57  1,426,953  54 
CRE investment 490,053  17  460,721  16  448,758  17 
Construction & land development 137,670  5  131,283  5  96,055  4 
Commercial real estate
627,723  22  592,004  21  544,813  21 
Commercial-based loans
2,212,907  78  2,159,667  78  1,971,766  75 
Residential construction 39,586  1  41,707  1  52,945  2 
Residential first mortgage 456,197  16  444,155  16  432,126  17 
Residential junior mortgage 107,641  4  111,877  4  121,105  5 
Residential real estate
603,424  21  597,739  21  606,176  24 
Retail & other 30,020  1  31,695  1  29,482  1 
Retail-based loans
633,444  22  629,434  22  635,658  25 
Total loans $ 2,846,351  100  % $ 2,789,101  100  % $ 2,607,424  100  %
Total loans ex. PPP loans $ 2,616,948  92  % $ 2,603,085  93  % $ 2,607,424  100  %
Broadly, the loan portfolio at March 31, 2021, 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. PPP loans, however, initially added during second quarter 2020, are fully guaranteed by the SBA, warranting no credit loss provisions.
Commercial-based loans of $2.2 billion increased $53 million (2%) since December 31, 2020, primarily due to a $43 million increase in the net carrying value of PPP loans (including an additional $147 million from the latest round of PPP loans, partly offset by approximately $100 million of PPP loan forgiveness) and growth of $10 million in the remainder of the commercial-based loan portfolio. Commercial and industrial loans continue to be the largest segment of Nicolet’s portfolio and represented 26% of the total portfolio at March 31, 2021.
Residential real estate loans of $603 million grew $6 million (1%) from year-end 2020, to represent 21% of total loans at March 31, 2021. Residential first mortgage loans include conventional first-lien home mortgages, while residential junior mortgage real estate loans consist mainly of home equity lines and term loans secured by junior mortgage liens. As part of its management of originating residential mortgage loans, the vast majority of Nicolet’s long-term, fixed-rate residential real estate mortgage loans are sold in the secondary market with servicing rights retained. Nicolet’s mortgage loans are typically of high quality and have historically had low net charge-off rates.
Retail and other loans were relatively unchanged from year-end 2020, and represented approximately 1% of the total loan portfolio, and include predominantly short-term and other personal installment loans not secured by real estate.

Allowance for Credit Losses - Loans
In addition to the discussion that follows, see also Note 6, “Loans, Allowance for Credit Losses - Loans, and Credit Quality,” in the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures on the allowance for credit losses.
Credit risks within the loan portfolio are inherently different for each loan type as summarized under “BALANCE SHEET ANALYSIS — Loans.” A discussion of the loan portfolio credit risk can be found in the “Loans” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2020 Annual Report on Form 10-K. Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and ongoing review of loan payment performance. Active asset quality administration, including early problem loan identification and timely resolution of problems, aids in the management of credit risk and minimization of loan losses. For additional information regarding nonperforming assets see also “BALANCE SHEET ANALYSIS – Nonperforming Assets.”
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The ACL-Loans represents management’s estimate of expected credit losses in the Company’s loan portfolio at the balance sheet date. To assess the appropriateness of the ACL-Loans, an allocation methodology is applied by Nicolet which focuses on evaluation of qualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to specific loans; (ii) management’s ongoing review and grading of the loan portfolio; (iii) consideration of historical loan loss and delinquency experience on each portfolio segment; (iv) trends in past due and nonperforming loans; (v) the risk characteristics of the various loan segments; (vi) changes in the size and character of the loan portfolio; (vii) concentrations of loans to specific borrowers or industries; (viii) existing economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect expected credit losses. Assessing these numerous factors involves significant judgment; therefore, management considers the ACL-Loans a critical accounting policy.
Management allocates the ACL-Loans by pools of risk within each loan portfolio segment. The allocation methodology consists of the following components. First, a specific reserve is established for individually evaluated credit-deteriorated loans, which management defines as nonaccrual credit relationships over $250,000, collateral dependent loans, and other loans with evidence of credit deterioration. The specific reserve in the ACL-Loans for these credit deteriorated loans is equal to the aggregate collateral or discounted cash flow shortfall. Second, management allocates the ACL-Loans with historical loss rates by loan segment. The loss factors are measured on a quarterly basis and applied to each loan segment based on current loan balances and projected for their expected remaining life. Next, management allocates ACL-Loans using the qualitative factors mentioned above. Consideration is given to those current qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the historical loss experience of each loan segment. Lastly, management considers reasonable and supportable forecasts to assess the collectability of future cash flows.
At March 31, 2021, the ACL-Loans was $32.6 million (representing 1.15% of period end loans and 1.25% of period end loans excluding PPP loans) compared to $32.2 million at December 31, 2020 and $26.2 million at March 31, 2020. The increase in the ACL-Loans from year-end 2020 was due to the $0.5 million provision for credit losses recognized and negligible net charge-offs (0.01% of average loans, annualized), while the increase from March 31, 2020 was largely due to the higher provision for credit losses in 2020 given the unprecedented economic disruptions and uncertainty surrounding the COVID-19 pandemic. The components of the ACL-Loans are detailed further in Table 7 below.
Table 7: Allowance for Credit Losses - Loans
Three Months Ended Year Ended
(in thousands) March 31, 2021 March 31, 2020 December 31, 2020
ACL-Loans:
Balance at beginning of period $ 32,173  $ 13,972  $ 13,972 
Adoption of CECL —  8,488  8,488 
Initial PCD ACL —  797  797 
Total impact for adoption of CECL —  9,285  9,285 
Provision for credit losses 500  3,000  10,300 
Charge-offs (94) (93) (1,689)
Recoveries 47  38  305 
Net (charge-offs) recoveries (47) (55) (1,384)
Balance at end of period $ 32,626  $ 26,202  $ 32,173 
Net loan (charge-offs) recoveries:
Commercial & industrial $ (13) $ 30  $ (692)
Owner-occupied CRE —  —  (449)
Agricultural —  —  — 
CRE investment (4) (20) (190)
Construction & land development —  —  — 
Residential construction —  —  — 
Residential first mortgage 10  1  9 
Residential junior mortgage 2  3  67 
Retail & other (42) (69) (129)
Total net (charge-offs) recoveries $ (47) $ (55) $ (1,384)
Ratios:
ACL-Loans to total loans 1.15  % 1.00  % 1.15  %
ACL-Loans to total loans ex. PPP loans 1.25  % 1.00  % 1.24  %
Net charge-offs to average loans, annualized 0.01  % 0.01  % 0.05  %
Net charge-offs to average loans ex. PPP loans, annualized 0.01  % 0.01  % 0.05  %
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Nonperforming Assets
As part of its overall credit risk management process, management is committed to an aggressive problem loan identification philosophy. This philosophy has been implemented through the ongoing monitoring and review of all pools of risk in the loan portfolio to ensure that problem loans are identified early and the risk of loss is minimized. Management continues to actively work with customers and monitor credit risk from the ongoing economic disruptions surrounding the COVID-19 pandemic. Since the pandemic started, approximately 1,000 loans were provided temporary payment modifications. As of March 31, 2021, only 9 loans (with a current balance of $3 million) remain under temporary payment modification structure and 3 loans (with a current balance of $4 million) have been classified as troubled debt restructurings (included in Table 8 below, with $2 million reflected as performing troubled debt restructrings and the remainder in nonaccrual). See also Note 6, “Loans, Allowance for Credit Losses - Loans, and Credit Quality” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for further disclosures on credit quality. For additional information see also “BALANCE SHEET ANALYSIS – Loans” and “BALANCE SHEET ANALYSIS – Allowance for Credit Losses-Loans.”
Nonperforming loans are considered one indicator of potential future loan losses. Nonperforming loans are defined as nonaccrual loans and loans 90 days or more past due but still accruing interest. Loans are generally placed on nonaccrual status when contractually past due 90 days or more as to interest or principal payments. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on loans, it is management’s practice to place such loans on nonaccrual status immediately. Nonperforming assets include nonperforming loans and other real estate owned (“OREO”). At March 31, 2021, nonperforming assets were $13 million, comprised of $9 million of nonaccrual loans and $4 million of OREO, and represented 0.28% of total assets, compared to $13 million or 0.29% of total assets at December 31, 2020.
The level of potential problem loans is another predominant factor in determining the relative level of risk in the loan portfolio and in determining the appropriate level of the ACL-Loans. Potential problem loans are generally defined by management to include loans rated as Substandard by management but that are in performing status; however, there are circumstances present which might adversely affect the ability of the borrower to comply with present repayment terms. The decision of management to include performing loans in potential problem loans does not necessarily mean that Nicolet expects losses to occur, but that management recognizes a higher degree of risk associated with these loans. The loans that have been reported as potential problem loans are predominantly commercial-based loans covering a diverse range of businesses and real estate property types. Potential problem loans were $13 million (0.4% of loans) and $21 million (0.7% of loans) at March 31, 2021 and December 31, 2020, respectively. Potential problem loans require a heightened management review of the pace at which a credit may deteriorate, the duration of asset quality stress, and uncertainty around the magnitude and scope of economic stress that may be felt by Nicolet’s customers and on underlying real estate values.
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Table 8: Nonperforming Assets
(in thousands) March 31, 2021 December 31, 2020 March 31, 2020
Nonperforming loans:
Commercial & industrial $ 2,842  $ 2,646  $ 6,050 
Owner-occupied CRE 1,563  1,869  3,837 
Agricultural 2,087  1,830  1,801 
Commercial 6,492  6,345  11,688 
CRE investment 1,436  1,488  1,029 
Construction & land development 327  327  533 
Commercial real estate 1,763  1,815  1,562 
Commercial-based loans 8,255  8,160  13,250 
Residential construction —  —  — 
Residential first mortgage 527  823  953 
Residential junior mortgage 116  384  566 
Residential real estate 643  1,207  1,519 
Retail & other 67  88  — 
Retail-based loans
710  1,295  1,519 
Total nonaccrual loans
8,965  9,455  14,769 
Accruing loans past due 90 days or more —  —  — 
Total nonperforming loans
$ 8,965  $ 9,455  $ 14,769 
Nonaccrual loans (included above) covered by SBA guarantee $ 1,416  $ 1,265  $ 1,308 
OREO:
Commercial real estate owned $ 302  $ —  $ — 
Residential real estate owned —  —  — 
Bank property real estate owned 3,495  3,608  1,000 
Total OREO
3,797  3,608  1,000 
Total nonperforming assets
$ 12,762  $ 13,063  $ 15,769 
Performing troubled debt restructurings $ 2,120  $ 2,120  $ — 
Ratios:
Nonperforming loans to total loans 0.31  % 0.34  % 0.57  %
Nonperforming assets to total loans plus OREO 0.45  % 0.47  % 0.60  %
Nonperforming assets to total assets 0.28  % 0.29  % 0.42  %
ACL-Loans to nonperforming loans 364  % 340  % 177  %

Deposits
Deposits represent Nicolet’s largest source of funds. The deposit levels have been heavily influenced by the ongoing economic uncertainty, government stimulus payments and other directives related to pandemic, which reduced spending and increased liquidity of consumers and businesses, as well as by PPP loan proceeds retained on deposit by corporate borrowers. The deposit composition is presented in Table 9 below.
Total deposits of $3.9 billion at March 31, 2021, were minimally changed (down slightly, $10 million) from December 31, 2020. Core customer deposits increased $54 million, aided in part by additional government stimulus payments and new PPP funds on deposit, while brokered deposits decreased $64 million, as brokered deposits matured without renewal given our liquid position.
Compared to March 31, 2020, total deposits increased $0.9 billion (29%), largely due to an increase in customer core deposits, partly offset by a $21 million reduction in brokered deposits. The increase in total deposits since March 31, 2020 was largely due to the liquidity objectives of consumers and businesses in very uncertain times noted above. Also contributing to the increase in deposits from March 31, 2020, was the acquisition of Advantage in August 2020, which added $141 million of deposits at acquisition.
38

Table 9: Period End Deposit Composition
March 31, 2021 December 31, 2020 March 31, 2020
(in thousands) Amount % of Total Amount % of Total Amount % of Total
Noninterest-bearing demand $ 1,216,477  31  % $ 1,212,787  31  % $ 791,563  26  %
Money market and interest-bearing demand 1,576,041  40  % 1,551,325  40  % 1,208,024  40  %
Savings 572,225  15  % 521,814  13  % 361,829  12  %
Time 535,851  14  % 624,473  16  % 662,050  22  %
Total deposits
$ 3,900,594  100  % $ 3,910,399  100  % $ 3,023,466  100  %
Brokered transaction accounts $ 35,615  1  % $ 46,340  1  % $ 36,331  1  %
Brokered and listed time deposits 225,402  6  % 278,521  7  % 245,252  8  %
Total brokered deposits
$ 261,017  7  % $ 324,861  8  % $ 281,583  9  %
Customer transaction accounts $ 3,329,128  85  % $ 3,239,586  83  % $ 2,325,085  77  %
Customer time deposits 310,449  8  % 345,952  9  % 416,798  14  %
Total customer deposits (core)
$ 3,639,577  93  % $ 3,585,538  92  % $ 2,741,883  91  %

Lending-Related Commitments
As of March 31, 2021 and December 31, 2020, Nicolet had the following off-balance sheet lending-related commitments.
Table 10: Commitments
(in thousands) March 31, 2021 December 31, 2020
Commitments to extend credit $ 960,788  $ 950,287 
Financial standby letters of credit 7,868  8,241 
Performance standby letters of credit 7,757  8,366 
Interest rate lock commitments to originate residential mortgage loans held for sale (included above in commitments to extend credit) and forward commitments to sell residential mortgage loans held for sale are considered derivative instruments (“mortgage derivatives”) and represented $82 million and $3 million, respectively, at March 31, 2021. In comparison, interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans held for sale represented $113 million and $20 million, respectively, at December 31, 2020. The net fair value of these mortgage derivatives combined was a loss of $211,000 at March 31, 2021 compared to a loss of $244,000 at December 31, 2020.

Liquidity Management
Liquidity management refers to the ability to ensure that cash is available in a timely and cost-effective manner to meet cash flow requirements of depositors and borrowers and to meet other commitments as they fall due, including the ability to service debt, invest in subsidiaries, repurchase common stock, pay dividends to shareholders (if any), and satisfy other operating requirements.
Given the stable core customer deposit base, fairly consistent patterns of activity in the core deposit base (including extra growth in core deposits during the pandemic as previously discussed), and the minimal use of capacity available in numerous non-core funding sources, Nicolet's liquidity levels and resources have been sufficient to fund loans, accommodate deposit trends and cycles, and to meet other cash needs as necessary. At the onset of the pandemic, but prior to the announcement of government stimulus, management initiated preparatory actions to increase on-balance sheet liquidity to ensure we could meet customer needs. These actions proved later to not be necessary, leading us to reduce non-deposit funding. In addition to this on-balance sheet liquidity build, remaining liquidity facilities continue to provide capacity and flexibility in an uncertain time.
Funds are available from a number of basic banking activity sources including, but not limited to, the core deposit base; repayment and maturity of loans; investment securities calls, maturities, and sales; and procurement of additional brokered deposits or other wholesale funding. All securities AFS and equity securities (included in other investments) are reported at fair value on the consolidated balance sheet. At March 31, 2021, approximately 26% of the $558 million securities AFS portfolio was pledged to secure public deposits, as applicable, and for other purposes as required by law. Additional funding sources at March 31, 2021, consist of $175 million of available and unused Federal funds lines, available borrowing capacity at the FHLB of $185 million, and borrowing capacity in the brokered deposit market.
In consideration of the funds availability for the Bank and the current high levels of cash in a very low interest rate environment, management has taken prudent pricing actions on deposits and loans, as well as actions to reduce non-deposit funding. Brokered deposits have matured without renewal and selected FHLB advances were repaid early.
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Management is committed to the Parent Company being a source of strength to the Bank and its other subsidiaries, and therefore, regularly evaluates capital and liquidity positions of the Parent Company in light of current and projected needs, growth or strategies. The Parent Company uses cash for normal expenses, debt service requirements, and when opportune, for common stock repurchases, repayment of debt, or investment in other strategic actions such as mergers or acquisitions. At March 31, 2021, the Parent Company had $56 million in cash. Additional cash sources, among others, available to the Parent Company include its $10 million available and unused line of credit, and access to the public or private markets to issue new equity, subordinated notes or other debt. Dividends from the Bank and, to a lesser extent, stock option exercises, represent significant sources of cash flows for the Parent Company.
Cash and cash equivalents at March 31, 2021 and December 31, 2020 were $736 million and $803 million, respectively. The decrease in cash and cash equivalents since year-end 2020 included $38 million net cash provided by operating activities (mostly earnings), $82 million net cash used by investing activities (primarily to fund loan growth, mostly PPP loans, and net investment purchases), and $23 million net cash used by financing activities (with seasonal reductions in deposits and brokered deposit maturities, partially offset by additional government stimulus). Management believes its liquidity resources were sufficient as of March 31, 2021 to fund loans, accommodate deposit cycles and trends, and to meet other cash needs as necessary in these unsettled times.

Interest Rate Sensitivity Management and Impact of Inflation
A reasonable balance between interest rate risk, credit risk, liquidity risk and maintenance of yield, is highly important to Nicolet’s business success and profitability. As an ongoing part of its financial strategy and risk management, Nicolet attempts to understand and manage the impact of fluctuations in market interest rates on its net interest income. The consolidated balance sheet consists mainly of interest-earning assets (loans, investments and cash) which are primarily funded by interest-bearing liabilities (deposits and other borrowings). Such financial instruments have varying levels of sensitivity to changes in market rates of interest. Market rates are highly sensitive to many factors beyond our control, including but not limited to general economic conditions and policies of governmental and regulatory authorities. Our operating income and net income depends, to a substantial extent, on “rate spread” (i.e., the difference between the income earned on loans, investments and other earning assets and the interest expense paid to obtain deposits and other funding liabilities).
Asset-liability management policies establish guidelines for acceptable limits on the sensitivity to changes in interest rates on earnings and market value of assets and liabilities. Such policies are set and monitored by management and the board of directors’ Asset and Liability Committee.
To understand and manage the impact of fluctuations in market interest rates on net interest income, Nicolet measures its overall interest rate sensitivity through a net interest income analysis, which calculates the change in net interest income in the event of hypothetical changes in interest rates under different scenarios versus a baseline scenario. Such scenarios can involve static balance sheets, balance sheets with projected growth, parallel (or non-parallel) yield curve slope changes, immediate or gradual changes in market interest rates, and one-year or longer time horizons. The simulation modeling uses assumptions involving market spreads, prepayments of rate-sensitive instruments, renewal rates on maturing or new loans, deposit retention rates, and other assumptions.
Among other scenarios, Nicolet assessed the impact on net interest income in the event of a gradual +/-100 bps and +/-200 bps change in market rates (parallel to the change in prime rate) over a one-year time horizon to a static (flat) balance sheet. The results provided include the liquidity measures mentioned earlier and reflect the changed interest rate environment in response to the pandemic. The interest rate scenarios are used for analytical purposes only and do not necessarily represent management’s view of future market interest rate movements. Based on financial data at March 31, 2021 and December 31, 2020, the projected changes in net interest income over a one-year time horizon, versus the baseline, are presented in Table 11 below. The results are within Nicolet’s guidelines of not greater than -10% for +/- 100 bps and not greater than -15% for +/- 200 bps and given the relatively short nature of the Company's balance sheet, reflect a largely unchanged risk position as expected.
Table 11: Interest Rate Sensitivity
March 31, 2021 December 31, 2020
200 bps decrease in interest rates (0.4) % (0.8) %
100 bps decrease in interest rates (0.4) % (0.8) %
100 bps increase in interest rates 2.0  % 4.0  %
200 bps increase in interest rates 4.1  % 8.1  %
Actual results may differ from these simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and their impact on customer behavior and management strategies.
The effect of inflation on a financial institution differs significantly from the effect on an industrial company. While a financial institution’s operating expenses, particularly salary and employee benefits, are affected by general inflation, the asset and
40

liability structure of a financial institution consists largely of monetary items. Monetary items, such as cash, investments, loans, deposits and other borrowings, are those assets and liabilities which are or will be converted into a fixed number of dollars regardless of changes in prices. As a result, changes in interest rates have a more significant impact on a financial institution’s performance than does general inflation.

Capital
Management regularly reviews the adequacy of its capital to ensure that sufficient capital is available for current and future needs and is in compliance with regulatory guidelines and actively reviews capital strategies 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, 2021, the Bank’s regulatory capital ratios qualify the Bank as well-capitalized under the prompt-corrective action framework. This strong base of capital has allowed Nicolet to be opportunistic in the current environment and in strategic growth. A summary of Nicolet’s and the Bank’s regulatory capital amounts and ratios, as well as selected capital metrics are presented in the following table.
Table 12: Capital
At or for the Three Months Ended
At or for the
Year Ended
($ in thousands) March 31, 2021 December 31, 2020
Company Stock Repurchases: *
Common stock repurchased during the period (dollars) $ 4,102  $ 40,544 
Common stock repurchased during the period (full shares) 56,886  646,748 
Company Risk-Based Capital:
Total risk-based capital $ 424,016  $ 406,325 
Tier 1 risk-based capital 402,419  385,068 
Common equity Tier 1 capital 378,394  361,162 
Total capital ratio 13.4  % 12.9  %
Tier 1 capital ratio 12.7  % 12.2  %
Common equity tier 1 capital ratio 12.0  % 11.4  %
Tier 1 leverage ratio 9.3  % 9.0  %
Bank Risk-Based Capital:
Total risk-based capital $ 360,815  $ 351,081 
Tier 1 risk-based capital 339,218  329,824 
Common equity Tier 1 capital 339,218  329,824 
Total capital ratio 11.5  % 11.2  %
Tier 1 capital ratio 10.8  % 10.5  %
Common equity tier 1 capital ratio 10.8  % 10.5  %
Tier 1 leverage ratio 7.8  % 7.8  %
* Reflects common stock repurchased under board of director authorizations for the common stock repurchase program.
In managing capital for optimal return, we evaluate capital sources and uses, pricing and availability of our stock in the market, and alternative uses of capital (such as the level of organic growth or acquisition opportunities) in light of strategic plans. During first quarter 2021, $4.1 million was utilized to repurchase and cancel 56,886 shares of common stock pursuant to our common stock repurchase program. At March 31, 2021, there remained $16.3 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.
41


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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See section “Interest Rate Sensitivity Management and Impact of Inflation” within Management’s Discussion and Analysis of Financial Condition and Results of Operations under Part I, Item 2.

ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management, under the supervision, and with the participation, of our President and Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act pursuant to Exchange Act Rule 13a-15). Based upon, and as of the date of such evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective.
There have been no changes in the Company’s internal controls or, to the Company’s knowledge, in other factors during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


42

PART II – OTHER INFORMATION

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

ITEM 1A. RISK FACTORS
There have been no material changes in the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Following are Nicolet’s monthly common stock purchases during the first quarter of 2021.
Total Number of
Shares Purchased (a)
Average Price
Paid per Share 		Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans
or Programs (b)
(#) ($) (#) (#)
Period
January 1 – January 31, 2021 9,688  $ 68.41  9,688  542,500 
February 1 – February 28, 2021 50,389  $ 72.94  43,698  498,800 
March 1 – March 31, 2021 3,716  $ 76.80  3,500  495,300 
Total 63,793  $ 72.48  56,886  495,300 
(a)During first quarter 2021, the Company repurchased 1,300 common shares for minimum tax withholding settlements on restricted stock and 5,607common shares were repurchased to satisfy the exercise price and / or tax withholding requirements of stock options. These purchases do not count against the maximum number of shares that may yet be purchased under the board of directors' authorization.
(b)During first quarter 2021, Nicolet utilized $4.1 million to repurchase and cancel approximately 56,900 shares of common stock pursuant to our common stock repurchase program. At March 31, 2021, approximately $16.3 million remained available under this common stock repurchase program.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.

ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

ITEM 5. OTHER INFORMATION
None.
43


ITEM 6. EXHIBITS
The following exhibits are filed herewith:
Exhibit
Number 		Description
2.1
31.1
31.2
32.1
32.2
101.INS
The XBRL Instance Document does not appear in the Interactive Date File because its XBRL tags are embedded within the Inline XBRL document (2)
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
(1) Incorporated by reference to the exhibit of the same number in the Registrant's Current Report on Form 8-K filed on April 12, 2021.
(2) Includes the following financial information included in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Stockholders' Equity, (v) the Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial Statements.
44

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.
April 30, 2021 /s/ Michael E. Daniels
Michael E. Daniels
President and Chief Executive Officer
April 30, 2021 /s/ Ann K. Lawson
Ann K. Lawson
Chief Financial Officer

45

EXHIBIT 31.1
Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Michael E. Daniels, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Nicolet Bankshares, Inc. (the “registrant”);
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
April 30, 2021 /s/ Michael E. Daniels
Michael E. Daniels
President and Chief Executive Officer
(Principal Executive Officer)



EXHIBIT 31.2
Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Ann K. Lawson, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Nicolet Bankshares, Inc. (the “registrant”);
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
April 30, 2021 /s/ Ann K. Lawson
Ann K. Lawson
Chief Financial Officer
(Principal Financial and Accounting Officer)



EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report of Nicolet Bankshares, Inc., (the “Company”) on Form 10-Q as filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), I, Michael E. Daniels, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. s.1350, as adopted pursuant to s.906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
April 30, 2021 /s/ Michael E. Daniels
Michael E. Daniels
President and Chief Executive Officer



EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report of Nicolet Bankshares, Inc., (the “Company”) on Form 10-Q as filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), I, Ann K. Lawson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. s.1350, as adopted pursuant to s.906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
April 30, 2021 /s/ Ann K. Lawson
Ann K. Lawson
Chief Financial Officer